LESSON 1:
INTRODUCTION TO LAW AND THE
MEANING AND ESSENTIALS OF
CONTRACT
English/ Foreign law
Introduction
Business laws are essential for the students of management to
understand the legal rules and aspects of business. Just like any
other study even business management is incomplete without a
proper study of its laws. Any form of business needs legal
sanction. Therefore, it is imperative that a manager understands
the various ways in which businesses can be organized. This
subject introduces some of the common forms of business
organizations, including some forms unique to India like the
Joint Hindu Undivided Family firm. Different types of
organizations like Sole Ownership, Partnership, Private Limited
Company, Public Limited Company, Joint Stock Company
along with the rationale for adopting these forms are explored.
What form of business organization is the best under a
particular set of conditions? What advantage or disadvantage
does it have over other forms of business? Formalities to be
gone through and some the quasi-legal processes required for
starting a business will be discussed in detail in this subject.
For the proper working of the society, there must exist a code
of conduct. As you all know, in the ancient times the society
was not organized. The rights of the individuals were not
recognized. Gradually, the society evolved and the state came
into being. As we all know, to regulate the state, there should be
a specific code of conduct, which should be followed by
everyone. As a result of which law evolved as a system of rights
and obligations including all the rules and principles, which
regulate our relations with other persons and with the state.
These rules and regulations took the form of statutes.
To enforce the law and to resolve the conflicts arising there
from, courts of law were setup by the state.
Laws were made to govern almost every walk of life. You all
must know that criminal laws were made to control criminal
activities in the society like Indian Penal Code, which enumerates which activities are considered criminal and what will be the
punishment for committing a crime. Likewise, mercantile law
was evolved to govern and regulate trade and commerce. Hence,
the term mercantile law can be defined as that branch of law,
which comprises laws concerning trade, industry and commerce.
It is an ever-growing branch of law with the changing circumstances of trade and commerce.
Now the question arises as to what are the sources of mercantile
law in India. The answer is
Learning Outcomes
Besides, the law of contract furnishes the basis for the other
branches of mercantile law. The enactments relating to sale of
goods, negotiable instruments, insurance, partnership and
insolvency are all founded upon the general principles of
contract law. That is why the study of the law of contract
precedes the study of all other sub-division of mercantile law.
1.
The Indian contract act was enacted from the 1st day of September; 1872.it is applicable to the whole of India except the state
of Jammu and Kashmir. There may be some occasions where
Indian law disagrees with the English laws. In such cases, the
Indian law will prevail.
Now we will move on to the definition and concept of the
contract.
The Indian Contract Act, 1972
The law of contract in India is contained in the Indian Contract
Act 1872. This Act is based mainly on English common law,
which is to a large extent made up of judicial precedents. (there
being a separate contract act in England). It extends to the
whole of India except the state of Jammu and Kashmir and
came into force on the first day of September 1872(Sec.1 Indian
Contract Act 1872). The act is not exhaustive. It does not deal
with all the branches of the law of contract. There are separate
acts, which deal with contracts relating to negotiable instruments, transfer of property, sale of goods, partnership,
insurance, etc. Again the act does not affect any usage or custom
of trade (Sec.1).
Scheme of the Act.
The scheme of the Act may be divided into two main groups.
1.
2.
2.
Definition of contract
Thus it may be concluded that the Act restricts the use of the
word contract to only those agreements, which give, rise to legal
obligations between the parties.
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2.
Try to work out the solution in the following cases and then go
to the answer.
5.
Illustrations.
(a) M promises his wife N to get her a necklace if she will
sing a song. N sang the song M did not bring the
necklace for her.
(b) The defendant was a civil servant in Ceylon. He and his
wife were enjoying leave in England. When the
defendant was due to return to Ceylon, his wife could
not accompany him because of her health. The
defendant agreed to send her 30 a month as
maintenance expenses during the time they were thus
forced to live apart. She sued for breach of this
agreement.
Answers
(a) N cannot bring an action in a court to enforce the
agreement as it lacked the intention to create legal
relations.
(b) Her action was dismissed on the ground that no legal
relations had been contemplated and therefore there
was no contract.(Balfour vs. Balfour)
In commercial agreements an intention to create legal relations is
presumed. Thus, an agreement to buy and sell goods intends
to create legal relationship hence is a contract, provided other
requisites of a valid contract are present. But if the parties are
under a legal obligation, even a business agreement does not
amount to a contract. The case of Rose & Frank co, vs.
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6.
7.
8.
3.
4.
5.
6.
7.
References
Notes:
2.
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LESSON 2
KINDS OF CONTRACTS
Learning Outcomes
By the end of the lecture we should be able to answer the
following questions:
Introduction
First of all we will study
[I] Kinds of contracts from the point of view of Enforceability
Valid contract
Voidable contract.
Void contract
Unenforceable contract
Illegal or unlawful contract
2.
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3.
each other. Before the time fixed for the marriage, A goes
mad. The contract to marry becomes void.
to sell his horse to him. It turns out that the horse was
dead at the time of the bargain, through neither party was
aware of the fact. In this case the agreement is discovered
to be void and B must repay to A Rs. 1,000. it should,
however, be noted that agreements which are known to be
void or illegal, when they are entered into, are excluded
from the purview of this section. Thus, if L pays Rs.
10,000 to M to murder Z, the money cannot be recovered.
Similarly, nothing can be recovered in the case of expressly
declared void agreements, of course, subject to the
following exceptions.
(i)
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(ii)
An illegal agreement is
wider in effect in relation to
A contract is always concluded and binding on the
collateral transactions than a void
concerned parties,
agreement. When an agreement is
All contracts are agreements.
illegal, other agreement which are
incidental
or
collateral
to
it
are also tainted with illegality,
Agreement
Contract
hence void, provided the third parties have the knowledge
of the illegal or immoral design of the main transaction.
Illegal and Void Agreements
The reason underlying this rule is that no person shall be
allowed to invoke the aid of the
Similarities
These agreements are not enforceable at law.
These agreements are not enforces able at law.
court if he is himself implicated
Differences
in the illegality. On the other
Scope- These agreements are narrower in scope. All These agreements are wider in scope.
hand, when an agreement is
illegal ag reements are void.
An agreement may be void because of a reason other
void (but not illegal),
than illegality.
agreements which are collateral
Effect on collateral transaction Collateral Collateral transaction of an agreement which is void
transaction of an illegal contract also becomes illegal for a reason other than illegality are enforceable at
to it are not invalidated and
and contract not be enforced.
law.
remain valid.
Punishment Parties may be punished for making
illegal agreement.
Illegal agreement
Void agreement
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Similarities
A void agreement cannot create any legal rights. It is a
total nullity.
Differences
It is an agreement. It never takes form of a contract.
It is a nullity since very beginning.
Kinds of contracts from the point of view of mode
of creation
From the point of view of mode of creation a contract may be
express or implied or constructive.
1.
2.
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was discovered that the horse was dead at the time of making
the contract. Advise the parties.
Practical Problems
Attempt the following problems, giving reasons for your
answers.
1.
8.
2.
3.
4.
References
http://www.indialawinfo.com/bareacts/soga.html
5.
Notes:
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LESSON 3:
ACCEPTANCE
Learning Outcomes
After todays class you should be able to answer the following
questions:
1.
Introduction
By now you must be aware of the essentials of a contract. In
todays lecture we shall do a detailed study of the concept of
offer
The four basic elements of a contract are offer, acceptance,
consideration and contractual capacity out of which we shall
study the first one in this lesson.
While discussing the essential elements of a valid contract in the
preceding chapter we observed that as a first step in the making
of a contract there must be a lawful offer by one party and a
lawful acceptance of the offer by the other party, thus where A,
offers to sell a wrist watch to B for Rs. 200 and B accepts the
offer, a contract comes into being provided other essentials of a
valid contract like that of competency of parties to contract, etc.
are present. We propose to discuss now the legal rules relating
to a lawful offer.
The Proposal or Offer
The words proposal and offer are synonymous and are used
interchangeably. Section 2 (a) of the Indian contract act defines a
proposal as, when one person signifies to another his
willingness to do or to abstain form doing anything, with a
view to obtaining the assent of that other to such act or
abstinence, he is said to make a proposal. This definition
reveals the following three essentials of a proposal.
(i)
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Illustration
(a) M says to N that he is willing to sell his motorcycle to him
for Rs. 20,000. this is an express offer.
(b) X writes to Y he offers to sell his house to him for Rs.
80,000. there is an express offer.
(a) The Delhi Transport Corporation runs omnibuses on
different routes to carry passengers at the scheduled fare.
This is an implied offer by the D.T.C.
(b) A shoe shiner starts shining some ones shoes, without
being asked to do so, in such circumstances that any
reasonable man could guess that he expects to be paid for
this, he makes an implied offer.
The second essential of a valid offer is intention.
2.
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3.
Answers
(a) Y could not enforce the agreement, it being loose and
vague (Taylor vs. Porting ton)
(b) As offer does not amount to lawful offer being vague and
uncertain.
(c) There is nothing to show which of the two prices was to
be given, thus it is not a valid offer.
3.
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of law, there is no contract (Rose & Frank Co. vs. Crompton &
Brothers Ltd.)
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3.
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sufficient for the class of persons to which he belongs (Thompson vs. L.M. & S. Railway co.)
4.
6.
7.
5.
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Practice Questions
I.
II. Define the term offer. Explain the legal rules regarding the
term offer.
III. How does an offer get terminated?
IV. Distinguish between
(1) General offer and specific offer
(2) Offer and an invitation to offer
(3) Cross offer and counter offer
V.
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(3) A sent a telegram to B, will you sell your car? Quote lowest
price. B sent a reply, lowest price Rs.25000. A sent a
second telegram to B, I agree to buy your car at Rs.25000.
B thereafter refuses to sell. Can a compel B to do so. Is
there a contract between A and B?
References:
Notes:
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15
LESSON 4:
ACCEPTANCE OF AN OFFER
Learning Outcomes
2.
Introduction
Today first we will start with the meaning of acceptance
A contract as already observed, emerges from the acceptance of
an offer. Section 2(b) states that A proposal when accepted
becomes a promise and defines acceptance as when the
person to whom the proposal is made signifies his assent
thereto, the proposal is said to be accepted. Thus, acceptance
is the manifestation by the offeree of his assent to the terms of
the offer. Thus there are two essential requirements of a valid
acceptance
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Now what about the cases where no acceptance is communicated although there is an intention of entering into a contract.
Mental acceptance ineffectual. Mental acceptance or quiet assent
not evidenced by words or conduct does not amount to a valid
acceptance, and this is so even where the offeror has said that
such a mode of acceptance will suffice. Acceptance must be
communicated to the offeror, otherwise it has no effect. Thus,
if an oral acceptance is spoken into a telephone after the
telephone has gone dead, there is in effect no acceptance. This
rule is based on the theory of consensus ad idem or of identity
of minds. Unless the acceptance of the offer comes to the
knowledge of the offeror, there is no identity of mind and
therefore no contract.
(a) A person received an offer by letter. In reply he wrote a
letter of acceptance. Put the letter in his drawer and forgot
all about it. Held, this uncommunicated acceptance did not
amount to acceptance and so did not complete the contract.
(Brogden vs. Metropolitan Rly co)
4.
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7.
2.
Illustrations
(i)
17
Illustration
(i)
18
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policy had revived from the date of the money order and not
from the late of its receipt by the company. The assured having
died in the mean times widow recovered the proceeds.
Whatever merit this rule may have from the point of view of
the assured or the offered, it certainly makes the position of the
offer or miserable. The current feeling, therefore, is that even in
reference to postal communications the principle of consensus
or meeting of minds should be adhered to and there should
be no contract till the acceptance is received. Thus in Holwell
Securities v. Hughes an option to purchase land was exercisable
by notice, it was held that the mere posting of the notice which
was never delivered was not a valid exercise of the option.
Supreme Court approval of Entores case
The principle of the Entores case has been endorsed by the
Supreme Court in Bhagwandas Goverdhandas Kedia v.
Girdharilal Parshottamdas & Co. In this case, the plaintiffs
made an offer from Ahmedabad to the defendants at
Khamgaon to purchase certain goods and the defendants
accepted the offer. The question was whether the conversation
resulted in a contract at Khamgaon at Ahmedabad. A majority
of the judges preferred to follow the English rule as laid down
in the Entores case and saw no reason for extending the post
office rule to telephonic communications but section 4 does not
imply that the contract is made qua the proposer at one place
and qua the acceptor at another place. The contract becomes
complete... when the acceptance of offer is intimated to the
offeror. It was further contended, that the draftsman of the
Indian Contract Act could not have envisaged use of telephone
because it had not yet been invented and, therefore, the words
of the section should be confined to communications by post.
The judge was, on the other hand, convinced that though the
law was framed at a time when telephones, wireless, Telstar and
Early Bird were not contemplated, the language of Section 4 is
flexible enough to cover telephonic communications. The
courts should not completely ignore the language of the Act.
When the words of acceptance are spoken into-the telephone,
they are put into the course of transmission to- the offeror so
as to be beyond the power of the acceptor; the acceptor cannot
recall them. The communication being instantaneous the
contract immediately arises
In the case of contracts over the telephone, each contracting
party is able to hear the voice of the other. There is instantaneous communication of offer and acceptance, rejection and
counter offer. And therefore, the rule which applies to contracts
negotiated orally by the parties in the physical presence of each
other i.e., the contract is complete only when the acceptance is
received by the offeror also applies to contracts made over the
telephone. If the acceptance is not in fact communicated to the
offeror because the telephone suddenly goes dead there will be
no contract ( Entores Ltd. Vs. miles for east corporation). The
offeree, therefore must make sure that his acceptance is received
(heard and understood) by the offeror, otherwise there is no
binding contract. The observation made by denning, L. J., in
Entores case is enlightening in this connection.
Now take a case where two people make a contract by
telephone. Suppose for instance, that I make an offer to a man
by telephone and in the middle of his reply, the line goes dead
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95,000 but B refused to sell the car. A sues B for the specific
performance of the contract. Will he succeed?
[Hint. No. Bs offer comes to an end by the counter offer
of A, and there, was no offer available for acceptance
subsequently.]
4.
5.
6.
8.
Practical Problems
Answer the following problems, giving reasons for your
answers.
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Solution: The owner of the hotel was liable because the special
terms (i.e. notice) were communicated after the formation of
the contract. [Leading case: Olley v. Marlborough Court Ltd.]
3.
Test Questions
2.
1.
[Hint. No, Harish has expressed his wish only, and has
never made an offer with a view to obtaining the assent of
the other party.]
X sees a book displayed in a shelf of a book shop with a
price tag of Rs. 85. X tenders Rs. 85 on the counter and
asks for the book. The bookseller r3fuses to sell saying that
the book has already been sold to someone else and he
does not have another copy of that book in the stock. Is
the bookseller bound to sell the book to X?
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References
Notes:
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LESSON 5:
CONSIDERATION
Learning Outcomes
After todays class you should be able to answer the following
questions:
Introduction
By now you all must have understood the concept and
definition of contract and its essentials. Our next topic of study
shall be consideration. Consideration constitutes the very
foundation of the contract. As you all know that as per section
10 of the Indian Contract Act there must be a consideration for
an agreement to become a contract and that consideration must
also be lawful. An agreement not supported by consideration is
void.
Consideration is one of the essential elements of a valid
contract (Sec. 10). The fact. of its existence serves to distinguish
those promises by which the promisor intends to be legally
bound from those which are not seriously meant.
In the words of Blackstone: A consideration of some sort or
other is so necessary to the forming of a contract, that a nudum
pactum, or agreement to do or pay something on one side,
without any compensation on the other, will not at law support
an action; and a man cannot be compelled to perform it. The
law supplies no means nor affords any rem-edy to compel the
performance of an agreement made without consideration. If I
promise a man 100 for nothing, he neither doing nor
promising anything in return or to compensate me for my
money, my promise has no force in law.
Anson said that the offer and acceptance bring the parties
together and constitute the outward semblance of a contract
but most systems of law require some further evidence of the
intention of the parties, which is provided by consideration and
form. It may be noted that consideration is a cardinal necessity
for the formation of a contract., but no consideraion is
necessary for the discharge or modification of a contract.
The breach of a gratuitous promise cannot be redressed by legal
remedies. It is only when a promise is made in return of
something from the promisee, that such promise can be
enforced by law against the promisor. This something in
return is the consideration for the promise. In the language of
purchase and sale Pollock has observed: Consideration is the
price for which the promise of the other is bought. Anson
said that an offer and acceptance bring the parties together and
constitute the outward semblance of a contract.
Definition
Section 2(d) of the Indian Contract Act defines consideration as
follows
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1.
Trust or Charge
Acknowledgement or Estoppel
Assignment
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4.
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Present consideration. Consideration which moves simultaneously with the promise, is called present consideration or
executed consideration. For example, A sells and delivers a
book to B, upon Bs promise to pay for it at a future date. The
consideration waiting from A is present or executed consideration since A has done his act of delivering the book
simultaneously. with the promise of B. It should, however, be
noted that it is said to be . present consideration when at the
time of the agreement it is executed on one side and executory
on the other. If both parties have done their part under the
contract, e.g., where A sells a book to B and B pays its price
immediately, it is a case of executed contract (where nothing
remains to be done) and not of executed or present consideration.
(b) Two of the crew of a ship deserted it half way while the
ship was on a voyage from London to the Baltic and back.
The captain, being unable to supply their place, promised
the rest of the crew that, if they would work the vessel
home, the wages of the two deserters should be equally
divided amongst them. The agree-ment was held to be
void for want of consideration because it was the
contractual duty of the mariners who remained with the
ship to exert themselves utmost in any emergency of the
voyage to bring the ship in safety to her destined port. The
desertion of a part of the crew is to be considered an
emergency of the voyage as much as their death. (Stilk vs
Myrick)
Performance of Existing Duties
(1) Performance of Legal obligation in order to constitute
proper consideration there should be a promise to do
something more than what a person is already bound to
do. Doing of something, which a person is already legally
bound to do, is no consideration. For instance, where a
person having received summons to give evidence in a case;
a promise to pay such a person for appearing in case is o
consideration. Similarly, a promise to pay a sum of money
to a police officer for investigating into the crime will be
without consideration. However, where the police authority
provides a special form of protection outside the scope of
their public duty (e.g. performing an extraordinary act) they
may demand payment of it.
(2) Performance of Contractual Obligations
(a) Pre existing contract with promisor - If A is already
bound to perform a particular contractual duty owed to
B, Bs promise to pay something additional for the
same promise is no consideration. Likewise, a promise
to pay a special reward to a pleader (apart from usual
fee) if the suit decided in the promisors favour, does
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The logic behind this exception is that by lapse of time the debt
is not destroyed but only the remedy is lost. The remedy is
revived by a new promise under the exception.
Illustration. A owes B Rs 1,000, but the debt is barred by the
Limitation Act. A signs a written promise to pay BRs 500 on
account of the debt. This is Ii contract (Appended to Sec. 25).
4.
5.
6.
7.
2.
3.
Practical Problems
Attempt the following problems, giving reasons for your
answers:
1.
[Hint. Yes. In the instant case the fireman took an extra risk of
endangering his life, which does not fall in his normal duties in
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Solution: Section to which the given problem relates: Explanation 1 to Section 25. Decision: A promise to gift is not valid.
2.
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8.
Solution: Section to which the given problem relates: Explanation 2 to Section 25.
Decision: X is liable to Y for damages.
Reason: An agreement to which the consent of the party is
freely given is not void merely because the consideration is
inadequate.
True or False
1. An act constituting consideration must be done by the
promisee only. 3. Consideration must result in a benefit to
both parties. (False)
2.
3.
4.
5.
6.
7.
8.
9.
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References
http://www.indialawinfo.com/bareacts/soga.html
Notes:
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Learning Outcomes
In todays lecture we shall study about capacity of a party to a
contract.
Intoduction
Today we will discuss what exactly is meant by competence to
enter into a contract
According to section 10 an essential ingredient of a valid
contract is that the contracting parties must be competent to
contract. Section 11 lays down that Every person is competent
to contract who is of the age of majority according to the law to
which he is subject, and who is of sound mind, and is not
disqualified from contracting by any law to which he is subject.
Thus the section declares that a person is incompetent to
contract under the following circumstances:
Thus minors, persons of unsound mind and persons disqualified by law are incompetent to contract.
We shall now discuss them one by one in detail.
I. Minor
First of all let us understand who is a minor
According to section 3 of the Indian majority Act 1875, a
person domiciled in India, who is under 18 years of age is a
minor. Accordingly every person who has completed the age of
18 years becomes a major. But minors of whose person or
property or both a guardian is appointed by a court, and minors
of whose property superintendence has been assumed by a
court of wards, attain majority at the age of 21 years. However,
by an amendment in 1999 in the Indian Majority Act1875, the
age of majority is fixed as 18 years for every person (irrespective
of the fact of appointment of a guardian.)
Section 11 expressly provides that the age of majority of a
person is to be determined according to the law to which he is
subject. The courts of law used to decide the age of majority
(competency to contract) by the law of domicile and not by the
law of the place where the contract is entered into (Kashiba Vs
Shripat). But the later trend of law for determining the age of
majority is:
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In the case of contracts relating to ordinary mercantile transactions, the age of majority is to be determined by the law of the
place where the contract is made, and
Minors Agreements
The law regarding minors agreements may be summed up as
under:
An agreement by a minor is absolutely void and inoperative as
against him. Law acts as the guardian of minors and protects
their rights, because their mental faculties are not mature they
dont possess the capacity to judge what is good and what is
bad for them. Accordingly, where a minor is charged with
obligations and the other contracting party seeks to enforce
those obligations against minors, the agreement is deemed as
void ab-initio.
In the leading case of Mohiri Bibi Vs Dharmo Das Ghosh, a
minor executed a mortgage for Rs. 20,000 and received Rs. 8,000
from the mortgage. The mortgage filed a suit for the recovery
of his mortgage money and for sale of the property in case of
default. The Privy Council held that an agreement by a minor
was absolutely void as against him and therefore the mortgagee
could not recover the mortgage money nor could he have the
minors property sold under his mortgage.
No restitution except in certain cases. A minor cannot be
ordered to make compensation for a benefit obtained under a
void agreement, because sections 64 and 65 of the contract Act,
which deal with restitution, apply only to contracts between
competent parties and are not applicable to case where there is
not and could not have been any contract at all. The court may,
however, in certain cases, while ordering for the cancellation of
an instrument, at the instance of a minor, require the minor
plaintiff to make compensation to the other party to the
instrument. This is so as per section 33 of the Specific Relief
Act, 1963 which states as follows:
On adjudging the cancellation of an instrument, the court may
require the party to whom such relief is granted, to restore, so
far as may be, any benefit which he may have received from the
other party and to make any compensation to him which justice
may require.
Thus, the court will compel restitution by a minor when he is a
plaintiff. For example, if a minor sells a house for Rs.50,000
and later on files a suit to set aside the sale on the ground of
minority, he may be directed by the court to refund the purchase
money received by him before he can recover possession of the
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LESSON 7
CAPACITY OF PARTIES
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Illustrations
(a) A supplies B, a lunatic, with necessaries suitable to his
condition in life. A is entitled to be reimbursed from Bs
property.
(b) A supplies the wife and children of B, a lunatic, with
necessaries suitable to their condition in life. A is entitled to
be reimbursed from Bs property.
Thus section 68 confers a quasi-contractual right on the supplier
of necessaries to a person incapable of entering into a
contract, or to any one whom he is legally bound to support.
But a minor is not personally liable, it is his property only which
is liable. Therefore. If a minor owns no property, the supplier
will lose the price of necessaries. Even where a minor owns
property, the supplier will get a reasonable price and not the
price agreed to by the minor.
Now let us discuss as towhat is a necessary
article,
This is to be determined with reference to the status and
circumstances of the particular minor. Objects of mere luxury
are not necessaries, nor are objects, which though of real use, are
excessively costly. Food and clothing may be taken as simple
examples of necessaries. The necessaries would also includes the
infants lodging expense, medical attendance, cost of defending
a minor in civil and criminal proceedings. Loans taken by a
minor to obtain necessaries also bind him. But where a minor
is engaged in trade, contracts entered into by him for trading
purposes are not for necessaries and are not binding on him.
Specific Performance.
Specific performance means the actual carrying out of the
contract as agreed. Since an agreement by a minor is absolutely
void the court will never direct specific performance of such an
agreement by him. But a contract entered into on behalf of a
minor, by his guardian or by the manager of his estate, is
binding on the minor and can be specifically enforced by or
against the minor, provided:
(a) The contract is within the authority of the guardian or
managers; and
(b) It is for the benefit of the minor. Thus it was held in
Gujoba Tulasiram vs Nilkanth, that a contract of sale of
immovable property by the guardian of minor, for the
minor benefit, may be specifically enforced by either party
to the contract.
Similarly, in Ramalingam vs Babanambal, it was held that a
Hindu minor is bound by a contract entered into by his mother
as his guardian for sale of his property, however a guardian has
no power to bind the minor: (i) by a contract, for the purchase
of immovable property (Mir Sarwarjan vs Fakruddin) and (ii)
ByaContractofserviceonhisbehalf
Raj
( Rani vs Prem Adib),
and therefore such contracts cannot be specifically enforced by or
against the minor.
Minor Partner.
A minor being incompetent to contract cannot be a partner in a
partnership firm, but under section 30 of the Indian partnership act he can be admitted to the benefits of partnership with
the consent of all the partners by an agreement executed
33
34
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Insolvent. An adjudged insolvent (before an order of discharge) is competent to enter into certain types of contracts i.e.
he can incur debts, purchase property or be an employee but he
cannot sell his property which vests in the official receiver.
Before discharge he also suffers from certain disqualifications
e.g. cant be a magistrate or a director of company or a member
of local body but he has the contractual capacity except with
respect to his property. After the order of discharge, he is just
like an ordinary citizen.
Joint-stock company and corporation incorporated under a
special act. A company/ corporation is an artificial person created
by law. It cannot enter into contracts outside the power
conferred upon it by its memorandum of association or by the
provisions of its special act, as the case may be. Again being an
artificial person(and not a natural person) it cannot enter into
contracts of a strictly personal nature e.g. marriage.
Practical Problems
Attempt the following problems, giving reasons for your
answers:
1.
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4.
5.
35
References
http://www.indialawinfo.com/bareacts/soga.html
Notes:
36
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Learning Outcomes
After todays class you should be able to answer the following
questions:
Introduction
In todays lecture we shall study about another essential
element of a contract that is free consent.
It has already been pointed out in the earlier lecture that,
according to Section 10 free consent of all the parties to an
agreement is one of the essential elements of a valid contract.
But students do you know what is meant by consent?
that if he had known the truth, or had not been forced to agree,
he would not have entered into the contract.
In the absence of free consent, the contract may turn out to be
either voidable or void depending upon the nature of the flaw
in consent to an agreement is caused by coercion, undue
influence, misrepresentation or fraud, there is no free consent
and the contract is voidable at the option of the party whose
consent was so caused (Sec. 19 and 19A).
But when consent is caused by bilateral mistake as to a matter
of fact essential to the agreement, the agreement is void (Sec.
20). In such a case there is no consent at all.
The various causes leading to flaw in consent will now be
discussed one by one in detail.
Consent Defined
Section 13 of the Contract Act defines the term consent and
lays down that Two or more persons are said to consent when
they agree upon the same thing in the same sense. Thus,
consent involves identity of minds or consensus ad-idem i.e.,
agreeing upon the same thing in the same sense. If, for
whatever reason, there is no consensus ad item among the
contracting parties, there is no real consent and hence no valid
contract.
Coercion
The Explanation to the Section further adds that it is immaterial whether the Indian Penal Code is or is not in force in the
place where the coercion is employed,
1.
Illustrations
2.
(i)
3.
4.
5.
Coercion,
Undue influence
Misrepresentation
Fraud
Mistake
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37
LESSON 8:
FREE CONSENT
Illustrations
(a) A. threatens to shoot B, a friend of C if C does not let out
his house to him. C agrees to do so. The agreement has
been brought about by coercion.
(b) A. threatens to shoot B if he does not let out his house to
C. B agrees to let out his house to C. Bs consent has been
caused by coercion.
3.
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(i)
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2.
39
In such cases the law presumes that consent must have been
obtained by undue influence and the burden of proving that
there was no undue influence lies on the creditor. It must be
noted that both the above conditions must be proved for
giving rise to a presumption of undue influence. There will be
no presumption of undue influence and a transaction will not
be set aside on ground of undue influence, merely because the
rate of interest is high if both the parties are, on equal footing
(i.e. none of the parties is in a position to dominate the, will of
the other party) or if there exists valid reason (like tight market
conditions) for charging high rate of interest
3.
4.
Illustrations
(a) A being in debt ,to B, the moneylender of his village, contract a fresh loan on terms which appear to be
unconscionable. It .lies on B to prove that the contract was
not induced by undue influence [Illustration (c) to Section
16].
(b) A poor Hindu widow borrowed Rs 1,500 ;from a
moneylender at 100 per cent per annum rate of interest for
the purpose of enabling her to establish her right to
maintenance. It lies on the moneylender to prove that there
was no undue influ-ence (Rannee Annapurni vs
Swaminatha).
(c) A, applied to a banker for a loan at the time when there is
stringency in the money market. The banker declines to
make the loan except at an unusually high, rate of interest.
A, accepts the loan on these terms. This is a transaction in
the ordinary course of business, and the contract is not
induced by undue influence [Illustration (d) to Section 16].
Pardanashin Woman
As observed earlier, there is a presumption of undue influence
in case of a contract by or with a pardanashin woman. She can
avoid any contract entered .by her on the plea of undue
influence and it is for the other party to prove that no undue
influence was used. For proving the absence of undue influence, the other party will have to satisfy the Court (i) that the
terms of the contract were fully explained to her, (ii) that she
understood their implications, and was free to have independent advice in the matter, and (iii) that she freely consented to
the contract. It may be noted that the term pardanashin here
refers to a woman who observes complete seclusion (parda) from
contact with people outside her own family, because of the
custom of her community, and one does not become
pardanashin simply because she lives in some degree of
seclusion Shaik Ismail vs Amir Bibi
Further note that the protection ranted to ardent in woman is
so extended to illiterate and ignorant ladies, who are equally
exposed to the danger and risk of an unfair deal (Sonia Parshini
vs,S.M. Baksha).
Distinction between Coercion and Undue 1n.i1uence
5.
Misrepresentation
A representation means statement of fact made by one party to
the other, either before or at the time of contract, relating to
some matter, essential to the formation of the contract, with
an intention to induce the other party to enter into the contract.
It may be expressed by words spoken or written or implied
from the acts or conducts of the parties (e.g., by any half
statement of truth).
A representation when wrongly made, either innocently or
indecently , is termed as a mi-representation. To put in differently, misrepresent- may be either innocent or intentional or
deliberate with an intent to deceive the other party. In law, for
the former kind, the term misrepresen-tation and for the latter
the term fraud is used.
Definition
According to Section 18 Misrepresentation means and
includes:
(a) The positive assertion, in a manner not warranted by the
information of the person making it, of that which is not
true, though he believes it to be true; or
(b) Any breach of duty which, without an intent to deceive,
gains an advantage to the person committing it, or anyone
Claiming under-him, by misleading another to the
prejudice or to the prejudice of any one claiming under
him; or
(c) Causing, however innocently, a party to an agreement, to
make a mistake as to the substance of the thing which is
the subject of the agreement.
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(i)
(ii) He may affirm the contract and insist that he shall be put
in the position in which he would have been; if the
represen-tation made had been true (Sec. 19).
Misrepresentation does not entitle the aggrieved party to
claim damages by way of interest or otherwise for expenses occurred.
Illustration A, innocently in good faith tells B that his T.V. set is
made in Japan. B. thereupon buys the T.V. set. However, it
comes out to be an Indian make. A. is guilty of misrepresentation. B. may either avoid the contract or may insist on its being
carried out. In the latter case, B may either ask for replacing the
set by a Japanese make set or may keep the Indian make set and
claim the difference in price between that set and a Japanese
make set.
Exception. The above remedy is lost, if the party whose
consent was caused by misrepresentation, had the means of
discovering the truth with ordinary diligence.
Illustration A. by a misrepresentation, leads B erroneously to
believe that 500 maunds of indigo are made annually at As
factory. B examines the accounts of the factory, which show that
only 400 maunds of indigo have been made. After this B buys
the factory. The contract is not voidable on account of A s
misrepresen-tation (Illustration ( b) to Section 19].
Fraud
The term fraud includes all acts committed by a person with
an intention to deceive another person. -
Definition
According to Section 17, fraud means and includes any of the
following acts committed by a party to a contract, or with his
connivance, or by his agent,. with intent to deceive or to induce
another party thereto or his agent, to enter into the contract:
1.
41
Illustrations
(a) X purchases certain goods from Y on credit without any
intention of paying for them as he was in insolvent
circumstances. It is a clear case of fraud from Xs side. Note
that mere failure to pay, where there was no original
dishonest intention, is not fraud.
(b) Where a man and a woman went throug a ceremony of
marriage without any intention on the part of the husband
to regard it as a real marriage, it was held that the consent
of the wife was obtained by fraud and that the marriage
was mere pretence. (Shireenl vs John J J. Taylor).
4.
5.
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2.
He can ask for restitution and insist that the contract shall
be per-formed, and that he shall be put in the position in
which he would have been, if the representation made had
been true (Sec. 19).
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(i)
2.
3.
43
4.
Mistake
Mistake may be defined as an erroneous belief concerning
something. It may be of two kinds:
1. Mistake of law.
2. Mistake of fact.
Mistake of Law
Mistake of law may be of two types:
44
(i)
Illustration
(ii) The fact must be essential to the agreement -i.e., the fact
must be- such which goes to the very root to the
agreement. On the basis of judicial decisions, the mistakes
which may be covered under this condition may broadly be
put into the following heads
(a) Mistake as to the existence of the subject-matter of the
agreement. If at the time of the agreement and unknown
to parties, the subject-matter of the agreement has ceased
to exist, or if it has never been in existence, then the
agreement is void (Bell vs Lever Bros.).
Illustrations
(a) A agrees to sell to B a specific cargo of goods supposed
to be on is way from England to Bombay. it turns out
that, before the day of the bargain, the ship conveying
the cargo had been cast away, and the goods lost.
Neither party was aware of these facts. The agreement
is void.
(b) A. agrees to buy from B a certain horse. It turns out
that the horse was dead at the time of-the bargain,
though neither party was aware of the fact. The
agreement is void.
(b) Mistake as to the identity of the subject-matter. Where
both parties are working under mistake as to the-identity
of the - subject-matter i. e., one, party had one thing in
mind and the other party had another, the agreement is
void for want of consensus-ad-idem
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45
Illustration.
Where there was a contract of the sale of ascertain quantity of
cotton arriving per ex ship Peerless, and there were two ships of
that name sailing, and the parties had in mind different ships at
the time of entering into the contract, held here was no contract.
The Court observed: the defendant meant one peerless and
the Plaintiff another. That being so, there was no consensus-adidem and therefore no binding contract. (Reffles vs Wichelaus)
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Illustrations
(a) An old illiterate woman executed a deed under the
impression that she was executing a power of attorney
authorising her nephew to manage her estate, while in fact
it was a deed of gift in favour of her nephew. The evidence
showed that the woman never intended to execute such a
deed of gift nor was the deed read or explained to her. The
document was held to be void, as her mind did not go
with her signature (Bala Devi vs Santi Mazllmda).
(b) A blind man signed what he thought was a compromise
petition, but was in fact a release, on the fraudulent
representation of another, the document was held to be
void (Hem Singh vs Bhaar).
(c) M, an old man with feeble sight, signed a bill of exchange
for 3,000 thinking it was a guarantee. It was held that M
was not liable (Foster vs Mackin-non). In this case made a
very interesting observation was made: It was as if he had
written his name in a ladys album, or on an order for
admission to the Temple Church, or in the fly-leaf of a
book, and there had already been without his knowledge, a
bill of exchange ... on the other side of the paper.
It should be borne in mind that in the aforesaid type of
mistake, even if one partys consent is induced by misrepresentation of another, the con-tract is not merely voidable but is
entirely void and the third party would acquire no rights
(Ningawwa vs Byrappa). .
Practical Problems
Attempt the following problems, giving reasons for your
answers:
1.
[Hint. B will not succeed because he bought the horse after his
examination and not on the basis of the Certificate. B has not
therefore been deceived by the Certificate actually and a deceit
which does not deceive is not fraud-.]
3.
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47
References
http://www.indialawinfo.com/bareacts/soga.html
Notes:
48
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Learning Outcomes
Illustrations
Introduction
In todays lecture we shall study about another essential element
of a contract that is legality of object and consideration
The object of consideration of an agreement must be lawful, in
order to make the agreement a valid contract, for, Section 10 lays
down that all agreements are contracts if made for lawful
consideration and with a lawful object. Section 23 declares what
kinds of considerations and objects are not lawful. If the object
or consideration is unlawful for one or the other of the reasons
mentioned in Section 23, the agreement is illegal and therefore
void (Sec. 23).
The use of the word illegal is somewhat a misnomer here. It
usually connotes a punishable offence, but the parties to a so
called illegal agreement, unless it is expressly punishable by
law or amounts to a criminal conspiracy are not liable to
punishment. They have committed no offence. They have
merely concluded a transaction that will be spurned by the
courts.
The words object and consideration used in Section 23 are
not synonymous. The word object here means purpose or
design. Thus, where a person, while in insolvent circumstances,
transferred his property to one of his creditors with the object
of defrauding his other creditors, it was held that the agreement
was void and the transfer was inoperative (Jajlar Meher Ali vs
Budge Budge Jute Mills Co. ). The court observed that although
the consideration of the contract was lawful but the object was
unlawful because the purpose of the parties was to defeat the
provisions of the Insolvency Law.
What Considerations and Objects are Unlawful?
According to Section 23, every agreement of which the object or
con-sideration is unlawful is void, and the consideration or the
object of an agreement is unlawful in the following cases:
1.
If it is forbidden by law.
b.
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Illustrations
(a) A loan granted under a promissory note to the guard-ian
of a minor to enable him to. celebrate the minors marriage
in contravention of the Child Marriage Restraint Act was
held illegal and could not be recovered back (Chandra
Shrinivisa Rao vs Korrapati Raja Rama Mohana Rao).It will
be seen that the purpose of borrowing in this case is of
such a nature that if permitted it would defeat the
provisions of Child Marriage Restraint Act of 1929, for the
money was lent to enable the guardian to celebrate the
marriage contrary to the provisions of the said Act.
(b) An agreement by the debtor not to raise the plea of
limitation, should a suit have to be filed, is void as tending
to limit the provisions of the Limitation Act (Rama
Murthy vs Gopayya).
(c) An agreement between husband and wife to live separately
is invalid as being opposed to Hindu Law (A. E.
Thimma/ Naidu vs Rajamma).
3.
If it is fraudulent.
49
LESSON 9:
LEGALITY OF OBJECT AND CONSIDERATION
4.
(b) A man who knowingly lets out his house for prostitution
cannot recover the rent, it being an act for furtherance of
sexual immorality ( Choga Lal vs Piyasi).
(i)
Illustrations
(a) A, agrees to let her daughter to hire to B for concubi-nage.
The agreement is void, because it is immoral, though the
letting may not be punishable under the Indian Penal
Code. - [Illustration (k) to Section 23]
(b) A gift deed executed in consideration of illicit intercourse
has been held void as its object was immoral (Ghumma vs
Ram Chandra ).
It may be noted that an agreement to pay for past or future
illicit cohabitation is also void, as being immoral. Consideration
which is immoral at the time when it passes cannot become
innocent by passage of time and therefore the .consideration for
past cohabitation is unlawful as being immoral (Hussenali vs
Dinbai). Similarly, a promise to pay for the purpose of future
cohabitation, which comprised the consideration, was held
illegal and void (Lakshminarayana vs Subhadri).
(ii) Furtherance of sexual immorality.
Illutration
(a) A prostitute was sued for the hire money of a carriage in
which she used to go every evening in order to make a
display of her beauty and thus to attract customers. The
suit was dismissed on the ground that the plaintiff
contributed towards the performance of an immoral and
illegal act and hence he was liable to suffer ( Pearce vs
Brooks).
50
Illustrations
(a) Money advanced to a married woman to enable her to
procure a divorce and to marry the plaintiff could not be
recovered back as the object of the agreement was held
immoral (Bai Vij/i vs Nansa Nagar).
(iii) An agreement for future separation between a husband
and wife is void ab--initio, it being immoral in the eye or
law.
(iv) Such acts which are against good public morals.
Illustrations
(a) An agreement for future marriage, after the death of first
wife is against good morals and hence would be void
(Wilson vs Comleyl)
(b) A who is Bs mukhtar, promises to exercise his influence,
as such with B in favour of C and C promises to pay Rs
1,000 to A. The agreement is void, because it is immoral.
[Illustration to Section 23]
6.
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51
Illustration.
A, borrowed money from B, a moneylender, and agreed that he
.would not, without the written consent of B, leave his job,
borrow money, dispose of his property or change his residence.
It was held that the agreement was illegal as it unduly restricted
the liberty of A ( Harwood vs Millers Timber and Trading Co ).
(viii)Agreements interfering with parental duties. A father, and
in his absence the mother, is the legal guardian of his/her
minor child. The au-thority of a guardian is to be exercised
in the best interest of the child, in accordance with good
public morals. If, therefore, the right of guardianship is
bartered away by any agreement, which is - inconsistent
with the duties arising out of such custody such an
agreement shall be void on the ground of public policy.
Illustration.
For monetary consideration, A agrees to place his daughter at
the disposal of B to be married as B likes. The agreement is
illegal and void as B it would interfere with As parental duty to
select a husband in the best interests of the girl (Alma Ram vs
Banku Mal)
(ix) Marriage brokerage agreements. These are agreements for
the- payment of money in consideration of procuring for
another in marriage a husband or a wife. Such agreement
its are illegal and void as being contrary to public policy.
Thus, when a profit was promised Rs 200 in consideration of procuring a wife for the defendant, the agreement
was held, invalid and the money could} recovered
(Pitamber vs. Jagjiwan).
.
Further, an agreement of dowry i.e., to give money or property
to the parents of the bride or the bridegroom in connection of
their agreeing to the contract of marriage is also illegal and
cannot be enforced. But such an agreement is illegal in respect
of payment only; the validity of marriage is not affected. So,
once the marriage is solemnized, money if actually paid cannot
be recovered back, and if not paid, a suit therefore would not
lie, because the agreement to pay is illegal. Of course the money
can be recovered when the marriage is not performed
(Dharnidhar vs. Kanhji Sahay). Similarly, clothes and ornaments
or their value can be recovered if the marriage does not take
place (Girdhari Singh vs Neelandhar Singh ).
(x) Miscellaneous cases. The following agreements have also
been held to be against public policy:
(a) Agreements tending to create monopolies are illegal and
void (Kameshwar Singh vs Yasin Khan). .
(b) Agreements to the fraud revenue authorities are void and
illegal. For example, an agreement by which an employee
was to get, in addition to salary, an expense allowance
grossly in excess of the expenses actually incurred by him,
was held illegal because the provision as to expenses was
contrary to public policy being merely a device to defraud
the income-tax authorities (Napeier vs National Business
Agency Ltd).
(c) Agreements whereby money is given to induce persons to
give evidences in a civil court are void because every one is
expected to perform his legal duty ( Adhiraja Shatty vs
Vittil Bhatta).
52
Illustrations
(a) A promises to superintend, on behalf of B, a legal
manufacturer of indigo and an illegal traffic in other
articles. B promises to pay to A a salary of Rs. 10,000 a year.
The agreement is void and unlawful. Here a part of the
object is legal and a part is illegal which are not severable
because the consideration for both promises is a single
sum (illustration to Section 24).
(c) A agrees to serve B as his housekeeper and also to live in
adultery with him at a fixed salary. The whole agreement is
unlawful and void. A cannot sue even for service rendered
as housekeeper because it cannot be ascertained as to what
was due on account of adulterous intercourse and what
was due for housekeeping (Alice Hill vs. William Clarke).
2.
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2.
[Hint. The agreement between C and A is valid. It is a champertous agreement which is valid provided its terms are fair and
reasonable and is made with a bona fide object of. assisting a
just claim.]
3.
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Illustrations
(a) A enters into a smuggling of goods agreement with B and
borrows Rs 1,000 from C for giving an advance to B. C
cannot recover the money lent - if he knew the illegal
purpose, because his loan agreement was a collateral
transaction to an illegal agreement. Of course if C. did not
know the purpose of the loan, he can recover even though
A had used the money for an illegal object. -
53
3.
References
http://www.indialawinfo.com/bareacts/soga.html
Notes:
54
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Learning Outcomes
After todays class you should be able to answer the following
questions;
1.
Introduction
In todays lecture we shall study about void agreements and
their different classes
You all must be aware by now that
An agreement not enforceable by law is said to be void
[Sec.2(g)]. Thus a void agreement does not give rise to any legal
consequences and is void ab-initio. In the eye of law such an
agreement is no agreement at all from its very inception.
We have already dealt with the following types of void agreements in the preceding chapters, and will not therefore discuss
them here again: The preceding chapters, and will not therefore
discuss them here again:
1.
2.
3.
4.
5.
2.
3.
4.
5.
6.
7.
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55
LESSON 10:
VOID AGREEMENTS
Exceptions
An agreement in restraint of trade is valid in the following cases
(i)
Illustrations
(a) A after selling the goodwill of his business to B promises
not to carry on similar business anywhere in the world.
As the restraint is unreasonable the agreement is void.
(b) C a seller of imitation jewellery in London sells his
business to D and promises that for a period of two years
he would not deal: (a) in imitation jewellery in England,
(b) in real jewellery in England, and (c) in real or imitation
jewellery in certain foreign countries. The first promise
alone was held lawful. The other two promises, namely (b)
and (c), were held void as the restraint was unreasonable in
point of space and the nature of business (Goldsoll vs
Goldma).
(ii) Partners agreements. An agreement in restraint of trade
among the partners or between any partner and the buyer
of firms goodwill is valid if the restraint comes within any
of the following cases:
(a) An agreement among the partners that a partner shall not
carry on any business other than that of the firm while he
is a partner .
(b) An agreement by a partner with his other partners that. on
retiring from the partnership he will not carry on any
business similar to that of the firm within a specified
period or within specified local limits, provided the
restrictions imposed are reasonable [Section 36(2) of the
Partnership Act}.
(c) An agreement among the partners, upon or in anticipation
of the dissolution of the term, that some or all of them
will not carry on a business similar to that of the firm
within a specified period or within specified local limits,
provided the restrictions imposed are reasonable (Section
54 of the Partnership Act).
(d) An agreement between any partner and the buyer of the
firms that such partner will not carry on any business
similar to that of the firm within a specified period or
within specified local limits, provided the restrictions
imposed are reasonable [Section 55(3) of the Partnership ,
Act.]
(iii) Trade combinations. As pointed out earlier, an agreement,
the Ii primary object of which is to regulate business and
not to restrain it, is valid. Thus, an agreement in the nature
of a business combination between traders or
56
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Wagering Agreements
57
(b) This Section does not affect the law relating to arbitration
e.g., if the parties agree to refer to arbitration any dispute
which may arise between them under the contract, such a
contract is valid (Exceptions 1 and 2 to Section 28).
58
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1.
2.
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3.
5.
6.
7.
8.
59
persons running the lottery and the buyer of lottery ticket) will
not. be guilty of a criminal offence, but the lottery remains a
wager alright (Dorabji Tata vs Lance). .
.
9.
1. False
5. True
9. False
2. False
6. . False
10. False
3. False
7. False
4. False
8. False
References
http://www.indialawinfo.com/bareacts/soga.html
Notes
60
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Learning Outcomes
After todays class you should be able to answer the following
questions:
(i)
Introduction
We have seen that a contract is the result of an agreement
enforceable by law. But in some cases there is no offer, no
acceptance, no consensus ad idem and in fact no intention on the
part of parties to enter into a contract and still the law, from the
conduct and relationship of the parties, implies a promise
imposing obligation on the one party and conferring a right in
favour of the other.
In other words under certain special circumstances obligations
resembling those created by a contract are imposed by law
although the parties have never entered into a contract. Such
obligations imposed by law are referred to as Quasi-Contracts
or Constructive Con-tracts under the English law, and certain
relations resembling those cre-ated by contracts under the
Indian law. The term quasi-contract has been used because
such a contract resembles with a contract so far as result or effect
is concerned but it has little or no affinity with a contract in
respect of mode of creation.
A quasi-contract rests upon the equitable doctrine of unjust
enrich-ment which declares that a person shall not be allowed
to enrich himself unjustly at the expense of another. Duty, and
not a promise or agreement, is the basis of such contracts. It
may be noted that a suit for damages for the breach of the
contract can be filed in the case of a quasi-contract in the same
way as in the case of a completed contract (Sec. 73).
The Contract Act deals with quasi-contractual obligations
under Sections 68 to 72, which are discussed below:
I.
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61
LESSON 11:
QUASI CONTRACTS AND CONTINGENT CONTRACTS
other party, giving him the full choice to reject the thing or
service.
(ii)
Illustrations.
(a) A sub-tenant pays the arrears of rent due by the tenant the
landlord, in order to save the tenancy from forfeiture. The
sub-tenant is entitled to recover from the tenant, the
amount paid by him to the landlord, although there is no
contract between the two.
(b) A, pays the arrears of rent of his neighbour B, just to
avoid a struggle between B and his landlord. A cannot
recover from B as he acted voluntarily and had no interest
of his own in the payment. [But if B should agree to
reimburse A, this would be a good contract under Section
25(2).]
(ii) The payment must be such as the other party was bound
by law to pay.
Illustration as goods were wrongfully attached to. realise the
arrears of Government revenue due by B. A pays the dues to
save the goods from being sold. He is entitled to recover the
amount from B (Abid Hussain vs Ganga Sahai).
(iii) The payment must not be such as the plaintiff himself
was bound to pay. He should only be interested in making
the payment. In other words, a suit under this section is
maintainable only for reimbursement and not for
contribution. Thus, where there is a joint liability on joint
wrong doers and only one of them discharges the liability,
no suit for contribution from the other would be
maintainable under this Section (Ramkrishna vs
Radhakrishana). [A suit for contribution from the other
joint promisor would be maintainable under Section 43.]
Illustration A and B have been fined jointly Rs500 for selling
adulter-ated ghee. A alone pays the amount of fine in good
faith, A cannot later claim contribution from B under Section
69. Notice that although B was bound by law to pay and A has
paid Bs share in good faith, yet A cannot recover as he himself
was bound to make the payment, being jointly liable with B
and was not simply inter-ested in making the payment. [A can,
however, claim contribution form B under action 43.]
3.
62
(iii) The person for whom the act is done must have enjoyed
the benefit of the act.
Illustrations
(a) A, a tradesman, leaves goods at Bs house by mistake. B
treats the goods as his own. He is bound to pay A for
them. [Illustration to Section 70].
(b) A saves Bs property from fire. A is not entitled to.
compensation from B if the -circumstances show that he
intended to act gratuitously. [Illustration to Section 70]
(c) Where a coolie takes the luggage at the railway station
without being asked by the passenger or a shoe-shiner
starts shining shoes of the passenger without being asked
to do so, and if the passenger does not object to that, then
he is bound to pay reasonably for the same as the work was
not intended to be gratuitous. .
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(b) When the lawful charges of the finder amount to twothirds of the value of the goods found. The true owner is
entitled to get the balance of sale proceeds, if there is
surplus after meeting the lawful charges.
It is to be noted that no one except the real owner can claim
possession of goods from the finder. If anybody deprives him
of the possession of the goods, he can file a suit for damages
for trespass.
Illustration. H picked up a diamond on the floor of Fs shop
and handed it over to F to keep it till the owner appeared. In
spite of best efforts the true owner could not be searched. After
the lapse of some weeks, H tendered to F the lawful expenses
incurred by him for finding the true owner and an indemnity
bond and requested him to return the diamond to him (i.e.,
H). F refused to do so. Held, F must return the diamond to H
as he was entitled to retain the goods as against everybody
except the true owner (Hollinsvs FowlerS).
5.
The term mistake has been used in the Section without any
qualifi-cation or limitation whatever and comprises within its
scope a mistake of law as well as a mistake of fact (Sales Tax
Officer vs Kanhaiyalal Mukund). The term coercion has been
used in its ordinary sense and not as defined in Section 157
(Pep/ad Bulakhidas Mills vs Union of India). Here coercion
means under pressure.
Illustration
(a) A and B jointly owe Rs 100 to C. A alone pays the amount
to C, and 13, not knowing this fact, pays Rs 100 over again
to C. C is bound to repay the amount to B [illustration to
Section 72].
(b) A railway company refuses to deliver up certain goods to
the consignee, except upon the payment of an illegal charge
for carriage. The consignee pays the sum charged in order
to obtain the goods. He is entitled to recover so much of
the charge as was illegally excessive (illustration to Section
72).
(c) A pays some money to B by mistake. It is really due to C. B
must refund the money to A. C, however, cannot recover
the amount from B in the absence of privities of contract
between B and C.
(d) A fruit parcel is delivered under a mistake to R who
consumes the fruits thinking them as birthday present, R
must return the parcel or pay for the fruits.
Althoughthereisnoagreement betwee
Rnand the true owner,
yet he is bound to pay as the law regards it a quasi-contract.
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Definition
Section 31 of the Contract Act defines a contingent contract as
follows:
A contingent contract is a contract to do or not to do something, if some event, collateral to such contract does or does not
happen. Thus it is a contract, the performance of which is
dependent upon, the happening or non-happening of an
uncertain event, collateral to such contract.
Illustration A contract to indemnify B upto Rs20,000, in
consideration of B paying Rs1,000 annual premium, if Bs
factory is burnt. This is a contingent contract.
Any ordinary contract can be changed into a contingent contract,
if its performance is made dependent upon the happening or
non-happening of an uncertain event, collateral to such contract.
For example, the following are contingent contracts:
(a) A contracts to sell B 10 bales of cotton for Rs20, 000, if the
ship by which they are coming returns safely.
(b) A promises to give a loan of Rs1, 000 to B, if he is elected
the president of a particular association.
(c) A promises to pay Rs50, 000 to B if a certain ship does not
return, of course after charging usual premium. (It is a
contract of insurance.)
(d) C advances a loan of Rs10, 000 to D and M promises to C
that if D does not repay the loan, M will do so. (It is a
contract of guarantee.)
Contracts of insurance and contracts of indemnity and
guarantee are popular instances of contingent contracts.
As the performance of a contract is made dependent upon a
contingency, contingent contracts are also known as conditional
contracts. But in certain cases a contract may look like a conditional contract, whereas in fact it may be simply an ordinary
absolute contract where the promisor undertakes to perform
the contract in all events. For example, where A promises to pay
Rs.500 to B, a property broker, if B manages to get a two
rooms accommodation for him at a rental of Rs2,500 per
months, it is not a contingent contract, though on the face of it,
it appears like a conditional contract. It is an ordinary absolute
contract because the uncertain event (namely, managing to get an
accommodation) itself forms the consideration of the contract
and is not a collateral event. Hence it must be clearly understood
that in the case of contingent contracts the uncertain events
must be collateral to such contracts.
Collateral event. According to Pollock and Mulla, a collateral
event, means an event which is neither a performance directly
promised as part of the contract, nor the whole of the consider-
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2.
Illustrations
(a) A makes a contract with B to buy Bs horse if A survives C.
The contract
cannot be enforced by law unless and until C, dies in As
lifetime.
(b) A makes a contract with B to sell a horse to B at a specified
price, if C, to whom the horse has been offered, refuses to
buy it. The contract cannot be enforced by law unless and
until C refuses to buy the horse.
(c) A contracts to pay B a sum of money (as loan when B
marries C. C dies without being married to B. The contract
becomes void.
2.
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2.
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References
http://www.indialawinfo.com/bareacts/soga.html
3.
Practical Problems
1. A, a Hindu minor, fraudulently representing himself as
major, takes a loan of Rs 5,000 for the marriage of his
sister from B at 8 per cent interest. Can B recover the loan
and the interest?
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65
LESSON 12:
PERFORMANCE AND DISCHARGE OF A CONTRACT
Learning Outcomes
After todays class you should be able to answer the following
questions:
Introduction
Let us first learn about the performance of a contract
Section 37 lays down that the parties to a contract must either
perform, or offer to perform, their respective promises, unless
such performance is dispensed with or excused under the
provisions of this Act, or of any other law. Promises bind the
representatives of the promisors in case of death of such
promisors before performance, unless a contrary intention
appears from the contract.
Illustrations
(a) A promises to deliver goods to B on a certain day on
payment of Rs. 1,000. A dies before that day. As
representatives are bound to deliver the goods to B, and B
is bound to pay Rs. 1,000 to As representatives.
(b) A promises to paint a picture for B by a certain day, at a
certain price. A dies before the day. The contract cannot be
enforced either by As representative or by B [section 37].
The performance can be actual performance or attempted
performance, i.e. offer to perform.
Section 38 specifies that where a promisor has made an offer of
performance to the promisee, and the offer has not been
accepted, the promisor is not responsible for non-performance,
nor does he thereby lose his rights under the contract.
Every such offer must fulfill the following conditions:
(1) It must be unconditional;
(2) It must be made at a proper time and place, and under such
circumstances, that the person to whom it is made may
have a reasonable opportunity of ascertaining that the
person by whom it is made is able and willing there and
then to do the whole of what he is bound by his promise
to do;
(3) If the offer is an offer to deliver anything to the promisee,
the promisee must have a reasonable opportunity of seeing
that the thing offered is the thing which the promisor is
bound by his promise to deliver.
An offer to one of several joint promisees has the same legal
consequences as an offer to all of them.
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67
void, any person who has received any advantage under such
agreement or contract is bound to restore it, or to make
compensation for it, to the person from whom he received it.
Mode of communicating or revoking rescission of a voidable
contract (Section 66) The rescission of a voidable contract may
be communicated or revoked in the same manner, and subject
to the same rules, as apply to the communication or revocation
of a proposal.
Effect of neglect of promisee to afford promisor reasonable
facilities for performance (Section 66) If any promisee neglects
or refuses to afford the promisor reasonable facilities for the
performance of his promise, the promisor is excused by such
neglect or refusal as to any non-performance caused thereby.
This was all-important about the performance of a contract. Let
us now learn about the modes of a discharge of a contract.
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 contract
A contract may be discharged in various modes as discussed
below:
Discharge by Performance
A contract can be discharged by performance in any of the
following ways:
(a) By Actual Performance A contract is said to be discharged
by actual per-formance when the parties to the contract
perform their promises in accordance with the terms of the
contract.
(b) By Attempted Performance or Tender A contract is said to
be discharged by attempted performance when the
promisor has made an offer of performance to the
promisee but it has not been accepted by the promisee.
a)
Example
68
following ways:
Novation [Section 62] Novation means the substitution of
a new contract for the original contract. Such a new contract
may be either between the same parties or between
different parties. The consideration for the new contract is
the discharge of the original contract.
i)
ii)
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69
Case
Where an act becomes impossible after the
contract is made
Such promisor must compensate the promisee for any marriage X goes mad. The
loss which such promisee might have suffered on
contract becomes void.
account of non-performance of the promise.
[Section 56 Para 3]
Example X agreed to sell his crop of wheat. The entire crop was
destroyed by fire though no fault of the party. The contract was
discharged.
Example A music hall was rented out for a series of concerts
on certain days. The hall caught fire before the date of first
concert. It was held, the contract has become void on ground of
supervening impossibility.
(b) Death or personal incapacity: The contract is discharged on
the death or incapacity or illness of a person if the
performance of a contract depends on his personal skill or
ability.
Example X agreed to sing on a specified day. X fell seriously ill
and could not perform on the day. The contract was discharged.
(c) Declaration of War The pending contracts at the time of
declaration of war are either suspended or declared as void.
Example X contracts to take in cargo for Y at a foreign port. Xs
government afterwards declares war against the country in which
the port is situated. The contract becomes void when the war is
declared.
(d) Change of Law The contract is discharged if the
performance of the contract becomes impossible or
unlawful due to change in law after the formation of the
contract.
Example X agreed to sell his land to Y. After the formation of
the contract, the Government issued a notification and acquired
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Solution
Case (a) The contract is discharged by lapse of time (i.e. 3 years)
from 1st July 2001 because the debt has become time barred
and hence X cannot exercise his right to recover this debt.
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Case (c) & (d) The contract has become void on the ground
of supervening possibility
Case (e) The contract is not discharged because of
commercial impossibility. Case (j) The contract is not
discharged because of default of third party. Case (g) The
contract is not discharged because of non-performance due
to strikes, lock-out or civil disturbance
4.
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References
http://www.indialawinfo.com/bareacts/soga.html
Notes:
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Learning Outcomes
would have been had there been performance and not breach,
and not to punish the defaulter party. As a general rule,
compensation must be commensurate with the injury or loss
sustained, arising naturally from the breach. If actual loss is
not proved, no damages will be awarded.
Introduction
There are the following remedies available to the aggrieved party
for the breach of the Contract
Let us first start with the Rescission of the Contract
3.
4.
Nominal damages.
We shall now see these kinds one by one.
1. Ordinary Damages
When a contract has been broken, the injured party can, as a
rule, always recover from the guilty party ordinary or general
damages. These are such damages as may fairly and reasonably
be considered as arising natu-rally and directly in the usual course of
things from the breach of contract itself. In other words,
ordinary damages are restricted to the direct or proximate
consequences of the breach of contract and remote or indirect
losses, which are not the natural and probable consequence of
the breach of contract, are generally not regarded.
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LESSON 13 :
REMEDIES FOR BREACH OF CONTRACT
Illustrations
(a) The leading case of Hadley vs Baxendale, which is said to
be the foundation of modern law of damages in England
and India (as Sec, 73 is almost based on the rules laid down
in this case); is an authority on the point. In that case:
Hs mill was stopped by a breakage of the crankshaft. H
delivered the shaft to B, a common carrier, to take it to the
manufacturers at Greenwich as a pattern for a new one. The
only information given to B was that the article to be carried was
the broken shaft of the mill. It was not made known to B that
delay would result in loss of profits. By some neglect on the
part of B the delivery of the shaft was delayed beyond a
reasonable time. In consequence the mill remained idle for a
longer period than should have been necessary. H brought an
action against B claiming damages for loss of profits, which
would have been made during the period of delay. Held that B
was not liable for loss of profits caused by the delay because it
was a remote consequence, and only nominal damages were
awarded. The Court pointed out that B, the defendant, was
never told that the delay in the delivery of the shaft would entail
loss of profits of the mill; the plaintiffs might have had
another shaft, or there might have been some other defect in
the machinery to cause the stoppage, or for any other reason
there might have been loss actually. Accord-ingly it was not a
direct consequence of the breach and hence not recoverable.
(b) A contracts to pay a sum of money to B on a specified day.
A does not pay the money on that day. B, in consequence
of not receiving the money on that day, is unable to pay his
debts, and is totally ruined. A is not liable to make good to
B anything except the principal sum he contracted to pay,
together with interest upto the date of payment
[Illustration (n) to Section 73]. (If a suit has been filed
then A will have also to pay cost of the suit to B.)
(c) A contracts to sell and deliver 500 bales of cotton to B on a
fixed day. A knows nothing of Bs mode of conducting his
business. A breaks his promise, and B, having no cotton, is
obliged to close his mill. A is not responsible to B for the
loss caused to B by the closing of the mill [Illustration (p)
to Section 73]. (B, however, can claim damages for the
breach of contract. He cannot claim the loss of profits
callused by the closing of the mill because it cannot be
considered to have been in contemplation of both the
parties when they made the contract and thus is a remote
consequence of the breach.)
In the case of a contract for sale and purchase the general rule
as regards measure of damages is that the damages would be
assessed on the difference between the contract price and the
market price at the date of breach and any subsequent increase
or decrease in the market price would not be taken note of. If
there is no market price for the subject matter of the contract,
the rule is to take the market price of the nearest substitute. If
there is no nearest substitute, the market price is to be ascertained by adding to the price at the place of purchase, the
conveyance charges to the place of delivery plus the usual profit
of the importer (Hajee Ismail & Sons vs Wilson & Co). If the
delivery is to be made in instalments, then the due date of each
instalment is taken as the date of breach and the measure of
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75
Illustrations
76
2.
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4.
5.
6.
7.
8.
9.
10. The injured party is entitled to get the costs of getting the
decree for damages from the defaulter party.
Suit Upon Quantum Meruit (Sections 65 and 70)
The third remedy for a breach of contract available to an injured
party against the guilty party is to file a suit upon quantum
meruit. The phrase quantum meruit literally means as much as
is earned or in proportion to the work done. A right to use
upon quantum meruit usually arises where after part performance of the contract by one party, there is a breach of contract,
or the contract is discovered void or becomes void. This remedy
may be availed of either without claiming damages (i. e.,
claiming reason-able compensation only for the work done) or
in addition to claiming damages for breach (i.e., claiming
reasonable compensation for part per-formance and damages
for the remaining unperformed part).
The aggrieved party may file a suit upon quantum meruit and
may claim payment in proportion to work done or goods
supplied in the follow-ing cases:
I.
Illustrations
(a) P agreed to write a volume on ancient arm our to be
published ,in a magazine owned by C. For this he was to
receive $ 100 on comple-tion. When he had completed part,
but not the whole, of his volume, C abandoned the
magazine. P was held entitled to get damages for breach of
contract and payment quantum meruit for the part already
completed (Planche vs Colburn).
(b) A, engages B, a contractor, to build a three storied house.
After a part is constructed A prevents B from working any
more. B, the contractor, is entitled to get reasonable
compensation for work done under the doctrine of
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Illustrations.
(a) C was appointed as managing director of a company by the
board of directors under a written contract which provided
for his remunera-tion. The contract was found void
because the directors who constituted the Board were not
qualified to make the appointment. C nevertheless,
purporting to act under the agreement, rendered services to
the company and sued for the sums specified in the
agreement, or, alternatively, for a reasonable, remuneration
on a quantum meruit. Held, C could recover on a quantum
meruit. (Craven-Ellis vs Canons Ltd. ).
(b) A contracts with B to repair his house at a piece rate. After
a part of the repairs were carried out, the house is
destroyed by lightning. Although the contract becomes
void and stands discharged because of destruction of the
house, A can claim payment for the work done on
quantum meruit. Note that if under the contract a lump
sum is to be paid for the repair job as a whole, then A
cannot claim quantum meruit because no money is due till
the whole job is done.
3. When a person enjoys benefit of non-gratuitous act
although there exists no express agreement between the
parties. One of such cases is provided in Section 70.14
Section 70 lays down that when services are rendered or
goods are supplied by a person, (i) without any intention
of doing so gratuitously, and (ii) the benefit of the same is
enjoyed by the other party, the latter must compensate the
former or restore the thing so deliv-ered.
Illustrations
(a) A, a trader, leaves certain goods at Bs house by mistake. B
treats the goods as his own. He is bound to pay A for
them. [Illustration (a) to Section 70]
(b) Where A ploughed the field of B with a tractor to the
satisfaction of B in Bs presence, it was held that A was
entitled to payment as the work was not intended to be
gratuitous and the other party has enjoyed the benefit of
the same. (Ram Krishna vs Rangoobed).
4.
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3.
Illustrations
(a) Where a common carrier fails to take a complete
consignment to the agreed destination, he may recover prorata freight. (He will, of course, be liable for breach of the
contract.)
(b) S had agreed to erect upon Hs land two houses and stables
for $ 565. S did part of the work and then abandoned the
contract. H himself completed the buildings using some
materials left on his land by S. In an action by S for the
value of work done and of the materials used by H, it was
held that S could recover the value of the materials (for H
had the option to accept or to reject these) but he could
not recover the value of the work done (for H had no
option with regard to the partly erected building, but to
accept that). The court observed, The mere fact that a
defendant is in possession of what he cannot help keeping,
or even has done work upon it, affords no ground for such
an inference. He is not bound to keep unfinished a
building which in an incomplete state would be a nuisance
on his land. (Sumpter vs Hedges).
Suit for Specific Performance
Specific performance means the actual carrying out of the
contract as agreed. Under certain circumstances an aggrieved
party may file a suit for specific performance, i. e., for a decree by
the court directing the defendant to actually perform the
promise that he has made. Such a suit may be filed either
instead of or in addition to a suit for damages.
A decree for specific performance is not granted for contracts of
every description. It is only where it is just and equitable so to
do, i.e., where the regal remedy is inadequate or defective, that
the courts issue a decree for specific performance. It is usually
granted in contracts connected with land buildings articles and
unique goods having some special value to the party suing
because of family association. Notice that in all these contracts
monetary compensation is not an adequate relief because the
injured party will not be able to get an exact substitute in the
market.
Specific performance is not granted, as a rule, in the following
cases:
(i)
Illustration
(a) A, agreed to sing at Bs theatre for three months from 1st
April and to sing for no one else during that period.
Subsequently she contracted to-sing at Cs theatre and
refused to sing at Bs theatre. On a suit by B, the court
refused to order specific performance of her positive
engagement to sing at the plaintiffs theatre, but granted an
injunction restraining A from singing elsewhere and
awarded damages to B to compensate him for the loss
caused by As refusal. (Lumley vs Wagnerl)
(b) G agreed to take the whole of his supply of electricity from
a certain company. The agreement was held to import a
negative promise that he would take none from elsewhere.
He was, therefore, restrained by an injunction from buying
electricity from any other company. (Metropolitan Electric
Supply Company vs Ginder).
Practical Problems
Attempt the following problems, giving reasons for your
answers:
1.
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4.
References
http://www.indialawinfo.com/bareacts/soga.html
Notes:
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79
LESSON 14:
THE SALE OF GOODS ACT, 1930
INTODUCTION TO SALE OF GOODS AND ITS FORMATION
Learning Outcomes
2.
3.
Introduction
Contract of Sale of Goods
We have already studied rules relating to Indian Contract Act,
1872. These rules are applicable to contract of Sales of Goods
Act as for as they are not in consistent with the express provisions of sales of goods Acts. This Act came into force on first
July 1930. The provisions of this Act extends to the whole of
India except the state of J&K. certain minor amendments
where made in this Act in 1963.
Some of the provisions of Indian Contract Act apply to this
Act for example the rules relating to Capacity of parties, free
consent, agreements in Restaurant of trade , wagering agreements and measure of damages. However the definition of
consideration stands modified to the extent that in a contract of
sale of goods consideration must be my way of Price, only
money consideration.
Just like Indian Contract Act, there should be offer and
acceptance in the case of sales of goods. The parties to the
contract enjoy unfettered discretion to agree to any terms they
like, for example delivery of goods and payment of Price etc.
The sales of goods Act does not seek to fetter this discretion; it
simply lays down certain positive rules of General application
for those cases where the parties have failed to contemplate
expressly for contingencies which may interrupt the smooth
performance of a contract of sale, such as destruction of goods
sold, before it is delivered or in solvency of the buyer. However
the law gives full freedom to the parties to modify any provisions.
Definition of Sale of goods
Section 4 (1) the sales of goods Act defines a contract of sale of
goods as A contract where by the seller transfers or agrees to
transfer the property in goods to the buyer for a price.
Essential Characteristics of Sale of Goods
1.
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6.
3.
4.
Illustration
(a) On 1 January, A agrees with B that he will sell B his scooter
on 15 January for a sum of Rs. 3,000. It is an agreement to
sell, since A agrees to transfer the ownership of the scooter
to B at a future time.
(b) A agrees to purchase Bs car for Rs 5,000 provided B stands
surety for him with C. It is an agreement to sell for B. It
becomes a sale when the condition is fulfilled by B.
(c) B agrees to buy As car for Rs. 30,000 and pay for it, if his
solicitor approves. It is an agreement to sell for A and an
agreement to buy for B.
(d) A buys some furniture for Rs. 2,000 and agrees to pay for
that in two monthly installments, the ownership to pass to
him on the payment of second installment. There is an
agreement to sell for the furniture dealer.
An agreement to sell becomes a sale when the time elapses or
the conditions are fulfilled subject to which the property in the
goods is to be transferred [Sec. 4(4)].
7.
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5.
6.
[Hint: B shall have to pay for the car already delivered a reasonable price. A cannot ask for its return. As regards the second car,
B cannot insist on its delivery to him since the contract has
become void (Sec. 10)].
d)
e)
Notes
Sale
1.
Ownership is transferred from the seller to
the buyer as soon as the contract is entered
into.
2.
The position of the buyer is that of the
owner.
3.
The buyer cannot terminate the contract and
as such is bound to pay the price of the
goods.
4
If the buyer makes the payment in
instalments, the amount payable by the buyer
to the seller is reduced, for the payment made
by the buyer is towards the price of the
goods.
Hire-purchase agreement
1 Ownership is transferred from the seller to the
hire-purchaser only when a certain agreed
number of instalments is paid.
2. The position of the hire-purchaser is that of
the bailee.
3. The hire-purchaser has an option to terminate
the contract at any stage, and cannot be forced
to pay the further instalments.
4. The instalments paid by the hire-purchaser are
regarded as hire charges and not as payment
towards the price of the goods till option to
purchase the goods is exercised.
b)
c)
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LESSON 15:
THE SALE OF GOODS ACT, 1930
SUBJECT MATTER OF CONTRACT OF SALE AND PRICE
Learning Outcomes
Example
(a) A agrees to sell to B all the milk that his cow may yield
during the coming year. This is a contract for the sale of
future goods.
Kinds of Goods
Perishing of Goods
Fixation of Price
Importance of time
Introduction
Subject Matter of Contract of Sale
The subject matter in sales of goods is goods. I have already
explained what we mean by Goods. Let us know about its
classification.
Goods may be classified into
1. Existing goods;
3. Contingent goods
Existing goods: At the time of sales if the goods are
physically in existence and are in possession of the seller
the goods are called Existing Goods
Existing goods can be classified into specific or
unascertained.
(a) Specific goods. Goods identified and agreed upon at the
time of the making of the contract of sale are called
specific goods [Sec. 2(14)]. It may be noted that in actual
practice the term ascertained goods is used in the same
sense as specific goods, For example, where A agrees to
sell to B a particular radio bearing a distinctive number,
there is a contract of sale of specific or ascertained goods.
(b) Unascertained goods. The goods, which are not separately
identified or ascertained at the time of the making of the
contract, are known as unascertained goods. They are
indicated or defined only by description. For example, if A
agrees to sell to B one bag of sugar out of the lot of one
hundred bags lying in his godown, it is a sale of
unascertained goods because it is not known which bag is
to be delivered. As soon as a particular bag is separated
from the lot for delivery, it becomes ascertained or specific
goods.
The distinction between specific or ascertained and unascertained goods is important in connection with the rules
regarding transfer of property from the seller to the buyer.
2.
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Example
A agrees to sell specific goods in a particular ship to B to be
delivered on the arrival of the ship. If the ship arrives but with
no such goods on board, the seller is not liable, for the contract
is to deliver the goods should they arrive.
Do you know what would happen if the goods are perished?
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2.
Price
Escalation Clause
Secton-64A, unless otherwise agreed, where, after making of the
contract and fixing the price but before the delivery of the
goods, a new or increased custom or excise duty of sale or
purchase tax is imposed and the seller has to pay it, the seller is
entitled to add the same to the price. Conversely, if the rate of
duty or tax is lowered, the buyer would be entitled to a
reduction in price.
3.
84
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References
http://www.indialawinfo.com/bareacts/soga.html
Bill of lading
Dock-warrant
Notes:
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85
2.
LESSON 16:
THE SALE OF GOODS ACT, 1930
CONDITIONS AND WARRANTIES
Learning Outcomes
Introduction
In a contract of sale of goods various terms or stipulations
regarding quality of the goods, price mode of payment, delivery
of goods etc. are very important. These stipulations are known
as conditions and warranties. Let us know about it.
86
Example
(a) A man buys a particular horse which is warranted quiet to
ride and drive. If the horse turns out to be vicious, the
buyers only remedy is to claim damages. But if instead of
buying a particular horse, a man asks a dealer to supply him
with a quiet horse and the dealer supplies him with a
vicious one, the stipulation is a condition, and the buyer
can return the horse and can also claim damages for breach
of contract ( Hartley vs Hyman).
(b) P goes to R, a horse dealer, and sys, I want a horse which
can run at a speed of 30 kilometers per hour. The horse
dealer points out a particular horse and says, This will suit
you. P buys the horse. Later on P finds that the horse can
run only at a speed of 20 kilometers per hour. There is a
breach of condition, P can repudiate the contract, return the
horse to R and get back the price.
But if P says to R, I want a good horse. R shows him a horse
and says, This is a good horse and it can run at a speed of 30
kilometers per hour, and P buys the horse and finds later on
that it can run at a speed of 20 kilometers per hour only, there is
a breach of warranty because the stipulation made by the seller
did not form the very basis of the contract and was only
subsidiary one. The seller gave the assurance about the running
speed of the horse of his own without being asked by the
buyer hence it is only of secondary important.
The above illustrations are a clear proof of the fact that an
exactly similar term may be a condition in one contract and a
warranty in another depending upon the construction of the
contract as a whole.
Distinction between condition and warranty
You may summarize the difference as follows:
1.
2.
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Example
R. purchased a motorcar from D used the same for several
months. D had no title to the car and, therefore, R was
compelled to return the car to the true owner. R sued D to
recover back the price which he had already paid. He was held
entitled to recover the whole of the price paid by him despite
the fact that he had used the car for some months ( Rowland vs
Divall).
It may be noted that the implied condition as to title makes it
obligatory upon the seller that he must not only be the owner
but also must be able to uphold the validity of the contract.
Thus if the goods sold bear labels infringing the trade mark of
another, the seller is guilty of breach of this condition although
he had full ownership of the goods.
2.
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Example
(b) M agreed to supply to L 3,000 tins of canned fruit, to be
packed in cases each containing 30 tins. M tendered a
substantial portion in cases containing 24 tins, It was held
that the mode of packing constituted a part of the
description and, therefore, L was entitled to reject the
whole consignment ( Re Moore & co. and Landaure & C.)
3.
4.
Example
(b) N agreed to sell G some oil described as foreign refined
rape oil, warranted only equal to sample. The oil supplied,
though corresponded with the sample, was adulterated
with hemp oil. Held that since the oil supplied was not in
87
3.
(i)
(ii) The buyer should rely on the sellers skill or judgment and
(iii) The goods sold must be of a description which the seller
deals in the ordinary course of his business, whether he be
the manufacturer or not.
Example
A buyer ordered for the Hessian cloth, which is generally used
for packing purposes, without specifying the purpose for which
he wanted the same. The cloth was supplied accordingly. On
receiving the cloth the buyer found that it was not suitable for
packing food products as it had an unusual smell. Held, that the
buyer had no right to reject the cloth as it was suitable for
packing purposes alright. The buyer ought to have disclosed his
particular purpose to the seller in order to make him liable for
the breach of implied condition as to fitness (Rs. Andrew Yule
& Co.)
Example
(b) The plaintiff bought a bun at a bakers and confectioners
ship. The bun contained a stone which broke one of the
plaintiffs teeth. Held, the seller was liable in damages
because he violated the condition of wholesomeness
(Chaproniere vs Mason).
(c) W bought a bottle of beer from H, a dealer in wines. The
beer was contaminated with arsenic. W, on taking the beer,
feel ill. H was held liable to W for the consequent illness
(Wren vs Halt ).
Implied Warranties
Unless otherwise agreed, the law in-corporate following Implied
Warranties
1.
The purpose need not be told expressly if the goods are fit for
one particular purpose only or if the nature of the goods itself
tells the purpose by implication. In such case the purpose is
deemed to be made known to the seller impliedly.
6. Condition as to merchantability: This condition is applicable
only when the sale is by description. The goods should
correspond with description. Sec-15 Lays down another
implied condition that the goods should be merchantable
quality and it should satisfy following conditions:
(a) The seller should be a dealer in goods of that description,
whether he be a manufacturer or not
(b) The buyer must not have any opportunity of examining
the goods or there must be some latent defect in the
goods, which should be apparent on reasonable
examination.
The term merchantable quality means that the goods are such
quality and in such condition that a reasonable man, acting
reasonably, would accept them under the circumstances of the
case in performance of his offer to buy those goods, whether he
buys them for his own use or to sell.
7.
88
Example
A pledges a watch with B. Later gets the watch for limited
purpose and A sales it to C. B tells C about the pledge. C has to
make payment for the pledge amount to B. Here is breach of
warranty and C can get compensation from A.
3.
Example
C. Purchases a tin of disinfectant powder from A. A knows that
the lid of the tin is defective and if it is opened without special
care it may be dangerous, but tells nothing to C. C opens the tin
in the normal ways whereupon the disinfectant powder flies
into her eyes and causes injury, A is liable in damages to C as he
should have warned C of the probable danger.
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2.
3.
4.
5.
6.
7.
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and judgement but the goods supplied are unfit for the
specified purpose, the principle of caveat emptor does not
protect the seller and he is liable in damages [Sec. 16(1)].
(See condition as to fitness or quality discussed earlier).
8.
[Hint. B can claim damages from S for the injury as the bottle is
not of merchantable quality and there is a sale of goods by
description. (Refer to Condition as to Merchantability)].
4.
89
[Hint: Yes, as the rule of caveat emptor will apply in this case].
14. H, a housewife, ordered from C, a coal merchant, a ton of
coalite and it was duly delivered to her. When part of the
consignment was put on fire in an open grate in Hs house,
an explosion occurred which caused damage. H claims
damages. Is she entitled to sue?
[Hint: Yes, as the goods are not of merchantable quality (Sec.
16(2)].
15. In a contract for the purchase of 3,00 tins of canned fruits
to be packed in cases each containing 30 tins, a substantial
part was tendered in cases containing 24 tins instead of 30.
Can the buyer reject the cases?
[Hint: Yes, as the goods do not correspond with the description of the goods ordered
[ Sec. 15; Moore & Co. v. Landaur & Co.)].
References
http://www.indialawinfo.com/bareacts/soga.html
Notes:
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Learning Outcomes
2.
Suit for price: Generally speaking the seller can sue for the
price if the property in goods has passed to the buyer.
3.
Introduction
You must know what we mean by transfer of property.
Transfer of property in a contract of sale is primarily the transfer
of property in goods by the seller to the buyer. The exact time
at which property in goods passes from seller to the buyer is of
great importance. The transfer of property in goods means
transfer of ownership of goods. Property in goods is different
from possession of goods. Possession simply refers to the
custody of goods. Although the property in goods may pass
from the seller to the buyer, but the goods may be in possession of the seller as unpaid seller or as a bailee for buyer. In
some cases the property in goods to still be with the seller
although the goods may be in possession of the buyer or his
agent or a carrier for transmission to the buyer.
The Following Require special Notice
1. Risk prima-facia passes with property.
As a general rule the risk of the loss of goods is prima-facie in
the person in whom property is. Section 26 provides to the
same effect, thus, Unless otherwise agreed, the goods remain
at the sellers risk until the property therein is transferred to the
buyer, but when the property therein is transferred to buyer, the
goods are at the buyers risk whether delivery has been made or
not. Thus, if after the contract the goods are destroyed or
damaged the question who is to bear the loss is to be decided
not on the basis of possession of the goods but on the basis
of ownership of goods. Whosoever is the owner of the goods
at the time of loss must bear the loss.
Example
A buys goods from B and property has passed to him, but the
goods remained in Bs warehouse. Before delivery of goods to
A, there is a fire in Bs warehouse and all the goods are destroyed. A must bear the loss and pay the price of goods to B,
if he has not paid it so far.
The opening words of Section 26, namely, unless otherwise
agreed are of great significance. These words imply that risk
passes with property is not an absolute or inflexible rule, but a
prima facie one. Risk is no test of property passing. There is
nothing to prevent the parties from contracting that risk shall
pass even before passing of property or vice versa.
1.
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Example
(a) A buys a bicycle for Rs. 300 on a months credit and asks
the shopkeeper to send it to his house. The shopkeeper
agrees to do so. The bicycle immediately becomes the
property of A.
(b) P buys a table for Rs 100 on a weeks credit and arranges to
take delivery of the table the next day. A fire broke out in
the furniture mart the same evening and the table is
destroyed. The property in the table has passed to P and
the is bound to pay the price.
The goods are said to be in a deliverable sate when they are in
such a state that the buyer would, under the contract, be bound
to take delivery of them [sec.2(3)]. For example, in illustration
(b) above, if the seller has to polish the table to make it
acceptable to the buyer, it is not in a deliverable state until it is
91
LESSON 17:
THE SALE OF GOODS ACT, 1930
TRANSFER OF PROPERTY
so polished, and the buyer does not acquire property at the time
of the contract.
2.
3.
It may be noted that if the seller has done all what he was
required to do under the contract and nothing remains to be
done by him, the property passes to the buyer even if the buyer
has to do something for his own satisfaction.
Example
A sold to B 289 bales of goat skins, each bale containing five
dozens, and the price was for certain sum per dozen skins. It
was the duty of A to count the goat skins in each bale. Before A
could do the same, the bales were destroyed by fire. Held, that
the property in the goods had not passed to the buyer (i.e.B) as
something still remained to be done by the seller (i.e. , A) for
ascertaining the price, and as such the loss caused by fire had to
be borne by the seller ( i.e., A) (Zagury vs Furnell).
4.
(i)
92
Example
(a) A delivered a horse to B on the terms of sale or return,
within 8 days. The horse died on the third day without
any fault on the part of B. Held, A was to bear the loss as
the horse was still his property when it perished (Elphick
vs Barnes).
(b) A delivered a horse to B on trial for 8 days. B continued to
retain the horse even after the expiry of 8 days without
giving notice of rejection A. B had automatically become
the owner of the horse on the expiry of 8 days.
Transfer of Property in Unascertained and future
goods
In section 18 and 23 the rules relating to transfer of property in
unascertained and future goods are laid down. These sections
provide that where goods contracted to be sold are not
ascertained or where they are future goods, the property in
goods does not pass to the buyer unless and until the goods
are ascertained or unconditionally appropriated to the contract
so as to bring them in a deliverable state, either by the seller
with the assent of the buyer or by the buyer with the assent of
the seller. Such assent may be expressed or implied, and may be
given either before or after the appropriation is made.
The above rule is fundamental rule and it applies irrespective of
what the parties intended until goods are ascertained or
appropriated there is merely as certained agreement to sell.
example: Sale of ten tons of wheat from a granary, has not the
effect of transferring property to buyer (It is an agreement to
sell only) until ten tons are appropriated to the contract by the
seller and the buyer knows it.
The process of ascertainment or appropriation consists in
earmarking or setting apart goods as subject-matter of the
contract. It involves separating, weighing, measuring, counting
or similar acts done in relation to goods with an intention to
identify and determine the specific goods to be delivered under
the contract. The distinction between ascertainment and
appropriation is that whereas ascertainment can be a unilateral
act of the seller, that is, he alone may set apart the goods,
appropriation involves the element of mutual consent of the
seller and the buyer.
Essentials of valid appropriation: As regard a valid or proper
appropriation of goods, the following point should be noted:
(i)
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(ii) Absolutely for the seller. Where the bill of lading or railway
receipt is taken in the sellers or his agents name and is sent
to the agent of the seller to be delivered to the buyer on
the fulfillment of certain conditions, the seller is deemed to
have reserved the right of disposal of the goods. In such a
case the ownership does not pass to the buyer until the
necessary conditions are fulfilled and the documents of
title are delivered to the buyer.
Reservation of right of disposal: (Sec. 25) Reservation of the
right of disposal means reserving a right to dispose of the
goods until certain conditions (like payment of the price) are
fulfilled. When the seller reserves such a right the property in
the goods does not pass until those conditions are fulfilled.
The seller may reserve such a right expressly while making a
contract or while making appropriation of unascertained goods.
He may also reserve this right by implication, for example,
when the seller while transporting goods takes the railway
receipt or the bill of lading in his own name or where the seller
has taken the R/R or B/L in the name of the buyer but has
delivered the same to his bank with the instructions that the
document is to be delivered to the buyer only when he makes
payment of the price or accepts the bill of exchange, the right of
disposal is said to be reserved impliedly.
Rule on transfer of title on sale: The rule is the seller can not
transfer to the buyer of goods a better title when he himself
has. Sector 27 says where goods are sold by a person who is
not the owner thereof and who does not sell them under the
authority or with the consent of the owner, the buyer acquires
no better title to goods than the seller had. The maxim is
nemo det quod non habet, which means that no one can give
what he has not got.
The general rule aims at protecting the interest of the true
owner and is deemed necessary in the larger interest of society.
If a thief disposes of a stolen property, the buyer acquire no
title though he may have purchased the goods bonabfide for
value, and real owner of the goods is entitled to recover
possession of goods without paying anything to the buyer.
who sells them under the authority or with the consent of the
owner.
Transfer of Title by Non-Owners
The above rule as to the title is however subject to following
exceptions where the buyer gets a better title to the goods than
what the seller himself possesses.
1.
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93
6.
94
8.
Practical Problems
Attempt the following problems, giving reasons:
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[Hint. B has to bear the loss as the property in the goods had
passed to him at once at the time of endorsement of the R/R
in his name, i.e., on 6th May while the loss occurred on 7th May].
9.
95
1.
[Hint: B must bear the loss because by transferring the diamonds further he has adopted the transaction and the property
in them has, therefore, passed to him.
References
Notes:
96
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Learning Outcomes
Introduction
Now you know much about the contract of Sale. Try to answer
what you could mean by Performance of Contract of Sale
The performance of contract of sale implies delivery of goods,
by the seller, and acceptance of the delivery of goods and
payment for them by the buyer, in accordance with in contract.
The parties are free to provide any terms they like in their
contract about the time, place and manner of delivery of
goods, acceptance there of and payment of the price. But if the
parties are silent and do not provide any thing regarding these
matters in the contract then the rules contained in the sale of
Goods Act are applicable.
If the contract contains any special terms as to delivery and
acceptance, these must be complied with. If there are no terms
in the contract to this effect, delivery of the goods and payment
of the price are concurrent conditions, that is , both these must
take place at the same time as in, for instance, a cash sale over a
shop over counter (sec.32).
Delivery of goods (section. 2(2)
Delivery means voluntary transfer of possession of goods
from one person to another [sec. 2(2)]. Delivery of goods sold
may be made by doing anything which the parties agree shall be
treated as delivery or which has the effect of putting the goods
in the possession of the buyer or his agent (sec.33)
Delivery of goods may be actual, symbolic, or constructive.
1.
2.
3.
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2.
4.
97
LESSON 18:
THE SALE OF GOODS ACT, 1930
PERFORMANCE OF CONTRACT OF SALE
(2) Delivery of
goods in
excess of the
At the place at which the goods are at the time of sale.
quantity
contracted for.
At the place at which the goods are at the time of
Where the
agreement to sell.
At the place at which the goods are manufactured or seller delivers
to the buyer a
produced.
quantity of
goods larger
1. Time of delivery [sec. 36(2) & (4)]. Where under the
than he contracted to sell, the buyer may (i) accept the
contract of sale the seller is bound to send the goods to
whole ; or (ii) reject the whole ;or (iii) accept the quantity he
the buyer, but no time for sending them is fixed, the seller
ordered and reject the rest. If the buyer accepts the whole
is bound to send them within a reasonable time. Further,
of the goods so delivered, he must pay for them at the
demand of delivery by the buyer or the tender of delivery
contract rate [sec. 37(2)
by the seller should be made at a reasonable hour. What is
Example . A places an order with B to supply 25 bottles of
a reasonable hour is a question of fact.
orange syrup. B sends 30.A is entitled to reject the whole, or he
2. Delivery of goods where they are in possession of a third
may accept 25 and reject the rest. If he accepts all the 30, he must
party (sec. 36(3). Where the goods at the time of sale are in
pay for them at the contract rate.
the possession of a third person, there is no delivery by the
(3) Delivery of goods contracted for mixed with other goods.
seller to the buyer unless and until such third person
Where the seller delivers to the buyer the goods he
acknowledge to the buyer that he holds the goods on his
contracted to sell mixed with goods of a different
behalf. Such a delivery is known as constructive delivery
description, the buyer may accept the goods which are in
or delivery by attornment and requires the consent of all
accordance with the contract and reject the rest, or may reject
the three parties, the seller, the buyer and the person having
the whole [sec 37(3)].
possession of the goods, where the seller hands over the
delivery order to the buyer, there is no delivery unless the
Example. A contracts with B to buy 100 tons of cane sugar. A
sellers agent holding the goods has assented thereto.
delivers to B 75 tone of cane sugar and 25 tons of beet sugar. A
may either (i) accept 75 tons of cane sugar which is in accordance
But where the goods have been sold by the transfer of the
with the contract, and reject 25 tons of beet sugar which is of a
document of title to goods, e.g., railway receipt or bill of lading,
different description, or (ii) reject the whole sugar.
the buyer is deemed to be in possession of the goods repre-
1.
3.
4.
98
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2.
Example
(a) Where the buyer having seen that samples drawn from
bulk were inferior to the samples originally shown to him,
offered the goods for sale by auction at reduced price and
the auction having failed to produce a purchaser, the buyer
purported to reject the goods, it was held that the buyer
could not do so as he had in law accepted the goods
(parker vs plamer)
(b) Where the buyer took delivery of wheat and sold a part of
it, and afterwards found that the wheat was not of contract
quality and therefore sought to reject it, it was held that he
had lost the right of rejection as he had accepted the wheat
by a dealing inconsistent with the rights of the seller, in so
far as he had sold out a portion of it ( Hardy & co. vs
fowler).
3.
Practical Problems
1.
99
When the parties agree that to be separately paid for, and either
buyer or seller commits a breach of contract in respect of one or
more installments, there arises a question as to whether such a
breach amounts to a breach of the whole of the contract or a
breach of only a part of it? The answer to this question
depends upon the terms of the contract and the circumstances
of the case, unless otherwise agreed the following two factors
must be borne in mind in deciding the whole matter.
9.
[Hint: A may accept the chairs which are in accordance with the
contract and reject the rest or may reject the whole (Sec. 37 (3)].
2.
(i.e., the post office) is delivery to the buyer and the buyer
becomes the owner thereafter who should bear the loss.]
[Hint: The buyer can reject the whole quantity (Sec. 37 (3); Payne
& Routh V. Lillico & Sons].
4. A of Agra ordered certain specified goods from B of
Mumbai. B sends the goods, not ordered, along with
them. What should A do?
References
http://www.indialawinfo.com/bareacts/soga.html
Notes:
{Hint: Yes].
6.
[Hint. Yes, R can recover the price of the book from P because
as per Section 39 of the sale of Goods Act, delivery to the carrier
100
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LESSON 19
THE SALE OF GOODS ACT, 1930
REMEDIES IN CASE OF BREACH BY BUYER AND SELLER
Learning Outcomes
After reading the lesson, you should
be able to know:
Introduction
Today will be discussing about the
remedies in case of breach by seller
and buyer. Let us first start with the
study of rights of an unpaid seller.
Stoppage
Secs. 50
to 52
Withholding
delivery
Stoppage in
Transit
Suit for
Price
(Sec.55)
1. Right of lien;
1.
2.
3.
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101
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Basis of distinction
1. Possession of goods
Right of lien
The goods must be in actual
possession of the seller.
2. Solvency
4. Purpose
103
(i)
104
Suit for price (Sec. 55). Where property in goods has passed
to the buyer; or where the sale price is payable on a day
certain, although the property in goods has not passed;
2.
The damages are calculated in accordance with the rules contained in Section 73 of the Indian Contract Act, that is, the
measure of damages is the estimated loss arising directly and
naturally from the buyers breach of contract. Where the goods
have a ready market the principle applicable is that the seller may
recover from the buyer damages equal to the difference between
the contract price and the market price on the data of the breach
of the contract. Thus, if the difference between the contract
price and market price is nil, the seller can get only nominal
damages ( Charter vs Sullivan). But where the goods do not
have any ready market, the measure of damages will depend
upon the facts of each case. For example, in Thompson Ltd. Vs
Robinson the damages were assessed on the basis of profits
lost. In that case, T Ltd., who were car dealers, contracted to
supply a motorcar to R.R refused to accept delivery. It was
found as a fact that the supply of cars exceeded the demand at
the time of breach and hence in a sense there was no market
price on the date of breach. Held, T Ltd., were entitled to
damages for the loss of their bargain viz., the profit they would
have made, as they had sold one car less than they otherwise
would have sold. To take another illustration, if the goods have
been manufactured to some special order and they are
unsaleable and have been manufactured to some special order
and they are unsaleable and have no value at all for other buyers,
then the seller may even be allowed the full price of the goods
as damages.
1.
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(b) Suit for Specific Performance [Section 58] In any suit for
breach of contract to deliver specific or ascertained goods,
the court may direct that the contract shall be performed
specifically.
(c) Suit for Breach of Warranty [Section 59] Where there is a
breach of warranty by the seller, or where the buyer elects or
is compelled to treat any breach of a condition on the part
of the seller as a breach of warranty, the buyer is not by
reason only of such breach of warranty entitled to reject the
goods, but he may
[Hint. Yes, A can stop the goods in transit but subject to the
pledge of C.C can recover the amount of pledge from the
goods or from A. Hence A can stop the goods in transit only
when he pays Rs. 5,000 to C (Sec.53)].
4.
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[Hint. Yes, A can sue B for the price. Where the sale price is
payable on a day certain, the seller can sue the buyer on his
default, irrespective of passing of property and delivery of
goods (Sec. 55)].
6. A attended an auction sale and made a bid of Rs. 600 for a
typewriter but withdrew the offer before the fall of the
hammer. One of the conditions of the sale, which A had
read was that biddings once made, shall not be withdrawn.
A was sued for Rs. 600, his being the highest bid. Decide.
[Hint. A is liable to pay Rs 600 because as per the conditions of
the auction no bid can be withdrawn. The auctioneer has the
right to make the auction subject to any conditions he likes (The
Coffee Board vs Famous Coffee and Tea Works, ]
7.
105
(a) Suit for Damages for Non-delivery [Section 57] Where the
seller wrongfully neglects or refuses to deliver the goods to
the buyer, the buyer may sue the seller for damages for
non-delivery.
References
http://www.indialawinfo.com/bareacts/soga.html
Notes:
106
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LESSON 21:
THE NEGOTIABLE INSTRUMENT ACT 1881
MEANING AND TYPES OF NEGOTIABLE INTRUMENTS
Learning Outcomes
Introduction
We are aware that money is most common medium of
exchange itself has the exchange value and is freely transferable.
It was felt although the use of ready cash is desirable due to
acceptability but may cause risk and inconvenience in dealing. Its
substitute leads to development of Negotiable Instruments.
The Negotiable Instrument Act 1881 came into force on 1st
March 1881. It extends to the whole of India except the State
of Jammu & Kashmir. The term Negotiable Instrument
consists of two parts viz; Negotiable and Instrument. The
word negotiable means transferable by delivery and the word
instrument mean written documents by which a right is
created in favour of some person. It means an instrument
possessing the quality of Negotiability is entitled to be called
negotiable instrument
According to Will A negotiable instrument is one the property
in which is acquired by anyone who takes it bonafide and for
value not withstanding any defect of title in the person from
whom he took it
2. Freely transferable
3. Presumption as to holder
4. Title of holder in due course
5. Presumption as to consideration
Let us discuss these one by one
1.
2.
3.
4.
5.
2.
The same are being discussed in some detail. Let us come to the
definition aspect of important negotiable instruments
Definitions
(a) Promissory Note: A promissory note is an instrument
(not being a bank note or a currency note ) in writing
containing an unconditional undertaking, signed by the
maker to pay a certain sum of money only to or to the
order of, a certain person or to the bearer of the
instrument ( Section 4).
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(a)
(b)
(c)
Mr B I.O.U Rs.1,000.
(d)
(e)
(f)
(g )
(h)
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Promissory Note
Bill of exchange
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
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7)
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111
112
the drawee bank. Y sued the bank for conversion. Is the bank
liable for conversion? The effect of Section 130 of the Act.
broadly, is that if the holder has a good title, he can still transfer
it with a good title; but if the transferor has a defective title, the
transferee is affected by such defects, and he cannot claim the
right of a holder in due course by providing that he purchased
the instrument in good faith and for value. As X in the case in
question had obtained the cheque by fraud, he had no title to it
and could not give to the bank any title to the cheque or the
money and the bank would be liable for the amount of the
cheque for conversion. A similar decision was taken in Great
Western Railway Co. vs. London and Country Banking Co.
(1901) A.C. 414 the facts whereof are exactly the same as the
example cited above.
The addition of the words not negotiable in a crossed cheque
has a special significance. The use of the words does not render
the cheque non-negotiable but only affects one of the main
features of negotiability. The general rule about the negotiability
is that the holder in due course of a bill or promissory note or
cheque takes the instrument free from any defect which might
be existing in the title of the transferor. If the holder takes the
instrument in good faith , before maturity and for valuable
consideration, his claim is not defeated or affected by the
defective title of the transferor. In case of any dispute, it is the
transferor with the defective title who is liable. But the addition
on the words not negotiable to the crossing of a cheque,
makes the position different. When such a crossing is placed on
a cheque, the holder in due course does not get any better title
than what the transferor had: If the transferor had defective
title, the title of the holder in due course also becomes defective.
Therefore, he will have to refund the amount of the bill to the
true owner. In other words, the principle of the nemo dat
quod non habet (that is, nobody can pass on a title better
than what he himself has ) will be applicable to a cheque with a
not negotiable crossing.
Thus, cheques with not negotiable crossing are negotiable so
long as their title is good. Once the title of the transferor or
endorser become defective the title of the transferee is also
affected by such defect and the transferee cannot claim the right
of a holder in due course.
As per the latest instructions issued by the Reserve Bank of
India (9-9-1992) it would be safer for the drawer to cross a
cheque not negotiable with the words account payee added
to it. The courts of law have held that an account payee
crossing is a direction to the collecting banker as to how the
proceeds are to be applied after receipt. The banker can disregard
the direction only at his own risk and responsibility. In other
words, an account payee, cheque can be collected only for the
account of the payee named in the cheque and not for anyone
else. A banker collecting an account payee cheque for a person
other than the payee named in the cheque may be held liable for
conversion.
In other words, if the bank collects an account payee cheque for
a person other than the payee it does so at its own risk. It is
imperative on the part of collecting bank, therefore to take
utmost care to enquire into the title of its customer and satisfy
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References
http://www.indialawinfo.com/bareacts/soga.html
Notes:
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Learning Outcomes
After reading the lesson, you should be able to know:
Introduction
The important parties to Negotiable Instruments can be listed
as follows:
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LESSON 22:
THE NEGOTIABLE INSTRUMENT ACT 1881
PARTIES TO A NEGOTIABLE INTRUMENTS
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(i)
If a cheque is undated
119
First Endorsement, B
Second Endorsement, C
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realize the amount of the bill from Q. But if R were bona fide
endorsee before maturity, he could relies the amount from Q.
References
Notes:
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121
LESSON 23:
THE NEGOTIABLE INSTRUMENT ACT 1881
NEGOTIATION, ENDORSEMENT, ASSIGN ABILITY
Learning Outcomes
After reading the lesson, you should be able to know:
Introduction
Today, we will discuss about the meaning of negotiation,
endorsement and assign ability and the important rules related
to it.
Negotiation
When a negotiable instrument is transferred to many person
with a view to constituting that person the holder thereof, the
instrument is deemed to have been negotiated (Section 14). A
negotiable instrument may be transferred in either of the two
ways viz., (1) by negotiation under the Negotiable Instruments
Act (Section 14, 48, 47, 46); and (ii) by assignment of the
instrument as an ordinary chosen in action under the Transfer
of Property Act (Chapter VII, Section 130). Transfer by
negotiation, however, is the only mode of transfer recognized
by the Act.
Duration of negotiation (Section 60): An instrument may be
negotiated until payment thereof by the maker, drawee or
acceptor at or after maturity, but not after such payment. But the
maker, drawee or acceptor cannot negotiate the instrument after
maturity, even if it remains unpaid. An instrument may be
satisfied even without payment, and such satisfaction is
equivalent to payment.
Under the Act, negotiable instruments may be negotiated either
by delivery when these are payable to bearer or by endorsement
and delivery when these are payable to order.
(i) Importance of delivery (Section 46): Delivery is an incident
of the utmost importance in the case of an instrument. It
is essential to the issue of an instrument for issue
means the delivery of the instrument, complete in form, to
a person who takes is as a holder. It is equally essential to
the negotiation of an instrument, for a bearer instrument,
must be transferred by delivery and in the case of any other
instrument, endorsement is incomplete without delivery.
In fact, a negotiable instrument is nothing but a contract,
which is incomplete and revocable until the delivery of the
instrument is made. For the payee cannot claim payment;
Section 46 of the Act provides as follows:
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Specimen
Pay to Hari Ram.
Kishan Lal
(c) Restrictive: Such an endorsement has the effect of
restricting further negotiation and transfer.
Specimen (1) Pay to A only ]
M.Lal
P.Kumar
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123
Specimen
Kishan Lal
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125
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127
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acceptance. When authorized by agreement of usage, a presentment through the post office by a registered letter is sufficient.
Drawees time for deliberation: Under Section 63, the drawee is
entitled to a respite of forty eight hours ( exclusive of public
holidays ) top consider whether he should accept a bill presented to him for acceptance.
When presentment is excused: Presentment for acceptance is
excused if the drawee is a fictitious person (Section 91) or if he
cannot, after reasonable search, be found (Section 61). Against
even if presentment is made irregularly, such an irregularity is
excused if the bill has been dishonoured by non-acceptance on
some other ground.
(b) Presentment of promissory note for sight (Section 64):
When and why a note is to be presented for sight? Like a
bill of exchange payable after sight, a promissory note
payable at a certain period after sight must be presented to
the maker for sight. The presentment is to be made by a
person entitled to demand payment who is usually the
holder. Against, the note must be presented within a
reasonable time after it is made and in business hours on a
business day. In default of such presentment, the maker is
not liable to pay anything to the holder. The necessity for
presentment, in the case of such a note, viz., a note payable
at a certain period after sight, is obvious; without such
presentment the maturity of the note cannot be fixed.
(c) Presentment of instrument for payment: Presentment of a
bill of exchange means it exhibition to drawee or acceptor
by holder with a request for payment in Accordance With
Its Apparent Tenor (section 64). Presentment may be made
through post by means of a registered letter if such a
mode of presentment is authorized by agreement or usage.
If registered letter if such a mode of presentment is
authorized by agreement or usage. If the bill is paid, the
holder would have to hand it over to the payer. In default
of the bill is paid, the holder would have to hand it over to
the payer. In default of presentment, the drawer and the
endorser would be discharged form their liability to the
holder.
(i)
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If the holder does not present the cheque at the bank in time,
the position of the bank may become unsound and it may not
be possible for the banker to honour the cheque; in this case,
the drawer is not liable if the bank refuses payment on presentment. The rule is that the cheque must be presented before the
relation between the drawer and his banker has been altered to
the prejudice of the drawer.
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The objective of these provisions are: (i) that the original parties
to the instrument may not deny the validity of the instrument;
(ii) that the maker of a promissory note or an acceptor of a bill
may not deny the right of the payee to receive the payment
therefore; and (iii) that an endorser of a negotiable instrument
may not disown the signature or capacity to contract of any
prior party to the instrument.
Hundis : Bills of exchange drawn up in the vernacular are
generally known as Hundis. The negotiable instruments Act
ordinarily is not applicable to Hundis but, the parties to the
Hundis may agree to be the Negotiable instrument Act.
Notes
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131
LESSON 24:
THE NEGOTIABLE INSTRUMENT ACT 1881
TUTORIAL
These questions are intended to enable the student to test his
knowledge before proceeding to answer the test paper. The
answer to these questions are not required to be written out or
submitted for evaluation. (The Answers are given at the end).
1.
7.
8.
9.
10. Where there are several drawees of a bill, who are not
partners, can any one of such drawees accept it for another
without that others authority?
11. A who is the holder of a bill transfers it to B without
consideration. B transfers it to C without consideration. C
transfers it to D for value. D transfers it without
consideration to E. (a) Can E recover the amount of the
bill from A? (b) Has E any right against D? Say Yes or No.
(d) I promise to pay X Rs. 400 and all other sums which
shall be due to him.
(e) I promise to pay X Rs. 400 first deducting thereout
any money which he may owe me.
(f) I promise to pay X Rs. 400 seven days after my
marriage with Z
(g) I promise to pay, X Rs. 400 on Ps death provided P
leaves me enough to pay that sum.
(h) I promise to pay Rs. 400 and deliver to him may black
horse on Ist July next. Which of the aforesaid
instruments are not promissory notes?
2.
3.
4.
5.
6.
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133
LESSON 25:
INDIAN PARTNERSHIP ACT, 1932
PARTNERSHIP ,FORMATION ,TEST AND REGISTRATION OF PAR TNERSHIP
Learning Objectives
2.
Introduction
Have you ever heard of partnership?
Try to answer what do you mean by partnership in general.
Yes, partnership is an association between two or more
persons. Let us now discuss about the legal aspects of partnership.
Definition
Section 4 Indian Partnership Act 1932 defines Partnership in
the following terms: Partnership is the relation between persons who have agreed
to share the profit of business carried on by all or any of them
acting for all.
Breaking the above definition, following essential elements of
partnership are revealed:1.
2.
3.
4.
5.
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Sec. 8, however, provides that there can be a particular partnership between partners whereby they engage in a particular
adventure or undertaking, which, if successful, would result in
profit. Thus there can be a partnership for production of a film,
construction of a building etc. although there is single adventure but the same requires a series of transaction a and
continuing relationship.
4.
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They are done for the purpose of the business of the firm
2.
3.
4.
5.
6.
7.
Test of Partnership
The all elements as discussed above must co-exist in order to
constitute partnership Sec 6 of Indian Partnership Act provides
that in determining whether a group of persons is or is not a
firm or whether a person is or in not a partner in a firm, regard
shall be had to the real relation between the parties, as shown by
all relevant facts taken together Thus all incidents of relations
of the partnership are to be examined as shown in written
agreement, verbal agreement or conduct. We can explain be
position by the following examples.
Example
(i)
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Now, we will discuss how the partnership comes into formation. What legal formalities are there in the formation of
partnership?
Formation of Partnership
A partnership is formed by an agreement between the partners.
The rights and obligations of the partners towards each other
and towards the firm can be determined by an oral or written
agreement. To avoid future dispute it is always advisable to have
partnership expressed in writing.
Partnership Deed
A partnership agreement put to writing and is termed as
partnership deed. Before starting of the business the partners
are drafting the deed in proper manner so that the business may
run smoothly by and if there is any dispute the same may be
settled according to the terms of partnership deed. What
should be the exact contents, it depends on the circumstances
but generally the partnership deed must contain the following
clauses
1.
2.
3.
4.
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5.
6.
7.
8.
9.
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(b)
(a)
(b)
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137
5.
[Hint. No]
4.
[Hint. Yes.]
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[Hint - Yes, after registration, the firm can file a fresh suit. The
provision is - before a suit is filed in the court, registration
must have been effected.]
7.
[Hint - No, As estate is not liable for the dealings of the firm
after A death.]
10. A, a holding out partner in the firm of X & Y is
adjudicated as insolvent. The firm caused heavy losses to Z
by breaching a contract. Z sued X, Y and A for the
damages. Is A liable to share such damages?
[Hint - No, A partner by holding out who is an insolvent,
cannot be held liable for the claims on the firm.]
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http://www.indialawinfo.com/bareacts/soga.html
References
Notes
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139
LESSON 26:
INDIAN PARTNERSHIP ACT, 1932
TYPES OF PARTNERS AND THEIR RIGHTS AND OBLIGATIONS
Learning Objectives
partner of the firm only for profits. In case the firm suffers
loss, he shall not be liable for the loss. These type of
partners have no say in the management of the firm.
However, the liability of such partner towards third party is
similar to active partner .
5.
6.
Introduction
We are now well versed what we mean by partnership. Its nature
and formation and registration formalities.
Today we will discuss about the kinds of partners and their
rights and obligations as provided under the Act.
Kinds of Partners in a partnership terms
The partners of partnership firm may be classified in following
categories: 1. Actual/Active partner
2. Dormant or sleeping partner
3. Nominal partner
4. Partner in profit only
5. Sub Partner
6. Partner by estoppels or partner by holding out.
1.
2.
Such partners can retire from the firm without giving notice but
they have assess to the books of the accounts of the firm and
can have a copy of the same.
Example:- A&B start a partnership firm wherein A is active
partners and B is dormant partner. This is valid partnership
3.
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(f) A partner shall indemnify the firm for any loss caused
to it by his wilful neglect in the conduct of the
business of the firm.
Section 14- The property of the firm
The property of the firm includes all property and rights and
interests in property originally brought into the stock of the
firm, or acquired, by purchase or otherwise, by or for the firm,
or for the purposes and in the course of business of the firm,
and includes also the goodwill of the business subject to
contract between the partners,.
Unless the contrary intention appears, property and rights and
interests in property acquired with money belonging to the firm
are deemed to have been acquired for the firm.
Section 15- Application of the property of the firm
Section 15 states that the property of the firm shall be held and
used by the partners exclusively for the purposes of the
business subject to contract between the partners
Section 16.-Personal profits earned by partners
As is subject to contract between the partners(a) If a partner derives any profit for himself from any 0
transaction of the firm, or from the use of the
property or business connection of the firm or the
firm name, he shall account for that profit and pay it to
the firm;
(b) If a partner carries on any business of the same nature
as and competing with that of the firm, he shall
account for and pay to the firm all profits made by him
in that business.
Section 17- Rights and duties of partners
Subject to contract between the partners(a) After a change in the firm-where a change occurs in the
constitution of a firm, the mutual rights and duties of
the partners in the reconstituted firm remain the same
as they were immediately before the change, as far as
may be;
(b) After the expiry of the term of the firm, and - where a
firm constituted for a fixed term continues to carry on
business after the expiry of that term, the mutual
rights and duties of the partners remain the same as
they were before the expiry, so far as they may be
consistent with the incidents of partnership at will; and
(c) Where additional undertakings are carried out-where a
firm constituted to carry out one or more adventures
or undertakings, the mental rights and duties of the
partners in respect of the other adventures or
undertakings are the same as those in respect of the
original adventures or undertakings.
Section 25- Liability of a partner for acts of the firm
Every partner is liable, jointly with all the other partners and
also severally, for all acts of the firm done while he is a partner.
Section 26- Liability of the firm for wrongful acts of
a partner
Where, by the wrongful act or omission of a partner acting in
the ordinary course of the business of a firm, or with the
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intio but he can derive benefit under it. Under section 30 of the
Partnership Act, a minor can be admitted to the partnership for
his benefit. Section 30 lays down certain condition which are
discussed as under:Section 30- Minors Admitted to the Benefits of
Partnership
(1) A person who is a minor according to the law to which
he is subject may not be a partner in a firm, but, with
the consent of all the partners for the time being, he
may be admitted to the benefits of partnership.
(2) Such minor has a right to such share of the property
and of the profits of the firm as may be agreed upon,
and he may have access to and inspect and copy any of
the accounts of the firm.
(3) Such minors share is liable for the acts of the firm, but
the minor is not personally liable for any such act.
(4) Such minor may not sue the partners for an account or
payment of his share of the property or profits of the
firm, save when severing his connection with the firm,
and in such case the amount of his share shall be
determined by a valuation made as far as possible in
accordance with the rules contained in section 48:
It is provided that all the partners acting together or any partner
entitled to dissolve the firm upon notice to other partners may
elect in such suit to dissolve the firm, and thereupon the court
shall proceed with the suit as one for dissolution and for
settling accounts between the partners, and the amount of the
share of the minor shall be determined along with the shares
of the partners.
(5) At any time within six months of his attaining
majority, or of his obtaining knowledge that he had
been admitted to the benefits of partnership,
whichever date is later, such person may give public
notice that he has elected to become or that he has
elected not to become a partner in the firm, and such
notice shall determine his position as regards the firm:
It is provided that, if he fails to give such notice, he shall
become a partner in the firm on the expiry of the said six
months.
(6) Where any person has been admitted as a minor to the
benefits of partnership in a firm, the burden of
proving the fact that such person had no knowledge of
such admission until a particular date after the expiry
of six months of his attaining majority shall lie on the
persons asserting that fact.
(7) Where such person becomes a partner(a) His rights and liabilities as a minor continue up to
the date on which he becomes a partner, but he also
becomes personally liable to third parties for all acts
of the firm done since he was admitted to the
benefits of partnership, and
(b) His share in the property and profits of the firm
shall be the share to which he was entitled as a
minor.
(8) Where such person elects not to become a partner,-
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[Hint - Yes, he will succeed. He can sue at his option either the
old partners, i.e., X, Y, and Z on the ground of estoppel, or the
new partners, i.e., X, Y. and A.]
(b) His share shall not be liable for any acts of the firm
done after the date of the notice, and
References
Notes
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143
LESSON 27:
INDIAN PARTNERSHIP ACT, 1932
DISSOLUTION OF PARTNERSHIP
Learning Objectives
Introduction
Today, we will be discussing dissolution of partnership
business.
But before going ahead you need to understand that there is a
difference between the dissolution of partnership and dissolution of firm.
Section 39 of the Act provides that there is a difference between
the dissolution of partnership and the dissolution of the firm.
Partnership is a relation between the partners and the partnership firm is an entity which exists because of partnership
relations. Thus, whenever a partner leaves the firm, partnership
is dissolved but the firm continues until the partnership firm is
dissolved. After starting the business, partners may feel like
closing the business, may be because the business is not
lucrative or it is not going the way they predicted or for any
other reason. When a partner close down the firm, dissolution
of the partnership firm takes place. Thus , when partners close
down the business, dissolution of the partnership firm takes
place. The dissolution of partnership between all the partners
of the firms occurs is called dissolution of the firm.
Let us now concentrate on the modes of dissolution of the
firm.
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Consequences of Dissolution
Since dissolution initiates the process of winding up the affairs
of the firm some rights are inferred and some obligation are
imposed upon the partners to do the needful in this regard .
Such consequences are covered under the Indian Partnership Act
1932 vide Vide Sec 45 to Sec 55
Section 45- Liability for acts of Partners done after
Dissolution
(10 Notwithstanding the dissolution of a firm, the
partners continue to be liable as such to third parties
for any act done by any of them, which would have
been an act of the firm if done before the dissolution,
until public notice is given of the dissolution:
It is further provided that the estate of a partner who dies, or
who is adjudicated an insolvent, or of a partner who, not
having been known to the person dealing with the firm to be a
partner, retires from the firm, is not liable under this section for
acts done after the date on which he ceases to be a partner.
Notices under sub-section (1) may be given by any partner.
Section 46- Rights of Partners to have Business
Wound up after Dissolution
On the dissolution of a firm every partner or his representative
is entitled, as against all the other partners or their representatives, to have the property of the firm applied in payment of
the debts and liabilities of the firm, and to have the surplus
distributed among the partners or their representatives according to their rights.
Section 47- Continuing authority of Partners for
Purposes of Winding up
After the dissolution of a firm the authority of each partner to
bind the firm, and the other mutual rights and obligations of
the partners continue notwithstanding the dissolution, so far as
may be necessary to wind up the affair of the firm and to
complete transactions begun but unfinished at the time of the
dissolution, but not otherwise:
It is provided that the firm is in no case bound by the acts of a
partner who has been adjudicated insolvent; but this proviso
does not affect the liability of any person who has after the
adjudication represented himself or knowingly permitted
himself to be represented as a partner of the insolvent.
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firm have been paid, for any sum paid by him for the
purchase of a share in the firm and for any capital
contributed to him;
(b) To rank as a creditor of the firm in respect of any
payment made by him towards the debts of the firm;
and
(c) To be indemnified by the partner or partners guilty of
the fraud or misrepresentation against all the debts of
the firm.
Section 53- Right to Restrain from use of Firm name
or firm Property
After a firm is dissolved, every partner or his representative may,
in the absence of a contract between the partners to the contrary,
restrain any other partner or his representative from carrying on
a similar business in the firm name or from using any of the
property of the firm for his own benefit, until the affairs of the
firm have been completely wound up:
It is provided that where any partner or his representative has
bought the goodwill of the firm, nothing in this section shall
affect his right to use the firm name.
Section 54- Agreements in Restraint of Trade
Partners may, upon or in anticipation of the dissolution of the
firm, make an agreement that some or all of them will not carry
on a business similar to that of the firm within a specified
period or within specified local limits; and notwithstanding
anything contained in section 27 of the Indian Contract Act,
1872 (9 of 1872), such agreement shall be valid if the restrictions imposed are reasonable.
Section 55- Sale of Goodwill after Dissolution
In settling the accounts of a firm after dissolution, the goodwill
shall, subject to contract between the partners, be included in
the assets, and it may be sold either separately or along with
other property of the firm.
Rights of buyer and seller of goodwill-Where the goodwill of a
firm is sold after dissolution, a partner may carry on a business
competing with that of the buyer and he may advertise such
business, but, subject to agreement between him and the buyer,
he may not(a) Use the firm name,
(b Represent himself as carrying on the business of the
firm, or
(c) Solicit the custom of persons who were dealing with
the firm before its dissolution.
Agreement in restraint of trade -Any partner may, upon the sale
of the goodwill of a firm, make an agreement with the buyer
that such partner will not carry on any business similar to that
of the firm within a specified period or within specified local
limits and, notwithstanding anything contained in section 27 of
the Indian Contract Act, 1872 (9 of 1872), such agreement shall
be valid if the restrictions imposed are reasonable.
References
http://www.indialawinfo.com/bareacts/soga.html
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LESSON 29:
THE COMPANIES ACT, 1956
DEFINITION AND NATURE OF A COMPANY
Learning Objectives
At the end of this chapter, you will be able to
Introduction
Today, we will begin with the Companies Act that was passed in
1956.
In the lecture of today we will discuss the meaning and nature
of a company.
Do you know what do we mean by company?
In simple words, a company can be defined as a group of
persons associated together for the purpose of carrying on a
business, with a view to earn profits. The word Company is an
amalgamation of the Latin word Com meaning with or
together and Pains meaning bread. Thus, a company is
nothing but a group of persons who have come together or
who have contributed money for some common person and
who have incorporated themselves into a distinct legal entity in
the form of a company for that purpose.
Section 3(1)(i) of the Act provides that, a company means a
company formed and registered under this Act or an existing
company.
Section 3(1)(ii) lays down that, An existing company means a
company formed and registered under any of the previous
companies laws specified below.
(a) any Act or Acts relating to companies in force before
the Indian Companies Act, 1866 (10 of 1886), and
repealed by that Act;
(b) The Indian Companies Act, 1866 (10 of 1866);
(c) The Indian Companies Act, 1882 (6 of 1882);
(d) The Indian Companies Act, 1913 (7 of 1913);
(e) The Registration of Transferred Companies Ordinance,
1942 (54 of 1942); and 40[
(f) An law corresponding to any of the Acts or the
Ordinance aforesaid and in force(1) In the merged territories or in a Part B State (other than
the State of Jammu and Kashmir), or any part thereof,
before the extension thereto of the Indian Companies
Act, 1913 (7 of 1913); or
(2) In the State of Jammu and Kashmir, or any part
thereof before the commencement of the Jammu and
Kashmir (Extension of Laws) Act, 1956 41[ in so far
as banking, insurance and financial corporations are
concerned, and before the commencement of the
Central Laws (Extension to Jammu & Kashmir)
There is very good definition by Lord Justice Lindey, A
company is an association of many persons who contribute
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2.
3.
4.
5.
6.
7.
8.
149
1.
2.
3.
Foreign companies.
When the number of members exceeds the prescribed maximum, members must register it under Companies Act or any
other Indian law.
Consequences of non-Registration
Law does not recognize an illegal association. An illegal
association cannot enter into any contract, cannot sue any
members or any outsider, and cannot be sued by any members
or outsiders for any of its debts. The members of the illegal
association are personally for the obligations of the illegal
association. A member may be liable to a fine of Rs. 1000. Any
member of an illegal association cannot sue another member in
respect of any matter connected with the association.
Minimum Number of Members
A public company must have at least 7 members whereas a
private company may have only 2 members. If the number of
members falls below the statutory minimum and the company
carries on its business beyond a period of six months after the
number has so fallen, the reduction of number of members
below the legal minimum is a ground for the winding up of
the company.
Practical Problems
1.
2.
3.
4.
References
http://www.vakilno1.com
http://www.saarclawnet.com/saarclawnet/
osca20.html
Notes:
150
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Learning Objectives
Introduction
Today we will learn about the important types of company.
There are various basis to classify companies.
On the basis of the number of the members,
companies can be divided in two:
A Private Company
A Public Company
3.
4.
8.
The Company Law Board on being satisfied that the infringement of the aforesaid 3 conditions was accidental or due to
inadvertence or that on other grounds, it just an equitable to
grant relief, may grant relief to the company from the consequences of such infringement. The infringement of the
aforesaid 3 conditions does not automatically convert a private
company into a public company. It continues to remain a
private company; it merely ceases to be entitled to the privileges
and exemptions available to a private company.
Companies Deemed to be Public limited Company
A private company will be treated as a deemed public limited
company in any of the following circumstances :1. Where at least 25% of the paid up share capital of a private
company is held by one or more bodies corporate, the
private company shall automatically become the public
company on and from the date on which the aforesaid
percentage is so held.
2.
3.
4.
Limited Companies
Unlimited Companies
5.
6.
Limited Companies
Companies may be limited or unlimited companies. Company
may be limited by shares or limited by guarantee.
7.
a.
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151
LESSON 30:
THE COMPANIES ACT, 1956
TYPES OF COMPANIES
2.
2.
3.
Government Companies
152
Government Companies
It means any company in which not less than 51% of the paid
up share capital is held by the Central Government or any State
Government or partly by the Central Government and partly by
the one or more State Governments and includes a company
which is a subsidiary of a government company. Government
Companies are also governed by the provisions of the Companies Act. However, the Central Government may direct that
certain provisions of the Companies Act shall not apply or shall
apply only with such exceptions, modifications and adaptions
as may be specified to such government companies.
Non Government Companies
It is controlled and operated by a private capital
Foreign Companies
By this, we mean a company incorporated in a country outside
India under the law of that other country and has established
the place of business in India.
There is another important type of company which is called as
One Man Company
One man company is a company in which one man holds
practically the whole of the share capital of the company, and in
order to meet the statutory requirement of minimum number
of members, some dummy members who are mostly his
friends or relations, hold just 1or 2 shares each. It is like any
other company is a legal entity distinct from its members. The
dummy members are usually nominees of the principal
shareholder who is the virtual owner of the business and who
carries it on with limited liability.
Now attempt the following problems.
Practical Problems
Attempt the following problems, giving reasons :
1.
2.
3.
[Hint. No]
35 percent of the paid up capita of a private company is
held by a public company. Does the private company
become a public company? Give reasons for your answer.
[Hint. Yes(Badri Prasad v.Nagarmal)]
4.
X & Co. and Y & co. are 2 firms roistered under the Indian
partnership act, 1932, each consisting of 12 partners. The
firms desire to carry on business jointly as partners under
the name XY & co. Does XY & co. require registration and,
if so, under what provisions of the companies act?
[Hint. Yes]
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5.
[Hint. Yes ]
References
http://www.vakilno1.com
http://www.saarclawnet.com/saarclawnet/osca20.html
Notes:
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153
LESSON 31:
THE COMPANIES ACT, 1956
PROMOTION AND FORMATION OF A COMPANY
Learning Objectives
Introduction
We have learnt about the meaning, nature and types of
company. Today we will learn about how the company is
formed.
Before a company is formed, certain preliminary steps are to be
taken, e.g; whether it should be a private company or a public
company; what should be its capital;etc.
The process of forming a company can be divided into four
distinct stages:
a) Promotion
b) Registration or incorporation
c)
Capital Subscription
Natal land & colonization co. Ltd. V. Pauline colliery & Development syndicate ltd., (1904) A.C. 120. The N company agreed
with an agent of the P syndicate Ltd before its formation to
grant a mining lease to the syndicate. The syndicate was
registered and discovered a seam of coal. The company refused
to grant the lease. Held, there was no binding contract between
the company and the syndicate.
Promoters are personally liable
Kelner v. Baxter, (1866) L.R. 2 C.P. 174.A hotel company was
about to be formed and persons responsible for the new
company signed an agreement on 27th January, 1866, for the
purchase of stock on behalf of the proposed company,
payment to be made on 28th January, 1866. The company was
incorporated on 20th February 1866. the goods were consumed
in the business and the company went into liquidation before
the debt was paid. The persons signing the agreement were
sued on the contract. Held. The persons signing were promoters and personally liable on their signatures.
d) Commencement of Business.
As regards a private company, it needs to go through the first
two stages only. As soon it receives the certificate of incorporation, it can commence business. This is so because it cannot
invite the public to subscribe to its shares and must arrange to
raise the capital privately. But Public Company has to go
through all of the four stages.
We shall now discuss each of these four stages.
Promotion
This is the first stage in the formation of a company. It refers to
the entire process by which a company is brought into existence.
It starts with the conceptualization of the birth a company and
determination of the purpose for which it is to be formed.
Do you know what we mean by promoters?
Promoters
The persons who conceive the company and invest the initial
funds are known as the promoters of the company. The
promoters enter into preliminary contracts with vendors and
make arrangements for the preparation, advertisement and the
circulation of prospectus and placement of capital. However, a
person who merely acts in his professional capacity on behalf of
the promoter (e.g. lawyer, CA, etc) for drawing up the agreement or other documents or prepares the figures on behalf of
the promoter and
whom the promoter pays is not a promoter.
Pre-Incorporation or Preliminary Contracts
The promoters of a company usually enter into contract to
acquire some property or right for the company, which is yet to
be incorporated. Such contracts are called Pre-Incorporation or
Preliminary Contracts.
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3.
2.
3.
4.
5.
6.
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c)
Unlimited company
4.
Certificate of Incorporation
Once all the above documents have been filed and they are
found to be in order, the Registrar of Companies will issue
Certificate of Incorporation of the Company. This document is
the birth certificate of the company and is proof of the
existence of the company. Once, this certificate is issued, the
company cannot cease its existence unless it is dissolved by
order of the Court.
Conclusiveness of Certificate of Incorporation
The certificate of incorporation given by registrar in respect of a
company is conclusive evidence that all the requirements of the
Companies Act have been complied in respect of registration.
This is known as Rule In Peels Case.
Note the following Case
Jubilee cotton mills Ltd. V. Lewis, (1924) A.C. 958, On 6th
January, the necessary documents were delivered to the registrar
for registration. Two days after, the registrar issued the certificate
of incorporation but dated it 6th January instead of 8th, i.e.. the
day on which the certificate was issued. On 6th January some
shares were allotted to L, i.e.. before the certificate of incorporation was issued. The question arose whether the allotment was
155
2.
Practical Problems
Attempt the following problems, giving reasons:
1.
g.
h. A statutory declaration in Form 19 signed by one
director or the employee - company secretary or a
Company secretary in whole time practice that the
above provisions have been complied with must be
filed.
2.
3.
a.
c.
d. Every director has paid to the company on each of the
shares, which he has taken the same amount as the
other members have paid on such shares
e.
f.
156
e.
f.
References
http://www.vakilno1.com
http://www.saarclawnet.com/saarclawnet/osca20.html
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Learning Objectives
At the end of this chapter, you will be able to know about:
Introduction
Memorandum and Articles of Association are the two important documents of the company.
Let us learn about them.
Memorandum of Association of a
Company
It is the constitution or charter of the company and contains
the powers of the company. No company can be registered
under the Companies Act, 1956 without the memorandum of
association. Under Section 2(28) of the Companies Act, 1956
the memorandum means the memorandum of association of
the company as originally framed or as altered from time to
time in pursuance with any of the previous companies law or
the Companies Act, 1956.
The memorandum of association should be in any of the one
form specified in the tables B,C,D and E of Schedule 1 to the
Companies Act, 1956. Form in Table B is applicable in case of
companies limited by the shares, form in Table C is applicable
to the companies limited by guarantee and not having share
capital, form in Table D is applicable to company limited by
guarantee and having a share capital whereas form in table E is
applicable to unlimited companies.
Contents of Memorandum:
The memorandum of association of every company must
contain the following clauses
Name Clause
The name of the company is mentioned in the name clause. A
public limited company must end with the word Limited and
a private limited company must end with the words Private
Limited. The company cannot have a name which in the
opinion of the Central Government is undesirable. A name
which is identical with or the nearly resembles the name of
another company in existence will not be allowed. A company
cannot use a name which is prohibited under the Names and
Emblems (Prevntion of Misuse Act, 1950 or use a name
suggestive of connection to government or State patronage.
Domicile clause
The state in which the registered office of company is to be
situated is mentioned in this clause. If it is not possible to state
the exact location of the registered office, the company must
state it provide the exact address either on the day on which
commences to carry on its business or within 30 days from the
date of incorporation of the company, whichever is earlier.
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2.
3.
157
LESSON 32:
THE COMPANIES ACT, 1956
MEMORANDUM AND AR TICLES OF ASSOCIATION
2.
3.
158
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Practical Problems
Attempt the following problems, giving reasons
1. 1. X Ltd. A cotton textile company enters into a
contract with A Ltd. an adjacent cotton textile mil, to
supply electricity form their power generation plant.
After supplies have been made fro 3 months it is
discovered that this activity is beyond the scope of the
objective clause of the memorandum of association of
X Ltd. Shareholders of X Ltd. Ratify the contract in
their general body meeting can A Ltd, which refuses to
make payment on the ground that the contract is
wholly null and void be legally compelled to make
payment?
The important items covered by the AA include :1. Powers, duties, rights and liabilities of Directors
2. Powers, duties, rights and liabilities of members
3. Rules for Meetings of the Company
4. Dividends
[Hint. No].
4. A company put up telephone wires in a certain area.
There was no power in the memorandum to put up
wires there. The defendants cut them down. Can the
company sue for the damage done to the wire?
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References
http://www.vakilno1.com
http://www.saarclawnet.com/saarclawnet/osca20.html
159
Articles of Association
The Articles of Association (AA) contain the rules and regulations of the internal management of the company. The AA is
nothing but a contract between the company and its members
and also between the members themselves that they shall abide
by the rules and regulations of internal management of the
company specified in the AA. It specifies the rights and duties
of the members and directors.
LESSON 33:
THE COMPANIES ACT, 1956
THE MANAGEMENT OF A COMPANY
DIRECTORS AND MANAGING DIRECTORS
Learning Objectives
Appointment of Directors
Introduction
A company in the eyes of the law is an artificial person. It has
no physical existence. As such it cannot act by itself and acts
instead through human agency. The persons through whom it
acts and by whom the business of the company is conducted
are known as directors. The directors of a company are collectively known as the board of directors or the board
First of all, you must know what do we mean by director?
Section 2(13) defines a director as any person occupying the
position of a director, by whatever name he is called.
It is the directors who exercise the powers of a company on the
behalf of the company. Only individuals can be appointed as
the directors of the company. No body corporate, association or
firm shall be appointed as director of a company. The directors
are the brain of a company. They occupy a pivotal position in
the structure of the company. They are in fact the mainsprings
of the company. Speaking about the importance of directors.
Nevile J; observed in Bath v. Standard Land Co [1910] 2CH.
408 that the Board of directors are the brain and the only
brain of the company which is the body, and the company can
and does act only through them. It is only when the brain
functions that the corporation is said to function.
1. First Directors
The articles of a company usually name the first directors by
their respective names or prescribe the method of appointing
them. In case the promoters of a company do not appoint the
first directors, subscribers of the memorandum who are
individuals, shall be deemed to be the directors of the company,
until the directors are duly appointed.
If the first directors are not appointed in the above manner, the
subscribers of the memorandum who are individuals become
directors of the company. They shall hold office until directors
are duly appointed in the first annual general meeting.
2. Appointment of Directors by the Company
(Secs 255 to 257, 263 and 264). Shareholders in general meeting
must appoint directors. In the case of a public company or a
private company, which is a subsidiary of a public company, at
least 2/3rds of the total number of directors shall be liable to
retire by rotation. Such directors are called rotational directors
and shall be appointed by the shareholders in general meeting.
Ascertainment of Directors retiring by Rotation and
Filling of Vacancies (Sec. 256)
Number of Directors
Every public company (other than a deemed public company)
must have at least three directors. Every other company must
have at least two directors. Subject to this minimum number of
directors, the articles of a company may fix the minimum and
maximum number of directors for its board of directors.
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He shall act for a director called the original director during his
absence for a period of at least 3 months form the state in
which board meetings are ordinarily held.
4. Appointment of directors by third parties.
The Articles under certain circumstances give power to the
debenture holders or other creditors, e.g., a banking company or
financial corporation, who have advanced loans to the company
to appoint their nominees to the board. The number of
directors so appointed shall not exceed 1/3 of the total number
of directors, and they are not liable to retire by rotation.
5. Appointment by Proportional Representation
[Sec. 265]
The Articles of a company may provide for the appointment of
not less than 2/3rds of the total number of directors of a public
company or of a private company which is a subsidiary of a
public company according to the principle of proportional
representation. The proportional representation may be by a
single transferable vote or by a system of cumulative voting or
otherwise. The appointment shall be made once in 3 years and
interim casual vacancies shall be filled in the manner as provided
in the articles.
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161
a very high price and they did not disclose this fact to the
shareholder. The shareholder sued to have the sale set
aside. Held, the sale was binding, as the directors were
under no obligation to disclose the negotiations to the
shareholder.
Quasi- trustees. Directors are really only quasi trustees because
162
(b) Either
i.
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ii.
d. He is adjudged an insolvent
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163
e.
f.
g.
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Managing Director
Managing Director means a person who, by virtue of an
agreement with the company or of a resolution passed by the
company in a general meeting or by its Board of directors or by
virtue of its memorandum or articles of association, is
entrusted with substantial powers of management which could
not otherwise be exercisable by him and includes a director
occupying the position of a managing director, by whatever
name called. The power merely to do administrative acts of a
routine nature, when so authorised by the Board such as the
power to affix the common seal of the company on any
document or to draw and endorse any cheque on the account of
the company in any bank or to draw and endorse any negotiable
instrument or to sign any share certificate or to direct registration of share transfers will not be deemed to be included within
substantial powers of management. The managing director
must exercise his powers subject to the superintendence, control
and direction of the Board.
Certain Persons not to be Appointed Managing
Directors
No company can, appoint or employ, or continue the appointment or employment of, any person as its managing or whole
time director whoa. Is an undischarged insolvent, or has at any time been
adjudged an insolvent
b. Suspends, or has at any time suspended, payment to
his creditors or makes, or has at any time made, a
composition with them
c.
Every public company or a private company which is a subsidiary of a public company, having a paid up share capital of Rs. 5
crores or more must have a managing director or wholetime
director or manager.
Appointment of managing director or wholetime director or
manager of a public company or a private company which is a
subsidiary of a public company requires the approval of the
Central Government unless the appointment is in accordance
with the conditions specified in Schedule XIII of the Companies Act, 1956 and a returm in Form 25 C is filed within 30 days
of appointment.
Application for approval must be made to the Central Government if Form 25 A within 90 days of appointment. The
Central Government shall grant its approval if it is satisfied that
a. The managing director or wholetime director or
manager is in its opinion, a fit and proper person
c.
165
Practical Problems
Attempt the following problems, giving reasons
1.
2.
3.
4.
References
http://www.vakilno1.com
http://www.saarclawnet.com/saarclawnet/osca20.html
Notes:
166
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Learning Objectives
After reading the lesson, you will be able to know about the:
Introduction
A company is an association of several persons. Decisions are
made according to the view of the majority. Various matters
have to be discussed and decided upon. These discussions take
place at the various meetings, which take place between members and between the directors. Needless to say, the importance
of meetings cannot be under-emphasized in case of companies.
The Companies Act 1956 contains several provisions regarding
meetings. These provisions have to be understood and
followed.
For a meeting, there must be at least 2 persons attending the
meeting. One member cannot constitute a company meeting
even if he holds proxies for other members.
Kinds of Company Meetings
Broadly, meetings in a company are of the following types :-
I Meetings of Members
These are meetings where the members / shareholders of the
company meet and discuss various matters. Members meetings
are of the following types :Statutory Meeting (Sec 165)
A public company limited by shares or a guarantee company
having share capital is required to hold a statutory meeting. Such
a statutory meeting is held only once in the lifetime of the
company. Such a meeting must be held within a period of not
less than one month or within a period not more than six
months from the date on which it is entitled to commence
business i.e. it obtains certificate of commencement of
business. In a statutory meeting, the following matters only can
be discussed: a. Floatation of shares / debentures by the company
b. Modification to contracts mentioned in the prospectus
The purpose of the meeting is to enable members to know allimportant matters pertaining to the formation of the company
and its initial life history. The matters discussed include which
shares have been taken up, what money has been received, what
contracts have been entered into, what sums have been spent on
preliminary expenses, etc. The members of the company
present at the meeting may discuss any other matter relating to
the formation of the Company or arising out of the statutory
report also, even if no prior notice has been given for such other
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167
LESSON 34:
THE COMPANIES ACT, 1956
MEETINGS AND PROCEEDINGS
168
2.
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c.
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169
b. Declaration of dividend
170
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171
i.
Voting by poll
172
b.
c.
Resolutions
Resolutions mean decisions taken at a meeting. A motion, with
or without amendments is put to vote at a meeting. Once the
motion is passed, it becomes a resolution. A valid resolution
can be passed at a properly convened meeting with the required
quorum. There are broadly three types of resolutions: 1. Ordinary Resolution [Sec. 189(1)]
An ordinary resolution is one which can be passed by a simple
majority. I.e. if the votes (including the casting vote, if any, of
the chairman), at a general meeting cast by members entitled to
vote in its favour are more than votes cast against it. Voting may
be by way of a show of hands or by a poll provided 21 days
notice has been given for the meeting.
2. Special Resolution [Sec. 189(2)]
A special resolution is one in regard to which is passed by a 75
% majority only i.e. the number of votes cast in favour of the
resolution is at least three times the number of votes cast
against it, either by a show of hands or on a poll in person or
by proxy. The intention to propose a resolution as a special
resolution must be specifically mentioned in the notice of the
general meeting. Special resolutions are needed to decide on
important matters of the company. Examples where special
resolutions are required are :a. To alter the domicile clause of the memorandum from
one State to another or to alter the objects clause of the
memorandum.
b. To alter / change the name of the company with the
approval of the central government
c.
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173
Practical Problems
Attempt the following problems, giving reasons
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1.
References
http://www.vakilno1.com
http://www.saarclawnet.com/saarclawnet/osca20.html
Notes:
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175
LESSON 35:
THE COMPANIES ACT, 1956
THE WINDING UP OF A COMPANY
MODES OF WINDING UP OF A COMPANY
Learning Objectives
After reading the lesson, you will be able to know about the:
3.
4.
5.
6.
Introduction
A company comes into existence by a legal process and when for
any reason, it is desired to end its existence; it must go through
the legal process of winding up of its affairs. Winding up or
liquidation is the process by which the management of a
companys affairs is taken out of its directors hands, its assets
are realized by a liquidator, and its debts are paid out of the
proceeds of realization. If any balance remains in the hands of
the liquidator, it is divided among the members of the
company in accordance with their rights under the articles.
However, you must understand that winding up and dissolution of the company are not one and the same thing. A
company is said to be dissolved when it ceases to exist as a
corporate body. Winding up precedes dissolution. It is the
process by which the dissolution of the company is brought
about. Let us learn about the modes of winding up.
Modes of Winding Up
(b) Voluntary; or
(c) Subject to the supervision of the Court.
(2) The provisions of this Act with respect to winding up
apply, unless the contrary appears, to the winding up of a
company in any of those modes.
Winding up By The Court
Section 433 lays down that the Court in the following case may
wind up a company:
2.
176
1.
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The Company
2.
3.
4.
177
5.
6.
178
grounds specified in 12[clause (b), (c), (d), (e) and (f)] of section
433:
It is also provided that the Registrar shall not present a petition
on the ground specified in clause (e) aforesaid, unless it appears
to him either from the financial condition of the company as
disclosed in its balance sheet or from the report of 13[a special
auditor appointed under section 233A or an inspector] appointed under section 235 or 237, that the company is unable to
pay its debts. A registrar shall obtain the previous sanction of
the Central Government for the presentation of the petition on
any of the grounds aforesaid.
The Central Government shall not accord its sanction in
pursuance of the foregoing proviso, unless the company has
first been afforded an opportunity of making its representations, if any.
Please note that a petition for winding up a company on the
ground specified in clause (b) of section 433 shall not be
presented(a) Except by the Registrar or by a contributory; or
(b) Before the expiration of fourteen days after the last day
on which the statutory meeting referred to in clause (b)
aforesaid ought to have been held.
Before a petition for winding up a company presented by a
contingent or prospective creditor is admitted, the leave of the
Court shall be obtained for the admission of the petition and
such leave shall not be granted(a) Unless, in the opinion of the Court, there is a prima facie
case for winding up the company; and
(b) Until such security for costs has been given as the Court
thinks reasonable.
Commencement of Winding up
Section 441 lays down that where, before the presentation of a
petition for the winding up of a company by the Court, a
resolution has been passed by the company for voluntary
winding up, the winding up of the company shall be deemed
to have commenced at the time of the passing of the resolution, and unless the Court, on proof of fraud or mistake,
thinks fit to direct otherwise, all proceedings taken in the
voluntary winding up shall be deemed to have been validity
taken.
In any other case, the winding up of a company by the Court
shall be deemed to commence at the time of the presentation
of the petition for the winding up.
Statement of affairs to be made to Official
Liquidator.
It is very important document to be prepared by the company.
Section 454 requires that where the Court has made a winding
up order or appointed the Official Liquidator as provisional
liquidator, unless the Court in its discretion otherwise orders,
there shall be made out and submitted to the Official Liquidator a statement as to the affairs of the company in the
prescribed form, verified by an affidavit, and containing the
following particulars, namely
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Powers of Tribunal
Power of Court to stay or restrain proceedings
against company.
It is provided under Section 442 that at any after the presentation of a winding up petition and before a winding up order
has been made, the company, or any creditor or contributory,
may(a) Where any suit or proceeding against the company is
pending in the Supreme Court or in any High Court, apply
to the Court in which the suit or proceeding is pending for
a stay of proceedings therein; and
(b) Where any suit or proceeding is pending against the
company in any other Court, apply to the Court having
jurisdiction to wind up the company, to restrain further
proceedings in the suit or proceeding;
and the Court to which application is so made may stay or
restrain the proceedings accordingly, on such terms as it thinks
fit.
Powers of Court on Hearing Petition (Section 443)
On hearing a winding up petition, the court may (a) Dismiss it, with or without cost; or
(b) Adjourn the hearing conditionally or unconditionally; or
(c) Make any interim order that it thinks fit; or
(d) Make an order for winding up the company with or
without costs, or any other order that it thins fit:
It is provided that the Court shall not refuse to make a winding
up order on the ground only that the assets of the company
have been mortgaged to an amount equal to or in excess of
those assets, or that the company has no assets.
Where the petition is presented on the ground that it is just and
equitable that the company should be wound up, the Court
may refuse to make an order of winding up, if it is of opinion
that some other remedy is available to the petitioners and that
they are acting unreasonably in seeking to have the company
would up instead of pursuing that other remedy.
Where the petition is presented on the ground of default in
delivering the statutory report to the Registrar, or in holding the
statutory meeting, the Court may(a) Instead of making a winding up order, direct that the
statutory report shall be delivered or that a meeting shall be
held; and
(b) Order the cost to be paid by any persons who, in the
opinion of the Court, are responsible for the default.
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180
ii)
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2.
3.
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181
2.
3.
4.
5.
3.
4.
5.
6.
7.
References
http://www.vakilno1.com
http://www.saarclawnet.com/saarclawnet/osca20.html
Notes:
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Learning Objectives
After reading the lesson, you will be able to know about the:
Introduction
By now, you are all aware of Winding Up. Today, we will discuss
its consequences and how the claims are settled.
Consequences of Winding Up
1. Consequences as to Shareholders/ Members
In a company limited by shares, a shareholder is liable to pay the
full amount up to the face value of the shares held by him. His
liability continues even after the company goes into liquidation,
but he is then described as a contributory. A contributory may
be present or past. The liability of present and past contributories has already been discussed in this chapter. In a company
limited by guarantee, the members are liable to contribute up to
the amount guaranteed by them.
2. Consequences as to Creditors
(1) Where the company is solvent (Sec. 528) Where a
company is being wound up, all debts payable on a
contingency and all claims against the company, present
or future, certain or contingent, ascertained or
sounding only in damages, shall be admissible to
proof against the company. A just estimate of the
value of such debts or claims shall be made. Where a
solvent company is wound up. Where a solvent
company is wound up, all claims of creditors, when
proved, are fully met.
(2) Where the company is insolvent (Sec.529) Where a
company is insolvent and is wound up, the same rules
shall prevail as in the case of insolvency with regard to:
(a) Debts provable;
(b) The valuation of annuities and future and contingent
liabilities, and
(c) The respective rights of secured and unsecured
creditors
The security of every secured creditor shall, however, be deemed
to be subject to a pari passu charge in favors of the workmen to
the extent of the workmens portion; therein. Where a secured
creditor instead of relinquishing his security and proving his
debt, opts to realize his security (a) The liquidator shall be entitled to represent the
workmen and enforce the workmens charge.
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183
LESSON 36:
THE COMPANIES ACT, 1956
THE WINDING UP OF A COMPANY
CONSEQUENCES OF A WINDING UP OF A COMPANY
184
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For the purposes of this section, section 529A and section 530,(a)
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Companies Act, 1913 (7 of 1913) occurred before the commencement of this Act, and in such a case, the provisions
relating to preferential payments which would have applied if
this Act had not been passed, shall be deemed to remain in full
force.
There is another important term which you could find in regard
to winding up of company.
Defunct company
A company is a said to be defunct when it is not carrying on
business or when it is not in operation. Sec. 560 deals with
defunct companies. If a company has ceased to carry on
business, the registrar may strike it off the register as a defunct
company in accordance with Sec. 560.
Practical Problems
Attempt the following problems, giving reasons
1.
3.
4.
(i)
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References:
http://www.vakilno1.com
http://www.saarclawnet.com/saarclawnet/osca20.html
Notes:
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187
LESSON 37:
TUTORIAL
THE COMPANIES ACT, 1956
You are the company secretary of XYZ Ltd., a listed company,
which is making a takeover bid to acquire control of ABC Ltd.,
another listed
Company. XYZ Ltd. presently has no stake in ABC Ltd. Advise
your
Board of directors in respect of the following queries:
(i)
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Learning Objectives
3.
4.
5.
6.
Introduction
The earlier principle of Caveat Emptor or let the buyer
beware which was prevalent has given way to the principle of
Consumer is King. The origins of this principle lie in the fact
that in todays mass production economy where there is little
contact between the producer and consumer, often sellers make
exaggerated claims and advertisements, which they do not
intend to fulfill. This leaves the consumer in a difficult position
with very few avenues for redressal. The onset on intense
competition also made producers aware of the benefits of
customer satisfaction and hence by and large, the principle of
consumer is king is now accepted. The need to recognize and
enforce the rights of consumers is being understood and
several laws have been made for this purpose. In India, we have
the Indian Contract Act, the Sale of Goods Act, the Dangerous
Drugs Act, the Agricultural Produce (Grading and Marketing)
Act, the Indian Standards Institution (Certification Marks) Act,
the Prevention of Food Adulteration Act, the Standards of
Weights and Measures Act, the Trade and Merchandise Marks
Act, etc which to some extent protect consumer interests.
However, these laws required the consumer to initiate action by
way of a civil suit, which involved lengthy legal process proving,
to be too expensive and time consuming for lay consumers.
Therefore, the need for a more simpler and quicker access to
redressal to consumer grievances was felt and accordingly, it lead
to the legislation of the Consumer Protection Act, 1986.
Object of the Consumer Protection Act, 1986
The main objective of the act is to provide for the better
protection of consumers. Unlike existing laws, which are
punitive or preventive in nature, the provisions of this Act are
compensatory in nature. The act is intended to provide simple,
speedy and inexpensive redressal to the consumers grievances,
and reliefs of a specific nature and award of compensation
wherever appropriate to the consumer. The act has been
amended in 1993 both to extend its coverage and scope and to
enhance the powers of the redressal machinery.
The basic rights of consumers as per the Consumer Protection
Act (CPA) are
1.
2.
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Extend and Coverage of the Act:The salient features of the Act are summed up as under:- The Act applies to all goods and services unless
specifically exempted by the Central Government.
- It covers all the sectors whether private, public or
cooperative.
- The provisions of the Act are compensatory in nature.
It enshrines the following rights of consumers:- Right to be protected against the marketing of goods and
services which are hazardous to life and property.
-Right to be informed about the quality, quantity, potency,
purity, standard and price of goods or services so as to
protect the consumer against unfair trade practices;
-Right to be assured , wherever possible , access to a variety
of goods and services at competitive prices;
-Right to be heard and to be assured that consumers
interests will receive due consideration at appropriate
forums;
-Right to seek redressal against unfair trade practices
unscrupulous exploitation of consumers; and
-Right to consumer education
-The Act envisages establishment of Consumer Protection
Councils at the Central and State levels, whose main objects
will be to promote and protect the rights of the consumers
The CPA extends to the whole of India except the State of
Jammu and Kashmir and applies to all goods and services
unless otherwise notified by the Central Government.
Definitions of Important Terms
Before studying the provisions of the CPA, it is necessary to
understand the terms used in the Act. Let us understand some
of the more important definations.
Complainant Means
1.
A consumer; or
2.
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LESSON 38:
CONSUMER PROTECTION ACT
3.
4.
2.
3.
4.
5.
(ii) It includes any user of such goods other than the person
who actualy buys goods and such use is made with the
approval of the purchaser.
190
(i)
i.It includes any beneficiary of such service other than the one
who actually hires or avails of the service for consideration and
such services are availed with the approval of such person.
Who Can file a Complaint
The following can file a complaint under the Act:- A consumer
- Any voluntary consumer organization registered under
the Societies Registration Act,1860 or under the Companies
Act,1956 or under any other law for the time being in force.
- The Central Government
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Structure
-To provide simple, speedy and inexpensive redressal of
consumer grievances, the Act envisages a three- tier quasijudicial machinery at the National, State and District levels.
The State Council meets as and when necessary but not less
than two meetings must be held every year.
District Forum
Under the CPA, the State Government has to set up a district
Forum in each district of the State. The overnment may
establish more than one District Forum in a district if it deems
fit. Each District Forum consists of :(a) A person who is, or who has been, or is qualified to be, a
District Judge who shall be its President
(b) Two other members who shall be persons of ability,
integrity and standing and have adequate knowledge or
experience of or have shown capacity in dealing with
problems relating to economics, law, commerce,
accountancy, industry, public affairs or administration, one
of whom shall be a woman.
Appointments to the State Commission shall be made by the
State Goverrnment on the recommendation of a Selection
Committee consisting of the President of the State Committee,
the Secretary - Law Department of the State and the secretary in
charge of Consumer Affairs
Every member of the District Forum holds office for 5 years or
upto the age of 65 years, whichever is earlier and is not eligilbe
for re-appointment. A member may resign by giving notice in
writing to the State Government whereupon the vacancy will be
filled up by the State Government.
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(b) Any one of the opposite parties (where there are more than
one) actually and voluntarily resides or carries on business
or has a branch office or personally works for gain, at the
time of institution of the complaint provided that the
other opposite party/parties acquiescence in such
institution or the permission of the Forum is obtained in
respect of such opposite parties; or
(c) The cause of action arises, wholly or in part.
State Commission
The Act provides for the establishment of the State Consumer
Disputes Redressal Commission by the State Government in
the State by notification. Each State Commission shall consist
of:(a) A person who is or has been a judge of a High Court
appointed by State Government (in consultation with the
Chief Justice of the High Court ) who shall be its
President;
(b) Two other members who shall be persons of ability,
integrity, and standing and have adequate knowledge or
experience of, or have shown capacity in dealing with,
problems relating to economics, law, commerce,
accountancy, industry, public affairs or administration, one
of whom must be a woman.
Every appointment made under this hall be made by the State
Government on the recommendation of a Selection Committee
consisting of the President of the State Commission, Secretary Law Department of the State and Secretary in charge of
Consumer Affairs in the State.
Every member of the District Forum holds office for 5 years or
upto the age of 65 years, whichever is earlier and is not eligilbe
for re-appointment. A member may resign by giving notice in
writing to the State Government whereupon the vacancy will be
filled up by the State Government.
The State Commission can entertain complaints where the value
of goods or services and the compensation, if any claimed
exceed Rs. 5 lakhs but does not exceed Rs. 20 lakhs;
3.
4.
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Speedy Disposal
The thrust of the Act is to provide simple, speedy and inexpensive redressal to consumers grievances. To ensure speedy
disposal of consumers grievances, the following provisions
have been incorporated in the Act and the rules farmed
thereunder:
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193
Q2. I had purchased seeds from a party. The seeds did not
germinate. The other party took the plea that I was not a
consumer. Whether purchase of seeds for the purpose of
agriculture is purchase for commercial purpose?
194
A. The Consumer Court will not be able to grant you any relief
since the driver employed by you did not have a driving license.
You were bound under law to check the ability of the person
employed by you and the failure in holding a license for driving
well debar you from claiming the Insurance Claims.
Q11. I had purchased a fridge, which suffered from several
defects, and those defects could not be removed or repaired
by the Company. Can I seek redressal of my grievance?
A. You can certainly seek redressal before the Consumer Forum.
In a similar case as yours, the Forum appointed a Local
Commissioner who corroborated the version of the complainant. It was held by the Forum that the fridge was found to be
defective within the period of warranty. The opposite party was
directed to replace the unit with a new one.
Q12. I filed a complaint before the State Commission regarding
payment of policy amount in death claim, which was
allowed to me by the State Commission. I wish to file
another complaint claiming the Double Accident Benefit.
Can I do so?
A. It is well-settled principal of law that one can not educate the
same cause of action before a court of law or before another
adjudicating Forum after it had already been adjudicating upon
earlier. This is the basis for the relevant provisions under the
Code of Civil Procedure, 1908 (CPC) which embody a sound
principal of law to obviate multiplicity of litigation. Even
though Consumer Forums are not governed by the CPC yet the
sound principles of law and procedure embody in that CPC are
followed by the Forums. Consequently, second complaint filed
on the same cause of action would not be maintainable.
Q13. I had applied for allotment for a plot and paid Rs.100 as
registration fees. At the time of draw my name was not
included. I lodged a complaint before the Consumer
Forum, wherein the Housing Board argued that I was not
a Consumer since no allotment had taken place. What is
the correct position in law?
A. Where the complainant had paid for the cost of application
form as well as the registration fee, he is the potential user and
the nature of transaction is covered by the expression service
of any description. As such the complaint is maintainable. The
Housing Board is deemed to have undertaken to include your
name in the draw of lots for allotment of a plot. However,
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References
http://www.vakilno1.com/consumerprotect_qns.htm
http://fcamin.nic.in/cpa.htm
http://www.indiainfoline.com/lega/cptc/ch01.html
Notes:
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Learning Objectives
After reading the lesson, you will be able to know about the:
Introduction
Today, we will discuss the two Acts as outlined above in brief
just to give you an idea as to the purpose of these Acts and the
brief introduction of these Acts.
Let us first talk about FEMA
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197
LESSON 39:
FEMA AND TRADE AND COPYRIGHTS ACT
special one rupee notes issued under section 28A of the Reserve
Bank of India Act, 1934 by the Ministry of Finance.
Person includes an individual, a Hindu undivided family, a
company, a firm, an association of persons or a body of
individuals, whether incorporated or not, every artificial juridical
person and any agency, office or branch owned or controlled by
such person;
Person Resident in India Means
i.
ii.
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c.
The Reserve Bank may, for the purpose of ensuring that the
full export value of the goods or such reduced value of the
goods as the Reserve Bank determines, having regard to the
prevailing market-conditions, is received without any delay,
direct any exporter to comply with such requirements as it
deems fit.
e.
f.
g.
j.
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199
issued and served a notice upon the defaulter calling upon him
to appear before him on the date specified in the notice and to
show cause why he should not be committed to the civil
prison, and unless the Adjudicating Authority, for reasons in
writing, is satisfied :a. That the defaulter, with the object or effect of
obstructing the recovery of penalty, has after the issue
of notice by the Adjudicating Authority, dishonestly
transferred, concealed or removed any part of his
property ; or
b. That the defaulter has, or has had since the issuing of
notice by the Adjudicating Authority, the means to pay
the arrears or some substantial part thereof and refuses
or neglects or has reused or neglected to pay the same.
A warrant for the arrest of the defaulter may be issued by the
Adjudicating Authority if the Adjudicating Authority is
satisfied, by affidavit or otherwise, that with the object or effect
of delaying the execution of the certificate the defaulter is likely
to abscond or leave the local limits of the jurisdiction of the
Adjudicating Authority.
Where appearance is not made pursuant to a notice issued and
served, the Adjudicating Authority may issue a warrant for the
arrest of the defaulter.
A warrant of arrest issued by the Adjudicating Authority may
also be executed by any other Adjudicating Authority within
whose jurisdiction the defaulter may for the time being be
found.
Every person arrested in pursuance of a warrant of arrest shall
be brought before the Adjudicating Authority issuing the
warrant as soon as practicable and in any event within twentyfour hours of his arrest (exclusive of the time required for the
journey). However, if the defaulter pays the amount entered in
the warrant of arrest as due and the costs of the arrest to the
officer arresting him, such officer shall at once release him.
When a defaulter appears before the Adjudicating Authority
pursuant to a notice to show cause or is brought before the
Adjudicating Authority, the Adjudicating Authority shall give
the defaulter an opportunity showing cause why he should not
be committed to the civil prison.
Pending the conclusion of the inquiry, the Adjudicating
Authority may, in his discretion, order the defaulter to be
detained in the custody of such officer as the Adjudicating
Authority may think fit or release him on his furnishing the
security to the satisfaction of the Adjudicating Authority for his
appearance as and when required.
Upon the conclusion of the inquiry, the Adjudicating Authority
may make an order for the detention of the defaulter in the civil
prison and shall in that event cause him to be arrested if he is
not already under arrest. However in order to give a defaulter an
opportunity of satisfying the arrears, the Adjudicating Authority may, before making the order of detention, leave the
defaulter in the custody of the officer arresting him or of any
other officer for a specified period not exceeding fifteen days, or
release him on his furnishing security to the satisfaction of the
Adjudicating Authority for his appearance at the expiration of
the specified period if the arrears are not satisfied.
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Miscellaneous
Where any document
a. Is produced or furnished by any person or has been
seized from the custody or control of any person, in
either case, under this Act or under any other
law; or
b. Has been received from any place outside India (duly
authenticated by such authority or person and in such
manner as may be prescribed) in the course of
investigation of any contravention under this Act
alleged to have been committed by any person,
and such document is tendered in any proceeding under this
Act in evidence against him, or against him and any other
201
carry out the provisions of this Act and the rules made
thereunder.
This was all about the FEMA.
Let us now talk of the Trade, Patents and Copyrights Act as
prevalent In India.
Trade, Patents and Copy Rights Act
These Acts are covered under the Intellectual Property Rights.
Do you know what is Intellectual Property Rights
(IPR)?
IPR is a general term covering patents, copyright, trademark,
industrial designs, geographical indications, protection of layout
design of integrated circuits and protection of undisclosed
information (trade secrets).
Legislations covering IPRs in India are the Following
Patents: The Patents Act,1970 and was amended in 1999 and
2002. The amended Act after the amendments made in 2002
came in to force on May 20, 2003.
Design: A new Design Act 2000 has been enacted superseding
the earlier Designs Act 1911.
Trade Mark: A new Trademarks Act, 1999 has been enacted
superseding the earlier Trade and Merchandise Marks Act, 1958.
The Act came in force from September 15, 2003
Copyright: The Copyright Act, 1957 as amended in 1983, 1984
and 1992, 1994,1999 and the Copyright Rules, 1958.
Layout Design of Integrated Circuits: The Semiconductor
Integrated Circuit Layout Design Act 2000. (Enforcement
pending)
Protection of Undisclosed Information: No exclusive legislation exists but the matter would be generally covered under the
Contract Act, 1872.
Geographical Indications: The Geographical Indication of
Goods (Registration and Protection) Act 1999.
Copyrights
Indias copyright law, laid down in the Indian Copyright Act,
1957 as amended by Copyright (Amendment) Act, 1999, fully
reflects the Berne Convention on Copyrights, to which India is
a party. Additionally, India is party to the Geneva Convention
for the Protection of rights of Producers of Phonograms and
to the Universal Copyright Convention. India is also an active
member of the World Intellectual Property Organization
(WIPO), Geneva and UNESCO.
The copyright law has been amended periodically to keep pace
with changing requirements. The recent amendment to the
copyright law, which came into force in May 1995, has ushered
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Several measures have been adopted to strengthen and streamline the enforcement of copyrights. These include the setting up
of a Copyright Enforcement Advisory Council, training
programs for enforcement officers and setting up special policy
cells to deal with cases relating to infringement of copyrights.
Trade Marks
Trademarks have been defined as any sign, or any combination
of signs capable of distinguishing the goods or services of one
undertaking from those of other undertakings. Such distinguishing marks constitute protect able subject matter under the
provisions of the TRIPS Agreement. The Agreement provides
that initial registration and each renewal of registration shall be
for a term of not less than 7 years and the registration shall be
renewable indefinitely. Compulsory licensing of trademarks is
not permitted.
Keeping in view the changes in trade and commercial practices,
globalization of trade, need for simplification and harmonization of trade marks registration systems etc., a comprehensive
review of the Trade and Merchandise Marks Act, 1958 was made
and a Bill to repeal and replace the 1958 Act has since been
passed by Parliament and notified in the Gazette on 30.12.1999.
This Act not only makes Trade Marks Law, TRIPS compatibility
but also harmonizes it with international systems and practices.
Work is underway to bring the law into force.
References
http://www.saarclawnet.com/saarclawnet/osca20.html
http://dipp.nic.in/ipr.htm
Notes:
Geographical Indications
The Agreement contains a general obligation that parties shall
provide the legal means for interested parties to prevent the use
of any means in the designation or presentation of a good that
indicates or suggests that the good in question originates in a
geographical area other than the true place of origin in a manner
which misleads the public as to the geographical origin of the
goo. There is no obligation under the Agreement to protect
geographical indications which are not protected in their country
or origin or which have fall en into disuse in that country.
A new law for the protection of geographical indications, viz.
the Geographical Indications of Goods (Registration and the
Protection) Act, 1999 has also been passed by the Parliament
and notified on 30.12.1999 and the rules made thee under
notified on 8-3-2002.
Patents
The basic obligation in the area of patents is that, invention in
all branches of technology whether products or processes shall
be patent able if they meet the three tests of being new
involving an inventive step and being capable of industrial
application. In addition to the general security exemption which
applied to the entire TRIPS Agreement, specific exclusions are
permissible from the scope of patent ability of inventions, the
prevention of whose commercial exploitation is necessary to
protect public order or morality, human, animal, plant life or
health or to avoid serious prejudice to the environment.
Further, members may also exclude from patent ability of
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LESSON 40:
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