LEGAL ASPECTS OF BUSINESS

UNIT - I
What is Law?

Law is the rules and

regulations, enacted by state to
govern and regulate the
conduct of the people of
large.
Why should we be aware
of law?
Ignorance to the law is not an
excuse.
Example: If X is caught
travelling in a train without
ticket, he cannot plead that he
was not aware of the rule.
LAW - DEFINITION

Includes all the rules and

principles, which regulate our
relations with other individuals
and with the state.
Law is the body of principles
recognized and applied by the
state in the administration of
justice.
What is CONTRACT?

Contract
sec-2 (h): An
Agreement Enforceable by law.

Contract = Agreement +
Enforceable by Law
Agreement

Sec 2 (e) : Every Promise or set of promises

forming an consideration for each other is an
agreement.

Agreement = Promise+
Consideration
Promise

Sec 2 (b) When the person to whom the

proposal is made, signifies his assent, there to
Accepts the proposal. Acceptance of proposal is
a promise.

Promise = Proposal +Acceptance

Example for promise

X offers to sell his car for Rs

1Lakh to Y. Y accepts this offer.
This offer after acceptance
becomes promise and this
promise is treated as an
agreement between X and Y.
CONTRACT ?

Section 2 (h) of the Indian contract

Act 1872, An agreement
enforceable by law is a contract.
In other words, an agreement which
can be enforced in a court of law is
known as a contract.
According to Pollock, Every
agreement and promise
enforceable by law is a contract.
 On analyzing this definition of contact, it appears
that a contract must have the following two
elements:
1 An agreement and
2. Enforceability by Law.
So

Contract = Agreement + Enforceability by Law

AGREEMENT

Every promise and every set of promises , forming

consideration for each other.
AGREEMENT = OFFER + ACCEPTANCE
CONSENSUS AD IDEM

This means that the parties to the

agreement must have agreed
about the subject matter of the
agreement in the same sense
and at the same time.
OBLIGATION

It is a legal tie which imposes

upon a definite person or
persons the necessity of doing
or abstaining from doing a
definite act or acts.
ESSENTIAL ELEMENTS OF
VALID CONTRACT
Agreement-Offer and Acceptance
Intention to create legal relation
Lawful consideration
Capacity of parties
Free and genuine consent
Lawful object
Writing and registration
Certainty

Possibility of Performance
Agreement not declared void.
1.Agreement-Offer and Acceptance

To constitute a contract there must be an

agreement and for an agreement, there must
be a lawful offer and a lawful acceptance of the
offer.
2.Intention to create
Legal Relations
There must be a intention among the parties
that the agreement should be attached by legal
consequences and create legal obligations.
Agreement to social or domestic nature do not
contemplate legal relations and such they do
not give rise to a contract.
Example: X invited Y to a dinner Y accepted the
invitation. It is a social agreement. If X fails to
serve dinner to Y, Y cannot go the court of law
for enforcing the agreement.
3.Lawful Consideration

Consideration means something in return.

It has been defined as the price paid by one
party for the promise of the other.
An agreement is legally enforceable only when
each of the parties to it gives something and
gets something.
Example:
X agrees to sell his car to Y for Rs 1,00,000.Here
Ys Promise to pay Rs1,00,000 is the
consideration for Xs promise to sell the car and
Xs promise to sell the car is the consideration
for Ys promise to pay Rs 1,00,000.
4. Capacity of Parties

The parties to an agreement must be competent to

contract. In other words, they must be capable of
entering into a contract.
According to section 11 of the Indian Contract Act,1872
specifies that every person is competent to contract
provided:
(1) Is of the age of majority
(2)Who is sound mind
(3)Is not disqualified from contracting by any law.
In other words the following persons are not competent to
contract:
A minor, A person of unsound mine and a person
disqualified from contracting by any law.
5. Free and Genuine
Consent
There must be free consent of the parties to the
contract.
According to section 14, Consent is said to be
free when it is not caused by :
(1)Coercion, (ii)undue influence, (iii)Fraud (iv)
Misrepresentation or (v) Mistake.
Example:X threatens to kill Y if he does not sell
his house to X. in this case, Ys consent has
been obtained by coercion and therefore, it
cannot be regarded as free.
6.Lawful Object (Section
23)
The object of an agreement must be lawful,
According to Section 23 of the Indian Contract
Act 1872, the object is considered lawful
unless it if forbidden by law or is fraudulent or
involves or implies injury to the person or
property of another or is immoral or is opposed
to public policy.
Example : X lets a flat on hire to Y a illegal
trader, knowing that it would be used for
immoral purposes. The agreement is void
because its object is for immoral purposes.
7. Writing and
Registration
According to the Indian contract
Act, a contract may be oral or in
writing. But in certain special
cases it lays down that the
agreement, to be valid, must be
writing or/and registered.
8.Possibility of
Performance
The terms of the agreement must be such as are
capable of performance. According to section 56, an
agreement to do an impossible act is void.

Example: X agrees to discover treasure by magic and

Y agrees to pay Rs 1000 to X. This agreement is void
because it is an agreement to do an impossible act.
9. Agreement not
declared void
Void means (Completely empty)
void means not valid or legally binding.
The agreement must be one, which the law
declares to either illegal or void.
A Void agreement is one, which is without any
legal effects.
Illegal agreements is an agreement expressly or
impliedly prohibited by law.
Example : Agreement is restraint of trade,
marriage.
CLASSIFICATION OF
CONTRACTS

Classification according to
validity
Classification according to
formation
Classification according to
performance
CLASSIFICATION
ACCORDING TO VALIDITY
Valid contract
Void contract
Voidable contract
Illegal agreement
Unenforceable agreement.
 Valid contract .all the essential elements of a valid
of a contract.
Void contract:- An agreement to carry out an illegal
act is an example of a void agreement.
According to section 2(j) defines a void contract as
a contract which ceases to be enforceable by law
becomes void when it ceases to be enforceable.
For Example, a contract between drug dealers and
buyers is a void contract simply because the terms
of the contract are illegal. Insucha case, neither
party can go to court to enforce the contract.
 3. Voidable Contract- A s per section 2(i), an
agreement which is enforceable by law at the
option of one or more the parties but not at the
option of the other or others is a voidable
contract.
Example: A contracts brought about as a result
of coercion, undueinflunece would be voidable
at the option f the person whose consent was
caused by any one of these factors.
 4 Illegal agreement- it is contract which the law
forbids to be made. The court will not enforce
such a contract but also the connected
contracts.
Example: Contract to commit crime, contract
that is immoral or opposed to public policy are
illegal in nature.
5. Unenforceable Agreement- where a contract is a
good in substance but because of some technical
defect i.e., absence in writing.
CLASSIFICATION
ACCORDING TO FORMATION
Express contract
Implied contract
Quasi-contract
1. Express Contract

Express contract is one which is made by words

spoken or written.
Example: X says to Y will you buy my car for Rs,
1,00,000. It is an express contract made orally.
X writes a letter to Y, I offer to sell for rs
1,00,000 to you. Y send a letter to X, Iam
ready to buy your car for 1,00,000.. It is an
express contract made in writing.
2. Implied Contract.

An implied contract is one which is made

otherwise than by words spoken or written. It is
inferred from the conduct of a person or the
circumstances of the particular case.
Example: A transport company runs buses on
different routes to carry passengers. This is an
implied offer by transport company. X hoards
the bus. This is an implied acceptance by X.
Now there is an implied contract and X is bound
to pay the prescribed fare.
3. Quasi Contract

The term quasi contract would literally mean semi-

contract.
A quasi contract is not a contract at all because one
or the other essentials for the formation of a
contract are absent.
Quasi contract are strictly not contracts as there is
no intention of parties to enter into a contract.
It is legal obligation which is imposed on a party
who is required to perform it.
Example: Finder of lost goods- X a guest found a
diamond ring at a birthday party of Y. X told Y and
other guests about it. He has performed his duty to
find the owner.
CLASSIFICATION ACCORDING
TO PERFORMANCE

Executed contract
Executory contract
Unilateral or one sided contract
Bilateral contract
1. Executed Contract

It is a contract where both the

parties to the contract have
performed their respective
obligations under the contract.
Example: X offers to sell his car to Y for Rs
1,00,000. Y accepts Xs offer, X delivers the car
to Y and Y pays 1,00,000 to X. It is an executed
contract.
2. Executory Contract

Itis a contract where both the

parties to the contract have still to
perform their respective obligations.
Example : X offers to sell his car to
Y for Rs 1,00,000 . Y accepts Xs
offer. If the car has not yet been
delivered by X and the price has not
yet been paid by Y, it is an
executory contract.
3. Unilateral Contract

Anunilateral contract is one sided

contract in which only one party
has to perform his promise or
obligation to do or forebear.
Example: A makes payment for
bus fare for his journey from
Chennai to Vaniyambadi. He has
performed his promise. It is now
for the transport company to
perform the promise.
4. Bilateral Contract

A bilateral contract is one in which both the

parties have to perform their respective
promises or obligations to do or forebear.
Example: For example, a person offers their
home for sale, and a buyer agrees to pay
$150,000 to purchase the home. In this bilateral
contract, each party is required to do
something: the buyer must pay the sales price,
and the seller must transfer ownership of the
home to the buyer.
Formation of Contract.

For the formation of a contract the process of

proposal or offer by one party and the
acceptance thereof by the other necessary.
This generally involves the process of
negotiation where the parties apply their minds
make offer and acceptance and create a
contract.
Essentials for formation
of contract
1. Agreement. Agreement = offer +Acceptance.
2. Enforceability by Law: An agreement is said
to be enforceable by if it creates some legal
obligation. In other words, the parties to an
agreement must be bound to perform their
promises and in case of default by either of
them must intend to sue. Example: domestic or
social agreements do not create legal relations.
3. Consideration: Something in return.
Performance of Contract-
Section 37
Meaning :The term performance of contract
means fulfillment of respective obligations
created under the contract by both the
promisor and the promise.
When a contract is duly performed by both the
parties, the contract comes to a happy ending
and nothing more remains.
Performance by all the parties of the respective
obligations is the normal and natural mode of
discharging or terminating the contract.
Who may perform a
contract?
1. Promisor Himself: if there is something in the
contract to show that it was the intention of the
parties that the promise should be performed by
the promisor himself, such promise must be
performed by the promisor. (section 40)
Example: X promises to paint a picture for Y. The
promise must be performed by X himself.
2. Agent: Where personal consideration is not the
foundation of a contract, the promisor or his
representative may employ a competent person
to perform it (section .40).
3. Representatives: A contract which involves the
use of personal skill or is founded on personal
consideration comes to an end on the death of the
promisor. A s regards any other contract the legal
representative of the deceased promisor are
bound to perform it unless a contrary intention
appears from the contract (Section 37, para 2).
4. Third Person: When a promise accepts
performance of the promise from a third person,
he cannot afterwards enforce it against the
promisor. That is performance by a stranger ,
accepted by the promise, produces the results of
discharging the promisor.
5. Joint Promisors: When two or more persons
have made a joint promise, then unless a contrary
intention appears from the contract, all such
persons jointly fulfill the promise. If any of them
dies, his legal representatives must, jointly with
the surviving promisors, fulfil the promise.
Discharge of Contract

Discharge of contract means

termination of the contractual
relationship between the parties.

A contract is said to be discharged

when it ceases to operate, i.e., when
the rights and obligations created by it
comes to an end.
Modes of Discharge of a
Contract
1. By Performance

I t takes place when the parties to the contract

fulfil their obligations arising under the contract
within the time and in the manner prescribed.
Discharge of Performance may be:
1.Actual Performance: it is said to have taken
place, when each of the parties has done what he
had agreed to do under the agreement.
2. Attempted Performance (Section 38)When the
promisor offers to perform his obligation, but the
promise refuses to accept the performance, it
amount to attempted performance or tender.
2.By Mutual Agreement

Since a contract is created by mutual

agreement, it can also be discharged by mutual
agreement.
A contract can be discharged by mutual
agreement in any of the following ways and
hence no need to perform the original contract:
(a) Express Consent: the express consent is the
consent expressed in word, written or oral.
(b)Implied Consent: The consent expressed
otherwise then in words, written or oral, but by
the conduct of the parties it includes the
following types:
(i) Novation section 62: (Substitution)- the Parties to a
contract may substitute a new contract for the old. If
they do so, it will be a case of novation.

(ii) Rescission section 62:(Cancellation)- 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.
Example: X promises Y to sell and deliver 100 Bales of
cotton on 1st October at his godown and Y promises to pay
for goods on 1 st Novemeber. X does not supply the goods.
Y may rescind the contract.
 Iii) Alteration section 62- Alternation means a
change in the terms of contract with mutual
consent of the parties. Alteration discharges the
original contract and creates a new contract.
However, parties to the new contract must not
change.
Example: X promises to sell and deliver of
cotton on 1 st October and Y promises to pay
goods on 1Sst November. X and Y mutually
decides that all the goods shall be delivered in
five equal installements at Zs godown.
 Iv) Remission (section 63): It means
acceptance by the promise of a lessor fulfilment
of the promise made.
Example- A owes B Rs 5000. A pays to B and B
accepts in satisfaction on the whole debt, rs
2000 paid at the time an place at which rs
5000, were payable. The whole debt is
discharged.
 V) Waiver : It means the deliberate
abandonment or giving up of a right which a
party is entitled to under a contract. Thus it
amounts to releasing a person of certain legal
obligation under a contract.
Example: Xpromises to supply goods to Y.
Subsequently. Y exemptes X from carrying out
the promise. This amounts to waiving the right
of performance on the part of Y.
3. Discharge by Impossibility of
Performance (Section 56)

Impossibility of performance may be:

1)Initial Impossibility: when the parties agree upon
doing of something which is obviously impossible in
itself the agreement would be void.. The fact of
impossibility may be and may not be known to the
parties.
(a) If known to the parties- it is void
(b) If unknown to the parties- both the promisor
and promise are ignorant of the impossibility of
performace, the contract is void
(c) If known to the promisor only- the promise is
entitled to claim compensation
 2)Supervening Impossibility: the cases covered
by supervening impossibilities are:
a) Destruction of subject matter
b) Death or incapacity personal services
c) Deceleration/ break of war
d) Change of law
 Example: X agreed to sell his crop of wheat. The
entire crop was destroyed by fire though no
fault of the party. The contract was discharged.
Example:X contract to take in cargo for Y at a
foreign port. Xs government afterwards
declares war against the country in which the
port is situated. The contract becomes void
when the was is declared.
X agreed to sing on a specified day. X fell
seriously ill and could not perform on that day.
The contract was discharged.
4. Discharge by Lapse of
Time
A contract should be performed within a
specified period as prescribed by the limitation
Act, 1963.
If it is not performed and if no action is taken by
the promising within the specified period of
limitation, he is deprived of remedy of law.
5.Discharge by Operation
of Law
A contract may be discharge independently of
the wishes of the parties i.e., by operation of
law. This includes discharge:
BY death
By insolvency
By unauthorized material alteration
By the identity of promisor and promise.
6. Discharge by Breach
of Contract
Breach -
A Contract is said to be discharged by breach of
contract if any party to the contract refuses or
fails to perform his part of the contract or by his
act makes it impossible to perform his
obligation under the contract.
A breach of contract may occurs in following
two ways:
1. Anticipatory Breach of contract.
2. Actual breach of contract
Breach of Contract

Insimple words, a breach of

contract arises when one of the
parties to the contract, denies
to perform the acts or to fulfil
the obligations laid upon him
under the contract.
Types of Breach of
Contract
Anticipatory Breach
(Section 39)
Anticipatory breach of contract occurs when the
party declares his intention of not performing the
contract before the performance is due.it may take
place in two ways:
1) expressly by words spoken or written: here the
party to the contract communicates to the other
party, before the due date of performance his
intention not to perform it.
Example:
A contract with B to supply 100 bags of what for Rs
60,000 on 1 st march . On 15th February A informs B
that he will not be able to supply the wheat. There is
express rejection of the contract.
2) Impliedly by the conduct of one of the parties:
Here the party by is own voluntary act disables
himself from performing the contract. For example
A agrees to marry B but before the agreed date of
marriage she marries C. it is the anticipatory
breach of contract brought about by the conduct
of one of the parties.
 1) on due date of performance: if any party to
contract refuses or fails to perform his part of
the contract at the time fixed for performance,
it is called an actual breach of contract on due
date of performance.
Example:X agreed to sell to Y 10 tonne of wheat
@ rs 8000 per tonne to be delivered on 20th
October. On 20th October, X refused to deliver
the goods. It is an actual breach of contract on
due date of performance.
2) During the course of performance: if any party
has performed a part of the contract and then
refuses or fails to perform the remaining part of
the contract, it is called an actual breach of
contract during the course of performance.
Example: X agreed to sell to Y 10 tonne of what @
rs 8000 per tonne on 20th October. On 20th
October, X delivered 5 tonne and refused to
deliver remaining 5 tonne. It is an actual breach of
contract during the course of performance.
Remedies for Breach of
Contract
A remedy is the course of action
available to an aggrieved party
(i.e the party not at default) for
the enforcement of a right
under a contract.
Remedies available to an
aggrieved party.
1. Rescission of contract
section 39
Rescission means cancellation.
Rescission means a right not to perform
obligation.
In case of breach of contract, the promisee may
put an end to the contract. In such case the
aggrieved party is discharged from all the
obligations under the contract and is entitled to
claim compensation for the damage which he
has sustained because of the non-performance
of the contract.
 Example: X agrees to supply 10 tons of sugar to
Y on 20th October. Y promises to pay for the
goods on its receipt. X does not supply the
goods on the due date. Here, Y is discharged
from the liability of paying the price, Y is
entitles to rescind the contract and to claim
compensation for the damages which he has
sustained because of non-supply of goods on
the due date.
2. Suit up on Quantum
Meruit
Quantum meruit means "what one has earned
or according the quantity of work done.
When a person has begun the work and before
he could complete it, the other party terminates
the contract or does something, which makes it
impossible for the other party to complete the
contract, he can claim for the work done the
contract.
 Example: A, a singer, contract with B, the
manager of a theatre, to sing at his theatre for
two nights every week during the next two
months, and B engages to pay her Rs 1000 for
each nights performance. On the sixth night, A
willfully absents herself from the theatre and B,
in consequence, rescinds the contract must pay
A for the five nights on which she had sung.
3. Suit for specific
Performance
Where the damages are not an adequate remedy
in the case of breach of contract, the court may
in its discretion on a suit for specific performance
direct in party in breach, to carry out his promise
according to the terms of the contract.
Specific performance will not be granted, where:
i) Damages are an adequate remedy
ii) The contract is not certain
iii) The contract is in its nature revocable
iv) The contract is of a personal nature, e.g.,
Contract to marry
4. Suit for Injunction

It means demanding Courts stay order.

Injunction means an order of the court which
prohibits a person to do a particular act.
Where a party to a contract does something
which he promised not to do, the court may
issue an order prohibiting him from doing so.
Example: W agreed to sing at L S theater only
during the contract period. During the contract
period, W made contract with Z to sing at
another theater and refused to perform the
contract with L. It was held that W could be
restrained by Injunction from singing for Z.
5. Suit for Damages

Damages are monetary compensation allowed

to the injured party for the loss or injury
suffered by him as a result of the breach of
contract.
The fundamental principal underlying damages
is not punishment but compensation.
By awarding damages the court aims to put the
injured party into the position in which he would
have been.