LEGAL ASPECTS OF BUSINESS

SESSION-4

SALE OF GOODS ACT, 1930. CONTD...... CONDITIONS AND WARRANTIES:

MEANING OF STIPULATION: SEC12(1) A STIPULATION IN A CONTRACT OF SALE OF

GOODS MAY BE A CONDITION OR WARRANTY.

MEANING OF CONDITION:SEC12(2) A CONDITION IS A STIPULATION – A) WHICH IS ESSENTIAL TO THE MAIN PURPOSE

OF THE CONTRACT AND B) THE BREACH OF WHICH GIVES THE

AGGRIEVED PARTY A RIGHT TO TERMINATE THE CONTRACT.

EXAMPLE: X ASKED A CAR DEALER TO SUGGEST

HIM A CAR SUITABLE FOR TOURING PURPOSES. THE DEALER SUGGESTED A SMALL CAR. ACCORDINGLY X PURCHASED IT BUT FOUND IT UNSUITABLE FOR TOURING PURPOSE.

IN THIS CASE , SUITABILITY FOR TOURING PURPOSE WAS A CONDITION OF CONTRACT. X WAS THEREFORE ENTITLED TO REJECT THE CAR AND HAVE REFUND OF THE PRICE PAID.

(BALDRY VS. MARSHALL).

MEANING OF WARRANTY SEC12(3): A WARRANTY IS A STIPULATION – A) WHICH IS COLLATERAL TO THE MAIN

PURPOSE OF THE CONTRACT AND B) THE BREACH OF WHICH GIVES THE

AGGRIEVED PARTY A RIGHT TO CLAIM DAMAGES BUT NOT THE RIGHT TO REJECT GOODS AND TO TERMINATE THE CONTRACT.

EXAMPLE: X ASKED A CAR DEALER TO SUGGEST HIM A GOOD CAR AND WHILE SUGGESTING THE CAR, THE DEALER SAID THAT IT COULD RUN FOR 20KMPL. BUT THE

CAR COULD RUN ONLY 15KMPL . IN THIS CASE, THE STATEMENT MADE BY

THE SELLER WAS A WARRANTY. X WAS, THEREFORE NOT ENTITLED TO REJECT THE CAR BUT HE WAS ENTITLED TO CLAIM THE DAMAGES.

DISTINCTION BETWEEN CONDITION AND WARRANTY: 1) ESSENTIAL vs. COLLATERAL: CONDITION IS A STIPULATION WHICH IS

ESSENTIAL TO THE MAIN PURPOSE OF THE CONTRACT.

WARRANTY IS A STIPULAION WHICH IS ONLY COLLATERAL TO THE MAIN PURPOSE OF THE CONTRACT.

2) RIGHT IN CASE OF BREACH: IN THE CASE OF CONDITION THE AGGRIEVED

PARTY CAN TERMINATE THE CONTRACT. IN THE CASE OF WARRANTY THE AGGRIEVED

PARTY CAN CLAIM DAMAGES BUT CAN NOT TERMINATE THE CONTRACT.

3) TREATMENT: IN CASE OF CONDITION A BREACH OF

CONDITION CAN BE TREATED AS BREACH OF WARRANTY.

FOR EXAMPLE : A BUYER MAY LIKE TO RETAIN THE GOODS AND CLAIM ONLY DAMAGES.

IN CASE OF WARRANTY A BREACH OF WARRANTY CANOT BE TREATED AS A BREACH OF CONDITION.

DOCTRINE OF CAVEAT EMPTOR –SEC 16: THE EXPRESSION CAVEAT EMPTOR MEANS LET

THE BUYER BEWARE.AS PER THIS SECTION “SUBJECT TO THE PROVISIONS OF THIS ACT AND ANY OTHER LAW FOR THE TIME BEING IN FORCE, THERE IS NO IMPLIED WARRANTY OR CONDITION AS TO QUALITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF GOODS SUPPLIED UNDER A CONTRACT OF SALE.”

ITS NOT THE SELLERS DUTY TO POINT OUT DEFECTS OF THE GOODS WHICH HE OFFERS FOR SALE, RATHER IT IS THE DUTY OF THE BUYER TO SATISFY HIMSELF ABOUT THE QUALITY AS WELL AS THE SUITABILITY OF THE GOODS.

EXCEPTIONS TO THE DOCTRINE OF CAVEAT EMPTOR: 1) IN CASE OF MISREPRESENTATION BY

THE SELLER. 2) IN CASE OF CONCEALMENT OF

LATENT DEFECT. 3) IN CASE OF SALE BY DESCRIPTION. 4) IN CASE OF SALE BY SAMPLE. 5) IN CASE OF SALE BY DESCRIPTON

AND SALE BY SAMPLE. 6) FITNESS FOR A PARTICULAR

PURPOSE. 7) MERCHANTABLE QUALITY.

RELEVANCE OF CAVEAT EMPTOR: THE RULE OF CAVEAT EMPTOR APPEARED TO PLAY

AN IMPORTANT ROLE IN THE PAST WHEN TRADE WAS CONDUCTED ON LOCAL SCALE AND THE BUYER HAD EVERY OPPORTUNITY TO EXAMINE THE GOODS BEFORE BUYING.

HOWEVER IN THE MODERN CONTEXT , THE RIGOURS OF THE RULE HAVE BEEN MITIGATED BECAUSE OF GLOBAL DIMENSIONS OF TRADE, GOVERNMENT LEGISLATIONS ON CONSUMER PROTECTION, PROFESSIONAL MANAGEMENT,INTENSE COMPETITION AND CONSUMER AWARENESS.IN FACT THE RULE OF CAVEAT EMPTOR SHOULD BE REPLACED BY THE RULE OF CAVEAT VENDOR- LET THE SELLER BE AWARE.

NEGOTIABLE INSTRUMENTS ACT 1881:THIS ACT CAME INTO FORCE ON MARCH

1ST 1881. IT EXTENDS TO WHOLE OF INDIA EXCEPT THE STATE OF JAMMU AND KASHMIR .

THE ACT DEALS WITH THE LAW RELATING TO THREE SPECIFIC CLASSES OF NEGOTIABLE INSTRUMENTS , VIZ. PROMISSORY NOTE, BILL OF EXCHANGE AND CHEQUE PAYABLE EITHER BY ORDER OR TO THE BEARER.

FEATURES OF NEGOTIABLE INSTRUMENTS: 1) THE RIGHT OF OWNERSHIP

CONTAINED IN THE INSTRUMENT CAN BE TRANSFERED FROM ONE PERSON TO ANOTHER BY MERE DELIVERY IF IT IS PAYABLE TO BEARER OR BY ENDORSEMENT AND DELIVERY IF PAYABLE TO ORDER AND

2) THE TRANSFEREE TAKING THE INSTRUMENT IN GOOD FAITH AND FOR CONSIDERATION GETS A GOOD TITLE TO THE SAME EVEN THOUGH THE TITLE OF THE TRANSFEROR IS DEFECTIVE.

PAYABLE TO ORDER: A PROMISSORY NOTE, BILL OF

EXCHANGE OR CHEQUE IS PAYABLE TO ORDER IF, EITHER OF THE FOLLOWING TWO CONDITIONS IS FULFILLED:

1) IT MUST BE EXPRESSED TO BE SO PAYABLE OR

2) IT MUST BE EXPRESSED TO BE PAYABLE TO A PARTICULAR PERSON AND IT MUST NOT CONTAIN WORDS WHICH PROHIBIT TRANSFER OR INDICATE AN INTENTION THAT IT SHALL NOT BE TRANSFERABLE.

PAYABLE TO BEARER: 1) IT MUST BE EXPRESSED TO BE SO

PAYABLE OR THE ONLY OR LAST ENDORSEMENT

MUST BE AN ENDORSEMENT IN BLANK.

ESSENTIAL CHARACTERISTIC FEATURES OF A NEGOTIABLE INSTRUMENT:

1) PAYABLE TO ORDER OR BEARER. 2) FREELY TRANSFERABLE. 3) PRESUMPTION TO HOLDER. 4) TITLE OF HOLDER IN DUE COURSE 5) PRESUMPTION AS TO

CONSIDERATION.

2) FREELY TRANSFERABLE: AN INSTRUMENT PAYABLE TO ORDER IS NEGOTIABLE BY ENDORSEMENT AND DELIVERY AND AN INSTRUMENT PAYABLE TO BEARER IS NEGOTIABLE BY MERE DELIVERY.

3) PRESUMPTION AS TO HOLDER: EVERY HOLDER OF A NEGOTIABLE INSTRUMENT IS PRESUMED TO BE A HOLDER IN DUE COURSE.

4) TITLE OF HOLDER IN DUE COURSE: A HOLDER IN DUE COURSE (i.e., THE PERSON WHO BECAME THE POSSESSOR OF NEGOTIABLE INSTRUMENT BEFORE MATURITY, FOR VALUABLE CONSIDERATION AND IN GOOD FAITH) GETS THE INSTRUMENT FREE FROM ALL DEFECTS IN THE TITLE OF THE TRANSFEROR).

5) PRESUMPTION AS TO CONSIDERATION:

EVERY NEGOTIABLE INSTRUMENT IS PRESUMED TO HAVE BEEN MADE, DRAWN, ACCEPTED, ENDORSED, NEGOTIATED, OR TRANSFERED FOR CONSIDERATION.

PROMISSORY NOTE SEC-4: MEANING: ACC. TO SEC-4 OF THE

NEGOTIABLE INSTRUMENTS ACT, 1881, A PROMISSORY NOTE IS AN INSTRUMENT IN WRITING(NOT BEING A BANK NOTE OR CURRENCY NOTE)CONTAINING AN UNCONDITIONAL UNDERTAKING SIGNED BY THE MAKER TO PAY A CERTAIN SUM OF MONEY ONLY TO, OR TO THE ORDER OF A CERTAIN PERSON OR TO THE BEARER OF THE INSTRUMENT.

ESSENTIAL FEATURES OF PROMISSORY NOTE: 1) IT SHOULD BE IN WRITING 2) EXPRESS TO PAY 3) DEFINITE AND UNCONDITIONAL

PROMISE 4) SIGNED BY THE MAKER 5) PROMISE TO PAY CERTAIN SUM 6) PROMISE TO PAY MONEY ONLY 7) CERTAIN PAYEE.

1) IN WRITING: IT MUST BE IN WRITING. IN OTHER WORDS, AN ORAL PROMISE DOES NOT MAKE A PROMISSORY NOTE SINCE IT IS NOT AN INSTRUMENT.

2) EXPRESS PROMISE TO PAY: THERE MUST BE AN EXPRESS PROMISE TO PAY AND NOT MERE ACKNOWLEDGEMENT OF INDEBTEDNESS.

EXAMPLES: “MR.B, I OWE YOU RS.500”. “WE HAVE RECD.THE SUM OF RS.500 IN

CASH FROM MR.B.”

“WE HAVE RECD. THE SUM OF RS.500 IN CASH FROM MR.B. THIS AMOUNT WILL BE REPAID ON DEMAND”.

“WE PROMISE TO PAY MR.B A SUM OF RS.500”.

FIRST TWO PHRASES ARE MERE ACKNOLGEMENTS OF INDEBTNESS BUTNOT PROMISSORY NOTES AS THERE IS NO EXPRESS PROMISE TO PAY.

LAST TWO PHRASES ARE PROMISSORY NOTES AS THERE IS AN EXPRESS PROMISE TO PAY.

3) DEFINITE AND UNCONDITIONAL PROMISE:

IT MAY BE NOTED THAT A PROMISE TO PAY IS NOT CONDITIONAL IF IT DEPENDS UPON AN EVENT WHICH IS CERTAIN TO HAPPEN BUT THE TIME OF ITS OCCURRENCE MAY BE UNCERTAIN.

FOR EXAMPLE : “ I PROMISE TO PAY RS.500 AFTER MY

MARRIAGE WITH KATRINA OR KARISHMA”.

4) SIGNED BY THE MAKER: IT MUST BE SIGNED BY THE MAKER.THE PURPOSE OF SIGNATURE IS TO AUTHENTICATE THE INSTRUMENT.

5) PROMISE TO PAY CERTAIN SUM: THE PROMISE BE TO PAY A CERTAIN SUM. NEGOTIABLE INSTRUMENTS ARE MEANT FOR FREE CIRCULATION AND IF THEIR VALUE IS NOT CLEARLY MENTIONED ON THE INSTRUMENTS, THEIR CIRCULATION WOULD BE MATERIALLY IMPEDED.

THE SUM PAYABLE IS ALSO CERTAIN IN THE FOLLOWING CASES:

A) WHERE IT IS PAYABLE ALONG WITH INTEREST AND EITHER THE AMOUNT OF INTEREST ITSELF OR THE RATE OF INTEREST IS GIVEN.

B) WHERE IT IS PAYABLE AT A SPECIFIED RATE OF EXCHANGE.

C) WHERE IT IS PAYABLE BY INSTALMENTS WITH A PROVISION THAT A DEFAULT BEING MADE IN PAYMENT, THE UNPAID BALANCE SHALL BECOME DUE (SEC-5).

STATE WITH REASONS WHETHER ECCH OF THE FOLLOWING INSTRUMENTS IS A PROMISSORY NOTE OR NOT:

1)“ I PROMISE TO PAY B RS.500 AND ALL OTHER SUMS WHICH SHALL BE DUE TO HIM”.

2) “ I PROMISE TO PAY B RS.500, FIRST DEDUCTING THREOUT ANY MONEY WHICH HE MAY OWE ME.”

3) “ I PROMISE TO PAY RS.500 ALONG WITH THE INTEREST THEREON”.

THESE INSTRUMENTS ARE NOT PROMISSORY NOTES AS THE SUM PAYABLE IS NOT CERTAIN.

6)PROMISE TO PAY MONEY ONLY: THE PROMISE MUST BE IN MONEY AND MONEY ONLY.

“ I PROMISE TO DELIVER TO B 1000KG OF PADDY”.

THE AFORESAID INSTRUMENT IS NOT PROMISSORY NOTE BECAUSE THE PAYMENT IS NOT IN MONEY.

7) CERTAIN PAYEE:THE PAYEE MUST BE CERTAIN.

PARTIES TO A PROMISSORY NOTE: THE MAKER: THE PERSON WHO MAKES

THE PROMISSORY NOTE IS CALLED THE MAKER.

THE PAYEE: THE PERSON TO WHOM OR TO WHOSE ORDER THE PAYMENT IS TO BE MADE, IS CALLED THE PAYEE.

RQUIREMENTS UNDER THE INDIAN STAMP ACT, 1899:

A PROMISSORY NOTE MUST BE STAMPED WITH ADHESIVE STAMP OR ENGROSSED ON A STAMP PAPER OF PROPER VALUE.

EXAMPLE : BHARAT TULSIAN SELLS GOODS TO

RAHUL FOR RS.10,000 TO BE PAID 3 MONTHS AFTER DATE.IF RAHUL PROMISES TO PAY IN WRITING, THIS PROMISE WILL BE A PROMISSORY NOTE.

SPECIMEN OF A PROMISSORY NOTE: RAHUL HIS ADDRESS. DATE:17TH JAN

2011. RS.10,000/- ONLY. THREE MONTHS AFTER DATE I PROMISE

TO PAY BHARAT OR TO HIS ORDER THE SUM OF RS.TEN THOUSAND , FOR VALUE RECEIVED.

TO, BHARAT, SIGN HIS ADDRESS. RAHUL.