Mercantile Law Short Notes by Syed Ali Raza

Paper B-5... CA, Module-B

Mercantile Law

SUBJECT: BUSINESS LAW (from book written by Khalid Mehmood Cheema) Contract Act 1872 1. Offer { sec 2(a) } 2. Acceptance { sec 2(b) } 3. Consideration { sec 2(d) } 4. Agreement { sec 2(e) } 5. Reciprocal promises {sec 2(f) } 6. Void Agreement { sec 2(g) } 7. Contract { sec 2(h) } 8. Voidable Contract { sec 2(i) } 9. Void Contract { sec 2(j) } Contract:sec 2(h): An agreement enforceable by law is contract 1. Agreement 2. Enforceability •

Essentials for a Valid contract ( section 10) 1. Offer and Acceptance 2. legal relationship 3. Lawful Consideration 4. Capacity of Parties(section 11) 5. Free Consent (section 14) 6. Lawful Object 7. Writing and Registration 8. Certainty of Terms (section 29) 9. Possibility of Performance 10. Not 10. Not Expressly Declared Void Kinds of Contract The contract can be divided according to enforceability, formation, and performance. Enforceability 1. Valid Contract 2. Void Contract{sec(j)} 3. Void Agreement{sec(g)} 4. Voidable Contract {sec(i)} 5. Unenforceable Contract 6. Illegal Agreement (section 23) Formation 1. Express contract (section 9) 2. Implied contract (section 9) 3. Quasi contract Performance 1. Executed contract 2. Executory contract Unilateral contract Bilateral contract •

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Mercantile Law

OFFER AND ACCEPTANCE OFFER : sec 2(a) Section 2(a) defines a proposal as, “When one person signifies to another his willingness to do or to abstain from doing any thing, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal. Essentials for valid Offer : 1. It may Express or Implied 2. It must create legal relations 3. It must be definite and clear 4. It is different from invitation of offer 5. It may be Specific or General 6. It must communicated to the Offeree 7. It should not contain negative conditions 8. It may be subject to any conditions 9. It must not contain cross offer Revocation of Offer : 1. Notice of Revocation 2. Lapse of time 3. Failure to fulfill Condition 4. Death or insanity of Offeror 5. Revocation of Offer by Offeree 6. Death or insanity of Offeree 7. Counter offer by Offeree 8. Subsequent Illegality 9. Destruction of subject matter 10. Failure to Accept according to Mode ACCEPTANCE : sec 2(b) Section 2(b) defines acceptance as follows: When the person to whom proposal is made signifies his assent thereto, the proposal is said to b e accepted. A proposal when accepted becomes a promise (agreement). Essentials for a Valid Acceptance : 1. It must given by the Offeree 2. It must absolute and unconditional 3. It must be in prescribed Manner 4. It must be communicated to the Offeree 5. It may be express or implied 6. It must follow the offer 7. It must be given within reasonable time


Mercantile Law CONSIDERATION

Consideration : sec 2(d)

sec 2(d) of contract Act define consideration as, “When at the desire of the promisor, the promisee or any other person has done or o r abstained from doing, or does or abstains ab stains from doing, or promises to do or abstain from doing something, such act or abstinence or promise is called a consideration for promise.” Essentials for a Valid Consideration

1. 2. 3. 4. 5. 6.

It must be given at the desire de sire of the promisor It may move form the promisee or any other Person It may be any Act, Abstinence or Promise It may be Past, Present or Future It need not be sufficient It must be real

Exception to Consideration :

1. 2. 3. 4. 5. 6.

Agreement on Account of Natural Love and Affection Agreement for compensate for Past Voluntary services Agreement to pay a Time-Barred Debt Agreement to give something as Gift Agreement to Act as Agent Agreement to Remit by the Promisee

UNLAWFUL OBJECT or CONSIDERATION :

“According to section 23 the consideration or object of an agreement is unlawful in the following cases: 1. 2. 3. 4. 5. 6.

If it is Forbidden by Law If it Defeat the Provision of any Law If it is Fraudulent It it involves Injury to Person or property of another If the court regard it as Immoral If the court regards it as opposed to Public Policy


Mercantile Law

CAPACITY OF PARTY CH# 4 SECTION 11 : “ Every person is competent to contract who is of age of majority according to the law to which he is subject, and who is of sound mind, and is not n ot disqualified from contracting by any law to which he is subject.” ( 1. Minor, 2. Person of unsound mind, 3. Person disqualified by law.) MINOR According to the Majority Act, 1875, a minor is a person who has not completed 18 years of age. Where a guardian of minor's or property has been appointed under the guardian and ward Act or court of ward has taken charge c harge of minor's property, a minor will attain the age o f majority after 21 years of age. •

Nature of Minor Agreements : 1. Void Agreement 2. Minor and Confirmation 3. Minor and Estoppel 4. Minor and Repayment 5. Minor and Necessaries 6. Agreement by Guardian on behalf of Minor 7. Minor can be a Promisee or Beneficiary 8. Minor as an Agent 9. Minor as a Partner 10. Surety for a Minor 11. Minor as a member of a Company 12. Minor and Insolvency 13. Contract by Minor and Adult jointly 14. Position of Minor Parents 15. Minor and Negotiable Instruments PERSON OF UNSOUND MIND Section 12 defines the term sound mind as: “A person is said to be of sound mind for the purpose of contract if, at the time when he makes it, he is capable c apable of understanding it, and of forming a rational judgment as to its effect upon his interests. A person who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind. A person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind.” Causes of Unsoundness of Mind Effect on Agreement ……….. Burden of Proof •

DISQUALIFIED PERSONS The following are the persons who are disqualified from contracting due to political, Professional or legal status, etc.(sec.11) 1. Joint Stock Company 2. Diplomatic Agent 3. Alien Enemies 4. Insolvent 5. Convict •


Mercantile Law FREE CONSENT

Consent : Section 13 of the Contract Act, define the term Consent as, “Two or more than two person said to consent when they agree upon the same thing in the same sense.” Free Consent : Section 14 lays down that Consent is said to be free when it is not caused by coercion, undue influence, fraud, misrepresentation, or mistake. Coercion : Section 15 defines coercion as follow: “Coercion is the committing or threatening to commit, any act, forbidden by the Pakistan Penal Code, or the unlawful detaining, or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causin g any person to enter into an agreement.”

This definition can be analyzed as follows: 1. Committing of an Act 2. Detaining of Property 3. Threat against third party 4. Enforcement of Pakistan Penal Code Effect of Coercion, Burden of proof Undue Influence : Section 16(1) define: “A contract is said to be induced by undue 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.” Fraud : Section 17 define: “Fraud means and includes any an y of the following acts committed by a party to a con tract, or with his connivance, or by his agent with intent to deceive another party thereto or his h is agent or to induce him to enter into the contract”: 1. The suggestion , as a fact, of that which is not true, by one who does not believe it to be true; 2. the active concealment of a fact by one having knowledge or belief of the fact; 3. A promise made without any intention of performing it; 4. Any other act fitted to deceive ; and 5. Any such act or omission as the law specially declares to be fraudulent.

As per section 17, there is fraud in the following cases. 1. Suggestion regarding facts 2. Active Concealment of fact 3. Promise without Intention of Performing 4. Any Act with Intention to Deceive 5. Any Act or Omission


Mercantile Law

MISREPRESENTATION : (SEC 18) According to section 18 Misrepresentation means and includes:

1. The positive assertion in a manner not warranted b y the information of the person making it, of that which is not true, though he believes it to be true; 2. Any breach of duty which without an intent to deceive, gains an advantage to the person committing it, or any one claiming under h im, by misleading another to his prejudice or to the prejudice of anyone claiming under him; 3. 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. As per section 18, there is misrepresentation in following cases: 1. Unjustified Statement 2. Breach of duty 3. Mistake about Subject matter Bilateral Mistake : (sec 20) “where both the parties to an agreement a greement are under a mistake as to the matter of fact, essential to the agreement, there is a bilateral mistake and the agreement is void. The following conditions must be fulfilled to avoid a contract on o n the ground of mistake. Bilateral mistake may be be of any of the following types. 1. Mistake Regarding the existence of subject matter 2. Mistake regarding the identity of the subject matter 3. Mistake regarding the ownership of subject matter 4. Mistake regarding the quantity of the subject matter 5. Mistake regarding the quality of the subject matter 6. Mistake regarding the fact essential to the agreement Unilateral Mistake : sec 22 When in a contract only onl y one party is at mistake regarding the terms of the agreement, the mistake is a unilateral Section 22 provides that “ A contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact”. Effect of unilateral mistake on different contracts: 1. Valid contract 2. Voidable contract 3. Void Agreement Mistake regarding the identity of person Mistake regarding the nature of the contract Mistake of Law : 1. Mistake of Pakistani Law (sec 21) 2. Mistake of Foreign Law (sec 21) • •


Mercantile Law

CONTINGENT AND QUASI CONTRACTS Contingent Contract: “A contingent contract is a contract is a contract to do or not to do something, if some event, collateral to such contract does or does not happen.” Collateral Event : The collateral event means connected event. The collateral event is not the part the consideration but in fact, a part the contract. Performance of Contingent contracts: 1. Happening of an event 2. Non-happening of an event 3. Depending on Future conduct 4. Happening of an event within fixed time 5. Non-happening of an event within fixed time 6. Happening of an impossible event Difference between contingent and wagering contract: 1. Validity 2. Interest 3. Uncertain Event Quasi Contract : Quasi contracts are based on the principle p rinciple of equity and justice. It is simply states that no body shall be allowed to become b ecome rich at the cost of another. ano ther. In such contracts there is no face to face agreement. However, the law imposes the obligations of a contract. Such o bligations are generally described as quasi contracts. These are a lso called constructive contracts. Kinds of Quasi Contracts: 1. Supply of necessaries 2. Payment by an Interested Person 3. Liability to pay for Non-Gratuitous Acts 4. Responsibility of Finder of Goods( duties and rights) 5. Liability under Mistake or Under Coercion


Mercantile Law

PERFORMANCE OF CONTRACTS

“The fulfillment of legal obligations created under the co ntract by both the promisor and the promisee is said to be performance of contract”. Performance of a Single Promise: Who can demand Performance 1. Promisee 2. Legal representatives Who may perform 1. The promisor himself 2. The promisor or his agent 3. The legal representatives 4. The third person •

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Performance by joint promises: Who can demand performance 1. Promisee 2. Legal Representatives Who may perform 1. All promisors must jointly fulfill the promise 2. Any one of joint promisor may be compelled to perform 3. Each promisor may compel for contribution 4. Sharing of loss by default in contribution 5. Effect if release if one joint promisor •

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Assignment of Contracts: “An assignment means a transfer by a party to a contract of some or all of his rights under the contract, to a person who is not a party to the contract. The party making the assignment is the assignor, and the person whom the assignment is made is the assignee. Rules 1. 2. 3. 4. 5.

regarding Assignment: Personal nature Consent of promisee Impersonal nature Operation of law Legal and Illegal Reciprocal Promises

Reciprocal Promises: “Promises which form the consideration for each other are called reciprocal promises.” Rules of Performance: 1. Mutual and Concurrent (simultaneously performance of promises) 2. Conditional and dependent 3. Mutual and Independent (one party part y perform his promise independently) 4. Where a party prevents performance


Mercantile Law

Time and Place of Performance: 1. Where no time is specified and no Application made 2. Where time is specified but no Application made 3. Where time is specified and Application made 4. Where no place is specified and no Application is made 5. When manner and time is prescribed by the promisee Effect of failure to perform : 1. When time is essence 2. When time is not essence of contract 3. Acceptance of delayed performance Appropriation of Payments: When a debtor owes several distinct debts to a creditor and makes all the payment, which is insufficient to discharge the debts the question arises to which debt the payment is to be applied. The rules are: 1. Appropriation by debtor 2. Appropriation by creditor 3. Appropriation by law 4. Principal and interest due Contract not Need be Performed: 1. Termination by agreement 2. Remission by promisee 3. Voidable contracting 4. Refusal to accept performance


Mercantile Law

DISCHARGE OF CONTRACT

“When the rights and obligations arising out of a contract come to an end, end , the contract is said to be discharged or terminated.” A contract ma y be discharged in any of the following ways: 1. Discharge by Performance • •

Actual performance Tender

2. Discharge by Agreement • • • • •

Novation Alteration Rescission Remission Waiver

3. Discharge by Subsequent Impossibility • • • • •

Destruction of subject matter Failure of Ultimate purpose Death or Personal Incapacity Change of law Declaration of war

4. Discharge by laps of time(limitation act 1908) 5. Discharge by operation of law • • •

Insolvency Merger (inferior right and superior right) Unauthorized material Alteration

6. Discharge by Breach of contract • •

Actual breach Anticipatory Breach: 1. Express Breach 2. Implied Breach


Mercantile Law

INDEMNITY AND GURANTEE Contract of Indemnity: “A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself or by the cond uct of any other person is called a contract of indemnity.” Rights of Indemnity holder Rights of Indemnifier Contract of Guarantee: “A contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default.” The person who give the guarantee is called the surety or guarantor. The person to whom the guarantee is given is called the creditor. The person in respect of whose default the guarantee is given is called the principal debtor. Essentials Features: 1. Secondary contract 2. Consideration 3. No Misrepresentation 4. writing not necessary Kinds of Guarantee: 1. Specific guarantee 2. Continuing guarantee Rights of surety: 1. Rights against the creditor Right to securities Right to claim set-off 2. Rights against the principal debtor Right of subrogation Right to indemnify 3. Rights against co-sureties Similar amount Different amount • •

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Discharge of Surety from Liability: 1. Notice of revocation 2. Death of surety 3. change in term of contract 4. Release or discharge of principal debtor 5. Arrangement without surety's consent 6. Creditor's act or omission 7. Invalidation of the contract of guarantee


Mercantile Law

BAILMENT AND PLEDGE Contract of Bailment: “A bailment is the delivery of goods by b y one person to another for some purpose, pu rpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed off according to the directions of the person delivering them.” Essentials Features: 1. Contract 2. Specific purpose 3. Delivery of goods 4. No change of ownership 5. Return of same goods\ Kinds of Bailment: 1. benefit For the benefit of bailor for the benefit of the bailee For the benefit of the bailor and bailee 2. Reward Bailment without reward Bailment for reward Duties of Bailor: 1. Duties to disclose faults 2. Duty to repay necessary expenses 3. Duty to repay Extra-ordinary expenses 4. Duty to Indemnify for Demanding back 5. Duty to Indemnify for defective title 6. Duty to receives back the goods Rights of Bailee: 1. Right to claim damages 2. Right to recover expenses 3. Right to Deliver goods 4. Right to compensation 5. Right to stop delivery 6. Right to sue 7. Right to Lien Duties of Bailee: 1. Duty to take reasonable care 2. Duty not to make unauthorized use 3. Duty not to mix the goods 4. Duty to return the goods 5. Duty to return increase Rights of the Bailor: 1. Right to claim damages 2. Right to demand return of goods 3. Right to claim increase 4. Right to terminate bailment 5. right to sue • • •

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Mercantile Law

Termination of Bailment: 1. Expiry of time 2. Accomplishment of purpose 3. Unauthorized used 4. On death 4. Termination by bailor 5. Destruction of subject matter Finder of lost goods: “ A person who finds goods belonging to another and take them into his custody is subject to the same responsibility as a bailee”. Duties of Finder: 1. Duty to find out the owner 2. Duty to take reasonable care 3. Duty not to use the goods 4. Duty not to mix the goods Rights of Finder: 1. Right to retain 2. Right of lien 3. Right to sue third person 4. Right to sue for reward 5. Right of sale

PLEDGE OR PAWN “The bailment of goods as security for payment of a debt or performance of a promise is called pledge”. Essentials of Pledge: 1. Movable property 2. Limited interest 3. Transfer of Possession 4. No transfer of ownership 5. Not mere custody Rights of Pledgee: 1. Right to retain 2. Right to retain for other debts 3. Right to Extraordinary expenses 4. Right to sue and sell Duties of Pledgee: 1. Take reasonable care 2. Not make an authorized use 3. Not mix the goods 4. Returned the goods 5. deliver and profit Rights of Pledgor: 1. Right to redeem 2. Right to claim damages 3. Right to claim increase 4. Right to redeem the debt Duties of Pledgor: 1. Duty to compensate 2. Duty to complete


Mercantile Law CONTRACT OF AGENCY

“A contract which creates the relationship of principal and agent is called an agency.” Essentials of Agency: 1. Agreement 2. who can be principal 3. who can be agent 4. Consideration not necessary 5. Intention Kinds of Agent: 1. General Agent 2. Special Agent 3. Universal Agents 4. Mercantile Agent 5. Factor 6. Commission Agent 7. Del Credere Agent 8. Broker 9. Auctioneer 10. Indenter 11. Banker 12. Advocate Creation of Agency: 1. Agency by express agreement 2. Agency by Implied agreement Agency by Estoppels Agency by Holding out Agency by necessity 3. Agency by ratification 4. Agency by operation of law • • •

Ratification:196 Where acts are done by one person on behalf of another, but without his knowledge or authority, he may elect to ratify or to disown such act, if he ratifies theme , the same effect e ffect will be follow as if they had been performed by his authority. Where a principal affirms or adopts the unauthorized act of his agent he is said to have ratified that act there comes into existence ex istence an agency by ratification retrospectively. Essentials/Conditions for a valid ratification: 1. Existence of principal(at the time of agent act) 2. The act to be ratified must be lawful one 3. Principal capable of being ascertained(principal must be named or identifiable) 4. Principal must have full knowledge of material fact of section 198.


Mercantile Law

5. Principal must be competent to contract 6. Whole transaction must be ratified 7. Ratification must be made within reasonable time 8. Ratification must not injure a third person Duties of Agent: 1. Duty to follow principals directions or customs 2. Duty to work with reasonable skill & Diligence 3. Duty to render accounts 4. Duty to communicate in Difficulty 5. Duty to termination of Agency 6. Duty not to deal on his own account 7. Duty to pay all sums 8. Duty not to make any secrete profit 9. Duty not to delegate Authority Rights of Agent: 1. Right to retain 2. Right to receive remuneration 3. Right of lien 4. Right to be indemnified 5. Right to be indemnified for act done in good faith 6. Right to compensation for injury 7. Right of stoppage of goods in transit Rights of Principal: 1. Right to recover damages 2. Right to obtain secrete profit 3. Right to refuse to indemnify Agent Duties of Principal: 1. Duty to indemnify for lawful acts 2. Duty to indemnify for acts done in good faith 3. Duty to Indemnify for Injury caused by Principals Neglect Termination of Agency: 1. Agreement 2. Revocation by Agent 3. Revocation by Agent 4. Completion of Business 5. Expiry of Time 6. Death of Principal or Agent 7. Insanity of the Principal or Agent 8. Insolvency of Principal 9. Destruction of subject matter 10. Principal or Agent become Alien Enemy 11. Change of law


Mercantile Law

CONTRACT OF SALES OF GOODS SALES OF GOODS ACT 1930 (66 sections) “A contract whereby the seller transfers or agree to transfer the property in goods to the buyer for the price”. Essentials: 1. Contract 2. Two parties 3. Transfer of property 4. Goods 5. Price 6. Sale and agreement to sell 7. Other formalities Distinction between Sales and Agreement to sale 1. Transfer of property 2. Types of goods 3. Nature of rights 4. Risk of loss 5. Consequences of breach 6. Right of resale 7. Insolvency of buyer 8. Insolvency of seller 9. Nature of contract Kinds of Goods: 1. Existing goods Specific goods Ascertained goods Unascertained goods 2. Future goods 3. Contingent goods • • •

Destruction of goods: 1. Physical destruction 2. Lost their commercial value 3. Loss of goods by theft 4. Lawfully requisitioned by the govt. Effect of goods before formation of contract: 1. Perishing of goods before formation of contract Perishing of the whole of the goods Perishing only a part of the goods 2. Perishing of goods before sale but after agreement to sell 3. Perishing of Future and contingent goods • •


Mercantile Law

Fixation of Price: The money consideration for a sale of goods is known as price. Modes of Fixing the Price: 1. Parties 2. Agreed manner (on particular date or by third person) 3. Course of dealing (market price price on date on contract) 4. Reasonable price ( depends on circumstances of each case: on the day of order)


Mercantile Law

CONDITIONS AND WARRANTIES Condition: A condition is a stipulation essential to the main purpose o f the contract, the breach of which gives to a right to treat the contract as repudiated.sec 12(2)e.g quality, Warranty: A warranty is a stipulation collateral to the main purpose of the contract, the breach of which gives rise to a claim for damages but bu t not to right to reject the goods and treat the contract as repudiated. e.g time, place ets Distinction b/w Condition and Warranty: 1. Value 2. Basis 3. Breach 4. Treatment 5. Option Condition treated as Warranty: 1. Option by Buyer 2. Acceptance of goods by buyer Express and implied Conditions and Warranties: Implied Conditions: 1. Condition as to title 2. Sale by description 3. Sale by sample 4. Sale by sample as well as by Description seller, seller’s skill, skill, 5. Condition as to fitness or quality ( buyer should inform the seller, 6. Condition as to Merchantability 7. Condition by custom 8. Condition as to Wholesomeness Implied Warranties: 1. Quiet Possession 2. Freedom from Encumbrances 3. Usage of trade (fading of color within week... p ay damages) 4. Disclosure of Dangerous Goods

must be of description) description)

Doctrine of Caveat Emptor: Means let the buyer beware according to this principle it is the duty of the buyer bu yer to be careful while purchasing goods of his requirement. Exceptions of Doctrine of caveat Emptor: 1. Purchase by Description 2. Purchase by sample and description 3. Fitness for purpose 4. Merchantable quality 5. Usage of trade 6. Purchase by sample 7. Consent by fraud 8. Consent by Misrepresentation


Mercantile Law

TRANSFER OF PROPERTY Means transfer of ownership of goods. Rules regarding transfer of property: 1. Transfer of property in Specific or Ascertained goods (when the parties want transfer it) Goods in a deliverable state Goods to be put into a deliverable state Goods to be measured, tested ets Goods delivered on Approval (give acceptance, retain the goods beyond reasonable • • • •

time)

2. Transfer of property in unascertained and future goods (when goods of that description in deliverable state are unconditionally appropriated to the contract, either by seller with the assent of buyer and vice versa.)

Sale by non-owner: Only true owner of the goods can sell the goods. The maxim ‘memo dat quod non habit’ means that no one can transfer a better title that he himself possesses. Exceptions to the rule of sale by non-owner: 1. Person not the owner (in the presence of true owner) 2. Mercantile agent 3. Joint owner 4. Person in possession in voidable contract 5. Seller in possession after sale 6. Buyer in possession before sale 7. Unpaid seller 8. Finder of lost goods 9. Pledgee 10. Exceptions under other Acts In case of insolvency of individual and Co , the official receiver can transfer a better title) In case of negotiable instruments, the holder in due course gets a better title than that of transferor.


Mercantile Law

PERFORMANCE OF CONTRACT OF SALE If contract is silent the rules contained in the sale of Goods Act applies: Deliver of Goods: Delivery means a “voluntary transfer of possession from one person to another” Modes of Delivery: 1. Actual delivery 2. Symbolic delivery (means of obtaining possession of goods is delivered) 3. Constructive delivery (change in possession of goods without any cahnge in the custody) Rules of Delivery of Goods: 1. Duties of buyer and seller 2. Delivery and payment 3. Mode of deliver 4. Effect of part of delivery 5. Demand of delivery 6. Place of delivery (place where they are at the time of sale, agreement to sell, for future goods where manufacture or produce)

7. Time of delivery 8. Possession by third party 9. Expenses of delivery 10. Wrong delivery 11. Installment delivery 12. Delivery to carrier 13. Delivery at distant place 14. Examining the goods 15. Acceptance of delivery (inform about acceptance, does any act , lapse of reasonable time) 16. Rejection of goods 17. Refusal to take delivery Rights of Buyer: 1. Right to take delivery 7. Right to sue for price 2. Right to reject 8. Right to sue for performance 3. Right to cancel 9. Right to sue for breach of warranty 4. Right to notice of insurance insurance 10. Right to cancel the contract 5. Right to examine 11. Right to sue for interest 6. Right to sue for damages Duties of buyer: 1. Duty to accept the goods 2. Duty to apply for delivery 3. Duty to demand delivery 4. Duty to take risk of deterioration 5. Duty to inform the seller 6. Duty to take delivery 7. Duty to pay price 8. Duty to pay damages


Mercantile Law

NEGOTIABLE INSTRUMENTS(Negotiable Instruments Act, 1881.

According to section 13(1) of Negotiable instruments “means a promissory note, bill of exchange or ch eque payable either to the order or bearer.” Characteristics: 1. Easy Transferability 2. Right of the holder 3. Better Title to transferee 4. Unconditional promise or order 5. Certain Amount 6. Presumptions (consideration, date, time of acceptance, stamp, holder in due course.) Promissory Note: “A promissory note is an instrument in writing containing an unconditional u ndertaking, signed by the maker, to pay pa y on demand or at a fixed or determinable future time a certain sum of money only to, or to the order o rder of, a certain person, or to the bearer of the instruments.”

Essentials. 1. 2. 3. 4. 5. 6. 7. 8. 9.

In writing Promise to pay Unconditional promise Signed by Maker Certain Maker Certain Payee Certain Sum Pakistani Currency Other formalities( date, stamped, lawful consideration, place)

Bill Of Exchange: “A bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person pe rson to pay on demand or at a fixed or determinable future time a certain sum of money only onl y to, or to the order of, a certain person or to the bearer of the instrument.” Essentials: 1. In Writing 2. Unconditional Order 3. Signed by Drawer 4. Certain Drawee 5. Certain Payee 6. Certain Sum 7. Pakistani Currency 8. Other Formalities( date, stamped, lawful consideration, place)


Mercantile Law

Distinction b/w Promissory note and Bill of Exchange 1. Number of Parties 2. Maker and Payee 3. Promise and order 4. Nature of Liability 5. Maker’s Position 6. Liability of Drawer 7. Payable to bearer 8. Acceptance 9. Notice of Dishonor 10. Payable to maker 11. Copies 12. Protest 13. Certain provisions(presentment for acceptance & acceptance for hono ur) CHEQUE: “A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand.” Essentials: 1. In Writing 2. Unconditional Order 3. Signed by Drawer 4. Payable on Demand 5. Certain sum 6. Payable to bearer or order Distinction b/w Cheque and Bill of Exchange 1. Drawee 2. Payable on demand 3. Payable to bearer on demand 4. Acceptance 5. Grace Days 6. Stamp 7. Crossing 8. Noting or Protest 9. Stopping the payment 10. Notice 10. Notice of Dishonour Types of Crossing 1. General Crossing 2. Special Crossing Account payee crossing Not Negotiable crossing Classification of Negotiable Instruments 1. Inland Instrument 2. Foreign Instrument • •


Mercantile Law

3. Bearer Instrument 4. Order Instrument 5. Ambiguous Instrument 6. Amount different in figures from words 7. Instrument payable on demand 8. Inchoate instrument 9. Time Instrument 10. Fictitious Bill 11. Accommodation Bill 12. Undated Bill 13. Bank Draft 14. Bill in Sets 15. Documentary Bill 16. Clean Bill 17. Trade Bill 18. Escrow Payment in Due Course: “Means payment in accordance with the apparent appa rent tenor of the instrument in good faith and without negligence to any person in possession thereof under circumstances which do not afford a reasonable ground for believing that he is not entitles to receive payment p ayment of the amount therein mentioned.”


Mercantile Law

PARTIES TO NEGOTIABLE INSTRUMENT Holder: Sec 8 “The holder of promissory note, bill of exchange o r cheque means the pa yee or endorsee who is in possession of it or the bearer thereof but it does not include a beneficial ben eficial owner claiming though a benamidar.” Conditions: 1. Entitled to Possess 2. Entitled to receive the amount 3. Entitled to negotiate 4. Entitled to sue Holder in Due Course: Sec 9 Means any person who for consideration becomes the possessor of a promissory note, bill of exchange or cheque if payable to bearer, or the payee or thereof, if payable to order, before it became overdue, without notice that the title of the person from whom he derived his own title was defective. Conditions for Holder in due Course: 1. Holder 2. Lawful Consideration 3. Holder before Maturity 4. Complete and regular 5. Holder in good faith Privileges( for holder in due course) 1. Better title 2. Transfer of good title 3. Incomplete stamped instrument 4. Prior Parties 5. Fictitious bill 6. Conditional Instrument 7. Validity of Instrument 8. Payee’s Incapacity to Indorse 9. Capacity of prior Parties Join holders Drawee in case of Need (alternative drawee name may be mentioned) Acceptance for Honour: Conditions: Bill must be noted or protested for non-acceptance or for better security A person desiring to protest for honour must, b y writing on the bill, under his hand, declare that he accepts ac cepts under protest, the protested bill for the hon our of the drawer or of a particular endorser whome he names or generally for honour. The party giving acceptance for honour should not be one who already liable thereon on the bill. • •

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Mercantile Law

Capacity of Parties: 1. Minor 2. Insolvent 3. Person of unsound mind 4. Joint stock company 5. Partner 6. Agent 7. Legal representative Liabilities of 1. 2. 3. 4. 5. 6. 7. 8. 9.

Parties: Drawer Drawee of cheque Maker of note and acceptor of bill Indorser Prior parties to a holder in due course Maker, drawer and acceptor as principals Prior parties to subsequent party Accommodation party Surety ship


Mercantile Law

PRESENTMENT OF NEGOTIABLE INSTRUMENT

Means presenting a negotiable instrument for acceptance, sight, or payment before acceptor, maker, drawee or other party liable thereon b y or on behalf of the holder. Presentment for Acceptance (in bill of exchange only) Presentment for Sight Presentment for Payment • • •

Presentment for Acceptance: Following bills must be presented for acceptance: 1. A bill payable at a specified period after sight must be presented for fix the maturity date of the bill. 2. A bill in which there is an express stipulation that it shall be presented for acceptance before presentment for payment. Acceptance: Acknowledgment of the sum mentioned in a bill by the drawee or an y other person on his behalf. Essentials of valid Acceptance: 1. It must be written. 2. It must be signed by the drawee or his agent. 3. It must appear on the bill. 4. It must be deliver to the holder. ho lder.

Types of Acceptance: 1. General Acceptance 2. Qualified Acceptance Who can Present Who can Accept Time of presentment Place of presentment Presentment for acceptance Necessary

Presentment for acceptance Un-necessary Where drawee is dead or insolvent or fictitious person or a person not having capacity to contract. Drawee cannot, after reasonable search be found. Where presentment is irregular, acceptance has been refused on some other ground. •

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Presentment for Sight: showing of promissory to the maker for his knowledge. Presentment for Payment: On default of such presentment the maker, acceptor or drawee, as the case may be, is not liable to pay.


Mercantile Law

NEGOTIATION OF NEGOTIABLE INSTRUMENT

A negotiable instruments may be transferred in either of the following wa ys: By Negotiation By Assignment • •

1. Transfer by Negotiation: When a promissory note, bill of exchange, or o r cheque is transferred to any person, so as to constitute that person the holder thereof, the instrument is said to be negotiated. ne gotiated. Modes of Negotiation: Negotiation by delivery Negotiation by Endorsement and Delivery • •

2. Transfer by Assignment: The ownership may be transferred by “assignment” by written and registered document in accordance with the transfer o Property Act. Difference b/w Negotiation and Assignment: Formalities Notice of Transfer Title Consideration Sue • • • • •

ENDORSEMENT: “When the maker or the holder of negotiable instrument signs the same, otherwise than as such maker, for the purpose of negotiation, on the back or face thereof or on a slip of paper annexed thereto, or so signs or for the same purpose a stamped paper intended to be completed as negotiable instrument, he is said to indorse the same, and is called c alled endorser”. Essentials of Valid Endorsement. 1. Signature of holder 2. Stranger cannot indorse 3. It must be back or the face of the instrument or on a slip of paper annexed thereto, such a slip is called allonge. 4. Must be made in INK.(not pencil) 5. Illiterate person may indorse the instrument by affixing his thumb impression . 6. If by thumb impression , then it should be attested by somebody. 7. It must be made with with the intention of transferring transferring the instrument to a third person person so as to give the right to recover money due under it. 8. The intention must be clearly expressed thereon. 9. It must be completed by the delivery of the instrument. Kinds of Endorsement: 1. Blank Endorsement

Paper B-5... CA, Module-B 2. 3. 4. 5. 6. 7.

Mercantile Law

Full Endorsement Partial Endorsement Restrictive Endorsement Conditional Endorsement Sans Recourse Endorsement Facultative Endorsement

Instruments Obtained by Unlawful Means: 1. Lost instrument 2. Stolen instrument 3. Instrument obtained by fraud 4. Instrument obtained for an unlawful consideration 5. Forged instrument 6. Forged endorsement 7. Instrument without consideration


Mercantile Law

DISHONOUR OF NEGOTIABLE INSTRUMENTS “When the drawee refuses to accept it or to make payment”

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Dishonour by Non-Acceptance Dishonour by Non-Payment

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Effect of Dishonour( holder become entitled)

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Notice of Dishonour

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Notice by whom( holder, agent, party liable on inst, to all parties parties by receiving party) party)

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Notice to whom( except maker of note, acceptor of bill, drawee of cheque)

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Mode of Notice ( oral or written, by post)

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Reasonable time

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Place of Notice

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Notice of dishonour Unnecessary

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NOTING: Noting is the authentic and official proof of p resentment and dishonour of negotiable instrument. When the bill or note has been dishonour by non-acceptance or by b y non payment , the holder may cause such dishonour d ishonour to be noted b y Notary Public upon the instrument, or on paper attached thereto. Notary public makes a demand for acceptance or payment upon the drawee or acceptor or maker formally and on his h is refusal to do so notes the same on the bill or note. PROTEST: Protest is the formal certificate of dishonour issued by the notary public to the holder o f the bill or note, on h is demand. Notary is merely a record of dishonour on the instrument itself. It is a proof that a bill or note was presented for acceptance, payment, for better security but was dishonour. Protest for Better Security: When the acceptor of bill become insolvent, the holder may not wait up to maturity of the bill. He may demand better security to ensure its p ayment on due date. Compensation for Dishonour ( 6% interest) Dishonestly issuing a cheque


Mercantile Law

Discharge of parties from Liability: 2. Cancellation 3. Release 4. Payment 5. Allowing Drawee 6. Delay in presentment of cheque 7. Cheque payable to order 8. Draft by one Bank on another 9. Accepting Qualified acceptance 10. Operation of law 11. Material Alteration 12. Payment of altered instrument 13. Notice 13. Notice of dishonour 14. Non-presentment 14. Non-presentment for acceptance of a Bill


Mercantile Law

CARRIAGE OF GOODS BY SEA

The law relating to carriage of goods by sea is contained in the Bill Of Lading Act.1856 and Carriage of Goods by Sea Act, 1925. Contract of Affreightment : The contract to carry goods by b y sea is called a contract of affreightment. The consignor and the ship owner are the two parties to the contract. The consideration paid for the carriage is c alled freight. The contract of affreightment may be inco rporated in a formal document containing the terms of the agreement. Such document is called charter Party. Charter Party: A charter party is an agreement in writing for the purpose of hiring of the whole ship or a part thereof for the purpose of carriage of foods. The person who hires the ship is called the charter. Kinds of Charter Party : 1. Voyage Charter Party 2. Time Charter Party 3. Charter by Demise Clauses of Charter Party: 1. Names of the Parties and the ship 2. Class of charter party 3. Class of the ship 4. Now at 5. Seaworthiness and the fitness 6. Port of Lading 7. Full and complete cargo 8. Lay days and demurrage 9. Payment of freight 10. Ship owner’s Lien 11. Cesser clause 12. Excepted Perils clause 13. Delivery of goods in the usual manner Mate Receipt : When the goods are delivered to the ship for carriage , a receipt called mate receipt is issued by the mate of the ship. It is an acknowledgment that goods have been received on board the ship. It is provisional receipt which is subsequently exchanged for a regular bill of lading. Bill Of Lading: “A bill of lading is a document issued by master of the ship or the ship-owner or other agent in exchange of mate's receipt after the goods are placed on board the ship”.


Mercantile Law

Contents of Bill of Lading: 1. Stamped and signed 2. Leading marks necessary for identification of the goods 3. Number of packages or pieces or the quantity, or weight in writing by the shipper 4. Statement about condition of goods 5. Name of the ship, the port of shipment, port of delivery and the person to whom w hom delivery is to be made 6. Excepted peril clause 7. Amount of freight Feature of Bill of Lading: 1. It is an acknowledgment of the receipt of the goods on the boar the ship. 2. It contains the terms and conditions of the carriage of goods. 3. It is a document of title of the goods. good s. It enables the holder to obtain delivery of the goods. 4. It is a semi negotiable instrument. It can be transferred freely by enforcement and delivery. Kinds of bill of Lading: 1. Clean bill of lading 2. Qualified bill of lading 3. Through bill of lading Difference between Bill of Lading and Charter Party:

1. A bill of lading is an evidence e vidence of the receipt of the goods on board the ship. 2. A bill of lading is a document do cument of title to the goods. 3. A bill of lading is transferable by endorsement and delivery. 4. A bill of lading is always for a particular destination. 5. A bill of lading does not no t amount to a lease of the ship.

1. A charter party is a contract con tract relating to the hiring of the ship. 2. A charter party is not a document of title to the goods. 3. A charter party is not transferable. 4. A charter party may be for a particular voyage or for a particular time. 5. A charter party may amount to a lease of the ship.

Duties of a Carrier by Sea: 1.The carrier shall be bound before and at the beginning of the voyage to exercise due diligence to: Make the ship seaworthy; Properly man equip and supply the ship; Make the holds, refrigerating and cool chamber ch amber and all other parts of the ship shi p fit and safe for reception, carriage and preservation. 2. The carrier must carefully load, handle, stow, carry keep, care for and discharge the th e goods carried. 3. After receiving the goods the carrier must issue a bill of lading. Liabilities of Carrier by Sea : 1. Liable for loss 2. Cannot limit his liability 3. Shall not be liable unless the nature and value of the goods are declared by the shipper in the bill of lading. • • •


Mercantile Law

4. Shall not be liable if nature and value has been misstated by the shipper in the bill of lading 5. Danger goods loaded without the consent of carrier, they can be landed or destroyed at any place and no compensation shall be paid to the shipper 6. Shall be discharged from all liability for loss unless suit is brought within one year after delivery of the goods. 7. The carrier is not responsible for loss due to unavo idable circumstances. Right of stoppage in Transit: The shipping company is not required to deliver the goods to the holder holde r the bill of lading if the consignor, in exercise of his right of stoppage in transit give instructions not to deliver the goods. Maritime lien: A maritime lien is claim on a ship, cargo and freight in respect of services rendered to them. Law on subject gives this right to all freight in respect of render some service to save the ship or cargo in time of danger. They can recover their charges from the ship owner of cargo-owner. Until such charges are cleared , the ship is not allowed to leave the harbour and court may order for sale of the ship or cargo in favour of the holders of maritime lien. Bottomry Bond: When a ship needs urgent repair during voyage and it is not possivle for the captain of the ship to negotiate with the ship owner to arrange for the funds for the repairs, it becomes unavoidable for the Captain to borrow money on the security of the ship and cargo. When the master raises the money on the security of the ship and cargo, the contract is called Bottomry Bond. Respodentia Bond: When master of the ship raises money on the security of cargo only, the contract is called Respodentia Bond. The special quality of these bonds is that such loan would be payable only when the ship reached destination d estination safely.


Mercantile Law LAW OF PARTNERSHIP st

Law of Partnership is contained in the Partnership Act 19 32, which came into force on 1 day of October 1932. It extend to the whole of Pakistan. Sec 3 Definition : According to section 4, “Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all”. Characteristics : 1. Legal Entity 2. Agreement 3. Number of Partners 4. Existence of Business 5. Sharing of Profits 6. Mutual Agency 7. Unlimited Liability 8. Capital 9. Utmost Good faith 10. Management 11. Control 12. Transfer of Interest 13. Duration Advantages : 1. Ease of formation 2. More capital 3. Better Management 4. High credit standing 5. More Interest 6. Useful Employees 7. Public relations 8. Flexibility 9. Protection to Minorities 10. Protection to minor 11. Quick decision 12. Sharing of risk 13. Possibility of Expansion 14. Business secrets 15. Spirit of cooperation 16. Personal supervision 17. Ease of dissolution


Mercantile Law

Disadvantages : 1. Unlimited liability 2. Risk of Dissolution 3. Possibility of disagreement 4. Limited Resources 5. No transfer of shares 6. Lack of Public confidence 7. Lack of Authority 8. Lack of Harmony 9. Lack of Secrecy 10. Authority of Partners 11. Loss of opportunities 12. Possibility of Fraud Partner : sec 4) “A person who have entered into partnership with one another are called individually partners. Generally, the partner means a person who has agreed to share the profit of the business. Firm : “The person who have entered en tered into partnership with one another are called collectively a firm. A firm is collective name of the individuals forming it. A firm cannot posses property. It cannot sue or be sued. It is only for convenience, convenienc e, we use the terms like firm's property, suit against the firm and so on. Firm's Name : “The name under which partners carry on their business is called the firm's name”. The p artner can choose any name according to the following rules: 1. The name must not identical or similar to the name of existing firm. 2. It must not contain the words GOVT, JINNAH, QUID-e-AZAM, or words showing the approval or patronage of the federal govt or any provincial govt, without the consent of the provincial govt. 3. It must not contain the name of United Nation or abbreviations of its subsidiary body without the sanction of secretary General of the UNO. 4. It must not contain the name World Health Organization or its abbreviations without the sanction of the Director-General of WHO. 5. - - - - - - - - - - - - - - - - - - - - - which may be declared by the provincial p rovincial Govt, as undesirable. Ideal Partnership: 1. Mutual Understanding 2. Common purpose 3. Good faith 4. Sufficient capital 5. Long duration 6. Number of partners 7. Written Agreement 8. Registration


Mercantile Law

Kind of Partners : 1. Active Partner 2. Sleeping Partner 3. Nominal Partner 4. Senior Partner 5. Junior Partner 6. Partner in Profits Only 7. Secret Partner 8. Minor Partner ( a. Position during minority, b .Position after Majority, c. When he decides to becomes a partner , d. when he decides not to become a partner Co-ownership : Co-ownership refers to joint ownership in a property. If some property owned jointly without any intention to carry on a business, it is called co-ownership. Distinction b/w Partnership & Co-ownership 1. Agreement 7. Business 2. Agency 8. Partition 3. Lien 9. Refund 4. Transfer of Interest 10. Sharing of o f Profits 5. Common Interest 11. Regulation 6. Number of members Partnership Deed : A partnership can be formed by b y oral or written agreement. It is better to have a written agreement. The partnership agreement in writing is called partnership deed. It contains the rights and duties of the members. Contents Of Partnership deed: 1. Name of partnership 2. Nature of business 3. Town and place of business 4. Amount of capital 5. Name and addresses of the Partners 6. duration of partnership 7. Ratio of sharing profits and losses 8. Rate of interest on capital 9. Loans and advances to the th e firm by partners and rate rate of interest 10. Rate of interest on drawing 11. drawing per month or per year 12. Amount of salary or commission payable to partner 13. Manner to dissolve and division of partnership property 14. Right, duties and liabilities of partners 15. Treatment of goodwill 16. Provision regarding the accounting system and the financial year 17. rules of deal of retirement, death, and admission ad mission of partner 18. Method of solving disputes among the partners


Mercantile Law

19. Power of partner to retire after giving notice 20. rules to determine amount due to deceased partner. 21. In the case of breach of duty by one partner, power of other partners p artners to expel him from firm. 22. Keeping of proper books of accounts and preparation of accounts 23. Any other provision to prevent any future misunderstanding and dispute Types of Partnership : The following of two main types of Partnership. 1. General Partnership : a: Partnership-at-Will(section 7). No provision about duration. b: Particular Partnership(section 8). For a pa rticular business 2. Limited Partnership : (regulated and controlled by Limited Partnership Act 1907.) One or more partners have limited liability and at least one of the partners has unlimited liability. REGISTRATION OF FIRM : Optional Registration : The registration of partnership is not compulsory. If the partners so desire they ma y get their firm registered. The unregistered firm suffer from number of problems. Meaning of Registration : The registration of firm only a proof of the ex istence of the firm. It does not provide an y legal entity to the firm. Procedure of Registration : 1. Submission of Application (name of the firm, principal place, other places where firm carries on business, name and addresses of partners, partners date of joining, duration of firm if any.) 2. Certification 3. Changes of particulars 4. Penalty for 5. false Particulars Effect of Non-Registration : 1. Suit by Partner 2. suit by firm 3. Suit by firm against partner 4. Suit by third party 5. No claim for Adjustment Exceptions: 1. Third party can sue 2. Partner can sue for dissolution 3. Partner can sue for accounts of a dissolved firm 4. Partner can sue for realization of property of dissolved firm 5. Dissolved firm can sue to recover damages for breach of contract 6. The firm and its partners can sue third party for adjustment of claim up to Rs. 100 7. The receiver of insolvent partner can sue for the realization of insolvent share 8. The partner can refer disputes to the arbitrator


Mercantile Law

Advantages of Registration : 1. Advantages to firm 2. Advantages to the partners 3. Advantages to the Creditors Rights of Partners : 1. Right to take part in Business 2. Right to express opinion 3. Right of inspect to books 4. Right to share the profit 5. Right to interest on capital 6. Right to interest on Advances 7. Right to be indemnified 8. Right to Act in emergency 9. Right to give consent 10. Right to retire 11. Right to not be Expelled 12. Right to carry on competing business 13. Right to share in profits or interest 14. Right to bind other partners 15. Right to enforce Duties of Partners : 1. Duty to carry on Business 2. Duty to just and faithful 3. Duty to render Accounts 4. Duty to Provide information 5. Duty to Indemnify 6. Attend Diligently 7. Share losses 8. Indemnify for willful Neglect 9. Use firm's property for the firm 10. Account for personal profits 11. Account for Profits 12. be 12. be liable individually & jointly 13. Not 13. Not to transfer his rights Liabilities of Partners : 1. Liability of a Partner for Acts of the firm 2. Liability of the firm for the Wrongful Act 3. Liability of the firm for Misapplication Implied Authority : It means the authority of the partner to bind the firm by his act under law. Reconstitution of Firm : 1. Introduction of Partner (incoming partner) Liability of incoming partner

Paper B-5... CA, Module-B 2. 3. 4. 5.

Mercantile Law

Retirement of Partner (retiring partner ) Liability of retiring partner Expulsion of Partner Insolvency of Partner Death of Partner

DISSOLUTION OF FIRM : Dissolution of partnership is different from dissolution of a firm. When one partner dies, retires or become insolvent but the remaining partners continue the business, it is called dissolution of the partnership. When the relationship between all the partners p artners comes to an end and the business is closed, it is called dissolution of firm. It means that the dissolution of the firm includes the dissolution of partnership, but the dissolution of partnership may or may not include the dissolution of the firm. Grounds of Dissolution of Firm : 2. Dissolution by Agreement 3. Compulsory dissolution 4. Contingent dissolution 5. Dissolution by notice 6. Dissolution by the court: a. b. c. d. e. f. g.

Insanity Permanent Incapacity Misconduct Breach of agreement Transfer of interest Continues losses Just and Equitable

Consequences of Dissolution: Following are the: Rights of Partners of Dissolution 2. Application of Property 3. Utilization of Assets 4. Personal profit 5. Demand of premium 6. Agreement based on fraud and misrepresentation 7. Restraint from use of firm’s name or form property Liabilities of partners on dissolution: 1. Partner on dissolution 2. Continuing authority 3. Personal profits Settlement of Accounts upon dissolution: 1. Sale of goodwill 2. Sharing of deficiency 3. Order of application of assets 4. Payment of firm debts and separate debts


Mercantile Law LAW OF TRUST

TRUST ACT, 1882 A trust is an obligation annexed to the ownership of property and arising out of confidence reposed in and accepted by the owner or declare and accepted by him, for the benefit of another and the owner. Trustee Settler Beneficiary Trust property Instrument of trust Classification 1. 2. 3. 4. 5. 6. 7.

of trust: Public or charitable Private Express Implied Constructive Executed Executory

Purpose of trust: 1. Fraudulent 2. Forbidden by law 3. If permitted ,...defeat the provision 4. Involves any injury to the person 5. As immoral 6. Opposed to public policy Declaration of trust: Immovable property.......declared by non-testamentary non -testamentary instrument Movable property........declared as aforesaid or unless the ownership of property is transferred to the trustee. Creation of Trust: When the author of the trust indicates ind icates with reasonable certainty by words or acts; 1. The intention on his part to create it 2. The purpose of property 3. The beneficiary 4. The trust property Who may create a trust: Every person competent to contract With the permission of a principal civil court of original jurisdiction, by or on behalf of minor. • •

Who may be beneficiary:


Mercantile Law

Person cable of holding property Who may be a trustee: Every person capable of holding property, prope rty, where trust involves the exercise the discretion, it is necessary that he must be a person competent to contract. Duties of Trustee: 1. Duty to fulfill the purpose 2. Duty to acquaint 3. Duty to protect the title 4. Duty not to set up title adverse to beneficiary 5. Duty to exercise reasonable care 6. Duty to convert perishable property 7. Duty to be impartial 8. Duty to prevent waste 9. Duty to maintain accounts 10. Duty to invest Liabilities of 1. 2. 3. 4.

Trustee: Personally liable and his estate after his death Liable for interest in addition to the damages More trustees than one , liability is joint and several Not liable for default of his predecessor and for d efault of his co-trustees

Rights of Trustee: 1. Right of possession (instrument of trust & all other documents) 2. Right of reimbursement 3. Right of lien ( pays out of pocket) 4. Right of indemnify 5. Right to apply to court 6. Right to settlement of accounts Power of trustee: 1. Power to sell 2. Power to convey 3. Power to vary investments 4. Power to apply property 5. Power to give receipts 6. Power to copound Disability of trustee: 1. Renunciation of trust (perm of civil court, beneficiary, special power reserved in Instrument of trust) 2. Delegation of office (sec 47) ( it it can, instrument provides, absolutely necessary, ordinary course of business, consent of beneficiary beneficiary if he is competent to to contract ) 3. Execution of trust (sec 48) (all co-trustee)

4. Right of remuneration (50) 5. Use of trust property (sec 51)


Mercantile Law

6. Purchase of trust property. (sec 52, 53) 7. Lend of trust property (sec 54) (should not lend to one of himself on mortgage or personal security)

8. Court may control discretionary power of trustee Vocation of the office of Trustee: Sec 70 1. By his death 2. By his discharge from his office which arises: By extinction of the trust Completion of his duties By such means as may be described by the instrument By appointment of new trustee under this act By consent of beneficiary, or by more beneficiary if, competent to contract By court to which a petition for his discharge is presented under this ACT.sec 71.72 • • • • • •

Extinction of Trust: sec 77 conditions when the trust is extinguished; 1. Purpose completely fulfilled 2. Purpose become unlawful 3. Fulfillment become impossible 4. When trust being revocable, is expressly revoked\ Revocation of Trust: 1. Trust created by will may be revoked at the pleasure of the author of the trust 2. A trust may be revoke: When all the beneficiaries are competent to contract Trust declared by non-testamentary instrument or by words of mouth in exercise of power of revocation expressly ex pressly reserved to the auther of trust. Trust is for payment of debts of the author, and has not been communicated to the creditors at the pleasure of the auther of trust. • •

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Appointment of New Trustee: sec 73 In the following situations; 1. Appointment on death of trustee Trustee dies Appointed disclaim More than 6 months absents from country Leave country for staying abroad Declared insolvent Trustee refuses or becomes unfit or incapable to a ct Accepts inconsistent trust 2. Appointment by court (when it is impracticable to appoint new trustee under section 73) • • • • • • •

Who can appoint:

Paper B-5... CA, Module-B 1. 2. 3. 4.

Mercantile Law

Person nominated for that purpose by instrument Author of the trust if survives Surviving trustee or the legal representative of such last trustee Retiring trustee with the consent of the court

Rules for appointment: In appointing new trustee the court shall have regard to:sec 74 1. Wishes of the auther of trust express in instrument 2. Wishes of person if any, empowered to appoint a new trustee 3. The question whether the appointment will promote or impede the execution of trust 4. When there are more beneficiaries than one, to the interest of all such beneficiaries ben eficiaries

Mercantile Law Short Notes by Syed Ali Raza

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