Legal Aspect of Business PDF - Amity University Online

Legal Aspect of Business 1 Module-1: Commercial Laws Notes...

Legal Aspect of Business 1 Module-1: Commercial Laws Notes e in Unit 1.1 Indian Contract Act 1.1.1 Definition and Nature of Contracts 1.1.2 Essentials Elements and Types of a Contract nl 1.1.3 Formation of a Contract, Performance of Contracts 1.1.4 Principles Governing Capacity of Parties and Free Consent O 1.1.5 Legality of Objects, Performance and Discharge of Contract 1.1.6 Breach of Contract and Its Remedies, Quasi Contracts 1.1.7 Special Contracts of Bailment and Pledge ty 1.1.8 Indemnity and Guarantee 1.1.9 Contract of Agency: Nature of Agency, Creation and Types of Agents si 1.1.10 Rights and Duties of Principal and Agents, Termination of Agency Unit 1.2 Sale of Goods Act, 1930 1.2.1 Sale and Agreement to Sell r ve 1.2.2 Hire Purchase; Pledge; Mortgage; Hypothecation Lease 1.2.3 Goods – Different Types of Goods, Passing of Property in Goods 1.2.4 Conditions and Warranties, Doctrine of Caveat emptor ni 1.2.5 Rights of an Unpaid Seller Unit 1.3 Negotiable Instruments Act, 1882 U 1.3.1 Meaning of Negotiability and Negotiable Instruments 1.3.2 Nature and Requisites of Negotiable Instruments, Types of Negotiable Instruments ity 1.3.3 Cheques Bill of Exchange and Promissory Note –Liability of Parties 1.3.4 Holder in Due Course 1.3.5 Special rules for Cheque and Drafts, Crossing of Cheques – Endorsement – Dishonour of Cheques m 1.3.6 Discharge of Negotiable Instruments Case Study )A (c Amity University Online  2 Legal Aspect of Business Unit – 1.1: Indian Contract Act Notes e Objectives in At the end of this unit, you will be able to understand: Definition and Nature of Contract nl Essentials Elements and Types of a Contract Formation of a contract, performance of Contracts O Principles Governing Capacity of Parties and Free Consent Legality of Objects, Performance and Discharge of Contract Breach of contract and its remedies, Quasi contracts ty Special contracts of Bailment and Pledge Indemnity and Guarantee Contract of Agency: Nature of Agency, Creation and Types of Agents si Rights and Duties of Principal and Agents, Termination of Agency Introduction r ve The Indian Contract Act, 1872 codifies the legal rules and regulations that regulates ‘contracts’. This Act basically finds out the ingredients of a legally enforceable valid contract in besides dealing with certain special type of contractual relationships like indemnity, guarantee, bailment, pledge, quasi contracts, contingent contracts etc. ni All agreements are not covered under the Indian Contract Act, 1872, as some of them are not considered as contracts. Only the agreements, which are enforceable by law, are contracts. U 1.1.1 Definition and Nature of Contract Definition of Contract ity Contract: A Contract is an agreement enforceable by law [Section2 (h)]. “An agreement is enforceable by law, if it is made by the free consent of the parties who are competent to contract and the agreement is made with a lawful object and is for a lawful consideration, and is not hereby expressly declared to be void [Section10]. m All contracts are agreements, but all agreements are not considered as contracts. Agreements which lack any of the above-mentioned attributes are not contracts. A contract that fails to be enforceable by law is named as ‘void contract’, [Section2 (i)], )A However an agreement which is enforceable by law at the option of one party but not at the option of the other is known as a ‘voidable contract’ [(Section 2(i)]. Offer and Acceptance: Offeror initiate to do or to refrains from doing a specific act if the offer is properly accepted by the offeree. Offer may be specifically made or may (c even be implicit in conduct of the offeror, but it must be competent of creating legal relations and must try to create legal relations. The terms of offer must be specific or at least be competent of being made certain. Amity University Online  Legal Aspect of Business 3 Acceptance of offer must be complete and adequate and must be according to the Notes e prescribed or customary mode. If the offer has been offered to a specific person, it must be approved by that person only, but a general offer may be approved by any person. in Communication of offer and acceptance, and cancellation thereof- 1) Communication of an offer is complete: when the person to whom it is made comes to know about it nl 2) Communication of an acceptance is complete: In contrary the offeror when it is bringing in the course of transmission to him as against the acceptor, when it comes O to the recognition of the offeror 3) Communication of revocation of an offer or acceptance is complete: It is considered to be finished as against the person performing it, when it is set into a course of transmission so as to be out of power of the person performing it and as against the ty person to whom it is made, when it comes to his observation. Meaning of Certain Terms si Consideration 1) Consideration is a compensation for the promise of the other party, and it can either r be in the way of ‘benefit’ or some ‘detriment’ to the parties ve 2) Consideration must move at the willingness of the promisor 3) It can be executed or executory 4) Past consideration is valid ensured that it moved at the previous demand of the promisor ni 5) It must not be anything which the promisor is already legally bound to perform 6) It may step from the promise or any third party U 7) Inadequacy of consideration is not significant 8) Consideration necessary be legal 9) The general rule of law is “No Consideration, No Contract” but there are a few ity exceptional cases where a contract, even though without consideration is still considered to be valid 10) Stranger to a contract can’t sue although in some notable cases the contract can be enforced by a person who is not a party to the contract m The Nature of Contract For the practicing surveyor, contract law is a highly important domain of study. Its )A scope is boundless and tries to cover all its ramifications would be incompatible with the objective of this handout. The attempt here will be to treat briefly the various types of contracts and their interpretation, modification, rescission, performance, and breach. The definitions of “contract” put forth over the years of slowly changing usage (c and convenience are multitude. Section 1549 of the Civil Code of California defines a contract as “an agreement to do or not to do a certain thing.” The American Law Institute, declares that “a contract is a promise or a set of promises for the breach Amity University Online  4 Legal Aspect of Business of which the law gives a remedy, or the performance of which the law in some way Notes e recognizes as a “duty.” A contract is an agreement which is enforceable at law, which is performed in between two or more persons, by which rights are attained on the one side to deeds or forbearances on the other. To make an agreement which results into a contract, there must be an offer and an acceptance; and to the promises which stem from the offer and nl acceptance the law affix a binding force of obligation. 1.1.2 Essentials Elements and Types of a Contract O 1. Offer and Acceptance Basically, a contract stretches out when an offer by one party is approved by the other party. The accepted offer should be without any qualification and be exact. ty An offer requirement should be clear, definite, complete and final. It should be communicated to the offeree. A proposal when approved leads to a promise or an agreement. The offer and acceptance must be ‘consensus ad idem’ which states that si both the parties must mutually agree on the very same thing in the same sense i.e., status of wills or uniformity of minds. r 2. Objective to Generate Legal Relationship ve The objective of the parties to a contract must be to generate a legal relationship amongst them. Agreements of social nature, as they do not consider legal relationship, are not contracts. For example, if a father fails to give his daughter the promised pocket money, the daughter cannot sue the father, as it was purely a domestic arrangement. ni Hence, it is clear that all agreements, which do not lead to legal relations, are not contracts. 3. Capacity to Contract U If an agreement is created between parties who are efficient enough to contract, then the agreement turns into a contract. ity In order to be capable to contract the parties must be of the age of majority of sound mind Must not be prohibited from contracting by any other law. m 4. Bona Fide and Free Consent Free consent is another essential element of a valid contract. Consent means that )A the parties must have accepted upon the same thing in the same way. Consent is said to be free when it is not caused by Coercion (c Mistake Fraud Amity University Online  Legal Aspect of Business 5 Misrepresentation, Notes e Undue influence An agreement must have been made by free consent of the parties. The contract in would be void in case of mutual confusion. When consent is accessed by unfair means, the contract would be voidable. nl 5. Lawful Object Intention of an agreement must be lawful. It should not be illegal or immoral or opposed to public policy. It is lawful except for it is forbidden by law. When the object of O a contract is not lawful, the contract is proclaimed void. 6. Lawful Consideration Something in return is termed as Consideration. In every contract, agreements ty should be backed personally by consideration. It must be lawful and real and should be something of value si 7. Certainty and Possibility of Performance The agreements, in which the connotation is uncertain or if the agreement is not accomplished of being made certain, it is believed to become void. T&C of the contract r may always be certain and cannot be ambiguous. Any contract that are uncertain are ve treated as void. The terms of the agreement must also be capable of performance and should not enforce impossible deeds. 8. Legal Formalities ni Legal formalities if required for particular agreement such as registration, writing, they must be taken into consideration. Writing is mandatory in order to consequence a sale, lease, mortgage, gift of immovable property etc. Registration is required to be U done in such cases and legal procedure in the relevant legislation should be rigidly followed. Types of Contracts ity Contracts can be Classified into following Categories: - 1) On the basis of creation 2) On the basis of validity m 3) On the basis of execution 4) On the basis of liability )A 1) Contracts on The Basis of Creation Express contract: - A contract generated by the word spoken or written. According to Sec. 9 in so far as the proposal or acceptance of any promise is made words, the promise is termed out to be as express. (c Example – A says to B ‘will you purchase my motorbike for Rs.20, 000?’’ B says to A ‘’yes’’. Amity University Online  6 Legal Aspect of Business Implied contract: is a contract inferred by Notes e The contract with a person or The incident of the case. in By implied contract we can infer that it is a contract which is implied by law _ (i.e.,) the law implied a contract through parties never contracted. According to Sec. 9 As far as such proposed or acceptance is built otherwise than in words, the promises are nl termed as to be implied. Example: A stops a taxi by waving his hand and takes his seat. There is an implied contract that A will pay the prescribed amount. O Tacit contract: - A contract is called to be a tacit when it has to be understood from the conduct of the parties. ty Example- Obtaining cash through automatic teller machine, sale by fall hammer of an auction sale. Quasi-contracts are contracts which are generated through: - si Neither by the word was spoken Nor written r Nor by the conduct of the parties. ve But these are created by the law. Example- If Mr A leaves his commodity at Mr B’s outlet by mistake, then it is for Mr B to return the commodity or to compensate the price of the goods. In fact, these contracts depend upon the principle that nobody will be permitted to become rich at the ni expenses of the other by taking unfair advantage of others. E-contracts: - An e-contract is one, which is entered into between two parties via the internet. U 2) Contracts on The Basis of Validity Valid contracts: - An agreement which satisfies all the obligations as recommended ity by law on the basis of creation. (According to sec. 10) Void contracts: The word ‘void’ states ‘not binding in law’. Accordingly, the word ‘void contract’ means a useless contract that has no legal effect at all. A contract which refrains to be enforceable by law because it turns out to be void, when, ceased to be m enforceable. (Acc. Section 2 (j)). Voidable contracts: According to section 2 (i) “an agreement, which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the )A other of others, is a voidable contract.” Therefore, a voidable contract is one that is enforceable by law at the choice of one of the parties. It continues to be a valid contract till one of the parties withdraw or rescinds the contract by exercising the option of rejecting the contract within a reasonable time. Unenforceable contracts: Where a contract is good in substance but due to some (c technical defect/errors such as absence of written document, registration or required stamp etc. Is termed out to be as unenforceable contracts Amity University Online  Legal Aspect of Business 7 Example-Writing registration or stamping. Notes e Illegal contracts: It is a contract which the law forbids or declares to be immoral in nature to be formed. All illegal agreement is void but all void agreement or contracts are in not certainly illegal. A contract that is immoral or opposed to public policy is illegal in nature. nl Unlike the illegal agreement, there is no punishment for the parties to a void agreement. The illegal agreement is void from the very starting but occasionally valid contracts O may subsequently turn out to be void. 3) Contracts on The Basis of Execution ty Executed contracts: A contract in which both the parties have realised their obligations under the contract. Example- A contract to purchase a car from B by giving cash, B instantly delivers si his car. Executory contracts: A contract in which both the parties have still to fulfil their obligations. r Example- D agrees to buy V’s cycle by agreeing to pay cash on 15th July. V agrees ve to deliver the cycle on 20th July. Partly executed and partly executor: A contract in which one of the parties has completed his obligation but the other party is yet to complete his obligation. ni Example- A sells his car to B and A has delivered the car but B is yet to pay the amount. For A, it is executed contract whereas it is executory contract on the part of B since the amount is yet to be paid. U 4) Contracts on The Basis of Liability for Performance Bilateral contracts: A contract in which both the parties execute to performing their various promises is stated as a bilateral contract. ity Example- A offers to sell his car to B for Rs. 1,00,000 on acceptance of A’s offer by B, there is a promise by A to sell the car and there is a promise by B to purchase the car there exists two promises. m Unilateral contracts: A unilateral contract is a one-sided contract in which only one party has to execute his promises or obligation party has to perform his promise or obligation to do or forbear. )A Example: A wants to get his room whitewashed. He offers Rs. 500 to B for this purpose B says to A “if I have spare time next Sunday, I will paint your room”. There is a promise by A to pay Rs. 500 to B, If B is able to spare time to whitewash A’s room. However, there exists no promise by B to paint the house. There is only one promise. (c Amity University Online  8 Legal Aspect of Business 1.1.3 Formation of a Contract, Performance of Contracts Notes e Formation of Contract in An agreement should have four essential elements to give rise to a contract and its respective obligations which includes: offer, acceptance, consideration and an intention to establish legal relations. When you buy a newspaper, clearly these all are present in an instant; alternatively, for a large-scale transaction there may be a lengthy negotiation nl producing in an end contract. Offer: An offer is a promise to arrive into a contract on specific terms. It must be O specific, complete, capable of acceptance, and intended to be bound by acceptance. It can be express or implied by conduct. It can be formed with an individual or a group or people. It can even be made to the world (such as in the famous case of Carlill v Carbolic Smoke Ball Co 1 QB 256, where an advertisement in the Pall Mall ty Gazette was taken to be an offer). The key is that the offer cannot be an invitation to treat, being an invitation for people to make offers, such as the display of commodities in a shop, in product si catalogues or at auctions. Offers may be discharged prior to acceptance: by lapse, withdrawal, rejection, death of the offeror, or failure of a condition precedent. Acceptance: An offer must be accepted to construct a contract. It must be final and r unqualified with no disparity to the proposed conditions. It must be communicated by ve the accepting party to the offeror or, in few cases, conduct will establish acceptance (for example, where goods are delivered, and payment taken). Where an offeree professes to accept an offer but promotes new terms, this is not acceptance, but a counteroffer. This is effectively a repudiation of the original offer ni (meaning no contract exists) and the formulation of a new offer which, if accepted, will comprise the contractual terms. U In business, notably supply agreements where both supplier and buyer have their own specific terms, this can lead to the “battle of the forms”. For example, if the supplier arranges its standard terms but the buyer raises a purchase order expressing its own terms will apply, if the supplier then delivers goods (i.e., its conduct is acceptance of ity the counter-offer), the buyer’s terms might apply instead. Often, the last set of terms dispatched will be the terms which shall apply. Consideration: Consideration literally states that a person cannot impose a promise unless he has given or promised something in return. A contract without consideration m will only be enforceable if made out of a deed. A court will not view behind the value of consideration even if it is inadequate (i.e., a peppercorn rent). However, it must move from the promisee and not from the t third )A party. However, a third party cannot enforce a contract, unless the contract plunge within the Contracts (Rights of Third Parties) Act 1999 which allows this where the contract expressly refers that the party may do so or where the contract claims to give an advantage on him. (c Consideration must not be ancient, i.e. performance of a pre-existing obligation cannot be termed as good consideration, unless the party does in addition to what was originally contracted. However, where the performance of a pre-existing duty Amity University Online  Legal Aspect of Business 9 provides a practical commercial advantage to the promisor, such as a saving of time Notes e or inconvenience in securing substitute of performance, it can be valid consideration (although this principle has been judicially criticised). in Performance of (or the promise to perform) a current contractual duty owed to a third party is good consideration. For example, where a party is contractually bound to hand over goods to A but is ordered to deliver to B instead, that delivery (an existing nl contractual duty to A) would be consideration to enforce B’s promise to unload the goods in return (Scotson v Pegg (1861) 3 L.T. 753). Intention to create legal relations: The parties must contemplate to create a O legally binding agreement, otherwise there will exist no contract. This is assumed in commercial dealings but rebuttable with clear evidence to the contrary such as express wording not to be bound. The phrase “subject to contract” can assist with this but is not determining. ty Heads of terms, a letter of intent or a memorandum of association are preliminary documents which are used to forbid such an intention originating, although morally they may have binding effect. si Capacity: In addition to the four elements mentioned above, contracting parties must have the capacity to be bound. For example, where a party is of the knowledge r that the other is of unsound mind or drunk and that he is incapable of understanding the nature of the agreement, the contract will turn out to be voidable at the option of the ve other party. There are also special rules for minors. Formalities: Finally, it is important to remind that although a lot of contracts can be oral, while others have certain formalities: for example, contracts for the sale of land ni and most share transfers must be in writing; transfers of land, leases and powers of attorney must be executed by performing a deed. An intention to be bound may be shown by signing a contract, although signature is not an essential prerequisite. U Performance of Contract 1. The promisor or his representative should execute unless the nature of contract presents that it may be performed by a third person, but the promisee may accept ity performance through a third party. (Sections 37, 40 and 41) 2. In case of joint promisors, all must perform, and after the death of any of the promisors, the survivors and the representatives of the deceased must execute. But their liability is joint and several. If the promisees demands any one of them can m perform the whole promise, he can claim contribution from others. (Sections 42, 43 and 44) 3. Joint promises have only a combined power to claim performance. (Section 45) )A 4. The promisor must offer to perform, and such offer must be without any conditions, and be executed at the significant time and place, allowing the promisee a reasonable opportunity of checking of the things to be delivered. (Sections 38, 46, 47, 48, 49 and 50) 5. If the performance consists of mode of payment of money and there are several (c debts to be settled, the payment shall be appropriated as per provisions of Sections 59, 60and 61. Amity University Online  10 Legal Aspect of Business 6. If an offer of performance is rejected, the promisor is not liable for non-performance Notes e and does not lose his rights under the contract; also, if the promisee fails to concede reasonable facilities. He may sue for specific performance or he may refrain from the contract and claim compensation (Sections 38, 39, 53 and 67). in 7. Rescission is communicated and repeal in the same manner as a promise. The effect is to dispense with further performance and to render the party revoke responsible to nl restore any benefit he may have received. (Sections 64 and 66) 8. Parties may accord to terminate the contract or to amend it or to substitute a new contract for it. (Section 62) O 1.1.4 Principles Governing Capacity of Parties and Free Consent According to Section 10 of the Indian Contract Act, free consent of the parties is a vital demanded for the origination of a valid contract. If the consent of parties is not ty freely provided, then it will not compose a valid contract and it will follow the statement that “all contracts are agreements, but all agreements are not contracts”. si For example, if ‘A’ gives 1000 Rs to ‘B’ to murder ‘C’. There is an agreement between the parties but not a contract since it is unlawful. So, an agreement will only constitute a contract when it follows the requirements mentioned under section 10. r Section 14 of the Indian Contract Act gives a clear definition of free consent. ve According to section 14, “Consent is said to be free when it is not caused by: 1. Coercion, as defined in section 15. 2. Undue influence, as defined in section 16. ni 3. Fraud, as defined in section 17. 4. Misrepresentation, as defined in section 18. 5. Mistake, subject to the provisions of section 20, 21 and 22.” U Where the consent of the parties to an agreement is caused by coercion, undue influence, fraud and/ or misrepresentation, the agreement is voidable at the option of the aggrieved party to reject the contract whose consent was so caused by the above ity mentioned elements. For instance, if a person is forced to provide his consent to an agreement with a pistol loaded on his head then it is at the option of such aggrieved party to accept or reject it. If he accepts it then the contract is binding on him. Meaning of voidable m contract is defined under Section 2(i) which reads as, “An agreement which is enforceable by law at the option of one or more parties, but not at the option of other, is a voidable contract.” )A Coercion Coercion is defined under section 15 of the Indian Contract Act. An agreement whose consent is provided by coercion is voidable at the option of the party whose consent was so obtained. Section 15 states, “Coercion is committing or threatening (c to commit any act forbidden by the Indian Penal Code, or the unlawful detaining or threatening to detain any property to the prejudice of any person, with the intention of inducing such person to an agreement” Amity University Online  Legal Aspect of Business 11 For the application of section 15 it is immaterial whether the Indian Penal Code is Notes e in force in the place where the coercion is employed. For instance, if A on board an English ship on the high seas, leads B to penetrate in into an agreement by the act amounting to criminal intimidation under the Indian Penal Code. B can avoid the contract or accept it. It is not necessary that the coercion is to be employed by the contracting parties nl or to be employed upon the contracting parties. It can be implemented upon the close relatives of the contracting parties such as son, wife, and mother and can be executed by the stranger of which the party has knowledge. O Techniques of Creating Coercion Consent is said to be caused by coercion when it is caused by the following techniques: ty 1. “Committing or threatening to commit any act forbidden by the Indian Penal Code. si 2. Unlawfully detaining or threatening to detain any property.” Undue Influence r Section 16 of the Indian Contract Act defines undue influence. If the consent of any ve party is affected by undue influence, then it is voidable at the option of the party whose consent was so obtained. Section 16 reads as follows. (1) A contract is said to be induced by undue influence where the connections subsisting the parties are such that one of the parties is in power to dominate as well as influence ni the will of the other and uses his power and position to obtain an unfair advantage over the other. (2) In particular and without prejudice to the generality of the foregoing principle a person U is deemed to be in a position to influence the will of other: 1. Where he holds a real or apparent authority over the person or is in a fiduciary relation to others. ity 2. Where he makes a contract with a person whose mental capacity is temporarily or permanently damaged by reason of age, illness or mental or bodily distress. (3) Where a person who is in a position to dominate the will of another, arrives into a contract with him, and the transaction on the face appears on the face to be m unconscionable, the burden of justifying that such contract was not influenced by undue influence shall lie upon a person in a position to influence the will of another.” In common phraseology, undue influence is often baffled with coercion or duress )A but law draws a distinction and caters that undue influence is said to be a subtle species of fraud whereby mastery is achieved over the mind of the individuals by seductive and deceiving approaches. Duress arises when there is a physical compulsion or there is direct use of force (c upon the person or there is a risk to a person’s life. In contrast to duress, undue influence may exist with or without the force or threat to a person’s life. It relies upon Amity University Online  12 Legal Aspect of Business the existence of a relationship between the parties which while it keeps on producing a Notes e natural influence over another. For instance, ‘A’ provides a sum of money to his son ‘B’ in his age of minority and in uses his parental influence over his son to sign a bond of a greater amount of sum due in respect of the advance. “A” uses undue influence in this case as father and son relationship is a fiduciary relationship and there is natural confidence between both nl which ‘An’ abuse by making his son sign a bond. Relations which involve domination O All cases where there exist active trust and confidence between the parties and both the parties are in different positions the principle of undue influence applies to all the cases where influence is captured and abused, where confidence is betrayed. It exists to all the relations where domination can be executed by one party over the other ty i.e., where there exists a real or apparent authority (boss and employee) or fiduciary relationships such as parent and child, doctor and patient, etc. Presumption of undue influence si There are some cases in which the Honourable Courts presume the existence of undue influence between the parties. 1. r Where one of the parties to a contract is in a position and power to dominate and ve influence the will of another party and contract is prima facie unconscionable i.e. unfair, the court presumes the existence of undue influence in such cases. 2. Where one of the parties to a contract is a pardanashin woman, the contract is presumed to be suffered by undue influence. In relation to pardanashin women, ni Bombay High Court made a judgement that a woman becomes pardanashin not because she is in a seclusion of some degree, but it explains a woman who is entirely secluded from the ordinary social intercourse. U Fraud Basically, fraud is the wilful suppression or misrepresentation of bonfire facts. Fraud in Indian laws is defined under section 17 of the Indian Contract Act. According to ity section 17 fraud means as follows. “Fraud means and includes any of the following acts committed by a party to contract, or with his connivance, or by his agent with intent to deceive another party or his agent or to induce him to enter into a contract. m (1) The suggestion, as a fact which is not true, by one who does not believe it to be true. )A (2) The active concealment of a fact by one having knowledge of the fact. (3) A promise made without the intention of performing it. (4) Any other act to deceive. (5) Any such act or omission which law specifically declares to be a fraud. (c Explanation: Mere Silence to facts likely to affect the willingness of a person enters into a contract is not fraud unless the situations are such that a person has a duty to speak. Amity University Online  Legal Aspect of Business 13 Illustrations Notes e (1) A person covered the injury of his horse by colouring and covering it with blinkers before putting it to sale. He did not inform the buyer about the injury. By doing this in he committed fraud as there was active concealment of facts which was in his knowledge. (2) ‘A’ sells, by auction his horse who he knows is unsound, but ‘A’ says nothing to ‘B’ nl about the unsoundness of horse. This is not fraud by A as mere silence about the facts is not treated as fraud. ‘Mere silence to facts is no fraud’ ordinarily even if it results in the concealment O of facts likely to affect the willingness of a person to arrive into a contract. Both the contracting parties are not under any liability to reveal the whole truth to the other party or other information which may affect the subject matter of the contract. But this principle does not apply to all the cases. Silence may become misleading when there ty is a duty to speak (cases of uberrima fides), where silence is misleading, change of circumstances and half-truths. si Duty to speak (uberrima fides): The first such case where silence results to fraud is when a person is under a duty to speak. A person is considered under a duty to speak where one of the contracting parties holds faith, trust and confidence in the other party. For instance, a father while selling a horse to his son is under an r obligation to inform him that the horse is unsound, as the son is likely to depend ve upon the facts given to him by his father. Where silence is deceptive: Silence of a person sometimes is equivalent to speech. A person who remains silent being aware of the facts that his silence may be deceptive then he is considered guilty of fraud. ni Change of circumstances: Sometimes a representation is true when it is made but with the passage of time the circumstances are not as they were before and becomes untrue. In such cases, it is the responsibility of the person who made the U representation to convey the change of circumstances. For example, a legal practitioner represented to the litigant that his practice was worth 2000 dollars per annum. The objectification was real when it was made but ity six months later its worth falls due to defendant’s serious unwellness. Here the defendant is under a duty to communicate his decline in worth after six months due to his unwellness. Half-truths: Even if a person is under no duty to disclose the facts, he may be m responsible for guilty of fraud when he voluntarily discloses half of the information and then stops half of the way. So, the non-disclosure of the remaining half of the information will lead to fraud as by disclosing half of the fact the person is under a )A duty to disclose the entire information. Misrepresentation Misrepresentation means the curtailment of the fact’s material to contract. Any contract in which consent of one party is evoked by misrepresentation is voidable. (c Misrepresentation is defined in section 18 as follows. Amity University Online  14 Legal Aspect of Business “Misrepresentation means and includes- Notes e (1) The positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true. in (2) Any breach of duty which, without intent to deceive, gains an advantage to the person committing it or anyone claiming to it, by misleading another to his prejudice. (3) Causing however innocently, a party to an agreement to make a mistake as to the nl substance of the thing which is subject of the agreement.” Section 18 includes three types of misrepresentation. Which includes: O Unwarranted statements: When a person proclaim that specific piece of information is correct but does not warrant it to be so, though he infers it to be correct, this is a misrepresentation. A warranted statement is a statement when ty the person making the statement accepts the information from a trustworthy source and it is not hearsay. Breach of duty: Any breach of duty which brings an advantage to the person committing it by deceptive the other person is a misrepresentation. This si clause is deliberate to meet the cases of constructive fraud i.e. where there is no intention to commit fraud but the situations are such that the party who derives benefits is equally responsible as he had been motivated by motives r of fraud or deceit. ve For example, the defendant made the litigant to sign a deed of release of property in his favour by offering the litigant the impression that the deed contains the subjects which are actually settled between them. Mistake about the subject matter: Causing innocently a party to an agreement ni to conduct a mistake as to the substance which is the subject matter of the agreement is a misrepresentation. Further, it should be kept in mind that misrepresentation should be of the material facts which form the foundation U of agreement. Misrepresentation of any subject matter which is not of much importance will not help the person to avoid the contract. A fact is considered relevant or material when it bothers the decision of any reasonable person to enter into a contract or not enter into a contract. ity A mere expression of opinion does not result to misrepresentation. Even suppression of relevant information in some cases does not contribute to misrepresentation if plaintiff by his reasonable diligence is able to discover the true facts. m For instance, if a person went to purchase a factory and there, he was informed that the production capacity of the factory is 2, 00,000 tons but the data shows a slight variation in the capacity. Here the person cannot sue for misrepresentation and avoid )A the contract because with reasonable diligence he can discover the facts. Fraud and Misrepresentation The major difference between fraud and misrepresentation is that in a fraud (c a person has an intention to deceive the other party while misrepresentation can be performed if a person does not have an intention to deceive. Thus, we can conclude that fraud is an intentional wrong while misrepresentation is an unintentional wrong. Amity University Online  Legal Aspect of Business 15 Mistake Notes e In contracts, a mistake could be in two ways. Firstly, it may defeat the consent of the parties’ altogether and secondly, it may misguide the parties about the intention of in the contract. The cases in which consent of the parties is defeated are covered under section 13 of the Indian Contract Act. Section 13 of the Act defines consent as, “Two or more persons are said to consent nl when they agree upon the same thing in the same sense.” Basically, for consent, there should be consensus ad idem. A mistake can be of mistake of fact and mistake of law. If a mistake of law is of Indian law, then parties cannot ignore the contract and O same is the case with the mistake of fact where the mistake is unilateral. But if the mistake is of foreign law and there is a bilateral mistake of fact by the parties then the agreement will turn out to be void. A void agreement is defined under section 2(g) ty of the Indian Contract Act. It reads as, “An agreement not enforceable by law is void agreement.” Provisions regarding mistake are dealt in three sections of the Indian Contract Act si (section 21, 22 and 23). When the mistake of the parties does not defeat the consent but only misguides the parties’ section 20 of the Indian Contract Act shall exert. It defines as, “Where both the parties to an agreement are under a mistake of fact essential to the agreement, the agreement is void.” r ve For example, if A agrees to purchase from B a white coloured cow but it turns out that at the time of the bargain, the cow was dead and none of the parties to contract was aware about it. Thus, in such a situation the agreement is considered void. Section 20 will operate only when both the parties of an agreement are under a mistake and the fact about which they were under a mistake is essential to the agreement. ni Section 21 of the Act emphasises upon the effect of mistake of law. It reads as “A contract is not voidable merely of the fact that it was caused by the mistake of law in U India, but a mistake of law as to not in force in India has the same effect as a mistake of fact.” For example, “A” and “B” perform a contract on the belief that a particular deal is barred by Indian law of limitation, the contract can never be held voidable or void. ity Section 22 of the Indian Contract Act deals with the provision where the mistake is of one of the parties to contract. It provides that, “A contract is not voidable merely because of the fact that it was caused by the mistake of the fact of one of the parties.” m What facts are essential? There cannot be a complete list of facts which are vital to perform a contract and )A which are not vital l to contract. The value of the facts depends upon the nature of The contract which differs in every case. Broadly, Courts have laid down certain facts which are essential for every agreement. Which are as follows. The identity of parties. (c The identity and nature of the subject matter of the contract, The nature and content of the promise itself. Amity University Online  16 Legal Aspect of Business 1.1.5 Legality of Object, Performance and Discharge of Contract Notes e The contract in order to become a valid contract two things are absolutely vital – the first is lawful object and the second is lawful consideration. Therefore, the Indian in Contract Act gives us the parameters that make up lawful consideration and objects of a contract. Now let us take a look at the legality of object and consideration of a contract Lawful Consideration and Lawful Object nl Section 23 of the Indian Contract Act clearly states that the consideration and/or object of a contract are considered lawful consideration and/or object unless they are O specifically forbidden by law are of such a nature that they would expel t the purpose of the law are fraudulent ty involve injury to any other person or property the courts consider them as immoral Hence, lawful consideration and/or lawful object cannot contain any of the above si requirements. Let us take a detail look at each of them. 1) Forbidden by Law r When the object of a contract or the consideration of a contract is considered illegal ve by law, then they are not lawful consideration or object anymore. Then they become unlawful in nature. And such a contract will not be valid anymore. Unlawful consideration of object contains all those acts that are specifically punishable by the law. This also includes those that the appropriate authorities prohibit ni via rules and regulations. But if the rules made by such authorities are not in line-up with the law than these will not apply. For example, “A” received a license from the Forest Department to cut the grass of U a certain place. The authorities at the department informed him he cannot pass on such interest to another person. But the Forest Act has no such statute. Hence, a sold his interest to “B” and the contract was held as valid. ity 2) Consideration or Object Defeats the Provision of the Law This states if the contract is leading to defeat the intention of the law. If the courts find that the original intention of the parties to the agreement is to defeat the provisions of the law, it will put aside the said contract. Say for instance, “A” and “B” enter into an m agreement, where “A” is the debtor, that “B” will not plead limitation. This, however, is performed to defeat the intention of the Limitation Act, and so the courts can rule the contract as void due to unlawful object. )A 3) Fraudulent Consideration or Object Lawful consideration or object cannot be considered as fraudulent. Agreements entered into containing unlawful fraudulent consideration or object are void by nature. (c Say for example A agrees to sell goods to B and smuggle them outside the country. This is a fraudulent operation as so it is void. Now B cannot recover the money under the law if A does not deliver on his promise. Amity University Online  Legal Aspect of Business 17 4) Defeats any Rules in Effect Notes e If the consideration or the object is against any rules in effect in the nation for the time being, then they will never be lawful consideration or objects. And the contract thus in framed will not be valid anymore. 5) When they involve Injury to another Person or Property nl In legal terms, an injury explains to a criminal and harmful wrong done to another person. If the object or the consideration of the contract harms and damages the person or property, this will certainly lead to unlawful consideration. Say for instance O a contract to publish a book that is a violation of another person’s copyright would be void. This is because the consideration here is unlawful and harms another person’s property, i.e. his copyright. ty 6) When Consideration is Immoral If the object or the consideration are considered by the court as immoral, then such object and consideration will be immoral. Say for example, a lent money to “B” si to take up a divorce from her husband “C”. It was agreed once “B” obtains the divorce “A” would marry her. But the court issued the judgement that “A” cannot recover money from “B” since the contract is void on account of unlawful consideration. 7) Consideration is opposed to Public Policy r ve For the welfare of the community as a whole, we restrict certain contracts in the name of public policy. But we do not use public policy in a broader manner in this matter. If that was the case it would restrict individual freedom of people to enter into ni contracts. So, for the purpose of lawful consideration and object public policy is used in a narrow scope. We only focus on public policy under the law. Here is the list of some agreements that are opposed to public policy, U 1. Trading with the Enemy: Entering into an agreement with a person from a nation with whom India is at war i.e. the country becomes alien enemy, it make make the contract void For example, a trader entering into a contract with a Pakistani national ity during the Kargil war as during the times of war Pakistan will become the alien enemy of India. 2. Stifling Prosecution: This is a diffusion of the natural course of law, and contracts of such nature are void. For example, “A” agrees to sell his land to “B” if he does not m participate in the criminal proceedings against him. 3. Maintenance and Champerty: Maintenance agreement is when a person assures to maintain a suit in which he has no real interest. And champerty is when a person )A agrees to assist another party in proceeding for a portion of the damages or proceeds. 4. An Agreement to Traffic in Public Offices 5. Agreements to make Monopolies 6. An agreement to brokerage marriage for rewards (c 7. Interfering with the Courts: An agreement whose object is to bring on a judicial or state officials to act viciously and interfere with legal proceedings Amity University Online  18 Legal Aspect of Business Discharge of a Contract Notes e A contract creates certain obligations on one or all parties involved. The discharge of a contract happens when these obligations come to an end. There are many modes in by which a contract can be discharged. Here is the list of various modes under which the contract can be discharged nl 1) Discharge by Performance When the parties to a contract complete their share of obligations arising under the contract within the time and manner stated, then the contract is discharged by performance. O Example: Peter agrees to sell his bicycle to John for a price of Rs 10,000 to be compensated by John on the delivery of the bicycle. As soon as it is delivered, John pays the promised amount. ty Since both the parties to the contract complete their share of obligations arising under the contract, then it is termed as discharged by performance. Now, discharge by the performance of a contract can be by: si Actual performance Attempted performance As shown in the instance stated above, actual performance is when all the parties r to a contract perform what they had agreed for under the contract. On the other hand, ve it is possible that when the promisor attempts to perform his promise, the promisee disdain to accept it. In such cases, it is termed as attempted performance or tender. 2) Discharge by Mutual Agreement ni If all parties to a contract mutually support to replace the existing contract with a new one or annul or remit or alter it, then it leads to a discharge of the original contract due to a mutual agreement U Example: Peter owes Rs 100,000 to John and agrees to repay it within a year. They documented the debt under a contract. Subsequently, he loses his job and requests John to accept Rs 75,000 as a final settlement of the loan amount. John ity agrees and they make a contract to that effect. This discharges the original contract due to mutual consent. 3) Discharge by the Impossibility of Performance m If it is impossible for any of the parties to the contract to exercise their set of obligations, then the impossibility of performance can lead to discharge of the contract. If the impossibility exists from the beginning, then it is impossible to execute this type of contract i.e. “void ab-initio”. However, the impossibility might also arise later due to: )A An unforeseen change in the law Destruction of the subject-matter essential to the performance The non-existence or non-occurrence of a particular state of things which was (c considered a given for the performance of the contract A declaration of war Amity University Online  Legal Aspect of Business 19 Example: Peter enters into a contract with John to marry his sister Olivia within one Notes e year. However, Peter meets with an accident and becomes insane. That accident has led to impossibility of performing this event which in turn will discharge the contract. in 4) Discharge of a Contract by Lapse of Time The Limitation Act, 1963 prescribes a specified time frame for performance of nl a contract. If the promisor does not perform and the promisee fails to take any legal action within this specified time period, then the latter cannot seek remedy through law. It discharges the contract due to the lapse of time. O Example: Peter takes a loan from John and agrees to pay the instalments every month for the next five years. However, he does not pay even a single instalment. John calls him a few times but then gets busy and takes no action. Three years later, he approaches the court to help him recover his money. However, the court rejects his plea ty since he has crossed the time-limit of three years to recover his debts. 5) Discharge of a Contract by Operation of Law si A contract can be discharged by operation of law which includes insolvency or death of the promisor. 6) Discharge by Breach of Contract r ve If a party to a contract does not perform his share of obligation according to the time and place specified, then he is said to have bound a breach of contract. Also, if a party revokes a contract before the specified time of performance of a contract, then he is said to have committed an anticipatory breach of contract. ni In both cases, the breach discharges the contract. In the case of: An actual breach, the promisee maintains his right of action for damages. U An anticipatory breach of contract, the promisee cannot file a suit for damages. It also discharges the promisor from carrying out his part of the contract. ity 7) Discharge of a Contract by Remission A promisee can waive or remit the performance of promise of a contract, wholly or in part. He can also expand the time specified for the performance of the same. In Example 3 stated above, Peter only repays a part of the amount he owes to m John. However, John agrees to accept it as a final settlement of the debt. John’s act of remission discharges the contract. )A 8) Discharge by Non-Provisioning of Facilities In many contracts, the promisee agrees to offer reasonable facilities to the promisor for the performance of the contract. If the promisee is unable to perform it, then the promisor is discharged of all liabilities which arise due to non-performance of the contract. (c Amity University Online  20 Legal Aspect of Business Example: Peter agrees to fix John’s garage floor provided he keeps his car out for Notes e at least 6 hours. Peter approaches him a few times, but John is hesitant to get his car out. John fails to provide reasonable facilities to Peter (an empty floor). This discharges him of all obligations arising under the contract. in 9) Discharge of a Contract due to the Merger of Rights nl In certain circumstances it is possible that inferior and superior right coincides in the same person. In such cases, both the rights combine causing it to discharge the contract governing the inferior rights. O Example: Peter rents John’s flat for two years. One year into the contract, he offers to buy the property from John, who agrees. The enter a sale contract and Peter becomes the owner of the flat. Here Peter has two rights; one accorded by the lease agreement making him the renter and second by the sale agreement making ty him the owner. The former being an inferior right combined with the superior one and discharges the lease contract. si 1.1.6 Breach of Contract and its Remedies and Quasi Contracts A breach of contract is a violation or breaking of any of the agreed-upon terms and conditions of a binding contract. The breach could be anything from a delay in payment r to a more serious violation such as the unable to deliver a promised asset. A contract is ve binding and will hold weight if taken to court. In case of breach of contract by one party, the other party not required to perform his share of the contract and is entitled to compensation for the loss incurred to him. ni Damages for breach of contract must be such loss or damage as naturally arise, in the usual course of things or which had been reasonably supposed to have been in observation of the parties when they entered into the contract, as the probable result of the breach. Any other damages are said to be remote or indirect damages/losses, U hence, cannot be demanded. Remedies for Breach of Contract ity The Indian Contract Act chalks out all the provisions for the performance of a contract. It also contains the provisions in case of breach of contract by either party. Let us take a comprehensive look at the available remedies for breach of contract. When a promise or agreement is not fulfilled by any of the parties, it is called as breach of contract. So, when either of the parties does not keep their end of the agreement or m does not fulfil their share of obligations as per the terms and condition of the contract, it is termed as breach of contract. There are a few remedies for breach of contract available to the aggrieved party. )A 1] Recession of Contract When one of the parties to a contract is unable to complete his obligations, then the other party can revoke the contract and refuse the performance of his obligations. (c As per section 65 of the Indian Contract Act, the party that rescinds the contract must restore any benefits he received under the said agreement. And section 75 Amity University Online  Legal Aspect of Business 21 states that the party that rescinds the contract is entitled to receive damages and/or Notes e compensation for such a recession. 2] Sue for Damages in Section 73 clearly states that the party who has suffered, because the other party has broken promises, can demand compensation for loss or damages caused to them nl in the normal course of business. Such damages will not be provided if the loss is abnormal in nature, i.e. not in the ordinary course of business. There are two types of damages according to the Act, O Liquidated Damages: In certain circumstances the parties to a contract will agree to the amount payable in case of a breach. This is called as liquidated damages. ty Unliquidated Damages: Here the amount payable due to the breach of contract is determined by the courts or any appropriate authorities. 3] Sue for Specific Performance si This states that the party in breach will actually have to carry out his obligations as per the rules of the contract. In certain cases, the courts may insist that the party carry out the agreement. r ve So, if any of the parties is unable to execute the contract, the court may order them to do so. For example, “A” decided to buy a certain area of land from “B”. “B” then refuses to sell. The courts can order “B” to perform his duties under the contract and sell the land ni to “A”. 4] Injunction U An injunction is basically like a decree for specific performance but for a negative contract. An injunction is a court order restricting a person from doing a particular act. So, a court may grant an injunction to stop a party of a contract from performing ity something he promised not to do. In a prohibitory injunction, the court restricts the commission of an act and in a mandatory injunction, it will stop the continuance of an act that is unlawful. Thus injunction is a preventive relief. It is appropriate in cases of anticipatory breach of contract where damages would not be an adequate relief m 5] Quantum Meruit Quantum meruit literally translates to “as much is earned” or “in proportion to the work done”. At times when one party of the contract is stopped from completing his )A performance of the contract by the other party, he can claim quantum meruit. So, he must be paid a reasonable compensation for the part of the contract he has already exercised. This could be the remuneration of the services he has given or the value of the work he has already completed. (c Amity University Online  22 Legal Aspect of Business Rules for Enforcement Notes e 1) If it is unforeseen on the occurrence of a future event, it is enforceable when the event occurs. The contract turns out to be void if the event becomes beyond the in bounds of possibility, or the event does not happen till the expiry of time fixed for happening of the event. 2) If it is contingent on an expected event not taking place. It can be enforced when nl happening of that event becomes impossible to perform or it does not occur at the end of time fixed for non-happening of the event 3) If the future event is the act of a living person, any conduct of that person which O prevents the occurrence of the event within a fixed time period making the event impossible. 4) If the future event is impossible in itself at the time of the contract when entered ty upon makes the contract is “void ab initio”. Wagering Contracts are void. Quasi Contracts automatically emerge out where obligations are generated si without a contract. The obligations which give rise to are expressly enacted: 1. If necessaries are supplied to a person who is unable of contracting, the supplier is entitled to claim their amount from the assets of such a person 2. r A person who is interested in the payment of amount which the other is bound to pay, ve and who therefore pays it, is entitled to be compensated by the other 3. A person who enjoys the perk of a non-gratuitous act is obligated to make compensation. ni 4. A person who discovers lost property may preserve it subject to the responsibility of a Bailee. 5. If money is compensated or goods delivered by mistake or under coercion, the U beneficiary must repay or make restoration. Quasi Contract The word ‘Quasi’ states pseudo. Hence, a quasi-contract is a pseudo-contract. ity When we speak about a valid contract, we anticipate it to have few elements like offer and acceptance, consideration, the capacity to contract, and free will. But there are other kinds of contracts as well. There are cases where the law implies a promise and imposes responsibility on one party while consulting the rights to the other even m when the basic elements of a contract are not present. These promises are not legal contracts, but the Court recognizes them as relations resembling a contract and enforces them like a contract. )A These promises/ relations are quasi contracts. These obligations can also appear due to different social connections which we will look in the following. The core maxim behind a Quasi Contract are justice, equity and good conscience. It is based on the principle that: “No man must grow rich out of another persons’ loss.” (c Let’s have a look at an example of a quasi-contract: Peter and Oliver enter into a contract under which Peter agrees to hand over a basket of fruits at Oliver’s residence and Oliver promises to give Rs 1,500 after consuming all the fruits. However, Peter Amity University Online  Legal Aspect of Business 23 erroneously delivers a basket of fruits at John’s residence instead of Oliver’s. When Notes e John gets home, he assumes that the fruit basket is a birthday gift and consumes them. Although there is no contract between Peter and John, the Court treats this as a in Quasi-contract and orders John to either return the basket of fruits or compensate Peter. Features of a Quasi Contract nl 1. It is generally a right to money and is usually (not always) to a liquated the amount of money 2. The right is not a result of an agreement but is imposed by law. O 3. The right is not available against everyone in the world but only against a specific person(s). Hence it resembles a contractual right. Sections 68 – 72 of the Indian Contract Act, 1872 detail five circumstances under ty which a quasi-contract comes into existence. Although, there exist no apparent contract between the parties and the law imposes the contractual obligation due to the peculiar circumstances. si 1. Section 68 – Necessaries Supplied to Persons who is Incapable of Contracting A person who is not capable of entering into a contract such as a lunatic or a r minor. If a person provides necessaries suited to the condition in life of such a person, then he can get reimbursement from the property/assets of the incapable person. ve Example: John is a lunatic. Peter supplies John with certain necessaries suited to his condition in life. However, John does not have the amount or sanity and is unable to repay Peter. This is termed as a Quasi contract and Peter is entitled to reimbursement from John’s property. ni However, in order to establish his claim, Peter needs to prove two things: U 1. John is a “lunatic” 2. The commodities provided were “necessary” for John at the time they were sold/ delivered. ity 2. Section 69 – Reimbursement of person paying money due by another, in payment of which he is interested If a person pays the money on someone else’s behalf which the other person is bound by law to repay back the amount, then he is entitled to reimbursement by the other person. m Peter is a zamindar. He has leased his land to John, a farmer. However, Peter is unable to pay the revenue due to the government. After sending notices and not )A receiving the payment, the government releases an advertisement for sale of the land (which is leased to John). As per the Revenue law, once the land is sold, John’s lease agreement is revoked. John does not want to let go of the land since he has worked hard on the land and it has started producing crops. In order to stop the sale, John pays the government the (c sum of money due from Peter. In this scenario, Peter is liable to repay the said amount to John. Amity University Online  24 Legal Aspect of Business 3. Section 70 – Obligation of Person enjoying the benefits of a Non-Gratuitous Act Notes