Fundamentals of

Business Laws and

Business
Communication

CMA-Foundation
2022 Syllabus

CA Aishwarya Khandelwal Kapoor

© All rights reserved
Revised Edition
Price: ` 500

Every effort has been made to present this publication in the most authentic form without any
errors and omissions. In spite of this errors might have inadvertently crept in, or there may be a
difference of opinion on certain points. Any mistake, error or discrepancy noted may be kindly
brought to the notice of the Author, which shall be dealt with suitably. It is notified that the Author
does not guarantee the accuracy or completeness of any information published herein, and will not
be responsible for any damage or loss, of any kind, in any manner, arising out of use of this
information.

No Part of this publication may be reproduced or copied in any form or translated in any other
language without prior written permission of the Author.
 About the Author

CA Aishwarya Khandelwal Kapoor is a qualified Chartered Accountant and a

first class graduate from Banaras Hindu University. She also holds the
prestige of being a merit holder by scoring 99 marks in Accountancy at
Senior Secondary Level. She also has the experience of working with
PricewaterhouseCoopers, a well renowned multinational company. Her
passion for teaching and excellent communication makes her one of the
finest faculties for professional exams. Also her fund about smart studying
motivates students to achieve their goal.

Email ID: [email protected]

Website: www.studyathome.org
 About the Book
I am pleased to commend to readers the revised edition of Fundamentals of Business
Laws and Business Communication, which is commensurate with the New Syllabus of
ICAI.

It is a comprehensive presentation of the subject matter in a lucid form understandable

to the students. These will help students to maintain a meaningful focus on examination
requirements.

The book is intended to serve as a standard text for students pursuing their
CMA- Foundation.

The following are the main features of the book:

• Simple Language
• Self-explanatory notes
• Numerous Practice questions

I hope this edition will endear itself to students and peers. I welcome comments and
suggestions for improving the utility of this book.

CA Aishwarya Khandelwal Kapoor

 Index
S. No. Topics Page No.
1 Sources of Law 1.1 – 1.8
2 Legislative Process in India 2.1 – 2.5
3 Legal Methods and Court System in India 3.1 – 3.12
4 Primary and Subordinate Legislation 4.1 – 4.9
5 Indian Contract Act, 1872 5.1 – 5.51
6 Sale of Goods Act, 1930 6.1 – 6.31
7 Negotiable Instrument Act, 1881 7.1 – 7.61
8 Introduction to Business Communication 8.1 – 8.10
9 Features of Effective Business Communication 9.1 – 9.4
10 Process of Communication 10.1 – 10.4
11 Types of Business Communication 11.1 – 11.11
12 Internet Based Business Communication 12.1 – 12.18
13 Do’s and Don’ts of Communication 13.1 – 13.4
14 Writing and Drafting for Business Audiences 14.1 – 14.19
15 Intercultural and International Business
15.1 – 15.3
Communication
16 Barriers to Business Communication 16.1 – 16.7
17 Legal Aspects of Business Communication 17.1 – 17.3
18 Use of Graphics and References for Business
18.1 – 18.14
Communication

Watch Demo Lectures on our YouTube Channel Link:

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 1 SOURCES OF LAW
- CONCEPTS, COMPONENTS

Law, as a tool of governance, has been dynamic in nature, expanding its horizons to accommodate
the requirements of the society, over centuries. As we trace the sources, let us understand what law
is, in the simplest of terms.

“Law is a set of rules…” (for the society) – Concept of Law by H.L.A. Hart.

Introduction
The founding stone of source of law in modern India, post Independence, is the Constitution of India,
1950 which provides us the basic principles of law. However, there are various other sources of law,
which has been developed with respect to customs, personal beliefs, pre-existing statutes,
ordinances, regulations and judicial pronouncements.
It sources of law in India can be broadly classified as the below mentioned:
1) All statutes (preceding and proceeding the adoption of the Constitution of India, 1950),
2) Case Laws (judicial precedents) and customary law (personal laws)
3) Ordinances, regulations and other mandates that effect us.

1. Statutes:
• The statutes are enacted by the Parliament and State Legislatures according to their domain,
mentioned in the 7th Schedule of the Constitution of India (the Union List, The State List and
the Concurrent List).

• There are laws known as delegated legislation in the form of rules, and regulations, as well as
bye-laws made by Central Government, State Governments and local authorities under the
authority conferred or delegated by Parliament or the concerned State Legislature.

• Laws made by Parliament may extend throughout, or in any part of the territory of India and
those by State Legislatures may generally apply only within the territory of the State
concerned.
 1.2 SOURCES OF LAW

Enacted By

+
Parliament State Legislature
(Union List) Concurrent List (state List)

May extend throughout or any part of Only within the State concerned
the territory of India

☞ Rules, regulations, bye taws made

by central government, State
Government and Local authorities Delegated Legislation

Under authority delegated

2. Judicial Precedents:
• As, we try and enhance our understanding of the law and its sources, it is very pertinent to
know that all laws, go through rigorous scrutiny under the public eye, once it comes into
effect. The concerned entities therefore, challenge laws, regulations before the court of law
accordingly.

• The Constitution of India, 1950 therefore provides for provision under Article 141 for the
same, which illustrates - Law declared by Supreme Court to be binding on all courts. The law
declared by the Supreme Court shall be binding on all courts within the territory of India.

• Although, the Supreme Court of India or the High Courts of the respective states do not
legislate, they have time and again provided with the correct interpretations for our
understanding, and thereby acted as a source of law.

3. Personal Laws – Personal Laws are mostly based on individual faith, hence mostly guided by
customs and practice.
Example – Hindu Marriage Act, 1955, The Indian Christian Marriage Act,1872, The Kazis Act,
1880, etc.

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 SOURCES OF LAW 1.3

4. Ordinance/Regulations - Article 13.3 (a) on the Constitution of India, 1950 mentions law
includes any Ordinance, order, bye-law, rule, regulation, notification, custom or usage having in
the territory of India the force of law;

Therefore, in times of these exigencies The President of India 123. Power of President to
promulgate Ordinances during recess of Parliament. Similar powers have been provided to the
Governor of a State, under Article 213 of the Constitution of India, 1950, in territorial limit of the
concerned state.

The authorities (Panchayati Raj) 00are notified under Article 243 of the Constitution of India,
1950, have the power delegated, to frame the required regulations for governance as local rural
administration along with various institutions/ organisations empowered to legislate
rules/regulations.

Sources of Law and Legal System in India before Independence – Brief History
The study of Indian legal history can primarily be divided into four periods:
1) The Ancient Period
2) The Medieval Period
3) The British Administrative Period
4) Indian Legal Period

1. The Ancient Period of law and governance can be found in and around the geographical
boundaries of modern day India, 1500 years before and after the beginning of approximately the
first decade of the Gregorian calendar.
• This era is mostly ruled and governed by kings having their own territories, and having laws
and regulations that were very localized and specific to their geographical boundaries. So,
with every passing territory, the set of laws differed.
• There were some underlying texts that have had their universal presence, i.e. Vedas, Smritis
(Manu-Smriti being one of the most popular texts to have been in circulation), Upanishads
and Arthasastra in the post Mauryan Empire era.
• One of the salient features of the ancient Indian law was that it was based on the principle of
“dharma”, basing righteousness and duty as its guiding principle, which was a
conglomeration of both legal and religious duties.
• The jurisdiction of each was determined by the importance of the dispute, the minor
disputes being decided by the lowest court and the most important by the king. The decision
of each higher Court superseded that of the court below.

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 1.4 SOURCES OF LAW

Six Categories of Ancient Indian Courts

• The Kula (Family Councils or groups):
A group of elderly people who educated members of the family how to handle conflicts inside
the family or among families of similar background.

• The Shreni (Trade or Professional Councils):

An assembly of old and knowledgeable people who are recognized as unbiased among a group
of traders. Professionals, and craftsmen to arbitrate conflicts.

• The Gana (Village Assembly):

This was a huge gathering of village or grama elders who were regarded as knowledgeable,
unbiased, and trustworthy by the people of the region.

• Adhikrita (Court appointed by the King):

These are all the courts recognized by the king to serve justice, with justices who are highly
trained in the Shastras and Smrithis. This sort of court came in a variety of forms depending on
its jurisdiction. They are partishtitha, which was founded in a certain village or town and
Apratishtitha was a movable court that would convene in a given location to try a specific matter
as summoned by the king and Mudrita was a higher-level court that had the authority to use the
royal seal[4].

• Sasita (King’s Court):

This was the Kingdom’s highest court of law. The King himself presided over it. To serve and
support the King, there was a Chief justice named Pradvivaka and a group of judges named
Sabhyas.

• Nripa (The King):

The King was the Supreme authority in the legal judicial adjudication process and he was
governed by Dharma precepts that the he could not contradict.

But, as foreign invasions began to rise in numbers along-with the magnitude of these attacks, it
became inevitable that the Indian sub-continent continue in the model of governance, that it had for
centuries. Alongwith it, came changes to administration and subsequently to the legal system
concerned.

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 SOURCES OF LAW 1.5
The Medieval Period:
Brief History: The Medieval period

Begins around 12th Century

Mohammed Ghori defeated Prithviraj Chauhan

(Battle of Tarain in 1192 AD)

Qutubuddin Aibak become first sultan of delhi

(Slave Dynasty)

Slave Dynasty Lodhi Dynasty

(1206-1526)

Zahiruddin Babu Defeated Ibrahim Lodhi

Started Rule of Mughal Empire

(AD 1707)

Mughal Empire Flourished

Death & Bahadur Shah Zafar

Mughal Rule Ends

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 1.6 SOURCES OF LAW

Legal System
(i) Sultanate Period: Several Courts of justice related to different branches of law.
Example: Diwan-i-Mazlim deals with disputes concerning with administration or
bureaucracy.

(ii) Mughal Period: courts were categorized according to the subject and requirement in
contention.
(1) Central Administration By the central Judiciary system
Chief Judicial functionary Qazi-ul-Quzat was Assisted by Mufti and Mir Ad’l
Qazi-ul-Quzat - Appointed by emperor
- to hear appeals,
- deliver the verdicts , and
- supervise the provincial courts

Mufti - Duty to expound the law

Mir Ad’l - Bringing the parties to court

- Enforcing the decrees

(2) For Province:

Chief Qazi of provincial court
Dealt with all the cases which were civil and criminal nature and served as the highest
forum of appeal within the province

(3) Capital:
Military had own judge: Qadi-e-Askar moved from place to place with the troops and
whose office corresponds to the present day Court Martial.

2. The British Administrative Period

- lasted for approximately around 200 years. They entered India as traders, during the
medieval period, however they were not alone in their endeavour. The Portuguese, the
British, the Danes, the Dutch, and the French also reached India.
- The East India Company enjoyed more than trade rights, if one is to see the complete
picture, and what followed in the aftermath of its arrival in India. The Charter of Elizabeth,
1600 empowered them legislative right, although limited, it led to the establishment of a
new judicial system in India.

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 SOURCES OF LAW 1.7
- However, in this process of acquiring territories after territories after Battle of Plassey in
1757, and the subsequent grant of Dewani rights (1765) in Bengal. The need for resolution
of disputes, also arose, and it’s out of this necessity the introduction of British legal system,
as suited for the Britishers, was implemented in territories under British occupancy.

To name a few reforms that are still prevalent till date:

a) Establishment of Mayor’s Court – 1726
b) Warren Hastings with his Judicial Plan of 1772 which is known as The Adalat System
now.
c) Establishment of High Courts - The Indian High Courts Act, 1861 which suggested the
establishment of High Courts in place of Supreme Court in three Presidencies: Calcutta,
Madras, and Bombay.
d) The Government of India Act, 1935 (alongwith the introduction of the Federal Court in
1937)

• Along-with the above mentioned introductions, the British have introduced law as a codified
subject, which till then, in its previous era, was that of an abstract idea of justice.

In this course of time, they have also provided us with The Indian Penal Code, 1860, the
Indian Contract Act, 1872, the Indian Evidence Act, 1872, etc. An essential set of laws which
govern the modern day world.

The Indian Contracts Act becomes one of the branches of law, that requires our special
attention, which in fact had many more parts than its present version. Over time separate
legislations were enacted for the same. They are:
i. The Sale of Goods Act, 1930
ii. The Indian Partnership Act, 1932.

3. Indian Legal Period (1950 – Present Day) –

(i) The Indian (post Independence) legal history, begins with the Abolition of Privy Council
Jurisdiction Act, 1949 (earlier Privy Council seated in England acted as the Highest Court of
Appeal, since 1726) which was passed by the Indian Government.
• This Act accordingly abolished the jurisdiction of Privy Council to entertain new appeals
and petitions.
• To dispose of any pending appeals and petitions.
• It also provided for transfer of all cases filed.

(ii) The Drafting Committee for the Constitution was formed and appointed with Mr. B.R.
Ambedkaras its Chairman on 29th August 1947. On 26 November 1949, the Constitution of
India was passed and adopted by the Constituent Assembly (celebrated as Law Day). On
26th January 1950, the Constitution of India was adopted.

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 1.8 SOURCES OF LAW
(iii) With this, India gained its autonomy in Independent judicial system and infrastructure
under the Constitution of India, 1950 and over the years been empowered with the same,
to have a sovereign entity, with segregation of powers at all levels and all branches of
administration.

(iv) With this, the Supreme Court of India was established on 26th January 1950, established
under Article 124 (1) of the Constitution of India, 1950 with a strength of 8 (1 + 7) judges.
Currently it has a strength of 34 judges (33 judges of the Supreme Court of India and 1
Chief Justice of India).

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 LEGISLATIVE PROCESS IN
2 INDIA
- CONCEPTS, COMPONENTS
Introduction
The legislative process in India derives its authority from the Constitution of India, 1950. The
structure of the Indian polity is that of federal (two tier structure - Central and State Government) in
nature. However, India is a federation with a unitary bias and is referred as a quasi federal state
because of its strong central machinery. The Indian legislative process has two major law making
bodies, The Parliament of India and the State Legislature.

Parliament of India and State Legislature:

(i) Article 79 of the Constitution of India states that The Parliament for the Union which shall
consist of the President and two Houses to be known respectively as the Council of States
(Rajya Sabha) and the House of the People (Lok Sabha).
(ii) Article 168 of The Constitution of India, 1950 – Constitution of Legislatures in States - For every
State there shall be a Legislature which shall consist of the Governor and one House (Legislative
Assembly). In some states, there are two houses, Article 168 (2) of the Constitution of India,
where there are two Houses of the Legislature of a State:
1) Legislative Council and
2) Legislative Assembly.

The legislative bodies in India, i.e. at the Central Level (the Parliament) and State Level (Legislative
Assembly) derive its power to frame laws from Article 245 of the Constitution of India.

Power to Legislate - Part XI of the Constitution of India, Article 245, states-

(1) Subject to the provisions of this Constitution, Parliament may make laws for the whole or any
part of the territory of India, and the Legislature of a State may make laws for the whole or any
part of the State.
The power to make laws can further be found in Article 246 of the Indian Constitution which is
to be read along-with the Schedule 7 of the Indian Constitution. The Parliament has exclusive
power to make laws with respect to any of the matters enumerated in List I. (Seventh Schedule-
Union List).
(2) The Parliament and the Legislature of any State have power to make laws with respect to any of
the matters enumerated in List III. (Seventh Schedule-Concurrent List). The Legislature of any
State has exclusive power to make laws for such State or any part thereof with respect to any of
the matters enumerated in List II (Seventh Schedule-State List).
 2.2 LEGISLATIVE PROCESS IN INDIA

(i) Article 79 of the constitution of India.

Parliament for the union

President Two Houses

Council of States Houses of People

(Rajya Sabha) (Lok Sabha)

(ii) Article 168 of the constitution of India.

Constitution of Legislature in state for

every state these shall be legislature

One House
One governor (Legislative Assembly)

(iii) Article 168(2) of the cons. Of India.

Two Houses of Legislature of State

Legislature Council Legislature Assistant

However, despite demarcations, disputes arise on powers being transgressed between the two law
making bodies, Article 254 of the Indian Constitution illustrates: Inconsistency between laws made
by Parliament and laws made by the Legislatures of States—

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 LEGISLATIVE PROCESS IN INDIA 2.3

(1) If any provision of a law made by the Legislature of a State is repugnant to any provision of a law
made by Parliament which Parliament is competent to enact, or to any provision of an existing
law with respect to one of the matters enumerated in the Concurrent List,

(2) Law made by Parliament, whether passed before or after the law made by the Legislature of
such State, or, as the case may be, the existing law, shall prevail

Where a law made by the Legislature of a State with respect to one of the matters enumerated in
the Concurrent List contains any provision repugnant to the provisions of an earlier law made by
Parliament if it has been reserved for the consideration of the President and has received his assent,
prevail in that State.

Introduction of Bill - In order to formulate a law, all legislative proposals have to be brought in the
form of bills. The process of law making begins with the introduction of a Bill in either House of
Parliament. A bill can be introduced either by a Minister or a member other than a Minister. In the
former case, it is called a Government Bill and in the latter case, it is known as a Private Member’s
Bill.

Article 107 of the Indian Constitution, 1950 specifies the provisions as to introduction and passing of
Bills — Subject to the provisions of Articles 109 and 117 with respect to Money Bills and other
financial Bills, a Bill may originate in either House of Parliament. (a money bill is not introduced in
the Council of States/Rajya Sabha – Article 109 of The Constitution of India, 1950).

A bill undergoes readings in each House, i.e., the Lok Sabha and the Rajya Sabha, before it is
submitted to the President for assent. Therefore, as every bill goes through several rounds of
debates and scrutiny before it becomes a law, therefore the time frame for the same too is one that
takes time, weeks or sometimes months.

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 2.4 LEGISLATIVE PROCESS IN INDIA

Introduction of Bill:

Introduction of Bill in either house of parliament

By a member By a minister

Private members bill Government bill

Under goes reading in each house Lok Sabha

and Rajya Sabha

Goes through several round of debates & scrutiny

before it becomes a law

Presented to president for assent

Many times, there are certain exigencies where the time and/or the circumstances do not permit for
a law to be passed through the normal procedure, i.e. the legislative procedure vide the Parliament
and/or the State Legislature.

Article 13.3 (a) on the Constitution of India, 1950 mentions law includes any Ordinance, order, bye-
law, rule, regulation, notification, custom or usage having in the territory of India the force of law;

Therefore, in times of these exigencies The President of India 123. Power of President to promulgate
Ordinances during recess of Parliament — If at any time, except when both Houses of Parliament are
in session, the President is satisfied that circumstances exist which render it necessary for him to
take immediate action, he may promulgate such Ordinances as the circumstances appear to him to
require. (The tenure of an ordinance can vary from six weeks to six months, depending upon the
circumstance)

Similar powers have been provided to the Governor of a State, under Article 213 of the Constitution
of India, 1950, in territorial limit of the concerned state.

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 LEGISLATIVE PROCESS IN INDIA 2.5
The Article 243 of the Constitution of India, 1950 illustrates how the power sharing has gone a step
down further (w.r.t rural India), in order to incorporate local governance and required adequate
support for the same.

Along with all the power to formulate the laws, what becomes a necessity is to amend the same
over time. Article 368 of the Constitution of India, 1950 states that notwithstanding anything in this
Constitution, Parliament may in exercise of its constituent power amend by way of addition,
variation or repeal any provision of this Constitution in accordance with the procedure laid down in
this article.

However, with all these powers conferred there remains a risk of introduction/deletion of certain
laws, which are in contravention of the rights that are fundamental to human survival with a
dignified life and enhancement of the same. The Supreme Court of India, in Keshavananda Bharati vs
State of Kerala (AIR 1973 SC 1461), mentioned any amendment which is in contravention of the
Fundamental Rights of an individual, will be unconstitutional.

However, despite all such checks and balances, powers are transgressed, and disputes arise. In order
to seek the correct understanding and validity of the law/bye law concerned, we approach the Court
to address the merit in the situation, and decide accordingly.

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 LEGAL METHODS AND COURT
3 SYSTEM IN INDIA
-
CONCEPTS, COMPONENTS
Introduction
The judiciary has been established under the Constitution of India, 1950 as an institution of last
resort, for common public, as well as all legal entities under law, inclusive of the State Governments
and the Government of India. The Supreme Court of India is the apex institution, in its hierarchy,
followed by the High Courts in respective States, followed by the Sub-Ordinate Courts.

Hierarchy of Courts in India

The Constitution of India, 1950 has provided us with a single integrated judicial system with a
pyramidal structure which consists of different types of courts each having varying powers
depending on their tier and jurisdiction. The framework of the current legal system has been laid
down by the Constitution of India, 1950 in Part V (Chapter IV-Supreme Court of India) and Part VI
(Chapter V-High Courts) and (chapter VI-Subordinate Courts).

Supreme Court
Supreme Court is the apex court under the Indian Judicial system governed under Chapter IV of Part
V- Art 124-147 of the Constitution comprising of the Chief Justice and other Judges appointed by the
President. The Constitution bestows the following powers to the Supreme Court
a. Original Jurisdiction - Art 131 provides for the original jurisdiction whereby the Court can decide
disputes between the Government of India and one or more states, between two or more
states, between Government of India and State (s) on one side and State(s) on the other side.

b. Writ Jurisdiction - Any person has the right to approach the Court against violation of his
fundamental rights prescribed under Part-III, as expressly provided under Article 32 which
guarantees constitutional remedies in the form of writs.

c. Appellate Jurisdiction - Being the highest court of appeal, the Supreme Court has power to hear
all appeals against any order of the High Court.

d. Advisory Jurisdiction - The Supreme Court can advise the President on any question of public
importance etc as desired.

e. Punishment for Contempt - Under Article 129 of the Constitution of India, 150 The Supreme
Court of India and the High Court of each state under Article 215 of the Constitution of India,
1950 are declared as a Court of record with the power to punish for contempt of itself.
 3.2 LEGAL METHODS AND COURT SYSTEM IN INDIA

f. Review Jurisdiction - The Court under Art 137 can review its own orders or judgments.

High Court
High Courts are the second highest courts in the hierarchy dealt in Chapter V of Part VI of the
Constitution. The Constitution bestows the following powers to the High Court-
a. Original Jurisdiction - The Court has original jurisdiction and can decide disputes related to
enforcement of fundamental rights, settlement of disputes relating to election to the Union and
State Legislatures and jurisdiction over revenue matters.
b. Writ Jurisdiction - Any person has the right to approach the Court against violation of his
fundamental rights as well as legal rights under Article 226. Thus, it has a wider scope than that
with the Supreme Court.
c. Appellate Jurisdiction - An appeal against orders of subordinate courts in both civil and criminal
matters lies with the High Court.
d. Power of superintendence - Article 227 of Constitution empowers all High Courts to practice
superintendence over all the courts or tribunals within its territorial jurisdiction. Moreover,
under Article 228, the High Court can transfer any case pending before a subordinate court to
itself if it involves a substantial question of law.
e. Punishment for Contempt - Like the Supreme Court, the High Court is also declared as a Court of
record with the power to punish for contempt of itself.

LOWER/SUBORDINATE COURTS
Chapter VI of Part VI of the Indian Constitution incorporates provisions related to the subordinate
courts. These courts are established and controlled by the High Court taking into account various
factors. The Lower/Subordinate court structure can be divided into the following two branches of
the legal system-

Criminal Court Structure

Section 6 of the Criminal Procedure Code, 1973 prescribes for the constitution of following four
classes of criminal courts:
a) Court of Session –
• Every State has session divisions with each of them having a Court of Sessions to be
presided over by the Sessions Judge who is appointed by the High Court.
• The court has power to try any criminal matter and pass any punishment authorized by law.
• Punishment of death penalty has to be confirmed by the High Court.

b) Court of Metropolitan Magistrate –

• This is a special court.

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 LEGAL METHODS AND COURT SYSTEM IN INDIA 3.3
• Established by the State Government in consultation with the High Court in metropolitan
areas, i.e., areas with population of more than a million.
• These Courts are subordinate to the Sessions Court.
• Chief Metropolitan Magistrate can pass any punishment authorized by law, except death
penalty, penalty of life imprisonment or imprisonment for a term of more than seven years.

c) Court of Chief Judicial Magistrate –

• The State Government in consultation with the High Court establishes number of Courts of
the Judicial Magistrate- Judicial Magistrate of First Class (JMFC) and second class headed by
the Chief Judicial Magistrate (CJM).
• These Courts can pass any punishment authorized by law, except death penalty, penalty of
life imprisonment or imprisonment for a term of more than seven years.

d) Executive Magistrates –
• The functions and powers of an Executive Magistrate are more or less administrative in
nature and are for maintaining law and order. They are appointed by the respective State
Government. Their essential job is not as a judicial officer.

Hierarchy of Courts – Criminal justice system in India

Civil Court Structure

• The district court is the highest civil court in a district and has judicial as well as administrative
powers including the power of superintendence with both appellate and original jurisdiction.

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 3.4 LEGAL METHODS AND COURT SYSTEM IN INDIA
• According to Article 233 of the Constitution the appointment of district judges that shall be done
by the Governor in consultation with the High Court in every district or more than one district.
• Following are the courts subordinate to the district courts which have jurisdiction based on
subject matter, pecuniary or territorial jurisdictions
a. Sub-Judge
b. Additional Sub-Judge
c. Munsif Courts

Thus, judiciary comprising of the court system is one of the most vital organs of the state that not
only acts as a watchdog of democracy but also as the guardian of the Constitution. It is evident from
the strong base and the proven efficiency of the structure of the Indian judiciary being independent
and impartial that the existing system is ideal for a big country like India to ensure proper
administration of justice at all levels starting from the grass root.

Hierarchy of Civil Judicial System

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 LEGAL METHODS AND COURT SYSTEM IN INDIA 3.5

The Tribunal System in India

Key insights
• Tribunals are institutions established for discharging judicial or quasi-judicial duties. The
objective may be to reduce case load of the judiciary or to bring in subject expertise for technical
matters.

• The Supreme Court has ruled that tribunals, being quasi-judicial bodies, should have the same
level of independence from the executive as the judiciary. Key factors include the mode of
selection of members, the composition of tribunals, and the terms and tenure of service.

• In order to ensure that tribunals are independent of the executive, the Supreme Court had
recommended that all administrative matters be managed by the law ministry rather than the
ministry associated with the subject area. Later, the Court recommended creation of an
independent National Tribunals Commission for the administration of tribunals. These
recommendations have not been implemented.

• Whereas the reasoning for setting up some tribunals was to reduce pendency of cases in courts,
several tribunals are facing the issue of a large case load and pendency.

Evolution of the Tribunal System

Tribunals are judicial or quasi-judicial institutions established by law. Currently, tribunals have been
created both as substitutes for High Courts and as subordinate to High Courts (see Figure). In the
former case, appeals from the decisions of Tribunals (such as the Securities Appellate Tribunal) lie
directly with the Supreme Court. In the latter case (such as the Appellate Board under the Copyright
Act, 1957), appeals are heard by the corresponding High Court.

Structure of Indian tribunal system

• Composition of Tribunals:
 The Supreme Court has noted that the members of a tribunal may be selected from
departments of the central government as well as from various other fields of expertise.
 The presence of expert members (technical members) along with judicial members is a key
feature of tribunals which distinguishes them from traditional courts.

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 3.6 LEGAL METHODS AND COURT SYSTEM IN INDIA
 Only persons with a judicial background (such as Judges of the High Court and lawyers with
the prescribed experience who are eligible for appointment as High Court Judges) may be
considered for appointment as Judicial Members.
 The Tribunals Reforms (Rationalisation and Conditions of Service) Ordinance, 2021 has
abolished nine tribunals and transferred their functions to High Courts. This action would
add to the pending cases in such High Courts.

Appeals from tribunals usually lie with the concerned High Court. However, some laws
specify that appeals will be heard by the Supreme Court. Table illustrates some tribunals and
the court with appellate jurisdiction over them.

Table: Appellate courts for some Tribunals in India

Name of Tribunal Act establishing the Tribunal Appellate Court
Industrial tribunal The Industrial Disputes Act, 1947 High Court
Income- tax Appellate Tribunal The Income – tax act, 1961 High Court
Customs, Excise and Service Tax The customs Act, 1962 High Court
Appellate Tribunal
Central Administrative Tribunal The Administrative Tribunal Act, 1985 Supreme Court
Securities Appellate Tribunal The Securities Exchange Board of India Supreme Court
Act, 1992
Debts Recovery Appellate Tribunal The Recovery of Debts Due to Banks High Court
and Financial Institutions Act, 1993
Telecom Disputes Settlement and The Telecom Regulatory Authority of Supreme Court
Appellate Tribunal India Act, 1997
National Company Law Appellate The Companies Act, 2013 Supreme Court
Tribunal
National Consumer Disputes The consumer Protection Act, 2019 Supreme Court
Redressal
Appellate Tribunal for Electricity The Electricity Act, 2003 Supreme Court
Armed Forces Tribunal The Armed Forces Tribunal Act, 2007 Supreme Court
National Green Tribunal The national Green Tribunal Act, 2010 Supreme Court

Alternate Dispute Resolution (ADR)

The process by which disputes between the parties are settled or brought to a result without the
intervention of Judicial Institution and without any trial is known as Alternative Dispute Resolution
ADR offers to resolve all type of matters including civil, commercial, industrial and family etc., where
people are not being able to start any type of negotiation and reach the settlement.

Generally, ADR uses neutral third party who helps the parties to communicate, discuss the
differences and resolve the dispute.

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 LEGAL METHODS AND COURT SYSTEM IN INDIA 3.7

Modes of Alternate Dispute Resolution (ADR)

1. Arbitration
The dispute is submitted to an arbitral tribunal which makes a decision (an “award”) on the
dispute that is mostly binding on the parties. Except for some interim measures, there is very
little scope for judicial intervention in the arbitration process.
2. Conciliation
A non-binding procedure in which an impartial third party, the conciliator, assists the parties
to a dispute in reaching a mutually satisfactory agreed settlement of the dispute.
The parties are free to accept or reject the recommendations of the conciliator. However, if
both parties accept the settlement document drawn by the conciliator, it shall be final and
binding on both.
3. Mediation
In mediation, an impartial person called a “Mediator” helps the parties try to reach a mutually
acceptable resolution of the dispute.

The mediator does not decide the dispute but helps the parties communicate so they can try
to settle the dispute themselves. Mediation leaves control of the outcome with the parties.
This is more or less an informal way of arriving at a settlement/arrangement.
4. Lok Adalat
An interesting feature of the Indian legal system is the existence of voluntary agencies called
Lok Adalat (People’s Court). The Legal Services Authorities Act was passed in 1987 to
encourage out-of-court settlements.

Lok Adalat or “People’s Court” comprises of a forum which facilitates negotiations in the
presence of a judicial officer. The order of the Lok-Adalat is final and shall be deemed to be a
decree of a civil court and shall be binding on the parties to the dispute. The order of the Lok-
Adalat is not appealable in a court of law.

Important Provisions Related To ADR

Section 89 of the Civil Procedure Code, 1908 provides that opportunity to the people, if it appears to
court there exist elements of settlement outside the court then court formulate the terms of the
possible settlement and refer the same for: Arbitration, Conciliation, Mediation or Lok Adalat.

The Acts which deal with Alternative Dispute Resolution are

i. Arbitration and Conciliation Act, 1996 and,
ii. The Legal Services Authority Act, 1987
Since courts in India are already burdened by a huge backlog of cases, many statutory provisions
make mediation a compulsory prerequisite to filing of a suit in court. Some of these statutes are:

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 3.8 LEGAL METHODS AND COURT SYSTEM IN INDIA
• Industrial Disputes Act, 1947 – Section 4 of the Act assigns conciliators the responsibility to
mediate and settle industrial disputes and prescribes the procedure to be followed in great
detail.

• Code of Civil Procedure, 1908 – The Code was amended in 2002 which provided for the
reference of all pending court cases to mediation. The amendment also prescribes mediation for
all family and personal matters due to their sensitive nature.

• Companies Act, 2013 – Section 442 provides for the referral of disputes to mediation by the
National Company Law Tribunal and the Appellate Tribunal.

• Micro, Small and Medium Enterprises Development Act, 2006 – The Act mandates mediation
and conciliation when disputes arise. (Section 18)
• Real Estate (Regulation and Development) Act, 2016 – Section 32(g) provides for the amicable
settlement of disputes through an established dispute resolution forum.

• Commercial Courts Act, 2015 – The new amendment made to the Act in 2018 provide for
mandatory mediation between parties before filing of a suit. The amendment allows litigation
only if the parties meaningfully engage in mediation proceedings and still fail to resolve the
matter.

• Consumer Protection Act, 2019 – The new rendition of the Consumer Protection Act dedicates
an entire Chapter to the resolution of disputes through mediation first before approaching a
consumer redressal agency

Advantages of Alternative Dispute Resolution

Less Time Consuming: People resolve their disputes in short period as compared to traditional
litigation forums.
Cost effective method: ADR as a process in general is less expensive than litigation process. Also, as
a platform this is a less aggressive dispute resolution process, which often leads to an amicable
settlement.

Regulatory Bodies in India

Along with Courts, Tribunals and other forums in India, we have various regulatory bodies in India,
which are the part and parcel of governance in their respective sectors, a watchdog and also a
guardian in case of any irregularity.

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 LEGAL METHODS AND COURT SYSTEM IN INDIA 3.9

Listed below, are few of the most important one’s affecting on our day to day life.
1. Securities and Exchange Board of India (SEBI)
The Securities and Exchange Board of India (SEBI) is a statutory body established under the SEBI
act of 1992, as a response to prevent malpractices in the capital markets that were negatively
impacting people’s confidence in the market. Its primary objective is to protect the interest of
the investors, prevent malpractices, and ensuring the proper and fair functioning of the markets.
SEBI has many functions, they can be categorized as:
(i) Protective functions: To protect the interests of the investors and other market
participants. It includes – preventing insider trading, spreading investor education and
awareness, checking for price rigging, etc.

(ii) Regulatory functions: These are performed to ensure the proper functioning of various
activities in the markets. It includes – formulating and implementing code of conduct
and guidelines for all types of market participants, conducting an audit of the exchanges,
registration of intermediaries like brokers, investment bankers, levying fees, and fines
against misconduct.

(iii) Development functions: These are performed to promote the growth and development
of the capital markets.
It includes – Imparting training to various intermediaries, conducting research,
promoting self-regulation of organizations, facilitating innovation, etc.

To perform its functions and achieve its objectives, SEBI has the following powers:
a. To change laws relating to the functioning of the stock exchange
b. To access records and financial statements of the exchanges
c. To conduct hearing and give judgments on cases of malpractices in the markets.
d. To approve the listing and force delisting of companies from any exchanges.
e. To take disciplinary actions like fines and penalties against participants who involve in
malpractice.
f. To regulate various intermediaries and middlemen like brokers.

2. Reserve Bank of India (RBI)

The Reserve Bank of India (RBI) is India’s central bank and was established under the Reserve
Bank of India act in 1935. The primary purpose of RBI is to conduct the monetary policy and
regulate and supervise the financial sector, most importantly the commercial banks and the non-
banking financial companies. It is responsible to maintain price stability and the flow of credit to
different sectors of the economy.

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 3.10 LEGAL METHODS AND COURT SYSTEM IN INDIA

Some of the main functions of RBI are:

a. It issues the license for opening banks and authorizes bank branches.
b. It formulates, implements, and reviews the prudential norms like the Basel framework.
c. It maintains and regulates the reserves of the banking sector by stipulating reserve
requirement ratios.
d. It inspects the financial accounts of the banks and keeps a track of the overall stress in the
banking sector.
e. It oversees the liquidation, amalgamation or reconstruction on financial companies.
f. It regulates the payment and settlement systems and infrastructure.
g. It prints, issues and circulates the currency throughout the country.
The RBI is the banker to the government and manages its debt issuances, and is also responsible
to maintain orderly conditions in the government securities markets (G-Sec). RBI manages the
foreign exchange under the Foreign Exchange Management Act, 1999.

3. Insurance Regulatory and Development Authority of India (IRDAI)

The Insurance Regulatory and Development Authority of India (IRDAI) is an independent
statutory body that was set up under the IRDA Act, 1999. Its purpose is to protect the interests
of the insurance policyholders and to develop and regulates the insurance industry. It issues
advisories regularly to insurance companies regarding the changes in rules and regulations.
It promotes the insurance industry but also controls the various charges and rates related to
insurance.

The three main objectives of IRDA are:

(i) To ensure fair treatment and protect the interests of the policyholder.
(ii) To regulate the insurance companies and ensure the industry’s financial soundness.
(iii) To formulate standards and regulations so that there is no ambiguity.

Some important functions of IRDA are:

a. Granting, renewing, canceling or modifying the registration of insurance companies.
b. Levying charges and fees as per the IRDA act.
c. Conducting investigation, inspection, audit, etc. of insurance companies and other
organizations in the insurance industry.
d. Specifying the code of conduct and providing qualifications and training to intermediaries,
insurance agents etc.
e. Regulating and controlling the insurance premium rates, terms and conditions and other
benefits offered by insurers.
f. Provides a grievance redressal forum and protect the interests of the policyholder.

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 LEGAL METHODS AND COURT SYSTEM IN INDIA 3.11

4. Pension Funds Regulatory and Development Authority (PFRDA)

The Pension Fund Regulatory and Development Authority (PFRDA) is a statutory body, which
was established under the PFRDA act, 2013. It is the sole regulator of the pension industry in
India. Initially, PFRDA covered only for employees in the government sector but later, its services
were extended to all citizens of India including NRI’s. Its major objectives are – to provide
income security to the old aged by regulating and developing pension funds and to protect the
interest of subscribers to pension schemes.
The National Pension System (NPS) of the government is managed by the PFRDA. It is also
responsible for regulating custodians and trustee banks. The Central Record Keeping Agency
(CRA’s) of the PFRDA performs record keeping, accounting and provides administration and
customer services to subscribers of the pension fund.

Some functions of PFRDA are:

(i) Conducting enquiries and investigations on intermediaries and other participants.
(ii) Increasing public awareness and training intermediaries about retirement savings, pension
schemes etc.
(iii) Settlements of disputes between intermediaries and subscribers of pension funds.
(iv) Registering and regulating intermediaries.
(v) Protecting the interest of pension fund users.
(vi) Stipulating guidelines for investment of pension funds.
(vii) Formulating code of conduct, standards of practice, terms and norms for the pension
industry.

5. Association of Mutual Funds in India (AMFI)

The Association of Mutual Funds in India (AMFI) was set up in 1995. It is a non-profit
organization that is self-regulatory and works for the development of mutual fund industry by
improving professional and ethical standards, thus aiming to make the mutual funds more
accessible and transparent to the public. It provides spreads awareness vital information about
mutual funds to Indian investors.

The Association of Mutual Funds in India is the regulatory body for mutual funds sector in India.
It is a division of the Securities and Exchange Board of India, Ministry of Finance, Government of
India. Most mutual funds firms in India are its members.

AMFI ensures smooth functioning of the mutual fund industry by implementing high ethical
standard and protects the interests of both – the fund houses and investors. Most asset
management companies, brokers, fund houses, intermediaries etc in India are members of the

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 3.12 LEGAL METHODS AND COURT SYSTEM IN INDIA
AMFI. Registered AMC’s are required to follow the code of ethics set by the AMFI. These code of
ethics are – integrity, due diligence, disclosures, professional selling and investment practice.
The AMFI updates the Net Asset Value of funds on a daily basis on its website for investors and
potential investors. It has also streamlined the process of searching mutual fund distributors.

6. Ministry of Corporate Affairs (MCA)

The Ministry of Corporate Affairs (MCA) is a ministry within the government of India. It regulates
the corporate sector and is primarily concerned with the administration of the Companies Act,
1956, the Companies Act, 2013 and other legislations. It frames the rules and regulations to
ensure the functioning of the corporate sector according to the law.

The objective of MCA is to protect the interest of all stakeholders, maintain a competitive and
fair environment and facilitate the growth and development of companies. The Registrar of
Companies (MCA), is a body under the MCA that has the authority to register companies and
ensure their functioning as per the provisions of the law. The issuance of securities by the
companies also comes under the purview of the Companies Act.

7. National Housing Bank (NHB)

National Housing Bank is the apex regulatory body for overall regulation and licensing of housing
finance companies in India. It is under the jurisdiction of Ministry of Finance, Government of
India. It was set up on 9 July 1988 under the National Housing Bank Act, 1987.

The primary function of NHB is to “operate as a principal agency to promote housing finance
institutions both at local and regional levels and to provide financial and other support to such
institutions and for matters connected therewith or incidental thereto”.

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 PRIMARY AND SUBORDINATE
4 LEGISLATION
- CONCEPTS, COMPONENTS
Introduction
In modern day world, government activity influences almost every field of human behaviour, thus
necessitating laws in regulating this ever-widening sphere of activity. Therefore, there is constant
need to legislate, at a rapid pace, with a localized understanding, which however is cumbersome and
impractical to perform, for the Union Legislature and State Legislature. As we move towards a more
dynamic society, therefore the governance of the same extends to various levels of government
bodies, as according to the complexity, furthermore delegated power (subordinate legislation) to
authorities and officials.

Primary Legislation is the law that derives its source from the enactments passed by the Parliament
or the State Legislatures, the bodies empowered by the Constitution of India, 1950 by its provisions.
In addition to these the President and the Governor have limited powers to issue ordinances when
the Parliament or the State Legislature are not in session.

Secondary Legislation/Sub-Ordinate Legislation arises from the need for empowering authorities (to
legislate) working at the grass-root level to counter the daily challenges to the existing laws becomes
a necessity. The provision for secondary legislation (in the form of regulations/bye laws) has been
ingrained in the Constitution of India, 1950. Article 13.3 (a) of the Constitution of India, 1950
mentions law includes any Ordinance, order, bye-law, rule, regulation, notification, custom or usage
having in the territory of India the force of law; therefore provision for such delegation (subordinate
legislation) gains its prominence.

The Constitution of India, 1950 in its provisions illustrates of power delegation (if need be), Article
312- All India Services (1) Notwithstanding anything in Chapter VI of Part VI or Part XI, if the Council
of States (Rajya Sabha) has declared by resolution supported by not less than two thirds of the
members present and voting that it is necessary or expedient in the national interest so to do,
Parliament may by law provide for the creation of one or more all India services (including an all
India judicial service) common to the Union and the States, and, subject to the other provisions of
this Chapter, regulate the recruitment, and the conditions of service of persons appointed, to any
such service. (the Indian Administrative Service and the Indian Police Service shall be deemed to be
services created by Parliament under this article)

Supreme Court of India in the Gwalior Rayon Mills Mfg. (Wing.) Co. Ltd.V.Asstt. Commissioner of
Sales Tax and Others (All India Reporter1974 SC 1660 (1667)), The legislatures because of limitations
imposed upon by the time factor hardly go into matters of detail. Provision is, therefore, made for
delegated legislation to obtain flexibility, elasticity, expedition and opportunity for experimentation.
 4.2 PRIMARY AND SUBORDINATE LEGISLATION
The practice of empowering the executive to make subordinate legislation within a prescribed
sphere has evolved out of practical necessity and pragmatic needs of a modern welfare state.

Subordinate legislation is the legislation made by an authority subordinate to the legislature.

Subordinate legislation is that which proceeds from any authority other than the sovereign power
and is, therefore, dependent for its continued existence and validity on some superior or supreme
authority. Most of the enactments provide for the powers for making rules, regulations, bye-laws or
other statutory instruments which are exercised by the specified subordinate authorities. Such
legislation is to be made within the framework of the powers so delegated by the legislature and
is, therefore, known as delegated or subordinate legislation. The sub-ordinate legislation cannot go
beyond the act or the objective of the act, or the same would be held invalid.

There are instances where pieces of subordinate legislation which tended to replace or modify the
provisions of the basic law or attempted to lay down new law by themselves had been struck down
as ultra vires either because of transgressing the ambit of the Act or the Act itself is inconsistent with
the provisions of the Constitution of India.

Local Governance - The Constitution of India, 1950 itself provides provisions for decentralization of
governance, for effective and adequate authority over a territory to look after the requirements.
Part IX (Panchayat System) and Part IXA (Municipalities) of the Constitution of India, 1950 give them
adequate powers and autonomy over their jurisdiction. These two bodies are one of the largest
sources of sub-ordinate legislation, as regulations in these territories need to be revised very rapidly.

As, we have observed in the Covid-19 pandemic, how frequently, guidelines and regulations have
been required to cater to the unprecedented circumstances we have been through. This would have
been a cumbersome task for the Parliament or the State legislature to be able to analyse and react
to the situation in a localized manner, taking adequate measures for the general well being and
requirements of the population.

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 PRIMARY AND SUBORDINATE LEGISLATION 4.3

Exercise:

Multiple Choice Questions (MCQ)

1. What are the sources of law?

(a) Constitution of India
(b) Constitution of India, judicial precedents, customary laws, statutes and ordinance
(c) Statutes enacted by the Parliament of India and State Legislatures
(d) Religion

2. Which Article in the Constitution of India, 1950 has provisions for introduction of a bill in the
Parliament of India?
(a) Article 119
(b) Article 141
(c) Article 107
(d) Article 243

3. Money Bill is introduced in which House of the Parliament?

(a) Council of People – Lok Sabha
(b) Council of States – Rajya Sabha
(c) Both the Houses
(d) None of the Houses

4. Under what Article of the Constitution of India, 1950 is The President of India empowered to
make an Ordinance?
(a) Article 243
(b) 123
(c) Article 129
(d) Article 368

5. The essence of Sub-Ordinate legislation can be found in which Article of the Constitution of
India, 1950?
(a) Article 12
(b) Article 32
(c) Article 13
(d) Article 14

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 4.4 PRIMARY AND SUBORDINATE LEGISLATION

6. When was the Constitution of India passed by the Constituent Assembly?

(a) 26th January 1950
(b) 26th November 1949
(c) 25th November 1949
(d) 15th August 1947

7. Which is the highest Court in India?

(a) High Court
(b) Supreme Court of India
(c) International Court of Justice
(d) Sessions Court

8. Which Articles of the Constitution of India have the power to entertain petitions of violation of
Fundamental Right?
(a) Article 32
(b) Article 226
(c) Article 226 and Article 32
(d) Article 356

9. Which is the highest civil court in a district?

(a) Sessions Court
(b) Supreme Court of India
(c) District Court
(d) High Court

10. Which Article of the Constitution of India empowers the legislature to make laws?
(a) Article 12
(b) Article 243
(c) Article 141
(d) Article 245

11. When was the Supreme Court of India established?

(a) 26th November 1949
(b) 26th January 1950
(c) 28th January 1950
(d) 01st October 1937

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 PRIMARY AND SUBORDINATE LEGISLATION 4.5

12. Which Article of the Constitution of India stipulates law made by the Supreme Court of India?
(a) Article 141
(b) Article 245
(c) Article 368
(d) Article 352

13. What is the Schedule in the Constitution of India, for Separation of Subject for Legislature?
(a) 9th Schedule
(b) 7th Schedule
(c) 32nd Schedule
(d) 14th Schedule

14. What kind of structure does the Indian Constitution have?

(a) Unitary
(b) Federal
(c) Autocracy
(d) Totalitarian

15. Under which Article can we amend the provisions of the Constitution of India?
(a) Article 356
(b) Article 368
(c) Article 254
(d) Article 245

16. Which is the lowest court to approach for criminal matters?

(a) Munsif Court
(b) Judicial Magistrate
(c) Sessions Court
(d) District Court

17. Mention the number of judges in the Supreme Court of India including Chief Justice of India
currently.
(a) 23
(b) 32
(c) 34
(d) 46

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 4.6 PRIMARY AND SUBORDINATE LEGISLATION

18. Fundamental Rights are mentioned under which part of the Constitution of India?
(a) Part-II
(b) Part-III
(c) Part-IX
(d) Part-XII

19. Municipalities are provided for authority under which part of the Constitution of India?
(a) Part IX
(b) Part IXA
(c) Part III
(d) Part I

20. Under what Article of the Constitution of India, 1950 is the Governor of a State empowered to
make an Ordinance?
(a) Article 123
(b) Article 243
(c) Article 245
(d) Article 213

21. What Are Personal Laws?

(a) Laws relating to inter personal behavior
(b) Customs (religious beliefs) that have now been codified
(c) Laws that a person makes
(d) Laws based on opinion

22. Which Article of the Constitution of India, deal with inconsistency between laws made by
Parliament and laws made by the Legislatures of States?
(a) Article 245
(b) Article 254
(c) Article 368
(d) Article 32

23. What is a Private Bill?

(a) A bill introduced by a member other than a Minister
(b) Bill introduced by a private citizen
(c) Bill introduced by a Private company
(d) A bill relating affairs which are private to individual

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 PRIMARY AND SUBORDINATE LEGISLATION 4.7
24. The Parliament for the Union of India which shall consist?
(a) The President, the Council of States (Rajya Sabha) and the House of the People (Lok Sabha)
(b) Rajya Sabha
(c) Lok Sabha
(d) Legislative Assembly

25. Secondary/Sub-ordinate legislation cannot go beyond:

(a) The ambit of the Act
(b) The ambit of the Act or the Constitution of India
(c) The Constitution of India
(d) Directive Principles of State Policy

State True or False:

1. Sessions Court is the lowest court to approach for criminal matters.
2. Money Bill is introduced in Lok Sabha.
3. Any Elected Minister can pass an ordinance.
4. There is no punishment for Contempt of Court.
5. The Supreme Court of India was established by Britishers.
6. We can approach the Court for violation of our Fundamental Rights.
7. The International Court of Justice is the highest court in the hierarchy of Indian Judicial System.
8. The President of India and the Governor of a State can pass an Ordinance.
9. Executive Magistrates have responsibilities only related to the judicial system.
10. Only acts passed by the Parliament of India or State Legislature are the laws.

Fill in the Blanks:

1. Law is a ______ of rules.
2. The need for empowering authorities to frame _________ working at the grass-root level.
3. The Part ___ provides for provisions for the Panchayat Raj system.
4. Mr. ____________ was the head of the drafting committee of the Constitution of India, 1950.
5. Under Article ______ of the Constitution of India, 1950, The Supreme Court of India and the High
Court of each state under Article _____ of the Constitution of India, 1950 have the powers to
initiate action for contempt of Court.
6. Some states are provided with Legislative ______________ and Legislative ____________, both.
7. Article ____ of the Indian Constitution illustrates about recourse in situations of inconsistency
between laws made by Parliament and laws made by the Legislatures of States.
8. An appeal against orders of subordinate courts in both ________ and _________ matters lies
with the High Court.
9. The Supreme Court of India can under Article ________ can review its own orders or judgments.

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 4.8 PRIMARY AND SUBORDINATE LEGISLATION
10. Article ______ of Constitution of India, 1950 empowers all High Courts to practice
superintendence over all the courts or tribunals within its territorial jurisdiction.
11. Case laws are _________ precedents.
12. The _________ Court can decide disputes between the Government of India and one or more
states.
13. An ordinance is law, that can be brought into place by the ________________ for the whole of
India or any territory within and/or the ___________ of any state for the concerned territory in
case of any exigency.
14. Article _____ of the Constitution of India states that The Parliament for the Union shall be
headed by the President and shall have two house.
15. The jurisdiction of Privy Council was established by the _________________________________.

Short Essay Type Questions (Give the answers in one (or) two sentences)
1. Law/s
Ans: Law is a set of rules, all statutes, case laws (judicial precedents) and customary law, Ordinances,
regulations and other mandates that affect us.

2. Lists in the Constitution

The statutes are enacted by the Parliament and State Legislatures according to their domain,
mentioned in the 7th Schedule of the Constitution of India (the Union List, The State List and the
Concurrent List).

3. Ordinance
In times of these exigencies The President of India 123. Power of President to promulgate
Ordinances during recess of Parliament. Similar powers have been provided to the Governor of a
State, under Article 213 of the Constitution of India, 1950, in territorial limit of the concerned
state.

4. Bill
Article 107 of the Indian Constitution, 1950 specifies the provisions as to introduction and
passing of Bills. (1) Subject to the provisions of Articles 109 and 117 with respect to Money Bills
and other financial Bills, a Bill may originate in either House of Parliament. (a money bill is not
introduced in the Council of States/Rajya Sabha – Article 109 of The Constitution of India, 1950).

5. Writ Jurisdiction
The right to approach the Court against violation of his fundamental rights prescribed under
Part-III, as expressly provided under Article 32 which guarantees constitutional remedies in the
form of writs.

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 PRIMARY AND SUBORDINATE LEGISLATION 4.9

Answers

Multiple Choice Questions (MCQ)

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 5 INDIAN CONTRACT ACT,1872

Essential Elements of a Contract, Offer and Acceptance

Introduction
The law relating to contracts in India is contained in Indian Contract Act, 1872. The Act was passed
by British India and is based on the principles of English Common Law. It extends to the whole of
India except the State of Jammu and Kashmir. It determines the circumstances in which promises
made by the parties to a contract shall be legally binding on them. All of us enter into a number of
contracts everyday knowingly or unknowingly. Each contract creates some rights and duties on the
contracting parties. Hence this legislation, Indian Contract Act of 1872, being of skeletal nature,
deals with the enforcement of these rights and duties on the parties in India.

Commencement of Act
The Act came into effect from 1st September, 1872 and applies to all contracts in India.

Proposal
According to Section 2(a) of Act, when one person signifies to another his willingness to do or to
abstain from doing anything, with a view to obtaining the assent of that other to such act or
abstinence, he is said to make a proposal.

Acceptance
As per Section 2(b), when the person to whom the proposal is made signifies his assent thereto, the
proposal is said to be accepted. A proposal, when accepted, becomes a promise.

Section 2(c) defines that the person making the proposal is called the “promisor”, and the person
accepting the proposal is called the “promise”.

Agreement
According to Section 2(e), every promise and every set of promises, forming the consideration for
each other, is an agreement.

As per Section 2(f), promises which form the consideration or part of the consideration of each other
are called reciprocal promises.

Void Agreement
According to Section 2(g), an agreement not enforceable by law is said to void.
 5.2 INDIAN CONTRACT ACT, 1872

Contract
Section 2(h) defines the term ‘contract’ as an agreement enforceable by law.

As per Section 2(j), a contract which ceases to be enforceable by law becomes void when it ceases to
be enforceable.

Voidable Contract
Section 2(i) defines a voidable contract as an agreement which is enforceable by law at the option of
one or more of the parties thereto, but not at the option of the other or others.

Essentials of a valid contract

Section 10 provides that all agreements are contracts if they are made by the free consent of parties
competent to contract, for a lawful consideration and with a lawful object, and are not otherwise
expressly declared to be void.

The following are the requirements for a valid contract-

• There shall be an offer or proposal by one party and acceptance of the proposal by the other
party which results in an agreement;
• There shall be an intention to create legal relations or an intent to legal consequences;
• The agreement shall be supported by lawful consideration;
• The parties to the contract shall be competent to contract;
• There shall be free consent between the parties to the contract;
• The object and consideration of the contract shall be legal and the same shall not be
opposed to public policy;
• The terms of the consent shall be certain;
• The agreement is capable of being performed i.e., it is not impossible of being performed.

Offer and Acceptance

Offer
The term ‘proposal’ is otherwise called ‘offer’. An offer is a proposal by one person, whereby he
expresses his willingness to enter into a contractual obligation in return for promise, act or
forbearance. Section 2(a) of the Act defines ‘proposal’ or offer as when one person signifies to
another his willingness to do or abstain from doing anything with a view to obtaining the assent of
that other to such act or abstinence. The person making the proposal is called as ‘offeror’ or
proposer’ and the person the proposal is made is called as ‘offeree’.

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 INDIAN CONTRACT ACT, 1872 5.3
The offer must be a valid one. The following points are to be taken into account for a valid offer-
• The offer must be in clear, definite, complete and final in terms. It should not be vague in
terms;
• The offer must be communicated to the offeree. The offer becomes effective only when it
has been communicated to the offeree so as to give him an opportunity to accept or reject
the offer;
• The communication may be in writing or oral;
• The communication may be in expressed terms or in implied terms;
• The offer may be general or specific – if an offer is made to a specific person it is called
specific offer. Such offer can be accepted by such specific person; if an offer is made to the
world at large, it is a general offer. It can be accepted by any member of the general public
by fulfilling the condition laid down in the offer;
• Communication of offer is complete when it comes to the knowledge of the person to whom
it is made. (Section 4)
An offer which has been communicated property continues as such until it lapses or revoked by the
offeror or rejected or accepted by the offeree. An ideal offer should have all the essentials of a valid
contract as once it is accepted by the offeree, it becomes a contract.

Revocation of offer
Section 5 provides that a proposal may be revoked at any time before the communication of
acceptance is complete as against the proposer but not afterwards.

Example-A proposes, by a letter sent by post, to sell his house to B; B accepts the proposal by a
letter sent by post, a may revoke his proposal at any time before or at the moment when B posts his
letter of acceptance, but not afterwards.

Section 4 provides that the communication of a revocation is complete-

• As against the person who makes it, when it is put into a course of transmission to the
person to whom it is made, so as to be out of the power of the person who makes it;
• As against the person to whom it is made, when it comes to his knowledge.

Example – A revokes his proposal by telegram. The revocation is complete as against A when the
telegram is dispatched. It is complete as against B when B receives it.

As per Section 6, a proposal is revoked-

1. By the communication of notice of revocation by the proposer to the other party;
2. By the lapse of the time prescribed in such proposal for its acceptance or, if no time is so
prescribed, by the lapse of a reasonable time, without communication of the acceptance;

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 5.4 INDIAN CONTRACT ACT, 1872
3. By the failure of the acceptor to fulfil a condition precedent to acceptance; or
4. By the death or insanity of the proposer, if the fact of his death or insanity comes to the
knowledge of the acceptor before acceptance.

A proposal also stands revoked if-

• It is not accepted in the prescribed mode and if no mode is prescribed, in some usual and
reasonable manner or
• The offered makes a counter offer.

Acceptance
To constitute a promise, the intention of the parties must be communicated. One cannot accept an
offer which had not been communicated to him. In general, uncommunicated offer cannot result in
a promise.

The term ‘acceptance’ means admitting and agreeing to something to accede to something or to
accept something. An offer to enter into legal relations, upon definite terms, to create legal
relations, must be followed by an intention of the offeree to accept that offer.

In ‘Thawardar Pherumal V. Union of India’- AIR 1955 SC 468 the Supreme Court held that before an
offer can become a binding promise and result in an agreement it must be accepted, either by words
or acts. A person cannot be bound by a one side offer which is never accepted particularly when the
parties intended that the contract should be reduced in writing. A promise cannot bind its make
unless the promise has assented to it.

Section 4 provides that the communication of an acceptance is complete-

• As against the proposer, when it is put in a course of transmission to him, so as to be out of
the power of the acceptor;
• As against the acceptor, when it comes to the knowledge of the proposer.

Example
A proposes, by letter, to sell a house to B at a certain price. B accepts A’s proposal by a letter sent by
post. The communication of the acceptance is complete, as against A when the letter is posted and
as against B, when the letter is received by A.

The following points shall be taken into account in the case of acceptance-
• Acceptance may be oral or in writing;
• It may be expressed or implied;

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 INDIAN CONTRACT ACT, 1872 5.5
• If a particular method of acceptance is prescribed, the offer must be accepted in the
prescribed manner;
• It must be unqualified and absolute and must correspond with all terms of the offer;
• The conditional acceptance will amount to rejection of offer;
• A counter offer for acceptance will also amount to reject of offer but the counter offer may
be accepted or rejected by the other party;
• It must be communicated to the officer, since acceptance is completed the moment it is
communication;
• Mere silence on the part of the offeree does not amount to acceptance;
• The acceptance should be given if there is a time limit is fixed or otherwise at a reasonable
time and before he offer lapses or is revoked.

Revocation of acceptance
Section 5 provides that an acceptance may be revoked at any time before the communication of
acceptance is complete as against the acceptor but not afterwards.

Example – A proposes, by a letter sent by post, to sell his house to B; B accepts the proposal by a
letter sent by post. The communication of the acceptance is complete, as against A when the letter
is posted and as against B, when the letter is received by A.

The following points shall be taken into account in the case of acceptance-
• Acceptance may be oral or in writing;
• It may be expressed or implied;
• If a particular method of acceptance is prescribed, the offer must be accepted in the
prescribed manner;
• It must be unqualified and absolute and must correspond with all terms of the offer;
• The conditional acceptance will amount to rejection of offer;
• A counter offer for acceptance will also amount to reject of offer but the counter offer may
be accepted or rejected by the other party;
• It must be communicated to the officer, since acceptance is completed the moment it is
communication;
• Mere silence on the part of the offeree does not amount to acceptance;
• The acceptance should be given if there is a time limit is fixed or otherwise at a reasonable
time and before he offer lapses or is revoked.

Revocation of acceptance
Section 5 provides that an acceptance may be revoked at any time before the communication of
acceptance is complete as against the acceptor but not afterwards.

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 5.6 INDIAN CONTRACT ACT, 1872

Example – A proposes, by a letter sent by post, to sell his house to B; B accepts the proposal by a
letter sent by post; B may revoke his acceptance at any time before or at the moment when the
letter communication it reaches A, but not afterwards.

Section 4 provides that the communication of a revocation is complete as against the person who
makes it, when it is put into a course of transmission to the person to whom it is made, so as to be
out of the power of the person who makes it and as against the person to whom it is made, when it
comes to his knowledge.

Example – B revokes his acceptance by telegram. B’s revocation is complete as against B when the
telegram is dispatched and as against A when it reaches him.

Void Agreements
The following agreements are considered to be void-
• If considerations and objects are unlawful in part – Section – 24;
• Agreements without consideration – Section 25;
• Agreement in restraint of marriage – Section 26;
• Agreement in restraint of trade – Section 27;
• Agreements in restraint of legal proceedings – Section 28;
• Agreements void for uncertainty – Section 29;
• Agreements by way of wager- Section 30;

Considerations and objects unlawful in part

Section 24 provides that if any part of a single consideration for one or more objects or any one or
any part of any one of several considerations for a single object is unlawful, the agreement is void.

Example – A promises to superintend, on behalf of B, a legal manufacture of Indigo and an illegal

traffic in other articles, B promises to pay to a salary of ` 10,000/- a year. The agreement is void, the
object of A’s promise, and the consideration for B’s promise, being in part unlawful.

This section has no application to a contract which is a single contract and has no contingent part,

Agreement without consideration

Section 25 provides that an agreement made without consideration is void unless-
1. It is in writing and registered- it is expressed in writing and registered under the law for the
time being in force for the registration of documents and is made on account of natural love
and affection between parties standing in a near relation to each other; or unless

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 INDIAN CONTRACT ACT, 1872 5.7
2. If is a promise to compensate for something done – It is a promise to compensate, wholly or
in part, a person who has already voluntarily done something for the promisor, or something
which the promisor was legally compellable to do; or unless
3. It is a promise to pay a debt, barred by limitation law – It is a promise, made in writing and
signed by the person to be charged herewith, or by his agent generally or specially
authorized in that behalf, to pay wholly or in part a debt of which the creditor might have
enforced payment but for the law for the limitation of suits.

In any of these cases, such an agreement is a contract.

Explanation 1 – to this Section provides that nothing in this section shall affect the validity, as
between the donor and done of any gift actually made.

Explanation 2 – this Section provides that an agreement to which the consent of the promisor is
freely given is not void merely because the consideration is inadequate; but the inadequacy of the
consideration may be taken into account, by the Court in determining the question whether the
consent of the promisor was freely given.

Examples-
• A promises, for no consideration, to give B ` 1,000/-. This is a void agreement;
• A, for the natural love and affection, promises to give his son B, ` 1,000/-. A put his promise
to B into writing and registers it. This is a contract.
• A finds B’s purse and gives it to him. B promises to give A ` 50/-. This is a contract;
• A supports B’s infant son. B promises to pay A’s expenses in so doing. This is a contract;
• A owes B ` 1,000/- but the debt is barred by the Limitation Act. A signs written promises to
pay B ` 500 on account of the debt. This is a contract;
• A agrees to sell a horse worth of ` 1,000/- for ` 10/-. A’s consent to the agreement was
freely given. The agreement is a contract notwithstanding the inadequacy of the
consideration;
• A agrees to sell a horse worth of ` 1,000/- for ` 10/-. A denies that his consent to the
agreement was freely given.
The inadequacy of the consideration is a fact which the Court should take into account in considering
whether or not A’s consent was freely given.

Agreement in restrain of marriage

Minor, is void.

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 5.8 INDIAN CONTRACT ACT, 1872
Agreement in restraint of trade
Section 27 provides that every agreement by which any one is restrained from exercising a lawful
possession, trade or business of any kind, is to that extent void.

The exception to this section is saving of agreement not to carry on business of which goodwill is
sold. One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a
similar business, within specified local limits, so long as the buyer, or any person deriving title to the
goodwill from him, carries on a like business therein. Provide that such limits appear to the Court
reasonable, regard being had to the nature of business.

Agreements in restraint of legal proceedings

Section 28 provides that every agreement-
(a) By which any party thereto is restricted absolutely from enforcing his rights under or in
respect of any contract, by the usual legal proceedings in the ordinary tribunals, or which
limits the time within which he may thus enforce his rights; or
(b) Which extinguishes the rights of any party thereto, or discharges any party thereto, from any
liability, under or in respect of any contract on the expiry of a specified period so as to
restrict any party from enforcing his rights, is void to that extent.

Exceptions – The following are the exceptions to this Section –

• Saving of contract to refer to arbitration dispute that may arise - This section shall not
render illegal a contract, by which two or more persons agree that any dispute which may
arise between them in respect of any subject or class of subjects shall be referred to
arbitration and that only the amounts awarded in such arbitration shall be recoverable in
respect of the dispute so referred;
• Saving of contract to refer questions that have already arisen- Nor shall this section render
illegal any contract in writing, by which two or more persons agree to refer to arbitration any
question between them which has already arisen, or affect any provision of any law in force
for the time being as to references to arbitration.
• Saving of a guarantee agreement of a bank or a financial institution – Nor shall this section
render illegal any contract in writing, by which two or more persons agree to refer to
arbitration any question between them which has already arisen, or affect any provision of
any law in force for the time being as to references to arbitration.
• Saving of a guarantee agreement of a bank or a financial Institution – This section shall not
render illegal a contract in writing by which any bank or financial institution stipulate a term
in a guarantee or any agreement making a provision for guarantee for extinguishment of the
rights or discharge of any party thereto from any liability under or in respect of such
guarantee or agreement on the expiry of a specified period which is not less than one year

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 INDIAN CONTRACT ACT, 1872 5.9
from the date of occurring or non-occurring of a specified event for extinguishment or
discharge of such party from the said liability.

Agreements void for uncertainty

Section 29 provides that agreements, the meaning of which is not certain, or capable of being made
certain are void.
Examples-
(a) A agrees to sell to B, ‘a hundred tons of oil’. There is nothing whatever to show what kind of
oil was intended. The agreement is void for uncertainty;
(b) A agrees to sell to B, ‘One Hundred tons of oil of specified description known as an article of
commerce. There is no uncertainty here to make to agreement void;
(c) A who is a dealer in coconut oil only, agrees to sell to B ‘One hundred tons of oil’. The nature
of A’s trade affords an indication of the meanings of the words, and A has entered into a
contract for the sale of one hundred tons of coconut oil.
(d) A agrees to sell to B, ‘all the grain in my granary at Ramanagar’. There is no uncertainty here
to make the agreement void;
(e) A agrees to sell to B ‘One thousand mounds of rice at a price to be fixed by C’. As the price is
capable of being made certain, there is no uncertainty here to make the agreement void;
(f) A agrees to sell to B’ ‘My white horse for ` 500/- ` 1000/-. There is nothing to show which of
the two prices was to be given. The agreement is void.

Agreement by way of wager

Section 30 provides that agreements by way of wager are void; and no suit shall be brought for
recovering anything alleged to be won on any wager, or entrusted to any person to abide the result
of any game or other uncertain event on which any wager is made.

Exception in favor of certain prizes for horse-racing – This section shall not be deemed to render
unlawful a subscription, or contribution, or agreement to subscribe contribute, made or entered into
for or toward any plate, prize, or sum of money, of the value or amount of ` 500/- or upwards, to be
awarded to the winner or winners of any horse-race.

Section 294A of the Indian Penal Code not affected – Nothing in this section shall be deemed to
legalize any transaction connected with horse-racing to which the provisions of Section 294A of the
Indian Penal Code, apply.

Consideration
Section 2(d) of the Act defines the term ‘consideration’ as, when, at the desire of the promisor, the
promisee or any other person has done or abstained from doing, or does or abstains from doing, or

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 5.10 INDIAN CONTRACT ACT, 1872
promises to do or to abstain from doing, something, such act or abstinence or promise is called a
consideration for the promise. Consideration is essential for every contract. The following are the
fundamental principles for consideration –
• Consideration must be at the desire of the promisor;
• Consideration may move from the promise of any other person;
In ‘Chinnaya V. Ramaya’ – (1881) Mad. 137 it was held that a lady by a deed of gift made over certain
property to her daughter directing her to pay an annuity to the donor brothers as had been done by
the donor herself before she gifted the property. On the same day her daughter executed in writing
in favor of the donors’ brother agreeing to pay the annuity. Afterwards the done declined to fulfill
her promise to pay her uncle saying that no consideration had moved from him. The court held that
the uncle could sue even though no part of the consideration received by the niece moved from him.
The consideration from her mother was sufficient consideration.

Types of consideration
Consideration may be of the following types-
• Executor or future – it means it makes the form of promise to be performed in the future;
• Example – A makes an engagement with B to marry her in future.
• Executed or present – it is an act or forbearance made or suffered for a promise.
• Past – it means a past act or forbearance, that is to say, an act constituting consideration,
took place and is complete before the promise is made.

Legal Rules Regarding Consideration:

1. It must move at the desire of the promisor.
2. It may move from the promise or any other person.
3. Consideration must be something of value.
4. It may be an act, abstinence or forbearance or a return promise.
5. It may be past, present or future which the promisor is already not bound to do.
6. It must not be unlawful.
7. Consideration need not be adequate.
8. It must not be illusory.
9. It must not be opposed to public policy.
10. Pre-existing obligations.

No Consideration – No Contract: [Sec. 25]

The general rule is Ex Nudo pacto non Oritur actio Notes i.e. an agreement made without
consideration is void. For example if A promises to pay B’ 1000 without any obligation from B, this is
a void agreement for want of consideration. However, the Act itself provides exceptions to this rule

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 INDIAN CONTRACT ACT, 1872 5.11
in section 25 itself. As per section 25, an agreement made without consideration is not void in the
following circumstances:
1. Promise made on account of natural love and affection.
2. Promise to compensate for voluntary services.
3. Promise made to pay a time bared debt. Also, an agreement without consideration is not
void in the following cases:-
1. Gift actually made.
2. Creation of agency.
3. Charitable subscription.

Stranger to Contract / Doctrine of Privity of Contract:

The doctrine of privity of contract means that a contract is between the parties only and no third
person can sue upon it. It means that a stranger to contract cannot sue upon it. The Supreme Court
of India recognized this rule in MC Chacko v State Bank of Travancore. It is settled law that a person
not a party to a contract cannot subject to certain well recognized exceptions, enforce the term of
the contract. Under the English Common law, only a person who is party to a contract can sue upon
it. In India, the common law doctrine of privity of contract is applicable. In the course of time, the
courts have introduced a number of exceptions to rule of privity of contract.

The Indian Contract Act, 1872 is silent about the right of a stranger to contract to sue or not to sue
but the Privity Council extended the Principal of English Common law to India in its decision in Jamna
Das V Ram Avtar Pandy which was affirmed by the Honorable Supreme Court of India in the case of
MC Chako v State Bank of Travancore.

Accordingly, in the following circumstances a stranger to contract can sue:

1. Beneficiaries under trust or charge.
2. Marriage settlement, partition or other family arrangements.
3. Acknowledgement or estoppels.
4. Agency
5. Assignee in case of insurance policy.

Legality of Object
The object of the contract is the ultimate purpose which the contract sub serves. In contract the
subject matter or the agreement is its object.

Section 23 discusses about the legality of the object or consideration. The said section provides that
the consideration or object of an agreement is lawful, unless-
• It is forbidden by law; or

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 5.12 INDIAN CONTRACT ACT, 1872
• Is of such nature that, if permitted, it would defeat the provisions of any law; or
• Is fraudulent; or
• Involves or implies, injury to the person or property of another; or
• The Court regards it as immoral, or opposed to public policy. In each of these cases, the
consideration or object of an agreement is said to be unlawful. Every agreement of which
the object or consideration is unlawful is void.

Examples –
(a) A agrees to sell his house to B for ` 10,000/-. Here B’s promise to pay the sum of ` 10,000/-
is the consideration for A’s promise to sell the house and A’s promise to sell the house is the
consideration for B’s promise to pay ` 10,000/-. These are lawful considerations;
(b) A promises to pay B ` 1,000/- at the end of six month, if C who owes that sum to B, fails to
pay it. B promises to grant time to C accordingly. Here the promise of each party is the
consideration for the promise of the other party, and they are lawful considerations;
(c) A promises for a certain sum paid to him by B, to make good to B the value of his ship if it is
wrecked on a certain voyage. Here, A’s promise is the consideration for B’s payment and B’s
payment is the consideration for A’s promise, and these are lawful considerations;
(d) A promises to maintain B’s child and B promises to pay A ` 1,000/-yearly for the purpose.
Here, the promise of each party is the consideration for the promise of the other party. They
are lawful considerations;
(e) A, B and C enter into an agreement for the division among them of gains acquired, or to be
acquired, by them by fraud. The agreement is void, as its object is unlawful;
(f) A promises to obtain for B an employment in the public service, and B promises to pay
` 1,000/- to A. The agreement is void, as the consideration for its unlawful;
(g) A being agent for a landed proprietor, agrees for money, without the knowledge of his
principal to obtain for B a lease of land belonging to the principal. The agreement between A
and B is void, as it implies a fraud by concealment by A, on his principal;
(h) A promises B to drop a prosecution which he has instituted against B for robbery, and B
promises to restore the value of the things taken. The agreement is void, as its object is
unlawful;
(i) A’s estate is sold for arrears of revenue under the provisions of an Act of the Legislature, by
which the defaulter is prohibited from purchasing the estate. B, upon an understanding with
A, becomes the purchaser, and agrees to convey the estate to A upon receiving from him the
price which B has paid. The agreement is void as it renders the transaction in effect, a
purchase by the defaulter and would so defeat the object of the law;
(j) A, who is B’s mukhtar, promises to exercise his influence, as such, with B in favor of C and C
promises to pay ` 1000/- to A. The agreement is void, because it is immortal;

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 INDIAN CONTRACT ACT, 1872 5.13
(k) A agrees to let her daughter to hire to B for concubinage. The agreement is void, because it
is immoral, though the letting may not be punishable under the Indian Penal Code.

E-Contracts
Electronic contracts are paperless contracts and are in electronic form. It is the change of technology
and legal requirements lead the contract to be in electronic form. E-contract is a contract modeled,
specified, executed and deployed by a software system. They are conceptually very similar to
traditional commercial contracts. E-contract also requires the basic elements of a contract. The
following are ingredients of the E-contracts-
• An offer is to be made;
• Offer is to be accepted;
• There shall be a lawful consideration;
• There shall be an intention to create legal relations;
• The parties must be competent to contract;
• There must be free and genuine consent;
• The object of the contract must be lawful;
• There must be certainty and possibility of performance.
The main feature of this type of contract is speed, accurate and reliable. The parties to the contract
have to obtain digital signature from the competent authority and they have to affix the digital
signature instead of manual signing. The information Technology Act, 2000 regulates such e-
contracts.

In this type of contract the web site of the offeror acts as a display to the world at large. E-mails are
used to negotiate and agree on contract terms and to send and agree to the final contract. An email
contract is enforceable if the requirements of the contract are fulfilled. Electronically signed
contracts cannot be denied because they are in electronic form and delivered electronically.

Constraints to enforce contractual Obligations

Capacity of Contract
Who are Competent to Contract? (Section 11)
As per Section 11 every person is competent to contract who is of the age of majority according to
the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by
any law to which he is subject.

From the above provisions of the section, it means the following types of persons are not competent
to contract:
(a) A person who has not attained the age of majority, i.e. minor.

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 5.14 INDIAN CONTRACT ACT, 1872
(b) A person of unsound mind
(c) A person who is disqualified from contracting by some law.

(a) Minor:
As per section 3 of the Indian Majority Act of 1875, every person in India is a minor if he has
not attained the age of 18 years of age. However in case of a minor of whose person or
property or both a guardian has been appointed under the Guardian and Wards Act, 1890 or
whose property is under the superintendence of any court of wards before the attains 18
years of age is 21 years.
The position of Minor’s agreement and effect thereof is as under;
1. An agreement with a minor is void ab-initio.
2. The law of estoppel does not apply against a minor. It means a minor can always plead his
minority despite earlier misrepresenting to be a major. In other words, he cannot be held
liable on an agreement on the ground that since earlier he had asserted that he had attained
majority.
3. Doctrine of Restitution does not apply against a minor. In India, the rules of restitution by
minor are similar to those found in English laws. The scope of restitution of contract by
minor was examined by the Privy Council in Mohiri Bibi case when it has held that the
restitution of money under section 64 of the Indian Contract Act cannot be granted under
section 65 because a minor’s agreement is not voidable but absolutely void ab-initio.
Similarly no relief can be granted under section 65 as this section is applicable where the
agreement is discovered to be void or the contract becomes void.
4. No Ratification on Attaining Majority – Ratification means approval or confirmation. A minor
cannot confirm an agreement made by him during minority on attaining majority. If the
wants to ratify the agreement, a fresh agreement and fresh consideration for the new
agreement is required.
5. Contract beneficial to Minor – A minor is entitled to enforce a contract which is of some
benefit to him. Minority is a personal privilege and a minor can take advantage of it and bind
other parties.
6. Minor as an agent – A minor can be appointed an agent, but he is not personally liable for
any of his acts.
7. Minor’s liability for necessities- If somebody has supplied a minor or his dependents with
necessities, minor’s property is liable but a minor cannot be held personally liable
8. A minor cannot be adjudged insolvent as he is incapable of entering into a contract.
9. Where a minor and an adult jointly enter into an agreement with another person, the minor
is not liable and the contract can be enforced against the major person.

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 INDIAN CONTRACT ACT, 1872 5.15
(b) Sound Mind Person:
What is a sound mind for the Purposes of contracting? (Section 12)

A person is said to be of sound mind for the purposes of making a contract if, at the time when he
makes it, he is capable of understanding it and of forming a rational judgment as to its effect upon
his interests.

A person, who is usually of unsound mind, but occasionally of sound mind, may make a contract
when he is of sound mind. A person, who is usually of sound mind, but occasionally of unsound
mind, may not make a contract when he is of unsound mind.

Illustrations;
(a) A patient in a lunatic asylum, who is at intervals of sound mind, may contract during those
intervals.
(b) A sane man, was is delirious from fever or who is so drunk that he cannot understand the
terms of a contract or form a rational judgement as to its effect on his interests, cannot
contract whilst such delirium or drunkenness lasts.
Going by the spirit of the section, it is clear that a person is of sound mind if he fulfils the two
conditions at the time when he makes it namely:-
(i) He/ she is capable of understanding the contract
(ii) He/ she is capable of forming a rational judgment about the effects of such contract on
his interest.
A person not satisfying any of these two conditions is not treated as a person of sound mind.

(c) Other Disqualified Persons:

The persons who are disqualified from entering into contract due to certain other reasons
may be from legal status, political status or corporate status. Some of such categories of
persons are given below:
(i) Alien Enemy: An agreement with an Alien Enemy is void. But agreement with an Alien friend
is perfectly valid and enforceable. When the Government of an Alien is at war with the
Government of India, the alien is called Alien enemy, who cannot enter into any contract
with any Indian citizen without the permission of Government of India as the same is against
the public policy. Contract entered into with an alien before was is put into suspension
during the duration of war.
(ii) Foreign Sovereign and Ambassadors: Foreign sovereigns and their representatives enjoy
certain privileges and immunities in every country. They cannot enter into contract except
through their agents residing in India. They can sue the Indian citizen but an Indian citizen
cannot sue them.

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 5.16 INDIAN CONTRACT ACT, 1872
(iii) Convicts: A convict cannot enter into a contract while he is undergoing imprisonment.
(iv) Insolvents: An insolvent person is one who is unable to discharge his liabilities and therefore
has applied for being adjudged insolvent of such proceedings have been initiated by any of
his creditors. An insolvent person cannot enter into any contract relating to his property.
(v) Company or Statutory bodies: A contract entered into by a corporate body or statutory
body will be valid only to the extent it is within its Memorandum of Association.

Free Consent
Consent: ‘Two or more persons are said to consent when they agree upon the same thing in the
same sense.’ – [Sec 13].

If the parties have not agreed upon the same thing in the same sense, there is no real consent and
hence no contract is formed.

As per Section 14 of the Indian Contract Act, 1872 consent is said to be free when it is not caused by
–
1. Coercion (Sec 15), or
2. Undue influence (Sec 16), or
3. Fraud (Sec 17), or
4. Misrepresentation (Sec 18), or
5. Mistake, subject to the provisions of section 20, 21 and 22.

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 INDIAN CONTRACT ACT, 1872 5.17
Coercion: [Sec. 15]
The term “Coercion” has been defined in Section 15 of the Act as the committing or threatening to
commit, any act forbidden by the Indian Penal Code, or the unlawful detaining, or threatening to
detain, any property, to the prejudice of any person whatever, with the intention of causing any
person to enter into an agreement.

Explanation: It is immaterial whether the Indian Penal Code is or is not in force in the place where
the coercion is employed.

From the above definition of coercion given in section 15, consent is said to be caused by coercion,
when it is obtained by any one of the following:
(i) Committing or threatening to commit any act forbidden by Indian Penal Code;
(ii) Unlawful detaining or threatening to detain the property of another person.
Coercion may come from a person party to the contract or even third person not connected with the
contract directly.

Unlawful detaining also amounts to coercion: if a person unlawfully detains or gives a threat to
detain any property to the prejudice of any person whatever, with the intention of causing any
person to enter into an agreement amounts to coercion.

Effect of coercion:
According to section 19 when the consent is caused by coercion, fraud, misrepresentation, the
agreement is voidable at the option of the party whose consent was so caused. The aggrieved party
may opt to rescind the contract. If the aggrieved party seeks to rescind the contract, he must restore
the benefit so obtained under the contract from other party.

It should be noted that threat to commit suicide also amounts to coercion.

Some special cases which are prone to be construed cases of coercion are discussed as under;
1. Prosecution: A mere threat to prosecute a man or file suit against him does not constitute
coercion. In the case of Andhra Sugar Lts V State of AP air 1968 SC 599, it was held that
compulsion of law is not a coercion, fraud, misrepresentation, mistake or even undue-
influence.
2. High prices and high interest Rates: Charging high interest rate, high price etc is not
coercion as the same is not prohibited under the Indian Penal Code.
3. A threat of commit suicide: Consent to an agreement may at times be obtained by
threatening to commit suicide. The Madras High court has held that threat to commit suicide
amounts to coercion. In Amraju v Seshamma 1917 41 Mad 33 it was argued by Oldfield J,
one of the judge of the Bench which decided this case, that section 15 of the Indian Contract

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 5.18 INDIAN CONTRACT ACT, 1872
Act, must be construed strictly and that an act which is not punishable under the Indian
Penal Code cannot be said to be forbidden by it. Suicide is not punishable by the Indian
Penal Code, only the attempt to suicide is punishable.

Undue Influence: [Sec. 16]

Section 16 of the Indian Contract Act defines undue influence as under:
(i) A contract is said to be induced by “undue influence” where the relations subsisting
between the parties are such that one of the parties is in a position to dominate the will
of the other and uses that position to obtain an unfair advantage over the other.
(ii) In particular and without prejudice to the generality of the forgoing principle, a person is
deemed to be in a position to dominate the will of another-
(a) Where he holds a real or apparent authority over the other, or where he stands in a
fiduciary relation to the other; or
(b) Where he makes a contract with a person whose mental capacity is temporarily or
permanently affected by reason of age, illness, or mental or bodily distress.
(iii) Where a person, who is in a position to dominate the will of another, enters into a
contract with him, and the transaction appears, on the face of it or on the evidence
adduced, to be unreasonable, the burden of proving that such contract was not induced
by undue influence shall lie upon the person in a position to dominate the will of the
other.

Nothing in this sub-section shall affect the provisions of section 111 of the Indian Evidence Act,
1872 (1 of 1872). There is presumption of undue influence in the following relationships:
(i) Parent and child
(ii) Guardian and ward
(iii) Doctor and patient
(iv) Solicitor and client
(v) Trustee and beneficiary
(vi) Religious advisor and disciple
(vii) Finance and fiancée

There is however no presumption of undue influence in case of relationship of –

(i) Landlord and tenant
(ii) Debtor and creditor
(iii) Husband and wife.

The wife has to be pardanashni for such presumption. In these relationships undue influence has to
be proved.

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 INDIAN CONTRACT ACT, 1872 5.19

Going through the definition of undue influence in section 16 we find that two elements are found in
undue influence:
(i) The relationship subsisting between the parties is such that one party is in a position to
dominate the will of other and
(ii) He uses that position to obtain an unfair advantage over the other. The person intending
to avoid the contract on the ground of undue influence must prove both the above two
elements.

Examples
(a) A having advanced money to his son, B, during his minority, upon B’s coming of age obtains,
by misuse of parental influence, a bond from B for a greater amount than the sum due in
respect of the advance. A employs undue influence.
(b) A, a man enfeebled by disease or age, is induced, by B’s influence over him as his medical
attendant, to agree to pay B an unreasonable sum for his professional services, B employs
undue influence.
(c) A, being in debt to B, the money-lender of his village, contracts a fresh loan on terms which
appear to be unconscionable. It lies on B to prove that the contract was not induced by
undue influence.
(d) A applies to a banker for a loan at a time when there is stringency in the money market. The
banker declines to make the loan except at an unusually high rate of interest. A accepts the
loan on these terms. This is a transaction in the ordinary course of business, and the contract
is not induced by undue influence.

Effect of undue influence: Section 19 A provides that when the consent is caused by undue
influence, the agreement is voidable at the option of the party whose consent was so caused. The
aggrieved party may opt to rescind the contract. If the aggrieved party seeks to rescind the contract,
he must restore the benefit so obtained under the contract from other party, upon such terms and
conditions as to the court may seem just. The following illustrations are appended to the section.
(a) A’s son has forged B’s name to a promissory note. B, under threat of prosecuting A’s son,
obtains a bond from A for the amount of the forged note. If B sues on this bond, the Court
may set the bond aside.
(b) A, a moneylender, advances ` 100 to B, an agriculturist, and, by undue influence, induces B
to execute a bond for ` 200 with interest at 6 per cent per month. The Court may set the
bond aside; ordering B to repay ` 100 with such interest as may seem just.
The court has discretion to direct the aggrieved party for giving back the benefit whether in whole or
in part or set aside the contract without any direction for refund of benefit.

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 5.20 INDIAN CONTRACT ACT, 1872
In a case for avoiding a contract on the ground of undue influence, the plaintiff has to prove that:
(i) The other party was in a position to dominate the will; and
(ii) He actually used his influence to obtain the plaintiff’s consent to the contract; ir will be
then for the defendant to show that the plaintiff freely consented.

The presumption is raised at least in the following cases:

(a) Unconscionable bargains
(b) Contracts with pardanashin women

Fraud: [Sec. 17]

As per section 17 of the Indian Contract Act;

“Fraud” means and includes any of the following acts committed by a party to a contract, or with his
connivance, or by agent, with intent to deceive another party thereto or his agent, or to induce him
to enter into the contract:
(i) The suggestion, as a fact, of that which is not true by one who does believe it to be true;
(ii) The active concealment of a fact by one having knowledge or belief of the fact;
(iii) A promise made without any intention of performing it;
(iv) Any other act fitted to deceive;
(v) Any such at or omission as the law specially declares to be fraudulent.

Explanation: Mere silence as to facts likely to affect the willingness of a person to enter into a
contract is not fraud, unless the circumstances of the case are such that, regard being had to them, it
is the duty of the person keeping silence to speak, or unless his silence is, in itself, equivalent to
speech.

Does silence amount to fraud?

At times one of the parties to a contract makes silence to some of the facts relating to the subject
matter of contract. The matter on which silence is maintained by party may be material fact. Does
this amount to passive fraud under the Indian Contract Act or not depends upon various factors?

Explanation to Section 17 of the Indian Contract Act provides that mere silence as to facts likely to
affect the willingness of a person to enter into a contract is not fraud unless the circumstances of
case are such that having regard to them, it is the duty of the person keeping silence to speak or
unless silence itself is equivalent to speech.

Thus. We can say that there is exception to the rule that mere silence does not amount to silence.
These two exceptions are provided in explanation to section 17 and these are as under.

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 INDIAN CONTRACT ACT, 1872 5.21
(i) When there is a duty to speak.
(ii) Where silence is equivalent to speech.
However, in the following two types of cases, silence amounts to fraud, as held by the courts in
various cases:

(a) Where there is change in circumstances: A representation may be true when made but with
the passage of time or changed circumstances it may become false. Accordingly, this must
be communicated to other party otherwise it amount to fraud.
(b) When there is half-truth – Even when a person is not bound to disclose a fact, he may be
held guilty of fraud if he volunteers to disclose a state of fact partly. This is so when the
undisclosed part renders the disclosed part false.

Examples:
(a) A sells, by auction, to B, a horse which A knows to be unsound. A says nothing to B about the
horse’s unsoundness. This is not fraud in A.
(b) B is A’s daughter and has just come of age. Here, the relation between the parties would
make it A’s duty to tell B if the horse is unsound.
(c) B says to A- “If you do not deny it, I shall assume that the horse is sound.” A says nothing.
Here. A’s silence is equivalent to speech.

Effect of Fraud: According to section 19 when consent to an agreement is caused by coercion, fraud
or misrepresent, the agreement is a contract voidable at the option of the party whose consent was
so caused.

A party to a contract, whose consent was caused by fraud or misrepresentation, may, if he thinks fit,
insist that the contract shall be performed, and that he shall be put in the position in which he would
have been, if the representations made had been true.

However, there is one exception to the rule of void ability of contract at the option of aggrieved
party. If such consent was caused by misrepresentation, or by silence, fraudulent within the meaning
of section 17, the contact, nevertheless, is not voidable, if the party whose consent was so caused
had the means of discovering the truth with ordinary diligence.

Misrepresentation: [Sec. 18]

A statement of fact which one party makes in the course of negotiation with a view to induce the
other party to enter into a contract is known as misrepresentation. It must relate to some fact which
is material to the contract. It may be expressed by words spoken or written or implied from the acts
and conduct of the parties.

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 5.22 INDIAN CONTRACT ACT, 1872

A representation when wrongly made either innocently or unintentionally is a misrepresentation.

When it is made innocently or unintentionally, it is misrepresentation and when made intentionally
or willfully it is fraud.

Misrepresentation has been defined in Section 18 of the Act as under;

“Misrepresentation” means and includes-

(1) The positive assertion, in a manner not warranted by the information of the person making
it, of that which is not true, though he believes it to be true;
(2) Any breach of duty which, without an intent to deceive, gains an advantage to the person
committing it, or any one claiming under him, by misleading another to his prejudice or to
the prejudice of anyone claiming under him;
(3) Causing, however innocently, a party to an agreement to make a mistake as to the substance
of the thing which is the subject of the agreement.

From the above definition of the term Misrepresentation, the following two types of
misrepresentations are noticed;
(a) Unwarranted statements: When a person positively assets, makes an absolute and explicit
statement of facts, that fact is true, though he has no reliable source to form this opinion,
but he believe it to be true. This is one type of misrepresentation.
(b) Breach of duty: Any breach of duty which brings advantages to the person committing it by
misleading the other to his prejudice is a misrepresentation.

Effect of Misrepresentation:
as per section 19 when consent to an agreement is caused by misrepresentation, the agreement is a
contract voidable at the option of the party whose consent was so caused. A party to a contract,
whose consent was caused by misrepresentation, may, if he thinks fit, insist that the contract shall
be performed, and that he shall be put in the position in which he would have been, if the
representations made had been true.

Exception: If such consent was caused by misrepresentation or by silence, fraudulent within the
meaning of section 17, the contract, nevertheless, is not voidable, if the party whose consent was so
caused had the means of discovering the truth with ordinary diligence.

Explanation: A fraud or misrepresentation which did not cause the consent to a contract of the party
on whom such fraud was practiced, or to whom such misrepresentation was made, does not render
a contract voidable.

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 INDIAN CONTRACT ACT, 1872 5.23

Examples:
(a) A, intending to deceive B, falsely represents that five hundred maunds of indigo are made
annually at A’s factory, and thereby induces B to buy the factory. The contract is voidable at
the option of B.
(b) A, by a misrepresentation, leads B erroneously to believer that, five hundred maunds of
indigo are made annually at A’s factory. B examines the accounts of the factory, which show
that only four hundred maunds of indigo have been made. After this B buys the factory. The
contract is not voidable on account of A’s misrepresentation.
(c) A graudulently informs B that A’s estate is free from encumbrance. B thereupon buys the
estate. The estate is subject to a mortgage. B may either avoid the contract, or may insist on
its being carried out and the mortgage debt redeemed.
(d) B, having discovered a vein of ore on the estate of A, adopts means to conceal, and does
conceal, the existence of the ore from A. Through A’s ignorance B is enabled to buy the
estate at an under-value. The contract is voidable at the option of A.
(e) A is entitled to succeed to an estate at the death of B, B dies: C, having received information
of B’s death, prevents the information reaching A, and thus induces A to sell him his interest
in the estate. The sale is voidable at the option of A.

Mistake: [Sec. 20, 21 and 22]

Mistake means an erroneous belief about something. It has not been defined in the Indian contract
Act.

Mistake can be-

(a) Mistake of law, or (sec 21)
(b) Mistake of fact (Sec 20)

(a) Mistake of law may be:

(i) Mistake of law of the country
(ii) Mistake of law of a foreign county

(i) Mistake of law of the country;

When a party enters into a contract, without the knowledge of law in the country, the
contract is affected by such mistake but it is not void. A contract is not voidable because it
was caused by a mistake as to any law in force in India. The reason here is that ignorance of
law is not an excuse at all. However, if a party is induced to enter into a contract by the
mistake of law, then such a contract may be avoided.

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 5.24 INDIAN CONTRACT ACT, 1872
(ii) Mistake of law of foreign country: Such a mistake is treated as mistake of fact and
agreement is such case is void.

(b) Mistake of fact may be:

(i) Bilateral mistake, or
(ii) Unilateral mistake

(i) Bilateral mistake

Where both the parties to an agreement are under a mistake as to a matter of fact
essential to the agreement, the agreement is void.

Explanation: an erroneous opinion as to the value of the thing which forms the subject-
matter of the agreement is not to be deemed a mistake as to a matter of fact.

In order to render an agreement void due to bilateral mistake, the following two conditions
must be met:-
(a) Mistake must be mutual: Both the parties must misunderstand each other and should
be at cross purpose.
(b) Mistake must relate to a matter of fact essential to the agreement: what is essential
fact of an agreement depends upon the nature of promise in each case.
The various types of mistakes falling under bilateral mistakes are as under:
(i) Mistake as to subject matter covers following cases:
(a) Mistake as to existence of subject matter: If both the parties are at mutual mistake
as to existence of the subject matter, the agreement is void.
(b) Mistake as to identity of subject matter: It usually happens when both he parties
have different subject matter of contract in their mind. The agreement is void due to
mistake of identify of subject matter.
(c) Mistake as to the quality of the subject matter: If the subject matter is something
essentially different from what the parties thought to be the agreement is void..
(d) Mistake as to quantity of subject matter: Bilateral mistake as to quantity of subject
matter would render the agreement void.
(e) Mistake as to title of subject matter: The agreement is void due to bilateral mistake
as to title of the subject matter.
(f) Mistake as to price of the subject matter: Mutual mistake as to price of the subject
matter would render the agreement void.

(ii) Mistake as to possibility of performance of Contract

Impossibility may be:

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 INDIAN CONTRACT ACT, 1872 5.25
(a) Physical impossibility: An agreement is void, if it is identified to be non-feasible due to
physical factors, like time, distance, height, etc.
(b) Legal impossibility: An agreement is void, if it provides that something shall be done
which as a matter of law cannot be done.

Examples:
(a) A agrees to sell to B a specific cargo of goods supposed to be on its way from England to
Bombay. It turns out that, before the day of the bargain, the ship conveying the cargo had
been cast away and the goods lost. Neither party was aware of the these facts. The
agreement is void.
(b) A agrees to buy from B a certain horse. It turns out that the horse was dead at the time of
bargain, though neither party was aware of the fact. The agreement is void.
(c) A, being entitled to an estate for the life of B, agrees to sell it to C. B was dead at the time
of the agreement, but both parties were ignorant of the fact. The agreement is void.

(ii) Unilateral Mistake as to fact:

As per Section 22, a contract is not voidable merely because it was caused by one of the
parties to it being under a mistake as to a matter of fact. A unilateral mistake is not
allowed as a defence in avoiding a contract unless brought about by another party’s
fraud or misrepresentation.

Quasi Contracts, Contingent Contracts, Termination or Discharge of Contracts

Quasi Contracts
Sometimes the law implies a promise imposing obligations one party and conferring the right in
favor of the other even when there is no offer, no acceptance, no consensus ad idem, and in fact,
there is neither agreement nor promise. Such cases are not contracts but the court recognizes them
as relations resembling those of contracts and enforces them as if they were contracts. Such is called
as a quasi-contract.

This type of contract rests on the equitable principle that a person shall not be allowed to enrich
himself unjustly in the experience of another. It is obligation which the law creates in the absence of
any agreement, when any person is in the possession of one person’s money or its equivalent under
such circumstances that in equity and good conscience, he ought not to retain it and which injustice
and fairness belongs to another. It is the duty and not an agreement or intention which defines it.

In the Act, the following type of quasi contracts are discussed-

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 5.26 INDIAN CONTRACT ACT, 1872
• Section 68- claim for necessaries supplied to person incapable of contracting, or on his
account – This section provides that if a person, incapable of entering into a contract, or any
one whom he is legally bound to support, is supplied with another person with necessaries
suited to his condition in life, the person who has furnished such supplies is entitled to be
reimbursed from the property of such incapable person.
Examples:
(a) A supplies B, a lunatic, with necessaries suitable to his condition in life. A is entitled to
be reimbursed from B’s property.
(b) A supplies the wife and children of B, a lunatic, with necessaries suitable to their
condition to in life. A is entitled to be reimbursed from B’s property.
• Section 69 – Reimbursement of persons paying money due by another, in payment of
which he is interested – This section provides that a person who is interested in the
payment of money which another is bound law to pay, and who therefore pays it, is entitled
to be reimbursed by the other.

Examples:
B holds land in Bengal, on a lease granted by A, the zamindar. The revenue payable by A to
the Government being in arrear, his land is advertised for sale by the Government. Under
the revenue law, the consequence of such sale will be the annulment of lease. B, to prevent
the sale and the consequent annulment of his own lease, pays to the Government the sum
due from A. A is bound to make good to B the amount so paid.

• Section 70 – Obligation of person enjoying benefit of non-gratuitous act – this section

provides that where a person lawfully does anything for another person, or delivers anything
to him, not intending to do so gratuitously, and such other person enjoys the benefit
thereof, the latter is bound to make compensation to the former in respect of, or to restore,
the thing so done or delivered – it Is otherwise called as quantum meruit.
Examples:
(a) A, a tradesman, leaves goods at B’s house by mistake. B treats the goods as his own. He
is bound to pay A for them.
(b) A saves B’s property from fire. A is not entitled to compensation from B, if the
circumstances show that he intended to act gratuitously.

• Section 71- Responsibility of finder of goods - This section provides that a person who finds
goods belonging to another, and takes them into his custody, is subject to the same
responsibility as a Bailee.

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 INDIAN CONTRACT ACT, 1872 5.27
• Section 72 – Liability of person to whom money is paid or thing delivered, by mistake or
under coercion - This section provides that a person to whom money has been paid, or
anything delivered, by mistake or under coercion, must repay or return it.
Examples:
(a) A and B jointly owe 100 rupees to C, A alone pays the amount to C, and B, and knowing
this fact, pays 100 rupees over again to C. C is bound to repay the amount to B.
(b) A railway company refuses to deliver up certain goods to the consignee, except upon
the payment of an illegal charge for carriage. The consignee pays the sum charged in
order to obtain the goods, he is entitled to recover so much of the charge as was
illegally excessive.

Contingent Contracts
Section 31 defines ‘contingent contract’ as a contract to do or not to do something, if some event,
collateral to such contract, does or does not happen. The following are the essentials of contingent
contract-

Example:
A contracts to pay B ` 10,000 if B’s house is burnt. This is a contingent contract.
The following are the essentials of a contingent contract.
• Uncertainty and futurity of the event to which it is related;
• Uncertain future event must be collateral to the contract.

Reciprocal promises are not contingent contracts as they cannot be said to be collateral to each
other. The law allows the enforcement of a contingent contract after the event upon which it was
contingent has happened. The contingency which is the essence of a condition must be distinguished
from mere futurity. An obligation is not to be classified as conditional because its performance is not
yet due.

A contingent contract need not necessarily be independent on any external event. It may be
conditional on the voluntary act or the future conduct of one of the parties or a third person.

Enforcement of contingent contract

Section 32 provides that contingent contract to do or not to do anything, if an uncertain future event
happens cannot be enforced by law unless and until that event has happened. If the event becomes
impossible, such contract become void.

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 5.28 INDIAN CONTRACT ACT, 1872
Examples –
(a) A makes a contract with B to buy B’s horse if A survives C. This contract cannot be enforced
in law unless and until C dies in A’s lifetime.
(b) A makes a contract with B to sell a horse to B at a specified price if C, to whom the horse has
been offered, refused to buy him. The contract cannot be enforced by law unless and until C
refuses to buy the horse.
(c) A contract to pay B a sum of money when B maries C. C dies without being married to B. the
contract becomes void.

Section 33 provides for enforcement of contacts contingent on an event not happening. This section
provides that contingent contracts to do or not to do anything if an uncertain future event does not
happen, can be enforced when the happening of that event becomes impossible, and not before.

Explanation – A agrees to pay B a sum of money, if a certain ship does not return. The ship is sunk.
The contract can be enforced when the ship sinks.

Section 34 discusses about deemed impossible contract. The said section provides that if the future
event on which a contract is contingent is the way in which a person will act at an unspecified time,
the event shall be considered to become impossible when such person does anything which renders
it impossible that he should so act within any definite time, or otherwise than under further
contingencies.

Example – A agrees to pay B a sum f money if B marries C, C marries D. The marriage of B to C must
now be considered impossible; although it is possible that D may die and that C may afterwards
marry B.

Section 35 provides for the contracts which are contingent on happening of specified event within
fixed time. The said section provides that contingent contracts to do or not to do anything, if a
specified uncertain event happens within a fixed time, become void if, at the expiration of the time
fixed, such event has not happened, or if, before the time fixed, such event becomes impossible.

Contingent contracts to or not to do anything, if a specified uncertain event does not happen within
a fixed time, may be enforced by law when the time fixed has expired and such event has not
happened, or before the time fixed has expired, if it becomes certain that such event will not
happen.

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 INDIAN CONTRACT ACT, 1872 5.29
Examples-
(a) A promises to pay B a sum of money if a certain ship returns within a year. The contract may
be enforced if the ship returns within the year and becomes void if the ship is burnt within
the year;
(b) A promises to pay B a sum of money if a certain ship does not return within a year. The
contract may be enforced if the ship does not return within the year, or is burnt within the
year.

Agreements contingent on impossible event void

Section 36 provides that contingent agreements to do or not to do anything, if an impossible event
happens, are void, whether the impossibility of the event is known or not to the parties to the
agreement at the time when it is made.

Example-
(a) A agrees to pay B ` 1,000/- If two straight lines should enclose of a space. The agreement is
void.
(b) A agrees to pay B ` 1,000/- If B will marry A’s daughter C. C, was dead at the time of the
agreement. The agreement is void.

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 5.30 INDIAN CONTRACT ACT, 1872

Previous Year Question

Q1. Mr. Sohanlal sold 10 acres of his agricultural land to Mr. Mohanlal on 25th September 2018 for
` 25 Lakhs. The Property papers mentioned a condition, amongst other details, that whosoever
purchases the land is free to use 9 acres as per his choice but the remaining 1 acre has to be allowed
to be used by Mr. Chotelal, son of the seller for carrying out farming or other activity of his choice.
On 12th October, 2018, Mr. Sohanlal died leaving behind his son and life. On 15th October, 2018
purchaser started construction of an auditorium on the whole 10 acres of land and denied any land
to the son.
Now Mr. Chotelal wants to file a case against the purchaser and get a suitable redressed. Discuss the
above in light of provisions of Indian Contract Act, 1872 and decide upon Mr. Chotelal’s plan of
action?

Answer: Problem as asked in the question is based on the provisions of the Indian Contract Act, 1872
as contained in section 2(d) and on the principle ‘privity of consideration’. Consideration is one of
the essential elements to make a contract valid and it can flow from the promise or any other
person. In view of the clear language used in definition of ‘consideration’ in Section 2(d), it is not
necessary that consideration should be furnished by the promise only. A promise is enforceable if
there is some consideration for it and it is quite immaterial whether it moves from the promise or
any other person. The leading authority in the decision of the Chinnaya Vs. Ramayya, held that the
consideration can legitimately move from a third party and it is an accepted principle of law of in
India.

In the given problem, Mr. Sohanlal has entered into a contract with Mr. Mohanlala, but Mr. Chotelal
has not given any consideration to Mr. Mohanlal but the consideration did flow from Mr. Sohanlal to
Mr. Mohanlal on the behalf of Mr. Chotelal and such consideration from third party is sufficient to
enforce the promise of Mr. Mohanlal to allow Mr. Chotelal to use 1 acre of land. Further the deed of
sale and the promise made by Mr. Mohanlal to Mr. Chotelal to allow the use of 1 acre of land were
executed simultaneously and therefore they should be regarded as one transaction and there was
sufficient consideration for it.

Moreover, it is provided in the law that “in case covenant running with the land, where a person
purchases land with notice that the owner of the land is bound by certain duties affecting land, the
covenant affecting the land may be enforced by the successor of the seller.”

In such a case, third party to a contract can file the suit although it has not moved the consideration.

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 INDIAN CONTRACT ACT, 1872 5.31
Hence, Mr. Chotelal is entitled to file a petition against Mr. Mohanlal for execution of contract.

Q2. “Mere silence is not fraud” but there are some circumstances where the “silence is fraud”.
Explain the circumstances as per the provision of Indian Contract Act, 1872?

Answer:
Mere silence is not fraud
Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not
fraud, unless the circumstances of the case are such that, regard being had to them, it is the duty of
the person keeping silence to speak, or unless his silence is, in itself, equivalent to speech.

It is a rule of law that mere silence does not amount to fraud. A contracting party is not duty bound
to disclose the whole truth to the other party or to give him the whole information in his possession
affecting the subject matter of the contract.

The rule is contained in explanation to Section 17 of the Indian Contract Act which clearly states the
position that mere silence as to facts likely to affect the willingness of a person to enter into a
contract is not fraud.

Silence is fraud:
1. Duty of person to speak: Where the circumstances of the case are such that it is the duty of the
person observing silence to speak.
(a) Fiduciary Relationship: Here, the person in whom confidence is reposed is under a duty to
act with utmost good faith and make full disclosure of all material facts concerning the
agreement, known to him.
(b) Contracts of Insurance: In contracts of marine, fire and life insurance, there is an implied
condition that full disclosure of material facts shall be made, otherwise the insurer is entitled
to avoid the contract.
(c) Contracts of marriage: Every material fact must be disclosed by the parties to a contract of
marriage.
(d) Contracts of family settlement: These contracts also require full disclosure of material facts
within the knowledge of the parties.
(e) Share Allotment contracts: Persons issuing ‘Prospectus’ at the time of public issue of shares/
debentures by a joint stock company have to disclose all material facts within their
knowledge.
2. Where the silence itself is equivalent to speech: For example, A says to B “If you do not deny
it, I shall assume that the horse is sound.” A says nothing. His silence amounts to speech.

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 5.32 INDIAN CONTRACT ACT, 1872

Q3. Mr. Rich a spired to get a self-portrait made by an artist. He went to the workshop of Mr. C an
artist and asked whether he could sketch former’s portrait on oil painting canvass. Mr. C agreed to
the offer and asked for ` 50,000 as full advance payment for the above creative work. Mr. C clarified
that the painting shall be completed in 10 sittings and shall take 3 months.

On reaching to the workshop for the 6th sitting, Mr. Rich was informed that Mr. C became paralyzed
and would not be able to paint for near future. Mr. C had a son Mr. K who was still pursuing his
studies and had not taken up his father’s profession yet?
Discuss in light of the Indian Contract Act, 1872?
(i) Can Mr. Rich ask Mr. K to complete the artistic work in lieu of his father?
(ii) Could Mr. Rich ask Mr. K for refund of money paid in advance to his father?

Answer: A contract which involves the use of personal skill or is founded on personal consideration
comes to an end on the death of the promisor. As regards any other contract the legal
representatives of the deceased promisor are bound to perform it unless a contrary intention
appears from the contract (Section 37 of the Indian Contract Act, 1872). But their liability under a
contract is limited to the value of the property they inherit from the deceased.
(i) In the instant case, since painting involves the use of personal skill and on becoming Mr. C
paralyzed, Mr. Rich cannot ask Mr. K to complete the artistic work in lieu of his father Mr. C.
(ii) 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 be received it.

Hence, in the instant case, the agreement between Mr. Rich and Mr. C has become void because
of paralysis to Mr. C. So, Mr. Rich can ask Mr. K for refund of money paid in advance to his
father, Mr. C.

Q4. Discuss the essentials of Undue Influence as per the India Contract Act, 1872.

Answer: The essentials of Undue Influence as per the Indian Contract Act, 1872 are the following:
(1) Relation between the parties: A person can be influenced by the other when a near relation
between the two exists.
(2) Position to dominate the will: Relation between the parties exist in such a manner that one
of them is in a position to dominate the will of the other. A person is deemed to be in such
position in the following circumstances:

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 INDIAN CONTRACT ACT, 1872 5.33
(a) Real and apparent authority: Where a person holds a real authority over the other as in
the case of master and servant, doctor and patient and etc.
(b) Fiduciary relationship: Where relation of trust and confidence exists between the
parties to a contract. Such type of relationship exists between father and son, solicitor
and client, husband and wife, creditor and debtor, etc.
(c) Mental distress: An undue influence can be used against a person to get his consent on
a contract where the metal capacity of the person is temporarily or permanently
affected by the reason of mental or bodily distress, illness or of old age.
(d) Unconscionable bargains: Where one of the parties to a contract is in a position to
dominate the will of the other and the contract is apparently unconscionable i.e., unfair,
it is presumed by law that consent must have been obtained by undue influence.
Unconscionable bargains are witnessed mostly in money lending transactions and in
gifts.
(3) The object must be to take undue advantage: Where the person is in a position to influence
the will of the other in getting consent, must have the object to take advantage of the other.
(4) Burden of proof: The Burden of proving the absence of the use of the dominant position to
obtain the unfair advantage will lie on the party who is in a position to dominate the will of
the other.

Q5. X found a wallet in a restaurant. He enquired of all the customers present there but the true
owner could not be found. He handed over the same to the manager of the restaurant to keep till
the true owner is found. After a week he went back to the restaurant to enquire about the wallet.
The manager refused to return it back to X, saying that it did not belong to him.
In the light of the Indian Contract Act, 1872, can X recover it from the Manager?

Answer: Responsibility of finder of goods (Section 71 of the Indian Contract Act, 1872): A person
who finds goods belonging to another and takes them into his custody is subject to same
responsibility is if he were a bailee.
Thus, a finder of lost goods has:
(i) To take proper care of the property as man of ordinary prudence would take no right to
appropriate the goods and
(ii) No right to appropriate the goods and
(iii) To restore the goods if the owner is found.
In the light of the above provisions, the manager must return the wallet to X, since X is entitled to
retain the wallet found against everybody except the true owner.

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 5.34 INDIAN CONTRACT ACT, 1872
Q6. Define consideration. What are the legal rules regarding consideration under the Indian Contract
Act, 1872?

Answer: Consideration [Section 2(d) of the Indian Contract Act, 1872]: When at the desire of the
promisor, the promise or any other person has done or abstained from doing, or does or abstains
from doing or promises to do or abstain from doing something, such an act or abstinence or promise
is called consideration for the promise.
Legal rules Regarding Consideration
(i) Consideration must move at the desire of the promisor: Consideration must be offered
by the promise or the third party at the desire or request of the promisor. This implies
“return” element of consideration.
(ii) Consideration may move from promise or any other person: In India, consideration
may proceed from the promise or any other person who is not a party to the contract. In
other words, there can be a stranger to a consideration but not stranger to a contract.
(iii) Executed and executory consideration: A consideration which consists in the
performance of an act is said to be executed. When it consists in a promise, it is said to
be executory. The promise by one party may be the consideration for an act by some
other party, and vice versa.
(iv) Consideration may be past, present or future: It is a general principle that consideration
is given and accepted in exchange for the promise. The consideration, if past, may be the
motive but cannot be the real consideration of a subsequent promise. But in the event
of the services being rendered in the past at the request or the desire of the promisor,
the subsequent promise is regarded as an admission that the past consideration was not
gratuitous.
(v) Consideration need not be adequate: Consideration need not to be of any particular
value. It need not be approximately of equal value with the promise for which it is
exchanged but it must be something which the law would regard as having some value.
(vi) Performance of what one is legally bound to perform: The performance of an act by a
person who is legally bound to perform the same cannot be consideration for a contract.
Hence, a promise to pay money to a witness is void, for it is without consideration.
Hence such a contract is void for want of consideration.
But where a person promises to do more that he is legally bound to do, such a promise
provided it is not opposed to public policy, is a good consideration. It should not be
vague or uncertain.
(vii) Consideration must be real and not illusory: Consideration must be real and must not
be illusory. It must be something to which the law attaches some value. If it is legally or
physically impossible it is not considered valid consideration.

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 INDIAN CONTRACT ACT, 1872 5.35
(viii) Consideration must not be unlawful, immoral, or opposed to public policy. Only
presence of consideration is not sufficient it must be lawful. Anything which is immoral
or opposed to public policy also cannot be valued as valid consideration.

Q7. Mr. Sonumal a wealthy individual provided a loan of ` 80,000 to Mr. Datumal on 26.02.2019.
The borrower Mr. Datumal asked for a further loan of ` 1,50,000. Mr. Somal agreed but provided the
loan in parts at different dates. Dates. He provided ` 1,00,000 on 28.02.2019 and remaining ` 50,000
on 03.03.2019.

Answer:
Appropriation of Payments: in case where a debtor owes several debts to the same creditor and
makes payment which is not sufficient to discharge all the debts, the payment shall be appropriated
(i.e. adjusted against the debts) as per the provisions of Section 59 to 61 of the Indian Contract Act,
1872.
(i) As per the provisions of 59 of the Act, where a debtor owing several distinct debts to one
person, makes a payment to him either with express intimation or under circumstances
implying that the payment is to be applied to the discharge of some particular debt, the
payment, if accepted, must be applied accordingly.
Therefore, the contention of Mr. Datumal is correct and he can specify the manner of
appropriation of repayment of debt.
(ii) As per the provisions of 60 of the Act, where the debtor has omitted to intimate and there
are no other circumstances indicating to which debt the payment is to be applied, the
creditor may apply it at his discretion to any lawful debt actually due and payable to him
from the debtor, where its recovery is or is not barred by the law in force for the time being
as to the limitation of suits.
Hence in case where Mr. Datumal fails to specify the manner of appropriation of debt on
part repayment, Mr. Sonumal the creditor, can appropriate the payment s per his choice.
(iii) As per the provisions of 61 of the Act, where neither party makes any appropriation, the
payment shall be applied in discharge of the debts in order of time, whether they are or are
not barred by the law in force for the time being as to the limitation of suits. If the debts are
of equal standing, the payments shall be applied in discharge of each proportionately.
Hence in case where neither Mr. Datumal nor Mr. Sonumal specifies the manner of
appropriation of debt on part repayment, the appropriation can be made in proportion of
debts.

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 5.36 INDIAN CONTRACT ACT, 1872
Q8. Explain the term ‘Coercion” and what are the effects of coercion under Indian Contract Act,
1872.
Answer: Coercion (Section 15 of the Indian Contract Act, 1872): “Coercion’ is the committing, or
threatening to commit, any act forbidden by the Indian Penal Code or the unlawful detaining, or
threatening to detain any property, to the prejudice of any person whatever, with the intention of
causing any person to enter into an agreement”.
Effects of coercion under section 19 of Indian Contract Act, 1872
(i) Contract induced by coercion is voidable at the option of the party whose consent was
so obtained.
(ii) As to the consequences of the rescission of voidable contract, the party rescinding a void
contract should, if he has received any benefit, thereunder from the other party to the
contract, restore such benefit so far as may be applicable, to the person from who it
was received.
(iii) A person to whom money has been paid or anything delivered under coercion must
repay or return it.

Q9. Mr. X and Mr. Y entered into a contract on 1st August, 2018, by which. Mr. X had to supply 50
tons of sugar to Mr. Y at a certain price strictly within a period of 10 days of the contract. Mr. Y also
paid an amount of ` 50,000 towards advance as per the terms of the above contract. The mode of
transportation available between their places is roadway only. Severe flood came on 2nd August,
2018 and the only road connecting their places was damaged and could not be repaired within
fifteen days. Mr. X offered to supply sugar on 20th August, 2018 for which Mr. Y did not agree. On
1st September, 2018, Mr. X claimed compensation of ` 10,000 from Mr. Y for refusing to accept the
supply of sugar, which was not there within the purview of the contract. On the other hand, Mr. Y
claimed for refund of ` 50.000 which he had paid as advance in terms of the contract. Analyse the
above situation in terms of the provisions of the Indian Contract Act, 1872 and decide on Y's
contention.

Answer: Subsequent or Supervening impossibility (Becomes impossible after entering into

contract): When performance of promise become impossible or illegal by occurrence of an
unexpected event or a change of circumstances beyond the contemplation of parties, the contract
becomes void e.g. change in law etc.

Also, 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.

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 INDIAN CONTRACT ACT, 1872 5.37
In the given question, after Mr. X and Mr. Y have entered into the contract to supply 50 tons of
sugar, the event of flood occurred which made it impossible to deliver the sugar within the
stipulated time. Thus, the promise in question became void. Further, Mr. X has to pay back the
amount of ` 50,000 that he received from Mr. Y as an advance for the supply of sugar within the
stipulated time. Hence, the contention of Mr. Y is correct.

Q10. What is Contingent Contract? Discuss the essentials of Contingent Contract as per the Indian
Contract Act, 1872.

Answer: According to section 31 of the Indian Contract Act, 1872, contingent contract means a
contract to do or not to do something, if some event, collateral to such contract, does or does not
happen.
Example: Contracts of Insurance, indemnity and guarantee.
Essentials of a contingent contract
(a) The performance of a contingent contract would depend upon the happening or non-
happening of some event or condition. The condition may be precedent or subsequent.
(b) The event referred to, is collateral to the contract. The event is not part of the contract. The
event should be neither performance promised nor a consideration for a promise.
(c) The contingent event should not be a mere ‘will’ of the promisor. The event should be
contingent in addition to being the will of the promisor.
(d) The event must be uncertain. Where the event is certain or bound to happen, the contract is
due to be performed, then it is a not contingent contract.

Q11. “Though a minor cannot be a partner in a firm, he can nonetheless be admitted to the benefits
of partnership."
(i) Referring to the previsions of the Indian Partnership Act, 1932, state the rights which can be
enjoyed by a minor partner.
(ii) A. State the liabilities of a minor partner both:
(i) Before attaining majority and
(ii) After attaining majority.
OR
B. State the legal position of a minor partner after attaining majority:
(i) When he opts to become a partner of the same firm.
(ii) When he decide not to become a partner.

Answer:
(i) Rights which can be enjoyed by a minor partner:
(i) A minor partner has a right to his agreed share of the profits and of the firm.

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 5.38 INDIAN CONTRACT ACT, 1872
(ii) He can have access to, inspect and copy the accounts of the firm.
(iii) He can sue the partners for accounts or for payment of his share but only when severing his
connection with the firm, and not otherwise.
(iv) On attaining majority, he may within 6 months elect to become a partner or not to become a
partner. If he elects to become a partner, then he is entitled to the share to which he was
entitled as a minor. If he does not, then his share is not liable for any acts of the firm after
the date of the public notice served to that effect.
(ii) A. (i) Liabilities of a minor partner before attaining majority:
(a) The liability of the minor is confined only to the extent of his share in the profits and the
property of the firm.
(b) Minor has no personal liability for the debts of the firm incurred during his minority.
(c) Minor cannot be declared insolvent, but if the firm is declared insolvent his share in the
firm vests in the Official Receiver/ Assignee.

(ii) Liabilities of a minor partner after attaining majority:

Within 6 months of his attaining majority or on his obtaining knowledge that he had been
admitted to the benefits of partnership, whichever date is later, the minor partner has to
decide whether he shall remain a partner or leave the firm.

Where he has elected not to become partner he may give public notice that he has elected
not to become partner and such notice shall determine his position as regards the firm. If he
fails to give such notice he shall become a partner in the firm on the expiry of the said six
months.
OR
B. (i) When he becomes partner: If the minor becomes a partner on his own willingness or by his
failure to give the public notice within specified time, his rights and liabilities as given in Section
30(7) of the Indian Partnership Act, 1932, are as follows:
(a) He becomes personally liable to third parties for all acts of the firm done since he was
admitted to the benefits of partnership.
(b) His share in the property and the profits of the firm remains the same to which he was
entitled as a minor.

(ii) When he elects not to become a partner:

(a) His rights and liabilities continue to be those of a minor up to the date of giving public
notice.
(b) His share shall not be liable for any acts of the firm done after the date of the notice.

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 INDIAN CONTRACT ACT, 1872 5.39
(c) He shall be entitled to sue the partners for his share of the property and profits. It may be
noted that such minor shall give notice to the Registrar that he has or has not become a
partner.
Q12. Mr. Ramesh promised to pay ` 50,000 to his wife Mrs. Lali so that she can spend the sum on
her 30th birthday. Mrs. Lali insisted her husband to make a written agreement if he really loved her.
Mr. Ramesh made a written agreement and the agreement was registered under the law.
Mr. Ramesh failed to pay the specified amount to his wife Mrs. Lali. Mrs. Lali wants to file a suit
against Mr. Ramesh and recover the promised amount. Referring to the applicable provisions of the
Contract Act, 1872, advise whether Mrs. Lali will succeed.

Answer:
Parties must intend to create legal obligations: There must be an intention on the part of the
parties to create legal relationship between them. Social or domestic type of agreements are not
enforceable in court of law and hence they do not result into contracts.

In the given question, Mr. Ramesh promised to pay ` 50,000 to his wife so that she can spend the
same on her birthday. However, subsequently, Mr. Ramesh failed to fulfil the promise, for which
Mrs. Lali wants to file a suit against Mr. Ramesh. Here, in the given circumstance wife will not be
able to recover the amount as it was a social agreement and the parties did not intend to create any
legal relations.

Q13. A shop-keeper displayed a pair of dress in the show-room and a price tag of ` 2,000 was
attached to the dress. Ms. Lovely looked to the tag and rushed to the cash counter. Then she asked
the shop-keeper to receive the payment and pack up the dress. The shop-keeper refused to hand-
over the dress to Ms. Lovely in consideration of the price stated in the price tag attached to the Ms.
Lovely seeks your advice whether she can sue the shop-keeper for the above cause under the Indian
Contract Act, 1872.

Answer: The offer should be distinguished from an invitation to offer. An offer is definite and
capable of converting an intention in to a contract. Whereas an invitation to an offer is only a
circulation of an offer, it is an attempt to induce offers and precedes a definite offer. Where a party,
without expressing his final willingness, proposes certain terms on which he is willing to negotiate,
he does not make an offer, but invites only the other party to make an offer on those terms. This is
the basic distinction between offer and invitation to offer.

The display of articles with a price in it in a self-service shop is merely an invitation to offer. It is in no
sense an offer for sale, the acceptance of which constitutes a contract. In this case, Ms. Lovely by
selecting the dress and approaching the shopkeeper for payment simply made an offer to buy the

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 5.40 INDIAN CONTRACT ACT, 1872
dress selected by her. If the shopkeeper does not accept the price, the interested buyer cannot
compel him to sell.

Q14. Explain the modes of revocation of an offer as per the Indian Contract Act, 1872.

Answer: Modes of revocation of Offer

(i) By notice of revocation
(ii) By lapse of time: The time for acceptance can lapse if the acceptance is not given within
the specified time and where no time is specified, then within a reasonable time.
(iii) By non-fulfilment of condition precedent: Where the acceptor fails to fulfil a condition
precedent to acceptance the proposal gets revoked.
(iv) By death or insanity: Death or insanity of the proposer would result in automatic
revocation of the proposal but only if the fact of death or insanity comes to the knowledge
of the acceptor.
(v) By counter offer
(vi) By the non-acceptance of the offer according to the prescribed or usual mode
(vii) By subsequent illegality

Q15. X, Y and Z are partners in a firm. They jointly promised to pay ` 3,00,000 to D. become
insolvent and his private assets are sufficient to pay 1/5 of his share debts. X is compelled to pay the
whole amount to D. Examining the provisions of the Indian Contract Act, 1872, decide the extent to
which X can recover the amount from Z.

Answer: As per section 43 of the Indian Contract Act, 1872, when two or more persons make a joint
promise, the promise may, in the absence of express agreement to the contrary, compel any one or
more of such joint promisors to perform the whole of the promise.

Each of two or more joint promisors may compel every other joint promisor to contribute equally
with himself to the performance of the promise, unless a contrary intention appears from the
contract.

If any one of two or more joint promisors makes default in such contribution, the remaining joint
promisors must bear the loss arising from such default in equal shares.

If the instant case, X, Y and Z jointly promised to pay ` 3,00,000. Y become insolvent and his private
assets are sufficient to pay 1/5 of his share of debts. X is compelled to pay the whole amount. X is
entitled to receive ` 20,000 from Y’s estate, and ` 1,40,000 from Z.

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 INDIAN CONTRACT ACT, 1872 5.41
Q16. State the exceptions to the rule “An agreement without consideration is void”.

Answer: The general rule is that an agreement made without consideration is void (Section 25 of the
Indian Contract Act, 1872). However, the Indian Contract Act contains certain exceptions to this rule.
In the following cases, the agreement though made even without consideration, will be valid and
enforceable.
1. Natural Love and Affection: Any written and registered agreement made on account of love
and affection between the parties standing in near relationship to each other.
2. Compensation for past voluntary services: A promise to compensate, wholly or in part, a
person who has already voluntarily done something for the promisor.
3. Promise to pay time barred debt: A promise in writing signed by the person making it or by
his authorized agent, made to pay a debt barred by limitation.
4. Agency: According to Section 185 of the Indian Contract Act, 1872, no consideration is
necessary to create an agency.
5. Completed gift: In case of completed gifts, the rule no consideration no contract does not
apply. Explanation (1) to Section 25states “nothing in this section shall affect the validity as
between the donor and done, of any gift actually made. “Thus, gifts do not require any
consideration.
6. Bailment: No consideration is required to effect the contract of bailment (Section 148).
7. Charity: If a promises undertakes the liability on the promise of the person to contribute to
charity, there the contract shall be valid.

Q17. Distinguish between wagering agreement and contract of insurance.

Answer: Distinction between Wagering Agreement and Contract of Insurance
Basis Wagering Agreement Contracts of Insurance
1. Meaning It is a promise to pay money or It is a contract to indemnify the
money’s worth on the happening loss.
or non-happening of an uncertain
event.
2. Consideration There is no consideration between The crux of insurance contract is
the two parties. There is just the mutual consideration
gambling for money. (premium and compensation
amount).
3. Insurable Interest There is no property in case of Insured party has insurable
wagering agreement interest in the life or property
There is betting on other’s life and sought to be insured.
properties.
4. Contract of Indemnity Loser has to pay the fixed amount Except life insurance, the

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 5.42 INDIAN CONTRACT ACT, 1872
on the happening of uncertain contract of insurance
event. indemnifies the insured person
against loss
5. Enforceability It is void and unenforceable It is valid and enforceable
agreement.
6. Premium No such logical calculations are Calculation of premium is based
required in case of wagering on scientific and actuarial
agreement. calculation of risks.
7. Public Welfare They have been regarded as against They are beneficial to the
the public welfare. society.

Q18. Examine with reason that the given statement is correct or incorrect “Minor is liable to pay for
the necessaries supplied to him”

Answer: Minor is liable to pay for the necessaries supplied to him: This statement is incorrect. The
Case of necessaries supplied to a minor or to any other person whom such minor is legally bound is
governed by section 68 of the Indian Contract Act, 1872. A claim for necessaries supplied to a minor
is enforceable by law, only against minor’s estate, if he possesses. But a minor is not liable for any
price that he may promise and never for more than the value of the necessaries. There is no
personal liability of the minor, but only his property is liable.

Q19. M Ltd. contract with Shati Taders to make and deliver certain machinery to them by 30.6.2017
for ` 11.50 lakhs. Due to labour strike, M Ltd. could not manufacture and deliver the machinery to
Shanti traders. Later, Shanti traders procured the machinery from another manufacturer for ` 12.75
lakhs. Due to this Shanti Traders was also prevented from performing a contract which it had made
with Zenith Traders at the time of their contract with M Ltd. and were compelled to pay
compensation for breach of contract. Advise Shanti Traders the amount of compensation which it
can claim from M Ltd., referring to the legal provisions of the Indian Contract Act, 1872.

Answer: Section 73 of the Indian Contract Act, 1872 provides for consequences of breach of
contract. According to it, when a contract has been broken, the party who suffers by such breach is
entitled to receive from the party who has broken the contract, compensation for any loss or
damage caused to him thereby which naturally arose in the usual course of things from such breach
or which the parties knew when they made the contract, to be likely to result from the breach of it.
Such compensation is not given for any remote and indirect loss or damage sustained by reason of
the breach. It is further provided in the explanation to the section that in estimating the loss or

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 INDIAN CONTRACT ACT, 1872 5.43
damage from a breach of contract, the means which existed of remedying the inconvenience caused
by the non-performance of the contract must be taken into account.

Applying the above principle of law of the given case, M Ltd. is obliged to compensate for the loss of
` 1.25 lakh (i.e. ` 12.75 minus ` 11.50 = ` 1.25 lakh) which had naturally arisen due to default in
performing the contract by the specified date.

Regarding the amount of compensation which Shanti traders were compelled to make to Zenith
traders, it depends upon the fact whether M Ltd., knew about the Contract of Shanti Traders for
supply of the contracted machinery to Zenith Traders on the specified date. If so, M Ltd is also
obliged to reimburse the compensation which Shanti Traders had to pay to Zenith Traders for breach
of contract. Otherwise M Ltd is not liable.

Q20. Define Fraud. Whether “mere silence will amount to fraud” as per the Indian Contract Act,
1872?

Answer: Definition of Fraud under Section 17: ‘Fraud’ means and includes any of any the following
acts committed by a party to a contract, or with his connivances, or by his agent, with an intent to
deceive another party thereto or his agent, or to induce him to enter into the contract:
(1) The suggestion, as a fact, of the which is not true, by one who does not believe it to be true;
(2) The active concealment of a fact by one having knowledge or belief of the fact;
(3) A promise made without any intention of performing it;
(4) Any other act fitted to deceive;
(5) Any such act or omission as the law specially declares to be fraudulent.

Mere silence will amount to fraud: This statement is incorrect as per the Indian Contract Act, 1872.
A party to the contract is under no obligation to disclose the whole truth to the other party. ‘Caveat
Emptor’ i.e. let the purchaser beware is the rule applicable to contracts. There is no duty to speak in
such cases and silence does not amount to fraud. Similarly, there is no duty to disclose facts which
are within the knowledge of both the parties.

Q21. (a) Define fraud under India contract Act. State Whether Silence amount to fraud.
(b) Describe the essential features of a valid contract.

Answer: (a) “Fraud” means and includes any of the following acts committed by a party to a
contract, or with his connivance, or by his agent, with intent to deceive another party thereto or his
agent, or to induce him to enter into the contract:

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 5.44 INDIAN CONTRACT ACT, 1872
(i) The suggestion, as a fact, of that which is not true by one who does not believe it to be
true;
(ii) The active concealment of a fact by one having knowledge or believe of the fact;
(iii) A promise made without any intention of performing it;
(iv) Any other act fitted to deceive;
(v) Any such act or omission as the law specially declares to be fraudulent.

Does silence amount to fraud:

At times one of the parties to a contract makes silence to some of the facts relating to the
subject matter of contract. The matter on which silence is maintained by party may be material
fact. Does this amount to passive fraud under the Indian Contract Act or not depends upon
various factors?

Explanation to Section 17 of the Indian Contract Act provides that mere silence as to facts likely
to affect the willingness of a person to enter into a contract is not fraud unless the
circumstances of case are such that having regard to them, it is the duty of the person keeping
silence to speak or unless silence itself is equivalent to speech.

Thus. We can say that there is exception to the rule that mere silence does not amount to
silence. These two exceptions are provided in explanation to section 17 and these are as under.
(i) When there is a duty to speak.
(ii) Where silence is equivalent to speech.
However, in the following two types of cases, silence amount to fraud, as held by the courts in
various cases:

(a) Where there is change in circumstances – A representation may be true when made but
with the passage of time or changed circumstances it may become false. Accordingly, this must
be communicated to other party otherwise it amount to fraud.

(b) When there is half-truth – Even when a person is not bound to disclose a fact, he may be
held guilty of fraud if he volunteers to disclose a state of fact partly. This is so when the
undisclosed part renders the disclosed part false.

Answer: (b) Section 10 provides that all agreements are contracts if they are made by the free
consent of parties competent to contract, for a lawful consideration and with a lawful object,
and are not otherwise expressly declared to be void.

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 INDIAN CONTRACT ACT, 1872 5.45
The following are the requirements for a valid contract-
• There shall be an offer or proposal by one party acceptance of the proposal by the other
party which results in an agreement;
• There shall be an intention to create legal relations or an intent to legal consequences;
• The agreement shall be supported by lawful consideration;
• The parties to the contract shall be competent to contract;
• There shall be free consent between the parties to the contract;
• The object and consideration of the contract shall be legal and the same shall not be
opposed to public policy;
• The terms of the consent shall be certain;
• The agreement is capable of being performed i.e., it is not impossible of being
performed.

Q22. Short Note E-Contract

Answer: Electronic contracts are paperless contracts and are in electronic form. It is the change of
technology and legal requirements lead the contract to be in electronic from. E-contract is a contract
modeled, specified, executed and deployed by a software system. They are conceptually very similar
to traditional commercial contracts. E- Contract also requires the basic elements of a contract. The
following are ingredients of the E-contracts-
• An offer is to be made;
• Offer is to be accepted;
• There shall be a lawful consideration;
• There shall be an intention to create legal relations;
• The parties must be competent to contract;
• There must be free and genuine consent;
• The object of the contract must be lawful;
• There must be certainty and possibility of performance.
The main feature of this type of contract is speed, accurate and reliable, the parties to the
contract have to obtain digital signature from the competent authority and they have to affix
the digital signature instead of manual signing. The Information Technology Act, 2000
regulates such e-contracts.

In this type of contract the web site of the offer or acts as a display to the world at large. E-
mails are used to negotiate and agree on contract terms and to send and agree to the final
contract. An email contract is enforceable if the requirements of the contract are fulfilled.
Electronically signed contracts cannot be denied because they are in electronic form and
delivered electronically.

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 5.46 INDIAN CONTRACT ACT, 1872

Q23. Contingent contract

Answer: Contingent Contract

Section 31 under the Indian Contract Act, 1872 defines ‘contingent contract’ as a contract to do or
not to do something, if some event, collateral to such contract, does or does not happen. The
following are the essential of contingent contract-
(a) Uncertainty and futurity of the event to which it is related
(b) Uncertain future event must be collateral to the contract.

A contingent contract need not necessarily be independent on any external event. It may be
conditional on the voluntary act or the future conduct of one of the parties or a third person.
Section 32 of the Act provides that contingent contract to do or not to do anything if an
uncertain future event happens cannot be enforced by law unless and until that event has
happened. If the event becomes impossible, such contracts become void.

Q24. (i) What do you understand by Quasi Contract?

(ii) What are the rights of a finder of goods under the Indian Contract Act, 1872?

Answer (i) Quasi Contract

Sometimes the law implies a promise imposing obligations on one party and conferring the right in
favor of the other even when there is not offer, no acceptance, no consensus ad idem, and in fact,
there is neither agreement nor promise. Such cases are not contracts but the court recognizes them
as relations resembling those of contracts and enforces them as if they were contracts. Such is called
as a quasi-contract.

This type of contract rests on the equitable principle that a person shall not be allowed to enrich
himself unjustly in the experience of another. It is obligation which the law creates in the absence of
any agreement, when any person is in the possession of one person’s money or its equivalent under
such circumstances that in equity and good conscience he ought not to retain it and which in justice
and fairness belongs to another. It is the duty and not an agreement or intention which defines it.

In the Act the following type of quasi contracts are discussed-

• Section 68 - Claim for necessaries supplied to person incapable of contracting, or on his
account – this section provides that if a person, incapable of entering into a contract, or any
one whom he is legally bound to support, is supplied with another person with necessaries
suited to his condition in life, the person who has furnished such supplies is entitled to be
reimbursed from the property of such incapable person;

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 INDIAN CONTRACT ACT, 1872 5.47
• Section 69 – Reimbursement of persons paying money due by another, in payment of which
he is interested – This section provides that a person who is interested in the payment of
money which another is bound by law to pay, and who therefore pays it, entitled to be
reimbursed by the other;
• Section 70 – Obligation of person enjoying benefit of non-gratuitous act – This section
provides where a person lawfully does anything for another person, or delivers anything to
him, to intending to do so gratuitously, and such other person enjoys the benefit thereof,
the latter is bound to make compensation to the former in respect of, or to restore, the
thing so done or delivered – it is otherwise called as quantum meruit;
• Section 71 – Responsibility of finder of goods – This section provides that a person who
finds goods belonging to another, and takes them into his custody, is subject to the same
responsibility as a bailee;
• Section 72 – Liability of person to whom money is paid or thing delivered by mistake or
under Coercion – This section provides that a person to whom money has been paid, or
anything delivered, by mistake or under coercion, must repay or return it.

Q25. (a) Explain the meaning of ‘Quasi-Contracts’. State the circumstances which are identified as
quasi-contracts by the Indian Contract Act, 1872.
(b) C is the wife of A. She purchased some sarees on credit from B. B demanded the amount
from A. A refused. B filed a suit against A for the said amount. Decide in the light of provisions of
the Indian Contract Act, 1872, whether B would succeed.

Answer: (a) Even in the absence of a contract, certain social relationships give rise to certain specific
obligations to be performed by certain persons. These are known as – quasi contracts as they create
some obligations as in the case of regular contracts. Quasi-contracts are based on the principles of
equity, justice and good conscience. The salient features of quasi-contracts are firstly, such a right is
always a right to money and generally, though not always, to a liquidated sum of money; Secondly, if
does not arise from any agreement between the parties concerned but the obligation is imposed by
law and; Thirdly, the rights available are not against all the world but against a particular person or
persons only, so in this respect it resembles to a contractual right.

Circumstances identified as quasi – contracts:

1. Sec – 68—Claim for necessaries supplied to person incapable of contracting: Any person
supplying necessaries of life to persons who are incapable of contracting is entitled to claim
the price from the other person’s property. Similarly, where money is paid to such persons
for purchase of necessaries, reimbursement can be claimed.

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 5.48 INDIAN CONTRACT ACT, 1872
2. Sec – 69 Right to recover money paid for another person: A person who has paid a sum of
money which another person is obliged to pay, is entitled to be reimbursed by that other
person provided that the payment has been made by him to protect his own interest.
3. Sec – 70 – Obligation of person enjoying benefits of non – gratuitous act: Where a person
lawfully does anything for another person, or delivers anything to him not intending to do so
gratuitously and such other person enjoys the benefit thereof, the later is bound to pay
compensation to the former in respect to, or to restore, the thing so done or delivered.
4. Sec – 71 – Responsibility of finder of goods: A person who finds goods belonging to another
person and takes them into his custody is subject to same responsibility as if he were a
bailee.
5. Sec – 72 – Liability for money paid or thing delivered by mistake or by coercion: A person
to whom money has been paid or anything delivered by mistake or under coercion, must
repay or return it.

In all the above cases contractual liability arises without any agreement between the parties.

Answer: (b) Problem as asked in the question is based on the provisions related with the modes of
creation of agency relationship under the Indian Contract Act, 1872. Agency may be created by a
legal presumption; in a case of cohabitation by a married woman (i.e. wife is considered as an
implied married agent, of her husband). If wife lives with her husband, there is a legal presumption
that a wife has authority to pledge her husband’s credit for necessaries.

But the legal presumption can be rebutted in the following cases:

(i) Where the goods purchased on credit are not necessaries.
(ii) Where the wife is given sufficient money for purchasing necessaries.
(iii) Where the wife is forbidden from purchasing anything on credit or contracting debts.
(iv) Where the trader has been expressly warned not to give credit to his wife.

If the wife lives apart for no fault on her part, wife has authority to pledge her husband’s credit
for necessaries. This legal presumption can be rebutted only in cases (iii) and (iv).

Applying the above conditions in the given case ‘B’ will succeed. He can recover t he said amount
from ‘A’ if sarrees purchased by ‘C’ are necessaries for her.

Q26. What is a sound mind for the purpose of contracting? Describe other disqualified persons.
Answer: A person is said to be of sound mind for the purposes of making a contract if, at the time
when he makes it, he is capable of understanding it and of forming a rational judgment as to its
effect upon his interests.

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 INDIAN CONTRACT ACT, 1872 5.49
A person, who is unsound mind, but occasionally of sound mind, may make a contract when he is of
sound mind. A person, who is usually of sound mind, but occasionally of unsound mind, may not
make a contract when he is of unsound mind.

Other Disqualified Persons: The persons who are disqualified from entering into contract due to
certain other reasons may be from legal status, political status or corporate status. Some of such
categories of persons are given below:
(i) Alien Enemy: Any agreement with an Alien Enemy is void. But agreement with an Alien
friend is perfectly valid and enforceable. When the Government of an Alien is at war with
the Government of India, the alien is called Alien enemy, who cannot enter into any
contract with any Indian citizen without the permission of Government of India as the
same is against the public policy. Contract entered into with an alien before was is put into
suspension during the duration of war.
(ii) Foreign Sovereign and Ambassador: Foreign sovereigns and their representatives enjoy
certain privileges and immunities in every country. They cannot enter into contract except
through their agents residing in India. They can sue the Indian citizen but an Indian citizen
cannot sue them.
(iii) Convicts: A convict cannot enter into a contract while he is undergoing imprisonment.
(iv) Insolvents: An insolvent person is one who is unable to discharge his liabilities and
therefore has applied for being adjudged insolvent or such proceedings have been initiated
by any of his creditors. An insolvent person cannot enter into any contract relating to his
property.
(v) Company or Statutory bodies: A contract entered into by a corporate body or statutory
body will be valid only to the extent it is within its Memorandum of Association.

Q27. What are essential elements of a valid acceptance?

Answer:
(a) Acceptance must be absolute and unqualified; it must conform to the offer:
As per Section 7 in order to convert a proposal into a promise, the acceptance must-
(1) Be absolute and unqualified: If the parties are not ad idem on all matters concerning
the offer and acceptance, there is no contract. An invitation with variation is no
acceptance, it is simply a counter proposal which must be accepted by the original
proposer before any contract is made. A counter offer puts an end to the original offer
and cannot be revived by subsequent acceptance unless it is renewed. In Hyde v Wrench
1840 3 Bear 334 an offer to sell a car for $1000 was turned down by the plaintiff who
offered $950 for it. This was rejected by the offeror and then the plaintiff agreed to pay
$1000. It was held that there would undoubtedly have been perfect contract, instead of
that the plaintiff made an offer of his own to purchase the property for $950 and

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 5.50 INDIAN CONTRACT ACT, 1872
rejected the offer previously made by the defendant. He was not afterwards competent
to revive the proposal of the defendant, by tendering an acceptance for it. Thus the suit
of the plaintiff was dismissed.

(2) Be expressed in some usual and reasonable manner: Unless the proposal prescribes
The Manner In Which it is to be accepted. If the proposal prescribes a manner in which it
is to be accepted, and the acceptance is not made in such a manner, the propose may,
within a reasonable time after the acceptance is communicated to him, insist that his
proposal shall be accepted in the prescribed manner, and not otherwise; but f he fails to
do so, he accepts the acceptance. In Surender Nath v Kedar Nath AIR 1936 Cal 87 the
Calcutta High Court held that where an offeror requires that the acceptance should be
sent to a particular person in writing, section 7 was not violated when the offeree
instead of writing to the particular person, sent his agent in person to communicate the
acceptance.

(b) Specific offer can be accepted by the person to whom it is made: Whereas general offer
can be accepted by anyone competent to contract and meeting the conditions of offer. It
was held in Boulton V Jones (1857)27 LJ ex 117 case that a specific offer can be accepted
only by the person to whom it is made. A general offer can be accepted by any one as held in
case of Carlill v Carbolic Smoke ball co, HarbansLal V Harbanslal,

(c) Acceptance may be express or implied: As per section 9 in so far as the proposal or
acceptance of any promise is made in words, the promise is said to be express. In so far as
such proposal or acceptance is made otherwise than in words, the promise is said to be
implied. It can be inferred from the conduct of the parties. When a person boards in Metro
Rail it is an implied acceptance.

(d) Acceptance should be of the whole proposal and not in part; Acceptor should accept the
whole proposal in total and not in parts, Part acceptance is no acceptance binding upon the
proposer.

(e) Acceptance should be according to the mode prescribed or usual and reasonable mode;
acceptor cannot accept the proposal in a manner different from the manner prescribed in
the offer. If no such mode is prescribed it should be usual and reasonable mode. Silence
cannot be a mode of acceptance. In SurenderNath VKedarNath, AIR 1936 Cal 87, the
Calcutta High court held that where an offeror requires that the acceptance should be sent
in writing to a particular person, section 7 of the Contract Act is not violated when the

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 INDIAN CONTRACT ACT, 1872 5.51
oferee instead of writing to particular person, sent his agent in person to communicate the
acceptance.

(f) Communication of acceptance is must; a mental determination to accept unaccompanied

by any external indication will not be sufficient acceptance. To constitute an acceptance
such acceptance must be communicated to the offeror or his authorized agent. Example: A
makes an offer to B to supply certain goods at a certain price. B writes the letter of
acceptance and puts the letter in the drawer of his table and forgets all about it. Hence
putting the letter of acceptance in the drawer does not amount to communication of
acceptance without any external manifestation of the intention to accept the offer (Brogden
v Metropolitan Railway Co, 1877 AC 666). A mere mental assent is not a sufficient
acceptance of an offer. To constitute an acceptance such assent must be communicated to
the offeror or his authorized agent.

(g) Acceptance must be given before its lapse: Acceptance must be given before the offer
lapses by expiry of time fixed or by expiry of reasonable time if no time is so fixed or before
it is withdrawn or revoked by the offeror. In Ramasgate Victoria Hotel co v Montefoire
(1866) LR 1 Exch 109 it was held that a person who applied for shares in a company in June
was not bound by any allotment made in November.

Q28. X Father promised to pay his son Y a sum of ` One Lakh if Y (son of X) passed CMA examination
in the first attempt. Y passed the CMA examination in his first attempt, but X failed to pay the
amount as promised. Y files a suit for recovery of the said amount. State along with reasons
whether Y can recover the amount under the Indian Contract Act, 1872.

Answer: Problem asked in the question is based on the provisions of the Indian Contract Act, 1872 as
contained in section 10. According to the provisions there should be an intention to create legal
relationship between the parties. Agreement of a social nature or domestic nature do not
contemplate legal relationship and as such are not contracts, which can be enforced. This principle
has been laid down in the case of Balfour vs. Balfour. Accordingly, applying the provisions and the
ease decision, in the case Y cannot recover the amount of ` One lakh from X for the reasons
explained above.

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 6 SALE OF GOODS ACT, 1930

Introduction
The law relating to sale or purchases goods was dealt with by the Indian Contract Act, 1872, prior to
1930. During the year 1930, Sections 76 to 123 of the Indian Contract Act were repealed. A separate
Act viz., Sale of Goods Act, 1930 was passed. The Sale of Goods Act, 1930 lays down the special
provisions governing the contract of sales of goods. The provisions of the Indian Contract Act are
also applicable to the contracts for the sale of goods unless they are inconsistent with the express
provisions of the Sale of Goods Act.

Applicability
This Act extends to whole of India, except Jammu and Kashmir.

Effective date
This Act came into force from 01.07.1930.

Important Definitions
Goods
Section 2(7) defines the term ‘goods’ as every kind of moveable property other than actionable
claims and money; and includes stock and shares, growing crops, grass, and things attached to or
forming part of the land which are agreed to be severed before sale or under the contract of sale.

Future Good
Section 2(6) defines the phrase ‘future good’ as goods to be manufactured or produced or acquire
by the seller after making of the contract of sale.

Document of title to goods

Section 2(4) defines the phrase ‘document of tile to goods’ as including bill of lading dock-warrant,
warehouse keeper’s certificate, wharfingers’ certificate, railway receipt, multimodal transport
document, warrant or order for the delivery of goods and any other document used in the ordinary
course of business as proof of the possession or control of goods or authorizing or purporting to
authorize, either by endorsement or by delivery, the possessor of the document to transfer or
receive goods thereby represented.

Insolvent
Section 2 (8) provides that a person is said to be “insolvent” who has ceased to pay his debts in the
ordinary course of business, or cannot pay his debts as they become due, whether he has committed
an act of insolvency or not;
 6.2 SALE OF GOODS ACT, 1930
Mercantile agent
Section 2(9) defines the phrase ‘mercantile agent’ as a mercantile agent having in the customary
course of business as such agent authority either to sell goods, or to consign goods for the purposes
of sale, or to buy goods, or to raise money on the security of goods.

Specific goods
Section 2(14) defines the phrase ‘specific goods’ as goods identified and agreed upon at the time a
contract of sale is made;

Contract of Sale
As per section 4(1) “A contract of sale of goods is a contract whereby the seller transfers or agrees to
transfer the property in goods to the buyer for a price.” According to Section 4(2), a contract of sale
may be absolute or conditional.

Essentials of a Contract of Sale

The following are thus the essentials of a contract of sale of goods:
(1) Bilateral contract: It is a bilateral contract because the property in goods has to pass from
one party to another. A person cannot buy the goods himself.
(2) Transfer of property: The object of a contract of sale must be the transfer of property
(meaning ownership) in goods from one person to another.
(3) Goods: The subject matter must be some goods.
(4) Price or money consideration: The goods must be sold for some price, where the goods are
exchanged for goods it is barter, not sale.
(5) All essential elements of a valid contract must be present in a contract of sale.

Agreement to sell
As per Section 4(3), where the transfer of the property in the goods is to take place at a future time
or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell.
Section 4(4) provides that an agreement to sell becomes a sale when the time elapses or the
conditions are fulfilled subject to which the property in the goods is to be transferred.

Contract of sale how made

Section 5(1) provides that a contract of sale is made by-
• An offer to buy or sell goods for a price; and
• The acceptance of such offer.

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 SALE OF GOODS ACT, 1930 6.3
The contract may provide for the immediate delivery of the goods or immediate payment of the
price of both, or for the delivery or payment by instalments, or that the delivery or payment or both
shall be postponed.
Section 5(2) provides that a contract of sale may be made in writing or by word of mouth, or partly
in writing and partly by word of mouth or may be implied from the conduct of the parties.

Subject matter of contract

The subject matter of the contract –
• existing or future goods;
• goods perishing before making contract;
• goods perishing before sale but after agreement to sell.

Existing or future goods

Section 6 provides that-
• The goods which form the subject of a contract of sale may be either existing goods, owned
or possessed by the seller, or future goods.
• There may be a contract for the sale of goods the acquisition of which by the seller depends
upon a contingency which may or may not happen.
• Where by a contract of sale the seller purports to effect a present sale of future goods, the
contract operates as an agreement to sell the goods.

Goods perishing before making contract

Section 7 provides that where there is a contract for the sale of specific goods, the contract is void if
the goods without the knowledge of the seller have, at the time when the contract was made,
perished or become so damaged as no longer to answer to their description in the contract.

Goods perishing before sale but after agreement to sell

Section 8 provides that where there is an agreement to sell specific goods, and subsequently the
goods without any fault on the part of the seller or buyer perish or become so damaged as no longer
to answer to their description in the agreement before the risk passes to the buyer, the agreement is
thereby avoided.

Ascertainment of price
Section 9(1) provides that the price in a contract of sale may be fixed by the contract or may be left
to be fixed in manner thereby agreed or may be determined by the course of dealing between the
parties. Section 9(2) provides that where the price is not determined in accordance with the
foregoing provisions, the buyer shall pay the seller a reasonable price. What is a reasonable price is a
question of fact dependent on the circumstances of each particular case.

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 6.4 SALE OF GOODS ACT, 1930
Agreement to sell at valuation
Section 10(1) provides that where there is an agreement to sell goods on the terms that the price is
to be fixed by the valuation of a third party and such third party cannot or does not make such
valuation, the agreement is thereby avoided. If the goods or any part thereof have been delivered
to, and appropriated by, the buyer, he shall pay a reasonable price therefor.

Section 10(2) provides that where such third party is prevented from making the valuation by the
fault of the seller or buyer, the party not in fault may maintain a suit for damages against the party
in fault.

Stipulations to time
Section 11 provides that unless a different intention appears from the terms of the contract,
stipulations as to time of payment are not deemed to be of the essence of a contract of sale.
Whether any other stipulation as to time is of the essence of the contract or not depends on the
terms of the contract.

Difference between contract of sale and agreement to sell.

Basis Contract of sale Agreement to sell
Transfer of property The property of the goods The transfer of property takes
passes from the buyer to the place at a future time subject to
seller. certain conditions to be
fulfilled.
Type of contract It is an executed contract. It is an executor contract
Type of goods Sales takes place only for Future and contingent goods.
existing and specific goods.
Risk of loss If the goods are destroyed, the If the goods are destroyed, the
loss falls on the buyer despite loss falls on the seller despite
the goods are in the possession the goods are in the possession
of the seller. of the buyer
Breach of contract The seller can sue the buyer for The seller can sue for damages
price and for damages in case only in case of breach by the
of breach by the buyer buyer
General and particular property It gives buyer to enjoy the It gives a right to the buyer
goods as against the world at against the seller to sue for
large including the seller damages
Insolvency of the buyer In the absence of lien over the The seller is not bound to part
goods the seller is to return the with the good until the price is
goods to the Official receiver or paid to him.

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 SALE OF GOODS ACT, 1930 6.5
assignee. He is entitled to get
the dividend declared by the
official receiver which will be at
the reduced rate.
Insolvency of the seller The buyer, becoming the The buyer cannot claim the
owner, is entitled to recover goods but the dividend
the same from the Official declared by the Official receiver
receiver or assignee or assignee.
2.2 TRANSFER OF OWNERSHIP
Transfer of Ownership
The Sections 18 to 25 of the Sale of Goods Act, determine when the property passes from the seller
to the buyer.

Rules for Ascertaining Passing of Property:

The provisions are discussed hereunder:

(a) Goods must be ascertained (section18)

As per section 18 in a contract for sale of unascertained goods, the property in the goods
does not pass to the buyer unless and until the goods are ascertained.

(b) Intention of the parties for such transfer (section 19)

As per section 19(1), in a contract for the sale of specific or ascertained goods, the property in
them is transferred to the buyer at such time as the parties to the contract intend it to be
transferred. Section 19(2) provides that the intention of the parties is ascertained from the
terms of the contract, the conduct of the parties and the circumstances of the case.

When intention of the parties cannot be ascertained, rules contained in section 20-24 are
required to be applied for ascertaining the time of transfer of property and same and discussed
hereunder;
(i) Specific goods (Sec. 20 to 22)
(a) Specific goods in a deliverable state (Section 20)
In an unconditional contract for the sale of specific goods in a deliverable state, the
property in the goods passes to the buyer when the contract is made, and it is
immaterial whether the time of payment of the price or the time of delivery of the
goods, or both, is postponed. (Sec20). Goods are said to be in deliverable state when
they are in such a state that the buyer would under the contract is bound to take
delivery thereof.

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 6.6 SALE OF GOODS ACT, 1930
(b) Specific goods to be put into a deliverable state (Sec. 21)
Where there is a contract for the sale of specific goods and the seller is bound to do
something to the goods for the purpose of putting them into a deliverable state, the
property does not pass until such thing is done and the buyer has notice thereof (Sec
21).
(c) Specific goods in a deliverable state, when the seller has to do anything thereto in
order to ascertain price (Section 22)
If there is a contract for the sale of specific goods in a deliverable state, but the seller is
bound to weigh, measure, test or do some other at or thing with reference to the
goods for the purpose of ascertaining the price, the property does not pass until such
act or thing is done and the buyer has notice thereof. (sec 22).

(ii) Unascertained goods (sec 23)

(a) Where there is a contract for the sale of unascertained or future goods by description
and goods of that description and in a deliverable state are unconditionally
appropriated to the contract, either by the seller with the assent of the buyer or by the
buyer with the assent of the seller, the property in the goods thereupon passes to the
buyer. Such assent may be expressed or implied, and may be given either before or
after the appropriation is made.
(b) Delivery to carrier: Where, in pursuance of the contract, the seller delivers the goods
to the buyer or to a carrier or other bailee for the purpose of transmission to the buyer
and does not reserve the right of disposal, he is deemed to have unconditionally
appropriated the goods for the purpose of the contract.

(iii) Goods on approval or ‘on sale or return’ (sec 24)

In order to push up the sale generally there is a practice of sending goods to the customer
with the clear cut understanding that he has option to approve or return the goods within
a given period. This type of sale is known as “approval or sale or return” In such cases, the
transaction does not culminate into sale until the goods are approved by the customer and
the property in goods still remains with the seller.
When goods are delivered to the buyer on approval or on sale or return or other similar
terms, the property therein passes to the buyer-
(a) When he signifies his approval or acceptance to the seller
(b) When he does any other act adopting the transaction.
(c) If he does not signify his approval or acceptance to the seller but retains the goods
without giving notice of rejection, then, if a time has been fixed for the return of the
goods, on the expiration of such time, and, if no time has been fixed, on the expiration
of a reasonable time.

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 SALE OF GOODS ACT, 1930 6.7
Reservation of Right of Disposal (sec 25)
Section 25(1)- Where there is a contract for the sale of specific goods or where goods are
subsequently appropriated to the contract, the seller may, by the terms of the contract or
appropriation, reserve the right of disposal of the goods to a buyer, until the conditions imposed by
the seller are fulfilled.

Sec 25(2) - where goods are shipped or delivered to a railway administration for carriage by railway
and by the bill of landing or railway receipt, as the case may be, the goods deliverable to the order of
the seller or his agent, the seller is prima facie deemed to reserve the right of disposal.

Sec 25(3)-Where the seller of goods draws on the buyer of the price and transmits to the buyer the
bill of exchange together with the bill of lading or, as the case may be, the railway receipt, to secure
acceptance to payment of the bill of exchange, the buyer is bound to return the bill of lading or the
railway receipt if he does not honour the bill of exchange, and, if he wrongfully retains the bill of
lading or the railway receipt, the property in the goods does not pass to him.

Effect of Destruction of Goods:

As per section 26 of the Act, unless otherwise agreed, the goods remains at the seller’s risk until the
property therein is transferred to the buyer, but when the property in goods is transferred to the
buyer, the goods are at the risk of the buyer whether delivery of the goods has been made or not.
Thus, risk prima facie passes with property unless otherwise is agreed by the parties. On other word,
the parties may in the contract have different stipulation as to time of passing of risk irrespective of
what is provided in section 26 of the Act.

Risk Prima Facie Passes with Property: Exceptions

The rule regarding risk passes with the property enshrined in Section 26 is subject to the following
exceptions:
(a) This rule of 26 will apply only if there is no agreement to the contrary. It is permissible for
the parties to provide in the agreement that although the property does not pass, the risk
passes and they may fix the point of time when it is to pass.
(b) Where delivery has been delayed through the fault of either party the buyer or the seller,
the goods are at the risk of the party at fault as regards any loss which might not have been
occurred but for such fault. The goods are at the risk of the party who is at fault in delay of
delivery.
(c) It there is a custom in that particular trade that the risk does not pass with property, in such
a case the risk will pass as per the Custom.
(d) Risk and property may be separated by agreement between the parties. Section 40 of the
Act also provides that where the seller agrees to deliver the goods at his own risk at a distant

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 6.8 SALE OF GOODS ACT, 1930
place from where they are, the buyer shall unless otherwise agreed, not take risk of
deterioration in the goods incidental to the transit. This will be discussed subsequently in the
paragraph dealing with delivery of goods.

Transfer of Title by Non-Owners of Goods:

As per section 27 of the Sale of Goods Act, where goods are sold by a person who is not the owner
thereof and who does not sell them under the authority or with the consent of the owner, the buyer
acquires no better title to the goods than the seller had, unless the owner of the goods is by conduct
precluded from denying the seller’s authority to sell.

A buyer cannot get good title to the goods unless he purchased the goods from a person who is the
owner thereof and sell them under the authority or with the consent of real owner.
“Nemo dat quod non habet” means that no one can give what he himself does not have. It means a
non-owner cannot make valid transfer of property in goods. If the title of the seller is defective, the
buyer’s title will also be subject to same defect, if the seller has no title, the buyer does not acquire
any title although he might have acted honestly and might have acquired the goods after due
payment. This rule is to protect the real owner of the goods. Though this doctrine seeks to protect
the interest of real owners, but in the interest of the trade and commerce, there must be some
safeguard available to a person who acquired such goods in good faith for value.

Accordingly the Act provides the following exceptions to this doctrine which seek to protect the
interest of bona fide buyers:
1. Sale by a mercantile agent: If a mercantile agent is authorized by the owner of the goods to
sell on his behalf, then such sale shall be valid. In such cases, the buyer can acquire a good
title of the goods. This exception will be implemented subject to fulfilment of the following
conditions:-
• The person must be in possession of goods or documents of title to the goods in his
capacity as a mercantile agent and with the consent of his owner
• The person must sell the goods while acting in the ordinary course of business.
• The buyer must act in good faith without having any notice, at the time of contract that
the mercantile agent has no authority to sell the goods.
2. Transfer of title by Estoppels: This exception is based on the principle of personal estoppels.
Sometime, the real owner may lead the buyers by virtue of his conduct or words or by act to
believe that the seller is the owner of the goods or has the authority to sell them. In such
case, he may not thereafter deny the seller’s authority to sell.
3. Sale by a joint owner: As per Section 28, it there are several joint owners of goods, one of
them if has sole possession of the goods by permission of the co-owners, then the property

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 SALE OF GOODS ACT, 1930 6.9
in goods is transferred to any person who buys them from such joint owner. In order to
apply this exception, following conditions must be fulfilled.
• One of the several owners must be in sole possession of the goods.
• The joint owner must have permission of co-owners.
• The buyer must purchase goods in good faith,
• The buyer should not have notice regarding the matter that the seller has no authority
to sell.
4. Sale by person in possession under voidable contract: According to the Section 29 a person
in possession of goods under a voidable contract which is not rescinded, can transfer a good
title to the buyer. The buyer should purchase the goods in good faith and without notice of
the seller’s defective title.
5. Sale by person in possession after sale:- Under Section 30(1) it is laid down that where a
person has sold goods but he continues in possession of goods or of the documents of title
to the goods, he may sell them to a third person and if such person obtains delivery thereof
in good faith and without notice of the previous sale, the person can get a good title to
them. In order to apply this exception, the seller must be in possession after sale of goods
and there must be delivery or transfer of the goods or documents of title by the seller.
6. Sale by buyer in possession after sale: - Under Section 30(2), it is laid down that where a
buyer having bought or having agreed to buy goods, obtain with the consent of the seller the
possession of the goods or documents of title to the goods, he can resell the goods to a bona
fide transfer. If of the time of this sale, buyer was not in possession, then this exception will
not apply.
7. Sale by an unpaid seller:- If the unpaid seller has exercise right of lien or stoppage in transit,
resells the goods, then the buyer acquires a good title as against the original buyer, even
though the resale is not justified in the circumstances.
8. Exception under other Acts: - According to some Acts, a person although he is not the
owner of the goods may sell the goods and pass a better title than he himself has. As for
example-
(i) Under Section 169 of the Indian Contract Act, a finder of the goods has the right to sell.
(ii) Under Section 176 of the Indian Contract Act, a pawnee of goods has the right to sell
the goods pawned subject to satisfying some conditions.
(iii) In certain cases, a special right of sale is given to officers of court, liquidators of the
companies, receivers of insolvents estate, custom officers for dues and duties remaining
unpaid etc.
(iv) A person who takes a negotiable instrument in good faith and for value becomes the
true owner even if he take it from a thief or finder.

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 6.10 SALE OF GOODS ACT, 1930
Conditions and Warranties
Section 12(1) provides that a stipulation in a contract of sale with reference to goods which are the
subject thereof may be a condition or a warranty.

Condition [Section 12(2)]

A condition is a stipulation essential to the main purpose of the contract, the breach of which gives
rise to a right to treat the contract as repudiated.

A condition in contract of sale of goods is of fundamental nature for breach of which the buyer can
repudiate the contract.

Warranty [Section 23(3)]

A warranty is a stipulation collateral to the main purpose of the contract, the breach of which gives
rise to a claim of or damages but not to a right to reject the goods and treat the contract as
repudiated.

Whether a stipulation in a contract of sale is a condition or a warranty depends in each case on the
construction of the contract. A stipulation may be a condition, though called a warranty in the
contract.

Differences between Condition and Warranty

S. No. Condition Warranty
1. A condition is a stipulation which is A Warranty is a stipulation which is
essential to the main purpose of the collateral to the main purpose of the
contract. contract.
2. The aggrieved party can repudiate the The aggrieved party can claim
contract of sale in case there is a breach damages only in case of breach of a
of a condition warranty.
3. A breach of condition may be treated as a A breach of a warranty, con not be
breach of a warranty. This would happen treated as a breach of a condition.
where the aggrieved party is contended
with damages only

When condition to be treated as warranty?

Section 13 provides that where a contract of sale is-
• Subject to any condition to be fulfilled by the seller, the buyer may waive the condition or
elect to treat the breach of the condition as a breach of warranty and not as a ground for
treating the contract as repudiated.;

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 SALE OF GOODS ACT, 1930 6.11
• Not severable and the buyer has accepted the goods or part thereof, the breach of any
condition to be fulfilled by the seller can only be treated as a breach of warranty and not as a
ground for rejecting the goods and treating the contract as repudiated, unless there is a
term of the contract, express or implied, to that effect.

Nothing in this section shall affect the case of any condition or warranty fulfilment of which is
excused by law by reason of impossibility or otherwise.

Remedies Available to the Buyer for Breach of Conditions

(a) Affected party may claim refund of price and reject the goods:
(b) Elect to treat breach of condition as breach of warranty and claim damages or
compensation:
(c) When the affected party treat, breach of condition as breach of warranty he cannot
repudiate the contract but claim damages only;
(d) No remedy is available when the fulfilment of condition is excused by law by means of
impossibility or otherwise 13(3).

Consequences of Breach of Warranty:

(a) The breach of warranty gives right to a claim for damages but not to reject the goods and
treat the contract s repudiated.
(b) Buyer may sue for damages.
(c) No remedy is available if the fulfilment of warranty becomes impossible by law.

Implied conditions are of the following types:

(i) Condition as to title [Sec 14(a)]
In a contract of sale, unless the circumstances of the contract are such as to show a different
intention, there is-
• An implied condition on the part of the seller that, in the case of a sale, he has a right to
sell the goods and that, in the case of an agreement to sell, he will have a right to sell the
goods at the time when the property is to pass.
(ii) Sale by description (sec 15)
Where there is a contract for the sale of goods by description, there is an implied condition that
the goods shall correspond with the description, and, if the sale is by sample as well as by
description, it is not sufficient that the bulk of the goods corresponds with the sample if the
goods do not also correspond with the description. Goods are sold by description when they are
described in the contract such as MP Atta, Dehradun Rice, Kasmiri Rajama, Amul butter and the
buyer contracted relying on such description of goods by the seller.

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 6.12 SALE OF GOODS ACT, 1930
(iii) Condition as to quality or fitness (sec 16)
As per Sec 16 of the Sale of goods Act, the buyer is supposed to satisfy himself about the quality
of goods he purchased and is also charged with the responsibility of seeing that the goods suit
the purpose for which they were purchased by him. Later on if the goods does not turn out to be
as per his purpose, the seller cannot be asked to compensate him. This is based on the famous
doctrine of CAVEAT EMPTOR which means ‘let the buyer beware’. However, there are some
exceptions to this which are as under:
(a) Where the buyer, expressly or by implication, makes it known to the seller the particular
purpose for which the goods are required, so as to show that the buyer relies on the seller’s
skill or judgement, and the goods are of a description which it is in the course of the seller’s
business to supply (whether he is the manufacturer or producer or not), there is an implied
condition that the goods shall be reasonably be fit for such purpose. However, in the case of
a contract for the sale of a specified article under its patent or other trade name, there are
no implied conditions as to its fitness for any particular purpose.
(b) Where goods are bought by description from a seller who deals in goods of that description
(whether he is the manufacturer or producer or not), there is an implied condition that the
goods shall be of merchantable quality. However, if the buyer has examined the goods,
there shall be no implied conditions as regards defect which such examination ought to have
revealed.
In order to apply the implied condition as to merchantability the following requirements must be
satisfied.
(i) The seller should be dealer in goods of that description;
(ii) The buyer must have not opportunity to examine the goods or there must be some
latent defect in the goods which would not be apparent on reasonable examination of
the same.
It may be noted the term merchantability has not been defined in the Act. As per English Sale of
Goods Act, goods of any kind are merchantable quality if they are as fit for the purpose or
purposes for which goods of that kind are commonly brought as it is reasonable to expect having
regard to any description applied to them, the price and all other relevant circumstances.

(c) An implied warranty or condition as to quality or fitness for a particular purpose may be
annexed by the usage of trade. In some cases the purpose for which the goods are required
may be ascertained from the acts and conducts of the parties to the sale or from the nature
of the description of the article purchased. For example if a hot water bottle is purchased,
the purpose for which it purchased is implied in the thing itself. In such a case the buyer
need not tell the seller the purpose for which the bottle is purchased. Similarly if a
thermometer is purchased in common usage, the purpose of thermometer is well known,
the buyer need not tell the seller.

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 SALE OF GOODS ACT, 1930 6.13
(d) An express warranty or condition does not negative a warranty or condition implied by this
Act unless inconsistent therewith.

(iv) Sale by sample (sec 17)

A contract of sale is a contract for sale by sample where there is a term in the contract, express
or implied, to that effect.

In the case of a contract for sale by sample there is an implied condition-

• That the bulk shall correspond with the sample in quality.
• That the buyer shall have a reasonable opportunity of comparing the bulk with the
sample.
• That the goods shall be free from any defect, rendering them un-merchantable, which
would not be apparent on reasonable examination of the sample.

(v) In case of eatables and provisions, in addition to the implied condition as to

merchantability, there is another implied condition that the goods shall be wholesome.

Implied warranties are of following types:

The implied warranties are as under:

(i) Warranty of quiet possession [Sec. 14 (b)]

If the buyer in any way is disturbed from enjoying the quiet possession of goods
purchased because of seller’s defective tile, the buyer can claim damages from seller. It
is a warranty that neither the seller shall nor shall anybody claiming under a superior
title or under his authority interfere with the quite enjoyment of the superior title or
under his authority interfere with the quite enjoyment of buyer.

(ii) Warranty of freedom from encumbrances [Sec. 14(c)]

The buyer is also entitled to additional warranty that the goods are free from any charge
or right of any third party, not declared or known to the buyer. It is presumed that the
goods are free of third parties charges, if it is otherwise the buyer is entitled to claim
damages from the seller.

(iii) Warranty as to quality of fitness by usage of trade:

An implied warranty as to quality or fitness for a particular purpose may be annexed by
usage of trade.

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 6.14 SALE OF GOODS ACT, 1930
(iv) Warranty to disclose dangerous nature of goods:
Where a person sell goods knowing that the goods are inherently dangerous or they are
likely to be dangerous to the buyer and the buyer is ignorant of the danger, he must
warn the buyer of the probable danger, otherwise he will be liable in damages.

Doctrine of Caveat Emptor

The term “caveat emptor” is a Latin word which means “let the buyer beware”. This principle states
that it is for the buyer to satisfy himself that the goods which he is purchasing are of the quality
which he requires. If he buys goods for a particular purpose, he must satisfy himself that they are fit
for that purpose. The doctrine of caveat emptor is embodied in Section 16 of the Act which states
that “subject to the provisions of this act and of any other law for the time being in force, there is
not implied warranty or condition as to the quality or fitness for any particular purpose of goods
supplied under a contract of sale”. In simple words, it is not the seller’s duty to give to the buyer the
goods which are fit for a suitable purpose of the buyer. If he makes a wrong selection, he cannot
blame the seller if the goods turn out to be defective or do not serve his purpose. The principle was
applied in the case of Ward v. Hobbs, (1878) 4 A.C. 13, where certain pigs where sold by action and
no warranty was given by seller in respect of any fault or error of description. The buyer paid the
price for healthy pigs. But they were ill and all but one died of typhoid fever. They also infected some
of the buyer’s own pigs. It was held that there was no implied condition or warranty that the pigs
were of good health. It was the buyer’s duty to satisfy himself regarding the health of the pigs.

Exceptions: Section 16 days down the following exceptions to be doctrine of Caveat Emptor:
1. Where the seller makes a false representation and the buyer relies on it.
2. When the seller actively conceals a defect in the goods which is not visible on a reasonable
examination of the same.
3. When the buyer, relying upon the skill and judgement of the seller, has expressly or
impliedly communicated to him the purpose for which the goods are required.
4. Where goods are bought by description from a seller who deals in goods of that description.

Performance of Contract of Sale

Chapter IV of the Act describes the procedure for performance of the contract of sales. Section 31
provides that it is the duty of the seller to deliver the goods and the buyer to accept and pay for
them, in accordance with the terms of the contract. The performance of contract involves the
following-
• Payment and delivery are concurrent conditions;
• Delivery;
• Buyer’s right of examining the goods;
• Acceptance of goods;

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 SALE OF GOODS ACT, 1930 6.15
• Buyer’s liability

Payment and delivery are concurrent conditions

Section 32 provides that the delivery of the goods and payment of the price are concurrent
conditions unless otherwise agreed.
• The seller shall be ready and willing to give the possession of the goods to the buyer in
exchange for the price.
• The buyer shall be ready and willing to pay the price in exchange for the possession of the
goods.

Delivery
Section 33 provides that the delivery of goods sold may be made-
• By doing anything which the parties agree; or
• Which has the effect of putting the goods in the possession of the buyer or of any person
authorized to hold them on his behalf;

Section 35 provides that the seller of goods is not bound to deliver them until the buyer applies for
the delivery apart from any express contract.

Part delivery
Section 34 deals with the effect of part delivery. A delivery of part of goods, in progress of the
delivery of the whole, has the same effect as a delivery of the whole for the purpose of passing the
property in such goods. If a delivery of part of the goods is done with an intention of severing it from
the whole, then it does not operate as a delivery of the reminder.

Rules as to delivery
Section 36 provides rules for the delivery as detailed below;
• Apart from any contract, goods sold are to be delivered
• At the place at which they are at the time of the sale; and
• Goods agreed to be sold are to be delivered at the place at which they are at the time of
the agreement to sell; or
• If not then in existence, at the place at which they are manufactured or produced;

• Where under the contract of sale the seller is bound to send the goods to the buyer, but no
time for sending them is fixed, the seller is bound to send them within a reasonable time;

• Where the goods at the time of sale are in the possession of a third person, there is no
delivery by seller to buyer unless until such third person acknowledges to the buyer that he

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 6.16 SALE OF GOODS ACT, 1930
holds the goods on his behalf; this shall not affect the operation of the issue or transfer of
any document of title to the goods;

• Demand or tender of delivery may be treated as ineffectual unless made at reasonable hour;

• Unless otherwise agreed, the expenses of and incidental to putting the goods into a
deliverable state shall be borne by the seller.

Delivery of wrong quantity

The transfer of goods, in a sale, is expected to be delivered as agreed to in the contract. If there is
variation in the quantity of goods delivered, the following action may be taken by the buyer-
• Section 37(1) provides that where the sellers delivers to the buyer a quantity of goods less
than he contracted to sell, the buyer may reject them. If the buyer accepts the goods so
delivered he shall pay for them at the contract rate;
• Section 37(2) provides that where the seller delivers to the buyer a quantity of goods larger
than he contracted to sell, the buyer may accept the goods included in the contract and the
reject the rest. Or he may reject the whole. If the buyer accepts the whole of the goods so
delivered, he shall pay for them at the contract rate;
• Section 37(3) provides that where the seller delivers to the buyer the goods he contracted to
sell mixed with goods of a different description not included in the contract, the buyer may
accept the goods which are in accordance with the contract and reject the reject or may
reject the whole;
• Section 37(4) provides that the provisions of this section are subject to any usage of trade,
special agreement or course of dealing between the parties.

Instalment deliveries
Section 38(1) provides that the buyer of the goods is not bound to accept the delivery of goods by
instalment unless otherwise agreed to between both the parties.

Section 38(2) provides that where there is a contract for the sale of goods to be delivered by stated
instalment which are to be separately paid for and-
• The seller makes no delivery or defective delivery in respect of one or more instalments; or
• The buyer neglects or refuses to take delivery of or pay for one or more instalments
It is a question in each case, depending on the terms of the contract and circumstances of the case
as to whether the breach of contract is-
• A repudiation of the whole contract; or
• Whether it is severable breach giving rise to a claim for compensation
But not to treat the whole contract as repudiated.

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 SALE OF GOODS ACT, 1930 6.17
Delivery to carrier or wharfinger
Section 39(1) provides that if the seller is authorized to send the goods to the buyer, through a
carrier whether it is named by the buyer or not or delivery of the goods to a wharfinger for safe
custody, the delivery of goods to such a carrier or wharfinger shall be deemed to be a delivery of the
goods to the buyer.

Section 39(2) provides that the seller shall make contract with the carrier or wharfinger on behalf of
the buyer as may be reasonable having regard to the nature of the goods and other circumstances of
the case. If the seller omits so to do and the goods are lost or damaged in the course of transit or
whilst in the custody of the wharfinger, the buyer-

• May decline to the treat the delivery to the carrier or wharfinger as a delivery to himself; or
• May hold the seller responsible for damages.

Section 39(3) provides that where goods are sent by the seller to the buyer by a route involving sea
transit, in circumstances in which it is usual to insure the seller shall give such notice to the buyer as
may enable him to insure them during their sea transit. If the seller fails so to do, the goods shall be
deemed to be at his risk during such sea transit.

Delivery of goods at a distant place

Section 40 provides that where the seller of goods agrees to deliver them at his own risk at a place
other than that where they are when sold, the buyer shall, nevertheless, unless otherwise agreed,
take any risk of deterioration in the goods necessarily incident to the course of transit.

Buyer’s right of examining the goods

According to Section 41, the buyer is having right to examine the goods, which have not been
examined by him previously before acceptance, the examination of the goods by the buyer is for the
purpose of ascertaining whether they are in conformity with the contract. The seller is also bound to
afford on opportunity to the buyer for examining the goods for the purpose of ascertaining whether
they are in conformity with the contract.

Acceptance
Section 42 Provides that the buyer is deemed to have accepted the goods-
• When he intimates to the seller that he has accepted them; or
• When the goods have been delivered to him and he does any act in relation to the which is
inconsistent with the ownership of the seller; or
• When, after the lapse of a reasonable time, he retains the goods without intimating to the
seller that he has rejected them.

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 6.18 SALE OF GOODS ACT, 1930

Return of rejected goods

Section 43 provides that where goods are delivered to the buyer and he refuses to accept them, the
buyer is not bound to return them to the seller. It is sufficient if he intimates to the seller that he
refuses to accept them.

Liability of the Buyer

Section 44 provides that where the seller is ready and willing to deliver the goods and requests the
buyer to take delivery and the buyer does not within a reasonable time take delivery of the goods he
is liable to the seller any loss occasioned by his neglect or refusal to take delivery and also for a
reasonable charge for the care and custody of the goods. The rights of the seller shall not be affected
by this section where the neglect or refusal of the buyer to take delivery amounts to a repudiation of
the contract.

Rights of an unpaid Vendor

Unpaid Seller
According to Section 45(1), the seller of the goods is deemed to be ‘unpaid seller’ within the
meaning of this Act-
• When the whole of the price has not been paid or tendered;
• When a bill of exchange or other negotiable instrument has been received as conditional
payment, and the condition on which it was received has not been fulfilled by reason of the
dishonour of the instrument or otherwise;
Section 45(2) defines the term ‘seller’ as including any person who is in the position of a seller as for
instance an agent of the seller to whom the bill of lading has been endorsed or a consignor or agent
who has himself paid, or is directly responsible for the price.

Rights of an Unpaid Seller against the Goods

According to Section 46, an unpaid seller’s right against the goods are:
(a) A lien or right of retention
(b) The right of stoppage in transit.
(c) The right of resale.
(d) The right to withhold delivery

(a) Right of Lien (sections 47-49) and 54) An unpaid seller who is in possession of goods sold,
may exercise is lien on the goods, i.e., keep the goods in his possession and refuse to deliver
them to the buyer until the payment or lender of the price in cases where:
(i) The goods have been sold without any stipulation as to credit; or

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 SALE OF GOODS ACT, 1930 6.19
(ii) The goods have been sold on credit, but the term of credit has expired; or
(iii) The buyer becomes insolvent.
The lien depends on physical possession. The seller’s lien is possessory lien, so that it can be
exercised only so long as the seller is in possession of the goods. It can only be exercised for
the non-payment of the price and not for any other charges.

A lien is lost – (i) when the seller delivers the goods to a carrier or other bailee for the
purpose of transmission to the buyer, without reserving the right of disposal of the goods;
(i) When the buyer or his agent lawfully obtains possession of the goods;
(ii) By waiver of his lien by the unpaid seller

(b) Stoppage in transit (Sections 50-52) The right of stoppage in transit is a right of stopping the
goods while they are in transit, resuming possession of them and retaining possession until
payment or tender of the price.
The right to stop goods is available to an unpaid seller
(i) When the buyer becomes insolvent; and
(ii) The goods are in transit.
The buyer is insolvent if he has ceased to pay his debts in the ordinary course of business, or
cannot pay his debts as they become due. It is not necessary that he has actually been
declared insolvent by the court.

The goods are in transit from the time they are delivered to a carrier or other bailee like a
wharfinger of warehouse keeper for the purpose of transmission to the buyer and until the
buyer takes delivery of them.
The transit comes to an end in the following cases:

(i) If the buyer obtains delivery before the arrival of the goods at their destination;
(ii) If, after the arrival of the goods at their destination, the carrier acknowledges to the
buyer that he holds the goods on his behalf, even if further destination of the goods is
indicated by the buyer;
(iii) If the carrier wrongfully refuses to deliver the goods to the buyer.

If the goods are rejected by the buyer and the carrier or other bailee holds them, the transit
will be deemed to continue even if the seller has refused to receive them back.

The right to stop in transit may be exercised by the unpaid seller either by taking actual
possession of the goods or by giving notice of the seller’s claim to the carrier or other person

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 6.20 SALE OF GOODS ACT, 1930
having control of the goods. On notice being given to the carrier, he must redeliver the
goods to the seller who must pay the expenses of the re-delivery.

The seller’s right of lien or stoppage in transit is not affected by any sale on the part of the
buyer unless the seller has assented to it. A transfer, however, of the bill of lading or other
document of seller to a bona fide purchaser for value is value against the seller’s right.

(c) Right of re-sale (Section 54):

The unpaid seller may re-sell:
(i) Where the goods are perishable:
(ii) Where the right is expressly reserved in the contract;
(iii) Where in exercise of right of lien or stoppage in transit, the seller gives notice to the buyer
of his intention to re-sell, and the buyer, does not pay or tender the price within a
reasonable time.
If an a re-sale, there is a deficiency between the price due and amount realised, he is entitled to
recover it from the buyer. If there is a surplus, he can keep it. He will not have these rights if he
has not given any notice and he will have to pay the profit, if any, on the resale.

(d) Rights to withhold Delivery:

If the property in the good has passed, the unpaid seller has right as described above. If,
however, the property has not passed, the unpaid seller has a right of withholding delivery
similar to and co-extensive with his rights of lien and stoppage in transit.

Rights of an unpaid seller against the buyer

An unpaid seller in addition to his rights against the goods has the following rights against the
buyer personally.
1. Suit for price: [Sec. 55]
Where the property in goods has passed to the buyer, and the buyer wrongfully neglects or
refuses to pay the price, the seller can sue the buyer for price.

2. Suit for damages for non-acceptance: [Sec. 56]

Where the buyer wrongfully neglects or refuses to accept and pay for the goods, the seller can
sue him for damages for non-acceptance of the goods.

3. Suit for repudiation:

Where the buyer repudiates the contract before the date of delivery, the seller may wait till the
date of delivery or may treat the contract as cancelled an sue for damages for breach.

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 SALE OF GOODS ACT, 1930 6.21
4. Suit for interest: [Sec. 61]
Where there is specific agreement between the seller and the buyer regarding interest on the
price of goods, the seller may claim it from the date when payment becomes due. If there is no
specific agreement, the interest is payable from the date notified by the seller to the buyer.

Buyer’s Remedies against seller for Breach of Contract

A buyer also has certain remedies against the seller who commits a breach. These are:

1. Suit for Damages for Non-Delivery [Section 57]- When the seller wrongfully neglects or
refuses to deliver the goods to the buyer, the buyer may sue the seller for damages for non-
delivery. This is in addition to the buyer’s right to recover the price, if already paid, in case of
non-delivery.
2. Suit for price – where the buyer has paid the price and the goods are not delivered to him,
he can recover the amount paid.
3. Suit for specific performance [Section 58] - When the goods are specific or ascertained, a
buyer may sue the seller for specific performance of the contract and compel him to deliver
the same goods. The court order for specific performance only when the goods are specific
or ascertained and an order for damages would not be an adequate remedy. Specific
performance is generally allowed where the goods are of special significance or value e.g. a
rare paining, a unique piece of jewellery, etc.
4. Suit for Breach of Warranty [Section 59] - Where there is a breach of warranty by the seller,
or where the buyer elects or is compelled to treat the breach of condition as breach of
warranty; the buyer cannot reject the goods. The buyer may,
(a) Set up the breach of warranty in extinction or diminution of the price payable by him, or
(b) Sue the seller for damages for breach of warranty.

5. Repudiation of contract before the due date [Section 60] - Section 60 provides that where
either party to a contract of sale repudiates the contract before the date of delivery, the
other may either treat the contract as subsisting or wait till the date of delivery, or he may
treat the contract as rescinded and sue for damages for the breach.

6. Suit for interest - The buyer may recover such interest or special damages, as may be
recoverable by law. He may also recover the money paid where the consideration for the
payment of it has failed.
In the absence of a contract to the contrary, the court may award interest, to the buyer, in a
suit by him for the refund of the price in a case of a breach on the part of the seller, at such
rate as it thinks fit on the amount of the price from the date on which the payment was
made.

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 6.22 SALE OF GOODS ACT, 1930
Auction Sale
Section 64 provides that in the case of a sale by auction-
• Where goods are put up for sale in lots, each lot is prima facie deemed to be the subject
of a separate contract of sale;
• The sale is complete when the auctioneer announces its completion by the fall of the
hammer or in other customary manner; and until such announcement is made, any
bidder may retract his bid;
• A right to bid may be reserved expressly by or on behalf of the seller and, where such
right is expressly so reserved, but not otherwise, the seller or any one person on his
behalf may, subject to the provisions hereinafter contained, bit at the auction;
• Where the sole is not notified to be subject to a right to bid on behalf of the seller, it
shall not be lawful for the seller to bid himself or to employ any person to bid at such
sale, or for the auctioneer knowingly to take any bid from the seller or any such person;
and any sale contravening this rule may be treated as fraudulent by the buyer;
• The sale may be notified to be subject to a reserved or set up price;
• If the seller makes use of pretended bidding to raise the price, the sale is voidable at the
option of the buyer.
Section 64 does not deal with the question of passing of the property at auction sale but merely
deals with completion of the contract of sale which takes place at the fall of the hammer or at the
announcement of the close of the sale in other customary manner by the auctioneer. In other words,
all that happens at the fall of the hammer or at the announcement of the closure of the sale in other
customary manner is that a contract of sale comes into existence and parties get into the
relationship of a promisor and a promisee in an executor contract.

Effect of Tax [Section 64A]

In the event of any tax being imposed, increased, decreased, decreased or remitted in respect of any
goods after the making of any contract for the sale or purchase of such goods without stipulations as
to the payment of tax where tax was not chargeable at the time of the making of the contract, or for
the sale or purchase of such good tax was chargeable at that time.

(a) If such imposition or increase so takes effect that the tax or increased tax, as the case may
be, or any part of such tax is paid or is payable, the seller may add so much to the contract
price as will be equivalent to the amount paid or payable in respect of such tax or increase of
tax, and he shall be entitled to be paid and to sue for and recover such addition, and
(b) If such decrease or remission as takes effect that the decreased tax only, or no tax, as the
case may be, is paid or is payable, the buyer made deduct so much from the contract price
as will be equivalent to the decrease of tax or remitted tax, and he shall not be liable to pay,
or be sued for, or in respect of, such deduction.

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 SALE OF GOODS ACT, 1930 6.23

Previous Year Question

Q1. Discuss the various types of implied warranties as per the Sales of Goods Act, 1930?

Answer: Various types of implied warranties

1. Warranty as to undisturbed possession [Section 14(b) of the Sales of goods Act, 1930]: An
implied warranty that the buyer shall have and enjoy quiet possession of the goods. That is
to say. If the buyer having got possession of the goods, is later on disturbed in his
possession, he is entitled to sue the seller for the breach of the warranty.
2. Warranty as to non-existence of encumbrances [Section 14(c)]: An implied warranty that
the goods shall be free from any charge or encumbrance in favour of any third party not
declared or known to the buyer before or at the time the contract is entered into.
3. Warranty as to quality or fitness by usage of trade [Section 16(3)]: An implied warranty as
to quality or fitness for a particular purpose may be annexed or attached by the usage of
trade.
4. Disclosure of dangerous nature of goods: Where the goods are dangerous in nature and the
buyer is ignorant of the danger, the seller must warn the buyer of the probable danger. If
there is a breach of warranty, the seller may be liable in damages.

Q2. “A non-owner can convey better title to the bonafide purchaser of goods for value.” Discuss the
cases when a person other than the owner can transfer title in goods as per the provisions of the
Sales of Goods Act, 1930?

Answer: In the following cases, a non-owner can convey better title to the bona fide purchaser of
goods for value:
(1) Sale by a Mercantile Agent: A sale made by a mercantile agent of the goods for document of
title to goods would pass a good title to the buyer in the following circumstances; namely;
(a) If he was in possession of the goods or documents with the consent of the owner;
(b) If the sale was made by him when acting in the ordinary course of business as a
mercantile agent; and
(c) If the buyer had acted in good faith and has at the time of the contract of sale, no notice
of the fact that the seller had no authority to sell (Proviso to Section 27 of the Sale of
Goods Act, 1930).
(2) Sale by one of the joint owners (Section 28): If one of several joint owners of goods has the
sole possession of them by permission of the co-owners, the property in the goods is
transferred to any person who buys them of such joint owner in good faith and has not at
the time of the contract of sale notice that the seller has no authority to sell.

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 6.24 SALE OF GOODS ACT, 1930
(3) Sale by a person in possession under voidable contract: A buyer would acquire a good title
to the goods sold to him by a seller who had obtained possession of the goods under a
contract voidable on the ground of coercion, fraud, misrepresentation or undue influence
provided that the contract had not been rescinded until the time of the sale (Section 29).
(4) Sale by one who has already sold the goods but continues in possession thereof: If a
person has sold goods but continues to be in possession of them or of the documents of title
to them, he may sell them to a third person, and if such person obtains the delivery thereof
in good faith and without notice of the previous sale, he would have good title to them,
although the property in the goods had passed to the first buyer earlier. [Section 30(1)]
(5) Sale by buyer obtaining possession before the property in the goods has vested in him:
Where a buyer with the consent of the seller obtains possession of the goods before the
property in them has passed to him, he may sell, pledge or otherwise dispose of the goods
to a third person, and if such person obtains delivery of the goods in good faith and without
notice of the lien or other right of the original seller in respect of the goods, he would get a
good title to them [Section 30(2)].
(6) Effect of Estoppel: Where the owner is estopped by the conduct from denying the seller’s
authority to sell, the transferee will get a good title as against the true owner. But before a
good title by estoppel can be made, it must be shown that the true owner had actively
suffered or held out the other person in question as the true owner or as a person
authorized to sell the goods.
(7) Sale by an unpaid seller: Where an unpaid seller who had exercised his right of lien or
stoppage in transit resells the goods, the buyer acquires a good title to the goods as against
the original buyer [Section 54(3)].
(8) Sale under the provisions of other Acts:
(i) Sale by an Official Receiver or Liquidator of the Company will give the purchaser a
valid title.
(ii) Purchase of goods from a finder of goods will get a valid title under circumstances
[Section 169 of the Indian Contract Act, 1872]
(iii) A sale by pawnee can convey a good title to the buyer [Section 176 of the Indian
Contract Act, 1872]

Q3. State the various essential elements involved in the sale of unascertained goods and its
appropriation as per the Sale of Goods Act, 1930.

Answer: Sale of unascertained goods and Appropriation (Section 23 of the Sale of goods Act,
1930): Appropriation of goods involves selection of goods with the intention of using them in
performance of the contract and with the mutual consent of the seller and the buyer.
The essentials are:

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 SALE OF GOODS ACT, 1930 6.25
(a) There is a contract for the sale of unascertained or future goods.
(b) The goods should conform to the description and quality stated in the contract.
(c) The goods must be in a deliverable state.
(d) The goods must be unconditionally appropriated to the contract either by delivery to the
buyer or his agent or the carrier.
(e) The appropriation must be made by:
(i) The seller with the assent of the buyer; or
(ii) The buyer with the assent of the seller.
(f) The assent may be express or implied.
(g) The assent may be given either before or after appropriation.

Q4. What are the rights of an unpaid seller against goods under the Sale of Goods Act, 1930?

Answer: Right of an unpaid seller against the goods: As per the provisions of Section 46 of the Sale
of Goods Act, 1930, notwithstanding that the property in the goods may have passed to the buyer,
the unpaid seller of goods, as such, has by implication of law-
(a) A lien on the goods for the price while he is in possession of them;
(b) In case of the insolvency of the buyer, a right of stopping the goods in transit after he has
parted with the possession of them;
(c) A right of re-sale as limited by this Act. [Sub-Section (1)]
Where the property in goods has not passed to the buyer, the unpaid seller has, in addition to
his other remedies, a right of withholding delivery similar to and co-extensive with his rights of
lien and stoppage in transit where the property has passed to the buyer. [Sub-section (2)]
These rights can be exercised by the unpaid seller in the following circumstances:
(i) Right of lien (Section 47): According to sub-section (1), the unpaid seller of goods who is in
possession of them is entitled to retain possession of them until payment or tender of the price
in the following cases, namely:-
(a) Where the goods have been sold without any stipulation as to credit;
(b) Where the goods have been sold on credit, but the term of credit has expired;
(c) Where the buyer becomes insolvent.
(ii) Right of stoppage in transit (Section 50): When the buyer of goods becomes insolvent, the
unpaid seller who has parted with the possession of the goods has the right of stopping them in
transit, that is to say, he may resume possession of the goods as long as they are in the course of
transit, and may retain them until paid or tendered price of the goods.
(iii) Right to re-sell the goods (Section 54): The unpaid seller can exercise the right to re-sell the
goods under the following conditions:
1. Where the goods are of a perishable nature
2. Where he gives notice to the buyer of his intention to re-sell the goods

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 6.26 SALE OF GOODS ACT, 1930
3. Where an unpaid seller who has exercised his right of lien or stoppage in transit resells the
goods
4. A re-sale by the seller where a right of re-sale is expressly reserved in a contract of sale
5. Where the property in goods has not passed to the buyer.

Q5. Mrs. Geeta went to the local rice and wheat wholesale shop and asked for 100 kgs of Basmati
rice. The Shopkeeper quoted the price of the same as ` 125 per kg to which she agreed. Mrs. Geeta
insisted that she would like to see the sample of what will be provided to her by the shopkeeper
before she agreed upon such purchase.

The shopkeeper showed her a bowl of rice as sample. The sample exactly corresponded to the entire
lot.

The buyer examined the sample casually without noticing the fact that even though the sample was
that of Basmati Rice but it contained a mix of long and short grains.

The cook on opening the bags complained that the dish if prepared with the rice would not taste the
same as the quality of rice was not as per requirement of the dish.

Now Mrs. Geeta wants to file a suit of fraud against the seller alleging him of selling mix of good and
cheap quality rice. Will she be successful?

Explain the basic law on sale by sample under Sale of Goods Act 1930?

Decide the fate of the case and options open to the buyer for grievance redressal as per the
provisions of Sale of Goods Act 1930?

What would be your answer in case Mrs. Geeta specified her exact requirement as to length of rice?

Answer:
(i) As per the provisions of Sub-Section (2) of Section 17 of the Sale of Goods Act, 1930, in a
contract of sale by sample, there is an implied condition that:
(a) The bulk shall correspond with the sample in quality;
(b) The buyer shall have a reasonable opportunity of comparing the bulk with the sample.
In the instant case, in the light of the provisions of Sub-Clause (b) of Sub-Section (2) of
Section 17 of the Act, Mrs. Geeta will not be successful as she casually examined the sample
of rice (Which exactly corresponded to the entire lot) without noticing the fact that even
though the sample was that of Basmati Rice but it contained a mix of long and short grains.

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 SALE OF GOODS ACT, 1930 6.27
(ii) Sale by Sample: (Section 17 of the Sale of Goods Act, 1930): As per the provisions of Sub-
Section (1) of section 17 of the Sale of Goods Act, 1930, a contract of sale is a contract for
sale by sample where there is a term in the contract, express or implied, to that effect.
As per the provisions of Sub-Section (2) of section 17 of the Sale of Goods Act, 1930, in a
contract of sale by sample, there is an implied condition that:
(a) That the bulk shall correspond with the sample in quality;
(b) That the buyer shall have a reasonable opportunity of comparing the bulk with the
sample.
(c) That the goods shall be free from any defect, rendering them unmerchantable, which
would not be apparent on reasonable examination of the sample.
(iii) In the instant case, the buyer does not have any option available to him for grievance
redressal.
(iv) In case Mrs. Geeta specified her exact requirement as to length of rice, then there is an
implied condition that the goods shall correspond with the description. If it is not so, the
seller will be held liable.

Q6. Differentiate between Ascertained and Unascertained Goods with example.

Answer: Ascertained Goods are those goods which are identified in accordance with the agreement
after the contract of sale is made. This term is not defined in the Act but has been judicially
interpreted. In actual practice the term ‘ascertained goods’ is used in the same sense as ‘specific
goods’. When from a lot or out of large quantity of unascertained goods, the number or quantity
contracted for is identified such identified goods are called ascertained goods.

Unascertained goods: The goods which are not specifically identified or ascertained at the time of
making of the contract are known as ‘unascertained goods’. They are indicated or defined only by
description or sample.

Q7. What is the Doctrine of “Caveat Emptor”? What are the exceptions to the Doctrine of “Caveat
Emptor”?

Answer: Caveat Emptor

In case of sale of goods, the doctrine ‘Caveat Emptor’ means ‘let the buyer beware’. When sellers
display their goods in the open market, it is for the buyers to make a proper selection or choice of
the goods. If the goods turn out to be defective, he cannot hold the seller liable. The seller is in no
way responsible for the bad selection of the buyer. The seller liable. The seller is in no way
responsible for the bad selection of the buyer. The seller is not bound to disclose the defects in the
goods which he is selling.

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 6.28 SALE OF GOODS ACT, 1930
Exceptions: Following are the exceptions to the doctrine of Caveat Emptor:
1. Fitness as to quality or use: Where the buyer makes known to the seller the particular purpose
for which the goods are required, so as to show that he relies on the seller’s skill or judgment
and the goods are of a description which is in the course of seller’s business to supply, it is the
duty of the seller to supply such goods as are reasonably fit for that purpose [Section 16(1) of
the Sales of Goods Act, 1930].
2. Goods purchased under patent or brand name: In case where the goods are purchased under
its patent name or brand name, there is no implied condition that the goods shall be fit for any
particular purpose [Section 16(1)]
3. Goods sold by description: Where the goods are sold by description there is an implied
condition that the goods shall correspond with the description [Section 15]. If it is not so then
seller is responsible.
4. Goods of Merchantable Quality: Where the goods are bought by description from a seller who
deals in goods of that description there is an implied condition that the goods shall be of
merchantable quality. The rule of Caveat Emptor is not applicable. But where the buyer
examined the goods this rule shall apply if the defects were such which ought to have not been
revealed by ordinary examination [Section 16(2)].
5. Sale by sample: Where the goods are bought by sample, this rule of Caveat Emptor does not
apply if the bulk does not correspond with the sample [Section 17].
6. Goods by sample as well as description: Where the goods are bought by sample as well as
description, the rule of Caveat Emptor is not applicable in case the goods do not correspond with
both the sample and description or either of the condition [Section 15].
7. Trade Usage: An implied warranty or condition as to quality or fitness for a particular purpose
may be annexed by the usage of trade and if the seller deviates from that, this rule of Caveat
Emptor is not applicable [Section 16(3)]
8. Seller actively conceals a defect or is guilty of fraud: Where the seller sells the goods by making
some misrepresentation or fraud and the buyer relies on it or when the seller actively conceals
some defect in the goods so that the same could not be discovered by the buyer on a reasonable
examination, then the rule of Caveat Emptor will not apply. In such a case the buyer has a right
to avoid the contract and claim damages.

Q8. Mr. G sold some goods to Mr. H for certain price by issue of an invoice, but payment in respect
of the same was not received on that day. The goods were packed and lying in the godown of Mr. G.
The goods were inspected by H’s agent and were found to be in order. Later on, the dues of the
goods were settled in cash, Just after receiving cash, Mr. G asked Mr. H that goods should be taken
away from his godown to enable him to store other goods purchased by him. After one day, since
Mr. H did not take delivery of the goods, Mr. G kept the goods out of the godown in an open space.
Due to rain, some goods were damaged.

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 SALE OF GOODS ACT, 1930 6.29

Referring to the provisions of the Sale of Goods Act, 1930, analyse the above situation and decide
who will be held responsible for the above damage. Will your answer be different, it the dues were
not settled in cash and are still pending?

Answer:
1. According to section 44 of the Sales of Goods Act, 1932, when the seller is ready and willing
to deliver the goods and requests the buyer to take delivery, and the buyer does not within a
reasonable time after such request take delivery of the goods, he is liable to the seller for
any loss occasioned by his neglect or refusal to take delivery and also for a reasonable
charge for the care and custody of the goods.

The property in the goods or beneficial right in the goods passes to the buyer at appoint of
time depending upon ascertainment, appropriation and delivery of goods. Risk of loss of
goods prima facie follows the passing of property in goods. Remain at the seller’s risk unless
the property there in is transferred to the buyer, but after transfer of property therein to the
buyer the goods are at the buyer’s risk whether delivery has been made or not.

In the given case, since Mr. G has already intimated Mr. H, that he wanted to store some
other goods and thus Mr. H should take the delivery of goods kept in the godown of Mr. G,
the loss of goods damaged should be borne by Mr. H.

2. If the price of the goods would not have settled in cash and some amount would have been
pending then Mr. G will be treated as an unpaid seller and he can enforce the following
rights against the goods as well as against the buyer personally:
(a) Where under a contract of sale the property in the goods has passed to the buyer and
the buyer wrongfully neglects or refuses to pay for the goods according to the terms of
the contract, the seller may sue him for the price of the goods. [Section 88 (1) of the
Sales of Goods Act, 1930]
(b) Where under a contract of sale the price is payable on a day certain irrespective of
delivery and the buyer wrongfully neglects or refuses to pay such price, the seller may
sue him for the price although the property in the goods has not passed and the goods
have not been appropriated to the contract. [Section 55(2) of the Sales of Goods Act,
1930].

Q9. What is meant by delivery of goods under the Sale of Goods Act, 1930? State various modes of
delivery.

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 6.30 SALE OF GOODS ACT, 1930
Answer: Delivery of goods [Section 2(2) of the Sale of Goods Act, 1930]: Delivery means voluntary
transfer of possession from one person to another. AS a general rule, delivery of goods may be made
by doing anything, which has the effect of putting the goods in the possession of the buyer, or any
person authorized to hold them on his behalf.
Modes of delivery: Following are the modes of delivery for transfer of possession:
(i) Actual delivery: When the goods are physically delivered to the buyer.
(ii) Constructive deliver: When it is effected without any change in the custody or actual
possession of the thing as in the case of delivery by attornment (acknowledgement) e.g.,
where a warehouseman holding the goods of A agrees to hold them on behalf of B, at A’s
request.
(iii) Symbolic delivery: When there is a delivery of a thing in token of a transfer of something
else, i.e., delivery of goods in the course of transit may be made by handing over documents
of title to goods, like bill of lading or railway receipt or delivery orders or the key of a
warehouse containing the goods is handed over to buyer.

Q10. What is appropriation of goods under the Sale of Goods Act, 1930? State the essentials
regarding appropriation of unascertained goods.

Answer: Appropriation of goods: Appropriation goods involve selection of goods with the intention
of using them in performance of the contract and with the mutual consent of the seller and the
buyer.
The essentials regarding appropriation of unascertained goods are:
(a) There is a contract for the sale of unascertained or future goods.
(b) The goods should conform to the description and quality stated in the contract.
(c) The goods must be in a deliverable state.
(d) The goods must be unconditionally (as distinguished from an intention to appropriate)
appropriated to the contract either by delivery to the buyer or his agent or the carrier.
(e) The appropriation must be made by:
(i) The seller with the assent of the buyer; or
(ii) The buyer with the assent of the seller.
(f) The assent may be express or implied.
(g) The assent may be given either before or after appropriation.

Q11. Mr. D sold some goods to Mr. E for ` 5,00,000 on 15 days credit. Mr. D delivered the goods. On
due date Mr. E refused to pay for it. State the position and rights of Mr. D as per the Sale of Goods
Act, 1930.
Answer: Position of Mr. D: Mr. D sold some goods to Mr. E for ` 5,00,000 on 15 days credit. Mr. D
delivered the goods. On due date Mr. E refused to pay for it. So, Mr. D is an unpaid seller as

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 SALE OF GOODS ACT, 1930 6.31
according to section 45(1) of the Sale of Goods Act, 1930 the seller of goods is deemed to be an
‘Unpaid Seller’ when the whole of the price has not been paid or tendered and the seller had an
immediate right of action for the price.

Rights of Mr. D: As the goods have parted away from Mr. D, therefore, Mr. D cannot exercise the
right against the goods, he can only exercise his rights against the buyer i.e. Mr. E which are as
under:
(i) Suit for Price (Section 55)
In the mentioned contract of sale, the price is payable after 15 days and Mr. E refuses to pay
such price, Mr. D may sue Mr. E for the price.
(ii) Suit for damages for non-acceptance (Section 56): Mr. D may sue Mr. E for damages for
non-acceptance if Mr. E wrongfully neglects or refuses to accept and pay for the goods. As
regards measure of damages, Section 73 of the Indian Contract Ac, 1872 applies.
(iii) Suit for interest [Section 61]: If there is no specific agreement between the Mr. D and Mr. E
as to interest on the price of the price of the goods from the date on which payment
becomes due, Mr. D may charge interest on the price when it becomes due from such day as
he may notify to Mr. E.

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 NEGOTIABLE INSTRUMENTS
7 ACT,1881
Definition and Features of Negotiable Instrument

Introduction
The law relating to negotiable instruments is contained in the negotiable Instruments Act, 1981. It is
an act to define and amend the law relating to promissory note, bills of exchange and cheques. The
purpose of the Act is to present an orderly and authoritative statement of the leading rules of law
relating to the negotiable instruments. The word negotiation has come from latin word “negos”
which means “business”.

Applicability of the Act

This Act is applicable to the whole of India.

Negotiable Instrument
Generally, an instrument, under legal parlance, denotes a piece of paper by which rights or liabilities
of a person is created, satisfied, diminished, enhanced in relation to any other person.

Section 13 of the Act defines the terms ‘negotiable instrument’ as a promissory note, bill of
exchange or either payable either to order or to bearer. A promissory note, bill of exchange or
cheque-
• Is payable to order which is expressed to be so payable or which is expressed to be payable
to a particular person and does not contain words prohibiting transfer or indicating an
intention that it shall not be transferable;
• Is payable to the bearer which is expressed to be so payable or one which the only or last
endorsement is an endorsement in blank;
• Either originally or by endorsement, is expressed to be payable to two or more payees
jointly, or it may be made payable in the alternative to one of two, or one or some of several
payees.
Section 13 shows that the Act is confined to three specific types of instruments most in common
use, namely, promissory notes, this bills of exchange and cheques. The Contract Act is a general
statute dealing with contracts. The Negotiable instruments Act is a statute dealing with a
particular form of the contract. The law laid down for special cases must always overrule the
provisions of general character as held in ‘kwong Hip Lone Saw Mill Co.V.C.A.M.A.L Firms’ – AIR
1933 Rang. 131. The following are not the negotiable instruments-
• Share certificate passing from hand to hand with blank transfers
• Deposit receipts
• Mate’s receipt
• Bill of lading
 7.2 NEGOTIABLE INSTRUMENTS ACT, 1881
• Promissory note
• A benefit under a letter of credit

Essential Features of a Negotiable Instrument:

1. It must be in writing.
2. It should be signed by the maker or drawer.
3. There must be a promise or order to pay.
4. The promise or order must be unconditional.
5. It must call for payment in money and money only.
6. It should call for payment of a certain sum.
7. The property in the instrument may be passed in two ways:
(a) By mere delivery; and
(b) By indorsement and delivery.
8. The consideration is also presumed to have been passed

Promissory Note
Section 4 of the Act defines the term ‘promissory note’ as 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.

Example –
1. I promise to B or order ` 50,000/-
2. I acknowledge myself to be indebted to B in ` 1 lakh to be paid on demand, for value
received.
3. I promise to pay B ` 20,000/- seven days after my marriage with Helen.
4. I promise to pay ` 50,000/- on D’s death, provided D leaves me enough to pay that sum.
The instruments in the above two examples do not amount to promissory notes.
The High Court in ‘Santisingh v. Madandas Panika’ AIR 1976 MP 144 held that an instrument is a
promissory note if there are present the following elements-
• There should be an unconditional undertaking to pay;
• The sum should be a sum of money and should be certain;
• The payment should be the order or a person who is certain, or t the bear of the
instrument;
• The maker should sign it.

The High Court, Andhra Pradesh in ‘Bahadurrinisa v. Vasudev’ AIR 1967 AP 123 categorized the
promissory note into three types-

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 NEGOTIABLE INSTRUMENTS ACT, 1881 7.3
• A promise to pay a certain sum of money to a certain person;
• A promise to pay a certain sum of money to the order of a certain person;
• A promise to pay the bearer.
Though currency note has all the features of promissory, it is not be considered as such. Further
bearer promissory note cannot be issued as it would have the same feature of a currency note.

Bill of exchange
Section 5 defines the expression ‘bill of exchange’ as an instrument in writing containing an
unconditional order, signed by the maker, directing a certain person to pay a certain sum of money
only to, or to the order of, a certain person or to the bearer of the instrument.

A promise or order to pay is not ‘conditional’ within the meaning of this section and Section 4, by
reason of the time for payment of the amount or any instalment thereof being expressed to be on
the lapse of a certain period after the occurrence of a specified event which, according to the
ordinary expectation of mankind, is certain to happen, although the time of its happening may be
uncertain.

The sum payable may be ‘certain’ within the meaning of this section and section 4, although it
includes future interest or is payable at an indicated rate of exchange, or is according to the course
of exchange, and although the instrument provides that, on default of payment of an instalment, the
balance unpaid shall become due.

The person to whom it is clear that the direction is given or that payment is to be made may be a
‘certain person’ within the meaning of this section and section 4, although he is mis-named or
designated by description only.

The following are the bills of exchange-

• A banker’s draft – Birdhum Central Co-op Bank V. Pioneer Bank Limited – AIR 1956 Cal. 615;
• A demand draft even if it be drawn upon another office of the same bank – S.N. SHukla V.
Punjab National Bank Limited’ – AIR 1960 All. 238;
• An order issued by a District Board Engineer on Government Treasury for payent to or order
of a certain person – Rangaswami. V Sankaralingam – ILR 43 Mad 816.

Cheque
The term ‘cheque’ is defined under Section 6 of the Act. It 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.

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 7.4 NEGOTIABLE INSTRUMENTS ACT, 1881
For the purposes of this section, the terms ‘a cheque in the electronic form’, ‘truncated cheque’ are
defined which has been substituted by the Negotiable Instruments (Amendment) Act, 2015, with
effect from 26.12.2015.

‘A cheque in the electronic form’ is a cheque drawn in electronic form by using any computer
resource and signed in a secure system with digital signature (with or without biometric signature)
and asymmetric crypto system or with electronic signature, as the case may be.

‘A truncated cheques’ is a cheque which is truncated during the course of a clearing cycle, either by
the clearing house or by the bank whether paying or receiving payment, immediately on generation
of an electronic image for transmission, substituting the further physical movement of the cheque in
writing.

The expression’ clearing house’ is the clearing house managed by the RBI or clearing house
recognized as such by RBI.

Distinction between Promissory Note and Bill of Exchange

Promissory Note Bill of Exchange
1. It is defined in Sec. 4 of NI Act, 1881. 1. It is defined in Sec. 5 of the NI Act, 1881.
2. There are two parties: 2. There are three parties:
• Maker. • Drawer.
• Payee • Drawee.
If it is given a guarantee, then there will be • Payee.
a third person, who is called as
“Guarantor” or “Surety”
3. It contains a Promise to pay. 3. It contains an order to pay.
4. No conditions shall be made in promissory 4. A bill may be accepted conditionally.
note.
5. the liability of a maker of the promissory 5. The liability of the drawee of a bill of
note is primary and absolute. exchange is secondary and conditional.

Distinction between Promissory Note and Cheque

Promissory Note Cheque
1. It is defined in Sec. 4 of NI Act, 1881. 1. It is defined in Sec. 6 of the NI Act, 1881.
2. There are two parties: 2. There are three parties:
• Maker. • Drawer.
• Payee • Drawee.
If it is given a guarantee, then there will be • Payee.

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 NEGOTIABLE INSTRUMENTS ACT, 1881 7.5
a third person, who is called as
“Guarantor” or “Surety”
3. Promissory note contains a promise to pay 3. A cheque is payable immediately on
the sum with interest or without interest at demand without any days of grace.
a later date.
4. Promissory note is not crossed. 4. Cheque can be crossed.
5. No protection is available to the payee of5. Statutory protection is given to the draw
note. banker. (Sec. 128)
6. A promissory note cannot be self-draw. 6. A cheque can be self-drawn or bearer
cheque.
7. No criminal liability shall be imposed on 7. Criminal liability may be imposed on
the maker. drawee for the dishonour of cheques in
certain circumstances.
8. Stamp is necessary. 8. Stamp is not necessary.
9. Limitation: 3 years 9. Limitation: 3 months

Distinction between Bill of Exchange and Cheque

Bill of Exchange Cheque
1. It is defined in Sec. 5 of NI Act, 1881. 1. It is defined in Sec. 6 of the NI Act, 1881.
2. There are three parties: 2. There are three parties:
• Drawer. • Drawer.
• Drawee. • Drawee.
• Payee. • Payee.
3. Bills of exchange are not crossed. 3. Cheques may be crossed.
4. Generally three days of grace are given for 4. Immediate payment is required in case of
the payment in case of a bill of exchange. cheque. No grace days are allowed.
However, this convenience is not allowed
in case of bill of exchange payable on
demand.
5. Anybody including banker may be a 5. The drawee is always a banker.
drawee in case of bill of exchange.
6. It must be accepted before the acceptor 6. It requires immediate payment. It does
can be made liable upon it. not require acceptance of the maker.
Thus the question of acceptance does not
arise in case of cheque.
7. Where a Bill of Exchange is not paid and 7. Where a cheque is dishonoured, Notice of
not honoured, a notice of dishonour should Dishonour is not strictly necessary. The
be sent to the drawer to charge him. banker can return the cheque with the

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 7.6 NEGOTIABLE INSTRUMENTS ACT, 1881
memo “Refer to Drawer” which is a
sufficient notice.
8. Statutory protection is not available. 8. Sec. 85 of the N.I Act, 1881 affords
protection to bankers.
9. Civil Liability in case of dishonour of bill of 9. Criminal liability in case of dishonour of a
exchange. cheque/bouncing of a cheque and is liable
to be prosecuted under sec. 138 of the
N.I. Act, 1881.

Parties to the Instruments

The transaction of the instrument requires at least two persons. One is the drawer and other is the
drawee. The drawer of the instrument is the person who makes a bill of exchange or a cheque and
the person thereby directed to pay is called the drawee. In ‘Shivanth V. Bsihambar’ – AIR 1935 Lah.
153 it was held that the definition of drawer is not exhaustive; the maker of the promissory note can
also be called a drawer.

Drawer in case of need- When in the bill or in any endorsement thereof the name of any person is
given in addition to the drawee to be resorted to in case of need, such a person is called a ‘drawee in
case of need’.

Acceptor- After the drawee of a bill has signed his assent upon the bill, or, if there are more parts
thereof than one, upon one such parts, and delivered the same, or given notice of such signing to
the holder or to some person on his behalf, he is called the acceptor.

Acceptor for honor- When a bill of Exchange has been noted or protested for non-acceptance or for
better security and any person accepts it supra protest for honor of the drawer or any one of the
endorsers, such person is called an ‘acceptor for honor’.

Payee – The person named in the instrument, to who or to whose order the money is by the
instrument directed to be paid, is called the ‘payee’.

Holder – Section 8 defines the term ‘holder’. The holder of a promissory note or a bill of exchange or
Cheque is any person entitled in his own name to the possession thereof and to receive or recover
the amount due thereon from the parties thereto. Where the note, bill or cheque is lost or
destroyed, its holder is the person so entitled at the time of such loss or destruction.

In ‘Anjaniaih V. Nagappa’ – AIR 1967 AP 61 it was held that the term ‘holder’ as defined in Section 8
of the Act would not include a person, who, though in possession of the instrument, had no right to

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 NEGOTIABLE INSTRUMENTS ACT, 1881 7.7
recover the amount due from the parties thereto, such as the finder of a lost instrument payable to
bearer or a thief in possession of such an instrument, or even the payee himself, is he is prohibited
by an order of court from receiving the amount due on the instrument. Where a plaintiff sued not as
a holder in possession of the promissory note but claimed to recover the debt, on the basis of a
succession certificate, he would be the only person entitled to recover the debt.

Holder in due course - Section 9 defines the term ‘holder is due course. It 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 the 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.

In ‘Braja Kishore Dikshit V. Purna Chandra Panda’ – AIR 1957 Ori. 153 the High Court held that the
holder in due course under Section 9 has to satisfy the following thee conditions-
• An endorsee becomes a holder in due course for consideration;
• He can become an endorsee before the amount mentioned in the promissory note became
payable; and
• He should have no sufficient cause to believe that any defect existed in the title of the
person from whom he was to derive his title.
As regard to the second condition the promissory note becomes payable either on demand or at
maturity.

Difference between holder and holder-in-due course

1. Holder is entitled in his own name to 1. Holder in due course possesses the
possess the instrument and the amount instrument for consideration before
thereon from parties involved. maturity and in good faith.
2. Title of the holder is subject to title of 2. Holder in due course gets a better title
the transferor. than transferor.
3. Holder may receive the instrument 3. Holder in due course always receives the
without consideration. instrument for consideration.
4. Holder does not get certain privileges 4. Holder in due course always gets
available to the holder in due course. privileges not available to holder.

Payment in due course - Section 10 defines this expression as 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.

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 7.8 NEGOTIABLE INSTRUMENTS ACT, 1881
Example:
Where a bank makes payment in accordance with the apparent tenor of the instrument in good faith
and without negligence under circumstances which do not afford a reasonable ground for believing
that he is not entitled to receive payment, payment is said to be done in due course. Therefore it is
said “A banker’s duty in paying a cheque is discharged by payment in due course”.

Instruments
There are various types of instruments mentioned in this Act as follows:
• Inland instrument – 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.
• Foreign instrument – a promissory note, bill of exchange or cheque not drawn, made or
made payable, in India, shall be deemed to be a foreign instrument.
• Ambiguous instrument – 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.
• Instruments payable on demand – A promissory note or bill of exchange, in which no time
for payment is specified, and a cheque, are payable on demand.
• Inchoate stamped instruments – Where one person signs and delivers to another a paper
stamped in accordance with the law relating to negotiable instruments for the time being in
force in India and either wholly blank or having written thereon an incomplete negotiable
instrument, he thereby gives prima facie authority to the holder thereof to make or
complete, as the case may be, upon it a negotiable instrument, for any amount specified
therein and not exceeding the amount covered by the stamp. The person so signing shall be
liable upon such instrument, in the capacity in which he signed the same, to any holder in
due course for such amount provided that no person other than a holder in due course shall
recover from the person delivering the instrument anything in excess of the mount intended
by him to be paid there under.

Maturity (Sec 22-25)

Section 22 provides the date of the maturity of the instruments. The maturity of a promissory note
or bill of exchange is the date at which falls due. If the promissory note or bill of exchange does not
express to be payable on demand, at sight or on presentment, the maturity for such case is the third
day on which it is expressed to be payable.

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 NEGOTIABLE INSTRUMENTS ACT, 1881 7.9

Calculation of Maturity date

Section 23 provides for calculating maturity of bill or note payable so many months after date or
sight. In calculating the date at which a promissory note or bill of exchange, made payable a 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
• Or protested for non-acceptance; or
• The event happens; or
• Where the instrument is a bill of exchange made payable a stated number of months after
sight and has been accepted for honour 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 held to
terminate on the last day of such month.

Example – 1. A negotiable instrument, dated 29th January, 2015, is made payable at one month
after date. The instrument is at maturity on the third day after the 28th February, 2015, i.e., 3rd
March, 2015;
2. A negotiable instrument, dated 30th August, 2015 is made payable three months after date. The
instrument is at maturity on 3rd December, 2015;
3. A promissory note or bill of exchange dated 31st August, 2015, is made payable three months
after date. The instrument is at maturity on the 3rd December, 2015.

Section 24 provides for exclusion of days in calculating the maturity date. In calculating the date at
which a promissory note or bill of exchange made payable a 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 protect for non-acceptance, or on which the event happens shall be
excluded. If the maturity day is a public holiday then which will be the maturity date. Section 25
provides that when the day on which a promissory note or bill of exchange is maturity is a public
holiday, the instrument shall be deemed to be due on the next preceding business day. The public
holiday includes Sundays and any other day declared by the Central Government, by notification in
the Official Gazette to be a public holiday.

Example – The maturity date is 14th April, 2016. That day was declared by the Central Government,
as a public holiday on the eve of Dr. Ambedhkar’s birthday. In this case the maturity date is 13th
April, 2016.

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 7.10 NEGOTIABLE INSTRUMENTS ACT, 1881
Crossing, Endorsement and Material Alteration
Crossing of Cheques
Section 123 provides that where a cheque bears across its face an addition of the words ‘and
company’ or any abbreviation thereof, between two parallel transverse lines, or of two parallel
transverse lines simply, either with or without the words ‘Not negotiable’ that addition shall be
deemed a crossing, and the cheque shall be deemed to be crossed generally.

Section 124 provides that where a cheque bears across its face an addition of the name of a banker,
either with or without the words ‘not negotiable’ that addition shall be deemed a crossing, and the
cheque shall be deemed to be crossed specially, and to be crossed to that banker.

Section 125 provides that where a cheque is not crossed, the holder may cross it generally or
specially.
• Where a cheque is crossed generally, the holder may cross it specially;
• Where a cheque is crossed generally or specially, the holder may add the word ‘not
negotiable’;
• 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.

Payment of cheque
The Payment may be made in respect of the following cases-
• Payment of cheque crossed generally;
• Payment of cheque crossed specially;
• Payment of cheque crossed specially more than once;
• Payment in due course of crossed cheque;
• Payment of crossed cheque out of due course.
Section 126 provides that where a cheque is crossed generally, the banker, on whom it is drawn,
shall not pay it otherwise than to a banker. Section 127 provides that where a cheque is crossed
specially to more than one banker, except when crossed to an agent for the purpose of collect, the
banker on whom it is drawn shall refuse payment thereof. Section 128 provides that where the
banker on whom a cross cheque is drawn has paid the same in due course, the banker paying the
cheque, and (in such case cheque has come to the hands of the payee) the drawer thereof, shall
respectively 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 it if the amount of the cheque had been paid to and
received by the true owner thereof.

Section 129 provides that 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

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 NEGOTIABLE INSTRUMENTS ACT, 1881 7.11
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.

Cheque bearing ‘not negotiable’

Section 130 provides that a person taking a cheque crossed generally or specially, bearing in either
case the words ‘not negotiable’, shall not have, and shall not be capable of giving, a better title to
the cheque that which the person from whom he took it had.

Non liability of banker

Section 131 provides that 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.

A banker receives payment of a crossed cheque for a customer within the meaning of this section
notwithstanding that he credits his customer’s account with the amount of the cheque before
receiving payment thereof.

It shall be the duty of the banker who receives payment based on an electronic image of a truncated
cheque held with him, to verify the prima facie genuineness of the cheque to be truncated and any
fraud, forgery or tampering apparent on the face of the instrument that can be verified with due
diligence and ordinary case.

Endorsement
Meaning of Endorsement: The term ‘Endorsement’ can also be pronunciated as ‘Indorsement’. This
term is said to have been derived from the Latin word ‘Indorsum’, which means ‘upon the back’ (in –
upon; dorsum = back).

The ‘Indorsement’ means signatures of the person which are generally made at the back of the
instrument, for the purpose of transfer of rights to another person,

Section 15 of the Act provides that when the maker or holder of a negotiable instrument signs the
same, otherwise than as such maker, for the purpose of negation on the back or face there or on a
slip of paper annexed thereto, or so signs for the same purpose a stamped paper intended to be
completed as negotiable instrument he is said to indorse the same and is called the ‘indorser’.

Therefore, endorsement (indorsement) means writing of a person’s name (other than maker) on the
face or back of an instrument or on a slip of paper attached thereto for the purpose of negotiation.

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 7.12 NEGOTIABLE INSTRUMENTS ACT, 1881
The person signing the instrument is known as endorser and the person in whose favour it is
endorsed is known as endorsee.

Essentials of a valid endorsement

(i) It must be on the instrument itself or on a separate slip of paper (called allonge)
attached thereto.
(ii) For the purpose of negotiation, it must be signed by the endorser.
(iii) The instrument may contain in addition to the signature of the endorser, the name the
endorsee also. No particular form of words is necessary for endorsement.
(iv) Endorsement is complete when the instrument is delivered to the endorsee with the
intention of passing the property in it to the endorsee. Delivery is to be made by the
endorser himself or someone on behalf of him.

Who may endorse a bill?

The first endorsement of an instrument can be made by the payee only, however, subsequent
endorsement can be made by any person who becomes the holder of the instrument. As per section
15 endorsement cannot be made by the maker or holder of an instrument as maker. Thus if a bill is
drawn payable to the drawer’s order the first signature of the drawer as a drawer is not an
endorsement, but if he signs the bills second time for the purpose of negotiating it, the second
signature would be an endorsement.
It may note that as per section 51 every sole maker, drawer, payee or indorsee or all of several joint
makers, drawers, payees or indorsees of a negotiable instrument may endorse and negotiate it.

Types of endorsement
The endorsement of a negotiable instrument can be (i) blank (ii) full (iii) restrictive endorsement or
(iv) conditional endorsement

As per section 16(1), if the endorser signs his name only, the endorsement is said to be “in blank”,
and if he adds a direction to pay the amount mentioned in the instrument to, or to the order of, a
specified person, the endorsement is said to be “in full”, and the person so specified is called the
“endorsee” of the instrument. Section 49 of the Act provides the mechanism of conversion of a
blank endorsement into a full endorsement. As per section 49 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 endorsement in full; and the holder
does not thereby incur the responsibility of an endorser

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 NEGOTIABLE INSTRUMENTS ACT, 1881 7.13

Example:
X is a holder of a bill which has been endorsed in blank by Y and delivered to him. If X writes over the
signature of Y “Pay to Z or order”, X is not liable as a endorser but this operate as full endorsement
by Y to Z.

As per 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 section 54, subject to
the provisions hereinafter (section 55) contained crossed cheques, a negotiable instrument indorsed
in blank is payable to the bearer thereof even although originally payable to order.

Example:
If A is a payee and holder of a negotiable instrument. He endorses it in blank and delivers it to B who
in turn endorse in full” Pay to C or order”. C transfers it to D without any formal endorsement. In the
instant D as the bearer of the instrument is entitled to payment or to sue drawer, acceptor or A who
endorsed the bill in blank but he cannot hold B or C liable. However, C can sue B as he received the
bill in full endorsement from B. But if C makes a proper endorsement in favour of D and then delivers
to him, D can claim payment from all the prior parties including A and B in addition to C.

As per section 50 endorsement of a negotiable instrument followed by delivery thereof has the
effect of transferring the property in the instrument to the endorsee with a further right to negotiate
the Instrument. But the endorser may by express words restrict or exclude such rights in which it will
be called a restrictive endorsement. As per section 50 the of a negotiable instrument followed by
delivery transfers to the endorsee the property therein with the right of further negotiation; but the
endorsement may be express words, restrict or exclude such right, or may merely constitute the
endorsee an agent to indorse the instrument, or to receive its contents for the endorser, or for some
other specified person.

The effect of restrictive endorsement is that the endorsee gets the right to full payment of the bill
when due for payment and has right to sue any party to the bill but he has no right to transfer this
right to any other person unless he expressly authorized to do so. The negotiability of the instrument
comes to an end and the last endorsee is the person to sue upon. However, when the restrictive
endorsement transfer the right of further endorsement or transfer all the subsequent endorsee get
the bill with same right and liabilities as the fires endorsee after the first restrictive endorsement.
As per section 40 if the holder of a negotiable instrument without consent of the endorsee, destroys
or impairs the endorser’s remedy against a prior party, the endorser is discharged from liability as if
the instrument had been paid at maturity.

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 7.14 NEGOTIABLE INSTRUMENTS ACT, 1881
Quite possible the holder of a negotiable instrument lost the instrument before its date of maturity.
In such cases as per section 45 A of the act the holder has right to claim a duplicate copy of the lost
bill subject to giving security to the drawer, if required, to indemnify him against all persons
whatever in case the bill alleged to have been lost shall be found again. If the drawer on request as
aforesaid refuses to give such duplicate bill, he may be compelled to do so as he has no option to
give a duplicate copy of the said instrument.

As per section 52 of the Act, the endorser of a negotiable instrument may, by express words in the
endorsement, exclude his own liability thereon, or make such liability or the right of the endorsee to
receive the amount due thereon depend upon the happening of a specified event, although such
event may never happen. This is called conditional endorsement.

Where an endorser so excludes his liability and afterwards becomes the holder of the instrument all
intermediate endorsers are liable to him.

Example 1:
The Endorser of a negotiable instrument signs his name adding the words “without resources” upon
this endorsement he incurs no liability.

Example 2:
X is both holder as well payee of a negotiable instrument. Excluding personal liability by an
endorsement “without recourse” he transfers the Instrument to B and B further endorses it to C who
endorse it to A. A is not only reinstated in his former rights, but has the rights of an endorsee against
B and C.
As clear from the above examples we can say that an endorser can exclude or limit his liability in the
following ways;
(a) By excluding his liability by making a Sans recourse endorsement. This can be done by
adding the words’ Sans recourse (Without recourse) to the endorsement. For example the
endorsement can be in the form” 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 the instant case if the instrument is
dishonoured, the subsequent holder or the endorsee cannot look to the endorser for the
payment of the same. Where an endorser excludes or limits his liability in this manner and
afterwards becomes the holder of the same instrument, all intermediate endorsers continue
to be liable to him.
(b) Sans Frais endorsement: It may be understood that where the endorser does not want that
the endorsee or any other holder to incur any expense on his account, it is called a “ sans
frais endorsement”. In a “Sans Frais’ endorsement the endorsee or any other holder does

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 NEGOTIABLE INSTRUMENTS ACT, 1881 7.15
not want to incur any expense on his account This is called without expense endorsement
also.

(c) By making his liability contingent upon an uncertain event which may never happen as when
the uncertain future event is not possible his liability is extinguished. But the endorsee can
sue the prior parties before happening of the event.
Example:
The holder of a bill may endorse it “pay A order on the arrival of the ship ‘Vikrant” at Surat
or pay A or order on his marriage with B. In all these case, the liability of the Holder as an
endorser would arise upon the happening of the event specified.

(d) By making right of endorse to receive payment on event which may never happen. In this
case endorsee cannot sue prior parties before the happening of the specified event.

(e) Partial endorsement: In order to be called a proper and valid endorsement the whole
amount of the bill has to be endorsed. A part of the amount of an instrument cannot be
endorsed. However, where a part of the amount has been paid or received by the holder, in
such endorsement of the remaining unpaid amount can be made.
Example:
An instrument is of ` 5,000 however, if any party to the instrument endorsee it for ` 4,000 in
favour of any party such endorsement will not be valid.

However, where ` 1,000 has been received against that instrument and the fact is recorded
in the instrument then the endorsement of balance ` 4,000 is perfectly valid.

(f) Facultative endorsement: - in case of such an endorsement the endorser abandoned some
rights or increases his liability as endorser e.g. “Pay A or order, notice of dishonour waived”.

Material Alteration
Any material alteration of a negotiable instrument renders the same void as against anyone who is a
party thereto at the time of making such alteration and does not consent thereto, unless it was
made in order to carry out the common intention of the original parties:

Alteration by endorsee: And any such alteration, if made by an endorsee, discharges his endorser
from all liability to him in respect of the consideration thereof.

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 7.16 NEGOTIABLE INSTRUMENTS ACT, 1881
It may be noted that to get benefit of this section the alteration must be intentional and not purely
accidental. Secondly the alteration must be material. In Lookaram Sethiya V Ivon E John (1977) SC
defined the term material alteration as follows:

“A Material alteration is one which varies the rights, liabilities or legal position of the parties as
ascertained by the deeds in its original state or otherwise varies the legal effects of the instruments
as originally expressed or which may otherwise prejudice the party bound by the deed as originally
executed. Some of the alterations which have been held to be material in various cases are as under;
(i) Alteration of an order cheque to a bearer cheque except by or with the consent of the
drawer.
(ii) Alteration by tearing material part of the instrument.
(iii) Alteration by erasing account paying crossing (J ladies Beauty V State Bank of India. AIR
1984 Guj 33)
(iv) Alteration by affixing stamps without the promisor’s knowledte to a note. (Thommer V
Union Khan 1967 Ker LJ 80 N Gowda v B Gowda 1968 1 Myrs LJ 591)
(v) Alteration of the date of payment [(A Subha Reddy v Neelapa Reddy Rammana Reddy
AIR 1966 AP 267]
(vi) Alteration of the time of payment. (Long v Moore, 1790 3 Esp 155)
(vii) Alteration of the place of payment (Tidamarsh V Grover 1813 23 LJ QB 261)
(viii) Alteration of the sum payable (scholfield v Earl of Londesborough 1896 AC 514)
(ix) Alteration by adding new party to the instrument (Garner v Walsh 1855 5 ESB 83)
(x) Alteration by tearing a material part of the instrument.
(xi) Alteration of the rate of interest (seeth Tulsidas lalalchand v Rajagopal 1967 2 MLJ66)
From the above cases of alteration which have been treated material alteration we can say that
any alteration which changes the legal character of the instrument or alters the liabilities of the
parties, whether change is prejudicial or beneficial is a material alteration.

Though we have discussed that material alteration discharges the parties to an instrument. But
still there are some alterations which do not vitiate the instrument. These are as under:-
(i) Alteration before the completion of the instrument.
(ii) Crossing of an open cheque or conversion of general crossing into a special crossing.
(iii) Making qualified acceptance.
(iv) Completion of inchoate instrument.
(v) Making a blank endorsement into full endorsement.
(vi) Conversion of a bearer cheque into an order cheque.
(vii) Alteration with the consent of the party liable on the instrument.
(viii) Alteration made for the purpose of correcting mistake.
(ix) Making a blank instrument into a full endorsement.

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 NEGOTIABLE INSTRUMENTS ACT, 1881 7.17

Payment of Instrument on which alteration is not apparent

So far we have discussed that material alteration on a instrument discharge the parties to it. Still
there may be some alteration in an instrument which may not be apparent at the time of payment.
As per section 89:
(1) Where a promissory note, bill of exchange or cheque has been materially altered but does
not appear to have been so altered, or where a cheque is presented for payment which does
not at the time of presentation appear to be crossed or to have had a crossing which has
been obliterated, payment thereof by a person or banker liable to pay an paying the same
according to the apparent tenor thereof at the time of payment and otherwise in due
course, shall discharge such person or banker liable to pay and paying the same according to
the apparent tenor thereof at the time of payment and otherwise in due course, shall
discharge such a person or banker from all liability thereon, and such payment shall not be
questioned by questioned by reasons of the instrument having been altered, or the cheque
crossed.
(2) Where the cheque is an electronic image of a truncated cheque, any difference in apparent
tenor of such electronic image and the truncated cheque shall be a material alteration and it
shall be the duty of the bank or the clearing house, as the case may be, to ensure the
exactness of the apparent tenor of electronic image of the truncated cheque while
truncating and transmitting the image.
(3) Any bank or a clearing house which receives a transmitted electronic image of a truncated
cheque, shall verify from the party who transmitted the image to it, that the image so
transmitted to it and received by it, is exactly the same.

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. (Section 90)

Acceptance, Assignment and Negotiation

Acceptance
(i) Must be written on the face of the bill,
(ii) The bill must be signed by drawee or his authorized agent.
(iii) The accepted bill is required to be delivered to the holder of the instrument.

Meaning of acceptance:
A bill is said to be accepted when the drawee (i.e., the person on whom the bill is drawn), after
putting his signature on it, either delivers it or gives notice of such acceptance to the holder of the
bill or to some person on his behalf.

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 7.18 NEGOTIABLE INSTRUMENTS ACT, 1881

Acceptor:
After the drawee has accepted the bill, he is known as the acceptor, it is only the bill of exchange
(other than cheque) which requires acceptance. However, acceptance is not necessary to make a
valid bill. If a bill is not accepted, it does not become invalid. It only becomes dishonoured by non-
acceptance.

Presentation for acceptance may be excused in the following circumstances:

(a) Where the drawee is dead or insolvent.
(b) Where the drawee is a fictitious person or one incapable of contracting.
(c) When the drawee can cannot be found with reasonable efforts.
(d) When acceptance has been refused on some other grounds.

Acceptance in Case of Bills in Sets:

Where a bill is drawn in sets, the acceptance is required to be put on one part only. Where the draw
signs his acceptance on two or more parts, he may become liable on each of them respectively.

When presentation for acceptance is necessary:

(a) Where the bill is payable at a given time after acceptance or after sight.
(b) Where the bill expressly stipulates that it shall be presented for acceptance before
presented for payment.
(c) Where the bill is made payable at a place other than the place of residence or business of
the drawee.
In no other case is presentation for acceptance necessary in order to render liable any party
to the bill.

Types of Acceptance:
Acceptance may be either general or qualified.

General Acceptance: An acceptance is said to be general when the drawee accepts the bill without
qualification to the order of the drawer. If the acceptance is not absolute, the holder may treat the
bill as dishonoured by non-acceptance

Qualified Acceptance: An acceptance is said to be qualified when the drawee accepts the bill subject
to qualification. It may be noted that an acceptance will not be treated as a qualified acceptance
unless the qualification is expressed on the bill in the clearest language. The qualification may relate
to an event, amount, place, time, etc.

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 NEGOTIABLE INSTRUMENTS ACT, 1881 7.19
Circumstances indicating Qualified Acceptance
According to Section 86, an acceptance is qualified under the following circumstances:
(a) Where it undertakes the payment on the happening of an event therein stated;
(b) Where it undertakes the payment of part only of the sum ordered to be paid.
(c) Where it undertakes the payment at a specified place of his choice and not otherwise or
elsewhere;
(d) Where it undertakes the payment at a time other than that of which under the order it
would be legally due.
(e) Where it is not signed by all drawees who are not partners.

Effect of Qualified Acceptance

(a) The holder, may, treat the bill as dishonoured due to non-acceptance and after giving due
notice of dishonour, sue the drawer and prior endorsers.
(b) If he accepts a qualified acceptance all prior parties whose consent is not obtained are
discharged as against the older and those deriving title from him.

Examples of Qualified Acceptance

(a) Accepted payable when in funds.
(b) Accepted payable on giving up bill of lading.
(c) Accepted payable when a cargo consigned to me is sold.
(d) A bill drawn for ` 1,000 accepted for ` 900 only.
(e) Accepted payable at Delhi only where no place of payment is specified in the order.
(f) Accepted payable at Delhi only where the place of payment specified in the order was
Bombay.
(g) Accepted payable 4 months after date where the bill drawn as payable 3 months after date.
(h) Accepted by A, B and C Where drawees were A.B.C and D who not partners.
(i) Accepted payable on receiving income tax refund
(j) A bill drawn for ` 1,000 but accepted to the extent considered reasonable and just by a
common friend of both.

Negotiation
Chapter IV of the Act deals with negotiation.

Section 14 defines the term ‘negotiation’. When a promissory note, bill of exchange or cheque is
transferred to any person, so as to constitute that person the holder thereof, the instrument is said
to be negotiated.

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 7.20 NEGOTIABLE INSTRUMENTS ACT, 1881
In ‘L. Parsotam V. L. Bankey Lal’ – AIR 1935 All. 1041 it was held that handing over a negotiable
instrument to an agent for safe custody is not negotiation. There must be a transfer by the holder to
the transferee to make the latter a holder within the meaning of Section 8.

Delivery
Section 46 provides that the making, acceptance or indorsement of a promissory note, bill of
exchange or cheque is completed by delivery. The delivery is of two types – one is actual delivery
and the other is constructive delivery.

As between parties standing in immediate relation, delivery to be effectual must be made by the
party making, accepting or indorsing the instrument, or by a person authorized by him in that behalf.

As between such parties and any holder of instrument other than a holder in due course, it may be
shown that the instrument was delivered conditionally or for a special purpose only, and not for the
purpose of transferring absolutely the property therein.

A promissory note, bill of exchange or cheque payable to bearer is negotiable by the delivery
thereof. A promissory note, bill of exchange or cheque payable to order is negotiable by the holder
by indorsement and delivery thereof.

In ‘Vaddadi Venkitasami V. Mh. Begum’ – AIR 1956 AP 9 it was held that in addition to the mode of
transfer of a promissory note indicated in Section 46 here are two other modes of its transfer-
• By operation of law; and
• Transfer as a chose-in-action contemplated by Section 130 of the Transfer of Property Act.
The only difference between the two modes is that while transfer by negotiation clothes the
transferee with certain rights, assignment as a chose-in-action under Section 130 limits such rights,
as the transferor had in the document i.e., the assignee takes only subject to equities in favour of the
maker; an assignee of a promissory note otherwise than by indorsement such as transfer by means
of writing under Section 130 of the Transfer of Property Act, can sue on the promissory note.
Negotiation is of two types-one is negotiation by delivery and the other is negotiation by
indorsement.

Negotiation by Delivery
Section 47 provides that subject to the provisions of Section 58 a promissory note, bill of exchange
or Cheque payable to bearer is negotiable by delivery thereof. There is an exception to this. A
promissory note, bill of exchange or cheque delivered on condition that it is not to take effect except
in certain event is not negotiable (except in the hands of a holder for value without notice of the
condition) unless such event happens.

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 NEGOTIABLE INSTRUMENTS ACT, 1881 7.21

Example:
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 bank 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 becomes the
holder of it.

Negotiation by endorsement
Section 48 provides that subject to the provisions of Section 58, a promissory note, a bill of exchange
or cheque payable to order is negotiable by the holder by endorsement and delivery thereof.

In ‘Chaitram V. Mohanlal’ – AIR 1957 Nag. 65 it was held that where a promissory note payable to a
particular person does not contain any words prohibiting transfers or indicating that it was not
transferable, it would be a negotiable instrument payable to order; it would be negotiable by the
holder by endorsement and delivery with the necessary intention to constitute the person in whose
favour the endorsement is made as the holder thereof; there must be intention of the endorser to
constitute the endorsee as a holder of the pro-note accompanied by delivery; unless this is proved
negotiation is not complete.

Conversion of endorsement in blank into endorsement in full

Section 49 provides that the holder of a negotiable instrument indorsed in blank may, without
signing his own name, by writing above the indorser’s signature a director to pay to any other
person as endorsee, convert the endorsement in blank into an endorsement in full and the holder
does not there by incur the responsibility of an endorse.

Effect of endorsement
Section 50 provides that the endorsement of a negotiable instrument followed by delivery transfer
to the endorsee the property therein with the right of further negotiation, but the endorsement
may, by express words, restrict or exclude such right, or may merely constitute the endorsee an
agent to endorse the instrument, or to receive its contents for the endorser, or for some other
specified person.

Example:
B signs the following indorsements on different negotiable instruments payable to bearer-
(i) ‘Pay the contents to C only’

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 7.22 NEGOTIABLE INSTRUMENTS ACT, 1881
(ii) ‘Pay C for my use’
(iii) ‘Pay C for order for the account of B’
(iv) ‘The within must be credited to C’
These indorsement exclude the right of further negotiation by C
(v) ‘Pay C’
(vi) ‘Pay C value in account with the Oriental Bank’
(vii) ‘Pay the contents to C, being part of the consideration in a certain deed of assignment
executed by C to the indorser and others’
These indorsements do not exclude the right of further negotiation by C.

In ‘Wasudev V. National savings Bank’ – IR 1953 Bom. 209 it was held that Section 50 deals with
what are known as restrictive endorsements which in express words restrict or exclude the rights of
endorsees; it does not apply to cases where the endorsee wishes to satisfy the Court by oral
evidence that he was endorsee for a particular purpose only.

Who may negotiate?

Section 51 provides that every sole maker, drawer, payee or indorsee, or all of several joint makers,
drawers, payees or indorsees, of a negotiable instrument may, if the negotiability of such instrument
has not been restricted or excluded as mentioned in Section 50, indorse and negotiate the same.

Nothing in this section enables a maker or drawer to indorse or negotiate an instrument, unless he is
in lawful possession or is holder thereof; of enables a payee or indorsee to indorse or negotiate an
instrument unless he is holder thereof.

Example- A bill is drawn payable to A or order. A indorses it to B, the indorsement not containing the
words ‘or order’ or any equivalent words. B may negotiate the instrument.

Indorsement for part of sum due

Section 56 provides that no writing on a negotiable instrument is valid for the purpose of negotiation
if such writing purports to transfer only a part of the amount appearing to be due on the instrument
where such amount has been partly paid, a note to that effect may be indorsed on the instrument,
which may then be negotiated for the balance.

Instrument obtained by unlawful means

Section 57 provides that when a negotiable instrument has been lost, or has been obtained from any
maker, acceptor or holder by means of an offence or fraud or 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

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 NEGOTIABLE INSTRUMENTS ACT, 1881 7.23
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 dishonour

Section 59 provides that 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 bill
Any person, who in good faith and for consideration becomes the holder, after maturity, of a
promissory note or a 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 or bill
from any party.

Example – The acceptor of a bill of exchange, when he accepted it, deposited with the drawer
certain goods as a collateral security for the payment of the bill, with power to the drawer to sell the
goods and apply the proceeds in discharge of the bill but if it were not paid at maturity. The bill not
having been paid at maturity the drawer sold the goods and retained the proceeds, but indorsed the
bill to A. A’s title is subject to the same objection as the drawer’s bill.

Instrument negotiable till payment

Section 60 provides that a negotiable instrument may be negotiated, (except by the maker, drawee
or acceptor after maturity) until payment or satisfaction by the maker, drawee or acceptor at or
after maturity, but not after such payment or satisfaction.

Presentment
Chapter V of the Act provides the procedure of presentment of negotiable instruments.
• Section 61 – Presentment for acceptance;
• Section 62 – Presentment of promissory note at sight;
• Section 63 – Drawee’s time for deliberation;
• Section 64 – Presentment for payment;
• Section 65 – Hours for presentment;
• Section 66 – Presentment for payment of instrument payable after the date or sight;
• Section 67 – present for payment of instrument payable by instalments;
• Section 68 – Presentment for payment of instrument payable at specified place and not
elsewhere;
• Section 69 – Instrument payable at specified place;
• Section 70 – Presentment where no exclusive place specified;

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 7.24 NEGOTIABLE INSTRUMENTS ACT, 1881
• Section 71 – Presentment when maker, etc., has no known place of business or residence;
• Section 72 – Presentment of cheque to charge drawer;
• Section 73 – Presentment of cheque to charge any other person;
• Section 74 - Presentment of instrument payable on demand;
• Section 75 – Presentment by or to agent, representative or deceased or assignee of
insolvent;
Presentment for acceptance must always and in every case precede presentment for payment. But
when the bill is payable on demand, both stages synchronize; there would be only one presentment,
both for acceptance and for payment. When the bill is paid, it involves acceptance; but when not
paid, it is really dishonoured for non-acceptance. But whether the bill is payable after sight, or at
sight or on demand, acceptance by the drawee is necessary before he can fixed with liability on it. It
is acceptance that establishes privity on the instrument between the payee and the drawee.

In ‘Gopikisan V. Jethmal’ Air 1935 Nag.144 it was held that in the absence of any indication in the
instrument itself of the place of payment, presentment must be at the place of business of the
acceptor or maker or the place where he has his home or residence.

Presentment when not necessary

Section 76 provides that no presentment for payment in necessary in any one of the following cases-
• If the maker, drawee or acceptor intentionally prevents the presentment of the instrument;
or
• If the instrument is being payable at his place of business, he closes such place on a business
day during the usual business hours; or
• If the instrument being payable at some other specified place, neither he nor any person
authorized to pay it attends at such place during the usual business hours; or
• If the instrument not being payable at any specified place, he cannot after due search be
found;
• As against any party sought to be charged therewith, if he has engaged to pay
notwithstanding non presentment;
• As against any party if, after maturity, with knowledge that the instrument has not been
presented he makes a part payment on account of the amount due on the instrument or
promises to pay the amount due thereon in whole or in part or otherwise waives his right to
take advantage of any default in presentment for the payment

Payment and Interest

Chapter VI deals with the payment of interest. Section 78 provides that the payment should be made
to the holder or his accredited agent. Section 79 provides that interest is payable on the amount

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 NEGOTIABLE INSTRUMENTS ACT, 1881 7.25
which has been paid after the due date. The interest is payable from the date of due to the date of
realization. Section 80 provides that when no interest rate has been specified in the instrument then
the interest shall be calculated at the rate of 18% per annum from the date of due to the date of
realization of the amount.

Assignment of Negotiable Instruments

Assignment takes place where the holder of an instrument transfers it to another so as to confer a
right on the transferee to receive the payment of the instrument. All negotiable instruments are
chose in action and as such are transferable by assignment without endorsement under sections
130-132 of the Transfer of property act. Assignment of a negotiable instrument is effected by writing
without endorsement. The main feature of assignment is that the assignee obtains the right of the
assignor. Therefore if the assignor’s title is defective assignee’s title will also be defective.

Difference between Negotiation and Assignment

Negotiation Assignment
Consideration is presumed until contrary is Consideration must be proved
proved.
It transferee is a holder in due course he takes Assignee’s title is always subject to defences and
the instrument free from any defects. equities between the original debtor and
assignor.
Notice of transfer is not necessary. Notice of assignment must be given.
Negotiation is effected by delivery in case of Assignment is effected only by writing
instruments payable to bearer and by delivery
and endorsement in case of instrument payable
to order.
Transferee can sue the third party in his own Assignee cannot do so.
name.
There are a number of presumptions in favour of There are no such presumptions.
holder in due courses

Discharge from liability

Chapter VII deals with the discharge from liability on negotiable instruments, Section 82 provides the
methods of discharge from liability-
• By cancellation;
• By release; and
• By payment.

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 7.26 NEGOTIABLE INSTRUMENTS ACT, 1881
Section 83 provides that if the holder allows the drawee more than 48 hours, Exclusive of public
holidays, to consider whether he will accept the same, all previous parties not consenting to such
allowance and thereby discharged them from liability to such holder.

Delay in presentation of cheque

Section 84 provides that where a cheque is not presented for payment within a reasonable time and
the drawer at the time when presentment ought to have been made, as between himself and the
banker, to have the cheque paid and suffers actual damage through the delay, he discharged to the
extent of such damage, that is to say, to the extent to which such drawer is a creditor of the banker
to a larger amount that he would have been if such cheque had been paid.

In ‘Abdul Majid V. Ganesh Das Kalooram’ – AIR 1954 Ori. 124 it was held that a drawer of a cheque
who wants to take advantage of section 84 must prove two facts-
• He had sufficient money in deposit in the bank in his account to honour the cheque: and
• He had suffered actual damage on account of non-presentment of the cheque within a
reasonable time.

Rights and Liabilities of Parties

Parties to notes, bills and cheques

Chapter III of the Act deals with the parties to notes, bills and cheques.

Capacity
Section 26 provides that every person capable of contracting may bind himself and be bound by the
making, drawing, acceptance, indorsement, delivery and negotiation of a promissory note, bill of
exchange or cheque. A minor may draw, indorse, deliver and negotiate such instrument so as to bind
all parties except himself.

Nothing herein contained shall be deemed to empower a corporation to make, indorse or accept
such instruments except in cases in which, under the law for the time being in force, they are so
empowered.

In ‘Sulochana V. Paniadyan Bank Limited’ – AIR 1975 Mad 70 (DB) it was held that when a minor
being along with one other executed a promissory note, held, though no liability could be enforced
against the minor executants, the other executants, also a party to the document, could not escape
his liability.

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 NEGOTIABLE INSTRUMENTS ACT, 1881 7.27
In ‘Orilo Industries Limited v. Bombay Mercantile Bank Limited’ – AIR 1961 SC 993 it was held that
Section 26 does not purpose to make any provision of substantive or procedural law. The latter part
of the section merely brings out that a company cannot claim authority to issue a cheque under its
first part. The law in regard to the company’s power to issue negotiable instruments has to be found
in the relevant provisions of the Companies Act itself.

Agency
Section 27 provides that every person capable of binding himself or being bound may so bind
himself or be bound by a duly authorized agent acting in his name. A general authority to transact
business and to receive and discharge debt does not confer upon an agent the power of accepting or
indorsing bills of exchange so as to bind his principal. An authority to draw bills of exchange does not
itself import an authority to indorse.

In ‘M. Rajagopal V. K.S. Imam Ali’ – AIR 1981 Ker 36 (DB) it was held that in case of conflict between
Sections 19 and 22 of the Partnership Act on the one hand and Sections 26,27 and 28 of the
Negotiable Instruments Act on the other, the latter Act should prevail. A claim against a firm based
on a written contract by one partner in the course of business and with authority to act is binding on
the firm. But When such claim is made on a promissory note or bill of exchange, the Court has to be
satisfied that the negotiable instrument disclosed the liability of the firm clearly.

Liability of agent
Section 28 of the Act provides that an agent who signs his name to a promissory note, bill of
exchange or cheque without indicating thereon that he signs as agent, or that he does not intend
thereby to incur personal responsibility, is liable personally on the instrument, except to those who
induced him to sign upon the belief that the principal only would be held liable.

This section carries an exception to the general law of contract, that the principal, though not
disclosed on the instrument may be proceeded against if it is discovered later on that the agent had
acted on his behalf as held in ‘Ramanathan V. Baldeo Singh’ – AIR 1933 Rang. 111.

Liability of the representative

Section 29 provides that a legal representative of a deceased person who signs his name to a
promissory note, bill of exchange or a cheque is liable personally thereon unless he expressly limits
his liability to the extent of the assets received by him as such.

Liability of drawer
Section 30 provides that the drawer of a bill of exchange or cheque is bound, in case of dishonour by

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 7.28 NEGOTIABLE INSTRUMENTS ACT, 1881
the drawee or accepter thereof, to compensate the holder, provided due notice of dishonour has
been given to, or received by the drawer as herein provided.

In ‘Union Bank of India V. Swastika Motors’ – AIR 1983 Del. 420 it was held that a drawee having
dishonoured the hundis, their drawer would be liable to the payee provided he had due notice of
dishonour, even if the documents of title, accompanying the hundis, had been delivered to the
drawee without valid acceptance.

In ‘Silchar Bank V. Pioneer Bank’- AIR 1951 Assam 127 it was held that if the drawee bank dishonours
the cheque after the drawer had stopped payment, the question of notice of dishonour does not
arise; the drawer is liable to compensate the holder.

Liability of the drawee of cheque

Section 31 provides that the drawee of a cheque having sufficient funds of the drawer in his hands
property applicable to the payment of such cheque must pay the cheque when duly required so to
do, and, in default of such payment, must compensate the drawer for any loss or damage caused by
such default.

Liability of maker of note and Acceptor of bill

Section 32 provides that in the absence of contract to the contrary, the maker of promissory note
and the acceptor before maturity of a bill of exchange are bound to pay the amount thereof at
maturity according to the apparent tenor of the note or acceptance respectively, and the acceptor of
a bill of exchange at or after maturity is bound to pay the amount thereof to the holder of the
demand. In default of such payment, such maker or acceptor is bound to compensate any party to
note or bill for any loss or damage sustained by him and caused by such default.

In ‘Jagjivan Mavji V. Ranchoddas’ – AIR 1954 SC 554, the Supreme Court held that the drawee of a
negotiable instrument is not liable to the payee, unless the drawee has accepted it. Under Section 32
the liability of the drawee arises only when he accepts the bill; there is no provision in the Act that
the drawee is as such liable on the instrument, except under Section 31 when the drawee has
sufficient funds of the customer in his hands; and even then, the liability is only towards the drawer,
not the payee.

In ‘M. Ramnarain Private Limited V. State Trading Corporation of India Limited’ – AIR 1988 Bom 45
(DB) it was held that where the payee was the holder of bills but not willing to part with them unless
the entire amount covered by the bills had been paid to him, the drawer may sue the acceptor for
compensation but only after payment to the payee and his endorsement on the bills in favour of the
drawer.

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 NEGOTIABLE INSTRUMENTS ACT, 1881 7.29

Only drawee can be acceptor except in need or for honour

Section 33 provides that no person except the drawee of the bill of exchange or all or some of
several drawees, or a person named therein as a drawee in case of need, or an acceptor for honour
can bind him by an acceptance.

In ‘Manikchand V. Chartered Bank’ – AIR 1961 Cal. 653 (DB) the High Court narrated the scopr of
Section 33. Section 33 must not be misread as preventing the drawee from accepting through an
agent; under section 26 and 27 the drawee can accept a bill through his agent.

Acceptance by several drawees not partners

Section 34 provides that where there are several drawees of a bill of exchange who are not partners.
Each of them can accept if for himself, but none of them can accept it for another without his
authority.

Liability of Indorser
Section 35 provides that in the absence of contract to the contrary, whoever indorses and delivers a
negotiable instrument before maturity, without, in such indorsement, expressly excluding or making
conditional his own liability, is bound thereby to every subsequent holder, in case of dishonour by
the drawee, acceptor or maker, to compensate such holder for any loss or damage caused to him by
such dishonour, provided due notice of dishonour has been given to, or received by, such indorser as
herein after provided.

Liability of prior parties to holder in due course

Section 36 provides every prior party to a negotiable instrument is liable thereon to holder in due
course until the instrument is duly satisfied.

Maker, drawer and acceptor principals

Section 37 provides that the maker of a promissory note or a cheque. The drawer of a bill of
exchange until acceptance, and the acceptor are, in the absence of a contract to the contrary,
respectively liable thereon as principal debtors, and the other parties thereto are liable thereon as
sureties for the maker, drawer or acceptor as the case may be.

Prior party a principal in respect of each subsequent party

Section 38 provides that as between the parties the parties so liable as sureties, each prior party is,
in the absence of a contract to the contrary, also liable thereon as a principal debtor in respect of
each subsequent party.

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 7.30 NEGOTIABLE INSTRUMENTS ACT, 1881
Example – A draws a bill payable to his own order on B, who accepts. A afterwards indorses the bill
to C, C to D and D to E. As between E and B, B is the principal debtors, and A, C and D are his
sureties. As between E and A, A is the principal debtors and C and D are his sureties. As between E
and C, C the principal debtor and D is his surety.

Suretyship
Section 39provides that when the holder of an accepted bill of exchange enters into any contract
with the acceptor which, under Sections 134 or 135 of the Contract Act, would discharge the other
parties, the holder may expressly reserve his right to charge the other parties, and in such case they
are not discharged.

Discharger of indorser’s liability

Section 40 provides that 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.

Example –
As the holder of a bill of exchange made payable to the order of B, which contains the following
indorsements in blank-
• First indorsement – B
• Second indorsement – Peter Williams;
• Third indorsement – Wright and Co;
• Fourth indorsement – John Rozario
This bill A puts in suit against John Rozario and strikes without john Rozario’s consent the
indorsements by Peter Williams and Wright and Co. A is not entitled to recover anything from
Rozario

Acceptor bound, although indorsement forged

Section 41 provides that an acceptor of a bill of exchange already indorsed is not relieved from
liability by reason that such indorsement is forged, if he knew or had reason to believe the
indorsement to be forged when he accepted the bill.

Negotiable instrument made without consideration

Section 43 provides that 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 such party has transferred the instrument with or without
endorsement to a holder for consideration, such holder, and every subsequent holder deriving title

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 NEGOTIABLE INSTRUMENTS ACT, 1881 7.31
from him may recover the amount due on such instrument from the transferor for consideration or
any prior party thereto.

Explanation 1 to this section provides that no party for whose accommodation a negotiable
instrument has been made, drawn accepted or indorsed can, if he has paid the amount thereof,
recover thereon such amount from any person who became a party to such instrument for his
accommodation.

Explanation 2 to this section provides that no party to the instrument who has induced any other
party to make, draw, accept, indorse or transfer the same to him for a consideration which he failed
to pay or perform in full shall recover thereon an amount exceeding the value of the consideration
(if any) which he has actually paid or performed.

In ‘Ram Narain V. Ramjiwan’ AIR 1937 Nag. 267 it was held that Section 43 must be read subject to
Section 59 in all cases in which the latter section applies; the holder, as against other parties, would
have only the rights thereon of his transferor.

Partial absence or failure of money consideration

Section 44 provides that when the consideration for which a person signed a promissory note, bill of
exchange or cheque consisted or money, and was originally absent in part of has subsequently failed
in part, the sum which is a holder standing in immediate relation with such signer is entitled to
receive from his is proportionately reduced.

Explanation to this section provides that 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 indorser with the indorsee. Other signers may by
agreement stand in immediate relation with the holder.

Example:
A draws a bill on ` 500 payable to the order of A. B accepts the bill, but subsequently dishonours it
by non-payment. A sues B on the bill, B proves that it was accepted for value as to ` 400/- and as
accommodation to the plaintiff as to the residue. A can only recover ` 400/-

In ‘Mutyala Yarakadu V. State of Andhra Pradesh’s – 1955 An. WR 870 it was held that where a
promissory note has been endorsed to a third person, Section 44 cannot be applied so as to
prejudice his rights. Where the maker of the promissory note stands in immediate relation to the
payee, Section 44 would entitle the debtor to relief.

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 7.32 NEGOTIABLE INSTRUMENTS ACT, 1881
In ‘Tirupagari Tayaramma V. Sri Ramanjaneya Mercantile Co. Eluru’ – AIR 1977 AP 205 it was held
that Section 44 Would not apply when consideration for the promissory note was a set of
obligations, not merely of money.

Partial failure of consideration not consisting of money

Section 45 provides that where a part of the consideration for which a person signed a promissory
note, bill of exchange or a cheque, though not consisting of money, is ascertainable in money
without collateral enquiry, and there has been a failure of that part, the sum which a holder standing
in immediate relation with such signer is entitled to receive from him is proportionately reduced.

Holder’s right to duplicate of lost bill

Section 45A provides that where a bill of exchange has been lost before it is overdue the person who
was the holder of it may apply to the drawer to give him another bill of the same tenor, giving
security to the drawer, if required, to indemnify him against all persons whatever in case the bill
alleged to have been lost shall be found again. If the drawer on request refuses to give such
duplicate bill, he may be compelled to do so.

Dishonour of Negotiable Instrument

Notice of dishonour
Chapter VIII deals with the notice of dishonour.

When dishonoured?
The dishonour may be due to the following reasons-
• Non acceptance; and
• By non-payment.
Section 91 provides that a bill of exchange is said to be dishonoured by non-acceptance when the
drawee, a one of several drawees, not being partners, makes default in acceptance upon being duly
required to accept the bill, or where presentment is excused and the bill is not accepted. When the
drawee is incompetent to contract, or the acceptance is qualified the bill may be treated as
dishonoured.

Section 92 provides that an instrument 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.

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 NEGOTIABLE INSTRUMENTS ACT, 1881 7.33

Notice
Section 93 provides that when an instrument is dishonoured the holder must give notice that he
instrument has been dishonoured.

Mode of giving notice

Section 94 provides that the notice may be in writing or oral. If it is in written from it must 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 intendment that the instrument has been dishonoured and he will be held liable
thereon. It must be given within a reasonable time after dishonour at the place of business or at the
residence of the party for whom it is intended.

Section 97 provides that when the party, to whom a notice of dishonour is dispatched, is dead, but
the party is not aware of the death, the notice is sufficient.

Notice – when not necessary?

Section 98 provides that in the following circumstances there is no requirement to issue notice-
• When it is dispensed with by the party entitled thereto;
• In order to charge the drawer, when he has countermanded payment;
• When the party charged could not suffer damage for want of notice;
• 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;
• In the case of a promissory note which is not negotiable;
• When the party entitled to notice, knowing the facts, promises unconditionally to pay the
amount due on the instrument.

Noting and Protest

Chapter IX deals with the procedure of noting and protest.

Noting
Section 99 provides that when an instrument is dishonoured for any reason, the holder may cause
the dishonour to be noted by a notary public upon the instrument, or upon a paper attached
thereto, or partly upon each. The noting must be made within a reasonable time after dishonour.
The noting must specify the date of dishonour, the reason assigned for such dishonour or if the
instrument has not been expressly dishonoured, the reason the holder treats it as dishonoured and
the notary’s charges.

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 7.34 NEGOTIABLE INSTRUMENTS ACT, 1881

Protest
Section 100 provides that when an instrument is dishonoured the holder may cause such dishonour
to be noted and certified by a notary public. Such certificate is called a protest.

When the acceptor of an instrument becomes insolvent or his credit has been publicly impeached,
before maturity of bill, the older may, within a reasonable time, cause a notary public to demand
better security of the acceptor and on its being refused may, within a reasonable time, cause such
facts to be noted and certified. Such certificate is called a protest for better security.

Contents of the protest

Section 101 provides that a protest must contain-
• Either the instrument itself, or a literal transcript of the instrument and of everything
written or printed thereupon;
• The name of the person for whom and against whom the instrument has been protested;
• A statement that payment or acceptance or better security, as the case may be, has been
demanded of such person by the notary public, or that he could not be found;
• When the note or bill has been dishonoured, the place and time of dishonour and when
better security has been refused, the place and time of refusal.
• The subscription of the notary public making the protest;
• In the event of an acceptance for honour or of a payment for honour, the name of the
person by whom, of the person for whom, and the manner in which such acceptance or
payment was offered and effected.

Notice of protest
Section 102 provides that notice of protest must be give instead of notice of dishonour in the same
manner and subject to the same conditions but the notice may be given by the notary public who
makes the protest.

Special Rules of evidence

Chapter XII deals with this subject. Section 118 what are the presumptions that can be made as to
negotiable instruments. Until the contrary is proved the following presumptions shall be made-
• Of consideration;
• As to date;
• As to time of acceptance;
• As to time of transfer;
• As to order of indorsement;
• As to stamp;

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 NEGOTIABLE INSTRUMENTS ACT, 1881 7.35
• That holder is a holder in due course.

It can be presumed that-

• Every negotiable instrument was made or drawn for consideration and that every such
instrument, when it has been accepted, indorsed, negotiated or transferred, was accepted,
indorsed, negotiated or transferred for consideration;
• Every negotiable instrument bearing a date was made or drawn on such date;
• Every accepted bill of exchange was accepted within a reasonable time after its date and
before its maturity;
• Every transfer of a negotiable instrument was made before its maturity;
• The indorsement appearing upon a negotiable instrument were made in the order in which
they appear thereupon;
• A promissory note, bill of exchange of cheque was duly stamped;
• The holder of a negotiable instrument is a holder in due course.

Onus of holder in due course

Where the instrument has been obtained from its lawful owner, or from any person in lawful
custody thereof, by means of an offence or fraud, or has been obtained from the maker or acceptor
thereof by means of an offence or fraud, or for unlawful consideration, the burden of proving that
the holder is a holder in due course lies upon them.

Presumption on proof of protest

Section 119 provides that in a suit upon an instrument which has been dishonoured, the Court shall,
on proof of the protest, presume that fact of dishonour, unless and until such fact is disproved.

Estoppel
Sections 120 to 122 deals with the following types of estoppels-
• Estoppels against denying original validity of instrument;
• Estoppels against denying capacity of payee to indorse;
• Estoppels against denying signature or capacity of prior party.
Section 120 provides that no maker of a promissory note, and no drawer of a bill of exchange or
cheque and no acceptor of a bill of exchange 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.

Section 121 provides that no maker of a promissory note and no acceptor of a bill of exchange
payable to order shall, in a suit thereon by a holder in due course, be permitted to deny the payee’s
capacity, at the date of the note or bill, to indorse the same.

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 7.36 NEGOTIABLE INSTRUMENTS ACT, 1881

Section 122 provides that no indorser of a negotiable instrument shall, in a suit thereon by a
subsequent holder, be permitted to deny the signature or capacity to contract of any prior to the
indorsement.

International Law
Chapter XVI deals with the negotiable instrument in international law. Section 134 provides that in
the absence of a contract to the contrary, the liability of the maker or drawer of a foreign promissory
note, bill of exchange, or cheque is regulated 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.

Example - A bill of exchange was drawn by A in California, where the rate of interest is 25% 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
6% only; but if A is charged as drawer, A is liable to pay interest @ 25%.

Section 135 provides that where a promissory note, bill of exchange or a cheque is made payable in
a different place from that in which it is made or indorsed, the law of the place where it is made
payable determines what constitutes dishonour and what notice of dishonour is sufficient.

Example – A bill of exchange is drawn and indorsed in India but accepted payable in France, is
dishonoured. The indorsee causes it to be protested for such dishonour and given notice in
accordance with the law of France, though not in accordance with the rules herein contained in
respect of bill which are not foreign. The notice is sufficient.

Section 136 provides that if an instrument is made, drawn, accepted or indorsed outside India, but in
accordance with the law of India, the circumstance that any agreement evidenced by such
instrument is invalid according to the law of the country wherein it was entered into does not
invalidate any subsequent acceptance or indorsement made thereon within India.

Section 137 provides that the law of any foreign country regarding promissory notes, bill of
exchange and cheques shall be presumed to be the same as that of India unless and until the
contrary is proved.

Penalties
Section 138 provides penalty for dishonour of cheque for insufficiency etc., of funds in the account.
Where any cheque drawn by a person on an account maintained by him with a banker for payment

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 NEGOTIABLE INSTRUMENTS ACT, 1881 7.37
of any money to another person from out of that account for the discharge, in whole or in part, of
any ‘debt or other liability’ (a legally enforceable debt or other liability) 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, without prejudice to any
other provision of this Act, be punished with imprisonment for a term which may be extended to 2
years or with fine which may extend to twice the amount of the cheque, or with both.
The penal prevision in this cheque shall not apply unless-
• The cheque has been presented to the bank within a period of three months (with effect
from 01.04.2012, before that it is six months) from the date on which it is drawn or within
the period of its validity, whichever is earlier;
• 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 cheques as unpaid; and
• 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 15 days of the
receipt of the said notice.

Conditions precedent
In ‘Kusum Ingots & alloys Limited V. Pennar Peterson Securities Limited’ – AIR 2000 SC 954, the
Supreme Court held that the ingredients which are to be satisfied for making out a case under
Section 138 of the Act, are-
• A person must have drawn a cheque on an account maintained by him in a bank for
payment of a certain amount of money to another person from out of that account for
discharge of any debt or other liability;
• That cheque has been presented to the bank within a period of six months (now three
months) from the date on which it is drawn or within the period its validity whichever is
earlier;
• That the cheque is returned by the bank unpaid, either because of the amount of money
standing to the credit of the account is insufficient to honour the cheque or that it exceeds
the amount arranged to be paid from that account by an agreement made with the bank;
• The payee or holder i due course of the cheque 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 15 days

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 7.38 NEGOTIABLE INSTRUMENTS ACT, 1881
(now 30 days) of the receipt of information by him from the bank regarding the return of the
cheque as unpaid;
• The drawer of such cheque fails to make payment of the said amount of money to the payee
or the holder in due course of the cheque within 15 days of the receipt of the said notice.

Presumption in favour of holder

Section 139 provides that 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, of any debt or other liability.

Section 140 provides 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 the section.

Offence by companies
Section 141 of the Act provides that a company and every person who was in charge of and
responsible to the company for the conduct of the business of the company at the time of offence,
the company and such person shall be liable to be proceeded against and punished accordingly. If
such person proves that the offence was committed without this knowledge or that he has exercised
such due diligence to prevent the commission of the offence he shall not be punishable.

Where a person is nominated as a Director of the company by virtue of his holding any office or
employment in the Central Government or State Government or a financial corporation owned or
controlled by the Central Government or the State Government as the case may be, he shall not be
liable for prosecution under this chapter. If it is proved that the offence has been committed with
the connivance or consent of, it is attributable to any neglect on the part of, any director, manager,
secretary or other officer of the company, such persons shall be deemed to be guilty of that offence
and shall be liable to be proceeded against and punished accordingly.

Cognizance of offence
Section 142 provides that no court shall take cognizance of any offence punishable under Section
138 except upon a complaint, in writing, made by the payee or the holder in due course of the
cheque. Such complaint shall be made within one month of the date on which the cause of action
arises. The cognizance of a complaint may be taken by the Court after the prescribed period, if the
complainant satisfies the Court that he has sufficient cause for not making a complaint within such
period. 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.

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 NEGOTIABLE INSTRUMENTS ACT, 1881 7.39
The offence shall be inquired and tried only by a court within those local jurisdiction-
• If the cheque is delivered for collection through an account, the branch of the bank where
the payee or holder in due course maintains the account, is situated; or
• 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.

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 maintains the account.

Summary trial
Section 143 provides that all the offences under this Chapter shall be tried by a Judicial Magistrate of
the I class or by a Metropolitan Magistrate. The provisions of Section 262 to 265 of the Code of
Criminal Procedure shall apply to such trials.

In case of any conviction in a summary trial 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 `5,000/-

When at the commencement of, or in the course of, a summary trial under this section, it appears to
the Magistrate that the nature of the case is such that a sentence of imprisonment for a term
exceeding one year may have to be passed or that it is, for any other reason, undesirable to try the
case summarily, the Magistrate shall after hearing the parties, record an order to that effect and
thereafter recall any witness who may have been examined and proceed to hear or rehear the case
in the manner provided by the Code of Criminal Procedure.

The trial shall be continued from day to day until its conclusion, unless the court finds the
adjournment of trial beyond the following day to be necessary for reasons to be recorded in writing.
Every trial under this section shall be conducted as expeditiously as possible and an endeavour shall
be made to conclude the trial within 6 months from the date of filing of the complaint.

The Act was amended in August 2018. Section 143A has been inserted which empowers the court to
direct the drawer to pay interim compensation upto 20% of the cheque value which the drawer
pleads “no guilty”. In case the drawer files an appeal, the appellate court may direct to the drawer to
deposit 20% of the fine or compensation, in addition to what has been paid at trial stage.

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 7.40 NEGOTIABLE INSTRUMENTS ACT, 1881

Service of summons
Section 144 provides that a Magistrate issuing a summons to an accused or a witness may direct a
copy of summons to be served at the place where such accused or witness ordinarily resides or
carries on business or personally works for gain, by speed post or such courier services as are
approved by a Court of Session.

Where an acknowledgement purporting to be signed by the accused or the witness or an

endorsement purported to be made by any person authorized by the postal department or the
courier services that the accused or the witness refused to take delivery of summons has been
received, the Court issuing the summons may declare that the summons have been duly served.

Evidence on affidavit
Section 145 provides that the evidence of the complainant may be given by him on affidavit and
may, subject to all just exceptions be read in evidence in any inquiry, trial or other proceeding under
the Code of Criminal Procedure. The Court may, if it thinks fit, and shall on the application of the
prosecution or the accused, summon and examine any person giving evidence on affidavit as to the
facts contained therein.

Bank’s slip – prima facie evidence

Section 146 provides that the Court shall, in respect of every proceeding, on production of bank’s
slip or memo having thereon the official mark denoting that the cheque has been dishonoured,
presume the fact of the dishonour of such cheque, unless and until such fact is disproved.

Compounding
Section 147 of the Act provides that every offence punishable under this Act is compoundable.

In ‘M. Rangaswamia V. R. Shettappa’ – 2002 CrLJ 4792 (Karn) the High Court held that there is no
prohibition in this Act against compounding of an offence punishable under Section 138. In the
absence of any such prohibition therefore, where the Court finds that the parties have settled the
matter, where the complainant being present before the Court and submits before the Court that
the accused has paid the money covered by the cheque it would be appropriate to allow the parties
to compound, rather than negativing such a joint request made by the parties, and proceeding to
inflict the sentence on the accused. Particularly when there is no prohibition against compounding,
any rejection of request in that regard would not further the cause of the justice, and particularly
where the commission of offence is not related to the society at large, but only against a particular
person, viz., the complainant to whom certain sum is due under the cheque. Therefore it would be

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 NEGOTIABLE INSTRUMENTS ACT, 1881 7.41
legally permissible for the parties to compound the offence punishable under Section 138 of the
Negotiable Instruments Act, 1881.

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 7.42 NEGOTIABLE INSTRUMENTS ACT, 1881

Check Your Progress

Q1. Fill in the blanks

1. The transaction of negotiable instrument requires at least ____________ persons.
2. The person named in the instrument, to who or to whose order the money is by the
instrument directed to be paid is. Called the ___________.
3. Negotiation is of two types, namely. ____________, ___________
4. A cheque is a bill of exchange drawn on a specified _____________ on demand.
5. Clearing house is managed by ______________
6. Draft cannot be drawn on _____________.
7. Indorsement is of two types, namely, ___________,_________
8. A negotiable instrument indorsed in blank is payable to the ____________.
9. If the amount is paid after due date, the interest is payable at __________ when no interest
rate has been specified in the instrument.
10. The dishonour of the instrument may be due to ___________ and __________

Q2. Choose the correct answer

1. One of the following is not a negotiable instrument. Identify the same.
(a) Share certificate; (b) Bill of exchange;
(c) Cheque; (d) promissory note.

2. Which one of the following is a bill of Exchange?

(a) A banker’s draft;
(b) A demand draft;
(c) An order issued by a District Board Engineer on Government Treasury for payment to or
order of a certain person;
(d) All the above.

3. Which one of the following is not the element of draft?

(a) It cannot be drawn on private individual;
(b) It cannot be countermanded easily;
(c) It is open to the person to stop payment;
(d) The bank undertakes the liability which it is bound to discharge in whose favour the
draft is issued;

4. Holder in due course means any person-

(a) Drawing the instrument;

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 NEGOTIABLE INSTRUMENTS ACT, 1881 7.43
(b) Who for consideration became the possession of a promissory note;
(c) Named in the instrument to whom or to whom order the money is directed to be paid;
(d) None of the above.

5. Who may negotiate?

(a) Drawer; (b) Payee;
(c) All of the joint makers; (d) Any of (a) to (c)

6. The liability on the instrument may be discharged-

(a) By cancellation; (b) By release;
(c) By payment; (d) by any one of the above methods.

7. A cheque shall be deemed to be crossed specially-

(a) On addition of the name of the banker;
(b) Drawing two lines parallel;
(c) Any of (a) or (b);
(d) None of (a) and (b).

Q3. State whether true or false

1. Currency note is a negotiable instrument.
2. Cheque is a bill of exchange.
3. The maker of the promissory note can also be called a drawer.
4. Handing over a negotiable instrument to an agent for safe custody is negotiation.
5. If the maturity date is a public holiday the instrument shall be deemed to be due on the next
preceding business day.
6. Bill of exchange is an instrument in writing an unconditional order directing to pay a certain
sum of money to the bearer of the instrument.
7. If the indoser signs his name only, the indorsement is called to be ‘in full’.
8. Only drawee can be acceptor except in need for hour.
9. A holder is not having right to duplicate of lost bill, before it is overdue.
10. When an instrument is dishonoured the holder must give notice that the instrument has
been dishonoured.

Q4. Model Questions

1. What are the elements to be present to hold an instrument on a promissory note?
2. Write not on ‘bill of exchange’.
3. What are the differences between a cheque and a draft?
4. Discuss about the various types of instruments.

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 7.44 NEGOTIABLE INSTRUMENTS ACT, 1881
5. Who are the parties to an instrument?
6. How the maturity date of an instrument is calculated?
7. Discuss about the liability of drawer, agent, representative and drawee.
8. Where are the procedures involved in the presentment of negotiable instrument?
9. Under which circumstances the presentment of negotiable instrument is not necessary.
10. When an acceptance is said to be qualified?
11. Under which circumstances the notice for dishonour is not required?
12. Write notes on ‘noting’ and ‘protest’.
13. Discuss about the contents to be incorporated in a protest.
14. Briefly discuss the various types of estoppels.
15. Discuss the provisions relating the negotiable instrument in International Law.

Answers:
Ans1. Fill in the blanks
1. 2;
2. Payee;
3. Negotiation by delivery, negotiation by indorsement;
4. Banker;
5. Reserve Bank of India;
6. Private individual;
7. Indorsement in blank, indorsement in full;
8. Bearer;
9. 18%
10. Non acceptance, non-payment.

Ans. Choose the correct answer

1. A;
2. D;
3. C;
4. B;
5. E;
6. D;
7. A;

Ans3. State whether true or false

1. False;
2. True;
3. True;

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 NEGOTIABLE INSTRUMENTS ACT, 1881 7.45
4. False;
5. True;
6. True;
7. False;
8. True;
9. False;
10. True.

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 7.46 NEGOTIABLE INSTRUMENTS ACT, 1881

Previous Year Question

Q1. Multiple Choice Questions.

1. Which one of the following is a bill of exchange?

(a) A banker’s draft;
(b) A demand draft;
(c) An order issued by a district board engineer on government treasure for payment to or
order of certain person;
(d) All of the above.

2. The liability on the instrument may be discharged.

(a) By cancellation
(b) By release
(c) By payment
(d) By any one of the above methods

3. Holder in due course means any person

(a) Drawing the instrument.
(b) Who for consideration become the possession of a promissory note?
(c) Named in the instrument to whom or to whom order the money is directed to be paid.
(d) None of the above

4. The first endorsement of an instrument can be made by the

(a) Banker
(b) Payee
(c) Holder in due Course
(d) Agent

5. Where the endorser does not want that the endorsee or any other holder to incur any
expense on his account is called
(a) Restrictive endorsement
(b) Sans frais endorsement
(c) Conditional endorsement
(d) Unwanted endorsement

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 NEGOTIABLE INSTRUMENTS ACT, 1881 7.47
6. In case of banker’s refusal to honour the cheque in spite of sufficient funds in customer’s
account, the banker is
(a) Liable to compensate the drawer.
(b) Not liable to compensate the drawer.
(c) Criminally liable under section 138.
(d) Liable to be delisted.

7. Which one of the following is not the element of draft?

(a) It cannot be drawn on private individual;
(b) It cannot be countermanded easily;
(c) It is open to the person to stop payment;
(d) The bank undertakes the liability which it is bound to discharge in who favour the draft is
issued;

8. Who may negotiate?

(a) Drawer; (b) Payee;
(c) All of the joint makers; (d) Any of (a) to (c).

9. As per the RBI Act, which of the following negotiable Instruments can be payable to the
bearer on demand?
(a) Cheque (b) Hundi
(c) Bank Draft (d) Promissory Note

10. Holder in due course means any person-

(a) Drawing the instrument;
(b) Who for consideration became the possession of a promissory note;
(c) Named in the instrument to whom or to whom order the money is directed to be paid;
(d) None of the above.

11. Which of the following is a method of discharge from liability?

(a) By endorsement (b) By promising
(c) By breach of contract
(d) By the unauthorized alteration of items of a written document

12. 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
(a) Preceding day
(b) Next preceding business day

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 7.48 NEGOTIABLE INSTRUMENTS ACT, 1881
(c) Same day of next week
(d) 3rd days following the day holiday

Q2. Fill In the Blank.

1. Draft cannot be drawn on _________.
2. A cheque is a bill of exchange drawn on a specified ___________ payable on demand.
3. The dishonour of the instrument may be due to ___________.
4. When an instrument is dishonoured the holder may cause such dishonour to be noted and
certified by the notary public. Such certificate is called a ________.
5. Immediate payment is required in case of ___________. No grace days are allowed.

Q3. True and False.

1. Cheque is a promissory note.
2. Currency is a bill of exchange.
3. In Bill of Exchange Statutory protection is not available.
4. A holder is not having right to duplicate of lost bill, before it is overdue.
5. Cheque is a bill of exchange.
6. Where a bill is drawn in sets, the acceptance is required to be put on all the parts separately.

Answers:
Q1. Choose the correct answer:
1. D
2. D
3. B
4. B
5. B
6. A
7. C
8. D
9. A
10. B
11. C
12. B

Q2. Fill in the blanks:

1. Private individual
2. Banker
3. Non acceptance

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 NEGOTIABLE INSTRUMENTS ACT, 1881 7.49
4. Protest
5. Cheque

Q3. State true and false:

1. False
2. False
3. True
4. False
5. True
6. False

Q4. Question and Answer.

Q1. Difference between bill of exchange & cheque.
Answer:
Bill of Exchange Cheque
1. It is defined in Sec. 5 of NI Act, 1881. 1. It is defined in Sec. 6 of the NI Act,
1881.
2. There are three parties: 2. There are three parties:
• Drawer. • Drawer.
• Drawee. • Drawee.
• Payee. • Payee.
3. Bills of exchange are not crossed. 3. Cheques may be crossed.
4. Generally three days of grace are given 4. Immediate payment is required in case
for the payment in case of a bill of of cheque. No grace days are allowed.
exchange. However, this convenience is
not allowed in case of bill of exchange
payable on demand.
5. Anybody including banker may be a 5. The drawee is always a banker.
drawee in case of bill of exchange.
6. It must be accepted before the acceptor 6. It requires immediate payment. It does
can be made liable upon it. not require acceptance of the maker.
Thus the question of acceptance does
not arise in case of cheque.
7. Where a Bill of Exchange is not paid and 7. Where a cheque is dishonoured, Notice
not honoured, a notice of dishonour of Dishonour is not strictly necessary.
should be sent to the drawer to charge The banker can return the cheque with
him. the memo “Refer to Drawer” which is a
sufficient notice.

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 7.50 NEGOTIABLE INSTRUMENTS ACT, 1881
8. Statutory protection is not available. 8. Sec. 85 of the N. I Act, 1881 affords
protection to bankers.
9. Civil Liability in case of dishonour of bill of 9. Criminal liability in case of dishonour of
exchange. a cheque/ bouncing of a cheque and is
liable to be prosecuted under Sec. 138
of the N.I. Act, 1881.

Q2. Who are the parties to the instruments?

Answer. Parties to the Instruments
The transaction of the instrument requires at least two persons. One is the drawer and other is
the drawee. The drawer of the instrument is the person who makes a bill of exchange or a
cheque and the person thereby directed to pay is called the drawee. In ‘Shivanth V. Bishambar’ –
AIR 1935 Lah. 153 it was held that the definition of drawer is not exhaustive; the maker of the
promissory note can also be called a drawer.

Drawer in case of need – When in the bill or in any endorsement thereof the name of any
person is given in addition to the drawee to be resorted to in case of need, such a person is
called a ‘drawee in case of need’.

Acceptor – After the drawee of a bill has signed his assent upon the bill, or, if there are more
parts thereof than one, upon one such parts, and delivered the same, or given notice of such
signing to the holder or to some person on his behalf, he is called the acceptor.

Acceptor for honour- When a bill of exchange has been noted or protested for non-acceptance
or for better security and any person accepts it supra protest for honor of the drawer or any one
of the endorsers, such person is called an ‘acceptor for honour’.

Payee – The person named in the instrument, to whom or to whose order the money is by the
instrument directed to be paid, is called the ‘payee’.

Holder - Section 8 defines the term ‘holder’. The holder of a promissory note or a bill of
exchange or cheque is any person entitled in his own name to the possession thereof and to
receive or recovery the amount due thereon from the parties thereto. Where the note, bill or
cheque is lost or destroyed, its holder is the person so entitled at the time of such loss or
destruction.

Holder in due Course- Section 9 defines the term ‘holder in due course. It means any person
who for consideration became the possessor of a promissory note, bill of exchange or cheque if

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 NEGOTIABLE INSTRUMENTS ACT, 1881 7.51
payable to bearer, or the payee or the 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.

Q3. X, by inducing Y, obtains a bill of exchange from him fraudulently in his (X) favour. Later, he
enters Into a commercial deal and endorses the bill to Z towards consideration to him (Z) for
the deal. Z takes the Bill as a holder in due count. Z subsequently endorses the bill to X for
value, as consideration to X for some other deal. On maturity, the bill is dishonoured. X sues
Y for recovery of money. With reference to the provisions of Negotiable Instruments Act,
decide whether X will succeed in the case.

Answer: Section 58 of Negotiable Instruments Act provides that when an instrument is obtained
by fraud, offence or for unlawful consideration, possessor or endorsee cannot receive the
amount of instrument. Hence, normally X would not be entitled to sue Y as X has obtained
instrument through fraud.

However, as per section 53, a holder who derives title from holder in due course has all rights of
a holder in due course. Since X derives his title from Z (who is a holder in due course 0, X has all
rights of Z.

Second part of Section 58 also makes it clear that even if a negotiable instrument is obtained by
means of an offence or fraud or for unlawful consideration, the possessor or endorsee is entitled
to receive the amount from the maker, if he is a holder in due course or claims through a person
who was a holder in due course. Hence, X can sue Y as he is deriving his right from Z, who is
holder in due course. Hence will succeed.

Q4. When is presentment of an instrument not necessary under the Negotiable Instruments Act?

Answer: According to Section 76 of the Negotiable Instruments Act 1881, no presentment to

payment is necessary in any one of the following cases:
(i) If the maker, drawee or acceptor intentionally prevents the presentment of the
instrument, or
(ii) If the instrument being payable at his place of business, he closes such place on a business
day during the usual business hours, or
(iii) If the instrument being payable at some other specified place, neither he nor any other
person authorised to pay it attends at such place during the usual business hours, or
(iv) If the instrument not being payable at any specified place, if he (i.e. maker etc) cannot
after due search be found;

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 7.52 NEGOTIABLE INSTRUMENTS ACT, 1881
(v) As against any party sought to be charged therewith, if he (i.e. maker, etc.) has engaged to
pay notwithstanding non-presentment;
(vi) As against any party if after maturity, with knowledge that the instrument has not been
presented – he makes a part payment on account of the amount due on the instrument, or
promises to pay the amount due thereon in whole or in part, or otherwise waives his right
to take advantage of any default in presentment for payment; as against the drawer, if the
drawer could not suffer damage from want the of such presentment.

Q5. Rahul draws a cheque payable to ‘sell or order’. Before he could encash the cheque, one of
his creditors, Samrat approaches him for payment. Rahul endorses the same cheque in
Samrat’s favour. The banker refuses payment to Samrat on account of insufficiency of funds
in the account. Can Rahul be made liable to penalties for dishonour of cheque due to
insufficiency of funds in the account under section 138 of Negotiable Instruments Act, 1881?

Answer: Section 138 of Negotiable Instrument Act, 1881, creates statutory offence in the
matter of dishonour of cheques on the ground of insufficiency of funds in the account
maintained by a person with the banker.

Section 138 of the Act can be said to be said to be falling either in the acts which are not criminal
offense in real sense, but are acts which in public interest are prohibited under the penalty or
those where although the proceeding may be in criminal form, they are really only a summary
mode of enforcing a civil right. Normally in criminal law existence of guilty intent is an essential
ingredient of a crime.
However the Legislature can always create an offence of absolute liability or strict where ‘mens
rea’ is not at all necessary.
No, Rahul cannot be made liable to penalties for dishonour of cheque due to insufficiency of
funds in the account since the cheque was not originally drawn payable to another person.
A Cheque drawn payable to self and later endorsed in favour of another person does not seem
to fall within the purview of the provisions of Section 138 which law down that the cheque
should have been drawn for payment to another person.

Q6. A draws a bill on B. B accepts the bill without any consideration. The bill is transferred to C
without consideration. C transferred it to D for value, Decide – (i) Whether D can sue the
prior parties of the bill, (ii) whether the prior parties other than D have any right of action
intense? Give your answer in reference to the Provisions of Negotiable Instruments Act,
1881.

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 NEGOTIABLE INSTRUMENTS ACT, 1881 7.53
Answer: Section 43 of the Negotiable instruments Act. 1881 provides that an 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 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.
(i) In the problem, as asked in the question, A has drawn a bill on B and B accepted the bill
without consideration and transferred it to C without consideration. Later on in the next
transfer by C to D is for value. According to provisions of the aforesaid section 43, the bill
ultimately has been transferred to D with consideration. Therefore, D can sue any of the
parties i.e. A, B or C, as D arrived a good title on it being taken with consideration.
(ii) As regards to the second part of the problem, the prior parties before D i.e., A, B and C
have no right of action inter se because first part of Section 43 has clearly lays down that 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 prior to the parties who receive it on consideration.

Q7. Anil draws a bill of exchange payable to himself on Sushil, who accepts the bill without
consideration just to accommodate Anil. Anil transfers the bill to Ajay for good
consideration.
State the rights of Anil and Ajay. Would your answer be different if Anil transferred the bill
to Ajay after maturity?

Answer: Section 43 of the Negotiable Instrument Act, 1881 states the following:
(i) Liability of parties if there is no consideration – A negotiable instrument made, drawn,
accepted, endorsed or transferred without consideration, or for a consideration which fails,
creates no obligation of payment between the parties to the transaction.
(ii) Rights of holder for consideration – but if any such party has transferred the instrument 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.
(iii) No right of accommodating party to recover from accommodating party – No party for
whose accommodation a negotiable instrument has been made, drawn, accepted,
endorsed can, if he has paid the amount thereof, recover thereon such amount from any
person who became a party to such instrument for his accommodation.

In the given case, Anil is not entitled to sue Sushil, since there is no consideration between Anil
and Sushil and hence there is no obligation to pay.

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 7.54 NEGOTIABLE INSTRUMENTS ACT, 1881

Again Ajay is entitled to sue Anil and Sushil, since Ajay is a holder for consideration. Ajay is
entitled to sue the transferor for consideration and every other party prior to him.

According to Sec 59, in the case of accommodation bills, a defect in the title of the transferor
does not affect the title of the holder acquiring after maturity. Hence, even if Ajay has acquired
the bill for consideration after maturity, he is entitled to sue.

Q8. Which are the essential elements of a valid acceptance of a Bill of Exchange? An acceptor
accepts a ‘Bill of Exchange’ but write on it ‘Accepted but payment will be made when goods
delivered to me is sold.’ Decide the validity.

Answer: Essentials of a Valid Acceptance of a Bill of Exchange:

The essentials of a valid acceptance are as follows: -
1. Acceptance must be written: The drawee may use any appropriate word to convey his
assent. It may be sufficient acceptance even if just signatures are put without additional
words. An oral acceptances is not valid in law.
2. Acceptance must be signed: A mere signature would be sufficient for the purpose.
Alternatively, the words ‘accepted’ may be written across the face of the bill with a signature
underneath; if it is not so signed, it would not be an acceptance,
3. Acceptance must be on the bill: The acceptance should be on the face of the bill normally
but it is not necessary. An acceptance written on the back of a bill has been held to be
sufficient in-law. What is essential is that must be written on the bill; else it creates no
liability as acceptor on the part of the person who signs it.
4. Acceptance must be completed by delivery: Acceptance would not be complete and the
drawee would not be bound until the drawee has either actually delivered the accepted bill
to the holder or tendered notice of such acceptance to the holder of the bill or some person
on his behalf.
5. Where a bill is drawn in sets, the acceptance should be put on one part only: Where the
drawee signs his acceptance on two or more parts, he may become liable on each of them
separately.
6. Acceptance may be either general or qualified: An acceptance is said to be general when
the drawee assents without qualification order of the drawer. The qualification may relate to
an event, amount, place, time etc. (Explanation to Section 86 of the Negotiable instruments
Act 1881).

In the given case, the acceptance is a qualified acceptance since a condition has been
attached declaring the payment to be dependent on the happening of an event therein

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 NEGOTIABLE INSTRUMENTS ACT, 1881 7.55
stated. As a rule, acceptance must be general acceptance and therefore, the holder is at
liberty to refuse to take a qualified acceptance. Where, he refuse to take it, the bill shall be
dishonoured by non-acceptance. But, if he accepts the qualified acceptance, even then it
binds only him and the acceptor and not the other parties who do not consent thereto.
(Section 86).

Q9. Negotiable Instruments

Answer: Negotiable Instruments
Section 13 of the Act defines the terms ‘negotiable instrument’ as a promissory note, bill of
exchange or either payable either to order or to bearer. A promissory note, bill of exchange or
cheque-
• Is payable to order which is expressed to be so payable or which is expressed to be
payable to a particular person and does not contain words prohibiting transfer or
indicating an intention that it shall not be transferable;
• Is payable to the bearer which is expressed to be so payable or on which the only or last
endorsement is an endorsement in blank;
• Either originally or by endorsement, is expressed to be payable to two or more payees
jointly, or it may be made payable in the alternative to one of two, or one or some of
several payees.
Section 13 shows that the Act is confined to three specific types of instruments most in common
use, namely, promissory notes, bills of exchange and cheques. The Contract Act is a general
statute dealing with contracts. The Negotiable instruments act is a statute dealing with a
particular form of the contract. The law laid down for special cases must always overrule the
provisions of general character as held in ‘kwong Hip Lone Saw Mill Co. V. C.A.M.A.L. Firms’

The following are not the negotiable instruments-

• Share certificate passing from hand to hand with blank transfers –
• Deposit receipts
• Mate’s receipt
• Bill of lading
• A benefit under a letter of credit

Q10. Crossing
Answer: Section 123 provides that where a cheque bears across its face an addition of the words
‘and company’ or any abbreviation thereof, between two parallel transverse lines, or of two
parallel transverse lines simply, either with or without the words ‘not negotiable’ that addition
shall be deemed a crossing, and the cheque shall be deemed to be crossed generally.

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 7.56 NEGOTIABLE INSTRUMENTS ACT, 1881
Section 124 provides that where a cheque bears across its face an addition of the name of a
banker, either with or without the words ‘not negotiable’ that addition shall be deemed a
crossing, and the cheque shall be deemed to be crossed specially, and to be crossed to that
banker.

Section 125 provides that where a cheque is not crossed, the holder may cross it generally or
specially.
• Where a cheque is crossed generally, the holder may corsss it specially;
• Where a cheque is crossed generally or specially, the holder may add the word ‘not
negotiable’;
• 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.

Q11. Ajay draws a bill on Anoop. Anoop accepts the bill without any consideration. The bill is
transferred to Udit without consideration. Udit transferred it to Vicky for value.
Decide-
(i) Whether Vicky can sue the prior parties of the bill?
(ii) Whether the prior parties other than Vicky have any right of action Intense?
Answer: Section 43 of Negotiable Instrument Act, 1881, provides that an 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.
(i) In the problem, as asked in the question, Ajay has drawn a bill on Anoop and Anoop
accepted the bill without consideration and transferred it to Udit without consideration.
Later on in the next transfer by Udit to Vicky is for value. According to provisions of the
aforesaid Section 43, the bill ultimately has been transferred to Vicky with consideration.
Therefore, Vicky can sue any of the parties i.e. Ajay, Anoop or Udit, as Vicky arrived a good
title on it being taken with consideration.
(ii) As regards to the second part of the problem, the prior parties before Vicky i.e. Ajay,
Anoop and Udit have no right of action inter se because first part of Section 43 has clearly
lays down that 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 prior to the parties who receive it on consideration.

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 NEGOTIABLE INSTRUMENTS ACT, 1881 7.57
Q12. Lokesh draws a bill of exchange payable to himself on Prachi, who accepts the bill without
consideration just to accommodate Lokesh. Lokesh transfers the bill to Govind for good
consideration.
State the rights of Lokesh and Govind. Would your answer be different if Lokesh
transferred the Bill to Govind after maturity?
Answer: Section 43 of the Negotiable Instrument Act, 1881 states the following:-
(i) Liability of parties if there is no consideration – A negotiable instrument made, drawn,
accepted, endorsed or transferred without consideration, or for a consideration which fails,
creates no obligation of payment between the parties to the transaction.
(ii) Rights of holder for consideration – But if any such party has transferred the instrument 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.
(iii) No right of accommodating party to recover from accommodating party – No party for
whose accommodation a negotiable instrument has been made, drawn, accepted,
endorsed can, if he has paid the amount thereof, recover thereon such amount from any
person who became a party to such instrument for his accommodation.

In the given case, Lokesh is not entitled to sue Prachi, since there is no consideration
between Lokesh and Prachi and hence there is no obligation to pay.

Again Govind is entitled to sue Lokesh and Prachi, since Govind is a holder for
consideration. Govind is entitled to sue the transferor for consideration and every other
party prior to him.

According to Sec 59, in the case of accommodation bills, a defect in the title of the
transferor does not affect the title of the holder acquiring after maturity. Hence, even if
Govind has acquired the bill for consideration after maturity, he is entitled to sue.

Q13. State the circumstances under which a baker is bound to refuse the payment of a cheque.
Answer: Circumstances when the banker must refuse the payment
Following are the circumstances in which the banker is bound to refuse the payment of a
cheque:
(1) When the customer has countermanded payment: The term ‘countermand’ means the
issue of instruction to the banker not to pay a particular cheque. Thus, where a customer
issues instructions to the banker not to make the payment of a particular cheque, the
banker must not make the payment. A cheques, the payment of which is stopped by the
customer is known as a ‘stopped cheque’. And a stopped cheque is a piece of waste paper in

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 7.58 NEGOTIABLE INSTRUMENTS ACT, 1881
the hands of payee. It is, however, necessary that a countermand to be effective must reach
the banker before he had paid the cheque in the ordinary course. It may also be noted that
the countermand notice must be duly signed by the customer and give correct particulars of
the cheque.
(2) When the customer has died: Sometimes, the banker receives notice of customer’s death.
In such cases, he must refuse the payment of the cheque presented after the notice of
death. However, if the payment is made before the banker receives the notice of death, the
payment is valid and banker is justified in making such payment.

(3) When the customer has become insolvent: Sometimes, the banker receive; the notice of
customer’s insolvency. In such cases also he must refuse the payment of the cheques
presented after the notice.

(4) When the customer has become a person of unsound mind (i.e. insane): Sometimes, the
banker receives the notice that his customer has become insane. In such cases also, he must
refuse payment of the cheque presented after the notice.

(5) When a garnishee order has been received by the banker: The term Garnishee order may
be defined as a court order attaching the balance in customer’s account. When the banker
receives such order then he is bound to refuse the payment of the customer’s cheque.

(6) When the cheque is lost: Sometimes, the drawer informs the banker that a particular
cheque is lost. In such cases, banker must refuse the payment of that cheque.

(7) When the account is closed: Sometimes the customer closes his account and gives notice to
the banker. In such cases the banker must not pay any cheque of the customer after the
closure of the account.

(8) When holder’s title is defective: Sometimes, the banker comes to know of any defect in the
title of the person presenting the cheque. In such cases, he must refuse the payment of the
cheque.

(9) When a customer gives notice of assignment of credit balance: In his account, the banker
must refuse the payment of cheque.

Q14. Difference between promissory note and cheque.

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 NEGOTIABLE INSTRUMENTS ACT, 1881 7.59
Answer:
Sl. Promissory Note Cheque
No.
1. It is defined in Sec. 4 of NI Act, 1881. It is defined in Sec. 6 of the NI Act, 1881.
2. There are two parties: There are three parties:
• Maker. • Drawer.
• Payee. • Drawee
If it is given a guarantee, then there will • Payee.
be a third person, who is called as
“Guarantor” or “Surety”.
3. Promissory note contains a promise to A cheque is payable immediately on
pay the sum with interest or without demand without any lays of grace.
interest at a later date.
4. Promissory note is not crossed. Cheque can be crossed.
5. No protection is available to the payee of A cheque can be self-drawn or bearer
note. cheque.
6. A promissory note cannot be self-drawn. A cheque can be self-drawn or bearer
cheque.
7. No criminal liability shall be imposed on Criminal Liability may be imposed on
the maker. drawee for the dishonour of cheques in
certain circumstances.
8. Stamp is necessary. Stamp is not necessary
9. Limitation: 3 years. Limitation: 6 months.

Q15. X, by inducing Y, obtains a Bill of Exchange from him fraudulently in his (X) favour. Later,
he enters into a commercial deal and endorses the bill to Z towards consideration to him
(z) for the deal. Z takes the Bill as a holder in due course. Z subsequently endorses the bill
to X for value, as consideration to X for some other deal. On maturity, the bill is
dishonoured. X sues Y for recovery of money. With reference to the provisions of
Negotiable Instruments Act, decide whether X will succeed in the case.

Answer: Section 58 of Negotiable Instruments Act provides that when an instrument is obtained
by fraud, offence or for unlawful consideration, possessor or endorsee cannot receive the
amount of Instrument. Hence, normally X would not be entitled to sue Y as X has obtained
instrument through fraud.

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 7.60 NEGOTIABLE INSTRUMENTS ACT, 1881
However, as per section 53, a holder who derives title from holder in due course has all rights of
a holder in due course. Since X derives his title from Z (who is a holder in due course), X has all
rights of Z.

Second part of section 58 also makes it clear that even if a negotiable instrument is obtained by
means of an offence or fraud or for unlawful consideration, the possessor or endorsee is entitled
to receive the amount from the maker, if he is a holder in due course or claims through a person
who was a holder in due course. Hence, X can sue Y as he is deriving his right from Z, who is
holder in due course. Hence, X will succeed.

Q16. State the circumstances under which a banker is bound to refuse the payment of a
cheque.
Answer:
Following are the circumstances in which the banker is bound to refuse the payment of a
cheque:
(1) When the customer has countermanded payment: The term ‘countermand’ means the
issue of instruction to the banker not to pay a particular cheque. Thus, where a customer
issues instructions to the banker not to make the payment of a particular cheque, the
banker must not make the payment. A cheque, the payment of which is stopped by the
customer is known as a ‘stopped cheque’. And a stopped cheque is a piece of waste paper in
the hands of payee. It is, however, necessary that a countermand to be effective must reach
the banker before he had paid the cheque in the ordinary course. It may also be noted that
the countermand notice must be duly signed by the customer and give correct particulars of
the cheque.

(2) When the customer has died: Sometime, the banker receives notice of customer’s death. In
such cases, he must refuse the payment of the cheque presented after the notice of death.
However, if the payment is made before the banker receives the notice of death, the
payment is valid and banker is justified in making such payment.

(3) When the customer has become insolvent: Sometimes, the banker receive; the notice of
customer’s insolvency. In such cases also he must refuse the payment of the cheques
presented after the notice.

(4) When the customer has become a person of unsound mind (i.e. insane). Sometimes, the
banker receives the notice that his customer has become insane. In such cases also, he must
refuse payment of the cheque presented after the notice.

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 NEGOTIABLE INSTRUMENTS ACT, 1881 7.61
(5) When a garnishee order has been received by the banker: The term Garnishee order may
be defined as a court order attaching the balance in customer’s account. When the banker
receives such order then he is bound to refuse the payment of the customer’s cheque.

(6) When the cheque is lost: Sometimes, the drawer informs the banker that a particular
cheque is lost. In such cases, banker must refuse the payment of that cheque.

(7) When the account is closed: Sometimes the customer closes his account and gives notice to
the banker. In such cases the banker must not pay any cheque of the customer after the
closure of the account.

(8) When holder’s title is defective: Sometimes, the banker comes to know of any defect in the
title of the person presenting the cheque. In such cases, he must refuse the payment of the
cheque.

(9) When a customer gives notice of assignment of credit balance: In his account, the banker
must refuse the payment of cheque.

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 INTRODUCTION TO
8 BUSINESS COMMUNICATION
- CONCEPTS, COMPONENTS
Communication is an integral activity of human beings. Communication in its simplest form means
transferring of information from one person to other. The word communication has been derived
from the Latin word ‘communicare’ which means ‘to share’.
Hence, it can be defined as the process of transferring/sharing/exchanging/transmitting ideas, facts,
feelings, data, information and experience from one entity to other through a medium.
The basic aim of communication is to share, listen and understand the message being exchanged by
the parties involved.

Introduction to Business Communication

Business communication is the process of sharing/exchanging information between people within
and outside the organisation in order to accomplish organizational goals and have mutual
understanding of the commercial benefit of the organization. For example- inter and intra
departmental communication within organization, stakeholders, etc.

Significance of Business communication:

No entity can function solely in absence of communication. The exchange of ideas, information and
instructions internally and externally is a fundamental feature of an entity is necessary for its
working. Significance of business can be understood by following-

Managerial
efficiency Building a
Improving dedicated and
customer loyal employee
service base

Managerial Introduction to
Business Effective
functions leadership
Communication

Human Mutual trust

resources and
management Better
decision confidence
making with
informed
judgement
 8.2 INTRODUCTION TO BUSINESS COMMUNICATION
• Managerial efficiency: Management Must communicate its goals in a way so that all parties
involved are on the same page and can carry out the tasks required to achieve those goals.

• Building a dedicated and loyal employee base:

(i) Emphasizes the employee’s participation in management.
(ii) Creates a positive environment where an employee can flourish.
(iii) It helps to build the employees morale.
(iv) Build cordial industrial relations between management and employees.

• Effective leadership: A leader must communicate and listen to views and share feedback to
his/her subordinates for smooth functioning of tasks.

• Mutual trust and confidence: Effective communication helps to reduce misunderstandings and
resolve conflicts leading to mutual trust & confidence.

• Better decision making with informed judgement: If the data, information and goals are not
effectively communicated, it hampers the decision-making process and could even have adverse
impacts on the organization’s profitability.

• Human resources management: Effective communication helps in the proper human resource
management of the company in form of selection, placement, socialization, promotion, and
transfer. Communication also plays a major role in teaching and training employees.

• Managerial functions: All managerial functions such as planning, organizing, directing,

controlling, etc cannot be conducted without communication.

• Improving customer service: Effective communication with customers by answering questions

and providing solutions helps to improve the business’ reputation and enhance customers’
satisfaction.

Flow of Communication within an Organization:

Man is a social being and seeks to socialize and be accepted by the members of society.
Communication is essential tool in the socializing process. However, when we talk from an
organization’s perspective communication among team members, colleagues, managers, vendors,
distributers, customers are highly essential.

There are 5 main types of communication that take place in all organization irrespective of their size,
employee strength and nature of business namely:

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 INTRODUCTION TO BUSINESS COMMUNICATION 8.3

Upward
Communication
Flow of Communication within an
Downward
Communication
Organization

Lateral Communication

Diagonal
Communication

Grapevine
Communication

1. Upward Communication – Communication that originates at a lower level or position in the

organizational hierarchy and flows upward to higher levels.

2. Downward Communication – Communication that originates at a higher level and flows down
to the lower levels or posts in a given organizational structure.

3. Lateral Communication – Communication among employees at the same level in the

organizational structure is called a lateral communication. For eg: Departmental heads
interacting among themselves or two fellow workmen discussing over a matter.

4. Diagonal Communication – Communication between employees working in different

departments of the organization is called diagonal communication.

5. Grapevine Communication – This is a type of informal communication that arises out of social
relationships. These are usually referred to as the water-cooler gossips that two-colleagues
share during breaks. For eg: When a person draws an example from someone else’s life to pass
on some information.

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 8.4 INTRODUCTION TO BUSINESS COMMUNICATION
Uses of Business Communication
The significance of business communication is not only restricted to business organizations. These
days we all rely upon business communication either directly or indirectly. Some of these cases
include:

1. Group Discussion (GD) –

(i) GD is a technique where individuals are put into groups and given a particular topic,
question or problem statement.
(ii) Once the topic is introduced to the members of the group they are given some time to
discuss, share ideas or come up with a solution to the given problem or statement.
(iii) The concept of GD is becoming increasingly popular these days in the interview process.
(iv) It helps to develop and evaluate the skills in leadership, communication, listening,
awareness, social skills, initiative taking ability, etc.

Rules to be followed for an effective Group Discussion

 Be clear, confident and to the point about your content
 Prepare well the topic
 Introduce yourself at before you present your content / views / opinion
 Display a positive body language and attitude
 Avoid making vague or false statements
 Do not put on a casual attitude
 Do not argue with someone you disagree with
 Follow your domain
 Try to take a leadership initiative within the group

2. Speeches and Debates –

• While the two terms are used inter-changeably there exists a thin line of difference between
the two.

• A speech is more performative in nature as compared to a debate. Speeches include public

addressing, radio broadcasting, drama, poetry, extemporary speeches, oratory etc.

• On the contrary a debate is based usually on current affairs or situations where the speaker
researches in depth about the topic and either speaks for or against the notion.

• Business Communication is an essential requirement or skill that one must possess to

present or deliver an effective speech or debate.

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 INTRODUCTION TO BUSINESS COMMUNICATION 8.5
3. Presentations –
• Presentation is the process of conveying information to an audience. These are used to
introduce, pursue, inspire, or convey details.
• Presentations are widely being used by businesses and educational institutes. It saves time
and provides a bird’s view on a given matter or report.
• While presentations and PowerPoint presentations are used as synonyms one must note
that all forms of presentations do not essentially require a PowerPoint or any form of
graphical aid.

Illustration:
Michael Hill International Limited is a speciality retail jeweller is headquartered in Australia and
operates in North America, New Zealand and Canada. It has more than 300 retail stores and over
2000 employees and millions of customers globally.
However, the head office lately has been facing multiple challenges in such as misunderstandings,
lack of trust among employees and management, improper customer feedback mechanisms.

Q. The owner of Michael Hill International Limited approaches you and wants to know why is it so
difficult to handle the branches, when he sees other competitors with more branches functioning
smoothly.

Role of Business Communication in Functional Areas of an Organisation

In an organization there are diverse roles that are played by each and every department. In order to
perform these diverse roles effectively the concept of communication plays an essential role. Let us
take a look at the essence of business communication in some of the functional areas of an
organization.

Business Communication and Marketing

Marketing, is a process of creating, communicating, delivering, and exchanging products and services
to the customers, clients and society at large.
The terms marketing and communication are inter-related. Communication is the core element in
marketing. Communication is the key through which marketers can spread the word about the
products of their businesses to customers.

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 8.6 INTRODUCTION TO BUSINESS COMMUNICATION

The benefits of communication in marketing include:

The benefits of
communication
in marketing
include:

1. Building and maintaining relationships

In order to have effective and efficient long-term relationships with its stakeholders, a good
marketer must possess good interpersonal skills. It is essential to create an emotional and
emphatical connection with their clients.

2. Facilitates innovation when marketing

Innovation is another key component in the marketing process. To beat completion, business
needs to be creative and for that effective communication skills are required.

3. Enhancing transparency
Marketers are the brand ambassadors of the business, who convince the customers across the
globe to trust the brand they work for and for that transparency is essential. Effective
communication makes employees and customers sure that their needs are considered and
understood.

4. Overcoming marketing obstacles

In a dynamic VUCAFU (V– Volatility, U- Uncertainty, C- Complexity, A- Ambiguity, F- Fear of
unknown, U- Unprecedentedness) world businesses face multiple hurdles in their day-to-day
functioning. These hurdles appear in the form of cultural barriers, linguistic barriers, legal

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 INTRODUCTION TO BUSINESS COMMUNICATION 8.7
barriers etc. these barriers hinder the process of marketing. Hence, in order to make marketing
effective one needs an effective communication system.

5. Establishing professionalism while marketing

A professional relationship exists between the business and its customers and clients. It is
essential to use a professional language while dealing with customers. A marketer, must possess
good interpersonal skills to connect with prospective clients.

Major modes of Communication in marketing

• Advertising – Advertising is an impersonal form of communication which is persuasive in nature.

The main aim of advertising is to target the mass audience. It is viewed as the cheapest way of
reaching out to the customer. Communication in advertisement plays four objectives i.e. to
inform, persuade, differentiate and remind.
• Direct marketing – Direct marketing involves communicating directly with the target customers
using telephone, mail or any other electronic means. Direct marketing allows a company to
focus precisely on a segment of customers and prospects with a sales message tailored to their
specific needs and characteristics.
• Sales promotion - Sales promotion is done in order to accelerate the product’s movement from
the producer to the consumer. Consumer promotions includes techniques of non-verbal
communication such as coupons, samples, premiums, and negotiating discounts.

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 8.8 INTRODUCTION TO BUSINESS COMMUNICATION
• Personal selling - Personal selling basically means face to face interaction with the customer
with the purpose of introducing a product and persuading the customer or potential customer
about the product and closing the sale. Being an interpersonal form of verbal communication,
and it is also the most effective tool of communication as it provides immediate feedback.

In marketing, communication is an important player. Consumers rely on the information available

from marketing communication to make purchase decisions. Businesses, ranging from global MNC’s
to small retailers, all rely upon marketing communication to sell their goods and services.
Communication helps to move products, services, and ideas from manufacturers to end users and
builds and maintains relationships with customers, and other important stakeholders in the
company. Communication is vital to marketing because it brings everyone on the same page.

Skills for sender and receiver of message-

Effective communication is said to have taken place when the sender and receiver of the message
assign similar interpretations to the message, when the receiver listens closely to what has been said
and makes the sender feel heard and understood.
In order to make a communication effective both the parties must possess the following skills:
i) Inform the listener about the topic prior to the conversation or at the beginning of the
conversation thus giving the listener time to form an opinion or get an idea on the topic.
ii) The speaker must deliver the message in a concrete and clear manner to avoid
miscommunications.
iii) Both the parties must be empathic towards each other.
iv) The message should be complete.
v) The speaker must try and use non-verbal forms of communication as well while delivering the
message
vi) The listener must be attentive and alert.
vii) Both the listener and speaker must have an open mind towards each other’s opinions.
viii) It is the responsibility of the listener to provide feedback to the speaker and also the
responsibility of the speaker to seek a response from the listener.

Listening and Hearing-

Active listening is paying attention to a speaker, comprehending what they’re saying, responding and
reflecting on what they’re saying, and storing the information for later use. This retains both the
listener and the speaker in the discourse. People often overlook the importance of listening. People
frequently hear what is being said, although hearing differs significantly from listening.
To listen, we must make a conscious effort to not just hear but also absorb, digest, and comprehend
what others are saying. Listening is important because:
a) It helps improve problem-solving abilities

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 INTRODUCTION TO BUSINESS COMMUNICATION 8.9
b) It helps improve social skills
c) It helps to empathize with others
d) It helps to absorb information better
e) It helps to learn and grasp things better in a social and professional setting
f) It helps to build stronger relationships and by making people feel appreciated.

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 INTRODUCTION TO BUSINESS COMMUNICATION 8.10

Business Communication

Flow of communication within an

Definition Significance organization Uses of Business communication
The process of transferring/ • Managerial efficiency 1. Upward Communication (i) Group Discussion
sharing/ exchanging/ • Building a dedicated and loyal 2. Downward Communication (ii) Speeches & debates
transmitting ideas, facts, employee base 3. Lateral Communication (iii) Presentations
feelings, data, information • Effective leadership 4. Diagonal Communication
and experience from one • Mutual trust and confidence 5. Grapevine Communication
entity to other through a • Better decision making with
medium. informed judgement
• Human resources management
• Managerial functions
• Improving customer service

Benefits of communication in marketing Modes of communication Skills for sender and receiver of message Active listening
in marketing
(i) Building and maintaining • Advertising (i) Inform the listener about the topic (a) Improve problem-
relationships • Direct marketing (ii) Deliver the message in a concrete solving abilities
(ii) Facilitates innovation when • Sales promotion and clear manner (b) Improve social skills
marketing • Personal selling (iii) Parties must be empathic (c) Helps to empathise
(iii) Enhancing transparency (iv) Message should be complete (d) Absorb information
(iv) Overcoming marketing obstacles (v) Must try and use non-verbal forms better
(v) Establishing professionalism while of communication (e) Learn and grasp things
marketing (vi) Listener must be attentive better
(vii) Listener and speaker must have an (f) To build stronger
open mind relationships
(viii) Provide feedback

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 FEATURES OF EFFECTIVE
9 BUSINESS COMMUNICATION
- CONCEPTS, COMPONENTS

Communication is vital in businesses. Communication helps in establishing relationships, negotiating

deals, selling, delivering presentations, problem solving, decision making and many other aspects of
an employee, manager and executives’ role.
Whilst effective practical training is an invaluable aid in improving business communication skills, the
best communicators on their part must exhibit certain characteristics which enable them to
maximise their abilities. Some of them include:

Goods listening skills

Open Minded
Goods
Communication
Skills Being attentive

Participating

1. Good listening skills – In order for a communication to be effective it is essential to develop a

good listening skill rather than speaking skills. It is important to hear the other person in order to
avoid premature evaluation and verbal conflicts.
2. Open Minded – While communicating people must keep an open mind and accept that they too
could be wrong. Hence it is essential to keep an open mind and learn from others.
3. Being attentive – During communication it is essential to be attentive and listen to the
communicator patiently without fidgeting or being distracted
4. Participating – Just like being a good listener is essential it is also necessary to participate and
show interest in the discussion.
Effective communication is the key to successful working of an organization. Poor communication in
the organization leads to:
(i) Less employee engagement
(ii) Decreased productivity
(iii) High employee turnover.
In order to convey intended message to the parties concerned, business communication relies on
8Cs of communication.
 9.2 FEATURES OF EFFECTIVE BUSINESS COMMUNICATION
1. Clarity: Clarity in the communication ensures that the message is understood accurately by the
receiver. There is no scope for assumptions by the receiver. Example;
Bad- “The company has received a new manufacturing order of tyres from a new client.”
Good – “The company has received a manufacturing order of 150 units of tyres from JVC Ltd.”
2. Conciseness: All message short, direct and to the point. Unnecessary complex words and beating
around the bush should be avoided. Example;
Before – “We are attempting to create a meticulous proposal of expanding our business
operations and customer reach by open a new branch in the City of Joy, Kolkata.”
After – “We’re planning to open a new branch in Kolkata.”
3. Courteous: Courtesy is important in a corporate communication to maintain a healthy working
relationship. Harsh, aggressive, disrespectful and humiliating tones and gestures should be
avoided. Example;
Bad – “I don’t appreciate how your team ignores our requests for collaboration with my team.
The work we do is more vital as compared to yours. Talk to your team and ensure that they
promptly collaborate with my team from now on.”
Good – “I understand that your team is busy and receives many requests to collaborate on other
important matters. However, my team is working on a high priority and urgent project. I would
greatly appreciate if you could ask your team to collaborate more readily with mine to move this
project forward faster. Please let me know in case you need anything.”
4. Correctness: Proper grammar and syntax increase the effectiveness and credibility of the
message. Mistakes and typos affect clarity, create ambiguity, and raise doubts. Example;
Bad – “This weak expenses have increased by 6.5%.”
Good – “This week’s expenses have increased by 6.5%.”
5. Completeness: The message should have all information on the basis of which the receiver can
respond and take action. Incomplete messages waste lot of time and efforts. Example;
Bad – “There is marketing department meeting tomorrow at 7 for discussing marketing
strategies.”
Good – “There is a marketing department meeting tomorrow at 7:00 pm in conference room no.
5 for discussion of marketing strategies for our newly launched soap product.”
6. Concreteness: Concrete communication is specific, clear, and meaningful. It avoids vagueness
and adds authenticity.
Bad – “Manufacturing costs have increased. They need to be reduced.”
Good – “Manufacturing costs have increased by 30 %. They need to be reduced at least by 15
%.”
7. Consideration: Before communicating, the sender should put itself in the place of receiver and
try to understand the potential effects of the message transmitted. Hence, words should used
after a lot of consideration. Example;
Bad – “The presentation made by you looks awful. Why can’t you improve?”

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 FEATURES OF EFFECTIVE BUSINESS COMMUNICATION 9.3
Good – “I noticed some mistakes in the presentation made by you. Let us have a meeting to help
you work on this.”
8. Coherence: Communication should be relevant, logical and make sense. It will help in
comprehending the information. Example;
Bad – “The due date for the project has been extended to next month. Arex Ltd. wants to discuss
some new issues with the product. They requested a meeting for this Saturday.”
Good – “Arex Ltd. wants to discuss some new issues with their product this Saturday. So, the due
date for project completion has been extended to next month to assess the new issues.
Every business revolves around successful and effective communication, be it non-verbal, verbal,
written, analogue or digital. Managers, leaders and salespeople all need to be skilled
communicators in order to perform their roles effectively. Effective business communication is a
valuable asset that every leader, manager or salesperson should aspire to obtain.

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FEATURES OF EFFECTIVE BUSINESS COMMUNICATION 9.4

Features of Effective Business Communication

Characteristics of best communicator 8 Cs of Communication

1. Good listening skills 1. Clarity: Ensure that the message is understood accurately
2. Open Minded 2. Conciseness: Message short, direct and to the point
3. Being attentive 3. Courteous: Courtesy is important. Harsh, aggressive, disrespectful
4. Participating and humiliating tones and gestures should be avoided.
4. Correctness: Proper grammar and syntax
5. Completeness: Message should have all information
6. Concreteness: Communication is specific, clear, and meaningful.
7. Consideration: The sender should put itself in the place of
receiver and try to understand the potential effects of the
message transmitted.
8. Coherence: Communication should be relevant, logical and make
sense.

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 PROCESS OF
10
COMMUNICATION
- CONCEPTS, COMPONENTS
As a concept communication might sound simple. However, there are a lot of hidden elements and
an entire chain of events or stages that are going on while we communicate even though we are
unaware of it.
The communication process is a dynamic framework that explains the transmission of message
between a sender and receiver using various communication channels.

Key elements of communication:

• Sender: The person who first has the idea/ message and sends it to the recipient.
• Encoding: The way the information is described or translated into a message and put in verbal or
non-verbal medium.
• Message: The information that the sender wants to send. Messages can be in speech and
writing, signs, pictures or symbols depending upon the situation and the nature and importance
of information desired to be sent.
• Communication channel: The method of delivering the message. The message may be oral or
written. Written messages can be transmitted through computer, telephone, cell phone, apps or
televisions.
• Receiver: An individual or a group of individuals for whom the information was intended to
reach. The receiver is at the other end of the communication process.
• Decoding: It refers to interpretation and conversion of information communicated into
intelligible form so that the recipient can fully understand the true meaning of the information.
• Feedback: It is the final step of the process. It refers to the response or action a receiver takes
after decoding a message.

Process of Communication
 10.2 PROCESS OF COMMUNICATION

1. Development of an idea: The first step is identifying the information the sender wants to
communicate to the receiver.

2. Encoding of message: Once the sender develops the idea to be transmitted, the message needs
to be presented in a proper and coherent manner using suitable words, phrases and symbols.

3. Transmission of the message: the sender determines the method/channel/medium of

transmission of message. Communication channels can be verbal, non-verbal, written and visual.

4. Receipt of message: Receiver receives the message. The receiver will process the message
according the channel of communication. If written message is sent, then the receiver will read
that message and if the message is verbal, then receiver will listen to the message.

5. Decoding of message: This is one of the most crucial stages in the communication process. The
receiver will convert the message in the form which is understandable to him/her.
Communication process will be successful if receiver can get and understand the context of
message sent correctly.

6. Feedback of message: It is the receiver’s response to the message. The sender gets to know
whether the recipient got the message and interpreted it accurately or not.

Essence of Feedback
After the communicator is done with his role of communicating the message via the appropriate
medium, he must ensure that the recipient has understood the message in the way he was supposed
to. Hence, the communicator must take feedback from the recipient.
The feedback that the communicator receives is broadly classified into four categories according to
Kevin Eujeberry:
1. Positive Feedforward – It basically means affirming comments with regard to future behaviour.

2. Negative Feedforward – It is the opposite of a positive feedforward it includes corrective

comments with regard to future behaviour.

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 PROCESS OF COMMUNICATION 10.3

3. Positive Feedback – Positive feedback means affirming comments with regard to past
behaviour.

4. Negative Feedback – Negative feedback is the opposite of a positive feedback it includes

corrective comments with regard to past behaviour.

Models in the Communication Process

1. One-way process – A one way communication process is a simple communication process
wherein the communication is one sided. It begins when the sender selects a message to deliver
to the receiver, followed by the encoding stage. The message is transmitted to the receiver via a
medium, followed by which the receiver decodes the message.

2. Two-way process – The two-way communication process is an improved version of the one-way
process. It is more contemporary in nature. In the one-way communication model, the sender
continues to remain in a dilemma if the receiver has correctly interpreted the message.
However, in the two-way process follows the same steps only here the receiver gives the sender
feedback and can also clarify his / her doubts or even share his / her perspective on the
proposed topic of discussion.

The differences between a one-way and two-way communication process include the following:
Basis One-way communication Two-way Communication
Process
Model Type One-way communication is a linear Two-way communication is a
Communication model. cyclic model.
Perceiving The sender is unaware if the receiver The sender is aware if the
has correctly perceived and receiver has correctly
interpreted the message. perceived and interpreted
the message.
Feedback One-way communication eliminates Two-way communication
the concept and significance of includes the concept and
feedback. significance of feedback.
Nature One-way communication is a Two-way communication is a
monologue by nature. dialogue by nature.
Examples Watching a video, listening to music Communicating with a
friend, interviews

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PROCESS OF COMMUNICATION 10.4

Process of Communication

Key elements of Communication Process of communication Essence of feedback Modes of communication

• Sender 1. Development of an idea 1. Positive feedforward 1. One-way process
• Encoding 2. Encoding of message 2. Negative Feedforward 2. Two-way process
• Message 3. Transmission of the message 3. Positive Feedback
• Communication channel 4. Receipt of message 4. Negative Feedback
• Receiver 5. Decoding of message
• Decoding 6. Feedback of message
• feedback

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 TYPES OF BUSINESS
11 COMMUNICATION
- CONCEPTS, COMPONENTS
Business Communication can be classified into different categories depending upon the nature of
communication, origin of the communication and the relationship between the parties involved in
the communication process.
Communication can be broadly classified under the following heads on the basis of:

Formal and Informal Communication Formal Communication

• Formal communication also known as official communication is designed by organizations to
ensure the flow of official information through proper, predefined channels and routes.
• Employees are bound to follow formal communication channels while performing their duties.
• The flow of information is controlled.
• It also ensures that deliberate effort to be properly communicated.

Disadvantages of Formal Communication include:

1. The structure is typically top down.
2. It is slower than informal communication because it is time consuming to follow communication
through a long chain of command.
3. It also tends to cause a lot of distortions.

Advantages of Formal Communication include:

1. It is considered effective as it is a timely and systematic flow of communication.
2. It is more reliable than informal communication.
3. Documentary evidence is present.
4. Full secrecy is maintained.
5. It follows a hierarchical structure and chain of command.
 11.2 TYPES OF BUSINESS COMMUNICATION

Structure of formal communication

Informal Communication
• In this kind of communication, the communication is multidimensional. It moves freely within
the organization.
• It is not bound by pre-defined channels and communication routes and is particularly quick.
• Neither does not have a paper trail.
• It is also known as grapevine communication and generally begins with employees through
social relations.
• Informal communications can turn to formal communication if they are added into the formal
communication information flow of a company.

Disadvantages of Informal communication includes:

1. Informal communication is less reliable than formal communication.
2. It propagates the spread of rumours.
3. It is difficult to maintain secrecy.

Advantages of Informal Communication includes:

1. It is faster than formal communication.
2. It is rapid and quick.
3. It boosts employee morale.
4. It increases trust and develops a better employee relations and coordination.

There are different types of communication structures in informal communication:

1. Single Strand Chain: The communication in which one person tells something to another, who
again says something to some other person and the process goes on.

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 TYPES OF BUSINESS COMMUNICATION 11.3
2. Cluster Chain: The communication in which one person tells something to some of its most
trusted people, and then they tell them to their trustworthy friends and the communication
continues.

3. Probability Chain: The communication happens when a person randomly chooses some persons
to pass on the information which is of little interest but not important.

4. Gossip Chain: The communication Starts when a person tells something to a group of people,
and then they pass on the information to some more people and in this way the information is
passed on to everyone.

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 11.4 TYPES OF BUSINESS COMMUNICATION

Basic Formal Communication Informal Communication

Origin Deliberately Structured Spontaneous and Unstructured
Nature Well planned, Systematic and Authorized Unplanned, unsystematic not Prescribed
Flow Prescribed through chain of command Unofficial channels not prescribed
Flexibility Rigid Flexible
Authority Official channel Unofficial
Purpose To achieve Business Objectives To satisfy personal needs
Speed Time taking Fast
Accuracy Accurate, legal and authentic Often distorted, may be rumors and gossips
Form Oral and Written Usually Oral
Source Can be traced Cannot be traced

Written, Verbal and Non-verbal Communication

Verbal Communication
It uses spoken words to communicate a message. It is the most effective form of communication. It
leads to the rapid interchange of information and feedback. There are fewer chances of
misunderstanding as the communication between parties is clear. But in this communication,
listening is crucial.

Non-Verbal Communication
It is based on the understanding of the parties. It uses signs. Communication succeeds only when the
receiver understands the message completely and proper feedback is given afterwards. It
complements the verbal communication.

The types of Non-verbal communication are as under:

• Chronemics: The use of time in communication is chronemics, which speaks about the
personality of the sender/ receiver like punctuality, the speed of speech, etc.
• Vocalics or Paralanguage: The volume, tone of voice and pitch used by the sender in
communication.
• Haptics: The use of touch in communication.
• Kinesics: It studies the body language of a person.
• Proxemics: The distance maintained by a person while communicating with others.
• Artifacts: The study of the appearance of a person.

Sign Language
“Action speaks louder than words”, non-verbal communication often depends on the uses of
gestures and signs to express oneself. Language in itself is a combination of a set of sophisticated

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 TYPES OF BUSINESS COMMUNICATION 11.5
signs and symbols. For example, two friends making gestures towards each other to communicate in
front of strangers or when they are uncomfortable to speak in front of a third party. These signs are
usually of two kinds visual signs and audio or sound signs.

1. Visual Signs – These are commonly seen and used in and around us. We come across multiple
visual signs in our daily life. For example:
• The traffic signs that we see on the road are an essential form of visual signs for drivers
which help prevent accidents and mishaps on the road.
• The use of posters in advertising to communicate messages to potential buyers or buyers to
keep them informed about products or details.
• The shade-card we receive from painters or interior decorators when we are renovating or
painting.
• Maps and e-maps that help us to navigate to and across places.

2. Audio Signs - Audio signs are another common form of non-verbal communication. Some
examples of audio signs we come across in our daily life include:
 Sirens on the ambulance which act as audio signs telling the driver in front to let the
ambulance pass.
 Car horns are ways drivers communicate to each other while driving.
 Parade drums which alarm the passing of a parade.
 Warning signals and alarms telling people to vacate in case of a building fire.

Advantages of sign language includes:

a) Posters and paintings have an educational value.
b) People perceive and remember the visual signs that are attractive.
c) It is an effective means of communication if properly used.
d) Pictures and drawings can also lead to mental motivation for many people.
e) It promotes creativity and uniqueness.

Disadvantages of sign language includes:

a) Sometimes sign language might not be effective enough to convey a message.
b) If the receiver does not understand sign language communication might become difficult.
c) It is not used properly sign languages can create huge misunderstandings between the
parties.

Modern methods of Communication

a) Jingle - A jingle is a short piece of music with one or more hooks and meanings that promote
a product or service being sold, usually through the use of one or more advertising slogans.

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 11.6 TYPES OF BUSINESS COMMUNICATION
Jingles are utilised by ad buyers in radio and television ads, but they can also be employed to
develop or maintain a brand image in non-advertising circumstances. Many jingles are made
from snatches of popular songs, with the lyrics changed to better sell the product or service.
For eg: McDonald’s jingles is “I’m Lovin’ It”.

b) Music - Music is an excellent and powerful medium for conveying information. It can also be
a lifeline for those with special needs who find it challenging to communicate through other
means. Music has the ability to have significant bodily impacts, to elicit deep and profound
emotions in us, and to be exploited by great composers and performers to achieve infinitely
tiny variations of expressiveness.

c) Cartoon - A cartoon can express a lot of information with very few or no words. It makes
severe depictions on occasion, but always with a sense of humour, and shines a light on the
dark parts of society or political goals. Social media has reshaped and improved
communication using cartoons, particularly during times of crisis.
d) Memes

Written Communication
• Written communication refers to sending of messages, orders or instructions in writing through
letters, circulars, manuals, reports, telegrams, office memos, bulletins, etc.
• It is a formal method of communication. It is less flexible. It can also be used as legal evidence.
• It is time-consuming, costly and unsuitable for confidential and emergent communication.
• In order to be effective communication should be clear, complete, concise, correct, and
courteous.
• This kind of communication is suitable for long distance communication and repetitive standing
orders.

The advantages of written communication include:

1. It creates permanent record of evidence.
2. It can be used for future reference.
3. It gives the receiver sufficient time to think, act and react.
4. It can be sent to multiple persons at a time.
5. It is suitable for sending statistical data, charts, diagrams, pictures, etc.
6. Good written communication can create goodwill and promote business.

The disadvantages of written Communication include:

1. Feedback process also is not instant.
2. It is expensive.

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 TYPES OF BUSINESS COMMUNICATION 11.7
3. There is no scope for immediate clarification.
4. It is less flexible.
5. It is not effective in case of emergency.

Steps involved in Written Communications

In order for a written business communication to be effective the communicator must follow the
following steps:
Step 1 – Preparing the message – After the communicator has successfully planned the
communication, he must draft it properly on paper. After drafting the message, he should be
checked properly for any errors or mistakes.
Step 2 – First Draft – After the message is prepared it should be expressed properly. The
communicator at this stage should focus more on the what he wants to communicate that is the
idea. He can avoid spelling and grammar checks at this stage.
Step 3 – Revising and editing – At this stage the communicator focuses on correcting the grammar,
spellings and punctuations. While editing he must ensure the message is brief and to the point and
that there is no unnecessary information.
Step 4 – Proof Reading – During proof reading the communicator must check the context, accuracy,
form and appearance of the message before he sends it out to people.

Basic Verbal communication None-verbal Communication

Use of word Verbal communication uses oral Non-verbal communication not uses any oral
or written words. or written words.
Types Verbal communication is of two Non-verbal communications may be of
types: Oral and written. various types: visual, audio, audio-visual,
silent etc.
Understand Easy to understand. Difficult to understand
Structured Verbal communication is highly Non-verbal communication lacks formal
structured. structure.
Distortion of Less possibility of distortion of High possibility of distortion of information.
information information
Continuity Verbal communication begins Non-verbal communication continues until
and ends with words. the purpose achieved.
Feedback Verbal communication gives a Non-verbal communication gives a lot of
less and delayed feedback. feedback.

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 11.8 TYPES OF BUSINESS COMMUNICATION
Vertical, Horizontal and Diagonal Communication

Vertical Communication
• Vertical communication takes place among seniors and subordinates or between two people at
different levels of the organizational hierarchy.
• It is generally used when a senior has to assign tasks or delegate authority among subordinates.
It is also used when the subordinate is responsible and accountable for a certain task for which
he must report to his senior.
• The flow of communication is either upward, when the communication is from a subordinate to
his senior. Or, downward when the senior communicates to the subordinate.

The Flow of Vertical Communication

Horizontal Communication
• Horizontal Communication that takes place among any employees on the same organizational
level. It is also known as lateral communication.
• This form of communication is more timely, direct, and efficient than up or down
communication.
• It produces a higher quality of information exchange since it occurs directly between people
working in the same environment.

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 TYPES OF BUSINESS COMMUNICATION 11.9
• Horizontal communication generally occurs formally in meetings, presentations, and formal
electronic communication, and informally in other, more casual exchanges within the office.
• However, there are a few barriers to horizontal communication such as differences in style,
personality, or roles amongst co-workers. Problems can occur because of territoriality, rivalry,
specialization, and simple lack of motivation.

Horizontal Communication Chart

Diagonal Communication
• Diagonal communication is said to take place when people working at the same level interact
with those working at a higher or lower-level of organizational hierarchy and across the
boundaries of their reporting relationship. It is also known as crosswise communication.
• It promotes inter departmental coordination and is more practical. Diagonal communication also
plays a vital role to boost workers’ morale.
• It makes the superior feel like he has been by passed in the communication process
• However, superiors may refuse to implement the suggestion as he has not been consulted. As a
result, it may lead to internal anarchy and external animosity.

Diagonal Communication Chart

Upward and Downward Communication Downward communication

In downward or downstream communication people working at higher levels have the authority to
communicate to the people working at lower levels. It strengthens the authoritarian structure of the
organization. However, it is time-consuming and, in the process, managers may withhold some
valuable information from the employees.

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 11.10 TYPES OF BUSINESS COMMUNICATION
Upward communication
• Upward or upstream communication is useful in sending information, suggestions, complaints
and grievances of the lower-level workers to the managers above.
• It is more participative in nature. It is the direct result of increasing democratization. Here,
psychological problem may come up as managers do not like being told by their subordinates.
• One of the major problems that most modern businesses face is the communication gap that
exists between the top management and the lower-level employees. This communication gap
often leads to increase in conflicts, misunderstandings and misinterpretation of company
policies, in order to eliminate these conflicts arising out of the communication gap many
organizations are adapting to the concept of an ombudsperson. An ombudsperson is a person
hired by the organization who acts as a liaison between the top management and the
employees. The ombudsperson promotes upward communication by discussing the employees
concerns and grievances with the top management.

Lateral Communication
Lateral communication refers to interactions between individuals and groups on the same
organisational level. In contrast to other, less formal situations, lateral communication in the
workplace suggests a more defined goal.
The following are some of the benefits of lateral communication:
1. It saves time.
2. It makes task co-ordination easier.
3. It makes it easier for team members to work together.
4. It offers emotional and social support to the members of the organisation.
5. It aids in the resolution of a variety of organisational issues.
6. It is a method of exchanging information.
7. It can also be utilised to resolve departmental disagreements with other departments as well as
internal departmental conflicts.

Drawbacks:
(i) As lateral communication grows, management may have a harder time maintaining control.
This is partly because controlling the flow of information allows management to exert a great
deal of control and authority.
(ii) Lateral communication can also lead to conflict among employees who are exposed to each
other as a result of the procedure.
(iii) If stringent communication procedural standards are not enforced and followed, it may result in
a lack of discipline.

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TYPES OF BUSINESS COMMUNICATION 11.11

Types of Business Communication

Relationship Flow of Media used during

between the parties Communication communication

Single Strand
Cluster chain
Informal Probability chain Verbal (using spoken Non-verbal Written
Formal
Gossip chain words to (uses signs) (in writing)
communicate a
Advantage: Advantage: message) Chronemics (use of time)
• Effective • Faster Vocalics (volume Tone pitch)
• Timely • Boosts employee Haptics (touch)
• Systematic flow of morale Types Kinesics (body)
information • Creates trust Proxemics (distance)
• Reliable • Develops better Artifacts (appearance)
• Documentary evidence employee relations
present Disadvantage: Visual Signs
• Full secrecy • Less reliable Sign Language
• Hierarchical structure • Propagates the spread
Disadvantage: Audio Signs
• Mostly top down Modern means of
• Slower communication Jingle
• Flows long chain of Horizontal Diagonal (at
Vertical
command (at different level in a (lateral)(at different level Music
• Cause lot of distortions chain of command) same level) outside the chain
of command) Cartoon

Upward Downward Memes

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 INTERNET BASED BUSINESS
12 COMMUNICATION
Over the years the concept of e-communication has gained significant importance in the business
world. While the internet makes doing business online easier, communication can prove tricky.
However, online communication, can create hindrances for businesses if it is not done properly.
Hence, businesses must conduct proper research and consider the different areas of internet
communication that would suit the business and also provide their clients with the best service
available. The way personal communication has changed in the era of the internet is truly
commendable. It affects everything beginning from purchasing groceries to holding conferences and
meetings with overseas stakeholders. The internet has truly helped businesses grow and become
more productive by helping them seek multiple new opportunities.

Advantages of Internet based Business Communication

• Customer Interaction
Businesses should have instant messaging services for customers and online forums as well to
discuss the product and offer tips and reviews.

• Support Options
Customer support is a crucial part of doing business online. It indicates that the company is
making efforts to show customers that it takes their concerns seriously and are willing to resolve
it as soon as possible. Posting and following turnaround policies for answering customer
questions makes the customer feel valued. Also, providing customers with a Frequently Asked
Questions (FAQs) section on the main page of the website helps a lot. Questions can be
answered and the customers’ time is saved.

• The Personal Touch

Since online business communications are mostly faceless, it helps to make the customers feel
like they are talking to people rather than computers. Moreover, sending personal messages in
response to emails can make the customer feel like the company cares about them and their
views. Entities can delegate this task or create separate department.

• Professional Presentation
While it is important for business to make customers feel like they are talking to real people, it is
also necessary to maintain a professional presentation. By projecting themselves as professional,
companies ensure about its reliability to customers. Companies can use a certain professional
email template or include a letterhead along with some professional information to make the
customer feel secure about the business.
 12.2 INTERNET BASED BUSINESS COMMUNICATION

Types of Internet based Business Communication

Email:
Every good business has an email id to make communication easier. Sometimes they have different
email ids for different departments so that the customer can send an email directly to the concerned
department. Businesses should invest in an email provider that prevents spamming and offers filters.

Cloud Computing
A cloud is an on-demand availability of computer resources with direct active management by the
users. This helps business save space and hence time and money by storing all information. Before
cloud, businesses had physical infrastructure for all communications systems located on-premises,
which was expensive due to hardware and maintenance costs. It also increases a company’s
flexibility and collaboration since information can be accessed by the authorized personnel from
anywhere in the world. By using the cloud for mobile communications, businesses can access all in-
office telephone features and critical cloud-based applications from anywhere.

E-Commerce
Internet has made business more accessible by removing the geographical barrier. Activities like
sending catalogues and salespeople to customers is time-consuming and expensive. Only large
companies benefited since they had enough funds. Medium and small business can become
profitable too through e-commerce. Now people from all over the world can view and purchase
their product at no extra cost to the business. This helps the customers as they are no longer limited
to buying products in their cities or towns. E-commerce is reducing the gap between businesses and
customers. It is making companies reassess their sales and marketing strategies. It has made retail a
much more competitive business in terms of both price and quality.

VoIP and Video Conferencing

Before the internet, calling customers on phones or travelling to them was very expensive and time-
consuming. Now, with the internet, business can place calls over the internet using VoIP at low costs.
Sales representatives can also save time and energy by conducting face-to-face interactions via video
conferencing. Hence the company can hire employees from all across the country and get them to
work remotely so they can get the best quality of workers to work at untapped places.

Illustration:
ABC Ltd. had commenced operations in 1994. After a couple of years, the business began to grow in
size and diversify and open overseas branches. By 2012, the company had 23 branches in different
countries and a staff strength of 10,900 workers in all the branches combined. Communication was
becoming huge problem among the staff and management, within the same branch as well as across

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 INTERNET BASED BUSINESS COMMUNICATION 12.3
various branches. Especially when it came to holding joint meetings of the branches there were
numerous barriers. Due to this communication gap employee and customer grievances began to
increase. Customers complained that their problems were not being resolved as a result they had to
shift to substitute companies. Employees too complained that there was no proper communication
from the management and decision making was getting delayed. As, a result the company faced a
tremendous loss in 2014 followed by large amounts of staff turnovers.

The CEO of the company approaches you and explains the problem. You tell him about digital
communication and how this has solved similar problems in other companies. He is impressed and
asks you to think for the various internet-based business communication channels that would
recommend and how these would solve his problem and avoid such situations in the coming yea

Business and Social Etiquette

Etiquette is a set of guidelines and rules for manners and behaviour that is acceptable in a
professional conduct. In a corporate world, good business etiquette means a person acts
professionally and behaves properly with socially acceptable manners when interacting with others
in his/her profession. Good business etiquette is a valuable skillset that can make a person stand out
from others, enhance the person’s individual success rate in the organisation.

A basic example of business etiquette is using simple greetings while acknowledging someone.
Instead of saying “Hey, how can I help you?”, say “Good morning, Mr. Alok, tell me how can I help
you?”. The second sentence looks more engaging. The person addressed feels respected and as a
result a trust is built.

Importance of business and social etiquette

Building positive
relationships: Makes a workplace productive: Rewarding in nature:
Establishing good rapport Business etiquette is essential Those who exercise good
with colleagues and because it creates a professional business etiquette show that
seniors helps in and respectful environment. It they value their job, respect
progressing a person’s improves communication among colleagues, understand
career in the organisation. the members which ultimately customers and take their
This can be done by makes the workplace a productive performance seriously.
exercising good etiquette place. People feel satisfied about These people get rewarded
and exhibiting great their jobs when they feel for their professional and
communication skills. respected, and that helps in polite skills in the form of
translating into better customer promotions to advance in
relationships as well. their career.

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 12.4 INTERNET BASED BUSINESS COMMUNICATION

Building
positive
relationship

Makes a
workplace
Productive

Rewarding in
nature

Professional conduct in a business setting

Professional behaviour in the workplace is a set of guidelines that demands professionally
acceptable attitude, appearance and manners. It involves the way a person speaks, looks, behaves
and make decisions. The main features of professional behaviour are:
• Respecting managers, colleagues and clients.
• Behaving in a positive manner.
• Being calm and polite in stressful situations.
• Making good and ethical decisions.
• Dressing appropriately.

Here are some of the ways an employee can exhibit business etiquette in workplace.
• Honesty: An employee should always act openly and be honest with his/her job. He/she must
not in any case share confidential and privileged information of client unless necessary

• Respect: An employee works in a socially active workplace. Maintaining a respectful attitude to

every member of the organisation is must. He/ she is expected to not lose his/her temper during
stressful times. An employee should refrain from using inappropriate languages and apologise
for misunderstandings or mistakes done because of his/her negligence.

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 INTERNET BASED BUSINESS COMMUNICATION 12.5
• Meetings: A person should always arrive on time. He/she should make contributions to
discussions whenever required and never interrupt anyone unless necessary.

• Communication: An employee should speak clearly and act courteously with others. He/she
should always use good manners when interacting with co -workers and clients. Also, he/she
should be careful of language and tone in communications.

• Integrity: A person should always try to act ethically and make ethical decisions. He/she should
remain impartial keeping aside any personal bias in work.

• Corporate Goals: An employee should have an understanding of the company’s missions, goals
and objectives and the responsibility and role that he/she is expected to perform in achieving
those aims.

• Dress: An employee should follow the company’s dress code of conduct or guidelines. If there
aren’t any such rules, he/she avoid wearing offensive , provocative and revealing clothing.

• Accountability: An employee should always be accountable and responsible for his/her work.
He/she should be honest if things go wrong and always try to improve and learn.

• Teamwork: an employee works in social setting. So it is important for a person to work with
people by setting aside the differences to work well for the benefit of the organisation.

• Commitment: An employee should work with dedication and a positive mindset. He/she should
remain fully committed to his / her responsibility.

Workplace Hierarchy
In a business organization, a chain of command refers to levels of authority starting from top level
like CEO to bottom level like supervisors. Companies institute a chain of command to provide all the
members at all levels with a supervisor to whom they may ask their queries or report grievances.

The chain of command involves moving to the next level of authority. For instance, a plant worker
will report issues to his immediate supervisor and the supervisor will report them to a manager.

It is the duty of Business Leaders to educate their employees about the chain of command. It is
usually desirable that a problem stays at the lowest possible chain in the hierarchy unless it is
necessary to move up to the higher level of organization. Employees should study the organization’s
chain of command and respect it as much as possible.

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 12.6 INTERNET BASED BUSINESS COMMUNICATION

In some cases, in order to voice his opinion immediately, an employee can break the chain of
command. Instead of reporting to the immediate supervisor, he may approach the manager directly.

Business Meeting etiquette

A business meeting is generally of two types internal and external meeting. An internal meeting is
one wherein the members and hosts are from within the organisation and no external member is
allowed to participate in the meeting without the permission of the host. On the contrary, an
external meeting is one wherein the attendees of the meeting are the external stakeholders of the
company such as the general public, government, media houses, etc.
• Invite only people who are essential to the meeting or have a role to play in the meeting.
• Choose the right time and proper place to conduct the meeting.
• Every meeting should have a proper and well-defined agenda that the attendees mut be aware
of.
• All the attendees and host of the meeting should be well prepared with the documents or
presentations that might be required for the meeting to avoid delay and disturbances during the
meeting.
• The host and attendees must be on time for the meeting to avoid delay.
• A note taker should be assigned for a meeting to keep track of the minutes of the meeting.

Telephone etiquette
There are some certain basic manners and rules that everyone in the business should follow while
representing the organisation while communicating.
Some common telephone etiquettes are:
• Person communicating should keep maintaining a calm tone while communicating.
• Warm wishes like good morning, thank you, have a nice day etc should be used.
• It’s important to know who you are speaking to set the tone and use relatable language with
them.
• A person should never call any client at odd hours because it will be considered rude to disturb
them while the client is busy.
• Make sure that the content is short and concise before calling any client.
• It is always appreciated to be a good listener and ask for feedback.
• It is important to never put another party on hold for too long.
• It is one of the important telephone etiquettes is to not take too long to pick up a call.
• In case of network issues between a call, it is advisable to deal with patience and wisely.
• At the end of the conversation, the final etiquette is to ensure that everyone is on the same
page.

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 INTERNET BASED BUSINESS COMMUNICATION 12.7
Meal etiquette
The way a person behaves in a business meal reflects his/her personality and the level of
professionalism. A person needs to demonstrate social skills by following some etiquette rules.
• A person should dress appropriately as per the occasion.
• Arrive few minutes earlier because showing up earlier is respectful to the host and guests.
• It is desirable to make light and mindful conversations with others.
• Direct the conversation slightly towards the agenda of the invitation.
• Make an effort to maintain good posture on the chair throughout the meal.
• It is polite to wait until everyone at the table has received their meal.
• Remember to be kind and gentle toward the server.
• Always follow the host’s lead in these get together meals.
• Exhibit politeness in actions like offering others to fill up their glass and so on.
• At the end of the meal, express gratitude to the host for inviting.

E-mail and blog etiquette

People are more likely to respond positively to emails and blogs if an organisation has a good email
and blog etiquette. It demonstrates that the organisation is professional, and it reduces the
likelihood of misunderstandings.
• Ensure that every e-mail has a proper and relevant subject. Avoid sending e-mails without a
subject
• Proof read mails before sending it.
• Follow a proper e-mail format.
• Avoid using short-forms and acronyms.
• Keep an e-mail short and to the point.
• A blogger must ensure originality in work and avoid plagiarism.
• Use images and graphics that are relevant. Ensure they are not disturbing graphics in the blog.
• Avoid making blogs very lengthy unless required.

Business attire
Business attire refers to clothing worn in a professional setting. Business attire varies from business
casual to business formal.
• Business Casual for men: It typically involves wearing a pair of dress slacks along with a button-
down shirt or sweater. Khakis can also be worn. A sport coat or blazer is also common. Neckties
are completely optional.

• Business Formal for men: Business formal dress is highly professional, and consists of a suit-pant
in preferred colours like black, navy blue, grey, or brown. This suit is worn with a traditional

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 12.8 INTERNET BASED BUSINESS COMMUNICATION
dress shirt, along with dress socks and shoes. Neckties are a must, and should contain only a
minimal pattern design. Shirts should always be tucked and neatly-ironed.

• Business Casual for women: Women may choose patterned outfits with features such as ruffles
or lace, provided they are not excessive. A good rule of thumb is that clothing should not be too
tight or revealing. Knee-high and ankle boots, along with flats, sandals, and higher-heeled shoes
are also acceptable.

• Business Formal for women: Women should wear tidy dresses, skirts or slacks. Tops should
include neat button-down shirts or blouses with a blazer. Business professional shoes include
classic medium sized heels, loafers or tidy flats. Women can accessorize with minimal jewellery
and belts.

Proper way to make introductions:

A proper introduction makes a person look poised, polished and professional. Some guidelines are:
• Introduce people in business based on rank, not gender or age.
Example: “Mr. Suresh, I would like to introduce Jyoti Kumari, assistant manager from Human
Resources.”
• In business, the client, guest or visitor is more important than the boss or co-worker and should
be introduced first.
• Always smile and maintain eye contact.
• Extend a good and firm (not painful) handshake to exhibit respect, trust, and acceptance. It is
desirable to say something nice to other person while introducing like “It’s a pleasure to meet
you”.
• Keep the forms of address equal to all the members avoid differential treatment.
• Use a person’s surname at first introduction.
• Avoid using an honorific such as Ms. or Mr.to introduce oneself.
• Demonstrate professionalism and credibility by clearly stating full name.
• Always be respectful to everyone.
• Always stand up for introductions.
• Ensure that people’s names are pronounced correctly when making introductions.

Courtesy at workplace
Courtesy is one of the C’s of communication. It helps in gaining trust and building strong and positive
relationships.
Some guidelines for showing courtesy are
• Greet people properly. Acknowledge them with a smile and calm tone.
• Introduce yourself and/or other people to the rest of the members.

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 INTERNET BASED BUSINESS COMMUNICATION 12.9
• It is desirable to address your colleagues by their names to make them feel comfortable.
• It is rude to interrupt people when they are speaking.
• Reply to all conversations or invitations kindly.
• Avoid discussing sensitive or controversial matters in public.
• Try to arrive on time or early for meetings and appointments.
• Dress appropriately as per the company’s guidelines.
• Exhibit positive and kind actions like holding the door and the elevator for people.
• Respect people’s property.
• Avoid humiliating others for fun.
• Respect people’s privacy. Do not ask personal or offensive questions.

Business Communication and Public Relations

In today’s information driven world, it is a well-established fact that the communication is as crucial
as other basic necessities of life. Business communication is an important tool for all organisations. It
involves managing and orchestrating all internal and external communications which are beneficial
for the organisation.

Public plays a significant role in carrying out the success for any organisation. In this cut-throat
competition, where every organization strives hard to work toward its brand image, public relations
has become the need of the hour. It is essential for every organization to communicate well with its
target audience. The perception of the public, competitors, employees and other stakeholders
define the organisation’s reputation, respect and success.

Concept of Public Relations

Public relations can be defined as maintaining and sustaining a healthy relationship between the
organization and public/employees/stakeholders/investors. Public relation includes activities to
ensure the correct flow of information between the organization and its target audience. It helps in
maintaining the brand image of an organization in the eyes of its audience impactfully for a long
period of time.

Target audience refers to the parties to whom the organisation wants to deliver its information to
create and maintain relationship.

Example- For hospitals, the target audience would be patients and their families/guardians and for
retailers, the target audience would be customers.

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 12.10 INTERNET BASED BUSINESS COMMUNICATION
In the above examples, Public Relations ensures a smooth two-way communication between the
hospital management and its target audiences (patients and their families). Retailers must respond
to their customers well for a positive word of mouth and a strong brand positioning.

Functions of Public Relations

The main aim of PR is to create a positive and favourable public relations. Some basic functions of
Public Relations are:
• Public Relations Policy: Develop and recommend corporate public relations policy and share it
with top management and all departments.

• Statements and Press Releases: Preparation of corporate statements, speeches for executives
and press releases are to be prepared by the PR personnel to articulate and project positive
image of the company or product or Policies.

• Publicity: Making announcements of company activities and products to media to reach to the
general public and other stakeholders. It includes planning promotional campaigns for the
business and answering inquiries from press and people at large.

• Maintaining Relations: The PR is intended to maintain good and cordial relations with
Government units at local, national and international levels as well as with the community. This
includes compliance with environmental protection standards, giving employment opportunities
to locals, and cooperating and participating in locality development programmes.

• Publications: Preparing and publishing in-house magazines is also the function of PR.

Major areas of public relations activity

• Press conferences
• Advertisements
• Publications
• Media interactions
• Relations with constituents like local community, banks and financial institutions, investors,
shareholders, customers and employees

Principles of public relations

Arthur W Page has established 7 principles of public relations management. They are:
• Tell the accurate picture of the organisation to the public.
• Focus on actions instead of words to appeal to the public.
• Understand the wants and respond clearly to the public.

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 INTERNET BASED BUSINESS COMMUNICATION 12.11
• Anticipate public relations and eliminate practices that may hinder the goodwill.
• Adopt the corporate strategy keeping in mind the interests of the public.
• Realise that the success of the organisation lies in the hands of the public.
• Remain calm, composed, dignified and peaceful.

Negative public relations

It refers to the situations in which a bad image of the company is created. Negative PR also includes
using dirty tricks through extensive research and information gathering. In cases of negative PR,
public relations experts/ agencies should concentrate on reducing the tarnishing reputation of the
organization.

Effective Public Relations

Public Relations is said to be effective under all the below circumstances:
• Awareness: To create a positive image of an organization, the message must reach the public.
Information must reach in its desired form for effective public relations.
• Acceptance: The audience must understand what the message intends to communicate. They
ought to agree with the message.
• Action: The audience ought to give feedback to the organization accordingly.

To conclude, public relations is simply an effort to present one’s organization in the best possible
positive light.

Examples:
1. Uber – Thank You for not riding
At the beginning of worldwide lockdowns, Uber decided to join many companies urging people
to stay home. In their ‘Thank You for not riding’ campaign, Uber thanked their customers for not
using their services unnecessarily at the moment with a simple message: “Stay home for
everyone who can’t. “
Along with the campaign, Uber committed to providing 10 million free rides and food deliveries
to healthcare workers, senior citizens, and all those in need in difficult times.

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 12.12 INTERNET BASED BUSINESS COMMUNICATION

2. Vicks – Touch of Care

Vicks uploaded a video where it shows the story of a transgender woman, Gauri, who cares for
and raises an orphan child, Gayatri, despite all the odds faced due to non-conformity with the
societal norms. The Vicks campaign hoped to redefine the meaning of family.
The goal was to show that it is cares only that makes people come together and become a
family. In just 48 hours, with no paid media support, or promoted views, PR alone generated
over 4 million views” of the video and earned great appreciation from worldwide.

Advertisement and Business Communication

Right from buying groceries to all kind of dresses, finding a resort for vacation to watching a movie,
selecting restaurant for dinner to booking a banquet hall for special events, and searching schools
and colleges to finding jobs, almost every activity is guided by advertisements.
Advertising is derived from a Latin word ‘Advertere’ which means ‘turn the minds of someone
towards something. It can be defined as non-personal presentation and promotion of ideas, goods
and services paid by an identified sponsor. It is a paid non- personal mass communication wherein
business information is made available to an audience.
The aim of advertisement is to promote the business. Objectives of advertisement are:
• To promote newly launched products among the potential customers.
• To promote unique selling point of an organisation.
• To create awareness among the general public.
• To tap into untapped market segment.
• To enhance the goodwill and build credibility.

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 INTERNET BASED BUSINESS COMMUNICATION 12.13

Importance of advertising

Introducing new product: A business organisation introduces its new product by giving out all
information to the general public about the product.

Amplifying sales: Advertising helps in reaching to a larger audience and make new
customers for the business.

Steady demand: Advertising helps in creating and maintaining the consistent demand of
the product by constantly reaching out to the public.

Stay in Competition: If products are not continuously advertised, then the potential
customers can be snatched by other competitors through their rigorous advertising.

Public Awareness: customers get awareness about a product and its usage through advertising.

Mediums of advertising:

Print media advertising: It is done in the Broadcast advertising: It includes television

form of newspaper, magazines, newspaper and radio advertising.
advertisements and brochures.

Outdoor advertising: It includes banners Digital advertising: It is done in the form of

and billboards, advertising on trains, internet, social media, videos, media devices
subways, taxis, and bus stops. and podcasts.

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 12.14 INTERNET BASED BUSINESS COMMUNICATION

Relationship between advertising and communication

There is a relationship between advertising and communication because companies cannot
advertise without communicating. The relationships between the two are on the basis of audience,
message creation, methods of communication and customer service.

• Target Audience: Audience is the receiver of the message. Companies formulate marketing
plans and strategies in order to find suitable customers who will be interested in their products
and services. Advertising facilitates this function of the companies because it has a soft and
subtle way of persuading people.

• Message creation: Every firm must have a marketing objective and it must deliver that message
to the target audience. Advertisements in business helps to increase the customer base,
improving the customer attitudes for the brand, generating clients and revenue. It is possible
only through communication.

• Methods of communication: Advertising is done through print media like newspapers and
magazines, digitally like social media, blogs, videos, broadcasting through televisions and radios
and also through banners and billboards.

• Customer service: Follow up communication is essential in businesses that are sourcing and
retaining clients through advertisement. This helps to build a good understanding between
customers and the company and as a result customer loyalty is built. Communication helps the
company to know on what areas it needs to improve so that it comes with better quality
products and services.

Examples:

1. Maggi from Nestle

Till 1980s, the concept of noodles was alien in Indian market. The marketing team of Nestle
studied the diverse food habits of an average Indian. The team found out that there was a huge
demand of quick freshly made snack item in an Indian family diet consumption. Nestle took this
opportunity and revolutionised the snacking in two minutes by introducing ‘Maggi’. Till now,
Maggi has been dominating snacking segment of Indian market. Although, it had few ups and
downs in its journey to become successful. This success has been possible with the help of
Nestle’s heartfelt and relatable ad campaigns.

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 INTERNET BASED BUSINESS COMMUNICATION 12.15

2. Amul
More than its dairy products, Amul is known for its topical, contemporary and subtle print ads.
This brand doesn’t only run with the time but also makes sure to include their star mascot ‘the
butter girl’ in every possible way. That Amul butter girl’s wit and satire managed to capture the
imagination of every Indian, irrespective of time, region, language, gender and age. Today, Amul
is not just a brand. It is an open display of public emotions.

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INTERNET BASED BUSINESS COMMUNICATION 12.16

Internet Based Business Communication

Advantages Types Business and Social Etiquettes

1. Customer interaction 1. Email Advertisement and
2. Support options 2. Cloud computing Business communication
3. Personal touch 3. E-commerce Page 12.18
Importance Types
4. Professional 4. VolP and video Page 12.17
presentation conferencing Building Positive
relationship
Business Communication and
Makes workplace public Relations
productive

Rewarding in
nature

Concept Functions Principles Effective PR

Maintaining and sustaining a (i) PR policy (1) Tell the accurate picture Awareness
healthy relationship between the (ii) Statement and Press (2) Focus as actions Acceptance
organization and stakeholders releases (3) Understand the want Action
and public at large (iii) Publicity (4) Eliminate practices that hinder
(iv) Maintaining the goodwill
relationship (5) Success of organization is in
public’s hand
(6) Adopt people’s friendly
corporate strategy
(7) Remain calm, composed

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 INTERNET BASED BUSINESS COMMUNICATION 12.17

Business and Social Etiquette

Professional Conduct Business meeting etiquette Telephone

• Invite only people who are essential. • Maintaining a clam tone
• Right time and proper place • Warm wishes
Features Ways • Well-defined agenda • Set the tone and use relatable language
• Respecting all • Honesty • Prepared with the documents • Never call any client at odd hours
• Positive manner • Respect • Must be on time • Content is short
• Calm & polite • Meetings • A note taker • A good listener
• Good & Ethical decision making • Communication • Never put another party on hold for too long.
dressing appropriately • Integrity • Not take too long to pick up a call.
• Corporate goals • Ensure that everyone is on the same page.
• Dress
• Accountability
• Teamwork
• Commitment

Meal Email & blog Attire Introduction Courtesy

• Dress appropriately • A proper and relevant subject • Introduce people based on rank • Greet with a smile and calm
• Arrive few minutes earlier • Proof read mails • The client guest or visitor should be tone.
• Light and mindful conversations • Proper e-mail format. Business Business introduced first • Introduce yourself
• Conversation towards the agenda • Avoid using short-forms Casuals Formals • Smile and maintain eye contact. • Address your colleagues by
• Goods posture on the chair • To the point • Good and firm (not painful) their names
• Wait until everyone has received • Originality in work handshake • Rude to interrupt people
their meal • Use images and graphics • Avoid differential treatment • Avoid discussing sensitive or
• Be kind and gentle toward the server • Person’s surname at first controversial matters
• Follow the host’s lead introduction. • Arrive on time
• Exhibit politeness • Avoid Ms. or Mr. to introduce • Dress appropriately
• At the end express gratitude oneself. • Exhibit positive and kind
• State full name. actions
• Stand up for introductions • Respect people’s property
• Ensure names are pronounced • Avoid humiliating other
correctly • Respect people’s privacy

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 INTERNET BASED BUSINESS COMMUNICATION 12.18

Advertisement and
Business communication

Objectives Importance Medium Relationship between advertising and

1. Promote newly launched 1. Introducing new • Print: Newspaper, magazines etc. communication
products product • Broadcast: television and radio etc. Basis
2. Promote unique selling 2. Amplifying sales • Outdoor: banners and billboards 1. Target audience
point 3. Steady demand hoardings etc. 2. Message creation
3. Create awareness 4. Stay in competition • Digital: Social media, video, etc. 3. Method of communication
4. Tap into untapped market 5. Public awareness 4. Customer service
segment
5. Enhance the goodwill

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 DO’S AND DON’TS OF
13 COMMUNICATION THROUGH
SOCIAL MEDIA
- CONCEPTS, COMPONENTS

The evolution of social networking sites and platforms has had a tremendous impact on the
everyday life of people. Over the last couple of years social media has changed the ways we conduct
business. The traditional business was governed by 3B’s the building, the boss and the boundaries.
Social media has eliminated the dependency of businesses on these 3B’s. Today we can start our
own businesses whilst sitting at a sofa in our home and pressing a few buttons. However, even
though we use informal channels to conduct our business knowing the art of business
communication while communicating over social media is essential. It is important to be able to
communicate effectively through social media because it is omnipresent and can prove to be highly
productive. From advertising to lead generation to conversions, businesses can easily multifold their
returns via Social Channels, and in the same very manner, candidates can impress hiring managers,
and get the best-suited jobs.
Paying proper heed upon the Social Media Do’s and Don’ts is very important to productively use
these highly fruitful platforms.

Do’s of Communication through Social Media

1. Do have Complete and Active Social Profiles:
Complete profiles are credible in nature. It ensures engagement and forming connections
becomes easy.

2. Be Consistent with Business Profiles:

It is good to be consistent with the type of content you share for others to see. But it is essential
to post content that is significant to the business.

3. Be Unique and Engaging with Sharing:

Social media communication must ensure that business is represented properly. Grounds should
be created for healthy discussion on social media about the business. But a business should
avoid spamming as much as possible.

4. Do Make Relationships:
Before building new relationships, it is important to nurture existing relationships. Business gets
to know how often it should engage with its clients or target audience. Also, firms utilize
connections to organize face-to-face interactions. However, there is clear separation business
and personal relationships.
 13.2 DO’S AND DON’TS OF COMMUNICATION THROUGH SOCIAL MEDIA

5. Do Prioritize Networks:
Organizations use networks that best fit their business and target audience. LinkedIn for B2B
businesses and Facebook, Twitter, and Instagram for B2C and B2B marketing is considered best.
It is vital to use the right content on the right network since audiences vary across networks,
have a clear vision of the brand and translate the same across all networks.

6. Regularly Interact with Audience:

Firms can send friendly replies to queries, ask the connections and friends for recommendations.
It must be kept in mind that firms do not need to be offensive or aggressive and must handle
criticism gracefully.

7. Do Entertain and Inform Audience:

Businesses should not constantly focus on selling their product or service. Informative and
entertaining posts attract more attention as they have more visually appealing power.
Businesses should try new ideas, have fun and be selective and spread positivity and inspire
people to grow traffic organically.

Don’ts of Communication through Social Media

1. Don’t Project as Needy:
A business should not do the followings:
- Ask its followers to retweet or like its post.
- Worry about the number of followers rather focus on quality and not on quantity.
- Be fake and pretentious.
- Dedicate the whole time on social media rather than develop productive relationships.

2. Don’t Over-share the Content:

A business should not:
- Spam with the same promotional messages.
- Join groups, spam, and then leave.
- Overshare as it can lead to losing the followers.
- Automate the same message across different networks

3. Don’t use Poor Grammar and Spelling:

A business should not:
- Use grammatical mistakes as they reduce credibility.
- Write posts in all caps as it seems offensive.
- Use hashtags unnecessarily.

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 DO’S AND DON’TS OF COMMUNICATION THROUGH SOCIAL MEDIA 13.3

4. Don’t excessively depend upon Automated DMs:

A business should change the voice of the message to match the network and always try to write
an original message for each social media network based on its intended purpose and audience.

5. Don’t believe Everything you Read:

A business must always cross check for authenticity of things it sees and considers.

6. Don’t Project as a know-it-all

A business is not required to project itself as know it all because it creates a negative image and
comes off as arrogant.

7. Don’t Complain:
Business should avoid complaining as it can make it seem unprofessional.

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DO’S AND DON’TS OF COMMUNICATION THROUGH SOCIAL MEDIA 13.4

Do’s and Don’ts of Communication

through Social Media

Do’s Don’ts
• Do have complete and active social profiles • Don’t’ project as needy
• Be consistent with business profiles • Don’t over-share the content
• Be unique and engaging with sharing • Don’t use poor grammar and spelling
• Do make relationships • Don’t excessively depend upon automated DMs
• Do prioritize networks • Don’t believe everything you read
• Regularly interact with audience • Don’t project as a know-it-all
• Don’t complain

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 WRITING AND DRAFTING
14 FOR BUSINESS AUDIENCES
- CONCEPTS, COMPONENTS
Every business has audiences. These audiences are none other than the customers or clients of the
businesses. It is the duty of every business to satisfy their audience at the end of the day. The
audience on the other hand want the business to maintain a personal touch with them, keep them
updated about new products, discounts and benefits. In order to communicate these details, the
business relies upon various forms of communication techniques such as sending letters, emails and
sometimes using social media promotions to maintain a personal touch with their audiences.
There are mainly 4 types of business audiences:

Business Audiences

Friendly Uninformed Apathetic Audience – Hostile Audience –

Audience – Audience – They are They are uninterested They began to disagree
They are easy unaware about the from the start and it is with the communicator
to deal with and business or details of hard to deal with from the start and they
the duty of the the business. Hence, them. The business are the hardest to deal
business is to the primary duty of must first have to with. They listen with a
reinforce their the business is to prove and justify their closed mind.
beliefs. educate them. point of view.

Inform

Reasons for writing and drafting for

Persuade
business audiences

Create Goodwill

Some of the reasons businesses write and draft for their audiences are:
• Inform – It is the duty of every business to inform its audiences and stakeholders about relevant
informed about corporate policies, decisions, upcoming offers and discounts. Laws have also
been created under the constitution such as the Right to Information so as to protect the rights
of the business audiences.
 14.2 WRITING AND DRAFTING FOR BUSINESS AUDIENCES
• Persuade – These days PR and marketing have become one of the top priorities of businesses.
While PR’s try to pursue and develop the company name and reputation through
communications with potential audiences, the marketing department tries to pursue potential
consumers about the company, brand name and the product and services offered by the
business. Apart from these there are several other stakeholders that a business needs to pursue
to help build trust of the stakeholders and company reputation.
• Create Goodwill – Goodwill is an immeasurable and intangible asset however it is the aim of
every business to create as much as goodwill as they can. In order to create and maintain the
goodwill of the business communication plays a significant role.

Business Meetings
A business meeting is a gathering of two or more persons for the purpose of making decisions or
discussing the goals and operations of a firm. Business meetings are often held in person in an office,
but with the advancement of video conferencing technology, participants can now join a conference
from anywhere.

A business meeting has the following objectives:

a) Decision making
b) Brainstorm ideas
c) Build morale of the team
d) Status and work updates

Advantages of Business Meetings

i. Business meetings make it possible to work together and solve problems as a team.
ii. Employees and members realize the significance of their role in the organisation.
iii. Helps in brainstorming for the best ideas
iv. Ensures that all members and employees are on the same page and aware of the affairs of
the organization.
v. Boosts employee morale as when contrasted to completing solo work

Disadvantages of Business Meetings

While there are multiple advantages of a business meeting, there are certain disadvantages as well:
i) Business meetings are a time-consuming process.
ii) There might be people who are insignificant at a meeting but are forced to attend it.
iii) Meetings could sometimes be biased.

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 WRITING AND DRAFTING FOR BUSINESS AUDIENCES 14.3

Types of Meetings

One to one meeting - A One to many meeting – A One to group meeting - A one to
regular check-in between two meeting wherein a single group meeting or a town hall
persons in an organisation – person presides over the meeting is a form of gathering
which often a manager and meeting and the audience that brings together everyone in
an employee – is known as a is restricted to a small an organisation or team to
one-to-one meeting. It is group of people. This is discuss critical issues. They
generally used to provide a generally used to give provide a chance for managers
feedback, keep each other instructions to a team or or team leaders to share fresh
informed, manage problems, particular departmental information and for employees
and assist participants meeting of an organisation. of all levels to participate in the
advance in their professions. discussion. The frequency of
town hall meetings varies, but
weekly or monthly meetings are
common. It is critical to organize
town hall meetings at times that
are convenient for everyone, so
keep time zones and peak
meeting hours in mind.

Letters and Memorandums

Letters
Business letters illustrate commitment to the objective at hand. A letter must be in the desired
format, expressing ideas, dedication to the requirements, and an understanding that words and
letters can make a difference in the lives of others. Business letters can be informational, persuasive,
motivational, or promotional by nature. It can be for various purposes such as sending order,
sending offer details, communicating to vendors, etc.

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 14.4 WRITING AND DRAFTING FOR BUSINESS AUDIENCES

Types of business letters

Enquiry Letter - Buyers usually want to

know the details of the goods which they
are willing want to buy, like quality,
quantity, price, mode of delivery and
payment, etc. They may also ask for a Quotation Letter - After receiving an
sample prior to making an order. enquiry letter from a prospective buyer.
The seller supplies the relevant
information by writing a letter that is
Order Letter - The prospective buyer after called quotation letter.
receiving a reply to the earlier enquiry
letter may decide to place on order with
the best business firm which offers goods
at minimum price and favourable terms Complaint Letter - When the purchaser
and conditions. does not find the goods up to his
satisfaction, he files a complaint letter. It
is normally written by the purchaser when
Recovery Letter - A letter written by the he receives improper, incorrect,
seller for collecting of money for the insufficient, or damaged goods
goods supplied by him to the buyer is
called recovery letter.

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 WRITING AND DRAFTING FOR BUSINESS AUDIENCES 14.5

Formal Letter Format:

Sender’s Name
Sender’s Address
Sender’s Address

Recipients Designation and Name,

Recipient’s Address
Recipient’s Address

Date

Subject of the Letter

Salutation,

Introduction Paragraph (1 para) - Set the context of the discussion

Body of the Letter (1 -2 Paras)

Conclusion (1 para) - Expected Action by the addressee

Yours Sincerely,
Signature of the Sender
Full name of Sender

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 14.6 WRITING AND DRAFTING FOR BUSINESS AUDIENCES

Sample Formal Letter

Write a letter to the supplier of raw materials for receiving lesser quantity of goods than ordered.

Mr. ABC
XYZ Limited
Los Angeles, California – 90011
4th August, 2021

Mr. PQR
RST Limited,
Gotham City – 53540

Subject: Receiving lesser quantity of goods than ordered

Respected Mr. PQR,

With respect to order no. 54321 dated 20th September 2021, this is to inform you that I have
received lesser quantity of microchips of type X than ordered. Also, some of the pieces received
were damaged and needs to be replaced.

I am writing to request you to please replace the defective microchips and makeup for the shortage
in quantity that has been supplied. According to the order details I have ordered for 15,000 pieces
however only 9000 pieces were delivered. I am including a copy of the order receipt and Invoice
received during delivery for your reference.

I have made purchased other products manufactured by your company in the past as well, and have
always been impressed with the quality of the products made available to customers. I sincerely
hope this is a one-time incident, and that any future purchases I make will live up to the standard my
family has come to expect from your company.

Yours Sincerely
Signature
Mr. ABC

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 WRITING AND DRAFTING FOR BUSINESS AUDIENCES 14.7

Memorandum
A memorandum is a one to all note normally used for communicating policies, procedures, or
related official business within an organization. It is often written for broadcasting a message to an
audience, rather than a oneon- one, interpersonal communication. It may also be used to update a
team on activities for a given project, or to inform a group within a company of an event, action, or
observance. A short message or record used for internal communication in a business.

Memorandum Format:

To:
From:
Date:
RE:

Body of the memorandum

Sample Memorandum

To: Mr. ABC, Sales Manager

From: Mr. XYZ, M.D.
Date: 14th December, 2017

RE: Behavioural Issues

A number of clients lately have been complaining about the behaviour of the sales team members.
Our clients have complained regarding the use of inappropriate language and rude behaviour from
the sales staff. These complaints could have an adverse effect on the company image and brand
name.

I think it is essential that you need to coordinate with your team members and sort out this issue. If
complaints like this continue in future the management will be forced to take serious steps against
some of the sales staff. You are requested to get this matter sorted out with your sales team.

If necessary, I can arrange for the HR personnel to assist you in the process and send us a detailed
report along with statements from your team members.

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 14.8 WRITING AND DRAFTING FOR BUSINESS AUDIENCES

Report – Formal and Informal

A report is written to pass on specific information with a clear purpose to a particular audience. The
information is clearly structured making use of sections and headings so that the information is easy
to locate and follow. A report can outline the purpose, audience and problem or issue, together with
any specific requirements for format.

Information Reports – Information reports present facts

about a certain given activity in detail without any note or
suggestions.

Analytical Reports – Analytical reports contain facts and

analytical explanations offered by the reporter himself or
may be asked for by the one who is seeks the report.

Research Reports – Research reports are usually based on

research work conducted by an individual or by a group of
individuals on a given problem statement.

Types of Reports Statutory and Non – Statutory Reports – Statutory reports

are made to be presented according to the legal
requirements of a rule or a custom now has become a rule.
Non-statutory reports are not legal requirements or rules
wants.

Routine Reports – Routine reports are required to be

prepared and submitted periodically on matters required
by the organization.

Special Reports – Special report is specially required to be

prepared to be submitted on matters of special nature.

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 WRITING AND DRAFTING FOR BUSINESS AUDIENCES 14.9
Basic Formal Report Informal Report
Meaning Reports that are prepared in Informal reports are prepared with no
prescribed forms, according to proper prescribed forms or according to
some established procedures to established procedures and neither for
proper authorities are said to be proper authorities are said to be formal
formal reports. reports. It is the opposite of a formal
report.
Form of the Formal report is highly structured Informal report are less structured and it is
report and is prepared in a prescribed less important to follow the prescribed
format. format.
Purpose Formal report is written to help The main purpose of an informal report is
management in making long term to present the facts to assist managers in
and strategic decision making. making daily business decisions.
Objective Formal report are used to assist Conveying routine messages and to help
decision making by providing an routine functions is the basic objective of
effective recommendation. an informal report.
Length It is long in size. Size of a formal It is short in size. An informal report is
report is large. short in size.
Distribution Formal reports are circulated to Short report is usually circulated within an
top-level executives and outside organization.
parties.
Nature of Formal report deals with complex Informal report deals with less complex
problem and non-recurring problems. It is and recurring problems.
analytical and systematic in
nature.
Frequency of Formal report is writtenIt is written frequently almost on a daily
writing infrequently. basis.
Writing This type of report is usually These reports are usually written by a
responsibility written by internal or external subordinate.
experts
Use of visual aids This type of report makes This type of report seldom uses visual aids.
extensive use of visual aids to
present the facts.
Writing Style This report follows an indirect and This report follows direct and personal
impersonal writing style. writing style.
Recommendation Recommendation is an essential Recommendations are not required in
part of a formal report. informal reports.

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 14.10 WRITING AND DRAFTING FOR BUSINESS AUDIENCES
Sample Report of an Event
On the eve of 24th September as South Africa celebrates its Heritage Day recognising and
celebrating the diversity of culture, beliefs and traditions of the nation. India shares a deep cultural
relation with South Africa that dates back several centuries. Indian diaspora holds a significant place
in the cultural milieu of South African nation.

Acknowledging this deep bilateral cultural relationship between both nations and commemorating
the South African Heritage Day, Swami Vivekananda Cultural Center at the Consulate General of
India, along with Institute of Social and Cultural Studies India, African Heritage Collective and KZN
Department of Arts and Culture organised a three day long web based heritage festival titled Virasat
Parva/ Umcimbi Wamagugu from 24th to 26th September, 2021, highlighting the cultural diversity
and cultural interconnectedness’ between both India and South Africa.

The first day of this web-based heritage festival commenced with a meaningful disquisition on
Heritage of love and compassion by distinguished speakers like Ms. Fezeka Shandu, Dr. Sujit Kumar
Pruseth and Ms. Nithabiseng Mohanelai. In the following day the discourse of the online heritage
festival focused on the issue of Heritage of Dialogue and Cooperation where eminent speakers like
Mr. Thokazani OkaMbalane, Dr. Ishani Naskar, Mr. Samu Pacho and Dr. Janardan Ghose shared their
valuable thoughts over this issue. The concluding day of the web- based symposium saw
distinguished speakers like Ms. Zee Imbongi, Dr. Phirmi Bodo, Mr. Khulekani Mkhize and Mr. Syon
Niyogi deliberating on the topic of Heritage of Hard work and Experimentation. Beside the academic
deliberation this web-based symposium also displayed delectable cultural performances of
accomplished artists that exhibited the cultural heritage of both India and South Africa.

Business Proposal
A business proposal is a written document sent to prospective clients to obtain a specific job. A
business proposal is a written proposal presented from a business that intends to elicit business
from a prospective buyer. It is unique because it contains a lot of figures and statistics represented
by pie charts and graphs. Characteristics of a Business Proposal
1. Solutions - After writing a lead paragraph on the company’s problems, follow up with a solid
presentation of how your business can provide solutions.
2. Benefits - Business proposals, clearly outline for the company the benefits to be gained from
doing business with a firm Credibility - This is often the overlooked portion of a business
proposal but all proposals glow with credibility.
3. Samples - Business proposals with samples and evidence of one’s ability to deliver is vital to
gaining the winning bid.
4. Targeted - Business proposal is all about communication. Speak in a language spoken by the
intended audience.

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 WRITING AND DRAFTING FOR BUSINESS AUDIENCES 14.11

Sample Business Proposal:

To: ABC, Human Resources

From: Mr. PQR, Accounts Department
Subject: Proposal to create a Fund Raiser Program
Date: 19th April, 2005

There are a lot of old equipment and used office items lying in the store which are still in usable
condition. We can have an auction which will not only help get rid of the goods but also create space
in the store. We can use the collected funds to renovate the defective office equipment and
machines. And the surplus thereafter can be used in the annual CSR program conducted by the
company.

Benefits of the program include

• Generating funds
• Preventing the equipment in the store from damage
• Gathering funds for CSR activities
• Cleaning up office space
• Getting new machines and equipment for the office

Obstacles of holding the program

While trying to conduct the program there could be certain hindrances such as:
• Certain Employees might disagree to the plan
• Funds accumulated might not be as high as expected

Enhancement of writing skills

Apart from oral communication, written communication is an essential part of the daily
communication in this world in forms like text messages, mails, business letters, press releases and
social media posts.

Writing is not just a job-related skill. It is more than that. It is an art of expressing one’s ideas,
opinions, learning, experiences, views and values. In short, it is basically a life skill.

Writing is personal in nature and it represents one’s true characteristics. As a result, it helps a person
to connect with others.

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 14.12 WRITING AND DRAFTING FOR BUSINESS AUDIENCES
However, many people underestimate the scope and value of having writing skills. People usually
tend to think that only a certain group of people like journalists, editors and writers have good
writing skills. But with the rise in importance of communication, having good writing skills has
become a necessity for every person with different social and industrial background. It can be
learned by anyone at any time.

Significance of writing skills:

Before focusing on improvement of writing skills, it is critical to clearly understand the benefits of
having good writing skills.
• Improving communication skills - Strong writing skills help a person to communicate and
connect with others. It makes the message transmitted clear, concise and concrete. Readers can
easily understand the essence of idea being presented.

• Fostering creativity, imagination and knowledge - Writing enables a person to pour down his
idea, thought, imagination in a paper. The frequently a person writes, the more his brain is
enhanced to generate new ideas. Reflecting on these ideas helps in exploring productive ways of
solving an issue, leading to fostering creativity.
Moreover, writing involves reading and researching. As a result, knowledge base of a person is
widened.

• Enhancing problem solving skills - Writing involves several complex cognitive activities, such as
listening, reading, and then processing the concept in your mind, and finally put it down in a
paper. It leads to a clarity of thought and thereby improving problem solving skills.

• Targeting a large audience - Writing enables a person to make its idea reach to a large number
of people. If judiciously planned, designed and written the information, the intended readers get
the idea directed to them in complete manner.

• Demanding skill in today’s world - Having good writing skills is one of the top attributes an
employer looks for in a job in today’s evolving period. So, this might act as an income generator
for a person.

Enhancement of writing skills:

Following points should be kept in mind to improve writing skills:
• Organising the thought
It is foremost a person to organise the concepts on which he/she is planning to write to have a
clear purpose.

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 WRITING AND DRAFTING FOR BUSINESS AUDIENCES 14.13
• Outlining before writing
Outlining the idea and making key points helps the writing process smoother and leads to early
and better finishing of the project.

• Wide reading
Reading a variety of material helps in increasing knowledge base and growing a lot of
vocabulary. Also, a person gets introduced to different styles of writing.

• Use simple words and phrases

Writing too many jargons and complex words do not make a writing smart and impressive. It is
advisable to use simple and effective words to convey the message to the intended readers.

• Practice
Frequent writing will make writing easier, more efficient and more effective. A person can
develop his/her own personal writing style through regular practice.

• Awareness about audience

It is necessary for a person to understand the kind of readers who will be reading. Careful choice
of appropriate words and selection of the right length of communication will help to streamline
the writing.

• Read before sending

A person should always read what he/she has written before sending it to others. While doing
so, shortcomings of the writing become evident and can be corrected timely.

• Feedback on writing
Getting responses is extremely helpful in providing valuable lessons and improving writing skills
in future.

Notice and Circulars

Notice
A notice is defined as a written or printed announcement. It is a form of non-verbal communication.
A notice is written in order to inform people about something that has happened or something that
is about to happen.

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 14.14 WRITING AND DRAFTING FOR BUSINESS AUDIENCES

Notice Format

Name of Organization / Institute / Person issuing the Notice

Date of Notice

Title or Subject

Body of the Notice

Signature or stamp of issuing authority

Sample Notice
ABC School
Date: 04/12/2013
Upcoming Winter Vacation
Dear Parents,
Kindly note there has been a slight change in the upcoming winter vacation schedule. Winter
vacation has been preponed to 20th of December, 2013 and school will reopen on 8th January 2014.

Regards,

Signature / Stamp
ABC School

Circulars:
A circular is defined as a type of business letter that is used for promotion of the business or its
product or services.
Circular Format
Issuing Authority / Business
Date of Issuing Circular
Salutation
Body of Circular
Yours Sincerely / Faithfully / Best / Warm Regards
Signature / Stamp of Issuing Authority or business

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 WRITING AND DRAFTING FOR BUSINESS AUDIENCES 14.15

Circulars:
A circular is defined as a type of business letter that is used for promotion of the business or its
product or services.
Circular Format
Issuing Authority / Business
Date of Issuing Circular
Salutation
Body of Circular
Yours Sincerely / Faithfully / Best / Warm Regards
Signature / Stamp of Issuing Authority or business

Sample Circular
ABC
1st July, 2018

Dear customers,
It is our pleasure to inform you about our grand clearance sale of our stocks before the winter
starting from 15th August, 2018 across all our outlets.

The offer covers most favorite winter fashion garments. We have a wide collection for Men, Women,
and Children. There will be clearance sale up to 50% and for each purchase, you will be given a free
coupon which may give you an opportunity to win attractive prizes. So, HURRY UP and don’t miss the
opportunity as our exclusive offer will remain up to 15th October 2018.

Best,
ABC

Business Report Writing

A formal business document is an official document that provides statistics, research, information,
and other pertinent elements to assist decision-makers in developing strategies and objectives to
benefit the organisation. A formal business report could be several pages lengthy and feature a lot of
data and information, depending on the topic.
Elements of a business reports
i) Cover Page - The first and the most crucial element of a business report is its cover page which
tells the readers what the report is about and who wrote the report.

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 14.16 WRITING AND DRAFTING FOR BUSINESS AUDIENCES
ii) Contents – A business report must have an index page which tells the readers about the titles of
topics covered in the report. It provides a quick glance and opinion of the nature and contents
of the report.
iii) Executive Summary - An executive summary provides a concise description of the report’s
purpose as well as the report’s main findings, recommendations, and conclusions. The summary
is usually a half-page or less in length and does not include any supporting documentation.
iv) Sections - To make your report easier to grasp and flow from one issue to the next, divide it into
chunks of related content in the form of sections.
v) Supporting information - If the report contains a lot of research, data, financial records, charts,
reviews, graphs, and drawings, put them in an appendix. If they are only supporting documents
that readers might desire after they have read the report to verify your claims. Include them on
the pages where you are making your remarks if they are important to demonstrate a point.

Sample Format
1. Cover Page

2. Contents

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 WRITING AND DRAFTING FOR BUSINESS AUDIENCES 14.17

3. Executive Summary

4. Topics / Sections

5. Supporting Information

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 WRITING AND DRAFTING FOR BUSINESS AUDIENCES 14.18

Writing and Drafting for Business Audiences

Business Business
Documents Writing Skills
Audience Meetings

(i) Letters Enquiry letters Significance Enhancement of writing

Types Reasons for writing Quotation Letter skill
1. Friendly and drafting for Order Letter • Improving communication • Organizing the though
Audience business Audience Complaint Letter skills • Outlining before
2. Uninformed • Inform Recovery Letter • Fostering creativity, writing
Audience • Persuade imagination and • Wide reading
3. Apathetic • Create Goodwill (ii) Memorandum knowledge • Use simple words and
Audience (iii) Reports Formal • Enhancing problem solving phrases
4. Hostile Informal skills • Practice
Audience
• Targeting a large audience • Awareness about
(iv) Business Solution • Demanding skill in today’s audience
Proposal – Benefit world • Read before sending
Characteristics Sample
• Feedback on writing
Targeted
(v) Notice
(vi) Circulars
(vii) Business Cover page
Reports – Contents
Page 14.19 Elements Executive summary
Supporting information

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WRITING AND DRAFTING FOR BUSINESS AUDIENCES 14.19

Business Meetings

Objectives Advantage Disadvantage Types

(a) Decision making (i) Work together and solve problems (i) Time-consuming (a) One to one
(b) Brainstorm ideas (ii) Realize the significance of their role (ii) Sometimes be biased. (b) One to many
(c) Build morale of the team (iii) Helps in brainstorming (c) One to group
(d) Status and work updates (iv) Ensures that all members and
employees are on the same page
(v) Boosts employee morale

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 INTERCULTURAL AND
15 INTERNATIONATIONAL
BUSINESS COMMUNICATION
- CONCEPTS, COMPONENTS

Since the onset of globalization and the industrial revolution businesses have sought to expand their
activities across various cities and countries around the globe. However, before commencing
operations in a new region it is essential for the business to understand the culture, language and
lifestyle of the people living that region in order for it to be a successful venture.

These days it has become important to understand the diverse cultures. Cultures vary from place to
place and it is essential for businesses to be sensitive to the diverse cultures as they expand. When a
business expands to a new city or country it depends upon that place for its suppliers, employees,
customers and other forms of stakeholders. During international or intercultural communications an
organization must keep the following points in mind:

1. Display respect, patience and empathy towards the others culture.

2. Sometimes in order to adapt to a particular culture a business firm might have to tweak its rules
and regulations, habits and business methodology. Hence it is essential to remain open minded
during an intercultural or international communication.
3. Search for similarities instead of differences in culture. Searching for similarities will help both
the parties connect and communicate more smoothly and effectively.
4. Use gestural communication as much as possible. When people belonging to different cultures
or languages communicate, they tend to follow each other’s gestures and reactions.
5. Be attentive and avoid any form of distractions.

Stages of Intercultural Sensitivity

Cultural sensitivity is defined as recognizing the different types of cultures, the similarities and
differences between them, without being judgemental or prejudicial and thereby accepting the
culture. Bennett had described six stages intercultural sensitivity.

Stage 1 : Denial – The denial stage is the first stage in intercultural sensitivity. At this stage the
members are completely unaware about the cultural differences that exist among their respective
cultures, It, is essential that the members recognize and understand the differences among the
cultures to avoid any form of intercultural disputes.

Stage 2 : Defence – In the second stage, once the members have spotted the differences in their
cultures and they look upon these differences as negatives. They uphold the values of their own
 15.2 INTERCULTURAL AND INTERNATIONAL BUSINESS COMMUNICATION
culture as “rightness” and criticize the beliefs and practices of other culture. At this stage each
member of one culture must be taught to be tolerant towards the other culture(s).
Stage 3 : Minimization – In this stage the members recognize and even appreciate the differences in
the cultures. The members focus their attention on studying more about their own culture and avoid
projecting their cultural values upon others.

Stage 4 : Acceptance – This stage is a reasonable goal that every organization must seek to achieve
while expanding across cultures and countries. At this stage the members learn to accept each
other’s culture however they still remain devoted to their own respective cultures.

Stage 5 : Adaptation – In the fifth stage of the intercultural sensitivity the members function in a bi-
cultural capacity. That is, they learn more about the other culture(s) and mentally shift adapt, adjust
and operate within the other culture after understanding both the cultures.

Stage 6 : Integration – In the final stage the members have complete in depth knowledge and adept
to the different cultures and the ability shift easily among cultures. At this stage the members
integrate both the cultures and cultural flexibility emerges as a result of the integration.

Ethnocentrism
When a person(s) believes that his or her culture is superior compared to the culture of other
people, this belief is called ethnocentrism. It is a type of psychological barrier that obstructs
communication among people belonging to different cultures. There are 3 ways to avoid
ethnocentrism:
a) Avoid assuming details. One must not assume that the other will possess the same ideas, notions
as himself.
b) Avoid premature evaluations. Avoid judging and evaluating people without completely
understanding or gaining proper knowledge about the other person’s culture.
c) Recognize the differences in culture. One must keep an open mind in order to understand and
accept the differences among the cultures.

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INTERCULTURAL AND INTERNATIONAL BUSINESS COMMUNICATION 15.3

Intercultural and International

Business Communication

Requisites Stages
1. Display respect, patience and empathy 1. Denial
2. Tweak own rules and regulations, and remain 2. Defence
open minded 3. Minimization
3. Search for similarities instead of differences 4. Acceptance
4. Use gestural communication 5. Adaptation
5. Be attentive 6. Integration

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 BARRIERS TO BUSINESS
16 COMMUNICATION
- CONCEPTS, COMPONENTS
There is an old saying that “Good fences make good neighbors”, but often it is seen that these “good
fences” also act as barriers that create misunderstandings and divisions among people. While
communication is an effective tool in expressing oneself, an improper communication can lead to
the creation of barriers and obstructions, that might disrupt smooth functioning. There are multiple
kinds of barriers that effect a smooth flow of communication. These barriers are often caused by
misinterpretations of various kinds and lead to misunderstandings between the parties.

The barriers in communication simply refer to the obstructions that affect the smooth transmission
of messages and can be of various forms for example noise, improper medium, languages
community, region and many others.

One of the best ways to understand the barriers that exist in communication is through the popular
childhood game of Chinese Whisper.

Types of Communication Barriers:

• Physical Barriers– Physical barriers are created mainly due to disturbances in the surroundings
or environment of either party or both parties involved in the communication process. A physical
barrier can be natural or artificial and can easily be spotted.
Physical barriers can be of many types. Firstly, disturbances in the background in the form of
noise. Secondly, Inappropriate communication medium. Thirdly, when either party (listener or
speaker) is disturbed or inattentive or suffers some physiological defect like shortness of hearing
or stammering. Fourthly, disturbances in the environment or surroundings.

Causes of Physical Barriers are:

• Distance: Geographical distance is a big cause of physical barriers. It prevents personal
communication. Communication is done through video conferencing, phone calls, mails and
memos. Obstacles can be in forms of poor reception and slow network which later cause delay
in communication process.

• Environment: Environmental conditions can badly affect the flow of communication. For
example, if a person is standing in adverse weather conditions, the conversation would be
hampered because that person would not be able to pay full attention to what the other person
is saying and the flow of information will not be smooth.

• Technical Disturbances: Technology is very helpful in an organization. But technical disturbances

can happen unexpectedly. For example – a broken fax machine, crashed system and a faulty
 16.2 BARRIERS TO BUSINESS COMMUNICATION
printer, etc. All these can cause delay in the flow of information and data can be deleted if not
saved before.

• Time: Organizations or people located in areas with different time zones face this issue. The
sender should ensure that the message is concise, relevant and short so that crucial information
can be communicated to the receiver to prevent further delays.

• Sematic Barriers – Sematic barriers or language barriers arise when both the parties speak two
different languages and most of the essence of the message is lost in the translation process.
Even when both the parties speak the same language the essence could be lost when either of
them uses jargons, dual meaning words.
Here are some of the common language features and phrases that can cause communication
problems arising out of semantic barriers:
 Misunderstood words: Some words have different meanings or usage in different context.
They sound exactly the same. As a result, confusion in the mind of listener is created.
Example- Right and Write, Fair and Fare, Sale and sell.

 Missed humor: many times, people don’t get the jokes or humor. They find it offensive and
inappropriate. Humor is only applicable and effective when there is a cordial, comfortable
and harmonious relationship among the members of the organization.

 Usage of idioms: Idioms are the phrases which have a figurative meaning which is totally
different from literal meaning. They are usually used in daily normal interactions. In a
business communication, it can be ambiguous and illogical. Example - The marketing
manager felt like he was ‘sitting on pins and needles’. ‘Sitting on pins and needles’ means to
be anxious or nervous. For a person who is not familiar with the idiom, finds it difficult to
understand the meaning of the sentence.

Some of the ways to overcome semantic barriers are:

 A speaker should express himself/ herself to the listener clearly.
 Appropriate body languages like facial expressions and gestures while communicating
should be used.
 Any party should never assume anything while communicating. If in any doubt, the person
should immediately clarify.
 A speaker should always listen actively to the listener so that any confusion is not built.

• Psychological Barriers – Communication is a form of expressing one’s thoughts using a verbal or

non-verbal medium. The origin of communication is in one’s mind and hence involves the

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 BARRIERS TO BUSINESS COMMUNICATION 16.3
concept of psychology. However, the mind too can create barriers in communication that
prevents a person from properly expressing himself or understanding the other person.
Psychological barriers are of various types some of the most popular types include:
 Emotions – Emotions play a major role in making rational decisions. Sometimes,
communication also involves making decisions and these are affected by the persons mood
and emotions.

 Halo Effect – When a particular trait of a person outweighs the other traits it is said to be a
halo effect. For example, judging people by their appearances or intelligence.

 Information Overload – Burdening the listener with too much of information at a time gives
rise to fatigue and the listener is unable to retain all the points during the conversation
which might have severe impacts on the effectiveness of the communication.

• Others – Other forms of psychological barriers include closed mindedness of either parties.
Impatience of either parties is also another form of psychological barrier.

• Organizational Barriers – Sometimes communication barriers could be created within an

organization due to inter and intra departmental conflicts or complexities within the
organizational structure, organization policies and politics can all be different kinds of
obstructions that prevent proper communication among the individuals in the organization.

Major organizational barriers are listed below:

• Rules and policies: Usually an organization has some rule regulations and policies regarding type
of message, channel of communication and people to be contacted. If rules are stringent and
rigid, employees will be hesitant to communicate freely. Further, the transmission of
information can get delayed.

• Hierarchical positions: An organization is divided into three levels of management- lower,

middle and top. Sometimes, a superior may possess an arrogant and power conscious attitude
which makes lower-level employee feel inferior and unworthy. They become reluctant to send
information in the fear of sending faulty message or getting rejected/ humiliated.

• Organization structure: Free interdepartmental communications become difficult especially in

the organization which is divided into different departments on the basis of roles,
responsibilities and authority.

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 16.4 BARRIERS TO BUSINESS COMMUNICATION

Overcoming the Communication Barriers

It is essential to overcome the various barriers in communication to ensure that there is no
misunderstanding or conflict arising among the parties due to a communication gap. Some of the
ways to overcome these barriers include:
1. Choose a proper medium of communication – The communicator must ensure that a proper
medium or channel is selected for the communication. While choosing the correct medium the
communicator must consider the length, importance, time and environment.

2. Proper focused communication – The sender must make sure to keep his / her point precise and
to the point and avoid unnecessarily beating around the bush. Meaningless small talk must be
avoided while passing on an important message.

3. Avoiding the use of jargons and dual meaning words and using translators – In order to avoid
sematic barriers, the communicator must avoid using jargons or dual meaning words which the
listener or perceiver might be unfamiliar with. Also, in case both the parties do not speak each
other’s language a translator should be arranged for.

4. Open Mindedness and attentiveness – Both the parties must try to keep an open mind and be
attentive during communication to prevent any sort of psychological barriers such as halo effect
or allowing emotions to affect the communication process.

5. Feedback and Follow-ups – In businesses it is essential to ensure that the listener has
understood the message in the exact same way as the communicator wanted him to understand
it hence it is always essential to ask for feedbacks and opinions in this matter. Also, organizations
have to talk to multiple stakeholders and there could be instances of forgetting or missing out on
details hence taking regular and timely follow-ups are essential.

6. Fostering Strong Relationships – In order to avoid or reduce organizational conflicts arising due
to communication gaps an organization must try and foster a strong relationship between the
business and its various stakeholders and employees.

7. Organizational Policies – While formulating policies an organization must be considerate and

flexible. The goals of the organization must be clear and every employee irrespective of his / her
position in the organizational hierarchy should be proper opportunities in the organizational
communication process. The policies should be framed in a way that eliminates organizational
communication barriers to the least.

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 BARRIERS TO BUSINESS COMMUNICATION 16.5
8. Division of labor – There must be a proper division of labor intra and inter departmentally to
reduce information overload and prevent delays in organizational communication.

Choose a proper
medium of
communication

Proper focused
Division of labor
communication

Overcoming the Avoiding the use

Organizational of jargons and
Policies Communication dual meaning
Barriers words and using
translators

Open
Fostering Strong
Mindedness and
Relationships
attentiveness

Feedback and
Follow-ups

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BARRIERS TO BUSINESS COMMUNICATION 16.6

Types of Communication Barriers

Physical Barriers Sematic Barriers Psychological Barriers Organization Barriers

• Misunderstood • Emotions • Rules and policies
words • Halo Effect • Hierarchical positions
Causes of Physical Barriers
• Missed humor • Information Overload • Organization Structure
• Distance • Usage of idioms
• Environment
• Technical Disturbances
• Time

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BARRIERS TO BUSINESS COMMUNICATION 16.7

BARRIERS TO BUSINESS COMMUNICATION

Types of Communication Barriers Overcoming the Communication

Choose a proper medium of

communication
Physical Barriers Psychological Barriers
• Emotions Proper focused communication
• Halo Effect
Causes of Physical Barriers • Information Overload Avoiding the use of jargons and dual
• Distance meaning words and using translators
• Environment
• Technical Disturbance Open Mindedness and attentiveness
Organization Barriers
• Time
• Rules and policies Feedback and Follow-ups
Sematic Barriers • Hierarchical positions
• Misunderstood words • Organization Structure Fostering Strong Relationships
• Missed humor
• Usage of idioms Organizational Policies

Division of labor

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 LEGAL ASPECTS OF
17 BUSINESS COMMUNICATION
- CONCEPTS, COMPONENTS
It is essential for entrepreneurs, businessmen, managers, executives and other front-line employees
to understand the legal aspects of business communication. Business communication in certain
cases could be regulated by the law or could even lead to serious civil litigations.

In this case a legal aspect refers to selection of words used during a business communication to
ensure that it is in conformity with the laws and regulations that govern a country’s business or
corporate law and failure to abide by it could lead to serious legal actions against the individual(s) or
the organization as a whole.

There are various cases where business communication is essential, and its non-compliance could
have serious legal impacts.
1. Product Disclaimer – Product disclaimers are a form of written or oral communications wherein
the seller warns the buyers in case of any harmful side effect or dangers in using or consuming a
certain product. If the seller fails to inform the buyer or hides details from the buyer, the buyer
possesses the right to sue the seller for damages. Eg: Warnings on cigarette packets.

2. Legal Disclosures – Disclosures are similar to disclaimers but are less specific in nature. For eg:
When an organization wants to protect its property or intellectual rights and prevent employees
from disclosing such facts to outsiders a non-disclosure agreement is signed which is legally
enforceable in a court of law in case of a breach of the terms and conditions.

3. Financial Reporting – This is the most essential form of written communication which presents
the actual financial status of the company. Every organization must mandatorily maintain books
of accounts which it presents to its stakeholders and any window dressing or fraudulent
accounting can be legally enforceable in a court of law.

4. Contracts and Internal Communications – Businesses enter into new contracts and hold
meetings every second day with its stakeholders and it is essential for businesses to maintain a
record of the minutes of the meetings, reports and contracts entered into not only for recording
purposes but also to meet legal compliances.

5. Marketing Communications – The techniques of sales, promotion and marketing involves a lot
of communications of various types written, oral, gestural, direct and indirect. However, the
salesman or person marketing the product on behalf of the business must be clever in his word
usage, presentation. H must be tactful describes the commodity such that he does violate the
laws of business communication in the process.
 17.2 LEGAL ASPECTS OF BUSINESS COMMUNICATION

How to prevent the threats of legal aspects of Business Communication?

Law suits against an organization can sometimes be a huge threat to the reputation, brand name,
profitability and trust worthiness. In order to avoid these an organization must follow the following
points:
1. It must maintain proper records, documentation, letters, contracts, books of accounts and
vouchers audited or unaudited as the case may be.
2. Avoid copying copyrighted documents and documents prohibited from photocopying or copying
in any form without proper consent of the involved parties.
3. Use a proper tone and avoid inappropriate language or behaviour while dealing with employees
and other stakeholders.
4. Avoid window dressing of balance sheet and other financial documents.
5. Ensure that all license and legal documents are always updated and all changes are made note
of.
6. Keep confidential documents at a safe place where it can only be accessed by authorized
personnel to avoid fraudulent behaviour and misplacing documents.
7. Seal confidential documents and mark them as confidential so that others are aware.
8. Sales promoters and company representatives must be well trained and groomed about
business communication, its types, significance and legal aspects.

Activitiy:
Union Allied Ltd. is a construction company. Over the years there were several changes in the office
location, company management and contracts with different with vendors. But over the years some
of the documents and vouchers were misplaced by the company.

In 2017 the company was sued by one of its vendors. When the lawyer of the company asked to
furnish a copy of the original contract the management had found the document to be missing.
When the court had examined all the company documents it was noticed that there were several
unaccounted transactions, incomplete reports and missing files. The company was charged huge
penalty and some of the management members were arrested for fraud and misconduct. The court
ordered a committee to be formed to closely monitor the company, its dealings and other relevant
details.
1. What do you think should have been the approach of Union Allied Ltd. to avoid such a mishap?
2. What changes should be brought about in the way the company is functioning?

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 LEGAL ASPECTS OF BUSINESS COMMUNICATION 17.3

Legal Aspects of Business

Communication

Cases where necessary How to avoid legal threats

1. Product Disclaimer 1. Maintain proper records
2. Legal Disclosures 2. Avoid copying copyrighted
3. Financial Reporting documents
4. Contracts and Internal 3. Use a proper tone, avoid
Communications inappropriate language
5. Marketing Communications 4. Avoid window dressing
5. Keep confidential documents at
a safe place
6. Seal confidential documents
7. Sales promoters and company
representative must be well
trained

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 USE OF GRAPHICS AND
18 REFERENCES FOR BUSINESS
COMMUNICATION
- CONCEPTS, COMPONENTS

Graphic Elements
Suppose you are the director of an MNC having branches in different cities and have to go through
sales data, financial data, HR records and other documents on a regular basis. Now, if the data is
given in text and paragraphs, it would take forever to go through all this data. On the contrary if
these were presented in the form of charts, graphs and presentations it would be much easier and
faster to review all these documents.

Using graphic elements provides a bird’s view over documents and reports thereby allowing us to
scan through and get an overall summary of the entire data. There are various types of graphical
elements that are used in business communication, some of them include:
1. Flowcharts – A flowchart is a step-by-step breakdown of a long cumbersome process which also
shows us what could happen if we are made to choose between different alternatives. It speeds
up the explanation process, easy to understand and interpret however sometimes lengthy
flowcharts tend to become complicating.

2. Presentations – Over the years with the evolution of Microsoft PowerPoint the concept of using
presentations have gained importance. It is used by almost all the departments across all the
organizations in the globe. Moreover, delivering presentations is actually considered a skill.

A sample presentation template

 18.2 USE OF GRAPHICS AND REFERENCES FOR BUSINESS COMMUNICATION

3. Colour Coding – Colour coding is commonly generally used to highlight certain important
documents or matters of significance in a document. This is done by assigning colours. For
example: Highlighted in red could mean matters requiring urgent attention and needs to be
checked. Blue could mean matters of considerably lower significance and green means a
desirable situation.

4. Tables and Graphs – Graphs and tables are used to summarize huge volumes of sales, financial
and HR reports. Tables make it easy to understand the break up and summarize the contents of
a long cumbersome reports, tables in MS excel or spreadsheets also make it easy to run
calculations and create reports. Graphs are imagery representations of a table or a huge bulk of
data. Using graphs makes it easier to understand and interpret data which could otherwise be
hectic and time consuming.

The Online Sales of Smartphones, Laptops and Tablets in the First Quarter of 2019

5. Motion Graphics – These days organizations also rely upon short videos which are usually in an
animated or documentary form to explain, train and summarize the content of what is to be
communicated. These are commonly used in training processes, product launch, introducing a
new plan of action or process or a new machinery and in meetings to get the attention of
everyone in the room.

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 USE OF GRAPHICS AND REFERENCES FOR BUSINESS COMMUNICATION 18.3

Advantages of using graphic elements

• Using spreadsheet tools to design tables not only summarize the data but also allows the user to
perform mathematical calculations and draw reports.
• Charts and tables are easy to explain, understand and interpret.
• Graphic elements help save time.
• Using animated videos and graphics help to draw the attention of listeners.
• It makes reports and data more presentable and colourful.

Disadvantages of using graphic elements

• Not everyone can easily understand and interpret a flowchart.
• People who are not tech-savvy may find it difficult and overwhelming.
• Designing videos is a very time-consuming process.
• Theoretical data cannot be easily graphically represented.
• Video designing and editing tools are expensive.
• Specialized knowledge is required to create motion graphics and videos and it cannot be done by
everyone.

Referencing
As businesses diversify and expand operations it becomes essential for businesses to provide
continuous reports to their stakeholders. These reports could be in the form of journals, press
release statements, bi-monthly or quarterly magazines. Hence, it is essential to ensure that the
reports presented to the stakeholders of the organization are true and are not plagiarised or window
dressed. As a result, the concept of referencing becomes essential. Referencing will help provide a
trail to the original source document and act as supporting evidence to the report.

Features of Referencing
• Referencing helps to avoid plagiarism by making it clear which ideas are original and which
belong to someone else.
• Proper referencing shows your understanding of the topic
• Referencing provides supporting evidence for ideas, arguments and opinions
• Allows third parties to identify the sources that were have used while drafting the document.

Advantages of Referencing
The advantages of referencing include the following:
• Using good references improves the quality of work. Often editors and publishers determine the
quality of write-ups and research papers depending upon the references used and the quality of
the bibliography.
• Writers often can get new ideas and learn about the short-comings that they might encounter
while proceeding with their topics or ideas and hence it is a time saving process.
• It is the basis of research using secondary data.
• It acts as a protection of the author’s right of copywriting and protection against plagiarism.

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 18.4 USE OF GRAPHICS AND REFERENCES FOR BUSINESS COMMUNICATION

Disadvantages of Referencing
• References sometimes leads to misleading or inadequate information
• Sometimes the referencing styles and techniques might be complicated to understand and
interpret.
• Too much referencing can lead to lack of originality.
• It brings about rigidity in research and is time consuming process.

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 USE OF GRAPHICS AND REFERENCES FOR BUSINESS COMMUNICATION 18.5

Use of Graphics and References

for Business Communication

Graphic Elements Referencing

Types Advantages Disadvantages Concept Features Advantages Disadvantages

Flow chars (i) Summarize (i) Not everyone can Provide a trail to • Helps to avoid • Improves the • Sometimes leads
Presentations (ii) Allows the user to easily understand the original plagiarism quality of work to misleading or
Colour Coding perform (ii) People who are source • Shows your • A time saving inadequate
(iii) Mathematical not tech-savvy document and understanding of process information
Tables and Graphs
calculations find it difficult act as supporting the topic • Basis of • Might be
Motion Graphics (iv) Easy to explain, (iii) Time-consuming evidence to the • Provides research using complicated to
understand and process report supporting secondary data understand and
interpret. (iv) Theoretical data evidence for • It acts as a interpret.
(v) Help save time. cannot be easily ideas protection of • Too much
(vi) Draw the attention graphically • Allows third the authors referencing lead
of audience represented parties to identify to lack of
(vii) More presentable (v) Tools are the sources originality
and colourful. expensive. • It brings about
rigidity

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USE OF GRAPHICS AND REFERENCES FOR BUSINESS COMMUNICATION 11. 6

Exercise

Multiple Choice Questions (MCQs)

1. Communication that originates at a lower level and flows to a higher level is called -
a) Upward Communication
b) Diagonal Communication
c) Downward Communication
d) None of the above

2. Communication among employees at the same level in the organizational structure is called -
a) Grapevine Communication
b) Diagonal Communication
c) Lateral Communication
d) None of the above

3. Which of the following should be avoided in the Group discussion?

a) Positive body language
b) Leadership initiative
c) False statements
d) Confidence

4. Which business communication usage provides a bird’s eye view on a matter?

a) Speech
b) Group Discussion
c) Debate
d) Presentation

5. How many types of communication takes place in an organisation?

a) 5
b) 1
c) 3
d) 4

6. In which business communication, a speaker has to clearly speak for or against a topic?
a) Presentation
b) Debate
c) Speech
d) Group discussion

7. Includes face to face interaction with customers for closing the sale?
a) Sales promotion
b) Advertising
c) Direct marketing

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 18.7 USE OF GRAPHICS AND REFERENCES FOR BUSINESS COMMUNICATION

d) Personal Selling

8. Use of coupons and samples come under which mode of marketing communication?
a) Sales promotion
b) Advertising
c) Personal selling
d) Direct marketing

9. What is the situation called when a bad image of the company is created?
a) Positive PR
b) Negative PR
c) Customer service
d) Promotion

10. Business communications help in establishing ________________ when marketing?

a) Professionalism
b) Rudeness
c) Negaitivity
d) Casualness

11. Participants involved in the process of communication must be __________.

a) Judgemental
b) Open-minded
c) Both a and b
d) None of the above

12. Which of the following is not one of the 8C’s of communication?

a) Curiousness
b) Conciseness
c) Considerate
d) Concreteness

13. Need of proper grammar and syntax comes under which C of communication?
a) Completeness
b) Coherence
c) Courteous
d) Correctness

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 USE OF GRAPHICS AND REFERENCES FOR BUSINESS COMMUNICATION 18.8

14. If a message is short and to the point, the message is said to be ___________?
a) Correct
b) Concise
c) Coherent
d) Complete

15. The way the information is described or translated into a message and put in verbal or non-
verbal medium is called ___________.
a) Feedback
b) Decoding
c) Encoding
d) None of the above

16. Affirming comments with regard to future behaviour is called ___________.

a) Positive Feedback
b) Negative Feedforward
c) Positive Feedforward
d) Decoding

17. Corrective comments with regard to past behaviour -

a) Encoding
b) Positive Feedback
c) Negative Feedforward
d) Negative Feedback

18. Interpretation and conversion of information communicated into the intelligible form so that the
recipient can fully understand the true meaning of the information is called ________________.
a) Decoding
b) Encoding
c) Feedback
d) None of the above

19. What is the first step of communication process?

a) Encoding
b) Transmitting
c) Decoding

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 18.9 USE OF GRAPHICS AND REFERENCES FOR BUSINESS COMMUNICATION

d) Developing an idea

20. Method of delivering the message is known as _______________?

a) Reciever
b) Channel
c) Sender
d) Feedback

21. Feedback is needed in which way communication?

a) One-way
b) Two-way
c) Both a and b
d) None of the above

22. Communication happens when a person randomly chooses some persons to pass on the
information which is of little interest but not important.
a) Gossip Chain
b) Cluster Chain
c) Probability Chain
d) None of the above

23. The communication starts when a person tells something to a group of people, and then they
pass on the information to some more people and in this way the information is passed on to
everyone.
a) Gossip Chain
b) Probability Chain
c) Either (a) or (b)
d) None of the above

24. Which of the following is not an advantage of formal communication?

a) Reliable
b) Fast
c) Secrecy
d) None of the above

25. At which stage the communicator focuses on correcting the grammar, spellings and
punctuations?
a) Proof Reading

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 USE OF GRAPHICS AND REFERENCES FOR BUSINESS COMMUNICATION 18.10
b) Revising and editing
c) Either (a) or (b)
d) None of the above

26. Study of body language of a person is called __________.

a) Kinesics
b) Chronemics
c) Paralanguage
d) None of the above

27. A cloud computing is availability of computer resources?

a) Off demand
b) From demand
c) On demand
d) None of the above

28. The cost incurred in interacting with customers via video call has been ___________?
a) Constant
b) Reduced
c) Increased
d) None of the above

29. Providing Frequently Asked Questions (FAQs) to customers result in which of the following
benefits of internet communication?
a) Support care
b) Professional presentation
c) Personal touch
d) None of the above

30. Professional behaviour includes behave in a ___________ manner in the workplace?

a) Neutral
b) Positive
c) Negative
d) None of the above

31. Business attire refers to _____________ in a professional conduct?

a) Manners
b) Qualities

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 18.11 USE OF GRAPHICS AND REFERENCES FOR BUSINESS COMMUNICATION

c) Clothing
d) None of the above

32. It is to interrupt people while they are speaking?

a) Polite
b) Desirable
c) Rude
d) None of the above

33. At the end of the day, who needs to be satisfied?

a) Company
b) Customers
c) Suppliers
d) None of the above

34. Writing is _______________in nature?

a) Personal
b) Impersonal
c) Neutral
d) None of the above

35. Which of the following skills is the most important for professionals like editors?
a) Oral skills
b) Writing Skills
c) Presenting skills
d) None of the above

36. In which type of letter, buyers want to know the price and quality of the goods they are willing
to buy?
a) Quotation
b) Enquiry
c) Complaint
d) Order

37. How many reports are there on the basis of legality?

a) 2
b) 3
c) 1

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 USE OF GRAPHICS AND REFERENCES FOR BUSINESS COMMUNICATION 18.12
d) None of the above

38. A stage wherein member have spotted the differences in their cultures and they look upon these
differences as negatives is called __________.
a) Minimization
b) Integration
c) Denial
d) None of the above

39. Mr. A and Mr. B belong to two distinct cultural backgrounds. Mr. B believes that his culture is
superior compared to the culture of Mr. A. This phenomenon is known as __________.
a) Defence
b) Ethnocentrism
c) Denial
d) None of the above

40. _____________ stage at which members learn to accept each other’s culture however they still
remain devoted to their own respective cultures
a) Adoption
b) Integration
c) Denial
d) Minimization

41. Recognizing the different types of cultures, the similarities and differences between them
without being judgemental is called ____________.
a) Acceptance
b) Cultural Sensitivity
c) Adoption
d) Integration

42. Which of the following is not an example of a physical communication barrier?

a) Telephonic Disturbances
b) Distance
c) Background noises
d) Language

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 18.13 USE OF GRAPHICS AND REFERENCES FOR BUSINESS COMMUNICATION

43. Excessive usage of technical jargons and double meaning words are what type of barrier?
a) Sematic Barriers
b) Psychological Barriers
c) Physical Barriers
d) None of the above

44. Information Overload is when ___________________.

a) Listener gets inadequate information
b) Listener gets too much information
c) Listener gets adequate information
d) Listener is inattentive

State True or False

1. The word ‘communicare’ means share.
2. Communication that arises out of social relationships is called Vertical Communication.
3. Television and radio advertising are examples of Broadcast advertising.
4. Advertising is derived from latin word "Venalicium".
5. Employee disengagement is a result of Poor communication.
6. On way communication process is a Circular model.
7. The use of touch in communication is called Haptics.
8. Chain of command means Levels of authority.
9. Social media post is a written type of communication.
10. Statutory reports are required to be prepared and submitted periodically on matters required by
the organization.

Fill in the blanks:

1. Reaching before or on time at meeting reflects ______________.
2. Audience which are easy to deal are known as ______________.
3. When a particular trait of a person outweighs the other traits, it is said to be _______________.
4. _________________ are a form of written or oral communications wherein the seller warns the
buyers.
5. ___________________ and ______________________ are similar to one another.
6. A _____________________is a step-by-step breakdown of a long cumbersome process.
7. The process of using colours to highlight certain important documents or matters of significance
in a document is called _________________.
8. _________________ are imagery representations of a huge bulk of data.

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 USE OF GRAPHICS AND REFERENCES FOR BUSINESS COMMUNICATION 18.14
9. _________________ helps to provide a trail to the original source document and act as
supporting evidence to a given document.
10. An animated video used to summarize the content of what is to be communicated is called
___________.

Answers:
Multiple Choice Questions (MCQ):

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