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 Business Laws Solved Question Papers
Dibrugarh University
2 0 2 1 (March)
COMMERCE (Core)
Paper: C–102 (Business Law)
Full Marks: 80
Pass Marks: 32
Time: 3 hours
The figures in the margin indicate full marks for the questions


1. Write True or False:                   1×8=8

a)    The Indian Contract Act was passed in 1873.  False, 1872

b)   A quasi-contract is a contract created by law, not by the parties.         True

c)    Registration of a partnership firm is not compulsory. True

d)   The rights and liabilities of partners of LLP are stated in the LLP agreement. 

e)   A cheque is not payable on demand.                False     

f)     Days of grace is counted in cheque.  False

g)    To execute a contract of sale; seller and buyer must be there.             True

h)   Implied warranties are not written in a contract of sale.           True

2. Write short notes on (any four):                          4×4=16

a) Free consent.

Ans: 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. An offer 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

(ii) Undue influence, as defined in Section 16, or

(iii) Fraud as defined in Section 17, or

(iv) Misrepresentation as defined in Section 18, or

b) Elements of a contract of sale.

Ans: The essentials of a contract of sale are:-

1. Numbers of parties: Since a contract of sale involves a change of ownership, it follows that the buyer and the seller must be different persons. A sale is a bilateral contract. A man cannot buy from or sell goods to himself. To this rule there is one exception provided for in section 4(1) of the Sale of Goods Act. A part-owner can sell goods to another part-owner. Therefore a partner may sell goods to his firm and the firm may sell goods to a partner.

2. Goods: The subject-matter of the contract of sale must be ‘goods’. According to Section 2(7) “goods means every kind of movable property other than actionable claims and money; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale.” Goodwill, trademarks, copyrights, patents right, water, gas, electricity,, decree of a court of law, are all regarded as goods. In the case of land the grass which forms part of land have to be separated from the land. Thus where trees sold so that they could be cut out and separated from the land and then taken away by the buyer, it was held that there was a contract for sale of movable property or goods (Kursell vs Timber Operators & Contractors Ltd.). But contracts for sale of things ‘forming part of the land itself’ are not contracts for sale of goods. 

3. Price: The consideration for a contract of sale is price. Price means money consideration. If it is anything other than money, it will not be sale. But if the exchange is made partly for goods and partly for price, it will still amount to sale. However, the price may be paid or promises to be paid.

4. Transfer of property: 'Property' here means ownership. Transfer of property in the goods is another essential of a contract of sale of goods. A mere transfer of possession of the goods cannot be termed as sale. To constitute a contract of sale the seller must either transfer or agree to transfer the property in the goods to the buyer. Further, the term 'property', as used in the Sale of Goods Act, means 'general property' in goods as distinguished from 'special property' [Sec. 2(11)]. If P, who owns certain goods, pledges them to R, he has general property in the goods, whereas R (the Pawnee) has special property or interest in the goods to the extent of the amount of advance he has made to the Pawnor. Similarly, in the case of bailment of goods for the purpose of repair, the bailee has special interest in goods bailed to the extent of his labour charges.

c) Rights of partners.

Ans: The Rights of a partner are as under:

(i) 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.

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

(iii) 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.

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

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

d) Kinds of bailment.

Ans: Bailments are divided into two parts on the basis of reward and on the basis of benefit.

On the basis of reward it is of two types: Gratuitous bailment and non-gratuitous bailment.

On the basis of benefit it is divided into three categories: For the exclusive benefit of the bailor, for the exclusive benefit of the bailee and for mutual benefit of bailor and bailee.

Gratuitous bailment: It is a contract of bailment where no consideration passes between the bailor and the bailee.

Non-Gratuitous bailment: It is a contract of bailment where consideration passes between the bailor and the bailee.

For the exclusive benefit of the bailor: It is a contract of bailment where only bailer is benefited and not benefit is derived by bailee. For example: A delivers his car to B for proper care and handling.

For the exclusive benefit of the bailee: It is a contract of bailment where only bailee is benefited and no benefit is derived by bailee. For example: A delivers his car to B for free driving.

For mutual benefit of bailor and bailee: It is a contract of bailment where both bailor and bailee are benefited. For example: X gives his car to Y on hire.

e) Voidable agreements.

Ans: Voidable Agreements: An agreement, which is enforceable by law at the option of one more of the parties, but not at the option of the other (s), is a voidable agreement.

For example: - Mr. A, at knife - point, asks B to sell his scooter for Rs. 50. Mr. B gives consent. The agreement is voidable at the option of B, whose consent is not free.

Features of Voidable agreements

1.       It is a contract, which is enforceable by law at the option of one or more parties thereof, but not at the option of others.

2.       A voidable contract takes its full and proper legal effect unless it is disputed and set aside by the person entitled to do so.

3.       A contract may be voidable since very beginning or may subsequently become voidable.

4.       A voidable contract gives right to the aggrieved party to rescind the contract and claim the damages, etc in certain cases.

5.       A voidable contract does not affect the collateral transactions.

f) Negotiable instrument.

Ans: Negotiable Instruments are money/cash equivalents. These can be converted into liquid cash subject to certain conditions. They play an important role in the economy in settlement of debts and claims. The transactions involving the Negotiable Instruments in our country are regulated by law and the framework of the Statute which governs the transaction of these instruments is known as The Negotiable Instruments Act. This act was framed in our country in the year 1881 when the British ruled our country. Prior to 1881 the transactions governing Negotiable Instruments were regulated under the cover of Indian Contract Act 1872.

Essentials or Characteristics of Negotiable Instruments:

a)      Witting and Signature according to the rules: A Negotiable Instrument must be in writing and signed by the parties according to the rules relating to (a) promissory notes, (b) Bills of Exchange and (c) Cheques.

b)      Payable by Money: Negotiable Instruments are payable by the legal tender money of India. The Liabilities of the parties are governed in terms of such money only.

c)       Unconditional Promise: If the instrument is a promissory note, it must contain an unconditional promise to pay. If the instrument is a bill or cheque, it must be an unconditional order to pay money.

d)      Freely transferable: A negotiable instrument is transferable from one person to another by delivery or by endorsement and delivery.

3. (a) “A contract is an agreement enforceable by law.” Explain.                              11

Ans: Meaning of Contract: 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 possess 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. 

Or

(b) Discuss in brief the various modes of discharge of a contract.                 11

Ans: Meaning of Discharge of a Contract

Discharge of a contract means termination of the contractual relations between the parties to a contract. A contract is said to be discharged when the rights and obligations of the parties under the contract come to an end.

Modes of discharge of a contract: A Contract is said to be discharged when the rights and obligations created by it come to an end. A contract may be discharged in the following modes:-

1.    Discharge by performance: Discharge by performance takes place when the parties to a contract fulfill their obligations arising under the contract within the time and in the manner prescribed. Performance may be actual performance or attempted performance.

2.    Discharge by Agreement or Consent: A Contract comes into existence by an agreement and it may be discharged also by an agreement. The following are modes of discharge of a contract by an agreement:

a)    By Waiver: Waiver takes place when the parties to a contract agree that they shall no longer be bound by the contract. For e.g. A an actor promised to make a guest performance in the film made by B. Later B forbids A from making the guest appearance. B is discharged of his obligation.

b)   By Novation: Novation occurs when a we contract is substituted  for an existing contract, either between the same parties or between different parties, the consideration being the discharge of old contract, mutually. E.g.: A is indebted to B & C to C. By mutual agreement B’s debt to C & B’s loan to A are cancelled & C accepts as his debtor.

c)    By Rescission: Rescission of a contract takes place when all or some of the terms of the contract are cancelled. It may occur by mutual consent or where one party fails in the performance of his obligations, the other party may rescind the contract.

d)   By alteration: Alteration of a contract may take place when one or more of the terms of the contract is/are altered by mutual consent of the parties to the contract.

e)   By Remission: Remission means acceptance of a lesser fulfillment of the promise made, E.g. Acceptance of a lesser sum than what was contracted for, in discharge of the whole of the debt.

f)     By Merger: Merger takes place when an inferior right accruing to a party under a contract merges into a superior right accruing to the same party under the same or some other contract. For e.g. P holds a property under a lease. He later buys the property. His rights as a lessee merge into his rights as an owner.

3.    Discharge by impossibility of performance: If a contract contains an undertaking to perform impossibility, it is void ab initio. As per Section 56, impossibility of performance may fall into either of the following categories –

(i) Impossibility existing at the time formation of the contract: This is known as pre-contractual impossibility. The fact of impossibility may be:

a) Known to the parties: Both the parties are aware or know that the contract is to perform an impossible act. For e.g. A agrees with B to put life into dead wife of B, the agreement is void.

b) Unknown to the parties: Both the parties are unaware of the impossibility. The contract could be on the ground of mutual mistake of fact. For e.g. contract to sell his house at Andaman to B. Both the parties are in Mumbai and are unknown to the fact that the house is actually washed away due to Tsunami.

(ii) Impossibility arising subsequent to the formation of the contract: Where impossibility of performance of the contract is caused by circumstances beyond the control of the parties, the parties are discharged from further performance of the obligation arising under the contract.

4.    Discharge by lapse of time:  The Limitation Act, 1963 lays down certain specified periods within which different contracts are to be performed and be enforceable. If a party to a contract does not perform, action can be taken only within the time specified by the Act. Failing which the contract is terminated by lapse of time. For e.g. A sold a gold chain to B on credit without any period of credit, the payment must be made or the suit to recover it, must be instituted within three years from the date of delivery of the instrument.

5.    Discharge by Operation of Law: A contract may be discharged independently of the wished of the parties i.e. by operation of law. This includes discharge:

a)    By death: In contract involving personal skill or ability, the contract is terminated on the death of the promisor. In other contracts the rights and liabilities of a deceased person pass on to the legal representatives of the deceased person.

b)   By insolvency: When a person is declared insolvent, he is discharged from all liabilities incurred prior to such declaration.

c)    By unauthorized material alteration of the terms of a written agreement: Any material alteration made by a party to the contract, without the prior permission of the other party, the innocent party is discharged.

d)   By rights and liabilities becoming vested in the same person: When the rights and liabilities under a contract vests in the same person.

6.    Discharge by 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.

4. (a) What is a continuing guarantee? When and how is it revoked?        4+7=11

Or

(b) Briefly explain the duties of an agent towards his principal. What are his rights against the principal?   5+6=11

Ans: Rights and duties of agent

Rights of agent

a)      Right to remuneration: Every agent has a right to receive remuneration from his principal for performing his duties. But, if an agent is guilty of misconduct in the business is not entitled to any remuneration in that part of the business which he has mis-conducted.

b)      Right of retaining cash: Agent has the right to retain cash, received by selling goods of the principal, to the extent of amount spent and advances given to the principal by him in carrying out his business.

c)       Right of lien: In the absence of any contract to the contrary, an agent is entitled to retain goods, papers and other property, whether movable or immovable, of the principal received by him, until the amount due to himself for commission, disbursements and services in respect of the same has been paid or accounted for to him.

d)      Right to compensation: if any loss or injury caused to agent due to negligence or lack of skill of principal, then the agent has the right to claim compensation for the same.

e)      Right to indemnity: The employer of an agent is bound to indemnify him against the consequences of all lawful acts done by such agent in exercise of the authority conferred upon him. Further, where one person employs another to do an act, and the agent does the act in good faith, the employer is liable to indemnify the agent against the consequences of that act.

Duties of Agents

a)      Duty to follow instructions given by the principal: Agent should follow the instructions given by the principal while conducting business and in the absence of any such directions, according to the custom which prevails in doing business of the same kind at the same place.

b)      Duty of reasonable care: Agent must take due care and skill while performing his duties. If agent comes across any complicated situation, he has to communicate that situation to principal and his advice is to be obtained.

c)       Be honest: Agent should behave in his capacity as agent; he should not run the transaction in his own name.

d)      Duty not to make secret profit: Agent should not make secret profits by utilizing reputation of the principal.

e)      Duty to protect the property of principal: Agent should safe guard property of principal particularly upon happening of events like death of principal, insolvency of principal, etc.

f)       Duty to maintain accounts: Agent should maintain proper accounting records to enroll the transactions run by him. Agent has to remit amounts to principal properly.

g)      Duty to remit sums: The agent is bound to pay to his principal all sum received on his account. He should not use for his own work the amount received for principal.

h)      Duty not to delegate: Agents are appointed by the principal. Such agent cannot lawfully employ another to perform acts which he has expressly or impliedly undertaken to perform personally.

5. (a) Distinguish between a sale and an agreement to sell. What are the essential elements of sale?   6+5=11

Ans: Difference between ‘Sale’ and ‘agreement to sell’:

Basis

Sale

Agreement to Sell

Definition

Where under a contract of sale, the property in the goods is transferred from the seller to the buyer (i.e. at once); the contract is called a ‘sale’.

where the transfer of the property in the goods is to take place at a further time or subject to some condition thereafter to be fulfilled, the contract is called an ‘agreement of sell’

Transfer of ownership

Transfer of ownership of goods takes place immediately.

Transfer of ownership of goods is to take place at a future time or subject to fulfillment of some condition.

Executed contract or Executory contract

It is an executed contract.

It is an Executory contract.

Conveyance of property

Buyer gets a right to enjoy the goods against the whole world including seller.

Buyer does not get such right.

Transfer of risk

Transfer of risk of loss of goods takes place immediately because ownership is transferred.

Transfer of risk of loss of goods does not take place because ownership is not transferred.

Right of seller against the buyer’s breach

Seller can sue the buyer for the price, even though the goods are in his possession.

Buyer can sue the seller for damages only.

Rights of buyer against the seller’s breach

Buyer can sue the seller for damages and can sue the third party who bought those goods for goods.

Buyer can sue the seller for damages only.

The essentials of a contract of sale are:-

1. Numbers of parties: Since a contract of sale involves a change of ownership, it follows that the buyer and the seller must be different persons. A sale is a bilateral contract. A man cannot buy from or sell goods to himself. To this rule there is one exception provided for in section 4(1) of the Sale of Goods Act. A part-owner can sell goods to another part-owner. Therefore a partner may sell goods to his firm and the firm may sell goods to a partner.

2. Goods: The subject-matter of the contract of sale must be ‘goods’. According to Section 2(7) “goods means every kind of movable property other than actionable claims and money; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale.” Goodwill, trademarks, copyrights, patents right, water, gas, electricity,, decree of a court of law, are all regarded as goods. In the case of land the grass which forms part of land have to be separated from the land. Thus where trees sold so that they could be cut out and separated from the land and then taken away by the buyer, it was held that there was a contract for sale of movable property or goods (Kursell vs Timber Operators & Contractors Ltd.). But contracts for sale of things ‘forming part of the land itself’ are not contracts for sale of goods. 

3. Price: The consideration for a contract of sale is price. Price means money consideration. If it is anything other than money, it will not be sale. But if the exchange is made partly for goods and partly for price, it will still amount to sale. However, the price may be paid or promises to be paid.

4. Transfer of property: 'Property' here means ownership. Transfer of property in the goods is another essential of a contract of sale of goods. A mere transfer of possession of the goods cannot be termed as sale. To constitute a contract of sale the seller must either transfer or agree to transfer the property in the goods to the buyer. Further, the term 'property', as used in the Sale of Goods Act, means 'general property' in goods as distinguished from 'special property' [Sec. 2(11)]. If P, who owns certain goods, pledges them to R, he has general property in the goods, whereas R (the Pawnee) has special property or interest in the goods to the extent of the amount of advance he has made to the Pawnor. Similarly, in the case of bailment of goods for the purpose of repair, the bailee has special interest in goods bailed to the extent of his labour charges.

5. No formalities to be observed (Sec. 5): The sale of Goods Act does not prescribe any particular form to constitute a valid contract of sale. A contract of sale of goods can be made by mere offer and acceptance. The offer may be made either by the seller or the buyer and the same must be accepted by the other. Neither payment nor delivery is necessary at the time of making the contract of sale. Further, such a contract may be made either orally or in writing or partly orally and partly in writing or may be even implied from the conduct of the parties. Where articles are exhibited for sale and a customer picks up one and the sales assistant packs the same for him, there has resulted a contract of sale of goods by the conduct of the parties.

6. Includes both a ‘sale’ and ‘an agreement to sell’: The term ‘contract of sale’ is a generic term and includes both a ‘sale’ and an ‘agreement to sell’.

Sale: Where under a contract of sale, the property in the goods is immediately transferred at the time of making the contract from the seller to the buyer; the contract is called a 'sale' [Sec. 4(3)]. It refers to an absolute sale, e.g., an outright sale on a counter in a shop. There is immediate conveyance of the ownership and mostly of the subject-matter of the sale as well (delivery may also be given in future). It is an executed contract.

An agreement to sell: Where under a contract of sale, the transfer of property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called 'an agreement to sell' [Sec. 4(3)]. It is an Executory contract and refers to a conditional sale.

Or

(b) State the rules in regard to passing of property from a seller to a buyer in a contract for sale of goods.    11

Ans: Transfer of ownership/Passing of property from a seller to a buyer:

Provisions of the Sale of Goods Act, 1930 relating to transfer of ownership are stated below:

1. Goods must be ascertained: As per sec 18 this Act, the property in the goods does not pass to the buyer unless and until the goods are ascertained.

2. Intention of the parties for such transfer: The property on goods transferred to the buyer only when the parties to the contract intended to be transferred. The intention of the parties is ascertained from the terms of the contract. When the intention of the parties cannot be ascertained, the following provisions of the Act are applicable:

(i) Specific goods: (Sec. 20 to 22)

(a) Specific goods in a deliverable state: In an unconditional contract for the sale of specific goods in a deliverable state, the property in the goods passes to the buyer when the contract is made.

(b) Specific goods to be put into a deliverable state: Where there is a contract for the sale of specific goods and the seller is bound to do something to the goods to put them into a deliverable state, the property does not pass until such thing is done.

(c) Specific goods in a deliverable state but the seller has to weigh, measure, test or do some other act or thing for the purpose of ascertaining the price, the property does not pass until such act or thing is done and the buyer has notice thereof.

(ii) Unascertained Goods: (Sec 23)

(a) Where there is a contract for the sale of unascertained or future goods by description and goods of that description and in a deliverable state are unconditionally appropriated to the contract, the property in the goods thereupon passes to the buyer.

(b) Delivery to carrier: Where, in pursuance of the contract, the seller delivers the goods to the buyer or to a carrier or other bailee for the purpose of transmission to the buyer and does not reserve the right of disposal, he is deemed to have unconditionally appropriated the goods for the purpose of the contract.

(iii) Goods on approval or ‘on sale or return’: (Sec 24)

When goods are delivered to the buyer on approval or on sale or return or other similar terms, the property therein passes to the buyer:

(a) When he signifies his approval or acceptance to the seller

(b) When he does any other act adopting the transaction.

(c) If he does not signify his approval or acceptance to the seller but retains the goods without giving notice of rejection, then, if a time has been fixed for the return of the goods, on the expiration of such time, and, if no time has been fixed, on the expiration of a reasonable time.

Reservation of Right of Disposal (Sec 25)

Sec 25(1): The seller may reserve the right of disposal of the goods until certain conditions are fulfilled. The property in the goods does not pass to the buyer until the conditions imposed by the seller are fulfilled.

Sec 25(2):  Where goods are shipped or delivered to a railway administration for carriage by railway and by the bill of landing or railway receipt, the goods are deliverable to the order of the seller or his agent, the seller is prima facie deemed to reserve the right of disposal.

Sec 25(3): Where the seller of goods draws on the buyer for the price and transmits to the buyer the bill of exchange together with the bill of lading and buyer fails to honour the bill of exchange, the property in the goods does not pass to him.

6. (a) How and why is cheque crossed? Distinguish between cheque crossed generally and cheque crossed specially. Illustrate your answer with examples of both the types of crossing of cheques.               4+4+3=11

Ans: Crossing of a cheque

A cheque is said to be crossed when two parallel transverse line with or without any words are drawn on the left hand corner of the cheque. It is simply a direction to the paying banker that the cheque should be paid only to a banker. Crossing of cheque is very safe because the holder of the cheque is not allowed to encashed it across the counter of the bank. A crossed cheque provides protection not only to the holder of the cheque but also to the receiving and collecting bankers.

The following parties can cross a cheque:

a)      The Drawer: The drawer of a cheque may cross a cheque before issuing it. He may cross it generally or specially.

b)      The Holder: The holder of a cheque can cross in the following way:

Ø  The holder may cross an open cheque generally or specially.

Ø  The holder may specially cross a generally crossed cheque.

Ø  The holder may add the words “Not-Negotiable” in a generally or specially crossed cheque.

c)       The Banker: The banker to whom the cheque is crossed specially may again cross it especially to another banker's agent, for collection. This is called double special crossing.

Types of crossing:

1. General crossing: A general crossing is a crossing where a cheque simply bears two parallel lines with or without any words and without any specification. According to Sec. 123 of the Negotiable Instrument Act, 1881, “When a cheque bears across its face an addition of the words. “and company” or any abbreviations thereof between two parallel transverse line or of two parallel transverse lines simply either or without the words, “Not Negotiable” that addition shall be deemed a general crossing. Simplify, In case of General crossing words such as “and company”, “not Negotiable”, “Account payee” etc. may be inserted between the lines.

A general crossing cheque protects the drawer and also the payee or the holder thereof. Whenever a drawer desires to make payment to an outstation party, he can cross the cheque so that even if the cheque is lost, it means only a piece of paper is lost and nothing beyond that. If by any chance, it is encashed by a third and unauthorized person, it is possible to find out to whose account the amount is credited and the unauthorized person can be identifies and suitable action taken against him. (Specimen - 2012

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2. Special crossing: Section 124 of the Negotiable Instruments Act, 1881 defines special crossing as “where a cheque bears across its face, an addition of the name of a banker with or without the words “not negotiable”, that addition shall be deemed a crossing and the cheque shall be deemed to be crossed specially and to be crossed to that banker.”

Thus, in case of special crossing, the name of a particular bank is written in between the parallel lines. The main implication of this type of crossing is that the amount of the cheque will be paid to the specified banker whose name is written in between the lines. Special crossing is in a particular bank and by special crossing, he is assured of double safety, safety to the drawer and safety to the payee.

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Differences between General and Special crossing

The difference between General and Special crossing are:

a)      In case of general crossing drawing two parallel transverse lines on the face of the cheque is must. But, in case of special crossing drawing two parallel lines is not necessary.

b)      In case of general crossing writing the name of a bank across the face of the cheque is not required. But in case of special crossing the name of a bank must be mentioned across the face of the cheque.

c)       Generally crossed cheque is payable through any bank account. But specially crossed cheque is payable only through the specific bank mentioned in the crossing.

d)      A generally crossed cheque is safer as compared to open cheque. But a specially crossed cheque is safer than open cheque as well as generally crossed cheque.

e)      General crossing can be easily converted into special crossing by inserting the name of a bank in between the two lines. But special crossing is not convertible into general crossing except by the drawer.

Or

(b) Define holder in due course. State and explain the privileges of a holder in due course under the provisions of the Negotiable Instrument Act.        4+7=11

Ans: Holder and Holder in due course

According to Section 9 of the Negotiable Instrument Act, 1881, “Holder in due course means any person who, for consideration, become the possessor of a promissory note, bill of exchange or cheque, if payable to bearer, or the payee or endorsee thereof if payable to order, before the amount mentioned, in it became payable and without having sufficient course to believe that defect existed in the title of the person from whom he derived his title.”

A person is said to be holder in due course in the following cases:

a)      A negotiable instrument must be in the possession of the holder-in-due-course.

b)      A negotiable instrument must be regular and complete in all aspects.

c)       The instrument must have been obtained for valuable consideration.

d)      The instrument must have been obtained before the amount mentioned therein becomes payable or before maturity.

Holder in Due Course enjoys the following rights and privileges:

a)      He possesses better title free from all defects: He always possesses better title than that of his transferor or any of the previous parties and can give to the subsequent parties the good title that he possesses. The holder in due course is entitled to recover the amount of the instrument from any or all of the previous parties.

b)      All prior parties liable: All prior parties to the instrument i.e. its maker or drawer, acceptor or endorser, is liable thereon to a holder in due course until the instrument is duly satisfied. The holder in due course can file a suit against the parties liable to pay in his own name.

c)       No effect of conditional delivery: Where a negotiable instrument delivered conditionally or for a special purpose and is negotiated to a holder in due course, a valid delivery of it is conclusively presumed and he acquires good title to it.

d)      Right in case of fictitious bills: Where both drawer and payee of a bill are fictitious persons, the acceptor is liable on the bill to a holder in due course.

e)      Right of the holder in due course in case of inchoate instrument: If a negotiable instrument was originally an inchoate (incomplete) instrument and subsequent transferor completed the instrument for a sum greater than what was the intention of the market, the right of a holder in due course to recover the money of the instrument is not at all affected.

f)       Right is cane the instrument is obtained by unlawful means or for unlawful consideration: A person liable on negotiable instrument cannot denied himself against payment to a holder in due course on the ground that the instrument was lost or obtained from him by means of an offense or fraud or far an unlawful consideration.

g)      Estoppel against endorser to deny capacity of prior parties: The endorser of a negotiable instrument in a suit thereon by the holder-in-due-course cannot deny the signatures or capacity to contract of any prior party to the instrument.

7. (a) State the rights and duties of partners according to the law of partnership in India.             6+6=12

Ans: Rights and Duties of Partners of a Firm

The Rights of a partner are as under:

(i) 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.

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

(iii) 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.

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

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

(vi) 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.

The duties of a partner are as under:

(i) To carry on the business to the common advantage: Every partner is bound to:

(a) 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.

(c) To use reasonable care and skill in the performance of his duties and

(d) Render true accounts and full information of all things, affecting the firm, to any partner or his legal representative.

(ii) To indemnify: Every partner is bound to indemnify the firm:

(a) For any loss cause to it by his fraud in the conduct of business of the firm.

(b) For any loss incurred due to his willful neglect in the conduct of the business of the firm.

(iii) 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.

(iv) 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.

(v) 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.

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

Or

(b) What is an LLP agreement? What are the contents of such agreement?         4+8=12

Ans: LLP Agreement: LLP Agreement is a very important document which defines the mutual rights and obligations of the partners. Sec. 2 (o) of the LLP Act, 2008 defines LLP Agreement as under:

“Limited Liability Partnership Agreement” means any written agreement between the partners of the limited liability partnership or between the limited liability partnership and its partners which determines the mutual rights and duties of the partners and their rights and duties in relation to that limited liability partnership.

The LLP agreements provides the:

a) The mutual rights and the duties of the LLP and its partners shall be governed by the LLP agreement between the partners or between the LLP and its partners.

b) The LLP agreement and any changes made therein shall be filed with the registrar of the LLPs.

Contents of LLP Agreement

An LLP agreement must contain the following:

1. Name of the LLP 

Name under which an LLP is registered must be stated in LLP agreement. The name must end with LLP.

2. Date of the agreement and parties to the agreement 

LLP agreement is between all the partners and designated partner.  The agreement must contain the date of entering into an agreement. The LLP agreement must be executed within 30 days of its incorporation.

3. Introductory provisions

It includes all the definitions of terms used in the LLP agreement. It must also include the name of partners, new parts, designated partners, rules regarding management and accounting of LLP etc.

4. Place of business 

The registered address of an LLP must be included in an LLP agreement.

5. Business to be carried on

An LLP must contain the details of business which is to be carried on by LLP. It must be in the same nature as approved at the time of incorporation of LLP.

6. Partner’s contribution

Capital contribution by each partner, rules regarding drawings of capital, interest on capital and interest on drawings must also be included in LLP agreement. It is important for maintaining a good relationship between partners.

7. Duration of LLP

Duration for which an LLP is incorporated must be stated in LLP agreement. If it is for a specific period, LLP will be dissolved after completion of that period. If it is for a particular purpose, LLP will be dissolved after completion of that purpose.

8. Accounting and auditing

How books of accounts are maintained i.e., cash basis or accrual basis, partner’s right of access to books of accounts, whether or not auditing is compulsory must be included in LLP agreement.

9. Record keeping and bank arrangement

It includes the maintenance, storage, and recording of books and other related documents.

10. Allocation and distribution

Profit sharing ratio to share profits or loss must be included in LLP agreement. Also appropriations before distribution of profit must be stated.

11. Disassociation of partner

Terms and conditions relating to disassociation or withdrawal of partners from LLP should be stated. It also states the rights of partners after disassociation or withdrawal.

12. Partners’ rights to records

Each partner has the right to access the books of account and records for avoiding misappropriation.

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