Saturday, February 23, 2013

Ignou Solved Assignments: ECO - 5


Answer of Question no.1(a).

Section 13 defines consent as “Two or more persons are said to consent when they agree upon the same thing in the same sense.” Consent of the party’s means, the parties to a contract must mean the same thing in the same sense. It means ‘Consensus ad idem’. For e.g. A have 2 cars – Maruti 800 and Maruti Zen. A offers to sell the Maruti 800 while B accepts the offer thinking the car to be sold is Maruti Zen. Here there is no consent.

Free consent refers to consent which has been rendered by free will of the parties i.e. consent is voluntary. Section 10 of the Act, specifically states that a contract is valid and enforceable if it is made with the free consent of the parties.

Section 14 defines ‘Free Consent’ as – Consent is said to be free consent when it is not caused by:
(i) Coercion, as defined in Section 15, or  Coercion" is the committing or threatening to commit any act forbidden by the Indian Penal Code, or the unlawful detaining, or threatening to detain any property to the prejudice of any person whatever, with the intention to inter into contact.  A person to whom money has been paid or anything delivered under coercion must repay or return it.

(ii) Undue influence, as defined in Section 16, or  A contract is said to be induced By undue influence where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage of the other.

(iii) Fraud as defined in Section 17, or  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.

(iv) Misrepresentation as defined in Section 18, or Misrepresentation means and includes:
a)      the positive assertion in a manner not warrant by the information of the person making it of that which is not true though he believe it to be true

b)      any breach of duty which without an intent to deceive, gains an advantage to the person committing it or any one claiming under him by misleading another to his prejudice or to the prejudice of anyone claiming under him; causing however innocently a party to an agreement to make a mistake as to the substance of the thing which is the subject of the agreement.

(v) Mistake, subject to the provisions of Sections 20, 21 and 22.  Mistake is erroneous belief about something. It may be a (1) mistake of law, or (2) mistake of fact. It may be a (1) mistake of law of the country, or (2) mistake of law of a foreign country. The general rule as regards mistake of law of the country is that ignorance of law is no excuse. Mistake of law of a foreign country is regarded as a mistake of fact.

Answer of Question no. 1(b).

Coercion, as defined in Section 15, or  Coercion" is the committing or threatening to commit any act forbidden by the Indian Penal Code, or the unlawful detaining, or threatening to detain any property to the prejudice of any person whatever, with the intention to inter into contact.  A person to whom money has been paid or anything delivered under coercion must repay or return it.

(1) A Hindu widow is forced to adopt X under threat that her husband’s corpse (dead body) would not be allowed to be removed unless she adopts X. The adoption is voidable as having been induced by coercion [Ranganayakamma v. Alwar Setti, 13 Mad. 24.].

(2) A threatens to kill B if he doesn’t transfer his house in A’s favour for a very low price. The agreement is voidable for being the result of coercion.

(3) An agent refused to hand over the books of accounts of the principal unless he (principal) released him from all liabilities concerning past transactions. Held : The release so given was not binding, being the outcome of coercion [Muthia v. Karuppan 50 Mad. 780].

Note that, it is not necessary that coercion must have been exercised against the promisor only, it may be directed at any person. Examples

(1) A threatens to kill B (C’s son) if C does not let out his house to A. The agreement is caused by coercion.

(2) X threatens to kill A if he does not sell his house to B at a very low price. The agreement is caused by coercion though X is stranger to the transaction. Further, note that, it is immaterial whether the Indian Penal Code is or is not in force in the place where the coercion is employed (Explanation to Section 15).

Features of Coercion:
It is immaterial whether Indian penal code (IPC) is or is not in force in the place where the coercion is employed [Explanation to Section 15]. It is not required that coercion must proceed from the party to the contract. It may proceed from a third person also It is not necessary that coercion be immediately directed against the party whom it is intended to induce to enter into a contract. It may be directed against any third person whatever. Coercion must be done to induce the other party to enter into a contract

When consent to an agreement is caused by coercion, the agreement is a contract voidable at the option of the party whose consent was so obtained. In other words, the aggrieved party can have the contract set aside or if he so desires to insist on its performance by the other party.

Liability of Person to Whom Money is Paid or Thing Delivered Under Coercion (Section 12) A person to whom money has been paid, or anything delivered under coercion must repay or return it.

A railway company refuses to deliver 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 so much of the charge as was illegally excessive.

Answer of Question no. 2(a).

Quantum Meruit
The phrase “quantum meruit” means ‘as much as merited’ or ‘as much as earned’. The general rule of law is that unless a person has performed his obligations in full, he cannot claim performance from the other. But in certain cases, when a person has done some work under a contract, and the other party repudiated the contract, or some event happens which makes the further performance of the contract impossible, then the party who has performed the work can claim remuneration for the work he has already done. The right to claim quantum meruit does not arise out of the contract as the right to damages does; it is a claim on the quasi-contractual obligation which the law implies in the circumstances [Patel Engg. Co. Ltd. v Indian Oil Corporation Ltd., AIR (1975) Pat. 212].

The claim on ‘quantum meruit’ arises in the following cases:
1. When a contract is discovered to be unenforceable (Section 65): When an agreement is discovered to be void or 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.

2. When one party abandons or refuses to perform the contract: Where there is a breach of contract, the aggrieved party is entitled to claim reasonable compensation for what he has done under the contract.

3. When a Contract is divisible: When a Contract is divisible, and the party not in default, has enjoyed the benefit of the part performance, the party in default may sue on quantum meruit.

4. When an indivisible contract is completely performed but badly: When an indivisible contract for a lump sum is completely performed, but badly, the person who has performed can claim the lump sum less deduction for bad work.

5. In case of Non – gratuitous Act – Three condition
(i) The thing must have been done or delivered lawfully.
(ii) The person who has done or delivered the thing must not have intended to do so gratuitously  And
(iii) The person from whom the act is done must have enjoyed the benefit of the act.

Answer of Question no.2(b).

Supervening or Subsequent Impossibility (Section 56)
Impossibility in a contract may either be inherent in the transaction or it may be introduced later by the change of certain circumstances material to the contract.

Examples of Inherent Impossibility
(1) A promises to pay B Rs. 50,000 if B rides on horse to the moon. The agreement is void.

(2) A agrees with B to discover treasure by magic. The agreement is void. The impossibility in these cases is inherent in the transaction. Such a contract is void ab-initio. On the other hand, where a contract originates as one capable of performance but later due to change of circumstances its performance becomes impossible, it is known to have become void by subsequent or supervening impossibility. We shall now consider this kind of impossibility in details.

Subsequent Impossibility in England is referred to as ‘Doctrine of Frustration’. A contract is deemed to have become impossible of performance and thus void under the following circumstances:

1.       Destruction of subject-matter of the contract: Where the subject-matter of a contract is destroyed, for no fault of the promisor, the contract becomes void by impossibility.

Example: A music hall was agreed to be let out on certain dates, but before those dates it was destroyed by fire. Held, that the owner was absolved from liability to let the building as promised [Taylor v. Caldwell (1863) 122 E.R. 299].

2.       By the death or disablement of the parties: Where the performance of the contract must be executed personally by  the promisor, his death or physical disability to perform shall render the contract void and thus exonerate him from the obligation.

Examples: (1) A and B contract to marry each other. Before the time fixed for the marriage, A dies. The contract becomes void.

(2) A, a singer, agrees with B to give his performance at some particular theatre on a specified date. While on his way to the theatre A meets an accident and is rendered unconscious. The agreement becomes void.

3.       Subsequent illegality: Where by subsequent legislation the performance of a contract is forbidden by law, the parties are absolved from liability to perform it.
Example: A contracts to supply B 100 bottles of wine. Before the contract is executed, i.e., bottles supplied, dealings in all sorts of liquor are declared forbidden, the contract becomes void.

4.       Declaration of war: If war is declared between two countries subsequent to the making of the contract, the parties would be exonerated from its performance.
Example: A contracts to take indigo for B to a foreign port. A’s Government afterwards declares war against the country in which the port is situated. The contract becomes void when war is declared.

5. Non-existence or non-occurrence of a particular state of things: When certain things necessary for performance cease to exist the contract becomes void on the ground of impossibility.
Examples: (1) A and B contract to marry each other. Before the time fixed for the marriage, A goes mad. The contract becomes void.
(2) A contract was to hire a flat for viewing the coronation procession of the king. The procession had to be cancelled on account of king’s illness. In a suit for the recovery of the rent, it was held that the contract became impossible of performance and that the hirer need not pay the rent [Krell v. Henry (1903) 2 K.B. 740].

Apart from the cases mentioned above, impossibility does not discharge contracts. He that agrees to do an act should do it, unless absolutely impossible which may happen in any one of the ways discussed above. Some of the circumstances in which a contract is not discharged on the ground of subsequent impossibility are stated hereunder:

1. Difficulty of performance: The mere fact that performance is more difficult or expensive or less profitable than the parties anticipated does not discharge the duty of performance.

2. Commercial impossibility: It means that if the contract is performed, it will result in a loss to the promisor. Commercial impossibility to perform a contract does not discharge the contract.

3. The promisor is not exonerated from his liability if the third person, on whose work the promisor relied, fails to perform. Thus, a wholesaler’s contract to deliver goods is not discharged because a manufacturer has not produced the goods concerned.

4. Strikes, lockouts and civil disturbances: Events like these do not terminate contracts unless there is a clause in the contract to that effect.

5. Failure of one of the objects: If the contract is made for several purposes, the failure of one of them does not terminate the contract.

Answer of Question no. 3(a).

The dissolution of partnership between all the partners of a firm is called the "dissolution of the firm". A firm may be dissolved with the consent of all the partners or in accordance with a contract between the partners.

Modes Of Dissolution Of A Partnership Firm:
The Indian Partnership Act, 1932 provides that a partnership firm may be dissolved in any of the following modes:

a)      Compulsory dissolution;
b)      Dissolution on the happening of certain contingencies;
c)       Dissolution by notice of partnership at will;
d)      Dissolution by the court.

a)      Compulsory Dissolution: A firm is dissolved by the adjudication of all the partners or of all the partners but one as insolvent, or by the happening of any event which makes it unlawful for the business of the firm to be carried on or for the partners to carry it on in partnership.

However, where more than one separate venture or business or undertaking is carried on by the firm, the illegality of one or more ventures or businesses or undertakings shall not by itself cause the dissolution of the firm in respect of its lawful ventures, businesses and undertakings.

b)      Dissolution On The Happening Of Certain Contingencies: Subject to contract between the partners, a firm is dissolved:
1)      if constituted for a fixed term, by the expiry of that term;
2)      if constituted to carry out one or more adventures or undertakings, by the completion thereof;
3)      by the death of a partner; and
4)      by the adjudication of a partner as an insolvent.

c)       Dissolution By Notice Of Partnership At Will: Where the partnership is at will, the firm may be dissolved by any partner giving notice in writing to all the other partners of his intention to dissolve the firm. The firm is dissolved as from the date mentioned in the notice as the date of dissolution or, if no date is so mentioned, as from the date of the communication of the notice.

d)      Dissolution by Court: A court may order a partnership firm to be dissolved in the following cases:
1)      When a partner becomes of unsound mind
2)      When a partner becomes permanently incapable of performing his/her duties as a partner,
3)      When partner deliberately and consistently commits breach of agreements relating to the management of the firm;
4)      when a partner’s conduct is likely to adversely affect the business of the firm;
5)      when a partner transfers his/her interest in the firm to a third party;
6)      When the court regards dissolution to be just and equitable.

Answer of Question no. 3(b).
Any partner may, with the consent of all the other partners OR according to thedeed of partnership where the partnership is a "partnership at will", retire by giving notice in writing to all other partners.

The retirement of a partner could have the effect of dissolving a partnership firm, and bring the partnership to an end. However, it is very possible to reconstitute it by inducting new members.

It may be noted that as per Section 32 of the Indian Partnership Act, 1932, a retiring partner continues to be liable to third parties for prior actions while he was still a partner even if the firm is reconstituted by the remaining partners.

Rights and duties of partners:
The Rights of a partner are as under:

a)      To take active part in the business: Every partner has a right to take active part in the conduct and management of the business of the firm.

b)      To share Profits: Every partner has a right to share profits earned and are liable to contribute to the losses incurred by the firm.

c)       To be consulted:  Every partner has a right to be consulted in all matters affecting the business of the partnership firm before any decision is been taken. In case of difference of opinion it may be settled by decision of majority of the partners.

d)      To have access to the accounts:  Every partner has a right to have access, inspect and copy the books of accounts of the firm.

e)      To be indemnified: Every partner has a right to be indemnified for the expenses incurred or payments made in the ordinary course of business.

f)       To use the property of the firm:  Every partner has a right to use the property of the firm for the purposes of the business of the firm. If the partner uses the firm’s property for private purpose then he is liable to compensate the firm for the same.

g)      Interest on capital:  Every partner has a right to receive interest on capital at a certain rate as may be specified and agreed in the partnership agreement. Such interest is payable only out of profits, in any, earned by the firm.

h)      Interest on loan: Every partner has a right to receive interest on loan at the rate of 6% p.a. on any loans or advance payments made by him beyond the capital. Such interest is payable not only out of the profits but also from the assets of the firm.

i)        To act as agent of the firm:  Every partner has a right to act as the agent of the firm and to bind the firm and other partners for acts done by him in ordinary course of business.

j)        To retire: A partner has a right to retire
(a) with the consent of all the other partners, or
(b) in accordance with the express agreement between the partners or
(c) in case of Partnership-at-will by giving notice to all the other partners of his intention to retire.

The duties of a partner are as under:
a)      To carry on the business to the common advantage:  Every partner is bound to  Carry on the business of the firm to the greatest common advantage.

b)      To be just and faithful to each other in the mutual dealings.  To use reasonable care and skill in the performance of his duties and Render true accounts and full information of all things, affecting the firm, to any partner or his legal representative.

c)       To indemnify: Every partner is bound to indemnify the firm  For any loss cause to it by his fraud in the conduct of business of the firm. For any loss incurred due to his willful neglect in the conduct of the business of the firm.

d)      To attend diligently to his duties:  Every partner is bound to attend diligently to his duties in the conduct of the business of the firm. He must use his knowledge and skill for the benefit of the firm.

e)      To account for private profits:  If a partner derives any benefit, without the consent of the other partners from any transactions of the firm or from any use of the partnership property, name or business connection. He must account for it and compensate it to the firm. There exists a fiduciary relationship between partners and therefore no partner is entitled to make any personal profit.

f)       To account for profit in competing business: A partner must not carry a business as of competing nature with the firm. If he does that then he is bound to account for and compensate to the firm all the profits made by him in that competing business.

g)      To act within authority: Every partner is bound to act within the scope of his actual or implied authority.

h)      To hold and use the property of the firm exclusively for firms business:  Every partner is bound to hold and use the property of the firm exclusively for the purposes of the business of the firm.

i)        Not to assign his rights:  A partner cannot assign rights and interest in the firm to an outsider so as to make him the partner of the firm. He can, however, assign his share of the profit and share in the assets of the firm.

j)        To be liable jointly and severally: Every partner is liable jointly with all the other partners and also severally for all the acts of the firms done during the period he is the partner.

Answer of Question no. 4(a).
Sections 7 and 8 deal with the effect of perishing of goods on the rights and obligations of the parties to a contract of sale. Under these Sections, the word 'perishing' means not only physical destruction of the goods but it also covers:

(a) Damage to goods so that the goods have ceased to exist in the commercial sense, i.e., their mechantable character as such has been lost by water and becomes almost stone or where sugar becomes sharbat and thus are unsaleable as cement or sugar;

(b) Loss of goods by theft (Barrow Ltd. vs. Phillips Ltd.);

(c) Where the goods have been lawfully requisitioned by the government (Re Shipton, Anderson & Co.).

It may also be mentioned that it is only the perishing of specific and ascertained goods that affects a contract of sale. Where, therefore, unascertained goods form the subject-matter of a contract of sale, their perishing does not affect the contract and the seller is bound to supply the goods from wherever he likes, otherwise be liable for breach of contract. Thus where A agrees to sell to B ten bales of Egyptian cotton out of 100 bales lying in his godown and the bales in the godown are completely destroyed by fire, the contract does not become void. A must supply ten bales of cotton after purchasing them from the market or pay damages for the breach.

The effect of perishing of goods may be discussed under the following heads:
1. Perishing of goods at or before making of the contract (Sec. 7): This may again be divided into the following sub-heads:

(i) In case of perishing of the whole of the goods:
Where specific goods form the subject- matter of a contract of sale (both actual sale and agreement to sell), and they, without the knowledge of the seller, perish, at or before the time of the contract, the contract is void. This provision is based either on the ground of mutual mistake as to a matter of fact essential to the agreement, or on the ground of impossibility of performance, both of which render an agreement void ab-initio.

A sold to B a specific cargo of goods supposed to be on its way from England to Bombay. It turned out, that before the day of the bargain, the ship conveying the cargo had been cast away and the goods were lost. Neither party was aware of the fact. The agreement was held to be void (Hastie vs Conturier).

(ii) In case of perishing of only 'a part' of the goods.
Where in a contract for the sale of specific goods, only part of the goods are destroyed or damaged, the effect of perishing will depend upon whether the contract is entire or divisible. If it is entire (i.e., indivisible) and only part of the goods had perisohed, the contract is void. If the contract is divisible, it will not be void and the part available in good condition must be accepted by the buyer.

2. Perishing of goods before sale but after agreement to sell Sec. 8:
Where there is an agreement, to sell specific goods and subsequently the goods, without, any fault on the part of the seller or buyer, perish before the risk passed to the buyer, the agreement is there by avoided. This Provision is based or the ground of Supervening impossibility of performance which makes a contract void.

If only part of the goods agreed to be sold perish, the contract becomes void if it is indivisible. But if it is divisible then the parties are absolved from their obligations only to the extent of the perishing of the goods (i.e., the contract remains valid as regards the part available in good condition).

It must further be noted that if fault of either party causes the destruction of the goods, then the party in default is liable for non-delivery or to pay for the goods, as the case may be (Sec. 26). Again, if the risk has passed to the buyer, he must pay for the goods, though undelivered [unless otherwise agreed risk prima facie passes with the property (Sec. 26).]

A buyer took a horse on a trial for 8 days on condition that if found suitable for his purpose, the bargain would become absolute. The horse died on the 3rd day without any fault of either party. Held, the contact, which was in the form of an agreement to sell, becomes void and the seller should bear the loss (Elphick vs. Barnes).

3. Effect of Perishing of Future Goods :
As observed earlier, a present sale of future goods always operates as an agreement to sell [Sec. 6(3)]. As such there arises a question as to whether Section 8 applies to a contract of sale of future goods (amounting to an agreement to sell") as well? The answer is found in the leading case of Howell vs. Coupland, where it has been held that future goods, if sufficiently identified, are to be treated as specific goods, the destruction of which makes the contract void.

C agreed to sell to H 200 tons of potatoes to be grown on C's land. C sowed sufficient land to grow the required quantity of potatoes, but without any fault on his part, a disease attacked the crop and he could deliver only about ten tons. The contract was held to have become void.

Answer ofQuestion no. 4(b).

Section 2 (d) of Indian Contract Act, 1872, defines consideration as “When at the desire of the promisor the promise or any other person has done or abstained from doing or does or abstains from doing something, such act abstinence or promise is called a consideration for the promisor.”

Consideration is an advantage or benefit which moves from one party to another. It is the essence of bargain. It is the reciprocal promise i.e. to do something or abstain from doing something in return of a promise. It is necessary for an agreement to be enforceable by law. In consideration both the parties give something & get something in return. It may be in cash or kind.

The following are the rules related to the consideration:
(i) Consideration must move at the desire of promisor. If it is done at the instance of a third party without the desire of the promisor, it is not consideration. Act done at the desire of a third party is not a consideration. Act must be done voluntarily at the desire of the promisor.

(ii) It may move from the Promisee or any other person in the Indian Law so that a stranger to the consideration may maintain a suit. A consideration may move from the promise or any other person. Consideration from a third party is a valid consideration. Under English Law, however, consideration must move from the Promisee only.

(iii) Consideration may be past, present or future. The words used in Section 2(d) are “has done or abstained from doing (past), or does or abstains from doing (present), or promises to do or to abstain from doing (future) something” This means consideration may be past, present or future.

(iv) There must be mutuality in consideration.

(v) It must be real & not illusory, infinite or vague. Although consideration need not be adequate, it must be real, competent and of some value in the eye of law. Physical impossibility, legal impossibility, uncertain consideration & illusory consideration.

(vi)  Consideration must not be unlawful, illegal, immoral or opposed to public policy. The consideration given for an agreement must not be unlawful. Where it is unlawful, the courts do not allow an action on the agreement.

(vii) Consideration need not be adequate. Consideration as already explained means “something in return”. This “something given”. The law simply provides that a contract should be supported by consideration. So long as consideration exists, the courts are not concerned as to its adequacy, provided it is of some value. “The adequacy of the consideration is for the parties to consider at the time of making the agreement, not for the court when it is sought to be enforced.”

Answer of Question no. 5.
Rights of surety are discussed under the following three heads :
a)      Against the principal debtor.
b)      Against the creditor, and
c)       Against the co-sureties.

a)      Rights of the surety against the principal debtor: The surety can exercise the following two rights against the principal debtor:

            1.Right of subrogation [Section 140]
Soon after making a payment and discharging the liability of the principal debtor, the surety is clothed with all the rights of the creditor which he can himself exercise against the principal debtor. This right of the surety is called the right of subrogation. The surety steps into the shoes of the creditor. The surety who pays off the debt is entitled to all the remedies which the creditor could have enforced not merely against the principal debtor but also against all persons claiming under him. Thus, if the creditor has the right to stop goods in transit or has a seller’s lien, the surety, on payment of all he is liable for, would be entitled to exercise these rights, but it is only on payment of the debt, that the surety can claim to walk into the shoes of the creditor.

Example : A mortgages a house to B. C offers himself as a surety for B. A fails to pay. B recovered the amount from C. C can get into the shoes of the creditor B and enforce the mortgage itself against A.

2.Right to indemnity [Section 141]
As between the surety and the principal debtor there is an implied promise to indemnify the surety. Under section 145 the surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under the guarantee. The surety can recover from the debtor not only the actual amount he has paid to the creditor, but also interest thereon. The reason is that the surety is entitled to full indemnification.

Examples : (a) B is indebted to C and A is surety for the debt. C demands payment from A and on his refusal sues him for the amount. A defends the suit having reasonable grounds for doing so, but he is compelled to pay the amount of the debt with costs. He can recover from B the amount paid by him for costs, as well as the principal debt.

(b) A guarantees to C, to the extent of Rs. 2000, payment for rice to be supplied by C to B. C supplied to B rice to a less amount than Rs. 2000 but obtains from A payment of the sum of Rs.2000 in respect of the rice supplied. A cannot recover from B, more than the price of the rice actually supplied.
The actual payment made by the surety entitles him to demand indemnity from the principal debtor. But a promissory note i.e. a promise to pay certain sum at a future date, given by the surety will not entitle him to claim indemnification from the principal debtor.

b)       Rights against the creditor

1)      Right of subrogation
The surety can claim all the securities which the creditor had at the time of giving of guarantee  It is immaterial as to whether the surety had knowledge of such securities or not.  If the securities are returned by the creditor to the principal debtor the surety is discharged to the extent of value of the securities so returned.

2)      Right of set off
Any amount recoverable by the principal debtor may be claimed as deduction.  Any amount recoverable by the surety may be claimed as deduction.  The creditor is bound to keep intact the securities so that they may the available to the surety in the event of the latter paying the debt. The creditor cannot withhold any security, or impair them with additional burden or part with them or lose them. If he does any of these, then the surety is entitled to claim a discharge from all liability. But if the security that is given up is worthless, the surety is not discharged.

c)      Rights against co-sureties

1)      Rights to contribution: General Rule is that All the co-sureties shall contribute equally. But there are some exceptions to this rule. Exceptions:
i. Under the contract of guarantee, the co-sureties may fix limits on their respective liabilities. Even in such a case, the co-sureties shall contribute equally, subject to maximum limit fixed by the co-sureties.
ii. The contract of guarantee may provide that the co-sureties shall contribute in some other proportion.

2)      Right to share benefit of securities: If one co-surety receives any security, all the other co-sureties are entitled to share the benefit of such security.