index [s3. ] · pdf filequestion.3 state essential elements of contract of guarantee. 1.valid...

INDEX

CHAPTER NAME OF THE CHAPTER PAGE NO.

1 SPECIAL TYPE OF CONTRACTS 1-33

2 PAYMENT OF BONUS ACT 1965 34-49

3 PAYMENT OF GRATUITY 1972 50-67

4 EMPLOYEES PROVIDENT FUNDS AND

MISCELLANEOUS PROVISIONS ACT 1952

68-93

5 NEGOTIABLE INSTRUMENTS ACT 1881 94-127

6 INDIAN CONTRACT ACT 1872 128-180

Special type of Contracts CA-IPCC Law, Ethics & Communication

Sudhir Sachdeva (MBA, M.Com, B.Ed, DiEM) Page 1

CHAPTER 1 SPECIAL TYPE OF CONTRACTS

CONTRACTS OF INDEMNITY AND GUARANTEE

QUESTION.1 WHAT ARE CONTRACTS OF INDEMNITY? EXPLAIN.

(A) MEANING OF

INDEMNITY

• To make good loss incurred by another person

• To protect the other person from incurring loss

• To compensate the other party who has suffered loss

(B) DEFINITION

OF CONTRACT OF

INDEMNITY

• A contract by which

• one party promises to save the other party

• from loss caused to him

• by the conduct of the promisor himself or

• the conduct of any other person is called a “contract of indemnity”.

(C) PURPOSE OF

CONTRACT OF

INDEMNITY

The object of contract of indemnity is to protect the promisee against the

anticipated loss.

(D) TYPE OF

CONTRACT OF

INDEMNITY

• It is a typical contingent contract.

• The enforcement of contract of indemnity depends on the

happening of loss.

(E) FORM OF

CONTRACT OF

INDEMNITY

The obligation to indemnify may arise under contract • express or implied,

• from relation of parties viz. employer & employee, principal & agent, • under statutes viz. Partnership Act.

(F) PARTIES TO A

CONTRACT OF

INDEMNITY

1. Indemnifier • The party who promises to compensate the loss, is known as

indemnifier. • The indemnifier is always a promisor in the contract of indemnity. 2. Indemnity-holder • The party who is protected against the loss, is known as indemnified

or indemnity-holder. • The indemnified is always a promisee in the contract of indemnity.

(G) EXAMPLE OF

CONTRACT OF

INDEMNITY

If X contracts to indemnify Y against the consequences of any proceedings which Z may take against Y in respect of ` 5000 borrowed from Z then it is a contract of indemnity where X is a promisor (Indemnifier) and Y is promisee (i.e Indemnified or Indemnity Holder).



QUESTION.2 WHAT ARE ESSENTIAL ELEMENTS OF A VALID CONTRACT OF INDEMNITY?

(1) IT MUST BE A VALID CONTRACT

The contract of indemnity must satisfy all the essential elements of a valid contract. Thus, all elements like a valid Agreement, lawful consideration, lawful object, free consent, capacity to contract etc should be present. Any contract of indemnity, the object of which is unlawful will be void.

(2) MODES OF CONTRACT OF INDEMNITY

The contract may be express or implied.

(3) PROMISE BY INDEMNIFIER

There must be a promise by one party (i.e the indemnifier) to save the other party (i.e. the indemnified or indemnity holder) from loss caused to the indemnified.

(4) REASONS FOR

LOSS

To indemnify means to compensate or make good the loss. Thus, under contract of indemnity, it is essential that the other party (i.e. Indemnified) suffers loss. It may be due to

o The action of the promisor himself, or o The action of any other person, or o Any act, event or accident which is not in the control of

the parties. Unless, the promisee has suffered a loss, he cannot hold promisor liable on the contract.

QUESTION.3 WHAT ARE RIGHTS OF INDEMNITY-HOLDER?

The indemnity-holder has the following rights against the indemnifier in case he incurs loss

(1) RIGHT TO RECOVER DAMAGES

All damages which he is compelled to pay in any suit in respect of any

matter which is covered by contract of indemnity.

(2) RIGHT TO RECOVER LEGAL COSTS OF ADJUDICATION

All costs which he was compelled to pay in bringing or defending such suit provided:

i. The indemnifier authorized him to bring or defend the suit; and ii. He acted in such a way as a prudent man would act in the absence

of Contract of indemnity.

(3) RIGHT TO RECOVER OTHER SUMS

All sums which he has paid under the terms of any compromise of any suit, in accordance with the instructions of the indemnifier provided:

i. The indemnifier authorized him to bring or defend the suit; and ii. The compromise was not contrary to the orders of the indemnifier;

and iii. He acted in such a way as a prudent man would act in the absence

of Contract of indemnity.



QUESTION.4 WHEN DOES THE LIABILITY OF INDEMNIFIER COMMENCES?

COMMENCEMENT

OF INDEMNIFIER’S

LIABILITY

• The liability of indemnifier commences as soon as the liability of the

indemnity-holder becomes absolute.

• Indemnity is not always in the form of reimbursement.

• Thus, if the indemnity-holder incurs an absolute liability, he is

entitled to ask the indemnifier to make good his loss although he

has himself paid nothing.

CONTRACT OF GUARANTEE

QUESTION.1 WHAT IS A CONTRACT OF GUARANTEE?

(A) DEFINITION

A contract of guarantee is a contract • to perform the promise or • to discharge the liability

of a third person in case of his default”.

(B) PURPOSE OF CONTRACT OF GUARANTEE

The object of contract of guarantee is to enable a person to get loan or employment or goods on credit.

(C) FORM OF CONTRACT OF GUARANTEE

The contract of guarantee may be oral or written.

(D) PARTIES TO A CONTRACT OF GUARANTEE

1) Surety The person who gives the guarantee is called ‘the surety’. 2) Principal debtor The person who is primarily liable to pay the debt and on whose behalf the guarantee is given is called ‘the principal debtor’. 3) Creditor The person to whom the guarantee is given is called ‘the creditor’.

(E) EXAMPLE OF GUARANTEE

• A obtains loan from B. C promises B, to pay the amount of loan if A fails to repay the loan. Here C has given guarantee on behalf of A.

• In this case, A is the principal Debtor, B is the Creditor, C is the Surety.



QUESTION.2 A CONTRACT OF GUARANTEE IS A TRIPARTITE AGREEMENT. EXPLAIN.

There is a three faced relationship in a contract of guarantee through which three contracts come

into the existence.

CONTRACT OF

GUARANTEE - A

TRIPARTITE

AGREEMENT

1. Contract between Principal debtor and Creditor It is due to the debt taken by the principal debtor from the creditor.

2. Contract between Surety and Creditor When surety gives guarantee to pay the creditor in case of default by Principal debtor.

3. Contract between Surety and Principal debtor When the debtor undertakes to indemnify the surety if he pays in the

event of debtor’s default.

QUESTION.3 STATE ESSENTIAL ELEMENTS OF CONTRACT OF GUARANTEE.

1.VALID CONTRACT A contract of guarantee must satisfy all the essential of a valid contract. Thus, all elements like a valid Agreement, lawful consideration, lawful object, free consent, capacity to contract etc should be present. EXCEPTION TO CAPACITY OF PARTIES If the Principal debtor is incompetent to the contract, contract of guarantee is valid but if the surety is incompetent to the contract, contract of guarantee is void. EXCEPTION TO CONSIDERATION A contract of guarantee, like any other contract, should be supported

by a consideration.

But there need not be a direct consideration between the surety and

the creditor.

According to Sec 127 “Anything done or any promise made for the

benefit of the principal debtor is sufficient consideration to the surety

for giving the guarantee.

2. EXISTENCE OF A DEBT

• The purpose of a contract of guarantee is to secure the payment of a debt.

• If there is no valid debt, then there can be no valid guarantee. • Debt must be legally enforceable and should not be a time

barred debt. • Liability of the principal debtor is primary.

3. THE PROMISE TO PAY MUST BE CONDITIONAL AND LIABILITY OF SURETY IS SECONDARY

• In a contract of guarantee, there must be a conditional promise to pay.

• The liability of a surety arises only when the principal debtor makes a default in the payment therefore his liability is secondary.



4. NO MISREPRESENTATION OR FRAUD

• The guarantee should not be obtained by misrepresenting or concealing important facts from the surety, if it is so the contract will be void.

• The creditor should disclose all the facts which may affect the surety’s liability.

5. CO-SURETIES

• In case a condition is imposed by the surety that he will give guarantee only if some other person also join as co-surety

• Then Guarantee by surety is valid only if other surety join as co-surety.

QUESTION.4 STATE NATURE OF LIABILITY of SURETY. (1) LIABILITY OF THE SURETY IS CO-EXTENSIVE WITH THAT OF THE PRINCIPAL DEBTOR

• Ordinarily, the surety is liable for all those amounts like interest, damages or other costs, which the principal debtor is liable to pay.

• But if the contract of guarantee provides that liability of the surety is limited then his liability may not be co-extensive with the principal debtor.

• A surety’s liability cannot be more than the liability of the principal debtor.

EXAMPLE A gives guarantee to B for the payment of promissory note by C, the acceptor. The promissory note is dishonored by C. A is liable not only for the amount of the bill, but also for any interest and charges which may become due on it. But if in the contract of guarantee it is mentioned that A will be liable for the amount of promisory note only and not for the other expenses then his liability will be limited to the amount of promissory note only.

(2) LIABILITY OF THE SURETY IS SECONDARY AND CONDITIONAL

• The liability of the principal debtor is primary whereas liability of the surety is secondary.

• Liability of the surety is conditional because he is liable for payment only in case of default by the principal debtor.

• Thus surety is liable for the part of the contract which is unperformed.

(3) COMMENCEMENT OF SURETY’S LIABILITY

• The liability of surety arises immediately on the default of the principal debtor.

• The surety cannot demand a notice of default from the creditor, unless agreed otherwise.

• (4) PROCEEDINGS AGAINST THE SURETY

• Because the contract between the surety and the creditor is an independent contract,

• the creditor is entitled to file a suit against the surety without suing the principal debtor.



(5) LIABILITY OF SURETY MAY BE DEPENDENT ON SOME CONDITIONS

• The surety may impose some conditions to the contract of guarantee.

• He will not be liable unless those conditions are fulfilled.

(6) LIABILITY OF THE SURETY MAY BE CONTINUOUS

Although the surety may agree to become liable for a series of transaction but he may fix the time limit up to which he can be held liable for the amount of guarantee.

(7) SECURITIES GIVEN TO CREDITOR

• Where the securities are given to the creditor by the principal debtor for the debt, the creditor need not first use securities before suing the surety, unless the same is required under the contract.

• However, the surety will get the benefit of such securities in the hands of the creditor, whether the surety was or was not aware of such securities.

QUESTION.5 WHAT ARE KINDS OF GUARANTEE?

(1) SPECIFIC GUARANTEE

• Where the guarantee is given in respect of a specific transaction or debt, it is known as specific guarantee.

• Such guarantee is expected to come to an end with the completion of transaction.

• In case of death of the surety, his legal representative will be liable to the extent of assets inherited by him.

(2) CONTINUING GUARANTEE

(A) MEANING A guarantee which extends to a series of transactions is called a Continuing Guarantee. (B) FEATURES

• Such guarantee does not come to an end on the performance of a single transaction or debt but continues for subsequent transactions or debts.

• Whether a guarantee is continuing or not that depends upon the intention of the parties as expressed in the terms of the contract and existing circumstances.

QUESTION.6 CAN CONTINUING GUARANTEE BE REVOKED?

REVOCATION OF CONTINUING GUARANTEE

(1) BY NOTICE

• The continuing guarantee may at any time be revoked by the surety • as to future transactions (that means the surety will remain liable for

the transactions entered into before the revocation) • by the notice to the creditor.



(2) BY DEATH • In absence of contract to the contrary, the continuing guarantee • gets revoked upon the death of the surety • as to all future transactions. • Legal representative shall not be liable for any future transactions

they will be liable for transactions entered into before the death of the surety.

• No notice of death is required to be given to the creditor.

QUESTION.7 WHEN DOES THE SURETY GET DISCHARGED?

(1) BY NOTICE OF REVOCATION

A surety may revoke the guarantee as to future transactions, at any time, by giving notice of revocation to the creditor.

(2) BY DEATH OF SURETY

Unless contrary agreed, a continuing guarantee is revoked by the death of the surety as to the future transactions.

(3) NOVATION • Contract of guarantee is also discharged by Novation. • Where a new contract of guarantee is entered into between the

same parties or between different parties, the original contract gets discharged.

(4) VARIANCE IN THE TERMS OF CONTRACT

• If there is any variation • in the terms of contract between the principal debtor and creditor

AND without surety’s consent. • Then surety will be discharged in respect of all transactions taking

place after such variance. (5) RELEASE OR DISCHARGE OF PRINCIPAL DEBTOR

The surety is discharged if the principal debtor is discharged by the creditor i. by a contract between them; or ii. Any act or any omission of the creditor resulting in discharge of

principal debtor.

(6) COMPOUNDING BY THE CREDITOR

The surety will be discharged if, the creditor, without the permission of the surety

i. Enters into a settlement agreement with the principal debtor; or ii. Promises not to sue the principal debtor.

(7) EXTENTION OF TIME TO REPAY DEBT

When the creditor gives more time to the principal debtor for repayment without sanction of surety, surety will get discharged.

(8) PARTING WITH THE SECURITY

When the creditor parts with the security given by principal debtor without sanction of surety, surety will get discharged.

(9) INVALIDATION OF THE CONTRACT OF GUARANTEE

• Guarantee obtained by misrepresentation or concealment of facts. • Due to Non-fulfillment of the condition posed by surety.



QUESTION.8 WHICH RIGHTS ARE AVAILABLE TO SURETY?

(1) RIGHTS AGAINST PRINCIPAL DEBTOR

(A) RIGHT OF SUBROGATION • After the surety has paid the debt and discharged the obligation of

the principal debtor, • he shall be entitled to all the rights which the creditor had against

the principal debtor. • When the surety steps into the shoes of the creditor. This is known

as subrogation.

(B) RIGHT OF INDEMNITY

• In every contract of guarantee, there is an implied promise by the principal debtor to indemnify the surety.

• The surety is entitled to recover from the principal debtor whatever sums he has rightfully paid.

• However, the surety can only recover the amount he has paid rightfully to the creditor and not those amounts which he has paid wrongfully.

(2) RIGHTS AGAINST THE CREDITOR

(A) RIGHT TO CLAIM SECURITIES

• The surety becomes entitled to claim the securities which the creditor has against the principal debtor when he pays the whole of the debt due to the creditor.

• However, only those securities can be claimed which the creditor holds at the time of guarantee.

• This right is available to surety whether or not he knows about the existence of such securities.

• Where the creditor loses or parts with the securities, without the consent of the surety, the surety is discharged from the liability to the extent of the value of such securities.

(B) RIGHT TO SET OFF

• Where the creditor sues the surety for the payment of the debt, the surety can claim set off, or counter claim, if any, which the principal debtor had against the creditor.

• That means if any amount is recoverable by the principal debtor from the creditor, the surety can claim set-off of that amount from the creditor.

(3) RIGHTS AGAINST CO-SURETIES

When two or more persons give a guarantee for the same debt, they are termed as Co-sureties. All the co-sureties are equally liable to the creditor. (A) RIGHT OF CONTRIBUTION

• When a co-surety has paid more than his share of debt to the creditor,

• he has a right of contribution from the other sureties • who are equally bound to pay the debt.



(B) RIGHT TO SHARE SECURITIES

• When at the time of guarantee one of the surety receives security from the creditor on repayment of debt,

• all the co-sureties are entitled to share the benefits of the securities.

(C) LIABILITY OF THE CO-SURETIES ARE JOINT AND SEVERAL

• Unless contrary agreed, co-sureties are jointly as well as severally liable.

• If one of the sureties becomes insolvent, the solvent co-sureties will have to contribute the whole amount equally.

(D) LIABILITY OF CO-SURETIES WHO HAVE GUARANTEED DIFFERENT SUMS

• Where the co-sureties have guaranteed different sums, • they are bound to contribute equally subject to the limit fixed by their

guarantee • and not in proportion to the amount guaranteed.

QUESTION.9 DIFFERENCE BETWEEN CONTRACTS OF INDEMNITY AND GUARANTEE

BASIS OF DIFFERENCES

CONTRACTS OF INDEMNITY CONTRACTS OF GUARANTEE

(1) Number of parties

There are only two parties namely the indemnifier and the indemnity-holder

There are three parties- creditor, principal debtor and surety.

(2) Nature of liability

The liability of the indemnifier is primary and independent

The liability of the surety is secondary.

(3)Commencement of liability

The liability of the indemnifier arises on happening of a contingency

The liability of a surety arises on default of the principal debtor.

(4) Nature of Contract

The contract of indemnity is for the reimbursement of the loss incurred by the indemnified

The surety generally gives guarantee at the request of debtor.

(5) Number of contracts

In case of indemnity there is only one contract between the indemnified and the indemnifier.

In case of guarantee there are three contracts. (i)between principal debtor and creditor; (ii)between the creditor and surety, and (iii)between the surety and the principal debtor.



(6) Right to sue third party

Indemnifier cannot sue a third party for loss in his own name as there is no privity of contract. Such a right would arise only if there is an assignment in his favour.

Surety can proceed against principal debtor in his own right because he gets all the right of a creditor after discharging the debts.

CONTRACTS OF BAILMENT AND PLEDGE

QUESTION.1 WHAT ARE CONTRACTS OF BAILMENT? EXPLAIN.

(A) DEFINITION

• Bailment is the delivery of goods • by one person to another upon a contract • for some purpose, • that they shall be returned or otherwise disposed of • according to the directions of the person delivering them, • when the purpose is accomplished.

(B) MEANING OF BAILMENT

• The delivery of goods by one person to another for some specific purpose is known as bailment.

• In bailment there is a change in the possession only and not in the ownership of the goods.

• Bailment may be gratuitous or non-gratuitous.

(C) PARTIES TO THE CONTRACT OF BAILMENT

•••• Bailor The person delivering the goods is called the “bailor”. Therefore the bailor is the transferor of goods.

•••• Bailee The person to whom they are delivered is called the “bailee”. Therefore the bailee is the transferee of goods.

QUESTION.2 WHAT ARE ESSENTIAL ELEMENTS CONTRACTS OF BAILMENT?

(1) DELIVERY OF GOODS

There should be delivery of goods from the bailor to the bailee. The delivery may be (a) Actual delivery In actual delivery, goods are actually delivered to the bailee. (b) Constructive delivery Constructive delivery may be made by doing anything which has the effect of putting the goods in the possession of intended bailee or of any person authorized by him.



(c) Symbolic Delivery

•••• Transfer of physical Possession is not done actually. •••• But some symbol of control of the goods is given.

Examples i. If keys of godown are given that means goods in the godown are

delivered ii. Delivery of keys of car is treated as delivery of car. iii. Transfer of document of title of goods means delivery of goods

(2) AGREEMENT

• Goods are delivered by the bailor to bailee under an agreement. • The agreement may be express or implied.

(3) PURPOSE

• Goods should be delivered by the bailor to bailee for some specific purpose.

• It is not necessary that the purpose should be expressly stated. It may be implied from the circumstances of case.

(4) RETURN OF GOODS

• Goods should be returned to the bailor or disposed of • according to the directions of bailor,

o after the accomplishment of purpose or o after the expiry of the period of bailment.

QUESTION.3 WHAT ARE KINDS OF BAILMENT?

(1) GRATUITOUS BAILMENT

It is bailment without any charge or reward. No consideration is involved in this type of bailment. (i) For benefit of bailor It is a bailment where goods are delivered from the bailor to bailee for the benefit of the bailor. (ii) For benefit of the bailee It is a bailment where goods are delivered from the bailor to bailee for the benefit of the bailee.

(2) NON- GRATUITOUS BAILMENT

• It is bailment for some charge or reward. Consideration is involved in this type of bailment.

• Thus, some charges are paid either by bailee or by bailor.

QUESTION.4 WHAT ARE DUTIES OF A BAILOR?

(1) DUTY TO DISCLOSE FAULTS IN THE GOODS

• The bailor is bound to disclose all the faults in the goods bailed to the bailee,

• which materially interfere with the use of them or • expose the bailee to extraordinary risks.



(a) Consequences Of Non-Disclosure In Case Of Gratuitous Bailment

• The bailor shall be liable for damages • for any loss caused to the bailee • due to such faults • if he was aware of such faults.

(b) Consequences of Non-disclosure in case of Non-Gratuitous Bailment

• The bailor shall be liable for damages • for any loss caused to the bailee • due to such faults • whether he was or was not aware of the faults.

(2) DUTY TO BEAR EXPENSES

(a) Extra-ordinary expenses

• It is the duty of the bailor to bear the extraordinary expenses • incurred by the bailee for the purpose of bailment • whether the bailment is Gratuitous or non- Gratuitous.

Therefore, i. Extra-ordinary expenses in case of Gratuitous bailment

will be borne by BAILOR ii. Extra-ordinary expenses in case of Non-Gratuitous bailment

will be borne by BAILOR

(b) Ordinary and reasonable expenses

• The ordinary and reasonable expenses are to be borne by bailee. • However, in case of gratuitous bailment, the bailor shall repay both

ordinary and extraordinary expenses incurred by the bailee. Therefore, (i) Ordinary & reasonable expenses in case of Gratuitous bailment

will be borne by BAILOR (ii) Ordinary & reasonable expenses in case of Non-Gratuitous bailment

will be borne by BAILEE

(3) DUTY TO INDEMNIFY THE BAILEE

• It is the duty of the bailor to indemnify the bailee, • for any loss which the bailee has incurred • due to the defective title of the bailor.

(4) DUTY TO BEAR RISKS

• It is the duty of the bailor to bear • the risk of loss, deterioration or destruction of the things bailed, • provided the bailee has taken reasonable care of the goods.

(5) DUTY TO • It is the duty of the bailor to receive the goods back that when the



RECEIVE THE GOODS BACK

bailee returns the goods to him. • Where the bailor refuses to take back the goods without any

reasonable reason, the bailee can claim all ordinary and reasonable expenses incurred by him.

(6) DUTY TO INDEMNIFY THE BAILEE FOR TERMINATION OF BAILMENT BEFORE SPECIFIED TIME

• Where the bailment is gratuitous and for a specified period and • the bailor terminates the bailment before the expiry of the period of

bailment, • the bailor must compensate the bailee • for the loss or damage suffered by the bailee due to such

termination. QUESTION.5 WHAT ARE DUTIES OF A BAILEE?

(1) DUTY TO TAKE REASONABLE CARE OF THE GOODS

(A) REASONABLE CARE • The bailee must take as much care of the goods bailed • as a man of ordinary prudence would take care of his own goods • of the same Quantity, Quality and Value of the goods bailed.

(B) IN CASE OF NEGLIGENCE OF BAILEE • Bailee shall be liable the loss or deterioration to the goods if it

happened due to his negligence. (C) IN CASE OF ACT OF GOD

• But if such loss was caused due to act of God or other uncontrollable and unavoidable reasons then bailee cannot be held liable for such loss.

(2) DUTY NOT TO MAKE UNAUTHORIZED USE OF GOODS

(A) NOT TO MAKE UNAUTHORIZED USE • Bailee must use the goods according to the terms of the contract

and strictly for the purpose of bailment. (B) BAILMENT WILL BE VOIDABLE AT THE OPTION OF THE BAILOR

• Where the bailee makes unauthorized use of goods, • the contract becomes voidable and • the bailor can rescind the bailment at any time and • ask for the return of goods.

(C) BAILEE LIABLE FOR DAMAGES • Bailee shall be liable to compensate the bailor • for any damage caused to the goods from such use.

(3) DUTY NOT TO MIX GOODS BAILED WITH HIS OWN GOODS

It is the duty of the bailee not to mix the goods bailed by the bailor with his own goods. (A) MIXING THE GOODS WITH BAILOR’S CONSENT

• Where the bailee mixes the bailed goods with his own goods • with the consent of the bailor, there is no liability of the bailee. • Both the parties will have proportionate interest in the mixture.



(B) MIXING OF GOODS WITHOUT BAILOR’S CONSENT AND THE GOODS ARE SEPARABLE (i) Goods (which are seperable) mixed without consent of bailor

• both the parties will remain owner of their respective goods. (ii) Expenses for separation

• The bailee shall bear the expenses of separation. (iii) Liablility for damage, if any

• Bailee shall be liable to pay damages arising due to such mixing of goods.

(C)MIXING OF GOODS WITHOUT BAILOR’S CONSENT AND THE GOODS ARE INSEPARABLE

• Where the bailee mixes the goods bailed with his own goods • without the consent of the bailor and • goods are not separable, • the bailee is bound to compensate the bailor for any loss due

to such mixing of goods.

(4) DUTY TO RETURN THE GOODS

(A) GOODS BAILED TO THE BAILEE FOR SOME SPECIFIED TIME OR SPECIFIC PURPOSE

• The bailee must return or deliver the goods, without waiting for demand from the bailor.

o at the expiry of the bailment or o after the completion of specific purpose.

(B) BAILEE SHALL BE LIABLE FOR DAMAGES IF THE BAILEE FAILS TO RETURN

• Bailee shall be liable to compensate the bailor • for any loss, destruction or deterioration of the goods. • Bailee shall be liable even if • there was no fault or negligence of the bailee or • it was due to act of God or • other uncontrollable and unavoidable reasons.

(5) DUTY NOT SET UP ADVERSE TITLE

• It is the duty of the bailee that he should not set up his own title or • the title of a third party on the goods bailed to him. • He cannot claim that bailor had no authority to bail them, unless he

has an evidence that third person had a better title to goods bailed as against the baillor.

(6) DUTY TO RETURN ACCRETION IN THE GOODS

• Where there is any increase in the goods bailed, • or some profit arises from such goods, • the bailee is bound to return the bailor such increase or profit.



QUESTION.6 WHAT ARE RIGHTS OF A BAILOR?

(1) RIGHT TO RESCIND THE CONTRACT OF BAILMENT

• If the bailee does any act, with regard to the goods bailed, • which is inconsistent with the terms and conditions of bailment. • Then the contract of bailment becomes voidable at the option the

bailor.

(2) RIGHT TO DEMAND RETURN OF GOODS

(a) Bailor can demand back anytime even if bailment is for specific period • In case of gratuitous bailment, bailor can demand his goods back • at any time before specified time or purpose is completed.

(b) Bailor is bound to compensate • If the return of goods before the specified time • causes loss to the bailee • then the bailor is bound to compensate the bailee.

(3) RIGHT TO CLAIM DAMAGES

• Every bailor has a right to claim damages for any loss • that have been caused to the goods bailed, • due to bailee’s negligence.

(4) RIGHT TO CLAIM INCREASE OR PROFIT FROM GOODS BAILED

• The bailor has a right to claim from the bailee, • any increase or profit which may have accrued from the goods

bailed.

(5) RIGHT TO FILE A SUIT AGAINST THIRD PARTY

• Being the owner of the goods • the bailor has a right to file a suit against third party who • causes any damage to the goods bailed or • deprives the bailee from using the goods bailed.

(6) RIGHT TO ENFORCE BAILEE’S DUTIES

• Where a bailee neglects to perform his duties, • the bailor has a right to enforce these duties • by filing a suit against the bailee.

QUESTION.7 WHAT ARE RIGHTS OF A BAILEE?

(1) RIGHT TO RECOVER CHARGES INCURRED

Bailee Has A Right To Recover (A) EXTRA-ORDINARY EXPENSES In case of Gratuitous or Non-Gratuitous bailment (B) ORDINARY & REASONABLE EXPENSES In case of Gratuitous bailment

(2) RIGHT OF LIEN (RIGHT TO RETAIN POSSESSION)

• Where the bailor fails to pay the lawful charges of bailee, • the bailee can exercise the right of lien and retain possession of

goods • till the charges are paid.



LIEN EXERCISED BY THE BAILEE MAY BE (A) GENERAL LIEN The bailee has a right to retain any goods bailed to him for any amount due in respect of those goods or any other goods.

(B) PARTICULAR LIEN The bailee can exercise particular lien only if he has rendered some services involving the exercise of labour or skill in respect of the goods bailed.

(3) RIGHT TO FILE SUIT IN CASE OF DISPUTED TITLE

• Where the person other than the bailor, claims to be the owner of the goods,

• the bailee may apply to the Court to decide the title of the goods.

(4) RIGHT TO BE INDEMNIFIED

• The bailee has a right get compensation from the bailor, • if the bailor has no title to the goods and • due to that bailee suffers some loss.

(5) RIGHT TO SUE THIRD PARTY

• Where a third person causes damage to the goods bailed, • Or deprives the bailee from the use of the goods bailed • the bailee has a right to file a suit against the third person and • claim compensation from him.

(6) RIGHT TO RETURN GOODS TO ANY ONE OF THE JOINT BAILORS

• Where goods are bailed by more than one bailor, • the bailee may return the goods to anyone of the joint bailors • without taking consent of the other joint bailor/s.

(7) RIGHT TO ENFORCE BAILOR’S DUTIES

Where the bailor fails to perform his duties, bailee can sue bailor for non-performance.

QUESTION.8 DIFFERENCE BETWEEN GENERAL LIEN AND PARTICULAR LIEN? BASIS OF DIFFERENCES

GENERAL LIEN PARTICULAR LIEN

(1) NATURE OF RIGHT OF LIEN

It means the right to retain possession of goods as security for general balance of account.

It means the right to retain possession of only those particular goods in respect of which the charges are due.

(2) WHO CAN EXERCISE

Unless there is an express authorization in the agreement, only bankers, Factors, wharfingers, Attorneys of High Court and Policy brokers have a right to exercise general lien.

Every Bailee can exercise particular lien.



(3) WHEN IT CAN BE EXERCISED

The bailee can exercise general lien EVEN if he has NOT rendered some services involving the exercise of labour or skill in respect of the goods bailed.

The bailee can exercise particular lien ONLY if he has rendered some services involving the exercise of labour or skill in respect of the goods bailed.

QUESTION.9 IN WHICH CASES BAILMENT GETS TERMINATED?

(1) EXPIRY OF THE STIPULATED PERIOD

• Where bailment is for a specific period, • it terminates on the expiry of the specified period.

(2) REVOCATION OF BAILMENT BEFORE THE EXPIRY OF STIPULATED PERIOD

• In case of gratuitous bailment, bailor can demand his goods back • at any time before specified time or purpose is completed. • If the return of goods before the specified time causes loss to the

bailee and • the bailor compensates the bailee for such loss, • bailment shall be treated as terminated.

(3) COMPLETION OF PURPOSE

• Where bailment is for a specific purpose, • it terminates on the completion of such purpose.

(4) DEATH OF THE PARTIES TO THE CONTRACT OF BAILMENT

• A gratuitous bailment terminates • on the death of the bailor or the bailee.

(5) DESTRUCTION OF SUBJECT MATTER OF BAILMENT

• A gratuitous bailment shall be treated as terminated • by the destruction of goods bailed.

(6) INCONSISTENT USE OF GOODS BY THE BAILEE

• If the does any act which is inconsistent with the terms and conditions of bailment,

• the contract becomes voidable at the option of the bailor, • and if the bailor opts to rescind the bailment, • contract of bailment shall be terminated.

QUESTION.10 WHO IS FINDER OF LOST GOODS?

(A) MEANING OF FINDER OF GOODS

• Finder of goods is a person who finds the goods • belonging to another and takes them in his possession. • The moment the finder of goods takes the possession of goods, • he will be treated as bailee of the goods and • will be liable to perform duties of the bailee.



QUESTION.11 WHAT ARE THE DUTIES OF FINDER OF LOST GOODS?

(1) Dos 1. To take reasonable steps to find the true owner. 2. To take reasonable care of the goods. 3. Return the goods to the true owner when found. 4. Return the accretion in goods to the true owner.

(2) DON’Ts

1. Not to use the goods for his own purpose. 2. Not to mix the goods found with his own goods.

QUESTION.12 WHAT ARE THE RIGHTS OF FINDER OF LOST GOODS?

(1) RIGHT OF LIEN

• Where the finder has voluntarily incurred any expenses • in preserving the goods or finding the true owner, • he can exercise the right of lien (Particular lien) • till he is compensated for those expenses. • But the finder cannot sue the true owner for compensation.

(2) RIGHT TO SUE FOR REWARD

• Where the true owner has declared reward for return of the lost goods,

• the finder can sue the true owner for the recovery of reward. • The finder can also exercise right of lien until he receives the

reward. (3) RIGHT OF SALE OF GOODS

1. If the true owner could not be found even after taking all the reasonable steps; or

2. If the true owner is found but refuses to pay the lawful charges to the finder or;

3. If the goods are of perishable nature; or 4. If the lawful charges of the finder are two-third or more than the

value of the goods found. PLEDGE

QUESTION.1 DEFINE PLEDGE. WHO ARE THE PARTIES TO THE CONTRACT OF PLEDGE?

(A) DEFINITION

• ‘The bailment of goods as security • for payment of a debt or • for performance of a promise’.

Thus Pledge is a variety or specie of bailment.

(B) PARTIES TO THE CONTRACT OF PLEDGE

1. PAWNOR (OR PLEDGOR) The person who delivers the goods (i.e. bailor) is known as pawnor or pledger. 2. PAWNEE (OR PLEDGEE) The person to whom the goods are delivered (i.e. bailee), is known as pawnee or pledgee.



QUESTION.2 WHAT ARE THE ESSENTIAL ELEMENTS OF THE CONTRACT OF PLEDGE?

(1) VALID CONTRACT

All essential elements of a valid contract must be present in a contract of pledge.

(2) MODE OF CONTRACT

It may be expressed or implied.

(3) SUBJECT MATTER OF PLEDGE

Subject matter of contract of pledge must be goods.

(4) TRANSFER OF POSSESSION OF GOODS

There must be transfer of possession from one person to another.

(5) PURPOSE OF THE PLEDGE

The purpose must be to deliver the goods as security for the payment of debt or for performance of the promise.

(6) RETURN OF GOODS AFTER THE PARTICULAR PURPOSE IS COMPLETED

The goods pawned must be returned or disposed of as per the instructions of the pledgor after the particular purpose is completed.

QUESTION.3 WHAT ARE THE RIGHTS OF PAWNEE ?

(1) RIGHT OF LIEN (i.e. TO RETAIN PLEDGED GOODS)

Pawnee has a right to retain the goods pledged i. for repayment of debt or performance of a promise, ii. for the interest due on the debt and iii. ordinary expenses incurred which were necessary for possession

and preservation of goods. (2) RIGHT TO EXTRAORDINARY EXPENSES

Pawnee has a right to get reimbursed for extraordinary expenses incurred for the preservation of the goods pledged.

• He can file a suit against pawnor for the recovery of extraordinary expenses

• but cannot exercise right of lien for such recovery.

(3) RIGHT TO SELL

(I) NOTICE BEFORE SALE IN CASE OF DEFAULT • If pawnor makes default in payment of debt then • the pawnee can sell the goods • after giving a reasonable notice of sale to the pawnor.

(II) RIGHT TO RECOVER DEFICIENCY FROM PAWNOR • If the proceeds of such sale are less than • the amount of the debt due • the pawnee can recover such deficit from the pawnor.

(III) LIABILITY TO REFUND SURPLUS TO THE PAWNOR • If the proceeds of the sale are more than • The amount of the debt due • the pawnee will have to refund the surplus to the pawnor.



(4) RIGHT TO FILE A SUIT AGAINST PAWNOR

• The pawnee has a right to sue the pawnor if • the pawnor fails to pay his debt or perform his promise within the

stipulated time. (5) RIGHT TO RETENTION TO SUBSEQUENT DEBTS

• Pawnee has a right to retain the goods pledged • towards subsequent advances as well, • only if such right was specifically mentioned in the contract.

(6) RIGHT TO ENFORCE PAWNOR’S DUTIES

If the pawnor fails to fulfill his duties, pawnee has a right to enforce such duties.

QUESTION.4 WHAT ARE THE RIGHTS OF PAWNOR ?

(1) RIGHT TO REDEEM GOODS PLEDGED

(I) REDEMPTION OF GOODS PLEDGED • On repayment of the debt with interest and other charges, • Pawnor has a right to recover the goods pledged.

(II) WHEN TO REDEEM Either before or at the expiry of the time fixed after paying all the dues. (III) REDEMPTION AFTER THE EXPIRY OF THE TIME FIXED

• If the pawnor makes the payment of the debt after the expiry of time fixed

• he may still redeem the goods pledged if • he pays expenses incurred by the pawnee due to late payment, if

any, • before the pawnee sells the pledged goods.

(2) RIGHT TO SUE

• If even after the repayment of all the dues by the pawnor • the pawnee refuses to return the goods • pawnor may file the suit against pawnee to recover the goods

pawned.

(3) RIGHT TO RECEIVE NOTICE OF SALE FROM PAWNEE

• If the pawnee intends to sell the goods for the recovery of the debt, • Due to default by pawnor, • the pawnor has a right to receive notice before sale.

• If the pawnee fails to give notice to the pawnor, • Pawnor has a right to get compensation for loss.

• Where the proceeds of such sale are more than the due amount, • the pawnor has a right to recover such excess from pawnee.

(4) RIGHT TO COMPENSATION IN CASE OF LOSS CAUSED DUE TO NEGLIGENCE

• Where any injury is caused to the pledged goods • due to mishandling or negligence of pawnee, • the pawnor can claim compensation for such loss to goods.



(5) RIGHT TO RECEIVE ACCRETION IN GOODS

The pawnor has a right to receive any accretion (increase) in the goods pledged.

(6) RIGHT TO ENFORCE PAWNEE’S DUTIES

If the pawnee fails to fulfill his duties, pawner has a right to enforce such duties.

QUESTION.5 WHAT ARE THE DUTIES OF PAWNOR ?

(1) DUTY TO REPAY THE DEBT

• Pawnor must repay loan taken from the pawnee.

(2) DUTY TO PAY EXTRA ORDINARY EXPENSES

• Pawnor must make reimbursement of extraordinary expenses • incurred by the pawnee for the preservation of the goods pledged.

(3) DUTY TO DISCLOSE FAULTS IN THE GOODS

• Pawnor must disclose to pawnee • all the material faults or • extraordinary risks in the goods to which the pawnee may be

exposed.

(4) DUTY TO BEAR DEFICIENCY IN SALE

• If the pawnee has sold the goods to recover the debt, • Due to default in payment by the pawnor, • pawnor has to compensate the pawnee for deficiency arising out of

such sale. (5) DUTY TO INDEMNIFY

• Where the title of the pledgor is defective, • it is the duty of the pawnor to compensate the pawnee • for any loss incurred by him due to such defect.

QUESTION.6 WHAT ARE THE DUTIES OF PAWNEE ?

(1) DUTY TO RETURN GOODS

Pawnee must return the goods to the pawnor on repayment of the debt by him.

(2) DUTY TO TAKE REASONABLE CARE OF PLEDGED GOODS

• Pawnee has to take reasonable care of pledged goods • As a man of ordinary prudence takes care of his own goods. • If the goods a damaged due to the negligence of pawnee, • then he is liable to compensate pawnor for the loss.

(3) DUTY NOT TO MIX HIS OWN GOODS WITH GOODS PLEDGED

Pawnee should not mix his own goods with the pledged by the pawnor.

(4) DUTY NOT TO MAKE UNAUTHORIZED USE OF GOODS

• Pawnee should not make unauthorized use the goods pledged by the pawnor.

• He will be liable for any loss caused to the goods due to such unauthorized use.



(5) DUTY TO RETURN THE ACCRETION IN THE GOODS PLEDGED

Pawnee must return the accretion (increase) in the goods.

QUESTION.7 EXPLAIN EFFECT OF PLEDGE BY A MERCANTILE AGENT?

(1) PLEDGE BY MERCANTILE AGENTS

A pledge by mercantile agent will be valid if • He is in possession of goods or the document of title to goods; • with the consent of the owner of goods; • in the ordinary course of business; • acts in good faith.

QUESTION.8 EXPLAIN EFFECT OF PLEDGE BY PERSON (1) IN POSSESSION UNDER VOIDABLE CONTRACT AND (2) IN POSSESSION OF GOODS BY THEFT?

(1) PLEDGE BY PERSON IN POSSESSION UNDER VOIDABLE CONTRACT

• If a person obtains possession of goods under a voidable contract • And pledges those goods to some other person • That pledge will be treated as valid if

i. The aggrieved party has not rescinded the contract before pledge.

ii. The pawnee must have received the goods in good faith, and iii. Pawnee has no notice of the defective title of the pawnor.

(2) PLEDGE BY PERSON IN POSSESSION OF GOODS BY THEFT

Pledge by person in possession of goods by theft is not valid. EXAMPLE A person obtained a costly ring from a jeweler pretending himself to be a man of credit. Before the fraud could be detected, he pledged the ring. The pledge was held invalid.

QUESTION.9 DIFFERENCE BETWEEN PLEDGE AND BAILMENT?


PLEDGE BAILMENT

(1) PURPOSE

Pledge is a variety of bailment. Under pledge goods are bailed as a security for a loan.

In bailment the goods are bailed for any purpose. The bailee may take goods for repairs or for safe custody etc.

(2) RIGHT OF SALE

The Pawnee enjoys the right to sell goods on default by the pledgor to repay the debt or perform his promise but only after giving due notice.

In bailment, the bailee generally cannot sell the goods. He can either retain or sue for non-payment of dues.

(3) RIGHT OF USING GOODS

Pawnee has no right to use pledged goods.

Bailee, however, can use the goods bailed as per terms of the bailment.



CONTRACT OF AGENCY

QUESTION.1 WHAT DO YOU MEAN BY CONTRACT OF AGENCY?

MEANING OF CONTRACT OF AGENCY

• A person who is competent to enter into a contract • may do so

a. Either by himself, or b. Through another person.

• When he contracts through another person, • That another person is called an agent and • This creates a contract of agency.

QUESTION.2 DEFINE AGENCY, AGENT AND PRINCIPAL?

(1) AGENCY

• The contract which creates • the relationship of principal and agent • is called an agency.

(2) AGENT

• An agent is a person employed to do any act • for another or to represent another in dealing with third persons.

(3) PRINCIPAL

• The person for whom such act is done, or • who is so represented is called the principal.

QUESTION.3 WHAT ARE SALIENT FEATURES OF AGENCY?

(1) PRINCIPAL IS LIABLE FOR LAWFUL ACTS OF AN AGENT

• The principal is liable for all the lawful acts of the agent • which are within the authority of the agent. • Thus, the contracts entered into by agent on behalf of his principal • have the same effect as if these contracts were made by the

principal.

(2) CONSIDERATION NOT NECESSARY

• A contract of agency requires no consideration. • Thus, relationship of agency need not be supported by

consideration. (3) PRINCIPAL SHOULD BE COMPETENT

• In order to act as principal a person must have capacity to enter into a contract.

• He must have attained the age of majority, must be of sound mind and should not be disqualified by law.

(4) AN AGENT NEED NOT BE COMPETENT

(A) AGENT NEED NOT BE COMPETENT • As the agent does not enter into a contract on his own behalf, • he need not be competent to contract. • Thus, a minor or a person of unsound mind can also become agent.

(B) NO LIABILITY OF AGENT • If the agent is incompetent to contract, • he shall not be liable to the principal or the third party.

(C) PRINCIPAL SHALL BE LIABLE TO THIRD PARTY • However, the principal will be liable to the third party • for the contracts entered into by an incompetent agent.



QUESTION.4 WHAT ARE MODES OF CREATING AN AGNECY?

(1) BY EXPRESS AGREEMENT

• When a person is appointed as an agent • by an oral or written agreement, • agency is said to have made by an express agreement.

(2) BY IMPLIED AGREEMENT

Where it is inferred from the conduct of the parties, it is called implied agency. Implied agency may be: (A) AGENCY BY ESTOPPEL

• Where a person by his conduct or by words (written or spoken), • leads a third party to believe that a certain person is his agent, • though he is actually not his agent or has ceased to be his agent, & • the third party believing it enters into a contract with the agent, • an agency by estoppel is created.

• Thus, a person will be stopped from • denying his agent’s authority and • getting himself relieved from his obligations to a third party • by proving that no such relationship in fact existed.

(B) Agency by Holding out

• It is a variant of agency by estoppel. • It comes into existence when a person • by his prior positive or affirmative act • leads a third party to believe that • the other person is his principal and doing the act with his authority.

(3) AGENCY BY NECESSITY

• Under urgent circumstances • the law confers a right on a person to act as an agent of another • in order to save the other person from loss. • Such agency is called agency by necessity.

To make a Contract of agency by necessity following conditions must be satisfied:

i. There should be an actual necessity to act on behalf of the other person.

ii. The agent was not in a position to communicate with the principal. iii. The act was done to protect interest of the principal. iv. The act of an agent was bonafide. v. The agent must have acted as a man of ordinary prudence would

have acted in his own case.

(4) AGENCY BY OPERATION OF LAW

• Agency by operation of law comes into existence • when law treats a person as an agent of another.



(5) AGENCY BY RATIFICATION

• When the acts are done by one person on behalf of another • without his knowledge or consent. • The doctrine of ratification gives an option to the person, • on whose behalf the act is done, • either to adopt the act by ratification or to reject it.

• If he decides to accept the act done without his consent, • he is said to have ratified the act and • an agency by ratification comes into existence.

• A ratified act binds the principal in the same way • as if the acts have been performed under his authority and on his

behalf.

Rules of Ratification (i) Agent must have acted for a principal who is identifiable at

the time of contract and not in his own behalf. (ii) Person making ratification was in existence at the time of act. (iii) The principal must have contractual capacity both at the time

of the contract and at the time of ratification. (iv) Ratification must be done within the reasonable time. (v) Ratification must be communicated to the party who is

sought bound by the act done by the agent. (vi) Ratification can be of the acts which the principal had the

power to do. (vii) Ratification would take effect retrospectively. (viii) Ratification must be of the whole act and not of a part of the

act only. (ix) Ratification must be done with the full knowledge of the

facts. (x) The act to be ratified must be lawful and not void or illegal.

QUESTION.5 WHAT ARE TYPES OF AGENT?

(1) SPECIAL AGENT

• An agent who is appointed to perform a particular act or to represent his principal in some particular transaction.

• Such an agent has limited authority, i.e. as soon as the act is performed; his authority comes to an end.

• The principal is only bound for the acts for which special agent is employed not by any other acts.

(2) GENERAL AGENT

• An agent who has the authority to do all acts connected with a particular trade or business of the principal.

• Such agents can bind their principal with all the acts connected with the business for which he is employed.



• The authority of a general agent continues unless it is terminated. • The principal will be bound by the acts done by the agent outside his

authority and will be liable to third parties if the third party dealing with the agent has no notice of such limitation.

(3) UNIVERSAL AGENT

• A universal agent is one whose authority is unlimited. • Such agent is authorized to do all the acts which his principal can do

lawfully.

(4)MERCANTILE OR COMMERCIAL AGENT

• A mercantile agent is one who has the authority to • Sell, Consign, Buy, pledge the goods on behalf of his principal. • Factor, commission agent, broker, auctioneer etc are examples of a

mercantile agent.

(5) NON- MERCANTILE AGENT

• A non- mercantile agent is one who does not deal in the buying and selling of goods.

• Attorneys, wife, insurance agents, guardian are examples of non-mercantile agent.

WIFE AS AN AGENT 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). [That means husband will not be liable in case (iii) & (iv)]

(6) DEL CREDERE AGENT

• A del-credere agent is one who for some extra commission • guarantees his principal that the person, • with whom he enters into a contract on behalf of his principal, • shall perform his promise. • He acts as a guarantor (surety) as well as an agent.

(7) PRETENDED AGENT

Where a person represents himself to be an authorized agent of another, without being so, he is called a pretended agent. When a pretended agent enters into a contract with a third party,



1) Principal may ratify the act of the pretended agent In this case, principal will be liable to the third party as if the contract was entered into by the pretended agent by his authority.

2) Principal may not ratify the act of the pretended agent In such case the agent will be liable to compensate the third party for any loss or damage which he has incurred by dealing so.

(8) SUB AGENT

• A Sub agent is a person employed by and acting under the control of original agent in the business of the agency.

• Thus, sub agent is the agent of the original agent.

An agent may appoint sub agent and delegate work to him in following cases.

a) Custom of trade, b) Nature of work, c) Principal is aware but does not object to it, d) Unforeseen emergencies, e) Principal permits the appointment, f) Work is purely clerical. WHERE THE SUB-AGENT IS PROPERLY APPOINTED

WHERE THE SUB-AGENT IS NOT PROPERLY APPOINTED

(1) Principal is bound by acts of sub-agent. (2) Agent is also responsible for acts of sub-agent. (3) Sub-agent is responsible for his acts to the agent but not to the principal except in case of fraud or willful wrong. (4) Termination of agent causes termination of all sub-agent appointed by him.

(1) Principal is not bound by acts of sub-agent. (2) Agent is responsible for acts of sub-agent. (3) Sub agent is responsible for his acts to the agent but not to the principal even in case of fraud or willful wrong.

(9) SUBSTITUTED AGENT

• When an agent has an express or implied authority of his principal • to name another person to act for the principal and • the agent names another person accordingly, • such person is not a sub agent but substituted agent of the principal • in respect of the business entrusted to him. • They are also called co-agents.

EXAMPLE A directs B his solicitor to sell his property by auction and B appoints C an auctioneer. In this regard, C is an agent of A and not a sub agent.



DUTY OF AGENT APPOINTING SUBSTITUTED AGENT • While selecting a substituted agent, the agent is bound to exercise

same amount of diligence as a man of ordinary prudence would exercise in its own case.

• If he does so he will not be responsible for acts or negligence of the substituted agent. The agent’s duty is only to take reasonable care while selecting his substituted agent.

QUESTION.6 DIFFERENCE BETWEEN SUB-AGENT AND SUBSTITUTED AGENT?


SUB-AGENT SUBSTITUTED AGENT

(1) CONTROL

A sub-agent acts under the control of agent.

A substituted agent acts under the instructions of his principal.

(2) PRIVITY OF CONTRACT

There is no privity of contract between the principal and the sub agent.

There is privity of contract between the principal and substituted agent.

(3) LIABILITY OF SUB-AGENT / SUBSTITUTED AGENT

Sub agent is only liable to the agent and is not generally liable to the principal.

A substituted agent is liable to the principal and not to the original agent who appointed him.

(4) LIABILITY OF AGENT

Agent is liable to the principal for the acts of the sub agent.

An agent is not liable to the principal for any act or negligence of the substituted agent.

(5) DELEGATION Agent delegates a part of his work to sub agent.

The agent does not delegate his work to the substituted agent.

QUESTION.7 WHAT ARE AUTHORITIES OF AN AGENT?

(1) ACTUAL AUTHORITY

It is an authority which has been conferred upon the agent by his principal. The agreement between the principal and the agent may be express or

implied.

(2) OSTENSIBLE OR APPARENT AUTHORITY

An agent having an authority to carry on business has authority a. To do every lawful thing necessary for the purpose, or b. Usually done in the course of conducting such business and

which is necessary to perform his function. e.g. X employed Y to recover debt due to X from Z. Y may adopt any legal process necessary for the purpose of recovering the debt from Z and perform the contract.

• When an agent has done some act, without authority, or • incurred obligations to third person in performing his function, • the principal is bound by such acts or obligations, • if it is within the apparent authority of agent.



(3) AUTHORITY IN EMERGENCY

An agent has the authority in an emergency to do all such acts, for protecting his principal from losses, as a man of ordinary prudence would do in his own case. EXAMPLE Ramesh instructed Suresh, a transporter, to send a consignment of apples to Mumbai. After covering half the distance, Suresh found that the apples will perish before reaching Mumbai. He sold the same at half the market price. Suresh acted in emergency.

QUESTION.8 WHAT IS NOTICE TO AN AGENT?

NOTICE TO AN AGENT

Any notice given to an agent or information obtained by him will be deemed to be given to the principal. e.g Notice to an insurance agent about an accident is deemed to have notice to the insurance company.

QUESTION.9 WHAT ARE DUTIES OF AN AGENT?

(1) DUTY TO CONDUCT THE BUSINESS IN ACCORDANCE WITH PRINCIPAL’S DIRECTIONS

• If the agent fails to act according to directions or customs of the

principal • then the agent is liable to principal for any loss suffered by him.

• But if there is some profit, he must account the same to the

principal.

(2) DUTY TO CARRY OUT WORK WITH SKILL AND DILIGENCE

• Agent should carry out the work with reasonable care and skill. • If the principal suffers any loss due to • agent’s neglect in want of skill or misconduct, • then the agent must compensate his principal for such loss.

(3) DUTY TO RENDER TRUE & PROPER ACCOUNTS

• Agent must maintain and render proper accounts supported by vouchers

• and the agent should give an explanation as and when required.

(4) DUTY TO COMMUNICATE WITH PRINCIPAL IN DIFFICULTY

• In case of difficulty, it is the duty of the agent • to communicate with his principal and obtain his instructions. • In emergency where there is no time to communicate with the

principal, • the agent may act in good faith without consulting the principal.

(5) DUTY TO PAY THE AMOUNT RECEIVED FOR THE PRINCIPAL

• It is the duty of an agent to pay all money received • after deducting his lawful charges like expenses incurred • in conducting the business, his remuneration etc.



(6) DUTY NOT TO DISCLOSE CONFIDENTIAL INFORMATION

• If the agent misuses any information obtained, • then he will have to compensate the principal for any loss sustained

by him.

(7) DUTY NOT TO DELEGATE AUTHORITY

• An agent should not further delegate his work to another person • without the consent of principal except in few exceptional cases.

(8) DUTY OF AGENT WHEN PRINCIPAL DIES OR BECOMES UNSOUND

• Agency comes to an end on the death of the principal. • The agent is bound to take all reasonable steps, • on behalf of the legal representatives • for the protection and preservation of the interests entrusted to

him.

(9) DUTY NOT TO DEAL ON ITS OWN ACCOUNT

It is the duty of agent not to deal on his own account and should take prior consent and disclose all material facts.

(a) When Prior consent of the principal is TAKEN and Disclosure of all the material facts is DONE by the agent Principal may not repudiate the transaction shall be liable for agent’s act. b) When Prior consent of the principal is NOT TAKEN and Disclosure of all the material facts is NOT DONE by the agent Principal may repudiate the transaction and the agent shall cease to be entitled for his remuneration.

(10) DUTY NOT TO MAKE SECRET PROFITS

• If the agent makes any secret profit, without knowledge of his principal,

• then the principal is entitled to claim such benefit arising from such transaction.

(11) NO REMUNERATION IN CASE OF MISCONDUCT

• An agent who is guilty of misconduct in the business of agency • is not entitled to any remuneration arising from such business.

QUESTION.10 WHAT ARE RIGHTS OF AN AGENT?

(1) RIGHT TO BE INDEMNIFIED

• The principal is bound to indemnify the agent • against all losses and expenses incurred by the agent • in the course of the agency business. • However, the agent is not entitled to compensation in respect of

acts which are unlawful or criminal in nature.

(2) RIGHT OF RECEIVE REMUNERATION

• The agent is entitled to receive agreed remuneration from his principal.

• In the absence of any agreed remuneration, he is entitled for usual remuneration which is usual and customary in such business.



(3) RIGHT TO COMPENSATION

• The agent has the right to claim compensation • for the losses suffered due to principal’s negligence or want of skill.

(4) RIGHT TO RETAIN MONEY

The agent has a right to retain following sums out of the money received by him on behalf of his principal:

i. Advances made by the agent on behalf of his principal. ii. legitimate expenses incurred in conducting the agency business. iii. Remunerations payable to the agent.

(5) RIGHT OF LIEN

• An agent is entitled to retain principal’s goods, books, papers and documents

• and other movable and immovable properties received by him • till any remuneration, commission, etc. is due to him. • However, he has only the right of particular lien.

QUESTION.11 AGENT CAN BE HELD PERSONALLY LIABLE FOR THE CONTRACTS ENTERED INTO BY HIM ON BEHALF OF HIS PRINCIPAL. COMMENT.

(1) AGENT IS NOT PERSONALLY LIABLE PRINCIPAL IS LIABLE

• Being a connecting link between the principal and the third party • an agent cannot be held personally liable • for the contracts entered into by him on behalf of his principal.

(2) EXCEPTIONS TO THE ABOVE RULE

IN THE FOLLOWING CASES AGENT IS PERSONALLY LIABLE AND PRINCIPAL IS NOT LIABLE 1) Where the principal

a. Does not exist; or b. Is a foreign principal; or c. Is an undisclosed principal; or d. Is an incompetent principal.

2) Where the agent i. has an interest in the subject matter of the contract; or ii. exceeds or acts without authority; or iii. enters into the contract in his own name; or iv. is guilty of fraud or misrepresentation; or v. fails to follow the principal’s instructions; or vi. signs negotiable instrument without mentioning that he is

signing as an agent vii. acts as a pretended agent and the alleged principal does not

ratify his act. 3) Where the Contract expressly provides for personal liability of the agent. 4) Where the trade usage or custom makes the agent personally liable.



QUESTION.12 STATE WHETHER PRINCIPAL IS LIABLE FOR THE ACTS OF HIS AGENT TO THIRD PARTIES?

1) WHEN AGENT ACTS WITHIN HIS AUTHORITY

• The principal is liable for all lawful acts of the agent • done within the scope of his actual or apparent authority.

2) ACTS BEYOND THE AUTHORITY OF AGENT

Where the agent acts beyond his authority, the liability of the principal is as follows (A) WHERE THE WORK IS SEPARABLE

• if the work within his authority CAN be separated • from the work which is beyond his authority, • the principal is liable only for the work done within the

authority.

(B) WHERE THE WORK IS NOT SEPARABLE • if the work within his authority CANNOT be separated • from the work which is beyond his authority, • the principal is NOT liable for whole transaction.

3) PRINCIPAL IS BOUND BY NOTICE GIVEN TO AGENT BY THIRD PARTIES

• Notice given to an agent is treated as notice to the principal • and thus Principal is bound by that notice given by third

parties. • The principal is not bound where agent acts fraudulently.

4) LIABILITY FOR MISREPRESENTATION OR FRAUD DONE BY THE AGENT

• The principal is liable for any fraud or misrepresentation • done by the agent while acting in the course of agency. • However, the principal is not liable for fraud or

misrepresentation of agent • which do not fall within the agent’s authority.

5) UNNAMED PRINCIPAL

• Where the existence of the principal is known • but his name is not known, • the principal is liable towards third parties for the acts of

the agent.

QUESTION.13 WHEN DOES AUTHORITY OF AN AGENT GETS TERMINATED?

A. BY THE ACT OF PARTIES

(1) BY AGREEMENT The parties may agree to terminate the agency at any time and at any stage by the mutual agreement.

(2) REVOCATION BY THE PRINCIPAL The principal may, by notice, revoke the authority of the agent at any time. (i) Where the agent is appointed for a single act before the commencement of the act.



(ii) Where the agent is appointed for continuing transactions by giving the notice to the agent as well as the third parties. (iii) Where agency is for a fixed term and agency is revoked without a sufficient cause the agent must be compensated. 3) RENUNCIATION BY AGENT (i) The agent can renounce his agency by giving sufficient notice to the principal. (ii) If the agency is for the fixed period, and agency is renounced without a sufficient cause, the principal must be compensated.

B. BY OPERATION OF LAW

(1) Completion of the agency business (2) Expiry of fixed period. (3) Death or insanity of the principal or agent (4) Insolvency of the principal (5) Destruction of the subject matter (6) Subsequent events rendering the agency as unlawful

QUESTION.14 WHAT IS AN IRREVOCABLE AGENCY?

The agency which cannot be revoked by the principal is called irrevocable agency. The agency is irrevocable in the following cases- 1) Where the agency is coupled with interest

• Agency coupled with interest means an agency • which is created for the purpose of securing some benefit

to the agent. • Interest should exist at the time of creation of agency. • Where the agent has some interest in the subject matter of

agency, • Such agency is irrevocable and cannot be terminated during

the subsistence of agent’s interest. • This agency is not terminated even on the death or insanity

of the principal. 2) WHERE THE AGENT HAS PARTLY EXERCISED HIS AUTHORITY

• Where the agent has partly exercised the authority, the authority cannot be revoked.

• Thus, the principal will be bound by the acts already done by the agent.

3) WHERE THE AGENT HAS INCURRED PERSONAL LIABILITY

• Where the agent has incurred some personal liability on behalf of the principal,

• the principal cannot revoke the agency leaving the agent to face the liability.

Payment of Bonus Act 1965 CA-IPCC Law, Ethics & Communication


CHAPTER 2 PAYMENT OF BONUS ACT, 1965

QUESTION.1 WHAT IS THE OBJECTIVE OF PAYMENT OF BONUS ACT?

Objective

To provide for the payment of bonus to persons employed in certain establishments • on the basis of profits or • on the basis of production or productivity

• and for matters connected therewith.

QUESTION.2 DOES PAYMENT OF BONUS ACT EXTEND TO JAMMU AND KASHMIR?

Scope Yes, It extends to whole of India including Jammu and Kashmir.

QUESTION.3 WHEN DID THIS ACT COME INTO FORCE?

Date The Act came into force on 25th September, 1965.

QUESTION.4 DISCUSS THE APPLICABILITY OF PAYMENT OF BONUS ACT 1965.

(a)Every Factory • According to Sec 2(m) of Factories Act, 1948

(b)Establishments

• Where 20 or more employees are employed on any day during any accounting year

(c) Other Establishments

• Where 10 or more employees are employed on any day during any accounting year. (i.e. Between 10 to 19 employees)

• Atleast 2 months notification by Appropriate Government in Official Gazette to make the provisions of this act applicable

(d) Once Applicable, Always Applicable

• Once the Act becomes applicable to an establishment in any accounting year,

• it shall continue to be applicable on the establishment • even if number of persons employed falls below the minimum

number of 20 persons.

QUESTION.5 WHAT IS “ESTABLISHMENT” AS PER PAYMENT OF BONUS ACT 1965?

(A) Meaning

Any unit, undertaking or place of business in which any: • Commercial activity or business is carried on; or

• Services are rendered, • under any form of business organization.

(B) Establishment to include Undertakings, Departments & Branches (Sec 3)

Rule

• Where an establishment consists of different department or undertakings or branches,

• whether situated in the same place or in different places,

• all such departments, undertakings or branches shall be • treated as parts of same establishment • for the purpose of computation of bonus under this Act.



Exception A branch, department or undertaking is not treated as part of an establishment if the following TWO conditions are satisfied:

i. a separate balance-sheet and profit and loss account are prepared and maintained in respect of any such department or undertaking or branch, AND

ii. Such department or undertaking or branch, has not been treated as part of the establishment for the purpose of computation of bonus.

QUESTION.6 WHAT IS AN ACCOUNTING YEAR?

Accounting Year Means-

A. In case of Corporation

The year ending on the day on which the books of account of the corporation are to be closed and balanced.

B. In case of Company

The period in respect of which P&L Account of the company is prepared, which is to be laid before in AGM.

C. In Other cases

i. The year commencing on the 1st April and ending on following 31st March. ii. If accounts are closed and balanced on any day other than 31st March, then at the option of the employer, the year ending on the day on which its accounts are so closed and balanced.

Once the option is exercised by the employer, he cannot change it except with previous permission in writing of prescribed authority.

QUESTION.7 DEFINE “EMPLOYEE”?

EMPLOYEE Employee means, • Any person (other than an apprentice)

• employed on a salary or wage • not exceeding Rs. 10,000 per month • in any industry; • to do any work (skilled or unskilled, manual, supervisory,

managerial, administrative, technical or clerical work ,

• For hire or reward, • Whether the terms of employment are express or implied.



QUESTION.8 STATE REFERRING CASE LAWS WHETHER THE FOLLOWING PERSONS ARE ENTITLED TO RECEIVE BONUS UNDER THE PAYMENT OF BONUS ACT?

1. Probationer Entitled (Bank of Madura Ltd. V. Employee union) 2. Temporary

Employees Entitled (Cooper Allen & Co. Ltd V Their Workmen)

3. Part time Employees

Entitled (Automobile Karamchari Sangh V. Industrial Tribunal)

4. Employee of a seasonal factory

Entitled (Entitled to proportionate bonus and not minimum bonus)

5. Retrenched Employee

Entitled (East Asia Co. (P) Ltd. Industrial Tribunal)

6. Piece rated Employee

Entitled (Mathuradas Kanji V. Labour Appellate Tribunal)

7. Dismissed or suspended Employee reinstated with back wages

Entitled (Provided employee is not disqualified u/s 9) (ONGC V. Sham Kumar Sehgal, GAMMON INDIA Ltd V. Niranjan Das )

8. An Apprentice Covered under Apprenticeship Act

Not Entitled (Wheel RIM Co. Govt. Of Tamilnadu)

9. An employee employed through contractors on building operations

Entitled (Earlier not entitled, but made entitled after payment of Bonus Amendment) ordinance 2007)

10. An employee dismissed on the ground of misconduct

NOT ENTITLED (Pandian Railways Corpn Ltd V. Presiding Officer)

QUESTION.9 WHO IS AN EMPLOYER?

A. In case of Factory

i. Owner ii. Occupier (Occupier means a person who has ultimate control over the affairs of the establishment) iii. Agent of owner or occupier iv. Legal representative of deceased owner or occupier iv. Person named as a manager of factory under Factories Act 1948.

B. In case of any other establishment

i. Person or authority having ultimate control over affairs of the establishment. ii. Manager or the managing director, where the said affairs are entrusted to them.



QUESTION.10 DEFINE SALARY OR WAGE?

MEANING • Remuneration, capable of being expressed in terms of money (Not in kind), in respect of work done

• which would become payable to an employee • if the terms of employment (Whether express or implied) were

fulfilled”.

It includes i. Dearness Allowance (Mehngai Bhatta, i.e all cash payments paid to an employee on account of a rise in the cost of living)

ii. Food Allowance or iii. the value of free food given by the employer in lieu of the salary

It does not include i. Allowances ii. Bonus iii. Commission iv. Travelling concession v. Any amenity, service or concessional supply of food grains or other

articles vi. Remuneration for overtime work vii. Ex-gratia payment viii. Employer’s contribution to Provident Fund or Pension Fund Retrenchment compensation, gratuity or other retirement benefits

QUESTION.11 WHAT IS THE ELIGIBILITY FOR BONUS?

Eligibility For Bonus

• Every employee is eligible for bonus • if he has worked in the establishment for

• at least 30 working days in an accounting year.

QUESTION.12 WHEN IS AN EMPLOYEE DISQUALIFIED FOR BONUS?

An employee is disqualified to receive (Not eligible to receive) any bonus if

Disqualification for Bonus

1. Employee is dismissed from service 2. because of any of the following reasons a. Fraud b. Riotous or violent behavior on premises of establishment c. Theft, misappropriation or sabotage of any property of establishment

QUESTION.13 WHAT IS ALLOCABLE SURPLUS AND AVAILABLE SURPLUS?

ALLOCABLE SURPLUS

(A) Allocable surplus means 67% of the available surplus in an accounting year. It is in relation to an employer, which is a company (not a banking company) & which has not made the arrangements under the Income Tax Act, for the declaration and payment within India of the dividends payable out of its profits in accordance with the provisions of Section 194 of the Act. (B) In any other case, the allocable surplus means 60% of such

available surplus



AVAILABLE SURPLUS

Available surplus means the available surplus computed under Section 5 of the Act. The available surplus in respect of any accounting year means the gross profits for that year after deducting therefrom the sums referred to in Section 6. Section 6 refers to the following deductions: i. depreciation, ii. development rebate or investment allowance or development

allowance, iii. income tax payable during the year, and iv. such further sums as are specified in Third Schedule.

QUESTION.14 DISCUSS PROVISIONS REGARDING PAYMENT OF MINIMUM BONUS.

(1) AMOUNT OF MINIMUM BONUS

• In every accounting year • Every employer is bound to pay to every eligible employee • in respect of every accounting year, • a minimum bonus

• Whether the employer has allocable surplus or not.

(2) CALCULATION OF AMOUNT OF MINIMUM BONUS

CASES Age of the Employee

Amount of Minimum Bonus

Case: 1

15 yrs or Above

8.33% of salary/wages OR Rs.100 (Whichever is Higher)

Case: 2

Below 15 yrs

8.33% of salary/wages OR Rs.60 (Whichever is Higher)

(3) PROPORTIONATE REDUCTION IN MINIMUM BONUS

(i) Condition

• The minimum bonus of Rs 100/60 shall be proportionately reduced

• if the employee has not worked on all the working days in the accounting year.

(ii) Computation of Number of working days Employee shall be deemed to have worked on the days on which the employee was: a. Laid off; b. On leave with salary or wages; c. On maternity leave with salary or wages; d. Absent due to temporary disablement arising out of and in the

course of his employment. Thus, the above days shall be added to calculate the total working days of the employee.



(4) Ceiling on Salary for calculation of bonus [Sec.12]

• If the salary or wage of an employee exceeds Rs. 3500 per month,

• the salary or wage for the purpose of computation of bonus

• shall be taken as Rs.3500 per month.

(5) Computation of Allocable Surplus

Amount to be set on or set off u/s 15 shall be taken into account while computing the allocable surplus for any accounting year.

QUESTION.15 DISCUSS PROVISIONS REGARDING PAYMENT OF MAXIMUM BONUS.

(1) ALLOCABLE SURPLUS MORE THAN MINIMUM BONUS

• If in an accounting year the allocable surplus • exceeds the minimum bonus, • the employer shall • divide the whole of allocable surplus among the employees in

proportion of their salary or wage.

(2) MAXIMUM BONUS SHOULD NOT EXCEED

• 20% of salary or wages of employee

(3) EXCESS ALLOCABLE SURPLUS

Where the division of the allocable surplus among the employees exceeds 20% of their salary or wage, then

a) Such excess shall be carried forward for being set on in the FOUR succeeding accounting years; and

b) Every employee shall be paid ‘MAXIMUM BONUS’ (i.e. bonus equal to 20% of his salary or wage).

(4) CEILING ON SALARY FOR CALCULATION OF BONUS [SEC.12]

• If the salary or wage of an employee exceeds Rs. 3500 per month, • the salary or wage for the purpose of computation of bonus

• shall be taken as Rs. 3500 per month.

QUESTION.16 DISCUSS PROVISIONS OF SET ON AND SET OFF OF ALLOCABLE SURPLUS UNDER PAYMENT OF BONUS ACT.

(1) SURPLUS ALLOCABLE SURPLUS IS MORE THAN MAXIMUM BONUS

• SURPLUS (subject to the limit of 20% of salary or wage of the employees) shall be carried forward for being SET ON

• in the FOUR succeeding accounting years • in the manner illustrated in Schedule 4.

(2) DEFICIENCY ALLOCABLE SURPLUS IS LESS THAN MINIMUM BONUS

• DEFICIENCY shall be carried forward for being SET OFF • in the FOUR succeeding accounting years • in the manner illustrated in Schedule 4.

(3) HOW THE AMOUNT CARRIED FORWARD SHALL BE UTILISED

• While calculating bonus for any succeeding accounting year, • the amount of set off/set on • carried forward from the earliest accounting year

• shall be first taken into account.



QUESTION.17 STATE PROVISIONS RELATED TO DEDUCTION FROM BONUS UNDER PAYMENT OF BONUS ACT.

(1) ADJUSTMENT OF BONUS

The employer is entitled to deduct from bonus payable to an employee- The amount paid as

• Customary bonus like Puja bonus, Deepawali bonus, any festival bonus etc.

• Interim Bonusr (Bonus paid in between the year before it became due for payment)

(2) DEDUCTIONS FROM BONUS

IF

• Any employee is found guilty of misconduct and

• due to that misconduct

• Financial loss is actually caused to the employer.

• THEN

• The employer may recover such loss

• From the bonus payable to employee BUT

• Deduction can be made only from the bonus of same accounting year

• In which such financial loss was caused.

QUESTION.18 DISCUSS THE PROVISIONS OF TIME LIMIT FOR PAYMENT OF BONUS UNDER PAYMENT OF BONUS ACT.

(1) IN CASE OF ANY DISPUTE PENDING BEFORE ANY AUTHORITY

Where there is a dispute regarding payment of bonus, the bonus shall be paid within 1 month of the date on which the:

• Award becomes enforceable; or • Settlement coming into operation.

(2) IN ANY OTHER CASE

(a) Time Limit The bonus shall be paid within 8 months from the end of accounting year (b) Extension of time limit Appropriate Government may extend the time limit If following conditions are satisfied:

• An application shall be made by the employer to Appropriate Govt.

• Appropriate Govt must be satisfied that there are sufficient reasons to grant extension of time for payment of bonus.

• Total period including the period of extension period shall not exceed 2 years.

(c).Mode of Payment

• Bonus shall be paid ONLY IN CASH.



QUESTION. 19 EXPLAIN PROVISIONS OF PAYMENT OF BONUS LINKED WITH PRODUCTION OR PRODUCTIVITY UNDER SECTION 31A OF PAYMENT OF BONUS ACT.

(1) APPLICABILITY PROVISIONS OF SEC 31A

• Only if there is and express agreement or settlement • between employer and the employees • for payment of annual bonus linked with production or productivity.

• Sec.31A overrides the entire Payment of Bonus Act EXCEPT right to minimum bonus and maximum bonus.

(2) AGREEMENT The agreement or settlement may provide that:

• The bonus shall be paid annually to the employees; • Such bonus shall be linked with production or productivity; • Such bonus shall be paid in lieu of bonus based on profits.

(3) REQUIREMENT MINIMUM BONUS

• Such agreement or settlement between the employer and employees shall be null and void,

• if it deprives the employees the right to receive minimum bonus u/s 10.

• Thus, every employee is entitled to receive minimum bonus computed as per Sec 10.

(4) MAXIMUM BONUS

• Bonus linked with production or productivity

• shall not exceed 20% of salary or wage earned in the relevant accounting year.

QUESTION.20 EXPLAIN PROVISIONS OF RECOVERY OF BONUS DUE FROM AN EMPLOYER.

(1) WHO CAN FILE APPLICATION?

a) Employee including an ex-employee; b) Any person authorized by the employee in writing; or c) Legal heirs of deceased employee.

(2) TO WHOM APPLICATION IS TO BE FILED?

Application has to be filed to Appropriate Govt. (AG)

(3) TIME LIMIT FOR FILING AN APPLICATION

• The application shall be made within 1 year of bonus becoming due for payment.

• The above time limit may be extended by the AG, if sufficient cause is shown.

(4) RECOVERY CERTIFICATE

• After hearing the application, if AG is satisfied that bonus is due, he shall issue a recovery certificate.

(5) RECOVERY BY WHOM

• The collector shall recover the bonus from the employer in the same manner as arrears of Land Revenue.

(6) POWER TO DELEGATE

• The AG may delegate his powers u/s 21 to such authority as may be specified by AG.



QUESTION.21 STATE THE NAMES OF THE ESTABLISHMENTS/EMPLOYERS ON WHOM THIS ACT DOES NOT APPLY.

The provisions of this Act shall not be applicable to Employees employed by

(1)

a. General insurance companies b. LIC

(2) Seamen

(3) Employees registered under scheme of Dock Workers (Regulation of Employment) Act, 1948.

(4) Employees employed by an establishment engaged in any industry carried on by or under the authority of any department of the Central Government or a State Government or a Local authority

(5) Reserve Bank of India

(6) a. Indian Red Cross Society, b. Universities or other educational institutions, c. Institutions (including hospitals, chamber of commerce and social welfare institutions) established not for purposes of profit.

(7) i. IFCI (Industrial Finance Corporation of India) ii. SFC (State Financial Corporations) iii. DIC (Deposit Insurance Corporation) iv. NABARD (National Bank for Agriculture and Rural Development) v. UTI (Unit Trust of India) vi. IDBI (Industrial Development Bank of India) vii. SIDBI (Small Industries Development Bank of India) viii. NHB (National Housing Bank) ix. any other financial institution (other than a banking company), being an

establishment in public sector, which the Central Government may, by notification in the Official Gazette, specify, having regard to –

i. its capital structure; ii. its objectives and the nature of its activities;

the nature and extent of financial assistance or any concession given to it by the Government; and any other relevant factor.

(8) Employees employed by inland water transport establishment operating on routes passing through any other country.

(9) Employees employed through contractors on building operations

QUESTION.22 DEFINE APPROPRIATE GOVERNMENT UNDER PAYMENT OF BONUS ACT.

(1) CENTRAL GOVERNMENT

In relation to an establishment where, the Appropriate Government under the Industrial Dispute Act, 1947, is Central Government.

(2) STATE GOVERNMENT

In relation to any other establishment



QUESTION.23 EXPLAIN PROVISIONS OF SPECIAL PROVISIONS APPLICABLE TO NEW ESTABLISHMENTS.

(1) PROVISIONS REGARDING PAYMENT OF BONUS IN CASE OF NEW ESTABLISHMENTS

FIRST 5 YEARS a. Bonus is payable only in respect of an accounting year in

which the employer derives profit. b. The bonus shall be calculated in accordance with the

provisions of this Act. c. However, the provisions of Sec 15 (set on/set off of

allocable surplus), shall not apply. 6TH YEAR

• Set on/Set off of allocable surplus shall be made • taking into account the excess/deficiency of the allocable

surplus

• in respect of 5th and 6th accounting year. 7TH YEAR

• Set on/Set off of allocable surplus shall be made • taking into account the excess/deficiency of the allocable

surplus

• in respect of 5th, 6th and 7th accounting year. 8TH YEAR ONWARDS

• Sec 15 shall apply as it applies to any other establishment.

(2) CHANGE IN ITS LOCATION, MANAGEMENT, NAME OR OWNERSHIP

An establishment shall not be deemed to be newly set up merely because of the reason of these changes.

(3) WHEN THE EMPLOYER IS DEEMED TO HAVE DERIVED PROFITS

An employer shall be deemed to have derived profit in any accounting year IF:

a. Depreciation of such accounting year has been provided; and b. The arrears of such depreciation and losses incurred during

earlier accounting years have been FULLY SET OFF against the profits.

(4) MEANING OF FIRST ACCOUNTING YEAR FOR NEW ESTABLISHMENTS

• First accounting year shall mean, • the accounting year following the accounting year • in which the employer sells the goods manufactured by him or

• renders services, as the case may be, • from such establishment. Note

• Sale of goods manufactured during the trial running of any factory or

• of the prospecting stage of any mine or an oil field • shall not be taken into consideration.



QUESTION.24 DEFINE “ESTABLISHMENTS IN PUBLIC SECTOR” UNDER PAYMENT OF BONUS ACT. STATE WHETHER POB ACT APPLIES TO THEM OR NOT?

(1) MEANING An establishment owned, controlled or managed by- a. A Government company; or b. A corporation in which 40% or more capital is held by CG, SG, RBI

or a corporation owned by CG, SG or RBI.

(2) APPLICABILITY OF ACT

Payment of Bonus Act, 1965 is not applicable to an establishment in public sector.

(3) EXCEPTION (APPLICABILITY OF ACT ON ESTABLISHMENT IN PUBLIC SECTOR)

This Act is applicable to establishments in public sector if the following TWO conditions are fulfilled: (a) Sells goods or renders service in competition with establishment in private sector AND (b) Income from such Business is 20% or more of its gross total income

QUESTION.25 WHAT PRESUMPTION ARE TAKEN ABOUT ACCURACY OF BALANCE SHEET AND P&L ACCOUNT OF CORPORATION, COMPANIES UNDER PAYMENT OF BONUS ACT.

(1) PRESUMPTION IN CASE THERE IS A DISPUTE RELATING TO BONUS

a. Where there is a DISPUTE (such dispute shall be deemed to be an

industries dispute within the meaning of the Industrial Disputes Act, 1947) relating to bonus between the employee and the employer.

b. The APPROPRIATE AUTHORITY (Arbitrator, Tribunal or any Court having jurisdiction) dealing with the dispute may presume that

c. the statements and particulars in the BALANCE SHEET AND THE PROFIT AND LOSS ACCOUNT of the company are ACCURATE.

(2) NO NEED TO PROVE WHEN ACCOUNTS AND FINANCIAL STATEMENTS ARE AUDITED

Company or Corporation need not • Prove the accuracy of such B/S and P&L Account, and • Produce any affidavit for establishing such accuracy.

Where the accounts are audited, • In case of Corporation: By the C & AG • In case of Company: By an auditor duly qualified to Act as

auditor of the companies under Companies Act, 1956.

(3) POWER OF APPROPRIATE AUTHORITY TO DEMAND CLARIFICATION

• Any trade union or employees who are a party to the dispute • may make an application to the authority • requiring any clarification relating to any item in the B/S or P&L

Account. • If the authority is satisfied that such clarification is necessary, • he may direct the company or corporation

• to furnish such clarification to the trade union or employees.



QUESTION.26 WHAT PRESUMPTION ARE TAKEN ABOUT ACCURACY OF BALANCE SHEET AND P&L ACCOUNT OF EMPLOYERS WHO ARE NOT COMPANIES OR CORPORATIONS UNDER PAYMENT OF BONUS ACT.

(1) PRESUMPTION IN CASE THERE IS A DISPUTE RELATING TO BONUS

• Where there is a DISPUTE (such dispute shall be deemed to be an industries dispute within the meaning of the Industrial Disputes Act, 1947) relating to bonus between the employee and the employer.

• The APPROPRIATE AUTHORITY (Arbitrator, Tribunal or any Court having jurisdiction) dealing with the dispute may presume that

• the statements and particulars in the BALANCE SHEET AND THE PROFIT AND LOSS ACCOUNT of the company are ACCURATE.

(2) NO NEED TO PROVE WHEN ACCOUNTS AND FINANCIAL STATEMENTS ARE AUDITED

Employers need not • Prove the accuracy of such B/S and P&L Account, and • Produce any affidavit for establishing such accuracy.

Where the accounts are audited, • By an auditor duly qualified to audit the accounts of companies

under Companies Act, 1956. (3) ACCOUNTS OF SUCH EMPLOYER HAVE NOT BEEN AUDITED BY DULY QUALIFIED AUDITOR

• When the said authority finds that the accounts of such employer • have not been audited by any such auditor and • it is of opinion that an audit of the accounts of such employer is

necessary

• then, it may direct the employer to get his accounts audited • within such time as may be specified or as it thinks fit.

(1) IF EMPLOYER FAILS TO GET THE ACCOUNTS AUDITED • The said authority may get the accounts audited • by such auditor or auditors as it thinks fit.

(2) THE EXPENSES OF AND INCIDENTAL TO, ANY AUDIT • The expenses including the remuneration of the auditor or auditors

• shall be determined by the said authority and • paid by the employer.

QUESTION.27 WHAT PRESUMPTION ARE TAKEN ABOUT AUDITED ACCOUNTS OF BANKING COMPANIES UNDER PAYMENT OF BONUS ACT.

AUDITED ACCOUNTS OF BANKING COMPANIES NOT TO BE QUESTIONED

• Where there is a dispute between a banking company and its employees regarding bonus,

• the authority shall not permit any trade union or employees

• to question the correctness of accounts of the banking company • if such accounts are duly audited.

• However, the authority may permit the trade union or the employees

• to obtain from the banking company • the necessary information for verifying the amount of bonus due

under the Act.



QUESTION.28 EXPLAIN THE PROVISIONS OF APPOINTMENT AND POWERS OF INSPECTORS UNDER PAYMENT OF BONUS ACT.

(1) APPOINTMENT OF INSPECTORS

• AG may appoint inspectors under this Act (by Notification in the Official Gazette)

• to ascertain whether or not the provisions of this Act has been complied by an employer.

• The AG may appoint such number of inspectors as he deems fit. • AG defines the limits within which the inspectors shall exercise

jurisdiction.

(2) POWERS OF INSPECTOR

1) To call such information from the employer as he considers necessary.

2) To examine the employer, his agent or servants. 3) To enter into any establishment and require production of

any books, registers and documents. 4) To make copies or extracts of any book, register or other

document. 5) To exercise such other powers as may be prescribed.

(3) EMPLOYER/HIS AGENTS/ HIS SERVANTS LEGALLY BOUND

Any person required to

• produce any accounts, books, register or other documents or • to give any information to an Inspector,

shall be legally bound to do so.

QUESTION.29 STATE WHETHER UNDER PAYMENT OF BONUS ACT, EMPLOYEES AND EMPLOYERS CAN ENTER INTO AGREEMENT FOR GRANT OF BONUS UNDER A DIFFERENT FORMULA?

(1) AS PER SEC.34 • Yes as per Sec.34, Employees can enter into an agreement with their employer for granting them bonus under a formula which is different from that under this Act.

(2) APPROVAL OF THE APPROPRIATE GOVERNMENT

• For this purpose a previous approval of the Appropriate Government is necessary.

(3) RIGHT TO RECEIVE THE MINIMUM BONUS

• Any agreement depriving the employees from their right to receive the minimum bonus shall be null and void.

(4) EMPLOYEES SHALL NOT BE ENTITLED TO BE PAID BONUS IN EXCESS OF

(a) 8.33 per cent of the salary or wage earned by them during accounting year (if the employer has no allocable surplus in the accounting year or the amount of such allocable surplus is only so much that), or (b) 20 per cent of the salary or wage earned by them during the accounting year.



QUESTION.30 WHETHER EXEMPTION FROM PROVISIONS OF PAYMENT OF BONUS ACT CAN BE OR NOT? IF YES, STATE THE PROVISIONS.

(1) GROUND OF EXEMPTION

• AG shall consider the financial position and other relevant circumstances of any establishment or class of establishment.

(2) OPINION OF APPROPRIATE GOVT.

• It may do so if it is of the opinion that it is not in the public interest to apply all or any of the provisions of this Act to an establishment or class of establishment.

(3) NOTIFICATION IN THE OFFICIAL GAZETTE

The order of the exemption shall be published by way of notification in the

Official Gazette.

(4) CONTENTS OF ORDER OF EXEMPTION

The order shall specify the

• circumstances subject to which the exemption is granted that and • the period of exemption.



PROCEDURE FOR COMPUTATION OF BONUS

STEP 1: Computation of Gross Profit

Net profit as shown in P&L Account after making usual and necessary provisions

ADD: 1) Provisions for bonus and depreciation and reserves

2) Bonus paid to employees in respect of previous accounting years 3) Gratuity paid or payable to employees in excess of the aggregate of:

a. The provisions made for approved Gratuity Fund; and

b. The amount actually paid to employees on their retirement or on termination of their employment. 4) Donation in excess of the amount admissible for income tax

5) Capital expenditure (other than capital expenditure on scientific research) and capital losses 6) Losses and expenditure of any business situated outside India

7) Income directly credited to any reserve

LESS: 1) Capital receipts and capital profits

2) Profits of any business situated outside India 3) Refund of any excess direct tax paid for previous accounting years

4) Cash subsidy received from the Government ___________________

GROSS PROFIT

STEP 2: Deduct prior charges from Gross Profit

Gross Profit LESS:

1) Development Rebate

2) Development Allowance 3) Investment Allowance

4) Depreciation admissible under Income Tax Act 5) Direct tax which the employer is liable to pay for the accounting year.

6) Sums referred to in the Third Schedule- a. 8.5% of equity share capital (at the beginning of the accounting year)

b. 6% of reserves (at the beginning of the accounting year)

c. Dividend paid on preference shares at actual rate _______________

GROSS PROFIT AFTER PRIOR CHARGES

STEP 3: Computation of available surplus

Gross Profit after prior charges ADD: Tax saved in respect of bonus paid during the preceding accounting year [Tax on Gross Profit Less Tax on

(Gross Profit – Bonus Paid)] _____________________

AVAILABLE SURPLUS

STEP 4: Computation of allocable surplus

a) In case of company which has not made prescribed arrangements for declaration and payment of dividend as per Sec 194 on Income Tax Act, 1961: Allocable surplus shall be 67% of the available surplus

b) In any other case: Allocable surplus shall be 60% of the available surplus

STEP 5: Compute Bonus

Bonus shall be calculated as per the provisions contained in Sec. 10, 11, 12, 15 and other applicable provisions of the Act.



FOURTH SCHEDULE

In this Schedule, the total amount of bonus equal to 8.33 per cent of the annual salary or wage payable to all the employees is assumed to be Rs. 1,04,167. Accordingly, the maximum bonus to which all the employees are entitled to be paid (twenty per cent of the annual salary or wage of all the employees) would be Rs. 2,50,000. Year Amount equal to

sixty per cent or

sixty seven per cent as the case

may be or

available surplus allocable as bonus

Amount payable as bonus

Set on or set off of the year

carried forward

Total set on or set off carried forward

(1) (2) (3) (4) (5)

1 1,04,167 1,04,167 Nil Nil

2 6,35,000 2,50,000 Set on 2,50,000 Set on 2,50,000 (2)

3 2,20,000 2,50,000

(inclusive of 30,000 From year-2)

Nil Set on 2,20,000 (2)

4 3,75,000 2,50,000 Set on 1,25,000 Set on 2,20,000 (2)

1,25,000 (4)

5. 1,40,000 2,50,000

(Inclusive of 1,10,000 from year 2)

Nil Set on 1,10,000 (2)

1,25,000 (4)

6. 3,10,000 2,50,000 Set on 60,000 Set on Nil + (2)

1,25,000 (4)

60,000 (6)

7. 1,00,000 2,50,000

(inclusive of 1,25,000 from

year 4 and 25,000 from year 6)

Nil Set on 35,000 (6)

8. Nil (due to loss)

1,04,167 (inclusive of 35,000

From year 6)

Set off 69,167 Set off 69,167 (8)

9. 10,000 1,04,167 Set off 94,167 Set off 69,167 (8) 94,167 (9)

10 2,15,000 1,04,167 (after setting off

69,167 from year 8 and

41,666 from year 9)

Nil Set off 52,501 (9)

Payment of Gratuity Act 1972 CA-IPCC Law, Ethics & Communication


CHAPTER 3 PAYMENT OF GRATUITY ACT 1972

QUESTION.1 WHAT IS THE PURPOSE OF PAYMENT OF GRATUITY ACT 1972.

PURPOSE • When due to retirement, the tenure of service of the employee comes to an end,

• It often results in fall in his regular earning and more often than not total stoppage of earnings.

• In case of death of the worker, members of his family face even more critical situation.

• Gratuity is the retirement benefit which helps the worker or his family in facing this situation.

• The purpose of this act is to support the employees after termination of their services due to retirement.

Delhi Cloth and General Mills Co. Ltd. V their workers

Supreme Court held that the object of providing a gratuity scheme is to provide a retiring benefit to the workman who have rendered long and unblemished service to the employer and thereby contributed to the prosperity of the employer.

QUESTION.2 WHEN THE BILL FOR PAYMENT OF GRATUITY ACT, 1972 WAS PASSED AND WHEN DOES THIS ACT CAME INTO FORCE.

(A) BILL WAS PASSED ON

21ST August, 1972

(B) ACT CAME IN TO FORCE ON

16TH Sep 1972.

QUESTION.3 WHAT IS THE SCOPE OF PAYMENT OF GRATUITY ACT, 1972.

SCOPE OF THE ACT

• It extends to whole of India • but in case of Plantation or Ports, • it shall not extend to the State of Jammu and Kashmir.

QUESTION.4 DISCUSS THE APPLICABILITY OF PAYMENT OF GRATUITY ACT, 1972.

APPLICABILITY It applies to every a. Mine b. Railway Companies c. Plantation d. Factory e. Port f. Oilfield g. Every shop or establishment, within the meaning of any law

for the time being in force in relation to shop or establishments in a State, in which 10 or more persons are or were employed on any day of the preceding 12 months.



APPLICABILITY TO OTHER ESTABLISHMENTS

• Such other establishments or class of establishments,

• in which 10 or more persons are or were employed • on any day of the preceding twelve months • as the Central Government may, by notification specify in

this behalf.

Note: The Central Government has extended the Act upon educational institutions in which 10 or more persons were employed on any day of the preceding 12 months.

CONTINUITY OF APPLICATION

• Once the provisions of this Act apply to any shop or establishment,

• it continues to apply to such shop or establishment even if the number of persons employed falls below 10.

APPLICABILITY OF THE ACT AS PER DECIDED CASE LAWS

1. Municipal council or committee

(Municipal Committee v A. Nathi Ram) 2. To temples and gratuity payable to employees working in temples

(Shri Jagannath Temple, Puri v Jagannath Padhi) 3. To polytechnics

(V. Venketeswar Rao v Chairman, SMVM Polytechnic, Tanuku)

4. Charitable hospitals although it has no profit motive (Management of Goos Samaritan Rural Development Project v T.A. Ramaiah)

5. Cooperative society (M.P. State Cooperative Union Ltd v J.L. Kashyap)

QUESTION.5 DEFINE THE TERMS “RETIREMENT” AND “SUPERANNUATION” UNDER PAYMENT OF GRATUITY ACT, 1972.

(A) RETIREMENT Termination of the service of an employee otherwise than on superannuation.

(B) SUPERANNU-ATION

It means: • The attainment of such age by the employee,

• As is fixed in the contract or conditions of service, • As the age, on attainment of which, the employee shall vacate the

employment.



QUESTION.6 DEFINE THE TERMS “APPROPRIATE GOVERNMENT” AND “MACHINERY UNDER THE ACT” UNDER PAYMENT OF GRATUITY ACT, 1972.

(A) APPROPRIATE GOVERNMENT [Sec.2 (a)]

Central Government In relation to:

• An establishment or a factory belonging to or under the control of, the Central Government

• An establishment of a major port, mine, oilfield or railway company

• An establishment having branches in more than one State. State Government In any other case

(B) MACHINERY FOR THE ENFORCEMENT OF THIS ACT

CONTROLLING AUTHORITIES

All Assistant Labor Commissioners (Central) have been appointed as

controlling authorities, and

APPELLATE AUTHORITIES

All Regional Labor Commissioners (Central) have been appointed as Appellate Authorities.

QUESTION.7 DEFINE THE TERM “EMPLOYER” AND “EMPLOYEE” UNDER PAYMENT OF GRATUITY ACT, 1972.

(A) EMPLOYER Employer means in relation to any establishment, factory, mine, oilfield, plantation, port, railway company or shop belonging to or under the control of the a) Central Government or a State Government

i. Where any person has been appointed by AG : A person or authority appointed by the appropriate Government for the supervision and control of employees.

ii. Where no person has been so appointed by AG: Head of the Ministry or the Department concerned.

b) Local authority i. Where any person has been appointed by Local Authority : The

person employed by such authority for the supervision and control of employees.

ii. Where no such person has been appointed by Local Authority: The Chief Executive Officer of the local authority.

c) In any other case i. The person who or the authority which has the ultimate control

over the affairs of the establishment, factory, mine, oilfield, plantation, port, Railway Company or shop.

ii. Where the said affairs are entrusted to any other person, whether called a manager or managing director or by any other name.



(B) EMPLOYEE Employee Means And (1) It includes • Any person (other than the apprentice) • Employed on wages in any establishment, factory, mine, oilfield,

plantation, port, Railway Company or shop.

• To do any skilled, semi-skilled or unskilled, manual, supervisory, technical or clerical work

• Whether the terms of employment are express or implied. (2) It does not include:

• Any person who holds a post • under the Central Government or State Government, and • is covered by any other Act or • by any rules providing for payment of Gratuity.

WORKERS WHO ARE ELIGIBLE FOR GRATUITY AS PER DECIDED CASE LAWS:

1. Home workers (Bagi Beedi factory v Appellate Authority) 2. Field workers (United India Insurance Co. Ltd v H.K. Khatau) 3. Employees holding post under CG/SG, according the gratuity act

where he is covered under separate rules made for payment of gratuity (Union of India v Manik Lal Banerjee)

4. Teachers (Ahmedabad Pvt Primary Teacher’s Ass. V Adm. Officer)

5. Principal of educational institution ( Administrator, Lihodhi Multipurpose Higher Secondary School v Viddyavati Chaturvedi)

QUESTION.8 DEFINE THE TERM “WAGES” AND “FAMILY” UNDER PAYMENT OF GRATUITY ACT, 1972.

(A) WAGES • All emoluments which are earned by an employee • while on the duty or on leave in accordance with the terms and

conditions of his employment

• which are paid or payable to him in cash. • It includes : Dearness Allowance • It does not include: Bonus, commission, HRA, overtime wages and

any other allowances.

(B) FAMILY The family shall be deemed to consist of a. In case of Male Employee

• Himself, his wife, his children (whether married or unmarried),

• his dependent parents, and the dependent parents of his wife,

• and the widow and children of his deceased son, if any.



b. In case of Female Employee

• Herself, her husband, his children (whether married or unmarried),

• her dependent parents, and the dependent parents of her husband, and

• the widow and children of his deceased son, if any.

c. Where the personal law of an employee permits the adoption of a child

• Any child lawfully adopted by the employee shall be included in his family.

• Where the child of an employee has been adopted by another person,

• such child shall be excluded from his family.

QUESTION.9 WHAT DO YOU MEAN BY GRATUITY AND TO WHOM IT IS PAYABLE?

(1) MEANING OF GRATUITY

• Gratuity is a gift from the employer to his employee • at the time of termination of service, • for the long and unblemished service rendered to his

establishment,

• which contributed in the growth and prosperity of the establishment.

(2) GRATUITY SHALL BE PAYABLE TO

(a) Where employee is not deceased

The employee himself

(b) Where employee is deceased

i. If nomination is made

To Nominee

ii. If no nomination made

To Legal heir

iii. If nominee or legal heir is a minor

• Amount of gratuity shall be deposited with the

controlling authority

• who must invest it for the benefit of minor

• in prescribed bank or financial institution

• until such minor attains majority.



QUESTION.10 WHAT IS THE ELIGIBILITY CRITERIA FOR PAYMENT OF GRATUITY?

(1) ELIGIBILITY FOR GRATUITY

• Gratuity shall be payable to an employee

• on the termination of his employment

• after he has rendered continuous service for not less than 5

years:

a) On his superannuation, or

b) On his retirement or resignation, or

c) On his death or disablement* due to accident or disease (the

condition of completion of 5 years is not essential in this

case)

* Disablement means such disablement due to which an employee

becomes incapable of performing the work which he was performing

before the accident or disease resulting in such a disablement.

(2) RELATED CASE LAWS

• Mettur Beardsell Ltd v Regional Labor Comm. Employee to claim gratuity where he worked for 10 months & 18 days in the fifth year.

• Dungerbhai v Arbanda mills Where the employee has been re-employed after a break, then period prior to re-employment be termed as continuous service

QUESTION.11 HOW IS “COMPLETED YEAR OF SERVICE” AND “CONTINUOUS SERVICE” IS CALCULATED?

(1) COMPLETED YEAR OF SERVICE

Completed year of service means continuous service for one year.

(2) CONTINUOUS SERVICE

(A) Employee is said to be in continuous service • An employee is said to be in continuous service for a period, if he has, for

that period, been in uninterrupted service.

• The term uninterrupted service includes service which may be interrupted on account of:

� Sickness � Accident � Leave � Absence from duty without leave � Lay off � Strike and lockout � Cessation of work not due to fault of the employee



(B) Employee is DEEMED to be in continuous service • Where an employee is not in a continuous service,

• shall be deemed to be in continuous service under the employer,

• if the employee has actually worked under the employer for not less

than

CASE.1

In case

of

establish-

ment

other

than

seasonal

establish-

ment

In case of mine below ground

Establish- ment which work for less than 6 days in a week

Establish- ment which work for 6 days or more in a week

Where an employee is not in a continuous service For 1 year

190 days

190 days 240 days

Where an employee is not in a continuous service For 6 months

95 days 95 days 120 days

CASE.2 In case of

seasonal

establish-

ment

Atleast 75% of the number of days on which the

establishment was in operation during the period.

Points to be noted:

1. The number of days the employee has actually worked under an employer

shall include days on which:

a. He has been laid off.

b. He has been on leave with full wages, earned in the previous year.

c. He has been absent due to temporary disablement caused by

accident arising out of and in the course of his employment

d. In case of female employee, she has been on maternity leave;

however, the total period of such maternity leave does not exceed

12 weeks.

2. An employee who is re-employed without any break in service will be

eligible for gratuity.

3. A retrenched employee is also entitled for gratuity.



QUESTION.12 HOW THE AMOUNT OF GRATUITY IS CALCULATED AS PER THE PROVISIONS OF PAYMENT OF GRATUITY ACT 1972?

(A) IN CASE OF MONTHLY SALARIED EMPLOYEES

• @ 15 days wages for every completed year of service or part thereof in excess of 6 months.

• Gratuity= Last Drawn Wages x 15/26 x Completed years of service( including part thereof in excess of six months)

(B) IN CASE OF PIECE RATED EMPLOYEE

• @ 15 days wages for every completed year of service or part thereof in excess of 6 months.

• Gratuity= Last Drawn Wages x 15 x Completed years of service ( including part thereof in excess of six months)

• Last drawn wages=Total wages received by him for a period of 3 months immediately preceding the termination of his employment/ number of days the employee actually worked during those 3 months.

• For computing wages, wages paid for any overtime work shall not be included.

(C) IN CASE OF AN EMPLOYEE OF SEASONAL ESTABLISHMENT

@ 7 days wages for each season

(D) IN CASE OF DISABLED EMPLOYEE

• If an employee becomes disabled due to any accident or disease • so that he is not in a position to do the same work and • re-employed on reduced wages on some other job • the gratuity will be calculated in TWO parts:

a. For the period preceding the disablement: On the basis of wages last drawn by the employee at the time of his disablement.

b. For period subsequent to the disablement: On the basis of reduced wages as drawn by him at the time of the termination of services.

(E) MAXIMUM AMOUNT OF GRATUITY

Rs.10,00,000 (As amended by payment of Gratuity (Amendment ) Act 2010. Earlier this amount was Rs.3,50,000)

QUESTION.13 EXPLAIN PROVISIONS REGARDING PAYMENT OF AMOUNT OF GRATUITY?

(A) APPLICATION FOR GRATUITY

(1) APPLICATION IS TO BE GIVEN BY i. An employee eligible for gratuity ii. Any person authorized in writing by such employee iii. Nominee of the employee ( if the deceased employee had made a

nomination) iv. Legal heir of the employee ( if the deceased employee had not

made any nomination)



(2) APPLICATION IS TO BE GIVEN TO the employer (3) APPLICATION MADE SHOULD BE

i. in Writing and ii. presented through

• Registered post with A/D (Acknowledgement of delivery) or • Personal services.

(4) TIME LIMIT FOR FILING AN APPLICATION i. In case of eligible employee:

a. Within 30 days from the date on which the gratuity become payable.

b. Where the date of superannuation or retirement of the employee is known in advance the employee may apply before 30 days of the date of superannuation or retirement.

ii. In case of nominee: Within 30 days from the date on which the gratuity become payable.

iii. In case of Legal Heir: Ordinarily Within 1 year from the date on which the gratuity become payable.

• If sufficient cause for delay has been mentioned in the application then the employer shall entertain the application even after the prescribed time limit.

• Any dispute in this regard shall be referred to the Controlling Authority for his decision.

• In any case, the claim for gratuity cannot be treated as invalid merely because the claimant failed to submit the application within the prescribed time.

(B) EMPLOYER’S DUTY REGARDING THE PAYMENT

(1) DETERMINATION OF AMOUNT OF GRATUITY AND NOTICE BY

THE EMPLOYER

As soon as gratuity becomes payable, the employer shall, a) determine the amount of gratuity and b) given notice in writing, specifying the amount of gratuity,

i. to the person to whom the gratuity is payable and ii. the controlling officer

Employer has to give notice whether the employee has given the application for the payment of gratuity or not.



(2) TIME LIMIT FOR ARRANGEMENT OF AMOUNT OF GRATUITY

• The employer shall arrange to pay the amount of gratuity within 30 days

• from the date of its becoming due/payable to the person to whom it is payable.

(3) CONSEQUENCES OF DEFAULT BY EMPLOYER

• If the amount of gratuity payable is not paid by the employer within period specified,

• the employer shall pay, • from the date on which the gratuity becomes payable to the date

on which it is paid, • simple interest at prescribed rate by CG from time to time.

INTEREST paid should not exceed the rate notified by the Central Government from time to time for repayment of long term deposits, as the Government may, by notification specify. (4) CONSEQUENCES OF DEFAULT BY EMPLOYEE

• If default in payment is due to the fault of the employee and • the employer has obtained permission in writing from the

Controlling Authority for the delayed payment on this ground,

• the employer is not required to pay interest on late payment.

(C) NOTICE FOR PAYMENT OF GRATUITY

(1) IF THE CLAIM IS FOUND ADMISSIBLE ON VERIFICATION

• the employer shall issue a notice on Form ‘L’. • to the applicant employee, nominee or legal heir, as the case may

be,

• specifying the amount of gratuity payable and fixing a date, • within 30 days after the date of receipt of the application.

(2) IF THE CLAIM FOR GRATUITY IS NOT FOUND ADMISSIBLE

• the employer shall issue a notice in Form ‘M’. • to the applicant employee, nominee or legal heir, as the case may

be

• specifying the reasons why the claim for gratuity is not considered admissible.

(3) NOTICE TO BE DELIVERED TO WHOM

• Notice has to be issued within 15 days of the receipt of application

• for the payment of gratuity from the applicant employee, nominee

or legal heir.

• Also a copy of the notice has to be endorsed to the controlling

authority.



(4) IF THE APPLICANT IS THE NOMINEE OR THE LEGAL

REPRESENTATIVE OF THE EMPLOYEE

• The employer may ask such witness or evidence

• relevant for establishing the identity or maintainability of his claim.

• In such case, the time limit specified for issuance of notice

• shall be operative with effect from the date

• when such witness or evidence, is furnished to the employer.

(D) MODE OF PAYMENT OF GRATUITY

The gratuity shall be paid either in

1. Cash

2. Demand draft

3. Bank Cheque

4. PMO

By Postal money order, after deducting postal money order

commission from the amount payable (only in the case where the

claimant desires and the amount of gratuity payable is less than Rs.

1000)

5. Term deposit with State Bank of India or any of its subsidiaries or

any nationalized Bank

• In case the nominee or legal representative is a minor,

• the employer shall deposit the gratuity amount with controlling

authority.

• The controlling authority shall invest the amount of gratuity

• for the benefit of such minor in term deposit with

• State Bank of India or any of its subsidiaries or any nationalized

Bank.

QUESTION.14 HOW DISPUTES AS TO GRATUITY ARE HANDLED UNDER PAYMENT OF GRATUITY ACT 1972?

(A) NATURE OF DISPUTES

Dispute may arise as to � The amount payable as gratuity, or � The admissibility of any claim of an employee for payment of

gratuity, or � The person entitled to receive the gratuity.

(B) DUTY OF EMPLOYER

Employer shall deposit such amount as he admits to be payable by him with the Controlling Authority.



(C) INQUIRY BY CONTROLLING AUTHORITY

i. Inquiry by controlling authority shall be treated as a judicial

proceedings.

ii. the controlling authority shall issue a notice calling the

applicant and the employer to appear before him to hold an

Inquiry on the specified date, place and time with relevant

documents and evidences.

iii. If the employer fails to appear on the specified date without

sufficient cause, the controlling authority may decide to proceed

with the case and decide the case ex parte.

iv. If the applicant fails to appear on the specified date without

sufficient cause, the controlling authority may dismiss the

application.

v. After affording the parties to the dispute a reasonable opportunity of being heard and determine the amount of gratuity payable to an employee.

vi. After enquiry, if the amount payable to the employee is more than the amount deposited by the employer, the authority shall direct the employer to pay the balance amount.

vii. The controlling authority shall pay the amount of gratuity deposited by the employer including the excess amount, to the person entitled thereto.

(D) POWERS OF CONTROLLING AUTHORITY

The Controlling Authority shall have the same powers as are vested in a Civil Court in respect of the following matters:

� Summoning and enforcing the attendance of any person or examination on oath.

� Requiring the discovery and production of documents. � Receiving evidence on affidavits. � Issuing commissions for examination of witnesses or documents.

(E) APPEAL TO APPELLATE AUTHORITY AGAINST THE ORDER OF CONTROLLING AUTHORITY

1. FILING OF APPEAL WITH AG

• Any person aggrieved by the order of the Controlling Authority may, • within 60 days from the date of receipt of the order, • file an appeal with the AG or such other authority specified by the

Appropriate Government in this behalf.

• Authority specified in this behalf is called appellate authority.

2. EXTENSION OF TIME TO FILE AN APPEAL • Where the AG is satisfied that the applicant

• was prevented by sufficient cause from filing the appeal within the aforesaid 60 days,

• the AG may admit the appeal within a further period of 60 days.



3.THE EMPLOYER’S APPEAL SHALL NOT BE ADMITTED UNLESS

• he produces the certificate of deposit of gratuity amount • issued by the controlling authority or

• unless he deposits the said amount with the Appellate Authority. 4. OPPORTUNITY OF BEING HEARD

• The appellate authority shall give

• a reasonable opportunity of being heard to the parties concerned. 5. POWER REGARDING DECISION

• The Appellate Authority may, after hearing the case, • confirm, modify or reverse the decision of the controlling authority.

QUESTION.15 DISCUSS THE PROVISIONS OF NOMINATIONS FOR GRATUITY UNDER THE PAYMENT OF GRATUITY ACT 1972?

In case of death of an employee, gratuity is payable to the nominee of the employee.

(A) NOMINATION IS COMPULSORY

• Every employee who has completed one year of service • is compulsorily required to make a nomination in Form ‘F’ • within 30 days of the completion of one year of service.

(In case of employee who is already in employment for 1 year or more on the date of commencement of these rules, Within 90 days from the date of commencement of this act).

(B) WHO CAN BE NOMINEE

If, at the time of making nomination: (1) If the employee has a family

• The nomination must be made in favor of one or more members of the family.

• Nomination in favour of a person who is not a member of his family shall be void.

(2) If the employee does not have a family

• The nomination may be made in favour of any person or persons. • If the employee subsequently acquires a family, such nomination

will become void and the employee shall, within 90 days, make a fresh nomination in favour of one or more member of his family.

(C) MORE THAN ONE NOMINEE

• An employee has a right to distribute the amount of gratuity payable to him

• amongst more than one nominee.

(D) IN CASE OF MODIFICATION OF NOMINATION

• The nomination made by the employee may be modified by him at anytime

• Employee shall give notice to his employer in Form ‘H’, for this purpose.

(E) IN CASE OF DEATH OF NOMINEE

• If the nominee dies before the employee, • the employee shall make a fresh nomination.

(F) EFFECTIVE DATE OF NOMINATION

• Nomination comes in to operation from the date of receipt of the same by the employer.



(G) FORMALITIES

• A nomination or fresh nomination or a notice of modification of nomination shall be duly signed by the employee.

• If the employee is illiterate, it shall bear the thumb impression of the employee.

• The signature or thumb impression shall be done in presence of two witnesses, who shall also sign a declaration to that effect in the application.

(H) DUTY OF EMPLOYER FOR SAFE CUSTODY OF NOMINATION

The employer shall keep the nomination form in safe custody. • The employer shall verify the particulars mentioned in the

nomination. • The employer shall return one copy of the nomination form to the

employee as acknowledgement.

QUESTION.16 DISCUSS THE PROVSIONS REGARDING ‘REDUCTION AND FORFEITURE OF GRATUITY’.

(A) FORFEITURE TO THE EXTENT OF DAMAGE OR LOSS (Reduction of Gratuity)

IF • the services of the employee have been terminated for • any act, willful omission or negligence • causing any damage or loss to, or destruction of the property

belonging to the employer THEN

The gratuity payable to employee shall be forfeited to the extent of such damage or loss.

(B) FORFEITURE OF THE WHOLE OR PARTIAL GRATUITY (Forfeiture of Gratuity)

IF • the services of an employee have been terminated for • His riotous or disorderly conduct, or • Any other act of violence on his part, or • Any offence committed in the course of employment involving

moral turpitude; THEN

• The gratuity payable to the employee may be wholly or partially forfeited.

(C) FORFEITURE OF GRATUITY BY EMPLOYER ACCORDING TO DECIDED CASE LAWS

Delhi Cloth & General Mills Co. Ltd v Their Workmen If a workman is guilty of serious misconduct such as acts of violence

against management, or other employees or riotous or disorderly behavior

in or near the place of employment which, though not directly causing

damage is conducive to great indiscipline, then his gratuity can be

forfeited entirely.

Bharat Gold Mines Ltd. v Regional Labor Comm

If the services of an employee are terminated for committing theft during the course of his employment, his gratuity can be forfeited entirely.



QUESTION.17 DISCUSS THE PROVISIONS REGARDING ‘RECOVERY OF GRATUITY’ UNDER PAYMENT OF GRATUITY ACT, 1972.

(A) RECOVERY CERTIFICATE ISSUED BY CONTROLLING AUTHORITY

• If the gratuity payable under this Act is not paid by the employer

within prescribed time

• The controlling authority shall issue a certificate for the amount of

the gratuity

• to the collector to recover the same along with compound interest,

• at such rate prescribed by the Central Government

• from the date of expiry of the prescribed time to get the amount.

• The amount of interest shall not exceed the amount of gratuity

payable.

(B) RECOVERY BY COLLECTOR

• The collector shall recover the amount in the same manner as if it were arrears of land revenue. The gratuity so recovered shall be paid to the person entitled to receive gratuity.

(C) OPPORTUNITY OF BEING HEARD

• Before issuing a certificate, the controlling authority shall give

• the employer a reasonable opportunity of being heard.

QUESTION.18 DISCUSS THE PROVISIONS OF EXEMPTION BY NOTIFICATION. UNDER PAYMENT OF GRATUITY ACT, 1972.

(A) EXEMPTION BY AG BY WAY OF NOTIFICATION

• The AG may exempt from the operation of the provisions of this

Act,

• by giving notification and

• subject to such conditions as may be specified in the notification.

(B) EXEMPTION TO WHOM

• Any establishment, factory, mine, oilfield, plantation, port, railway

company or shop, or;

• Any employee or class of employees employed in an establishment, factory, mine, oilfield, plantation, port, railway company or shop.

(C) CONDITION OF

EXEMPTION

� if in the opinion of the AG, the employees in such concern

� are ALREADY in receipt of gratuity

� which are not less favourable than the benefits provided under this

Act.

(D) TERMS OF EXEMPTION

• The exemption may be given from operation of all or any of the

provisions of this act.

• A notification issued under this section may be issued prospectively

or retrospectively from a date not earlier than the date of

commencement of this Act.

• No such notification shall be issued so as to prejudicially affect the interests of any person.



QUESTION.19 DISCUSS THE PROVISIONS OF COMPULSORY INSURANCE UNDER PAYMENT OF GRATUITY ACT, 1972.

(A) COMPULSORY REGISTRATION

• Every employer who has taken insurance or • has established an approved gratuity fund • shall get his establishment registered with the controlling authority

• within the prescribed time and in the prescribed manner.

(B) COMPULSORY INSURANCE

• The Payment of Gratuity (Amendment) Act, 1987 provides that • every employer shall take compulsory insurance • against his liability for payment of gratuity under the Act • from LIC or any other prescribed insurance company.

(C) EXEMPTION

1. Employer of an establishment belonging to or under the control of the Central Government or the State Government.

2. The AG at its discretion may exempt � Employer who have already established � an approved gratuity fund in respect of his employees � and who desires to continue such arrangement.

3. The AG at its discretion may exempt

� Employers having 500 or more employees, � who establishes an approved gratuity fund in the manner

prescribed.

(D) PENALTY (a) When employer fails to pay the insurance premium • If the employer fails to pay the insurance premium or

• contribute to an approved gratuity fund, • he shall be liable to pay the amount due including interest, if any, • for delayed payments, to the controlling authority.

(b) Fine to be imposed in case of contravention

• Its contravention is punishable with a fine upto Rs. 10,000, and • In case of continuing offence with a further fine of Rs. 1000 per day

• upto the duration the offence continues.

QUESTION.20 DISCUSS THE APPOINTMENT AND POWERS OF INSPECTORS UNDER PAYMENT OF GRATUITY ACT, 1972.

(A) APPOINTMENT OF INSPECTORS (Sec.7A)

1. Appointment by Appropriate Govt

� The AG, by giving notification, may appoint as many Inspectors, as

it deems fit, for the purpose of this Act.

� Every inspector shall be deemed to be public servant within the

meaning of Section 21 of the IPC.



2. Number and Jurisdiction

� The AG may by general or special orders,

� define the area to be covered by such inspectors and

� where two or more inspectors are appointed for the same area,

� it shall provide for distribution and allocation of work.

(B) POWERS OF INSPECTORS (Sec. 7B)

An inspector may exercise all or any of the following powers, for ensuring

compliance under the Act.

i. To call such information as he may consider necessary.

ii. To enter and inspect, at all reasonable hours, any premises

to which this Act applies, for the purpose of examining any register,

record or notice or other documents required to be kept or

exhibited under this Act.

iii. To examine the employer and employee employed therein.

iv. To make copies of, or take extracts from, any register, record,

notice or other document.

v. To search and seize with such assistance any record, notice or

other document where he has reason to believe that the employer

has committed any offence under this Act.

vi. To exercise such other powers as may be prescribed.

QUESTION.21 STATE WHETHER ANY COURT CAN TAKE COGNIZANCE OF AN OFFENCE UNDER PAYMENT OF GRATUITY ACT, 1972.

(A) COGNIZANCE OF OFFENCES

� Court shall take cognizance of any offence punishable under this

Act only on a complaint made by or under the authority of the

AG.

� The controlling authority with authorization from the AG, shall

within 15 days from the date of authorization make such

complaint to the Magistrate where the gratuity has not been paid

or recovered within 6 months of the expiry of the prescribed time.

� No court inferior to that of a Metropolitan Magistrate or a

Judicial Magistrate of the first class shall try any offence

punishable under this Act.

QUESTION.22 STATE WHETHER ANY PROTECTION TO GRATUITY IS GIVEN UNDER PAYMENT OF GRATUITY ACT, 1972.

PROTECTION OF GRATUITY

Gratuity cannot be attached in execution of any decree or order of any

civil, revenue or criminal court.



QUESTION.23 DISCUSS VARIOUS NOTICES OF OPENING, CHANGE OR DISCLOSURE OF ESTABLISHMENT BY THE EMPLOYER UNDER PAYMENT OF GRATUITY ACT, 1972.

A notice shall be submitted by the employer to the controlling authority of the area

(A) CHANGE IN NAME, ADDRESS,

EMPLOYER OR NATURE OF

BUSINESS

Within 30 days of the change.

(B) CLOSURE OF BUSINESS Atleast 60 days before the intended date of closure

QUESTION.24 DISCUSS THE PROVISIONS REGARDING ‘DISPLAY OF CERTAIN THINGS’ UNDER PAYMENT OF GRATUITY ACT, 1972.

(A) DISPLAY OF CERTAIN THINGS

The employer shall display

• at or near the main entrance of the establishment

• in bold letters

• in English and in Language understood by the majority of the

employees:

1. A notice specifying the name of the officer with designation

authorized by the employer to receive on his behalf notices under

the Act or Rules made there under.

2. An abstract of the Payment of Gratuity Act and the Rules made

there under.

Employees Provident Fund & Misc. Prov. Act 1952 CA-IPCC Law, Ethics & Comm


CHAPTER 4 THE EMPLOYEES’ PROVIDENT FUND AND

MISCELLANEOUS PROVISIONS ACT, 1952

QUESTION.1 WHAT IS THE NEED & OBJECTIVE EMPLOYEES’ PROVIDENT FUND AND

MISCELLANEOUS PROVISIONS ACT, 1952? IS IT APPLICABLE TO WHOLE OF INDIA?

(A) NEED

• Every worker wants security and maintenance for old age. • The Provident Fund Act, 1925 deals with the provident funds

relating to

• only Government, Railways and local authorities. • So it was considered desirable to introduce a • Provident Fund Scheme for the industrial workers.

(B) OBJECTIVE

Its objective is to provide for the institution of

• provident fund,

• family pension fund and

• deposit-linked insurance fund

for employees in factories and other establishments.

(C) EXTENT OF

APPLICABILITY

Whole of India except the State of Jammu and Kashmir.

QUESTION.2 DEFINE THE TERMS “APPROPRIATE GOVT” AND “AUTHORIZED

OFFICER” UNDER EMPLOYEES’ PROVIDENT FUND AND MISCELLANEOUS

PROVISIONS ACT, 1952?

(A) APPROPRIATE GOVT

Central Government: In relation to:

• An establishment belonging to, or under the control of the Central

Government.

• An establishment having branches in more than one State

• An establishment connected with a major port, a mine, an oilfield,

a railway company or a controlled industry

State Government: In any other case

(B) AUTHORIZED OFFICER

Authorized officer means:

1. Central Provident Fund Commissioner

2. Additional Central Provident Fund Commissioner

3. Deputy Provident Fund Commissioner

4. Regional Provident Fund Commissioner

Such other officer as authorized by Central Government by notification in Official Gazette.



QUESTION.3 DEFINE THE TERMS “FACTORY”, “INDUSTRY” AND “MANUFACTURING

PROCESS” UNDER EMPLOYEES’ PROVIDENT FUND AND MISCELLANEOUS


(A) FACTORY

Factory Means:

• Any premises, including the precincts thereof,

• In any part of which a manufacturing process is being carried on

or is ordinarily so carried on,

• Whether with the aid or without the aid of power.

(B) INDUSTRY Industry means:

a. An industry specified in Schedule I, and

b. Any other industry added to the Schedule by notification u/s 4.

[Schedule I covers almost all types of industry, including • Food products, • Aerated water, • Cigarettes, • Beedi, • Textiles, • Brick making • Iron and steel, • Cement, • Paper and Paper products, • Medical and pharmaceutical preparations, • Chemicals, • Electrical, mechanical and general engineering products, • Automobile repairing and servicing etc.

Practically, all organised industries are covered under the Act.

However, tea factories in Assam have been exempted of EPF Scheme].

(C) MANUFACTURE

OR

MANUFACTURING

PROCESS

Manufacture Or Manufacturing Process Means

• Any Process for

• making, altering, repairing, ornamenting,

• finishing, packing, washing, cleaning,

• breaking up, demolishing

• or otherwise treating or adapting any article

• with a view of its use, sale, transport, delivery or disposal.



QUESTION.4 EXPLAIN THE APPLICABILITY OF EMPLOYEES’ PROVIDENT FUND AND

MISCELLANEOUS PROVISIONS ACT, 1952 ON VARIOUS ESTABLISHMENTS?

(A) APPLICABILITY

TO FACTORIES

• Every establishment which is a factory

• engaged in any industry specified in Schedule I and

• in which 20 or more persons are employed.

(B) WHEN CENTRAL GOVT EXERCISE ITS POWER AND APPLIES THIS ACT

(1) APPLICABILITY TO ANY OTHER ESTABLISHMENT

• To any other establishment

• employing 20 or more persons or class of such establishments

• which the Central Government may,

• by notification in the official gazette, specify in this behalf.

(2) APPLICABILITY TO ESTABLISHMENT EMPLOYING LESS

THAN 20 PERSONS

The Central Government may apply the provisions of this Act to any

establishment:

• Employing less than 20 persons,

• By giving not less than 2 months’ notice of its intention to do

so by notification in the official gazette.

(3) APPLICABILITY WHEN CG DOES ADDITION TO SCHEDULE I

(i) Power of CG

• The Central Government has a power to add any other industry to

the Schedule I.

(ii) Notification in the official gazette

• The addition has to be made through a notification in the official

gazette and

• the notification is required to be laid before the parliament as soon

as possible after issue.

(iii) Provisions of this Act to be applied to such industry.

• The industry so added shall be deemed to be an industry specified

in Schedule I for the purpose of this Act.

• Thus the provisions of this Act shall also apply to such industry.

(C) ON

APPLICATION TO

CPFC BY

EMPLOYER AND

EMPLOYEES

Where it appears to CENTRAL PROVIDENT FUND COMMISSIONER,

whether on an application made to him in this behalf or

otherwise that,

(i) The employer and majority of employees have agreed that the

provisions of this Act should be made applicable to the establishment,

(ii) He may apply the provisions of this Act to the establishment by



giving notification in official gazette

(iii) The Act shall apply to such establishment on and from the date of

such agreement or from any subsequent date specified in the

agreement.

(D) APPLICABILITY

TO DEPARTMENTS

AND BRANCHES OF

ESTABLISHMENT

• If an establishment consists of different departments or has

branches

• whether situated in the same place or in different places,

• all departments and branches shall be treated as

• parts of the same establishment.

M/S Wipro Ltd v RPF Comm Different departments or branches of an establishment to be treated as

parts of same establishment

(E) CONTINUED

APPLICABILITY

An establishment to which this Act applies shall continue to be governed

by the Act, even if the number of employees falls at any time below 20.

(F) APPLICABILITY OF THE ACT TO AN ESTABLISHMENT WHICH HAS A COMMON PROVIDENT FUND WITH ANOTHER ESTABLISHMENT

When an establishment covered by this Act has

• A common Provident fund with another establishment

immediately before the Act came into force,

• The Central Government has a power to direct through a

notification in the official gazette, that the provisions of this Act

shall also apply to that another establishment.

QUESTION.5 EXPLAIN ON WHICH CLASSES OF ESTABLISHMENTS EMPLOYEES’

PROVIDENT FUND AND MISCELLANEOUS PROVISIONS ACT, 1952 DOES NOT APPLY?

The Act does not apply to the following classes of establishments

(A) CO-OPERATIVE SOCIETY

• Establishments registered under Co-operative Societies Act,

1912 or any other law for the time being in force in any State,

• Employing less than 50 persons, and

• Working without the aid of power.

(B) GOVERNMENT UNDERTAKING

• Establishments belonging to or under the control of the Central

Government or a State Government, and

• If employees are entitled to benefits of

i. contributory provident fund or

ii. old age pension

• in accordance to any scheme or rule framed by Government.



(C)

ESTABLISHMENTS

CONSTITUTED

UNDER A SPECIAL

ACT

• Establishments set up under any Central or State Act, and

• If employees are entitled to the benefits of

i. contributory provident fund or

ii. old age pension

• in accordance to any scheme or rule framed under the Act.

(D) EXEMPTION BY

NOTIFICATION

[SECTION 16(2)]

Power of Central Government to exempt certain establishments from the

Act

(a) Under certain circumstances

• If the Central Government is of the opinion that having

regard to the financial position of any class of

establishments or other circumstances of the case, it is

necessary or expedient to do so.

(b) Notification in the official gazette

• The Central Government shall give notification in the official

gazette and mention conditions and shall specify period.

(c) Exemption to such class of establishment

• CG shall exempt such class of establishments from the

operation of this Act.

(d) Exemption to be effective prospectively or Retrospectively

• Exemption may be retrospective or prospective.

QUESTION.6 DEFINE THE TERMS “EMPLOYER”AND “OCCUPIER OF A FACTORY”

UNDER EMPLOYEES’ PROVIDENT FUND AND MISCELLANEOUS PROVISIONS ACT,

1952?

(A) EMPLOYER A. In relation to an establishment which is factory

• Owner or occupier of the factory,

• Agent of such owner or occupier,

• Legal representative of a deceased owner or occupier

• Where a person has been named as manager of the factory: the

person so named; and

B. In relation to any other establishment

• Person who or the authority which, has ultimate control over the

affairs of establishment,

• Where the said affairs are entrusted to a manager or managing

director, such manager, managing director or managing agent.

(B) OCCUPIER OF A

FACTORY

• Person who has ultimate control over the affairs of the factory and

• where the said affairs are entrusted to a managing agent,

• such agent shall be deemed to be the occupier of the factory.



QUESTION.7 DEFINE THE TERMS “EMPLOYEE”, “EXEMPTED EMPLOYEE” AND

“EXEMPTED ESTABLISHMENT” UNDER EMPLOYEES’ PROVIDENT FUND AND

MISCELLANEOUS PROVISIONS ACT, 1952?

(A) EMPLOYEE

• Employee means any person who is employed on wages,

• In any kind of work in an establishment or in connection with the

work of an establishment.

• The work may be manual or otherwise.

• The employee may get his wages directly or indirectly from the

employer.

Employee includes any person

a. Employed by or through a contractor in or in connection with the

work of the establishment;

b. Engaged as an apprentice, not being an apprentice engaged under

the Apprentice Act, 1961 or under the standing orders of the

establishment.

DECIDED CASE LAWS: (1) SRI RAMA VILAS SERVICE LTD. V. RPFC (2) GANDHI VINITA ASHRAM V. PFC

• It has been decided by the courts that trainees are not employees

• and are not covered by the EPF Act.

• The court has held that stipend paid is not wages.

• It must be noted that trainees were recruited under a particular Training Scheme and

• there was no guarantee of employment after completion of the training period and

• that they were not entitled to other benefits, which were available to other permanent employees.

(B) EXEMPTED

EMPLOYEE

Exempted employee means an employee to whom the scheme does not

apply due to exemption u/s 17.

(C) EXEMPTED

ESTABLISHMENT

Exempted establishment means:

a. An establishment in respect of which an exemption is granted u/s

17,

b. from the operation of all or any of the provisions of any scheme,

c. Whether such exemption has been granted to the establishment

as such or to any person or class of persons employed therein.



QUESTION.8 DEFINE THE TERM “BASIC WAGES ” UNDER EMPLOYEES’ PROVIDENT

FUND AND MISCELLANEOUS PROVISIONS ACT, 1952?

BASIC WAGES

A. All emoluments which are earned by an employee while on duty, on

leave or on holidays with wages in accordance with the terms of the

contract of employment and which are paid or payable in cash to him.

B. It does not includes:

i. The cash value of any food concession ;

ii. Dearness allowance, house rent allowance, overtime allowance,

bonus, commission or pay and other similar allowance payable to

the employee in respect of his employment;

iii. Any presents made by the employer.

QUESTION.9 EXPLAIN ‘EMPLOYEES PROVIDENT FUND SCHEME’ UNDER EMPLOYEES’

PROVIDENT FUND AND MISCELLANEOUS PROVISIONS ACT, 1952?

(A) ELIGIBILITY OF

EMPLOYEE

• Every employee other than the exempted employee shall be

entitled to become a member of the fund.

• The employee shall become a member from the date of joining

the establishment or factory.

(B) EMPLOYER’S

CONTRIBUTION

10% of ( Basic Pay + Dearness Allowance + Retaining Allowance )

(C) EMPLOYEE’S

CONTRIBUTION

10% of ( Basic Pay + Dearness Allowance + Retaining Allowance )

(Employee may make higher contribution at his desire)

HINDUSTAN LEVER EMPLOYEES UNION V RPFC

Encashment of leave is not to be treated as part of basic wages

for the purpose of calculating contribution towards PF.

(D)

CONTRIBUTION ON

ACTUAL PAYMENT

• Contribution shall be calculated on

• basic wages, dearness allowance and retaining allowance,

• actually drawn during the whole month

• whether paid on daily, fortnightly or monthly basis.

(E) ROUNDING OFF Contribution has to be rounded off to the nearest rupee.

(F) HIGHER

CONTRIBUTION

• Central Government may by notification, increase the contribution

• from 10% to 12% in respect of any establishment

(G) DEARNESS

ALLOWANCE

Shall also include the cash value of any food concession allowed to an

employee.



(H) RETAINING

ALLOWANCE

• Means an allowance given for the time being to

• an employee of any factory or other establishments

• during any period in which the establishment is not working,

• for retaining his services.

(I) LIABILITY OF

THE EMPLOYER

• Payment of contribution is a statutory liability of employer under

the Act.

• Employer shall pay both his contribution and employee’s

contribution at first instance.

• Employee’s contribution shall be deducted from employee’s

wages.

• Notwithstanding any contract to the contrary, the employer shall

not be entitled to deduct employer’s contribution from the wages

of the employee.

QUESTION.10 EXPLAIN ‘EMPLOYEES PENSION SCHEME’ UNDER EMPLOYEES’


(A) NOTIFICATION

IN THE OFFICIAL

GAZETTE BY CG

The Central Government may, by notification in the official gazette,

frame a scheme to be called the Employee’s Pension Scheme.

(B) THE SCHEME

PROVIDES FOR

1. Superannuation pension

2. Retiring pension

3. Permanent total disablement pension (Payable to employees of

any establishment or class of establishment to which this Act

applies)

4. Widow or widower’s pension

5. Children pension

6. Orphan pension (Payable to the beneficiaries of such employees)

(C)CONTRIBUTION

BY EMPLOYER

Out of the employer’s contribution to Employee’s provident fund scheme,

8.33% shall be remitted to Employee Scheme within 15 days of the close

of every month.

(D)CONTRIBUTION

BY EMPLOYEE

Employee is not required to contribute in this scheme

(E) CONTRIBUTION

BY CG

CG also contributes 1.16% to this scheme for the benefit of employee



(F) BENEFITS OF

THE SCHEME

1. Pension will be given to widow/widower for life or till remarriage.

2. Children will be entitled to pension till 25 years of their age.

Benefit of pension is restricted to two children only.

3. Orphans will be entitled to pension at enhanced rates. Benefit of

pension is restricted to two orphans only.

4. If the person is unmarried or has no family, pension is available to

nominee for specified period.

QUESTION.11 EXPLAIN ‘EMPLOYEES DEPOSIT LINKED INSURANCE SCHEME’ UNDER

EMPLOYEES’ PROVIDENT FUND AND MISCELLANEOUS PROVISIONS ACT, 1952?

(A) CAME INTO

EFFECT ON

The Employee’s Deposit Linked Insurance Scheme was introduced by Amendment Act of 1976, which came into effect from 1st August, 1976.

(B) ELIGIBILITY

FOR SCHEME

• Applicable to all Factories/Establishments to which the Employee’s

Provident fund Act applies.

• All employees who are member of Provident funds in both

exempted and un-exempted establishments are covered under the

scheme.

(C) EMPLOYER’S

CONTRIBUTION TO

INSURANCE FUND

0.5% of the Total Emoluments (Basic Wages+ DA+ Cash value of any

Food Concession+ Retaining Allowance, if any)

[Employer’s contribution should not exceed 1% of the Total Emoluments]

(D) EMPLOYEE’S

CONTRIBUTION TO

INSURANCE FUND

The employees are not required to contribute to the Insurance Fund.

(E) CONTRIBUTION

BY CG

CG also contributes 0.25% to this scheme for the benefit of employee.

(F)

ADMINISTRATIVE

EXPENSES

• Employer shall also pay into the fund such further sum of money

• not exceeding 1/4th of the contribution which he is required to make

• as the Central Government may, from time to time, determine.

• This payment is required to be made

• to meet all the expenses, • other than the expenses towards the cost of any benefits provided

by or under that scheme,

• in connection with the administration of the Employees.

(G) NOMINATION

Nomination made under the Provident fund Scheme will be treated as

nomination under this scheme.



(H) ROUNDING

OFF

Contribution has to be rounded off to the nearest rupee.

(I) BENEFITS

UNDER THE

SCHEME

In the event of death of a member while in service, nomine or heirs are

paid, besides the PF accumulations, an additional amount equal to

1. TIME PERIOD

a. Preceding 12 months before death or

b. the period of membership,

whichever is less.

2. AVERAGE SALARY

Average salary of the TIME PERIOD as calculated in point.1.

3. AMOUNT OF TOTAL BENEFIT

20 times of AVERAGE SALARY as calculated in point.2.

4. MAXIMUM BENEFIT

Amount of maximum benefit should not exceed Rs.1,30,000

(20 x Rs.6,500).

QUESTION.12 HOW AN ESTABLISHMENT CAN TAKE EXEMPTION FROM ‘EMPLOYEES

PROVIDENT FUND SCHEME’ UNDER EMPLOYEES’ PROVIDENT FUND AND


(A) EXEMPTION BY

WHOM

Exemption may be given by Appropriate Govt.

(B) EXEMPTION BY

NOTIFICATION

ONLY

Exemption can be given by notification in Official Gazette only.

(C) TERMS OF

EXEMPTION

• Exemption shall be subject to such terms as specified in the

notification.

• Exemption may be from all or any of the provisions of any

scheme.

• Exemption may be retrospectively or prospectively.

(D) CONDITIONS

FOR EXEMPTION

• While granting exemption, the appropriate Government shall see that, in its opinion,

• the rules in force regarding provident fund in the establishment i. with respect to the rates of contribution, or ii. with respect to other provident fund benefits

• are not less favourable to employees • than the benefits provided in the Act or the Scheme in relation to

the establishment.




PENSION SCHEME’ UNDER EMPLOYEES’ PROVIDENT FUND AND MISCELLANEOUS


(A) EXEMPTION BY

WHOM

Exemption may be given by Appropriate Govt.

(B) EXEMPTION BY

NOTIFICATION


(C) TERMS OF

EXEMPTION

• Exemption shall be subject to such terms as specified in the

notification.

• Exemption may be from all or any of the provisions of any

scheme.


• The notification may also specify the pattern of investment of

pension fund.

(D) CONDITIONS

FOR EXEMPTION

• While granting exemption, the appropriate Government shall see that, in its opinion,

• the pension benefits in the establishment

• are not less favourable to employees • than the benefits provided in the Act or the Scheme in relation to

the establishment.


DEPOSIT LINKED INSURANCE SCHEME’ UNDER EMPLOYEES’ PROVIDENT FUND AND


(A) EXEMPTION BY

WHOM

Exemption may be given by Central Provident Fund Commissioner

(B) EXEMPTION BY

NOTIFICATION


(C) TERMS OF

EXEMPTION

• Exemption shall be subject to such conditions as specified in

the notification.


• Exemption may be from all or any of the provisions of scheme.

(D) CONDITIONS

FOR EXEMPTION

• Central Provident Fund Commissioner must be satisfied that

• employees of such establishment are enjoying benefits in the nature of life insurance without making any separate contribution or payment of premium

• and such benefits are more favorable than the benefits admissible under the Insurance Scheme.



QUESTION.15 WHAT IS CENTRAL BOARD? HOW IS IT CONSTITUTED EMPLOYEES’


(A) CONSTITUTION

OF CENTRAL

BOARD

• The Central Government, by giving notification, in the official

gazette, constitutes the Central Board.

• The Central Board shall come into force from such date as is

specified in the Notification.

• The contributions to Provident fund Scheme, Employee’s Pension

Scheme and Employee's Deposit Linked Insurance Scheme are

credited to a fund.

(B) CENTRAL

BOARD

ADMINISTERS THE

SCHEMES AND

FUND

• Central Board Administers

a. Employees Provident Fund Scheme

b. Employees Pension Scheme

c. Employees deposit Linked Insurance Scheme

• The fund vests in and is administered by Central Board of Trustees

i.e. Board of trustees or Board.

(C) BOARD OF

TRUSTEES IS A

BODY CORPORATE

The Board of Trustees is a body corporate having perpetual succession

and common seal and shall sue and be sued in its name.

(D) COMPOSITION

OF THE BOARD

(1) Appointment by central govt. on its own

a. 1 Chairman

b. 1 Vice-Chairman

c. 1 Central Provident Fund Commissioner

d. Maximum 15 Officials Representing the Central Government

e. Maximum 15 Officials Representing the State Government

(2) Appointment by central govt. in consultation with

association of employers

10 persons Representing employers

(3) Appointment by central govt. in consultation with

organisation of employees

10 persons Representing employees

(E) SCHEME SHALL

PROVIDE FOR

(1) TERMS AND CONDITIONS FOR APPOINTMENT

• Terms and conditions subject to which a member of Central Board

may be appointed and

(2) TIME, PLACE AND PROCEDURE OF MEETINGS

• Time, place and procedure of meetings of central board shall be

as provided in the scheme.



QUESTION.16 WHAT FUNCTIONS OF CENTRAL BOARD ARE PRESCRIBED BY

EMPLOYEES’ PROVIDENT FUND AND MISCELLANEOUS PROVISIONS ACT, 1952?

FUNCTIONS OF

CENTRAL BOARD

1. Central Board shall administer Employee’s Provident fund, Pension

Fund, Employee's Deposit Linked Insurance fund vested in it in

such manner as may be specified in the schemes.

2. Central Board shall take policy decisions.

3. It shall maintain proper accounts of its Income and Expenditure in

such form and in such manner as the Central Government may,

after consultation with C&AG, specify in the Scheme.

4. Central Board may delegate authority subject to such conditions

and limitations as it may deem fit (Sec 5E). The powers may be

delegated to:

a. Executive committee

b. State Board

c. Chairman or any other officer of the Board

QUESTION.17 EXPLAIN PROVISIONS REGARDING ACCOUNTS, AUDIT AND ANNUAL

REPORT OF CENTRAL BOARD UNDER EMPLOYEES’ PROVIDENT FUND AND


(A) ACCOUNTS

1. Central board shall maintain proper accounts relating to income

and expenditure.

2. The accounts shall be maintained in such form and a manner as

specified by Central Govt. in consultation with CAG.

(B) AUDIT 1. Accounts of Central Board shall be audited annually.

2. Accounts of Central Board shall be audited by CAG.

3. CAG and any person appointed by him for audit of accounts shall

have same rights, privileges and authority as that of audit of

Central Government accounts.

4. It shall have the right to demand production of books, accounts,

connected vouchers, documents and papers and inspect

any office of the Central Board.

5. Audit expenses shall be borne by the Central Board.

6. Certified accounts along with audit report of CAG shall be

forwarded to the Central Board which shall forward the same to

Central Government along with comments on the report of CAG.

(C)ANNUAL

REPORT

Central Board shall also send an Annual Report of its working and

activities to Central Government.



(D) ALL ACCOUNTS

AND REPORTS TO

LAID BEFORE

PARLIAMENT

Central Government shall cause a copy of Annual Report, audited

accounts, report of CAG and comments of Central Board on the Report to

be laid before each house of Parliament.

QUESTION.18 EXPLAIN PROVISIONS REGARDING CONSTITUTION OF EXECUTIVE

COMMITTEE UNDER EMPLOYEES’ PROVIDENT FUND AND MISCELLANEOUS


(A) PURPOSE OF

CONSTITUTION OF

EXECUTIVE

COMMITTEE

Purpose of Executive Committee is to assist the Central Board in

performance of its functions.

(B) SCHEME SHALL

PROVIDE FOR


• Terms and conditions subject to which a member of Central Board

may be appointed to the Executive Committee and


• Time, place and procedure of meetings of Executive Committee

shall be as provided in the scheme.

(C)

CONSTITIUTION

OF EXECUTIVE

COMMITTEE BY

NOTIFICATION

AND ITS MEMBERS

• Central Government may, by notification in the official gazette,

constitute an executive committee.

• Members of Executive Committee are appointed out of members

of the Central Board.

• Executive Committee shall consist of 13 members

(D) COMPOSITION

OF EXECUTIVE

COMMITTEE

(a) To be Appointed by Central Government

i. 1 Chairman

Appointed from among the members of Central Board

ii. 2 Persons

Appointed from amongst Central Government officials to

the Central Board

iii. 3 Persons

Appointed from amongst the representatives of the

State Government to the Central Board

(b) To be Elected by the Central Board

i. 3 Persons


employers



ii. 3 Persons


employees

(c) Central Provident Fund Commissioner

As a Member of the Central Board

QUESTION.19 EXPLAIN PROVISIONS REGARDING CONSTITUTION OF STATE BOARD

UNDER EMPLOYEES’ PROVIDENT FUND AND MISCELLANEOUS PROVISIONS ACT,

1952?

(A) NOTIFICATION

IN THE OFFICIAL

GAZZETTE

The Central Government may, by notification, in official gazette,

constitute a State Board of Trustees for any State after consultation

with the State Government.

(B) POWERS AND

DUTIES OF STATE

BOARD

The State Board shall exercise such powers and perform such duties as

the Central Government may assign to it from time to time.

(C) SCHEME SHALL

PROVIDE FOR


• Terms and conditions subject to which a member of State Board

may be appointed and


• Time, place and procedure of meetings of State board shall be as

provided in the scheme.

QUESTION.20 CAN ANY ACT OF BOARD OR COMMITTEE BE QUESTIONED IN CASE OF

VACANCY OR DEFECT IN CONSTITUTION?

(A) NO QUESTION

ON THE ACTS OF

BOARDS OR

COMMITTEE IN

CASE OF ANY

DEFECT

• No act of Central Board, Executive Committee or State Board

• shall be questioned on the ground

• merely because of the existence of any vacancy in or any defect

• in the constitution of Central Board, Executive Committee or State

Board.

QUESTION.21 DOES THIS ACT AUTHORIZE EMPLOYERS OF ESTABLISHMENTS TO

MAINTAIN PROVIDENT FUND ACCOUNTS ON THEIR OWN?

Generally, the accounts of every employer are maintained in the PF office.

However, an establishment may be permitted to maintain the PF accounts of its employees, if

some conditions are satisfied

(A) CONDITIONS 1. An application is made to the Central Government for seeking



permission to maintain PF accounts.

2. Application must be made by employer and majority of employees.

3. Establishment employees 100 or more persons.

4. Establishment has not committed any default in payment of PF

contribution or any other offence under this Act during 3 years

immediately preceding the date of application.

5. Central Government has authorized the employer in writing to

maintain the PF accounts.

(B) CANCELLATION

OF

AUTHORIZATION

Authorization given by the Central Government may be cancelled by it, if

the employer:

1. REASONS

a. Fails to comply with any of the terms and conditions of

authorization.

b. Commits any offence under any provision of this Act.

2. PROCEDURE

a. Before cancellation of the authorization, Central

Government shall give the employer an opportunity of

being heard.

b. The order of cancellation shall be in writing.

QUESTION.22 EXPLAIN THE PROVISIONS OF DETERMINATION OF MONEY DUE FROM

EMPLOYERS UNDER EPF&MP ACT 1952?

(A) NATURE OF DISPUTES

DISPUTE MAY BE REGARDING 1. The applicability of the act. 2. The amount to be paid by the employer under any provisions of

the act, such as a) Contribution b) Administrative charges c) Damages payable by employer for delayed payment d) Any other amount payable by the employer

(B)EMPOWERMENT OF AUTHORIZING OFFICERS TO DETERMINE DISPUTES

Following Authorizing Officers may determine disputes 1. Central Provident fund commissioner 2. Additional Central Provident fund commissioner 3. Deputy Provident fund commissioner 4. Regional Provident fund commissioner

(C) POWERS OF OFFICERS

1. The officer may conduct an enquiry for the above purposes, if he deems necessary. 2. The officer conducting the inquiry shall have the same powers as are



vested in a Civil Court (a) Enforcing attendance of any person for examining him on oath (b) Requiring discovery and production of documents (c) Receiving evidences on affidavit

(d) Issuing commissions for examination of witnesses.

(D) FAILURE OF EMPLOYER, EMPLOYEE OR ANY OTHER PERSON TO ATTEND THE INQUIRY

1. Where the employer, employee or any other person, who is required to attend the inquiry under Sec. 7-A

a. Fails to attend such inquiry without assigning any valid reason or b. Fail to produce any document or file or any report or return when

called upon to do so.

2. Power to order ex-parte • In such a case, the officer conducting the inquiry may decide the

case ex parte • and determine the amount due from any employer • on the basis of the evidence produced during such inquiry • and other documents available on record.

3. Setting aside of ex parte order Where an order under Sec. 7-A is passed against an employer ex parte, he may apply to officer for setting aside such order.

(a) Time within which application is to be filed

• 3 months (b) Employer satisfies the following conditions to the officer

i. Show cause notice was not duly served or he was prevented by any sufficient cause from appearing when the inquiry was held.

ii. The employer has not filed appeal against any appeal against the ex-parte order.

QUESTION.23 IS THERE ANY RIGHT AVAILABLE TO MAKE AN APPLICATION FOR

REVIEW OF ORDER?

Section 7B confers right to make an application for review of an order made u/s 7A.

(A) APPLICATION FOR REVIEW

Any person aggrieved by an order u/s 7A, may apply for review of the order.

(B) OFFICER SUO-MOTO

The officer may review the order on its own motion.

(C) NO REVIEW IF APPEAL IS FILED

No application for review can be made if an appeal is filed against the order made u/s 7A.



(D) TIME LIMIT TO FILE AN APPLICATION FOR REVIEW

Within 45 days of the order.

(E) APPLICATION CAN BE MADE REGARDING FOLLOWING MATTERS

(i) New and important evidence is found

• New and important evidence is discovered • which could not be produced earlier

• as it was not in employer’s knowledge even after due diligence or • could not be produced by him at the time when the order was

made, or (ii) There is some mistake or error apparent on the face of records, or (iii) Any other sufficient reason.

(F) ACTION BY OFFICER

The officer may: (a) Reject the application for review if there are not sufficient grounds

for review. (b) Grant the review.

(G) APPEAL AGAINST THE ORDER OF OFFICER

• No appeal shall lie against the order of the officer rejecting the application for review.

• However, an appeal may lie against the order passed under the review.

QUESTION.24 DOES THIS ACT ALLOW THE AUTHORIZED OFFICERS TO DETERMINE

THE ESCAPED AMOUNT?

(A) POWER OF AUTHORIZING OFFICER

1. The Authorized officer is empowered to reopen cases where orders have been passed u/s 7A or 7B.

2. He may re-determine the amount due from an employer if such amount has escaped from determination.

(B) RE-DETERMINATION CAN BE MADE IF

• Employer has not disclosed all material facts for determining correct amount payable, or

• New facts have come into knowledge.

(C) CONDITIONS

1. Re-determination can be made within 5 years from the date of communication of order u/s 7A or 7B.

2. Before re-determining the amount, the employer shall be given an opportunity of being heard.



QUESTION.25 HOW APPEALS ARE MADE TO EPF APPEALATE TRIBUNAL AGAINST THE

ORDER OF AUTHORIZED OFFICER?

(A) WHOM TO APPEAL

• Appeal against various orders under this Act can be made to • Employees Provident Fund Appellate Tribunal.

(B) CONDITIONS ON WHICH APPEAL CAN BE FILED

• Appeal can be entertained only after depositing 75% of the amount demanded.

• However, Tribunal can waive or reduce the deposit, for reasons to be recorded in writing.

(C) PROCEDURE ADOPTED BY TRIBUNAL

• Tribunal will give an opportunity of being heard to the parties before passing an order.

(D) ORDERS BY TRIBUNAL

Tribunal may pass the following orders:

• Confirm, modify or set aside the order • Send the matter back to the authority for fresh decision, with such

directions as Tribunal may deem fit.

(E) EFFECT OF ORDER

• Copies of order of Tribunal shall be sent to the parties to appeal. • Order passed by the Tribunal is final. • No appeal can be filed in any Court against such order.

(F) RECTIFICATION OF ORDER

(i) Tribunal has the power to make amendments in its own order • if the mistake is brought to its notice

• by the parties to the appeal.

(ii) Rectification can be made

• If the mistake is apparent from the records, • Within 5 years from date of order.

(iii) If the amendment has the effect of increasing the liability of the employer,

• Such amendment shall not be made • unless Tribunal has given notice to him of its intention to do so

and

• has allowed him a reasonable opportunity of being heard.



QUESTION.26 WHAT IS EMPLOYEES PROVIDENT FUND APPEALATE TRIBUNAL

(EPFAT). EXPLAIN ALL THE PROVISIONS REGARDING EPFAT?

(1) CONSTITUTION BY NOTIFICATION IN THE OFFICIAL GAZZETTE

• The Central Government may by notification in the Official Gazette • constitute one or more Appellate Tribunals to be known as

• the Employees' Provident Funds Appellate Tribunal (‘Tribunal’).

(2) POWER AND JURISDICTION OF TRIBUNAL

• Notification shall state how to exercise the powers and • discharge the functions conferred on such Tribunal by this Act and • every such Tribunal shall have jurisdiction • in respect of establishments situated in such area • as may be specified in the notification constituting the Tribunal.

(3) PRESIDING OFFICER OF TRIBUNAL

1. A Tribunal shall consist of one person only to be appointed by the Central Government.

2. A person shall not be qualified for appointment as the Presiding Officer of a Tribunal (hereinafter referred to as the Presiding Officer)

3. unless he is or has been or is qualified to be a. a Judge of a High Court or b. a district judge.

(4) TERM OF OFFICE

The Presiding officer of a Tribunal shall office for a term i. 5 years from the date on which he enters upon his office,

or ii. Until he attains the age of 62 years.

Whichever is earlier.

(5) RESIGNATION BY PRESIDING OFFICER

(a) The Presiding Officer may resign his office

• by giving notice in writing under his hand • addressed to the Central Government.

(b) The Presiding Officer shall continue to hold office until i.The expiry of 3 months from the date of receipt of such notice, or ii.A person duly appointed as his successor enters upon his office, or iii.The expiry of his term of office. whichever is earlier.

BUT If he is permitted by the Central Government to relinquish his office sooner above condition shall not apply.

(6) REMOVAL OF PRESIDING OFFICER

• The Presiding officer shall not be removed from his office • except by an order made by the President • on the ground of proved misbehaviour or incapacity • after an enquiry made by a Judge of the High Court

• in which such Presiding officer has been of the charges against him and

• given a reasonable opportunity of being heard in respect of those charges.



QUESTION.27 IS ANY DEPOSIT REQUIRED TO BE MADE WITH EPFAT BEFORE FILING

AN APPEAL?

DEPOSIT OF

AMOUNT DUE ON

FILING APPEAL

• No appeal by an employer shall be entertained by a Tribunal • unless he has deposited with it 75% of the amount due from him

• as determined by (PFC) Authorised officer. • However, the Tribunal may for reasons to be recorded in writing, • waive or reduce the amount to be deposited.

QUESTION.28 EXPLAIN THE PROVISIONS REGARDING INTEREST PAYABLE BY THE

EMPLOYER IN CASE OF DELAYED PAYMENT OF AMOUNT OF EPF?

(A) RATE OF INTEREST FOR DELAYED PAYMENTS DUE UNDER THE ACT

• The employer shall be liable to pay simple interest at the rate of 12% per annum or

• at such higher rate as may be specified in the Scheme • on any amount due from him under this Act .

(B) PERIOD FOR WHICH INTEREST PAYABLE

• The interest is payable from • the date on which the amount has become so due till the date of

its actual payment.

(C) MAXIMUM RATE OF INTEREST

• However, the higher rate of interest specified in the Scheme • cannot exceed the lending rate of interest charged by any

scheduled bank.

QUESTION.29 EXPLAIN THE PROVISIONS REGARDING RECOVERY OF MONEY BY

EMPLOYERS AND CONTRACTORS UNDER EPF&MP ACT 1952?

(A) RIGHT OF EMPLOYER TO RECOVER EMPLOYEE CONTRIBUTION FROM CONTRACTOR

• The amount of contribution payable by an employer under this Act • in respect of an employee employed by or through a contractor • may be recovered by such employer from the contractor • either by deduction from any amount payable to the contractor

under any contract or • as a debt payable by the contractor.

(B) RIGHT OF CONTRACTOR TO RECOVER EMPLOYEE CONTRIBUTION FROM EMPLOYEE

• A contractor may recover from such employee, the employee's contribution

• by deduction from wages payable to such employee.

(C) NO RIGHT TO DEDUCT THE EMPLOYER'S CONTRIBUTION

• Notwithstanding any contract to the contrary,

• no contractor shall be entitled to deduct the employer's contribution • from the wages payable to an employee employed by or through

him or

• otherwise to recover such contribution or charges from such employee.



QUESTION.30 EXPLAIN THE PROVISIONS REGARDING RECOVERY OF MONEY FROM EMPLOYER UNDER EPF&MP ACT 1952?

(A) ISSUE OF

CERTIFICATE OF

RECOVERY

• Authorized officer shall issue a Certificate to Recovery Officer • specifying the amount due from the employer.

(B) CERTIFICATE TO WHICH RECOVERY OFFICER

• The recovery certificate shall be sent to the Recovery Officer within whose jurisdiction i. Business or profession is situated, or ii. Employer resides, or iii. Any movable or immovable property of establishment or

employer is situated.

(C) MODE OF RECOVERY

(1) Attachment and sale of movable or immovable property of the establishment.

If the amount recovered is insufficient for recovering the whole amount,

i. movable and immovable property of the employer may also be attached and sold.

ii. Arrest of the employer and his detention in prison.

(2) Appointment of a receiver

• Appointing a receiver for the management of • movable or immovable properties of the establishment or the

employer.

(D) STAY OF PROCEEDINGS

i. Authorized Officer may grant time for payment of the amount, and thereupon the Recovery Officer shall stay the proceedings until the expiry of the time so granted.

ii. Stay of proceedings may be granted notwithstanding that a certificate has been issued to Recovery Officer for recovery of any amount.

QUESTION.31 EXPLAIN THE PROVISIONS REGARDING “TRANSFER OF ACCOUNTS” UNDER EPF & MP ACT 1952?

• When an employee who is a member of PF leaves establishment and joins another

• that new establishment may be covered under PF and may not be covered.

(A) OLD ESTABLISHMENT IS COVERED UNDER PF

If in the old establishment he has credit in the PF account the treatment with that credit amount in PF account will be as follows

1. New establishment is covered under PF

• Amount standing to his credit will be transferred to his account in the new establishment.



2. New establishment is not covered under PF

• If the new establishment has a PF of its own and • the rules of such fund permits such transfer,

• then at the request of the employee, • within such time as specified by CG, • the amount standing to his credit will be transferred to his account

in the new establishment.

(B) WHERE OLD ESTABLISHMENT IS NOT COVERED UNDER PF AND HAS ITS OWN RULES OF SUCH PF

This is also possible that old establishment is not covered under PF whereas new establishment is covered under PF. 1. Old establishment was not covered under PF

• If the old establishment has a PF of its own and • the rules of such fund permits such transfer, • then at the request of the employee • the amount standing to his credit will be transferred to his account

in the new establishment.

QUESTION.32 EXPLAIN THE PROVISIONS REGARDING “LIABILITY OF EMPLOYER IN CASE OF TRANSFER OF ESTABLISHMENT” UNDER EPF&MP ACT 1952?

(A) JOINT AND SEVERAL LIABILITY OF TRANSFEROR AND TRANSFEREE FOR CONTRIBUTION

• If an employer transfers an establishment,

• Whether by way of gift, sale, lease, or any other mode, • he as well as transferee of the establishment • shall be jointly and severally responsible for contributions

and

• other sums due upon the date of transfer of establishment.

(B) LIMITED LIABILITY

(1) Liability of transferor Liability of transferor shall be limited with respect to period upto the date of transfer.

(2) Liability of transferee Liability of transferee shall be limited to the assets obtained by him by way of transfer of establishment.

QUESTION.33 EXPLAIN THE PROVISIONS REGARDING “PROTECTION AGAINST ATTACHMENT ” UNDER EPF&MP ACT 1952?

(A) TYPE OF PROTECTION

THE AMOUNT STANDING TO THE CREDIT OF ANY MEMBER IN THE FUND

1. Cannot be assigned or charged, 2. Cannot be attached under any decree or order of any Court in

respect of any debt or liability, 3. Cannot be capable of being claimed by the official assignee or the



official receiver, 4. Shall be free from any debt or other liability (in hands of nominee)

incurred by the deceased member.

(B) NO PROTECTION FOR MONEY WITHDRAWN

• Employee cannot claim any protection in respect of money

• which has been withdrawn by him from the PF Account.

QUESTION.34 PAYMENT OF CONTRIBUTIONS IS MADE IN PRIORITY OF OTHER DEBTS. EXPLAIN.

PAYMENT OF CONTRIBUTION IN PRIORITY OVER OTHER DEBTS

• Where any employer is adjudicated insolvent or, • being a company, an order for winding up is made, • any amount due from the employer under any provisions of this

Act,

• are to be paid in priority to all other debts • in the distribution of the property of the insolvent or • the assets of the company being wound up as the case may be.

• In other words, this payment will be a preferential payment • provided the liability there for has accrued • before this order of adjudication or winding up is made.

QUESTION.35 UNDER THE PROVISIONS OF EPF&MP ACT 1952 EMPLOYER IS NOT TO REDUCE WAGES ETC . EXPLAIN.

EMPLOYER NOT TO REDUCE WAGES ETC.

• No employer in relation to any establishment to which any Scheme applies

• shall by reason only of his liability for the payment of • any contribution to the Funds or any charge under this Act or the

Scheme,

• reduce (whether directly or indirectly) • the wages of any employee or

• the total quantum of benefits in the nature of old age pension, gratuity fund

• to which the employee is entitled under the term of his employment, whether express or implied.



QUESTION.36 EXPLAIN THE PROVISIONS REGARDING “APPOINTMENT OF INSPECTORS” UNDER EPF&MP ACT 1952.

(A) APPOINTMENT BY APPROPRIATE GOVT.

• AG is empowered, by notification in Official Gazette, • to appoint such persons as it thinks fit to be Inspectors for the

purpose of the Act.

(B) JURISDICTION

• The jurisdiction of the inspectors shall be specified by the AG.

(C) PUBLIC SERVANT

• The inspector shall be a public servant within the meaning of Sec.21 IPC.

(D) POWERS OF INSPECTOR

1. Call such information from the employer or contractor as he considers necessary.

2. To enter and search any establishment at any reasonable time and require production of any accounts, books, registers and other documents.

3. Examine the employer, his agent or servant or any other person found in charge of the establishment.

4. Make copies of or take extracts from any book, register or other documents maintained in relation to the establishment.

5. Seize the books, registers or other documents as he considers necessary if he has reason to believe that any offence under this Act has been committed by an employer.

6. Exercise such other powers as the Provident Fund Scheme or pension scheme or the Insurance Scheme may provide.

QUESTION.37 EXPLAIN THE PROVISIONS REGARDING “PENALTIES” UNDER EPF&MP ACT 1952.

(A) PENALTY FOR ANY FALSE STATEMENT OR FALSE REPRESENTATION

• Penalty for knowingly making or causing to be made, • any false statement or false representation • for avoiding any payment to be made by himself or • of enabling any other person to avoid such payment. • Such penalty is in the form of

i. imprisonment for a term extending to one year or ii. fine extending to Rs. 5,000 iii. or both.

(B) PENALTY FOR DEFAULT IN COMPLYING WITH ANY OF THE PROVISIONS THE FAMILY PENSION SCHEME OR THE INSURANCE SCHEME

• Any person who contravenes or makes default in complying with any of the provisions of

• the family Pension Scheme or the Insurance Scheme

• shall be punishable with i. imprisonment for a term extending to 1 year, or ii. fine extending to Rs. 4,000, iii. or with both.



(C) OFFENCES BY COMPANIES

(i) Every officer incharge of the company is liable

• If the person committing an offence under this Act is a company, • every person, who at the time of the offence was incharge of and

• was responsible for the conduct of the business of the company, • as well as the company, shall be deemed guilty of the offence and • shall be liable to be proceeded against and punished accordingly.

(ii) No liability in certain cases

• However, if a person proves that the offence was committed without his knowledge or

• that he had exercised all due diligence to prevent the offence,

• shall not be liable to any punishment.

(iii) Liablity in case of connivance or consent • Further, where the offence has been committed • with the consent or connivance of or is due to the negligence of

• any director, manager, secretary or other officer of the company • such officer shall be deemed guilty of that offence and • shall be liable to be proceeded against and punished accordingly.

(D) COGNIZABLE OFFENCE

• The offences relating to default in payment of contribution by the employer is a cognizable offence.

• A cognizable offence is one where the police can arrest a person without warrant.

(E) COGNIZANCE AND TRIAL OF OFFENCE

The complaints regard to offences under the Act, the scheme or the Family Pension Scheme or Insurance Scheme and their cognizance. The essential conditions of cognizance of offences are (a) There must be a report in writing of the facts constituting such offence. (b) This report must be made with the previous sanction of the : (i) Central Provident Fund Commissioner; or (ii) Such officer as may be authorised by the Central Government. (c) The report must be made by an Inspector.

The Negotiable Instruments Act 1881 CA-IPCC Law, Ethics & Communication


CHAPTER 5 THE NEGOTIABLE INSTRUMENTS ACT, 1881

QUESTION.1 WHAT IS THE SCOPE OF NEGOTIABLE INSTRUMENTS ACT 1881 AND WHEN DID IT CAME INTO FORCE?

(1) ACT CAME INTO FORCE ON

1st March, 1882

(2) THE ACT APPLIES TO

The Act applies to whole of India and to all persons resident in India, whether foreigners or Indians.

(3) SCOPE It deals with Promissory Notes (popularly called pro-notes), Bills of exchange (popularly called bills) and Cheque. The Act does not affect any local / custom usage relating to any instrument in a vernacular language Hundis (a popular local document prevalent in India). The local usage may however be excluded by any words in the body of the instrument.

QUESTION.2 WHAT IS NEGOTIABLE INSTRUMENT?

(1) DEFINITION “A negotiable instrument means a Promissory note, Bill of exchange or Cheque Payable either to order or to bearer".

(2) MEANING Negotiable instrument means

• an instrument, • the property in which is acquired by anyone who takes it • bonafide and • for value (Valuable consideration),

• notwithstanding any defect in the title of any prior party.

QUESTION.3 WHAT IS CHARACTERISTICS/ ESSENTIAL ELEMENTS OF A NEGOTIABLE INSTRUMENT?

(1) FREELY TRANSFERABLE

The property in a negotiable instrument passes from one person to another (i) by mere delivery : if the instrument is payable to bearer, and (ii) merely by endorsement and delivery : if it is payable to order.

(2) TRANSFERABLE INFINITUM (i.e. INDEFINITELY)

A negotiable instrument can be transferred any number of times before its maturity.

(3) TITLE OF A TRANSFEREE (HIDC) FREE FROM DEFECTS

Holder in Due course (HiDC) gets a good title to negotiable instrument even though the title of transferor is defective. He is not affected by any defect in the title of the transferor or of any prior party.

(4) TRANSFEREE (HIDC) CAN SUE IN HIS OWN NAME

The Holder in due course (HiDC) can sue upon a negotiable instrument in his own name for the recovery of the amount. Further he need not give notice of transfer to the party liable on the instrument to pay.

(5) TO MORE THAN ONE PAYEE

A negotiable instrument may name more than one payee jointly or alternatively.



QUESTION.4 WHAT DO YOU MEAN BY PROMISSORY NOTE?

MEANING OF PROMISSORY NOTE

• A promissory note is an instrument in writing (not being a bank note or a currency note)

• containing an unconditional undertaking, • signed by the maker,

• to pay a certain sum of money only: � to a certain person or � to the order of a certain person or � to the bearer of the instrument.

QUESTION.5 GIVE SPECIMEN OF A PROMISSORY NOTE

Rs.10,000/- New Delhi 1 April 2012 On Demand I promise to pay Mr. Rajesh Mehta S/O Suresh Mehta of Punjab or order a sum of Rs.10,000/- (Rupees Ten Thousand Only), For Value Received. To Rajesh Mehta Sd/- Sanjiv Babu Address: Stamp …………………………. ………………………….

QUESTION.6 WHAT ARE PARTIES TO A PROMISSORY NOTE ?

(1) MAKER

• The person who makes the promissory note and promises to pay a certain

• sum of money. His liability is primary and unconditional.

• (In the above Example Maker is Sanjiv Babu)

(2) PAYEE • The person to whom the payment is to be made under a promissory note.

• (In the above Example Payee is Rajesh Mehta)

QUESTION.7 WHAT ARE ESSENTIAL CHARACTERISTICS OF A PROMISSORY NOTE?

(1) IT MUST BE IN WRITING

An oral promise to pay is not sufficient.

(2) THERE MUST BE AN EXPRESS PROMISE TO PAY

• A mere acknowledgement of indebtedness is not a promissory note.

• In the above specimen there is an express promise to Pay. Because Sanjiv Babu is giving acknowledgement to his indebtedness of Rs.10,000/- for value received. Because the promise to pay is definite, therefore this is a promissory note.

• But if in the above specimen, had Sanjiv Babu written the words “Mr. Rajesh Mehta I.O.U Rs.10,000” There would have no promise to pay therefore it could have never been a promissory note.



(3) DEFINITE AND UNCONDITIONAL PROMISE TO PAY

• The promise to pay depending upon the happening of some uncertain event is not valid promissory note.

• { e.g. Abhay writes “I promise to pay Rs.1,00,000/- to Manish after my marriage with Amita” This promise is conditional and dependent upon marriage of the promisor with Amita, which may or may not happen. Therefore promissory note is not valid.}

• Whereas if the promise to pay is dependent upon a certain event, even though the time of its happening is not certain, the promissory note is valid.

• { e.g. A writes “ I promise to pay B Rs. 10,000 on the death of C” This promise is unconditional and definite since death of C is certain. Therefore promissory note is valid.}

(4) SIGNED BY MAKER

The instrument must be signed by the maker otherwise it is of no effect. The signature of maker can be on any part of the instrument.

(5) PROMISE TO PAY A CERTAIN SUM OF MONEY

• The sum payable under promissory note must be certain. • Example of Valid promissory note : • “ I promise to pay B a sum of Rs. 1,00,000/- on 10 Dec’ 11”.

(Amount is certain)

• Invalid promissory note • “I promise to pay B Rs.1,000 and all other sums which shall be due

to him” (Amount is not certain)

• “I promise to pay B Rs.1,000 after deducting all of the amounts which he owes me.” (Amount is not certain)

(6) PROMISE TO PAY MONEY ONLY AND NOT IN KIND

• A promissory note must contain a promise to pay only money. If it contains a promise to pay something other than money (i.e. in kind) or something in addition to money, it is not a promissory note.

• { e.g. if Raja writes “I promise to give you my car and Rs.1,500 on 1st day of the next month” it is not a valid pro-note. Since the promise includes delivery of car, which is not money. }

(7) PARTIES TO NEGOTIABLE INSTRUMENT MUST BE CERTAIN

• The promissory note must clearly specify the maker and the payee of the amount, otherwise pro-note is invalid.

• As per provisions of RBI Act, 1934, a pro-note cannot be made payable to the bearer.

• According to Section 31 of Reserve Bank of India Act, no person in India other than the RBI or the Central Government can make or issue a promissory note payable to bearer of the instrument.

• However, where the payee is misnamed or designated by description only, the note is valid if the payee can be ascertained by evidence.

(8) STAMPED

A promissory note must be properly stamped according to the provisions of Indian Stamp Act 1899.

SOME ADDITIONAL POINTS TO BE KEPT IN MIND ABOUT PRO-NOTE

(1) ABOUT DATE

1. An undated instrument will be treated as having been made on the date of its delivery.



2. the date on which it is made should be mentioned but their omission will not render the instrument invalid. However, where the instrument is payable at a certain time after date, the date on promissory note is necessary. Post-dated instrument is invalid.

3. It may be payable “on date” or “after a definite period”.

(2) ABOUT PLACE AND INSTALLMENTS

1. Place should be mentioned where the promissory note is made. 2. It may be payable in installments.

(3) ABOUT PERSONS

1. A promissory note can be made by several persons jointly and their liability will be joint and several. 2. It cannot be made payable to the maker himself. Such instrument is invalid. However, it would become valid when it is endorsed by the maker.

QUESTION.8 WHAT DO YOU MEAN BY BILL OF EXCHANGE AND WHAT ARE ITS ESSENTIAL CHARACTERISTICS?

(1) MEANING • A bill of exchange is an instrument is writing, • containing an unconditional order, • signed by the maker,

• directing a certain person to pay a certain sum of money only to � A certain person; or � The order of a certain person: or � The bearer of the instrument.

(2) CHARACTERISTICS 1. It must be in writing. 2. It must contain an express order to pay. A mere request to pay

will not amount to a bill of exchange. 3. The order to pay must be Definite and Unconditional. 4. The bill must contain an order to pay money only. 5. The sum payable must be certain. 6. It must be signed by the drawee. 7. The drawer, drawee and payee must be certain and specified in

the bill with reasonable certainty. As per provisions of RBI Act, 1934, a pro-note cannot be made payable to the bearer.

8. It must be stamped according to the provisions of Indian Stamp Act 1899.

9. NOTE: Though it is proper to mention date, place and consideration but their omission will not render the bill invalid.



QUESTION.9 WHAT ARE PARTIES TO A BILL OF EXCHANGE?

(1) DRAWER

• The person who makes (draws) the bill.

• His liability is secondary and conditional. • His liability is primary and conditional until the bill is accepted.

(2) DRAWEE

• The person who is directed to pay in the bill of exchange. • On acceptance, he becomes the acceptor and becomes liable for

payment.

• His liability is primary and unconditional.

(3) PAYEE • The person to whom the money is to be paid.

QUESTION.10 GIVE SPECIMEN OF BILL OF EXCHANGE.

Rs.10,000/- New Delhi 1 April 2012 Five months after date, pay me or to my order, the sum of Rupees Ten Thousand only for value received. To Rajesh Mehta Accepted Sd/- Sanjiv Babu Address: Rajesh Mehta Stamp ………………………….

QUESTION.11 DISTINCTION BETWEEN PROMISSORY NOTE & BILLS OF EXCHANGE

BASIS PROMISSORY NOTE BILLS OF EXCHANGE

(1) NATURE It contains an unconditional promise to pay money.

It contains an unconditional order to pay money.

(2) NUMBER OF PARTIES

In note there are only two parties- Maker and Payee.

In bill there are three parties- Drawer, Drawee and Payee

(3) STATUS OF MAKER

Maker of a note is a debtor who undertakes to pay money.

Drawer of a bill is the creditor who directs the drawee to pay.

(4) CONVERGENCE OF PARTIES

Maker and payee of a note cannot be same person.

Drawer and payee of a bill can be same person.

(5) ACCEPTANCE It requires no acceptance. Requires acceptance by drawee.

(6) NATURE OF LIABILITY

Liability of maker of a note is primary and absolute.

The liability of the drawer of a bill is secondary and conditional.

(7) RESTRICTION It cannot be issued payable to bearer.

It cannot be drawn payable to bearer on demand.

(8) CONDITIONAL It can never be conditional. It cannot be conditional but can be accepted conditionally.

(9) DISCHARGE OF LIABILITY ON NON-PRESENTATION FOR PAYMENT

The liability of the maker is not discharged unless the maker has suffered loss due to delay in presentation for payment.

The liability of the drawee gets discharged on non-presentation of bill for payment.

(10) NOTICE OF DISHONOR

Notice of dishonor is not required.

Notice of dishonor must be given to the drawer and other endorsers to make them liable.



QUESTION.12 WHAT IS CHEQUE?

(1) DEFINITION • Cheque is a bill of exchange

• drawn on a specified banker

• and not expressed to be payable otherwise than on demand (That means it is always payable on demand)

• and it includes

• the electronic image of a truncated cheque and

• a cheque in the electronic form.

(2) CHEQUE IN THE ELECTRONIC FORM (e-Cheque with digital signature)

• "a cheque in the electronic form" means a cheque • which contains the exact mirror image of a paper cheque, • and is generated, written and signed in a secure system • ensuring the minimum safety standards • with the use of digital signature (with or without biometrics

signature) and asymmetric crypto system.

(3) TRUNCATED CHEQUE (Scanned copy of paper Cheque)

• "A truncated cheque" means a cheque • which is truncated during the course of clearing cycle, • either by the Clearing house* or • by the bank whether paying or receiving payment, • immediately on generation of an electronic image (Cheques will be

scanned) for transmission,

• substituting the further physical movement of the cheque in writing. * “Clearing house” means the clearing house managed by the RBI or a clearing house recognized as such by the RBI.

PROVISIONS RELATING TO TRUNCATED CHEQUE

• Duties of collecting bank

The collecting bank shall verify with due diligence and ordinary care:

� Prime facie genuineness of the cheque truncated; � Any fraud, forgery or tampering apparent on face of the

instrument.

• Duties of paying banker In case of any suspicion about the genuineness of the truncated

cheque, the paying bank is entitled:

� Demand any further information regarding the truncated cheque;

� Demand the presentation of truncated cheque itself for verification.



QUESTION.13 GIVE SPECIMEN OF CHEQUE.

……….......20....... Pay……................................................................................................................................. ……...................................................................................................................... or Bearer Rupees…………………………………………………………..… ……………………………………………………… STATE BANK OF INDIA Connaught Place , New Delhi – 110001 MSBL/97 6 5 3 0 0 3 1 1 0 0 0 2 0 5 6 1 0

QUESTION.14 WHAT ARE TYPES OF CHEQUES?

(1) BEARER CHEQUE

A bearer cheque is one which is either expressed to be so payable or on which the last or only endorsement is an endorsement in blank.

(2) ORDER CHEQUE

An order cheque is one which is expressed to be so payable or which is expressed to be payable to a particular person without containing any instruction against its transfer.

(3) CROSSED CHEQUE

A crossed cheque is one which can be collected only through a banker.

QUESTION.15 WHO ARE PARTIES TO A CHEQUE?

(1) DRAWER The person who draws the cheque. His liability is primary and conditional.

(2) DRAWEE

The bank on whom the cheque is drawn. He makes the payment of the cheque.

(3) PAYEE

The person to whom money is to be paid. The payee may be drawer himself or a third party.

QUESTION.16 WHAT ARE ESSENTIAL CHARACTERISTICS OF A CHEQUE?

1) It must be in writing. 2) It must contain an express order to pay. 3) The order to pay must be definite and unconditional. 4) It must be signed by the drawer. 5) It must be drawn to pay a certain sum of money. 6) The order must be to pay money only. 7) Drawer, drawee and payee must be certain. 8) It is always drawn upon a specified banker. 9) It is always payable on demand. 10) It is not required to be stamped and accepted.

Account No.



QUESTION.17 DISTINCTION BETWEEN A CHEQUE AND BILLS OF EXCHANGE.

BASIS BILLS OF EXCHANGE CHEQUE

(1) DRAWEE It can be drawn on any person including a banker.

It is always drawn on a banker.

(2) PAYABLE It may be payable on demand or after a specified period.

It is always payable on demand.

(3) RESTRICTION It cannot be drawn payable to bearer on demand.

It can be drawn payable to bearer on demand.

(4) ACCEPTANCE It must be accepted by drawee to make him liable for payment.

Cheque does not require any acceptance.

(5) STAMPED Must be property stamped. Not required to be stamped

(6) GRACE PERIOD It is entitled to 3 days of grace period in calculating its maturity.

It is not entitled to days of grace.

(7) CROSSING A bill cannot be crossed. A cheque may be crossed.

(8) COUNTERMANDING PAYMENT

Countermanding is not possible. Payment can be stopped before cheque is presented.

(9) NOTING OR PROTESTING

A bill is noted and protested to establish dishonor.

A cheque need not be noted and protested.

(10) DISCHARGE OF LIABILITY

Drawer is discharged from the liability if bill is not duly presented for payment.

Drawer is not discharged when the delay is due to the reason of failure of bank.

QUESTION.18 WHAT IS CROSSING OF A CHEQUE?

(1) CROSSING IS AN ‘INSTRUCTION’

• Crossing is an ‘instruction’ given to the paying banker to pay the amount of the cheque through a banker only and not directly to the person presenting it to the counter.

• A cheque bearing such an instruction is called a ‘crossed cheque’, others without such crossing are ‘open cheques’ which may be encashed at the counter of the paying banker as well.

• The crossing on a cheque is intended to ensure that its payment is made to the right payee.

(2) HOW CHEQUE IS CROSSED?

• A cheque is crossed by

• drawing two parallel transverse lines across the face of the cheque • with or without the addition of certain words. • The crossing directs the drawee banker to pay the amount of the

cheque only to a banker.

• The crossing enables tracing the recipient of money, if an unauthorized person receives it.

Negotiable Instruments Act 1881 CA-IPCC Law, Ethics & Comm


QUESTION.19 WHAT ARE THE TYPES OF CROSSING OF A CHEQUE?

(1) GENERAL CROSSING

• A cheque is said to be crossed generally where it bears across its face an addition of:

• The words ‘and company’ or any abbreviation thereof, between two parallel transverse lines, either with or without the words ‘not negotiable’.

• Two parallel transverse lines simply, either with or without the words ‘not negotiable’.

• Where a cheque is crossed generally, the drawee banker shall not pay it otherwise than to a banker.

• The effect of general crossing is that the cheque must be presented to the paying banker through any banker and not by the payee himself at the counter.

• The collecting banker credits the proceeds to the account of the payee or the holder of the cheque. The latter may thereafter withdraw the money.

(2) SPECIAL CROSSING

• Where a cheque bears across its face an addition of the name of a banker, either with or without the words ‘not negotiable’, the cheque is deemed to be crossed specially.

• Parallel transverse lines are not necessary in case of special crossing.

• Where a cheque is crossed specially the banker on whom it is drawn shall pay it only to the banker on whom it is crossed, or his agent for collection.

• Special crossing differs from General crossing because in case of the Special crossing inclusion of the name of a banker is essential whereas in General crossing drawing of two parallel transverse lines is a must.

• Cheuqe specially crossed is safer than generally crossed • The cheque crossed specially this becomes more safe than the

generally crossed cheque. The banker, to whom a cheque is crossed specially, may appoint another banker as his agent for the collection of such cheques.

(3) RESTRICTIVE CROSSING

• In restrictive crossing the words ‘A/C Payee’ is added to the general or special crossing.

• The words ‘A/C Payee’ on a cheque are a direction to the collecting banker that the amount collected on the cheque is to be credited to the account of the payee.

• The effect of restrictive crossing is that the cheque does not remain negotiable any more.

(4) NOT NEGOTIABLE

• The effect of the words ‘not negotiable’ on a crossed cheque is that the title of the transferee cannot be better than that of its



CROSSING transferor.

• Suppose that a bearer cheque or an order cheque duly endorsed is stolen and the thief transferred it for value to one who was not aware of the situation. Under such circumstances, the transferee has a right to the value represented by the cheque and the previous parties would be liable. Thus, the drawer of a stolen cheque may still find himself liable for the amount of it even though he may have placed a ‘stop’ on it. The way to avoid such possible liability for the drawer is to cross cheques “not negotiable”.

• If a cheque is crossed “not negotiable”, this quality of negotiability is destroyed and no one taking subsequent to theft can acquire a good title even though the transferee gives value for it.

• The words ‘not negotiable’ does not restrict the cheque from being transferred, it only means that the transferee will get a good title only when the title of the transferor is also good.

• The effect of non-negotiable crossing is that the cheque nevertheless remains negotiable. But the title of the transferee shall not be better than that of the transferor, even though the transferee had acquired it in good faith and without negligence.

QUESTION.20 WHAT DOES NOT CONSTITUTE CROSSING?

The specific lines or words which constitute general or special crossing respectively are spelt out very categorically. The inclusion of any other word/words, without the essential ingredients of crossing, on the face of a cheque does not constitute crossing. Examples (1) A cheque bears the words ‘not negotiable’ or ‘account payee’ without two parallel lines or the name of any bank. This is not deemed to be a crossed cheque because the words ‘not negotiable’ within two parallel transverse lines on the face on the cheque constitute general crossing. The two transverse lines are essential in case of general crossing. The name of a bank without two parallel lines is a must for Special Crossing. (2) If a cheque bears single line across its face or simply an X mark, the cheque is not treated as crossed cheque. (3) The inclusion of any other word/words within two parallel lines is irrelevant and the cheque is still deemed to be a crossed cheque e.g., --------------------------- Under Rupees one hundred --------------------------- --------------------------- & Co. Lucknow ---------------------------



QUESTION.21 WHO MAY CROSS A CHEQUE?

(1) THE DRAWER

He may cross the cheque generally or specially.

(2) THE HOLDER

The cheque can be crossed after issue also. (1) Where the cheque is uncrossed The holder may cross it generally or specially. (2) Where a cheque is crossed generally The holder may cross it specially. (3) Where a cheque is crossed generally or specially The holder may add the words “not negotiable”.

(3) THE BANKER Where a cheque is crossed specially, the banker to whom it is crossed may again cross it specially to another banker or his agent, for collection.

QUESTION.22 WHAT SAFEST FORM OF CROSSING A CHEQUE?

• The addition of the words 'not negotiable' in a crossed cheque does not restrict the transferability of the instrument, but the cheque is deprived of its special feature of negotiability.

• The general rule about the negotiability is that the holder in due course of a bill or promissory note or cheque takes the instrument free from any defect which might be existing in the title of the transferor.

• A person who takes a cheque bearing not negotiable' shall not have, and shall not be capable of giving, a better title to the cheque which the person from whom he took it had.

• A bank, therefore should be extra careful in paying such cheques. The payment should be

made only after he is satisfied that the person demanding payment is the person entitled to receive it.

• Account payee crossing directs the collecting banker to collect it for the payee only and warns

that if the amount is collected for someone else, he may be held liable for damages.

• In view of the advantages explained above, the continuation of 'not-negotiable' and 'A/c payee' crossing can be considered as the safest form of crossing.

QUESTION.23 WHAT IS THE LIABILITY OF DRAWEE OF CHEQUE ON DISHONOUR?

(1) DUTY OF THE DRAWEE

• It is the duty of the drawee banker to pay the cheque, • provided he has in his hands sufficient funds of the drawer and • the funds are properly applicable to such payment.



(2) DEFAULT BY DRAWEE

• In case of default of such payment by the drawee (i.e. the banker) • the banker must compensate the drawer for any loss or damage

caused by such default.

QUESTION.24 WHAT IS THE AMOUNT OF COMPENSATION IN CASE OF DISHONOUR OF A CHEQUE?

AMOUNT OF COMPENSATION

• The amount of compensation is to be measured by the loss or damage suffered by the drawer.

• The principal is “The lesser the value of the cheque dishonoured, The greater the damage to the credit of the drawer”.

QUESTION.25 IN WHICH CASES THE BANKER REFUSES TO HONOUR THE CHEQUE?

(1) BANKER MUST REFUSE TO HONOUR CUSTOMER’S CHEQUE

1. If a cheque is undated.

2. If cheque is outdated (Stale Cheque) i.e. if it has not been presented within reasonable period.

3. If the cheque is post-dated and is presented before the date of the cheque.

4. If the drawer has countermanded the payment (Stop Payment).

5. Where the drawer has become insolvent or lunatic or died and the banker has received the notice thereof.

6. Where a garnishee or other legal order from the court is served on the banker.

7. Of notice in respect to the closure of the account is served by either party on the other.

8. If the cheque contains material alterations, irregular signature or irregular endorsement.

9. Where the drawer signature does not agree.

10. If the instrument is not free from reasonable doubt. 11. Cheque is mutilated. 12. If the instrument is inchoate (Assignment of funds by customer).

(2) BANKER MAY REFUSE TO HONOUR CUSTOMER’S CHEQUE

1. When funds are insufficient.

2. If the drawer has credit with one branch of a bank and he draws a cheque of another branch of the same bank in which either he has no account or his account is overdrawn.

3. If the drawer’s funds are not properly applicable for the payment of the cheque drawn by him.

4. Presentment after banking hours.



QUESTION.26 WHAT IS DISHONOR OF CHEQUE?

(1) NATURE OF LIABILITY

Every drawer issuing a cheque which gets dishonored due to insufficiency of funds will be

• punishable with imprisonment for a term upto two years • or with a fine twice the amount of cheque

• or both.

(2) CONDITIONS

(i) LEGALLY ENFORCEABLE DEBT The cheque should have been issued to discharge a legally enforceable debt (Therefore gift cheques does not come under its periphery)

(ii) PRESENTMENT OF CHEQUE The cheque should have been presented within 3 months or its specific validity period whichever is earlier.

(iii) REASON OF DISHONOUR

Dishonour should be due to reason of insufficiency of funds. (iv) DEMAND MADE FROM DRAWER

Payee or holder in due course should give notice to the drawer demanding payment within 30 days of his receiving information of dishonor.

(v) DEFAULT BY THE DRAWER TO PAY

Only if the drawer fails to make payment within 15 days of the receipt of the notice, prosecution can take place

(vi) COMPLAINT BY HOLDER

Complaint can be made only by payee or holder in due course within 1 month.

(3) DISHONOR OF A CHEQUE ISSUED BY A COMPANY

• Where a cheque issued by a company gets dishonored due to insufficiency of funds,

• then the company as well as every person • who was in charge of and was responsible to the company,

• at the time when the offence was committed, • shall deemed to be guilty of offence and liable to be proceeded

against.



QUESTION.27 EFFECT OF NON-PRESENTMENT WITHIN A REASONABLE TIME?

NO LIABILITY OF THE OF THE DRAWER IF BANK FAILS (BECOMES INSOLVENT)

It is the duty of the holder of cheque to present it for payment within reasonable time of its issue. If he fails to do so and in the meanwhile the bank fails causing damage to the drawer, the drawer is discharged to the extent of the actual damage suffered by him. FOR THIS FOLLOWING CONDITIONS MUST BE SATISFIED

1. The drawer has sufficient balance when he issues the cheque and when the cheque ought to be presented for payment.

2. The holder fails to present the cheque within a reasonable time of issue of the cheque.

3. Meanwhile (i.e. after the issue of the cheque and before the presentment of a cheque by the holder) the bank fails (Became insolvent), and consequently the drawer suffers actual damages.

QUESTION.28 WHEN DOES PAYING BANKER GET PROTECTION IN CASE THE PAYMENT IS MADE TO A WRONG PARTY? OR QUESTION. WHAT IS MEANT BY PAYMENT IN DUE COURSE

(1) PAYMENT IN DUE COURSE

Protection against payment to wrong party is available to the paying banker if payment is made “in due course” i.e. • Payment has been made according to apparent tenor of the

instrument.

• Banker has acted in good faith and without negligence. • Payment has been made to a person in circumstances which do

not excite any suspicion that he is not entitled to receive payment of cheque.

• However, where the drawer’s signature is forged, the banker remains liable to the drawer even if the payment is made in due course and cannot debit the drawer’s account. The bank is expected to verify the drawer’s signature, every time it makes payment.



QUESTION.29 WHICH TYPE OF PROTECTION IS GIVEN TO PAYING BANKER IN CASE THE AMOUNT OF CHEQUE DOES NOT REACH THE TRUE OWNER? OR QUESTION. WHEN THE PAYING BANKER SHALL NOT BE LIABLE TO TRUE OWNER OF THE CHEQUE FOR ANY LOSS SUSTAINED BY HIM?

It means that drawee banker is discharged from his liability and drawee banker is entitled to debit the drawer’s account with the amount so paid even though the amount of cheque does not reach the true owner.

(1) IN CASE OF UNCROSSED CHEQUE

a) CHEQUE PAYABLE TO ORDER • When a banker pays in due course. • which purports to be indorsed by or on behalf of the

payee – To endorsee. • even though the endorsement of payee subsequently

turns out to a forgery or may have been made by payee’s agent without authority.

b) CHEQUE PAYABLE TO BEARER • When a banker pays in due course.

• Payment is made to the bearer of the cheque • even though the endorsement of payee subsequently

turns out to a forgery or may have been made by payee’s agent without authority.

(2) IN CASE OF CROSSED CHEQUE

GENERALLY CROSSED CHEQUE • When a banker pays in due course. • Payment is made to any Banker.

SPECIALLY CROSSED CHEQUE

• When a banker pays in due course. • Payment is made whom it is crossed or its agent for collection,

being a banker.

• Where a banker has paid a crossed cheque in due course, the banker and drawer shall have same rights and be placed in same position in all respect as if the amount has been paid to and recovered by true owner.



QUESTION. 30 IN WHICH CASES THE PAYING BANKER DOES NOT GET ANY PROTECTION IF THE AMOUNT OF CHEQUE DOES NOT REACH THE TRUE OWNER? OR QUESTION. WHEN THE PAYING BANKER SHALL BE HELD LIABLE TO TRUE OWNER OF THE CHEQUE FOR ANY LOSS SUSTAINED BY HIM?

LIABILITY OF THE PAYING BANKER

The paying banker shall be liable to true owner of the cheque for any loss sustained by him in the following TWO cases 1. Where the paying banker pays the cheque crossed generally otherwise than a banker. 2. Where the paying banker pays the cheque crossed specially otherwise than to a specified banker.

QUESTION.31 WHAT IS HOLDER, HOLDER FOR VALUE AND HOLDER IN DUE COURSE?

(1) HOLDER

Holder of a negotiable instrument means any person entitled to: i. Possession of instrument in his own name and ii. Receive or recover amount due on instrument from parties liable

thereto. iii. 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.

(2) HOLDER FOR VALUE

Holder for value means a person who gets the instrument for consideration but after maturity. A negotiable instrument can be transferred even after maturity till its satisfaction. However, such holder will get the same title as the title of its transferor.

(3) HOLDER IN DUE COURSE

HOLDER IN DUE COURSE(HiDC) MEANS • any person who became payee or indorsee of a negotiable

instrument:

• For consideration • Before maturity of the instrument and • Without having sufficient cause to believe that any defect

existed in title of the person from whom he derived title.

QUESTION.32 DISTINCTION BETWEEN HOLDER AND HOLDER IN DUE COURSE.

BASIS HOLDER HOLDER IN DUE COURSE

(1) CONSIDERATION

He may become the possessor or payee of instrument even without consideration.

HiDC acquires possession of instrument only for consideration.

(2) TIME OF POSSESSION

Can become possessor of instrument even after maturity.

Must become possessor of the instrument before its maturity.

(3) GOOD FAITH A person becomes holder even if the instrument is not obtained in good faith.

Must have become possessor of the instrument in good faith and without having sufficient cause to believe that any defect existed in the transferor’s title.



QUESTION.33 WHICH PRIVILEGES ARE AVAILABLE TO HOLDER IN DUE COURSE?

(1) BETTER TITLE

He gets a title free from any defects even if the title of the transferor is defective.

(2) LIABILITY OF PRIOR PARTIES

All prior parties to a negotiable instrument continue to remain liable to a HiDC both jointly and severally until the instrument is duly satisfied.

(3) INSTRUMENT CLEARED OF ALL DEFECTS

Once a negotiable instrument passes through the hands of a HiDC, it is cleared of all defects. Any person acquiring it takes it free from all defects, unless he was himself a party to the fraud.

(4) INSTRUMENT WITHOUT CONSIDERATION

No prior party can set up a defense that the instrument was drawn, made or indorsed by him without any consideration.

(5) INSTRUMENT OBTAINED UNLAWFULLY

No prior party can set up a defense that the negotiable instrument was lost or was obtained from him by an offence or fraud or for an unlawful consideration.

(6) FICTITIOUS BILLS

Where a bill of exchange is drawn in a fictitious name is payable to his order and is indorsed by the same hand as the drawer’s signature, the acceptor will remain liable and cannot allege as against the HiDC that such name is fictitious.

(7) CONDITIONAL DELIVERY

No prior party can escape his liability on the ground that the instrument was delivered conditionally or for special purpose only.

(8) ESTOPPEL FROM DENYING VALIDITY

No maker of a note, no drawer of a bill of exchange or cheque and no acceptor of a bill for the honor 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.

(9) ESTOPPEL AGAINST DENYING CAPACITY OF PAYEE TO ENDORSE

No maker of a note and no acceptor of a bill payable to order shall, in a suit thereon by a HiDC, be permitted to deny the payee’s capacity, at the date of the note or bill, to indorse the same.

(10) INCHOATE STAMPED INSTRUMENT

HiDC can claim the full amount of the negotiable instrument (not exceeding the amount covered by the stamp) even though such amount is in excess of the amount authorized by the person delivering an inchoate negotiable instrument.

QUESTION.34 HOW NEGOTIABLE INSTRUMENTS CAN BE CLASSIFIED?

(1) ORDER INSTRUMENT

• A negotiable instrument payable to a specified person or his order is called an order instrument.

• It should not contain words prohibiting transfer or indicating an intention that it shall not be transferable.

• They can be transferred by endorsement and delivery.

(2) BEARER INSTRUMENT

• An instrument which is expressed to be payable to bearer or • In which the only or last endorsement is in blank is called a bearer

instrument. • Bearer instruments can be transferred by mere delivery.



(3) DEMAND INSTRUMENT

• An instrument on which time for payment is not specified or • which is expressed to be payable on demand is called an instrument

payable on demand. • A demand instrument may be presented for payment anytime but

only after reasonable time.

(4) TIME INSTRUMENT

• An instrument in which time for payment is specified is called a time instrument.

• A time instrument may be payable: a) On a specific day, or b) After a specified period, or c) After a certain period after sight, or d) On happening of a certain event.

(5) INLAND INSTRUMENT

• A negotiable instrument is an Inland Instrument if it is: • Drawn or made in India and made payable in India or • Drawn or made in India and drawn on a person resident in India. • They remain inland even if it has been endorsed to a foreign

country.

(6) FOREIGN INSTRUMENT

• A negotiable instrument which is not an Inland instrument is called a foreign instrument.

• Foreign bill must be protested for dishonor when such protest is required by law of place where they are drawn.

• In case of inland bills, protest is optional.

(7) ACCOMMODATION BILL

An accommodation bill means the bill drawn, accepted or indorsed without consideration. RULES REGARDING ACCOMODATION BILL i. The accommodated party cannot, after he has paid the amount of

the bill, recover the amount from any person who becomes party to the bill for his accommodation.

ii. Such bill can never be negotiated after maturity provided the person to whom it is negotiated takes it in good faith and for consideration.

iii. Non-presentation of an accommodation bill to the acceptor for payment does not discharge the drawer.

iv. When an accommodation bill is dishonored, failure to give notice of dishonor does not discharge the prior parties from the liability.

(8) AMBIGUOUS INSTRUMENT

• Where an instrument may be construed either as a promissory note or as a bill of exchange, is known as ambiguous instrument.

• The holder of such instrument may at his option treat it as note or bill. Once the holder chooses an option the same cannot be changed.



(9) INCHOATE INSTRUMENT

1. An inchoate instrument is an incomplete instrument. 2. When a person signs and deliver to another a blank or incomplete

stamp paper, he authorizes the other person to make or complete upon it a negotiable instrument for any amount not exceeding the amount covered by the stamp paper.

3. The person so signing is liable upon such instrument, in the capacity in which he signed the same to any holder in due course for such amount. The above provisions are not applicable to a cheque.

RIGHTS (i) Person to whom an inchoate instrument is delivered He can recover only such amount as he was authorized to fill. (ii) Holder in due course He can recover the whole amount stated in the instrument but no exceeding the amount covered by the stamps.

(10) FICTITIOUS BILL

• A fictitious bill is a bill in which the name of the drawer or the payee or both is fictitious.

• When both the drawer and payee of a bill are fictitious persons, • the acceptor is liable to a HiDC • if the HiDC can show that

(i) the signature of the drawer and (ii) that of the first endorser are in the same handwriting.

QUESTION.35 EXPLAIN PROVISIONS REGARDING MATURITY OF NEGOTIABLE INSTRUMENT?

(1) MATURITY DATE PROMISSORY NOTE OR BILL OF EXCHANGE GET MATURED WHEN THEY FALL DUE FOR PAYMENT (1) DEMAND INSTRUMENT

• Such bills or note may be presented for payment • at any time at the option of holder • but within a reasonable time after issue. • Such instruments become overdue when in circulation for

unreasonable length of time. (2) TIME INSTRUMENT Such instruments are payable: i. After a fixed period, or ii. On a specified day, or iii. After sight, or iv. On the happening of an event which is certain to happen



(2) GRACE DAYS

• In case of TIME INSTRUMENTS, 3 days of grace shall be added to the date on which the instrument is expressed to be payable.

• Further, where a note or bill is payable in installments, days of grace are allowed on each installment.

• In case of bill of exchange payable after a fixed period after sight, the period of maturity is to be calculated:

• From date of acceptance, or • If not accepted, from date of noting or protest.

QUESTION.36 HOW MATURITY DATE IS CALCULATED?

(A) CASES BASED ON DAYS DATE OF MATURITY 1. Negotiable instrument payable on a

specified day Specified day + 3rd day

EXAMPLE: (1) A bill is payable on 28th February 2012. 2. Negotiable instrument payable on a stated

number of days after a date Date on which negotiable instrument is drawn + stated number of days + 3rd day

EXAMPLE: (1) A bill, dated 31st July, 2012, is made payable 15 Days after date. 3. Negotiable instrument payable on a stated

number of days after sight Date on which negotiable instrument is presented for sight + stated number of days + 3rd day

EXAMPLE: (1) A bill drawn on 15th Oct, 2012, is payable twenty days after sight is presented for acceptance on 31st Oct, 2012. 4. Negotiable instrument payable on a stated

number of days after happening of an event which is certain to happen

Date on which such event happens + stated number of days + 3rd day

EXAMPLE: (1) A bill drawn on 6th Sep, 2012, is payable 10 days after death of Mr. C (B) CASES BASED ON MONTHS DATE OF MATURITY 1. Negotiable instrument payable on a stated

number of months after a date Corresponding day of relevant month* [i.e. date on which negotiable instrument is drawn+ stated number of months]+ 3rd day

EXAMPLE: (1) A bill dated 1st January 2012 is made payable three months after date. (2) A bill, dated 31th January 2012, is made payable one month after date. 2. Negotiable instrument payable on a stated

number of months after sight Corresponding day of relevant month* [i.e. Date on which negotiable instrument is presented for sight + stated number of months] + 3rd day

EXAPMLE: (1) A bill drawn on 15th Jan, 2007, is payable two months after sight is presented for acceptance on 31st Jan, 2007. 3. Negotiable instrument payable on a stated

number of months after happening of an event which is certain to happen

Corresponding day of relevant month* [i.e. Date on which such event happens + stated number of months] + 3rd day

EXAMPLE: (1) A bill drawn on 15th Sep, 2012, is payable 3 months after death of Mr. C *if in the relevant month, there is no corresponding day, the las day of such month shall be taken.



IMPORTANT NOTE (1) IF THE DAY OF MATURITY OF NEGOTIABLE INSTRUMENT IS A PUBLIC HOLIDAY Date of Maturity = Immediate preceding business day. (2) IF THE DAY OF MATURITY OF NEGOTIABLE INSTRUMENT IS AN EMERGENCY HOLIDAY OR UNFORESEEN PUBLIC HOLIDAY Date of Maturity = Immediate succeeding business day. The expression “public holidays” includes Sundays and any other day declared by the Central Government, by notification in the official gazette, to be a public holiday. EXAMPLES: (1) A bill of exchange dated 12th JULY, 2012 was made payable one month after date. (2) A bill of exchange dated 2nd March, 2008 was made payable one month after date. It falls due on 5th April, 2008, which is declared a public holiday due to emergency.

QUESTION.37 WHAT IS NEGOTIATION OF BILL AND HOW THE BILL IS NEGOTIATED?

(1) MEANING OF NEGOTITION

Negotiation means transfer of a negotiable instrument to any other person so as to constitute that person as the holder of such negotiable instrument.

• Every maker, drawer, payee or indorsee, • and if there are several makers, drawers, payees or indorses, all of

them jointly • can negotiate an instrument • provided the negotiability of such instrument

• has not been restricted by any express words used in the instrument.

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

(2) METHODS OF NEGOTIATION

An instrument may be transferred in two ways: (A) NEGOTIATION BY DELIVERY (IN CASE OF BEARER INSTRUMENT) A bearer instrument may be negotiated by delivery. However, the delivery must be voluntary. (B) NEGOTIATION BY ENDORSEMENT & DELIVERY (IN CASE OF AN ORDER INSTRUMENT An order instrument can be negotiated by way of endorsement and delivery. Endorsement is done by the endorser (holder) signing on the back or face of the instrument or on a slip of paper annexed thereto.



QUESTION.38 WHAT ARE ESSENTIALS OF VALID ENDORSEMENT?

(1) ESSENTIALS OF VALID ENDORSEMENT

• In writing

• Either at the front or back of the instrument or on a separate paper

attached to instrument.

• Signed by the endorser.

• endorsement is complete by delivery of instrument.

QUESTION.39 WHAT ARE VARIOUS TYPES OF ENDORSEMENTS?

(1) GENERAL ENDORSEMENT OR ENDORSEMENT IN BLANK

It is an endorsement, wherein no endorsee is specified and the endorser signs his name only. A bill so endorsed becomes payable to the bearer even though originally payable to order.

(2) SPECIAL ENDORSEMENT OR ENDORSEMENT IN FULL

It is an endorsement which contains the signature of the endorser as well as the name of the person to whom or to whose order the instrument is payable is specified.

(3) RESTRICTIVE ENDORSEMENT

It is an endorsement which has the effect of restricting further negotiation and transfer of negotiable instrument. (eg: Account Payee Cheque)

(4) PARTIAL ENDORSEMENT

Where the Negotiable Instrument is endorsed for part of the amount, it is called Partial Endorsement. Such an endorsement is not valid, for it does not permit negotiation. However, if part amount has been paid, a note to that effect may be made on the instrument and then it may be negotiated for the balance amount.

(5) CONDITIONAL / QUALIFIED ENDORSEMENT

It is an endorsement in which the endorsee may by express words in the endorsement make his liability or make the right of endorsee to receive the amount; dependent upon the happening of an event although such event may never happen. (i) SANS RECOURSE ENDORSEMENT It is an endorsement in which the endorser may by express words; exclude his own liability i.e. in the event of dishonor, he cannot be held liable. Where an endorser so excludes his liability and afterwards becomes the holder of the instrument, all intermediate endorsers are liable to him.

(ii) FACULTATIVE ENDORSEMENT It is an endorsement where in certain rights are waived and suitable words to this effect are indicated.

(iii) CONTINGENT ENDORSEMENT It is an endorsement where in endorser makes his liability dependent upon happening of some event.



QUESTION.40 HOW CONVERSION OF ENDORSEMENT IN BLANK INTO ENDORSEMENT IN FULL IS DONE?

CONVERSION OF ENDORSEMENT IN BLANK INTO ENDORSEMENT IN FULL

• The holder of a negotiable instrument endorsed in blank, may, without signing his own name, by writing above the endorser’s signature a direction to pay any other person as endorsee, convert the endorsement in blank into an endorsement in full and the holder does not thereby incur the responsibility of an endorser.

• The holder may then transfer the instrument to the person whose name he has so specified, but will not incur the liability of an endorser.

QUESTION.41 WHAT IS NEGOTIATION BACK?

(1) MEANING During the course of negotiation if an instrument is re-endorsed by the endorsee to the original holder or previous endorser, it is called a negotiation back.

(2) EFFECTS OF NEGOTITION BACK

1. The holder cannot enforce payment against an intermediate party to whom he was previously liable. 2. The holder can enforce payment against all the parties to whom he was not previously liable. 3. However the holder can sue all the parties (Including all intermediate parties), if he had made sans recourse endorsement.

QUESTION.42 WHAT IS MATERIAL ALTERATION?

When Negotiable instrument is altered between drawing and presentation without authority of drawer, it is called alteration of Negotiable instrument. Alteration may be material or immaterial.

(1) MEANING An alteration is called material alteration if it alters: � The character or operation (i.e the legal effect) of a negotiable

instrument or � The rights and liabilities of any of the parties of negotiable

instrument.

(2) EXAMPLES OF MATERIAL ALTERATION

1. Date 2. Time of payment 3. Place of payment 4. Sum payable 5. Opening of crossed cheque 6. Relationship between parties 7. Converting order cheque into bearer cheque



(3) EFFECT OF MATERIAL ALTERATION

1. All the parties to the negotiable instrument not consenting to the material alteration are discharged.

2. Where material alteration was done with the consent of all interested parties, the instrument will remain valid.

3. Any alteration to be valid must be under full signatures of the drawer.

(4) MATERIAL ALTERATIONS AUTHORIZED BY ACT

(ALTERATION WHICH ARE NOT CONSIDERED MATERIAL) 1. Filling inchoate instrument 2. Conversion of blank endorsement into endorsement in full 3. Crossing of cheque 4. Conversion of general crossing into special crossing, Addition of

words “A/C Payee” or “Not Negotiable” to a crossing (But not vice-versa)

5. Conversion of bearer instrument into order instrument by deleting the words ‘bearer’

6. Alteration made with the consent of the parties

QUESTION.43 WHO IS A DRAWEE IN CASE OF NEED?

(1) MEANING When in the bill or in any endorsement thereon the name of any person is given in addition to the drawee, to be referred to in case of need, such person is called a drawee in case of need.

(2) WHO APPOINTS DRAWEE IN CASE NEED

The name of the drawee in case of need may be given in the bill by the drawer or by subsequent endorser. The holder can refer to drawee in case of need when the bill gets dishonored by non-acceptance or non-payment.

(3) IN CASE OF DISHONOUR

If the bill is dishonored by drawee, it is obligatory for the holder to present the instrument to drawee in case of need and it will not be considered to have been dishonored, unless it has been dishonored by such drawee (i.e. drawee in case of need).

QUESTION.44 WHAT DO YOU MEAN BY ACCEPTANCE ?

(1) MEANING

• When the drawee of a bill of exchange has • signified his assent to the order of the drawer, • he is said to have accepted the bill.

• After the drawee has signed his consent upon the bill • and delivered the same, or give notice of such acceptance to the

holder, • he is called an acceptor.



(2) ESSENTIALS OF A VALID ACCEPTANCE

i. It must be in writing. ii. It must be signed by the drawee or his agent. iii. It must be on the bill. iv. It must be completed by delivery to the holder or by notice of

acceptance to him.

(3) WHO CAN ACCEPT

1. Drawee, i.e. the person directed to pay. 2. All or some of several drawees, when bill is addressed to more than

one drawee. However, only those who accept become liable on the bill.

3. Drawee in case of need. 4. An acceptor for honor. 5. Agent of any of the persons mentioned above.

(4) CONDITIONAL / QUALIFIED ACCEPTANCE

• The acceptance of a bill is said to be qualified, • when the drawee attaches some conditions or qualification • which have the effect either reducing his liability or acceptance

of the liability subject to certain conditions.

(5) AN ACCEPTANCE IS QUALIFIED IF

1. It is conditional, declaring the payment to be dependent on the happening of an event stated therein.

2. It undertakes the payment of only part of the sum ordered to be paid.

3. When no place of payment being specified in the order, it undertakes the payment at a specified place and not otherwise or elsewhere.

4. When a place of payment being specified in the order, it undertakes the payment at some other place and not otherwise or elsewhere.

5. Where it undertakes the payment at a time other than that under the order at which it would legally due.

(6) EFFECT OF QUALIFIED ACCEPTANCE

i. Holder may refuse to take qualified acceptance, and treat the bill as dishonored by non-acceptance. He may sue the drawer/prior endorsers after giving due notice of dishonor.

ii. If the holder accepts a qualified acceptance without obtaining the consent of all prior parties thereto, the prior parties are discharged from liability as against the holder and those deriving title from such holder.

QUESTION.45 WHAT DO YOU MEAN BY PRESENTMENT OF BILLS FOR ACCEPTANCE ?

(1) ACCEPTANCE OF BILL

A bill is said to be accepted when drawee puts his signature on it signifying his assent to order of drawer to pay amount of bill at maturity.

(2) BILLS WHICH NEED NOT BE PRESENTED FOR ACCEPTANCE

(1) A bill payable on demand (2) payable at sight (3) payable certain number of days after date (4) payable on a certain day



(3) BILLS WHICH MUST BE PRESENTED FOR ACCEPTANCE

(1) Bill payable after sight Presentation of such bills for acceptance is required to fix maturity of the bill. (2) Express stipulation A bill that contains an express stipulation that it should be presented for acceptance before presentation for payment.

(4) PRESENTATION TO WHOM

i. Drawee or his duly authorized agent ii. All drawees, where there are more than one drawee. iii. Legal representative, if drawee is dead iv. Official receiver, if drawee is declared insolvent

(5) PRESENTATION BY WHOM

Holder of bill

(6) TIME OF PRESENTATION

(i) IF SPECIFIED At specified time (ii) IF NOT SPECIFIED Demand instrument : Reasonable time Time instrument : Before maturity NOTE: Presentation must be done during business hours on a business day

(7) PLACE OF PRESENTATION

(i) IF PLACE IS SPECIFIED At specified place (ii) IF PLACE IS NOT SPECIFIED Place of business or at residence

(8) IF DRAWEE IS NOT FOUND

If the drawee cannot be found after reasonable search, the bill is treated as dishonored due to non-acceptance.

(9) TIME LIMIT FOR ACCEPTANCE

According to Section 63, the drawee is entitled to a period of 48 hours, exclusive of public holidays, to consider whether he should accept the bill or not.

(10) FAILURE TO PRESENT

If bill is not presented for acceptance, drawer and all other parties thereon cease to be liable to holder.

(11) PRESENTATION EXCUSED

Presentment for acceptance is excused where: i. Drawee is a fictitious person ii. Drawee cannot be found after reasonable search

iii. Drawee is incompetent to contract iv. Acceptance is qualified. v. Presentation is irregular but acceptance is refused on some other

ground.

QUESTION.46 WHO IS AN ACCEPTOR FOR HONOUR?

(1) MEANING • A stranger cannot accept a bill, But • if a bill is dishonored by non-acceptance, • the holder may allow any other person to accept it • for the honor of the drawer or any of the endorsers. • The person so accepting the bill is called “acceptor for honor”.



• The object for such an acceptance for honor is to protect • the credit of the party liable on the bill, and

• to prevent legal proceedings being taken against him. • An acceptor for honor binds himself to all the parties • subsequent to the party for whose honor he has accepted the bill.

(2) ESSENTIALS FOR VALID ACCEPTANCE FOR HONOR

(1) Bill must have been noted or protested for non-acceptance for better security.

(2) The acceptance for honor has give acceptance with the consent of the holder.

(3) The acceptance for honor must be made by writing and signing on the bill and must indicate that it is an acceptance for honor.

(4) The acceptor for honor is a person who is not already liable on the bill.

(5) Acceptance is made in honor of a person already liable to pay on the bill.

(3) RIGHTS OF AN ACCEPTOR FOR HONOR

• On paying the bill, the acceptor for honor can make • the party for whose honor he has accepted the bill and • all prior parties liable • to compensate him for all loss or damage sustained by him in

consequence of such acceptance.

(4) OBLIGATION OF AN ACCEPTOR FOR HONOR

An acceptor for honor is liable to all parties subsequent to the party for whose honor he has accepted to pay the amount of the bill. The acceptor for honor is liable to pay only if the following conditions are fulfilled: i. Bill should be presented to drawee for payment at maturity. ii. Drawee must have refused to pay the bill. iii. Bill has been noted and protested for payment. iv. Bill should be presented or forwarded for presentation to the

acceptor for honor not later than the day next after the day of its maturity.

QUESTION.47 WHAT IS PRESENTATION OF INSTRUMENT FOR PAYMENT?

(1) MEANING

Presentation for payment of a negotiable instrument means its exhibition to maker, drawee or acceptor by holder or his agent with request for its payment in accordance with its apparent tenor. Presentation for payment is necessary in all negotiable instruments. In default of such presentation, parties to instrument other than maker, drawee or acceptor will not be liable to such holder.



(2) TIME OF PRESENTATION

i. Instrument made payable at a specified period after date or sight – Presentation at maturity.

ii. Instrument payable on demand - Presentation for payment within reasonable time after its receipt by holder.

iii. Presentation for payment must be made during usual business hours on a business day.

(3) PLACE OF PRESENTATION FOR PAYMENT

(A) PLACE IS SPECIFIED IN THE INSTRUMENT AT SUCH PLACE (B) NO PLACE IS SPECIFIED

a. At Place of business or b. At Residence c. If he has no fixed place of business or residence, it must be

presented to him in person wherever he can be found.

(4) PRESENTATION OF PROMISSORY NOTE PAYABLE BY INSTALLMENT

• A promissory note payable by installment must be presented for payment on the 3rd day after the date fixed for each installment.

• Where the date for payment of an installment is not stated in the note, the note is invalid.

• Further if a single installment is not paid the whole instrument can be treated as dishonored by non-payment.

(5) PRESENTATION OF CHEQUE

(1) TO CHARGE DRAWER • It is the duty of holder of cheque to present it at the bank upon

which it is drawn. Only if payment is refused by bank, the holder may sue drawer.

• Holder should present the cheque at the bank within reasonable time before relation between drawer and his banker has been altered to the prejudice of drawer.

• Thus, if cheque is not presented in time and the bank becomes unsound, drawer is not liable if bank refuses payment on presentation.

(2) TO CHARGE OTHER PARTIES • In order to charge any person other than drawer, cheque must be

presented within reasonable time.

QUESTION.48 WHEN DOES PRESENTATION FOR PAYMENT BECOMES UNNECESSARY?

Presentation for payment is necessary in all negotiable instruments. However, such presentation is not necessary and the instrument can be treated as dishonored in following cases:

1. Where presentation is intentionally prevented by maker, drawer or acceptor. 2. If he promises to pay notwithstanding non presentation. 3. If he waives presentation. 4. If the instrument is payable at his place of business and the place is closed during usual

business hours on the due date. 5. If instrument is payable at some other specified place, no one is there to make payment.



6. If no place of payment is specified in the instrument – he cannot be found after reasonable search.

7. If he makes part payment due on account to the instrument. 8. If he promises to pay amount due thereon in whole or in part. 9. If presentation becomes impossible. 10. If bill is dishonored by non-acceptance. 11. If drawee is fictitious person. 12. If drawee is incompetent person.

QUESTION.49 WHAT IS PAYMENT FOR HONOR?

(1) MEANING When a bill is noted and protested for non-payment, a stranger may agree to pay the bill for the honor of any party already liable on the bill. Such payment is called payment for honor.

(2) ESSENTIAL CONDITIONS

THE CONDITIONS ESSENTIAL FOR SUCH PAYMENT ARE i. Bill must have been noted and protested for payment. ii. Person paying or his agent must declare before Notary Public,

the party for whose honor he pays the bill, iii. Such declaration must have been recorded by Notary Public. iv. Payment must have been made for honor of a party liable to pay

bill. v. Payment may be made by any person whether he is already

liable on bill or not.

(3) EFFECT OF SUCH PAYMENT

(1) All parties subsequent to party for whose honor it is paid are discharged.

(2) Payer for honor acquires all rights of a holder whom he pays and becomes entitled to all the remedies of the holder on the instrument.

(3) Payer can recover from party for whose honor he has made payment, all sums paid by him together with interest and expenses properly incurred in making such payment.

QUESTION.50 EXPLAIN PROVISIONS REGARDING PAYMENT OF NEGOTIABLE INSTRUMENTS?

(1) TO WHOM PAYMENT IS TO BE MADE

Payment of amount due on note, bill or cheque must, in order to discharge maker or acceptor, be made to holder. If payment is made to any other person than holder, the holder can claim payment again from maker or acceptor.

(2) WHO SHOULD PAY

In case of Promissory note – Maker In case of Bill of exchange – Acceptor or if not accepted by drawer

(3) PAYMENT BY STRANGER

Payment by any other person is regarded as a payment by a stranger, the party liable to pay will not discharged from his liability to pay.



QUESTION.51 EXPLAIN PROVISIONS REGARDING PAYMENT OF INTEREST IN CASE OF DELAY OF PAYMENT OF NEGOTIABLE INSTRUMENTS?

(1) WHEN RATE IS SPECIFIED

Interest is calculated at the rate specified on principal amount due on the instrument, from date of the instrument, until tender or realization of such amount, or until such date after institution of a suit to recover the principal amount as Court directs.

(2) WHEN RATE IS NOT SPECIFIED

Interest on the amount due shall be calculated at the rate of 18% per annum from date at which the instrument ought to have been paid until tender or realization of the amount, or until such date as Court directs.

QUESTION.52 EXPLAIN PROVISIONS REGARDING DISHONOUR OF NEGOTIABLE INSTRUMENTS?

(1) MEANING (a) BILL OF EXCHANGE A bill may be dishonoured either by non-payment or by non-acceptance. (B) A PROMISSORY NOTE AND A CHEQUE These are dishonoured only by non- payment.

(2) DISHONOUR BY NON-ACCEPTANCE {Possible only in the case of bills of exchange}

DISHONOUR BY NON-ACCEPTANCE MAY TAKE PLACE IN ANY OF THE FOLLOWING CIRCUMSTANCES

1. When drawee or one of several drawees (not being partners) makes default in acceptance.

2. Where presentment for acceptance is excused and bill remains unaccepted.

3. When drawee is incompetent to contract. 4. Where drawee gives a qualified acceptance. 5. If drawee is a fictitious person. 6. Drawee cannot be found after reasonable search. 7. Where drawee either does not accept the bill within 48 hours

of presentment or refuses to accept it.

(3) EFFECT OF DISHONOUR BY NON-ACCEPTANCE

• When the bill has been dishonoured by non-acceptance, • it gives an immediate right to the holder to take action • against the drawer or the endorser by giving a notice of dishonour. • Thus, the holder need not wait till maturity of the bill.

Note: Where “a drawee in case of need” has been named in a bill, bill is not treated as dishonoured until it has been dishonoured by such drawee in case of need.

(4) DISHONOUR BY NON-PAYMENT {Possible in all negotiable instruments}

• An instrument is said to be dishonoured by non-payment when maker, acceptor or drawee, as the case may be, makes default in payment upon presentation for payment.

• A promissory note or bill of exchange is dishonoured by non-payment when presentment of payment is excused expressly by maker of the note or acceptor of bill and the note or bill remains unpaid at or after maturity.



QUESTION.53 EXPLAIN PROVISIONS REGARDING NOTICE OF DISHONOUR OF NEGOTIABLE INSTRUMENTS?

(1) BY WHOM • By holder or • By any of the parties to the instrument who remains liable thereon.

(2) TO WHOM

i. Notice must be given to the drawer and all other parties whom he seeks to make liable.

ii. Notice may be given either • to party himself or to his agent, or • to his legal representative on his death, or • to official assignee on his insolvency.

iii. It is not necessary to give notice to maker of a note or drawee or acceptor of a bill or cheque.

iv. Notice may be oral or in writing.

(3) EFFECT OF NON-SERVICE OF NOTICE

If the notice is not sent to any prior party who is entitled to such notice within a reasonable time, he is discharged from liability.

• To continue the liability of drawer and • To continue the liability of the endorsers,

notice of dishonour should be given to them.

(4) REQUIREMENT OF A VALID NOTICE

• The holder must inform the party to whom the notice has been given that the instrument has been dishonoured, and that he will be held liable thereon.

• It must give an exact description of the instrument dishonoured, any wrong description which misleads the addressee, invalidates the notice.

(5) MODE OF SERVICE OF NOTICE

Notice may be:

• Oral or • Written.

The notice, if written, may be given by post at:

• Place of business or • Residence

If the notice is duly directed and sent by post and miscarries, such miscarriage does not render the notice invalid.

(6) TIME OF SERVING NOTICE

IF THE HOLDER OF INSTRUMENT AND THE PARTY TO WHOM NOTICE OF DISHONOUR IS TO BE GIVEN: (a) Carry on business or live at the same place

Notice of dishonour must reach its destination on the day next after the day of dishonour.

(b) Carry on business or live at different places Notice of dishonour must be sent on or before the day next after the day of dishonour.



(7) TRANSMISSION OF NOTICE OF DISHONOUR BY PARTY RECEIVING IT

The party receiving the notice of dishonour should communicate the same within a reasonable time to any prior party he intends to hold liable in respect of the instrument, but if the prior party receives the notice otherwise, no such communication is necessary.

(8) WHEN NOTICE OF DISHONOUR IS UNNECESSARY

THE NOTICE OF DISHONOUR IS NOT NECESSARY IN THE FOLLOWING CASES:

(i) When it has been dispensed with by an express waiver by the party entitled to the notice. For example: Facultative endorsement

(ii) When the drawer of a cheque has countermanded payment no notice of dishonour is required to charge the drawer.

(iii) When the party charged could not suffer damage for want of notice.

(iv) When the party entitle to notice cannot be found after reasonable search,

(v) Where there has been accidental omission to give the notice due to some unavoidable circumstances (e.g., death, accident or serious illness)

(vi) When the drawer also happens to be acceptor. (vii) In the case of promissory note which is not negotiable. (viii) When the party entitled to notice promises to pay

unconditionally the amount due on the instrument after dishonour and with full knowledge of facts.

QUESTION.54 EXPLAIN PROVISIONS REGARDING NOTING OF NEGOTIABLE INSTRUMENTS?

(1) MEANING

Noting is a minute recorded by a notary public on the dishonoured instrument or upon a paper attached thereto. It is a mode of authenticating the fact that a bill or note has been dishonoured.

(2) NOTING BY NOTARY PUBLIC

When an instrument has been dishonoured by non-acceptance or non-payment, the holder should get such dishonour to be noted by the Notary Public.

(3) PRESENTATION BY NOTARY PUBLIC AGAIN

When an instrument is to be noted for dishonour, it is taken to the notary public who presents it once again for acceptance or payment, as the case may be, and if the drawee or acceptor still refuses to accept or pay the bill, it is noted, i.e, a minute is prepared containing the date of dishonour, reason for such dishonour, etc and the facts are noted on the instrument.

(4) TIME FOR NOTING

Noting must be made within reasonable time after dishonour.



(5) ADVANTAGE OF NOTING

It creates evidence of the fact of dishonour and things connected with it.

(6) NOTING NOT COMPULSORY

However, noting is not compulsory except for foreign bills.

QUESTION.55 EXPLAIN PROVISIONS REGARDING PROTESTING OF NEGOTIABLE INSTRUMENTS?

(1) MEANING

Protest is a formal certificate of dishonour issued by the notary public to the holder. Protest is one step further to noting.

(2) TIME OF PROTESTING

The protest should be done within reasonable time.

(3) ADVANTAGE

The advantage of both noting and protesting is that it constitutes prime facie good evidence in Court of the fact that the instrument has been dishonoured.

(4) RECOGNITION BY COURT

The Court is bound to recognize protest u/s 119. But it may or may not recognize noting.

(5) PROTEST FOR BETTER SECURITY

• Protest for better security is a measure of protection against consequences of acceptor’s insolvency.

• When acceptor of a bill becomes insolvent or his credit has been publicly impeached, before maturity of the bill, holder may within a reasonable time, approach a notary public cause such facts to be recorded and certified.

• Noting and protest of inland bills or notes is not compulsory, but foreign bills must be protested for dishonour if required by law of place where they are drawn.

QUESTION.56 WHO IS NOTARY PUBLIC?

(1) APPOINTMENT • A Notary Public is appointed by Central or State Government. • He enjoys the confidence of business world, and any certificate

given by him is presumed to be true by Court of law.

(2) FUNCTIONS OF NOTARY PUBLIC

• His functions are to attest deeds, contracts and other instrument that are to be used abroad and to give a certificate of due execution of such documents.

(3) WHERE THERE IS NO NOTARY PUBLIC

• At places where there is no Notary Public, dishonoured bills cannot be noted. These instruments should be protested by Bank’s lawyer or other respectable person in the prescribed form.



QUESTION.57 WHAT IS COMPENSATION TO HOLDER FOR DISHONOUR?

(1) IN CASE OF OTHER THAN FOREIGN BILLS

Holder is entitled to the amount due upon the instrument, together with the expenses properly incurred in presenting, noting and protesting it.

(2) IN CASE OF FOREIGN BILLS

Where the person charged resides at a place different from that at which the instrument was payable, the holder is entitled to receive such sum at the current rate of exchange between the two parties.

QUESTION.58 WHAT IS DISCHARGE OF NEGOTIABLE INSTRUMENTS?

(1) MEANING

• An instrument is said to be discharged when it becomes completely useless i.e. no action can be taken on it. An instrument gets discharged only when the party who is ultimately liable thereon is discharged from liability.

• Once an instrument is discharged, all rights of action under it are completely extinguished and no party, even a HiDC cannot claim the amount of the instrument.

• There is a difference between discharge of a party and discharge of a negotiable instrument. The discharge of a party to the instrument does not discharge the instrument itself.

QUESTION.59 HOW INSTRUMENTS GET DISCHARGED? OR WHAT ARE THE MODES OF DISCHARGE OF INSTRUMENTS?

(1) PAYMENT IN DUE COURSE

Instrument gets discharged when primary person liable on instrument, i.e. maker of note, acceptor of bill and drawee of cheque, makes payment to holder of the instrument at or after maturity in good faith.

(2) CANCELLATION

When holder of an instrument cancels maker’s (In case of note) or acceptor’s (in case of bill) name with an intention to discharge him, the instrument also gets discharged.

(3) RELEASE

If the holder of the instrument renounces (waives) his right against all the parties to the instrument, the instrument is discharged.

(4) NEGOTIATION TO THE PRIMARY PARTY

When the acceptor of the bill becomes its holder at or after maturity in his own right, the instrument is discharged.

(5) OPERATION OF LAW

An instrument gets discharged by the operation of law in following cases: (i) BY LAPSE OF TIME When instrument becomes time barred under Limitation Act. (ii)BY INSOLVENCY When the party primarily liable on the instrument becomes insolvent, the instrument is discharged and the holder cannot make any other prior party liable thereon.



QUESTION.60 WHAT IS DISCHARGE OF ONE OR MORE PARTIES TO A NEGOTIABLE INSTRUMENT?

(1) MEANING

• When the liability of a party on the instrument comes to an end, the party gets discharged from the instrument.

• The discharge of one or more parties to an instrument does not discharge the instrument, the instrument continues to be negotiable and the undercharged parties remain liable on it.

QUESTION.61 HOW DOES A PARTY PARTIES TO A NEGOTIABLE INSTRUMENT GETS DISCHARGED?

(1) BY PAYMENT

When a party whose liability is secondary on the instrument, makes the payment to the holder, then all parties subsequent to the party making payment of the instrument, gets discharged.

(2) BY CANCELLATION

When holder of an instrument deliberately cancels name of any of party liable on the instrument with an intention to discharge him from his liability, such party and all endorsers subsequent to him are discharged from their liability.

(3) BY RELEASE

When the holder of an instrument releases any party liable on the instrument, by express or implied waiver, such party and all parties subsequent to him are discharged from the liability.

(4) BY ALLOWING DRAWEE MORE THAN 48 HOURS TO ACCEPT

When holder of a bill allows drawee more than 48 hours, exclusive of public holidays, to consider whether he will accept the same or not, all previous parties not consenting to such allowance are thereby discharged from the liability to such holder.

(5) BY DELAY IN PRESENTING CHEQUE

It is the duty of the holder of cheque to present it for payment within reasonable time of its issue. If he fails to do so and in the meanwhile the bank fails causing damage to the drawer, the drawer is discharged to the extent of the actual damage suffered by him.

(6) BY QUALIFIED ACCEPTANCE

If a holder of a bill agrees to a qualified acceptance, all parties prior to him whose consent was not taken to such an acceptance are discharged from the liability.

(7) BY MATERIAL ALTERATION

When the instrument is materially altered, all parties not consenting to such alteration are discharged from the liability. To discharge a party alteration should be so material that it alters the character of the instrument to a great extent.

(8) BY PAYMENT, ALTERATION NOT BEING APPARENT

A payment to an altered note, bill or cheque, provided alteration is not apparent and the payment is made in due course by a person or a banker who is liable to pay the amount, the person/bank gets discharged from the liability.



QUESTION.62 EXPLAIN PROVISIONS REGARDING HUNDI? DISCUSS VARIOUS TYPES OF HUNDIS.

(1) MEANING Bills of exchange drawn up in the vernacular language are generally known as hundis.

(2) APPLICABILITY OF NEGOTIABLE INSTRUMENT ACT TO HUNDI

The Negotiable instrument Act is applicable to hundis unless the parties to the hundis may agree otherwise.

TYPES OF HUNDIS

(1) DHANI-JOG OR DEKHANDAR HUNDI

• Dhani means ‘owner / holder / Bearer’. It is a hundi which is payable to dhani (Holder).

• The words Dhani-jog or Dekhandar is mentioned on the instrument.

• It is like an instrument payable to bearer, which can be negotiated by mere delivery.

(2) FIRMAN JOG HUNDI

• Firman means ‘order’. A firman jog hundi is one which is payable to order.

• Like instrument payable to order, It can be negotiated by endorsement and delivery.

(3) DHARSHANI HUNDI

• It is a hundi payable at sight. It is like a demand instrument. • The hundi must be presented for payment within reasonable time

after its receipt by the holder.

(4) MIADI OR MUDDATI HUNDI

• A hundi which is payable after a specified period of time like a time bill.

• In such type of hundi, the interest for the period of hundi is charged.

(5) NAM JOG HUNDI • It is a hundis which is payable to or to the order of a specified person.

• It can be negotiated by endorsement and delivery like a bill of exchange.

• It is similar to Shah Jog Hundi except that in place of the name of shah name of the payee is given.

(6) SHAH-JOG HUNDI

• A shah jog hundi is one which is payable only to a Shah. Shah is a respectable and known person in the market.

• The shah presents the hundis when it falls due for payment to the drawee on behalf of the holder.

• Such hundi can be freely transferred from one person to another by mere delivery and no endorsement is required.

• In case a Shah jog hundi turns out to be false, stolen or forged, the Shah is bound to return the amount of the hundi with interest.

(7) JOKHMI HUNDI

• It is a documentary bill which is drawn by consignor on the consignee in respect of goods shipped by the consignor.

• The name of the vessel by which the goods are shipped is also mentioned on the hundi.



• The consignee is not required to pay the bill unless the goods arrive safely to their destination.

• Thus, the consignor or the subsequent holder of the hundis will suffer the loss if the ship sinks.

(8) JAWABEE HUNDI

• These hundis are instrument for remitting money from one place to another via banker.

• It is an ordinary letter, written by the person desirous of making a remittance, advising the payee that he may collect money from a banker.

• The remitter hands over the hundis to his banker. The banker in turn endorses the hundis to a correspondent residing in the same town in which the payee is resident.

• The correspondent on receiving the letter forwards it to the payee. The payee on presenting the letter collects the amount from the correspondent.

• The payee gives his receipt in the form of an answer to the letter to the correspondent which is forwarded by the same channel to the drawer of the hundi.

(9) KHOTI HUNDI

In case there is any kind of defect in the hundi or in case the hundi has been forged, then such a hundi is known as a khoti hundi.

(10) KHOKA HUNDI After the hundi has been paid and cancelled, it is known as khoka.

RELATED TERMS TO HUNDI

(1) ZIKRI CHIT

• It is a letter issued by any party liable on the hundi to the holder of the instrument.

• It is a letter of protection addressed to a merchant in the town where the hundi is payable requesting acceptance of the hundi in case of dishonour.

• The letter is intended to be used by the holder in case of dishonour of hundi by non-acceptance. By accepting the hundi in case of dishonour on the basis of zikri chit, the the acceptor becomes Acceptor by Honour.

(2) PETH

Peth is the duplicate copy of the hundi, issued on the loss of the original hundi.

(3) PERPETH Perpeth is the triplicate copy of the hundi given on the loss of the peth.

Indian Contract Act, 1872 CA-IPCC Law, Ethics & Communication


INDIAN CONTRACT ACT 1872

CHAPTER 1: NATURE OF CONTRACTS

6.1 DEFINITIONS

a) Contract

An Agreement + Enforceability of an Agreement

b) Agreement

Offer (or Proposal) + Acceptance of Offer (or proposal)

c) Proposal

A proposal when accepted becomes a promise.

d) Agreement

Every promise and every set of promise forming consideration for each other is an

agreement.

e) Enforceability

An agreement is said to be enforceable by law if it creates some legal obligation.

f) Usual Presumption

• In Social or Domestic Agreements– That the parties do not intend to create legal

relations.

• In Commercial or Business Agreements– That the parties intend to create legal

relations.

LETS PRACTICE

Q1. Ram invites Madhuri (a well-known film actress) to his daughter’s engagement and dinner party. Madhuri accepts the invitation and promised to attend. Ram made special arrangements for Madhuri at the party but she did not turn up. Ram enraged with Madhuri’s behaviour, wanted to sue for the loss incurred in making special arrangements. Ram is seeking your advice. Q2. X makes a promise to his wife Y to give her pocket money of Rs. 1,000 per month. After 6 month, he stops making the payment. Can Y claim damages from X. Q3. X promise Y to give a diamond ring at the time of his marriage. X fails to give the ring. Can

Y claim the ring? Q4. X Ltd. was appointed as an agent by Y Ltd. by an agreement. One of the clauses of the

agreement provided. “This agreement is not entered into as a formal or legal agreement and shall not be subject to legal jurisdiction in the law courts.” Is this agreement a valid contract?

Q.5 State with reasons whether there is any contract made in the following case as per the



Indian Contract Act, 1872: “ J accepts an invitation to dinner but fails to attend” (PE-II, May 2010) Q.6 Father promised to pay his son a sum of Rs. one lakh if the son passed C.A. examination in the first attempt. The son passed the examination in the first attempt, but father failed to pay the amount as promised. Son files a suit for recovery of the amount. State along with reasons whether son can recover the amount under the Indian Contract Act, 1872. (PE-II,May 2005)

DECIDED CASE LAWS

1. Household agreements are not contracts as there is no intention to create legal

relationship. Balfour v Balfour

6.2 CLASSIFICATION OF CONTRACTS

(a) On The Basis of Creation

i. Express Contract

One which is made by words spoken or written

ii. Implied Contract

One which is made otherwise than by words spoken or written.

iii. Tacit Contract

One which in inferred from the conduct of parties or circumstances of the case

(b) On the Basis of Execution

i. Executed Contract

Where both the parties to the contract have performed their respective obligations.

ii. Executory Contract

Where both the parties to the contract have still to perform their respective obligations.

(c) On the Basis of Execution

i. Unilateral Contract

One in which only one party has to perform his promise or obligation to do forebear without

first securing promise from the other party.

ii. Bilateral Contract

One in which both parties have their respective obligations to perform. That means both

parties are required to perform their promise.

(d) On the Basis of Enforceability:

i. Valid Contract

Which satisfies all the conditions prescribed by law.

ii. Void Contract

A contract which was valid when entered into but which subsequently becomes void due to

impossibility of performance due to change of law or any other reason.



iii. Void Agreement

An agreement not enforceable by law.

Note: Collateral Agreements do not always become void.

iv. Voidable Contract

An agreement which is enforceable by law at the option of one or more of the parties but not

at the option of the other or others.

v. Illegal Agreement

One the object or consideration of which is unlawful.

Note: Collateral Agreements also become void.

vi. Unenforceable Contract

A contract which is actually valid but cannot be enforced because of some technical defect.

Such contract can be enforced if the technical defect is removed.

LETS PRACTICE

Q.1 X polished Y’s shoes without being asked by Y to do so. Y does not make any attempt to

stop X from polishing the shoes. Is Y bound to make payment to X?

6.3 ESSENTIAL ELEMENTS OF A VALID CONTRACT

“All agreements are contracts if they are made by the free consent of the parties competent to

contract, for a lawful consideration and with a lawful object and are not hereby expressly declared

to be void”.

1. Proper Offer and its Proper Acceptance

2. Intention to create legal relationship

3. Free Consent

4. Capacity to Contract

5. Lawful Consideration

6. Lawful Object

7. Agreement not expressly declared void

8. Certainty of Meaning

9. Possibility of performance

10. Legal Formalities

LETS PRACTICE

Q.1. X agreed to sell a particular horse to Y. Later on, it was discovered that the horse was dead at the time of making the contract. Advise the parties.

Q.2. X agrees to let his flat to Y for use as a gambling den on a monthly rent of Rs.

10,000. After 3 months, Y stops making the payment of rent. Advise X.



Q.3. X agrees to pay Rs. 1,00,000 to Y if Y does not marry throughout his life. Y

promises not to marry at all but later on X refuses to pay Rs. 1,00,000. Advise Y. Q.4 X threatens to kill Y if he (Y) does not sell his house to X for Rs. 1,00,000. Y agrees.

X borrows Rs. 1,00,000 from Z who is also aware of the purpose of the loan. What is the nature of the agreement between X and Y, and X and Z?

Q.5. X agrees to pay Y Rs. 1,00,000 if kills Z. To pay Y, X borrows Rs. 1,00,000 from W

who is also aware of the purpose of the loan. Y kills Z but X refuses to pay. X also refuses to repay the loan to X. Advise Y and W.



CHAPTER-2 OFFER AND ACCEPTANCE

6.4 DEFINITIONS

(a) Offer

A person is said to have made the proposal

when he signifies to another his willingness

to do or to abstain from doing anything

with a view to obtaining the assent of that offer

to such act or abstinence.

(b) Offeror

The person making the proposal is called the offerer or proposer.

(c) Offeree

The person to whom the proposal is made is called the ‘offeree’ or ‘proposee’.

6.5 TYPES OF OFFER

(a) Express offer

One which is made by words spoken or written.

(b) Implied offer

One which is made otherwise than in words.

It is inferred from the conduct of the person

or the circumstances of the particular case.

(c) Specific Offer

A specific offer is one which is made to

a definite person or particular group of persons.

A specific offer can be accepted only by

that definite person or that particular group of persons to whom it has been made.

(d) General Offer

A general offer is one which is not made to a definite person,

but to the world at large or public in general.

A general offer can be accepted by

any person by fulfilling the terms of the offer.

(e) Cross Offers

Two offers which are similar in all respects made by two parties to each other,

in ignorance of each other’s offer are known as ‘cross offers’.

Cross offers do not amount to acceptance of one’s offer by the other.

Hence, no contract is entered into on cross offers.



(f) Counter offer

An offer made in response to an offer is known as counter offer.

Where an offer is accepted with some modification in the terms of the offer or with some other condition not forming part of the offer, such qualified acceptance amounts to a counter-offer.

(g) Standing Offer

An offer of a continuous nature is known as ‘standing offer’.

An Offer which remains open for a particular period of time and can be accepted within that

specified time.

DECIDED CASE LAWS

An offeree agreed to accept half the quantity of goods offered by the offeror on the same terms and conditions as would have applied to the full contract. Held, there was no contract as there was counter-offer to the offer (Tinn v. Hoffman)

LETS PRACTICE

Q.1 X offered to sell his car for Rs. 1,00,000 to Y. Y replies “I will pay Rs. 90,000 for it.” X refuses

to sell at this price. Y then attempts the original offer but X refuses to sell his car. Discuss the

legal position.

6.6 Legal Rules for a Valid Offer

i. Intention to create legal relations

ii. Certain and unambiguous

iii. Must be Properly communicated

iv. No term the non–compliance of which amounts to acceptance

v. Communication of special terms

vi. Different from a mere declaration of intention

vii. Different from an invitation to offer

DECIDED CASE LAWS

1. Offer is different from invitation to offer. Mere statement of price is not an offer.

Harvey v Facie

2. Terms & conditions imposed on the offeree must be mentioned in such a way that a

person of ordinary prudence may find indication for those conditions & those conditions must be readable with reasonable eyesight.

Reichadson v Rown Tree



3. The display of articles with a price in it in a self-service shop is merely an invitation to offer. If the cashier does not accept the price, the interested buyer cannot compel him to sell.

(Fisher V Bell), (Pharmaceutical society of Great Britain V Boots Cash Chemists)

LETS PRACTICE

Q.1. X, a broker of Mumbai wrote to Y, a merchant of Ghaziabad stating the terms on which he is willing to do business. Is the letter a valid offer by X to Y?

Q.2. A notice that the goods stated in the notice will be sold by tender. Is the notice a valid

offer to sell? Q.3. X, gave an advertisement in a newspaper that a sale of office furniture by auction will be

held at 2pm. On 9th August 1997 at ‘Pragati Maidan, Stall No. 420, New Delhi.’ Y from Mumbai reached New Delhi on the appointed date and time but X had cancelled the auction sale. Advise Y.

Q.4. X delivered a coat to Y, a dry cleaner for dry cleaning and took the receipt. On the back of

the receipt, certain conditions were printed in English language. One of the conditions printed on the back was “the liability of the dry cleaner company shall be limited to the 50% of the cost of the goods.” X never looked at the back of the receipt. X’s coat was lost and X claimed the actual value of the coat. Discuss the legal position in each of the following alternative cases:

Case: a) If there was nothing on the face of the receipt to draw the attention to the conditions

printed on the back side and X was a graduate in English. b) If on the face of the receipt, the words ‘See back’ were printed in English but X did not

read it.

Q.5. X and Mrs. X hired a room in a hotel for a week. When they entered the room, they found a

notice on the wall disclaiming the owner’s liability for damages, loss or theft of articles.

Some of their items were stolen. Discuss the legal position.

Q.6 State with reasons whether there is any contract made in the following case as per the Indian Contract Act, 1872:

a. “J takes a seat in public bus”

b. “J bids at a public auction”

c. “J puts three one rupee coins in the slot of a platform ticket vending machine at the

Railway Station” (PE-II, May 2010)



Q.7 Shambhu Dayal started “self service” system in his shop. Smt. Prakash entered the shop, took a basket and after taking articles of her choice into the basket reached the cashier for payments. The cashier refuses to accept the price. Can Shambhu Dayal be compelled to sell the said articles to Smt. Prakash? Decide. (PE-II, May 2004) Q.8 A sends an offer to B to sell his second-car for Rs.40,000 with a condition that if B does not reply within a week, he (A) shall treat the offer as accepted. Is A correct in his proposition? What shall be the position if B communicates his acceptance after one week?

6.7 REVOCATION OR LAPSE OF OFFER 1. Notice of revocation by the offeror

By communication of notice of revocation by the offeror at any time before its acceptance is complete as against him.

2. By lapse of time if it is not accepted within the prescribed time. If however, no time is prescribed, it lapses by the expiry of a reasonable time.

3. Non-fulfilment of a condition precedent By non-fulfilment by the offeree of a condition precedent to acceptance.

4. By death or insanity of the offeror By death or insanity of the offeror provided the offeree comes to know of it before acceptance. If he accepts an offer in ignorance of the death or insanity of the offeror, the acceptance is valid.

5. By Counter Offer Where an offer is accepted with some modification in the terms of the offer or with some other condition not forming part of the offer, such qualified acceptance amounts to a counter-offer.

6. Acceptance not made according to the prescribed mode If an offer is not accepted according to the prescribed or usual mode, provided the offeror gives notice to the offeree within a reasonable time that the acceptance is not according to the prescribed or usual mode. If the offeror keeps quiet, he is deemed to have accepted the acceptance.

7. By change in law An offer comes to an end if the law is changed so as to make the contract contemplated by the offer illegal or incapable of performance.

6.8 AN OFFER CAN BE REVOKED ACCORDING TO THE FOLLOWING RULES

(1) It can be revoked at any time before its acceptance is complete as against the offeror. (2) Revocation takes effect only when it is communicated to the offeree. (3) If the offeror has agreed to keep his offer open for a certain period, he can revoke it before the expiry of that period only-

(a) If the offer has in the meantime not been accepted, or (b) If there is no consideration for keeping the offer open.



6.9 ACCEPTANCE

(a) Definition of acceptance

Acceptance means giving consent to the offer.

“A proposal is said to be accepted when the person to whom the proposal is made signifies

his assent thereto. A proposal when accepted becomes a promise.”

(b) Who can Accept Offer?

i. In case of Specific Offer

• An offer made to a definite person or particular group of person (called specific offer)

• can be accepted only by that definite person or that particular group of persons to whom it

has been made and none else.

ii. In case of General Offer

• An offer made to the world at large or public in general (called general offer)

• can be accepted by any person having knowledge of the offer by fulfilling the terms of the

offer.

DECIDED CASE LAW

In this case the defendant a sole proprietary concern manufacturing a medicine which was a carbolic ball whose smoke could be inhaled through the nose to cure influenza, cold and other connected ailments issued an advertisement for sale of this medicine. The advertisement also included a reward of $100 to any person who contracted influenza, after using the medicine (which was described as carbolic smoke ball.). Mrs. Carlill bought these smoke balls and used them as directed but contracted influenza. It was held that Mrs Carlill was entitled to a reward of $100 as she had performed the condition for acceptance. Further as the advertisement did not require any communication of compliance of the condition, it was not necessary to communicate the same. In case of public offer, acting according to terms and conditions of the offer is implied acceptance and hence valid. Express communication is not necessary. Carlill v Carbolic Smoke Ball Co

Lets Practice

Q.1 X sold his business to Y but this fact was not known to an old customer Z. Z placed an order

for certain goods to X by name. Y supplied the goods to Z. Is there a valid contract?



(c) How to make an Acceptance?

i. Express Acceptance

• Like an offer, an acceptance may also be either an ‘implied acceptance’ or ‘express

acceptance’.

• An express acceptance is one which is may by words spoken or written.

ii. Implied Acceptance

• An implied acceptance is one which is made otherwise than in words.

• In other words, it is inferred from the conduct of the person or the circumstances of the

particular case.

(d) Legal Rules for a Valid Acceptance

1. Absolute and unqualified

2. Prescribed /Usual Manner

3. Communication to Offerer

4. Communication by Offeree

5. Within Prescribed / Reasonable Time

6. Before Lapse of Offer

7. It must be absolute & unqualified.

8. The offer must be accepted in the prescribed manner (if any) or in same usual and

reasonable manner (if not prescribed)

9. It must communicated to the offerer.

10. It must be communicated by the offeree or his authorized agent.

11. It must be communicated within the time prescribed (if/any) or within a reasonable time.

(if no time in prescribed).

12. It must be made before the offer lapses or is withdrawn.

DECIDED CASE LAWS

1. M offered to sell his land to N for £ 280. N replied purporting to accept the offer but enclosed a cheque for £ 80 only. He promised to pay the balance of £ 200 by monthly installments of £ 50. It was held that N could not enforce his acceptance because it was not an unqualified one.

Neale vs. Merret

2. Offer cannot be accepted in ignorance of it. Thus, offer needs to be communicated. Lalman Shukla v Gauri Dutt

3. Acceptance is not valid unless it is communicated to the offeror. Mere signing the contract &

keeping it in drawer is not acceptance. Brogden v Metropolitan Railway Coy



LETS PRACTICE

Q.1.X advertises in a newspaper that he would pay Rs. 1,00,000 to anyone who traces his missing son. Y traced that boy and claimed the amount of reward. State whether Y is entitled to receive the amount of reward if (a) he did not know about the reward, (b) if he knew about the reward?

Q.2 X offered to sell two plots of land to Y at a certain price. Y accepted the offer for one plot. Is there a valid contract?

Q.3 State with reasons whether there is any contract made in the following case as per the Indian Contract Act, 1872: “J tells M that N has expressed his willingness to marry her (M)”. (PE-II, May 2010)

6.10 COMMUNICATION OF OFFER AND ACCEPTANCE

(a) Communication of Offer

• The communication of offer is complete when it comes to the knowledge of the person to

whom it is made.

• In case an offer is made by post, its communication will complete when the letter

containing the offer reaches the offeree.

(b) Communication of Acceptance

(i) The Communication of 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.

• In case of acceptance made by post, the proposer becomes bound by the acceptance

as soon as the properly addressed and stamped letter of acceptance is duly posted

even if such letter of acceptance is lost or delayed in post.

(ii) The Communication of Acceptance is Complete As against the acceptor

• When it comes to the knowledge of the proposer.

• In case of acceptance made by post, the acceptor becomes bound by the acceptance

only when the letter of acceptance is actually received by proposer.

• Note: The time gap between the date on which the letter of acceptance is posted and

the date on which the letter of acceptance is received by the proposer, can be utilized

by the acceptor to withdraw his acceptance by a speedier mode of communication so

that the revocation notice reaches the proposer before the letter of acceptance.



6.11 REVOCATION OF OFFER AND ACCEPTANCE

(a) Meaning

The term ‘revocation’ means ‘taking back’ or ‘withdrawal’.

(b) Time Limit within which Offer can be Revoked

A proposal may be revoked at any time before the communication of its acceptance is

complete as against the proposer, but not afterwards.

Hence, an offer can be revoked at any time before the letter of acceptance is duly posted by

the acceptor.

• Revocation must always be expressed.

• Revocation must move from the offeror himself or a duly authorized agent.

• Notice of revocation of a general offer must be given through the same channel by

which the original offer was made.

• Offer cannot be revoked even if the letter of acceptance is lost or delayed in transit.

(c) The Communication of Revocation is Complete As against the person who

makes it

When it is put in 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.

(d) The Communication of Revocation is Complete As against the person to whom

it is made

When it comes to his knowledge.

LETS PRACTICE

Q.1 X of Agra sends a letter by post to Y of Delhi offering to sell his car for Rs.1,00,000. This letter is posted on 1st January and reaches Y on 7th January Y sends his acceptance by post on 10th January but X receives this letter of acceptance on 15th January. Answer each of the following questions. a) When is the communication of the complete? b) When is the communication of acceptance complete as against the offerer? c) When is the communication of acceptance complete as against the acceptor? d) If X sends a telegram on 8th January revoking his offer, and this telegram reaches Y

before the letter of the acceptance is posted. Is revocation of offer is valid? e) If Y sends a telegram on 14th January revoking his acceptance and this telegram

reaches X before the letter of acceptance is received by X. Is revocation is valid? Q.2 Ramaswami proposed to sell his house to Ramanathan. Ramanathan sent his acceptance by post. Next day, Ramanathan sends a telegram withdrawing his acceptance. Examine the validity of the acceptance in the light of the following: (i) The telegram of revocation of acceptance was received by Ramaswami before the letter of acceptance. (ii) The telegram of revocation and letter of acceptance both reached together. (PE-II, May 2006)



CHAPTER-3 CAPACITY OF PARTIES

6.12 PERSONS WHO ARE COMPETENT TO CONTRACT

(a) Major

Person who is of the age of majority according to the law to which he is subject.

i. Majority on completion of 21 years

A minor whose property has passed under superintendence of the court of wards

where a guardian has been appointed under the guardian and wards act, 1890,

ii. Majority on completion of 18 years

in other cases.

(b) Sound Mind

Person who is of sound mind, who is able to think properly.

(c) Not Disqualified

Person who is not disqualified from contracting by any law to which he is subject.

6.13 POSITION OF AGREEMENTS BY A MINOR

(1) Void-ab-initio

An agreement with a minor is void ab-initio.

DECIDED CASE LAWS

Agreement with minor is void ab initio. Mohiri Bibi v Dharmodas Ghosh

(2) No Estoppel

A minor is not stopped from setting up the plea of minority.

He may plead infancy to escape from being liable.

(3) In case of fraudulent representation of age by minor

The Court may award compensation to the other party

if the money or property supplied to minor could be traced.

DECIDED CASE LAWS

1. Where minor has committed fraud to enter into an agreement, then also he cannot be stopped from pleading his minority and the agreement will be void-ab-initio.

Gadigeppa Bhimappa Mets v Balangowda Bhiman Gowda

(4) No Ratification on attaining the Age of Majority

An agreement with a minor cannot be ratified even after he attains majority. Ratification

relates back to the date of the making of the agreement and therefore an agreement

which was then void cannot be made valid by subsequent ratification.



DECIDED CASE LAW

Debts incurred by minor during minority are invalid even after attaining majority. Thus, any promise to pay those debts after becoming major is invalid. Ramaswamy v A. Chettiar

(5) Validity of minor’s Agreement jointly with a Major Person

The agreements made by a minor jointly with a major person are void vis-à-vis the minor but

can be enforced against the major person who has jointly promised to perform.

(6) Minor as a Partner

A minor cannot become a partner in a partnership firm. However, with the consent of all the

partners, minor may be admitted to the benefits of partnership in an existing firm.

(7) Minor can be an Agent and not Principal

A minor can become a shareholder or member of a Company if

(a) the share are fully paid up and

(b) the articles of association do not prohibit so.

(8) Minor can not be declared an insolvent

A minor cannot be declared insolvent because he is not competent to contract.

(9) Contract for Minor’s Benefit

A minor can be a promisee.

DECIDED CASE LAWS

1. Minor can purchase property. If minor has performed his obligation under the agreement to purchase property, minor can enforce the agreement against the vendor.

Collector of Meerut v Hardian

(10) Contract by guardian for Minor

The contracts entered into on behalf of a minor by his guardian or manager of his estate

can be enforced by against the minor if the contract

(a) is within the scope of the authority of guardian or manager, and

(b) is for the benefit of the minor.

(11) Contract for Supply of Necessaries

• A person who has supplied the necessaries to a minor or his dependents is entitled to

be reimbursed from the property of such minor.

• ‘Necessaries’ include articles required to maintain a particular person in the state,

degree and station in life in which he is. Such as food, clothing, shelter, education and

marriage of a female.

• This claim can be made against the minor’s property and not against the minor

personally.



(12) Liability of Minor’s Guardian

The parent or guardian of a minor cannot be held liable unless those goods/services are

supplied/rendered to a minor as the agent of the parent or guardian.

(13) Minor’s Liability in Tort

A minor cannot be held liable in Tort (civil wrong).

LETS PRACTICE

Q.1 D, a minor, borrowed a sum from M by executing a mortgage of his property in favour of M. Subsequently, D sued for setting aside the mortgage. Is mortgage valid? Can M recover the sum advanced to D?

Q.2 X, on attaining majority, gave a promissory note in the satisfaction of one executed by

him for money borrowed when he was a minor. Is this promissory note valid? Q.3 X, a guardian, on behalf of Y, a minor, entered into a contract into a contract with Z for

the purchase of a movable property for the benefit of the minor. Is the contract valid? Q.4. X, a minor entered into contract with Y to supply food and clothes to this dependents. Y

supplied the same but X refused to pay for the same. Can Y recover anything?

6.14 Persons of Unsound Mind

(a) Sound mind Person

“A person is said to be of sound mind for the purpose of making a contract, if at the time

when he makes it, is capable –

• To understand the terms of the contract.

• To form a rational judgement as to its effect upon his interests.”

(b) Can make Contract

“A person who is usually of unsound mind but occasionally of sound mind may make a

contract when he is of sound mind”.

(c) Cannot make Contract

“A person who is usually of sound mind but occasionally of unsound mind may not make a

contract when he is of unsound mind”.

6.15 POSITION OF CONTRACTS WITH PERSON OF UNSOUND MIND

• The position of contracts with persons of unsound mind is identical with that of contracts

with a minor. Thus,

• He may enforce a contract for this benefit;

• His properties shall be attachable for realization of money due against him for the supply of

necessaries to him or to any of his dependents.



LETS PRACTICE

Q.1. X agreed to sell his property worth about Rs. 1,00,000 for Rs. 10,000 only. X’s mother proved that X was a congenital idiot, incapable of understanding the transaction. Is this sale valid?

6.16 PERSON DISQUALIFIED BY LAW

(a) Alien Enemy

An alien whose country is at war with the Republic of India is called an alien enemy.

i. Position of contracts during the war

An alien enemy can neither enter into any contract nor can be sued in an Indian Court

except by license from the Central Government.

ii. Position of contracts entered into before the war

• If such contracts may benefit the enemy in war

Such contracts stand dissolved.

• If such contracts may not benefit the enemy in war

Such contracts are merely suspended for the duration of the war and revived

after the war is over unless they have already become time barred under the

Law of Limitation Act.

(b) Foreign Sovereigns and Ambassadors

They can enter into contracts and enforce those contracts in our courts but they

cannot be sued in our courts without sanction of the Central Government unless they

choose to submit themselves to the jurisdictions of our Courts.

(c) Company

Contractual Capacity is determined by the ‘Object Clause’ of its memorandum

of Association.

(d) Statutory Corporation

Contractual Capacity is determined by the statute creating it.

Act Ultra vires

Any act done in excess of the power given in ultra vires (i.e., beyond power) and

hence void.

(e) Insolvents

When a person’s debts exceed his assets, he is adjudged insolvent and his property

stands vested in the Official receiver or Official Assignee appointed by the Court. Such

person-

Cannot enter into contracts relating to his property, Cannot sue, Cannot be sued.

(f) Convicts

A person is called a convict during his period of sentence.



CHAPTER-4 CONSIDERATION

DEFINITION (Sec. 2 (d))

• 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 • promises to do or abstain from doing something, • such an act or abstinence or promise is called consideration for the promise”.

Consideration in simple term means something in return (quid-pro-quo). DECIDED CASE LAWS

Consideration is “some right, interest, profit or benefit accruing to one party or forbearance, detriment, loss, or responsibility given, suffered or under taken by the other”. The judgment thus refers to the position of both the promisor, and the promisee in an agreement. (Curie V Misa) GRATUITOUS PROMISE The word ‘gratuitous’ means ‘free of cost’ or ‘without expecting any return’. Therefore a gratuitous promise will not result in an agreement in the absence of consideration.

LETS PRACTICE

Q.1 State whether the following contract can be enforced. “Where an orphanage wishes to enforce a promise made by a philanthropist to donate a specified sum”. Q.2 X promises to donate Rs. 10,000 towards the repairs the repairs of temple. X does not pay. Can the trustees recover the promised amount from X (a) if they have not incurred any liability on the faith of the X’s promise, (b) if they have incurred any liability on the faith of this promise.

ESSENTIAL ELEMENTS OF VALID CONSIDERATION

• It must be given at the desire of promisor. • It may be given by the promise or any other person (i.e. stranger). • It may be past or present or future. • [Note: Past consideration is no consideration in England] • It need not be adequate but it must be of some value in the eye of law. • It must be real and not illusory • It must be something which the promisor is not already bound to do. • It must be lawful. • It must not be opposed to public policy.



DECIDED CASE LAWS

1. It is not necessary that consideration should be furnished by the promisee only. A promise is enforceable if there is some consideration for it and it is quite immaterial whether it moves from the promisee or any other person. It was held in a leading case that the consideration can legitimately move from a third party and it is an accepted principle of law in India. (Chinnaya Vs. Ramayya) 2.. The law provides that a contract should be supported by consideration. So long as consideration exists, the Courts are not concerned to its adequacy, provided it is of some value. The adequacy of the consideration is for the parties to consider at the time of making the agreement, not for the Court when it is sought to be enforced. (Bolton v. Modden). 3.. During a civil strike, a question arose as to how best to protect a coal mine. The police authorities thought that surveillance by a mobile force would be adequate but the colliery manager desired a stationary police guard. Ultimately it was agreed that the police authorities would provide a stationary guard and the manager would pay $2,200 for the service. It was held that the promise to pay the amount was not without consideration. The police, no doubt, were bound to afford protection, but they had discretion as to the form it should take. The undertaking to provide more protection than what they deemed to be necessary was a consideration for the promise of reward. (Classbrook Brothers vs. Glamorgan Country Council)

LETS PRACTICE

Q.1 Mr. Singh, an old man, by a registered deed of gift, granted certain landed property to A, his daughter. By the terms of the deed, it was stipulated that an annuity of Rs.2, 000 should be paid every year to B, who was the brother of Mr. Singh. On the same day A made a promise to B and executed in his favour an agreement to give effect to the stipulation. A failed to pay the stipulated sum. In an action against her by B, she contended that since B had not furnished any consideration, he has no right of action. Examining the provisions of Indian Contract Act, 1872, decide, whether the contention of A is valid? (PCE, Nov. 2009) Q.2 X transferred his house to his daughter M by way of gift. The gift deed, executed by X, contained a direction that M shall pay a sum of Rs. 5,000 per month to N (the sister of the executor). Consequently M executed an instrument in favour of N agreeing to pay the said sum. Afterwards, M refused to pay the sum to N saying that she is not liable to N because no consideration had moved from her. Decide with reasons under the provisions of the Indian Contract Act, 1872 whether M is liable to pay the said sum to N. (PE-II, Nov. 2007) Q.3 A fire broke out in X’s house. He offered to pay an amount of Rs.5,000 to anyone who brought out his trapped son Y safe. A fireman brought out Y alive. Is X bound to pay?



Q.4 X, who was badly in need of money offered to sell his car worth Rs. 1,00,000 to Y for Rs. 10,000. Before the car was delivered, X received an offer of Rs. 20,000 and refused to carry out the contract on the ground of inadequacy of consideration. Is X liable to Y for damages? Q.5 X, a client promises to pay Y, his advocate Rs. 10,000 in addition to his fees if he succeeds. X succeeds but refuses to pay Rs. 10,000. Can Y recover from X?

STRANGER TO A CONSIDERATION AND STRANGER TO CONTRACT

Stranger to Consideration

A stranger to consideration can sue because the consideration can be furnished or supplied by any

person whether he is the promise or not.

Stranger to Contract

A Stanger to a contract cannot sue because of the absence of privity of contract (i.e. relationship

subsisting between the parties to a contract).

STRANGER TO CONTRACT CANNOT SUE

Exception to above Rule

• In case of Trusts • In case of Family Settlement • Acknowledgment of a debt • Covenant running with land • Contracts entered through an agents • Holder in Due course of negotiable instruments • Assignment of a contract

DECIDED CASE LAWS

In the case of family settlement, if the terms of settlement are reduced in writing, members of the family who were not a party to the settlement can (also) enforce their claim. (Shuppu Vs Subramanian) In the case of a trust, the beneficiary can sue enforcing his right though he was not a party to the contract between the trustee and the settler. Where, the father of the bridegroom promised to pay through a contract with the father of the bride, an allowance to the bride, if she married his son, the bride sued her father-in-law after marriage for the allowance which he did not pay as per the contract. It was held by the Privy Council that though the bride was not a party to the contract between her father and father in law, she could enforce her claim in equity. (Khawja Mohammed Khan V Hussaini Begum)



In the case of certain marriage contracts a female member can enforce a provision for marriage expense based on a petition made by the Hindu undivided family. (Sunder Raja Vs Lakshmi)

LETS PRACTICE

Q.1 State whether the following contract can be enforced. Where there is a family settlement in writing and a family member who is not a party to the settlement wishes to enforce his claim.

NO CONSIDERATION NO CONTRACT

Exceptions to above Rule 1. Written & Registered Agreements made on Account of Natural Love and Affection

between parties standing in a near relation to each others.

2. Promise to compensate the person whose has already done something voluntarily or has

done something which the promisor was legally bound to do.

3. Written Promise duly signed by debtor or his authorized agent to pay Time Barred Debt.

4. A Completed gift needs no consideration. The gifts actually made by a donor and accepted by

the done are valid even without consideration.

5. Agency–No consideration is necessary to create an agency.

6. Gratuitous Bailment

LETS PRACTICE Q.1 X owes Y Rs. 10,000 but this debt is time barred. In a birthday party of Z, who is a friend of X and Y. X promises Y to pay this debt. Later, X refuses to Y. Can Y recover the promised amount from X? Q.2 R owed to M Rs. 5,000.The debt was barred by the Limitation Act. R signed a written promise to pay Rs. 2,000 to M on account of this debt. Can M claim it? Q.3 X supports Y’s infant son without being asked to do so. Y promises to pay X Rs. 10,000 for doing so. Later, Y refuses to pay. Can X recover the promised amount from Y? Q.4 X, a Hindu husband executed a registered document in favour of Y, his wife, whereby he promised to pay her Rs. 1,000 per month. Later, X did not pay. Can Y recover from X (a) if this promise was made without any disagreement and quarrels between them? (b) if this promise was made after disagreement and quarrels between them?



CHAPTER-5 FREE CONSENT

FREE CONSENT

Meaning of Consent

The consent means an act of assenting to an offer.

“Two or more persons are said to consent when they agree upon the same thing in the same

sense.”

Thus, consent involves identity of minds in respect of the subject matter of the contract. In English

Law, this is called ‘consensus – ad – idem’.

Effect of Absence of Consent

When there is no consent at all, the agreement is void ab-initio, i.e. it is not enforceable at the

option of either party.

Meaning of Free Consent

Consent is said to be free when it is not caused by (a) coercion, or (b) undue influence, or (c)

fraud, or (d) misrepresentation, or (e) mistake.

Effect of Absence of Free Consent

• When there is consent but it is not free • (i.e., when it is caused by coercion or undue influence or fraud or misrepresentation), • the contract is usually voidable • at the option of the party • whose consent was so caused.

LETS PRACTICE Q.1 X is having two horses, a white and another black. X offers to sell his black horse to Y. Y not knowing that X has two horses, thinks of white horse and agrees to buy the horse. Is this agreement valid?

Meaning of Coercion

• Coercion means compelling a person to enter into a contract under a pressure or a threat. According to Section 15, a contract is said to be caused by coercion when it is obtained by-

• Committing any act which is forbidden by the Indian Penal Code; or • Threatening to commit any act which is forbidden by the Indian Penal Code; or • Unlawful detaining of any property; or



• Threatening to detain any property. Note: the Indian Penal Code need not be in force in place where the coercion is employed.

Against Whom/By Whom

• Coercion may proceed from any person, and • may be directed against any person, even a stranger.

Threat to file a Suit

• A threat to file a suit (whether civil or criminal) does not amount to coercion unless the suit is on false charge.

• Threat to file a suit on false charge is an act forbidden by the Indian penal Code and thus

will amount to an act of coercion. Threat to commit suicide

• Threat to commit suicide is not punishable under the Indian Penal Code, it is deemed to be forbidden by that code.

• It amounts to coercion and hence the contact IS voidable. Effect of Coercion

• Right of aggrieved party to Rescind the contract. • Obligation of aggrieved party to restore benefit. • Obligation of other party to repay or return.

LETS PRACTICE

Q.1 X beats Y and compels him to sell his house for Rs. 1,00,000. Y agrees to sell his house to Y. y

signs the necessary documents for the sale of house and receives the payment. Later on, Y wants

to avoid the contract? Will he succeed?

Q.2 X threatens to kill Y’s son if Y does not sell his house to Z for Rs. 1,00,000. Y signs the necessary document for the sale of house and receives the payment. Later on, Y wants to avoid the contract. Will he succeed? Q.3 X, and agent, refused to hand over the account books of Y, the principal to the new agent appointed in his place unless the principal released him from all liabilities. The principal had to give a release deed as demanded. Is this release deed binding upon the principal? Q.4 X, by a threat to commit suicide induced Y, his wife, and Z, his son, to execute a release deed in favour of his brother in respect of certain property. Are Y and Z bound by such release deed?



Q.5 X, by a threat to commit suicide induced Y, his wife, and Z, his son, to execute a release deed in favour of his brother in respect of certain property. Are Y and Z bound by such release deed?

Undue Influence

Meaning

The term ‘undue influence’ means dominating the will of the other person to obtain an unfair

advantage other the other. A contract is said to be induced by undue influence –

• Where the relations subsisting between the parties are such that one of them is in a position

to dominate the will of the other, and

• The dominant party uses that position to obtain an unfair advantage over the other.

Presumption

A person is deemed to be in a position to dominate the will of another in the following three

circumstances:

1) Where he holds a real or apparent authority over the other

Master and Servant, Parent and Child, Income Tax Officer and Assessee, Principal and a

Temporary Teacher.

2) Where he stands in a fiduciary relation to the other

Trustee and beneficiary, spiritual adviser (Guru) and his disciples, solicitors and Client,

Guardian and Ward.

3) Where he makes a contracts with a person whose mental capacity is

temporarily or permanently affected by reason of age, illness or mental or bodily

distress

Medical attendant and patient

No presumption of domination of will in the following relationships:

• Husband and wife (other than pardanashin) • Landlord and tenant • Creditor and debtor

Effect of Undue Influence

• When Consent to an agreement is caused by undue influence,



• then the contract is voidable at the option of the party whose consent was so caused. Similarities between Coercion and Undue Influence

• In case of both coercion and undue influence, the consent is not free and • the contract is voidable at the option of the aggrieved party.

LETS PRACTICE

Q.1 X, a poor Hindu widow, was in great need of money to establish her right to

maintenance. She took a loan of Rs. 1,500 bearing a rate of interest of 100% p.a. Is this

transaction an unconscionable?

Q.2 A student was induced by his teacher to sell his brand new car to the later at less than the purchase price to secure more marks in the examination. Accordingly the car was sold. However, the father of the student persuaded him to sue his teacher. State on what ground the student can sue the teacher? Q.3 ‘A’ applies to a banker for a loan at a time where 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. Whether the contract is induced by undue influence? Decide. (PE-II,Nov. 2002)

FRAUD

Meaning

• The term ‘Fraud’ means a false representation • of fact made by a party to a contract • (i.e., not by a stranger to a contract) • willfully (i.e., with knowledge of its false hood) • with a view to deceive the other party • who has acted on the basis of such representation • and has been actually deceived.

Essential Elements

• By a party to a contract • False representation of fact • Intention of deceiving the other party • Act of other party on the basis of such presentation



Effects of Fraud

• Right to a Rescind the Contract • Right to insist Upon Performance • Right to Claim Damages

Silence does not amount to Fraud

General Rule : “Mere silence as to facts likely to affect the willingness of a person to enter into a

contract is not fraud”.

Three exceptions to the General Rule

• Where parties stand in fiduciary relationship like parent-child, trustee-beneficiary. • Where the silence itself is equivalent to speech. • Half Truth.

Conclusion

• Fraud is said to have taken place where a party to the contract (i.e., no stranger) • made a false representation as to the fact with the knowledge of its falsehood • with the intention of deceiving the other party who actually acted • on the faith of such representation and suffered a loss.

LETS PRACTICE

Q.1 Where the vendor of a piece of land told a prospective purchaser that, in his opinion, the land can support 2000 heads of sheep whereas, in truth, the land could support only 1500 sheep. Q.2 X bought shares in a company on the faith of a prospectus which contained an untrue statement that one Z was a director of the company. X had never heard of Z and the untrue statement of Z being a director was immaterial from his point of view. Can X claim damages on grounds of fraud? Q.3 ‘A’ & ‘B’ are partners in a firm. They agree to defraud a Government department by submitting a tender in the individual name and not in the firm name. Is this a valid agreement ? Misrepresentation Meaning

• The term ‘Misrepresentation’ means a false representation of fact • made by a party to a contract (i.e., not by a stranger to a contract) • made innocently (i.e., without knowledge of its falsehood) or



• non-disclosure of a material fact • without any intention to deceive the other party • who has acted on the basis of such representation.

Misrepresentation is present

1. When a person positively asserts that a fact is true when his information does not warrant it to be so, though he believes it to be true.

2. When there is any breach of duty by a person, which brings an advantage to the person

committing it by misleading another to his prejudice.

3. When a party causes, however, innocently, the other party to the agreement to make a mistake as to the substance of the thing which is the subject of the agreement.

Essential Elements

• By a party to a contract • False representation of fact • Inducing other party to enter into contract without any intention to deceive the other party • Act of other party on the basis of such presentation

Effects

1. Right to a Rescind the Contract 2. Right to insist Upon Performance

Conclusion

• Misrepresentation is said to have taken place • where a party to the contract (i.e., no stranger) • made a false representation as to the fact • without the knowledge of its falsehood • without the intention of deceiving the other party • who actually acted on the faith of such representation.

LETS PRACTICE

Q.1 X sells by auction to Y a horse which X knows to be unsound. The horse appears to be sound but X knows about the unsoundness of the horse. Is this contract valid in each of the following alternative cases: Case: a) X says nothing about the unsoundness of the horse to Y. b) If X says nothing about it to Y who is X’s daughter who has just come of age. If Y says to X “If you do not deny it, I shall assume that the horse is sound.” X says nothing.

Q.2 Sohan induced Suraj to buy his motorcycle saying that it was in a very good condition. After



taking the motorcycle, Suraj complained that there were many defects in the motorcycle. Sohan proposed to get it repaired and promised to pay 40% cost of repairs After a few days, the motorcycle did not work at all. Now Suraj wants to rescind the contract. Decide giving reasons. (PE-II, Nov. 2003) Effect of Mistake Type of Mistake Mistake of Indian Law The contract is Valid because everyone is supposed to know the law of his country. Mistake of Foreign Law A mistake of foreign law is treated as mistake of fact, i.e., the contract is void if both the parties are under a mistake as to a foreign law because one cannot be expected to know the law of other country. In case of Bilateral Mistake as to essential fact (i.e., where both the parties to an agreement are under mistake to essential fact) The agreement is void. In case of Unilateral Mistake (i.e., where one of the parties to an agreement in under mistake) (i) As to the identity of the person contract with : The agreement is void. (ii) As to the nature of contract: The agreement is void. (iii) As to other matter: The agreement not void. LETS PRACTICE

Q.1 X offers to sell his black horse to Y. Y agrees to buy that horse. It turns out that the horse was dead at the time of bargain though neither party was aware of the fact. Is this agreement valid? Q.2 X buys a painting believing it to be worth Rs. 1,00,000 while in fact it is worth only Rs. 10,000. Is it a valid contract? Q.3 X offers to sell a painting to Y which X knows is the copy of a well – known master piece. Y, thinking that the painting is the original one, decides to buy it at a buy it at a very high price. Is this a valid contract? Q.4 X entered into a contract for the hiring of a room for witnessing the coronation procession of Edward VII. Unknown to both the parties, the procession had already been cancelled. Is this contract valid? Q.5 X sold oats to Y by sample and Y, thinking that they were old oats, purchased them. In fact,

the oats were new. Is Y bound by the contract?

Q.6 M purchased a wrist watch from N, both believed that it was made with gold plaque. Hence, M

paid a very high price for that. Latter it was found that the wrist watch was not made so. State the



validity of the contract.

Q.7 X buys from Y a painting which both believe to be the work of an old master and for which X pays a high price. The painting turns out to be only a modern copy .Discuss the validity of the contract? Q.8 A and B enter into contract believing wrongly that a particular debt is not barred by law of limitation. Is this a valid contract?

LEGALITY OF OBJECT AND CONSIDERATION, AND AGREEMENTS OPPOSED TO PUBLIC

POLICY

Circumstances Under Which The Object Or Consideration Is Deemed To Be Unlawful

• If it is Forbidden by Law • If it Defeats the Provisions of any law • If it is Fraudulent • If it Involves or Implies Injury to a Person or Property of Another • If the Court Regard it as Immoral or Opposed to Public Policy.

Note:If one of the several considerations or objects of an agreement is unlawful, the agreement is void.

LETS PRACTICE

Q.1 Mr. Seth an industrialist has been fighting a long drawn litigation with Mr. Raman another industrialist. To support his legal campaign Mr. Seth enlists the services of Mr. X a legal expert stating that an amount of Rs. 5 lakhs would be paid, if Mr. X does not take up the brief of Mr. Raman. Mr. X agrees, but at the end of the litigation Mr. Seth refuses to pay. Decide whether Mr. X can recover the amount promised by Mr. Seth under the provisions of the Indian Contract Act, 1872. (PE-II, Nov. 2004) Q.2 ‘X' agreed to become an assistant for 5 years to 'Y' who was a Doctor practising at Ludhiana. It was also agreed that during the term of agreement 'X' will not practise on his own account in Ludhiana. At the end of one year, ‘X' left the assistantship of 'Y' and began to practise on his own account. Referring to the provisions of the Indian Contract Act, 1872, decide whether ‘X' could be restrained from doing so? (PE-II, Nov. 2007)



Illegal Agreements Meaning

• Illegal agreements are those agreements which are- • Void ab-initio, i.e., void from the very beginning, and • Punishable by the criminal law of the country or by any special legislation/regulation.

Effect

• The collateral transactions to an illegal agreement also become illegal and hence cannot be enforced.

• No action can be taken for the recovery of money paid or property transferred under an illegal agreement and for the breach of an illegal agreement.

• In case of an agreement containing the promise, some part of which is legal and other part illegal, the legal position is as under:

Case 1) In the illegal part cannot be separated from the legal part The whole agreement is altogether illegal. 2) If the illegal part can be separated from the legal part The court will enforce the legal part and reject the illegal part.

Agreements Opposed To Public Policy

1. Agreements of Trading With Enemy 2. Agreements for Stifling Prosecution 3. Agreement in Restraint of Legal Proceeding. 4. Agreements Interfering with Course of Justice 5. Agreements in the Nature of Maintenance and Champerty 6. Agreement for the Sale/Transfer of Public Offices or to Obtain Public Titles 7. Marriage Brokerage Contracts 8. Agreement Tending to Create Monopoly 9. Agreement in Restraint of Marriage of any person other than a minor is void. 10. Agreements in Restraint of Parental Rights 11. Agreement in Restraint of any lawful Trade profession, or business, is to that extent void.

LETS PRACTICE Q.1 X granted a loan to Y a guardian of a minor to enable him to celebrate the minor’s marriage. Can X recover his loan from Y? Q.2 Pick out the correct answer from the following and give reasons: An agreement to subscribe to or contribute a plate or prize of the value of Rs.500 or above to be awarded to the winner of a horse race is (1) Void (2) Valid (3) Illegal (4) Unenforceable



Q.3 Pick out the correct answer from the following and give reasons: X sells the goodwill of his retail store to Y for Rs. 5 lac and promises not to carry on the same business forever and anywhere in India. Is the agreement : 1. Valid 2. Void 3. Voidable 4. Illegal. (PCE, May 2010) Q.4 M promised to pay N for his services at his (M) sole discretion found to be fair and reasonable. However, N dissatisfied with the payment made by M and wanted to sue him. Decide whether N can sue M under the provisions of Indian Contract Act, 1872? Q.5 ‘P’ advanced money to ‘D’ a married woman to enable her to obtain a divorce from her husband. She also promised to marry him after divorce. Is P entitled to recover the amount in case of breach of his promise.



CHAPTER- VOID AGREEMENTS

Meaning And Examples Of Void Agreements

Meaning

• A void agreement is an agreement which is not enforceable by law. • The agreements which are not enforceable by law right from the time when they are made,

are void-ab-initio.

Agreements which have expressly been declared void

1) Agreements by or with persons incompetent to contract (Sec. 10,11)

2) Agreements entered into through a mutual mistake of fact between the parties (Sec.20)

3) Agreement, the object or Consideration of which is unlawful (Sec.23)

4) Agreement, the consideration or Object of which is partly unlawful (Sec.24)

5) Agreement made without Consideration (Sec.25)

6) Agreements in Restraint of Marriage of any person other than minor (sec.26)

7) An agreement to enter into an Agreement in the Future. 8) AGREEMENTS IN RESTRAINT OF TRADE (Sec.27) “Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.”

Meaning of Expression ‘that extent’

• The expression ‘that extent’ may be interpreted in the sense that only that portion of such agreement is void which is considered either as unreasonable or as opposed to public policy being in restraint of trade.

• The rest of the agreement would continue to be valid.

Exceptions

A. Under Statutory Provisions

1. Agreement with seller of Goodwill

2. Agreements with partners

a. Restriction on Existing Partner to carry a any business other than that of firm while he is a partner.

b. Restrictions on outgoing partner to carry on similar business within specified period or local limits if restrictions are reasonable.



c. Restriction on partners on dissolution of firm to carry on similar business within specified period or local limits if restrictions are reasonable.

d. Restriction on partners in case of sale of firm’s goodwill, to carry on similar business within specified period or local limits if restrictions are reasonable.

B. Under Judicial Interpretations

a. Trade combinations to regulate the business or to fix prices (but not to create monopoly)

b. Sole Dealing Agreements on reasonable terms.

c. Service Agreements

9) AGREEMENTS IN RESTRAINT OF LEGAL PROCEEDINGS (Sec.29)

a. Restricting Enforcement of Rights

Agreements Restricting Enforcement of Rights is void to that extent.

b. Limiting Period of Limitation

Agreements Limiting the Period of Limitation is void because its object is to defeat the provisions of law.

LETS PRACTICE Q.1 X promised to marry Y only and none else, and to pay Rs. 1,00,000 in default. X married z. Y claimed Rs. 1,00,000 but X refused to pay. State the legal position. Q2. X employed Y. The terms of service agreement are –

1. The employee has to serve the organization for 5 years. 2. The employee shall not accept any other similar engagement during the term of

agreement. 3. The employee shall not accept similar engagement after the termination of services. 4. The employee shall not compete with his employer after the termination of services. State

the legal position of the terms of service agreement. Q3. X and Y were rival traders in South Delhi. X agreed to pay Y Rs. 5,00,000 if Y closes his business in that locality. Y accordingly did so but X refused to pay. Can Y claim Rs. 5,00,000? Q4. X sold his business including goodwill to Y for Rs. 5,00,000 by an agreement. The agreement provided that X shall not engage himself in the similar business in the whole of India for the next 10 years. X started the same business in the same city after 1 month. State the legal position. Q5. A clause in a life insurance policy was that “no suit to recover under the policy shall be brought after one year from the date of death of assured.” X died and his legal representatives filed a suit to recover the assured sum after two and half years. Is this suit maintainable?



Q6. X agrees to sell to Y “one hundred tons of oil.” State the legal position of this agreement in each of the following alternative cases:

1. If X, who is a dealer in coconut oil only, decides to sell @ Rs. 10,000 per ton. 2. If X is a dealer in coconut oil and price is not fixed. 3. If x is a dealer in coconut oil and price is to be fixed by Z. 4. If X who is a dealer in coconut oil agrees to sell at Rs. 10,000 per ton or Rs. 11,000 per

ton. 5. If X is a dealer in coconut oil and mustard oil.

Q.7 Mr. Seth an industrialist has been fighting a long drawn litigation with Mr. Raman another industrialist. To support his legal campaign Mr. Seth enlists the services of Mr. X a legal expert stating that an amount of Rs. 5 lakhs would be paid, if Mr. X does not take up the brief of Mr. Raman. Mr. X agrees, but at the end of the litigation Mr. Seth refuses to pay. Decide whether Mr. X can recover the amount promised by Mr. Seth under the provisions of the Indian Contract Act, 1872. (PE-II, Nov. 2004) Q.8 ‘X' agreed to become an assistant for 5 years to 'Y' who was a Doctor practising at Ludhiana. It was also agreed that during the term of agreement 'X' will not practise on his own account in Ludhiana. At the end of one year, ‘X' left the assistantship of 'Y' and began to practise on his own account. Referring to the provisions of the Indian Contract Act, 1872, decide whether ‘X' could be restrained from doing so? (PE-II, Nov. 2007) 10) Wagering Agreement (Sec.30)

• An agreement between two persons under which

• money or money’s worth is payable by one person to another

• on the happening or non-happening of a future uncertain event

• is called a wagering event.

a) In the States of Maharashtra & Gujarat

• Wagering agreements : Illegal

• Agreements collateral to wagering agreements : Void

b) In Rest of India

• Wagering agreements : Void

• Agreements collateral to wagering agreements : Valid

11) Contingent Agreement based on Impossible Event (Sec.56)

• An agreement to do or not to do anything

• if an impossible event happens

• whether impossibility of the event is known or not

• to the party to the agreement at the time when it is made are VOID.

12) Uncertain Agreement

An agreement the meaning of which is not certain or capable of being made certain is Void.



CHAPTER - CONTINGENT CONTRACTS AND QUASI CONTRACTS

CONTINGENT CONTRACTS (Sec.31) Meaning

• The contracts to do or not to do something • if some event, collateral to such contract • does or does not happen.

RULES REGARDING CONTINGENT CONTRACT Contingent contract dependent 1. On the happening of some uncertain future event.

a. Enforceable when When such event has happened.

b. Become void when When the happening of such event becomes impossible

2. Non happening of some uncertain future event. a. Enforceable when

When the happening of such event becomes impossible b. Become void when

When such event has happened. 3. On the happening of specified event within fixed time.

a. Enforceable when When such event happens within fixed time.

b. Become void when (i) When the happening of such event becomes impossible before the expiry of

specified time. (ii) When such event has not happened within fixed time.

4. Non happening of some uncertain future event within fixed time.

a. Enforceable when (i) When the happening of such event becomes impossible before the expiry of

specified time. (ii) When such event has not happened within fixed time.

b. Become void when When such event happens within fixed time.

5. On the future act or conduct of a living person. a. Enforceable when

When such person acts in a manner as desired in the contract. b. Become void when



When such person does anything which makes the desired future conduct of such person either impossible or dependent upon certain contingency.

6. On impossible event. These are void whether the impossibility is known or not known to the parties.

Difference between Wagering Agreement and Contingent Contract

1. A wagering agreement is a promise to give money or money’s worth, depending on a future uncertain event. A contingent contract is to do or not to do something if some event does or does not happen [Sec.32].

2. In a wager, the future event is the only event. It is the sole determining factor of contract in

wager. In contingent contract, the future uncertain event is collateral to the contract.

3. In a wagering agreement, parties have no pecuniary or financial interest in subject matter

except the winning or losing amount or wager. In contingent contract, the party has pecuniary financial interest in the event.

4. Wagering agreement is a game of chance.

A contingent event is uncertain but not a game of chance.

5. Wagering agreement consists of reciprocal promises. It is a set of mutual promises, each of them conditional on the happening or not happening of a future uncertain event. A contingent contract may or may not contain reciprocal promises.

6. In a wager, the uncertain event is beyond the power of both parties.

In contingent contract, the event may be within the power of one of the parties.

7. Wagering agreement is void. Contingent contract is valid.

Similarity between Wagering Agreement and Contingent Contract Performance of agreement depends on happening or not happening of a future uncertain event.

LETS PRACTICE Q.1. X instructed Y to enter on his behalf a wagering transaction. Y lost Rs. 10,000 in that transaction and paid from his pocket. Y claimed Rs. 10,000 from X who refused on the ground of wagering transaction. State the legal position if wagering transaction was entered into (a) Delhi (b) Mumbai (c) Ahmadabad.



Q.2. A agrees to pay B Rs. 50,000 if B marries C within 1 years. State the legal position in each of the following alternative cases:

a. If B marries C after 1 year. b. If B marries C within 1 year. c. If B marries D within 6 months of agreement. d. If B marries D within 6 months of agreement. Subsequently, D dies and B marries C within 6

months of marriages D. Q.3. A agrees to pay B Rs. 1,00,000 if a certain ship returns within a year. State the legal position in each of the following alternative case:

a. If the ship returns within the year. b. If the ship returns after the expiry of 1 year. c. If the ship is burnt within the year.

Q.4. A agrees to pay B Rs. 1,00,000 if a certain ship does not return within a year. State the legal position in each of the following alternative cases:

a. If the ship does not return within a year. b. If the ship returns after within a year. c. If the ship is burnt within a year.

Q.5. A agreed to pay B Rs. 50,000 if B marries C. C was already married to D at the time of agreement. State the legal position. Q.6. Pick out the correct answer from the following: (a) In case of void agreements, collateral transactions are (1) Also void (2) Unenforceable (3) Not affected (4) Illegal. (b) A contract of insurance is (1) Contingent Contract (2) Wagering Agreement (3) Contract of guarantee (4) Unilateral agreement. (PCE, Nov. 2007) (c) A contingent contract is: (1) Valid (2) Void (3) Voidable (4) Illegal. (PCE, May 2008)



QUASI CONTRACT Meaning

• A Quasi – contract is an obligation imposed by law • upon a person for the benefit of another • even in the absence of a contract. • It is based on the principle of equity.

Features

1. It is imposed by law and does not arise from any agreement. 2. The duty of a party and not the promise of any party is the basis of such contract. 3. The right under it is always a right to money and generally, through not always, to a

liquidated sum of money. 4. The right under it is available against specific person(s) and not against the world. 5. A suit for its breach may be field in the same way as in case of a complete contract.

Similarity with contracts entered into intentionally

• The outcome of quasi – contracts resemble that created by a contract. • In case of breach of a quasi – contract, the same remedies are available as in case of breach

of a contract such as claim for damages. TYPES OF QUASI CONTRACT (Sec.68-72) (a) Claim for necessaries supplied to persons 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. (b) Right to recover money paid for another person. A person who has paid a sum of money which another is obliged to pay, is entitled to be reimbursed by that other person provided the payment has been made by him to protect his own interest. (c) 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 latter is bound to pay compensation to the former in respect of, or to restore, the thing so done or delivered. (d) Responsibility of finder of goods. A person who finds goods belonging to another and takes them into his custody is subject to same responsibility as if he were a bailee. Thus a finder of lost goods has

(i) to take proper care of the property as men of ordinary prudence would take (ii) no right to appropriate the goods and



(iii) to restore the goods if the owner is found. (e) 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. Every kind of payment of money or delivery of goods for every type of mistake is recoverable.

LETS PRACTICE Q.1 X, a minor was studying M.Com. in a college. On 1st July, 2005 he took a loan of Rs. 10,000 from B for payment of his college fees and to purchase books and agreed to repay by 31st December, 2005. X possesses assets worth Rs. 2 lakhs. On due date X fails to pay back the loan to B. B now wants to recover the loan from X out of his (X’s) assets. Referring to the provisions of Indian Contract Act, 1872 decide whether B would succeed. (PE-II, Nov. 2006) Q.2 Y holds agricultural land in Gujarat on a lease granted by X, the owner. The land revenue payable by X 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 termination of Y’s lease. Y, in order to prevent the sale and the consequent termination of his own lease, pays the Government, the sum due from X. Referring to the provisions of the Indian Contract Act, 1872 decide whether X is liable to make good to Y, the amount so paid? (PE-II, May 2007) Q.3 Z rent out his house situated at Mumbai to W for a rent of Rs. 10,000 per month. a sum of Rs. 5 lac, the house tax payable by Z to the Municipal Corporation being in arrears, his house is advertised for sale by the corporation. W pays the corporation, the sum due from z to avoid legal consequences. Referring to the provisions of the Indian Contract Act, 1872 decide whether W is entitled to get the reimbursement of the said amount from Z. (PCE, May 2010) Q.4 The principle that no one shall be allowed to enrich himself at the expense of another is known as: 1. Quantum Meruit 2. Nudem Pactum 3. Quasi-contract 4. None of these. (PCE, Nov. 2008) Q.5 M found a purse in a mall. He deposited the purse to the manager of the mall, so that the true owner can claim it back. However , no one claimed the purse. M wants the purse back. Can he succeed? [Hint: Yes, finder’s right of possession is superior to all except the true owner.] Q.6 P pays the arrears of rent of his nephew to his landlord just to avoid tension. Can he recover this amount from his nephew? [Hint: No, Section 69 applies only when such a payment is made in which the person is interested]



Q.7. N had to pay property tax to the government. To save N’s property from being seized by the government, N’s friend O paid the tax to the government in N’s presence. Can O recover the money from N? [Hint: Yes, under the section 70 of the Indian Contract Act,1872] Q.8. A promises to sell his bike to Z for Rs. 75,000 if he feels like selling it after having a new bike. Is it a contingent contract? [Hint: No, it is a void agreement because it is an uncertain agreement] Q.9. A agrees to make a furniture for B for Rs. 1 lac on the term that payment will be made after the completion of the work. Is it a contingent contract? [Hint: No ,because the uncertain event(completion of the work) is not collateral to the contract, but the main part of the consideration in the contract]



CHAPTER - PERFORMANCE OF CONTRACT

Meaning of Performance

A contract is said to have been performed when the parties to a contract either perform or offer to

perform their respective promises.

Two Types of Performance

Actual Performance

Where a promisor has made an offer of performance to the promise and the promise, it is called an

actual performance.

Attempted performance (or Tender) Where a promisor has made an offer of performance to the promise, and the offer has not been accepted by the offer has not been accepted by the promise, it is called an attempted performance. EFFECTS, TYPES AND ESSENTIALS OF A VALID TENDER Two Effects of Tender

• The promisor is not responsible for non – performance. • The promisor does not lose his rights under the contract.

Two Types of Tender

• Tender of Goods/Services • Tender of Money

Essentials of a Valid Tender i. Unconditional ii. At Proper Time iii. At Proper Place iv. Reasonable opportunity to promise v. For whole obligation vi. To proper person WHO MAY DEMAND PERFORMANCE AND WHO MAY PERFORM Who may demand performance i. Promise ii. Legal representative iii. Third party iv. Joint promises



Who may perform the contract i. Promisor ii. Promisor’s Agent iii. Legal Representatives iv. Third Party v. Joint Promisors

LETS PRACTICE Q.1. A received certain goods from B promising to pay Rs. 10,000/-. Later on, A expressed his inability to make payment. C, who is known to A, pays Rs, 6000/- to B on behalf of A. However, A was not aware of the payment. Now B is intending to sue A for the amount of Rs. 10000/- . Can B do so? Advise. Q.2 Pick out the correct answer from the following and give reasons: A promises to paint a picture for B by a certain day, at a certain price. A dies before the day. The contract: (1) can be enforced by A's representative (2) can be enforced by B (3) can be enforced either by A's representative or by B (4) cannot be enforced either by A's representative or by B (PCE, Nov. 2009)

DEVOLUTION OF JOINT LIABILITIES AND JOINT RIGHTS

Meaning of Devolution

Devolution means passing over from one person to another.

Meaning of Devolution of Joint Liabilities

The liabilities of joint promisors pass to their legal representatives (in case of death).

Rules Regarding the Performance of Joint Promise

a) Joint and several liability of Joint Promisors

b) Joint promisor’s Right to Claim Contribution.

c) Joint promisor’s Duty to share loss from Default in Contribution

d) Effect of Release of One Joint Promisor

Meaning of Devolution of Joint Rights

When a person has made a promise to two or more persons jointly, then, unless a contrary intention appears from the contract, the right to claim performance rests, as between him and them, with them during their joint lives, and, after the death of any of them, with the



representative of such deceased person jointly, with the survivor or survivors and after the death of the last survivor, with the representatives of all jointly.

LETS PRACTICE Q.1 W promises X, Y and Z and Z jointly to repay a sum of Rs. 9,000. Who can demand the performance of the promises in each of the following alternative cases:

a. If X dies. b. If Y dies. c. If Z dies. d. If X, Y and Z die?

Q.2. X, Y and Z jointly promise to pay Rs. 9,000 to W. Who is liable to pay the amount to W in each of the following alternative cases:

a. If X dies. b. If X, Y and Z die?

Q.3. X, Y and Z jointly promise to pay Rs. 9,000 to W. Can W compel X to pay him in full? Q.4. X, Y and Z jointly promise to pay Rs. 9,000 to W. W compelled X to pay the whole amount. Can X recover anything from Y and Z (a) if both Y and Z are solvent, (b) if Y is solvent and Z being insolvent pays only 60 paise in a rupee. Q.5. X, Y and Z jointly borrowed Rs.50,000 from A. The whole amount was repaid to A by Y. Decide in the light of the Indian Contract Act, 1872 whether: (i) Y can recover the contribution from X and Z, (ii) legal representatives of X are liable in case of death of X, (iii) Y can recover the contribution from the assets, in case Z becomes insolvent. (PE-II, Nov. 2007) Q.6. ‘A’, ‘B’ and ‘C’ are partners in a firm. They jointly promise to pay Rs. 1,50,000 to ‘P’. C became insolvent and his private assets are sufficient to pay only 1/5 of his share of debts. A is compelled to pay the whole amount to P. Examining the provisions of the Indian Contract Act, 1872, decide the extent to which A can recover the amount from B. (PCE, Nov. 2007) Q.7. Ajay, Vijay and Sanjay are partners of software business and jointly promises to pay Rs.60, 000 to Kartik. Over a period of time Vijay became insolvent, but his assets are sufficient to pay one-fourth of his debts. Sanjay is compelled to pay the whole. Decide whether Sanjay is required to pay whole amount himself to Kartik in discharging joint promise. Q.8 X, Y, and Z jointly sells goods to D for Rs, 18,000.After a week, D pays the total amount to Y alone. Is D discharged from liability?



RULES AS TO TIME AND PLACE OF PERFORMANCE OF A CONTRACT

1. Time not specified

Within a reasonable time 2. Time specified but promise is to be performed without promisee’s application.

During the usual business hours on that particular day. 3. Time specified but promises is to be performed on promisee’s application

The promise must apply for performance at a proper place and within usual business hours.

4. Place not specified

The promisor must apply to the promisee to appoint a reasonable place for the performance and to perform the promise at such place.

5. Manner for performance prescribed

The promise must be performed in the manner and at the time prescribed by the promise.

IS TIME AN ESSENCE OF CONTRACT? Meaning Time is an essence of a contract means that it is essential for the parties to a contract to perform their respective promises within the specified time. When Time Essence?

1. Where the parties have expressly agreed to treat the time as the essence of the contract. 2. Where the non-performance at the specified time operates as an injury to the party. 3. Where the nature and necessity of the contract requires the performance of the contract

within the specified time. In commercial contracts In commercial contracts time fixed for the delivery of goods and not for the payment of price is considered to be the essence of a contract. CONSEQUENCES OF NON – PERFORMANCE OF CONTRACT WITHIN SPECIFIED TIME a. WHERE TIME IS ESSENCE

i. Contract becomes voidable ii. Promise cannot claim compensation

b. WHERE TIME IS NOT ESSENCE

i. Contract does not become voidable ii. Promise can claim compensation



LETS PRACTICE Q.1 X agrees to sell 50 tons of some raw material to Y on 20th June,2010.X delivers the goods on 30th of June ,2010.Is Y bound to accept the goods?

RECIPROCAL PROMISES Meaning Promises which form the consideration or part of the consideration for each other are called ‘reciprocal promises’. Types Lord Mansfield in Jones v. Barkley case have classified the reciprocal promises as under: TYPE OF RECIPROCAL PROMISES A. Mutual and Independent When the promises are to be performed by each party independently, without waiting for the other party to perform his promises B. Mutual and Dependent When the performance of one party depends on the prior performance of the other party. C. Mutual and Concurrent When the promises are to be performed simultaneously.

ASSIGNMENT OF CONTRACTS Meaning Assignment of a contract means transfer of contractual rights and liabilities to a third party. Mode

1. By Act of Parties a. Assignment Liabilities

Contractual liabilities cannot be assigned unless Novation takes place. (Novation is a tripartite agreement between promisor, promise and third party)

b. Assignment of Contractual Rights

Contractual Rights can be assigned subject to all equities between the original parties.

2. By Operation of Law The rights and obligations (other than those of personal nature) of the deceased insolvent party pass on to legal Represent-tatives / Official Receiver / Assignee.

Assignment & Succession Under succession, both benefits and burden attached to the contract develop upon the legal heir. A son succeeding his father’s estate shall be liable to meet the debts and liability of his father to the



extent of the property inherited. However, in assignment, only the benefit of a contract can be assigned and not the liabilities attached thereto. LETS PRACTICE

Q.1 M and N had a contract. M broke it. N had a right to file a case against M for damages. N wants to assign this right. Decide. MEANING OF APPROPRIATION OF PAYMENT Meaning It means application of payment to a particular debt. Rules 1. Where debt to be discharged is indicated, The payment, if accepted must be applied accordingly.

2. Where debt to be discharged is not indicated The creditor has option to apply the payment to any lawful debt due from the debtor even if it is a time barred debt. But he cannot apply to a disputed debt. 3. Where neither party makes any appropriation The payment shall be applied in discharge of the debts in order of time whether or not they are time barred. If the debt are of equal standing, the payment shall be applied in discharge of each, proportionately. In other words all payments shall be applied towards the payment of first debt till it gets extinguished. Similarly, all subsequent payments applied towards the payment of first debt till it gets extinguished. Similarly, all subsequent payments applied towards second debt till it gets fully paid and so on and so forth.

LETS PRACTICE

Q.1. X owes Y three sums, one for Rs. 2,000 which is barred by limitation, second for Rs. 3,000 which is not barred, and third for Rs. 4,000 which is not barred. X sends Rs. 1,000 to Y. Can Y appropriate Rs. 1,000 towards Rs. 2,000 (a) if X gives no direction in this regard (b) if X asks Y to appropriate Rs. 1,000 towards the third debt of Rs. 4,000. Q.2. X owes Y Rs. 1,000 and Z owes X Rs. 1,000. Can Y recover Rs. 1,000 from Z (a) if No agreement has been entered into between X, Y and Z (b) if Y accepts Z as his debtor in pursuance of an agreement entered into between X, Y and Z?



RESTITUTION Meaning

Restitution means “Return or Restoration of Benefit”.

Provision

1. When a person at whose option a contract is voidable rescinds it [Sec. 64].

The party rescinding a voidable contract must restore the benefit to the person from whom

he has received it.

2. When an agreement is discovered to be void or the contract becomes void

[Sec. 65].

The person who has received any benefit or advantage under such agreement or contract

must restore it or compensate for it to the person from whom he has received it.

Non–Applicability

The principle of restitution does not apply to contracts which are void ab-initio with the exception

where the minor has entered into agreement by misrepresenting his age.

index [s3. ] · pdf filequestion.3 state essential elements of contract of guarantee. 1.valid...

Documents