Chapter 1

Indian Contract Act, 1872

Synopsis
Unit 1: Indemnity and Guarantee
1. Contract of Indemnity and Guarantee [Section 124 to 147]
(1) Meaning of Indemnity
(2) Rights of Indemnity Holder when Sued
2. Meaning of Contract of Guarantee [Section 126]
(1) Essentials of valid Guarantee
3. Distinction between Indemnity and Guarantee
4. Liability of two persons, primarily liable, not affected by arrangement between them that one shall be
surety on other’s default
5. Nature and Extent of Surety’s Liability [Section 128]
6. Kinds of Guarantee
(1) Specific Guarantees
(2) Continuing Guarantee [Section 129]
(3) Revocation of Continuing Guarantee [Section 130 & 131]
7. Rights of Surety
8. Discharge of Surety
Unit 2: Bailment and Pledge
Contract of Bailment and Pledge
9. Bailment [Section 148]
(1) Essential Element of Bailment
10. Classification of Bailment on the basis of Consideration
(1) Gratuitous Bailment
(2) Bailment for Reward
11. Different forms of Bailment
12. Duties of Bailee
13. Rights of Bailee
14. Particular and General Lien
(1) Bailee’s particular lien [Section 170]
(2) General lien of bankers, factors, wharfingers, attorneys and policy brokers [Section 171]
(3) Difference between General Lien and Particular Lien
15. Duties of Bailor
16. Rights of Bailor
17. Termination of Bailment
18. Finder of Lost Goods
19. Right of Third Person claiming goods Bailed [Section 167]
20. Pledge [Section 172]
(1) Essential Element of Pledge
21. Rights of the Pawnee
22. Rights of Pawnor
23. Pledge by Non-Owners
24. Distinction between Bailment and Pledge

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Mission CA Inter Telegram Channel
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 Unit 3: Agency
25. Agency
26. Definition of Agent [Section 182]
(1) Test of Agency
(2) Who may employ Agent
(3) Who may be an Agent
27. Creation of Agency [Section 185]
28. Classes of Agents
29. Duties and Obligations of Agent
30. Rights of Agent
31. Extent of Agent’s Authority
32. Responsibilities of Agent to Third-parties
33. Principal liable for Agent’s Torts [Section 238]
34. Personal Liability of Agent to Third-party
35. Meaning of Authority coupled with Interest [Section 202]
36. Termination of Agency
(1) When Agency is Irrevocable
37. Relation between principal and person duly appointed by agent to act in business of agency [Section 194]
38. Agent’s duty in naming such person [Section 195]
39. Difference between a Sub-agent and a substituted Agent
40. Non- Liability of Employer of Agent to do a Criminal Act
41. Compensation to Agent for injury caused by Principal’s neglect
42. Agent’s liability to Third Parties

Unit 1: Indemnity and Guarantee

1. Contract of Indemnity and Guarantee [Section 124 to 147]
(1) Meaning of Indemnity
 A contract of indemnity is 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 by the conduct of any other person
(Section 124).
 For example, A contracts to indemnify B against the consequence of any proceedings which C may
take against B in respect of a certain sum of 300 rupees. This is a contract of indemnity. The contract
of indemnity may be express or implied.
 The person who promises to indemnify or make good the loss is called the indemnifier and the
person whose loss is made good is called the indemnified or the indemnity holder.
(2) Rights of Indemnity Holder when Sued
Under Section 125, the promisee in a contract of indemnity, acting within the scope of his authority, is
entitled to recover from the promisor—
 All damages which he may be compelled to pay in any suit in respect of any matter to which the
promise to indemnify applies.
 All costs which he may be compelled to pay in any such suit if, in bringing or defending it, he did not
contravene the orders of the promisor, and acted as if it would have been prudent for him to act in the
absence of any contract of indemnity, or if the promisor authorised him to bring or defend the suit.
 All sums which he may have paid under the terms of any compromise of any such suit, if the
compromise was not contrary to the orders of the promisor, and was one which would have been
prudent for the promisee to make in the absence of any contract of indemnity, or if the promisor
authorised him to compromise the suit.
2. Meaning of Contract of Guarantee [Section 126]
A contract of guarantee is a contract to perform the promise, or discharge the liability of a third
person in case of his default.

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  The person who gives the guarantee is called the Surety.
 The person for whom the guarantee is given is called the Principal Debtor.
 The person to whom the guarantee is given is called the Creditor.
 A guarantee may be either oral or written, although in the English law, it must be in writing.
Example: A advances a loan of ` 5,000 to B and C promises to A that if B does not repay the loan, C will
do so. This is a contract of guarantee. Here B is the principal debtor, A is the creditor and C is the surety or
guarantor.
A contract of guarantee must also satisfy all the essential elements of a valid contract.
Section 127 provides that anything done or any promise made for the benefit of the principal debtor
may be a sufficient consideration to the surety for giving the guarantee.
Example: B requests A to sell and deliver to him goods on credit. A agrees to do so, provided C will
guarantee the payment of the price of the goods. C promises to guarantee the payment in consideration of A’s
promise to deliver the goods. This is sufficient consideration for C’s promise.
(1) Essentials of valid Guarantee
The followings are essential elements of a valid guarantee:
 Existence of a principal debt;
 Benefit to principal debtor is sufficient consideration, but past consideration is no consideration for a
contract of guarantee;
 Consent of surety not to be obtained by misrepresentation or concealment of a material fact;
 Can be oral or written;
 Surety can be proceeded against without proceeding against the principal debtor first;
 If the Co-surety does not join, the contract of guarantee is not valid.

3. Distinction between Indemnity and Guarantee

A contract of indemnity differs from a contract of guarantee in the following ways:
 In a contract of indemnity there are only two parties: the indemnifier and the indemnified. In a
contract of guarantee, there are three parties; the surety, the principal debtor and the creditor.
 In a contract of indemnity, the liability of the indemnifier is primary. In a contract of guarantee, the
liability of the surety is secondary. The surety is liable only if the principal debtor makes a default,
the primary liability being that of the principal debtor.
 The indemnifier need not necessarily act at the request of the debtor; the surety gives guarantee
only at the request of the principal debtor.
 In the case of a guarantee, there is an existing debt or duty, the performance of which is guaranteed
by the surety, whereas in the case of indemnity, the possibility of any loss happening is the only
contingency against which the indemnifier undertakes to indemnify.
 The surety, on payment of the debt when the principal debtor has failed to pay is entitled to proceed
against the principal debtor in his own right, but the indemnifier cannot sue third-parties in his
own name, unless there be assignment. He must sue in the name of the indemnified.

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 Difference between Indemnity and Guarantee

S. Basis Indemnity Guarantee

No
1. Parties 2 parties – Indemnifier and 3 parties – Surety, Creditor & Principal
Indemnified. Debtor.
2. No of One agreement between Three agreements between surety and
agreements indemnifier and indemnified. creditor, creditor and debtor, surety and
debtor
3. Liability Indemnifier – Primary liability. Surety – Secondary & contingent liability.
4. Claim Indemnifier can’t claim re – After making payment to debtor, surety will
imbursement from 3 rd party. step into the shoes of creditor.
5. Act on It is not necessary for indemnifier to It is necessary that the surety should give
request act at the request of indemnified. guarantee at the request of debtor.
6. Nature of Liability arises on happening of a There is usually an existing debt or duty, the
liability contingency. performance of which is guaranteed by
surety.
4. Liability of two persons, primarily liable, not affected by arrangement between them that one shall
be surety on other’s default
Where two persons contract with a third person to undertake a certain liability, and also contract with
each other that one of them shall be liable only on the default of the other, the third person not being a party
to such contract, the liability of each of such two persons to the third person under the first contract is not
affected by the existence of the second contract., although such third person may have been aware of its
existence [Section 132].
Example: A and B make a joint & several promissory note to C. A makes it, in fact as surety for B, and
C knows this at the time when the note is made. The fact that A, to the knowledge of C, made the note as
surety for B, is no answer to a suit by C against A upon the note.
5. Nature and Extent of Surety’s Liability [Section 128]
 The liability of the surety is co-extensive with that of the principal debtor unless the contract
otherwise provides.
 A creditor is not bound to proceed against the principal debtor. He can sue the surety without suing
the principal debtor.
 As soon as the debtor has made default in payment of the debt, the surety is immediately liable.
 However, until default, the creditor cannot call upon the surety to pay. In this sense, the nature of the
surety’s liability is secondary.

6. Kinds of Guarantee
A contract of guarantee may be for an existing debt, or for a future debt. It may be a specific guarantee,
or it may be a continuing guarantee.
(1) Specific Guarantees
A specific guarantee is given for a single debt and comes to an end when the debt guaranteed has been
paid.
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(2) Continuing Guarantee [Section 129]
A continuing guarantee is one which extends to a series of transactions. The liability of surety in case
of a continuing guarantee extends to all the transactions contemplated until the revocation of the guarantee.
Continuing Guarantee can either be:
(a) On the basis of time;
(b) On the basis of amount;
Example of Time Bound Guarantee: A guarantees payment to B of the price of 5 sacks of flour to be
delivered by B to C to be paid for in a month. B delivers 5 sacks to C. C pays for them. Afterwards B delivers
4 sacks to C, which C does not pay for. The Guarantee given by A was not Continuing Guarantee, and
accordingly he is not liable for the price of 4 sacks.
Example of Amount Bound Guarantee: A guarantees payment to B, a tea-dealer, to the amount of `
100, for any tea he may from time to time supply to C. B supplies C with tea to above the value of ` 100, and
C pays B for it. Afterwards B supplies C with tea to the value of ` 200. The guarantee given by A was a
continuing guarantee, and he is accordingly liable to B to the extent of ` 100.
(3) Revocation of Continuing Guarantee [Section 130 & 131]
A continuing guarantee is revoked in the following circumstances:
(a) By notice of revocation by the surety [Section 130]: The notice operates to revoke the surety’s
liability as regards future transactions. He continues to be liable for transactions entered into prior to
the notice.
Example: A guarantees to B, to the extent of ` 10000, that C shall pay all the bills that B shall draw
upon. B draws upon C. C accepts the bill. A gives notice of revocation. C dishonours the bill at
maturity. A is liable upon his guarantee.
(b) By the death of the surety [Section 131]: The death of the surety operates, in the absence of contract
as a revocation of a continuing guarantee, so far as regards future transactions.
7. Rights of Surety
A surety has certain rights against
 The creditor [Section 141]
 The principal debtor [Sections 140 and 145]
 The co-securities [Sections 146 and 147].
(a) [Section 141] Surety’s rights against the creditor
Under Section 141 a surety is entitled to the benefit of every security which the creditor has against
the principal debtor at the time when the contract of suretyship is entered into whether the surety
knows of the existence of such security or not; and, if the creditor losses or, without the consent of
the surety parts with such security, the surety is discharged to the extent of the value of the security.
Example 1: C advances to B his tenant, ` 200,000/- on the guarantee of A. C has also a further
security of ` 200,000/- by a mortgage of B’s furniture. C cancels the mortgage. B becomes insolvent,
and C sues A on his guarantee. A is discharged from liability to the amount of the value of the
furniture.
Example 2: C, a creditor, whose advance to B is secured by a decree, receives also a guarantee for
that advance from A. C afterwards takes B’s goods in execution under the decree, and then, without
the knowledge of A, withdraws the execution. A is discharged.
Example 3: A, as surety for B, makes a bond jointly with B to C, to secure a loan from C to B.
afterwards, C obtains from B a further security for same debt. Subsequently, C gives up the further
security, A is not discharged.
(b) Rights against the principal debtor

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 [Section 140] Rights of Subrogation: After discharging the debt, the surety steps into the shoes of
the creditor or is subrogated to all the rights of the creditor against the principal debtor. He can then
sue the principal debtor for the amount paid by him to the creditor on the debtors default; he becomes
a creditor of the principal debtor for what he has paid.
In some circumstances, the surety may get certain rights even before payment. The surety has
remedies against the principal debtor before payment and after payment.
Case Law: Mamta Ghose v United Industrial Bank
Where the principal debtor, after finding that the debt became due, started disposing of his
properties to prevent seizure by surety, the Court granted an injunction to the surety restraining the
principal debtor from doing so. The surety can compel the debtor, after debt has become due to
exonerate him from his liability by paying the debt.
[Section 145] Implied promise to indemnify surety: 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 sum he has rightfully paid under the guarantee, but no sums which he
has paid wrongfully.
Example 1: B is indebted to C, and is surety for the debt. C demands payment from A, and on his
refusal sues him for the amount. A defends the suit, having reasonable grounds to do so, but is
compelled to pay the amount of the debt with costs. He can recover from B the amount paid by him
for costs, as well as the principal debt.
Example 2: C lends B a sum of money, and A at the request of B. accepts a bill of exchange drawn
by B upon A to secure the amount. C, the holder of the bill, demands payment of it from A, and, on
A’s refusal to pay, sues him upon the bill. A, not having reasonable grounds for doing, defends the
suit, and has to pay the amount of the bill and costs. He can recover from B the amount of the bill but
not the sum paid for costs, a there was no real ground for defending the action.
Example 3: A guarantees to C, to the extent of ` 200,000/-, payment for wheat to be supplied by C to
B. C supplies to B the wheat to a less amount than ` 200,000/-, but obtains from A payment of the
sum of ` 200,000/- in respect of the wheat supplied. A cannot recover from B more than the price of
the wheat actually supplied.
(c) Surety’s rights gains co-sureties
[Section 146] Co-sureties liable to contribute equally: When a surety has paid more than his share
of debt to the creditor, he has a right of contribution from the co-securities who are equally bound to
pay with him.
Example: A, B and C are sureties to D for the sum of ` 3,000 lent to E who makes default in
payment. A, B and C are liable, as between themselves to pay ` 1,000 each. If any one of them has to
pay more than ` 1,000 he can claim contribution from the other two to reduce his payment to only `
1,000. If one of them becomes insolvent, the other two shall have to contribute the unpaid amount
equally.
[Section 147] Liability of Co-sureties bound in different sums: The principal of equal contribution
is, however, subject to maximum limit fixed by a surety to his liability. Co-sureties who are bound in
different sums are liable to pay equally as far as the limits of their respective obligations permit.
Example: A, B & C, as sureties for D, enter into three several bonds, each in a different penalty,
namely A in the penalty of ` 100,000, B in that of ` 200,000, C in that of ` 400,000, conditioned for
D’s duly accounting to E. D makes default to the extent of ` 300,000. Here, A, B & C are each liable
to pay ` 100,000.

8. Discharge of Surety
A surety may be discharged from liability under the following circumstances:
 By notice of revocation in case of a continuing guarantee as regards future transaction.

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  By the death of the surety as regards future transactions, in a continuing guarantee in the absence of
a contract to the contrary.
 Any variation in the terms of the contract between the creditor and the principal debtor, without
the consent of the surety, discharges the surety as regards all transactions taking place after the
variation.
Example: A becomes surety to C for B’s conduct a s a manager in C’s bank. Afterwards B & C
contract, without A’s consent, that B’s salary shall be raised, and that he shall become liable for one-
fourth of the losses on overdrafts. B allows a customer to overdraw, and the bank loses a sum of
money. A is discharged from his suretyship by the variance made without his consent, and is not
liable to make good this loss.
 A surety will be discharged if the creditor releases the principal debtor, or acts or makes an
omission which results in the discharge of the principal debtor.
 Where the creditor, without the consent of the surety, makes an arrangement with the principal
debtor for composition, or promises to give time or not to sue him, the surety will be discharged.
 If the creditor does any act which is against the rights of the surety, or omits to do an act which
his duty to the surety requires him to do, and the eventual remedy of the surety himself against the
principal debtor is thereby impaired, the surety is discharged.
 If the creditor loses or parts with security which at the time of the contract the debtor had given in
favour of the creditor, the surety is discharged to the extent of the value of the security, unless the
surety consented to the release of such security by creditor in favour of the debtor. It is immaterial
whether the surety was or is aware of such security or not.
 If the creditor does not act which is inconsistent with the rights of the surety, or omits to do any act
which his duty to the surety requires him to do, and the eventual remedy of the surety himself against
the principal debtor is thereby impaired, the surety is discharged.
Example: B contracts to build a ship for C for a given sum, to be paid by instalments as the work
reaches certain stages. A becomes surety to C for B’s dues performance of the Contract. C without
knowledge of A, prepays to B the last 2 instalments, A is discharged by this pre-payment.

Case Law: Wythes v Labouchere (1859)

 A contract of guarantee is not a contract of Uberrimae Fidei i.e., one requiring full disclosure of all
material facts by the principal debtor or creditor to the surety before the contract is entered into.
 Fraud on the part of the principal debtor is not enough to set aside the contract, unless the surety
can show that the creditor or his agent knew of the fraud and was a party to it.
 When a guarantee is given to a banker, there is no obligation on the banker to inform the intending
surety of matters affecting the credit of the debtor or any circumstances connected with the
transaction which render the position of the surety more hazardous

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 Unit 2: Bailment and Pledge
Contract of Bailment and Pledge
9. Bailment [Section 148]
A bailment is a transaction whereby one person delivers goods to another person for some purpose,
upon a contract that they are, when the purpose is accomplished to be returned or otherwise disposed of
according to the directions of the person delivering them.
The person who delivers the goods is called the bailor and the person to whom they are delivered is
called the bailee.
(1) Essential Element of Bailment
The Essential characteristics of bailment are as follows:
1. Bailment is based upon a contract. Sometimes it could be implied by law as it happens in the case of
finder of lost goods;
2. It involves the delivery of goods from one person to another for some purposes;
3. Delivery involves change of possession from one person to another, and not change of ownership.
In bailment, bailor continues to be the owner of goods as there is no change of ownership;
4. Bailment is only for movable goods and never for immovable property or money;
5. In bailment, possession of goods changes. Change of possession can happen by physical delivery or
by any action which has the effect of placing the goods in the possession of bailee;
6. Bailee is obliged to return the goods physically to the bailor. The bailee cannot deliver other goods
even if of the higher value.
10. Classification of Bailment on the basis of Consideration
(1) Gratuitous Bailment
A gratuitous bailment is one in which neither the bailor nor the bailee is entitled to any remuneration.
Such a bailment may be for the exclusive benefit of the bailor, e.g., when A leaves his dog with a neighbor
to be looked after in A’s absence on a holiday. It may again be for exclusive benefit of the bailee, e.g., where
you lend your book to a friend of yours for a week. In neither case any charge is made.
A gratuitous bailment terminates by the death of either the bailor or the bailee [Section 162].
(2) Bailment for Reward
This is for the mutual benefit of both the bailor and the bailee. For example, A lets out a motor-car for
hire to B. A is the bailor and receives the hire charges and B is the bailee and gets the use of the car. Where,
A hands over his goods to B, a carrier for carriage at a price, A is the bailor who enjoys the benefit of carriage
and B is the bailee who receives a remuneration for carrying the goods.
11. Different forms of Bailment
Following are the popular forms of Bailment:
 Delivery of goods by one person to another to be held for the bailor’s use;
 Goods given to a friend for his own use without any charge;
 Hiring of goods;
 Delivering goods to a creditor to serve as security for a loan;
 Delivering goods for repair with or without remuneration;
 Delivering goods for carriage.
12. Duties of Bailee
The bailee owes the following duties in respect of the goods bailed to him:
 The bailee must take as much care of the goods bailed to him as a man of ordinary prudence
would take under similar circumstances of his own goods of the same bulk, quality and value as the
goods bailed.

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  The bailee is under a duty not to use the goods in an unauthorised manner or for unauthorised
purpose.
 He must keep the goods bailed to him separate from his own goods. If the bailee without the
consent of the bailor, mixes the goods of the bailor with his own goods, and the goods can be
separated or divided, the property in the goods remains in the parties respectively; but the bailee is
bound to bear the expenses of separation, and any damages arising from the mixture.
 He must not set up an adverse title to the goods.
 It is the duty of the bailee to return the goods without demand on the expiry of the time fixed or
when the purpose is accomplished.
 In the absence of any contract to the contrary, the bailee must return to the bailor any increase, or
profits which may have accrued from the goods bailed; for example, when A leaves a cow in the
custody of B to be taken care of and the cow gets a calf, B is bound is deliver the cow as well as the
calf to A’.
 If several joint owners of goods bail them, the bailee may deliver them back to, or according to the
directions, one joint owner without the consent of all, in the absence of any agreement to the contrary.
13. Rights of Bailee
The bailee has the following rights in respect of the goods bailed to him:
 To claim compensation for any loss arising from non- disclosure of known defects in the goods;
 To claim indemnification for any loss or damage as a result of defective title;
 To deliver back the goods to joint bailors according to the agreement or directions;
 If the bailor has no title to the goods, and the bailee, in good faith delivers them back to, or according
to the directions of, the bailor, the bailee is not responsible to the owner in respect of such delivery;
 To exercise his ‘right of lien’. This right of lien is a right to retain the goods and is exercisable where
charges due in respect of goods retained have not been paid;
 To take action against third parties if that party wrongfully denies the bailee of his right to use the
goods.

14. Particular and General Lien

 A particular lien is one which is available only against that property of which the skill and labour
have been exercised. A bailee’s lien is a particular lien.
 A general lien is a right to detain any property belonging to the other and in the possession of the
person trying to exercise the lien in respect of any payment lawfully due to him.
Thus, a general lien is the right to retain the property of another for a general balance of accounts
but a particular lien is a right to retain only for a charge on account of labour employed or expenses
bestowed upon the identical property detained.

(1) Bailee’s particular lien [Section 170]

Where the bailee has, in accordance with the purpose of the bailment, rendered any service involving the
exercise of labour or skill in respect of the goods bailed, he has, in the absence of a contract to the contrary, a
right to retain such goods until he receives due remuneration for the services he has rendered in respect of
them.
Example 1: A delivers a rough diamond to B, a jeweler, to be cut and polished, which is accordingly
done. B is entitled to retain the stone till he is paid for the services he has rendered.
Example 2: A gives cloth to B, tailor to make into a coat. B promises A to deliver the coat as soon as it is
finished, and to give a three months’ notice for the price. B is not entitled to retain the coat until he is paid.
In accordance with the provisions of the bailment if the bailee by his skill or labour improves the goods
bailed, he is entitled for remuneration for such services. Towards such remuneration, the bailee can retain the
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goods bailed if the bailor refuses to pay the remuneration. Such a right to retain the goods bailed is the right
of particular lien. He however does not have the right to sue.
Where the bailee delivers the goods without receiving his remuneration, he has a right to sue the bailor. In
such case the particular lien maybe waived. The particular lien is also lost if the bailee does not complete the
work within the time agreed.
(2) General lien of bankers, factors, wharfingers, attorneys and policy brokers [Section 171]
Bankers, factors, wharfingers, attorneys of a high court and policy brokers may, in the absence of a
contract to the contrary, retain as a security for a general balance on account of any goods bailed to them. ,
but no other person have a right to retain, as a security for such balance, goods bailed to them, unless there is
an express contract to the effect.
Bankers, factors, wharfingers, policy brokers and attorneys of law have a general lien in respect of goods
which come into their possession during the course of their profession.
For instance, a banker enjoys the right of a general lien on cash, cheques, bills of exchange and securities
deposited with him for any amounts due to him. For instance, A borrows ` 500/- from the bank without
security and subsequently again borrows another ` 1000/- but with security of certain jewellery. In this case,
even where A has returned ` 1000/- being the second loan, the banker can retain the jewellery given as
security to the second loan towards the first loan which is yet to be repaid.
Under the right of general lien the goods cannot be sold but can only be retained for dues. The right of
lien can be waived through a contract.

Note: If goods were destroyed or stolen in which there is no fault of bailee, then Bailee is entitled to be paid for
service performed before they were destroyed.

(3) Difference between General Lien and Particular Lien

 In case of General Lien, it is a right to detain/retain any goods of bailor for general balance of account
outstanding whereas in case of Particular Lien it is a right exercisable only on such goods in respect
of which charges are due;
 A General Lien is not Automatic but is recognized through an agreement. It is exercised by bailee
only by name whereas Particular Lien is automatic;
 A General Lien can be exercised against goods even without involvement of labour or skill whereas
A Particular Lien comes into play only when some labour or skill is involved;
 Bankers, factors, wharfingers, policy brokers etc. are entitled to General Lien whereas Bailee, finder
of goods, pledgee, unpaid seller, agent, partner etc. are entitled to Particular Lien.

Quick Recap
Difference between Particular Lien and General Lien

Basis Particular Lien General Lien

1. Meaning Particular lien available to bailee only General lien is a right to retain all the
against those goods on which some skill goods or property of anther until all claims
and labour have been expended by him. of holder are satisfied
2. Right to Right to retain any goods for a charge of Right to retain any property belonging to
retain labour employed. other party for a general balance of
account.

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15. Duties of Bailor
 The bailor must disclose all the known faults in the goods and if he fails to do that, he will be liable
for any damage resulting directly from the faults;
 In the case of bailment for hire, a still greater responsibility is placed on the bailor. He will be liable
even if he did not know of the defects;
 It is the duty of the bailor to pay any extraordinary expenses incurred by the bailee;
 The bailor is bound to indemnify the bailee for any cost or costs which the bailee may incur because
of the defective title of the bailor of the goods bailed;
 The bailor is bound to accept the goods after the purpose is accomplished.
16. Rights of Bailor
 Right to enforce the duties of the bailee and claim for damages;
 Right to terminate the contract in the event of inconsistent goods use of the goods bailed by the
bailee;
 Right to demand back the goods on expiry of the time for the which goods were bailed;
 Right to claim the increase or profits, if any received by bailee in respect of the goods bailed.
17. Termination of Bailment
 Where the bailee wrongfully uses or dispose of the goods bailed, the bailor may determine
(terminate) the bailment.
 As soon as the period of bailment expires or the object of the bailment has been achieved, the
bailment comes to an end, and the bailee must return the goods to the bailor.
 Bailment is terminated when the subject matter of bailment is destroyed or by reason of change in
its nature, becomes incapable of use for the purpose of bailment.
 A gratuitous bailment can be terminated by the bailor at any time, even before the agreed time.
 A gratuitous bailment terminates by the death of either the bailor or the bailee.

18. Finder of Lost Goods

The position of a finder of lost goods is exactly that of a bailee.
 The rights of a finder are that he can sue the owner for any reward that might have been offered,
and may retain the goods until he receives the reward.
 But where the owner has offered no reward, the finder has only a particular lien and can detain the
goods until he receives compensation for the troubles and expenses incurred in preserving the
property for finding out the true owner. But he cannot file a suit for the recovery of the compensation
[Section 168].
 Thus, as against the true owner, the finder of goods in a public or quasi public place is only a bailee;
he keeps the article in trust for the real owner.
 As against every-one else, the property in the goods vests in the finder on his taking possession of it.
 The finder has a right to sell the property—
(a) Where the owner cannot with reasonable diligence be found, or
(b) When found, he refuses to pay the lawful charges of the finder; or
(c) If the thing is in danger of perishing or losing greater part of its value, or
(d) When the lawful charges of the finder for the preservation of goods and the finding out of the
owner amounts to two-thirds of the value of the thing.

1.11 CS AMIT VOHRA

19. Right of Third Person claiming goods Bailed [Section 167]
If a person other than the bailor, claims goods bailed, he may apply to the Court to stop delivery of the
goods to the bailor, and to decide the title to the goods.
20. Pledge [Section 172]
 Pledge or pawn is a contract whereby an article is deposited with a lender of money or promisee
as security for the repayment of a loan or performance of a promise.
 The bailor or depositor is called the ‘’Pawnor’’ and the bailee or depositee the “Pawnee”.
Since pledge is a branch of bailment, the pawnee is bound to take reasonable care of the goods pledged
with him. Any kind of goods, valuables, documents or securities may be pledged.
(1) Essential Element of Pledge
The following are the essential elements of a pledge:-
1. The property pledged should be delivered to the Pawnee.
2. Delivery should be in pursuance of a contract.
3. Delivery should be for the purpose of security.
4. Delivery should be upon a condition to return.



1.12 CS AMIT VOHRA

21. Rights of the Pawnee
 [Section 173] Right of Retainer: No property in goods pawned passes to the pawnee, but the
pawnee gets a “special right to retain possession even against the true owner until the payment of the
debt, interest on the debt, and any other expense incurred in respect of the possession or for
preservation of the goods pledged”.
 [Section 176] Pawnee’s right where Pawnor makes default: If the pawnor makes a default in
payment of the debt or performance of the promise at the stipulated time, the pawnee may-
(a) File a suit for the recovery of the amount due to him while retaining the goods pledged as
collateral security.
(b) Sue for the sale of the goods and the realisation of money due to him.
(c) Himself sell the goods pawned, after giving reasonable notice to the pawnor, sue for the
deficiency, if any, after the sale.
Note: If after sale of the goods, there is surplus, the pawnee must pay it to the pawnor [Section
176].
 [Section 174] Right to retention of subsequent debts: Pawnee has a right to retain the goods
pledged towards subsequent advances as well, however subject to such right being specifically
contemplated in the Contract;
 [Section 175] Pawnees’s right as to extraordinary expenses incurred: The pawnee is entitled to
receive from the Pawnor extraordinary expenses incurred by him for the preservation of goods
pledged;
 [Section 178A] Pledge by person in possession under voidable contract: When the Pawnor has
obtained possession of goods pledged by him under a contract voidable under Section 19 or Section
19A, but the contract has not been rescinded at the time of the pledge, the pawnee acquires a good
title to the goods, provided he acts in good faith and without notice of the pawnor’s defect of title.
22. Rights of Pawnor
 If the pawnee makes an unauthorized sale without giving notice to the pawnor, the pawnor has the
following rights—
(a) He can file a suit for redemption of goods by depositing the money treating the sale as if it had
never taken place; or
(b) He can ask for damages on the ground of conversion.

23. Pledge by Non-Owners

Ordinarily, the owner of the goods would pledge them to secure a loan but the law permits under certain
circumstances a pledge by a person who is not the owner but is in possession of the goods.
Thus, a valid pledge may be created by the following non-owners.
 A mercantile agent: Where a mercantile agent is, with the consent of the owner, in possession of
goods or the documents of title to goods, any pledge made by him, when acting in the ordinary course
of business of a mercantile agent, is as valid as if he was expressly authorised by the owner of the
goods to make the same.
 But the pledge is valid only if the pawnee acts in good faith and has not at the time of the pledge
notice that the pawnor did not had the authority to pledge.
 Pledge by seller or buyer in possession after sale: A seller, left in possession of goods sold, is no
more the owner, but pledge by him will be valid, provided the pawnee acted in good faith and had no
notice of the sale of goods to the buyer.
 Pledge where pawnor having limited interest: When the pawnor is not the owner of the goods but
has a limited interest in the goods which he pawns.
1.13 CS AMIT VOHRA
  Pledge by co-owner in possession: One of the several co-owners of goods in possession thereof with
the assent of the other co-owners may create a valid pledge of the goods.
24. Distinction between Bailment and Pledge
Following are the points of distinction between Bailment and Pledge:
1. As to Purpose: Pledge is a kind of Bailment. Under pledge goods are bailed as a security for a loan
or a performance of a promise. In regular bailment, goods are bailed for purposes other than the two
referred above. The bailee takes them for repairs, safe custody etc.;
2. As to Right of Sale: The pledgee enjoys the right to sell only on default by the pledger to repay the
debt or perform his promise, that too 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. As to right of using goods: Pledgee has right to use goods. A bailee can, if the terms so provide, use
the goods;
4. Consideration: In pledge there is always a consideration whereas in bailment there may or may not
be consideration;
5. Discharge of Contact: Pledge is discharges on the payment of debt or performance of promise,
whereas bailment is discharged when the purpose is accomplished or after a specified time;
6. Return of goods on demand: In case of Gratuitous bailment, the bailee is bound to return the goods
on demand by the bailor. On the other hand, pledgee is not bound to return the goods delivered as
security on demand by the bailor unless and until the debt is repaid or promise is performed.
Quick Recap
Difference between Bailment and Pledge

Basis Bailment Pledge

1. Consideration With or without consideration. With consideration.

Purpose For some specific purpose. Security purpose

Term Wider Narrow

Scope All bailment are not pledge All pledge are bailment

Lien Particular Lien General Lien

1.14 CS AMIT VOHRA

 Unit 3: Agency
25. Agency
The relationship of Agency arises whenever one person called the agent has authority to act on behalf of
another called the Principal. An agent is not a mere connecting link between principal and third party. He has
the power to make the principal answerable to third parties for his conduct.

26. Definition of Agent [Section 182]

 An agent is a person who is employed to bring his principal into contractual relations with third-
parties.
 As the definition indicates, an agent is a mere connecting link between the principal and a third-
party.
 During the period that an agent is acting for his principal, he is clothed with the capacity of his
principal.
Example: P appoints Q, a minor, to sell his car for not less than ` 250,000/-. Q sells it for ` 200,000/-. P
will be held bound by the transaction and further shall have no right against Q for claiming the compensation
for having not obeyed the instructions, since Q is a minor and a contract with a minor is void-ab-initio.
(1) Test of Agency
1. Whether the person has the capacity to bind the principal and make him answerable to the third party;
2. Whether he can establish Privity of Contract between the Principal and Third Parties.
(2) Who may employ Agent
 According to Section 183, any person who is of the age of majority according to the law to which he
is subject, and who is of sound mind, may employ and agent;
 Thus a minor or a person of unsound mind cannot appoint an agent.
(3) Who may be an Agent
 Section 184 provides that “as between the principal and third persons and person may become an
agent, but no person who is not of the age of majority and of sound mind can become an agent, so as
to be responsible to his principal according to the provisions in that behalf herein contained.
Quick Recap
Difference between Agent and Servant

S. No Basis Agent Servant

rd
1. Relationship Legal relations with 3 party. Ordinary relations with 3rd party.
2. Control Follows instructions but no direct Direct control of employer.
control of employer.
3. Number Many principals at same time Only 1 master at one time.

1.15 CS AMIT VOHRA

 Difference between Agent and independent Contractor

S. No Basis Agent Independent Contractor

1. Autonomy Acts within authority provided by Acts independently without any control
principal. or interference of employer.
2. Liability Generally not personally liable. Always personally liable
27. Creation of Agency [Section 185]
A contract of agency may be express or implied, but consideration is not an essential element in this
contract.
(a) Express Agency:
A contract of agency may be made orally or in writing. The usual form of written contract of
agency is the Power of Attorney, which gives him the authority to act on behalf of his principal in
accordance with the terms and conditions therein. In an agency created to transfer immovable
property, the power of attorney must be registered. A power of attorney may be general, giving
several powers to the agent, or special, giving authority to the agent for transacting a single act.
(b) Implied Agency:
Implied agency may arise by conduct, situation of parties or necessity of the case.
(i) Agency by Estoppel: Estoppel arises when you are precluded from denying the truth of
anything which you have represented as a fact, although it is not a fact.
Example: where P allows third-parties to believe that A is acting as his authorised agent, he will
be estopped from denying the agency if such third-parties relying on it make a contract with A
even when A had no authority at all.
(ii) Wife as agent: Where a husband and wife are living together, the wife is presumed to have
her husband’s authority to pledge his credit for the purchase of necessaries of life suitable to
their standard of living. But the husband will not be liable if he shows that
 he had expressly warned the tradesman not to supply goods on credit to his wife; or
 he had expressly forbidden the wife to pledge his credit; or
 his wife was already sufficiently supplied with the articles in question; or
 she was supplied with a sufficient allowance.
Similarly, where any person is held out by another as his agent, the third-party can hold that
person liable for the acts of the ostensible agent, or the agent by holding out. Partners are each
other’s agents for making contracts in the ordinary course of the partnership business.
(iii) Agency of Necessity: In certain circumstances, a person who has been entrusted with another’s
property, may have to incur unauthorized expenses to protect or preserve it.
Such an agency is called an agency of necessity. For example, A sent a horse by railway and on
its arrival at the destination there was no one to receive it. The railway company, being bound to
take reasonable steps to keep the horse alive, was an agent of necessity of A.
A wife deserted by her husband and thus forced to live separate from him, can pledge her
husband’s credit to buy all necessaries of life according to the position of the husband even
against his wishes.
(c) Agency by ratification:
Where a person having no authority purports to act as agent, or a duly appointed agent exceeds his
authority, the principal is not bound by the contract supposedly based on his behalf. But the principal
1.16 CS AMIT VOHRA
 may ratify the agent’s transaction and so accept liability. In this way an agency by ratification arises.
This is also known as ex post facto agency—agency arising after the event.
Ratification is effective only if the following conditions are satisfied:-
 The agent must expressly contract as agent for a principal who is in existence and competent to
contract.
 The principal must be competent to contract not only at the time the agent acted, but also when
he ratified the agents act.
 The principal at the time of ratification has full knowledge of the material facts and must ratify
the whole contract, within a reasonable time.
 Ratification cannot be made so as to subject a third-party to damages, or terminate any right or
interest of a third person.
 Only lawful acts can be ratified.
28. Classes of Agents
Agents may be special or general or, they may be mercantile agents:
(a) Special Agent: A special agent is one who is appointed to do a specified act, or to perform a
specified function. He has no authority outside this special task. The third-party has no right to
assume that the agent has unlimited authority. Any act of the agent beyond that authority will not
bind the principal.
(b) General Agent: A general agent is appointed to do anything within the authority given to him by
the principal in all transactions, or in all transactions relating to a specified trade or matter. The third
party may assume that such an agent has power to do all that is usual for a general agent to do in the
business involved. The third party is not affected by any private restrictions on the agent’s authority.
(c) Sub-Agent
 A person who is appointed by the agent and to whom the principal’s work is delegated to
known as subagent.
 Section 191 provides that “a sub-agent is a person employed by, and acting under the control of
the original agent in the business of the agency.” So, the sub-agent is the agent of the original
agent.
 As between themselves, the relation of sub-agent and original agent is that of agent and the
principal. A subagent is bound by all the duties of the original agent.
 The sub-agent is not directly responsible to the principal except for fraud and wilful wrong.
 The sub-agent is responsible to the original agent. The original agent is responsible to the
principal for the acts of the sub-agent.
 As regards third persons, the principal is represented by sub-agent and he is bound and
responsible for all the acts of sub-agent as if he were an agent originally appointed by the
principal.
An agent must not delegate his authority to sub-agent. This rule is based on the principle: Delegatus
non-protest delegare—a delegate cannot further delegate (Section 190).
But there are exceptions to this rule and the agent may delegate :-
 Where delegation is allowed by the principal.
 Where the trade custom or usage sanctions delegation.
 Where delegation is essential for proper performance.
 Where an emergency renders it imperative.
 Where nature of the work is purely ministerial.

1.17 CS AMIT VOHRA

  Where the principal knows that the agent intends to delegate..
(d) Mercantile Agents: Section 2(9) of the Sale of Goods Act, 1930, defines a mercantile agent as “a
mercantile agent having in the customary course of business as such agent authority either to sell
goods or consign goods for the purposes of sale, or to buy goods, or to raise money on the security of
goods”. This definition covers factors, brokers, auctioneers, commission agents etc.
(e) Factors: A factor is a mercantile agent employed to sell goods which have been placed in his
possession or contract to buy goods for his principal. He is the apparent owner of the goods in his
custody and can sell them in his own name and receive payment for the goods. He has an insurable
interest in the goods and also a general lien in respect of any claim he may have arising out of the
agency.
(f) Brokers: A broker is a mercantile agent whose ordinary course of business is to make contracts
with other parties for the sale and purchase of goods and securities of which he is not entrusted
with the possession for a commission called brokerage. He acts in the name of principal. He has
no lien over the goods as he is not in possession of them.
(g) Del Credere Agent: A del credere agent is a mercantile agent, who in consideration of an extra
remuneration guarantees to his principal that the purchasers who buy on credit will pay for the
goods they take. In the event of a third-party failing to pay, the del credere agent is bound to pay his
principal the sum owned by third-party.
(h) Auctioneers: An auctioneer is an agent who sells goods by auction, i.e., to the highest bidder in
public competition. He has no authority to warrant his principal’s title to the goods. He is an agent for
the seller but after the goods have been knocked down he is agent for the buyer also for the purpose
of evidence that the sale has taken place.
(i) Partners: In a partnership firm, every partner is an agent of the firm and of his co-partners for
the purpose of the business of the firm.
(j) Bankers: The relationship between a banker and his customer is primarily that of debtor and
creditor. In addition, a banker is an agent of his customer when he buys or sells securities, collects
cheques dividends, bills or promissory notes on behalf of his customer. He has a general lien on all
securities and goods in his possession in respect of the general balance due to him by the customer.
29. Duties and Obligations of Agent
An agent’s duties towards his principal are as follows (which give corresponding rights to the principal
who may sue for damages in the event of a breach of duty by the agent):
 An agent must act within the scope of the authority conferred upon him and carry out strictly the
instructions of the principal.
 In the absence of express instructions, he must follow the custom prevailing in the same kind of
business at the place where the agent conducts the business.
Example: A an agent engaged on for B’s business, in which it is the custom to invest from time to
time, at interest, the moneys which may be in hand, fails to make such investment. A must make good
to B the interest usually obtained by such investment.
 He must do the work with reasonable skill and diligence whereby the nature of his profession, the
agent purports to have special skill, he must exercise the skill which is expected from the members of
the profession;
Example: A, an agent for the sale of goods, having authority to sell on credit, sells to B on credit,
without making the proper and usual enquiries as to the solvency of B. B, at the time of such sale is
insolvent. A must make compensation to his principal in respect of any loss thereby sustained;
 He must disclose promptly any material information coming to his knowledge which is likely to
influence the principal in the making of the contract;
 He must not disclose confidential information entrusted to him by his principal;
 He must not allow his interest to conflict with his duty;
1.18 CS AMIT VOHRA
 Example: An Agent must not compete with his principal;
 Not to deal on his own account i.e. if an agent, without the knowledge of his principal deals in the
business of the agency on his own account instead of on account of his principal, the principal is
entitled to claim from the agent any benefit which may have resulted to him from the transaction
[Section 216].
Example: A directs B, his agent, to buy a certain house for him. B tells A it cannot be bought, and
buys the house for himself. A may, on discovering that B has bought the house, compel him to sell it
to A at the price he gave for it.
 The agent must keep true accounts and must be prepared on reasonable notice to render an account.
 He must not make any secret profit and he must disclose any extra profit that he may make.

30. Rights of Agent

 Right of retain out of sums received on principal’s account [Section 217]: This Section empowers
the agent to retain, out of any sums received on account of the principal in the business of the agency
for the following payments:
o All moneys due to himself in respect of advances made;
o In respect of expenses properly incurred by him in conducting such business;
o Such remuneration as may be payable to him for acting as agent.
 Right to Remuneration [Section 219]: Where the services rendered by the agent are not gratuitous
or voluntary, the agent is entitled to receive the agreed remuneration, or if none was agreed, a
reasonable remuneration. The agent becomes entitled to receive remuneration as soon as he has
done what he had undertaken to do.
 Agents Lien on Principal’s property [Section 221]: Certain classes of agents, e.g., factors who
have goods and property of their principal in their possession, have a lien on the goods or property in
respect of their remuneration and expense and liabilities incurred.
 He has a right to stop the goods in transit where he is an unpaid seller.
 Right of Indemnification against acts done in good faith [Section 222 & 223]: As the agent
represents the principal, the agent has a right to be indemnified by the principal against all charges,
expenses and liabilities properly incurred by him in the course of the agency.
31. Extent of Agent’s Authority
 The extent of the authority of an agent depends upon the terms expressed in his appointment or
it may be implied by the circumstances of the case.
 The contractual authority is the real authority, but implied authority is to do whatever is incidental to
carry out the real authority.
 This implied authority is also known as apparent or ostensible authority.
 Thus, an agent having an authority to do an act has authority to do everything lawful which is
necessary for the purpose or usually done in the course of conducting business.
 An agent has authority to do all such things which may be necessary to protect the principal
from loss in an emergency and which he would do to protect his own property under similar
circumstances.
Example: where butter was becoming useless owing to delay in transit and was therefore sold by the
station master for the best price available as it was not possible to obtain instructions from the
principal, the sale was held binding upon the principal.
32. Responsibilities of Agent to Third-parties
The effect of a contract made by an agent varies according to the circumstances under which the agent
contracted. There are three circumstances in which an agent may contract, namely—
 The agent acts for an un-named principal.
1.19 CS AMIT VOHRA
 The agent acts for an undisclosed principal.
 The agent acts for a concealed principal.
(a) Disclosed principal: Where the agent contracts as agent for a named principal, he generally incurs
neither rights nor liabilities under the contract, and drops out as soon as it is made. The contract is
made between the principal and the third-party and it is between these two that rights and obligations
are created. The legal effect is the same as if the principal had contracted directly with the third-party.
The effect is that the principal is bound by all acts of the agent done within the scope of actual,
apparent or ostensible authority. This ostensible authority of the agent is important, for the acts of a
general agent are binding on the principal if they are within the scope of his apparent authority,
although they may be outside the scope of his actual authority. Therefore, a private or secret
limitation or restriction of powers of an agent do not bind innocent third-party.
(b) Undisclosed principal: Where the agent disclose that he is merely an agent but conceals the identity
of his principal, he is not personally liable, as the drops out in normal way. The principal, on being
discovered, will be responsible for the contract made by the agent.
(c) Concealed principal: Where an agent appears to be contracting on his own behalf, without either
contracting as an agent or disclosing the existence of an agency (i.e., he discloses neither the name of
the principal nor his existence), he becomes personally liable. The third-party may sue either the
principal (when discovered) or the agent or both. If the third-party chooses to sue the principal and
not the agent, he must allow the principal the benefit of all payments made by him to the agent on
account of the contract before the agency was disclosed. The third-party is also entitled to get the
benefit of anything he may have paid to the agent.
If the principal discloses himself before the contract is completed, the other contracting party may
refuse to fulfil the contract if he can show that, if he had known who was the principal in the contract,
or if he had known that the agent was not the principal, he would not have entered into the contract.
33. Principal liable for Agent’s Torts [Section 238]
If an agent commits a tort or other wrong (e.g., misrepresentation or fraud) during his agency, whilst
acting within the scope of his actual or apparent authority, the principal is liable. But the agent is also
personally liable, and he may be sued also. The principal is liable even if the tort is committed exclusively for
the benefit of the agent and against the interests of the principal.
34. Personal Liability of Agent to Third-party
An agent is personally liable in the following cases:
 Where the agent has agreed to be personally liable to the third-party.
 Where an agent acts for a principal residing abroad.
 When the agent signs a negotiable instrument in his own name without making it clear that he is
signing it only as agent.
 When an agent acts for a principal who cannot be sued (e.g., he is minor), the agent is personally
liable.
 An agent is liable for breach of warranty of authority. Where a person contracts as agent without
any authority there is a breach of warranty of authority. He is liable to the person who has relied on
the warranty of authority and has suffered loss.
 Where authority is one coupled with interest or where trade, usage or custom makes the agent
personally liable, he will be liable to the third-party.
 He is also liable for his torts committed in the course of agency.

35. Meaning of Authority coupled with Interest [Section 202]

An agency is coupled with an interest when the agent has an interest in the authority granted to him or
when the agent has an interest in the subject matter with which he is authorised to deal. Where the agent was

1.20 CS AMIT VOHRA

appointed to enable him to secure some benefit already owed to him by the principal, the agency was coupled
with an interest.
The principal laid down in Section 202 applies only if the following conditions are fulfilled:
 The interest of the agent should exist at the time of creation of agency and should not have arisen
after the creation of agency.
 Authority given to the agent must be intended for the protection of the interest of the agent.
 The interest of the agent in the subject matter must be substantial and not ordinary.
 The interest of the agent should be over and above his remuneration.
36. Termination of Agency
An agency comes to an end or terminates—
 By the performance of the contract of agency.
 By an agreement between the principal and the agent.
 By expiration of the period fixed for the contract of agency.
 By the death of the principal or the agency.
 By the insanity of either the principal or the agent.
 By the insolvency of the principal, and in some cases that of the agent.
 Where the principal or agent is an incorporated company, by its dissolution.
 By the destruction of the subject-matter.
 By the renunciation of his authority by the agent.
 By the revocation of authority by the principal.
(1) When Agency is Irrevocable
Revocation of an agency by the principal is not possible in the following cases:
 Where the authority of agency is one coupled with an interest, even the death or insanity of the
principal does not terminate the authority in this case.
 When agent has incurred personal liability, the agency becomes irrevocable.
 When the authority has been partly exercised by the agent, it is irrevocable in particular with regard
to obligations which arise from acts already done.

37. Relation between principal and person duly appointed by agent to act in business of agency [Section
194]
Where an agent, holding an express of implied authority to name another person to act for the principal in
the business of the agency, has named another person accordingly, such person is not a sub-agent but an agent
of the principal for such part of business of the agency as is entrusted to him.
Example 1: A directs B, his solicitor, to sell his estate by auction, and to employ an auctioneer for the
purpose. B names C, an auctioneer, to conduct the sale. C is not a sub-agent, but is A’s agent for the conduct
of the sale.
Example 2: A authorizes B, a merchant in Kolkata, to recover the moneys due to A from C & Co. B
instructs D, a solicitor, to take legal proceedings against C & Co. for the recovery of the money. D is not a
sub agent, but is a solicitor of A.

38. Agent’s duty in naming such person [Section 195]

In selecting such agent for his principal, an agent is bound to exercise the same amount of discretion as a
man of ordinary prudence would exercise in his own case; and, if he does this, he is not responsible to the
principal for the acts or negligence of the agent so selected.

1.21 CS AMIT VOHRA

 While selecting a substantial agent, the agent is bound to exercise same amount of diligence as a man of
ordinary prudence and is he does so he will not be responsible for acts or negligence of the substituted agent.
Example 1: A instructs B, a merchant to buy a ship from him. B employs a ship surveyor of good
reputation to choose a ship for A. The surveyor makes the choice negligently and the ship turns out to be
unseaworthy and is lost. B is not, but the surveyor is, responsible to A.
39. Difference between a Sub-agent and a substituted Agent
Both sub-agent and a substituted agent are appointed by the agent. But, however, the following are the
points of distinction between the two:
1. A sub- agent does his work under the control of agent but a substituted agent works under the
instructions of the principal;
2. The agent not only appoints a sub – agent but also delegates to him a part of his own duties. The
agent does not delegate any part of his task to a substituted agent;
3. Privity of contract is established between a principal and a substituted agent. But there is no privity of
contract between the principal and the sub-agent;
4. The sub-agent is responsible to the agent alone and is not generally responsible to the principal. But a
substituted agent is responsible to the principal and not the original agent who appointed him;
5. The agent is responsible to the principal for the acts of the sub-agent, but he is not liable for those of
the substituted agent, provided he has taken due care in selecting him;
6. In the case of a substituted agent, the agent’s duty ends once he has named him, but in the case of a
sub – agent the agent remains answerable for the acts of the sub-agent as long as sub-agency
continues.
Quick Recap
Difference between Sub Agent & Substituted Agent

Basis Co – agent Sub – agent

1. Control Control of Principal Control of agent
2. Stranger Principal can sue co – agent as Principal can’t sue sub – agent being
none of the party is stranger. stranger to contract.
3. Responsibility Agent isn’t responsible for acts of Agent is responsible for acts of sub –
of agent co – agent. agent.
40. Non-Liability of Employer of Agent to do a Criminal Act
According to section 224, where one person employs another to do an act which is criminal, the employer
is not liable to the agent, either upon an express or an implied promise, to indemnify him against the
consequences of that act.
Example 1: A employs B to beat C, and agrees to indemnify him against all consequences of the act. B
thereupon beats C, and has to pay damages to C for so doing. A is not liable to indemnify B for those
damages.
Example 2: B, the proprietor of a newspaper publishes, at A’s request, a libel upon C in the paper and A
agrees to indemnify B against the consequences of the publication, and all costs and damages of any action in
respect thereof. B is sued by C and has to pay damages, and also incurs expenses. A is not liable to B upon
the indemnity
41. Compensation to Agent for injury caused by Principal’s neglect
Section 225 provides that the principal must make compensation to his agent in respect of injury caused
to such agent by the principal's neglect or want of skill.
Example: A employs B as a bricklayer in building a house, and puts up the scaffolding himself. The
scaffolding unskillfully put up, and B is in consequence hurt. A must make compensation to E

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42. Agent’s liability to Third Parties
An agent does all acts on behalf of the principal but incurs no personal liability. The liability remains that
of the principal unless there is a contract to the contrary. This is because there is no privity of contract and
passing of consideration between the agent and third party. An agent also cannot personally enforce contracts
entered into by him on behalf of the principal.
(i) Principal's liability for the Acts of the Agent
Principal liable for the acts of agents which are within the scope of his authority. Contracts entered
into through an agent, and obligations arising from acts done by an agent, may be enforced in the
same manner and will have the same legal consequences, as if the contracts had been entered into and
the acts done by the principal in person.
Example 1: A buys goods from B, knowing that he is an agent for their sale, but not knowing who is
the principal. B's principal is the person entitled to claim from A the price of the goods, and A cannot,
in a suit by the principal, set off against that claim a debt due to himself from B.
Example 2: A, being B's agent with authority to receive money on his behalf, receives from C, a sum
of money due to B. C is discharged of his obligation to pay the sum in question to B.
(ii) Principal not bound, when agent exceeds authority [Section 227]
When an agent does more than he is authorised to do, and when the part of what he does which is
within his authority, can be separated from the part which is beyond his authority, so much only of
what he does as is within his authority is binding as between him and his principal.
Example: A, being owner of a ship and cargo, authorizes B to procure an insurance for ` 400,000 on
the ship. B procures a policy for ` 400,000 on the ship, and another for the like sum on the cargo. A is
bound to pay the premium for the policy on the ship, but not the premium for the policy on the cargo.
(iii) Principal not bound when excess of agent's authority is not separable [Section 228]
Where an agent does more than he is authorised to do, and what he does beyond the scope of his
authority cannot be separated from what is within it, the principal is not bound to recognise the
transaction.
Example: A authorizes B to buy 500 sheep for him. B buys 500 sheep and 200 lambs for one sum of
` 6, 00,000. A may repudiate the whole transaction.
(iv) Consequences of notice given to agent [Section 229]
Any notice given to or information obtained by the agent, provided it be given or obtained in the
course of the business transacted by him for the principal, shall, as between the principal and third
parties, have the same legal consequence as if it had been given to or obtained by the principal.
Example 1: A is employed by B to buy from C certain goods of which C is the apparent owner, and
buys them accordingly. In the course of the treaty for the sale, A learns that the goods really belonged
to D, but B is ignorant of that fact. B is not entitled to set off a debt owing to him from C against the
price of the goods.
Example 2: A is employed by B to buy from C goods of which C is the apparent owner. A was,
before he was so employed, a servant of C, and then learnt that the goods really belonged to D, but B
is ignorant of that fact. In spite of the knowledge of his agent, B may set off against the price of the
goods a debt owing to him from C.
(v) Agent cannot personally enforce, nor be bound by, contracts on behalf of principal [Section
230]
In the absence of any contract to that effect, an agent cannot personally enforce contracts entered into
by him on behalf of his principal, nor is he personally bound by them.
Presumption of contract to the contrary: Such a contract shall be presumed to exist in the
following cases:
(a) Where the -contract is made by an agent for the sale or purchase of goods for a merchant resident
abroad/foreign principal
1.23 CS AMIT VOHRA
 (b) Where the agent does not disclose the name of his principal or undisclosed principal; and
(c) Where the principal, though disclosed, cannot be sued.

(vi) Rights of parties to a contract made by agent not disclosed [Section 231]
If an agent makes a contract with a person who neither knows, nor has reason to suspect, that he is an
agent, his principal may require the performance of the contract; but the other contracting party has,
as against the principal, the same right as he would have had as against the agent if the agent had
been the principal.
If the principal discloses himself before the contract is completed, the other contracting party may
refuse to fulfil the contract, if he can show that, if he had known who was the principal in the
contract, or if he had known that the agent was not a principal, he would not have entered into the
contract.
(vii) Performance of contract with agent supposed to be principal [Section 232]
Where one man makes a contract with another; neither knowing nor having reasonable ground to
suspect that the other is an agent, the principal, if he requires the performance of the contract, can
only obtain such performance subject to the rights and obligations subsisting between the agent and
the other party to the contract.
Example: A, who owes 50,000 rupees to B, sells 100,000 rupees worth of rice to B. A is acting as
agent for c in the transaction, but B has no knowledge nor reasonable ground of suspicion that such is
the case. C cannot compel B to take the rice without allowing him to set off A's debt.
(viii) Right of person dealing with agent personally liable [Section 233]
In cases where the agent is personally liable, a person dealing with him may hold either him or his
principal, or both of them, liable.
Example: A enters into a contract with B to sell him 100 bales of cotton, and afterwards discovers
that B was acting as agent for C. A may sue either B or C, or both, for the price of the cotton.
(ix) Consequence of inducing agent or principal to act on belief that principal or agent will be held
exclusively Liable [Section 234]
When a person who has made a contract with an agent induces the agent to act upon the belief that
the principal only will be held liable, or induces the principal to act upon the belief that the agent only
will be held liable, he cannot afterwards hold liable the agent or principal respectively.
(x) Liability of pretended agent [Section 235]
A pretended agent is a person who represents himself to be an agent of another, when infect he has no
authority from him, whatsoever if the principal ratifies his acts as agent, he has no liability. but if the
principal refuses to ratify his acts, he becomes personally liable to third party for any loss or damage
caused to him. It is to be noted that where agent is personally liable, the third party can sue the
principal or the agent or both the principal and the agent, as the liability of the principal and agent is
joint and several.
(xi) Person falsely contracting agent not entitled to performance [Section 236]
A person with whom a contract has been entered into in the character of agent, is not entitled to
require the performance of it if he was in reality acting, not as agent, but on his own account.
(xii) Liability of principal inducing belief that agent's unauthorized acts were authorized [Section
237]
When an agent has, without authority, done acts or incurred obligations to third persons on behalf of
his principal, the principal is bound by such acts or obligations, if he has by his words or conduct
induced such third persons to believe that such acts and obligations were within the scope of the
agent's authority

1.24 CS AMIT VOHRA

 Example 1: A consigns goods to B for sale, and gives him instructions not to sell under a fixed price.
C, being ignorant of B's instructions, enters into a contract with B to buy the goods at a price lower
than the reserved price. A is bound by the contract.
Example 2: A entrusts B with negotiable instruments endorsed in blank. B sells them to C in
violation of private orders from A. The sale is good.
(xiii) Effect on agreement, of misrepresentation or fraud by agent [Section 238]
Misrepresentations made, or frauds committed, by agents acting in the course of their business for
their principals, have the same effect on agreements made by such agents as if such
misrepresentations or frauds had been made, or committed, by the principals; but misrepresentations
made, or frauds committed, by agents, in matters which do not fall within their authority, do not
affect their principals.
Example 1: A, being B's agent for the sale of goods, induces C to buy them by a misrepresentation,
which he was not authorized by B to make. The contract is voidable, as between B and C, at the
option of C'
Example 2: A, the captain of B's ship, signs bills of lading without having received on board the
goods mentioned therein. The bills of lading are void as between B and the pretended consignor

1.25 CS AMIT VOHRA

Mission CA Inter Telegram Channel
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 Chapter 2
Negotiable Instruments Act, 1881

Synopsis
1. [Section 13] What is Negotiable Instrument
2. [Section 13] Characteristics of a Negotiable Instrument
3. [Section 118] Presumptions as to a Negotiable Instrument
4. Kinds of Negotiable Instrument
5. [Section 4] Promissory Note
6. Promissory to a Promissory Note
7. Essential Characteristics of a Promissory Note
8. [Section 26] Capacity of a person to be a party to a Negotiable Instrument
9. [Section 5] Bill of Exchange
10. Essential Characteristics of Bill of Exchange
11. Distinction between Promissory Note and Bill of Exchange
12. [Section 6] Cheque
13. Distinction between Electronic Cheque and Truncated Cheque
14. Distinction between Bill of Exchange and Cheque
15. [Section 7] Drawer and Drawee
16. Essentials of Valid Acceptance
17. Type of Acceptance
18. Acceptor
19. Acceptance for Honour
20. Payee for Honour
21. Effect of Non-presentment
22. [Section 8] Holder
23. Status of Holder
24. [Section 9] Holder in Due Course
25. Distinction between Holder and Holder in Due Course
26. [Section 10] Payment in Due Course
27. Classification of Bills
28. Negotiation and Assignment
29. Distinction between Negotiation and Assignment
30. Modes of Negotiation
31. [Section 16, 50, 52 & 56] Kinds of Endorsement
32. [Section 17] Ambiguous Instrument
33. [Section 18] Where amount is stated differently in figures and words
34. [Section 20] Inchoate Instrument
35. [Section 22] Maturity
36. [Section 23] Calculating Maturity of Bill or note payable so many days after date or sight
37. [Section 25] When day of Maturity is a Holiday
38. [Section 27] Authority to sign i.e. through Agency
39. [Section 28] Liability of Agent signing
40. [Section 29] Liability of legal representative signing
41. [Section 30] Liability of Drawer
42. [Section 31] Liability of Drawee of cheque
43. [Section 32] Liability of maker of note and acceptor of bill
44. [Section 35] Liability of Endorser
45. [Section 41] Acceptor bound, although endorsement forged, if accepted knowingly.
46. [Section 43] Negotiable Instrument made without Consideration
2.1 CS AMIT VOHRA
47. Crossing
48. [Section 123 – 131A] Types of Crossing
49. Opening of Crossing
50. When banker may refuse payment of his Customer’s cheques
51. When the banker must refuse to honor Customer’s cheques
52. [Section 84] Effect of Non-presentment of cheque within reasonable time
53. [Section 85] Cheque payable to Order
54. Discharge of Parties
55. Dishonor
56. [Section 92] Dishonor by Non-Payment
57. [Section 93-98] Notice of Dishonor
58. [Section 99-103] Noting & Protesting
59. Discharge of a Negotiable Instrument
60. [Section 61, 62 & 64] Presentment of a Negotiable Instrument
61. [Section 75A] Excuse for delay in presentment or payment
62. [Section 82-90] Discharge of a party on Payment
63. [Section 138] Bouncing or Dishonor of Cheques
64. [Section 141] Offences by Companies
65. [Section 142] Cognizance of Offences
66. Meaning of Hundi
67. Kinds of Hundies

1. [Section 13] What is Negotiable Instrument

The term negotiable instrument consists of two parts negotiable and instrument. The word negotiable
means transferable by delivery and the word ‘instrument’ means a written document by which a right is
created in favour of some person. Therefore, negotiable instrument means a written document which
creates a right in favour of some person and which is freely transferable.
Section 13(1) “A negotiable instrument means a promissory note, bill of exchange, or cheque payable
either to order or to bearer.”
Payable to order
An instrument is payable to the order if it is expressed to be so payable or if it is expressed to be payable
to a particular person and does not contain words prohibiting transfer or indicating an intention that it shall
not be transferable.
E.g.,
1. Pay to A.
2. Pay to A or order
3. Pay to the order of A
Payable to bearer
An instrument is payable to the bearer if it is expressed to be so payable.
E.g.,
1. Pay to A or bearer
2. Pay to the bearer

2. [Section 13] Characteristics of a Negotiable Instrument

1. In writing; the negotiable instrument must be in writing.
2. The Signature: a negotiable instrument must be authenticated by the signature of the maker.
3. Unconditional promise or order: a promise to pay money in a promissory note or an order to pay
money in a bill of exchange, or a cheque must be unconditional.
2.2 CS AMIT VOHRA
 4. A certain sum of money
5. Free Transferability: the property in a negotiable instrument is freely transferable. In case of order
instrument, it is transferable by endorsement and delivery, and in case of bearer instrument, it is
transferable by mere delivery.
6. Title: the order in due course (means a person who is a holder and has accepted a Negotiable
Instrument for value, in good faith and before maturity) is not in any way affected by the defective
title of the transferor or any party.
7. Recovery: the holder in due course is entitled to sue on the instrument in his own name for the
recovery of the amount represented in the instrument.
3. [Section 118] Presumptions as to a Negotiable Instrument
1. Consideration: Every Negotiable Instrument was drawn, accepted and endorsed or transferred for
consideration.
2. Date: The date it bears is the date on which it was made.
3. Time of Acceptance: It was accepted within a reasonable time after being made and before maturity.
4. Time of Transfer: Every transaction was made before maturity.
5. Order of Endorsement: The endorsements were made in the same order in which they appear.
6. Stamp: The lost instrument was duly signed and stamped.
7. Every holder of a Negotiable Instrument is a holder in due course: unless it is proved that the
holder has taken it from the true owner either without his free consent or without consideration.
8. In a suit upon a dishonored instrument: the court shall, on proof of the protest, presume that it was
dishonored until this fact is disproved.
4. Kinds of Negotiable Instrument
1. Instrument Negotiable by Statute: Eg - Promissory Note, Bill of Exchange and Cheque.
2. Instrument Negotiable by Custom: Eg - Hundis, share warrants, banker’s draft, etc.

5. [Section 4] Promissory Note

Promissory Note is an instrument in writing containing an unconditional undertaking signed by the
maker to pay a certain sum of money only to or to the order of, a certain person or to the bearer of the
instrument.”

6. Promissory to a Promissory Note

There are two parties to a Promissory Note which are as follows:
Maker
The person who makes the promissory note and promises to pay the money stated therein.
Payee
The person to whom the amount of promissory note is payable, i.e., to whom the promise of payment
is made.
7. Essential Characteristics of a Promissory Note
1. It is an instrument in writing.
2. It is a promise to pay.
3. The undertaking to pay is unconditional.
4. It should be signed by the maker.
5. The maker must be certain.

2.3 CS AMIT VOHRA

 6. The payee must be certain.
7. The promise should be to pay money and money only.
8. The amount should be certain.

Specimen of a Promissory Note (to pay money after the expiry of a fixed time)
Rs. 10,000 Delhi,
February 12, 2017
Three month after date, I promise to pay Mr. Amit Vohra or order the sum of rupees ten thousand, for value
received.
Sd/-
Revenue stamp
To, Amit Vohra
A - 10 Green Park
New Delhi.
Specimen of a Promissory Note (to pay money on demand)
Rs. 10,000 Delhi,
February 12, 2017
On demand, I promise to pay Mr. Rachit Dhingra or order the sum of rupees ten thousand, for value received
Sd/-
Revenue stamp
To, Rachit Dhingra
A – 11, Green Park
New Delhi.

8. [Section 26] Capacity of a person to be a party to a Negotiable Instrument

1. Person must be capable of entering into a Contract
A person shall be liable on a negotiable instrument (by reason of making, drawing, accepting,
endorsing, delivering or negotiating a negotiable instrument) only if he is capable of contracting
according to the law to which he is subject.
2. Liability in case of a minor
 A minor may draw, endorse, deliver and negotiate any negotiable instrument.
 All the parties shall be bound on such negotiable instrument.
However, the minor shall not be bound on such negotiable instrument.
9. [Section 5] Bill of Exchange
Bill of exchange is “an instrument in writing containing an unconditional order, signed by the
maker, directing a certain person to pay a certain sum of money only to, or the order of a certain
person or to the bearer of the instrument”
A bill of exchange is a written acknowledgement of the debt, written by the creditor and accepted by
the debtor. There are usually three parties to a bill of exchange i.e., drawer, acceptor or drawee and
payee. Drawer himself may be the payee.

10. Essential Characteristics of Bill of Exchange

1. It must be in writing.

2.4 CS AMIT VOHRA

 2. It must be signed by the drawer.
3. The drawer, drawee and payee must be certain.
4. The sum payable must be certain.
5. It should be properly stamped.
6. It must contain an express order to pay money and money alone.
Specimen of a BOE (Drawn on demand)
Mr. Z (Drawer)
F-100, Rajouri Garden
New Delhi
August 22, 2017
Rs. 10,000
On demand, pay to Z or order the sum of rupees ten thousand, for value received

Revenue stamp
To,
Mr. X (Drawee)
J – 22, Rajouri Garden
New Delhi
Signature
Mr. Z
Specimen of a BOE (Drawn on time)
Mr. Z (Drawer)
F-100, Rajouri Garden
New Delhi
August 22, 2017
Rs. 10,000
Three months after date, pay to Z or order the sum of rupees ten thousand, for value received
Revenue stamp

To,
Mr. X (Drawee)
A – 10, Rajouri Garden,
New Delhi
Signature
Mr. Z
11. Distinction between Promissory Note and Bill of Exchange
S. No. Distinction Promissory Note Bill of Exchange
1. Number of Parties Two Three
2. Nature of Negotiable It contains a promise and not an A bill contains an order to pay
Instrument order
3. Need for acceptance A Promissory Note does not It is required to be accepted by a
require any acceptance because drawee, as the payment upon the
the person signing as a maker is Negotiable Instrument has to be

2.5 CS AMIT VOHRA

 himself liable to pay upon it made by the drawee
4. Nature of Liability Liability of the maker of a note is Liability of drawer of Bill of
primary Exchange is Secondary and
conditional since he can be held
liable only on the default of the
acceptor in payment of money
5. Conditionality A maker of the note cannot make An acceptor of the bill can
it conditional accept it conditionally making
his liability to pay conditional.
6. Identity of maker and In a note, maker and payee cannot Drawer and payee can be the
payee be the same persons because a same person because drawer
person cannot make a promise to may order the drawee to pay
pay money himself money to him.
12. [Section 6] Cheque
A bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on
demand and it includes the electronic image of a truncated cheque and cheque in electronic form.

Cheque in Electronic Form: It means a cheque drawn in electronic form by using any computer
resource, and signed in a secure system with a digital signature (with/without biometric signature) and
asymmetric crypto system or electronic signature, as the case may be.
Truncated Cheque: It 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 for transmission, substituting the further physical movement of the cheque in writing.
Harmonious Construction of Section 5 & Section 6
A combined reading of Section 5 and 6 tells us that a bill of exchange is a negotiable instrument in
writing containing an instruction to a third party to pay a stated sum of money at a designated future date or
on demand. Whereas, a cheque is also a bill of exchange but is drawn on banker and payable on demand.
13. Distinction between Electronic Cheque and Truncated Cheque
S. No. Electronic cheque Truncated cheque
1. Paper is not used at any stage in creation of A truncated cheque is nothing, but a paper cheque,
an electronic cheque. which is truncated during the clearing cycle.
2. Digital signatures must be used to create an The paper cheque, which is afterwards truncated,
electronic image of a cheque. Thus, an contains no digital signature. The signature is appear
electronic cheque contains digital signature. on the truncated cheque.
3. The original writing of an electronic cheque The original writing of a truncated cheque is on paper,
is in electronic form. duly signed in ink. After the paper cheque is
converted into electronic form, it is truncated, and
thus, it becomes a truncated cheque.

Comparison
Electronic Cheque Truncated Cheque
1. No use of paper Use of paper
2. Digital signature No digital signature
3. Originally in electronic form Originally in ink form and converted into electronic
form

2.6 CS AMIT VOHRA

14. Distinction between Bill of Exchange and Cheque
S. No. Distinction Bill of Exchange Cheque
1. Drawee A bill may be drawn on any person A cheque has to be drawn on a
including a banker banker only.
2. Acceptance It generally requires acceptance A cheque does not require any
before the payment can be acceptance.
demanded from drawee
3. Drawn A bill may be drawn “Payable on A cheque can only be drawn
Demand” or “Payable after the “Payable on demand”
expiration of certain period”
4. Valid A bill drawn “Payable to bearer on A cheque drawn “Payable to bearer
demand” is absolutely void and on demand” is valid.
illegal
5. Stamping A bill is required to have adequate A cheque does not require any
stamp on it stamping
6. Crossing There is no provision regarding the A cheque may be crossed.
Crossing of a Bill of Exchange
7. Maturity Three days of grace is allowed Since a cheque is always “Payable
while calculating maturity date is on demand”, there is no question of
case of time bill allowing any days of grace.
8. Noting and Protesting In case of dishonor of bill, it is There is no system of noting or
noted or protested for dishonor protesting in case of dishonour
9. Notice of dishonor The notice of dishonor must be In case of dishonor of cheques, no
given to the drawer. If notice is not notice is required.
given to the drawer, he will not be
liable for payment
10. Stop payment The payment of bill cannot be The payment of a cheque can be
countermanded by drawer. countermanded by drawer.
15. [Section 7] Drawer and Drawee
Drawer
The maker of a bill of exchange or cheque is called the “drawer”
Drawee
The person thereby directed to pay is called the “drawee”
Drawee in case of need
When in the bill or in any endorsement thereon, the name of any person is given in addition to the
drawee to be resorted to in case of need, such person is called a “drawee in case of need”.
16. Essentials of Valid Acceptance
1. Acceptance should be given on the bill.
2. Acceptance should be signed by the drawee.
3. The instrument should be delivered to the holder.
17. Type of Acceptance
General
Acceptance means an unqualified acceptance, i.e., where the drawee accepts the liability to pay the
amount as mentioned in the bill in full, without any condition.

2.7 CS AMIT VOHRA

Qualified
Acceptance means a qualified acceptance in which the drawee accepts the bill subject to a certain
conditions.
18. Acceptor
Where the drawee of a bill has signed his assent upon the bill and delivered the same to the drawer or to
some other person on his behalf, such drawee is called the “acceptor”.
Drawee = Acceptor = Payer
19. Acceptance for Honour
Meaning
The person who accepts the bill for the honour of any other person is called as an ‘acceptor for honour’.
Conditions for ‘acceptance for honour ’
 The bill must have been noted for non-acceptance
 The acceptance is given—
o For the honour of any part already liable under the bill.
o By any person who is already not liable under the bill;
o With the consent of the holder of the bill
 The acceptance must be made in writing on the bill
Liability of Acceptor for Honour
 He is liable to pay the amount of the bill, if the drawee does not pay on maturity
 He is liable only to the parties subsequent to the party for whose honour the bill is accepted
Note: The Liability of Acceptor for honour is Secondary and arises only at the default made by Drawee.
Rights of Acceptor for Honour
He is entitled to recover the amount paid by him from the party for whose honour the bill was accepted
and from all the parties prior such party.

20. Payee for Honour

Meaning
A person who pays a bill for any other person is called as ‘payer for honour’.
Conditions for ‘Payment for Honour’
 The bill must have been noted for non-payment.
 Payment for honour is made—
o For the honour of any party already liable under the bill;
o By any person (whether or not he is already liable under the bill);
o With the consent of the holder of the bill
 The payment must be recorded by Notary Public.
Right of Payer for Honour
 The payer for honour is entitled to all the rights of a holder.
 He can recover all the sums paid by him from—
(a) The party for whose honour he pays; and
(b) All the prior parties.
21. Effect of Non-presentment
Where presentment for acceptance is compulsory and holder fails to do so, the drawer and all the
2.8 CS AMIT VOHRA
endorser are discharged from liability to him. In such a case, the holder cannot make his claim even on the
original consideration.
22. [Section 8] Holder
A person is a holder when he satisfies two conditions.
1. He is entitled to possess the instrument in his own name.
For example, Payee – the person to whose order the instrument is payable if an instrument reads-`pay
to the order of X’. X is the holder when he is in possession of the instrument. If Y has possession of
the same instrument, he is not holder because the instrument is not in his name.
2. He is entitled to receive or recover the amount due thereon.
23. Status of Holder
A holder has the
 Legal power to transfer the Negotiable Instrument to another person; or
 To enforce the payment of the Negotiable Instrument himself.
24. [Section 9] Holder in Due Course
Essential to become a Holder in Due Course:-
1. A Holder in Due Course must first be a holder of the instrument.
2. He must be holder for valuable consideration.
3. He must have become a holder (possessor) before the date of maturity of the Negotiable
Instrument.
4. He must have become holder of the Negotiable Instrument in good faith. Good faith implies that he
should not have accepted the Negotiable Instrument after knowing about the defect in the title to the
Negotiable Instrument.
5. A Holder in Due Course must take the Negotiable Instrument complete and regular on the face of
it.
Privileges of a Holder In Due Course
1. Better title than that of the transferor:—A holder in due course gets the Negotiable Instrument
free from all defects in the title of the transferor or any of the previous holders of the Negotiable
Instrument.
2. Instrument cured of all defects:—When a Negotiable Instrument passes through the hands of a
Holder in Due Course, it is cured of all defects. Thus a Holder in due Course is not only protected
against all defects of title of the persons from whom he has received the Negotiable Instrument, but
also protects all subsequent holders who derive title from him.
3. Right not affected in case of an inchoate instrument:—The right of Holder in Due Course to
recover money is not at all affected even though the Negotiable Instrument was originally an inchoate
stamped instrument and the transferor completed the Negotiable Instrument for a sum greater than
what was intended by the maker.
4. [Section 36] All prior parties liabl:—All prior parties to the Negotiable Instrument continue to
remain liable to the Holder in due Course until the instrument is duly satisfied. The Holder in Due
Course can file a suit against the parties liable to pay in his own name.
5. [Section 42] Holder in Due Course can enforce payment of fictitious bill:—Fictitious bill is a bill
of exchange which is payable to a fictitious person by the drawer’s order. A fictitious bill may come
into the hands of a Holder in Due Course. If the Holder in Due Course proves the signature of the
drawer and that of the first endorsee are in writing of the same person, he can recover the amount of
the bill from the acceptor. The acceptor cannot escape the liability on the ground that the payee was a
fictitious person.

2.9 CS AMIT VOHRA

 Example: X drew a bill of exchange on Y for Rs. 10,000 payable to F, a fictitious person. Y accepted
the bill and returned it to X. X subsequently endorsed the bill to Z (an ordinary holder) by signing as
F.
During the course of negotiation; the bill came in the hands of H, a Holder in due Course. In this
case, H can recover the amount on the bill from the acceptor “Y” by showing the signature of the
drawer “X” and the first endorser “F” are in the same handwriting. However, Z cannot recover the
amount on the bill since he is not Holder in due Course.
6. No effect of conditional delivery:—When a Negotiable Instrument is delivered to a person on the
condition that it will be effective on the happening of certain event, it cannot be enforced until such
event happens. But if such instrument is transferred to a Holder in due Course, his rights are not
affected by such condition. The parties to the Negotiable Instrument cannot escape their liability as
against a Holder in due Course, on the ground that the delivery of the Negotiable Instrument was
conditional.
Example: X gives a promissory note to Y. It is agreed that Y will demand the payment of the note at
the time of the marriage of Y’s son. Before the marriage of his son, Y endorses the note to Z, a
Holder in due Course. Z can recover the amount from X irrespective of the time of marriage of Y’s
son.
7. Estoppels against denying the original validity of the Negotiable Instrument:—The plea of
original validity of the Negotiable Instrument cannot be put fourth against the Holder in due Course
by the drawer of a bill of exchange or cheque, and acceptor of the bill.
Example: A bought a car from B, and issued a promissory note worth the one lakh in consideration.
Later on he realized that B misrepresented the condition of the car. In the meanwhile, the promissory
note reached in the hands of a Holder in due Course who claimed payment upon it from A. Here, A
cannot refuse payment to the Holder in due Course on the ground that the original contract was
vitiated by misrepresentation.
But where the instrument is void on the face of it, e.g., promissory note made payable to “bearer”,
even the Holder in due Course cannot recover the money.
8. Negotiable Instrument made without consideration:—The plea of absence of or unlawful
consideration is not available against the Holder in due Course. The parties responsible will have to
make payment.
Example: X gives a promissory note to Y without consideration. Y cannot recover the amount due
thereon from X but suppose Y transfers this note to Z, a Holder in due Course, Z can enforce this note
as against X.
9. Unlawful Negotiable Instrument cannot be enforced:—Negotiable Instrument obtained by
unlawful means or for unlawful consideration cannot be enforced by an ordinary holder, but once
such Negotiable Instrument reaches in the hands of a Holder in due Course, it can be enforced by him
or by any holder thereafter.
10. Estoppel against endorser to deny capacity of prior parties:—An endorser of the bill by his
endorsement guarantees that all previous endorsements are genuine and that all prior parties had
capacity to enter into valid contracts. Therefore, he on a suit thereon by subsequent holder cannot
deny the signature of capacity to contract of any prior party to the Negotiable Instrument.
Privilege of a Holder in Due Course
1. A holder in due course can fill in an inchoate stamped instrument for any amount provided the
stamp is sufficient to cover the amount [Section 20].
2. Every prior party to a negotiable instrument is liable thereon to a holder in due course until the
instrument is duly satisfied [Section 36].
3. If a bill or note is negotiated to a holder in due course, the other parties to the bill or note cannot
avoid liability on the ground that the delivery of the instrument was conditional or for a special
2.10 CS AMIT VOHRA
 purpose only [Section 46].
4. Once a negotiable instrument passes through the hands of a holder in due course, it gets cleansed of
all its defects [Section 53].
5. The defence on the part of a person liable on a negotiable instrument that it has been lost, or
obtained from him by means of an offence or fraud or unlawful consideration, cannot be set up
against a holder in due course [Section 58].
6. The law presumes that every holder is a holder in due course, although the presumption is rebuttable
[Section 118].
7. In a suit on a negotiable instrument by a holder in due course, the validity of the instrument as
originally made or drawn cannot be denied [Section 120].
8. No endorser of a negotiable instrument is, in a suit thereon by a subsequent holder, permitted to
deny the signature or capacity to contract of any prior party to the instrument [Section 121].
25. Distinction between Holder and Holder in Due Course
S. No. Basis Holder Holder in Due Course (HDC)
1. Consideration A person becomes a holder even if A person becomes a HDC only if
he obtains the negotiable instrument he obtains the negotiable
without any consideration. instrument for consideration.
2. Before or after Maturity A person becomes a holder even if A person becomes a HDC only if
he obtains the negotiable instrument he obtains the negotiable
after the maturity of the negotiable instrument before its maturity
instrument
3. Good faith i.e. Bona fide A person is a holder, even if he does
For being a HDC, a person must
not obtain the negotiable instrument
obtain the negotiable instrument
in good faith. in good faith.
4. Privileges A holder is not entitled to the A HDC is entitled to various
privileges, which are available for
privileges as specified under the
HDC. Negotiable Instruments Act,
1881.
5. Right to sue A holder cannot sue all the prior A HDC can sue all the prior
parties. parties.

Difference between Holder & HDC

Basis Holder HDC

1. Consideration Without consideration With consideration
2. Maturity After or before maturity Before maturity only
3. Bona fide Not essentially required Essentially required

26. [Section 10] Payment in Due Course

1. Payment must be in accordance with the apparent tenor of the instrument.
2. Payment in order to be payment in due course must be in all good faith.
3. The drawee must not be guilty of any negligence in making the payment.
4. Payment in due course must be made to a person who has the actual possession of the
instrument.

2.11 CS AMIT VOHRA

Note: Payment should not be made under circumstances which afford a reasonable ground for believing
that the person who is not entitled to receive the amount mentioned in the instrument.

27. Classification of Bills

(A) Inland and Foreign bill
[Section 11] Inland Bill: A bill is termed as an inland bill if it is drawn in India on a person residing
in India whether payable in or outside India.
[Section 12] Foreign Bill: A bill which is not an inland bill is a foreign bill. Any such instrument not so
drawn, made or made payable in India shall be deemed to be Foreign instrument.

(B) Time and Demand bill

Time Bill: A bill payable after a fixed time is termed as a time bill. A bill payable “after date” is a time
bill.
[Section 19] Demand Bill: A bill payable at sight or on demand is termed as a Demand bill.
(C) Trade and Accommodation bill
A bill drawn and accepted for a genuine trade transaction is termed as a trade bill. A bill drawn and
accepted not for a genuine transaction but only to provide financial help to some party is termed as an
accommodation bill.
28. Negotiation and Assignment
The ownership of a Negotiable Instrument can be transferred in two ways:
1. By Negotiation
2. By Assignment

[Section 14] Negotiation

Negotiation means transfer of an instrument from one person to another so as to constitute that person
the holder of the Negotiable Instrument. Negotiation therefore, involves the transfer of right or title in a
Negotiable Instrument to another so as to give a good title to the transferee and make him a holder thereof.
Assignment
Assignment means transfer of ownership in an article by means of a written and registered document
under the provisions of the Transfer of Property Act. Negotiable Instruments are choose-in-action and,
therefore, their ownership can also be transferred by assignment. The assignee will get the rights of a holder
but not of a holder in due course.

29. Distinction between Negotiation and Assignment

S. No. Basis Negotiation Assignment
1. Formalities Requires very little formalities as Requires more formalities as assignment
Negotiation can be effected either by can be effected only by a written
a delivery or by delivery and document signed by the Transferor
endorsement both
2. Title Negotiation gives a better title to the The assignee would not be able to get a
transferee than that of transferor, better title than what the assignor has.
provided he is a holder in due course
3. Notice of It does not require any notice of Such a notice is legally necessary in the
Transfer transfer case of assignment of a Negotiable

2.12 CS AMIT VOHRA

 Instrument to make it complete and
effective.
4. Consideration Consideration is always presumed in Consideration is not presumed in the
the case of Negotiation case of assignment, here the burden of
proof of consideration will always lie on
the transferee.
30. Modes of Negotiation
There are two modes of Negotiation
1. Delivery
2. Endorsement and Delivery

[Section 46] Delivery is the voluntary transfer of the possession of the Negotiable Instrument. It should
be given voluntarily and with the intention of transferring ownership of the instrument to whom it is
delivered.
[Section 47] Negotiation by Delivery is a promissory note, bill of exchange or cheque payable to bearer
is negotiable by delivery.
[Section 15] Endorsement means writing of a person’s name on the back of the instrument for the
purpose of negotiation.
[Section 48] Negotiation by Endorsement is a promissory note, bill of exchange or cheque payable to
order, is negotiable by the holder by endorsement and delivery.
Rules regarding endorsement
 A regular endorsement implies signatures of the holder of the Negotiable Instrument himself on its
back for the purpose of negotiation;
 The payee must sign his name in the exact spelling as appearing on the face of the Negotiable
Instrument;
 Endorsement in pencil is usually not accepted;
 Endorsement need not contain the complimentary of prefixes or suffixes;
 In the case of a married woman, the name of her husband must also be mentioned in the
endorsement;
 An illiterate man can make a valid endorsement by putting his left thumb impression in the
presence of certain other person who should sign it as witness;
 It should be made in the manner appearing on the Negotiable Instrument;
 Endorsement must be completed by delivery of the Negotiable Instrument.
31. [Section 16, 50, 52 & 56] Kinds of Endorsement
General or Blank endorsement
 The person making it signs on the back of the Negotiable Instrument in his name only;
 He does not make any mention of the name of the endorsee;
 Such an endorsement makes an order instrument payable to the bearer and property in it can be
transferred by mere delivery.
Endorsement in full or special endorsement
The person signing adds a direction to pay the amount to or to the order of a specified person. Any
holder of the Negotiable Instrument can convert a blank endorsement into a special endorsement.
In other words, where endorser endorses an instrument by mentioning the name of endorsee thereby
converting a blank instrument into the Special one.

2.13 CS AMIT VOHRA

Partial endorsement
A Negotiable Instrument cannot be endorsed for a part of its value. A partial endorsement is invalid.
Restrictive endorsement
It prohibits the endorsee from further negotiating the Negotiable Instrument or restricts the endorsee
to deal with the Negotiable Instrument as directed by the endorser.
Conditional or Sans Recourse endorsement
It limits the liability of the endorser or the endorser is able to further negotiate the instrument without
being held liable for any dishonor.
32. [Section 17] Ambiguous Instrument
Where an instrument may be construed either as a promissory note or bill of exchange (example: a
bill drawn by a person on himself in favour of a third person or where the drawee is a fictitious person), the
holder may at his election treat it as either and the instrument shall be then treated accordingly.
An Ambiguous Instrument may be one with the defective language.
Example: I order myself to pay Rs. 1000 to Mr. Z. The Language of the instrument is defective to
determine and recognize such instrument as bill of exchange or Promissory Note.
Here, the stamp duty shall be paid on BOE or Promissory Note whichever is higher (Section 6 of
Indian Stamp Act, 1899).
33. [Section 18] Where amount is stated differently in figures and words
If the amount undertaken or ordered to be paid is stated differently in figures and in words, the amount
stated in words shall be the amount undertaken or ordered to be paid.
34. [Section 20] Inchoate Instrument
When an instrument is issued with certain spaces left blank- for example, the designation of the payee,
or the amount payable, or the promise or order to pay, or nothing is written on the instrument except the
signature of the maker, it is termed as “Inchoate Instrument”. Thus, an inchoate instrument may be wholly
blank, or incomplete in certain specific accounts.
Important points relating to Inchoate Instrument
1. When an inchoate instrument is issued, it is not negotiable as such.
2. The holder of the instrument is authorized to complete the instrument.
3. When the instrument is so completed, it is negotiable.
4. The right of filling up the blanks of the instrument can be exercised by any holder.
5. The liability of the person who signs and delivers the inchoate instrument arises only when the
blanks are filled in and the instrument is complete.
Escrow A bill endorsed or delivered to a person subject to the understanding that it will be paid only
if certain conditions are fulfilled is called an Escrow. In case of such a bill there is no liability unless
conditions agreed upon are fulfilled. However, a right of holder-in-due-course will not be affected at all.
35. [Section 22] Maturity
Where bill or note is payable at fixed period after sight, the question of maturity becomes important. The
maturity of a note or bill is the date on which it falls due.

Days of Grace: A note or bill, which is not expressed to be payable on demand, at sight or on
presentment, is at maturity on the third day after the day on which it is expressed to be payable. Three days
are allowed as days of grace.
36. [Section 23] Calculating Maturity of Bill or note payable so many days after date or sight
In calculating the date at which a promissory note or bill of exchange made payable at certain number of

2.14 CS AMIT VOHRA

days after date or after a certain event is at maturity, then the following days shall be excluded
 the day of the date; or
 the day of presentment for acceptance or sight; or
 the day of protest for non-acceptance; or
 the day on which the event happens.
37. [Section 25] When day of Maturity is a Holiday
When the day on which a promissory note or bill of exchange is at maturity is a public holiday, the
instrument shall be deemed to be due on the next preceding business day.
Note: The expression “Public Day” includes “Sunday” and any other day declared by the Central
Government by notification in the Official Gazette to be a public holiday.
38. [Section 27] Authority to sign i.e. through Agency
 Every person, capable of incurring liability, may bind himself or be bound by a duly authorized
agent acting in his name;
 A general authority given to an agent to transact business and to receive & discharge debts does not
empower him to accept or endorse bills of exchange so as to bind his principal;
 An agent may have authority to draw bills of exchange, but not endorse them. An authority to draw
does not, necessarily, imply an authority to endorse.
39. [Section 28] Liability of Agent signing
 An agent who signs his name to a promissory note, bill of exchange or cheque without indicating
thereon that he signs as agent, or that he does intend thereby to incur personal responsibility, is
liable personally on the instrument, except to those who induced him to sign upon the belief that
the principal only would be held liable;
 An agent can be sued by the holder in an action for falsely representing that he had authority.
40. [Section 29] Liability of legal representative signing
A legal representative of a deceased person who signs his name to a promissory note, bill of exchange or
cheque is liable personally thereon unless he expressly limits his liability to the extent of the assets
received by him as such.
41. [Section 30] Liability of Drawer
The drawer of a bill of exchange or cheque is bound in case of dishonor by the drawee or acceptor
thereof, to compensate the holder, provided due notice of dishonor has been given to, or received by, the
drawer as hereinafter provided.
42. [Section 31] Liability of Drawee of cheque
 The drawee of a cheque having sufficient funds of the drawer in his hands properly applicable to
the payment of such cheque must pay the cheque when duly required so to do; and
 In default of such payment, must compensate the drawer for any loss or damage caused by such
default.
43. [Section 32] Liability of maker of note and acceptor of bill
In the absence of a contract to the contrary:
 The maker of a promissory note and the acceptor before maturity of a bill of exchange are bound
to pay the amount thereof at maturity according to the apparent tenor of the note or acceptance
respectively; and
 The acceptor of a bill of exchange at or after maturity is bound to pay the amount thereof to the
holder on demand.
In default of such payment as aforesaid, such maker or acceptor is bound to compensate any party to
the note or bill for any loss or damage sustained by him and caused by such default.
2.15 CS AMIT VOHRA
44. [Section 35] Liability of Endorser
Whosoever endorses and delivers a negotiable endorsement before maturity, without expressly excluding
his own liability, is bound to compensate such holder for any loss or damage caused to him by drawee,
acceptor or maker, due to such dishonor.
Every endorser after dishonor is liable as upon an instrument payable on demand.
45. [Section 41] Acceptor bound, although endorsement forged, if accepted knowingly.
An acceptor of a bill of exchange already endorsed is not relieved from liability by reason that such
endorsement is forged, if he knows or had reason to believe the endorsement to be forged when he
accepted the bill.
46. [Section 43] Negotiable Instrument made without Consideration
Liability of parties if there is no consideration
A negotiable instrument made, drawn, accepted, endorsed, or transferred without consideration or for a
consideration which fails creates no obligation of payment between the parties to transaction.
Rights of holder for consideration under subsequent endorsement
But if any such party has transferred the instrument to a holder for a consideration, such holder, and every
subsequent holder deriving title from him, may recover the amount due on such instrument from the
transferor for consideration or any prior party thereto.
No right of accommodated party to recover from accommodating party
No party for whose accommodation a negotiable instrument has been made, drawn, accepted or endorsed,
can, if he has paid the amount thereof, recover thereon such amount from any person who became a part to
such instrument for the accommodation.
47. Crossing
A cheque is said to be crossed when two parallel transverse lines, with or without any words, are
drawn across the face of a cheque. They may be drawn anywhere on the face of the cheque but usually they
are drawn on the left hand top corner of the cheque.
The purpose of the crossing is to give a direction to the banker not to pay the cheque across the counter
but to pay it only to a banker.
48. [Section 123 – 131A] Types of Crossing
Crossing is of two types as follows:
1. General Crossing
2. Special Crossing
3. Restrictive or Account Payee
4. Not Negotiable

1. General Crossing
Crossing with two parallel lines
This is made by drawing two parallel transverse lines on the face of the cheque. It is a simple crossing
which prohibits the banker to make payment over the counter of the bank. The payee has to deposit it with his
banker in order to get payment thereon. He also has an option to endorse it to any other person.
2. Not Negotiable Crossing
Crossing containing words “Not Negotiable ” along with two parallel lines
The inclusion of the words not negotiable in the crossing has great practical significance. These words do
not make the cheques non-transferable but their inclusion in the crossing takes away one of the important
characteristics of Negotiable Instrument, i.e., the holder for value acquire absolute title to the instrument even

2.16 CS AMIT VOHRA

if the transferor’s title was defective and holder was unaware of it.
Thus, the inclusion of words “not negotiable” in the crossing on cheque removes this important
characteristic of Negotiable Instrument and the transferee of cheque cannot have title better than that of
the transferor
3. Restrictive or Account Payee
Crossing containing words “Account Payee” along with the two parallel lines
This is an instruction to the collecting banker that he should collect the amount of the cheque to credit the
amount to the account of payee and nobody else. Any further endorsement has no meaning.
4. Special Crossing
The addition of the name of the banker across the face of the cheque constitute special crossing. Drawing
of two parallel lines on the face of the cheque is not essential in case of special crossing. Whereas drawing of
two parallel transverse lines on the face of cheque is must in case of general crossing. The special crossing on
the cheque is a direction to the paying banker, to honor the cheque only when it is presented through the bank
mentioned in the crossing and no other banker.
A general crossed cheque can be converted into special crossed cheque by adding the name of the bank
but reverse is not possible because it will amount to material alteration.
49. Opening of Crossing
If the crossing on a cheque is cancelled, it is called opening of the crossing and the cheque becomes open
cheque only the drawer of the cheque is entitled to open the crossing of a cheque by writing the words “Pay
Cash” and canceling the crossing along with his full signature.
50. When banker may refuse payment of his Customer’s cheques
 When the balance to the credit of the customer is insufficient to meet the cheque.
 When the money deposited by the customer cannot be withdrawn on demand, e.g., fixed deposit.
 When the cheque has not been properly drawn, i.e., is not complete in its form, words and figures
differ or signature differs from specimen.
 When the cheque is stale.
 When the bank has a claim for set off or a lien on the funds of the customer, it may refuse to honor a
cheque.
 When the account is in joint names and the cheques has not been signed by all persons.
51. When the banker must refuse to honor Customer’s cheques
 When the customer has countermanded or stopped the payment of the cheque;
 When the banker is served with Garnishee Order (Order to Seize the account issued by court
against criminally accused person);
 When the notice of customer’s death, insolvency or lunacy is received by the banker (Operation of
Law);
 When the customer has informed about the loss of the cheque;
 When the banker comes to know of the defect in the title of the person presenting a cheque;
 When the customer closes the account before the cheque is presented for encashment;
 When the cheque is post-dated and is presented for payment before its date.
52. [Section 84] Effect of Non-presentment of cheque within reasonable time
Non-presentment of cheque within reasonable time-Whether drawer is liable if the Bank becomes
insolvent?
Non liability of drawer if bank fails – subject to the following conditions
(a) The drawer has sufficient balance when he issue the cheque which is ought to be presented for

2.17 CS AMIT VOHRA

 payment.
(b) The holder fails to present the cheque within reasonable time of issue of the cheque.
(c) Meanwhile (i.e., after issue of the cheque but before the cheque is presented by the holder) the bank
becomes insolvent and consequently the drawer suffers actual damages.
53. [Section 85] Cheque payable to Order
Nature of cheque
Cheque payble to order
Conditions subject to which protection is available to paying banker
 Payment is made in due course.
The protection shall be available notwithstanding that any endorsement subsequently turns out to be a
forgery.
Cheques originally payable to bearer
 Payment is made in due course
 Payment is made to the bearer of the cheque.
The protection shall be available notwithstanding that any endorsement appears on cheque.
Cheques crossed generally
 Payment is made in due course.
 Payment is made to any banker.
Cheques crossed specially
 Payment is made in due course.
 Payment is made to the banker to whom the cheque is crossed.
54. Discharge of Parties
Discharge
The term discharge of parties is used in relation to Negotiable Instrument in two ways:—
1. Discharge of one or more parties from liability under the Negotiable Instrument: In this case, the
Negotiable Instrument continues to be negotiable with the liabilities of undischarged parties attached
thereto.
2. Discharge of the Negotiable Instrument: In this case, the Negotiable Instrument ceases to be
negotiable and all the rights of action upon the Negotiable Instrument are extinguished.
Ways of Discharge
1. By payment:—All rights of action on a Negotiable Instrument are extinguished when payment of
money due thereon is made to the person legally entitled to receive it. When the rate of interest is
given in the Negotiable Instrument, complete discharge means payment of both principal and interest.
2. By cancellation:—Holder may deliberately cancel the name of any of the parties liable under a
Negotiable Instrument with the intention to discharge him from the liability thereon.
3. By release:—The holder of the Negotiable Instrument may grant, by an agreement, release to the
person liable to pay amount thereon.
4. By default of Holder:—All prior parties will be discharged from liability when any of the following
faults are committed.
(a) When he agrees to allow more than 48 hours to the drawee of a Bill of Exchange for the
acceptance of the bill without the consent of the prior parties.
(b) When he agrees to accept qualified acceptance (with regard to time, amount and place) of the
drawee without the contest of the prior parties.

2.18 CS AMIT VOHRA

 (c) When he fails to give notice of dishonor of the Negotiable Instrument to all previous parties.
(d) When he fails to present the Negotiable Instrument for payment of acceptance on the specified
date or within a reasonable time.
5. By material alteration: Material alteration is that change in the Negotiable Instrument which causes
it to speak a different language in legal effect from that which it had originally spoken. All changes
which alter the operation of the Negotiable Instrument or the rights and liabilities of the parties shall
be material.
Instances of material alteration:
 Alteration in the date of the Negotiable Instrument
 Alteration of the sum payable
 Alteration in time of payment
 Alteration in the rate of interest
Alteration authorized by the Act:
 Completion of an inchoate instrument [Section 20].
 Conversion of blank endorsement into endorsement in full [Section 49].
 Crossing of cheques [Section 125]
 Negotiation Back (when Payer becomes Payee due to endorsement in his favour)
55. Dishonor
A Negotiable Instrument may be dishonored either by non-acceptance or by non-payment.
[Section 91] Dishonor by non-acceptance: Only a Bill of Exchange can be dishonored by non-acceptance in
the following cases:—
1. The drawee has refused to accept the Bill of Exchange when it is presented to him for acceptance or
he does not accept the bill within 48 hours from the time of presentment for acceptance;
2. When the drawee is incompetent to contract;
3. When the drawee given a qualified acceptance;
4. When drawee is a fictitious person.
Note:—In case of dishonor of a bill by non acceptance, drawer will immediately get a right of action against
the drawee as he need not wait till the date maturity of the bill.

56. [Section 92] Dishonor by Non-Payment

1. The maker of a Promissory Note, acceptor of a Bill of Exchange, or the drawee of the cheque makes
default in the payment;
2. Where a bill remains unpaid at or after maturity in those cases where it is required to be presented
for payment.
57. [Section 93-98] Notice of Dishonor
It is always given on the dishonor of a Negotiable Instrument.
Notice By Whom
Notice should be given by the holder of the Negotiable Instrument. When the holder has given notice of
dishonor to any party liable on the Negotiable Instrument and the party has in turn given due notice of
dishonor to all prior parties, the holder can treat the notice given by the other party as notice given by himself.
Notice to whom
Notice must be given to all other parties whom the holder wants to make liable.
Effect of omission to give notice

2.19 CS AMIT VOHRA

 It will discharge them from their liability.
58. [Section 99-103] Noting & Protesting
Noting
 Noting is authenticate and official proof of presentment and dishonor of a Negotiable Instrument;
 It is recorded by a notary public upon the dishonored instrument or upon a paper attached thereto;
 Its need arises in the case of the dishonor of a Bill of Exchange or a Promissory Note;
 However, noting is not compulsory;
 It specifies:
o the date of dishonor; and
o reasons if any assigned for dishonor; and
o the noting charges.
 It should be made within a reasonable time after dishonor.
Protesting
Protesting is a formal certificate of dishonor issued by the notary public to the holder of a bill or note on
his demand. It contains the following particulars:—
 The instrument or exact copy thereof.
 The name of the person for and against whom the instrument is protested.
 A statement that payment was demanded by notary public from the person concerned and he:
o Defused to give it; or
o Did not answer; or
o He could not found.
Difference between Noting and Protesting
Noting Protesting
Promissory Note, Bill of Exchange, Cheque has been Promissory Note or Bill of Exchange has been
dishonoured by non-acceptance or non-payment, the dishonoured by non-acceptance or non payment- the
holder may cause such dishonor to be noted by a holder may, cause such dishonor to be:
notary public upon:  Noted; and
 The instrument; or  Certified
 Upon a paper attached thereto; or By a notary public
 Partly upon each

59. Discharge of a Negotiable Instrument

Payment in due course
 A negotiable instrument is discharged if the party primarily liable on the negotiable instrument makes
the payment in due course.
 When the payment is made, the negotiable instrument must be cancelled or the fact of payment be
recorded on negotiable instrument.
Cancellation
Where the holder cancels the name of the party primarily liable on the negotiable instrument, with
intention to discharge him, the negotiable instrument is discharged.
Release
Where the holder releases or renounces his right against the party primarily liable on the negotiable
instrument, the negotiable instrument is discharged.
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Negotiation back
Where a party primarily liable on a negotiable instrument becomes the holder of the negotiable
instrument, the negotiable instrument is discharged.
Operation of law
A negotiable instrument is discharged if it becomes time barred.

60. [Section 61, 62 & 64] Presentment of a Negotiable Instrument

Presentment means placing before the drawee a Negotiable Instrument for any of the following three
purposes:
 [Section 61] For acceptance
 [Section 62] For sight
 [Section 64] For payment
It is only a bill that can be presented for acceptance. But it is not necessary that every bill should be
presented for acceptance. Bills payable on demand and those payable on a fixed date need not be presented by
the holder for acceptance [Section 61].
But the following bills must be presented for acceptance in order to charge the parties with liability.
1. Bills payable after sight require presentment for acceptance in order to fix the date of maturity of the
bill [Section 62].
2. Bills in which there is an express stipulation that they shall be presented for acceptance before they
are presented for payment [Section 64].
61. [Section 75A] Excuse for delay in presentment or payment
 Delay in presentment for acceptance or payment is excused if the delay is caused by
circumstances beyond the control of the holder and not imputable to the default, misconduct or
negligence.
 When the cause of delay ceases to operate, presentment must be made within reasonable time.
62. [Section 82-90] Discharge of a party on Payment
Payment by a party who is secondarily liable on a negotiable instrument discharges the holder and all
parties subsequent to the party making payment of the negotiable instrument.
Cancellation
Where the holder cancels the name of any party liable on the negotiable instrument (other than the party
primarily liable on the negotiable instrument), such a party and all parties subsequent to him are discharged.
Release
Where the holder releases any party liable on the negotiable instrument (other than the party primarily
liable on negotiable instrument), such a party and all parties subsequent to him are discharged.

Negation back
Where a party already liable on the negotiable instrument becomes the holder of negotiable instrument,
such a party and all intermediate parties to whom such a party was previously liable shall be discharged.
Allowing drawee more than 48 hours to accept
All prior parties not consenting to the same are discharged from liability to such holder.
Qualified acceptance
Where a holder of the bill consents to qualified acceptance, all the prior parties who did not consent to
qualified acceptance are discharged.
Material alteration

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 Every party not consenting to material alteration of a negotiable instrument discharged.
Operation of law
A party is discharged if he is declared as an insolvent by the Court.
63. [Section 138] Bouncing or Dishonor of Cheques
Where any cheque drawn by a person on an account maintained by him with a banker for payment of any
amount of money to another person from out of that account for the discharge, in whole or in part, of any debt
or other liability is returned by the bank unpaid either because of the:
o Amount of money standing to the credit of that account is insufficient to honour the cheque; or
o That it exceeds the amount arranged to be paid from that account by an agreement made with that
bank.
Then such person shall be deemed to have committed an offence and shall be punished with:
 imprisonment -for a term which may extend to two years; or
 fine which may extend to twice the amount of cheque; or
 both.
64. [Section 141] Offences by Companies
If the person committing an offence under Section 138 is a Company, then every person who at the time
of offence was committed:
 was incharge and responsible to the Company for the conduct of the business of the Company: and
 every such director, manager, secretary or any other officer
shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished
accordingly.
65. [Section 142] Cognizance of Offences
Adjudication/Particulars of Complaint in respect of dishonor
Notwithstanding anything contained in Code of Criminal Procedure, 1973:
(a) Cognizance of written complaint: No court shall take cognizance of any offence punishable under
Section 138 except upon a complaint, in writing made by the payee or, as the case may be, the
holder in due course of the cheque
(b) Limitation for filing of complaint: such complaint is made within one month of the date on which
the cause of action arises.
Provided that the cognizance of complaint may be taken by the court after the prescribed period, if
the complainant satisfies the court that he had sufficient cause for not making a complaint within such
period.
(c) Jurisdiction of Court: No court inferior to that of Metropolitan Magistrate or Judicial
Magistrate of the first class shall try any offence punishable under section 138.
Provided that in case of any conviction in a summary trial as prescribed under section 262 to 265 of
Criminal Procedure Code, 1973, it shall be lawful for a magistrate to pass a sentence of imprisonment
not exceeding one year and amount of fine not exceeding Rs. 5,000
Place of Jurisdiction of Court for the trial of offences:
The offence under Section 138 which deals with the dishonor of cheque, shall be inquired into and tried
only by a court within whose local jurisdiction:
(a) If the cheque is delivered for collection through an account, the branch of the bank, where the
payee or holder in due course, as the case maybe, maintains the account, is situated.
(b) If the cheque is presented for payment by the payee or holder in due course, otherwise through
an account, the branch of the drawee bank where the drawer maintains the account, is situated.

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66. Meaning of Hundi
Hundi means a bill of exchange drawn in an oriental language, i.e., local language. Negotiable
Instruments Act, 1881 applies to Hundies if there is no local usage of trade or custom prevailing in the area in
which hundi is drawn. However, if there is any custom or usage prevailing in such area, the same will apply
to hundies, and therefore Negotiable Instruments Act, 1881 shall not apply to Hundies.
67. Kinds of Hundies
 Nam jog hundi
Hundi payable to a party named in the Hundi or to his order.
 Dhani Jog hundi
Hundi payabe to the Dhani or the owner, i.e., the bearer.
 Darshani hundi
Hundi payable at sight.
 Miadi hundi or Muddati hundi
Hundi payable after a specified period of time.
 Shahjog hundi
Hundi payable to a shah.
 Jokhmi hundi
Hundi drawn in respect of goods shipped on the vessel, and is payable only when the goods reach
their destination safely.
 Peth
Duplicated copy of a hundi
 Perpeth
Triplicate copy of a hundi
 Khoka
Hundi which has already been paid or discharged.

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Mission CA Inter Telegram Channel
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 Chapter 3
General Clauses Act, 1897
Synopsis
1. Introduction
(1) Introduction to General Clauses Act
2. Object, Purpose and Importance of the General Clauses Act
3. Application of the General Clauses Act
4. Few Examples highlighting the importance of General Clauses Act, 1897
5. Interpretation of Means v Include
6. Interpretation of Shall v May
7. Definitions
8. Application of foregoing definitions to previous enactments [Section 4]
(1) Application of terms/expression to all Central Acts made after the 3 rd day of January, 1868, and to all
regulations made on or after the 14th day of January, 1887
(2) Application of terms/expression to all Central Acts and Regulations made on or after the 14th day of
January, 1887
9. Commencement and Termination of time [Section 9]
10. Computation of Time [Section 10]
11. Measurement of Distance [Section 11]
12. Duty to be taken pro rata in enactments [Section 12]
13. Gender and Number [Section 13]
14. Powers and Functionaries
(1) Powers conferred to be exercisable from time to time [Section 14]
(2) Power to appoint to include power to appoint ex officio [Section 15]
(3) Power to appoint to include power to suspend or dismiss [Section 16]
(4) Substitution of functionaries [Section 17]
(5) Successors [Section 18]
(6) Official chiefs and subordinates [Section 19]
15. General Rule of Construction
16. Judicial Pronouncements on Rule of Construction
17. Kinds of Rule of Construction and Interpretation
18. Purposive Rule of Interpretation
19. Harmonious Construction
20. Rule of Beneficial Construction
21. Strict Construction of Penal Statutes

1. Introduction
(1) Introduction to General Clauses Act
 The General Clauses Act, 1897 contains
o Definitions of some words; and
o General principles of interpretation.
 This is an Act intends to provide general definitions which shall be applicable to all Central Acts
and regulations where there is no definition in those Acts or regulations;
 The General Clauses Act is very effective:
o in the absence of clear definition; and
o where there is a conflict between the pre-constitutional laws and post-constitutional Law;
 The Act gives a clear suggestion for the conflicting provisions and to avoid uncertainty.

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  The General Clauses Act has been enacted to shorten language used in parliamentary legislation and
to avoid the repetition of the same words in the different pieces of legislation;
Case Law Rayarappon v Madhavi Amma (1950)
Wherever the law provides that court will have the power to appoint. Suspend or remove a receiver the
legislature simply enacted that wherever convenient the court may appoint receiver and it was implied
within that language that it may also remove or suspend him.
The General Clauses Act, 1897 was enacted on 11th March, 1897 to consolidate and extend the
 General Clauses Act, 1868; and
 General Clauses Act, 1887
2. Object, Purpose and Importance of the General Clauses Act
The objects of the Act are several, namely:
(1) To shorten the language of Central Acts;
(2) To provide for uniformity of expression in Central Acts, by giving definitions of a series of terms in
common use;
The purpose of the General Clauses Act is:
(1) To place in one single statute different provisions as regards interpretation of words and legal
principles which would otherwise have to be specified separately in many different Acts and
Regulations.
(2) That whatever General Clauses Act says, has to be read in every statute to which it applies.
Example Chief Inspector of Mines v Karam Chand Thapar
with
Case Law
The Supreme Court applied the provisions of section 24 of the General Clauses Act to the Mines Act, 1923.
The importance of the General Clauses Act is:
(1) The General Clauses Act, thus, makes provisions as to the construction of General Acts and other
laws of all India application. Its importance, therefore, in point of the number of enactments to which
it applies, is obvious.
(2) The importance of an interpretation Act can be seen from the fact that this Act has been famously
known by the name “Law of all Laws" by various jurists.
Thus, we can see that the purpose of this Act itself enshrines the importance of the Act.
3. Application of the General Clauses Act
 The Act does not define any "territorial extent" clause.
 Its application is primarily with reference to all Central legislation and also to rules and regulations
made under a Central Act.
 If a Central Act is extended to any territory, the General Clauses Act would also be deemed to be
applicable in territory and would apply in the construction of that Central Act.
 The provisions of the General Clauses Act are mere rules of interpretation and they apply
automatically in each and every case. It all depends on the facts and circumstances of each case.
In many countries Legislatures similar to the General Clauses Act are called Interpretation Acts.
Case Law Chief Inspector of mines v K. C. Thapar
The Supreme Court had observed that whatever the General Clauses Act says whether as regards the
meanings of words or as regards legal principles has to be read into every Act to which it applies.

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 Note: It may also be noted that though Act does not in terms apply to State laws it is evident that the State
General clauses Acts should conform to the General Clauses Act of 1897 for; otherwise divergent rules of
construction and interpretation would apply and as a result great confusion might ensue.
4. Few Examples highlighting the importance of General Clauses Act, 1897
Sometimes, definitions are referred in another statute. If words are not defined in the respective Acts,
such words are to be taken from General Clauses Act.
Example (1): The word 'Company' used in the Companies Act, is defined in section 2(20) of the
respective Act.
Example (2): word ''Security' used in the companies Act, not defined in the respective Act. It has been
defined under section 2(h) of the Securities Contracts (Regulations) Act, 1956.This word is equivalent
applicable on the companies Act, 2013' Similarly the word 'Digital signature used in the Companies Act,
shall be construed as per the section 2(1) (p) of the Information Technology Act, 2000.
Example (3) The word Affidavit' used in section 7 during the incorporation of company' in the
Companies Act, 2013, shall derive its meaning from the word Affidavit' as defined in the General Clauses
Act, 1897.
5. Interpretation of Means v Include
(1) Means
Some definitions use the word "means" Such definitions are exhaustive definitions and exactly define the
term
Example (1): Definition of 'Company' as given in section 2(20) of the Companies Act' 2013. lt states,
"Company" means a company incorporated under this Act or under any previous company law.
Example (2): Section 2(34) of the Companies Act, 2013 defines the term director as "director" means a
director appointed to the Board of a company.
(2) Includes
Some definitions use the word "include". Such definitions do not define the word but are inclusive in
nature. The word defined is not restricted to the meaning assigned to it but has extensive meaning which also
includes the meaning assigned to it in the definition section.
Example (1): word 'debenture' defined in section 2(30) of the Companies Act' 2013 states that,
debenture" includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether
constituting a charge on the assets of the company or not". This is a definition of inclusive nature.
Example (2): "Body Corporate" or "Corporation" includes a company incorporated outside India.
[Section 2(11) of the Companies Act, 2013]
The above definition of Body Corporate does not define the term Body Corporate but just states that
companies incorporated outside India will also cover under the definition of Body corporate, apart other
entities which are called as Body Corporate.
(3) Means & Includes
Some words are defined as 'means and includes', here again the definition would be exhaustive.
Example: Share defined under section 2(84) of the Companies Act, 2013, states that "Share" means a
share in the share capital of a company and includes stock On the other hand, if the word is defined 'to apply
to and include', the definition is understood as extensive.
6. Interpretation of Shall v May
(1) Shall
The word 'shall' is used to raise a presumption of something which is mandatory or imperative while the
word 'may' is used to connote something which is not mandatory but is only directory or enabling. Hence,
while interpreting any provision of law, the words "shall" and "may" have to be given utmost importance to
understand what is mandatory and what is optional or directory under law.

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 Example (1): Section 3 of the Companies Act, 2013 states that 'A company may be formed for any
lawful purpose’.
Here the word used "may" shall be read as "shall".
Example (2): Section 21 of the Companies Act, 2013, provides that documents/ proceeding requiring
authentication or the contracts made by or on behalf of the company may be signed by any Key Managerial
Personnel an officer of the company duly authorised by the Board in this behalf.
Here the word used 'may' shall be read as 'may'.
Case Law Labour Commr. M.P. v Burhanpur Tapti Mitt (1964)
The use of word 'shall' with respect to one matter and use of word may with respect to another matter in the
same section of a statute will normally lead to the conclusion that the word shall imposes an obligation
whereas word 'may confers a discretionary power.
Our approach in this text is to provide basic understanding of law while studying any legislation. These
are few concepts which every student should keep in mind while studying law. You will read the following
concepts in detail in the chapter of 'interpretation of Statutes'.
7. Definitions
[Section 3(1)] Act: “act”, used with reference to an offence or a civil wrong, shall include a series of acts,
and words which refer to acts done extend also to illegal omissions;
[Section 3(3)] Affidavit: “affidavit” shall include affirmation and declaration in the case of persons by
law allowed to affirm or declare instead of swearing;
There are two important points derived from the above definition:
1. Affirmation and Declaration;
2. In case of persons allowed affirming or declaring instead of swearing.
The above definition is inclusive in nature. It states that affidavit shall include affirmation and
declarations. This definition does not define affidavit. However, we can understand this term in general
parlance. Affidavit is a written statement confirmed by oath or affirmation for use as evidence in court or
before any authority.
[Section 3(7)] Central Act: “Central Act” shall means an Act of Parliament, and shall include—
(a) an Act of the Dominion Legislature or of the Indian Legislature passed before the commencement of
the Constitution, and
(b) an Act made before such commencement by the Governor General in Council or the Governor
General, acting in a legislative capacity;
The date of commencement of the Constitution is 26th January, 1950.
[Section 3(8)] Central Government: “Central Government” shall,—
(a) in relation to anything done before the commencement of the Constitution, mean the Governor
General or the Governor General in Council, as the case may be; and shall include,—
(i) in relation to functions entrusted under sub-section (1) of Section 124 of the Government of India
Act, 1935, to the Government of a Province, the Provincial Government acting within the scope
of the authority given to it under that sub-section; and
(ii) in relation to the administration of a Chief Commissioner’s Province, the Chief Commissioner
acting within the scope of the authority given to him under sub-section (3) of section 94 of the
said Act; and
(b) in relation to anything done or to be done after the commencement of the Constitution, mean the
President; and shall include,—
(i) in relation to functions entrusted under clause (1) of article 258 of the Constitution, to the
Government of a State, the State Government acting within the scope of the authority given to it
under that clause;

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 (ii) in relation to the administration of a Part C State before the commencement of the Constitution
(Seventh Amendment) Act, 1956], the Chief Commissioner or the Lieutenant-Governor or the
Government of a neighbouring State or other authority acting within the scope of the authority
given to him or it under article 239 or article 243 of the Constitution, as the case may be; and
(iii) in relation to the administration of a Union territory, the administrator thereof acting within the
scope of the authority given to him under article 239 of the Constitution;
The date of commencement of the Constitution (Seventh Amendment) Act, 1956 is 1st January, 1956.
[Section 3(9)] Chief Controlling Revenue Authority or Chief Revenue Authority: "Chief Controlling
Revenue Authority" or "Chief Revenue Authority" shall mean
 In a State where there is a Board of Revenue, that Board;
 In a State where there is a Revenue Commissioner, that Commissioner;
 In Punjab, the Financial Commissioner; and
 Elsewhere, such authority as, in relation to matters enumerated in List I in the Seventh Schedule to
the Constitution, the Central Government, and in relation to other matters, the state Government, May
by notification in the Official Gazette, appoint;
[Section 3(13)] Commencement: “commencement” used with reference to an Act or Regulation, shall
mean the day on which the Act or Regulation comes into force;
A law cannot be said to be in force unless it is brought into operation by legislation enactment, or by the
exercise of authority by a delegate empowered to bring it into operation. The theory of a statute being ‘in
operation in a constitutional sense” though it is not in fact in operation, has no validity [State of Orissa v/s
Chandrasekhar Singh Bhoi (1970)]
[Section 3(15)] Constitution: “constitution" shall mean the Constitution of India;
[Section 3(18)] Document: “document” shall include any matter written, expressed or described upon
any substance by means of letters, figures or marks, or by more than one of those means which is intended to
be used, or which may be used, for the purpose or recording that matter;
[Section 3(19)] Enactment: “enactment” shall include a Regulation (as hereinafter defined) and any
Regulation of the Bengal, Madras or Bombay Code, and shall also include any provision contained in any Act
or in any such Regulation as aforesaid;
Case Law State of Punjab v Sukh Deo Sarup Gupta (1970) and
Godhra Electricity Co. v Somalal (1967)
It has been held that an ‘enactment’ would include ay Act (or a provision contained therein) made by the
Union Parliament or the State Legislature. Again since ‘enactment’ is defined to include also any provision
of an act Section 6 (Effect of Repeal) would apply to a case where not only the entire act is repealed but also
where any provision of an Act is repealed.
[Section 3(21)] Financial Year: “financial year” shall mean the year commencing on the first day of
April;
The term year has been defined under Section 3(66) as a year reckoned according to the British calendar.
Thus as per General Clauses Act, Year means Calendar Year which starts from January to December.
Difference between Calendar Year and Financial Year:
Financial Year starts from first day of April, but Calendar Year starts from first day of January.
[Section 3(22)] Good Faith: a thing shall be deemed to be done in “good faith” where it is in fact done
honesty, whether it is done negligently or not;
[Section 3(23)] Government: “Government” or “the Government” shall include both the Central
Government and any State Government;
Hence, wherever, the word Government is used, it will include Central Government and State
Government both.

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 [Section 3(24)] Government Securities: “Government securities” shall mean securities of the Central
Government or of any State Government, but in any Act or Regulation made before the commencement of the
Constitution shall not include securities of the Government of any Part B State;
[Section 3(26)] Immovable Property: “immovable property” shall include
 Land;
 Benefits to arise out of land; and
 Things attached to the earth; or
 Permanently fastened to anything attached to the earth;
Example (1): Trees are immovable property because trees are benefits arising out of the land and
attached to the earth. However, Timber is not immovable property as the same are not permanently attached
to the earth. In the same manner, buildings are immovable property.
Example (2): Right of way to access from one place to another, may come within the definition of
Immovable property whereas right to drain water is not immovable property. Any machinery fixed to the soil,
standing crops, can be held as Immovable Property according to the General Clauses Act, 1897.
[Section 3(27)] Imprisonment: “imprisonment” shall mean imprisonment of either description as defined
in the Indian Penal Code;
[Section 3(28)] India: "India" shall mean-
 As respects any period before the establishment of the Dominion of India, British India together with
all territories of Indian Rulers then under the suzerainty of His Majesty, all territories under the
suzerainty of such an Indian Ruler, and the tribal areas;
 As respects any period after the establishment of the Dominion of India and before the
commencement of the Constitution, all territories for the time being included in that Dominion; and
 As respects any period after the commencement of the Constitution, all territories for the time being
comprised in the territory of India;
[Section 3(29)] Indian Law: “Indian law” shall mean any Act, Ordinance, Regulation, rule, order,
bye-law or other instrument] which before the commencement of the Constitution had the force of law in any
Province of India or part thereof, or thereafter has the force of law in any Part A State or Part C State or Part
thereof, but does not include any Act of Parliament of the United Kingdom or any Order in Council, rule or
other instrument made under such Act;
[Section 3(35)] Month: “month” shall mean a month reckoned according to the British calendar;
[Section 3(36)] Movable Property: “movable property” shall mean property of every description, except
immovable property;
[Section 3(37)] Oath: “oath” shall include affirmation and declaration in the case of persons by law
allowed to affirm or declare instead of swearing;
[Section 3(38)] Offence: “Offence” shall mean any act or omission made punishable by any law for the
time being in force;
[Section 3(39)] Official Gazette: “official Gazette” or “Gazette” shall mean the Gazette of India or the
Official Gazette of a State;
[Section 3(42)] Person: “person” shall include any company or association or body of individuals,
whether incorporated or not;
[Section 3(43)] Political Agent: "political Agent" shall mean,-
 In relation to any territory outside India, the Principal Officer, by whatever name called, representing
the central Government in such territory; and
 In relation to any territory within India to which the Act or regulation containing the expression does
not extend, any officer appointed by the Central Government to exercise all or any of the powers of a
Political Agent under that Act or regulation;

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 [Section 3(44)] Presidency-town: "presidency-town" shall mean tire local limits for the time being of the
ordinary original civil jurisdiction of the High Court of Judicature at Calcutta, Madras or Bombay, as the case
may be;
[Section 3(45)] Province: "province" shall mean a Presidency, a Governor's Province, a Lieutenant
Governor's Province or a Chief Commissioner's province;
[Section 3(49)] Registered: “registered”, used with reference to a document, shall mean registered in
India under the law for the time being in force for the registration of documents;
[Section 3(51)] Rule: “rule” shall mean a rule made in exercise of a power conferred by any enactment,
and shall include a Regulation made as a rule under any enactment;
[Section 3(52)] Schedule: “schedule” shall mean a Schedule to the Act or Regulation in which the word
occurs;
[Section 3(54)] Section: “section” shall mean a section of the Act or Regulation in which the word
occurs;
[Section 3(59)] State Act: "state Act" shall mean an Act passed by the Legislature of a State established
or continued by the Constitution;
[Section 3(61)] Sub-section: “sub-section” shall mean a sub-section of the section in which the word
occurs;
[Section 3(62)] Swear: “swear”, with its grammatical variations and cognate expressions, shall include
affirming and declaring in the case of persons by law allowed to affirm or declare instead of swearing;
Note: the terms Affidavit, Oath and Swear have the same definitions in the Act.
[Section 3(65)] Writing: expressions referring to “writing” shall be construed as including references to
printing, lithography, photography and other modes of representing or reproducing words in a visible form;
and
[Section 3(66)] Year: “year” shall mean a year reckoned according to the British calendar.
8. Application of foregoing definitions to previous enactments [Section 4]
(1) Application of terms/expression to all Central Acts made after the 3 rd day of January, 1868, and to all
regulations made on or after the 14th day of January, 1887
The definitions in section 3 of the following words and expressions, that it to say, “affidavit”,
“immovable property”, “imprisonment”, “month”, “movable property’, “oath”, “person”, “section”, and
“year” apply also, unless there is anything repugnant in the subject or context, to all Central Acts made after
the third day of January, 1868, and to all Regulations made on or after the fourteenth day of January, 1887.
(2) Application of terms/expression to all Central Acts and Regulations made on or after the 14 th day of
January, 1887
The definitions given in section 3, of the following words and expressions, that is to say,
“commencement”, “financial year”, “offence”, “registered”, “schedule”, “sub-section” and “writing” apply
also, unless there is anything repugnant in the subject or context, to all Central Acts and Regulations made on
or after the fourteenth day of January, 1887.
9. Commencement and Termination of time [Section 9]
(1) In any Central Act or Regulation, it shall be sufficient,
(a) for the purpose of excluding the first in a series of days, to use the word “from”; and
(b) for the purpose of including the last in a series of days, to use the word “to”.
(2) This section applies also to all Central Acts made after the third day of January, 1868, and to all
Regulations made on or after the fourteenth day of January, 1887.
Example: If a Company declares dividend for its Shareholders in its Annual General Meeting held on
30/09/2016. Under the provisions of the Companies Act, 2013 Company is required to pay declared dividend
within 30 days from the date of declaration i.e. from 01/10/2016 to 30/10/2016. In this series of 30 days,
30/09/2016 will be excluded and last 30th day i.e. 30/10/2016 will be included.
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10. Computation of Time [Section 10]
(1) Where, by any Central Act or regulation made after the commencement of this Act, any act or
proceeding is directed or allowed to be done or taken in any Court or office on a certain day or within a
prescribed period, then, if the Court or office is closed on that day or the last day of the prescribed
period, the act or proceeding shall be considered as done or taken in due time if it is done or taken on
the next day afterwards on which the Court or office is open:
Provided that nothing in this section shall apply to any act or proceeding to which the Indian Limitation
Act, 1877, applies.
(2) This section applies also to all Central Acts and Regulations made on or after the fourteenth day of
January, 1887.
Example: Mr. A defaulted in making payment to Mr. B on 31st December, 2016. The right of Mr. B to
institute a legal suit against Mr. A immediately starts from the day succeeding the day of default i.e. from 1 st
January, 2017 till 31st December, 2019 i.e. 3 years from the date of default. It means that Mr. B can file
petition to the court of law on or before 31st December, 2019 and if such day seems to be Sunday then the
Limitation period shall be deemed as extended to 1st January, 2020.
Case Law K. Soosalrathnam v Div. Engineer N.H.C. Tirunelveli (1995)
Since the last date of the prescribed period was subsequent to the date of notification declared to be a
holiday on the basis of the principles laid down in this section the last date of prescribed period for obtaining
the tender schedules was extended to the next working day.
11. Measurement of Distance [Section 11]
In the measurement of any distance, for the purpose of any Central Act or Regulation made after the
commencement of this Act, that distance shall, unless a different intention appears, be measured in a straight
line on a horizontal plane.
12. Duty to be taken pro rata in enactments [Section 12]
Where, by any enactment now in force or hereafter to be in force, any duty of customs or excise, or
excise, or in the nature thereof, is leviable on any given quantity, by weight, measure or value of any goods or
merchandise, then a like duty is leviable according to the same rate on any greater or less quantity.
13. Gender and Number [Section 13]
In all Central Acts and Regulations, unless there is anything repugnant in the subject or context,—
(1) words importing the masculine gender shall be taken to include females;
(2) words in the singular shall include the plural, and vice versa.
Example: The word “He” includes “She” similarly the word “Employee” includes “all employees”
14. Powers and Functionaries
(1) Powers conferred to be exercisable from time to time [Section 14]
(1) Where, by any Central Act or Regulation made after the commencement of this Act, any power is
conferred, then unless a different intention appears that power may be exercised from time to time as
occasion requires.
(2) This section applies also to all Central Acts and Regulations made on or after the fourteenth day of
January, 1887.
Example: Registrar of Companies is empowered to deal with the matters of LLPs incorporated under LLP
Act, 2008
(2) Power to appoint to include power to appoint ex officio [Section 15]
Where, by any Central Act or Regulation, a power to appoint any person to fill any office or execute any
function is conferred, then, unless it is otherwise expressly provided, any such appointment, if it is made after
the commencement of this Act, may be made either by name or by virtue of office.

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 Ex- officio is a Latin Word which means by virtue of one’s position or office. Provision under this
section states that where there is a power to appoint, the appointment may be made by appointing ex-officio
as well.
(3) Power to appoint to include power to suspend or dismiss [Section 16]
Where, by any Central Act or Regulation, a power to make any appointment is conferred, then, unless a
different intention appears, the authority having for the time being power to make the appointment shall
also have power to suspend or dismiss any person appointed whether by itself or any other authority in
exercise of that power.
(4) Substitution of functionaries [Section 17]
(1) In any Central Act or Regulation made after the commencement of this Act, it shall be sufficient, for
the purpose of indicating the application of a law to every person or number of persons for the time being
executing the function of an office, to mention the official title of the officer at present executing the
functions, or that of the officer by whom the functions are commonly executed.
Example: For the Employee Provident Fund and Miscellaneous Provisions Act, 1952, the term
“Authority” includes “Central Provident Find Commissioner” and in his absence “Additional Provident Fund
Commissioner”
(2) This section applies also to all Central Acts made after the third day of January, 1868, and to all
Regulations made on or after the fourteenth day of January, 1887.
(5) Successors [Section 18]
(1) In any Central Act or Regulation made after the commencement of this Act, it shall be sufficient, for
the purpose of indicating the relation of a law to the successors of any functionaries or of corporations having
perpetual succession, to express its relation to the functionaries or corporations.
Example: Under Competition Act, 2002, in case of inability of Chairperson to act, the senior most person
after Chairperson shall be deemed to be the Chairperson till the appointment of new Chairperson has been
made.
(2) This section applies also to all Central Act made after the third day of January, 1868, and to all
Regulations made on or after the fourteenth day of January, 1887.
(6) Official chiefs and subordinates [Section 19]
(1) In any Central Act or Regulation made after the commencement of this Act, it shall be sufficient, for
the purpose of expressing that a law relative to the chief or superior of an office shall apply to the deputies or
subordinates lawfully performing the duties of that office in the place of their superior, to prescribe the duty
of the superior.
Example: The legal obligation of Regional Passport officer shall be deemed as extended to his
subordinates i.e. Assistant Passport officer and/or any other officer/deputy performing the duties of Regional
Passport Officer in his place.
(2) This Section applies also to all Central Act made after the third day of January, 1868, and to all
Regulations made on or after the fourteenth day of January, 1887.
15. General Rule of Construction
Introduction and Meaning
Rule of Construction is a rule used for interpreting legal instruments, especially Contracts and Statutes.
Very few states have codified the rules of construction. Most states treat the rules as mere customs not
having the force of law.
Judges usually makes a construction of an unclear term in a document at issue in a case that involves
a dispute as to its legal significance.
The judge examines the circumstances surrounding the provision, laws, other writings, and verbal
agreements dealing with the same subject matter and the probable purpose of the unclear phrase in order to
conclude the proper meaning of such words. Once the judge has done so, the court will enforce the words as
construed. However, for language that is plain and clear, there cannot be a construction.

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 A rule of construction is a principle that either governs the effect of the ascertained intention of a
document or agreement containing an ambiguous term or establishes what a court should do if the intention is
neither express nor implied. A regular pattern of decisions concerning the application of a particular provision
of a statute is a rule of construction that governs how the text is to be applied in similar cases.

16. Judicial Pronouncements on Rule of Construction

It was held in The Secretary of State in Council of India v. The Bombay Landing and Shipping Company
Limited, that in a winding up proceedings the Crown was entitled to the same precedence in regard to the
debts due to it in England.
Case Law Ganpat Putava v Collector of Kanara
Ganpat Putava v Collector of Kanara
It was held that the Crown was entitled to the same precedence in regard to fees payable to it by a pauper
plaintiff.

Case Law Motilal Virchand v The Collector of Ahmedabad

Motilal Virchand v The Collector of Ahmedabad
It was decided that the Mamlatdars Courts could not entertain and decide a suit to which the collector
was a party.

Case Law The Government of Bombay v Esufali Salebhai

The Government of Bombay v Esufali Salebhai
The decision was that the Crown had a prerogative right to intervene and claim compensation in Land
Acquisition proceedings.

Case Law Hiranand Khushiram v Secretary of State

Hiranand Khushiram v Secretary of State
The Crown was not bound by the provision of The Bombay Municipality' Act.

Case Law The Secretary of State for India v The Municipal Corporation of Bombay
The Secretary of State for India v The Municipal Corporation of Bombay
The Crown was subject to a charge under Section 212 of the Bombay City Municipal Act

A careful study of these decisions discloses that all of them related to particular prerogatives of the
Crown and that the Court held either that the prerogative of the Crown was taken away by the statute or not
having regard to the construction placed by it on the relevant statute. It is true that in some of the decisions
the said rule of construction was noticed, but as the decisions turned upon the constriction of the relevant
provisions, it could not be said that the said rule had been accepted as an inflexible rule of construction by the
Bombay High Court.
Finally we can conclude that in the rule of construction of a statute, the office of the judge is Simply to
ascertain and declare what is in terms or in substance, contained therein, not to insert what has been omitted,
or to omit what has been inserted; and where there are several provisions or particulars such construction is, if
possible, to be adopted as will give effect to all.

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17. Kinds of Rule of Construction and Interpretation
The Literal Rule of Interpretation
Th. Primary and important rule of interpretation is called the Literal Rule. This rule stated that the only
rule for the construction of Acts of Parliament is, that they should be construed according to the intent
of the Parliament which passed the Act. If the words of the statute are in then serves precise and
unambiguous, then no more can be necessary than to expound those words in their natural and ordinary sense.
The words themselves alone do, in such case, best declare the intention of the law giver.
But if any doubt arises from the terms employed by the Legislature, it has always been held a safe mean
of collecting the intention to call in aid the ground and cause of making the statute, and to have recourse to
the preamble, which, according to Chief Justice Dyer is "a key to open the minds of the makers of the Act,
and the mischiefs which they intend to redress".
18. Purposive Rule of Interpretation
In Halsbury’s Laws of England, it is stated
"Parliament intends that an 'enactment shall remedy a particular mischief and it is therefore
presumed that Parliament intends that the court, when considering, in relation to the facts of the
instant case, which of the opposing constructions of the enactment corresponds to its legal meaning,
should find a construction which applies the remedy provided by it in such a way as to suppress
that mischief ”.
Number of laws are made to cure a mischief. The mischief rule of interpretation is based on this reason
and it states that interpretation should be made in such way that it is able to cure that mischief for which the
law had been made. Thus, law should be interpreted in such a way so that it suppresses the mischief and
advances the remedy.
Case Law CIT v Sodra Devi
CIT v Sodra Devi
It may be noted that mischief rule is applicable only when a particular rule is ambiguous and capable of
different meanings. In such a case, the meaning which can suppress the mischief and advance the remedy
should be taken and other meaning should be discarded. Thus where a law is clear and can have only one
meaning, this rule shall not apply.
This Rule has been applied for the first time in Heydon’s Case and thus it is also popularly known as
Heydon’s Rule.
19. Harmonious Construction
According to the principle of harmonious interpretation, when there are two provisions in a statute, which
are in apparent conflict with each other, they should be interpreted such that effect can be given to both and
that construction which renders either of them inoperative and useless should not be adopted except in the last
resort,
Case Law Raj Krishna v Binod Kanungo
This principle is illustrated in the case of Raj Krishna v Binod Kanungo
In this case, two provisions of Representation of People Act, 1951, which were in apparent conflict, were
brought forth. Section 33(2) says that a Government Servant can nominate or second a person in election but
section 123(8) says that a Government Servant cannot assist any candidate in election except by casting his
vote. The Supreme Court observed that both these provisions should be harmoniously interpreted and
held that a Government Servant was entitled to nominate or second a candidate seeking election in
State Legislative assembly. This harmony can only be achieved if Section 123(8) is interpreted as giving
the Government servant the right to vote as well as to nominate or second a candidate and forbidding him to
assist the candidate in any other manner.

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20. Rule of Beneficial Construction
Beneficent construction involves giving the widest meaning possible to the statutes. When there are
two or more possible ways of interpreting a section or a word, the meaning which gives relief and protects
the benefits which are purported to be given by the legislation, should be chosen. A beneficial statute has
to be construed in its correct perspective so as to fructify the legislative intent. Although beneficial legislation
does receive liberal interpretation, the courts try to remain within the scheme and not extend the benefit to
those not covered by the scheme. It is also true that once the provision envisages the conferment of benefit
limited in point of time and subject to the fulfillment of certain conditions, their non-compliance will have the
effect of nullifying the benefit. There should be due stress and emphasis to Directive Principles of State
Policy and any international convention on the subject.
21. Strict Construction of Penal Statutes
The general rule for the construction of a penal statute is that it would be strictly interpreted, that is, if
two possible and reasonable constructions can be put upon a penal provision, the Court must lean towards that
construction which exempts the subject from penalty rather than the one which imposes a penalty. A penal
statute has to be construed narrowly in favor of the person proceeded against. This rule implies a preference
or the liberty of the subject, in case of ambiguity in the language of the provision. The courts invariably
follow the principle of strict construction in penal statutes. In constructing a penal Act, if a reasonable
interpretation in a particular case can avoid the penalty the Court adopts that construction.

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 Chapter 4
Interpretation of Statutes
Synopsis
1. Introduction
2. Object
3. Statutes are commonly divided
4. Primary Principles or Rules of Interpretations
5. Other Principle/Rules of Interpretation
6. Internal Aids of Interpretation
7. Presumptions
1. Introduction
 Interpretation means decoding the law or finding out the meaning of the rules of law.
 Statute means the will of legislature.
 In the words of Bouvier’s Law dictionary, statute is a law established by the act of legislature.
2. Object
 The object of interpretation of a written document is to discover the intention of the author.
 Interpretation is done by using two principles.
 Primary Principles AND Secondary Principles.
Primary Principles: These are principles which are used in first instance. If law can not be interpreted to
its full extent, then secondary principles are applicable.

(1) codifying, when they codify the unwritten law on a subject; (2) declaratory, when they do not profess
to make any alteration in the existing law, but merely declare or explain what it is; (3) remedial, when they
alter the common law, or the judge made (non-statutory) law; (4) amending, when they alter the statute law;
(5) consolidating, when they consolidate several previous statutes relating to the same subject matter, with or
without alternations of substance; (6) enabling, when they remove a restriction or disability; (7) disabling or
restraining, when they restrain the alienation of property; (8) penal, when they impose a penalty or forfeiture.
4. Primary Principles or Rules of Interpretations

(i) Rule of Literal Construction/Interpretation

According to this rule, the words, phrases and sentences of a statute are ordinarily to be understood in
their natural, ordinary or popular and grammatical meaning unless such a construction leads to an
absurdity or the content or object of the statute suggests a different meaning.
Case Law Nand Prakash Vohra v State of HP
Held-Interpretation should not be given which would make other provisions redundant.
A law can not be interpreted word to word in a different language. In this, the common and normal
meaning is given to rules.
The objectives, natural, ordinary and popular are used interchangeably. They mean the grammatical or
literal meaning, except when the words are technical because technical words have technical meanings.
In simple words, this rule means to give simple straight forward and fair meaning to the provisions of
law. It is the simplest form of interpretation and also known as golden or primary rule of interpretation.



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(ii) Rule of Reasonable Construction or Doctrine of Ut Res Magis Valeat Quam Pareat
The maximum Ut Res Magis Valeat Quam Pareat, i.e., the rule of reasonable construction implies that
Statute must be constructed sensibly and reasonably.
Case Law Tirath Singh v Bachittar Singh (1955)
A statute or any enacting provision therein must be so constructed so as to make it effective and operative.
A construction should be rejected if it results in hardship, serious inconvenience, injustice, absurdity,
etc.
 In simple words, this rule means that if any word in a law can be given more than one meaning,
then the court gives the reasonable meaning relevant to the circumstances.
 The scope of law should not be broadened unnecessarily.
 While interpreting the intention, the Court must match with the desired result.
If the litera-legis, i.e., the letter of the law is not clear, the interpretation must be according to the
purpose, policy, object or spirit of law.

(iii) Mischief Rule or Heydon’s Rule

Numbers of laws are made to cure a mischief. The mischief rule of interpretation is based on this reason
and it states that interpretation should be made in such way that it is able to cure that mischief for which the
law had been made. Thus, law should be interpreted in such a way so that it suppresses the mischief and
advances the remedy.
It may be noted that mischief rule is applicable only when a particular rule is ambiguous and capable of
different meanings. In such a case, the meaning which can suppress the mischief and advance the remedy
should be taken and other meaning should be discarded.
Case Law CIT v Sodra Devi
Where a law is clear and can have only one meaning, this rule shall not apply.

(iv) Harmonious Construction

When one rule or provision is interpreted then it must be interpreted along with other provisions of law.
There must not be conflict between the various provisions of law.
When a different section in an enactment is to be interpreted, it should be done in such a way that the Act
as a whole serves a useful purpose. It may be possible that different sections may appear to mean contrary to
each other or contradicting each other. Under such circumstances, an attempt should be made to reconcile the
provisions of the Act and an effect should be made to give the effect to both the apparently contradictory
provisions. Thereby a head on clash between sections of the Act is avoided. This is known as harmonious
construction.
Effect should be given to both the laws, is the very essence of the rule of harmonious construction. Thus a
construction that reduces one of the provisions to a dead letter is not harmonious construction.
Case Law Raj Krishna v Vinod Kanungo in 1954
Where, in an enactment, there are two provisions which can not be reconciled with each other, they should
be so interpreted, that if possible, effect may be given to both.

(v) Rule of Ejusdem Generis

The literal meaning of the term ejusdem generis is “of the same kind or species”.
It literally means, that while interpreting the provisions of law, if general words are given after some
specific words then while interpreting the general words, they must be treated as applying to the matters
previously mentioned.
If any general words such a ‘like’, ‘so on’ etc. follow specific words, the general words should include
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only those meaning which can be given to the specific words. The rule requires that where specific words
are all of one genus, meaning of the general words shall be restricted to that genus only, unless there is
something to show that a wider meaning was intended.
The rule of Ejusdem Generis applies only when the following conditions are satisfied:
 The statute contains an enumeration of specific words.
 The members of enumeration constitute a class or category.
 The class or category is not exhausted by the enumeration.
 There is no indication of different legislative intent.

5. Other Principle/Rules of Interpretation

(i) Noscitur A Sociis
The rule literally means that “a word is known by its associates”. In other words, the meaning of the
word is to be judged by the company it keeps. When two or more words having the analogous meaning
are coupled together, then one word shall be constructed in the manner deriving its meaning from other.

(ii) Expressio Unis Est Exclusio Alterius

The rule literally means that express mention of one thing implies the exclusion of another. In other
words, mention of one or more things of a particular class may be regarded as silently excluding all other
members of the class. Thus where a statute uses two words or expressions, one of which generally includes
the other, the more general term is taken in a sense excluding the less general one.
For example, Section 149 of Companies Act, 2013 mentions that individual can be a director.
It means any person other than individual can not be a director.
It may be noted that this maxim ought not to be applied, where its application leads to inconsistency or
injustice.

(iii) Strict and Liberal Construction

The words of a statute are to be constructed in the manner in which they are stated in the Act. The statute
is not to be regarded as including anything which is not within its letter and its spirit and which is not clearly
and manifestly described in the words of the statute itself.
In other words, the law is interpreted by strict interpretation and spirit of law is to be used strictly.
Where the usual meaning of the words falls short of the object of the legislature, a more extended
meaning may be attributed to them. It has been held in many cases that it is the duty of the judge to make
such construction of a statute as shall suppress the mischief and advance the remedy or which fulfills the
objective thought behind in enactment of that law. This is called liberal construction.

(iv) Contemporanea Expositio Est Optima Et Fortissima in Lege

The rule literally means that a contemporaneous exposition is the best and strongest in the law. It is
said that the best exposition of the statute or any other document is that which it has received from
contemporary authority. The language of the statute must be understood in the sense in which it was
understood when it was made.
It may be noted that the application of this doctrine is confined to the construction of ambiguous language
used in very old statutes where indeed the language itself might have had a rather a different meaning on
those days.

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6. Internal Aids of Interpretation
Title
Title are understood in their cognate sense. They take their colour from each other.
Aids of Interpretation
1. Title - The long title is set out at the head of the statute and gives a fairly full description of the
general purpose, object and scope of the Act. It is now settled that the long title of an Act is the
part of the Act and it is legitimate to use it for the purpose of interpreting the Act as a whole.
2. Preamble
A preamble may afford useful light as to what a statute intends to achieve. It may be noted that the
preamble can be taken as an aid in interpretation of law only if that law is not clear and ambiguous
in nature, otherwise not.
3. Headings
The prefix ‘headings’ to sections, chapters and parts of statute can be used in constructing the
provision of an Act, but only in cases where the enacting words are ambiguous.
4. Marginal Notes
Marginal notes are often found printed at the side of the sections in an Act. They purport to
summaries the effect of the section and have sometimes to be used as an aid to interpretation.
5. Interpretation Clause
Interpretation clause consists of definitions of various words which are frequently used throughout
the Act. Whenever a word has been defined in an interpretation clause prima facie, that
definition governs whenever that word is used in the body of the statute. However, if in a
particular context, different meaning of a word is given, then the different meaning will be used and
general meanings will be discarded for the purpose of interpretation.
6. Provisos
Provisos are the various conditions appended to a section in an Act. A particular section will be
applicable only if the conditions specified in its proviso are satisfied. For example, exceptions of
caveat emptor.
7. Illustrations
Illustrations attached to sections are part of the statute and they are useful so far as they furnish some
information which helps in interpretation.
8. Explanation
An explanation is, at times, appended to a section to explain the meaning of words contained in the
section. It becomes the part and parcel of an enactment.
9. Schedules
The schedules form a part of the statute and must be read together with it for the purpose of
construction.
10. Statement of Objects (Purpose) and Reasons
The fact that Parliament has passed the provisions of the statement of objects, given sanction to
them, and thus they are a valid aid in the interpretation of provisions.

External Aids of Interpretation

Following are important external aid of interpretation:
1. Parliamentary History
The Supreme Court, on many occasions, has used this aid of parliamentary history, i.e., debates
and discussions of the Parliament while making that law, in resolving questions of construction.
2. Historical facts and circumstances
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 It has already been established that the court is entitled to take into account such external or
historical facts as may be necessary to understand the subject matter of the statute.
3. Reference to reports of committees
The report of a selected committees or other committees on whose report an enactment is based,
can be looked into for the interpretation of statute.
4. Reference to other statutes
It has already been established that reference to other statutes in “Parimeteria”, i.e., statutes dealing
with the same subject matter, is permitted to interpret other laws dealing with the same subject.
5. Dictionaries
When a word is not defined in the Act itself, it is permissible to refer to dictionaries to find out the
general sense in which that word is understood in common parlance.
6. Use of Foreign decision
Use of foreign decisions of countries, following the same systems of jurisprudence as ours, and
rendered on statutes in ‘Parimateria’ (statutes dealing with the same subject matter), has been
Permitted by Practice Courts.
7. Presumptions
Where the meaning of the statute is clear, there is no need for presumptions. But if the intention of the
legislature is not clear, there are number of presumptions. These are:
(a) that the words in a statute are used precisely and not loosely.
(b) that vested rights, i.e., rights which a person possessed at the time the statute was passed, are not
taken away without express words, or necessary implication or without compensation.
(c) that “mens rea”, i.e., guilty mind is required for a criminal act. There is a very strong presumption
that a statute creating a criminal offence does not intend to attach liability without a guilty intent.
The general rule applicable to criminal cases is “actus non facit reum nisi mens sit rea" (The act itself
does not constitute guilt unless done with a guilty intent).
(d) That the state is not affected by a statute unless it is expressly mentioned as being so affected.
(e) That a statute is not intended to be inconsistent with the principles of International Law. Although the
judges cannot declare a statute void as being repugnant to International Law, yet if two possible
alternatives present themselves, the judges will choose that which is not at variance with it.
(f) That the legislature knows the state of the law.
(g) That the legislature does not make any alteration in the existing law unless by express enactment.
(h) That the legislature knows the practice of the executive and the judiciary.
(i) Legislature confers powers necessary to carry out duties imposed by it.
(j) That the legislature does not make mistake. The Court will not even alter an obvious one, unless it be
to correct faulty language where the intention is clear.
(jj) The law compels no man to do that which is futile or fruitless.
(k) Legal fictions may be said to be statements or suppositions which are known, to be untrue, but which
are not allowed to be denied in order that some difficulty may be overcome, and substantial justice
secured. It is a well settled rule of interpretation that in construing the scope of a legal fiction, it
would be proper and even necessary to assume all those facts on which alone the fiction can operate.
(l) Where powers and duties are inter-connected and it is not possible to separate one from the other in
such a way that powers may be delegated while duties are retained and vice versa, the delegation of
powers takes with it the duties.
(m) The doctrine of natural justice is really a doctrine for the interpretation of statutes, under which the
Court will presume that the legislature while granting a drastic power must intend that it should be
fairly exercised.

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