20

MERCANTILE LAW
Sanjeev Kumar*

I INTRODUCTION

MERCANTILE LAW in India, principally originated from lex mercantoria

and the British Common Law, has developed over the years and has become
a matured legal regime. However, the changing global business scenario
brings out new disputes and issues before the judiciary from time to time and
the judiciary untiringly contributes by its decisions to its continuous
development.
In the present survey, all the important judicial pronouncements made
during the year 2003 by the Supreme Court and the various high courts
encompassing different facets of mercantile transactions have been dealt with.
Although the courts have, by and large, reiterated the established legal
positions, there are a few new judicial pronouncements, which are of great
significance and break new grounds or give new dimensions to Indian
mercantile law.
The survey is divided into four major parts, namely: (i) Law of Contracts;
(ii) Law of Negotiable Instruments; (iii) Law of Sale of Goods; and (iv) Law
of Partnerships.

II LAW OF CONTRACTS

In a significant development, the Supreme Court in Bank of India v. OP

Swarnkar^ examined the application of the law of contracts in a batch of
appeal cases related to voluntary retirement schemes (VRS) of the banks,
while deciding the question whether an employee, who opts for the voluntary
retirement pursuant to or in furtherance of a scheme floated by the nationalised
banks and the State Bank of India would be precluded from withdrawing the
said offer.
The Supreme Court held that a contract of employment is a subject matter
of contract. Unless governed by a statute or statutory rules, the provisions of
the Contract Act, 1872 would not only be applicable to the formulation of the
contract, but also to the determination thereof. Subject to certain just

* President, India Economic Foundation and Vice President (Legal) & Company Secretary, HB
Stockholdings Ltd., New Delhi.
1 (2003) 2 SCC 721.

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exceptions, even specific performance of such a contract by way of a direction

for reinstatement of a dismissed employee is permissible in law.

Offer and acceptance

The law relating to 'offer' or proposal is not decisive. It depends on the
facts involved in a matter. An offer should essentially be distinguished from
an invitation to offer.
In Bank of India v. OP Swarnkar2 the Supreme Court was to decide
whether VRS is an offer/proposal or merely an invitation to offer. The apex
court observed that it was essentially a question of facts. In the instant case,
the request of employees seeking voluntary retirement was not to take effect
until and unless it was accepted in writing by the competent authority. It was
observed that the banks treated the application from the employees as an offer
which could be accepted or rejected; acceptance of such an offer is required
to be communicated in writing; the decision making process involved
application of mind on the part of several authorities; decision making process
was to be formed at various levels; the process of acceptance of an offer made
by an employee was at the discretion of the competent authority; the request
of voluntary retirement would not take effect in praesenti but in future; and
the bank reserved its right to alter/rescind the conditions of the scheme.
It is apparent from the above that the nationalised banks, in terms of the
scheme, had secured for themselves an unfettered and unguided right to deal
with the jural relationship between themselves and their employees.
It is not a case where on mere making of option on the part of an
employee, the offer was to be accepted or even that it would be reasonably
certain that some norms would be maintained. There was no consideration for
the contractual bar clause. The banks' submission that the option made by an
employee would be considered was a consideration, was not accepted by the
court.
The apex court held that VRS does not constitute an offer within the
meaning of the definition of proposal under section 2(a), since banks have in
no way expressed their 'willingness to do or to abstain from doing anything
with a view to obtaining consent' of the employees to such an act. In fact, the
bank had not only the power to accept or reject such application at its
discretion, it could also rescind the scheme altogether. On the contrary, the
proposal of the employee, when accepted would constitute promise within the
meaning of section 2(b) and only then the promise became an enforceable
contract. In the instant case, the banks when floating the scheme did not
signify that on the employees assenting thereto a concluded contract would
come into being in terms whereof and they would be permitted to retire
voluntarily and get benefits thereunder.
Furthermore, in terms of the said scheme no consideration passed so as to
constitute an agreement. Once it was found that by giving their option under
the scheme, the employees did not derive an enforceable right, it would in the

2 Ibid.

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Vol. XXXIX] Mercantile Law 623

absence of any consideration, be void in terms of section 2(g) of the Contract

Act, as opposed to section 2(h) thereof. Even by opting for the scheme as
floated by the banks, no consideration was passed far less amounting to
reciprocal promise.
In addition, there was even no reasonable certainty that the scheme would
be acted upon and even the terms and conditions thereof could be amended
and the scheme itself could be rescinded.
Therefore, it was finally held that VRS was not a proposal or an offer, but
merely an invitation to treat. On the contrary, the applications filed by the
employees was an offer. Consequently, section 5 of the Contract Act, in the
absence of any other independent binding contract or statute or statutory rules
to the contrary, would come into play and an employee would be within his
rights to withdraw his application before it was accepted and such acceptance
was duly communicated by the bank.3

Revocation and forfeiture

Section 5 provides that a proposal may be revoked at any time before the
communication of its acceptance is complete as against the proposer, but not
afterwards. In bid cases, it is well settled that a bid may be retracted before
the hammer is down. In tender cases, where acceptance of the bid is finally
subject to approval of the authority or otherwise on its confirmation, it is
settled by the Supreme Court in Union of India v. Bhimsen Walaiti Ram4 , that
the bidder can withdraw before such approval or confirmation takes place.
In the case oi National Highway Authority of India v. M/s. Ganga
Enterprises^ the question, inter alia, before the Supreme Court was whether
the forfeiture of security deposit is without authority of law and without any
binding contract between the parties and also contrary to Section 5 of the
Contract Act.
The facts in the instant case were that the appellant invited tenders for
collection of tolls and the successful bidder was required to furnish bank
guarantee with the stipulation that the same would be enforceable in case he
withdrew the bid during its validity period or failed to sign the contract. The
respondent was the highest bidder. He deposited bid security of Rs. 50 lakhs
and performance security by way of a bank guarantee of Rs. 2 crores with the
appellant. The bid validity period was 120 days. The respondent withdrew his
bid before the expiry of 120 days. The appellant encashed the banks guarantee
for Rs. 50 lakhs.
The apex court held that where an offer is made to undertake certain work
on a condition that the earnest money furnished by the bidder would be
forfeited for not signing the contract or for non-performance of some act,
although section 5 entitles him to withdraw his offer, if the same is not

3 The Supreme Court reaffirmed the principle laid down in Harvey v. Facey, (1893) ACT 552
as also earlier followed by it in McPherson v. Apparta, AIR 1951 SC 184.
4 (1969)3 SCC 146.
5 (2003)7 SCC 410.

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accepted, it would not entitle him to claim refund of the earnest money.
But in State of AP v. Singam Setty Yellananda6 where upon a breach of
contract, the appellant was authorised to forfeit the amount of the highest
bidder in respect of a forest contract, but since no prejudice was caused, the
Andhra Pradesh High Court held that total forfeiture of the deposit amount
was not justified and hence allowed only proportionate amount to be forfeited.

Concluded contract
A contract is an agreement enforceable by law. Only concluded contracts
can be enforced at a law court. Where an offer is conditional or acceptance is
not duly and lawfully made, a contract cannot be concluded. A conditional
offer, unless specifically accepted, results into no contract. An assurance has
no legal value.
In Alok Enterprises v. Rajasthan Financial Corporation,1 in a tender,
conditional offer was made by the highest bidder, the plaintiff. Negotiations
were also made, but the same did not culminate into final acceptance. The
Rajasthan High Court held that the contract was not complete in view of non-
acceptance of conditional offer. Merely on an oral assurance basis, letter of
acceptance cannot be claimed. In the absence of letter of acceptance, no
contractual right is created in plaintiff's favour.
In Cotton Corporation of India Ltd. v. Kothari Ltd. (Madras)* in a CIF
contract, provision was made for cancellation of agreement, if the goods were
of different quality than the one intended by the purchaser/ defendant, without
any consequence to any of the parties thereto. The purchaser/ defendant later
rejected goods as not being in accordance with the terms of agreement. There
was no evidence that the purchaser accepted goods by conduct in terms of
section 42 of the Sale of Goods Act, 1930. The Madras High Court held that
the purchaser could not be fastened with the liability of damages, caused to the
plaintiff on account of subsequent sale of the said goods.

Parties to contract
A contract is enforceable as against the parties to the contract. Where a
person is not a party to the contract, he owes no liability to perform it. When
all the essential parties for a contract are not parties to a contract, the contract
cannot be enforced.
In MV Shankar Bhat v, Claude Pinto since Deceased by LRs? a sale
agreement was made subject to ratification by the co-heirs-legatees, who were
not parties to the contract. The Supreme Court held that there was no
conclusive contract between the parties and the sale agreement could not be
specifically enforced.

6 AIR 2003 AP 182.

7 AIR 2003 Raj 199.
8 AIR 2003 Mad 164.
9 (2003) 4 SCC 86.

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Vol. XXXIX] Mercantile Law 625

Consideration
Consideration is the recompense given by the party contracting to the
other. An agreement is void in terms of Section 25, if made without
consideration.
In Food Corporation of India v. Surana Commercial Company™ tender
for milling arhar whole into dal was invited by the appellant and agreement
was entered into with the respondent. The respondent delivered dal to the
appellant, which was accepted and supplied to the army, where the same was
rejected due to non-adherence to specifications. The appellant asked the
respondent to take back the rejected dal and upgrade it. A supplemental
agreement was entered into between them without consideration to improve
the quality of dal. Subsequently, the appellant filed suit for damages for non-
delivery.
The court held that since the subject matter of supplemental agreement,
namely, upgradation of dal was different from the subject matter of the
original contract, namely, conversion of arhar whole into dal, the two
contracts were separate and independent.
The court rejected the claim under supplemental agreement on the ground
that the supplemental agreement had been entered into by the respondent
under duress and coercion. In the supplemental agreement, there was no
mention that the consideration was non-enforcement of bank guarantees. The
court, held that the respondents had delivered the dal and the appellants had
accepted the same. Thus, it could not be said to be in breach of the original
agreement.
In appeal, the Supreme Court observed that there was no duress, but there
was no element of consideration involved in the supplemental agreement. The
court, thus, upheld the finding of the lower court that there was no
consideration for the supplemental agreement. It was observed by the court
that it was not claimed that the consideration for the supplemental agreement
was non-enforcement of the bank guarantees. The appeal was, thus dismissed.

Consent
Under section 20, an agreement is void by reason of mistake, when both
parties are mistaken as to matter of fact essential to the agreement.
In State of Karnataka v. Steller Construction11 a contract was entered into
for construction of road. The contractor was to verify all aspects like work
site, its surrounding, availability and quantities of materials required and then
give his offer. While executing the contract, contractor was required to bring
material from a far away quarry. This led to increase in the cost and the
contractor claimed that the agreement was void under section 20.
The Karnataka High Court held that there was no explicit contract
between the parties to bring material from any specified place or known
distance, therefore provisions of section 20 were not attracted and parties were
not relieved from the terms of the contract.
10 (2003) 8 SCC 636.
11 AIR 2003 Kant 6.

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Void contracts
Section 28 renders void two kinds of agreements:

(a) An agreement by which a party is restricted absolutely from

enforcing rights under a contract by the usual legal proceedings in
the ordinary tribunals, and
(b) an agreement which limits the time within which the contract rights
may be enforced.

Section 28 was amended in 1997 on the recommendation of the Law

Commission in order to remove anomalies created by the earlier Act. The
position of law settled before the amendment was that section 28 would
invalidate only a clause in an agreement which restricts a party from enforcing
his right absolutely or which limits the time within which he may enforce his
right.
In Continental Construction Ltd. v. Food Corporation of India12 the
Delhi High Court held that section 28 before amendment did not come into
operation when contractual terms spelt out an extension of a right of a party
to sue or spelt out the discharge of a party from the liabilities. However, the
amended provision could not come into operation retrospectively. Therefore,
the contract could not be declared as unlawful.

Ratification
Ratification is an approval of a previous act or contract, which after it is
ratified, becomes the act or contract of the person approving it. It is not a
contract to assume such liability.
In Ashok Kumar J Pandya v. Suyog Coop Housing Society Ltd,12 an
agreement to sell was entered into , when the society was not registered.
Hence, it was a void agreement. However, later when the owner of the land
had put two endorsements over the agreement, the Gujarat High Court held
that a condition in agreement was ratified by virtue of the endorsement and the
agreement was not void.
The court observed that in the case of contracts, ratification is affirmance
of contract already made and as on the date on which it was made. It is neither
making of a new contract to be bound by the old one, nor the making of a new
contract in the terms of the old one, but adoption of the old contract itself, as
it existed, as if it were made with the previous authority. As soon as an act is
ratified, it stands on the same footing as an act or contract previously
authorised and not merely as an act of contract whose effect the principal may
be estopped from denying. Another feature is that ratification is retrospective,
while estoppel operates after the act and in reliance upon it ratification makes
the whole act good from the beginning.

12 AIR 2003 Del 32.

13 AIR 2003 N O C 118 (Guj).

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Performance of contract
The subject matter of contract must be certain. Where the subject matter
is uncertain, performance of the contract becomes impossible. In Mirahul
Enterprises v. Mrs. Vijaya Srivastava?4 the Delhi High Court observed that
though the matter was related to sale of immovable property, the identity of
the property and the price were not disclosed in the agreement. The court held
that the agreement must identify the property, which was the subject matter of
the agreement with certainty and price fixed and the contract for sale of
immovable property must be based on mutuality. In the absence of the same
a contract cannot be enforced.
In A. Mohammed Basheer v. State of Kerala?5 the Supreme Court held
that the subject of the contract must be made available for its performance.
Mere bid is no concluded contract. Contractor cannot be made liable for
damages, if there was no concluded contract. There is no breach of contract
if the event is a "vis major" occurring before the conclusion of the contract.
In Syndicate Bank v. R Veeranna,]6 the Supreme Court held that if an
agreement makes express provisions for enhancement of the rate of interest,
the bank need not put borrower on notice before charging higher rate on the
basis of the agreement. The principles of natural justice cannot be read into
express terms of the contract. Besides, the internal circulars of the bank are
for the internal guidance purposes and the same cannot vary the terms of the
agreement between the bank and the borrower. The respondent must perform
the contract. The apex court also reaffirmed its judgement in Hiral Lai v.
BadakulaP1 and held that an unqualified acknowledgement of liability not
only saves the period of limitation but also gives a cause of action to the
plaintiff to base its claim.
Similarly in KP Minerals Pvt Ltd. v. Bihar State Credit & Investment
Corporation Ltd.,]S where the petitioner took loan from the corporation in
1990 at the interest rate of 14 per cent and the rates were later revised under
IDBI refinance scheme and made applicable for loans granted on or after
1.5.1992, it was held that the petitioner could not claim the benefit of revised
rate.
In Archana M Kamath v. Canara Bank?9 the Supreme Court has held
that charging of small amount towards service charges for issuance of MICR
cheques is not improper. It is necessitated due to general modernisation of
functioning of banks. Introduction of MICR cheques facilitates clearance of
cheques and avoids undue delay. Neither such charging is unilateral nor
consent of each customer is necessary for this.

14 AIR 2003 Del 15.

15 (2003) 6 SCC 159.
16 (2003)2 SCC 15.
17 AIR 1953 SC 225.
18 AIR 2003 NOC 73 Jhar.
19 AIR 2003 SC 1694.

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While dealing with the question of waiver and estoppel in Bharat Coking
Coal Ltd. v. Annapurna Construction20 the Supreme Court held that in works
contract, acceptance of final bill by the contractor would not mean that he
would not be entitled to raise any further claim. It was not the case that while
accepting the final bills, the contractor had unequivocally stated that it would
not raise any further claim. In the absence of such a determination, the
respondent contractor could not be estopped or precluded from raising any
claim.
In the matter related to claim of damages, three major decisions have been
decided.
In ONGC Ltd. v. Saw Pipes Ltd21 the Supreme Court has held that in a
case where genuine pre-estimated loss is provided/stipulated in contract proof
of loss is not required upon breach of contract and the burden is on the other
party to prove that no loss is likely to occur by such breach.
In Epoch Enterrepots v, MV Won Fu?2 a claim was made under an
agreement relating to use and/or hire of the ship although a maritime claim
would not be liable to be classified as maritime lien. No action in rem would
be permissible, where the ownership of the vessel was not disclosed. The
Supreme Court did not express any view as regards the maintainability of an
action in personem or its eventual success.
In Ex Servicemen Security Bureau v. TN Electricity Board,22, where the
terms of contract provided that if loss of defendant's property was due to
involvement of security guards, the plaintiff would make good all the loss, but
no complaint was lodged with the police regarding theft and no investigation
was done establishing that the theft was caused due to security guards'
involvement, the Madras High Court held that recovery of amount in respect
of alleged theft by the defendant could not be done.

Novation and alteration of contract

Section 62 provides that if the parties to a contract agree to substitute a
new contract for it or rescind or alter it, the original contract need not be
performed.
In United Bank of India v. Ramdas Mahadeo Prashad24 during pendency
of the suit a memorandum of understanding (MOU) was arrived at in which
a compromise was reached, but the same was not complied with. The question
before the Supreme Court was whether there was a novation of contract. The
court held that there had been non-compliance of the terms and conditions of
the MOU by the respondents and a party in breach could hardly seek to
enforce a contract. Therefore, the MOU did not amount to novation of contract
as envisaged under section 62 of the Indian Contract Act.

20 (2003) 8SCC 154.

21 AIR 2003 SC2629.
22 AIR 2003 SC 24.
23 AIR 2003 NOC 13 Mad.
24 (2004) 1 SCC 252.

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In Dayal Singh v. Union of India25 it was held that the agreement

regarding compensation payable under Requisitioning & Acquisition of
Immovable Property Act, 1952 (RAIPA) came within the realm of law of
contract and therefore, the parties to such an agreement would normally be
bound by it, unless it was vitiated by fraud, misrepresentation etc. The court
held that once a matter was concluded by a contract, a novation of such
contract would also be governed by law of contract only.
It further held that a person entering into an agreement under section
8(1 )(a) of RAIPA could not claim later a legal right to obtain a court order
directing reopening of the agreement, just because subsequent award granted
higher compensation for land similar to his own.
In Satish Chandra Jain v. National Small Industries Corp. Ltd.26 the
appellant stood as guarantor to funding done by the respondent to his son's
proprietary business venture. The same was later converted into a private
limited company. The respondent creditor gave consent to the change and
fresh agreement was entered into under which the company became hirer and
the appellant's son with another became guarantors. The Supreme Court held
that subsequent agreement amounted to novation of contract by which
appellant's guarantee stood discharged.

Contracts of guarantee
In respect of contracts of guarantee, several cases came before the courts
for determination of the surety's liability.
The contract of guarantee is an independent contract. In National
Highway Authority of India v. M/s. Ganga Enterprises?7 the Supreme Court
has held that it is settled law that a contract of guarantee is a complete and
separate contract by itself notwithstanding that the underlying contemplated
contract comes into being or not. If the enforcement of 'on-demand bank
guarantee' is made in terms of the guarantee, then courts must not interfere
with the enforcement of bank guarantee on the basis of the terms of the
underlying contract. It could not be said that the invocation of the bank
guarantee was against the terms of the bank guarantee.
In Ibrahim Abdul Latif Shaikh v. Corporation Bank, Karwar2* the
Karnataka High Court has observed that under the Contract Act, it is in the
domain of the parties to stipulate the logistic details of the performance and
execution of the contract agreed upon. In the normal course it is in the
discretion of the creditor to choose the time and situation to proceed against
the securities. However, by a contract it is permissible for the parties to
stipulate the contingencies and situation as to when the creditor shall proceed
against the securities and if there is any such clear stipulation with regard to
the contingencies under which the creditor has to proceed and if there is a

25 2003 2 SCC 593.

26 AIR 2003 SC 623.
27 Supra note 5.
28 AIR 2003 Kant 98.

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failure, it would necessarily be assumed to result in impinging the rights of

surety.
In the present case, it was the contention of the guarantor that despite his
insistence and notice, the plaintiff bank did not proceed against the security.
As a result value of assets diminished, otherwise the loan would have been
fully satisfied with the securities available. The court held that it was not
within the right of the guarantor to insist to proceed against the security at the
time pointed out by him in the absence of specific contract to that effect.
There was nothing to show that under the contract, the plaintiff bank had
conceded to act against the security at the insistence of the guarantor. In the
absence of such contractual obligation, it was impermissible for the appellant
to contend that there was failure on the part of the bank in not proceeding
against the security at the appropriate time pointed out by him. Mere
forbearance on the part of the bank in proceeding against the security at the
instance of the guarantor did not amount to per se negligence or failure on its
part so as to exonerate him of his liability. The guarantor could not say that
his rights under section 141 had been impaired.
In Kailash Nath Agarwal v. PICUP Ltd.29 the appellants had executed
a bond of guarantee for the loan advanced by the respondent financial
institution. The clauses in the bond of guarantee clearly showed that the
liability of the guarantors was to remain unaffected by the failure of PICUP
to enforce its mortgage and hypothecation against the assets of the company.
The apex court held that, where express provision was made, there was
nothing, which could in any way be construed as contrary to the joint and
several liability created under section 128.
In Mak Impex Chemicals P Ltd. v. Union of India?0 the company was
engaged in the business of import and export. It entered into a contract for
export of cotton textiles which was supported by a performance bank
guarantee. On the petitioner's failure to fulfil the obligation the respondent
invoked the bank guarantee wherein the latter raised an objection regarding
liability to pay for non-performance. The Bombay High Court held that the
bank was under an obligation to remit the amount of the bank guarantee,
notwithstanding the dispute raised by its circumstances.
In Crown Maritime Co I Ltd. v. Econ Engineering P Ltd.?1 the bank had,
under the terms of the bank guarantee, undertaken to pay mobilization advance
paid by the owner to the contractor and the owner-invoked guarantee by giving
a written demand, the Mumbai High Court held that there was nothing
improper or not in accordance with the terms of guarantee.
In Satish Chandra Jain v. National Small Industries Corp. Ltd?2 where
the appellant had stood as guarantor to funding done by the respondent to his
son's proprietary business venture. Later the firm was converted into a private

29 (2003)4 SCC 305.

30 AIR 2003 Bombay 88.
31 AIR 2003 Bom. 16.
32 Supra note 26.

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Vol. XXXIX] Mercantile Law 631

limited company and the respondent creditor gave consent to the change. A
fresh agreement was entered into under which the company became hirer and
the appellants' son with another became guarantors. On default by the
company the respondent filed a suit for recovery against the company and its
two guarantors. In the plaint no reference was made either to the first
agreement or to the first guarantee. No relief was asked against the appellant
as well. But the property of the appellant was included in the recovery
certificate issued by the respondent.
The Supreme Court held that the subsequent agreement amounted to
novation of contract and thereby the appellant's guarantee stood discharged
and, therefore, his property, could not be included in the recovery certificate.
In Smt HP Jalajakshi v. Karnatakla Bank?3, a decree was passed against
the principal debtor in 1992, but bank delayed the recovery. Salary of the
surety was also attached to enable simultaneous recovery of decretal amount
from the principal debtor as well as the surety to reduce time of recovery. The
Karnataka High Court held that it was inequitable for the bank to proceed
against surety as long as principal debtor regularly paid up instalments.
In PN Bank v. Maya Enterprises?4 it was held that where counter-
guarantee was given in favour of the plaintiff that in case the plaintiff had to
pay any amount in pursuance of the invocation of bank guarantee issued by it
and the defendant failed to pay the same, the counter-guarantors were liable
to pay the amount. The plaintiff was held to be entitled to a decree against the
counter-guarantors.
In Syndicate Bank v. Wilfred D' Souza35 a case for recovery of dues by
the bank, the bank exercised lien of set off and right of general lien by bank
over amount in the bank account of the guarantor to protect its financial
interests, it issued notice before exercise of lien. Deed of guarantee did not
stipulate that said right can be exercised only after liability is determined by
debt recovery tribunal. The Karnataka High Court held that the action of the
bank could not be said to be arbitrary or irrational or in violation of article 14
of Constitution.
In another case Syndicate Bank v. K Manohara36 loan was advanced by
the bank to certain principal borrower under certain scheme. There was a
clause in the scheme that the bank shall not ask for borrower's contribution in
the form of margin money or seek collateral security or third party guarantee.
However, execution of document was done by the borrower and surety for
repayment of loan. The Kerala High Court held that the surety was liable to
repay loan jointly and severally with borrower as clause in the scheme did not
mean that if anybody voluntarily agrees to repay loan, it should be refused.
In case of Daewoo Motors India Ltd. v. Union of India37 the appellant
company availed of the export promotion capital goods scheme. The scheme

33 AIR 2003 Kant. 280.

34 AIR 2003 N O C 299 Del
35 AIR 2003 Kant 337.
36 AIR 2003 Ker 284.
37 AIR 2003 SC 1786.

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envisaged exemption from custom duty on imported capital goods subject to

the conditions in exemption that upon importing plants and machinery and
equipment it should fulfil the export obligation equivalent to six times the CIF
value of the goods imported on FOB basis. Agreeing to the above conditions
the appellant availed of the benefits of the scheme and furnished bank
guarantees.
The bank guarantee was invoked by the government by reason of non-
fulfilment of export obligation under the said scheme. The court held that it
was true that the bank guarantee had to be read in conjunction with the terms
of the contract. But when the bank guarantee itself was in absolute terms, the
agreement between the company and the government would be of no avail.
When it became apparent that the company could not fulfil its export
obligations, the action in invoking bank guarantee could not be said to be
premature and unjustified, much less arbitrary and illegal so as to warrant any
interference by the court.

Mortgage and hypothecation

There are three requisites of a mortgage by deposit of title deeds: (a) a
debt, (b) a deposit of the title deeds, and (c) an intention that the deeds shall
be security for the debt. In Lakshami Vilas Bank Ltd. v. Shreechakra
Enterprises?^ the bank could not prove that the guarantor ever deposited the
title deeds in respect of properties. Neither original nor copies of the title
deeds were produced. The bank claimed to have had obtained only an affidavit
from the guarantor, but that could also not be produced. Thus, in the absence
of necessary proof, the Madras High Court held that the guarantor was not
liable to payment of debt.
In Tarun Bhargava v. State of Haryana?9 the Punjab and Haryana High
Court held that in a loan agreement for financing goods on hypothecation
basis, the creditor cannot forcibly repossess the hypothecated item, though he
can enforce the security through the court. If the agreement is held to be a loan
agreement and rights of the creditor are held to be those of a hypothecatee,
rights of the parties under the agreement would be different. A hypothecatee
cannot take possession of the security without the intervention of the court,
though he has right to repossession or to sell the hypothecated goods through
the court or to give notice to the hypothecator to enforce the security.
The court further stated that forcible repossession without intervention of
the court would involve commission of an offence. In a loan transaction,
unlike in hire purchase transactions, the principle that owner cannot be guilty
of theft of his own property, shall not apply, since in substance, in a loan
agreement the owner is the borrower and not the financer

Bailment
The exclusive possession is the sine qua non for bailment. The question
of reasonable care and quantum of damage could be considered only when it

38 AIR 2003 Mad 1.

39 AIR 2003 P&H 98.

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is proved that exclusive possession of property was given. In Atul Mehra v.

Bank of Maharashtra,40 it was held that mere hiring of a locker would not be
sufficient to constitute a contract of bailment as provided under section 148.
Consequently where robbery occurred and the lockers were looted, the bank
was not liable as bailee.
A presumption that the strong room and the lockers were not built
according to specifications could not be drawn in the absence of any evidence.
Thus, even if bailment was accepted, the bank could not be held liable for
damages.
In Dinesh V Pai v. Chief Engineer Naval Academy,41 the Kerala High
Court was to consider the constructive bailment ie, whether it conferred any
right to a stranger. The contracting parties had hired an excavator for site
work. One of the parties refused to hand over the excavator to its owner. The
court held that there was no parting with the legal ownership and possession
of the excavator by the owner. There cannot be any lien on the same. At the
most there was constructive bailment. Thus, neither of the parties would have
any right to detain the excavator. There was no justification in not releasing
the excavator to the owner. More so, when it was not a case that contract had
been awarded in favour of another person or loss had been suffered.

Ill LAW OF NEGOTIABLE ISNTRUMENTS

The law relating to negotiable instruments is contained in the Negotiable

Instruments Act, 1981. It deals with promissory notes, bills of exchange and
cheques. The most dealt with aspects of the law during the survey year related
to the dishonour of cheques and the bankers' liability.

Dishonour of cheques
Introduced in 1988, the law relating to dishonour of cheques has
developed very fast, due to fairly large number of cases coming before the
judiciary. New issues still keep on emerging and the process of development
is still going on.
In Geoplast Pvt. Ltd. v. Shri Chico Ursula D' Souza?2 the Supreme
Court was to consider the right of the drawer of a cheque to stop payment. It
was held that once a cheque was issued by a drawer, a presumption under
section 139 which says that the holder of cheque receives it in discharge in
whole or part of any debt or any other liability must follow, and merely
because the drawer issued notice to the drawee or to the bank for stoppage of
payment before due date of payment it would not preclude an action under
section 138 by the drawee or holder of cheque in due course.
The court observed that the presumption coupled with the object of
chapter XVII of the Act which is to promote the efficacy of the banking

40 AIR 2003 P&H II.

41 AIR 2003 Ker 280.
42 AIR 2003 SC 2035.

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634 Annual Survey of Indian Law [2003

operation and to ensure credibility in business transactions through banks

persuaded it to take a view that by countermanding payment of post dated
cheque, a party should not be allowed to get away from the penal provisions
of section 138 of the Act. A contrary view would render section 138 a dead
letter and would provide a handle to persons trying to avoid payment under
legal obligations undertaken by them through their own acts which in other
words could be said to be taking advantages of one's own wrong.
A post-dated cheque shall lose credibility and acceptability if its payment
can be stopped routinely. A cheque is a well-recognised mode of payment and
post-dated cheques are often used in various transactions in daily life. Thus,
the purpose of a post-dated cheque is to provide some accommodation to the
drawer of cheque. Therefore, it is all the more necessary that the drawer of the
cheque should not be allowed to abuse the accommodation given to him by a
creditor by way of acceptance of post-dated cheque. If stoppage of payment
of a post dated cheque is permitted to take the case out of the purview of
section 138 of the Act, it will amount to allowing the person to take advantage
of his own wrong.
The Supreme Court held that the observations in the Anil Kumar Sawhney
v. Gulshan Ali43 that a post-dated cheque becomes a cheque only on the date
it bears, was made in a very different type of case. However, the presumption
under section 139 is rebuttable and hence the question whether a case for
punishment was made out against the drawer would have to be decided in the
trial.
In KR Indira v. Dr. G Adinarayana44 it was held by the Supreme Court
that the notice upon dishonour of cheque should provide sufficient information
as envisaged by the statutory provisions and there should be specific demand
for the payment of the sum covered by the cheque dishonoured. A notice shall
not be invalidated merely because it was a consolidated notice and/or that
further demands in addition to the statutory demands were also found to have
been made.
In C Antony v. K G Raghavan Nair45 the trial court passed an order for
acquittal on the following grounds;

(a) Although the complainant admitted that he did not know the accused
personally and had advanced the money at the instance of V, but he
did not examine V to prove that fact;
(b) the complainant did not examine the accused despite his presence
in the court; and
(c) there was difference in the ink used in writing of the name and
amount in the cheque and the ink used in signature portion thereof.

43 (1993) 4 SCC 424.

44 (2003) 8 SCC 300.
45 AIR 2003 SC 182.

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The appellate court noticed that (a) the accused had failed to produce the
counterfoils of his cheque-book to prove the year of issuance of the cheque;
and (b) the accused also failed to examine himself. The court, therefore, held
the accused guilty and convicted him.
The apex court held that the appellate court was obliged to come to a
definite conclusion that the findings of the trial court were either perverse or
contrary to the material on record because the high court could not have
substituted its findings merely because another contrary opinion was possible
based on the material on record. Moreover, while hearing an appeal against an
order of acquittal, the high court must express its reasons in the judgement for
holding the acquittal to be not justified. If two reasonable conclusions could
be reached on the basis of the evidence on record, the appellate court should
not disturb the findings of the trial court.
In an interesting issue of adjustment of penalty against liability, in Smt.
Gayathri v. Smt. Clement Mary46 the Karnataka High Court held that in the
proceedings for execution of money decree, adjustment of fine amount
ordered in criminal proceedings in a cheque bouncing case, could not be
permissible and such amount of fine could not be taken into account even as
part of the fine amount received by the complainant in a criminal case.
In P Mohan v. Basavaraju47 a suit for recovery, settlement was arrived
at and money was paid by cash as well as by cheque and the same was
accepted towards discharge of the liability. Subsequently, the cheque was
dishonoured. The Karnataka High Court held that the agreement between the
parties not to pay interest would remain valid only till the cheque was
dishonoured. Thereafter the liability to pay interest would arise in view of
provisions of section 80 of the Act.

Bankers' liability
The relationship between a banker and his customer is that of a debtor and
a creditor with the added responsibility on the bank to honour the cheques
drawn by his customer. If the bank wrongfully refuses to honour the cheques
of its customer, the bank shall be liable to pay damages to him.
In N Santosh v. Indian Overseas Bank, Basheerbagh4S the petitioner had
a savings bank account with the respondent bank. The bank withheld
withdrawal of amount by the account holder on the ground that it suspected
that money held by him was for and on behalf of the person who owed amount
to it. The court held that it was improper and unjustified to withhold the
amount and the acfion of the bank could not be sustained. The court further
held that the bank was a nationalised institution and it ought to have acted as
a model banking agency. The stand of the bank was not only unreasonable and
arbitrary, but was in flagrant violation of the very basic principles and
provisions of the Banking Regulation Act and the Negotiable Instruments Act,
1SSL
46 AIR 2003 Kant 134.
47 AIR 2003 Kant 213.
48 AIR 2003 AP 187.

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The court recognised that " the receipt of money by a banker from or on
account of his customer constitutes him the debtor of the customer". "There
is always an element of trust between the bank and its customer. The banks'
business depends upon this trust. Whenever a cheque purporting to be issued
by a customer is presented before a bank it carries a mandate to the bank to
pay.
The court observed that when such was the preponderance of the authority
as well as the mandate of the law, there just could not exist any basis for the
bank to deny payments and the bank had not only violated its contractual and
statutory obligations, but had exposed itself to the damages or compensation
as contemplated under section 31 of the Act.
Section 131 provides that "a banker who has in good faith and without
negligence received payment for a customer of a cheque generally crossed or
specially to himself shall hot, in case the title to the cheque proves defective,
incur any liability to the true owner of the cheque by reason only of having
received such payment."
In State Bank of India v. United Commercial Bank50 a cheque was
presented by the defendant bank to the plaintiff bank for clearing. The latter
bank made payment to the former bank. However, it failed to prove that the
cheque was not genuine and contended that its officers made payment
believing the same to be genuine. There was also no report lodged with the
police about the theft of cheque. It was held that the defendant bank could not
be held liable for negligence of the plaintiff bank's officers in not verifying
the signature on the cheque with the specimen signature of the account holders
before clearing. There could be no question of unjust enrichment when the
defendant bank had paid money to the account holder.
In Citizen Cooperative Bank Ltd. v. Ritesh Mittal5* a cheque was stolen
and encashed committing forgery. The question before the court was whether
the bank was liable. The bank argued that the difference in the handwriting
pointed out by the complainant could not be easily detected by visual
comparison and he was responsible for negligence in maintaining cheque-
book. The court held that the forged signatures were not with the connivance
of the complainant and the bank's pleas were not tenable. There was no
mandate to the bank to pay such forged cheques. The protection under section
85 was not available to the bank in respect of forged cheques. .
In Indian Bank v. B Patnaik Mines (P) Ltd?2 the Orissa High Court held
that knowledge of agency to the other party did not free the agent from
liability, if he did not disclose on the instrument that he signed as agent. The
principle is that unless the maker has clearly affixed his signature to the
instrument as agent or on account of or on behalf of a principal whose name
is disclosed or unless though he has signed unconditionally he has

49 Reliance was placed on Canara Bank v. Canara Sales Corporation, AIR 1987 SC 1603.
50 AIR 2003 Delhi 284.
51 AIR 2003 J&K 67.
52 AIR 2003 Orissa 81.

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Vol. XXXIX] Mercantile Law 637

unequivocally and clearly disclaimed his own responsibility and mentions the
name of the person really liable, he cannot escape personal liability.
Thus, where in a suit for recovery of loan filed by the bank against a
company and its directors on the basis of a promissory note, it was found that
the defendants signed the demand promissory note and other documents
without indicating therein that they signed as directors, it would squarely come
within the exception to section 28 of the NI Act and it was held by the court
that the directors were personally liable under the instrument.

Material alteration
In terms of Section 87, any material alteration of a negotiable instrument
renders the same void as against any one who is a party thereto at the time of
making such alteration and does not consent thereto, unless it was made in
order to carry out the common intention of the original parties.
In KK Thankappan v. KS Jayan?3 alteration in the promissory note was
made without the knowledge and consent of the defendants, increasing
liability of the person, who executed the negotiable instrument from 12 per
cent to 20 per cent. The Kerala High Court held that there was material
alteration in the promissory note and hence no relief could be granted to the
plaintiff under promissory note.
However, since loan was completed before execution of the note, it was
independent of the note and the plaintiff was entitled to base his claim on
original cause of action.

IV LAW OF SALE OF GOODS

The sale of goods is the most common of all commercial contracts. The
law relating to the sale of goods or movables in India is contained in the Sale
of Goods Act, 1930. During the survey year there have been only few cases
involving issues related to sale of goods.

Conditions and warranties

There are certain implied conditions and warranties, which the law
incorporates into the contract, unless the parties stipulate to the contrary.
These may be cancelled or varied by an express agreement or by the course
of dealings or by usage and custom.
In Eternit Everest Ltd, Coimbatore v. CG Abraham?4 the Kerala High
Court observed that in order to attract section 16, it has to be proved that the
buyer expressly or by implication had made known to the seller the particular
purpose for which the goods were purchased.
In the instant case, letter was sent by the dealer along with the invoice
showing the sale of the asbestos sheets with accessories for the roofing
indicated that the purpose of purchase of semi corrugated asbestos sheets was

53 AIR 2003 Ker 114

54 AIR 2003 Ker 273

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638 Annual Survey of Indian Law [2003

for roofing and that had been disclosed too. Moreover, the corrugated asbestos
sheets are mainly used for roofing of building for protecting the building from
sun and rain and it is not being used for a variety of purposes. The leak proof
of the asbestos sheets is the essential quality of the sheets and only if it is leak
proof, can it be said to be fit for the purpose for which it is purchased. The
plaintiff, viz., the buyer wanted Everest asbestos sheets as it has reputation
regarding its quality.
The court observed that the plaintiff was trusting on the judgement or skill
of the manufacturer or the dealer and thus, there was an implied term of
warranty that the articles would be reasonably fit for the purpose to which it
was applied. The court, therefore, held that as the article was purchased for
a specific purpose and it was disclosed to the seller, sub-section (1) of section
16 would be attracted and there was an implied warranty as to the quality of
the articles sold. It was further held that sub-section (2) of section 16 would
also be attracted, as the above article should be of mercantile quality. An
implied warranty of merchantability of the goods ie, the goods were free from
latent defects, was also there. Thus, section 16 of the Sale of Goods Act would
be applicable and there was an implied warranty as to the quality or fitness for
the particular purpose for which the goods were sold.
The court also held that on account of breach of warranty, the supplier
was liable to pay compensation for the damage caused to the plaintiff, as the
leakage caused in the sheets damaged the ceiling made of plaster of Paris and
additional amount had to be spent by him for repairing the same.

Delivery of possession
'Delivery', as section 2(2) of the Act defines, "means voluntary transfer
of possession from one person to another," which, as section 33 states, can be
made by doing anything, which the parties agree to be treated as delivery or
which has the effect of putting the goods in the possession of the buyer or of
any person authorised to hold them on his behalf.
However, in Cotton Corporation of India Ltd. v. Kothari Ltd. (Madras)?5
in a CIF contract, provision was made for cancellation of agreement, if the
goods were of different quality than the one intended by the purchaser/
defendant, without any consequence to any of the parties thereto. The
purchaser/defendant later rejected the goods as not being in accordance with
the terms of agreement. The court observed that there was no evidence that the
purchaser accepted goods by conduct in terms of section 42 of the Sale of
Goods Act. Hence, the purchaser could not be fastened with the liability.

V LAW OF PARTNERSHIPS

The law of partnership is contained in the Indian Partnership Act, 1932.

During 2003, issues that came before the court include interpretation of entity
of partnership, registration, rights and liabilities of partners in different

55 Supra note 8.

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Vol. XXXIX] Mercantile Law 639

changed circumstances.

Entity of partnership firm

In Comptroller & Auditor General v. Kamlesh Vadilal Mehta?6 the
Supreme Court held that a partnership firm is not a legal entity like a
company; it is a group of individual partners.
In N Khadervali Saheb (Dead) By LRs v. N Gudu Sahib (Dead) & Ors57
the Supreme Court again reiterated that a partnership firm is not an
independent legal entity. Firm's name is only a compendious name given to
the partnership and the partners are the real owners of its assets. Therefore,
allotment of assets to individual partners on dissolution of firm does not
constitute transfer of any assets of the firm. Therefore, an award or instrument
recording such settlement shall not require registration.
In Alka Builders Pvt Ltd, v. Cityspace Developers Pvt. Ltd.,5* the
Calcutta High Court held that the principle of the partnership law would be
applicable to the joint venture agreement. A joint venture agreement is a
particular partnership within the meaning of section 8 and upon completion of
the adventure in question, the partnership is automatically dissolved. It cannot
be said that there cannot be partnership between the companies, since the
partnership is a relation between persons and it is not necessary that persons
must only be natural persons, it is open to the companies to become partners.

Registration of firm
In Alka Builders Pvt Ltd. v. Cityspace Developers Pvt. Ltd.?9 the
Calcutta High Court also held that registration was required of the partnership
firm and not of the partnership agreement.
In Narendra Kumar Saxena v. Paper Traders,60 the Madhya Pradesh
High Court has held that registration of firm can be proved only by certified
copy of entry relating to firm in register of firms and not otherwise. Thus,
acknowledgement of registration of firm cannot be accepted as proof relating
to its registration.
In the instant case, the defendant had issued cheques, but the same were
dishonoured, because the defendant had stopped payment of cheques. The
court held that a suit for recovery of amount of these cheques with interest
filed by a partner of the firm on behalf of the firm was maintainable, as it was
not a suit arising out of contract to enforce the right under a contract. Bar
under section 69(2) would not apply.

Partners' liability
In Vijay Kumar v. Punjab & Sindh Bank,6] the Rajasthan High Court held
that where a person had signed the application and his name was shown in the
56 (2003) 2 SCC 349.
57 (2003) 3 SCC 229.
58 AIR 2003 NOC 264 (Cal).
59 Ibid.
60 AIR 2003 MP 193.
61 AIR 2003 Raj 176.

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640 Annual Survey of Indian Law [2003

loan application as partner, he could not say that he was not a partner.

Incoming partner
In BM Deviah v. Canara Bank, Yelwal Branch,62 the Karnataka High
Court held that in a case of introduction of new partner, liability of the
incoming partner in respect of pre-existing debts would arise if he assumed
liability and creditor had accepted him as debtor. Conduct of both the bank as
well as the new partner showed that the debt was acknowledged and thus
liability assumed. Thus, the incoming partner was liable to pay pre-existing
debts. In such a case it would be immaterial that the new partnership deed did
not provide for assumption of such liability.

Outgoing partner
In Subhash Chandra Kesrawani v. Asst. Registrar, Firms, Societies and
Chits, Allahabad63 an agreement between the partners provided that on death
of any partner, partnership shall not be dissolved, but would be continued with
the remaining partners or with any modification. One of the partners died. The
petitioner was not willing to continue as partner thereafter, while the
remaining partners were willing to continue the partnership business. He
contended for dissolution of the firm, while the other partners proceeded for
reconstitution and the registrar passed an order registering reconstitution.
The Allahabad High Court held that as an outgoing partner, the petitioner
would only have right to be paid the agreed balance which was in his capital
account, but he would have no right to contend that the firm should be
dissolved and the remaining partners should not be permitted to continue
business under the same firm name.
In Pamuru Vishnu Vinod Reddy v. Chillakuru Chandrasekhara Reddy?4
on retirement from partnership, the retiring partner sold his share in the firm.
The Supreme Court held that separation of share of a retiring partner should
be effective from the date from which the liability of the firm had to be
determined, since cause of action arose on the date of retirement of the partner
from the partnership firm. Further, liability was to be determined as on the
date of his retirement. If any delay was made in payment of his share, the
retiree would be entitled to interest till the date of payment. Retirement did not
comprehend dissolution.

The court observed:65

It follows from the above that in cases where there is an agreement

to purchase share of partner, the value of the share of the outgoing
partner or retiring partner shall be ascertained on the basis of the

62 AIR 2003 Kant. 143

63 AIR 2003 All. 254.
64 AIR 2003 SC 1614.
65 hi. at 1619.

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Vol. XXXIX] Mercantile Law 641

value on the date of the retirement, unless it is a case where the

valuation is directed by the Court in the exercise of its discretion, in
which event, the relevant date will be the date on which the share is
actually valued. Admittedly, it is a case where the plaintiff had retired
from the concern on 5.4,1971 and agreed to sell his share to Sri M.
Subbareddy.
Therefore, there was an express agreement to sell the share, pursuant
to which, he sold his share to defendant No. 12 and thereafter he
retired and ceased to be a partner on 5.4.1971. If there was delay in
payment of his financial entitlement, he is entitled to interest at the
rate of six per cent per annum in the property of the firm. Section 37
of the Indian Partnership Act also says that in the case of an outgoing
partner, he is entitled to such share of the profits made since he
ceased to be a partner as may be attributable to the use of his share
of the property of the firm or to interest at the rate of six per cent per
annum or the amount of his share in the property of the firm. The
language used in Section 37 is that "since he ceased to be a partner".
In other words, since he ceased to be a partner, he is entitled to
interest at the rate of six per cent per annum on the amount of his
share in the property of the firm. Section 37 itself makes it clear that
the relevant date is the date on which he ceases to be a partner. The
proviso to Section 37 also says that if option is given to surviving
partners to purchase the share of an outgoing partner and if any
partner assuming to act in exercise of the option does not in all
material respects comply with the terms thereof, he is liable to
account.

Assignment
In Commissioner of Income Tax v. Sunil J Kinariwala?6 the Supreme
Court has held that there is a clear distinction between a case where a partner
of a firm assigns his share in favour of a third person and a case where a
partner constitutes a sub-partnership with his shares in the main partnership.
In the former case, in view of section 29(1), the assignee gets no right or
interests in the main partnership, except, of course, to receive that part of the
profits of the firm referable to the assignment and to the assets in the event of
dissolution of the firm, but in the latter case, the sub-partnership acquires a
special interest in the main partnership.
Hence, when in the instant case, the assessee partner assigned 50 per cent
of his share in certain partnership firm in favour of a trust, the case of such
assignment could not be treated as one of a sub-partnership, though in view
of section 29.(1), the trust had an assignee share in the profits from the firm.
The said entitlement was not as a sub-partner because no sub-partnership came
into existence but as an assignee of the share of income of the assigner partner.

66 AIR 2003 SC 668.

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VI CONCLUSION

During the year under survey, though the number of cases before the
courts has been limited, several new issues came up, which have definitely
contributed to the development of Indian mercantile law.

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