IGNOU Solved Question Papers - ECO 05 (December' 2011)

Bachelor’s Degree Programme
Term – End Examination: December 2011
Time: 2 hours
Maximum Marks: 50
Note: Attempt any five questions. All questions carry equal marks.
1. Explain the essentials of a valid contract. 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:

  1. Offer & Acceptance: There must be two parties to an agreement.
  2. 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.
  3. Lawful consideration: An agreement to be enforceable by law must be supported by consideration.
  4. 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.  
  5. Free Consent: It is necessary between the contracting parties to have a free & genuine consent to an agreement.
  6. Lawful object: The object of an agreement must be lawful. It should not be illegal, immoral or it should not oppose public policy.
  7. 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.
  8. 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.
2. Distinguish between fraud and misrepresentation. What are their effects on a contract? 4, 6
Ans: The basic difference between misrepresentation and fraud is that in fraud the person making the representation does not himself believe in the truth of the statement he is making whereas in situations of innocent misrepresentation the person making the statement may believe that what he is saying is true. This is due to the fact that the person making the statement is simply repeating what another person has asserted to be true. In cases of fraud, the person making the statement is a complete liar and is making the statement to deceive others to enter into a contract. However this is just the general rule. Misrepresentation is not an offence under Indian penal code and hence not punishable. Fraud, In certain cases is a punishable offence under Indian penal code.
EFFECTS OF FRAUD ON THE VALIDITY OF CONTRACT or REMEDIES: In case of fraud the contract is voidable at the option of defrauded party. A party has the following three options:
1. Contract May be Avoided: Defrauded party may avoid itself from the contract where his consent was obtained by fraud. In case of fraudulent silence he cannot avoid if he had the means to discover the truth.
2. Act Upon the Contract: Second option for the defrauded party is that it may act upon the contract and may ask the other party to fulfill the terms and conditions of the contract.
3. Claims for Damages: Third option for the defrauded party is that may claim for damages. Suit for damage can be filled.
1. Voidable: In case of misrepresentation the contract is voidable at the option of the party whose consent is caused.
2. Acceptable: The contract may be accepted by the aggrieved party but it can insist to be placed in that position if the representation made were true.

3. Discuss the circumstances under which surety is discharged from his liability. 10
Ans: Important circumstances under which a surety is discharged from his liability are given below:
1. Notice of revocation: An ‘ordinary guarantee’ for a single specific debt or transaction cannot be revoked once it is acted upon. But a ‘continuing guarantee’ may at any time, be revoked by the surety as to future transactions, by giving notice to the creditor (Sec. 130). Thus, in such a case, the liability of the surety comes to an end in respect of future transaction which may be entered into by the principal debtor after the surety has served the notice of revocation. The surety shall, however, continue to remain liable for transactions entered into prior to the notice.
2. Death of surety (Sec. 131): In case of a ‘continuing guarantee’ the death of a surety also discharges him from liability as regards transactions after his death, unless there is a contract to the contrary.
3. Variance in terms of contract (Sec. 133): A surety is discharged from liability when, without his consent, the creditor makes any change in the terms of his contract with the principal debtor because a surety is liable only for what he has undertaken in the contract.
4. Release or discharge of principal debtor (Sec. 134): This Section provides for the following two ways of discharge of surety from liability:
(a) The surety is discharged by any contract between the creditor and the principal debtor, by which the principal debtor is released.
(b) The surety is also discharged by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor.
5. Arrangement by creditor with principal debtor without surety’s consent (Sec. 135): Where the creditor, without the consent of the surety, makes an arrangement with the principal debtor for composition, or promises to give him time or not to sue him, the surety will be discharged.
6. Creditor’s act or omission impairing sureties’ eventual remedy (Sec. 139): It is the duty of the creditor to do every act necessary for the protection of the rights of the surety and if he fails in this duty, the surety is discharged.
7. Loss of security (Sec. 141): If the creditor loses or, without the consent of the surety, parts with any security given to him, at the time of the contract of guarantee, the surety is discharged from liability.
8. Invalidation of the contract of guarantee (in between the creditor and the surety): A surety is also discharged from liability when the contract of guarantee (in between the creditor and the surety) is invalid.
4. Define partnership and explain the essential characteristics of a partnership. 2, 8
Ans: In India, Partnership firm is governed by the Indian Partnership Act 1932. Section 4 of this act defines partnership as: "The relationship between persons, who have agreed to share the profits of a business carried on by all or any one of them acting for all."
According to Prof. Haney, partnership is "the relation between persons competent to make contract who agree to carry on a lawful business in common with a view to private gain."
Partnership in this way is an agreement, between two or more persons to carry on legal business with profit motive, which is carried on by all or any one of them acting for all.
Partnership has the following characteristics:
  1. Contract: Partnership is the result of contract between the partners and their relation of partnership arises from contract and not from status.
  2. Number of Persons: In a partnership firm there must be at least two people to form the business. Partnership Act 1932, does not specifies the maximum numbers of persons, but the Indian Company Act 1956, restricts the number of Partners to 10 for a partnership carrying on banking business and 20 in case of other kinds of business.
  3. Profit-Sharing: The agreement between/among partners must be to share profit or losses. It is not essential that all the partners must share the losses also. There may be specific provision in the partnership deed that a particular partner or partners shall not bear the losses.
  4. Business: Business must be carried on by all the partners or any one of them acting as agent of other partners. Each partner carrying on the business is the principle as well as the agent for all the other partners.
  5. Motive: For a partnership firm there must be motive to earn profit. A partnership firm cannot be formed with service motive.
  6. Legality of the Business: The business to be carried on by the partners must be legal. There should be lawful consideration and the business should not be illegal in the eyes of law.

5."No seller can pass a better title than he himself has". Explain this rule. Are there any exceptions to this rule? Explain. 10
Ans: "A seller cannot convey a better title to the buyer then he himself has." Only the owner of the goods or his authorized person can sell the goods. If the seller is not the owner of the good then a buyer can not become the owner of the good even he has paid the value of good. Example: Mr. Nonee steals a car and sells to Mr. Rao for sale. Mr. Rao cannot become the owner of a car because Mr. Nonee seller was not the owner of car.
But there are certain exceptions to this rule which are given below
1. Agent Exceptions of Rules: If goods are in a possession of a mercantile agent, he can pass a good title even he had no authority or his authority was restricted.
2. Sale By Unpaid Seller: An unpaid seller can sell the goods to the subsequent buyer if first buyer fails to make the full payment.
3. Sale By Pledgee: Under some special circumstances a pledgee can also sell the goods and buyer also gets a good title.
4. Sale of Lost Goods: If a person finds some lost well. Finder can sell the goods under some circumstances. The buyer gets the good title.
5. Mercantile Agent: If the goods or documents of title are in the possession of a mercantile agent, he can pass a good title. He can convey a better title to the buyer without having any authority to do so.
6. Second Sale Due To Possession: A person has sold the goods but the goods or a document continuously remains in his possession. He may sell them to the third party. If third party obtains the delivery of the goods and he has no knowledge about the previous sale he will get a good title.
7. Sale By One of the Joint Owner: If there are many partners in business and one of them has the sole possession of goods with the permission of the other partners. If he sells the goods, the buyer will get a good title of goods, if he buys in good faith.
8. Sale Under Implied Authority: In some cases the conduct or any act of owner of goods leads the buyer to believe that seller id the owner of the goods. It is presumed that seller has the authority to sell the goods. In such cases buyer can get a better title of goods than the seller.

9. Sale Under Voidable Contract: If a person obtains the goods under voidable contract and sells before the revocation of contract to other person. The buyer who obtains such goods has better title of goods if he acts in good faith.
10. Solvency Case: In case of companies and individuals the official receiver can convey better title to the buyer.

6. Who is an 'Unpaid Seller’? Explain the rights of an unpaid seller against the buyer personally.   4, 6
Ans: Unpaid Seller: Section 45 define an unpaid seller as “One who has not been paid or tendered the whole of the price or one who receives a bill of exchange or other negotiable instrument as conditional payment and the condition on which it was received has not been fulfilled by reason of dishonour of the instrument or otherwise.”
The following conditions must be fulfilled before a seller can be deemed to be an unpaid seller:
(i) He must be unpaid and the price must be due.
(ii) He must have an immediate right of action for the price.
(iii) A bill of exchange or other negotiable instrument was received but the same has been dishonoured.
The rights of an unpaid seller can be broadly divided under 2 main headings:
1) Rights against the goods and
2) Rights against the buyer
1) Rights of an unpaid seller against the buyer personally: In addition to the unpaid seller’s rights against the goods, he has rights even against the buyer personally. They are as follows:
1. Suit for Price: Generally the seller can sue for the price of the goods only when the property in the goods has passed to the buyer and the price is not paid as per the terms of the contract. In cases where the property in the goods has not passed to the buyer, suit for price generally, cannot be maintained, unless under the contract, price is payable on a certain date irrespective of the delivery of passing of the ownership of the goods.
2. Suit for damages: The unpaid seller can bring an action for damages where the buyer wrongfully refuses to accept the goods or repudiates the contract.
3. Suit for interest: In case of breach of contract on the part of the buyer, the unpaid seller can claim for interest from the date of tender of the goods or from the date, the price becomes payable along with a suit for price.

7. Differentiate between bailment and pledge. Discuss the duties of a bailee. 4, 6
Ans: Difference between Bailment and Pledge: Pledge is a special kind of Bailment. Thus, all Pledges are Bailments but the reverse is not true. 
Bailment can be for many reasons ranging for reward to gratuitous.
A pledge is bailment done for a specific type of purpose, which is to secure a loan or performance of a promise.
The bailee does not get a right to sell the goods.
A pawnee has a right to sell the goods in case of default.
The bailee only gets a right of lien over the goods.
A pawnee gets a right of retainer and a special interest in the goods, which is more than just the lien.
The bailee can use the goods bailed.
The pawnee has no right to use the goods.
The bailee is not responsible for the loss, destruction, or deterioration if he uses the goods with reasonable care.
The pawnee is absolutely liable for the upkeep of the goods.

Duties of Bailee
  1. Bailee should take reasonable care on goods.
  2. Bailee should use the goods for an unauthorised purpose.
  3. Bailee should not setup adverse title.
  4. Bailee should return the goods after fulfillment of purpose.
  5. Bailee should return not only delivered goods, but also additions.
  6. Bailee should not mix up the goods with his own goods or others goods. If bailee has mixed the goods and the goods are of sufferable nature, bailee has to face the cost of separation. If the goods are of insufferable nature, bailee has to compensate bailer.
8."An agreement in restraint of trade is Void". Comment on this statement mentioning the exceptions if any. 10
Ans: The Indian Contract Act, 1872, which provides a framework of rules and regulations, governing the formation and performance of a contract in India deals with the legality of such non-compete covenants. It stipulates that an agreement, which restrains anyone from carrying on a lawful profession, trade or business, is void to that extent. Under section 27 of the Indian Contract Act, 1872 agreements in restraint of trade are void.
Agreement in restraint of trade is defined as the one in which a party agrees with any other party to restrict his liberty in the present or the future to carry on a specified trade or profession with other persons not parties to the contract without the express permission of the latter party in such a manner as he chooses. Providing for restraint on employment in the employment contracts of the employees in the form of confidentiality requirement or in the form of restraint on employment with competitors has become a part of the corporate culture.
There are two kinds of exceptions to this rule under section 27 of the Indian Contract Act:
1) Exceptions created by the statutes and
2) Those created by judicial interpretations of section 27.
1) Statutory exceptions:
i) Sale of goodwill: Proviso to section 27 provides that one who sales the goodwill of a business may agree with the buyer to restrain from carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein, provided that such limits appear to the court reasonable, regard being had to the nature of the business.
ii) Partnership Act:
a) According to section 11 partners may be restrained from carrying on any business other than that of the firm by virtue of contracts whereby determining the mutual rights and duties of the partners.
b) Section 36 enables the partners to restrain an outgoing partner from carrying on a similar business within a specified period and local limits.
c) The partners may make an agreement upon or in anticipation of dissolution by which they may restrain each other from carrying on a similar business to that of the firm.
d) An agreement by a retiring partner not to carry on similar business on the land belonging to him and adjoining to the factory of the firm is valid.
2. Judicial interpretations:-
i) Trade combinations: The practice for traders and manufacturers in the same line of business to carry on their trade in an organized way is said to be trade combinations and object of this association is to regulate business and not to restrain it.
ii) Exclusive Dealing agreements: When a producer or manufacturer likes to market his goods through a sole agent or distributer and the latter agrees in turn by way of agreement not to deal with the goods of any other manufacturer, it becomes an exception to section 27 of the Indian Contract Act.
iii) Restraints upon Employees: Trade secrets, the names of customers, all such things are objective knowledge and these may not be given away by a servant. They are his master’s properties. A servant may therefore be restrained from taking part in any business in direct competition with that of his employer.
9. (a) Explain the legal position of a minor: 6, 4
(i) as a promisee
(ii) as an agent
Ans: (i) Position of a Minor as a promise:  If a contract is beneficiary to a minor it can be enforced by him. There is no restriction on a minor from bring a beneficiary, for example, being a payee or a promisee in a contract. Thus a minor is capable of purchasing immovable property and he may sue to recover the possession of the property upon tender of the purchase money. Similarly a minor in whose favor a promissory note has been executed can enforce it.
(ii) Position of a Minor as an agent: A minor can act as an agent. But he will not to be liable to his principal for his acts. A minor can draw, deliver and endorse negotiable instruments without himself being liable.
(b) Ramesh sold some goods to Kamal on credit not knowing that Kamal was a minor. Ramesh did not receive the payment. Can he sue Kamal? Give reasons.