CA Foundation Law: All Important Case Laws
ALL IMPORTANT CASE LAWS
PAPER 2: BUSINESS LAWS_CA FOUNDATION
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I) THE INDIAN CONTRACT ACT, 1872
1) Case Law: Balfour v Balfour
In Balfour v Balfour, Mr, Balfour was a civil servant stationed in Ceylon (now Sri Lanka). During his leave, he and his wife went back to England. But Mrs. Balfour got rheumatic arthritis (swollen, painful joints) and the doctor advised her not to travel. As Mr Balfour’s boat was about to set sail, he promised to pay her £30 per month as maintenance expenses until she came back to Ceylon. However, Mr. Balfour failed to keep his promise. Mrs. Balfour filed a case against her husband.
Judgement
Her action was dismissed on the ground that the promise was a domestic agreement and at the time of making the promise, parties never intended to create legal relations.
2) Case Law: Carlill v Carbolic Smoke Ball Co.
In Carlill v Carbolic Smoke Ball Co., the company issued an advertisement in the newspaper offering to pay £100 to any person who contracts influenza (i.e. Flu) after having used their smoke balls according to the printed instructions three times a day for two weeks. To prove their intention to pay the company had already deposited £1,000 in the bank. Mrs. Carlill, on the faith of the advertisement, bought and used the smokeballs according to the directions, but she subsequently contracted influenza. The company refused to admit her claim and she ultimately sued the company for the promised reward.
Judgement
It was held that, Mrs. Carlill by fulfilling the terms, had accepted the general offer of the company. She was entitled to recover the reward.
3) Case law: Lalman Shukla v Gauri Dutt
In Lalman Shukla v Gauri Dutt, Gauri Dutt’s nephew went missing. He sent his Munim, Lalman Shukla in search of his missing nephew. After Lalman had left, Gauri Dutt announced a reward of ₹ 501 to anyone who found his missing nephew. Lalman found the boy and brought him home. Later, when Lalman came to know about the reward, he file a suit against Gauri Dutt to recover it.
Judgement
It was held that Lalman was not entitled to reward because he did not know about the reward when he found the missing boy. Since he had no knowledge of the offer, he could not accept it.
4) Case law: Pharmaceutical Society of Great Britain vs Boots Cash Chemists (Southern) Ltd.
In Pharmaceutical Society of Great Britain vs Boots Cash Chemists (Southern) Ltd., the chemist instituted a ‘self-service system’ in his shop. Goods were displayed in the shop for sale with price tags attached on each article. The chemist would let shoppers pick medicines off the shelves and then pay for them at the till (cash desk). The Pharmaceutical Society argued that under the Pharmacy and Poisons Act 1933 this was an unlawful practice as display of goods was an “offer” and when a shopper selected and put the drugs into their shopping basket, that was an “acceptance”. Therefore, because no pharmacist had supervised the transaction at this point, Boots had violated the law.
Judgement
It was held that, the display of goods was merely an invitation to offer. Rather, by placing the goods into the basket, it was the customer who made the offer which could be either accepted or rejected by the pharmacist at the cash desk. The moment of the completion of contract was at the cash desk, in the presence of the supervising pharmacist.
5) Case law: Harvey vs Facey
In Harvey vs Facey, Harvey sent a telegram to Facey asking him two questions “Will you sell us Bumper Hall Pen? Telegraph lowest cash price.” Facey replied on the same day “Lowest price for Bumper Hall Pen is £900”. Harvey agreed to buy at that price and requested Facey to send the title deed (ownership document). Facey refused to sell.
Judgement
It was held that no contract existed between the two parties. The first telegram was simply a request for information. Statement of the lowest price is merely an invitation to offer and contained no implied contract to sell at that price to the persons making the inquiry.
6) Case law: Brogden vs Metropolitan Railway Co.
In Brogden vs Metropolitan Railway Co., B, a supplier sent a draft agreement offering to supply coal to Metropolitan Railway company. The manager of the company wrote the word ‘approved’ on the same and put the agreement in the drawer of the table with intention to post it but forgot all about it.
Judgement
It was held that, no contract was made because acceptance was not communicated
7) Case law: Powell vs Lee
In Powell vs Lee, P applied for the post of a headmaster in a school. The Managing Committee of the school passed a resolution selecting P for the post. But this decision was not communicated to P. L, a member of the Committee without any authority to reveal P’s appointment, informed P about the decision. Subsequently, the Managing Committee appointed someone else to the post. P filed a suit against the Committee and claimed damages for loss of salary.
Judgement
It was held that, P’s suit is not maintainable as there had been no authorised communication of intention to contract on the part of the committee or any authorized person.
8) Case law: Felthouse vs Bindley
In Felthouse vs Bindley, uncle Felthouse was a builder in London. He by a letter offered to buy a horse belonging to his nephew Felthouse. Uncle Felthouse wrote, “If I hear no more about him, I shall consider the horse mine at £30 and 15 pence.” The horse was catalogued to be sold at an auction. Nephew asked the auctioneer Bindley, not to sell the horse since it was already sold. Mr. Bindley, however, sold the horse by mistake. Uncle Felthouse sued Mr. Bindley and claimed ownership of the horse.
Judgement
It was held that acceptance must be communicated clearly and cannot be imposed due to silence of one of the parties. Though the nephew expressed interest in completing the sale there was no communication of that intention. Therefore, the sale by Mr. Bindley is valid and he cannot be sued upon.
9) Case Law: Lily White Drycleaners v R. Munuswami
In Lily White Drycleaners v R. Munuswami, Munuswami had given a new saree and blouse for dry cleaning. Lily White Drycleaners, lost the saree. They agreed to pay half the price of the saree as, the condition on the reverse side of the bill mentioned the fact that in case of loss, the dry cleaners would be liable for only 50% of the market price or value of the article. But Munuswami filed a case to recover the full price of the saree
Judgement
It was held that the customer is not bound by this condition because it means that the dry cleaner can purchase the garments at 50% of the market price. If this condition is enforced, then, any laundry owner will try to misappropriate new clothes.
Such condition was unreasonable and opposed to public policy and therefore could not bind the parties.
A term which is prima facie opposed both to public policy and to the fundamental principles of the law of contract, cannot be enforced by a court, merely, because it is printed on the reverse of a bill and there is a tacit acceptance of the term when the bill was received by the customer.
10) Case Law: Durga Prasad v Baldev
In Durga Prasad v Baldev, Collector of a District requested D, a Zamindar, to construct a market. D built the market at his own expense just to please the Collector. B and many others, occupied shops in the market and promised to pay D commission on the articles sold through their shops. When D sued the shopkeepers for commission.
Judgement
It was held that promise to pay commission did not amount to a contract for want of consideration, because D (the promisee) had not constructed the market at the desire of the shopkeepers (the promisors) but at the desire of the Collector of the District just to please him.
11) Case Law: In Chinnayya v Ramayya
In Chinnayya v Ramayya, A, an old lady, by a gift deed transferred property to her daughter R, with a direction that R should pay annuity to A’s sister C. On the same day, R executed a deed in writing in favour of her aunt C, agreeing to pay the annuity. Afterwards, R refused to pay saying that no consideration had moved from C.
Judgement
It was held that C was entitled to recover the annuity because consideration need not move from promisee only (i.e. C), it may move from any other person also (i.e. A). Also, the words “promisee or any other person” clearly show that a stranger to consideration may maintain a suit. Hence, C, though a stranger to consideration (as the consideration moves from A to R) was entitled to maintain the suit It is worth noting that stranger to consideration can sue provided he is party to the contract. In the above case, C could sue as there was a separate contract between her and R. In absence of a separate contract, C would have been regarded as stranger to contract and would have hence lost the case, as stranger to contract cannot sue.
12) Case law: Dunlop Pneumatic Tyre Co. Ltd. V Selfridge & Co. Ltd.
In Dunlop Pneumatic Tyre Co. Ltd. V Selfridge & Co. Ltd., Dunlop Tyre by an agreement restricted Dew & Co. (Dealer) from selling tyres below its recommended retail price and asked Dew & Co. to take same undertaking from its retailers. Dew & Co entered into an agreement with Selfridge (Retailer) to pay damages of ₤5 per tyre to Dunlop if it sold tyres at below the recommended retail price. Selfridge sold few tyres below retail price and Dunlop filed a case for recovery of damages from Selfridge.
Judgement
It was held that since Dunlop tyre was stranger to contract between Dew and Selfridge, it could not recover damages from Selfridge.
13) X promised to subscribe ₹10,000 towards the construction of a Town Hall at Howrah. The Secretary of the Town Hall on the faith of the promise entrusted the work to a contractor and undertook liability of ₹6,000. X was held liable to pay ₹6,000.
(The above example is based on case law: Kedar Nath vs Gorie Mohammad)
14) X promised to subscribe ₹5,000 to a fund started for rebuilding a mosque but no steps had been taken to carry out the repairs. X was held not liable and the suit was dismissed.
(The above example is based on case law: Abdul Aziz vs Masum Ali)
15) Case Law: Mohori Bibee v Dharmodas Ghose
In Mohori Bibee v Dharmodas Ghose, D, a minor, mortgaged his house in favour of Brahm Dutt (husband of Mohori Bibee), a money lender, to secure a loan of Rs. 20,000. Brahm Dutt actually advanced only Rs. 8,000 (a part of the loan) to D. Subsequently, D approached the court for setting aside the mortgage on the plea that he was a minor when the mortgage was executed. Brahm Dutt demanded repayment of the money lent.
Judgement
It was held that agreement with minor is absolutely void and money lender was not entitled to repayment of the money lent.
16) A gentleman died leaving a young widow. The relatives of the deceased threatened the widow to adopt a boy otherwise they would not allow her to remove the dead body of her husband for cremation. The widow adopted the boy and subsequently applied for cancellation of the adoption. It was held that her consent was not free but induced by coercion, as any person who obstructed a dead body from being removed for cremation would be guilty of offence under the Indian Penal Code. The adoption was set aside.
(The above example is based on the case law: Ranganayakamma vs Alwar Setti)
17) Case law: In Derry vs Peek
In Derry vs Peek, the prospectus of a company contained a statement that the company had been authorized by Special Act of Parliament to use steam or mechanical power to run trains. But, the authority to use steam was subject to approval of the ‘Board of Trade’ and this fact not mentioned in prospectus. The Board of Trade did not approve the use of steam and consequently the company wound up. The shareholders filed suit against the Directors for fraud.
Judgement
But the Court held that the directors are not guilty of fraud as they honestly believed that that consent of Board of Trade was inevitable (expected, certain) after authorization of Parliament.
18) A woman by falsely representing her to be wife of a well-known baron (a very rich person) obtained two pearl necklaces from a firm of jewellers on the pretext (excuse) of showing them to her husband before buying. She pledged them with a broker, who in good faith paid her ₹1 lakh. A suit was filed by the jeweller against the broker. It was held that there was no contract between the jeweller and the broker as the jeweller never intended to contract with her and as such, the broker did not get a good title and hence he must return the goods.
(The above example is based on case law: Lake vs Simmons)
19) Case law: Krell vs Henry
In Krell vs Henry, H hired a room from K for two days with the object (known to both parties) of using the room to view the coronation procession of King Edward VII. But the procession was cancelled due to King’s illness. H consequently could not use the room.
Judgement
It was held that, the contract was discharged and H was excused from paying the rent of the room as the procession which formed the basis of the contract did not occur.
20) Case law: Hadley v Baxendale
In Hadley v Baxendale, H’s mill stopped working due to breakdown of the crankshaft. H delivered the shaft to B, a common carrier, to be taken to the manufacturer as a pattern for a new one. H did not inform B that any delay in delivery would result in loss of profit. B delayed in delivering the shaft to the manufacturer resulting into loss of profit to H. H brought action against B claiming damages for loss of profit which would have been made during the period of delay.
Judgement
It was held that B was not liable for loss of profits during the period of delay as circumstances communicated to B did not show that a delay in delivery of shaft would entail loss of profit to the mill.
21) Wilson, a cap manufacturer was expecting Lancashire and Yorkshire Railway Company to deliver velvet cloth he had purchased for making caps for sale during the spring season. But the Railway Company delayed in delivering the cloth. Wilson was unable to use the cloth for making caps and filed a case against the Railway Company for damages caused by improper delay in delivery. It was held that the Railway Company was liable for damages due to deterioration in the form of loss of opportunity, being the direct and natural result of delay. The cloth was received when it was less in demand and less capable of being applied to immediate use. The carrier was liable even in the absence of notice of the purpose for which the cloth was required
(The above example is based on the case law: Wilson v Lancashire and Yorkshire Railway Company)
II) SALE OF GOODS ACT, 1930
22) X purchased a hot water bottle from Y, a retail chemist. X asked Y if it would stand boiling water. The Chemist told him that the bottle was meant to hold hot water. The bottle burst when water was poured into it and injured his wife. The Chemist was liable to refund the price and pay damages because the bottle was unfit for the purpose for which it was purchased.
(The above example is based on the case law: Priest vs Last)
23) F bough milk from A, a dairy owner. The milk was contaminated with germs of typhoid fever. F’s wife, on taking the milk, became infected and died of it. A, was held liable for damages
(The above example is based on the case law: Frost vs Aylesbury Dairy Co. Ltd)
24) Certain pigs were sold by auction ‘with all faults’. The seller knew that the pigs were suffering from swine-fever but he did not inform the buyer about this defect. All the pigs died and also infected a few of the buyer’s own pigs. It was held that the seller was not bound to disclose that the pigs were unhealthy. Caveat Emptor being the rule, the buyer could not claim damages from the seller.
(The above example is based on the case law: Ward v Hobbs)
III) THE COMPANIES ACT, 2013
25) Case Law: Macaura v Northern Assurance Co. Ltd
In Macaura v Northern Assurance Co. Ltd, Mr Macaura owned the Killymoon estate in Northern Ireland. He sold the timber there to Irish Canadian Sawmills Ltd for 42,000 fully paid up £1 shares, making him the whole owner. Mr Macaura was also an unsecured creditor for £19,000. He got insurance policies, but in his own name, not in the name of the company with Northern Assurance covering for fire. Two weeks later, there was a fire. M claimed insurance compensation but Northern Assurance refused to pay up.
Judgement
It was held that the insurance company was not liable to pay Mr. Macaura as no shareholder has any right to any item of property owned by the company. Since Mr. Macaura had no legal or equitable interest in the company’s property, the insurance is not valid.
26) Case Law: Saloman v Saloman and Company Ltd
In Saloman v Saloman and Company Ltd., Mr. Saloman was running a shoe business in England as a sole proprietor. He formed a company known as ‘Saloman and company Ltd.’ It consisted of Saloman himself, his wife, 4 sons and 1 daughter. The shoe business of Mr.Saloman was sold to the company for ₤39,000. Mr. Saloman received from the company purchase price in the form of ₤20,001 fully paid shares of ₤1 each and ₤10,000 in debentures which carried a floating charge over the assets of the company (ie. Salomon gave the company a £10,000 loan). One share of ₤1 each was subscribed for in cash by each member of Saloman’s family. Balance paid went to extinguish the business’s debts. The company ran into financial difficulties after some time and went into liquidation within a year. On winding up, the assets realized ₤6,000. the company owed ₤10,000 to Mr. Saloman (for secured debentures) and ₤7,000 to unsecured creditors. Thus, after paying off the debenture holder (Mr. Saloman), nothing was left for unsecured creditors. The creditors claimed priority over the debentures contending that Mr. Saloman and Saloman and company Ltd were one and the same person, the company was only a façade (disguise / cover up) to defraud the innocent creditors. Mr. Saloman should not therefore, be treated as a secured creditor.
Judgement
It was held that the company had been validly constituted and it had an independent existence distinct from its members. Therefore, Mr. Saloman was entitled to be paid his dues first as a secured creditor. It was observed that the business belonged to the company and not to Mr. Saloman. The company and Mr. Saloman enjoyed separate legal entities. The fact that the members were from one single family had no bearing upon the validity of the company
27) Case Law: Daimler Co. Ltd v Continental Tyres & Rubber Co
In Daimler Co. Ltd v Continental Tyres & Rubber Co., A company named Continental Tyre and Rubber Co Ltd. was registered in England. The object of this company was to sell tyres in United Kingdom, which were manufactured in Germany by a German company. Majority of the shares of this company were held by Germans. Besides this, all the directors of the company were German residents. When the first world war broke out, the company filed a suit to recover a trade debt.
Judgement
The court came to the conclusion that the company was an enemy company because the effective control of the company was in the hands of Germans who were alien enemy. Hence, the claim of the company was disallowed on the ground that it was against public policy to allow alien enemies to trade by using the corporate veil.
28) Case Law: Juggilal v Commissioner of Income Tax
In Juggilal v Commissioner of Income Tax, the assessee firm used to promote companies. With borrowed money, it purchased all the shares of a Company and disposed of all of them at a profit. He claimed that the assessee firm had taken over the shares to secure managing agency of that company and had thereafter distributed the shares to its allied concerns. He did not pay tax on such income claiming that the transaction was only to facilitate acquisition of a capital asset and the profit realised from the sale of such a capital investment was a capital gain. On investigation it was found that the shares were not merely distributed to the assessee’s associates, but that, some of the shares were sold to its allied concerns and others to strangers, through brokers, in small lots and at a profit.
It was held that all the transactions were impressed with the character of a commercial transaction entered with a view to earn profits and were not capital investments and hence were liable to tax. In other words, the plea of the firm that the amount was “capital gain” and was on that account not taxable was rejected. In the view of the Income-tax Officer the profit arose from “a well-planned business activity in which the assessee had fully utilised its resources”.
29) Case Law: Sir Dinshaw Manekjee Petit
In Sir Dinshaw Manekjee Petit, Sir Dinshaw was a very rich man earning huge dividend and interest income. He formed four private companies and entered into an agreement with each company to hold a block of investment as its agent. Under the arrangement interest and dividends earned by the companies were first credited to the company’s account and then the money was handed to him as loan (which was never repaid). Sir Dinshaw was assessed for tax on this income. Sir Dinshaw argued that he was only an agent for these family companies and that the interest and dividends were theirs and not his and that he had credited them in company’s account. And though he has had the benefit of that income in the form of loan lent by the companies, he has credited the interest payable to them in account (although he has not actually paid the interest in cash).
The court decided that the assessee’s contention in favour of each family company is a sham and all transactions are only paper transactions and not real. Sir Dinshaw divided his income in four parts to reduce his tax liability. The court ignored the corporate entity of these companies and held that Sir Dinshaw was the owner of total income and liable to pay tax.
30) Case Law: Workmen Employed in Associated Rubber Industries Ltd., Bhavnagar vs. The Associated Rubber Industries Ltd., Bhavnagar
In Workmen Employed in Associated Rubber Industries Ltd., Bhavnagar vs. The Associated Rubber Industries Ltd., Bhavnagar, company had purchased shares of INARCO Ltd. They were getting annual dividends on these shares which was shown in the P&L a/c every year. This dividend was also considered for calculating bonus payable to workmen. Later, the company transferred shares of INARCO Ltd. to Aril Holdings Ltd., a subsidiary company wholly owned by The Associated Rubber Industry Ltd. Aril holdings Ltd. had no other capital except these shares and no other business or source of income except dividend on these shares. This dividend income was not transferred to the Associated Rubber Industry Ltd. and was not reflected in its P&L a/c. The available surplus for purpose of bonus reduced and only 4% bonus was paid instead of 16% which the workers would have otherwise been entitled. Workers filed a case against the company.
The court rejected the independent status of the new company and directed that the amounts of dividend to be taken into account while determining the gross profits of the principal company.
31) Case Law: Gilford Motor Co Ltd v Horne
In Gilford Motor Co Ltd v Horne, the company entered into a contract with Mr. Horne the Managing Director of the Company that he shall not solicit customers after leaving the employment of the company. After being fired, Mr. Horne set up his own business and started undercutting Gilford Motor Company’s prices. To avoid breach of contract with Gilford Motor Company, Mr. Horne formed a new company, JM Horne & Co., where his wife and friend Mr. Howard were sold shareholders and directors. The new company took over Mr. Horne’s business and continued it. Gilford Motor Company alleged that the new company was an instrument of fraud to conceal Mr. Horne’s illegitimate actions. But Mr. Horne argued that Gliford Motor Company had no agreement with the new company about not competing.
Judgement
The court concluded that Horne had created the company for his own benefit and to solicit the customers of his employer’s company. The court issued an injunction against Horne and his new company and held that the new company was a mere cloak for the purpose of enabling the defendant to commit a breach of contract that he would not solicit the business of his employer’s company.
32) Case Law: Merchandise Transport Limited vs. British Transport Commission
In, Merchandise Transport Limited vs. British Transport Commission, a transport company wanted to obtain licenses for its vehicles, but could not do so if applied in its own name. It, therefore, formed a subsidiary company, and the application for license was made in the name of the subsidiary. The vehicles were to be transferred to the subsidiary company. The subsidiary company had no business nor any other income.
Judgement
It was held that, the subsidiary company was created merely for obtaining the license and therefore both the parent and the subsidiary companies were one commercial unit and the application for license was rejected.
33) Case Law: Royal British Bank vs Turquand
In, Royal British Bank vs Turquand, Mr. Turquand was the official manager (liquidator) of the insolvent Cameron’s Coalbrook Steam, Coal and Swansea and Loughor Railway Company. The company had given a bond for £ 2,000 to the Royal British Bank, which secured the company’s drawings on its current account. The bond was under the company’s seal, signed by two directors and the secretary. When the company was sued, it alleged that under its registered deed of settlement (the articles of association), directors only had power to borrow up to an amount authorized by a company resolution. An ordinary resolution had been passed but it did not specify how much the directors could borrow.
Judgement
It was held that the bond was valid, so the Royal British Bank could enforce the terms of the bond. Since the Articles of association were registered, there was constructive notice and so the bank was deemed to be aware that the directors could borrow only up to the amount the resolutions allowed. But the bank could not be deemed to know about which ordinary resolutions were passed, because these were not registered. The bond was valid, because there was no requirement to look into the company’s internal workings. This is the ‘indoor management rule’, that the company’s indoor affairs are the company’s problem.
34) Case Law: Ruben v Great Fingall Consolidated
In Ruben v Great Fingall Consolidated, Ruben was the transferee of a share certificate issued under the seal of the company. The company’s secretary issued the share certificate under the company’s seal after forging the signature of the two directors. The company refused to register Ruben as a member. Ruben contented that whether the signatures were genuine or forged was a part of the internal management, and therefore, the company should be estopped from denying genuineness of the document.
Judgement
But it was held, that the rule had never been extended to cover such a complete forgery. The doctrine of indoor management applies to irregularities and not illegalities (i.e.forgery)
35) In Howard v. Patent Ivory Manufacturing Co.,
The directors were empowered to borrow money upto ₤1,000 and sanction of the shareholders was required for an amount in excess of this. The directors themselves lent to the company an amount in excess of the borrowing powers without the consent of the shareholders. It was held that the directors had the notice of the internal irregularity and therefore the company was liable to them only for ₤1,000.
36) In Morris v Kansseen, a director could not defend an allotment of shares to him as he participated in the meeting, which made the allotment. His appointment as a director also fell through because none of the directors appointing him was validly in office.
37) In Haughton & co v. Nothard, Lowe & Wills Ltd, where a person holding directorship in two companies agreed to apply the money of one company in payment of the debt to other, the court said that it was something so unusual “that the plaintiff were put upon inquiry to ascertain whether the persons making the contract had any authority in fact to make it.”
38) Anand Bihari Lal v Dinshaw& Co., the accountant of the company transferred some property of the company to the plaintiff. The transfer was held to be void, because the power to transfer property could not be considered within apparent authority of the accountant. The plaintiff should have insisted on seeing the power of attorney executed in favour of the accountant.
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