ECO - 05: MERCANTILE LAW | IGNOU SOLVED ASSIGNMENT 2020 - 21 | B.COM | FREE SOLVED ASSIGNMENT

IGNOU FREE SOLVED ASSIGNMENTS (2020-21)
Elective Course in Commerce
ECO-05: MERCANTLE LAW
ASSIGNMENT- 2020-21

Attempt all the questions:

1. a) ‘A stranger to a Contract cannot sue’. Discuss. Are there any exceptions to this rule? (4+8)

Ans: Section 2 (h) defines ‘Contract’ as an agreement enforceable by law.  If we analyse the definition it has two components viz.

1. An agreement between two or more persons "To Do" or "Not to Do" something.

2. An enforceability of such an agreement at law i.e. personal rights and personal obligations created and defined by agreement must be recognized 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.

It is general law of contract that a person who is not a party to the contract cannot sue upon it. Any person who is not a party of the contract is called stranger to a contract and a stranger to a contract cannot be sued through it may be made for his benefit. This rule is known as the doctrine of privity of contract. This rule can be understood with the help of following example: For example, X and Y enter into an agreement. X promises Y to Sell his Car for Rs.5, 00,000/- and Y accepts to purchase it for the said amount and both of them enter into an agreement. It is a Contract between X and 'Y'. But after sometimes, X sold the car to Z for Rs. 6,00,000. In such a case Z cannot be sued.

A stranger to a contract cannot sue expect in the following cases:

1. Trust: A person in whose favour a trust or other interest in any immovable property can enforce his right even though he is not a party to the agreement.

2. Marriage settlement, partition or other family arrangement: 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 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.

4. Acknowledgement or estoppel: If the promisor by his conduct or acknowledgment or part payment or by estoppel creates privity of contract between himself and the stranger, the stranger can sue.

5. Contract entered into by an agent: If any contract is entered by an agent, it can be enforced by the principal because an agent acts on behalf of the principal.

6. 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.

b) All contracts are agreements but all agreements are not contracts. Discuss. (8)

Ans: Section 2 (h) defines ‘Contract’ as an agreement enforceable by law.  If we analyse the definition it has two components viz.

1. An agreement between two or more persons "To Do" or "Not to Do" something.

2. An enforceability of such an agreement at law i.e. personal rights and personal obligations created and defined by agreement must be recognized 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.”

An agreement in order to become a contract must be enforceable by law. Agreements, which do not fulfill the essential requirements of a contract, are not enforceable. Thus when an agreement enables a person to compel another to do something or not to do something it is called a contract. Thus all contracts are agreements but all agreements are not contracts. In order to become a valid contract an agreement must posses the following essential elements:

a)      Offer & Acceptance: There must be two parties to an agreement i.e. one making the offer & other party accepting it. Acceptance of must be unconditional & absolute. A part of an offer cannot be accepted. The terms of an offer must be definite. The acceptance must be in the mode as prescribed & must be communicated. The acceptor of an offer must accept it in the same way & same sense & at the same time as offered by the offeror i.e. there must be consensus ad idem.

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. Agreements of a social or domestic nature to do not constitute contracts.

c)       Lawful consideration: An agreement to be enforceable by law must be supported by consideration. “Consideration” means an advantage or benefit which one party receives from another. It is the essence of bargain. The agreement is legally enforceable only when both parties give something or get something in return. An agreement to do something without getting anything in return is not a contract. Contract must be in cash or kind.

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.  An agreement with minors, lunatics, drunkards, etc. is not contract & does not get a legal title.

e)      Free Consent: It is necessary between the contracting parties to have a free & genuine consent to an agreement. The consent of parties is said to be free when the contracting parties are of the same mind on the materials of a contract. They must mean the same thing at the same time the parties must not enter into a contract under undue influence, coercion, misrepresentation etc. If these flaws are present in an agreement it does not become a contract.

f)       Lawful object: The object of an agreement must be lawful. It should not be illegal, immoral or it should not oppose public policy. If an agreement suffers from a legal flaw with respect to object it is not enforceable by law & so it is not a contract.

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. For e.g. an agreement to sell a car for Rs. 100/- if sun does not rise tomorrow. This agreement is impossible & so not enforceable by law. 

Thus, agreement is the genus of which contract is the specie.

2. Explain the different types of remedies available to an aggrieved party in case of breach of a contract. (20)

Ans: Breach of Contract: A breach of contract occurs when a party thereto without lawful excuse does not fulfill his contractual obligation or by his own act makes it impossible that he should perform his obligation under it. A breach to a contract occurs in two ways:-

a)      Actual Breach: When a party fails, or neglects or refuses or does not attempt to perform his obligation at the time fixed for performance, it results in actual breach of contract. For e.g. A promises to deliver 100 packs of ice-cream to B on his wedding day. A does not deliver the packs on that day. A has committed actual breach of the contract.

b)      Anticipatory Breach: Anticipatory Breach is a breach before the time of the performance of the contract has arrived. This may take place either by the promisor doing an act which makes the performance of his promise impossible or by the promisor, in way showing his intention not to perform it.

In case of breach of contract, the following remedies are available:

1)      Money damages: When the contract is breached by a party, the common law remedy available for aggrieved party is monetary compensation which is called money damage. Money damage includes a sum of money that is given as compensation for financial losses caused by a breach of contract. The purpose of providing monetary compensation to the aggrieved party to put him into the same financial position he would have been in the contract had been properly performed.

2)      Restitution: Restitution is a remedy designed to restore the injured party to the position occupied prior to the formation of the contract.

3)      Rescission: Rescission of contract is the revocation of the contract. When a contract is broken by one party, the innocent party may approach to court to sue for format rescission of the contract. This will enable him to refuse further performance and be free from contractual obligations. In such a case, the aggrieved party is absolved of all its obligations under the contract.

4)      Injunction: The injunction is an order of the court requiring a person to refrain from doing some act which has been the subject matter of contract. The power to grant injunction is discretionary. This remedy is preventive in nature. This remedy is helpful in case of anticipatory breach of contract. Generally, this remedy is helpful in case of anticipatory breach of contract. Though this remedy, the aggrieved party can restrict the other party from committing acts which are against the contractual obligations.

5)      Specific performance: Specific performance is an equitable remedy that compels one party to perform, his or her duties specified by the contract. In some case, the performance of contractual obligations for a party may be more valuable which cannot be compensated in money. In such circumstances, he can approach to the court for specific performance of the contract. The following contracts cannot be specifically enforced namely:

·         A contract for non-performance of which compensation in money is an adequate relief.

·         A contract which is in its nature determinable

·         When there exists no standard for ascertaining the actual damage caused by the non-performance of the act agreed to be done.

·         That the breach of contract to transfer immovable property can be so relieved.

6)      Quantum meruit: The term “quantum merit” means, ‘as much as he deserves’ or ‘as much as earned’. A suit of quantum meruit is a claim for the value of the material used or supplied under a contract that has become void on account of breach by the other party. When a contract becomes void, any person who has received any advantages under such contract is bound to restore it, to the person from whom he received it. Salient characteristics of quantum meriut:

·         A claim for quantum meriut arises irrespective of contract.

·         The plaintiff can claim on a quasi contract reasonable remuneration for the work done by him.

·         A claim on a quantum meriut cannot be made in respect of a lump sum contract.

The availability of remedy of quantum meriut is as under:

·         A claim for quantum meriut will arise where a claim is brought for the value of work done.

·         The relief of quantum meriut is available to enable a reasonable sum to be claimed for work done under a void contract.

·         This remedy is available also where there was never a contract.

3. Distinguish between (a) coercion and undue influence (b) misrepresentation and fraud with examples. (10+10)

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Ans: (a) Difference between Coercion and undue influence:

Coercion: When a person is compelled to enter into a contract by the use of force by the other party or under a threat, ‘coercion’ is said to have been employed.  Section 15 of the Indian Contract Act, 1872 defines coercion as – “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 of causing any person to enter into an agreement.”

Coercion includes fear, physical compulsion and menace of the goods.  For e.g. A threatens to shoot B if B does not release A from the debt which he owed. B releases A under the threat. The release has been brought about by coercion and therefore voidable at the option of B.

Effect of coercion: According to section 19 when the consent is caused by coercion, fraud, misrepresentation, the agreement is avoidable at the option of the party whose consent was so caused. The aggrieved party may opt to rescind the contract. If the aggrieved party seeks to rescind the contract, he must restore the benefit so obtained under the contract from other party.

Undue influence: Undue influence is the term used to demonstrate unfair use of one’s position or power. There is once party who is in a dominant position, while the other party is in a sub-ordinate position. The dominant party exercising its influence over the subordinate party and getting an unfair advantage. Unlike Coercion where there is physical pressure, in undue influence, there is mental pressure.

Section 16 defines as “ 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 over the other.” 

Effect of undue influence: Section 19 A provides that when the consent is caused by undue influence, the agreement is voidable at the option of the party whose consent was so caused. The aggrieved party may opt to rescind the contract. If the aggrieved party seeks to rescind the contract, he must restore the benefit so obtained under the contract from other party, upon such terms and conditions as to the court may seem just.

From the above discussion, we get the following differences between Coercion and undue influence

(b) Difference between Fraud and Misrepresentation

Ans: Fraud: Fraud means cheating. It is intentionally stating something untrue as true. Section 17 defines Fraud as “Fraud means and included any of the following acts committed by a party to a contract or with his connivance, or his agent, which intent to decided another party thereto or his agent, or to induce him to enter into a contract.”

Effect of Fraud: According to section 19 when consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused.

A party to a contract, whose consent was caused by fraud or misrepresentation, may, if he thinks fit, insist that the contract shall be performed, and that he shall be put in the position in which he would have been, if the representations made had been true.

However, there is one exception to the rule of voidability of contract at the option of aggrieved party. If such consent was caused by misrepresentation, or by silence, fraudulent within the meaning of section 17, the contact, nevertheless, is not voidable, if the party whose consent was so caused had the means of discovering the truth with ordinary diligence.

Misrepresentation: Section18 defines misrepresentation as “a false representation a fact made innocently or non disclosure of a material fact without any intention to deceive the other party.”The essential features of misrepresentation are

(i) Party to the contract making misrepresentation: The false statement must be by the party to the contract or by his agent or by his connivance. Further it must be addressed to the party who is misled. If not address to the party who has been misled it will not be misrepresentation.

(ii) False representation: The statement made by the party must be false, but the person making statement must honestly believe it to be true.

(iii) Representation as to fact: it is very important that the false statement made must be of material facts. A mere expression of once opinion is not statement of facts.

(iv) Object: The representation must be made with the view to inducing the other party to enter into a contract but having no intention to deceive the other.

(v) Actually acted upon: The innocent party must have actually acted on the basis of the statement which turns out to be false.

Effect of Misrepresentation: As per section 19 when consent to an agreement is caused by misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused. A party to a contract, whose consent was caused by misrepresentation, may, if he thinks fit, insist that the contract shall be performed, and that he shall be put in the position in which he would have been, if the representations made had been true.

From the above discussion, we got the following differences between fraud and misrepresentation:

4. a) Discuss the various modes of termination of agency. (10)

Ans: Termination of agency may take place in two ways either by the operation of law or by the act of parties:

1) Termination of agency by the operation of law. 

The following are the situations where the agency is terminated by the operation of law.

a.       Expiry of time: At times contract of agency may get formed for a particular period. In such a case after expiry of that agreed period, termination of agency takes place.

b.      Fulfillment of object: At times the contract of agency may be found for a particular objective or to do a particular venture. In such a case termination of agency takes place after completion of that venture.

c.       Death or lunacy of either party: Whenever principal or agent come across death or lunacy, agency contract gets terminated.

d.      Insolvency of Principal: Principal should have capacity to contract. When principal becomes insolvent, He foregoes capacity to contract and termination of agency takes place. But the act is silent with regard to insolvency of agent. As minor also can act as agent, it can be conformed that insolvent person may act as agent.

e.      Destruction of subject matter:  When subject matter of contract gets destructed, agency contract comes to an end.

f.        Principal – Alien Enemy: When principal is alien and war breaks out between the countries, then principal becomes alien enemy and agency contract gets terminated.

g.       Liquidation of company: On account of legal entity company may act either as principal or agent. Whatever the status may be, if company enters into liquidation, termination of agency takes place.

h.      Termination of Sub-agency: When ever man agency gets terminated on account of any reason, sub-agency also goes off.

2) Termination of agency by the act of Parties. 

The following are the situations where the agency is terminated by the act of parties.

a.       Termination of agency by the Principal: Principal can terminate the contract of agency by giving notice to agent. By doing so if agent comes across any suffering. Principal has to compensate the agent.

b.      Termination of agency by the Agent: Agent also can terminate the agency contract by giving notice to principal but by doing so if principal comes across any suffering, agent has to compensate.

c.       Termination of agency by both the parties to the contract: By means of mutual understanding between principal and agent, the contract of agency may come to an end.

b) Is registration of partnership firm compulsory? What are the consequences of non-registration of a partnership firm. (10)

Ans: Registration of Firms: The registration of a partnership is not compulsory but to avoid future problems it is necessary for a firm to get itself registered under the Indian Partnership Act, 1932. Sec. 58 of the Indian Partnership Act lays down the provisions relating to the registration of a firm. If partners want to get their firm registered, they have to file statement in the prescribed form. The statement can be send by post or delivered to the registrar of the area in which the place of business is situated. The following points must be stated in the statement of registration:

a)      The firm’s name

b)      The principal place of business of the firm

c)       The names of any other places of business

d)      The date when each partner joined the firm

e)      The name and address of the firm

f)       The duration of the firm

The statement of registration shall be signed by the partners or their authorised agents. When the registrar is satisfied that the provisions of Sec. 58 have been duly complied with, he shall record an entry of this statement in the register of firms and shall file the statement.

Consequences of Non-registration of firms

The Indian Partnership Act does not make registration of a firm compulsory nor does it impose any penalty for non registration. It is optional for the firm to get itself registered or not. However, Section 69 puts down certain disabilities to a non registered firm which normally forces the partners the partners to get the firm registered. The effects of non registration are as follows:

(a) No suit by a partner against other partners or firm: A partner of an unregistered firm cannot sue the firm or any partner of the firm to enforce a right arising from the contract or conferred by the Partnership Act. He can do so only if the firm is registered and the person suing is shown as a partner in the register of firms.

(b) No suit against any third party: An unregistered firm cannot sue a third party to enforce a right arising from a contract. The firm can only do so if the firm is registered and the person suing is shown as a partner in the register of firms.

(c) No right to counter claim or to claim setoff: An unregistered firm or any partner thereof cannot claim setoff in the proceedings instituted against a firm by a third party to enforce a right arising from a contract. Setoff means a claim by the firm which would reduce the amount of money payable to the claimant.

(d) Arbitration proceedings: In Jagdish Chandra Gupta vs. Kajaria Traders (India) Limited it was held that arbitration proceedings were barred if the firm was unregistered.

Non registration of the firm however, does not affect the following rights:

(i) The right of a third party to sue the unregistered firm or its partners.

(ii) The right of a partner to sue for dissolution of a firm or for accounts of a dissolved firm or any right to realise the property of the dissolved firm.

(iii) The Power of an official assignee or court receiver to realise the property of an insolvent partner.

(iv) The right of a firm or partners of a firm having no place of business in India.

(v) The right of an unregistered firm to enforce a right arising otherwise then out of a contract.

(vi) One partner can bring a suit for damages for misconduct against the other partner.

(vii) The right to claim Set off in a suit for an amount not exceeding Rs.100/- in value.

5. a) What is the role of ‘caveat emptor’? Explain the exception to this rule. (10)

Ans: The term ‘Caveat Emptor’ means ‘Let the buyer beware’ i.e. in sale of goods, the seller is under no duty to reveal unflattering truths about the goods sold. Therefore, when a buyer buys some goods, he must examine them thoroughly. If the goods turn out to be defective or do not suit his purpose, or if he depends upon his own skill and judgment and makes a bad selection, he cannot blame anybody excepting himself. For e.g. H bought oats from S a sample of which had been shown to H. H erroneously thought that the oats were old. However the oats were new. Held, H could not avoid the contract.

The doctrine of caveat emptor provides that buyers are expected to fend for themselves, protected only by their own skepticism as to the value and condition of the subject of the transaction. The seller has no duty to voluntarily disclose any information regarding the property, whether material or not, and cannot be held liable for any harm sustained by the buyer or others as a result of a defect existing at the time of the sale. It mainly provides protection to the sellers.

The doctrine of Caveat Emptor has certain important exceptions as under:

1. Fitness for buyer’s purpose: Where the buyer, expressly or by implication makes known to the seller the particular purpose for which he needs the goods and depends upon the skill and judgement of the seller whose business it is to supply goods of that description, there is an implied condition that the goods are reasonable fit for that purpose. [Section 16(1)]. For e.g. an order was placed for some Lorries to be used “for heavy traffic in a hilly area”. The Lorries supplied were unfit and broke down. Held, there is a breach of condition as to fitness.

2. Sale under a patent or trade name: In the case of a contract for the sale of a specified article under its patent or other trade name, there is no implied condition that the goods shall be reasonably fit for any particular purpose.

3. Merchantable quality: Where goods are bought by description from a seller who deals in goods of that description, here is an implied condition that the goods are of merchantable quality. But if the buyer has examined the goods, there is no implied condition as regard defect which such examination ought to have revealed. [Section 16(2)]

4. Usage of trade: An implied warranty or condition as regards quality or fitness for a particular purpose may be annexed by the usage of trade. [Section 16(3)]

5. Consent by fraud: Where the consent of the buyer, in a contract of sale, is obtained by the seller by fraud or where the seller knowing conceals a defect which could not be discovered on a reasonable examination, the doctrine of Caveat Emptor does not apply.

b) Who is an unpaid seller? Explain his rights as against goods. (4+6)

Ans: 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.

Rights of an Unpaid Seller against the Goods

According to Section 46, an unpaid seller’s right against the goods are:

(a) A lien or right of retention

(b) The right of stoppage in transit.

(c) The right of resale.

(d) The right to withhold delivery

The above rights of the unpaid can be broadly divided under 2 main headings:

I] Rights against the goods and

II] Rights against the buyer

I] Rights against the goods:

A] Where the property in the goods has passed to the buyer: Where the ownership in the goods has already been transferred to the buyer the following rights are available to an unpaid seller –

1. Right of Lien: The right of lien means the right to retain the possession of goods until the full price is paid or tendered.  When can lien be exercised:

(a) Where the goods have been sold without any stipulation as to credit.

(b) Where the goods have been sold on credit, but the term of credit has expired, and

(c) Where the buyer becomes insolvent.

The right can be exercised even if the seller holds the goods as an agent or bailee. Where part delivery of goods has been made, it can be exercised on the remaining goods, unless circumstances show he has waived his right.

Termination of lien: The right gets terminated under following circumstances:

(a) When the goods are delivered to a carrier or bailee but without reserving the right of disposal.

(b) When the possession is acquired by the buyer or his agent lawfully.

(c) When the right of lien is waived by the seller.

(d) When the buyer has disposed of the goods by sale of in any manner with the consent of the seller.

2. Right of stoppage of goods in transit: The right of stoppage in transit means the right to stopping the goods while they are in transit, to regain possession and to retain them until the price is paid. The essential feature of stoppage in transit is that the goods should be in the possession of someone intervening between the seller and the buyer. The unpaid seller can exercise the right of stoppage in transit if:

(a) The seller has parted with the possession of the goods.

(b) The buyer has not taken possession of goods.

(c) Buyer has become insolvent.

The unpaid seller may exercise the right to stoppage in transit in any one of the following 2 ways:

(a) By taking actual possession of the goods, or

(b) By giving notice of his claim to the carrier or other bailee in whose possession the goods are.

The right to stoppage in transit is lost under the following circumstances:

(a) If the buyer or his agent obtains possession.

(b) If after arrival of the goods at the appointed destination, the carrier or the bailee acknowledges to the buyer that he holds the goods on his (buyer’s) behalf.

(c) If the carrier or bailee wrongfully refuses to deliver the goods to the buyer or his agent.

(d) Where the part delivery of the goods has been made to the buyer or his agent, the remainder of goods may be stopped in transit. But if such part delivery has been given in such circumstances as to show an agreement to give up possession of the whole of the goods the transit comes to an end at the time of part delivery.

3. Right of resale: Where the unpaid seller has exercised his right of lien or resumes possession of the goods by exercising his right of stoppage in transit upon insolvency of the buyer, he can re-sell the goods under the following circumstance:

(a) where the goods are of perishable nature.

(b) Where the seller has given notice of his intention to re-sell the goods and yet the price remains unpaid.

(c) Where the seller expressly reserves a right of resale if the buyer commits a default in making the payment.

B] Where the property in the goods has not passed to the buyer: Where the property in the goods has not passed to the buyer, the unpaid seller can exercise the right to withholding delivery of the goods. This right is similar to and co-extensive with the right of lien and stoppage in transit where the property has passed to the buyer. Other remedies may include the right to claim damages for the loss suffered, special damages, etc.

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