Indian Legal Environment

LEGAL ASPECTS OF BUSINESS
Prof.(CMDE) P. K. Goel
8/6/2014
2
Law of Contract
The law of contract is intended to
ensure that what a man has been led
to expect shall come to pass; that
what has been promised to him shall
be performed
- Sir William Anson
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What is a Contract?
Every agreement and promise
enforceable at law is a contract
-Sir Federick Pollock
An agreement creating and defining
obligations between the parties
-Sir William Anson
An Agreement enforceable by law is a
contract
- Sec.2(h) of the Indian Contract Act,1872
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Contract
Agreement Enforceability of an agreement
Offer (or proposal)
Acceptance of
offer (or proposal
Legal obligation arising
out of an agreement
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Distinction between an Agreement and a Contract
An Agreement differs from a contract in the following respects:
Contact is concluded and
binding on the concerned
parties.
Agreement is not
concluded or binding
contracts
4) Binding
All Contacts are
necessarily agreements.
Every Agreement need
not necessarily be a
contract
3) One in other
A Contract necessarily
creates a legal obligation.
An Agreement may or
may not create a legal
obligation.
2) Creating of
legal obligation

Agreement and its
enforceability constitute a
contract
Offer and its acceptance
constitute an agreement
1) What constitute
A Contract An Agreement Basis of distinction
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What is an Agreement?

Every Promise and every set of
Promises, forming the consideration for
each other, is an Agreement
-Sec. 2(e) of the Act

a) Offer
b) Acceptance
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Characteristics of an Agreement

- Plurality of Persons

- Consensus ad idem
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What is a Promise?
Proposal when accepted, becomes a
promise.
-Section 2 (b)

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The law of contract is not the whole law of
agreements, nor is it the whole law of
obligations. It is the law of those
agreements which create obligations, and
those obligations which have their source
in agreements.
-Salmond
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Essential elements of a valid contract
1. Agreement i.e. Offer & Acceptance.
2. Intention to create legal relations.
3. Lawful consideration
4. Competence of parties
5. Free Consent
- Coercion - Undue Influence
- Fraud - Misrepresentation
- Mistake
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Essential elements of a valid contract
6. Lawful object
7. Writing & Registration
8. Certainty
9. Possibility of Performance
10.Not Expressly declared void.

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Classification of contracts
1. On the basis of enforceability
Valid
Void
Voidable
Unenforceable
Illegal
2. On the basis of mode of creation
Express
Implied
Constructive or Quasi
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Classification of contracts..
3. On the basis of the extent of execution
Executed
Executory
4. On the basis of form of the contract
Formal
Simple
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What is an Offer (PROPOSAL)
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 proposal
Sec 2(a) of the Act
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Essentials of a Proposal
1. It must be an EXPRESSION OF
WILLINGNESS to do or to abstain from
doing some thing.
2. The expression must be TO ANOTHER
PERSON.
3. This must be made WITH A VIEW TO
OBTAINING THE ASSENT OF THE
OTHER PERSON.
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Legal Rules Regarding a Valid Offer
1. Express or Implied
2. Legal consequences, Legal Relations.
3. Certain.
4. Invitation to offer is no offer.
5. Specific or general
6. Communicated to the offeree
7. Non-compliance of the term-would amount to
acceptance-not valid
8. Subject to any terms and conditions.
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Legal Rules Reg. A Valid Acceptance
1. Acceptance must be given only by the
person to whom the offer is made.
2. Acceptance must be absolute &
unqualified.
3. Acceptance must be expressed in some
usual & reasonable manner, unless the
proposal prescribes the manner in which it
is to be accepted.

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Legal Rules Reg. A Valid Acceptance
4. Acceptance must be communicated by
the acceptor.
5. Acceptance must succeed the offer.
6. Acceptance must be given within a
reasonable time and before the offer
lapses and/or is revoked.
7. Rejected offers can be accepted only, if
renewed.
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Consideration
DEFINITION:
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 to do or abstain from doing,
something, such act or abstinence or promise
is called consideration for the promise
Sec 2(a)
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Consideration..
Consideration is the Price for which a
promise is bought

-Sir F. Pollock
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Essentials of 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 must be legal
4. It may be past, present or future.
5. It must be Something of value.
6. Consideration may be a promise to do
something or abstain from doing something.
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No Consideration Necessary
1. Made on account of natural love & affection.
2. To compensate for past voluntary service.
3. Agreement to pay a time barred debt.
4. Contracts of agency.
5. Completed gifts.
6. Remission of the promisee of performance
of the promise.
7. Guarantee
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Capacity of Parties
MEANING
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
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Minors Agreement
1. Absolutely Void
2. No Ratification
3. No Restitution
4. No Estoppels
5. Minor Beneficiary
6. Minors Liability for Necessities
7. Minor Promisee
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Minors Agreement..
8. Minor Agent
9. Minor Partner
10.Surety for a Minor
11.Minor as a member of a company
12.A minor cannot be declared as an
insolvent
13.Minors Liability for Tort.
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Persons of Unsound Mind
A Person is said to be of sound mind
for the purpose of making a contract, if
at the time when he makes it, he is
capable of understanding it, and of
forming a rational judgment as to its
effect upon his interests.
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Disqualified Person
1. Alien Enemy
2. Foreign Sovereigns & ambassadors
3. Convict
4. Company or corporation
5. Insolvent
-Sec. 13
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Free Consent
DEFINITION:
Two or more persons are said to
consent when they agree upon the
same thing in the same sense.
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Free Consent
Consent is said to be Free when it is
not caused by:
1) Coercion
2) Undue Influence
3) Fraud
4) Misrepresentation
5) Mistake
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Coercion
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
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Undue Influence
A contract is said to be induced by
undue influence where,
1) 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
2) He uses the position to obtain an
unfair advantage over the other

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Fraud
Fraud means & includes any of the following
acts committed by the party to a contract, or
with his connivance, or by his agent, with intent
to deceive or to induce another party there to
or his agent, to enter into the contract:

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Fraud
a) A suggestion as to a fact of that which is not
true by one who does not believe it to be true.
b) An active concealment of a fact by one having
knowledge or belief of the fact.
c) A promise made without any intention of
performing it.
d) Any other act fitted to deceive.
e) Any such act or omission as the law
specifically declares to be fraudulent.
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Misrepresentation
Misrepresentation means & Includes:
a) The positive assertion, in a manner
not warranted by the information to
the person making it, of that which is
not true, though he believes it to be
true; or
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b) Any breach of duty which, without an
intent to deceive, gains an advantage
to the person committing it, or any one
claiming under him, by misleading
another to his prejudice or to the
prejudice of any one claiming under
him, or
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c) Causing however innocently, a party
to an agreement, to make a mistake
as to the substance of the thing which
is the subject of the agreement.
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Mistake
MEANING
Mistake may be defined as an erroneous
belief concerning something
Kinds of mistake
1. Mistake of law
Foreign
Indian
2. Mistake of fact
Bilateral
Unilateral
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Legality of object & consideration
Consideration & objects are unlawful
IF
1) It is forbidden by law
2) It is of such a nature that, if permitted, it
would defeat the provisions of any law.
3) It is fraudulent
4) It involves or implies injury to the person
or property of another
5) The court regards it as immoral
6) The court regards it as opposed to public
policy.

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Expressly declared void agreements
Agreement
1) In restraint of marriage
2) In restraint of trade
3) In restraint of legal proceedings
4) The meaning of which is uncertain
5) By way of wager
6) Contingents on impossible events
7) To do impossible acts

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Contingent Contracts
A contingent contract is a contract to
do or not to do something, if some
event, collateral to such contract does
or does not happen
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PERFORMANCE OF CONTRACT
WHO CAN DEMAND PERFORMANCE?
ONLY THE PROMISEE
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By whom contracts must be performed
1. By the promisor himself
2. By the agent
3. By the legal representatives
4. Performance by a third person
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Discharge of a contract
Modes of discharge
1. By performance actual or attempted.
2. By mutual consent or agreement.
3. By subsequent or supervening
impossibility or illegality.
4. By lapse of time
5. By operation of law
6. By breach of contract
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Quasi Contract
Quasi Contractual obligations
1. Claim for necessaries supplied to a
person incapable of contracting or on
his account.
2. Reimbursement of person paying
money due by another, in payment of
which he is interested.

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Quasi Contractual obligations
3. Obligations of person enjoying benefit
of non-gratuitous act.
4. Responsibility of finder of goods.
5. Liability of person to whom money is
paid, or thing delivered by mistake or
under co-ercion.

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Remedies for breach of contract
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.
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Indemnity
DEFINITION:
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, is called
a contract of indemnity.
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Guarantee
DEFINITION:
A contract of guarantee is a contract
to perform the promise, or discharge
the liability of the third person in case
of his default.
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Distinction between Indemnity & Guarantee
Indemnity Guarantee
Liability of the
Indemnifier is
Primary
Liability of the surety is
secondary. Primary Liability
is of Principal Debtor
Indemnifier acts
independently
Surety gives guarantee at
the request of the debtor
Two parties
Indemnifier and
Indemnity holder
3 Parties Creditor,
Principal Debtor and Surety.
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Indemnity Guarantee
In most cases, liability of the
indemnifier arises only on the
happening of the
contingency.
There is an existing
legal debt/duty, the
performance of which is
guaranteed by the
surety.
The Indemnifier cannot sue
the third party for loss in his
own name. Can only bring
the suit in the name of the
indemnified unless there is
an assignment in his favour.
Can proceed against
the Principal Debtor in
his own right.
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Indemnity Guarantee
For the reimbursement of
loss. The liability of the
indemnifier arises only on
the happening of a
contingency.
Security of a debt or good
conduct of an employee.
There is usually an existing
debt or duty the
performance of which is
guaranteed by the surety.
Only one contract between
the indemnifier and the
indemnified
3 Contracts = A & B
= B & C
= A & C
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Kinds of Guarantee
a) Specific
b) Continuing Guarantee
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Discharge of Surety from Liability
1. Notice of Revocation
2. Death of Surety
3. Variance in terms of contract
4. Release or discharge of Principal Debtor.
5. Arrangement by Creditor with Principal
Debtor without suretys consent.
6. Creditors act or omission impairing suretys
eventual remedy.
7. Loss of security.
8. Invalidation of the contract of Guarantee.
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Bailment
DEFINITION:
A Bailment is the delivery of goods by one
person to another for some purpose, upon
a contract that they shall, when the
purpose is accomplished, be returned or
otherwise disposed of according to the
directions of the person delivering them.
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Essential features of Bailment
1. Delivery of movable goods
2. Goods are delivered for some
purpose.
3. Condition of delivery on
accomplishment of purpose goods
are to be returned.
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Duties of Bailee
1. To take reasonable care of goods
delivered to him.
2. Not to make unauthorized use of goods
entrusted to him.
3. Not to mix goods bailed with his own
goods
4. To Return the goods.
5. To deliver any accretion to the goods.
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Duties of Bailor
1. To disclose faults in goods bailed.
2. To repay necessary expenses in
case of gratuitous bailment.
3. To repay any extraordinary
expenses in case of non-gratuitous
bailment.
4. To indemnify bailee.
5. To receive back the goods.
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Rights of Bailee
1. Enforcement of bailors duties.
2. To deliver goods to one of several
joint bailors.
3. To deliver goods in good faith, to
bailor without title.
4. Lien.
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Rights of Bailor
1. Enforcement of bailees duties.
2. To terminate bailment if the bailee
uses the goods wrongfully.
3. To demand return of goods at any
time incase of Gratuitous Bailment.
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Agency
DEFINITION:
An AGENT is a person employed to do any act
for another or to represent another in dealing
with third persons. The person for whom such
act is done, or who is represented, is called the
PRINCIPAL
Sec 2(a)
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Creation of Agency
Agency by Express Agreement
Agency by Implied Agreement
Agency by Ratification
Agency by Operation of Law
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Duties of Agent
To follow Principals directions or customs.
To carry out the work with reasonable care, skill and
diligence.
To render accounts
To communicate with Principal in case of difficulty.
Not to deal on his own account.
Not to make any profit out of his agency except his
remuneration.
On termination of agency by Principals death or Insanity to
protect and preserve the interest of the Principal.
Not to delegate authority.

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Rights of Agent
To receive remuneration
Retainer
Lien - particular
To be indemnified against consequences of Lawful
acts
To be indemnified against consequences of acts
done in goods faith
To compensation
Stoppage of goods in transit.
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Duties of Principal
To indemnify agents against consequences of
all lawful acts.
To indemnify agents against consequences of
acts done in good faith
To indemnify against the injury caused by
Principals neglect.
To pay the agent for commission or other
remuneration agreed.
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Rights of Principal
To recover damages
To obtain an account of secret profits and
recover them and resist a claim for
remuneration.
To resist against agents claim for
indemnity against liability incurred.
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Termination of Agency
By Act of Parties By Operation of Law
Agreement
Revocation by
the Principal
Revocation by
the Agent
Performance of the Contract
Expiry of the time
Death of either party
Insanity of either party
Destruction of the subject matter
Principal becoming an alien enemy
Dissolution of Co.
Termination of agents authority
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Contract of sale of Goods
DEFINITION:
A Contract whereby the seller transfers or
agrees to transfer the property in goods to
the buyer for a price.
Sec 4(1) of the Sale of Goods Act
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Essential Characteristics of a
contract of Sale of Goods
1. Two Parties
2. Transfer of Property
3. Goods
4. Price
5. Includes both a Sale and an Agreement to
Sell
6. No Formalities to be observed
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Distinction between Sale and
Agreement to Sell
1. Transfer of property (ownership)
2. Risk of loss
3. Consequences of Breach
4. Right of Resale
5. Insolvency of buyer before he pays for
goods
6. Insolvency of seller if the buyer has already
paid the price.
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Condition
DEFINITION:
A Condition is a stipulation essential to
the main purpose of the contract, the
breach of which gives the aggrieved party
a right to repudiate the contract itself.
Sec 12(2)
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Warranty
DEFINITION:
A warranty is a stipulation collateral to the
main purpose of the contract, the breach
of which gives the aggrieved party a right
to sue for damages only, and not to avoid
the contract itself.
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Implied Conditions
As to title
In a sale by description
In a sale by sample
In a sale by sample as well as by description
As to fitness or quality
As to merchantability
As to wholesomeness
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Implied Warranties
Of quiet possession
Of freedom from encumbrances
Of disclosing the dangerous nature of
goods to the ignorant buyer.
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Exception to the Doctrine of Caveat emptor
In case of misrepresentation by seller
In case of concealment of latent defects by
seller.
In case of sale by description.
In case of sale by sample.
In case of sale by description by sample.
Fitness for a particular purpose
Merchantable quality.
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Transfer of Property
Risk Prima Face passes with
property
Action Against third parties
Suit for price
Insolvency of the seller or the buyer.
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Rules regarding transfer of property
1. In Specific or Ascertained Goods
When goods are in a deliverable state
When goods have to be put in a deliverable
state
When goods have to be measured etc. to
ascertain price
When goods are delivered on approval
2. In Unascertained goods & future goods

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Meaning of unpaid seller
DEFINITION:
The seller of goods is deemed to be UNPAID
SELLER (a) When the whole of the price has not
been paid or tendered; OR (b) Where a bill of
exchange or other negotiable instrument has been
received as a conditional payment, I.e. subject to the
realization thereof, and the same has been
dishonored
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Characteristics of an unpaid seller
He must sell goods on cash terms and
not on credit
He must be unpaid either wholly or
partly
He must not refuse to accept payment
when tendered.
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Rights of an unpaid seller
Against the Goods
Against the Buyer personally
Where the property
in the goods has
passed [Sec. 46(1)]
Where the property
in the goods has
Not passed
[Sec. 46(2)]
Lien
(Sec. 47
to 49
Stoppage
in transit
(Sec. 50
to 52
Suit for price
(Sec. 55)
Suit for
damages
(Sec. 56)
Re-sale
(Sec.54)
Repudiation
Of contract
(Sec. 60)
Suit for
interest
(Sec. 61)
With holding
delivery
Stoppage
in transit
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Negotiable Instrument
DEFINITION:
A Negotiable instrument means a promissory note,
bill of exchange or cheque payable either to order or
to bearer
-Sec. 13
A Negotiable instrument is one the property in which
is acquired by every person who takes it BONAFIDE
and for value, notwithstanding any defect of title in
the person from whom he took it.
-Judge Wills
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Essential Elements of
a Negotiable Instrument
In writing
Signed by the Maker/Drawer
Promise or order to pay
Promise/order must be unconditional
Payment in Money
For a certain sum
Payable at a time certain to arrive
Drawee must be named or described with
reasonable certainty.
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Promissory Note
Meaning
A Promissory note is an instrument in writing
(not being a bank note or currency note)
containing an unconditional undertaking,
signed by the maker, to pay a certain sum of
money, or to the order of, a certain person, or
to the bearer of the instrument.
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Bill of Exchange
Meaning
A Bill of exchange is an instrument in writing
containing an unconditional order signed by the
maker, directing a certain person to pay a
certain sum of money only to, or to the order of,
a certain person or to the bearer of the
instrument.
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Cheque
Meaning
A Cheque is a bill of exchange drawn on a
specified banker and not expressed to be
payable otherwise than on demand and it
includes the electronic image of a truncated
cheque and a cheque in the electronic form
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Cheque Electronic Form
Meaning
A cheque in the electronic form means a cheque
which contains the exact mirror image of a paper
cheque, and is generated, written and signed in a
secure system ensuring the minimum safety standards
with the use of digital signature (with or without
biometrics signature) and asymmetric crypto system.
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Truncated Cheque
Meaning
A truncated cheque means a cheque which is
truncated during the course of a clearing cycle, either
by the clearing house or by the bank, whether paying
or receiving payment, immediately on generation of an
electronic image for transmission, substituting the
further physical movement of the cheque in writing.
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Distinction between Bill & Promissory Note
Note Bill
Two parties Maker
(Dr) & Payee (Cr)
3 Parties Drawer Drawee &
Payee. Two can be OK
Cannot be made
payable to the maker
The drawer and payee or
drawee and payee same
Unconditional promise
by the maker to pay
Unconditional order to the
drawee to pay according to the
drawers directions.
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Note Bill
Presented for payment
w/o any prior
acceptance by the
maker
Payable after sight must be
accepted by the drawee or
some one else on his behalf
before it can be presented.
The liability of maker is
primary & absolute
Liability of the drawer is
secondary & conditional
Maker stands in
immediate relation with
the payee
Maker/drawer of an accepted
bill in immediate relation with
the acceptor & not the payee.
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Note Bill
No need of protest Foreign bills must be
protested for dishonor where
law requires it
No notice is necessary Notice of dishonor by the
holder to the drawer &
intermediate endorsers
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Distinction between A cheque & B/E
Cheque Bill of Exchange
Drawn on a Banker May be drawn on any
person including a banker
Payable on demand Payable on demand or
the expiry of certain
period after date of sight.
Payable to bearer on
demand-valid
Such a B/E is void and
illegal
Does not require
acceptance by the drawee
Such acceptance is
necessary
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Distinction between A cheque & B/E.
Cheque Bill of Exchange
Does not require any stamp Proper stamp is
necessary
No days of grace Three days of grace on
time bills
Can be crossed Can not be crossed
Payment can be
countermanded by the drawer
No
No system of noting/protest Such a thing is
required
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Holder
The holder of a negotiable instrument
means any person entitled to the
possession of the instrument in his own
name and to receive or recover the
amount due thereon from the parties liable
thereto.
-Sec.8
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Holder in due course
1. He must be a holder.
2. He must be a holder for valuable
consideration.
3. He must have become the holder of the N/I
before its maturity.
4. He must take the N/I complete and regular on
the face of it.
5. He must have become holder in good faith.
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Privileges of Holder in due course
He gets a better title than that of the transferor.
Privilege in case of inchoate stamped instruments.
Liability of prior parties
Privilege in case of fictitious bill.
Privilege when an instrument delivered conditionally
is negotiated.
Estoppel against denying original validity of
instrument.
Estoppel against denying capacity of payee to
indorse.
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Negotiation
DEFINITION
When a promissory note, bill of exchange
or cheque is transferred to any person, so
as to constitute that person the holder
thereof, the instrument is said to be
negotiated.
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Not Negotiable
MEANING
A person taking a cheque crossed
generally or specially, bearing in either
case the words Not Negotiable, shall not
have, and shall not be capable of giving, a
better title to the cheque than which the
person from whom he took it had.
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Bouncing of Cheques
Cheque should have been dishonored due to
insufficiency of funds.
Cheque presented within its validity.
For the discharge of legally enforceable debt or
other liability.
Notice within 30 days of dishonor.
Failed to make the payment within 15 days of the
receipt of notice.
A written complaint to a M.M. or 1
st
Class J.M. within
one month of the date when the cause of action
arose.

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Indian Legal Environment

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LEGAL ASPECTS OF BUSINESS

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