MMS LEGAL ASPECTS OF BUSINESS

UNIT-1

INDIAN CONTRACT ACT -1872

Books for referenceM.C.Kuchhal,Bulchandani, Avtar Singh

WHAT IS A CONTRACT?
Section 2(h) of the Indian Contract act, 1872 defines a contract as an agreement enforceable by law. Contract = An agreement + Enforceability of an agreement Thus an agreement which can be enforced in the court of law is a contract.

Section 2(e) defines agreement as every promise and every set of promises forming consideration for each other.

ESSENTIALS OF A VALID CONTRACT

According to sec 10 of the Indian Contract Act 1872, Every agreement is a contract if it is made by

the free consent of parties, competent to contract for a lawful consideration and with lawful consideration and with lawful object and not hereby expressly declared to be void

Following are the essentials of a valid contract: 1) Agreement 2) Intention to create legal relationship 3) Free Consent 4) Parties competent to contract 5) Lawful Consideration 6) Lawful Object 7) Agreement not expressly declared void

8)Legal Formalities 9)Certainty 10)Possibility Of Performance

CASES A invites B to a dinner .B accepts the invitation . A made elaborate arrangement but B failed to turn up. Can A sue B for the loss he has suffered? M agrees to pay N Rs. 100 and in consideration N agrees to write for him 100 pages within 5 minutes. Is it a valid contract.

CLASSIFICATION OF CONTRACTS A. Classification on the basis of validity: 1. Valid Contracts 2. Void Contracts 3. Voidable Contracts 4. Unenforceable Contracts 5. Illegal Contracts

B.

1.
2. 3. C. 1.

2.
3. 4.

Classification on the basis of formation: Express Contracts Implied Contracts Quasi Contracts Classification On the basis of Performance: Executed Contracts Executory Contracts Unilateral Contracts Bilateral Contracts

OFFER AND ACCEPTANCE

A contract is legally binding agreement. This agreement results when one person, the offeror or the promisor , makes a proposal or offer and the person to whom the offer is made, the offeree or promisee, accepts it. For an agreement to arise there must be two parties i.e. The offeror or the Promisor & the offeree or the Promisee. According to section 2(a) of the Indian Contract Act 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.

How to make an offer?

An offer may either be an : (a) Express Offer (b)Implied offer To whom an offer is made? An offer may be General offer or Specific offer. Essentials of Valid offer: 1.The offer must disclose the intention to create legal relationship 2.An offer must be certain and definite.

3.An offer must be properly communicated. 4.An offer may be general or specific. 5.An offer may Conditional. 6.An offer must be made with view to obtaining the assent of the other party

LAPSE AND REVOCATION OF OFFER

An offer lapses and becomes invalid in the following circumstances: 1.An offer lapses after stipulated or reasonable time 2.An offer lapses by not being accepted in the mode prescribed. 3.An offer lapses by rejection 4.An offer lapses by the death or insanity of the offeror or the offeree before acceptance.

5.Revocation by non fulfillment of a condition 6.An offer lapses by subsequent illegality or destruction of subject matter.

ACCEPTANCE
A contract emerges from the acceptance of an offer. The Indian Contract act, 1872 defines acceptance as follows: When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted Thus the acceptance is the act of giving consent to the proposal.

ESSENTIALS OF VALID ACCEPTANCE

1. 2. 3. 4.

5. 6. 7.

Acceptance must be absolute and unqualified It must be Communicated. It must be according to the mode prescribed It must be given within the time prescribed or within reasonable time. It must be in response to offer. It must be made before the offer lapses It must be given by the person to whom the offer is made.

CASES
1.Harish says in conversation to Suresh that he will give Rs. 10,000 to a person whosoever marries his daughter .Alok marries Harishs daughter and files a suit to recover Rs. 10,000. Will he succeed. 2.P sold his business to Q without disclosing this to his customers. M,an old customer sent an order for goods to P by name.Q,new owner, executed the order. Is M bound to accept the goods?

CAPACITY OF CONTRACT
Who are Competent To Contract? Section 11 provides that Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject Thus incapacity to contract may arise from : (i)Minority (ii)Mental incompetence, and (iii)Status

I. MINORITY: According to section 3 of the Indian majority Act, 1875, a minor is a person who has not completed 18 years of age Indian Contract Act 1872 has given privileged position to a minor. The law regarding minors contracts / agreements can be summed up as follows:

1.A contract with or by minor is void and a minor , therefore, cannot bind himself by a contract.
In the leading case of Mohori Bibi v/s Dharmo Das Ghosh, a minor executed a mortgage for Rs. 20000 and received Rs. 8000 from the mortgagee. The mortgagee filed a suit for the recovery of his mortgagee money and for the sale of the property in case of default. The Privy Council held that an agreement by a minor was absolutely void as against him and therefore the mortgagee could not recover the mortgage money nor could he have the minors property sold under his mortgage.

2.A minor can be a promisee or beneficiary. 3.Minors agreement can not be ratified by him on attaining the age of majority. 4.If a minor has received any benefit under a void contract , he cannot be asked to refund the same. 5.No rule of Estoppel against a minor 6.Specific Performance of a minors contract.

7.Minor cannot be a partner in a partnership firm. 8.Minors estate is liable to a person who supplies necessaries of life to a minor. 9.Minors parents are not liable. 10.Minor can be an agent.

II. Persons Of Unsound Mind An agreement entered by a person of unsound mind is absolutely void and inoperative as against him. a. Contracts by lunatics b. Contracts by drunkards III.Disqualified PersonsPersons disqualified by law to contract area. Alien enemies- an alien living in India can enter into contracts with citizens of India during peace time only, and that too subject to any restrictions imposed by the govt. in that

b.Foreign Sovereigns and ambassadorsc.Convict-A convict is one who is found guilty and is imprisoned. d.Insolvent

CASE
1.A, an infant, obtains a loan from B . Can a asked to repay the money? 2.A minor fraudulently represented toa moneylender that he was of full age, and obtained a loan of Rs, 500 . Has the moneylender any right of action against the minor for the money lent, or for damages for fraudulent misrepresentation. 3.A, an infant , borrows Rs 2000 from B and executes a promissory note for the amount in favour of B .

On his attaining majority , the minor executes another promissory note in lieu of the first which is then cancelled. Is the second promissory note valid?

FREE CONSENT
What is Free consent ?
Sec 13 says that When two or more persons agree upon the same thing in the same sense, they are said to consent. Free Consent defined u/sec 14: Consent is said to be free when it is not caused by(a) Coercion (b) Undue Influence (c) Fraud (d) Misrepresentation (e) Mistake

For a contract to be valid it is not only necessary that parties Consent but also that they consent freely. When there is a consent , but not free Consent the contract is voidable at the option of the party whose consent was not free.

WHEN IS A CONSENT NOT SAID TO BE FREE?

Consent is not said to be free when it is induced by,

Coercion: (Sec 15) Section 15 of Indian Contract Act defines Coercion as Coercion is the committing or threatening 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 whatever, with the intention of causing any person to enter into an agreement.

For Example:
A threatens to kill B (Cs) son if C does not let out his house to A . The agreement is caused by coercion. (2) X beats Y and compels him to sell his car for Rs.75000. Here Ys consent has been obtained by coercion because beating someone is an offence under the Indian Penal Code. Any act will amount to coercion if the following essentials are fulfilled: 1. There must be clear ulterance of threat. 2. The threat should commit an act forbidden by the IPC. 3. It must be uttered with the intention of causing the other party to enter into an agreement.
(1)

UNDUE INFLUENCE (SEC 16)

Undue Influence consists in the improper exercise of a power over the mind of one of the contracting parties by the other. Section 16 defines Undue Influence as, a contract is said to be induced by undue influence where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other.

For Example:
A having advanced money to his son B during his minority, upon B coming of age ,obtains by misuse of parental influence , a bond from B for greater amount than the sum due in respect of the advance. A employs undue influence. A person is deemed to be in position to dominate the will of another (a) Where he holds real or apparent authority over the other, or where he stands in a fiduciary relation (relation of trust & confidence) to the other; for ex. Such master and servant, between father and son.

(b) Where he makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness or mental or bodily distress. For ex. Such relation exists between Doctor and his Patient.

FRAUD(SEC 17)
Fraud means and includes any of the following acts committed by a party to a contract with intent to deceive another party thereto or his agent ; or to induce him to enter into an contract: 1.The suggestion , as a fact, of that which is not true by one who does not believe it to be true; 2.The active concealment of a fact by one having knowledge or belief of the fact ; 3.A promise made without any intention of performing it; 4.Any other act fitted to deceive; 5.Any such act or omission as the specifically declares to be fraudulent

MISREPRESENTATION(SEC 18)
Misrepresentation is incorrect or false statement but the falsity or inaccuracy is not due to any desire to deceive or defraud the other party. It is innocent. The party making it believes it to be true. Section 18 of the contract act classify cases of misrepresentation into three groups: (a) Unwarranted Assertion-The positive assertion is a manner not warranted by the information of the person making it, of what which is not true though he believes it to be true.

(b) Breach of duty-any breach of duty which without an intent to deceive , gains an advantage to the persons committing it, by misleading another to his prejudice. (c) Innocent mistake-Causing , however , innocently a party to an agreement to make a mistake as to the substance of a thing which is the subject of the agreement.

MISTAKE (20)
Mistake is a misconception or error. Mistake means erroneous belief or wrong motion concerning something. Section 20 of the Indian Contract act 1872, defines Mistake as follows: Where both parties to an agreement are under a mistake as to a matter of fact essential to the agreement , the agreement is void. Thus it means that parties entering into the contract s should not be under any error and they must agree on the same thing in the same sense.

CONSIDERATION
Consideration means something in return . Section 2(d)of the Indian Contract Act 1872 defines consideration as follows: when at the desire of the promisor, the promisee or any other person has done or abstained from doing, something , such act or abstinence or promise is called a consideration for the promise.

In simplest terms , Consideration is what a promisor demands as the price for his promise. For exampleA agrees to sell his house to B for Rs. 10,000. Here Bs promise to pay the sum of Rs. 10,000 is Consideration for As promise to sell the house ;and As promise to sell the house is the consideration for Bs promise to pay Rs. 10000.

ESSENTIALS/ LEGAL RULES OF VALID CONSIDERATION

The following are the legal rules for a valid Consideration : 1) Consideration must move at the desire of the promisor. 2) Consideration may move from the promisee or any other person. 3) Consideration need not be adequate. 4) Consideration must be real and adequate. 5) Consideration must be legal.

EXCEPTIONS TO THE RULENO CONSIDERATION NO CONTRACT Section 25 of the Indian contract Act 1872 specifically states that subject to certain exceptions , agreements without consideration are void. The exception are as follows: (1)Agreement made on account of natural love and affection. (2)Agreement to pay for past voluntary services.

(3)Agreement to pay a time barred debt. (4)Completed gift (5)It is Expressed in writing.

An agreement will not be enforceable if its object or the consideration is unlawful. According to Sec 23,of the act , the consideration and the object of an agreement are unlawful in the following cases: 1.If it is forbidden by law. 2.If it is of such a nature that if permitted , it would defeat the provisions of any law. 3.If it is fraudulent.

LEGALITY OF OBJECT/LAWFUL OBJECT

4.If it involves or implies injury to the person or property of another. 5.If the court regards it as immoral or opposed to public policy.

DISCHARGE OF CONTRACT
When the rights and obligations arising out of a contract are extinguished, the contract is said to be discharged or terminated. A contract may be discharged in any of the following ways:

Discharge Of Contract

By performance By Mutual Consent or Agreement

By lapse of time By subsequent By operation of or supervening law impossibility By breach of contract

Alteration Rescission Novation Remission

DETAILS
1.By Performance -if both parties to the contract have performed what they have agreed to do the contract , the contract is discharged. 2.By Mutual Consent or Agreement As a contract is created by means of an agreement , Following are the methods to discharge a contract by mutual consenta. Novation- Novation occurs when a new contract is substituted for an existing contract, either between the same parties or

b. Alteration- Alteration of a contract means change in one or more of the material terms of a contract, the original contract is discharged by alteration . c.Rescission A contract may be discharged, before the date of performance by agreement between the parties to the effect that it shall no longer bind them . d.Remission- remission may be defined as the acceptance of a lesser sum than what was contracted for or a lesser fulfillment of the promise made.

3.By subsequent or supervening impossibility- When the performance of a contract becomes subsequently impossible , the contract becomes void. Causes of supervening impossibility are :
Destruction

of the object necessary for the performance of the contract Change of law Death or personal incapacity

Out break of war

4.By Lapse of time-where time is of essence in a contract, if a contract is not performed at the fixed time, the contract comes to an end. 5.By operation of law- A contract terminates by operation of law in the following case: i)Death ii)Insolvency iii)Merger 6.By breach of contract- this is also a method of discharge of contract, when a party to the contract has refused to perform or disabled himself from performing his promise breach also brings to an end the obligations created by a contract on the part of each of the parties.

REMEDIES FOR BREACH OF CONTRACT When ever there is breach of a contract , the injured party becomes entitled to any one or more of the following remedies against the guilty party : 1.Rescission of the contract 2.Suit for damages 3.Suit upon quantum meruit 4.Suit for specific performance of the contract 5.Suit for an injunction

CONTRACT OF INDEMNITY
A contract of indemnity is a contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself , or by the conduct of any other person. A person who promises to make good the loss, i.e. the promisor is called the indemnifier and the person whose loss is to be made good i.e. the promisee is called the indemnity- holder. Essentials: 1.Contract of indemnity must contain all the

RIGHTS OF INDEMNITY HOLDER 1. An indemnity holder when sued is entitled to recover from the indemnifier all damages which he may be compelled to pay . 2. Costs 3. All sums 4. Suit for Specific performance

CONTRACT OF GUARANTEE
A contract of guarantee is a contract to perform the promise , or discharge the liability of a third person in case of his default. The person who gives the guarantee is called the surety, the person in respect of whose default the guarantee is given is called the principal debtor and the person to whom the guarantee is given is called the creditor. Essentials of contract of Guarantee1.There must be debt existing , which should be recoverable

2. Existence of three parties in a contract of guarantee 3. There must be distinct promise oral or written 4. There should be some consideration 5.The contract should have all the essentials of a valid contract.

CONTRACT OF INDEMNITY
1.Parties: there are two parties-indemnifier and indemnity holder. 2.Liability: liability of the indemnifier is primary. 3.Contingency: the liability of indemnifier arises only on the happening of a contingency 4.Contract: There is only one contract between the indemnifier and the indemnified

CONTRACT OF GUARANTEE
There are three partiescreditor, principal debtor, and surety. The liability of the surety is secondary. There is an existing debt

There are three contracts

DIFFERENCE BETWEEN

CONTRACT OF INDEMNITY

CONTRACT OF GUARANTEE

5.Object: the The contract provides indemnity contract is surety to the for reimbursement of creditor. loss. 6.Right to sue: indemnifier cannot Surety can sue the sue a third party for principal debtor the loss suffered.

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