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BA7107 LEGAL ASPECTS OF BUSINESS

UNIT - I

1.

THE INDIAN CONTRACT ACT, 1872

INTRODUCTION

The Indian Contract Act, 1872 came into force on 1 st September 1872. It

extends to the whole of India. The Act was mainly enacted with a view to

ensure reasonable fulfillment of expectation created by the promises of the

parties and also enforcement of obligation prescribed by an agreement

between the parties.

The basic equation which explains the contract is:

Whereas:

O = OFFER

A= ACCEPTANCE

C = CONTRACT

Definition Of Contract

According to Sec. 2(h) of the Act, The term Contract may be defined as,

“Any agreement which is enforceable by law”



Essential Elements Of Valid Contract:

Offer and Acceptance.

Intention to Create Legal Relationship.

Lawful Consideration.

Capacity of Parties.

Free and Genuine Consent.

Lawful Object.

Agreement Not Declared Void.

Certainty and Possibility of Performance

Legal Formalities.

Offer And Acceptance:

There must be two parties to an agreement. One party making the offer and

the other party accepting it. The acceptance must be communicated to the

offerer. (O+A=C)

Example: Ram wants to sell his house to Raj and Raj is accepting the offer.

Hence Contract is made between these two parties.

Intention To Create Legal Relationship:

When two parties enter into an agreement, their intention must be to create

legal relationship between them. If there is no legal relationship then it is not

a contract.

Lawful Consideration:

An agreement must be supported by consideration. Consideration means an

advantage. In simple terms, Consideration means something in return. The

agreement is legally enforceable only when both the parties give and get

something in return.



Capacity of Parties:

The parties to the agreement must be capable of entering into a valid

contract. The following persons are not eligible to enter into Contract:

Minor

Un-Sound mind

Drunken

Alien Enemy

Free and Genuine Consent:

The parties to the contract, should enter into a contract with a free and

genuine consent with same mind set on all the material terms of contract. That

is there should not be any undue influence, misrepresentation, fraud and

mistake by both the parties.

Lawful Object:

The object of the agreement must be lawful. That is the agreement must not

be illegal, immoral or opposed to public policy. That is the parties to the

contract must not involve in any kind of illegal activities.

Agreement Not Declared Void:

When the parties enter into an agreement, it must not have been declared

void by law. That is the agreement should not be declared as invalid.

Certainty and Possibility of Performance:

The agreement must be certain and not vague. If it is vague, it is not

acceptable by law.

Example: A agrees to sell B hundred tons of oil. This contract is void.

Because, the agreement does not mention what kind of oil.



Legal Formalities:

Each and every contract should fulfill all the legal formalities before the

parties enter into contract. The following are the legal formalities.:

The contract should be in writing.

The document of the contract should be stamped.

Contract besides being written one, it should be registered.

These are the essential elements of a valid contract. The parties to the

contract should fulfill all the essential elements before entering into a

contract.

TYPES OF CONTRACT/CLASSIFICATION OF CONTRACT:

Contract may be broadly classified into 3 types:

CLASSIFICATION IN TERMS OF VALIDITY:

In terms of Validity, the Contract can be further divided into:

Valid Contract: It is an agreement which is enforceable by law.

Void Contract: It is an agreement legally enforceable when entered into, but

has become void due to supervening impossibility of performance.

Example: War between import country and export country – this is void

Void Agreement: An agreement which is not enforceable by law by either of

the parties. Example: Contract with a minor or Contract without

consideration.

Voidable Contract: A contract becomes voidable when the consent of the

parties has been obtained by force. Example: Amar promises to sell his car

Bala for Rs. 2000/-. His consent was obtained by force. So this is voidable.



Unenforceable Contract: Contract is valid, but cannot be entered due to

some technical defects. Example: Contract is not in writing.

Illegal Agreement: These are the agreements prohibited by the law.

Example: Contract with alien to import prohibited goods.

CLASSIFICATION ACCORDING TO FORMATION:

According to formation, Contract can be further classified into:

Express Contract: The terms of the contract may be stated in words. That is

the written contract.

Implied Contract: The terms of the contract may be inferred from theconduct of the parties or from the circumstances of the case.

Example: Taking a seat in a bus.

Quasi Contract: This is not at all a contract. That is it is a contract

unintentionally entered into by the parties. Example: Raju a fruit seller leaves

a basket of fruits by mistake in Ramu’s house. Ramu treats the fruits as his

own and consumed the fruits. Now Ramu is bound to pay for the fruits he

consumed. This is known as quasi contract.

CLASSIFICATION ACCORDING TO PERFORMANCE:

According to Performance, Contract can be further divided into:

Executed Contract: It is a wholly performed by both the parties.

Example: Vijay wants to buy bicycle from Ajith for cash. Vijay pays the cash

and Ajith delivers the bicycle. Here the contract is wholly performed.

Executory Contract: It is a contract which is either partly performed or

unperformed. Example: On June 1st A agrees to buy a Car from B. While B

has to deliver it on June 15th and A has to pay the price on July 1st. Here the



contract is still executory, because something is remaining to be done

according to the terms of the contract.

Unilateral or One Sided Contract: The Unilateral contract is one in which

one party has to fulfill the obligation at the time of formation of contract.

Whereas, the other party has fulfilled his/her obligation. Example: Shankar

makes payment for bus journey from Chennai to Mumbai. He has performed

his obligation by buying a ticket, Now the transport company should perform

the obligation of reaching Mumbai.

Bilateral Contract: A Bilateral Contract is one in which the obligation on the

part of both the parties to the contract are outstanding at the time of formation

of the contract. Bilateral Contract is similar to executory contract. Example:

A Passenger standing in a queue to buy a rail ticket. Here passenger also not

performed his obligation of buying ticket and the railway authority has also

not issued a ticket.

These are the various types/classification of contract in terms of Validity,

formation and performance.

BREACH OF CONTRACT AND ITS REMEDIES

What is Breach of Contract?

Breach of Contract means breaking the obligation which a contract imposes.

It confers the right of action for damages on the affected party.

Remedies for Breach of Contract

o Recession of the Contract.

o Suit for Damages

o Suit upon Quantum Meruit.



o Suit for Specific Performance of the Contract.

o Suit for Injunction.

o

Recession of Contract: When a contract is broken by one party, the other

party may sue to treat the contract as a rescinded and refuse further

performance. In such a case, he is absolved of all his obligations under the

contract. Example: A promises B to supply ten bags of Cement on a certain

day. B agrees to pay the price after the delivery of the goods. But A does not

supply goods. B is discharge from paying the price to A.

o Suit for Damages: Damages are the monitory compensation allowed to

injured party by the court for the loss suffered by him. The object of awarding

compensation is to put the injured person at the same position.

Rules Relating to Damages:

1. Damages arising naturally.

2. Damages in contemplation of parties.

3. Vindictive or exemplary damages.

4. Nominal Damages.

5. Damages for loss of Reputation.

6. Damages for inconvenience and discomfort.

7. Mitigation of Damages.

8. Difficulty of Assessment.

o Suit for Quantum Meruit: The term Quantum Meruit means, “As much as

Earned”. This damage claim arises when one party partly performs his

obligation, but he has been discharged. Example: Passenger travelling in

Flight from Chennai to Singapore. Flight Cancelled/Returned back to Chennai

due to Bad Weather.



o Suit for Specific Performance of Contract: In certain case of breach of

contract, paying damages are not adequate remedy. In such cases, Specific

performance will be granted, where Court will order the party to continue the

contract. Example: Government Tender.

o Suit for Injunction: Injunction occurs when a party is in breach of negative

terms of contract, the court may issue the order restraining him/her from

doing what he/she is not supposed to do. Example: Neha a film actress,

agreed to act exclusively for Shankar for 1 year and not for anyone else.

During the year, she contracted to act for Vasu. Now she could be restrained

by Injunction from acting for Vasu.

QUASI CONTRACT

What is Quasi Contract?

This is not at all a contract. That is it is a contract unintentionally entered

into by the parties. Example: Raju a fruit seller leaves a basket of fruits by

mistake in Ramu’s house. Ramu treats the fruits as his own and consumed the

fruits. Now Ramu is bound to pay for the fruits he consumed. This is known

as quasi contract.

Kinds of Quasi Contract:

Supply of Necessaries.

Payment by an Interested Person.

Obligation to Pay for Non-Gratuitous Acts.

Responsibility of finder of goods.

Mistake or Coercion



AGENCY

INTRODUCTION TO AGENCY

Agency is a Contractual relationship between two parties created by

agreement, whether express or implied. The relationship of agency arises

wherever one person called “Agent” who is having authority to act on behalf

of another person called the “Principal”.

ESSENTIALS OF CONTRACT OF AGENCY

The following are the essentials of Contract of Agency:

There should be the appointment of the Agent by the Principal.

The Principal should confer authority on the Agent to act for him.

The Principal is answerable for the authority conferred to the Agent.

The object of the appointment of Agent must be to establish a relationship

between the Principal and third parties.

CLASSIFICATION OF AGENTS/TYPES OF AGENTS

Agents may be broadly classified into 3 types:

1.

Special Agent

2.

General Agent

3. Universal Agent



CREATION OF AGENCY

An agency may be constituted in four ways:

Agency by Express Agreement

Agency by Implied Agreement

Agency by Ratification

Agency by Operation of Law

AGENT AUTHORITY

Concept:

An agent is appointed with some authority by which he can bind the

principal with third parties.

Various Types of Agent’s Authority:

Express Authority: An authority is said to be expressed, when it is given by

written.

Implied Authority: The implied authority is to be inferred from the

circumstances of business.

Ostensible or Apparent Authority: The apparent authority of an agent is

that, When an agent is employed for particular business, the third parties

dealing with him should presume that he has authority to do all acts that are

necessary to business.

Emergency Authority: An agent will be given an emergency authority for

the purpose of protecting his principal from loss.



RIGHTS, DUTIES AND LIABILITIES OF AN AGENT

Rights Of An Agent

An agent is having right to receive agreed remuneration.

Agent may retain certain sum of money which he received on behalf of

principal in the business of agency.

In the absence of contract, the agent can retain goods, documents, property of

principal, until the amount is due to him.

Under certain circumstances, the agent is having right to stop the goods in

transit.

The principal must pay compensation to his agent in respect of injury caused

to agent.

Duties Of An Agent:

To follow the instructions of the principal.

To work with reasonable skill and diligence.

To render proper accounts.

To communicate with principal in difficult situations.

Not to act on his own account.

To pay all sums to his principal.

Not to set up adverse title.

Not to delegate his authority to someone else.

Not to use the agency information against principal.

Agent should terminate agency on the principal’s death.



Liabilities Of Agent:

Where the agent acts for a foreign principal.

Where an agent acts for the undisclosed principal.

Where an agent acts for the disclosed principal, who cannot be sued.

Where an agent’s authority is coupled with interest.

Where an agent receives or pays money by mistake or fraud.

Where the agent signs the Negotiable Instrument in his own name.

Where the agent exceeds his authority.

Where an agent acts for a non-existing principal.

TERMINATION OF AGENCY

An agency can be terminated in two cases:

Termination By Operation Of Law

o

By performance of contract of agency.

o By lapse of time.

o By death or insanity of agent or principal.

o By insolvency of principal and in some cases, insolvency of agent.

o By the destruction of subject matter.

o Where the principal or agent dissolute the business.

o

By the principal becoming an alien enemy.

o By termination of sub-agent’s authority.



Termination Of Agency By Act Of The Parties

By agreement between the principal and agent.

By revocation of agent’s authority by principal.

By renunciation of business by agent by giving a notice to principal.

Cases Where Agency Cannot Be Terminated

Where the agency is coupled with interest.

Where the agent has included a personal liability.

Where the agent has partly exercised his authority.



THE SALE OF GOODS ACT, 1930

INTRODUCTION

According to Sec.4 (1), “A contract of sale of goods is a contract. Whereby

the seller transfers or agrees to transfer the goods to the buyer for price.

The term “Contract of Sale” includes both Sale and Agreement to Sell.

Sale: A contract of sale is a contract in which, the seller transfer the goods to

the buyer for price.

Agreement to Sell: When property in the goods is to be transferred at some

future date and not at the time of contract is termed as an Agreement to Sell.

ESSENTIALS OF CONTRACT OF SALE

The following are the essentials of Contract of Sale:

Two parties.

Goods.

Price/Consideration.

Transfer of Property.

A Contract in which all essentials of valid contract applicable.

Definition of Goods

According to Sec.2 (7), “Goods means every kind of movable property other

than actionable claims and money and includes stocks and shares, growing

crops, etc.



Classification Of Goods/Various Types Of Goods:

Existing Goods.

Future Goods.

Contingent Goods.

TRANSFER OF TITLE AND RISK OF LOSS

A. Transfer Of Title:

Concept:

A document of title to goods is one, which enables its possessor to deal with

the goods described in it. It is used in ordinary course of business as a proof

for possession or control of goods. It authorises its possessor to transfer or

receive the goods.

Conditions To Be Fulfilled By A Document of Title Of

Goods:

o It must be used in the ordinary course of business.

o The undertaking to deliver the goods to the possessor of document must be

unconditional.

o The possessor of the document must be entitled to receive the goods

unconditionally.



Various Documents Of Title Of Goods

The following are the various documents of title of goods:

Bill of Lading

Dock Warrant

Warehouse Keeper’s Certificate/ Wharfinger Certificate

Railway or Lorry Recipt

Delivery Order

B. TRANSFER OF PROPERTY:

(i) Concept:

Transfer of property in goods from seller to the buyer is the main object of

contract of sale. The term property in goods must be distinguished from

possession of goods. Property in goods means ownership of goods, Whereas

possession of goods refers to the custody and control of goods.

(ii) Passing Of Property:

The primary rules to be followed when property in goods passes to the

buyer:

Goods must be ascertained

Intention of the parties



CONDITIONS AND WARRANTIES

Concept:

What are the various conditions and warranties need to be fulfilled by both

the parties of sales contract.

Condition:

A condition is a stipulation which is essential to the main purpose of the

contract. It is the base of the contract. Example: Conditions imposed when

selling household goods on instalment – Buyer should pay EMI every month.

Warranty:

A warranty is a stipulation which is collateral to the main purpose of the

contract. It is not of such vital importance like condition.

Example: Mobile Phone Manufacturers give warranty for Accessories like

battery, Ear phone, etc.

RIGHTS OF AN UNPAID SELLER

The Rights of an Unpaid Seller is broadly classified into two types:

Right Against The Goods

It is further divided into two types:

(i) Where The Property In Goods Has Passed:

Right of Lien

Right of Stoppage in Transit

Right of Re-Sale



(ii) Where The Property In Goods Has Not Passed:

Right of Withholding delivery

Right of Stoppage in Transit

Right Against The Buyer Personally:

It is further classified into four types:

Suit for Price

Suit for Damages

Repudiation of Contract

Suit for Interest

These are the various rights of an unpaid seller.



NEGOTIABLE INSTRUMENTS ACT, 1881

INTRODUCTION

The term “Negotiable” means transferable from one person to another

person in return for consideration.

The term “Instrument” means any written document by which a right is

created in favor of some person.

Definition Of Negotiable Instrument:

According to Sec. 13(a), “Negotiable Instrument (NI) means a Promissory

Note, Bill of Exchange or a Cheque payable either to order or bearer.

An Instrument may be negotiable either by:

(i) Statute (Written Law)

(ii) Usage of Promissory Note, Bill of Exchange or Cheque.

Types of Negotiable Instrument

There are 3 types of Negotiable Instrument:

Promissory Note

Bill of Exchange

Cheque

(i) PROMISSORY NOTE:

Definition:

Promissory Note may be defined as, “An instrument in writing containing an

unconditional order signed by the maker to pay a certain sum of money to

certain person or to the bearer of the instrument”



It is signed by the maker.

Essential Requirements of Promissory Note:

The following are the essential requirements of Promissory Note:

Promissory Note must be in writing.

It should contain unconditional order.

It should be signed and delivered by the maker.

Amount payable must be mentioned.

Promise must be a kind in money only.

It shall fulfill legal formalities.

It must be stamped.

(ii) BILL OF EXCHANGE:

Definition of Bill of Exchange:

A Bill of Exchange may be defined as, , “An instrument in writing

containing an unconditional order signed by the maker to pay a certain sum of

money to certain person or to the bearer of the instrument”

It is signed by the maker.

ESSENTIALS OF BILL OF EXCHANGE:

o

Bill of Exchange must be in writing.

o Order to Pay.

o It should be unconditional.

o It requires three parties – Drawer, Drawee and Payee.

o Amount payable must be certain.



o In case of dishonor, the notice has to be issued by the concerned party.

(iii) CHEQUE:

DEFINITION OF CHEQUE:

“A Cheque is a bill of exchange drawn upon a specified banker and payable

on demand”

FEATURES OF CHEQUE:

It always specifies the Bank.

It is payable on demand.

SPECIAL RULES FOR CHEQUES AND DRAFTS:

What is the Obligation of a Banker to a Customer:

Obligation to honor cheques.

Obligation to maintain secrecy of Account information.

Obligation to keep proper records of transaction.

Obligation to abide by customers instructions.

GENERAL TOPICS UNDER NEGOTIABLE INSTRUMENT:

RULES APPLICABLE IN CASE OF LOST NEGOTIABLE INSTRUMENT:

When a Negotiable Instrument has been lost before it is overdue, the holder

may apply to the drawer (maker) to give him another bill of the same amount.

The finder of the lost instrument gets no title.



When a Negotiable Instrument is lost, the holder should inform to parties

liable on it and should also give public notice by advertisement in news paper.

HOLDER IN DUE COURSE:

Meaning Of Holder In Due Course:

“Holder in Due Course” means any person who holds the possession of

Promissory Note, Bill of Exchange or a Cheque for Consideration.

Discharge Of Negotiable Instrument

A Negotiable Instrument is said to be discharged when it becomes

completely useless.

A Negotiable Instrument is also said to be discharged when the rights and

liabilities of all the parties connected comes to an end.

A Negotiable Instrument is discharged in the following cases:

By Payment in due course.

By Party Primarily Liable Became Holder.

By Express Waiver.

By Cancellation.

By Material Alteration.