BACHELOR'S DEGREE PROGRAMME
Term-End Examination: June, 2011
ELECTIVE COURSE: COMMERCE
ECO-5: MERCANTILE LAW
Time: 2 hours
Maximum Marks: 50
Note: Answer any five questions. All questions carry equal marks.
1. (a) "All contracts are agreements but all agreements are not contracts." Comment. 5, 5
Ans: Section 2 (h) defines ‘Contract’ as an agreement enforceable by law. If we analyse the definition it has two components viz.
(i) An agreement and
(ii) Its enforceability by law.
Section 2 (e) defines ‘agreement’ as “every promise and set of promises forming consideration for each other”. For a contract to be enforceable by law there must be an agreement which should be enforceable by law. To be enforceable, the agreement must be coupled with obligation. Obligation is a legal duty to do or abstain from doing what one promised to do or abstain from doing. All contracts are agreements but for agreement to be a contract it has to be legally enforceable.
Section10 of the Act provide “All agreements are contracts if they are made by the free consent of the parties competent to contract for lawful object & are not hereby expressly declared void.” All contracts are agreements but for an agreement following essential element are required:
- Offer & Acceptance: There must be two parties to an agreement.
- Intention to create legal relationship: When two parties enter into a contract their intention must be to create legal relationship. If there is no such intention between the parties, there is no contract between them.
- Lawful consideration: An agreement to be enforceable by law must be supported by consideration.
- Capacity to Contract-Competency: The parties competent to contract must be capable of contracting i.e. they must be of the age of majority, they must be of sound mind & they must not be disqualified from contracting by any law to which they are subject to.
- Free Consent: It is necessary between the contracting parties to have a free & genuine consent to an agreement.
- Lawful object: The object of an agreement must be lawful. It should not be illegal, immoral or it should not oppose public policy.
- Agreement not declared void: For an agreement to be a contract it is necessary for the agreement must not be expressly declared void by any law in force in the country.
- Possibility & Certainty of performance: The terms of an agreement must not be vague or indefinite. It should be certain. The agreement must be to do a thing which is possible.
Thus, agreement is the genus of which contract is the specie.
(b) Distinguish between 'void agreements' and 'voidable contracts'.
Ans: Distinction between voidable contract and void agreement:
- A void agreement has from the very beginning no legal effects. It is unenforceable at law. A voidable contract is one which one of the parties may affirm or reject at his option. It is valid and enforceable till it is repudiated or restricted.
- The defect in the case of voidable contract is curable and may be condoned. But a void agreement is void ab initio and its defects are incurable.
- In the case of void agreement even claiming under such contract while in the case of a voidable contract, a third party can acquire a valid title from a person claiming under such a contract.
- Since a void agreement is unenforceable at law three does not arise may question of compensation on account of non-performance of the agreement. But in case of voidable contract, a person is entitled to compensation for loss or damages suffered by him on account of the non-performance of the contract.
2. Under what circumstances contracts without consideration are valid? Explain. 10
Ans: Section 2 (d) of Indian Contract Act, 1872, defines consideration as “When at the desire of the promisor the promise or any other person has done or abstained from doing or does or abstains from doing something, such act abstinence or promise is called a consideration for the promisor.”
Consideration is an advantage or benefit which moves from one party to another. It is the essence of bargain. It is the reciprocal promise i.e. to do something or abstain from doing something in return of a promise. It is necessary for an agreement to be enforceable by law. In consideration both the parties give something & get something in return. It may be in cash or kind.
Exceptions to the rule ‘No consideration no contract’
The general rule is that an agreement made without consideration is void. Section 25 deals with the exceptions to this rule. In such cases the agreements are enforceable even though they are made without consideration. These cases are:
a) Love and Affection [Section 25(1)]: Where an agreement is expressed in writing and registered under the law for the time being in force for the registration of documents and is made on account of natural love and affection between the parties standing in a near relation to each other, it is enforceable even if there is no consideration.
For e.g. F, for natural love and affection, promises to give his son A, Rs. 1 Lac. F puts this promise in writing and registers it. This is a contract.
b) Compensation for voluntary services [Section 25(2)]: A promise to compensate wholly or part a person, who has already voluntarily done something for the promisor, is enforceable, even though without consideration. A promise to pay for a past voluntary service is binding.
For e.g. A says to B’ At the risk of your life you saved me from a serious accident. I promise to pay you Rs.1, 000.” There is a contract between A and B even though there is no consideration.
c) Promise to pay a time barred debt [Section 25(3)]: A promise by a debtor to pay a time barred debt is enforceable provided it is made in writing and is signed by the debtor or by his agent generally or specifically authorized in that behalf. The debt must be such “of which the creditor might have enforced payment but for the law for limitation of suits”
For e.g. D owes C Rs.1, 000 but the debt is barred by the Limitation Act. D signs a written promise to pay C Rs.500 on account of the debt. This is a valid contract.
d) Agency (Section 185): No consideration is necessary to create an agency.
e) Completed Gift (Explanation 1 to Section 25): The rule ‘No consideration no contract’ does not apply to completed gifts. This rule shall not affect the validity, as between donor and donee, of any gift actually made.
3. Define the term coercion. What are the essentials for coercion? 2, 8
Ans: Coercion, as defined in Section 15: Coercion" is the committing or threatening to commit any act forbidden by the Indian Penal Code, or the unlawful detaining, or threatening to detain any property to the prejudice of any person whatever, with the intention to inter into contact. A person to whom money has been paid or anything delivered under coercion must repay or return it.
Essentials for Coercion
1. The coercion must be the committing of any act forbidden by the Indian Penal Code: It is an important and essentials element of coercion. When the consent of a person is obtained by committing any act which is forbidden by the Indian Penal Code, the consent is said to be obtained by coercion.
2. The coercion must be the threatening to commit any act forbidden by the Indian Penal Code: It is another part of the main essential element of coercion. When the consent of a person is obtained by thre4t of committing any act which is forbidden by the Indian Penal Code, the consent is also said to be obtained by coercion e.g. consent obtained at the pistol point, or by threatening to cause death or by intimidation.
3. The coercion must be the unlawful detaining or threatening to detain any property: In case the consent of the party is obtained by unlawful detaining or threatening to detain any property, the consent is said to be obtained by coercion.
4. The acts of coercion must be done with the intention of causing the other party to enter into a contract: It is also an essential element of coercion. Threats, which amount to coercion, must be done with the intention of causing the other party to enter into a contract. In other words, the acts amounting to coercion must be done with the intention of obtaining the consent of the party, and inducing him to enter into a contract. If the act of coercion is done without any intention of obtaining the consent of the other party, it will not amount to coercion.
5. The Indian Penal Code may or may not be in force where the coercion is committed: This legal rule for coercion is emphasised in the Explanation to Sec. 15 of the Indian Contract Act. According to this explanation, it is immaterial whether the Indian Penal Code is or is not in force in the place where the act amounting to coercion is committed.
6. The acts of coercion may be initiated by any person: It is also a legal rule for coercion. According to this rule, the threat amounting to coercion need not necessarily be initiated from a party to the contract. It may be initiated by any person, even by a stranger. Similarly, it may be directed against any person including a stranger.
4. What do you mean by discharge of a contract? Discuss the "Discharge by breach" with examples. 2, 8
Ans: Discharge of contract means termination of the contractual relationship between the parties. A contract is said to be discharged when it ceases to operate, i.e. when the rights and obligations created by it come to an end.
A contract may be discharged:
- By Performance
- By Agreement or Consent
- By impossibility
- By Lapse of Time
- By operation of Law
- By Breach of Contract
Discharge by Breach of Contract: A breach of contract is a failure, without legal excuse, to perform any promise that forms all or part of the contract. This includes failure to perform in a manner that meets the standards of the industry or the requirements of any express warranty or implied warranty, including the implied warranty of merchantability. A breach of contract can be material or minor. The parties’ obligations and remedies depend on which type of breach occurred.
A breach is material if, as a result of the breaching party’s failure to perform some aspect of the contract, the other party receives something substantially different from what the contract specified. For example, if the contract specifies the sale of a box of tennis balls and the buyer receives a box of footballs, the breach is material. When a breach is material, the no breaching party is no longer required to perform under the contract and has the immediate right to all remedies for breach of the entire contract.
A breach is minor if, even though the breaching party failed to perform some aspect of the contract, the other party still receives the item or service specified in the contract. For example, unless the contract specifically provides that “time is of the essence” (i.e. deadlines are firm) or gives a specific delivery date of goods, a reasonable delay by one of the parties may be considered only a minor breach of the contract. When a breach is minor, the no breaching party is still required to perform under the contract, but may recover damages resulting from the breach.
a) Actual Breach: When a party fails, or neglects or refuses or does not attempt to perform his obligation at the time fixed for performance, it results in actual breach of contract. For e.g. A promises to deliver 100 packs of ice-cream to B on his wedding day. A does not deliver the packs on that day. A has committed actual breach of the contract.
b) Anticipatory Breach: Anticipatory Breach is a breach before the time of the performance of the contract has arrived. This may take place either by the promisor doing an act which makes the performance of his promise impossible or by the promisor, in way showing his intention not to perform it.
5. Explain the circumstances when the agent becomes personally liable on the contracts entered into by him on behalf of his principal. 10
Ans: Personal Liability of Agent: The general rule is that an agent cannot be made personally liable for the contracts entered into by him on behalf of his principal; neither is he personally bound by them. The circumstances under which an agent is personally liable to his principal acts are as follows:
1. When he agrees with the concerned parties (Sec. 230).
2. An agent who is not having any authority to act as an agent or who has exceeded the authority and the same has not been ratified by the principal, is personally liable for any loss bearded by a third party (Sec. 235).
3. A person with whom a contract has been entered into in the character of agent is not entitled to require the performance of it, if in reality he was acting not as agent, but as principal (Sec. 236).
4. When he is acting for a foreign principal.
5. Where the agency is coupled with interest that is the agent has interest in the subject matter of the agency.
6. When the agent signs a negotiable instrument in his own name without making it clear that he is signing as an agent.
7. Where trade, usage or customs holds him liable in certain kinds of business.
8. Where the agent acts for a principal who cannot be sued an account of his being a foreign sovereign Ambassador Etc.
9. Where the agents acts for an undisclosed principal.
6. Explain the differences between sale and an agreement to sell. 10
Ans: Difference between ‘Sale’ and ‘agreement to sell’.
According to Section 4 of the Sale of Goods Act, 1930, ‘A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in the goods to the buyer for a price.’
The term ‘Contract of sale’ is a generic term and includes both a sale and an agreement to sell. Where under a contract of sale, the property in the goods is transferred from the seller to the buyer (i.e. at once), the contract is called a ‘sale’ but where the transfer of the property in the goods is to take place at a further time or subject to some condition thereafter to be fulfilled, the contract is called an ‘agreement of sell’. [Section 4(3)].
Difference between Sale and Agreement to Sale:-
Basis
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Sale
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Agreement to Sell
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Where under a contract of sale, the property in the goods is transferred from the seller to the buyer (i.e. at once); the contract is called a ‘sale’.
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where the transfer of the property in the goods is to take place at a further time or subject to some condition thereafter to be fulfilled, the contract is called an ‘agreement of sell’
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Transfer of ownership of goods takes place immediately.
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Transfer of ownership of goods is to take place at a future time or subject to fulfillment of some condition.
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It is an executed contract because nothing remains to be done.
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It is an Executory contract because something remains to be done.
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Buyer gets a right to enjoy the goods against the whole world including seller.
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Buyer does not get such right.
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Transfer of risk of loss of goods takes place immediately because ownership is transferred.
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Transfer of risk of loss of goods does not take place because ownership is not transferred.
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Seller can sue the buyer for the price, even though the goods are in his possession.
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Buyer can sue the seller for damages only.
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Buyer can sue the seller for damages and can sue the third party who bought those goods for goods.
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Buyer can sue the seller for damages only.
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Buyer can claim the goods from the official receiver or assignee because the ownership of goods has transferred to the buyer.
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Buyer cannot claim the goods, even when he has paid the price because the ownership has not transferred to the buyer. The buyer who has paid the price can only claim rateable dividend.
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Seller must deliver the goods to the official receiver or assignee because the ownership of goods has transferred to the buyer. He can only claim rateable dividend for the unpaid price.
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Seller can refuse to deliver the goods unless he is paid full price of the goods because the ownership has not transferred to the buyer.
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It is a right in rem i.e. right against the whole world.
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It creates a right in personam i.e. right against a person.
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Buyer has to bear the risk even if possession is with the seller as ownership has passed.
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Seller has to bear the risk, even if possession is with the buyer, as ownership has not passed.
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7. Explain the procedure for registration of partnership firm. What are the consequences of non registration? 5, 5
Ans: Procedure for Registration of Firm:
Under the Indian Partnership Act, 1932, the registration of the firm is not compulsory. Because an unregistered firm suffers from certain limitations, hence the registration of the firm is desirable. Registration can be done at any time. The registration of partnership firm involves the following procedure:
The firm will have to apply to the Registrar of Firms of the respective State Government in a prescribed application form. The form should be duly signed by all the partners. The application form should contain the following information:
1. The firm-name.
2. The name of business place.
3. Names of other places, if any, where the firm is carrying on its business.
4. Date of commencement of business.
5. Date when each partner joined the firm.
6. Full names and permanent addresses of all the partners.
7. The duration of the firm, if any.
When the Registrar of Firms is satisfied that all formalities relating to registration have been fully complied with, he makes an entry in the Register of Firms. Thus, the firm is considered to be registered. The Registrar issues a certificate called ‘Registration Certificate’ to the firm. The Register of Firm remains open for inspection on payment of prescribed fee for the purpose.
Consequences of Non-registration of a partnership firm:
The Indian Partnership Act does not make registration of a firm compulsory nor does it impose any penalty for non registration. It is optional for the firm to get itself registered or not. However, Section 69 puts down certain disabilities to a non registered firm which normally forces the partners the partners to get the firm registered. The effects of non registration are as follows:
(a) No suit by a partner against other partners or firm: A partner of an unregistered firm cannot sue the firm or any partner of the firm to enforce a right arising from the contract or conferred by the Partnership Act. He can do so only if the firm is registered and the person suing is shown as a partner in the register of firms.
(b) No suit against any third party: An unregistered firm cannot sue a third party to enforce a right arising from a contract. The firm can only do so if the firm is registered and the person suing is shown as a partner in the register of firms.
(c) No right to counter claim or to claim setoff: An unregistered firm or any partner thereof cannot claim setoff in the proceedings instituted against a firm by a third party to enforce a right arising from a contract. Setoff means a claim by the firm which would reduce the amount of money payable to the claimant.
(d) Arbitration proceedings: In Jagdish Chandra Gupta Vs. Kajaria Traders (India) Limited it was held that arbitration proceedings were barred if the firm was unregistered.
8. Who is finder of goods? Explain the rights and duties of a finder of goods. 2, 8
Ans: A person, who find goods belonging to another and takes them into his custody, is subject to the responsibility of taking due care of them and trying to find out the real owner of the goods. It is also to be remembered that the finder has a good title over the things found and that his right is enforceable against all except the real owner.
In the words of 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”. It is true that a person who comes by an article is not obliged to take charge of it, but if he does pick it up, he becomes a bailee.
Rights of finder of goods:
The right of finder of goods is given below:
1. Right to receive compensation: The finder of goods has right to recover compensation for the trouble and expenses incurred in preserving.
2. Right of lien: He can exercise his right of lien and may retain the goods until he receive the expenses incurred in preserving the property or for finding out the true owner.
3. Right to Sue: He can file a suit against the owner for any reward that might have been offered to give him.
4. Right of legal Action: The finder may take necessary legal action against third party who wrongfully deprives him of the possession of the goods.
5. Right of Selling: The finder has a right to sell the thing of another found by him under the circumstances given below.
a. The thing found is commonly the subject of sale.
b. The owner cannot be found with reasonable diligence.
c. The owner refuses to pay the lawful charges.
d. The thing is in danger of perishing or losing the greater part of its value or the lawful charges amount to two thirds of its value.
Duties of Finder of Goods: The duties of finder of goods are given below:
1. Finding out the real owner: It is the duty of the finder of the goods to make possible effort in order to find out the real owner of the goods. He may retain such goods until he finds true owner by advertisement in case of costly thing.
2. Care to be taken by the finder: The finder is bound to take as much care of the goods lost as a man of ordinary prudence would under similar circumstances take of his own goods of the same bulk, quality and value as the goods lost.
3. Returning of goods: It is the duty of finder to return the lost goods to real owner when he receives reasonable compensation for his services he has rendered in respect of them.
9. (a) Distinguish between a 'condition' and a 'warranty'. 6
Ans: ‘Condition’ and ‘Warranty’: Section 12(2) states that a condition is a stipulation which is essential to the main purpose of the contract. The breach of a condition gives rise to a right to treat the contract as repudiated or broken.
Section 12(3) states that a warranty is a stipulation which is collateral to the main purpose of the contract. The breach of a warranty gives rise to a claim for damages but not a right to reject the goods and treat the contract as repudiated.
Difference between Condition and warranty:
Basis of Difference
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Condition
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Warranty
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Definition
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A stipulation which is essential to the main purpose of the contract.
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A stipulation which is collateral to the main purpose of the contract.
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Remedy
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The aggrieved party can terminate the contract, claim damages or treat it as breach of warranty
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The aggrieved party cannot terminate the contract but can only claim damages
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Treatment
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A breach of condition can be treated as a breach of warranty
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A breach of warranty cannot be treated as breach of condition.
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(b) Rohan contracts to sell Shyam timber of half inch thickness. The timber actually supplied varied in thickness from half inch to 1.25 inch and it was fit for the purpose. Can Shyam reject the timber? Give reasons in support of yours answer. 4
Ans: