Legal Aspects of Business Lecture Notes.docx

**Business Law Semester One** **Meaning of Law** - Rules of conduct enforced by state to maintain peace and order in society - Objectives: Security And uniformity by regulating human Actions its backed by authority and power of state its enforceable against all no matter their soc...

**Business Law Semester One** **Meaning of Law** - Rules of conduct enforced by state to maintain peace and order in society - Objectives: Security And uniformity by regulating human Actions its backed by authority and power of state its enforceable against all no matter their social status. **Meaning of business law** - Business law is sometimes called mercantile law and Commercial law. - They are laws that govern the dealings between people and commercial matters. - It's of two types regulation of commercial entities which includes: - laws of partnership, company, bankruptcy - Regulation of Commercial transactions which includes laws of contract. **Why contracts are important in business?** - It is the foundation upon which the superstructure of modern business is built. - As we all are aware that in business transactions quiet often promises are made at one time and performance follows later. - In such situation if either of the parties fail to perform their promises this will create endless complications and it would be impossible to carry trade and commerce. - Hence Law of contract was enacted which laws down the legal rules relating to promises; their formation their performances and their enforceability. The Object of the act is to introduce definiteness in business in business transactions. Scheme of the act: General principles of Law of contract (Section 1 to 75) Specific kinds of contract, viz: - Contracts of Indemnity and guarantee (section 124 to 147) - Contracts of bailment and pledge (148 to 181) - Contracts of agency (sections 182 to 238) **The Indian Contract Act 1872** The Indian contract Act 1872 is the law relating to contracts in India. It came into force on September 1 1872 and is extended to the whole of India. Contract Law is a body of Law that governs enforces and interprets agreements related to an exchange of goods services properties or money. **Law of Contract** - Law of contract creates right-in-personam and not right-in-rem - Right-in-personam means right against a particular person or group of persons. - Right-in-rem Implies right against the whole world - Right against a person in right in personam and right against a property is right in rem **What is A Contract?** - A Contract is an agreement enforced by law - The word Contract is derived from the Latin word "Contractum" which means "drawn together" - It denotes the drawing together the minds of two or more persons to form a common intention giving rise to an agreements - A contract is an agreement enforceable by law **Definition of Contract** - According to Sec 2(h) of Indian Contract Act, 1872, "An agreement enforceable by law is a contract" - Contract = Agreement + Enforceability of an agreement - Now the question arises what is an agreement and what is enforceability of agreement? **What is an Agreement?** - Every promise or a set of promises forming consideration for each other is an agreement. - A proposal when accepted becomes a promise. - Thus Agreement = offer + Acceptance - Section 2(e) of Indian Contract Act States that every promise and every set of promises forming the consideration for each other, is an agreement. **Enforceability at Law** - An Agreement to become a contract must give rise to legal obligation. - The common acceptance formed and communicated between the two parties create legal relations and not merely social or domestic nature. **Essentials of a Valid Contract (Indian Contract Act, 1872)** - Intention to create legal relationship - Lawful consideration - Capacity of parties - Legal formalities - Not declared to be void - Possibility of performance - Certainty of meaning - Lawful Object - Free consent - Offer and acceptance Offer and Acceptance; - There must be a lawful offer and a lawful acceptance of the offer thus resulting in an agreement. Consensus ad idem: - For a valid agreement, there must be a complete identity of minds between the contracting parties. - In a contract both the parties must understand the subject matter at the same time and type. Free Consent: - The Contracting parties must give their consent freely. It must not be given due to coercion, undue influence, fraud, misrepresentation or mistake. Capacity of Parties (Competency): - Incompetent People: Minors, Drunkards, Lunatics, Idiots, Alien Enemy, Convicts - Capacity of parties refers to each party who is entering a contract being required by law to have mental and intellectual capacity to understand the terms of the contract and to make the decision to enter it. - An agreement by incompetent parties shall be a legal nullity. Lawful Consideration: - An agreement to be enforceable by law must be supported by consideration. - Without consideration a contract is regarded as a ***nudum pactum***. - Each of the contracting parties must give as well as get something. Moreover, the consideration must be lawful. Lawful Object: - The object of the agreement must be lawful it is considered unlawful if it is: illegal, Immoral, fraudulent, of a nature that if permitted it would defeat the provisions of any law, causes injury to the person or property of another, opposed to public policy. Should Not Be Expressly Declared as Void: - The agreement must not have been declared void by any law in force in India. The Act has itself declared void certain types of agreements such as those in restrain of marriage, trade, legal proceedings as well as wagering agreement. Intention To Create legal Relations: - There must be an intention among the parties that the agreement should be attached by legal consequences and legal obligations. - For Example: A wife withdraws a complaint against her husband under an agreement that husband will pay her allowance. Court held it as a binding contract. - Balfour v. Balfour (1919) Agreement between husband and wife: Legal principle states that an agreement between husband and wife have generally been presumed not to be intended to create legal relations, but such presumption may be rebuttable depends on the facts of each case. Balfour V. Balfour, this case involved a husband and a wife who lived in Sri Lanka and they went back to England, while they were in England the wife fell ill and was not able to return back to Sri Lanka with her husband and the husband promised to pay the wife a certain amount of money after shifting back to Ceylon. After a while the husband stop paying and the wife insisted for the payment he had promised. Judgement: The court decided that he did not have to pay as the court did not find that the wife provided any consideration. The presumption in this case is that there is no intention to create legal relationship. - Agreements between parent and child: The principle in Balfour V. Balfour has been applied to an agreement between mother and daughter in Jones V. Padavatton (1969). Mrs. Padavatton lived in Washington, and her mother lived in Trinidad. The mother was very keen for her daughter to study Law so she offered her if she would give up her post in Washington, and move to London to study law. She would provide her with an apartment and pay for her upkeep. The daughter accepted the offer. After few years they fell off and the mother wanted her possession back on her apartment. The daughter refused. Judgement: The court held that there is presumption of no intention to create legal relationship in this case as the daughter and mother are involved. - Agreements between friends: In Coward v Motor Insurance Bureau (1963), Mr. Coward was the passenger on a motorcycle which was owned and driven by his friend. They had this arrangement for a long time whereby the friend would give Mr. Coward a lift to work on the motorcycle and sometimes Mr. Coward would contribute to the price of petrol. There was an accident in which Mr. Coward was hurt and the insurance would only pay out to Mr. Coward if in fact there was a contract for the carriage for hire. Basically, if his friend took him as a paying passenger. In order to support his argument Mr. Coward mentioned that he had paid for petrol. Judgement: However, the court held that there was no enforceable contract between the friend and Mr. Coward because there was no intention to create legal relationship. Certainty of Meaning: - The terms of the agreement must be certain and unambiguous. Section 29 of the Act, \"agreements the meaning of which is not certain or capable of being made certain are void\". - For example: A agrees to sell a car to B out of his 5 cars. There is nothing whatever to show which car was intended. The agreement is void for uncertainty. Legal Formalities: - The agreement must comply with the necessary formalities as to writing, registration, stamping etc. - If any required in order to make it enforceable by law. **Classification of Contracts** - On basis of enforceability. - On the basis of mode of creation - On the basis of execution **On the Basis of Enforceability:** - *[Valid contract]*: A contract which satisfies all the legal requirements laid down in section 10 of the act is a valid Contract. Such a contract creates rights in personam and is legally enforceable. - *[Void contract]*: Section 2 (j) provides that \"a contract which ceases to be enforceable by law becomes void when it ceases to be enforceable. This makes all those contracts that are not enforceable by a court of law as void. A agrees to pay B a sum of Rs 10,000 after 5 years against a loan of Rs. 8,000, A dies of natural causes in 4 years. The contract is no longer valid and becomes void due to the non-enforceability of the agreed terms. Following are the examples of such circumstances which render A contract void: \(i) Supervening impossibility or illegality as described in Section 56. \(ii) In the case of a voidable contract when the party whose consent is not free, repudiates the contract. \(iii) A contingent contract to do or not to do something on the happening of an event becomes void when the event becomes impossible (Section 32). The contracts of insurance, indemnity, and guarantee are some examples of contingent contracts. Illustration: A contracts to pay to B Rs. 20,000 if B\'s house is burnt. - *[Voidable contract]*: According to Section 2 (i) "An Agreement which is enforceable by law at the option of one or more of the parties thereto, but at the option of other or others, is a voidable contract." - *[Unenforceable contract]*: An unenforceable contract is that which is valid and enforceable, but for certain technical defects such as want of proof, expiry of the period within which enforceable, absence of writing, registration and attestation, insufficient stamp etc., it becomes unenforceable. For Example: If a document embodying a contract is under stamped, the contract is unenforceable, but if the requisite stamp is affixed (if allowed), the contract becomes enforceable. - *[Illegal agreement]*: An Agreement which is either prohibited by law or other wise against the policy of law is an illegal agreement. Such an agreement is a nullity and is void ab initio. **On The Basis of Mode of Creation:** - *[Express Contract]*: An express contract is that which is made in writing or by the words of mouth. Example: Sale of real estate, Employment Contracts, Contract to Preform a Service - *[Implied Contact]*: An implied contract is one which arises out of acts or conduct of the parties or out of the dealings between them. For example: A takes a seat in bus. There is an implied contract that he will pay the prescribed fare for him to his destination. - *[Quasi Contract]*: Under Certain Circumstances, law itself creates legal rights and obligations against the parties. These obligations are known as quasi contracts. There is no contract or agreement between parties, they are put in the same position as if there were a contract between them. A quasi contract rests on the ground of equity that a person shall not be allowed to enrich himself unjustly at the expense of another. For example: A supplies B, a lunatic with necessaries suitable to his condition in life. A is entitled to be reimbursed from B's Property. \- If I make a payment on behalf of my house owner (Payment by an interested person). \- Responsibility of a finder of goods. **On the Basis of Execution:** - *[Executed Contract]*: When a contract has been completely performed, it is termed as executed contract, i.e., it is contract where under the terms of a contract nothing remains to be done by either party. For Example: X sells Y Rice for 200. X delivered the rice and Y made the payment for the contract. - *[Executory Contact]*: Where one or both parties to the contract have still to perform their obligations in future the contract is termed as Executory Contract. For Example: A agrees to paint a picture for B and B in consideration promises to pay A, a sum of hundred rupees. The contract is executory. Types of Executory Contract: \- Unilateral Contract: A unilateral contract is the one-sided contract in which only one party has to perform his promise or obligation to do or forebear. For example: A, a coolie puts B's Luggage in the Carriage. The Contract comes into existence as soon as the luggage is put. It is now for B to perform his obligation by paying the charges to the coolie. \- Bilateral Contract: A bilateral contract is one in which both the parties have to perform their respective promises or obligations to do or forbear. **Offer and Acceptance** It is an established principle that an agreement arises only when an offer is made by one person and is accepted by the other person. **Offer or Proposal:** - According to Section 2 (a) of the Indian Contract Act, 1872 defines a proposal as follows: *\"When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal\".* - The person making the proposal is called the promisor or the offeror. The person whom the proposal is made is called the promise or the offeree. - X says to Y, "I want to sell my car to you for Rs. 1,00,000". Here, "to sell car" is an offer or proposal. - X who has made the offer is called offeror or promisor. Y to whom the offer has been made is called the offeree or promise. **Essentials Characteristics of a Valid Offer** - The offer must be capable of creating legal relations: An offer must intend to create legal relationship among the parties. If the parties have agreed that the breach of the agreement would not confer any right on either party to go to the court of law for enforcing the agreement, it will not be a valid offer. - The offer must be certain, definite and not vague: The terms of the offer must be certain and unambiguous and not vague. If the terms of the offer are vague, no contract can be entered into because it is not clear as to what exactly the parties intended to do. - The offer must be communicated to the other party: An offer accepted without its knowledge, does not confer any legal rights on the acceptor. (Lalman Shulka Vs Gauri Dutt 1913) - The offer must be made with a view to obtaining the consent of the offeree: If a person merely makes a statement without any intention to be bound by it, then it is not a valid offer. Merely making an enquiry does not constitute an offer. - The offer must be distinguished from an answer to a question: The terms of an offer should be clear so that there is no confusion whether it is a valid offer or an answer to a question. An answer to a question cannot be taken as an offer. - Invitation to an offer is not an offer: Price lists, catalogues, display of goods in a show window, tenders' advertisements, prospectus of a company, an auctioneer\'s request for bids, etc., are instances of invitation to offer. In case of an invitation for an offer, there is no intention on the part of the person sending out the invitation to obtain the assent of the other persons to such an invitation. - The offer must be distinguished from mere statement of intention: The terms of an offer should be clear so that there is no confusion whether it is a valid offer or a mere statement of intention. Such statement or declaration merely indicates that an offer may be made or invited in future. An offer becomes an agreement when accepted. On the other hand, an invitation to offer become as an offer when the public responds to it. The main objective of making an offer is to enter into the contract, whereas the main objective of an invitation to offer is to negotiate the terms on which the contract can be made. - Special conditions attached to an offer must also be communicated: In such cases the rule is that the party shall not be bound by the conditions unless conditions printed are properly communicated - The offer may be positive or negative: An offer to do something is a positive offer. And an offer not to do something is a negative offer. - The offer may be express or implied: - The offer may be specific or general: When an offer is addressed to a specific individual or a group of individuals, called it as specific offer. When an offer is addressed to an unascertained body of individuals or to the public at large, it is said to be a general offer. - The offer should not contain a term the non-compliance of which would amount to acceptance: One cannot say while making the offer that if the offer is not accepted by a certain time, it will be presumed to have been accepted. - Statement of Price is not an offer\ Harvey Vs Facey (1893) **Different Kinds of Offers** - Express Offer: - Implied offer: - Specific offer: - General offer: - Standing or Open or Continuing offer: An offer for a continuous supply of certain goods and services in any quantity at a certain price as and when required it will be termed as a standing or open offer. Example: When X requires a large quantity of certain goods during the 24 months period and gives an advertisement inviting offer in the leading newspaper Z submitted the offer to supply those goods at a specific rate. Z\'s offer is accepted or approved. Now, Z\'s offer becomes a standing offer. Each order given by X will be an acceptance of the offer. A standing offer or continuing offer may be revoked before acceptance or before order is placed once order is placed the contract takes place, therefore after placing order offer cannot be revoked. - Counter offer: A Counter offer is rejecting the original offer and making a new offer, The new offer is the counter offer. - Cross offer: Where identical offers are made by parties in ignorance of each other, the offers are said to be cross offers. **Lapses of offer (When does an offer come to an end)** - By communication of notice of revocation by the proposer: The proposer can revoke or withdraw his offer at any time before the acceptor posts his letters of acceptance - By lapse of prescribed time: - By non-fulfillment of a condition by acceptor: - By the death or insanity of the offeror: - By counter offer: A proposal lapses if it has been rejected by the other party or a counter offer is made. The counteroffer gives the original offeror three options accept the counteroffer, reject it, or make another offer. For example, Ms. X decides to put her house on the market for 3,00,000. Mr. Y views it and makes an offer of 2,85,000 instead. Ms. X decides to make a counteroffer of 2,95,000 instead, thus putting the onus on Mr. Y to accept, reject, or counter that offer and continue negotiations again. - By subsequent illegality or destruction of subject matter: An offer lapses if it becomes illegal after it is made or which the subject matter is destroyed or substantially impaired before acceptance. - By rejection: An offer lapses if it has been rejected by the offeree. The rejection may be express i.e., by words spoken or written, or implied, Implied rejection is one; \(a) where either the offeree makes a counter offer, or \(b) where the offeree gives a conditional acceptance. **Acceptance** - An acceptance is the expression by the offeree of his willingness to be bound by the terms of the offer. - According to Section 2 (b) of the Act, \"When the person to whom the offer is made signifies his assent thereto, the proposal Is said to be accepted. A proposal when accepted becomes a promise\". **Essential And Legal Rules for A Valid Acceptance** - The acceptance must be communicated: - Acceptance must be absolute or unqualified: - Acceptance may be express or implied: - The acceptance must be given in some usual and reasonable manner: - The acceptance must be given before the lapse of offer: - The acceptance cannot be implied from silence: - Acceptance means acceptance of all the terms of the offer: - If acceptance has been given conditional there will be no contract: **When is Communication Complete \[Sec. 4\]** - Communication of Offer The Communication of an offer is complete when it comes to the knowledge of the person to whom it is made. - Communication of Acceptance Communication of an acceptance is complete: \- As against the proposer, when it is put in course of transmission to him so as to be out of the power of the acceptor to withdraw the same; and \- As against the acceptor, when it comes to the knowledge of the proposer. - Communication of Revocation Revocation Means "taking back" or "withdrawal". It may be a revocation of offer and acceptance. The communication of revocation is complete. \- As against the person who makes it, when it is put into a course of transmission to the person to whom it is made, so as to be out of the power of the person who makes it; and \- As against the person to whom it is made, when it comes to his knowledge. **Consideration** - The Consideration is one of the essential elements of a valid contract. - The term 'Consideration' may be defined as the price of the promise. - This term is used in the sense of quid pro quo (i.e. something in return) - Accordingly, an agreement which is not supported by consideration is a nudum pactum (a nude or bare agreement). **Definition:** - Section 2 (d) of the Act defines consideration as under: \"When at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises or to do or abstain from doing something, such act or abstinence or promise is called a consideration for the promise\".