Prasanna

CA Foundation Business Laws Study Material Chapter 8 Performance of Contract

WHAT IS PERFORMANCE?

Definition: A contract creates legal obligations. “Performance of a contract” means the carrying out of these obligations. Each party must perform or offer to perform the promise which he has made. Sec. 37 para 1, of the Contract Act lays down that:
“The parties to a contract must either perform, or offer to perform, their respective promises, unless such performance is dispensed with or excused under the provisions of this Act, or of any other law.”
In case of death of the promisor before performance, the representatives of the promisor are bound to perform the promise unless a contrary intention appears from the contract.
Illustration – X promises to deliver a horse to Y on a certain day on payment of Rs. 1,000. X dies before that day. X’s representatives are bound to deliver the horse to Y and Y is bound to pay Rs. 1,000 to X’s representatives.

WHAT IS ACTUAL PERFORMANCE & ATTEMPTED PERFORMANCE?

Performance may be:

1. Actual performance; or
2. Attempted performance or Tender.

(1) Actual Performance
When each party to a contract fulfils his obligation arising under the contract within the time and in the manner prescribed, it amounts to actual performance of the contract and the contract comes to an end or stands discharged.
(2) Attempted Performance or Tender
When the promisor offers to perform his obligation under the contract, but is unable to do so because the promisee does not accept the performance, it is called “attempted performance” or “tender”. Thus, “tender” is not actual performance but is only an “offer to perform” the obligation under the contract. A valid tender of performance is equivalent to performance.

ESSENTIALS OF A VALID TENDER

A valid tender or offer of performance must fulfil the following conditions: (Sec. 38)

1. It must be unconditional. (A tender is conditional where it is not in accordance with the term of the contract).
2. It must be made at proper time and place.
3. It must be of the whole obligation contracted for and not only of the part.
4. If the offer/tender relates to delivery of goods, it must give a reasonable opportunity to the promisee for inspection of goods so that he may be sure that the goods tendered are of con-tract description.
5. It must be made by a person who is in a position and is willing to perform the promise.
6. It must be made to the proper person i.e., the promisee or his duly authorised agent. Tender made to a stranger is invalid.
7. If there are several joint promisees, an offer to any one of them is a valid tender.
8. In case of tender of money, exact amount should be tendered in the legal tender money.

Exception
If a debtor has properly offered to pay money, and the creditor refuses to accept payment, the debtor’s liability to pay shall not come to an end. However, he will get one relief starting from the date of rejection of the tender. He will not be liable to pay interest on the due amount from the date of rejection.

Effect of refusal of party to perform promise wholly [Sec. 39]
When a party to a contract has refused to perform, or disabled himself from performing his promise in it’s entirely, the promisee may put an end to the contract, unless he has signified, by words or conduct, his acquiescence in its continuance.
Illustrations:
(a) X, a singer enters into a contract with Y, the manager of a theatre to sing at his theatre two nights in every week during the next two months, and Y engages to pay her t 100 for each nights performance. On the sixth night X wilfully absents herself from the theatre. Y is at liberty to put an end to the contract.
(b) If in the above illustration, with the assent of Y, X sings on the seventh night, Y is presumed to have signified his acquiescence in the continuance of the contract and cannot put an end to it; but is entitled to compensation for the damages sustained by him through X’s failure to sing on the sixth night.

BY WHOM MUST A CONTRACT BE PERFORMED? [SECS. 40 & 41 ]

1. By promisor himself
   If that was the intention of the parties, ie. where personal consideration is the foundation of the contract. (Sec. 40)
2. By agent
   Where personal consideration is not the foundation of contract, a person can perform his obligations through an agent. (Sec. 40)
3. By legal representatives
   In case of death of the promisor, the legal successors are bound to perform the contract, unless the contract is of personal nature.
4. By joint promisors
   When two or more persons have made a joint promise, then unless a contrary intention ap-pears from the contract, ‘
   1. all such persons must jointly fulfil the promise.
   2. If any of them dies, his legal representative must, jointly with the surviving promisors, fulfil the promise.
   3. If all the promisors die, the legal representatives of all of them must fulfil the promise jointly.
5. Performance by third person
   When a promisee accepts a performance of the promise from a third person, he cannot afterwards enforce it against the promisor. (Sec. 41) Acceptance of performance from a third party involves waiver of right of performance by the promisor. According to the Calcutta High Court a consignee after receiving compensation for the loss from an insurer cannot again sue the carrier who was actually liable for causing the loss of goods in transit.

Who can demand performance?

1. The promisee
   The promise, i.e.; the person who was given the promise, can demand performance.
2. The agent
   The agent can also demand performance on behalf of the promisee.
3. The legal representative
   In case of death of the promisee before performance, his legal representative, can demand performance.
4. Performance of joint promises
   When a person has made a promise to several persons, then, unless a contrary intention appears from the contract, the right to claim performance rests with all of them. When one of the promisee dies, it rests with his legal representatives jointly with the surviving promisees.
   When all the promises die, it rests with their legal representatives jointly.

WHEN CONTRACTS NEED NOT BE PERFORMED?

Sections 62 to 67 of the Contract Act are listed under the heading “Contracts which need not be performed”. The relevant provisions are as follows:

1. If the parties to the contract agree to substitute a new contract for it or to rescind or alter it, the original contract need not be performed. (Sec. 62).
   Where the parties to a contract agree to substitute the existing contract for a new contract, that is called novation. In the well-known case of Scarf v. Jardine (1882) 7 App Cas-345 it was stated that novation is of two kinds,
   1. involving change of parties; or
   2. involving substitution of a new contract in place of the old. (see next chapter for more details)
2. If the promisee dispenses with or remits wholly or in part, the performance of promise made to him or extends the time for such performance or accepts in satisfaction for it, the contract need not be performed. (Sec. 63)
3. When a voidable contract is rescinded, the other party need not perform his promise. (Sec. 64).
4. “If the promisee neglects or refuses to afford the promisor reasonable facilities for the performance of his promise, the promisor is excused by such neglect or refusal as to any non-performance caused thereby”. (Sec. 67).

Illustration: A contracts with B to repair B’s house. B neglects or refuses to point out to A the places in which his house requires repair. A is excused for the non-performance of the contract, if it is caused by such neglect or refusal.

DEVOLUTION OF JOINT LIABILITIES & JOINT RIGHTS [SECS. 42 TO 45]

Devolution of joint liabilities (Section 42)
When two or more persons have made a joint promise, then, unless a contrary intention appears by the contract, all such persons, during their joint lives, and, after the death of any of them, his representatives jointly with the survivor or survivors and, after death of the last survivor, the representatives of all jointly, must fulfil the promise.
According to this section joint promisors must, during their joint lives, fulfil the promise. And if any of them dies, his representative must, jointly with the surviving promisors, fulfil the promise and so on. On the death of the last survivor, the representatives of all of them must fulfil the promise. But this is subject to any private arrangement between the parties. They may expressly or impliedly prescribe a different rule.

Any one of joint promisors may be compelled to perform [Section 43]
When two or more persons make a joint promise, the promisee may, in the absence of express agreement to the contrary, compel any (one or more) of such joint promisors to perform the whole of the promise.

• Each promisor may compel contribution.— Each of two or more joint promisors may com-pel every other joint promisor to contribute equally with himself to the performance of the promise, unless a contrary intention appears from the contract.
• Sharing of loss by default in contribution.— If any one of two or more joint promisors makes default in such contribution, the remaining joint promisors must bear the loss arising from such default in equal shares.

Illustrations

1. A, B and C jointly promise to pay D 3,000 rupees. D may compel either A or B or C to pay him 3,000 rupees.
2. A, B and C jointly promise to pay D fee sum of 3,000 rupees. C is compelled to pay the whole. A is insolvent, but his assets are sufficient to pay one-half of his debts. C is entitled to receive 500 rupees from A’s estate, and 1,250 rupees from B.
3. A, B and C are under a joint promise to pay D 3,000 rupees. C is unable to pay anything and A is compelled to pay the whole. A is entitled to receive 1,500 rupees from B.

This section lays down three rules:

• Firstly, when a joint promise is made, and there is no express agreement to the contrary, the promisee may compel any one or more of the joint promisors to perform the whole of the promise. “A, B and C jointly promise to pay D 3000 rupees. D may compel either A or B or C to pay him 3000 rupees.” This implies that unless there is a contract to the contrary, each joint-promisor is individually liable for the entire performance. Thus the liability of joint-prom¬isors is joint as well as several “Several” means severable or separable. Several liability of a joint-promisors is a liability which can be separated from the joint liability and becomes an individual liability.
• Secondly, a joint promisor who has been compelled to perform the whole of the promise, may require the other joint promisors to make an equal contribution to the performance of the promise, unless a different intention appears from the agreement. A, B and C are under a joint promise to pay D 3000 rupees. D recovers the whole amount from A. A may require B and C to make equal contributions.
• Thirdly, if any one of the promisors makes a default in such contribution, the remaining joint promisors must bear the deficiency in equal shares. A, B and C are under a joint promise to pay D 3000 rupees, C is unable to pay anything. The deficiency must be shared by A and B equally. If C’s estate is able to pay one-half of his share, the balance must be made up by A and B in equal proportions.

Section 43 allows an action to be brought against any one of the joint promisors without impleading the others as defendants. Suppose now that the creditor sues only one joint promisor, can he subsequently sue the others?
According to the English law he cannot, but according to Indian Law he can subsequently sue the others. The creditor is also given the right to release anyone of the joint promisors from his liability and this does not discharge the others from their liabilities.

Effect of release of one joint promisor [Section 44]
Where two or more persons have made a joint promise, a release of one of such joint promisors by the promisee does not discharge the other joint promisor or joint promisors; neither does it free the joint promisor so released from responsibility to the other joint promisor or joint promisors.
This section gives to the promisee a right to release any one or more of the joint-promisor from the liability under the joint promise. Once the release is granted, the promisee will not be able to file a suit against the released joint-promisor. But, the liability of the other joint-promisor shall continue unchanged. Similarly, the liability of the released joint-promisor towards other joint-promisors for contribution shall also continue. The net result is that there is no substantive gain to the released joint promisor.
This also marks a departure from the English Common Law, according to which a discharge of one joint promisor amounts to a discharge of all, unless the creditor expressly preserves his rights against them.

Devolution of joint rights [Section 45]
When a person has made a promise to two or more persons jointly, then, unless a contrary intention appears from the contract, the right to claim performance rests, as between him and them) with them during their joint lives, and, after the death of any of them, with the representatives of such deceased person jointly with the survivor or survivors, and after the death of the last survivor, with the representatives of all jointly.
Illustration: A, in consideration of 5000 rupees, lent to him by B and C, promises B and C jointly to repay them that sum with interest on a day specified- B dies. The right to claim performance rests with B’s representative jointly with C during Cs life, and after the death of C with the representatives of B and C jointly.

TIME AND PLACE OF PERFORMANCE [SECS. 46 TO 50]

Time and place of performance of a contract are matters to be determined by agreement between the parties themselves. If there is no such agreement, then provisions of sections 46 to 50 apply.
Where no time for performance is specified
Where no time for performance is specified, the promisor must perform the promise within a reasonable time (sec. 46). The question, “what is a reasonable time” is in each particular case, a question of fact.
When a promise is to be performed on a certain day
When a promise is to be performed on a certain day, the promisor may perform it at any time during the usual hours of business on such day and at the place at which the promise ought to be performed (sec. 47)
Illustration: A promises to deliver goods at B’s warehouse on the first January. On that day A brings the goods to B’s warehouse, but after the usual hour for closing it, and they are not received. A has not performed his promise.
If no time and place is fixed for the performance of, the promise
If no time and place is fixed for the performance of the promise, the promisor must apply to the promisee to fix the day and time for performance (secs. 48 & 49)
Illustration: A undertakes to deliver a thousand tons of jute to B on a fixed day. A must apply to B to appoint a reasonable place for the purpose of receiving it, and must deliver it to him at such place.
According to Sec. 50
According to Sec. 50 the performance of any promise may be made in any manner or at any time which the promisee prescribes or sanctions.

RECIPROCAL PROMISES [SECS. 51 TO 54 ANC 57]

According to Sec. 2(f) promises which form the consideration or part of the consideration for each other, are called reciprocal promises. Such promises are mutual promises, Le. a promise for a promise. When one party gives a promise in consideration for the other’s promise, both the promises are called reciprocal promises. For example, in a transaction of sale, there are two reciprocal promises:

1. The buyer promises to pay the price and,
2. The seller promises to deliver the goods.

Kinds of reciprocal promises

1. Mutual and independent promises
   Where one party has to perform his promise independently without waiting for the performance or willingness of the other party, the promises are mutual and independent. For example, A agrees to sell the car and deliver the same to B on 1-1-2009 while B agrees to pay the price on 15-1-2009. The promises are independent.
2. Mutual and dependent
   Where the performance of the promise by one party depends upon the prior performance of the promisor or by the other party, the promises are conditional and dependent. For example, X agrees to construct a house for Y. Y agrees to supply cement for building the house. The promises are conditional and dependent.
3. Mutual and concurrent
   Where the two promises are to be performed simultaneously, they are said to be mutual and concurrent.

Rules regarding performance of reciprocal promises [Secs. 51 to 54]

1. When reciprocal promises have to be simultaneously performed the promisor is not bound to perform, unless the promisee is ready and willing to perform his promise. [Sec. 51]
Illustrations:

1. A agrees to sell goods to B on cash payment, which B agrees. If A find that B is not ready to pay the cash then and there, he need not sell the goods.
2. A and B make a contract for sale of goods, the payment to be made by B in instalments.
   Goods are to be delivered on the payment of first instalment. If B is not ready and willing to pay the first instalment, A need not deliver the goods.

2. The reciprocal promises must be performed in the order fixed by the contract. [Sec. 52]
Illustration: A and B contract that A shall build a house for B for a fixed price. A’s promise to build the house must be performed before B’s promise to pay for it.

3. If one party prevents the other party from performing his reciprocal promise, the contract become voidable and the party so prevented can claim compensation. [Sec. 53]
Illustration: A and B contract that B shall execute certain work for A for a thousand rupees. B is ready and willing to execute the work accordingly, but A prevents him from doing so. The contract is voidable at the option of B; and if he elects to rescind it, he is entitled to recover from A compensation for any loss which he has incurred by its non-performance.

4. Where the nature of reciprocal promises is such that one cannot be performed unless the other party performs his promise in the first place, then if the latter fails to perform he cannot claim performance from the other, but must make compensation to the first party for his loss. [Sec. 54]
Illustrations:

1. hires B’s ship to take a cargo from Calcutta to Mauritius. A fails to supply the cargo. A cannot force B to perform his obligation. Rather, A has to give compensation to B for any loss that B may suffer by the non-performance of the contract.
2. A contracts to construct a building for B. B^was to supply some material necessary in the construction work. B fails to supply the material. A need not construct the building. He may take compensation from B.

5. Reciprocal promise to do things legal and also things illegal – The first is a contract, but the latter is a void agreement. (Sec. 57)
Illustrations:

1. A and B agree that A shall sell B a house for Rs. 10,000 but that if B uses it as a gambling house, he shall pay A Rs. 50,000 for it.
   The first set of reciprocal promises, namely, to sell the house and to pay Rs. 10,000 for it, is a contract. The second set is for an unlawful object, viz. that B may use the house as a gambling house, and is a void agreement.
2. A and B agree that A shall pay B 1000 rupees, for which B shall afterwards deliver to A either rice or smuggled opium. This is a valid contract to deliver rice, and a void agreement as to the opium.

TIME AS THE ESSENCE OF CONTRACT

Parties generally fix time for the performance of the contract. What happens if the contract is not performed within the fixed time? Does it become void or voidable?
This will depend upon “whether time was the essence of the contract”. The phrase “time as the essence of the contract” means that performance within time is the most vital condition of the contract. If time is the essence of the contract then the other party can avoid the contract and if it is not, the other party cannot avoid the contract.
When is the time the essence of the contract?

1. Whether time is of the essence of the contract, depends upon
   1. The intention of the parties
   2. Nature of the transaction
   3. The terms of the contract Le. if the parties to the contract have expressly agreed that performance within a limited time was necessary;
2. Even where a time is specified for the performance of a certain promise, “time may not be of the essence of the contract” and one has to look at the nature and construction of the contract and the intention of the parties in order to ascertain whether “time is of the essence of the contract” or not;
3. It is well settled that unless a different intention appears from the terms of the contract, ordi-narily in commercial contracts the time of delivery of goods is of the essence of the contract but not the time of payment of the price;
4. In contracts for the purchase of land, usually time is not of the essence of the contract because land values do not frequently fluctuate.

Effects of failure to perform a contract within the stipulated time
Sec. 55 deals with the subject and lays down the following rules:

1. Where “time is of the essence of the contract”and there is failure to perform within the fixed time, the contract (or so much of it as remains unperformed) becomes voidable at the option of the promisee. He may rescind the contract and sue for the breach.
2. Where “time is not of the essence of the contract”, failure to perform within the specified time does not make the contract voidable. It means that in such a case the promisee cannot rescind the contract and he will have to accept the delayed performance. But he would be entitled to claim compensation from the promisor for any loss caused to him by the delay. This rule is, however, subject to the condition that the promisor should not delay the performance beyond a reasonable time, otherwise the contract will become voidable at the option of the promisee.
3. In case of a contract voidable on account pf the promisor’s failure to perform his promise within the agreed time or within a reasonable time, as the case may be, and if the promisee, instead of rescinding the contract, accepts the delayed performance, he cannot afterwards claim compensation for any loss caused by the delay, unless, at the time of accepting the delayed performance, he gives notice to the promisor of his intention to do so.

APPROPRIATION OF PAYMENTS

Appropriation of payment means the application of payment by a creditor to the discharge of same particular debt. When money is paid, it must be applied according to the rule of the payer and not the receiver. Appropriation is a right primarily of the debtor and for his benefit. Sections 59 to 61 lays down 3 rules regarding appropriation of payments.

1. If the debtor indicates
As per section 59, where the debtor, owing several distinct debts indicates at the time of actual payment that the payment should be applied towards the discharge of a particular debt, the creditor must do so. If there are no clear instructions from the debtor but the circumstances of the case imply that the payment should be applied to a particular debt, then the accepted payment must be applied accordingly.

2. If the debt to be discharged is not indicated [Sec. 60]
If the debtor does not indicate, then the creditor may apply the payment at his discretion to any lawful debt. He cannot, however, apply the payment to a disputed or unlawful debt, but he may apply it to a debt which is barred by the law of limitation.

3. Where the debtor does not intimate and the creditor fails to appropriate [Sec. 61]
The payment shall be applied in discharge of the debts in order of time. If the debts are of the same date, the payment shall be applied in discharge of each proportionately.

[Summary: APPROPRIATION OF PAYMENTS: The debtor has at the time of payment, right of choice of appropriating the payment, in default of the debtor; the creditor has the right to appropriate, in default of either, the law will allow appropriation of debts in order of time.] [Rule in Clayton’s Case: Where the parties have a current account between them, appropriation impliedly takes place in the order in which the receipts and payments take place and are entered in the account. The first item on the debit side of the account is discharged or reduced by the first item on the credit side].

ASSIGNMENT OF CONTRACT

Definition
Assignment means transfer. The rights and liabilities of a party to a contract can be assigned under certain circumstances. Assignment may occur

1. by act of parties or
2. by operation of law.

Rules: The rules regarding assignment of contracts are summarised below:

ASSIGNMENT BY ACT OF THE PARTIES

1. Contracts involving personal skill, ability, credit, or other personal qualifications, cannot be assigned Examples: a contract to marry, a contract to paint a picture, a contract of personal service etc.
2. The obligations under a contract, i.e., the burden and the liabilities under the contract cannot be transferred. For example, if X owes Y Rs. 100 he cannot transfer the liability to Z, and force Y to collect his money from Z.
   Exception: In both cases 1 and 2, the parties to a contract may agree to replace the original contract by a new one under which the obligations of one of the parties are shifted to a new
   party. Thus, in the example given above if Y agrees to accept Z as his debtor in place of X, the liability to pay the debt is transferred from X to Z. Such cases are known as Novation.
3. A contract may be performed through the agency of a competent person, if the contract does not contemplate performance by the promisor personally – Sec. 40. But in this case the original party remains responsible for the proper performance of the obligations under the contract.
4. The rights and benefits under a contract (not involving personal skill or volition) can be as-signed. Thus if X is entitled to receive Rs. 500 from Y, he can assign his right to Z where upon Z will become entitled to receive the money from Y. But in this case the assignment is subject to all equities between the original parties. Thus if Y had already paid a portion of the debt to X, he will pay to Z correspondingly less.
5. Actionable claims can be assigned but only by a written document. Notice must be given to the debtor. An actionable claim is a claim to any debt or to any beneficial interest. E.g. A money debt.

ASSIGNMENT BY OPERATION OF LAW

Assignment by operation of law occurs in cases of death or insolvency. Upon the death of a party his rights and liabilities under a contract devolve upon his heirs and legal representatives (except in the case of contract involving personal qualifications). In case of insolvency, the rights and liabilities of the person concerned pass to the Official Assignee or the Official Receiver. Assignment by operation of law occurring upon the death of a party is known as succession.

Distinction between succession and assignment
In succession, the benefits of a contract are succeeded to by a process of law to the legal heirs. Here both, the burden and benefits attaching to the contract devolve on the legal heir. When a son succeeds to the estate of his deceased father he is liable to pay the debts and liability of his father, to the extent of property inherited by him.
In case of assignment, however the benefits of a contract can only be assigned and not the liabilities thereunder. This is because when liability is assigned, a third party gets involved therein. Thus, a debtor cannot relieve himself of the liability to creditor by assigning to someone else his obligation to repay the debt.

Basis of distinction	Succession	Assignment
1. Meaning	The transfer of rights and liabilities of a deceased person to his legal representative is called as succession.	The transfer of rights by a person to another person is called as assignment.
2. Time	Succession takes place on the death of a person.	Assignment takes place during the lifetime of a person.
3. Voluntary act	Succession is not a voluntary act. It takes place automatically by operation of law.	Assignment is a voluntary act of the parties.
4. Written document	Succession may take place even without any written document.	Assignment requires execution of an assignment deed.
5. Scope	All the rights and liabilities of a person are transferred by way of sufccession.	Only rights can be assigned liabilities, under a contract, cannot be assigned unless there is novation.
6. Notice	No notice of succession is required to be given to any person.	Notice of assignment must be given to the creditor.
7. Consideration	No consideration is necessary for succession.	Consideration between assignor and assignee is a must for assignment.

MULTIPLE CHOICE QUESTIONS:

1. Where a party to a contract fails to perform at or before a specified time and it was the intention of the parties that time should be of the essence,
(a) The contract becomes voidable
(b) The contract does not become voidable but the aggrieved party is entitled to compensation
(c) The contract becomes void
(d) None of these

2. A owes B Rs. 1,000 but the debt is barred by the Limitation Act. A signs a written promise to B for Rs. 500 on account of the debt. This is a :
(a) Valid contract
(b) Voidable contract
(c) Void contract
(d) Unenforceable agreement

3. A contracts with B to construct a building for a fixed price, B supplying the necessary timber. This reciprocal promise is :
(a) Mutual and Independent
(b) Mutual and Dependent
(c) Mutual and Concurrent
(d) None of the above

4. A contract of personal nature can be performed by:
(a) The promisor,
(b) The agent,
(c) The legal representative,
(d) None of the above.

5. Liability of the joint promisor is :
(a) Joint
(b) Several
(c) Joint and several
(d) None of the above

6. If neither the debtor nor the creditor appropriates the payment, the payment will be appropriated:
(a) As per the desire of the promisor,
(b) As per the desire of the promisee,
(c) In order of time,
(d) None of the above.

7. Agreement by way of wager are
(a) Valid and enforceable by law
(b) Void
(c) Voidable at the option of party
(d) Illegal

8, A, a singer enters into a contract with B, the manager of a theatre to sing at his theatre two nights in every week during the next two months and B engages to pay her Rs. 100 for each night’s performance. On the sixth night, A wilfully absents herself from the theatre.
(a) B is at liberty to put an end to the contract
(b) B cannot put an end to the contract
(c) The contract is left at the liberty of A
(d) None of these

9. A and B contract to marry each other before the time fixed for the marriage. A goes mad. The contract becomes :
(a) Void
(b) Voidable
(c) Unenforceable
(d) None of these

10. If a contract is based on personal skill or confi¬dence of parties, the death of a party in such a case :
(a) Puts an end to the contract
(b) Does not put an end to the contract
(c) The representatives of the deceased can be made liable to perform such a contract
(d) None of these

11. A modification or revocation of the contract requires a of each contracting party.
(a) Denial
(b) Consensus
(c) Modification
(d) Revocation

12. If the performance of contract becomes impos¬sible because the subject matter of contract has ceased to exist then :
(a) Both the parties are liable
(b) Neither party is liable
(c) Only offerer is liable
(d) Only acceptor is liable

13. A doctor teaching in a medical college pre-vented from doing private practice, such a restriction is :
(a) Valid
(b) Partial lawful
(c) Unlawful
(d) Partial Unlawful

14. A contracts to sing for B for a consideration of Rs. 5,000 which amount is paid in advance. A becomes unwell and is not able to perform. B suffers a loss of Rs. 10,000. A is liable to pay B
(a) Rs. 15,000
(b) Rs. 10,000
(c) Rs. 5,000
(d) Nothing

15. A promises to deliver goods at B’s warehouse on the 1st January. On that day, A brings the goods to B’s warehouse but after the usual hour for closing it and they are not received. Which one of the following is correct?
(a) A has not kept his promise
(b) A kept his promise as time was not specified
(c) A performs his duty as the time is not the essence of the contract
(d) All of these

Answers:

STATE WHETHER THE FOLLOWING ARE TRUE OR FALSE:

1. When a promisee neglects to give the promisor reasonable facilities for the performance of a promise, the promisor is still liable for performance.
2. Under the Contract Act the liability of joint promisors is joint as well as several.
3. A contract involving the exercise of personal skill, volition or credit can also be performed by an agent or a legal representative.
4. A debtor sends a payment but the creditor refuses to accept it. Even then the debtor is not discharged from the debt.
5. The promisee may compel any one of the joint promisors to perform the promise.
6. A debtor while making the payment expressly informs the creditor that the payment should be applied to particular debt, the creditor is not bound to do so.
7. A release of one promisor does not discharge the other joint promisors.
8. In a contract where time is the essence of the contract, if the promisor fails to perform in time, the contract becomes void.
9. A legal representative of a deceased promisee can demand performance of a contract under all circumstances.
10. In the absence of the debtor’s intimation to the creditor regarding appropriation of a payment, the cred¬itor can utilise the payment even towards payment of a time-barred debt.
11. In case of joint promise by two or more persons, the promisee may compel any of such joint promisors to perform the whole of the promise.
12. If a party to a contract has promised to do certain things, at a particular time, and fails to do by that time, the contract shall become voidable at the option of the promisee.
13. Performance of the contract may be made only by the parties to the contract.
14. If one of the joint promisors is made to perform the whole contract, he can ask for equal contribution from others.
15. The burden of the contract cannot be assigned without the consent of the other party or parties of the contract.
16. A promise under a contract can be performed by the promisor himself.
17. When the promisee does not accept the offer of performance, the promisor is not responsible for the non-performance.
18. Payments made by a debtor are always appropriated in a chronological order.
19. If the promisees are joint, the right to claim performance is joint and not joint and several.
20. It is mixed question of law and fact whether time was the essence of the contract.

Answers:

CA Foundation Business Laws Study Material Chapter 7 Contingent Contracts and Quasi Contracts

WHAT IS A CONTINGENT CONTRACT?

Definition
“A contingent contract is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen” – [Section 31]. Contracts of insurance, indemnity and guarantee are examples of contingent contract.

Meaning of Collateral Event
According to Pollock and Mulla, collateral event means an event which is, “neither a performance directly promised as part of the contract, nor the whole of the consideration for a promise For e.g. A contracts to pay B Rs. 1,00,000 if B’s house is burnt. This is a contingent contract, because the burning of B’s house is neither a performance promised as part of the contract nor it is the consideration obtained from B. The liability of A arises only on the happening of a collateral event which is an independent event but collateral to the main contract.

• A contract can also be contingent if it depends on act of a party to the contract or that of a third person. For example, a promise to purchase a computer if the managing director of the company approves it is a valid contract. A entered into a contract for the supply of timber to the Govt. One of the terms of the contract was that the timber would be rejected if it is not approved by the Superintendent of the Gun Carriage Factory for which the timber was required. The timber supplied was rejected. A filed a suit for breach of contract. Will he succeed?
• However, if the contingent event depends on the mere will and pleasure of one of the parties to the contract, it would not be valid. Thus, in a contract of service to pay as the employer pleases is no promise.
• The collateral event should not be a part of the reciprocal promises forming the contract. Thus, A agrees to construct a swimming pool for B for Rs. 80,000. The payment is to be made by B only on the completion of the pool. It is not a contingent contract, because these are mutual promises forming part of the contract.
• Where a contract provides that the goods would be delivered as and when they arrive, is not a contingent contract but it merely provides a particular mode of performance.

ESSENTIALS OF CONTINGENT CONTRACTS

1. ]The performance of such contracts depends on a contingency Le., on the happening or non-happening of the future event.
2. The event must be collateral i.e., incidental to the contract.
3. The event must be uncertain. If the event is bound to happen the contract is due to be per¬formed in any case then it is not a contingent contract.
4. The contingent event should not be the mere will of the promisor.

RULES REGARDING CONTINGENT CONTRACTS

Sections 32 to 36 of the Contract Act contain certain rules regarding contingent contract, they are summarised below:
Rules regarding contingent contract
1. Sec. 32: Dependent on the happening a future uncertain event
enforceable, when that event happens.
The happening of a future uncertain event: Contracts contingent upon the happening of a future uncertain event, cannot be enforced by law unless and until that event has happened, If the event becomes impossible, such contracts become void. [Sec 32]
Illustrations: A makes a contract with B to buy B’s horse if A survives C. This contract cannot be enforced by law unless and until C dies in A’s lifetime.
Illustrations: A contracts to pay B a sum of money when B marries C. C dies without being : married to B. The contract becomes void.
Illustrations: Where a car was insured against loss in transit, the car was damaged without being put in the course of transit, the insurer was held to be not liable.

2. Sec. 33: Dependent on non-happening of an uncertain future event.
enforceable, when the happening of that event becomes impossible, and not before.
The non-happening of an uncertain future event: Contracts contingent upon the non-happen¬ing of an uncertain future event, can be enforced when the happening of that event becomes impossible and not before. [Sec. 33]
Illustrations: A agrees to pay B a sum of money if a certain ship does not return. The ship is sunk. The contract can be enforced when the ship sinks.
Illustrations: A agrees to pay sum of money to B if a certain ship does not return. The ship, returns back. The contract has become void.

3. Sec. 35(1): Dependent on the happening of an event within a fixed time
enforceable, if the event happens within that time.
The happening of an event within a fixed time: Contracts contingent upon the happening of an event within a fixed time become void if, at the expiration of the fixed time, such event has not happened or if, before the time fixed, such event becomes impossible. [Sec. 35(1)]
Illustrations: A promises to pay B a sum of money if a certain ship return within a year. The contract may be enforced if the ship return within a year, and becomes void if the ship is burnt within a year (since the event becomes impossible).

4. Sec. 35(2): Dependent on the non-happening of an event within a fixed time.
enforceable, if the event does not happen or becomes impossible within that time.
The non-happening of art event within a fixed time: Contracts contingent upon the non-hap- pening of an event within a fixed time may be enforced by law when the time fixed has expired and such event has not happened, or before the time fixed has expired, if it becomes certain that such event will not happen. [Sec. 35(2)]
Illustrations: A promises to pay B a sum of money if a certain ship does not return within a year. The contract may be enforced if the ship does not return within the year, or is burnt within a year.

5. Sec. 34: Dependent on the future conduct of a person acting in a particular way
enforceable, if that person acts in that way or
the future conduct of any person is considered impossible, if that person does something which makes it impossible to perform in the given circumstances.
When event to be deemed impossible if it is the future conduct of a living person: If a contract is contingent upon how a person will act at an unspecified time, the event shall be considered to become impossible when such person does anything which renders it impossible that he should so act within any definite time, or otherwise than under further contingencies. [Sec. 34]
In other words, if a promise depends on the act of a third party, it will become void should such third party refuse to do the act or if he incapacitates himself from doing it. For e.g. S sells goods to B and B promises to pay the price after C has fixed it. If C refuses to fix the price or if he dies before fixing it, the agreement becomes void.
Illustration: A agrees to pay B a sum of money if B marries C. C marries D. The marriage of B to C must now be considered impossible although it is possible that D may die and that C may afterwards marry B.
Illustrations: In Frost v. Knight, the defendant promised to marry the plaintiff on the death of his father. While the father was still alive, he married another woman. It was held that it had become impossible that he should marry the plaintiff and she was entitled to sue him for the breach of the contract.

6. Sec. 36: Dependent on an impossible event.
is void ab initio.
Impossible event: Contingent agreements to do or not to do anything, if an impossible event happens, are void, whether the impossibility of the event is known or not to the parties to the agreement at the time when it is made. [Sec. 36]
Illustrations: 1. A agrees to pay B Rs. 1,000 if two straight lines should enclose a space. The agreement is void.
Illustrations: 2. A agrees to pay B Rs. 1,000 if B will marry A’s daughter C. C was dead at the time of the agreement. The agreement is void.

A DIFFERENCE BETWEEN CONTINGENT CONTRACT AND WAGERING AGREEMENTS:

Wagering Agreements	Contingent Contracts
1. A wagering agreement is void.	1. A contingent contract is valid.
2. A wagering agreement consists of reciprocal promises.	2. Contingent contract may not contain reciprocal promises.
3. In a wagering agreement the parties have no interest in the subject matter of the contract.	3. In a contingent contract either party may have interest in the subject matter of the contract.
4. In a wagering agreement the future event is the sole determining factor.	4. In a contingent contract the future event is only collateral and incidental.
5. Every wagering agreement is of a contingent nature.	5. Every contingent contract is not of a wagering nature.

QUASI CONTRACT : WHAT IT IS?

The term ‘Quasi’ means ‘as if’or ‘similar to’. A quasi-contract is similar to a contract. Just like a contract it also creates legal obligations. But the legal obligations created by quasi contract do not rest on any agreement but are imposed by law. It is therefore, contractual in law, but not in fact.

A Quasi Contract can be defined as a fictional contractual obligation created by law, in certain circumstances. (In the absence any mutual agreement between the parties.)
In reality it is not a contract since the essential elements of contract like offer and acceptance, lawful consideration etc. are not present. It is an obligation which the law creates in the absence of any agreement, when the acts of the parties or others have placed in the possession of one person, money or its equivalent, under such circumstances that in equity and good conscience he ought not retain it, and which ex aqeuqo bono (in justice and fairness) belongs to another. Quasi contract is fictitiously deemed contractual, in order to fit the cause of the action to the contractual remedy.
The Indian Contract Act describes quasi contract as ‘certain relations resembling those created by contracts’.

BASIS OF QUASI CONTRACT

Quasi contracts are based on principles of equity, justice and good conscience. They aim at prevention of “unjust enrichment” i.e. no man shall be allowed to enrich himself at the cost of another.
Another theory regarding the judicial basis of such contract is that it is implied, notional or fictional contract imputed by law out of equitable considerations.
The salient features of quasi-contractual right are as follows:

1. Such a right is always a right to money, and generally, though not always, to a liquidated sum of money,
2. It does not arise from any agreement of the parties concerned, but is imposed by the law,
3. It is a right which is available not against all the world, but against a particular person or person only, so that in this respect it resembles a contractual right, &
4. Damages can be claimed for breach of quasi-contractual right.

TYPES OF QUASI CONTRACTS

Sections 68 to 72 of the Contract Act deals with five different types of quasi contracts. In each of these cases there is no real contract between the parties, but due to peculiar circumstances in which they are placed, the law imposes in each of these cases a contractual liability.

(1) Claim for necessaries supplied to persons incapable of contracting [Sec. 68]
If necessaries are supplied to a person who is incapable of contracting, e.g., a minor or a person of unsound mind, the supplier is entitled to claim their price from the property of such a person.
Sec. 68 states “If a person, incapable of entering into a contract, or any one whom he is legally bound to support, is supplied by another person with necessaries suited to his condition in life, the person who has furnished such supplies is entitled to be reimbursed from the property of such incapable person. ”
Accordingly, if A supplies to B, a lunatic, necessaries suited to B’s status in life, A would be entitled to recover their price from B’s property. He would also be able to recover the price for necessaries supplied by him to his (B’s) wife or minor child since B is legally bound to support them. However, if B has no property, nothing would be realizable. It should, however, be noted that in such circum¬stances, the price only of necessaries and not of article of luxury, can be recovered.

(2) Right to recover money paid for another person [Sec. 69]
A person who has paid a sum of money which another is obliged to pay, is entitled to be reimbursed by that other person provided the payment has been made by him to protect his own interest.
Example: B holds land in Bengal, on a lease granted by A, the Zamindar. The revenue payable by A to the Government being in arrears his land is advertised for sale by the Government. Under the revenue law the consequences of such sale will be annulment of B’s lease. B to prevent the sale
and the consequent annulment of his own lease, pays to the Government the sum due from A. A is bound to make good to B the amount so paid.
Conditions: The following are the conditions mentioned in Sec. 69.

1. The payment made should be bona fide for the protection of one’s interest.
2. The payment should not be a voluntary one.
3. The payment must be such as the other party was bound by law to pay.

(3) Obligation of a person enjoying benefits of non-gratuitous act [Sec. 70]
Such an obligation arises under the provision of Section 70 reproduced below:
“Where a person lawfully does anything for another person, or delivers anything to him not intending to do so gratuitously, and such other person enjoys the benefit thereof, the latter is bound to make compensation to the former in respect of, or to restore, the thing so done or delivered”.
It thus follows that for a suit to succeed, the plaintiff must prove:

1. That he had done the act or had delivered the thing lawfully,
2. That he did not do so gratuitously, and
3. That the other person enjoyed the benefit.

Examples:

1. A, a tradesman, leaves goods at B’s house by mistake. B treats the goods as his own. He is bound to pay for them to A.
2. A saves B’s property from fire. A is not entitled to compensation from B, if the circumstances show that he intended to act gratuitously.

(4) Responsibility of a finder of goods [Sec. 71]
“A person who finds goods belonging to another and takes them into his custody, is subject to the same responsibility as a bailee”.
Conditions:

1. A person who finds goods and takes possession of it is responsible as a bailee.
2. That is, he is liable—
   1. To try and find out the true owner and
   2. To take due care of the property [Sec. 151]
3. Finder is entitled to a lien until paid compensation, but cannot file a suit to recover such compensation.
4. Finder is entitled to possession against all except the true owner.
5. When owner declares reward, finder can sue for reward.
6. Right of re-sale: If the owner is not found or if he refuses to pay lawful charges, the finder may sell—
   1. When the thing is in danger of perishing or losing the greater part of its value.
   2. When the lawful charges amount to two-thirds of its value.

Example: Hollins vs. Howler L. R. & H. L., H picked up a diamond on the floor of F’s shop and handed over the same to F to keep till the owner was found. In spite of best efforts, the true owner could not be traced. After the lapse of some week, H tendered to F the lawful expenses incurred by him and requested to return the diamond to him. F refused to do so. Held, F must return the diamond to H as he was entitled to retain goods found against everybody except the true owner.

(5) Liability for money paid or thing delivered by piistake or under coercion [Sec. 72]
“A person to whom money has been paid, or anything delivered by mistake or under coercion must repay or return it (Sec. 72)”. Thus, a payment made by A to B under the mistaken belief that he is liable in respect of a municipal tax on a mis-construction of the terms of the lease, can be recovered from the municipal authorities.
Examples:
A and B jointly owe Rs. 100 to C. A alone pays the amount to C & B, not knowing this fact, pays Rs. 100 over again to C. C is bound to pay the amount to B.
A railway company refuses to deliver up certain goods to the consignee, except upon the payment of an illegal charge for carriage. The consignee pays the sum charged in order to obtain the goods. He is entitled to recover as much of the charge that is illegally excessive.

MULTIPLE CHOICE QUESTIONS:

1. A makes a contract with B to buy B’s horse if A survives C. This is
(a) a Quasi-contract
(b) a Void contract
(c) a Contingent contract
(d) a Conditional contract

2. An insurance contract is—
(a) Contingent contract
(b) Wagering agreement
(c) Unenforceable contract
(d) Void contract

3. If the contingent depends on the mere will of the promisor it would be—
(a) Valid
(b) Void
(c) Illegal
(d) Depends on the circumstances

4. A contract of life insurance, the performance of which depends upon a future event falls under the category of
(a) Contract of Indemnity
(b) Contract of Guarantee
(c) Contingent Contract
(d) Special type of Contract

5. Which one of the following is not an essential feature of a wagering agreement?
(a) Insurable interest
(b) Uncertain event
(c) Mutual chances of gain or loss
(d) Neither party to have control over the event

6. The contingent contract dependent on the happening of the future uncertain event can be enforced when such event:—
(a) Happens
(b) Does not happen
(c) Does not become a impossible
(d) Both (a) & (c)

7. Contract contingent upon the happening of a future uncertain event becomes void.
(a) If the event becomes impossible
(b) If the event happens
(c) If the event does not happen
(d) None of the above.

8. Contracts contingent upon the non-happening of the future uncertain event becomes void when such event:—
(a) Happen
(b) Does not happen
(c) The event becomes impossible
(d) None of the above

9. Contract contingent upon the non-happening of the future uncertain event becomes enforceable
(a) When the happening of that event becomes impossible and not before
( b) When the happening of that event becomes possible and not before
(c) When the event happens
(d) None of the above.

10. A promises to pay B a sum of money if a certain ship does not return within a year. The ship is sunk within a year. The contract is
(a) Enforceable
(b) Void
(c) Voidable
(d) Illegal

11. Contingent contract to do or not to do anything, if an impossible event happens are:—
(a) Valid
(b) Void
(c) Voidable
(d) Illegal

12. Contingent contract dependent on the non-hap-pening of the event within a fixed time can be enforced, if the event:—
(a) Does not happen within the fixed time
( b) Before the time fixed such event becomes impossible
(c) Both (a) & (b)
(d) None of the above

13. In a contingent contract which event is contingent—
(a) Main event
(b) Collateral event
(c) Both (a) & (b)
(d) None of the above.

14. Under section 70 of the Indian Contract Act, 1872, if a person who enjoys the benefit of any other person’s work, the beneficiary must pay to the benefactor for the services rendered, provided the intention of the benefactor was :
(a) Gratuitous
(b) Non-gratuitous
(c) To create legal relations
(d) None of these

15. A finder of goods can:
(a) file a suit to recover his expenses,
( b) sell the goods if he likes,
(c) can sue for a reward, if any.
(d) None of the above.

16. A finder of goods can sell the goods if the cost of finding the true owner exceeds:
(a) 1/4 of the value of the goods,
(b) 1 /3 of the value of the goods,
(c) 1 /2 of the value of the goods,
(d) 2/3 of the value of the goods.

17. The contract uberrimae fidei means a contract
(a) Of goodwill
(b) Guaranteed by a surety
(c) Of utmost good faith
(d) Of good faith

18. A finder can sell the goods if:
(a) the goods are ascertained,
(b) the goods are un-ascertained,
(c) the goods are valuable,
(d) the goods are perishable.

Answers:

STATE WHETHER THE FOLLOWING ARE TRUE OR FALSE:

1. The event in a contingent contract may be certain or uncertain.
2. A contract of insurance is not a contingent contract.
3. A wagering agreement is a contingent contract.
4. Contracts of indemnity are contingent contracts.
5. Contracts contingent upon the happening of an uncertain specified event within a fixed time can become void only after the expiry of the fixed time.
6. A finder of goods can sue the true owner for recovery of expenses incurred for the safety of the goods.
7. Any person making payment for another can get reimbursement from the person for whom he has paid.
8. A person supplying articles of the necessities to the wife of a lunatic is entitled for reimbursement from the property of the lunatic.
9. A person cannot recover from another an amount paid under a mistake of law.
10. A person who enjoys the benefit of a non-gratuitous act is bound to make compensation.
11. A finder of lost goods is a bailee.
12. In Quasi-contract the promise to pay is always an implication of law and not of facts.

Answers:

CA Foundation Business Laws Study Material Chapter 6 Void Agreements

UNLAWFUL AGREEMENTS

According to sec. 23, the consideration or the object of an agreement is unlawful in following cases:

1. If it is forbidden by law.
Illustration: A promises to drop a prosecution which he has instituted against B for robbery, and B promises to restore the value of the things taken. The agreement is void, as its object is unlawful.
If it is of such a nature that, if permitted, it would defeat the provisions of any law.
Illustration: A’s estate is sold for arrears of revenue under the provisions of an Act of the Legislature, by which the defaulter is prohibited from purchasing the estate. B, upon an understanding with A, becomes the purchaser and agrees to convey the estate to A upon receiving from him the price which B has paid. The agreement is void, as it renders the transaction, in effect, a purchase by the defaulter, and would so defeat the object of the law.

2. If it is fraudulent.
Illustration:

1. A, being an agent for a landed proprietor, agrees, for money, without the knowledge of his principal, to obtain for B a lease of land belonging to his principal. The agreement between A and B is void as it implies a fraud by concealment by A, on his principal.
2. A scheme of fraud among partners in a firm to cheat income tax authorities or among directors of a company to cheat the investors is void.
3. An agreement between some persons to purchase shares in a company with a view to induce other persons to believe, contrary to the fact, that there is a bona fide market for the shares is void. [GherulalParekhv. Mahadeo A.I.R. (1956) S.E. 781].

3. If it involves or implies injury to the person or property of other.
Illustration: A borrowed ? 100 from B. He (A) executed a bond promising to work for B without pay for 2 years and in case of default agreed to pay interest at a very exorbitant rate and the principal amount at once. Held: The contract was void. [Ram Saroop v. Bansi 42 Cal. 742].

4. If the court regards it as immoral.
Illustration: A let a cab on hire to B, a prostitute, knowing that it would be used for immoral pur-poses. The agreement is void. [Pearce v. Brooks (1886) L.R. 1 Ex. 213]

5. If the court regards it as opposed to public policy.
Illustration: A promises to obtain for B an employment in the public service and B promises to pay A ? 1,000. This is an unlawful agreement.

6. Every agreement of which the object or consideration is unlawful is void.

AGREEMENTS OPPOSED TO PUBLIC POLICY

An agreement, which is injurious to the public or is against the interests of the society is said to be opposed to public policy. Public policy is not capable of exact definition. It varies from time to time. The Courts do not usually go beyond the decided cases on the subject. It has been said in the House of Lords that, “public policy is always an unsafe and treacherous ground for legal decision”. Courts are generally disinclined to create a new item in the list of agreements against public policy.
The agreements which have been declared against public policy by Courts can be described under the following heads:

1. Agreements for trading with the enemy.
2. Agreements for stifling (suppressing) prosecution. When an offence has been committed, the guilty party must prosecuted and any agreement which seeks to prevent the prosecution of such a person is opposed to public policy and is void.
3. Agreements of champerty and maintenance: Champerty and Maintenance are British terms and can be described as the promotion of litigation in which one has no self interest.
   When a person helps (financial or otherwise) another in litigation in which he is not himself interested and does not share in the proceeds of the action, it is called MAINTENANCE.
   When a person helps another in litigation in exchange of a promise to hand over a portion of the fruits of the litigation, if any, it is called CHAMPERTY.
   Ex: P files a suit against Q for the recovery of a claim of ? 1 lakh. X promises to advance ? 20,000 to P for the costs of the litigation and P promises to give to X ? 40,000 if he is successful in his suit. This is an agreement by way of champerty. Had P been liable to return to X only the amount taken by him, then it would have been a mere maintenance agreement.
   In India, an agreement to finance litigation in return of a portion of the results of the litigations is valid provided the litigation was instituted with a bona fide motive and the terms are not unfair or unjust to the helped person. If, however, the litigation was inspired by a malicious motive or to instigate litigation or is of a gambling character, or is against public policy, the agreement is bad.
4. Agreements interfering with the course of justice. Any agreement whose purpose or effect is to use improper influence of any kind with judges or officers of justice is void.
5. Agreements for marriage brokerage.
6. Agreements tending to create interest against obligation.
7. Agreements for sale of public offices, titles and appointments.
8. Agreements tending to create monopolies.
9. Agreements not to bid.
10. Agreements restraining personal liberty.
11. Agreements in restraint of parental rights.
12. Agreements interfering with marital duties.
13. Agreements to influence public servants to act opposed to their duty.
14. Agreements in restraint of marriage.
15. Agreements in restraint of trade.
16. Agreements in restraint of legal proceedings.

VOID AGREEMENTS

The following agreements have been expressly declared as void under the Indian contract Act.

1. Agreements by a minor or a person of unsound mind. (Sec. 11)
2. Agreements made under a bilateral mistake of fact material to the agreement. (Sec. 20)
3. Agreements whose objects or considerations are unlawful. (Sec. 23)
4. Agreements whose objects or considerations are unlawful in part and the illegal part cannot be separated from the legal part. (Sec. 24)
5. Agreements made without consideration. (Sec. 25)
6. Agreements in restraint of marriage. (Sec. 26)
7. Agreements is restraint of trade. (Sec. 27)
8. Agreements in restraint of legal proceedings. (Sec. 28)
9. Agreements the meaning of which is uncertain. (Sec. 29)
10. Agreements by way of wager. (Sec. 30)
11. Agreements contingent on impossible events. (Sec. 36)
12. Agreements to do impossible acts. (Sec. 56)

Serial numbers 1 to 5 have already been discussed in preceding chapters.

Agreements in restraint of marriage [Sec. 26]
Every agreement in restraint of marriage of any person other than a minor, is void. So if a person, being a major, agrees for good consideration not to marry, the promise is not binding.

Agreements in restraint of trade [Sec. 27]
Agreements in restraint of trade: “Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, to that extent void.” [Sec. 27.]
“Public policy requires that every man shall be at liberty to work for himself and shall not be at liberty to deprive himself of the fruit of his labour skill or talent, by any contract that he enters into”. The constitution of India guarantees Freedom of Trade.
“To that extent”- It means that only that portion of agreement is void which is restrictive.
Illustration: Twenty-nine out of thirty manufacturers of combs in the city of Patna agreed with R to supply him with combs and not to any one else. Under the agreement R was free to reject the goods if he found there was no market for them. Held: The agreement amounted to restraint of Trade and was thus void [Shaikh Kalu v. Ramsaran Bhagat (1909) 13 C.W.N. 388].

 An Agreement in restraint of Trade is void. State the Exceptions to the Rule
Agreement in restraint of trade is valid in the following cases:
A. Statutory Exceptions:
(a) Sale of goodwill (Sec. 21)
The seller of the goodwill of a business can be restrained from carrying on

1. a similar business
2. within specified local limits,
3. so long as the buyer or his successor in interest carries on a similar business provided
4. the restraint is reasonable in point of time and place.

(b) Partners’ Agreements (Exceptions given in the LLP and Partnership Act)

1. Partner’s competing business: A partner of a firm may be restrained from carrying on a similar business, so long as he remains a partner [Sec. 11(2) Partnership Act]
2. Rights of outgoing partner: A partner may agree with his partners that on ceasing to be a partner he will not carry on a similar business within a specified period or within specified local limits. [Sec. 36(2), Partnership Act.]
3. Partner’s similar business on dissolution: Partners may, in anticipation of the dissolution of the firm, agree that all or some of them shall not carry on similar business within a specified period or within specified local limits [Sec. 54, Partnership Act.]
4. An agreement between any partner and the buyer of the firm’s goodwill that such partner will not carry on any business similar to that of the firm within a specified period or within specified local limits provided the restrictions imposed are reasonable [Sec. 55(3) Partnership Act]

Note: It should be noted that such agreements can also be entered into by the partners of Limited Liability Partnership incorporated under LLP Act, 2008.

B. Legal decisions
(a) Trade Combinations
An agreement, the primary object of which is to regulate business and not to restrain it, is valid. Thus, an agreement in the nature of a business combination between traders or manufacturers e.g., not to sell their goods below a certain price, to pool profits or output and to divide the same in an agreed proportion does not amount to a restrain of trade and is perfectly valid. If an agreement attempts to create a monopoly, it would be void (Kameshwar Singh v. Yasin Khan). An agreement between Ice manufacturer not to sell ice below a stated price and to divide profits in a certain proportion is not void under. [Sec. 27]

(b) Negative stipulations in service agreements
An agreements of service by which a person binds himself during the term of the agreement, not to take service with any else, is not in restrain of lawful profession and is valid. Thus, a chartered accountant employed in a company may be debarred from private practice or from serving elsewhere during the continuance of service. But an agreement of service which seeks to restrict the freedom of occupation for some period, after the termination of service is void.
(c) Sole Selling Agent’s Agreement
An agreement between a manufacturer & sole selling agent in which the sole selling agent agrees not to deal with the goods of any other manufacturer, such a restraint in trade is binding. (Refer case laws at the end of the chapter)

Agreements in restraint of legal proceedings. [Sec. 28]
Section 28 declares void 3 types of agreements which restraint the parties to the contract to take recourse to legal proceedings –

1. Agreements which oust jurisdiction of courts in trying the legal dispute.
2. Agreements which curtail the period of limitation and prescribe a shorter period than that prescribed by law.
3. Agreements which provide for forfeiture/waiver/extinguishment of the legal right itself, if no action is commenced within the period stipulated by the agreement. (Amended by Indian Contract (Amendment) Act, 1996 effective from 8-1-1997).

As a result of this amendment personal legal rights by way of agreement can neither be restricted or curtailed by way of limitation of time nor those rights be extinguished. These kinds of clauses were usually found in insurance policy contracts which provide that if a claim is made and rejected and no action is commenced within the time stipulated in the policy, the benefits flowing from policy shall stand extinguished and any subsequent action would be time barred. Therefore, the right which has been extinguished for failure to commence action within the stipulated time could not be enforced, j But, consequent to the amendment to this section in 1996 “every agreement which extinguishes the rights of any party thereto, or discharges any party thereto from any liability, under or in respect of any contract on the expiry of a specified period so as to restrict any party from enforcing his rights would also be void to that extent”.

Certain exceptions to the above rule may be noted:

1. A contract by which the parties agree that any dispute between them in respect of any subject shall be referred to arbitration and that only the amount awarded in such arbitration shall be recoverable is a valid contract, (agreement to refer present disputes to arbitration)
2. Similarly, a contract by which the parties agree to refer to arbitration any question between them which has already arisen or which may arise in future, is valid; but such a contract must be in writing, (agreement to refer past & future disputes to arbitration)

Agreements with uncertain meanings [Sec. 29]
An agreement, the meaning of which is not certain, is void, but where the meaning thereof is capable of being made certain, the agreement is valid.

Agreements by way of wager [Sec. 30]
What is a wagering agreement?
Definition. A wager is an agreement by which money is payable by one person to another on the happening or non-happening of future uncertain event. “The essence of gaming and wagering is that one party is to win and the other to lose upon a future event, which at the time of the contract is of an uncertain nature-that is to say, if the event turns out one way A will lose but if it turns out the other way he will win”. Thacker v. Hardy.
Characteristics of wagering agreements:

1. The consideration for the promise under a wagering agreement is to pay or get money.
2. The money is payable on the happening or the non-happening of an event.
3. The agreement depends on a future and uncertain event.
4. The essence of gaming and wagering is that one party is to win & the other lose.
5. In wagering agreement no party has control over the event.
6. Commercial transactions are valid, but to pay price differences in a wagering agreement is void.

Exceptions
It has been held that the following transactions are not wagers:
(i) Shares: Share market transactions in which there is clear intention to give and take delivery share. ‘
(ii) Games of skill: Prizes and competitions which are games of skill, e.g. picture puzzles, athletic competitions etc. An agreement to enter into a wrestling contest, in which the winner was to be rewarded by the whole of the sale-proceeds of tickets and the party failing to appear on that day would have to forfeit Rs. 500 was held not to be a wagering agreement. However, crossword puzzles in which prize depends on the correspondence of the competitor’s solution with a previously prepared solution kept with the editor of the newspaper is a lottery and hence a wagering transaction. According to the Prize competition Act, 1955 prize competitions in games of skill are not wagers provided the prize money does not exceed Rs. 1,000. [State of Bombay vs. R.M.D. Chamarbangwala, AIR (1957)].
(in) A statutory exception: An agreement to contribute to the payment of a prize of the value of Rs. 500 or upwards to the winners of a horse race, is valid. This is statutory exception laid down in sec. 30 of the Contract Act.
(iv) Contract of Insurance: A contract of insurance is not a wagering agreement.
(v) Chit Fund: Chit fund does not come within the scope of wager.

Difference between insurance contracts and wagering agreements

S.No:	Basis	Contracts of Insurance	Wagering Agreement
1.	Meaning	It is a contract to indemnify the loss.	It is a promise to pay money or money’s worth on the happening or non-happening of an uncertain event.
2.	Consideration	The crux of insurance contract is the mutual consideration (premium and compensation amount).	There is no consideration between the two parties. There is just gambling for money.
3.	Insurable Interest	Insured party has insurable interest in the life or property sought to be insured.	There is no property in case of wagering agreement. There is betting on other’s life and properties.
4.	Contract of Indemnity	Except life insurance, the contract of insurance indemnifies the insured person against loss.	Loser has to pay the fixed amount on the happening of uncertain event.
5.	Enforceability	It is valid and enforceable	It is void and unenforceable agreement.
6.	Premium	Calculation of premium is based on scientific and actuarial calculation of risks.	No such logical calculations are required in case of wagering agreement.
7.	Public Welfare	They are beneficial to the society.	They have been regarded as against the public welfare.

The effects of a wagering agreement

An agreement by way of wager is void. It will not be enforced by the courts of law. In the State of j Maharashtra and of Gujarat wagering agreement are, by a local stature, not only void but also j illegal. Though wagering agreements and void, collateral transactions to it would be valid. Thus a | broker in a wagering transaction can recover his brokerage. Similarly a principal can recover from j his agent, the prize money received by him on account of wagering transaction. Thus wagering | v agreements are void but not illegal.

“An agreement to purchase a Lottery authorised by Govt, is valid” Comment.
Lottery is an agreement for the distribution of chance of prizes in money among persons pur¬chasing tickets. The dominant motive of the participants need not be gambling. Where a wagering transaction amounts to lottery, it is illegal as per section 294A of the Indian Penal Code. However, section 294A itself state that this rule will not apply on lotteries run or author ized by a State. The Supreme Court in H Anroj v. Government of Tamil Nadu upheld lotteries with a prior permission of the Government as legal thereby conferring upon the winner of the lottery a right to receive the 1 prize subject to payment of sales tax.

Speculative transactions: Though wagering transactions are void, speculative transactions are generally valid. It is, however, sometimes difficult to distinguish between a speculative transaction and a wagering transaction. A speculative transaction essentially, must have two elements, namely,

1. mutual intention of the contracting parties to acquire or deliver, as the case may be, the commodities; and
2. the undertaking of risk arising from movement in prices. A wager, on the other hand, postulates only the incurring of risk.

RESTITUTION 

Is a party receiving benefit under a void agreement, voidable contract, a void contract bound to return it?
Secs. 64 & 65 which deal with ‘restitution’ are reproduced below.
Consequences of rescission of voidable contract
When a person at whose option a contract is voidable rescinds it, the other party thereto need not perform any promise therein contained in which he is promisor. The party rescinding a voidable contract shall, if he has received any benefit there under from another party to such contract, restore such benefit, so for as may be, to the person from whom it was received. (Sec. 64).

Advantage received under void agreement or void contract
When an agreement is discovered to be void or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it, or to make ! compensation for it, to the person from whom he received it. (Sec. 65).
Examples
(a) A contracts to sing for B at a concert for t 1,000 which are paid in advance. A is too ill to sing.
A is not bound to make compensation to B for the loss of the profit which B would have made if A had been able to sing, but must refund to B ? 1,000 paid in advance.
(b) A contractor entered into an agreement with Government to construct a godown and received advance payments for the same. He did not complete the work and the Government terminated the contract. Held, the Government under Sec. 65 could recover the amount advanced
TAXMANN to the contractor under (State of Orissa v. Rajballav, A.I.R. 1976 Ori.10).

Sec. 65 applies to contracts “discovered to be void” and “Contracts which becomes void”. It does not apply to—

1. Contracts which are known to be void when they are entered into. Thus, if P pays Rs. 500 to D to beat T, the money should not be recovered (Inderjit Singh v. Sunder Sing).
2. Contracts of parties who are incompetent to contract e.g., contracts of a minor or of a person of unsound mind. But the Court may, on equitable grounds, order for the restoration of the benefit by the minor where he has misrepresented his age.

MULTIPLE CHOICE QUESTIONS:

1. The period of limitation for simple contract in India is
(a) 2 years
(b) 3 years
(c) 6 years
(d) 8 years

2. A void agreement is
(a) Illegal
(b) Enforceable by law
(c) Not enforceable by law
(d) None of these.

3. An agreement in restraint of parental rights is
(a) Void
(b) Valid
(c) Voidable
(d) Defective.

4. An agreement will be unlawful if:
(a) There is no consent
(b) Consent is not free
(c) There is no consideration
(d) The object is forbidden by law.

5. An agreement in restraint of marriage is:
(a) Voidable
(b) Void
(c) Valid
(d) Illegal.

6. An agreement in restraint of trade is:
(a) Voidable
(b) Valid
(c) Void
(d) Illegal.

7. A wagering agreement is:
(a) Voidable
(b) Void
(c) Valid
(d) Illegal.

8. A contract of insurance is a :
(a) Contract of guarantee
( b) Contract of indemnity
(c) Wagering agreement
(d) Contingent contract

9. In a wagering agreement:
(a) Both the parties win
(b) Both the parties loose
(c) None of the parties wins
(d) One party wins and the other looses.

10. A wagering agreement in India is declared by the Contract Act as
(a) Illegal and void
(b) Void but not illegal
(c) Voidable at the option of the aggrieved party
(d) Immoral

11. Agreement to do an impossible act has been declared
(a) Void
(b) Voidable
(c) Enforceable
(d) None of these

12. An agreement which restricts a person’s freedom to marry or to marry any person of his choice is against public policy and is
(a) Lawful
(b) Illegal
(c) Void
(d) None of these

13. An agreement of service under which an employee agrees that he will serve a particular employer for a certain duration and that he will not serve anybody else during that period, is a
(a) Valid agreement
(b) Void agreement
(c) Illegal agreement
(d) None of these

14. If the contract is impossible in itself physically or legally the agreement is
(a) Void contract
(b) Voidable
(c) Void ab initio
(d) None of these

15. M, who is a dealer in mustard oil only, agrees to sell to N 500 litres of oil’. This agreement is
(a) Valid contract
(b) Void contract
(c) Voidable contract
(d) Unenforceable contract

16. A and B agree that A shall pay Rs. 1000 for which B shall afterwards deliver to A either rice or smuggled opium. In this case
(a) The first agreement is void and the second voidable
(b) The first is voidable and the second is void
(c) The first is valid and the second is void
(d) The first is void and the second is valid

17. A promises B to pay Rs. 100 if it rains on Monday, and B promises A to pay Rs. 100 if it does not rain on Monday. This agreement is
(a) a valid agreement
(b) a voidable agreement
(c) a wagering agreement
(d) an illegal agreement

18. P engages B to kill C and borrows Rs. 100 from D to pay B. If D is aware of the purpose of the loan, the transaction is
(a) Valid
(b) Void
(c) Illegal
(d) Not enforceable

19. A leaves a firm doing a particular business in Mumbai. He agrees with the other partners of the firm not to start a similar business as that of the firm in and around Mumbai for 3 years. This agreement is
(a) Valid
(b) Immoral
(c) Illegal
(d) Void

20. A, while filling up the insurance application form, states his age as 25 believing it to be true. His actual age was 27. The Life Insurance Corporation issued a policy in his favour charging a lower premium than what it should have charged if the actual age had been given. This is a case of
(a) Fraud
(b) Misrepresentation
(c) Undue influence
(d) Mistake of fact

21. B, having discovered a vein of ore on the estate of A, adopts means to conceal, and does conceal, the existence of the ore from A. Owing to A’s ignorance B is enabled to buy the estate at a low price. The contract is
(a) Valid
(b) Void
(c) Voidable at the option of A
(d) Invalid

22. B let a cabin on hire to P a prostitute, knowing that it would be used for immoral purposes. The agreement is .
(a) Enforceable
(b) Valid
(c) Voidable
(d) Void

23. A asks B to beat C, promising to compensate B against the consequences. B beats C and is fined Rs. 100. B can recover from A
(a) Rs. 50
(b) Rs. 100
(c) Nothing
(d) Rs. 100 plus damages

24. A enters into an agreement with B who has robbed A of Rs. 10,000 to drop prosecution against him (B) in consideration of B’s returning Rs. 8,000. Afterwards B refused to pay. A can get from B
(a) Rs. 8,000
(b) Rs. 100
(c) Nothing
(d) Rs. 10,000 plus damages

25. A agrees with B to discover treasure by magic for a consideration of Rs. 500. This is
(a) A void agreement
(b) A void contract
(c) A valid agreement
(d) An unenforceable contract.

26. X, a tailor, employed Y as his assistant under an agreement that Y, on termination of his employment shall not start the business of a tailor. This restraint is
(a) Void
(b) Valid
(c) Illegal
(d) Voidable

27. X promises to marry Y after the death of his wife. This agreement is
(a) Valid
(b) Void
(c) Illegal
(d) Invalid

28. A promises B to drop a prosecution which he has instituted against B for robbery, and B promises to restore the value of the things taken. The agreement is
(a) Valid
(b) Void
(c) Voidable
(d) A contract

29. Rajeev entered into a contract with Lata to marry her on a fixed date. However, before the marriage date. Rajeev went mad. With reference to the Indian Contract Act which is the valid response?
(a) Lata can’t marry till Rajeev dies
(b) The executers of Rajeev can enforce the contract against Lata
(c) The contract becomes void
(d) All the statements are correct

Answers:

STATE WHETHER THE FOLLOWING ARE TRUE OR FALSE:

1. An Agreement to discover treasure by magic is valid.
2. An Agreement to refer a future dispute to arbitration is perfectly valid.
3. Lotteries authorised by the Government are not to be taken as of wagering nature.
4. Wagering agreements do not cover insurance contracts.
5. A contract by which two or more persons agree to refer their disputes if any to arbitration shall be illegal.
6. Insurance contracts are basically wagering contracts.
7. Speculative transactions being wagering transactions are void.
8. An agreement which extinguishes personal legal rights of the parties is void.
9. An agreement the meaning of which is not certain or capable of being made certain is not void.
10. Transactions incidental to wagering agreements are not void.
11. An illegal contract is fatal to the main contract, but not to collateral transactions.

Answers:

CA Foundation Business Laws Study Material Chapter 5 Free Consent

WHAT IS CONSENT?

Section 13: “Two or more persons are said to consent when they agree upon the same thing in the same sense ”.
Consent involves a union of the wills and an accord in the minds of the parties. When the parties agree upon the same thing in the same sense, they have consensus ad idem. If there is no consent, there is no contract. Salmond states it as error in consensus.

WHAT IS FREE CONSENT?

Section 14 lays down that consent is not free if it is caused by

1. coercion,
2. undue influence,
3. fraud,
4. misrepresentation, or
5. mistake.

If the consent is not free then it is known as error in cause.
The effect of absence of free consent on contract depends on various factors as mentioned in this chapter. Let us see them all one by one.

WHAT IS COERCION?

Coercion is defined by section 15 of the Act as follows: Coercion is the:

1. committing or threatening to commit, any act forbidden by the Indian Penal Code or
2. unlawful detaining, or threatening to detain, any property
3. to the prejudice of any person whatever
4. with the intention of causing any person to enter into an agreement.

Explanation – It is immaterial whether the Indian Penal code is or is not in force in the place where the coercion is employed.
Whether threat to commit suicide amounts to coercion?
The Madras High Court in Amiraju v Seshamma (1918) held by majority that threat to commit suicide amounts to coercion. The Court observed that though suicide was not punishable by IPC, yet it was one forbidden by the IPC, since an attempt to commit suicide is punishable. In this’ case a person threatened to commit suicide if his wife and son did not contract with his brother to release certain disputed property in his favour. The court held that the contract was caused by coercion.

Consequences of coercion
A contract brought about by coercion is voidable at the option of the party whose consent was so caused. [Sec. 19],

WHAT IS UNDUE INFLUENCE?

A contract is said to be induced by undue influence where:

1. one of the parties is in a position to dominate the will of the other and
2. he uses the position to obtain an unfair advantage over the other Sec. 16(1).

Section 16(2) provides that a person is deemed to be in a position to dominate the will of another where:

1. Where he holds a real or apparent authority over the other (For ex- master & servant, ITO & Assessee)
2. Where he stands in a fiduciary relationship to the other. Fiduciary relationship means a relationship of mutual trust and confidence. Such a relationship is supposed to exist in the following cases – father and son; guardian and ward; solicitor and client; doctor and patient; preceptor and disciple; trustee and beneficiary etc.
3. Where a party makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness, or mental or bodily distress.
4. Where the contract is apparently unconscionable (i.e.; unfair). Ex.: an unfair money lending transaction.

The following relationships usually raise a presumption of undue influence, viz:

1. Parent and child,
2. guardian and ward,
3. trustee and beneficiary,
4. doctor and patient,
5. lawyer and client,
6. spiritual guru and disciple. This list, however, is not exhaustive.

There is no presumption of existence of a power to dominate the will of another in the following cases:
(a) Landlord and tenant,
(b) Creditor and debtor,
(c) Husband and wife.
It has been held by judicial decisions that in all these cases, the party alleging undue influence must prove that undue influence existed.
Example I. A, a man enfeebled by disease of age, is induced by B’s influence over him as his medi-cal attendant, to agree to pay B an unreasonable sum for his professional services. B has employed undue influence.
Example II. A, being in debt to B, the money-lender of his village, contracts a fresh loan on terms which appear to be unconscionable. It lies on B prove that the contract was not induced by undue influence.
Example III. A applies to a banker for a loan at a time when there is stringency in the money mar-ket. The banker declines to make the loan except at an unusually high rate of interest. A accepts the loan on these terms. This is a transaction in the ordinary course of business, and the contract is not induced by undue influence.

Burden of Proof. Section 16(3)
“Where a person who is in a position to dominate the will of another, enters into a contract with him, and the transaction appears, on the face of it or on the evidence adduced, to be unconscio-nable, (unfair, unreasonable) the burden of proving that such contract was not induced by undue influence shall be upon the person in a position to dominate the will of the other.” Thus, in case of unconscionable transactions, the dominant party is under the burden to prove that undue influence was not employed. (In other cases, the burden of proof is on the weaker party to prove that undue influence was employed.)
The presumption of undue influence can be rebutted by the dominant/stronger party by showing that:

1. All material facts were disclosed to the party who is alleging exercise of undue influence.
2. The consideration was adequate.
3. The party alleging exercise of the undue influence was in receipt of independent advice and was free to exercise it.
4. The transaction was fair.

Pardanashin women: A pardanashin woman is one who, by virtue of the custom of her community, is required to live behind a veil and is totally secluded from ordinary social interaction. Any contract made by such a women is under the presumption of undue influence.

Effect of Undue Influence
(a) According to Section 19 of the Contract Act, when a contract is induced by undue influence, it is voidable at the option of the aggrieved party, i.e., the party whose consent is obtained by undue influence.
(b) According to Section 19A, any such contract may be set aside by the Court absolutely. However, if the aggrieved party has received any benefit thereunder, it may be set aside upon such terms and conditions as are just in the eyes of the Court.
Example: A, a money-lender, advances Rs. 10,000 to B, a farmer and by undue influence, induces B to execute a bond for Rs. 20,000 with interest at 48 percent per year. The court may set the bond aside, ordering B to repay Rs. 10,000 with such interest as may seen just.

Difference between Coercion and Undue Influence

Points	Coercion	Undue influence
Type of force	Coercion involves use of physical force.	Undue influence involves use of mental pressure.
Relationship	In case of coercion, there is no relationship between the parties to the contract.	Whereas in case of undue influence some sort of relationship generally exists between the two parties.
Third Party	Coercion may be employed either against the party to the contract or against any third person who is not a party to the contract.	Undue influence is exercised against a person who is a party to the contract. No third party is involved in creating undue influence.
Presumption	The Court cannot draw the presumption of coercion.	The Court may draw the presumption of undue influence if the circumstances so warrant it.
Effect	The contract is voidable at the option of one of the parties of the contract.	The contract is either voidable or the Court may enforce it in a modified form.

 WHAT IS MISREPRESENTATION?

Representation is a statement or assertion, made by one party to the other, before or at the time of the contract, regarding some fact relating to the contract. Misrepresentation arises when the representation made is untrue but the person making it believes it to be true. There is no intention to deceive. Misrepresentation is misstatement of facts by one, which misleads the other.
Section 18 of the Contract Act classifies cases of misrepresentation into three groups as follows:

(a) Unwarranted Assertion
When a person makes a positive statement of material facts honestly believing it to be true though it is false, such act amounts to misrepresentation.
Example: X while selling his car to Y, informs him that the car runs 18 kilometres per litre of petrol. X himself also believes this. Later on, Y finds that the car runs only 12 kilometres per litre. This is a case of misrepresentation by X.

(b) Breach of duty
“Any breach of duty, without an intent to deceive, which brings an advantage to the person committing it, by misleading another to his prejudice amounts to misrepresentation”. Under this heading would fall cases where a party is under a duty to disclose certain facts and does not do so and thereby misleads the other party. Such a duty exist between the insurer and the insured; banker and customer; landlord and tenant; seller and buyer; and all contracts of utmost good faith. In English law such cases are known as cases of “constructive fraud.”
Example: X while selling his land to Y, told him that all the farms on the land were fully let out. But he negligently omitted to inform him that the tenants had given notice to quit. Here, X is liable for misrepresentation.

(c) Innocent Mistake
If one of the party causes the other, however, innocently, to make a mistake as to the nature or substance of the agreement, it is considered misrepresentation.
Example: In a case, X chartered a ship to Y, which was described in the charter-party (lease or hire contract), and was represented to him as being not more than 2,800 tonnage registered. It turned out that the registered tonnage was 3,045 tons. Y refused to accept the ship in fulfil¬ment of the charter-party (i.e., an agreement between a ship owner and merchant for the use of a ship). It was held that Y was entitled to avoid the charter-party by reason of erroneous statements as to tonnage (The Ocean Steam Navigation Co. v. Soonderdas Dhurumsey, 1890, 14 Bom. 241).

Consequences of Misrepresentation
In case of misrepresentation the aggrieved party can:

1. avoid the agreement, or
2. insist that the contract be performed and that he shall be put in the position in which he would have been if the representation made had been true. But if the party whose consent was caused by misrepresentation had the means of discovering the truth with ordinary dili-gence, he has no remedy. [Sec. 19]

“Ordinary diligence” means such diligence as a reasonably prudent man would consider necessary, having regard to the nature of the transaction.
Example: A informs B that his estate is free from encumbrance. B thereupon buys the estate. In | fact, the estate is subject to mortgage, though unknown to A also. B may either avoid the contract | or may insist on its being carried out and the mortgage debt redeemed.

WHAT IS FRAUD?

The term “Fraud” includes all acts committed by a person with a view to deceive another person. | “To deceive” means to “induce a man to believe that a thing is true which is false”. Fraud is a false | statement or wilful concealment of a material fact with an intent to deceive another party.
Section 17 of the Contract Act states that “Fraud” means and includes any of the following acts:
(i) False Statement
“The suggestion as to a fact, of that which is not true by one who does not believe it to be true”. A false statement intentionally made is fraud.
Example: X while selling his car to Y says that it is of the latest model and brand-new knowing fully well that it is a used car of old model. His representation or statement amounts to fraud.

(ii) Active Concealment
“The active concealment of a fact by one having knowledge or belief of the fact.” Mere non-disclosure is not fraud where the party is not under any duty to disclose all facts. But ! active concealment is fraud.
Example: X, a scooter dealer, showed a scoQter to Y, X knew that its handle and body are cracked which he had repaired in such a way as to defy detection. The defect was subsequently discovered by Y. Hence he refused to buy the scooter. Here, the contract could be avoided by Y as his consent was obtained by fraud.

(iii) Intentional non-performance
“A promise made without any intention of performing it”.
Example: Purchase of goods without any intention of paying for them.

(iv) Deception
“Any other act fitted to deceive”.
Example: X, with an intention to deceive Y, makes a false statement to him that the sales from his shop are to the tune of Rs. 2,000 per day, although X is aware that they amount to Rs. 1,000 per day only. Y is induced to buy the shop. Here, the statement of X amounts to fraud.

(v) Fraudulent act or omission
“Any such act or omission as the law specially declares to be fraudulent”. This clause refers to provisions in certain Laws, which declare certain acts or omissions to be fraudulent.
Example: Thus, under section 55 of the Transfer of Property Act the seller of immovable property is bound to disclose to the buyer all material defects. Failure to do so amounts to fraud. In the insolvency legislations, the fraudulent preference to creditors is not allowed.
Note: A deceit which does not deceive is no fraud. This means that if the promisee is not deceived or did not rely on the representation then there is no fraud. Fraud must have been made with an intention to deceive and must actually deceive the other party. Also, the party subjected to fraud must have suffered some loss.

Consequences of Fraud.
A party who has been induced to enter into an agreement by fraud has the following remedies open to him. [Sec. 19]

1. He can avoid the performance of the contract.
2. He can insist that the contract shall be performed and that he shall be put in the position in which he would have been if the representation made had been true.
3. The aggrieved party can sue for damages.

Can Silence be Fraudulent?
“Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, if the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak, or unless his silence is, in itself equivalent to speech”. [Explanation to sec. 17]
Example I: H sold to W certain pigs. The pigs were suffering from fever and H knew it. The pigs were sold “with all faults”. H did not disclose the fever to W. Held :There was no fraud [ Ward v. Hobbs (1878) A. C. 13],
Example II: A sells by auction to B, a horse which A knows to unsound. A says nothing to B about the horse’s unsoundness. This is not fraud by A. Mere non-disclosure is not fraud. If there is no duty to speak.
Example III: A and B, being traders enter upon a contract. A has private information of a change in prices which would affect B’s willingness to proceed with the contract. A is not bound to inform B.
From the above, following rules can be deduced:

1. The general rule is that mere silence is not fraud.
2. Silence is fraudulent, “if the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak”. The duty to speak, Le. disclose all facts exists where there is a fiduciary relationship between the parties (such as in father and son; guardian and ward, etc, and also in the insurance contracts, marriage contracts, partnership contract etc which are contracts based on good faith [contracts of uberimae fidei]). The duty to disclose may also be an obligation imposed by statute.
   Example: A sells by auction to B, a horse which A knows to be unsound. B is A’s daughter and has just come of age. Here the relation between parties would make it A’s duty to tell B if the horse is unsound.
3. Silence is fraudulent where the circumstances are such that “Silence is in itself equivalent to speech”.
   Example: B says to A – “If you do not deny it, I shall assume that the horse is sound.” A says nothing. Here A’s silence is equivalent to speech.

Difference between Misrepresentation and Fraud

S.No	Points of Difference	Misrepresen ta Hon	Fraud
1.	Different intention:	In misrepresentation there is no intention to deceive.	Fraud implies an intention to deceive.
2.	Different Belief:	The person believes it to be true.	The person believes and makes false statements.
3.	Different Rights:	In case of misrepresentation the only remedy is rescission. There can be no suit for damages.	In case of fraud the aggrieved party can rescind the contract. He can also sue for damages.
4.	Different Defence:	The aggrieved party cannot avoid the contract if he had the means to discover the truth with ordinary diligence.	But in case of fraud excepting fraud by silence, the contract is voidable even though the party defrauded had the means of discovering the truth with ordinary diligence.

 WHAT IS MISTAKE? WHAT IS THE EFFECT OF MISTAKE ON CONTRACT?

Mistake may be defined as an erroneous belief concerning something. It may be of two kinds:

1. Mistake of Law
2. Mistake of Fact.

(1) MISTAKE OF LAW
Mistake of law may be of two types—
(a) Mistake of general law of country
Every one is deemed to be conversant with the law of his country, and hence the maxim “ignorance of law is no excuse.” Mistake of law, therefore, is no excuse and it does not give right to the parties to avoid the contract. If a mistake of law leads to a formation of contract, section 21 enacts that a contract is not voidable because it was caused by a mistake as to any law in force in India ’’.
A person cannot get any relief on the ground that he had entered into a contract in ignorance of law.
Illustration: A and B make a contract grounded on the erroneous belief that a particular debts is barred by the Indian law of limitation; the contract is not voidable.
(b) Mistake of Foreign Law: 
Mistake of foreign law is treated as ‘mistake of fact’. Here the law relating to factual mistakes will apply.

(2) MISTAKE OF FACT
Mistake of Fact may be of two types:—
(a) Bilateral mistake
In case of bilateral mistake of essential fact, the agreement is void ab-initio. Section 20 pro-vides that “Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement is void.’’ Thus for declaring an agreement void ab-initio under this section, the following three conditions must be fulfilled:

1. Both the parties must be under a mistake.
2. Mistake must relate to some fact and not to judgment or opinion etc. An erroneous opinion as to the value of the thing which forms the subject-matter of the agreement is not to be deemed a mistake as to a matter of fact (Explanation to Section 20).
3. The fact must be essential to the agreement i.e., the fact must be such which goes to the very root of the agreement.

On the basis of judicial decisions, the mistakes which may be covered under this condition may broadly be put into the following heads:

• Mistake as to the existence of the subject-matter of the contract.
  Ex.: A agrees to buy from B a certain horse. It turns out that the horse was dead at the time of the bargain, though neither party was aware of the fact. The agreement is void.
• Mistake as to the title of the subject-matter.
  Ex.: A believed that she had inherited rights over a fishery from her father. B, her cousin brother, also believed in A’s rights. B agreed to take the fishery on lease from A. Actually the fishery belonged to B. The agreement, caused by mistake as to title, was held to be void (Cooper v. Phibbs (1867) LR HL 149).
• Mistake as to the quantity of the subject-matter.
  Ex.: P wrote to H inquiring the price of rifles and suggested that he might buy as many . as 50. On receipt of the information, he telegraphed “Send three rifles.”But because of the mistake of the telegraph authorities, the message transmitted was “Send the rifles. ” H dispatched 50 rifles. Held: There was no contract between the parties. However, P could be held liable to pay for three rifles on the basis of an implied contract [Henkel v. Pape (1870) 6 Ex. 7].
• Mistake as to the quality of the subject-matter.
  Ex.: X agreed to sell to Y an antique item believed by X to be of the 18th Century. What Xpossessed was actually of the 20th century. So the bilateral mistake about quality of the subject-matter makes it a void agreement.

(b) Unilateral Mistake
Where only one of the contracting parties is mistaken as to a matter of fact, the mistake is a unilateral mistake. Regarding the effect of unilateral mistake, on the validity of a contract, sec. 22 provides that “A contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact”.

Law regarding unilateral mistake
(1) Contract Valid: As a rule, a unilateral mistake is not allowed as a defence in avoiding a contract Le., it has no effect on the contract and the contract remains valid.
(2) Contract voidable: If the unilateral mistake is caused by fraud or misrepresentation etc., on the party, the contract is voidable and can be avoided by the injured party.
(3) Agreement void ab-initio; In the following two cases, where the consent is given by a party under a mistake which is so fundamental as goes to the root of the agreement and has the effect of nullifying consent, no contract will arise even though there is a unilateral mistake only.

(a) Mistake as to the identity of person contracted with, where such identity is important. If A intends to contract with B only, but enters into contract with C believing him to be B, the contract is void.
Example:

• In Cundy v. Lindsay & Co., (1878) 3 App. Cas. 459., A company (Lindsay & Co.) had regular dealing with a firm Blenkiron & Co., having office in Wood Street. Another person with a similar name, Blenkarn, maintaining an office in the same street, sent an order on its printed letter head to the company for purchase of some goods. The company were led to believe that the order came from the famous firm they knew. They sent the goods. The fraudulent Blenkarn sold the received goods down to Cundy. In a suit by Lindsay against Cundy for recovery of goods, it was held that as Lindsay never intended to contract with Blenkarn, there was no contract between them and as such even as innocent purchaser of the goods from Blenkarn did not get a good title, and must return them or pay their price.
  Further, “Mistake as to the identity” of a party is to be distinguished from “mistake as to the attributes” of the other party. Mistake as to attributes, for example, as to the solvency or social status of that person cannot negate the consent. It can only vitiate consent. It therefore, makes the contract merely voidable for fraud.
  Thus, where X enters into a contract with Y falsely representing himself to be a rich man, the contract is only voidable at the option of Y. Again where the identity of the party contracted with is immaterial, mistake as to identity will not avoid a contract. Thus, if X enters a shop introduces himself as Y and purchased some goods for cash, the contract is valid.

Example:

• Philips v. Brooks (1919) 2 KB 243 – In this case a man, N, called in person at a jeweller’s shop and chose some jewels, which the jeweller was prepared to sell him as a casual customer. He tendered in payment a cheque which he signed in the name G, a person with credit. Thereupon N was allowed to take away the jewels which N pledged with B who took them in good faith. Held, the pledge, B, had a good title since the contract between N and the jeweller could not be declared void on the ground of mistake but was only voidable on the ground of fraud. Horridge, J. held that although the jeweller believed the person to whom he was handling the jewels was G, he in fact contracted to sell and deliver to the person who came into his shop. The contract, therefore, was not void on the ground of mistake but only voidable on the grounds of fraud.

(b) Mistake as to the nature and character of a written document. The second circumstance in which even an unilateral mistake may make a contract absolutely void is where the consent is given by a party under a mistake as to the nature and character of a written document. The rule of law is that where the mind of the signatory did not accompany the signature; i.e., he did not intend to sign; in contemplation of law, he never did sign the contract to which his name is appended and the agreement is void ab-initio.
Example: In case of Foster v. MacKinnon (1868) LR 4 CP 704, an old illiterate man was made to sign a bill of exchange, by means of a false representation that it was a guarantee. Held: the contract was void.

MULTIPLE CHOICE QUESTIONS:

1. If there is no consent the agreement is:
(a) Void
(b) Voidable
(c) Illegal
(d) Valid

2. If consent in not free due to coercion, undue influence, fraud, and misrepresentation then the agreement is:
(a) Void
(b) Voidable
(c) Illegal
(d) Valid

3. If the agreement is made by obtaining consent by doing an act forbidden by the Indian Penal Code, the agreement would be caused by:
(a) Coercion
(b) Fraud
(c) Misrepresentation
(d) Undue influence

4. A buys an article thinking that it is worth Rs. 100 when in fact it is worth only Rs. 50. There has been no misrepresentation on the part of the seller. The contract is:
(a) Valid
(b) Void
(c) Voidable
(d) Unenforceable

5. Where a person is in a position to dominate the will of another person and uses that position to obtain on unfair advantage it is called:
(a) Fraud
(b) Coercion
(c) Undue influence
(d) Misrepresentation.

6. An agreement caused by unilateral mistake of fact is:
(a) Void
(b) Voidable
(c) Illegal
(d) Valid

7. Unlawfully detaining or threatening to detain any property, to the prejudice of any person making him to enter into an agreement amounts to:
(a) Threat
(b) Coercion
(c) Undue influence
(d) Misappropriation

8. An agreement made under mistake of fact, by both the parties, forming the essential subject matter of the agreement is:
(a) Void
(b) Voidable
(c) Valid
(d) Unenforceable

9. “Active concealment of fact” is associated with which one of the following?
(a) Misrepresentation
(b) Undue influence
(c) Fraud
(d) Mistake

10. Lending money to a borrower, at high rate of interest, when the money market is tight renders the agreement of loan:
(a) Void
(b) Valid
(c) Voidable
(d) Illegal

11. When a person, who is in dominating position, obtains the consent of the other by exercising his influence on the other, the consent is said to be obtained by:
(a) Fraud
(b) Intimidation
(c) Coercion
(d) Undue influence

12. With regard to the contractual capacity of a per-son of unsound mind, which one of the following statements is most appropriate?
(a) A person of unsound mind can never enter into a contract
(b) A person of unsound mind can enter into a contract
(c) A person who is usually of unsound mind can contract when he is, at the time of entering into a contract, of sound mind
(d) A person who is occasionally of unsound mind can contract although at the time of making the contract, he is of unsound mind

13. While obtaining the consent of the promisee, keeping silence by the promisor when he has a duty to speak about the material facts, amounts to consent obtained by:
(a) Coercion
(b) Misrepresentation
(c) Mistake
(d) Fraud

14. ‘A’ threatened to commit suicide if his wife did not execute a sale deed in favour of this brother. The wife executed the sale deed. This transaction is:
(a) Voidable due to under influence
(b) Voidable due to coercion
(c) Void being immoral
(d) Void being forbidden by law

15. A threatens to shoot B, if B does not agree to sell his property to A at a stated price. B’s consent in this case has been obtained by
(a) Fraud
(b) Undue influence
(c) Coercion
(d) None

16. A master asks his servant to sell his cycle to him at less than the market price. This contract can be avoided by the servant on grounds of:
(a) Coercion
(b) Undue influence
(c) Fraud
(d) Mistake

17. If A sells, by auction to B a horse which A knows to be unsound and A says nothing to B about the horse’s unsoundness, this amounts to:
(a) Fraud
(b) Not fraud
(c) Unlawful
(d) Illegal

18. Silence is fraud when silence is, in itself equivalent to speech. This statement is:
(a) True
(b) False
(c) Untrue in certain cases
(d) None of these

19. A person is deemed to be in a position to dominate the will of another if he:
(a) Holds real or apparent authority
(b) Stands in a fiduciary relationship
(c) Both (a) and (b)
(d) Either (a) or (b)

20. If both the parties to a contract believe in the existence of a subject, which infact does not exist, the agreement would be
(a) Unenforceable
(b) Void
(c) Voidable
(d) None of these

21. When both the parties to an agreement are under a mistake as to a matter of fact essential to an agreement, the agreement is:
(a) Void
(b) Valid
(c) Voidable
(d) Illegal

Answers:

STATE WHETHER THE FOLLOWING ARE TRUE OR FALSE:

1. A threat to commit suicide does not amount to coercion.
2. A deceit which does not deceive is no fraud.
3. Consent obtained by fraud makes the agreement void.
4. A person who is usually of unsound mind but occasionally of sound mind can always enter into contract.
5. Mere silence as to facts likely to affect the willingness of a person to enter into contract is not fraud.
6. A contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact.
7. In the absence of consent, there can be no contract.
8. A threat amounting to coercion must necessarily proceed from a party to the contract.
9. Undue influence involves use of moral pressure.
10. Undue influence can be exercised only by a party to the contract.
11. If there is no damage, there is no fraud.
12. In case of fraud, the aggrieved party loses the right to rescind the contract if he had the means of dis-covering the truth by ordinary diligence.
13. Undue influence can be exercised only between the parties who are related to each other.
14. A promise made without any intention of performing it amounts to fraud.
15. If one of the parties to a contract was under a mistake as to the matter of fact, the contract is voidable.
16. Ignorance of foreign law is put on a same level with ignorance of fact.
17. A contract is not voidable only because there is a mistake of Indian law.

Answers:

CA Foundation Business Laws Study Material Chapter 4 Capacity of Parties

WHAT DO YOU MEAN BY CAPACITY TO CONTRACT?

An essential ingredient of a valid contract is that the contracting parties must be ‘competent to contract’ (Sec. 10). Section 11 lays down 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.”Thus the following persons are incompetent to contract.

1. Minors
2. Persons of unsound mind
3. Persons disqualified by law from contracting.

LAW RELATING TO MINOR’S AGREEMENTS

According to section 3 of the Indian Majority Act, 1875, a person, domiciled in India, who is under 18 years of age is a minor. Accordingly, every person who has completed the age of 18 years becomes a major. In two exceptional cases a minor attains majority when he completes 21 years of his age:
(a) a guardian is appointed by court, for the minor to look after his person or property or both;
(b) a Court of Wards has been appointed for the superintendence of minor’s property.

1. An agreement with a minor is void ab initio
An agreement with a minor is absolutely void and inoperative. This rule was established by the Privy Council in the famous case MohiriBibiv. Dharmodas Ghose ( 1903) LR 30 Cal 539. In this case, Dharmodas Ghose, a minor, mortgaged his house in favour of the defendant. Mohiri Bibi, to secure a loan of Rs. 20,000. A part of this amount was actually advanced to him. Subsequently, Dharmodas Ghose approached the Court for the cancellation of mortgage since he was a minor. It was held j by the Privy Council that agreement with a minor is absolutely void and the money lender is not i entitled even to repayment of the money lent because he had given the loan with full knowledge j of the minority of the borrower.

2. No restitution
Restitution means ‘restoring’ (i.e. giving back) of something to its proper owner. A minor cannot be j directed to return benefit obtained under a void agreement (because sections 64 & 65 which deal with restitution do not apply to a minor). However, according to the doctrine of equitable restitution, the goods and property which are still in possession of minor can be recovered from him, if so required with the condition that it does not involve any personal liability of the minor.
However under section 33 of the Specific Relief Act, 1963 where the minor misleads the other person into believing him to be of majority age, restitution shall be available to the deceived party.

• Where minor is the plaintiff (complainant) and has requested the court to cancel his agreement and get his money or property restored from the other party, the court will demand from the minor either the restoration back of what he himself obtained from the other party, or if this was not possible, to compensate him suitably. This is based on the view ‘ One who seeks equity must do equity himself too’. Thus, the Court will compel restitution by a minor when he is a plaintiff. For example, if a minor sells a house for ? 5 lakhs and later on files a suit to set aside the sale on the ground of minority, he may be directed by the Court to refund the purchase money received by him.
• Where the other party himself is unscrupulous towards the minor, or is not influenced by the false representation by minor, or the court has no reason to believe that restitution is necessary in the interest of justice, minor may not be asked to restore back anything.
• In case, the person is aware of or has reason to be aware of the minority age of the opposite party, then no restitution whatsoever, shall be granted to that person.

3. Minor can be a beneficiary
The Court protects the rights of minors. Accordingly, any contract, which is of some benefit to the minor and under which he is required to bear no obligation, is valid. In other words, a minor can be a beneficiary e.g., a payee, an endorsee or a promisee under a contract. Thus, money advanced by a minor can be recovered by him by a suit because he can take benefit under a contract. Generally contracts for the benefits of minor are made by guardian on behalf of the minor. It should be how-ever be noted that all contracts made by guardian on behalf of a minor are not valid. For example, a guardian cannot empower himself to bind the minor by a contract for the purchase of immovable property unless such contracts are sanctioned by the Court.

4. No ratification
A minor’s agreement being a nullity and void ab initio has no existence in the eye of law. It cannot be ratified by the minor on attaining the age of majority, for, an agreement void ab initio cannot be made valid by subsequent ratification (Mohendra v. Kailash).

5. The rule of estoppel does not apply to a minor
The ride of estoppel does not apply to a minor ie., a minor is not estopped from pleading his infancy in order to avoid a contract, even if he has entered into an agreement by falsely representing that he was of full age. In other words, where a minor represents fraudulently or otherwise that he is of age majority and thereby induces another to enter into a contract with him, then in an action v founded on the contract, the infant is not estopped from setting up infancy.
But if anything is traceable in the hands of minor, out of the proceeds of the contact made by I fraudulently representing that he was of full age, the court may direct the minor to restore that | thing to the other party, on equitable considerations, for minors can have no privilege to cheat men.

According to the rule of estoppel, if a person has, by words or conduct, led another to believe in a state of facts as true and induced him to act on that faith, such a person will be stopped by law from denying those facts later even if the facts presented earlier were untrue. In simple words, rule of estoppel means one cannot deny his previous conduct. This principle does not apply against a minor. So, if a minor misleads the other party to believe that he is of majority age, and then acquires | some benefit from him under an agreement, he will be permitted to deny later the fact that he was of majority age. Thereby, he will have no liability towards the other party.

6. Minor’s liability for necessaries
A minor is not personally liable for the necessaries supplied to him but his property is liable for payment to the other person.
The case of necessities supplied to a minor is governed by Section 68 of the Contract Act which provides that “if a person, incapable of entering into a contract, or any one whom he is legally bound | to support, is supplied by another person with necessaries suited to his condition in life, the person who has furnished such supplies is entitled to be reimbursed from the property of such incapable person”.
Illustration: A minor is ill and needs urgent medical attention. N, a neighbour, arranges for his treatment and spends his money. He is entitled to be paid out of minor’s property. Necessaries would include such items as food, clothing, accommodation, expenses on education,
medical treatment, funeral ceremonies, etc. and not items of comfort or luxury. It would depend on socio-cultural status of the minor.

7. Minor cannot bind his parents or guardian
If there is no express or implied authority, a minor cannot bind his parents or guardian, even for necessaries. Parents will be held liable only if the child acts as an agent for parents.

8. Contract by a major and a minor
In case when a major and a minor enters jointly into a contract, then only major person will be liable and not the minor. As held in Sain Das v. Ram Chand, when a contract for purchase is entered f into by a major and a minor, the seller could enforce the contract against the major purchaser and not the minor.

9. No Specific performance
Since an agreement by a minor is absolutely void, the court will never direct ‘specific performance’ of such an agreement by him.

10. Minor Partner
A minor being incompetent to contract cannot be a partner in a partnership firm, but under Section 30 of the Indian partnership Act, he can be admitted to the ‘benefits of partnership’ by an agreement executed by his guardian on his behalf, with the consent of all the partners.

11. Minor Agent
A minor can be an agent (Sec. 184). He shall bind the principal by his acts done in the course of such an agency, but he cannot be held personally liable for negligence or breach of duty. Thus in appointing a minor as an agent, the principal runs a great risk.

12. Surety for a minor
In case of a contract of guarantee when a major stands as a surety for a minor then the surety is primarily liable as if the contract was entered by him with the third party.

13. Minor and insolvency
A minor cannot be adjudicated an insolvent, for, he is incapable of contracting debts. Even for necessaries supplied to him, he is not personally liable, only his property is liable (Sec. 68)

14. Minor as a shareholder
A minor can become a shareholder of fully paid of shares through transfer, if he applies for registration of transfer through his guardian. However, if a minor makes application for shares, the company will refuse to allot him shares because being incompetent, he will have no liability to pay the amounts due on the shares.

15. Minor’s liability for torts
A tort can be described as a civil wrong. A minor is liable for the torts which do not arise from a contract. For example, a minor was held liable when he failed to returned certain goods which he has hired and passed them to his friend instead.

PERSONS OF UNSOUND MIND

As per Section 11 of the Contract Act, for a valid contract, it is necessary that each party to it must have a ‘sound mind’..
What is a ‘sound mind’? Section 12 of the Contract Act defines the term ‘sound mind’ as follows. “A person is said to be of sound mind for the purpose 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 effects upon his interest. ”

According to this Section, therefore, the person entering into the contract must be a person who understands what he is doing and is able to form a rational judgment as to what he is about to do, is to his interest or not.
Section 12 further states that:

1. “A person who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind. ” Thus a patient in a lunatic asylum, who is at intervals of sound mind, may contract during those intervals.
2. “A person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind. ” Thus, a sane man, who is delirious from fever, or who is so drunk that he cannot understand the terms of a contract, or form a rational judgment as to its effect on his interest, cannot contract whilst such delirium or drunkenness lasts.

DISQUALIFIED PERSONS

The third type of incompetent persons, as per Section 11, are those who are “disqualified from contracting by any law to which they are subject.” These are:
(a) Alien enemies
An alien (a person of a foreign country) living in India can enter into contracts with citizens of India during peace time only, and that too subject to any restrictions imposed by the Government in that respect. On the declaration of a war between his country and India, he becomes an alien enemy and cannot enter into contracts. Alien friend can contract but an alien enemy can’t contract.
A contract entered into with an alien enemy before the declaration of war shall be suspended until the war is over. However, the existing contract can be revived after the completion of war or with the approval of the central government.

(b) Foreign sovereigns and ambassadors
One has to be cautious while entering into contracts with foreign sovereigns and ambassa- dors, because whereas they can sue others to enforce the contracts. They cannot be sued in the Indian Courts, except in the following two cases:
(a) Where they voluntarily submit themselves to the Court.
( b) Where the person intending to sue them obtains the approval of the Central Government. Thus they are in privileged position and are ordinarily considered incompetent to contract.

(c) Convict
A convict is one who is found guilty and is imprisoned. During the period of imprisonment, a convict is incompetent (a) to enter into contracts, and (b) to sue on contracts made before conviction. On the expiry of the sentence, he is at liberty to institute a suit and the Law of Limitation is held in abeyance during the period of his sentence.

(d) Insolvent
An adjudged insolvent (before an ‘order of discharge’) is competent to enter into certain types of contracts i.e. he can incur debts, purchase property or be an employee but he cannot sell his property which vests in the Official Receiver. Before ‘discharge’ he also suffers from certain disqualifications e.g., he cannot be a magistrate or a director of a company or a member of local body but he has the contractual capacity except with respect to his property. After the ‘order of discharge’, he is just like an ordinary citizen.

(e) Joint-stock company and corporation (Example: LIC, RBI, SEBI, etc.)
A company/Corporation is an artificial person created by law. It cannot enter into contracts outside the powers conferred upon it by its Memorandum of Association or by the provisions of its special Act, as the case may be. Again, being an artificial person (and not a natural per-son) it cannot enter into contracts of strictly personal nature e.g., marriage.

MULTIPLE CHOICE QUESTIONS:

1. For necessaries supplied to a minor
(a) he is personally liable
(b) his parents are liable
(c) his estate is liable
(d) the contract is valid under Indian law

2. A minor is a person who has not attained the age of:
(a) 15 years
(b) 18 years
(c) 21 years
(d) 25 years

3. An agreement with a minor is :
(a) Void
(b) Voidable
(c) Valid
(d) Illegal

4. A contract for the benefit of the minor is :
(a) Valid
(b) Void
(c) Voidable
(d) Illegal

5. Minor’s contract is
(a) Voidable
(b) Voidable at the option of the minor
(c) Illegal
(d) Void

6. A supplies B, a lunatic, with necessaries suitable to his condition in life. A is
(a) Not entitled to be reimbursed from B’s property
( b) Entitled to be reimbursed from B’s property
(c) Personally liable
(d) None of these

7. A mortgage executed by minor is ……………………
(a) Void
(b) Voidable
(c) Both (a) and (b)
(d) Neither (a) nor (b)

8. ……………… is the most extreme form of mental un-soundness?
(a) Lunacy
(b) Incapacity
(c) Minority
(d) Idiocy

9. A minor
(a) Can be a promisee
(b) Cannot be an agent
(c) Can be a principal
(d) Can ratify a past contract entered during minority

Answers:

STATE WHETHER THE FOLLOWING ARE TRUE OR FALSE:

1. A minor can be a promisee in a contract.
2. A person, who is usually of unsound mind but occasionally of sound mind, can always enter into a valid contract.
3. A minor can be a partner in a firm.
4. A minor can ratify his contract after attaining majority.
5. Minor can be held personally responsible for the necessaries supplied to him.
6. A person who is usually of unsound mind cannot enter into a contract even when he is of a sound mind.
7. Contracts with a lunatic during lucid intervals are valid.
8. A minor can be declared as an insolvent.
9. A minor can be an agent.
10. Husband and wife cannot enter into a valid contract.
11. A contract to take a loan by a boy of sixteen years of age from a money lender of 50 years old is a valid contract.
12. A promissory note duly executed in favour of a minor is void.
13. A person who is usually of sound mind, but occasionally of unsound mind cannot enter into contract when he is of unsound mind.

Answers:

CA Foundation Business Laws Study Material Chapter 17 Registration of Firm

The registration of a partnership is not compulsory. Therefore an unregistered firm is not an illegal association. But an unregistered firm suffers from certain disabilities and therefore registration is necessary for carrying on business.
The formalities of registration (Sections 58-59): The following are the formalities that are required to he fulfilled for registration of the firm. The registration of the firm can be classified under the following 3 steps. It should be in a Prescribed Form, there should be Prescribed Documents and it should be deposited along with the Prescribed Fees.

PRESCRIBED FORM

The Registration of a firm may be effected at any time by sending by post or delivering to the Registrar of Firms of the locality, a statement in the prescribed form and accompanied by the prescribed fee.
The application for registration contains the following particulars;

1. the firm-name,
2. the place or principal place of business of the firm,
3. the names of any other places where the firm carries on business,
4. the date when each partner joined the firm
5. the names in full and permanent addresses of the partners, and
6. the duration of the firm.

Undesirable names suggesting the sanction, patronage or approval of the Govt, shall not be allowed unless specially consented to in writing by the Govt.

Signing and verification
The statement shall be signed and verified by all the partners or their agents specially authorised on this behalf.

Registration
When the Registrar is satisfied that the above provisions have been duly complied with, he shall j record an entry of the statement in the Register of Firms and then file the statement (sec. 59). He shall then issue under his hand a certificate of Registration.

Time of registration
There is no provision in the Partnership Act regarding the time of registration of firm. However, [ section 69(2) lays down that before any suit can be filed in Court of Law registration of the firm must have been effected, otherwise the suit will be dismissed.
Registration is effective from the date when the Registrar files the statement and makes entries in j the Register of Firms and not from the date of presentation of the statement to him.

PARTNERSHIP DEED
The partnership agreement may be oral or written. But to avoid any dispute, it is always advisable to have a written agreement, which is commonly known as partnership deed. Under the Income tax Act also, written partnership deed is a pre-requisite for the assessment of the firm.
The partnership deed usually contains provisions relating to the following :

1. Name of the firm,
2. Duration of partnership,
3. Nature of business,
4. Place where business is to be carried on,
5. Capital brought in by each individual partner,
6. Property of the firm,
7. Proportions of profits and losses of each partner,
8. Rights and duties of partners,
9. Provisions for accounts, audit, keeping of account books,
10. Drawings by partners and specially by a working partner,
11. Dissolution of the firm,
12. Retirement of a partner,
13. Settlement of accounts, division of assets, profits etc., upon dissolution,
14. Arbitration clause in case of dispute.

Under the Income-tax Act it is essential to insert clauses in the partnership for payment of interest to partners and remuneration to working partners so that payment thereof may be allowed as deduction to the firm.

CONSEQUENCES OF NON REGISTRATION (SEC. 69)
An unregistered firm and the partners thereof suffer from certain disabilities, Suit between partners and firm [sec. 69( 1 )]
A partner of an unregistered firm cannot file a suit (against the firm or any partner thereof) for the purpose of enforcing a right arising from contract or a right conferred by the Partnership Act.

Suits between firm & third parties [sec. 69(2)]
No suit can be filed by or on behalf of an unregistered firm against any third party for the purpose of enforcing a right arising from a contract, unless the firm is registered and the persons suing are or have been shown in the Register of Firms as partners in the Firm.

Claims of set-off [sec. 69(3)]
An unregistered firm cannot claim a set-off in a suit, (‘set-off’ means a claim by the defendant which would reduce the amount of money payable by him to the plaintiff).

EXCEPTIONS
There are certain exceptions to the rules stated above.

1. A partner of an unregistered firm can file a suit for the dissolution of the firm or for accounts of dissolved firm.
2. The Official Assignee or Receiver acting for an insolvent partner of unregistered firm may bring a suit for the realisation of the properties of an insolvent partner or further realisation of the property of dissolved firm.
3. There is no bar to suits by firms which have no place of business in the territories to which the Indian Partnership Act extends.
4. There is no bar to suits by unregistered firms or by the partners thereof in areas where the provisions relating to the registration of firms do not apply by notification of State Government under Section 56.
5. An unregistered firm can file a suit (or claim a set off) for a sum not exceeding Rs. 100 in value, provided the suit is of such a nature that it has to be filed in the small Causes Court.
   Proceedings incidental to such suits, e.g., execution of decrees, are also allowed.
6. Non-registration will not affect the enforcement of rights arising otherwise than out of contract e.g. for an injunction against wrongful infringement of a trademark etc.
   An unregistered firm suffers from certain disabilities but is not an illegal association. Therefore registration of a firm is optional.

ALTERATIONS
Any alteration in the name, principal place of business, branches, names and addresses of partners etc. of a firm subsequent to registration, must be intimated in the prescribed form to the Registrar of Partnership Firms. Registrar shall make the necessary amendment relating to such a firm in the Register of firms maintained by it. These matters are:

1. Change in the firm name or in location of the principal place of business of the registered firm. Statement to be sent to the Registrar in this case should be accompanied by the prescribed fee. (Sec. 60)
2. Closing and opening branches:
   When a registered firm discontinues at any place or begins to carry on business at any place other than the principal place of business, an intimation is to be sent to the Registrar by any partner or the agent of the firm. (Sec. 61)
3. Changes in the names and addresses of partners:
   When any partner in a registered firm alters his name or permanent address, an intimation of the alteration is to be sent to the Registrar by any partner or agent of the firm. (Sec. 62)
4. Changes in the constitution of a firm and its dissolution:
   When a change occurs in the constitu-tion of a registered firm, any incoming, continuing or outgoing partner may give notice to the Registrar of such change. Similarly, when a registered firm is dissolved, any person who was a partner immediately before the dissolution, may give notice to the Registrar. [Sec. 63(1)]
5. Election of minor on attaining the age of the majority as partner:
   When a minor who had been admitted to the benefits of partnership attains majority, he has to choose whether he intends to continue as a partner or whether he intends to sever his connection from the firm which is a registered firm. Whatever the election, he or his agent specially authorized on his behalf may give notice to the Registrar that he has or has not become a partner. [Sec. 63(2)]

REGISTER OF FIRMS-A PUBLIC DOCUMENT
The register of firms is a public document shall be open to inspection by any person on payment of the prescribed fee (Sec. 66). Registrar shall also furnish to any person on payment of a prescribed fee a copy, certified under his of any entry or position thereof in the Register of Firms (Sec. 67)

REGISTER OF FIRMS-A CONCLUSIVE EVIDENCE (SEC. 68)
Any statement, intimation notice recorded or noted in the Register of Firms, shall, as against any person by whom whose behalf such statement, intimation or notice was signed, be conclusive of any fact the stated.
A certified copy of an entry relating to a firm in the Register of Firms may be the proof of the fact of the registration of such firm, and of the contents of any statement, intimation or notice recorded or noted therein.

PENALTY FOR FURNISHING FALSE PARTICULARS (SEC. 70)
The Act provides a penal imprisonment which may extend to three months or fine or both to any person liable supplying to the Registrar any information which he knows to be false or does not believe true.

MULTIPLE CHOICE QUESTIONS:

1. Registration of the firm under the Partnership Act is:
(a) Optional
(b) Obligatory
(c) Compulsory
(d) Necessary

2. The Partnership Act by section 69 indirectly renders the registration firm compulsory by providing :
(a) Certain disabilities.
( b) Penalties on partners of unregistered firms.
(c) Penalties on unregistered firms.
(d) Monetary fine on partners.

3. A firm name shall not contain any of the following words :
(a) Crown, Imperial.
(b) Emperor,Empress
(c) King, Queen
(d) All the above.

4. Registration of firm is effective from —
(a) The date when the Registrar files the statement and makes entries in the Register of firms
(b) The date of presentation of the statement to the Registrar of firms
(c) The date published in the Official Gazette
(d) The date intimated to the partners.

5. Non-registration of the firm does not affect the right of the firm to institute a suit or claim of set-off not exceeding —
(a) Rs. 100
(b) Rs. 1,000
(c) Rs. 10,000
(d) Rs. 50,000.

6. After the registration of a firm, if a partner retires, such a change in the constitution of the firm requires :
(a) A notice to be sent to the Registrar.
(b) New registration.
(c) An affidavit of a managing partner about the change.
(d) No intimation.

7. If an unregistered firm intends to file a suit against a third party, it should get itself registered before filing the suit.
(a) False, as such disability can never be removed.
(b) True, as after registration firm’s disability to file such suit is removed.
(c) It should take permission of the court before filing the suit.
(d) Either (b) or (c)

8. In case of an unregistered firm the partners can file a suit for the :
(a) Dissolution of the firm
(b) Accounts of dissolved firm
(c) Realization of property of dissolved firm
(d) All the above

9. Any person who supplies false information to the
Registrar of firms, shall be liable to punishment with imprisonment upto
(n) Three months
(b) Six months
(c) Nine months
(d) Twelve months

Answers:

STATE WHETHER THE FOLLOWING ARE TRUE OR FALSE:

1. The registration of a firm is a condition precedent to the right to institute a suit.
2. If a partner refuses to sign the application for registration, then registration can be done only by dropping the name of such a partner from the firm.
3. Application for registration of the firm must be signed by all the partners.
4. A third party cannot file a suit against an unregistered firm.
5. A partner of an unregistered firm cannot sue for the dissolution of the firm.
6. Registration of the firm may be done before filing a suit against the third party.
7. Registration of the firm must be done at the time of formation of the firm.

Answers:

CA Foundation Business Laws Study Material Chapter 16 Nature of Partnership

INTRODUCTION

Prior to the Partnership Act, 1932 the law of partnership was covered by the Indian Contract Act, 1872. Due to rapid growth in trade and commerce and growing industrialization, a need was felt to
have a separate law on partnership. This led to the enactment of the Indian Partnership Act, 1932. It extends to the whole of India except the State of Jammu and Kashmir. It came into force on the 1st day of October, 1932, except section 69, which come into force on the 1st day of October, 1933.

The Partnership Act is not exhaustive. Where the Partnership Act is silent on any point, the general principles of the law of contract apply (section 3)

A. WHAT IS PARTNERSHIP?
Section 4 of the Indian Partnership Act, 1932, lays down that “Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all ”
Partnership v. Firm

• Persons who have entered into partnership with one another are called individually “Partners ” and collectively “a firm”.
• The name under which their business is carried on is called the “firm name”.
• A firm is a collective name of partners. It is a physical unit. It is concrete. While partnership is merely an abstract legal relation between the partners. Partnership is an invisible tie, which binds the partners together, and the firm is the visible form of those partners who are thus bound together.

The legal status of a firm. A firm is not a legal entity. It is merely a collective name for the individuals, who have entered into partnership. It does not have a separate legal entity distinct from the partners who compose it. As a firm is not a legal entity, there cannot be partnership of firms.

B. WHAT ARE THE ESSENTIAL ELEMENTS OF PARTNERSHIP?
All the following elements must be present if an association of persons is to be called a partnership:
1. Association of two or more persons
There must be at least two persons to form a partnership. As far as the maximum number of partners, in a firm is concerned, the Partnership Act is silent. However, Section 464 of the Indian Companies Act, 2013 lays down that where the firm is carrying any business, the number of partners should not exceed 50 (It can be increased upto 100). If the number of maximum partners exceeds this limit, the partnership becomes an illegal association of persons.

2. Agreement between persons
According to Section 5 of Partnership Act, the relation of partnership arises from contract and not from status. Thus, the members of a Hindu Joint Family carrying on a business, or the co-owners of a business are not ‘ partners’ because H U F and co-ownership are created by operation of law and not by contract. The agreement of partnership may be expressed or implied.

3. Business
Partnership can be formed only for the purpose of carrying on some business. Section 2(b) of Partnership Act says that the term ‘business’ includes every trade, occupation or profession.
Thus, an association created primarily for charitable, religious and social purposes are not regarded as partnership. Similarly, when two or more persons agree to share the income of a joint property, it does not amount to partnership such relationship is termed as co-ownership.

4. Sharing of Profits
The division of profits is an essential condition of the existence of a partnership. The sharing of profits is only a prima facie evidence of the existence of partnership, and this is not the conclusive test of it.

5. Business carried on by all or any of them acting for all. (Mutual Agency)
The underlying or cardinal principle which governs partnership is the mutual agency relationship amongst the partners. It means each partner is the agent of the firm as well as of the other partners. The business of the firm may be carried on by all the partners or by any of them acting for all. Thus, a partner is both an agent and a principal. He can bind the other partners by his acts and is also bound by the acts of the other partners. The law of partnership is regarded as an extension of the general law of agency.

“Partnership arises from contract and not from status”.
That partnership is the result of a contract and cannot arise by status is sufficiently emphasised by section 4 itself by use of the words “partnership is the relation between the persons who have agreed to share the profits of a business”. It is clear from the definition that the partnership is of contractual nature. It springs from an agreement. The same point is further stressed by the opening words of Section 5 that the relation of partnership arises from contract and not from status.

Thus if on the death of the sole proprietor of a business the legal heirs decide to continue to carry on the business, they cannot be called as partners because there is no agreement between them. Similarly members of Joint Hindu Family business carrying on a family business cannot be treated as partners because a person becomes the member of the business by birth and not by agreement. Sec.5
On the death of a partner, his legal heirs do not automatically become the partners of the firm. If the surviving partners agree to admit the legal heirs into partnership, then a fresh agreement to that effect will have to be made. Thus from the above it is clear that partnership always arises out of a contract and not from status.

Who may be partners of a firm?
According to the definition of partnership in section 4, a partnership is an agreement. All those persons who are competent to contract can become partners. As per section 11 of Contract Act, a person is competent to contract if he is a major, of sound mind and is not disqualified from contracting by any law. Thus a partner must fulfil the conditions of section 11. However, a minor u/s 30 of the Partnership Act, can be admitted to the benefits of the partnership firm with the consent of all the partners.

C. THE TESTS OF A TRUE PARTNERSHIP:
According to Sec. 4, there are 4 essential elements of partnership;

1. That it is the result of an agreement, between two or more persons.
2. That it is formed to carry on a business.
3. That the persons concerned agree to share the profits of the business.
4. That the business is to be carried on by all or any of them acting for all.

If there is an express agreement between them to share the profits of a business and the business is being carried on by all or any of the acting for all there will be no difficulty, in the light of provisions of sec. 4, in determining the existence or otherwise of partnership.
But the task becomes difficult when either there is no specific agreement or the agreement is such as does not specifically speak of partnership. In such a case, for testing the existence or otherwise of partnership relation, Section 6 has to be referred.

According to Sec. 6 in determining whether a group of persons is or is not a firm or whether a person is or is not a partner in a firm, regard shall be had to the real relation between the parties, as shown by all relevant facts taken together.
If all the relevant facts taken together show that all the four essential elements are present, the group of persons doing business together will be called a partnership. The tests of a true partnership were first laid down by the House of Lords in the case of Cox v. Hickman (1860) 8 II L.C. 268. In that case, a trader entered into arrangement with creditors to manage his business and to use the profits for paying off the creditors. It was held that the creditors were not partners of the business. Sec. 6 of the Partnership Act is a comprehensive restatement of the rule laid down in this case.

The relevant factors to be considered for determining whether there is partnership are the conduct of parties, the mode of doing business, who controls the property, the mode of keeping accounts, correspondence, the manner of distribution of profits, etc. of the four elements, the third element, viz., sharing of profits is important but not conclusive.
In the following cases there is no partnership even though there is sharing profits:

1. A creditor taking a share of profits in lieu of interest and part-payment of principal.
2. An employee getting a share of profits as remuneration.
3. Share of profits given to workers as bonus.
4. Share of profits given to the widow or children of deceased partners as annuity.
5. Share of profits given to a previous owner of the business as the consideration for the sale of the goodwill (Explanation 2 to Section 6).

In all the above cases the fourth essential element of partnership (viz., agency) is absent. A creditor or any employee, or the widow and children of deceased partners cannot bind the firm by any act done on behalf of the firm. Only those who have authority to bind the firm by their actions can be called partners. Thus, the most important test of partnership is agency and authority. This is the cardinal principle of partnership law. If this element of mutual agency is absent, then there will be no partnership.

KD Kamath & Co.:
It was held by the Supreme Court that the two essential conditions need to be satisfied in relation to the partnership:

1. There should be an agreement to share the profits as well as the losses of business, and
2. The business must be carried on by all or any of them acting for all, within the meaning of the definition of Partnership under section 4.

If the above-said conditions are satisfied and even if the exclusive power and control was vested in one partner or if the bank account can be operated by only one partner, then also there will be a partnership between the parties.

Satranjan Das Gupta v. Dasyran Murzamull (SC):
It was held that there was no partnership between the parties because of the following conditions:

1. Parties have not retained any record of ternis and conditions of the partnership.
2. Partnership business has maintained no accounts of its own, which would be open to inspection by both the parties.
3. No account of the partnership was opened with any bank.
4. No written intimation was conveyed to the Deputy Director of Procurement with respect to the newly created partnership.

D. DIFFERENCE BETWEEN PARTNERSHIP FIRM AND VARIOUS ENTITIES:
(A) Distinction between Partnership & Company
A company is a legal entity distinct from its shareholders. While a firm is a compendious name for all the partners. Both are forms of business organization:

Sr. no.	Company	Partnership Firm
1. Formation	A company comes into existence only after registration under the Companies Act.	A partnership is formed by mutual agree­ment of all the partners. Registration is not compulsory.
2. Legal Status	A company has a separate legal entity distinct from its members.	A partnership is collection of individuals. It does not have a separate legal entity.
3. Number of Members	(i) The minimum number of persons re­quired to form a company is 2 for pri­vate company (other than One Person Company) and 7 for public co.	(i) The minimum number of persons re­quired to form a partnership is 2.
	(ii) There is no maximum limit to the num­ber of members in the case of public company. A private company cannot have more than 200 members.	(ii) As per Companies Act, 2013 the num­ber of partners in a partnership firm carrying on any business should not exceed 50 persons.
4. Liability of Members	The liability of the members is limited.	The liability of partners is unlimited.
5. Agency of Members	A shareholder is not an agent of the company nor he is agent of other shareholders	Every partner is the agent of the firm and his partners for the purposes of the business of the firm.
6. Transfer of shares	Shares can be transferred without the con­sent of other members. In a private company there are restrictions on transfer of shares.	No partner can transfer his share or inter­est in the firm without the consent of his co-partners.
7. Stability	A company has perpetual succession. The death or insolvency of a member does not affects its existence.	A partnership comes to an end on the death and insolvency of its partners.
8. Management	There is separation of ownership from man­agement. The shareholders do not actually take part in the management of the company. The Board of Directors manage the company.	A partnership firm is managed by partners themselves.
9. Powers	The general powers of the company are regulated by Memorandum of Association. It is difficult to change the objects.	The partnership agreement (deed) regulates the mutual rights and duties of partners only.
10. Statutory Obligations	A company is required to comply with various statutory obligation. Such as compulsory au­dit, the holding of the meetings, the keeping of proper account books and registers, filing of annual returns etc.	A partnership firm is not required to comply with any such statutory obligation.
11. Interest	A member has no interest in the assets of the company.	A partner has an interest in assets of the partnership.

(B) Distinction between Partnership and Co-Ownership.
Co-ownership’s like joint purchasers, co-tenants, co-heirs are different from partnerships. Co-owners may share profits, by virtue of their status and not by virtue of a contract; One co-owner is not the agent of other co-owner; co-owner may transfer his shares to a stranger but a partner cannot do so.
The following are the points of distinction:

1. Formation
   Partnership always arises out of contract. Co-ownership may arise either from agreement or by the operation of law, such as by inheritance.
2. Sharing of profits
   In a partnership, profit must have to be shared, but in the case of a co-ownership, it does not necessarily involve sharing of profits.
3. Agency
   In a partnership, a partner is the agent of the other partners, but in the case of co-ownership, a co-owner is not the agent of other co-owners.
4. Lien
   A partner has a lien on the partnership property for outlay or expenses or a loan advanced to the firm, whereas a co-owner has no such lien.
5. Transfer of interest
   A share in the partnership may be transferred only with the consent of all other partners. Co-owner may transfer his interest in the property without the consent of other co-owners.

(C) Distinction between Partnership and Joint Hindu Family.
There are some common features in partnership and Joint Hindu Family. Both are forms of business organization and there is sharing of profits. The important points of distinction are :

1. Mode of creation
The partnership is created by agreement, whereas joint family is established by law. A person becomes a member of a joint family by birth.

2. Death
Death of a partner brings about dissolution of partnership. But the death of a member of a Joint Hindu Family does not give rise to dissolution of the family business. HUF has continuity till its partition.

3. Mutual Agency
In a partnership, every partner can bind the firm by his acts. However, in HUF, only the Karta has the authority to contract on behalf of HUF.

4. Management
In a joint family, only Karta has the right to manage the business. In partnership, all the partners have the right to take part in the management of the firm.

Note: the amendment in the Hindu Succession Act, 2005, entitled all adult members, whether male or female, to become coparceners in a HUF. They enjoy equal rights of inheritance due to this amendment, On 1st February, 2016, Justice Najmi Wazari, in a judgment allowed the eldest female coparcener of an HUF to become the Karta.

5. Liability
The liability of partners in a partnership concern is unlimited, joint and several. The liability of members of a joint Hindu family except the Karta is limited only to the extent of their share in the business of the family.

6. Calling for accounts
On the partition of joint family a member is not entitled to ask for the accounts of the family business. But a partner can bring a suit against the firm for account on the dissolution of the firm.

7. Registration
Registration of partnership is essential for the maintenance of suits both against the partners as well as outsider but a joint family business need not be registered at all.

8. Number of members
In a partnership the number of partners is limited to 50, but in the case of joint family business there is no such restriction.

9. Minor’s position
A minor can be a member of a Hindu joint family, but a minor cannot be a partner in a firm. However, he can be admitted to the benefits of partnership with the consent of all the partners.

10. Governing Law
A partnership is governed by the Indian Partnership Act, 1932, while joint Hindu family is governed by Hindu Law.

11. Share in Business
Share in a partnership is defined by an agreement between partners. However, in HUF, share of coparceners is not definite. His interest is fluctuation which is capable of being enlarged by deaths in the family and diminished by births.

(D) Partnership and Club or Society:
Partnership is different from a club or a society. In case of a club or a society, the two essential ingredients viz. intention to share profits and an intention to constitute one member as agent for another member are lacking.
The following are the points of distinction :
1. Definition/meaning
A club or a society is an association of persons formed with the object, but to promote some beneficial purposes such as improvement of health or providing recreation for the member ‘ etc. A partnership on the other hand is an association of persons also, but formed for earning profits from a business carried on by all or any one of them acting for all. These persons share the profit so earned as per their agreement.

2. Relationship
Persons forming a club/society are called members, while persons forming a partnership are called partners. Members of a club are not agents for the other member’s while a partner is an agent for other partners.

3. Interest in the property
A member of a club/society has no interest in the property of the club/society in the manner a partner has in the property of the firm.

4. Dissolution
A member leaving a club or a society shall not affect the existence of the club, while retirement of a partner from the firm does effect the existence of the firm.

(E) Partnership and Association
An association evolve due to social cause where there need not be a motive to earn and share profits. Further, there may not be a contract of mutual agency unlike as in case of a partnership.

TYPES OF PARTNERS
1. Active partner
An active partner is one who actually participates in the business of the firm. He is also known as actual or ostensible partner.

2. Dormant or sleeping partner
The dormant or sleeping partner joins the firm by agreement but do not take any active part in the business. The liabilities are same as of active partners.

3. Nominal partner
A nominal partner lends his name to the firm. The firm gets advantage of his reputation and name.

• He does not contribute capital nor does he participate in the partnership business.
• He is liable to the third parties for the act of the firm.

4. Sub partner
Where a partner agrees to share his profits in the firm with a third person, that third person is called a sub-partner. Thus a sub-partner is a transferee of a share of a partner’s interest in a firm. Suppose P, the owner of 25% share of firm transfers 10% of his share to Q. Q will be called a sub-partner.

• A sub-partnership is a partnership within a partnership
• A sub-partner has no obligations towards the firm and
• He does not carry any liability for the debts of the firm.
• He cannot bind the firm by his acts.
• A sub-partner does not get any right against the main firm to take part in or to interfere with the business of the firm or to examine the accounts of the firm. So long as main partnership continues, he is also not allowed to ask for the accounts of the firm. He has a right to
• claim the agreed share from the actual partner with whom he has entered into sub-partnership.
  The sub-partner does not become a partner in the original firm. Such partners are not counted for the maximum number of partners. Sub-Partner does not become a partner in the original firm. Such partners are not counted for the maximum number of partners.

5. Partner in Profits only
He is a partner who is entitled to share of profits only without being liable to any losses. He is liable to the third parties for all acts of the profits only.

6. Outgoing Partner
A partner who is leaving the firm and rest of the partners continue to carry on the business is called as a retiring partner.

7. Incoming Partner
Incoming partner is a partner who is admitted as a partner into an already existing firm. He should be admitted with the consent of all the existing partners.

8. Partner by estoppel or holding out:
The circumstances under which a person may be held liable for the acts of a firm. without being its partners.

Doctrine of ‘holding out’
Holding out means “to represent”. Strangers, who hold themselves out or represent themselves to be partners in a firm, whereby they induce others to give credit to the partnership are called “part- ners by holding out” or partnership by estoppel. The object of the above stated rule, obviously, is to prevent frauds to which creditors would otherwise be exposed.
The principle of ‘holding out’ has been recognised by Sec. 28 of the Indian Partnership Act.

“Anyone who by words spoken or written or by conduct represents himself, or knowing per-
mils himself to be represented, to be a partner in a firm, is liable as partner in that firm to any one who has on the faith of any such representation given credit to the firm, whether the person representing himself or represented to be a partner does or does not know that the representation has reached the person so giving credit”.

In order to hold a person liable as a partner-though in fact he may not be one on the basis of holding i out, it must be established:

1. That by words or conduct he represented himself to be a partner or knowingly permitted himself to be represented as a partner to anyone and,
2. That the other person acting on the faith of the representation gave credit to the firm.

Effects of holding out: The partner by estoppel or holding out becomes personally liable for the | acts of the firm. But he does not become a partner in the firm and is not entitled to any rights or I claim upon the firm. An outsider, who has given credit to the firm thinking him to be a partner can hold him liable as if he is a partner in that firm.
Example: A retired businessman of some repute assumed the honorary presidentship of the business j of certain persons who requested him for the same. Held, he was liable for the debts of the firm | to those who gave credit to the firm in the bona fide belief that he was a partner. [Lake v. Duke of Argyll, (1844) 6 Q.B. 477],

TYPES OF PARTNERSHIP
Partnership can be classified as below:
1. Partnership at will (sec. 7)
A partnership is called a partnership at will—

1. When the partnership is not for a fixed period of time and
2. When no provision is made as to when and how the partnership will come to an end.

Thus, in partnership at will there is no provision in the contract between the partners for the duration of their partnership. Secondly, there should be no provision in their contract for the determination [i.e. ending] of their partnership. If either of these provisions exist, it is not
partnership at will. The essence of partnership at will is that it is open to either partner to dissolve the partnership by giving notice in writing to all other partners.
The firm is then dissolved from the date mentioned in the notice as the date of dissolution, and if no such date is mentioned, then from the date of the communication of the notice (sec. 43)
If a partnership is to be dissolved by mutual agreement only, then it will not be a partnership at will.
Examples:

1. Anil and Mukesh agree to do trading of laptops for a period of 3 years. This partnership is to be terminated after the expiry of 3 years. This is not a partnership at will.
2. Ram, Laxman and Bharat agree to carry on a business in partnership subject to the condition that the partnership may be terminated by mutual agreement. In this case, a specific i mode is prescribe to determine the partnership, thus it is not a partnership at will.

2. Particular partnership (sec. 8)
A particular partnership is one which is formed for a particular adventure or a particular undertaking. Such a partnership is usually dissolved on the completion of the adventure or undertaking. For example, forming a partnership for construction of a bridge.

3. Partnership for a Fixed period
Where a provision is made by a contract for the duration of the partnership, the partnership is called as a partnership for a fixed period. Such partnership comes to an end after the expiry of the fixed period.

4. General Partnership
Where a partnership is constituted with respect to the business in general, it is called a general partnership. A general partnership is different from a particular partnership. In particular partnership, the liability of the partners extends only to that particular adventure or an undertaking but it is not so in case of a general partnership.

PARTNERSHIP PROPERTY (SECS. 14 & 15)

What constitutes a partnership property depends upon the agreement between the partners?
It is open to the partners to agree among themselves as to what is to be treated as the property of the firm and what is to be separate property of one or more partners. They can convert by mutual agreement, partnership property into separate property of an individual partner and vice versa. In the absence of any such agreement, the property of the firm according section 14, means—

1. property originally brought into the common stock of the firm by the partners,
2. property acquired in the course of the business with money belonging to the firm;
3. the goodwill of the firm.

Unless the contrary intention appears, property and rights and interests in property acquired with money belonging to the firm are deemed to have been acquired for the firm.
Application of the property of the firm (sec. 15)
Subj ect to contract between partners, the property of the firm shall be held and used by the partners exclusively for the purposes of the business.
Goodwill

1. Goodwill is not defined in the Partnership Act. Goodwill may be described as the advantage which is acquired by a firm from the connection it has built up with its customers and the reputation it has gained.
2. “The goodwill of business is the whole advantage of the reputation and connection formed with customers together with the circumstances whether of habit or otherwise, which tend to make such connection permanent. It represents in connection with any business of business product the value of attraction to customers which the name & reputation possesses.”
3. Goodwill is part of the property of the firm (Sec. 14).

Sale of goodwill after dissolution (sec. 55)
The rules relating to sale of goodwill upon dissolution of a firm are as follows:

1. In settling the accounts of a firm after dissolution, the goodwill shall, subject to contract between the partners be included in the assets, and it may be sold either separate or along with other property of the firm. [Sec. 55(1)],
2. The rights of the buyer and seller of the goodwill are as follows:
   1. Seller’s rights : After the sale of goodwill, the seller i.e., the partner of the dissolved firm,
      1. may carry on a business competing with that of the buyer of goodwill, and
      2. may advertise such business. [Sec. 55(2)].
         But subject to agreement between him and the buyer, the seller of goodwill that is, partners of the dissolved firm may not :
         1. use the firm name,
         2. represent themselves as carrying on the business of the old firm, and
         3. solicit the customers of the old firm. [Sec. 55(2)]
   2. Buyer’s rights- On the purchase of goodwill the buyer gets the (I) right to carry on the same business under the old name and (II) to represent himself in continuing the business and solicit former customers of the business and restrain the sellers of the goodwill from doing so.
3. But any partner of the dissolved firm may make an agreement with the buyer that such partner will not carry on a business similar to that of the firm within a specified period or within specified local limits, provided the restrictions imposed are reasonable. Sec. 55(3)

MULTIPLE CHOICE QUESTIONS:

1. What among the following is not an essential element of partnership:
(a) There must be an agreement entered into by all the persons concerned
( b) The agreement must be to share the profits of a business
(c) The business must start within six months from the date of agreement
(d) The business must be carried on by all or any one of them acting for all.

2. A Joint Hindu Family is created:
(a) By a contract
(b) By operation of law or status
(c) By registration
(d) By all the above mode

3. A club is the form of:
(a) Association not for profit
(b) Partnership
(c) Sole proprietorship
(d) Public company.

4. The Partnership Act, 1932
(a) Specifies the minimum number of partners in a firm
( b) Specifies the maximum number of partners in a firm
(c) Both (a) and (b)
(d) None of the above

5. The ceiling on maximum number of partners in a firm is laid down in:
(a) The Partnership Act, 1932
(b) The Indian Contract Act, 1872
(c) The Companies Act, 1956
(d) Central Government notification

6. The test of partnership is laid down in the following case:
(a) Cox v. Hickman
(b) Garner v. Murray
(c) Mohiribibi v. Dharmodas Ghosh
(d) None of the above

7. A partnership firm
(a) Is a legal person
(b) Is not a legal person
(c) Has a distinct legal personality
(d) None of the above

8. A partnership formed for the purpose of carrying on particular venture or undertaking is known as:
(a) Limited partnership
(b) Special partnership
(c) Joint Venture
(d) Particular partnership

9. The principle of is applicable to partners in a partnership:
(a) Uberrimae fidei/Utmost Good Faith
(b) Ultimate Trust
(c) Insurable Interest
(d) Blind Faith

10. Limited Liability partnership is a form of part-nership that:
(a) Is not possible
(b) Is allowed in certain circumstances in the Partnership Act, 1932
(c) Is now abolished
(d) Can be set up by LLP Act, 2008

11. A partnership for which no period or duration is fixed under the Indian Partnership Act is known as :
(a) Unlimited partnership
(b) Co-ownership
(c) Particular partnership
(d) Partnership at will

12. The essential elements of partnership does not include:
(a) Partnership should be registered
( b) There must bean agreement to share profits of a business.
(c) There must be mutual agency among partners.
(d) There must be an association of two or more persons.

13. To form a partnership, the minimum capital contribution should be:
(a) Rs. 1 lakh
(b) Rs. 10 lakh
(c) Rs. 1 crore
(d) There is no minimum limit.

14. Property of firm does not include:
(a) All property which the partners have originally brought into the common stock of the business
(b) Goodwill of the business
(c) Personal properties belonging to the partner
(d) Property acquired by the funds of the firm

15. Which of the parties may be admitted to the benefits of partnership?
(a) Person of unsound mind
(b) Minor
(c) Alien enemies
(d) An insolvent.

Answers:

STATE WHETHER THE FOLLOWING ARE TRUE OR FALSE:

1. Maximum number in a partnership firm is 50 members.
2. A partnership firm cannot be registered for carrying on any charitable activity.
3. The maximum number of partners in a partnership firm is specified in Companies Act, 2013.
4. Sharing of profits is the conclusive evidence of the existence of the partnership between the parties.
5. A minor can be a partner in a partnership firm.
6. A and B agree to buy 100 tins of ghee agreeing to share it between them. They are not partners.
7. If a partnership can be dissolved by the mutual agreement only, then it will be called as a partnership at will.
8. Forming a partnership for construction of a bridge is a type of particular partnership.
9. Goodwill is to be considered as a partnership property.
10. Prior to the enactment of Indian Partnership Act, 1932 the law relating to partnership was contained in the Indian Contract Act, 1872.
11. True test of partnership was first laid down in the case of Cox v. Hickman.
12. A sub-partner has a right to participate in the conduct of the business.
13. Law of partnership is an extension of the general law of guarantee.
14. Partnership firm has a separate legal entity.

Answers: