UNIT -1

CONTRACT OF INDEMNITY AND GUARANTEE

CA DEEPIKA RATHI

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 1

OVERVIEW
Contract of Indemnity
{Section 124-125}

Contract of Guarantee
{Section 126-127}

Nature of Surety’s Liability

{Section 128}
Contract of Indemnity and Guarantee
{Section 124-147}
Continuing Guarantee
{Section 129-132}

Discharge of Surety
{Section 133-139}

Right of Surety
{Section 140-147}
CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 2
 INTRODUCTION
 Contract of Indemnity and Guarantee are the specific types of contracts provided under
section 124 to 127 of the Indian Contract Act 1872.
 In addition to the specific provisions (i.e. Section 124 to Section 147 of the Indian
Contract Act, 1872) the general principles of contracts are also applicable to such
contracts which includes-
a. Offer and Acceptance
b. Intention to create legal obligation
c. Consideration
d. Competency to contract
e. Free consent
f. Lawful object
g. The agreement must not be expressly declared to be void- eg: an agreement in
restraint of trade/ marriage etc.
h. The terms of the agreement must not be vague or uncertain
i. The agreement must be capable of performance- An agreement to do an impossible
act is void.
j. Legal formalities.
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CONTRACT OF INDEMNITY
 Definition u/s 124 of Indian Contract Act 1872
’’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.”

 Meaning

o Indemnity/ Indemnify means:

• Security against loss or
• To make good the loss or
• To compensate the party who suffered some loss.

 Basic Conditions
• Under a contract of indemnity the “existence of loss” is essential.
• Unless the promise has suffered a loss he cannot liable on the contract of indemnity.
• Such loss is caused by
- Conduct of the promisor himself or
- Conduct of any other person.
CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 4
 • Loss occasioned by
i. An accident not caused by any person or
ii. An act of God/ Natural event is not covered.

 Mode of Contract of indemnity

i. Express : It is said to be express when a person expressly promises to compensate

the other from loss.
ii. Implied : It is said to be implied when it is to be inferred from the conduct of the
parties or from the circumstances of the case.

 Insurance Contracts

a. Fire Insurance or Marine insurance → Contract of Indemnity

b. Life Insurance → Not a Contract of indemnity

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Two parties in Contract of indemnity

Indemnified/
Indemnifier
Indemnity Holder

The party who promises to

The party who is promised to
indemnify/save the other
be saved against the loss
party from loss.

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 Contract for
Compensation

Indemnifier Indemnity Holder

Contract
(Promisor) (Promisee)

Compensation Paid
on Actual Loss

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 7

Some Examples of Contract of Indemnity

• Example 1 :- Mr. X contracts with the Government to return to India after completing his studies
(which were funded by the Government) at University of Cambridge and to serve the Government for a
period of 5 years. If Mr. X fails to return to India, he will have to reimburse the Government. It is a
contract of indemnity.

• Example 2 :- A may contract to indemnify B against the consequences of any proceedings which C may
take against B in respect of a sum of ` 5000/- advanced byC to B. In consequence, when B who is called
upon to pay the sum of money to C fails to do so, C would be able to recover the amount from A as
provided inSection 124.

• Example 3 :- X, a shareholder of a company lost his share certificate. He applied for the duplicate. The
company agreed to issue the same on the term that X will compensate the company against the loss
where any holder produces the original certificate. Here, there is contract of indemnity between X and
the company.

• Example 4 :- X may agree to indemnify Y for any loss or damage that may occur if a tree on Y’s
neighboring property blows over. If the tree then blows over and damages Y’s fence, X will be liable for the
cost of fixing the fence.
CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 8
Right of Indemnifier Right of Indemnity Holder (Section 125)
• Indian Contract Act is silent about The promisee in a contract of indemnity, acting within the scope of his
the rights which the indemnifier authority, is entitled to recover from the promisor/ indemnifier-
has on carrying out his promise to 1. Damages : All damages which he may be compelled to pay in any
indemnify. suit in respect of any matter to which the promise to indemnify
• But they are similar to the rights applies.
of a surety under section 141 of 2. Costs : All costs which he may be compelled to pay in such suit if in
the Indian Contract Act which are bringing or defending it, provided
as follows • He did not contravene the orders of the indemnifier as per
 Right to benefit of creditor’s contract and
securities. • Acted prudently to minimize losses as he would if there were
 Right to set off no indemnity contract or
 Right to share reduction • If the promiser authorized him to bring or defend the suit.
3. Sums : All sums which he may have paid under the terms of any
compromise of any such suit,
• If the compromise was not contrary to the orders of the
promisor, and was one which it would have been prudent for
the promisee to make in the absence of any contract of
indemnity, or
• If the promisor authorized him to compromise the suit.
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Section 125
In a contract of indemnity the Promisee (Indemnity Holder)
acting within the scope of his authority is entitled to recover
from the Promisor (Indemnifier) the following rights

All costs which he may All sums which he may

All damages which he may
have been compelled to have paid under the
be compelled to pay in any
pay in bringing/ defending terms of any compromise
suit
the suit of suit

Note : The rights contemplated under section 125 are not exhaustive. The indemnity holder/ indemnified has
other rights besides those mentioned above. If he has incurred a liability and that liability is absolute, he is
entitled to call upon his indemnifier to save him from the liability and to pay it off.

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• Question : When does the liability of an indemnifier commence ?

• Answer : The Indian Contract Act, 1872, is silent on the time of commencement of liability
of indemnifier, however, on the basis of judicial pronouncements it can be stated that the
liability of an indemnifier commences as soon as the liability of the indemnity-holder
becomes absolute and certain. This principle has been followed by the courts in several
cases.

Example : A promises to compensate X for any loss that he may suffer by filling a suit
against Y. The court orders X to pay Y damages of Rs. 10000. As the loss has become
certain, X may claim the amount of loss from A and pass it to Y.

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 11

CONTRACT OF GUARANTEE
‘’Contract of guarantee’’, ‘’surety’’, ‘’principal debtor’’ and ‘’creditor’’[Section 126]

 A Contract of Guarantee is a contract

- To perform the promise or
- To discharge the liability
- Of third person in case of default

 Three parties are involved in a contract of guarantee

Surety :- Person who gives the guarantee
Principal Debtor :- Person in respect of whose default the guarantee is given
Creditor :- Person to whom the guarantee is given

 Guarantee is a promise to pay a debt owed by a third person in case the latter does not pay.

 Guarantee: An Express contract → Given may be oral or written

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 A contract of guarantee is a tripartite agreement between principal debtor, creditor and
surety. There are in effect three contracts
i. A principal contract between the principal debtor and the creditor.
ii. A secondary contract between the creditor and the surety.
iii. An implied contract between the surety and the principal debtor whereby principal
debtor is under an obligation to indemnify the surety ; if the surety is made to pay or
perform.

 Note: The right of surety is not affected by the fact that the creditor has refused to sue
the principal debtor or that he has not demanded the sum due from him.
Contract of Guarantee
(Tripartite Agreement)

Principal Secondary Implied

Contract Contract Contract

Principal Principal
Creditors Creditor Surety Surety
Debtor Debtor
CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 13

Creditor Principal Debtor

Main Payment Relationship

Surety

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 ESSENTIAL FEATURES OF A GUARANTEE

The following are the requisites of a valid guarantee

 Principal Debt : The purpose of a guarantee being to secure the payment of a debt, the
existence of recoverable debt is necessary. It is of the essence of a guarantee that there
should be someone liable as a principal debtor and the surety undertakes to be liable on his
default. If there is no principal debt, there can be no valid guarantee.

 Consideration : A contract of guarantee should also be supported by some consideration. A

guarantee without consideration is void, but there is no need for a direct consideration
between the surety and the creditor.
• As per Section 127 consideration received by the principal debtor is sufficient
consideration to the surety for giving the guarantee, but past consideration is no
consideration for the contract of guarantee.
• Even if the principal debtor is incompetent to contract, the guarantee is valid.
• But, if surety is incompetent to contract, the guarantee is void.
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Example : B requests A to sell and deliver to him goods on credit. A agrees to do so

provided C will guarantee the payment of the price of the goods. C promises to guarantee
the payment in consideration of A ‘s promise to deliver the goods. As per Section 127,
there is a sufficient consideration for C’s promise. Therefore, the guarantee is valid.

Example : A sell and delivers goods to B. C afterwards requests A to forbear to sue B for
the debt for a year, and promises that if he does so, C will pay for them in default of
payment by B. A agrees to forbear as requested. This is a sufficient consideration for C’s
promise.
Any Promise
made

Consideration for
Anything
done Guarantee

Anything
done

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 Existence of a liability : There must be an existing liability or a promise whose performance
is guaranteed. Such liability or promise must be enforceable by law. The liability must be
enforceable by law. The liability must be legally enforceable and not time barred.

 No misrepresentation or concealment (Section 142 and 143) :

• Section 142 : Any guarantee which has been obtained by the means of
misrepresentation made by the creditor, or with his knowledge and assent, concerning a
material part of the transaction, is invalid.
• Section 143 : Any guarantee which the creditor has obtained by means of keeping
silence as to material circumstances, is invalid.
Example : A engages B as clerk to collect money for him. B fails to account for some of his
receipts, and A in consequence calls upon him to furnish security for his duly accounting. C
gives his guarantee for B’s duly accounting. A does not acquaint C, with his previous conduct.
B afterwards make default. The guarantee is invalid.
Example : A guarantees to C payment for iron to be supplied by him to B to the amount of
2,000 tons. B and C have privately agreed that B should pay rupee five per ton beyond
the market price, such excess to be applied in liquidation of an old debt. This agreement is
concealed from A. A is not liable as a surety.

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 Writing not necessary : Section 126 expressly declares that a guarantee may be either oral
or written.

 Joining of the other co-surities (Section 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.
• That implies, the guarantee by a surety is not valid if a condition is imposed by a
surety that some other person must also join as a co-surety, but such other person
does not join as a co-surety

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 ESSENTIAL FEATURES OF A GUARANTEE
Key Points

• Principal Debt :→ Existence of recoverable debt is necessary

• Consideration :→ Should be supported by some consideration
- There is no need for a direct consideration between the surety and the creditor.
- Consideration received by the principal debtor is sufficient consideration to surety for giving the
guarantee.
- Principal Debtor incompetent to contract : Guarantee is valid
- Surety incompetent to contract : Guarantee Void (Surety must be competent to contract)
• Existence of a liability or a promise whose performance is guaranteed.
• No misrepresentation or concealment by the creditor in obtaining guarantee.(Surety must be aware of all
material facts w.r.t. liability/promise else it shall invalid).
• Guarantee may be either oral or written.
• Joining of the other co-sureties (Section 144) : Where a person gives a guarantee upon the condition that
another surety must join along with him, and no such person joins as surety then such guarantee is not
valid.

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Types of Guarantees

A B
Specific Guarantee Continuing Guarantee
{Section 129}
• A guarantee which extends to a • A guarantee which extends to a series of transaction is
single debt/ specific transaction called a continuing guarantee.
is called a specific guarantee. • A surety’s liability continues until the revocation of the
guarantee.
• The surety’s liability comes to • The essence of continuing guarantee is that it applies not
an end when the guaranteed debt to a specific number of transactions but to any number
is duly discharged or the promise of transactions and makes the surety liable for the
is duly performed. unpaid balance at the end of the guarantee.
• In the continuing guarantee, the liability of surety
continues till the performance or the discharge of all the
transactions entered into or the guarantee is withdrawn.
CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 20
 • Example : On A’s recommendation B, a wealthy landlord
• Example: A guarantees payment
employs C as his estate manager. It was the duty of C to
to B of the price of the five
collect rent on 1st of every month from the tenant of B
bags of rice to be delivered by B
and remit the same to B before 5th of every month. A,
to C and to be paid for in a
guarantee this arrangement and promises to make good
month. B delivers five bags to C.
any default made by C. This is a contract of continuing
C pays for them. This is a
guarantee.
contract for specific guarantee
• Example : A guarantee payment to B a tea-dealer, to the
because A intended to guarantee
amount of Rs.10000, for any tea he may from time to
only for the payment of price of
time supply to C. B supplies C with tea to above the value
the first five bags of rice to be
of Rs. 10,000, and C pays B for it. Afterwards B supplies
delivered one time [Kay v Groves]
C with tea to the value of Rs.20,000. C fails to pay. The
guarantee given by A was a continuing guarantee, and he
is accordingly liable to B to the extent of Rs.10,000.

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 21

DISTINCTION BETWEEN A CONTRACT OF INDEMNITY AND A CONTRACT OF GUARANTEE

Point of distinction Contract of Indemnity Contract of Guarantee
Number of There are only two parties namely the There are three parties- creditor, principal debtor and
party/parties to indemnifier [promisor] and the indemnified surety.
the contract [promisee]
Nature of liability The liability of the indemnifier is primary and The liability of the surety is secondary and conditional
unconditional as the primary liability is that of the principal debtor.
Time of liability The liability of the indemnifier arises only on The liability arises only on the non-performance of an
the happening of a contingency. existing promise or non-payment of an existing debt.
Time to Act The indemnifier need not act at the request of The surety acts at the request of principal debtor.
indemnity holder.
Right to sue third Indemnifier cannot sue a third party for loss in Surety can proceed against principal debtor in his own
party his own name as there is no privity of contract. right because he gets all the right of a creditor after
Such a right would arise only if there is an discharging the debts.
assignment in his favour.
Purpose Reimbursement of loss For the security of the creditor
Competency to All parties must be competent to contract In the case of a contract of guarantee, where a minor
contract is a principal debtor the contract is still valid.
CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 22
 NATURE AND EXTENT OF SURETY’S LIABAILITY [SECTION -128]

 Section 128 :- The liability of the surety is co-extensive with that of the principal debtor
unless it is otherwise provided by the contract.
 Analysis :-
i. The term “co-extensive with that of principal debtor” means that the surety is liable for what
the principal debtor is liable. However, the liability of the surety may be made less than that of
the principal debtor by an express contract to that effect.
ii. The liability of a surety arises only on default by the principal debtor.
- But as soon as the principal debtor defaults, the liability of the surety begins and runs co-
extensive with the liability of the principal debtor, in the sense that the surety will be liable
for all those sums for which the principal debtor is liable.
- If there is a condition precedent for surety’s liability, the surety would be liable only when
such condition is fulfilled.
- A partial recognition of this principal is found in Section 144 (Joining of co-surety).
iii. Where a debtor cannot be held liable on account of any defect in the document, the liability of
the surety also ceases.
iv. Surety’s liability continues even if the principal debtor has not been sued or is omitted from
being sued. In other words, a creditor may choose to proceed against a surety first, unless
there is an agreement to the contrary.

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 Example : A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill
is dishonoured by C. A is liable not only for the amount of the bill but also for any interest
and charges which may have become due on it.

 Nature of Surety’s liability can be summed up as:

a. Liability of surety is of secondary nature as he is liable only on default of principal

debtor.

b. His liability arises immediately on the default by the principal debtor.

c. The creditor has a right to sue the surety directly without first proceeding against
principal debtor.

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 LIABIALITY OF TWO PERSONS,PRIMARILY LIABALEL, NOT AFFECTED BY
ARRANGEMENT BETWEEN THEM THAT ONE SHALL BE SURETY ON OTHER’S DEFAULT

 Section 132 :-

- Where two persons contract with a third person to undertake a certain liability and
- also contract with each other
- that one of them shall be liable only on the default of the other,
- the liability of each of such two persons to the third person under the first contract
is not affected by the existence of the second contract, although such third person
may have been aware of its existence.

 Example : A and B make a joint and several promissory note to C. A makes it, in fact, as
surety for B, and C knows this at the time when the note is made. The fact that A, to the
knowledge of C, made the note as surety for B, is no answer to a suit by C against A upon
the note.

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DISCHARGE OF A SURETY

 A surety is said to be discharged when his liability as surety comes to an end.

 The various modes of discharge of surety are -
By Revocation of the By Conduct of the Creditor By the invalidation of the
contract of guarantee contract of guarantee
a. Revocation of a. By variance in terms of contract (Section 133) a. Guarantee obtained by
continuing guarantee Exception : Variation which is not substantial or material or misrepresentation invalid
by notice (Section which is beneficial to surety will not discharge him of his (Section 142)
labiality
130) b. Guarantee obtained by
b. By release or discharge of principal debtor (Section 134)
c. Discharge of Surety when creditor compounds with, gives time concealment invalid
b. Revocation of to, or agree not to sue principal debtor (Section 135) (Section 143)
continuing guarantee i. Composition c. Guarantee on contract that
by surety’s death ii. Promise to give time creditor shall not act on it
(Section 131) iii. Promise not to sue until Co-Surety joins
Exception: (i) Surety not discharge when agreement made with (Section 144)
c. By Novation (Section third person to give time to principal debtor (Section- 136)
(ii) Creditor’s forbearance to sue does not discharge surety
62)
(Section-137)
d. Discharge of surety by creditor’s act or omission impairing
surety’s eventual remedy (Section 139)

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 26

 By revocation of the Contract of Guarantee

a. Revocation of continuing guarantee by Notice (Section 130) :

 The continuing guarantee may at any time be revoked by the surety as to future
transactions by notice to the creditors.
 Once the guarantee is revoked, the surety is not liable for any future transaction
however he is liable for all the transactions that happened before the notice was
given.
 A specific guarantee can be revoked only if liability to principal debtor has not
accrued.
 Example : Arun promises to pay Rama for all groceries bought by Carol for a period of 12
months if Carol fails to pay. In the next three months, Carol buys Rs.2000/- worth of
groceries. After 3 months, Arun revokes the guarantee by giving a notice to Rama. Carol
further purchases Rs.1000 of groceries. Carol fails to pay. Arun is not liable for Rs.1000/-
of purchase that was made after the notice but he is liable for Rs.2000/- of purchase made
before the notice.
 Example : A guarantees to B, to the extent of Rs. 100,000, that C shall pay all the bills
that B shall draw upon him. B draws the bill upon C. C accepts the bill. A gives notice of
revocation after the bill is drawn and accepted. C dishonors the bill at maturity. A is liable
upon his guarantee
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b. Revocation of continuing guarantee by surety’s death (Section 131) :

 In the absence of any contract to the contrary, the death of surety operates as a
revocation of a continuing guarantee as to the future transactions taking place after
the death of surety.
 However, the surety’s estate remains liable for the past transactions which have
already taken place before the death of the surety.
C. By novation (Section 62) :
 The surety under original contract is discharged if a fresh contract is entered into
either between the same parties or between the other parties, the consideration
being the mutual discharge of the old contract.

 By conduct of the creditor

a. By variance in terms of contract (Section 133)

 Where there is any variance in the terms of contract between the principal debtor
and creditor without surety’s consent, it would discharge the surety in respect of all
transactions taking place subsequent to such variance.

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  Example : A becomes surety to C for B’s conduct as a manager in C’s bank.
Afterwards, B and C contract, without A’s consent, that B’s salary shall be raised,
and that he shall become liable for one-fourth of the losses on overdrafts. B allows a
customer to overdraw, and the bank loses a sum of money. A is discharged from his
suretyship by the variance made without his consent, and is not liable to make good
this loss.

 *Variation which is not substantial or material or which is beneficial to the

surety will not discharge him of his liability : (M.S Anirudhan v Thomco’s Bank Ltd.
AIR 1963 SC 746)
• The surety guaranteed the repayment of loan provided by the bank to the
principal debtor of only upto Rs. 25,000. Subsequently, since the bank was willing
to provide loan only upto Rs. 20,000, the principal debtor reduced the amount to
Rs.20,000 in the guarantee form and without intimation to the surety gave it to
the bank which was then accepted. On default by the principal debtor, the court
held that the surety’s liability was not discharged as the alteration was beneficial
to him and not substantial

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b. By release or discharge of principal debtor (Section 134)

The surety is discharged if the creditor :
i. Enters into a fresh/new contract with principal debtor; by which the principal
debtor is released or
ii. Does any act or omission the legal consequences of which is discharge of the
principal debtor.
Example : A contracts with B for a fixed price to build a house for B within a stipulated
time, B supplying the necessary timber. C guarantees A’s performance of the contract. B
omits to supply the timber. C is discharged from his suretyship.
Example : A gives a guarantee to C for goods to be delivered to B. Later on, B contracts
with C to assign his property to C in lieu of the debt. B is discharged of his liability and A is
discharged of his liability.

c. Discharge of surety when creditor compounds with, gives time to or

agrees not to sue, principal debtor (Section 135)
 A contract between the creditor and the principal debtor, by which the
creditor makes a composition with, or promises to give time to, or promises not
to sue, the principal debtor, discharges the surety, unless the surety assents to
such contract.
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 i. Composition: If the creditor makes a composition with the principal debtor,
without consulting the surety, the latter is discharged. Composition
inevitably involves variation of the original contract, and, therefore, the
surety is discharged.

ii. Promise to give time: When the time for the payment of the guaranteed
debt comes, the surety has the right to require the principal debtor to
pay off the debt. Accordingly, it is one of the duties of the creditor
towards the surety not to allow the principal debtor more time for
payment.

iii. Promise not to sue : If the creditor under an agreement with the
principal debtor promises not to sue him, the surety is discharged. The main
reason is that the surety is entitled at any time to require the creditor to
call upon the principal debtor to pay off the debt when it is due and this
right is positively violated when the creditor promises not to sue the
principal debtor.

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*Cases where surety not discharged

i. Surety not discharged when agreement made with third person to give time
to principal debtor [Section 136] :-Where a contract to give time to the
principal debtor is made by the creditor with a third person, and not with the
principal debtor, the surety is not discharged.

Example : C, the holder of an overdue bill of exchange drawn by A as surety for

B, and accepted by B, contracts with M to give time to B. A is not discharged.

ii. Creditor’s forbearance to sue does not discharge surety [Section 137] :-
Mere forbearance on the part of the creditor to sue the principal debtor or to
enforce any other remedy against him does not in the absence of any provision
in the guarantee to the contrary, discharge the surety.

Example : B owes to C a debt guaranteed by A. The debt becomes payable. C

does not sue B for a year after the debt has become payable. A is not
discharged from his suretyship.

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 d. Discharge of surety by creditor’s act or omission impairing surety’s
eventual remedy (Section 139) :
• 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, the surety is
discharged.

• It is the plain duty of the creditor not to do anything inconsistent with the rights
of the surety. A surety is entitled after paying off the creditor, to his indemnity
from the principal debtor.

• If the creditors act or omission deprives the surety of the benefit of this remedy,
the surety is discharged.

• State bank of Saurashtra V Chitranjan Rangnath Raja (1980) 4 SCC 516 : In a

case before the Supreme Court of India, “A bank granted a loan on the security of
the stock in the godown. The loan was also guaranteed by the surety. The goods were
lost from the godown on account of the negligence of the bank officials. The surety
was discharged to the extent of the value of the stock so lost.’’

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 33

 By invalidation of the contract of guarantee

a. Guarantee obtained by misrepresentation invalid (Section 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.

b. Guarantee obtained by concealment invalid (Section 143)

Any guarantee which the creditor has obtained by means of keeping silence as to
material circumstances is invalid.

c. Guarantee on contract that creditor shall not act it until co-surety joins
(Section 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.

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 34

 RIGHT OF A SURETY

Right to Set off

Creditor Right to Share Reduction

Right to Security

Right of subrogation
Surety enjoys Principal
right against Debtor
Right of indemnity

Co- Sureties Right of contribution

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 Right Against the Principal Debtor

a. Right of subrogation [Section 140] :

• Where, a guaranteed debt has become due, or default of the principal debtor to
perform a guaranteed duty has taken place, the surety, upon payment or
performance of all that he is liable for, is invested with all the rights which the
creditor had against the principal debtor.
• This right is known as right of subrogation. It means that on payment of the
guaranteed debt, or performance of the guaranteed duty, the surety steps into
the shoes of the creditor.

b. Implied promise to indemnify surety [Section 145] :

• In every contract of guarantee there is an implied promise by the principal debtor
to indemnify the surety. The surety is entitled to recover from the principal
debtor whatever sum he has rightfully paid under the guarantee, but not sums
which he paid wrongfully.

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 36

 Right Against the Creditor

a. Surety’s right to benefit of creditor’s securities [Section 141] :

• A surety is entitled to the benefit of every security which the creditor has
against the principal debtor at the time when the contract of suretyship is
entered into, whether the surety knows of the existence of such security or not;
and, if the creditor loses, or, without the consent of the surety, parts with such
security, the surety is discharged to the extent of the value of the security.

b. Right to set off :

• If the creditor sues the surety, for payment of principal debtor’s liability, the
surety may have the benefit of the set off, if any, that the principal debtor had
against the creditor.

c. Right to share reduction :

• The surety has right to claim proportionate reduction in his liability if the principal
debtor becomes insolvent.
CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 37

 Right Against the Co-Sureties

‘’When the same debt or duty is guaranteed by two or more persons, such persons are called co-
sureties’’

a. Co-Sureties liable to contribute equally [Section 146] :

• Equality of burden is the basis of Co-suretyship.
• when two or more persons are co-sureties for the same debt, or duty, either jointly,
or severally and whether under the same or different contracts and whether with
or without the knowledge of each other, the co-sureties in the absence of any
contract to the contrary, are liable, as between themselves, to pay each an equal
share of the whole debt, or of that part of it which remains unpaid by the principal
debtor”

b. Liability of Co- Sureties bound in different sums [Section 147] :

• The principal of equal contribution is, however, subject to the maximum limit fixed
by a surety to his liability.
• Co-sureties who are bound in different sums are liable to pay equally as far as the
limits of their respective obligations permit.
CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 38
 UNIT -2

BAILMENT AND PLEDGE

CA DEEPIKA RATHI

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 1

OVERVIEW
Bailment and Pledge [Section 148-181]

Bailment [Section 148-171] Pledge [Section 172-181]

Distinction
between bailment
General and pledge
Duties & Duties &
Finder of Lien and
Rights of Rights of
Goods Particular
Bailor Bailee
lien

Pledge by
Pawnee Pawnor
Mercantile
Rights Rights Agent

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 2

➢ Question : What is Bailment ?
➢ Answer :
• The word “Bailment” has been derived from the French word “ballier” which means “to
deliver”.
• Bailment etymologically means ‘handing over’ or ‘change of possession’.
• As per section 148 of the Act,
- Bailment is the delivery of goods by one person to another for some purpose
- upon a contract
- that the goods shall, when the purpose is accomplished
- be returned or otherwise disposed of according to the direction of the person
delivering them.

➢ Parties to bailment
a. Bailor : The person delivering the goods.
b. Bailee : The person to whom the goods are delivered.

• Example : Where ‘X’ delivers his car for repair to ‘Y’, ‘X’ is the bailor and ‘Y’ is the bailee.
• Example : X delivers a piece of cloth to Y, a tailor, to be stitched into a suit. It is
contract for bailment.
CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 3

➢ Essential Elements of a Contract of Bailment

a. Contract : Bailment is based upon a contract.
The contract may be express or implied.
No consideration is necessary to create a valid contract of bailment.

b. Delivery : It involves the delivery of goods form one person to another for some
purposes.
Bailment is only for moveable goods and never for immovable goods or money
The delivery of the possession of goods is of following kinds :
i. Actual Delivery : When goods are physically handed over to the bailee
by the bailor. E.g: Delivery of a car for repair to workshop.
ii. Constructive Delivery : Where delivery is made by doing anything
that has the effect of putting goods in the possession of the bailee or
of any person authorized to hold them on his behalf. Eg: Delivery of
the key of car to a workshop dealer for repair of the car.

c. Purpose : The goods are delivered for some purpose. The purpose may be express or
implied.

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 4

 d. Possession : In bailment, possession of goods changes. Change of possession can
happen by physical delivery or by any action which has the effect of
placing the goods in the possession of bailee.
The change of possession does not lead to change of ownership.
In bailment bailor continues to be the owner of goods.
Where a person is in custody without possession he does not become a
bailee.
Example: Servant of a master who is in custody of goods of the master
does not become a bailee.
Example : Depositing ornaments in a bank locker is not bailment, because
ornaments are kept in a locker whose key are still with the
owner and not with the bank. The ornaments are in possession
of the owner though kept in a locker at the bank.
e. Return of goods : Bailee is obliged to return the goods physically to the bailor.
The goods should be returned in the same form as given or may be
altered as per bailor’s direction.
It should be noted that exchange of goods should not be allowed. The
bailee cannot deliver some other goods even not those of higher value.
Deposit of money in a bank is not bailment since the money returned
by the bank would not be identical currency notes.
CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 5

1. The contract may be express or implied

Contract 2. No Consideration is necessary

1. Bailment is only for movable goods never for

immovable goods or money.
Delivery of Goods 2. Delivery of the possession of goods is of two kinds
i. Actual Delivery
Essentials of

ii. Constructive Delivery

Bailment

Goods are delivered for some purpose. Purpose may be

Purpose express or implied.

1. Possession of goods change but does not lead to

change of ownership.
Possession 2. Change of possession can happen either by Physical
Delivery or by any action which has the effect of
placing the goods in the possession of bailee.

1. Bailee is obliged to return the goods physically to

the bailor.
Return of Goods 2. Exchange of goods not allowed, even not those of
higher value.
CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 6
➢ Different forms of Bailment :
1. Delivery of goods by one person to another to be held for the bailor’s use
2. Goods given to a friend for his own use without any charge.
3. Hiring of goods.
4. Delivering goods to a creditor to serve as security for a loan.
5. Delivering goods for repair with or without remuneration.
6. Delivering goods for carriage.

➢ On the basis of reward, bailment can be classified into two types :

a. Gratuitous Bailment :
• The word gratuitous means free of charge.
• So, a gratuitous bailment is one when the provider of service does it gratuitously i.e. free of
charge.
• Such bailment would be either for the exclusive benefits of bailor or bailee.

b. Non- Gratuitous Bailment :

• Non gratuitous bailment means where both the parties get some benefit i.e. bailment for the
benefit of both bailor & bailee.

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 7

For the exclusive

benefit of bailor
Gratuitous
Bailment

For the exclusive

benefit of bailee
Bailment

For the benefit of

Non Gratuitous
the bailor and the
Bailment bailee

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 8

 DUTIES OF A BAILOR

Duty to indemnify the

Bailor’s duty to disclose Duty to pay necessary Bailor’s responsibility to
Bailee for premature
faults in goods bailed expenses bailee
termination
{Section 150} {Section 158} {Section 164}
{Section 159}

Gratuitous bailment Bailor shall Indemnify for any loss

Bailor is liable to pay compensate the Bailee sustain because
Gratuitous bailment
the bailee the bailee for the loss or of Bailors defective
Bound to disclose
necessary expenses damage suffered by title in goods
faults in the goods
incurred by him if the bailee that is in
bailed
some work has been excess of the benefit
done on bailed goods received, where he Bailor duty to receive
had lent the goods back the goods when
Non-gratuitous Non-gratuitous the bailee return
gratuitously and
bailment bailment them after the time of
decides to terminate
Bailor is responsible Bailor is liable to pay bailment has expired
the bailment before
for damage whether the extraordinary or purpose has been
the expiryof the
was aware or not expenses incurred by accomplished
period of bailment
the bailee
CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 9

DUTIES OF A BAILOR
i. Bailor’s duty to disclose faults in goods bailed [Section 150]
✓ In case of gratuitous bailment
The bailor is bound to disclose to the bailee faults in the goods bailed, of which the
bailor is aware, and which materially interfere with the use of them, or expose the
bailee to extraordinary risks; and if he does not make such disclosure, he is responsible
for damage arising to the bailee directly from such faults.
✓ In case of non-gratuitous bailment
• If the goods are bailed for hire, the bailor is responsible for such damage, whether
he was or was not aware of the existence of such faults in the goods bailed.
• Hyman & Wife v. Nye & Sons (1881), A hired from B a carriage along with a pair
of horses and a driver for a specific journey. During the journey a bolt in the under-
part of the carriage broke away. As a result of this, the carriage became upset and
A was injured. It was held that B was liable to pay damages to A for the injury
sustained by him. The court observed that it was the bailor’s duty to supply a
carriage fit for the purpose for which it was hired.
• Sometimes, the goods bailed are of dangerous nature (e.g., explosives). In such
cases it is the duty of the bailor to disclose the nature of goods. [Great Northern
Ry’ case (1932)]
CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 10
ii. Duty to pay necessary expenses [Section 158]

✓ In case of gratuitous bailment

• Where, by the conditions of the bailment, the goods are to be kept or to be carried,
or to have work done upon them by the bailee for the bailor, and the bailee is to
receive no remuneration (gratuitous bailment),
• the bailor shall repay to the bailee the necessary expenses incurred by him and any
extraordinary expenses incurred by him for the purpose of the bailment.

✓ In case of non-gratuitous bailment

• The bailor is liable to pay the extraordinary expenses incurred by the bailee.

iii. Duty to indemnify the Bailee for premature termination [Section 159]
✓ The bailor must compensate the bailee for the loss or damage suffered by the bailee
that is in excess of the benefit received, where he had lent the goods gratuitously and
decides to terminate the bailment before the expiry of the period of bailment.

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 11

iv. Bailor’s responsibility to bailee [Section 164]

The bailor is responsible to the bailee for following :

a. Indemnify for any loss which the bailee may sustain by reason that the bailor was
not entitled to make the bailment, or to receive back the goods or to give directions,
respecting them (defective title in goods).

b. It is the duty of the bailor to receive back the goods when the bailee returns them
after the time of bailment has expired or the purpose of bailment has been
accomplished.
If the bailor refuses to take delivery of goods when it is offered at the proper time
the bailee can claim compensation for all necessary expenses incurred for the safe
custody.

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 12

 DUTIES OF A BAILEE

No mixing of bailor’s
Take Reasonable No Unauthorized
goods with his own Return the good
Care of the goods use of goods
(Section 155, 156 & (Section 160 & 161)
(Section 151 & 152) (Section 153 & 154)
154)

To Return any extra

profit accruing from Not to setup Adverse
goods bailed Title
(Section 163)

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 13

i. Take reasonable care of the goods [Section 151 & 152]

• In all cases of bailment, the bailee is bound to take as much care of the goods bailed
to him as a man of ordinary prudence would, under similar circumstances, take care of his
own goods of the same bulk, quality and value, as the goods bailed.

• Exception: Bailee when not liable for loss, etc.,of thing bailed [Section 152]: The
bailee, in the absence of any special contract, is not responsible for the loss,
destruction or deterioration of the thing bailed, if he has taken reasonable care as
required under section 151.

ii. Not to make inconsistent use of goods [section 153 & 154]

• Section 154 :If the bailee makes any use of the goods bailed, which is not according to
the terms and conditions of the bailment, he is liable to compensate the bailor for any
loss or destruction of goods.

• Section 153 : A contract of bailment is voidable at the option of the bailor, if the bailee
does not use the goods according to the terms and conditions of bailment.
CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 14
iii. Not to mix the goods [Section 155,156 & 157]

a. Goods mix with consent of the bailor (Section 155) : If the Bailee, mixes the goods
bailed with his own goods, with the consent of the bailor, both the parties shall have an
interest in proportion to their respective shares in the mixture thus produced.

b. Goods mix without consent of the bailor & can be separated (Section 156) : If the
bailee, without the consent of the bailor, mixes the goods bailed with his own goods and
the goods can be separated or divided, the property in the goods remains in the parties
respectively; but the bailee is bound to bear the expense of separation or division and
any damage arising from the mixture.

c. Goods mix without consent of the bailor & cannot be separated (Section 157) : If
the bailee, without the consent of the bailor mixes the goods of the bailor with his own
goods in such a manner that it is impossible to separate the goods bailed from the other
goods and to deliver them back, the bailor is entitled to be compensated by the bailee
for loss of the goods.

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 15

iv. Return the goods [Section 160 & 161]

a. Duty of bailee to return or delivery according to bailor’s direction (Section 160) :
It is the duty of bailee to return, or deliver according to the bailor’s directions, the
goods bailed without demand, as soon as the time for which they were bailed, has
expired, or the purpose for which they were bailed has been accomplished.
b. Bailee responsible for any loss because of his default (Section 161) : If, by the
default of the bailee, the goods are not returned, delivered or tendered at the proper
time, he is responsible to the bailor for any loss, destruction or deterioration of the
goods from that time.

v. Return an accretion from the Goods [Section 163]

In the absence of any contract to the contrary, the bailee is bound to deliver to the bailor,
or according to his directions, any increase or profit which may have accrued from the
goods bailed.

vi. Not to setup Adverse Title

Bailee must not set up a title adverse to that of the bailor. He must hold the goods on
behalf of and for the bailor. He cannot deny the title of the bailor.

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 16

 RIGHTS OF A BAILOR

Right to terminate the bailment

Right to demand back the goods at any time

Right to file a suit against any wrong doer

Right to file a suit for enforcement of duties imposed upon a bailee

Right to claim compensation

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 17

i. Right to terminate the bailment [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.
ii. Right to demand back the goods [section 159]
• When the goods are lent gratuitously, the bailor can demand back the goods at any time
even before the expiry of the time fixed or the achievement of the object.
• However, due to the premature return of the goods, if the bailee suffers any loss, which
is more than the benefit actually obtained by him from the use of the goods bailed, the
bailor has to compensate the bailee.
iii. Right to file a suit against a wrong doer [Section 180 & 181]

iv. Right to sue the bailee

• The bailor has a right to sue the bailee for enforcing all the liabilities and duties of
him.
v. Right to compensation
• If any damage is caused to the goods bailed because of the unauthorized use of the
goods or unauthorized mixing of the goods, the bailor has a right to claim compensation
for the same
CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 18
 RIGHTS OF A BAILEE
a Right to Deliver the Goods to any one of the joint bailors (Section 165)

b Right to indemnity (Section 166)

c Right to claim compensation in case of faulty goods (Section 150)

d Right to claim necessary expenses (Section 158)

e Right to Apply to Court to Decide the Title to the Goods [Section 167]

f Right of particular lien for payment of services [Section 170]

g Right of general lien (Section 171)

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 19

i. Right to Deliver the Goods to any one of the joint bailors [Section 165]
• If several joint owners bailed the goods, the bailee has a right to deliver them to any
one of the joint owners unless there was a contract to the contrary.

ii. Right to indemnity [section 166]

• Bailee is entitled to be indemnified by the bailor for any loss arising to him by reasons
that the bailor was not entitled to make the bailment or to receive back the goods or to
give directions in respect to them.
• If the bailor has no title to the goods, and the bailee in good faith, delivers them back
to, or according to the directions of the bailor, the bailee shall not be responsible to
the owner in respect of such delivery. Bailee can also claim all the necessary expenses
incurred by him for the purpose of gratuitous bailment.

iii. Right to claim compensation in case of faulty goods [Section 150]

• A bailee is entitled to receive compensation from the bailor or any loss caused to him
due to the failure of the bailor to disclose any faults in the goods known to him.
• If the bailment is for hire, the bailor will be liable to compensate even though he was
not aware of the existence of such faults.

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 20

iv. Right to claim necessary expenses [Section 158]
• In case of gratuitous bailment, the bailor shall repay to the bailee the necessary
expenses incurred by him and any extraordinary expenses incurred by him for the
purpose of the bailment.

v. Right to Apply to court to decide the title to the goods [Section 167]
• If the goods bailed are claimed by the person other than the bailor, the bailee may
apply to the court to stop its delivery and to decide the title to the goods.

vi. Right to particular lien for payment of services [Section 170]

vii. Right to general lien [Section 171]

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 21

RIGHTS OF A BAILOR AND BAILEE AGAINST ANY WRONG DOER (THIRD PARTY)

Suit by bailor & bailee against wrong

doers [Section 180] Apportionment of relief or
compensation obtained by such suits
If a third person wrongfully deprives the [Section 181]
bailee of the use or possession of the
goods bailed, or does them any injury- Whatever is obtained by way of relief or
compensation in any such suit shall, as
• the bailee is entitled to use such between the bailor and the bailee, be dealt
remedies as the owner might have used with according to their respective
in the like case if no bailment had interests.
been made; and
• either the bailor or the bailee may bring
a suit against a third person for such
deprivation or injury.

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 22

 TERMINATION OF BAILMENT

Destruction/
Expiry of fixed Fulfilment of the By death of Inconsistent use modificationof
period purpose bailor or bailee of goods the subject
matter

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 23

A contract of bailment shall terminated in the following circumstances :

1. On expiry of stipulated period : If the goods were given for a stipulated period, the contract of
bailment shall terminate after the expiry of such period.
2. On fulfillment of the purpose : If the goods were delivered for a specific purpose, a bailment
shall terminate on the fulfillment of that purpose.
3. By Notice :
a. Where the bailee acts in a manner which is inconsistent with the terms of the bailment, the
bailor can always terminate the contract of bailment by giving a notice to the bailee.
b. A gratuitous bailment can be terminated by the bailor at any time by giving a notice to the bailee.
However, the termination should not cause loss to the bailee in excess of the benefit derived by
him.
In case the loss exceeds the benefit derived by the bailee, the bailor must compensate the bailee
for such a loss.(Section 159)
4. By Death : A gratuitous bailment terminates upon the death of either the bailor or the bailee.
5. Destruction of the subject matter : A bailment is terminated if the subject matter of the
bailment is destroyed or there is a change is in the nature of goods which makes it impossible to be
used for the purpose of bailment.

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 24

 FINDER OF LOST GOODS
Right of finder of lost goods –may sue for specific reward offered [Section
168]:

• A person who finds some goods which do not belong to him, is called the finder of the goods.

• It is the duty of the finder of goods to find the true owner and surrender the goods to
him.

• However, the finder of goods has no right to sue the owner for compensation for trouble
and expense voluntarily incurred by him in finding the owner and preserving the goods
found.

• But he has a right to retain the goods against the owner until he receives such
compensation; and,

• where the owner has offered a specific reward on the lost goods, the finder may sue the
owner for such reward, and may retain the goods until then.

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 25

Analysis:

• The ‘finder of lost goods’ can ask for reimbursement of expenditure incurred for preserving
the goods and searching the true owner.

• If the real owner refuses to pay compensation, the ‘finder’ cannot sue but retain the goods
so found.

• Further where the real owner has announced any reward, the finder is entitled to receive the
reward.

• The right to collect the reward is a primary and a superior right even more than the right
to seek reimbursement of expenditure.

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 26

When finder of thing commonly on sale may sell it [Section 169]:

• When a thing which is commonly the subject of sale if lost, if the owner cannot with
reasonable diligence be found, or if he refuses, upon demand, to pay the lawful charges of
the finder, the finder may sell it-
a. when the thing is in danger of perishing or of losing the greater part of its value or
b. when the lawful charges of the finder in respect of the thing found amount to two-
thirds of its value

• Analysis :
✓ The finder though has no right to sell the goods found in the normal course
✓ however, he may sell the goods if the real owner cannot be found with reasonable
efforts or if the owner refuses to pay the lawful charges subject to the following
conditions :
a. when the article is in danger of perishing and losing the greater part of the value or
b. when the lawful charges of the finder amounts to two-third or more of the value of
the article found.

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 27

GENERAL LIEN AND PARTICULAR LIEN

Bailee’s particular lien [Section 170]:

• Where the bailee has, in accordance with the purpose of the bailment, rendered any service
involving the exercise of labour or skill in respect of the goods bailed.
• He has, in the absence of a contract to the contrary, a right to retain such goods until he
receives due remuneration for the services he has rendered in respect of them.
• Analysis :
✓ In accordance with the purpose of bailment if the bailee by his skill or labour improves the goods
bailed, he is entitled for remuneration for such services.
✓ Towards such remuneration, the bailee can retain the goods bailed if the bailor refuses to pay the
remuneration.
✓ Such a right to retain the goods bailed is the right of particular lien.
✓ He however does not have the right to sue.
✓ Where the bailee delivers the goods without receiving his remuneration, he has a right to sue the
bailor. In such a case the particular lien may be waived.
✓ The particular lien is also lost if the bailee does not complete the work within the time agreed.

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 28

General lien of bankers ,factors ,wharfingers, attorneys and
policy brokers [Section 171]:
• Bankers, factors, wharfingers, attorneys of a High Court and policy brokers may, in the
absence of a contract to the contrary,
- retain, as a security for a general balance of account any goods bailed to them
- but no other persons have a right to retain, as a security for such balance, goods bailed
to them, unless there is an express contract to the effect.

• Analysis :

✓ Bankers, factors, wharfingers, policy brokers and attorneys of law have a general lien in
respect of goods which come into their possession during the course of their profession.
✓ For instance, a banker enjoys the right of a general lien on cash, cheques, bills of exchange
and securities deposited with him for any amounts due to him.

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 29

Difference between Bailee’s General and Particular Lien

General Lien Particular Lien
Section 171 of the Indian Contract Act, 1872 confer Section 170 of the Indian Contract Act, 1872 confers
on Bailee the right of General Lien. on the Bailee, the right of particular lien.

General lien alludes to the right to keep possession Particular lien implies a right of the bailee to retain
of goods belonging to other against general balance specific goods bailed for non-payment of amount.
of account.
A general lien is not automatic but is recognized It is automatic
through on agreement. It is exercised by the bailee
only by name
It can be exercised against goods even without It comes into play only when some labor or skill is
involvement of labor or skill. involved has been expended on the goods, resulting
in an increase in value of goods.
Only such persons as are specified under section Bailee, finder of goods, pledgee, unpaid seller, agent,
171, e.g., Bankers, factors, wharfingers, policy partner etc. are entitled to particular lien.
brokers etc. are entitled to general lien.
CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 30
 PLEDGE
“Pledge”, “Pawnor” and “Pawnee” defined [Section 172]:

• Meaning: 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 “pawnor”. The bailee is called the “pawnee”.

• Analysis :

✓ Pledge is a variety or species of bailment.

✓ It is bailment of goods as a security for payment of debt or performance of a promise.
✓ The person who pledges [or bails] is known as pledger or pawnor.
✓ The person to whom the goods are delivered is known as pledgee or pawnee.
✓ In pledge, there is no change in ownership of the property.
✓ Under exceptional circumstances, the pledgee has a right to sell the property pledged.
✓ Section 172 to 182 of the Indian Contract Act, 1872 deal with the contract of pledge.
CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 31

Essential of Contract of Pledge

• Since pledge is a special kind of bailment, therefore all the essentials of bailment are also
the essentials of the pledge.
• Apart from that, the other essentials of the pledge are :
✓ There shall be a bailment for security against payment or performance of the promise.
✓ The subject matter of pledge is goods.
✓ Goods pledged for shall be in existence.
✓ There shall be the delivery of goods from pledger to pledgee.
Rights of a Pawnee/Pledgee
a. Right to retain the pledged goods [Section 173] :
The Pawnee may retain the goods pledged, not only for payment of the debt or the
performance of the promise, but for the interest, of the debt, and all necessary expenses
incurred by him in respect of the possession or for the preservation of the goods pledged.
b. Right to retention of subsequent debts [Section 174] :
✓ The Pawnee can retain the goods pledged for any debt or promise other than the debt or
promise for which they are pledged.
✓ But he can exercise this right only when there is a contract to this effect. i.e. a right to
retain goods for subsequent debts can be exercised only when it has been provided for
in a contract to this effect.
CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 32
c. Pawnee’s right to extraordinary expenses incurred [Section 175] :
✓ The pawnee is entitled to receive from the pawnor extraordinary expenses incurred by
him for the preservation of the goods pledged.
✓ For such expenses, however, he does not have the right to retain the goods, but he can
sue the pawnor for such expenses.

d. Pawnee’s right where pawnor makes default [Section 176] :

✓ If the pawnor makes default in payment of the debt, or performance, at the stipulated
time of the promise, in respect of which the goods were pledged, the pawnee has the
following rights :
i. the pawnee may bring a suit against the pawnor upon the debt or promise, and retain
the goods pledged as a collateral security or
ii. he may sell the thing pledged on giving the pawnor reasonable notice of the sale .
✓ If the proceeds of such sale are less than the amount due in respect of the debt or
promise, the pawnor is still liable to pay the balance.
✓ If the proceeds of the sale are greater than the amount so due, the pawnee shall pay
over the surplus to the pawnor.

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 33

Right of a Pawnor [Section 172]:

• As the bailor of goods, pawnor has all the rights of the bailor. Along with that he also has
the right of redemption to the pledged goods which is enumerated under section 177 of
the Act.

• Right to redeem [Section 177]:

✓ If a time is stipulated for the payment of the debt, or performance of the promise,
for which the pledge is made, and the pawnor makes default in payment of the debt
or performance of the promise at the stipulated time,
✓ he may redeem the goods pledged at any subsequent time before the actual sale of
them
✓ But he must, in that case, pay, in addition, any expenses which have arisen from his
default.

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 34

Duties of the Pawnee
a. Duty to take reasonable care of the pledged goods.
b. Duty not to make unauthorized use of pledged goods.
c. Duty to return the goods when the debt has been repaid or the promise has been
performed.
d. Duty not to mix his own goods with goods pledged.
e. Duty not to do any act which is inconsistent with the terms of the pledge.
f. Duty to return accretion to the goods, if any.

Duties of the Pawnor

a. The pawnor is liable to pay the debt or perform the promise as the case may be.
b. It is the duty of the pawnor to compensate the pawnee for any extraordinary
expenses incurred by him for preserving the goods pawned.
c. It is the duty of the pawnor to disclose all the faults which may put the pawnee
under extraordinary risks.
d. If loss occurs to the pawnee due to defect in pawnor’s title to the goods, the pawnor
must indemnify the pawnee.
e. If the pawnee sells the good due to default by the pawnor, the pawnor must pay the
deficit.
CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 35

PLEDGE BY NON-OWNERS

• Ordinarily, it is the owner of the goods, or any person authorized by him in that behalf, who
can pledge the goods. But in order to facilitate mercantile transactions, the law has
recognized certain exceptions.
• These exceptions are for bonafide pledges made by those persons who are not the actual
owners of the goods, but in whose possession the goods have been left.

a. Pledge by mercantile agent [Section 178]:

✓ Where a mercantile agent is, with the consent of the owner, in possession of goods or
the documents of title to goods, any pledge made by him, when acting in the ordinary
course of business of a mercantile agent, shall be as valid as if he were expressly
authorised by the owner of the goods to make the same
✓ provided that the pawnee acts in good faith and has not at the time of the pledge
notice that the Pawnor has no authority to pledge.
✓ Explanation: In this section, the expressions ‘mercantile agent and documents of title’
shall have the meanings assigned to them in the Sale of Goods Act, 1930.

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 36

 ✓ Analysis :
o Though generally only a owner of goods can pledge, the Act recognizes the right of
certain mercantile agents to pledge provided that the mercantile agent should be in
custody of goods with the consent of the owner.
o Such a pledge done in the ordinary course of business is valid.
o Pledge in this case can be effected through pledge of documents like a bill of lading
or a railway receipt etc.
o The necessary conditions of validity under the section 178 are as follows:
i. The person pledging the goods must be a mercantile agent
ii. Mercantile agent must be in possession either of the goods or the documents of
title to goods
iii. Such possession must be with the consent of the owner. If possession has been
obtained dishonestly or by a trick, a valid pledge cannot be effected.
iv. Pledge must have been made by the mercantile agent, when acting in the
ordinary course of business of a mercantile agent.
v. The pledgee must act in good faith.
vi. The pledgee should have no notice of the pledger's defect of title. If the
pledgee knows that the pledger has a defective title, the pledge will not be
valid.
CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 37

b. Pledge by person in possession under voidable contract [Section 178A]:

✓ When the pawnor has obtained possession of the goods pledged by him under a
contract voidable under section 19 or section 19A (contracts where consent has been
obtained by fraud, coercion, misrepresentation, undue influence),
✓ but 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 without notice of
the pawnor’s defect of title.
c. Pledge where Pawnor has only a limited interested [Section 179]:
✓ Where a person pledges goods in which he has only a limited interest i.e. pawnor is not
the absolute owner of goods, the pledge is valid to the extent of that interest.
d. Pledge where Pawnor has only a limited interested:
✓ Where the goods are owned by many person and with the consent of other owners, the
goods are left in the possession of one of the co-owners. Such a co-owner may make a
valid pledge of the goods in his possession.
e. Pledge by seller or buyer in possession:
✓ A seller, in whose possession, the goods have been left after sale or a buyer who with
the consent of the seller, obtains possession of the goods, before sale, can make a valid
pledge, provided the pawnee acts in good faith and he has no knowledge of the defect in
title of the pawnor.
CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 38
 DISTINCTION BETWEEN BAILMENT AND PLEDGE
Basis of Bailment Pledge
Distinction

Meaning Transfer of goods by one person to another for some Transfer of goods from one person to another as
specific purpose is known as bailment. security for repayment of debt is known as the
pledge.
Terms The person delivering the The person who delivers the
Applicable Goods under a contract of bailment is called as “Bailor’’ good as security is called the “Pawnor’’.
The person to whom the goods are delivered under a The person to whom the goods are delivered as
contract of bailment is called as “Bailee’’ security is called the “pawnee’’
Purpose Bailment may be made for any purpose (as specified in Pledge is made for the purpose of delivering the
the contract of bailment, eg: for safe custody, for goods as security for payment of a debt, or
repairs, for processing of goods). performance of a promise.
Consideration The bailment may be made for consideration or without Pledge is always made for a consideration.
consideration.

Right to sell The bailee has no right to sell the goods even if the The pawnee has right to sell the goods if the
the goods charges of bailment are not paid to him. The bailee’s pawnor fails to redeem the goods.
rights are limited to suing the bailor for his dues or to
exercise lien on the goods bailed.
CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 39

Right to use Bailee can use the goods only for a purpose specified in Pledgee or Pawnee cannot use the goods
of goods the contract of bailment and not otherwise. pledged.

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 40

 UNIT -3

AGENCY

CA DEEPIKA RATHI

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 1

OVERVIEW Appointment

Meaning
Authority

Sub Agents

Ratification

Agency
{Section 182-238}
Revocation of Authority

Duties, obligations and

Rights of Agent

Effect of agency on contract

with third persons
CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 2
 WHAT IS AGENCY ?

➢ Question : What is Agency ?

➢ Answer :
✓ The Indian Contract Act, 1872 does not define the word ‘Agency’.
✓ However, section 182 of the Indian Contract Act, 1872 defines Agent and Principal as :
▪ Agent: means a person employed to do any act for another or to represent
another in dealing with the third persons and
▪ The principal: means a person for whom such act is done or who is so
represented.
➢ Test of Agency
✓ Question (a) : Whether the person has the capacity to bind the principal and make
him answerable to the third party ?
✓ Question (b) : Whether he can establish privity of contract between the principal and
third parties ?

✓ Answer : If the answer to these questions is in affirmative (Yes), then there is a

relationship of agency.

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 3

✓ Thus, ‘Agency’ is a comprehensive word used to describe the relationship between one
person and another, where the first mentioned person brings the second mentioned
person into legal relation with others.
✓ The Rule of Agency is based on the maxim “Qui facit per alium, facit per se” i.e., he who
acts through an agent is himself acting.

APPOINTMENT AND AUTHORITY OF AGENTS

Who may employ an agent ? [Section 183] Who may be an agent ? [Section 184]

• A person who has attained majority • A person who has attained majority
according to the law (+18). according to the law (+18) [to be responsible
• Has sound mind. to his principal]
• Has sound mind.
Whether the consideration is necessary?
✓ As per Section 185
- No consideration is necessary to create an agency?
- Acceptance of the office of an agent is sufficient consideration.
CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 4
 ➢ Who may employ an agent :
• According to Section 183, “any person who has attained majority according to the law to
which he is subject, and who is of sound mind, may employ an agent.” Thus, a minor or a
person of unsound mind cannot appoint an agent.
➢ Who may be an agent :
• Section 184 provides that “as between the principal and third persons any person may
become an agent, but no person who is not of the age of majority and of sound mind can
become an agent, so as to be responsible to his principal according to the provisions in
that behalf herein contained.”
• Thus, according to Section 184 of the Act
▪ Any person may become an agent i.e. even a minor or a person of unsound mind may
become an agent and the principal shall be bound by his acts.
▪ But as a rule of caution, a minor or a person of unsound mind should not be
appointed as an agent because he is incompetent to contract and in case of his
misconduct or negligence, the principal shall not be able to proceed against him.
➢ Consideration not necessary :
• According to Section 185, no consideration is necessary to create an agency. The
acceptance of the office of an agent is regarded as a sufficient consideration for the
appointment.
CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 5

CREATION OF AGENCY
Modes of Creation of Agency

1. Express 2. Implied 3. By Estoppel 4. By Necessity 5. By Ratification

appointment (Sec. 187) appointment (Sec. 187) (Sec.237) (Sec. 196)
Given by words, It is to be inferred from When one person by • An agency of • ‘’Ratification ”
spoken or written Eg: • The circumstances representation, act or necessity arises due means approving a
by deeds or orally of the case omission has to some emergent previous act or
• Things spoken or intentionally caused or circumstances. transaction.
written permitted another • where an agent is • Where acts are
• Or in the ordinary person to believe that authorized to do done by one person
course of dealing. he is the agent of the certain act, and on behalf of
principal , without the while doing such an another, but
authority of principal act, an emergency without his
→ then he shall not be arises, he acquires knowledge or
allowed to deny his an extra-ordinary or authority he may
previous statement. special authority to elect to ratify it.
prevent his principal • This will make the
from loss. agency valid.
CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 6
➢ In the words of Desai J, of the Supreme Court of India :
“The relation of agency arises whenever one person called the agent has the authority to act
on behalf of another called the principal and consents to act. The relationship has genesis in a
contract”
➢ The relationship of the principal and the agent may be created in any of the following
ways –
1. Express Authority/Appointment (Section 187) : An authority is said to be express
when it is given by words, spoken or written.
Example : A is residing in Delhi and he has a house in Kolkata. A authorizes B under a
power of attorney, as caretaker of his house. Agency is created by express agreement
Example : If a customer of a bank wishes to transact his banking business through an
agent, the bank will require written evidence of the appointment of the agent and will
normally ask to see the registered power of attorney appointing the agent.
2. Implied Authority/ Appointment (Section 187) : An authority is said to be implied
when it is to be inferred from the circumstances of the case, conduct of the parties
and things spoken or written, or in the ordinary course of dealing, may be accounted
from the circumstances of the case.
Example : If a person realizes rent and gives it to the landlord, he impliedly acts for
the landlord as an agent.
CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 7

3. Agency by Estoppel (Section 237):

• An agency by estoppel is based on the principle of estoppel.
• The principle of estoppel lays down that :
“when one person by declaration (representation), act or omission has intentionally
caused or permitted another person to believe a thing to be true and to act upon
such belief, he shall not be allowed to deny his previous statement or he shall be
stopped to deny his previous statement or conduct”
• Section 237 states: “When an agent has without authority done acts or incurred
obligations to third persons on behalf of his principal the principal is bound by such
acts or obligations if he has by his words or conduct induced such third persons to
believe that such acts and obligations were within the scope of the agent's
authority”
• An agency by estoppel may be created when following essentials are fulfilled:
1. The principal must have made a representation
2. The representation may be express or implied
3. The representation must state that the agent has an authority to do certain
act although really he has no authority
4. The principal must have induced the third person by such representation; and

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 8

 5. The third person must have believed the representation and made the contract
on the belief of such representation.
Example : A consigns goods to B for sale and gives him instructions not to sell below
a fixed price. C being ignorant of B's instruction enters into a contract with B to
buy the goods at a price lower than the reserved price. A is bound by the contract.
A cannot plead that he had given instructions to B to not sell the goods below
certain price. An agency by estoppel is, consequently, deemed between A and B.
4. Agency by Necessity :
• An agency of necessity arises due to some emergent circumstances. In emergency a
person is authorized to do what he cannot do in ordinary circumstances.
• Thus, where an agent is authorized to do certain act, and while doing such an act,
an emergency arises, he acquires an extra-ordinary or special authority to prevent
his principal from loss.
• Example : Raja has a large farm on which Shyam is the caretaker. When Raja is in
Canada, there is a huge fire on the farm. Shyam becomes an agent of necessity for
Raja so as to save the property from being destroyed by fire. Raja (the principal) will
be liable for any expenses, Shyam (his agent of necessity) incurred to put out the
fire and save the farm from destruction during Raja’s absence from the country.

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 9

5. Ratification :
• Rights of person as to acts done for him without his authority, Effect of
ratification [Section 196]
▪ Where acts are done by one person on behalf of another, but without his
knowledge or authority, he may elect to ratify or to disown such acts.
▪ If he ratifies them, the same effects will follow as if they had been performed
by his authority.
▪ In simple words, “Ratification” means approving a previous act or transaction.
▪ Ratification may be express or implied by the conduct of the person on whose
behalf the act was done.
• Essential of Valid Ratification
a) Ratification may be expressed or Implied [Section 197] : Ratification may be
expressed or may be implied in the conduct of the person on whose behalf the acts are
done.
b) Knowledge requisite for valid ratification [Section 198] : No valid ratification can be
made by a person whose knowledge of the facts of the case is materially defective.
c) Effect of ratifying unauthorized act forming part of a transaction [Section 199] :
- A person ratifying any unauthorized act done on his behalf ratifies the whole of the
transaction of which such act formed a part.
- There can be ratification of an act in entirely or its rejection in entirely.
CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 10
 - The principal cannot ratify a part of the transaction which is beneficial to him and
reject the rest.
d) Ratification of unauthorized act cannot injure third person [Section 200]:
• An act done by one person on behalf of another, without such other person’s
authority, which, if done with authority, would have the effect of subjecting a third
person to damages, or of terminating any right or interest of a third person, cannot,
by ratification, be made to have such effect.
• In other words, when the interest of third parties is affected, the principle of
ratification does not apply.
• Ratification cannot relate back to the date of contract if third party has in the
intervening time acquired rights.
e) Ratification within reasonable time:
• Ratification must be made within a reasonable period of time.
f) Communication of Ratification:
• Ratification must be communicated to the other party.
g) Act to be ratified must be valid:
• Act to be ratified should not be void or illegal, for e.g. payment of dividend out of
capital, forgery of signatures, any other criminal offence, or anything which is not
permitted under law.

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 11

EXTENT OF AGENT’S AUTHORITY

➢ The authority of an agent means his capacity to bind the principal to third parties.

➢ The agent can bind the principal only if he acts within the scope of his authority.

➢ The extent of an agent’s authority, whether expressed or implied is determined by:

a) the nature of the act or the business he is appointed to do
b) things which are incidental to the business or are usually done in the course of such
business
c) the usage of trade or business

➢ Whatever be the nature or extent of the agent’s authority, it will always include the
authority to do :
1. every lawful thing necessary for the purpose of carrying it out
2. every lawful thing justified by various customs of trades
3. in an emergency, all such acts for the purpose of protecting the principal from loss as
will be done by a person of ordinary prudence in his own case under similar
circumstances.

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 12

 Scope of Agent’s Authority

Under Normal Circumstances

In Emergency (Section 189)
(Section 188)

• An agent has authority, in an emergency, to do all such acts for

An agent having an authority the purpose of protecting his principal from loss as would be
1) To do an act has authority to done by a person of ordinary prudence, in his own case, under
do every lawful thing which is similar circumstances.
necessary in order to do such • Conditions for valid agency during emergency
act. 1. Agent should not be a in a position or have any opportunity to
communicate with his principal within the time available.
2) To carry on a business has 2. There should have been actual and definite commercial
authority to do every lawful necessity for the agent to act promptly
thing necessary for the 3. the agent should have acted bonafide and for the benefit of
purpose, or usually done in the the principal.
course, of conducting such 4. the agent should have adopted the most reasonable and
business. practicable course under the circumstances, and
5. the agent must have been in possession of the goods belonging
to his principal and which are the subject of contract.

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 13

SUB - AGENTS

PRINCIPAL • Delegates act/work

AGENT • Further delegates

SUB-AGENT

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 14

➢ When agent cannot delegate [Section 190] : An agent cannot lawfully employ another to perform
acts which he has expressly or impliedly undertaken to perform personally, unless by the ordinary
custom of trade a sub-agent may, or from the nature of the agency, a sub-agent must, be employed.

➢ “Sub-agent” defined [Section 191] : A “Sub-agent” is a person employed by, and acting under the
control of, the original agent in the business of the agency.

➢ Analysis:
✓ Sub agency refers to case where an agent appoints another agent. The appointment of sub agent
is not lawful, because the agent is a delegatee and a delegatee cannot further delegate. This is
based on the Latin principle “delegatus non potest delegare’’.
✓ A contract of agency is of a fiduciary character. It is based on the confidence reposed by the
principal in the agent and that is why a delegatee cannot further delegate.

➢ Exception where an agent can appoint Sub-agent

1. The appointment of a sub agent would be valid if the terms of appointment originally contemplated
it.
2. Sometimes customs of the trade may provide for appointment of sub agents
In both these cases the sub agent would be treated as the agent of the principal.
3. Where in the course of the agent’s employment, unforeseen emergency arise making it necessary
for him to delegate the authority that was given to him by the principal
CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 15

➢ Representation of principal by sub-agent properly appointed [Section 192]:

Where a sub-agent is properly appointed,

1. The principal is, so far as regards third persons, is bound and responsible for the acts of sub-
agent as if he were an agent originally appointed by the principal.

2. Agents responsibility for sub agents: The agent is responsible to the principal for the acts of
the sub-agent.

3. Sub-agents liability to principal: The sub-agent is responsible for his acts to the agent, but not
to the principal, except in case of fraud or willful wrong.

➢ Agent’s responsibility for sub-agent appointed without authority [Section 193]:

Where an agent, without having authority to do so, has appointed a person to act as a sub-agent.

1. The agent stands towards such person in the relation of a principal to an agent, and is responsible
for his acts both to the principal and to third persons.

2. The principal is not represented by or responsible for the acts of the sub agent, the sub agent
is not responsible to the principal at all. He is answerable only to the agent.

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 16

 Analysis

Where the sub-agent is properly appointed In the case of appointment without

authority
• The principal is bound by his acts and is
therefore responsible to third parties as • The principal is not bound by the acts of sub
if he were an agent originally appointed agent and sub agent is not answerable to the
by the principal. principal.
• It is the agent who is the principal of sub
agent.
• Where the sub- agent purportedly acts in
the name of first principal, that first
principal may ratify the act of sub agent.
• However, if the sub agent acts in his own
name or in the name of the agent who has
without authority delegated to the sub
agent the business which is in fact of the
principal, the principal cannot ratify such
acts of sub agent.

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 17

SUBSTITUED - AGENT

➢ Substituted Agent is a person appointed by the agent to act for the principal, in the
business of agency, with the knowledge and consent of the principal.
➢ Substituted agents are not sub agents.
➢ They are agents of the principal.

➢ Relation between principal and person duly appointed by agent to act in business of
agency [Section 194] : Where an agent, holding an express or implied authority to name
another person to act for the principal in the business of the agency, has named another
person accordingly, such person is not a sub-agent, but an agent of the principal for such
part of the business of the agency as is entrusted to him.

➢ Agent’s duty in naming such person [Section 195] :

• In selecting such agent for his principal, an agent is bound to exercise the same amount
of discretion as a man of ordinary prudence would exercise in his own case and
• if he does this, he is not responsible to the principal for the acts or negligence of the
agent so selected.

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 18

 DIFFERENCE BETWEEN A SUB-AGENT AND SUBSTITUED AGENT
S. Sub Agent Substituted Agent
No.
1. A sub-agent does his work under the control and A substituted agent works under the instructions of the
directions of agent. principal.
2. The agent not only appoints a sub-agent but also The agent does not delegate any part of his task to a
delegates to him a part of his own duties. substituted agent.
3. There is no privity of contract between the Privity of contract is established between a principal and a
principal and the sub-agent. substituted agent.
4. The sub-agent is responsible to the agent alone A substituted agent is responsible to the principal and not
and is not generally responsible to the principal. to the original agent who appointed him.
5. The agent is responsible to the principal for the The agent is not responsible to the principal for the acts
acts of the sub- agent. of the substituted agent.
6. The sub-agent has no right of action against the The substituted agent can sue the principal for
principal for remuneration due to him. remuneration due to him.
7. Sub-agents may be improperly appointed. Substituted agents can never be improperly appointed.
8. The agent remains liable for the acts of the The agent's duty ends once he has named the substituted
sub-agent as long as the sub-agency continues. agent.

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 19

DUTIES AND OBLIGATIONS OF AN AGENT

Duty to execute • Agent should perform the work which he has been appointed to do.
mandate • Otherwise he shall be liable to compensate the principal.

• Agent must conduct business as per the instructions of the

principal.
Duty to follow
• In absence of instructions, he must follow general customs of
instructions or customs
business.
(Section 211)
• Otherwise, loss sustained/ undue profits made must be
compensated back by agent to principal.

• Duty to reasonable care and skill to be used in exercising all his

Duty to Reasonable
duties.
care and skill
• Moreover, he is liable to compensate the principal for his
(Section 212)
negligence/misconduct

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 20

 Agent duty to
• Agent duty to communicate with principal and seeking his
communicate with
instructions in case of any difficulty in execution of his duties.
principal (Section 214)

a. Right of Principal when agent deals, on his own account, in

business of agency without principals consent (Section 215)
• The Principal may cancel the transaction if :
i. Material fact has been dishonestly concealed from him or
Duty to Avoid Conflict
ii. Dealing have been disadvantageous to him.
of Interest
(Section 215)
b. Principal’s right to benefit gained by agent dealing on his account
in business of agency (Section 216)
• The principal is entitled to claim any benefit resulting from
the transaction from the agent.

• An agent not to make any secret profit in the business of agency.

Duty not to make
• His relationship with the principal is of fiduciary nature and this
secret profits
requires absolute good faith in the conduct of agency.

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 21

Duty to render proper • Accounts supported with vouchers must be submitted whenever
accounts (Section 213) demanded by principal.

Duty not to Delegate • Acts which he is personally responsible to fulfil unless its required
(Section 190) in ordinary course of trade.

Agent’s Duty to pay

• Subject to such deductions, the agent is bound to pay to his
sums received for
principal all sums received on his account.
principal (Section 2018)

Duty not to use any confidential information received in the course of agency against the principal.

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 22

➢ Duty to execute mandate:
✓ The first and foremost duty of every agent is to carry out the mandate of his principal.
✓ He should perform the work for which he has been appointed.
✓ Any failure in this respect would make the agent absolutely responsible for the principal’s loss.
✓ Pannalal Jankidas V Mohanlal, :
o A commission agent purchased goods for his principal and stored them in a godown, pending
their dispatch.
o The agent was under instruction to insure them.
o He actually charged the premium for insurance but failed to insure the goods.
o The goods were lost in an explosion on Bombay harbor.
o The agent was held liable to compensate the principal for his loss minus the amount received
under the Bombay Explosion (Compensation) Ordinance, 1944.

➢ Duty to follow instructions or customs(Section 211):

✓ An agent is bound to conduct the business of his principal according to the direction given by the
principal, or,
✓ in the absence of any such directions, according to the customs which prevails in doing business of
the same kind at the place where the agent conducts such business.
✓ When the agent acts otherwise and any loss is sustained by the Principal, he must indemnify him,
and, if any profit accrues, he must account for it.

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 23

➢ Duty of reasonable care and skill (Section 212):

✓ An agent is bound to conduct the business of the principal with as much skill as is generally
possessed by persons engaged in similar business, unless the principal has notice of his want of
skill.
✓ The agent is always bound to act with reasonable diligence, and to use such skill as he possesses
and
✓ To make compensation to his principal in respect of the direct consequences of his own neglect,
want of skill or misconduct, but not in respect of loss of damage which are indirectly or remotely
caused by such neglect, want of skill or misconduct

➢ Agent’s duty to communicate with principal (Section 214):

✓ It is the duty of an agent, in cases of difficulty, to use all reasonable diligence in communicating
with his principal, and in seeking to obtain his instructions.

➢ Duty to avoid conflict of interest (Duty not to deal on his own account):
✓ Right of principal when agent deals, on his own account, in business of agency without
principals consent (Section 215) :
• if an agent deals on his own account in the business of the agency, without first obtaining the
consent of his principal and acquainting him with all material circumstances which have come to
his own knowledge on the subject the principal :

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 24

 i. may repudiate the transaction, if the case shows either that any material fact has been
dishonestly concealed from him by the agent, or that the dealings of the agent have
been disadvantageous to him.
ii. may repudiate the sale if he can show that B has dishonestly concealed any material fact,
or that the sale has been disadvantageous to him
✓ Principals right to benefit gained by agent dealing on his account in business of agency
(Section 216)
• If an agent, without the knowledge of his principal deals in the business of the agency on his
own account instead of on account of his principal, the principal is entitled to claim from the
agent any benefit which may have resulted to him from the transaction.

➢ Duty not to make secret profits:

✓ It is the duty of an agent not to make any secret profit in the business of agency.
✓ His relationship with the principal is of fiduciary nature and this requires absolute good faith in the
conduct of agency.
✓ Secret Profit: Any advantage obtained by the agent over and above his agreed remuneration and
which he would not have been able to make but for his position as agent.

➢ Duty to render proper accounts (Section 213):

✓ An agent is bound to render proper accounts to his principal on demand.
✓ Rendering accounts does not mean showing the accounts but the accounts supported by vouchers.
(Anandprasad vs. Dwarkanath)

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 25

➢ Duty not to delegate (Section 190):

✓ An agent cannot lawfully employ to perform acts which he has expressly or impliedly undertaken to
perform personally, unless by the ordinary custom of trade a sub-agent may, or, from the nature
of agency, a sub- agent, must be employed.

➢ Agent’s duty to pay sums received for principal (Section 218):

✓ Subject to such deductions, the agent is bound to pay to his principal all sums received on his
account.
➢ Duty not to use any confidential information received in the course of agency against the principal

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 26

 RIGHTS OF AN AGENT

a. All moneys due to himself

Right of retain out of sums b. Expenses properly incurred by him in conducting such
received on principal’s account business
(Section 217)
c. Remuneration

• Remuneration may be as per contract or as per usual

customary in business.
Right to remuneration
(Section 219) • Section 120 : However an agent who is guilty of
misconduct in the business of the agency is not
entitled to any remuneration in respect of that part
of the business which he has misconducted.

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 27

In the absence of any contract to the contrary an

agent is entitled
• Retain the goods, papers and other property, whether
movable or immovable of the principal.
• Until the amount due to himself for commission,
disbursement and services in respect of the same has
been paid or accounted for him.
Conditions :
Agent’s lien on principal’s ✓ Agent should be lawfully entitled to receive
property remuneration /commission from the principal
(Section 221) ✓ Property belongs to the principal
✓ Property has been received by the agent in his
capacity and during the course of his ordinary duties
as agent.
✓ Agent has only a particular/ specific lien.
The agent’s right to lien is lost in the following cases:
✓ Possession of the property is lost.
✓ Agent waives his right expressly or impliedly.
✓ Contract does not allow lien.

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 28

 a. Right of indemnification for lawful acts (Section
222) :
Loss caused even after lawfully execution of
Right to indemnity authority shall be indemnified by principal

b. Right of indemnification against acts done in good

faith (Section 223)
• Losses/ damages caused even though agent acted
in good faith shall be indemnified by principal.
• Reimbursement cannot be claimed where the agent
has contravened any laws and penalty is levied.

c. Non-liability of employer of agent to do a criminal

act (Section 224)
• Principal must make compensation to his agent any
loss/damage caused to him due to principal’s
neglect or want of skill.
Right to compensation for
• Principal must make compensation to his agent any
injury caused by principal’s
loss/ damage caused to him due to principal’s neglect
neglect
or want of skill.
(Section 225)
CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 29

1. Right of retain out of sums received on principal’s account [Section 217]:

This section empowers the agent to retain, out of any sums received on account of the principal in
the business of the agency for the following payments:
a. all moneys due to himself in respect of advances made
b. in respect of expenses properly incurred by him in conducting such business
c. such remuneration as may be payable to him for acting as agent.
The right can be exercised on any sums received on account of the principal in the business of
agency.

2. Right to remuneration [Section 219]:

✓ The agent in the normal course is entitled for remuneration as per the contract.
✓ In the absence of any agreed amount of remuneration, he is entitled for usual remuneration which
is customary in the business.
✓ Section 220 : However, an agent who is guilty of misconduct in the business of the agency is not
entitled to any remuneration in respect of that part of the business which he has misconducted.

3. Agent’s lien on principal’s property [Section 221]:

✓ In the absence of any contract to the contrary, an agent is entitled to retain the goods, papers
and other property, whether movable or immovable, of the principal received by him, until the
amount due to himself for commission, disbursement and services in respect of the same has been
paid or accounted for him.
CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 30
 ✓ The conditions of this right are
a. The agent should be lawfully entitled to receive from the principal a sum of money by way of
commission earned or disbursement made or services rendered in the proper execution of the
business of agency.
b. The property over which the lien is to be exercised should belong to the principal and it
should have been received by the agent in his capacity and during the course of his ordinary
duties as an agent. If the agent obtains possession of the property by unlawful means, he
cannot exercise particular lien.
✓ The agent’s right to lien is lost in the following cases :
a. When the possession of the property is lost.
b. When the agent waives his right. Waiver may arise out of agreement express or implied.
c. The agent’s lien is subject to a contract to the contrary.
4. Right to indemnity :
a. Right of indemnification for lawful acts [Section 222]:
✓ The principal is bound to indemnify the agent against all consequences of lawful acts done in
exercise of his authority.
b. Right of indemnification against acts done in good faith [Section 223]:
✓ Where the agent acts in good faith on the instruction of principal, agent is entitled for
indemnification of any loss or damage from the principal.
✓ However, the agent cannot claim any reimbursement or indemnification for any loss etc.
arising out of acts done by him in violation of any penal laws of the country.
CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 31

c. Non-liability of employer of agent to do a criminal act [Section 224]:

✓ Where one person employs another to do an act which is criminal, the employer is not liable to
the agent, either upon an express or an implied promise, to indemnify him against the
consequences of that act.

5. Right to compensation for injury caused by principal’s neglect [Section 225]:

✓ The principal must compensate his agent in respect of injury caused to such agent due to principal’s
neglect or want of skill.
✓ Thus, every principal owes to his agent the duty of care, and not to expose him to unreasonable
risks.

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 32

 PRINCIPAL’S LIABILITY TO THIRD PARTIES
➢ An agent does all acts on behalf of the principal but incurs no personal liability.
➢ The liability remains that of the principal unless there is a contract to the contrary.
➢ This is because there is no privity of contract and passing of consideration between the agent and
third party.
➢ An agent also cannot personally enforce contracts entered into by him on behalf of the principal.
i. Principal’s liability for the Acts of the Agent [Section 226] :
• Principal liable for the acts of agents which are within the scope of his authority
• Contracts entered into through an agent, and obligations arising from acts done by an agent, may
be enforced in the same manner, and will have the same legal consequences, as if the contracts
had been entered into and the acts were done by the principal in person.
ii. Principal’s liability when agent exceeds authority [Section 227] :
• When an agent does more than he is authorized to do, and
• When the part of what he does, which is within his authority,
• can be separated from the part which is beyond his authority, so much only of what he does as is
within his authority is binding as between him and his principal.
Principal not bound when excess of agent’s authority is not separable [Section 228]:
Where an agent does more than he is authorized to do, and what he does beyond the scope of his
authority cannot be separated from what is within it, the principal is not bound to recognize the
transaction.
CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 33

Exception : Liabaility of principal inducing belief that agent’s unauthorized acts were
authorized [Section 237] :
When an agent has, without authority, done acts or incurred obligations to third persons on behalf
of his principal, the principal is bound by such acts or obligations, if he has by his words or conduct
induced such third persons to believe that such acts and obligations were within the scope of the
agent’s authority.

iii. Consequences of notice given to agent [Section 229] :

Any notice given to or information obtained by the agent, provided it be given or obtained in the
course of the business transacted by him for the principal, shall, as between the principal and third
parties, have the same legal consequence as if it had been given to or obtained by the principal.

iv. Principal’s liability for the agent’s fraud, misrepresentation or torts [Section 238] :
• Misrepresentations made, or frauds committed, by agents acting in the course of their business
for their principals, have the same effect on agreements made by such agents as if such
misrepresentations or frauds had been made, or committed, by the principals but
• misrepresentations made, or frauds committed, by agents, in matters which do not fall within
their authority, do not affect their principals

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 34

 Principal’s Liability to Third Parties

Section 226 Section 227 Section 229 Section 238

Principal not bound,
Principal is when agent exceeds Consequence of notice Principal’s liability for the
liable/bound by for authority : In such given to agent: Any agent’s fraud,
the Acts of the situation part of the notice given to agent misrepresentation or torts:
Agent as per contract which is as during course of • Misrepresentation by
authority given in per the authority, business would agents acting in the
contract. shall be binding on the deemed notice to course of their business
principal. principal. for their principals, have
the same effect as if
such misrepresentations
Section 228
Exception or frauds had been made
Section 237 or committed by principal
Principal not bound,
• Matter which are not
when excess of
Liability of principal fall within authority of
agent’s authority is
inducing belief that agent do not affect
not separable from
agent’s unauthorized their principals
the authorized part
acts were authorized.
of the transaction.
CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 35

PERSONAL LIABILITY OF AGENT TO THIRD PARTY

➢ Agent cannot personally enforce nor be bound by, contract on behalf of principal
[Section 230] :
• In the absence of any contract to that effect, an agent cannot personally enforce contracts
entered into by him on behalf of his principal, nor is he personally bound by them.
• He can neither sue nor be sued on contracts made by him on his principal’s behalf.
➢ Exceptions : In the following exceptional cases, the agent is presumed to have agreed to be
personally bound :
1. Where the contract is made by an agent for the sale or purchase of goods for a merchant
resident abroad/foreign principal :
• When an agent has entered into a contract for the sale or purchase of goods on behalf of a
principal resident abroad, the presumption is that the agent undertakes to be personally
liable for the performances of such contract.
2. Where the agent does not disclose the name of his principal or undisclosed principal;
(Principal unnamed):
• When the agent does not disclose the name of the principal then there arises a presumption
that he himself undertakes to be personally liable.
• When the principal is undisclosed, the liability under section 230 is of the agent only, and the
principal cannot be sued in such a case.

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 36

 3. Non existence or incompetent principal:
• Where the principal, though disclosed, cannot be sued, the agent is presumed to be personally
liable.
4. Pretended agent (Section 235) :
• if the agent pretends but is not an actual agent, and the principal does not rectify the act
but disowns it, the pretended agent will be himself liable.
5. When agent exceeds authority :
• When the agent exceeds his authority, misleads the third person in believing that the
agent he has the requisite authority in doing the act, then the agent can be made liable
personally for the breach of warranty of authority.

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 37

Agent cannot personally enforce, nor be bound by, contracts on behalf of

principal (Section 230) : Agent can neither sue nor be sued on contracts
made by him on his principal’s behalf.

Exceptions

A B c D E

Sale or purchase of Agent does not Principal is agent exceeds his

Agent pretended but
goods for a disclose the name minor/incompetent authority, misleads
not an actual agent
merchant resident of his principal to the third person in
abroad/foreign contract/nonexistent believing that the
principal by agent agent he has the
requisite authority
in doing the act

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 38

 RIGHTS OF THIRD PARTIES

i. Right of parties to a contract made by undisclosed agent [Section 231] :

• If an agent makes a contract with a person who neither knows, nor has reason to suspect, that
he is an agent, his principal may require the performance of the contract; but the other
contracting party has, as against the principal, the same right as he would have had as against
the agent if the agent had been the principal.
• If the principal discloses himself before the contract is completed, the other contracting party
may refuse to fulfill the contract, if he can show that, if he had known who was the principal
in the contract, or if he had known that the agent was not a principal, he would not have entered
into the contract.

ii. Performance of contract with agent supposed to be principal [Section 232] :

• Where one man makes a contract with another, neither knowing nor having reasonable ground to
suspect that the other is an agent, the principal, if he requires the performance of the
contract, can only obtain such performance subject to the rights and obligations subsisting
between the agent and the other party to the contract.

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 39

iii. Option to Third Person- sue the Agent or the Principal :

a. Right of person dealing with agent personally liable [Section 233]:
• In cases where the agent is personally liable, a person dealing with him may hold either him
or his principal, or both of them, liable.

b. Consequence of inducing agent or principal to act on belief that principal or agent will be
held exclusively liable [Section 234]:
• When a person who has made a contract with an agent induces the agent to act upon the
belief that the principal only will be held liable or
• induces the principal to act upon the belief that the agent only will be held liable, he cannot
afterwards hold liable the agent or principal respectively.

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 40

 REVOCATION OF AUTHORITY

Termination of Agency [Section 201]

Renunciation Completion Death of Principal

Revocation
by agents of business or the agent

Principal or agent
Insolvency of
becoming of Expiry of time
principal
unsound mind

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 41

i. Revocation :
• Section 203 : Principal may revoke the authority given to his agent at any time before the
authority has been exercised so as to bind the principal .
• Section 204 : However, the principal cannot revoke the authority given to his agent after the
authority has been partly exercised so far as regards such acts and obligations as arise for acts
already done in the agency
• Compensation for revocation by principal [Section 205] : If there is premature revocation of
agency without sufficient cause, the principal must compensate the agent, for such revocation.
• Notice of revocation [Section 206]: When the principal, having justification to do so,
revokes the authority, he must give reasonable notice of such revocation to the agent,
otherwise, he can be liable to pay compensation for any damage caused to the agent.
• Revocation and renunciation may be expressed or implied [Section 207]: Revocation of
agency may be expressed or implied in the conduct of the principal.
ii. Renuncation by agent [Section 206] :
• An agent may renounce the business of agency in the same manner in which the principal has
the right of revocation.
• Section 205 : If the agency is for a fixed period, the agent would have to compensate the
principal for any premature renunciation without sufficient cause.
• Section 206 : A reasonable notice of renunciation is necessary. Length of notice is to be
determined by the same principles which apply to revocation by the principal. If the agent
renounces without proper notice, he shall have to make good any damage thereby resulting to the
principal.
CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 42
iii. Completion of business :
• An agency is automatically and by operation of law terminated when its business is completed.
Thus, for example, the authority of an agent appointed to sell goods ceases to be exercisable
when the sale is completed.
iv. Death or insanity :
• An agency is determined automatically on the death or insanity of the principal or the agent.
Winding up of a company or dissolution of partnership has the same effect.
• Act done by agent before death would remain binding.
v. Principal’s insolvency : An agency ends on the principal being adjudicated insolvent.

vi. On expiry of time : Where an agent has been appointed for a fixed term, the expiration of the
term puts an end to the agency, whether the purpose of agency has been accomplished or not. An
agency comes to an automatic end on expiry of its term

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 43

When the agency is irrevocable ?

✓ When the agent is personally interested in the subject matter of agency the agency
becomes irrevocable.

✓ Section 202 states that ”where the agent has himself an interest in the property which
forms the subject matter of the agency, the agency cannot, in the absence of an express
contract, be terminated to the prejudice of such interest.”

✓ Example 57: A gives authority to B to sell A’s land, and to pay himself, out of the proceeds,
the debts due to him from A. A cannot revoke this authority, nor can it be terminated by
his insanity or death.

✓ Example 58: A consigns 1000 bales of cotton to B, who has made advances to him on
such cotton, and desires B to sell the cotton, and to repay himself, out of the price, the
amount of his own advances. A cannot revoke this authority, nor it is terminated by his
insanity or death.

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 44

 Effect of Termination [Section 208]
✓ When termination of agent’s authority takes effect as to agent, and as to third persons
[Section 208]: The termination of the authority of an agent does not, so far as regards the agent,
take effect before it becomes known to him, or, so far as regards third persons, before it becomes
known to them.

Agent’s duty on termination of agency by principal’s death or insanity

[Section 209]
✓ When an agency is terminated by the principal dying or becoming of unsound mind, the agent is
bound to take, on behalf of the representatives of his late principal, all reasonable steps for the
protection and preservation of the interests entrusted to him.

Termination of sub-agent’s authority [Section 210]

✓ The termination of the authority of an agent causes the termination (subject to the rules herein
contained regarding the termination of an agent’s authority) of the authority of all sub-agents
appointed by him.

CA DEEPIKA RATHI : INDIAN CONTRACT ACT 1872 45

 Questions & Answers

Chapter 11 : The Indian Contract Act 1872

Compiled by CA DEEPIKA RATHI

CA DEEPIKA RATHI 1
Question 1 : ‘A’ gives to ‘M’ a continuing guarantee to the extent of Rs. 8,000 for the fruits to be supplied by ‘M’ to ‘S’
from time to time on credit. Afterwards ‘S’ became embarrassed and without the knowledge of ‘A’, ‘M’ and ‘S’ contract that
‘M’ shall continue to supply ‘S’ with fruits for ready money and that payments shall be applied to the then existing debts
between ‘S’ and ‘M’. Examining the provision of the Indian Contract Act, 1872, decide whether ‘A’ is liable on his guarantee
given to M. [RTP NOV 2019]

Answer 1 : Discharge of surety by variance in terms of contract: The problem asked in the question is based on the
provisions of the Indian Contract Act, 1872 as contained in Section 133. The section provides that any variance made
without the surety’s consent in the terms of the contract between the principal debtor and the creditor, discharges the
surety as to transactions subsequent to the variance.
In the given problem, ‘M’ and ‘S’ entered into arrangement by entering into a new contract without knowledge of the
Surety ‘A’. Since, the variance made in the contract is without the surety’s consent in the existing contract, as per the
provision, ‘A’ is not liable on his guarantee for the fruits supplied after this new arrangement. The reason for such a
discharge is that the surety agreed to be liable for a contract which is no more there now and he is not liable on the
altered contract because it is different from the contract made by him.

CA DEEPIKA RATHI 2
Question 2 : Mr. Chintu was appointed as Site Manager of ABC Constructions Company on a two years contract at a
monthly salary of Rs. 50,000. Mr. Ganesh gave a surety in respect of Mr. Chintu's conduct. After six months the company was
not in position to pay Rs. 50,000 to Mr. Chintu because of financial constraints. Chintu agreed for a lower salary of Rs. 30,000
from the company. This was not communicated to Mr. Ganesh. Three months afterwards it was discovered that Chintu
had been doing fraud since the time of his appointment. What is the liability of Mr. Ganesh during the whole duration of
Chintu's Appointment. [RTP NOV 2019]

Answer 2 : As per the provisions of Section 133 of the Indian Contract Act, 1872, if the creditor makes any variance (i.e.
change in terms) without the consent of the surety, then surety is discharged as to the transactions subsequent to the
change
In the instant case, Mr. Ganesh is liable as a surety for the loss suffered by ABC Constructions company due to
misappropriation of cash by Mr. Chintu during the first six months but not for misappropriations committed after the
reduction in salary.
Hence, Mr. Ganesh, will be liable as a surety for the act of Mr. Chintu before the change in the terms of the contract i.e.,
during the first six months. Variation in the terms of the contract (as to the reduction of salary) without consent of Mr.
Ganesh, will discharge Mr. Ganesh from all the liabilities towards the act of the Mr. Chintu after such variation.

CA DEEPIKA RATHI 3
Question 3 : Pankaj appoints Shruti as his agent to sell his estate. Shruti, on looking over the estate before selling it, finds
the existence of a good quality Granite-Mine on the estate, which is unknown to Pankaj. Shruti buys the estate herself after
informing Pankaj that she (Shruti) wishes to buy the estate for herself but conceals the existence of Granite-Mine. Pankaj
allows Shruti to buy the estate, in ignorance of the existence of Mine. State giving reasons in brief the rights of Pankaj, the
principal, against Shruti, the agent. Give your answer as per the provisions of the Contract Act, 1872.
What would be your answer if Shruti had informed Pankaj about the existence of Mine before she purchased the estate,
but after two months, she sold the estate at a profit of Rs.10 lac? [RTP MAY 2020]
Answer 3 : Agent’s duty to disclose all material circumstances & his duty not to deal on his own account without
principal’s consent The problem is based on Sections 215 & 216 of the Indian Contract Act, 1872. According to Section 215,
if an agent deals on his own account in the business of the agency, without obtaining the consent of his principal and
without acquainting him with all material circumstances, then the principal may repudiate the transaction. On the other
hand, section 216 provides that, if an agent, without the knowledge of his principal, acts on his own account in the
business of the agency, then the principal may claim any benefit which may have accrued to the agent from such a
transaction. Hence in the first instance, though Pankaj had given his consent to Shruti permitting the latter to act on his own
account in the business of agency, Pankaj may still repudiate the sale as the existence of the mine, a material circumstance,
had not been disclosed to him.
In the second instance, Pankaj had knowledge that Shruti was acting on her own account and also that the mine was in
existence; hence, Pankaj cannot repudiate the transaction under section 215. Also, under Section 216, Pankaj cannot claim
any benefit from Shruti as he had knowledge that Shruti was acting on her own account in the business of the agency.

CA DEEPIKA RATHI 4
Question 4 : Sandeep guarantees for Gaurav, a retail textile merchant, for an amount of Rs.1,00,000, for which Sharma, the
supplier may from time to time supply goods on credit basis to Gaurav during the next 3 months.
After 1 month, Sandeep revokes the guarantee, when Sharma had supplied goo ds on credit for Rs.40,000. Referring to
the provisions of the Indian Contract Act, 1872, decide whether Sandeep is discharged from all the liabilities to Sharma for
any subsequent credit supply. What would be your answer in case Gaurav makes default in paying back Sharma for the
goods already supplied on credit i.e. R s . 40,000? [RTP NOV 2020]
Answer 4 : Discharge of Surety by Revocation: As per section 130 of the Indian Contract Act, 1872 a specific guarantee
cannot be revoked by the surety if the liability has already accrued. A continuing guarantee may, at any time, be revoked by
the surety, as to future transactions, by notice to the creditor, but the surety remains liable for transactions already entered
into.
As per the above provisions, liability of Sandeep is discharged with relation to all subsequent credit supplies made by
Sharma after revocation of guarantee, because it is a case of continuing guarantee.
However, liability of Sandeep for previous transactions (before revocation) i.e. for Rs. 40,000 remains. He is liable for
payment of Rs. 40,000 to Sharma because the transaction was already entered into before revocation of guarantee.
Question 5 : Raj gives his umbrella to Manoj during raining season to be used for two days during Examinations. Manoj
keeps the umbrella for a week. While going to Raj’s house to return the umbrella, Manoj accidently slips and the umbrella
is badly damaged. Taking into account the provisions of the Indian Contract Act, 1872, who will bear the loss and why ?
[RTP NOV 2020]

CA DEEPIKA RATHI 5
Answer 5 : It is the duty of bailee to return, or deliver according to the bailor’s directions, the goods bailed without
demand, as soon as the time for which they were bailed, has expired, or the purpose for which they were bailed has been
accomplished. [Section 160 of the Indian Contract Act, 1872]
If, by the default of the bailee, the goods are not returned, delivered or tendered at the proper time, he is responsible to
the bailor for any loss, destruction or deterioration of the goods from that time. [Section 161]
In the instant case, Manoj shall have to bear the loss since he failed to return the umbrella within the stipulated time and
Section 161 clearly says that where a bailee fails to return the goods within the agreed time, he shall be responsible to the
bailor for any loss, destruction or deterioration of the goods from that time notwithstanding the exercise of reasonable care
on his part.
Question 6 : Akash is a famous manufacturer of leather goods. He appoints Prashant as his agent. Prashant is entrusted
with the work of recovering money from various traders to whom Akash sells leather goods. Prashant is paid a monthly
remuneration of Rs.15,000. Prashant during a particular month recovers Rs.40,000 from traders on account of Akash.
Prashant gives back Rs.25,000 to Akash, after deducting his salary.
Examine with reference to relevant provisions of the Indian Contract Act, 1872, whether act of Prashant is valid. [RTP MAY
2021]
Answer 6 : The given problem is based on the provision related to ‘agency coupled with interest’. According to Section
202 of the Indian Contract Act, 1872 an agency becomes irrevocable where the agent has himself an interest in the
property which forms the subject-matter of the agency, and such an agency cannot, in the absence of an express provision
in the contract, be terminated to the prejudice of such interest.

. CA DEEPIKA RATHI 6
In the given instance, Akash appointed Prashant as his agent to recover money from various traders to whom Akash sold
his leather goods, on a monthly remuneration of Rs. 15,000. Prashant during a month recovers Rs.40,000 from traders on
account of Akash. Prashant after deducting his salary give the rest amount to Akash. In the said case, interest was created in
favour of Prashant and the said agency is not revocable, therefore, the act of Prashant is valid.
Question 7 : Mr. Yadav, a cargo owner, chartered a vessel to carry a cargo of wheat from a foreign port to Chennai. The
vessel got stranded on a reef in the sea 300 miles from the destination.
The ship’s managing agents signed a salvage agreement for Mr. Yadav. The goods (wheat) being perishable, the salvors stored
it at their own expense. Salvors intimated the whole incident to the cargo owner. Mr. Yadav refuse to reimburse the Salvor, as
it is the Shipowner, being the bailee of the cargo, who was liable to reimburse the salvor until the contract remained
unterminated. Referring to the provision of The Indian Contract Act 1872, do you acknowledge or decline the act of Salvor, as
an agent of necessity, for Mr. Yadav. Explain [RTP NOV 2021]
Answer 7 : Section 189 of Indian Contract Act 1872 defines agent's authority in an emergency. An agent has authority, in
an emergency, to do all such acts for the purpose of protecting his principal from loss as would be done by a person of
ordinary prudence, in his own case, under similar circumstances.
In certain circumstances, a person who has been entrusted with another’ s property may have to incur unauthorized
expenses to protect or preserve it. This is called an agency of necessity. Hence, in the above case the Salvor had implied
authority from the cargo owner to take care of the cargo. They acted as agents of necessity on behalf of the cargo owner.
Cargo owner were duty-bound towards salvor. Salvor is entitled to recover the agreed sum from Mr. Yadav and not from the
ship owner, as a lien on the goods.

CA DEEPIKA RATHI 7
Question 8 : Rahul is the owner of electronics shop. Priyanka reached the shop to purchase an air conditioner whose
compressor should be of copper. As Priyanka wanted to purchase the air conditioner on credit, Rahul demand a guarantor for
such transaction. Mr. Arvind ( a friend of Priyanka) came forward and gave the guarantee for payment of air conditioner.
Rahul sold the air conditioner of a particular brand, misrepresenting that it is made of copper while it is made of aluminium.
Neither Priyanka nor Mr. Arvind had the knowledge of fact that it is made of aluminium. On being aware of the facts, Priyanka
denied for payment of price. Rahul filed the suit against Mr. Arvind. Explain with reference to the Indian Contract Act 1872,
whether Mr. Arvind is liable to pay the price of air conditioner ? [RTP NOV 2021]
Answer 8 : As per the provisions of section 142 of the Indian Contract Act 1872, where the guarantee has been obtained
by means of misrepresentation made by the creditor concerning a material part of the transaction, the surety will be
discharged. Further according to provisions of section 134, the surety is discharged by any contract between the creditor and
the principal debtor, by which the principal debtor is released, or by any act or omission of the creditor, the legal
consequence of which is the discharge of the principal debtor.
In the given question, Priyanka wants to purchase air conditioner whose compressor should be of copper, on credit from
Rahul. Mr. Arvind has given the guarantee for payment of price. Rahul sold the air conditioner of a particular brand on
misrepresenting that it is made of copper while it is made of aluminium of which both Priyanka & Mr. Arvind were unaware.
After being aware of the facts, Priyanka denied for payment of price. Rahul filed the suit against Mr. Arvind for payment of
price.
On the basis of above provisions and facts of the case, as guarantee was obtained by Rahul by misrepresentation of the facts,
Mr. Arvind will not be liable. He will be discharged from liability.

CA DEEPIKA RATHI 8
Question 9 : Surendra’ guarantees ‘Virendra’ for the transactions to be done between ‘Virendra’ & ‘Jitendra’ during the
month of March, 2021. ‘Virendra’ supplied goods of Rs.30,000 on 01.03.2021 and of Rs.20,000 on 03.03.2021 to ‘Jitendra’.
On 05.03.2021, ‘Surendra’ died in a road accident. On 10.03.2021, being ignorant of the death of ‘Surendra’, ‘Virendra’
further supplied goods of Rs. 40,000. On default in payment by ‘Jitendra’ on due date, ‘Virendra’ sued on legal heirs of
‘Surendra’ for recovery of Rs . 90,000. Describe, whether legal heirs of ‘Surendra’ are liable to pay Rs . 90,000 under the
provisions of Indian Contract Act 1872 .
What would be your answer, if the estate of ‘Surendra’ is worth of R s . 45,000 only? [RTP MAY 2022]
Answer 9 : According to section 131 of Indian Contract Act 1872, in the absence of a contract to contrary, a continuing
guarantee is revoked by the death of the surety as to the future transactions. The estate of deceased surety, however, liable
for those transactions which had already taken place during the lifetime of deceased. Surety’s estate will not be liable for the
transactions taken place after the death of surety even if the creditor had no knowledge of surety’s death.
In this question, ‘Surendra’ was surety for the transactions to be done between ‘Virendra ’& ‘Jitendra’ during the month
of March’2021. ‘Virendra’ supplied goods of R s . 30,000, Rs.20,000 and of Rs.40,000 on 01.03.2021, 03.03.2021 and
10.03.02021 respectively
‘Surendra’ died in a road accident but this was not in the knowledge of ‘Virendra’. When ‘Jitendra’ defaulted in payment,
‘Virendra’ filed suit against legal heirs of ‘Surendra’ for recovery of full amount i.e. Rs.90,000.
On the basis of above, it can be said in case of death of surety (‘Surendra’), his legal heirsare liable only for those
transactions which were entered before 05.03.2021 i.e. for Rs.50,000. They are not liable for the transaction done on
10.03.2021 even though Virendra had no knowledge of death of Surendra.

CA DEEPIKA RATHI 9
Further, if the worth of the estate of deceased is only Rs. 45,000, the legal heirs are liable for this amount only.
Question 10 : Explaining the provisions of the Indian Contract Act, 1872, answer the following:-
i. A contracts with B for a fixed price to construct a house for B within a stipulated time. B would supply the necessary
material to be used in the construction. C guarantees A’s performance of the contract. B does not supply the material
as per the agreement. Is C discharged from his liability?
ii. C, the holder of an over due bill of exchange drawn by A as surety for B, and accepted by B, contracts with X to give time
to B. Is A discharged from his liability? [MTP MAY 2019]
Answer 10 :
i. According to section 134 of the Indian Contract Act, 1872, the surety is discharged by any contract between the
creditor and the principal debtor, by which the princ ipal debtor is released or by any act or omission of the creditor,
the legal consequence of which is the discharge of the principal debtor. In the given case, B does not supply the
necessary material as per the agreement. Hence, C is discharged from his liability.
ii. According to Section 136 of the Indian Contract Act, 1872, where a contract to give time to the principal debtor is
made by the creditor with a third person and not with the principal debtor, the surety is not discharged. In the given
question the contract to give time to the principal debtor is made by the creditor with X who is a third person. X is not
the principal debtor. Hence, A is not discharged.

CA DEEPIKA RATHI 10
Question 11 : A appoints M, a minor, as his agent to sell his watch for cash at a price not less than Rs. 700. M sells it to D
for Rs. 350. Is the sale valid? Explain the legal position of M and D, referring to the provisions of the Indian Contract Act,
1872 [MTP MAY 2019]
Answer 11 :
According to the provisions of Section 184 of the Indian Contract Act, 1872, as between the principal and a third person, any
person, even a minor may become an agent. But no person who is not of the age of majority and of sound mind can become
an agent, so as to be responsible to his principal. Thus, if a person who is not competent to contract is appointed as an
agent, the principal is liable to the third party for the acts of the agent. Thus, in the given case, D gets a good title to the
watch. M is not liable to A for his negligence in the performance of his duties.
Question 12 : What is agent’s authority in case of an emergency. What are the essential conditions to be satisfied to
constitute a valid emergency. Give your answer as per the provisions of the Indian Contract Act, 1872. [MTP MAY 2019]
Answer 12 : An agent has authority, in an emergency, to do all such acts for the purpose of protecting his principal
from loss as would be done by a person of ordinary prudence, in his own case, under similar circumstances.
To constitute a valid agency in an emergency, following conditions must be satisfied.
i. Agent should not be a in a position or have any opportunity to communicate with his principal within the time
available.
ii. There should have been actual and definite commercial necessity for the agent to act promptly.
iii. The agent should have acted bonafide and for the benefit of the principal.

CA DEEPIKA RATHI 11
iv. The agent should have adopted the most reasonable and practicable course under the circumstances and
v. The agent must have been in possession of the goods belonging to his principal and which are the subject of contract.
Question 13 : Explaining the provisions of the Indian Contract Act, 1872, answer the following
Mr. D was in urgent need of money amounting Rs. 5,00,000. He asked Mr. K for the money. Mr. K lent the money on the
sureties of A, B and N without any contract between them in case of default in repayment of money by D to K. D makes
default in payment. B refused to contribute, examine whether B can escape liability? [MTP MAY 2019]
Answer 13 : Co-sureties liable to contribute equally (Section 146 of the Indian Contract act, 1872): Equality of burden is
the basis of Co-suretyship. This is contained in section 146 which states that “when two or more persons are co-sureties for
the same debt, or duty, either jointly, or severally and whether under the same or different contracts and whether with or
without the knowledge of each other, the co-sureties in the absence of any contract to the contrary, are liable, as between
themselves, to pay each an equal share of the whole debt, or of that part of it which remains unpaid by the principal
debtor’’.
Accordingly, on the default of D in payment, B cannot escape from his liability. All the three sureties A, B and N are liable to
pay equally, in absence of any contract between them.
Question 14 : Mr. Ahuja of Delhi engaged Mr. Singh as his agent to buy a house in West Extension area. Mr. Singh
bought a house for Rs. 20 lakhs in the name of a nominee and then purchased it himself for Rs. 24 lakhs. He then sold the
same house to Mr. Ahuja for Rs. 26 lakhs. Mr. Ahuja later comes to know the mischief of Mr. Singh and tries to recover the
excess amount paid to Mr. Singh. Is he entitled to recover any amount from Mr. Singh? If so, how much? Explain[MTP MAY
2019]

CA DEEPIKA RATHI 12
Answer 14 : Co-sureties liable to contribute equally (Section 146 of the Indian Contract act, 1872): Equality of burden is
the basis of Co-suretyship. This is contained in section 146 which states that “when two or more persons are co-sureties for
the same debt, or duty, either jointly, or severally and whether under the same or different contracts and whether with or
without the knowledge of each other, the co-sureties in the absence of any contract to the contrary, are liable, as between
themselves, to pay each an equal share of the whole debt, or of that part of it which remains unpaid by the principal
debtor’’.
Accordingly, on the default of D in payment, B cannot escape from his liability. All the three sureties A, B and N are liable to
pay equally, in absence of any contract between them.
The problem in this case, is based on the provisions of the Indian Contract Act, 1872 as contained in Section 215 read with
Section 216. The two sections provide that where an agent without the knowledge of the principal, deals in the business of
agency on his own account, the principal may.
1. repudiate the transaction, if the case shows, either that the agent has dishonestly concealed any material fact from him, or
that the dealings of the agent have been disadvantageous to him.
2. claim from the agent any benefit, which may have resulted to him from the transaction.
Therefore, based on the above provisions, Mr. Ahuja is entitled to recover Rs. 6 lakhs from Mr. Singh being the amount of
profit earned by Mr. Singh out of the transaction

CA DEEPIKA RATHI 13
Question 15 : Define contract of indemnity and contract of guarantee and state the conditions when guarantee is
considered invalid? [MTP MAY 2019]

Answer 15 : Section 124 of the Indian Contract Act, 1872 says that “A contract by which one party promises to save the
other from loss caused to him by the conduct of the promisor himself, or the conduct of any person”, is called a “contract of
indemnity”.
Section 126 of the Indian Contract Act says that “A contract to perform the promise made or discharge liability incurred by a
third person in case of his default.” is called as “contract of guarantee”.
The conditions under which the guarantee is invalid or void are stated in section 142,143 and 144 of the Indian Contract Act
are :
i. Guarantee obtained by means of misrepresentation
ii. creditor obtained any guarantee by means of keeping silence as to material circumstances.
iii. When contract of guarantee is entered into on the condition that the creditor shall not act upon it until another person
has joined in it as co-surety and that other party fails to join as such.

CA DEEPIKA RATHI 14
Question 16 : Mr. Dhannaseth delivers a rough blue sapphire to a jeweller, to be cut and polished. The jeweller carries
out the job accordingly. However, now Mr. Dhannaseth refuses to make the payment and wants his blue sapphire back. The
jeweller denies the delivery of goods without payment. Examine whether the jeweler can hold blue sapphire. Give your
answer as per the provisions of the Contract Act, 1872. [MTP NOV 2019]

Answer 16 : According to section 170 of the Indian Contract Act, 1872, where the bailee has, in accordance with the
purpose of the bailment, rendered any service involving the exercise of labour or skill in respect of the goods bailed, he has,
in the absence of a contract to the contrary, a right to retain such goods until he receives due remuneration for the services
he has rendered in respect of them.
Thus, in accordance with the purpose of bailment if the bailee by his skill or labour improves the goods bailed, he is entitled
for remuneration for such services. Towards such remuneration, the bailee can retain the goods bailed if the bailor refuses
to pay the remuneration. Such a right to retain the goods bailed is the right of particular lien. He however does not have
the right to sue.
Where the bailee delivers the goods without receiving his remuneration, he has a right to sue the bailor. In such a case the
particular lien may be waived. The particular lien is also lost if the bailee does not complete the work within the time agreed.
Hence, in the given situation the jeweller is entitled to retain the stone till he is paid for the services he has rendered.

CA DEEPIKA RATHI 15
Question 17 : Rahul, a transporter was entrusted with the duty of transporting tomatoes from a rural farm to a city
by Aswin. Due to heavy rains, Rahul was stranded for more than two days. Rahul sold the tomatoes below the market rate in
the nearby market where he was stranded fearing that the tomatoes may perish. Can Aswin recover the loss from Rahul on
the ground that Rahul had acted beyond his authority. [MTP NOV 2019]
Answer 17 : Agent's authority in an emergency (Section 189 of the Indian Contract Act, 1872): An agent has authority, in
an emergency, to do all such acts for the purpose of protecting his principal from loss as would be done by a person of
ordinary prudence, in his own case, under similar circumstances.
In the instant case, Rahul, the agent, was handling perishable goods like ‘tomatoes’ and can decide the time, date and place
of sale, not necessarily as per instructions of the Aswin, the principal, with the intention of protecting Aswin from losses.
Here, Rahul acts in an emergency as a man of ordinary prudence, so Aswin will not succeed against him for recovering the
loss.
Question 18 : Define contract of indemnity and contract of guarantee and state the conditions when guarantee is
considered invalid ? [MTP NOV 2019]
Answer 18 : Section 124 of the Indian Contract Act,1872 says that “A contract by which one party promises to save the
other from loss caused to him by the conduct of the promisor himself, or the conduct of any person”, is called a “contract
of indemnity”.
Section 126 of the Indian Contract Act says that “A contract to perform the promise made or discharge liability incurred by a
third person in case of his default.” is called as “contract of guarantee

CA DEEPIKA RATHI 16
The conditions under which the guarantee is invalid or void are stated in section 142,143 and 144 of the Indian Contract
Act are :
i. Guarantee obtained by means of misrepresentation
ii. creditor obtained any guarantee by means of keeping silence as to material circumstances
iii. When contract of guarantee is entered into on the condition that the creditor shall not act upon it until another person
has joined in it as co-surety and that other party fails to join as such.
Question 19 : Explaining the provisions of the Indian Contract Act, 1872, answer the following :
i. A contracts with B for a fixed price to construct a house for B within a stipulated time. B would supply the necessary
material to be used in the construction. C guarantees A’s performance of the contract. B does not supply the material as
per the agreement. Is C discharged from his liability?
ii. C, the holder of an overdue bill of exchange drawn by A as surety for B, and accepted by B, contracts with X to give time
to B. Is A discharged from his liability? [MTP MAY 2020]
Answer 19 :
i. According to Section 134 of the Indian Contract Act, 1872, the surety is discharged by any contract between the creditor
and the principal debtor, by which the principal debtor is released or by any act or omission of the creditor, the legal
consequence of which is the discharge of the principal debtor. In the given case, B does not supply the necessary material
as per the agreement. Hence, C is discharged from his liability.

CA DEEPIKA RATHI 17
ii. According to Section 136 of the Indian Contract Act, 1872, where a contract to give time to the principal debtor is made
by the creditor with a third person and not with the principal debtor, the surety is not discharged. In the given question
the contract to give time to the principal debtor is made by the creditor with X who is a third person. X is not the
principal debtor. Hence, A is not discharged.
Question 20 : Mrs. A delivered her old silver jewellery to Mr. Y a Goldsmith, for the purpose of making new a silver bowl
out of it. Every evening she used to receive the unfinished good (silver bowl) to put it into box kept at Mr. Y’s Shop. She kept
the key of that box with herself. One night, the silver bowl was stolen from that box. Whether the possession of the goods
(actual or constructive) delivered, constitute contract of bailment or not? [MTP MAY 2020]
Answer 20 : Section 148 of Indian Contract Act 1872 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 direction of the person delivering them.
According to Section 149 of the Indian Contract Act, 1872, the delivery to the bailee may be made by doing anything which
has the effect of putting the goods in the possession of the intended bailee or of any person authorised to hold them on his
behalf. Thus, delivery is necessary to constitute bailment.
Thus, the mere keeping of the box at Y’s shop, when Mrs.A herself took away the key cannot amount to delivery as per the
meaning of delivery given in the provision in section 149. Therefore, in this case there is no contract of bailment as Mrs. A did
not deliver the complete possession of the good by keeping the keys with herself.

CA DEEPIKA RATHI 18
Question 21 : Comment on the following ‘Principal is not always bound by the acts of a sub-agent . [MTP MAY 2020]
Answer 21 : The statement is correct. Normally, a sub-agent is not appointed, since it is a delegation of power by an
agent given to him by his principal. The governing principle is, a delegate cannot delegate’. (Latin version of this principle is,
“delegates non potestdelegare”). However, there are certain circumstances where an agent can appoint sub-agent.
In case of proper appointment of a sub-agent, by virtue of Section 192 of the Indian Contract Act, 1872 the principal is bound
by and is held responsible for the acts of the sub-agent. Their relationship is treated to be as if the sub-agent is appointed by
the principal himself.
However, if a sub-agent is not properly appointed, the principal shall not be bound by the acts of the sub-agent. Under the
circumstances the agent appointing the sub-agent shall be bound by these acts and he (the agent) shall be bound to the
principal for the acts of the sub-agent.

Question 22 : Mr. Arora of Delhi engaged Mr. Saini as his agent to buy a house in West Extension area. Mr. Saini bought
a house for Rs.50 lakhs in the name of a nominee and then purchased it himself for Rs.54 lakhs. He then sold the same house
to Mr. Arora for Rs.56 lakhs. Mr. Arora later comes to know the mischief of Mr. Saini and tries to recover the excess amount
paid to Mr. Saini. Is he entitled to recover any amount from Mr. Saini? If so, how much? Explain with the help of provisions of
the Indian Contract Act, 1872 [MTP NOV 2020]

CA DEEPIKA RATHI 19
Answer 22 : The problem in this case, is based on the provisions of the Indian Contract Act, 1872 as contained in
Section 215 read with Section 216. The two sections provide that where an agent without the knowledge of the principal,
deals in the business of agency on his own account, the principal may:
i. repudiate the transaction, if the case shows, either that the agent has dishonestly concealed any material fact from him,
or that the dealings of the agent have been disadvantageous to him.
ii. claim from the agent any benefit, which may have resulted to him from the transaction.
Therefore, based on the above provisions, Mr. Arora is entitled to recover R s . 6 lakhs from Mr. Saini being the amount of
profit earned by Mr. Saini out of the transaction.
Question 23: Amar bailed 50 kg of high quality sugar to Srijith, who owned a kirana shop, promising to give
Rs.200 at the time of taking back the bailed goods. Srijith's employee, unaware of this, mixed the 50 kg of sugar belonging to
Amar with the sugar in the shop and packaged it for sale when Srijith was away. This came to light only when Amar came
asking for the sugar he had bailed with Srijith, as the price of the specific quality of sugar had trebled. What is the remedy
available to Amar under the Indian Contract Act, 1872? [MTP NOV 2020]
Answer 23 : According to Section 157 of the Indian Contract Act, 1872, if the bailee, without the consent of the bailor,
mixes the goods of the bailor with his own goods, in such a manner that it is impossible to separate the goods bailed from the
other goods and deliver them back, the bailor is entitled to be compensated by the bailee for the loss of the goods.
In the given question, Srijith’s employee mixed high quality sugar bailed by Amar and then packaged it for sale. The sugar
when mixed cannot be separated. As Srijith’s employee has mixed the two kinds of sugar, he (Srijith) must compensate Amar
for the loss of his sugar.

CA DEEPIKA RATHI 20
Question 24: Mr. D was in urgent need of money amounting to Rs.5,00,000. He asked Mr. K for the money. Mr. K lent
the money on the sureties of A, B and N without any contract between them in case of default in repayment of money by D
to K. D makes default in payment. B refused to contribute, examine whether B can escape liability under the Indian Contract
Act, 1872? [MTP NOV 2020]
Answer 24: Co-sureties liable to contribute equally (Section 146 of the Indian Contract Act, 1872): Equality of burden
is the basis of Co-suretyship. This is contained in section 146 which states that “when two or more persons are co-sureties
for the same debt, or duty, either jointly, or severally and whether under the same or different contracts and whether with
or without the knowledge of each other, the co-sureties in the absence of any contract to the contrary, are liable, as
between themselves, to pay each an equal share of the whole debt, or of that part of it which remains unpaid by the
principal debtor”.
Accordingly, on the default of D in payment, B cannot escape from his liability. All the three sureties A, B and N are liable to
pay equally, in absence of any contract between them.
Question 25: Mr. Gogia has contracted with Rajeev Ltd. on 1st January, 2019, to manufacture certain machinery and
deliver it to Mr. Gogia by 31st May, 2019. Part of the contract price was to be paid in advance, and thus Mr. Gogia
accordingly paid Rs. 2,00,000. An earthquake on 31st March, 2019, destroyed the area in which Rajeev Ltd. was
situated which resulted in break in the operations of Rajeev Ltd for at least 1 year. Mr. Gogia thereupon requested the
return of the Rs. 2,00,000. This amount was not returned by Rajeev Ltd. only because considerable work had already been
put into construction of the machinery. In the light of the provisions of the Indian Contract Act, 1872, please advise Mr.
Gogia whether he can regain the amount from Rajeev Ltd. [MTP MAY 2020]

CA DEEPIKA RATHI 21
Answer 25: According to section 65 of the Indian Contract Act, 1872, when an agreement is discovered to be void, or
when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to
restore, it, or to make compensation for it, to the person from whom he received it.
In the given case, the contract for supply of machinery by Rajeev Ltd. to Mr. Gogia by 31 st May, 2019 was frustrated due
to the occurrence of an earthquake on 31st March, 2019 which has led to the break in the operations of Rajeev Ltd. for at
least one year.
Since, Mr. Gogia obtains no benefit from the contract, and he has paid part of a sum before frustration, he can recover the
money paid in advance because it can be said there has been total failure of consideration. Hence, Mr. Gogia can recover
the amount of Rs. 2,00,000 from Rajeev Ltd.
Question 26: Mrs. Shivani delivered her old silver jewellery to Mr. Y a Goldsmith, for the purpose of making anklet
out of it. Every evening she used to receive the unfinished good ( anklet) to put it into box kept at Mr. Y’s Shop. She kept
the key of that box with herself. One night, the anklet was stolen from that box. Was there a contract of bailment? Whether
the possession of the goods (actual or constructive) delivered, constitute contract of bailment or not? Give your answer as
per the provisions of the Indian Contract Act, 1872. [MTP MAY 2021]
Answer 26: Section 148 of Indian Contract Act 1872 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 direction of the person delivering them.
According to Section 149 of the Indian Contract Act, 1872, the delivery to the bailee may be made by doing anything which

CA DEEPIKA RATHI 22
has the effect of putting the goods in the possession of the intended bailee or of any person authorised to hold
them on his behalf. Thus, delivery is necessary to constitute bailment.
Thus, the mere keeping of the box at Y’s shop, when Mrs. Shivani herself took away the key cannot amount to delivery as per
the meaning of delivery given in the provision in section 149. Therefore, in this case there is no contract of bailment as Mrs.
Shivani did not deliver the complete possession of the good by keeping the keys with herself.
Question 27: What is the meaning of ‘Agency by estoppel’? What are the essential conditions for creation of anagency
by estoppel? Give your answer with respect to the provisions the Indian Contract Act, 1872. [MTP MAY 2021]
Answer 27: An agency by estoppel is based on the principle of estoppel. The principle of estoppel lays down that
“when one person by declaration (representation), act or omission has intentionally caused or permitted another person to
believe a thing to be true and to act upon such belief, he shall not be allowed to deny his previous statement or he shall be
stopped to deny his previous statement or conduct”.
The agency by Estoppel is provided under section 237 of the Indian Contract Act. Section 237 states: “When an agent has
without authority done acts or incurred obligations to third persons on behalf of his principal the principal is bound by such
acts or obligations if he has by his words or conduct induced such third persons to believe that such acts and obligations
were within the scope of the agent's authority”.
According to section 237 of the Contract Act, an agency by estoppel may be created when following essentials are fulfilled :
1. the principal must have made a representation
2. the representation may be express or implied

CA DEEPIKA RATHI 23
3. The representation must state that the agent has an authority to do certain act although really he has no authority
4. The principal must have induced the third person by such representation; and
5. The third person must have believed the representation and made the contract on the belief of such representation
Question 28 : Y advances Z a loan of Rs.10,000 on the guarantee of X, at an interest of 10%. Subsequently, as Z was
having some financial problems, Y reduced the rate of interest to 7% and also extended time for repayment of loan without
the consent of X. Z becomes insolvent. Can Y sue X for recovery of amount? [MTP NOV 2021]
Answer 28 : According to section 133 of the Indian Contract Act, 1872, where there is any variance in the terms of
contract between the principal debtor and creditor without surety’s consent, it would discharge the surety in respect of
all transactions taking place subsequent to such variance.
Accordingly, Y cannot sue X, because a surety (X) is discharged from liability when, without his consent, the creditor makes
any change in the terms of his contract with the principal debtor (Z), no matter whether the variation is beneficial to the
surety or does not materially affect the position of the surety.
Question 29 : Mr. D was in urgent need of money amounting to Rs.5,00,000. He asked Mr. K for the money. Mr. K lent
the money on the sureties of A, B and N without any contract between them in case of default in repayment of money by D
to K. D makes default in payment. B refused to contribute, examine whether B can escape liability? [MTP NOV 2021]
Answer 29 : Co-sureties liable to contribute equally (Section 146 of the Indian Contract act, 1872): Equality of burden
is the basis of Co-suretyship. This is contained in section 146 which states that “when two or more persons are co-sureties
for the same debt,

CA DEEPIKA RATHI 24
or duty, either jointly, or severally and whether under the same or different contracts and whether with or without the
knowledge of each other, the co-sureties in the absence of any contract to the contrary, are liable, as between themselves, to
pay each an equal share of the whole debt, or of that part of it which remains unpaid by the principal debtor”.
Accordingly, on the default of D in payment, B cannot escape from his liability. All the three sureties A, B and N are liable to
pay equally, in absence of any contract between them.
Question 30 : On the basis of reward, what are various categories of bailment? [MTP NOV 2021]
Answer 30 : On the basis of reward, bailment can be classified into two types :
i. Gratuitous Bailment: The word gratuitous means free of charge. So, a gratuitous bailment is one when the provider
of service does it gratuitously i.e. free of charge. Such bailment would be either for the exclusive benefits of bailor
or bailee.
ii. Non-Gratuitous Bailment: Non gratuitous bailment means where both the parties get some benefit i.e. bailment for
the benefit of both bailor & bailee.
Question 31 : Alia appoints Monu, a minor, as his agent to sell her watch for cash at a price not less than Rs. 700. Monu
sells it to David for Rs. 350. Is the sale valid? Explain the legal position of Monu and David, referring to the provisions of the
Indian Contract Act, 1872. [MTP NOV 2021]
Answer 31 : According to the provisions of Section 184 of the Indian Contract Act, 1872, as between the principal and a
third person, any person, even a minor may become an agent. But no person who is not of the age of majority and of sound
mind can become an agent, so as to be responsible to his principal.

CA DEEPIKA RATHI 25
Thus, if a person who is not competent to contract is appointed as an agent, the principal is liable to the third party for the
acts of the agent. Thus, in the given case, David gets a good title to the watch. Monu is not liable to Alia for his negligence in
the performance of his duties.
Question 32 : Mrs. Shriya delivered her old silver jewellery to Mr. Yash a Goldsmith, for the purpose of making new a
silver bowl out of it. Every evening she used to receive the unfinished good (silver bowl) to put it into box kept at Mr. Yash’s
shop. She kept the key of that box with herself. One night, the silver bowl was stolen from that box. Was there a contract of
bailment? Whether the possession of the goods (actual or constructive) delivered, constitute contract of bailment or not?
[MTP NOV 2021]
Answer 32 : Section 148 of Indian Contract Act 1872 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 direction of the person delivering them.
According to Section 149 of the Indian Contract Act, 1872, the delivery to the bailee may be made by doing anything which
has the effect of putting the goods in the possession of the intended bailee or of any person authorised to hold them on his
behalf. Thus, delivery is necessary to constitute bailment.
Thus, the mere keeping of the box at Yash’s shop, when Mrs. Shriya herself took away the key cannot amount to delivery as
per the meaning of delivery given in the provision in section 149. Therefore, in this case there is no contract of bailment as
Mrs. Shriya did not deliver the complete possession of the good by keeping the keys with herself.

CA DEEPIKA RATHI 26
Question 33 : Define contract of indemnity and contract of guarantee and state the conditions when guarantee is
considered invalid? [MTP NOV 2021]
Answer 33 : Section 124 of the Indian Contract Act, 1872 states that “A contract by which one party promises to save the
other from loss caused to him by the conduct of the promisor himself, or the conduct of any person”, is called a “contract of
indemnity”.
Section 126 of the Indian Contract Act, 1872 states that “A contract to perform the promise made or discharge liability
incurred by a third person in case of his default” is called a “contract of guarantee”.
The conditions under which the guarantee is invalid or void is provided in section 142, 143 and 144 of the Indian Contract
Act. These include:
i. Guarantee obtained by means of misrepresentation.
ii. Guarantee obtained by means of keeping silence as to material circumstances.
iii. When contract of guarantee is entered into on the condition that the creditor shall not act upon it until another person
has joined in it as co-surety and that other party fails to join as such.

CA DEEPIKA RATHI 27
Question 34 : Anay bailed 100 kg of high quality sugar to Saksham, who owned a kirana shop, promising to give
Rs.800 at the time of taking back the bailed goods. Saksham’s employee, unaware of this, mixed the 100 kg of sugar
belonging to Anay with the sugar in the shop and packaged it for sale when Saksham was away. This came to light only when
Anay came asking for the sugar he had bailed with Saksham, as the price of the specific quality of sugar had trebled. What is
the remedy available to Anay, as per the provisions of the Indian Contract Act, 1872? [MTP MAY 2022]
Answer 34 : According to section 157 of the Contract Act, 1872, if the bailee, without the consent of the bailor, mixes
the goods of the bailor with his own goods, in such a manner that it is impossible to separate the goods bailed from the other
goods and deliver them back, the bailor is entitled to be compensated by the bailee for the loss of the goods.
In the given question, Saksham’s employee mixed high quality sugar bailed by Anay and then packaged it for sale. The sugars
when mixed cannot be separated. As Saksham’s employee has mixed the two kinds of sugar, he (Saksham) must compensate
Anay for the loss of his sugar.
Question 35 : Shiva appoints Ganesh as Shiva's agent to sell Shiva's land. Ganesh, under the authority of Shiva, appoints
Gauri as agent of Ganesh. Afterwards, Shiva revokes the authority of Ganesh but not of Gauri. What is the status of agency
of Gauri? Advise whether the said agency shall be terminated as per the provisions of the Indian Contract Act, 1872. [MTP
MAY 2022]
Answer 35 : According to section 191 of the Indian Contract Act, 1872, a “Sub-agent” is a person employed by, and
acting under the control of, the original agent in the business of the agency.

CA DEEPIKA RATHI 28
Section 210 provides that, the termination of the authority of an agent causes the termination (subject to the rules regarding
the termination of an agent’s authority) of the authority of all sub- agents appointed by him.
In the given question, Ganesh is the agent of Shiva, and Gauri is the agent of Ganesh. Hence, Gauri becomes a sub- agent.
Thus, when Shiva revokes the authority of Ganesh (agent), it results in termination of authority of sub-agent appointed by
Ganesh i.e. Gauri (sub-agent).
Question 36 : Enumerate the following as per the provisions of the Indian Contract Act, 1872:
i. Meaning of contract of guarantee
ii. Parties to a contract of guarantee [MTP MAY 2022]
Answer 36 :
i. Contract of guarantee: As per the provisions of section 126 of the Indian Contract Act, 1872, a contract of guarantee is
a contract to perform the promise made or discharge the liability, of a third person in case of his default.
ii. Three parties are involved in a contract of guarantee:
Surety- person who gives the guarantee,
Principal debtor- person in respect of whose default the guarantee is given,
Creditor- person to whom the guarantee is given.

CA DEEPIKA RATHI 29
Question 37 : A Ltd. sells its products through some agents and it is not the custom in their business to sell the products
on credit. Mr. Pintu, one of the agents sold goods of A Ltd. to Parul Pvt. Ltd. (on credit) which was insolvent at the time of
such sale. A Ltd. sued Mr. Pintu for compensation towards the loss caused due to sale of products to Parul Pvt. Ltd. Will A Ltd.
succeed in its claim? [MTP MAY 2022]
Answer 37 : According to section 211 of the Indian Contract Act, 1872, an agent is bound to conduct the business of his
principal according to the direction given by the principal, or, in the absence of any such directions, according to the
custom which prevails in doing business of the same kind at the place where the agent conducts such business. When the
agent acts otherwise, if any loss be sustained, he must make it good to his principal, and, if any profit accrues, he must
account for it.
In the present case, Mr. Pintu, one of the agents, sold goods of A Ltd. to Parul Pvt. Ltd. (on credit) which was insolvent at the
time of such sale. Also, it is not the custom in A Ltd. to sell the products on credit.
Hence, Mr. Pintu must make good the loss to A Ltd.
Question 38 : Prisha acquired valuable diamond at a very low price by a voidable contract under the provisions of the
Indian Contract Act, 1872. The voidable contract was not rescinded. Prisha pledged the diamond with Mr. Vikas. Is this a valid
pledge under the Indian Contract Act, 1872? [MTP MAY 2022]
Answer 38 : According to section 178A of the Indian Contract Act, 1872, when the pawnor has obtained possession of
the goods pledged by him under a contract voidable under section 19 or section 19A, but the contract has not been

CA DEEPIKA RATHI 30
rescinded at the time of the pledge, the pawnee acquires a good title to the goods, provided he acts in good faith and
without notice of the pawnor’s defect of title
Therefore, the pledge of diamond by Prisha with Mr. Vikas is valid.

Question 39 : Explain the following as per the provisions of the Indian Contract Act, 1872
(i) What is the meaning of ‘Agent’ and ‘Principal’?
(ii) Who can appoint an agent. [MTP MAY 2022]
Answer 39 :
i. Agent: means a person employed to do any act for another or to represent another in dealing with the third persons and
The principal: means a person for whom such act is done or who is so represented.
ii. Who may employ an agent: According to section 183 of the Indian Contract Act, 1872,“any person who has attained
majority according to the law to which he is subject, and who is of sound mind, may employ an agent.” Thus, a minor or
a person of unsound mind cannot appoint an agent.

CA DEEPIKA RATHI 31
Question 40 : Mr. Shiv, a cargo owner, chartered a vessel to carry a cargo of wheat from a foreign port to Tuticorin. The
vessel got stranded on a reef in the sea 300 miles from the destination. The ship’s managing agents signed a salvage
agreement for Mr. Shiv. The goods (wheat) being perishable, the salvors stored it at their own expense. Salvors intimated the
whole incident to the cargo owner. Mr. Shiv refuse to reimburse the salvor, as it is the Ship-owner, being the bailee of the
cargo, who was liable to reimburse the salvor until the contract remained unterminated. Referring to the provision of The
Indian Contract Act 1872, do you acknowledge or decline the act of salvor, as an agent of necessity, for Mr. Shiv. Explain?
[MTP NOV 2022]
Answer 40 : Section 189 of the Indian Contract Act, 1872 defines agent's authority in an emergency. An agent has
authority, in an emergency, to do all such acts for the purpose of protecting his principal from loss as would be done by a
person of ordinary prudence, in his own case, under similar circumstances.
In certain circumstances, a person who has been entrusted with another’s property may have to incur expenses to protect or
preserve it. This is called an agency of necessity. Hence, in the above case the Salvor had implied authority from the cargo
owner to take care of the cargo. They acted as agents of necessity on behalf of the cargo owner. Cargo owner were duty-
bound towards salvor. Salvor is entitled to recover the agreed sum from Mr. Shiv and not from the ship owner, as a lien on the
goods.

CA DEEPIKA RATHI 32
Question 41 : Shweta and Mira are very good friends. Shweta bailed her jewellery with Mira on the condition to
safeguard it in a bank’s safe locker. However, Mira kept it in safe locker at her residence, where she usually keeps her own
jewellery. After a month all jewellery was lost in a religious riot. Shweta filed a suit against Mira for recovery. Referring to
provisions of the Indian Contract Act, 1872, state whether Shweta will succeed. [MTP NOV 2022]
Answer 41 : According to section 152 of the Indian Contract Act, 1872, the bailee, in the absence of any special
contract, is not responsible for the loss, destruction or deterioration of the thing bailed, if he has taken reasonable care as
required under section 151.
In the given question, Shweta and Mira agreed to keep Shweta’s jewellery (bailed to Mira) at the Bank’s safe locker and not at
the latter’s residence (i.e. Mira’s residence). So, Mira is liable to compensate Shweta for her negligence to keep jewellery at
her (Mira’s) residence. Thus, Shweta will succeed in her claim.
Question 42 : As per the provisions of the Indian Contract Act, 1872, what is the meaning of :
i. Continuing guarantee
ii. Gratuitous Bailment [MTP NOV 2022]
Answer 42 :
i. Continuing guarantee: A guarantee which extends to a series of transaction is called a continuing guarantee. A surety’s
liability continues until the revocation of the guarantee The essence of continuing guarantee is that it applies not to a
specific number of transactions but to any number of transactions and makes the surety liable for the unpaid balance at
the end of the guarantee.

CA DEEPIKA RATHI 33
ii. Gratuitous Bailment: The word gratuitous means free of charge. So, a gratuitous bailment is one when the provider of
service does it gratuitously i.e. free of charge. Such bailment would be either for the exclusive benefits of bailor or bailee.
Question 43 : Ricky is the owner of electronics shop. Prisha reached the shop to purchase an air conditioner whose
compressor should be of copper. As Prisha wanted to purchase the air conditioner on credit, Ricky demand a guarantor for
such transaction. Mr. Shiv (a friend of Prisha) came forward and gave the guarantee for payment of air conditioner. Ricky sold
the air conditioner of a particular brand, misrepresenting that it is made of copper while it is made of aluminium. Neither
Prisha nor Mr. Shiv had the knowledge of fact that it is made of aluminium. On being aware of the facts, Prisha denied for
payment of price. Ricky filed the suit against Mr. Shiv. Explain with reference to the Indian Contract Act 1872, whether Mr. Shiv
is liable to pay the price of air conditioner? [MTP NOV 2022]
Answer 43 : As per the provisions of section 142 of the Indian Contract Act 1872, where the guarantee has been obtained
by means of misrepresentation made by the creditor concerning a material part of the transaction, the surety will be
discharged. Further according to provisions of section 134, the surety is discharged by any contract between the creditor and
the principal debtor, by which the principal debtor is released, or by any act or omission of the creditor, the legal
consequence of which is the discharge of the principal debtor.
In the given question, Prisha wanted to purchase air conditioner whose compressor should be of copper, on credit from Ricky.
Mr. Shiv has given the guarantee for payment of price. Ricky sold the air conditioner of a particular brand on misrepresenting
that it is made of copper while it is made of aluminium of which both Prisha & Mr. Shiv were unaware. After being aware of
the facts, Prisha denied for payment of price. Ricky filed the suit against Mr. Shiv for payment of price.
On the basis of above provisions and facts of the case, as guarantee was obtained by Ricky by misrepresentation of the facts,
Mr. Shiv will not be liable. He will be discharged from liability.

CA DEEPIKA RATHI 34
Question 44 : Explain whether the agency shall be terminated in the following cases under the provisions of the Indian
Contract Act, 1872:
(i) A gives authority to B to sell A's land, and to pay himself, out of the proceeds, the debts due to him from A.
Afterwards, A becomes insane.
(ii) A appoints B as A's agent to sell A's land. B, under the authority of A, appoints C as agent of B. Afterwards, A
revokes the authority of B but not of C. What is the status of agency of C? [MTP NOV 2022]
Answer 44 :
i. According to section 202 of the Indian Contract Act, 1872, where the agent has himself an interest in the property which
forms the subject matter of the agency, the agency cannot, in the absence of an express contract, be terminated to the
prejudice of such interest.
• In other words, when the agent is personally interested in the subject matter of agency, theagency becomes
irrevocable.
In the given question, A gives authority to B to sell A’s land, and to pay himself, out of the
proceeds, the debts due to him from A.
• As per the facts of the question and provision of law, A cannot revoke this authority, nor itcan be terminated by his
insanity.

CA DEEPIKA RATHI 35
ii. According to section 191 of the Indian Contract Act, 1872, a “Sub-agent” is a person employed by, and acting under the
control of, the original agent in the business of the agency.
• Section 210 provides that, the termination of the authority of an agent causes the termination (subject to the rules
regarding the termination of an agent’s authority) of the authority of all sub-agents appointed by him.
• In the given question, B is the agent of A, and C is the agent of B. Hence, C becomes a sub- agent.
• Thus, when A revokes the authority of B (agent), it results in termination of authority of sub - agent appointed by B
i.e. C (sub-agent).

CA DEEPIKA RATHI 36
Question 45 : Distinguish between a contract of Indemnity and a contract of Guarantee as per the Indian Contract Act,
1872. [MTP NOV 2022]
Answer 45 :
Point of distinction Contract of Indemnity Contract of Guarantee
Number of party/Parties to the there are only two parties namely the indemnifier there are three parties creditor,principal debtor and
contract [promisor] and the indemnified [promisee] surety.

Nature of liability The liability of the indemnifieris primary and The liability of the surety is secondary and conditional as
unconditional. the primary liability is that of the principal debtor.

Time of liability The liability of the indemnifier arises only on the The liability arises only on the non performance of an
happening ofa contingency. existing promise or non-payment of anexisting debt.

Time to act The indemnifier need not act atthe request of The surety acts at the request ofprincipal debtor.
indemnity holder
Right to sue thirdparty indemnifier cannot sue a third party for loss in his surety can proceed against principal debtor in his own right
own name as there is no privity of contract. Such a because he gets all the right of a creditor after discharging
right would arise only if there is an assignment in his the debts.
favour.

Purpose Reimbursement of loss For the security of the creditor

Competency tocontract All parties must be competentto contract In the case of a contract of guarantee, where a minor is a
principal debtor, the contract is still valid.

CA DEEPIKA RATHI 37
Question 46 : Vishal bailed 50 kg of high quality sugar to Naresh, who owned a kirana shop, promising to give Rs.200
at the time of taking back the bailed goods. When Naresh was not at shop, his employee, unaware of bailed sugar of
Vishal, mixed the 50 kg of sugar belonging to Vishal with the sugar in the shop and packaged it for sale. This came to light
only when Vishal came asking for the sugar he had bailed with Naresh, as the price of the specific quality of sugar had
trebled. What is the remedy available to Vishal as per the provisions of the Indian Contract Act, 1872? [RTP NOV 2022]
Answer 46 :
According to section 157 of the Indian Contract Act, 1872, if the bailee, without the consent of the bailor, mixes the goods
of the bailor with his own goods, in such a manner that it is impossible to separate the goods bailed from the other goods
and deliver them back, the bailor is entitled to be compensated by the bailee for the loss of the goods.
In the given question, Naresh’s employee mixed high quality sugar bailed by Vishal and then packaged it for sale. The sugars
when mixed cannot be separated. As Naresh’s employee has mixed the two kinds of sugar, he (Naresh) must compensate
Vishal for the loss of his sugar.

CA DEEPIKA RATHI 38
Question 47 : X has made an agency agreement with Y to authorize him to purchase goods on the behalf of X for the
year 2020 only. The agency agreement was signed by both and it contains all the terms and conditions for the agent. It has a
condition that Y is allowed to purchase goods maximum upto the value of Rs.10 lakhs only. In the month of April 2020, Y
has purchased a single item of Rs.12 lakhs from Z as an agent of X. The market value of the item purchased was R s . 14 lakhs
but a discount of R s . 2 lakhs was given by Z. The agent Y has purchased this item due to heavy discount offered and the
financially benefit to X
After delivery of the item Z has demanded the payment from X as Y is the agent of X. But X denied to make the payment
stating that Y has exceeded his authority as an agent therefore he is not liable for this purchase. Z has filed a suit against X
for payment.
Decide whether Z will succeed in his suit against X for recovery of payment as per provisions of The Indian Contract Act,
1872. [NOV 2020, 3 Marks]
Answer 47 : An agent does all acts on behalf of the principal but incurs no personal liability. The liability remains that of
the principal unless there is a contract to the contrary. An agent also cannot personally enforce contracts entered into by him
on behalf of the principal. In the light of section 226 of the Indian Contract Act, 1872, Principal is considered to be liable for
the acts of agents which are within the scope of his authority. Further section 228 of the Indian Contract Act, 1872 states
that where an agent does more than he is authorised to do, and what he does beyond the scope of his authority cannot be
separated from what is within it, the principal is not bound to recognise the transaction.
In the given case, the agency agreement was signed between X and Y, authorizing Y to purchase goods maximum upto the
value of R s . 10 lakh. But Y purchased a single item of Rs.12 lakh from Z as an agent of X at a discounted rate to
financially benefit to X.
CA DEEPIKA RATHI 39
On demand of payment by Z, X denied saying that Y has exceeded his authority therefore he is not liable for such
purchase. Z filed a suit against X for payment.
As said above, liability remains that of the principal unless there is a contract to the contrary. The agency agreement clearly
specifies the scope of authority of Y for the purchase of goods, however he exceeded his authority as an agent. Therefore,
in the light of section 228 as stated above, since the transaction is not separable, X is not bound to recognize the transaction
entered between Z and Y, and therefore may repudiate the whole transaction. Hence, Z will not succeed in his suit against X
for recovery of payment.
Question 48 :
i. Mr. CB was invited to guarantee an employee Mr. BD who was previously dismissed for dishonesty by the same
employer. This fact was not told to Mr. CB. Later on, the employee embezzled funds. Whether CB is liable for the
financial loss as surety under the provisions of the Indian Contract Act, 1872?
ii. Mr. X agreed to give a loan to Mr. Y on the security of four properties. Mr. A gave guarantee against the loan. Actually Mr.
X gave a loan of smaller amount on the security of three properties. Whether Mr. A is liable as surety in case Mr. Y failed
to repay the loan? [NOV 2020, 3 Marks]
Answer 48 :
i. As per section 143 of the Indian Contract Act, 1872, any guarantee which the creditor has obtained by means of keeping
silence as to material circumstances, is invalid. In the given instance, Mr. CB was invited to give guarantee of an
employee Mr. BD to the same employer who previously dismissed Mr. BD for dishonesty.

CA DEEPIKA RATHI 40
 This fact was not told to Mr. CB. Here, keeping silence as to previous dismissal of Mr. BD for dishonesty is a material
fact and if Mr. BD later embezzled the funds of the employer, Mr. CB will not be held liable for the financial loss as
surety since such a contract of guarantee entered is invalid in terms of the above provisions.
ii. As per the provisions of section 133 of the Indian Contract Act, 1872, any variance, made without the surety’s
consent, in the terms of the contract between the principal [debtor] and the creditor, discharges the surety as to
transactionssubsequent to the variance.
In the given instance, the actual transaction was not in terms of the guarantee given by Mr. A. The loan amount as well
as the securities were reduced without the knowledge of the surety.
So, accordingly, Mr. A is not liable as a surety in case Y failed to repay the loan.

Question 49 : Radheshyam borrowed a sum of Rs.50,000 from a Bank on the security of gold on 1.07.2019 under an
agreement which contains a clause that the bank shall have a right of particular lien on the gold pledged with it.
Radheshyam thereafter took an unsecured loan of Rs.20,000 from the same bank on 1.08.2019 for three months. On
30.09.2019 he repaid entire secured loan of Rs.50,000 and requested the bank to release the gold pledged with it. The Bank
decided to continue the lien on the gold until the unsecured loan is fully repaid by Radheshyam. Decide whether the
decision of the Bank is valid within the provisions of the Indian Contract Act, 1872 ? [JAN 2021, 4 Marks]

CA DEEPIKA RATHI 41
Answer 49 : General lien of bankers: According to section 171 of the Indian Contract Act, 1872, bankers, factors,
wharfingers, attorneys of a High Court and policy brokers may, in the absence of a contract to the contrary, retain, as a security
for a general balance of account any goods bailed to them; but no other persons have a right to retain, as a security for such
balance, goods bailed to them, unless there is an express contract to the effect.
Section 171 empowers the banker with general right of lien in absence of a contract whereby it is entitled to retain the goods
belonging to another party, until all the dues are discharged. Here, in the first instance, the banker under an agreement has a
right of particular lien on the gold pledged with it against the first secured loan of Rs . 50,000/-, which has already been
fully repaid by Radheshyam. Accordingly, Bank’s decision to continue the lien on the gold until the unsecured loan of Rs.
20,000/- (which is the second loan) is not valid.
Question 50 : Explain whether the agency shall be terminated in the following cases under the provisions of the Indian
Contract Act, 1872 :
i. A gives authority to B to sell A's land, and to pay himself, out of the proceeds, the debts due to him from A. Afterwards, A
becomes insane.
ii. A appoints B as A's agent to sell A's land. B, under the authority of A, appoints C as agent of B. Afterwards, A revokes the
authority of B but not of C. What is the status of agency of C ? [JAN 2021, 4 Marks]
Answer 50 :
i. According to section 202 of the Indian Contract Act, 1872, where the agent has himself an interest in the property which
forms the subject matter of the agency, the agency cannot, in the absence of an express contract, be terminated to the
prejudice of such interest.

CA DEEPIKA RATHI 42
 In other words, when the agent is personally interested in the subject matter of agency, the agency becomes
irrevocable.
In the given question, A gives authority to B to sell A’s land, and to pay himself, out of the proceeds, the debts due to
him from A.
As per the facts of the question and provision of law, A cannot revoke this authority, nor it can be terminated by his
insanity.
ii. According to section 191 of the Indian Contract Act, 1872, a “Sub-agent” is a person employed by, and acting under the
control of, the original agent in the business of the agency.
Section 210 provides that, the termination of the authority of an agent causes the termination (subject to the rules
regarding the termination of an agent’s authority) of the authority of all sub-agents appointed by him.
In the given question, B is the agent of A, and C is the agent of B. Hence, C becomes a sub- agent.
Thus, when A revokes the authority of B (agent), it results in termination of authority of sub-agent appointed by B i.e. C
(sub-agent).

CA DEEPIKA RATHI 43
Question 51 : Satya has given his residential property on rent amounting to Rs.25,000 per month to Tushar. Amit became
the surety for payment of rent by Tushar. Subsequently, without Amit's consent, Tushar agreed to pay higher rent to Satya.
After a few months of this, Tushar defaulted in paying the rent.
i. Explain the meaning of contract of guarantee according to the provisions of the Indian Contract Act, 1872.
ii. State the position of Amit in this regard. [JAN 2021, 4 Marks]
Answer 51 :
i. Contract of guarantee: As per the provisions of section 126 of the Indian Contract Act, 1872, a contract of guarantee is a
contract to perform the promise made or discharge the liability, of a third person in case of his default.
Three parties are involved in a contract of guarantee:
Surety- person who gives the guarantee,
Principal debtor- person in respect of whose default the guarantee is given,
Creditor- person to whom the guarantee is given
ii. According to the provisions of section 133 of the Indian Contract Act, 1872, where there is any variance in the terms of
contract between the principal debtor and creditor without surety’s consent, it would discharge the surety in respect of
all transactions taking place subsequent to such variance.
iii. In the instant case, Satya (Creditor) cannot sue Amit (Surety), because Amit is discharged from liability when, without his
consent, Tushar (Principal debtor) has changed the terms of his contract with Satya (creditor). It is immaterial whether
the variation is beneficial to the surety or does not materially affect the position of the surety.

CA DEEPIKA RATHI 44
Question 52 : Paul (minor) purchased a smart phone on credit from a mobile dealer on the surety given by Mr. Jack, (a
major). Paul did not pay for the mobile. The mobile dealer demanded the payment from Mr. Jack because the contract
entered with Paul (minor) is void. Mr. Jack argued that he is not liable to pay the amount since Paul (Principal Debtor) is not
liable. Whether the argument is correct under the Indian Contract Act, 1872?
What will be your answer if Jack and Paul both are minor? [JULY 2021, 4 Marks]
Answer 52 : In the case of a contract of guarantee, where a minor is a principal debtor, the contract is still valid.
In the given question, the contract is a valid contract and Jack (major) shall be liable to pay the amount even if Paul
(Principal debtor) is not liable (as Paul i s minor).
If both Jack and Paul are minors then the agreement of guarantee is void because the surety as well as the principal debtor
are incompetent to contract.

CA DEEPIKA RATHI 45
Question 53 : Mr. Stefen owns a chicken firm near Gurgaon, where he breeds them and sells eggs and live chicken to
retail shops in Gurgaon. Mr. Flemming also owns a similar firm near Gurgaon, doing the same business. Mr. Flemming had to
go back to his native place in Australia for one year. He needed money for travel so he had pledged his firm to Mr. Stefen for
one year and received a deposit of ` 25 lakhs and went away. At that point of time, stock of live birds were 100,000 and eggs
10,000. The condition was that when Flemming returns, he will repay the deposit and take possession of his firm with live
birds and eggs.
After one year Flemming came back and returned the deposit. At that time there were 109,000 live birds (increase is due to
hatching of eggs out of 10,000 eggs he had left), and 15,000 eggs.
Mr. Stefen agreed to return 100,000 live birds and 10,000 eggs only.
State the duties of Mr. Stefen as Pawnee and advise Mr. Flemming about his rights in the given case.[JULY 2021, 4 Marks]
Answer 53 : According to section 163 of the Indian Contract Act, 1872, in the absence of any contract to the contrary, the
bailee is bound to deliver to the bailor, or according to his directions, any increase or profit which may have accrued from the
goods bailed.
In the given question, when Mr. Flemming returned from Australia there were 1,09,000 live birds and 15,000 eggs (1,00,000
birds and 10,000 eggs were originally deposited by Mr. Flemming). Mr. Stefen agreed to return 1,00,000 live birds and 10,000
eggs only and not the increased number of live birds and eggs.
In the light of the provision of law and facts of the question, following are the answers:
Duties of Mr. Stefen: Mr. Stefen (pawnee) is bound to deliver to Mr. Flemming (pawnor), any increase or profit (9,000 live
birds and 5,000 eggs) which has occurred from the goods bailed (i.e the live birds and eggs).

CA DEEPIKA RATHI 46
Right of Mr. Flemmimg: Mr. Flemming is entitled to recover from Pawnee any increase in goods so pledged.

Question 54 : A rented his house to B on lease for 3 years. The lease agreement is terminable on 3 month notice by either
party. C, the son of A, being in need of a separate house to live, served a notice on B, without any authority, to vacate the
house within a month and requested his father A to ratify his action. Examine whether it shall be valid for A to ratify the
action of C taking into account the provisions of the Indian Contract Act, 1872?
[JULY 2021, 4 Marks]
Answer 54 : As per section 200 of the Indian contract Act, 1872, an act done by one person on behalf of another,
without such other person’s authority, which, if done with authority, would have the effect of subjecting a third person to
damages, or of terminating any right or interest of a third person, cannot, by ratification, be made to have such effect.
In the given instance, A rented his house to B on lease for 3 years. The lease agreement was terminable on three months’
notice. C, son of A, gives notice of termination to B, without any authority, to vacate the house within a month. Also
requested A to ratify his action.
Here by the act of C, the interest of B is affected, therefore the principle of ratification does not apply. Hence, it’s not valid
for A to ratify the action of C, thereby causing the notice to be binding on B.

CA DEEPIKA RATHI 47
Question 55 : Due to urgent need of money amounting to ` 3,00,000, Pawan approached Raman and asked him for the
money. Raman lent the money on the guarantee of Suraj, Tarun and Usha. Pawan makes default in payment and Suraj pays
full amount to Raman. Suraj, afterwards, claimed contribution from Tarun and Usha refused to contribute on the basis that
there is no contract between Suraj and him. Examine referring to the provisions of the Indian Contract Act, 1872, whether
Tarun can escape from his liability. [DEC 2021, 4 Marks]
Answer 55 : Equality of burden is the basis of Co-suretyship. This is contained in section 146 of the Indian Contract Act,
1872, which states that “when two or more persons are co-sureties for the same debt, or duty, either jointly, or severally and
whether under the same or different contracts and whether with or without the knowledge of each other, the co- sureties in
the absence of any contract to the contrary, are liable, as between themselves, to pay each an equal share of the whole debt,
or of that part of it which remains unpaid by the principal debtor’’.
Accordingly, on the default of Pawan in payment, Tarun cannot escape from his liability. All the three sureties Suraj, Tarun
and Usha are liable to pay equally, in absence of any contract between them.

CA DEEPIKA RATHI 48
Question 56 : Shyam, at the request of Govind, sells goods which were, in the possession of Govind. However, Govind had
no right to dispose of such goods. Shyam did not know this and handed over the proceed of the sale to Govind. Afterwards,
Manohar, who was the true owner of the goods, sued Shyam and recovered the value of the goods. In the light of the
provisions of the Indian Contract Act,1872, answer the following questions:
i. Is Govind liable to indemnify Shyam for his payment to Manohar?
ii. What will be the liability of Govind if the goods is a prohibited drug? [DEC 2021, 4 Marks]
Answer 56 : According to section 178 of the Indian Contract Act, 1872, where a mercantile agent is, with the consent of
the owner, in possession of goods or the documents of title to goods, any pledge made by him, when acting in the ordinary
course of business of a mercantile agent, shall be as valid as if he were expressly authorised by the owner of the goods to
make the same; provided that the pawnee acts in good faith and has not at the time of the pledge notice that the Pawnor
has no authority to pledge.
It is also to be noted that:
1. The possession of goods must be with the consent of the owner. If possession has been obtained dishonestly or by a
trick, a valid pledge cannot be effected.
2. The pledgee should have no notice of the pledger's defect of title. If the pledgee knows that the pledger has a defective
title, the pledge will not be valid.
i. In the given question, Shyam had no notice of the Govind’s defect of title. He acted in ordinary course of business of a
mercantile agent considering Govind as owner of the good and genuinely handed over the proceed of the sale to him.
Therefore, said transaction is invalid.

CA DEEPIKA RATHI 49
 Thus, Govind shall be liable to indemnify Shyam for his payment to Manohar.
ii. Govind shall not be liable to indemnify Shyam as selling of prohibited drugs is a prohibited act and against the public
policy.

Question 57 : Alpha Motor Ltd. agreed to sell a bike to Ashok under hire-purchase agreement on guarantee of Abhishek.
The Terms were: hire-purchase price Rs.96,000 payable in 24 monthly instalments of ` 8,000 each. Ownership to be
transferred on the payment of last instalment. State whether Abhishek is discharged in each of the following alternative
case under the provisions of the Indian Contract Act,1872:
i. Ashok paid 12 instalments but failed to pay next two instalments. Alpha Motor Ltd. sued Abhishek for the payment of
arrears and Abhishek paid these two instalments i.e. 13th and 14th. Abhishek then gave a notice to Alpha Motor Ltd. to
revoke hisguarantee for the remaining months
ii. If after 15th months, Abhishek died due to COVID-19. [DEC 2021, 4 Marks]
Answer 57 : According to section 130 of the Indian Contract Act, 1872, the continuing guarantee may at any time be
revoked by the surety as to future transactions by notice to the creditors. Once the guarantee is revoked, the surety is not
liable for any future t ransaction however he is liable for all the transactions that happened before the notice was given.
A specific guarantee can be revoked only if liability to principal debtor has not accrued.

CA DEEPIKA RATHI 50
i. In the given question Ashok paid 12 instalments (out of total 24 monthly instalments), but failed to pay next two
instalments. Abhishek (guarantor) paid the 13th and 14th installments but then he revoked guarantee for the remaining
months. Thus, Abhishek is not liable for installments that was made after the notice, but he is liable for installments
made before the notice (which he had paid i.e. 13th and 14th installments).
ii. According to section 131 of the Indian Contract Act, 1872, in the absence of any contract to the contrary, the death of
surety operates as a revocation of a continuing guarantee as to the future transactions taking place after the death of
surety. However, the surety’s estate remains liable for the past transactions which have already taken place before the
death of the surety.
In the given question, Abhishek (guarantor) died after 15th month. This will operate as a revocation of a continuing
guarantee as to the future transactions taking place after the death of surety (i.e. Abhishek). However, the Abhishek’s
estate remains liable for the past transactions (i.e. 15th month and before) which have already taken place before the
death of the surety.

CA DEEPIKA RATHI 51
Question 58 : Ramu has given authority to Prem to buy certain goods at the market rate. Prem buys the goods at a higher
rate than the market rate. However, Ramu accepted the purchase in spite of higher rate. Afterwards, Ramu comes to know that
the goods purchased belonged to Prem himself. Decide, whether Ramu is bound by ratification done? [MAY 2022, 2 Marks]
Answer 58 : According to section 198 of the Indian Contract Act, 1872, no valid ratification can be made by a person whose
knowledge of the facts of the case is materially defective.
In the instant case, Ramu has given authority to Prem to buy certain goods at the market rate. Prem buys the goods at a
higher rate than the market rate. However, Ramu accepted the purchase inspite of higher rate. Afterwards, Ramu comes to
know that the goods belonged to Prem himself. The ratification is not binding on Ramu.

Question 59 : Hari, authorises Bharat, a merchant in Mumbai, to recover dues from Bankey & Co. Bharat instructs
Deepak, a solicitor, to take legal proceedings against Bankey & Co., for recovery of the money. Explain the legal position of
Deepak, referring provisions of the Indian Contract Act, 1872, related to agency. [MAY 2022, 2 Marks]
Answer 59 : As per section 194 of the Indian Contract Act, 1872, where an agent, holding an express or implied authority
to name another person to act for the principal in the business of the agency, has named another person accordingly, such
person shall be an agent of the principal for such part of the business of the agency as is entrusted to him.
In the instant case, Hari, authorizes Bharat, a merchant in Mumbai, to recover dues from Bankey & Co. Bharat instructs
Deepak, a solicitor, to take legal proceedings against Bankey & Co. for recovery of the money.
Here, Deepak, a solicitor, is a substituted agent to act for the principal in the business of the agency, to take legal proceedings
for recovering of money.

CA DEEPIKA RATHI 52
Question 60 : Examine the validity of the following statements under the provisions of the IndianContract Act, 1872.
i. Creditor should proceed legal action first against the Principal Debtor and lateragainst the surety.
ii. A guarantee which extends to a single debt/ specific transaction is called continuing Guarantee.
iii. Variation which is not material and beneficial to the surety will not discharge him ofhis liability.
iv. If the bailee does not use the goods according to the terms and conditions of bailment, the contract of bailment
becomes void. [MAY 2022, 4 Marks]
Answer 60 :
i. Creditor should proceed legal action first against the Principal Debtor andlater against the surety: Invalid
Reasoning: As per Section 128 of the Indian Contract Act, 1872, the surety’s liability is co-extensive with that of Principal
debtor. It’s not mandatory that creditor should proceed legal action in case of default, first against the Principal debtor
and later against the surety. It is on creditor to start action first either against the Principal debtor or the surety.
ii. A guarantee which extends to a single debt/ specific transaction is calledcontinuing Guarantee: Invalid
Reasoning: Continuing Guarantee [Section 129 of the Indian Contract Act, 1872] - A guarantee which extends to a series
of transaction is called a continuing guarantee. It applies not to a specific number of transactions but to any number of
transactions and makes the surety liable for the unpaid balance at the end of the guarantee.
iii. Variation which is not material and beneficial to the surety will not dischargehim of his liability: Valid
Reasoning: Based on the principle held in the M.S Anirudhan v Thomco’s Bank Ltd. AIR 1963 SC 746 that the surety’s
liability will not be discharged where the alteration is for beneficial to him and is not substantial in nature.

CA DEEPIKA RATHI 53
iv. If the bailee does not use the goods according to the terms and conditions of bailment, the contract of bailment becomes
void: Invalid
Reasoning: As per Section 153, a contract of bailment is voidable at the option of the bailor, if the bailee does not use
the goods according to the terms and conditions of bailment.

Question 61 : Mr. Truth deposited 100 bags of groundnut in the factory of Mr. False for safe keeping. Mr. False mixed the
groundnut bags with the other groundnut bags in the factory with the consent of Mr. Truth and consumed it to produce edible
oil.
i. Whether Mr. Truth is entitled to claim his share in the edible oil produced under the provisions of the Indian Contact Act,
1872?
ii. What will be the consequences in case the groundnut bags were mixed without the consent of Mr. Truth under the
above said Act? [MAY 2022, 4 Marks]
Answer 61 : The given question is based on section 155, 156 & 157 of the Indian Contract Act, 1872.
i. W.r.t. this part of the question, Mr. Truth deposited his ground nut bags for safe keeping in the factory of the Mr. False. He
mixed the ground nut bags of Mr. Truth with the other ground nut bags lying in the factory with the consent of Mr. Truth
and consumed the same for producing edible oils.
According to section 155 of the Indian Contract Act, 1872, if the Bailee, mixes the goods bailed with his own goods, with
the consent of the bailor, both the parties shall have an interest in proportion to their respective shares in the mixture
thus produced.

CA DEEPIKA RATHI 54
 Accordingly, Mr. Truth is entitled to claim his share in the edible oil produced
ii. According to section 156 & 157 of the Indian Contract Act, 1872, where the bailee, without the consent of the bailor, mixes
the goods bailed with his own goods and the goods can be separated or divided, the property in the goods remains in the
parties respectively; but the bailee is bound to bear the expense of separation or division and any damage arising from
the mixture.
In the given case, the goods were mixed without consent of Mr. Truth, and if such mixture can be separated, then Mr.
False will bear the expense of separation and the damage, if any, arising from mixture.
However, in the light of given facts, as mixture of goods were consumed to produce oil, and so it cannot be separated
and therefore Mr. False shall be liable to compensate Mr. Truth.

CA DEEPIKA RATHI 55
THE NEGOTIABLE INSTRUMENTS
ACT, 1881

MEANING OF NEGOTIABLE INSTRUMENTS

Negotiable Instruments is an instrument (the word instrument means

a document) which is freely transferable (by customs of trade) from
one person to another by mere delivery or by indorsement and
delivery.
The property in such an instrument passes to a bonafide transferee
for value.

The Act does not define the term ‘Negotiable Instruments’. However,
Section 13 of the Act provides for only three kinds of negotiable
instruments namely, bills of exchange, promissory notes and
cheques, payable either to order or bearer.
 Essential Characteristics of Negotiable Instruments
1. It is necessarily in writing.
2. It should be signed.
3. It is freely transferable from one person to another.
4. Holder’s title is free from defects.
5. It can be transferred any number of times till its satisfaction.
6. Every negotiable instrument must contain an unconditional promise
or order to pay money. The promise or order to pay must consist of
money only.
7. The sum payable, the time of payment, the payee, must be certain.
8. The instrument should be delivered. Mere drawing of instrument does
not create liability.
PROMISSORY NOTE

Meaning

According to section 4 of the NI Act, 1881, “A 'promissory note' is an

instrument in writing (not being a bank-note or a currency-note)
containing an unconditional undertaking signed by the maker, to pay a
certain sum of money only to, or to the order of, a certain person, or
to the bearer of the instrument.”
 Parties to promissory note
1. Maker: The person who makes the promise to pay is called the Maker.
He is the debtor and must sign the instrument
2. Payee: Payee is the person to whom the amount on the note is
payable.
 Essential Characteristics of a Promissory Note

a. In writing- An oral promise to pay is not sufficient There must be an

express promise to pay. Mere acknowledgment of debt is
insufficient.
Example 1: I acknowledge myself to be indebted to B in ` 1,000, to
be paid on demand, for value received. (Valid promissory note as the
promise to pay is definite)
Example 2: “Mr. B I.O.U ` 1,000.” – Invalid promissory note as there
is no promise to pay. It is just an acknowledgement of debt.

b. The promise to pay should be definite and unconditional. Therefore,

instruments payable on performance or non-performance of a
particular act or on the happening or non-happening of an event, are
not promissory notes. However, the promise to pay may be subject
to a condition, which according to the ordinary experience of mankind,
is bound to happen.
Example 3: I promise to pay B ` 500 seven days after my marriage
with C. (the promissory note is invalid as marriage with C may or may
not happen.)
Example 4: I promise to pay B ` 500 on D’s death- as the death of D
is certain, promise in unconditional. Thus, the promissory note is valid.
Example 5: I promise to pay B ` 500 on D’s death, provided D leaves
me enough to pay that sum. Invalid promissory note as promise is
dependent on D leaving behind money which is not certain.

c. A promissory note must be signed by the maker otherwise it is

incomplete and ineffective.
d. Promise to pay money only.
Example 6: I promise to pay B ` 500 and to deliver to him my black
horse on 1st January next. – It is not a valid promissory note, as the
promisor needs to deliver its black horse which is not money.

e. Promise to pay a certain sum

Example 7: “I promise to pay B ` 500 and all other sums which shall
be due to him.”- Promissory note invalid as the amount payable is not
certain.

f. The maker and payee must be certain, definite and different

persons. A promissory note cannot be made payable to the bearer
[Section 31 of the Reserve Bank of India Act, 1934 (RBI Act)]. Only
the Reserve Bank or the Central Government can make or issue a
promissory note 'payable to bearer'.

g. Stamping: A promissory note must be properly stamped in accordance

with the provisions of the Indian Stamp Act and such stamp must be
duly cancelled by maker's signatures or initials or otherwise

BILLS OF EXCHANGE

A “bill of exchange” is an instrument in writing containing an

unconditional order, signed by the maker, directing a certain person
to pay a certain sum of money only to, or to the order of, a certain
person or to the bearer of the instrument.
 Parties to the bill of exchange

a. Drawer: The maker of a bill of exchange.

b. Drawee: The person directed by the drawer to pay is called the
'drawee'. He is the person on whom the bill is drawn. On acceptance
of the bill, he is called an acceptor and is liable for the payment of
the bill. His liability is primary and unconditional.
c. Payee: The person named in the instrument, to whom or to whose order
the money is, by the instrument, directed to be paid
 Essential characteristics of bill of exchange
(a) It must be in writing.
(b) Must contain an express order to pay.
(c) The order to pay must be definite and unconditional.
(d) The drawer must sign the instrument.
(e) Drawer, drawee, and payee must be certain. All these three parties
may not necessarily be three different persons. One can play the role
of two. But there must be two distinct persons in any case. As per
Section 31 of RBI Act, 1934, a bill of exchange cannot be made
payable to bearer on demand.
(f) The sum must be certain.
(g) The order must be to pay money only.
(h) It must be stamped
 CHEQUE [SECTION 6]

A “cheque” is a bill of exchange drawn on a specified banker and not

expressed to be payable otherwise than on demand and it includes the
electronic image of a truncated cheque and a cheque in the electronic
form.

Payable on demand means- It should be payable whenever the holder

chooses to present it to the drawee (the banker).
The expression “Banker” includes any person acting as a banker and
any post office saving bank [Section 3]

Explanation: For the purposes of this section, the expressions-

(a) Cheque in the electronic form-means a cheque drawn in electronic

form by using any computer resource, and signed in a secure system
with a digital signature (with/without biometric signature) and
asymmetric crypto system or electronic signature, as the case may
be;
(b) “a truncated cheque” means a cheque which is truncated during 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.

 Whereas a cheque is also a bill of exchange but is drawn on a banker

and payable on demand
 Parties to Cheque

1. Drawer: The person who draws a cheque i.e., makes the cheque
(Debtor). His liability is primary and conditional.
2. Drawee: The specific bank on whom cheque is drawn. He makes the
payment of the cheque. In case of cheque, drawee is always banker.
3. Payee: The person named in the instrument (i.e., the person in whose
favour cheque is issued), to whom or to whose order the money is, by
the instrument, directed to be paid, is called the payee. The payee
may be the drawer himself or a third party.

Essential Characteristics of a cheque

According to the definition of cheque under section 6, a cheque is a
species of bill of exchange. Thus, it should fulfil:
a. all the essential characteristics of a bill of exchange
b. Must be drawn on a specified banker.
Note: These two additional features
c. It must be payable on demand. distinguish a cheque from bill. Thus,all
cheques are bills while all bills are not
cheques.
 CROSSING OF CHEQUES [SECTION 123 – 131]
There are two types of cheques,

 open cheques and crossed cheques

 A cheque which can be presented to the banker and can be

paid at the counter of the bank is called an open cheque. If the
drawer loses an open cheque, the finder of it may go to the bank
and get payment unless its payment has been stopped.

 When a cheque bears across its face two parallel transverse

lines, the cheque is said to be crossed. The lines are usually
drawn on the left hand top corner but may be drawn anywhere.

Meaning of crossing: Crossing of a cheque means an instruction to

the drawee i.e., the paying bank that the payment is not to be made
at the counter but through a bank.

Objects of Crossing: A crossing is a warning to the bank not to

make payment of the crossed cheque over the counter. Crossing
operates as a caution to the paying banker.

i) Crossing affects the mode of payment of cheque- An open or

uncrossed cheque is payable to the payee or holder at the counter
of the bank. In such a case, if a wrong person takes away the payment
 of cheque, it is difficult to trace him.

ii) Crossing does not affect the transferability or negotiability of

cheque- a crossed cheque can be negotiated just the same way as
an open cheque, person acquiring a crossed cheque in good faith
becomes its holder in due course just as in case of open cheque.

iii) Crossing is a material alteration but crossing of cheque by the holder

does not in any way affect his rights in respect of cheques.

TYPES OF CROSSING:

(a) General Crossing: Where a cheque bears across its face two parallel,
transverse lines without any words or with words ‘and company’ or/and
‘not negotiable’ written in between these two parallel lines, it is called
general crossing. Where a cheque is crossed generally, the banker on
whom it is drawn shall not pay it otherwise than to a banker (Sec.
126)

(b) Special Crossing: where the lines of crossing bear the name of a
banker either with or without any additional words. The effect is that
its payment can be obtained only through particular banker whose
name appears between the lines.

(c) A/c payee crossing: When the words “A/C payee” or “A/C payee only”
are added to a general or special crossing, it is called restrictive
crossing. The effect of “Account payee” crossing is that the banker
 is supposed to collect the cheque on behalf of that payee only whose
name appears on the face of the cheque. Such a cheque can not be
endorsed.

(d) Not negotiable Crossing:

 This requires writing of words “not negotiable” in addition to the
two parallel lines. These words may be written inside or outside
these lines.
 The addition of the words not negotiable does not restrict the
further transferability of the cheque, but it entirely takes away
the main feature of negotiability, which is that a holder with a
defective title can give a good title to the subsequent holder in
due course.
 A cheque with such crossing is not negotiable but continues to
be transferable as before. Ordinarily, in a negotiable instrument,
if the title of the transferor is defective, the transferee, if he
is a HDC, will have a good title. When the words” not negotiable”
are written, even a HDC will get the same title as that of
transferor. Thus, if the title of the transferor is defective,
the title of transferee will also be so.

Who my cross? [Section 125]

A cheque may be crossed by the following parties:
(a) By Drawer: A drawer may cross it generally or specially.
(b) By Holder: A holder may cross an uncrossed cheque generally or
specially. If the cheque is crossed generally, the holder may cross
specially. If cheque crossed generally or specially, he may add words
 “not negotiable”.
(c) By Banker: A banker may cross an uncrossed cheque, or if a cheque is
crossed generally he may cross it specially to himself. Where a cheque
is crossed specially, the banker to whom it is crossed may again cross
it specially to another banker, his agent, for collection.

PROTECTION OF LIABILITY OF THE PAYING BANKER:

The banker who makes the payment of a crossed cheque is called the
paying banker.

(a) Cheque payable to order [Section 85(1)]: Where a cheque payable

to order purports to be indorsed by or on behalf of the payee, the
banker is discharged by payment in due course. The banker, in other
words, can debit his customers account even though the indorsement
by the payee might turn out to be forgery or the indorsement might
have been placed by the payee’s agent without his authority.

(b) Cheque payable to bearer [Section 85(2)]: As regards bearer

cheque, the rule is “once a bearer always a bearer”. A banker gets a
good discharge by payment in due course of the amount on a bearer
cheque to the holder of the cheque. It does not matter whether the
apparent holder is the owner of the cheque or not.

(c) Payment of cheque crossed generally: Where a cheque is crossed

generally, the banker on whom it is drawn shall not pay it otherwise
than to a banker.

(d) Payment of cheque crossed specially: Where a cheque is crossed

specially, the banker on whom it is drawn shall not pay it otherwise
than to the banker to whom it is crossed, or his agent for collection.
(e) Payment in due course of crossed cheque [Section 128]: Where the
banker on whom a crossed cheque is drawn has paid the same in due
course, the banker paying the cheque, and (in case such cheque has
come to the hands of the payee) the drawer thereof, shall
respectively be entitled to the same rights, and be placed in the same
position in all respects, as they would respectively be entitled to and
placed in if the amount of the cheque had been paid to and received
by the true owner thereof

(f) Payment of crossed cheque out of due course [Section 129]: Any
banker paying a cheque crossed generally otherwise than to a banker,
or a cheque crossed specially otherwise than to the banker to whom
the same is crossed, or his agent for collection, being a banker, shall
be liable to the true owner of the cheque for any loss he may sustain
owing to the cheque having been so paid.

EXCEPTION: Payment of a cheque on which drawer signatures were

forged: If any drawee banks made the payment on a cheque on which
drawer signatures were forged then such bank shall be liable to the
true owner. Thus, the paying banker shall be liable if it makes the
payment of the cheque on which drawers’ signature was forged.

PROTECTION OF LIABILITY OF THE COLLECTING BANKER

The bank which receives the payment of a crossed cheque on behalf of its customer is
known as the collecting banker.
Section 131- Non liability of banker receiving payment of cheque: A banker who has
in good faith and without negligence received payment for a customer of a cheque
crossed generally or specially to himself shall not, in case the title of the cheque proves
 defective, incur any liability to the true owner of the cheque by reason only of having
received such payment.

In order to avail such a protection, the banker needs to prove the following:
(a) That the banker had received the payment of crossed cheque
(b) That the collection was made by the bank on behalf of the customer
(c) That the collecting bank must have acted in good faith and without negligence.

ACCEPTOR AND ACCEPTOR FOR HONOR

ACCEPTOR AND ACCEPTOR FOR HONOUR

“Acceptor” [Section 7] - An acceptor is the drawee who has signed

his assent upon the bill and delivered it to the holder.

“Acceptor for honour” [Section 7] - When a bill of exchange has

been dishonoured by non-acceptance and any person accepts it for
honour of the drawer or of any indorsers, such person is called "an
Acceptor for honour".
The payment which he makes is known as “payment for honour. In
other words, it is an undertaking by a third party to accept and pay a
bill of exchange that was dishonored, either by non-acceptance or by
non- payment by the party on whom it was drawn. It is also called
acceptance supra protest.
How acceptance for honor must be made: A person desiring to
accept for honor must, [by writing on the bill under his hand], declare
that he accepts under protest the protested bill for the honor of the
drawer or of a particular indorser whom he names, or generally for
honor.
 Example 8: The acceptor for honor may write across the bill of
exchange “Accepted Supra Protest” or “Accepted for AB (the name
of drawee)”.

Essentials of valid acceptance for honor

1. The holder must consent to acceptance for honor. The holder cannot
be compelled to assent to acceptance for honor.
2. The bill must have been noted or protested for the non-acceptance or
for better security.
3. Acceptance for honor can be made by a person who is not already
liable on the bill.
4. It must be made by writing on the bill.
5. It must be for the whole amount due on the bill
6. Acceptance must be for the honor of any party already liable on the
bill.
7. Acceptance for honor must be made before bill is overdue
8. Stranger paying for honor must, before payment, declare before a
Notary Public the party for whose honor he pays and the Notary Public
must have recorded such a declaration.
 Rights and liabilities of an acceptor for honour (Sections 111 & 112)
1. Acceptor for honor binds himself to all the subsequent parties to pay
the amount of the bill if the drawee does not pay.
2. The party for whose honor he accepts to pay the amount and all prior
parties are liable to compensate the acceptor for honor for all loss or
damage sustained by him in consequence of such acceptance. The
liability of an acceptor for honor is conditional and he is liable only
if the drawee fails to pay the bill.

The bill of exchange should be presented at its maturity to the drawee

for payment and it must be dishonoured by the drawee and noted or
protested for non-payment to charge an acceptor for honor.

HOLDER AND HOLDER IN DUE COURSE

“Holder” [Section 8] — the “holder” of a promissory note, bill of
exchange or cheque means—

 any person
 entitled in his own name to the possession thereof, and
 to receive or recover the amount due thereon from the parties
thereto.
Broadly speaking, a holder means the owner of a negotiable instrument.
What is required is a right to possession. A person in possession of an
instrument without having a right to possess cannot be called a holder.
Example : A person who finds or steals a bearer instrument or takes
an instrument under forged indorsement is not a holder. The reason is
that the holder of a negotiable instrument must have right to
receive or recover the money thereon from the parties thereto.
Example : An agent holding an instrument for his principal is not a
holder. The reason being that, although agent can receive payment
of the instrument, he has no right to sue on the instrument in his own
name.

“Holder in due course” [Section 9]— ”Holder in due course”

means—

any person
who for consideration
became the possessor of a promissory note, bill of exchange or
cheque (if payable to bearer), or the payee or indorsee thereof, (if
payable to order),
before the amount mentioned in it became payable, and
without having sufficient cause to believe that any defect existed
in the title of the person from whom he derived his title.

Example : A draws a cheque for ` 5,000 and hands it over to B by

way of gift. B is a holder but not a holder in due course as he does not
get the cheque for value and consideration. His title is good and
bonafide. As a holder he is entitled to receive ` 5000 from the bank
on whom the cheque is drawn.

Example : On a Bill of Exchange for ` 1 lakh, X’s acceptance to the

Bill is forged. ‘A’ takes the Bill from his customer for value and in good
faith before the Bill becomes payable. State with reasons whether ‘A’
can be considered as a ‘Holder in due course’ and whether he (A) can
receive the amount of the Bill from ‘X’.
Answer: According to section 9 of the Negotiable Instruments Act,
 1881, ‘holder in due course’ means any person who for consideration
becomes the possessor of a promissory note, bill of exchange or
cheque if payable to bearer or the payee or indorsee thereof, if
payable to order, before the amount in it became payable and without
having sufficient cause to believe that any defect existed in the title
of the person from whom he derived his title.
As ‘A’ in this case prima facie became a possessor of the bill for value
and in good faith before the bill became payable, he can be considered
as a holder in due course.
But where a signature on the negotiable instrument is forged, it
becomes a nullity. The holder of a forged instrument cannot enforce
payment thereon. A holder in due course is protected when there is
defect in the title. But he derives no title when there is entire absence
of title as in the case of forgery. Hence ‘A’ cannot receive the amount
on the bill.

ESSENTIALS TO BECOME HOLDER IN DUE COURSE (HDC):

a) The holder must have paid valuable consideration:

i) To become a holder in due course, a person must obtain a negotiable
instrument by paying valuable and lawful consideration for it.
ii) When given as a gift or has been inherited, the transferee cannot
be a holder in due course.
b) A holder must acquire the instrument before its maturity in order
to attain the status of holder in due course.
c) The holder must have obtained the instrument in good faith.
d) The instrument must be complete and regular on the face of it.
e) He must have received the instrument as a holder- i.e. A HDC may be
either payee, or the possessor (if the instrument is payable to
 bearer), or the indorsee (if the instrument is payable to order).

PRIVILEGES OF BEING A HOLDER IN DUE COURSE:

(i) In case of Inchoate Instrument: A person signing and delivering to
another a stamped but otherwise inchoate instrument (Inchoate
negotiable instrument means an incomplete instrument because the
amount is not filled.) is debarred from asserting, as against a holder
in due course, that the instrument has not been filled in accordance
with the authority given by him, the stamp being sufficient to cover
the amount (Section 20).
Example : A signs his name on a blank but stamped instrument which
he gives to B with an authority to fill up as a note for a sum of ` 3
000 only. But B fills it for ` 5,000. B then transfers it to C for a
consideration of 5000 who takes it in good faith. Here in the case, C
is entitled to recover the full amount of the instrument because he is
a holder in due course whereas B, being a holder cannot recover the
amount because he filled in the amount in excess of his authority.

(ii) In case of fictitious bill: In case a bill of exchange is drawn payable

to the drawer’s order in a fictitious name and is indorsed by the
same hand as the drawer’s signature, it is not permissible for acceptor
to allege as against the holder in due course that such name is
fictitious (Section 42)1.

(iii) In case of conditional instrument or ‘escrow’: In case a bill or note

is negotiated to a holder in due course, the other parties to the bill or
note cannot avoid liability on the ground that the delivery of the
instrument was conditional or for a special purpose only.

(iv) In case of instrument obtained by unlawful means or for unlawful

consideration; The person liable in a negotiable instrument cannot set
 up against the holder in due course the defenses that the instrument
had been lost or obtained from the former by means of an offence or
fraud or for an unlawful consideration (Section 58). Thus, a holder in
due course acquires a title free from all defects.

(v) In case original validity of the instrument is denied; No maker of a

promissory note, and no drawer of a bill or cheque and no acceptor
of a bill for the honour of the drawer shall, be permitted to deny the
validity of the instrument as originally made t o a holder in due
course (Section 120). In short, a holder in due course gets a good
title to the bill.

(vi) In case Payee’s capacity to indorse is denied: No maker of a

promissory note and no acceptor of a bill payable to order shall, , be
permitted to deny the payee’s capacity, at the date of the note or
bill, to indorse the same to a holder in due course (Section 121). In
short, a holder in due course gets a good title to the bill.

“Payment in due course” [Section 10]—”Payment in due course”

means payment in accordance with the apparent tenor of the
instrument in good faith and without negligence to any person in
possession thereof under circumstances which do not afford a
reasonable ground for believing that he is not entitled to receive
payment of the amount therein mentioned.
CLASSIFICATION OF NEGOTIABLEINSTRUMENTS

“Bearer instrument” and “order instrument” [Section 13]

Bearer Instrument: It is an instrument

 where the name of the payee is blank or
 where the name of payee is specified with the words “or bearer”
 or where the last indorsement is blank.
 Such instrument can be negotiated by mere delivery.

Order Instrument: It is an instrument

 which is payable to a person or
 Payable to a person or his order or
 Payable to order of a person or where the last indorsement is in full,
such instrument can be negotiated by indorsement and delivery.

“Inland instrument” and “Foreign instrument” [Sections 11 & 12]

A promissory note, bill of exchange or cheque drawn or made in India

 and made payable in, or drawn upon any person resident in India shall
be deemed to be an inland instrument.
Example : (i) A promissory note made in Kolkata and payable in
Mumbai.

(ii) A bill drawn in Varanasi on a person resident in Jodhpur (although

it is stated to be payable in Singapore)

“Foreign instrument”
Any such instrument not so drawn, made or made payable (as that of
Inland Instrument), shall be deemed to be foreign instrument. In
other words,

Liability of maker/ drawer of foreign bill

 In the absence of a contract to the country, the liability of the maker
or drawer of a foreign promissory note or bill of exchange or cheque is
regulated in all essential matters by the law of the place where he made
the instrument, and the respective liabilities of the acceptor and indorser
by the law of the place where the instrument is made payable (Section
134).

Example: A bill of exchange is drawn by A in Berkley where the rate of

interest is 15% and accepted by B payable in Washington where the rate
of interest is 6%. The bill is indorsed in India and is dishonoured. An
action on the bill is brought against B in India. He is liable to pay interest
at the rate of 6% only. But if A is charged as drawer, he is liable to pay
interest at 15%.

Inland instrument-when B.o.E/ P/N, Foreign instrument-when

Cheque B.o.E/ P/N, Cheque, IS NOT

drawn /made in India Drawn in India

made payable in/drawn

Made in India
upon person resident in
India

Made payable in
India

Inchoate and Ambiguous Instruments

Inchoate Instrument:
 It means an instrument that is incomplete in certain respects.
 The drawer/ maker/ acceptor/ indorser of a negotiable instrument
 may sign and deliver the instrument to another person in his
capacity leaving the instrument, either wholly blank or having written
on it the word incomplete. Such an instrument is called an inchoate
instrument and this gives a power to its holder to make it complete by
writing any amount either within limits specified therein or within the
limits specified by the stamp’s affixed on it.
 The person signing and delivering the inchoate instrument is liable
both to a holder and holder in due course. However, there is a
difference in their respective rights. The holder of such an
instrument cannot recover the amount in excess of the amount
intended to be paid by the signor. The holder in due course can,
however recover any amount on such instrument provided it is covered
by the stamp affixed on the instrument.

Ambiguous Instrument:
 Section 17 of the Act, reads as: “Where an instrument may be
construed either as a promissory note or bill of exchange, the holder
may at his election treat it as either, and the instrument shall be
thenceforward treated accordingly.“
 Thus, an instrument which is vague and cannot be clearly identified
either as a bill of exchange, or as a promissory note, is an ambiguous
instrument. In other words, such an instrument may be construed
either as promissory note, or as a bill of exchange.
 Section 17 provides that the holder may, at his discretion, treat it as
either and the instrument shall thereafter be treated accordingly.
Thus, after exercising his option, the holder cannot change that it is
the other kind of instrument.

Where amount is stated differently in figures and words [Section

18]

If the amount undertaken or ordered to be paid is stated differently

in figures and in words, the amount stated in words shall be the
amount undertaken or ordered to be paid.

Demand and Time Instrument

Demand Instruments (Section 19):

 A promissory note or bill of exchange in which no time for payment is
mentioned, is payable on demand.
 Bills and notes are payable either on demand or at a fixed future
time. Cheques are always payable on demand.
 A bill or promissory note is also payable on demand when it is
expressed to be payable on demand, or "at sight" or "presentment".
 The expression “after sight” means, in a promissory note, after
presentment for sight, and, in a bill of exchange after acceptance, or
noting for non-acceptance, or protest for non-acceptance.
 Time instrument (Section 22): A bill or note which is payable:

a) After a fixed period or

b) After sight or
c) On a specified day or
d) On the happening of an event which is certain to
e) happen is known as time instrument.

“AT SIGHT”, “ON PRESENTMENT”, “AFTER SIGHT” [SECTION

21]

In a promissory note or bill of exchange the expressions “at sight” and

“on presentment” means on demand.
The expression “after sight” means, in a promissory note, after
presentment for sight, and, in a bill of exchange after acceptance, or
noting for non-acceptance, or protest for non-acceptance.

“MATURITY OF NEGOTIABLE INSTRUMENT”

Where bill or note is payable at a fixed period after sight, the

question of maturity becomes important. The maturity of a note or
bill is the date on which it falls due.

Days of grace: A note or bill, which is not expressed to be payable

on demand, at sight or on presentment; is at maturity on the third day
after the day on which it is expressed to be payable. Thus, a time
instrument payable after sight is allowed three days grace period
(Section 22).
 Calculation of maturity [Section 23]:

 In calculating the date at which a promissory note or bill of exchange,

made payable at stated number of months after date or after sight,
or after a certain event, is at maturity, the period stated shall be held
to terminate on the day of the month, which corresponds with the day
on which the instrument is dated, or presented for acceptance or
sight, or noted for non- acceptance, or protested for non-acceptance,
or the event happens or, where the instrument is a bill of exchange
made payable at stated number of months after sight and has been
accepted for honor, with the day on which it was so accepted

 If the month in which the period would terminate has no

corresponding day, the period shall be held to terminate on the last
day of such month.

Example 17:
(a) A negotiable instrument dated 29th January, 2019, is made payable at
one month after date. The instrument is at maturity on the third day
after the 28th February, 2019, i,e, on 3rd March 2019.
(b) A negotiable instrument, dated 30th August, 2019, is made payable
three months after date. The instrument is at maturity on the 3rd
December, 2019.
(c) A promissory note or bill of exchange, dated 31st August, 2019, is
made payable three months after date. The instrument is at maturity
on the 3rd December, 2019.
Calculating maturity of bill or note payable so many days after date or
sight [Section 24]
In calculating the date at which a promissory note or bill of exchange
made payable at certain number of days after date or after sight or
after a certain event is at maturity, the day of the date, or of
presentment for acceptance or sight, or of protest for non-
acceptance, or on which the event happens, shall be excluded.

Example 18: Bharat executed a promissory note in favour of Bhushan

for ` 5 crores. The said amount was payable three days after sight.
Bhushan, on maturity, presented the promissory note on 1st January,
2019 to Bharat. Bharat made the payments on 4th January, 2019.
Bhushan wants to recover interest for one day from Bharat. As per
Section 24 of the Negotiable Instruments Act, 1881 states that
where a bill or note is payable after date or after sight or after
happening of a specified event, the time of payment is determined by
excluding the day from which the time begins to run.
Therefore, in the given case, Bharat will succeed in objecting to
Bhushan’s claim. Bharat paid rightly “three days after sight”. Since
the bill was presented on 1st January, Bharat was required to pay only
on the 4th and not on 3rd January, as contended by Bhushan.

When the day of maturity is a holiday [Section 25]

When the day on which a promissory note or bill of exchange is at

maturity is a public holiday, the instrument shall be deemed to be due
on the next preceding business day.

Explanation: The expression “Public Holiday” includes Sundays and any

other day declared by the Central Government, by notification in the
Official Gazette, to be a public holiday.

Negotiation by delivery [Section 47]

Subject to the provisions of section 58 [Instrument obtained by
unlawful means or for unlawful consideration], a promissory note, bill
of exchange or cheque payable to bearer is negotiable by delivery
thereof.

Exception: A promissory note, bill of exchange or cheque delivered on

condition that it is not to take effect except in a certain event is not
negotiable unless such event happens.
 Example 19:
(1) A, the holder of a negotiable instrument payable to bearer, delivers it
to B’s agent to keep for B. The instrument has been negotiated.
(2) A, the holder of a negotiable instrument payable to bearer, which is in
the hands of A’s banker, who is at the time the banker of B, directs
the banker to transfer the instrument to B’s credit in the banker’s
account with B. The banker does so, and accordingly now possesses the
instrument as B’s agent. The instrument has been negotiated, and B
has become the holder of it.

Negotiation by indorsement [Section 48]

Subject to the provisions of section 58, a promissory note, bill of
exchange or cheque payable to order, is negotiable by the holder by
indorsement and delivery thereof.

Importance of Delivery in Negotiation [Section 46]

 Delivery of an instrument is essential whether the instrument is

payable to bearer or order for effecting the negotiation.
 The delivery must be voluntary, and the object of delivery should be
to pass the property in the instrument to the person to whom it is
delivered. The delivery can be, actual or constructive.
 Actual delivery takes place when the instrument changes hand
physically.
 Constructive delivery takes place when the instrument is delivered
 to the agent, clerk or servant of the indorsee on his behalf or when
the indorser, after indorsement, holds the instrument as an agent of
the indorsee.
 The contract on a negotiable instrument until delivery remains
incomplete and revocable.
 The rights in the instrument are not transferred to the indorsee
unless after the indorsement the same has been delivered.
 If a person makes the indorsement of instrument but before the same
could be delivered to the indorsee the indorser dies, the legal
representatives of the deceased person cannot negotiate the same by
mere delivery thereof

INDORSEMENT OF INSTRUMENT (Section 15)

INDORSEMENT: When the maker or holder of a negotiable

instrument ,signs the same (otherwise than as such maker)—
 for the purpose of negotiation
 on the back or face thereof or on a slip of paper annexed thereto, or
so signs for the same purpose a stamped paper intended to be
completed as a negotiable instrument,
 he (maker/holder) is said to indorse the same, and is called the
“indorser”.

Various Kinds of Indorsement:

1. Indorsement in Blank (only signature): Where the indorser just puts
is signature without specifying the indorsee, the indorsement is said
to be in blank (Section 16). The effect of such an indorsement is to
render the instrument payable to bearer.

2. Indorsement in Full (name and signature): Where along with

indorser's signature, the name of the indorsee is specified, the
indorsement is called 'indorsement in full' (Section 16). Thus, where
the instrument states, 'Pay X or order' and is signed by A, the payee,
it constitutes 'indorsement in full'.
3. Partial indorsement: An indorsement which purports to transfer
only a part of amount of the instrument is called as partial
indorsement. As per section 56, such an indorsement is invalid under
law.
Example 23: A is a holder of a bill for ` 10000. A indorses it thus:
“Pay B or order ` 5000”. This is partial indorsement and invalid for the
purpose of negotiation.

Exception: Second part of section 56 states that if a bill has been

paid in part, the fact of the part payment may be indorsed on the
instrument and it may then be negotiated for the residue.
Example 24: A bill may be indorsed: Pay A or order ` 5000 being the
unpaid residue of the bill. It is a valid indorsement.

4. Restrictive Indorsement: An indorsement is restrictive when the

indorser while making indorsement restricts or excludes the right of
the indorsee to further transfer the instrument. An indorsement is
“restrictive” when it prohibits or restricts the further negotiability
of the instrument. It merely entitles the holder of the instrument to
receive the amount on the instrument for a specific purpose.
 Example: D signs the following indorsements on different
negotiable instruments payable to bearer:
(a) Pay the contents to G only
(b) Pay G for my use

These indorsements exclude the right of further negotiation by G.

Conditional indorsement: Section 52 gives power to an indorser to

insert in the indorsement by express words, a stipulation negating
(excluding) or limiting his own liability to the holder by making such
liability or the right of the indorsee to receive the amount due
thereon upon the happening of a specified event although such event
may never happen.
Conditional indorsement can be achieved by an indorser in any of the
following ways:

(1) Sans recourse indorsement- By excluding his liability e.g. the holder
of a bill may indorse it thus: ‘Pay A or order without recourse to me,
or Pay A or order sans recourse, or Pay A or order at his own risk’. In
these cases, the holder does not incur any liability on the bill as an
indorser.
(2) Liability dependent upon a contingency- By making his liability
dependent upon the happening of a specified event which may never
happen, in such a case the liability of the holder as an indorser, arises
only upon the happening of the event specified, and is extinguished if
the event becomes impossible, or the conditions specified are not
fulfilled. But the indorsee can sue the prior parties before the
 happening of the event.

(3) Facultative indorsement – An indorser by express words abandons

some right or increases his liability under an instrument. It means
endorser can be sued if the bill gets dishonored without any notice of
dishonor

(4) ‘Sans frais’ indorsement – Where the indorser shall not be liable to
pay any expenses which might have been incurred on dishonor of the
bill.

CONVERSION OF INDORSEMENT IN BLANK INTO

INDORSEMENT IN FULL [SECTION 49]

The holder of a negotiable instrument indorsed in blank may—

 without signing his own name, by writing above the indorser’s
signature a direction to pay to any other person as indorsee,
convert the indorsement in blank into an indorsement in full; and
the holder does not thereby incur the responsibility of an
indorser.

According to Section 55, if a negotiable instrument, after having been

indorsed in bank, is indorsed in full, the amount of it cannot be
claimed from the indorser in full, except by the person to whom it has
been indorsed in full, or by one who derives title through such person.
 Example 26: A is the payee holder of a bill. A indorses it in blank and
delivers it to B. B indorses it in full to c or order. C without
indorsement transfers the bill to D. D as the bearer is entitled to
receive payment or to sue drawer, acceptor, or A who indorsed the bill
in blank, but he cannot sue B or C. C can sue B as he received the bill
form by indorsement in full. If, however, C instead of passing the bill
to D without indorsement passes it by a regular indorsement, D can
claim against all prior parties.

Essentials of a valid indorsement

(a) Signature of indorser: The indorsement must be signed. The

indorsement may be made by the indorser either by merely signing his
name on the instrument or by specifying in addition to his signature,
the person to whom or to whose order the instrument is payable.

(b) Who may indorse or negotiate- Every sole maker, drawer, payee or
indorsee, or all of several joint makers, drawers, payees or indorsee’s
of a negotiable instrument may indorse and negotiate the same unless
negotiability of such instrument has been restricted or excluded as
mentioned in Section 50.

(c) Effect of indorsement: The indorsement of a negotiable instrument

followed by delivery transfers to the indorsee the property therein
with the right of further negotiation, but the indorsement may by
express words, restrict or exclude such right, or may merely
constitute the indorsee an agent to indorse the instrument, or to
receive its contents for the indorser, or for some other specified
person.
Example : B signs the following indorsements on different
negotiable instruments payable to bearer,—
(a) “pay the contents to C only”.
(b) “pay C for my use”.
(c) “pay C on order for the account to B”.
(d) “the within must be credited to C”.
(e) The above indorsements exclude the right of
further negotiation by C

Where an indorser so excludes his liability and afterwards becomes

the holder of the instrument all intermediates indorsers are liable to
him.

A is the payee and holder of a negotiable instrument. Excluding

personal liability by an indorsement, “without recourse”, he transfers
the instrument to B, and B indorses it to C, who indorses it to A. A is
not only reinstated in his former rights, but has the rights of an
indorsee against B and C.
 INSTRUMENT OBTAINED BY UNLAWFUL MEANS OR FOR
UNLAWFUL CONSIDERATION [SECTION 58]
 When a negotiable instrument has been lost, or
 has been obtained from any maker, acceptor or holder thereof by
means of
o an offence or
o fraud, or
o for an unlawful consideration,

no possessor or indorsee who claims through the person who found or

so obtained the instrument is entitled to receive the amount due
thereon from such maker, acceptor or holder, or from any party prior
to such holder, unless such possessor or indorsee is, or some person
through whom he claims was, a holder thereof in due course.

INSTRUMENT ACQUIRED AFTER DISHONOR OR WHEN OVERDUE

[SECTION 59]
The holder of a negotiable instrument, who has acquired it after
dishonour, whether by—
 non-acceptance
 or non-payment,
 with notice thereof, or
 after maturity,
has only, as against the other parties, the rights thereon of his
transferor.

Accommodation note or bill: Provided that any person who, in good

faith and for consideration, becomes the holder, after maturity, of a
promissory note or bill of exchange made, drawn or accepted without
consideration, for the purpose of enabling some party thereto to
raise money thereon, may recover the amount of the note or bill from
any prior party.

Instrument negotiable till payment or satisfaction [Section 60]

A negotiable instrument may be negotiated (except by the maker,
drawee or acceptor after maturity) until payment or satisfaction
thereof by the maker, drawee or acceptor at or after maturity, but
not after such payment or satisfaction.

Cancellation of indorsement: Where the holder of a negotiable

instrument, without the consent of the indorser, destroys or impairs
the indorser’s remedy against a prior party, the indorser is discharged
from liability to the holder to the same extent as if the instrument
had been paid at maturity (Sec. 40).

Negotiation Back (“taking up of a bill”)

 In the course of negotiation, if a negotiable instrument is
circulated/negotiated back by an indorser to any of the prior party
on the negotiable instruments, it is termed as negotiation back.
 The person who becomes the holder in due course under this
negotiation back cannot make any of the intermediate indorsers
liable on the instruments.
 But where an indorser had excluded his liability, by the use of the
 words ‘sans recourse’ or ‘without recourse to me’ and after that
becomes the holder of the instrument in his own right under the
‘negotiation back’ all intermediate indorsers are liable to him and
in case of dishonour, he can recover the amount from all or any
one of them.

DISCHARGE FROM LIABILITY ON NOTES,BILLS AND CHEQUES

When a party, who is liable on a negotiable instrument, ceases to

be liable he is said to be discharged from liability. Discharge from
liability of a party to an instrument is different from the discharge
of negotiable instrument itself. When only some of the parties to an
instrument are discharged from liability but others continue to be
liable thereon, it is only discharge of some of the parties from
liability.

Modes of discharge from liability on Instruments

The parties to a negotiable instrument may be discharged in the

following ways:

• Cancellation

• Release
discharge of
parties from
• Payment
liability by
 As per section 82, the maker, acceptor or indorser of a negotiable
instrument is discharged from liability thereon by cancellation,
release or payment

Thus, the parties to the negotiable instrument may be discharged in

the following ways—

(a) By cancellation [Section 82 (a)]

When the holder of a negotiable instrument or his agent cancels the
name of a party on the instrument with an intention 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.

(b) By release [Section 82 (b)]

Where the holder of a negotiable instrument releases any party to
the instrument by any method other than cancellation, the party so
released is discharged from liability.
For example discharge by an agreement between the parties, and
includes waiver, release, accord and satisfaction.

The party so released and all parties subsequent to him who have a
 right of action against the party so released are discharged from
liability. Thus, the effect of release is the same as that of cancelling
a party’s name

(c) By payment [Section 78]3

When payment on an instrument is made in due course, both the
instrument and the parties to it are discharged subject to the
provision of Sec. 82(c). The payment on an instrument may be made by
any party to the instrument. It may even be made by a stranger
provided it is made on account of the party liable to pay.

(d) By the holder allowing the drawee of a bill more than 48 hours to
accept [Section 83]
If the holder of a bill of exchange allows the drawee more than forty
eight hours, exclusive of public holidays, to consider whether he will
accept the same, all previous parties not consenting to such allowance
are thereby discharged from liability to such holder.

(e) By the Holder agreeing to a qualified or limited acceptance of bill of

exchange [Section 86]:
If the holder of a bill agrees to a qualified acceptance all prior parties
whose consent is not obtained to such an acceptance are discharged
from liability.

(f) By the Drawer not duly presenting a cheque for payment [Section
84]:
If a holder does not present a cheque within reasonable time after its
issue, and the bank fails causing damage to the drawer, the drawer is
 discharged as against the holder to the extent of the actual damage
suffered by him.

(g) By the bill coming to the acceptor’s hands after maturity (Section
90)
If a bill of exchange which has been negotiated is, at or after
maturity, held by the acceptor in his own right, all rights of action
thereon are extinguished.

(a) Discharge by material alteration

 If a material alteration is made by an indorsee, the indorser will be
discharged from his liability even in respect of the consideration
thereof.” If the holder of a negotiable instrument makes a material
alteration of instrument he loses his right of action against those
parties who would otherwise have been liable towards him.
 It is generally an accepted rule of law that a material alteration of an
instrument by a party to it, without the consent of the other party,
renders it void.

 By material alteration the identity of original instrument is

destroyed and those parties who had agreed to be liable on the
original instrument cannot be made liable on the new contract
contained in the altered instrument to which they never consented.

 It makes no difference whether the alteration is made by a party who

is in possession of the same, or by a stranger while the instrument
was in the custody of a party, because the party in custody of
 instrument is bound to preserve it in its integrity. The rule is
defended on the ground that no man shall be permitted to take the
chance of committing a fraud without running any risk of loss by the
event when it is detected.

Any alteration is material

(a) which alters the business effect of the instrument if used for any
business purpose.
(b) which causes it to speak a different language in legal effect form
which it originally spoke or which changes the legal identity or
character of the instrument.

“The following alteration are specifically declared to be material:

any alteration of (i) the date, (ii) the sum payable, (iii) the time of
payment, (iv) the place of payment, or the addition of a place of
payment.”
Following are the examples of material alteration: -
(a) Alteration of date.
(b) Alteration of rate of interest (if specified.
(c) Alteration of the sum payable
(d) Alteration in the time of payment, e.g., a bill payable 3 months
after date is altered to be payable 1 month after date.
(e) Alteration of the place of payment e.g., change of bank at which the
bill is. Likewise, alteration by addition of place for payment e.g. where
a place of payment is not given but is subsequently added without the
acceptor’s consent.
(f) Alteration by addition of parties .

(g) Alteration by tearing material part of the instrument.

(h) Alteration by increasing or affixing stamps.
(i) Alteration by erasure of an “account payee” crossing
(j) Alteration of an order cheque to a bearer cheque, except by or
with consent of the drawer.

The following alterations do not affect the liability of parties

thereto:

(a) If the alteration is unintentional and due to pure accident (e.g.

accidental disfigurement of document).
(b) Alteration made by a stranger without the consent of holder and
without any fraud and negligence on his part.
(c) An alteration made to correct a clerical error or a mistake, thus, if
instead of 1823, the date entered was 1832, the agent of drawer held
entitled to correct mistake.
(d) Alteration made to carry out common intention of original parties is
permitted by Section 87. For example, where the words “or order”
after the name of payee, inserted subsequently.
(e) Alteration with the consent of the parties liable thereto.
(f) An alteration made before the completion or the issue of negotiable
Instrument.
(g) A material alteration doesn’t affect the liability of those parties who
 become liable after the alteration is made.
(k) An alteration which is not material e.g. when a bill payable to bearer is
converted to bill payable to order/or an incomplete name of a person
converted into the complete name of same person.

(h) Alterations permitted (Exceptions to Section 87)

(a) Section 20 – Incomplete instrument (e.g. column of sum left blank)
can be filled up by the holder.
(b) Section 49 – It enables the holder of an instrument indorsed in blank
to convert it into indorsement in full (by writing above the indorser’s
signature a direction to pay to any other person as indorsee). Thus,
addition of parties allowed here.
(c) Section 125- the holder of an uncrossed cheque may cross it or may
convert general into special crossing or may make it ‘not negotiable’.
(d) Apparent alteration – The alteration should be apparent on the face
of the instrument otherwise it remains a valid security in the hands
of a holder in due course.

Example: A promissory note was made without mentioning any time

for payment. The holder added the words “on demand” on the face
of the instrument. As per the above provision of the Negotiable
Instruments Act, 1881 this is not a material alteration as a promissory
note where no date of payment is specified will be treated as payable
on demand. Hence adding the words “on demand” does not alter the
business effect of the instrument.
 DISHONOUR OF NEGOTIABLE
INSTRUMENTS

Dishonour of a bill
A bill may be dishonoured by:
(a) Non-acceptance, or
(b) Non- payment.

Dishonor of Negotiable
Instruments

Non Acceptance
Non Payment

Dishonour by Non-acceptance
A bill of exchange is said to be dishonoured by non-acceptance in any
one of the following ways (Section 91):
(a) When a bill is duly presented for acceptance, and the drawee, or one
of several drawees not being partners, refuse acceptance within
forty eight hours from the time of presentment, the bill is
dishonored.
(b) where presentment is excused, and the bill is not accepted.
(c) Where the drawee is incompetent to contract, the bill may be
treated as dishonored.
(d) Where the drawee is a fictitious person.
(e) Where the drawee could not be found even after reasonable search
(f) When a drawee gives a qualified acceptance, the holder may treat
the instrument dishonored.

The effect of dishonoured by non-acceptance is that the holder of

the bill can start an action against the drawer and the indorsers
and need not wait for maturity of the bill

Dishonour by non-payment

A promissory note, bill of exchange and 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 (Sec. 92).
 Notice of Dishonour
When negotiable instrument is dishonoured either by non-acceptance
or by non- payment, the holder must give a notice of dishonour to the
drawer or his previous holder in order to make them liable on the
instrument.

Object of notice of Dishonour

 The object of notice of dishonour is to inform (or warn) the party or
the person who is liable on instrument about the dishonour 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.
 In order to make the drawer liable, on the dishonour by the drawee
or the acceptor, it is necessary that a ‘notice of dishonour’ must have
been given to him.
 The omission on the part of holder to give due notice of dishonour
would discharge the drawer not only from his liability upon the cheque,
but also upon the original debtor consideration.

By and to whom notice should be given [Section 93]

P/N, BoE, Cheque

Dishonoured by
non-acceptance non- payment

Holder/some party thereto liabile thereon

give notice of dishonour

to parties whom holder seeks liable

severally jointly

Notice by whom: Notice of dishonour must be given by the holder, or

by a person liable on the instrument. But it is not necessary that the
notice should always come from the holder, for he is entitled to avail
himself of a notice given by any party liable on the instrument.

Notice to whom:

 Notice of dishonour must be given to all parties other than the maker
or the acceptor or the drawee whom the holder seeks to make liable.
 Notice of dishonour to the acceptor of a bill or to the maker of a note
or the drawee of cheque is not necessary as per section 93 of the Act.
They are the parties primarily liable upon the instrument, on the due
 date and at the proper place. It is they who dishonour the instrument
by no-acceptance or non-payment and notice to them will merely be
notice of fact already known to them

Modes of giving Notice

 Notice of dishonour may be given to a duly authorized agent of

the person to whom it is required to be given, or, where he has died,
to his legal representative or, where he has been declared insolvent,
to his assignee;
 may be oral or written; may, if written, be sent by post; and may be
in any form; but it must inform the party to whom it is given, either
in express term or by reasonable in intendment, that the instrument
has been dishonoured, and
 in what way, and that he will be held liable thereon; and it must be
given within reasonable time after dishonour, 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.
 If the notice is duly directed and sent by post and miscarries, such
miscarriage does not render the notice invalid (Section 94).

Party receiving must transmit notice of dishonor

Any party receiving notice of dishonour must, in order to render any
prior party liable to himself, give notice of dishonour to such party
within reasonable time, unless such party otherwise receives due
notice as provided by Section 93 (Section 95).
Thus, a person receiving notice must transmit it to prior parties whom
he wishes to make liable to himself because the holder may have
omitted to give notice to some of the prior parties.
 Agent of presentment
When instrument is deposited with an agent for presentment, the
agent is entitled to the same time to give notice to his principal as if
he were the holder giving notice of dishonour, and the principal is
entitled to a further like period to give notice of dishonour (Section
96).

When party to whom notice given is dead

When the party to whom notice of dishonour is dispatched is dead,
but the party dispatching the notice is ignorant of his death, the
notice is sufficient (Section 97).

When notice of dishonor is unnecessary [Section 98]

No notice of dishonour is necessary, -

(a) Waiver: When it is dispensed with by the party entitled thereto; a

waiver of notice may be made at the time of drawing or indorsing the
instrument, or before or after the time for giving notice has arrived.
A waiver by a party to receive notice ensures for the benefit of all
the parties coming after him.
(b) in order to charge the drawer, when he has countermanded
payment.
(c) No damage: when the party charged could not suffer damages for
want of notice.
(d) when the party entitled to notice cannot after due search be found;
or the party bound to give notice is, for any other reason, unable
without any fault of his own to give it.
(e) to charge the drawers, when the acceptor is also a drawer.
(f) in the case of a promissory note which is not negotiable.
(g) Promise to pay - when the party entitled to notice, knowing the facts,
promises unconditionally to pay the amount due on the instrument.

Example 36: Is notice of dishonour necessary in the following cases:

(1) X having a balance of ` 1,000 with his bankers and having no
authority to over draw, drew a cheque for ` 5,000/-. The cheque was
dishonored when duly presented for repayment.
(2) X, drawer of a Bill informs Y, the holder of the bill that the bill would
be dishonored on the presentment for payment.
Answer: Notice of dishonour is not necessary in both the cases.
[Section 98 of the Negotiable Instruments Act, 1881].

DISHONOUR OF CHEQUES FOR

INSUFFICIENCY OF FUNDS IN THE
ACCOUNTS [SECTION 138 TO 142]

DISHONOR OF CHEQUE FOR INSUFFICIENCY, ETC., OF FUNDS

IN THE ACCOUNTS [SECTION 138]
 Where any cheque drawn by a person on an account maintained by
him with a banker—
 for payment of any amount of money
 to another person from that account
 for the discharge, in whole or in part, of any debt or other liability,
[A cheque given as gift or donation, or as a security or in discharge
of a mere moral obligation, or for an illegal consideration, would be
outside the purview of this section]
 is returned by the bank unpaid

 either because of the—

 amount of money standing to the credit of that account is
insufficient to honor the cheque, or
 that it exceeds the amount arranged to be paid from that account
by an agreement made with that bank,
such person shall be deemed to have committed an offence and shall,
be punished with imprisonment for a term which may extend to two
years, or with fine which may extend to twice the amount of the
cheque, or with both.

Provided that this section shall not apply, unless—

a) Cheque presented within validity period: The cheque has been
presented to the bank within a period of three months from the
date on which it is drawn or within the period of its validity,
whichever is earlier.
 b) Demand for the payment through the notice: the payee or the
holder in due course of the cheque, as the case may be, makes a
demand for the payment of the said amount of money by giving
a notice, in writing, to the drawer of the cheque, within 30 days
of the receipt of information by him from the bank regarding
the return of the cheque as unpaid, and
c) Failure of drawer to make payment: the drawer of such cheque
fails to make the payment of the said amount of money to the
payee or, as the case may be, to the holder in due course of the
cheque, within fifteen days of the receipt of the said notice.

Explanation: For the purpose of this section, “debt or other liability”

means a legally enforceable debt or other liability.

Example 37: X issued a post-dated cheque to Y on the account of

discharge of its liability. Further, X instructed to the bank to stop
the payment due to unavailability of the adequate amount in the
account. Here, in this instance section 138 of the Act is attracted
as when a cheque is dishonoured on account of stop payment
instructions sent by the drawer to his banker in respect of a post-
dated cheque irrespective of insufficiency of funds in the account. A
post-dated cheque is deemed to have been drawn on the date it bears
and the three months period for the purposes of section 138 is to be
counted from that date. So, X will be liable for dishonour of cheque.
Once a cheque is issued by the drawer, a presumption under section
139 must follow.

Penalty: According to Section 138 of the Act, the dishonour of cheque

is a criminal offence and is punishable with imprisonment up to 2 years
or fine up to twice the amount of cheque or both.
 PRESUMPTION IN FAVOR OF HOLDER [SECTION 139]
When a cheque is dishonoured, it shall be presumed, unless the
contrary is proved, that the holder of a cheque received the cheque
of the nature referred to in section 138 for the discharge, in whole
or in part, or any debt or other liability.
Presumption prescribed here is a “rebuttable presumption” as the
provisions clearly provides that the person issuing the cheque is at
liberty to prove to the contrary. The effect of this presumption is
to place the evidential burden on the accused.

DEFENCE WHICH MAY NOT BE ALLOWED IN ANY PROSECUTION

UNDER SECTION 138 [SECTION 140]
It shall not be a defence in a prosecution of an offence under section
138 that the drawer had no reason to believe when he issued the
cheque that the cheque may be dishonoured on presentment for the
reasons stated in that section.

OFFENCES BY COMPANIES [SECTION 141]

(1) If the person committing an offence under section 138 is a company,
every person who, at the time the offence was committed—
 was in charge of, and
 was responsible to the company for the conduct of the business of the
company,
as well as the company, shall be deemed to be guilty of the offence
and shall be liable to be proceeded against and punished accordingly.
 Exception: Provided that nothing contained in this sub-section shall
render any person liable to punishment if he proves that the offence
was committed without his knowledge, or that he had exercised all
due diligence to prevent the commission of such offence.

Explanation: For the purpose of this section

(a) “Company” means any body corporate and includes a firm or other
association of individuals; and
(b) “Director”, in relation to a firm, means a partner in the firm.

Example 38: A promoter who has borrowed a loan on behalf of

company, who is neither a director nor a person-in-charge, sent a
cheque from the company’s account to discharge its legal liability.
Subsequently, the cheque was dishonoured and the complaint was
lodged against him. So, according to Section 138 of the Negotiable
Instruments Act, 1881, where any cheque drawn by a person on an
account maintained by him with a banker for payment of any amount
of money to another person from/out of that account for discharging
any debt or liability, and if it is dishonoured by banker on sufficient
grounds, such person shall be deemed to have committed an offence
and shall be liable.
However, in this case, the promoter is neither a director nor a person-
in-charge of the company and is not connected with the day-to-day
affairs of the company and had neither opened nor is operating the
bank account of the company.
Further, the cheque, which was dishonoured, was also not drawn on an
account maintained by him but was drawn on an account maintained
by the company. Therefore, he has not committed an offence under
 section 138.

COGNIZANCE OF OFFENCES [SECTION 142]

(1) Notwithstanding anything contained in the Code of Criminal
Procedure, 1973—
(a) Cognizance on written complaint: Notwithstanding anything
contained in Code of Criminal Procedure, 1973, a written complaint
should have been made to a metropolitan or a first-class judicial
magistrate by the payee, or holder in due course of the cheque.
(b) Limitation for filing of complaint: such complaint is made within one
month of the date on which the cause of action arises under clause
(c) of the proviso to section 138.
Provided that the cognizance of a complaint may be taken by the court
after the prescribed period, if the complainant satisfies the court
that he had sufficient cause for not making a complaint within such
period.
(c) Jurisdiction of court: no court inferior to that of a Metropolitan
Magistrate or a Judicial Magistrate of the first class shall try any
offence punishable under section 138.

(2) Jurisdiction of courts for the trial of offence [Section 142 (2)]:
The offence under section 138, which deals with the dishonor of
cheque, shall be inquired into and tried only by a court within whose
local jurisdiction,—
(a) if the cheque is delivered for collection through an account, the
branch of the bank where the payee or holder in due course, as the
case may be, maintains the account, is situated; or
(b) if the cheque is presented for payment by the payee or holder
in due course, otherwise through an account, the branch of the
drawee bank where the drawer maintains the account, is situated.

Explanation— For the purposes of clause (a), where a cheque is

delivered for collection at any branch of the bank of the payee or
holder in due course, then, the cheque shall be deemed to have been
delivered to the branch of the bank in which the payee or holder in
due course, as the case may be, maintains the account.”

Example 39: Mr. A holds an account in Navrangpura Branch,

Ahmedabad of “XYZ” Bank, issues a cheque payable in favour of B. B,
who holds an account with the M.S University Road Branch, Vadodara
of the “PQR” bank, deposits the said cheque at Surat Branch of ‘PQR
bank’ and the cheque is dishonoured. The complaint will have to be filed
before the court having jurisdiction where the M.S University Road
branch is situated.

POWER OF COURT TO TRY CASES SUMMARILY [SECTION 143]

(1) Trial of Offence: All offences under this Chapter shall be tried
by a Judicial Magistrate of the first class or by a Metropolitan
Magistrate.

In case of summary trial: Provided that in the case of any conviction

in a summary trial under this section, it shall be lawful for the
Magistrate to pass a sentence of imprisonment for a term not
exceeding one year and an amount of fine exceeding five thousand
rupees.
 During the proceeding of the case, court can convert summary trial
into regular trial, if it deems fit.

(2) Speedy and efficient Disposal: Every trial under this section
shall be conducted as expeditiously as possible and an endeavour shall
be made to conclude the trial within six months from the date of
filing of the complaint.

POWER TO DIRECT INTERIM COMPENSATION [SECTION 143A]

(1) Notwithstanding anything contained in the Code of Criminal Procedure,

1973, the Court trying an offence under section 138 may order the
drawer of the cheque to pay interim compensation to the
complainant—
(a) in a summary trial or a summons case, where he pleads not guilty to
the accusation made in the complaint; and
(b) in any other case, upon framing of charge.

(2) The interim compensation under sub-section (1) shall not exceed
twenty per cent. of the amount of the cheque.

(3) The interim compensation shall be paid within sixty days from the
date of the order under sub-section (1), or within such further
period not exceeding thirty days as may be directed by the Court
on sufficient cause being shown by the drawer of the cheque.

(4) If the drawer of the cheque is acquitted, the Court shall direct the
complainant to repay to the drawer the amount of interim
 compensation, with interest at the bank rate as published by the
Reserve Bank of India, prevalent at the beginning of the relevant
financial year, within sixty days from the date of the order, or within
such further period not exceeding thirty days as may be directed by
the Court on sufficient cause being shown by the complainant.

(5) The amount of fine imposed under section 138 or the amount of
compensation awarded under section 357 of the Code of Criminal
Procedure, 1973, shall be reduced by the amount paid or recovered as
interim compensation under this section.

OFFENCES TO BE COMPOUNDABLE [SECTION 147]

Notwithstanding anything contained in the Code of Criminal

Procedure, 1973, every offence punishable under this Act shall be
compoundable.

POWER OF APPELLATE COURT TO ORDER PAYMENT PENDING

APPEAL AGAINST CONVICTION [SECTION 148]

(1) In an appeal by the drawer against conviction under section 138, the
Appellate Court may order the appellant to deposit such sum which
shall be a minimum of twenty per cent of the fine or compensation
awarded by the trial Court:
Provided that the amount payable under this sub-section shall be in
addition to any interim compensation paid by the appellant under
section 143A.
(2) The amount referred to in sub-section (1) shall be deposited within
sixty days from the date of the order, or within such further period
not exceeding thirty days as may be directed by the Court on
sufficient cause being shown by the appellant.

(3) The Appellate Court may direct the release of the amount deposited
by the appellant to the complainant at any time during the pendency
of the appeal:
Provided that if the appellant is acquitted, the Court shall direct the
complainant to repay to the appellant the amount so released, with
interest at the bank rate as published by the Reserve Bank of India,
prevalent at the beginning of the relevant financial year, within sixty
days from the date of the order, or within such further period not
exceeding thirty days as may be directed by the Court on sufficient
cause being shown by the complainant.
 Questions & Answers

Chapter 12 : The Negotiable Instrument Act 1881

Compiled by CA DEEPIKA RATHI

CA DEEPIKA RATHI 1
Question 1: Manoj owes money to Umesh. Therefore, he makes a promissory note for the amount in favour of Umesh, for
safety of transmission he cuts the note in half and posts one half to Umesh. He then changes his mind and calls upon Umesh
to return the half of the note which he had sent. Umesh requires Manoj to send the other half of the promissory note.
Decide how rights of the parties are to be adjusted.
Give your answer in reference to the Provisions of Negotiable Instruments Act, 1881 . [RTP MAY 2019]
Answer 1: The question arising in this problem is whether the making of promissory note is complete when one half of the
note was delivered to Umesh. Under Section 46 of the Negotiable Instruments Act, 1881, the making of a promissory note is
completed by delivery, actual or constructive. Delivery refers to the whole of the instrument and not merely a part of it.
Delivery of half instrument cannot be treated as constructive delivery of the whole. So, the claim of Umesh to have the
other half of the promissory note sent to him is not maintainable. Manoj is justified in demanding the return of the first
half sent by him. He can change his mind and refuse to send the other half of the promissory note.
Question 2: Mr. Madhavan drew a cheque payable to Mr. Vikas or order. Mr. Vikas lost the cheque and was not aware of
the loss of the cheque. The person who found the cheque forged the signature of Mr. Vyas and endorsed it to Mr. Pawan as
the consideration for goods bought by him from Mr. Pawan. Mr. Pawan encashed the cheque, on the very same day from the
drawee bank. Mr. Vikas intimated the drawee bank about the theft of the cheque after three days. Examine the liability of
the drawee bank.
Give your answer in reference to the Provisions of Negotiable Instruments Act, 1881. [RTP MAY 2019]
Answer 2:Cheque payable to order According to Section 85 of the Negotiable Instruments Act, 1881

CA DEEPIKA RATHI 2
1) Where a cheque payable to order purports to be indorsed by or on behalf of the payee, the drawee is discharged by
payment in due course.
2) Where a cheque is originally expressed to be payable to bearer, the drawee is discharged by payment in due course to
the bearer thereof, notwithstanding any indorsement whether in full or in blank appearing thereon, and
notwithstanding that any such indorsement purports to restrict or exclude further negotiation.
As per the given facts, cheque is drawn payable to “Mr. Vikas or order”. It was lost and Mr. Vikas was not aware of the same.
The person found the cheque and forged and endorsed it to Mr. Pawan, who encashed the cheque from the drawee bank.
After few days, Mr. Vikas intimated about the theft of the cheque, to the drawee bank, by which time, the drawee bank
had already made the payment.
According to above stated section 85, the drawee banker is discharged when it has made a payment against the cheque
payable to order when it is purported to be endorsed by or on behalf of the payee. Even though the signature of Mr.
Vikas is forged, the banker is protected and is discharged. The true owner, Mr. Vikas, cannot recover the money from the
drawee bank in this situation.

CA DEEPIKA RATHI 3
Question 3 : Discuss with reasons, whether the following persons can be called as a ‘holder’ under the Negotiable
Instruments Act, 1881.
i. X who obtains a cheque drawn by Y by way of gift
ii. A, the payee of the cheque, who is prohibited by a court order from receiving the amount of the cheque
iii. M, who finds a cheque payable to bearer, on the road and retains it
iv. B, the agent of C, is entrusted with an instrument without endorsement by C, who is the payee
v. B, who steals a blank cheque of A and forges A’s signature [RTP MAY 2020]
Answer 3 : Person to be called as a holder: As per section 8 of the Negotiable Instruments Act, 1881 ‘holder’ of a
Negotiable Instrument means any person entitled in his own name to the possession of it and to receive or recover the
amount due thereon from the parties thereto.
On applying the above provision in the given cases –
i. Yes, X can be termed as a holder because he has a right to possession and to receive the amount due in his own name.
ii. No, he is not a ‘holder’ because to be called as a ‘holder’ he must be entitled not only to the possession of the
instrument but also to receive the amount mentioned therein.
iii. No, M is not a holder of the Instrument though he is in possession of the cheque, so is not entitled to the possession
of it in his own name.
iv. No, B is not a holder. While the agent may receive payment of the amount mentioned in the cheque, yet he cannot be
called the holder thereof because he has no right to sue on the instrument in his own name.
v. No, B is not a holder because he is in wrongful possession of the instrument.

CA DEEPIKA RATHI 4
Question 4: Rahul drew a cheque in favour of Aman. After having issued the cheque; Rahul requested Aman not to present
the cheque for payment and gave a stop payment request to the bank in respect of the cheque issued to Aman. Decide,
under the provisions of the Negotiable Instruments Act, 1881 whether the said acts of Rahul constitute an offence ?
[RTP NOV 2020]
Answer 4 : As per the facts stated in the question, Rahul (drawer) after having issued the cheque, informs Aman (drawee)
not to present the cheque for payment and as well as gave a stop payment request to the bank in respect of the cheque
issued to Aman.
Section 138 of the Negotiable Instruments Act, 1881, is a penal provision in the sense that once a cheque is drawn on an
account maintained by the drawer with his banker for payment of any amount of money to another person out of that
account for the discharge in whole or in part of any debt or liability, is informed by the bank unpaid either because of
insufficiency of funds to honour the cheques or the amount exceeding the arrangement made with the bank, such a person
shall be deemed to have committed an offence.
Once a cheque is issued by the drawer, a presumption under Section 139 of the Negotiable Instruments Act, 1881 follows and
merely because the drawer issues a notice thereafter to the drawee or to the bank for stoppage of payment, it will not
preclude an act ion under Section 138.
Also, Section 140 of the Negotiable Instruments Act, 1881, specifies absolute liability of the drawer of the cheque for
commission of an offence under the section 138 of the Act. Section 140 states that it shall not be a defence in a
prosecution for an offence under section 138 that the drawer had no reason to believe when he issued the cheque that the
cheque may be dishonoured on presentment for the reasons stated in that section.

CA DEEPIKA RATHI 5
Accordingly, the act of Rahul, i.e., his request of stop payment constitutes an offence under the provisions of the Negotiable
Instruments Act, 1881.
Question 5 : Calculate the date of maturity of bill of exchange drawn on 1 6.2019, payable 120 days after considering
the relevant provisions of the Negotiable Instruments Act, 1881. [RTP MAY 2021]
Answer 5 : Date of maturity of the bill of exchange: In this case the day of presentment for sight is to be excluded i.e. 1st
June, 2019. The period of 120 days ends on 29th September, 2019 (June 29 days + July 31 days + August 31 Days + September
29 days = 120 days). Three days of grace are to be added. It falls due on 2nd October, 2019, which happens to be a public
holiday. As such it will fall due on 1st October, 2019 i.e., the next preceding Business Day.
Question 6 : Chandra issues a cheque for Rs. 50,000/- in favour of Daye. Chandra has sufficient amount in his account
with the Bank. The cheque was not presented within reasonable time to the Bank for payment and the Bank, in the
meantime, became bankrupt. Decide under the provisions of the Negotiable Instruments Act, 1881, whether Daye can
recover the money from Chandra? [RTP MAY 2021]
Answer 6 : Section 84(1) of the Negotiable Instruments Act, 1881 provides that cheque should be presented to Bank
within reasonable time. If cheque is not presented within reasonable time, meanwhile the drawer suffers actual damage, the
drawer is discharged to the extent of such actual damage. This would be so if the cheque would have been passed if it was
presented within reasonable time. As per section 84(2), in determining what is a reasonable time, regard shall be had to (a)
the nature of the instrument (b) the usage of trade and of bankers, and (c) facts of the particular case. The drawer will get
discharge, but the holder of the cheque will be treated as creditor of the bank, in place of drawer. He will be entitled to
recover the amount from Bank [section 84(3)].

CA DEEPIKA RATHI 6
In the above case drawer i.e. Chandra has suffered damage as cheque was not presented by Daye within reasonable time.
Hence, Chandra will be discharged but Daye will be the creditor of bank for the amount of cheque and can recover the
amount from the bank.
Question 7 : ‘Akhil’ made a promissory note for Rs. 4,500 payable to ‘Bhuvan’, and delivered the same to ‘Bhuvan’ on the
condition that he (‘Bhuvan’) will demand payment only on the death of ‘Chaman’. Before the death of ‘Chaman’, ‘Bhuvan’
indorsed and delivered the promissory note to ‘Deepak’, who receive the promissory note in good faith. On the date of
maturity, ‘Deepak’ presented the promissory note for payment but ‘Akhil’ denied for payment by stating that he issued this
promissory note on the condition that it can be paid only on the death of ‘Chaman’. Can ‘Deepak’ recover the amount due on
the promissory note from ‘Akhil’ under the provisions of the Negotiable Instrument Act 1881? [RTP NOV 2021]
Answer 7 : By virtue of provisions of section 9 of the Negotiable Instrument Act 1881, any person who for consideration
became the possessor of a negotiable instrument in good faith and without having sufficient cause to believe that any defect
existed in the title of the person from whom he derived his title. While Sec.47 provides if a negotiable instrument is delivered
to a person, upon condition, i.e. it will be effective on the happening of a certain event, such negotiable instrument cannot
be further negotiated unless such event happens. However, if it is transferred to a holder in due course, his rights will not be
affected by such condition.
‘Akhil’ issued a promissory note to ‘Bhuvan’ on the condition that he (‘Bhuvan’) will demand payment only on the death of
‘Chaman’. Before the death of ‘Chaman’, ‘Bhuvan’ indorsed and delivered the promissory note to ‘Deepak’, who receive the
promissory note in good faith. On due date, ‘Deepak’ presented the promissory note for payment but ‘Akhil’ denied
for payment.

CA DEEPIKA RATHI 7
From the above provisions and facts of the case, it can be said that ‘Deepak’ has received the promissory note in good faith,
he is a holder in due course and his rights will not be affected by any condition attached to the instrument by any prior party.
Therefore, ‘Deepak’ can recover the amount due on the promissory note from ‘Akhil’.

Question 8 : ‘Anjum’ drew a cheque for Rs. 20,000 payable to ‘Babloo’ and delivered it to him. ‘Babloo’ indorsed the
cheque in favour of ‘Rehansh’ but kept it in his table drawer. Subsequently, ‘Babloo’ died, and cheque was found by ‘Rehansh’
in ‘Babloo’s table drawer. ‘Rehansh’ filed the suit for the recovery of cheque. Whether ‘Rehansh’ can recover cheque under
the provisions of the Negotiable Instrument Act 1881? [RTP MAY 2022]
Answer 8 : According to section 48 of the Negotiable Instrument Act 1881, a promissory note, bill of exchange or cheque
payable to order, is negotiable by the holder by indorsement and delivery thereof.
The contract on a negotiable instrument until delivery remains incomplete and revocable. The delivery is essential not only
at the time of negotiation but also at the time of making or drawing of negotiable instrument. The rights in the instrument
are not transferred to the indorsee unless after the indorsement the same has been delivered. If a person makes the
indorsement of instrument but before the same could be delivered to the indorsee the indorser dies, the legal
representatives of the deceased person cannot negotiate the same by mere delivery thereof. [Section 57]
In the given case, cheque was indorsed properly but not delivered to indorsee i.e.‘Rehansh’, Therefore, ‘Rehansh’ is not
eligible to claim the payment of cheque.

CA DEEPIKA RATHI 8
Question 9 : Manoj owes money to Umesh. Therefore, he makes a promissory note for the amount in favour of Umesh,
for safety of transmission he cuts the note in half and posts one half to Umesh. He then changes his mind and calls upon
Umesh to return the half of the note which he had sent. Umesh requires Manoj to send the other half of the promissory
note. Decide how rights of the parties are to be adjusted?
Give your answer in reference to the Provisions of Negotiable Instruments Act, 1881. [MTP MAY 2019]
Answer 9 : The question arising in this problem is whether the making of promissory note is complete when one half of
the note was delivered to Umesh. Under Section 46 of the Negotiable Instruments Act, 1881, the making of a promissory note
is completed by delivery, actual or constructive. Delivery refers to the whole of the instrument and not merely a part of it.
Delivery of half instrument cannot be treated as constructive delivery of the whole. So, the claim of Umesh to have the
other half of the promissory note sent to him is not maintainable. Manoj is justified in demanding the return of the first half
sent by him. He can change his mind and refuse to send the other half of the promissory note.
Question 10 : Explain the meaning of ‘Negotiation by delivery’ with the help of an example. Give your answer as
per the provisions of the Negotiable Instruments Act, 1881. [MTP MAY 2019]
Answer 10 : Negotiation by delivery : According to section 47 of the Negotiable Instruments Act, 1881, subject to the
provisions of section 58, a promissory note, bill of exchange or cheque payable to bearer is negotiable by delivery thereof.
Exception: A promissory note, bill of exchange or cheque delivered on condition that it is not to take effect except in a
certain event is not negotiable (except in the hands of a holder for value without notice of the condition) unless such event
happens.
Example: A, the holder of a negotiable instrument payable to bearer, delivers it to B’s agent to keep for B. The instrument
has been negotiated.

CA DEEPIKA RATHI 9
Question 11 : On a Bill of Exchange for Rs. 1 lakh, X’s acceptance to the Bill is forged. ‘A’ takes the Bill from his customer
for value and in good faith before the Bill becomes payable. State with reasons whether ‘A’ can be considered as a ‘Holder in
due course’ and whether he (A) can receive the amount of the Bill from ‘X. [MTP MAY 2019]
Answer 11 : According to section 9 of the Negotiable Instruments Act, 1881 ‘holder in due course’ means any person
who for consideration becomes the possessor of a promissory note, bill of exchange or cheque if payable to bearer or the
payee or endorsee thereof, if payable to order, before the amount in it became payable and without having sufficient cause
to believe that any defect existed in the title of the person from whom he derived his title.
As ‘A’ in this case prima facie became a possessor of the bill for value and in good faith before the bill became payable, he
can be considered as a holder in due course.
But where a signature on the negotiable instrument is forged, it becomes a nullity. The holder of a forged instrument cannot
enforce payment thereon. In the event of the holder being able to obtain payment in spite of forgery, he cannot retain the
money. The true owner may sue on tort the person who had received. This principle is universal in character, by reason
where of even a holder in due course is not exempt from it. A holder in due course is protected when there is defect in the
title. But he derives no title when there is entire absence of title as in the case of forgery. Hence ‘A’ cannot receive the
amount on the bill.

CA DEEPIKA RATHI 10
Question 12 : Mr. S Venkatesh drew a cheque in favour of M who was sixteen years old. M settled his rental due by
endorsing the cheque in favour of Mrs. A the owner of the house in which he stayed. The cheque was dishonoured when
Mrs. A presented it for payment on grounds of inadequacy of funds. Advise Mrs. A how she can proceed to collect her dues
Give your answer in reference to the Provisions of Negotiable Instruments Ac t, 1881. [MTP MAY 2019]
Answer 12 : Capacity to make, etc., promissory notes, etc. (Section 26 of the Negotiable Instruments Act, 1881): Every
person capable of contracting, according to the law to which he is subject, may bind himself and be bound by the making,
drawing, acceptance, endorsement, delivery and negotiation of a promissory note, bill of exchange or cheque.
However, a minor may draw, endorse, deliver and negotiate such instruments so as to bind all parties except himself.
As per the facts given in the question, Mr. S Venkatesh draws a cheque in favour of M, a minor. M endorses the same in favour
of Mrs. A to settle his rental dues. The cheque was dishonoured when it was presented by Mrs. A to the bank on the ground of
inadequacy of funds. Here, in this case, M being a minor may draw, endorse, deliver and negotiate the instrument so as to
bind all parties except himself. Therefore, M is not liable. Mrs. A can, thus, proceed against Mr. S Venkatesh to collect her
dues.

Question 13 : What are the circumstances under which a bill of exchange can be dishonoured by non-acceptance? Give
your answer as per the provisions of the Negotiable Instruments Act, 1881. [MTP MAY 2019]
Answer 13 : As per section 91 of the Negotiable Instruments Act, 1881, a bill may be dishonoured either by non-
acceptance or by non-payment

Dishonour by non-acceptance may take place in any one of the following circumstances :

CA DEEPIKA RATHI 11
i. When the drawee either does not accept the bill within forty-eight hours (exclusive of public holidays) of presentment or
refuse to accept it;
ii. When one of several drawees, not being partners, makes default in acceptance
iii. When the drawee makes a qualified acceptance
iv. When presentment for acceptance is excused and the bill remains unaccepted; and
v. When the drawee is incompetent to contract.

Question 14 : P draws a bill on Q for Rs. 10,000. Q accepts the bill. On maturity, the bill was dishonored by non-payment. P
files a suit against Q for payment of Rs. 10,000. Q proved that the bill was accepted for value of Rs. 7,000 and as an
accommodation to the plaintiff for the balance amount i.e. Rs. 3,000. Referring to the provisions of the Negotiable
Instruments Act, 1881 decide whether P would succeed in recovering the whole amount of the bill? [MTP MAY 2019]
Answer 14 : As per Section 44 of the Negotiable Instruments Act, 1881, when the consideration for which a person signed a
promissory note, bill of exchange or cheque consisted of money, and was originally absent in part or has subsequently failed in
part, the sum which a holder standing in immediate relation with such signer is entitled to receive from him is proportionally
reduced.
Explanation—The drawer of a bill of exchange stands in immediate relation with the acceptor. The maker of a promissory
note, bill of exchange or cheque stands in immediate relation with the payee, and the endorser with his endorsee. Other
signers may by agreement stand in immediate relation with a holder.
On the basis of above provision, P would succeed to recover Rs. 7,000 only from Q and not the whole amount of the bill
because it was accepted for value as to Rs. 7,000 only and an accommodation to P for Rs. 3,000.

CA DEEPIKA RATHI 12
Question 15 : Mr. Muralidharan drew a cheque payable to Mr. Vyas or order. Mr. Vyas lost the cheque and was not
aware of the loss of the cheque. The person who found the cheque forged the signature of Mr. Vyas and endorsed it to
Mr. Parshwanath as the consideration for goods bought by him from Mr. Parshwanath. Mr. Parshwanath encashed the
cheque, on the very same day from th e drawee bank. Mr. Vyas intimated the drawee bank about the theft of the cheque after
three days. Examine the liability of the drawee bank. [MTP NOV 2019]

Answer 15 : Cheque payable to order [Section 85 of the Negotiable Instruments Act, 1881
1. Where a cheque payable to order purports to be indorsed by or on behalf of the payee, the drawee is discharged by
payment in due course
2. Where a cheque is originally expressed to be payable to bearer, the drawee i s discharged by payment in due course to the
bearer thereof, notwithstanding any indorsement whether in full or in blank appearing thereon, and notwithstanding that
any such indorsement purports to restrict or exclude further negotiation
As per the given facts, cheque is drawn payable to “Mr. Vyas or order”. It was lost and Mr. Vyas was not aware of the same.
The person found the cheque and forged and endorsed it to Mr. Parshwanath, who encashed the cheque from the drawee
bank. After few days, Mr. Vyas intimated about the theft of the cheque, to the drawee bank, by which time, the drawee
bank had already made the payment.
According to above stated section 85, the drawee banker is discharged when it has made a payment against the cheque
payable to order when it is purported to be endorsed by or on behalf of the payee. Even though the signature of Mr. Vyas is
forged, the banker is protected and is discharged. The true owner, Mr. Vyas, cannot recover the money from the drawee bank
in this situation

CA DEEPIKA RATHI 13
Question 16 : Manoj owes money to Umesh. Therefore, he makes a promissory note for the amount in favour of Umesh,
for safety of transmission he cuts the note in half and posts one half to Umesh. He then changes his mind and calls upon
Umesh to return the half of the note which he had sent. Umesh requires Manoj to send the other half of the promissory note.
Decide how rights of the parties are to be adjusted in reference to the Negotiable Instruments Act, 1881. [MTP MAY 2020]

Answer 16: The question arising in this problem is whether the making of promissory note is complete when one half of
the note was delivered to Umesh. Under Section 46 of the Negotiable Instruments Act, 1881, the making of a promissory note
is completed by delivery, actual or constructive. Delivery refers to the whole of the instrument and not merely a part of it.
Delivery of half instrument cannot be treated as constructive delivery of the whole. So, the claim of Umesh to have the other
half of the promissory note sent to him is not maintainable. Manoj is justified in demanding the return of the first half sent by
him. He can change his mind and refuse to send the other half of the promissory note.

Question 17 : What are the circumstances under which a bill of exchange can be dishonored by non-acceptance? Also,
explain the consequences if a cheque gets dishonored for insufficiency of funds in the account. [MTP MAY 2020]
Answer 17 : As per section 91 of the Negotiable Instruments Act, 1881, a bill may be dishonoured either by non-
acceptance or by non-payment.
Dishonour by non-acceptance may take place in any one of the following circumstances
i. When the drawee either does not accept the bill within forty-eight hours (exclusive of public holidays) of presentment or
refuse to accept it.
ii. When one of several drawees, not being partners, makes default in acceptance
iii. When the drawee makes a qualified acceptance

CA DEEPIKA RATHI 14
iv. When presentment for acceptance is excused and the bill remains unaccepted and
v. When the drawee is incompetent to contract.
Dishonour of Cheque for insufficiency, etc. of funds in the account: As per section 138 of the Negotiable Instruments Act
1881, where any cheque drawn by a person on an account maintained by him with a banker for payment is dishonoured due
to insufficiency of funds, he shall be punished with imprisonment for a term which may extend to two years or with fine which
may extend to twice the amount of the cheque or with both.

Question 18 : Mr. V draws a cheque of Rs. 11,000 and gives to Mr. B by way of gift. State with reason whether-
i. Mr.B is a holder in due course as per the Negotiable Instrument Act, 1881?
ii. Mr.B is entitled to receive the amount of Rs. 11,000 from the bank? [MTP MAY 2020]

Answer 18 : According to section 9 of the Negotiable Instrument Act, 1881, "Holder in due course" means
• any person
• who for consideration
• becomes the possessor of a promissory note, bill of exchange or cheque (if payable to bearer), or the payee or
endorsee thereof,(if payable to order),
• before the amount mentioned in it became payable, and
• without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his
title.

CA DEEPIKA RATHI 15
In the instant case, Mr. V draws a cheque of Rs. 11,000 and gives to Mr. B by way of gift.
i. Mr. B is holder but not a holder in due course since he did not get the cheque for value and consideration
ii. Mr. B’s title is good and bonafide. As a holder, he is entitled to receive Rs. 11,000 from the bank on whom the cheque is
drawn.

Question 19 : P draws a bill on Q for Rs.10,000. Q accepts the bill. On maturity, the bill was dishonored by non -payment.
P files a suit against Q for payment of Rs.10,000. Q proved that the bill was accepted for value of Rs.7,000 and as an
accommodation to the plaintiff for the balance amount i.e . Rs.3,000. Referring to the provisions of the Negotiable
Instruments Act, 1881 decide whether P would succeed in recovering the whole amount of the bill? [MTP NOV 2020]
Answer 19 : As per Section 44 of the Negotiable Instruments Act, 1881, when the consideration for which a person signed
a promissory note, bill of exchange or cheque consisted of money, and was originally absent in part or has subsequently failed
in part, the sum which a holder standing in immediate relation with such signer is entitled to receive from him is
proportionally reduced.
Explanation—The drawer of a bill of exchange stands in immediate relation with the acceptor. The maker of a promissory
note, bill of exchange or cheque stands in immediate relation with the payee, and the endorser with his endorsee. Other
signers may by agreement stand in immediate relation with a holder.
On the basis of above provision, P would succeed to recover R s . 7,000 only from Q and not the whole amount of the bill
because it was accepted for value as to R s . 7,000 only and an accommodation to P for Rs.3,000.

CA DEEPIKA RATHI 16
Question 20 : On a Bill of Exchange for Rs.1 lakh, X’s acceptance to the Bill is forged. ‘A’ takes the Bill from his customer for
value and in good faith before the Bill becomes payable. State with reasons whether ‘A’ can be considered as a ‘Holder in
due course’ and whether he (A) can receive the amount of the Bill from ‘X’. [MTP NOV 2020]

Answer 20 : According to section 9 of the Negotiable Instruments Act, 1881 ‘holder in due course’ means any person who
for consideration becomes the possessor of a promissory note, bill of exchange or cheque if payable to bearer or the payee or
endorsee thereof, if payable to order, before the amount in it became payable and without having sufficient cause to
believe that any defect existed in the title of the person from whom he derived his title.
As ‘A’ in this case prima facie became a possessor of the bill for value and in good faith before the bill became payable, he
can be considered as a holder in due course.
But where a signature on the negotiable instrument is forged, it becomes a nullity. The holder of a forged instrument cannot
enforce payment thereon. In the event of the holder being able to obtain payment in spite of forgery, he cannot retain the
money. The true owner may sue on tort the person who had received. This principle is universal in character, by reason where
of even a holder in due course is not exempt from it. A holder in due course is protected when there is defect in the title.
But he derives no title when there is entire absence of title as in the case of forgery. Hence ‘A’ cannot receive the amount
on the bill.

CA DEEPIKA RATHI 17
Question 21 : X draws a bill on Y but signs it in the fictitious name of Z. The bill is payable to the order of Z. The bill is duly
accepted by Y. M obtains the bill from X thus, becoming its holder in due course. Can Y avoid payment of the bill? Decide in
the light of the provisions of the Negotiable Instruments Act, 1881.[MTP NOV 2020]
Answer 21 : Bill drawn in fictitious name: The problem is based on the provision of Section 42 of the Negotiable
Instruments Act, 1881. In case a bill of exchange is drawn payable to the drawer’s order in a fictitious name and is endorsed
by the same hand as the drawer’s signature, it is not permissible for the acceptor to allege as against the holder in due
course that such name is fictitious. Accordingly, in the instant case, Y cannot avoid payment by raising the plea that the
drawer (Z) is fictitious. The only condition is that the signature of Z as drawer and as endorser must be in the same
handwriting.
Question 22 : Mr. Manoj Malik, a major and Preet, a minor executed a promissory note in favour of Rimpy. Examine
with reference to the provisions of the Negotiable Instruments Act, 1881, the validity of the promissory note and whether
it is binding on Mr. Manoj Malik and Preet. [MTP MAY 2021]
Answer 22 : According to Section 26 of the Negotiable Instruments Act, 1881, every person competent to contract
(according to the law to which he is subject to) has capacity to bind himself and be bound by making, drawing, accepting,
endorsing delivering and negotiating an instrument. A party having such capacity may himself put his signature or authorize
some other person to do so.
A minor may draw, endorse, deliver and negotiate an instrument so as to bind all the parties except himself. A minor may be a
drawer where the instrument is drawn or endorsed by him. In that case he does not incur any liability himself although
other parties to the instrument can be made liable and the holder can receive payment from any other party thereto.
Therefore, in the instant case, the promissory note is valid and it is binding on Mr. Manoj Malik but not on Preet, a minor.

CA DEEPIKA RATHI 18
Question 23 : What is the meaning of Not negotiable crossing as per the Negotiable Instruments Act, 1881? [MTP MAY
2021]
Answer 23 : Not negotiable Crossing
This requires writing of words “not negotiable” in addition to the two parallel lines. These words may be written inside or
outside these lines. According to Section 130, a person taking a cheque crossed generally or specially, bearing in either case
the word “not negotiable” shall not have, and shall not be capable of giving a better title to the cheque than that which the
person from whom he took it. It is a statutory crossing. A cheque with such crossing is not negotiable, but continues to be
transferable as before. Ordinarily, in a negotiable instrument, if the title of the transferor is defective, the transferee, if he is a
Holder in Due Course, will have a good title. When the words “not negotiable” are written, even a Holder in Due Course will
get the same title as that of transferor. Thus, if the title of the transferor is defective, the title of transferee will also be so.

Hence, the addition of the words not negotiable does not restrict the further transferability of the cheque, but it entirely takes
away the main feature of negotiability, which is that a holder with a defective title can give a good title to the subsequent
holder in due course.

Question 24 : Mina owes money to Nina. Therefore, she makes a promissory note for the amount in favor of Nina, for
safety of transmission she cuts the note in half and posts one half to Nina. She then changes her mind and calls upon Nina
to return the half of the note which she had sent. Nina requires Mina to send the other half of the promissory note. Decide
how rights of the parties are to be adjusted. Give your answer with respect to the provisions of the Negotiable Instruments
Act, 1881. [MTP MAY 2021]

CA DEEPIKA RATHI 19
Answer 24 : The question arising in this problem is whether the making of promissory note is complete when one half
of the note was delivered to Nina. Under Section 46 of the Negotiable Instruments Act, 1881, the making of a promissory
note is completed by delivery, actual or constructive. Delivery refers to the whole of the instrument and not merely a part
of it. Delivery of half instrument cannot be treated as constructive delivery of the whole. So, the claim of Nina to have the
other half of the promissory note sent to her is not maintainable. Mina is justified in demanding the return of the first half
sent by her. She can change her mind and refuse to send the other half of the promissory note.

Question 25 : Rama executes a promissory note in the following form, 'I promise to pay a sum of `10,000 after three
months'. Decide whether the promissory note is a valid promissory note. [MTP NOV 2021]
Answer 25 : The promissory note is an unconditional promise in writing. In the above question the amount is certain but
the date and name of payee is missing, thus making it a bearer instrument. As per Reserve Bank of India Act, 1934, a
promissory note cannot be made payable to bearer - whether on demand or after certain days. Hence, the instrument is
illegal as per Reserve Bank of India Act, 1934 and cannot be legally enforced.

Question 26 : What are the essential characteristics of Negotiable Instruments. [MTP NOV 2021]
Answer 26 : Essential Characteristics of Negotiable Instruments ;
i. It is necessarily in writing.
ii. It should be signed.
iii. It is freely transferable from one person to another.
iv. Holder’s title is free from defects.
v. It can be transferred any number of times till its satisfaction.

CA DEEPIKA RATHI 20
vi. Every negotiable instrument must contain an unconditional promise or order to pay money. The promise or order to
pay must consist of money only.
vii. The sum payable, the time of payment, the payee, must be certain.
viii. The instrument should be delivered. Mere drawing of instrument does not create liability.
Question 27 : Discuss with reasons, in the following given conditions, whether ‘M’ can be called as a “holder”
under the Negotiable Instruments Act, 1881 :
(1) M’ the payee of the cheque, who is prohibited by a court order from receiving the amount of the cheque.

(2) ‘M’ the agent of ‘Q’ is entrusted with an instrument without endorsement by ‘Q’ who is the payee. [MTP NOV 2021]

Answer 27 : Person to be called as a holder: As per section 8 of the Negotiable Instruments Act, 1881, ‘holder’ of a
Negotiable Instrument means any person entitled in his own name to the possession of it and to receive or recover the
amount due thereon from the parties thereto.
On applying the above provision in the given cases-
1. ‘M’ is not a ‘holder’ because to be called as a ‘holder’ he must be entitled not only to the possession of the instrument
but also to receive the amount mentioned therein.
2. No, ‘M’ is not a holder. While the agent may receive payment of the amount mentioned in the cheque, yet he cannot be
called the holder thereof because he has no right to sue on the instrument in his own name.

CA DEEPIKA RATHI 21
Question 28 : Mr. Amna draws a cheque of Rs. 11,000 and gives to Mr. Babita by way of gift. State with reason whether -
(1) Mr. Babita is a holder in due course as per the Negotiable Instrument Act, 1881?
(2) Mr. Babita is entitled to receive the amount of Rs. 11,000 from the bank ? [MTP NOV 2021]
Answer 28 : According to section 9 of the Negotiable Instrument Act, 1881, "Holder in due course" means-
• any person
• who for consideration
• becomes the possessor of a promissory note, bill of exchange or cheque (if payable to bearer), or the payee or indorsee
thereof, (if payable to order),
• before the amount mentioned in it became payable, and
• without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title.
In the instant case, Mr. Amna draws a cheque of Rs. 11,000 and gives to Mr. Babita by way of gift
Hence
1. Mr. Babita is holder but not a holder in due course since he did not get the cheque for value and consideration.
2. Mr. Babita’s title is good and bonafide. As a holder he is entitled to receive Rs. 11,000 from the bank on whom the cheque
is drawn.

CA DEEPIKA RATHI 22
Question 29 : What are the parties to a bill of exchange. [MTP NOV 2021]
Answer 29 : The parties to a bill of exchange are :
1. Drawer: The maker of a bill of exchange
2. Drawee: The person directed by the drawer to pay is called the 'drawee'. He is the person on whom the bill is drawn. On
acceptance of the bill, he is called an acceptor and is liable for the payment of the bill. His liability is primary and
unconditional.
3. Payee: The person named in the instrument, to whom or to whose order the money is, by the instrument, directed to be
paid.
Question 30 : Discuss with reasons, whether the following persons can be called as a ‘holder’ under the Negotiable
Instruments Act, 1881:
1. Megha, who finds a cheque payable to bearer, on the road and retains it.
2. Bob, who steals a blank cheque of Alpa and forges Alpa’s signature. [MTP NOV 2021]
Answer 30 : Person to be called as a holder: As per section 8 of the Negotiable Instruments Act, 1881, ‘holder’ of a
Negotiable Instrument means any person entitled in his own name to the possession of it and to receive or recover the
amount due thereon from the parties thereto.
On applying the above provision in the given cases-
1. No, Megha is not a holder of the Instrument though she is in possession of the cheque, so is not entitled to the possession
of it in his own name.

CA DEEPIKA RATHI 23
2. No, Bob is not a holder because he is in wrongful possession of the instrument.

Question 31 : Discuss with reasons, whether the following persons can be called as a ‘holder’ under the
Negotiable Instruments Act, 1881 :
i. Madan was going to office through metro rail. He found a cheque payable to bearer, on thefloor of coach number 6 and
retains it.
ii. Preeti, the agent of Mr. Rajesh, is entrusted with an instrument without indorsement byMr. Rajesh, who is the payee.
[MTP MAY 2022]

Answer 31 : Person to be called as a holder: As per section 8 of the Negotiable Instruments Act, 1881 , ‘holder’ of a
Negotiable Instrument means any person entitled in his own name to the possession of it and to receive or recover the
amount due thereon from the parties thereto.
On applying the above provision in the given cases-
i. In the given question, though Madan is in possession of the cheque but is not entitled to the possession of it in his own
name (he got the cheque on the floor of metro coach). Hence, Madan is not a holder of the Instrument.
ii. In the given question though the agent (i.e. Preeti) may receive payment of the amount mentioned in the cheque, yet she
cannot be called the holder thereof because she has no right to sue on the instrument in her own name. Hence, Preeti is
not a holder.

CA DEEPIKA RATHI 24
Question 32 : What are the essential characteristics of Negotiable Instruments. (Write any five) [MTP MAY 2022]
Answer 32 : Essential Characteristics of Negotiable Instruments
1. It is necessarily in writing.
2. It should be signed
3. It is freely transferable from one person to another
4. Holder’s title is free from defects.
5. It can be transferred any number of times till its satisfaction.
6. Every negotiable instrument must contain an unconditional promise or order to pay money.The promise or order to pay
must consist of money only.
7. The sum payable, the time of payment, the payee, must be certain.
8. The instrument should be delivered. Mere drawing of instrument does not create liability.
Question 33 : A bill of exchange is drawn by ‘A’ in Berkley where the rate of interest is 15% and accepted by ‘B’ payable in
Washington where the rate of interest is 6%. The bill is indorsed in India and is dishonoured. An action on the bill is brought
against ‘B’ in India.
Advise as per the provisions of the Negotiable Instruments Act, 1881, what rate of interest ‘B’ is liable to pay? [MTP MAY
2022]
Answer 33 : According to section 134 of the Negotiable Instruments Act, 1881, in the absence of a contract to the country,
the liability of the maker or drawer of a foreign promissory note or bill of exchange or cheque is regulated in all essential
matters by the law of the place where he made the instrument, and the respective liabilities of the acceptor and indorser by
the law of the place where the instrument is made payable.
In the given case, since action on the bill is brought against B in India, he is liable to pay interestat the rate of 6% only.

CA DEEPIKA RATHI 25
Question 34 : Discuss with reasons, whether the following persons can be called as a ‘holder’ under the Negotiable
Instruments Act, 1881:
i. Babita, stole a blank cheque of Aman and forged Aman’s signature.
ii. Arvind, the payee of the cheque, who is prohibited by a court order from receiving the amount of the cheque.

Answer 34 : Person to be called as a holder: As per section 8 of the Negotiable Instruments Act, 1881 ‘holder’ of a
Negotiable Instrument means any person entitled in his own name to the possession of it and to receive or recover the
amount due thereon from the parties thereto.
On applying the above provision in the given cases-
i. Babita is not a holder because she is in wrongful possession of the instrument (as she stole and forged Aman’s signature).
ii. Arvind is not a ‘holder’ because to be called as a ‘holder’ he must be entitled not only to the possession of the
instrument but also to receive the amount mentioned therein

CA DEEPIKA RATHI 26
Question 35 : Mr. Mudit is the employee in Senior Research Analyst Private Limited. He went to a Super Mall, a
departmental store, where he purchased some goods for his personal use on credit. Mr. Mudit gave a cheque drawn on the
Senior Research Analyst Private Limited's account to Super Mall towards the full payment of the dues. The cheque was
dishonoured by the company's bank. Mr. Mudit was neither a director nor a person in-charge of the company.
Explain under the provisions of the Negotiable Instruments Act, 1881, whether Mr. Mudit has committed an offence under
section 138.[MTP MAY 2022]
Answer 35 : According to section 138 of the Negotiable Instruments Act, 1881, where any cheque drawn by a person on
an account maintained by him with a banker for payment of any amount of money to another person from/out of that
account for discharging any debt or liability, and if it is dishonoured by banker on sufficient grounds, such person shall be
deemed to have committed an offence and shall be liable.
According to section 141, if the person committing an offence under section 138 is a company, every person who, at the time
the offence was committed was in charge of, and was responsible to the company for the conduct of the business of the
company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and
punished accordingly.
However, in this case, Mudit is neither a director nor a person-in-charge of the company and is not connected with the day-
to-day affairs of the company and had neither opened nor is operating the bank account of the company. Further, the
cheque, which was dishonoured, was also not drawn on an account maintained by him but was drawn on an account
maintained by the company. Therefore, Mudit has not committed an offence under section 138.

CA DEEPIKA RATHI 27
Question 36 : Discuss with reasons, whether the following persons can be called as a ‘holder’ under the
Negotiable Instruments Act.
i. Babita finds a cheque payable to bearer, on the road and retains it.
ii. Biswas, the agent of Chandan, is entrusted with an instrument without indorsement by Chandan, who is the payee.
[MTP NOV 2022]
Answer 36 : Person to be called as a holder: As per section 8 of the Negotiable Instruments Act, 1881 , ‘holder’ of a
Negotiable Instrument means any person entitled in his own name to the possession of it and to receive or recover the
amount due thereon from the parties thereto.
On applying the above provision in the given cases
i. Babita is not a holder of the Instrument though she is in possession of the cheque. She is not entitled to the possession
of it in her own name.
ii. No, Biswas is not a holder. While the agent may receive payment of the amount mentioned in the cheque, yet he cannot
be called the holder thereof because he has no right to sue on the instrument in his own name.
Question 37 : What is the meaning of ‘Acceptor for honour’ and ‘payment for honour’? Give your answer in terms of
the Negotiable Instruments Act, 1881. [MTP NOV 2022]
Answer 37 : When a bill of exchange has been dishonoured by non-acceptance and any person accepts it for honour of
the drawer or of any indorsers, such person is called ‘an Acceptor for honour’.The payment which he makes is known as
‘payment for honour.’

CA DEEPIKA RATHI 28
Question 38 : Mr. Krishna draws a cheque of Rs. 20,000 and gives to Mr. Balram by way of gift. State with reason
whether-
1. Mr. Balram is a holder in due course as per the Negotiable Instrument Act, 1881?
2. Mr. Balram is entitled to receive the amount of R s . 20,000 from the bank? [MTP NOV 2022]
Answer 38 : According to section 9 of the Negotiable Instrument Act, 1881, "Holder in due course" means-
• any person
• who for consideration
• becomes the possessor of a promissory note, bill of exchange or cheque (if payable to bearer), or the payee or indorsee
thereof, (if payable to order),
• before the amount mentioned in it became payable, and
• without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his
title.
In the instant case, Mr. Krishna draws a cheque of R s . 20,000 and gives to Mr. Balram by way of gift.
Hence,
(1) Mr. Balram is holder but not a holder in due course since he did not get the cheque for value and consideration.
(2) Mr. Balram’s title is good and bonafide. As a holder he is entitled to receive Rs. 20,000 from the bank on whom the
cheque is drawn.

CA DEEPIKA RATHI 29
Question 39 : ‘Shama' made a promissory note for ` 4,500 payable to ‘Vihari’, and delivered the same to ‘Vihari’ on
the condition that he (‘Vihari’) will demand payment only on the death of ‘Kayah’. Before the death of ‘Kayah’, ‘Vihari’
indorsed and delivered the promissory note to ‘Deepak’, who receive the promissory note in good faith. On the date of
maturity, ‘Deepak’ presented the promissory note for payment but ‘Shama’ denied for payment by stating that he issued this
promissory note on the condition that it can be paid only on the death of ‘ Kayah’. Can ‘Deepak’ recover the amount due
on the promissory note from ‘Shama’ under the provisions of the Negotiable Instrument Act 1881? [MTP NOV 2022]
Answer 39 : By virtue of provisions of section 9 of the Negotiable Instrument Act 1881, any person who for consideration
became the possessor of a negotiable instrument in good faith and without having sufficient cause to believe that any defect
existed in the title of the person from whom he derived his title. Exception to section 47 provides if a negotiable instrument is
delivered to a person, upon condition, i.e. it will be effective on the happening of a certain event, such negotiable instrument
cannot be further negotiated unless such event happens. However, if it is transferred t o a holder in due course, his rights
will not be affected by such condition.
‘Shama’ issued a promissory note to ‘Vihari’ on the condition that he (‘Vihari’) will demand payment only on the death of
‘Kayah’. Before the death of ‘Kayah’, ‘Vihari’ indorsed and delivered the promissory note to ‘Deepak’, who receive the
promissory note in good faith. On due date, ‘Deepak’ presented the promissory note for payment but ‘Shama’ denied for
payment

CA DEEPIKA RATHI 30
From the above provisions and facts of the case, it can be said that ‘Deepak’ has received the promissory note in
good faith, he is a holder in due course and his rights will not be affected by any condition attached to the
instrument by any prior party. Therefore, ‘Deepak’ can recover the amount due on the promissory note from
‘Shama’.

Question 40 : A signs his name on a blank cheque with ‘not negotiable crossing’ which he gives to B with an authority to
fill up a sum of Rs.3,000 only. But B fills it for Rs.5,000. B then endorsed it to C for a consideration of Rs.5,000 who takes it in
good faith. Examine whether C is entitled to recover the full amount of the instrument from B or A as per the provisions of
the Negotiable Instruments Act, 1881. [MTP NOV 2022]
Answer 40 : As per section 130 of the Negotiable Instruments Act, 1881, a cheque marked “not negotiable” is a
transferable instrument. The inclusion of the words ‘not negotiable’ however makes a significant difference in the
transferability of the cheques i.e., they cannot be negotiated. The holder of such a cheque cannot acquire title better than
that of the transferor.
In the given question, A gave to B the blank cheque with ‘not negotiable crossing’. B had an authority to fill only a sum of Rs.
3,000 but he filled it up Rs. 5,000. This makes B’s title defective.B then endorsed it to C for consideration of Rs. 5,000.
In the light of above stated facts and provision, C is not entitled to recover the full amount from A or B as C cannot acquire a
title better than that of the transferor (B).

CA DEEPIKA RATHI 31
Question 41 : Examine the following cases with respect to their validity. State your answer with reasons.
i. A bill of exchange is drawn, mentioning expressly as 'payable on demand'. The bill will be at maturity for payment on 04-
01-2022, if presented on 01-01-2022.
ii. A holder gives notice of dishonor of a bill to all the parties except the acceptor. The drawer claims that he is discharged
from his liability as the holder fails to give notice of dishonour of the bill to all the parties thereto.[MTP NOV 2022]
Answer 41 :
i. The bill of exchange is drawn, mentioning expressly as ‘payable on demand’. The bill will be at maturity for payment
on 04-1-2022, if presented on 01-01-2022 : This statement is not valid as no days of grace are allowed in the case of
bill payable on demand.
ii. A holder gives notice of dishonor of a bill to all the parties except the acceptor. The drawer claims that he is discharged
form his liability as the holder fails to give notice of dishonour of the bill to all the parties thereto:
As per section 93 of the Negotiable Instruments Act, 1881, notice of dishonor must be given by the holder to all
parties other than the maker or the acceptor or the drawee whom the holder seeks to make liable. Accordingly, notice
of dishonour to the acceptor of a bill is not necessary. Therefore, claim of drawer that he is discharged from his liability
on account of holder’s failure to give notice to all the parties thereto, is invalid.

CA DEEPIKA RATHI 32
Question 42 : Mr. Zahid accepted a bill of exchange and gave it to Mr. Kamil for the purpose of getting it discounted and
handing over the proceeds to Mr. Zahid. Mr. Kamil couldn’t get the bill discounted and returned the bill to Mr. Zahid. Mr.
Zahid cut the bill in two pieces for the purpose to cancel it and he threw the pieces on the street. Mr. Kamil picked up the
pieces and joined those pieces in such manner that the bill seemed to have been folded for safe custody, rather than
cancelled. Mr. Kamil put it into circulation and it finally reached to Mr. Salim, who took it in good faith and for value. Explain
in the light of the provisions of the Negotiable Instruments Act, 1881, whether Mr. Zahid is liable to pay the bill to Mr. Salim?
[RTP NOV 2022]
Answer 42 :
According to the section 9 of the Negotiable Instrument Act 1881, “Holder in due course” means any person who for
consideration became the possessor of a negotiable instrument in good faith and without having sufficient cause to believe
that any defect existed in the title of the person from whom he derived his title. Further, section 120 says that no maker of a
promissory note and no drawer of a bill or cheque and no acceptor of a bill for the honour of the drawer shall, in a suit
thereon by a holder in due course be permitted to deny the validity of the instrument as originally made or drawn. Thus, a
holder in due course gets a good title to the bill.
In the given question, since Mr. Salim acquired the bill in good faith and for value, he becomes the holder in due course. Mr.
Zahid cannot deny the original validity of the bill towards Mr. Salim (he being holder in due course). Hence, Mr. Salim has
right to recover the amount of bill from Mr. Zahid

CA DEEPIKA RATHI 33
Question 43 : State with reasons whether each of the following instruments is an Inland Instrument or a Foreign
Instrument as per The Negotiable Instruments Act, 1881:
i. Ram draws a Bill of Exchange in Delhi upon Shyam a resident of Jaipur and accepted to be payable in Thailand after 90
days of acceptance.
ii. Ramesh draws a Bill of Exchange in Mumbai upon Suresh a resident of Australia and accepted to be payable in Chennai
after 30 days of sight.
iii. Ajay draws a Bill of Exchange in California upon Vijay a resident of Jodhpur and accepted to be payable in Kanpur after
6 months of acceptance.
iv. Mukesh draws a Bill of Exchange in Lucknow upon Dinesh a resident of China and accepted to be payable in China after
45 days of acceptance. [NOV 2020, 4 Marks]
Answer 43 : “Inland instrument” and “Foreign instrument” [Sections 11 & 12 of the Negotiable Instruments Act, 1881]
A promissory note, bill of exchange or cheque drawn or made in India and made payable in, or drawn upon any person
resident in India shall be deemed to be an inland instrument.
Any such instrument not so drawn, made or made payable shall be deemed to be foreign instrument.
Following are the answers as to the nature of the Instruments:
i. In first case, Bill is drawn in Delhi by Ram on a person (Shyam), a resident of Jaipur (though accepted to be payable in
Thailand after 90 days) is an Inland instrument.
ii. In second case, Ramesh draws a bill in Mumbai on Suresh resident of Australia and accepted to be payable in Chennai
after 30 days of sight, is an Inland instrument.
CA DEEPIKA RATHI 34
iii. In third case, Ajay draws a bill in California (which is situated outside India) and accepted to be payable in India (Kanpur),
drawn upon Vijay, a person resident in India (Jodhpur), therefore the Instrument is a Foreign instrument.
iv. In fourth case, the said instrument is a Foreign instrument as the bill is drawn in India by Mukesh upon Dinesh, the
person resident outside India (China) and also payable outside India (China) after 45 days of acceptance.
Question 44 : Vikram accepts a Bill of Exchange for ` 50,000 which is an accommodation bill drawn by A on 1st January
2020 to be payable at Mumbai on 1st July 2020. A transfers the bill to B on 1st February 2020 without any consideration. B
further transfers it to C on 1st March 2020 for value. Then C transfers it again to D on 1st April 2020 without consideration. D
holds the bill till maturity and on the due date of payment he presented the bill for payment but the bill is dishonoured by
Vikram.
Discuss the rights of A, B, C and D to recover the amount of this bill as per the provisions of the Negotiable Instruments
Act, 1881. [NOV 2020, 3 Marks]
Answer 44 : According to section 43 of the Negotiable Instruments Act, 1881, a negotiable instrument made, drawn,
accepted, indorsed, or transferred without consideration, or for a consideration which fails, creates no obligation of payment
between the parties to the transaction. But if any such party has transferred the instrument with or without endorsement to
a holder for consideration, such holder, and every subsequent holder deriving title from him, may recover the amount due on
such instrument from the transferor for consideration or any prior party thereto.
In view of the above provisions, A and B have no right to recover the bill amount. But, C, being a holder for consideration and
the subsequent party D have right to recover the amount of the bill.

CA DEEPIKA RATHI 35
Question 45 :
i. Are the following instruments signed by Mr. Honest is valid promissory Notes? Give the reasons
a. I promise to pay D's son Rs.10000 for value received (D has two sons).
b. I promise to pay Rs.5000/- on demand at my convenience
ii. Who is the competent authority to issue a promissory note 'payable to bearer'?
Your answers shall be in accordance with the provisions of the Negotiable Instruments Act, 1881. [NOV 2020, 3 Marks]
Answer 45 :
i. Promissory Note: As per the provisions of Section 4 of the Negotiable Instruments Act, 1881, a promissory note is an
instrument in writing (not being a bank-note or a currency note) containing an unconditional undertaking, signed by
the maker, to pay a certain sum of money to or to the order of a certain person, or to the bearer of the instruments.
a. This is not a valid promissory note as D has two sons and it is not specified in the promissory note that which son of
D is the payee.
b. This is not a valid promissory note as details of the payee are not mentioned in it and it is not an unconditional
undertaking.
ii. A promissory note cannot be made payable to the bearer (Section 31 of Reserve Bank of India Act, 1934). Only the
Reserve Bank or the Central Government can make or issue a promissory note 'payable to bearer'.

CA DEEPIKA RATHI 36
Question 46 : Referring to the provisions of the Negotiable Instruments Act, 1881, examine the validityof the following:
A Bill of Exchange originally drawn by R for a sum of Rs.10,000 but accepted by S only for Rs.7,000. [JAN 2021, 3 Marks]
Answer 46 : As per the provisions of Section 86 of the Negotiable Instruments Act, 1881, if the holder of a bill of
exchange acquiesces in a qualified acceptance, or one limited to part of the sum mentioned in the bill, or which substitutes
a different place or time for payment, or which, where the drawees are not partners, is not signed by all the drawees, all
previous parties whose consent is not obtained to such acceptance are discharged as against the holder and those claiming
under him, unless on notice given by the holder they assent to such acceptance.
Explanation to the above section states that an acceptance is qualified where it undertakes the payment of part only of the
sum ordered to be paid.
In view of the above provisions, the bill, which has been drawn by R for Rs . 10,000/-, has been accepted by S only for
Rs . 7,000/-. It is a clear case of qualified acceptance, which may either be rejected by R or he may give assent to the
acceptance of Rs.7,000/- only.

CA DEEPIKA RATHI 37
Question 47 : A promissory note specifies that three months after, A will pay Rs.10,000 to B or his order for value
received. It is to be noted that no rate of interest has been stipulated in the promissory note. The promissory note falls due
for payment on 01.09.2019 and paid on 31.10.2019 without any interest. Explaining the relevant provisions under the
Negotiable Instruments Act, 1881, state whether B shall be entitled to claim interest on the overdue amount?.
[JAN 2021, 3 Marks]
Answer 47 : When no rate of interest is specified in the instrument: As per the provisions of Section 80 of the
Negotiable Instruments Act, 1881, when no rate of interest is specified in the instrument, interest on the amount due
thereon shall, notwithstanding any agreement relating to interest between any parties to the instrument, be calculated at the
rate of eighteen per centum per annum, from the date at which the same ought to have been paid by the party charged, until
tender or realization of the amount due thereon, or until such date after the institution of a suit to recover such amount as
the Court directs.
In the given question, the promissory note falls due for payment on 1.9.2019 and was paid on 31.10.2019. The note does
not mention any rate of interest, hence interest will be charged @ 18% p.a.
Thus, B shall be entitled to claim interest on the overdue amount for the period from 01.09.2019 to 31.10.2019, @ 18% p.a.

CA DEEPIKA RATHI 38
Question 48 : Gireesh, a legal successor of Ripun, the deceased person, signs a Bill of Exchange in his own name
admitting a liability of Rs.50,000 i.e. the extent to which he inherits the assets from the deceased payable to Mukund after 3
months from 1st January, 2019. On maturity, when Mukund presents the bill to Gireesh, he (Gireesh) refuses to pay for the
bill on the ground that since the original liability was that of Ripun, the deceased, therefore, he is not liable to pay for the bill.
Referring to the provisions of the Negotiable Instruments Act, 1881 decide whether Mukund can succeed in recovering Rs.
50,000 from Gireesh. Would your answer be still the same in case Gireesh specified the limit of his liability in the bill and the
value of his inheritance is more than the liability ?
[JAN 2021, 4 Marks]
Answer 48 : Liability of a legal representative (Section 29 of the Negotiable Instruments Act, 1881): A legal
representative of a deceased person, who signs his name on a promissory note, bill of exchange or cheque is liable personally
thereon unless he expressly limits his liability to the extent of the assets received by him.
Thus, in the absence of an express contract to the contrary, the liability of a legal representative is unlimited. However, a legal
representative may, by an express agreement, limit his liability to the extent of the assets received by him.
In the light of the stated provision, Mukund can succeed in recovering Rs . 50,000 from Gireesh as he has admitted liability
of Rs . 50,000 i.e. to the extent of the assets received by him from the Ripun, the deceased.
Yes, the limit of liability specified in the bill by Gireesh, will remain same even if value of his inheritance is more than the
liability, in case he specified the liability by an express agreement.

CA DEEPIKA RATHI 39
Question 49 : A signs his name on a blank cheque with ‘not negotiable crossing’ which he gives to B with an authority to
fill up a sum of Rs.3,000 only. But B fills it for Rs.5,000. B then endorsed it to C for a consideration of Rs.5,000 who takes it in
good faith. Examine whether C is entitled to recover the full amount of the instrument from B or A as per the provisions of
the Negotiable Instruments Act, 1881. [JAN 2021, 3 Marks]
Answer 49 : As per section 130 of the Negotiable Instruments Act, 1881, a cheque marked “not negotiable” is a
transferable instrument. The inclusion of the words ‘not negotiable’ however makes a significant difference in the
transferability of the cheques i.e., they cannot be negotiated. The holder of such a cheque cannot acquire title better than
that of the transferor.
In the given question, A gave to B the blank cheque with ‘not negotiable crossing’. B had an authority to fill only a sum of
Rs.3,000 but he filled it up Rs . 5,000. This makes B’s title defective. B then endorsed it to C for consideration of Rs.5,000.
In the light of above stated facts and provision, C is not entitled to recover the full amount from A or B as C cannot acquire a
title better than that of the transferor (B).

CA DEEPIKA RATHI 40
Question 50 : Mr. Harsha donated Rs.50,000 to an NGO by cheque for sponsoring the education of one child for one
year. Later on he found that the NGO was a fraud and did not engage in philanthropic activities.
He gave a "stop payment" instruction to his bankers and the cheque was not honouredby the bank as per his instruction.
The NGO has sent a demand notice and threatened to file a case against Harsha. Advise Mr. Harsha about the course of
action available under the Negotiable Instruments Act, 1881. [JULY 2021, 3 Marks]
Answer 50 : In the given instance, Mr. Harsha donated Rs.50,000 to NGO by cheque for sponsoring child education for
1 year. On founding that NGO was fraud, Mr. Harsha instructed bankers for stop payment. In lieu of that, NGO sent a demand
notice and threatened to file a case against him.
Section 138 of the Negotiable Instruments Act, 1881 deals with dishonor of cheque which is issued for the discharge, in
whole or in part, of any debt or other liability. However, any cheque given as gift or donation, or as a security or in discharge
of a mere moral obligation, would be considered outside the purview of section 138.
Here the cheque is given as a donation for the sponsoring child education for 1 year and is not legally enforceable debt or
other liability on Mr. Harsha. Therefore, he is not liable for the donated amount which is not honoured by the bank to the
NGO.

CA DEEPIKA RATHI 41
Question 51 : Examine the following cases with respect to their validity. State your answer with reasons.
i. A bill of exchange is drawn, mentioning expressly as 'payable on demand'. The bill will be at maturity for payment on 04-
01-2021, if presented on 01-01-2021.
ii. A holder gives notice of dishonor of a bill to all the parties except the acceptor. The drawer claims that he is discharged
from his liability as the holder fails to give notice of dishonour of the bill to all the parties thereto. [JULY 2021, 3
Marks]
Answer 51 :
i. The bill of exchange is drawn, mentioning expressly as ‘payable on demand’. The bill will be at maturity for payment on
04-1-2021, if presented on 01-01-2021: This statement is not valid as no days of grace are allowed in the case of bill
payable on demand.
ii. A holder gives notice of dishonor of a bill to all the parties except the acceptor. The drawer claims that he is discharged
form his liability as the holder fails to give notice of dishonour of the bill to all the parties thereto:
As per section 93 of the Negotiable Instruments Act, 1881, notice of dishonor must be given by the holder to all parties
other than the maker or the acceptor or the drawee whom the holder seeks to make liable. Accordingly, notice of
dishonour to the acceptor of a bill is not necessary. Therefore, claim of drawer that he is discharged from his liability on
account of holder’s failure to give notice to all the parties thereto, is invalid.

CA DEEPIKA RATHI 42
Question 52 : M’ is the holder of a bill of exchange made payable to the order of ‘F’
The bill of exchange contains the following endorsements in blank:
First endorsement ‘N’
Second endorsement ‘O’
Third endorsement ‘P’ and
Fourth endorsement ’Q’
‘M’ strikes out, without Q’s consent, the endorsements by ‘O’ and ‘P’. Decide, with reasons, whether ‘M’ is entitled to
recover anything from ‘Q’ under the provisions of the Negotiable Instruments Act, 1881. [DEC 2021, 3 Marks]
Answer 52 : According to section 40 of the Negotiable Instruments Act, 1881, Where the holder of a negotiable
instrument—
➢ without the consent of the indorser,
➢ destroys or impairs the indorser’s remedy against a prior party,
the indorser is discharged from liability to the holder to the same extent as if the instrument had been paid at maturity.
In the given question, ‘M’ strikes out, without Q’s consent, the endorsements by ‘O’ and ‘P’. In the light of the above
provision of law and facts of the question, ‘M’ is not entitledto recover anything from ‘Q’.

CA DEEPIKA RATHI 43
Question 53 : A is a payee and holder of a bill of exchange. He endorses it in blank and del ivers it to B. B endorses it
in full to C or order. C without endorsement transfers the bill to D. State giving reasons whether D, as bearer of the bill of
exchange, is entitled to recover the payment from A or B or C. [DEC 2021, 3 Marks]
Answer 53 : According to section 49 of the Negotiable Instruments Act, 1881, the holder of a negotiable instrument
indorsed in blank may-
• without signing his own name, by writing above the endorser’s signature a direction to pay to any other person as
endorsee, convert the indorsement in blank into an indorsement in full; and the holder does not thereby incur the
responsibility of an endorser.
According to section 55, if a negotiable instrument, after having been indorsed in blank, is indorsed in full, the amount of it
cannot be claimed from the endorser in full, except by the person to whom it has been indorsed in full, or by one who
derives title through such person.
As per the facts of the question and above mentioned provisions of the Negotiable Instruments Act, 1881, D as the bearer of
the Bill of Exchange, is entitled to receive payment or to sue drawer, acceptor, or A who indorsed the bill in blank, but he
cannot sue B or C.

CA DEEPIKA RATHI 44
Question 54 : Referring the provisions of the Negotiable Instruments Act, 1881 give the answer of the following.
i. A promissory note was made without mentioning any time for payment. The holder added the words ‘on demand’ on
the face of the instrument. Whether this may be treated as material alteration in the instrument?
ii. Ankit draws a cheque for Rs.2,000 and hands it over to Shreya by way of gift. Whether Shreya is a holder in due
course?. [DEC 2021, 4 Marks]
Answer 54 :
i. Material alteration: An alteration is material which in any way alters the operation of the instrument and affects the
liability of parties thereto.
Any alteration is material
a. which alters the business effect of the instrument if used for any business purpose;
b. which causes it to speak a different language in legal effect form that which it originally spoke or which changes the legal
identity or character of the instrument.
The following alteration are specifically declared to be material: any alteration of (i) the date, (ii) the sum payable, (iii) the
time of payment, (iv) the place of payment, or the addition of a place of payment.
A promissory note was made without mentioning any time for payment. The holder added the words “on demand” on the
face of the instrument. As per the above provision of the Negotiable Instruments Act, 1881 this is not a material alteration
as a promissory note where no date of payment is specified will be treated as payable on demand. Hence, adding the words
“on demand” does not alter the business effect of the instrument

CA DEEPIKA RATHI 45
ii. Person to be called as a holder: As per section 8 of the Negotiable Instruments Act, 1881 ‘holder’ of a Negotiable
Instrument means any person entitled in his own name to the possession of it and to receive or recover the amount due
thereon from the parties thereto.
Person holder in due course: Holder in due course means any person who for consideration became the possessor of a
promissory note, bill of exchange or cheque (if payable to bearer) or the payee or endorsee there of (if payable to order)
before the amount mentioned in it became payable, and without having sufficient cause to believe that any defect
existed in title of the person from whom he derived his title.
In the given case, Ankit draws a cheque for R s . 2,000 and hands it over to Shreya by way of gift. Hence, Shreya can
be termed as a holder because she has a right to possession and to receive the amount due in her own name.
But she cannot be termed as a holder in due course.

CA DEEPIKA RATHI 46
Question 55 : Examine the validity of the following statements with reference to the Negotiable Instruments Act, 1881.
(i) When payment on an instrument is made in due course, both the instrument and theparties to it are discharged.
(ii) Alteration of rate of interest specified in the Promissory Note is not a materialalteration.
(iii) Conversion of the blank indorsement into an indorsement in full is not a materialalteration and it does not require
authentication. [MAY 2022, 3 Marks]
Answer 55 :
i. When payment on an instrument is made in due course, both the instrument and the parties to it are discharged: Valid
Reasoning: As per section 78 of the Negotiable Instrument Act, 1881, when payment on an instrument is made in due
course, both the instrument and the parties to it are discharged subject to the provision of section 82(c). The payment
on an instrument may be made by any party to the instrument. It may even be made by a stranger provided it is made
on account of the party liable to pay.
ii. Alteration of rate of interest specified in the Promissory Note is not a materialalteration: Not valid
Reasoning: An alteration is material which in any way alters the operation of the instrument and affects the liability of
parties thereto. Hence, Alteration of rate of interest is material alteration.
iii. Conversion of the blank indorsement into an indorsement in full is not a material alteration and it does not require
authentication: Valid
Reasoning: Conversion of a blank indorsement into an indorsement in full [under Section 49 of the Negotiable
Instruments Act, 1881] is not a material alteration. It has been authorised by the Act and do not require any
authentication.

CA DEEPIKA RATHI 47
Question 56 : Healthcare Services Limited (the Bidder), bids the tender floated by Super Care Hospital (the Tenderer),
attaching a cheque dated 01.04.2021 for Rs.5,00,000 towards earnest money deposit. Since the tender process was
extended, the Tenderer returned the cheque expiring on 30.06.2021 to the Bidder for its resubmission after having
revalidated by changing the date of the cheque to 01.07.2021. Accordingly, the revalidated cheque was resubmitted by the
Bidder to the Tenderer. The cheque was presented by the Tenderer to the banker. It was dishonoured by the bank. Examine,
whether the cheque altered with a new date shall be deemed to be a valid cheque binding the Bidder for payment as per
the Negotiable Instruments Act, 1881? [MAY 2022, 4 Marks]
Answer 56 :An alteration is material which in any way alters the operation of the instrument and affects the liability of
parties thereto.
By material alteration the identity of original instrument is destroyed and those parties who had agreed to be liable on the
original instrument cannot be made liable on the new contract contained in the altered instrument to which they never
consented (Gour Chandra vs Prasanna Kumar 33 Cal 812). It makes no difference whether the alteration is made by a party
who is in possession of the same, or by a stranger while the instrument was in the custody of a party, because the party in
custody of instrument is bound to preserve it in its integrity. The rule is defended on the ground that no man shall be
permitted to take the chance of committing a fraud without running any risk of loss by the event when it is detected.
The party who consents to the alteration as well as the party who makes the alteration are disentitled to complain against
such alteration.
In the given question, the tenderer (Super Care Hospital) returned the cheque to the bidder (i.e. the drawer of cheque-
Healthcare Services Limited) for its resubmission after having revalidated by changing the date of the cheque

CA DEEPIKA RATHI 48
The drawer himself altered the date of the cheque for re-validating the same instrument, he cannot take advantage of it by
saying that the cheque becomes void as there was a material alteration thereto. It is always open to a drawer to voluntarily
re-validate a negotiable instrument including a cheque [Veera Exports v T. Kalavathy (2002) 1 SCC97].
In the light of the above discussion, the cheque altered with a new date shall be deemed to be a valid cheque and thus,
binding the Bidder for payment.

CA DEEPIKA RATHI 49
Question 57 : 'A' draws a cheque for ` 5,000 in favour of 'B'. 'A' had sufficient funds in his bank account to meet it, when
the cheque ought to be presented in the bank. The bank fails before the cheque is presented. 'B' wants to claim it from 'A'.
Decide, whether 'A' is liable as per the Negotiable Instruments Act, 1881. [MAY 2022, 4 Marks]
Answer 57 :According to section 84 of the Negotiable Instruments Act, 1881, if a holder does not present a cheque within
reasonable time after its issue, and the bank fails causing damage to the drawer, the drawer is discharged as against the holder
to the extent of the actual damage suffered by him.
In the given situation, when the cheque ought to be presented, ‘A’ had sufficient funds at the bank to meet it. The bank failed
before the cheque was presented. Thus, the drawer (‘A’) is discharged, but the holder (‘B’) can prove against the bank for the
amount of the cheque.

CA DEEPIKA RATHI 50