All BATCHES DATE: 22.07.2018 (B-2, P-1) MAXIMUM MARKS: 60 TIMING: 2 Hours PAPER 1: BUSINESS LAW All Questions is compulsory. Answer 1: (a) Incorrect. In accordance with the provisions of the Indian Contract Act, 1872 as contained in Section 11, every person is competent to contract who is of the age of majority... Accordingly, a person who is minor is incompetent to contract. The law declares that an agreement entered into with a minor is void. As a minor s agreement is void ab initio, he cannot validate it by ratification on attaining his majority. (b) (ii) A minor and a major can enter into an agreement of partnership because minor cannot be a partner as he is incapable to do a contract. for correct, incorrect and 1 for reason (c) Void : As per Section 27 of the Indian Contract Act, 1872, an agreement in restraint trade isvoid. However, a buyer can put such a condition on the seller of goodwill not carry on same business. However, the conditions must be reasonable regarding the duration and the place of the business. (d) Ans. (b) Communication of Offer : The communication of an offer is complete when it comes to the knowledge of the person to whom it is made. 1 for Decision, and 1 for reason (e) Ans.(d) Communication of acceptance: Communication of acceptance is complete: (i) Against the proposer :When acceptor put his acceptance in transit so it is out of the power of the acceptor to withdraw it. (ii) Against the acceptor :When acceptance comes to the knowledge of the proposer/offeror. (f) Contract cannot be enforced A gratuitous promise such as a promise to donate money lacks consideration and cannot be enforced. Answer 2: (a) Coercion and Undue Influence : Basis of difference Coercion Undue Influence Nature of action It involves the physical force or threat. The aggrieved party is compelled to make the contract against its will. It involves moral or mental pressure. 1 P a g e
for each correct 6 points for each correct 6 points Involvement of criminal action Relationship between parties Exercised by whom Enforceability Position of benefits received It involves committing or threatening to commit and act forbidden by Indian Penal Code or detaining or threatening to detainproperty unlawfully. It is not necessary that there must be some sort of relationship between the parties. Coercion need not proceed from the promisor nor need it be the directed against the promisor. It can be used even by a stranger to the contract. The contract is voidable at the option of the party whose consent has been obtained by the coercion. In case of coercion where the contract is rescinded by theaggrieved party, as per Section 64, any benefit received has to be restored back to the other party. No such illegal act is committed or a threat is given. Some sort of relationship between the parties is absolutely necessary. Undue influence is always exercised between parties to the contract. Where the consent is induced by undue influence, the contract is either voidable or the court may setit aside or enforce it in a modifiedform. The court has the discretion to direct the aggrieved party to return the benefit in whole or in part or not to give any such directions. Section Section 15 Section 16 (b) Distinction between liquidated damages and penalty Penalty and liquidated damages have one thing in common that both are payable on the occurrence of a breach of contract. It is very difficult to draw a clear line of distinction between the two but certain principles as laid down below may be helpful (Section 74). 1. If the sum payable is so large as to be far in excess of the probable damage on breach, it is certainly a penalty. 2. Where a sum is expressed to be payable on a certain date and a further sum in the event of default being made, the latter sum is a penalty because mere delay in payment is unlikely to cause damage. 3. The expression used by the parties is not final. The court must find out whether the sum fixed in the contract is in truth a penalty or liquidated damages. If the sum fixed is extravagant or exhorbitant, the court will regard it is as a penalty even if, it is termed as liquidated damages in the contract. 4. The essence of a penalty is payment of money stipulated as a terrorem of the off ending party. The essence of liquidated damages is a genuine preestimate of the damage. 5. English law makes a distinction between liquidated damages and penalty, but no such distinction is followed in India. The courts in India must ascertain the actual loss and award the same which amount must not, however exceed the sum so fixed in the contract. The courts have not to 2 P a g e
bother about the distinction but to award reasonable compensation not exceeding the sum so fixed. Case: Sri Chunnilal Vs. Mehta & Sons Ltd. 6. If the penalty provided by the contract isrs.1,00,000 and the actual loss because of breach isrs. 70,000, only Rs. 70,000 shall be available as damages, i.e., the amount of actual loss and not the amount stipulated. But if the loss is, say, Rs. 1,50,000, then only, Rs. 1,00,000 shall be recoverable. Answer 3: (a) Quantum Meruit i.e. as much as work done or as much as earned as much as the party doing the service has deserved. It covers a case where the party injured by the breach had at time of breach done part but not all of the work which he is bound to 2 Mark do under the contract and seeks to be compensated for the value of the work done. For the application of this doctrine, two conditions must be fufilled: 1. It is only available if the original contract has been discharged. 2. The claim must be brought by a party not in default. for any 1 correct e.q. 2 Mark The claim for quantum meruit arises in the following cases: (a) When an agreement is discovered to be void or when a contract becomes void. (b) When something is done without any intention to do so gratuitously. (c) Where there is an express or implied contract to render services but there is no agreement as to remuneration. (d) When one party abandons or refuses to perform the contract. (e) Where a contract is divisible and the party not in default has enjoyed the benefit of part performance. (f) When an indivisible contract for a lump sum is completely performed but badly the person who has performed the contract can claim the lump sum, but the other party can make a deduction for bad work. Example 1: X wrongfully revoked Y s (his agent) authority before Y could complete his duties. Held, Ycould recover, as a quantum meruit, for the work he had done and the expenses he had incurred in the course of his duties as an agent. Example 2: A agrees to deliver 100 bales of cottons to B at a price ofrs.1000 per bale. The cotton baleswere to be delivered in two installments of 50 each. A delivered the first installment but failed to supply the second. B must pay for 50 bags. (b) A valid contract must contain certain essential elements, such as Offer and acceptance, capacity to contract, consideration and free consent. But sometimes the law implies a promise imposing obligations on one party and conferring right in favour of the other even when there is no Offer, no acceptance, no genuine consent, lawful consideration, etc. and in fact neither agreement nor promise. Such cases are not contracts in the strict sense, but the Court recognises them as relations resembling those of contracts and enforces them as if they were contracts. Hence the term Quasi contracts (i.e. resembling a contract). Even in the absence of a contract, certain social relationships give rise to certain specific obligations to be performed by certain persons. These are known as quasi contracts as they create same obligations as in the case of regular contract. Quasi contracts are based on principles of equity, justice and good conscience. A quasi or constructive contract rests upon the maxims, No man can grow rich out of another persons loss. 3 P a g e
for any 1 correct e.q. Example 1: T, a tradesman, leaves goods at C s house by mistake. C treats the goods as his own. C is boundto pay for the goods. Example 2: A pays some money to B by mistake. It is really due to C. B must refund the money to A. Example 3: A fruit parcel is delivered under a mistake to R who consumes the fruits thinking them asbirthday present. R must return the parcel or pay for the fruits. Although there is no agreement between R and the true owner, yet he is bound to pay as the law regards it a Quasi-contract. These relations are called as quasi-contractual obligations. In India it is also called as certain relation resembling those created by contracts. Salient features of quasi contracts: (a) In the first place, such a right is always a right to moneyand generally, though not always, to a liquidated sum of money. (b) Secondly, it does not arise from any agreement of the parties concerned, but is imposed by the law; and (c) Thirdly, it is a right which is available not against all the world, but against a particular person or persons only, so that in this respect it resembles a contractual right. Answer 4: (a) Section 73 of the Indian Contract Act, 1872 provides for consequences of breach of contract. According to it, when a contract has been broken, the party who suffers by such breach is entitled to receive from the party who has broken the contract, compensation for any loss or damage caused to him thereby which naturally arose in the usual course of things from such breach or which the parties knew when they made the contract, to be likely to result from the breach of it. Such compensation is not given for any remote and indirect loss or damage sustained by reason of the breach. It is further provided in the explanation to the section that in estimating the loss or damage from a breach of contract, the means which existed of remedying the inconvenience caused by the non-performance of the contract must be taken into account. (Hadley V. Bexandle). Applying the above principle of law to the given case, M Ltd is obliged to compensate for the loss of Rs. 1.25 lakhs (i.e. Rs. 12.75 minus Rs. 11.50 = Rs. 1.25 lakhs) which had naturally arisen due to default in performing the contract by the specified date. Regarding the amount of compensation which Shanti Traders were compelled to make to Zenith Traders, it depends upon the fact whether M Ltd., knew about the contract of Shanti Traders for supply of the contracted machinery to Zenith Traders on the specified date. If so, M Ltd is also obliged to reimburse the compensation which Shanti Traders had to pay to Zenith Traders for breach of contract. Otherwise M Ltd is not liable. (b) The legal liability of a joint promisor, joint promisee and other connected issues are set out in Sections 42, 43 and 44 of the Indian Contract Act, 1872. In terms of section 42 of the Act When two or more persons have made a joint promise then unless a contrary intention appears from the contract, all such persons, during their joint lives, and after the death of anyone of them, his representative jointly with the survivor or survivors and after the death of the last survivor, representatives of all jointly must fulfill the promise. 4 P a g e
Further, the promisee can enforce his right against any one of the joint promisor and if he does so then the rights and duties of the other promisors is to make contributions. In terms of section 43 of the Act, (i) when two or more persons make joint promise, the promisee can compel any one of the joint promisors to perform the whole of promise. (ii) in the above situation, the performing promisor can enforce contribution from other joint promisors, in the absence of express agreement to the contrary. Section 44 of the Act, states that in the matter of release of one of the joint promisors, it must be understood that such a release does not discharge other joint promisors nor does the released joint promisor would stand released to other joint promisor or promisors. Hence, in the instant case, D, E and F who are partners in a firm, jointly promised to payrs. 1,50,000/- to A. Later on, F became insolvent and his private assets are sufficient to pay only 1/5th of his share of debt i.e. Rs. 10,000/- (1/5th of Rs. 50,000/-) (Amount to be contributed by F is Rs. 50,000/- (1/3rd of Rs. 1,50,000/-). A recovers the whole amount from D through a legal action. Here, D is entitled to receive (a) From F s assets: Rs. 10,000/- (b) From E :Rs. 70,000/- (Rs. 50,000/- being his own share + ½ (50,000 10,000) i.e. Rs. 20,000/- being one half share of total loss of Rs. 40,000/- due to F s insolvency). Thus, in the above case, under the provisions of the Indian Contract Act, 1872, D can recoverrs. 70,000/- from E. Answer 5: (a) No consideration no contract: The general rule is that an agreement made without consideration is void (Section 25). In every valid contract, consideration is very important. A contract may only be enforceable when consideration is there. However, the Indian Contract Act contains certain exceptions to this rule. In the following cases, the agreement though made without consideration, will be valid and enforceable. 1. In case of an agreement on account of natural love and affection: An agreement on account of natural love and affection will be valid if it : Written Registered Based on Natural Love affection Parties stand in near relation with each other (e.g. husband and wife) for each correct 6 points Example: A husband, by a registered agreement promised to pay his earnings to his wife.held the agreement though without consideration, was valid. 2. Agency: In case of contract of agency the consideration is not required. 3. Bailment: In case of contract of bailment the consideration is not required. 4. Completed gift: Completed gift means a gift actually handed over. Thus gifts actually made by a donor and accepted by the done are valid even without consideration. 5. Charity: A mere promise for charity is void because it is without consideration. But if a person promises to contribute for charity and the promisee undertakes liability i.e. incur liability then the contract will be valid up to the extent of the subscription promised. 5 P a g e
6. Compensation for Past Voluntary Service: When a person has already voluntarily done something for the promisor then a promise to compensate either wholly or partly will be binding when: (a) The services should have been done voluntarily (but not involuntarily) (b) The services should have been rendered for the promisor (c) The promisor must be in existence at the time when services was rendered (d) The promisor must have intended to compensate 7. In case of Promise to Pay time barred debt: Time barred debt or a debt based by limitation refers to an amount which has remained unclaimed beyond a time period of 3 years. A promise to pay time barred debt is valid if: It is in writing & Signed by the person making promise or by his agent. 2 Mark (b) The law provides that a contract should be supported by consideration. So long as consideration exists, the Courts are not concerned to its adequacy, provided it is of some value. The adequacy of the consideration is for the parties to consider at the time of making the agreement, not for the Court when it is sought to be enforced (Bolton v. Modden). Consideration must however, be something to which the law attaches value though it need not be a equivalent in value to the promise made. According to Explanation 2 to Section 25 of the Indian Contract Act, 1872, an agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate but the inadequacy of the consideration may be taken into account by the Court in determining the question whether the consent of the promisor was freely given. *** 6 P a g e