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Re: Commercial Law exam Model Paper
This is the ICWA Commercial Law exam Model Paper: Q. 1. Comment on the following statements based on legal provisions : (a) A lost his dog. He sent his servant to search the dog. When he did not hear about the lost dog, he advertised a reward of ` 500 to any person who found the lost dog and returned it to A. The servant found the lost dog and returned the dog to A. When the servant came to know about the reward, he claimed the reward from A. Can he claim the reward? Give reasons. (b) A is sixteen years of age. He lends ` 1 lac to B on the strength of a mortgage executed in his favour. Is the borrower liable to repay the money? Give reasons. (c) Can a minor appoint an agent? (d) Does the endorsement of a Railway Receipt amount to Transfer of Ownership? (e) What is ‘Caveat Emptor’? (f) Gratuity can be attached by an order of the court. (g) Eligibility to Bonus depends on the period of actual service. (h) It is illegal to pay gratuity in excess of the limits prescribed in the Payment of Gratuity Act. (i) As per Industrial Disputes Act, 1947, the Charitable Institutions are not industry. (j) Bonus is payable only if there is profit. (k) A drew cheques in favour of B. A’s clerk forged B’s endorsement and negotiated the cheques to C who took them in good faith and for value. C received payment of the cheques. A claims to recover the amount from C. will he succeed? Answers 1. (a) No, the servant cannot claim the money. He acted without any information as to the offer. A person cannot accept an offer unless he is aware of it. Therefore, the offer cannot be said to have been accepted thereby resulting in a contract. Similar decision was given in Lalman Shukla v. Gauri Dutt. (b) Yes, A can recover the money from B. Though a contract with a minor is void ab initio, he is allowed to be a beneficiary in a transaction and enforce his claim. The basic logic is that a contract with a minor has been kept void only to protect his interest and not to prejudice his interest. (c) Section 183 of the Indian Contract Act permits only persons of the age of majority to employ an agent. Thus, a minor cannot appoint an agent. Revisionary Test Paper (Revised Syllabus-2008) 62 DIRECTORATE OF STUDIES, THE INSTITUTE OF COST AND WORKS ACCOUNTANTS OF INDIA (d) The question was raised in a Bombay case of Shamji v. N . W. Rly.. The High Court, in the case, ruled that endorsing a railway receipt in favour of another does not by itself, pass property in the goods to the endorsee. It merely constitutes the endorsee the agent of the consignor, to receive the goods. Such an endorsement by itself, does not constitute the endorsee either a bona fide pledge or transferee for value of the goods represented by the railway receipt. (e) Caveat Emptor is the fundamental principle of the law of sale of goods. It means ’buyers beware’ or ‘caution buyer’ (i.e. let the buyer beware). In the other words, it is no part of the seller’s duty to point out defects of his own goods. The buyer must inspect the goods to find out if they will suit his purpose. He must buy goods after satisfying himself about quality, suitability etc. If he makes a bad choice, he cannot blame the seller. (f) No gratuity payable under the Act and no gratuity payable to an employee in any establishment, factory, mine, oilfield, plantation, port, railway company or shop exempted under Section 5 shall be liable to attachment in execution of any decree or order of any Civil, Revenue or Criminal Court. (g) Eligibility to Bonus amount depends on the actual period of service of an employee provided he has worked for a minimum number of 30 days in a year. Sanctioned leave is treated as actual service. (h) False, The Payment of Gratuity Act specifies the minimum amount of gratuity payable but the right of an employee to receive better terms of gratuity under any award, or agreement or contract with the employer is protected. (i) As per Industrial Disputes Act institutions owned or managed by organisations wholly or substantially engaged in any charitable, social or philanthropic service are not covered in the definitions of “Industry”. (j) False- The Payment of Bonus Act, 1965 provides for minimum bonus of 8.33% even if a unit makes loss. (k) In his claim to recover the amount from C, A will succeed if the cheque was an order cheque, but fall if the cheque was payable to bearer. Indian Contract Act, 1872 : Q. 2. (a) An employee agrees not to institute any legal proceedings against his employer. Can the agreement be enforced by the employer? (b) “A mere mental acceptance not evidenced by words or conduct is, in the eyes of the law, no acceptance.” Comment. (c) Write a note on ‘Counter Offer’. (d) Distinguish between an ‘agent’ and a ‘servant’. Answer 2. (a) No, such an agreement is void ab initio since it constitutes restraint of legal proceedings. Section 28 of the Indian Contract Act, in this regard, provides that every agreement by which any party thereto is restricted absolutely from enforcing his rights under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals or which limits the time within which he may thus enforce his rights, is void to that extent. Thus, the agreement is question shall be void as per Section 28 and hence the employer will not be in a position to enforce the agreement. (b) One of the rules of valid acceptance is that it must be communicated to the offeror. The communication may, however, be express or implied. A mere, mental acceptance is no acceptance. A mere mental acceptance means that the offeree is assenting to an offer in his mind only and has not communicated it to the offeror. Group-I : Paper-6 : Commercial and Industrial Law and Auditing 63 DIRECTORATE OF STUDIES, THE INSTITUTE OF COST AND WORKS ACCOUNTANTS OF INDIA (c) Where the offeree, instead of unconditionally assenting to the terms of the offer, accepts subject to certain conditions, he is said to have made a counteroffer. Thus, where A offers his car to B for ` 1,00,000 and B accepts to buy A’s car for ` 80,000, B has made a counter offer. A counter offer has the effect of terminating the original offer. If in the aforesaid illustration, B later accepts to pay ` 1,00,000 for the car, it shall amount to a fresh offer by B which A may or may not accept. Similarly, where an offeree agreed to accept half the quantity of goods offered by the offeror on the same terms and conditions as would have applied to the full contract, it was held that there was no contract as there was a counter offer to the original offer. (d) There is too much of similarity between an agent and a servant as both are employed to act for and on behalf of principal. However, there is a lot of difference between the two. An agent has the authority to create contractual relationship between the principal and a third party, but a servant ordinarily has no such authority. A servant usually serves only one master but an agent may work for several principals at the same time. A servant is generally paid salary or wages, whereas an agent may be paid on commission basis. Thus, we find that an agent is not a servant though a servant may be authorized to serve as an agent. Q. 3. Write short notes on : (a) Bailee’s Lien (b) Essentials of a valid acceptance. (c) Position of the finder of lost goods. (d) Personal liability of agent. Answer 3. (a) Bailee’s right of lien is particular in certain cases whereas general in other cases. Particular Lien is conferred upon a bailee by virtue of the provision of Section 170. It reads : ‘Where the bailee has, in accordance with the purpose of the bailment, rendered any service involving the exercise of labour or skill in respect of the goods bailed, he has, in the absence of a contract to the contrary, a right to retain such goods until he receives due remuneration for the service he has rendered in respect of them.’ General Lien : The provisions of Section 171 empower certain categories of bailees to exercise a general lien. These include : bankers, factors, wharfingers, attorneys of High Court and policy brokers. These bailees can retain all goods of the bailor so long as anything is due to them, unless there is a contract to the contrary. Answer 3. (b) Essentials of a valid acceptance : (i) Acceptance must be absolute and unqualified. (ii) It must be communicated. (iii) It must be according to the mode prescribed. (iv) It must be given within the time prescribed or within reasonable time. (v) It must be in response to offer. (vi) It must be made before the offer lapses. (vii) It must be given by the person to whom the offer is made. Revisionary Test Paper (Revised Syllabus-2008) 64 DIRECTORATE OF STUDIES, THE INSTITUTE OF COST AND WORKS ACCOUNTANTS OF INDIA Answer 3. (c) Finding is not keeping. A finder of lost goods is treated as the bailee of the goods found and is, therefore, charged with the responsibilities of a bailee, besides the responsibility of exercising reasonable efforts in finding the real owner. However, he enjoys certain rights also. His rights may be summed up hereunder : 1. Right to retain the goods (Section 168). A finder of lost goods may retain the goods until he receives the compensation for money spent in preserving the goods and/or amounr spent in finding the true owner. A finder, however, cannot sue for such compensation. But, where a specific reward has been offered by the owner for the return of lost goods, the finder may sue for such reward, and may retain the goods until he receives it. 2. Right to sell (Section 169). When a thing which is commonly the subject of sale is lost, if the owner cannot, with reasonable diligence, be found or if he refuses, upon demand, to pay the lawful charges of the finder, the finder may sell it : (a) When the thing is in danger of perishing or of losing the greater part of the value; and (b) When the lawful charges of the finder in respect of the thing found, amount to 2/3 of its value. Answer 3. (d) The general rule is that only the principal can enforce, and can be held liable on a contract entered into by the agent except when there is a contract to the contrary. Sec. 230 of the Contract Act clearly lays down this rule: “In the absence of any contract to that effect, an agent cannot personally enforce contracts entered into by him on behalf of his principal, nor is he personally bound by them.” An agent is, however, personally liable in the following cases : 1. When the contract expressly provides. A person while entering Into a contract with an agent may expressly stipulate that he would hold the agent personally liable in case of breach of contract, and if the agent agrees to it, he is personally liable. 2. When the agent acts for a foreign principal (Sec. 230, para 2). When the contract is made by an agent for the sale or purchase of goods for a merchant residing abroad, the agent is personally liable. He can exclude his personal liability by express provision to this effect in the contract. If he does so, he cannot be sued on the contract. 3. When he acts for an undisclosed principal (Sec. 230, para 2). Where an agent acts for an undisclosed principal, he is personally liable though the principal, on being dlscovered by the third party, is also liable. 4. When he acts for a principal who cannot be sued (Sec. 230, para 2). Where the principal is incompetent to enter into a contract, e.g., where he is a minor or an idiot, the agent is personally liable as the credit is presumed to have been given to the agent and not to the principal. 5. Where he signs a contract In his own name. An agent who signs a contract in his own name without qualification (i.e., without disclosing that he is acting as an agent), though known to be an agent, is understood to have contracted personally, unless a contrary intention appears from the body of the instrument. 6. Where he acts for a principal not in existence. This is a rather peculiar case. The promoters of a company, yet to be incorporated, sometimes enter Into contracts on behalf of the company, though in such a case the alleged principal (i.e., the company) has no legal existence till the time of incorporation. In such a case the promoters are held to have contracted on their own account and are personally liable. 7. Where he is liable for breach of warranty of authority. Where a person professes to act as an agent but has no authority from the alleged principal or exceeds his authority, he is personally liable for breach of warranty of authority in a suit by the third party with whom he professed to make the contract [Cohen v. Wright, (1857) 7 E. & B. 301]. Group-I : Paper-6 : Commercial and Industrial Law and Auditing 65 DIRECTORATE OF STUDIES, THE INSTITUTE OF COST AND WORKS ACCOUNTANTS OF INDIA 8. Where he receives or pays money by mistake or fraud. Where an agent receives money from a third party by mistake or fraud, he is personally liable to the third party. Likewise, he has the right to sue the third party for the recovery of the money where he has paid it by by mistake or under fraud of the third party. 9. Where his authority is coupled with interest. When an agent has an interest in the subject matter of the contract entered into by him with a third party, his authority is coupled with interest. He has, in such a case, the right to sue, or be sued, but only to the extent of his interest in the subject-matter. 10. Where the trade usage or custom makes him personally liable. Where there is a trade usage or a custom making the agent personally liable, he is liable unless there is a contract to the contrary. Q. 4. (a) A’s wife B paid ` 500 to C to be given as a bribe to a jailor for procuring release for her husband from jail. The Jailor failed to procure the release. Can B recover the amount ? (b) Mr. Pal of his own promised to subscribe to Indira Gandhi Memorial Fund by 30.04.2010, but did not pay. Under the circumstances, he can be enforced – Comment. (c) Mr. X forced Mr. Y to sale Y’s house to Mr. Ex at ` 5 lakhs, the market price of which was ` 15 lakhs. (d) Distinguish between Indemnity and Guarantee. Answer 4. (a) An agreement will not be enforceable if its object or the consideration is unlawful. According to Section 23 of the Act, the consideration and the object of an agreement are unlawful if the court regards it as immoral or opposed to public policy, an agreement whose object or consideration is immoral or is opposed to the public policy, is void. In the given case, as the agreement is unlawful, being opposed to public policy, is void. So, B cannot recover the amount. Answer 4. (b) False. Consideration is essential element of contract without which no promise can be enforced. Therefore a gratuitous promise to contribute to Indira Gandhi Memorial Fund can not be enforced. However if the promisor knew the purpose and also knew that on the faith of such promise, certain obligations are incurred, the promisor would be bound by the promise. Answer 4. (c) It is a case of voidabe contract. In this case Mr. Y at his option can avoid the contract. However if ‘Y’ wants he can enforce it against Mr. ‘X’. Answer 4. (d) A contract by which one party promises to another to compensate him for loss is a contract of Indemnity. A contract to perform the promises or discharge the liability is a contract of Guarantee. Basic points of differences are Indemnity Guarantee There are two parties viz. the indemnifier and the indemnified. There are three parties viz. the creditor, the principal debtor and the surety (or Guarantor) Indemnifier’s liability is primary and independent. Surety’s liability is secondary i.e. it arises only on default of principal debtor. Indemnifier’s right is contingent. Surety’s liability is subsisting. It is a simple contract i.e. one contract. It is composite in nature i.e. 3 contracts. Revisionary Test Paper (Revised Syllabus-2008) 66 DIRECTORATE OF STUDIES, THE INSTITUTE OF COST AND WORKS ACCOUNTANTS OF INDIA Q. 5. (a) A sells his grocery business, including goodwill, to B for a sum of ` 50,000. It is agreed that A is not to open another grocery store in the whole of India for the next ten years. A opens another store in the same city two months later. What are the rights of A? (b) A made a contract with B supplying to him certain goods at a place outside the State when there was no prohibition against sending the goods outside the State. Subsequently prohibition was imposed on the sending on those goods to that place and the railway booking was consequently closed. A failed to supply the goods. B sued A for damages for non-supply of goods. A, inter alia, pleaded that the contract becomes impossible of performance and so he was absolved from performing it. Will A succeed in his said defense? (c) A, B and C jointly promise to pay D ` 5,000. A and B are untraceable. Can D compel C to pay him in full? (d) A promises to sell and deliver on the 5th of January a lorry to B. The parties have stipulated that time should be the essence of the contract. A delivers the lorry only on the 5th of February. Explain what are the rights of B against A in this case. Suppose B desires to accept the belated delivery and also to claim compensation for loss occasioned by the non-performance of promise at the time agreed. Advise B as to whether he can achieve these two objectives. Answer 5. (a) As per Section 27 of The Indian Contract Act, every agreement, by which anyone is retained from exercising a lawful profession, trade or business of any kind, is to that extent void. Exception to Section 27 provides that the seller of the goodwill of a business may agree with the buyer to refrain from carrying on a similar business, within local limits, so long as the buyer or any one deriving title to the goodwill from him carries on alike business, provided that such limits are reasonable. In the given case, as the limits agreed regarding place as well as time is not reasonable, the agreement is void. So, B cannot take any legal action against A. Answer 5. (b) According to Section 56, impossibility of performance may fall into either at the time of agreement or arising subsequent to the formation of contract. Impossibility which arises subsequent to the formation of a contract (which could be performed at the time when the contract was entered into) is called postcontractual or supervening impossibility. In such a case, the contract becomes void when the act becomes impossible or unlawful. Impossibility of performance of a contract, as a general rule, is no excuse for the non-performance of the contract, but where this impossibility is caused by the circumstances beyond the control of the parties, the parties are discharged from further performance of the obligation under the contract. In the given case, the contract is void and A is absolved from performing it. It is for the reimbursement of the loss if any on the happening of a contingency. Indemnity Guarantee It is for the security of the creditor, Guaranteed by the surety of an existing debt. The indemnifier cannot sue the third party in his own name unless there is an assignment in indemnifier’s favour. If there is no such assignment, the idemnifier must bring the suit in the name of indemnified. The surely can proceed against the principal debtor in his own right. Group-I : Paper-6 : Commercial and Industrial Law and Auditing 67 DIRECTORATE OF STUDIES, THE INSTITUTE OF COST AND WORKS ACCOUNTANTS OF INDIA Answer 5. (c) As per Section 43 of The Indian Contract Act when two or more persons make a joint promise and there is no express agreement to the contrary, the promisee may compel any one or more of the joint promisors to perform the whole of the promise. This means the liability of joint promisors is joint and several. So, in the given case, D can compel C to pay him in full. Answer 5. (d) In a contract, in which time is of the essence of the contract, if there is a failure on the part of the promisor to perform his obligation within the fixed time, the contract (or so much of it as remains unperformed) becomes voidable at the option of the promisee (Sec. 55, para 1). If, in such a case, the promisee accepts performance of the promise after the fixed time, he cannot claim compensation for any loss occasioned by the non-performance of the promise at the agreed time. But if at the time of acepting the delayed performance, he gives notice to the promisor of his intention to claim compensation, he can do so (Sec. 55, para 3). In the given case B can repudiate the contract. In the latter case, B may accept the delivery and also claim compensation if he gives notice of his intention to do so. Q. 6. (a) A agrees to sell to B a horse for ` 20,000 if it wins a race and for ` 500 if it does not. The horse wins the race. Advise the parties if — i. B refuses to pay ` 20,000 and buy the horse ii. A refuses to sell the horse to B iii. B agrees to buy the horse for ` 10,000 (b) A sold some land to B. At the time of sale both parties believed in good faith that the area of the land sold was 10 hectares. It, however, turned out that the area was 7 hectares only. How is the contract of sale affected? Given reasons. (c) H who was badly in need of money offered to sell his piano worth ` 5,000 to C for ` 4,000. C refused to buy. H gradually lowered his price until ` 1,000 was reached, which C accepted. Before the piano was delivered, H received an offer of a larger sum from T, and he refused to carry out the contract with C, claiming that the consideration was inadequate. Is H liable to pay damages to C for failure to carry out his part of the contract? (d) A offers, by a letter, to sell a certain articles to B who receives the letter the next day. B immediately posts his letter of acceptance. The same evening A posts a letter revoking the offer. A’s letter of revocation and B’s letter of acceptance cross in the post. Is there a contract between A and B? Answer 6. (a) A wager is an agreement between two parties by which one promises to pay money or money’s worth on the happening of some uncertain event in consideration of the other party’s promise to pay if the event does not happen. As per Section 30 no suit can be brought for recovering anything alleged to be won or any wager, or entrusted to any person to abide by the result of any game or other uncertain event on which any wager is made. In the given case, as the agreement is a wager, the effect will be as follows : i. A cannot compel B to buy the horse and pay ` 20,000 ii. B cannot compel A to sell the horse iii. A is not bound to sell the horse. Answer 6. (b) |
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