BUSINESS LAW

ASSSIGNMENT 2

QUESTION 1 : - A holder in due course purges an instrument all its affects. Explain all
its effects

Answer 1
The party liable to pay can take, as against P, the defence of theft or fraud, but as against R he will
not be allowed to take such a defence.
Further, not only the holder in due course himself gets a good title free from all defects but also
serves as a channel to protect all subsequent holders. Once an instrument passes through the hands
of a holder in due course it is purged of all defects. Section 53 states that a holder of a negotiable
instrument who derives title from a holder in due course has the rights thereon of that holder in
due course.
ADVERTISEMENTS:
Thus, anybody who takes a negotiable instrument from a holder in due course can recover the
amount from all prior parties, although he had knowledge of the prior defects e.g., no consideration
was paid by some of the prior parties or some one of them was a thief.
It is important to note that a forged instrument, even if it passes through the hands of a holder in
due course, cannot be cured of its defect because there is no defect of title but there is complete
absence of title.
2. Privilege in case of inchoate stamped instruments (Sec. 20):
In the case of inchoate stamped instrument, if the holder or original payee fills more amount than
that was authorised, he cannot enforce the instrument for the whole amount (only actual authorised
amount can be recovered).
ADVERTISEMENTS:
If such an instrument is transferred to a holder in due course, he can claim the whole of the amount
so entered provided that the amount is covered by the stamp affixed thereon. Thus, the defence
that the amount filled by the holder was in excess of the authority given cannot be taken against a
holder is due course.
3. Liability of prior parties:
All prior parties to a negotiable instrument (i.e., its maker or drawer, acceptor and intervening
indorsers) continue to remain liable to a holder in due course both jointly and severally (i.e., he
can hold any or all prior parties liable) until the instrument is duly satisfied (Sec. 36). Whereas,
only preceding party is liable to a succeeding party, if the succeeding party is only a holder.
4. Privilege in case of Fictitious bills (Sec. 42):
When a bill of exchange is drawn in a fictitious name and is made payable to the drawers order
(i.e., where both drawer and payee of a bill are fictitious persons), the bill is said to be a fictitious
bill. Such a bill is not a good bill and cannot be enforced at law.
But the acceptor of such a bill is liable to a holder in due course provided the latter can show that
the first indorsement on the bill and the signature of the supposed drawer are in the same
handwriting.
5. Privilege when an instrument delivered conditionally is negotiated:
When a negotiable instrument is endorsed or delivered conditionally or for a special purpose only,
e.g., as collateral security or for safe custody, and not with the idea of transferring absolutely
property therein, the property in the instrument does not pass to the indorsee, and he is merely a
bailee with limited title and power of negotiating it.
This, however, does not affect the rights of a holder in due course, i.e., if such an instrument is
negotiated to a holder in due course, the parties liable on the instrument cannot escape liability
(Sections 46 and 47).
For example, if I give a cheque to a shopkeeper with the condition that he should not encash the
cheque till he supplies me the goods, anybody encashing the cheque prior to fulfilling the condition
is liable to return the money except the holder in due course.
6. Estoppel against denying original validity of instrument (Sec. 120):
The plea of original invalidity of the instrument; e.g., that no consideration actually passed between
the maker and the payee of a promissory note; cannot be put forth against the holder in due course
by the drawer of a bill of exchange or cheque or by the maker of a promissory note or by an
acceptor of a bill for the honour of the drawer.
However, the aforestated parties are not precluded from challenging the validity of the instrument
on the ground that at the time of making the instrument he was a minor or his signature had been
forged or the instrument is otherwise void ab-initio, e.g., where a promissory note is made payable
to bearer it is void and illegal as per the Reserve Bank of India Act.
7. Estoppel against denying capacity of payee to indorse:
No maker of a note and no acceptor of a bill payable to order shall, in a suit thereon by a holder
in due course, be permitted to deny the payees capacity, at the date of the note or the bill to indorse
the same (Sec. 121).
Thus, a holder in due course can claim payment in his own name despite the payees incapacity to
indorse the instrument. As per Section 51, only a holder or a person in lawful possession of the
instrument is competent to indorse. Accordingly, a person who got the instrument for a gambling
debt or for unlawful consideration cannot negotiate the same.
However, the holder in due course enjoys a privilege in this regard and he gets a good title even if
he holds a negotiable instrument endorsed by a person who got the instrument for unlawful
consideration because Section 121 provides that as against a holder in due course, no maker of a
note and no acceptor of a bill payable to order shall be permitted to deny the payees capacity to
indorse the same.

Question 2 :- Q2:-H draw a bill on S who accept it but without any consideration S indorce
the bill to J for consideration. In the due date J present the bill for payment. But S takes
the plea of lack of consideration and refuses to pay. Can J insist of payment?

ANSWER:- In the above case YES,J insist of payment of payment because there is an
consideration (or payment) .WHEN THERE IS NO CONSIDERATION then there is a
choice to pay or not. Like s take a plea of lack of consideration and not pay the amount.
When there is a party who can work for other or supply any goods, provide any service.
Having the right to get the money. when the second party cant pay the money then the first
party has a right to file a sue against the second party.as J has a right to file a a sue against S.
but S cant file sue against H because there is no consideration then it is a void contract.
Generally, courts do not inquire whether the deal between two parties was monetarily
fairmerely that each party passed some legal obligation or duty to the other party. The
dispositive issue is presence of consideration, not adequacy of the consideration. The values
between consideration passed by each party to a contract need not be comparable.some
promises that might otherwise serve as consideration are voidable by the promisor, for a
variety of reasons, including infancy, fraud, duress, or mistake. But a voidable contract does
not automatically become void, and if the promisor has not avoided the contract but instead
thereafter renews his promise

Consideration is an essential element for the formation of a contract. It may consist of a prom
 rise to perform a desired act ora promise to refrain from doing an act that one is legally entitled
to do. In a bilateral contractan agreement by which both parties exchange mutual promises
each promise is regarded as sufficient consideration for the other. In a unilateral contract, an
agreement by which one party makes a promise in exchange for the other's performance,
the performance is consideration for the promise, while the promise is consideration for the
performance.
Consideration must have a value that can be objectively determined. A promise, for example, to
make a gift or a promise of love or affection is not enforceable because of the subjective nature
of the promise.
Traditionally, courts have distinguished between unilateral and bilateral contracts by
determining whether one or both parties provided consideration and at what point they provided
the consideration. Bilateral contracts were said to bind both parties the minute the parties
exchanged promises, as each promise was deemed sufficient consideration in itself. Unilateral
contracts were said to bind only the promisor and did not bind the promisee unless the promisee
accepted by performing the obligations specified in the promisor's offer. Until the promisee
performed, he or she had provided no consideration under the law.
Generally, past consideration is not a valid consideration and has no legal value. Past
consideration is consideration that has already flowed from the promisee to the promisor That is,
the promisee's act or forbearance predates the promisor's promise. Past
considerationtherefore cannot be used as a basis when claiming damages.
An exception to this rule is where there is a duty owed to a third party. An act done before the
giving of a promise to make a payment or to confer some other benefit can sometimes be
consideration for the promise. For this to hold, three conditions must be satisfied (Pao On v
Lau Yiu Long [1980]):
1. The act must have been done at the promisors request
2. The parties must have understood the act was to be remunerated either by a payment
or the conferment of some other benefit
3. Payment/conferment of the benefit must have been legally enforceable had it been
promised in advance