UNIT 2

Q1) Sale of Goods Act, 1930

Rights of sellers and buyers

Q2) Banker and Customer Relationship

Role of Banks as a custodian, guarantor and trustee
Q3) Conditions and Warranty:
Doctrine of Caveat Emptor
Q3) Negotiable Instruments:
Promissory Notes
Cheques
Features of Bill of Exchange

Q1) Sale of Goods Act, 1930

The Sales of Goods Act, 1930 considers the fundamental standards of contract and
makes a clear scrutiny of commercial transactions.
Section 4(1) of the Indian Sale of Goods Act, 1930 describes the agreement of offer of
goods in the consecutive aspect: “A agreement of offer of goods is a contract whereby
the seller transfers or agrees to transfer the property in goods to the buyer for a price.”

“A contract of sale of goods is a contract whereby the seller transfers or agrees to

transfer the property in goods to the buyer for a price. There may be a contract of sale
between one part-owner and another.”

Section 4(1) of the Indian Sale of Goods Act, 1930 describes agreement to sell as,
“Where under a contract of sale the property in the goods is transferred from the seller
to the buyer, the contract is called a sale, but where the transfer of the property in the
goods is to take place at a future time or subject to some condition thereafter to be
fulfilled, the contract is called an agreement to sell.”

Goods- Types:

Goods According to Sec. 2(7), “‘Goods’ means each kind of movable assets other than
actionable claims and money and consists of stocks and shares, growing crops, grass and
things connected to or farming part of land which are agreed to be severed before sale or under
the agreement of offer.”

Goods can be classified into 3 types on the basis of their quality

• Existing goods
• Future goods
• Contingent goods
Types of Sales:
There are several types of sales that can occur in a business or retail setting:
Retail sales: This is the most common type of sale, where a business sells products or services
directly to consumers at a retail price.
Wholesale sales: These are sales that occur between a business and another business, where
the products or services are sold at a wholesale price, which is typically lower than the retail
price.
Bulk sales: These are sales that involve the purchase of large quantities of a product or service
at a discounted price.
Closeout sales: These are sales where a business sells off remaining inventory at discounted
prices in order to make room for new products or to liquidate excess stock.
Sales events: These are sales that are typically held for a limited time and may include
discounts, promotions, or special offers. Examples include Black Friday sales, Cyber Monday
sales, and holiday sales.
Special sales: These are sales that are offered to specific groups of customers, such as
students, military personnel, or senior citizens.
Clearance sales: These are sales where a business sells off products that are being
discontinued or that are no longer in demand at discounted prices.
Private sales: These are sales that are only offered to a select group of customers, such as
members of a loyalty program for VIPs.

Rights of the Seller:

• To reserve the right to dispose of the goods until certain conditions are met in
accordance with Section 25(1).
• To consider a sale on approval to be completed when the buyer conveys his acceptance,
performs an act adopting the sale, or retains the goods after the stated date (or a
reasonable amount of time) without providing notice of rejection. (Section 24)
• To only deliver the goods upon request from the buyer. (Section 35)
• To provide the goods in instalments when agreed upon. [Section 39(1)]
• To assert a lien and maintain ownership of the items until the purchase price is paid
[Section 47(1)]
• Until the price is paid, the goods may be stopped in transit and returned to the owner
[Sections 49(2) and 50].
• To resell the goods in certain conditions. (Section 54)
• Keeping the goods from being delivered until the buyer acquires ownership. [Section
46(2)]
• When ownership of the goods has been transferred to the buyer or when the price is due
on a specific date under the terms of the contract and the buyer does not make the
payment, the seller may bring a price claim against the buyer. [Section 55]

Rights of the Buyer:

• To receive the items in accordance with the contract. (Sections 31 & 32)
• Rejecting the goods when they don’t match the contract’s specifications for description,
quality, or quantity. (Section 37)
• When goods are given in instalments without a written agreement to that effect, the
contract may be terminated.[Section 38(1)]
• The seller must inform the buyer when the goods are being shipped by sea so that the
buyer can make insurance arrangements. [Section 39(3)]
• To be given a fair chance to inspect the goods and determine whether they are in
compliance with the contract.(Section 41)
• To file a lawsuit against the seller if they don’t deliver the goods in order to get their
money back.
• If the seller wrongfully fails or declines to deliver the goods to the customer, the buyer
has the right to sue the seller for damages. (Section 57)
• To bring a specific performance claim against the seller.
 • To file a claim against the seller for damages for failing to uphold a warranty or a
situation that is deemed to be a violation of a warranty (Section 59)
• To file a claim against the seller for damages for a potential violation of the contract
(Section 60)
• When a seller breaches a contract and must refund the customer’s money, the buyer
may sue the seller for interest (Section 61)

Q2) Banker and Customer Relationship

1. General Relationship\
a) Debtor-Creditor: When a 'customer' opens an account with a bank, he fills in and
signs the account opening form. When customer deposits money in his account the
bank becomes a debtor of the customer and customer a creditor. The money so and
bank has a right to use the money as it likes. The bank is not bound to inform the
depositor the manner of utilization of funds deposit depositor i.e., debtor. The bank
has borrowed money and it is only when the depositor demands, banker pays.
Bank’s position is quite different. For convenience and information of prospective
customers a few banks have uploaded the account opening form, terms and
condition various services provided by the bank etc., on their web site. While issuing
Demand Draft, Mail / Telegraphic Transfer, bank becomes a debtor as it owns money
to the payee/ beneficiary

b) Creditor–Debtor: Lending money is the most important activities of a bank. The

resources mobilized by banks are utilized for lending bank owns money to the bank.
In the case of any loan/advances account, the banker is the creditor and the
customer is the debtor. The release money with the bank reverses when he borrows
money from the bank. Borrower executes documents and offer security to the bank
before in addition to opening of a deposit/loan account banks provide variety of
services, which makes the relationship more wide and complete and the nature of
transaction, the banker acts as a bailee, trustee, principal, agent, lessor, custodian
etc

Banker and Customer- Special Relationship:

a) Bailee – Bailor: A “bailment” is the delivery of goods by one person to another for some
purpose, upon a contract that they shall, when the purpose is accomplished, be
returned or otherwise disposed of according to the directions of the person delivering
them. The person delivering the goods is called the "bailor". The person to whom they
are delivered is called, the "bailee". Banks secure their advances by obtaining tangible
securities. In some cases, physical possession of securities goods (Pledge), valuable
possession of securities the bank becomes bailee and the customer bailor. Banks also
keeps articles, valuables, securities etc., of its customer bailee the bank is required to
take care of the goods bailed.
b) Trustee And Beneficiary: The bank performs the relationship as a trustee with his
customer when the bank customer deposits his property or other assets. In this case,
the bank holds the property of other documents of bank customers in exchange for the
loan provided by the bank. The person who is depositing the property or other
documents is known as the beneficiary. It can be done in two conditions:
• When a person deposits his important document in the bank locker.
• The person took the loan and deposited his property document as security
c) Lessor and Lessee: A lease of immoveable property is a transfer of a right to enjoy such
property, made for a certain time, express or implied, or in perpetuity, in consideration of
a price paid or promised, or of money, a share of crops, service or any other thing of
value, to be rendered periodically or on specified occasions to the transferor by the
transferee, who accepts the transfer on such terms.
Definition of Lessor, lessee, premium and rent:
• The transferor is called the lessor,
• The transferee is called the lessee,
• The price is called the premium, and the money, share, service or other thing to
be so rendered is called the rent.
When a customer hires a safe deposit locker from the bank, the relation between the
bank and the customer is lessor and lessee. The Banks do not assume any liability or
responsibility in case of any damage to the contents kept in the lock lockers by
customers.
d) Agent and Principal: The Indian Contract Act, 1872 defines an ‘Agent’ in Section 182 as
a person employed to do any act for another or to represent another in dealing with third
persons. According to Section 182, The person for whom such act is done, or who is so
represented, is called the “principal”. Therefore, the person who has delegated his
authority will be the principal. Banks collect cheques, bills, and makes payment to
various authorities viz., rent, telephone bills, insurance premium etc., on behalf of
instructions given by its customers. In all such cases bank acts as an agent of its
customer, and charges for these services. Bank charges are levied in collection of local
cheques through clearing house. Charges are levied in only when the cheque is returned
in the clearance.
e) Pledger And Pledgee: The banker performs the relationship of Pledger and Pledgee
when the customer took the loan from the bank and deposits some security to the
banker. The customer becomes a pledger and the bank is pledgee. The security of the
customer will remain in the custody of the bank until the person repays the money from
the loan taken by him from the bank. In a banking context, the customer may pledge
assets such as real estate, vehicles, or stocks as collateral for a loan or line of credit.
The bank, as the pledgee, holds the right to take possession of and sell the pledged
assets in the event that the customer defaults on the loan. This allows the bank to
recover its losses if the borrower is unable to repay the loan

However, the bank’s rights as a pledgee are subject to certain restrictions. For example,
it is not usually allowed to take possession of the pledged assets prior to default and can
only sell the assets after default and after reasonable efforts have been
made to give notice to the pledger and offer the assets for sale to the public or to
specific third parties at a reasonable price. The bank also has a duty to exercise
reasonable care in protecting and preserving the pledged assets. Additionally, the
pledged assets can be used as security for more than one debt, so one pledge of the
assets may have multiple pledgees. In such a case, the pledgee with the highest priority
in the pledge takes precedence over the other pledgees in the right to take possession
and sell the assets in case of default of the pledger. The pledge relationship also
benefits the pledger. It allows them to obtain the financing they might not have been
able to without collateral, and it reduces the risk of lending for the bank and lowers the
interest rate for the pledger. But the pledger should be aware of the risks and the
possible consequences of a default and the impact on their credit score.
Role of Banks as a custodian, guarantor and trustee:

a) Custodian: A custodian is a person who acts as a caretaker of something. Banks take legal
responsibility for a customer’s security.

b) Guarantor: Banks give guarantee on behalf of their customers and enter into their shoes.
Guarantee is a contingent contract. Contingent contract is a contract to do or not to do
something, if some event, collateral to such contract, does or does not happen.

c) Bank as a Trustee: "A trust is an obligation annexed to the ownership of property, and arising
out of the confidence reposed in and accepted by the owner; or declared and accepted by him,
for the benefit of another, or of another and the owner.". Thus, trustee is the holder of property. In
case of trust banker customer relationship is a special contract. When a person entrusts
valuable items with another person with an demand to the keeper the relationship becomes of a
trustee and trustier. Customers keep certain valuables or securities with the bank specific
purpose (Escrow accounts) the banker in such cases acts as a trustee. Banks charge fee for
safekeeping valuables.

Termination of relationship between the banker and customer:

• The death, insolvency, lunacy of the customer.

• The customer closing the account i.e., Voluntary termination
• Liquidation of the company
• The closing of the account by the bank after giving due notice.
• The completion of the contract or the specific transaction

Q3) Conditions and Warranty: Conditions and warranties are both stipulations in a contract,
but they differ in their importance to the contract's main purpose and the consequences of a
breach.
Conditions: A condition is a fundamental term that's essential to the contract's main purpose.
If a condition is breached, the aggrieved party can terminate the contract, reject the goods, and
recover the price.
Warranties: A warranty is a secondary promise that's collateral to the contract's main purpose.
If a warranty is breached, the aggrieved party can claim damages but can't reject the goods or
terminate the contract.
Conditions help protect consumers' rights, while warranties help businesses prevent faulty
products from being sold

Express and Implied Conditions and Warranty: `Express’ conditions and warranties are
those, which have been explicitly agreed upon by the parties at the time of the agreement of
offer. A provision in a legal agreement that stipulates hat something must be done or exist is
how the term is defined in the dictionary.
• The term “expressed conditions” refers to clauses that both parties agree to include in the
contract and that are necessary for it to work.

• Those warranties that are included in the contract and are typically accepted by both parties
are referred to as “expressed warranties.”

`Implied’ conditions and warranties are those, which the law includes into the contract unless
the party’s stipulate hostile. Sec.62 says Implied conditions and warranties might be call off or
diverse by an express agreement or by the advancement of dealings or by usage and custom.
Implied Conditions
Section 14(a) of the Sale of Goods Act 1930 explains the implied condition as to title as ‘in the
case of a sale, he has a right to sell the goods and that, in the case of an agreement to sell, he
will have a right to sell the goods at the time when the property is to pass’.

This means that the seller has the right to sell a good only if he is the true owner and holds the
title of the goods or is an agent of the title holder. When a good is sold the implied condition for
the good is its title, i.e., the ownership of the good. If the seller does not own the title of the said
good himself and sells it to the buyer, it is a breach of condition. In such a situation the buyer
can return the goods to the seller and claim his money back or refuse to accept the good before
delivery or whenever he learns about the false title of the seller.
Implied Conditions- Types
Implied conditions as to title: According to Section 14(a), in every contract of sale, unless the
circumstances of the contract are such as to show a different intention, there is an implied
condition on the part of the seller that, in the case of a sale, he has a right to sell the goods. The
fundamental yet crucial implied terms on the part of the seller are as follows in any contract of
sale:
• First off, he is legally authorised to sell the goods.
• Second, if there is a sale agreement, he will have the right to sell the products when the
contract is fulfilled.

As a result, the buyer has the right to reject the products if the seller does not have the title to
sell them. He has the right to receive his entire purchase price back.

Implied condition in sales by description: Section 15 of the Act states that there is an
implied condition that the products meet the description in a sale of goods by description.
There is a condition that the goods shall meet the description. It is a fundamental
requirement of the contract, and if it is breached, the buyer is entitled to reject the goods
regardless of whether they can be inspected.

Implied condition as to the quality of fitness:

Section 16 lays down exceptions to the rule of caveat emptor. These are as follows:

• Implied condition as to the quality or fitness [Section 16(a)]

The following are the essentials of this condition as mentioned in sub-section (1):

• The buyer makes known to the seller the particular purpose for which the goods are
required.
• The buyer relies on the seller’s skill or judgement.
• The goods are of a description dealt in by the seller, whether he be the manufacturer
or not.
Implied condition as to merchantable quality
The second exception, as stated in sub-section (2), is when the goods are purchased by
description from a seller, whether or not he is the manufacturer, who deals in goods of
that description. There is an implied condition that the goods must be of merchantable
quality in such circumstances
Implied Warranty
Section 14(b) of the Act mentions ‘an implied warranty that the buyer shall have and
enjoy quiet possession of the goods’ which means a buyer is entitled to the quiet
possession of the goods purchased as an implied warranty which means the buyer after
receiving the title of ownership from the true owner should not be disturbed either by the
 seller or any other person claiming superior title of the goods. In such a case, the buyer
is entitled to claim compensation and damages from the seller as a breach of implied
warranty.
Implied warranty of quiet possession
As per Section 14(b), every contract of sale contains an implied warranty that the buyer
will have and that they shall enjoy quiet possession of the goods unless the conditions
of the contract indicate a different condition. The seller is responsible for compensating
the buyer for any damages if this warranty is breached.
Implied warranty that goods are free from encumbrances
Section 14(c) states that there is an implied warranty from the seller that the goods are
unencumbered by any charge or encumbrance. The seller is responsible for
compensating the buyer for damages if it is later discovered that the goods are subject
to a charge in the favour of a third party
.
Doctrine of Caveat Emptor
“Caveat Emptor” is a Latin phrase that translates to “let the buyer beware”. It is specifically
defined in Section 16 of the act “there is no implied warranty or condition as to the quality or the
fitness for any particular purpose of goods supplied under such a contract of sale “
A seller makes his goods available in the open market. The buyer previews all his options and
then accordingly makes his choice. Now let’s assume that the product turns out to be defective
or of inferior quality. This doctrine says that the seller will not be responsible for this. The buyer
himself is responsible for the choice he made.
Example: A bought a horse from B. A wanted to enter the horse in a race. Turns out the horse
was not capable of running a race on account of being lame. But A did not inform B of his
intentions. So, B will not be responsible for the defects of the horse. The Doctrine of Caveat
Emptor will apply.

Doctrine of Caveat Emptor -Exceptions

Exceptions to the Doctrine of Caveat Emptor:
Fitness of Product for the Buyer’s Purpose
When the buyer informs the seller of his purpose of buying the goods, it is implied that he is
relying on the seller’s judgment. It is the duty of the seller then to ensure the goods match their
desired usage. Example: A goes to B to buy a bicycle. He informs B he wants to use the cycle for
mountain trekking. If B sells him an ordinary bicycle that is incapable of fulfilling A’s purpose the
seller will be responsible.
Goods Purchased under Brand Name
When the buyer buys a product under a trade name or a branded product the seller cannot be
held responsible for the usefulness or quality of the product. So, there is no implied condition
that the goods will be fit for the purpose the buyer intended.
Goods sold by Description
When the buyer buys the goods based only on the description there will be an exception. If the
goods do not match the description, then in such a case the seller will be responsible for the
goods.

Goods of Merchantable Quality

Section 16 (2) deals with the exception of merchantable quality. The sections state that the
seller who is selling goods by description has a duty of providing goods of merchantable quality,
i.e., capable of passing the market standards. So, if the goods are not of marketable quality,
then the buyer will not be the one who is responsible.
It will be the seller’s responsibility. However, if the buyer has had a reasonable chance to
examine the product, then this exception will not apply.
Sale by Sample
If the buyer buys his goods after examining a sample, then the rule of Doctrine of Caveat Emptor
will not apply. If the rest of the goods do not resemble the sample, the buyer cannot be held
responsible. In this case, the seller will be the one responsible.
Example: A place an order for 50 toy cars with B. He checks one sample where the car is red.
The rest of the cars turn out orange. Here the doctrine will not apply and B will be responsible.
Sale by Description and Sample
If the sale is done via a sample as well as a description of the product, the buyer will not be
responsible if the goods do not resemble the sample and/or the description. Then the
responsibility will fall squarely on the seller.
Usage of Trade
There is an implied condition or warranty about the quality or the fitness of goods/products. But
if a seller deviated from this then the rules of caveat emptor cease to apply.
Example: A bought goods from B in an auction of the contents of a ship. But B did not inform A
the contents were sea damaged, and so the rules of the doctrine will not apply
Fraud or Misrepresentation by the Seller
This is another important exception. If the seller obtains the consent of the buyer by fraud, then
caveat emptor will not apply. Also, if the seller conceals any material defects of the goods which
are later discovered on closer examination, then again, the buyer will not be responsible. In both
cases, the seller will be the guilty party.

Q3) Negotiable Instruments: The word “instrument” refers to a written document by virtue of
which a right is created in favour of some individual. The word “negotiable” indicates
transferable from one person to another in exchange for payment. A negotiable instrument is a
piece of paper that guarantees the payment of a certain sum of money, either immediately upon
demand or at any predetermined period, and whose payer is typically identified. It is a
document that is envisioned by or made up of a contract that guarantees the unconditional
payment of money and may be paid now or at a later time. Promissory notes, bills of exchange,
and cheques are the three types of instruments covered by the Negotiable Instruments Act of
1881.
Negotiable instruments act, 1881
• The Negotiable Instruments Act, 1881 is a significant law that governs the use of
negotiable instruments in India.
• This Act is enacted to define and amend laws relating to promissory note, bills of
exchange and cheque
Presumptions
• Consideration
• Date
• Time of Acceptance
• Transfer
• Order of indorsement
• Stamp
Negotiable Instruments- Differences
Cheque: By a cheque one individual/party orders the bank to transfer the money to the bank
account of another individual/party in whose name the cheque has been issued.
Legally -- A cheque is a negotiable instrument under Section 6 of the Negotiable Instruments
Act, 1881.
Partied involved - Three parties are involved as a drawn payee.
Payability - It is payable on-demand only.
Notice of Dishonour - For a cheque, a notice of dishonour is not compulsory.
Bill of Exchange: A negotiable instrument is in writing and holds an unconditional order by the
bill’s maker to pay a certain amount of money either to a specific person or its bearer.
Legally - The definition of a bill of exchange is given in Section 5 of the Negotiable Instruments
Act, 1881. Bill of exchange is also defined in Section 2(2) of the Indian Stamps Act, 1899 and the
bill of exchange payable on demand has been explained in Section 2(3) of the Indian Stamps
Act, 1899
Partied involved - The three parties are a drawer, drawee and payee.
Payability - The same person can be the drawer and payee.It is payable ondemand or on the
expiry of a certain period.
Notice of Dishonour- For a bill of exchange, a notice of dishonour is mandatory and it should be
served to all the concerned parties involved in the transaction on dishonouring the bill of
exchange.
Promissory note: It is an instrument given in writing with an unrestricted guarantee to pay a
certain amount of money to a certain individual or to the bearer of the instrument and signed by
the maker of it.
Legally - The definition of the promissory note is given in Section 4 of the Negotiable
Instruments Act, 1881.
Partied involved - Two parties involved are the drawer/maker and the payee.
Payability- The drawer and payee cannot be the same person.
Notice of Dishonour - No notice is served to the drawer in case of dishonouring the promissory
note.
Types and Features of negotiable instruments
Promissory Note
“Promissory note.”—A “Promissory note” is an instrument in writing (not being a bank-note or a
currency-note) containing an unconditional undertaking, signed by the maker, to pay a certain
sum of money only to, or to the order of, a certain person, or to the bearer of the instrument.

There is a particular promissory note form that is more common than others. The demand
promissory note, for example, is a type of promissory note which allows the holder to demand
payment from the maker at any time. This can be useful in cases where the maker may not have
good credit or may be otherwise unable to repay the debt when it comes due. The promissory
note form should include all the basic elements to ensure that both parties know their rights
and responsibilities in the agreement: names of lender and borrower, the amount borrowed,
date signed (with notary seal, if applicable), interest rate (if any), payments schedule and terms
of repayment

Features of Promissory Note

• Regardless of whether it is negotiable or not, an instrument that complies with the
definition in Section 4 of the Negotiable Instruments Act, of 1881 must be regarded as a
promissory note.
• According to Section 4 of the Negotiable Instruments Act of 1881, a written instrument
(not a banknote or currency note) that contains an unconditional undertaking, signed by
the maker with the promisor with the promise to pay a specific amount of money only to,
or at the direction of, a specific person, or to the bearer of the instrument, qualifies as a
negotiable instrument.
• It must be signed, sealed, and written down;
• There must be a commitment or undertaking to pay; The mere admission of debt is
insufficient;
• There must be no conditions;
• It must include a commitment to pay just money;
• A promissory note’s maker and payee, or its parties, must be certain;
 • It is repayable immediately or following a specific date; and
• The amount owing must be certain
Bill of Exchange
According to Negotiable Instruments Act, A “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 to the order of, a certain person or to the bearer of the
instrument. A promise or order to pay is not “conditional”, within the meaning of this section
and section 4, by reason of the time for payment of the amount or any instalment thereof being
expressed to be on the lapse of a certain period after the occurrence of a specified even which,
according to the ordinary expectation of mankind, is certain to happen, although the time of its
happening may be uncertain. The sum payable may be “certain”, within the meaning of this
section and section 4, although it includes future interest or is payable at an indicated rate of
exchange, or is according to the course of exchange, and although the instrument provides that,
on default of payment of an instalment, the balance unpaid shall become due. The person to
whom it is clear that the direction is given or that payment is to be made may be a “certain
person”, within the meaning of this section and section 4, although he is mis-named or
designated by description only
According to the Bills of Exchange Act, 1882, a Bill of Exchange is: “An unconditional order in
writing, addressed by one person to another, signed by the person giving it, requiring the person
to whom it is addressed to pay on demand, or at a fixed or determinable future time, a certain
sum in money to, or to the order of, a specified person, or to bearer.”
Features of Bill of Exchange
• As per Section 5, a bill of exchange involves three parties: the drawer, the drawee, and
the payee;
• It must be in writing, suitably stamped, and duly accepted by its drawee;
• There must be a payment order;
• Unconditional promise or order to pay is required; and
• Both the sum and the parties must be agreed upon and must be certain.
Cheque
A “cheque” is a bill of exchange drawn on a specified banker and not expressed to be payable
otherwise than on demand and it includes the electronic image of a truncated cheque and a
cheque in the electronic form
Features of Cheque
• A cheque involves three parties: the drawer, the drawee bank, and the payee;
• It must be in writing and has the drawer’s signature;
• Payee is confident;
• The payment is always due upon demand;
• It must contain a date in order for the bank to honour it; otherwise, it is invalid;
• The sum must be expressly stated, both verbally and numerically. 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, according to
Section 18 of the Negotiable Instruments Act, 1881;
• When a cheque is truncated, it is scanned, an electronic image of the cheque is created,
and instead of a physical cheque being communicated in a clearing cycle, the image is
instantly used to replace any further physical movement of the cheque.
Cheque – An overview
A “cheque” is a bill of exchange drawn on a specified banker and not expressed to be payable
otherwise than on demand and it includes the electronic image of a truncated cheque and a
cheque in the electronic form.
Parties to a Cheque
There are basically three parties involved in a bill of exchange:
a) The Drawer - The Customer who draws the Cheque on his Account.
b) The Drawee Bank - The Banker on whom the cheque is presented.
c) The Payee - The Person on whose name is mentioned and the beneficiary of the payment.
Drawer and Payee can be the same individual.
Apart from the three parties, others involved in payment and collection of cheques:
a) Endorser: The Person who transfers his right to another person.
b) Endorsee: The Person on whom the right is transferred
Cheque – Advantages
• It is more convenient and safer to carry around than cash.
• It is a negotiable instrument that can be endorsed in favour of a third party.
• They can be easily traced if lost.
Cheque – Types
a) Open cheque: With such a cheque, it is possible to obtain cash from the bank’s counter. The
holder of an open cheque can receive its payment over the counter at the bank, deposit the
cheque in his own account or pass it to someone else by signing behind the cheque.
b) Bearer Cheque: It is somewhat comparable to an open cheque in that any person carrying or
bearing the bearer cheque may be paid the amount specified in the cheque.
c) Crossed Cheque: A crossed cheque, which would only be credited into the payee’s bank
account, can be used to reduce the risk associated with open cheques, which are often risky to
write and issue. The top left corner of a cheque can be crossed by drawing two parallel lines
across it, with or without writing “Account Payee” or “Not Negotiable.”
d) Order Cheque: It is a cheque that can have the word “word bearer” cut or cancelled and is
made out to a specific person. An order cheque is a cheque which is payable only to a particular
person. In case of an order cheque, the
word ‘bearer’ may be cut out or cancelled and the word ‘order’ may be written over there. The
payee may transfer an order cheque to someone else by signing his or her name behind the
cheque.
e) Electronic Cheque: It is a cheque that is generated in a secure system, ensuring safety
requirements through the use of digital signatures, and it contains an exact mirror image of the
original cheque.
f) Ante-dated cheques: A cheque in which the drawer mentions the date earlier to the date of
presenting if for payment. For example, a cheque issued on March 20, 2020 may bear a date
March 5, 2020.
g) Post-dated Cheque: In case the drawer mentions a specific date on the cheque which is
subsequent to the date on which it is presented, is called post-dated cheque. To say, if a cheque
is presented on March 5, 2020 bears a date of March 25, 2020, it is considered a post-dated
cheque by the bank and the payment can only be made on or after March 25, 2020.
h) Stale Cheque: A stale cheque is the cheque which is issued at some particular date and must
be presented before at bank for payment within a stipulated period as, no payment will be made
after expiry of that period and the cheque will automatically stand cancelled.
i) Mutilated Cheque:
When a cheque is torn into two or more pieces or is in deteriorated condition and presented for
payment, such a cheque is called a mutilated cheque. The bank has a right not to make
payment against such a cheque without getting confirmation of the drawer. However, if a
cheque is torn at the corners and no material fact is lost, the bank can initiate the payment
against such a cheque
Bank draft & banker’s cheque
When a bill of exchange drawn by one bank on another bank, or by itself on its own branch, and
is a negotiable instrument then it is called as bank draft.

a) A bank is the issuer of these types of cheques.

b) The bank issues these cheques on behalf of an account holder to make a remittance to
another person in the same city. Here the specified amount is debited from the account
of the customer, and then, the cheque is issued by the bank.
c) This is the reason banker’s cheques are called non-negotiable instruments as there is
no room for banks to dishonour these cheques. They are valid for three months. They
can be revalidated provided specific conditions are met.