r Atray MBA-III-Sem MB0035

MB0035 - Legal Aspects of Business

(Book ID: B0764)

Assignment Set- 1 (60 Marks)
Question1: 'All contracts are agreements but all agreements are not contracts.' Discuss
Answer :
Contract: Under Sec. 2 (h) it is defined as 'An agreement enforceable by law is a
contract'. To make a
contract, there must be (1) an agreement and (ii) the agreement should be
enforceable by
law.

Agreement: Agreement is defined as 'every promise and every set of promises

forming consideration for each other '. A promise is defined as "an accepted
proposal." Thus, every agreement in its ultimate analysis is made of a proposal
from one side and its acceptance by the other.

To become a contract an agreement must be enforceable by law. Sec. 10 of the Act

lays down the condition of enforceability. An agreement becomes enforceable only
when it is coupled with obligation. An obligation is the legal bond, which binds the
parties to a contract. The obligations springing from agreements should be legal
obligations and not moral, social or religious obligations.

All contracts are agreements but all agreements need not be contracts. The
agreements that create legal obligations only are contracts. The validity of an
enforceable agreement depends upon whether the agreement satisfies the essential
requirements laid down in the Act. Section 10 lays down that 'all the agreements are
contracts if they are made by the free consent of the parties competent to contract
for a lawful object and are not hereby expressly declared to be void'.

The following are the essentials:

a) Agreement: An agreement which is preliminary to every contract is the

outcome of offer and acceptance. An offer to do or not to do a particular act is
made by one party and is accepted by the other to whom the offer is made. Then
we say that there is a meeting of the minds of the parties. Such a position is
known as consensus ad idem.

b) Free consent: The parties should agree upon the same thing in the same
sense and their consent should be free from all sorts of pressure. 1n other words
it should not be caused by coercion, undue influence, misrepresentation, fraud or
mistake.
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c) Contractual capacity: The parties entering into an agreement must have

legal competence. 1n other words, they must have attained the age of majority,
should be of sound mind and should not be disqualified under the law of the land.
A contract entered into between the parties having no legal capacity is nullity in
the eyes of law.
d) Lawful consideration: There must be consideration supporting every contract.
Consideration means something in return for something. 1t is the price for the
promise. An agreement not supported by consideration becomes a 'nudum
pactum' i.e., naked agreement. The consideration should be lawful and
adequate. However, there are certain exceptions to this rule.

e) Lawful object: The object or purpose of an agreement must be lawful. 1t should

not be forbidden by law, should not be fraudulent, should not cause injury to the
person or property of another, should not be immoral or against public policy.

f) Not expressly declared void: The statute should not declare an agreement
void. The Act itself has declared certain types of agreements as void. E.g.,
agreements in restraint of marriage, trade, legal proceedings. 1n such cases, the
aggrieved party can't seek any relief from the court of law.

g) Possibility of performance: The agreement should be capable of being

performed. e.g., Mr. A agrees with Mr. B to discover treasure by magic. Mr. B
can't seek redressal of the grievance if Mr. A fails to perform the promise.

h) Certainty of terms: The terms of the agreement should be certain. E.g., Mr. A.
agrees to sell 100 tons of oil. The agreement is vague as it does not mention the
types of oil agreed to be sold.

i) Intention to create legal obligation: Though Sec. 10 is silent about this, under
English law this happens to be an important ingredient. Therefore, 1ndian courts
also recognize this ingredient. An agreement creating social obligation can't be
enforced.

j) Legal formalities: 1ndian Contract Act deals with a simple contract supported by
consideration. Agreements made in 1ndia may be oral or written. However, Sec.
10 states that where the statute states that the contract should be in writing and
should be witnessed or should be registered, the same must be observed.
Otherwise, the agreement can't be enforced e.g., Under 1ndian Companies Act,
the Memorandum of Association and Articles of Association must be registered.
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Question 2: 'Not all persons have the capacity to enter into a contract.' Discuss
this statement.
Answer :

Legal disability of the parties would render the agreement entered into between them
unenforceable in a court of law. 1n fact, even a desirable person may enter into an
agreement. Law does not infringe his freedom of making an agreement with anybody
he likes. But by declaring certain classes of persons having no contractual capacity,
law seeks to protect their interests from being exploited by unscrupulous persons.
Definition:
Section 11 lays down 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." This section
declares following persons to be incompetent: (1) Minors (2) persons of unsound
mind and (3) persons disqualified by law to which they are subject.
Minors: A minor is a person who has not attained the age of majority. According to
1ndian Majority Act, 1875 the age of 18 years is a major. However, if a guardian is
appointed by the court or if the minor or his property is under the supervision of a
court of wards, the age of majority is 21 years.
Principles governing minor's contracts: The law protects minor's persons,
preserves either their rights or estates, excuses their shortcomings and negligences
and assists them in their pleadings, the judges are their counsellors, the jury are their
servants and law is their guardian.
1n pursuing the above objective, the law should not cause unnecessary hardship to
those who deal with minors.
Sec. 11 of the Act is silent as regards the legal effects of an agreement entered into
by or with a minor. 1n Mohari Bibi Vs. Dharmo Das Ghosh case it was held that a
minor's agreement is void-ab-initio.
Effects of minor's agreement: A minor's agreement is void-ab-initio. Where there is
no contract, there should be no contractual obligation on either side. Hence, the
effects of a minor's agreements are worked out independently of any contract.
1. No estoppel against minor: A minor who has made an agreement by
misrepresentation of his age may disclose his real age. There is no estoppel against
him.
2. No liability in contract or tort arising out of contract: A minor is, in law,
incapable of giving consent. Hence, there could be no change in the character or
status of the parties. A minor who misrepresents his age to obtain a contract cann't
be sued for deceit. 'You cann't convert a contract into a tort to enable you to sue an
infant.' This principle has been followed in 1ndia. Where, however, the tort is
independent of contract the mere fact that a contract is also involved will not absolve
the minor from liability.
3. Doctrine of restitution: 1f a minor obtains property or goods by
misrepresentating his age, he can be compelled to restore it but only so long as the
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same is traceable in his possession. This is known as the equitable doctrine of

restitution. Suppose the minor has sold the goods he can't be made to repay the
value of the goods because that would amount to enforcing a void contract.
However, when a minor invites the aid of the court for the cancellation of his contract
the court may grant relief subject to the condition that he shall restore all benefits
obtained by him under the contract or make suitable compensation to the other
party. But the court will not compel any restitution by a minor even when he is a
plaintiff, where the other party was aware of the infancy so that he was not deceived
or where the other party was unscrupulous in his dealings with the minor.
4. Beneficial contracts: The law that a minor's agreement is absolutely void has
been confined to the cases where a minor is charged with obligations and the other
party seeks to enforce them. On the other hand a minor is allowed to enforce a
contract which is of some benefit to him and under which he is required to bear no
obligations. A minor is capable of purchasing immovable property and he may sue to
recover the possession of the property purchased by tendering the purchase money.
A minor can be a beneficiary e.g., a payee, an endorsee, or a promisee under a
contract. A promissory note executed in favour of a minor is valid and can be
enforced in a court.
5. Ratification: On attaining majority, a person can't ratify an agreement made by
him when he was a minor. Ratification relates back to the date of making of the
contract. Therefore, a contract which was void originally can't be made valid by
subsequent ratification. 1f it is necessary, a fresh contract should be made on
attaining majority. A new contract requires a fresh consideration. The consideration
which passed under the earlier contract can't be implied into the contract into which
the minor enters on attaining majority.
6. Liability for necessaries (Sec. 68): Persons incompetent to contract are made
liable for necessaries supplied to them. Sec. 68 reads "1f a person incapable of
entering into a contract or any one whom he is legally bound to support is supplied
by another person with necessaries suited to his conditions in life, the person who
has furnished such supplies is entitled to be reimbursed from the property of such
incapable person."
The liability is only for necessaries. But what is 'necessary' is not defined by the Act.
We have to depend upon judicial decisions. Things necessary are those without
which an individual cann’t reasonably exists such as food, raiment, lodging etc. What
may be necessary for one class may be luxury for another. Therefore, the class has
to be ascertained and then whether a thing is a necessity or not has to be
determined. To render an infant's estate liable for necessaries, two conditions must
be satisfied: (1) The contract must be for goods reasonably necessary for his support
in his state of life and (2) he must not have already a sufficient supply of these
necessaries. The supplier has to prove not only that the goods supplied were
suitable to the conditions in life of the minor but that he was not sufficiently supplied
with the goods of that class.
Thus, the liability for supply of necessaries attaches only to the estate of a minor and
he does not incur any personal liability.
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Question 3: Discuss how a contract can be discharged by breach.

Answer :

Discharge by breach of contract: Breach of contract by a party thereto is also a

method of discharge of a contract, because "breach" also brings to an end the
obligations created by a contract on the part of each of the parties. Of course the
aggrieved party i.e., the party not at fault can sue for damages for breach of contract
as per law ; but the contract as such stands terminated.

Breach of contract may be of two kinds: (1) Anticipatory breach and (2) Actual
breach.

1 Anticipatory breach : An anticipatory breach of contract is a breach of contract

occurring before the time fixed for performance has arrived. 1t may take place in two
ways: (a) Expressly by words spoken or written. Here a party to the contract
communicates to the other party, before the due date of performance, his intention
not to perform it. (b) 1mpliedly by the conduct of one of the parties. Here a party by
his own voluntary act disables himself from performing the contract. When a party to
a contract has refused to perform or disabled himself from performing, his promise in
its entirity, the promisee may put an end to the contract, unless he has signed, by
words or conduct his acquiescence in its continuance.
2 Actual breach : Actual breach may also discharge a contract. 1t occurs when
a party fails to perform his obligations upon the date fixed for performance by the
contract. Actual breach entitles the party not in default to elect to treat the contract as
discharged and to sue the party at fault for damages for breach of contract.

Remedies for Breach of Contract

Whenever 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 merit.
4.. Suit for specific performance of the contract.
5. Suit for an injunction.

As regards the last two remedies stated above, the law is regulated by the Specific
Relief Act, 1963.
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Question 4: Discuss the essentials of a contract of guarantee.

Answer 4:

Essential of Contract of Guarantee:

1. From: A contract of guarantee is just like any other contract which may be either
oral or in writing.

2. Tripartite agreement: Every contract of guarantee involves three agreements

between (i) the creditor and principal debtor, (ii) the surety and the creditor, and
(iii) the surety and the principal debtor.

Consent of the parties: There must be consent of all the three parties.

Example: X sells and delivers goods to Y. X afterwards requests Z to pay in

default of Y. Z agrees to do so. Here, Z cannot become surety without the
consent of Y.
3. Secondary Liability: The test which applied to determine whether the contract
is one of guarantee or indemnity is whether the obligation has been undertaken
at the debtor's request in which case the contract is one of guarantee. 1f the
obligation is undertaken without any request of the debtor, the contract is one of
indemnity. The intention of the parties is also important whether one making
oneself primarily or collaterally liable. Hence, the promise to be primarily and
independently liable is not a guarantee, though it may be an indemnity. Hence in
a contract of guarantee, the primary liability is with the principal debtor.

4. Existing liability: 1t is not necessary that the principal contract must be in

existence at the time the contract of guarantee is made ; the original contract by
which the principal debtor undertakes to repay the money to the creditor may be
about to come into existence.

Example: X took a loan of Rs.10,000 from Y on 1st Jan. 1999 and paid nothing on
account of interest and principal. On 2nd Jan. 2002, Z gave the guarantee to Y for
the payment of Rs.10,000 due from X. This is not a valid contract of guarantee
because the primary liability between X and Y is a time barred debt which is not
enforceable by law.

1 The promise to pay must be conditional: 1n other words, the liability of the
surety should arise only when the principal debtor makes a default.
2 Consideration: Something done for the benefit of the principal debtor is
considered as consideration for the guarantee to make the contract valid. The legal
detriment incurred by the promisee at the promisor's request is sufficient to
constitute the element of consideration.
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3 Competency: The principal debtor, surety and creditor must be a person competent
to contract. However, under certain circumstances, a surety is liable though the
principal debtor is not i.e. the original contract is void as is the case of a contract with
a minor in which the surety is liable not only as surety but also as principal debtor. A
person of unsound mind or an undischarged insolvent cannot give a valid guarantee.
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4. Consent: There must be free consent� otherwise the contract of guarantee

may become void or voidable. Generally a contract of guarantee is not the
contract of utmost good faith i.e., �berrimae fidei, but it is sometimes a first
cousin to it. Mere non-disclosure will not effect the contract of surety unless there
is an intentional concealment.

Example: I: A engages B as clerk to collect money from him. B fails to

account for some of his receipts, and A in consequence calls upon him to
furnish security for his duty accounting. C gives his guarantee for B's duty
accounting. A does not acquaint C with B's previous conduct. B afterwards
makes a default. The guarantee is invalid.

Example: II: A guarantees to C payment for iron to be supplied by him to B to

the amount of 2000 tons. B and C have privately agreed that we should pay
Rs.500 per ton beyond the market price, such excess to be applied on
liquidation of an old debt. This agreement is concealed from A. A is not liable
as a surety.

Kinds of Guarantee

A contract of guarantee may be either 'retrospective' e.g., for an existing debt or

'prospective' i.e. for a future debt. Guarantee are further divided into 'specific' also
known as simple or single guarantee and 'continuing'. When the guarantee is given
for a single or particular debt, it is called a 'specific guarantee' and it comes to an
end when the debt guaranteed has been paid. A guarantee which extends to a
series of transactions is called a continuing guarantee. (Sec. 129 of the 1ndian
Contract Act).
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Question 5: How can negotiable instruments be endorsed ? Discuss in detail.

Answer :

Section 15 defines endorsements as follows: "When the maker or holder of a

negotiable instrument signs the same, otherwise than as such maker, for the
purpose of negotiation, on the back or face thereof or on a slip of paper annexed
thereto, or so signs for the same purpose a stamped paper intended to be completed
as negotiable instrument, he is said to indorse the same, and is called the indorser."

Thus, an endorsement consists of the signature of the holder usually made on the
back of the negotiable instrument with the object of transferring the instrument. 1f no
space is left on the back of the instrument for the purpose of endorsement, further
endorsements are signed on a slip of paper attached to the instrument. Such a slip is
called 'along' and becomes part of the instrument. The person making the
endorsement is called an 'endorser' and the person to whom the instrument is
indorsed is called an 'endorsee.'

Kinds of Indorsements: 1ndorsements may be of the following kinds:

1 Blank or general indorsement: 1f the indorser signs his name only and
does not specify the name of the indorsee, the indorsement is said to be in blank.
The effect of a blank indorsement is to convert the order instrument into bearer
instrument which may be transferred merely by delivery.
2 Indorsement in full or special indorsement: 1f the indorser, in addition to
his signature, also adds a direction to pay the amount mentioned in the instrument
to, or to the order of, a specified person, the indorsement is said to be in full.
3 Partial indorsement: Section 56 provides that a negotiable instrument
cannot be indorsed for a part of the amount appearing to be due on the instrument.
1n other words, a partial indorsement which transfers the right to receive only a part
payment of the amount due on the instrument is invalid.

4. Restrictive indorsement: An indorsement which, by express words, prohibits

the indorsee from further negotiating the instrument or restricts the indorsee to deal
with the instrument as directed by the indorser is called 'restrictive' indorsement.
The indorsee under a restrictive indorsement gets all the rights of an indorser
except the right of further negotiation.
5. Conditional indorsement: 1f the indorser of a negotiable instrument, by express
words in the indorsement, makes his liability, dependent on the happening of a
specified event, although such event may never happen, such indorsement is called
a 'conditional' indorsement.

1n the case of a conditional indorsement the liability of the indorser would arise only
upon the happening of the event specified. But the indorsee can sue other prior
parties, e.g., the maker, acceptor etc., if the instrument is not duly met at maturity,
even though the specified event did not happen.
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Question 6: Why do you think an agreement to take a person to moon for a

holiday cannot be a contract?
Answer :

The essentials of valid contract states that" the terms of agreement should be
capable of being performed & must be certain." Taking a person to moon for a
holiday cannot be a valid contract because neither the activity is being capable of
being performed in near future nor it is certain that someone making such kind of
promise will be able to fulfill. We all know that moon missions are multi-billion
projects & all are funded by Government, so someone making such a promise would
only be a fraud. The government laws have also not yet authorized any agency or
person to make such contracts so any agency or person promising a holiday on
moon is unlawful which an essential term of valid Contract is also.