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Akshey Kumar

RAVI found a purse in a computer education centre. He deposited the purse with proprietor of the centre so that the real owner can claim it. However, no one claimed the purse. Ravi wants the purse back. Can he succeed?

This is one of the questions in the December 2002 business law and management paper of the Institute of Company Secretaries of India. The paper covers the Indian Contract Act, the Indian Partnership Act, the Sale of Goods Act and the principles of management.

Coming back to the case of the lost purse, yes, Ravi will succeed. The proprietor of the computer education centre is in the position of a bailee. Section 160 provides that it is the duty of the bailee to return or deliver the goods bailed without demand, as soon as the time for which they were bailed has expired or the purpose for which they were bailed has been accomplished. If the purpose for which goods bailed is not accomplished, the bailee is liable to return the goods to the bailor.

While tackling questions on business laws, candidates must be clear about the concepts. Incorporating the relevant provisions and decided case law, no doubt, lends weightage to the answers. As regards principles of management, presentation plays an important role. As the paper tends to be lengthy, candidates must be brief and to the point to ensure full justice to all the questions attempted.

What follows are the model answers to the paper:

True or false

ALL void agreements are not illegal: True. All illegal agreements are void but all void agreements are not necessarily illegal — for example, an agreement with a minor is void but not illegal. Moreover, an illegal agreement not only vitiates the primary transaction but also collateral transactions.

Acceptance can be made even without the knowledge of the offer: False. Section 2(b) of Indian Contract Act specifically provides that when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted.

A minor cannot enter into a contract: True. Section 11 states that a person is incompetent to contract if he is a minor according to the law to which he is subject.

Partnership is an extension of the principle of agencies: True. Section 18 provides that a partner is the agent of the firm for the purposes of the business of the firm. Thus the true test in determining whether a partnership exists or not is to see whether the relationship of principal and agent exists between the parties (Cox vs Hickman).

A private company prohibits an invitation to the public to subscribe for any of its shares or debentures of accept deposits: True. (Section 3 (1)(iii))

Distinguish between

FRAUD and misrepresentation: In fraud (Section 17), there is an intention to deceive (Derry vs Peak) and the person making the false statement does not believe it to be true. The aggrieved party can rescind the contract besides claiming damages. In certain cases, fraud can be a criminal action and punishable under the Indian Penal Code. In misrepresentation (Section 18), there is no intention to deceive, it is an innocent wrong, the aggrieved party cannot claim damages and the contract is also not voidable if the deceived party had the means of discovering the truth with ordinary diligence.

Void contract and voidable contract: A contract which ceases to be enforceable by law becomes void. A contract may be enforceable at the time when it was entered into but later on it may become void due to certain reasons. For example, a contract may become void by subsequent impossibility (Section 56) or when a voidable contract is made void by the aggrieved party when his consent is not free.

An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract (Section 2(i)). Thus, a voidable contract is one which may be repudiated at the will of one of the parties but until it is so repudiated, it remains valid and binding. The presence of flaw or vice (coercion, undue influence, misrepresentation, fraud) enables the aggrieved party to avoid the contract.

Sale and hire purchase: Besides referring to the study material, the observations of Supreme Court, in K. L. John & Co. vs Deputy Commercial Tax Officer, delineating the difference between sale and hire-purchase agreement are noteworthy. "The essence of sale is that the property is transferred from the seller to the buyer whether paid at once or paid later in instalments. On the other hand, a hire-purchase agreement has two aspects: first, the aspect of bailment of goods subject to the hire-purchase agreement; and second, an element of sale which fructifies when the option to purchase is exercised by the intending purchaser. Thus, a sale is an executed contract in which ownership is transferred as soon as the contract is made. In a hire-purchase agreement, the hire-purchaser remains a bailee till he becomes owner by paying agreed number of instalments.

No consideration

SECTION 25 declares that an agreement without consideration is void. This means that consideration is a must in all cases. There are some exceptions where an agreement is valid even without consideration. These are agreements borne out of natural love and affection between parties standing in near relation to each other (Rajluckhy Debee vs Bhootnath Mookerjee), promise to compensate a person who has voluntarily done something for the promisor, promise to pay time-barred debts, completed gift, and a contract of agency (Section 185).

Caveat emptor

A LATIN term, caveat emptor means `let the buyer beware'. The principle is contained in Section 16 of the Sale of Goods Act, which states that there is no implied warranty or condition as to the quality or fitness for any particular purpose of goods supplied under a contract of sale. Since the rule is too harsh, the law has laid down certain exceptions, such as: i) implied condition as to quality or fitness (Grant vs Australian Knitting Mills), ii) implied condition as to merchantability, iii) implied condition as to quality or fitness for a particular purpose annexed by the usage of trade, iv) implied conditions as to wholesomeness; and v) consent obtained by fraud.

Partnership registration

REGISTRATION of partnership is not mandatory as it is basically created by an agreement between two or more persons. However, an unregistered firm and its partners suffer from various disadvantages as spelt out in Section 69.

Crossed cheque

THE money deposited by a customer can be withdrawn by a cheque. Payment of a cheque by banker will depend upon whether the cheque is open or crossed. Crossing is the drawing of two parallel transverse lines with or without any words across the face of the cheque. Crossing compels the holder to present the cheque through a banker and affords protection and security to the true owner of the cheque as the cheque is payable through a banker only. There are two statutory types of crossing — general (Section 123) and special (Section 124). The payment of a cheque bearing general crossing is always made through some banker. Where a cheque is crossed specially, the banker on whom it is drawn shall not pay it otherwise than to the banker to whom it is crossed or his agent for collection (Section 126).

The words `not negotiable' may be added to general or special crossing, the effect of which is that the cheque loses the feature of negotiability. There is another type of crossing — restrictive crossing — which has developed out of business usage. In this type of crossing, the words "Account payee" are added to the general or special crossing. This does not restrict further negotiability of the cheque but is intended to protect the drawer against theft or loss.

(To be concluded)

(Suggested answers to the December 2002 ICSI (Foundation, New Syllabus) paper on business laws and management.)

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