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ASSIGNMENT SOLUTIONS GUIDE (2015-2016) E.C.O.-5 Mercantile Law Disclaimer/Special Note: These are just the sample of the Answers/Solutions to some of the Questions given in the Assignments. These Sample Answers/Solutions are prepared by Private Teacher/Tutors/Authors for the help and guidance of the student to get an idea of how he/she can answer the Questions given the Assignments. We do not claim 100% accuracy of these sample answers as these are based on the knowledge and capability of Private Teacher/Tutor. Sample answers may be seen as the Guide/Help for the reference to prepare the answers of the Questions given in the assignment. As these solutions and answers are prepared by the private teacher/tutor so the chances of error or mistake cannot be denied. Any Omission or Error is highly regretted though every care has been taken while preparing these Sample Answers/ Solutions. Please consult your own Teacher/Tutor before you prepare a Particular Answer and for up-to-date and exact information, data and solution. Student should must read and refer the official study material provided by the university. N A contract is an agreement, creating and defining the obligation between parties. Salmond Attempt all the questions. Q. 1. (a) All contract are agreements but all agreements are not contracts. Comment. Ans. According to Section 2(h) of the Indian Contract Act, 1872, An agreement enforceable by law is a contract. Every agreement and promise enforceable at law is a contract. Sir Fredrick Pollock A contract is an agreement enforceable at law made between two or more persons by which rights are acquired by one or more to acts or forbearances on the part of others. Sir William Anson On the basis of analysis of the above definitions, a contract must have the following two elements: (i) An agreement (ii) Its enforceability by law. According to Section 2(e) of the Indian Contract Act, 1872, Every promise and every set of promises forming the consideration for each other is an agreement. According to Section 2(b) of the Indian Contract Act, 1872, A proposal when accepted becomes a promise. For example: Ramesh offers to sell his scooter for Rs. 8000 to Shyam. Shyam accepts the offer. It becomes a promise and is treated as an agreement between Ramesh and Shyam. It can also be said that an agreement is inclusive of an offer by one party and its acceptance by the other. Therefore, Agreement = Offer (or proposal) + Acceptance of Offer (or proposal). Based on the above definitions Section 10 states that, all agreements are contracts if they are made by the free consent of the parties competent to contract, for a lawful consideration and with a lawful object and are not hereby expressly declared to be void. In other words, it is important for a contract to fulfil all the necessary requirements for it to be a valid contract. Also the fact that an agreement with all the essential elements mixed with a valid acceptance makes it to being a valid contract. Section 10 provides for the essential elements for a valid contract, which include: (i) Proper offer and proper acceptance: There must be atleast two parties in order to create a valid contract, one making the offer and the other accepting it. Such offer and acceptance must be valid. The law has laid down specific rules for making the offer and its acceptance, that is, it must be absolute and unconditional. (ii) An intention to create legal relationship: The agreement must be capable of creating legal obligation among the parties. It does not that it is not a contract. As in case of social or domestic agreements the usual presumption 2
is that the parties do not intend to create legal relationship however in commercial or business agreements, the usual presumption is that the parties intend to create legal relationship unless otherwise agreed upon. (iii) Free consent of the parties: It is essential that there must be free and genuine consent of the parties to the contract so as to create a valid contract. According to Section 14, Consent is said to be free when it is not caused by: (a) coercion; (b) undue influence; (c) fraud; (d) misrepresentation, and (e) mistake. The contract is voidable at the option of the aggrieved party if the consent is obtained by any of the above four factors. (iv) Capacity of parties: The parties to the contract must be capable of entering into a contract. The contract is not valid if any of the parties in not competent to contract. According to Section 11 of the Act, states that, 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. (v) Lawful consideration: The agreement must be based on a consideration. Consideration means something in return. In other words, it is Nthe price paid by one party to buy the promise of the other. The consideration may be past, present or future, however it must be real. (vi) Lawful object: An agreement which is made for any act which is prohibited by law is not valid. That is the object of an agreement must be lawful. (vii) Agreements not expressly declared void: Sections 24 to 30 clearly specify certain types of agreements which have been expressly declared void. (viii) Certainty of meaning: The terms of the contract must be certain and unambiguous. As per Section 29 of the Indian Contract Act, agreements the meaning of which is not certain or capable of being made certain are void. (b) Define offer and distinguish between offer and invitation to offer with examples. Ans. In simple words it is the starting point in the making of an agreement. An offer is also called proposal. According to Section 2(a) of the Indian Contract Act, 1872, When one person signifies to another his willingness to do or to abstain from doing something, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal. Essentials of a Valid Offer An offer or proposal made by a person is not treated as legal unless the following conditions are satisfied, namely: (i) Offer must intend to create legal relations: The offer does not turn into a promise if it has been accepted unless it is made to create legal obligations. As the underlying feature for the creation of an agreement is its enforceability at the law. Therefore, a mere social invitation cannot be regarded as an offer because if such an invitation is accepted it does not give rise to any legal relationship. (ii) Terms of offer must be certain, definite and not vague: The terms of the offer must be certain and unambiguous and not vague. As a vague offer does not convey what is exactly means and also that the parties would not exactly know what they intend to do. (iii) The offer must be distinguished from a mere declaration of intention: When the statement is without any intention of creating a binding obligation, it only indicates that he is willing to negotiate and an offer will be made or invited in future. (iv) Offer must be distinguished from an invitation to offer: In case of invitation to offer there is no intention on the part of the person sending out the invitation to obtain the assent of the other party to such invitation, which makes it important for an offer to be distinguished from an invitation to receive an offer or to make an offer or to negotiate. (v) The offer must be communicated: It is very important that the offer is communicated to the person to whom it is made. As an offer is only complete when it is communicated to the offeree, based on the fact that the offer can only be accepted only when one knows about it. Therefore, an offer accepted without its knowledge does not confer any legal rights on the acceptor. 3
(vi) Offer should not contain a term the non-compliance of which would amount to acceptance: The offeree must not be under an obligation to reply under the offer. While making the offer the offeree cannot say that if the offer is not accepted before a certain date it will be presumed to have been accepted. (vii) Special terms or conditions in an offer must also be communicated: If the special terms of the offer are not communicated then the offeree will not be bound by those terms. In other words, the offerer is free to lay down any terms and conditions in his offer and the other party accepts the offer then he will be bound by those terms and conditions. In case of invitation to offer there is no intention on the part of the person sending out the invitation to obtain the assent of the other party to such invitation, which makes it important for an offer to be distinguished from an invitation to receive an offer or to make an offer or to negotiate. In case of an invitation to offer the main object is to merely circulate information of his readiness to negotiate business with any body who on such information comes to him. An invitation to offer is not an offer in the eyes of law and does not become a promise on acceptance. Q. 2. What is fraud State its essentials and consequences. Ans. Fraud refers to a false representation of fact made willfully with an intention to deceive the other party. According to Section 17 of the Indian Contract Act, Fraud means and includes any of the following acts committed by a party to a contract or by any one with his connivance or by his agent, with intent to deceive another party thereto or his agent, or to induce Nhim to enter into the contract: (i) The suggestion, as to a fact, of that which is not true, by one who does not believe it to be true; (ii) The active concealment of a fact by one having knowledge or belief of the fact; (iii) A promise made without any intention of performing it; (iv) Any other act fitted to deceive; (v) Any such act or omission as the law specially declares to be fraudulent. In case the consent to a contract is induced by fraud, the contract is voidable at the option of the party whose consent was so caused. The consequences of fraud are as follows: 1. Right to Rescind the Contract: The aggrieved party has the right to rescind (cancel) the contract, however, the following cases act as exception to the same: (i) When the party whose consent was caused by fraudulent silence had the means of discovering the truth with ordinary diligence; (ii) Where the party was not defrauded, that is, the party gave the consent in ignorance of fraud; (iii) Where the party, after becoming aware of the fraud, takes a benefit under the contract or affirms it in some other way; (iv) Where, an innocent third party, before the contract is rescind, acquires, for consideration; some interest in the property passing under the contract; or (v) Where the parties cannot be restored to their original position. 2. Right to insist upon Performance: The second para of Section 19 insist that the contract shall be performed, and that he shall be put in the position which he would have been if the representation made had been true. 3. Right to Claim Damages: The aggrieved party can also sue for damages, as fraud is a civil wrong. Therefore, compensation can be claimed. Q. 3. Explain the following: (i) Stranger to a contract. Ans. A stranger to the contract is an entity not party to a contract. It can also specifically refer to an entity seeking to deprive one of the parties the benefit of the contract. Stranger to contract cannot sue because only parties to the contract can proceed against one another and not a third person. That is a third person cannot file a suit on a party to the contract for enforcement of promise. If x sells his property to y and in turn y promises x that he would pay off the debt of x which is due to z. In such a case, if y did not pay the debt money to z, then z cannot file suit on y because z is stranger to contract. So stranger to consideration can sue but not a stranger to contract. 4
(ii) Agency coupled with interest. Ans. Agency coupled with an interest is when an agent has possession or control of the property of his principal and possesses a legal rights against interference by third parties. It is an agency relationship in which the agent is given an estate or interest in the property that is the subject of the agency. It is distinguished from situations in which an agent merely derives proceeds or profits from transactions. An agency coupled with an interest may also be referred to as a power coupled with an interest or a power given as security. In an agency coupled with an interest, the agent has some legal right to (an interest in) the property that is covered by the agency arrangement, and his position as agent continues until that interest ends. Generally, the ownership of the principal s property does not pass to the agent, whereas in a full trust agreement, ownership does pass to the trustee. If the agency is coupled with an interest, the agency usually cannot be revoked by the principal before the expiration of the interest and is not terminated by the death or insanity of either the principal or the agent. Q. 4. (a) The liability of Surety is co-extensive with that of principal debtor. Elucidate. Ans. The liability of the surety is co-extensive along with the principal debtor unless it is otherwise provides in the contract. His rights include: (i) Rights against the Nprincipal debtors; (ii) Rights against the creditor; and (iii) Rights against the co-sureties. 1. Rights against the Principal Debtor: The surety has the following rights against the principal debtor, namely (a) Right of Subrogation: It means that on payment of the guarantee debt, or performance of the guaranteed duty, the surety becomes the creditor. (b) Right of Indemnity: The surety is entitles to recover from the principal debtor the amount of sum paid under the guarantee in case of an implied promise. 2. Rights against the Creditor: These can be sub-classified as: (a) Right to securities: The surety is entitled to claim all the securities which were given by the principal debtor to the creditor. (b) Right to set off: When the creditor sues the surety for payment of the principal debtor's liabilities, the surety can claim set off. 3. Rights against the Co-sureties: Between co-sureties there is equality of the burden and the benefit. The surety is discharged from his liabilities in the following circumstances: (i) By revocation of the contract of guarantee: This is done in the following ways: (a) Notice by surety (b) Death of the surety (c) Novation (ii) By Conduct of the Creditor: It can be in the following ways: (a) Variance in terms of the Contract: A surety is discharged by such contract of the creditor which has the effect of materially altering the terms of the contract of guarantee. (b) Release or discharge of the Principal Debtor: if the creditor makes a contract with the principal debtor by which the principal debtor is released, then the surety is discharged. (c) Arrangement between Principal Debtor and Creditor: If the creditor makes an arrangement with the principal debtor for composition without the consent of the surety, the surety will be discharged. (d) By creditor s act or omission impairing surety s eventual remedy: The surety gets discharges if the creditor does any act which is against the right of the surety. (e) Loss of security: The surety gets discharged if the creditor parts with or loses any security given to him at the time of the guarantee without the consent of the surety. (iii) By invalidation of the contract: In the following cases: (a) Guarantee obtained by misrepresentation: If the misrepresentation is made by the creditor relating to the material fact in the contract of the guarantee, the contract becomes invalid. 5
(b) Guarantee obtained by concealment: If the guarantee is obtained by silence regarding a material fact by the creditor the contract becomes invalid. (c) Failure of co-surety to join a surety: If the other person does not join as the co-surety and because of which the creditor is not allowed to act, the contract becomes void. (b) An unregistered partership firm is not illegal but its rights are not enforceable Comment. Ans. Registration refers to the process of registering the partnership with the Registrar of firms of the area in which the place of business of the firm is located. It is not compulsory for a partnership firm to get it registered under the Partnership Act; however, it has been made desirable by law so as to avoid the disabilities from which the unregistered firms suffer. When the partners decide to get the firm registered then they need to follow the following procedure: (i) Obtain a statement in the prescribed from the office of the Registrar of Firms of the area in which any place of business of the firm is situated or is proposed to be located. (ii) The above statement must be signed by all the partners or their authorized agents, in which the following information is mentioned, namely: (a) The name of the firm; (b) The principal place of business of the firm; (c) The names Nof other places where the firm carries on business; (d) The date when each partner joined the firm; (e) The names in full and the permanent address of the partners; (f) The duration of the firm. (iii) According to Section 58(1), the contents of the statement must be duly verified and signed by all the partners or by their authorized agents. (iv) File the statement with the prescribed fees with the Registrar of the Firms of the area. The firms are also restrained from using the words such as, Crown, Emperor, Imperial, Royal, etc. in its name. (v) When the Registrar is satisfied under the provisions of Section 58, then he would record an entry of the statement in a register called the Register of Firms. And then would issue a certificate of registration. Effects of Non-Registration: Section 69 of the Act defines the various disabilities which the non-registered firms suffer. There include the following: (i) No suit can be filled in a civil court by a partner against the firm or the other partners: According to Section 69(1), in case of any dispute amongst the partner (s) and the firm, between the partners and between the partner and the ex-partners, then the unregistered firm cannot file a suit against the firm or the partner (s) to enforce any right arising from the contract. However, criminal proceedings may be brought by one partner against the other(s). (ii) No suit in a civil court by the firm against third parties: In order to enforce any right arising from the contract the unregistered firm cannot file a suit against a third party. However, criminal proceedings may be brought against the wrong doers. Also that the third party has the right to file a suit against the firm or its partners in case of any claim. (iii) The firm or its partners cannot make a claim of set-off or other proceedings based upon a contract: The unregistered firm as per Section 69(3) cannot claim a set off or other proceedings so as to enforce any right arising from a contract. (b) Registration refers to the process of registering the partnership with the Registrar of firms of the area in which the place of business of the firm is located. It is not compulsory for a partnership firm to get it registered under the Partnership Act; however, it has been made desirable by law so as to avoid the disabilities from which the unregistered firms suffer. When the partners decide to get the firm registered then they need to follow the following procedure: (i) Obtain a statement in the prescribed from the office of the Registrar of Firms of the area in which any place of business of the firm is situated or is proposed to be located. (ii) The above statement must be signed by all the partners or their authorized agents, in which the following information is mentioned, namely: 6
(a) The name of the firm; (b) The principal place of business of the firm; (c) The names of other places where the firm carries on business; (d) The date when each partner joined the firm; (e) The names in full and the permanent address of the partners; (f) The duration of the firm. (iii) According to Section 58(1), the contents of the statement must be duly verified and signed by all the partners or by their authorized agents. (iv) File the statement with the prescribed fees with the Registrar of the Firms of the area. The firms are also restrained from using the words such as, Crown, Emperor, Imperial, Royal, etc. in its name. (v) When the Registrar is satisfied under the provisions of Section 58, then he would record an entry of the statement in a register called the Register of Firms. And then would issue a certificate of registration. Effects of Non-Registration: Section 69 of the Act defines the various disabilities which the non-registered firms suffer. There include the following: (i) No suit can be filled in a civil court by a partner against the firm or the other partners: According to Section 69(1), in case of any dispute amongst the partner (s) and the firm, between the partners and between the partner and the ex-partners, Nthen the unregistered firm cannot file a suit against the firm or the partner (s) to enforce any right arising from the contract. However, criminal proceedings may be brought by one partner against the other(s). (ii) No suit in a civil court by the firm against third parties: In order to enforce any right arising from the contract the unregistered firm cannot file a suit against a third party. However, criminal proceedings may be brought against the wrong doers. Also that the third party has the right to file a suit against the firm or its partners in case of any claim. (iii)the firm or its partners cannot make a claim of set-off or other proceedings based upon a contract: The unregistered firm as per Section 69(3) cannot claim a set off or other proceedings so as to enforce any right arising from a contract. Q. 5. State the rules regarding transfer of ownership from seller to buyer in a sale of goods. Ans. As per the Sale of Goods Act, the term property is used for Ownership. That is, when the goods are sold, it is the property in the goods which is transferred to the buyer. It is the time of transfer of ownership of goods which decides the various rights and liabilities of the seller and the buyer. The extact reason of knowing the exact moment when the property in goods passes to the buyer is because the risk prima facie passes with the property as per Section 26 of the Act. That is, if the property in goods has been transferred to the buyer, the buyer becomes the owner of the goods. And in case, the goods are lost or damaged then the buyer would be responsible to bear the loss. According to Section 19(1) of the Act, Where there is a contract for the sale of specific or ascertained goods the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred. The following rules are applicable in the case where it is important to know the intention of the parties with respect to the time when the property in the goods is to pass to the buyer, they are: (a) Specific goods in a deliverable state: The property in the goods passes to the buyer when the contract is made in the case where there is an unconditional contract for the sale of specfic goods and the goods are in a deliverable state. Also that as per Section 20 it is imaterial whether the time of payment of the price or the time of delivery of goods or both is postponed. (b) Specific goods not in a deliverable state: According to Section 21 of the Sale of Goods Act, Where there is a contract for the sale of specific goods and the seller is bound to do something to the goods for the purpose of putting them into a deliverable. state, the property does not pass until such thing is done and the buyer has notice thereof. (c) Specific goods in a deliverable state when the seller has to do something to ascertain the price: According to Section 22 of the Act, Where there is a contract for the sale of specific goods in a deliverable state, but the seller is bound to weigh, measure, test or do some other act or thing with reference to goods for the purpose of ascertaining the price, the property does not pass until such act or thing is done and the buyer has notice thereof. 7