1. Papers - Business Law
Paper 1
Question1:Define promissorynote andbill of exchange ?Highlightthe essentialsof eachone anddraw
comparisonbetweenthese twonegotiable instrument.( 2+2+2+2+2=10)
Question2:What are the essentialsof contractof sales,defineunpaidseller,highlightshisrightsand
lien?(4+2+2+2=10)
Question3:What do you understandbyfree consentinacontract ? Elaborate itseach aspect.
SolutionPaper1
Answer1: A promissorynote isaninstrumentisaninstrumentin writing( notbeingacurrencynote or
banknote) containinganunconditionalundertaking,signedbythe maker,topaya certainperson,or to
the bearerof the instruments
Section5 of the Act defines,“A bills of exchangeisan instrumentin writing an unconditionalorder,
signed by the maker,directing a certain person to pay a certain sumof money only to,or to the orderof
a certain person orto the bearerof theinstrument.” A bill of exchange,therefore,isawritten
acknowledgementof the debt,writtenbythe creditor andacceptedbythe debtor.There are usually
three partiestoa bill of exchange drawer,acceptorordrawee andpayee.Drawerhimself maybe the
payee.
EssentialsOf PromisoryNote
1. It mustbe inwriting:
A mere verbal promise topayisnot a promissorynote.The methodof writing( eitherinkorpencil or
printing,etc.) isunimportant,butitmustbe inany formthat cannot be alteredeasily.
2.It mustcertainly an express promiseor clear understandingtopay:
There mustbe an expressundertakingtopay.A mere acknowledgementisnotenough.
3. promise to pay must be unconditional:
A conditional undertakingdestroysthe negotiable characterof anotherwise negotiable instrument.
Therefore,the promisetopaymust notdependupon the happeningof some outside contingencyor
event.Itmustbe payable absolutely.
4. it shouldbe singedby the maker
The personwhopromise topay mustsignthe instrumenteventhoughitmight have beenwritten
by the promisorhimself.
2. 5.The maker must be certain:
The note self mustshowclearlywhoisthe personagreeingtoundertake the liabilitytopaythe
amount
6. The payee mustbe certain:
The instrumentmustpointoutwithcertaintythe persontowhomthe promise hasbeenmade.
7. The promise shouldbe topaymoneyandmoneyonly:
Moneymeansthe legal tendermoneyandnotoldand rare coins
8. The amountshouldbe certain:
One of the mostimportantcharacteristicsof a promissorynote iscertainly-notonlyregardingthe
personto whomor bywhom paymentisto be made butalsoregardingthe amount.
There isa promise topaycertainamountwithinterestata specifiedrate.
the amountisto be paid at an indicatedrate of exchange
9. Other Formalities:
The other formalitiesregardingnumber,place,date,considerationetc.thoughusuallyfoundgiven
inthe promissorynotesbutare notessential inlaw
EssentialsOf Bill Of Exchange
It mustbe inwriting.
It mustbe signed bythe drawer.
The drawer,drwaee & payee mustbe certain.
The sum payable mustalsobe certain.
It shouldbe properlystamped.
It mustcontainan expressordertopay moneyandmoneyonly.
Number,date , place are not essential.
ComparisonBetweenPromissoryNote andBill Of Exchange
3. Basis of
difference
Promissory note Bill of exchange
Numberof
parties
There are two
parties-
The
maker(debtor),&
thepayee( creditor).
There are three parties-
Drawer, drawee & payee:
Although anytwoout of
thethree may be filled by
one and thesame person.
Payment to
the maker
A promissorynote
cannot be made
payable themaker
himself.
Bill of exchange tothe
drawerand payee or
drawee and payee maybe
thesame person.
Conditional
instrument
it cannot be made
conditionally.
A bill also cannot be
drawn conditionally.
Nature of
liability
Theliability of
maker is primary &
absolute.
Theliability of a maker of
a bill of exchange is
secondaryand
conditional.
Maker Themaker of a
promissory note is
in a position of a
debtorwho
promises topay the
sumspecified in it.
Themaker of a bill of
exchange is in a position
of a creditorwhoorders to
paythesum specified in it.
4. Answer2: It isa contract bywhichthe ownershipof movable goodsistransferredfromthe
sellertothe buyer.The term‘contract of sale’isdefinedinSection4(1) of the Sale of GoodsAct
as-
“A contract ofsale of goodsis a contract wherebythe sellertransfersor agreesto transferthe
property in goodsto the buyer for a price”
Contract ofsale may be absolute or conditional
Property in goodstransferred it iscalled SALE
Transfer to take place in future calledAGREEMENT TO SELL
Agreementto Sell becomesSale when propertyin goods is transferred.
EssentialsOf Contract Of Sale : Must be a transfer of property or an agreementto transferit from
sellerto buyer
Transfer must take place in considerationofa moneypayment made by the buyer. This money
payment iscalled price.
Property to be transferredmust be saleable
Sellerand buyermust be differentperson
UnpaidSeller: THE SELLER OF GOODSIS DEEMED TO BE AN UNPAIDSELLERWHEN THE WHOLE
PRICE HAS NOT BEEN PAID OR TENDERED
WHEN A BILL OF EXCHANGEOR OTHER NEGOTIABLE INSTRUMENT HAS BEEN RECEIVED AS
CONDITIONAL PAYMENTAND THE CONDITION NOT FULFILLED BY REASON OF DISHONOUR OR
OTHERWISE.
RIGHTS OF UNPAID SELLER:
A Lien on the goods for the price while he isin possessionofthem
In case of the insolvencyofthe buyera right of stoppingthe goodsin transit after he
has parted with possessionwiththem
A right of resale as limitedbythe salesof good act
Where the property in goods has not passedto the buyer , in additionto hisother
remedies,a right of withholdingdeliverysimilar toand coextensive withhisrights of
lienand stoppage intransit where the property has passedto the buyer
UNPAIDSELLER’S LIEN:
While he isin possessionofgoods he entitledtoretain the possessionofthemuntil
payment or tenderof the price in the followingcases
1. Where the goods have beensoldwithout any stipulationas to credit
5. 2. Where the goods have beensoldto the credit but the terms of ccredit
has expired
3. Where the buyer become insolvent
The unpaid sellermayexcise hisright of liennot withstandingthat he isin possession
of the goodsas agent or bailee or the buyer
Answer3 :
Consent: Two or more persons are said to consentwhen theyagree upon the same thing in the
same sense
Consentof both parties must be free.
Consentis said to be free whenit is not caused by
(1) coercion,as definedinsection15
(2) undue influence,asdefinedinsection16
(3) fraud, as definedinsection17
(4) misrepresentation,asdefinedinsection18
(5) mistake,subjectto the provisionsof sections20, 21 and 22.
Coercion: Insimple words,coercionisthreatorforce usedbyone party againstanotherfor
compellinghimtoenterintoan agreement.
Section15 of IndianContractAct definescoercion asthe committingorthreateningtocommitany
act forbiddenbythe IndianPenal Code oran unlawful detainingorthreateningtodetain,any
propertyto the prejudice of anypersonwiththe intentionof inducinganypersontoenterintoan
agreement.
Consentobtainedatthe pointof pistol orintimidation,threatof imprisonmentandthreatto
commitsuicide withthe intentionof causingapersontoenterintoan agreementisanact of
coercion.
In simple words,coercionisthreatorforce usedbyone party againstanotherfor compellinghimto
enterintoan agreement.
Section15 of IndianContractAct definescoercionasthe committingorthreateningtocommitany
act forbiddenbythe IndianPenal Code oran unlawful detainingorthreateningtodetain,any
propertyto the prejudice of anypersonwiththe intentionof inducinganypersontoenterintoan
agreement.
6. Consentobtainedatthe pointof pistol orintimidation,threatof imprisonmentandthreatto
commitsuicide withthe intentionof causingapersontoenterintoan agreementisanact of
coercion
Undue Influence: acontract issaidto be inducedbyundue influence wherethe relationssubsisting
betweenthe partiesare suchthatone of the partiesisina positiontodominate the will of the other
and usesthe positiontoobtainanunfairadvantage overthe other
A personisin positiontodominate the will of otherwhen: Where he holdsa real or apparent
authorityoverthe othere.g.relationshipbetweenmasterandservant,publicofficerand accused,
income tax officerinrelationanassessee.
Where he standsin a fiduciaryrelationshiptothe other.Fiduciaryrelationmeansarelationof
mutual trustand confidence.like fatherandson,guardianandward, solicitorandclient,doctorand
patient,trustee andbeneficiary.
Where he makesa contract witha personwhose mental capacityistemporarilyorpermanently
affectedbyreasonof age,illnessormental orbodilydistress.
Whenconsentto an agreementiscausedbyundue influence,the agreementisacontract voidable
at the optionof the party whose consentwassocaused.Suchcontract may be set aside either
absolutelyorsubjecttorestitutionof the benefitthere underoruponsuch conditionasthe court
may deemjust.(section19 (A)).
Pardanashin Ladies-A paranashinwomenisone wholivesinseclusionhavingnocommunication
exceptfrombehindthe pardahwithanymale personexceptafew privilegedrelations.
Law providesspecial protectiontothemonthe groundof theirbeingignorant sofar as the worldly
knowledge goes.A contractwiththemispresumedtohave beeninducedbyundue influence unless
the otherparty showthat it washer intelligentandvoluntaryact.
Fraud : "Fraud" meansandincludesanyof the followingactscommittedbya partyto a
contract, or withhisconnivance,orbyhisagent,withintenttodeceive anotherpartytheretoof
hisagent,or to induce himto enterintothe contract:-
the suggestion,asa fact,of that whichisnot true,byone who doesnotbelieve ittobe true ;
the active concealmentof afact by one havingknowledgeorbelief of the fact ;
a promise made withoutanyintentionof performingit
any otheract fittedtodeceive ;
any suchact or omissionasthe law speciallydeclarestobe fraudulent.
Mere silence astofacts likelytoaffectthe willingnessof apersontoenterintoa contract isnot
fraud,unlessthe circumstancesof the case are suchthat, regardbeinghadto them, it isthe
7. dutyof the personkeepingsilence tospeak,orunlesshissilence is,initself,equivalentto
speech.
1.The suggestion,asafact, of that whichisnot true,by one whodoesnotbelieve ittobe true.
The leadingcase:PeekV.Gurney.
The prospectusof a companydidnotreferto the existence of adocumentdisclosingliabilities.
Thiscreatedan impressionthatthe companywasprosperous.Itwasheldthatthere was
suppressionof truthandsuggestionof false statementamountingtofraud.
2. The active concealmentof afact by one havingknowledge orbelief of the fact-If aperson
concealsa fat whichismaterial tothe contract will be a case of fraud.Mere nondisclosure is
not fraud,where there isnodutyto disclose.”CaveatEmptor”or “BuyerBeware”isthe rule,but
incontracts of absolute faithmere silence aboutmaterial factswill be takenasfraud.
E.g. A,horse dealersolda mare to B.A knew that the mare hada crackedhoof,whichhe filled
up insuch a way as to defydetection.The defectwassubsequentlydiscoveredbyB.Itwas held
that the agreementcouldbe avoidedbyBas hisconsentwasobtainedbyfraud.
A promise made withoutanyintentionof performingitisfraud.
Anyotheract fittedtodeceive.E.g.Where aparty,who by false impersonationinducesanother
to enterintoa contract withhimunderthe belief thathe issomebodyelse,commitsfraud.
Anysuch act or omissionasthe law speciallydeclarestobe fraudulent.
A party to the contract isunderno obligationtodisclose the whole truthtothe otherparty.
CaveatEmptor i.e.letthe buyerbeware isthe rule applicable tocontracts.There isno dutyto
speakinsuch casesand silence doesnotamounttofraud.
Silence istreatedasFraudin:
Fiduciaryrelationship
Contract of insurance
Contract of marriage
Contract of Familysettlement
Share allotmentcontracts.
Whenthe consentto an agreementiscausedbyfraud,the agreementisavoidable contractat
the optionof the partywhose consentwasso caused.
A party whose consenttoanagreementissoobtainedhastworemedies,namely:
He mayrescindthe contract or
8. He mayinsistthat the contract shall be performedandthathe shall be put inthe positionin
whichhe wouldhave been,if the representationmade hadbeentrue.
Misrepresentation: The term “Misrepresentationmeansafalse representationof factmade
innocentlyornon-disclosure of amaterial factwithoutanyintentiontodeceive the otherparty.
Accordingto Section18 the term misrepresentationmeans:
The positive assertion,inamannernot warrantedbythe informationof the personmakingit,of
that whichisnot true,thoughhe believesittobe true.
E.g. A onthe strengthof hearsayinformationpositivelyassertedtoBthat certainthirdparty is
goingto be the Director of the co. to be incorporated, boughtthe sharesonfaithof such a
statement.Thisiscase of misrepresentationbyA.(Mohanlal V Shri GangaJi CottonMillsco.)
2.Anybreach of duty,which,withoutanintentiontodeceive gainsanadvantage tothe person
committingitor anyone claiming underhim, bymisleadinganothertohisprejudiceorto the
prejudice of anyone claimingunderhim.Thisisknownas‘Constructivefraud".
3.It alsocoversthose caseswhere a statementwhenmade wastrue butsubsequentlybefore it
was actedupon,itbecame false tothe knowledge of the personmakingit.Insucha case , the
personmakingthe statementcomesunderanobligationto informthe otherpartyof the true
facts.
There shouldbe a representationorassertion.
Such representationmustrelate toamatterof fact whichhasbecome untrue ; and Itwas made
before the finalizationof transactionwithaview toinduce the otherpartyto enterintoa
contract.
It mustactuallyhave beenacteduponby the party.
It musthave beenmade eitherbythe party himself orby hisdulyauthorizedagent.
Consequencesof Misrepresentation- The aggrievedpartymayavoidthe contract,or May affirm
the contract and insistonthe misrepresentationbeingmade good.
Whenconsentisinducedbymisrepresentation&aggrievedpartyhasthe meansof discovering
the truth withordinarydiligence,the contractcannotbe setaside.
Mistake : Mistake maybe definedasanerroneousbeliefconcerningsomething.Itmeansthat
partiesintendingtodoone thinghave by intentionalerrordone somethingelse.
Mistake of IndianLaw: The contract isbindingbecause everybodyissupposedtoknow the law
of the country.”A contract isnot voidable because itwascausedbya mistake asto any lawin
force in India”(section21).
9. Mistake of ForeignLaw and Mistake of Private rightsof Partiesare treatedas mistake of facts.
Mistake as to subjectmatter. It fallsintosix headsnamely
1.Existence 2.Identity3.Title 4. Price 5. Quantity6.Quality
Whenboththe parties toan agreementare undera mistake asto a matter of fact, whichare
essential tothe agreement,andthis agreementshall be Void.
Thus this mistake shall be termedasbilateral mistake of facts.
It shouldbe committedbyboththe parties
It shouldbe relatedtoa matterof fact whichare essential tothe agreement.
Section22 providesthatif one party alone isundermistake of fact. Unilateral mistakesdonot
affectthe validityof contractunlesstheyconcernsome fundamental factandthe otherparty is
aware of the mistake.
1.Mistake as to identityof the personorparty: Mistake asto the identityof apersonmayalso
avoida contract. Where A intendstocontract onlywithB,but entersintoa contract withC
believinghimtobe B,the contract isvitiated.
2.Mistake as to the nature of transaction:A blindmansigninga document,readovertohim
wrongly,will notbindhim.
Case ; FosterV. Mackinnon.
A an illiterate oldman,wasmade toputhis signature ona documentwhichwasa pronote .A
thoughtthe documenttobe a will where hissignature wasrequiredasawitness.Underthis
presumptionhrsignedthe documentwhichwasinfact a pronote.SubsequentlyBendorsedthe
pronote to C whopaidvalue forit ingoodfaith.C suedA onthe pronote.Itwasheldthat A was
not boundbyit.
