LEGAL ASPECTS

OF BUSINESS

CC 30102 - 10/07/2023

Course coordinator : Amitava Banerjee

IICA -MCA assessed eligible Independent Director
FCS, LLB, M. Com, B. Com, Dip in Business Laws (NUJS, Kolkata)
Former Consultant, NFCG (PPP by MCA, Govt of India)
Flashback
 The terms ‘proposal’ and ‘offer’ are used interchangeably and defined in Section 2(a) of
the Indian Contract Act. Acceptance by the promisee must be absolute and unqualified. It
is also called the mirror-image rule.

 In case any change is made, it does not remain an offer. It becomes a counter-offer.

 When contracts are negotiated face-to-face or through almost instantaneous digital

means there is hardly any problem. This section is relevant in case the parties are at
different places and communication has to be made through slower means such as the
postal service.

 Consideration can be either, a benefit moving from a party, or a detriment or obligation

taken up by the other party as a part of the agreement.

 Abhay is in the business of making fake medicines. Mahim runs a shop and sells them.
Mahim made an advance payment of 50,000 for a consignment. He was to pay the
remaining 20,000 later. Soon after Mahim received the goods, a raid was conducted by
the police. Mahim is now refusing to pay the remaining 20,000 to Abhay, while Abhay
claims that there was a contract between the parties and that he must get his
LBSIM-DELHI Tuesday 17 Decembe
consideration.
Capacity to contract- Minors
 Every person who has attained the age of majority, who is of sound mind and
who is not disqualified from contracting by any law to which he is subject is
competent to contract [Section 11].

 However, in the following two cases, a person continues to be a minor until

he/she completes 21 years of age:

1. Where a guardian of a minor or his/her property or both has been

appointed by a court of law under the Guardian and Wards Act, 1890, and
2. Where his/her property has passed under the superintendence of the
court of wards.

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Capacity to contract- Minors
 A minor can always plead minority and is not stopped from doing so even when
he/she has procured a loan or entered into some other contract by falsely
representing himself/herself as a major, when in reality he/she was a minor.
The reason behind this is quite apparent. The policy of the law of contract is to
protect minors from contractual liability, and if such a thing is permitted, it
wouldde feat that very policy.

 But where the loan was obtained by fraudulent representation by the minor or
some property was sold by him/her, and those transactions were set aside as
being void, then the court might direct the minor, on equitable grounds, to
restore the money or property to the other party [Khan Gul vs Lakha Singh.

 In Indran Rama Swami vs Anthoapa , a promise made by a minor that the

money advanced during his minority will be repaid by him/her after
attaining majority has been held invalid. However, when a person on
attaining majority actually repays the debt incurred by him/her during his/her
minority is regarded as a valid transaction.

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Capacity to contract- Minors
Under Section 65, when a contract becomes void or is discovered to be void, the
person who received any advantage shall refund the advantage.

But the Privy Council' held in the above case that Section 65 does not apply to a
minor's contract.

Under Section 33 of the Specific Relief Act, 1963 Court will order, on equitable
considerations for restitution if the minor is still in possession of the money or things
purchased out of it.

The minor shall have no liability if the money or thingsMujhe

cannot be traced out in his
laga
hands. humari
aish hai ?

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Capacity to contract- Minors
 Despite the fact that a minor is incompetent to contract, nothing in the law
prevents him/her from becoming a promisee, transferee, payee, endorsee,
and receiver of a benefit arising under a contract. According to Transfer of
Property Act, 1882, also, a minor cannot transfer property but he/she can be a
transferee (person accepting a transfer). Similarly, if a minor sells goods to an
adult on credit, he/she shall be entitled to recover its price from the buyer [Abdul
Ghaffar vs Prem Pyarelal]

 It should, however, be noted that all contracts made by guardian on behalf of a

minor are not enforceable. For example, an agreement for service, entered into
by a father on behalf of his daughter who is a minor is not enforceable at law
[Raj Rani vs Prem Adib]]. Similarly, the guardian of a minor has no power to bind
the minor by a contract for the purchase of immovable property [Mir Sarwarjan
vs Fakhruddin Mohd Chowdhury].

 A minor cannot become a partner in a partnership firm. However, he/she

may, with the consent of all the partners, be admitted to the benefits of
partnership (Section 30 of the Indian Partnership Act). This implies that he/she
can share the profits without incurring any personal liability for losses.
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Capacity to contract - Minors
 A minor can act as an agent and bind his/her principal by his/her acts done in the
course of such an agency. But he/she does not incur any personal liability towards the
principal for his/her wrong actions, negligence, or breach of duty, whatsoever.

 A minor can become a shareholder, or a member in a company in respect of fully paid

shares (e.g., in case of transfer or transmission of shares), if the articles of the
company so permit. However, if a minor is allotted partly paid shares, he/she being
incompetent to contract, incurs no liability

 Any person would be entitled to be reimbursed from the property of the minor for
necessaries supplied to him or to anyone whom the minor is bound to support, i.e., his
family [Section 60]. Thus, for the supply of necessaries, a minor is not personally liable; it
is only his property which shall be liable. If a minor owns no property, the supplier
cannot recover the price of the necessaries.

 Accordingly, necessaries supplied must be according to economic and social

status of the minor in question and must be the goods or services, the minor actually
needs to support himself/herself. This follows that an item will not come under the
purview of necessaries if a minor is already sufficiently supplied with things of that kind.
Tuesday 17 Decembe
Necessaries
LBSIM-DELHI include not only goods—food, shelter, clothing, etc. but also necessary
 Capacity to contract- Unsound mind
 A person is said to be of sound mind for the purpose of making a contract if at the
time, when he/she makes it, he/she is capable of understanding it and forming a
rational judgment as to its effect upon his/her interests [Section 12].

 A person, who is usually of unsound mind, but occasionally of sound mind, may
make a contract when he is of sound mind.

 A person, who is usually of sound mind, but occasionally of unsound mind, may
not make a contract when he is of unsound mind.

 An intoxicated person is placed in the same category as a lunatic. Therefore, a

contract by such persons is altogether void. However, merely partial or ordinary
intoxication cannot deprive a person of capacity to contract. In order to avoid a contract
on this ground it must be shown that the person was so intoxicated that he/she
was unable to understand the terms of the contract, or form a rational
judgment, as to its effects on his/her interests.

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Capacity to contract- Unsound mind
Where a person is usually of sound mind, the burden of proving that he/she was of
unsound mind at the time of the execution of a document lies on him/her who
challenges the validity of the contract.

Mere weakness of mind is not sufficient proof

Temporary forgetfulness is not a sufficient
Only proof of loss of memory is not sufficient
If the contract was made by the mentally disordered person during a lucid interval it will be binding upon
him notwithstanding that the other party had knowledge of his disability.

Drunkards

But where the judgment of one party was, to the knowledge of the other part, seriously affected by
drink, equity will generally refuse specific performance at the suit of the other.

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Capacity to contract- Legally disqualified
 An alien refers to a person who is not a citizen of the country in which they
live or work or enter into a contract with any of its residents. That is, in Indian
context, an alien is one who is the citizen of a foreign country. An alien may be either
a friend or an enemy. An alien friend or a foreigner, whose country is at peace with
the Republic of India, can enter into a contract with an Indian citizen subject to the
provisions of the International Law.

 If a person’s debts exceed his property, he/she is adjudicated as insolvent.

An adjudged insolvent’s property stands vested in the official receiver or official
assignee appointed by the court. He/she cannot enter into contracts relating to
his/her property and sue and be sued until he/she obtains a certificate of discharge
from the court.

 Foreign sovereigns and accredited representatives of a foreign nation, i.e.,

Ambassadors and High Commissioners, enjoy special privilege in that they cannot be
legally proceeded against in Indian Courts. However, they can, in their personal
capacity, enter into contracts that may be enforceable in Indian Courts.

 The contractual capacity of a company is determined by its charter, i.e.,

Memorandum of Association. Similarly, the statute creating a statutory corporation
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Free consent – meeting of minds
No free consent

1. Coercion (Section 15) :It is committing, or threatening to commit, any

act forbidden by the Indian Penal Code (XLV of 1860), 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.

Burden of Proof: The party avoiding the contract has to prove that
Coercion was exercised upon him and his consent received is not voluntary
or he has not exercised his consent freely.
Coercion need not necessarily be directed by a party to the contract.
It may or may not emanate from a stranger to the contract.
it may be aimed at any person, either a party to the contract or a
stranger to the contract.

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Free consent – meeting of minds

2. Undue Influence (S.16)

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.
Person is said to dominate the will of another. (a) where he holds a real
or apparent authority over the other, or where he stands in a
fiduciary relation to the other; or (b) when 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.
Burden of proof : the burden of proving that such contract was not
induced by undue influence shall lie upon the person in a position to
dominate the will of the other.

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Free consent – meeting of minds
3. Transaction with Parda-nishin women:
A woman who observes complete seclusion due to the prevailing custom in her community is
said to be parda-nishin.
She does not act independently but has to depend upon someone else for performing her
outward duties.
The training, habit and surrounding circumstances are the main elements to be considered to
decide whether a woman is a Parda-nishin
A woman wearing a Burkha does no make a woman a Pardanishin.

4. Fraud” : “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
the contract.
The suggestion, of an untrue fact knowingly
Intentional concealment of facts
Any other act fitted to deceive
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Such act / commission legally declared as fraudulent
Free consent – meeting of minds
5. Misrepresentation ( Sec18 ): “Misrepresentation” means and includes:
(a) stating something in a positive manner which is untrue under the belief that the
same is true
(b) Unintentional breach of duty giving gains to the person committing it, or any one
claiming under him
(c) causing, however innocently, a party to an agreement to make a mistake on
subject of the agreement.

Effect of Misrepresentation:
The party being affected by misrepresentation has got the following rights: (1) He can
avoid or revoke the contract; or
(2) He can affirm the contract and insist on the misrepresentation to be made good,
if it is possible to do so; or
(3) He can rely upon the misrepresentation as a defence to an action of the contract.

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Free consent – meeting of minds

6. Mistake : it can be defined as an erroneous belief about something.

(1) Mistake as to fact, and
(2) Mistake as to Law.
Sec. 21 of the Act deals with the effect of Mistake as to Law
Mistake of Law is again classified into two- (1) Mistake as to Indian Law;
(2) Mistake as to Foreign Law;

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 Comparison ….

Fraud Misrepresentation
Party’s intention is to deceive the Party does not have any intention to
other party and get the benefit from deceive. It makes a careless
him, while in Misrepresentation the misstatement of facts of only.
Gives two rights to the aggrieved party, Only one right, to avoid the contract
a right to action for damages and also
to avoid the contract
The defendant can not take the plea Defendant is allowed to take this plea in
that plaintiff had means to discover case of misrepresentation
the truth
Party defrauding the other can be Such is not the case in
prosecuted for cheating under I.P.C. misrepresentation

JAIPURIA INSTITUTE OF MANAGEMENT STUDIES - NOIDA

Tuesday 17 December 2024
Comparison…….

Coercion Undue influence

Coercion is an act punishable under the Undue Influence is not a penal act
Indian Penal Code

Requires physical force Requires moral force

Stranger’s act may account to coercion Undue influence can be exercised only by
one of the parties to the contract.

Coercion gives a right to the effected Court may set aside the contract
party to repudiate the contract absolutely or modify the terms

JAIPURIA INSTITUTE OF MANAGEMENT STUDIES - NOIDA

Tuesday 17 December 2024
Performance of a Contract Defined
 The term ‘performance of contract’ means that both the promisor and the promisee
have fulfilled their respective obligations, which the contract placed upon them.

 According to Section 37, ‘The parties to a contract must either perform or offer to
perform their respective promises, unless such performance is dispensed with or
excused under the provisions of this Act, or any other law’.

 Actual performance gives a discharge to the contract and the liability of the
promisor ceases to exist. For example, A agrees to deliver 10 bags of cement at B’s
factory and B promises to pay the price on delivery.

 In the law of contracts, ‘substantial performance’ implies fulfilment of the

obligations agreed to in a contract, with only slight variances from the exact terms
and/or unimportant omissions or minor defects. That is, where the work agreed upon
is almost finished. Substantial performance is applicable only if the contract is not an
entire contract and is severable. The rationale behind creating the doctrine of
substantial performance is to avoid the possibility of one party evading his liabilities
by claiming that the contract has not been completely performed.
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Performance of a Contract Defined
There is a thin line of difference between substantial and partial performance. The two
following points would help in distinguishing the two types of performance.

 Partial performance must be accepted by the other party In other words, the
party who is at the receiving end of the partial performance has a genuine choice
whether to accept or reject. Substantial performance, on the other hand, is legally
enforceable against the other party.

 Payment is made on a different basis from that for substantial performance

It is made on quantum meruit, which literally means as much as is deserved. So, for
example, if half of the work has been completed, half of the negotiated money would
be payable. In case of substantial performance, the party that has performed can
recover the amount appropriate to what has been done under the contract

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Performance of a Contract Defined
Attempted Performance

Thus, attempted performance or tender may be defined as an offer to perform the

obligation under the contract in accordance with the terms of the contract. It is not
actual performance. If goods are tendered by the seller but refused by the buyer, the
seller is discharged from further liability, given that the goods are in accordance with the
contract as to quantity and quality, and he may sue the buyer for breach of contract if he
so desires.

 It must be unconditional [Section 38(1)]. In order to be legally enforceable, a

tender should not only be in accordance with the contractual terms, the promisor
should also not attach any condition to it, because it is not reasonable to compel the
other party to accept a changed or otherwise modified performance, whatsoever.

 It must be made at a proper time and place [Section 38(2)]. If a person’s obligation
is to deliver goods or render services, they must be tendered at a reasonable hour, for
example, not in the middle of the night. If such a tender is refused, it will not
release the tendering party from further obligation.
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Performance of a Contract Defined
Attempted Performance

 It must be made under such circumstances that the person to whom it is made may
have a reasonable opportunity of ascertaining that the person by whom it is made is
able and willing, and then do what he is bound by his promise to do [Section 38(2)].
For instance, if a debtor sends money by post and it is lost, he will have to pay again,
unless the mode of delivery was requested by the creditor and the debtor
took reasonable care.

 If the offer is to deliver a particular thing to the promisee, the promisee must have a
reasonable opportunity of seeing that the thing offered is the same that the
promisor is bound by his promise to deliver [Section 38(3)]. For example, if a seller
tenders too few goods, too many goods, or the right amount of goods mixed
with other goods, the buyer may reject all of them because the performance is not
exact. The buyer can also reject the tender where the goods are not packed in
accordance with the contract

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By Whom Can a Contract Be Performed?
Promisor If it appears from the nature of any case that it was the contracting parties’
intention that any promise contained in the contract should be performed by the
promisor himself, such a promise must be performed by the promisor himself [Section
40].

Agent Where personal consideration is not the subject matter of the contract, the
promisor or his representatives may employ a competent person to perform it [Section
40]. For example, A promises to pay B a sum of money. A may perform this promise,
either by personally paying the money to B or by causing it to be paid to B by someone
else; if A dies before the time appointed for payment, his representatives must perform
the promise, or they may employ some able person to do so

Legal representative Promises bind the representatives of the promisors. This will hold
good even in case of death of the promisors before performance, unless an exemption to
that effect is stated in the contract itself [Section 37]. However, in contracts of personal
nature or where personal consideration is the subject matter of the contract, such
promises come to an end should the promisor die, and therefore, such contracts cannot
be performed by the representatives.
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By Whom Can a Contract Be Performed?
Joint promisors When two or more persons have made a joint promise, then, unless a
contrary intention appears by the contract, all such persons must perform the promise
during their lifetime. In case of death of any of them, his representative jointly with the
survivor or survivors must perform the promise, and, after the death of the last survivor,
the representatives of all the promisors, must fulfil the promise jointly [Section 42].

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Time and Place for Performance?
 Where no time is specified A contract is not bad for want of certainty if time for
performance is not stated. Where the time for performance is not specified in the
contract, the promise must be performed within a reasonable time. The question
‘What is a reasonable time’ is a question of fact in each particular case. Reasonable
time is a relative term that is considered on a case-to-case basis [explanation added to
Section 46].

 Where time is specified When a contract specifies the time and place for its
performance, the parties must perform accordingly. But, when the contract is to be
performed on a certain day, and the promisor has undertaken to perform without a
request from the promisee, he may perform it at any time during the usual business
hours on that day at the specified place. For example, A promises to deliver goods at
B’s warehouse on the January 1. On that day A brings the goods to B’s warehouse, but
after the usual hours for closing, and they are not received. It is deemed that A has not
performed his promise [Section 47].

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 Time and Place for Performance?

 On application by promisee for performance When a promise is to be performed

on a certain day, and the promisor has not undertaken to perform it without application
by the promisee, it is the duty of the promisee to apply for performance at a proper
place and within the usual hours of business. The question ‘What is a proper time
and place’ is, in each particular case, a question of fact [Section 48].

 Without application by the promisee When a promise is to be performed without a

request by the promisee, and no place is fixed for its performance, the promisor
must request the promisee to fix a reasonable place for the performance and
perform the promise at such place. For example, A undertakes to deliver a thousand
sacks of jute to B on a specific date. A must apply to B to appoint a suitable place for
the delivery and must deliver it to B there [Section 49].

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 Discharge of a Contract?
Discharge of a contract implies termination of contractual obligations.

This is because when the parties originally entered into the contract, the rights and duties in
terms of contractual obligations were set up. Consequently when those rights and duties
are put out then the contract is said to have been discharged. Once a contract stands
discharged, parties to it are no more liable even though the obligations under the contract
remain incomplete.

A contract emanates from an agreement between the parties. It thus follows that, the
contract must also be discharged by agreement. Therefore, what is required, inevitably, is
mutuality. Discharge by substituted agreement arises when a contract is abandoned, or the
terms within it are altered, and both the parties are in conformity over it. For instance, A and B
enter into some agreement, and A wants to change his mind and not to carry out his terms of
the contract. If he does this unilaterally, then he will be in breach of contract to B.

The term novation implies the substitution of a new contract for the original one. This
arrangement may be either between the same parties or between different parties. For a
novation to be valid and effective, the consent of all the parties, including the new one(s), if
any, is essential. Moreover, the subsequent or second agreement must be one capable of
enforcement in law, the consideration for which is the exchange of promises not toTuesday
LBSIM-DELHI 17 Decembe
enforce the
 Discharge of a Contract?
Rescission This refers to cancellation of all or some of the material terms of the
contract. If the contracting parties mutually decide to do so, the respective contractual
obligations of the parties stand terminated.

Alteration This refers to a change in one or more of the terms of a contract with the
consent of all the contracting parties. Alteration results in a new contract but parties to it
remain the same. Here the assumption is that both the parties are to gain a fresh but
different benefit from the new agreement.

Remission This means the acceptance (by the promisee) of a lesser sum than what was
contracted for, or a lesser fulfilment of the promise made. As per Section 63, ‘every
promisee may (a) remit or dispense with it, wholly or in part, or (b) extend the time of
performance, or (c) accept any othersatisfaction instead of performance’.

Waiver The term waiver implies abandonment or relinquishment of a right. Where a party
deliberately abandons its rights under the contract, the other party is released of its
obligations, otherwise binding upon it.

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 Discharge of a Contract?
A contract stands discharged if not enforced within a specified time called the ‘period of
limitation’. The Limitation Act, 1963, prescribes the period of limitation for various
contracts. For instance, period of limitation for exercising right to recover an immovable
property is 12 years, and right to recover a debt is 3 years.

Merger A contract also stands discharged through a merger that occurs when an inferior
right accruing to party in a contract amalgamates into the superior right ensuing to the
same party. For instance, A hires a factory premises from B for some manufacturing
activity for a year, but 3 months ahead of the expiry of lease purchases that very
premises. Now since A has become the owner of the building, his rights associated with
the lease (inferior rights) subsequently merge into the rights of ownership (superior
rights). The previous rental contract ceases to exist.

Breach occurs where a party to a contract fails to perform its contractual obligations, or
the performance is defective. A breach of contract does not per se bring a contract to an
end. The breach may give to the aggrieved party the right to terminate the contract, but
it is for the non-breaching side to decide whether or not to exercise that option. The
aggrieved party has a right of election; that is to say, it can choose either to affirm the
contract or to terminate it. However, once that decision has been taken, it is, in
principle,irrevocable.
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 Discharge of a Contract?
Assignment is a method by which a party to a contract transfers the rights and benefits
accruing to it out of the contract to a third party, so as to enable it to enforce the
performance of the contract. The party that transfers its contractual rights is called
‘assignor’ and the third party so appointed is known as ‘assignee.’ Unlike a novation
where consent of both the promissor and the promisee is required for the third party to
assume all obligations and liabilities of the original promisee, an assignment does not
always need the consent of all parties. If the contract terms state specifically that the
promisor’s consent is not needed to assign the contract, then the promisee can assign the
contract to whomever he wants to.

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