MH0039-Legal Aspect of Business

8/8/2019 MH0039-Legal Aspect of Business

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LEGAL ASPECT OF BUSINESS

RAHUL GUPTA, MBAHCS (3RD

SEM), SUBJECT CODE-MH0039, SET-1 Page 1

Q-1 all contracts are agreement but all agreement are not contracts

Answer; A contract is a legally binding agreement or relationship that exists between twoor more parties to do or abstain from performing certain acts. A contract can also be definedas a legally binding exchange of promises between two or more parties that the law will

enforce. For a contract to be formed an offer made must backed acceptance of which theremust be consideration. Both parties involved must intend to create legal relation on a lawfulmatter which must be entered into freely and should be possible to perform.

An agreement is a form of cross reference between different parties, which may bewritten, oral and lies upon the honor of the parties for its fulfillment rather than being in anyway enforceable.

All contracts are agreement because there must be mutual understanding between twoparties for a contract to be formed. All parties should agree and adhere to the terms andconditions of an offer.

The following cases illustrate ways in which all contracts are agreements;

In the case of invitation to treat, where an invitation to treat is merely an invitation to makean offer. When a firm's offer is accepted it results into a contract provided other elements ofcontracts are accepted.

Considering person A buying a radio on hire purchase from person B who deals withelectronics and its appliances. Both parties must come to an agreement on payment ofmonthly installment within specified period of time. Such an agreement result to specialtycontract which a contract under seal.

Allcontracts are agreement until avoided for example, avoidable contract where one of

the parties can withdraw from it if s/he wishes. This occurs due to minor agreement andmisrepresentation or undue influence. Considering a case where person A make contractwith person B but during the contract period B realizes that he was engaged to perform anagreement under undue influence.

Definition of contract

According to section 2(h) of the Indian Contract Act: An agreement enforceable by law is acontract." A contract therefore, is an agreement the object of which is to create a legalobligation i.e., a duty enforceable by law.

From the above definition, we find that a contract essentially consists of two elements: (1)

An agreement and (2) Legal obligation i.e., a duty enforceable by law. We shall nowexamine these elements detail.

1. Agreement. As per section 2 (e): Every promise and every set of promises, forming theconsideration for each other, is an agreement." Thus it is clear from this definition that a'promise' is an agreement. What is a 'promise'? The answer to this question is contained insection 2 (b) which defines the term." When the person to whom the proposal is madesignifies his assent thereto the proposal is said to be accepted. A proposal, when accepted,becomes a promise."


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An agreement, therefore, comes into existence only when one party makes a proposal oroffer to the other party and that other party signifies his assent (i.e., gives his acceptance)thereto. In short, an agreement is the sum total of 'offer' and 'acceptance'.

On analyzing the above definition the following characteristics of an agreement becomeevident:

(a) At least two persons. There must be two or more persons to make an agreementbecause one person cannot inter into an agreement with himself.

(b) Consensus-ad-idem. Both the parties to an agreement must agree about the subjectmatter of the agreement in the same sense and at the same time.

2. Legal obligation. As stated above, an agreement to become a contract must give rise toa legal obligation i.e., a duty enforceable by law. If an agreement is incapable of creating aduty enforceable by law. It is not a contract. Thus an agreement is a wider term than acontract. All contracts are agreements but all agreements are not contracts,"

Agreements of moral, religious or social nature e.g., a promise to lunch together at afriend's house or to take a walk together are not contracts because they are not likely tocreate a duty enforceable by law for the simple reason that the parties never intended thatthey should be attended by legal consequences

Essential Elements of a Valid Contract

A contract has been defined in section 2(h) as "an agreement enforceable by law." To beenforceable by law, an agreement must possess the essential elements of a valid contractas contained in sections 10, 29 and 56. According to section 10, all agreements arecontracts if they are made by the free consent of the parties, competent to contract, for alawful consideration, with a lawful object, are not expressly declared by the Act to be void,

and where necessary, satisfy the requirements of any law as to writing or attention orregistration. As the details of these essentials form the subject matter of our subsequentchapters, we propose to discuss them in brief here.

The essential elements of a valid contract are as follows.

1. Offer and acceptance. There must a 'lawful offer' and a 'lawful acceptance' of the offer,thus resulting in an agreement. The adjective 'lawful' implies that the offer and acceptancemust satisfy the requirements of the contract act in relation thereto.

2. Intention to create legal relations. There must be an intention among the parties that theagreement should be attached by legal consequences and create legal obligations.

Agreements of a social or domestic nature do not contemplate legal relations, and as suchthey do not give rise to a contract. An agreement to dine at a friend's house in not anagreement intended to create legal relations and therefore is not a contract. Agreementsbetween husband and wife also lack the intention to create legal relationship and thus donot result in contracts.

Try to work out the solution in the following cases and then go to the answer.


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3. Lawful consideration. The third essential element of a valid contract is the presence of'consideration'. Consideration has been defined as the price paid by one party for thepromise of the other. An agreement is legally enforceable only when each of the parties to itgives something and gets something. The something given or obtained is the price for thepromise and is called 'consideration' subject to certain exceptions; gratuitous promises arenot enforceable at law.

The 'consideration' may be an act (doing something) or forbearance (not doing something)or a promise to do or not to do something. It may be past, present or future. But only thoseconsiderations are valid which are 'lawful'. The consideration is 'lawful'. unless it is forbiddenby law; or is of such a nature that, if permitted it would defeat The provisions of any law; oris fraudulent; or involves or implies injury to the person or property of another; or isimmoral; or is opposed to public policy (sec.23).

4. Capacity of parties. The parties to an agreement must be competent to contract. But thequestion that arises now is that what parties are competent and what are not. Thecontracting parties must be of the age of majority and of sound mind and must not bedisqualified by any law to which they are subject (sec.11). If any of the parties to the

agreement suffers from minority, lunacy, idiocy, drunkenness etc. The agreement is notenforceable at law, except in some special cases e.g., in the case of necessaries supplied toa minor or lunatic, the supplier of goods is entitled to be reimbursed from their estate (sec68).

5. Free consent. Free consent of all the parties to an agreement is another essentialelement. This concept has two aspects. (1) Consent should be made and (2) it should befree of any pressure or misunderstanding. 'Consent' means that the parties must haveagreed upon the same thing in the same sense (sec. 13). There is absence of 'free consent,'if the agreement is induced by (I) coercion, (ii) undue influence, (iii) fraud, (IV) miss-representation, or (v) mistake (sec. 14). If the agreement is vitiated by any of the first fourfactors, the contract would be voidable and cannot be enforced by the party guilty ofcoercion, undue influence etc. The other party (i.e., the aggrieved party) can either rejectthe contract or accept it, subject to the rules laid down in the act. If the agreement isinduced by mutual mistake which is material to the agreement, it would be void (sec. 20)

6. Lawful object. For the formation of a valid contract it is also necessary that the parties toan agreement must agree for a lawful object. The object for which the agreement has beenentered into must not be fraudulent or illegal or immoral or opposed to public policy or mustnot imply injury to the person or the other of the seasons mentioned above the agreementis void. Thus, when a landlord knowingly lets a house to a prostitute to carry onprostitution, he cannot recover the rent through a court of law or a contract for committinga murder is a void contract and unenforceable by law.

7. Writing and registration. According to the Indian contract Act, a contract to be valid,

must be in writing and registered. For example, it requires that an agreement to pay a timebarred debt must be in writing and an agreement to make a gift for natural love andaffection must be in writing and registered to make the agreement enforceable by law whichmust be observed.

8. Certainty. Section 29 of the contract Act provides that Agreements, the meaning ofwhich is not certain or capable of being made certain, are void." In order to give rise to avalid contract the terms of the agreement must not be vague or uncertain. It must bepossible to ascertain the meaning of the agreement, for otherwise, it cannot be enforced


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Illustration. A, agrees to sell B a hundred ton of oil" there is nothing whatever to showwhat kind of oil was intended. The agreement is void for uncertainly.

9. Possibility of performance. Yet another essential feature of a valid contract is that it mustbe capable of performance.

Section 56 lays down that "An agreement to do an act impossible in itself is void". If the actis impossible in itself, physically or legally, the agreement cannot be enforced at law.

Illustration. A agrees with B, to discover treasure by magic. The agreement is notenforceable.

10. Not expressly declared void. The agreement must not have been expressly declared tobe void under the Act. Sections 24-30 specify certain types of agreements that have beenexpressly declared to be void. For example, an agreement in restraint of marriage, anagreement in restraint of trade, and an agreement by way of wager have been expresslydeclared void under sections 26, 27 and 30 respectively

Q-2.Not all Person have the capacity to enter into a contact discuss thisStatement

Ans. Not All people are completely free to enter into a valid contract. The contract of thegroups of people listed below involves problematic consent and are dealt with separately, asfollows

y People who have a mental impairment,y Young people (minors);y Bankrupts;y Corporations(People acting on behalf of a company); andy

Prisoners.

People who have a mental impairment, generally speaking, people are free to enter intocontracts even though they may have a mental impairment, or are temporally disabled bydrugs or alcohol. They are however, sometimes vulnerable to being bound by contracts theydo not fully understand. The question of capacity to make the contracts often arise onlyafter the contactor is in place.

People with disabilities and their advocates will find some protection in the rule thata contract is not valid and enforceable unless there was genius consent to its making.Capacity it give consent involves a general understanding the general nature of the

contract, (not necessarily its fine details). A person with a mental impairment, for example,may have the capacity to understand some contracts (for example, buying a loaf of bread),but not to understand other more complicated contracts (for example, buying a car on

credit)Where a person with a disability did not understand the general nature of the contacts, acourt can intervene to set aside the contacts only if

y The other party knew ( or ought to have know ) of the disability or lack of capacity;and

y The person with the disability can give back most of the benefit they received underthe contract; and

y The benefit received by the other person has not been sold to a third party who didnot know the previous transaction might not be valid, generally, to escape the


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consequence of a contracts , the other party should be intention not to be bound bythe contract within a reasonable time.

If the contract was made during a period when the person was able to understand it(legally termed a lucid interval), the contract will be binding even though the otherparty knew of the disability.

Some people with disability (temporary or long-term) are assisted by a

administration appointed by the guardianship list of the Victorian civil administrationTribunal (VCAT).People with disability who have an administrator appointed to act ontheir behalf are generally not free to enter into contract, unless this a approved inwriting by their administrator or an order of the Guardianship List of VCAT.

A person with an intellectual or psychiatric disability will be liable to pay only areasonable price for necessaries sold and delivered. Necessaries and the rulesapplicable here are dealt with in Young people below because the definition is thesame for both groups).

Young people, the term young person is used here to anyone under the age of 18year. Sometimes legal writing refers to minors or infant.

The exact capacity of young to people to bind themselves and be bound by contract islimited but also unclear, because no Act of parliament completely covers this area oflaw. The supermen court 1986 (VIC) in sections 49 to 51 contracts of minors is the mostuseful reference on this question.

Binding contracts and young peopleContracts for the supply of necessaries will generally be binding. There are no hard andfast rules to identify what is a necessary but it does include the sorts of things the youngperson needs to live a reasonable lifestyle, it including basics such as

y Food;y Clothing;y A place to livey Medicine,

And so on.

It will also include any contracts relating to the young persons education, apprenticeship orsomething very similar, if it can be shown to be of benefit to the young person. While acourt has not yet considered the issue specifically, mobile phones are probably notnecessaries.

The young person contracting in this situation will be held bound to pay a reasonable price(although that may not be the contract price) for necessary actually sold and delivered.(Delivered is a technical term. Generally, delivery takes the goods away). Wherenecessaries have been sold but there has been no delivery, the young person does not haveto take delivery or pay for the goods.

Non-binding contracts and young people.Two classes of contracts are not binding on a young person, namely:

y Contracts which are not for necessaries andy Contracts for the repayment of money lent or to be (thetas is any form of credit

contract).Where a young person has already paid money under a non-binding contract, that moneywill not be recoverable unless no benefit has been received by the young person. The youngperson can, however, refuse to make any further payment under the contracts. It is notcertain who then own goods that are not necessaries. It appears that they become the


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property of the young person unless the young person has fraudulently misrepresented theirage.

Even after turning 18, a person cannot confirm a prior contract and the n become bound byit any money paid by a young person under such circumstances may be recovered.

Bankrupts, bankrupts people are not deprived of their general capacity to contract.However there are provisions of the Bankrupts Act 1966 that relate to dealing and contractsby bankrupts. For example, obtaining credit of $4,145(indexed) or more without disclosingyour bankruptcy is an offence and liable to penalty under section 269 of the bankruptcy Act.

Corporations: A corporation is an artificial body created by law. The corporation has alegal existence separate from the individual people who comprise it. However, a companyhas the legal capacity of a natural person and therefore has the capacity to entercontractual relations. This is so even if there is an express prohibition contained in thecompanys construction. Such trisection is not deemed void and beyond the companypowers simply because the exercise of such powers is in breach of the restrictions placed inthe company constitution.

A company has the capacity to enter contractual relations, but such relations are onlybinding on the company if these acting on behalf of the company do so with the companysexpress or implied authority ( $.126(1)). The courts have been quite liberal in their interpreton of implied authority. It has been found that in case where directors with expressauthority have acquiesced and allowed directors with no authority to frequently enterscontractual relation on behalf of the company, that such directors have implied authorityand therefore can contractually bind the company.

Prisoners: During their imprisonment, prisoners may enter contracts, including contractsto buy and sell property. The usual restriction about supervision and censorship of anythingcoming into the prison still apply, so that the permission of correction Victoria is requiredbefore a prisoner may sign for deliver or receive any document.

Q-3.Discuss how a contract can be discharged by breach

Discharge of contract means parties to the contract is no more liable to the contract. Inother words, the liability of the parties to the contract will come to an end.

Discharge by breach of contract: Breach of contract by a party thereto is also a methodof discharge of a contract, because breach also brings to an end the obligations created bya contract on the part of each of the parties. Of course the aggrieved party i.e., the partynot at fault can sue for damages for breach of contract as per law; but the contract as suchstands terminated. Breach of contract may be of two kinds: (1) Anticipatory breach; and (2)Actual breach.

1. Anticipatory breach: An anticipatory breach of contract is a breach of contractoccurring before the time fixed for performance has arrived. It may take place in twoways: (a) expressly by words spoken or written. Here a party to the contractcommunicates to the other party, before the due date of performance, his intentionnot to perform it. (b) Impliedly by the conduct of one of the parties. Here a party byhis own voluntary act disables himself from performing the contract. When a party to


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a contract has refused to perform or disabled himself from performing, his promise inits entirety, the promise may put an end to the contract, unless he has signed, bywords or conduct his acquiescence in its continuance.

2. Actual breach: Actual breach may also discharge a contract. It occurs when a partyfails to perform his obligations upon the date fixed for performance by the contract.Actual breach entitles the party not in default to elect to treat the contract as

discharged and to sue the party at fault for damages for breach of contract.

Q-4. Discuss the Essential of Contract of Guarantee:

1. From: A contract of guarantee is just like any other contract which may be eitheroral or in writing.

2. Tripartite agreement: Every contract of guarantee involves three agreementsbetween (I) the creditor and principal debtor, (ii) the surety and the creditor, and (iii)the surety and the principal debtor.

Consent of the parties: There must be consent of all the three parties.

Example: X sells and delivers goods to Y. X afterwards requests Z to pay in default of Y.Z agrees to do so. Here, Z cannot become surety without the consent of Y.

3. Secondary Liability: The test which applied to determine whether the contract isone of guarantee or indemnity is whether the obligation has been undertaken at thedebtors request in which case the contract is one of guarantee. If the obligation isundertaken without any request of the debtor, the contract is one of indemnity. Theintention of the parties is also important whether one making oneself primarily orcollaterally liable. Hence, the promise to be primarily and independently liable is nota guarantee, though it may be an indemnity. Hence in a contract of guarantee, theprimary liability is with the principal debtor.

4. Existing liability: It is not necessary that the principal contract must be in existenceat the time the contract of guarantee is made; the original contract by which theprincipal debtor undertakes to repay the money to the creditor may be about to comeinto existence.

Example: X took a loan of Rs.10, 000 from Y on 1 st Jan. 1999 and paid nothing onaccount of interest and principal. On 2nd Jan. 2002, Z gave the guarantee to Y for thepayment of Rs.10, 000 due from X. This is not a valid contract of guarantee because theprimary liability between X and Y is a time barred debt which is not enforceable by law.

1. The promise to pay must be conditional: In other words, the liability of thesurety should arise only when the principal debtor makes a default.2. Consideration: Something done for the benefit of the principal debtor is consideredas consideration for the guarantee to make the contract valid. The legal detrimentincurred by the promise at the promises request is sufficient to constitute theelement of consideration.

3. Competency: The principal debtor, surety and creditor must be a person competentto contract. However, under certain circumstances, a surety is liable though theprincipal debtor is not i.e. the original contract is void as is the case of a contractwith a minor in which the surety is liable not only as surety but also as principal


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debtor. A person of unsound mind or an undercharged insolvent cannot give a validguarantee.

4. Consent: There must be free consent; otherwise the contract of guarantee maybecome void or voidable. Generally a contract of guarantee is not the contract ofutmost good faith i.e., uberrimae fideism, but it is sometimes a first cousin to it.Mere non-disclosure will not affect the contract of surety unless there is an

intentional concealment.5. Example: I: A engages B as clerk to collect money from him. B fails to account for

some of his receipts, and A in consequence calls upon him to furnish security for hisduty accounting. C gives his guarantee for Bs duty accounting. A does not acquaintC with Bs previous conduct. B afterwards makes a default. The guarantee is invalid.

Indemnity Guarantee

Number of parties: There are twoparties: Indemnifier and Indemnified.

There are three parties to it viz., theprincipal debtor, the surety & the creditor.

Number of Contracts: There is onlyone contract between the indemnifiedand Indemnifier.

Three contracts: (I) between the principaldebtor and the creditor, (ii) between thesurety and the creditor, and (iii) betweenthe surety and the principal debtor(implied).

Form: May be written or oral in bothIndian and English Law.

According to section 4, of the Statute ofFrauds (in England) it should be in writing:in Indian Law it may be written or oral.

Interest in the transaction: Theindemnifier has interest in thetransaction apart from the indemnityi.e., apart from his promise to pay theloss.

The guarantee is totally unconnected withthe contract but the only interest in thecontract is his promise to the loss.

Nature of risk: It is possibility of riskof any loss happening in futureagainst which the indemnifier

undertakes to indemnify i.e.,continuing risk.

There is an existing debt the discharge orperformance of which is guaranteed by the

surety i.e., it is the absolute andsubsisting risk.

Nature of liability: The indemnifieris primarily and independently liable. In a guarantee the liability of the surety is

co-extensive with that of the principaldebtor (ancillary liability). The guarantor ifsecondarily liable except where theprincipal debtor is incapable ofcontracting).


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Example: II: A guarantees to C payment for iron to be supplied by him to B to the amountof 2000 tons. B and C have privately agreed that we should pay Rs.500 per ton beyond themarket price, such excess to be applied on liquidation of an old debt. This agreement isconcealed from A. A is not liable

A contract of guarantee may be either retrospective e.g., for an existing debt orprospective i.e. for a future debt. Guarantee are further divided into specific also knownas simple or single guarantee and continuing. When the guarantee is given for a single orparticular debt, it is called a specific guarantee and it comes to an end when the debtguaranteed has been paid. A guarantee which extends to a series of transactions is called acontinuing guarantee. (Sec. 129 of the Indian Contract Act).

Guarantee may be for a part of a whole debt or for the whole debt subject to alimit: When the intention of the parties is not explicit it will be presumed that where aportion of a floating balance is guaranteed it is for a part of it only. When portion of a fixedand ascertained debt is guaranteed the guarantee applied to the whole debt subject to thelimit.

Distinction between Indemnity and Guarantee Distinction between Indemnity andGuarantee

Q-5.How can negotiable instruments are endorsed? Discuss in detail.

Negotiable Instruments Act

The law relating to Negotiable Instruments is contained in the Negotiable Instruments Act,1881, as amended up-to-date. It deals with three kinds of negotiable instruments, i.e.,Promissory Notes, Bills of Exchange and Cherubs. The provisions of the Act also apply tohands (an instrument in oriental language), unless there is a local usage to the contrary.Other documents like treasury bills, dividend warrants, share warrants, bearer debentures,port trust or improvement trust debentures, railway bonds payable to bearer etc., are alsorecognized as negotiable instruments either by mercantile custom or under other

enactments like the Companies Act, and therefore, Negotiable Instruments Act is applicableto them.

Definition & Features

The word negotiable means transferable by delivery, and the word instrument means awritten document by which a right is created in favor of some person. Thus, the termnegotiable instrument literally means a written document transferable by delivery.

Subrogation: An indemnifier cannothave subrogation unless there is anassignment. Otherwise he must bringthe suit in the name of theindemnified.

If a surety pay the debt or perform theobligation he can file a suit in his ownname against the principal debtor toreimburse the amount so paid.

Request: It is not necessary for theindemnifier to act the request of theindemnified.

It is necessary for the surety to give hisguarantee at the request of the debtor.


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Examples of Negotiable Instruments: The following instruments have been recognizedas negotiable instruments by statute or by usage or custom: (I) Bills of exchange; (ii)Promissory notes; (iii) Cherubs; (iv) Government promissory notes; (v) Treasury bills; (vi)Dividend warrants; (vii) Share warrants; (viii) Bearer debentures; (ix) Port Trust orImprovement Trust debentures; (x) Hindis; (xi) Railway bonds payable to bearer, etc.

Examples of Non-negotiable Instruments: These are: (I) Money orders; (ii) Postalorders; (iii) Fixed deposit receipts; (IV) Share certificates; (v) Letters of credit.

Endorsement:

Section 15 defines endorsement as follows: When the maker or holder of a negotiableinstrument signs the same, otherwise than as such maker, for the purpose of negotiation,on the back or face thereof or on a slip of paper annexed thereto, or so signs for the samepurpose a stamped paper intended to be completed as negotiable instrument, he is said toindorse the same, and is called the endorser.

Thus, an endorsement consists of the signature of the holder usually made on the back of

the negotiable instrument with the object of transferring the instrument. If no space is lefton the back of the instrument for the purpose of endorsement, further endorsements aresigned on a slip of paper attached to the instrument. Such a slip is called along andbecomes part of the instrument. The person making the endorsement is called an endorserand the person to whom the instrument is indorsed is called an indorse.

Kinds of Endorsements: Endorsements may be of the following kinds:

1. Blank or general endorsement: If the endorser signs his name only and does notspecify the name of the indorse, the endorsement is said to be in blank. The effect ofa blank endorsement is to convert the order instrument into bearer instrument whichmay be transferred merely by delivery.

2. Endorsement in full or special endorsement: If the endorser, in addition to hissignature, also adds a direction to pay the amount mentioned in the instrument to,or to the order of, a specified person, the endorsement is said to be in full.

3. Partial endorsement: Section 56 provides that a negotiable instrument cannot beindorsed for a part of the amount appearing to be due on the instrument. In otherwords, a partial endorsement which transfers the right to receive only a partpayment of the amount due on the instrument is invalid.

4. Restrictive endorsement: An endorsement which, by express words, prohibits theindorse from further negotiating the instrument or restricts the indorse to deal withthe instrument as directed by the endorser is called restrictive endorsement. Theindorse under a restrictive endorsement gets all the rights of an endorser except theright of further negotiation.

5. Conditional endorsement: If the endorser of a negotiable instrument, by expresswords in the endorsement, makes his liability, dependent on the happening of aspecified event, although such event may never happen, such endorsement is calleda conditional endorsement.

In the case of a conditional endorsement the liability of the endorser would arise only uponthe happening of the event specified. But the indorse can sue other prior parties, e.g., themaker, acceptor etc., if the instrument is not duly met at maturity, even though thespecified event did not happen.


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Q-6. Why do you think an agreement to take a person to moon for a holiday cannotbe a contract?

The essential of a valid contactor state thats the terms of the agreement should becapable of being performed and should be certain taking a person to the moon for aholiday cannot be a valid contract because neither the activity is being capable of being

performed in the near future nor it is certain that someone making such kind of promise willbe able to fulfill. We all know thats moon missions are multi-billion projects and are fundedby governments, so someone making such a

Promise would only be a fraud. The governments laws have also not yet authorized anyagency or person to make such contracts so any agency or person promising someone aholiday on the moon is unlawful which an essential term of a valid contract is also.

MH0039-Legal Aspect of Business

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Transcript of MH0039-Legal Aspect of Business