Legal Aspect of Supply Chain Management

Legal Aspect of Supply Chain Management

This book is a part of the course by Jaipur National University, Jaipur. This book contains the course content for Legal Aspect of Supply Chain Management. JNU, Jaipur First Edition 2013 The content in the book is copyright of JNU. All rights reserved. No part of the content may in any form or by any electronic, mechanical, photocopying, recording, or any other means be reproduced, stored in a retrieval system or be broadcast or transmitted without the prior permission of the publisher. JNU makes reasonable endeavours to ensure content is current and accurate. JNU reserves the right to alter the content whenever the need arises, and to vary it at any time without prior notice.

Index I. Content...II II. List of Figures...VI III. List of Tables... VII IV. Abbreviations...VIII V. Case Study... 163 VI. Bibliography... 167 VII. Self Assessment Answers... 169 Book at a Glance I/JNU OLE

Contents Chapter I... 1 The Indian Contract Act, 1872... 1 Aim... 1 Objectives... 1 Learning outcome... 1 1.1 Introduction... 2 1.2 Definitions... 2 1.3 Role of Communication in Contracts... 3 1.4 Essentials of a Valid Contract... 3 1.5 Contract of Bailment... 5 1.5.1 Duties of the Bailee... 5 1.5.2 Rights of a Bailee... 5 1.6 Contract of Agency... 6 1.7 Rights/Authorities of an Agent... 6 1.7.1 Duties of an Agent... 7 1.7.2 Sub-Agent... 7 1.7.3 Types of Agents... 8 1.7.4 Termination of Agency... 8 1.8 Few Terms in Indian Contract Act, 1872... 8 Summary...11 References...11 Recommended Reading...11 Self Assessment... 12 Chapter II... 14 Negotiable Instruments Act, 1881... 14 Aim... 14 Objectives... 14 Learning outcome... 14 2.1 Introduction... 15 2.2 Characteristics of a Negotiable Instrument... 15 2.3 Promissory Note... 16 2.3.1 Format of a Promissory Note... 17 2.4 Bill of Exchange... 17 2.5 Cheque... 18 2.5.1 Characteristics of a Cheque... 18 2.6 Demand Draft... 19 2.7 Modes of Negotiation... 20 2.7.1 Types of Endorsements... 21 2.7.2 General Rules Regarding Endorsement... 21 2.7.3 Negotiation Back... 22 2.7.4 Crossing... 22 2.7.4.1 General Crossing... 22 2.7.4.2 Special Crossing... 22 2.7.4.3 Not Negotiable Crossing... 22 2.7.4.4 Account Payee Crossing... 22 2.7.4.5 Double Crossing... 23 2.8 Bouncing of a Cheque a Criminal Offence... 23 2.8.1 Format of Notice... 24 2.8.2 Offences by Companies... 25 2.8.3 Cognisance of Offences... 25 2.8.3.1 Mode of Service of Summons... 26 2.8.3.2 Evidence on Affidavit... 26 II/JNU OLE

2.9 Few Terms in Negotiable Instruments Act, 1881... 26 Summary... 31 References... 31 Recommended Reading... 31 Self Assessment... 32 Chapter III... 34 The Sale of Goods Act, 1930... 34 Aim... 34 Objectives... 34 Learning outcome... 34 3.1 Introduction... 35 3.2 Essentials of a Contract of Sale... 35 3.3 Difference Between Sale and Agreement to Sale... 39 3.4 Conditions and Warranties... 39 3.4.1 Caveat Emptor... 40 3.5 Rights of an Unpaid Seller... 40 3.5.1 Unpaid Seller's Lien... 41 3.5.2 Right of Stoppage in Transit... 41 3.6 Few Terms in Sales of Goods Act, 1930... 43 Summary... 46 References... 46 Recommended Reading... 46 Self Assessment... 47 Chapter IV... 49 The Standards of Weights and Measures Act, 1976... 49 Aim... 49 Objectives... 49 Learning outcome... 49 4.1 Introduction... 50 4.2 Provisions Applicable to Every Part (Part I)... 50 4.3 Establishment of Standards of Weights and Measures (Part II)... 53 4.3.1 Standard Units... 53 4.4 Physical Representation of Standard Units... 54 4.5 Standards of Weights and Measures... 55 4.6 Custody and Verification of Standard Equipments... 56 4.7 Import And Export of Weights and Measures (Part V)... 57 4.7.1 Registration of Exporters and Importers... 57 4.7.2 Export and Import of Weights, Measures and Commodities in Packaged Form... 57 4.8 Offences and Their Trial (Part VI)... 58 4.9 Few Terms in Standards in Weights and Measures Act, 1976... 62 Summary... 64 References... 64 Recommended Reading... 64 Self Assessment... 65 Chapter V... 67 The Consumer Protection Act, 1986... 67 Aim... 67 Objectives... 67 Learning outcome... 67 5.1 Introduction... 68 5.2 The Salient Features of the Act... 68 5.3 Section 2: Definitions... 68 III/JNU OLE

5.3.1 Additional Information... 72 5.4 District Forum... 72 5.5 State Commission... 75 5.6 National Commission... 76 5.7 Few Terms in Consumer Protection Act, 1986... 79 Summary... 80 References... 80 Recommended Reading... 80 Self Assessment... 81 Chapter VI... 83 The Motor Vehicles Act, 1988... 83 Aim... 83 Objectives... 83 Learning outcome... 83 6.1 Introduction... 84 6.2 Act 59 of 1988... 84 6.3 Definitions... 84 6.4 Licensing of Drivers of Motor Vehicles... 87 6.5 Licensing of Conductors of Stage Carriages... 96 6.6 Registration of Motor Vehicles... 98 6.7 Few Terms in Motor Vehicles Act, 1988... 103 Summary... 107 References... 107 Recommended Reading... 107 Self Assessment... 108 Chapter VII...110 Insurance Laws...110 Aim...110 Objectives...110 Learning outcome...110 7.1 Introduction...111 7.2 Indian Insurance Industry...111 7.2.1 Types of Insurance...111 7.3 Motor Vehicle Insurance...111 7.3.1 Liability Only Policies...112 7.3.2 Package Policy...112 7.4 Marine Cargo Policy...113 7.5 Few Terms in Insurance Laws...115 Summary... 124 References... 124 Recommended Reading... 124 Self Assessment... 125 Chapter: VIII... 127 Taxation Laws Relevant to SCM... 127 Aim... 127 Objectives... 127 Learning outcome... 127 8.1 Introduction... 128 8.2 Income From Salary... 128 8.3 Income From Business... 132 8.4 Income From Capital Gain... 134 8.5 Tax Deduction at Source... 134 IV/JNU OLE

8.5.1 General Guidelines Regarding TDS... 135 8.6 Payment of Advance Tax... 136 8.7 Service Tax... 137 8.8 Sales Tax... 139 8.9 Central Excise Act... 139 8.10 Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000... 141 8.11 Few terms in Taxation Laws Relevant to SCM... 143 Summary... 145 References... 145 Recommendation Reading... 145 Self Assessment... 146 Chapter IX... 148 Labour Laws... 148 Aim... 148 Objectives... 148 Learning outcome... 148 9.1 Introduction... 149 9.2 Definitions... 149 9.3 Important Provisions of Contract Labour Act... 152 9.4 Registration of Establishments Employing Contract Labour... 153 9.5 Licensing of Contractors... 154 9.6 Welfare and Health of Contract Labour... 154 9.7 Penalties and Procedure... 156 9.8 The Minimum Wages Act, 1948... 156 9.9 Workmen's Compensation Act, 1923... 157 9.9.1 Amount of Compensation... 158 9.10 Few Terms in Labour Laws... 158 Summary... 160 References... 160 Recommended Reading... 160 Self Assessment... 161 V/JNU OLE

List of Figures Fig. 1.1 A typical supply chain... 2 Fig. 2.1 Format of a promissory note... 17 Fig. 2.2 Format of a cheque... 19 Fig. 2.3 Example of cheque crossed... 22 Fig. 2.4 Generally crossed cheque payable to order... 23 Fig. 2.5 Format of notice... 25 VI/JNU OLE

List of Tables Table 2.1 Examples negotiable instruments and non negotiable instruments... 16 Table 2.2 Differences between promissory note and bill of exchange... 18 Table 2.3 Differences between cheque and bill of exchange... 19 Table 2.4 Differences between cheque and demand draft... 20 Table 2.5 Few terms in Negotiable Instruments Act, 1881... 30 Table 3.1 Differences between sale and agreement to sell... 39 Table 3.2 Few terms in Sales of Goods Act, 1930... 45 Table 4.1 Unit and its abbreviation... 54 Table 4.2 Few terms in Standards in Weights and Measures Act, 1976... 63 Table 5.1 Comparative study of district, state and national forum... 78 Table 5.2 Few terms in Consumer Protection Act, 1986... 79 Table 6.1 Age limits for driving different vehicles... 87 Table 6.2 Minimum experience for driving different vehicles... 88 Table 6.3 Few terms in Motor Vehicles Act, 1988... 106 Table 7.1 Few terms in Insurance Laws... 123 Table 8.1 Tax rate for AY 2010-11... 128 Table 8.2 Nature of deduction... 132 Table 8.3 Format of income from business... 133 Table 8.4 The important areas of tax deduction at source... 135 Table 8.5 Due dates for various instalments of advance tax for non corporate assessees... 136 Table 8.6 Due dates for various instalments of advance tax for corporate assessees... 136 Table 8.7 Few terms Taxation Laws Relevant to SCM... 144 Table 9.1 Amount Payable... 157 Table 9.2 Few terms in Labour Laws... 159 VII/JNU OLE

Abbreviations AY - Assessment Year C & F - Cost & Freight CBDT - Central Board of Direct Taxes Cenvat - Central Value Added Tax CIF - Cost, Insurance & Freight ESI - Employees' State Insurance FIR - First Information Report FOB - Free on Board GTA - Goods Transport Agency HRA - House Rent Allowance HSD - High Speed Diesel Oil IDV - Insured's declared Value ILO - International Labour Organisation LDO - Light Diesel Oil LIC - Life Insurance Corporation MRP - Material requirements planning N I - Negotiable Instruments PA - Power of Attorney PAN - Permanent Account Number SCM - Supply Chain Management SRCC - Strike Riot and Civil Commotion TAN - Tax Deduction Account Number TDS - Tax Deduction at Source w.e.f - With effect from VIII/JNU OLE

Chapter I The Indian Contract Act, 1872 Aim The aim of this chapter is to: describe the essentials of a valid contract explain the important definitions of the Indian Contract Act illustrate the provision of contract of bailment Objectives The objectives of this chapter are to: narrate the provision of a contract highlight the provision of contract of agency describe the modes of discharge of a contract Learning outcome At the end of this chapter, the students will be able to: understand the Indian Contract Act, 1872 elaborate the provision of contract of bailment understand the provision the contract of agency, duties of an agent 1/JNU OLE

Legal Aspect of Supply Chain Management 1.1 Introduction Supply chain consists of all the stages that are directly or indirectly involved in fulfilling a customer request. Supply chain involves the constant flow of information, product and funds between different stages. The supply chain not only includes the manufacturer and suppliers, but also transporters, warehouses, retailers, and customers themselves. Within each organisation, the supply chain includes all functions involved in receiving and filling a customer request. All these people are entering into contracts with each other. Therefore, it is essential that the people involved in supply chain management should know the basics of the Indian Contract Act, 1872. Tier 2 supplier Tier 1 supplier Product Manufacturer Wholesaler Distributor Retailer End Customer Fig. 1.1 A typical supply chain A typical supply chain may involve many participants, but some orders may pass through only a few. Not all participants will be in all supply chains. It will depend on the needs of the customers and the roles of the participants fulfilling these needs. 1.2 Definitions When you place an order for purchase of raw material from a supplier, if the supplier accepts your order, it means you have entered into a contract with your supplier of raw materials. What is the meaning of "Contract"? As per Section 2 (h), an agreement enforceable by law is a contract. It can be shown as under: Contract = Agreement + Enforceability Agreement must create a legal obligation or duty. By Enforceability it is meant that the party to a contract can approach a Court of Law to enforce his rights under the contract provided he has fulfilled all the conditions of a valid contract. As per Section 2(g) an agreement not enforceable by law is said to be void agreement. This leads us to a next question, "What is the meaning of Agreement?" As per Section 2 (e) every promise and every set of promises, forming the consideration for each other, is an agreement. Agreement can be shown as under: Agreement = Proposal (Offer) + Acceptance There are two parties in a contract: One party makes an offer to another party. When the other party accepts this offer, the agreement takes place. Proposal is also called as 'Offer'. As per Section 2 (a), when one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that either to such act or abstinence, he is said to make a proposal. As per Section 2 (b), when the person to whom the proposal is made, signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise. As per Section 2 (c), the person making the proposal is called the promisor, and the person accepting the proposal is called promisee. As per Section 2 (d), when, at the desire of the promisor, the promisee or any other person has done or abstained 2/JNU OLE

from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise. As per Section 2 (f), promises which form the consideration or part of the consideration for each other, are called reciprocal promises. As per Section 2 (i), an agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract. 1.3 Role of Communication in Contracts Since the offer and acceptance have to be communicated between the parties, the role of communication is very important. As per Section 3, the communication of proposals, the acceptance of proposals, and the revocation of proposals and acceptances, respectively, are deemed to be made by any act or omission of the party proposing, accepting or revoking, by which he intends to communicate such proposal, acceptance or revocation, or which has the effect of communicating it. As per Section 4, the communication of a proposal is complete when it becomes to the knowledge of the person to whom it is made. The communication of an acceptance is complete as against the proposer, when it is put in a course of transmission to him so to be out of the power of the acceptor; as against the acceptor, when it comes to the knowledge of the proposer. The communication of a revocation is complete as against the person who makes it, when it is put into a course of transmission to the person to whom it is made, so as to be out of the power of the person who makes it; as against the person to whom it is made, when it comes to his knowledge. As per Section 5, a proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards. An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not afterwards. As per Section 6, a proposal is revoked- 1. 2. 3. by the communication of notice of revocation by the proposer to the other party by the lapse of the time prescribed in such proposal for its acceptance, or, if no time is so prescribed, by the lapse of a reasonable time, without communication of the acceptance by the failure of the acceptor to fulfil a condition precedent to acceptance or by the death or insanity of the proposer, if the fact of the death or insanity comes to the knowledge of the acceptor before acceptance As per Section 7, in order to convert a proposal into a promise the acceptance must: 1. be absolute and unqualified 2. be expressed in some reasonable manner or the manner prescribed in the proposal As per Section 8, in so far as the proposal or acceptance of any promise is made in words, the promise is said to be express. In so far as such proposal or acceptance is made otherwise than in words, the promise is said to be implied. 1.4 Essentials of a Valid Contract As per Section10, all agreements are contracts, if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void. Nothing herein contained shall affect any law in force in India, by which any contract is required to be made in writing or in the presence of witnesses, or any law relating to the registration of documents. For a contract to be legal and valid, it must fulfil the following conditions: 3/JNU OLE

Legal Aspect of Supply Chain Management (a) There should be two or more parties. (b) There should be agreement between the parties. (c) There should be free consent of parties. (d) There should be a lawful consideration. (e) There should be a lawful object. (f) The parties should be competent to contract. (g) The agreements are not hereby expressly declared to be void. (h) They should fulfil norms under any other applicable Acts in respect of witness, documentation, registration and stamp duty etc. As per Section 11, every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind and is not disqualified from contracting by any law to which he is subject. A person is said to have attained majority, if he has attained the age of 18 years. A person below the age of 18 years is considered as minor. Any contract with a minor is void ab initio. It means right from the beginning, such contracts are invalid. Minor can be a beneficiary of a contract, but he cannot incur liability under the contract. If you enter into a contract with a minor, you cannot enforce your rights through court of law in the case of non performance by the minor. If you employ a minor to load the goods into a lorry and pay him the advance wages, if the minor does not load the goods you cannot take any action against the minor. As per Section 12, a person is said to be of sound mind for the purposes of making a contract, if, at the time when he makes it, he is capable of understanding it and of forming a rational judgment as to its effect upon his interests. If a person is in a state of drunkenness then temporarily he is of unsound mind since he is not capable of understanding the consequences of a contract. Therefore, you should not deal with a person when he is under the influence of alcohol. As per Section 13, two or more persons are said to consent when they agree upon the same thing in the same sense. As per Section 14, consent is said to be free when it is not caused by- (1) coercion, as defined in section 15, or (2) undue influence, as defined in section 16, or (3) fraud, as defined in section 17, or (4) misrepresentation, as defined in section 18, or (5) mistake, subject to the provisions of sections 20, 21, and 22. As per Section 15, "Coercion" is the committing, or threatening to commit, any act forbidden by the Indian Penal Code (45 of 1860) or the unlawful detaining, or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement. As per Section 16; (1) A contract is said to be induced by "undue influence" where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other. (2) In particular and without prejudice to the generality of the foregoing principle, a person is deemed to be in a position to dominate the will of anotherwhere he holds a real or apparent authority over the other, or where he stands in a fiduciary (a) relation to the other; or (b) where he makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness, or mental or bodily distress. As per Section 17, "Fraud" means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agents, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract: (1) the suggestion as a fact, of that which is not true, by one who does not believe it to be true (2) the active concealment of a fact by one having knowledge or belief of the fact (3) a promise made without any intention of performing it (4) any other act fitted to deceive (5) any such act or omission as the law specially declares to be fraudulent 4/JNU OLE

As per Section 18, "Misrepresentation" means and includes- (1) the positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true (2) any breach of duty which, without an intent to deceive, gains and advantage to the person committing it, or any one claiming under him; by misleading another to his prejudice, or to the prejudice of any one claiming under him (3) causing, however innocently, a party to an agreement, to make a mistake as to the substance of the thing which is the subject of the agreement As per Section 19, when consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused. As per Section 23, the consideration or object of an agreement is lawful, unless- It is forbidden by law; or is of such nature that, if permitted it would defeat the provision of any law or is fraudulent; or involves or implies, injury to the person or property of another; or the court regards it as immoral, or opposed to public policy. In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void. 1.5 Contract of Bailment As per Section 148, 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". Delivery of goods to transport operator is an example of bailment. Storage of goods in a ware house is another example of bailment. In supply chain management parties repeatedly enter into this contract. As per Section 149, the delivery to the bailee may be made by doing anything which has the effect of putting the goods in the possession of the intended bailee or of any person authorised to hold them on his behalf. As per Section 150, the bailor is bound to disclose to the bailee faults in the goods bailed, of which the bailor is aware, and which materially interfere with the use of them, or exposethe bailee to extraordinary risk; and if he does not make such disclosure, he is responsible for damage arising to the bailee directly from such faults. 1.5.1 Duties of the Bailee As per Section 151, the bailee is bound to take as much care of the goods bailed to him as a man of ordinary prudence would, under similar circumstances, take of his own goods of the same bulk, quantity and value as the goods bailed. As per Section 160, it is the duty of the bailee to return, or deliver according to the bailor's directions, the goods bailed, without demand, as soon as the time for which they were bailed has expired, or the purpose for which they were bailed has been accomplished. As per Section 161, if by the fault of the bailee, the goods are not returned, delivered or tendered at the proper time, he is responsible to the bailor for any loss, destruction or deterioration of the goods from that time. As per Section 154, if the bailee makes any use of the goods bailed which is not according to the conditions of the bailment, he is liable to make compensation to the bailor for any damage arising to the goods from or during such use of them. 1.5.2 Rights of a Bailee As per Section 152, the bailee, in the absence of any special contract, is not responsible for the loss, destruction or deterioration of the thing bailed, if he has taken the amount of care of it. As per Section 170, where the bailee has, in accordance with the purpose of the bailment, rendered any service involving the exercise of labour or skill in respect of the goods bailed he has in the absence of a contract to 5/JNU OLE

Legal Aspect of Supply Chain Management the contrary, a right to retain such goods until he receives due remuneration for the services he has rendered in respect of them. This is called right of particular lien. If you have delivered some finished goods to Mr. Ashok for packaging, then Mr. Ashok has right of lien on these goods and he may not return the goods to you unless his charges are paid by you. As per Section 171, Bankers, factor, wharfingers, attorneys of a High Court and policy brokers may, in the absence of a contract to the contrary, retain as a security for a general balance of account, any goods bailed to them. If you have fixed deposit with a bank and also a loan account and if there is default in loan amount, then the banker can refuse to repay the fixed deposit to you and the banker has right to retain this amount as a security for the loan. This is called Right of General Lien. Lien is an implied pledge. As per Section 71, a person who finds goods belonging to another, and takes them into his custody, is subject to the same responsibility as a bailee, if a visitor to your office forgets his bag in your office, you will become a bailee. 1.6 Contract of Agency When a business man is doing the business, very often he acting as an agent of some body and also very often he deals with the agents. He may be also acts as an agent, since he appoints agents to do certain things on his behalf. When you deposit a cheque in a bank, the bank is acting as your agent. When you ask your supplier to send the documents through the bank, the posit man is acting an agent. Transport operator is acting as an agent. People acting under power of attorney or mandate are also agents. It is very essential to understand the legal provisions of contract of agency. When one person is authorised to act on behalf of another it is called a contract of Agency. As per Section 182, an "agent" is a person employed to do any act for another in dealings with third persons. The person for whom such act is done, or represented, is called the "principal". As per Section 183, any person who is of the age of majority according to the law to which he is subject, and who is of sound mind, may employ an agent. Minor can be an agent but he will not incur personal liability in case of any default by him. Hence, it is better not to appoint a minor as an agent. 1.7 Rights/Authorities of an Agent The authority of an agent may be express or implied. As per Section 187, an authority is said to be express when it is given by words spoken or written. An authority is said to be implied when it is to be inferred from the circumstances of the case; and things spoken or written, or the ordinary course of dealing, may be accounted circumstances of the case. An agent, having an authority to do an act, has authority to do every lawful thing which is necessary in order to do such act. As per Section 188, an agent having an authority to carry on a business has authority to do every lawful thing necessary for the purpose, or usually done in the course, of conducting such business. As per Section 189, an agent has authority, in an emergency, to do all such acts for the purpose of protecting his principal from loss and would be done by a person or ordinary prudence, in his own case, under similar circumstances. As per Section 190, an agent cannot lawfully employ another to perform acts which he has expressly or impliedly undertaken to perform personally. As per Section 217, an agent may retain, out of any sums received on account of the principal in the business of the agency, all moneys due to himself in respect of advances made or expenses properly incurred by him in conducting such business, and also such remuneration as may be payable to him for acting as agent. As per Section 221, in the absence of any contract to the contrary, an agent is entitled to retain goods, papers, and other property, whether movable or immovable of the principal received by him, until the amount due to himself for commission, disbursements and services in respect of the same has been paid or accounted for to him. As per Section 222, the employer of an agent is bound to indemnify him against the consequences of all lawful 6/JNU OLE

acts done by such agent in exercise of the authority conferred upon him As per Section 230, in the absence of any contract to that effect an agent cannot personally enforce contracts entered into by him on behalf of his principal, nor is he personally bound by them. 1.7.1 Duties of an Agent As per Section 211, an agent is bound to conduct the business of his principal according to the directions given by the principal, or in the absence of any such directions according to the customs which prevails in doing business of the same kind at the place where the agent conducts such business. When the agent acts otherwise, if any loss be sustained, he must make it good to his principal and if any profit accrues, he must account for it. As per Section 212, an agent is bound to conduct the business of the agency with as much skill as is generally possessed by person engaged in similar business unless the principal has notice of his want of skill. The agent is always bound to act with reasonable diligence, and to use such skill as he possesses; and to make compensation to his principal in respect of the direct consequences of his own neglect, want of skill, or misconduct, but not in respect of loss or damage which are indirectly or remotely caused by such neglect, want of skill, or misconduct. As per Section 213, an agent is bound to render proper accounts to his principal on demand. As per Section 214, it is the duty of an agent in case of difficulty, to use all reasonable diligence in communicating with his principal, and in seeking to obtain his instructions. As per Section 216, if an agent, without the knowledge of his principal, deals in the business of the agency on his own account instead of on account to his principal, the principal is entitled to claim from the agent any benefit which may have resulted to him from the transaction. As per Section 218, subject to such deductions, the agent is bound to pay to his principal all sums received on his account. As per Section 227, when an agent does more than he is authorised to do, and when the part of what he does, which is within his authority, can be separated from the part which is beyond his authority, so much only of what he does as is within his authority is binding as between him and his principal. 1.7.2 Sub-Agent As per Section 191, a "sub-agent" is a person employed by, and acting under the control of, the original agent in the business of the agency. As per Section 192, where a sub-agent is properly appointed, the principal is, so far as regards third persons, represented by the sub-agent, and is bound by and responsible for his acts, as if he were an agent originally appointed by the principal. Agent's responsibility for sub-agents: The agent is responsible to the principal for the acts of the subagent. Sub-agent's responsibility: The sub-agent is responsible for his acts to the agent, but not to the principal Agency by Ratification As per Section 196, where acts are done by one person on behalf of another, but without his knowledge or authority, he may elect to ratify or to disown such acts. If he ratifies them, the same effects will follow as if they had been performed by his authority. As per Section 197, ratification may be expressed or may be implied in the conduct of the person on whose behalf the acts are done. Agency by Estoppel If a person acts as an agent even though he is not appointed as an agent for a considerable time, then he cannot take a stand that he is not an agent. 7/JNU OLE

Legal Aspect of Supply Chain Management 1.7.3 Types of Agents Following are the types of agents: 1. Mercantile Agent: Traders who sell goods of another person on commission basis. 2. Sub Agent: An agent appointed by an agent. 3. Co-agent: When principal appoints two or more agents, the agents are called co-agents. 4. Substituted Agent: A new agent appointed in place of an old agent. 5. Consignee: A stockist of owner of goods to dispose off them as per his order. 6. Forwarding Agent: Agent involved in forwarding the export goods. 7. Clearing Agent: Agent involved in clearing imported goods. 8. Commission Agent: An agent who sells goods of another on commission basis. 9. Mandate Holder: A person holding a letter of mandate (authority) from another person to do certain acts on his behalf. 10. P A Holder: A person who is appointed through a Power of Attorney to do certain acts on behalf of the principal. 1.7.4 Termination of Agency As per Section 201, an agency is terminated by the principal revoking his authority, or by the agent renouncing the business of the agency; or by the business of the agency being completed; or by either the principal or agent dying or becoming of unsound mind; or by the principal being adjudicated an insolvent under the provisions of any Act for the time being in force for the relief of insolvent debtors. As per Section 224, where one person employees another to do an act which is criminal, the employer is not liable to the agent, either upon an express or an implied promise to indemnify him against the consequences of that Act. 1.8 Few Terms in Indian Contract Act, 1872 Acceptance Agent Agreement Bailee When the person to whom the proposal is made signifies his assent thereto. An "agent" is a person employed to do any act for another in dealings with third persons. Every promise and every set of promises forming the consideration for each other is an agreement. The person to whom the goods are delivered in a contract of bailment. Bailor Coercion Competence to Contract Consent The person delivering the goods in case of bailment. The committing, or threatening to commit, any act forbidden by the Indian Penal Code. Every person is competent to contract. (a) who is of the age of majority (b) who is of sound mind (c) who is not disqualified from contracting Two or more persons are said to have consented when they agree upon the same thing in the same sense. 8/JNU OLE

Consideration Contingent Contract Contract Contract of Bailment Express Proposal Fraud Free Consent Implied Proposal Insolvent Lawful Consideration Mercantile Agent Misrepresentation Pawnee When at the desire of the promisor, the promisee or any other person has done or abstained from doing something, such act or abstinence or promise is called consideration. A contract to do or not to do something, if some event, collateral to such contract, does or does not happen. An agreement enforceable by law. 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. In so far as the proposal or acceptance of any promise is made in words, the promise is said to be express. Suggesting a fact which is not true, active concealment of a fact etc., with intent to deceive. The consent is said to be free when it is not caused by coercion, undue influence, fraud, misrepresentation and mistake. In so far as such proposal or acceptance is made otherwise than in words, the promise is said to be implied. A person who has ceased to pay his debts in the ordinary course of business, or cannot pay his debts as they become due. The consideration which is not forbidden by law. An agent having in the customary course of business as such agent authority either to sell/buy/consign goods. Saying something as true which is not true but the person believes that it is true. The bailee in a pledge. Principal The person for whom agent works or represents. Principal Debtor The person in respect of whose default the guarantee Promise A proposal when accepted becomes a promise. Promisee The person to whom the proposal is made. Promisor Proposal The person who makes the proposal. When one person signifies to another his willingness to door to abstain from doing anything, with a view to obtaining the assent to such act or abstinence, he is said to make a proposal. 9/JNU OLE

Legal Aspect of Supply Chain Management Reciprocal Promises Sound Mind Undue Influence Promises which form the consideration or part of the consideration for each other are called reciprocal promises. A person is said to be of sound mind for the purposes of making a contract, if, at the time when he makes it, he is capable of understanding it and of forming a rational judgement as to its effect upon his interests. Where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other. Void Agreement Voidable Contract An agreement not enforceable by law. An agreement enforceable at the option of one or more parties thereto, but not at the option of the other or others. Table 1.1 Few terms in Indian Contract Act, 1872 10/JNU OLE

Summary The supply chain not only includes the manufacturer and suppliers, but also transporters, warehouses, retailers, and customers themselves. Contract = Agreement + Enforceability Agreement = Proposal (Offer) + Acceptance All participants will be in all supply chains. It will depend on the needs of the customers and the roles of the participants fulfilling these needs. The communication of an acceptance is complete as against the proposer, when it is put in a course of transmission to him so as to be out of the power of the acceptor. As against the acceptor, when it comes to the knowledge of the proposer. The communication of a revocation is complete as against the person who makes it, when it is put into a course of transmission to the person to whom it is made, so as to be out of the power of the person who makes it; as against the person to whom it is made, when it comes to his knowledge. The person delivering the goods is called the "bailor". The person to whom they are delivered is called the "bailee". An "agent" is a person employed to do any act for another in dealings with third persons. The person for whom such act is done, or represented, is called the "principal". References Arish, M., Supply Chain. Available at: <http://www.slideshare.net/aarish9696/supply-chain\> [Accessed on 7 th March, 2011]. Bhadbhade, N., 2010. Contract Law in India. Kluwer Law International. Pages 316. Recommended Reading Available at: <http://www.lawzonline.com/bareacts/indian-contract-act/indian-contract-act.html> [Accessed on 8 th March 2011]. th Available at: <http://www.vakilno1.com/bareacts/indiancontractact/indiancontractact.html> [Accessed on 7 March 2011]. Available on: <http://www.scribd.com/doc/4972338/the-indian-contract-act-18721> [Accessed on 8 th March 2011]. Chopra, S. and Meindl, P., Supply Chain Management. Available at: <http://www.sbaer.uca.edu/publications/ supply_chain_management/pdf/01.pdf> [Accessed on 7 th March 2011]. 11/JNU OLE

Legal Aspect of Supply Chain Management Self Assessment 1. involves the constant flow of information, product and funds between different stages. a. Supply chain b. Supplier c. Agent d. Management 2. 3. 4. 5. 6. 7. A person is said to have attained majority if he has attained the age of. a. 9 years b. c. d. 18 years 37 years 50 years Which of the following statements is true? a. A " Promisee" is a person employed to do any act for another in dealings with third persons. b. A " Mercantile Agent" is a person employed to do any act for another in dealings with third persons. c. An "agent" is a person employed to do any act for another in dealings with third persons. d. An " Insolvent" is a person employed to do any act for another in dealings with third persons. A "sub-agent" is a person employed by, and acting under the control of, the original agent in the business of the. a. authority b. c. d. bureau agency promisor Which of the following statements is true? a. When principal appoints two or more agents, the agents are called co-agents. b. c. d. When principal appoints only one agent, the agent is called co-agent. When principal appoints two or more agents, the agents are called sub-agents. When principal appoints two or more agents, the agents are called mercantile-agents. An agreement not enforceable by is said to be void agreement. a. contracts b. c. d. law agency ratification may be expressed or may be implied in the conduct of the person on whose behalf the acts are done. a. Reciprocal promises b. c. d. Free consent Ratification Communication 12/JNU OLE

8. 9. Which of the following statements is false? a. If a person acts as an agent even though he is not appointed as an agent for a considerable time then he cannot take a stand that he is not an agent. b. A person who is appointed through a Power of Attorney to do certain acts on behalf of the principal. c. Every promise and every set of promises forming the consideration for each other is an agreement. d. Promisor is the person to whom the proposal is made. Match the following. 1. Promise a. An agreement not enforceable by law. 2. Void Agreement b. The person delivering the goods in case of bailment. 3. Pawnee c. A proposal when accepted becomes a promise. 4. Bailor d. The bailee in a pledge. a. b. c. d. 1-d, 2-c, 3-b, 4-a 1-c, 2-a, 3-d, 4-b 1-b, 2-d, 3-a, 4-c 1-a, 2-d, 3-b, 4-c 10. Agent involved in clearing imported goods is called. a. forwarding agent b. substituted agent c. clearing agent d. commission agent 13/JNU OLE

Legal Aspect of Supply Chain Management Chapter II Negotiable Instruments Act, 1881 Aim The aim of this chapter is to: describe the important definitions of the Negotiable Instruments Act, 1881 explain the duties and liabilities of parties to a negotiable instrument elucidate the characteristics of negotiable instruments Objectives The objectives of this chapter are to: describe duties and liabilities of parties of a paying banker enlist duties and liabilities of collecting banker determine the modes of negotiation Learning outcome At the end of this chapter, the students will be able to: understand the duties and liabilities of parties to a negotiable instrument differentiate between cheque and demand draft, promissory note and bill of exchange and cheque and bill of exchange discuss the provisions in respect of bouncing of a cheque 14/JNU OLE

2.1 Introduction When you place an order for purchase of raw material from a supplier, the supplier draws a bill on you along with Lorry receipt and sends it to your bankers for collection. This bill is called 'Bill of Exchange'. You may make payment through cheque or demand draft. You will have to endorse the lorry receipt for taking delivery of goods. The provisions in respect of bill, cheque, demand draft and endorsement are covered in Negotiable Instruments Act, 1881. Therefore, it is essential that the people involved in Supply Chain Management should know the basics of the Negotiable Instruments Act, 1881. It is one of the oldest Acts in India. 2.2 Characteristics of a Negotiable Instrument The Negotiable Instruments Act does not define a negotiable instrument, however, it has named the negotiable instrument. As per Section 13, a "negotiable instrument" means a promissory note, bill of exchange or cheque payable either to order or to bearer. Payable to Order: A promissory note, bill of exchange or cheque is payable to order which is expressed to be so payable to a particular person, and does not contain words prohibiting transfer or indicating an intention that it shall not be transferable. Where a promissory note, bill of exchange or cheque, either originally or by endorsement, is expressed to be payable to the order of a specified person and not to him or his order; it is nevertheless payable to him or his order at his option. Payable to Bearer: A promissory note, bill of exchange or cheque is payable to bearer which is expressed to be so payable or on which the only or last endorsements is an endorsement in blank. As per Section (2), a negotiable instrument may be made payable to two or more payees jointly, or it may be made payable in the alternative to one or two, or one or some of several payees. A negotiable instrument is a written document creating rights for one party and the obligation for another party expressed in terms of money, payable to bearer or to the order of a person and easily transferable not withstanding any defect in the title of the transferor. The following are the features of a negotiable instrument: 1) A negotiable instrument is in writing. 2) It creates right for one party. 3) It creates liability for another party. 4) It is expressed in terms of money. 5) It is payable to bearer or to the order of a person. 6) It is easily transferable not withstanding any defect in the title of the transferor. "Not withstanding any defect in the title of the transferor" is the speciality of a negotiable instrument. In normal course, if the transferor is having clear title the transferee gets clear title. If the transferor is having defective title the transferee gets defective title. In case of a negotiable instrument, transferee gets clear title even if the transferor is having defective title. This aspect is the main difference between a negotiable instrument and other type of property. 15/JNU OLE

Legal Aspect of Supply Chain Management Examples negotiable instruments Promissory Note Bill of Exchange Cheque Demand draft Traveller s Cheque Gift Cheque Dividend warrant Interest Warrant Pay Order Banker s Cheque Examples non negotiable instruments Stock Invest National Saving Certificate Fixed Deposit Receipt Share Certificate Withdrawal Slip Bill of Lading Airway Bill Railway Receipt Lorry Receipt Warehouse Receipt Table 2.1 Examples negotiable instruments and non negotiable instruments Section 118 lists the presumptions as to negotiable instruments Until the contrary is proved, the following presumptions shall be made: a. of consideration: that every negotiable instrument was made or drawn for consideration, and that every such instrument, when it has been accepted, indorsed, negotiated or transferred, was accepted, indorsed, negotiated or transferred for consideration. b. as to date: that every negotiable instrument bearing a date was made or drawn on such date. c. as to time of acceptance: that every accepted bill of exchange was accepted within a reasonable time after its date and before its maturity. d. as to time of transfer: that every transfer of a negotiable instrument was made before its maturity. e. as to order of endorsements: that the endorsements appearing upon a negotiable instrument were made in the order in which they appear thereon. f. as to stamps: that a lost promissory note, bill of exchange or cheque was duly stamped g. that holder is a holder in due course: that the holder of a negotiable instrument is a holder in due course, provided that, where the instrument has been contained from its lawful owner, or form any person in lawful custody thereof, by means of an offence or fraud, or for unlawful consideration, the burden of proving that the holder is a holder in due course lies upon him. h. Presumption on proof of protest: In a suit upon an instrument, which has been dishonoured, the court shall on proof of the protest, presume the fact of dishonour, unless and until such fact is disproved. 2.3 Promissory Note As per Section 4, 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. Following are the characteristics of a promissory note: 1) It is an instrument in writing. 2) It contains an unconditional undertaking (promise). 3) It is signed by the maker. Promisor is a certain person. 4) The promise is to pay a certain sum of money. 5) It is payable only to the order of a certain person or to the bearer of the instrument. 6) It is stamped as per Indian Stamp Act. Defect in respect of any one or more aspects will render the promissory note as legally invalid and unenforceable in court of law. Whenever you take a loan from a bank or a financial institution or buy goods on credit you may be required to sign the promissory note. Please ensure that the blanks in the format are duly filled in before you sign them. 16/JNU OLE

2.3.1 Format of a Promissory Note Date: 16-12-2007 Rs. 1,000/- On demand I, Mr.Vithalsingh Hajeri, promise to pay Bank of Maharashtra, Pune branch or order a sum of Rs.1, 000/- (Rs. One thousand only) at Pune or wherever demanded at a rate of interest of 12% per annum. Revenue Stamp (Signature) Fig. 2.1 Format of a promissory note The promissory notes are of two types: 1) Demand Promissory Note: Promise to pay on demand. 2) Usance Promissory Note: Promise to pay on a future date. There are two parties in a promissory note 1) Maker or Promisor: The persons who make the promise. 2) Payee or Promisee: The person to whom the sum is payable. 2.4 Bill of Exchange As per Section 5, 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. Following are the characteristics of a bill of exchange: 1) It is an instrument in writing. 2) It contains an unconditional order. 3) It is signed by the drawer. 4) Drawer is a certain person. 5) Drawee is a certain person. 6) The order is to pay a certain sum of money. 7) It is payable only to the order of a certain person or to the bearer of the instrument. 8) It is stamped as per Indian Stamp Act, if applicable. Defect in respect of any one or more aspects will render the promissory note as legally invalid and unenforceable in court of law. There are three parties in a bill of exchange: 1) Drawer: The person who draws the bill. 2) Drawee: The person on whom the bill is drawn and who has to make payment. 3) Payee: The person to whom the sum is payable. The bills of exchange are of following types. 1) Demand Bill: Bill payable on demand. 2) Usance Bill: Bill payable on a future date. 3) Inland Bill: All parties are in India. 4) Overseas Bill: Any one or more parties are outside India. 5) Accommodation Bill: Bill not backed by any genuine transactions. 6) Genuine Trade Bill: Bill backed by any genuine transactions. 7) Clean Bill: A bill not accompanied by any document of title to goods. 8) Documentary Bill: A bill accompanied by any document of title to goods. 17/JNU OLE

Legal Aspect of Supply Chain Management 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 certain period after the occurrence of a specified event 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 indicated rater of change, 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. Thus, specifying instalments and rate of interest for the sum payable are not treated as conditional or uncertain sums. Sl. No Particulars Promissory note Bill of exchange 1 Nature of payment Promise to pay Order to pay 2 No. of parties Two Three 3 Drawer's liability Primary Secondary 4 Stamp duty 5 Usage Applicable in case of both demand and usance promissory notes. Promissory notes are obtained by Lenders from their borrowers. Applicable in case of only usance bills. Bills are issued by Creditors on their Debtors. Table 2.2 Differences between promissory note and bill of exchange 2.5 Cheque As per Section 6, 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. Explanation I: For the purposes of this section, the expressions are as follows: (a) "A cheque in the electronic form" means a cheque which contains the exact mirror image of a paper cheque, and is generated, written and signed in a secure system ensuring the minimum safety standards with the use of digital signature (with or without biometrics signature) and asymmetric crypto system. (b) "A truncated cheque" means a cheque which is truncated during the course of a clearing cycle, either by the clearing house or by the bank whether paying or receiving payment, immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing. Explanation II: For the purposes of this section, the expression "clearing house" means the clearing house managed by the Reserve Bank of India or a clearing house recognised as such by the Reserve Bank of India. 2.5.1 Characteristics of a Cheque It is an instrument in writing or electronic form. It contains an unconditional order. It is signed by the drawer, i.e., account holder or his authorised agent. Drawee is always a branch of a bank. 18/JNU OLE

The order is to pay a certain sum of money. It is payable only to the order of a certain person or to the bearer of the instrument. It is valid for 6 months from the date written on cheque. In case of post dated cheque, status of the cheque will be that of a usance bill till the date comes. From the date mentioned, it becomes cheque. Fig. 2.2 Format of a cheque There are three parties in a cheque: 1) Drawer: The person who issues the cheque, i.e., Account Holder. In reference to the above example: Swaroopa Hajeri is a drawer. 2) Drawee: The Branch of a Bank on whom the cheque is drawn and who has to make payment. In reference to the above example: ICICI Bank, Shivajinagar Branch Pune is the drawee. 3) Payee: The person to whom the sum is payable. In reference to the above example: Harshalsingh Hajeri is the payee. Sl. No Particulars Cheque Bill of exchange 1 Drawer Any Account holder A creditor 2 Drawee Any branch of any bank A debtor 3 Drawer's liability Primary Secondary 4 Stamp duty Not applicable Applicable in case of only usance bills 5 Usage Cheques are issued by debtors to creditors Bills are drawn by creditors on their debtors 6 Demand or usance Always payable on demand Payable on demand or on a future date 2.6 Demand Draft Table 2.3 Differences between cheque and bill of exchange It is an order to pay money, drawn by one office of a bank upon another office of the same bank for a sum of money payable to order on demand. As per Section 7, the maker of a bill of exchange or Cheque is called the "drawer"; the person thereby directed to pay is called the "Drawee." 19/JNU OLE

Legal Aspect of Supply Chain Management "Drawee in case of need": When the bill or in any endorsement thereon the name of any person is given in addition to the drawee to be resorted to in case of need such person is called a "drawee in case of need". "Acceptor": After the drawee of a bill has signed his assent upon the bill, or, if there are more parts thereof than one, upon one of such part, and delivered the same, or given notice of such signing to the holder or to some person on his behalf, he is called the "acceptor". "Acceptor for honour": When a bill of exchange has been noted or protested for non-acceptance or for better security, and any person accepts it supra protest for honour of the drawer or of any one of the endorser, such person is called an "acceptor for honour". "Payee": The person named in the instrument, to whom or to whose order the money is by the instrument directed to be paid, is called the "payee". As per Section 8, the "holder" of a promissory note, bill of exchange or cheque means any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereto. Where the note, bill or cheque is lost or destroyed, its holder is the person so entitled at the time of such loss or destruction. As per Section 9, "Holder in due course" means any person who for consideration became the possessor of a promissory note, bill of exchange or cheque if payable to bearer, or the payee or indorse thereof, if payable to order before the amount mentioned in it became payable, and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title. Sl. No Particulars Cheque Demand Draft 1 Assurance of payment Payee gets payment only if there is balance in the drawer's account. Payee gets payment definitely 2 Consideration Presumed Specifically mentioned as "For Value Received" 3 Drawer Any Account holder Always a banker 4 Drawee Any branch of any bank Any branch of the same bank which issued DD 5 Payable to Order or bearer Always order 2.7 Modes of Negotiation Table 2.4 Differences between cheque and demand draft Negotiation is defined under section 14. When a promise note, bill of exchange or cheque is transferred to any person, so as to continue the person the holder thereof, the instrument is said to be negotiated. Order cheques are negotiated by endorsement and delivery. Therefore you should know the meaning of endorsement. Endorsement is defined under Section 15 when the marker or holder of an negotiable instrument signs the same, otherwise than as such maker, for the purpose of negotiation, on the back or face thereof or on a slip of paper annexed thereto, or so signs for the same purpose a stamped paper intended to be completed as a negotiable instrument, he is said to indorse the same, and is called the endorser. 20/JNU OLE

2.7.1 Types of Endorsements Following are the types of endorsements: 1) Endorsement in blank or General Endorsement 2) Endorsement in full or Special Endorsement 3) Per Pro Endorsement 4) Sans Recourse Endorsement 5) Restrictive Endorsement As per Section 16(1), if the endorser signs his name only, the endorsement is said to be "in blank", and if he adds a direction to pay the amount mentioned in the instrument to, or to the order of, a specified person, the endorsement is said to be "in full", and the person so specified is called the "endorsee" of the instrument. 2.7.2 General Rules Regarding Endorsement Listed below are the general rules regarding endorsement: 1) Endorsement is not applicable to bearer instruments. Even if endorsements are made in respect of bearer instruments, such endorsements will be ignored and the instrument will be continued to be treated as bearer. 2) Endorsement is applicable to order instruments. 3) Payee has the right to make first endorsement. 4) If the endorsement is made in blank, the instrument which was originally Order now becomes bearer. 5) A bearer instrument is negotiated by delivery. 6) An Order instrument is negotiated by endorsement and delivery. 7) An Order cheque crossed account payee cannot be endorsed by payee. 8) Endorser should sign as per the spelling in the instrument. Even if the spelling is wrong, then he has to endorse as per wrong spelling and in bracket he can write correct spelling. 9) Endorsement need not be as per specimen signature. 10) It is not the duty of paying or collecting banker to verify the signature of the endorser. 11) An endorsement in blank can be converted into an endorsement in full. This does not require the signature of the endorser or drawer. 12) An endorsement in full can be converted into an endorsement in blank. This requires the signature of the endorser. 13) Endorser should not use the title like Dr., Prof., etc while endorsing the cheque. Similarly, he should not include the qualification in the endorsement. 14) Endorsement should be in proper sequence. A endorsing to B, B endorsing to C, C endorsing to D etc. It means endorsee in one transaction should be become endorser in the next transaction. 15) If the serial number of endorsement is not written, then the order will be presumed as appearing on the cheque. 16) Endorsement can be done on the face or back of the instruments. But, the practice is to do it on the back side. 17) If the space is not sufficient to do the endorsement, a piece of paper can be attached to the instrument and endorsement can be made on this paper. This paper is called Allonge. 18) Endorsement can be done by duly authorised agent. Agent has to show that he is endorsing in the capacity of Agent. 19) If the payee has died, the legal heirs of the deceased payee can jointly make the endorsement. They have to show that they are endorsing in the capacity of legal heirs. 20) After doing the endorsement in favour of a person, if the instrument is not delivered then the endorsee does not get any rights. 21) If the cheque is payable to a married woman in the name of her maiden name, she should endorse in present name after marriage and show maiden name also. Liabilities of parties to a negotiable instrument Liability of drawer: As per Section 30, the drawer of a bill of exchange or cheque is bound in case of dishonour by the drawee or acceptor thereof, to compensate the holder, provided due notice of dishonour has been give to, or received by, the drawer as hereinafter provided. 21/JNU OLE

Legal Aspect of Supply Chain Management Liability of prior parties to holder in due course: As per Section 36, every prior party to a negotiable instrument is liable thereon to a holder in due course until the instrument is duly satisfied. 2.7.3 Negotiation Back If payee or endorser becomes endorsee/holder in due course, it is called negotiation back. In this case the intervening parties are not liable in case of dishonour of the instrument. 2.7.4 Crossing To prevent frauds in encashment of cheques, there is a system called Crossing. Crossing is an instruction to paying bank not to make cash payment to payee. Payment should be made only through an account. Even if there is a fraud, the culprit can be traced, because he has an account, he has given photograph, introduction and address proof. Following are the types of cheque crossing: 2.7.4.1 General Crossing As per Section 123, where a cheque bears across its face an addition of the words and company or any abbreviation thereof, between two parallel transverse lines, that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed generally. And Company 2.7.4.2 Special Crossing Fig. 2.3 Example of cheque crossed As per Section 124, where a cheque bears across its face an addition of the name of a banker, either with or without the words "not negotiable", that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed specially, and to be crossed to that banker. As per Section 126, where a cheque is crossed generally, the banker on whom it is drawn shall not pay it otherwise than to a banker. Payment of cheque crossed specially: Where a cheque is crossed specially, the banker on whom it is drawn shall not pay it otherwise than to the banker to whom it is crossed or his agent for collection. 2.7.4.3 Not Negotiable Crossing As per Section 130, a person taking a cheque crossed generally or specially, bearing in either case the words not negotiable, 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 had. 2.7.4.4 Account Payee Crossing This type of crossing is not defined by Negotiable Instruments Act. It is very much in practice. It increases the safety of a cheque and prevents frauds. 22/JNU OLE

It is an instruction to collecting bank to collect the amount of cheque only if the payee is having account with him. If the payee does not have an account with any bank, he cannot encash the cheque. There is no difference between bearer or order once the account payee crossing is done. Account payee and not negotiable crossing are used in combination to have highest safety. 2.7.4.5 Double Crossing These kinds of cheques are to be collected by the banker specified. It cannot be crossed again as the purpose of the first is frustrated by the second crossing. This is only allowed if the bank to which it is crossed does not have a branch at the paying banker s place. After combining the cheques payable to bearer or order and crossed and uncrossed we can have the following types of cheques. Crossing under Serial No. 11 is the safest mode of issuing a cheque. Fig. 2.4 Generally crossed cheque payable to order 2.8 Bouncing of a Cheque a Criminal Offence These provisions were incorporated in the year 1988, with a view to encourage the culture of use of cheques and enhancing the credibility of the instrument. Section 138 deals with dishonour of cheque for insufficiency of funds in the accounts and circumstances under which it can become a criminal liability. Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall without prejudice to any other provisions of this Act, be punished with imprisonment for "a term which may extend to two year", or with fine which may extend to twice the amount of the cheque, or with both. Provided that nothing contained in this section shall apply unless: (a) The cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier. (b) The payee or the holder induce course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice, in writing, to the drawer, of the cheque, within thirty days of the receipt of information by him from the bank regarding the return of the cheques as unpaid, and (c) The drawer of such cheque fails to make the payment of the said amount of money to the payee or, 23/JNU OLE