MBA book international business laws

International Business Law

MBA Second Year
(International Business)

School of Distance Education

Bharathiar University, Coimbatore - 641 046


Authors: B. Murali Krishna and Pavan Kumar
Copyright © 2008, Bharathiar University
All Rights Reserved
Produced and Printed
by
EXCEL BOOKS PRIVATE LIMITED
A-45, Naraina, Phase-I,
New Delhi-110028
for
SCHOOL OF DISTANCE EDUCATION
Bharathiar University
Coimbatore-641046


CONTENTS

Page No.
UNIT I
Lesson 1

Law of Contract

Lesson 2

Negotiable Instruments

7
23
UNIT II

Lesson 3

Contract of Sale

41

Lesson 4

Performance of Contract

50
UNIT III

Lesson 5

Carrier and Carriage of Goods

61

Lesson 6

IATA Rules for Contract

88
UNIT IV

Lesson 7

Uniform International Law

103

Lesson 8

Supplementary Rules Concerning Damages

115

UNIT V
Lesson 9

International Law: Environmental Agreements

127

Lesson 10

Basel Convention on Transboundary Shipment of Wastes

136

Model Question Paper

177


INTERNATIONAL BUSINESS LAW
SYLLABUS
UNIT I
Definition of contracts - types - essentials of valid contract - performance of contractNegotiable instruments - Types - negotiation - Endorsement - Acceptance - PresentationDishonor - Discharge -Compensation -international law.
UNIT II
Contract of Sale - Sale and agreement to sell goods - Conditions and warranties -passing
of property in goods, performance of the contract of sale - Sellers and buyers duties and
rights under contract of sale.
UNIT III
Carrier and carriage of goods - Contract of carriage - common carriers - Carriage of
goods by Rail, Sea - Contract of affreightment - charter party- Bill of Lading - Carriage
by air. IATA rules for contract. UNCTAD Rules on shipping. Conference systems in
shipping.
UNIT IV
Uniform international law - sale of goods - obligations of the seller - obligations of the
Buyer, common provisions - Avoidance of contract - Supplementary rules concerning
damages -Provisions of passing of risk in international sale contracts - Arbitration procedure and practice.
UNIT V
International law Environmental Agreements - The Stockholm Conference - Basel
convention on transboundary Shipment of wastes.


5
Law of Contract

UNIT 1

UNIT I


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International Business Law


LESSON

7
Law of Contract

1
LAW OF CONTRACT
CONTENTS
1.0

Aims and Objectives

1.1

Introduction

1.2

Agreement

1.3

1.2.1

Characteristics of Agreement

1.2.2

Legal Obligation

Types of Contracts
1.3.1

Kinds of Contracts from the Point of View of Enforceability

1.3.2

Kinds of Contracts from the Point of View of Mode of Creation

1.3.3

Kinds of Contracts from the Point of View of the Extent of Execution

1.3.4

Kinds of Contracts in English Law

1.4

Essentials of a Contract

1.5

Performance of Contract
1.5.1

Parties that are Involved in the Performance of Contracts

1.5.2

Performance of Joint Promises

1.5.3

Assignment of Contracts

1.5.4

Order of Performance of Reciprocal Promises

1.5.5

Time and Place for Performance

1.5.6

Effects of Failure to Perform a Contract within the Stipulated Time

1.5.7

Mode or Manner of Performance

1.5.8

Appropriation of Payments

1.5.9

Contracts which need not be Performed

1.6

Let us Sum up

1.7

Lesson End Activity

1.8

Keywords

1.9

Questions for Discussion

1.10

Suggested Readings

1.0 AIMS AND OBJECTIVES

After studying this lesson, you should be able to:
z

Understand the meaning of contracts

z

Write a critical appreciation of the different types of contracts


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z

Know about negotiable instruments

z

Explain different provisions of the International law

1.1 INTRODUCTION
The law of contract is the foundation upon which the super structure of modern
business is built. The law of contract is contained in the Indian Contract Act. It is
common knowledge that in business transactions quite often promises are made at one
time and the performance follows later. In such a situation if either of the parties were
free to go back on its promise without incurring any liability, there would be endless
complications and it would be impossible to carry on trade and commerce. Hence the
law of contract was enhanced which lays down the legal rules relating to promises:
their formation, performance and enforceability. The law of contract is that branch of

law which determines the circumstances in which promises made by the parties to a
contract shall be legally binding on them. The rules define the remedies that are
available in a court of law against a person who fails to perform his contract and the
conditions under which the remedies are available. Explaining the object of law of
contract sir William Anson observes: “The law of contract is intended to ensure that
what a man has been led to expect shall come to pass; that what has been promised to
him shall be performed”.
The law of contract is not only applicable to the business community, but also to
others. Every one of us enters into a number of contracts almost every day, and most
of the time we do so without even realizing what we are doing from the point of law.
A person rarely realizes that he is entering into a contract of bailment when he entrusts
his scooter to the mechanic for repairs. Likewise in most of the cases he is
unknowingly entering into various contracts. So the law of contract is a very
important topic to be known by every person.
Definition of Contract
According to section 2(h) of the Indian Contract Act: “An agreement enforceable by
law is a contract.” A contract therefore is an agreement the object which is to create a
legal obligation i.e., a duty enforceable by law. So from the above definition we find
that a contract essentially consists of two elements: (1) an agreement and (2) legal
obligation i.e., a duty enforceable by law. A contract is an agreement between two or
more parties, which the law will enforce.
Sir Williams Anson defines a contract as ‘a legally binding agreement between two or
more persons by which rights are acquired by one or more to acts or forbearances on
the part of the others’.
According to Salmond, “a contract is an agreement creating and defining obligations
between the parties”.

1.2 AGREEMENT
As per section 2(e): “Every promise and every set of promises, forming the
consideration for each other, is an agreement”. Thus it is clear from this definition that

a promise is an agreement. What is a promise? The answer to this question is
contained in section 2(b) which defines the term. When the person to whom the
proposal is made signifies his assent thereto the proposal is said to be accepted. A
proposal, when accepted, becomes a promise”. An agreement, therefore, comes into
existence only when one party makes a proposal or offer to the other party and that
other party signifies his assent thereto. In short, an agreement is the sum total of offer
and acceptance.


1.2.1 Characteristics of Agreement
Plurality of persons: There must be two or more persons to make an agreement
because one person cannot enter into an agreement with himself.
Consensus ad idem: Both the parties to an agreement must agree about the subject
matter of the agreement in the same sense and at the same time.

1.2.2 Legal Obligation
An agreement to become a contract must give rise to a legal obligation. If an
agreement is incapable of creating a duty enforceable by law it is not a contract. Thus
an agreement is a wider term than a contract. “All contracts are agreements but all
agreements are not contracts.” Agreements of moral, religious or social nature are not
contracts because they are not likely to create a duty enforceable by law for the simple
reason that the parties never intended that they should be attended by legal
consequences.
In business agreements the presumption is usually that the parties intend to create
legal relations. Thus an agreement to buy certain specific goods at an agreed price is a
contract because it gives rise to a duty enforceable by law, and in case of default on
the part of either party an action for breach of contract could be enforced through a
court provided other essential elements of a valid contract as laid down in section 10
are present, namely, if the contract was made by free consent of the parties competent
to contract, for a lawful consideration and with a lawful object.

1.3 TYPES OF CONTRACTS
The contract is classified on the basis of: (1) Enforceability, (2) Mode of Creation, and
(3) the Extent of Execution.

1.3.1 Kinds of Contracts from the Point of View of Enforceability
From the point of view of enforceability a contract may be valid or voidable or void or
unenforceable or illegal.
1. Valid Contract: A valid contract is an agreement enforceable by law.
An agreement becomes enforceable by law when all the essential elements of a
valid contract as enumerated above are present.
2. Voidable Contract: According to section 2 (i) an agreement, which is enforceable
by law at the option of one or more of the parties thereto but not at the option of
the other or others, is a voidable contract. Thus a voidable contract is one which is
enforceable by law at the option of one of the parties. Until it is avoided or
rescinded by the party entitled to do so by exercising his option in that behalf, it is
a valid contract.
Usually a contract becomes voidable when the consent of one of the parties to the
contract is obtained by coercion, undue influence, misrepresentation or fraud. But the
agreed party must exercise his option of rejecting the contract (i) within a reasonable
time, and (ii) before the rights of third parties intervene, otherwise the contract cannot
be repudiated.
For example: A, threatens to shoot B if he does not sell his new car to A for
Rs. 20000. B agrees. The contract has been brought about by coercion and is voidable
at the option of B.

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Circumstances under which a contract becomes voidable:
The Indian contract act has laid down certain other situations also, under which a
contract becomes voidable. For example:
1. When a contract contains reciprocal promises, and one party to the contract
prevents the other form performing his promise, then the contract becomes
voidable at the option of the party so prevented (sec 53). For ex: A, contracts with
B that A shall whitewash B’s house for Rs.500. A, is ready and willing to execute
the work accordingly, but B prevents him form doing so. The contract becomes
voidable at the option of A.
2. When a party to the contract promises to do a certain thing within a specified
time, but fails to do it, then the contract becomes voidable at the option of the
promisee, if the intention of the parties was that time should be of the essence of
the contract (sec 55). For ex: X, agrees to sell and deliver 100 bags of rice to Y for
Rs. 500000 within one wee. But X does not supply the rice within the specified
time. The contract becomes voidable at the option of Y.
Consequences of cancellation of voidable contract:
Section 64 lays down the rights and obligations of the parties to a voidable
contract after it is rescinded. This section states that when a person at whose
option a contract is voidable rescinds it, the other party thereto need not perform
any promise therein contained in which he is a promisor. If the party rescinding a
voidable contract has received any benefit, so far as may be, to the person from
whom it was received. It must be remembered that the benefit which is to be
restored must have been received under the contract, if an amount has been
received has a security for the due performance of the contract, such earnest
money deposit is not to be returned if the contract becomes voidable under section
55 on account of the promisor’s failure to complete the contract at the time agreed
and has been rescinded by the promisee because it is not a benefit received under

the contract.
3. Void Contract: Void means not binding in law. Void contract implies a useless
contract which has no legal effect at all. Section 2(j) defines: a contract which
ceases to be enforceable by law becomes void, when it ceases to be enforceable.
The reasons which transform a valid contract into a void contract as give in
contract act is as follows:
i.

Supervening impossibility (sec 56): A contract becomes void by impossibility
of performance after the formation of the contract. Ex: A and B contract to
marry each other. Before the time fixed for the marriage, A goes mad. The
contract to marry becomes void.

ii. Subsequent illegality (sec 56): A contract also becomes void by subsequent
illegality. Ex: A agrees to sell B 500 bags of rice at Rs. 550 per bag. Before
delivery, the government bans private trading of rice. The contract becomes
void.
iii. Repudiation of a voidable contract: A voidable contract becomes void, when
the party, whose consent is not free, repudiates the contract. Ex: X by
threatening to murder B’s son, makes B agree to sell his bike worth Rs. 60000
for a sum of Rs. 10000 only. The contract, being the result of coercion, is
voidable at the option of B. B may either affirm or reject the contract. in case
B decides to rescind the contract, it becomes void.
iv. In the case of a contract contingent on the happening of an uncertain
future event if that event becomes impossible: A contingent contract to do or
not to do something on the happening of an uncertain future event becomes


void, when the event becomes impossible (sec 32). Ex: A contracts to give
Rs. 10000 as loan to B, if B marries C. C dies without being married to B, the

contract becomes void.
4. Void Agreement: An agreement not enforceable by law is said to be void sec 2(g).
Avoid agreement does not give rise to any legal consequences and is void
ab-initio. An agreement with a minor is void ab-initio as against, because a minor
lacks the capacity to contract.
A void agreement should be distinguished form a void contract. A void agreement
never amounts to a contract as it is void ab-initio. A void contract is valid when it
is entered into, but subsequent to its formation something happens which makes it
unenforceable by law.
Obligation of person who has received advantage under void agreement or
contract that becomes void: Section 65 lays down that when an agreement is
discovered to be void or when a contract becomes void, any person who has
received any advantage under such agreement or contract is bound to restore it, or
to make compensation for it, to the person from whom he received it. This section
provides for restitution of the benefit received so that both parties may stand uneffected by the transaction in the following two cases:
i.

When an agreement is discovered to be void: when an agreement is void
ab-initio but the fact of its being void being discovered at a later stage.
Ex: A pays B Rs. 1000 for B for agreeing to sell his horse to him. It turns out
that the horse was dead at the time of the bargain though neither party was
aware of the fact. In this case the agreement is discovered to be void and B
must repay Rs. 1000 to A. Nothing can be recovered in case of expressly
declared void agreements subject to following exceptions: (i) in the case of an
agreement caused by bilateral mistake of essential fact restitution is allowed
as it comes under the category of an agreement discovered to be void, (ii) in
the case if an agreement with a minor who commits fraud by misrepresenting
his age restoration is allowed in specie on equitable grounds because a minor
cannot be allowed to cheat people, and also because the other party has not
lost his title to the thing in question.

ii. When a contract becomes void: Restitution is also allowed in the case of a
void contract. Ex: A agrees to sell B after one month 10 quintals of wheat at
Rs 500 per quintal and receives Rs. 400 as advance. Soon after the contract,
private sales of wheat are prohibited by an Act of legislature. The contract
becomes void but A must return the sum of Rs. 500 to B.
5. Unenforceable Contract: An unenforceable contract is one which is valid in it,
but is not capable of being enforced in a court of law because of some technical
defect such as absence of writing, registration, requisite stamp or time barred by
the law of limitation.
6. Illegal or Unlawful Contract: The word illegal means contrary to law and the
term contract means an agreement enforceable by law. As such to speak of an
illegal contract involves a contradiction in terms because it means something like
this and agreement enforceable by law and contrary to law. There is apparent
contradiction in terms. Such an agreement can never attain the status of a contract.
An agreement is illegal and void if its object or consideration is forbidden by law,
is of such a nature that if permitted, it would defeat the provisions of any law or is
fraudulent or involves or implies injury to the person or property of another or the
court regards it as immoral, or opposed to public policy.

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1.3.2 Kinds of Contracts from the Point of View of Mode of Creation
From the point of view of mode of creation a contract may be express or implied or
constructive:

1. Express Contract: Where both the offer and acceptance constituting an agreement
enforceable at law are made in words spoken or written, it is an express contract.
ex: A tells B on telephone that he offers to sell his bike for Rs. 20000 and B in
reply informs A that he accepts the offer, there is an express contract.
2. Implied Contract: Where both the offer and acceptance constituting an agreement
enforceable at law are made otherwise than in words it is an implied contract. Ex:
where A, a coolie in uniform takes up the luggage of B to be carried out of the
railway station without being asked by B, and B allows him to do so, then the law
implies that B agrees to pay for the services of A, and there is an implied contract.
3. Constructive or Quasi Contract: The term constructive or quasi contract is a
misnomer. The cases grouped under this type of contracts have little or no affinity
with contract. Such a contract does not arise by virtue of any agreement, express
or implied between the parties but the law infers or recognizes a contract under
certain special circumstances.
A quasi contract is based upon the equitable principle that a person shall not be
allowed to retain unjust benefit at the expense of another. Ex: T a tradesmen
leaves goods at C house by mistake. C treats the goods as his own. C is bound to
pay for the goods.
4. E-Commerce: An E-commerce contract is one which is entered into between tow
parties via internet. In internet, different individuals or companies create networks
which are linked to numerous other networks. This expands the area of operation
in commercial transactions for any person.

1.3.3 Kinds of Contracts from the Point of View of the Extent of Execution
From the point of view of the extent of execution a contract may be executed or
executory.
1. Executed Contract: A contract is said to be executed when both the parties to a
contract have completely performed their share of obligation and nothing remains
to be done by either party under the contract. Ex: when a bookseller sells a book
on cash payment it is an executed contract because both the parties have done

what they were to do under the contract.
2. Executory Contract: It is one in which both the obligations are outstanding, one
on either party to the contract, either wholly or in part, at the time of formation of
the contract. In other words, a contract is said to be executory when either both
the parties to a contract have still to perform their share of obligation into or there
remains something to be done under the contract on both sides. Ex: If A agrees to
engage B as his servant from the next month the contract is executory.
3. Unilateral or One-sided Contract: A unilateral or one sided contract is one in
which only one party has to fulfill his obligation at the time of the formation of
the contract, the other party having fulfilled his obligation at the time of the
contract or before the contract comes into existence. Such contracts are also
known as contracts with executed consideration. Ex: A permits a railway coolie to
carry his luggage and place it in a carriage. A contract comes into existence as
soon as the luggage is placed in the carriage. But by that time the coolie has
already performed his obligation. Now only A has to fulfill his obligation.
4. Bilateral Contract: A bilateral contract is one in which the obligation on the part
of both the parties to the contract are outstanding at the time of the formation of
the contract.


1.3.4 Kinds of Contracts in English Law
In English law contracts are classified into formal contracts and simple contracts.
1. Formal contracts: These include contracts of record and contracts under seal.
(i) Contracts of record: A contract of record is either a judgment of a court or a
recognizance. A judgment is an obligation imposed by a court upon one or
more persons in favor of another or others. Strictly speaking it is not a
contract which rests upon agreement. A recognizance is a written
acknowledgement of a debt due to the crown. It is usually met with in
connection with criminal proceedings. Ex: when a person is arrested, he may
be released on a promise to appear in a court or to be of good behavior subject

to a money penalty if the obligation is broken.
(ii) Contracts under seal: A contract under seal is one which derives its binding
force from its form alone. It is in writing and is signed, sealed and delivered
by the parties. It is also called a deed or a specialty contract. No consideration
is however necessary in the case of contracts under seal.
The contracts, which must be made under seal include (i) Contracts made with out
consideration, (ii) Contracts made by corporations, (iii) Conveyances of the legal
estate in land or any interest in land, including leases of land for more then three
years, (iv) A transfer of a British ship or any share therein.
2. Simple contracts: All contracts, which are not made under seal are simple
contracts. They may be in writing or may be made by word of mouth. All simple
contracts must be supported by consideration. These contracts are also known by
older name parol contracts.
Check Your Progress 1
Describe, in brief, the following:
1.

Void Agreement
…………….…………….…………….…………….…………….………
…………….…………….…………….…………….…………….………

2.

Illegal or Unlawful Contract
…………….…………….…………….…………….…………….………
…………….…………….…………….…………….…………….………

1.4 ESSENTIALS OF A CONTRACT
A contract has been defined in sec 2(h) as “an agreement enforceable by law”. To be
enforceable by law, an agreement must possess the essential elements of a valid

contract as contained in sections 10, 29 and 56. According to section 10, all
agreements are contracts if they are made by the free consent of the parties, competent
to contract, for a lawful consideration, with a lawful object, are not expressly declared
by the act to be void, and where necessary, satisfy the requirements of any law as to
writing or attestation or registration. The essential elements of a valid contract are as
follows:
1. Offer and Acceptance: There must be “lawful offer” and “lawful acceptance” of
the offer, thus resulting in an agreement. The adjective ‘lawful’ implies that the
offer and acceptance must satisfy the requirements of the contract act in relation
thereto.

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2. Intention to Create Legal Relations: There must be an intention among the
parties that the agreement should be attached by legal consequences and create
legal obligations. Agreements of a social or domestic nature do not contemplate
legal relations; as such they do not give rise to a contract. An agreement to dine at
a friend’s house is not an agreement intended to create legal relations and
therefore is not a contract. Agreements between husband and wife also lack the
intention of creating legal relationship and thus do not result in contracts. For
instance, if Mr. a promises his wife that he would get her a saree on her birthday
and if he fails to do so, his wife cannot sue on him because there is no intention to
create a legal relationship or a contract in this case.
3. Lawful Consideration: The third essential element of a valid contract is the
presence of ‘consideration’. Consideration has been defined as the price paid by

one party for the promise to it gives something and gets something. The
something given or obtained is the price for the promise and is called
‘consideration’. The consideration may be an act or a promise to do or not to do
something. It may be past, present or future. But only those considerations are
valid which are ‘lawful’. The consideration is ‘lawful’ unless it is forbidden by
law; or is of such a nature that, if permitted it would defeat the provisions of any
law; it is fraudulent; it involves or implies injury to the person or property of
another; or is immoral; or is opposed to public policy (sec 23).
4. Capacity of Parties: The parties to an agreement must be competent to contract;
otherwise it cannot be enforced by a court of law. In order to be competent to
contract the parties must not be of the age of minority and of sound mind and
must mot be disqualified from contracting by any law to which they are subject. If
any of the parties to the agreement suffers from minority, lunacy, idiocy,
drunkenness, etc., the agreement is not enforceable at law; except in some special
cases.
5. Free Consent: Free consent of all the parties to an agreement another essential
element of a valid contract. ‘Consent’ means that the parties must have agreed
upon the same thing in the same sense. There is absence of ‘free consent’, if the
agreement is induced by coercion, undue influence, fraud, misrepresentation, or
mistake. If the agreement is vitiated by any if the first four factors the contract
would be voidable and cannot be enforced by the party guilty of the above. The
other party can either reject the contract or accept it, subject to the rules laid down
in the act. If the agreement is induced by mutual mistake which is material to the
agreement, it would be void.
6. Lawful Object: For the formation of a valid contract it is also necessary that the
parties to an agreement must agree for a lawful object. The object for which the
agreement has been entered into must not be fraudulent or illegal or immoral or
opposed to public policy or must not imply injury to the person or property of
another. If the object is unlawful for one or the other of the reasons mentioned
above the agreement is void.

7. Writing and Registration: According to the Indian Contract Act, a contract may
be oral or in writing. But in certain special cases it lays down that the agreement,
to be valid, must be in writing or/and registered. For example, it requires that an
agreement to pay a time barred debt must be in writing and an agreement to make
a gift for natural love and affection must be in writing and registered. Similarly,
certain other acts also require writing or/ and registration to make the agreement
enforceable by law which must be observed. Thus an arbitration agreement must
be in writing as per the Arbitration Act, 1940.
8. Certainty: Section 29 of the Indian Contract Act provides that “agreements, the
meaning of which is not certain or capable of being made certain, are void.” In
order to give rise to a valid contract the terms of the agreement must not be vague


or uncertain. It must be possible to ascertain the meaning of the agreement, for
otherwise, it cannot be enforced.
9. Possibility of Performance: Yet another essential feature of a valid contract is
that it must be capable of performance. Section 56 lays down that “an agreement
to do an act impossible in itself is void”. If the Act is impossible in itself,
physically or legally, the agreement cannot be enforced at law.
10. Not Expressly Declared Void: The agreement must not have been expressly
declared to be void under the Act sections 24-30 specify certain types of
agreements which have been expressly declared to he void. For example
agreement on restraint of marriage an agreement in restraint of trade have been
expressly declared void under sections 26, 27 and 30 respectively.
11. Legal Formalities: A contract may be made by words spoken or written. As
regards the legal effects, there is no difference between a contract in writing and a
contract made by word of mouth. It is, however, in the interest of the parties that
the contract should be in writing. There are some other formalities also which
have to be complied with in order to make an agreement legally enforceable. In
some cases, the document in which the contract is incorporated is to be stamped.

In some other cases, a contract, besides being a written one, has to be registered.
Thus where there is a statutory requirement that a contract should be made in
writing or in the presence of witness or registered, the required statutory
formalities must be complied with sec 10.

1.5 PERFORMANCE OF CONTRACT
“Performance of Contract” means fulfilling of their respective legal obligations
created under the contract by both the promisor and the promisee. When a contract is
duly performed by both the parties, the contract comes to a happy ending and nothing
more remains. Performance by all the parties of the respective obligations is the
normal and natural mode of discharging or terminating a contract.

1.5.1 Parties that are Involved in the Performance of Contracts
1. By the promisor himself: In case of a contract involving personal skill, taste or
credit; e.g., a contract to paint a picture, a contract of agency or service; the
promisor must himself perform the contract. Section 40 states thus, ‘if it appears
from the nature of the case that it was the intention of the parties to any contract
that any promise contained in it should be performed by the promisor himself,
such promise must be performed by the promisor’.
2. By the promisor or his agent: In the case of a contract of impersonal nature, e.g.,
a contract of sale of goods or a contract to lend a sum of money, the promisor
himself or his agent may perform the contract.
3. By the legal representatives: In case of the death of the promisor before the
performance, the liability of performance falls on his legal representatives, unless
a contrary intention appears from the contract. Thus, in the case of contracts
involving personal skills, the heirs or legal representatives of a deceased promisor
are not bound to perform the contract. Such contracts come to an end on the death
of the promisor. The rule of law is: “a personal cause of action comes to an end
with the death of the person concerned”. In the case of contracts not involving
personal considerations, the legal representatives are bound to perform the

contract. But their liability is limited to the estate of the deceased, which has come
to their hands, in case of breach of contract. They are not personally liable.
4. Performance by a third person: Section 41 lays down that if a promisee accepts
performance of the promise from a third person, he cannot afterwards enforce it
against the promisor. Thus, where a promisee accepted lesser amount from a third

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party in full satisfaction of his claim, it was held that he cannot enforce the
promise against the promisor. Notice that under this section performance of the
promise by a stranger, once accepted by the promisee, discharges the promisor,
although the latter has neither authorized not ratified the act of the third party.

1.5.2 Performance of Joint Promises
Joint promises may take any of the following shapes:
1. Where several joint promisors make a promise with a single promise, e.g: A, B
and C jointly promise to pay Rs. 3000 to D, or
2. Where a single promisor makes a promise with several joint promisees, e.g: P
promises to pay Rs 3000 to Q and R jointly, or
3. Where several joint promisors make a promise with several joint promisees
e.g: A, B and C jointly promise to pay Rs 3000 to P, Q and R jointly.
Who can Demand Performance of Joint Promises?
Section 45, which provides that when a promise is made to several persons jointly,
then unless a contrary intention appears from the contract the right to claim
performance rests with all the promisees jointly and a single promisee cannot demand

performance. When any one of the promisees dies, the right to claim performance
rests with the legal representatives of such deceased person jointly with the surviving
promisees. When all the promisees are dead, the right to claim performance rests with
the legal representatives of all jointly.
Ex: A, in consideration of Rs. 5000 lent to him by B and C, promises B and C jointly
to repay them that sum with interest on a day specified. B dies. The right to claim
performance rests with B’s representative jointly with C during C’s life and after the
death of C with the representatives of B and C jointly.
By whom Joint Promises must be Performed?
The rules on the subject as contained in sections 42 and 44 of Indian Contract Act are
as follows:
1. All promisors must jointly fulfill the promise: When tow or more persons have
made a joint promise then unless a contrary intention appears by the contract, all
such persons must jointly fulfill the promise. When any one of the joint promisors
dies, his legal representatives must, jointly with the surviving promisors, fulfill the
promise. On the death of all the original promisors, the legal representatives of all
of them jointly must fulfill the promise (sec 42).
The above rule is of course subject to the following usual conditions:
a) Contracts involving personal skill, e.g., to paint a picture, come to an end on
the death of any of the joint promisors and the liability of performance does
not fall on the legal representatives.
b) Wherever the legal representatives are made liable to perform the promise,
they are not personally liable. Their liability is limited to the assets inherited
by them.
2. Any one of joint promisors may be compelled to perform: When two or more
persons make a joint promise, the promisee is entitled, in the absence of express
agreement to the contrary, to compel any one or more of such joint promisors to
perform the whole of the promise. Ex: A, B and C jointly promise to pay D
Rs. 3000, may compel either A or B or C or all or any two of them to pay him
Rs. 3000.

In case of death of original debtor, if the debt falls upon a number of heirs,
promisee must bring the suit against all heirs collectively, because the liability is
only joint and not several in case of co-heirs.
It will be pertinent to discuss as to what is the effect of a decree obtained against
only one or two of the joint promisors? The Calcutta High Court has held that a
decree against some only of the joint promisors constitutes a bar to a second suit
against other co-promisors, even if the promisee fails to realize the whole of the
decretal amount, for, its claim merges in the decree. Thus in the above example, if
D sues only A and could recover only Rs 1500 from him on a decree of Rs 3000
he cannot as per the above verdict, sue for the balance other joint promisors later
on. But Madras High Court has dissented from the above decision. It says that D
can sue the remaining joint promisors later on for the unsatisfied portion of the
decree. The Madras High Court view seems logical. In fact a decision of the
Supreme Court is required to settle the law on the point in question.
3. Right of contribution inter-se between joint promisors: If one of several joint
promisors is made to perform the whole contract, he may require equal
contribution form the other joint promisors, unless a contrary intention appears
from the contract. If A is compelled to pay the entire amount of Rs 3000 he can
realize from B and C Rs 1000 each.
4. Sharing of loss by default in contribution: If any one of the joint promisors
makes a default in making contribution, if any, the remaining joint promisors must
bear the loss arising from such default in equal shares Sec 43. If A is compelled to
pay the whole and C is unable to pay anything, A is entitled to receive Rs 1500
from B. If C’s estate is able to pay one half of his share, A is entitled to receive
Rs 500 from C’s estate and Rs 1250 from B.
5. Effect of release of one joint promisor: In case of joint promise, if one of the
joint promisors is released from his liability by the promisee, his liability to the
promisee ceases but this does not discharge the other joint promisors from their

liability; neither does it free the joint promisor so released from his liability to
contribute to the other joint promisors Sec 44.

1.5.3 Assignment of Contracts
Assignment of contract means transfer of contractual rights and liabilities to a third
party with or without the concurrence of the other party to the contract. The Indian
Contract Act contains no specific provisions dealing with assignment of contracts. But
the law on the subject is well settled and the rules, which have been applied by courts
in India in this regard, are as follows:
1. Contracts involving personal skill, taste or credit e.g.: a contract to paint a picture,
a contract to perform a service or to marry, cannot be assigned.
2. The obligations under a contract cannot be assigned except with the consent of the
promisee, and when such consent is given, it is really a novation resulting in a
substitution of liabilities. Ex: if X owes Y Rs 200 he cannot transfer the liability to
Z and force Y to collect his money from Z. but if Y agrees to accept Z as his
debtor in place of X, there is novation.
3. The rights and benefits under a contract are assignable unless the contract is of
personal nature or the rights are incapable of assignment either under the law or
under an agreement between the parties, and the assignee can demand
performance against the other contracting party. This is so because it makes no
difference to the party bound by that obligation whether he is called upon to
perform it in favor of the original party or in favor of the assignee. But the
assignee takes the assignment subject to all equities if any. This means that the
debtor may plead against the assignee all defenses that he could have pleaded

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Law of Contract


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against the assignor. Ex: if one of the parties induced to enter into a contract by
fraud, and the fraudulent party assigns his interest in the contract to a bonafide
third party for value, the defrauded party is entitled to rescind the contract in
equity in spite of its assignment to an innocent party.
4. Assignment by operation of law takes place in cases of death and insolvency.
Upon the death of a party his rights and liabilities under a contract devolve upon
his heirs and legal representatives. In case of insolvency, all rights and liabilities
of the insolvent pass to the official assignee or receiver as the case may be.

1.5.4 Order of Performance of Reciprocal Promises
Promises which form the consideration for each other are called reciprocal promises
or mutual promise. It is common knowledge that bilateral contracts, where both
contracting parties have to perform their promises involve mutual promises amongst
the parties. E.g.: A promises to sell certain goods to B and B in return promises to pay
the price to A, and there is an obligation on each party to perform his won promise
and to accept performance of other’s promise.
Reciprocal promises may be classified into three categories (1) Mutual and
Independent, (2) Mutual and Dependent, and (3) Mutual and concurrent. Section 51 to
54 of Indian Contract Act lay down the rules regarding the order of performance of
reciprocal promises, which are stated below:
1. Mutual and Dependent: Where each party must perform his promise
independently without waiting for the performance or the willingness to perform
of the other, the promises are ‘mutual and dependent’. According to section 52,
such promises must be performed in the order expressly fixed by the contract, and
where the order is not expressly fixed, they must be performed in that order which
the nature of the transaction requires. For instance A and B contract that A shall
build a house for B at a fixed price. A’s promise to build the house must be
performed before B’s promise to pay for it. Whether the promises are such as are

to be ‘independently performed is often a question of construction depending on
the intention of the parties collected from the agreement as a whole or from what
the nature of transaction requires’.
2. Mutual and Dependant: Where the performance of the promise by one party
depends on the prior performance of the promise by the other party, the promises
are ‘mutual and dependent’. Section 54 provides for such promises and lays down
that if the promisor who is required to perform his promise in the first place, fails
to perform it, such promisor cannot claim the performance of the reciprocal
promise, and must make compensation to the other party to the contract for any
loss which such other party may sustain by the non-performance of the contract.
For instance A contracts with B to execute certain builders work for a fixed price,
B supplying the scaffolding or timber, and the work cannot be executed. A need
not execute the work, and B is bound to make compensation to A for any loss
caused to him by the non-performance of the contract.
3. Mutual and Concurrent: Where the two promises are to be performed
simultaneously, they are to be ‘mutual and concurrent’. According to section 51,
in the case of such promises the promisor need mot perform his promise unless
the promisee is ready and willing to perform his reciprocal promise. For instance
A and B contract that A shall deliver foods to B at a price to be paid by
installments, the first installment to be paid on delivery. A need not deliver, unless
B is ready and willing to pay the first installment on delivery. B need not pay the
first installment, unless A is ready to deliver the goods on payment of the first
installment.


4. Consequences where a party prevents performance: “When a contract contains
reciprocal promises and one party to the contract prevents the other from
performing his promise, the contracts become voidable at the option of the party
so prevented; and go is entitled to compensation form the other party for any loss
which may sustain in consequences of the non-performance of the contract”. For

instance A and B contract that B shall execute certain work for A for Rs. 1000, B
is ready and willing to do the work accordingly, but A prevents him from doing
so. The contract becomes voidable at the option of B, and if he elects to rescind it,
he is entitled to recover from a compensation for any loss which he has incurred
by its non-performance.

1.5.5 Time and Place for Performance
Sections 46 to 50 and 55 of the Contract Act lay down the rules regarding the time and
place for performance of a contract, which are summarized below:
z

Where prescribed by the promisee: where the time and place are prescribed by
the promisee, the performance of the contract must be at the specified time and
place.

z

Where not prescribed by the promisee: If no time and place are prescribed by the
promisee, then the contract must be performed:
™

Within a reasonable tine, on a working day and within the usual hours of
business. The question, “what is a reasonable time” is, in each particular case,
a question of fact. It depends either on special circumstances of each
particular case or the usage of trade or the intention of parties at the time of
entering into contract. For instance, A promises to deliver goods at B’s
warehouse on 1st January. On that day A brings the goods to B’s warehouse,
but after the usual hour for closing it, and they are not received. A has not
performed his promise.

™

At proper place e.g., godown or shop, and not at a public meeting or a fair.
“What is a proper place” is, in each particular case, a question of fact.
Generally speaking the promisor must ask the promisee where he would like
the contract to be performed, and to perform it at such place (sec 49). For
instance A undertakes to deliver a thousand maunds of jute to B on a fixed
day. A must apply to B to appoint a reasonable place for the purpose of
receiving it and must deliver it to him at such place.

1.5.6 Effects of Failure to Perform a Contract within the Stipulated Time
Section 55 deals with the subject and lays down the following rules:
1. Where “time is of the essence of the contract” and there is failure to perform
within the fixed time, the contract becomes voidable at the option of the promisee.
He may rescind the contract and sue for the breach.
2. Where “time is not of the essence of the contract,” failure to perform within the
specified time does not make the contract voidable. It means that in such a case
the promisee cannot rescind the contract and he will have to accept the delayed
performance. But he would be entitled to claim compensation from the promisor
for any loss caused to him by the delay. This rule is however, subject to the
condition that the promisor should not delay the performance beyond a reasonable
time, otherwise the contract will become voidable at the option of the promisee.
3. In case of a contract voidable on account of the promisor’s failure to perform his
promise within the agreed time or within a reasonable time, as the case may be, if
the promisee, instead of rescinding the contract, accepts the delayed performance,
he cannot afterwards claim compensation for any loss caused by the delay, unless,

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Law of Contract

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International Business Law

at the time of accepting the delayed performance, he gives notice to the promisor
of his intention to do so.
When is the time the essence of the contract? “Time is of the essence of the contract”,
z

If the parties to the contract have expressly agreed to treat it as such, or

z

If the nature pf transaction and the intention of parties were such that the
performance within a limited time was necessary. Even where a time is specified
for the performance of a certain promise, “time may not be of the essence of the
contract” and one has to look at the nature and construction of the contract and the
intention of the parties in order to ascertain whether “time is of the essence of the
contract” or not. It is well settled that unless a different intention appears from the
terms of the contract, ordinarily in commercial contracts the time of delivery of
goods is of the essence of the contract but not the time of payment of the price.
This is because there are great chances of rapid market fluctuations and also
because after entering into a contract the businessman, on that basis may enter
into other contracts with other persons which cannot be fulfilled unless he
receives the delivery of goods under the contract. In contracts for the purchase of
land, usually time is not of the essence of the contract because land values do not
frequently fluctuate.

1.5.7 Mode or Manner of Performance
“The performance of any promise may be made in any manner in which the promisee

prescribes or sanctions” (sec. 50). The promisor must perform the promise in strict
accordance with the terms of the contract or instructions form the promisee. He has no
right to substitute, for what he has been directed, something else, even if the substitute
may be more beneficial to the promisee. For instance A desires B, who owes him
Rs100, to send him a note for Rs. 100 by post. The debt is discharged as soon as B
puts into the post a letter containing the note duly addressed to A.
Check Your Progress 2
Fill in the blanks:
1.

“Performance of contract” means fulfilling of their respective
………………… created under the contract by both the promisor and the
promise.

2.

Free consent of all the parties to an agreement another essential element of a
valid …………………

3.

A promise is an …………………

1.5.8 Appropriation of Payments
When a debtor, who owes several debts to the same creditor, makes a payment which
is insufficient to satisfy the whole indebtedness, the question arises, “as to which of
the debts the payment is to be applied?” sections 59 to 61 of the Indian Contract Act
answer this question and lay down the following rules:
1. Debtor’s express instructions must be followed: Appropriation is a right given to
the debtor for his benefit. This if the debtor expressly states that the payment

made by him is to be applied to the discharge of some particular debt, the creditor
must act accordingly otherwise he should not accept the payment.
2. Debtor’s implied intention must be followed: If there are no express instructions,
then debtor’s implied intention should be gathered from the circumstances
attending the payment and appropriation must be done accordingly.


3. Appropriation by Creditor: If there is no express or implied direction by the
debtor regarding appropriation, then the creditor has got the option to apply the
payment to any debt lawfully due from the debtor, including a debt which is
barred by the Limitation Act.
4. Appropriation by Law: Where neither the debtor not the creditor has made any
appropriation, then according to law, the payment is to be applied in discharge of
the debts in order of time, whether of not they are time-barred. If the debts are of
equal standing, the payment shall be applied in discharge of each proportionately.
5. Where principal and interest both due: If a payment has been made without
expressly stating whether it is towards interest or principal, payment is to be
applied towards interest first, and then the balance to principal. It may be
emphasized that if the creditor accepts the payment, he must follow the above
rules of appropriation otherwise he must refuse to accept the payment.

1.5.9 Contracts which need not be Performed
The circumstances under which contracts need not be performed are as follows:
1. If parties to a contract agree to ‘notation’, ‘rescission’ or ‘alteration’, the original
contract need not be performed. In such cases the original contract disappears and
is substituted by a new contract.
2. If parties to a contract agree to dispense with or remit performance of promise
either wholly or in part, the original contract stands discharged. This is technically
called as “remission”.
3. When a person at whose option a contract is voidable rescinds it, the other party

thereto need not perform his promise.
4. If any promisee neglects or refuses to afford the promisor reasonable facilities for
the performance of his promise, the promisor is excused for the non-performance
of the contract. For instance, A contracts with B to repair B’s house. B neglects or
refuses to point out to A the places in which his house requires repair. A is
excused for the non-performance of the contract, if it is caused by such neglect or
refusal.

1.6 LET US SUM UP
“The law of contract is intended to ensure that what a man has been led to expect shall
come to pass; that what has been promised to him shall be performed”.
According to section 2(h) of the Indian Contract Act: “An agreement enforceable by
law is a contract.” A contract therefore is an agreement the object which is to create a
legal obligation i.e., a duty enforceable by law.
“Performance of contract” means fulfilling of their respective legal obligations created
under the contract by both the promisor and the promisee. When a contract is duly
performed by both the parties, the contract comes to a happy ending and nothing more
remains.

1.7 LESSON END ACTIVITY
Discuss the following:
1. Agreement
2. Valid and voidable contract
3. Quasi contract
4. Express and Executed contract

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Law of Contract

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International Business Law

1.8 KEYWORDS
Contract: According to section 2(h) of the Indian Contract Act: “An agreement
enforceable by law is a contract.”
Consideration: Consideration has been defined as the price paid by one party for the
promise to it gives something and gets something.
Consent: Consent means that the parties must have agreed upon the same thing in the
same sense.

1.9 QUESTIONS FOR DISCUSSION
1. Explain the term contract and what are the various types of contracts?
2. What are the essentials of a valid contract?
3. What is meant by performance of contract?

Check Your Progress: Model Answers
CYP 1
1.

Void Agreement: An agreement not enforceable by law is said to be void
sec 2(g). A void agreement does not give rise to any legal consequences and
is void ab-initio. An agreement with a minor is void ab-initio as against,
because a minor lacks the capacity to contract.

2.

Illegal or Unlawful Contract: An agreement is illegal and void if its object
or consideration is forbidden by law, is of such a nature that if permitted, it
would defeat the provisions of any law or is fraudulent or involves or

implies injury to the person or property of another or the court regards it as
immoral, or opposed to public policy.

CYP 2
1.

Legal obligations

2.

Contract

3.

Agreement

1.10 SUGGESTED READINGS
Herbert M. Bohlman & Mary Jane Dundas, The Legal Ethical, and International Law
Environment of Business, 4th Edition, South-Western College Publishing, 1999.
Miller, Roger LeRoy; Cross, Frank B., Legal Environment Today: Businessmen Its Ethical,
Regulatory & International Law.
Krishnaveni Muttai, Logistics Management
Kapoor S K, International Law, Central Law Agency, 13th ed., Motilal Nehru Road, Allahabad,
2000.
Kapoor N D, Elements of Mercantile Law, 26th ed., Sultan Chand & Sons, New Delhi, 2002.
Gulshan S S, Business Law, Excel Books, New Delhi, 2002.
Mithani, D M, International Economics, 3rd ed., Himalaya Publishing House, Mumbai, 2000


23

Negotiable Instruments

LESSON

2
NEGOTIABLE INSTRUMENTS
CONTENTS
2.0

Aims and Objectives

2.1

Introduction

2.2

Negotiable Instruments
2.2.1

2.3

2.4

2.5

2.6

2.7

Characteristics

Types of Negotiable Instruments
2.3.1

Negotiable by Statue

2.3.2

Negotiable by Custom or Usage

2.3.3

Negotiation

Endorsement
2.4.1

Essentials of Valid Endorsement

2.4.2

Acceptance

Presentation
2.5.1

Presentment for Acceptance

2.5.2

Presentment for Sight

2.5.3

Presentment for Payment

Dishonor
2.6.1

Dishonor by Non-acceptance

2.6.2

Dishonor by Non-payment

2.6.3

Effect of Dishonor

2.6.4

Notice of Dishonor

2.6.5

Consequences of Not Giving Notice of Dishonor

Discharge
2.7.1

Different Modes of Discharge

2.7.2

Discharge of a Party or Parties

2.8

Compensation

2.9

International Law
2.9.1

Liability

2.9.2

Dishonor

2.9.3

Instruments Made Out of India according to the Provisions of Indian Law

2.10

Let us Sum up

2.11

Lesson End Activity

2.12

Keywords

2.13

Questions for Discussion

2.14

Suggested Readings


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International Business Law

2.0 AIMS AND OBJECTIVES
After studying this lesson, you should be able to:
z

Explain the concept of negotiable instruments

z

Write a critical appreciation of the characteristics of negotiable

z

Analyse the types of negotiable instruments

z

Study the international laws

2.1 INTRODUCTION
The word “negotiable” means ‘transferable by delivery’ and the word “instrument”
means ‘a written document by which a right is created in favor of some person’. Thus,
the term “negotiable instrument” literally means ‘a written document transferable by
delivery’.
According to section 13 of the Negotiable Instruments Act, “a negotiable instrument
means a promissory note, bill of exchange, or cheque payable either to order or to
bearer”. “A negotiable instrument may be made payable to two or more payees
jointly, or it may be made payable in the alternative to one of two, or one or some of
several payees”. The act thus mentions three kinds of negotiable instruments namely
promissory notes, bills of exchange and cheque and declares that to be negotiable they
must be made payable in any of the following forms:
1. Payable to order: A note, bill or cheque is payable to order which is expressed to
be payable to a particular person of his order. Ex: (i) Pay A (ii) Pay A or order,
(iii) Pay to order of A (iv) pay A and B and (v) Pay A or B are various forms in
which an instrument may be made payable to order. But it should not contain any
words prohibiting transfer. It may be noted that documents containing express
words prohibiting negotiability remain valid as a document but they are not
negotiable instrument, as they cannot be negotiated further. There is however an
exception in favor of a cheque. A cheque crossed “Account payee only” can still
be negotiated further of course the banker is to take extra care like a bloodhound
in that case.

2. Payable to Bearer: Payable to bearer means payable to any person whosoever
bears it. A note bill or cheque is payable to bearer which is expressed to be so
payable or on which the only or last endorsement is an endorsement in blank.
Thus a note, bill or cheque in the form pay to A or bearer or Pay A, B or bearer or
Pay bearer is payable to bearer. Where an instrument is originally payable to order
it may become payable to bearer if endorsed in blank by the payee. Ex: A cheque
is payable to A. A endorses it merely by putting his signature on the back and
delivers it to B with the intention of negotiating it. In the hands of B the cheque is
a bearer instrument.
Check Your Progress 1
Define the following:
1.

Negotiable Instrument
……………………………………………………………………………..
……………………………………………………………………………..

2.

Payable to Bearer
……………………………………………………………………………..
……………………………………………………………………………..


2.2 NEGOTIABLE INSTRUMENTS
2.2.1 Characteristics
1. Easy Negotiability: They are transferable from one person to another without any
formality. In other words the property in these instruments passes by either
endorsement or delivery or by delivery merely and no further evidence of transfer
is needed.

2. Transferee can sue in his own name without giving notice to the debtor: A bill
note or cheque represents a debt and implies the right of the creditor to recover
something form his debtor. The creditor can either recover this amount himself or
can transfer his right to another person. In case he transfers his right, the
transferee of a negotiable instrument is entitled to sue on the instrument in his
own name in case of dishonour, without giving notice to the debtor of the fact that
he has become holder. In case of transfer or assignment of an ordinary actionable
claim under the transfer of property act, notice to the debtor is necessary in order
to make the transferee entitled to sue in his own name; otherwise he has always to
sue in his transferor before he can recover his claim from the debtor.
3. Better title to a bona fide transferee for value: A bona fide transferee of a
negotiable instrument for value gets the instrument free from all defects. He is not
affected by any defect of title of the transferor or any prior party. Thus, the
general rule of the law of transfer applicable in the case of ordinary chattels that
nobody can transfer a better title than that of his won does not apply to negotiable
instruments. A man may sell to another a stolen radio set but the true owner may
claim back the radio set from the buyer even though he may have got it in good
faith for consideration. The result would have been different if instead of the radio
set a negotiable instrument, say a bill of exchange made payable to bearer, had
thus been transferred in which case the buyer would have obtained a good title. It
is relevant to state that such instruments, which restrict transferability, are treated
like ordinary chattels and not like negotiable instruments. Hence the transferee
takes such instruments subject to all equities and his title shall not be better than
that of the transferor.
4. Presumptions: Certain presumptions apply to all negotiable instruments unless
contrary is proved. These presumptions are dealt with in secs. 118 and 119 and are
as follows:
a) Consideration: Every negotiable instrument is presumed to have been made,
dawn, accepted, indorsed, negotiated or transferred, for consideration. This
would help a holder to get a decree from a court without any difficulty.

b) Date: Every negotiable instrument bearing a date is presumed to have been
made or drawn on such date.
c) Time of Acceptance: When a bill of exchange has been accepted, it is
presumed that it was accepted within a reasonable time of its date and before
its maturity.
d) Time of Transfer: Every transfer of a negotiable instrument is presumed to
have been made before its maturity.
e) Order of Endorsements: The endorsements appearing upon a negotiable
instrument are presumed to have been made in the order in which they appear
thereon.
f) Stamp: When an instrument has been lost, it is presumed that it was duly
stamped.

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Negotiable Instruments