Business Law Module i

8/2/2019 Business Law Module i

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LAW

It is a rule of external human action enforced by thesovereign political authority

Law is the body of principles recognized and applied by

the state in administration of justice

Democracy can remain in a society of equals. The

concept of equality of all persons in the eye of law is

the basis of what is called Rule of Law


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Business Manager

A Business Manager is always under Legal

obligations

A practicing manager must know the Business

laws

A manager is effective in managing the affairs

of business, only if, he is aware about the laws

to which he is subject to


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Business laws to which you are subject to as

managers are : Indian Contract Act, 1872

Sale of Goods Act, 1930

Negotiable Instruments Act, 1881

Companies Act, 1956

FEMA, Imports & Exports Laws

Tax Laws

Labour & Social Security Laws Patents & Trade Mark Laws

Transfer of Properties Act

Environmental Laws etc.


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THE INDIAN CONTRACT ACT,

1872


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Contract: Inseparable Part of Ones Life

You.

Buy groceries

Board a train

Hire a cabConsult a doctor or solicitor

Give your any household gadget for repair

Ever realised!In each of the above and numerous such situations

you enter into a contractual obligation.


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Contract Defined Under The Act

An agreement enforceable by law is a contract.

Section 2(h)

Agreement: Every promise and every set of promises,forming the consideration for each other.

A proposal (offer) when accepted becomes a promise.

Mutuality is the very base of an agreement.

Legal obligation: To become a contract , an agreementmust be enforceable by law.


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Contract Distinguished From Agreement

Elements. An agreement consists of an offer and itssubsequent acceptance, whereas a contract is composedof an agreement and its legal enforceability.

Essence of a legal relationship. An agreement may notcreate legal relationship. Parties entering into a contractessentially have a common intention of entering intolegal obligation.

Scope. All agreements may not be contracts but all

contracts are primarily agreements.

Enforceability by law. A contract is legally enforceable,whereas an agreement is not necessarily so.


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Essentials of Contract(Sec. 10,29,56)

Offer & Acceptance

Intention to create legal relation

Lawful consideration

Capacities of parties or competence

Free consent

Lawful object

Not expressly declared to be void

Writing & Registration Legal formalities

Certainty & Possibility of performance


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Types of Contracts

voidable and void contracts, contracts

Executed contracts and executory contracts

Express contracts and implied contracts

Unilateral contracts and bilateral contracts

Quasi contracts


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Difference Between Void and Voidable Contracts

S.

No.

Point of

difference

Void contract Voidable contract

1 Definition A contract, which ceases to be enforceable

by law, becomes void when it ceases to be

enforceable [Section 2 (j)].

A voidable contract is an agreement which is

enforceable by law at the option of one or more of

the parties thereto, but not at the option of the

other(s) [Section 2 (i)].

2 Nature &

validity

A void contract is valid and binding upon the

parties when entered into, but subsequent

to its formation, it becomes unenforceable

due to certain reasons.

A voidable contract is repudiate at the option of the

aggrieved party. It remains a valid contract until it is

set aside or rescinded by the party entitled to do so.

3. Factorsresponsible

A valid contract may become void due to

supervening impossibility; change of law; a

contingent contract due to emergence of an

uncertain event etc.

Coercion, undue influence, error, fraud,

misrepresentation are the main factors responsible

for rendering a contract voidable.

4 Enforceability It cannot be enforced byeither party.It may be enforced or set aside at the option of the

aggrieved party.


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Difference Between Void and Voidable Contracts

5. Relationship A void contract under no

circumstances results in a

voidable contract.

When a voidable contract is rejected by the

aggrieved party it results in a void contract.

6. Rights of third

party

A void contract confers no rights or

legal remedies to the third party.Rights acquired under voidable contract by an

innocent third party are not wiped out by such

subsequent avoidance of the contract.7. Compensation In case of void contract question of

compensation or damages does not

arise on the non-performance of such

contract.

In case of voidable contract, the party

rescinding the contract can also claim

damages.

8. Effect of lapse

of time

Lapse of reasonable time does not

render a void contract enforceable. It

always remains void i.e.,

unenforceable.

If a voidable contract is not rescinded by the

aggrieved party within reasonable time it may

become enforceable at the option of the other

party (i.e, who induced the contract).


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DEFINING AN OFFER

An offer is a medium through which a person

expresses his intention to enter into a

contractual obligation against a promise.

Section 2(a)


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Characteristics of a Valid Offer

1. Offer can be expressed or implied

2. Offer can be made to an individual or groupof individuals or public at large.

3. It must be to create a legal relationship

4. It must be communicated to Offeree

5. It can be conditional

6. Bargaining gives rise to Counter Offer

7. It must be made to create a legal relationship


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Firm Offer Vs Invitation to Treat

Examples of Invitations to Treat

Auctions

Display of goods for salein shelf

An invitation for tenders

Red herring prospectus

General advertisement ofgoods


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Acceptance

An acceptance is a expression of assent to theterms of the offer.

When the person to whom the proposal ismade signifies his assent thereto, the proposal

is said to be accepted. A proposal, whenaccepted, becomes a promise. Section 2(b)

Acceptance to an offer is what a lighted matchto is to a train of gunpowder.

Thus, an offer becomes irrevocable upon itsacceptance.


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Legal Rules Governing a Valid Acceptance

Must be made by the offeree

Must be unconditional

Must be communicated to the offeror

May be in any form, oral or written

Must be in the mode prescribed by the offeror

Must be given within a reasonable time, if no

time limit is set

Must be given while the offer is in force


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Termination of Offer & Acceptance

Revocation/withdrawal/cancellation of offer before the

offeree accepts it

Failure to fulfil a condition precedent to acceptance

Death or insanity of either party

Refusal or counter-offer

Acceptance differs from the prescribed one

Subsequent illegality or destruction of subject matter

Acceptance can be revoked at any time before it is

communicated to Offeror


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Gourav owned a house at Calcutta. Nibedita offeredto buy that house for Rs.2 lacs and Gouravs agent

Debendra to whom the offer was given cabled toGourav: Have had offer for the house for Rs.2 lacs.Then the agent got the reply from Gourav: Will not

accept less than Rs.3 lacs Then Nibedita accepted

Gouravs price of Rs.3 lacs and confirmed the

acceptance by a letter to the agent. But Gourav soldthe the house for a higher price to Purnendu.Nibedita then sued Gourav for damages for breach ofcontract. Decide the case

There was no offer, but an invitation to an offer;


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The Managing Committee of a college in response toProf. Ravi Ranjans application for the post ofprincipal passed a resolution appointing Prof. Ravi tothe post. But this decision was not communicated toProf. Ravi. However Prof. Ravi came to know aboutthis decision from one of the member of theManaging Committee. After waiting for six months,

Prof. Ravi filed a case against the ManagingCommittee for breach of contract. Decide the case

Prof. Ravi will not succeed since there were no communicationof the acceptance to him


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Dinesh agrees to pay Rs.5000 if Jagmohan marries

Aishariya. But Aishariya marries Abhisek. Subsequently

Abhisek divorced Aishariya and Jagmohan marriedAishariya. Now Jagmohan claims Rs.5000 from Dinesh

which he refuses. Decide

Jagmohan will fail. Contract became void on the

ground of impossibility as soon as Aishariya married

Abhisek.


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Priyanka promised to repay a loan of Rs.5000 to

Manasi by 5 equal installments. She further

agreed that if she defaults to pay any oneinstallment then the whole amount of Rs.5000

will become due. Decide?

It is a void contract since the sum mentioned

amounts to penalty which is not allowed under

contract Act


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Chandramuli agrees to buy a certain horsefrom Biswajit. It turns out that the horse was

dead at the time of bargain, though neither

party was aware of the fact. Is the agreement

valid?

No the agreement is void . sec. 20(Mistake)


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Prashant promises to obtain for Pritam anemployment in the public service and Pritam

promises to pay Rs. 1 lac to Prashant. Is this a

valid contract?

No, it is void as the consideration is unlawful.

Sec. 24(unlawful consideration)


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A agrees to pay B a sum of money if B marries

C. C married D. B is still willing to marry Cwhen D dies. What is the consequence?

Now marriage of B to C shall be considered

impossible vide sec. 34. Hence the contract

is void


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A promise to deliver 50 rice bags at Bswarehouse on 1st January. A brings the

goods as promised but after the usual

business hours. Decide

A has not performed his part of the promise. It is

voidable at the option of B


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P promised to marry L and L only. P

further promised to pay L a sum of Rs. 2

lac in case P broke the promise. P broke

promise and married X. Can L recover

the sum promised?

No. Agreements in restraint ofmarriage is opposed to public policy.


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Aditya, a merchant of Agra, made a contract to despatch 100

quintals of gur to Akhil at Delhi at a certain price and Akhil paidRs.5000 as earnest money. None of the parties had knowledge

that gur transport from state to state is prohibited by Govt.

Aditya owing to such prohibition could not transport the goods.

Akhil claims damages for non performance as well as refund ofearnest money. Is he entitled to these remedies?

The agreement is void ab initio. Akhil can claimrefund of earnest money but not damages


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Chapter 3: Consideration

Consideration is elemental to a contract. Apromise is not binding unless made forsomething in return - consideration. For

instance the seller of goods undertakes totransfer ownership in the goods for a price tobe paid by the buyer for acquiring theownership.


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Consideration simply means that both the

contracting parties are bound to give something (of

value) to each other.

Thus, the term consideration is used in the sense of

quid pro quo, meaning thereby something in return.

It may involve a positive act (i.e., doing something) oran abstinence (i.e., something given up).

Consideration may be in the form of some right,interest, profit, or benefit accruing to one party, or

some forbearance, detriment, loss, or responsibility

given, suffered or undertaken by the other.


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1. A offers to sell his plasma TV set to B for Rs 50,000. B accepts the offer.Here, Bs promise to pay Rs 50,000 is the consideration for As promise to sellthe TV and As promise to sell the TV is the consideration for Bs promise to payRs 50,000.

2. Xapplies for a loan from Y, who is unwilling to advance the amount, unless Sguarantees the repayment of the loan ifXdefaults and thereupon Yadvancesmoney toX. In this case, the benefit conferred on Xby Yat the surety ofS is asufficient consideration on the part ofYas against the promise ofS to repay theloan. In other words, the detriment which Ymay not suffer by advancing loan to

Xdue the guarantee ofS is sufficient consideration on the part ofYin respect ofthe promise ofS to repay the loan.

3.A promises to maintain Bs child, and B promises to payA Rs 1,000 annuallyfor the purpose. Here, the promise of each party is the consideration for thepromise of the other party. (Illustration appended to Section 23)

4. A promises Y, his debtor, not to file a recovery suit against him on Bsagreeing to repay the amount of loan along with a compound interest @ 12%p.a. within a year. As abstinence is the consideration for Y based on Bspromise to pay.


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RULES GOVERNING CONSIDERATION

1. Simple Contracts must be supported by Consideration

In the absence of a valid consideration passing between the parties the generalrule is that the agreement they have made will be of no legal effect.

The existence of a consideration implies that the parties have devoted somereflection to the matter, and seriously desire their promises to have legalconsequences.

2. Consideration Must Move at the Desire of the Promisor (Promissory Estoppels)

Whatever is done must be done at the desire or request of the promisor and notvoluntarily or at the desire of a third party.

For instance, ifA rushes to the rescue ofB whose house has been trapped in fire, itis not a consideration but a voluntary act on the part ofA. He cannot ask B tocompensate him for the services rendered by him as B had never requested him tohelp. However, ifA goes to Bs rescue at the latters express request, this will beregarded as consideration asA did not wish to do the act voluntarily.


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Consideration At Desire Of Third Person Not Valid

In Durga Prasad vs Baldeo, D the claimant hadconstructed, at his own expense, a market at the instanceof the Collector of the District. The occupants of theshops i.e., shopkeepers in the market promised to pay

the plaintiff a commission on the articles sold throughtheir shops. Subsequently the shopkeepers refused topay any commission. D sued the shopkeepers againsttheir alleged default. It was held that there was noconsideration because the plaintiff (the promisee) had

constructed market not at the desire or request of thedefendants (the promisors), but at the desire of a thirdperson (i.e., the Collector) to oblige him and thus, thecontract between D and the shopkeepers was void.


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Rules Governing Consideration

3. Consideration May Move From the Promisee or Any OtherPerson

This means that as long as there is a consideration for thepromise, it is immaterial who has furnished it. This issometimes referred to as Doctrine of ConstructiveConsideration. It may proceed from the promisee, or if thepromisor has no objection, from any other person who isnot a party to the contract. But the English Law on thispoint is different. In the United Kingdom a person to whom

a promise was made can enforce it only if he himselfprovided the consideration for it. He cannot sue of theconsideration for the promise moved from a third party.


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Consideration must have some Value Something of value must be given for a promise

in order to make it enforceable as a contract.

An informal unnecessary promise therefore does

not amount to a contract. A person or body towhom a promise of gift is made from purelycharitable or sentimental motive gives nothingfor the promise.

Consideration means something which is of somevalue in the eyes of the law. It may be somebenefit to the plaintiff or some detriment to thedefendant.


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Past, Present or Future Consideration

Depending upon the circumstances and facts ofeach case in India consideration may be in thepast, present or future.

Past Consideration

Past consideration means a past act orforbearance which took place and is complete(wholly executed) before the agreement is made.Past consideration may consist of servicesrendered at request but without any promise atthe time or it may consist of voluntary services


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Consideration Need not be Adequate But ItMust Be Sufficient

Sufficiency of consideration is not the same thing

as adequacy of consideration, at least in law.The word adequate in this context refers to fairlyequal to the promise given. On the contrary,sufficiency is used here as a legal term, and it

means that what is promised must be real,tangible and have some actual value. Adequacywill be decided by the parties themselves.


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Present or Executed ConsiderationA consideration, which consists in the performance of an act orforbearance, is said to be executed at present.

For instanceA pays Rs 1000 to B, and B promises to deliver a certainquantity of wheat the following day. In this case,A pays the amount

but B has merely made a promise. Therefore, the considerationpaid by A is executed, whereas the consideration promised by B isexecutory. If A pays the price and B delivers the goods at the sametime, consideration is said to be executed by both the parties

Future or Executory Consideration

An example is an agreement in which the seller promises to delivergoods next week, and the buyer agrees to pay for them on delivery.However, consideration on part of one party may be executed andin respect of the other executory.


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Consideration must be Legal

It must not involve an illegal act. For example,promising to pay money to a witness to turn hostile. Anillegal consideration makes the whole contract invalid.

It should be noted that attempting to enter into anillegal contract might itself give rise to criminal liability.

Moreover, consideration should not be physicallyimpossible or illusory. For example, promise to double

the money by magic or to make a dead man alive, areimpossible acts and therefore such promises constituteno consideration.


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STRANGER TO A CONTRACT AND STRANGER TO CONSIDERATION

A stranger to a contract is one who is not a party to the contract.The rule that consideration may move from the promisee or anyother person implies that the consideration is permitted to besupplied by a third person (i.e., stranger) as well, thereby need notnecessarily be supplied by the promisee himself.

In other words, as long as there is a consideration in exchange of apromise, it is immaterial who has furnished it. Thus, a stranger tothe consideration may maintain a suit. But the English Law on thispoint is different. Nonetheless, a stranger to a contract cannot sueupon a contract both under the British Law as well as the IndianLaw. From this arises the doctrine of privity of contract, discussed

below.


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Examples on Strangers to Contracts

1. A is indebted to B.A sells his property to Cwho undertakes to discharge his debt vis--vis

B. In case C fails to keep his promise, B has noright to sue C because of privity of contractbetween B and C. Cis a stranger to the contract(between A and B) the example is based on

Jamna Das vs Ram Autar.


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VALIDITY OF AGREEMENTS WITHOUT CONSIDERATION

The Indian Contract Act contains certain exceptions, which make a promisewithout consideration valid and binding, stated as under.

Natural Love and Affection

An agreement without consideration is valid if it is

made in writing,

registered,

made out of natural love and affection, and between the parties standing in near relation to each other [Section 25 (1)]

In Rangaswamy an elder brother, on account of natural love and affection,promised to pay off the debts of his younger brother. The agreement was put intowriting and was registered. The court held the agreement as valid and binding.

Promise to Compensate for Past Voluntary ServicesAs per Section 25 (2) a promise to compensate, wholly or in part, a person who

has already done something voluntarily for the promisor, or something, which thepromisor was legally compellable to do, is enforceable.


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VALIDITY OF AGREEMENTS WITHOUT

CONSIDERATION

Illustrations: Compensation for Past Voluntary ServicesExample 1

A finds Bs purse and, gives it to him. B promises to giveA Rs 50.This is a valid contract.

Example 2

A supports Bs infant son. B promises to pay As expenses in doingso. This is a valid contract.

Promise to Pay Time-barred Debt

A promise made in writing and signed by the person to be charged

therewith, or by his agent to pay a debt (wholly or in part) barredby the law of limitation is valid without consideration [S 25 (3)].


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VALIDITY OF AGREEMENTS WITHOUT CONSIDERATION

Completed GiftIn case of completed gifts (i.e., gifts actually made), therule no consideration no contract does not apply. Herenearness of relation between the parties is immaterial

and even if it, there may not be any natural love andaffection between them.

Agency

As per Section 185 of the Indian Contract Act, noconsideration is required to create an agency.

Guarantee

In a contract of guarantee there is no considerationbetween the creditor and the surety [Section 127].

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Business Law Module i