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Mercantile Law
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Q. 1. (a) Distinguish between:

(i) Void and Voidable Contracts

Void Contract

Voidable Contract

It is void from its very inception; it becomes void

subsequent to the happ-ening of certain reasons.

It remains valid till it is repudiated by the aggrieved


It is valid and binding on the parties when made,

but subsequently beco-mes unenforceable.

A contract is voidable if the consent of a party is not


It cannot be enforced by any party.

If the aggrieved party so decides, the contract may

continue to be valid and enforceable.

Third party does not acquire any rights.

An innocent party in good faith and for consideration

acquires good title before the contract is avoided.

Lapse of time will not make it valid.

If its not avoided within reasonable time then
it may become valid.

Question of damages does not arise.

The aggrieved party may claim damages.

(ii) Void and Illegal Contracts


Void Agreement
All void agreements are not necessarily
To a void agreements are not affected, that do
not become void.
If a contract void sub-sequently the benefit
received has to be restored to the other party.

Illegal Agreement
All illegal agreements are void.
Collateral transactions to an illegal agreement is
also affected, they also become void.
The money advanced or thing given cannot be
claimed back.

(b) Define the term Offer. Discuss the essential elements of a valid offer.
Ans.There must be a definite offer by one party and its unconditional acceptance by the other so as to make a
contract valid. A person is said to have made an offer, when a person signifies his readiness to do or to abstain from



doing something with a view to obtain the consent of the other party. An offer may be general or specific offer. A
specific offer is when the offer is made to a specific person and when it is made to the world at large it is known as
a general offer. An offer may be made expressly by words, spoken or written, or it may be implied when it is inferred
from the conduct of the parties or circumstances of the case.
For an offer to be valid, the following conditions must be fulfilled:
(i) It must intend to create legal relations;
(ii) The terms of offer must be certain and unambiguous;
(iii) It must be distinguished from a mere declaration of intention;
(iv) It must be distinguished from an invitation to offer;
(v) It must be communicated;
(vi) It must not contain a term the non-compliance of which would amount to acceptance;
(vii) Special terms of the offer must be communicated along with the offer.
Cross offer takes place when, similar offers are made by two parties to each other, in ignorance of each other's
offer. They do not amount to acceptance. Where an offer is of a continuous nature (tender) it is referred to as a
standing offer. It is treated equivalent to an invitation to an offer.
The offer is said to have been accepted when the person to whom an offer is made gives his consent thereto, and
based on which the offer is converted into a promise. Only the person to whom the offer has been made can accept
in through express or implied means.
For an acceptance to be valid, the following conditions must be fulfilled:
(i) It must be absolute and unqualified;
(ii) Must be in the prescribed manner;
(iii) Must be communicated;
(vi) Must be communicated by an authorized person;
(v) Must be given within the time prescribed or within a reasonable time;
(vi) Must be given before the offer lapses.
It is very important that the communication of acceptance is complete:
(i) As against the offer, when it is put in a course of transmission to him so as to be out of the power of the
(ii) As against the acceptor, when it comes to the knowledge of the offerer.
The offer can only be revoked before the acceptor posts his letter of acceptance but not after such time. It can
also be revoked at any time but before such letter of acceptance reaches the offer however not later.
Q. 2. What is breach of a Contract? Explain the various remedies available to the aggrieved party for
breach of Contract.
Ans. A breach of contract occurs if any of the party fails or refuses to perform his part of the contract or by his
act makes it impossible to perform his obligation under the contract. The aggrieved party is discharged from performing his obligation in case of breach. The breach of contract may arise in two ways, namely, (a) anticipatory
breach and (b) actual breach.
In case when a contract is broken by a party, then the other party has the following remedies available with it, namely:
(i) Rescission of the contract: Section 39 of the Act states that when a party to a contract has refused to
perform, or disabled himself from performing his promise in its entirety, the promisee may put an end to the contract.
This further discharges the aggrieved party from all the obligations under the contract.
However, Section 75 also provides that the person rightfully rescinding the contract can make a claim for the
compensation of any loss or damage sustained through the non-fulfilment of the contract.
(ii) Suit for damages: The aggrieved party also has the right to claim for damages apart from rescinding the
contract. It can also be said that, damages are the monetary compensation allowed for loss suffered by the aggrieved
party due to the breach of the contract. The object of damages is that the aggrieved party is put in the financial
position which would have existed had there was no breach of the contract and also to punish the party at fault.



The leading case Hadley v. Baxendale is used as the basis for the judgments for the rules pertaining to damages.
As per the case; His mill was stopped due to the breakdown of a shaft, he delivered the shaft to B, a common carrier,
to be taken to a manufacturer to copy it and make a new one. H had not made it known to B that delay would result
in loss of profits. By some neglet on part of B, the delivery of the shaft was delayed in transit beyond a reasonable
time. It was held that B was not liable for loss of profits during the period of delay.
Section 73 deals with the compensation for loss or damage caused by breach of contract is based on the above
case, which states that the aggrieved party may claim damages as follows:
(a) Such damages which naturally arose in the usual course of things from such breach. This relates to ordinary
damages arising in the usual course of things.
(b) Such damages which the parties knew, when they made the contract, to be likely to result from the breach.
This relates to special damages.
(c) The above compensation is not to be given for any remote or indirect loss or damage sustained by reason
of the breach, and
(d) Such compensation of damages arising from breach of quasi-contracts shall be same as in any other contract.
(iii) Suit for specific performance: Where the aggrieved party is not interested in damages or in monetary
compensation, then in that case, the court may direct the defaulting party to carry out the promise according to the
terms of the contract, which is referred to as 'specific performance' of the contract.
(iv) Suit for injunction: Where the party is in breach of a negative term of a contract, the court may be the issue
of an order, prohibit him from doing so. This court order is referred to as injunction.
(v) Suit upon Quantum Meruit: This remedy provides for certain exceptions on the basis of quantum meruit.
The right of claiming the payment for work already done, before the repudiation of the contract or its further
performance becoming impossible is called the right to quantum meruit.
Q. 3. (a) Discuss the circumstances under which a contract without consideration is valid.
Ans. According to Section 10 of the Act, consideration is an important element for a contract to be valid. It also
states that all contracts have two parts, namely (a) the promise, and (b) the consideration for the promise. It has been
added in Section 25 of the Act that any contract without consideration is treated as void.
The person who makes a promise to do or to abstain from doing something usually does so as a return for some
loss, damage, or inconvenience that may have or may have been occasioned to the other party in due respect of the
promise. As per the law the consideration for the promises is regarded as the benefit so received or the loss, damage,
inconvenience so caused. It is based on the principle of 'No Consideration No Contract'.
The above argument is illustrated through a leading case of Abdul Aziz v. Mazum Ali, where a person verbally
promised the Secretary of the Mosque Committee to subscribe Rs. 500 for rebuilding of a mosque. Later, he declined
to pay the same amount. Therefore, it was held that there was no consideration and thus the agreement was void.
However, Section 185 of the Indian Contract Act states that there are certain exceptions to the above rule, that is,
there are certain cases were a contract without consideration is treated as valid. And thus are enforceable by law.
These circumstances include:
(i) Agreements in Writing and Registered: An agreement without consideration is considered valid if it is:
(a) Expressed in writing;
(b) Registered under the law currently in force;
(c) Made on account of natural love and affection; and
(d) Is between parties standing in a near relation to each other. (Leading Case: Venkataswamy v. Rangaswamy;
Rajlakhi Devi v. Bhootnath)
However, for the agreement to be valid under this clause the agreement must be the result of natural love and affection.
(ii) Promise to Compensate: According to Section 25(2) of the Act, a promise made without consideration is valid if:
(a) it is a promise to compensate (wholly or in part);
(b) the person to be compensated has already done something voluntarily, or has done something which the
promisor was legally compellable to do.



For example, A supports B's infant son without asking. B promises to pay A's expenses for doing so. This is
treated as a contract.
(iii) Promise to pay a debt barred by limitation act: According to Section 25(3) of the Act states that a
promise to pay a debt barred by Limitation Act shall be valid without consideration as legally it remain no longer
claimable. If a debt is not claimed under a time frame of 3 years then it gets barred as per the Limitation Act. On the
other hand, a promise to pay a time barred debt will be valid if:
(a) the promise is out into writing;
(b) signed by the debtor or his agent; and
(c) related to a debt which the creditor might have enforced payment of but for the law of limitation.
For example, X owes Y Rs. 800, but the debt is time barred. X signs a writing promise to pay Rs. 600 on account
of the debt. This is a valid contract under Section 23.
(iv) Completed Gifts: Complete gifts refer to gifts made and accepted. These need to be based on natural love
and affection or near relation; however the gifts must be complete. A promise to gift is not valid.
(v) Agency: No consideration is required for the creation of an agency. As without any consideration being
passed on the agent he remains a gratuitous agent and is not bound to do work entrusted to him.
(vi) Charity: If a person promises to contribute to charity and on this faith the promisee undertakes a liability to
the extent of the promised subscription, the contract is treated as valid. (Leading Case: Kedarnath v. Gorie Mohammad).
There are certain essential features that are necessary for consideration to be valid and accepted legally, which
are known as legal rules for consideration. Thus it can be said that the contract must contain the following essential
features of consideration, enlisted as follows:
(i) Consideration must move at the desire of the promisor: It is important that the consideration is supplied
at the desire of the promisor so as to make a contract binding and enforceable. The contract is not considered valid
if the act is done at the desire of a third party and not the promisor. For example, D constructed a market at the
instance of the Collector of a district. The occupants of the shops in the said market promised to pay D a commission
on articles sold through their shops. Therefore, it was held that there was no consideration because the money was
not spent by the plaintiff at the request of the defendants but voluntarily for a third person, thus the contract was
void. (Leading Case Durga Prasad v. Baldeo)
(ii) Consideration may move from the promisee or any other person: The consideration can move from a
stranger. This is in reference to the doctrine of constructive consideration. Where the term 'any other person', that is
a person other than the promisee, is technically referred to as stranger to consideration. In other words, if there is a
consideration for a promise, it is immaterial who furnishes the same.
This is further explained through the leading case of Chinnayya v. Ramayya, where A by a deed of gift transferred
certain property to her daughter, with a direction that the daughter should pay an annuity to A's brother, as had been done
by A. And on the same day the daughter executed writing in favour of the brother, agreeing to pay the annuity. Later, she
declined to fulfil her promise saying that no consideration had moved from her uncle (As brother). It was held by the court
that the words the promisee or any other person in Section 2(d) clearly show that the consideration need not move from
the promisee, it may move from any other person. Therefore, As brother was entitled to maintain the suit.
(iii) Consideration may be past, present or future: There are three types of Considerations, namely: Past
Consideration, Present Consideration and Future Consideration.
(a) Past Consideration: The words used in Section 2(d) are has done or abstain from doing refer to past. Past
consideration is something wholly done, forborne or suffered before the making of the agreement.
For example, A, a minor was given the benefit of certain services by the plaintiff. The plaintiff rendered those
services, not voluntarily but at the desire of A. These services were continued even after majority at the request of A,
who subsequently promised to pay an annuity to the plaintiff. It was held that the past consideration was a good
consideration. (Leading case: Sindhe v. Abraham)
(b) Present Consideration: The consideration which moves simultaneously with the promise is referred to as
present consideration. For example, cash sales.



(c) Future Consideration: When the consideration is to move at a future date, it is referred as future consideration.
It converts into a promise to be performed in the future. For example, A promises B to deliver him 100 bags of wheat
at a future date, to which B promises to pay for it on delivery.
(iv) Consideration must be of some value: According to Section 2(d) of the Indian Contract Act, abstinence or
promise on the part of the promisee or any other person which has been done at the desire of the promisor. This
means that even a small act will be sufficient enough to make a good consideration.
(v) Consideration must be legal: The consideration which is illegal is not enforceable by law. That is it cannot
be considered as a real consideration.
(b) Anil (A) permits his agent Basant to purchase goods on credit from Chander (C). Basant (B) makes
credit purchases from Chander by using the authority for his own use. Is the principal Anil liable to Chander?
Give reasons in support of your answer.
Ans. The principal A is liable to C on the basis of the agency by holding out. A, having hold out B as his agent
on a previous occasion, becomes bound by subsequent transactions entered into under similar circumstances.
Though the principal has the authority to revoke the agents authority however he is incapable of revoking the
agency in the following cases:
(i) If the agency is coupled with interest: When the agency is created for securing some benefit to the agent in
addition to his remuneration as agent then it is called as agency coupled with interest. According to Section 202,
'where the agency has himself an interest in the property which forms the subject matter of the agency, cannot in the
absence of an express contract, be terminated to the prejudice of such interest'.
(ii) Where the agent has partly exercised his authority: According to Section 204, the principal cannot revoke the
authority given to his agent after the authority has been partly exercised, so far as regards such acts and obligations as arise
from acts already done in the agency. In other words, the principal cannot revoke the agents authority already done in the
agency. Also that the principal would be liable for such acts which have already been done on his behalf.
(iii) When the agent has incurred a personal liability: If the agent has incurred any personal liability in the
pursuance of a contract of agency, the principal cannot revoke the agency.
Q. 4. Explain with examples the meaning and types of goods in a Contract of Sale.
Ans. According to Section 2(7), goods are defined to mean every kind of movable property other than actionable
claims and money, it is inclusive of:
(i) stock and shares
(ii) growing crops, grass and things attached to, or farming part of the land which are agreed to be sewered
before sale or under the contract of sale.
The definition of goods as per the English law does not include stock and shares however they are covered
under goods as per the Sale of Goods Act. Though money and actionable claims have been expressly excluded from
the term goods. As money refers to the legal tender and excludes old coins and foreign currency, which is regulated
by the Foreign Exchange Regulation Act. On the other hand, actionable claims like debets are things which a person
cannot make use of however, which can be claimed by him by means of a legal action. Such claims cannot be sold or
purchased like goods they can only be assigned.
Types of Goods
The goods which form the subject-matter of the contract of sale may be classified into the following types:






Ascertained Unascertained

1. Existing Goods: According to Section 6 of the Act, existing goods are those goods which are owned or
possessed by the seller at the time of contract of sale. That is, the seller is either the owner of goods or he is in
possession of goods. It can also be said that, when a person sells goods possessed by not awned by him it is treated
as sale by an agent, that is, it is a sale of existing goods. The existing goods may be:



(a) Specific Goods: These are the goods which are identified and agreed upon by the parties at the time a
contract of sale is made.
(b) Ascertained Goods: These are intended to include goods which have become ascertained subsequently to
the formation of the contract.
(c) Unascertained Goods: These are the goods which are not identified and agreed upon at the time when the
contract is made, they are identified only by discription.
2. Future Goods: According to Section 2(6) of the Act, future goods means goods to be manufactured or
produced or acquired by the seller after making the contract of sale. Therefore, it can be said that, the future goods
are goods which either are not in existence at this time of contract of sale or they may be in existence when the
agreement of their sale is entered upon but have not yet been acquired by the seller by that time. The future goods
become the subject-matter of an agreement to sell only and not the contract of sale, as they are not in the possession
of the seller at the time of cantract.
3. Contingent Goods: These are the goods the acquisition of which by the seller depends upon a contingency
which may or may not happen, as per Section 6 (2) of the Act.
Q. 5. (a) Can a minor be admitted to partnership? If so what are his rights and liabilities during minority
and after he has attained majority?
Ans. As a minor he/she is not capable of entering into any contract thus, any agreement by, or with a minor is
void ab initio. (Leading case: Mohni Bibi v. Dharamdas Ghosh). As partnership is created by an agreement, a minor
thus cannot enter into partnership, though he can be admitted to the benefits of the firm only with the consent of all
the other partners.
Rights of a minor admitted to the benefits of a partnership are:
(i) He has the right to share the profits and the property of the firm in accordance with the agreement. However,
he cannot participate in the conduct of the business.
(ii) He has the right to have access to, and inspect, and copy, any of the accounts of the firm. However, his right
is only limited to the books of accounts and not in respect of other books.
(iii) When he is not given his due share of the profits he has the right to file a suit for his share of profits or the
property of the firm.
(iv) He can become a partner in the firm on attaining majority and he would be entitled to the same amount of
share as he was getting as a minor.
(v) He can use his option to serve his connections from the firm on attaining majority by giving a public notice
of the same.
Liabilities of a minor admitted to the benefits of a partnership are:
(i) He is only liable to the extent of his share in the profits and the property and he is not personally liable to
the third parties. Therefore, his private property cannot be used for the payments of the firm's debts incurred
in his minority.
(ii) He cannot be declared insolvent in case the firms debts cannot be repaid out of the property of the firm.
Position on attaining Majority
Within six months of his attaining majority or his obtaining knowledge that he had been admitted to the benefits
of the firm, which ever is later, the minor partner has to exercise his option, whether or not to become a partner. In
case he fails to give a public notice within six months then it is presumed that he wishes to be partner.
His liability when he becomes a partner
When the minor becomes a partner of his own volition or failure to give public notice in the specified time, then
his rights and liabilities according to Section 30(7) are:
(i) He becomes personally liable to the third parties for all the acts done since he was admitted to the benefits
of the partnership.
(ii) His share in profits and property remains the same as he was entitled to as a minor.
However, when he selects not to become a partner then according to Section 30(8) his rights and liabilities are:
(i) Up to the date of giving public notice his rights and liabilities remain the same of a minor.



(ii) His share is not liable for any acts of the firm done after the date of public notice.
(iii) He is entitled to sue the partners for his share of the profits and property in the firm.
(b) X & Y jointly own a Car which they use for themselves on Sundays and Holidays and occasionally let
it on hire and divide the earnings. Are they partners? Give Reasons in support of your answer.
Ans.They should not be considered as a partner because: The main characteristics of partnership are:
(a) It is an association of two or more persons,
(b) It arises out of agreement,
(c) It is to carry on a business,
(d) It is for sharing the profits of the business, and
(e) It has an element of mutual agency amongst the partners.
While selecting the firm's name the partners are required to ensure that it does not violate the rules relating to the
trade name or implies the patronage of the government. While determining whether a group of persons is or is not a
firm, the real relationship amongst the partners need to be ascertained along with the help of their agreement or from
other relevant facts taken together. Though sharing of profits is considered a strong evidence of partnership, however,
mutual agency relationship between them is the real test of partnership.
As per the Partnership Act, the registration of the partnership is not compulsory however, desirable so as to
avoid the various disabilities suffered by the non-registered firms. These are:
(a) The partners cannot file a suit against the firm or any other partner for enforcing his contractual rights or
rights accruing under the Partnership Act,
(b) The firm cannot file a suit against a third party for enforcing rights arising out of contracts with him, and
(c) It cannot claim any set-off.
The types of partners any be judged on the basis of their conduct or sharing of profits, they can be of the
following types, such as, actual partner, sleeping partner, nominal partner, partner in profits only, sub partner, partner
by estoppel or holding out. It is on the type of a partner that his liability to the third parties is determined.
The true test of partnership is not sharing of profits but the existence of mutual agency relationship, that is, the
capacity of a partner to bind other partners by his acts done in firms name and be bound by the acts of other partners
in the firms name.
Though sharing of profits is an important evidence of partnership but it is not true in all the cases. That is, there
may be persons who are in receipt of a share of profit of a business, or of a payment contingent upon the earning of
profits or varying with the profits earned by a business who are not partners. These may include:
(i) Creditors of the firm;
(ii) The widow or child of a deceased partner;
(iii) A person receiving a share of profit in consideration of sale of business or goodwill of the business sold to
the firm;
(iv) A servant or agent receiving profits in consideration of his association with the firm.
The Law also states that the minor cannot become a partner in a firm; however, he can be admitted to the benefits
of partnership with the consent of all the partners. His liability is limited to his share in the partnership business. He
has a right to share the profits and enjoys full access to the books of accounts. He may opt to become partner on his
attaining majority by giving a public notice to that effect if he wants to serve his connection with the firm.