Legal Aspects of Business: Quiz 2

Answers

Multiple Choice Questions

The answer to the multiple choice questions is as follows.

1. B 6. B 11. C

2. C 7. A 12. A

3. B 8. D 13. B

4. A 9. D 14. B

5. D 10. C 15. B

The questions are in the multiple choice format. Each question follows with four options.
One option has to be selected as the answer. Only one among the four options is the
correct answer.

0.2 mark will be awarded for a right answer. 0.06 mark will be deducted for a wrong
answer. No mark will be deducted for not answering a question.

____ 1. Consider the following two statements.

Statement 1. Warranty is the core part of the contract for whose breach the innocent party
can terminate the contract.

Statement 2. A contract stands terminated on its own on the breach of a core term.

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 a. Both, statement 1 and 2 are correct.

b. Both, statement 1 and 2 are incorrect.

c. Only statement 1 is correct.

d. Only statement 2 is correct.

____ 2. Consider the following two statements.

Statement 1. The contracting parties can terminate a contract by mutual consent.

Statement 2. A contract can be terminated only by the consent of both the parties.

a. Both, statement 1 and 2 are correct.

b. Both, statement 1 and 2 are incorrect.

c. Only statement 1 is correct.

d. Only statement 2 is correct.

____ 3. Consider the following two statements.

Statement 1. A party can terminate a contract if he does not want to continue with it.

Statement 2. A termination for convenience clause has to give equal opportunity to both
the parties to terminate the contract.

a. Both, statement 1 and 2 are correct.

b. Both, statement 1 and 2 are incorrect.

c. Only statement 1 is correct.

d. Only statement 2 is correct.

____ 4. Consider the following two statements.

Statement 1. Every breach gives the right to the innocent party to claim damages.

Statement 2. In award of damages, a distinction is made between direct losses and

indirect and consequential losses.

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 a. Both, statement 1 and 2 are correct.

b. Both, statement 1 and 2 are incorrect.

c. Only statement 1 is correct.

d. Only statement 2 is correct.

____ 5. Consider the following two statements.

Statement 1. In a business contract, loss of profit is taken to be an indirect loss as the

profit may or may not arise from a business.

Statement 2. The principle for award of damages is to give a money value to put the party
in a situation he would be if the contract were not breached.

a. Both, statement 1 and 2 are correct.

b. Both, statement 1 and 2 are incorrect.

c. Only statement 1 is correct.

d. Only statement 2 is correct.

____ 6. Consider the following two statements.

Statement 1. The courts insist on the party breaching the contract paying the entire
amount of liquidated damages to the other party irrespective of the actual losses.

Statement 2. If termination of a contract is for convenience, the party terminating the

contract has to pay damages to the other party.

a. Both, statement 1 and 2 are correct.

b. Both, statement 1 and 2 are incorrect.

c. Only statement 1 is correct.

d. Only statement 2 is correct.

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____ 7. Consider the following two statements.

Statement 1. An undertaking to cover a loss caused by a human agent is binding even

without consideration.

Statement 2. In a bond, the consideration is assumed and not insisted on by the courts.

a. Both, statement 1 and 2 are correct.

b. Both, statement 1 and 2 are incorrect.

c. Only statement 1 is correct.

d. Only statement 2 is correct.

____ 8. Consider the following two statements.

Statement 1. An instrument titled bank guarantee must be a contract of guarantee.

Statement 2. An instrument is not a contract of guarantee if the money has to be paid on

demand.

a. Both, statement 1 and 2 are correct.

b. Both, statement 1 and 2 are incorrect.

c. Only statement 1 is correct.

d. Only statement 2 is correct.

____ 9. Consider the following two statements.

Statement 1. In a contract of indemnity, the drawer can undertake to cover only a loss
caused by him and not a third party.

Statement 2. A contract of indemnity has two parties while a contract of guarantee

involves three parties.

a. Both, statement 1 and 2 are correct.

b. Both, statement 1 and 2 are incorrect.

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 c. Only statement 1 is correct.

d. Only statement 2 is correct.

____ 10. Consider the following two statements.

Statement 1. In a sale of unascertained goods, ownership passes to the buyer as provided

in the contract but only after the goods have been ascertained.

Statement 2. Ownership in goods transfers only when the buyer pays the price to the
seller.

a. Both, statement 1 and 2 are correct.

b. Both, statement 1 and 2 are incorrect.

c. Only statement 1 is correct.

d. Only statement 2 is correct.

____ 11. Consider the following two statements.

Statement 1. In a sale of specific goods, ownership transfers as the parties have provided
in the contract.

Statement 2. In a sale of unascertained goods, ownership passes on delivery.

a. Both, statement 1 and 2 are correct.

b. Both, statement 1 and 2 are incorrect.

c. Only statement 1 is correct.

d. Only statement 2 is correct.

____ 12. Consider the following two statements.

Statement 1. A customer, in good faith, bought a product from a store. The store was not
the owner of the goods. The customer will have to restore the goods to the owner.

Statement 2. If a sale contract for the sale of specific goods is silent on the transfer of
ownership, the ownership transferred when the contract got formed.

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 a. Both, statement 1 and 2 are correct.

b. Both, statement 1 and 2 are incorrect.

c. Only statement 1 is correct.

d. Only statement 2 is correct.

____ 13. Consider the following two statements.

Statement 1. If a product is used for two purposes and is fit for use for one, but not the
other, it is not of merchantable quality.

Statement 2. If goods are not of merchantable quality, the buyer can claim replacement
but not terminate the contract.

a. Both, statement 1 and 2 are correct.

b. Both, statement 1 and 2 are incorrect.

c. Only statement 1 is correct.

d. Only statement 2 is correct.

____ 14. Consider the following two statements.

Statement 1. In business-to-business sale contract, there is no implied condition of the

goods being of merchantable quality.

Statement 2. A product is of merchantable quality if a retailer has stored it in its shop.

a. Both, statement 1 and 2 are correct.

b. Both, statement 1 and 2 are incorrect.

c. Only statement 1 is correct.

d. Only statement 2 is correct.

____ 15. Consider the following two statements.

Statement 1. A customer should do his own research on the utility of goods and not rely
on the seller. The seller is not responsible for his recommendations.

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Statement 2. As the law has provided it to be an implied condition that the goods would
be of merchantable quality, the contracting parties cannot oust it.

a. Both, statement 1 and 2 are correct.

b. Both, statement 1 and 2 are incorrect.

c. Only statement 1 is correct.

d. Only statement 2 is correct.

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 Writing Answer Questions

Answer the following questions in the space provided. Each question requires
application of a legal principle(s). First, state the principle which applies to the
question. Follow this with the answer to the question. The questions are specific.
Answer should be specific and based on reason. Write clearly and legibly. Each
question is of one mark. One mark will be awarded for a right answer. No mark will be
awarded for a wrong answer. There is no partial grading.

Question 1

A sale contract had the following termination clause:

Termination: (1) The buyer can terminate the contract for breach of any term by the
seller.

(2) The buyer can terminate the contract at any point of time for his convenience.

The seller was to deliver 10 Kgs silver to the buyer at 3.00 PM at the office of the
buyer. The seller took a taxi to the buyers office with the silver. The taxi lost his way
and the seller started getting delayed. The seller called up the buyer and informed him
that he was on his way and would be reaching shortly. The seller reached at 3.05 PM.
Since entering the contract, the silver prices had fallen down. The buyer was looking
to get out of the contract. The buyer terminated the contract on the ground that the
seller was late. The seller claims that no damage is caused to the buyer by the slight
delay.

Question: Is the termination of the contract by the buyer valid?

Answer: Yes. The seller is in breach and the buyer can terminate the contract.

Explanation: The termination clause gives the right to the buyer to terminate the
contract for any breach by the seller. Once 3.00 PM went by and the seller did not
deliver the goods, he became in breach. The breach could not be remedied by the
seller subsequently appearing to deliver the goods.

Question 2

A sale contract had the following termination clause:

Termination: (1) The buyer can terminate the contract for breach of any term by the
seller.

(2) The buyer can terminate the contract at any point of time for his convenience.

The contract was for supply of 80,000 Kgs of oranges. The seller procured the
oranges, put them on his truck and was taking it to deliver to the buyer. While the

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oranges were on their way to be delivered to the buyer, the buyer terminated the
contract. The seller took the oranges to the nearest market. In the course of this, most
of the oranges got spoilt. The seller suffered a loss of Rs. 50,000. The seller is claiming
the damages from the buyer.

Question: Should the damages be awarded to the seller?

Answer: No. The buyer is only exercising his right under the contract.

Explanation: Damages are awarded only when there is a breach of contract, by the
party breaching the contract to the party in breach. Terminating the contract on the
grounds of convenience is a right of the party. The parties have to assess the risks
involved in termination for convenience before getting into it.

Question 3

Orange Peel Limited took a packaging machine on hire for 2 years at the rate of Rs.
80,000 a month from Hindustan Packing Limited. Orange Peel beached a term of the
contract. This gave the right to Hindustan Packing Limited to terminate the contract.
The company terminated the contract and had the packing machine restored to itself.
By this time, the hiring was complete for one year. The going rental for a similar
machine on the day of termination of the contract was Rs. 90,000 a month. Hindustan
Packing Limited is claiming damages from Orange Pell Limited for breach of contract.

Question: What damages should be awarded to Hindustan Packing Limited?

Answer: None. There is a breach but no losses.

Question 4

A credit card company had the following terms and conditions for its credit cardholders:

The cardholder will pay the bill by 10th of the month. If the cardholder defaults, he will
be levied a penalty of Rs. 800 and charged interest for late payment at the rate of 0.5%
per day.

A customer had a bill of Rs. 50,000. He defaulted in paying the bill by two days. The
credit card company raised a bill which included Rs. 800 as penalty for default and Rs.
500 as interest for late payment by two days. The cardholder is protesting that the
claims are exorbitant. The credit card company asserts that these are the terms of the
contract and bind the parties.

Question: Should the customer be made to pay Rs. 1300 in damages?

Answer: Both, yes or no will count as right answers. If an answer states the principle
that liquidated damages are paid only if these are genuine pre-estimate of losses will
be awarded a score.

Explanation: It is a matter of fact whether charging Rs. 1300 for a delay of two days is
punitive or not. The principle for award of damages is to put the parties in a situation

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they would be if the contract were performed. Even if we take short term interest on
capital to be 24% year, it works out to 2% per month and Rs. 70 for two days. Rs. 1300
seems punitive. At the same time, as the Indian banks actually charge such values,
one may let it go as genuine. Australian and EU courts have held similar charges to
be fine. Thus, one may judge the facts either way.]

Question 5

Zed Limited was negotiating to contract with Sigma Limited to supply a green house.
Sigma Limited demanded a performance bond of Rs. 20 lakhs even before a contract
was formed. Zed Limited was keen at the contract. It delivered the following
performance bond to Sigma Limited.

To: Sigma Limited

We undertake to pay up to Rs. 20 lakhs on behalf of Zed Limited, who are prospecting
to enter in a contract with you to supply goods, within 48 hours on demand, towards
formation and performance of the contract.

Bank B

After the bond was given, the parties failed to enter in a contract. Zed Limited informed
the bank that it had not entered in a contract with Sigma Limited. Further, it instructed
the bank not to honour the bond. Sigma Limited raised a demand on the bank to be
paid the sum.

Question: Should the bank pay the money to Sigma Limited?

Answer: Yes. The bond is a contract between the bank and Sigma Limited. Both are
bound by its terms.

Explanation: We have to first judge whether the instrument is a contract of

guarantee? The text brings out that the money is to be paid in relation to the formation
of a contract. It is setting out the context. But it is not saying that the money will be
paid for default of the contract. It is not a contract of guarantee. It is a demand bond.

Question 6

In a sale contract, according to the terms of the contract, the seller, S, furnished a
performance guarantee for Rs. 5 lakhs to the buyer. The performance guarantee read:

We undertake to pay up to Rs. 5 lakhs on behalf of S who has entered in a contract to

supply goods, within 48 hours on demand, on breach of contract by S creating a right
of claim for the buyer.

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The seller successfully performed the contract. The buyer gave a certificate to the
seller stating that the goods were supplied on time and were in conformity with the
terms of the contract. Thereafter, the buyer made a demand on the bank to pay them
Rs. 5 lakhs under the performance guarantee. The seller submitted a copy of the
certificate issued by the buyer to the bank and recommended the bank not to pay the
money.

Question: Is the bank bound to pay the money to the buyer?

Answer: No. The instrument is a contract of guarantee. The bank need pay only when
a breach is established.

Question 7

A sale contract was for supply of a projector of model WT-3020 of a particular

company. By the time the seller could procure the goods, the manufacturer had
stopped manufacturing the model and come up with a better model WT- 3030. The
new model was better in several respects than the earlier model. The seller supplied
the new model. The sale contract was subject to the following term.

Warranty: The goods are warranted for a period of six months from the date of purchase
against defective material or inadequate workmanship. The limited six month warranty
is in lieu of all implied or express conditions and warranties.

The buyer needed the specific model only. The buyer terminated the contract. The
seller claims that the buyer does not have the right to terminate the contract.

Question: Does the buyer have the right to terminate the contract?

Answer: No. The contract term has ousted all implied conditions and warranties.

Explanation: The three implied conditions are on description of goods,

merchantability and fit for described use. The simple statement in lieu of all implied ...
conditions vacates all the three implied conditions. The buyer has no right to terminate
the contract.

Question 8

A buyer entered in a contract with a seller to supply 1000 Kgs of glue. The contract
term stated: The seller will supply 1000 Kgs of glue fit for the purposes of sticking
ceramic pieces together. The seller supplied glue which was good enough to stick
paper together but not ceramic. The contract had a warranty clause. It read:

Warranty: We expressly disclaim all warranties or conditions (express or implied) in

respect of description or merchantability of goods.

The parties are in dispute on the scope of the warranty clause. The buyer claims he
has a right to terminate the contract as the seller has not supplied goods fit for the
particular purpose. The seller claims that implied conditions and warranties are

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expressly ousted and the buyer has the right to claim damages but not terminate the
contract.

Question: Can the buyer terminate the contract?

Answer: Yes. The contract term has not ousted the implied condition that the goods
would be suitable for the described use.

Explanation: The three implied conditions are on description of the goods,

merchantability and fitness for described purpose. In the first category, the parties
describe the goods itself. In the last category, the buyer describes the use for the
goods. In this case, the buyer has described the use, glue to stick ceramic. The ousting
clause has not taken care to oust the implied condition of fitness. Thus, the implied
condition is available to the buyer.

Question 9

An online webstore put to sale prints of a painting titled Monsoon of a famous artist.
Print of a painting is a good quality print on paper of the original painting. Several
prints are made and sold for the benefit of the enthusiasts who cannot afford the
original painting. The terms of the contract included the following:

The print is being sold on Ex- (Sellers Warehouse basis). The print will be depatched
with a reputed courier company, ABC Couriers. The insurance and courier charges are
included in the quoted price of the print.

[Ex is an incoterm]. A person bought the painting and the painting was dispatched to
him. In transit, the print got drenched and destroyed. The buyer claims that the seller
has not delivered the print to the buyer and should make it good. The seller claims that
the loss should fall on the buyer.

Question: Who would bear the loss of the print?

Answer: Buyer. In an Ex term, the risk transfers to the buyer at the premises of the
seller.

Question 10

In an auction of a painting by a famous painter, Sudha was the highest bidder. She
was awarded the bid by the fall of the hammer. There were no terms to the auction.
The auctioneer made her pay the full amount immediately. She was to collect the
painting after five days. The day after the auction, a special tax on sale of paintings,
applicable when ownership was transferred, became effective. The bid price was
exclusive of taxes. Sudha took delivery of the painting the fifth day. The auctioneer
claimed that she had to pay the tax. Sudha claimed that there were no tax liabilities.
The answer to the questions depended on when the ownership in the painting got
transferred to Sudha.

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Question: When did the ownership in the painting transfer to Sudha?

Answer: When the hammer was struck. In a contract without terms on transfer of
ownership, ownership transfers when the contract is made.

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