Category: CA Foundation

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:

CA Foundation Business Laws Study Material Chapter 3 Consideration

WHAT IS CONSIDERATION?

• Consideration is an essential element in a contract. It is the normal ‘badge of enforceability’. Subject to certain exceptions, an agreement is not enforceable unless each party to agreement gets something. This “something” is called consideration. It is also called as “quidpro quo”
• A promise without consideration is called nudum pactum. The law will not enforce a bare promise (nudumpactum) but only a bargain ie. promise supported by consideration.
• According to Pollock “Consideration is the price for which the promise of the other is bought”. Consideration is also defined as the ‘element of exchange in a contract’.
• In the English case, Curie v. Misa (1875) L.R Ex. 153 consideration was defined as “some right, interest, profit or benefit accruing to one party, or some forbearance, detriment loss or responsibility given, suffered or undertaken by the other”. In simple words, consideration is ‘a benefit to one party or a detriment to the other’.
• Section 2(d) of the Contract Act define consideration as follows:
  (a) “When, at the desire of the promisor,
  (b) the promisee or any other person
  (c) has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something,
  (d) such act or abstinence or promise is called a consideration for the promise. ”

ESSENTIALS OF VALID CONSIDERATION

1. Consideration must move at the desire of the promisor
The act or abstinence must be done at the desire of the promisor. If it is done at the instance of a third party or without the desire of the promisor, it is no consideration. In Durgaprasad v. Baldev 1880 3 ALL 221, the plaintiff, baldev, at the desire and request of the collector of the town expanded money in the construction of a market in the town. Subsequently the de-fendants, Durgaprasad & ors. Occupied the shops in the market. Since the plaintiff had spent money for the construction of the market, the defendants in consideration thereof, promised to pay to plaintiff, a commission on the articles sold through their (defendants) shops in that market. Defendants however, failed to pay the promised commission, the plaintiff brought an action to recover the promised commission. It was held that they were not bound to pay as it was without consideration and hence void)

However, consideration need not be to the benefit of the promisor. In Kedarnath v. Gorie Mohamed (1886) ILR 14 Cal 64, on the strength of the promise of the defendant to give donation the plaintiff started the construction of town hall. It was held that the defendant was liable to pay as the construction work started by the plaintiff was done at the desire of the defendant (the promisor) so to constitute consideration. However, if the plaintiff that is promisee did not incurred any liability on the promise of the donation then the defendant is not liable (Abdul Aziz v. Masum Ali, 1914).

2. Consideration may move from the promisee or any other person
Consideration may be supplied by the promisee or any other person. But the stranger to the consideration will be able to sue only if he is a party to the contract. The leading case is of Madras High Court in Chinnaya v. Ramaya (1882) 4 Mad 137.
An old lady (A) had a highly valued estate. She made a contract with her daughter (R) that the whole of the property shall be gifted to R if R agrees to pay annuity to C (C was the sister of A). R made a contract with C agreeing to pay C annuities. After the death of A, R stopped the payment of annuities on the ground that no consideration had passed from C to R and therefore agreement between C and R was void. The Court held that the consideration had been furnished to R (since the property was gifted to R at the desire of R). It was immaterial that A had furnished this consideration. As long as there is consideration in a contract, it is immaterial as to who has given this consideration.

3. Consideration may be an act or abstinence
A person may promise to do something or not to do something for a promise. To do or not to do something in return is consideration. If A promises to give Rs. 10,000 to B, if B stops smoking, it will be a good consideration.

4. Consideration may be past, present or future
When the consideration of one party was given before the date of the promise, it is said to be past. Past consideration means the consideration for a promise given by a party before the promise is made. It is the consideration given earlier by a party and the promise is made thereafter. Such a consideration given by a party must be at the desire of the promisor. Past voluntary services rendered by a party cannot be said to be the past consideration.
Example: A requests B to search out his lost cow. B searched out and deliver the cow to A. thereafter A promises to pay B Rs. 500 as a reward. Here, the efforts to B at the request of A constitutes a valid past consideration for the promise by A to pay 1500 to B. The consideration by B was given before the promise to pay is made by A.

Consideration which moves simultaneously with the promise is called present or executed consideration. Cash sales are good examples of present or executed consideration. The seller delivers the articles sold and the buyer simultaneously pays the price of them.
When the consideration is to move at a future date, it is called future or executory consideration.
Example: X promise to deliver to Y certain electric appliances as soon as he receives them from the wholeseller at Bombay and Y promises to pay Rs. 5,000 against the delivery of the articles. Here is future consideration which is to be performed by both the parties when supplies are received from Bombay.

5. Consideration need not he adequate
Consideration need not be adequate nor equivalent to promise.
Illustration: A agrees to sell his horse worth Rs. 1,000 for Rs. 10 only. The consideration is valid though inadequate, as there is something of value to be given by the buyer (Attached to Sec. 25).
However, Sec. 25 (Explanation 2) provides that inadequacy of the consideration may be taken into account by the Court in determining the question whether the consent of the promisor was freely given.

6. Consideration must be real and not illusory
Consideration must be real or of some value in the eyes of law. It should not be physically impossible or illegal or illusory for e.g. to make a dead man alive.
Instances of good consideration:

1. Forbearance to sue;
2. Compromise of disputed claims
3. Composition with creditors
4. To avoid disputes in future

7.Consideration must be lawful
Consideration given for an agreement must be lawful one. Consideration must not be illegal, immoral or opposed to public policy.

8. Consideration must not be a pre-existing obligation or duty.
Consideration must not be something, which a person is already bound by law to do. Discharging of pre-existing obligation is no consideration. A person may be bound to do something by law, e.g. to give evidence when called by the Courts. Performance of a legal obligation is no consideration for a promise and therefore the witness cannot demand money to give evidence.

‘NO CONSIDERATION NO CONTRACT’ – EXCEPTIONS TO THE RULE

The general rule is “an agreement made without consideration is void” (Opening words of Sec. 25).
Thus where A promises, for no consideration, to give to B Rs. 1000 this is a void agreement.
However, sec. 25 also mentions some exceptions to the general rule. These exceptions are given below:

A. Agreement made on account of natural love and affection [sec. 25(1)]
An agreement made without consideration is enforceable if it is

1. made on account of natural love and affection,
2. between parties standing in a near relation to each other,
   expressed in writing, and
3. registered under the law.

In Rajlakhi Debi v. Bhootnath Mukerjee case (1900) 4 Cal WN 488, a husband promised to pay to his wife, after constant quarrels between them, a fixed monthly amount for her maintenance and separate residence without any consideration. The promise was in writing and registered. When he refused to pay, the wife filed a case. She was not allowed anything by court on the ground that the j exception was not applicable as there was no natural love left between them.

B. Agreement to compensate for past voluntary service [sec. 25(2) ]
A promise made without consideration is also valid, if it is a promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor, or done something which the promisor was legally compellable to do. The following two situations are covered by this section:
(A) Voluntary Services:
When there is a voluntary act by one party and there is a subsequent promise to pay compensation to the former. E.g. A finds B’s purse. B promises to give him Rs. 500 this promise is enforceable.
(B) Legally Compellable Duty:
Another situation covered by the exception is where the promisee has done something for the promisor, “which the promisor was legally compellable to do”.
A subsequent promise to pay for such an act is enforceable. E.g. T supports the son of E F promises to pay the expenses to T. Here T has done something, which the promisor was legally bound to do. This is a valid contract.

C. Agreement to pay a time-barred debt [sec. 25(3)]
Where there is an agreement,

1. made in writing and
2. signed by the debtor, or by his authorised agent,
3. to pay wholly or in part a debt barred by the law of limitation, the agreement is valid even though it is not supported by any consideration.

A time barred debt is one which remains unpaid or unclaimed for a period of 3 years, hence it can-not be recovered under the Indian Limitation Act and therefore a promise to repay such a debt is without consideration, hence the importance of the present exception.

D. Completed Gift
Gift is transfer of property without consideration. In order to be valid a gift does not require consideration. As per Explanation 1 to section 25, gifts given by donor to donee are valid. Once a gift has been actually given, the donor cannot demand it back on the ground that there was no consideration.
Promise for a donation is not a gift. As such a promise for a donation is invalid for want of consid-eration.

E. Contract of Agency
Sec. 185 of the Contract Act lays down that no consideration is necessary to create an agency.

F. Bailment
Sec. 148 of the Contract Act lays down that no consideration is necessary in case of a gratuitous bailment.

G. Remission.
Sec. 63 of the Contract Act lays down that where a person agrees to receive less than what is due to him, such an agreement is said to be an agreement of remission. No consideration is required for a contract of remission.

H. Guarantee
Sec. 127 of the Contract Act lays down that under the contract of guarantee, no consideration is received by the surety, even then the contract of guarantee is valid.

I. Charity
If the promise undertakes the liability on the promise of the person to contribute to charity, there the contract shall be valid as held in Kedarnath v. Gorie Mohammad.

CAN A PERSON WHO IS NOT A PARTY TO A CONTRACT SUE UPON IT?

The doctrine of Privity of Contract: According to the doctrine of privity of contract only a party to a contract is entitled to enforce a right created by the contract. No one is entitled to or bound by the terms of a contract to which he is not an original party. A third party (stranger to contract) has no locus standi in a contract, he is debarred from interfering with the contractual rights or obligations of the parties. Only a person who is a party to a contract can sue on it. The doctrine of privity of contract prevent imposition of contractual obligations upon a person without his consent.
D bought tyres from Dunlop Rubber Co. and sold them to S, a sub-dealer, who agreed with D not to sell below Dunlop’s list price and to pay to Dunlop co. $ 5 as damages on every tyre he undersells. S sold two tyres at less that the list price, and thereupon, the Dunlop co. sued him for the breach. Will the Dunlop Co. succeed?
No. Dunlop Co. cannot claim the benefit of the contract as against S, a sub-dealer. There is no privicy of contract between the two.

Difference between the right of a stranger to a contract and of a stranger to the consideration.
A stranger to a contract, Le., one who is not a party to it, cannot file a suit to enforce it. A contract between P and Q cannot be enforced by R. But a stranger to the consideration can sue to enforce it provided that he is a party to the contract. A contract between P, Q and R whereby P pays money to Q for delivering goods to R can be enforced by R although he did not pay any part of the con-sideration.
Upon A’s marriage his father and father-in-law entered into a contract to contribute a certain sum of money to be given to A after his marriage. A’s father paid his contribution but his father-in-law failed to pay. Held: A could not sue his father-in-law since he (A) was a stranger to the contract [Tweddle v. Atkinson (1861) 1 B. & S. 393],

Exceptions – There are certain exceptions to the rule that a stranger to the contract cannot sue upon it.
They are as follows:
1. Beneficiaries in the case of trust
An agreement to create a trust can be enforced by the beneficiary (though he was not a party to the contract between the settlor and the trustee). S agrees to transfer certain properties to T to be held by T in trust for the benefit of B. B can enforce the agreement though he was not a party to the agreement.
In Khwaja Muhammad v. Hussaini Begum (1910) 32 ALL 410, A and B made an agreement that A’s son S, and B’s daughter D, would be married, both being minors at the time. In con-sideration of this marriage, A promised to B that he will give to D, his daughter-in-law, an amount in perpetuity as, what is a traditional payment, ‘kharcha-e-paan daan’. He even made his immovable property liable for the payment. After the marriage, S and D separated on ac-count of some quarrel. D filed a case against A for the recovery of the promised amount.
In spite of A’s argument that D was a stranger to his contract with B, court allowed D to recover the amount because A had specifically charged his immovable property for the liability. This charge did not amount to creation of a trust, but the seriousness of the situation was found to be similar to that of the trust.

2. Family settlement
When family disputes are settled by mutual agreement and the terms of settlement are writ¬ten down in a document it is called a Family Settlement. Such agreements can be enforced by members of the family who were not originally parties to the settlement.

3. Assignee of contract
In case of assignment of a contract, when the benefit under a contract has been assigned, the assignee can enforce the contract for e.g., S sell goods to B and is entitled to receive the price. S may by giving notice to B assign his right to receive the price in favour of third party X. X, the assignee, may then sue B for the price of goods. The assignee of an insurance policy can sue even though he was not party to it.

4. Provision for marriage or maintenance.
At the time of partition of property of a joint family, the male members may agree that a certain portion of property shall be kept aside for the benefit of, for example, some elderly person or the education and marriage of a female child. Such beneficiaries may not be party to the arrangement. But, they have been held entitled to enforce the agreement for their benefit (Sundararaja v. Lakshmi Ammal( 1914) 38 Mad 788).

5. Contracts entered into through an agent
The principal can enforce the contracts entered into by his agent provided the agent acts within the scope of his authority and in the name of the principal.

6. Acknowledgement
The person who becomes an agent of third party by acknowledgement or otherwise, can be sued by such third party. (If the promisor acknowledges his liability to the third person, then such a third person can file a suit to recover the benefit.)
Example: X gives to Y Rs. 5,000 again to be given to Z. Y informs Z that the holding the money for him. Later on, Y refuses to pay the money. Z is entitled to recover the money from Y (Lily v. Hays, 1886, HIER 1272).

7. Covenants attached with the land
In case of covenant running with the land, the person who purchases land with the notice that the owner of the land is bound by certain duties affecting the land, the covenant affecting the land may be enforced by the successor of the seller.

MULTIPLE CHOICE QUESTIONS:

1. If there is no consideration, then
(a) The agreement is void
(b) The agreement is valid
(c) The agreement is illegal
(d) The agreement is voidable

2. A valid consideration has the following essential elements :
(a) It must move at the desire of the promisor
(b) Consideration may be supplied by the promisee or any other person
( c) Consideration may be past, present or future
(d) All the above

3. The latin term “quidpro quo” refers to :
(a) Something in return
(b) Stranger to consideration
(c) Something sensible
(d) Something valuable

4. A promise to pay a time-barred debt must be :
(a) Oral
(b) Written and signed
(c) Registered
(d) Written and registered

5. A stranger to a consideration
(a) Can file a suit
(b) Cannot file a suit
(c) Can file, only with consent of court
(d) Is similar to stranger to a contract

6. A stranger to a contract
(a) Can file a suit
( b) Can file a suit only with permission of court
(c) Can file a suit, if contract is in writing
(d) Cannot file a suit

7. An agreement not supported by consideration is called :
(a) Consensus ad idem
(b) Ignoratia juris non execuset
(c) Ab initio
(d) Nudum Pactum

8. Past consideration means
(a) Money received in the past without making even a proposal
( b) The price which is more than the promisee’s expectation
(c) A past act done before the promise is made
(d) None of the above

9. In India, a person who is stranger to the consideration
(a) Can sue on the contract, if he is a party
(b) Cannot sue the contract
(c) Depends on the parties
(d) Depends on the circumstances

10. A promise to pay a time barred debt is enforceable, if some conditions are fulfilled. Which of the following conditions is not required?
(a) It must be signed by the promisor
(b) It must be definite and express
(c) It must be in writing
(d) It must be registered

11. X promised Y, a priest, to pay Rs. 10,000 as charity. The priest on X’s promise incurred certain liabilities towards the repairing of the temple to the extent of Rs. 7,500. Y, the priest, can recover from X
(a) Rs. 10,000
(b) Rs. 7,500
(c) Nothing
(d) Rs. 7,500 plus damages

Answers:

STATE WHETHER THE FOLLOWING ARE TRUE OR FALSE:

1. Inadequacy of consideration does not affect the validity of a contract.
2. A stranger to the contract can enforce the contract.
3. Consideration need not be material and may even be abstract.
4. Consideration must move simultaneously with promise.
5. A stranger to the consideration can enforce the contract.
6. Forbearance to sue or compromising disputed claim is no good consideration.
7. Consideration is essential for the validity of a contract in all cases.
8. Adequacy of consideration is essential for validity of a contract.
9. No consideration is required to create agency.
10. Past consideration is no consideration
11. According to the doctrine of “Privicy of contract”, a stranger to a contract, if he is beneficiary cannot enforce the contract.
12. Inadequacy of consideration cannot be taken into account by the court in determining whether the consent was given freely.
13. The manufacture of goods can enforce conditions imposed upon the dealer against the sub-dealer.
14. In the Indian Law, consideration must move from the promise only.
15. In discharge of the whole claim, a party to the contract agrees to accept a lesser amount than due, from the other party is a valid contract inspite of inadequate consideration.
16. Consideration may move even from a person who is not a party to the contract.
17. A promise to pay a time barred debt is not enforceable.

Answers:

CA Foundation Business Laws Study Material Chapter 2 Offer and Acceptance

INTRODUCTION

The offer or proposal is the starting point in the formation of a contract. The parties through negotiation & bargaining may strike a deal resulting into acceptance of offer, thereby creating a contract.
However in the modern times, due to enormous increase in the commercial transactions, ‘standard form’ of contracts is used. For example, the insurance company prints the terms of insurance contract in advance on a standard form and the insured person has to simply sign on the dotted lines indicating his acceptance. These terms are not open for discussions or bargaining and the other party has to either ‘take it or leave it’.
Such standard forms of contract containing the various conditions and terms are also called as ‘adhesive contracts’. These contracts have become the order of the day.

WHAT IS AN OFFER?

The Indian Contract Act uses the term proposal, instead of offer. However the words proposal and offer are synonymous and are used interchangeably. Section 2(a) of the Indian Contract Act defines a proposal as:

“When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence he is said to make a proposal”.

The definition of proposal has two elements:

1.  It must be an expression/declaration of the willingness to do or to abstain from doing something. For example, A says to B, will you buy my car for Rs. 2 lakh? This is a declaration j to sell the car.
2. This declaration is made with a view to obtain the assent of the other person to such act or abstinence. Thus a casual statement that “I may sell my Maruti car if I can get Rs. two lakh for it” is not a proposal, because this expression is not made with a view to obtain assent of the other person.

The person who makes the offer is called the ‘offeror’or ‘promisor’and the person to whom the offer is made is called the ‘offeree’or ‘promisee’. [Sec. 2(c).]

Illustration – The case of Harveyv. Facey( 1893, AC 552) illustrates nicely the concept of offer. Harvey sent a telegram to Facey “Will you sell us your Bumper Hall Pen? Telegraph lowest cash price”. Facey replied also by telegram, “Lowest price for Bumper Hall Pen pound 900”. Harvey immediately sent second telegram “We agree to buy Bumper Hall Pen for the sum of pound 900 asked by you”. There was no reply from Facey.
Hence, there was no concluded contract between Harvey and Facey. In the first telegram, Harvey asked two questions, first as to willingness to sell and second as to the lowest price. Facey answered only the second question and gave the lowest price. He reserved his answer to the willingness to sell. Thus he made no offer. The second telegram sent by Harvey was an offer to buy, but that was never accepted by Facey. Mere statement of lowest price at which the vendor would sell contains no implied promise to sell at that price to the person making the enquiry.

(A) Legal Rules Regarding Offer
1. An offer may be express or implied
When the offer is made in words, it is said to be express. An implied offer is one which is inferred from the act or conduct of the party or from the circumstances of the case. Sec. 9 states, “In so far as the proposal or acceptance of any promise is made in words the promise is said to be express. In so far as such proposal or acceptance is made otherwise than in words, the promise is said to be implied”.
Examples:

• When MSRTC bus runs on specific routes there is an implied offer to carry passengers for a certain fare.
• A weighing machine at the railway station is an implied offer to use the machine by inserting the requisite coin. A person who inserts the coin accepts the offer.

2. An offer may be specific or general
When an offer is made to a specific person or a group of specific persons (for example an offer to doctors), is called a specific offer. When the offer is addressed to public at large, it is called a general offer. A specific offer can be accepted by the specific person only, while a general offer can be accepted by any member of the general public.
Examples:

• A advertises that whosoever finds and brings his lost briefcase to him shall be paid Rs. 500; it is a general offer and when B finds out the briefcase and brings it to A, it amounts to acceptance of the offer by B.
• The Carbolic Smoke Ball Co., issued an advertisement in which the Company offered to pay pound 100 to any person who contracts influenza, after having used their smoke balls three times daily for two weeks, according to the printed direction. Mrs. Carlill, on the faith of the advertisement, bought and used the balls according to the directions, but nevertheless suffered from influenza. She sued the company for the promised reward. The company was held liable. [Carlill v. Carbolic Smoke Ball Co., (1893) 10 B 256]

3. An offer must be made with a view to create legal relationship
If the offer is made to create only a social or moral obligation, the obligation shall not be legally binding. Mere invitation to dinner is no offer. An offer to go to a picnic or an offer by a father to give a mobile to his son on passing’ C.A. foundation exams are the examples where there is no intention to create legal relationship.

4. Offer must be distinguished from an invitation to offer
Invitation to offer or invitation to treat means supply of information so that the negotiations can start and the other person can be moved to make an offer. It is an indication that the inviter is willing to enter into negotiations but is not yet prepared to be bound. A response to invitation to treat does not lead to an agreement. In fact it generates an offer.
Preliminary negotiations, or expressions of interest will be regarded as invitations to treat, rather than as offers. Thus, a sales person issuing a catalogue or price list informs the customers about the available products and their prices, makes an invitation to offer. Any per¬son desiring to buy any of those products will be making an offer, which may or may not be accepted.
The distinction between an offer and an invitation to offer depends upon the intention of the parties and this must be judged objectively.

OFFER	INVITATION TO OFFER
An offer is an indication by one person that he is prepared to enter into contract on certain terms.	An invitation to offer is a statement made by a person with a view to elicit response and to negotiate a deal, without expressing final willingness to contract.
When an offer is accepted it becomes a promise.	An invitation to offer, when responded generates an offer.

Examples:

• Catalogue of goods is not offer, but only an invitation for offer; so also statement of lowest price in answer to enquiry.
• Display of goods with price tags in a self-service shop is merely an invitation to offer, and when a customer picks up those goods and intends to buy them that amounts to an offer. The shop-keeper is free not to accept that offer.
• A letter from a prospective buyer asking for quotations from a merchant is an invitation for an offer.
• A tender notice does not amount to an offer; it is merely an invitation to contractors for making offers. An advertisement calling for tenders, therefore, is not a proposal within the meaning of the Contract Act. It only invites a proposal It is the submission of a tender which is in the nature of a proposal or an offer.
• A prospectus issued by a company to purchase its shares or debentures is an invitation to offer. Application for the shares amounts to offer to the company. Allotment of shares by the company amounts to acceptance of the offer.
• A menu card in a hotel is an invitation to offer. When the order for eatables is placed it amounts to offer.
• Newspaper advertisements are generally not offers. Thus a newspaper advertisement inviting applications for jobs is not an offer but an invitation to offer. However the newspaper advertisement may be drafted in such a way that they may constitute offer. For example an offer for reward published in a newspaper may constitute an offer and any person who performs the required act accepts the offer and creates an agreement.
• An advertisement inviting intending buyers of goods to come and make bids at the auction is merely invitation to offer. Each bid is an offer, and when a bid is accepted that amounts to acceptance of the offer and results in an agreement.
• A Railway time table is not an offer. The Railway time table usually contains a notice “Railways gives notice that they do not undertake that the trains will arrive at the time specified in the time tables nor will they be accountable for any loss, inconvenience or injury that may arise from the delays or detentions”.

5. An offer must be communicated to the offeree
There can be no acceptance of an offer until the communication of the offer has been made to the offeree.
Example:

• G’s nephew was missing from home. He sent his servant L in search of his nephew. After his servant had left, he announced a reward for anybody who would trace his nephew, L traced the nephew without knowing the announcement of the reward. When he came to know of the reward he claimed it. It was held that he could not recover the reward as the offer containing the reward was not communicated to him. (Lalmatt Shukla v. Gauri Dutt. 11 All j 489).

6. The terms of offer must be certain
The terms of the offer must be certain or capable of being made certain. They should not be vague or ambiguous. For example, A says to B “I will give you a reasonable price if you sell the car”. This is not an offer since it is vague. According to sec. 29, agreements the meaning of which is uncertain are void.

7. An offer may be conditional
An offer may be subject to terms and conditions. In such cases
(a) the conditions must be clearly communicated to the offeree,
(b) the conditions must be reasonable.
Examples:

• A landlord’s offer to rent his house only to a vegetarian family is a conditional offer.
• X delivered one new sari to a laundry for washing. On the back of the printed receipt it was stated that the customer would be entitle to recover only 15% of the market-price of the article in case of loss. The sari was lost owing to the negligence of the laundry. In a suit by X it was held that the term was unreasonable. Such a term would give a premium on dishonesty and is against the public interest. Lily White v. R. Munnuswami. AIR (1966) Mad 13.

8. An offer must not be “negative” in terms
An offer should not contain a term, the non-compliance of which would amount to acceptance. For example. X writes to Y “I shall buy your house for Rs. 20 lakh. If you do not reply I shall assume that you have accepted my offer” This is not a valid offer.

9. Two identical cross offers do not make a contract.
When two persons make an offer to each other on similar terms, without having the knowledge of the offer being made by the other side, it is known as cross offer. Such cross offer does not amount to acceptance of one’s offer by the other and therefore does not constitute a contract.

• E.g. X, by a letter, offers to sell his car to Y for Rs. one lakh. Y, by a letter, which crosses, X’s letter in the post, offers to buy it for Rs. one lakh. The offers are cross offers and no binding contract will arise. A contract can arise only when acceptance is given after
  the knowledge of the offer.

(B) Kinds of Offer
1. Express or implied Offer:
When the offer is made in words, it is said to be express. An implied offer is one which is inferred from the act or conduct of the party or from the circumstances of the case. Sec. 9 states. “Insofar as the proposal or acceptance of any promise is made in words the promise is said to be express. Insofar as such proposal or acceptance is made otherwise than in words, the promise is said to be implied”.

2. Specific or general Offer:
When an offer is’ made to a specific person or a group of specific persons (for example an offer to doctors), is called a specific offer: When the offer is addressed to public at large, it is called a general offer. A specific offer can be accepted by the specific person only, while a general offer can be accepted by any member of the general public.

3. Standing offer:
A standing offer is a continuous offer. It consists of an offer to supply goods as and when required during a certain period for a certain price. It usually takes the form of a tender. It creates a contract only when an order of specified quantity is given to the tenderer. Thus each order placed creates a separate contract. A Ltd. gives a standing offer to supply cement to Public Works Department (PWD) at Rs. 130 per cement bag for the period of one year with a minimum quantity of 1 lakh bags. This is a standing offer. PWD can place order anytime during the year and purchase cement for Rs. 130 per bag but they will have to buy minimum 1 lakh bags of cement.

4. Cross Offer:
When two persons make an offer to each other on similar terms, without having the knowledge of the offer being made by the other side, it is known as cross offer. Such cross offer does not amount to acceptance of one’s offer by the other and therefore does not constitute a contract.

5. Counter Offer:
It is necessary that the acceptance must match the offer. It must be a mirror image of the offer. If any alteration is made, or anything added, then this will be a counter offer, and will terminate the offer. A counter offer is an implied rejection of original offer. [Union of India v. Bahulal AIR 1968 Bombay 294]

Standard form of contracts:
In the modern times due to ever-increasing growth in trade & commerce, contracts are concluded in standardized forms. Organisation like LIC, GIC, Railways enter into thousands of contracts every day. It is not possible for them to draft separate contracts with every individual. They issue printed forms of contract, which contains a large number of terms and conditions in “fine print” which restrict and often exclude liability under the contract. The individual is bound to sign them whether he likes the terms or not. They are for him to take or leave, he cannot alter those terms or even discuss them. Previously the offerees of such printed forms were helpless against such giant organisations which availed the opportunity to exploit the weak individuals by imposing onerous terms upon them. However in the recent times, in order to protect the oppressed individuals the courts have evolved various modes of protection. In fact in England. The (English)Unfair Contract Terms Act, 1977 was enacted to protect the individuals from unreasonable terms in the printed contracts.

WHAT IS AN ACCEPTANCE?

A contract emerges from the acceptance of an offer. Section 2(b) states that “A proposal when accepted becomes a promise” and defines ‘acceptance’ as “When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted.” Acceptance converts the offer into a promise and then it is too late to remove it. Acceptance is to offer what a lighted match is to a train of gunpowder. It produces something which cannot be recalled or undone.

(A) Legal rules regarding a valid acceptance
1. Acceptance must be absolute and unqualified [Sec. 7(1)]
A conditional or a qualified acceptance is no acceptance at all. There should be 100% acceptance of the terms of the offer. The acceptance must match with the offer. It should be a mirror image of the offer. An acceptance with a variation is no acceptance but is a mere counter proposal, which the original offer or may accept or not.
Merret offered to sell his land to Neale for 280 pounds. Neale accepted the offer and enclosed a cheque for 80 pounds only and promised to pay the balance 200 pounds by monthly instalments of 50 pounds each. Held there was no acceptance. [Neale v. Merret (1930) W.N. 189]

2. Acceptance must be given only by the person to whom the offer is made
In the case of specific offer, it can be accepted only by that person to whom it is made. (Boulton v. Jones (1857) ER 232). In the case of a general offer, it can be accepted by any one by complying with the terms of the offer {Carlill v. Carbolic Smoke Ball Co. (1893)}

3. Acceptance may be expressed or given by conduct.
Acceptance may be expressed in words, spoken or written or it may be implied by conduct.

4. Acceptance must be expressed in some usual and reasonable manner. [Sec. 7(2)]
(a) Acceptance in a prescribed manner. If the offeror prescribes a particular method or type of acceptance, it should be given in that manner. Ex: If the offeror insists that acceptance should be given by telegram, then that method should be followed.
(b) Acceptance in usual and reasonable rpannenli the offeror does not prescribe any particular method of acceptance in that case according to sec. 7(2), the acceptance must be expressed in some usual and reasonable manner.
(c) Consequences of not following the prescribed manner. If the offeree fails to follow the prescribed mode of acceptance, the offeror may accept or reject such acceptance. If the offeror wants to reject it, he must inform the acceptor within a reasonable time that he is not bound by acceptance because it is not in the prescribed manner. If he does not inform the offeree, he is deemed to have accepted the acceptance although it is not in the desired manner. For example; X offers to buy house from Y at a certain price asks Y to send a telegram, if he accepts Y writes a letter accepting the offer. X may insist on a telegram from Y; but if X does not insist, the acceptance is valid.

5. Acceptance must be communicated by the acceptor.
Acceptance is not complete unless and until it is communicated to the offeror (Pawell v. Lee, 1908). Mental acceptance is no acceptance. But the party entitled to get the communication of acceptance can waive that right expressly or impliedly. In the case of unilateral contracts such waiver can generally be assumed. For e.g. a reward for finding a lost bag. If the agreement is signed and kept in the drawer instead of sending it to the other party then there is no acceptance (Brogden v. Metropolitan Railway Co.)
When communication of acceptance not necessary? (Exceptions to the rule that acceptance must be communicated.)
Acceptance can be by conduct. Where an offer takes the form of a promise to pay money in return for an act, the performance of that act will constitute acceptance. For example when a trader sends goods on receiving an order from a customer it is a case of acceptance by conduct. Sec. 8 provides that “performance of the conditions of a proposal is an acceptance of the proposal Similarly the acceptance of any consideration for a reciprocal promise is also an acceptance of the proposal ”

Thus communication of acceptance is not necessary in the following cases: (i.e., acceptance is implied)

1. By performance of conditions:!! the offeree merely performs the conditions of an offer, he will be taken to have accepted it. (Carlill v. Carbolic Smoke Ball Co. (1893) 1 Q.B. 269).
2. By acceptance of consideration: Sometimes offeror may send consideration with offer. If the offeree accepts the consideration, he accepts the offer. A sends a cheque of X one lac to B and offers to purchase his car for X one lac. If B encashes the cheque, he accepts the offer of A.
3. By accepting a benefit or service : Where offeree enjoys or avails the benefits of goods or services.
4. By acceptance of an offer by conduct : E.g. of trader sending goods on receiving an order
5. By waiver of the communication of acceptance : Where the party entitled to get the communication of acceptance waives-the right.

In the modern world contract may well be made by much more sophisticated means of communication than by the post. Telexes, faxes, and e-mail are all widely used, in addition to letters and telephones, as means of transmitting offers, counter-offer, acceptance and rejections. If one of these methods is used for an acceptance, when is it effective? (It takes effect at the point of receipt as held in Enstores Ltd. v. Miles Far East Corporation)

6. Acceptance must be given within a reasonable time and before the offer lapses and or is revoked.
The acceptance must be made when the offer is in force. If any time limit is prescribed in the offer, it should be accepted within that prescribed time limit. However if no time limit is  prescribed, it must be accepted within a reasonable time. What is reasonable time depends upon the facts of each case.

7. Acceptance must succeed the offer.
There is an offer first followed by its acceptance to create a contract. There can be no acceptance without offer. Acceptance in ignorance of the offer is no acceptance.

8. Rejected offers can be accepted only, if renewed
Once an offer is rejected it is dead. Only when the offer is renewed, that it can be accepted.

9. Acceptance cannot be presumed from silence
The acceptance of an offer cannot be taken as implied from the silence of the offeree. A mere silence or inaction of the offeree not evidenced by words or conduct, is in the eye of law no acceptance at all. For example, in Fellkouse v. Bindley (1862) F offered to buy B’s horse and added that if B did not reply within 2 weeks, F would be taken to have become the owner of the horse. The court held that no man can accept an offer by remaining silent.

COMMUNICATION OF OFFER AND ACCEPTANCE

When the contracting parties are face to face and negotiate in person there is instantaneous communication of offer and acceptance. But where services of the post offices are utilised for communication the following rules as laid down in sections 4 and 5 will apply.
Communication of offer (Sec. 4) :
The communication of offer is complete when it comes to the knowledge of the person to whom it is made.

Communication of acceptance (Sec. 4) :
The communication of acceptance has two aspects viz., as against the proposer and as against the acceptor. The communication of an acceptance is complete –

1. as AGAINST THE PROPOSER, when it is put in a course of transmission to him so as to be out of the power of the acceptor, and
2. as AGAINST THE ACCEPTOR, WHEN it comes to the knowledge of the proposer Le., when the letter of acceptance is received by the proposer.

Illustration : B accepts A’s proposal by a letter sent by post on 16th instant. The letter reaches A on 20th instant. The communication of acceptance is complete, as against A (proposer) when the letter is posted, i.e., 16th as against B on 20th Le., when the letter is received by A.
The acceptor becomes bound only when his acceptance comes to the knowledge of the proposer.
After the posting of the acceptance and before its delivery to the proposer, the acceptor has the right to rescind the contract by revoking his acceptance by speedier means.

Communication of revocation when complete Sec. 4

1. as against the person who makes it: When it is put into a course of transmission to the person to whom it is made, so as to be out of the power of the person who makes it.
2. as against the person to whom it is made: When it comes to his knowledge.

Illustration: A revokes his proposal by telegram. The revocation is complete as against A when the telegram is despatched. It is complete as against B when B receives it. B revokes his acceptance by telegram. B’s revocation is complete as against B when the telegram is despatched and against. A when it reaches him.

REVOCATION OF OFFER AND ACCEPTANCE: SEC. 5

Revocation of a proposal: It may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards (Sec. 5). This means that offer can be revoked at any time before the letter of acceptance is posted by the acceptor.
Revocation of an acceptance: It may be revoked a(any time before the communication of its acceptance is complete as against the acceptor, but not afterwards (Sec. 5). This means that an acceptance can be revoked at any time before the letter of acceptance is actually received by the proposer.

2.5 REVOCATION – HOW MADE/LAPSE OF OFFER: SEC. 6

An offer lapses or comes to an end

1. By notice of revocation.Tf the offeror gives notice of revocation to the other party, i.e., expressly withdraws the offer.
2. By passage of time:By passage of a stipulated time and if no time is stipulated, it lapses by the expiry of a reasonable time.
3. By death or insanity: By death or insanity of the offeror if the fact of the death or insanity is known to acceptor.
4. By failure of the acceptor to fulfil a condition precedent to acceptance.
5. By counter offer: An offer is revoked if a counter offer is made to it. A response to an offer which introduces new terms or conditions is a counter offer.
6. By rejection. When an offer is rejected it is dead and cannot be revived by its subsequent acceptance.

MULTIPLE CHOICE QUESTIONS:

1. Partial acceptance of offer result in
(a) counter offer
(b) unqualified acceptance
(c) binding contract
(d) none of the above

2. A tender is –
(a) an offer
(b) invitation to an offer
(c) acceptance of offer
(d) none of the above

3. Death or insanity of the proposer will revoke the proposal –
(a) Automatically.
( b) If the fact of the death or insanity is known to the offeree.
(c) The knowledge of death or insanity is irrelevant.
(d) Only if the family members of the proposer informs the offeree.

4. When counter offer is given, the original offer –
(a) Lapses.
(b) Remains valid.
(c) Is accepted and becomes a contract.
(d) The original offer can also be accepted.

5. For an acceptance to be valid, it must be –
(a) Partial & qualified.
(b) Absolute & unqualified.
(c) Partial & unqualified.
(d) Absolute & qualified.

6. Acceptance takes place as against the proposer, when –
(a) When the letter of acceptance is posted by the acceptor.
(b) When the letter of acceptance is received by the proposer.
(c) When the offeree, writes the letter of acceptance, but doesn’t post it.
(d) All the above.

7. An advertisement for sale goods by auction –
(a) Amounts to an invitation to offer.
(b) Amounts to an offer to hold such sale.
(c) Amounts to an implied offer.
(d) Amount to a general offer.

8. Communication of offer is complete when –
(a) It comes to the knowledge of the offeree.
(b) It is posted to the offeree.
(c) When the offeror writes the letter but does not post it.
(d) None of the above

9. An acceptance will be revoked at any time before the communication of acceptance is complete against the acceptor, but not afterwards –
(a) True
(b) False
(c) Acceptance once given cannot be revoked.
(d) Acceptance can be revoked at any time.

10. Acceptance once given cannot be revoked.
(a) True
(b) False
(c) Incomplete information.
(d) None of the above.

11. A tender and a bid at an auction sale are-
(a) Not offers.
(b) Offers.
(c) Acceptance of the offer.
(d) Invitation to offer.

12. A quotation is:
(a) Not offer.
(b) Offer.
(c) Acceptance of the offer.
(d) Invitation to offer.

13. If the offeree does not accept the offer according to the mode prescribed, then –
(a) The offeror may accept or reject such acceptance.
(b) The offer lapses automatically.
(c) It is a counter offer.
(d) Offeree commits a breach of contract.

14. Communication of offer is complete when –
(a) The letter is posted to the offeree.
(b) The letter is received by the offeree.
( c) The offer is accepted by the person to whom it is made.
(d) It comes to the knowledge of the offeror that the letter has been received by the offeree.

15. A bid at an auction sale is
(a) An implied offer to buy
(b) An express offer to buy
(c) An Invitation to offer to buy
(d) An invitation to come to bid

16. When the offers made by two persons to each other containing similar terms of bargain cross each other in post, they are known as
(a) Cross offers
(h) Implied offers
(c) Direct offers
(d) Expressed offers

17. When the proposal or acceptance is made otherwise than words, the promise is said to be
(a) Expressed
(b) Implied
(c) Accepted
(d) Rejected

18. The communication of an acceptance is complete as against the acceptor
(a) When it is posted by him
(b) When it is put in the course of transmission
(c) When it comes to the knowledge of the proposer
(d) None of these

19. Goods displayed in a shop window with a price label will amount to
(a) Offer
(b) Invitation to offer
(c) Acceptance of offer
(d) None of these

20. A promisee is
(a) A person who makes a promise
(b) A person who monitors the statement of intentions of two parties
(c) A person to whom the promise is made
(d) None of these

21. The person making the proposal is called
(a) Promisor
(b) Promise
(c) Participator
(d) None of these

22. Acceptance in ignorance of the offer is
(a) Valid
(b) Invalid
(c) Void
(d) Voidable

23. When the contract is perfectly valid in its sub¬stance but which cannot be enforced because of certain technical defects. This is called a
(a) Unilateral contract
(b) Bilateral contract
(c) Unenforceable contract
(d) Void contract

24. Is telegraphing lowest price on request a mere invitation for an offer?
(a) Yes
(b) No
(c) Not in normal cases
(d) None of these

25. In the case of proposal and acceptance by telephone conversation, contract is made at place where ………….. is received.
(a) Offer
(b) Consideration
(c) Proposal
(d) Acceptance

26. An offer does not lapse if the
(a) Offeror dies before acceptance
(b) The offeree dies before acceptance
(c) Acceptance is made by the offeree in igno¬rance of the death of the offeror
(d) Acceptance is made by the offeree with knowledge of the death of the offeror

27. When a person without expressing his final willingness, proposes certain terms on which he is willing to negotiate, he makes
(a) Counter offer
(b) Standing offer
(c) Offer
(d) Invitation to treat

28. A subscribed to the “Daily News” for one year. After the expiry of his subscription, the newspaper company continued to send him the paper by mail for 3 years. A continued to use the paper but failed to pay the bills.
(a) A is not liable to pay as non-renewal of the subscription is akin to non-acceptance
( b) Non-payment of bills by A can be construed as non-acceptance of the offer made by sending the newspapers
(c) A is bound to pay as his continued use of the newspaper was an acceptance of the . offer made by sending the newspaper
(d) A fresh contract is to be entered into after the lapse of the first year

29. Which one of the following falls into the category of offer?
(a) Newspaper advertisement regarding a sale
(b) Display of goods by a shopkeeper in his window with prices marked on them
(c) An advertisement for a concert
(d) Announcement of reward to the public

30. The big Corporations like LIC supply ready forms of Contract with all conditions printed; the offeree has either to take all or let go. Such contracts are known as
(a) Company contracts
(b) Corporation contracts
(c) Government
(d) Standard form contracts

31. A dress is displayed in the showroom of a shop with a price tag attached to the dress. A buyer interested in the dress and ready to pay the price mentioned in the tag approached the shopkeeper for purchasing the dress.
(a) The shopkeeper can refuse to sell the dress
(b) The shopkeeper cannot refuse to sell the dress as the buyer has accepted the offer
(c) In case of refusal, the shopkeeper will be liable for breach of contract
(d) The shopkeeper cannot refuse to sell the dress but may charge higher price

32. In one auction sale, ‘X’ is the highest bidder. The auctioneer accepts the offers not by speaking but by striking the hammer on the table. This amounts to
(a) Express acceptance
(b) Implied acceptance
(c) Future acceptance
(d) No acceptance

Answers:

STATE WHETHER THE FOLLOWING ARE TRUE OR FALSE:

1. Death or insanity of the proposer automatically revokes the proposal.
2. Crossing of letters of offer in the post for the sale & purchase of the same article constitute a valid agreement.
3. A proposal may be revoked by the proposer before the posting of the letter of acceptance by the acceptor.
4. If an offer is made in the form of a promise in return for an act, the performance of that act, even without any communication thereof, is to be treated as an acceptance of the offer.
5. Counter offer to an offer does not make the original offer lapse.
6. Acceptance can be made even without the knowledge of the offer.
7. A counter offer proposing different terms amount to rejection of the proposal.
8. When the promisee does not accept the offer of performance the promisor is not responsible for non-performance.
9. For an acceptance to be valid it should not be partial or qualified.
10. Acceptance takes place as against the proposer, when a letter is posted, not when it is received.
11. An advertisement for sale of goods by auction amounts to an offer to hold such sale.
12. Communication of offer is complete when it is posted to the offeree.
13. Performance of conditions of a proposal is an acceptance of the proposal.
14. An acceptance will be revoked at any time before the communication of the acceptance is complete against the acceptor, but not afterwards.
15. An offer need not be made to an ascertained person.
16. An agreement to agree in future upon terms to be settled afterwards between the parties is valid.
17. Acceptance once given cannot be revoked.
18. A tender and a bid at an auction sale are not offers.
19. A quotation and an answer to a question or inquiry are not offers.
20. A contract is formed when the acceptor has done something to signify his intention to accept, not when he has made to his mind to do so.
21. If the offeree does not accept the offer according to the mode prescribed by the offeror, the offer does not lapse automatically.
22. Communication of an offer is complete when the letter is posted though it has not reached the person to whom the offer is made.
23. Where the mode of acceptance is prescribed in the proposal, it need not be accepted in that manner.
24. A proposal when accepted becomes a contract.
25. Acceptance takes place when and where the message is received.

Answers:

CA Foundation Business Laws Study Material Chapter 15 Auction Sale

A sale by auction is a public sale where various intending buyers offer bids for the goods and try to outbid each other. Ultimately, the goods are sold to the highest bidder. A bid by the buyer is an offer and it is said to be accepted when the auctioneer announces its completion by the fall of the hammer or in any other customary manner. The words ‘any other customary manner’, takes into account all the manners which may be prevalent to denote acceptance in an auction sale. It may be by shouting one, two, three; or shouting going, going, gone, etc.
A person may himself sell his own goods by auction, or he may appoint an agent, known as auc¬tioneer, to conduct the sale on his behalf.

15.1	Rules of Auction Sale (Sec. 64)	Following rules have been laid down to regulate the sales by auction:
	1. Sale of goods in lots	Where goods are put up for sale in lots, each lot is prima facie deemed to be the subject of a separate contract of sale.
	2. Completion of Sale	An auction sale is complete when the auctioneer announces its completion by the fall of the hammer or in other customary manner, and until then the bidder has the right to revoke or retract his bid. If before the fall of the hammer the bidder withdraws, his security amount cannot be forfeited. But if he does so after the fall of the hammer, it amounts to a breach of the contract and his security amount will be liable to be forfeited. If the conditions of sec. 20, namely, the goods should be specific and in a deliverable state, are satisfied, the property in such goods passes to the buyer at the completion of the contract (by the fall of the hammer)
	3. Seller’s Right to Bid	Unless the auction is notified to be subject to a right to bid on behalf of the seller, it is not lawful – (i) for the seller to bid himself or to employ any person to bid at such sale on his behalf and (ii) for the auctioneer to, knowingly take any bid from the seller or any such person. Any contravention of this rule renders the sale as fraudulent.
	4. Pretended bi­ding	If the seller makes use of pretended bidding to raise the price, the sale is voidable at the option of the buyer. However, the seller may expressly reserve the right to bid at the auction and in such case, the seller or any one person on his behalf may bid at the auction. But there should be only one person on behalf of the seller; if there are more than one person, the intention is to raise the price and is fraudulent.        .
	5. Reserve Price	The seller may notify that the auction will be subject to a reserve or upset price, that is, the price below which the auctioneer will not sell. In such a case the auctioneer is not bound to accept the highest bid unless it reaches the reserve price. Further the property in the goods, even if they are specific, will not pass if the highest bid falls short.of the reserve price.
	6. Knock-out agreement	Knock-out agreement is a f arm of combination of buyers to prevent competition among themselves at an auction sale. They agree that they will not raise the bid against each other and only one of them will bid of the auction. When the goods have been purchased they will share the profits. Prima facie, a knock-out agreement is not illegal. However, if the intention of the parties to the agreement is to defraud third party, the third party can claim the damages. The seller may protect his interests against such agreements by reserving his right to bid at the auction, or by fixing a reserved price.
15.2	Upset price	“Upset price” is the Scottish equivalent of “reserved price”.
15.3	Damping	It is an unlawful act by which an intending purchaser is prevented from bidding or raising the price at an auction sale. The damping is usually done in any of the following ways : (i)    By pointing out defects in the goods put up in an auction sale. (ii)  By taking the intending buyers away from the place of auction by some other device. Damping is illegal and the auctioneer can withdraw the goods from auction sale in case he observes that the damping is being resorted to Puffer-A person who is appointed by the seller to raise the price by fictitious bids.
15.4	Incidence of Taxation [Sec. 64A]	♦     Where after a contract has been made but before it has been performed, tax revision takes place, the parties would become entitled to readjust the price of the goods accordingly. Taxes covered are customs or goods and service tax on the goods and any tax payable on manufacture, sale or purchase of goods. ♦      The buyer would have to be pay the increased price if the tax increases and would be entitled to the benefit of reduction if taxes are curtailed. ♦      Thus, the seller may add the increased taxes in the price. ♦     The effect of the provision can, however, is excluded by an agreement to the contrary. It is open to the parties to stipulate anything about the incidence of taxation.

MULTIPLE CHOICE QUESTIONS:

1. An auction sale is complete on the –
(a) delivery of goods
(b) payment of price
(c) fall of hammer
(d) None of the above

2. In the case of sale by auction, where goods are put for sale in lots, each lot is prima facie the subject of—
(a) a single contract of sale
(b) a separate contract of sale
(c) either (a) or (b)
(d) both (a) and (b)

3. Where a right to bid at the auction has been expressly reserved by the seller, the seller can depute —
(a) not more than one agent to bid on his behalf
(b) not more than two agents to bid on his behalf
(c) not more than three agents to bid on his behalf
(d) any number of agents to bid on his behalf

4. Where the sale is not notified to be subject to a right to bid on behalf of seller, it shall not be lawful for the seller—
(a) to bid for himself
(b) to employ any person to bid at such sale
(c) either (a) or (b)
(d) neither (a) nor (b)

5. X purchased a VCD at a public auction. Neither Auctioneer nor X knew at that time that the VCD was a stolen property. In such case, the true owner can —
(a) recover the goods from X
(b) sue the Auctioneer for fraud
(c) both (a) and (b)
(d) either (a) or (b)

6. At an auction sale, the bidder can withdraw his bid –
(a) before fall of hammer
(b) at any time during auction
(c) before payment of price
(d) cannot withdraw bid

7. An act by which an intending bidder is discour¬aged or dissuaded from bidding in the auction sale is called
(a) Puffer
(b) Damping
(c) Dumping
(d) knockout

8. is a form of combination of buyers to prevent competition among themselves at an auction sale.
(a) Knock-out agreement
(.b) monopoly agreement
(c) oligopoly agreement
(d) puffing agreement

9. In pretended bidding, sale is
(a) voidable at the option of the seller
(b) valid
(c) voidable at the option of the buyer
(d) illegal

10. Unless excluded by an agreement to the contrary, where after a contract has been made but before it has been performed, excise duty is increased:—
(a) The buyer would have to pay increased price
(b) The seller cannot charge increased price
(c) The seller can charge increased price
(d) Both ‘a’ and ‘c’

11. Any imposition, increase, decrease or remission of (z) Customs or Excise Duty on Goods and (z’z) Tax on the Sale or Purchase of Goods, subsequent to the sale, in case of decrease of tax, shall be deducted from the contract price by the Buyer and he shall not be liable to pay or be sued for such deduction.
(a) True
(b) Depends on the contract
(c) False
(d) Both ‘a’ and ‘b’

Answers:

IS STATE WHETHER THE FOLLOWING ARE TRUE OR FALSE

1. In case of sale by auction, a bid can be recalled at any time before the fall of hammer.
2. An auctioneer shall be liable for damages if the auctioneer had no authority to sell the goods.
3. If the buyer’s possession is disturbed by the auctioneer or the seller then buyer has a right to claim compensation.

Answers:

CA Foundation Business Laws Study Material Chapter 14 Rights of Buyer & Rights of Unpaid Seller

RIGHTS OF BUYER

A. GENERAL RIGHTS

1. Right to have delivery as per contracts (Secs. 31 & 32).
2. Right to reject the goods if they are delivered in wrong quantities (Sec. 37).
3. Right to refuse delivery of goods by instalments (Sec. 38)
4. Right to notice of shipment in case the goods are sent by sea so that he may get the goods insured (Sec. 39).
5. Right to examine goods for the purpose of ascertaining whether they are in conformity with the contract (Sec. 41)

B. RIGHTS OF A BUYER AGAINST THE SELLER FOR BREACH OF CONTRACT
A seller may breach the contract in any of the following ways:

1. He fails to deliver the goods at the time or in the manner called for in the contract
2. He repudiates the contract.
3. He delivers non-conforming goods and the buyer rightfully rejects the goods or properly revokes acceptance.

A buyer has the following rights against the seller for breach of contract under the Sale of Goods Act.
1. Suit for non-delivery [Sec. 57]
Where the seller wrongfully neglects or refuses to deliver the goods to the buyer, the buyer may sure the seller for damages for non-delivery. This remedy would be available even if the property has passed to the buyer.

2. Specific performance [Sec. 58]
Where property has passed to the buyer, he also can exercise another right, viz., a right to sue for specific performance and its limits are regulated by the Specific Relief Act. In such cases the court may in its discretion grant a decree ordering the seller to deliver those specific or ascertained goods which formed the subject-matter of the contract. It should be noted that the remedy is discretionary and will only be granted if the damages are not an adequate remedy or the goods are unique, e.g., rare book, a picture or a rare piece of jewellery.

3. Breach of Warranty [Sec. 59]
Where there is a breach of warranty by the seller (Le. defects in the goods delivered) or where the buyer elects or is compelled to treat any breach of condition on the part of the seller as a breach of warranty, the buyer has the following remedies:

1. He may claim a deduction from the price.
2. He may refuse to pay the price altogether, if the loss equals the price.
3. If the loss exceeds the price, he may not only refuse to pay the price, but also claim the excess, or
4. He may sue the seller for damages for the breach of warranty in addition to the right to claim diminution or extinction of the price.

4. Suit for Anticipatory breach [Sec. 60]
The buyer has the right to sue the seller for damages for anticipatory breach of contract Section 60 lays down that where the seller repudiates the contracts before the date of delivery, the buyer may either treat the contract has subsisting and wait till the date of delivery or he may treat the contract as rescinded and sue for damages for the breach.

5. Suit for interest and recovery of the price [Sec. 61]
If the buyer has already paid the price and the seller fails to deliver the goods, the buyer is entitled to file a suit for the refund of the price. In such a suit, the buyer may also claim interest or special damages from the defaulting seller. In the absence of any other contract to the contrary, the court may award interest at such rate as it thinks fit on the amount of price from the date on which the payment was made.

RIGHTS OF THE UNPAID SELLER

1. Unpaid seller defined [Sec. 45]
2. Unpaid sellers’ rights [Sec. 46]
   1. Unpaid sellers ’ lien [Secs. 47 to 49]
   2. Stoppage in transit [Secs. 50 to 52]
   3. Transfer by buyer and seller [Secs. 53 & 54]
3. Suit for breach of the contract [Secs. 55 to 61 ]

A. Who is an unpaid seller?
The seller is deemed to be an unpaid seller under any of the following circumstances:
(a) If the whole of the purchase price is not paid on the due date.
(b) If payment is made in the form of a negotiable instrument. (Bill of exchange or cheque) and the instrument is dishonoured.

B. Unpaid Sellers’ Rights [Sec. 46] 
Rights of an unpaid seller can be listed as follows:

1. Against the goods
   1. Right of Lien,
   2. Right of Stoppage in Transit, and
   3. Right of Resale
2. Against the buyer personally
   1. Suit for price,
   2. Suit for damages for non-acceptance of delivery,
   3. Suit for damages for repudiation of the contract, and
   4. Suit for interest or special damages

B(a). Right of Unpaid Seller against the Goods
(I) Right of Lien or Vendor’s Lien [Secs. 47-49]
The ‘unpaid seller’ has a lien on the goods for the price while he is in possession, until the payment or tender of the price. A lien is a right to retain possession of goods until payment of the price. He is entitled to lien in the following three cases, namely;

1. where goods have been sold without any stipulation as to credit; Le. cash sale.
2. where goods have been sold on credit but the term of credit has expired; or
3. where the buyer becomes insolvent.

Rules:

1. The seller may exercise his right of lien notwithstanding that he is in possession of the goods as agent or bailee for the buyer.
2. If the goods have been sold on credit, the seller cannot refuse to part with possession unless the term of credit has expired.
3. Lien can be exercised for non-payment of the price, not for any other charges.
4. Effect of part delivery (Sec. 48): When an unpaid seller has made a part delivery of the goods he can exercise lien on the balance of the goods not delivered unless the part delivery was made under such circumstances as to show an intention to waive the lien.
5. The seller can abandon or waive the lien if he so desires.
6. Termination of lien (Sec. 49): If possession is lost, lien is lost. The unpaid seller of goods loses his lien thereon in the following cases:
   1. When he delivers the goods to a carrier or other bailee for the purpose of transmission to the buyer without reserving the right of disposal of the goods;
   2. when the buyer or his agent lawfully obtains possession of the goods; and
   3. where the seller has waived the right of lien. The unpaid seller does not lose his lien by reason only that he has obtained a decree for the price of the goods.
7. Sale not rescinded by lien (Sec. 54): A contract of sale is not rescinded by the mere exercise of the right of lien. The contract still remains live and the buyer can claim delivery of the goods by tendering the price. However, if the buyer defaults, the sellers remedy is to resell the goods and claim damages.

(II) The Right of Stoppage in Transit [Secs. 50-52]
When the buyer of goods becomes insolvent, and the goods are in course of transit to the buyer, the seller can resume possession of the goods from the carrier. This is known as the right of stoppage in transit. The right is exercisable by the seller only if the following conditions are fulfilled:
The seller must be unpaid.

1. He must have parted with the possession of goods.
2. The goods must be in transit.
3. The buyer must have become insolvent.
4. The right is subject to provisions of the Act.

The right of stoppage means the right to stop further transit of the goods to resume possession and to retain the same till the price is paid.
Who is an insolvent?
The term insolvent is used here to denote a person who is financially embarrassed. It is not necessary that the buyer should be declared insolvent by a court of law before the right of stoppage in transit can be exercised. According to section 2(8). The buyer is said to be ‘insolvent’ when he has ceased to pay his debts in the ordinary course of business, or cannot pay his debts as they become due whether he has committed an act of insolvency or not.

Rules:
The following points are to be noted in connection with the right of stoppage in transit:
1. Duration of transit [Sec. 51]
The goods are deemed to be in course of transit from the time they are delivered to a carrier or other bailee for the purpose of transmission to the buyer, until the buyer or his agent takes delivery of them.

2. When does transit end?

1. Delivery before destination:If the buyer or his agent obtains delivery of the goods before their arrival at the appointed destination, the transit is at an end. [Sec. 51(2)]
2. Attornment by carrier to buyer: if after the arrival of the goods at the appointed destination, the carrier expressly or by implication enters into a new agreement to hold the goods for the buyer (for purpose of custody), the original transit comes to an end. [Sec. 51(3)]
3. Goods rejected by biiyer.Af the goods are rejected by the buyer and they continue to be in possession of the carrier or other bailee, then the transit continues even if the seller has refused to receive them back. [Sec. 51(4)]
4. Delivery on ship chartered by buyer: When the goods are delivered to a carrier who is acting as agent of the buyer, e.g. when goods are delivered to a ship chartered by the buyer, the transit comes to an end as soon as the goods are loaded on board the ship. [Sec. 51(5)]
5. Wrongful refusal by carrier to deliver: If the carrier wrongfully refuses to deliver the goods to the buyer, the transit is at an end. [Sec. 51(6)]
6. Part delivery. Where the part delivery of the goods has been made to the buyer the remainder of the goods may be stopped in transit, unless such part delivery has been given in such circumstances as to show an agreement to give up possession of the whole of the goods. [Sec. gi 51(7)]

3. How stoppage in transit is effected [Sec. 52]
There two modes of stoppage in transit are—

1. By taking actual possession of the goods or
2. By giving notice to the carrier not to deliver the goods to the buyer or his agent.

When notice of stoppage in transit is given by the seller to the carrier or other bailee in possession of the goods, he shall re-deliver the goods to, or according to the directions of, the seller. The expenses of such re-delivery shall be borne by the seller.
Effect of Stoppage: Contract not rescinded- The contract of sale is not rescinded when the seller exercises his right of stoppage in transit. The contract still remains in force and the buyer can ask for delivery of goods on payment of price. [Sec. 54]

Effect of sub-sale or pledge by the buyer [Section 53]
The unpaid seller’s right of lien or stoppage in transit is not affected by any sale or pledge of the goods made by the buyer.
Exceptions: In the following two cases the unpaid seller’s right of lien or stoppage in transit is affected by any sale or pledge of the goods made by the buyer: (i.e., Unpaid seller cannot exercise right of lien or stoppage in transit.)

1. when the seller assents to such sale or pledge; or
2. when the seller has transferred a document of title to the goods, who transfers it by way of a sale, pledge or other disposition for value, to a person who takes it in good faith and for consideration.

Where (i) the seller has issued or lawfully transferred a document of title to goods, e.g. a bill of lading or a railway receipt to a person as buyer and (ii) the buyer transfers the document by way of sale or pledge to a person who takes the document in good faith and for consideration. In such a case if the transfer is by way of sale the unpaid sellers right of lien or stoppage is defeated, and if it was by way of pledge, his right of lien or stoppage can only be exercised subject to the rights of the pledgee.
Thus the effect of the rule is that the seller may still exercise his rights by paying off the pledgee.

DISTINCTION BETWEEN LIEN AND STOPPAGE IN TRANSIT:

1. The essence of lien is to retain possession while the essence of the stoppage in transit is to regain possession.
2. The right of lien is applicable to goods, which are in the possession of the seller. The right of stoppage in transit is applicable to the goods, which are in possession of the carrier.
3. The right of stoppage in transit is applicable to the insolvent buyer. But the right of lien is applicable to all persons, solvent or insolvent.
4. The right of stoppage in transit is applied to the buyer through the carrier. Therefore stoppage means the seller’s right to ‘regain’ the goods. But lien means the right to ‘retain’ the goods. Of course both the rights are applicable to goods only.
5. When the right of lien ends the right to stop in transit begins.

(Ill) The Right of Resale [Sec. 54]
The unpaid seller who has retained possession of the goods in exercise of his right of lien or who has resumed possession from the carrier upon insolvency of the buyer, can resell the goods:

1. If the goods are of a perishable nature, without any notice to the buyer, and
2. In other cases after notice to the buyer, calling upon him to pay or tender the price within reasonable time, and upon failure of the buyer to do so.

If the money realised upon such resale is not sufficient to compensate the seller, he can sue the buyer for the balance. But if he receives more than what is due to him, he can retain the excess. A resale does not absolve the buyer from his liabilities to compensate the seller for damages he may 2 have suffered.

B(b). Right of Unpaid seller against the buyer personally
1. Suit for the Price [Sec. 55]
Where under a contract of sale the property in the goods has passed to the buyer and the buyer wrongfully neglects or refuses to pay for the goods according to the terms of the contract, the seller may sue him for the price of the goods.
Where the property in goods has not passed to the buyer, the seller as a rule cannot file a suit for the price and his remedy is to claim damages.
According to section 55(2), where under a contract of sale the price is payable on a certain day irrespective of delivery and the buyer wrongfully neglects or refuses to pay such price, the seller may sue him for the price although the property in the goods has not passed and the goods have not been appropriated to the contract.

2. Suit for damages for non-acceptance [Sec. 56]
Where the buyer wrongfully neglects or refuses to accept and pay for the goods, the seller may sue him for damages for non-acceptance.

3. Suit for damages for repudiation of the contract [Sec. 60]
Where the buyer repudiates the contract before the date of delivery, the seller may either treat the contract as subsisting and wait till the date of delivery, or he may treat the contract as rescinded i and sue for damages for the breach.

4. Claim for interest and special damages [Sec. 61]
The seller may recover interest or special damages in any case where by law interest or special damages may be recoverable. He may also recover the money paid where the consideration for the payment of it has failed.

MULTIPLE CHOICE QUESTIONS:

1. The Seller of Goods is deemed to be an Unpaid Seller —
(a) when the whole of the price has not been paid or tendered.
(b) when a bill of exchange or other negotiable instrument has been received as conditional payment and the condition has not been fulfilled by reason of the dishonour of the instrument or otherwise.
(c) both (a) and (b).
(d) either (a) or (b).

2. The term “Unpaid Seller” includes —
(a) Agent of the Buyer
(b) Agent of the Seller
(c) Agent of the Carrier/Transporter
(d) All of the above

3. The right of lien is available to the Unpaid Seller, only when —
(a) he is not in possession of the goods
(b) he is in possession of the goods
(c) he has delivered the goods to the Carrier/ Transporter
(d) he has delivered the goods to the Buyer

4. The right of lien is available to the Unpaid Seller, u/s 47 of the Sale of Goods Act, when he is in possession of goods —
(a) as an agent of the Buyer
(b) as a Bailee for the buyer
(c) in his own right.
(d) all of the above

5. In which of the following situations, the right of lien available to the Unpaid Seller is lost?
(a) Where the Goods have been sold without any stipulation as to credit;
( b) Where the Goods have been sold on credit, but the credit period has expired;
(c) Where the Buyer becomes insolvent;
(d) Where the Unpaid Seller has parted with the possession of the goods.

6. Where the goods have been delivered to Railways for carriage and the R/R is taken in the name of the seller or his agent :
(a) the seller is prima facie deemed to reserve the right of disposal
( b) the seller did not retain the right of disposal
(c) the seller cannot retain right of disposal
(d) none of the above.

7. When the goods have been sold on credit and the credit period lien can he exercised
(a) has not expired
(b) has expired
(c) has not been extended
(d) has been extended

8. The right of lien can be exercised by the Unpaid Seller in respect of—
(a) Price
(b) Any other expenses, e.g. Godown Charges, Interest, etc.
(c) Both (a) and (b)
(d) Either (a) or (b)

9. The Unpaid Seller to deliver a part of the Goods on payment of a proportionate part of the price by the Buyer.
(a) shall be bound
(b) may refuse
(c) must honour his commitment
(d) shall request the carrier

10. Generally, where an Unpaid Seller has made part delivery of the Goods, he —
(a) may exercise his right of lien on the remainder
(b) has to honour the entire contract
(c) loses his lien on the remainder of the goods
(d) can supply defective goods in respect of the remainder

11. Where the Unpaid Seller has parted with the goods by handing it over to a carrier for transmission, and the goods are in transit, he can reclaim possession thereof. This right is called —
(a) Right of Lien
(b) Right of Stoppage of goods in transit
(c) Right of withholding delivery of goods
(d) Right of Re-sale

12. Right of Stoppage in transit can be exercised by the Unpaid Seller, where he —
(a) has lost his right of lien
(b) still enjoys his right of lien
(c) either (a) or (b)
(d) neither (a) nor (b)

13. Right of Stoppage in transit can be exercised by the Unpaid Seller, where the Buyer—
(a) is solvent
(b) becomes insolvent
(c) acts fraudulently
(d) acts smartly

14. The right of stoppage in transit may be exercised by the Unpaid Seller till—
(a) payment or tender of the price
(b) Buyer becomes solvent
(c) such time as the Carrier may think fit
(d) such time as the Court may think fit

15. Goods are deemed to be in transit from the time they are delivered to the Carrier or other bailee for transmission to the buyer, until —
(a) Buyer becomes solvent
(b) Buyer or his agent takes delivery of the goods
(c) Seller becomes solvent
(d) Seller or his agent takes delivery of the goods

16. If, after the arrival of goods at their destination, Carrier or other Bailee acknowledges to Buyer or his agent that he holds goods on his behalf, and continues possession of the goods, the transit —
(a) is at an end
(b) is deemed to continue
(c) is not at an end
(d) is not affected at all

17. If goods are rejected by the buyer and the Carrier or other Bailee continues in possession of them, and the seller has refused to receive them back, then transit —
(a) is at an end
( b) is deemed to be at an end
(c) is not deemed to be at an end
(d) is dependent on the Court’s decision.

18. If the Carrier/Bailee wrongfully refuses to deliver the goods to the buyer or his agent, the transit —
(a) is at an end
(b) is deemed to be at an end
(c) is not deemed to be at an end
(d) is dependent on the Court’s decision

19. Right of Stoppage in Transit may be exercised by the Unpaid Seller, by —
(a) taking actual possession of Goods
(b) giving notice of his claim to the Carrier/ Bailee who holds the Goods.
(c) either (a) or (b)
(d) Both (a) and (b)

20. The Unpaid Seller’s right of lien is to —
(a) re-organize possession of goods
(b) re-sell the goods
(c) regain possession of goods
(d) retain possession of goods

21. The word “perishable” in respect of goods, u/s 54 of the Sale of Goods Act, means —
(a) physically perishable
(b) commercially perishable
(c) both (a) and (b)
(d) either (a) or (b)

22. Where under a contract of sale, the price is payable on a certain day irrespective of delivery and Buyer wrongfully neglects or refuses to pay the price, the Seller can sue the Buyer for the price of goods. For this purpose, goods —
(a) should be appropriated to the contract
(b) need not be appropriated to the contract
(c) should be delivered to the buyer
(d) need not be delivered to the buyer

23. The unpaid seller who has retained possession of the goods in exercise of his right of lien or who has resumed possession from the carrier upon insolvency of the buyer, can resell the goods :
(a) If the goods are of perishable nature, without any notice to the buyer
(b) If the goods are non-perishable, by giving notice to the buyer
(c) Either ‘a’ or ‘b’
(d) Neither ‘a’ nor ‘b’

24. In case of interest by way of damages and special damages in a suit by the seller u/s 61, the interest may be calculated from —
(a) date of tender of goods
(b) date on which the price was payable
(c) either (a) or (b)
(d) both (a) and (b)

25. When under a contract of sale, buyer has paid the price, but seller neglects to deliver goods, buyer has a right to claim interest on the amount of price. The buyer can claim interest —
(a) only when he can recover the price
(b) only when he is entitled to claim damages
(c) either (a) or (b)
(d) both (a) and (b)

Answers:

STATE WHETHER THE FOLLOWING ARE TRUE OR FALSE:

1. The term unpaid seller includes buyer’s agent to whom bill of lading is endorsed.
2. Unpaid seller can exercise his right of lien even when property in goods has been passed to the buyer.
3. Once possession is lost, right of lien of the unpaid seller is also lost.
4. Unpaid seller can exercise his right of resale of goods only when property in goods has not passed to the buyer.
5. Where the unpaid seller has obtained a decree for the price of the goods the right of lien cannot be exercised.
6. Nemo dat quad non habet means let the buyer beware.
7. Sub-sale by the buyer with seller’s consent leads to loss of right of stoppage in transit.
8. Unpaid seller’s right of stoppage in transit can be exercised only when the buyer is insolvent.

Answers:

CA Foundation Business Laws Study Material Chapter 13 Performance of Contract: Delivery and Payment

After the conclusion of contract of sale, the next stage is of performance of that contract. The buyer & seller must perform their respective duties and obligations Sec. 31 lays down that it is the duty of the seller to deliver the goods and of the buyer to accept and pay for them in accordance with the terms of the contract of sale.

DELIVERY OF GOODS
Delivery means voluntary transfer of possession of goods from the seller to the buyer. It may be

1. actual,
2. symbolic, or
3. constructive.

Section 33 lays down that delivery of goods sold may be made by doing anything which the parties agree shall be treated as delivery or the delivery may be made by doing anything which has the effect of putting the goods in possession of the buyer.
Delivery is said to be actual when the seller hands over the goods physically, to the buyer or his agent, authorised to take possession of the goods.

A symbolic delivery
A symbolic delivery takes place when the ‘means of obtaining possession’ is handed over to the buyer. This happens where the goods are bulky and incapable of actual delivery, e.g. a truck is delivered” (symbolically) by handling over its keys to the buyer or the transfer of bill of lading/RR in the name of the buyer entitles him to obtain the goods. Delivery of the key of a godown is symbolic delivery of the goods therein.

A constructive delivery
A constructive delivery takes place when goods are delivered to another person on behalf of buyer, instead of buyer himself. A third party is authorized by buyer to take delivery on his behalf. Such third party may be seller himself or carrier or godown keeper.
Constructive delivery is a delivery by attornment i. e. by formal acknowledgement. It involves change in the possession of goods without any change in,their actual and visible custody. It takes place when the person in possession of the goods acknowledges that he holds.the goods on behalf of and at the disposal of the buyer. Constructive delivery takes place in the following cases:

1. when the seller, who is in possession of the goods, agrees to hold them on behalf of the buyer;
2. when the buyer is already in possession of the goods and the seller agrees to the buyer’s holding the goods as owner;
3. when the goods are in possession of a third person (e.g. a warehouseman, a carrier or any other bailee) who acknowledges to hold them on behalf of the buyer. For instance, A sells 100 bags of sugar to B, A’s stock of sugar-bags is lying in X’s godown. A issues a delivery order to X, asking him to deliver to B or his order 100 bags. X acknowledges the delivery order and agrees to hold 100 bags of sugar on B’s behalf. This is a constructive delivery, even though the goods still continue to be in X’s possession.

Rules as to delivery
1. Duty to deliver [Sec. 31]
It is the duty of the seller to deliver the goods. It is duty of the buyer to accept the goods and to pay for them in accordance with the terms of the contract of sale.

2. Payment and delivery are concurrent conditions [Sec. 32]
Unless otherwise agreed, delivery of the goods and payment of the price are concurrent conditions.

3. Mode of delivery [Sec. 33]
Mode of delivery may be actual, symbolic or constructive.

4. Part delivery [Sec. 34]
HOW MUCH GOODS MUST BE DELIVERED? (SECTION 34):
The quantity of goods to be delivered is specified in the contract. If the parties have not agreed otherwise, the seller must deliver all the goods in a single delivery. However, where part of the goods have been delivered, and rest of the goods are yet to be delivered, there may be two possibilities:

1. where the part delivery is made in progress of the whole delivery, then it is treated as a delivery of the whole. And the ownership of the whole quantity is transferred to the buyer.
2. Where the part delivery is made with the intention of separating it from the whole, then in is not treated as delivery of the whole, (since each part of delivery is intended to be treated as separate delivery) In such a case the ownership of the whole quantity is not passed to the buyer.

Example: Goods were sold in a lot and the seller instructed the wharfinger to deliver them to the buyer who had paid for them. The buyer thereafter weighed all the goods, accepted them and took away a part. The court held this constituted delivery of the whole – Hommond v. Anderson (1803) 1 Bank P.N.S. 69.

5. Buyer to apply for delivery [Sec. 35]
Apart from any express contract, the seller of goods is not bound to deliver them until the buyer applies for delivery. The buyer has no cause of action against the seller if he has not applied for delivery. It may be noted here that this provision is intended for the benefit of the seller. The seller may, if he chooses, deliver the goods without any application in that behalf of the buyer. But he is also entitled to wait until the buyer applies for delivery.

6. Place of delivery [Sec. 36(1)]
Whether it is for the buyer to take possession of the goods or for the seller to send them to the buyer is a question depending in each case on the terms of the contract. When nothing is agreed upon, the following rules apply — a) the goods are to be delivered at the place where they were lying, at the time of the sale or at the time of the agreement to sell; b) if the goods are future goods, they should be delivered at the place of manufacture or production thereof.

7. Time for delivery [Sec. 36(2) & 36(4)]
If time is fixed, and the seller is bound to send the goods to the buyer, he must send them within the fixed time. If no time is fixed, then the seller must send them within a reasonable time 36(2). The demand or tender of delivery must be at a reasonable hour 36(4).

8. Goods in possession of third person [Sec. 36(3)]
If the goods are in possession of a third party, there is no delivery until such third party acknowledges to the buyer that he holds the goods on his behalf.

9. Expenses of delivery [Sec. 36(5)]
Unless otherwise agreed, expenses of making delivery are borne by the seller and expenses of obtaining delivery by the buyer.

10. Delivery of wrong quantity [Sec. 37]
Subject to any usage of trade, special agreement or course of dealing between parties, the following rules shall apply when delivery of wrong quantity is made—

1. Short delivery : If the seller delivers to the buyer a quantity less than he contracted to sell, the buyer may:
   1. reject the goods, or
   2. accept the goods, if he accepts, he shall pay for the accepted quantity at the rates contracted for.
2. Excess delivery: If the seller delivers to the buyer a quantity larger than he contracted to sell, the buyer may:
   1. reject the whole, or
   2. accept the whole, or
   3. accept the quantity he ordered and reject the rest.
3. Delivery of goods mixed with other goods:Ii the seller delivers to the buyer goods ordered mixed with goods of a different description, the buyer may:
   1. reject the whole, or
   2. accept the agreed goods and reject the remaining goods.

11. Instalment deliveries [Sec. 38]
Unless otherwise agreed, the goods are not to be delivered by instalments. There might be an agreement for delivery by instalments but the price may be payable either on complete delivery or on delivery of each instalment. There will be a breach of such contract in the following cases:
(a) If the seller makes no delivery or makes defective delivery, in respect of one or more instalments; or
(b) If the buyer neglects or refuses to take delivery of or pay for, one or more instalments.
In each of the above breach, it will depend upon the terms of the contract and the circumstances of each individual case whether

1. the whole contract is repudiated, or
2. it is a severable (separable) breach giving rise to a claim for compensation but not to right to treat the whole contract as repudiated [Sec. 38(2)].

12. Delivery to a carrier or wharfinger [Sec. 39]
The delivery of goods to a carrier or a wharfinger in pursuance of a contract of sale, is prima facie deemed to be delivery of goods to buyer. If the contract of sale specifies the name of the carrier, the seller must deliver the goods to such named carrier. If the instructions of the buyer are carried out properly, the risk is with the buyer. If the instructions of the buyer are not carried out properly, the goods remain at the risk of the seller during transit.

While delivering goods to the carrier, it is the sellers duty to do whatever is necessary to secure the carrier’s responsibility for the safe delivery of goods to the buyer so that in the event of the loss, the buyer can claim compensation against the carrier.
Where the goods are sent by sea it is usual fçr the buyer himself to insure. In such a case it is the duty of the seller to give such notice of the shipment to the buyer as may enable him to insure the goods. If he does not, the risk does not pass to the buyer.

13. Buyer’s risk for deterioration of goods in transit [Sec. 40]
Where the seller agrees to deliver the goods to the buyer at a place other than that where they are when sold, the merchantable quality of the goods may be affected due to transit. In such a case any risk of deterioration in the goods necessarily incident to the course of transit shall be borne by the buyer, unless otherwise agreed. e.g. A sold to B a certain quantity of hoop iron which was to be sent by canal at the request of B. It was rusted before it reached the buyer. The sting, however, was not more than what was necessarily incidental to its transmission. It was held that B was bound to accept the goods.

“Force majeure”: Force majeure is a situation in which either of the parties to a contract is prevented from performing its obligations due to circumstances beyond its control. The clause on force majeure usually starts with a description of the events which are considered as events of force majeure. Such events are acts of God, acts of nature (earthquakes, floods, epidemics and fires etc.), acts of governments, wars, riots and civil disturbances, strikes and lockouts etc.
The party who is affected by it, has to notify the other party of the occurrence of the event and the cessation of the event, supported by documentary evidence. If it is a strike or a lockout, the labour departments certificate/statement would act as the evidence.

The force majeure may be short term or long term or prolonged force majeure. For short term force majeure, the normal remedy is to allow extension of the delivery date(s) to the extent the performance is affected by the event. Examples of long-term or prolonged force majeure are natural calamities such as earthquakes, typhoons, severe cyclones, devastating fire/explosion in chemical factories, which may ravage the facilities and prevent the performance of the obligations. The general remedy is to provide for a discussion between the two parties within a time-frame already specified in the clause to explore ways to fulfil all or some obligations and to find a solution. If is not feasible to perform the contract, it may be terminated.

14. Buyers Right of Examining the Goods
A buyer cannot be said to have accepted the goods unless he had an opportunity to examine the goods and ascertain that they are in conformity with the contract, (sec. 41).

15. ‘Delivery of the goods to the buyer does not mean acceptance of the goods’
Delivery of goods to the buyer does not amount to acceptance thereof by the buyer. According to sec. 42 a buyer is deemed to have accepted the goods—

1. When he intimates to the seller that he has accepted them, or
2. When he does an act in relation to such goods which is inconsistent with the ownership of the seller. e.g. pledges or resells, or
3. When, after the lapse of a reasonable time, he retains the goods without intimating the seller that he has rejected the goods.

16. Buyer not bound to return rejected goods [Sec. 43]
Where goods are delivered to the buyer and he refuses to accept them, having the right so to do, he is not bound to return them to the seller. It is sufficient if he intimates to the seller that he refuses to accept them. This rule applies when the rejection is rightful and there is no agreement to the contrary.

17. Liability of buyer for neglecting or refusing delivery of good [Sec. 44]
When the property in the goods has passed to the buyer and the seller is ready and willing to deliver the goods and requests the buyer to take delivery, but the buyer fails to take delivery within reasonable time, he is liable to the seller for any loss occasioned by his neglect or refusal to take delivery, and also for reasonable charge for the care and custody of the goods.

FORMS OF CONTRACT AS REGARDS CARRIAGE BY SEA

The three common forms of contract as regards carriage by sea are –

1. F.O.B. (Free on board),
2. C.I.F. (Cost Insurance & Freight)
3. Ex-ship.

1. Free On Board (FOB):
Transportation term meaning that the invoice price includes delivery at the seller’s expense to a specified point and no further. In other words the seller has to place the goods on board a ship at his own expense. He has only to bear the expenses of loading the goods. The seller must notify the buyer immediately that the goods have been delivered on board, so that the buyer may insure them. If he fails to do so the goods shall be deemed to be at seller’s risk during such sea transit. Thereafter the goods are at the buyer’s risk and he is responsible for freight, insurance and subsequent expenses thus the price is exclusive of freight and insurance.
For example, “FOB our Nagpur warehouse” means that the buyer must pay all shipping and other charges associated with transporting the merchandise from the seller’s warehouse in Nagpur to the buyer’s receiving point.
In a F.O.B. (Free on Board) shipment, the risk passes to buyer at the F.O.B. point. The F.O.B. point can be the seller’s factory or warehouse. In that case, the sale price quoted does not include freight which is the responsibility of the buyer as is the risk from the warehouse onward. If, however, the term is F.O.B. point of destination, seller bears the risk during transit and is responsible for payment of the freight.

FAS (free alongside): The term F.A.S. (Free Alongside) followed by “vessel” at some specific port is a variation of F.O.B. The sale of consummated when the seller delivers the goods alongside the vessel. The difference between the terms “F.O.B. vessel” and “F.A.S. vessel” is that in the F.O.B. the seller bears the risk until the loading has been completed.
FAS means that the seller fulfils his obligation to deliver when the goods have been placed alongside | he vessel on the quay or in lighters at the named port of shipment. This means that the buyer has to bear all costs and risks of loss of or damage to the goods from that moment. The FAS term requires the buyer to clear the goods for export. It should not be used when the buyer cannot carry out either directly or indirectly all of the export formalities. This term can only be used for sea freight or inland waterway transport.

2. C.I.F. Contracts:
‘C.I.F.’ stands for cost, insurance and freight. A CIF contract is a type of contract where in the price includes cost, insurance and freight charges. “C.I.F. London”, for example, would mean that the quoted price would include the price of the goods plus freight up to London and insurance.
A CIF contract is performed by delivery of the shipping documents relating to the goods and not by actual delivery of goods. Documents of title to the goods (bill of lading) are delivered so as to symbolise the delivery of goods. Under a CIF contract the seller is required to insure the goods, deliver them to the shipping company, arrange for their affreightment and send the bill of lading and insurance policy together with the invoice and a certificate of origin to a bank. The documents are usually delivered by the bank against payment of the price, or against acceptance of the bill. This method protects the seller since he continues to be the owner of goods until the buyer pays for them and obtains the documents. The buyer is equally protected as he is called upon to pay only against the documents and the moment he pays, he obtains the documents, which enable him to get delivery of the goods.

3. Ex-ship Contracts:
“Ex Ship” means that the seller fulfils his obligation to deliver when the goods have been made available to the buyer on board the ship uncleared for import at the named port of destination. The seller has to bear all costs and risks involved in bringing the goods to the named
port of destination.

MULTIPLE CHOICE QUESTIONS:

1. Voluntary transfer of possession from one person to another is called as
(a) Ownership
(b) Delivery
(c) Gift
(d) License

2. Delivery of goods means
(a) Voluntary transfer of possession
(b) Compulsory transfer of possession
(c) Exchange of goods
(d) Voluntary transfer of ownership

3. For a valid contract of sale, delivery may be:
(a) Actual delivery
(b) Symbolic delivery
(c) Constructive delivery
(d) All of these

4. Delivery of the keys of a godown where goods are kept amounts to:
(a) Actual delivery
(b) Symbolic delivery
(c) Constructive delivery
(d) All of these

5. delivery involves change in the possession of goods without any change in their actual custody.
(a) Actual delivery
(b) Symbolic delivery
(c) Constructive delivery
(d) None of these

6. Which of the following is not a form of delivery
(a) Actual delivery
(b) Symbolic delivery
(c) Constructive delivery
(d) Systematic delivery

7. When goods are in possession of third person, delivery is complete:
(a) When such third party acknowledges to the buyer that he holds the goods on his behalf
(b) Even though such third party does not acknowledge
(c) When the physical possession of the goods is given
(d) None of the above

8. Where the part delivery is made in progress of the whole delivery, then:
(a) It is treated as delivery of the whole
(b) It is treated as delivery of the part
(c) It is not treated as delivery at all
(d) None of these

9. Unless otherwise agreed, the expenses of making delivery are borne by:
(a) The carrier
(b) The buyer
(c) The seller
(d) The agent

10. Unless otherwise agreed, the expenses of obtaining delivery are borne by:
(a) The carrier
(b) The buyer
(c) The seller
(d) The agent

11. If the seller delivers to the buyer a quantity less than he contracted to sell, the buyer may
(a) reject the goods,
(b) accept the goods,
(c) either ‘a’ or ‘b’
(d) neither ‘a’ nor ‘b’

12. If the seller delivers to the buyer a quantity larger than he contracted to sell, the buyer may
(a) reject the whole
( b) accept the whole
(c) accept the quantity he ordered and reject the rest X
(d) either ‘a’, ‘b’ or ‘c’

13. If the seller delivers to the buyer goods ordered mixed with goods of a different description, the | buyer may—
(a) reject the whole
(b) accept the agreed goods and reject the remaining goods
(c) either ‘a’ or ‘b’
(d) neither ‘a’ nor ‘b’

14. In case of carriage of goods by sea, where the seller has to put the goods on board a ship at his own expenses, the contract is known as
(a) F.O.B. Contract
(b) C.I.F. Contract
(c) Ex-ship Contract
(d) FAS Contract

15. In case of carriage of goods by sea, where the seller has to deliver the goods to the buyer at the port of destination, the contract is known as
(a) F.O.B. Contract
(b) C.I.F. Contract
(c) Ex-ship Contract
(d) FAS Contract

16. Under a contract the seller is required to insure the goods, deliver them to the shipping company, and arrange for their affreightment.
(a) F.O.B. Contract
(b) C.I.F. Contract
(c) Ex-ship Contract
(d) FAS Contract

17. The general principle regarding transfer of title in case of sale of goods is that—
(a) The seller cannot transfer to the buyer a better title than he himself has
(b) The seller can transfer to the buyer a better title than he himself has
( c) The buyer can transfer to the seller a better title than he himself has
(d) The seller’s representative can transfer to the buyer no title

18. Diamond necklace valued Rs. 10 lacs was sent by S to B on sale or return basis. B pledged the diamond necklace with money lender M for Rs. 6 lacs. Discuss the rights and liability of the parties.
(a) B is not bound to pay the price to S
(b) B is bound to pay the price to S and M will remain as pawnee
(c) B is bound to pay the price to S and M will not have rights as pawnee
(d) B is not bound to pay anything to M

Answers:

IS STATE WHETHER THE FOLLOWING ARE TRUE OR FALSE:

1. It is not the duty of the seller to deliver the goods.
2. Delivery by acknowledgement is an actual delivery.
3. There are three modes of delivery.
4. Unless otherwise agreed, goods shall be delivered before payment of price.
5. Unless otherwise agreed, the buyer must apply for the delivery.
6. The place of delivery can be the place where the goods are lying at the time of sale.
7. When means of obtaining possession are handed over to the buyer, it amounts to symbolic delivery.
8. When goods are delivered to the buyer and the buyer refuses to accept them, having a right to do so, then the buyer is bound to return them to the seller.
9. It is the duty of seller to take back the goods in case where buyer rightfully refuses to accept the goods.
10. Any risk of deterioration in the goods necessarily incident to the course of transit shall be borne by the „ seller.
11. The delivery of goods to a carrier in pursuance of a contract of sale, is prima facie deemed to be the
delivery of goods to the buyer.

Answers: