Intermediate Paper 6 Laws & Ethics Study Notes PDF

INTERMEDIATE : PAPER - 6 6 01 -2 US AB LL SY LAWS & ETHICS INTERMEDIATE STUDY NOTES The Institute of Cost Accountants of India CMA Bhawan, 12, Sudder Street, Kolkata - 700 016 First Edition : August 2016 Revised Edition : January 2018 Revised Edition : June 2018 Revised Edition : October 2018 Revised Edition : February 2019 Edition: August 2019 Reprint: August 2020 Reprint : October 2020 Reprint : January 2021 Published by : Directorate of Studies The Institute of Cost Accountants of India (ICAI) CMA Bhawan, 12, Sudder Street, Kolkata - 700 016 www.icmai.in Printed at : M/s. SAP Print Solutions Pvt. Ltd. 28A, Lakshmi Industrial Estate, S. N. Path, Lower Parel (W) Mumbai - 400 013, Maharashtra. Copyright of these Study Notes is reserved by the Institute of Cost Accountants of India and prior permission from the Institute is necessary for reproduction of the whole or any part thereof. Syllabus – 2016 PAPER 6: LAWS & ETHICS Syllabus Structure A Commercial Laws 30% B Industrial Laws 25% C Corporate Law 35% D Ethics 10% D 10% A 30% C 35% B 25% ASSESSMENT STRATEGY There will be written examination paper of three hours. OBJECTIVES To give an exposure to some of the important laws essential and relevant for a business entity. To demonstrate an overview of laws related to Companies. To provide knowledge, comprehension and principles of Corporates. To construct the principles and ethical values of the business and professionals. Learning Aims The syllabus aims to test the student’s ability to:  Explain fundamental aspects of laws relevant for a business entity  Understand the principles of corporate governance and ability to implement and report compliance  Create awarness and understanding of the ethical values Skill sets required Level B: Requiring the skill levels of knowledge and comprehension, application and analysis. Note: Subjects related to applicable statutes shall be read with amendments made from time to time. Section A : Commercial Laws 30% 1. Laws of Contracts (Advanced level) 2. Laws relating to Sale of Goods (Advanced level) 3. Negotiable Instruments Act,1881 (Advanced Level) 4. Indian Partnership Act, 1932 5. Limited Liability Partnership Act, 2008 Section B : Industrial Laws 25% 6. Factories Act, 1948 7. Payment of Gratuity Act, 1972 8. Employees Provident Fund and Miscellaneous Provisions Act, 1952 9. Employees State Insurance Act, 1948 10. Payment of Bonus Act, 1965 11. Minimum Wages Act, 1948 12. Payment of Wages Act, 1936 13. Pension Fund Regulatory and Development Authority Act, 2013 Section C : Corporate Law 35% 14. Companies Act, 2013 Section D : Ethics 10% 15. Business Ethics SECTION A: COMMERCIAL LAWS [30 MARKS] 1. Indian Contracts Act, 1872 (a) Essential elements of a contract, offer and acceptance (b) Void and voidable agreements (c) Consideration (d) Legality of object (e) E-contracts (f) Constraints to enforce contractual obligations (g) Quasi-contracts, contingent contracts, termination or discharge of contracts (h) Special contracts: Indemnity and Guarantee; Bailment and Pledge; Laws of Agency 2. Sale of Goods Act, 1930 (a) Definition (b) Transfer of ownership (c) Conditions and Warranties (d) Performance of the Contract of Sale (e) Rights of Unpaid Vendor (f) Auction Sales 3. Negotiable Instruments Act, 1881 (a) Definition and features of Negotiable Instrument (b) Crossing, Endorsement and Material Alteration (c) Acceptance, Assignment and Negotiation (d) Rights and liabilities of Parties (e) Dishonor of a Negotiable Instrument. 4. Indian Partnership Act, 1932 (a) Nature of Partnership (b) Rights and liabilities of Partners (c) Formation, Reconstitution and Dissolution of Firms 5. Limited Liability Partnership Act, 2008 (a) Concept, formation, membership, functioning (b) Dissolution SECTION B: INDUSTRIAL LAWS: Objects, Scope and Applicability of the following Acts [25 MARKS] 6. Factories Act, 1948 7. Payment of Gratuity Act, 1972 8. Employees Provident Fund Act, 1952 9. Employees State Insurance Act, 1948 10. Payment of Bonus Act, 1965 11. Minimum Wages Act, 1948 12. Payment of Wages Act, 1936 13. Pension Fund Regulatory and Development Authority Act, 2013 SECTION C : CORPORATE LAW [35 MARKS] 14. Companies Act, 2013 (a) Company types, promotion, formation and related procedures i.e, Sec 1 to Sec 122 of Companies Act, 2013. (b) Director-Role, Responsibilities, Qualification, disqualification, appointment, retirement, resignation, removal, remuneration and powers, Director Identification Number. SECTION D : ETHICS [10 MARKS] 15. Business Ethics: (a) Ethics-meaning, importance, nature and relevance to business (b) Values and attitudes of professional accountants. (c) S even principles of public life-selflessness, integrity, objectivity, accountability, openness, honesty and leadership. (d) Ethics in Business Contents SECTION – A: COMMERCIAL LAWS Study Note 1 : Indian Contract Act, 1872 1.1 Essential Elements of a Contract, Offer and Acceptance 1 1.2 Void and voidable agreements 4 1.3 Consideration 7 1.4 Legality of object 9 1.5 E-contracts 10 1.6 Constraints to enforce contractual obligations 10 1.7 Quasi-contracts, contingent contracts, termination or discharge of contracts 19 1.8 Special contracts: Indemnity and Guarantee; Bailment and Pledge; Laws of Agency 25 Study Note 2 : Sale of Goods Act, 1930 2.1 Definition 49 2.2 Transfer of ownership 52 2.3 Conditions and Warranties 56 2.4 Performance of the Contract of Sale 59 2.5 Rights of Unpaid Vendor 62 2.6 Auction Sales 65 Study Note 3 : Negotiable Instruments Act, 1881 3.1 Definition and features of Negotiable Instrument 69 3.2 Crossing, Endorsement and Material Alteration 76 3.3 Acceptance, Assignment and Negotiation 81 3.4 Rights and liabilities of Parties 89 3.5 Dishonor of a Negotiable Instrument 93 Study Note 4 : Indian Partnership Act, 1932 4.1 Nature of Partnership 103 4.2 Rights and liabilities of Partners 108 4.3 Formation, Reconstitution and Dissolution of Firms 113 Study Note 5 : Limited Liability Partnership Act, 2008 5.1 Concept, formation, membership, functioning 127 5.2 Dissolution 153 SECTION – B : INDUSTRIAL LAWS Study Note 6 : Factories Act, 1948 6.1 Factories Act, 1948 – Objects, Scope and Applicability 173 Study Note 7 : Payment of Gratuity Act, 1972 7.1 Payment of Gratuity Act, 1972 – Objects, Scope and Applicability 191 Study Note 8 : Employees Provident Fund and Miscellaneous Provisions Act, 1952 8.1 Employees Provident Fund and Miscellaneous Provisions Act, 1952 – Objects, Scope and Applicability 207 Study Note 9 : Employees State Insurance Act, 1948 9.1 Employees State Insurance Act, 1948 – Objects, Scope and Applicability 219 Study Note 10 : Payment of Bonus Act, 1965 10.1 Payment of Bonus Act, 1965 – Objects, Scope and Applicability 235 Study Note 11 : Minimum Wages Act, 1948 11.1 Minimum Wages Act, 1948 – Objects, Scope and Applicability 249 Study Note 12 : Payment of Wages Act, 1936 12.1 Payment of Wages Act, 1936 – Objects, Scope and Applicability 267 Study Note 13 : Pension Fund Regulatory and Development Authority Act, 2013 13.1 Introduction 283 13.2 National Pension System 284 SECTION – C : CORPORATE LAW Study Note 14 : Companies Act, 2013 14.1 Company Types, Promotion, Formation and Related Procedures 287 14.2 Directors 397 SECTION – D : ETHICS Study Note 15 : Business Ethics 15.1 Ethics - Meaning, Importance, Nature and Relevance to Business 415 15.2 Values and Attitudes of Professional Accountants 417 15.3 Seven Principles of Public Life 419 15.4 Ethics in Business 420 Section A Commercial Laws (Syllabus - 2016) Study Note - 1 INDIAN CONTRACT ACT, 1872 This Study Note includes 1.1 Essential Elements of a Contract, Offer and Acceptance 1.2 Void and Voidable Agreements 1.3 Consideration 1.4 Legality of Object 1.5 E-Contracts 1.6 Contraints to Enforce Contractual Obligations 1.7 Quasi-Contracts, Contingent Contracts, Termination or Discharge of Contracts 1.8 Special Contracts: Indemnity and Guarantee; Bailment and Pledge; Laws of Agency 1.1 ESSENTIAL ELEMENTS OF A CONTRACT, OFFER AND ACCEPTANCE Introduction The law relating to contracts in India is contained in INDIAN CONTRACT ACT, 1872. The Act was passed by British India and is based on the principles of English Common Law. It extends to the whole of India. It determines the circumstances in which promises made by the parties to a contract shall be legally binding on them. All of us enter into a number of contracts everyday knowingly or unknowingly. Each contract creates some rights and duties on the contracting parties. Hence this legislation, Indian Contract Act of 1872, being of skeletal nature, deals with the enforcement of these rights and duties on the parties in India. Commencement of Act The Act came into effect from 1st September, 1872 and applies to all contracts in India. Proposal According to Section 2(a) of Act, when one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal. Acceptance As per Section 2(b), when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise. Section 2(c) defines that the person making the proposal is called the “promisor”, and the person accepting the proposal is called the “promisee”. Agreement According to Section 2(e), every promise and every set of promises, forming the consideration for each other, is an agreement. As per Section 2(f) ,promises which form the consideration or part of the consideration for each other are called reciprocal promises. Void Agreement According to Section 2(g) , an agreement not enforceable by law is said to be void. THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 1 LAWS & ETHICS Contract Section 2(h) defines the term ‘contract ‘ as an agreement enforceable by law. As per Section 2(j), a contract which ceases to be enforceable by law becomes void when it ceases to be enforceable. Voidable Contract Section 2(i) defines a voidable contract as 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. Essentials of a valid contract Section 10 provides that all agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not otherwise expressly declared to be void. The following are the requirements for a valid contract- There shall be an offer or proposal by one party and acceptance of the proposal by the other party which results in an agreement; There shall be an intention to create legal relations or an intent to legal consequences; The agreement shall be supported by lawful consideration; The parties to the contract shall be competent to contract; There shall be free consent between the parties to the contract; The object and consideration of the contract shall be legal and the same shall not be opposed to public policy; The terms of the consent shall be certain; The agreement is capable of being performed i.e., it is not impossible of being performed. OFFER AND ACCEPTANCE Offer The term ‘proposal’ is otherwise called as ‘offer’. An offer is a proposal by one person, whereby he expresses his willingness to enter into a contractual obligation in return for promise, act or forbearance. Section 2(a) of the Act defines ‘proposal’ or offer as when one person signifies to another his willingness to do or abstain from doing anything with a view to obtaining the assent of that other to such act or abstinence. The person making the proposal is called as ‘offeror’ or proposer’ and the person the proposal is made is called as ‘offeree’. The offer must be a valid one. The following points are to be taken into account for a valid offer- The offer must be in clear, definite, complete and final in terms. It should not be vague in terms; The offer must be communicated to the offeree. The offer becomes effective only when it has been communicated to the offeree so as to give him an opportunity to accept or reject the offer; The communication may be in writing or oral; The communication may be in expressed terms or in implied terms; The offer may be general or specific – if an offer is made to a specific person it is called specific offer. Such offer can be accepted by such specific person; if an offer is made to the world at large, it is a general offer. It can be accepted by any member of the general public by fulfilling the condition laid down in the offer; 2 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA Indian Contract Act, 1872 Communication of offer is complete when it comes to the knowledge of the person to whom it is made. (Section 4) An offer which has been communicated properly continues as such until it lapses or revoked by the offeror or rejected or accepted by the offeree. An ideal offer should have all the essentials of a valid contract as once it is accepted by the offeree, it becomes a contract. Revocation of offer Section 5 provides that a proposal may be revoked at any time before the communication of acceptance is complete as against the proposer but not afterwards. Example – A proposes, by a letter sent by post, to sell his house to B; B accepts the proposal by a letter sent by post. A may revoke his proposal at any time before or at the moment when B posts his letter of acceptance, but not afterwards. Section 4 provides that the communication of a revocation is complete- as against the person who makes it, when it is put into a course of transmission to the person to whom it is made, so as to be out of the power of the person who makes it; as against the person to whom it is made, when it comes to his knowledge. Example – A revokes his proposal by telegram. The revocation is complete as against A when the telegram is dispatched. It is complete as against B when B receives it. As per Section 6, a proposal is revoked— (1) by the communication of notice of revocation by the proposer to the other party; (2) by the lapse of the time prescribed in such proposal for its acceptance, or, if no time is so prescribed, by the lapse of a reasonable time, without communication of the acceptance; (3) by the failure of the acceptor to fulfil a condition precedent to acceptance; or (4) by the death or insanity of the proposer, if the fact of his death or insanity comes to the knowledge of the acceptor before acceptance. A proposal also stands revoked if – It is not accepted in the prescribed mode and if no mode is prescribed , in some usual and reasonable manner or The offered makes a counter offer. Acceptance To constitute a promise, the intention of the parties must be communicated. One cannot accept an offer which had not been communicated to him. In general, uncommunicated offer cannot result in a promise. The term ‘acceptance’ means admitting and agreeing to something to accede to something or to accept something. An offer to enter into legal relations, upon definite terms, to create legal relations, must be followed by an intention of the offeree to accept that offer. In ‘Thawardar Pherumal V. Union of India’ – AIR 1955 SC 468 the Supreme Court held that before an offer can become a binding promise and result in an agreement it must be accepted, either by words or acts. A person cannot be bound by a one sided offer which is never accepted particularly when the parties intended that the contract should be reduced in writing. A promise cannot bind its make unless the promise has assented to it. Section 4 provides that the communication of an acceptance is complete- as against the proposer, when it is put in a course of transmission to him, so as to be out of the power of the acceptor; as against the acceptor, when it comes to the knowledge of the proposer. THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 3 LAWS & ETHICS Example A proposes, by letter, to sell a house to B at a certain price. B accepts A’s proposal by a letter sent by post. The communication of the acceptance is complete, as against A when the letter is posted and as against B, when the letter is received by A. The following points shall be taken into account in the case of acceptance- Acceptance may be oral or in writing; It may be expressed or implied; If a particular method of acceptance is prescribed, the offer must be accepted in the prescribed manner; It must be unqualified and absolute and must correspond with all terms of the offer; The conditional acceptance will amount to rejection of offer; A counter offer for acceptance will also amount to reject of offer but the counter offer may be accepted or rejected by the other party; It must be communicated to the officer, since acceptance is completed the moment it is communication; Mere silence on the part of the offeree does not amount to acceptance; The acceptance should be given if there is a time limit is fixed or otherwise at a reasonable time and before he offer lapses or is revoked. Revocation of acceptance Section 5 provides that an acceptance may be revoked at any time before the communication of acceptance is complete as against the acceptor but not afterwards. Example – A proposes, by a letter sent by post, to sell his house to B; B accepts the proposal by a letter sent by post; B may revoke his acceptance at any time before or at the moment when the letter communication it reaches A, but not afterwards. Section 4 provides that the communication of a revocation is complete as against the person who makes it, when it is put into a course of transmission to the person to whom it is made, so as to be out of the power of the person who makes it and as against the person to whom it is made, when it comes to his knowledge. Example – B revokes his acceptance by telegram. B’s revocation is complete as against B when the telegram is dispatched and as against A when it reaches him. 1.2 VOID AGREEMENTS Void agreement The following agreements are considered to be void- If considerations and objects are unlawful in part – Section – 24; Agreements without consideration – Section 25; Agreement in restraint of marriage – Section 26; Agreement in restraint of trade – Section 27; Agreements in restraint of legal proceedings – Section 28; 4 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA Indian Contract Act, 1872 Agreements void for uncertainty – Section 29; Agreements by way of wager – Section 30; Considerations and objects unlawful in part Section 24 provides that if any part of a single consideration for one or more objects or any one or any part of any one of several considerations for a single object is unlawful, the agreement is void. Example – A promises to superintend, on behalf of B, a legal manufacture of indigo and an illegal traffic in other articles, B promises to pay to A salary of `10,000/- a year. The agreement is void, the object of A’s promise, and the consideration for B’s promise, being in part unlawful. This section has no application to a contract which is a single contract and has no contingent part. Agreement without consideration Section 25 provides that an agreement made without consideration is void unless- (1) it is in writing and registered – It is expressed in writing and registered under the law for the time being in force for the registration of documents and is made on account of natural love and affection between parties standing in a near relation to each other; or unless (2) if is a promise to compensate for something done – It is a promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor, or something which the promisor was legally compellable to do; or unless (3) it is a promise to pay a debt, barred by limitation law – It is a promise, made in writing and signed by the person to be charged herewith, or by his agent generally or specially authorized in that behalf, to pay wholly or in part a debt of which the creditor might have enforced payment but for the law for the limitation of suits. In any of these cases, such an agreement is a contract. Explanation 1 – to this Section provides that nothing in this section shall affect the validity, as between the donor and done of any gift actually made. Explanation 2 – to this Section provides that an agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate; but the inadequacy of the consideration may be taken into account, by the Court in determining the question whether the consent of the promisor was freely given. Examples – A promises, for no consideration, to give B `1,000/-. This is a void agreement; A, for the natural love and affection, promises to give his son B, `1,000/-. A put his promise to B into writing and registers it. This is a contract. A finds B’s purse and gives it to him. B promises to give A `50/-. This is a contract; A supports B’s infant son. B promises to pay A’s expenses in so doing. This is a contract; A owes B `1,000/- but the debt is barred by the Limitation Act. A signs written promises to pay B `500 on account of the debt. This is a contract; A agrees to sell a horse worth of `1,000/- for `10/-. A’s consent to the agreement was freely given. The agreement is a contract notwithstanding the inadequacy of the consideration; A agrees to sell a horse worth of `1,000/- for `10/-. A denies that his consent to the agreement was freely given. The inadequacy of the consideration is a fact which the Court should take into account in considering whether or not A’s consent was freely given. THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 5 LAWS & ETHICS Agreement in restrain of marriage minor, is void. Agreement in restraint of trade Section 27 provides that every agreement by which any one is restrained from exercising a lawful possession, trade or business of any kind, is to that extent void. The exception to this section is saving of agreement not to carry on business of which goodwill is sold. One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein. Provide that such limits appear to the Court reasonable, regard being had to the nature of business. Agreements in restraint of legal proceedings Section 28 provides that every agreement- (a) 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; or (b) which extinguishes the rights of any party thereto, or discharges any party thereto, from any liability, under or in respect of any contract on the expiry of a specified period so as to restrict any party from enforcing his rights, is void to that extent. Exceptions – The following are the exceptions to this Section- Saving of contract to refer to arbitration dispute that may arise – This section shall not render illegal a contract, by which two or more persons agree that any dispute which may arise between them in respect of any subject or class of subjects shall be referred to arbitration and that only the amounts awarded in such arbitration shall be recoverable in respect of the dispute so referred; Saving of contract to refer questions that have already arisen – Nor shall this section render illegal any contract in writing, by which two or more persons agree to refer to arbitration any question between them which has already arisen, or affect any provision of any law in force for the time being as to references to arbitration. Saving of a guarantee agreement of a bank or a financial institution – This section shall not render illegal a contract in writing by which any bank or financial institution stipulate a term in a guarantee or any agreement making a provision for guarantee for extinguishment of the rights or discharge of any party thereto from any liability under or in respect of such guarantee or agreement on the expiry of a specified period which is not less than one year from the date of occurring or non- occurring of a specified event for extinguishment or discharge of such party from the said liability. Agreements void for uncertainty Section 29 provides that agreements, the meaning of which is not certain, or capable of being made certain are void. Examples – (a) A agrees to sell to B, ‘a hundred tons of oil’. There is nothing whatever to show what kind of oil was intended. The agreement is void for uncertainty; (b) A agrees to sell to B, ‘One hundred tons of oil of specified description known as an article of commerce. There is no uncertainty here to make to agreement void; (c) A who is a dealer in coconut oil only, agrees to sell to B ‘One hundred tons of oil’. The nature of A’s trade affords an indication of the meanings of the words, and A has entered into a contract for the sale of one hundred tons of coconut oil. 6 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA Indian Contract Act, 1872 (d) A agrees to sell to B, ‘all the grain in my granary at Ramnagar’. There is no uncertainty here to make the agreement void; (e) A agrees to sell to B ‘One thousand maunds of rice at a price to be fixed by C’. As the price is capable of being made certain, there is no uncertainty here to make the agreement void; (f) A agrees to sell to B’ ‘my white horse for `500/- or `1000/-. There is nothing to show which of the two prices was to be given. The agreement is void. Agreement by way of wager Section 30 provides that agreements by way of wager are void; and no suit shall be brought for recovering anything alleged to be won on any wager, or entrusted to any person to abide the result of any game or other uncertain event on which any wager is made. Exception in favor of certain prizes for horse-racing – This section shall not be deemed to render unlawful a subscription, or contribution, or agreement to subscribe or contribute, made or entered into for or toward any plate, prize, or sum of money, of the value or amount of `500/- or upwards, to be awarded to the winner or winners of any horse-race. Section 294A of the Indian Penal Code not affected – Nothing in this section shall be deemed to legalize any transaction connected with horse-racing to which the provisions of Section 294A of the Indian Penal Code, apply. 1.3 CONSIDERATION Section 2(d) of the Act defines the term ‘consideration’ as, when, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise. Consideration is essential for every contract. The following are the fundamental principles for consideration- Consideration must be at the desire of the promisor; Consideration may move from the promise or any other person; In ‘Chinnaya V. Ramaya’ – (1882) Mad. 137 it was held that a lady by a deed of gift made over certain property to her daughter directing her to pay an annuity to the donors brothers as had been done by the donor herself before she gifted the property. On the same day her daughter executed in writing in favor of the donors’ brother agreeing to pay the annuity. Afterwards the done declined to fulfill her promise to pay her uncle saying that no consideration had moved from him. The court held that the uncle could sue even though no part of the consideration received by the niece moved from him. The consideration from her mother was sufficient consideration. Types of consideration Consideration may be of the following types- Executory or future – it means it makes the form of promise to be performed in the future; Example – A makes an engagement with B to marry her in future. Executed or present – it is an act or forbearance made or suffered for a promise. Past – it means a past act or forbearance, that is to say, an act constituting consideration, took place and is complete before the promise is made. Legal Rules Regarding Consideration: 1. It must move at the desire of the promisor. 2. It may move from the promisee or any other person. THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 7 LAWS & ETHICS 3. Consideration must be something of value. 4. It may be an act, abstinence or forbearance or a return promise. 5. It may be past, present or future which the promisor is already not bound to do. 6. It must not be unlawful. 7. Consideration need not be adequate. 8. It must not be illusory. 9. It must not be opposed to public policy. 10. Pre-existing obligations. NO CONSIDERATION – NO CONTRACT: [Sec. 25] The general rule is ex-nudopacto non oritur action i.e. an agreement made without consideration is void. For example if A promises to pay B ` 1000 without any obligation from B, this is a void agreement for want of consideration. However, the Act itself provides exceptions to this rule in section 25 itself. As per section 25, an agreement made without consideration is not void in the following circumstances: 1. Promise made on account of natural love and affection. 2. Promise to compensate for voluntary services. 3. Promise made to pay a time barred debt. Also, an agreement without consideration is not voild in the following cases :- 1. Gift actually made. 2. Creation of agency. 3. Charitable subscription. STRANGER TO CONTRACT / DOCTRINE OF PRIVITY OF CONTRACT: The doctrine of privityof contract means that a contract is between the parties only and no third person can sue upon it. It means that a stranger to contract cannot sue upon it. The Supreme Court of India recognized this rule in MC Chacko v State Bank of Travancore. It is settled law that a person not a party to a contract cannot subject to certain well recognized exceptions, enforce the terms of the contract. Under the English Common law, only a person who is party to a contract can sue upon it. In India, the common law doctrine of privity of contract is applicable. In the course of time, the courts have introduced a number of exceptions to rule of privity of contract. The Indian Contract Act, 1872 is silent about the right of a stranger to contract to sue or not to sue but the Privity Council extended the Principal of English Common law to India in its decision in Jamna DasV Ram Avtar Pandy which was affirmed by the Honourable Supreme Court of India in the case of MC Chako v State Bank of Travancore. Accordingly, in the following circumstances a stranger to contract can sue: 1. Beneficiaries under trust or charge. 2. Marriage settlement, partition or other family arrangements. 3. Acknowledgement or estoppel. 4. Agency. 5. Assignee in case of insurance policy. 8 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA Indian Contract Act, 1872 1.4 LEGALITY OF OBJECT The object of the contract is the ultimate purpose which the contract sub serves. In contract the subject matter or the agreement is its object. Section 23 discusses about the legality of the object or consideration. The said section provides that the consideration or object of an agreement is lawful, unless- it is forbidden by law; or is of such nature that, if permitted, it would defeat the provisions of any law; or is fraudulent; or involves or implies, injury to the person or property of another; or the Court regards it as immoral, or opposed to public policy. In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void. Examples – (a) A agrees to sell his house to B for `10,000/-. Here B’s promise to pay the sum of `10,000/- is the consideration for A’s promise to sell the house and A’s promise to sell the house is the consideration for B’s promise to pay `10,000/-. These are lawful considerations; (b) A promises to pay B `1,000/- at the end of six months, if C who owes that sum to B, fails to pay it. B promises to grant time to C accordingly. Here the promise of each party is the consideration for the promise of the other party, and they are lawful considerations; (c) A promises for a certain sum paid to him by B, to make good to B the value of his ship if it is wrecked on a certain voyage. Here, A’s promise is the consideration for B’s payment and B’s payment is the consideration for A’s promise, and these are lawful considerations; (d) A promises to maintain B’s child and B promises to pay A `1,000/- yearly for the purpose. Here, the promise of each party is the consideration for the promise of the other party. They are lawful considerations; (e) A, B and C enter into an agreement for the division among them of gains acquired, or to be acquired, by them by fraud. The agreement is void, as its object is unlawful; (f) A promises to obtain for B an employment in the public service, and B promises to pay `1,000/- to A. The agreement is void, as the consideration for its unlawful; (g) A being agent for a landed proprietor, agrees for money, without the knowledge of his principal to obtain for B a lease of land belonging to the principal. The agreement between A and B is void, as it implies a fraud by concealment by A, on his principal; (h) A promises B to drop a prosecution which he has instituted against B for robbery, and B promises to restore the value of the things taken. The agreement is void, as its object is unlawful; (i) A’s estate is sold for arrears of revenue under the provisions of an Act of the Legislature, by which the defaulter is prohibited from purchasing the estate. B, upon an understanding with A, becomes the purchaser, and agrees to convey the estate to A upon receiving from him the price which B has paid. The agreement is void as it renders the transaction in effect, a purchase by the defaulter and would so defeat the object of the law; (j) A, who is B’s mukhtar, promises to exercise his influence, as such, with B in favor of C and C promises to pay `1000/- to A. The agreement is void, because it is immortal; (k) A agrees to let her daughter to hire to B for concubinage. The agreement is void, because it is immoral, though the letting may not be punishable under the Indian Penal Code. THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 9 LAWS & ETHICS 1.5 E-CONTRACTS Electronic contracts are paperless contracts and are in electronic form. It is the change of technology and legal requirements lead the contract to be in electronic form. E-contract is a contract modeled, specified, executed and deployed by a software system. They are conceptually very similar to traditional commercial contracts. E-contract also requires the basic elements of a contract. The following are ingredients of the E-contracts- An offer is to be made; Offer is to be accepted; There shall be a lawful consideration; There shall be an intention to create legal relations; The parties must be competent to contract; There must be free and genuine consent; The object of the contract must be lawful; There must be certainty and possibility of performance. The main feature of this type of contract is speed, accurate and reliable. The parties to the contract have to obtain digital signature from the competent authority and they have to affix the digital signature instead of manual signing. The Information Technology Act, 2000 regulates such e-contracts. In this type of contract the web site of the offeror acts as a display to the world at large. E-mails are used to negotiate and agree on contract terms and to send and agree to the final contract. An email contract is enforceable if the requirements of the contract are fulfilled. Electronically signed contracts cannot be denied because they are in electronic form and delivered electronically. 1.6 CONTRAINTS TO ENFORCE CONTRACTUAL OBLIGATIONS CAPACITY OF CONTRACT Who are Competent to Contract? (Section 11) As per Section 11 every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject. From the above provisions of the section, it means the following types of persons are not competent to contract: (a) A person who has not attained the age of majority, i.e. minor. (b) A person of unsound mind (c) A person who is disqualified from contracting by some law. (a) MINOR: As per section 3 of the Indian Majority Act of 1875, every person in India is a minor if he has not attained the age of 18 years of age. However in case of a minor of whose person or property or both a guardian has been appointed under the Guardian and Wards Act, 1890 or whose property is under the superintendence of any court of wards before he attains 18 years of age is 21 years. 10 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA Indian Contract Act, 1872 The position of Minor’s agreement and effect thereof is as under: 1. An agreement with a minor is void ab-initio. 2. The law of estoppel does not apply against a minor. It means a minor can always plead his minority despite earlier misrepresenting to be a major. In other words, he cannot be held liable on an agreement on the ground that since earlier he had asserted that he had attained majority. 3. Doctrine of Restitution does not apply against a minor. In India, the rules of restitution by minor are similar to those found in English laws. The scope of restitution of contract by minor was examined by the Privy Council in Mohiri Bibi case when it has held that the restitution of money under section 64 of the Indian Contract Act cannot be granted under section 65 because a minor’s agreement is not voidable but absolutely void ab-initio. Similarly no relief can be granted under section 65 as this section is applicable where the agreement is discovered to be void or the contract becomes void. 4. No Ratification on Attaining Majority - Ratification means approval or confirmation. A minor cannot confirm an agreement made by him during minority on attaining majority. If he wants to ratify the agreement, a fresh agreement and fresh consideration for the new agreement is required. 5. Contract beneficial to Minor - A minor is entitled to enforce a contract which is of some benefit to him. Minority is a personal privilege and a minor can take advantage of it and bind other parties. 6. Minor as an agent - A minor can be appointed an agent, but he is not personally liable for any of his acts. 7. Minor’s liability for necessities - If somebody has supplied a minor or his dependents with necessities, minor’s property is liable but a minor cannot be held personally liable 8. A minor cannot be adjudged insolvent as he is incapable of entering into a contract. 9. Where a minor and an adult jointly enter into an agreement with another person, the minor is not liable and the contract can be enforced against the major person. (b) SOUND MIND PERSON: What is a Sound Mind for the Purposes of Contracting? (Section 12) A person is said to be of sound mind for the purposes of making a contract if, at the time when he makes it, he is capable 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. Illustrations: (a) A patient in a lunatic asylum, who is at intervals of sound mind, may contract during those intervals. (b) A sane man, who is delirious from fever or who is so drunk that he cannot understand the terms of a contract or form a rational judgment as to its effect on his interests, cannot contract whilst such delirium or drunkenness lasts. Going by the spirit of the section, it is clear that a person is of sound mind if he fulfils the two conditions at the time when he makes it namely :- (i) He/she is capable of understanding the contract. (ii) He/she is capable of forming a rational judgment about the effects of such contract on his interest. A person not satisfying any of these two conditions is not treated as a person of sound mind. THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 11 LAWS & ETHICS (c) OTHER DISQUALIFIED PERSONS: The persons who are disqualified from entering into contract due to certain other reasons may be from legal status, political status or corporate status. Some of such categories of persons are given below: (i) Alien Enemy: An agreement with an Alien Enemy is void. But agreement with an Alien friend is perfectly valid and enforceable. When the Government of an Alien is at war with the Government of India, the alien is called Alien enemy, who cannot enter into any contract with any Indian citizen without the permission of Government of India as the same is against the public policy. Contract entered into with an alien before war is put into suspension during the duration of war. (ii) Foreign Sovereign and Ambassadors: Foreign sovereigns and their representatives enjoy certain privileges and immunities in every country. They cannot enter into contract except through their agents residing in India. They can sue the Indian citizen but an Indian citizen cannot sue them. (iii) Convicts: A convict cannot enter into a contract while he is undergoing imprisonment. (iv) Insolvents: An insolvent person is one who is unable to discharge his liabilities and therefore has applied for being adjudged insolvent or such proceedings have been initiated by any of his creditors. An insolvent person cannot enter into any contract relating to his property. (v) Company or Statutory bodies: A contract entered into by a corporate body or statutory body will be valid only to the extent it is within its Memorandum of Association. FREE CONSENT Consent: ‘Two or more persons are said to consent when they agree upon the same thing in the same sense.’ - [Sec 13]. If the parties have not agreed upon the same thing in the same sense, there is no real consent and hence no contract is formed. As per section 14 of the Indian Contract Act, 1872 consent is said to be free when it is not caused by— (1) Coercion (Sec 15), or (2) Undue influence (Sec 16), or (3) Fraud (Sec 17), or (4) Misrepresentation (Sec 18), or (5) Mistake, subject to the provisions of Sec 20, 21 and 22. 12 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA Indian Contract Act, 1872 COERCION: [Sec. 15] The term “Coercion” has been defined in Section 15 of the Act as the committing or threatening to commit, any act forbidden by the Indian Penal Code, or the unlawful detaining, or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement. Explanation: It is immaterial whether the Indian Penal Code is or is not in force in the place where the coercion is employed. From the above definition of coercion given in section 15, consent is said to be caused by coercion, when it is obtained by any one of the following; (i) Committing or threatening to commit any act forbidden by Indian Penal Code; (ii) Unlawful detaining or threatening to detain the property of another person. Coercion may come from a person party to the contract or even third person not connected with the contract directly. Unlawful detaining also amounts to coercion: If a person unlawfully detains or gives a threat to detain any property to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement amounts to coercion. Effect of coercion: According to section 19 when the consent is caused by coercion, fraud, misrepresentation, the agreement is avoidable at the option of the party whose consent was so caused. The aggrieved party may opt to rescind the contract. If the aggrieved party seeks to rescind the contract, he must restore the benefit so obtained under the contract from other party. It should be noted that threat to commit suicide also amounts to coercion. Some special cases which are prone to be construed cases of coercion are discussed as under; 1. Prosecution: A mere threat to prosecute a man or file suit against him does not constitute coercion. In the case of Andhra Sugar Lts V State of AP AIR 1968 SC 599, it was held that compulsion of law is not a coercion, fraud, misrepresentation, mistake or even undue-influence. 2 High prices and high interest Rates: Charging high interest rate, high price etc is not coercion as the same is not prohibited under the Indian Penal code. 3. A threat to commit suicide: Consent to an agreement may at times be obtained by threatening to commit suicide. The Madras High court has held that threat to commit suicide amounts to coercion. In Amraju v Seshamma 1917 41 Mad 33 it was argued by Oldfield J, one of the judge of the Bench which decided this case, that section 15 of the Indian Contract Act, must be construed strictly and that an act which is not punishable under the Indian Penal Code cannot be said to be forbidden by it. Suicide is not punishable by the Indian Penal Code, only the attempt to suicide is punishable. UNDUE INFLUENCE: [Sec. 16] Section 16 of the Indian Contract Act defines undue influence as under: (i) 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. (ii) In particular and without prejudice to the generality of the forgoing principle, a person is deemed to be in a position to dominate the will of another— (a) Where he holds a real or apparent authority over the other, or where he stands in a fiduciary relation to the other; or THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 13 LAWS & ETHICS (b) Where he makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness, or mental or bodily distress. (iii) Where a person, who is in a position to dominate the will of another, enters into a contract with him, and the transaction appears, on the face of it or on the evidence adduced, to be unconscionable, the burden of proving that such contract was not induced by undue influence shall lie upon the person in a position to dominate the will of the other. Nothing in this sub-section shall affect the provisions of section 111 of the Indian Evidence Act, 1872 (1 of 1872). There is presumption of undue influence in the following relationships: (i) Parent and child (ii) Guardian and ward (iii) Doctor and patient (iv) Solicitor and client (v) Trustee and beneficiary (vi) Religious advisor and disciple (vii) Fiancé and fiancée There is however no presumption of undue influence in case of relationship of — (i) Landlord and tenant (ii) Debtor and creditor (iii) Husband and wife. The wife has to be pardanashin for such presumption. In these relationships undue influence has to be proved. Going through the definition of undue influence in section 16 we find that two elements are found in undue influence: (i) The relationship subsisting between the parties is such that one party is in a position to dominate the will of other and (ii) He uses that position to obtain an unfair advantage over the other. The person intending to avoid the contract on the ground of undue influence must prove both the above two elements. Examples (a) A having advanced money to his son, B, during his minority, upon B’s coming of age obtains, by misuse of parental influence, a bond from B for a greater amount than the sum due in respect of the advance. A employs undue influence. (b) A, a man enfeebled by disease or age, is induced, by B’s influence over him as his medical attendant, to agree to pay B an unreasonable sum for his professional services, B employs undue influence. (c) A, being in debt to B, the money-lender of his village, contracts a fresh loan on terms which appear to be unconscionable. It lies on B to prove that the contract was not induced by undue influence. (d) A applies to a banker for a loan at a time when there is stringency in the money market. The banker declines to make the loan except at an unusually high rate of interest. A accepts the loan on these terms. This is a transaction in the ordinary course of business, and the contract is not induced by undue influence. 14 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA Indian Contract Act, 1872 Effect of undue influence: Section 19 A provides that when the consent is caused by undue influence, the agreement is voidable at the option of the party whose consent was so caused. The aggrieved party may opt to rescind the contract. If the aggrieved party seeks to rescind the contract, he must restore the benefit so obtained under the contract from other party, upon such terms and conditions as to the court may seem just. The following illustrations are appended to the section. (a) A’s son has forged B’s name to a promissory note. B, under threat of prosecuting A’s son, obtains a bond from A for the amount of the forged note. If B sues on this bond, the Court may set the bond aside. (b) A, a moneylender, advances `100 to B, an agriculturist, and, by undue influence, induces B to execute a bond for ` 200 with interest at 6 per cent per month. The Court may set the bond aside; ordering B to repay ` 100 with such interest as may seem just. The court has discretion to direct the aggrieved party for giving back the benefit whether in whole or in part or set aside the contract without any direction for refund of benefit. In a case for avoiding a contract on the ground of undue influence, the plaintiff has to prove that: (i) the other party was in a position to dominate the will; and (ii) he actually used his influence to obtain the plaintiff’s consent to the contract; it will be then for the defendant to show that the plaintiff freely consented. The presumption is raised at least in the following cases: (a) Unconscionable bargains (b) Contracts with pardanashin women FRAUD: [Sec. 17] As per section 17 of the Indian Contract Act: “Fraud” means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract: (i) The suggestion, as a fact, of that which is not true by one who does not believe it to be true; (ii) The active concealment of a fact by one having knowledge or belief of the fact; (iii) A promise made without any intention of performing it; (iv) Any other act fitted to deceive; (v) Any such act or omission as the law specially declares to be fraudulent. Explanation: Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak, or unless his silence is, in itself, equivalent to speech. Does silence amount to fraud? At times one of the parties to a contract makes silence to some of the facts relating to the subject matter of contract. The matter on which silence is maintained by party may be material fact. Does this amount to passive fraud under the Indian Contract Act or not depends upon various factors? Explanation to Section 17 of the Indian Contract Act provides that mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud unless the circumstances of case are such that having regard to them, it is the duty of the person keeping silence to speak or unless silence itself is equivalent to speech. THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 15 LAWS & ETHICS Thus. we can say that there is exception to the rule that mere silence does not amount to silence. These two exceptions are provided in explanation to section 17 and these are as under. (i) When there is a duty to speak. (ii) Where silence is equivalent to speech. However, in the following two types of cases, silence amounts to fraud, as held by the courts in various cases: (a) Where there is change in circumstances- A representation may be true when made but with the passage of time or changed circumstances it may become false. Accordingly, this must be communicated to other party otherwise it amount to fraud. (b) When there is half-truth- Even when a person is not bound to disclose a fact, he may be held guilty of fraud if he volunteers to disclose a state of fact partly. This is so when the undisclosed part renders the disclosed part false. Examples: (a) A sells, by auction, to B, a horse which A knows to be unsound. A says nothing to B about the horse’s unsoundness. This is not fraud in A. (b) B is A’s daughter and has just come of age. Here, the relation between the parties would make it A’s duty to tell B if the horse is unsound. (c) B says to A—“If you do not deny it, I shall assume that the horse is sound.” A says nothing. Here, A’s silence is equivalent to speech. (d) A and B, being traders, enter upon a contract. A has private information of a change in prices which would affect B’s willingness to proceed with the contract. A is not bound to inform B. Effect of Fraud: According to section 19 when consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused. A party to a contract, whose consent was caused by fraud or misrepresentation, may, if he thinks fit, insist that the contract shall be performed, and that he shall be put in the position in which he would have been, if the representations made had been true. However, there is one exception to the rule of voidability of contract at the option of aggrieved party. If such consent was caused by misrepresentation, or by silence, fraudulent within the meaning of section 17, the contact, nevertheless, is not voidable, if the party whose consent was so caused had the means of discovering the truth with ordinary diligence. MISREPRESENTATION: [Sec. 18] A statement of fact which one party makes in the course of negotiation with a view to induce the other party to enter into a contract is known as misrepresentation. It must relate to some fact which is material to the contract. It may be expressed by words spoken or written or implied from the acts and conduct of the parties. A representation when wrongly made either innocently or unintentionally is a misrepresentation. When it is made innocently or unintentionally, it is misrepresentation and when made intentionally or wilfully it is fraud. Misrepresentation has been defined in section 18 of the Act as under: “Misrepresentation” means and includes— (1) The positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true; 16 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA Indian Contract Act, 1872 (2) Any breach of duty which, without an intent to deceive, gains an advantage to the person committing it, or any one claiming under him, 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. From the above definition of the term Misrepresentation, the following two types of misrepresentations are noticed: (a) Unwarranted statements: When a person positively asserts, makes an absolute and explicit statement of facts, that fact is true, though he has no reliable source to form this opinion, but he believe it to be true. This is one type of misrepresentation. (b) Breach of duty: Any breach of duty which brings advantages to the person committing it by misleading the other to his prejudice is a misrepresentation. Effect of Misrepresentation: As per section 19 when consent to an agreement is caused by misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused. A party to a contract, whose consent was caused by misrepresentation, may, if he thinks fit, insist that the contract shall be performed, and that he shall be put in the position in which he would have been, if the representations made had been true. Exception: If such consent was caused by misrepresentation or by silence, fraudulent within the meaning of section 17, the contract, nevertheless, is not voidable, if the party whose consent was so caused had the means of discovering the truth with ordinary diligence. Explanation: A fraud or misrepresentation which did not cause the consent to a contract of the party on whom such fraud was practised, or to whom such misrepresentation was made, does not render a contract voidable. Examples: (a) A, intending to deceive B, falsely represents that five hundred maunds of indigo are made annually at A’s factory, and thereby induces B to buy the factory. The contract is voidable at the option of B. (b) A, by a misrepresentation, leads B erroneously to believe that, five hundred maunds of indigo are made annually at A’s factory. B examines the accounts of the factory, which show that only four hundred maunds of indigo have been made. After this B buys the factory. The contract is not voidable on account of A’s misrepresentation. (c) A fraudulently informs B that A’s estate is free from incumbrance. B thereupon buys the estate. The estate is subject to a mortgage. B may either avoid the contract, or may insist on its being carried out and the mortgage debt redeemed. (d) B, having discovered a vein of ore on the estate of A, adopts means to conceal, and does conceal, the existence of the ore from A. Through A’s ignorance B is enabled to buy the estate at an under-value. The contract is voidable at the option of A. (e) A is entitled to succeed to an estate at the death of B, B dies: C, having received intelligence of B’s death, prevents the intelligence reaching A, and thus induces A to sell him his interest in the estate. The sale is voidable at the option of A. MISTAKE: [Sec. 20, 21 and 22] Mistake means an erroneous belief about something. It has not been defined in the Indian Contract Act. THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 17 LAWS & ETHICS Mistake can be - (A) Mistake of law, or (Sec 21) (B) Mistake of fact (Sec 20) (A) Mistake of law may be: (i) mistake of law of the country (ii) mistake of law of a foreign country (i) Mistake of law of the country: When a party enters into a contract, without the knowledge of law in the country, the contract is affected by such mistake but it is not void. A contract is not voidable because it was caused by a mistake as to any law in force in India. The reason here is that ignorance of law is not an excuse at all. However, if a party is induced to enter into a contract by the mistake of law, then such a contract may be avoided. (ii) Mistake of law of foreign country: Such a mistake is treated as mistake of fact and agreement is such case is void. (B) Mistake of fact may be: (I) Bilateral mistake, or (II) Unilateral mistake (I) Bilateral mistake Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void. Explanation: An erroneous opinion as to the value of the thing which forms the subject-matter of the agreement is not to be deemed a mistake as to a matter of fact. In order to render an agreement void due to bilateral mistake, the following two conditions must be met:- (a) Mistake must be mutual: Both the parties must misunderstand each other and should be at cross purpose. (b) Mistake must relate to a matter of fact essential to the agreement: What is essential fact of an agreement depends upon the nature of promise in each case. The various types of mistakes falling under bilateral mistakes are as under: (i) Mistake as to subject matter covers following cases: (a) Mistake as to existence of subject matter: If both the parties are at mutual mistake as to existence of the subject matter, the agreement is void. (b) Mistake as to identity of subject matter: It usually happens when both the parties have different subject matter of contract in their mind. The agreement is void due to mistake of identify of subject matter. (c) Mistake as to the quality of the subject matter: If the subject matter is something essentially different from what the parties thought to be, the agreement is void. (d) Mistake as to quantity of subject matter: Bilateral mistake as to quantity of subject matter would render the agreement void. (e) Mistake as to title of subject matter: The agreement is void due to bilateral mistake as to title of the subject matter. 18 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA Indian Contract Act, 1872 (f) Mistake as to price of the subject matter: Mutual mistake as to price of the subject matter would render the agreement void. (ii) Mistake as to possibility of performance of Contract Impossibility may be: (a) Physical impossibility: An agreement is void, if it is identified to be non-feasible due to physical factors, like time, distance, height, etc. (b) Legal impossibility: An agreement is void, if it provides that something shall be done which as a matter of law cannot be done. Examples: (a) A agrees to sell to B a specific cargo of goods supposed to be on its way from England to Bombay. It turns out that, before the day of the bargain, the ship conveying the cargo had been cast away and the goods lost. Neither party was aware of the these facts. The agreement is void. (b) A agrees to buy from B a certain horse. It turns out that the horse was dead at the time of bargain, though neither party was aware of the fact. The agreement is void. (c) A, being entitled to an estate for the life of B, agrees to sell it to C. B was dead at the time of the agreement, but both parties were ignorant of the fact. The agreement is void. (II) Unilateral Mistake as to fact: As per section 22, 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. A unilateral mistake is not allowed as a defence in avoiding a contract unless brought about by another party’s fraud or misrepresentation. 1.7 QUASI CONTRACTS, CONTINGENT CONTRACTS, TERMINATION OR DISCHARGE OF CONTRACTS QUASI CONTRACTS Sometimes the law implies a promise imposing obligations on one party and conferring the right in favor of the other even when there is no offer, no acceptance, no consensus ad idem, and in fact, there is neither agreement nor promise. Such cases are not contracts but the court recognizes them as relations resembling those of contracts and enforces them as if they were contracts. Such is called as a quasi contract. This type of contract rests on the equitable principle that a person shall not be allowed to enrich himself unjustly in the experience of another. It is obligation which the law creates in the absence of any agreement, when any person is in the possession of one person’s money or its equivalent under such circumstances that in equity and good conscience, he ought not to retain it and which in justice and fairness belongs to another. It is the duty and not an agreement or intention which defines it. In the Act, the following type of quasi contracts are discussed- Section 68 – Claim for necessaries supplied to person incapable of contracting, or on his account - This section provides that if a person, incapable of entering into a contract, or any one whom he is legally bound to support, is supplied with another person with necessaries suited to his condition in life, the person who has furnished such supplies is entitled to be reimbursed from the property of such incapable person. Examples: (a) A supplies B, a lunatic, with necessaries suitable to his condition in life. A is entitled to be reimbursed from B’s property. THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 19 LAWS & ETHICS (b) A supplies the wife and children of B, a lunatic, with necessaries suitable to their condition in life. A is entitled to be reimbursed from B’s property. Section 69 – Reimbursement of persons paying money due by another, in payment of which he is interested – This section provides that a person who is interested in the payment of money which another is bound by law to pay, and who therefore pays it, is entitled to be reimbursed by the other. Examples: B holds land in Bengal, on a lease granted by A, the zamindar. The revenue payable by A to the Government being in arrear, his land is advertised for sale by the Government. Under the revenue law, the consequence of such sale will be the annulment oflease. B, to prevent the sale and the consequent annulment of his own lease, pays to the Government the sum due from A. A is bound to make good to B the amount so paid. Section 70 – Obligation of person enjoying benefit of non-gratuitous act – This section provides that where a person lawfully does anything for another person, or delivers anything to him, not intending to do so gratuitously, and such other person enjoys the benefit thereof, the latter is bound to make compensation to the former in respect of, or to restore, the thing so done or delivered – it is otherwise called as quantum meruit. Examples: (a) A, a tradesman, leaves goods at B’s house by mistake. B treats the goods as his own. He is bound to pay A for them. (b) A saves B’s property from fire. A is not entitled to compensation from B, if the circumstances show that he intended to act gratuitously. Section 71 – Responsibility of finder of goods – This section provides that a person who finds goods belonging to another, and takes them into his custody, is subject to the same responsibility as a bailee. Section 72 – Liability of person to whom money is paid or thing delivered, by mistake or under coercion – This section provides that a person to whom money has been paid, or anything delivered, by mistake or under coercion, must repay or return it. Examples : (a) A and B jointly owe 100 rupees to C, A alone pays the amount to C, and B, not knowing this fact, pays 100 rupees over again to C. C is bound to repay the amount to B. (b) A railway company refuses to deliver up certain goods to the consignee, except upon the payment of an illegal charge for carriage. The consignee pays the sum charged in order to obtain the goods. He is entitled to recover so much of the charge as was illegally excessive. CONTINGENT CONTRACTS Section 31 defines ‘contingent contract’ as a contract to do or not to do something, if some event, collateral to such contract, does or does not happen. The following are the essentials of contingent contract- Example: A contracts to pay B ` 10,000 if B’s house is burnt. This is a contingent contract. The following are the essentials of a contingent contract. Uncertainty and futurity of the event to which it is related; Uncertain future event must be collateral to the contract. 20 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA Indian Contract Act, 1872 An agreement to sell unspecified half share in the property is not contingent contract as held in ‘Harbakhash Singh Gill V. Ram Rattan’ AIR 1988 P&H 60. In ‘Bhairon Prasad Chaurasiya V. Smt. Tara Devi’ – AIR 1980 All. 36 it was held that an agreement to sell a house is by no means a ‘contingent contract’. An agreement to purchase a property is neither a contingent contract nor can it be characterized as a mere possible right or interest. It was contended that the contract is a ‘contingent contract’ because of either of the parties to the contract may refuse to perform his part on the contract. The Court held that the argument is fallacious. Such a contingency would not be a collateral to a contract. An agreement to purchase a property is neither a ‘contingent contract’ nor can it be characterized as a mere possible right of interest. Reciprocal promises are not contingent contracts as they cannot be said to be collateral to each other. The law allows the enforcement of a contingent contract after the event upon which it was contingent has happened. The contingency which is the essence of a condition must be distinguished from mere futurity. An obligation is not to be classified as conditional because its performance is not yet due. A contingent contract need not necessarily be independent on any external event. It may be conditional on the voluntary act or the future conduct of one of the parties or a third person. Enforcement of contingent contract Section 32 provides that contingent contracts to do or not to do anything, if an uncertain future event happens cannot be enforced by law unless and until that event has happened. If the event becomes impossible, such contracts become void. Examples – (a) A makes a contract with B to buy B’s horse if A survives C. This contract cannot be enforced in law unless and until C dies in A’s lifetime. (b) A makes a contract with B to sell a horse to B at a specified price if C, to whom the horse has been offered, refused to buy him. The contract cannot be enforced by law unless and until C refuses to buy the horse. (c) A contract to pay B a sum of money when B marries C. C dies without being married to B. The contract becomes void. Section 33 provides for enforcement of contacts contingent on an event not happening. This section provides that contingent contracts to do or not to do anything if an uncertain future event does not happen, can be enforced when the happening of that event becomes impossible, and not before. Explanation – A agrees to pay B a sum of money, if a certain ship does not return. The ship is sunk. The contract can be enforced when the ship sinks. Section 34 discusses about deemed impossible contract. The said section provides that if the future event on which a contract is contingent is the way in which a person will act at an unspecified time, the event shall be considered to become impossible when such person does anything which renders it impossible that he should so act within any definite time, or otherwise than under further contingencies. Example – A agrees to pay B a sum of money if B marries C, C marries D. The marriage of B to C must now be considered impossible; although it is possible that D may die and that C may afterwards marry B. Section 35 provides for the contracts which are contingent on happening of specified event within fixed time. The said section provides that contingent contracts to do or not to do anything, if a specified THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 21 LAWS & ETHICS uncertain event happens within a fixed time, become void if, at the expiration of the time fixed, such event has not happened, or if, before the time fixed, such event becomes impossible. Contingent contracts to or not to do anything, if a specified uncertain event does not happen within a fixed time, may be enforced by law when the time fixed has expired and such event has not happened, or before the time fixed has expired, if it becomes certain that such event will not happen. Examples – (a) A promises to pay B a sum of money if a certain ship returns within a year. The contract may be enforced if the ship returns within the year and becomes void if the ship is burnt within the year; (b) A promises to pay B a sum of money if a certain ship does not return within a year. The contract may be enforced if the ship does not return within the year, or is burnt within the year. Agreements contingent on impossible event void Section 36 provides that contingent agreements to do or not to do anything, if an impossible event happens, are void, whether the impossibility of th event is known or not to the parties to the agreement at the time when it is made. Example – (a) A agrees to pay B `1,000/- if two straight lines should enclose a space. This agreement is void. (b) A agrees to pay B `1,000/- if B will marry A’s daughter C. C, was dead at the time of the agreement. The agreement is void. DISCHARGE OF CONTRACTS When the rights and obligations created by a contract come to an end, the contract is said to be discharged or terminated. In other words, discharge of contract means termination of contractual relationship between the parties. Modes of discharge of contracts: The following are the various modes or methods by which a contract is discharged. Discharge amounts to end of a contract. 1. Discharge by performance 2. Discharge by agreement 3. Discharge by lapse of time 4. Discharge by operation of law 5. Discharge by impossibility of performance 6. Discharge by breach of contract 1. Discharge by performance: Performance is the usual mode of discharge of a contract. Performance may be (a) actual performance (b) attempted performance. Actual performance is the fulfilment of the obligations arising from a contract by the parties to it, in accordance with the terms of the contract. 22 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA Indian Contract Act, 1872 Offer of performance is also known as attempted performance or tender of performance. A valid tender of performance is equivalent to performance. Modes of Discharge Discharge by Discharge by Discharge by Discharge by Discharge by Discharge by performance agreement lapse of time operation of impossibility of breach of law performance contracrt 1. Novation 2. Alteration 1. Death 3. Recession 2. Insolvency 4. Remission 3. Unauthorised material 5. Waiver alternation 4. Merger Actual Attempted Performance Performance 2. Discharge by agreement: The parties may agree to terminate the existence of the contract by any of the following ways: (a) Novation. (b) Alteration (c) Rescission (d) Remission (e) Waiver a. Novation: Substitution of a new contract in place of the existing contract is known as “Novation of Contract”. It discharges the original contract. The new contract may be between the same parties or between different parties. Novation can take place only with the consent of all the parties. Example: A owes money to B under a contract. It is agreed between A, B and C that B should accept C as his debtor, instead of A. The old debt of A and B is at an end and a new debt from C to B has been contracted. There is novation involving change of parties. b. Alteration: Alteration means change in one or more of the terms of the contract. In case of novation, there may be a change of the parties, while in the case of alteration, the parties remain the same. But there is a change in the terms of the contract. c. Rescission: Rescission means “cancellation”. All or some of the terms of a contract may be cancelled. Rescission results in the discharge of the contract. Example: A promises to deliver certain goods to B at a certain date. Before the date of performance A and B mutually agree that the contract need not be performed. The contract stands discharged by rescission. THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 23 LAWS & ETHICS d. Remission: Remission means acceptance of a lesser performance that what is actually due under the contract. There is no need of any consideration for remission. Example: A has borrowed Rs. 500 from B. A agrees to accept Rs. 250 from B in satisfaction of the whole debt. The whole debt is discharged. e. Waiver: Waiver means giving up or foregoing certain rights. When a party agrees to give up its rights, the contract is discharged. Example: A promises to paint a picture of B. B afterwards forbids him to do so. A is no longer bound to perform the promise. 3. Discharge by lapse of time: Every contract must be performed within a fixed or reasonable period. Lapse of time discharges the contract. The Indian Limitation Act has prescribed the period within which the existing rights can be enforced in courts of law. Example: If a creditor does not file a suit within three years of debt, the debt becomes time-barred. He is deprived of his legal remedy. 4. Discharge by operation of law: A contract may be discharged by operation of law in the following cases. (a) Death (b) Insolvency (c) Unauthorized material alteration. (d) Merger a. Death: In contracts involving personal skill or ability, death terminates the contracts. In other cases, the rights and liabilities of the deceased person will pass on to his legal representatives. b. Insolvency: The insolvency of the promisor discharges the contract. The promisor is discharged from all liabilities incurred prior to his adjudication. c. Unauthorized material alteration: Material alteration in the terms of the contract without the consent of the other party discharges the contract. Change in the amount of money to be paid, date of payment, place of payment etc. are examples of material alteration. d. Merger: When inferior rights of a person under a contract merge with superior rights under a new contract, the contract with inferior rights will come to an end. Example: Where a part-time lecturer is made full-time lecturer, merger discharges the contract of part- time lecturership. 5. Discharge by impossibility of performance: Impossibility of performance results in the discharge of the contract. An agreement which is impossible is void, because law does not compel to do impossible things. 24 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA Indian Contract Act, 1872 6. Discharge by breach: Breach means failure of a party to perform his obligations under a contract. Breach brings an end to the obligations created by a contract. Example: A and B wanted to marry each other. Before the time fixed for marriage, A goes mad. The contract becomes void. TERMINATION OF CONTRACT The proper way, in which the agreement could have been terminated by issuing of a notice to the plaintiff, calling upon to complete the transaction within a particular time, failing which the contract will be treated as cancelled. That this is the proper way of terminating the contract is cleared from what has been observed in ‘’Narayana Swami PillaiV. Dhanakodi Ammal’ – (1971) 1 Mys. L.J., 245 that when the contract is for the sale of immovable property the vendor must given reasonable notice requiring the performance within a definite time. 1.8 SPECIAL CONTRACTS: INDEMNITY AND GUARANTEE; BAILMENT AND PLEDGE; LAWS OF AGENCY CONTRACT OF INDEMNITY AND GUARANTEE Chapter VIII of the Act deals with the contract of indemnity and guarantee. Sections 124 and 125 deal with the contract of indemnity. The other provisions deal with the contract of guarantee. Contract of Indemnity Section 124 of the Act defines the expression ‘contract of indemnity’ as 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 conduct of any other person. Example – A contracts to indemnify B against the consequences of the proceedings which C may take against B in respect of a certain sum of `2 lakhs. This is a contract of indemnity. This contract includes indemnifier and indemnity holder. A person who promises to indemnify from losses is called as indemnifier and the person whose loss is made good is called as indemnity holder. To indemnify does not merely means to reimburse in respect of moneys paid, but to save from loss in respect of the liability for which the indemnity has been given. A contract of indemnity may be either expressed or implied. In ‘Kuppan Chettiar V. Ramaswami Chettiar’ – ILR (1947) Mad.58 it was held that there is implied by law a contract by the person making the request to keep indemnified the person having the duty against any liability which may result from such exercise of the supposed duty. In ‘The New India Assurance Co. Limited V. State Trading Corporation of India’ – AIR 2007 (NOC) 517 (Guj) it was held that almost all insurance other than life and personal accident insurances are contracts of indemnity. In ‘National Overseas V. Export Credit Guarantee Corporation of India Limited’ Air 2008 All 18 it was held that where export risk policy issued by Export Credit Guarantee Corporation and exporter had consigned shipments to buyer at his own risk without resorting to terms of policy, the corporation is not liable to indemnify loss caused to exporter. Rights of indemnity holder when sued Section 125 provides the rights of indemnity holder when sued. This section provides that the promise, in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor- all damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies; THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 25 LAWS & ETHICS all costs which he may be compelled to pay in any such suit if, in bringing or defending it, he did not contravene the orders of the promisor, and acted as it would have been prudent for him to act in the absence of any contract of indemnity, or if the promisor authorized him to bring or defend the suit; all the sums which he may have paid under the terms of any compromise of any such suit, if the compromise was not contrary to the orders of the promisor, and was one which it would have been prudent for the promise to make in the absence of any contract of indemnity, or if the promisor authorized him to compromise the suit. This section is not exhaustive and does not set out all the reliefs which an indemnity holder who has been sued may get. It leaves untouched certain equitable reliefs which he may get. The rights of the indemnity holder are not confined to those mentioned in this section. Even before damage is incurred, it is open to him to sue for the specific performance of the contract of indemnity, provided that it is show, that an absolute liability has been incurred by him and that the contract of indemnity covers the said liability. In ‘Pepin V. Chandra Seekur’ – ILR 5 Cal. 811 it was held that in the case of contract of indemnity, the liability of the party indemnified to a third person is not only contemplated at the time of indemnity, but is the very moving cause of that contract and in case of such a nature, the costs reasonably incurred in resisting or reducing or ascertaining the claim may be recovered. Contract of Guarantee Section 126 defines the expression ‘the contract of guarantee’ as a contract to perform the promise, or discharge the liability of a third person in case of his default. The components of this contract consist of- surety – the person who gives the guarantee is called as the ‘surety’; principal debtor – the person in respect of whose default the guarantee is given is called the ‘principal debtor’; creditor – the person to whom the guarantee is given is called the ‘creditor’. A guarantee may be either oral or written. It is a tripartite agreement which contemplates the principal debtor, the creditor and the surety. Consideration for guarantee Section 127 provides that anything done, or any promise made, for the benefit of the principal debtor, may be a sufficient consideration to the surety for giving guarantee. Examples – (a) B requests A to sell and deliver to him goods on credit. A agrees to do so, provided C will guarantee the payment of the price of the goods. C promises to guarantee the payment in consideration of A’s promise to deliver the goods. This is sufficient consideration for C’s promise (b) A sells and delivers goods to B. C afterwards requests A to forbear to sue B for the debt for a year, and promises that, if he does so, C will pay for them in default of payment by B. A agrees to forbear as requested. This is a sufficient consideration for C’s promise (c) A sells and delivers goods to B. C afterwards, without consideration, agrees to pay for them in default of B. The agreement is void. This section takes into its fold past consideration also. Like any other contract, a contract of guarantee must be supported by consideration. It is not necessary that the consideration should be received by the surety. Consideration between the principal debtor and the creditor is good consideration for the guarantee given by the surety. 26 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA Indian Contract Act, 1872 In ‘Rajemdra V. Mahila Chandrabai’ – 2012 (1) MPLJ 164 the case is within the purview of example (c). Merely because the appellant made promise to the plaintiff that in this case first and second defendants who were required to pay the sale price to her, fail to pay the same, he would pay the sale price, that promise was without consideration and therefore the said agreement between the plaintiff and third defendant was void. Needless to say that a void agreement cannot be enforced by law and therefore, since the status of the appellant (third defendant) is that of a guarantor, his case is covered under the ambit of example © to Section 127 of the Act and he is not liable to pay the sale consideration or any other amount to the plaintiff on account of the failure in making the payment by first and second defendants. In ‘United Breweries (Holding) Limited V. K.S.I.I. & D.C. Limited’ – AIR 2012 (NOC) 154 (Cal.) it was held that it is clear that the question as to whether the deed in question is a deed of guarantee or not depends upon the terms under which the guarantor binds himself. Under law, he cannot be made liable for more than what he has undertaken. There is no ambiguity that the appellant has not undertaken that he would repay the loans of respondent No. 2, in case if respondent No.2 fails to discharge its liability. Therefore the appellant cannot be made liable for more than what it has undertaken. Distinction between Indemnity and Guarantee The contract of indemnity differs from the contract of guarantee in the aspects shown in the following table: Sl.No. Contract of Indemnity Contract of guarantee 1 In this contract there are two parties – the In this contract three parties are involved – indemnifies and the indemnified principal debtors, surety and creditor 2 The primary liability is on the indemnifier The principal liability is on the principal debtors. Secondary liability is on the surety. 3 The indemnifier is not acting at the request The surety gives contract at the request of the of the debtor. principal debtor. 4 The possibility of any loss happening is There is an existing debt for which the surety the only contingency against which the gives guarantee to the creditor on behalf of the indemnifier undertakes to indemnify. principal debtor. 5 The indemnifier cannot sue the third party The surety is entitled to proceed against the in his own, unless there is an assignment. principal debtor when he is obliged to perform the guarantee 6 The contract is between the indemnifier The contract is between the principal debtor- and indemnified. creditor; surety – creditor; principal debtor- surety. Liability of surety The liability of surety arises only when the principal debtor fails to pay the debt to the creditor. Section 128 provides for the liability of surety. The said section provides that the liability of the surety is co- extensive with that of the principal debtor, unless it is otherwise provided by the contract. Example – A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is dishonored by C. A is liable, not only for the amount of the bill, but also for any charges which may have become due on it. The liability of the surety is co-extensive with that of the principal debtor and the surety is liable to pay the entire amount his liability being immediate as held in ‘Gouri Prasad V. Rabo India Finance Limited’ – 2013 (2) Mh.L.,J. 195. In ‘Swaminatha Pillai V. Lakshman Ayya’ – AIR 1935 Mad 748 it was held that there is no authority for the general proposition that a creditor cannot proceed against the surety unless he has first exhausted all his remedies against the principal debtor. THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 27 LAWS & ETHICS Where the letter of guarantee issued by a guarantor, guarantees repayment of only the principal sum and does not guarantee the payment of any interest, he could not be made liable for the payment of interest as held in ‘S.N. Prasad V. Monnet Finance Limited’ – (2011) SCC 320. Continuing Guarantee Section 129 of the Act defines the expression ‘continuing guarantee’ as a guarantee which extends to a series of transactions. Examples – A, in consideration that B will employ C in collecting the rents of B’s zamindari, promises B to be responsible, to the amount of `5,000/- for the due collection and payment by C of those rents. This is a continuing guarantee. A guarantees payment to B, a tea-dealer, to the amount of $100, for any tea he may from time to time supply to C, B supplies C with tea to above the value of $ 100 and C pays B for it. Afterwards B supplies C with tea to the value of $ 200. C fails to pay. The guarantee given by A was a continuing guarantee and he is accordingly liable to B to the extent of $100. A guarantees payment to B of the price of five sacks of flour to be delivered to B to C and to be paid for in a month. B delivers five sacks to C. C pays for them. Afterwards B delivers four sacks to C, which C does not pay for. The guarantee given by A was not a continuing guarantee and accordingly he is not liable for the price of four sacks. A guarantee for a future performance may either be restricted to a debtor or liability of a certain amount to be incurred once for all, or it may be continuing. If the liability extends to a single transaction, it is specific. In case it extends to a series of transactions it is continuing. In ‘Gopinathan V. Nedungadi Bank Limited’ – 2013 (3) KLT 115 it was held that on the strength of continuing guarantee, liability of the guarantors continued not withstanding that the personal remedy against the second respondent stood discharged. Revocation of continuing guarantee A continuing guarantee can be revoked by two ways- Revocation by surety; Revocation on the death of surety. Revocation of continuing guarantee by surety Section 130 provides that a continuing guarantee may at any time revoked by the surety, as to future transactions, by notice to the creditor. Example – A, in consideration of B’s discounting at A’s request, bills of exchange for C, guarantees to B, for 12 months, the due payment of all such bills to the extent of `5000. B discounts bill for C to the extent of `2000/-. Afterwards, at the end of three months, A revokes guarantee. The revocation discharges A from all liability to B for any subsequent discount. But A is liable to B for `2000/- on default of C. A guarantees to B, to the extent of `10,000/- that C shall pay all the bills that B shall draw upon C. C accepts the bill. A gives notice of revocation. C dishonors the bill at mat

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