IGNOU SOLVED ASSIGNMENT 2021 – 22
MERCANTILE LAW ECO 05 SOLVED ASSIGNMENT
TUTOR MARKED ASSIGNMENT
COURSE CODE: ECO-05
COURSE TITLE: MERCANTILE LAW
ASSIGNMENT CODE: ECO-05/TMA/2021-22
COVERAGE: ALL BLOCKS
Maximum Marks: 100
Attempt all the questions:
1. a) Discuss the essential elements of a valid contract. (12)
Ans: Section 2 (h) defines ‘Contract’ as an agreement enforceable by law. If we analyse the definition it has two components viz.
(i) An agreement and
(ii) Its enforceability by law.
Section 2 (e) defines ‘agreement’ as “every promise and set of promises forming consideration for each other”. For a contract to be enforceable by law there must be an agreement which should be enforceable by law. To be enforceable, the agreement must be coupled with obligation. Obligation is a legal duty to do or abstain from doing what one promised to do or abstain from doing. All contracts are agreements but for agreement to be a contract it has to be legally enforceable.
Section10 of the Act provide “All agreements are contracts if they are made by the free consent of the parties competent to contract for lawful object & are not hereby expressly declared void.” All contracts are agreements but for an agreement following essential element are required:
a) Offer & Acceptance: There must be two parties to an agreement.
b) Intention to create legal relationship: When two parties enter into a contract their intention must be to create legal relationship. If there is no such intention between the parties, there is no contract between them.
c) Lawful consideration: An agreement to be enforceable by law must be supported by consideration.
d) Capacity to Contract-Competency: The parties competent to contract must be capable of contracting i.e. they must be of the age of majority, they must be of sound mind & they must not be disqualified from contracting by any law to which they are subject to.
e) Free Consent: It is necessary between the contracting parties to have a free & genuine consent to an agreement.
f) Lawful object: The object of an
agreement must be lawful. It should not be illegal, immoral or it should not
oppose public policy.
g) Agreement not declared void: For an agreement to be a contract it is necessary for the agreement must not be expressly declared void by any law in force in the country.
h) Possibility & Certainty of performance: The terms of an agreement must not be vague or indefinite. It should be certain. The agreement must be to do a thing which is possible.
b) “A Contract with minor is void ab-initio” Discuss? (8)
Ans: A minor is a person who is not a major. According to The Indian Majority Act, 1875, a minor is one who has not completed his or her 18th year of age. A person attains majority on completing
his 18th year in India. A minor can enter into a valid contract in the following cases:
1) Minor can be admitted to the benefit of transfer such as sale mortgage contracts. The guardian of the minor may enter into a contract with the other on the behalf of the minor for the minors’ benefit.
2) Minor can be admitted to the benefits of a partnership firm. There is no personal liability in this case.
3) It is allowed in law for a minor to elect to repay the debts that have been incurred during his minority after attaining majority.
4) A contract for the benefit of the minor entered into by the guardian can be specifically enforced.
5) Minor is liable for necessaries supplied to him during his minority. Education, food, clothing, house are necessaries and not anything luxurious. The liability is not personal. It pertains to the estate of the minor.
6) A guardian of a minor can enter into a contract of insurance on behalf of the minor, but it shall only be for minors’ goods are property and not the person of the minor.
7) When a joint document is executed by minor and an adult only the adult is liable in the contract. The document is void in respect of the minor and valid in respect of the major.
8) Marriage: Minors marriage is a voidable marriage.
9) Contracts of apprenticeship: The Indian apprenticeship act 1850 provides for service contracts to be entered into by the guardian of a minor on behalf of the minor for the minors’ benefit. Such contract is binding on the minor.
Consequences of misrepresentation of age by minor:
It has been noted above that an agreement by a minor is void and, therefore, if a minor makes a breach of an agreement he cannot be made liable for the same. On the other hand, when a
minor commits a tort he is liable for that in the same way and to the same extent as an adult person commits a tort. For example, a minor misrepresents his age and fraudulently stating that he is of the age of majority takes a loan from another person. Under the law of contract, the minor cannot be asked to repay the loan as a minor’s agreement is void, but he has also committed fraud for which the liability for the tort of deceit can be possibly be there. On this point the Courts have held that where permitting an action in tort will result in an indirect enforcement of an agreement the law will not permit such an action, because “one cannot make an infant liable for breach of a contract by challenging the form of action to one ex delicto.
2. a) Define fraud and Misrepresentation and also distinguish between them. (3+3+4)
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 decide 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 misleaded. 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.
Difference between fraud and misrepresentation
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.
b) Explain the different types of remedies available to an aggrieved party on the breach of a contract. (10)
Ans: Remedies for Breach of Contract
The five basic remedies for breach of contract 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 is the name for the remedy that terminates the contractual duties of both parties. it seeks to place the parties back in their pre-contractual position.
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.
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.
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.
3. a) “No consideration, No Contract” Discuss. Are there any exceptions to the rule explain? (4+6)
Section 2 (d) of Indian Contract Act, 1872, defines consideration as “When at the desire of the promisor the promise or any other person has done or abstained from doing or does or abstains from
doing something, such act abstinence or promise is called a consideration for the promisor.” Consideration is based on the term ‘quid-pro-quo’ which means ‘something in return’. When a person makes a promise to other, he does so with an intention to get some benefit from him. This act to do or to refrain from doing something is known as consideration.
Consideration is an advantage or benefit which moves from one party to another. It is the essence of bargain. It is the reciprocal promise i.e. to do something or abstain from doing something in return of a promise. It is necessary for an agreement to be enforceable by law. In consideration both the parties give something & get something in return. It may be in cash or kind.
Exceptions to the rule ‘No consideration no contract’
The general rule is that an agreement made without consideration is void. Section 25 deals with the exceptions to this rule. In such cases the agreements are enforceable even though they are made without consideration. These cases are:
a) Love and Affection [Section 25(1)]: Where an agreement is expressed in writing and registered under the law for the time being in force for the registration of documents and is made on account of natural love and affection between the parties standing in a near relation to each other, it is enforceable even if there is no consideration.
b) Compensation for voluntary services [Section 25(2)]: A promise to compensate wholly or part a person, who has already voluntarily done something for the promisor, is enforceable, even though without consideration. A promise to pay for a past voluntary service is binding.
c) Promise to pay a time barred debt [Section 25(3)]: A promise by a debtor to pay a time barred debt is enforceable provided it is made in writing and is signed by the debtor or by his agent generally or specifically authorized in that behalf. The debt must be such “of which the creditor might have enforced payment but for the law for limitation of suits”
d) Agency (Section 185): No consideration is necessary to create an agency.
e) Completed Gift (Explanation 1 to Section 25): The rule ‘No consideration no contract’ does not apply to completed gifts. This rule shall not affect the validity, as between donor and donee, of any gift actually made.
b) Can a non – owner makes a valid pledge? (10)
Ans: Pledge by non-owners: Generally, the owner can pledge the goods or with his consent, others can pledge also. Hence, a pledge made by a person, who is neither owner nor allowed by owner, is invalid. But there are some circumstances where a person who is not the owner but in possession of goods can pledge:
a) Pledge by mercantile agent: The term ‘mercantile agent’ is defined under Section 2(2) of Sale of Goods Act as an agent having in the course of ordinary business having authority, either to
sell goods or to consign goods for the purposes of sale or to buy goods or to raise money on the security of the money.
Section 178 provides that where a mercantile agent is, with the consent of the owner, in possession or goods or the documents of the title of goods, any pledge made by him, when acting in the ordinary course of business of a mercantile agent, shall be as valid as if he were expressly authorized by the owner of the goods to make the same.
b) Pledge by a person in Possession under voidable contract: If the pledgee acts in good faith and without notice of the pledger’s defect of title, he acquires a good title to the goods.
Section178A provides that when the Pawnor has obtained possession of the goods pledged by him under a contract voidable under Section 19 or Section19A, but the contract has not been rescinded at the time of pledge, the Pawnee acquires a good title to the goods, provided he acts in good faith and without notice of the pawnor’s defect of title.
c) Limited interest of Pawnor: Section 179 provides that where a person pledges goods in which he has only a limited interest, the pledge is valid to the extent of that interest.
Rights of Pledgee: The pledgee has the following rights:
a) Right to retain: The pledgee may retain the goods pledged, not only for payment of the debt or the performance of the promise, but for the interest of the debt and all necessary expenses incurred by his in respect of the possession or for the preservation of the goods pledged (Sec. 173). But, the pledgee shall not, in the absence of a contract to that effect, retain the goods pledge for any debt or promise for which they are pledged; but such contract, in the absence of anything to the contrary, shall be presumed in regard to subsequent advances made by the pledgee (Sec. 174).
b) Right to extraordinary expenses: The pledgee is entitled to receive from the pledger extraordinary expenses incurred by him for the preservation of the goods pledged (Sec. 175).
c) Right to sale: If the pledger makes default in payment of the debt, or performance at the stipulated time of the promise, in respect of which the goods are pledged, the pledgee may bring a suit against the pledger upon the debt or promise, and retain the goods pledged as a collateral security or he may sell the thing pledged, on giving the pledger reasonable notice of the sale (Sec. 176).
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4. a) What is a continuing a guarantee? How it can be revoked? (2+8)
Ans: According to Sec. 129 of the Indian Contract Act,” A guarantee which extends to a series of transactions is called a ” continuing guarantee”
A continuing guarantee may be revoked in any of the following ways:
1) By Notice of Revocation: The continuing guarantee may at any time be revoked by the surety as to future transactions, by notice to the creditor (Sec.130). In such a case, the surety remains liable for the transactions which have already taken place. But where a continuing relationship is established on the faith of a guarantee the guarantee cannot be annulled during the continuance of that
relationship. For example, A guarantees to B to the extent of Ks. 10,000, that C shall pay for all the goods bought by him during the next three months. B sells goods worth Rs. 6,000 to C. A gives a notice of revocation, C is liable for Rs. 6,000. If any goods are sold to C after the notice of revocation, A shall not be, liable for that.
2) By Death of Surety: The death of the surety operates, in the absence of any contract to the contrary, as a revocation of a continuing guarantee, so far as regards future transactions.” (Sec. 131)
3) In the Same Manner in which the Surety is Discharged: A continuing guarantee is also revoked under all the circumstances under which a surety is discharged from the liability, such as:
a. 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.
b. 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.
c. 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.
d. 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.
b) Define Conditions and warranty is a contract of sale. Explain the implied conditions. (6+4)
Ans: ‘Condition’ and ‘Warranty’
In a contract of sale, the subject matter is ‘goods’. There are millions of sale transactions which occur in the normal course, all around the world. There are certain provisions which need to be fulfilled because it is demanded by the contract. These prerequisites can either be a condition and warranty. The condition is the fundamental stipulation of the contract of sale whereas Warranty is an additional stipulation.
Condition: Section 12(2) states that a condition is a stipulation which is essential to the main purpose of the contract. The breach of a condition gives rise to a right to treat the contract as repudiated or broken. So according the above definition it is clear that condition is very essential for the performance of a contract. The breach of condition will be regarded as the breach of the whole contract.
Example: A buys from B hair oil advertised as pure coconut oil. The oil turns out to be mixed with herbs. A can return the oil and claim the refund of price.
Warranty: Section 12(3) states that a warranty is a stipulation which is collateral to the main purpose of the contract. The breach of a warranty gives rise to a claim for damages but not a right to reject the goods and treat the contract as repudiated. The above definition shows that for the implementation of a contract warranty is not essential. For the breach of warranty only damages can be claimed.
Example: A while selling his car to B, stated the car gives a mileage of 12 kms per litre of petrol. The car gives only 10 kms per litre. B cannot reject the car. It is breach of warranty. He can only claim damages for the loss due to extra consumption of petrol.
1. Condition as to title: In a contract of sale, unless the circumstances of the contract are such as to show a different intention, there is an implied condition on the part of the seller that –
(a) In the case of a sale, he has a right to sell the goods and
(b) In the case of an agreement to sell, he will have a right to sell the goods at the time when the property is to pass.
2. Sale by description: Where there is a contract for the sale of goods by description, there is an implied condition that the goods shall correspond with the description (Section 15). If you contract to sell peas, you cannot oblige a party to take beans.
3. Sale by sample: In a case of a contract for sale by sample, there is an implied condition:
(a) That the bulk shall correspond with the sample in quality
(b) That the buyer shall have a reasonable opportunity of comparing the bulk with the sample.
(c) That the goods shall be free from any defect, rendering them unmerchantable.
4. Sale by description as well as sample: Section 15 further provides that if the sale is by sample as well as by description, the goods must correspond both with the sample and with the description.
5. Condition as to quality or fitness: Normally, in a contract of sale there is no implied condition as to quality or fitness of goods for a particular purpose. The buyer must examine the goods thoroughly before he buys them in order to satisfy himself that the goods will be suitable for the purpose for which he is buying them. However, in the following instances, the condition as to quality or fitness applied –
(a) 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.
(b) An implied condition as to quality or fitness for a particular purpose may also be annexed by the usage of trade. [Section 16(3)]
6. Condition as to merchantability: 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. This means that the goods should be such as are commercially saleable under the description by which they are known in the market at their full value.
7. Condition as to wholesomeness: In the case of eatable and provisions, in addition to the implied condition as to merchantability, there is another implied condition that the goods shall be wholesome. For e.g. C bought a bun containing a stone which broke one of C’s teeth. Held, he could recover damages.
8. Condition implied by custom: An implied condition as to quality or fitness for a particular purpose may also be annexed by the usage of trade in the locality concerned.
5. a) What is the contract of agency? Explain different types of implied agency. (4+6)
Ans: Contract of agency
Agency is a relationship between two parties in which one party known as agent agrees to represent or act for the other person known as principal. Contract of agency is simply an intention to create relationship between agent and principal so as to establish legal relation of principal with third person through agent. The following are the essential elements of a contract of agency:
1) Principal must be competent to enter into a contract. If he is not, he cannot appoint an agent.
2) At the time of creation of agency, there is no need of consideration as the agent is remunerated by way of commission for services rendered.
Types of contract of agency – Expressed and Implied
Contract of agency may be of two types expressed or implied.
1) Contract of Agency created by Express Agreement: When the agency is created by the words of mouth or in writing by the principal, it is called agency is created by express agreement. Sec. 187 says that an authority is said to be express when it is given by words spoken or written.
2) Implied Contract of Agency: Implied contract of agency may be of three types
a) By conduct of the parties: The agency may be created by the conduct of parties also which is called implied agency. If the principal allowed to another person to represent or to act for him,
though there is no express agency, the person acting on behalf of principal is called implied agent.
b) By necessity: If there is any emergency and agent is not in position to contact the principal to gent the instructions in such condition, the agency of necessity is created and what is required in such circumstances like a prudent person, if that is done by the agent, the principal cannot refuse.
c) By Ratification: According to Sec. 196, where acts are done by one person on behalf of another, but without his knowledge or authority, he may elect to ratify or to disown such acts. If he accepts, it is called agency by ratification. Soon after ratification, the person who has done the activity becomes agent and that person who has given ratification becomes principal. Ratification is of two types. Namely;
a) Express Ratification and
b) Implied Ratification.
The ratification where there is wording and expression is called express ratification. For example: Without A`s direction, B has purchased goods for the sake of A from C. Thereafter, A has given his Support to B`s activity, it is called ratification and now A is principal and b is agent.
b) What is partnership? Explain the essential elements of a partnership. (4+6)
Ans: Meaning and Characteristics of Partnership
Partnership is an association of two or more persons who agreed to do business and share profits and losses arises from it in an agreed ratio. The partners act both as agents and principals of the firm. 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.
Partners, Firm and Firm name: The persons who have entered into a partnership with one another are individually called partners and collectively a firm. The name under which the business is carried is called firm name.
Partnership has the following characteristics:
(i) Agreement: Partnership is the result of an agreement, either written or oral, between two or more persons. An agreement between the partners may be expressed or implied. It arises from contract and not from status or process of law.
a) Number of Persons: In a partnership firm there must be at least two people to form the business. Partneship Act 1932, does not specifies the maximum numbers of persons, but Section 464 of the Indian Companies Act 2013, restricts the number of Partners to 50 for a partnership firm. But in case of limited liability partnership there is no maximum limit.
(ii) Profit-Sharing: The agreement between/among partners must be to share profit or losses. Sharing of profit is an essential feature of partnership. But an agreement to share losses is not an essential element. There may be specific provision in the partnership deed that a particular partner or partners shall not bear the losses.
(iii) Business: The existence of business is essential in case of partnership. The term business includes every trade, occupation and profession. Also the motive of the business is the acquisition of gain which leads to the formation of partnership. If there is no intention to carry on the business and to share the profit thereof, there can be no partnership.
(iv) Business carried on by all or any of them acting for all: 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. Any act of one partner in the course of the business of the firm is in fact an act of all the partners. This relationship between the partners is the true test of partnership.
(v) Motive: For a partnership firm there must be motive to earn profit. A partnership firm cannot be formed with service motive.
(vi) 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.