ASSIGNMENTS

MB0035

LEGAL ASPECTS OF BUSINESS

(3 credits)

Set I

Marks 60

Each question carries 10 marks

1. What are the essentials for a Valid Contract? Describe them in

details.

Essential of a Valid Contract

All contracts are agreement but all agreements need not be contracts. The

agreements that create legal obligation only are contracts. This validity of

an enforced able agreement depends upon whether the agreement

satisfies the essential requirements laid down in the acts. Section 10 lays

down that ‘all the agreement are contracts if they are made by the free

consent of the parties competent to contract for a lawful object and are not

hereby expressly declared to the void’.

The following are the essentials:

a) Agreement : An agreement which is preliminary to every contract is

the outcome of offer and acceptance. An offer to do or not to do a

particular act is made by one party and is accepted by the other to

whom the offer is made the we say that there is meeting of the

mind of the parties. Such a position is know as consensus ad idem.

b) Free consent : The parties should agree upon the same thing in the

same sense and their consent should be free from all sorts of

pressure. In other words it should not be caused by coercion,

undue influence, misrepresentation, fraud or mistake.

c) Contractual capacity : The parties entering into an agreement

must have legal competence. In other word they must have

attained the age of majority should be of sound mind and should be

disqualified under the law of the land. A contract entered into

between the parties having no legal capacity is nullity in the eyes of

laws.

d) Lawful consideration : There must be consideration supporting

every contract. Consideration means something in return for

something. It is the price for the promise. An agreement not

supported by consideration becomes a nudum pactum that is

naked agreement. The consideration should be lawful and

adequate how ever there are certain exception to this rule.

e) Lawful object : The object or purpose of an agreement must be

lawful. It should not be forbidden by law, should not be fraudulent,

Should not cause injury to person or property of another, should not

be immortal or against public policy.

f) Not expressly declared void : The Statue should not declared an

agreement void. The act itself has declared certain type of

agreement as void. Example agreement is restraint of marriage,

trade, legal proceeding. In such cases, the aggrieved parties can’t

seek any relief from the court of law.

g) Possibility of performance : The agreement should be capable of

being perform. E.g. Mr A agrees with Mr B to discover treasure by

magic Mr B can’t see redressal of the grievance if Mr A fails to

performed the promise.

h) Certainty of terms : the terms of the agreement should be certain.

Eg- Mr. A agrees to sell 100 tons oil. The agreement is vague as it

does not mention the type of oil agreed to be sold.

i) Intention to create legal obligation : Though section 10 is silent

about this, under English law this happen to be an important

ingredient. Therefore, Indian courts also recognized this ingredient.

An agreement creating social obligation can’t be enforced.

j) Legal formalities : India contract act deals with the a simple

contract supported by consideration. Agreement made in India may

be oral or written. However section 10 states that where the statue

states that the contract should be in writing and should be

witnessed or should be registered the same must be observed.

Otherwise the agreement can’t be enforced.

2. What are the rules regarding the acceptance of a proposal? Describe

them in details.

Rules regarding the acceptance of a proposal

a) An offer can be accepted only by the person to whom it is

made: The offeree only has to accept the offer. In case it is

accepted by any other person no agreement is formed. However in

case authority is given to another person to accept the offer on the

behalf of the person to whom it is made, It is valid acceptance.

b) Acceptance should be unconditional and absolute : Section 7 (i)

states that acceptance should be absolute and unconditional. The

acceptor should accept the offer in toto it is qualified or conditional,

it ceases to be valid. In fact, A qualified or conditional acceptance is

nothing but a counter offer.

c) Acceptance should be communicated : The party accepting the

offer must communicate his acceptance to the offeror. Acceptance

is not mental resolve but some external manifestation. The

acceptance can be communicated in writing or word of mouth or

also by conduct. An agreement does not result for mere state mind.

As regards unilateral contracts, it is impossible to the offeree to

communicate his acceptance otherwise then by performing the

contract. In the case of bilateral contracts acceptance must be

communicated. The offeror can’t forced a contracted on offeree by

fixing the mode of refusal.

d) Acceptance should be according to the prescribed form :

Unless specified in the offer the acceptance must be in some usual

and reasonable manner. The proposer has a right to prescribed the

manner of acceptance he can also waive his right or may ask the

offeree to express acceptance by some gesture ones he prescribes

the mode of communication later he can’t say that it was

insufficient. If the offeree doesn’t signify his accent to the offeror

according to the mode prescribed it becomes deviated acceptance

and strictly speaking it is no acceptance at all. However such a

regid rule is not followed in India in the case of the deviated

acceptance the proposer may insist for the acceptance in the

prescribed manner. Otherwise it will be presumed that the proposal

has accepted the deviated acceptance.

e) Acceptance must be provoked by offer : the acceptor must be

aware of the offer. Even if he fulfills the conditions mention in the

offer, if he is ignorant of the offer itself, he can’t give valid

acceptance.

f) Acceptance must be given before the offer lapses or is

revoked: where a time limit has been fixed the acceptor has to

accept the offer with in such time. Where no time limit is prescribe

the acceptance had to occur in fair time. An offer one dead can’t be

accepted unless there is fresh offer.

g) Provisional acceptance is no acceptance : A Provisional

acceptance doesn’t make a binding agreement unless a final

agreement is given. The offer may be withdrawn before giving final

approval. However, Whether an agreement is provisional or final

depends upon the intention of the parties.

3. What is the difference between fraud and misinterpretation? What do

you understand by mistake?

The difference between fraud and misinterpretation:

1. In Misrepresentation the person making the false statement honestly

believes it to be true. In fraud, the false statement is made by person

who knows that it is false or he does not care to know whether it is true

or false.

2. There is not intention to deceived the other party when there is

misrepresentation of fact. The very purpose of fraud is to deceive the

other party to the contract.

3. Misrepresentation renders the contract voidable at the option of the

party whose consent was obtained by misrepresentation. In the case of

fraud the contract is voidable. It also gives rise to an independent

action in tort for damages.

4. Misrepresentation is not an offence under Indian Penel Code and

hence not punishable. Fraud, in certain cases is a punishable offence

under Indian Penel code.

5. Generally, silence is not fraud except where there is a duty to speak or

the relation between parties is fiduciary. Under no circumstances can

silence be considered as misrepresentation.

6. The party complaining of misrepresentation can’t avoid the contract if

he had the means to discover the truth with ordinary deligance. But in

the case of fraud, the party making a false statement cannot say that

the other party had the means to discover the truth with ordinary

deligance.

Mistake: Usually, mistake refers to mis-understanding or wrong

thinking or wrong belief. But legally its meaning is restricted and is to

mean” operative mistake”. Courts recognize only such mistakes which

invalidate the contract. Mistake may be mistake of fact (either unilateral

or bilateral) or mistake of law (either Indian law or foreign law).

Sec.20 “Where both parties to an agreement are under a mistake as to

a matter of fact essential to the agreement, the agreement is void.”

Sec.21 “A contract is not voidable because it was caused by a mistake

as to a law not inforce in India has the same effect as a mistake of

fact.”

Bilateral mistake: Sec.20 deals with bilateral mistake. Bilateral mistake

is one where there is no real correspondence of offer and acceptance.

The parties are not really in consensus-ad-idem. Therefore there is no

agreement at all.

A bilateral mistake may be regarding the subject matter or the

possibility of performing the contract.

Mistake as to the subject matter: This mistake arises when the parties

to the contract assume at the time of making the contract that a certain

state of things exists, but in reality it does not exist. Such a mistake

may not relate to-

I. Existence of the subject matter: Two parties may enter into

the contract on the assumption that the subject matter exists

at the time contract. But actually it may have ceased to exist

or has never existed at all. Then the contract becomes void.

II. Identity of the subject matter: A mutual mistake as to the

identity of subject matter renders the contract void.

III. A mistake as to the quality of the subject matter will not

render the agreement void owing to the application of the

principle of ‘caveat emptor’ unless there is misrepresentation

or guarantee by the seller.

IV. Price of the subject matter: An explanation to sec.20

provides that “an erroneous opinion as to the value of the

thing which forms the subject matter of the agreement is not

to be deemed a mistake as to matter of Fact.” A mistaken

notice about the value of the thing bought or sold may be

unilateral or bilateral. If it is unilateral, the buyer or seller has

to presume that he has made a bad bargain.

4. What are the different ways in which a contract can be discharged?

Describe these ways in details.

Ways of discharge of contract

When the rights and obligation arising out of a contract are extinguished,

the contract is said to be discharged or terminated. A contract may be

discharged in any of the following ways:

1. By Performance-actual or attempted

2. By Mutual consent or agreement.

3. By subsequent or supervening impossibilities or illegality.

4. By lapse of time.

5. By operation of law.

6. By breach of contract.

Discharge by performance:

When a contract is duly performed by both the parties, the contract is discharged

or terminated by due performance. But if one Party only perform his promise, he

alone is discharged. Such a party gets a right of action against the other party

who is guilty of breach. Performance may be:

(1) Actual performance; or (2) Attempted performance or Tender.

(1) Actual performance: When each party to a contract fulfils his obligation

arising under the contract with in the time and in the manner prescribed, it

amounts to actual performance of the contract and the contract comes to

an end.

(2) Attempted performance or tender: When the promisor offer to perform his

obligation under the contract, But is unable to do so because the promise

does not accepted the performance, it is called “attempted performance”

or “tender”. Thus “tender” is not a actual performance but is only an “offer

to perform” the obligation under the contract. A valid tender of

performance is equivalent to performance.

Essentials of a valid tender. A valid “tender” or offer of performance must fulfil

the following conditions:

1) It must be unconditional. A conditional tender is not a tender.

2) It must be made at proper time and place. A tender before or after

the due date or at a place other than agreed upon is not a valid

tender.

3) It must be of the whole obligation contracted for and not only of the

part.

4) If the tender relates to delivery of goods. It must give a reasonable

opportunity to the promise for inspection of goods so that he may

be sure that the goods tendered are of contract description

5) It must be made by a person who is in a position and is willing to

perform the promise. A tender by a minor or idiot is not a valid

tender.

6) It must be made to the proper person i.e., the promisee or his duly

authorized agent. Tender made to a stranger is invalid.

7) If there are several joint promises, an offer to any one of them is a

valid tender.

8) In case of tender of money, exact amount should be tendered in the

legal tender money. Tendering a smaller or larger amount is an

invalid tender. Similarly, a tender by a cheque is invalid as it is not

legal tender but if the creditors accepts the cheque, he cannot

afterwards raise an objection.

Effect of refusal to accept a valid tender (Sec. 38): The effect of refusal to accept

a properly made “offer of performance” is that the contract is deemed to have

been performed by the promisor i.e., tenderer and the promisee can be sued for

breach of contract. A valid tender, thus, diacharges the contract.

Exception: Tender of money, however, does not discharge the contract. The

money will have to be paid even after the refusal of tender of course without

interest from the date of refusal. In case of a suit, cost of defence can also

be recovered from the plaintiff, if tender of money is proved.

Discharge by Mutual Consent or Agreement

Since a contract is created by means of an agreement, It may also but

discharged by another agreement between the same parties. Sections 62 and 63

provide for the following methods discharged a contract by mutual agreement:

1. Novation: “Novation occurs when a new contract is substituted for an

existing contract, either between the same parties or between different

parties, the consideration mutually being the discharge of the old

contract.” When the parties, to a contract agree for “novation,” the original

contract is discharged and need not be performed. The following point are

also worth-notng in connection with novation:

a) Novation cannot be compulsory, it can only be with the mutualconsent of all the parties.b) The new contract must be valid and enforceable. If it suffers fromany legal flaw on account of which it becomes unenforceable, thenthe original contract revives.Alteration: Alteration of a contract means change in one or more of thematerial terms of a contract. If a material alteration in a written contractis done by mutual consent, the original contract is discharged byalteration and the new contract in its altered form takes its place. Amaterial alteration made in a written contract by one party without theconsent of the other, will, make the whole contract void and no personcan maintain an action upon it.Rescission: A contract may be discharged, before the date ofperformance, by agreement between the parties to the effect that it shallno longer bind them. Such an agreement amounts to “rescission” orcancellation of the contract, the consideration for mutual promises beingthe abandonment by the respective parties of their rights under thecontract. An agreement of rescission releases the parties from theirobligations arising out of the contract. There may also be an impliedrescission of a contract e.g., where there is non-performance of acontract by both the parties for a long period, without complaint, itamounts to an implied rescission.Remission: Remission may be defined “As the acceptance of a lessersum than what was contracted for or a lesser fulfilment of the promisemade.” Section 63 lays down that a promisee may give up wholly or inpart, the performance of the promise made to him and a promise to doso is binding even though there is no consideration for it. An agreementto extend the time for the performance of a promise also does notrequire consideration to support it on the ground that it is a partialremission of performance.Waiver: Waiver means the deliberate abandonment or giving up of aright which a party is entitled to under a contract, whereupon the otherparty to the contract is released from his obligation.Discharge by subsequent or supervening impossibility or illegality:Impossibility at the time of contract: There is no question of discharge of acontract which is entered into to perform something that is obviouslyimpossible, e.g., an agreement to discover treasure by magic, because, in

such a case there is no contract to terminate, it being an agreement void ab-initio by virtue of Section 56, Para 1, which provides: “An agreement to doan act impossible in itself is void.”Subsequent impossibility: Section 56, Para 2, declares: “A contract to do anact which, after the contract is made, becomes impossible, or, by reason ofsome event which the promisor could not prevent, unlawful, becomes voidwhen the act becomes impossible or unlawful.” The following conditions must be fulfilled: (1) that the act should have become impossible; (2) that impossibility should be by reason of some event which the promisor could not prevent; and (3) that the possibility should not be self-induced by the promisor or due to his negligence.Thus, under Section 56 (Para 2), where an extent which could notReasonably have been in the contemplation of the parties when the contractwas made, renders performance impossible or unlawful, the contractbecomes void and stands discharged. This is known as frustration of the contract brought about by supervening impossibility. It is also known as the doctrine of supervening impossibility. The rationale behind the doctrine is that if the performance of a contract becomes impossible by reason of supervening impossibility or illegality of the act agreed to be done, it is logical to absolve the parties from further performance of it as they never did promise to perform an impossibility. The doctrine of supervening impossibility as enunciated in Section 56 (Para 2), is wider than the “doctrine of frustration” known to the English law. The doctrine of frustration is an aspect or part of the law of discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done. In the case of subsequent impossibility or illegality, the dissolution of the contract occurs automatically. It does not depend on the choice of the parties. Cases where the doctrine of supervening impossibility applies: A contract will be discharged on the ground of supervening impossibility in the following cases:Destruction of subject-matter: When the subject-matter of a contract,subsequent to its formation, is destroyed, without the fault of thepromisor or promisee, the contract is discharged. It is so only whenspecific property or goods are destroyed which cannot be regained.Failure of ultimate purpose: Where the ultimate purpose for which thecontract was entered into fails, the contract is discharged, although thereis no destruction of any property affected by the contract and theperformance of the contract remains possible.Death or personal incapacity of promisor: Where the performance ofa contract depends upon the personal skill or qualification or theexistence of a given person, the contract is discharged on the illness orincapacity or the death of that person.Change of law: A subsequent change in law may render the contractillegal and in such cases the contract is deemed discharged. The lawmay actually forbid the doing of some act undertaken in the contract, orit may take from the control of the promisor something in respect ofwhich he has contracted to act or not to act in a certain way.

Cases not covered by supervening impossibility: “He that agrees to doan act must do it or pay damages for not doing it” is the general rule of thelaw of contract. Thus, unless the performance becomes absolutelyimpossible (as discussed above), a person is bound to perform anyobligation which he has undertaken, and cannot claim to be excused by themere fact that performance has subsequently become unexpectedlyburdensome, more difficult or expensive. Some of the cases whereimpossibility of performance is not an excuse are as follows:Difficulty of performance: Increased or unexpected difficulty andexpense do not, as a rule, excuse from performanceCommercial impossibility: When in a transaction profits dwindle to a verylow level or actual loss becomes certain, it is said that the performanceof the contract has become commercially impossible. Commercialimpossibility also does not discharge a contract.Impossibility due to the default of a third person. The doctrine ofsupervening impossibility does not cover cases where the contract couldnot be performed because of the impossibility created by the failure of athird person on whose work the promisor relied.Strikes and lock-outs: A strike by the workmen or a lock-out by theemployer does not excuse performance because the former ismanageable and the latter is self-induced. Where the impossibility is notabsolute or where it is due to the default of the promisor himself, Section56 would not apply. As such these events also do not discharge acontract.Failure of one of the objects: When a contract is entered into for severalobjects, the failure of one of them does not discharge the contract.Discharge by lapse of time:The Limitation Act lays down that in case of breach of a contract legal actionshould be taken within a specified period, called the period of limitation. Otherwise the promisee is debarred from instituting a suit in a court of law and the contract stands discharged. Thus in certain circumstances lapse of time may also discharge a contract. Where “time is of essence in a contract” if the contract is not performed at the fixed time, the contract comes to an end, and the party not at fault need not perform his obligation and may sue the other party for damages.Discharge by operation of law:A contract terminates by operation of law in the following cases:a) Death: Where the contract is of a personal nature, the dealth of thepromisor discharges the contract. In other contracts the rights andliabilities of the deceased person pass on to the legal representatives ofthe dead man.b) Insolvency: A contract is discharged by the insolvency of one of theparties to it when an insolvency court passes an “order of discharge”exonerating the insolvent from liabilities on debts incurred prior to hisadjudication.c) Merger: Where an inferior right contract merges into a superior rightcontract, the former stands discharged automatically.

d) Unauthorised material alteration: A material alteration made in a writtendocument or contract by one party without the consent of the other, willmake the whole contract void.

Discharge by breach of contract: Breach of contract by a party theretois also a method of discharge of a contract, because “breach” also brings toan end the obligations created by a contract on the part of each of theparties. Of course the aggrieved party i.e., the party not at fault can sue fordamages for breach of contract as per law; but the contract as such standsterminated. Breach of contract may be of two kinds: (1) Anticipatory breach; and (2) Actual breach

1. Anticipatory breach: An anticipatory breach of contract is a breach of contract occurring before the time fixed for performance has arrived. Itmay take place in two ways: (a) Expressly by words spoken or written. Here a party to the contract communicates to the other party, before the due date of performance, his intention not to perform it. (b) Impliedly by the conduct of one of the parties. Here a party by his own voluntary act disables himself from performing the contract. When a party to a contract has refused to perform or disabled himself from performing, his promise in its entirety, the promise may put an end to the contract, unless he has signed, by words or conduct his acquiescence in its continuance.

2. Actual breach: Actual breach may also discharge a contract. It occurswhen a party fails to perform his obligations upon the date fixed forPerformance by the contract. Actual breach entitles the party not indefault to elect to treat the contract as discharged and to sue the party atfault for damages for breach of contract.

5. What do you understand by Discharge of Instrument? What are the

different ways in which one or more parties to a negotiable

instrument are discharged?

Discharge of Negotiable InstrumentsA negotiable instrument may be dishonoured by (i) non-acceptance or(ii) non-payment. As presentment for acceptance is required only in case ofbills of exchange, it is only the bills of exchange which may be dishonouredby non-acceptance.

Dishonour by Non-acceptance:A bill of exchange is said to be dishonoured by non-acceptance when thedrawee makes default in acceptance upon being duly required to accept thebill.

Dishonour by Non-payment:A promissory note, bill of exchange or cheque is said to be dishonoured bynon-payment when the maker of the note, acceptor of the bill or drawee ofthe cheque makes default in payment upon.

Effect of DishonourAs soon as a negotiable instrument is dishonoured (either by non-acceptance or by non-payment) the holder becomes entitled to sue theparties liable to pay thereon. The drawer of cheque, maker or note, acceptorand drawer of bill and all the indorsers are liable severally and jointly to aholder in due course. The holder must, however, give ‘notice of dishonour’to all parties against whom he intends to proceed. He may (at his option)also have the instrument ‘noted and protested’ before a notary public.

Discharge of the Instrument and the PartiesThe term ‘discharge’ in relation to negotiable instruments has twoconnotations, viz., (1) discharge of instrument, and (2) discharge of one ormore parties from liability on the instrument.

Discharge of the InstrumentA negotiable instrument is said to be discharged when it becomescompletely useless, i.e., no action on that will lie, and it cannot benegotiated further. After a negotiable instrument is discharged the rightsagainst all the parties thereto comes to an end, and no party, even a holderin due course, can claim the amount of the instrument from any party thereto. Discharge of the party primarily and ultimately liable on the instrument results in the discharge of the instrument itself. For example, in the following cases and instrument is deemed to be discharged:

1. When the party primarily liable on the instrument (i.e., the maker of the note, acceptor of the bill or drawee bank) makes the payment in due course to the holder at or after maturity. A payment by a party who is secondarily liable does not discharge the instrument because in that case the payer holds it to enforce it against prior indorser and the principal debtor.

2. When a bill of exchange which has been negotiated is, at or aftermaturity, held by the acceptor in his own right, the instrument isdischarged

3. When the party primarily liable becomes insolvent, the instrument isdischarged and the holder cannot make any other prior party liablethereon. Similarly, an instrument stands discharged when the primaryparty liable is discharged by material alteration in the instrument or bylapse of time making the debt time barred under the Limitations Act.

4. When the holder cancels the instrument with an intention to release the

party primarily liable thereon from the liability, the instrument isdischarged and ceases to be negotiable.

Discharge of One or More PartiesA party is said to be discharged from his liability when his liability on the instrument comes to an end. When only some of the parties to a negotiable instrument are discharged, the instrument continues to be negotiable and the undischarged parties remain liable on it.One or more parties to a negotiable instrument are are discharged fromliability in the following ways:

1. By cancellation: When the holder of a negotiable instrumentdeliberately cancels the name of any of the party liable on the instrumentdeliberately cancels the name of any of the party liable on the instrumentindorsers subsequent to him, who have a right of action against theparty whose name is so cancelled, are discharged from liability. If thename of an indorser has been cancelled then all the indorserssubsequent to him will be discharged but those prior him will remainliable. Where the cancellation is done under a mistake or without theauthority of the holder if will not discharge any party.

2. By release: If the holder of a negotiable instrument releases any partyto the instrument by any method other than cancellation of names (i.e.,by a separate agreement of waiver, release or remission), the party soreleased and all parties subsequent to him, who have a right of actionagainst the party so released, are discharged from liability.

3. By payment: When the party primarily liable on the instrument makesthe payment in due course to the holder at or after maturity, all theparties to the instrument stand discharged.

4. By allowing drawee more than 48 hours to accept: If the holder of abill of exchange allows the drawee more than forty-eight hours, toconsider whether he will accept the same, all previous parties notconsenting to such allowance are thereby discharged from liability tosuch holder.

5. By taking qualified acceptance: If the holder of a bill agrees to aqualified acceptance all prior parties whose consent is not obtained tosuch an acceptance are discharged from liability.

6. By not giving notice of dishonuour: Any party to a negotiableinstrument (other than the party primarily liable) to whom notice ofdishonour is not sent by the holder is discharged from liability as againstthe holder, unless the circumstances are such that no notice ofdishonour is required to be sent.

7. By non-presentment for acceptance of a bill: When a bill ofexchange is payable certain period after sight, its holder must present itfor acceptance to the drawee within a reasonable time after it is drawn. Ifhe makes a default in making such presentment the drawer and allindorsers who were liable towards such a holder are discharged fromtheir liability towards him.

8. By delay in presenting cheque: It is the duty of the holder of a chequeto present it for payment within reasonable time of its issue. If he fails todo and in the meanwhile the bank fails.

6. What do you understand by Arbitration? What are the objectives of the

Arbitration Act? What are the essentials for Arbitration Agreement?

Arbitration- (The Arbitrator decides):Arbitration is a dispute resolution process where the opposing parties selector appoint an individual called an Arbitrator. Upon appointment, theArbitrator will arrange the process to hear and consider the evidence, reviewarguments and afterwards will publish an award in which the items ofdispute are decided.In some cases the Arbitrator can conduct the arbitration on documentsevidence only. When published the Arbitrator's decisions are final andbinding on the parties. It is rare for an arbitration to be appealed to the courts. Arbitration may comprise a sole Arbitrator, or may be a panel of Arbitrators. Costs of the arbitration are disposed of in the Arbitrator's award, unless the parties have some agreement to the contrary.Arbitration is a settlement of dispute by the decision of one or more personscalled arbitrators. It is an arrangement for investigation and settlement of adispute between opposing parties by one or more unofficial persons chosenby the parties. In arbitration some dispute is referred by the parties for settlement to a tribunal of their own choosing. The dispute is not submitted for decision to the ordinary courts but a domestic tribunal. It is thus a method of settling the disputes in a quasi-judicial manner. The essence of arbitration is that the arbitrator decides the case and his award is in the nature of a judgement. Arbitration is a speedy and inexpensive method of settling the disputes between the parties.In lines with the international trend, the Government of India has alsoenacted the Arbitration and Conciliation Act, 1996 and repealed the threeearlier enactments namely, the Arbitration (Protocol and Convention) Act, 1937; the Arbitration Act, 1940; and the Foreign Award (Recognition and Enforcement) Act, 1961.

Objectives of the ActThe main objectives of the Act are as underi) To comprehensively cover international commercial arbitration andconciliation as also domestic arbitration and conciliation.

ii) To make provision for an arbitral procedure which is fair, efficient andcapable of meeting the needs of the specific arbitration.iii) To provide that the arbitral tribunal gives reasons for its arbitral award.iv) To ensure that the arbitral tribunal remains with in the limit ofjurisdiction.v) To minimize the supervisory role of courts in the arbitral process.vi) To permit an arbitral tribunal to use mediation, conciliation or otherprocedures during the arbitral proceedings to encourage settlement ofdisputes.vii) To provide that every final arbitral award is enforced in the samemanner as if it were a decree of the court.viii) To provide that a settlement agreement reached by the parties as aresult of conciliation proceedings will have the same status and effectas an arbitral award on agreed terms on the substance of the disputerendered by an arbitral tribunal.ix) To provide that, for purposes of enforcement of foreign awards, everyarbitral award made in the country to which one of the two internationalConventions relating to foreign arbitral awards to which India is a partyapplies, will be treated as a foreign award.

Essentials of Arbitration Agreement

1. It must be in writing [Section 7(3)]: Like the old law, the new law alsorequires the arbitration agreement to be in writing. It also provides insection 7(4) that an exchange of letters, telex, telegrams, or othermeans of telecommunications can also provide a record of such anagreement. Further, it is also provided that an exchange of claim anddefence in which the existence of an arbitration agreement is alleged byone party and not denied by the other, will also amount to be anarbitration agreement.It is not necessary that such written agreement should be signed by theparties. All that is necessary is that the parties should accept the termsof an agreement reduced in writing. The naming of the arbitrator in thearbitration agreement is not necessary. No particular form or formaldocument is necessary.

2. It must have all the essential elements of a valid contract: Anarbitration agreement stands on the same footing as any otheragreement. Every person capable of entering into a contract may be aparty to an arbitration agreement. The terms of the agreement must bedefinite and certain; if the terms are vague it is bad for indefiniteness.

3. The agreement must be to refer a dispute, present or future,between the parties to arbitration: If there is no dispute, there can beno right to demand arbitration. A dispute means an assertion of a rightby one party and repudiation thereof by another. A point as to which

there is no dispute cannot be referred to arbitration. The dispute mayrelate to an act of commission or omission, for example, with holding acertificate to which a person is entitled or refusal to register a transfer ofshares.Under the present law, certain disputes such as matrimonial disputes,criminal prosecution, questions relating to guardianship, questions aboutvalidity of a will etc. or treated as not suitable for arbitration. Section2(3) of the new Act maintains this position. Subject to this qualificationSection 7(1) of the new Act makes it permissible to enter into anarbitration agreement “in respect of a defined legal relationship whethercontractual or not”.

4. An arbitration agreement may be in the form of an arbitrationclause in a contract or in the form of a separate agreement [Section 7(2)].

Appointment of Arbitrator : The parties can agree on a procedure forappointing the arbitrator or arbitrators. If they are unable to agree, each party will appoint one arbitrator and the two appointed arbitrators will appoint the third arbitrator who will act as a presiding arbitrator [Section 11(3)]. If one of the parties does not appoint an arbitrator within 30 days, or if two appointed arbitrators do not appoint third arbitrator within 30 days, the party can request Chief Justice to appoint an arbitrator [Section 11(4)]. The Chief Justice can authorize any person or institution to appoint an arbitrator. [Some High Courts have authorized District Judge to appoint an arbitrator]. In case of international commercial dispute, the application for appointment of arbitrator has to be made to Chief Justice of India. In case of other domestic disputes, application has to be made to Chief Justice of High Court within whose jurisdiction the parties are situated [Section 11(12)]

Challenge to Appointment of arbitrator: An arbitrator is expected to be independent and impartial. If there are some circumstances due to which his independence or impartiality can be challenged, he must disclose the circumstances before his appointment [Section 12(1)]. Appointment of Arbitrator can be challenged only if (a) Circumstances exist that give rise to justifiable doubts as to his independence or impartiality (b) He does not possess the qualifications agreed to by the parties [Section 12(3)].Appointment of arbitrator cannot be challenged on any other ground. The challenge to appointment has to be decided by the arbitrator himself. If he does not accept the challenge, the proceedings can continue and the arbitrator can make the arbitral award. However, in such case, applicationfor setting aside arbitral award can be made to Court. If the court agrees tothe challenge, the arbitral award can be set aside [Section 13(6)]. Thus, even if the arbitrator does not accept the challenge to his appointment, the other party cannot stall further arbitration proceedings by rushing to court. The arbitration can continue and challenge can be made in Court only after arbitral

award is made.

Conduct of Arbitral Proceedings : The Arbitral Tribunal should treat theparties equally and each party should be given full opportunity to present hiscase [Section 18]. The Arbitral Tribunal is not bound by Code of Civil Procedure, 1908 or Indian Evidence Act, 1872 [Section 19(1)]. The parties to arbitration are free to agree on the procedure to be followed by the Arbitral Tribunal. If the parties do not agree to the procedure, the procedure will be as determined by the arbitral tribunal.

Law of Limitation Applicable: Limitation Act, 1963 is applicable. For this purpose, date on which the aggrieved party requests other party to refer the matter to arbitration shall be considered. If on that date, the claim is barred under Limitation Act, the arbitration cannot continue [Section 43(2)]. If Arbitration award is set aside by Court, time spent in arbitration will be excluded for purpose of Limitation Act. So that case in court or fresh arbitration can start.

Flexibility in respect of procedure, place and language: Arbitral Tribunalhas full powers to decide the procedure to be followed, unless parties agreeon the procedure to be followed [Section 19(3)]. The Tribunal also haspowers to determine the admissibility, relevance, materiality and weight of any evidence [Section 19(4)]. Place of arbitration will be decided by mutual agreement. However, if the parties do not agree to the place, the same will be decided by tribunal [Section 20]. Similarly, language to be used in arbitral proceedings can be mutually agreed. Otherwise, Arbitral Tribunal can decide [Section 22].Submission of statement of claim and defence: The claimant shouldsubmit statement of claims, points of issue and relief or remedy sought. Therespondent shall state his defense in respect of these particulars. Allrelevant documents must be submitted. Such claim or defense can beamended or supplemented any time [section 23].

Hearings and Written Proceedings: After submission of documents anddefense, unless the parties agree otherwise, the Arbitral Tribunal can decidewhether there will be oral hearing or proceedings can be conducted on thebasis of documents and other materials. However, if one of the partiesrequests the hearing shall be oral. Sufficient advance notice of hearingshould be given to both the parties [Section 24]. [Thus, unless one party requests, oral hearing is not compulsory].

Settlement during Arbitration: It is permissible for parties to arrive atMutual settlement even when arbitration is proceeding. In fact, even the Tribunal can make efforts to encourage mutual settlement. If parties settle he dispute by mutual agreement, the arbitration shall be terminated. However, if both parties and the Arbitral Tribunal agree, the settlement can be recorded in the form of an arbitral award on agreed terms. Such Arbitral Award shall have the same force as

any other Arbitral Award [Section 30].

Arbitral Award: Decision of Arbitral Tribunal is termed as 'Arbitral Award'.Arbitrator can decide the dispute ex aqua et bono (In justice and in goodfaith) if both the parties expressly authorize him to do so [Section 28(2)]. The decision of Arbitral Tribunal will be by majority. The arbitral award shall be in writing and signed by the members of the tribunal [Section 29]. The award must be in writing and signed by the members of Arbitral Tribunal[Section 31(1)]. It must state the reasons for the award unless the parties have agreed that no reason for the award is to be given [Section 31(3)]. The award should be dated and place where it is made should be mentioned. Copy of award should be given to each party. Tribunal can make interim award also [Section 31(6)].

Cost of Arbitration: Cost of arbitration means reasonable cost relating toFees and expenses of arbitrators and witnesses, legal fees and expenses,administration fees of the institution supervising the arbitration and other expenses in connection with arbitral proceedings. The tribunal can decide the cost and share of each party [Section 31(8)]. If the parties refuse to pay the costs, the Arbitral Tribunal may refuse to deliver its award. In such case, any party can approach Court. The Court will ask for deposit from the parties and on such deposit, the award will be delivered by the Tribunal. Then Court will decide the costs of arbitration and shall pay the same to Arbitrators. Balance, if any, will be refunded to the party [Section 39].

Intervention by Court One of the major defects of earlier arbitration lawWas that the party could access court almost at every stage of arbitration -Right from appointment of arbitrator to implementation of final award. Thus,the defending party could approach court at various stages and stall the proceedings. Now, approach to court has been drastically curtailed. In some cases, if an objection is raised by the party, the decision on that objection can be given by Arbitral Tribunal itself. After the decision, the arbitration proceedings are continued and the aggrieved party can approach Court only after Arbitral Award is made. Appeal to court is now only on restricted grounds. Of course, Tribunal cannot be given unlimited and uncontrolled powers and supervision of Courts cannot be totally eliminated.

Arbitration Act has Over-Riding Effect : Section 5 of Act clarifies that notwithstanding anything contained in any other law for the time being in force, in matters governed by the Act, the judicial authority can intervene only as provided in this Act and not under any other Act.

ASSIGNMENTS

MB0035

LEGAL ASPECTS OF BUSINESS

(3 credits)

Set II

Marks 60

Each question carries 10 marks

1. What do you understand by the Offer of Proposal? What are the

essentials of a Valid Offer?

Offer or Proposal

Sec. 2 (a) defines offer as follows: “When one person signifies to another hiswillingness to do or to abstain from doing anything with a view to obtainingthe assent of that other person to such act or abstinence, he is said to makea proposal”The person making the proposal is called ‘promisor’ and the personaccepting it is called ‘promisee’.Essentials of a Valid Offer:a) An offer may be general or specific: According to Sec. 2 (a) an offermust be made to a specific person. An offer may be made to the worldat large. But the contract is made only with the person who accepts andfulfills the conditions of the proposal.In the words of Anson, ‘An offer need not be made to an ascertainedperson, but no contract can arise until it has been accepted by anascertained person’.In Carlill Vs Carbolic Smoke Ball Co. (1893) , a Company offered byadvertisement to pay £100 to any one who contacts the increasingepidemic influenza, cold or any disease caused by taking cold afterhaving used the ball as per printed directions. It was added that ‘£1000is deposited with the Alliance Bank showing our sincerity in the matter’.The plaintiff used the smoke mokeball as per the directions butsubsequently suffered from influenza. She was held entitled to recoverthe promised reward.b) An offer should be made with an intention of creating legalobligation: This principle of English law though not incorporatedspecifically under Section 10, is generally accepted as vital to form alegal agreement. Social, moral or religious agreements are not legallyenforceable. For example, Mr. A invites Mr. B to dinner. Mr. B fails toattend. Mr. A cannot sue Mr. B for unconsumed food.Whether the offeror intended to enter into legal obligations or not couldbe known from the nature of the agreement and the surrounding

circumstances. The court has to ascertain the intention of the parties.The test of contractual intention is objective and not subjective. What isconsidered is not what the parties had in mind but what a reasonableperson would think in the circumstances their intentions to be.c) An offer must be definite and certain: The terms of an offer should notbe uncertain and ambiguous. Anson expressed ‘The law requires theparties to make their own contract, it will not make a contract for themout of terms which are indefinite or illusory ’. This is so because thecourts cannot say what the parties to the contract are to do and whetherthere is violation of the contract.However, all the terms of an offer need not be expressed. If some of theessential terms of a bargain may not be specified but are capable ofbeing determined by some method other than by a future agreementthere will be a good contract between the parties.d) A statement of intention and an invitation to offer are not offers:Preliminary negotiations are likely to take place before entering into anagreement. In the course of such negotiations one party may makesome declarations regarding his intention of doing something. Such adeclaration by itself does not become an offer. e.g., A tells B ‘I want tosell my car’. This is not an offer.An invitation to offer is not an offer. An advertisement for tenders for saleof goods by auction, an announcement about the stock of goods forsale, display of goods in shop windows, prospectus of a company.catalogue, price-lists, loudspeaker announcements etc. are merelyinvitations to offer or offers.e) An offer must be communicated to the offeree: An offer becomesoperative only when it has been communicated to the person to whomthe offer is made. Communication is necessary whether the offer isspecific or general. Under Section 4 ‘the communication of a proposal iscomplete when it comes to the knowledge of the person to whom it ismade ’. However, mere knowledge of a proposal does not amount tocommunication unless the offeree acquires it with express or impliedintention of the offeror.The Act does not indicate the mode of communication. The offeror maycommunicate the offer by choosing any available means. However, aletter containing an offer which is never mailed is not an offer even if thecontents are known by the offeree in some manner. General offers are communicated to public through notice and advertise-ments. But as regards reward cases the question arises whether the person performing the conditions of the offer can claim the reward evenif he is ignorant of the offer. In Lalman Shukla Vs. Gouri Dutt case it was held that knowledge of the offer is essential. There can be no acceptance unless there is knowledge of the offer. When the offer is not communicated silence on the part of the offeree. does not amount to consent since he does not have the opportunity to reject the offer. E.g., A works for B without the request or knowledge of B. A can’t sue B for remuneration since B’s consent can’t be

presumed from his silence.f) The terms and conditions of offer should also be communicated:An agreement is a two-sided bargain based on freedom of contract.However, in modern times the buyer of an article is in an unfavourableposition. Freedom of contract becomes one-sided in the case ofagreements with common carriers, dry cleaners, tailors, insurancecompanies, landlords, public utilities etc. It is also difficult to draw up aseparate agreement with each individual. Therefore, printed forms ofagreements known as ‘standard form contracts’ are used. Such formscontain large number of terms and conditions very often small in printabsolving the dominant party of all liability. The economically weakerparty has to accept all such terms and conditions irrespective of whetherhe likes them or not. The Court too finds it difficult at times to protect theinterest of the weaker party. Therefore the courts have evolved certainmethods. When the offer contains special terms and conditions theofferor must communicate all the terms and conditions either before orat the time of contracting in order to bind the acceptor.On the other hand if the acceptor knew that there was writing and knewor believed that the writing contained conditions he is then bound by theconditions even though he did not read them. It is enough if the offerorhas done all that can be considered necessary to give notice to theacceptor.g) Two identical offers do not make a contract: An offer made by aperson may cross a similar one made by another person of course in thecourse of transit. They are just two identical or cross offers, though thereseems to be identity of mind.h) An offer should not contain any term the non-compliance of whichamounts to acceptance: There may be any number of terms andconditions in an offer. The acceptor can accept or reject them. While theofferor can prescribe mode of acceptance, he can’t prescribe the form ortime of refusal so as to fix a contract upon the acceptor. He can’t say, forexample, that if the offeree does not communicate before a given time,he is deemed to have accepted the offer.

2. What are the effects of Minor’s Agreement? State in details.

Effects of minor’s agreement: A minor’s agreement is void-ab-initioWhere there is no contract, there should be no contractual obligation on either side. Hence, the effects of a minor’s agreements are worked out independently of any contract.1. No estoppel against minor: A minor who has made an agreement bymisrepresentation of his age may disclose his real age. There is noestoppel against him.2. No liability in contract or tort arising out of contract: A minor is, inlaw, incapable of giving consent. Hence, there could be no change in thecharacter or status of the parties. A minor who misrepresents his age toobtain a contract cann’t be sued for deceit. ‘You cann’t convert a

contract into a tort to enable you to sue an infant.’ This principle hasWhere, however, the tort is independent of contract the mere fact that acontract is also involved will not absolve the minor from liability.3. Doctrine of restitution: If a minor obtains property or goods by misrepresentating his age, he can be compelled to restore it but only so long as the same is traceable in his possession. This is known as the equitable doctrine of restitution. Suppose the minor has sold the goods he can’t be made to repay the value of the goods because that would amount to enforcing a void contract. However, when a minor invites the aid of the court for the cancellation of his contract the court may grant relief subject to the condition that he shall restore all benefits obtained by him under the contract or make suitable compensation to the other party. But the court will not compel any restitution by a minor even when he is a plaintiff, where the other party was aware of the infancy so that he was not deceived or where the other party was unscrupulous in his dealings with the minor.4. Beneficial contracts: The law that a minor’s agreement is absolutelyvoid has been confined to the cases where a minor is charged withobligations and the other party seeks to enforce them. On the otherhand a minor is allowed to enforce a contract which is of some benefit tohim and under which he is required to bear no obligations. A minor iscapable of purchasing immovable property and he may sue to recoverthe possession of the property purchased by tendering the purchasemoney.A minor can be a beneficiary e.g., a payee, an endorsee, or a promiseeunder a contract. A promissory note executed in favour of a minor isvalid and can be enforced in a court.5. Ratification: On attaining majority, a person can’t ratify an agreementmade by him when he was a minor. Ratification relates back to the dateof making of the contract. Therefore, a contract which was void originallycan’t be made valid by subsequent ratification. If it is necessary, a freshcontract should be made on attaining majority. A new contract requires afresh consideration. The consideration which passed under the earliercontract can’t be implied into the contract into which the minor enters onattaining majority.6. Liability for necessaries (Sec. 68): Persons incompetent to contractare made liable for necessaries supplied to them. Sec. 68 reads “If aperson incapable of entering into a contract or any one whom he islegally bound to support is supplied by another person with necessariessuited to his conditions in life, the person who has furnished suchsupplies is entitled to be reimbursed from the property of such incapableperson.” The liability is only for necessaries. But what is ‘necessary’ is not defined by the Act. We have to depend upon judicial decisions. Thingsnecessary are those without which an individual cann’t reasonably existsuch as food, raiment, lodging etc. What may be necessary for oneclass may be luxury for another. Therefore, the class has to beascertained and then whether a thing is a necessity or not has to be

determined. To render an infant’s estate liable for necessaries, twoconditions must be satisfied: (1) The contract must be for goodsreasonably necessary for his support in his state of life and (2) he mustnot have already a sufficient supply of these necessaries. The supplierhas to prove not only that the goods supplied were suitable to theconditions in life of the minor but that he was not sufficiently suppliedwith the goods of that class. Thus, the liability for supply of necessaries attaches only to the estate of a minor and he does not incur any personal liability.

3. What do you understand by Consideration? What are the rules governing

Consideration?

ConsiderationConsideration means something in return.It is one of the essentials of validcontract. ‘Ex Nudo Pacto Non Oritar Actio’ means ‘out of bare promise noaction arises’.Definition:Blackstone defined consideration as “the recompense given by the partycontracting to the other.” In the words of Pollack, “Consideration is the pricefor which the promise of the other is bought and the promise thus given forvalue is enforceable.”Sec. 2 (d) of the Act defines consideration in the following terms: “When atthe desire of the promisor the promisee or any other person has done orabstained from doing, or does or abstains from doing, or promises to do orabstain from doing something, such act or abstinence or promise is called aconsideration for the promise.”Rules Governing Consideration:i) Consideration should be furnished at the desire of the promisor. Theconsideration should be the outcome of the desire of the promisor. Thedesire may be express or implied. The act done at the instance of thirdparty or gratuitously does not become consideration. e.g. A’s housecatches fire. B goes and helps in extinguishing it. B later cannot ask forany payment for his services. Even spiritual promises or mentalsatisfaction are not enforceable. The question arises whether apromise of a subscription to a public or charitable trust becomes legal.(Kedarnath Vs Gorie Mohammed). A mere promise is not enough. Thepromisee must have done some act or incurred expenses on thestrength of the promise. (Abdul Aziz Vs Maznoon Ali).ii) Consideration may move from the promisee or any other person: Sec.2 (d) provides that the consideration may be furnished by the promiseeor any other person. At this point Indian law differs from English lawaccording to which the consideration must move from the promiseeonly and not from the third party. However, there is a doctrine known asconstructive consideration under which if the person who was to take abenefit under the contract was nearly related by blood to the promisee,a right of action would vest to him. But this doctrine is no more valid.

iii) Consideration may be past, present or future: Past consideration issomething done or not done at the request of the promisor, before themaking of the agreement. Under English Law, past consideration is noconsideration. Nevertheless, past consideration will support asubsequent promise of the promisor. If services are rendered undercircumstances which raise an implication of a promise to pay for them,the subsequent promise to pay is merely fixing a reasonablecompensation for the services. In India past consideration is sufficient to support a promise provided it is made at the request of the promisor.Present consideration refers to one furnished at the time of thepromise. Where both the parties to a contract promise to each other ofdoing or not doing something the consideration on both sides moves toa future date and is known as future consideration. Present and futureconsiderations are also known as executed and executory consideration respectively.iv) Consideration need not be adequate: The law does not expect that the consideration should be adequate. It is the lookout of the promisor. Theparties as between themselves can determine adequate consideration.The consideration which the contracting parties give to each other neednot be of equal value. However, explanation 2 to Sec. 25 provides thatthe agreement to which the consent of the promisor is given is not voidmerely because the consideration is inadequate; but the inadequacy ofthe consideration may be taken into consideration by the court indetermining whether the consent of the promisor was freely given.v) Consideration should be valuable: The consideration should not be unreal or illusory or of the nature of moral obligation. It should bevaluable, though the value of the consideration need not be the sameas the value of the promise which it supports.vi) The discharging of a pre-existing obligation is not consideration: Theaw may compel a person to do an act. Then the mere doing of suchact can’t become consideration for another’s promise. However, doingor agreeing to do more than what a person is legally bound amounts togood consideration. In the same way performing or promising toperform an existing obligation imposed by a previous contract will notform consideration.vii) Consideration should be certain and lawful: Consideration should notbe illusory or uncertain or impossible. Discovering a treasury by magic,for example, cannot form consideration.

4. What do you understand by the ‘Negotiable Instruments Act’? What are

the different characteristics of the Negotiable Instruments?

Negotiable Instruments ActThe law relating to “Negotiable Instruments” is contained in the NegotiableInstruments Act, 1881, as amended up-to-date. It deals with three kinds ofnegotiable instruments, i.e., Promissory Notes, Bills of Exchange and

Cheques. The provisions of the Act also apply to ‘hundis’ (an instrument inoriental language), unless there is a local usage to the contrary. Otherdocuments like treasury bills, dividend warrants, share warrants, bearerdebentures, port trust or improvement trust debentures, railway bondspayable to bearer etc., are also recognised as negotiable instruments eitherby mercantile custom or under other enactments like the Companies Act,and therefore, Negotiable Instruments Act is applicable to them.The word ‘negotiable’ means ‘transferable by delivery’, and the word‘instrument’ means ‘a written document by which a right is created in favourof some person’. Thus, the term ‘negotiable instrument’ literally means ‘a written document transferable by delivery’. According to Section 13 of the Negotiable Instruments Act, “a negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer.” The Act, thus, mentions three kinds of negotiable instruments, namely notes, bills and cheques and declares that to be negotiable they must be made payable in any of the following forms:Payable to order: A note, bill or cheque is payable to order which isexpressed to be ‘payable to a particular person or his order’. But itshould not contain any words prohibiting transfer, e.g., ‘Pay to A only’ or‘Pay to A and none else’ is not treated as ‘payable to order’ and‘therefore such a document shall not be treated as negotiable instrumentbecause its negotiability has been restricted. There is, however, anexception in favour of a cheque. A cheque crossed “Account Payeeonly” can still be negotiated further, of course, the banker is to take extracare in that case.Payable to bearer: ‘Payable to bearer’ means ‘payable to any personwhom so ever bears it.’ A note, bill or cheque is payable to bearer whichis expressed to be so payable or on which the only or last endorsementis an endorsement in blank. The definition given in Section 13 of theNegotiable Instruments Act does not set out the essential characteristicsof a negotiable instrument. Possibly the most expressive and allencompassing definition of negotiable instrument had been suggestedby Thomas which is as follows:“A negotiable instrument is one which is, by a legally recognised customof trade or by law, transferable by delivery or by endorsement anddelivery in such circumstances that (a) the holder of it for the time beingmay sue on it in his own name and (b) the property in it passes, freefrom equities, to a bonafide transferee for value, notwithstanding anydefect in the title of the transferor."Characteristics of Negotiable Instruments:An examination of the above definition reveals the following essentialcharacteristics of negotiable instruments which make them different from anordinary chattel:Easy negotiability: They are transferable from one person to anotherwithout any formality. In other words, the property (right of ownership) inthese instruments passes by either endorsement and delivery (in case it

is payable to order) or by delivery merely (in case it is payable tobearer), and no further evidence of transfer is needed.Transferee can sue in his own name without giving notice to thedebtor: A bill, note or a cheque represents a debt, i.e., an “actionableclaim” and implies the right of the creditor to recover something from hisdebtor. The creditor can either recover this amount himself or cantransfer his right to another person. In case he transfers his right, thetransferee of a negotiable instrument is entitled to sue on the instrumentin his own name in case of dishonour, without giving notice to the debtorof the fact that he has become holder.Better title to a bonafide transferee for value: A bonafide transfereeof a negotiable instrument for value (technically called a holder in duecourse) gets the instrument ‘ free from all defects.’ He is not affected byany defect of title of the transferor or any prior party. Thus, the generalrule of the law of transfer applicable in the case of ordinary chattels that‘nobody can transfer a better title than that of his own’ does not apply tonegotiable instruments.

5. What do you understand by Company? What are the characteristics of a

Company? What are the different types of company?

Definition:The term ‘company’ implies an association of a number of persons for somecommon objective e.g. to carry on a business concern, to promote art,science or culture in the society, to run a sport club etc. Every association,however, may not be a company in the eyes of law as the legal import of theword ‘company’ is different from its common parlance meaning. In legal terminology its use is restricted to imply an association of persons, ‘registered as a company’ under the law of the land. The following are someof the definitions of company given by legal luminaries and scholars of law:“Company means a company formed and registered under this Act or anexisting company. Existing company means a company formed andregistered under the previous company laws.” – Companies Act, 1956Sec. 3(i & ii)“A joint stock company is an artificial person invisible, intangible and existing only in the eyes of law. Being a mere creature of law, it possesses only those properties which the charter of its creation confers upon it, either expressly or as incidental to its very existence.” – Justice Marshall“A company is an association of many persons who contribute money or money’s worth to a common stock and employ it in some common trade or business and who share the profit or loss arising therefrom. The common stock so contributed is denoted in terms of money and is the capital of the company. The persons who contribute it or to whom it belongs are members. The proportion of capital to which each member is entitled is his share. Shares are always transferable although the right to transfer them isoften more or less restricted.” – Lord Lindley

Characteristics of CompanyThe various definitions reveal the following essential characteristics of a company:1. Artificial Person: A company is an association of persons who haveagreed to form the company and become its members or shareholderswith the object of carrying on a lawful business for profit. It comes intoexistence when it is registered under the Companies Act. The law treatsit as a legal person as it can conduct lawful business and enter intocontracts with other persons in its own name. It can sell or purchaseproperty. It can sue and be sued in its name. It cannot be regarded asan imaginary person because it has a legal existence. Thus company isan artificial person created by law.2. Independent corporate existence: A company has a separateindependent corporate existence. It is in law a person. Its entity isalways separate from its members. The property of the companybelongs to it and not to the shareholders. The company cannot be heldliable for the acts of the members and the members can not be heldliable for the acts or wrongs or misdeeds of the company. Once acompany is incorporated, it must be treated like any other independentperson. As a consequence of separate legal entity, the company mayenter into contracts with its members and vice-versa.3. Perpetual existence: The attribute of separate entity also provides acompany a perpetual existence, until dissolved by law. Its life remainsunaffected by the lunacy, insolvency or death of its members. Themembers may come and go but the company can go on for ever. It iscreated by law and the law alone can dissolve it.4. Separate property: A company, being a legal entity, can buy and ownproperty in its own name. And, being a separate entity, such propertybelongs to it alone. Its members are not the joint owners of the propertyeven though it is purchased out of funds contributed by them.Consequently, they do not have even insurable interest in the propertyof the company. The property of the company is not the property of theshareholders; it is the property of the company.5. Limited liability: In the case of companies limited by shares the liability of every member of the company is limited to the amount of shares subscribed by him. If the member has paid full amount of the face value of the shares subscribed by him, his liability shall be nil and he cannot be asked to contribute anything more. Similarly, in the case of a company limited by guarantee, the liability of the members is limited up to the amount guaranteed by a member. The Companies Act, however, permits the formation of companies with unlimited liability. But such companies are very rare.6. Common seal: As a company is devoid of physique, it can’t act inperson like a human being. Hence it cannot sign any documents personally. It has to act through a human agency known as Directors. Therefore, every company must have a seal with its name engraved on it. The seal of the

company is affixed on the documents which require the approval of the company. Two Directors and the Secretary or such other person as the Board may authorize for this purpose, witness the affixation of the seal. Thus, the common seal is the official signature of the company.7. Transferability of shares: The shares of a company are freely transferable and can be sold or purchased through the Stock Exchange. A shareholder can transfer his shares to any person without the consent of other members. Under the articles of association, even a public limited company can put certain restrictions on the transfer of shares but it cannot altogether stop it. A shareholder of a public limited company possessing fully paid up shares is at liberty to transfer his shares to anyone he likes in accordance with the manner provided for in the articles of association of the company. However, private limited company is required to put certain restrictions on transferability of its shares. But any absolute restriction on the right of transfer of shares is void.8. Capacity to sue and be sued: A company, being a body corporate, cansue and be sued in its own name.

Types of CompaniesCompanies may be classified into various categories as shown in the chartbelow:

Companies

Royal or Chartered Companies Statutory Companies Registered Companies

Companies Limited by Shares Companies Limited by guarantee Unlimited Companies

6. What do you understand by Cyber Crime? Explain the importance of the IT

Act 2000.

Definition of Cyber Crime:Cyber crime refers to all the activities done with criminal intent inCyberspace or using the medium of Internet. These could be either the criminal activities in the conventional sense or activities, newly evolved with the growth of the new medium. Any activity, which basically offends human sensibilities, can be included in the ambit of Cyber crimes.Because of the anonymous nature of Internet, it is possible to engage in avariety of criminal activities with impunity, and people with intelligence, have been grossly misusing this aspect of the Internet to commit criminal activities in cyberspace. The field of cyber crime is just emerging and new forms of criminal activities in cyberspace are coming to the forefront each day. For example, child pornography on Internet constitutes one serious cyber crime. Similarly, online pedophiles, using Internet to induce minor children into sex, are as much

cyber crimes as any others.