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.
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.
Menu card of a restaurant showing the prices of food items.
Railway timetable on which the train timings and fares are shown.
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.
(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.
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.
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.
(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.
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."
(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, 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.