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- 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.