The Hindu Business Line : Cheques and crossings

WHAT do you understand by "crossing of cheques"? What is the object of crossing? State the implications of the following crossings: i) restrictive crossing; and ii) not-negotiable crossing. (6 marks)

When a cheque bears across its face two parallel transverse lines, the cheque is said to be crossed. The lines are usually drawn on the left-hand top corner of the cheque. But they may be drawn anywhere across the face.

Crossing affects the mode of payment of the cheque. The cheque is no more payable to the payee or holder at the counter of the bank. The payment of a crossed cheque can be obtained only through a banker.

Thus, crossing is a mode of assuring that only the rightful holder gets payment. Even if some wrongful person secures payment it can be traced, because he can receive payment only through an account with a bank.

Restrictive crossing: `A/c Payee only' crossing is also called as restrictive crossing since it has the effect of restricting further transfers. It is a directive to the paying bank that the proceeds be released for the account of payee only. But, it is the collecting bank which has to ensure that the proceeds are credited to the account of payee only and no other.

If the collecting banker allows the proceeds of the cheque so crossed to be credited to any other account, he may be held guilty of negligence in the event of an action for wrongful conversion of funds being brought against him.

Not-negotiable crossing: Crossing whether `general' or `special' may be accompanied by words `not negotiable'.

The effect of inclusion of such words will be not to render the cheques `non-transferable'. Such cheques can very well be transferred by endorsement and delivery.

But as per Section 130, a person who takes such a cheque shall not have and shall not be capable of giving a better title to the cheque than that which the person, from whom he took it in the first instance, had.

Sale by sample

WHAT are the implied conditions in a contract of `sale by sample' under the Sale of Goods Act, 1930? State also the implied warranties operative under the said Act. (6 marks)

In the case of a contract of sale by sample, the law assumes sale to be subject to the following three implied conditions:

i) Bulk to correspond with sample: The goods must correspond to the sample, that is, the buyer shall have a right to reject goods inferior or even superior to the sample.

ii) Reasonable opportunity: The buyer must be given a reasonable opportunity to compare the goods with the sample.

Where in a sale of 100 bags of cement, the buyer is given an opportunity to examine the contents of three bags only, the buyer can terminate the contract.

iii) Merchantable: The goods must be free from any latent (hidden) defect rendering them un-merchantable.

Such defect may be discovered when the goods are put to use.

Thus, even where the approved sample was un-merchantable, goods when supplied must be merchantable.

Agency by ratification

WHAT do you understand by `agency by ratification'? What is the effect of ratification? Point out any four elements of a valid ratification.

(6 marks)

According to Section 196 of the Indian Contract Act, 1872, where a person acts for someone but without his knowledge or authority and the other person subsequently accepts or ratifies the act, agency by ratification arises and the ratifier is bound by the act as if he had expressly authorised the person to do the act on his behalf.

The four elements of a valid ratification include:

The agent must contract as agent; he must not allow the third party to believe that he is the principal.

A man cannot enter into a contract at his own and later shift it to another.

The principal must have been in existence at the time the agent originally acted. This condition is significant in case of joint stock companies.

The principal must not only be in existence but must also have contractual capacity at the time of the contract as well as at the time of ratification. Thus, a minor on whose behalf a contract is made cannot ratify it on attaining majority.

Ratification, if made, shall be of the contract as a whole (Section 199). The principal cannot reject the burdens and accept only the benefits.

Partner authority

WHAT do you understand by `implied authority' of a partner? Is such authority subject to any condition? Which of the acts of a partner come within the implied authority under the Indian Partnership Act, 1932? (6 marks)

The act of a partner which is done to carry on, in the usual way, business of the kind carried on by the firm, binds the firm (Section 19).

This capacity of a partner to bind the firm by his acts is called "implied authority of a partner". In order that his act may fall within the scope of the implied authority, the following conditions must be fulfilled:

i) The act done by the partners must relate to the normal business of the firm;

ii) The act must have been done in the usual way of carrying on the firm's business; and

iii) The act must be done in the firm's name or should, in some manner, imply an intention to bind the firm.

Acts within the implied authority of a partner: In a trading firm, the implied authority of a partner shall normally include:

i) purchasing, on behalf of the firm, goods in which the firm deals or which are used in the firm's business; ii) selling the goods of the firm; iii) receiving payments of the debts due to the firm and giving receipt therefor; iv) settling accounts with third parties dealing with the firm; v) employing servants necessary for carrying on the firm's business; vi) borrowing money on behalf of the firm; vii) pledging goods of the firm as security for the purpose of getting loans; viii) drawing, accepting and endorsing negotiable instruments on behalf of the firm; and ix) employing solicitor to defend action against the firm.

(Suggested answers to the November 2003 CA (PE-II) paper on business and corporate laws.)

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