Alternative Way of Analyzing a Price Change

One can also analyze the income and substitution effects by first considering the income change necessary to move the consumer to the new utility level at the initial prices. This constitutes the income effect. The movement along the new indifference curve from the intermediate point to the new equilibrium as the slope of the price line changes is then the substitution effect. See if you can identify the “intermediate” point on the lower indifference curve by shifting the budget line (Hint: q1 and q2 both fall.).

Income & The Substitution Effect

When the price of q1, p1, changes there are two effects on the consumer. First, the price of q1 relative to the other products (q2, q3, . . . qn) has changed. Second, due to the change in p1, the consumer's real income changes. When we compute the change in the optimal consumption as a result of the price change, we do not usually separate these two effects. Sometimes we might want to separate the effects.
The Substitution Effect is the effect due only to the relative price change, controlling for the change in real income. In order to compute it we ask what is the bundle that would make the consumer just as happy as before the price change, but if they had to make their choice faced with the new prices. To find this point we
consider a budget line characterized by the new prices but with a level of income such that it is tangent to the initial indifference curve. In the diagram on the next page, the initial consumer equilibrium is at point A where the initial budget line is tangent to the higher indifference curve. Consumption at this point is 11 units of good 1 and 8 units of good 2. After an increase in the price of good 1, the consumer moves to point E,
where the new budget line is tangent to the lower indifference curve. Consumption of good 1 has fallen to 4 units while consumption of good 2 has increased to 10 units. The substitution effect is the movement from point A to point G. This point is characterized by two things. (1) It is on the same indifference curve as the original consumption bundle; AND (2) it is the point where a budget line that is parallel to the new budget line is just tangent to initial indifference curve. This "intermediate" budget line is attempting to hold real income fixed so we can isolate the substitution effect. The point G reflects the consumer's choice if faced with the new prices (the budget line has the slope reflecting the new prices) and the compensated income (i.e., an income level that holds real income fixed). The substitution effect is the difference between the original consumption and the new "intermediate" consumption. In this case consumption of good 1 falls
from 11 to 6.84 while consumption of good 2 increases to 14.27.
When p1 goes up the Substitution Effect will always be non-positive (i.e., negative or zero).

The Income Effect is the effect due to the change in real income. For example, when the price goes up the consumer is not able to buy as many bundles that she could purchase before. This means that in real terms she has become worse off. The effect is measured as the difference between the “intermediate" consumption” at G and the final consumption of q1 and q2 at E.
Unlike the Substitution Effect, the Income Effect can be both positive and negative depending on whether the product is a normal or inferior good. By the way we constructed them, the Substitution Effect plus the Income Effect equals the total effect of the price change.

Duties and Responsibilities of Bailee

Duties and Responsibilities of Bailee

1. To take care of goods bailed:

The bailee is bound to take as much care of the goods entrusted to him as a man of ordinary prudence. (Sect. 151)

2. To avoid the inconsistent act:

A contract of bailment is voidable at the option of the bailor, if the bailee does any act with regard to the goods bailed, inconsistent with the conditions of the bailment (Sect. 153)

3. The authorize use of goods:

If the bailee makes any unauthorized use of the goods bailed, he is liable to make compensation to the bailor for any damage arising to the goods from or during such use of them. (Sect. 154)

4. Not to mix bailor’s goods:

The bailee is bound to keep the goods of the bailor separate from his own where the mixture without the consent of the bailor is inseparable, the bailor is entitled to be compensated by the bailee for the loss of the goods. (Sect. 155, 156, 157)

5. To return the goods:

It is the duty of the bailee to return, or deliver the goods bailed according to the bailor’s directions. (Sect. 160)

6. Responsibility in case of default:

If the goods are not returned, delivered or tendered due to default of the bailee, he is responsible to the bailor for any loss of the goods from that time. (Sect. 161)

7. To return any profit from the goods:

The bailee is bound to deliver to the bailor, or according to his directions, any increase or profit which may have accrued from the goods bailed. (Sect. 163)

8. Not to set up adverse title:

The bailee has no right to deny the bailor’s title or set up against the bailor his own title or the right of a third party.

Right of Bailee

Right of Bailee

1. Right to recover damages:

A bailee has right to recover damages from the bailor if he suffers any loss due to defects of the goods bailed.

2. Right to receive compensation:

A bailee is entitled to receive compensation from the bailor for any loss resulting from the defect in the bailor’s title.

3. Right of Legal Action:

A bailee may take necessary legal action against the person who wrongfully deprives him of the use of goods bailed or does them any injury (Sect. 180)

4. Right to recover Bailment Expenses:

Bailee is entitled to be reimbursed for all legitimate expenses incurred for any purpose of bailment.

5. Right of Lien:

Where the bailee has rendered any service for the purpose of bailment, he has right to retain such goods bailed until he receives due remuneration for his services in absence of contract to the contrary. (Sect. 170)

6. Right of Indemnity:

The bailee has right to receive the amount of indemnity from bailor for any loss which he may sustain by reason that the bailor was not entitled to make the bailment or to receive back the goods, or to give directions respecting them. (Sect. 164)

Minor as a Partner

Partnership is based on legal contract between two persons who agree to share the profits or losses of a business carried on by them. As such a minor is incompetent to enter into a valid contract with others, he cannot become a partner in any firm. However, a minor can be admitted to the benefits of a partnership firm with the mutual consent of all other partners.

In such cases, his liability will be limited to the extent of the capital contributed by him and in the firm. He will not be eligible to take an active part in the management of the firm. Thus, a minor can share only the profits and can not be asked to bear the losses. However, he can if he wishes, inspect the accounts of the firm. The status of a minor changes when he attains majority. In fact, on attaining majority, the minor has to decide whether he would like to become a partner in the firm. He has to give a public notice of his decision within six months of attaining majority. If he fails to do so, within the stipulated time, he will be treated as a full-fledged partner and will become liable to the debts of the firm to an unlimited extent, in the same way as other active partners are.

JOINT HINDU FAMILY BUSINESS

Joint Hindu family business is a
specific form of business organisation found only in India. It is one of the oldest forms of business organisation in the country. It refers to a form of organisation wherein the business is
of the Hindu Undivided Family (HUF).
It is governed by the Hindu Law. The
basis of membership in the business is
birth in a particular family and three
successive generations can be members
in the business.

The business is controlled by the
head of the family who is the eldest
member and is called karta. All
members have equal ownership right
over the property of an ancestor and
they are known as co-parceners.
systems. Dayabhaga system prevails
in West Bengal and allows both the
male and female members of the family
to be co-parceners. Mitakashara
system, on the other hand, prevails all
over India except West Bengal and
allows only the male members to be
co-parceners in the business.

owned and carried on by the members

What is Fraud

Fraud

The term ‘fraud’ includes all acts committed by a person with an intention to deceive another person.

Fraud is the willful representation made by a party to a contract with the intent to deceive the other party or to induce such party to enter into a contract. It means made knowingly or without belief in its truth or recklessly without caring whether is it true or false.

Accordingly to Section 17, fraud means and includes any of the following acts done with intent to deceive or to induce a person to enter into a contract.
4. Any other act fitted to deceive.The intention to deceive and the fitness of the act for deceit must be present. Thus, where a party, who by false impersonation includes another to enter into a contract with him under the belief that he is somebody that he is somebody else, commits fraud.
5. Any such act or omission as the law specially declares to be fraudulent. It is fraudulent to conceive of any act that attempts to deceive law. Thus, where a contract is based against the policy of insolvency law, or a secret agreement is formed between the insolvent and the party, it is nothing short of a fraud on insolvency law.

1. A False Suggestion as to fact known to be false or not believed to be true. A False statement made recklessly without inquiring whether it is true or false would amount to fraud. But if a statement which turns out to be false is made in the honest beleief that it is true there is no fraud.

Case: - PEEK V. GURNEY (1873)

2. The Active concealment of fact by one having knowledge or belief of fact. If a person conceals a fact which is material to the contract and it is duty to disclose it, it will be a case of fraud. Mere non-disclosure is not a fraud, where there is no duty to disclose. ‘Caveat Emptor’ or ‘Buyer Beware’ is the rule in contracts of sale of goods, but in contracts of absolute faith mere silence about materials facts will be taken as fraud.

3. A promise made without any intention of performing it. The initial intention not to perform the promise that is being made is a necessary element to constitute fraud. Thus, where a person orders and obtains possession of goods with the intention of not paying for them, he commits fraud.

ELEMENTS OF FRAUD

Elements of Fraud

1. The fraud must have been committed by a party to the contract or with his connivance or by his agent. fraud by a stranger to contract does not affect its validity.

2. There must be anyone of the above mentioned in last post in act of fraud.
3. The act of fraud must have been committed with the intent to deceive and must actually deceive. A deceit which does not deceive is not fraud. No cause of action arises where there is fraud without damage or damage without fraud. An action lies where these two occur together.
4. The representation must have been aimed at the other party ti contract or his agent or with a view to induce the other party to enter into the contract, Such representation must have been made before the conclusion of the contract.
5. The other party must have suffered a loss.

What Are The Effects of Fraud

When consent to an agreement is caused by fraud, the agreement is a contract voidable at the option of the party whose consent was so caused.

A party whose consent to an agreement was caused by fraud has two remedies, namely :

• ha may rescind the contract, or

• he may insist that the contract shall be performed and that he shall be put in the position in which have been, if the representation made had been true.
  

Example : A fraudulently informs B that A's estate is free from encumberance. B thereupon buys the estates. The estate is subject to a mortgage. B may avoid the contract or may insist on its carried out and the mortgage debt repaid by A.

Apart from the above, the person defrauded may obtain rescission, restitution or damages. The aforesaid remedies are subject to an exception. A contract cannot be avoided on the ground of misrepresentation or silence amounting to fraud., if a party to whom an untrue or misleading statement was made had the means of discovering the truth with reasonable diligence. 

Difference between Misrepresentation and Fraud

The basic difference between misrepresentation and fraud is that in fraud the person making the representation does not himself believe in the truth of the statement he is making whereas in situations of innocent misrepresentation the person making the statement may believe that what he is saying is true. This is due to the fact that the person making the statement is simply repeating what another person has asserted to be true. In cases of fraud, the person making the statement is a complete liar and is making the statement to deceive others to enter into a contract. However this is just the general rule.

Difference between fraud and misinterpretation :-

In misrepresentation the person making the false statement believes it to be true. In fraud the false statement is person who knows that it is false or he does not care to know whether it is true or false.

There is no intention to deceive the other party when there is misrepresentation of fact. The very purpose of the fraud is to deceive the other party to the contract.

Misrepresentation renders the contract voidable at the option of the party whose consent was obtained by misrepresentation. In the case of fraud the contract is voidable It also gives rise to an independent action in tort for damages.

Misrepresentation is not an offence under Indian penal code and hence not punishable. Fraud, In certain cases is a punishable offence under Indian penal code.

Generally, silence is not fraud except where there is a duty to speak or the relations between parties is fiduciary. Under no circumstances can silence be considered as misrepresentation.

The party complaining of misrepresentation can’t avoid the contract if he had the means to discover the truth with ordinary diligence. But in the case of fraud, the party making a false statement cannot say that the other party had the means to discover the truth with ordinary diligence.

CAPACITY OF PARTIES

For a valid contract, the parties to a contract must have capacity i.e. competence to enter into a contract. Every person is presumed to have capacity to contract but there are certain persons whose age, condition or status renders them incapable of binding themselves by a contract. Incapacity must be proved by the party claiming the benefit of it and until proved the ordinary presumptions remains.



Section 11 of the Contract Act deals with the competency of parties and provides that "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 disqualified from contracting by any law to which he is subject."

It follow that the following person are incompetent to contract. (a) minor (b) person of unsound mind, and (c) Person disqualified by any law to which they are subject. Contract entered into by the persons mentioned above are void.

Every person is competent to contract: (a) Who is of the age of majority. (b) Who is of sound mind. (c) Who is not disqualified from making a contract.

Therefore the following persons are not competent to contract (a) A person who is a minor.

(b) A person of unsound mind.

(c) A person who is disqualified from making a contract. 

MINOR

An infant or a minor is a person who is not a major. According to the Indian Majority Act, 1875, a minor is one who has not completed his or her 18th year of age. A person attains majority on completing his 18th year in India.

In the following two cases, a person continues to be a minor until he completes the age 21 years.(a) Where a guardian of a minor' person or property has appointed under the Guardians and Wards Act, 1890; or(b) Where the superintendence  of a minor's property is assumed by a court of wards.

An amendment to this ACt was made by Indian Majority (Amendment) Act 2000 which fixed uniform age of majority as 18 years irrespective of the fact whether any guardian has been appointed but president's assent to kid has yet to be obtained.

To deal with the problem the law provides the following two approaches.(a) In case of contracts relating to ordinary merchantile transactions, the age of majority is to be determined by the law of place where the contract is made.(b) In case of contracts relating to land, the age of majority is to be determined by the law of the place where the land is situated.

Example: A, 18 years old-domiciled in india, endorsed certain negotiable Instrument in Ceylon, by the law of which he was a minor. Therefore, he was held not to be liable as endorser.

RULES REGARDING MINOR'S AGREEMENT

A minor's agreement being void is wholly devoid of all effects. When there is no contract there should be no contractual obligation on either side.



1. An agreement with or by minor is void             Section 10 of the Indian Contract Act requires that the parties to a contract must be competent and Section 11 says that a minor is not a competent. BUt either section makes it clear whether the contract entered into by a minor is void or voidable. Till 1903, court in india wee not unanimous on this point the privy council made it perfectly clear that a minor is not competent to a contract and that a contract by minor is void ab initio.    The leading case is:

To render minor's estate liable for necessaries two conditions must be satisfied.
(a) The contract must be for the goods reasonably necessary for his support in his station in life.   

MOHRI BIBI V. DHARMO DAS GHOSE (1903)

    "A minor borrowed Rs. 20000 from B and as a security for the same executed a mortgage in his favor. He became    a major a few months later and filled a suit for the declaration that the mortgage executed by him during his majority was void and should be cancelled. It was held that a mortgage by a minor was void and B was not entitled to replacement of money.

2. No ratification

            An agreement with the minor is completely void. A minor cannot ratify the agreement even on attaining majority, because a void agreement cannot be ratified. A person who is not competent authorize an act cannot give it validity by ratifying.

   But If on becoming major, minor makes a new a new promise for fresh consideration, then this new promise will be binding.

3. Minor can be a promise or beneficiary

            If a contract is beneficiary to a minor it can be enforced by him. Their is no restriction on a minor from bring a beneficiary, for example, being a payee or a promisee in a contract. Thus a minor is capable of purchasing immovable property and he may sue to recover the possession of the property upon tender of the purchase money. Similarly a minor in whose favor a promissory note has been executed can enforce it.

4. No estoppel against a minor 

            Where a minor by misrepresenting his age has induced the other party enter into a contract with him, he cannot be made liable on the contract. There can be no estoppel against a minor. It means he is not estoppel from pleading his infancy in order to avoid a contract.

5. No Specific performance Except in certain cases

            A minor's contract being absolutely void, there can be no question of the specific performance of such contract. A guardian of a minor cannot bind the minor by an agreement for the purchase of immovable property ; so the minor cannot ask for the specific performance of the contract which the guardian had no power to enter into.

But a contract entered into by guardian or manager on minor's behalf can be specifically enforced if

(a) The contract is within the authority of the guardian or manager.

(b) It is for the benefit of the minor.

(LALCHAND V. NARHAR 89 IC 896)

6. Liability for torts

            A trot is a civil wrong. A minor is liable in tort unless the tort in reality is a breach of contract. Thus, where a minor borrowed a horse for riding only he was held liable when the he lent the horse to one of his friends who jumped and killed the horse.

   But a minor cannot be made liable for a breach of contract by framing the action on tort. you cannot convert a contract into a tort to enable you to sue an infant.

7. No insolvency

            A minor cannot be declared insolvent as he is incapable of contracting debts and dues are payable from the personal properties of minor and he is not personally liable.

8. Partnership

            A minor being incompetent to contract cannot be a partner in a partnership firm, but under Section 30 of the Indian Contract Act , he can be admitted to the benefits of partnership.

9. Minor can be an agent

            A minor can act as an agent. But he will not to be liable to his principal for his acts. A minor can draw, deliver and endorse negotiable instruments without himself being liable.

10. Minor cannot bind parent or guardian

            In the absence of authority, express or implied, an infant is not capable of binding his parent or guardian, even for necessaries. The parents will be held liable only when the child is acting as an agent for parents.

11. Joint contract by minor and adult

            In such a case, the adult will be liable on the contract and not the minor. In Sain Das Vs Ram Chand, where there was a joint purchase by two purchaser, one of them was a minor. It was held that the vendor could enforce the contract against the major purchaser and not the minor.

12. Surety for a minor

            In a contract of guarantee when an adult stands for a minor then he (adult) is liable to third party as there is direct contract between the surety and the third party.

13. Minor as Shareholder

            A minor, being incompetent to contract cannot be a shareholder of the company. If by mistake he become a member, the company can rescind the transaction and remove his name from register. But, a minor may, acting through his lawful guardian become a shareholder by transfer or transmission of fully paid shares to him.

14. Liability for necessaries

            The case of necessaries supplied to a minor or to any other person whom such minor is legally bound to support is governed by section 68 of the Indian Contract Act. A claim for necessaries supplied to a minor is enforceable by law. But a minor not liable for any price that he may promise and never for more than the value of the necessaries. There is no personal liability of the minor, but only his property is liable.

(b) The minor must not have already a sufficent  supply of these necessaries.

PERSON OF UNSOUND MIND

As explained earlier, as per Section 11 of contract Act, for a valid contract each party to the contract must have a sound mind. Contract made by person of unsound mind are void. The reason is that a contract requires assents of two minds but a person of unsound mind has nothing which the law recognize as a mind.

Section 12 deals with the question as to what is a sound mind for the purpose of entering into contract. It lays down that, "A person is said to be of sound mind for the purpose of making a contract if, at the time when he makes it he is capable of understanding it and of forming a rational judgement as to its effects upon his interest."

Unsoundness of mind may arise from:(a) Idiocy. An Idiot is a person with no intervals of saneness. He is in capable. His mental powers of understanding even ordinary matters are absent because of lack of development of brain. The agreement with an idiot is void.  (b) Lunacy or Insanity. It is disease of brain. A lunatic loses the use of his reason due to some mental strain or disease. He may have Lucid Intervals of sanity. He can enter into contract during that period when he is of sound mind.

(c) Drunkenness. It produces temporary incapability till the man is under the effect of intoxication creating impotence of mind. He stands on the same footing as a lunatic.

(d) Hypnotism. It also produce temporary incapability till the person is under the impact of artificially induced sleep.

(e) Mental decay. It is on account of old age etc.

So, an agreement with person of unsound mind is void. But under Section 68, the property of such person is always liable for necessaries supplied to him or to anyone whom he is legally bound to support.

ESSENTIAL ELEMENTS OF A VALID ACCEPTANCE

1.             Acceptance must be absolute and unconditional. An acceptance must be unconditional and unqualified. Accepting an offer with conditions, variations and reservations amounts to counter offer and rejection of the original offer. The accepter must comply with the terms of the offer. A variations or alteration, however, small of the offer, will make the acceptance invalid.

2.             Acceptance must be communicated to the offeror. If the offeror remains silent and does nothing to show that he has accepted the offer, no contract is formed. The acceptor should do something to signify his intention to accept. Thus, where a person accepts an offer but fails to post the letter of acceptance, it is no acceptance.

3.             Acceptance must be within a reasonable time. Acceptance to be valid must be made within the time allowed by the offeror and if no time is specified, it must be made within a reasonable time.

4.             It must be according to the mode prescribed or usual or reasonable mode. Acceptance has to be made in the manner prescribed, the proper may within a reasonable time after the acceptance is communicated to him, insist that the acceptance must be made in the manner prescribed. Failure on the part of the offeror to do so, will imply that he has accepted the acceptance although it is not in the desired manner.

5.             The acceptor must be aware of the proposal at the time of the offer. Acceptance follows offer. It the acceptor is not aware of the existence of the offer and conveys his acceptance, no contract comes into being.

6.             Acceptance must be given before the offer lapses or before the offer is revoked. It means that acceptance must be made within the offer is in force i.e. before the offer has been revoked or offer has lapsed.

      7.      Acceptance cannot be implied from silence. No contract is formed if the offeree remains silent and does nothing to show that he has accepted the offer

Starting the Business

Some of the basic factors which must be considered by anybody who is to start the business are:-

(a) selection of line

of business, size of the firm

(b) choice of form of ownership.

(c) location of business

enterprise.

(d) financing the proposition.

(e) physical facilities.

(f) plant layout

competent.

(g) committed workforce.

(h) tax planning.

(i) launching the

enterprise.