mb0035 legal aspects of business

Sikkim Manipal University

Q.1. What are the essentials for a Valid Contract? Describe them in details.

Answer:

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 requirement laid down in the Act. Section

10 lays down that ‘all the agreement are contracts if they are made by the free consent of the

parties competent to contract for a lawful object and are nor 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 as 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. In other words it should not be caused by

coercion, under influence, misrepresentation, fraud or mistake.

C). Contractual Capacity: the parties entering into an agreement must have legal competence.

In 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

parities having no legal capacity in nullity in the eyes of law.

D). Lawful Consideration: there must be consideration supporting every contract.

Consideration means something in return for something. It is the price for the promise. An

agreement not supported by consideration becomes an ‘undue partum’ 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. It 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.

Legal Aspects of Business


F). not express 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. In 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 redressed of the grievance if

Mr. A fails to perform the promises.

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 dose not mention the types of oil agreed to be

sold.

I). Intention to create legal obligation: Through Sec. 10 is silent about this, under English law

this happens to be an important ingredient. Therefore, Indian courts also recognize this

ingredient. An agreement creating social obligation can’t be enforced.

J). Legal formalities: Indian contract Act deals with a simple contract supported by

consideration. Agreements made in India may be oral or written. However, sec. 10 states that

where the statute stares that the contract should be in written and should be witnessed or

should be registered, the same must be observed. Otherwise the agreement can’t be enforced

e.g., under Indian companies act, the memorandum of association and articles of association

must be registered.

Q.2. What are the rules regarding the acceptance of a proposal? Describe them

in details.

Answer:

According to Sec. 2 (b) “When the person to whom the proposal is made signifies his willingness

there to the proposal is said to be accepted. A proposal, when accepted, becomes a promise.”

By accepting the offer, the acceptor expresses his willingness to be bound by the terms and

conditions of the offer. Regarding an offer and its acceptance, Anson has given as analogy of a

lighted match stick. “Acceptance is to an offer what a lighted match is to a train of gunpowder.



It produces something which can’t be recalled or undone.” An acceptance turns the offer into a

binding obligation.

Rules Regarding Acceptance:

A). an offer can be accepted only by the person to whom it is made: the offered only has to

accept the offer. In case it is accepted by any other person on agreement is formed. However,

in case authority is given to another person to accept the offer on behalf of the person to whom

it is made, it is a valid acceptance.

B). Acceptance should be unconditional and absolute: Sec. 7(I) states that the acceptance

should be absolute and unconditional. The acceptor should accept the offer in to to. If it is

qualified or conditional, it ceases to be valid. In fact, a qualified or conditional acceptance is

nothing but a counter-offer.

C). Acceptance should be communicated: the party accepting the offer must communicate his

acceptance to the offer or. Acceptance is not a mental resolve but some external manifestation.

The acceptance can be communicated in writing or word of mouth or also by conduct. An

agreement dose not result from a mere state of mind.

As regards unilateral contracts (e.g. offer of reward) it is impossible to the offered to

communicate his acceptance otherwise then by performing the contract. In the case of bilateral

contracts acceptance must be communicated. The offered can’t force a contract on offered by

fixing the mode of refusal. Further, acceptance should be communicated only to the offered

and not to somebody else.

D). Acceptance should be according to the prescribed form: Unless specific in the offer the

acceptance must be in some usual and reasonable manner. The proposer has the right to

prescribe the manner of acceptance. He may require it to be oral or in writing or to be

communicated to him by phone or telephone etc. He can also waive his right or may ask the

offered to express acceptance by some gesture. Once he prescribes the mode of

communication later he can’t say that it was insufficient.

If the offered dose not signify his assent to the offered according to the mode prescribed it

becomes ’deviated acceptance’ and strictly speaking it is no acceptance at all. However, such a

rigid rule is not followed in India. In the case of deviated acceptance the proposer may insist for



the acceptance in the prescribed manner. He then has to do this within a reasonable time after

communication of acceptance to him. Otherwise it will be presumed that the proposer has

accepted the deviated acceptance. Sec. 7 of the Act dose not tells that deviated acceptance is

no acceptance.

E). Acceptance must be provoked by offer: the acceptor must be aware of the offer. Even if the

fulfills the conditions mentioned in the offer, if he is ignorant of the offer itself, he can’t give a

valid acceptance

F). Acceptance must be given before the offer lapses or is revoked: where a time has been fixed

the acceptor has to accept the offer within such time. Where no time limit is prescribed the

acceptance has to be within the reasonable time. An offer once dead can’t be accepted unless

there is a fresh offer.

G). Provisional acceptance is no acceptance: A provisional acceptance dose not makes a binding

agreement unless final approval is given. The offer may be withdrawn before giving final

approval. However, whether an agreement is provisional or final depends upon the intention of

the parties.

Q.3.What is the difference between fraud and misinterpretation? What do you

understand by mistake?

Answer:

1). in misrepresentation the person making the false statement honestly believes it to be

true. In fraud, the false statement is made by person who knows that it is false are he does

not care to know whether it is true or false.

2). There is no intention to deceive the other party when there is misrepresentation of fact.

The very purpose of fraud is to deceive the other party to the contract

3). Misrepresentation renders the contract voidable at the option of the party whose

consent was obtained by misrepresentation. In the case of fraud the contract is voidable. It

also gives rise to an independent action in tort for damages.



4). Misrepresentation is not an offence under Indian Penal Code and hence not punishable.

Fraud, in certain cases is a punishable offence under Indian Penal Code.

5). generally, silence is not fraud except where there is a duty to speak or the relation

between parties is fiduciary. Under no circumstances can silence be considered as

misrepresentation.

6). The party complaining to misrepresentation can not avoid the contract if he had the

means of discover the truth ordinary diligence. But in the case of fraud, the party making a

false statement can not say t5hat the other party had the means to discover the truth with

ordinary diligence.

Q.4. What are the different ways in which a contract can be discharged?

Describe these ways in details.

Answer:

When the rights and obligations arising out of a contract are extinguished the contract is

said to be discharged or terminated. A contract may be discharged by the following ways:

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.

A. Discharge by performance:

When a contract is duly performed by both the parties, the contract is discharged or

terminated by due performance. But if one party only performs this promise, he alone is

discharged. Such a party gets a right of action against the other party who is guilty of

breach. Performance may be (1) Actual performance; or (2) Attempted performance or

Tender



1. Actual performance: when each party to a contract fulfills his obligation arising under

the contract within the time and in the manner prescribed, it amounts to actual

performance of the contract and the contract comes to an end.

2. Attempted performances or tender: when the promise offers to perform his obligation

under the contract, but is unable to do so because the promise dose not accepts the

performance, it is called “attempted performance” or “tender”. Thus “tender” is not

actual performance but is only an “offer to perform” the obligation under the contract.

A valid tender of performance.

B. Discharge by mutual constant or agreement:

Since a contract is created by means of an agreement, it may also be discharged by

another agreement between the same parties. Sections 62 and 63 provide for the

following methods of discharges a contract by mutual agreement.

1. Novation: “Novation occurs when a new contract is substituted for an exit sting

contract, either between the same parties or between different parties, the

consideration mutually being the discharge of the old contract”. The following points

are also worth- noting in connections with novation :

a) Novation cannot be compulsory, it can only be with the mutual consent of all the

parties.

b) The new contract must be valid and enforceable. It suffers form any legal flaw on

account of which it becomes unenforceable, then the original contract revives.

2. Alteration: Alteration of a contract means change in one or more of the material

terms of a contract. If a material alteration in a written contract is done by mutual

consent, the original contract is discharged by alteration and the new contract is its

altered form takes its place.

3. Rescission: A contract may be discharged before the date of performance, by

agreement between the parties to the effect that it shall no longer bind them. Such

an agreement amounts to “rescission” or cancellation of the contract, the

consideration for mutual promises being the abandonment by the respective parties

of their rights under the contract.



4. Remission: Remission may be defined “ As the acceptance of a lesser sum than what

was contracted for or a lesser fulfillment of the promise made.”

5. Waiver: Waiver means the deliberate abandonment or giving up the of aright which

a party is entitled to under a contract, whereupon the other party to the contract is

released form his obligation.

C) Discharge by subsequent or supervening impossibility or illegality: Impossibility

at the time of contract: There is no question of discharge of a contract which is

entered in to to perform something that is obviously impossible, e.g an agreement

to discover treasure by magic, because, in the such a case there info contract to

terminate, it being an agreement void abilities by virtue of section 56, Para 1, which

proves: “ An agreement to do an act impossible in itself is void.

Subsequent impossibility: Section 56, Para 2 declares: “ A contract to do an act

which, after the contract is made, becomes impossible, or by reason of some event

which the promissory could not prevent, unlawful, becomes void when the act

becomes impossible or unlawful”. The following condition must be fulfilled: (1) that

the act should have become impossible; (2) that impossibility should be by reason of

some event which the promissory could not prevent; and (3) that the possibility

should not be self- induced him the promissory or due to his negligence.

Thus under section 56 (Para 2), where an extent which could not reasonably have been in the

contemplation of the parties when the contract was made, renders performance impossible or

unlawful, the contract becomes void and stands discharged. This is known as frustration of the

contract brought about by supervening impossibility. It is also known as the doctrine of

supervening impossibility. The rational behind the doctrine is that if the performance of a

contract becomes impossible by reason of supervening impossibility or illegality of the act

agreed to be done. It is logical to absolve the parties from further performance of it as they

never did promise to perform impossibility. The doctrine of supervening “doctrine of

frustration” known to the English law. In the case of subsequent impossibility or illegality , the



dissolution of the contract occurs automatically. It does not depend on the choice of the

parties.

Cases where the doctrine of supervening impossibility applies. A contract will be discharged on

the ground of supervening impossibility in the following cases:

1. Destruction of subject- matter: When the subject- matter of a contract, subsequent

to its formation, is destroyed, without the fault of the promissory or promise, the

contract is discharged. It is so only when specific property or goods are destroyed

which can not be regained.

2. Failure of ultimate purpose: where the ultimate purpose for which the contract was

entered into fails, the contract is discharged, although there is no destruction of any

property affected by the contract and the performance of the contract remains

possible.

3. Death or personal incapacity of promisor: Where the performance of a contract

depends upon the personal skill or qualification or the existence of a given person,

the contract a discharged on the illness or incapacity or the death of that person.

4. Change of law: A subsequent change in law may render the contract illegal and in

such cases the contract is deemed discharges. The law may actually forbid the doing

of some act undertaken in the contract, or it may take from the control of the

promisor something in respect of which he has contracted to act or not to act in a

certain way.

Cases not covered by supervening impossibility: “ He that agrees to do an act must do

it or pay damages for not doing it” is the general rule of the law of contract. Thus, unless

the performance becomes absolutely impossible, a person is bound to perform any

obligation which he has undertaken, and cannot claim to be excused by the mere fact

that performance has subsequently become unexpectedly burdensome, more difficult

or expensive. Some of the cases where impossibility of performance is not an excuse are

as follows:



1. Difficulty of Performance: Increased or unexpected profits dwindle to a very

expense do not, as rule, excuse from performance.

2. Commercial impossibility: When in a transaction profits dwindle to a very low

level or actual loss becomes certain, it is said that the performance of the

contract has become commercially impossible. Commercial impossibility also

does not discharge a contract.

3. Impossibility due to the default of a third person. The doctrine of supervening

impossibility does not cover cases where the contract could not be performed of

the impossibility created by the failure of a third person on whose work the

promisor relied.

4. Strikes and look-outs: A strike by the workmen or a lock- out by employer does

not excuse performance because the former is manageable and the latter is self-

induced. Where the impossibility is not absolute or where it is due the default of

the promisor himself, Section 56 would not apply.

5. Failure of one of the objects: When a contract is entered into for several objects,

the failure of one of them does not discharge the contract.

D. Discharge by lapse of time:

The Limitation Act lays down that in case of breach of a contract legal action

should be taken within a specified period, called the period of limitation.

Otherwise the promisee is debarred from instituting a suit in a court of law and

the contract stands discharged. Thus in certain circumstances lapse of time may

also discharge a contract.

E. Discharge by operation of law:

A contract terminates by operation of law in the following cases:

a. Death: Where the contract is of a personal nature, the death of the promisor

discharged the contract. In other contract the rights and liabilities of the

deceased person pass on the legal representatives of the dead man.



b. Insolvency: A contract is discharged by the insolvency of one of the parties to it

when an insolvency court passes an “order of discharges” exonerating the

insolvent from liabilities on debts incurred prior to his adjudication.

c. Merger: Where an inferior right contract merges into a superior right contract,

the former stands discharged automatically.

d. Unauthorized material alteration: A material alteration made in a written

document of contract by one party without the consent of the other, will make

the whole contract void.

F. Discharged 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

obligation created by a contract on the part of each of the parties.

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. It 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) Impliedly by the conduct of one of the parties.

Here a party by his own voluntary act contract has refused to perform or

disabled himself from performing, his promise in its entirety, the promise may

put an end to the contract, unless he has signed, by words or conduct his

acquiescence in its continues.

2. Actual breach: Actual breach may also discharge a contract. It occurs when a

party fails to perform his obligation 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.



Q.5.What do you understand by Discharge of Instrument? What are the

different ways in which one or more parties to a negotiable instrument are

discharged?

Answer:

Discharge of Instrument

The term ‘Discharge’ in relation to negotiable instruments has two connotations, viz.,

Discharge of the instrument

A negotiable instrument is said to be discharged when it becomes completely useless, i.e., no

action on that will lie, when it cannot be negotiated further. After a negotiable instrument is

discharged the rights against all the parties thereto comes to an end, and no party, even a

holder in due course, can claim the amount of the instrument from any party thereto.

Discharge of the party primarily and ultimately liable on the instrument resulting eh discharge

of the instrument itself. For example, in the following cases and instrument is deemed to be

discharged:

1. When the party primarily liable on the instrument (i.e. the maker of the note, acceptor

of the bill or drawer bank) makes the payment in due course to the holder at or after

maturity. A payment by a party who is secondarily liable does not discharge the

instrument because in that case the payer holds it to enforce it against prior indorse and

the principal debtor.

2. When a bill of exchange which has been negotiated is, at or after maturity, held by the

acceptor in his own right, the instrument is discharged.

3. When the party primarily liable becomes insolvent, the instrument is discharged and the

holder cannot make any other prior party liable thereon. Similarly, an instrument stands

discharged by material alteration in the instrument or by lapse of time making the debt

time barred under the limitation act.



4. When the holder cancels the instrument with an intention to release the party primarily

liable thereon from the liability, the instrument is discharged and ceases to be

negotiable.

Discharge of one or more parties.

A party is said to be discharged from his liability when his liability on the instrument comes

to an end. When only some of the parties to negotiable instrument are discharged, the

instrument continues to be negotiable and the undercharged parties remain liable on it.

One more parties to a negotiable instrument are discharged from liability in the following

ways:

1. By cancellation : when the holder of a negotiable instrument deliberately cancels the

name of any of the party liable on the instrument with an intent to discharged him from

liability thereon, such party and all indorses subsequent to him, who have a right of

action against the party whose name is so cancelled, are discharged from liability . if the

subsequent to him will be discharged but those prior he will remain liable. Where the

cancellation is done under a mistake or without the authority of the holder if will not

discharge any party.

2. By release: If the holder of a negotiable instrument releases any party to the instrument

by any method other than cancellation of names. the party so released and all parties

subsequent to him, who have a right of action against the party so released, are

discharged from liability.

3. By payment: When the party primarily liable on the instrument makes the payment in

due course to the holder at or after maturity, all the parties to the instrument stand

discharged.

4. By allowing drawer more than 48 hours to accept: if the holder of a bill of exchange

allows the drawer more than forty- eight hours, to consider whether he will accept the

same, all previous parties not consenting to such allowances are thereby discharged

from liability to such holder.



5. By taking qualified acceptance: If the holder of a bill agrees to a qualified acceptance all

prior whose consent is not obtained to such an acceptance are discharged from liability.

6. By not –presentment for acceptance of a bill: When a bill of exchange is payable certain

period after sight, its holder must present it for acceptance to the drawer within a

reasonable time after it is drawn. If he makes a default in making such presentment the

drawer and all indorses who were liable towards such a holder are discharged from their

liability towards him.

7. By delay in presenting cheque: It is the duty of the holder of a cheque to present it for

payment within reasonable time of its issue, if the fails to do and in the meanwhile the

bank fails.

Q.6.What do you understand by Arbitration? What are the objectives of the

Arbitration Act? What are the essentials for Arbitration Agreement?

Answer:

Arbitration- (The Arbitrator decides):

Arbitration is a dispute resolution process where the opposing parties select or appoint an

individual called an Arbitrator. Upon appointment, the Arbitrator will arrange the process to

hear and consider the evidence, review arguments and afterwards will publish an award in

which the items of dispute are decided.

In some cases the Arbitrator can conduct the arbitration on documents evidence only.

When published the Arbitrator’s decisions are final and binding on the parties. It is rare for

an arbitration to be appealed to the courts. Arbitration may comprise a sole arbitrator, or

may be a panel of arbitrators.

Cost of the arbitration are disposed of in the Arbitrator’s award, unless the parties have

some agreement to the contrary.

Arbitration is a settlement of dispute by the decision of one or more person called

arbitrator. It is an arrangement for investigation and settlement of a dispute between



opposing parties by one or more unofficial persons chosen by the parties. The essence of

arbitration is that the arbitrator decides the case and his award is in the nature of a

judgment. Arbitration is a speedy and inexpensive method of settling the disputes between

the parties.

In lines with the international trend, the Government of India also enacted the Arbitration

and Conciliation Act 1996 and repealed the three earlier enactments namely, the

Arbitration (Protocol and Convention) Act, 1937; the Arbitration Act, 1940; and the foreign

award (Recognition and Enforcement) Act, 1961.

Objectives of the Act

The main objectives of the Act are as under:

i) To comprehensively cover international commercial arbitrating and conciliation as

also domestic arbitration and conciliation.

ii) To make provision for an arbitral procedure which is fair, efficient and capable of

meeting the needs of the specific arbitration?

iii) To provide that the arbitral tribunal gives reasons for its arbitral award.

iv) To ensure that the arbitral tribunal remains within the limit of jurisdiction.

v) To minimize the supervisory role of the courts in the arbitral process.

vi) To permit an arbitral tribunal to use mediation, conciliation or other procedures

during the arbitral proceedings to encourage settlement of disputes.

vii) To provide that every final arbitral award is enforced in the same manner as it were

a decree of the court.

viii) To provide that a settlement agreement reached by the parties as a result of

conciliation proceedings will have the same status and effect as an arbitral award on

agreed terms on the substance of the dispute rendered by an arbitral tribunal.

To provide that, for purposes of enforcement of foreign awards, every arbitral award made in

the country to which one of the two international conventions.

-End of Assignment-


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