CMA (Cost & Management Accountancy) Foundation: Fundamentals of Business Laws and Business Communication Syllabus

What are the exceptions to the rule that agreements in restraint of trade (Sec 27) are void?

Exceptions: (1) Sale of goodwill — a buyer may restrain the seller from carrying on a similar business within specified local limits, so long as reasonable; (2) Partnership Act provisions — restraints on outgoing/continuing partners and on partners during continuance; and (3) reasonable trade/service agreements during employment.

What is meant by 'performance of a contract' and who must perform (Sections 37-40)?

Parties to a contract must either perform or offer to perform their respective promises, unless dispensed with or excused. Performance may be by (1) the promisor himself, especially where personal skill is involved; (2) his agent; (3) legal representatives (except personal-skill contracts); or (4) a third person if the promisee accepts performance from him (Sec 41).

What is a 'tender' or 'attempted performance' (offer to perform) under Section 38?

A tender is an offer of performance which the promisor makes but which the promisee refuses to accept. A valid tender must be (1) unconditional, (2) at the proper time and place, (3) of the whole obligation, (4) give a reasonable opportunity to inspect, and (5) made to the proper person. A valid tender refused discharges the promisor from liability without losing his rights under the contract.

Explain the rules for performance of reciprocal promises (Sections 51-54).

Reciprocal promises are promises that form the consideration for each other. They may be (1) mutual and independent, (2) conditional/dependent (one depends on prior performance of the other), or (3) mutual and concurrent (to be performed simultaneously). A promisor need not perform unless the promisee is ready and willing to perform his reciprocal promise.

List the various modes by which a contract may be discharged.

A contract may be discharged by: (1) performance (actual or attempted), (2) mutual agreement/consent (novation, rescission, alteration, remission, waiver), (3) impossibility/frustration (Sec 56), (4) lapse of time (Limitation Act), (5) operation of law (death, insolvency, merger), and (6) breach of contract (actual or anticipatory).

Explain discharge by mutual agreement: novation, rescission, alteration, and remission (Section 62-63).

Novation = substituting a new contract for the old (between same/different parties). Rescission = cancelling the contract by mutual consent. Alteration = changing one or more terms with mutual consent. Remission (Sec 63) = acceptance of lesser performance/sum than what is due, or extension of time. Each discharges the original contract.

What is the doctrine of frustration / supervening impossibility under Section 56?

An agreement to do an act impossible in itself is void. A contract to do an act which, after the contract is made, becomes impossible or unlawful by a supervening event beyond the parties' control becomes void when the act becomes impossible/unlawful. Grounds include destruction of subject-matter, death/incapacity (personal contracts), change of law, non-occurrence of an event, and outbreak of war.

What circumstances do NOT amount to frustration of contract?

A contract is NOT frustrated by: (1) difficulty of performance, (2) commercial hardship or rise in price/loss of profit, (3) self-induced impossibility, (4) failure of a third party, (5) strikes or riots, or (6) partial impossibility of one of several objects. Mere onerousness does not discharge the contract.

What is the difference between actual breach and anticipatory breach of contract?

Actual breach occurs when a party fails to perform at the time fixed for performance or during performance. Anticipatory breach occurs when a party, before the due date, declares his intention not to perform (renunciation) or disables himself from performing. On anticipatory breach the aggrieved party may sue immediately or wait until the due date (Hochster v. De La Tour).

List the remedies available to an aggrieved party on breach of contract.

(1) Rescission of the contract (Sec 39), (2) Suit for damages (Sec 73), (3) Suit upon quantum meruit (payment for work done), (4) Suit for specific performance (Specific Relief Act), and (5) Suit for injunction (to restrain a party from doing what he promised not to do).

Explain the rule of damages laid down in Section 73 and Hadley v. Baxendale.

The aggrieved party is entitled to compensation for any loss or damage that naturally arose in the usual course of things from the breach, OR which the parties knew at the time of contract to be likely to result (special damages). Remote or indirect loss is not recoverable. Hadley v. Baxendale established this two-limb rule of ordinary and special damages.

Distinguish between liquidated damages and a penalty, and state the Indian position (Section 74).

Liquidated damages = a genuine pre-estimate of probable loss, agreed in advance. A penalty = a sum fixed in terrorem to compel performance, disproportionate to actual loss. Under English law only liquidated damages are recoverable; under Section 74, Indian law makes no such distinction — the court awards reasonable compensation not exceeding the amount named, whether termed penalty or liquidated damages.

What are the types of damages recognized in contract law?

(1) Ordinary/general (compensatory) damages — arising naturally from breach; (2) Special damages — from special circumstances known to parties; (3) Exemplary/vindictive/punitive damages — to punish (e.g., breach of promise to marry, wrongful dishonour of cheque by bank); and (4) Nominal damages — token amount where breach occurred but no real loss.

Define a 'contract of indemnity' under Section 124.

A contract of indemnity is one by which one party promises to save the other from loss caused to him by the conduct of the promisor himself or by the conduct of any other person. The person who promises to make good the loss is the 'indemnifier' and the person whose loss is to be made good is the 'indemnity-holder' (indemnified).

Define a 'contract of guarantee' and name its three parties (Section 126).

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 three parties are: the 'surety' (who gives the guarantee), the 'principal debtor' (in respect of whose default the guarantee is given), and the 'creditor' (to whom the guarantee is given). It may be oral or written.

Distinguish between a contract of indemnity and a contract of guarantee.

Indemnity: 2 parties, 1 contract; indemnifier's liability is primary and independent; protects against loss; no existing debt necessarily. Guarantee: 3 parties, 3 contracts; surety's liability is secondary/collateral (arises on default of principal debtor); there is an existing debt/duty; the surety has a right of subrogation after paying.

What is the nature and extent of a surety's liability (Section 128)?

The liability of the surety is co-extensive with that of the principal debtor, unless otherwise provided by the contract. The surety is liable to the same extent as the principal debtor. The surety's liability is secondary — it arises only when the principal debtor defaults. The creditor can proceed against the surety without first proceeding against the principal debtor.

Distinguish between a specific guarantee and a continuing guarantee (Section 129).

A specific guarantee covers a single transaction/debt and ends when that transaction is complete. A continuing guarantee extends to a series of transactions (Sec 129). A continuing guarantee can be revoked by the surety as to future transactions by notice to the creditor (Sec 130) and is revoked by the surety's death as to future transactions (Sec 131).

State the rights of a surety against the principal debtor, the creditor, and co-sureties.

Against the principal debtor: right of subrogation (steps into creditor's shoes, Sec 140) and right of indemnity (Sec 145). Against the creditor: right to securities held by the creditor (Sec 141) and right to set-off. Against co-sureties: right of contribution — co-sureties are liable to contribute equally (Sec 146) or rateably as per their limits (Sec 147).

State the ways in which a surety is discharged from liability.

A surety is discharged by: (1) revocation of continuing guarantee (Sec 130) or by death (Sec 131); (2) variance in terms of the contract without surety's consent (Sec 133); (3) release or discharge of the principal debtor (Sec 134); (4) arrangement/composition by creditor with principal debtor (Sec 135); (5) creditor's act/omission impairing surety's eventual remedy (Sec 139); and (6) loss of security by the creditor (Sec 141).

Define 'bailment', 'bailor', and 'bailee' under Section 148.

Bailment is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. The person delivering the goods is the 'bailor' and the person to whom they are delivered is the 'bailee'. Ownership is not transferred — only possession.

State the essential features and classification of bailment.

Essentials: (1) delivery of goods (actual or constructive), (2) a contract, (3) a specific purpose, and (4) return or disposal of the same goods after the purpose. Classification by benefit: (a) for benefit of bailor, (b) for benefit of bailee, (c) for mutual benefit. By reward: gratuitous (without charge) or non-gratuitous (for reward).

State the duties of a bailee.

(1) Take reasonable care of goods as a man of ordinary prudence (Sec 151-152); (2) not make unauthorized use of goods (Sec 154); (3) not mix the goods with his own (Sec 155-157); (4) return the goods on accomplishment of purpose (Sec 160); (5) return any accretion/increase or profit from the goods (Sec 163); and not set up an adverse title.

State the duties of a bailor.

(1) Disclose known faults in the goods (Sec 150) — a gratuitous bailor must disclose faults known to him; a bailor for reward is liable for all defects whether known or not; (2) bear extraordinary/necessary expenses of bailment; (3) indemnify the bailee for loss due to defective title; and (4) receive back the goods when returned.

What is the bailee's 'particular lien' versus 'general lien' (Sections 170-171)?

A particular lien (Sec 170) is the right of the bailee to retain the specific goods on which he has bestowed labour or skill until his charges for that work are paid. A general lien (Sec 171) is the right to retain any goods of the bailor for a general balance of account; it is available to bankers, factors, wharfingers, attorneys of a High Court, and policy brokers.

Define 'pledge', 'pawnor', and 'pawnee' (Section 172).

Pledge (pawn) is the bailment of goods as security for payment of a debt or performance of a promise. The bailor (who delivers the goods as security) is the 'pawnor' and the bailee (who receives them) is the 'pawnee'. The pawnee gets only special property (possession + right to sell on default), not general ownership.

What are the rights of a pawnee on default by the pawnor (Section 176)?

On default, the pawnee may either (1) bring a suit against the pawnor for the debt and retain the goods as collateral security, OR (2) sell the goods after giving reasonable notice of the sale to the pawnor. If sale proceeds exceed the debt, the surplus goes to the pawnor; if less, the pawnor remains liable for the deficit. The pawnee also has a right of retainer and reimbursement of expenses.

Define 'agent' and 'principal' (Section 182) and state who can be an agent.

An 'agent' is a person employed to do any act for another or to represent another in dealings with third persons; the person for whom such act is done, or who is so represented, is the 'principal' (Sec 182). Any person may become an agent (even a minor, Sec 184), but to be liable to the principal, the agent must be competent. No consideration is necessary to create agency (Sec 185).

State the modes of creation of agency.

Agency may be created by: (1) express agreement (oral/written), (2) implied agreement (conduct, situation), (3) necessity (Sec 189 — emergency), (4) estoppel/holding out (Sec 237 — principal's conduct leads third party to believe), and (5) ratification (Sec 196-200 — subsequent adoption of an unauthorized act done on one's behalf).

State the modes of termination of agency (Sections 201-210).

Agency terminates by ACT OF PARTIES: (1) revocation by principal, (2) renunciation by agent, (3) mutual agreement; or by OPERATION OF LAW: (4) completion of the business/purpose, (5) expiry of time, (6) death or insanity of principal or agent, (7) insolvency of the principal, and (8) destruction of subject-matter. An agency coupled with interest cannot be terminated to the prejudice of that interest (Sec 202).

How does the Sale of Goods Act, 1930 define a 'contract of sale' and distinguish 'sale' from 'agreement to sell' (Section 4)?

A contract of sale is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. Where property is transferred immediately, it is a 'sale' (an executed contract); where transfer is to take place at a future time or subject to conditions, it is an 'agreement to sell' (an executory contract). A sale creates a jus in rem; an agreement to sell creates a jus in personam.

Distinguish a 'sale' from an 'agreement to sell' on key consequences.

Sale: ownership passes to buyer; risk passes with ownership; on buyer's default seller sues for price; on seller's insolvency buyer can claim goods. Agreement to sell: ownership remains with seller; risk stays with seller; on default seller sues for damages only; goods remain seller's property if either becomes insolvent. A sale is executed; an agreement to sell is executory.

What is the difference between a 'condition' and a 'warranty' (Sections 12-13)?

A condition is a stipulation essential to the main purpose of the contract, the breach of which gives the right to repudiate the contract and claim damages. A warranty is a stipulation collateral to the main purpose, the breach of which gives only a right to claim damages but not to reject the goods or repudiate. A breach of condition may be treated as a breach of warranty by the buyer (Sec 13).

What is the doctrine of 'caveat emptor' and its exceptions under the Sale of Goods Act?

Caveat emptor ('let the buyer beware', Sec 16) means it is the buyer's duty to examine goods before purchase; the seller is not bound to disclose defects. Exceptions: (1) buyer makes known the particular purpose and relies on seller's skill (fitness implied), (2) sale by description (merchantable quality), (3) usage of trade, (4) fraud/misrepresentation by seller, and (5) sale by sample.

State the implied conditions in a contract of sale of goods.

(1) Condition as to title (Sec 14 — seller has right to sell); (2) sale by description — goods must match the description (Sec 15); (3) sale by sample — bulk must correspond with sample (Sec 17); (4) sale by sample and description — must match both; (5) condition as to fitness for buyer's particular purpose (Sec 16(1)); and (6) condition as to merchantable quality (Sec 16(2)).

What is the general rule for transfer of property (ownership) in specific/ascertained goods (Sections 19-20)?

In a sale of specific or ascertained goods, property passes to the buyer at the time the parties intend it to pass (Sec 19). Where goods are in a deliverable state and the contract is unconditional (Sec 20), property passes at the time the contract is made, irrespective of the time of payment or delivery. The terms of the contract, conduct, and circumstances determine intention.

State the rule 'Res perit domino' regarding transfer of risk (Section 26).

Risk passes with ownership (property), not with possession. Under Section 26, unless otherwise agreed, goods remain at the seller's risk until property is transferred to the buyer; once property passes, goods are at the buyer's risk whether delivery has been made or not. Exception: where delivery is delayed due to the fault of one party, risk lies with the party at fault as regards loss caused by such delay.

What is the rule for passing of property in unascertained and future goods (Section 23)?

In a contract for the sale of unascertained or future goods by description, property passes to the buyer when goods of that description in a deliverable state are unconditionally appropriated to the contract, either by the seller with the buyer's assent or by the buyer with the seller's assent. Appropriation may also occur by delivery to a carrier.

Define an 'unpaid seller' under Section 45 of the Sale of Goods Act.

A seller is an 'unpaid seller' when (1) the whole of the price has not been paid or tendered, or (2) a bill of exchange or other negotiable instrument was received as conditional payment and the condition has not been fulfilled by reason of dishonour. The term 'seller' includes any person in the position of a seller, such as an agent who has paid for the goods.

State the rights of an unpaid seller against the goods (Sections 47-54).

Where property has passed: (1) right of lien (retain possession until paid, Sec 47); (2) right of stoppage in transit (resume possession while goods are in transit if buyer becomes insolvent, Sec 50); (3) right of resale (Sec 54). Where property has not passed: right of withholding delivery. These rights are exercisable even against the buyer's right of disposal.

State the rights of an unpaid seller against the buyer personally.

(1) Suit for the price (Sec 55) — where property has passed and buyer wrongfully neglects/refuses to pay; (2) suit for damages for non-acceptance (Sec 56); (3) suit for interest and special damages (Sec 61); and (4) suit for repudiation/damages on anticipatory breach. These remedies are in addition to rights against the goods.

When can an unpaid seller exercise the right of 'stoppage in transit', and when does transit end?

The unpaid seller can stop goods in transit only when (1) he has parted with possession, (2) the goods are in the course of transit (with a carrier/bailee), and (3) the buyer has become insolvent. Transit ends when the buyer or his agent takes delivery, when the carrier acknowledges holding goods on the buyer's behalf, or when the carrier wrongfully refuses to deliver to the buyer.