Commercial Law

FAQ
[ Indian Context]
Compiled by Prof G.C.Nijampure
 Nego tiab le In st rume nt

What is a negotiable instrument?

What is dishonour of a cheque all about?

What are electronic cheques?

Can an action be taken under S. 138 of Negotiable

Instrument Act, for the dishonour of a cheque that was
given as a gift?

Can a person file a suit for recovery and also file a

complaint under Section 138 of the Negotiable Instruments
Act for dishonour of a cheque?
Par tners hi p

Ø What is Partnership?

Ø How many partners are required to form a

partnership firm?

Ø Can a Hindu Undivided Family enter into a

partnership?

Ø What are the types of Partnership?

What rights and duties partners have in a

partnership firm?
 Sa le of
Goods

Ø What are the requirements of sale?

Ø What is the meaning of 'sale on approval basis' or,

'sale on return basis'?

Ø What happens in cases where the seller delivers

wrong quantity of goods to the buyer?

Ø What is the procedure of delivering the goods?

Ø What is a breach of contract?

Negotiable Instrument

Q: Wha t is a negoti abl e i nst ru me nt ?

The term, 'negotiable instrument' refers to a

promissory note, bill of exchange or cheque,
payable either to order or to bearer. Any
instrument, containing a contract to pay money, or
any other negotiable security representing money,
which is in a form which renders it capable of being
sued on by the holder, in his own name and, which
is transferable by custom of trade, is a negotiable
instrument. Bills of Exchange, cheques and
promissory notes are the most common examples
of negotiable instruments.
Q: Wha t is di shonour of a cheque al l
about ?

When any cheque, drawn by a person for the

discharge of any liability is returned by the
bank unpaid, because of insufficiency of the
amount of money, standing to the credit of the
account on which the cheque was drawn or,
for the reason that it exceeds the
arrangements made by the drawer of the
cheque, the cheque is said to have been
dishonoured.
Q: Wha t are el ect ronic chequ es?

The Negotiable Instruments (Amendment and

Miscellaneous Provisions) Act, 2002 defines
electronic cheques as those cheques, which
contain the exact mirror image of paper
cheques. In order to ensure the minimum safety
standards with the use of digital signatures and
asymmetric crypto system, such cheques are
generated, written and signed in a secure
system.
 Q: C an a n action b e ta ken under S. 138
of Negoti abl e Inst rument A ct, f or th e
di sho nour of a che que tha t was g iven as a
gi ft?

No. You cannot bring an action under S. 138 for

the dishonour of a cheque that is given as a gift.
This section applies only when the cheque, which
is dishonoured, was issued for the payment of a
debt or any other liability, which is legally
enforceable.
Q: C an a person fi le a s uit for rec overy and
als o fi le a compl aint u nder Sec tion 1 38 of
th e Ne goti abl e Inst ru ment s Act for
di shonou r of a chequ e?

Yes. In case a person has filed suits for recovery,

then he is not precluded from filing a complaint
under Section 138 of the Negotiable Instruments
Act and Section 420 of the Indian Penal
Code. The pendency of criminal matters would not
be an impediment to proceeding with the civil suits.
 Partnership
Q: W ha t is Pa rt nersh ip ?

According to the Indian Partnership Act, 1932, a

"Partnership" is the relation between persons who
have agreed to share the profit of a business
carried on by all, or, any of them acting for all.
Persons who have entered into a partnership are,
individually, called partners and, collectively, called
a firm. The name, under which the business is
carried on, is called the name of the firm. A firm is
not a legal person. Partnership is, merely a
relationship between persons, brought about by an
agreement to share the profits of a business.
Q: How many pa rtn ers ar e requ ir ed to f orm
a pa rt nershi p f ir m?

Since a partnership is the result of a contract,

there must be at least two partners. The
Partnership Act places no upper limit on the
number of partners. However, under S. 11 of the
Companies Act, 1956, it is provided that a
partnership cannot have more than ten partners
for carrying on the business of banking, or more
than twenty partners for carrying on any other
business. Thus, a partnership cannot have more
than 20 partners.
Q: Ca n a Hi nd u Und ivi ded Fa mil y ent er
into a pa rtn ershi p?

A Hindu Undivided family (HUF) cannot enter

into a partnership with other persons, as it is not
a legal person, but the karta of a HUF can. Two
kartas of Hindu undivided families can form a
partnership, but the individual members of the
two HUFs do not, automatically, become
partners.
Q: Wha t are t he t yp es of Pa rtners hi p?

The two types of partnership are as follows -

Partnerships at will - There is no provision for duration and

determination of partnership - it is not formed for a fixed
period of time and can be terminated by any of the partners,
by giving a notice in writing to all the other partners.
Particular partnership - Such partnerships are for a specific
duration or purpose or undertaking. A partnership determines
the expiry of such duration or completion of the purpose or
undertaking. It may be noted that where a firm, constituted
for a fixed term, continues to carry on business after expiry of
the term the mutual rights, obligation and duties of the
partners, remain the same as they were before the expiry of
the specified duration. The firm will, then, become a
partnership at will.
Q: Wha t righ ts a nd d uti es pa rt ners ha ve
in a pa rt ners hip f irm?

Subject to provision of this Act, mutual rights and

duties may be determined by the contract-- either
expressed or, implied by course of dealing -
between the partners. Such contract can be
varied by consent of all the partners and, such
consent may be expressed or, may be implied by
a course of dealing.
Gene ral dut ies of the pa rt ner:

To conduct the business of the firm to the greatest

common advantage.
To be just and faithful towards the firm and other
partners.
To render true accounts and full information,
relating to and, affecting the firm or, any partner
or, his legal representative.
To indemnify the firm for loss, caused by his fraud,
in conduct of the business of the firm.
To attend, diligently, to his duties in the conduct of
the business.
Rights of the partner:
To take part in the conduct of the business.
To express his opinion before a decision is taken. A
majority may take all decision relating to ordinary matters
connected with the business, but no change in nature of
business may be made without the consent of all the
partners.
To access and inspect and copy books of the firm.
To share the profits of the firm
To be indemnified, in respect of payment made, and
liabilities incurred, by him, in the ordinary and proper
course of business. In case of an emergency, every partner
is entitled to protect the firm from loss, as would have been
done by a prudent man, in his own case.
To receive interest, on an amount subscribed by him,
beyond the capital at the rate of 6%, per annum.
Sale of Goods
Q: Wha t are t he r equi reme nts of sa le?
Requi rement s of s ale a re:

Parties, competent to contract.

Mutual assent.
Passing of property.
Price to be paid.
Thus, a sale must be the result of a contract, in
pursuance, whereof; a transfer of property takes
place on payment of a price. The contract may be
oral or in writing. It may even be inferred from the
conduct of the parties. It must however, originate in
an offer and its acceptance.
Q: Wha t is the me ani ng of 's ale on appr oval
ba sis ' or, ' sa le on r etur n b asi s'?

As the name itself suggests, this is a sale of goods,

where the buyer has the option of either, accepting
the goods or, rejecting them and returning them.
The sale would be complete, only, if and when the
buyer accepts the goods. The parties to such a sale
may agree that the buyer shall, temporarily, take
the goods in his possession to see whether they are
satisfactory to him. If they are not, he may decline
to purchase them.
Q: Wha t ha ppe ns i n case s wh er e the sel ler del iv er s
wr ong quan tit y of goods to the bu ye r?
Followings are the consequences in cases where the seller delivers wrong
quantity of goods to the buyer:
Where the seller delivers to the buyer, a quantity of goods less than he
contracted to sell, the buyer has the option to reject the goods or, to accept
them. If the buyer accepts the goods, so delivered, he is bound to pay for
them at the contract price.
E.g. Mr. A. orders 100 boxes of pens from Mr. B, at the rate of Rs. 2000/- per
box. Mr. B delivers only 60 boxes. Now, Mr. A has the option to reject the
entire delivery of 60 boxes or, he may accept the 60 boxes. If, Mr. A, accepts
the boxes, he must pay for them at the contract price, i.e. Rs. 2000/- per
box.
Where the seller delivers to the buyer a quantity of goods, larger than he
contracted to sell, the buyer may accept the goods, included in the contract
and, reject the rest or, he may reject the whole. If the buyer accepts the
whole of the goods, so delivered, he shall pay for them at the contract rate.
Where the seller delivers to the buyer the goods, he contracted to sell, mixed
with goods of a different description, not included in the contract, the buyer
may accept the goods, which are in accordance with the contract, and, reject
the rest, or, may reject the whole.
: Wh at is the pro cedu re of de li ve rin g t he go ods?

The delivery of sold goods can be made in the following

ways: -by doing anything, which the parties agree shall be
treated as delivery, or by doing anything which has the effect
of putting the goods; in the possession of the buyer, or - in the
possession of any person, authorized to hold them on his
behalf.

Therefore, the delivery of goods is made when the seller,

either places the goods in the possession of the buyer or, in the
possession of any person, authorized to hold the goods on
behalf of the buyer. If, there is an agreement between the
buyer and the seller to treat any act as delivery, then the
delivery of the goods is said to have been made when that act
is performed.
Q: Wha t is a br each of co ntra ct ?

A breach occurs, where a party repudiates or, fails to

perform, one or more of the obligations, imposed upon
him by the contract.

A breach of contract may take any one of the following

three forms, namely:

Where a party fails to perform his obligation upon the

date fixed for the performance by the contract; as a
buyer, wrongfully, refusing to accept goods and pay the
price on the date agreed for acceptance;
Where a party expressly repudiates the contract; as where he
states expressly that he will not perform his promise;
Where a party does some act which disables him from
performing his obligation; as where a buyer does not secure
a license for exporting the goods.
The first form of breach occurs, only, when the performance
is due. The second and third forms of breaches may occur
before the performance is due. In the second form, the
breach is a breach of a presently binding promise, not an
anticipatory breach of an act, to be done in the future. The
person, guilty of the breach, is in default not because he
repudiates a performance that is not yet due, but, because
he renounces a promise that continues to bind him, from the
time of the making of the contract, until the completion of
the contract.