Q.1 Define and explain Promissory Note and bill of exchange. Definition y
promissory note is an instrument in writing (not being a bank note or a currency note) containing an unconditional undertaking, signed by the maker to pay a certain sum of money to, or to the order of, a certain person or to the bearer of the t he instrument
A
Examples of Promissory Notes y
y
³A´ signs instruments in the following terms: "I acknowledge myself to be indebted to 'B' in Rs. 1000, to be paid on demand, for value received."
Followings are Not Promissory Notes.
(i)
"Mr. B, I.O.U. (I owe you) Rs. 1000."
(ii) "I promise to pay B Rs. 1500 on D's death, provided provided he leaves me enough enough to pay that sum," (iii) "I promise to pay B Rs. 500 seven days after my marriage marriage with C." Essential s y
(1) (2)
or Characteri stic s of a Promi ssory Note
From the definition, it i s clear that a promissory note must have the following essential elements. In writing - A promissory promissory note must be i n writing. Writing includes print and typewriting. typewriting.
It must contain an undertaking or promise to pay. Thus, a mere acknowledgement of indebtedness is not sufficient. to pay -
Promise
Notice
that the use of the word `promise' is not essential to constitute an instrument as promissory
note.
(3)
promise to pay must not be conditional. Thus, instruments payable on performance or non-performance of a particular act or on the happening or non-happening of an event are not promissory notes. Unconditional
- The
(4)
Signed
by the Maker ± The promissory note must be signed by the maker,
(5)
Certain Parties
otherwise it is of no effect.
- The instrument must point out with certainty the maker and the payee of the promissory
note. (6)
Certain
sum of money - The
(7)
Promise
sum payable must be certain or capable of being made certain.
to pay money only -
If the instrument contains a promise to pay something in addition money, it
cannot be a promissory note. (8)
are usually found in a promissory note but are not essential in law. If a promissory note does not bear a date, it is deemed to have been made when it was delivered.
(9)
It may be payable in installments
Number,
place, date etc - These
(10) It may be payable on demand or after a definite period - Payable 'on demand' means payable immediately or any time till it becomes time-barred. A demand promissory note becomes time barred on expiry of 3 years from the date it bears. (11) It cannot be made payable to bearer on demand or even payable to bearer after a certain period (12) It must be duly stamped under the Indian Stamp Act - It means that the stamps of the requisit e amount must have been affixed on the instrument i nstrument and duly cancelled either before or at the time of its execution. A promissory note, which is not so stamped, is a nullity.
BILL
y
OF EX CHANGE
'bill of exchange' is defined by as an instrument in writing, containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to or to the order of, a certain person, or to the bearer of the instrument. A
Characteri s change stic Feature s of a Bill of Ex change
1.
It must be in writing.
2.
It must contain an order to pay and not a promise or request.
3.
The order must be unconditional.
4.
There
5.
The parties must be certain .
6.
It must be signed by the drawer.
7.
The sum payable must be certain
or capable of being made certain.
8.
The order must be to pay money
and money alone.
9.
It must be duly stamped as per the Indian Stamp Act.
must be three parties, viz., drawer, drawee and payee.
10. Number, date and place are not essential.
Difference Between Bill of Exchange and Promissory Note: A
bill of exchange differs from a promissory note on the t he following points: Promissory Note
1) There are only two parties ± the maker (debtor) and the payee (creditor). 2)
A note contains an unconditional promise by the maker to pay the payee. 3) No prior acceptance is needed.
4) The liability of the t he maker or drawer is primary and absolute. 5) No notice of dishonour di shonour need be given.
6) The maker of the note stands st ands in immediate relation with the payee.
Bill
of Exchange
1) There are three parties ± the drawer, the drawee and the payee- although any two of these capacities may be filled by one and the same sa me person. 2) It contains an unconditional order to the drawee to pay according to the drawer`s directors. 3) A bill payable `after sight` must be accepted by the drawee or his agent before it is presented for payment. 4) The liability of the drawer is secondary and conditional upon non-payment by the drawee. 5) Notice of dishonour must be given by the holder to the drawer and the intermediate endorsers to hold them liable thereon. 6) The maker or drawer does not stand in immediate relation with the acceptor drawee.
Q.2 State with reasons whether following statements are true or false. a) All negotiable instruments are governed by
Negotiable
Instruments Act.
Negotiable instruments may be defined as written documents which can be transferred from one person to another to make payments until the final payment is made. In India, the Negotiable Instruments Act, 1881 contains the rules relating to negotiable instruments. According to Section, 13 of this Act, a negotiable instrument means ³ a promissory note, bill of exchange or cheque, payable either to order or to bearer whether the words ³order ´ or ³ bearer ´ appear on the instrument or not. ´ b) A bill of exchange can be crossed.
c) A cheque is always payable on demand. d) Generally, every holder of a negotiable instrument is presumed by law to be holder-in-due course. e) An unstamped negotiable instrument signed but blank in some respect is called an inchoate instrument. f) Crossing a cheque amounts to a material alteration which requires authentication.
Q.3 Write Notes a) Crossing of cheque Cro ssing of cheque s y
y
y
Crossing is a unique feature associated with a cheque affecting to a certain extent the obligation of the paying banker and also its negotiable character. It is a peculiar method of modifying the instrument to the banker for payment of the cheque. Cro ssing on
a cheque is a di r ection t o the paying banke r by the d ra wer that payment should not be made acro ss the counter. The payment on a crossed cheque can be collected only through a banker.
Crossing of a cheque is effected by drawing two parallel transverse lines with or without the words 'and company' or any abbreviation thereof. A cheque that is not crossed is called an `open cheque`.
S ignificance y
As
payment cannot be claimed across the counter on a crossed cheque, crossing of cheques serves as a measure of safety against theft or loss of cheques in transit.
ype s T y
of cro ssing
of cro ssing
Crossing may be either (1) Gener al - to mean as where a cheque bears across its face an addition of the words 'and company' or any abbreviation thereof, between two parallel transverse lines or of two parallel transverse lines simply, either with or without the words 'not negotiable', that addition shall be deemed a crossing and the cheque shall be deemed to be crossed generally (2) Special - implies the specification of the name of the banker on the face of the cheque
y
The object of special crossing is to direct the drawee banker to pay the cheque only if it is the particular bank mentioned therein. Thus, it makes the cheque system still safer.
presented through
Not Negotiable Cro ssing y
person who takes such a cheque shall not have and shall not be capable of giving a better title to the cheque than that which the person, from whom he took it in the first instance, had. Thus, by including the words 'not negotiable', the cheque is deprived of its special feature of negotiability. A bank, therefore, should be extra careful in paying such cheques. A
Account y
Payee Cro ssing ( A/ c Payee Cro ssing)
An A/c
payee crossing signifies that the drawer intends the payment to be credited only to the payee¶s account and in none else. The addition of 'A/c payee' to a crossing has no legal sanctity and the paying banker may ignore such a direction without being liable for any damages.
Not Negotiable, A/c Payee Cro ssing y
The
instrument is rendered not negotiable (making the 'paying banker' responsible to see that payment is made to the person who is entitled to receive it) plus A/c payee crossing directs the collecting banker to collect it for the payee only.
W ho y
can cro ss a cheque
cheque may be crossed by any of the following: 1. The drawer of a cheque. A
2. The holder of a cheque. 3. The Banker, in whose favour the cheque has been crossed specially.
b) y
y
Sec.
138 of Negotiable Instrument Act
The
word 'negotiable' means transferable from one person to another, and the term 'instrument' means 'any written document by which a right is created in favour of some person.' Thus, the negotiable instrument is a document by which rights vested in a person can be transferred to another person in accordance with the provisions of the Negotiable Instruments Act, 1881. The term 'negotiable instrument' has been defined as - A 'negotiable instrument' means a promissory note, bill of exchange or cheque payable either to order or to bearer."
MAIN FEATURES OF A NEGOTIABLE INSTRUMENT y
An
instrument may be negotiable either by - Promissory notes, bills of exchange and cheques are negotiable instruments under the Negotiable Instruments Act, 1881; or
(1)
Statute
(2)
B y
usage - Bank notes, bank drafts, share warrants, bearer debentures, dividend warrants, scripts and treasury bills
instrument is to be called 'negotiable' if it possesses the following characteristic features: 1) F r eely t ra nsfer able - Transferability may be by (a) delivery, or (b) by endorsement and delivery. 2) H older' s title f r ee f rom defects: The holder (of the negotiable instrument) in due course acquires a good title not withstanding any defect in a previous holder's title. A holder in due course is one who receives the instrument for value and without any notice as to the defect in title of the transferor. 3) The H older can sue in his own Name - Another characteristic feature of a negotiable instrument, is that its holder in due course, can sue on the instrument in his own name. y
An
4)
negotiable instrument can be transferred infinitum, i.e., can be transferred any number of times till its maturity. 5) A negotiable instrument is subject to certain presumptions. A
P r esumptions as t o neg otiable inst r uments [Sections 118-119]
1)
Every negotiable instrument is deemed to have been made, drawn, and accepted endorsed, negotiated or transferred for consideration. 2 ) A s t o date- Every negotiable instrument bear the date on which it is made or drawn. A s t o Consider ation -
Every bill of exchange was accepted within a reasonable time after the date mentioned therein and before the date of its maturity.
3) A s t o Acceptance-
4)
A s t o
T r ansfer - Every transfer of a negotiable instrument was made before the date of its maturity in case
of an instrument payable otherwise than on demand. 5) A s t o the or der o f End or sements - The endorsements appearing on it were made in the order in which they
appear thereon. Where an instrument has been lost or destroyed, that it was duly stamped and the stamp was duly cancelled.
6) A s t o l o st Inst r uments -
7) A s t o holder -in-due cour se - The
holder of the instrument is a holder in due course.
If a suit is filed upon an instrument, which has been dishonoured, the Court shall, on proof of the protest, presume the fact of dishonour unless it is disproved 8) A s t o dishonour -
Q.4 What is a Contract sale of goods? Distinguish between A]
Sale and Bailment
SL.
Act
No.
1
Act
Transfer
Sale
Bailment
Sale is defined under Bailment is defined under Sec. 148 of Sec. 4(3) of the Sales of the Indian Contract Act, 1872. Goods Act, 1930.
2
of ownership Vs. Transfer of Possession
In a sale the transfer of ownership takes place from the seller to the buyer.
3
Reason for transfer
Only one party is under In Bailment, the reason for transfer of a mistake, the contract possession may either safe custody is not void. usage, carriage etc.
4
Use of goods
In a sale, the buyer may use the goods in any way he likes.
In Bailment, the bailee can use the goods only accordingly to the direction of the bailor.
5
Consideration
In a sale, the consideration is always
In a Bailment, the consideration need not be money as it may be the
In a Bailment, transfer of possession takes place from the bailer to the bailee.
in terms of money.
6
7
8
9
understanding to return the goods bailed on accomplishment of the purpose.
Return of goods
In a sale, there is no In a Bailment, the goods are necessarily return of goods from the returned after the specified time or buyer to the seller, accomplishment of the purpose. unless there is a breach.
Profit accrued in goods
In a sale, any profit In a Bailment, any profit accrued on accrued in goods sold is goods bailed is the property of the property of the the bailer. buyer.
Loss of goods
In a Bailment, if the goods are lost or In a sale, if the goods damaged, the loss is to be borne by the are lost or damaged, the bailee but only if he is guilty loss is to be borne by of negligence and carelessness in taking the buyer. care of goods bailed
Payment of charges
In a sale, the question of any charge to be paid by In a Bailment, the bailor has to repay the the seller to the buyer charges which the bailee has incurred in or vice versa does not keeping the goods safe arise.
In sale title and possession both get transfered while in contract of bailment only possession get transfered. Sale is governed by the Transfer of property Act and latter by the Indian Contract Act1872 In case of sales,the return of goods in contract of sale is not possible. whereas in contract of bailment,the bailee must return the goods to the bailor on the accomplishment of the purpose for which the bailment was made. B] Sale and Mortgage C] Sale and Gift Both words are related with transfer of immovable asset. But sale deed is money based while Gift deed is not based on cash transaction... For an example Father or mother give the asset through Gift Deed and depends on State Governments gives registration amount deduction for Gift Deed. Even though relatives and the Gift deed has been registered, the sale deed is powerful. Government earns through the registration amount. So, to avoid to loose the money, if both parties or non relatives, Govt wont accept the registration under Gift Deed. D] Sale and Pledge.
Q.5 Write Notes a)
Earnest Money
What is an Earnest Money Deposit?
It's a good faith deposit but not to be confused with a down payment. When buyers execute a purchase contract, the contract specifies how much money the buyer is initially putting up to secure the contract, to show "good faith," and how much money all together will be deposited as a down payment. The balance is generally financed as a mortgage or a combination of mortgages. An earnest money deposit says to the seller: "Yes, I am ser ious enough about buying your house that I 'm willing t o put my money wher e my mouth is." So, How
Much is Enough?
Because there is no set amount, it varies from market to market and across the country. Where I work in California, deposits are generally 1 to 3 percent of the sales price. Buyers here do not often put down more than 3% since most sign a liquidated damages clause that limits the seller to 3% of the purchase price as damages in the event of a default. But it's not unusual for a buyer purchasing a $300,000 home to put down $1,000, especially if the buyer is obtaining 100% financing. In those scenarios, the deposit is most often refunded to the buyer and subsequently used as a credit toward closing costs because the financing makes up the entire purchase price. If it's a seller's market, with many buyers fighting over limited inventory, it makes logical sense for the buyer to put down a much larger earnest money deposit to entice the seller to accept the offer. In buyer's markets, a larger earnest money deposit might entice a seller to accept a much lower purchase price. So you see, it all depends. Be Careful
to Whom You Give Your Earnest Money Deposit
reader from New Brunswick, Canada, Sylvie Schriver, claims she lost her $2,500 earnest money deposit by handing it over to an individual who professed to be a real estate broker. She says the broker stole a brokerage's logo and business supplies to make it appear that he was legitimate; however, he vanished when Sylvie called to ask questions about her mortgage. When she reported the crook to the police, she then discovered that others had filed complaints. Sadly, at that point, Sylvie's money was gone. A
y
y
Never give an earnest money deposit to the seller. Make the deposit payable to a reputable third party such as a well known real estate brokerage, legal firm, escrow company or title company.
y
y
y
Verify that the third party will deposit the funds into a separately maintained trust account. Obtain a receipt. It is not advisable to authorize a release of your earnest money (or a pass-through) until your transaction closes.
Is Your Earnest Money Deposit Refundable Upon Cancellation? First, read your contract. Laws vary from state to state. In California, standard C.A.R.
purchase contracts allow for the return of the earnest money deposit to the buyer within a specified time period, by default 17 days, should the buyer elect to cancel the transaction. If, at that point, the seller refused to return the deposit without cause, the seller could end up paying a $1,000 civil penalt y to the buyer. Upon cancellation, the sellers and buyers are asked to sign mutual release instructions. If an agreement cannot be reached, the party holding the earnest money deposit will continue to hold it until an agreement is reached. If no agreement has been reached after a few years, escrow companies then send the parties a certified letter asking for mutual instructions. The letter says if nobody responds within a certain time period, then escrow will return the money to the buyer. If the seller contests the action then, after 3 years, escrow will send the money to the state of California, presumably to help balance our budget deficit. Case
in Point
buyer's $1,000 was deposited into escrow two years ago. Unknown to the seller or real estate agent, a week before closing escrow, the buyer decided to buy another property and entered escrow at a different title company. A few days before she was scheduled to close on the first property, the buyer completed her final walkthrough and declared there were water stains on the ceiling. There was no evidence of water stains on the ceiling. But that didn't stop the buyer from canceling the escrow. The sellers believe the buyer has forfeited her deposit. The buyer believes it should be returned. Two years later, the money is still sitting in escrow. A
b)
Caveat
Emptor
Caveat Emptor: What do you mean by Caveat Emptor? Ans:
Section 16 of the Indian Sale of Goods Act begins with the enunciation of the principle involved in the maxim caveat emptor. It states that subject to the provisions of the Act and any other law for the time being in force, there is no implied warranty or condition as to the quality of fitness for any particular purpose
of the goods supplied under the contract of sale. The principle of Caveat Emptor (let the buyer beware) lays down that it is the duty of the buyer to satisfy himself before purchasing the article, that the article which he buys, is the one he wants. the exceptions to the principle of Caveat Emptor. Ans:
The two important exceptions to the principle are-
a.Where the buyeri)expressly or by implication makes known to the seller the particular purpose for which the goods are required so as to show that the buyer relies on the sellers skill or judgement; and ii)the goods are of a description which the seller supplies in the course of his business (whether he himself manufactures them or not).
c) Unpaid seller
Who is an unpaid seller? What are his rights against goods? Ans: An
unpaid seller is one who is not paid for the goods sold by him. Any seller would be deemed to be an unpaid seller if: -The whole price is not paid or tendered. -.The credit period allowed has passed and the payment is due. -The negotiable instrument issued against payment has been dishonoured. -The buyer is declared insolvent. His rights against goods are: Rights when the property is passed to the buyer: i)Right of lien. ii)Right of stoppage in transit. iii)Right of resale. Rights when the property has not passed to the buyer
i)Right of withholding delivery. ii)Right of stoppage in transit. What are the rights of an unpaid seller against the buyer? Ans:
If the goods are delivered to the buyer, the unpaid seller has a right to sue the buyer for recovery of price, including costs of suit, customary interest and damages, if any. If the buyer takes the delivery of the goods from the seller, by issuing a cheque and later the cheque gets bounced, the unpaid seller can sue the buyer under the Negotiable Instruments Act, 1881. Such a buyer is liable for punishment with imprisonment or a fine. What is sellers lien? Ans:
Sellers lien refers to the sellers right to retain the possession of goods until certain charges due in respect of them are paid. The unpaid seller of goods who is in possession of them is entitled to retain possession of them until payment or tender of the price in the following cases: Where the goods have been sold without any stipulation as to credit; Where the goods have been sold on credit but the term of credit has expired; Where the buyer becomes insolvent. . What is meant by stoppage in transit? Ans:
Stoppage in transit is one of the rights of an unpaid seller. This right consists of stopping the goods while they are in the possession of a carrier or lodged at any place in the course of transmission to the buyer. The seller can resume the possession of the goods and retain until the price is tendered or paid. Describe the rights of an unpaid seller to stop the goods in transit. Ans:
They
are:
a)The buyer of goods must have become insolvent. b)The goods should be in possession of a middleman or some person intervening between the vendor who has parted with the goods and a buyer who has not
received them. c)The goods must be in transit or in possession of a middleman for the purpose of transit. d)The sellers right of stoppage in transit can be exercised as long as the goods are in transit and not yet delivered to the buyer. e)The seller may retain the goods until price is tendered or paid.
Q.6 Discuss the conditions and warranties under Sale of Goods Act Ans:
Condition Warranty
a) A condition is a stipulation essential to the main purpose of the contract, the breach of which gives a right to treat the contract as repudiated. warranty is a stipulation collateral to the main purpose of the contract, the breach of which gives rise to a claim for damages, but not a right to reject the goods and treat the contract as repudiated. A
b) Condition is essential to the main purpose. b) Warranty is incidental or collateral to the main purpose. c) Breach of a condition may be treated as breach of warranty. c) Breach of warranty cannot be treated as breach of condition. Explain the difference between condition and warranty with an example. Ans:
X sells food-stuff to Y. The contract between X and Y states that the food to be sold should be fit for consumption and this is the essential term in the contract. So, if it contains any poisonous substance, Y is entitled to reject the food-stuff and to repudiate the contract This essential term is called a condition. On the other hand, if the contract stipulates that the food-stuff should be packed in 1 kilo box but the seller packs it in half-kilo box, only an auxiliary or minor term of the contract is broken, Y may be able to claim compensation in respect of its
breach, but not avoid the contract. Such an auxiliary term is called warranty. When is condition treated as a warranty? Ans:
In certain circumstances, a condition may be treated as a warranty:
a)Election in the hands of the buyer-Where a seller failed to fulfill a condition in a contract of sale; the buyer has a right to waive such condition or elect to treat the breach of condition as a breach of warranty. It depends upon the consent of the buyer, not the seller. b)If a contract of sale is not severable and the buyer has accepted the goods partly, this is called part-performance. In such a case, it cannot be treated as a breach of condition by the seller but it can be treated as a breach of warranty. However, if the parties have an express contract, the seller is liable for the breach of condition and not for breach of warranty. c)Impossibility of performance: If the seller is unable to perform his contract due to impossibility, then also a condition is treated as a warranty. Explain the various implied conditions and warranties governing the transaction of sale of goods. Ans:
The implied warranties in a sale are:
a) Undertaking as to the title: In every contract of sale, there isAn
implied condition on the part of the seller that-
i)In the case of a sale, he has a right to sell the goods; ii)In the case of agreement to sell, he will have the right to sell the goods as the time when the property is to pass. An
implied warranty that the buyer shall have and enjoy quiet possession of the goods. An
implied warranty that the goods shall be free from any charge or encumbrance,
not known or declared to the buyer. Or State the implied conditions and warranties in the contract of sale. Ans:
Implied conditions:
a.Condition as to title. (Sec. 14) b.Sale by description. (Sec. 15) Sale by description: In a sale by description, there is an implied condition that the goods shall correspond with the description. If such a sale is also by sample, the goods must correspond to both description and sample. In a contract for the sale of goods by description- the buyer does not see the goods physically, he trusts the description; - the goods supplied by the seller must correspond to the description; - the law implies a condition precedent that the goods which the seller has offered to deliver or delivered, should answer to the description -an undertaking by the seller to supply the goods on description is an implied condition, It is not an implied warranty. Sale by sample as well as description. Sale by sample. (Sec. 17). A sale by sample is a contract for sale where there is a term in the contract, express or implied, to that effect that: ii)the bulk shall correspond with the sample in quality. iii)The buyer shall have a reasonable opportunity of comparing the bulk with the sample. iv)The goods shall be free from any defect that would not be apparent on examination of the sample. v)If the seller supplies the bulk that does not correspond with the sample in quality, it is a clear breach of condition.
Condition as to wholesomeness. Implied warranties: a.Quiet possession. [Sec. 14(b)]. b.Free from encumbrances. [Sec. 14(c)] . c.Sale of dangerous goods. Unless a different intention appears from the terms of the contract, stipulations as to time of payment are not deemed to be of the essence of a contract of sale. Whether any other stipulation as to time is of the essence of the contract or not depends on the terms of the contract. [section 11]. As a general rule, time of payment is not essence of contract, unless there is specific different provision in Contract. In other words, time of payment specified is µwarranty¶. If payment is not made in time, the seller can claim damages but cannot repudiate the contract. Time o f payment is n ot essence o f cont ra y o f g oods is, unless specified other wise ct but time o f deliver
Caveat E mptor - The principle termed as µcaveat empt or¶ means µbuyer be aware¶.
Generally, buyer is expected to be careful while purchasing the goods and seller is not liable for any defects in goods sold by him. This principle in basic form is embodied in section 16 that subject to provisions of Sale of Goods Act and any other law, there is no implied condition or warranty as to quality or fitness of goods for any particular purpose. As per section 2(12), ³Quality of goods´ includes their state or condition. of property a s between seller and buyer - Transfer of general property is required in a sale. µProperty¶ means legal ownership. It is necessary to decide whether property in goods has transferred to buyer to determine rights and liabilities of buyer and seller. Generally, risk accompanies property in goods i.e. when property in goods passes, risk also passes. If property in goods has already passed on to buyer, seller cannot stop delivery of goods even if in the meanwhile buyer has become insolvent. - - - Where there is a contract for the sale of unascertained goods, no property in the goods is transferred to the buyer unless and until the goods are ascertained. [section 18]. T ran s fer
P ro per ty passes when intended t o pass - Where
there is a contract for the sale of specific or ascertained goods the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred. [section 19(1)]. For the purpose of ascertaining the intention of the parties regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case. [section 19(2)]. Unless a different intention appears, the rules contained in sections 20 to 24 are rules for ascertaining the intention of the parties as to the time at which the property in the goods is to pass to the buyer. [section 19(3)]. Specific g oods in a deliver able state - Where there is an unconditional contract for the sale of specific goods in a
deliverable state, the property in the goods passes to the buyer when the contract is made, and it is immaterial whether the time of payment of the price or the time of deli very of the goods, or both, is postponed. [section 20]. Auction sale - Auction
sale is special mode of sale. The sale is made in open after making public announcement. Buyers assemble and make offers on the spot. Person offering to pay highest price gets the goods. Usually, auctioneer is appointed to conduct auction. Higher and higher bids are offered and sale is complete when auctioneer accepts a bid.- - - In the case of a sale by auction² (1) where goods are put up for sale in lots, each lot is pr ima facie deemed to be the subject of a separate contract of sale; (2) the sale is complete when the auctioneer announces its completion by the fall of the hammer or in other customary manner; and, until such announcement is made, any bidder may retract his bid; (3) a right to bid may be reserved expressly by or on behalf of the seller and, where such right is expressly so reserved, but not otherwise, the seller or any one person on his behalf may, subject to the provisions hereinafter contained, bid at the auction; (4) where the sale is not notified to be subject to a right to bid on behalf of the seller, it shall not be lawful for the seller to bid himself or to employ any person to bid at such sale, or for the auctioneer knowingly to take any bid from the seller or any such person; and any sale contravening this rule may be treated as fraudulent by the buyer; (5) the sale may be notified to be subject to a reserved or upset price; (6) if the seller makes use of pretended bidding to raise the price, the sale is voidable at the option of the buyer. [section 64].
Delivery of good s to buyer - The
A ct makes elaborate provisions regarding delivery of goods to buyer. It is the duty of the seller to deliver the goods and of the buyer to accept and pay for them, in accordance with the terms of the contract of sale. [section 31]. Unless otherwise agreed, delivery of the goods and payment of the price are concurrent conditions, that is to say, the seller shall be ready and willing to give possession of the goods to the buyer in exchange for the price, and the buyer shall be ready and willing to pay the price in exchange for possession of the goods. [section 32]. - - Note that this is µunless other wise ag re ed ¶, i.e. buyer and seller can agree to different provisions in respect of payment and delivery.
Acceptance of good s by buyer - Contract of Sale is completed not by mere delivery of goods but by acceptance
of goods by buyer. µ Acceptance¶ does not mean mere receipt of goods. It means checking the goods to ascertain whether they are as per contract. - - - Where goods are delivered to the buyer which he has not previously examined, he is not deemed to have accepted them unless and until he has had a reasonable opportunity of examining them for the purpose of ascertaining whether they are in conformity with the contract. [section 41(1)]. - - Unless otherwise agreed, when the seller tenders delivery of goods to the buyer, he is bound, on request, to afford the buyer a reasonable opportunity of examining the goods for the purpose of ascertaining whether they are in conformity with t he contract. [section 41(2)]. Buyer¶ s and S eller¶ s dutie s
- The Act casts various duties and grants certain rights on both buyer and seller.
of unpaid seller again st the good s - After goods are sold and property is transferred to buyer, the only remedy with seller is to approach Court, if the buyer does not pay. Seller has no right to take forceful possession of goods from buyer, once property in goods is transferred to him. However, the Act gives some rights to seller if his dues are not paid.
Right s
for breach of the contract - Unpaid seller can exercise his rights to the extent explained above. In addition, seller can exercise following rights in case of breach of contract. Buyer has also rights in case of breach of contract. s S uit
for compen sation and damage s ± The Sale of Goods Act does not specify how to measure damages. However, since the Act is complimentary to Contract Act, measure of compensation and damages will be as provided in sections 73 and 74 of Contract Act. M ea sure
Q.7 State with reasons whether following statements are true or false: a)
No
consideration----No contract
Consideration:Consideration for a particular promise exists where some right, interest, profit or benefit accrues (or will accrue) to the promisor as a direct result of some forbearance, detriment, loss or responsibility that has been given, suffered or undertaken by the promisee. T he consideration must be executor or executed, but not past. Consideration is executor. Consideration can be anything of value (such as an item or service), which each party to a legally-binding contract must agree to exchange if the contract is to be valid. If only one party offers consideration, the agreement is not legally a binding contract. In its traditional form, consideration is expressed as the requirement that in order for parties to be able to enforce a promise, they must have given something for it (quid pro quo): something must be given or promised in exchange or return for the promise. contract:-
contract is an exchange of promises between two or more parties to do or refrain from doing an act which is enforceable in a court of law. It is where an unqualified offer meets a qualified acceptance and the parties reach Consensus In Idem. The parties must have the necessary capacity to contract and the contract must not be either trifling, indeterminate, impossible or illegal. A
Hence by watching both definitions you can understand that contract required benefit for both parties. If there is no consideration for one party it means that party is not getting any benefit so. If there is no benefit for both party it means why they will make contract. And if benefit is only for one party then that is no contract because it is not full feeling contract first essential of exchange of promises, goods, services or something worth full for both parties. b)
1.
Contract
and agreement mean the same
contract is a written or verbal agreement that is enforceable by law. Â An agreement is the same, however it is typically not enforced by the law. 2. A contract is a formal agreement which is legally binding, usually created for business purposes, or to ensure the safety of one¶s assets. Â Agreements are informally made with family and friends, they are similar to promises. Contracts involve a universal acceptance of the terms and the stipulations are deemed possible to attain by all parties. Â Agreements have universal acceptance, however there is no guarantee of attainment by parties and it can be changed at any time by either participant A
c) All agreements are contracts. All
contracts are agreement but all agreement are not contracts Answer; A contract is a legally binding agreement or relationship that exists between two or more parties to do or abstain from performing certain acts. A contract can also be defined as a legally binding exchange of promises between two or more parties that the law will enforce. For a contract to be formed an offer made must backed acceptance of which there must be consideration. Both parties involved must intend to create legal relation on a lawful matter which must be entered into freely and should be possible to perform. An agreement is a form of cross reference between different parties, which may be written, oral and lies upon the honor of the parties for its fulfillment rather than being in any way enforceable. d)
If there is no legal obligation, there is no contract.
According
to section 2(h) of the Indian Contract Act: " An agreement enforceable by law is a contract." A contract therefore, is an agreement the object of which is to create a legal obligation i.e., a duty enforceable by law. From the above definition, we find that a contract essentially consists of two elements: (1) An
agreement and (2) Legal obligation i.e., a duty enforceable by law. We shall now examine these elements detail.
As
stated above, an agreement to become a contract must give rise to a legal obligation i.e., a duty enforceable by law. If an agreement is incapable of creating a duty enforceable by law. It is not a contract. Agreements
of moral, religious or social nature e.g., a promise to lunch together at a friend's house or to take a walk together are not contracts because they are not likely to create a duty enforceable by law for the simple reason that the parties never intended that they should be attended by legal consequences
e)
An agreement entered into by a minor can not be enforced by law
The
parties to an agreement must be competent to contract. But the question that arises now is that what parties are competent and what are not. The contracting parties must be of the age of majority and of sound mind and must not be disqualified by any law to which they are subject (sec.11). If any of the parties to the agreement suffers form minority, lunacy, idiocy, drunkenness etc. The agreement is not enforceable at law, except in some special cases e.g., in the case of necessaries supplied to a minor or lunatic, the supplier of goods is entitled to be reimbursed from their estate (sec 68).
f)
All contracts have to be in writing to become an enforceable contract.
. According to the Indian contract Act, a contract to be valid, must be in writing and registered. For example, it requires that an agreement to pay a time barred debt must be in writing and an agreement to make a gift for natural love and affection must be in writing and registered to make the agreement enforceable by law which must be observed.
Q.8 Decide the following cases. Give the reasons. A]
Ramesh promises his wife to bring a beautiful sari if she sings a song. The wife obliges and sings a song. But, Ramesh refuses to buy the sari for her. His wife Ruchi wants to sue her husband for his failure. Decide. Ans- Ruchi, wife of Ramesh cannot bring legal action against her husband Ramesh for failure of performance. The agreement lacks the intention to create legal relationship. In the family
relationship of husband and wife, there is no legal relationship. B] Srinivas agrees to pay Rs.50,000/- to Mahesh if the later brings God before him. Mahesh agrees to pay the same amount, in the event of his failure. This agreement is executed on a stamped paper, with two witnesses. Mahesh has failed to perform. Srinivas plans to go to a court of law for recovering the amount, executed on a stamp paper. Decide. Answer: The
agreement between Srinivas and Mahesh is not a valid contract. It is a void agreement as per Section 56 of Indian Contract Act, 1872 as ³An agreement to do an
impossible act in itself is void. ´ The agreement is void from the beginning as bringing God in physical form is an impossible act
Q.9 Write Notes
A] Coercion
"Coercion" is the committing, or threatening to commit, any act forbidden by the Indian Penal Code, or the unlawful detaining, or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement. (45 of 1860.) Criminal Law, Contracts. Constraint; compulsion; force. It is positive or presumed. Positive or direct coercion takes place when a man is by physical force compelled to do an act contrary to his will; for example, when a man falls into the hands of the enemies of his country and they compel him, by a just fear of death, to fight against it. It is presumed where a person is legally under subjection to another and is induced in consequence of such subjection to do an act contrary to his will. A married woman, for example, is legally under the subjection of her husband, and if in his company she commit a crime or offence, (except the offence of keeping a bawdy-house, in which case she is considered by the law as a principal), she is presumed to act under this coercion. As
will is necessary to the commission of a crime or the making of a contract, a person coerced into either has no will on the subject and is not responsible.
B] Undue
Influence
(1) A contract is said to be induced by "under influence" where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other. (2) In particular and without prejudice to the generally of the foregoing principle, a person is deemed to be in a position to dominate the will of another (a) where he hold a real or apparent authority over the other, or where he stands in a fiduciary relation to the other; or (b) where he makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness, or mental or bodily distress. (3) Where a person who is in a position to dominate the will of another, enters into a contract with him, and the transaction appears, on the face of it or on the evidence adduced, to be unconscionable, the burden of proving that such contract was not induced by undue influence shall be upon the person in a position to dominate the will of the other.
C]
Fraud
fraud is an intentional or deliberate misrepresentation of facts. According to Indian Contract Act, Fraud means and includes any of the following acts done with intention to deceive or induce a person to enter into a contract: A
The
suggestion that a fact is true when it is not so and the person making the suggestion is ware of its falsehood; Active concealment of a fact by a person who has knowledge or belief of the fact; Promise made without any intention of performing it; Any other act fitted to deceive; Any such act or commission that the law declares as fraudulent.
D] Misrepresentation
Misrepresentation refers to misstatement of a fact or material of a contract. It includes: a)Positive assertion of fact or information that is not true; b)Any breach of duty which gains an advantage to the person committing it; c)Causing a party to an agreement to make a mistake in the subject matter or substance of the agreement.
E] Mistake
Mistake is of two kinds- of fact or of law. a) Mistake of fact: There are two principles: i.Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void. Mistake in this case, arises as to the identity of the person or as to the subject matter of the contract. A mistake of fact may be either bilateral or unilateral. A bilateral or mutual mistake as to an existing fact essential to the agreement. E.g. A agrees to sell to B a specific cargo of goods supposed to be on its way from England to Mumbai. It turns out that before the day of the bargain, the ship conveying the cargo is cast away and sinks. Neither party was aware of the facts. The agreement is void. ii.Where a contract is not voidable merely because it was by one of the parties to it being under a mistake as to a matter of fact. In other words, mistake must be mutual and not unilateral. Both the parties must be labouring under such a mistake. b) Mistake of law: This provides that a contract is not voidable because it was not caused by a mistake as to any law in force in India. This is based on the maxim Ignorantia juris non excusat.
Distinguish between Mistake of law and mistake of fact. Mistake of law Mistake of fact 1. A mistake of fact vitiates a contract 1. Generally, a mistake of law does not vitiate a contract. 2. Where there is mutual mistake as to an existing fact material to the agreement, the contract is void. 2. In most cases the contract is not voidable. Q.10 State with reasons whether following statements are true or false: A]
A company is a distinct person, with its own independent identity
On incorporation under law, a company becomes a separate legal entity as compared to its members. The company is different and distinct from its members in law. It has its own name and its own seal, its assets and liabilities are separate and distinct from those of its members. It is capable of owning property, incurring debt, borrowing money, having a bank account, employing people, entering into contracts and suing and being sued separately. . B] Common seal is the signature of the company company is a artificial person and does not have a physical presence. Therefore, it acts through its Board of Directors for carrying out its activities and entering into various agreements. Such contracts must be under the seal of the company. The common seal is the official signature of the company. The name of the company must be engraved on the common seal. Any document not bearing the seal of the company may not be accepted as authentic and may not have any legal force. A
C]
A person who assumes the task of promotion of the company is called ³Promoter´
Promotion refers to the entire process by which a company is brought into existence. It starts with the conceptualization of the birth of a company and determination of the purpose for which it is to be formed. 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 (eg lawyer, CA, etc) for drawing up the agreement or other documents or prepares the figures on behalf of the promoter and who is paid by the promoter is not a promoter. A
promoter of a Company is the person who takes preliminary steps for the purpose of
formation and incorporation of a Company. association, partner or a company.
A
promoter may be an individual,
D]A private company is allowed to raise funds from the public.
In terms of Section 3(1)(iii) of the Companies Act, 1956 and articles of association of the Company, the characteristics of a Private Company are :Restricts the right of members to transfer its shares Limits the number of its members to fifty. In determining this number of 50, employeemembers and ex-employee members are not to be considered. Prohibits an invitation to the public to subscribe to any shares in or the debentures of the company Any invitation or acceptance of deposits from persons other than its members, directors or relatives is hereby prohibited. E] The certificate of incorporation can be cancelled by the Registrar of Companies, when the certificate is found irregular. The certification of incorporation is conclusive evidence about registration and
compliance of all the legal requirements. Date of certificate of incorporation is date of birth of a company. Once a company is registered, the certificate of incorporation cannot be challenged, though there may be irregularities prior to registration. A company obtains separate legal existence only after it is registered under the Companies Act. By virtue of this legal existence, the company comes into being as a separate person, distinct from the persons who form it. The company becomes a body corporate, with perpetual succession. Once company is registered, the only method to end it is through the process of winding up. T he certificate of incorporation cannot be cancelled by the Registrar of Companies, even if irregular. F] In the eyes of law, shareholders of the company are part owners.-false
company is regarded as a legal entity in its own right and , as such , its members have limited liability for its debts and obligations. The company is able to own property in its own name and issue shares to raise capital. It is able to sue debtors and similarity be sued by its creditors. besides, shareholders and directors cannot be considered as the agents or trustees of a company. Finally, a fundamental characteristic of corporate separate personality is that of perpetual succession, which results in a continuation of the company¶s existence regardless of its members. A
Q.11 Define Company. Write the essential features of a company
In common usage, µCompany¶ means an association of persons associated for some common purpose. The common object may be business, charity, research etc. The persons are united for achieving a common objective, normally, for earning profits, which are shared by the investors.
Definition of Company: Section 3 (1) (i) of the Companies Act, 1956 defines a company as: ³A
company registered and formed under this Act or an existing company. ´
The
above definition does not give clear description about the company. The definition provided by Haney gives a better view about the essential elements of a company. According to Haney, company is an incorporated association which is an artificial person created for by law, having a separate entity, with a perpetual succession and a common seal. ´ ³A
T he
characteristics of the company give a better picture about the essential elements mentioned in the above definition. Let us discuss those characteristics that describe the company, comprehensively. 1.3 CHAR ACTERIS TICS OR ESSENTIAL FEATURES OF A COMP A NY 1. Registration: A company is to be compulsorily registered under the Companies
Act.
2. Artificial Person: A company is an artificial person. ³Company is an artificial person, invisible, intangible and existing only in the eyes of law. ´ It is created under the law, not itself a human being. It is called a person as it is clothed with certain rights and obligations. 3. Separate Legal Entity: A company can enter into contracts with its directors, its shareholders and outsiders. It functions through its board of directors. A company is a distinct person, with its own independent identity. 4. Common Seal: Common seal is the signature of the company. As company is an artificial person, it is not bestowed with the body of a human being. The company has a separate legal existence through its common seal. The use of common seal is provided in the articles of association of the company. 5. Separate Property: A company can open a bank account in its name. It can exercise the entire powers incidental to the attainment of the objects of the company. A company can enter into contracts, through its board of directors. Shareholders are not, in the eyes of the law, part owners of the company. 6. Company to Sue and be Sued: A company can sue and be sued in its name. The company¶s right to sue arises as and when some loss is caused to the company. In case of breach of performance by any third party, the company can sue the third party in its name. Q.12 Discuss the case of Solomon Vs. Soloman and Co.Ltd.State the principle laid down in the said case.
One Man Company: When a single person holds almost all the shares of the company, it is called µOne Man Company¶. Such a company has a legal personality, if it complies with the necessary requirements of registration (Solomon Vs A. Solomon & Co. Ltd.). Such companies may be public or private companies. Usually, they are private companies. In Solomon Vs A. Solomon & Co. Ltd. (1897) AC 22, it has been held that in common law, a company is a µlegal person or has a legal entity separate from its members and is capable of surviving beyond the lives of its members.¶ Solomon
Vs A. Solomon &
Co.
Ltd.:
In this case, one Solomon was a shoe manufacturer. He incorporated a company named Solomon and Co. Ltd. He took over the entire business of a running concern. Solomon and theF ormation and Incorporation of Companies seven subscribers to the memorandum were he and his family members. Solomon and his two sons were the Directors of the Company. The business of the company was transferred for £30,000. Solomon took 20,000 share of 1 £ each and debentures worth 10,000 in consideration. The
Company went into liquidation, within a year. On winding up, the unsecured creditors contended that the company was not having independent existence as Solomon was the Managing Director of the company and the entire company was under his control. They further contended that Solomon was holding majority of the shares and therefore, the company was merely a sham. Their contention was that the limited firm was only a guise to conceal the real identity of the persons who own. However, it was held that Solomon and Co. Ltd. fulfilled all the requirements of the legislature. Further, it was held that the company cannot be equated with the members comprising it. The company was not the agent of Solomon. It was therefore, treated as a company, distinct and independent corporation. A company has, therefore, a separate legal existence, and is altogether a different person even from its directors and members. Corporate Veil: On incorporation, a company assumes a separate personality of its own, called the µCorporate veil¶. On incorporation, the veil is drawn between the company and its members. The advantages of the incorporation ±separate entity ± were allowed only to those who make an honest use of the µcompany¶. Lifting Corporate Veil: T here may be circumstances in which the privileges of µseparate entity, may be misused. In such cases, the court, may disregard the corporate veil. Ignoring separate entity or overlooking corporate personality is known as the phenomenon of lifting corporate veil¶. Lifting corporate veil is an exception to the decision in Solomon¶s case. In the case of dishonest and fraudulent use of the facility of corporation, the law lifts the corporate veil and identifies the persons who are behind the scene and responsible for the perpetration of the fraud. (Life Insurance Corporation of India Vs. Escorts Ltd. (1986). Overlooking the corporate personality or separate entity is known as ³the phenomenon of lifting the corporate veil. ´
Conclusion
1. The question of whether the negative aspects of the decision in Salomon's case outweigh the good ones is best left unanswered for it is far too broad. One is inclined towards the view that the principle of separate legal entity established in Salomon's case has been instrumental in the development of modern capitalism and the immense social and economic wealth which it has generated. The House of Lords extended the principle so far as to cover small private enterprises. This move has had several negative consequences over time. However, it is also true that these have been largely neutralised by joint legislative and judicial action. 2. Indeed, "the legislature can forge a sledgehammer capable of cracking open the corporate shell." And, even without statutory assistance, the courts have often been
ready to draw aside the veil and impose legal liability on members and directors where to apply the Salomon principle strictly would lead to injustice, inconvenience or damage to government finances. 3. Similarly, it should be pointed out that, following Salomon's case, all Australian jurisdictions, in a desire to ameliorate legal facilities for small commercial enterprises, introduced provisions for private companies into their corporate law. Experience since Salomon's case demonstrated that there was no reason why the benefit of limited liability should apply only to groups of business entrepreneurs. The Corporations Act takes this to its logical conclusion and sanctions the registration of one-person companies. In 1995, the First Corporate Law Simplification Act amended the Corporations Act to permit a proprietary company to be set up with one or more shareholders. Under another amendment, the minimum number of directors needed to be designated in a proprietary company was cut from two to one. Moreover, the Corporations Act states that any sort of company, not just a proprietary company, may be established with only one member and may continue to exist with only one member (section 114). It would appear then that the overall balance is positive and that the decision of the House of Lords in Salomon v Salomon & Co Ltd was a good decision.
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