BUSINESS REGULATORY FRAMEWORK

NAAC ACCREDITED A+
DDCE
Education for all

DIRECTORATE OF DISTANCE & CONTINUING EDUCATION

Utkal University, Bhubaneswar-7, Odisha
Email: helpline@ddceutkal.ac.in
Website: www.ddceutkal.ac.in
© Directorate of Distance & Continuing Education, Utkal University, Vani Vihar, Bhubaneswar-751007 The
study material is developed exclusively for the use of the students admitted under DDCE, Utkal University.

Name of the Study Material: BUSINESS REGULATORY FRAMEWORK

ISBN : ************

Author's Name:
Dr. ULLAS CHANDRA DAS
NIRUPAMA MOHANTY

Edited by: Dr.Sujit Kumar Acharya

Dr.Biswo Ranjan Mishra
Dr.Rashmi Ranjeeta Das

Year of Print: 2020

No. of Copies: ******

Printed and Published by:

For:
Directorate of Distance & Continuing Education
Utkal University, Bhubaneswar - 751007
www.ddceutkal.ac.in
 DIRECTORATE OF DISTANCE & CONTINUING EDUCATION UTKAL UNIVERSITY :
VANI VIHAR BHUBANESWAR:-751007.

From the Director’s Desk

The Directorate of Distance & Continuing Education, originally established as the University Evening
College way back in 1962 has travelled a long way in the last 52 years. ‘EDUCATION FOR ALL’ is our motto.
Increasingly the Open and Distance Learning institutions are aspiring to provide education for anyone,
anytime and anywhere. DDCE, Utkal University has been constantly striving to rise up to the challenges of
Open Distance Learning system. Nearly ninety thousand students have passed through the portals of this
great temple of learning. We may not have numerous great tales of outstanding academic achievements but
we have great tales of success in life, of recovering lost opportunities, tremendous satisfaction in life, turning
points in career and those who feel that without us they would not be where they are today. There are also
flashes when our students figure in best ten in their honours subjects. In 2014 we have as many as fifteen
students within top ten of honours merit list of Education, Sanskrit, English and Public Administration,
Accounting and Management Honours. Our students must be free from despair and negative attitude. They
must be enthusiastic, full of energy and confident of their future. To meet the needs of quality enhancement
and to address the quality concerns of our stake holders over the years, we are switching over to self
instructional material printed courseware. Now we have entered into public private partnership to bring out
quality SIM pattern courseware. Leading publishers have come forward to share their expertise with us. A
number of reputed authors have now prepared the course ware. Self Instructional Material in printed book
format continues to be the core learning material for distance learners. We are sure that students would go
beyond the course ware provided by us. We are aware that most of you are working and have also family
responsibility. Please remember that only a busy person has time for everything and a lazy person has none.
We are sure you will be able to chalk out a well planned programme to study the courseware. By choosing to
pursue a course in distance mode, you have made a commitment for self improvement and acquiring higher
educational qualification. You should rise up to your commitment. Every student must go beyond the
standard books and self instructional course material. You should read number of books and use ICT learning
resources like the internet, television and radio programmes etc. As only limited number of classes will be
held, a student should come to the personal contact programme well prepared. The PCP should be used for
clarification of doubt and counseling. This can only happen if you read the course material before PCP. You
can always mail your feedback on the course ware to us. It is very important that you discuss the contents of
the course materials with other fellow learners.

We wish you happy reading.

DIRECTOR

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 SYLLABUS
1330302102 BUSINESS REGULATORY FRAME WORK
Unit-1 Law of contract: Nature of Contract, Classification of Contracts, Offer and Acceptance,
Consideration, Special Contract, Indemnity & Guarantee, Bailment and Pledge.

Unit-2 Sale of Goods Act: Contract of sale, Condition and Warranties, Transfer of Ownership,
Performance of the Contract, Unpaid Seller and his rights

Unit-3 Negotiable instruments: Definition, Types, Parties to the Negotiable Instrument,

Dishonour and Discharge of Negotiable Instruments.

Unit-4 Consumer Protection Act: Definition, Consumer Protection Council, Consumer Dispute
Redressal Agencies, Findings of District Forum and Appeals, Environment Protection Act.

Unit-5 Foreign Exchange Management Act, Information Technology Act.

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CONTENTS
1.1. Introduction
1.2. Law of Contract
1.3. Nature of laws of Contract
1.4. The Indian Contract Act 1872
1.5. Contract
1.6. Classification of Contract
1.7. Offer
1.8. Acceptance
1.9. Consideration
1.10. Special Contract
1.11. Indemnity And Guarantee
1.12. Bailment
1.13. Pledge
1.14. Summary
1.15. Self- Assessment Questions
UNIT-2
2.1:Introduction
2.2. Contact of Sale
2.3. Condition and Warranties
2.4. Doctrine of Caveat Emptor
2.5. Transfer of Ownership
2.6. Performance of Contract
2.7. Unpaid seller and his rights
2.8. Summary
2.9. Self-Assessment Questions
UNIT-3
3.1. Introduction
3.2. Meaning and Definition
3.3. Essential Characteristics of Negotiable Instrument
3.4. Types of Negotiable Instrument
3.5. Promissory Note
3.6. Bill of Exchange
3.7. Cheque
3.8. Parties to Negotiable Instrument
3.9. Dishonour of a Negotiable Instrument
3.10. Discharge of a Negotiable Instrument
3.11. Summary
3.12. Self-Assessment Questions
UNIT-4
4.1. About Consumer Protection Act
4.2. Meaning of Consumer
4.3. Meaning of Service
4.4. Unfair Trade Practice
4.5. Rights Of the Consumers And reliefs Available to Consumer
4.6. Consumer Protection Council
4.7. Consumer Dispute Redressal Agencies

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4.8. Finding of Districts Forum And appeal
4.9. The Environment Protection Act
4.10. Premises of the Act
4.11. Objectives
4.12. Scope and Applicability
4.13. Definitions of various terms under this act
4.14. Power of the Central Government to protect and improve environment
4.15. Power of the Court
4.16. Prevention, Control and abetment of Environment Pollution
4.17. Penalties
4.18. The National Environment Appelate Authority
4.19. Summary
4.20. Self-assessment Questions
UNIT-5
5.1.Introduction to FEMA
5.2. Objective of FEMA
5.3. Applicability of FEMA
5.4. Major Provisions of FEMA Act
5.5. Short Title, Extent, Application And Commencement
5.6. Definitions of Different Terms under this act
5.7. Regulation and Management of FEMA
5.8. Authorised person
5.9. Contravention and penalties
5.10. Adjudication and Appellate
5.11. Composition of Appellate Tribunal
5.12. Directorate of Enforcement
5.13. Information Technology Act 2000
5.14. Scope and application
5.15. Objective of the Act
5.16. Digital Signature
5.17. Electronic Governance
5.18. Certifying Authorities
5.19. Duties of Subscribers
5.20. Offence and Penalties
5.21. Applicability and Non-applicability of Law
5.22. Summary
5.23. Self-assessment Questions

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 UNIT-1
LAW OF CONTRACT
AIMS AND OBJECTIVES:-
After studying this unit you should be able to understand :
 The concept of law
 The meaning of the term contract
 The classification of contract
 The meaning of the term agreement offer and acceptance
 The concept of special contract
 The concept of consideration
 The contract of indemnity and guarantee
 The concept of bailment and pledge

CONTENTS:-
1.1. Introduction
1.2. Law of Contract
1.3. Nature of laws of Contract
1.4. The Indian Contract Act 1872
1.5. Contract
1.6. Classification of Contract
1.7. Offer
1.8. Acceptance
1.9. Consideration
1.10. Special Contract
1.11. Indemnity And Guarantee
1.12. Bailment
1.13. Pledge
1.14. Summary
1.15. Self- Assessment Questions

UNIT – I
LAW OF CONTRACT
1.1 INTRODUCTION
The term law refers to rules of conduct enforced by the State to maintain peace and order in
the society. Broadly speaking, law may be defined as the rules of conduct recognized and
enforced by the state to control and regulate the conduct of people, to protect their property and
contractual rights with a view to securing justice, peaceful living and social security.
1.1.1 Definition: Definitions of the term law by some eminent scholars are given below:
1. According to Salmond, “Law is the body of principles recognized and applied by the state in
administration of justice”.
2. Austin says, “A law is a rule of conduct imposed and enforced by the sovereign”.

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3. In the words of Holland, “law is a rule of external human actions enforced by sovereign
political authority”.
4. According to Woodrow Wilson, “Law is that portion of the established habit and thought of
mankind which has gained distinct and formal recognition in the shape of uniform rules
backed by authority and power of the government”.
1.1.2 Mercantile Law
Law being a wider subject touches all walks of our life. There are various branches of law
concerning specific aspects e.g., civil, criminal, administrative, constitutional, business, labour
laws, etc.
The legal framework within which different business firms have to operate are largely governed
by General Laws applicable to all forms of organisations-irrespective of their size and
ownership. These laws fall into the category of mercantile laws. The terms business laws,
commercial law and mercantile law are synonymous.
The term ‘Mercantile Law’ is used to denote that branch of law which is concerned with such
matters as are usually the subject of what may be called mercantile transactions. Basically,
mercantile law is a part of civil law which deals with the rights and obligations of mercantile
persons arising out of mercantile transactions in respect of mercantile property. A mercantile
person may be a single individual, a partnership or a joint stock company. These laws denote the
aggregate body of legal rules connected with trade, industry and commerce. They provide for
rules regarding the validity of making contracts and their performance. They deal with various
types of contracts such as those relating to partnership, sale of goods, agency, bailment,
indemnity and guarantee. Mercantile law also includes in its fold the laws relating to the joint
stock companies, carriage of goods, negotiable instruments, insurance, arbitration, consumer
protection, etc.
However, the scope of mercantile law is ever widening due to increasing complexities of
business world.
The following laws are included in business or mercantile law:
1. Contract Act
2. Sale of Goods Act
3. Partnership Act
4. Companies Act
5. Negotiable Instruments Act
6. Banking Companies Act

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7. Insurance Companies Act
8. Carriers and Carriage of Goods act
9. Commercial Securities Act
10. Patents and Copyright act
11. Insolvency Act
12. Arbitration Act
1.2 LAW OF CONTRACT
Law of contract is the most important and basic part of Mercantile law. It is not only the
merchant or trader but every person who lives in the organised society, consciously or
unconsciously enters into contracts from sunrise to sunset.
The law of contract is contained in the Indian Contract Act, 1872 which —
a. Deals with the general principles of law governing all contracts, and
b. Covers the special provisions relating to special contracts like bailment, pledge,
indemnity, guarantee and agency.
When a person buys a computer or hires a taxi or goes to video library to buy a video cassette
or takes a credit card fro a bank or gives loan to another or he does booking for an orchestra/DJ
for marriage party, he enters into and performs a contract though he may be unaware of this fact.
Such contracts create legal relations giving rise to certain rights and obligations. The law of
contract is designed to enforce rights and obligations in connection with the above activities.
The object of Law of Contract is to ensure that the rights and obligations created by a
contract are honoured. That the expectations created by the promises of the parties to an
agreement are fulfilled and that legal remedies are available to an aggrieved party against the
party failing to perform his part of the agreement.
1.3 NATURE OF LAW OF CONTRACT
The law of contract is that branch of law which determines the circumstances in which a promise
or an agreement shall be legally binding on the person making it. Unlike other branches of law,
law of contract does not state a number of rights and duties, but lays down certain limiting
principles within the framework of which the parties to an agreement may lay down their own
terms and conditions. These will be upheld by the courts as long as they do not infringe upon any
provisions of the law.
The contracts being the basis of most of the business transactions, the law of contract is of
particular significance to people (i.e., traders, factory owners, partnership firms, joint stock

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companies, banks, insurance companies, etc.) engaged in trading, commercial and industrial
activities.
In simple words, it may be said that the purpose of the law of contract is to ensure the realisation
of reasonable expectation of the parties who enter into a contract.
1.4 THE INDIAN CONTRACT ACT, 1872
The law relating to contracts in India is contained in the Indian Contract Act, 1872. The Act
came into force with effect from September 1, 1872. It is applicable to the whole of India except
the State of Jammu & Kashmir. The Act deals with
a) The general principals of the law of contract (Secs. 1 to 75) which apply to all types of
contracts irrespective of their nature and
b) Some special contracts only (Secs. 124 to 238)
The first six chapters of the Act (which embody the general principles) deal with the different
stages in the formation of a contract, its essential elements, its performance or breach and the
remedies for breach of contract. The remaining chapters deal with some of the special contracts,
viz., indemnity and guarantee [Chapter VIII (Secs. 124 to 147)], bailment and pledge [Chapter
IX (Secs. 148 to 189)] and agency [Chapter X (Secs. 182 to 238)]. The Act does not affect any
usage or custom of trade (Sec. 1, para 1).
The Act is not exhaustive
The Indian Contract Act does not profess to be a complete and exhaustive code because while
enforcement it depends on English common law. It deals with the general principles of the law of
contract and with some special contracts only. Some of the contracts not dealt with by the Act
are those relating to partnership, sale of goods, negotiable instruments, insurance, bill of lading,
etc. There are separate Acts which deal with these contracts.
According to Section 1, “Nothing herein contained shall affect the provisions of any
statute, Act or Regulation not hereby expressly repealed, nor usage or custom of trade, not
inconsistent with the provisions of this Act”.
1.5 CONTRACT
A contract is an agreement made between two or more parties which the law will enforce. A
contract is an agreement to do or not to do an act. It is a legally binding agreement, which is
enforceable at law.
1.5.1 Definition Sec. 2 (h) of the Indian Contract Act, 1872 defines contract as an agreement
enforceable by law.

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According to Salmond, “contract is an agreement creating and defining obligations between the
parties”.
In the words of Sir William Anson, “a legally binding agreement made between two or more
persons by which rights are acquired by one or more to acts or forbearances (abstaining from
doing something) on the part of other or others”.
Halsbury defines contract as, an agreement between two or more persons which is intended to be
enforceable at law and is constituted by the acceptance by one party of an offer made to him by
the other party to do or to abstain from doing some act.
Sir Fredrick Pollock says, “Every agreement and promise enforceable at law is a contract”.
So, the subject matter of contract consists of two essential elements:
a) Agreement and
b) Its enforceability at law.
a) Agreement: An agreement is defined in Section 2 (e) as every promise or every set of
promises forming the consideration for each other. A promise is defined in Section 2 (b) as a
proposal when accepted becomes a promise.
An agreement involves a proposal or offer by one party and acceptance of the same by the
other party. It requires existence of two or more persons i.e., plurality of persons because a
person cannot enter into an agreement with himself. It also implies that the parties have a
common intention about the subject matter of their agreement. Two parties should be
thinking of the same thing in the same sense at the same time. Thus, an agreement is the
outcome of two consenting minds i.e., consensus ad idem.
Thus, Agreement = Offer + Acceptance
b) Enforceable at Law: An agreement to become a contract must give rise to a legal obligation.
The common acceptance formed and communicated between the two parties must create
legal relations and not merely the relations which are purely social or domestic in nature.
If the parties specify or the circumstances indicate that the parties intend to create legal
relationship through it-even an agreement between husband and wife will be legally
enforceable. On the other hand, if the two parties rule out legal obligation expressly the
agreement will not be enforceable though it may be a trade agreement.
Thus, Contract = Agreement + Enforceability at Law
Therefore, all contracts are agreements but all agreements are not contracts.
1.5.2 Essential Elements of a Valid Contract

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According to Sec. 10, all agreements are contracts if they are made by the free consent of parties
competent to contract, for a lawful consideration and with a lawful object and are not expressly
declared to be void. All agreements are not contracts. Only that agreement which is enforceable
at law is a contract. In order to become a contract, an agreement must have the following
essential elements:
1. Offer and Acceptance: In order to create a valid contract, there must be two or more
parties because an individual cannot enter into an agreement with himself. It implies that one
party makes a lawful proposal (offer) and the other party makes a lawful acceptance of the offer.
The term lawful means offer and its acceptance must confirm to the rules laid down in the Indian
Contact Act regarding valid offer and acceptance and its communication. For example, if Kumar
makes a proposal to sell his house to Mahesh for Rs. 50,00,000 and Mahesh accepts the proposal,
there will be a valid agreement between the two.
2. Intention to Create Legal Relationship: When two parties enter into an agreement,
their intention must be to create legal relationship between them. If there is no such intention on
the part of the parties, there is no contract between them. Agreements of a social or domestic
nature do not contemplate legal relationship, as such they are not contracts.
3. Lawful Consideration: An agreement to be enforceable by law must be supported by
consideration. ′Consideration′ means an advantage or benefit moving from one party to the other.
For a valid contract, the consideration need not necessarily be in terms of a price — the
consideration can even be in the past, present or future – but the consideration needs to real and
lawful. [Secs.2 (d), 23 and 25]. As per Section 2 (d), “ when at the desire of the promisor, the
promisee or any other person has done or abstained from doing, or does or abstains from doing,
or promises to do or to abstains from doing an act, such act or abstinence or promise is called a
consideration for the promise”.
4. Competency or Contractual Capacity of Parties: The parties to the agreement must be
legally competent to enter into a valid contract. According to Section11 if the Act, every person
is competent to contract if he:
(a) is of the age of majority,
(b) is of sound mind and
(c) is not disqualified from contracting by any law to which he is subject.
If a party suffers from any flaw in capacity, the agreement is not enforceable except in some
special cases.

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 5. Free and Genuine Consent: It is essential to the creation of every contract that there
must be free and genuine consent of the parties to the agreement. According to Section 13, the
consent of the parties is said to be free when they are of the same mind on the material terms of
the contract. The parties are said to be of the same mind when they agree about the subject
matter of the contract in the same sense and at the same time. The identity of views is the pre-
requisite. If such identity is not there, no agreement is possible. As per section 14, consent is said
to be free when it is not caused by coercion or undue influence or fraud or mis-representation or
mistake.
6. Lawful Object: The object of an agreement must be lawful. Object has nothing to do
with consideration. It means the purpose or design of the contract. Thus, when one hires a house
for use as a gambling house, the object of the contract is to run a gambling house. The object is
said to be unlawful if —
a) it is forbidden by law;
b) it is of such nature that if permitted it would defeat the provisions of any law;
c) it is fraudulent;
d) it involves an injury to the person or property of any other and
e) the court regards it as immoral or opposed to public policy.
7. Certainty of Meaning: According to Section 29, agreements the meaning of which is not
certain or capable of being made certain are void. The terms of the contract must be precise and
certain and not vague or indefinite. A contract may be void on the ground of uncertainty. For
example, a purported acceptance of an offer to buy lorry on hire-purchase terms does not
constitute a contract if the hire-purchase terms are never agreed.
8. Possibility of Performance: If the act is impossible in itself, physically or legally, it
cannot be enforced at law.
9. Agreement not Declared Void or Illegal: The agreement though satisfying all the
conditions for a valid contract must not have expressly declared void by any law in force in the
country. Agreements mentioned in Sections 24 to 30 of the Contract Act have been expressly
declared void for example agreements in restraint of trade, marriage, legal proceedings, etc.
10. Legal Formalities: An oral contract is a perfectly valid contract, except in those cases
except where writing, registration, etc. is required by some statute. In India, writing is required
in cases of sale, mortgage, lease and gift of immovable property, negotiable instruments,
memorandum and articles of association of a company, etc. Registration is required in case of
documents coming within the scope of section 17 of the Registration Act.

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 If an agreement does not meet the above criteria, then it cannot be a contract. It will remain
an agreement.
1.6 CLASSIFICATION OF CONTRACTS
Contracts may be classified into different categories depending upon their enforceability or
validity, mode of creation or formation and extent of execution or performance.
A. CLASSIFICATION OF CONTRACTS ON THE BASIS OF ENFORCEABILITY
1. Valid Contracts: An agreement enforceable at law is a valid contract. An agreement
becomes a contract when all the essentials of a valid contract as laid down in Section 10 are
fulfilled. For example, A offers to sell his house for Rs. 10 lakhs to B and B agrees to buy it
for this price is a valid contract.
Agreements falling short of legal requirements of Section 10 are Invalid contracts. These
are:
2. Void Contract: An agreement which was legally enforceable when entered into but which
has become void later on due to certain reasons such as supervening impossibility of
performance or illegality are known as void contracts for e.g. when a war breaks out between
the importing country and exporting county.
3. Void Agreements: According to Section 2 (g), an agreement which is not enforceable by
law by either of the parties is said to be void. A void agreement does not create any legal
rights or obligations. It is void ab initio, i.e., from its very inception, for example, an
agreement without consideration or with a minor.
4. Voidable Contract: An agreement which is enforceable by law at the option of one or more
of the parties thereto, but not at the option of the other or others is a voidable contract [Sec. 2
(i)]. This happens when the essential element of free consent in a contract is missing. When
the consent of a party to a contract is not free, i.e., it is caused by coercion, undue influence,
misrepresentation or fraud, the contract is voidable at his option (Secs. 19 and 19-A). Thus, a
voidable contract is valid and enforceable until it is repudiated by the party entitled to avoid
it.
5. Unenforceable Contract: An unenforceable contract is one which cannot be enforced in a
court of Law because of some technical defect such as absence of writing or where the
remedy has been barred by lapse of time. The contract may be carried out by the parties
concerned; but in the event of breach or repudiation of such a contract, the aggrieved party
will not entitled to the legal remedies. Such contracts will not be enforced by the courts until
and unless the defect is rectified.

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6. Illegal Contracts: A contract which is either prohibited by law or otherwise against the
policy of law is an illegal agreement. It is void ab initio. Thus, a contract to commit dacoity
is an illegal contract and cannot be enforced at law. All illegal agreements are void but all
void agreements or contracts are not necessary illegal.
B. CLASSIFICATION OF CONTRACTS ON THE BASIS OF FORMATION
A contract may be made in writing or by word of mouth or inferred from the conduct of the
parties or the circumstances of the case. These are the modes of formation of a contract.
Contracts may be classified according to the mode of their formation as follows:
1. Express Contract: If the terms of a contract are expressly agreed upon (whether by words
spoken or written) at the time of formation of the contract, the contract is said to be an
express contract. Where the offer or acceptance of any promise is made in words, the
promise is said to be express (Sec. 9) and the resulting contract an express contract.
2. Implied Contract: Where the proposal or acceptance is made otherwise than in words, it is
an implied contract.An implied contract is one which is inferred from the acts or conduct of
the parties or course of dealings between them. So, where a person employs another to do
some work, the law implies that the former agrees to pay for the work.
3. Constructive or Quasi-Contract: A quasi-contract is not a contract at all. It is a contract in
which there is no intention on either side to make a contract, but the law imposes a contract.
In such a contract, rights and obligations arise not by any agreement between the parties but
by operations of law. It rests on the grounds of equity that “a person shall not be allowed to
enrich himself unjustly at the expense of another”. For example, a finder of lost goods is
under an obligation to find out the true owner and return the goods.
4. E-Com Contracts/Contracts over Internet: An E-Commerce contract is one which is
entered into between two parties via internet. In electronic commerce, different
parties/persons create networks which are linked to other networks through EDI (Electronic
Data Inter-change). This helps in expanding the area of operation in commercial transactions
for any person using electronic mode. These are known as EDI contracts or cyber contracts
or mouse click contracts.
C. CLASSIFICATION OF CONTRACTS ON THE BASIS OF PERFORMANCE
To the extent to which the contracts have been performed, these may be classified as —
1. Executed Contract: ‘Executed’ means that which is done. An executed contract is one where
both the parties have performed their respective obligation or carried out the terms of the

15
 contracts. In other words, it is a completed contract. For example, A sells a T.V set for Rs.
30,000 to B. B pays the price and A hands over TV set to B.
2. Executory Contract: ‘Executory’ means that which remains to be carried into effect. An
executory contract is one in which the contract is yet to be performed either wholly or
partially or one or both the parties have yet to perform their obligations. For example, A
agrees to make furniture for B for Rs. 20,000. A has yet to make furniture and B has not made
the payment. So, both A and B are yet to perform their obligations. Suppose A has made the
furniture but B has yet to make payment, it is executed on A’s part but executor on B’s part.
On the basis of execution, the contracts may also be classified as follows:
Unilateral Contract: A unilateral or one-sided contract is one in which only one party has to
fulfill his obligation at the time of the formation of the contract, the other party having
fulfilled his obligation t the time of the contractor before the contract comes into existence.
Such contracts are also known as contracts with executed consideration. For example, A
permits a railway coolie to carry his luggage and place it in a carriage. A contract comes into
existence as soon as the luggage is placed in the carriage. But by that time coolie has already
performed his obligation. Now only A has to fulfil his obligation, i.e., pay the reasonable
charges to the coolie.
Bilateral Contract: A bilateral contract is one in which the obligations on the part of both the
parties to the contract are outstanding at the time of the formation of the contract. In this
sense, bilateral contracts are similar to executory contracts and are also known as contracts
with executory consideration.
OFFER AND ACCEPTANCE
1.7 OFFER
1.7.1 Meaning and Definition of Offer
The primary element of a valid contract is an agreement between the parties to the contract. An
agreement comes into existence by a lawful offer by one party and lawful acceptance by the
other party. An offer is a proposal by one party to another to enter into a legally binding
agreement with him. According to Section 2 (c), “the person making the proposal is called the
‘promisor’ or offeror or proposer; the person to whom it is made is called the offeree or proposee
and the person accepting the proposal is called the ‘promisee’ or acceptor.”The British refer to it
as ‘offer’ but in the Indian Contract Act, it is called a ‘proposal’.

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 According to Section 2 (a) of the Indian Contract Act, “when one person signifies to another his
willingness to do, or to abstain from doing, anything with a view to obtaining the assent of the
other to such act or abstinence, he is said to make a proposal”.
A person making the proposal expresses that he is willing to contract on the terms stated in it
provided the other party to whom the proposal is made will likewise express his assent to the
same terms. Section 2 (a) reveals three essential elements in an offer:
i) Expression of willingness to do or not to do something,
ii) made to another person i.e., a person cannot make an offer to himself,
iii)with the object of gaining the consent of the other person to such act or abstinence.
1.7.2 Types of Offer
Offers or proposals may be classified on the basis of —
1) How an offer is made?
2) To whom an offer is made?
1. How an Offer is made: An offer may be either express or implied from the conduct of the
parties.
a) Express Offer: An express offer is one which may be made by words spoken or written
such as letter, telegram, telex, fax message, e-mail or through internet. For example,
when A offers to sell his dissection box to B for Rs. 400, it is an express offer.
b) Implied offer: An implied offer is one which may be gathered from the conduct of the
party or the circumstances of the case. Stepping into a local bus, consuming eatables at a
restaurant, shinning shoes by a shoe shiner, without being asked to do so etc. create
implied promises to pay for the benefits enjoyed.
2. To Whom an Offer is made: An offer may be made to —
a) a particular person or a particular group or body of persons,
b) the public at large i.e., the whole world.
a) Specific Offer: An offer made to a definite person or a body of persons is called a
specific offer. A specific offer can usually be accepted only by the person or persons to
whom it is made.
b) General Offer: When an offer is addressed to the whole world, it is called a general
offer. A general offer is accepted by any one.
For example, where A promises to give Rs. 100 to B if he brings back his missing horse, this
is a specific offer and can only be accepted by B; but if A issues a public advertisement to the
effect that he would give Rs. 500 to anyone who brings back his missing horse, such an

17
 advertisement amounts to a general offer and member of the public can accept the said offer
by searching for and bringing back A’s missing horse.
3. Positive and Negative Offers: A person may express his willingness to do something or to
abstain from doing something e.g., it may be an offer to construct a wall to provide privacy
or not to construct a wall so that free passage of light and air may not be obstructed.
4. Cross Offers: When two parties make identical offers to each other, in ignorance of each
other’s offer, such offers are known as cross offers. They shall not constitute acceptance of
one’s offer by the other.
1.7.3 Essentials of a Valid Offer
An offer becomes legally valid when it satisfies the following essential conditions:
1. Offer must be Capable of Creating Legal Relations: While making the offer, the aim of
the offeror should be to primarily create a legal obligation. An offer that creates only social
or moral obligation does not constitute a valid agreement or contract. A proposal to go to
picnic or to play a cricket match does not create a legal obligation – it is not legally binding
on the person making the proposal or the one who is accepting it. For example, if A invites
B for lunch but, for some reason, is not at home when b comes for lunch, it does not have any
legal obligation for A and b cannot sue A for not keeping his commitment because an
invitation to lunch is a social affair and does not create a legal obligation for either party. An
offer, therefore, must be such as would result in a valid contract when it is accepted.
2. Offer must be Certain, Definite and not Vague: No contract can come into existence if the
terms of the offer are vague or loose and indefinite. Both the parties should be clear about the
legal consequences arising out of contract. An indefinite or vague proposal is not a proposal
from the legal point of view and its acceptance cannot create any contractual relationship. If a
offers to B to take his building on a two-year lease if B repairs it thoroughly and ‘furnishes it
according to the latest style’, it cannot be said to constitute an offer because it is too vague to
result in a contractual relationship.
3. Offer must be communicated to the Offeree: There can be no offer by a person to
himself.An offer, to be complete, must be communicated to the person to whom it is made so
that he can accept or not accept the offer. Unless the offer is communicated by the offeror (or
by his agent) to the offeree, there can be no acceptance of the offer and as such, no agreement
can be reached. An acceptance of an offer, in ignorance of the offer, is no acceptance and
does not confer any right on the acceptor. If M has announced a reward to anyone who

18
 returned his lost dog. P brought the dog to M without having heard of the offer. Held P was
not entitled to the reward [Fitch v. Snedaker, (1868) 38N.Y.288]
4. Offer must be made with a view to obtaining the assent: An offer must be distinguished
from mere expression of intention. The offer to do or not to do something must be made with
a view to obtaining the assent of the other party addressed and not merely with a view to
disclosing the intention of making an offer.
5. Offer should not contain a term the non-compliance of which may be assumed to
amount to acceptance: One cannot say while making the offer that if the offer is not
accepted before a certain date, it will be presumed to have been accepted. For example,
where S writes to P, “I will sell you my horse for Rs. 4,000and if you do not reply, I shall
assume you have accepted the offer”, there is no contract if P does not reply. However, if P is
in possession of S’ horse at the time the offer is made and he continues to use the horse
thereafter, P’s silence and his continued use of the horse amount to acceptance on his part of
the terms of S’s offer.
6. An Offer may be Conditional: An offer can be made subject to a condition. In that case, it
can be accepted only subject to that condition. A conditional offer lapses when the condition
is not accepted. Thus, a conditional offer by the management of a company to the trade union
to pay a certain amount lapses when the condition is not accepted. A contract formed on a
conditional offer is valid. In recent times, however, the courts have adopted certain protective
measures for the aggrieved persons. Conditional offers are invalid where the terms are
unreasonable or the offeree is unaware of the terms.
7. Lapse of an Offer: An offer lapses
a) if either offeror or offeree dies before acceptance.
b) if it is not accepted within i) the specified time or (ii) a reasonable time, if no time is
specified.
c) if the offeree does not make a valid acceptance, for example makes a counter offer or
conditional acceptance or if a particular manner of acceptance has been requested, he
accepts in some other manner for example by sending a letter by mail when a reply by
hand was requested.
d) an offer can also lapse by revocation. A person who makes an offer can withdraw it at
any time before acceptance. A proposal may be made for a fixed period. The offer will
automatically expire if it has not been accepted till then. Where no time limit has been
specified, the offer will lapse after a reasonable time.

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8. An invitation to offer is not an offer: An offer must be distinguished from an invitation to
offer. In the case of an invitation to offer the aim is merely to circulate information of
readiness to negotiate business with anybody who on such information comes to the person
sending it. Such invitations are not offers in the eyes of law and do not become promises on
acceptance. A price list is not an offer to sell the goods at the listed prices. It is an attempt to
induce offers and not an offer in itself.
9. Communication of Special Conditions: When special terms and conditions are to be
attached in a contract, they must not only be specifically stated but also communicated to the
concerned party. It is the duty of the person who delivers a document to give adequate notice
to the offeree of the terms and conditions contained in the document. When this is not done,
the acceptor will not be bound by such terms. For example, a transport company accepts
goods of A for being carried without any conditions. Subsequently it issues a circular to the
consignors limiting its liability for the goods damaged or lost in transit. G is not bound by
this condition since it is not communicated to him prior to the date of contract.
1.8ACCEPTANCE
1.8.1 Meaning and Definition of Acceptance
Acceptance of an offer is of primary importance for a valid agreement. When the offeree or the
person to whom the offer is made, gives his acceptance, the offer is said to be accepted. An offer
becomes a promise or an agreement only after its acceptance.
According to Section 2 (b) of the Indian Contract Act, “when the person to whom the offer is
made signifies his assent thereto, the offer is said to be accepted. An accepted proposal is called
a promise or an agreement”.
According to Sir William Anson, “An acceptance is to an offer what a lighted match is to a train
of gun-powder. Just as a lighted match will blast a train load with gunpowder, an offer becomes
an agreement after its acceptance”.
Except where a proposal prescribes a particular mode of acceptance, the acceptance may be
made in several different ways. Acceptance may be express or implied. When acceptance is
made by words, spoken or written, it is an express acceptance. If it is accepted by conduct, it is
an implied acceptance.
When an offer is made to a particular person, it can only be accepted by the person to whom it is
made. Acceptance by any other person is not a valid acceptance. But if it is a general offer, then
anybody can accept it.
1.8.2Essentials of a Valid Acceptance

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Acceptance of an offer is the very essence of a contract. As per the sections of the Act and the
precedents set by court decisions, the legal rules as to acceptance are mentioned as under:
1. Acceptance must be absolute and unconditional: It must confirm with the offer. If it does,
the offer or proposal becomes a promise. The acceptance, in order to be binding, must be
absolute and unqualified [Sec. 7 (1)] in respect of all terms of the offer, whether material or
immaterial, major or minor. A qualified acceptance is not a contractual acceptance. If the
terms of acceptance are different from the terms of offer, it is termed as a counter offer and is
not recognized by law as an acceptance until the original offeror accepts the qualified terms.
If A offers to sell his land for Rs. 5,00,00 and B accepts the offer and encloses a cheque for
Rs. 50,000 with a promise to pay the balance by monthly instalments of Rs. 15,000 each, it
would not mean a contract between the two as the acceptance is unconditional.
2. Acceptance must be Communicated to the Offeror: To conclude a contract between the
parties, the acceptance must be communicated to the offeror. If the acceptance is not
communicated, the acceptance is not valid in terms of law. A mere resolve or mental
determination on the part of the offeree to accept an offer, when there is no external
manifestation of the intention to do so, is not sufficient [BhagwanDassKedia v. GirdhariLal,
A.I.R (1966) S.C.543].
3. Acceptance must be made within a reasonable time: Acceptance to be valid must be made
within the time allowed by the offeror and if no time is specified, it must be made4 within a
reasonable time. What is a reasonable time is a question of fact depending on the particular
circumstances. Acceptance may be made at any time till the offer is alive. Acceptance made
after the offer has been withdrawn is invalid.
4. Acceptance must be made according to the mode prescribed or usual or reasonable
mode: Acceptance has to be made in the manner prescribed or indicated by the offeror.
Section 7 (2) states that if the acceptance is not made in the manner prescribed, the proposer
may within a reasonable time after the acceptance is communicated to him, insist that the
acceptance must be made in the manner prescribed. Failure on the part of the offeror to do so
will imply that he has accepted although it is not in the desired manner. Where no mode of
acceptance is prescribed, acceptance must be expressed in some usual and reasonable manner.
Acceptance by mail is a very reasonable manner in such cases.
5. The Acceptor must be aware of the proposal at the time of the offer: Acceptance follows
offer. If the acceptor is not aware of the existence of the offer and conveys his acceptance, no
contract comes into being. There must be a knowledge of the offer before anyone could

21
 consent to it. An act done in ignorance of the offer of a reward cannot be called an
acceptance.
6. Acceptance must be given before the offer lapses or before the offer is revoked: It means
that acceptance must be made while the offer is in force i.e., before the offer has been revoked
or offer has lapsed. A prospective resignation to quit a post is an offer and it can be withdrawn
before the resignation is accepted by a competent authority. [Union of India vs. Gopal
Chandra, AIR 1978 See694].
7. Acceptance cannot be implied from silence: No contract is formed if the offeree remains
silent and does nothing to show that he has accepted the offer. The acceptance of an offer
cannot be implied from the silence of the offeree or his failure to answer, unless the offeree
has by his previous conduct indicated that his silence means that he accepts. Rakesh told
Shyam , “I offer you my carfor Rs. 2,00,00. If you don’t reply me in 15 days time, I shall
assume that you accept the offer.” Shyam kept silent. Held, there was no contract.
1.8.3 Communication of Offer, Acceptance and Revocation
A valid contract does not result from mere mental proposal and its mental acceptance. An offer
and its acceptance are pre-requisites for a valid contract. When the contracting parties are
physically present and negotiate in person, an agreement comes into existence the moment the
offeree gives his absolute and unqualified acceptance to the proposal made by the offeror.
Problems arise when the parties are at a distance and the proposal and its acceptance need to be
communicated between the two.
According to Section 3 of the Indian Contract Act, the communication of an offer, its acceptance
and revocation are deemed to be made by an act or its omission by the party offering, accepting
or revoking. Such act or omission must have the effect of communicating such offer, acceptance
or revocation.
A. Communication of an Offer (Section 4)
According to Section 4, the communication of a proposal is complete when it comes to the
knowledge of the person to whom it is made. For example, P proposes by letter to sell a house to
S at a certain price. The communication of the proposal is complete when b receives the letter.
B. Communication of Acceptance (Section 4)
Communication of an acceptance is complete —
a) as against the proposer when it is put in course of transmission to him, so as to be out of
power of the acceptors to withdraw the same.
b) As against the acceptor when it comes to the knowledge of the proposer.

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For example, A proposes by a letter to sell a house to B at a certain price. B accepts A’s proposal
by letter sent by post. The communication of the acceptance is complete as against A, when the
letter is posted, as against B when the letter is received by A.
The main difference the two is that the proposer is bound as soon as the acceptance letter is
posted but the acceptor is not bound till the letter is received by the proposer. In other words, the
acceptor has the option to revoke his acceptance of the proposal before it is received by the
proposer.
C. Communication of Revocation of Proposal (Section 5)
Revocation implies ‘taking back’, ‘recalling’ or ‘withdrawal’. It may be a revocation of the offer
or acceptance. The communication of revocation is complete in the following situations:
i) As against the person who is revoking: A proposal may be revoked at any time before the
communication of its acceptance is complete, as against the proposer, but not afterwards.
ii) As against the person to whom it is made: As against the person to whom the revocation is
made, it is complete, when it comes to his knowledge.
An offer can be revoked before acceptance and an acceptance can be revoked before its
communication. Therefore, the communication of revocation of acceptance must reach the
offeror before acceptance.
1.8.4 Modes of Revocation of an Offer (Section 6)
An acceptance of proposal needs to be made effective before it lapses. After the proposal has
lapsed, no law can enforce its acceptance. According to Section 6 of the Act, a proposal may be
revoked in any of the following ways:
1. By Notice: Section 4 and 5 of the Contract Act clearly stipulate that a proposer can revoke
his proposal before the completion of the acceptance by sending a notice of revocation. Such
notice needs to be clear and unambiguous and can be by word of mouth, by letter, telegram
or telephone or it can be through behavior and action. The notice for the revocation of an
offer should be communicated by the person who has made the offer or by his authorized
representative.
2. By Lapse of Time: A proposal will come to an end by the lapse of time prescribed in such
proposal for its acceptance or, if no time is so prescribed by the lapse of reasonable time. A
reasonable time could be a few hours or it could be a week or more depending upon the
circumstances of each case. Where the subject matter of the contract is an article, like gold,
the prices of which fluctuate daily in the market, very short period will be regarded as

23
 reasonable. Where a person applied for shares of a company in June, he cannot be bound by
an allotment made late in November.
3. By Non-fulfilment of an Essential Precedent: If the offeror has seta condition precedent to
the acceptance of the offer, such condition needs to be met for a valid acceptance of the
proposal. Non-fulfilment of an essential pre-condition nullifies \the proposal and its
acceptance. Thus, X may offer to sell certain goods to Y on a condition that Y pays a certain
amount before a certain date. The proposal is revoked if Y fails to pay the requested amount
within given time.
4. By Death or Insanity of the Proposer: A proposal is revoked by the death or insanity of the
proposer if the fact of his death or insanity comes to the knowledge of the acceptor before
acceptance. If the offer is accepted in ignorance of the death or insanity of the offeror, the
acceptance is valid. According to English law, even if an offer is accepted in ignorance of the
death of the offeror, it still cannot constitute a contract.
5. By Counter Offer: An offer comes to an end when the offeree makes a counter offer or
rejects the offer. Where an offer is accepted with some modification in the terms of the offer
or with some other condition not forming part of the offer, such qualified acceptance
amounts to a counter offer. An offer once rejected cannot be revived. For example, X offers
to sell his house to Y for Rs.10, 000. Y replies offering to pay Rs. 8, 000. X refuses.
Subsequently Y writes accepting the original offer has lapsed.
6. By the non-acceptance of the offer according to the prescribed or usual mode: The offer
will also stand revoked if it has not been accepted according to the mode prescribed.
According to Section 7, it is the duty of the offeror to inform the offeree that the acceptance
does not meet the conditions prescribed in the offer. If the offeror does not do that and keeps
quiet, he is deemed to have accepted the acceptance of the offer.
7. By subsequent Illegality: An offer lapses if it becomes illegal after it is made and before it
is accepted. If there is a change in law that makes the contract contemplated by the offer
illegal or incapable of performance, the offer comes to an end.

1.9 CONSIDERATION
1.9.1 Meaning
Consideration is one of the essential elements to support a contract. The law enforces only those
promises which are made for consideration. Where one party promises to do something, it must

24
get something in return. This something in return is called consideration. In everyday language, a
consideration means ‘something for something’. If a person does, or promises to do, something,
he expects (and is promised) something in return – which is the quid pro que or compensation –
without which the promise is not valid. This something is called consideration. Consideration is
the price that is paid for buying somebody’s promise. A consideration may be a profit or loss, a
benefit or damage, or an obligation.
1.9.2 Definitions
According to Pollock, “consideration is the price for which the promise of other is bought and
the promise thus given for value is enforceable.”
A most commonly accepted definition of consideration is given in the famous English case
Currie v. Misa as “Some right, interest, profit or benefit accruing to one party or some
forbearance, detriment, loss or responsibility, given, suffered or undertaken by the other”.
Section 2 (d) of the Indian contract Act defines consideration as, “when at the desire of the
promisor, the promisee or any other person has done or abstained from doing, or does or abstains
from doing, or promises to do or abstain from doing something, such act or abstinence or
promise is called a consideration for the promise”.
1.9.3 Essential Elements of Valid Consideration
As per the definition in Section 2 (d), a consideration has the following essential elements:
1. It must move at the Desire of the Promisor: Any act or abstinence constituting
consideration must have been done at the desire or request of the promisor. If it is done at the
instance of a third party or without the desire of the promisor, it will not be a good
consideration. The desire of the promisor may be express or implied.
2. It must move from the promisee or any other person: Under the English law,
consideration must move from the promisee. Under the Indian law, consideration may, move
from the promise or any other person, i.e., even a stranger. This means that as long as there is
consideration for a promise it is immaterial who has furnished it. But the stranger to
consideration will be able to sue only if he is a party to the contract. In the case of Chinayya
vs. Ramayya, a father left his entire property to his daughter under the condition that she will
pay a certain amount of money annually to her uncle (i.e., father’s younger brother). The
daughter promised to pay the agreed amount annually, but stopped doing it after a time on
the plea that no consideration moved from her uncle to herself, but the plea was rejected by
the court. It was held that an indirect consideration had moved from her uncle. The law
stipulates that ‘a stranger to consideration can sue but a stranger to a contract cannot’.

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3. Consideration may be past, present or future: The words used in Section 2 (d) — has
done or abstained from doing (past); or does or abstains from doing (present); or promises to
do or to abstain from doing (future) — indicates that consideration may be past, present or
future. The Indian Contract Act recognises past, present and future considerations whereas
the English law does not recognize a past consideration.
When the consideration for a present promise was given before the date of promise, it is said
to be past consideration. A past consideration, if given at the request of the promisor will
support a subsequent consideration.
When the consideration for a promise is given simultaneously with the promise, it is called
present or executed consideration. A present consideration consists in doing or abstaining
from doing something.
A future or executory consideration is a promise to do or give something in return in future
for the promise then made. It is also called a promise for the promise.
4. Consideration need not be adequate: Consideration means ‘something in return’. This
‘something in return’ need not necessarily be equal in value to ‘something given. The law
simply provides that a contract should be supported by consideration. So long as
consideration exists, the courts are not concerned as to its adequacy, provided it is of some
value. Adequacy is for the parties to decide at the time of making the agreement. Inadequacy
is no ground for refusing the performance of the promise, unless it is evidence of fraud.
5. Consideration must be real and not illusory: Though consideration need not be adequate,
yet it must be real and not illusory. Thus, a promise to do that which a person is by law
bound to do, does not amount to consideration. Consideration has also to be competent. If it
is physically impossible, vague or legally impossible, uncertain or illusory, the contract
cannot be enforced. Thus, a promise by a man to make two parallel lines meet is no good
consideration.
6. Consideration must be lawful: The consideration for an agreement must be lawful. An
agreement is void, if it is based on unlawful consideration. The consideration of an
agreement is lawful unless
i) It is forbidden by law, or
ii) is of such a nature that if permitted it would defeat the provisions of any law, or
iii) is fraudulent, or
iv) involves or implies injury to the person or property of another, or
v) the court regards it as immoral or opposed to public policy.

26
7. Consideration must be something which the promisor is not already bound to do: A
promise to do what one is already bound to do, either by general law or under an existing
contract, is not a good consideration for a new promise. There will be no detriment to the
promise or benefit to the promisor over and above their existing rights or obligations.
1.9.4 No Consideration No Contract – Exceptions
Every agreement to be enforceable at law must me supported by valid consideration. The general
rule is ex nudo non oritur action, i.e., an agreement made without consideration is void and is
unenforceable except in certain cases. Sections 25 and 185 deals with the exceptions to this rule
i.e., it specifies the cases where an agreement though made without consideration will be valid.
These cases are:
1. Natural Love and Affection [Section 25(1)]: Where an agreement is expressed in writing
and registered under the law for the time being in force for the registration of documents and
is made on account of natural love and affection between the parties standing in a near
relation to each other, it is enforceable even if there is no consideration. In simple words, a
written and registered agreement based on natural love and affection between near relatives
is enforceable even if it is without consideration [Ram Dass v. KrishanDev, A.I.R (1986)
H.P.9]. In the case Rajlukhy vs. Bhootnath, a Hindu husband, after referring to quarrels and
disagreements between himself and his wife, promised to pay a certain amount as allowance
to his wife vide a written document that was duly registered; but the court held the agreement
void since the essential element of love and affection between the parties was missing.
2. Compensation for Services Rendered [Sec. 25 (2)]: A promise to compensate, wholly or in
part, a person who has already voluntarily done something for the promisor, or has performed
an act for which the promisor was legally bound, is a valid contract even without
consideration. But it is essential in this case that the act must have been voluntary, and done
for the promisor who was in existence when the act was done, and must not have been done
without expecting any consideration. In simple words, a promise to pay for a past voluntary
service is enforceable. For example, P finds Q’s purse and gives it to him. Q promises to give
P Rs. 200. This is a contract. If M voluntarily supports N’s infant son, and N promises to
compensate m for the expense incurred in doing so, it would be a valid contract by law.
3. Time – barred Debt [Sec. 25 (3)]: According to section 25 (3), a promise by a debtor to pay
a time –barred debt is enforceable provided it is made in writing and is signed by the debtor
or his agent generally or specially authorized on his behalf. For example, A owes Rs.

27
 2,00,000 to B, but the debt is time-barred under the Law of Limitation. Even so, if A gives a
written promise to B to pay Rs. 1,00,000, it is deemed a valid contract.
4. Completed gifts [Exp. 1 to Sec. 25]: Explanation 1 to section 25 provides that the rule ‘NO
consideration, No Contract’ shall not affect validity of any gifts actually made between the
donor and the donee. Thus, if a person gives certain properties to another according to the
provisions of the Transfer of Property Act, he cannot subsequently demand the property back
on the ground that there was no consideration.
5. Agency (Sec. 185) According to Section 185 of the Indian Contract Act, no consideration is
necessary in a contract of agency. A person who works as an agent for another is not legally
entitled to a consideration unless there is an agreement to such effect between the concerned
parties.
6. Guarantee (Sec.127): A contract of guarantee is made without consideration.
7. Remission (Sec.63): No consideration is required for an agreement to receive less than what
is due. This is called remission in law.
8. When the promise is for a gift or donation: Such a promise does not entail a consideration.
Therefore, a promisor of a gift or donation is not liable to keep his promise and cannot be
enforced to do so.
1.10 SPECIAL CONTRACT
Special contracts are a species of general contract itself; as such the principles of general contract
are applicable to them. Special contracts include contract of indemnity and guarantee, bailment,
pledge and agency. The special principles relating to them are contained in Chapter VIII
(Sections 124 to 147), Chapter IX (Sections 148 to 181) and Chapter X (Sections 182 to 238).
1.11 INDEMNITY AND GUARANTEE
The contract of indemnity and contract of guarantee are specific types of contracts. The
provisions relating to these contracts are contained in Sections 124 to 147 (Chapter VIII) of the
Indian Contract Act, 1872.

1.11.1 Meaning and Definition of Contract of Indemnity

Ordinarily, the term indemnity means to make good any loss or to compensate any person
who has suffered some loss. According to Section 124 of the Indian Contract Act, “A contract,
by which one party promises to save the other from loss caused to him by the conduct of the
promisor himself, or by the conduct of any other person, is called a contract of indemnity”. The

28
person who makes the promise to make good the loss is called the indemnifier. The person
whose loss is to be made good is called indemnity holder.
A contract of indemnity refers to a promise made by one person to make good any loss or
damage another has incurred or may occur by acting at his request or for his benefit. As such, a
contract of indemnity is a type of contingent contract. The performance of the contract is
dependent on happening or non-happening of a contingency, which may cause losses to another
party. A contract of indemnity may be express or implied.
1.11.2 Essentials of the Contract of Indemnity
The definition of a contract of indemnity in Section 124 of the Indian Contract Act makes it clear
that, besides having the basic elements of a valid contract, a contract of indemnity must have the
following two elements:
a) The indemnifier expressly promises to indemnify the indemnity holder.
b) The promise is to protect the indemnity holder against loss that could be the result of an
act on the part of the promisor (i.e., the indemnifier) or a third party.
1.11.3 Rights of Indemnity Holder (Section 125)
Section 125 enumerates the rights of an indemnity holder in a contract of indemnity. According
to this section, an indemnity holder (or indemnified) is entitled to recover the following from the
promisor:
1. Right to Damages: An indemnity holder is entitled to recover the amount of damage that he
has been compelled to pay the other party in a suit to which the contract of indemnity is
applicable.
2. Right to Costs: An indemnity holder is also entitled to claim all the costs which he has
incurred for defending himself in a suit to which the promise of indemnity is applicable. Such
costs may include all incidental charges and legal expenses paid in that suit.
3. Sums paid under the conditions of compromise: The indemnity holder is entitled to
recover all sums which he may have paid under the terms of any compromise of any such
suit, provided such compromise is not contrary to the orders of the promisor and was one
which it would have been prudent for the indemnity holder to make.

1.11.4 Rights of the Indemnifier

When the indemnifier indemnifies an indemnity-holder, he has some rights on the indemnified.
The Indian Contract Act is silent on the rights of the indemnifier but, as per the provisions of

29
Section 141 and various court verdicts, the rights of the indemnifier are analogous to the rights of
a surety, which are as under:
1. An indemnifier, after he has paid the damages under an indemnity, regains the rights he
had delegated to the indemnified. But he gets these rights only after he has paid the
damage, and not before.
2. If the indemnifier has indemnified the indemnity holder, he gets the right to sue third
parties on behalf of the indemnified.
3. If the indemnified suffers any damages which are not covered by the contract of
indemnity, the indemnifier is not bound by law to pay such damages.
4. The indemnifier is entitled to sue third parties only to the extent of the damages he has
paid to the indemnified.
1.11.5 Definition of Contract of Guarantee
Section 126 of the Indian Contract Act defines a contract of guarantee as a contract to perform
the promise, or discharge the liability, of a third person in case of his default. The contract of
guarantee is made to ensure performance of a contract or discharge of obligation by the
promisor. In case he fails to do so, the person giving assurance or guarantee becomes liable for
such performance or discharge.
In a contract of guarantee, there are three parties, the creditor, the surety and the principal debtor.
The person who gives the guarantee is called the surety, the person in respect of whose default
the guarantee is given is called the principal debtor and the person to whom the guarantee is
given is called the creditor. The contract can be oral or written; but English law stipulates it to
be in writing. It may be expressed or implied and may even be inferred from the course of
conduct of the parties concerned. For example, A advances loan of Rs. 50,000 to B and C
promises to P that if B does not repay the loan, C will do so. This is a contract of guarantee. Here
B is the principal debtor, C is the surety and A, the creditor.
A contract of guarantee is a tripartite agreement which contemplates the principal debtor, the
creditor and the surety in it. There is a triangular relationship in which the following three
collateral contracts may be distinguished:
i) As between creditor and principal debtor, there is a contract out of which the guaranteed
debt arises.
ii) As between surety and creditor, there is a contract by which surety guarantees to pay to
creditor, principal debtor’s debt in case of his default.

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 iii) As between surety and principal debtor, there is a contract that principal debtor shall
indemnify surety in case surety pays in the event of a default by principal debtor. This
contract, if it is not expressed between the parties, is always implied.
1.11.6 Purpose of Contract of Guarantee
Normally, the purpose of a contract of guarantee can be one of the following:
i) For the security of a loan given to a party,
ii) For the assurance of good conduct and honesty of an employee in service contracts and
iii) For indemnity of a third party from loss resulting from the non-payment of a debt.
1.11.7 Essential Features of a Contract of Guarantee
Like in a contract of indemnity, a contract of guarantee also must have all the essential elements
of a valid contract. According to Section 126, the following are the essential features of a
contract of guarantee —
1. Existence of a Principal Debt: A contract of guarantee pre-supposes the existence of a
liability enforceable at law. If no such liability exists, there can be no contract of guarantee.
The surety undertakes to be liable only if principal debtor fails to discharge his obligation.
2. Benefit to principal debtor is sufficient consideration: Section 127 clearly provides that
anything done or any promise made for the benefit of the principal debtor may be a sufficient
consideration to the surety for giving the guarantee. Thus, any benefit received by the debtor
is adequate consideration to bind the surety. There must be a fresh consideration moving
from the creditor. Past consideration is no consideration for contract of guarantee.
3. Consent of surety not obtained by misrepresentation or concealment: A contract of
guarantee is not a contract of uberrimaefidei i.e., one requiring complete disclosure of all the
material facts by the principal debtor or the creditor to the surety before the contract is
entered into by him. Thus, when a guarantee is given to a bank, it is not bound to inform the
surety of matters affecting the credit of the debtor, or of any circumstances connected with
the transaction which may render the position of the surety more onerous. The contract of
guarantee is invalid in case of misrepresentation, concealment or when co-surety does not
join.
4. A contract of guarantee may be either oral or written. It may be expressed or implied from
the conduct of the parties.
5. Surety can be proceeded without proceeding against the principal debtor first.
6. A contract of guarantee can only be between at least three parties — surety, principal debtor
and creditor.

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7. Free consent of all parties is essential for a contract to be valid.
1.11.8 Distinction between Contracts of Indemnity and Guarantee
In both the contracts, the motive is to insure a person against the probable loss out of the deal.
But there are many points of distinction between the two which are listed below:
1. Function: In a contract of indemnity, the indemnifier promises to protect the indemnified
against the consequences of the conduct of the indemnity – holder or a third party whereas in
a contract of guarantee, the surety promises to perform the obligation or promise of a third
party.
2. Parties to the Contract: In a contract of indemnity, there are only two parties to the contract
— the indemnifier and the indemnity – holder whereas in a contract of guarantee, there are
three parties to the contract — the principal debtor, creditor and the surety.
3. Object: The purpose of contract of indemnity is a safety from an uncertain future event
whereas the purpose of contract of guarantee is to assure the other party of the performance
of an obligation.
4. Liability: In a contract of indemnity, the liability of the indemnifier is primary while in a
contract of guarantee, the liability of the surety is secondary and arises only on the default of
the principal debtor.
5. Time of Occurrence: Ina contract of indemnity, the liability of the indemnifier arises only
on the happening of a contingency whereas in the case of a contract of guarantee, there is an
existing debt or duty the performance of which is guaranteed by the surety.
6. Scope: In a contract of indemnity, the scope is limited and does not include contracts of
guarantee whereas in a contract of guarantee, the scope is wide and includes the contracts of
indemnity.
7. Nature: In a contract of indemnity, the contract is a security against loss whereas in a
contract of guarantee, the contract is an assurance to the creditor.
8. Purpose: A contract of indemnity is for the reimbursement of a loss while a contract of
guarantee is for the security of the creditor.
9. Consideration: In a contract of indemnity, the indemnifier receives a consideration from the
indemnity-holder at the beginning of the contract, whereas in a contract of guarantee, the
surety does not receive any consideration. The only consideration for the surety is the
expected gain of the principal debtor.
10. Right to Sue: In a contract of indemnity, the indemnifier cannot sue a third party for loss in
his own name, but must bring the suit on behalf of the indemnified. But in a contract of

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 guarantee, the surety, on discharging a debt payable by the principal debtor to the creditor,
can sue the principal debtor in his own right.
11. Number of Contracts: in a contract of indemnity, there is only one original and independent
contract between the indemnifier and the indemnity holder whereas in a contract of
guarantee, there are three contracts — between the principal debtor and the creditor, between
the creditor and the surety and an implied contract between the principal debtor and the
surety.
12. Competency to Contract: All parties in a contract of indemnity must be competent to
contract. As a special case, when a minor is a principal debtor, the contract of guarantee is
still valid.
13. In the case of a contract of indemnity, it is not necessary for the indemnifier to act at the
request of the indemnified, whereas in the case of a contract of guarantee, it is necessary that
the surety should give the guarantee at the request of the debtor.
1.11.9 Kinds of Guarantee
The function of a contract of guarantee is to enable a person to get a loan, or goods on credit, or
an employment. A guarantee may therefore be given for a) the repayment of debt, or b) the
payment of the price of the goods sold on credit, or c) the good conduct or honesty of a person
employed in a particular office. In the last case, the guarantee is called a ‘fidelity’ guarantee.
A guarantee may be one of various kinds, such as —
a) . Absolute and conditional guarantee: An absolute guarantee is one by which the
guarantor unconditionally promises payment or performance of the contract on default of the
principal debtor. A conditional guarantee is one which is not enforceable immediately on the
default of the principal debtor, but some contingency other than such default must happen.
b) General and special guarantee: A general guarantee is one for acceptance by the public
generally. It is a general promise to any one accepting it to be answerable for a debt in case
of the failure of another person. A special guarantee is one which is addressed to a particular
person who alone can take advantage of it and to whom alone the guarantor can be held
responsible.
c) Limited and unlimited guarantee: A limited guarantee is ordinarily one restricted to a
single transaction and in this sense it is different from a continuing guarantee. An unlimited
guarantee is one which is unlimited either as to time or amount.

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 d) Retrospective and prospective guarantee: A guarantee given for an existing debtor
obligation is called a retrospective guarantee. A guarantee given for future debt or obligation
is called a prospective guarantee. A prospective guarantee is of two types—
specific guarantee and continuing guarantee
i) Specific guarantee: When a guarantee extends to a single transaction or debt, it is a
specific guarantee. Such guarantee comes to an end with the discharge of a debt or the
performance of a promise.
ii) Continuing guarantee: It means a guarantee which extends to a series of transactions. It is
not limited to a single transaction but it is generally for an indefinite time or until revoked. It
is prospective in its operation. The essence of a continuing guarantee is that it applies not to a
specific number of transactions, but to any number of them and makes the surety liable for the
unpaid balance at the end of the guarantee (Sec.129).
The salient features of a continuing guarantee are:
i) Such guarantee is valid for a series of continuing transactions provided the transactions
are within the limits of the guarantee in terms of amount and time period.
ii) Such guarantee is only applicable to specific amount of money.
iii) The surety reserves the right to be kept informed about the probable future transactions.
iv) In the absence of an agreement to the contrary, the continuing guarantee terminates in the
event of death of the guarantor.
Revocation of a continuing guarantee
A continuing guarantee is revoked as to future transactions in the following ways:
1. By notice: A continuing guarantee may at any time be revoked by the surety as to future
transactions, by notice to the creditor (Sec. 130). In the event of revocation, the surety is
not responsible to the creditor for any future transactions, but continues to be responsible
for all such transactions that have been done till the notice of revocation of guarantee is
received by the creditor.
2. By surety’s death: According to Section 131, the death of the surety operates, in the
absence of any contract to the contrary, as a revocation of a continuing guarantee, so far
as regards future transactions. The liability of the surety for the previous transactions,
however, remains.
3. By other modes: A continuing guarantee is also revoked —
a) By Novation (Sec. 62): When the parties agree to substitute a new contract for the old
contract or rescind or alter the old contract of guarantee, it will amount to revocation.

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 b) By variance in the terms of contract (Sec. 133): If any variation has been made in the
terms of contract of guarantee between the creditor and the principal debtor without the
knowledge or concurrence of the surety, the contract of guarantee is revoked..
c) By release or discharge of the principal debtor (Sec.134): When a creditor discharges
principal debtor from the liability, the surety also gets discharged.
d) By compounding with the principal debtor (Sec. 135).
e) By creditor’s act or omission impairing surety’s eventual remedy (Sec. 139): Any act
or omission by the creditor which repairs the eventual remedy of the surety against the
debtor amounts to revocation of the contract of guarantee.
f) By loss of security (Sec. 141): When a creditor loses security under the contract, the
surety gets discharged to the extent of the value of that security.
e) Invalid guarantee: If the guarantee is not covered by the contracts of absolute faith, the
surety is not absolved of his obligation merely by proving that he was unaware of the
contract between the principal debtor and the creditor. But the surety has the right to be kept
informed by the party for whom he is giving the guarantee about the duration and amount of
the guarantee. A guarantee becomes valid in the following situations:
i) Guarantee obtained by misrepresentation (Sec. 142): Any guarantee which has been
obtained by means of misrepresentation made by the creditor, or with his knowledge and
assent, concerning a material part of the transaction, is invalid.
ii) Guarantee obtained by concealment (Sec. 143): Any guarantee which the creditor has
obtained by means of keeping silence as to the material circumstances is invalid.
iii) Guarantee on the condition of joining co-sureties (Sec.144): Where a person gives a
guarantee upon a contract that a creditor shall not act upon it until another person has
joined in it as co-surety, the guarantee is not valid if that other person does not join. This
means if the surety agrees to be only one of several co-sureties, he will not be liable
unless the other execute the guarantee.
1.11.10 Liability of Surety
Section 128 of the Contract Act defines the nature and extent of surety’s liability.
1. Liability of surety is of secondary nature: Ina contract of guarantee, the principal debtor
is primarily liable to pay or discharge liability. It is only at his default, the liability of the
surety arises and he may be called upon to discharge it. The creditor is not required to give
any notice to this effect to the surety.

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 2. Liability of the surety is contingent: In a contract of guarantee, the liability of the surety
is contingent or conditional in nature. It may or may not arise when the principal debtor
commits default. And it is not certain that he will default. In practice, generally he
discharges his liability to the satisfaction of the creditor.
3. Liability of the surety is immediate in nature: Once the principal debtor commits
default, immediately the creditor may proceed against the surety. It is not necessary that he
should first exhaust his remedies against the principal debtor. Thus, on default by the
principal debtor, the creditor instead of suing the principal debtor can file a suit against the
surety.
4. Liability of surety is ‘co-extensive’:In a contract of guarantee, the liability of the surety is
co-extensive with that of the principal debtor. He is liable for those sums that the principal
debtor is liable. His liability cannot be more than that of the principal debtor. In case the
principal debtor is scaled down or extinguished by the creditor or by the operation of the
law, either in whole or in part, the liability of the surety would also be reduced or
extinguished to the same extent.
5. Surety may limit his liability: Though the liability of the surety is co-extensive with that
of principal debtor, he has a right to limit his liability. He can do this by declaring it
expressly at the time of making the contract. In such an instance, the liability of the surety
will not go beyond the limit as declared by him.
6. Liability in continuing guarantee: In the case of continuing guarantee, the liability of the
surety extends to a series of transaction over a period of time and not to a specific number
of series but to any number of them. It makes the surety liable for unpaid balance at the end
of guarantee.
7. Liability of the surety where the original contract between the principal debtor and
the creditor is void or voidable: In a contract of guarantee, there are two independent
contracts, one between the principal debtor and the creditor and another between the
creditor and the surety. Since the law does not treat the principal debtor and the creditor is
void, the surety will be liable as if he were the principal debtor.
1.11.11 Discharge of Surety from Liability
A surety is said to be discharged when his liability comes to an end.The liability of a surety
comes to an end under the following circumstances:
1. Revocation by notice (Section 130): In case of continuing guarantee, a surety is discharged
from liability when he gives due notice to the creditor in respect of any future transactions. In

36
 such a case, the surety would not be responsible for future transactions which may be made
by the principal debtor after the surety has revoked the contract of guarantee.
2. Discharge by variation in terms of contract (Section 133): If a variation is made in the
terms of the contract between the principal debtor and the creditor, without the surety’s
consent, the surety is discharged from liability as to transactions made after the variance. But
the variation must be such as materially affects the position of the surety.
3. Revocation by death (Section 131): The death of the surety operates as a revocation of the
continuing guarantee, in the absence of a contract to the contrary, so far as regards future
transactions. But such revocation does not affect transactions which were executed prior to
the death of the surety.
4. Release or discharge of principal debtor (Section 134): This section provides for two kinds
of discharge from liability.
a) If the creditor makes any contract with the principal debtor by which the latter is
released, the surety is discharged. But if the principal debtor is discharged in insolvency,
this will not operate as a discharge of the surety.
b) The surety is also discharged by any act or omission of the creditor, the legal
consequence of which is the discharge of the principal debtor.
5. Discharge of surety on composition or extension of time or promise not to sue (Sec.
135): This section provides three modes of discharge from liability, namely —
a) Composition with principal debtor: The liability of the surety will be discharged where
a creditor in composition with his principal debtor accepts a lesser amount in full
satisfaction of his claim.
b) Promise to give time: A contract between the creditor and the principal debtor by which
the creditor promises to give time to the principal debtor discharges the surety
c) Promise not to sue: Where the creditor under an agreement with the principal debtor
promises not to sue him, the surety is discharged.
6. By creditor’s act or omission impairing surety’s eventual remedy (Sec.139): A surety is
discharged if the creditor does any act which is inconsistent with the rights of the surety or
omits to do any act which his duty to the surety requires him to do and the eventual remedy
of the surety himself against the principal debtor is thereby impaired. It is the duty of the
creditor not to do anything which is inconsistent with the rights of the surety.

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7. By the creditor losing his security (Section 141): Where the creditor loses or parts with the
securities without the consent of the surety, the surety is discharged to the extent of the value
of securities.
8. By concealment or misrepresentation (Section 142 and 143): Where a surety is induced to
enter into a contract of guarantee by a misrepresentation or concealment on the part of the
creditor concerning a material part of the transaction, such misrepresentation or concealment
operates to discharge the surety from his liability on the guarantee. Sections 142 & 143 will
not apply if the misrepresentation or concealment is by debtor and creditor has no knowledge
of it.
9. By the failure on the part of some person or persons to join the surety (Sec.144): Where
a person gives a guarantee upon a contract that the creditor shall not act upon it until another
person has joined in it as co-surety, the guarantee is not valid if that other person does not
join.
1.11.12 Rights of Surety
Under the Indian Contract Act, a surety has the following rights against the principal debtor,
the creditor and the co-sureties:
A. Rights against principal debtor: The surety can exercise the following two rights against
the principal debtor:
a) Right of subrogation (Sec. 140): When the principal debtor has committed the default
and the surety pays the debt to the creditor, the surety will stand in the shoes of the
creditor and will be invested with all the rights which the creditor had against the debtor.
b) Right to claim indemnity (Sec. 145): in every contract of guarantee, there is an implied
promise by the principal debtor to indemnify the surety and the surety is entitled to
recover from the principal debtor all payments properly made. After the surety makes
payment under the guarantee, he becomes a creditor of the principal debtor and can
recover from the latter the amount paid, he can recover that damage also.
B. Rights against the creditor
Section 141 provides the following rights to a surety against the creditor —
a) A surety is entitled to the benefit of every security which the creditor has at the time
when the contract of suretyship is entered into irrespective of whether the surety knows
of the existence of such security or not; and
b) If the creditor loses or without the consent of the surety parts with such security, the
security is discharged to the extent of the value of the security.

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 c) The surety has a right any time before the guaranteed debt has become due and before he
is called upon to pay, to require the creditor to sue the principal debtor. However, the
surety will have to indemnify the creditor for any expenses or loss resulting there from.
d) The surety is entitled, on being sued by the creditor, to rely on any set off or counter-
claim which the debtor might possess against the creditor.
C. Rights against co-sureties
Right of contribution: When a debt is guaranteed by two or more sureties, they are called
co-sureties. The co-sureties are liable to contribute, as agreed, towards the payment of the
guaranteed debt. When one of the co-sureties makes payment to the creditor, he has a right to
claim contribution from the other co-surety or co-sureties. The doctrine of contribution
applicable here is not founded on contract but on equity i.e., there is equality of burden and
benefit as between co-sureties. This rule is contained in Secs. 146 and 147.
a) Co-sureties liable to contribute equally (Sec. 146): Where there are two or more co-
sureties for the same debt or duty and the principal debtor makes a default, the co-
sureties, in the absence of any contract to the contrary are liable to contribute equally to
the extent of the default. This principle will apply whether their liability is joint oe
several, and whether their liability arises under the same or different contracts, and
whether with or without the knowledge of each other.
b) Liability of co-sureties bound in different sums (Sec.147): Where the co-sureties have
agreed to guarantee different sums, they have to contribute equally subject to the
maximum amount guaranteed by each one. The fact that the sureties are liable jointly or
severally under one contract or several contracts, or without the knowledge of each other,
is immaterial.
As between the co-sureties, the right of contribution arises only when a co-surety has
paid more than he is liable to pay. And if a co-surety obtains from the creditor any
security of the principal debtor, the other co-sureties have a right to share in the proceeds
of the security. To, sum up, it may be said that, between co-sureties, there is equality of
burden and benefit.
c) Release of a co-surety (Sec. 138): Where there are co-sureties, a release by the creditor
of one of them does not discharge the others, neither does it free the surety so released
from his responsibility to the other sureties.
1.12 BAILMENT

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1.12.1 Meaning: The term Bailment is derived from a French word “ballier” which means ‘to
deliver’. It means any kind of ‘handing over’ of goods from one person to another. Bailment
implies ‘voluntary change of possession from one person to another’. It involves change of
possession and not transfer of ownership. It denotes a contract resulting from delivery. Section
148 of the Contract Act defines bailment as the delivery of goods by one person to another for
some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or
otherwise disposed of according to the directions of the person delivering them. The person who
delivers the goods is called the bailor and the person to whom they are delivered is called bailee.
Common examples of bailment are giving cloth to the tailor to make a coat, delivering a car for
repair, delivering goods to a railway company for carriage from one place to another, etc.
Sections 148 to 181 contained in Chapter IX of the Contract Act deal with the law relating to
bailment. The Contract Act deals with the general principles relating to a contract of bailment
and some special types of bailment, namely, pledges, repair and finder of lost goods. The rest are
dealt with under other Acts namely Carriers Act, Railways Act, etc.
1.12.2 Definition of Contract of Bailment
A contract of bailment, like a contract of indemnity or guarantee, is a special type of business
contract. A contract of bailment is a contract in which one person delivers some goods for some
purpose and, when the purpose is accomplished, the goods are returned or otherwise disposed of
according to the directions of the person delivering them. A contract of bailment is one in which
a specific property, and the rights to it, of one person is transferred to another for a specific
period. The ownership of such property or goods remains with the person owning the property,
but the right of possession is transferred to the other person.
1.12.3 EssentialFeatures of Bailment
The essential features of bailment as stated in Section 148 of the Contract Act are as follows:
(i) Delivery of goods: The first important feature of bailment is the delivery of goods from one
person to another. Delivery involves change of possession from one person to another and not a
change of ownership. Mere custody without possession does not create bailment.
(ii) Delivery of goods must be for some purpose. Section 148 requires that there must not only
be a delivery of goods, but the delivery must be for some purpose. Where some goods are
delivered by mistake, there is no bailment. Delivery of goods being for a purpose, the bailee is
bound to return the goods as soon as the purpose is achieved.

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(iii) Contract: Bailment is based upon a contract between the parties. The relationship of bailer
and bailee is the creation of a contract. The contract may be expressed or implied. In certain
exceptional cases, bailment is implied by law as between a finder of goods and the owner.
(iv) Movable goods: The bailment can only be of movable goods. Money is not included in
movable goods. Transfer of immovable property does not constitute bailment.
(v) Return of goods: Bailment of goods is always for some purpose and is subject to the
condition that when the purpose is achieved the goods will be returned to the bailor or disposed
of according to his directions. If there is no contract to deliver back or otherwise to dispose of the
goods according to his directions, there is no bailment at all.
1.12.4 Kinds of Bailment
Bailment may be classified under the following heads:
1. Voluntary and Involuntary Bailments: Voluntary bailment is the outcome of an express
contract between the parties, whereas involuntary bailment arises by the operation of law.
Examples of involuntary bailment are in case of finder of goods, person to whom goods have
been sent wrongly or in excess of the quantity ordered or bailee’s heirs in case of bailee’s
death.
2. Gratuitous and non-gratuitous bailment: Where the bailee keeps the goods for the bailor
without reward, it is a gratuitous bailment. Where some consideration passes between the
parties, it is a non-gratuitous bailment or bailment for reward e.g., a motor car let out for hire,
goods given to a carrier at a price, articles given to a person for being required for
remuneration, etc.
3. Bailment may also be classified in accordance to the benefit derived by the parties. Thus, a
bailment may be —
a) For the exclusive benefit of the bailor, as the delivery of some valuables to a neighbor for
safe custody, without charge.
b) For the exclusive benefit of the bailee, as the lending of a bicycle to a friend for his use
without charge.
c) For the mutual benefit of the bailor and the bailee, as the hiring of a bicycle or giving of
a watch for repair. In these cases, consideration passes between the bailor and the bailee.

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1.12.5 Rights of a Bailor
(i) Enforcement of bailee’s duties: As a matter of fact, duties of the bailee are rights of the
bailor. A bailor can enforce such rights in a court of law. A bailor has the following rights
against the bailee:
(a) Right to claim compensation for loss caused to the goods by negligence of the bailee.
(b) Right to claim compensation for unauthorised mixing of boiled goods with the bailee’s
own goods.
(c) Right to claim damages for unauthorised use of goods.
(d) Right to demand goods back after the expiry of purpose or period.
(e) Right to claim any natural accretion to the goods bailed.
The following rights are provided to the bailor by the Contract Act.
(ii) Right of termination (Section 153): A contract of bailment is voidable at the option of the
bailor, if the bailee does any act with regard to the goods bailed, inconsistent with the conditions
of the bailment. In such a case, the bailor can terminate the bailment.
(iii) Restoration of goods lent gratuitously: When goods are lent gratuitously the bailor can
demand their return whenever he pleases, even though he lent it for a specified time or purpose.
But if the bailee suffers any loss exceeding the benefit actually derived by him from the use of
such goods because of premature return of goods, the bailor shall have to indemnify the bailee.
(Sec. 159)
(iv) Right to file a suit against any wrong-doer :If a third party does some wrongful act and
deprives the bailee from the use of goods bailed or does some injury to the goods bailed, the
bailor has a right to file a suit against the wrong-doer and claim compensation from him (Sec.
180).
1.12.6 Rights of a Bailee
The duties of a bailor are the rights of the bailee. The bailee can, by law, enforce the bailor to
honour his commitment in the case of a default. Under the provisions of the Indian contract Act,
the rights of the bailee are as under:
i) Bailment by several joint owners: If several joint owners of goods bail them, the bailee may
deliver them back to or according to directions of, one joint owner, without the consent of all,
in the absence of an agreement to the contrary (Secction 165).
ii) Right to Compensation (Section 164 and 166): If the bailor has no right to bail the goods or
to receive them back or to give directions regarding them and consequently the bailee is
exposed to some loss, the bailee has the right to damages from the bailor.

42
iii)Right to Remuneration: The bailee is entitled to lawful charges for providing services. But
where the goods are bailed and work is to be carried on them by the bailee, and the bailee is to
receive no remuneration, the bailee is entitled to claim the necessary expense incurred by him.
This right can be claimed by gratuitous bailee only (Sec 158).
iv) Right to Claim Damages: The bailee has a right to known the faults in the goods bailed to
him, of which the bailor is aware and which materially interfere with the use of them or
expose the bailee to extraordinary risks. A bailee is entitled to receive compensation from the
bailor for any loss or damages arising directly from such faults in the goods bailed. (Sec. 150).
v) Right of third person claiming goods bailed: If a person, other than the bailor, claims the
goods bailed, the bailee may apply to the court to stop delivery of goods to the bailor and to
decide the title to the goods (Section 167).
vi) Right to inter-plead: Under the provisions of sections 166 and 167, if the title of the bailor to
the goods is defective, and the bailee, in good faith, delivers them back to, according to the
directions of the bailor, the bailee is not responsible to the owner of goods for such delivery.
If a person other than the bailor claims the goods bailed, the bailee may apply to the court to
stop the delivery of goods to the bailor and to decide the title of goods.
vii) Right to Sue:Bailee can sue any person who has wrongfully deprived him of the use or
possession of the goods bailed or has done them an injury. His remedies against wrong doers
are the same as those of the owner. An action may, therefore, be brought by the bailee or the
bailor. (Sec. 180)
viii) Right against premature termination of bailment: According to Section159, when the
goods are lent gratuitously, if the bailor demands the return of goods before the expiry of the
period of bailment, and the bailee suffers a loss in such return that exceeds the benefit
actually derived by him from the use of such goods, the bailee has the right to claim such
expense from the bailor. The bailee has this right only when he has acted as per the
directions of the bailor for the duration of bailment, and the loss to him by premature
termination is greater than the profit he has made during the period the goods were in his
custody.
ix) Right of lien: The bailee enjoys the right to lien too. According to section 170, where the
legal charges of the bailee in respect of the goods bailed have not been paid, the bailee may
retain the goods. The right of the bailee to retain the goods is known as ‘particular lien’. It is
important to note here that the bailee can only retain the goods — he cannot sell the goods.
According to Section 171, some specific types of bailees have the right to the goods or

43
 property (which is in their possession) until all their claims are satisfied, even if the claims
are not with respect to the goods or property being held under bailment. General lien is
available only to banks, factors, wharfingers, attorneys of the High Court and brokers of
insurance policies.
1.12.7 Duties of a Bailor
The duties and responsibilities of a bailor are enumerated below:
(i) Duty to disclose known defects: According to Section 150, it is the duty of the bailor to
point out all the defects in the goods that he is delivering which are known to the bailor or
which can cause damage to the bailee if he is unaware of such defects. If the bailor does not
make such disclosure, he is responsible for any damage caused to the bailee by such faults.
In case the goods are bailed for hire, the duty of the bailor is still greater. He is responsible
even for those faults which are not known to him. In gratuitous bailment, however, the
bailor is responsible only for those faults which are known to him and which are not
disclosed.
(ii) Duty to bear extraordinary expenses of bailment: Where the bailment is gratuitous and
the bailee is to receive no remuneration, the bailor shall pay the bailee all the necessary
expenses incurred for the purpose of bailment (Sec 158).
(iii) Duty to indemnify bailee: Under Section 164, a bailor is responsible to the bailee for any
loss due to his imperfect title in the goods bailed. As such the bailee has a right to be
indemnified by the bailor when the latter’s title is defective.
(iv) Duty to receive back the goods: The bailor is under a duty to receive back the goods when
they are returned by the bailee on the expiry of the term of bailment or on fulfilment of the
purpose of bailment.
(v) Duty to bear normal risks: It is the duty of the bailor to bear the risk of normal loss,
deterioration and destruction of the things bailed if the bailee has taken reasonable care of
the things bailed.
(vi) Duty to indemnify bailee for loss in case of premature termination of gratuitous
bailment: A gratuitous bailment can be terminated by the bailor at any time even though the
bailment was for a specified time or purpose. But in such a case, the loss accruing to the
bailee from such premature termination should not exceed the benefit he has derived out of
the bailment. If the loss exceeds the benefit, the bailor shall have to indemnify the bailee
(Sec. 159).

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1.12.8 Duties of a Bailee
i) Duty of reasonable care: According to Section 151, a bailee is under a duty to take as
much care of the goods entrusted to him as a man of ordinary prudence would take of his
own goods of similar bulk, quality and value. The duty of the bailee starts as soon as the
bailee accepts delivery or receives property.
ii) Duty not to make unauthorised use of goods: Goods must be used by the bailee strictly
for the purpose for which they have been bailed to him. An unauthorised use of goods would
make the bailee absolutely liable for any loss or damage to the goods. Even an act of god or
inevitable accident would be of no defence. (Sec.154).
iii) Duty not to mix bailor’s goods with his own goods: A bailee is under a duty not to mix the
goods bailed with his own goods. If he mixes up his own goods with those of the bailor,
following rules shall apply.
a) Section 155 provides that if the bailee, with the consent of the bailor mixes the goods of the
bailor with his own goods, the bailor and the bailee shall have an interest in proportion to in
their respective shares in the mixture thus produced.
b) Section 156 provides that where goods are mixed without the consent of the bailor, and if the
goods can be separated or divided, the property in the goods will remain in the parties
respectively. The bailee is bound to bear the expenses of the separation or division and also
any damage arising from such unauthorised mixing.
c) Where the goods mixed cannot be separated, Section 157 becomes applicable. In such a case,
the bailor is entitled to be compensated by the bailee for the loss of the goods.
iv) Duty not to set up any adverse title against the bailor: A bailee is not authorised to set up
the plea of justertii, that is to say, that the goods belong to a third person. The bailee is
estopped from challenging the right of the bailor to receive the goods back. (Sec. 147 of the
Indian Evidence Act, 1872).
v) Duty to return any accretion to the goods: A bailee is bound to deliver to the bailor any
increase or profit accruing from the goods bailed. Section 163 provides that the bailor is
entitled to the profits accruing from the goods bailed unless there is a contract to the
contrary.
vi) Duty to return the goods: Section 160 imposes a duty on the bailee to return or deliver the
goods bailed. He must deliver back the goods as soon as the time for which they were bailed
has expired or the purpose for which they were bailed has been accomplished. If he failed to

45
 so, he is responsible to the bailor for any loss (Sec.161) notwithstanding the exercise of
reasonable care on his part.
vii) Duty not to do any act inconsistent with the terms of bailment: According to Section
153, if the bailee does any act with respect to the goods in bailment which is inconsistent
with the terms of the contract, the bailor, if he so desires, can terminate the contract of
bailment and recover the goods under bailment.
1.12.9 Bailee’sLien
Lien signifies the right of a person, who has possession of the goods of another, to retain such
possession until a debt due to him has been satisfied. It is a right in one person to retain that
which is in his possession belonging to another until certain demands of the person in possession
are satisfied.
Possession is essential for exercising the right of lien. It is therefore also called ‘possessory lien’
in order to create a lien the possession must be lawful, not for a particular purpose and
continuous. If the right to possession terminates, the lien also terminates. The right of lien arises
by statute, or by express or implied contract, or by a general course of dealing between the
parties in a particular trade. It implies that, under lien, the right is limited to the possession of
some item or goods and does not extend to its sale, or making any change to such item or goods.
Bailees’s lien may be of two types — Particular lien and General lien.
Particular Lien: A particular lien is a right of the bailee to retain the goods in his custody until
he receives due remuneration for the services rendered in respect of them. Where a bailee has
spent some labour or money on the goods bailed, he has a right of retaining possession of those
goods until his claim in respect of them is satisfied. Sec 170 of the Contract Act deals with
bailee’s particular lien.
According to the provisions of law, the following persons are the holders of particular lien:
a) Finders of Goods — Section 168 b) Bailees — Section 170
c) Pawnees — Section 173 d) Agents — Section 221
e) Unpaid Sellers — Section 71, Sale of Goods Act
General Lien: A general lien implies the right to retain all the goods or any property (which is in
the possession of the holder) of another until all the claims of the holder are satisfied. This is a
right to retain the property of another for a general balance of account. In general lien, it is not
essential that the demand is related to something which is in possession of the holder. It can be
related to a past or a present liability of the person whose property is in lien. A general lien is a
privilege which is available to selected categories of people by law. The Indian Contract Act

46
specifies the following persons who are entitled by law to general lien as per section 171 —
bankers, factors, wharfingers (those who have the care of, or own, a structure built especially
along the shore, for loading or unloading vessels), attorneys of High Courts, Insurance brokers
and others who give such rights by a written contract. These persons are entitled, in the absence
of a contract to the contrary, to retain possession of the goods bailed to them as security until
their claims are fully satisfied.
1.12.10 Termination of Bailment
A contract of bailment terminates in the following cases:
1. If the contract of bailment is for a specified period, the bailment terminates as soon as the
specified period expires.
2. If the contract of bailment is for a specific purpose, the bailment terminates as soon as the
purpose is achieved.
3. Where a bailee does something which is inconsistent with the terms of the contract, the
bailment is terminated (section 153).
4. Where the bailment is gratuitous, the bailor may terminate the bailment even before the
specified time or before the purpose is fulfilled (\Section 159).
5. The death of bailor or bailee terminates a gratuitous bailment (section 162).
1.13 PLEDGE
1.13.1 Meaning and Definition
According to Section 172, the bailment of goods as security for payment of a debt or
performance of a promise is called ‘pledge’. The bailor is, in this case, called the ‘pledger’
or’pawnor’ and the bailee is called the ‘pawnee’ or ‘pledgee’. For example, Mahesh delivers his
jewellery to rakesh as a security for a loan of Rs. 1,00,000. This is a contract of pledge. Mahesh
is the pawnor and Rakesh is the pawnee.
A pledge is a bailment for security. If the purpose of bailment is to provide security for the
payment of a loan or the performance of a promise, then such bailment is called a pledge. In a
contract of pledge, the pawnor delivers the goods to the pawnee. Such delivery may be actual or
constructive, but it can only be of movable property. A pledge for the immovable property is
called ‘mortgage’. If because of the bulk of the property or for some other reason, actual delivery
is impracticable, a symbolic delivery will suffice (as for example, the delivery of the keys to a
safe deposit box.
1.13.2 Essentials Features of a Valid Pledge
The essential features of a valid pledge are:

47
1. Pledge is only of movable goods: movable goods are any movable item, like valuables or
jewellery, shares of companies, documents or government securities. Immovable property is
beyond the scope of a pledge.
2. Pledge involves judicial possession of goods: Only a person who is the lawful owner of a
movable property can pledge such property. Mere possession of goods does not give the
possessor a right to pledge such goods. For example, an employee who is in possession of
some goods of the employer cannot pledge the goods he possesses because he does not have
judicial possession of the goods.
3. Pledge involves transfer of possession: In a contract of pledge, the goods pledged must be
transferred from the pawnor (pledger) to the pawnee (pledgee). The transfer can be actual or
constructive, but a pledge cannot be without a transfer.
4. Pledge can only be of a saleable commodity: This is an essential feature of a contract of
pledge. The main reason for this is that, if the pawnor is not able to clear his debt, the pawnee
can recover the amount of the loan by selling the goods that have been pledged to him.
Therefore, anything that is not saleable cannot be pledged.
5. Pledge involves return of goods: When the object of the pledge is accomplished, or after a
stipulated time, the pawnee returns the goods in his possession to the pawnor, the contract is
terminated.
1.13.3 Rights and Duties of Pawnor and Pawnee
Rights and duties of pawnor and pawnee are almost similar to those of bailor and bailee.
A. Rights of Pawnor or Pledger
1. Right to get back the goods pledged: According to section 160and 161, on the performance
of promise at the stipulated time or repayment of loan and interest, if any, the pawnor is
entitled to get back the goods pledged with the pawnee.
2. Right to increase or profit: According to Section163, if there is any increase in the value of,
or profit from, the goods in pledge, the pawnor has the right to such increase or profit.
3. Right to compensation: If the goods under pledge are not taken care of, or are not used
rightly and are damaged or deteriorated because of it, the pawnor has the right to claim
compensation for such damage or loss.
4. Right to get profit in case of sale: According to Section176, in case of default on the part of
the pawnor, if the goods under pledge are sold by the pawnee and the amount received from
such sale exceeds the amount of loan plus interest payable, the pawnor has the right to get
back the surplus.

48
5. Defaulting pawnor’s right: According to section 177, if there is a time limit fixed for the
repayment of a loan or the performance of a promise, and the pawnor makes a default in
doing that, then he has the right later, before the goods are actually sold, to get the goods
released on the payment of the amount of loan plus the expenses incurred by the pawnee
because of such default.
6. Preservationand maintenance of the goods: The pawnor has a right to see that the pawnee,
like bailee, preserves the goods pledged and properly maintains them.
7. Rights of an ordinary debtor: The pawnor has, in addition to the above rights, the rights of
an ordinary debtor which are conferred on him by various statutes meant for the protection of
debtors.
B. Duties of Pawnor or Pledger
The duties of a pawnor or pledger are as under:
1. To pay the debt: It is the duty of the pawnor to pay his debt and the interest on it by the date
and in the manner agreed to in the contract.
2. To disclose the defects in goods: According to Section 150, the pawnor is obliged to
disclose the defects, if any, are in his knowledge that may cause inconvenience or harm to the
pawnee, in the goods at the time of making the pledge.
3. To repay the necessary expenses: According to Section 175, if the pawnee has, during the
course of the contract, incurred any reasonable expense on the maintenance or upkeep of the
goods in pledge, the pawnor is duty–bound to pay such expense to the pawnee.
4. Duty after sale: In case of default in the payment of loan on the part of the pawnor, if the
goods under the pledge are sold and the sale proceeds are less than the amount of loan plus
interest payable, the pawnor is bound by law to pay such difference.
C. Rights of Pawnee or Pledgee
The rights of a pawnee or pledge are as under:
1. Right of retainer to goods: According to Section173, the pawnee has the right to retain the
goods till the amount of the loan and the interest payable is paid to him by the pawnor. But
Section 174 clearly specifies that the pawnee is entitled to retain only such goods that have
been pledged against a particular loan and the pawnor cannot retain the goods against a loan
other than that for which the goods were pledged.
2. Right of retainer for subsequent advances: When the pawnee lends money to the same
pawnor after the date of the pledge, it is presumed that the right of retainer over the pledged

49
 goods extends to subsequent advances also. This presumption can be rebutted by a contract
to the contrary.
3. Right to extraordinary expenses: According to Section 175, the pawnee is entitled to
receive from the pawnor any extraordinary expenses incurred by him for the preservation of
the goods pledged.
4. Right in case the pawnor makes default: According to Section 176, if the pawnor defaults
to redeem his pledge, the pawnee can exercise the following rights:
a) File a suit against the pawnor for breach of promise and may retain the goods in his
possession as collateral security.
b) Sell the goods pledged after giving the pawnor a reasonable notice of sale.
c) Recover from the pawnor any deficiency arising on the sale of the goods by him. But he
shall have to hand over the surplus, if any, realized ion the sale of the goods to the
pawnor.
5. Right against true owner in case the pawnor’s title is defective: If the pawnor has
obtained the possession of good pledged by him under a voidable contract, i.e., by fraud,
undue influence or coercion and the contract has not been rescinded at the time of the pledge,
the pawnee acquires a good title to the goods provided he acts in good faith and is not aware
of the pawnor’s defect of title. (Sec. 178-A).
D. Duties of Pawnee or Pledgee
The duties of pawnee includes the following:
1. To take reasonable care of goods pledged: The pawnee is bound under Section 151 to take
reasonable care of the goods that are pledged with him.
2. Not to make improper use of goods pledged: According to Section 154, the pawnee should
not make improper use of goods under his control under a pledge.
3. Not to mix the goods pledged with his own goods: it is the duty of the pawnee under
Sections 156 and 157 not to mix his own goods with the goods of the pawnor pledged to him.
4. To return the goods pledged after the performance of the contract: According to Section
160, after the payment of the loan or the performance of his promise by the pawnor, the
pawnee is obliged to return the goods under pledge. Section 163 stipulates that the pawnee
should also return the increase in the value of goods to the pawnor.
If the pawnee defaults in the performance of his duties, then he is responsible to the pawnor
just as a bailor is responsible to the bailee.
1.14. SUMMARY

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 Law: Law means a “set of rules”. Broadly speaking, Law may be defined as the rule of
conduct recognised and enforced by the state to control and regulate the conduct of
people , to protect their property and contractual rights with a view to securing justice,
peaceful leaving and social security.
Mercantile law: it is a part of civil law which deals with the rights and obligations of
mercantile persons arising out of mercantile transactions in respect of mercantile
property.
Contract: Section 2(h) of The Indian Contract Act defines a contract as, “an agreement
enforceable at law.”
Essentials of valid contract: The following are the essential element of a valid contract:
i) offer and acceptance ii) Agreement iii) Competent Parties iv) Free consent
v) Consideration vi) Legal object Vii) Legal formalities viii) Certainty of meaning ix)
Possibility of Performance x) Not declared to be void

Quasi Contract: These contracts are created by the circumstances where one person has done
something for another or paid money on his behalf, and the other persons enjoyed thebenefit of
the same. It is a kind of contract by which one party is bound to pay money in consideration of
something done or suffered by the other party.
Contract of Indemnity: A contract of Indemnity refers to a promise made by one person to
make good any loss or damage another has incurred or may incur by acting at his request or for
his benefit.
Contract of Guarantee: According to section 126, a contract of a guarantee is a contract to
perform the promise or to discharge the liability of a third person in case of his default.
Contract of bailment: The term bailment is derived from a French word baillior which means to
deliver. It means any kind of handing over. It involves change of possession and not transfer of
ownership. Section 148 of the Contract act defines bailment as the delivery of goods by one
person to another for some purpose upon a contract that they shall,when the purpose is
accomplished, be returned or otherwise disposed off according to the directions of the person
delivering them.
Bailor: The person who delivers the goods is called bailor.
Bailee: the person to whom they are delivered is called bailee.
Lien: Lien is a right of aperson to retain that which is in his possession and which belongs to
another, until the demand of a person in possession are satisfied.
Pledge: Pledge is the bailment of goods as security for the payment of a debt or performance of a
promise. Bailor in this case , is called the ‘pawner’ and thebailee is called the ‘pawnee’.
1.15. SELF ASSESSMENT QUESTIONS
1) Define the term contract . What are the essentials of valid contract?
2) A contract is defined as an agreement enforceable by law. Discuss
3) All contracts are agreements but all agreements are not contracts . Explain
4) Explain the meaning of the term ‘law’. Differentiate it from Mercantile Law.
5) “ The law of contract is not the whole law of agreements nor is it the whole law of
obligations”-(Salmond). Comment
6) ‘A contract is a contract from the time it is made and not from the time performance is
due’. Comment
7) Explain clearly the meaning of acceptance of an offer when each communication of
acceptance not necessary? How does an offer lapse?

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8) What is acceptance to an offer? Discuss the legal rules for a valid acceptance.
9) Give at least one example when a contract is valid without consideration.
10) Define consideration . Discuss rules relating to consideration.
11) State the exceptions to the rule “ no consideration no contract”.
12) What is the contract of indemnity? Give instances of liability to indemnify arising by
operation of law.
13) Define a contract of guarantee. How and in what respect is it different from a contract of
indemnity?
14) Explain the rights of surety against creditor .
15) What are the differences between a contract of guarantee and a contract of indemnity?
16) Define bailment.
17) What are the requisite of a contract of bailment? Explain
18) Explain the meaning of gratuitous and non-gratuitous bailment.
19) Define pledge. In what way does pledge differ from bailment.
20) What do you mean by lien ?and differentiate between general lien and particular lien.

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 UNIT-2
SALE OF GOODS ACT 1930
AIMS AND OBJECTIVE
After studying this lesson you should be able to understand :-
 The meaning of contract of sale
 Describe the meaning of agreement to sale
 Differentiate between conditions and warranties
 The transfer of ownership in goods
 Performance of contract of sale
 Enumerate the rules regarding the transfer of ownership
 Describe the rights of an unpaid seller

CONTENT
2.1:Introduction
2.2. Contact of Sale
2.3. Condition and Warranties
2.4. Doctrine of Caveat Emptor
2.5. Transfer of Ownership
2.6. Performance of Contract
2.7. Unpaid seller and his rights
2.8. Summary
2.9. Self-Assessment Questions

UNIT_II
SALES OF GOODS ACT
2.1 Introduction
The sale of goods is the most common of all commercial contracts. The law relating to it is
contained in the Sale of Goods Act, 1930. The law came into force from July 1, 1930. The Act
extends to the whole of India except the state of Jammu and Kashmir. Before 1930, the rules
governing the sale of goods were a part of the Indian contract Act, 1872, wherein sections 76 to
123 incorporated the laws regarding the sale of goods. The presently Act contains 66 sections.
The Sales of Goods Act today incorporates all such amendments that have been made since
the act was enacted in 1930. The Act today is much wider in scope and covers all aspects of the
sale of goods. It clarifies the difference between a ‘sale’ and an ‘agreement to sell’, and covers
such issues as ‘ownership’ and ‘transfer’ of goods. It also deals with sale by auction, delivering
the goods to the transporter and the laws that govern the stoppage of goods in transportation.

53
2.2 CONTRACT OF SALE
2.2.1 Meaning and Definition
According to Section 4 (1), “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 certain price”.
According to Blackstone, when one person transfers the ownership of goods to another the
consideration of a price, a sale is have to be made.
A ‘contract of sale’ is a wide term and it includes a sale (or absolute sale) and an agreement to
sell (or conditional sale) [Sec. 4 (2)]. According to Section 4 (3), when the right of ownership of
goods is transferred from the seller to the buyer under a contract, the transaction is called a sale;
but when the transfer of ownership is to be made at some future date, or is to be made on the
fulfillment of some condition, the contract is called an ‘agreement to sell’. When the condition in
such agreement has been fulfilled, or the transfer of ownership of goods has occurred, the
agreement to sell becomes a sale. The property (ownership) in goods shall not be transferred
from the seller to the buyer until and unless some condition is fulfilled for the completion of the
contract of sale.
A contract of sale may be express i.e., made in writing or by words, or may be implied from the
conduct of the parties.

2.2.2 Essentials of a Contract of Sale

To constitute a valid contract of sale, the following essentials must be present:
1. Valid Contract:A contract of sale is just like any other contract made under Indian Contract
Act, 1872. Therefore, to constitute a valid contract of sale it should satisfy all the essentials
of a valid, contract namely a valid offer, a valid acceptance, free consent of the parties, a
valid and lawful consideration, parties must be competent to contract and lawful object etc.
2. Two parties: To constitute a contract of sale, there must be a transfer or agreement to
transfer the property in goods by the seller to the buyer. It means that there must be two
persons, one the seller and the other the buyer. ‘Buyer’ means a person who buys or agrees to
buy goods [Sec. 2 (1)]. ‘Seller’ means a person who sells or agrees to sell goods [Sec.2 (13)].
The seller and the buyer must be two different persons, for a man cannot purchase his own
goods. The parties must be competent to contract.
3. Agreement for the transfer of ownership: To constitute a valid contract of sale, there
should be immediate transfer or an agreement to transfer the general property in goods sold

54
 or agreed to be sold. It is essential to transfer the general property in the goods from the seller
to the buyer with or without physical possession of the goods.
4. Goods: The subject-matter of the contract of sale must be goods, the property which is to be
transferred from the seller to the buyer. According to section 2(7), goods means every kind of
movable property other than actionable claims and money; and includes stock and shares;
growing crops, grass, trees and things attached to or forming part of the land which are
agreed to be severed it before sale or under contract of sale.
5. 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,
as for instance goods given in exchange for goods or as remuneration for work or labour.
2.2.3 Distinction between Sale and Agreement to Sell
The distinction between a sale and an agreement to sell is very necessary to determine the rights
and the liabilities of the parties to the contract. The main points of distinction are:
1. Nature of contract: An agreement to sell is an executory contract, a contract pure and
simple and no property passes; whereas a sale is an executed contract plus a conveyance.
2. Transfer of property: In sale, the property in goods passes from seller to buyer immediately
at the time of contract and buyer becomes the owner of the goods immediately. But in an
agreement to sell, the property in goods passes from seller to buyer at some future date or
subject to the fulfillment of certain conditions.
3. Risk of loss:Unless there is a contract to the contrary, in a sale, if the goods are destroyed,
the risk of loss falls on the buyer even if the goods were in the possession of the seller
because the risk of loss passes with the ownership. But in an agreement to sell, if goods are
destroyed the risk of loss falls on the seller even if the goods were in the possession of buyer
because ownership has not passed from the seller to the buyer and the risk passes with the
ownership.
4. Consequences of the breach: On breach of an agreement to sell by the seller, the buyer has
only a personal remedy against the seller. But if after a sale, the seller breaks the contract the
buyer may sue for delivery of the goods or for damages. In an agreement to sell, if the buyer
fails to accept the goods the seller may sue for damages only and not for the price. In a sale,
if the buyer does not pay the price, the seller may sue him for the price even though the
goods are still in his possession.
5. Insolvency of the buyer: In a sale, if the buyer is adjudged an insolvent, the seller in the
absence of a lien over the goods is bound to deliver the goods to the Official Receiver or

55
 Assignee. The seller will, however, be entitled to a rateable dividend for the price of the
goods. In an agreement to sell, when the buyer becomes insolvent before he pays for the
goods, the seller may not part with the goods until he is paid for.
6. Insolvency of the seller: In a sale, if the seller becomes insolvent before the delivery of
goods, the buyer is entitled to recover the goods from the Official Receiver or Assignee as he
(buyer) is the legal owner of the goods. In an agreement to sell, if the buyer has already paid
the price and the seller becomes insolvent, the buyer can claim only a rateable dividend and
not the goods because property in them is not yet passed to him.
7. General and particular property:An agreement to sell creates a right in personam (right
against a particular individual) while a sale creates a right in rem right against the whole
world). In case of an agreement to sell the buyer and seller get remedy against each other in
case of breach of an agreement. Whereas in case of sale, the buyer gets an absolute right of
ownership and this right of the buyer is recognised by the whole world.
8. Right of re-sell: In a sale, the seller cannot resell the goods, even if he is in possession of
the goods after sale (except in certain case, as for example, a sale by a seller in possession
after sale under Sec. 30, or a sale by an unpaid seller under Sec. 54). If he does so, the
subsequent buyer does not acquire title to the goods. In an agreement to sell, the seller may
sell the goods since ownership is with the seller.
9. Right of Usage: In a sale, the buyer has the right to use the goods he buys, i.e., he becomes
the sole owner of goods and can use them in any manner. But an agreement to sell being only
a contract between the buyer and seller, it does not give the buyer the right to use the goods
till the ownership of good is transferred to the buyer.
2.2.4 Formation of a Contract
Section 5 lays down the formalities of the contract of sale as under:
a) A contract of sale is made by an offer to buy or sell goods for a price. The contract may
provide for the immediate delivery of goods or immediate payment of the price or both, or
for the delivery or payment by installments, or that the delivery or payment or both shall be
postponed.
b) A contract of sale may be made in writing or by word of mouth, or partly in writing and
partly by word of mouth, or may be implied from the conduct of the parties.
2.3 CONDITIONS AND WARRANTIES
Before a contract of sale is entered into a seller frequently makes representations or statements
with reference to the goods which influence the buyer to clinch the bargain. Such statements

56
when made before entering into the contract are known as representations. Such representations
or statements differ in character and importance. Whether any statement or representation made
by the seller with reference to the goods is a stipulation forming part of the contractor is a mere
representation (such as expression of an opinion) forming no part of the contract, depends on the
construction of the contract.If there are 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.
On the other hand, if it forms an integral part of the contract and other party relies upon such a
representation, it will be stipulation within the meaning of Section 12 of the Act and may be
either treated as a condition or a warranty.
2.3.1 Meaning of Conditions and Warranties
A stipulation in a contract of sale with reference to goods which are subject matter there of, may
be a condition or a warranty. All the stipulations in a contract of sale are not of equal importance.
Some of them are essential to the main purpose of the contract which are called conditions and
some are collateral to he main purpose of the contract which are called warranties.
A. CONDITIONS: Section 12 (2) of the sale of Goods Act defines a condition as “a stipulation
essential to the main purpose of the contract, the breach of which gives right to treat the
contract as repudiated”. In other words, if an express stipulation is a part of the contract, i.e.,
its fulfillment is essential to be completed, it is deemed to be a condition. If the condition is
not met, the aggrieved party is entitled to terminate the contract. It may well be said that
‘condition’ is the foundation of the edifice of a contract of sale — the moment it is broken,
the whole edifice collapses, and the contract terminates.
Essentials of Conditions
1. It is essential to the main purpose of the contract.
2. The non-fulfillment of condition causes irreparable damage to the aggrieved party which
would defeat the very purpose for which the contract is made.
3. The breach of a condition gives a right to the aggrieved party to rescind the contract and
recover the damages for breach of condition
B. WARRANTIES: According to section12 (3), “A warranty is a stipulation collateral to the
main purpose of the contract, thee breach of which gives rise to a claim for damages but not
to a right to reject the goods and treat the contract as repudiated”. It is clear from the
definition that warranty is not an essential object of the contract; it only helps expedite the
execution of the contract.

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Essentials of Warranties
1. It is collateral to the main purpose of the contract.
2. The breach of warranty causes damage to the aggrieved party and does not defeat the main
purpose of the contract.
3. The aggrieved party can only claim the damages for breach of warranty but can not repudiate
the contract.
If the condition of the contract is violated, the contract terminates. The injured party is entitled
to repudiate the contract, to refuse the goods and if he has already paid for them, to recover the
price. But if the warranty is violated, the contract does not terminate — only the aggrieved party
can file a suit for recovery of damages only. It does not give right to reject the goods and treat
the contract as repudiated because the buyer is not solely dependent on it on a contract of sale—
he only recognizes it as being related to the contract and being helpful in its execution.
2.3.2 Difference between a Condition and Warranty
Following are the main points of distinction between the conditions and warranties:
1. Nature: condition is a stipulation which is essential to the main object of the contract
whereas warranty is a stipulation which is collateral to the main object of the contract.
2. Consequences of Breach: The breach of condition gives the aggrieved party to repudiate the
contract and claim damages from the defaulting party, whereas the breach of warranty does
not entitle the aggrieved party to repudiate the contract and only entitles the aggrieved party a
right to claim damages from the other party.
3. Legal Effect: The contract ceases to be legal on the breach of condition whereas a breach of
warranty does not have any legal effect on the contract.
4. Option of Treatment: In the case of condition, a breach of condition can be treated as a
breach of warranty as an option on the part of the aggrieved party and the aggrieved party
can only be compensated by damages it receives from the other party whereas in breach of
warranty there is no such option available to the aggrieved party i.e., breach of warranty can
never be treated as breach of condition.
2.3.4 Express and Implied Conditions and Warranties
The conditions or warranties of a contract of sale may be express or implied. The conditions and
warranties that have been specified by the parties in express words either spoken or written at the
time of making contract are called express conditions and warranties. Implied conditions and
warranties (contained in Secs. 14 to 17) are the ones that are applicable in a contract of sale by
operation of law. These are the conditions and warranties which do not form a part of contract of

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sale at the time of contract between the parties, but they automatically come into existence by
operation of law. In the case of implied conditions and warranties, the purpose of the law is to
infer the intention of the parties when making the contract because in the absence of a contract to
the contrary, such warranties and conditions are deemed to be part of the contract. 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.
A. Implied Conditions
A contract of sale has the following implied conditions:
1. Condition as to title (Section 14): Subject to a contrary intention, there is an implied
condition on the part of the seller that in the case of a sale, he has a right to sell goods and that
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. This is called condition as to title.
2. Sale by Description (Sec. 15): Where goods are sold by description, there is an implied
condition that the goods shall correspond with the description given by the seller, i.e., the
goods must be what they are described to be. If the description of the article tendered is
different in any respect, it is not the article bargained for and the other party is not bound to
take it. The word description has not been defined in the Act. It usually means a particular
class, kind or variety of goods.
3. Sale by Sample as well by Description (Sec 15): If the sale is by sample as well as by
description, it is not sufficient that the bulk of the goods shall correspond with the sample, if
the goods do not also correspond with the description. In other words, there is an implied
condition that the goods shall correspond both with the sample as well as with the description.
4. Condition as to quality or fitness[Sec. 16(1)]: Subject to the provisions of this Act and of
any other law for the time being in force, there is no implied condition as to the quality or
fitness for any particular purpose of goods supplied under a contract of sale. The buyer must
examine the goods thoroughly before he buys them in order to satisfy himself that the goods
will be suitable for the purpose for which he is buying them.
5. Condition as to merchantability[Sec. 16 (2)]: There is always an implied condition in a
contract of sale that the goods purchased should be of a merchantable quality. In order to
apply the implied condition as to merchantability, the following requirements must be
satisfied, namely :
(a) The goods should have been bought by description and

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(b) from a seller who deals in the goods of that description.
6. Sale by sample[Sec. 17]: In a contract of sale by sample, there is a term in the contract,
express or implied that the bulk of the goods are, or shall be equal to the sample. In a contract
of sale by sample, there is an implied condition.
a) that the bulk shall correspond with the sample in quality.
b) that the buyer shall have reasonable opportunity of comparing that bulk with the sample.
c) that the goods shall be free from any defect rendering them unmerchantable, which would
not be apparent on a reasonable examination of the sample.
7. Condition implied by custom or usage of trade [Sec. 16(3)]: An implied condition as to
quality or fitness for a particular purpose may be annexed by custom or usage of trade. If an
order for goods is placed with the manufacturer, it is an implied condition that the goods
supplied must be manufactured by the seller and not procured from others.
8. Condition as to Wholesomeness: When the goods are eatables and other provisions, in
addition to the implied conditions as to merchantability, there is another condition that the
goods shall be wholesome, i.e., the article should be fit for consumption and are not injurious
to the health of the consumer.
B. Implied Warranties
The implied warranties in a contract of sale are as follows:
1. Implied warranty of quiet and peaceful possession: According to Section14 (6), the
contract of sale, has an implied warranty that the buyer has the right to quiet and peaceful
possession of goods, which implies that, when the buyer has received the possession of
goods, he has the right to use and enjoy them. The implied warranty of quite possession is a
warranty against disturbance of possession. On breach of this warranty, the seller is liable to
the buyer in damages.
2. Implied warranty of freedom from charge or encumberance [Sec.14 (c)]: There is an
implied warranty on the part of the seller that the goods are free from any charge or
encumberance. A breach of this warranty will occur when the buyer discharges the amount of
encumberance.On breach of this warranty, the remedy of the buyer is to sue for damages.
3. Implied warranty annexed by usage of trade [Section 16(3)]: A warranty as to fitness for a
particular purpose may be annexed to a contract of sale by a custom or usage of trade.
4. Implied warranty to disclose dangerous nature of goods: If the goods are easily
destroyable (e.g., inflammable), or dangerous to handle, it becomes the duty of the seller to
forewarn the buyer of the danger in handling such goods so that the buyer takes specific care

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 in their usage, otherwise he will be liable in damages. That is the reason why some medicines
come with labels, warning the consumer to keep them in a cool dry place, or to use them only
according to the advice of a registered medical practitioner.
2.4 DOCTRINE OF CAVEAT EMPTOR
As a general rule, the doctrine of caveat emptor or ‘buyer beware’ is applicable in a contract of
sale, unless the contract does not specify anything to the contrary. Caveat emptor means ‘Let
the buyer beware’ i.e., in a contract of sale of goods, the seller is under no obligation to reveal
unflattering truths about the goods sold and thatordinarily, a buyer must buy goods only after
satisfying himself of their quality or fitness. If he makes a bad choice, he can’t blame the seller
and claim damage. In other words, it is not a part of the seller’s duty in a contract of sale to give
to the buyer, an article suitable for a particular purpose unless such purpose is made known to the
seller. It therefore, becomes the duty of the buyer not to take a chance but to take care and
examine the goods before he buys and satisfy himself that the goods meet his requirements.
Section 16 of the sale of Goods Act endorses this doctrine when it lays down that there is no
implied condition or warranty in a contract of sale about the quality or usability of goods
transferred under the contract for specific requirements. In other words, the seller is not bound by
any implied condition in a contract of sale about the quality and usability of goods, and the entire
responsibility rests with the buyer.
2.4.1 Exceptions to the rule of caveat emptor:
If this law is adhered to strictly to letter, there would be many buyers who would be put to
trouble. Every buyer is not clever enough or has the skill to evaluate the goods in terms of their
quality and suitability. To protect the interest of such buyers, the law provides some exceptions
to the rule (Section 16).
1. Where the buyer relies on the skill and judgement of the seller: The doctrine of caveat
emptor will not apply and the seller will be held liable for breach of implied condition as to
quality or fitness of the goods, if the buyer has known to the seller the particular purpose for
which he required the goods or how he intends to use them and the buyer has relied on the
skill and judgement of the seller, who deals in such goods.
2. Merchantable quality of goods: Where the goods are bought by description from a seller
who deals in goods of that description, there is an implied condition that goods shall be of
merchantable quality. But if the buyer has examined the goods there is no implied condition
as regards defects which such examination ought to have revealed [Sec.16 (2)].

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3. Consent by fraud: The doctrine of caveat emptor shall not apply to all those purchases
which have been made by a buyer under a contract where his consent was obtained by the
seller by fraud i.e, where the buyer relies on false representation of the seller and suffers
damages.
4. Usage of trade: An implied condition or warranty as to quality or fitness for a particular
purpose may be annexed by the usage of trade. [Sec. 16 (3)].
5. Sale by description: When the sale of goods is made by description, it involves some
implied conditions and warranties and the caveat emptor doctrine is not applicable. The
goods sold must match their description, otherwise the buyer can refuse to accept the goods
and is entitled to receive damages from the seller.
6. Sale under a patent or a trade name: in the case of contract for the sale of a specified
article under its patent or other trade name, there is no implied condition that the goods shall
be reasonably fit for any particular purpose [Proviso to Sec. 16(1)].
2.5 TRANSFER OF OWNERSHIP
A sale contract transfers the ownership of goods from one person to another in exchange for an
agreed price. There are three stages in the performance of a contract of sale of goods by a seller,
viz. the transfer of property in the goods; the transfer of possession of the goods (i.e., delivery)
and the passing of the risk. The term ‘property in goods’ should be differentiated from the term
‘possession of goods’. ‘Property in goods’ means ownership of goods whereas ‘possession of
goods’ refers to the custody or control of goods. Without the transfer of ownership of goods,
there cannot be a contract of sale. The transfer of ownership of goods from the seller to the buyer
is the core of a contract of sale and as such, it becomes important to know as to when the
property in goods passes from the seller to the buyer.
2.5.1 Meaning of Transfer of Ownership or Title
Transfer of ownership implies the transfer of all rights to the property in goods from the seller to
the buyer by virtue of which the buyer can use the goods as he desires, and this right of the buyer
cannot be restricted.
It is to be noted that transfer of ownership and transfer of possession of goods are two words
with different meanings. A person may be the owner of goods even if the goods are not in his
possession. If a person who has the right of ownership of goods sells the goods (even if they are
not in his possession), the right of ownership is transferred from the seller to the buyer of goods.
The transfer of possession of goods does not necessarily mean that property in goods has also
been transferred. Similarly, the transfer of property in goods does not essentially amount to

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transfer of possession of goods from the seller to the buyer. Transfer of possession and transfer
of ownership can occur at different times and not always be simultaneous.
2.5.2 Importance of Transfer of Ownership
Transfer of ownership from the seller to the buyer is important in a contract of sale for the
following reasons:
1. Risk follows Ownership: Unless otherwise agreed, risk follows ownership whether delivery
has been made or not and whether price has been paid or not. Thus, the risk of loss as a rule
lies on the owner. Sec. 26 provides in this regard that, unless otherwise agreed, the goods
remain at the seller’s risk until the property therein is transferred to the buyer, the goods are at
the buyer’s risk whether delivery has been made or not. But if delivery has been delayed
through the fault of either the buyer or the seller, the goods are at the risk of the party at fault.
Thus, ‘risk’ and ‘property’ or ‘ownership’ goes together.
2. Only owner can sue: When the goods are in any way damaged or destroyed by the action of
third parties, it is only the owner of the goods who can take action against them.
3. Insolvency of the seller or the buyer: In the event of insolvency of the seller or the buyer,
the question whether the Official Receiver or Assignee can take over the goods or not depends
on whether the property in the goods has passed from the seller to the buyer.
4. Suit for price: The seller can sue for the price, unless otherwise agreed, only if the goods
have3 become the property of the buyer.
2.5.3 Time When the Property Passes
When does the transfer of ownership pass from the seller to the buyer is an important issue in the
contract of sale. Normally, it is agreed between the parties when such transfer will take place;
but, in the absence of such agreement, the Act stipulates when the transfer of ownership will
deemed to be effected in a sale of contract. The primary rules for ascertaining when the property
in goods passes to the buyer are as follows:
1. Goods must be ascertained:Where there is a contract for the sale of unascertainedgoods,
no property in the goods is transferred to the buyer unless and until the goods are ascertained.
(Sec. 18). A contract to sell unascertained goods is not a complete sale, but an agreement to sell.
2. Intention of the parties: Where there is a contract for the sale of specific or ascertained
goods, the property in them passes to the buyer at the time when the parties intend it to pass
[Sec.19 (1)]. For the purpose of ascertaining the intention of the parties, regard shall be had to
terms of contract, the conduct of the parties and the circumstances of the case [Sec. 19 (2)].

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Where the intention of the parties cannot be ascertained:Where the intention of the parties as
to the time when the property in the goods is to pass to the buyer cannot be ascertained from the
contract, the rules contained in Sections 20 to 24 apply [Sec.19(3)].
1. Ascertained or Specific Goods (Secs. 20 to 22): Ascertained or specific goods refer to such
goods that have been identified or specified by the parties at the time of making the
contract, and the seller does not have to make any modification or addition to the goods. The
rules relating to the transfer of property in specific goods are as follows:
a) Goods in a deliverable state: Where there is an unconditional contract for the sale of
specific goods in a deliverable state, the property in the goods passes to the buyer when, the
contract is made. The fact that the time of payment of the price or the time of delivery of
goods, or both, is postponed does not prevent the property in goods passing at once (Sec.20)
Goods are deemed to be in a deliverable state when the buyer agrees to accept the delivery of
goods and the goods are in a condition that they can be delivered.
b) Goods not in a deliverable state: Section 21 lays down that where there is a contract for the
sale of specific goods not in a deliverable state i.e., the seller has to do something to the
goods to put them into a deliverable state, the property does not pass until such thing is done
and the buyer has notice of it. Something means an act, like collecting the goods, severing
the goods, or packing or loading the goods or filling them in containers, etc.
c) When the price of goods is to be ascertained by weighing, testing, etc.: Where there is a
contract for the sale of specific goods in a deliverable state, but the seller is bound to weigh,
measure, test or do some other act or thing with reference to the goods for the purpose of
ascertaining the price, the property does not pass until such act or thing is done and the buyer
has notice thereof (Sec.22).
2. Unascertained Goods (Sec. 23): Until goods are ascertained there is merely an agreement to
sell. Unascertained goods refer to such goods that have not been identified when the contract
is made; only a description of the goods has been given in the contract. The rules governing
the transfer of ownership of unascertained goods are as follows:
a) Goods must be ascertained: Where there is a contract for the sale of unascertained goods,
the property in the goods does not pass to the buyer until the goods are ascertained
(Sec.18). Until goods are ascertained there is merely an agreement to sell.
b) Goods must be appropriated:Section 23 deals with the question of passing of property in
the case of a contract for the sale of unascertained or future goods by description. Section
23 (1) further provides that in such cases, when the goods in a deliverable state are

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 unconditionally appropriated to the contract, either by the seller with the assent of the
buyer, or by the buyer with the assent of the seller, the property in goods passes to the
buyer. The assent to the appropriation may be given either before or after appropriation is
made. However, the appropriation of the goods must take place before there has been a
breach of contract by either party.
The word appropriation has not been defined in the Act. It means an overt act showing an
intention to identify and determine the specific goods as those to which the bargain of the
parties shall apply. Appropriation is generally made by the seller by putting the goods into
boxes, or gunny bags, or in the case of fluids into bottles or other suitable containers with the
assent of the buyer. The assent of the buyer may be express or implied.
c) Goods must be delivered to the carrier: According to Section 23 (2), “Where, in
pursuance of the contract, the seller delivers the goods to buyer or to a carrier or other
bailee (whether named by the bailee or not) for the purpose of transmission to the buyer,
and does not reserve the right of disposal, he is deemed to have unconditionally
appropriated the goods to the contract”. It is important to note that mere delivery of goods
does not transfer the ownership of goods to the buyer. The seller may reserve his right of
disposal with the intention that he receives his payment before he transfers his ownership to
the goods. In such case, the Bill of Lading or the Railway Receipt is in the name of the
seller or his agent so that ownership of the seller is secured and is not transferred to the
buyer.
3. Goods sent on approval, or on sale or return (Sec. 24): When goods are sold under a
contract of sale or return or in approval, the sale is a conditional sale. According to Section
24, in such cases, the property passes to the buyer –—
i) when the buyer signifies his approval or acceptance to the seller; or
ii) does any other act adopting the transaction; e.g., sells the goods to a third party or
pledges the goods with a third party,
iii) where the buyer does not signify his approval or acceptance but retains the goods
without giving notice of rejection, in such a case
a) if a time has been fixed for the return of the goods, on the expiration of such time; and
b) if no time has been fixed on the expiration of a reasonable time.
2.5.6 Contracts Involving Sea Routes

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F.A.S. Contracts: F.A.S stands for “free alongside ship”. The property in goods sold under an
F.A.S. contract passes from the seller to the buyer when the goods are delivered alongside the
ship named by the buyer under a contract of carriage.
F.O.B Contracts(Named port of shipment): F.O.B. stands for “free on board”. In a F.O.B.
contract, the seller is to put the goods on board a ship at his own expense, for carriage to the
buyer. Thereupon the delivery is complete and the property and risk in goods pass to the buyer.
Normally, the terms of the contract must specify the ship to which the goods are to be delivered.
The seller does not insure the goods, and the buyer has to do it if he likes. The seller, however,
must give notice of putting the goods on board the ship to enable the buyer to insure the goods.
In the absence of a contract to the contrary, payment in an F.O.B. contract becomes due on the
delivery of goods to the ship. The price under an F.O.B. contract includes the cost of the goods
and all expenses upto and including delivery on board the ship. Thereafter, all expenses have to
be paid by the buyer. The property in the goods does not pass to the buyer until the goods are
delivered on board the ship. If the seller is prevented from putting the goods on board the ship by
failure of the buyer to name a ship, the seller can sue for damages for non-acceptance and not for
the price.
C.I.F. Contracts(Named port of destination): the words C.I.F stands for “cost, insurance and
freight”. Under such a contract, the seller himself has to pay the cost of the goods, insurance
charges during transit to the buyer and the freight. The price agreed to be paid between the
parties to a contract of sale includes all these three. A C.I.F contract is performed by thedelivery
of documents (bill of lading, insurance policy, invoice, certificate of origin, etc.) representing the
goods to the buyer, through a bank. The documents are usually delivered by the bank against
payment of the price, or against payment of the price, or against acceptance of a draft (bill of
exchange). This protects both the seller and the buyer. The seller continues to be the owner of
goods until the buyer pays for the goods and gets the documents. If, in the meantime, the goods
are lost at sea, the buyer or the seller, whoever is the owner at the time of the loss, can recover
the amount from the insurer. If, on receiving the goods, the buyer finds that they are not
according to the contract, he may reject them and recover the price paid by him.
Ex-ship Contracts(Named ship and named port of delivery): These are contracts under which
the seller undertakes to give delivery to the buyer from a ship which has arrived at the port of
delivery at his (seller’s) expense and has reached a place therein which is usual for the delivery
of the goods of the kind in question. In such contracts, the property in the goods does not pass to
the buyer until the goods are actually delivered to him. In the case of an ex-ship contract, the

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property and risk in the goods do not pass to the buyer until they are delivered at the port of
destination. The goods are at the seller’s risk during the voyage and there is no obligation on him
to effect an insurance on behalf of the buyer.
2.5.7 Sale by Non-owners
In the case of transfer of ownership of goods from the seller to the buyer, it is presumed that the
seller is a full owner of the goods, and on transfer the buyer also becomes an absolute owner of
the goods. But where the seller is not an absolute owner of the goods, the buyer will not get a
better title than what the seller himself has. As a general rule, “no one can give that which one
has not got”. This is expressed in Latin maxim “nemodat quod non habet”which means that no
one can pass a better title than he himself has. If a person transfer articles not belonging to him,
the transferee gets no title although he may have acted in good faith and may have acted in good
faith and may have paid for the goods.
The rule of “nemodat quod non habet” is incorporated in Section 27of the sales of goods Act.
A person who has no title to property can convey none. This rule is meant to protect the true
owner and the fact of, an innocent and bonafide purchaser from the non-owner cannot dislodge
the claim of the true owner.
Exceptions to the rule
The rule that a person who buys goods from another, not the owner, acquires no title is subject to
certain exceptions. The following are the various exceptions to the rule:

1. Sale by a person not the owner or title by estoppel (Sec. 27): Where the owner by his
conduct, or by an act or omission, leads the buyer to believe that the seller has the authority
to sell and induces the buyer to buy the goods, he shall be stopped from denying the fact of
want of authority of the seller. The buyer in such a case gets a better title than that of the
seller. For example, B sells A’s bicycle to C. A is present when the sale is made, but he
makes no comment, nor does he say that the bicycle belongs to him. Here A’s conduct
convinces B that he is the owner of the bicycle. In such a case, A, because of his conduct,
cannot later say that B had no right to sell the bicycle and b will have a good title to it.
2. Sale by a mercantile agent (Proviso to Sec. 27): When a mercantile agent has the possession
of goods or the documents of title to the goods with the consent of the owner of the goods,
and sells the goods in the ordinary course of business, a sale made by the mercantile agent is
deemed to be as good as made by the owner of goods who has a good title to the goods. But,
in such circumstances, the buyer must have acted in good faith, and must not have the

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 knowledge that the seller has no authority to sell the goods. A mercantile agent means an
agent having in the customary business, has, as such agent, authority either to sell goods, or
to consign goods for the purpose of sale, or to buy goods or to raise money on the security of
goods.
3. Sale by one of several joint owners (Sec. 28): According to section 28, where one of the
several joint owners, who has sole possession of the goods, by permission of co-owners, sells
the goods, the buyer gets the complete ownership of the goods. But this is only possible when
the buyer has acted in good faith and paid price for it, and had no notice about the seller’s
right to sell the goods.
4. Sale by a person in possession under a voidable contract (Sec.29): Section 29 deals with
the case of sale by a person who has obtained possession of goods under a voidable contract.
It provides that when the seller of goods has obtained their possession under a voidable
contract, but the contract has not been rescinded at the time of sale, the buyer acquires a good
title to the goods, provided he buys them in good faith and without notice of the seller’s
defect of title. This exception is limited to contracts of sale voidable under sections 19 and
19A of the Contract Act, i.e., voidable on the ground of coercion, fraud, misrepresentation
and undue influence. It does not extend to all voidable contracts. If the contract under which
the seller obtains goods is void, then even an innocent buyer of the goods from such a seller
does not acquire title to the goods.
5. Sale by seller in possession after sale [Sec. 30 (1)]: Section 30 (1) provides that where a
seller, has sold goods but continues to be in possession of them or of the documents of title to
the goods and sells them either himself or through a mercantile agent to a third person who
buys in good faith and without notice of the previous sale, the buyer gets a good title.
6. Sale by buyer in possession after sale [Sec. 30 (2)]: Section 30 (2) deals with a case where
a person, having bought or agreed to buy goods, obtains, with the consent of the seller,
possession of the goods or documents of title to the goods and sells them either himself or
through an agent, the buyer who acts in good faith and without notice of any lien or other
right of the original seller in respect of the goods, gets a good title to the goods.
7. Sale by an unpaid seller [Sec. 54 (3)]:Section 54 (3) of the Act provides that when an
unpaid seller who has exercised his right of lien or stoppage in transit to get the possession of
the goods (of which the ownership has passed to the buyer) resells the goods, the buyer
acquires a good title to the goods against the original buyer.

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8. Exceptions in other Acts: Under certain Acts, a person although he is not the owner of the
goods may sell the goods and pass a better title than he himself has.
a) Under section 169 of the Contract Act, a finder of the goods has the power to sell the
goods under certain conditions and the buyer will acquire a better title.
b) Under Section 176 of the Contract Act, a pawnee of goods has the power to sell the goods
pawned under certain conditions and he passes a better title than he himself has.
c) In some cases, a special power of sale is given to officers of court, liquidators of
companies, receivers of insolvent’s estate, custom officers for duties remaining unpaid,
etc. All these persons are not owners, yet they sell properties of others, and convey a
better title to the buyers than they themselves possess.
d) Bills of exchange and negotiable instruments form an important exception to the general
rule and a thief or finder of such instrument if payable to bearer or endorsed in blank, can
give a good title to a bonafide purchaser for value without notice.
9. Sale in market overt: ‘Market overt’ means an “open, public and legally constituted
market” where goods are openly bought and sold according to the normal practices of the
trade without any restrictions. Where goods are sold in market overt, the buyer acquires a
good title to them irrespective of the seller’s title provided —
a) The goods are sold in accordance with the usage of the market; and
b) The buyer bought the goods in good faith and without notice of any defect or want of title
on the part of the seller.
2.6 PERFORMANCE OF CONTRACT
2.6.1 Meaning and Definition
According to Section 31 of the Sale of Goods Act, the gist of a contract of sale is the
performance of their obligations by the parties to the 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. The contract is completed when both parties have carried out their
obligations.
If the contract contains any special terms as to delivery and acceptance, these must be complied
with. In the absence of a contract to the contrary, delivery of the goods and payment of price are
concurrent conditions, that is, both these must take place at the same time i.e., the seller must be
willing and ready to deliver the goods and the buyer must be willing to and ready to accept the
goods and pay the price to the seller,as in, for instance, a cash sale over a shop counter (Sec. 32).

69
A contract of sale always involves reciprocal promises, the seller promising to deliver the goods
and the buyer to accept and pay for them.
2.6.2 DELIVERY OF GOODS
As per the terms of the contract, essentially the most important obligation of the seller is to
deliver the goods. Section 2 (2) of the Act defines delivery as the “voluntary transfer of
possession of goods from one person to another”. Delivery is a bilateral act. Delivery of goods
sold 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). the goods
must be in a deliverable state before the delivery can be made. Depending upon what the parties
have agreed to, the delivery can be concurrent or at a future date, or in instalments.
Essentials Elements of Delivery
The essential elements of delivery are:
i) A person has possession;
ii) He transfers that possession to another person;
iii) He does so voluntarily.
The essence of delivery is voluntary transfer of possession from one person to another.

2.6.3 Modes of Delivery

According to Section 33 of the Sale of Goods Act, the delivery of goods in a sale of contract is
any such act which both the parties to the contract deem to constitute ‘delivery’ or which transfer
the control and possession of goods to the buyer or, with the consent of the buyer, to a third party
nominated by the buyer. Delivery of goods may be made in any of the following ways:
a) Actual Delivery: An actual delivery is a physical delivery of goods. It takes place when the
goods are physically handed over by the seller to the buyer or his duly authorized agent. (Sec.
33). Any act of the seller or his agent that results in delivering the goods in the possession of
the buyer is deemed to be actual delivery.
b) Symbolic Delivery: When the goods are of such large quantity or weight or bulky and
incapable of actual delivery, the delivery of title documents of the goods, or any other
document or thing that serves as a proof of the transfer of possession to the buyer is deemed
to constitute delivery; for example, delivering the key of the warehouse where the goods are
stored, or the Bill of Lading or Railway Receipt to the buyer constitutes what is called
symbolic delivery of goods.

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c) Constructive Delivery or delivery by attornment[Sec.36 (3)]: Such delivery is also known
as fictitious delivery. A delivery is constructive, when it is made without any change in the
actual possession of the goods. Here only there is an acknowledgement by the third person
(e.g., bailee) who is in possession of the goods of the seller at the time of the sale to the buyer
that he holds the goods on his behalf. There is only a change in the legal character of
possession. Such delivery is deemed to take place in the following situations:
i) Where the seller in possession of the goods agrees to hold them on behalf of the buyer
after sale;
ii) Where the buyer is in possession of the goods before the sale and the seller agrees to
the buyers holding the goods as owner. The character of possession is changed from
that of a bailee for the seller to that of the owner; and
iii) Where a third party like a warehouseman, who was holding the goods as a bailee of
the seller agrees after a sale to hold them as the bailee of the buyer.
2.6.4 Rules regarding delivery of goods
Under the provisions of the Sale of Goods Act, the rules that apply to the delivery of goods are as
under:
1. Mode of delivery(Sec. 33): Delivery of the goods sold may be made by doing anything
which the parties agree or which has the effect of putting the goods in the possession of the
buyer or his duly authorized agent. Delivery of goods may be effected in any of the three
modes, namely, actual, symbolic or constructive.
2. Delivery and payment are concurrent conditions (Sec. 32): Delivery of the goods and
payment of the price must be according to the terms of the contract. Unless otherwise agreed,
delivery of the goods and payment of the price are concurrent conditions, i.e., the seller shall
be ready and willing to give possession of the goods to the buyer in exchange for the price
and the buyer shall be ready and willing to pay the price in exchange for possession of the
goods.
3. Effect of part delivery (Sec. 34): A delivery of the part of the goods in progress of the
delivery of the whole, has the same effect, for the purpose of passing the property in such
goods, as a delivery of the whole. But a delivery of the goods, with an intention of severing it
from the whole, does not operate a delivery of the remainder.
4. Buyer to apply for delivery (Sec. 35): Apart from any express contract, theseller of goods is
not bound to deliver them until thebuyer applies for delivery. Where the goods are
subsequently acquired by the seller, he should intimate this to the buyer and the buyer should

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 then apply for delivery. Unless otherwise agreed, the buyer has no cause of action against the
seller, if he does not apply for delivery.
5. Place of delivery: As a general rule, the contract of sale specifies where the good shave to be
delivered, and it is the duty of the seller to deliver the goods at the place specified in the
contract of sale. If there is no specific agreement as to place of delivery in the contract, the
rules laid down in Section 36 (1) are —
a) that the goods sold are to delivered at the place at which they are at the time of the sale,
and
b) goods agreed to be sold are to be delivered at the place at which they are at the time of
the agreement to sell, or
c) if the goods are not in existence at the time of the agreement to sell, i.e., future goods,
they are to be delivered at the place at which they are to be manufactured or produced.
6. Time of delivery[Sec. 36 (2)]: Where under the contract of sale, the seller is bound to send
the goods to the buyer, but if no time is fixed, the seller is bound to send them within a
reasonable time. Demand or tender of delivery should be made at a reasonable hour. What is
a reasonable hour is a question of fact [Sec. 36 (4)].
7. Goods in possession of a third person: When at the time of the sale, the goods are with a
third party, there is no delivery by the seller to the buyer until such third party acknowledges
to the buyer that he holds them on his behalf. But where the goods have been sold by the
issue or transfer of any document of title to goods, e.g., a railway receipt or a bill of lading,
such third party’s consent is not required.
8. Cost of delivery [Sec. 36 (5)]: Unless otherwise agreed, all expenses of and incidental to
making of delivery are borne by the seller, bit all expenses of and incidental to obtaining of
delivery are borne by the buyer.
9. Delivery of wrong quantity (Sec.37): The seller is under a duty to comply with the order of
the buyer in kind, quality and quantity. Delivery of goods must be of exact quantity ordered.
Delivering an excess or a lesser quantity of goods is called a delivery of wrong quantity, but
a marginal difference either way is not deemed to delivery of wrong quantity unless the
goods are very expensive, like gold, platinum or diamonds. If the difference in quantity is
marginal, the buyer does not have the right to refuse to accept the delivery of goods. A
defective delivery entitles the buyer to reject the goods. Section 37 provides for three
different contingencies which may arise in case of a defective delivery. These are —

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 i) Delivery of goods less than contracted for: According to section 37 (1), if the seller
makes the delivery of goods to the buyer in a lesser quantity than agreed to in the contract,
the buyer is entitled to refuse to accept the goods. But, if the buyer accepts the goods, he
shall pay for them at the contract rate. If the goods have been rejected for short delivery,
the seller can make, within the time limit, another delivery in accordance with the terms of
the contract.
ii) Delivery of goods in excess of quantity contracted for: According to Section 37 (2),
where the seller delivers to buyer a quantity of goods larger than he contracted to sell, the
buyer may, i) accept the whole; or ii) reject the whole; or iii) accept the quantity he
ordered and reject the excess. In case the buyer accepts the whole of the goods so
delivered, he must pay for them at the contract rate.
iii)Delivery of goods contracted for mixed with others: According to section 37 (3), where
the seller delivers to the buyer the goods he contracted to sell mixed with goods of a
different description, the buyer may accept the goods which are in accordance with the
contract and reject the rest, or may reject the whole.
The provisions of Section 37 are subject to any usage of trade, special agreement, or course
of dealing between the parties.
10. Instalment deliveries (Sec. 38): Unless otherwise agreed, the seller is not entitled to deliver
the goods by instalment and if he does so, the buyer is not bound to accept the goods. [Sec.
38 (1)]. The parties may, however, agree that the goods are to be or may be delivered by
instalments.
When the delivery of goods is in instalments and each instalment is to be paid for separately,
and if one or more instalments are not delivered or the goods delivered are defective, or if the
buyer refuses to take the delivery of, or neglects to make payment for, one or more
instalments, and the contract is deemed to have terminated, the question as to which party is
liable to for the damages depends upon the circumstances of the case and the terms of the
original contract.
11. Delivery to carrier or wharfinger (Sec. 39): According to Section 39 —
i) Where in pursuance of the contract of sale, goods are delivered to a carrier for the purpose
of transmission to the buyer or to a wharfinger for safe custody, delivery of goods to them
is prima facie deemed to be a deliveryof the goodsto the buyer [Sec. 39 (1)].
ii) In such a case, the seller must enter into a reasonable contract with the carrier or
wharfinger on behalf of the buyer for the safe transmission or custody of the goods. If the

73
 seller omits to do so, and if the goods are destroyed, the buyer may decline to treat the
delivery to the carrier or wharfinger as a delivery to himself, or may hold the seller
responsible in damages [Sec.39 (2)].
iii)Unless otherwise agreed, where goods are sent by the seller to the buyer by a route
involving sea transit, the seller must inform the buyer in time to get the goods insured
otherwise the goods will be at the seller’s risk during such sea transit [Sec. 39 (3)].
12. Goods delivered at a distant place (Sec. 40): where the seller of goods agrees to deliver the
goods at his own risk at a place other than that where they are sold, the buyer shall take risk
of any natural deterioration in the goods incident to the transit, unless otherwise agreed.
13. Buyer’s right of examining the goods : i) Section 41 (1) specifies that, where there has
been no previous examination of the goods the mere fact that the buyer has taken delivery of
them, does not amount to an acceptance until he has had a sufficient opportunity of
examining the goods, so as to see if they correspond with the contract.
ii) Section 41 (2) lays down that, if there is no contract to the contrary, and if the buyer wants
to examine the goods before they are delivered to satisfy himself that the goods conform
to specifications, the seller is bound to provide such opportunity to the buyer to examine
the goods. The seller cannot hold the buyer liable to accept the goods without examining
them.
14. When acceptance is complete on delivery(Sec.42): Acceptance of goods means the assent
of the buyer that he has received the goods under the contract of sale. According to section
42, the buyer is deemed to have accepted the goods in the following circumstances —
i) When he intimates to the seller that he has accepted the goods; or
ii) When the goods have been delivered to the buyer and he does any act in relation to them
which is inconsistent with the ownership of the seller, for instance where he resells the
goods or uses the goods as an owner or makes some changes in the goods delivered to
him; or
iii) Where the buyer retains the goods beyond a reasonable time without intimation of
rejection to the seller.
15. Buyer not bound to return rejected goods (Sec. 43): Section 43 provides that where the
goods are delivered to the buyer and he refuses to accept them, he is not bound to return the
goods to the seller. It would be sufficient if he intimates to the seller that he refuses to accept
the goods. However, the provisions of this rule are subject to a contract between the parties.

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16. Liability of the buyer for neglecting or refusing delivery of goods (Sec. 44): Section 44
of the sale of Goods Act specifies that when the seller is ready and willing to deliver the
goods and the seller actually requests the buyer to take delivery and the buyer does not,
within a reasonable time after such request, takes delivery of the goods, the buyer becomes
liable to the seller for —
i) Any loss occasioned by his neglect or refusal to take delivery, and
ii) A reasonable charge for the care and custody of the goods.
The section further provides that the seller shall be entitled to exercise the above rights,
even though the neglect or refusal of the buyer to take delivery amounts to a repudiation of
the contract.
2.7 UNPAID SELLER AND HIS RIGHTS
2.7.1 Definition of unpaid seller
A person who has sold good to another person but has not been paid for the goods, or has been
paid partially, is called an unpaid seller.
According to Section 45 (1) of the Sale of Goods Act, an unpaid seller is one —
a) Who has not been paid the whole of the price of the goods he has supplied, or has been
partially paid for the goods.
b) Who has been given a negotiable instrument like a bill of exchange that 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. It is immaterial
whether the seller is directly involved in the transaction, or he is acting through his agent.
‘Seller’ 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)].
2.7.2 Rights of an Unpaid Seller
The Sale of Goods Act has expressly given two kinds of rights to an unpaid seller of goods,
namely —
A. Rights against the goods
a) When the property in the goods has passed
i) Right of lien
ii) Right of stoppage of goods in transit
iii) Right if re-sale

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These rights of an unpaid seller do not depend upon agreement, express or implies between the
parties. They arise by the implication of law.
b) When property in the goods has not passed
i) Right of withholding delivery.
B. Rights against the buyer of goods personally
i) Right to sue for price
ii) Right to sue for damages
iii) Right to see for interest
iv) Repudiation of contract before due date
A. Rights against Goods
According to Section 46, when the buyer has not paid the full or partial price of the goods
supplied to him, the seller who has transferred the ownership of goods to the buyer has the
following rights with regards to the goods:
i) Right of Lien [Secs.46(1) (a) and 47 to 49]
Lien is the right to retain possession of goods until payment in respect of them is paid [Sec.
46 (1)]. According to section 47, if the seller of goods has not been paid, and the ownership of
goods has been transferred to the buyer but the goods are in the possession of the seller, the seller
has the right to retain the goods till he receives the price of goods from the buyer. Section 47 (1)
describes the circumstances in which an unpaid seller may exercise his right of lien —
a) When the goods have been sold without any stipulation as to credit;
b) Where the goods have been sold on credit, but the term of credit has expired;
c) Where the buyer becomes insolvent.
Termination of Lien [Sec. 49]: The right of lien is linked with the possession of the goods and
this right is lost if the possession is lost. According to Section 49, the lien of an unpaid seller
terminates in the following circumstances:
a) By delivery to carrier: When the seller delivers the goods to a carrier or any other bailee
for the purpose of transmission to the buyer without reserving the right of disposal of
goods, the right of lien is lost, but the seller still has a right to stoppage in transit.
b) By delivery to buyer: the right of lien is also lost when the buyer or his agent lawfully
obtains the possession of goods.
c) By waiver: when the seller has waived the right of lien on the goods, which may be
express or implied, the right of lien is lost. A waiver is express where the contract itself
provides that the seller shall not be entitled to retain possession of the goods even if the

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 buyer does not pay the price of the goods. A waiver is implied where the seller sells the
goods on credit or grants a fresh term of credit.
d) By tender of price: where the buyer tenders price for the goods purchased by him, the
seller no more remains an unpaid seller, therefore his right of lien is lost.
ii) Right of Stoppage in Transit (Sections 50-52)
The right of stoppage in transit means the right to stop the goods in transit after the unpaid seller
has parted with the possession of the goods, to resume possession of goods thereof and to retain
the same till the payment or tender of price. The right can be exercised by the seller under the
following circumstances —
i) The seller must be unpaid
ii) The seller must have parted with the possession of the goods and the buyer must not have
acquired it.
iii) The buyer has become insolvent before paying for the goods.
iv) The property must have passed from the seller to the buyer.
The buyer is said to be ‘insolvent’ when he has ceased to pay his debts in the ordinary course of
business or cannot pay his debts as they become due, whether he has committed an act of
insolvency or not [Sec. 2 (8)].
The right to stoppage is an extension of the right of lien, but it arises only on the insolvency of
the buyer and when the goods are in transit [Sec.46 (1) (b]. This right is available only when the
goods are neither in the possession of the seller nor that of the buyer, but are in the possession of
a middleman for the purpose of transmission to the buyer.
iii) Right of re-sale (Section 54)
This limited right of re-sale is conferred by the section 54 which also enumerated the
circumstances under which the right of re-sale may be exercised. The unpaid seller can re- sell
the goods —
a) Where the goods are of a perishable nature; or
b) Where he has exercised his right of lien or stoppage in transit and gives notice to the
buyer of his intention to re-sell the goods and the buyer does not within a reasonable time
pay or tender the price.
c) Where the seller expressly reserves a right of resale in case the buyer makes default. [Sec.
54 (4)].
b) i) Right of withholding delivery [Sec. 46 (2)]

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Where the property in goods has not passed to the buyer, the unpaid seller has in addition to
other remedies against the buyer personally, a right of withholding delivery of goods which are
the subject-matter of the contract. This right is similar to and co-extensive with his right of lien
and stoppage in transit where the property has passed to the buyer. This right can be
exercised even if the sale was on credit or that the goods were specific or unascertained.
B. Rights of an unpaid seller against the buyer personally
In addition to his rights against the goods, these are the rights which an unpaid seller may
enforce against the buyer personally. These rights of the seller against the buyer are called rights
in personam as against the rights in rem (i.e., rights against the goods). An unpaid seller has the
following rights against the buyer personally:
1. Suit for price (Sec. 55):
a) Where property has passed: Where under a contract of sale, the property in the goods has
passed to the buyer and the buyer wrongfully neglects or refuses to pay for the goods, the
seller may sue him for the price of the goods [Sec. 55 (1)].
b) Where property has not passed: Where under a contract of sale, the price is payable on a
certain day irrespective of delivery and the buyer wrongfully neglects or refuses to pay
such price, the seller may sue him for the price although the property in the goods may not
have passed and the goods have not been appropriated to the contract [Sec. 56 (2)].
2. Suit for damages for non-acceptance (Sec. 56): Where the buyer wrongfully neglects or
refuses to accept and pay for the goods, the seller may sue him for non-acceptance. The
measure of damages is determined by the rules contained in sections 73 and 74 of the Indian
Contract Act.
3. Repudiation of contract before due date (Sec. 60): Where the buyer repudiates the contract
before the date of delivery, the seller may either —
a) Treat the contract as subsisting and wait till the date of delivery. Or
b) He may treat the contract as rescinded and sue for damages for the breach. This rule
is known as the “rule of anticipatory breach of contract”.
4. Suit for Interest [Sec. 61(2) (a)]: Where there is a specific agreement between the seller and
the buyer as to interest on the price of the goods from the date on which payment becomes
due, the seller may recover interest from the buyer. If however, there is no specific agreement
to this effect, the seller may charge interest on the price when it becomes due from such day
as he may notify to the buyer. In the absence of a contract to the contrary, the court may
award interest to the seller in a suit by him at such rate as it thinks fit on the amount of the

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 price from the date of the tender of the goods or from the date on which the price was
payable.
2.8.SUMMARY
Contract of sale: Section 4 of the Sale of Goods Act defines a contract of sale of goods is a
contract whereby the seller transfers or agrees to transfer the property in goods to a buyer for a
price.
A contract of sale consists of the following:
i) Sale
ii) Agreement to sell
Goods: the term goods means “ every kind of movable property other than actionable claims
and money and includes stock and shares, growing crops, and things attached to or forming part
of the land which are agreed to be severed before sale under the contract of sale.”
Price: Price is “ as money consideration for a sale of goods.” Money means “ legal tender
money in circulation” . Old and rare coins are not included in the definition of the term money.

Condition: ‘A condition is a stipulation essential to the main purpose of the contract, the breach
of which gives rise to a right to reject goods and treat the contract as repudiated’.
Warranty: ‘ A warranty is stipulation collateral to the main purpose of the contract , the breach
of which gives rise to the claim damages but not a right to reject goods and treat the contract as
repudiated’
Transfer of ownership: Transfer of ownership means the transfer of property of the goods from
the seller to the buyer which constitute an ownership in the buyer. A contract of sale of goods
involves transfer of ownership from seller to the buyer. It is important to know the precise
moment of time at which property in goods passes from the seller to the buyer.
Delivery: Delivery of goods implies voluntary transfer of possession of goods from seller to
buyer.
Unpaid seller: Unpaid seller means a seller who has not been paid or tendered the whole of the
price of the goods sold or who had received a bills of exchange or any other negotiable
instrument as a conditional payment which is subsequently dishonoured.
Rights of unpaid seller: There are two types of rights under the sale of goods act 1930.
i) Rights of an unpaid seller against the goods.
ii) Rights of an unpaid seller against the buyer personally.
2.9. SELF ASSESSMENT QUESTION
1) Define a contract of sale and discuss essentials of a valid contract of sale.
2) How is a contract of sale different from an agreement to sale?
3) Explain the term goods under the sale of goods act 1930.
4) Differentiate between condition and warranty.
5) Describe various types of goods.
6) Briefly discuss the implied conditions and warranties in a contract of sale.
7) What are the exceptions to this rule of’ caveat emptor’?
8) Explain with example, the rules governing the transfer of ownership of goods from seller
to buyer.
9) What is meant by reservation of the right of disposal in a contract of sale of goods?
10) Explain in brief the rules relating to the delivery of goods.
11) Define an unpaid seller. Explain his right against the buyer’s personally.

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12) When can the seller resale the goods?
13) What is meant by the right of stoppage in transit in respect of sale of goods.
14) What is meant the right of lien in respect of sale of goods?
15) Explain in brief the rules relating to the delivery of goods.

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 UNIT-3
NEGOTIABLE INSTRUMENTS

AIMS AND OBJECTIVES

After studying this unit you should be able understand:
 The meaning of negotiable instrument
 Various types of negotiable instrument
 Different parties concerned with the various types of negotiable instrument
 Liabilities of parties to a negotiable instrument.
 Significance of acceptance of negotiable instrument
 Discharge of parties

CONTENTS
3.1. Introduction
3.2. Meaning and Definition
3.3. Essential Characteristics of Negotiable Instrument
3.4. Types of Negotiable Instrument
3.5. Promissory Note
3.6. Bill of Exchange
3.7. Cheque
3.8. Parties to Negotiable Instrument
3.9. Dishonour of a Negotiable Instrument
3.10. Discharge of a Negotiable Instrument
3.11. Summary
3.12. Self-Assessment Questions

UNIT-III
NEGOTIABLE INSTRUMENTS
3.1 INTRODUCTION
There are certain documents which are freely used in commercial transactions and monetary
dealings. These documents, if they satisfy certain conditions, are known as ‘negotiable
instruments’. The law relating to negotiable instruments is contained in the Negotiable
Instruments Act, 1881, which deals with promissory notes, bills of exchange and cheques. It is
based, except where conditions in India require a departure, mainly upon the English Law as to
negotiable instruments and judicial decisions. The Act was enacted in India in 1881. The Act is
applicable throughout India except in the state of Jammu and Kashmir from the 1 st of March, 1,
1882. Though the Act recognizes only three kinds of negotiable instruments, it includes all other

81
instruments which have the features of negotiability. Section 137 of the Transfer of Property Act,
1882 recognises the negotiability of instruments by law or custom. Thus, in India, government
promissory notes and hundis have been held to be negotiable by usage or custom. The
Negotiable Instruments Act does not affect the provisions of Secs. 31 and 32, of the Reserve
Bank of India Act, 1934. The Act was amended by the Banking, Public Financial Institutions and
Negotiable Laws (Amendment) Act, 1988 wherein a new chapter XVII was incorporated for
penalties in case of dishonor of cheques due to insufficiency of funds in the account of drawer of
the cheque. The Act has been further amended recently by the Negotiable Instruments
(Amendment and Miscellaneous Provisions) Act, 2002 redefining the term ‘cheque’ and making
the above punishment more harsh. In the amendment of 2002, in addition to the changes made in
certain Sections including 138, 141 and 142, five new Sections (143 to 147) were inserted.
3.2 MEANING AND DEFINITION
Meaning: 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 favour
of some person”. Therefore, a negotiable instrument is a document which entitles a person to a
sum of money and which is transferable from one person to another by mere delivery or by
endorsement and delivery.
Definition: 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. Section 13, however, says that “a negotiable instrument means a promissory note, bill of
exchange or cheque payable either to order or to bearer. The definition, as it is, says that a
negotiable instrument ‘means’ and not ‘means and includes’. Therefore, any other instrument
which satisfies the conditions of negotiability can be added to the list of negotiable instruments.
According to Justice Willis, “a negotiable instrument is one, the property and the title in which is
acquired by anyone who takes it as bonafide and for value notwithstanding any defect in the title
of the person from whom he took it”.
According to Thomas, “A negotiable instrument is one which is, by a legally recognized custom
of trade or law, transferable by delivery or by that endorsement and delivery in such
circumstance that a) the holder of it for the time being may sue on it in his own name, and
b) the property in it passes free from equities, to a bonafide transferee for value, notwithstanding
any defect in the title of the transferor”.
The above definitions make it clear that a negotiable instrument is different from other
commodities.

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An instrument is a negotiable instrument if it satisfies two conditions, namely —
a) That the instrument should be freely transferable (by delivery or by endorsement and
delivery) by the custom of the trade and
b) That the person who obtains it in good faith and for value should get it free from all defects,
and thus be entitled to recover the money of the instrument in his own name.
Documents such as Share warrants, Port trust or Improvement Trust Debentures, railway
receipts or railway bond payable to bearer are considered equivalent to negotiable instruments
either by mercantile custom or by other enactments like the Companies Act. However, money
orders and postal orders, deposit receipts, share certificates, Bills of lading, dock warrant, I.O.U.
etc., are not negotiable instruments. Though they are transferrable by delivery and
endorsements, yet they are not able to give better title to the bonafide transferee for value than
what the transferor has.
3.3 Essential Characteristics of a Negotiable Instrument
The essential characteristics of a negotiable instrument are as follows:
1. Property: The possessor of the negotiable instrument is presumed to be the owner of the
property contained therein. A negotiable instrument does not merely give possession of the
instrument but right to property also. The property in negotiable instrument means complete
right of ownership and not merely a right of possession.
2. Freely Transferable: the property in negotiable instrument passes from one person to
another by delivery, if the instrument is payable to bearer, and by endorsement and delivery
if it is payable to order.
3. Good title: A holder in due course i.e., a person, who is a bonafide transferee of a negotiable
instrument for value, gets a good title even if the transferor had the defective title. The
general principal laid down in the maxim “nemodat quod non habet” does not apply to
negotiable instruments.
4. Right to sue in own name: Where the negotiable instrument is dishonoured, the transferee
of that negotiable instrument has right to sue in his own name for the recovery of the amount.
A negotiable instrument can be transferred any number of times till its maturity and the
holder of the instrument need not give any notice of transfer to the party liable on the
instrument to pay.
5. Presumptions: There are certain presumptions which are applicable to all negotiable
instruments, e.g., consideration has been paid under it, order of endorsement and that of
reasonable time. These presumptions are dealt with in Secs. 118 and 119.

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6. Prompt payment: A negotiable instrument ensures the holder prompt payment because in
the case of dishonour, the goodwill of the persons who are party to that negotiable instrument
may be adversely affected and ruin their credibility.
7. Writing: A negotiable instrument must be in writing.
8. Signature: A negotiable instrument must be authenticated by the signature of the maker.
9. Consideration: The consideration is not mentioned on the negotiable instrument. It is
presumed that the negotiable instrument has been drawn for a valuable consideration.
3.4 Types of Negotiable Instruments
Negotiable instruments may be:
1. Negotiable by Statute: The Negotiable Instruments Act mentions only three types of
negotiable instruments (Sec.13). These are promissory notes, bills of exchange and cheques.
These are negotiable by statute.
2. Instruments Negotiable by Custom or Usage: There are certain other instruments which
have acquired the character of negotiability by usage or custom of trade. The Courts in India
usually follow the practice of English Courts in according the character of negotiability to
other instruments. Sec. 137 of the Transfer of Property Act also recognizes the negotiability
of instruments by law or custom. Thus, in India, Government promissory notes, treasury
bills, banker’s drafts and pay orders, hundis, delivery orders and railway receipts for goods,
share warrants, port trust debentures, Indira VikasPatras, have been held to be negotiable by
usage or custom.
Therefore, even though the Negotiable Instruments Act acknowledges the existence of other
kinds of negotiable instruments, it specifically mentions three kinds of negotiable instruments,
viz., promissory notes, bills of exchange or cheques.
3.5 PROMISSORY NOTE
3.5.1 Definition
According to Sec. 4 of the Indian Negotiable Instruments Act, 1881, “A promissory note is an
instrument in writing (not being a 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”.
3.5.2 Parties to a Promissory Note
There are two parties to a promissory note. They are

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 i) Maker: He is the debtor who makes the promissory note promising to pay a specified sum
after the expiry of a specified duration. There may be one or more makers of a promissory
note.
ii) Payee: He is the creditor in whose favour the promissory note is made.
For example, if X signs an instrument containing the following conditions:
i) I promise to pay Y or order Rs. 2,000, or
ii) I acknowledge myself to be indebted to Y to the extent of Rs. 2,000 payable on demand,
for value received, then the instrument will qualify as a promissory note.
However, if X signs an instrument containing any of the following conditions, it will not be a
promissory note.
i) I am indebted to Y for Rs. 2,000, or
ii) I promise to pay Y Rs. 2,000 along with any other sum which may be payable to him.
3.5.3 Essential Characteristics of Promissory Note
For an instrument to become a promissory note, it must have the following essential elements:
1. It must be in writing: A promissory note must always take the form of a written document.
Mere verbal promise to pay will not do. The instrument may be written on any paper, on any
bahi or book or any other substitute for paper. The writing may be in pencil or ink. Writing
includes printing, photography and lithography.
2. The promise to pay must be express: The essential of a promissory note is an express
promise to pay. A mere acknowledgement of debt without express promise to pay is not a
promissory note. A mere implied promise will not do.
3. The promise to pay must be unconditional: A promissory note must contain an
unconditional promise to pay. The promise to pay must not depend on the happening of a
contingency which may or may not happen. A conditional promissory note is not negotiable
and hence invalid. But when an instrument is payable on the happening of an event which is
certain to happen, though the time of its happening may be uncertain, it is a promissory note.
Similarly, an undertaking to pay money at a particular place or after a specified time is
unconditional, and the document is a promissory note.
4. It must be signed by the maker: The signature of the maker on the face of the note is the
most essential feature. It may be a thumb-mark, initials or any other mark. In the absence of
the signature of the maker, an instrument cannot be called a promissory note. Signature means
the writing of a person’s name in order to authenticate and give effect to the contract

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 contained in the instrument. It is at the same time essential that the mind of the signer must
accompany the signature.
5. The maker must be certain: The maker of the note must be definite. The note must show on
its face the person who is liable as a maker. The maker is taken as certain if from the
description of the maker, sufficient indication follows about his identity. He may be described
by his name or designation. A promissory note may be made by two or more makers, and they
may be liable thereon jointly or severally.
6. Promise must be to pay a certain sum: The amount promised to be paid by the promissory
note must be certain and definite and must not be capable of contingent additions or
subtractions.The promise must be to pay a definite sum and nothing else. The sum payable is
certain when —
i) it is payable with interest. But if the rate of interest is not stated in the instrument it is not a
promissory note.
ii) it is payable at an indicated rate of exchange.
iii) it is payable by instalments, with a provision that on default being made in payment, the
balance unpaid shall become due [Sec. 5, para 3].
7. The promise should be to pay money and money only:Money means legal tender money
and not old and rare coins. It is essential that the medium of payment must be money only and
not bonds, bills or any other article. Thus, a document containing a promise to pay money and
paddy is not a promissory note.
8. The payee must be certain: It is essential to the validity of a promissory note that the person
who is to receive the money should be capable of being ascertained from the instrument itself.
Where a document does not specify the person to whom the money is to be paid, it is not a
promissory note. It is to be noted that the maker and the person who is to receive the payment
cannot be one and the same person. A bank note or a currency note is not a promissory note as
both are treated as money itself.
9. Other formalities: Formalities like number, place, date, attestation, etc, are usually found in
the promissory note, but they are not essential in law. It is not essential to the validity of a
promissory note that it should contain the name of the place where it is made or the place
where it is payable. A promissory note must be properly stamped under the Indian Stamp Act,
1899 and must also be properly cancelled. The words “value received” is also unnecessary.

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10. It may be payable on demand or after a definite period of time: Where no time is mentioned,
the note is payable on demand. The expression ‘on demand’ means payable immediately or
forthwith.
11. It cannot be made payable to bearer on demand:The Reserve Bank of India Act, 1934
prohibits issue of such promissory notes except by the Reserve Bank of India itself or the
Central Government.
Lack of any of the requirements mentioned in Sec. 4 will not make a document a promissory
note.
Specimen form of Promissory Note
Rs. 5,000 Bengaluru
March 24, 2019
On demand, I promise to pay Mr. Suresh Padhi or order a sum of rupees five
thousand, value received.
To
Suresh Padhi R. Stamp
Q No. 29/5 Phase I, KananVihar, Sd/
Mahesh
Bengaluru

3.6 BILL OF EXCHANGE

3.6.1 Definition
According to Section 5 of the Negotiable Instruments Act, 1881, “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. A bill of exchange is sometimes also called a draft.
3.6.2 Parties to a Bill of Exchange
There are three parties to the bill of exchange.
i) Drawer: He is the person who draws and signs the bill of exchange. He is also known as
the creditor because he has the right to receive money from another person. In other
words, he is the person who gives the order to pay or who makes the bill.
ii) Drawee: he is the person on whom the bill of exchange is drawn, i.e., he is the person
who accepts the bill of exchange and is liable to pay the money thereon on the due date.
He is also known as the payer or the acceptor. In other words, drawee is the person who is
directed to pay.

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iii)Payee: He is the person who has the right to receive the payment of the bill of exchange
on the due date. In other words, the person to whom or to whose order the money is
directed to be paid called payee.
In some cases, the drawer and the payee may be one and the same person or they may be
different persons. The drawer or the payee who is in possession of the bill is called the
holder. The holder must present the bill to the drawee for his acceptance. When the drawee
accepts the bill, by writing the word ‘accepted’ and then signing it, he is called the
‘acceptor’. When the holder endorses the bill, note or cheque, he is called the endorser. The
person to whom the bill, note or cheque is endorsed is called the endorsee. When in the bill
or in any endorsement thereon the name of any person is given in addition to the drawee to
be referred to in the case of need, such person is called a drawee in case of need. (Sec. 7, para
2). The name of the drawee in case of need may be given in the bill by the drawer at the time
when it is drawn or by some subsequent endorser. The resort is to be had to the ‘drawee in
case of need only’ when the bill is dishonoured by non-acceptance or non-payment.
3.6.3 Essentials of a Bill of Exchange
The essential elements of a bill are more or less the same as of a promissory note and are
subject to same formalities as regards date, place, stamp, signature, etc. in order that an
instrument may be called a bill of exchange, it should satisfy the following conditions —
1. It must be in writing.
2. It must contain an unconditional order to pay.
3. It must be signed by the drawer.
4. There must be three parties to the instrument and the parties must be certain.
5. The order must be to pay a certain sum of money.
6. The instrument must contain an order to pay money and money only.
7. It must comply with the formalities as regards date, consideration, stamp, etc. A bill must
be affixed with the necessary stamp.
Briefly speaking, before a document can be called a bill of exchange, the drawer must be
certain, the order must be certain, the drawee must be certain, the payee must be certain and
the sum payable must also be certain. These are popularly called the five certainties of a bill
of exchange.
Specimen Form of Bill of Exchange

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 Cuttack
July 20, 2019
Two months after date, pay to P or order, the sum of Rs 5,000 (Rupees five
thousand only) for value received.
To
Mr. Ram Stamp
Sector 6, Rourkela Sd/- Ravi

3.6.4 Distinction between a Bill of Exchange and a Promissory Note

The points of distinction between a bill of exchange and promissory note are mentioned below:
1. Parties: There are three parties to a bill of exchange, namely, the drawer, the drawee and the
payee; while in a promissory note there are only two parties — maker and payee.
2. Nature of Payment: In a bill of exchange, there is an unconditional order to pay, while in a
promissory note there is an unconditional promise to pay.
3. Acceptance: A bill of exchange requires an acceptance of the drawee before it is presented
for payment, while a promissory note does not require any acceptance since it is signed by
the person who is liable to pay.
4. Liability: The liability of the maker of a promissory note is primary and absolute, while the
liability of drawer of bill of exchange is secondary and conditional. It is only when the
drawee fails to pay that the drawer would be liable as a surety.
5. Notice of dishonour: In case of dishonour of bill of exchange either due to non-payment or
non-acceptance, notice must be given to all persons liable to pay. But in case of a promissory
note, notice of dishonor to the maker is not necessary (Sec. 93).
6. Maker’s position: The drawer of a bill of exchange stands in immediate relationship with
the acceptor and not the payee. While in case of a promissory note, the maker stands in
immediate relationship with the payee.
7. Nature of acceptance: A promissory note can never be conditional, while a bill of exchange
can be accepted conditionally.
8. Copies: A bill of exchange can be drawn in sets, but a promissory note cannot be drawn in
sets.
9. Payable to bearer: A promissory cannot be made payable to a bearer, while a bill of
exchange can be so drawn provided it is not payable to bearer on demand.
10. Payable to maker: In a promissory note, the maker cannot pay to himself. While in the case
of a bill of exchange, the drawer and the payee may be one person.

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11. Protest: Foreign bills must be protested for dishonor when such protest is required by the
law of the place where they are drawn (Sec. 104). But no such protest is required in the case
of promissory note.
12. Applicability of certain provisions: Certain provisions like presentment of acceptance (Sec.
61), acceptance (Sec. 75), acceptance for honour (Sec. 108) and bill in sets (Sec. 132) are
applicable only to a bill of exchange, they are not applicable to a promissory note.
13. The maker of a promissory note is the debtor and he himself undertakes to pay. The drawer
of a bill of exchange is the creditor who directs the drawee (his debtor) to pay.
14. The maker of a promissory note corresponds in general to the acceptor of a bill. But the
maker of the note cannot undertake to pay conditionally whereas the acceptor may accept the
bill conditionally because he is not the originator of the bill.
3.7 CHEQUE
3.7.1 Meaning and Definition
A cheque is the means by which a person who has funds in the hand of a bank withdraws the
same or some part of it.
Section 6 of the Negotiable Instruments Act defines a cheque as 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.
The expression ‘cheque in electronic form’ means a cheque which contains the exact mirror
image of a paper cheque, and is generated, written and signed in a secure system ensuring the
minimum safety standards with the use of digital signature (with or without biometrics signature)
and asymmetric crypto system.
‘A truncated cheque’ means a cheque which is truncated during the course of a clearing cycle,
either by the clearing house or by the bank whether paying or receiving payment, immediately on
generation of an electronic image for transmission, substituting the further physical movement of
the cheque in writing.
‘Clearing house’ means the clearing house managed by the Reserve Bank of India or a clearing
house recognized as such by the Reserve Bank of India [Sec. 6 as substituted by the Negotiable
Instruments (Amendment and Miscellaneous Provisions) Act, 2002].
A cheque is a special kind of bill of exchange; but it has the following two additional
qualifications, viz.,—
i) It is always drawn on a specified banker, and
ii) It is always payable on demand without any days of grace.

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3.7.2 Essentials of a Cheque
All cheques are bills of exchange, but all bills of exchange are not cheques. A cheque being a bill
of exchange must possess the following requirements:
1. A cheque must be drawn upon a specified banker.
2. A cheque must be payable on demand.
3. A cheque must be signed by the drawer.
4. A cheque must be an unconditional order to pay a certain amount of money to or to the
order of a specified person or to the bearer of the cheque.
5. A cheque must be dated.
A cheque unlike a bill of exchange does not require acceptance as it is intended for immediate
payment.
The usual form of bank cheque is shown below.
No…….. Date……2007
PUNJAB NATIONAL BANK
SubziMandi, Delhi-110007
Pay………………………………………………………………………. or bearer the
sum of Rs. …………………………………………………………………………………..
Rs. …………………………….

Sd / –

3.7.3 Distinction between a Bill of Exchange and a Cheque

Cheques and bills of exchange are in many respects governed by the same rules and principles as
they have many points in common. Both are negotiable instruments. There are three parties in a
cheque as well as in a bill of exchange. There is an unconditional order to pay in a cheque and
bill of exchange.

A cheque differs from a bill of exchange in the following respects:

1. Drawee: A bill of exchange may be drawn on any person, including a banker, but a cheque is
always drawn on a bank or banker. Thus, all bills are not cheques whereas all cheques are
necessary bills.
2. Acceptance: A cheque does not require any acceptance. While a bill must be accepted before
the drawee can be called upon to make payment upon it.

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3. Days of grace: A cheque is payable on demand without any days of grace, but a bill of
exchange is normally entitled to three days of grace unless it is payable on demand.
4. Payment: A cheque is always payable on demand immediately whereas a bill may be payable
on demand or after expiry of a certain period after date or sight.
5. Presentment: A bill of exchange must be duly presented for payment to the acceptor or else
the drawer of the bill will be discharged from liability. The drawer of a cheque is not
necessarily discharged from his liability by delay of the holder in presenting it for payment.
He is discharged only to the extent of the damage, if any, suffered by him.
6. Crossing: A cheque may be crossed but there is no such provision in the case of a bill of
exchange.
7. Notice of dishonour: When a cheque is not met, notice of dishonor is not necessary. Want of
assets in the hands of the banker is sufficient notice. It is necessary to give a notice of
dishonor in order to make the drawee of a bill liable.
8. Payable to bearer on demand: A cheque can be drawn payable to bearer on demand. But a
bill of exchange cannot be so drawn.
9. Stamp: A cheque does not require any stamp whereas a bill, except in certain cases, must be
stamped.
10. Countermanding of payment: A cheque may be revoked by countermand of payment.
Moreover, in the case of a cheque the notice of customer’s death or insolvency automatically
requires the bank not to make the payment of the cheque. The payment of a bill, however,
cannot be countermanded.
11. Noting and protesting: A cheque is not noted or protested for dishonor and is generally
inland. But in the case of a bill of exchange, there can be noting and protest under Sections
99 and 100 of the Negotiable Instruments Act in order to obtain the proof that a bill of
exchange is dishonoured.
12. Protection: A banker is given necessary protection with regard to payment of cheques in
certain circumstances. No such protection is available to the drawee or acceptor of a bill of
exchange.
3.7.4 Crossing of Cheques
There are two types of cheques: open cheques or bearer cheques and crossed cheques.
Open Cheque: A cheque which is payable in cash across the counter of a bank is called an open
cheque. These need not be put through a bank account. When such a cheque is in circulation, a
great risk attends it, if its holder loses it, its finder may be go to the bank and get payment unless

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its payment has already been stopped. If the open cheque goes to wrong hands and from him it is
transferred to a holder in due course, the holder in due course will get a good title in the cheque
and the rights of the original holder would be affected thereby.
With a view to avoid such risks and protect the owner of cheque, a system of crossing was
introduced.
Crossed cheque:A cheque is one on which two parallel transverse lines with or without the
words ‘& Co.’ are drawn. These lines are drawn on the upper left hand corner of the cheque. The
payment of such a cheque can be obtained 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 be easily traced.
The crossing compels the holder to prevent the cheque through a “quarter of known
respectability and credit” and affords security and protection to the owner of the cheque, as
cheque is payable only through a banker.
3.7.5 Types of Crossing
There are two types of crossing provided by the Negotiable Instruments Act, namely general
crossing and special crossing.
A. General crossing: A cheque is said to be crossed generally when it bears across its face an
addition of —
a) The words ‘and company’ or any abbreviation there of, between two parallel lines, either
with or without the words not negotiable, or
b) Two parallel transverse lines simply, either with or without the words ‘not negotiable’
(Sec. 123).
Two transverse lines are essential for general crossing, though not for special crossing. The lines
must be drawn across the face of the cheque. Where a cheque is crossed generally, the drawee
banker shall not pay it unless it presented by a banker (Sec. 126). It means that a drawee bank is
not to make the payment of the cheque at the counter but the payment is to be made only to
another bank that collects the cheque on behalf of the holder. In case of general crossing,
therefore, the holder may get the cheque collected through some bank. Collecting bank may be
any bank of the choice of the holder.
Specimens of general crossing

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B. 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. A
special crossing makes the cheque safer than a general crossing because the payee or holder
receives the payment except through the banker named on the cheque. 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. Where a cheque
is crossed specially the banker on whom it is drawn shall pay it only to the banker on whom
it is crossed, or his agent for collection (Sec. 126, para 2).
C. Restrictive crossing: In addition to the two statutory types of crossing, there is another type
of crossing which has been adopted by commercial and banking usage. . It has the effect of
restricting the payments in certain ways. In this type of crossing, the words ‘A/c Payee’ are
added to the general or special crossing. The addition of these words makes the cheque non-
transferable.
The words ‘A/c Payee’ on a cheque are a direction to the collecting banker that the amount
collected on the cheque is to be credited to the account of the payee. If he credits the proceeds to
a different account, he is prima facie guilty of negligence and will be liable to the true owner for
the amount of the cheque. It should however be noted that ‘A/c Payee’ cheques are negotiable.
Specimens of special and restrictive crossing

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D. Not Negotiable Crossing (Sec. 130): A cheque may be crossed with the words ‘not
negotiable’ on it. The effect of these words is that the cheque cannot be negotiable i.e., the
endorsee will not acquire a title better than that of the endorser. The effect of the words ‘not
negotiable’ on a crossed cheque is that the title of the transferee of such a cheque cannot be
better than that of its transferor. The crossing of a cheque not negotiable does not render the
instrument non-transferable. It only takes away the main feature of negotiability which is that
a holder with a defective title can give a good title to a subsequent holder in due course.
Anyone who takes a cheque marked ‘not negotiable’ takes it at his own risk.
The object of crossing a cheque ‘not negotiable’ is to afford protection to the drawer or
holder of the cheque against miscarriage or dishonesty in the course of transit by making it
difficult to get the cheque so crossed, until it reaches its destination.
3.7.6 Who may cross a cheque
Section 125 deals with the crossing of a cheque after its issue. It provides that a cheque may be
crossed by any of the following:
1. The Drawer:While issuing a cheque, the drawer can cross the cheque generally or specially.
If a cheque is crossed by the drawer, he has the right to cancel the crossing by writing the
words, pay cash, across the cheque and by putting down his full signature on the cheque.
2. The Holder: The holder can also cross the cheque in the following manner:
i) If the cheque is not crossed, he can cross the cheque generally or specially,
ii) If the cheque is crossed generally, he may cross it specially, and
iii) If the cheque is crossed generally or specially, he may add the words not negotiable.
3. The Banker: The banker can also cross the cheque in the following manner:
i) If the cheque is not crossed and sent to the bank for collection, banker can cross the
cheque generally.
ii) If the cheque is crossed generally and sent to the bank for collection, bank can cross the
cheque specially.
iii) If the cheque is crossed specially, the banker to whom it is crossed may again cross it
specially to another banker for collection.
The crossing of a cheque is an instance of an alteration that is authorized by the Act.
3.8 PARTIES TO NEGOTIABLE INSTRUMENTS
The various parties to the three different kinds of negotiable instruments are:

A. Parties to a Promissory Note

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 1) Maker or drawer: He is the person who makes the promissory note in which he promises
to pay another person a fixed sum of money.
2) Payee: The person who has to receive the payment for the promissory note is called the
payee.
3) Holder: He is the person who has the right to possess the promissory note in his name and
to receive the amount due thereon. He may either be the original payee or the endorsee who
has purchased the promissory note.
4) Endorser: he is the holder of a promissory note who endorses it in favour of another
person.
5) Endorsee: he is the person in whose name the promissory note has been endorsed.
B. Parties to a Bill of Exchange
1) Drawer: The drawer is the person who draws the bill of exchange.
2) Drawee: The drawee is the person on whom the negotiable instrument has been drawn and
who is directed to pay.
3) Acceptor: The person who accepts the bill of exchange and is liable for the amount thereon
is called the acceptor. Normally, the drawee is also the acceptor of the bill; however, some
other person may also accept it on behalf of the drawee.
4) Payee: The person who has to receive the payment of the bill of exchange is known as the
payee. The payee is usually the drawer or the person ordered by the drawer as payee.
5) Holder: Holder of a bill of exchange means any person who is legally entitled to the
possession of it and to receive or recover the amount due thereon from the parties. He is
either the payee or endorsee. In case the bill has been drawn as payable to bearer, the bearer
of the instrument shall be the holder thereof.
6) Endorser: when the holder of a bill of exchange endorses it in favour of another person,
then he is known as the endorser.
7) Endorsee: the endorsee is the person in whose name the bill of exchange is endorsed.
8) Drawee in case of need: The drawer of a bill or even an endorser may write in the
instrument the name of as person directing the holder to resort to such person in case on
need. Such a person is called a drawee in case of need. He is merely in the position of a
drawee who has not accepted the bill. The bill cannot be presented to him for acceptance
but only for payment. Where a drawee in case of need is mentioned in the bill, such a bill
is not dishonoured until it has been dishonoured by such drawee in case of need. The effect

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 of this provision is to make the presentment of the drawee in case of need obligatory on the
part of the holder.
9) Acceptor for honour: Any person may voluntarily become a party to a bill as an acceptor
by accepting it for the honour of the drawer or of any person. When the original drawee
refuses to accept a bill or in case the bill is presented for better security by the Notary
public and the original drawee refuses to grant the same, the some other person may accept
the bill in order to save the honour and reputation of the drawer or any other endorser and
bind himself by an acceptance. Such a person is known as an acceptor for honour. The
effect of such acceptance is that the bill is treated as alive and is not considered to be
dishonoured till it is dishonoured by the acceptor for honour.
C. Parties to a Cheque
1) Drawer: He is the person who draws the cheque.
2) Drawee: The drawee in the case of a cheque is always a bank on which the cheque is
drawn.
3) Payee: He is the person who is to receive payment for the cheque.
4) Holder: Holder of a cheque is a person who is legally entitled to the possession of the
cheque.
5) Endorser: The person who endorses the cheque in favour of another person is called the
endorser.
6) Endorsee:The endorsee is the person in whose name cheque is endorsed.
3.8.1 HOLDER OF A NEGOTIABLE INSTRUMENT
There are three different kinds of holders in relation to negotiable instruments. They are — a)
holder, b) holder for value and c) holder in due course.
a) Holder: According to Sec. 8, holder means, “any person entitled in his own name to the
possession of a promissory note or bill of exchange or cheque and to recover or receive the
amount due thereon from the parties thereto. A person in order to be a holder should
possess two rights — he should be entitled to the possession of the instrument in his own
name (whether as bearer or as payee or endorsee) and he should be entitled to receive or
recover the payment in his name.
The position of a holder of a bill is important for a number of reasons. No person
other than a holder can sue upon a negotiable instrument. Where the note, bill or cheque is
lost or destroyed, its holder is the person entitled at the time of such loss or destruction.
Where a person obtains possession of an instrument by theft or under a forged

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 endorsement, he is not a holder, as he cannot obtain or recover the payment of the
instrument. But where a person (e.g., the heir of a deceased holder) in absence of a holder
can give a valid discharge to the maker or acceptor of the instrument, he acquires the status
of a holder and can sue on the instrument to recover the amount due thereon.
b) Holder for value:If any person is the holder of a negotiable instrument, the value of which
has been paid at anytime in the past, then he is known as a holder for value. Who actually
has paid the value is not a relevant question. Such a holder does not acquire the instrument
for any consideration but even he has all rights of payment against all the prior parties.
However, such holder has no rights against the person who has actually paid the value.
c) Holder in due course: According to Sec.9, holder in due course means, “any person who
for consideration becomes the possessor of a promissory note, a bill of exchange or cheque
if payable to the bearer or to the payee or endorsee thereof (if payable to order), before the
amount mentioned on it becomes payable and without having sufficient cause to believe
that any defect exist in the title of the person from whom he derived the title”. In case of
bearer instruments, the holder in due course means aperson who has acquired its possession
for consideration before the amount mentioned in it became payable. In case of an
instrument payable by order, the holder in due course means a person who became the
payee or endorsee of the instrument before the amount mentioned in it became payable.
3.8.2 Distinction between Holder and Holder in due course
The distinguishing points between holder and holder in due course are:
1. Meaning: Holder means any person entitled in his own name to the possession of the
negotiable instrument and to recover or receive the amount due thereon from the parties
thereto. A holder in due course on the other hand, means a holder who takes the instrument
in good faith for consideration before it is overdue and without any notice of defect in the
title of the person who transferred it to him.
2. Consideration: A person who claims to be a holder in due course must show that he
acquired the instrument for consideration. However, consideration may not pass from a
holder of the instrument.
3. Title: Holder of a negotiable instrument does not acquire a better title than that of the person
from whom he acquired the instrument. But a holder in due course gets a good title even
though there was a defect in the title of any prior parties to the instrument.

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 4. Liability: A holder in due course can sue all prior parties to a negotiable instrument until the
instrument is duly satisfied. Whereas a holder of the instrument can enforce it against the
person who has signed it and also against the transferor from whom he obtained it.
5. Maturity: A person will be a holder in due course only if he acquires the instrument before
the amount mentioned in it became payable. But a holder may acquire the instrument even
after it has become due for payment.
3.9 DISHONOUR OF A NEGOTIABLE INSTRUMENT
3.9.1 Meaning
The liability of parties to a negotiable instrument generally arise when the instrument is
presented or acceptance or payment. Dishonour denotes a state where the acceptance or
payment is refused. There are some instruments which are presented for acceptance and
dishonour arises when its acceptance or payment is refused. There are some instruments which
are not presented for acceptance and these are dishonoured on account of the non-payment. A
bill of exchange as it requires acceptance is dishonoured either on account of non-acceptance
or non-payment. The dishonour of promissory note and cheques becomes important on account
of non-payment.
3.9.2 Definition
A negotiable instrument is said to be dishonoured when the drawee (debtor) refuses to accept
the same or make payments thereon. Therefore, an instrument may be dishonoured by the
following two modes:
A. Dishonour by non-acceptance
B. Dishonour by non-payment
A bill of exchange may be dishonoured by both the above modes viz., by non-acceptance
(since only bills require acceptance) or non-payment, whereas a cheque or a promissory note can
only be dishonoured by non-payment. When a negotiable instrument is dishonoured, the holder
must give a notice of dishonor to all the parties in order to make them liable on the instrument. If
he fails to do so, except in cases where notice of dishonor may be excused, he forfeits his right of
action against the prior parties entitled to the notice of dishonor (Sec. 93).
A. Dishonour by Non-acceptance (Sec. 91)
A bill of exchange is dishonoured by non-acceptance in any one of the following situations:
i) If the drawee does not accept the bill within 48 hours from the time of presentment though
it is duly presented for acceptance;
ii) If there are several drawees (who are not partners) and all of them do not accept;

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 iii) when presentment for acceptance is excused and the bill is not accepted;
iv) when the drawee is incompetent to contract;
v) when the drawee gives a qualified acceptance;
vi) when the drawee is a fictitious person or after reasonable search cannot be found.
If a drawee in case of need is mentioned in a bill, the bill is not deemed to be dishonoured
unless it is dishonoured by such drawee in case of need also (Sec. 115).
B. Dishonour by Non-payment (Sec. 92)
A promissory note, bill of exchange or cheque is said to be dishonoured by non-payment when
the maker of the note, acceptor of the bill or drawee of the cheque makes default in payment
upon being duly required to pay the same. An instrument is also dishonoured by non-payment
when presentment for payment is excused and the instrument when overdue remains unpaid
(Sec. 76).
3.9.3 Differences between dishonour by non-acceptance and dishonour by non-payment
The main differences between dishonour by non-acceptance and dishonour by non-payment are
pointed below:
1. Occurrence: Dishonour by non-acceptance occurs when the bill is presented by the drawer
to the debtor for acceptance and acceptance is not granted by him whereas dishonour by non-
payment occurs when the maker of the promissory note, the acceptor of a bill of exchange or
the bank (in case of a cheque) refuses to make payment thereof.
2. Filing a suit: In case of dishonour by non-acceptance, a suit cannot be filed against the
debtor, since he is not a party to the instrument before he accepts the same whereas in case of
dishonour by non-payment, the holder can file a suit if he has served notice of dishonour on
all other parties.
3. Purpose of filing a suit: In case of dishonour by non-acceptance, the creditor can file a suit
only for the recovery of the amount of the loan, whereas in case of dishonour by non-
payment, the drawer can file a suit for recovering the noting and protesting charges, interest,
etc., along with the amount of the loan.
3.9.4 Notice of Dishonour
According to Section 93, when a negotiable instrument is dishonoured by non-acceptance or by
non-payment, the holder of the instrument or some party to it who is liable thereon, must give a
notice of dishonor to all the parties whom he wants to make liable on the instrument. If he does
not give this notice, except in cases when notice of dishonor may be excused, all the prior parties
liable thereon are discharged of their liability. Each party, on receiving such notice if dishonour,

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must, within reasonable time of receiving such notice, serves upon all such parties, whom he
intends to hold liable on the instrument (Sec. 95).
Object of notice of dishonour
The object of notice of dishonor is to inform the party liable on the instrument about the liability
which accrues as a result of the dishonor of the instrument. The notice is necessary whatever the
nature of the instrument, i.e., whether it is payable at sight or on demand or whether it is an
accommodation bill. If the holder neglects to give such notice within a reasonable time from the
date of dishonor, all the prior parties liable on the instrument and entitled to notice are
discharged.
Notice by whom
1. Notice by holder or any prior party: Notice of dishonor may be given by the holder or
any of the parties liable on the instrument (Sec. 93).
2. Chain method of giving notice of dishonor: A party receiving notice of dishonor must, in
order to render any prior party liable to himself, give notice of dishonor to such party within
a reasonable time, unless such party otherwise receives due notice (Sec. 95).But if a notice
is given by a stranger it would be a mere nullity.
3. Notice by principal or agent: If an instrument deposited with an agent for presentment is
dishonoured, the notice of dishonor may be given either by the agent or by the principal
himself. The agent may give notice to his principal within a reasonable time, and the
principal may give notice within a reasonable time to the parties sought to be held liable
(sec. 96).
Notice to whom
1. Notice to all parties whom the holder seeks to make liable: Notice of dishonor must be
given to all parties whom the holder seeks to make liable. Notice of dishonor need not be
given to the acceptor of a bill of exchange or the maker of a promissory note or the drawee
of a cheque (Sec. 93), because they are parties primarily liable upon the instrument.
2. Notice to party or his agent, or to legal representative or assignee: Notice of dishonor
may be given to the party liable or his duly authorized agent, or, where he has died, to his
legal representative, or, where he has been declared insolvent, to his assignee (Sec. 94).
When the party to whom the notice of dishonor is dispatched is dead, but the party
dispatching the notice is ignorant of his death, the notice is sufficient (Sec. 97).
Form of notice
1. The notice of dishonor may be oral or written. If it is written, it may be sent by post.

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2. It may be in any form but it must clearly indicate that the instrument has been dishonoured
and in what way, and that the party to whom it is being given will be liable on the
instrument.
3. It must be given within a reasonable time at the place of business or (in case such party has
no place of business) at the residence of the party for whom it is intended (Sec. 94).
When the notice of dishonor is not necessary (Sec. 98)
In the following circumstances, the notice of dishonor is not required:
1. When the party entitled to receive such notice voluntarily waives his right thereto.
2. When the drawer has himself ordered against making the payment on such instrument, the
notice of dishonour need not be served on the drawer.
3. When the party liable on the instrument does not incur any loss due to non-service of the
notice.
4. When the party entitled to such notice of dishonor cannot be found even after due search.
5. When the notice of dishonor cannot be served due to circumstances beyond the control of
the holder.
6. When the acceptor himself is the drawer.
7. When the promissory note ceases to be negotiable.
8. When the party entitled to the notice of dishonor promises unconditionally pay the
dishonoured instrument.
3.9.5 NOTING AND PROTESTING
A. Noting
When a promissory note or bill of exchange is dishonoured by non-acceptance or by non-
payment, then the holder of such instrument can, after giving due notice of dishonor, sue any or
all prior parties liable thereon. In case of any negotiable instrument has been dishonoured, then
the holder can get such dishonour noted on the instrument by the 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 the drawee or acceptor, he records the
noting on the instrument. As per the Negotiable Instruments Act, ‘noting’ means the recording of
the fact of dishonor 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). In short, noting is a
convenient way of certifying that the instrument has been dishonoured.

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 The Notary Public is an officer appointed by the State Government for certifying the
negotiable instrument or for noting the dishonor of bills of exchange or promissory notes under
the Negotiable Instruments Act.
Noting must contain the following particulars:
i) the fact of dishonor;
ii) the date of dishonor;
iii) the reasons, if any, assigned for such dishonor;
iv) if the instrument has not been expressly dishonoured, the reason why the holder treats it
as dishonoured; and
v) the Notary’s charges (Sec. 99)
Noting is not compulsory in the case of an inland bill or note. The omission to get the instrument
noted does not in any way affect the rights of the holder thereof.
B. 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 dishonor to be noted and certified
by a Notary Public. Such certificate is called a ‘protest’ (Sec. 100). In other words, a protest is
the formal notarial certificate attesting the dishonour of a bill or note. It is based upon noting.
Contents of a protest
The following are the essential contents of a protest —
i) The instrument or a literal transcript of the instrument.
ii) The name of the person for whom and against whom the instrument has been protested.
iii) The fact of, and reason for, dishonour.
iv) The place and time of dishonour.
v) The signature of the notary Public.
vi) 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
(Sec. 101).
Protest for better security:when the acceptor of a bill of exchange has become insolvent, or his
credit has been publicly impeached before the maturity of the bill, the holder may, within a
reasonable time, through a Notary Public, demand a better security from the acceptor. If the
acceptor refuses to give a better security, the fact may also be noted ands certified by the Notary
Public. Such certificate is called a ‘protest for better security’ (Sec. 100).

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The acceptor is not bound to give such security. On a refusal by the acceptor to give a better
security, the holder has no immediate right of action against the drawer and the endorsers. He
shall have to wait till the maturity of the bill.
Advantages of protest
1. It affords an authentic evidence of dishonour to the drawer and endorsers.
2. In a suit upon an instrument which has been dishonoured, the court shall, on proof of the
protest, presume the fact of dishonour, unless and until such fact is disproved.
Notice of protest: When a promissory note or bill of exchange is required by the law to be
protested, notice of such protest must be given instead of notice of dishonour, in the same
manner and subject to the same conditions. The notice may be given by the Notary Public who
makes the protest (Sec. 102).
Protest for non-payment after dishonour by non-acceptance: Where a bill of exchange drawn
payable at some other place than the place mentioned as the residence of the drawee, is
dishonoured by non-acceptance, it need not be presented again for payment. It may be protested
at the place specified for payment unless it is paid before or at maturity (Sec. 103).
Protest of Foreign Bills: Foreign Bills of exchange must be protested for dishonour when such
protest is required by the law of the place where they are drawn (Sec. 104)
3.10 DISCHARGE OF A NEGOTIABLE INSTRUMENT
In relation to the negotiable instruments, the word ‘discharge’ is used in two senses, viz.,
A) Discharge of the instrument, and
B) Discharge of one or more of the parties from liability thereon.
An instrument is said to be discharged when all rights of action under it are completely
extinguished and when it ceases to be negotiable. This would happen when the party who is
ultimately liable on the instrument is discharged from liability. In such a case, even a holder in
due course does not acquire any rights under the instrument. If, on the other hand, one or more of
the parties is/are discharged from liability, the instrument continues to be negotiable and the
parties continue to be liable on it. The discharge of one or more of the parties to a bill or note
does not discharge the instrument.
A. Discharge of an Instrument
An instrument is said to be discharged when all the rights contained therein are terminated and
the instrument ceases to be negotiable. Even the holder in due course does not get any rights in
the instrument in such a situation.

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The different modes of discharge of an instrument are as follows:
1. By payment in due course: This is the most obvious and the usual mode of discharge of an
instrument and of the parties to it. The instrument is discharged by payment made in due
course by the party who is primarily liable to pay (i.e., the maker or the acceptor), or by a
person who is accommodated in case the instrument was made or accepted for his
accommodation. The payment of the amount due on the instrument must be made at or after
the maturity to the holder of the instrument if the maker or acceptor is to be discharged (Sec.
78). A payment by a party who is secondarily liable does not discharge the instrument.
Again, any person liable to pay is entitled to have the instrument shown to him before
payment. On payment, he is entitled to have the instrument delivered up to him (Sec. 81).
Payment of Interest: If a rate of interest is specified in the promissory note or bill of
exchange, interest shall be calculated on the principal amount at the specified rate from the date
of the instrument until tender or realization of the amount (sec. 80). If no rate of interest is
specified, the law implies an agreement to pay interest at 18 percent per annum [rate increased
from 6 to 18 percent per annum by the Banking, Public financial Institutions and Negotiable
Instruments (Amendment) Act, 1988] in spite of any collateral agreement which is not
incorporated in the instrument.
2. By party primarily liable becoming holder: If the maker of a note or the acceptor of a bill
becomes its holder at or after its maturity in his own right(i.e, he has an absolute title and
does not hold it conditionally or as an agent), the instrument is discharged (Sec. 90).
3. By express waiver: When the holder of a negotiable instrument at or after its maturity
absolutely and unconditionally renounces in writing or gives up his rights against all the
parties to the instrument, the instrument is discharged. The renunciation must be in writing
unless the instrument is delivered up to the party primarily liable.
4. By cancellation: Where an instrument is intentionally cancelled by the holder or his agent
and the cancellation is apparent thereon, the instrument is discharged. Cancellation may take
place by crossing out signature on the instrument, or by physical destruction of the
instrument with the intention of putting an end to the liability of the parties to the instrument.
Cancellation through inadvertence or mistake will not discharge the party whose name has
been cancelled. (Sec. 82)

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5. By discharge as a simple contract: A negotiable instrument may be discharged in the same
w3ay as any other contract for the payment of money. This includes, for example, discharge
of an instrument by novation or rescission or by expiry of period of limitation..
B. Discharge of a party or parties
The holder of a negotiable instrument can hold each of the prior parties liable on the instrument
until he receives the payment thereon. Therefore, the liability of the parties to the instrument
comes to an end only when the instrument is fully paid. However, if any party to a negotiable
instrument is relieved of his liability thereon, the instrument continues to be negotiable and all
the other parties remain liable thereon. For example, if a bill of exchange is not presented for
payment on the due date, then all the endorsers to the bill are relieved of their liability, but the
acceptor continues to be liable thereon.
A party or parties to a negotiable instrument is/are discharged in any one of the following ways:
1. By payment in due course: When, on the date of maturity of the instrument, the holder
is made payment in due course, both the instrument and all the parties to the instrument
are relieved of their liability thereon [Sec. 82 (c)].
2. By cancellation: When the holder of a negotiable instrument or his agent cancels the
name of a party on the instrument with intent to discharge him, such party and all
subsequent parties, who have a right of recourse against the party whose name is
cancelled, are discharged from liability to the holder [Sec. 82 (a)]. The subsequent parties
are in the position of sureties to the prior party whose name is cancelled and discharge of
the principal debtor automatically discharges the sureties.
3. By release: Where the holder of a negotiable instrument releases any party to the
instrument of its liability in any manner other than cancellation, i.e., by cutting the name
of the party on the instrument, such party ceases to be liable on the instrument; for
example, if the holder releases the debtor by accepting only partial payment of the
amount of the instrument. [Sec. 82 (b)]. Sec. 63 of the Indian Contract Act, 1872 also
enunciates this rule.
4. By allowing the drawee more than 48 hours: In case the holder of a negotiable
instrument allows the drawee more than 48 hours (exclusive of public holidays) to decide
whether to accept the instrument or not, then all the prior parties who do not consent to
the allowance of extra time to the drawee are relieved of their liability towards the holder
(Sec. 83).

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5. By non-presentment of cheque: Where a cheque is not presented by the holder for
payment within a reasonable time of its issue and the drawer suffers actual damage
through the delay because of the failure of the bank, he is discharged from the liability to
the extent of such damage. In determining what a reasonable time is, regard shall be had
to the nature of the instrument, the usage of trade and of bankers, and the facts of the
particular case (Sec. 84).
6. Cheque payable to order: When a cheque payable to order purports to be endorsed by
the payee and the bank makes the payment thereof in due course, the bank is relieved of
its liability thereon even if the endorsement is subsequently proved to be false. Where a
cheque is expressed to be payable to bearer, the drawee is discharged by payment in due
course to the bearer thereof. It makes no difference even if any endorsement whether in
full or in blank appears on the cheque and even if any such endorsement purports to
restrict or exclude further negotiation (Sec.85).
7. Draft drawn by one branch on another: Where any draft (that is an order to pay
money) drawn by one office of a bank upon another office of the same bank for a sum of
money payable to order on demand purports to be endorsed by or on behalf of the payee,
the bank is discharged by payment in due course (Sec. 85-A).
8. Parties not consenting discharged by qualified acceptance: If the holder of a bill of
exchange acquiesces (assents) in a qualified acceptance, all the previous parties whose
consent is not obtained to such acceptance are discharged from liability (Sec.86). They
will, however, be liable if on a notice being given to them they give their assent to such
acceptance.
9. By operation of law: The parties to a negotiable instrument may also be relieved of their
liability thereon by the operation of any law. This includes discharge —
a) By an order of insolvency court, discharging the insolvent.
b) By merger: When a judgement is obtained against the acceptor, maker or endorser,
the debt under the bill is merged into judgement debt.
c) By lapse of time, i.e., when the remedy becomes time-barred.
10. By material alteration: A material alteration of a negotiable instrument renders the same
void against persons who were parties thereto before such alteration unless they have
consented to the alteration (Sec. 87).
11. Discharge by payment of altered instrument: When a promissory note, bill of
exchange or cheque has been materially altered but does not appear to have been so

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 altered, or where a cheque is presented for payment which does not at the time of
presentation appear to be crossed, payment on such an instrument discharges the party
liable if he pays according to the apparent tenor of the instrument (as altered) at the time
of payment and otherwise in due of course. Such a payment cannot be questioned even if
it is proved that the instrument has been altered or that the cheque was originally crossed
[sec. 89 (1)].
12. Bill in acceptor’s hand: If any instrument which has been negotiated returns into the
hands of the acceptor on maturity or thereafter, i.e., the acceptor becomes the holder
thereof, then all the rights contained in the instrument come to an end (Sec. 90).
Where the cheque is an electronic image of a truncated cheque, any difference in apparent tenor
of such electronic image and the truncated cheque shall be a material alteration and it shall be the
duty of the bank or the clearing house to ensure the exactness of the apparent tenor of electronic
image of the truncated cheque while truncating and transmitting the image. [Sec. 89 (2) inserted
by the negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002].
Material Alteration
An alteration is material which —
a) alters the character or identity of the instrument, or which shakes the very foundation of
the instrument, or
b) changes the rights and liabilities of the parties, or any of the parties to the instrument or
c) alters the operation of the instrument.
Any change in an instrument which causes it to speak a different language in effect from that
which it originally spoke, or which changes the legal identity or character of the instrument
either in its term or the relation of the parties to it, is a material alteration. It makes no difference
whether the alteration is beneficial or prejudicial.
Instances of material alteration:The following alterations are considered as material alterations
as per law —
a) alteration in the date of the instrument,
b) alteration in the amount payable,
c) alteration in the time of payment,
d) alteration in the rate of interest,
e) alteration in the place of payment,
f) addition of place of payment,
g) alteration in the parties to the instrument.

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In certain situations, a material alteration to the negotiable instrument also does not relieve the
parties thereto of their liabilities. In other words, such alterations are not considered material in
the sense to relieve the parties to the instrument of their liability.
Alterations authorized by the Act:The following alterations, though material, are permitted by
the Act, and do not invalidate the instrument:
a) filling blanks of an inchoate instrument (sec. 20).
b) conversion of a blank endorsement into an endorsement in full (sec. 49).
c) crossing of an open cheque (sec. 125)..
Alterations not vitiating the instrument: In the following cases, the alteration of a negotiable
instrument will not vitiate or avoid the instrument:
a) an alteration, though in a material part, made before the instrument is issued.
b) an alteration made for the purpose of correcting a mistake, e.g., the correction of mistake
in a bill dated 1989 instead of 1998.
c) an alteration made to carry out the common intention of the original parties, e.g., the
subsequent insertion of the words ‘or order’ where the drawer of a bill forgets to use
these words.
d) an alteration made with the consent of the parties.
e) an alteration which is not material.
Effect of material alteration
The effect of material alteration of a negotiable instrument is only to discharge those who
become parties thereto prior to the alteration. But if an alteration is made in order to carry out the
common intention of the original parties,it does not render the instrument void. Any material
alteration, if made by an endorsee, discharges his endorser from all liability to him in respect of
the consideration thereof (Sec.87).
The rule as contained in Sec. 87 is based on a sound policy and may be defended on two
grounds:
i. that no man should be permitted to take chance of committing a fraud without running any
loss by an event when it is detected, and
ii. that by the alteration the identity of the instrument is destroyed, and to hold one of the
parties under such circumstances would be to make him liable for something to which he
never agreed.

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 3.11. SUMMARY
Negotiable Instrument: According to section 13(1), Negotiable instrument means a promissory
note, bill of exchange or cheque payable either to order or to the bearer. According to Willis a
negotiable instrument is one the property in which is acquired by anyone who takes it bonafide,
and for value in spite of any defect of title in the person from whom he took it.
Types of negotiable instrument:
i) Promissory note: It is an instrument in writing 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.
ii) Bill of Exchange: It 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
certain person or to the bearer of the instrument.
iii) Cheque: it isa bill of exchange drawn on a specified banker and expressed to be payable
otherwise than on demand and it includes the electronic image of truncated and cheque in the
electronic form.
Parties to Bill of Exchange: i) Drawer, ii) Drawee, iii) Payee
Parties to Promissory Note: i) Maker,ii) Payee
Parties to Cheque: i) Drawer,ii) Drawee,iii)Payee
Holder: A person who is entitled in his own name to the possession of the instrument and who
has also the right to receive or recover the amount due thereon from the parties thereto.
Holder in due course: Any person who for valuation consideration become the possessor of a
negotiable instrument payable to bearer or the endorsee or payee thereof, if payable to order
before the amount mentioned in the document becomes payable and without having sufficient
cause to believe that any defect existed in the title of the person from whom he derives this title.
Negotiation: The term negotiation means transfer of an instrument from one person to another
person so as to constitute that person the holder of the instrument.
Delivery: delivery is the voluntary transfer of the possession of the instrument.
Dishonour: A negotiable instrument may be dishonoured either by non-acceptance or non-
payment.
Crossing of Cheque: A cheque is said to be crossed when two parallel lines with or without any
word are drawn across it’s face. A crossing is a direction to the paying banker to pay the money
generally to the banker or a particular banker as the case may be.
3.12. SELF ASSESSMENT QUESTION
1) What is a negotiable instrument?what are its essential characteristics?
2) Define bill of exchange. How does it differ from promissory notes?
3) What is a cheque? Why are cheque and bill of exchange treated as negotiable instrument?
4) Who is a holder in due course of a negotiable instrument? In what respect does it differ
from a holder.
5) Who are the important parties to a negotiable instrument? What do you know of their
capacities to draw, make, accept, endorse,negotiate such instrument?
6) Distinguish between bill of exchange and promissory notes.
7) What do you mean by noting and protesting? What are its effects?
8) What is meant by noting? What are its contents?

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9) What is meant by payment in due course in respect of a negotiable instrument?
10) Describe different modes of discharge of liability of parties with regard to a negotiable
instrument.

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 UNIT-4
CONSUMER PROTECTION ACT
AIMS AND OBJECTIVES
After studying this unit you will be able to understand:
 The meaning of certain terms related with the consumer protection act 1986
 The objective and functioning of consumer protection council
 The procedure adopted by different agencies in redressing consumerdisputes
 The meaning of environment protection act 1986
 State the power of the central government concerning protection and
improvement of environment.
 Various provisions concerning prevention and control of environment pollution.
 The provisions concerning actions taken and offences committed under the act.

CONTENTS
4.1. About Consumer Protection Act
4.2. Meaning of Consumer
4.3. Meaning of Service
4.4. Unfair Trade Practice
4.5. Rights Of the Consumers And reliefs Available to Consumer
4.6. Consumer Protection Council
4.7. Consumer Dispute Redressal Agencies
4.8. Finding of Districts Forum And appeal
4.9. The Environment Protection Act
4.10. Premises of the Act
4.11. Objectives
4.12. Scope and Applicability
4.13. Definitions of various terms under this act
4.14. Power of the Central Government to protect and improve environment
4.15. Power of the Court
4.16. Prevention, Control and abetment of Environment Pollution
4.17. Penalties
4.18. The National Environment Appelate Authority
4.19. Summary

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4.20. Self-assessment Questions

UNIT-4

CONSUMER PROTECTION ACT 1986

4.1.About Consumer Protection Act
The post-independence period witnessed a change in focus towards industrialization and
economic development which led to the increase in consumer as well as the consumption of
goods and services. This in turn led to the consumer exploitation on the part of the business
enterprises. Consequently there was a growing consumer awareness which led to consumer
movement throughout the country. This led to the enactment of the Consumer Protection Act,
1986. The Consumer Protection Act, 1986 came into effect from 15 th April, 1987 except
chapter 3rd (regarding Consumer Disputes Redressal Agencies) which came into effect
from1st July, 1987. The Act has been enacted to provide for better protection and promotion
of consumer rights through the establishment of consumer councils and other authorities for
settlement of customer’s disputes. The Act is applicable to the whole of India except the state
of Jammu and Kashmir.
Under the Act, consumer disputes redressal agencies have been set up throughout the
country at the district level, state level and national level to provide simple, inexpensive and
speedy justice to the consumers having complaints against defective goods, deficient services,
unfair and restrictive trade practices. The Act was amended in the years 1991, 1993 and 2002.
4.2. Meaning of Consumer
Section 2 (1) (d) of the Act defines the word ‘consumer’ and it includes the following persons
—
a) A person who buys any goods for a consideration which has been paid or promised or
partly paid and partly promised or under any system of deferred payment. It also includes
any other user of such goods when such use is made with the approval of the buyer. The
expression, however, does not include a person who obtains such goods for resale or for
any commercial purpose.
b) A person who hires or avails of any services for consideration which has been paid or
promised or partly paid and partly promised or under any system of deferred payment. It
also includes any other beneficiary of such services with the approval of the first

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 mentioned person. But a consumer does not include a person who avails of such services
for any commercial purpose.
The words ‘commercial purpose’ does not include use by a consumer of goods brought and
used by him and services availed by him exclusively for the purpose of earning his livelihood
by means of self-employment.
The courts have included the following under the meaning of consumer:
a) A railway passenger is a ‘consumer’.
b) An employee who is a member of Employees’ Provident is a consumer and duties
performed by Regional Provident Commissioner under such scheme are services and thus
delay in release of provident fund and complaint for deficiency in service are
maintainable.
c) A person registering himself for release of L.P.G., connection with a distributor is a
‘consumer’, though at that time he pays nothing and the payment is deferred till the time
of release of gas connection.
d) A person using electricity for a commercial purpose is a ‘consumer’.
e) Nominee under a policy of insurance is a ‘consumer’.
4.3.Meaning of Service
Section 2 (1) (O) of the Act defines the word ‘service’. It means service of any description
which is made available to potential users. It includes facilities in connection with banking,
financing, insurance, transport, processing, supply of electrical or other energy, boarding, or
both, housing construction, entertainment, amusement or purveying of news or other
information. But it does not include the rendering of any service free of charge or under a
contract of personal service.
Some of the important decisions taken by the courts related with the meaning of service are
—
a) The relationship of teacher and student of an educational institution is not a service on hire
because student is not such a consumer who is linked any way with the buyer of any
economic goods and hire has not been linked with education, teacher and student.
b) Grant of overdraft facility by bank to its customer, being not without consideration,
amounts to providing of ‘service’.
c) The services rendered by the government servant under the Central Government Health
Scheme are not covered by the term ‘service’ as defined in the Act.

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d) An employee who is a member of Employees’ Provident is a consumer and duties
performed by Regional Provident Commissioner under such scheme are services and thus
delay in release of provident fund and complaint for deficiency in service are
maintainable.
4.4. Unfair Trade Practice
Section 2 (1) (r) of the Consumer Protection Act, 1986 defines unfair trade practice as a
means of trade practice for the purpose of promoting sale, use or supply of any goods,
provision of service, adopts any unfair method or unfair or deceptive practice. Unfair trade
practices include the following practices:
1. Misleading advertisements and false representation: This means practice of making
any statement, whether orally or in writing or by visible representation, which includes:
a) Falsely representing that goods or services are of a particular standard, quality,
quantity, grade, composition, style or model
b) Falsely representing any second hand, rebuild, renovated or reconditioned old goods
as new goods.
c) False representation on part of seller about sponsorship, performance, characteristics,
etc., of the goods or services.
d) False or misleading representation concerning the need for or the usefulness of any
goods or services.
e) Making to the public any representation that purports to be a warranty or a guarantee,
a promise to replace, maintain or repair which is either misleading or no reasonable
prospect of carrying it out.
f) Materially misleading the public about the price at which products, goods services are
being sold.
2. Bargain sale: It means publication of advertisement, whether in newspaper or otherwise,
for the sale or supply at the bargain price of goods or services that are not intended to be
offered for sale or supply at the bargain price. Here bargain price means a price stated in
any advertisement to be a bargain price, by reference to any ordinary price or otherwise or
a price that a person who reads, hears or sees the advertisement would reasonably
understand to be a bargain price having regard to the price at which the product advertised
or like products are ordinarily sold. An illustration for this is a dealer selling spurious/sub-
standard suiting, etc. falsely claiming it to be a well-known brand.

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 3. Offering gifts, prizes with the intention of not providing and lottery: The offering of
gifts, prizes or other items with the intention of not providing the, or creating an
impression that something is being offered free of charge when it is actually covered by
the amount charged in the transaction as a whole is considered as an unfair trade.
Moreover, the conduct of any contest, lottery, game of chance for the purpose of
promoting directly or indirectly, the sale, use or supply of any product, etc. is also
considered as an unfair trade practice.
4. Non-confirming to the prescribed standards: The sale or supply of any goods which do
not comply with the standards prescribed by the competent authority relating to
performance, composition, contents, design or packaging is considered as means of an
unfair trade practice. An example of this is selling products which do not comply with ISI
certification.
5. Hoarding or destruction of goods: The hoarding or destruction of goods, or refusal to
sell the goods intentionally, so that the cist of those or similar goods rises, will amount to
unfair trade practice.
4.5.RIGHTS OF THE CONSUMERS AND RELIEFS AVAILABLE TO CONSUMERS
Section 6 of the Act recognizes the following rights:
a) Right to safety: the right to be protected against the marketing of goods and services
which are hazardous to life and property.
b) Right to be informed: the right to be informed about the quality, quantity, potency,
purity, standard and price of goods orservices, as the case may be, so as to protect the
consumeragainst unfair trade practices.
c) Right to choose: the right to be assured, wherever possible, access to a variety of goods
and services at competitive prices.
d) Right to be heard: the consumers interests will receive due consideration at appropriate
forums.
e) Right to seek redressal: against unfair practices or restrictive trade practices or
unscrupulous exploitation of consumers.
f) Right to consumer education: the right to acquire the knowledge and skill to be an
informed consumer.
The consumers in case of their grievances can approach any of the three tier quasi-judicial
redressal machinery envisaged in the Act. Any consumer or recognized consumer association
or the Central government or State Government could file a complaint with any of the

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 redressal forums. The filing of complaints with the redressal forums depends upon the value
of the goods or services and the compensation claimed. If the value of the goods or services
and the compensation is within Rs. 20 lakhs, then the complaint can be filed in the district
forum within the local limits of whose jurisdiction the opposite party actually resides or
carries on business or has a branch office or personally works for gain or where the cause of
action, wholly or in part, arises (Sec. 11).
If the value of the goods or services and compensation claimed exceeds Rs. 20 lakhs, but
does not exceed Rs. 1 crore, complaint can be filed before the State Commission (Section
17). In the event of the value of goods or services and the compensation claimed exceeds Rs.
1 crore, then the complaint can be filed before the National Commission (Section 21).
A complaint should contain the following information:
1. The name, description and address of the complainant and the opposite party.
2. The facts relating to the complaint and when and where it arouse.
3. Documents, if any, in support of the allegations contained in the complaint.
4. The relief which the complainant is seeking.
The complaint should be addressed to the President of the forum. A copy of the complaint
within 21 days of the date of its admission by the forum should be given to the opposite party
mentioned in the complaint, directing him to give his version of the case within a maximum of
30 days. In the case of denial on the part of the opposite party, the district forum will proceed in
the manner specified under Sec. 13 (c) (g) of the Act. In cases where the alleged defective goods
require analysis, it will be sent to the laboratory for testing by the district forum. On receipt of
the report from the appropriate laboratory, a copy of the report will be forwarded to the opposite
party. A reasonable opportunity to the complainant as well as the opposite party, of being heard
as to the correctness of the report, shall be given by the district forum. District forum has the
same power as that of the civil court under the Civil Procedure Code, 1908.
If the allegations made by the complainant are found to be true by the district forum, the
opposite party may be directed to remove the defect in the goods, replace the goods, return the
complainant the price, give certain amount as compensation to the complainant, discontinue the
unfair trade practice, not to offer the hazardous products, etc. any person aggrieved by an order
made by the district forum shall appeal to the state commission within 30 days from the date of
the order. The procedure applicable to State commissions is similar to that of district forums.
Any person aggrieved by the order of the State Commission shall appeal to the National

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 Commission within 30 days of the order. Appeals heard before the State or National Commission
shall be heard and disposed of within a period of 90 days.
4.6. CONSUMER PROTECTION COUNCILS
The Consumer Protection Act postulates establishment of Consumer Protection Councils at the
Central and State levels for the purpose of spreading consumer awareness. The objects of the
Councils, as per the Act, shall be to promote and protect the rights of the consumers such as:

 The right to be protected against the marketing of goods and services which are hazardous
to life and property
 The right to be informed about the quality, quantity, potency, purity, standard and price of
goods or services, as the case may be so as to protect the consumer against unfair trade
practices;
 The right to be assured, wherever possible, access to a variety of goods and services at
competitive prices;
 The right to be heard and to be assured that consumer's interests will receive due
consideration at appropriate forums
 The right to seek redressal against unfair trade practices or restrictive trade practices or
unscrupulous exploitation of consumers and
 The right to consumer education.
1. Central Consumer Protection Council

The Consumer Protection Act empowers the Central Government to establish a Central
Consumer Protection Council consisting of the Minister in charge of consumer affairs in the
Central Government as its Chairman and such number of other official and non-official members
representing such interests as may be prescribed. Under the Consumer Protection Council Rules
1987, the membership of the Council is restricted to 150 members including the Central Minister
in charge of Consumer Affairs as the Chairman. The term of the Council is three years. To
monitor the implementation of the recommendations of the Council, the Central Government
may constitute a standing working group from amongst the members of the council under the
Chairmanship of the Member Secretary of the Council. The Council shall meet as and when
necessary, but at least one meeting of the Council shall be held at such time and place as the
Chairman may think fit.

2. State Consumer Protection CouncilThe Consumer Protection Act provides for the
establishment of State Consumer Protection Councils by the State Governments. The State
Council shall consist of a Minister in charge of consumer affairs in the State Government as its
Chairman and such number of other official or non-official members representing such interests
as may be prescribed by the State Government and ten nominees of the Central Government. The
State Council shall meet as and when necessary but not less than two meetings shall be held
every year at such time and place as the Chairman may think fit.
3. District Consumer Protection Council

In order to promote and protect the rights of consumers, within the district, the Consumer
Protection Act, provides for the establishment of a District Consumer Protection Council in
every district. It shall consist of the Collector of the district as its Chairman and such number of
other official and non-official members representing such interests as may be prescribed by the

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State Government. It shall meet as and when necessary but not less then two meetings shall be
held every year. The Chairman shall decide the time and place of the meeting.

4.7. CONSUMER DISPUTE REDRESSAL AGENCIES

The act provides for three agencies to be established for redressal of consumer disputes as given
below

 District Forum: These forums are set by the district of the state concerned in each district
wherein it consists of President and two members of which one should be a woman and is
appointed by the State Government. In this, the complaining party should not make a
complaint more than 20 Lacs and once the complaint is filed the goods are sent for testing
and if they found defective the accused party should compensate and if the party is
dissatisfied can make an appeal with state commission within 30 days.

 State Commission: This is set up by each state It consists of President and two members.
Complains should be at least 20 lacs and exceed not more than 1 crore. The goods are sent
for testing and if found defective are asked for replacement or compensation. If not satisfied
can make an appeal within 30 days in front of the National Commission.

 National Commission: Consist of President and 4 members. The complaint must exceed an
amount of 1 crore. The goods are sent for testing and if found defective are asked for
replacement or compensation.

4.8. Finding of the District Forum and appeal

(1) If, after the proceeding conducted under section 13, the District Forum is satisfied
that the goods complained against suffer from any of the defects specified in the
complaint or that any of the allegations contained in the complaint about the services are
proved, it shall issue an order to the opposite party directing him to do one or more of the
following things, namely:—
 (a) to remove the defect pointed out by the appropriate laboratory from the goods in
question;
 (b) to replace the goods with new goods of similar description which shall be free from
any defect;
 (c) to return to the complainant the price, or, as the case may be, the charges paid by the
complainant;
 (d) to pay such amount as may be awarded by it as compensation to the consumer for
any loss or injury suffered by the consumer due to the negligence of the opposite party.
 Provided that the District Forum shall have the power to grant punitive damages in such
circumstances as it deems fit;
 (e) to remove the defects in goods or deficiencies in the services in question;
 (f) to discontinue the unfair trade practice or the restrictive trade practice or not to
repeat it;
 (g) not to offer the hazardous goods for sale;
 (h) to withdraw the hazardous goods from being offered for sale;
 (ha)to cease manufacture of hazardous goods and to desist from offering services which
are hazardous in nature;

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  (hb)to pay such sum as may be determined by it if it is of the opinion that loss or injury
has been suffered by a large number of consumers who are not identifiable conveniently:
 Provided that the minimum amount of sum so payable shall not be less than five per cent.
of the value of such defective goods sold or service provided, as the case may be, to such
consumers:
 Provided further that the amount so obtained shall be credited in favour of such person
and utilized in such manner as may be prescribed;
 (hc)to issue corrective advertisement to neutralize the effect of misleading advertisement
at the cost of the opposite party responsible for issuing such misleading advertisement;
 (i) to provide for adequate costs to parties.
 (2) Every proceeding referred to in sub-section (1) shall be conducted by the President of
the District Forum and at least one member thereof sitting together:
 Provided that where a member, for any reason, is unable to conduct a proceeding till it is
completed, the President and the other member shall continue the proceeding from the
stage at which it was last heard by the previous member.
 (2A) Every order made by the District Forum under sub-section (1) shall be signed by its
President and the member or members who conducted the proceeding:
 Provided that where the proceeding is conducted by the President and one member and
they differ on any point or points, they shall state the point or points on which they differ
and refer the same to the other member for hearing on such point or points and the
opinion of the majority shall be the order of the District Forum.
 (3) Subject to the foregoing provisions, the procedure relating to the conduct of the
meetings of the District Forum, its sittings and other matters shall be such as may be
prescribed by the State Government.
 15. Appeal. — Any person aggrieved by an order made by the District Forum may
prefer an appeal against such order to the State Commission within a period of thirty days
from the date of the order, in such form and manner as may be prescribed:
 Provided that the State Commission may entertain an appeal after the expiry of the said
period of thirty days if it is satisfied that there was sufficient cause for not finding it
within that period.
 Provided further that no appeal by a person, who is required to pay any amount in terms
of an order of the District Forum, shall be entertained by the State Commission unless the
appellant has deposited in the prescribed manner fifty per cent. of that amount or twenty-
five thousand rupees, whichever is less:
4.9. THE ENVIRONMENT (PROTECTION) ACT, 1986 (EPA)
Introduction
The Environment (Protection) Act was enacted in the year 1986. It was enacted with the main
objective to provide the protection and improvement of environment and for matters connected
therewith. The Act is one of the most comprehensive legislations with pretext to protection and
improvement of environment.

The Constitution of India also provides for the protection of the environment. Article 48A of the
Constitution specifies that the State shall endeavor to protect and improve the environment and
to safeguard the forests and wildlife of the country. Article 51 A further provides that every
citizen shall protect the environment.

4.10.Premises of the Act

It is now generally accepted that environment is threatened by a wide variety of human activities
ranging from the instinctive drive to reproduce its kind to the restless urge of improving the

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standards of living, development of technological solutions to this end, the vast amount of waste,
both natural and chemical, that these advances produce. Paradoxically, this urge to grow and
develop, which was initially uncontrolled is now widely perceived to be threatening as it results
in the depletion of both living and non-living natural resources and life support systems. The air,
water, land, living creatures as well as the environment in general is becoming polluted at an
alarming rate that needs to be controlled and curbed as soon as possible.

The 1986 Act was enacted in this spirit. From time to time various legislations have been enacted
in India for this purpose. However, all legislations prior to the 1986 Act have been specific
relating to precise aspects of environmental pollution. However, the 1986 Act was a general
legislation enacted under Article 253 (Legislation for giving effect to international agreements.—
Notwithstanding anything in the foregoing provisions of this Chapter, Parliament has power to
make any law for the whole or any part of the territory of India for implementing any treaty,
agreement or convention with any other country or countries or any decision made at any
international conference, association or other body) of the Constitution, pursuant to the
international obligations of India. India was a signatory to the Stockholm Conference of 1972
where the world community had resolved to protect and enhance the environment.

The United Nations conference on human environment, held in Stockholm in June 1972,
proclaimed that “Man is both creator and molder of his environment, which gives him physical
sustenance and affords him the opportunity for intellectual, moral, social and spiritual growth. In
the long and tortuous evolution of the human race on this planet a stage has reached when
through the rapid acceleration of science and technology man has acquired the power to
transform his environment in countless ways and on unprecedented scale. Both aspects of man’s
environment, the natural and man made are essential to his well being and to the enjoyment of
basic human rights even the right to life itself”.

While several legislations such as The Water (Prevention and Control of Pollution) Act, 1974
and The Air (Prevention and Control of Pollution) Act, 1981 were enacted after the Conference,
the need for a general legislation had become increasingly evident. The EPA was enacted so as
to overcome this deficiency.

4.11. Objectives
As mentioned earlier, the main objective of the Act was to provide the protection and
improvement of environment and for matters connected therewith. Other objectives of
implementation of the EPA are:

 To implement the decisions made at the UN Conference on Human Environment held at

Stockholm in June, 1972.
 To enact a general law on the areas of environmental protection which were left uncovered
by existing laws. The existing laws were more specific in nature and concentrated on a
more specific type of pollution and specific categories of hazardous substances rather than
on general problems that chiefly caused major environmental hazards.
 To co-ordinate activities of the various regulatory agencies under the existing laws
 To provide for the creation of an authority or authorities for environmental protection
 To provide a deterrent punishment to those who endanger human environment, safety and
health

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4.12.Scope and Applicability
The Environment (Protection) Act is applicable to whole of India including Jammu & Kashmir.
It came into force on November 19, 1986.

4.13. Definitions of Variuos terms under this act

Section 2 of the EPA deals with definitions. Some important definitions provided in the Section
are:

Section 2 (a) “Environment” includes water, air, and land and the interrelationship that exists
among and between water, air and land and human beings, other living creatures, plants, micro-
organism and property. This definition is not exhaustive but an inclusive one.

Section 2 (b) “Environmental Pollutant” means any solid, liquid or gaseous substance present in
such concentration as may be, or tend to be injurious to environment.

Section 2 (c) “Environmental Pollution” means the presence in the environment of any
environmental pollutant6 . This implies the imbalance in environment. The materials or
substances when after mixing in air, water or land alters their properties in such manner, that the
very use of all or any of the air water and land by man and any other living organism becomes
lethal and dangerous for health.

Section 2 (e) “Hazardous Substance” means any substance or preparation which, by reasons of
its chemical or physico-chemical properties or handling, is liable to cause harm to human beings,
other living creatures, plants, micro-organism, property or environment.

4.14. Powers of Central Government to take measures to Protect and Improve

Environment
According to the provisions of the Act, the Central Government shall have the power to take all
such measures as it deems necessary or expedient for the purpose of protecting and improving
the quality of the environment and preventing controlling and abating environmental pollution.
Such measures may include measures with respect to all or any of the following matters, namely:
a) co-ordination of actions by the State Governments, officers and other authorities-
(a) under this Act, or the rules made thereunder, or

(b) under any other law for the time being in force which is relatable to the objects of this Act;

1. b) planning and execution of a nation-wide programme for the prevention, control and
abatement of environmental pollution;
2. c) laying down standards for the quality of environment in its various aspects;
3. d) laying down standards for emission or discharge of environmental pollutants from
various sources whatsoever: Provided that different standards for emission or discharge
may be laid down under this clause from different sources having regard to the quality or
composition of the emission or discharge of environmental pollutants from such sources;
4. e) restriction of areas in which any industries, operations or processes or class of industries,
operations or processes shall not be carried out or shall be carried out subject to certain
safeguards;
5. f) laying down procedures and safeguards for the prevention of accidents which may cause
environmental pollution and remedial measures for such accidents;
6. g) laying down procedures and safeguards for the handling of hazardous substances;

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 7. h) examination of such manufacturing processes, materials and substances as are likely to
cause environmental pollution;
8. i) carrying out and sponsoring investigations and research relating to problems of
environmental pollution;
9. j) inspection of any premises, plant, equipment, machinery, manufacturing or other
processes, materials or substances and giving, by order, of such directions to such
authorities, officers or persons as it may consider necessary to take steps for the prevention,
control and abatement of environmental pollution;
10. k) establishment or recognition of environmental laboratories and institutes to carry out the
functions entrusted to such environmental laboratories and institutes under this Act;
11. l) collection and dissemination of information in respect of matters relating to
environmental pollution;
12. m) preparation of manuals, codes or guides relating to the prevention, control and
abatement of environmental pollution;
13. n) such other matters as the Central Government deems necessary or expedient for the
purpose of securing the effective implementation of the provisions of this Act.
The Central Government may, if it considers it necessary or expedient so to do for the purpose of
this Act, by order, published in the Official Gazette, constitute an authority or authorities by
such name or names as may be specified in the order for the purpose of exercising and
performing such of the powers and functions (including the power to issue directions under
section (5) of the Central Government under this Act and for taking measures with respect to
such of the matters referred to in sub-section (2) as may be mentioned in the order and subject to
the supervision and control of the Central Government and the provisions of such order, such
authority or authorities may exercise and powers or perform the functions or take the measures
so mentioned in the order as if such authority or authorities had been empowered by this Act to
exercise those powers or perform those functions or take such measures.

As considerable adverse environment impact has been caused due to degradation of the
environment with excessive soil erosion and water and air pollution due to certain development
activities therefore it is necessary to protect the environment. This can be achieved only by
careful assessment of a project proposed to be located in any area, on the basis of an environment
impact assessment and environment management plan for the prevention, elimination or
mitigation of the adverse impacts, right from the inception stage of the project.

The Central Government has passed certain notifications laying that the expansion or
modernization of any existing industry or new projects listed shall not be undertaken in any part
of India, unless it gets environmental clearance by the Central Government, or the State
Government.

4.15. Powers of the Court

The Act does not curtail the powers of the Supreme Court. It has from time to time in various
matters issued directions and orders to control pollution. Some such important cases pertaining to
protection of environment are:

 Directions issued to control vehicular pollution

In Mehta v Union of India (1998) 6 SCC 63, in order to control the chaotic traffic conditions and
vehicular pollution, the Supreme Court issued the following directions.

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(a) All commercial/transport vehicles which are more than 20 years old should be phased out and
not permitted to ply in Delhi after October 1998

(b) All such commercial /transport vehicles which are 17 to 19 years old (3200) shall not be
permitted to ply in the National Capital Territory, Delhi after 1998;

(c) Such of the commercial /transport vehicles which are 15 and 16 years old (4962) shall not be
permitted to ply after December 31, 1998

The Supreme Court made this order applicable to all commercial/transport vehicles whether
registered in the National Capital Territory of Delhi or outside (but ply in Delhi) which are of
more than stipulated age and which do not have any authority to paly in Delhi.

 Protection of Coastline of India

In Indian Council for Enviro-Legal Action v Union of India22 the Supreme Court in regard to
the 600 kms long coast line emphasized that that it would be the duty and responsibility of the
coastal states and Union Territories in which the stretch exists, to see that the notifications
issued, declaring the coastal stretches should be properly and duly implemented. Further the
various restrictions on the setting up and expansion of industries, operation or process, etc. in the
regulation Zone should be strictly enforced.

In the same case the court enunciated the principle further that the polluter pays. Once the
activity carried on is hazardous or inherently dangerous, the person carrying on such activity is
liable to make good the loss caused to any other person irrespective of the fact whether he took
reasonable care while carrying on his activity. Under this principle it is not the role of the
Government to meet the costs involved in either prevention of such damage or in carrying out
remedial action, because the effect of this would be to shift the financial burden of the pollution
incident on the taxpayer. The responsibility of repairing the damage is that of the offending
industry.

 Other cases
In Vellore Citizen Welfare Forum v. Union of India & others the polluter principle as interpreted
by the Supreme Court means that the absolute liability for harm to the environment extends not
only to compensate the victims of pollution but also the cost of restoring the environmental
degradation. Remediation of the damaged environment is part of the process of “Sustainable
Development” and as such polluter is liable to pay the cost to the individual sufferer as well as
the cost of reversing the damaged ecology.
In Goa Foundation v Diksha Holdings Pvt. Ltd the court observed that with a view to protect the
ecological balance in the coastal areas, notifications having been issued by the Central
Government, there ought not to be any violation and prohibited activities should not be allowed
to come up within the area declared as CRZ notification. The court also emphasised that no
activities which would ultimately lead to unscientific and unsustainable development and
ecological destruction should be allowed.

4.16. Prevention, Control and Abetment of Environment Pollution

Chapter III of the EPA deals with prevention, Control and abetment of Environmental Pollution.
Some important provisions of this chapter provide that, No person carrying on any industry,
operation or process shall discharge or emit or permit to be discharged or emitted any
environmental pollutant in excess of such standards as may be prescribed. No person shall
handle or cause to be handled any hazardous substance except in accordance with such procedure

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and after complying with such safe guards as may be prescribed. Where the discharge of any
environmental pollutant in excess of the prescribed standards occurs or is apprehended to occur
due to any accident or other unforeseen act or event, the person responsible for such discharge
and the person in charge of the place at which the discharge occurs shall be bound to prevent or
mitigate the environmental pollution. and shall also:

(a) intimate the fact of such occurrence or apprehension of such occurrence; and

(b) be bound, if called upon, to render all assistance. On receipt of such information, the
authorities or agencies shall cause such remedial measures to be taken as are necessary to
prevent or mitigate the environmental pollution.

The expenses incurred by any authority or agency may be recovered from the person concerned
as arrears of land revenue or of public demand.

4.17. Penalties
Section 15 provides for Penalties for contravention of the provisions of the Act as well as the
Rules, Orders and Directions. Whoever fails to comply with or contravenes any of the
provisions, rules, orders or directions of this Act shall be punishable with imprisonment for a
term which may extend to five years or with fine which may extend to one lakh rupees, or with
both. In case the failure or contravention continues, with additional fine which may extend to
five thousand rupees for every day during which such failure or contravention continues.

If the failure or contravention continues beyond a period of one year after the date of conviction,
the offender shall be punishable with imprisonment for a term which, may extend to seven
years.
Offences by Companies
Offences by Companies are dealt with under Section16. Where any offence is committed by a
company, every person who, at the time the offence was committed, was directly incharge of,
and was responsible to, the company for the conduct of the business of the company shall be
deemed to be guilty of the offence.

If he proves that the offence was committed without his knowledge or that he exercised due
diligence to prevent the commission of such offence he shall not be liable to any punishment.

Where the offence has been committed with the consent or connivance of or is attributable to any
neglect on part of , any director, manager, secretary or other officer of the company, such person
shall be deemed to be guilty of the offence

 Cognizance of Offences and Bar of Jurisdiction of Civil Courts

As per the provisions of Section 19 of the EPA, no court shall take cognizance of any offence
under this Act except on a complaint made by:

(a) the central Government or any authority or officer authorized in this behalf by that
Government; or

(b) any person who has given notice of not less that 60 days, of the alleged offence and his
intention to make a complaint, to the Central Government or the authority or officer authorized.

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Section 22 provides that no civil court shall have jurisdiction to entertain any suit or proceeding
in respect of anything done, action taken or order or direction issued by the Central Government
or any other authority or officer in pursuance of any power conferred under the Act.

4.18. The National Environment Appellate Authority

The National Environment Appellate Authority (NEAA) was set up as an independent body to
address cases in which environmental clearances granted by the ministry of environment are
challenged by civil society.

On January 30, 1997, the President of India, in exercise of the powers conferred under Article
123 (123. Power of President to promulgate Ordinances during recess of Parliament.— (1) If at
any time, except when both Houses of Parliament are in session, the President is satisfied that
circumstances exist which render it necessary for him to take immediate action, he may
promulgate such Ordinances as the circumstances appear to him to require.) of the Constitution,
promulgated an Ordinance to provide for the establishment of the NEAA to hear appeals with
respect to restriction of areas in which any industries, operations and processes shall not be
carried out or shall be carried out subject to the safeguards as provided under the EPA. The
Ordinance was later on repealed with the enactment of the National Environment Appellate
Authority Act, 1997.

The NEAA Act, which was granted presidential assent on 26th March, 1997 came into force
from 9.4.97. This Act provides for the establishment of a NEAA. The Act was enacted with the
following object:

To hear appeals with respect to restriction of areas in which any industry, operations or processes
or class of industries, operations or processes shall not be carried out or shall be carried out
subject to certain safeguards under the EPA and for matters connected therewith or incidental
thereto.

This is to bring in transparency in the process, accountability and to ensure smooth and
expeditions implementation of developmental schemes and projects. Jurisdiction of the Act

Any aggrieved person may file an appeal within thirty days of passing of an order granting
environmental clearance in the areas in which any industries, operations or processes shall not be
carried out or shall be carried out subject to certain safeguards under the EPA. It is further
provided that the Authority may entertain an appeal even after the expiry of the said term if a
sufficient cause for delay in filing such an appeal exists. The Authority is required to dispose off
the appeal within ninety days from the date of filing of the same. However, the Authority may,
for reasons that are to be recorded in writing, dispose off the appeal within a further period of
thirty days.

(2) An Ordinance promulgated under this article shall have the same force and effect as an Act of
Parliament, but every such Ordinance—

(a) shall be laid before both Houses of Parliament and shall cease to operate at the expiration of
six weeks from the reassembly of Parliament, or, if before the expiration of that period
resolutions disapproving it are passed by both Houses, upon the passing of the second of those
resolutions; and

(b) may be withdrawn at any time by the President.

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 Explanation.—Where the Houses of Parliament are summoned to reassemble on different dates,
the period of six weeks shall be reckoned from the later of those dates for the purposes of this
clause.

(3) If and so far as an Ordinance under this article makes any provision which Parliament would
not under this Constitution be competent to enact, it shall be void.

4.19.SUMMARY

Consumer Protection Act

Consumer Protection Act has been implemented(1986) or we can bring into existence to protect the
rights of a consumer. It protects the consumer from exploitation that business practice to make
profits which in turn harm the well being of the consumer and society.
This right help to educate the consumer on the right and responsibilities of being a consumer and
how to seek help or justice when faced exploitation as a consumer. It teaches the consumer to make
right choices and know what is right and what is wrong.
Who is a consumer according to the Consumer Protection Act, 1986?
A consumer is one that buys good for consumption and not for the resale or commercial purpose.
The consumer also hires service for consideration.

 If any defect found the seller should remove the mentioned defects from the whole batch or
the goods affected. For example, there have been cases where car manufacturing unit found a
defect in parts of the vehicle usually they remove the defect from every unit or they call of
the unit.
 They should replace the defective product with a nondefective product and that product
should be of similar configuration or should be the same as the product purchased.
The salient features of Consumer Protection Act are- The Consumer Protection Act covers all
public, private and cooperative sectors.This applies to all the goods and services until and unless
the Union government exempts it.Provisions of the Consumer Protection Act are compensatory in
nature.

Consumer Protection Councils

The Consumer Protection Act postulates establishment of Consumer Protection Councils at the
Central and State levels for the purpose of spreading consumer awareness. The objects of the
Councils, as per the Act, shall be to promote and protect the rights of the consumers such as:

 The right to be protected against the marketing of goods and services which are hazardous
to life and property
 The right to be informed about the quality, quantity, potency, purity, standard and price of
goods or services, as the case may be so as to protect the consumer against unfair trade
practices;
 The right to be assured, wherever possible, access to a variety of goods and services at
competitive prices;

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 The right to be heard and to be assured that consumer's interests will receive due
consideration at appropriate forums
 The right to seek redressal against unfair trade practices or restrictive trade practices or
unscrupulous exploitation of consumers and
 The right to consumer education.
Central Consumer Protection Council

The Consumer Protection Act empowers the Central Government to establish a Central
Consumer Protection Council consisting of the Minister in charge of consumer affairs in the
Central Government as its Chairman and such number of other official and non-official members
representing such interests as may be prescribed. Under the Consumer Protection Council Rules
1987, the membership of the Council is restricted to 150 members including the Central Minister
in charge of Consumer Affairs as the Chairman. The term of the Council is three years. To
monitor the implementation of the recommendations of the Council, the Central Government
may constitute a standing working group from amongst the members of the council under the
Chairmanship of the Member Secretary of the Council. The Council shall meet as and when
necessary, but at least one meeting of the Council shall be held at such time and place as the
Chairman may think fit.

State Consumer Protection CouncilThe Consumer Protection Act provides for the
establishment of State Consumer Protection Councils by the State Governments. The State
Council shall consist of a Minister in charge of consumer affairs in the State Government as its
Chairman and such number of other official or non-official members representing such interests
as may be prescribed by the State Government and ten nominees of the Central Government. The
State Council shall meet as and when necessary but not less than two meetings shall be held
every year at such time and place as the Chairman may think fit.
District Consumer Protection Council

In order to promote and protect the rights of consumers, within the district, the Consumer
Protection Act, provides for the establishment of a District Consumer Protection Council in
every district. It shall consist of the Collector of the district as its Chairman and such number of
other official and non-official members representing such interests as may be prescribed by the
State Government. It shall meet as and when necessary but not less then two meetings shall be
held every year. The Chairman shall decide the time and place of the meeting.

Redressal: Three Tier System Under Consumer Act

 District Forum: These fora are set by the district of the state concerned in each district
wherein it consists of President and two members of which one should be a woman and is
appointed by the State Government. In this, the complaining party should not make a
complaint more than 20 Lacs and once the complaint is filed the goods are sent for testing
and if they found defective the accused party should compensate and if the party is
dissatisfied can make an appeal with state commission within 30 days.

 State Commission: This is set up by each state It consists of President and two members.
Complains should be at least 20 lacs and exceed not more than 1 crore. The goods are sent
for testing and if found defective are asked for replacement or compensation. If not satisfied
can make an appeal within 30 days in front of the National Commission.

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 National Commission: Consist of President and 4 members. The complaint must exceed an
amount of 1 crore. The goods are sent for testing and if found defective are asked for
replacement or compensation

Environment Protection act 1986

It is now generally accepted that environment is threatened by a wide variety of human activities
ranging from the instinctive drive to reproduce its kind to the restless urge of improving the
standards of living, development of technological solutions to this end, the vast amount of waste,
both natural and chemical, that these advances produce. Paradoxically, this urge to grow and
develop, which was initially uncontrolled is now widely perceived to be threatening as it results
in the depletion of both living and non-living natural resources and life support systems. The air,
water, land, living creatures as well as the environment in general is becoming polluted at an
alarming rate that needs to be controlled and curbed as soon as possible.

The 1986 Act was enacted in this spirit. From time to time various legislations have been enacted
in India for this purpose. However, all legislations prior to the 1986 Act have been specific
relating to precise aspects of environmental pollution. However, the 1986 Act was a general
legislation enacted under Article 253 (Legislation for giving effect to international agreements.—
Notwithstanding anything in the foregoing provisions of this Chapter, Parliament has power to
make any law for the whole or any part of the territory of India for implementing any treaty,
agreement or convention with any other country or countries or any decision made at any
international conference, association or other body) of the Constitution, pursuant to the
international obligations of India. India was a signatory to the Stockholm Conference of 1972
where the world community had resolved to protect and enhance the environment.

The United Nations conference on human environment, held in Stockholm in June 1972,
proclaimed that “Man is both creator and molder of his environment, which gives him physical
sustenance and affords him the opportunity for intellectual, moral, social and spiritual growth. In
the long and tortuous evolution of the human race on this planet a stage has reached when
through the rapid acceleration of science and technology man has acquired the power to
transform his environment in countless ways and on unprecedented scale. Both aspects of man’s
environment, the natural and man made are essential to his well being and to the enjoyment of
basic human rights even the right to life itself”.

While several legislations such as The Water (Prevention and Control of Pollution) Act,
1974 and The Air (Prevention and Control of Pollution) Act, 1981 were enacted after the
Conference, the need for a general legislation had become increasingly evident. The EPA
was enacted so as to overcome this deficiency.

4.20. SELF-ASSESSMENT QUESTIONS

1) Explain the provisions of the consumer Protection Act regarding establishment,

objectives and meetings of the Central and State Consumer Protection Councils.
2) Enumerate briefly the establishment and working of different consumer dispute
redressal agencies established under the Consumer Protection Act, 1986.

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3) Write a note on the need and objectives of the environment Protection Act,1986.
4) What are the general powers of the Government under the Environment Protection
Act1986?
5) Write note on penalties and offences under the Environment Protection Act,1986.
6) What are the objective of Consumer Protection Act 1986?
7) Explain the redressal agencies available to the consumer under the consumer
protection act?
8) What are the different rights available to the consumers?
9) Name the few legislations enacted in India for the protection of the Environment.
10) What are the penal provisions of the environmental protection act 1986?
11) Write short note on the prevention, control and abatement of environmental
pollution.
12) Describe the concept of environment.

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 UNIT -5
FOREIGN EXCHANGE MANAGEMENT ACT, 1999

AIMS AND OBJECTIVE

After studying this unit you will be able to understand:-

 the salient features of FEMA

 The provisions applicable to regulations and management of foreign exchange
 The functions and responsibilities of an authorised dealer in foreign exchange
 The provisions relating to certifying authorities
 Contravention and penalties
 Details about the Information Technology act 2000
 Provisions relating to electronic governance
 Provisions relating to digital signature certificate

CONTENTS:-

5.1.Introduction to FEMA

5.2. Objective of FEMA

5.3. Applicability of FEMA

5.4. Major Provisions of FEMA Act

5.5. Short Title, Extent, Application And Commencement

5.6. Definitions of Different Terms under this act

5.7. Regulation and Management of FEMA

5.8. Authorised person

5.9. Contravention and penalties

5.10. Adjudication and Appellate

5.11. Composition of Appellate Tribunal

5.12. Directorate of Enforcement

5.13. Information Technology Act 2000

5.14. Scope and application

5.15. Objective of the Act

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 5.16. Digital Signature

5.17. Electronic Governance

5.18. Certifying Authorities

5.19. Duties of Subscribers

5.20. Offence and Penalties

5.21. Applicability and Non-applicability of Law

5.22. Summary

5.23. Self-assessment Questions

UNIT-5
FOREIGN EXCHANGE MANAGEMENT ACT 1999
5.1. INTRODUCTION:
The Government of India formulated FEMA or Foreign Exchange Management Act to
encourage the external payments and across the border trades in India. It was formulated in the
year 1999 while it replaced FERA (Foreign Exchange Regulation Act). This was meant to close
all the loopholes and drawback of FERA and hence major economic reforms were introduced
under this act. It was primarily formulated to de-regularize and have liberal Indian economy.

5.2. OBJECTIVES OF FEMA:

The main objective of FEMA was to facilitate external trade and payments in India. It was also
meant to help orderly development and maintenance of foreign exchange market in India. It
defines the procedures, formalities, dealings of all foreign exchange transactions in India. These
transactions are mainly classified under two categories -- Current Account Transactions and
Capital Account Transactions.
FEMA is applicable to all parts of India and was primarily formulated to utilize the foreign
exchange resources in efficient manner. It is also equally applicable to the offices and agencies
which are located outside India however is managed or owned by an Indian Citizen. FEMA head
office is known as Enforcement Directorate and is situated in heart of city of Delhi.
5.3. APPLICABILITY
 exports of any foods and services from India to outside, foreign currency, that is any currency
other than Indian currency,
 foreign exchange,
 foreign security,
 Imports of goods and services from outside India to India,
 securities as defined in Public Debt Act 1994,
 banking, financial and insurance services,
 sale, purchase and exchange of any kind (i.e. Transfer),

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 any overseas company that is owned 60% or more by an NRI (Non Resident Indian) and
 any citizen of India, residing in the country or outside (NRI)

5.4. MAJOR PROVISIONS OF FEMA ACT 1999:

Here are major provisions that are part of FEMA (1999) –
 Free transactions on current account subject to reasonable restrictions that may be imposed.
 RBI controls over capital account transactions.
 Control over realization of export proceeds.
 Dealing in foreign exchange through authorized persons like authorized dealer or money
changer etc.
 Appeal provision including Special Director (Appeals)
 Directorate of enforcement
 Any person can sell or withdraw foreign exchange, without any prior permission from RBI
and then can inform RBI later.
 Enforcement Directorate will be more investigative in nature
 FEMA recognized the possibility of Capital Account convertibility.
 The violation of FEMA is a civil offence.
 FEMA is more concerned with the management rather than regulations or control.
 FEMA is regulatory mechanism that enables RBI and Central Government to pass regulations
and rules relating to foreign exchange in tune with foreign trade policy of India.
5.5.SHORT TITLE, EXTENT, APPLICATION AND COMMENCEMENT.
This Act may be called the Foreign Exchange Management Act, 1999.
 It extends to the whole of India.
 It shall also apply to all branches, offices and agencies outside India owned or controlled
by a person resident in India and also to any contravention thereunder committed outside
India by any person to whom this Act applies.
 It has come into force from 1st June 2000.
5.6. DEFINITIONS OF DIFFERENT TERMS UNDER THIS ACT
1) "Adjudicating Authority" means an officer authorized under sub-section (1) of
section 16
2) "Appellate Tribunal” means the Appellate Tribunal for Foreign Exchange
established under section 18;
3) "Authorized person" means an authorized dealer, money changer, off-shore banking
unit or any other person for the time being authorized under subsection (1) of section
10 to deal in foreign exchange or foreign securities;
4) "Bench" means a Bench of the Appellate Tribunal;
5) "Capital account transaction" means a transaction which alters the assets or
liabilities, including contingent liabilities, outside India of persons resident in India or
assets or liabilities in India of persons resident outside India, and includes transactions
referred to in sub-section (3) of section 6;
6) "Chairperson" means the Chairperson of the Appellate Tribunal;
7) "Chartered accountant" shall have the meaning assigned to it in clause (b) of sub-
section (1) of section 2 of the Chartered Accounts Act, 1949 (38 of 1949);
8) "Currency" includes all currency notes, postal notes, postal orders, money orders,
cheques, drafts, travelers cheques, letters of credit, bills of exchange and promissory
notes, credit cards or such other similar instruments, as may be notified by the
Reserve Bank;

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 9) "Director of Enforcement" means the Director of Enforcement appointed under sub-
section (1) of section 36; o "export", with its grammatical variations and cognate
expressions, means- o the taking out of India to a place outside India any goods, o
provision of services from India to any person outside India;
10) "foreign currency" means any currency other than Indian currency;
11) "foreign exchange" means foreign currency and includes,- deposits, credits and
balances payable in any foreign currency :drafts, travelers cheques, letters of credit or
bills of exchange, expressed or drawn in Indian currency but payable in any foreign
currency, drafts, travelers cheques, letters of credit or bills of exchange drawn by
banks, institutions or persons outside India, but payable in Indian currency; expressed
in foreign currency, but where redemption or any form of re urn such as interest or
dividends is payable in Indian currency;
12) "import", with its grammatical variations and cognate expressions, means bringing
into India any goods or services;
13) "Indian currency" means currency which is expressed or drawn in Indian rupees but
does not include special bank notes and special one rupee notes issued under section
28A of the Reserve Bank of India Act, 1934 (2 of 1934 )
14) "person resident outside India" means a person who is not resident in India;
15) "repatriate to India" means bringing into India the realized foreign exchange
and- o the selling of such foreign exchange to an authorized person in India in exchange
for rupees, or o the holding of realized amount in an account with an authorized person in
India to the extent notified by the Reserve Bank, and includes use of the realized amount
for discharge of a debt or liability denominated in foreign exchange and the expression
"repatriation" shall be construed accordingly;
5.7. REGULATION AND MANAGEMENT OF FOREIGN EXCHANGE
1) Dealing in foreign exchange, etc.
Save as otherwise provided in this Act, rules or regulations made thereunder, or with the
general or special permission of the Reserve Bank, no person shall-
deal in or transfer any foreign exchange or foreign security to any person not being an
authorized person; • make any payment to or for the credit of any person resident outside
India in any manner; • receive otherwise through an authorized person, any payment by
order or on behalf of any person resident outside India in any manner. Explanation.-For
the purpose of this clause, where any person in, or resident in, India receives any payment
by order or on behalf of any person resident outside India through any other person
(including an authorized person) without a corresponding inward remittance from any
place outside India, then, such person shall be deemed to have received such payment
otherwise than through an authorized person; • enter into any financial transaction in
India as consideration for or in association with acquisition or creation or transfer of a
right to acquire, any asset outside India by any person.
2) Holding of foreign exchange, etc.
Save as otherwise provided in this Act, no person resident in India shall acquire, hold,
own, possess or transfer any foreign exchange, foreign security or any immovable
property situated outside India.
3) Current account transactions.-
Any person may sell or draw foreign exchange to or from an authorized person if such
sale or drawal is a current account transaction: Provided that the Central Government
may, in public interest and in consultation with the Reserve Bank, impose such
reasonable restrictions for current account transactions as may be prescribed Capital
account transactions.

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 4) Capital account transactions.
Subject to the provisions of sub-section (2), any person may sell or draw foreign
exchange to or from an authorized person for a capital account transaction. • The Reserve
Bank may, in consultation with the Central Government, specify- any class or classes of
capital account transactions which are permissible; the limit up to which foreign
exchange shall be admissible for such transactions: Provided that the Reserve Bank shall
not impose any restriction on the drawal of foreign exchange for payments due on
account of amortization of loans or for depreciation of direct investments in the ordinary
courts of business. Without prejudice to the generality of the provisions of sub-section
(2), the Reserve Bank may, by regulations, prohibit, restrict or regulate the following- o
transfer or issue of any foreign security by a person resident in India; o transfer or issue
of any security by a person resident outside India; o transfer or issue of any security or
foreign security by any branch, office or agency in India of a person resident outside
India; any borrowing or lending in rupees in whatever form or by whatever name called;
any borrowing or lending in rupees in whatever form or by whatever name called
between a person resident in India and a person resident outside India; deposits between
persons resident in India and persons resident outside India; export, import or holding of
currency or currency notes; transfer of immovable property outside India, other than a
lease not exceeding five years, by a person resident in India; acquisition or transfer of
immovable property in India, other than a lease not exceeding five years, by a person
resident outside India; giving of a guarantee or surety in respect of any debt, obligation or
other liability incurred- ƒ by a person resident in India and owed to a person resident
outside India; or ƒ by a person resident outside India. • A person resident in India may
hold, own, transfer or invest in foreign currency, foreign security or any immovable
property situated outside India if such currency, security or property was acquired, held
or owned by such person when he was resident outside India or inherited from a person
who was resident outside India. • A person resident outside India may hold, own, transfer
or invest in Indian currency, security or any immovable property situated in India if such
currency, security or property was acquired, held or owned by such person when he was
resident in India or inherited from a person who was resident in India. • A person
resident outside India may hold, own, transfer or invest in Indian currency, security or
any immovable property situated in India if such currency, security or property was
acquired, held or owned by such person when he was resident in India or inherited from a
person who was resident in India.

5) Export of goods and services.

*Every exporter of goods shall-
i) furnish to the Reserve Bank or to such other authority a declaration in such form and in
such manner as may be specified, containing true and correct material particulars, including
the amount representing the full export value or, if the full export value of the goods is not
ascertainable at the time of export, the value which the exporter, having regard to the
prevailing market conditions, expects to receive on the sale of the goods in a market outside
India;
ii)furnish to the Reserve Bank such other information as may be required by the Reserve
*Bank for the purpose of ensuring the realization of the export proceeds by such exporter.
The Reserve Bank may, for he purpose of ensuring that the full export value of the goods or
such reduced value of the goods as the Reserve Bank determines, having regard to the
prevailing market conditions, is received without any delay, direct any e porter to comply with
such requirements as it deems fit.

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 * Every exporter of services shall furnish to the Reserve Bank or to such other authorities a
declaration in such form and in such manner as may be specified, containing the true and
correct material particulars in relation to payment for such services.
6) Realisation and repatriation of foreign exchange.-
Save as otherwise provided in this Act, where any amount of foreign exchange is due or
has accrued to any person resident in India, such person shall take all reasonable steps to
realize and repatriate to India such foreign exchange within such period and in such
manner as may be specified by the Reserve Bank. Exemption from realization and
repatriation in certain cases.
7) Exemption from realization and repatriation in certain cases.
*The provisions of sections 4 and 8 shall not apply to the following, namely:-
possession of foreign currency or foreign coins by any person up to such limit as the Reserve
Bank may specify; • foreign currency account held or operated by such person or class of
persons and the limit up to which the Reserve Bank may specify; • foreign exchange acquired
or received before the 8th day of July, 1947 or any income arising or accruing thereon which
is he ld outside India by any person in pursuance of a general or spec ial permission granted
by the Reserve Bank; • foreign exchange held by a person resident in India up to such limit as
the Reserve Bank may specify, if such foreign exchange was acquired by way of gift or
inheritance from a person referred to in clause (c), including any income arising therefrom; •
foreign exchange acquired from employment, business, trade, vocation, services, honorarium,
gifts, inheritance or any other legitimate means up to such limit as the Reserve Bank may
specif y; and • such other receipts in foreign exchange as the Reserve Bank may specify

5.8. AUTHORISED PERSON

1) Appointment of Authorised person
The Reserve Bank may, on an application made to it in this behalf, authorize any person to be
known as authorized person to deal in foreign exchange or in foreign securities, as an authorized
dealer, money changer or off-shore banking unit or in any other manner as it deems fit. • An
authorization under this section shall be in writing and shall be subject to the conditions laid
down therein. • An authorization granted under sub-section (1) may be revoked by the Reserve
Bank at any time if the Reserve Bank is satisfied that- o it is in public interest so to do; or o the
authorized person has failed to comply with the condition subject to which the authorization was
granted or has contravened any of the provisions of the Act or any rule, regulation, notification,
direction or order made thereunder: ƒ Provided that no such authorization shall be revoked on
any ground referred to in clause (b) unless the authorized person has been given a reasonable
opportunity of making a representation in the matter. • An authorized person shall, in all his
dealings in foreign exchange or foreign security, comply with such general or special directions
or orders as the Reserve Bank may, from time to time, think fit to give, and, except with the
previous permission of the Reserve Bank, an authorized person shall not engage in any
transaction involving any foreign exchange or foreign security which is not in conformity with
the terms of his authorization under this section. • An authorized person shall, before
undertaking any transaction in foreign exchange on behalf of any person, require that person to
make such declaration and to give such information as will reasonably satisfy him that the
transaction will not involve and is not designed for the purpose of any contravention or evasion
of the provisions of this Act or of any rule, regulation, notification, direction or order made
thereunder, and where the said person refuses to comply with any such requirement or make only
unsatisfactory compliance therewith, the authorized person shall refuse in writing to undertake
the transaction and shall, if he has reason to believe that any such contravention or evasion as

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aforesaid is contemplated by the person, report the matter to the Reserve Bank. • Any person,
other than an authorized person, who has acquired or purchased foreign exchange for any
purpose mentioned in the declaration made by him to authorized person under sub-section (5)
does not use it for such purpose or does not surrender it o authorized person within the specified
period or uses the foreign exchange so acquired or purchased for any other purpose for which
purchase or acquisition or foreign exchange is not permissible under the provisions of the Act or
the rules or regulations or direction or order made thereunder shall be deemed to have committed
contravention of the provisions of the Act for the purpose of this section.
2) Reverve Bank's powers to issue directions to authorized person.-(1) The Reserve Bank
may, for the purpose of securing compliance with the provisions of this Act and of any rules,
regulations, notifications or directions made thereunder, give to the a thorized persons any
direction in regard to making of payment or the doing or desist from doing any act relating to
foreign exchange or foreign security. • The Reserve Bank may, for the purpose of ensuring
the compliance with the provisions of this Act or of any rule, regulation, notification, direction
or order made thereunder, direct any authorized person to furnish such information, in such
manner, a it deems fit. • Where any authorized person contravenes any direction given by the
Reserve Bank under this Act or fails to file any return as directed by the Reserve Bank, the
Reserve Bank may, after giving person a penalty which may extend to ten thousand rupees
and in the case of continuing contravention with an additional penalty which may extend to
two thousand rupees for every day during which such contravention continues reasonable
opportunity of being heard, impose on the authorised
3) Power of Reserve Bank to inspect authorised person.
• The Reserve Bank may, at any time, cause an inspection to be made, by any officer of the
Reserve Bank specially authorised in writing by the Reserve Bank in this behalf, of the
business of any authorised person as may appear to it to be necessary or expedient for the
purpose of- o verifying the correctness of any statement, information or particulars furnished
to the Reserve Bank; o obtaining any information or particulars which such authorised person
has failed to furnish on being called upon to do so; o securing compliance with the provisions
of this Act or of any rules, regulations, directions or orders made thereunder. • It shall be the
duty of every authorised person, and where such person is a company or a firm, every director,
partner or other officer of such company or firm, as the case may be, to produce to any officer
making an inspection under sub-section (1), such books, accounts and other documents in his
custody or power and to furnish any statement or information relating to the affairs of such
person, company or firm as the said officer may require within such time and in such manner
as the said officer m y direct.
5.9. CONTRAVENTION AND PENALTIES
1) Penalties Section 13,
Penalties provisions are given below:-
i) If any person contravenes any provision of this Act, or contravenes any rule, regulation,
notification, direction or order issued in exercise of the powers under this Act, or contravenes
any condition subject to which an authorization s issued by the Reserve Bank, he shall, upon
adjudication, be liable to a penalty up to thrice the sum involved in such contravention where
such amount is quantifiable, or up to two lakh rupees where the amount is not quantifiable,
and where such contravention is a continuing one, further penalty which may extend to five
thousand rupees for every day after the first day during which the contravention continues.
ii) Any Adjudicating Authority adjudging any contravention under sub-section (1), may, if he
thinks fit in addition to any penalty which he may impose for such contravention direct that
any currency, security or any other money or property in respect of which the contravention
has taken place shall be confiscated to the Central Government and further direct that the

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foreign exchange holdings, if any, of the persons committing the contraventions or any part
thereof, shall be brought back into India or shall be retained outside India in accordance with
the directions made in this behalf.
Explanation.-For the purposes of this sub-section, "property" in respect of which
contravention has taken place, shall include- o deposits in a bank, where the said property is
converted into such deposits; o Indian currency, where the said property is converted into that
currency; and o any other property which has resulted out of the conversion of that property.
2) Enforcement of orders of Adjudicating Authority Section 14

i) Subject to the provisions of sub-section (2) of section 19, if any person fails to make full
payment of the penalty imposed on him under section 13 within a period of ninety days from
the date n which the notice for payment of such penalty is served on him, he shall be liable to
civil imprisonment under this section.
ii) No order for the arrest and detention in civil prison of a defaulter shall be made unless the
Adjudication Authority has issued and served a notice upon the defaulter calling upon him to
appear before him on the date specified in the notice and to show cause why he should not be
committed to the civil prison, and unless the Adjudicating Authority, for reasons in writing, is
satisfied- o that the defaulter, with the object or effect of obstructing the recovery of penalty,
has after the issue of notice by the Adjudicating Authority, dishonestly transferred, concealed,
or removed any part of his property, or o that the defaulter has, or has had since the issuing of
notice by the Adjudicating Authority, the means to pay the arrears or some substantial part
thereof and refuses or neglects or has refused or neglected to pay the same.
iii) Notwithstanding anything contained in sub-section (1), a warrant for the arrest of the
defaulter may be issued by the Adjudicating Authority if the Adjudicating Authority is
satisfied, by affidavit or otherwise, that with the object or effect of delaing the execution of the
certificate the defaulter is likely to abscond or leave the local limits of the jurisdiction of the
Adjudicating Authority.
iv)Where appearance is not made pursuant to a notice issued and served under sub-section (1),
the Adjudicating Authority may issue a warrant for the arrest of the defaulter.
v) A warrant of arrest issued by the Adjudicating Authority under sub-section (3) or sub-
section (4) may also be executed by any other Adjudicating Authority within whose
jurisdiction the defaulter may for the time being be found.
vi) Every person arrested in pursuance of a warrant of arrest under this section shall be
brought before the Adjudicating Authority issuing the warrant as soon as practicable and in
any event within twenty-four hours of his arrest (exclusive of the time equired for the
journey): Provided that, if the defaulter pays the amount entered in the warrant of arrest as due
and the costs of the arrest to the officer arresting him, such officer shall at once release him.
Explanation.-For the purposes of this sub-section, where the defaulter is a Hindu undivided
family, the karta thereof shall be deemed to be the defaulter.
vii) When a defaulter appears before the Adjudicating Authority pursuant to a notice to show
cause or is brought before the Adjudicating Authority under this section, the Adjudicating
Authority shall give the defaulter an opportunity showing cause why he should not be
committed to the civil prison.
viii) Pending the conclusion of the inquiry, the Adjudicating Authority may, in his discretion,
order the defaulter to be detained in the custody of such officer as the Adjudicating Authority
may think fit or release him on his furnishing the security tothe satisfaction of the
Adjudicating Authority for his appearance as and when required.
ix)Upon the conclusion of the inquiry, the Adjudicating authority may make an order for the
detention of the defaulter in the civil prison and shall in that event cause him to be arrested if

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 he is not already under arrest: Provide that in order to give a defaulter an opportunity of
satisfying the arrears, the Adjudicating Authority may, before making the order of detention,
leave the defaulter in the custody of the officer arresting him or of any other officer for a
specifed period not exceeding fifteen days, or release him on his furnishing security to the
satisfaction of the Adjudicating Authority for his appearance at the expiration of the specified
period if the arrears are not satisfied.
x) When the Adjudicating Authority does not make an order of detention under sub-section
(9), he shall, if the defaulter is under arrest, direct his release.
xi) Every person detained in the civil prison in execution of the certificate may be so
detained,-where the certificate is for a demand of an amount exceeding rupees one crore, up to
three years, and, in any other case, up to six months: Provided that he shall be released from
such detention on the amount mentioned in the warrant for his detention being paid to the
officer-in-charge of the civil prison.
xii) A defaulter released from detention under this section shall not, merely by reason of his
release, be discharged from his liability for the arrears, but he shall not be liable to be arrested
under the certificate in execution of which he was detaine in the civil prison.
xiii) A detention order may be executed at any place in India in the manner provided for the
execution of warrant of arrest under the Code of Criminal Procedure, 1973 (2 of 1974).
3) Power to compound contravention.
i) Any contravention under section 13 may, on an application made by the person committing
such contravention, be compounded within one hundred and eighty days from the date of
receipt of application by the Director f Enforcement or such other officers of the Directorate
of Enforcement and officers of the Reserve Bank as may be authorised in this behalf by the
Central Government in such manner as may be prescribed.
ii) Where a contravention has been compounded under sub-section (1), no proceeding or
further proceeding, as the case may be, shall be initiated or continued, as the case may be,
against the person committing such contravention under that section, in respect of the
contravention so compounded.
5.10. ADJUDICATION AND APPEAL
1) Appointment of Adjudicating Authority.
i) For the purpose of adjudication under section 13, the Central Government may, by an order
published in the Official Gazette, appoint as many officers of the Central Government as it
may think fit, as the Adjudicating Authorities for holding an inquiry in the manner prescribed
after giving the person alleged to have committed contravention under section 13, against
whom a complaint has been made under sub-section (3) (hereinafter in this section referred to
a the said person) a reasonable opportunity of being heard for the purpose of imposing any
penalty: Provided that where the Adjudicating Authority is of opinion that the said person is
likely to abscond or is likely to evade in any manner, the payment of penalty, if levied, it may
direct the said person to furnish a bond or guarantee for such amount an subject to such
conditions as it may deem fit.
ii) The Central Government shall, while appointing the Adjudicating Authorities under sub-
section (1), also specify in the order published in the Official Gazette, their respective
jurisdictions.
iii) No Adjudicating Authority shall hold an enquiry under sub-section (1) except upon a
complaint in writing made by any officer authorised by a general or special order by the Central
Government.
iv) The said person may appear either in person or take the assistance of a legal practitioner or a
chartered accountant of his choice for presenting his case before the Adjudicating Authority.

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v) Every Adjudicating Authority shall have the same powers of a civil court which are conferred
on the Appellate Tribunal under sub-section (2) of section 28 and- a) all proceedings before it
shall be deemed to be judicial proceedings within the meaning of sections 193 and 228 of the
Indian Penal Code (45 of 1860); b) shall be deemed to be a civil court for the purposes of
sections 345 and 346 of the Code of Criminal Procedure, 1973 (2 of 1974).
vi) Every Adjudicating Authority shall deal with the complaint under sub-section (2) as
expeditiously as possible and endeavour shall be made to dispose of the complaint finally within
one year from the date of receipt of the complaint: Provided that where the complaint cannot be
disposed of within the said period, the Adjudicating Authority shall record periodically the
reasons in writing for not disposing of the complaint within the said period.
2) Appeal to Special Director (Appeals).
i) The Central Government shall, by notification, appoint one or more Special Directors
(Appeals) to hear appeals against the orders of the Adjudicating Authorities under this section
and shall also specify in t e said notification the matter and places in relation to which the
Special Director (Appeals) may exercise jurisdiction.
ii) Any person aggrieved by an order made by the Adjudicating Authority, being an Assistant
Director of Enforcement or a Deputy Director of Enforcement, may prefer an appeal to the
Special Director (Appeals).
iii) Every appeal under sub-section (1) shall be filed within forty-five days from the date on
which the copy of the order made by the Adjudicating Authority is received by the aggrieved
person and it shall be in such form, verified in such manner and be ccompanied by such fee as
may be prescribed: Provided that the Special Director (Appeals) may entertain an appeal after
the expiry of the said period of forty-five days, if he is satisfied that there was sufficient cause
for not filing it within that period.
iv) On receipt of an appeal under sub-section (1), the Special Director (Appeals) may after
giving the parties to the appeal an opportunity of being heard, pass such order thereon as he
thinks fit, confirming, modifying or setting aside the order appeale against.
v) The Special Director (Appeals) shall send a copy of every order made by him to the parties
to appeal and to the concerned Adjudicating Authority. • The Special Director (Appeals) shall
have the same powers of a civil court which are conferred on the Appellate Tribunal under
sub-section (2) of section 28 and- o all proceedings before him shall be deemed to be judicial
proceedings within the meaning of sections 193 and 228 of the Indian Penal Code (45 of
1860); o shall be deemed to be a civil court for the purposes of sections 345 and 346 of the
Code of Criminal Procedure, 1973 (2 of 1974).
3) Establishment of Appellate Tribunal.-
The Central Government shall, by notification, establish an Appellate Tribunal to be known as
the Appellate Tribunal for Foreign Exchange to hear appeals against the orders of the
Adjudicating Authorities and the pecial Director (Appeals) under this Act.
4) Appeal to Appellate Tribunal.
i) Save as provided in sub-section (2), the Central Government or any person aggrieved by an
order made by an Adjudicating Authority, other than those referred to in sub-section (1) of
section 17, or the Special Directo (Appeals), may prefer an appeal to the Appellate Tribunal:
Provided that any person appealing against the order of the Adjudicating Authority or the
Special Director (Appeals) levying any penalty, shall while filing the appeal, deposit the
amount of such penalty with such authority as may be notified by the Cental Government:
Provided further that where in any particular case, the Appellate Tribunal is of the opinion that
the deposit of such penalty would cause undue hardship to such person, the Appellate Tribunal
may dispense with such deposit subject to such conditions as i may deem fit to impose so as to
safeguard the realisation of penalty.

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ii) Every appeal under sub-section (1) shall be filed within a period of forty-five days from the
date on which a copy of the order made by the Adjudicating Authority or the Special Director
(Appeals) is received by the aggrieved person or by the Central Government and it shall be in
such form, verified in such manner and be accompanied by such fee as may be prescribed :
Provided that the Appellate Tribunal may entertain an appeal after the expiry of the said
period of forty-five days if it is satisfied that there was sufficient cause for not filing it within
that period.
iii) On receipt of an appeal under sub-section (1), the Appellate Tribunal may, after giving the
parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit,
confirming, modifying or setting aside the order appealed against.
iv) The Appellate Tribunal shall send a copy of every order made by it to the parties to the
appeal and to the concerned Adjudicating Authority or the Special Director (Appeals), as the
case may be.
v) The appeal filed before the Appellate Tribunal under sub-section (1) shall be dealt with by
it as expeditiously as possible and endeavour shall be made by it to dispose of the appeal
finally within one hundred and eighty days from the date of receipt of the appeal: Provided
that where any appeal could not be disposed of within the said period of one hundred and
eighty days, the Appellate Tribunal shall record its reasons in writing for not disposing off the
appeal within the said period.
vi) The Appellate Tribunal may, for the purpose of examining the legality, propriety or
correctness of any order made by the Adjudicating Authority under section 16 in relation to
any proceeding, on its own motion or otherwise, call for the records of su h proceedings and
make such order in the case as it thinks fit.
5.11. COMPOSITION OF APPELLATE TRIBUNAL.
i) The Appellate Tribunal shall consist of a Chairperson and such number of Members as the
Central Government may deem fit.
ii) Subject to the provisions of this Act,-] o the jurisdiction of the Appellate Tribunal may be
exercised by Benches thereof; a Bench may be constituted by the Chairperson with one or
more Members as the Chairperson may deem fit; the Benches of the Appellate Tribunal shall
ordinarily sit at New Delhi and at such other places as the Central Government may, in
consultation with the Chairperson, notify; the Central Government shall notify the areas in
relation to which each Bench of the Appellate Tribunal may exercise jurisdiction •
Notwithstanding anything contained in sub-section (2), the Chairperson may transfer a
Member from one Bench to another Bench.
ii) If at any stage of the hearing of any case or matter it appears to the Chairperson or a
Member that the case or matter is of such a nature that it ought to be heard by a Bench
consisting of two Members, the case or matter may be transferred by the Chairperson or, as
the case may be, referred to him for transfer, to such Bench as the Chairperson may deem fit.
5.12. DIRECTORATE OF ENFORCMENT
1. Establishment of Directorate of Enforcement sec36
Section 36 to 38 provide for establishments and functions and power of directorate of
enforcement. The provisions are given below:
i) The Central Government shall establish a Directorate of Enforcement with a Director and
such other officers or class of officers as it thinks fit, who shall be called officers of
Enforcement, for the purposes of this Act.
ii) Without prejudice to the provisions of sub-section (1), the Central Government may
authorise the Director of Enforcement or an Additional Director of Enforcement or a Special
Director of Enforcement or a Deputy Director of Enforcement to appoint officers of
Enforcement below the rank of an Assistant Director of Enforcement.

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 iii) Subject to such conditions and limitations as the Central Government may impose, an
officer of Enforcement may exercise the powers and discharge the duties conferred or
imposed on him under this Act.
2.Power of search, seizure, etc. Sec.37
i)The Director of Enforcement and other officers of Enforcement, not below the rank of an
Assistant Director, shall take up for investigation the contravention referred to in section 13.
ii) Without prejudice to the provisions of sub-section (1), the Central Government may also,
by notification, authorise any officer or class of officers in the Central Government, State
Government or the Reserve Bank, not below the rank of an Under Secreary to the Government
of India to investigate any contravention referred to in section 13.
iii) The officers referred to in sub-section (1) shall exercise the like powers which are
conferred on income-tax authorities under the Income-tax Act, 1961 (43 of 1961) and shall
exercise such powers, subject to such limitations laid down under that A t.
3.Empowering other officers.
i) The Central Government may, by order and subject to such conditions and limitations as it
thinks fit to impose, authorise any officer of customs or any central excise officer or any
police officer or any other officer ,the Central Government or a State Government to exercise
such of the powers and discharge such of the duties of the Director of Enforcement or any
other officer of Enforcement under this Act as may be stated in the order.
ii) The officers referred to in sub-section (1) shall exercise the like powers which are
conferred on the income-tax authorities under the Income-tax Act, 1961 (43 of 1961), subject
to such conditions and limitations as the Central Government may impose.

CONCLUSION:
As per Section 3 of FEMA, all the current account transactions are free; howevercentral
government at any time could impose reasonable instructions by issuing special rules. As per
Section 6 of FEMA, Capital Account Transactions are permitted only to the extent as
specified by RBI in its issued regulations. As per Section 10 of FEMA, RBI have controlling
role in its management however RBI cannot directly handle foreign exchange transaction and
must authorize a person to deal with it as per directions set by RBI. FEMA also have
provisions of various enforcement, penalties, adjudication and appeals in this area.
5.13. INFORMATION TECHNOLOGY ACT, 2000
Introduction
There has been revolutionary changes in the manner people transact business all over the world.
Digital technology and new communication systems have made dramatic changes in the lives of
the people. Business and consumers are increasingly using computers to create, transmit and
store information in the electronic form replacing the traditional paper documents. E-commerce
and e-governance have become the need of the hour. The lack of an appropriate legal framework
has hindered the electronic means of conducting business. The principal hurdles which stood in
the way of facilitating e-commerce and e-governance were the requirements with respect to
certain legal frameworks as well as the signature for legal recognition. As such now, it has
become a necessity to provide for legal recognition of electronic records and digital signature.

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Moreover, amendments were required in the Indian Penal Code and Indian Evidence Act, 1872
(which deals with offences related to documents and paper-based transactions); Reserve Bank of
India Act, 1934 and Banker’s Books Evidence Act, 1891. It is on this premise, the Information
Technology Act, 2000 was enacted.
The Information Technology Act, 2000 has been enacted by the Parliament to provide legal
recognition for transaction carried out by the means of electronic data interchange and other
means of electronic communication commonly referred to as electronic commerce. The General
Assembly of the United Nations by its resolution dated 30 thJanuary, 1997has also adopted the
Model Law on Electronic Commerce. The said resolution also asks the different States to enact
or revised their laws in view of the need for uniformity of law applicable to alternatives to paper
based method of communication and storage of information. In view of the above, the Indian
Government also got enacted the Information Technology Act, 2000.
5.14. SCOPE AND APPLICATION
The Information and Technology Act, 2000 has come into effect from 17 th October, 2000.It
extends to the whole of India. It also applies to any offence or contravention committed under
the Act by any person outside India except as otherwise provided in the Act. The Act does not
apply to the following:
a) A negotiable instrument as defined in Section 13 of the Negotiable Instruments Act,
1881.
b) A power-of-attorney as defined in Section1A of the Powers-of Attorney Act, 1882.
c) A trust as defined in Section 3 of the Indian Trusts Act, 1882.
d) A will as defined in clause and Section (2) (h) of the Indian Succession Act, 1925
including any other testamentary disposition by whatever name called.
e) Any contract for the sale or conveyance of immovable property or any interest in such
property.
f) Any such class of documents or transactions as may be notified by the Central
Government in the Official Gazette.
5.15.OBJECTS OF THE ACT
The objects of the Act are as follows:
1. To provide legal recognition to transactions carried out by means of electronic data
interchange in other means of electronic communication commonly referred to as

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 electronic commerce or e-commerce which involves the use of alternative to paper-based
means of communication and storage of information.
2. To facilitate electronic filing of documents with government agencies.
3. To facilitate electronic storage of data in place of paper-based methods of storage of data.
4. To provide for matters connected therewith or incidental thereto.
5.16. DIGITAL SIGNATURE
Section 3 of the Act provides modes of verifying the electronic records through digital signature.
The Act states that —
i) Any subscriber may authenticate an electronic record by affixing his digital signature.
ii) The authentication of the electronic record shall be affected by the use of asymmetric
crypto and hash function which envelope and transform the initial electronic record into
another electronic record. Hash function means an algorithm mapping or translation of
one sequence of bits into another, generally smaller set known as hash result, the
purpose is such that an electronic record yields to the same hash result every time the
algorithm is executed with the same electronic record.
iii) Any person by the use of a public key of the subscriber can verify the electronic record.
iv) The private key and the public key are unique to the subscriber to the function key pair.

5.17. ELECTRONIC GOVERNANCE

Sections 4 to 10 of the Act deal with provisions relating to electronic governance. Normally, law
insists on information being in written, or in typewritten or in printed form. In such cases,
Section 4 states that these requirements shall be deemed to have been satisfied if such
information is made available in an electronic form and accessible so as to be usable for a
subsequent reference. In cases where law insists on information being authenticated by affixing
the signature, such requirement shall be deemed to have been satisfied if such information or
matter is authenticated by means of digital signature affixed. If the documents, records or
information are to be retained for any specific period as specified by law, then that information is
permissible to be retained in electronic form, provided it is accessible for subsequent reference
and retained in the format in which it was originally generated.
Section 8 of the Act permits the publishing of rules, regulations, orders, bye-laws, etc. to be
published in the Electronic gazette. Section 10 of the Act states about the rules that are laid down
by the Central Government related with this matter. It lays down the type of digital signature, the

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manner in which digital signature shall be affixed, procedure which facilitates the certification of
person affixing the signature, procedures that need to be carried out for ensuring integrity,
confidentiality and security of electronic records, other matters which are necessary for giving
legal effect to digital signature.
Secured Electronic records and Secured Digital Signature
The electronic records are deemed to be secured if security procedures are applied to those data
for the purpose of verification (Section 14). The procedures for that, as per Section 15, are as
follows —
a) If it is unique to the subscriber affixing it,
b) Capable of identifying such subscriber, and
c) If it is created in such a manner that is under the exclusive control of the subscriber in
such a way that if the electronic record is altered, it would invalidate the digital signature.
5.18. CERTIFYING AUTHORITIES
Section 17 deals with the appointment of the Controller of Certifying Authorities by the Central
Government. Section 18 deals with the functions of the Controllers which are as follows —
1. Exercise supervision and lay down standards to be maintained by the Certifying
Authorities.
2. Specify the qualifications as well as the conditions subject to which the Certifying
Authorities should conduct their business.
3. Lay down the duties of the Certifying Authorities.
4. Specify the contents of written, printed or visual materials and advertisements that may
be distributed or used in respect of a digital signature certificate and the public key.
5. Specify the form and content of a digital signature certificate (DSC) and the key.
6. Specify the manner in which the Certifying Authorities shall conduct their dealings with
the subscribers.
7. Specify the form and manner in which accounts shall be maintained by the Certifying
Authorities.
The granting of digital certificate is within the power of the Certifying Authorities. On the
receipt of the application, the Certifying Authority may issue the digital signature after
considering the certifying practice statement and making such enquiry required. However, the
Certifying Authorities will not grant the digital certificate until and unless the applicant holds the
private key corresponding to the public key listed in the digital signature, and the applicant holds
a private key which is capable of creating a digital signature, and the public key to be listed in

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the certificate could be used to verify a digital signature affixed by the private key held by the
applicant.
The Certifying Authority holds wide power in suspension and revocation of digital
signature. In suspending digital certificate held by the subscriber, the Certifying Authorities
could do so on the application of the subscriber or on public interest. In the case of revocation,
the Certifying Authorities could do so if the subscriber makes a request or on the subscriber’s
death or on the winding up of a company. The Certifying Authority could also do so if it is of the
opinion that the material fact presented in the digital signature certificate is false or if a
requirement for issuance of digital signature certificate was not satisfied or if the reliability of the
digital signature certificate is been affected.
5.19. DUTIES OF SUBSCRIBERS
Sections 40 to 42 deal with the duties of subscribers. In case of acceptance of the DSC by the
subscriber, he certifies to all who reasonably rely on the DSC that the subscriber holds the
privates key corresponding to the public key enlisted in the DSC and all the information
contained in the DSC is true. It is also the duty of the subscriber to take reasonable care to retain
control of the private key corresponding to the public key listed in his DSC. He should also take
all steps to prevent its disclosure to any other person not authorised to affix the digital signature
of the subscriber and in cases where the compromising of the public key is known to the
subscriber, it should be communicated to the certifying authority in the prescribed manner as
early as possible.
5.20. OFFENCES AND PENALTIES
Sections 43 to 47 provide for Penalties and Adjudication in case of contravention of various
offences committed under the Act.
Damage to computer systems:Causing damage to computer systems is considered as offences.
Section 43 states that if a person does any of the following actions without the permission of the
owner, or the person in charge of a computer, computer network or system, he is liable to pay
compensation not exceeding Rs. 1 crore to the person affected —
a) Accesses or secures access to computer, computer system or network;
b) Downloads, copies or extracts any data, computer database or information from such
computer, computer system or computer network.
c) Introduces or causes to be introduced any computer contaminant or computer virus into
any computer, computer system or computer network including information or data held
or stored in any removable storage medium;

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 d) Damages or causes to be damaged any computer, computer system or computer network,
data, computer database or any other programmes residing in such computer, computer
system or computer network;
e) Disrupts or causes disruption of any computer, computer system or computer network;
f) Denies or causes the denial of access to any person authorized to access any computer
system or computer network by any means;
g) Provides any assistance to any person to facilitate access to a computer, computer system
or computer network in contravention of the provisions of the Act, rules or regulations
made thereunder;
h) Charges the services availed of by a person to the account of another person by tampering
with or manipulating any computer, computer system or computer network.
Hacking with computer system:Whoever with the intent to cause knowing that he is likely to
cause wrongful loss or damage to the public or any person destroys or deletes or alters any
information residing in a computer resource or diminishes its value or utility or affects it
injuriously by any means, commits hacking. In these cases, the person committing hacking
would be punished with imprisonment up to three years or with a fine which may extend up to
Rs. 2 lakhs.
Publishing of information which is obscene in electronic form:Whoever publishes or
transmits or causes to be published in the electronic form, any material which is lascivious or
appeals to the prurient interest or if it its effect is such as to tend to deprive and corrupt persons,
shall be punished on first conviction with imprisonment of either description for a term which
may extend up to five years or with a fine which may extend up to Rs.1 lakh.
Penalty for misrepresentation:Whoevermakes any misrepresentation to, or suppresses any
material fact from, the Controller of the Certifying Authority for obtaining any licence or DSC
would be punished with imprisonment for a term which may extend up to two years or with a
fine which may extend up to Rs. 1 lakh or with both.
Penalty for breach of confidentiality and privacy:Whoever has secured access to any
electronic record, book, register, correspondence, information, document or other material
without the consent of the person concerned and discloses such electronic record, book, register,
correspondence, information, document or other material to any other person would be punished
with imprisonment for a term which may extend up to two years or with a fine which may extend
up to Rs. 1 lakh or with both.

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Penalty for publishing DSC false in certain particulars: In cases where a DSC is made
available to any other person with the knowledge that the certifying authority listed in the
certificate has not issued it or the subscriber listed in the certificate has not accepted it or the
certificate has been revoked or suspended, the person doing so would be punished with
imprisonment for a term which may extend up to two years or with a fine which may extend up
to Rs. 1 lakh or with both.
Publication for fraudulent purpose:Whoever knowingly creates, publishes or otherwise makes
available a DSC forany fraudulent or unlawful purpose would be punished with imprisonment
for a term which may extend up to two years or with a fine which may extend up to Rs. 1 lakh or
with both.
All the above offences are also applicable to any offence or contravention committed by any
person outside India provided such an offence involves a computer, computer system or
computer network located in India.

5.21. Applicability and Non-Applicability of the Act

Applicability:-According to Section 1 (2), the Act extends to the entire country, which also
includes Jammu and Kashmir. In order to include Jammu and Kashmir, the Act uses Article 253 of
the constitution. Further, it does not take citizenship into account and provides extra-territorial
jurisdiction. Section 1 (2) along with Section 75, specifies that the Act is applicable to any
offence or contravention committed outside India as well. If the conduct of person constituting the
offence involves a computer or a computerized system or network located in India, then
Non-Applicability:-
According to Section 1 (4) of the Information Technology Act, 2000, the Act is not applicable to the
following documents:
1. Execution of Negotiable Instrument under Negotiable Instruments Act, 1881, except
cheques.
2. Execution of a Power of Attorney under the Powers of Attorney Act, 1882.
3. Creation of Trust under the Indian Trust Act, 1882.

4. Execution of a Will under the Indian Succession Act, 1925 including any other testamentary
disposition
by whatever name called.

5. Entering into a contract for the sale of conveyance of immovable property or any interest in
such property.

6. Any such class of documents or transactions as may be notified by the Central Government
in the Gazette.

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5.22.SUMMARY
The main objective of FERA was conservation and proper utilization of the foreign exchange
resources of the country. It also sought to control certain aspects of the conduct of business
outside the country by Indian companies and in India by foreign companies.When a business
enterprise imports goods from other countries, exports its products to them or makes investments
abroad, it deals in foreign exchange. Foreign exchange means 'foreign currency' and includes
deposits, credits and balances payable in any foreign currency and secondly drafts, travellers,
cheques, letters of credit or bills of exchange, expressed or drawn in Indian currency but payable
in any foreign currency.
FERA was to control everything that was specified, relating to foreign exchange whereas FEMA
lay down that ‘everything other than what is expressly covered is not controlled'. The overriding
objective of FERA was to regulate and minimize dealings in foreign exchange and foreign
securities while FEMA on the other hand aims to aid in creation of a liberal foreign exchange
market in India.
This difference in terminology reflects seriousness of government towards deregulation of
foreign exchange and promotion of free flow of international trade. To facilitate external trade is
concerned; section 5 of the Act removes restrictions on withdrawal of foreign exchange for the
purpose of current account transactions. As external trade i.e. imports / export of goods &
services involve transactions on current account, there is no need for seeking RBI permissions in
connection with remittances involving external trade.
FEMA permits only authorized person to deal in foreign exchange or foreign security. Such an
authorized person, under the Act, means authorizeddealer, money changer, off-shore banking
unit or any other person for the time being authorized by Reserve Bank. The Act thus prohibits
any person who deal in or transfer any foreign exchange or foreign security to any person not
being an authorized person. Make any payment to or for the credit of any person resident outside
India in any manner. Receive otherwise through an authorized person, any payment by order or
on behalf of any person resident outside India in any manner.
Enter into any financial transaction in India as consideration for or in association with acquisition
or creation or transfer of a right to acquire, any asset outside India by any person is resident in
India which acquires, hold, own, possess or transfer any foreign exchange, foreign security or
any immovable property situated outside India.

IT ACT 2000

The Information Technology Act, 2000 (also known as ITA-2000, or the IT Act) is an Act of
the Indian Parliament (No 21 of 2000) notified on 17 October 2000. It is the primary law
in India dealing with cybercrime and electronic commerce. It is based on the UNCITRAL Model
Law on International Commercial Arbitration recommended by the General Assembly of United
Nations by a resolution dated 30 January 1997

The Act provides a legal framework for electronic governance by giving recognition
to electronic records and digital signatures. It also defines cyber crimes and prescribes penalties
for them. The Act directed the formation of a Controller of Certifying Authorities to regulate the

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 issuance of digital signatures. It also established a Cyber Appellate Tribunal to resolve disputes
rising from this new law.[3]The Act also amended various sections of the Indian Penal Code,
1860, the Indian, 1872, the Banker's Book Evidence Act, 1891, and the Reserve Bank of India
Act, 1934 to make them compliant with new technologies. [3]
The Information Technology Act, 2000 provides legal recognition to the transaction done via
electronic exchange of data and other electronic means of communicationor electronic commerce
transactions.

This also involves the use of alternatives to a paper-based method of communication and
information storage to facilitate the electronic filing of documents with the Government agencies.

Further, this act amended the Indian Penal Code 1860, the Indian Evidence Act 1872, the Bankers’
Books Evidence Act 1891, and the Reserve Bank of India Act 1934. The objectives of the Act are as
follows:

i. Grant legal recognition to all transactions done via electronic exchange of data or other
electronic means of communication or e-commerce, in place of the earlier paper-based
method of communication.

ii. Give legal recognition to digital signatures for the authentication of any information or
matters requiring legal authentication

iii. Facilitate the electronic filing of documents with Government agencies and also departments

iv. Facilitate the electronic storage of data

v. Give legal sanction and also facilitate the electronic transfer of funds between banks and
financial institutions

vi. Grant legal recognition to bankers under the Evidence Act, 1891 and the Reserve Bank of
India Act, 1934, for keeping the books of accounts in electronic form.

Features of the Information Technology Act, 2000

a. All electronic contracts made through secure electronic channels are legally valid.

b. Legal recognition for digital signatures.

c. Security measures for electronic records and also digital signatures are in place

d. A procedure for the appointment of adjudicating officers for holding inquiries under the Act
is finalized

e. Provision for establishing a Cyber Regulatory Appellant Tribunal under the Act. Further, this
tribunal will handle all appeals made against the order of the Controller or Adjudicating
Officer.

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 f. An appeal against the order of the Cyber Appellant Tribunal is possible only in the High
Court

g. Digital Signatures will use an asymmetric cryptosystem and also a hash function

h. Provision for the appointment of the Controller of Certifying Authorities (CCA) to license
and regulate the working of Certifying Authorities. The Controller to act as a repository of
all digital signatures.

i. The Act applies to offences or contraventions committed outside India

j. Senior police officers and other officers can enter any public place and search and arrest
without warrant

k. Provisions for the constitution of a Cyber Regulations Advisory Committee to advise the
Central Government and Controller.
Applicability and Non-Applicability of the Act
Applicability:-According to Section 1 (2), the Act extends to the entire country, which also
includes Jammu and Kashmir. In order to include Jammu and Kashmir, the Act uses Article 253 of
the constitution. Further, it does not take citizenship into account and provides extra-territorial
jurisdiction. Section 1 (2) along with Section 75, specifies that the Act is applicable to any
offence or contravention committed outside India as well. If the conduct of person constituting the
offence involves a computer or a computerized system or network located in India, then irrespective
of his/her nationality, the person is punishable under the Act. Lack of international cooperation is
the only limitation of this provision.
Non-Applicability:-
According to Section 1 (4) of the Information Technology Act, 2000, the Act is not applicable to the
following documents:
7. Execution of Negotiable Instrument under Negotiable Instruments Act, 1881, except
cheques.
8. Execution of a Power of Attorney under the Powers of Attorney Act, 1882.
9. Creation of Trust under the Indian Trust Act, 1882.

10. Execution of a Will under the Indian Succession Act, 1925 including any other testamentary
disposition
by whatever name called.

11. Entering into a contract for the sale of conveyance of immovable property or any interest in
such property.

12. Any such class of documents or transactions as may be notified by the Central Government
in the Gazette.

5.23. SELF ASSESSMENT QUESTIONS

1. State the objectives and salient features of foreign Exchange Management act.
2. Describe the objective and salient features of Information Technology Act 2000.

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 3. Explain the different provisions under FEMA for regulation and management of foreign
exchange.
4. State the procedure to be adopted by the aggrieved for redressal of his grievances against
the order of Adjudicating authority.
5. Explain the consequences of contravention of the provisions of FEMA.
6. Write short notes on:
i) Directorate of Enforcement
ii) Duties of Exporter of Goods & Services under FEMA.
iii) Capital Account and Current Account Transactions

7.Define the term Electronic Governance.

8. State the duties of the subscribers under the IT Act 2000.

9. State the various provisions applicable to attribution, acknowledge and despatch of

electronic records

10. Write short notes on:-

a) Digital signature certificate

b) Computer system

c) Secure System

* THANK YOU*

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