After reading this lesson, you will be conversant with:

LAW

Tanu Agrawal

PREFACE

This Business Environment & Law module seeks to discuss the concept of Business Law & their application in the organization. The book is designed for use in graduate & post graduate courses for self study for students and for the faculty as well. An attempt has been made to relate theory to practice to make it understandable easily for students.

Each chapter is having various illustrations relating to each topic covered and followed by numerous questions and multiple choice questions also, which are designed to reinforce concepts & procedure presented in the body of chapter.I wish to express my sincere thanks to many of the authors who have received due acknowledgements, without whom, this module would not have been completed.

I have taken every possible effort to remove the errors either of principle or of printing. Even then, if the reader comes across any error, he/she is requested to point out the same to me.I hope that many students will find this module interesting & helpful. Further suggestion for the improvement of the module is solicited.

Tanu Agrawal

2009

Syllabus

BUSINESS ENVIRONMENT & LAW

Course Code:

Course Objective:

To give insight to various Business and corporate Laws so that the students are able to interpret the provisions of some of the important laws and apply the same in commercial and industrial enterprises.

Course Contents:

Module I: Legal Environment of Business

Environment of Business, Its importance, Legal environment of business

Module II: Indian Contract Act, 1872

Nature and kinds of Contracts, Concepts related to offer, Acceptance and Consideration, Principles Governing Capacity of Parties and Free Consent, Legality of Objects, Performance and Discharge of Contract, Breach of Contract and its Remedies, Basic Elements of Laws Relating to Agency, Guarantee and Pledge.

Module III: Indian Sale of Good Act, 1930

Sale and Agreement to Sell, sale & Hire Purchase, sale & barter., sale & bailment, sale & contract for work & material,

Goods Different types of Goods, effect of destruction of goods, Conditions and Warranties, performance of contract of sale, Doctrine of Caveat emptor, Transfer of property, Rights of an Unpaid Seller.

Module IV: Negotiable Instruments Act, 1881

Meaning of Negotiability and Negotiable Instruments Cheques, Bill of Exchange and Promissory Note Crossing of Cheques , negotiation, Endorsement, assignment Dishonour of Cheques.

Module V: Elements of Company Law

Meaning and types of companies, Formation of a company, Memorandum and Articles of Association, Prospectus and Issue of Shares, Share Capital and Shareholders, Company Meeting and Proceedings, Powers and Liabilities of Directors and Winding up of Company.

Module VI: Consumer Protection Act, 1986

Need for Consumer Protection Meaning of Consumer- Different redressal agencies for Consumers, Rights of Consumers, Unfair Trade Practices, Procedure for Filling Complaints.

INDEX

Chapter No.Chapter NamePage No.

Chapter 1Environment Of Business2

Chapter 2Legal Environment Of Business -Introduction To Law15

Chapter 3Indian Contract Act, 187222

Chapter 4Special Contracts37

Chapter 5Indian Sale of Good Act, 193057

Chapter 6Negotiable Instruments Act, 188192

Chapter 7Meaning And Types Of Companies119

Chapter 8Registration & Incorporation134

Chapter 9Share & Share Capital146

Chapter 10Prospectus162

Chapter 11Meetings170

Chapter 12Directors181

Chapter 13Winding Up195

Chapter 14Consumer Protection Act, 1986209

Answer Key to end chapter questions

Page no 220

Syllabus

Page no 221

Bibliography

Page no 222CHAPTER 1 ENVIRONMENT OF BUSINESS

After reading this lesson, you will be conversant with:

1.1 What is environment?

1.2 Relationship between business & environment1.3 Characteristics of environment1.4 Environmental scanning1.5 Types of environment1.6 Dimension of general environment1.7 Benefits of environmental analysis1.8 Limitations of environmental analysis

1.1 What is environment?

Environment literarily means the surroundings, external objects, influences or circumstances under which someone or something exists. The environment of any organization isthe aggregate of all conditions, events and influences that surround and affect it-Davis, K, The Challenge of Business, (New york: Mcgraw Hill, 1975), P43

Environment refers to all external forces that have a bearing on the functioning of a business. Jauch and Gluecke define environment thus: The environment includes factors outside the which can lead to opportunities or a threat to the firm. Although there are many factors, the most important of these sectors are socio-economic, technological, supplier, competitor and the government

Business is all about reaping profits from the opportunities available in the environment Opportunity can manifest themselves in the form of short supply, excess demand, latent need or new better and economical sources of supply or manufacturing.

Every business operates in a particular environment and each business unit has its own environment. A change in environment presents opportunity to some and threat to others.

Sometimes, in the same industry, a relevant change in environment can a favorable of the opposite impact on different units of the same industry.

For instance, the General Agreement on Trade and Services (GATS) implemented in India on January 1,2005, is an opportunity for research-based pharmaceutical companies like Ranbaxy but a threat for smaller companies. In the long run, only those organizations will survive that are able to forecast the environment early and can react in time to the change in environment.

The recent changes in tariff rates have changed the toy industry of India with the market now being dominated by Chinese products. A slight change in the Reserve Bank of Indias monetary policy can increase of decrease interest rates in the market. A slight shift in the governments fiscal policy can shift the whole demand curve towards the right or the left.

Hindustan Lever Limited (HLL) took advantage of the new takeover and merger codes and acquired brands like Kissanfrom the UB group. TOMCO (Tata Oil Mills Company) and Lakme from Tata and Modern Foods from the government, besides many other small takeovers and mergers.

The new moguls of the Indian business are those who predicted the changes in the environment and reacted accordingly. Azim Premji of Wipro, Narayana Murthy of Infosys, Subhash Goyal of ZEE, the Ambanis of reliance, L.N.Mittal of Mittal Steel, of Bharti Telecom are some of them.

Even a small businessman who plans to open a small shop as a general merchant in his town needs to study the environment before deciding where he wants to open his shop, the products he intend to sell and what brands he wants to stock.

1.2 relationship between a business and an environment

The relation between a business and an environment is not a one way affair. The business also equally influences the external environment and can bring about changes in It. Powerful business lobbies for instance, actively work towards changing government policies.

The business environment is not all about the economic environment but also about the social and political environment. Politically, after the Congress government came to power at the center with the support of the CPI in May 2004, the whole process of disinvestments took a U-turn Similarly, a new sociological order in India today has created a market for fast foods, packaged foods, multiplexes, designer names, valentine day gifts and presents, and gymnasiums and clubs etc.

So it is quite obvious that success in a business depends upon better understanding of the environment. A successful organization doesnt look at the environments on and ad hoc basis but develops a system to study the environment on a continuous basis to try and protect the organization from every possible threat and to take the advantage of every opportunity. Some times better and timely understanding of the environment can even turn threat into an opportunity.

1.3 Characteristics of Environment

1. Environment is Complex: The environment consists of a number of factors, events, conditions and influences arising from different sources. All these interact with each other to create new sets of influences.

2. It is Dynamic: The environment by its very nature, is a constantly changing one. The varied influences operating upon it impart a dynamism to it and cause it ot continually change its shape and character.

3. Environment is multi-faceted: The same environmental trend can have different effects on different industries. For instance GATS that is an opportunity for some companies but a threat for others.

4. It has a far-reaching impact: The environment has a far reaching impact on organizations inn that the growth and profitability of organization depends critically on the environment in which it exists.

5. Its impact on different firms with in the same industry differs: A change in environment may have different bearings on various firms operating in the same industry. In the pharmaceutical industry in India, for instance, the impact of the new IPR (Intellectual Property Rights ) law will different for research-based pharmacy companies such as Ranbaxy and Dr. Reddys Lab and will be different for smaller pharmacy companies.

6. It may be and opportunity as well as a threat to expansion: Developments in the general environment often provide opportunities for expansion in terms of both products and markets. For example, liberalization in 1991 opened lot of opportunities for companies and HLL took the advantage to acquire companies like Lakme, TOMCO, KISSAN etc. Changes in environment often also pose a serious threat to the entire industry. Like Liberalization does pose a threat of new entrants to Indian firms in the form of Multi National Corporation (MNCs).

7. Changes in the environment can change the competitive scenario: General environmental changes may alter the boundaries to an industry and change the nature of its competition. This has been the case with deregulation in the telecom sector in India. Since deregulation, every second year new competitors emerge, old foes become friends and M&As follow every new regulation.

8. Sometimes developments are difficult to predict with any degree of accuracy: Macroeconomic developments such as interest rate fluctuations, the rate of inflation, and exchange rate variations are extremely difficult of predict on a medium of a long term basis. On the hand, some trends such as demographic and income levels can be easy to forecast.

1.4 Environmental Scanning

The process by which organizations monitors their environment to identify opportunities and threats affecting their business, is known environmental scanning.

The following factors to be considered for environmental scanning.

1. Events: Important and specific occurrences that taking place in a certain sector.

2. Trends: The general tendencies or course of action along which these events take

Place.

3. Issues: the current concerns that arise in response to events and trends.

4. Expectations: The demands made by interested groups in the light of their concern for issues.(Azhar Kazmi, TATA McGraw Hill,p118)

1.5 Type of Environment

The environment can be divided into three broad categories:

Internal Environment

Macro Environment (General Environment)

Micro Environment(Relevant Environment of Competitive Environment)

Internal Environment Internal environment refers to that of the organization and is controllable. Some internal factors are:

1. Culture and Value Systems: Organizational culture can be viewed as the system of shared values and beliefs that shape a companys behavioral norms. A value is an enduring preference as a mode of conduct or an end state. The value system of the founders of the organization have a lasting impact on it. The value systems not only influence the working of the company and the attitude of its people but also the choice of its business.Values and cultures are inherited from seniors by juniors in a organization. If a young man gets a job in a bureaucraic culture he gets accustomed to a work routineof 10 to 6. On the other hand, if he gets a job in a private concern he works till the work finishes. Similarly, for organizations accustomed to and aggressive consumer goods sales culture, a foray into the industrial goods segment proves difficult.

2. Mission and Objectives: The mission and objectives of the company guide the priorities, direction of development, business philosophy, and business polivy.

3. Management Structure and Nature: Structure is the manner in which the tasks and sub-tasks of the organization are related. Structure is concerned with the hierarchical relationship and the relationship between the management od different functional areas like the structure of the top management and the pattern of share holding.

4. Human Resource: It concerns with factors like manpower planning, recruitment and selection, compensation, communication and appraisal.

Besides this, internal environment also includes corporate resources, production/operation of goods and services, finance and accounting systems and methods, marketing and distribution.

Macro Environment

The Macro/General environment consists of factors external to the industry that may have a significant impact on the firms strategies. Here we will look at six broad dimensions: demographic, socio-cultural, political/legal, technological, economic and global.

1.6 Dimensions in General Environment

All these dimensions of general environment are interrelated. These dimensions not only influence businesses, but also influence each other. After a political change in 1991, when congress government came to power, major economic change took place in the form of LPG, i.e., Liberalization, Privatization, and Globalizations. This led to and enhancement in the technological environment of the country. This technological and economical change has transformed the socio-culture environment of the country.

Globalization has also enabled India to become the software superpower of the world. All global organizations now have a new and vast market, as well as cheap manufacturing hub, which has compelled them to change their global marketing and manufacturing strategies.

With this, over the last ten years there has been a drastic change in the Indias demography per capita incomes have risen. The number of young achievers and high earners has increased drastically, which changed the entire demand schedule of products.

This shows that a single political in 1991 has changed all the components of the macro environment. So while studying macro environment, one should not only concentrate on how this factor will influence business but also on how this will influence other components of the environment and what will be the impact of these changes in the business. Only then can one design long term strategies.

1. Political Environment: It is the political environment of the country that decides the fortune of businesses in a country. After the 1917 revolution in sudden political change transformed the equation of doing business. After the change of tegime in the USSR in late 1980s and early 1990s business equations changed once again in Ressin.

In India in 1977, the janata government came to power because of which Coca Cola and IBM had to leave the country. All liquor companies had to close their operations. When P.V Narsimha Rao can to power and a new economic policy was putin, that presented of new opportunities for Businesses, but at the same time brought a threat for inefficient organizations.

Not only political philosophy but political stability too has a significance for businesses. The more stable the political environment of a country, the more conducive will be the environment for business. The consensus among various political parties on key issues are also relevant in this case.

2. Regulatory and Legal Environment: The political environment governs the legal and regulatory environment of country. The regulatory environment plays a vital role by dictating the dos and donts of a business. Every county has a different legal environment.

In India we have the Companies Act that governs Companies, the MRTP Act which restricts monopoly,various laws regarding shares, the Consumer protection Act, environmental laws, and the implementation of GATS.GATS has resulted in the implementation of international laws regarding patents,.There are laws for import and export, licensing etc. that have a drastic impact on business and the future of organizations.

When an NRI Lord Swaraj Paul, a British Citizen, tried take over Escorts, its owners, the Nandas approached the government to save their company. A law restricting any NRI from purchasing shares of an Indian company came into force, and Escorts was saved.

3. Demographic: It is the demographic environment which decides the marketing mix for an organization. It decides the type of product the organization comes out with. In India a lot of research and efforts are undertaken to reduce the cost of products and to launch products at the cheapest possible rates. A one rupee sachet of shampoo or a five rupee ice-cream cone are some examples. It is the demography that decides the pricing, promotion and distribution strategies. 70% of Indias population is lives in villages and of this, 70% are youth which is why every business house is launching new products, specifically for rural market. ITC launched its unique and ambitious programme called e-chaupal,targeted at the rural market.

4. Socio Culture: Socio culture variables like the beliefs, value system, attitudes of people and their demographic composition have a major impact on their personality and behavior style. The consumers preferences have undergone a drastic change through the 1990s This has led to the production of more cars, refrigerators, air conditioners and other articles that were at one time considered ostentatious and luxurious.

Not only this, this socio-cultute paradigms also dictates the preference of consumer in different regions. For instance companies launch different products in the south and north because of differing preferences. Companies have to change their product portfolio because of cultural preferences as Mc Donalds and KFC did when they launched their restaurant chain in India.

5. Technological: Technological forces present a wide range of opportunities and threats that have to be accounted for in the process of business strategy formulation. Technological advancement may dramatically affect an Organizations products, services, markets, suppliers, distributors, competitors, customers, manufacturing process, marketing practices, financial composition, and competitive position. Some of the important factors that influence operating in the technological environment are:

Sources of technology like company sources, external sources and foreign sources, cost of technology acquisition, collaboration and transfer of technology.

Rate of change in technology, of obsolesce

Impact of technology on human being, the man machine system, and the environmental effect of technology.

Communication and infrastructural technology in management.

In fact, technology is today a decisive factor. From FMCGs to the microprocessor industry is investing heavily technology. The technological knowledge of consumer the decisions. Organizations have to modify products according to the level of technological knowledge of the target costumer, because in developing nations complex household machines that need programming will not work. So they have to be technologically more and more focused.

6. Global Environment: The international environment consists of all factors operate at the transnational, cross-cultural level and across the border. The world is a global village today and it is getting closer and closer as far as business is concerned.

For the sake of business, countries are burying their grievances and forging economic relationships. Erstwhile adversaries like America and Russia are today goods friends and China ad India are coming closer.

India has signed a bilateral treaty with sri Lanka, it is developing close economic relationship with South Africa and Brazil, and is Planning to develop a road network in South East Asia. India is also a close ally of ASEAN, nd is also signatory of WTO which has a multilateral trade agreement among more than 100 nations.

India is in a process of laying down a gas pipeline from Iran via Pakistan. All this is just glimpse of the present international environment. Every new bilateral and multilateral agreement new vistas for business and also brings a new threat in the form of global competition.

7. Economic Environment: The economic environment consists of macro level factors related to the means of production and distribution of wealth, which have and impact on the business of an organization.

The economic structure of a country, whether it is socialist, mixed or capitalist, has drastic impact on the economy. Economic policies such as foreign trade policy, industrial policy, fiscal policy, GDP growth tare, policy of licensing, monetary policy, development of financial institutions, development of money and stock market, and the extent of globalization are some of the aspects of an economy that reflect on business in an economy. A slight change in monetary policy can release crores of rupees into the economy that may result in a decrease in interest rate, which further increases investment as well as inflation.

Also, banks lending rates decide the level of investment in any country. The higher the interest rate, the lower the level of investment. In most industrialized nations like the US, this interest tare is between 4% to 6%. In India in 1991, the PLR (prime lending rate) was 17% to 18% which was reduced to 8% to 10% by 2000 because of a change in the countrys economic policy.

8. National Competitive Advantage: Despite globalization, industrialization is clustered in a small and specific number of countries. Most successful computer and biotechnology firms are based in the US, the successful chemical and engineering industry is based in Germany, and the cream of the electronics industry is based in Japan.

Similarly the successful call centers are clustered in India as are many of the customized software companies. This suggests that nation and its environment in which a company is based may have an important bearing of the competitive position of that company in the global marketplace.

Michael Porters International Competitiveness Model

In a study national competitive advantage, Michael Porter identified four attributes of a national of country-specific environment that have an important impact on the global competitiveness of companies located within that nation.

a. Factor Endowments: A nations position in the factors of production such as skilled labor, capital, technology or infrastructure necessary to compete in a given industry.

b. Demand Condition: The nature of home demand for services.

c. Relating and Supporting Industry: The presence and absence in a nation of supplier industries and related industries that are internationally competitive .

d. Firm strategy, structure and rivalry: The conditions in the nation that govern how companies are created, organized and managed and the nature of domestic rivalry.

Micro Environment

Micro environment of the competitive environment refers to the environment which and organization faces in its specific arena. This arena may be an industry, of it may be what is referred to as a strategic group.

Besides looking at primary demand and supply factors, firms examine the state of competition they face because that determines whether that determines whether they will remain in the same industry or start a new one. All the business decisions-what business, pricing, distribution channel, promotion portfolio, etc. depends on competitive position of the firm.

For instance, a new entrant in the glucose biscuit segment will have to study and consider the marketing mix as well as strategy of existing players like Britannia, Parle, Priyagold, etc., before deciding its marketing mix following are the key Micro Environment factors:

The Five Forces of Competition

Professor Michael Porter of the Harvard Business School has demonstrated the state of competition in an industry as a composite of five composite of competitive forces. According to Michael Porter the five forces of competition are:

a. Threat of Competitors: The rivalry among sellers in the industry.

b. Threat of New Entrants: The potential entry of new competitors.

c. Threat of Substitutes: Market attempts of companies in other industries to win customers over to their own substitute products.

d. Bargaining Power of Supplier: The competitive pressure stemming from the supplier-seller collaboration and resultant bargaining.

e. Bargaining Power of Buyers: The competitive pressure stemming from seller-buyer collaboration and bargaining.

Michael Portes Five Forces Model

1.7 Benefits of Environmental Analysis

1. Environmental analysis gives an idea of organizations environment.

2. Environmental analysis gives a brief about competitors.

3. Environmental analysis tells us about opportunities to reap profits.

4. Environmental analysis gives details about threats in the environment.

5. Environmental analysis keeps the manager informed and alert.

6. Business is all about making the right decision at the right time. Without proper environmental analysis the right decision cant be made.

7. Environmental analysis helps in predicting the future.

8. Environmental analysis helps in suitable modification of strategies, as and when required.

1.8 Limitations of Environmental Analysis

1. Today the environment is turbulent and dynamic and it is difficult to forecast of predict the environment.

2. Business environment is global and any development in any part of the world can influence the business. Even a small political move can have a drastic impact, which in very difficult to scan and assess. A sudden disintegration of USSR had very adverse impact on many exporters in India. A sudden attack of Al Qaeda on the Twin Towers in the US resulted in the hike of global petroleum prices. After

Signing the WTO, all of a sudden the toy market of India was captured by Chinese products. Today it is extremely difficult to predict the external environment.

3. The Effectiveness of environmental analysis depends upon how it is practiced, i.e., whether it is a systematic approach, ad hoc or processed. Under a systematic approach, information for environmental scanning is collected, scanned and monitored on a continuous basis and forecast and is assessed for the relevant factor. In an ad hoc approach, an organization condusts special surveys and studies to deal with specific environmental issues from time to time. In a processed form approach, an organization uses information in a processed form, available from different sources, both inside and outside the organization. For effectiveness, an organization should use the combination of these approaches instead of just following the tried formulas, because all have their importance according to requirement.

Too much reliance is often placed on the information collected through environmental scanning.

When there is overloading of information, one is likely to get lost and become inactive-typical of paralysis through analysis syndrome.

MULTIPLE CHOICE QUESTIONES:

Q1 Q1 Environment includes:

a) Socio-economic sectors

b) Technological sectors

c) Competitive sectors

d) All of above

Q2 General Agreement on Trade and Services (GATS) was implemented on:

a) January 1, 2005

b) January 1, 2006

c) January 5, 2005

d) January 1, 2006

Q3 Which of the following characterizes business environment:

a) It is complex & dynamic

b) It is multi-faceted

c) None of the above

d) Both (a) & (b)

Q4 Which of the following factors is/are to be considered for environmental scanning:

a) Events

b) Trends

c) Issues

d) All of the above

Q5 Organizational culture can be viewd as:

a) The infrastructural environment of the company

b) The system of shared values and beliefs that shape a companys behavioral norms.

c) Both (a) & (b) above

d) None of the above

Q6 Human resource is the part of:

a) Internal environment

b) Micro environment

c) Macro environment

d) Both (a) & (c)

Q7 Macro envirionment consists of factors:

a) Which are external to the industry

b) Which are internal to the industry

c) Which are external & internal to the industry

d) None of the above

Q8 Demographic is the part of

a) Internal environment

b) Micro environment

c) Macro environment

d) Both (b) & (c) above

Q9 Which of the following factors influence operating in the technological environment:

a) Sources of technology

b) Communication and infrastructural technology in management

c) Socio culture variables

d) Both (a) & (b) above

Q10 means of production and distribution of wealth is related to

a) Technological environment

b) Economic environment

c) Social environment

d) Internal environment

Chapter 2 : LEGAL ENVIRONMENT OF BUSINESS -INTRODUCTION TO LAW

After reading this lesson, you will be conversant with:2.1 The meaning of law

2.2 Nature & Definition of Law

2.3 Functions and Purpose of Law

2.4 Advantages of Law

2.5 Disadvantages of Law

2.6 Kinds of Laws

2.7 Sources of Law2.1 Introduction:Business laws are essential for the students of management to understand the legal rules and aspects of business. Just like any other study even business management is incomplete without a proper study of its laws. Any form of business needs legal sanction. Therefore, it is imperative that a manager understands the various ways in which businesses can be organized. This subject introduces some of the common forms of business organizations, including some forms unique to India like the Joint Hindu Undivided Family firm. Different types of organizations like Sole Ownership, Partnership, Private Limited Company, Public Limited Company, Joint Stock Company along with the rationale for adopting these forms are explored.

What form of business organization is the best under a particular set of conditions? What advantage or disadvantage does it have over other forms of business? Formalities to be gone through and some the quasi-legal processes required for starting a business will be discussed in detail in this subject.

For the proper working of the society, there must exist a code of conduct. As you all know, in the ancient times the society was not organized. The rights of the individuals were not recognized. Gradually, the society evolved and the state came into being. As we all know, to regulate the state, there should be a specific code of conduct, which should be followed by everyone. As a result of which law evolved as a system of rights and obligations including all the rules and principles, which regulate our relations with other persons and with the state. These rules and regulations took the form of statutes.

To enforce the law and to resolve the conflicts arising there from, courts of law were setup by the state. Laws were made to govern almost every walk of life. You all must know that criminal laws were made to control criminal activities in the society like Indian Penal Code, which enumerates which activities are considered criminal and what will be the punishment for committing a crime. Likewise, mercantile law was evolved to govern and regulate trade and commerce. Hence, the term mercantile law can be defined as that branch of law, which comprises laws concerning trade, industry and commerce. It is an ever-growing branch of law with the changing circumstances of trade and commerce.

2.2 Nature & Definition of Law

Law is a social science that grows and develops with the growth and development of society. The law is required to deal with the new developments, which create new problems in the society. Thus, the definition of law given at a particular time cannot remain valid for all times to come. The definition of law today may become very narrow in future. Prof. Keeton rightly points out that, to attempt or to establish a single satisfactory definition of law is to seek to confine jurisprudence within a straitjacket from which it is continually striving to escape.

According to Austin, Law is the aggregate of rules set by men as politically superior, or sovereign, to men as politically subject. In other words, law is the command of the sovereign. It imposes a duty and is backed by a sanction. Command, duty and sanction are the three elements of law.

According to Holmes, Law is a statement of the circumstances in which the public force will be brought to bear upon men through courts. Again the prophecies of what the court will do in fact and nothing more pretentious, are what I mean by law.

According to Woodrow Wilson, Law is that portion of the established habit and thought of mankind which has gained distinct and formal recognition in the shape of uniform rules backed by the authority and power of the government.

2.3 Functions and Purpose of Law

The main functions of law is:

1. To maintain law and order within a given society;

2. To maintain status quo in society ensuring stability and security of social order;

3. To enable individuals, maximum of freedom to assert themselves;

4. Determine the sphere within which the existence and activity of each individual will be secure and free play;

5. The main goal of law is to secure justice; and

6. An important function of law is to ensure rule of law.

2.4 Advantages of LawThe main advantages of law are as follows:

1. The principles of law provide uniformity and certainty to the administration of justice.

2. The existence of fixed principles of law avoids the dangers of arbitrary, biased and dishonest decisions.

3. The fixed principles of law protect the administration of justice from the errors of individual judgment.

4. These fixed principles are reliable than individual judgment.

2.5 Disadvantages of Law

Some of the disadvantages of law are:

1. The lack of flexibility in law results in hardship and injustice to people, which needs to change according to the changing needs of the people.

2. Law is conservative in nature as the lawyers and judges favor continuation of the existing law making it static.

3. Another disadvantage of law is formalism, which emphasis more on the form of law than its substance.

4. Lastly, law is unduly and needlessly complex.2.6 Kinds of Laws

The following are different kinds of law:

1. Imperative Law: It is a rule which prescribes a general course of action imposed by some authority which enforces it by superior power either by physical force or any other form of compulsion. Austin who is a chief advocate of imperative law defines, Law as a command, which obliges a person or persons to a course of conduct.

2. Physical or Scientific Laws: Physical laws or the laws of science are expression of the uniformities of nature-general principles expressing the regularity and harmony observable in the activities and operations of the universe.

3. Natural Law or Moral Law: Natural law or moral law is ought to have the principles of natural right and wrong, i.e., to include the principles of natural justice, if it is used in a wider sense, then the term justice is to include all forms of rightful action.

4. Conventional Law: According to Salmond, conventional law means, any rule or system of rules agreed upon by persons for the regulation of their conduct towards each other.

5. Customary Law: According to Salmond, customary law means, any rule of action which is actually observed by men any rule, which is expression of some actual uniformity of some voluntary action. A custom may be voluntary and still becomes or retains the features of law. Therefore, when a custom is firmly established, it is enforceable by the authority of the state6. Practical or Technical Law: Practical or technical law consists of rules, which are made for the attainment of certain ends, for example, the law of health, the laws of architecture, etc.

7. International Law: According to Starke, international law may be defined, for its great part, as the principles and rules of conduct which the states feel themselves bound to observe and therefore do commonly observe in their relations with each other and includes: (i) the rules of law relating to functioning of international institutions and organizations, their relations with each other and their relations with states and individuals, and (ii) certain rules of law relating to individuals so far it relates to their rights and duties are the concern of the international community.

8. Civil Law: According to Salmond, civil law is, the law of the state or of the land, the law of lawyers and the law courts.

Advantages of Legal JusticeThe key advantages of legal justice are:

i. Legal justice ensures uniformity and certainty in the administration of justice;

ii. Impartiality in the administration of justice is another important advantage;

iii. Legal justice represents the collective wisdom of the community and it is always to be preferred to the wisdom of any one individual.

Disadvantages of Legal Justice

Some of the disadvantages are:

i. It is rigid, as it follows what has been laid down by precedents;

ii. It is not always possible to adjust to the changing needs of the society;

iii. Another defect of legal justice is its formalism or technicalities; and

iv. Lastly, it is complex.

2.7 SOURCES OF LAWAccording to Holland, the expression sources of law is employed to denote the quarter from where we obtain our knowledge of law, for example, whether from statute book, the reports or esteemed treatises. Sometimes it is used to denote the ultimate authority, which gives them the force of law, i.e., the State.

John Austin refers to three meanings for the term sources of law: (a) the first term refers to the immediate or direct author of the law which means the sovereign in the country, (b) the second term refers to the historical document from which the body of law can be known, and (c) the third term refers to the causes which have brought into existence the rules which later on acquire the force of law.

According to Salmond, the two main sources of law were formal and material. The legal sources consist of legislations, precedent (previous judgments of the court), custom, agreement and professional opinion.

Formal Sources The law derives its force validity from the formal sources.

The material sources of law is derived from the matter, which is composed of

(a)Legal sources and (b) Historical sources. LEGAL SOURCES

These are the sources which are recognized by the law itself as authoritative, for example, Statute Law, having its source in legislation; Case Law, having its source in precedents; Customary Law, having its source in customs. All these are inherent sources of law and have a binding force.

HISTORICAL SOURCES The sources which have no binding force and which are not recognized by the law are referred to as historical sources, for example, juristic writings, literary works, foreign decisions. These are of a great persuasive force, but they are not binding law by themselves.

Legislation

Etymologically, legislation means the making or the setting of law. In a wide sense, it includes all methods of law-making and, therefore, would include laws made by judges also. In the strict sense, it may be defined as the promulgation of legal rules by an authority which has the power to do so. In modern times, legislation is the most important source of law.

According to Salmond, legislation is that source of law which consists in the declaration of legal rules by a competent authority.

According to Austin, there can be no law without a Legislative Act.

MULTIPLE CHOICE QUESTIONES:Q1 Any rule or system of rules agreed upon by persons for the regulation of their conduct towards each other is known as:(a) Imperative law

(b) Moral law

(c) Conventional law

(d) Customary law

Q2 Something done or said which serves as an example or rule to authorize or justify a subsequent act of the same or an analogous kind is known as the(a) Legislation

(b) Precedent

(c) Golden rule

(d) Mischief rule

Q3 The law of the state or of the land, the law of lawyers and the law courts:(a) Imperative law

(b) Moral law

(c) Conventional law

(d) Civil law

Q4 Which one is the function of law:(a) To entertain people

(b) To stop crime in the country

(c) to secure justice

(d) all of the aboveQ5 The sources which have no binding force and which are not recognized by the law:(a) Legal source

(b) Historical law

(c) Formal

(d) Both (a) & (b)

Q6 Which law consists of rules, which are made for the attainment of certain ends:

(a) Practical or Technical Law

(b) Civil Law(c) Historical Law(d) Customary LawQ 7 The definition Law is the aggregate of rules set by men as politically superior, or sovereign, to men as politically subject is given by:

(a) Austin

(b) Holmes

(c) Woodrow Wilson

(d) None of aboveQ8 Something done or said which serves as an example or rule to authorize or justify a subsequent act of the same or an analogous kind is known as the:(a) Legislation

(b) Precedent

(c) Golden rule

(d) Mischief rule

Q9 The source of law, which is recognized by law is:(a) Legal source

(b) Historical law

(c) None of the above(d) Both (a) & (b)

CHAPTER 3 INDIAN CONTRACT ACT, 1872

After reading this lesson, you will be conversant with:

3.1 Definition of a contract

3.2 Elements of contract

3.3 Essential elements of a valid contract

3.4 Restitution

3.5 Contingent Contracts

3.6 Persons who are Required to Perform Contracts

3.7 Discharge of Contract

3.8 Remedies for Breach of Contract

3.9 Quasi-contracts

The Indian Contract Act, 1872 provides the general principles and rules governing contracts. All transactions that relate to the agreements and obligations of the contracting parties, come under the purview of the Act. Special categories of contracts, are governed by separate Acts. They are Partnership Act, Sale of Goods Act, Negotiable Instruments Act, Insurance Act, etc. The Indian Contract Act (referred as Act hereafter), which the law will uphold.

The Indian Contract Act, 1872 is one of the oldest Acts. It is one of the best drafted enactments which have stood the test of time. The provisions of the Indian Contract Act has laid down certain settled principles of law, which creates some rights and duties between the parties. They are very well known and well accepted in the commercial transactions. Initially, the Act contained provisions in respect of Sale of Goods and Partnership also. Later, certain Sections (76-123) were repealed and a separate law was passed on Sale of Goods as, Sale of Goods Act, 1930 and the Indian Partnership Act, 1932 was passed by repealing Sections (239-266).

3.1 Definition of Contract

Section 2(h) of the Act, defines a contract as an agreement enforceable by law. A contract is defined as an agreement enforceable at law, made between two or more persons, by which rights are acquired by one or more, to act on the part of the other. It creates and defines obligations between the parties.

All agreements are not necessarily enforceable by law. An agreement to sell a house may be a contract enforceable by law. However, an agreement to attend a party being of a social nature is not enforceable.

It is not necessary that a contract need not be only in writing, unless there is specific provision in law that it should be in writing. Certain contracts must be in writing as otherwise they are not enforceable in law. Following are the examples of such contracts.

Contract for sale of immovable property must be in writing, stamped and registered.

Certain other contracts though are required to be in writing do not compulsorily be require registration, for example, Bills of Exchange, Promissory Notes, Cheques, A Trust created under the Indian Trust Act, A promise to pay a time-barred debt, Contracts made without consideration with natural love and affection.

3.2 Elements of Contract

It may be noted that a contract essentially contains two elements: agreement and enforceability by law. For a better understanding, let us elaborate on these two elements. Section 2(e) of the Act defines agreement as, every promise and every set of promises, forming consideration for each other. This essentially means that there should be an offer and acceptance to form an agreement. It is important that before an agreement is finalized there should be a consensus ad idem (consent to the matter) between the two parties. Both the contracting parties should say and mean the same without, which there cannot be a contract.

The other element of contract, enforceability by law, emphasizes the importance of intention to create a legal obligation or duty to perform or abstain from performing certain act(s). These acts could relate to social or legal matters.

The classic case of Balfour vs. Balfour (1919) elaborates this point. A husband working in Ceylon, had agreed in writing to pay a housekeeping allowance to his spouse living in England. On receiving information that she was unfaithful to him, he stopped the allowance. It was held that the agreement was without any intention of creating a legal obligation. Hence, there was no contract. It may be summed up that all contracts are agreements, but all agreements are not contracts.

3.3 Essential Elements of a Valid Contract1. Offer and acceptance.

2. Intention to create legal relationship.

3. Capacity to contract.

4. Free consent.

5. Lawful consideration.

6. Legal object.

7. Certainty and possibility of performance.

Each of the essential elements are discussed in detail below.

1. Offer and Acceptance

A contract basically evolves from an offer by one party and acceptance of the same, by the other party. The acceptance should be definite and without any qualification. There should be a consensus ad idem between the two parties on the terms and conditions of contract.

Conditions of Making an Offer

The following conditions that govern making an offer are:

1. The offer must be definite and not vague.2. An offer should be differentiated from an invitation to make an offer. There are occasions where a person may make some statements or give information with an intention of inviting others to make an offer. For example, a catalogue with prices indicated on it is not an offer to sell. On the contrary it is only an invitation to make an offer. A person interested in buying the product specified in the catalogue, may make an offer to buy and it is left to the discretion of the seller to either accept or reject the same.

Lapse of Offer Section 6 specifies the instances which results in the lapse of an offer:I. An offer comes to an end if it is revoked by the offeror at any time before its acceptance is complete as against him and not after its acceptance;

II. If either the offeror or the offeree dies or becomes insane and the offeree comes to know about it, before acceptance. If the offeree accepts an offer in ignorance of the death and insanity of the offeror, the acceptance is valid;

III. If the offer is not accepted within the specified time or within a reasonable time, or if none of it is clearly specified then the law of limitation applies after that, if none is specified (Law of limitation applies). In Ramsgate Victoria Hotel Co vs. Montefiore, Montefiore agreed to take up shares in Ramsgate Victoria Hotel Co in June. However, when he received the letter of acceptance in November, he declined to take up shares. The offer had come to an end by lapse of time and therefore he could not be compelled to take up the shares. When an offer is made by an agent and it is accepted within a reasonable time, the contract will be binding on the principal even though the agent may have been guilty of delay in making the offer;

IV. On failure to fulfill a condition precedent to acceptance. In State of Madhya Pradesh vs. Gobardhan Dass where the tender required acceptance of a tender to be accompanied by payment of 25% of the amount and was fulfilled by the successful tenderer to make the requisite payment the court held that the omission did not give rise to a binding contract between the parties;

V. If it is not accepted in the mode prescribed or if no mode is prescribed, in some usual and reasonable manner or if the offer is rejected by the distinct refusal of the offeree;

VI. If the offeree makes a counter offer, it amounts to rejection of the original offer and such an offer by the offeree may be accepted or rejected by the offeree;

VII. If law is changed making the offer illegal or incapable of performance. According to the Indian Contract Act, an offer may be revoked at any time provided it is communicated to the offeree before the acceptance. Also an offer to keep an offer open for a specified time (option) is not binding unless it is supported by consideration.

Acceptance

Under Section 2(b) of the Act, when a person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. Just as in case of offer, acceptance may also be express or implied. An acceptance is said to be express when it is communicated by words spoken or written or by doing some required Act. It is implied when it is to be gathered from the surrounding circumstances or the conduct of the parties. In an auction sale, the highest bidder is assumed to be the buyer of the goods once the deal is struck.In order to convert an offer into a promise, acceptance should be absolute and unqualified. It is also essential that the acceptance is given in some usual and reasonable manner. If the offer prescribes the manner in which the acceptance is to be given, then the acceptor should adhere to the prescribed mode. On failure to do so, the offeror can insist that his offer will be accepted only if it is given in the prescribed manner

Conditions of Acceptance

i. An offer should be accepted only by the person to whom it is put forth. It is clear by the rule of law that if A proposes to make a contract with B, C cannot substitute himself with B without the consent of A. An acceptance may be withdrawn before it reaches the offeror.

ii. Acceptance of an offer should be absolute and unqualified and should conform totally with the offer made. A conditional or qualified acceptance does not result in a valid contract. By giving a conditional acceptance or counter offer, the original offer is deemed to have been rejected. Once the original offer has been rejected by making a counter offer, it cannot be accepted again, unless renewed. In Hyde vs. Wrench an offer made for the sale of a farm for 1,000 pounds was not accepted in the first instance. A counter offer was made wherein the plaintiff expressed his willingness to buy the same for 950 pounds. When the counter offer was rejected, the plaintiff consented to buy the farm for 1,000 pounds which was again rejected by the defendant. A suit filed for breach of contract was not maintainable as the counter offer implied that the original offer had been rejected. Hence, there was no valid contract between the parties.

iii. The acceptance must be communicated to the offeror. The acceptance must be in the form specified or in some perceptible form if not specified. A mere intent of acceptance will not suffice. In this regard, reference may be made to an American case, Eliason vs. Henshaw the mode of acceptance as prescribed by the offeror was not adhered to. The offeree sent the letter of acceptance by post when it was required to be sent by wagon as indicated by the offeror.A deviation in the mode of acceptance clearly entitled the offeror to treat the acceptance as invalid.

2. Intention to Create Legal Relationship: The validity of a contract is dependent on the intention of the contracting parties. A contract will be valid only when the parties to the contract intend to create a legal relationship between themselves. Non-existence of such an intention will not give rise to a valid contract. Agreements of social nature do not contemplate legal relationship and hence they are not contracts.

The parties to a contract may either specifically lay down that the agreement entered is not a formal or legal agreement or in certain cases the non-existence of an intention to enter into a legal relationship can be implied from the agreement itself.

3. Capacity to ContractSection 10 specifies that an agreement to be a contract, is to entered between the two parties who are competent to contract. The persons declared to be incompetent to contract are:

a. Minors: A minor is a person under the age of eighteen years, except when a guardian of a minors person or property has been appointed by the court, in which case it is twenty-one. The purpose of declaring minors as incompetent to enter into a contract is to protect minors against their own inexperience. However, law tries not to cause unnecessary hardships to persons who deal with minors..

b. Persons of Unsound Mind: Section 12 lays down a test of soundness of mind. It states that a person is said to be of sound mind for the purpose of making a contract if, at the time of making the contract, he is capable of understanding it and of forming a rational judgment as to its effect upon his interests. A person who is a lunatic (who is at times of sound mind) may enter into contract in these times. Persons who have completely lost their mental powers or those who are drunken or intoxicated are incapable of entering into a contract. The question of unsoundness has to be determined based on unmistakable facts and not merely on speculation. The burden of proving insanity will be on the person who alleges it. The question whether a contract is invalidated because of unsoundness of mind will not depend upon the belief or disbelief of the witness but largely based upon the inference to be drawn from evidence.

c. Persons Disqualified by any Law to which they are Subject: The following persons are disqualified by law to enter into a contract:

1. Alien Enemies: They are those persons who are not subjects of Republic of India and the country in which they reside, is not at peace with Republic of India. An Indian who resides voluntarily in a country hostile to India is also considered as an alien enemy. Contracts made before war may be either suspended or dissolved depending whether their performance would benefit the enemy or not.

2. A special privilege is granted to the foreign sovereigns, their diplomatic staff and accredited representatives of foreign states. Such persons can enter into contracts and enforce their performance in Indian courts. However, they cannot be sued unless these persons voluntarily submit to the Indian Law. An Indian citizen needs to obtain the permission of the Central Government to sue such a person.

3. A contract entered into by a company beyond its authority, as prescribed in its Memorandum of Association and the relevant provisions in the Companies Act, is declared as void. A company formed under the Companies Act, 1956 has a limited contractual capacity and any Act in excess of its powers whether expressly conferred on it or derived by reasonable implication from its objects clause in the Memorandum, is ultra vires the company and is void.

4. Any contract with a person adjudged insolvent is not valid. It is the official receiver or official assignee of the insolvent who can enter into contracts relating to his property and sue and be sued on his behalf.

5. A convict is incapable of entering into a contract while undergoing imprisonment. The incapacity to contract, or to sue on a contract, comes to an end when the sentence expires. Also, the convict does not suffer from the rigors of the Law of Limitation as the period of the sentence is not included in the lapsed time frame.4. Free Consent

The fourth essential element of a valid contract is free consent. Consent is said to be free when it is not caused by any of the following:

a. Coercion (Section 15)

Coercion is the committing or threatening to commit any act forbidden by the Indian Penal Code, or unlawful detaining or threatening to detain, any property to the prejudice of any person whatever with the intention of causing any person to enter into an agreement. Unlawful detaining or threatening to detain any property is also an instance of coercion. Threatening at gun-point, threatening to commit suicide and refusing to hand over the account books of a business to an agent are some of the instances which amount to coercion. The party whose consent is obtained by coercion has the right to avoid performance of the contract. In Ranganayakamma vs. Alwar Setti the question before the court was regarding the validity of the adoption of a boy by a widow aged 13 years. In the given case, the husbands dead body was not allowed to be removed for cremation until the widow adopted the boy. It was held that the adoption was brought about by coercion and was not binding.

b. Undue Influence (Section 16)

Undue influence is defined as follows: A contract is said to be induced by undue influence where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other. It is to be noted that the emphasis is on the ability to dominate the will of another. Such ability is said to be existing in cases, where a person:

1. Holds a real or apparent authority over the other. For example, income tax authority and assessee, police and accused;

2. Stands in a fiduciary relation (relation of trust and confidence). Fiduciary relationship implies a relationship of confidence and trust. Examples of fiduciary relationship are solicitor and client, spiritual adviser and devotee, husband and wife.

3. Makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness or mental or bodily distress. The unconscientious use by one person of power possessed by him over another in order to induce the other party to enter into a contract is referred as moral coercion and is considered as a form of undue influence. In Lakshmi Amma vs. Telengala, the executant who was aged and suffering from diabetes made a deed of settlement of the entire property in favor of one of his grandsons to the exclusion of his wife, his children and other grand children. The person in whose favor the deed was made was unable to prove that the executant had executed the deed without any external pressure while he was not of infirm mind and was fully aware of the dispositions. The court held the settlement deed to be invalid.

The following relationships raise the assumptions of undue influence:

Parent and child,

Guardian and ward,

Trustee and beneficiary,

Religious advisers and disciple,

Doctor and patient,

Solicitor and client, and

Fiance and fiancee.

c. Misrepresentation (Section 18) Misrepresentation is the innocent or unconscious presentation of wrong facts by one party which are taken into account by other party before entering into a contract. The person making such a misrepresentation honestly believes that such statement is true. Section 18 defines misrepresentation to be existing.

1. When a person positively asserts that a fact is true when his information does not warrant it to be so, though he believes it to be so.

2. When there is any breach of duty by a person which brings an advantage to the person committing it by misleading another to his prejudice.

3. When a party causes, however innocently, the other party to the agreement to make a mistake as to the substance of the thing which is the subject of the agreement.

d. Fraud (Section 17)

Fraud means and includes any of the following acts committed by a party to a contract, or with his connivance (intentional active or passive acquiescence) or by his agent with intent to deceive or to induce a person to enter into a contract.

The essential ingredients of fraud as contemplated by subsection (1) are as under:

1. There must be a False Representation of a Material Fact. 2. The Representation should be made with Knowledge of its Falsity.3. The Other Party should have been induced to Enter into the Contract based on the False Representation.4. The Other Party should have relied upon the False Representation and should have been deceived.5. LAWFUL CONSIDERATION:Consideration is an important element of a contract. In day to day life, quite often promises are made without giving them a thought. In order to make an agreement enforceable, law requires such agreements barring a few exceptions, to be backed by consideration.Consideration may be of following kinds:i. Executory or future consideration, in return of a promise which is to be fulfilled in future.

ii. Executed or present in which it is an act or forbearance made or suffered for a promise. For example, in a cash sale, consideration is present or executed.

iii. Past consideration is the one which pays for a past act or forbearance. An act constituting consideration which took place and is complete before the promise is made.

As per Section 23, there has to be a lawful consideration for a legal object in every contract. Hence, the following aspects should not exist in case of consideration and object for the contract to be declared as legal and binding.

1. It should not be Forbidden by Law:2. Performance should not Defeat the Provisions of any Law

3. It should not be Fraudulent

4. It should not be Considered Immoral6. LEGAL OBJECT. The sixth essential element of a valid contract is legal object. By object it is to mean the purpose of the contract. Contracts with unlawful objects are void.

7. CERTAINTY AND POSSIBILITY OF PERFORMANCE: the agreements in which the meaning is not certain, or is not capable of being made certain, are void. The uncertainty may exist because of quality, quantity, price or title of the subject matter. The terms of contract should be certain. In Keshavlal Lallubhai Patel vs. Lalbhai Trikumlal Mills Limited, the workers of the respondent Mill went on a strike expressing their support to the Quit India Movement. As a result, the respondent mill was closed and could not supply the textile goods to the appellants as agreed. In a letter seeking extension of time the respondent mill cited the reason for the failure to supply goods and stated that the delivery time of the goods stands extended until the normal state of affairs is restored.In Guthing vs. Lynn, the buyer of a horse agreed to pay 5 pounds extra, if the horse proved to be lucky. The agreement was held to be void for uncertainty. The definition of void agreements includes the wager agreements. Section 30 defines wager as an agreement between the parties by which one promises to pay money or moneys worth on the happening of some uncertain event in consideration of the other parties promise to pay if the event does not happen.3.4 RESTITUTION

When a contract becomes void, any benefit derived out of the contract by one party is required to be restored to the other. It is significant to note that the law of restitution covers only benefits received and not losses incurred. The principle of restitution is that the defendant who has been unjustly enriched at the expense of the plaintiff is required to make restitution to the plaintiff. There cannot be restitution where the parties are wholly incompetent to contract (where one of the parties is minor). Section 65 which deals with restitution applies to contracts discovered to be void and contracts which become void. A person who has received a benefit under any such contract will have to restore the benefit to the person from whom it was received. In Dharamsey vs. Ahmedbhai, a person hired a godown for a period of 12 months by paying an advance for the entire period. When a fire broke out in the godown he was entitled to claim a proportionate amount of rent paid in advance.

3.5CONTINGENT CONTRACTS:Section 31 of the Act provides for such contracts and defines it as a contract to do or not to do something, if some event, collateral to such contract, does or does not happen. In Muthu vs. Secretary of State, a person was the highest bidder for a house which was put up for sale. However, one of the conditions was that the sale could be confirmed only if the Collector authorizes it. The Collector declined to confirm the sale. It was held that there was no contract.

The event on which the happening of the contract is dependent should be uncertain. Further, the event should be collateral to the contract. The event should not form part of the consideration of the contract though the contract is made to depend upon it. Contracts of indemnity and insurance are examples of contingent contracts.

3.6 PERSONS WHO ARE REQUIRED TO PERFORM CONTRACTS

Where personal considerations form the basis of a contract, the promisor alone should perform the contract. Where personal considerations do not form the basis of a contract, then the contract may be performed by the promisor or his agent or legal representatives of the promisor in the event of his death.

Time and Place of Performance

A contract, which does not specify the time for performance should be performed within a reasonable time.

When a promise is to be performed on a certain day, and the promisor has undertaken to perform it, without application by the promisee, the promisor may perform it at any time during the usual hours of business on such day and at the place at which the promise ought to be performed.

When a promise is to be performed on a certain day, and the promisor has not undertaken to perform it, without application by the promisee, it is the duty of the promisee to apply for performance at a proper place and within the usual hours of business.

A contract should be performed in the manner and at the time prescribed in the contract.Devolution of Joint Rights and Liabilities

Where a joint promise is made, the promisee may compel any one of the joint promisors to perform the whole of the promise. The joint promisor, who performs the contract may claim contribution from the other joint promisors. Where any of the joint promisors defaults in making his contribution, then the other joint promisors will have to bear even the defaulted amount equally.

Appropriation of Payments

Where several debts are owed and where payment made is insufficient to discharge the debt, the debtor may intimate the creditor as to the nature of appropriation. In such a case, the creditor should follow the directions issued by the debtor. Assignment of Contracts

Assignment of a contract means the transfer of rights and liabilities arising out of the contract in favor of a third person either with or without the concurrence of other party to a contract.An assignment may take place either by the act of the parties or by operation of law.

3.7 Discharge of Contract

We now come to the last stage of contracts. A contract is said to be discharged when the rights and liabilities created by such contract come to an end. Contracts may be discharged or terminated by:

1. Performance of the contract, or

2. By mutual consent, or

3. By lapse of time (by limitation), or

4. By operation of law, or

5. Impossibility of performance, or

6. By breach of contract.

Each of the various modes of discharge of contract are explained below:

1. Performance of Contract: The most obvious and meaningful way to discharge a contract is to fulfill the terms and conditions agreed by each of the parties in the contract. Section 38 provides for tender of performance. As per this section if the promisor offers to perform his side of the contract, but the promisee does not accept his performance the promisor is discharged from his liability. This is known as attempted performance. The promisor may sue the promisee for the breach of contract, if he so desires.

2. Discharge by Mutual Agreement or Consent: The contract may be terminated by mutual consent of both the contracting parties. Various cases of discharge by mutual agreement are specified in Section 62 and Section 63. Section 62 provides about the effect of novation as to where a new contract is substituted for an existing contract by mutual agreement of both the parties, the new contract is basically agreed upon to adjust the remedial rights arising out of the breach of the old contract.

3. Discharge by Lapse of Time: Any contract cannot be extended indefinitely. The Limitation Act, 1963 provides for a certain time frame within which the contract has to be performed (called period of limitation). If no action is taken by the contracting parties within the period of limitation, no remedy at law will be available. It provides for a definite time frame within which, the deprived party may seek remedy at law.

4. Discharge by Operation of Law: A contract may be discharged by the operation of law in any of the following ways:i. By Merger: When the parties agree to include the previous inferior contract in a superior contract.

ii. Law does not permit any unauthorized alteration of the terms of a written agreement. Any such act by any one of the parties will automatically make the contract as discharged by operation of law.

iii. By Insolvency: When a person is adjudged insolvent, he is discharged from all liabilities incurred prior to his adjudication.

iv. Death: Where a contract is entered into, based on personal consideration and where it is required that performance of the contract should be made by the promisor in person, the contract will be discharged on the death of the promisor.

5. Discharge by Impossibility of Performance: A contract which is clearly impossible to perform is discharged. A contract which has its subject as an act, which is impracticable to perform by either of the parties is assumed to be impossible to perform and hence the contract is discharged. Section 56 states that a contract which is made impossible to perform due to subsequent changes is taken as void and hence discharged. This is known as, supervening impossibility or supervening illegality.6. Discharge by Breach of Contract: Breach of contract is often referred as the easiest way of discharging a contract. When either of the parties does not fulfill the duties and liabilities prescribed by the contract, the contract is said to be breached. There are two types of breach of contract:i. Actual breach of contract. Actual Breach of contract may take place in two instances:

a. When the performance is actually due

b. During the actual performance of the contract.

ii. Anticipatory breach of contract. Anticipatory breach of contract is stated to have occurred if a breach has been committed before the time for performance. When a party explicitly denies or abstains from performing the contract or does some definite act, which makes the performance impossible, then such a breach is an anticipatory breach of contract.3.8 REMEDIES FOR BREACH OF CONTRACTThe following alternatives are available for the injured party in case of a breach of contract.

a) Rescission: The injured party can rescind the contract and refuse the performance of contract.

b) Restitution: As per Section 65, when a party treats the contract as rescinded, he makes himself liable to restore any benefits that he has received, under the contract to the party from whom such benefits were received. The court may refuse to rescind the contract where the plaintiff has expressly or impliedly ratified the contract or where only a part of the contract is sought and such part is not severable from the rest of the contract. Section 75 provides relief to the person who sustains damages through non-fulfillment of the contract by entitling him to claim compensation for the same.

c) Claim Damages: Section 73 deals with the compensation for loss or damage caused by breach of contract. The foundation of the claim for damages rests in the celebrated case of Hadley vs. Baxendale (1854). The facts of the case are: A delivered a defective shaft in his mill to B, a manufacturer, for making a new shaft-identical to the one that is sent. A did not make known to B that delay would result in loss of profits. B by his neglect delayed the delivery of the shaft beyond a reasonable time. As a result the mill was idle for a longer period than it would otherwise have been, had there been no such delay. It was held, B was not liable for the loss of profits during the period of delay as the circumstances communicated to A did not show that the delay in the delivery of the shaft would entail loss of profits to the mill. Damages cannot be awarded if the injured party did not take any reasonable steps for the loss to be avoided. Section 74 allows for agreement of a sum to be paid as damages in case of breach of such contract. If the contract contains any stipulation by way of a penalty for failure to perform the obligations, the aggrieved party is entitled to receive from the party who has broken the contract. The damages are classified into four categories:i. General or Ordinary Damages: These are damages which naturally arise in the usual course of things from such breach.

General Damages are usually assessed based on the actual loss suffered. The main aim of providing general damages is to compensate the aggrieved party and not to punish the party which is at fault.

ii Special Damages: These are awarded from a breach of contract under some peculiar circumstances. At the time of entering into the contract the party has notice of special circumstances, which makes special loss, the likely result of the breach in the ordinary course of things. These are the damages which are claimed in addition to the damages arising from the breach of contract.

In Simpson vs. London and N W Rail Co, Simpson entrusted a few specimens of his goods to an agent of a railway company in order that the same be delivered at New Castle where an agricultural show was to be held. The consignment note clearly specified that the delivery was to be made in time. Because of default by the railway company, the samples arrived late for the show. It was held that Simpson could claim damages for loss of profits.

iii Vindictive or Exemplary Damages: These are discouraged by court of law. However, in case of breach of a promise to marry and dishonor of cheque by banker wrongfully when he possesses sufficient funds to the credit of the customer, exemplary damages are awarded.

iv Nominal Damages: These are awarded merely to acknowledge that the plaintiff has proved his case. Nominal damages are not awarded to compensate for the damages.3.9 Quasi-contracts

Such type of contract where there is no element of contract but still it is considered as contract is referred as quasi-contract. Quasi-contracts rest on the equitable principle that a person shall not be allowed to enrich himself unjustly at the expense of another.

The Indian Contract Act provides for the following types of quasi-contracts:

a. Necessaries supplied to a person incapable of contracting or to anyone who is legally bound to support. The persons who are incapable to contract may be minors and persons of unsound mind.b. Payment by an interested person on behalf of the actual party in pursuance of his own interests is required to be reimbursed by the other party.c. If any person lawfully does anything for another person without any intention to do it gratuitously, such other person, has to reimburse the amount as per Section 70, though there is no formal contract for such an act. This section does not apply to persons who have no a capacity to contract.

Case: In Damodar Mudaliar vs. Secretary of State for India, the Government undertook the repairs of an irrigation tank which was owned jointly by the Government and a Zamindar. Later, the Government sued the zamindar for his share of the repairs. It was held that the Government had carried out repairs not intending to do so gratuitously and hence the zamindar was liable to pay compensation.

MULTIPLE CHOICE QUESTIONS:

Q1 Which of the following statements is false?

a) Consideration must be received by all the joint promisors, to bind the other joint promisors.b) Consideration may move from promisee or any othe r person.

c) Consideration may be an act, abstinence or forbearance or a return promise.

d) Consideration must be realQ2 Which of the following offers constitute a valid offer?a) An auctioneer displays a T.V. set before a gathering in an auction sale.b) Shyam advertises in a newspaper that he would pay Rs 5000 to anyone, who finds out & returns his lost briefcase contaning valuables.c) Ram who is in a possession of three cars purchased in different years says I will sell you a car

d) Ram communicates to Shyam that he will sell his car for Rs 1,50,000.

Q3 Anil aged 17 years, borrowed money from a moneylender by representing himself to be of 21 yearsa. Anil can be sued for fraud;

b. Anil can not be sued for fraud

c. Anil is liable to replay the amount

d. Guardian of Anil is liable to repay the amount

Q4 Which of the following is not a flaw in a contract?a. Inadequacy of consideration

b. Wager in nature

c. Illegal object

d. Uncertainty of object

Q5 An agreement made under coercion, renders the contracta. Valid

b. Void

c. Voidable

d. illegal

Q6 The type of damages awarded in case of breach of a promise to marry isa. No damages

b. General damages

c. Nominal damages

d. Exemplary damages

Q7 Which of the following relationships does not raise presumption of undue influence?a. Trustee & beneficiary

b. Doctor & patient

c. Solicitor & client

d. Landlord tenant

Q8 The contract entered with a lunatic during the times of his sound mind is

(a) Valid(b) Void

(c) Void abinitio

(d) voidable

Q9 A accepts Bs invitation to dinner by phone. This is not a contract as

(a) There is no consensus between the two parties

(b) Acceptance is given orally

(c) There is no intention to create a legal relationship

(d) Both (b) & (c) above

Q10 A agreed to sell his car to B. His consent was given at gun point. This contract is void as it involves

(a) Undue influence

(b) Compulsion

(c) Coercion

(d) extortion

CHAPTER 4 SPECIAL CONTRACTSAfter reading this lesson, you will be conversant with:

4.1 Contracts Of Indemnity

4.2 Contracts Of Guarantee4.3 Kinds Of Guarantee

4.4 Consideration Of Guarantee

4.5 Suretys Liability

4.6 Limitation Of Suretys Liability

4.7 Rights Of The Surety

4.8 Discharge Of Surety

4.9 Bailment & Pledge

4.10 Duties Of A Bailor

4.11 Duties Of Bailee

4.12 Rights Of Finder Of Goods

4.13 Termination Of Bailment

4.14 Pledge

4.15 Rights And Duties Of Pawnee

4.16 Rights And Duties Of Pawnor

4.17 Contract Of Agency4.18 Agent

4.19 Classification Of Agents

4.20 Duties Of Agent

4.21 Rights Of Agent4.22 Duties Of Principle To Agent

4.23 Rights Of Principal

4.24 Termination Of Agency

4.25 Irrevocable Agency

4.1 Contracts of Indemnity According to Section 124, a contract by which, one party promises to save the other from loss caused to him by the conduct of the promisor himself or by the conduct of any other person, is called a contract of indemnity. The person who promises or makes good the loss is called the indemnifier (promisor) and the person whose loss is to be made good is called the indemnified or indemnity holder (promisee). A contract of insurance is an example of a contract of indemnity according to English Law. In consideration of a premium the insurer promises to make good the loss suffered by the assured on account of the destruction by fire of his property insured against fire. However, a contract of life insurance does not come under the category of a contract of indemnity. This is because, in the case of life insurance, the insurer agrees to pay a certain sum of money either on the death of a person or on the expiry of a stipulated period of time. The question of having suffered a loss does not arise. Moreover, as the life of a person cannot be valued, the whole of the sum assured becomes payable and for that reason also it is not a contract of indemnity.

The contract of indemnity in a real sense is a contingent contract. It must have all essentials of valid contract. It can be expressed or implied. It is relevant to discuss following cases in this regard:

The case of Goulston Discount Co. Ltd. vs Clark (1967), is an explicit example of express contract of indemnity.A and B go into a shop. B says to the shopkeeper let him (A) have the goods, I will see you paid. The contract is one of indemnity.

The case of Adamson vs Jarvis (1927) explains an implied contract of indemnity.

A on the instruction of T, sold certain cattle belonging to O. O held A liable for it and recovered damages from him for selling it. It was held that A could recover the loss from T, as a promise by T to A from any such loss would be implied from his conduct in asking A to sell the cattle.

The definition given in Sections 124 and is 125 of the Contract Act are not exhaustive of the law of indemnity as it does not include implied promises to indemnify and cases where loss arises from accidents and events that are not depending on the conduct of the promisor or any other person.

Certain rights have been granted to the indemnity holder under Section 125.

Rights of Indemnity Holder When SuedThe promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor:

a. all damages within the scope of the terms of the indemnity;

b. all costs which he may be compelled to pay in any such suit if, in bringing or defending it, he did not contravene the orders of the promisor, and acted as it would have been prudent for him to act in the absence of any contract of indemnity, or if the indemnifier authorized him to bring or defend the suit; and c. all sums to be paid under the terms of any compromise of any such suit, providedthe compromise is not contrary to the orders of the indemnifier, and should be authorized by him.

Though the Indian Contract Act does not grant specific rights to the indemnifier, we can however, as in English Law, draw the rights of the indemnifier to be the same as those of the surety which are detailed in the foregoing parts.The Indian Contract Act does not specify the time of commencement of the indemnifiers liability. Different courts have been following different rules with regard to this. Some courts contend that the indemnifiers liability will begin only when the indemnity holder actually suffers a loss. On the other hand, some have held that an indemnity holder may compel an indemnifier to fulfill his promise even before actually incurring the loss. Buckley L J in Richardson, ex parte etc. made the following observation Indemnity is not given by repayment after payment. Indemnity requires that the party to be indemnified shall never be called upon to pay. 4.2 Contracts of Guarantee

Section 126 deals with contract of guarantee. According to this Section contract of guarantee is a contract to perform the promise, or discharge the liability of a third person in case of his default. The person who gives the guarantee is called the surety, the person in respect of whose default the guarantee is given is called the principal debtor, and the person to whom the guarantee is given is called the creditor. A guarantee may be either oral or written.

The purpose of a contract of guarantee is to provide additional security to the creditor in the event of default by the principal debtor. In a contract of guarantee, there are three parties, i.e., the creditor, the debtor and the surety. Also, there are three contracts in a contract of guarantee (i.e., between the creditor and the debtor, between the creditor and the surety and between the debtor and the surety).

It should also be noted that a contract of guarantee presupposes the existence of a debt. If there is no existing liability, there cannot be a guarantee. Therefore, if the debt to be guaranteed is already time barred, guarantee given will not be valid and the surety will be discharged from his liability.

4.3 KINDS OF GUARANTEEA guarantee may be given retrospectively for an existing debt, or for future debt, or for the good conduct or honesty of an employee, in which case the guarantee is called a fidelity guarantee.

A guarantee may also be specific or continuing guarantee. A specific guarantee is one which is given for a specific debt, and comes to an end when the debt is paid. A continuing guarantee relates to a series of transactions where the surety remains liable for a fixed sum till the continuance of guarantee. However, a continuing guarantee can be revoked by the surety by giving due notice to the creditor. This can be explained by referring to the case Wingfield vs de St Croix. In this case, the creditor (C) let out his cottage to the principal debtor (P) on the condition that rent would be paid initially for three months and thereafter from week to week. S, who was the surety guaranteed the payment of rentals by P to C. After four months, the surety revoked his guarantee by giving notice to the creditor. It was held that the surety was not liable for the rentals which became due after revocation of the guarantee. The death of a surety also results in revocation of continuing guarantee as far as future transactions are concerned.

A continuing guarantee may also be revoked by any of the modes:

a. novation;

b. variance in the terms of the contract;

c. discharge of the principal debtor;

d. compounding with the principal debtor;

e. creditors act or omission impairing suretys eventual remedy; and

f. loss of security.

The following illustration discusses the case of continuing guarantee: A, in consideration that B will employ C in collecting the rents of Bs zamindari, promises B to be responsible, to the amount of Rs.5,000 for the due collection and payment by C of those rents. This is a continuing guarantee.

Just like other contracts, a contract of guarantee should also be supported by consideration. Inadequacy of consideration is not a criterion to judge the validity of a contract of guarantee. The only requirement is that there should be some consideration. Further, it is not necessary that consideration should have passed between the credito