TUTOR MARKED ASSIGNMENT
Course Code: ECO - 05
Course Title: Mercantile Law
Assignment Code: ECO –
05/TMA/2015-16
Coverage: All Blocks
Maximum Marks: 100
Attempt all the
questions.
1. (a) All contracts are
agreements but all agreements are not contracts. Comment. 10
Ans: Section 2 (h) defines ‘Contract’ as an agreement enforceable
by law. If we analyse the definition it
has two components viz.
(i) An agreement and
(ii) Its enforceability by law.
Section 2 (e) defines ‘agreement’ as “every
promise and set of promises forming consideration for each other”. For a
contract to be enforceable by law there must be an agreement which should be
enforceable by law. To be enforceable, the agreement must be coupled with
obligation. Obligation is a legal duty to do or abstain from doing what one
promised to do or abstain from doing.
All contracts are agreements but for agreement to be a contract it has to
be legally enforceable.
Section10 of the Act provide “All agreements
are contracts if they are made by the free consent of the parties competent to
contract for lawful object & are not hereby expressly declared void.” All contracts are agreements but for an
agreement following essential element are required:
a) Offer & Acceptance: There
must be two parties to an agreement.
b) Intention to create legal relationship: When two
parties enter into a contract their intention must be to create legal
relationship. If there is no such intention between the parties, there is no
contract between them.
c) Lawful consideration: An
agreement to be enforceable by law must be supported by consideration.
d) Capacity to Contract-Competency: The
parties competent to contract must be capable of contracting i.e. they must be
of the age of majority, they must be of sound mind & they must not be
disqualified from contracting by any law to which they are subject to.
e) Free Consent: It is
necessary between the contracting parties to have a free & genuine consent
to an agreement.
f) Lawful object: The
object of an agreement must be lawful. It should not be illegal, immoral or it
should not oppose public policy.
g) Agreement not declared void: For an
agreement to be a contract it is necessary for the agreement must not be
expressly declared void by any law in force in the country.
h) Possibility & Certainty of performance: The terms
of an agreement must not be vague or indefinite. It should be certain. The
agreement must be to do a thing which is possible.
Thus, agreement is the genus of which contract
is the specie.
(b) Define offer and
distinguish between ‘offer’ and ‘invitation to offer’ with examples. (10+10)
Ans: Definition of Offer: An offer is an expression of person showing
his willingness to another person to do or not to do something, to obtain his
consent on such expression. The acceptance of offer by such person may result
in a valid contract. An offer must be definite, certain and complete in all
respects. It must be communicated to the party to whom it is made. The offer is
legally binding on the parties.
Example:
A tells to B,”I
want to sell my motorcycle to you at Rs. 30,000, Will you purchase it?”
X says to Y,”I
want to purchase your car for Rs. 2, 00,000, Will you sell it to me?”
Definition of
Invitation to offer: An
Invitation to Offer is an act prior to an offer, in which one person induces
another person to make an offer to him, it is known as invitation to offer.
When properly responded by the other party, an invitation to offer results in
an offer. It is made to the public at large with intent to receive offers and
negotiate the terms on which the contract is created.
The invitation to
offer is made to inform the public, the terms and conditions on which a person
is interested to enter into a contract with the other party. Although, the
former party is not an offeror as he is not making an offer instead, he is
stimulating people to offer him. Therefore, the acceptance does not amount to a
contract, but an offer. When the former party accepts, the offer made by the
other parties, it becomes a contract, which is binding on the parties.
Example:
Menu card of a
restaurant showing the prices of food items.
Railway timetable
on which the train timings and fares are shown.
Government Tender
A Company invites
application from public to subscribe for its shares.
Recruitment
advertisement inviting application.
Differences
Between Offer and Invitation to Offer: The
following are the major differences between offer and invitation to offer.
a) An offer
is the final willingness of the party to create legal relations. An invitation
to offer is not the final willingness but the interest of the party to invite
public to offer him.
b) An offer
is an essential element to make an agreement between the parties, but an
invitation to offer is not an essential element until it becomes an offer.
c) An offer
becomes an agreement when accepted. On the other hand, an invitation to offer
becomes an offer when the public responds to it.
d) The main
objective of making an offer is to enter into the contract, whereas the main
objective of an invitation to offer is to negotiate the terms on which the
contract can be made.
2. What is ‘fraud’?
State its essentials and consequences. (6+14)
Ans: Definition of Fraud: ‘Fraud’
means and includes any of the following acts committed by a party to a contract
(or with his connivance or by his agent) with intent to deceive another party
thereto or his agent; or to induce him to enter into the contract:
1. the suggestion, as a fact, of that which is
not true by one who does not believe it to be true;
2. the active concealment of a fact by one
having knowledge or belief of the fact;
3. a promise made without any intention of
performing it;
4. any other act fitted to deceive;
5. any such act or omission as the law
specially declares to be fraudulent.
From the analysis of the above, it follows
that for fraud to exist there must be:
(A) A representation or assertion, and it must
be false. To constitute fraud there must be an
assertion of something false within the knowledge of the party asserting it. Mere
silence as to facts likely to affect the willingness of a person to enter
into a contract is not fraud.
Examples
(1) H sold
to W certain pigs. The pigs were
suffering from some 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].
(2) A sells
by auction to B, a horse which A knows to be unsound. A says nothing to B about the horse’s unsoundness. This
is not fraud by A.
(B) The representation or assertion must be of
a fact. The representation or assertion alleged
to be false must be of a fact. A mere expression of opinion, puffery or
flourishing description does not constitute fraud.
Example
A, a seller
of a horse, says that the horse is a ‘Beauty’ and is worth Rs. 5,000. It is
merely A’s opinion. But if in fact A paid
only Rs. 2,000 for it, then he has misstated a fact.
(C) The representation or statement must have
been made with a knowledge of its falsity or without belief in its truth or
recklessly.
Example
A company issued a prospectus giving false
information about the unbounded wealth of Nevada. A share broker who took
shares on the faith of such information wanted to avoid the contract.
(D) The representation must have been made
with the intention of inducing the
other party to act upon it. For fraud
to exist, the intention of misstating the facts must be to cause the other
party to enter into an agreement.
(E) The representation
must in fact deceive. It has been said that deceit which does not deceive
is not fraud. A fraud or misrepresentation which did not cause the consent to a
contract of the party on whom such fraud was practised or to whom such
misrepresentation was made does not render a contract voidable.
Examples
(1) A bought
a cannon of B. B knew the cannon had a defect, which
rendered it worthless, and so put a metal plug to conceal the defect. A accepted the cannon without
examining it. The cannon burst, when used. Held: There was no fraud
because A would have bought it
even if no deceptive plug had been put. He was not in fact
deceived by it [Horsefall v. Thomas, (1862) 158 E.R. 813].
(F) The Party
subjected to fraud must have suffered some loss. It is a common rule of law that “there
is no fraud without damages”. As such, fraud without damage does not give rise
to an action of deceit.
Consequences of Fraud (Section 19)
The party defrauded has the following
remedies:
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.
Example
A fraudulently
informs B that A’s estate is free from encumbrance. B, therefore, buys the estate. The estate is subject to mortgage. B may either avoid the contract, or
may insist on its being carried out
and the mortgage deed redeemed.
3. He can sue for damages. Exceptions, i.e., where the contract is not voidable. In the
following cases, the contract is
not voidable:
(1) When the party whose consent was caused by
misrepresentation or fraud had the means
of discovering the truth with ordinary diligence (Exception to Section 19).
(2) Where a party, after becoming aware of the
misrepresentation or fraud, takes a benefit
under the contract or in some other way affirms it.
3. Explain the
following: (10+10)
i. Stranger to a
contract.
Ans: STRANGER TO CONTRACT: It is general law of contract that a person who is not a party to
the contract cannot sue upon it. A stranger to a contract cannot sue in English
as well as in India through it may be made for his benefit. This means that
unless there is a privity of contract, a party cannot sue on it. A stranger to
a contract cannot sue expect in the following cases:
1. Trust. In the case of trust, the beneficiary may enforce the
contract even though he is stranger to contract creating the trust.
2. Where provision is made in a marriage settlement. Where an agreement is made in a
connection with marriage and a provision is made for the benefit of a person he
may take advantage of that agreement although he is not party to it.
3. Where provision is made in a partition or
family settlement. Such
members though not parties to the agreement can sue on the footing of the
arrangements.
4. Where a charge is created in favour of a stranger
on specific immovable property. A stranger to a contract can sue for the money made payable
to him by it where the money is charged on immovable properties.
5. Where the promisor has by his conduct privity of
contract with the stranger. Thus,
if A admits to C for the money, that he had received money from B for payment
to c, he constitute himself as the agent of C, who can successfully recover the
amount from A.
6. Where it is conductive to justice.
7. Contract entered into by an agent can be enforced
by the principal.
8. Covenants Running with the land. At the time of transfer of
immovable property, a notice that the owner of the land is bound due to certain
obligations created by a agreement relating to land, the new purchaser will be
bound by them though he was not a party to the original covenant.
ii. Agency coupled with
interest.
Ans: Termination of agency, where agent has an interest in
subject-matter (Section 202 of the Indian Contract Act.)
Where the agent has himself an interest in the property which
forms the subject-matter of the agency, the agency cannot, in the absence of an
express contract, be terminated to the prejudice of such interest. —Where the
agent has himself an interest in the property which forms the subject-matter of
the agency, the agency cannot, in the absence of an express contract, be
terminated to the prejudice of such interest."
Also, where an agency is created for valuable
consideration and authority is given to effect a security, it cannot be
revoked. The POA is irrevocable if it creates an agency coupled with interest.
Where an authority or power is coupled with interest, it is irrevocable unless
there is an express stipulation to the contrary. Still, the parities can by agreement make it
revocable. If the power is irrevocable, the parties are nevertheless free to
make it revocable by an express stipulation to the contrary. However, in cases
where it is revocable it cannot be made irrevocable merely by writing it in the
agreement.
Illustrations
(a) A gives
authority to B to sell A’s land, and to pay himself, out of the proceeds, the
debts due to him from A. A cannot revoke this authority, nor can it be
terminated by his insanity or death. (a) A gives authority to B to sell A’s
land, and to pay himself, out of the proceeds, the debts due to him from A. A
cannot revoke this authority, nor can it be terminated by his insanity or
death."
(b) A
consigns 1,000 bales of cotton to B, who has made advances to him on such
cotton, and desires B to sell the cotton, and to repay himself out of the price
the amount of his own advances. A cannot revoke this authority, nor is it
terminated by his insanity or death. (b) A consigns 1,000 bales of cotton to B,
who has made advances to him on such cotton, and desires B to sell the cotton,
and to repay himself out of the price the amount of his own advances. A cannot
revoke this authority, nor is it terminated by his insanity or death."
4. (a) ‘The liability of
surety is co-extensive with that of principal debtor’. Elucidate. 10
Ans: The
liability of the surety towards the creditor is co-extensive with that of the
principal debtor, unless it is otherwise provided in the contract of guarantee.
A guarantor, in common law, is in no better footing than the principal debtor.
It is open to the creditor to proceed legally against the guarantor first for
remedy. In the case of a loan, if a guarantor binds himself to a maximum limit
of the principal debt, his liability towards the creditor would not be beyond
that. A guarantee which extends to a series of transactions between the
creditor and principal debtor is called continuing guarantee. It may at any
time be revoked by the surety, as to future transactions between the creditor
and principal debtor, by notice to the creditor.
A surety's
liability to pay the debt is not removed by reason of the creditor's omission
to sue the principal debtor. The creditor is not bound to exhaust his remedy
against the principal before suing the surety, and a suit may be maintained
against the surety though the principal has not been sued.
It is not
necessary for the creditor, before proceeding against the surety, to request
the principal debtor to pay, or to sue him, although solvent, unless this is
expressly stipulated for.
The term
“co-extensive” has been defined in the celebrated book of Polock & Mulla on
Indian Contract and Specific Relief Act, Tenth Edition, at page 728 as under:
“Co - extensive.
Surety's liability is co-extensive with that of the principal debtor. A
surety's liability to pay the debt is not removed by reason of the creditor's
omission to sure the principal debtor. The creditor is not bound to exhaust his
remedy against the principal before suing the surety, and a suit may be
maintained against the surely though the principal has not been sued.”
In Chitty on
Contracts, 24th Edition, Volume 2 at page 1031 paragraph 4831 it is stated as
under,
“Conditions
precedent to liability of surety. Prima facie the surety may be proceeded
against without demand against him, and without first proceeding against the
principal debtor.”
In Halsbury's
Laws of England, Fourth Edition, Vol. 20, paragraph 159 at page 87 it has been
observed that "it is not necessary for the creditor, before proceeding
against the surety, to request the principal debtor to pay or to sue him,
although solvent, unless this is expressly stipulated for”.
The question as
to liability of a surety, its extent and the manner of its enforcement has always
been a highly controversial issue in India. The Supreme Court, in the case of Industrial
Investment Bank of India Ltd v. Biswanth Jhunjhunwala[3], has
discussed the issue elaborately and reiterated that the liability of the
guarantor / surety and principal debtor is co-extensive and not in the
alternative.
(b) An unregistered
partnership firm is not illegal but its rights are not enforceable. Comment. 10
Ans: Registration of a partnership firm is not compulsory under
law. The Partnership Act, 1932 provides that if the partners so desire they may
register the firm with the Registrar of Firms of the State in which the main
office of the firm is situated. In order to get a partnership firm registered
an application in the prescribed form must be filed with the Registrar of
Firms. The application should be signed and verified by each partner. A small
amount of registration fee is also deposited along with the application. The
application submitted to the Registrar is examined. If everything is in order
and all legal formalities have been observed, the Registrar shall make an entry
in the register of firms. He will also issue a certificate of registration. Any
change in the information submitted at the time of registration should be
communicated to the Registrar. Registration does not provide a legal entity to
the partnership firm.
Though registration of firm is not compulsory,
Indian Partnership Act by creating certain limitations on the rights of the
firm made it obligatory for every firm to take registration. Consequences of
Non-Registration: An unregistered partnership firm suffers from the following
limitations:
1. It cannot enforce its claims against a
third party in a court of law.
2. It cannot claim adjustment for any sum
exceeding Rs. 100. Suppose an unregistered firm owes Rs. 1200 to A and A owes
Rs. 1000 to the firm the firm cannot enforce adjustment of Rs. 1000 in a court
of law.
3. It cannot file a legal suit against any of
its partners.
4. Partners of an unregistered firm cannot
file any suit to enforce a right against the firm.
5. A partner of an unregistered firm cannot
file a suit against other partners. Non-registration of a firm, however, does
not affect the following rights:
(i) The right of a partner to sue for the
dissolution of the firm or for the accounts of a dissolved firm or to enforce
any right or power to realise the property of a dissolved firm.
(ii) The power of an Official Assignee or
Receiver to realise the property of an insolvent partner.
(iii) The rights of the firm, or its partners,
having no place of business.
(iv) Any suit or set off in which the claim
does not exceed rupees one hundred.
(v) The right of a third party to sue the
unregistered firm or its partners.
5. State the rules
regarding transfer of ownership from seller to buyer in a sale of goods. (20)
Ans: Transfer
Of Property In Goods
The property in
the goods is said, to be transferred from the seller to the buyer when the
latter acquires the proprietary rights over the goods and the obligations
linked thereto. 'Property in Goods' which means the ownership of goods, is
different from ' possession of goods' which means the physical custody or
control of the goods. The transfer of property in the goods from the seller to
the buyer is the essence of a contract of sale. Therefore the moment when the
property in goods passes from the seller to the buyer is significant for
following reasons:
1. Ownership: The
moment the property in goods passes, the seller ceases to be their owner and
the buyer acquires the ownership. The buyer can exercise the proprietary rights
over the goods. For example, the buyer may sue the seller for non-delivery of
the goods or when the seller has resold the goods, etc.
2. Risk follows
ownership: The general rule is that the risk follows the ownership,
irrespective of whether the delivery has been made or not. If the goods are
damaged or destroyed, the loss shall be borne by the person who was the owner
of the goods at the time of damage or destruction. Thus the risk of loss prima
facie is in the person in whom the property is.
3. Action Against
Third parties: When the goods are in any way damaged or destroyed by the action
of third parties, it is only the owner of the goods who can take action against
them.
4. Suit for
Price: The seller can sue the buyer for the price, unless otherwise agreed,
only after the gods have become the property of the buyer.
5. Insolvency: In
the event of insolvency of either the seller or the buyer, the question whether
the goods can be taken over by the Official Receiver or Assignee, will depend
on whether the property in goods is with the party who has become insolvent.