Taxmann's Business Laws & Ethics (Law/BLE) | CRACKER

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Module-wise Marks Distribution

I-5

Previous Exams Trend Analysis

I-7

Module-wise Comparison with Study Material

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SECTION A Module 1

INTRODUCTION TO LAW & LEGAL SYSTEM IN INDIA

1.3

Module 2

INDIAN CONTRACT ACT, 1872

2.1

Module 3

SALE OF GOODS ACT, 1930

3.1

Module 4

NEGOTIABLE INSTRUMENTS ACT, 1881

4.1

Module 5

INDIAN PARTNERSHIP ACT, 1932

5.1

Module 6

LIMITED LIABILITY PARTNERSHIP ACT, 2008

I-13

6.1

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COMMERCIAL LAWS

I-14

CONTENTS PAGE

SECTION B INDUSTRIAL LAWS Module 7

FACTORIES ACT, 1948

7.3

Module 8

PAYMENT OF GRATUITY ACT, 1972

8.1

Module 9

EMPLOYEES PROVIDENT FUND & MISCELLANEOUS PROVISIONS ACT, 1952

9.1

Module 10

EMPLOYEES STATE INSURANCE ACT, 1948

10.1

Module 11

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CODE ON WAGES, 2019

11.1

SECTION C CORPORATE LAWS Module 12

COMPANIES ACT, 2013

12.3

SECTION D BUSINESS ETHICS Module 13 BUSINESS ETHICS & EMOTIONAL INTELLIGENCE

13.3

Module-wise Solved Paper : Dec. 2023 (Suggested Answers)

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M O D U L E CHAPTER 2.1 ESSENTIAL ELEMENTS OF A CONTRACT, OFFER & ACCEPTANCE 䖾 A Quick Review Section

Particulars

Definition

Proposal/offer

When one person signifies to another, his willingness to do or to abstain from doing anything, with a view of obtaining the assent of that other person to such act, abstinence, he is said to make proposal.

2(b)

Promise

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.

2(c)

Promisor & Promisee

The person making the proposal is called “promisor” & person accepting it is called “promisee”.

2(d)

Consideration

When at the desire of the promisor, the promise or any other person has done or abstained from doing, or does or abstains from doing or promises to do or abstain from doing something, such act or abstinence or promise is called consideration.

2(e)

Agreement

Every promise & every set of promises, forming the consideration for each other is an agreement.

2(h)

Contract

An agreement between two or more parties enforceable by law.

MEANING OF CERTAIN TERMS Voidable contract

Void ab initio

An agreement which is enforceable by law at the option of one or more parties thereto but not at the option of other is a voidable contract. Ex. Any one of the essential element of valid contract is missing.

The agreement which from the very beginning is null and void with no legal enforceability is called void ab initio.

2.1

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2(a)

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SECTION A : COMMERCIAL LAWS

Void agreement Void contract

An agreement not enforceable by law is said to be a void agreement.

It is void ab initio.

A contract which ceases to be unenforceable by law becomes void.

Void contract is initially a perfectly valid contract but subsequent development turns it into a void contract.

ESSENTIAL ELEMENT OF VALID CONTRACT:

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Elements

Explanation

Agreement

For valid contract there must be an agreement which further comprises of offer (whose terms must be definite) & acceptance (which should be absolute & unconditional) between 2 or more parties.

Free consent

If the consent of the parties is obtained through coercion, undue influence, fraud, misrepresentation or mistake then a valid contract cannot take place. The consent must be free.

Lawful consideration

Consideration means something in return. It may be an act or abstinence. But it should be real & lawful.

Competent parties

A competent person is one who is 1. At least of 18 years 2. Of sound mind 3. Not disqualified by any law for contracting. If any point is missing in the person then he cannot be termed as competent person.

Legality of object

The object of the contract must be legal or else the contract will not be valid.

Legal relationships

Parties must create legal relationship. Agreements with social or domestic obligations are not contract.

Agreements not to be expressly declared void

Agreements should not be void or illegal.

Certainty & capability of performance

The terms & conditions of agreement must be certain & capable of being performed.

Legal formalities

There are certain legal formalities to be fulfilled until which the agreement cannot be enforced. For eg. Registration, etc.

The contract can be oral or written. Written is preferable.

LEGAL RULES REGARDING OFFER Offer may be expressed or implied Offer may be specific or general Offer must give rise to legal obligation Terms of an offer must be definite and certain Offer must be distinguished from an invitation to offer Offer must be communicated

2.3

MODULE 2 : INDIAN CONTRACT ACT, 1872

Offer must be made with a view to obtaining the consent of the other party Offer should not impose an unnecessary obligation to communicate non-acceptance Communication of Special Terms Offer to make an offer is not an offer

LEGAL RULES REGARDING ACCEPTANCE Acceptance must be absolute and unqualified Acceptance must be communicated Acceptance must be in a prescribed or reasonable mode Acceptance must be given within a reasonable time and before the offer lapses Acceptance cannot precede an offer Acceptance must be given only by the person to whom the offer is made Rejected offer can be accepted only on renewal Revocation of acceptance Acceptance to give an acceptance is not an acceptance

WHEN COMMUNICATION IS COMPLETE, IN DIFFERENT CASES Acceptance

Revocation

As per Para 2 of sec. 4, Communication of acceptance against proposer is complete when it is put into course of transmission to him & out of reach of acceptor.

Communication of acceptance against promisee or acceptor is complete when it comes to the knowledge of the proposer.

As per Para 3 of sec. 4, Communication of revocation comes to an end against the person who revocates it, when it is put into course of transmission to whom it is made & out of reach of person revocating it.

Communication of revocation comes to an end against the person to whom it is made when it comes to his knowledge.

PAST EXAMINATION QUESTIONS OBJECTIVES True or false: Q. 1. A promise in return for promise means Cross promises.

Ans. False

[June 2019, 1 Mark]

Q. 2. All agreements are contracts but all contracts are not agreements.

Ans. False

[Dec. 2019, 1 Mark]

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Offer As per Para 1 of sec. 4, the communication of offer comes to an end when it comes to the knowledge of the person to whom it is made.

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SECTION A : COMMERCIAL LAWS

Fill in the blanks: Q. 1. The maximum number of parties in a contract may be _______________.

Ans. Infinite Q. 2. Acceptance may be either general or

[June 2016, 1 Mark] .

Ans. Special

[July 2023, 1 Mark]

Multiple Choice Questions: Q. 1. Cash is withdrawn by a customer of a bank from the automatic teller machine is an example of: (a) Express Contract (b) Void Contract (c) Tacit Contract (d) Illegal Contract

[Dec. 2013, 1 Mark]

Q. 2. In social agreements usual presumption is: (a) That parties do not intend to create social relations. (b) That parties intend to perform them.

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(c) That parties do not intend to make legal and social relations. (d) That the parties do not intend to create legal relations between them.

[Dec. 2014, 1 Mark] Q. 3. Which of these are sources of Indian Contract Act? (a) Law framed by East India Company (b) American Mercantile Law (c) Vedas and Purans (d) English Mercantile Laws [Dec. 2015, 1 Mark] Q. 4. If the Act has been done before any promise is made, it is called: (a) Present consideration (b) Past consideration (c) Future consideration (d) Executory consideration [Dec. 2015, 1 Mark] Q. 5. A goods displayed in a shop with a price tag is a ______________. (a) Offer (b) Invitation to offer (c) Counter offer (d) None of the above [Dec. 2015, 1 Mark] Q. 6. A contract is a combination of: (a) Agreement and free consent (b) Agreement and consideration (c) Agreement and enforceability [June 2016, 1 Mark] (d) Agreement and competence of parties

2.5

MODULE 2 : INDIAN CONTRACT ACT, 1872

Q. 7. Which of the following is an invitation for offer? (a) A tender to supply goods at a certain time (b) A request for a loan (c) Bids in an auction sale (d) A catalogue of goods for sale [June 2017, 1 Mark] Q. 8. A invites B for his son’s wedding. B accepts the invitation. In this case, there is an agreement but no contract since: (a) There is no consideration. (b) There is no intention to create legal relationship. (c) There is no written document. (d) There is no formal acceptance of the offer.

[Dec. 2017, 1 Mark] Q. 9. A proposal may be revoked at any time before: (a) The communication of acceptance (b) The payment of consideration (c) Signing the agreement (d) Execution of the proposal [Dec. 2018, 1 Mark] ANSWERS: (c)

2.

(d)

8.

(b)

9.

(a)

3.

(d)

4.

(b)

5.

(b)

6.

(c)

7.

(d)

THEORY QUESTIONS Q. 1. When a communication of a revocation of an offer is complete.

[June 2014, 2 Marks] Ans. As per Section 4(3) of Indian Contract Act, 1872, the communication of a revocation of offer is complete: As against the person who revocates it: When it is put into a course of transmission to the person to whom it is made, so as to be out of power of the person revocating it.

As against the person to whom it is made: When it comes to his knowledge.

Q. 2. An offer may contain a term, the non-compliance of which would amount to acceptance. Give correct answer.

[Dec. 2014, 2 Marks] Ans. The offer should not impose on the offeree an obligation to reply, while making the offer, the offeror cannot say that if the offer is not accepted before a certain date it will be presumed to have been accepted, unless the offeree sends his reply, no contract will arise. There is no requirement for the acceptor to send communication of non-acceptance.

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1.

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SECTION A : COMMERCIAL LAWS

PRACTICAL QUESTIONS Q. 1. Mr. A offers to buy Mr. B’s house on certain terms. Acceptance was to be sent by B within 6(six) weeks. B within one week sent a letter accepting the offer with an alteration of one term. A then withdrew his offer. B writes again within three weeks accepting the terms originally proposed by A. Hence is this a valid contract?

[June 2013, 2 Marks] Or W offered to sell his house to M for ` 40 lakhs. M replied purporting to accept the offer and enclosed a cheque for ` 20 lakhs. He also promised to pay the balance amount in twenty equal instalments. Examine the validity of the contract.

[June 2014, 2 Marks] Or

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A offers to buy B’s House on certain terms. An answer is to be given within six weeks. B within this time writes to A a letter purporting to accept but in fact containing a material alteration of the terms. A then withdraws his offer.

B writes again still within 6 weeks correcting the error in his first letter and accepting the terms originally proposed by A. Is there a contract between A and B? Give reasons for your answer.

[Dec. 2015, 2 Marks] Ans. A proposal accepted by the offeree is termed as acceptance. An offer can be accepted by the person to whom the offer is made.

As per Section 7(1) of Indian Contract Act, 1872, acceptance must be absolute and unqualified. A qualified acceptance or a counter offer, offering different terms amounts to counter proposal leading to rejection of offer i.e. offer comes to an end.

No contract would come into existence even if the offeree wants to subsequently accept the original offer after withdrawal of offer as it will be deemed to have lapse.

In given case, B made a qualified acceptance by altering certain terms of the original offer. So, A withdraws the same. Then, B subsequently changes his mind and wants to accept the terms originally offered by A within the specified time. This will not give rise to any contract since the original offer of A will be deemed to have been lapsed.

Moreover, it is not binding on the part of A to keep his offer open for six weeks.

The contract is not valid. Now, if B still wants to purchase A’s house, he will have make a new offer to A or wait for A’s new offer.

In 2nd question also there is alteration of terms making acceptance qualified resulting in an invalid contract.

Q. 2. Mr. Rabin tells Miss Rekha that Mr. Rajib expressed his willingness to marry Miss Rekha on 25th December, 2014. This is a valid contract. Comment.

[Dec. 2014, 2 Marks] Ans. As per Section 10 of Indian Contract Act, 1872, the essential condition of communication of offer from one party to another must exist.

In given case, there was no communication between Mr. Rajib & Ms. Rekha is missing.

Therefore, this is neither a valid agreement nor a contract.

MODULE 2 : INDIAN CONTRACT ACT, 1872

2.7

Q. 3. Makhan, seeing a mobile phone in a showcase of a shop which was marked for sale for ` 2,000, enters the shop, places ` 2,000 on cash counter and told to give him displayed mobile. Shop owner refused. Can the shop owner refuse to sale the displayed mobile?

[Dec. 2014, 3 Marks] Ans. There is a difference between offer & invitation to an offer. Price quotations and price tags do not amount to an offer but are only an invitation to an offer.

Therefore, Makhan’s picking up the mobile with price tag of ` 2000/- amounts to an offer by Makhan to purchase the same at that price. It remains to be accepted by the seller i.e. the salesman at the cash counter of the mobile store, to result it in a concluded contract. The salesman has every right to accept or refuse the offer.

Thus Makhan shall have no remedies.

Q. 4. X Father promised to pay his son Y a sum of ` 1 lakh if Y (son of X) passed CMA examination in the first attempt. Y passed the CMA examination in his first attempt, but X failed to pay the amount as promised. Y files a suit for recovery of the said amount. State along with reasons whether Y can recover the amount under the Indian Contract Act, 1872.

[Dec. 2014, 5 Marks]

In given case, X promised his son to pay him ` 1 lakh. It is an agreement of social or domestic nature creating no legal relations.

So, Y cannot recover the amount of ` 1 lakh from X.

CHAPTER 2.2 VOID & VOIDABLE AGREEMENTS 䖾 A Quick Review AGREEMENTS EXPRESSLY DECLARED VOID: Section

Details of agreements

11

Agreement by a minor.

12

Agreement by a person of unsound mind.

20

Agreement made under a bilateral mistake of fact material to the agreement.

23

Agreement of which the consideration or object is unlawful.

24

Agreement of which the consideration or object is unlawful in part and the illegal part cannot be separated from the legal part.

25

Agreement made without consideration.

26

Agreement in restraint of marriage of any person, other than a minor, is void.

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Ans. As per Section 10 of Indian Contract Act, 1872, for making a contract valid, there should be an intention to create legal relationship between the parties. An agreement of a social nature or domestic nature does not create legal relationship and as such cannot be termed as enforceable contracts.

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SECTION A : COMMERCIAL LAWS

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Section

Details of agreements

27

Agreement in restraint of trade i.e. from exercising a lawful profession, trade or business of any kind, is void. The exception is of sale of goodwill.

28

Agreement in restraint of legal proceedings.

Agreement by which any party 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 Which extinguishes the rights of any party or discharges any party 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

29

Agreements, the meaning of which is not certain, or capable of being made certain, are void. Uncertain agreements.

30

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 a person to abide by the result of any game or other uncertain event on which any wager is made. Wagering agreements.

36

Agreements contingent on impossible events. Eg. Meeting of 2 parallel lines.

56

Agreements to do impossible acts. Impossibility may be at the time of entering into a contract or subsequent to the formation of the contract but before performance of the contract.

57

In case of reciprocal promises to do things legal and also other things illegal, the second set of reciprocal promises is a void agreement.

PAST EXAMINATION QUESTIONS OBJECTIVES Fill in the blank: Q. 1. Agreement by wager is _____________________________.

Ans. Void

[Dec. 2017, 1 Mark]

True or false: Q. 1. An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others is a void contract.

Ans. It is incorrect.

As per Section 2(i) of Indian Contract Act 1872, an agreement which is enforceable

by Law at the option of one or more of the parties but not at the option of the other or others is a voidable contract not a void contract.

[Dec. 2014, 1 Mark] Q. 2. An agreement which is impossible is void.

Ans. True

[June 2019, 1 Mark]

2.9

MODULE 2 : INDIAN CONTRACT ACT, 1872

Multiple Choice Questions: Q. 1. If part of contract is illegal, then the whole contract will be: (a) Voidable (b) Void (c) Legal (d) Illegal

[June 2014, 1 Mark]

Q. 2. Which of the following agreement is wagering agreement under the Indian Contract Act, 1872? (a) Crossword competition involving application of skill and knowledge. (b) Contract of Insurance. (c) A promise to pay B ` 1,000 if it rains on Monday. (d) A agrees to pay B ` 1,000 if two straight lines should enclose a space.

[Dec. 2015, 1 Mark] ANSWERS: 1.

(b)

2.

(c)

Q. 1. Mr. P and Mr. Q bet as to whether there would be rain on a particular day of December. Mr. P promises to pay ` 5,000 to Mr. Q if there is rain on that day and Mr. Q promises an equal amount to Mr. P if there is no rain on the day. Suppose, there is no rain on that specific day of December and Mr. Q filed a suit for recovery of ` 5,000 from Mr. P. Can Mr. Q recover the amount under Indian Contract Act, 1872?

[June 2017, 6 Marks] Ans. As per Section 30 of Indian Contract Act, 1872, an agreement 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.

In given case, the agreement between Mr. P and Mr. Q is of wagering nature and hence void. Thus, despite of no rain on specific day of December, Mr. Q cannot recover the amount of ` 5,000 from Mr. P for the reason of entering into an agreement of a wagering nature.

Q. 2. A agreed to become an assistant for five years to B who was a doctor practicing at Chennai. It was also agreed that during the term of agreement A will not practice on his own account in Chennai. At the end of one year, A left the assistantship of B and began to practice on his own account. Referring to the provisions of the Indian Contract Act, 1872, decide whether A could be restrained from doing so.

[Dec. 2017, 5 Marks] Ans. As per Section 27 of Indian Contract Act, 1872, any agreement through which a person is restrained from exercising a lawful profession or trade/business is void.

But, an agreement of service by which a person binds himself during the term of the

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PRACTICAL QUESTIONS

2.10

SECTION A : COMMERCIAL LAWS

agreement not to take service with anyone else directly or indirectly to promote any business in direct competition with that of his employer is not in restraint of trade.

In given case, A agreed not to practice during the term of agreement & as soon as he left, he began to practice leading to breach of contract.

Therefore, the step taken by A is not correct & he can be restrained by an injunction from doing so.

Q. 3. Mr. X, a businessman has been fighting a long drawn litigation with Mr. Y, another businessman. To support his legal campaign Mr. X enlists the services of Mr. Z, a legal expert, stating that an amount of ` 10 lakhs would be paid, if Mr. Z does not take up the brief of Mr. Y. Mr. Z agrees, but at the end of the litigation Mr. X refuses to pay. Decide whether Mr. Z can recover the amount promised by Mr. X under the provisions of the Indian Contract Act, 1872.

[June 2018, 5 Marks July 2023, 5 Marks] Ans. As per Section 10 of Indian Contract Act, 1872, an agreement must not be one which the law declares to be either illegal or void. It is one of the essentials of a valid contract. Any agreements in restraint of trade, marriage, legal proceedings etc. are void agreements.

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In given case, Mr. Z was to be paid by Mr. X for not taking briefing of Mr. Y, which is wrong legally & thus void.

Mr. Z cannot recover the amount of ` 10 lakhs promised by Mr. X because it is an illegal agreement and cannot be enforced by law.

CHAPTER 2.3 CONSIDERATION 䖾 A Quick Review NO CONSIDERATION – NO CONTRACT The general rule is ex-nudo pacto actio non oritur 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: Promise made on account of natural love and affection.

Promise to compensate for voluntary services.

Promise made to pay a time barred debt.

Completed Gifts.

Creation of agency.

Contract of Guarantee.

Remission.

LEGAL RULES REGARDING CONSIDERATION It must move at the desire of the promisor It may move from the promisee or any other person

2.11

MODULE 2 : INDIAN CONTRACT ACT, 1872 Consideration must be something of value.

It may be an act, abstinence or forbearance or a return promise.

It may be past, present or future which the promisor is already not bound

to do.

It must not be unlawful.

Consideration need not be adequate.

It must not be illusory.

It must not be opposed to public policy.

Pre-existing obligations.

PAST EXAMINATION QUESTIONS OBJECTIVES Multiple Choice Question: Q. 1. In which one of the following cases an agreement without consideration is void?

(d) Charitable subscription

[Dec. 2021, 1 Mark]

ANSWER: 1.

(b)

THEORY QUESTIONS Q. 1. In a contract of Guarantee, A surety is discharged from his liability where there is a failure of consideration between the creditor and the principal debtors. Comment.

[June 2014, 2 Marks] Ans. As per Section 10 of the Indian Contract Act, 1872, presence of consideration is an essential element for a valid contract. Therefore, where in a contract of guarantee, there is a failure of consideration between the creditor and the principal debtor, the surety is discharged.

Q. 2. Agreements without consideration are also valid. If you agree state the circumstances.

[June 2015, 3 Marks] Or No consideration, no contract’. – state the exceptions to it.

[Dec. 2017, 5 Marks] Or Short note on: Agreement without consideration.

[June 2019, 5 Marks, July 2023, 5 Marks]

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(a) Gift actually made (b) Sale of property (c) Creation of agency

2.12

SECTION A : COMMERCIAL LAWS

Ans. As per Section 25 of Indian Contract Act, 1872, an agreement made without consideration is void. The following are the exceptions to this rule:

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Written and registered agreements arising out of love and affection: An

agreement made without consideration is valid if, — It is expressed in writing and registered and is made on account of nature love and affection between parties standing in a near relation to each other.

Promise to compensate for voluntary services: A promise made without consideration is valid if 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 compelled to do.

Written promise to pay time-barred debt: A promise to pay wholly or in part, a debt which is barred by the law of limitation can be enforced if the promise is in writing and is signee by the debtor or his authorized agent.

Completed gifts i.e. gifts given and accepted: If a person gives certain properties to another according to the provisions of the Transfer of Property Act, he cannot subsequently demand the property back on the ground that there was no consideration: No consideration is required to create an agency Bailment Charitable subscription In these circumstances, in-spite of the fact there is no consideration the contract shall still be valid.

Q. 3. What are essential elements of valid acceptance?

[June 2016, 8 Marks] Ans. Be absolute & unqualified: If the parties are not ad idem on all matters

concerning the offer and acceptance, there is no contract. An invitation with variation is no acceptance; it is simply a counter proposal which must be accepted by the original proposer before any contract is made. A counter offer puts an end to the original offer and cannot be revived by subsequent acceptance unless it is renewed. It must be unqualified and absolute and must correspond with all terms of the offer.

Be accepted in prescribed or reasonable manner: If a particular method of acceptance is prescribed, the offer must be accepted in the prescribed manner.

If no manner is prescribed than in reasonable manner.

Specific offer must be accepted by specific person: If an offer is made to a specified person then that specific person can only accept the offer to make it valid.

It may be express or implied or oral or written: The proposal or acceptance of any promise is made in words, the promise is said to be express. Insofar as such proposal or acceptance is made otherwise than in words, the promise is said to be implied. It can be inferred from the conduct of the parties.

Be in whole not in parts: Acceptor should accept the whole proposal in total

and not in parts. Part acceptance is no acceptance binding upon the proposer.

MODULE 2 : INDIAN CONTRACT ACT, 1872

2.13

Communication of acceptance is must: A mental determination to accept

unaccompanied by any external indication will not be sufficient acceptance.

To constitute an acceptance such acceptance must be communicated to the offeror or his authorized agent.

Mere silence on the part of the offeree does not amount to acceptance.

It must be given before the time lapses: Acceptance must be given before

the offer lapses by expiry of time fixed or by expiry of reasonable time if no time is so fixed or before it is withdrawn or revoked by the offeror.

Q. 4. Anita and Binita are friends; Binita treats Anita during Anita’s illness.

Binita does not accept payment from Anita for treatment and Anita promises Binita’s son Sunit to pay him ` 12,000. Anita being in poor circumstances is unable to pay. Sunit sues Anita for the money. Can Sunit recover?

[June 2015, 3 Marks] Or

Ans. As per Section 2(d) of the Indian Contract Act, 1872, consideration to be valid must be move at the desire of the promisor.

Moreover, as per Privity of Contract, a third party can sue any party, if the third party is the beneficiary.

As per exceptions to Section 25 of Indian Contract Act, 1872, agreement can be made without consideration if it is a promise to compensate a person who has already voluntarily done something for the promisor. Thus as per the exception the promise must be to compensate a person who has himself done something for the promisor and not to a person who has done nothing for the promisor.

In given case, the agreement between Tania and Anita is not a contract in the absence of consideration. Tania’s mother Sonali, voluntarily treats Anita during her illness.

Now, as per exception of Section 25, Sonali’s daughter, Tania to whom the promise was made, did nothing for Anita, so Anita’s promise is not enforceable even under the exception.

No, Tania cannot recover the money from Anita. She can’t even sue Anita as she is not a third party benefitting to it.

Q. 5. Short note on: Privity of Contract.

[Dec. 2022, 5 Marks]

Ans. The doctrine of privities of 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. A person who is not a party to a contract cannot subject to certain well recognized exceptions, enforce the terms of the contract. In India the common law doctrine of privities of contract is applicable.

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Anita and Sonali are friends; Sonali treats Anita during Anita’s illness. Sonali does not accept payment from Anita for treatment and Anita promises Sonali’s daughter Tania to pay her ` 75,000. Anita being in poor circumstances is unable to pay. Tania sues Anita for the money. Can Tania recover? Offer your views based on provisions of the Indian Contract Act, 1872.

[Dec. 2019, 5 Marks]

2.14

SECTION A : COMMERCIAL LAWS

Consideration for an agreement may proceed from a third party, but the third party who is a stranger to the agreement cannot sue on the agreement. A person who is a party to the contract alone can enforce the legal rights arising there from. So a stranger to contract as a rule cannot sue upon the contract.

In the course of time, the courts have introduced a number of exceptions to rule of privities of contract as follows: Beneficiary of a trust: A trust is created for the benefit of a beneficiary. Hence,

the beneficiary can enforce the provisions of the trust even though he is a stranger to the contract.

Provision in marriage settlement: A stranger to the contract can sue on the

contract where a provision is made for him in marriage settlement.

Provision for maintenance or marriage expenses of female members

under a family arrangement: In case a provision is made for the marriage or maintenance of a female member of the family on the partition of a Hindu undivided family, the female member can enforce the promise though she may be a stranger to a contract.

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Assignee of a contract: The benefits of a contract may be assigned. The

assignee of a contract can enforce the benefits of a contract though he is not a party to it.

Example: ‘A’ assigns his insurance policy in favour of his wife. The wife can enforce it although she is not a party to it.

Acknowledgement of liability: Where the promisor either by his conduct or acknowledgement or by part payment or by estoppel creates privity of contract between himself and the stranger, the stranger can sue.

Example: A pays B ` 500 to be given to C, B acknowledges to C that he holds that amount for him. C can recover the amount from B. Agency contract: Contracts which are entered into by the agent on behalf of the principal can be enforced by the principal even though he is not a party to the contract.

PRACTICAL QUESTIONS Q. 1. Referring to a quarrel and disagreement between husband and wife, the husband agreed to execute and register a document in favour of his wife to transfer one of his properties to his wife. Later on husband refused. Whether wife can enforce?

[June 2013, 3 Marks] Ans. As per Section 25 of Indian Contract Act, 1872, an agreement made without consideration shall be void.

As per Section 25(1) of Indian Contract Act, 1872, it shall be valid only if it is made out of natural love and affection between parties standing in a near relation to each other through a written and registered document. Mere nearness of relation or relationship does not impart natural love and affection.

MODULE 2 : INDIAN CONTRACT ACT, 1872

2.15

In given case, although there is a written & registered document made between near parties but the promise to transfer property is made after reference to quarrels & disagreement not out of love & affection.

Thus, the wife will not succeed in enforcing the contract as natural love and affection was absent.

Q. 2. Mr. Amar on his own agrees to sell his house to Mr. Biman at ` 5 Lakh whereas the fair value is ` 15 Lakh. Hence the agreement is invalid as the consideration being inadequate. Offer your views.

[Dec. 2013, 2 Marks] Ans. As per few points stated in legal rules regarding consideration, we can say that: The consideration must move at desire of the promisor.

It must be something of value.

It need not be adequate.

In given case, Mr. Amar agreed at his own motion i.e. with free consent to sell at ` 5 lakhs. The consideration amount was stated by the promisor & wasn’t forced by offeree. The consideration was also something in value i.e. in money. Moreover, the inadequacy cannot be questioned.

This agreement is not void or invalid.

Q. 3. Asim without the request of any one extinguishes the fire of Nemai’s house. Asim suffers injury thereby. Nemai promises to compensate Asim the whole amount he has spent for his treatment. Can Asim enforce the promise of Nemai and recover the amount?

[June 2014, 2 Marks] Ans. As per Section 25(2) of Indian Contract Act, 1872, an agreement made without consideration is void unless 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.

In given case, Asim voluntarily extinguishes the fire for which Nemai promises to pay amount for his treatment. So, inspite of lack of consideration, the contract is valid.

Therefore, Asim can seek enforcement of promise of Nemai & recover the amount.

Q. 4. State your views on the following: Consideration for sale of goods must be in terms of money.

[June 2016, 2 Marks] Ans. As per Section 10 of Indian Contract Act, 1872, the essential condition of contract is that consideration must exist. The consideration must be of some value.

TAXMANN®

As per Section 25 of Indian Contract Act, 1872, no contract can be made without consideration. But nothing is stated about its inadequacy. So in this case, the house was sold for consideration. Even if the consideration is inadequate, the sale will be valid. The agreement is valid contract notwithstanding the inadequacy of the consideration.

Business Laws & Ethics (Law/BLE) | CRACKER AUTHOR PUBLISHER DATE OF PUBLICATION EDITION ISBN NO NO. OF PAGES BINDING TYPE

: : : : : : :

LEENA LALIT PARAKH TAXMANN 01/01/2024 2ND EDITION 9789357786157 426 PAPERBACK

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Description This book is prepared exclusively for the Intermediate Level of Cost Accountancy Examination requirement. It covers the past exam questions & point-wise answers as per the new syllabus of ICMAI. The Present Publication is the 2nd Edition for the CMA Intermediate | New Syllabus | June 2024 Exams. This book is authored by CA Leena Lalit Parakh, with the following noteworthy features: u

Strictly as per the New Syllabus of ICMAI

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Coverage of the book concludes: 

All Past Exam Questions, including 

Module-wise Solved Paper – Dec. 2023 (Suggested Answers)

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Practical questions about newly added topics

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Brief introduction of chapters

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[Questions & Case Studies] with detailed answers are given in this book

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[Objective-type questions] in the form of the following are given in this book: 

MCQs

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Blanks

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True or False

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Matching

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[Point-wise answers] for easy & quick learning

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[Tabular Summary] at the beginning of each chapter is given in this book

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[Most Updated & Amended] This book is updated & amended as per the following: 

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Labour Law Amendments

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Code on Wages

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Amendments to various other laws

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[Marks Distribution] is given Module-wise from June 2017 onwards

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[Previous Exam Trend Analysis] is provided in this book from Dec. 2023

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