mb0035 legal aspects of business set1 and set2

8/14/2019 MB0035 Legal Aspects of Business Set1 and Set2

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ASSIGNMENTS

MB0035

LEGAL ASPECTS OF BUSINESS

(3 credits)

Set I

Marks 60

Q1. What are the essentials for a Valid Contract? Describe them in details.

Ans:

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 andacceptance. 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. In other words it should not be caused by coercion, undue

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 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. It is the price for the promise. An agreement not supported by

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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. 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.

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. In such cases, the aggrieved party cant

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 cant 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, Indian courts also recognise this ingredient. An

agreement creating social obligation cant 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 states

that the contract should be in writing and should be witnessed or should be registered, the same must be

observed. Otherwise, the agreement cant be enforced e.g., Under Indian Companies Act, the

Memorandum of Association and Articles of Association must be registered.

Q2. What are the rules regarding the acceptance of a proposal? Describe them in details.

Ans:

According to law When the person to whom the proposal is made signifies his willingness thereto 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 an 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 cant be recalled or

undone. An acceptance turns the offer into a binding obligation.

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Rules Regarding Acceptance:

a) An offer can be accepted only by the person to whom it is made: The offeree only has to accept the

offer. In case it is accepted by any other person no 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 toto. 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 offeror. 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 does not

result from a mere state of mind. As regards unilateral contracts (e.g., offer of reward) it is impossible to

the offeree to communicate his acceptance otherwise than by performing the contract. In the case of

bilateral contracts acceptance must be communicated. The offeror cant force a contract on offeree by

fixing the mode of refusal. Further, acceptance should be communicated only to the offeror and not to

somebody else.

d) Acceptance should be according to the prescribed form: Unless specified 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 offeree to express acceptance by some

gesture. Once he prescribes the mode of communication later he cant say that it was insufficient. If the

offeree does not signify his assent to the offeror according to the mode prescribed it becomes deviated

acceptance and strictly speaking it is no acceptance at all. However, such a regid 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

does not tell that deviated acceptance is no acceptance.

e) Acceptance must be provoked by offer: The acceptor must be aware of the offer. Even if he fulfills

the conditions mentioned in the offer, if he is ignorant of the offer itself, he cant give a valid acceptance.

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[Lalmann Shukla V, Gouridutt]. f) Acceptance must be given before the offer lapses or is revoked: Where

a time limit 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 cant be accepted

unless there is a fresh offer.

g) Provisional acceptance is no acceptance: A provisional acceptance does not make 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. Contract

by post: No problem arises where there is instantaneous communication of offer and acceptance which is

possible when the parties are face to face. But how to determine the point of time when the contract is

complete if the parties are at distance by each other ? As regards the point of time when the contract is

complete, there is fundamental difference between English Law and Indian Law. Under English Law, the

proposer is legally bound by the acceptance effected through postal medium when the letter is prepared,

addressed, stamped and mailed eventhough it is delayed or lost in transit.

Indian Law (Sec. 4) lays down that the communication of an acceptance is complete as against the

proposer when it is put in a course of transmission to him so as to be out of the power of the acceptor; as

against the acceptor when it comes to the knowledge of the proposer . The distinction between English

Law and Indian Law lies with regard to the position of the acceptor. While under English Law, the

acceptor is bound by acceptance the moment the letter is mailed properly, under Indian Law the

communication of acceptance is complete as against, the acceptor only when it comes to the knowledge

of the proposer.

Termination of offer: Following are the circumstances under which an offer is terminated.

(a) Lapse : An offer lapses because of passage of time, death or insanity of the proposer. In case time

limit for acceptance is prescribed by the offeror, offer lapses if not accepted within that time. In the

absence of any stipulation of time, it has to be accepted within a reasonable time depending upon the

circumstances of each case. A proposal is revoked by the death or insanity of the proposer, if the fact of

his death or insanity comes to the knowledge of the acceptor before acceptance. An acceptance is not

effective if it is communicated to the legal representatives of the proposer. But in case the offeree is

ignorant of the offerors death, it can be accepted.

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(b) Failure to fulfill a condition procedent: Sec. 6 (3) provides that an offer is terminated by the failure

of the acceptor to fulfil a condition precedent to acceptance. e.g., A offers to sell his car to B for Rs.

1,00,000 on the condition that B has to show his driving licence to A. B has to comply with this condition

if he has to accept the offer.

(c) Rejection: By rejecting the offer offeror can terminate an offer. This rejection may be express or

implied. A counter offer has the same effect as rejection.

(d) Destruction of the subject matter or illegality : If the thing offered is destroyed or cant be bought

and sold due to operation of law, the offer itself lapses.

(e) Revocation: The withdrawal of an offer by the offeror is known as revocation. Till the acceptance of

the offer, the offeror can revoke it. Sec. 5 provides that a proposal may be revoked by the proposer at any

time before the communication of its acceptance is complete. Communication of acceptance as against

the proposer is complete where it is put in the course of transmission to him so as to be out of the reach of

the acceptor. In England, an acceptance cant be revoked.

Q3: What is the difference between fraud and misinterpretation? What do you understand by mistake?

Ans:

Distinction between fraud and misrepresentation:

1) In misrepresentation the person making the false statement honestly believes it to be true. In fraud, thefalse statement is made by person who knows that it is false or 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.

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6) The party complaining of misrepresentation cannt avoid the contract if he had the means to discover

the truth with ordinary deligance. But in the case of fraud, the party making a false statement cannot say

that the other party had the means to discover the truth with ordinary deligance.

5. Mistake:

Usually, mistake refers to mis-understanding or wrong thinking or wrong belief. But legally, its meaning

is restricted and is to mean operative mistake. Courts recognise only such mistakes which invalidate the

contract. Mistake may be mistake of fact (either unilateral or bilateral) or mistake of law (either Indian

law or foreign law). Sec. 20 Where both parties to an agreement are under a mistake as to a matter of

fact essential to the agreement, the agreement is void. Sec. 21 A contract is not voidable because it was

caused by a mistake as to any law in force in India; but a mistake as to a law not inforce in India has the

same effect as a mistake of fact. Bilateral mistake: Sec. 20 deals with bilateral mistake. Bilateral mistake

is one where there is no real correspondence of offer and acceptance. The parties are not really in

consensus-ad-idem. Therefore there is no agreement at all.

A bilateral mistake may be regarding the subject matter or the possibility of performing the contract.

Mistake as to the subject matter: This mistake arises when the parties to the contract assume at the time

of making the contract, that a certain state of things exists, but in reality it does not exist. Such a mistake

may relate to

(i) existance of the subject matter: Two parties may enter into the contract on the assumption that the

subject matter exists at the time contract. But actually it may have ceased to exist or has never existed at

all. Then the contract becomes void.

(ii) Identity of the subject matter: A mutual mistakes as to the identity of subject matter renders the

contract void.

(iii) A mistake as to the quality of the subject matter will not render the agreement void owing to the

application of the principle of caveat emptor unless there is misrepresentation or guarantee by the seller.

(iv) Price of the subject matter: An explanation to Sec. 20 provides that an erraneous opinion as to the

value of the thing which forms the subject matter of the agreement is not to be deemed a mistake as to a

matter of fact. A mistaken notion about the value of a thing bought or sold may be unilateral or bilateral.

If it is unilateral, the buyer or seller has to presume that he has made a bad bargain. Where the mistake is

mutual and the parties enter into the contract with false assumption and mistake as to the value of the

subject matter is the basis of their agreement, there cant be an enforceable contract between them.

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(v) Title of the subject matter: If a person agrees to purchase property which is unknown to himself and

the seller is his own already, the contract may be void. A mistake as to the title does not invalidate a

contract since Sec. 14 of the Sale of Goods Act imposes an implied condition as to the title of the seller.

Where there is no such warrantee or the buyer purchases his own property the agreement will be void-ab-

initio.

vi) A false and fundamental assumption: A false and fundamental assumption going to the root of the

contract would render the contract invalid. Mistake as to the possibility of performance: There may not

be any possibility of the performance of the contract. This impossibility of performance may be physical

or legal impossibility. However, impossibility of performance cannot be included under the head bilateral

mistake as there is Sec. 56 which lays down a positive rule of law regarding responsibility. Unilateral

mistakes: Mistake of one of the parties to a contract as to a matter of fact is known as unilateral mistake.

Sec. 22 provides that a contract is not voidable merely because it was caused by unilateral mistake.

A person is bound by an agreement to which he has expressed a clear assent unless the unilateral mistake

is caused by misrepresentation or fraud. However, where consent to an agreement is given by a party to it

under mistake which prevents the formation of a contract, the unilateral mistake multifies the consent and

the contract becomes void. The following are such exceptional cases:

(a) Mistake as to identity: It is a rule of law that if a person intends to contract with A, B cannot give

himself any right under it. An offer can be accepted only by the person to whom it is offered. If it is

accepted by some one else, there arises a unilateral mistake rendering the contract void. Mistake as to

identity is of two types: (i) where the parties are dating with each other from a distance (ii) where they are

face to face with each other.

b) Mistake as to the character of a written document: If a person signs a document under the mistaken

impression that he is signing a document of a different nature altogether he may escape liability in the

document signed by him, provided he can prove that the nature of the document is different from what it

is supposed to be. One party to a contract may not disclose to the other the nature of the document and

induce the other to sign the same. The other party may sign it presuming it to be a document of different

nature. In such a case, the contract becomes wholly void for want of concent. Mistake of law: A mistake

of law may be of law of land or of foreign law. Mistake as to the law of the land doesnot render the

contract voidable as ignorance of law is no excuse.

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Q4.What are the different ways in which a contract can be discharged? Describe these ways in

details.

Ans:

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 in any of 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.

1. 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 his promise, he alone is discharged. Such a partygets 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 performance or tender: When the promisor offers to perform his obligation under

the contract, but is unable to do so because the promisee does not accept the performance, it is

called attempted performance or tender. Thus tender is not actual performance but is onlyan offer to perform the obligation under the contract. A valid tender of performance is

equivalent to performance. Essentials of a valid tender. A valid tender or offer of performance

must fulfil the following conditions:1) It must be unconditional. A conditional tender is not a tender.2) It must be made at proper time and place. A tender before or after the due date or at a place

other than agreed upon is not a valid tender.

3) It must be of the whole obligation contracted for and not only of the part.4) If the tender relates to delivery of goods, it must give a reasonable opportunity to the promisee

for inspection of goods so that he may be sure that the goods tendered are of contract description.

5) It must be made by a person who is in a position and is willing to perform the promise. Atender by a minor or idiot is not a valid tender.

6) It must be made to the proper person i.e., the promisee or his duly authorised agent. Tender

made to a stranger is invalid.

7) If there are several joint promisees, an offer to any one of them is a valid tender.8) In case of tender of money, exact amount should be tendered in the legal tender money.

Tendering a smaller or larger amount is an invalid tender. Similarly, a tender by a cheque is

invalid as it is not legal tender but if the creditor accepts the cheque, he cannot afterwards raise anobjection.

Effect of refusal to accept a valid tender (Sec. 38): The effect of refusal to accept a properly made

offer of performance is that the contract is deemed to have been performed by the promisor i.e.,tenderer and the promisee can be sued for breach of contract. A valid tender, thus, diacharges the

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contract. Exception: Tender of money, however, does not discharge the contract. The money will

have to be paid even after the refusal of tender of course without interest from the date of refusal.

In case of a suit, cost of defence can also be recovered from the plaintiff, if tender of money isproved.

2. Discharge by Mutual Consent or AgreementSince 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

discharging a contract by mutual agreement:1. Novation: Novation occurs when a new contract is substituted for an existing contract, either

between the same parties or between different parties, the consideration mutually being the

discharge of the old contract. When the parties to a contract agree for novation, the original

contract is discharged and need not be performed. The following points are also worth-notng inconnection 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. If it suffers from 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 originalcontract is discharged by alteration and the new contract in its altered form takes its place. A

material alteration made in a written contract by one party without the consent of the other, will,

make the whole contract void and no person can maintain an action upon it.

3. Rescission: A contract may be discharged, before the date of performance, by agreementbetween 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. An agreement ofrescission releases the parties from their obligations arising out of the contract. There may also be

an implied rescission of a contract e.g., where there is non-performance of a contract by both the

parties for a long period, without complaint, it amounts to an implied rescission.4. Remission: Remission may be defined As the acceptance of a lesser sum than what was

contracted for or a lesser fulfilment of the promise made. Section 63 lays down that a promisee

may give up wholly or in part, the performance of the promise made to him and a promise to doso is binding even though there is no consideration for it. An agreement to extend the time for the

performance of a promise also does not require consideration to support it on the ground that it is

a partial remission of performance.

5. Waiver: Waiver means the deliberate abandonment or giving up of a right which a party isentitled to under a contract, whereupon the other party to the contract is released from his

obligation.

3. 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 into to perform

something that is obviously impossible, e.g., an agreement to discover treasure by magic, because,in such a case there is no contract to terminate, it being an agreement void ab- initio by virtue of

Section 56, Para 1, which provides: 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

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contract is made, becomes impossible, or, by reason of some event which the promisor could not

prevent, unlawful, becomes void when the act becomes impossible or unlawful.

The following conditions must be fulfilled:1) that the act should have become impossible;

2) that impossibility should be by reason of some event which the promisor could not prevent;

and3) that the possibility should not be self-induced by the promisor 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 orunlawful, the contract becomes void and stands dischraged. This is known as frustration of the

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

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

contract becomes impossible by reason of supervening impossibility or illegality of the act agreedto be done, it is logical to absolve the parties from further performance of it as they never did

promise to perform an impossibility. The doctrine of supervening impossibility as enunciated in

Section 56 (Para 2), is wider than the doctrine of frustration known to the English law. The

doctrine of frustration is an aspect or part of the law of discharge of contract by reason ofsupervening impossibility or illegality of the act agreed to be done. In the case of subsequent

impossibility or illegality, the dissolution of the contract occurs automatically. It does not dependon 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 itsformation, is destroyed, without the fault of the promisor or promisee, the contract is discharged.

It is so only when specific property or goods are destroyed which cannot be regained.

2. Failure of ultimate purpose: Where the ultimate purpose for which the contract was entered intofails, 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 uponthe personal skill or qualification or the existence of a given person, the contract is 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 casesthe contract is deemed discharged. 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 thegeneral rule of the law of contract. Thus, unless the performance becomes absolutely impossible

(as discussed above), 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 becomeunexpectedly 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 difficulty and expense do not, as a 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.

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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 because of the impossibility

created by the failure of a third person on whose work the promisor relied.4. Strikes and lock-outs: A strike by the workmen or a lock-out by the 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 to the default of the promisor himself, Section56would not apply. As such these events also do not discharge a contract.

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.4. 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. Wheretime is of essence in a contract if the contract is not performed at the fixed time, the contract

comes to an end, and the party not at fault need not perform his obligation and may sue the other

party for damages.

5. 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 dealth of the promisor discharges thecontract. In other contracts the rights and liabilities of the deceased person pass on to 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 discharge exonerating the insolvent from liabilities on debtsincurred prior to his adjudication.

c) Merger: Where an inferior right contract merges into a superior right contract, the former

stands discharged automatically.d) Unauthorised material alteration: A material alteration made in a written document or contract

by one party without the consent of the other, will make the whole contract void.

6. Discharge by breach of contract: Breach of contract by a party thereto is also a method ofdischarge 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. It may take place in two ways: (a) Expressly by wordsspoken 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 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 acquiscence in its continuance.2. Actual breach: Actual breach may also discharge a contract. It 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.

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Q5 : 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?

Ans:

The term discharge in relation to negotiable instruments has two connotations, viz., (1) discharge of

instrument, and (2) discharge of one or more parties from liability on the instrument.

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

that will lie, and 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 thereto.

Discharge of the party primarily and ultimately liable on the instrumentresults in the 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

drawee 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 indorser 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 when the primary

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

barred under the Limitations 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

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

be negotiable and the undischarged parties remain liable on it.

One or more parties to a negotiable instrument are 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 discharge him from liability thereon, such party and all

indorsers subsequent to him, who have a right of action against the party whose name is so cancelled, are

discharged from liability. If the name of an indorser has been cancelled then all the indorsers subsequent

to him will be discharged but those prior him 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 (i.e., by a separate agreement of waiver, release or remission), 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 drawee more than 48 hours to accept: If the holder of a bill of exchange allows the

drawee more than forty-eight hours, to consider whether he will accept the same, all previous parties not

consenting to such allowance 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 parties

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

6. By not giving notice of dishonuour: Any party to a negotiable instrument (other than the party

primarily liable) to whom notice of dishonour is not sent by the holder is discharged from liability as

against the holder, unless the circumstances are such that no notice of dishonour is required to be sent.

7. By non-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 drawee within a reasonable time after it is drawn. If

he makes a default in making such presentment the drawer and all indorsers who were liable towards

such a holder are discharged from their liability towards him.

8. 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 he fails to do and in the meanwhile the bank fails.

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Q6 : What do you understand by Arbitration? What are the objectives of the Arbitration Act? What are

the essentials for Arbitration Agreement?

Ans:

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.

Costs 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 persons called

arbitrators. It is an arrangement for investigation and settlement of a dispute between opposing parties by

one or more unofficial persons chosen by the parties. In arbitration some dispute is referred by the parties

for settlement to a tribunal of their own choosing. The dispute is not submitted for decision to the

ordinary courts but a domestic tribunal. It is thus a method of settling the disputes in a quasi-judicial

manner. The essence of arbitration is that the arbitrator decides the case and his award is in the nature of

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

In lines with the international trend, the Government of India has 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 arbitration 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 with in the limit of jurisdiction.

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

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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 if 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.

ix) 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 relating to foreign arbitral awards to which

India is a party applies, will be treated as a foreign award.

Arbitration Agreement: The foundation of arbitration is the arbitration agreement between the parties to

submit to arbitration all or certain disputes which have arisen or which may arise between them. Thus,

the provision of arbitration can be made at the time of entering the contract itself, so that if any dispute

arises in future, the dispute can be referred to arbitrator as per the agreement. It is also possible to refer a

dispute to arbitration after the dispute has arisen. Arbitration agreement may be in the form of an

arbitration clause in a contract or in the form of a separate agreement.

The agreement must be in writing and must be signed by both parties. The arbitration agreement can be

by exchange of letters, document, telex, telegram etc [section 7].

Court must refer the matter to arbitration in some cases: If a party approaches court despite the arbitration

agreement, the other party can raise objection. However, such objection must be raised before submitting

his first statement on the substance of dispute. Such objection must be accompanied by the original

arbitration agreement or its certified copy. On such application the judicial authority shall refer the parties

to arbitration. Since the word used is shall, it is mandatory for judicial authority to refer the matter to

arbitration [Section 8]. However, once first statement to court is already made by the opposite party, the

matter has to continue in the court. Once an application is made by other party for referring the matter to

arbitration, the arbitrator can continue with arbitration and even make an arbitral award.

Essentials of Arbitration Agreement

1. It must be in writing [Section 7(3)]: Like the old law, the new law also requires the arbitration

agreement to be in writing. It also provides in section 7(4) that an exchange of letters, telex, telegrams, or

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other means of telecommunications can also provide a record of such an agreement. Further, it is also

provided that an exchange of claim and defence in which the existence of an arbitration agreement is

alleged by one party and not denied by the other, will also amount to be an arbitration agreement.

It is not necessary that such written agreement should be signed by the parties. All that is necessary is that

the parties should accept the terms of an agreement reduced in writing. The naming of the arbitrator in

the arbitration agreement is not necessary. No particular form or formal document is necessary.

2. It must have all the essential elements of a valid contract: An arbitration agreement stands on the

same footing as any other agreement. Every person capable of entering into a contract may be a party to

an arbitration agreement. The terms of the agreement must be definite and certain; if the terms are vague

it is bad for indefiniteness.

3. The agreement must be to refer a dispute, present or future, between the parties to arbitration:

If there is no dispute, there can be no right to demand arbitration. A dispute means an assertion of a right

by one party and repudiation thereof by another. A point as to which there is no dispute cannot be

referred to arbitration. The dispute may relate to an act of commission or omission, for example, with

holding a certificate to which a person is entitled or refusal to register a transfer of shares.

Under the present law, certain disputes such as matrimonial disputes, criminal prosecution, questions

relating to guardianship, questions about validity of a will etc. or treated as not suitable for arbitration.

Section 2(3) of the new Act maintains this position. Subject to this qualification Section 7(1) of the new

Act makes it permissible to enter into an arbitration agreement in respect of a defined legal relationship

whether contractual or not.

4. An arbitration agreement may be in the form of an arbitration clause in a contract or in the

form of a separate agreement [Section 7(2)].

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ASSIGNMENTS

MB0035

LEGAL ASPECTS OF BUSINESS

(3 credits). Set II

Marks 60

Q1: Whatdo you understand by the Offer of Proposal? What are the essentials of a Valid Offer?

Ans:

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 person to such act or abstinence, he is said to make a proposal.The person making the proposal is called promisor and the person accepting it is called

promisee.

Essentials of a Valid Offer:

a) An offer may be general or specific: According to Sec. 2 (a) an offer must be made to a specific

person. An offer may be made to the world at large. But the contract is made only with the person who

accepts and fulfills the conditions of the proposal.

In the words of Anson, An offer need not be made to an ascertained person, but no contract can arise

until it has been accepted by an ascertained person.

In Carlill Vs Carbolic Smoke Ball Co. (1893), a Company offered by advertisement to pay 100 to any

one who contacts the increasing epidemic influenza, cold or any disease caused by taking cold after

having used the ball as per printed directions. It was added that 1000 is deposited with the Alliance

Bank showing our sincerity in the matter. The plaintiff used the smoke mokeball as per the directions

but subsequently suffered from influenza. She was held entitled to recover the promised reward.

b) An offer should be made with an intention of creating legal obligation: This principle of English

law though not incorporated specifically under Section 10, is generally accepted as vital to form a legal

agreement. Social, moral or religious agreements are not legally enforceable. For example, Mr. A invites

Mr. B to dinner. Mr. B fails to attend. Mr. A cannot sue Mr. B for unconsumed food.

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Whether the offeror intended to enter into legal obligations or not could be known from the nature of the

agreement and the surrounding circumstances. The court has to ascertain the intention of the parties. The

test of contractual intention is objective and not subjective. What is considered is not what the parties had

in mind but what a reasonable person would think in the circumstances their intentions to be.

c) An offer must be definite and certain: The terms of an offer should not be uncertain and ambiguous.

Anson expressed The law requires the parties to make their own contract, it will not make a contract for

them out of terms which are indefinite or illusory . This is so because the courts cannot say what the

parties to the contract are to do and whether there is violation of the contract.

However, all the terms of an offer need not be expressed. If some of the essential terms of a bargain may

not be specified but are capable of being determined by some method other than by a future agreement

there will be a good contract between the parties.

d) A statement of intention and an invitation to offer are not offers: Preliminary negotiations are likely to

take place before entering into an agreement. In the course of such negotiations one party may make

some declarations regarding his intention of doing something. Such a declaration by itself does not

become an offer. e.g., A tells B I want to sell my car. This is not an offer.

An invitation to offer is not an offer. An advertisement for tenders for sale of goods by auction, an

announcement about the stock of goods for sale, display of goods in shop windows, prospectus of a

company, catalogue, price-lists, loudspeaker announcements etc. are merely invitations to offer or offers.

e) An offer must be communicated to the offeree: An offer becomes operative only when it has been

communicated to the person to whom the offer is made. Communication is necessary whether the offer is

specific or general. Under Section 4 the communication of a proposal is complete when it comes to the

knowledge of the person to whom it is made. However, mere knowledge of a proposal does not amount

to communication unless the offeree acquires it with express or implied intention of the offeror.

The Act does not indicate the mode of communication. The offeror may communicate the offer by

choosing any available means. However, a letter containing an offer which is never mailed is not an offer

even if the contents are known by the offeree in some manner. General offers are communicated to public

through notice and advertise- ments. But as regards reward cases the question arises whether the person

performing the conditions of the offer can claim the reward even if he is ignorant of the offer. In Lalman

Shukla Vs. Gouri Dutt case it was held that knowledge of the offer is essential. There can be no

acceptance unless there is knowledge of the offer.

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When the offer is not communicated silence on the part of the offeree does not amount to consent since

he does not have the opportunity to reject the offer. E.g., A works for B without the request or knowledge

of B. A cant sue B for remuneration since Bs consent cant be presumed from his silence.

f) The terms and conditions of offer should also be communicated: An agreement is a two-sided

bargain based on freedom of contract. However, in modern times the buyer of an article is in an

unfavourable position. Freedom of contract becomes one-sided in the case of agreements with common

carriers, dry cleaners, tailors, insurance companies, landlords, public utilities etc. It is also difficult to

draw up a separate agreement with each individual. Therefore, printed forms of agreements known as

standard form contracts are used. Such forms contain large number of terms and conditions very often

small in print absolving the dominant party of all liability. The economically weaker party has to accept

all such terms and conditions irrespective of whether he likes them or not. The Court too finds it difficult

at times to protect the interest of the weaker party. Therefore the courts have evolved certain methods.

When the offer contains special terms and conditions the offeror must communicate all the terms and

conditions either before or at the time of contracting in order to bind the acceptor.

On the other hand if the acceptor knew that there was writing and knew or believed that the writing

contained conditions he is then bound by the conditions even though he did not read them. It is enough if

the offeror has done all that can be considered necessary to give notice to the acceptor.

g) Two identical offers do not make a contract: An offer made by a person may cross a similar one

made by another person of course in the course of transit. They are just two identical or cross offers,

though there seems to be identity of mind. h) An offer should not contain any term the non-compliance of

which amounts to acceptance: There may be any number of terms and conditions in an offer. The

acceptor can accept or reject them. While the offeror can prescribe mode of acceptance, he cant

prescribe the form or time of refusal so as to fix a contract upon the acceptor. He cant say, for example,

that if the offeree does not communicate before a given time, he is deemed to have accepted the offer.

Q2: What are the effects of Minors Agreement? State in details.

Ans:

Minors:

A minor is a person who has not attained the age of majority. According to Indian 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

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is under the supervision of a court of wards, the age of majority is 21 years. Principles governing minors

contracts: The law protects minors persons, preserves either their rights and 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.

In pursuing the above objective, the law should not cause unnecessary hardship to those who deal with

minors. Sec. II of the Act is silent as regards the legal effects of an agreement entered into by or with a

minor. In Mohari Bibi Vs. Dharmo Das Ghosh case it was held that a minors agreement is void-ab-

initio. Effects of minors agreement: A minors agreement is void-ab-initio. Where there is no contract,

there should be no contractual obligation on either side.

Hence, the effects of a minors 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 cannt be sued for deceit. You cannt convert a contract into a

tort to enable you to sue an infant. This principle has been followed in India. 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: If a minor obtains property or goods by misrepresentating his age, he can be

compelled to restore it but only so long as the same is traceable in his possession. This is known as the

equitable doctrine of restitution. Suppose the minor has sold the goods he cant 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 minors 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

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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 promise 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 cant 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 cant be made valid by subsequent ratification. If 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 cant 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 If 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 cannt

reasonably exist 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 infants 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.

Q3: Whatdo you understand by Consideration? What are the rules governing Consideration?

Ans:

Consideration means something in return.It is one of the essentials of valid contract. Ex Nudo Pacto Non

Oritar Actio means out of bare promise no action arises.

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Definition: Blackstone defined consideration as the recompense given by the party contracting to the

other. In the words of Pollack, Consideration is the price for which the promise of the other is bought

and the promise thus given for value is enforceable. Sec. 2 (d) of the Act defines consideration in the

following terms: 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 a consideration for the promise.

Rules Governing Consideration:

i) Consideration should be furnished at the desire of the promisor. The consideration should be the

outcome of the desire of the promisor. The desire may be express or implied. The act done at the instance

of third party or gratuitously does not become consideration. e.g. As house catches fire. B goes and helps

in extinguishing it. B later cannot ask for any payment for his services. Even spiritual promises or mental

satisfaction are not enforceable. The question arises whether a promise of a subscription to a public or

charitable trust becomes legal. (Kedarnath Vs Gorie Mohammed). A mere promise is not enough. The

promisee must have done some act or incurred expenses on the strength of the promise. (Abdul Aziz Vs

Maznoon Ali).

ii) Consideration may move from the promisee or any other person: Sec. 2 (d) provides that the

consideration may be furnished by the promisee or any other person. At this point Indian law differs from

English law according to which the consideration must move from the promisee only and not from the

third party. However, there is a doctrine known as constructive consideration under which if the person

who was to take a benefit under the contract was nearly related by blood to the promisee, a right of action

would vest to him. But this doctrine is no more valid.

iii) Consideration may be past, present or future: Past consideration is something done or not done at

the request of the promisor, before the making of the agreement. Under English Law, past consideration

is no consideration. Nevertheless, past consideration will support a subsequent promise of the promisor.

If services are rendered under circumstances which raise an implication of a promise to pay for them, the

subsequent promise to pay is merely fixing a reasonable compensation for the services. In India past

consideration is sufficient to support a promise provided it is made at the request of the promisor. Present

consideration refers to one furnished at the time of the promise. Where both the parties to a contract

promise to each other of doing or not doing something the consideration on both sides moves to a future

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date and is known as future consideration. Present and future considerations are also known as executed

and executory consideration respectively.

iv) Consideration need not be adequate: The law does not expect that the consideration should be

adequate. It is the lookout of the promisor. The parties as between themselves can determine adequate

consideration. The consideration which the contracting parties give to each other need not be of equal

value. However, explanation 2 to Sec. 25 provides that the agreement to which the consent of the

promisor is given is not void merely because the consideration is inadequate; but the inadequacy of the

consideration may be taken into consideration by the court in determining whether the consent of the

promisor was freely given.

v) Consideration should be valuable: The consideration should not be unreal or illusory or of the nature

of moral obligation. It should be valuable, though the value of the consideration need not be the same as

the value of the promise which it supports.

vi) The discharging of a pre-existing obligation is not consideration: The law may compel a person to

do an act. Then the mere doing of such act cant become consideration for anothers promise. However,

doing or agreeing to do more than what a person is legally bound amounts to good consideration. In the

same way performing or promising to perform an existing obligation imposed by a previous contract will

not form consideration.

vii) Consideration should be certain and lawful: Consideration should not be illusory or uncertain or

impossible. Discovering a treasury by magic, for example, cannot form consideration.

Q4: What do you understand by the Negotiable Instruments Act? What are the different characteristics

of the Negotiable Instruments?

Ans:

The word negotiable means transferable by delivery, and the word instrument means a written

document by which a right is created in favour of some person. Thus, the term negotiable instrument

literally means a written document transferable by delivery.

According to Section 13 of the Negotiable Instruments Act, a negotiable instrument means a promissory

note, bill of exchange or cheque payable either to order or to bearer. The Act, thus, mentions three kinds

of negotiable instruments, namely notes, bills and cheques and declares that to be negotiable they must be

made payable in any of the following forms:

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a) Payable to order: A note, bill or cheque is payable to order which is expressed to be payable to a

particular person or his order. But it should not contain any words prohibiting transfer, e.g., Pay to A

only or Pay to A and none else is not treated as payable to order and therefore such a document shall

not be treated as negotiable instrument because its negotiability has been restricted. There is, however, an

exception in favour of a cheque. A cheque crossed Account Payee only can still be negotiated further,

of course, the banker is to take extra care in that case.

b) Payable to bearer: Payable to bearer means payable to any person whom so ever bears it. A note,

bill or cheque is payable to bearer which is expressed to be so payable or on which the only or last

endorsement is an endorsement in blank. The definition given in Section 13 of the Negotiable

Instruments Act does not set out the essential characteristics of a negotiable instrument. Possibly the most

expressive and all encompassing definition of negotiable instrument had been suggested by Thomas

which is as follows:

A negotiable instrument is one which is, by a legally recognised custom of trade or by law, transferable

by delivery or by endorsement and delivery in such circumstances that (a) the holder of it for the time

being may sue on it in his own name and (b) the property in it passes, free from equities, to a bonafide

transferee for value, notwithstanding any defect in the title of the transferor."

Characteristics of Negotiable Instruments:

An examination of the above definition reveals the following essential characteristics of negotiable

instruments which make them different from an ordinary chattel:

1. Easy negotiability: They are transferable from one person to another without any formality. In other

words, the property (right of ownership) in these instruments passes by either endorsement and delivery

(in case it is payable to order) or by delivery merely (in case it is payable to bearer), and no further

evidence of transfer is needed.

2. Transferee can sue in his own name without giving notice to the debtor: A bill, note or a cheque

represents a debt, i.e., an actionable claim and implies the right of the creditor to recover something

from his debtor. The creditor can either recover this amount himself or can transfer his right to another

person. In case he transfers his right, the transferee of a negotiable instrument is entitled to sue on the

instrument in his own name in case of dishonour, without giving notice to the debtor of the fact that he

has become holder.

3. Better title to a bonafide transferee for value: A bonafide transferee of a negotiable instrument for

value (technically called a holder in due course) gets the instrument free from all defects. He is not

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affected by any defect of title of the transferor or any prior party. Thus, the general rule of the law of

transfer applicable in the case of ordinary chattels that nobody can transfer a better title than that of his

own does not apply to negotiable instruments.

Examples of Negotiable Instruments: The following instruments have been recognized as negotiable

instruments by statute or by usage or custom: (i) Bills of exchange; (ii) Promissory notes; (iii) Cheques;

(iv) Government promissory notes; (v) Treasury bills; (vi) Dividend warrants; (vii) Share warrants; (viii)

Bearer debentures; (ix) Port Trust or Improvement Trust debentures; (x) Hundis; (xi) Railway bonds

payable to bearer, etc. Examples of Non-negotiable Instruments: These are: (i) Money orders; (ii) Postal

orders; (iii) Fixed deposit receipts; (iv) Share certificates; (v) Letters of credit.

Q5: What do you understand by Company? What are the characteristics of a Company? What are the

different types of company?

Ans:

The term company implies an association of a number of persons for some common objective e.g. to

carry on a business concern, to promote art, science or culture in the society, to run a sport club etc.

Every association, however, may not be a company in the eyes of law as the legal import of the word

company is different from its common parlance meaning. In legal terminology its use is restricted to

imply an association of persons, registered as a company under the law of the land.

The following are some of the definitions of company given by legal luminaries and scholars of law:

Company means a company formed and registered under this Act or an existing company. Existing

company means a company formed and registered under the previous company laws. Companies Act,

1956 Sec. 3(i & ii)

A joint stock company is an artificial person invisible, intangible and existing only in the eyes of law.

Being a mere creature of law, it possesses only those properties which the charter of its creation confers

upon it, either expressly or as incidental to its very existence. Justice Marshall

A company is an association of many persons who contribute money or moneys worth to a common

stock and employ it in some common trade or business and who share the profit or loss arising therefrom.

The common stock so contributed is denoted in terms of money and is the capital of the company. The

persons who contribute it or to whom it belongs are members. The proportion of capital to which each

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member is entitled is his share. Shares are always transferable although the right to transfer them is often

more or less restricted. Lord Lindley

From the above definitions it is clear that a company has a corporate and legal personality. It is an

artificial person and exists only in the eyes of law. It has an independent legal entity, a common seal and

perpetual succession. Sometimes, the term corporation (a word derived from the Latin word corpus

which means body) is also used for a company.

At present the companies in India are incorporated under the Companies Act, 1956.

Characteristics of Company

The various definitions reveal the following essential characteristics of a

company:

1. Artificial Person: A company is an association of persons who have agreed to form the company and

become its members or shareholders with the object of carrying on a lawful business for profit. It comes

into existence when it is registered under the Companies Act. The law treats it as a legal person as it can

conduct lawful business and enter into contracts with other persons in its own name. It can sell or

purchase property. It can sue and be sued in its name. It cannot be regarded as an imaginary person

because it has a legal existence. Thus company is an artificial person created by law.

2. Independent corporate existence: A company has a separate independent corporate existence. It is in

law a person. Its entity is always separate from its members. The property of the company belongs to it

and not to the shareholders. The company cannot be held liable for the acts of the members and the

members can not be held liable for the acts or wrongs or misdeeds of the company. Once a company is

incorporated, it must be treated like any other independent person. As a consequence of separate legal

entity, the company may enter into contracts with its members and vice-versa.

3. Perpetual existence: The attribute of separate entity also provides a company a perpetual existence,

until dissolved by law. Its life remains unaffected by the lunacy, insolvency or death of its members. The

members may come and go but the company can go on for ever. It is created by law and the law alone

can dissolve it.

4. Separate property: A company, being a legal entity, can buy and own property in its own name. And,

being a separate entity, such property belongs to it alone. Its members are not the joint owners of the

property even though it is purchased out of funds contributed by them. Consequently, they do not have

even insurable interest in the property of the company. The property of the company is not the property

of the shareholders; it is the property of the company.

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5. Limited liability: In the case of companies limited by shares the liability of every member of the

company is limited to the amount of shares subscribed by him. If the member has paid full amount of the

face value of the shares subscribed by him, his liability shall be nil and he cannot be asked to contribute

anything more. Similarly, in the case of a company limited by guarantee, the liability of the members is

limited up to the amount guaranteed by a member. The Companies Act, however, permits the formation

of companies with unlimited liability. But such companies are very rare.

6. Common seal: As a company is devoid of physique, it cant act in person like a human being. Hence it

cannot sign any documents personally. It has to act through a human agency known as Directors.

Therefore, every company must have a seal with its name engraved on it. The seal of the company is

affixed on the documents which require the approval of the company. Two Directors and the Secretary or

such other person as the Board may authorize for this purpose, witness the affixation of the seal. Thus,

the common seal is the official signature of the company.

7. Transferability of shares: The shares of a company are freely transferable and can be sold or purchased

through the Stock Exchange. A shareholder can transfer his shares to any person without the consent of

other members. Under the articles of association, even a public limited company can put certain

restrictions on the transfer of shares but it cannot altogether stop it. A shareholder of a public limited

company possessing fully paid up shares is at liberty to transfer his shares to anyone he likes in

accordance with the manner provided for in the articles of association of the company. However, private

limited company is required to put certain restrictions on transferability of its shares. But any absolute

restriction on the right of transfer of shares is void.

8. Capacity to sue and be sued: A company, being a body corporate, can

sue and be sued in its own name.

Types of Companies

Companies may be classified into various categories as shown in the chart below:

Companies

Royal or Chartered Companies

Statutory Companies

Registered Companies

Companies Limited by Shares

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Companies Limited by guarantee

Unlimited Companies :

Public

Private

Public

Private

Public

Private

Royal or Chartered Companies: These companies are incorporated under a special charter such as the

East India Company, the Bank of England. A chartered company is regulated by the charter incorporating

it and the Companies Act does not apply to it. These companies are created and regulated by the king or

queen in exercise of an ancient prerogative vested in the crown. Such companies are formed in England

and do not exist in India.

Statutory Company: These companies are formed under a special Act of Parliament or the state

legislature e.g. the Reserve Bank of India, the State Bank of India, IFCI, Life Insurance Corporation, Unit

Trust of India. The powers which are to be exercised by such companies are defined by the Acts

constituting them and therefore, they are not required to have a memorandum of association. Although

each statutory company is governed by the provisions of its special Act, the provisions of the Companies

Act, 1956 also apply to them, in so far as the said provisions are not inconsistent with the provisions of

the Special Acts under which these companies are formed.

These companies are mostly public undertakings and are formed with the main object of public utilities

and not for profit. They also need not use the word limited with their names.

Registered Companies: A registered company is one which is formed and registered under the Indian

Companies Act, 1956 or under any earlier Companies Act in force in India. The two basic types of

companies which may be registered under the Act are:

(a) Private Companies; and (b) Public Companies. These companies may

be:

(i)Companies limited by shares;

(ii) Companies limited by guarantee;

(iii) Unlimited companies.

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Companies may also be classified as:

(1) Association not for profit having licence under Section 25 of the Act;

(2) Government companies;

(3) Foreign companies;

(4) Holding and Subsidiary companies.

A brief description of each type of company is given below:

1. Private Company: A Private Company is defined by Section 3(1) (iii) of the Act as a company which,

by its articles of association: (a) Restricts the right of the members to transfer shares, if any, (b) Limits

the number of its members to fifty, excluding members who are or were in the employment of the

company and (c) Prohibits any invitation to the public to subscribe for any shares in, or debentures of the

company. Section 26 of the Companies Act, provides that a private limited company must necessarily

have articles of its own.

2. Public Company: The Companies Act does not provide any positive definition of a Public Company.

Section 3(1) (iv) defines it as, A public company means a company which is not a private company.

Elaborating the above definition, a Public Company is one which:

(i) does not have any restriction on the transfer of shares;

(ii) does not limit the maximum number of members and

(iii) can invite public for the subscription of its shares and debentures.

The minimum number of members required to form a public company is

seven. There are no restrictions with regard to the maximum number of

members in a public company.

3. Companies Limited by Shares: When the liability of the members of a company is limited up to the

unpaid value of their shares, it is called a limited liability company or a company limited by shares. This

liability or unpaid amount may be called up at any time during the life time of the company or at the time

of its winding up. Such a company must have share capital since the extent of liability is determined on

the basis of the face value of shares. This company may be a public company or a private company.

4. Companies Limited by Guarantee: The liability of a member in these companies is limited to the

amount undertaken to be contributed by him at the time of winding up of the company. The amount of

guarantee is mentioned in the memorandum of association. Such companies are formed for non-trading

purposes such as charity, promotion of sports, science, art, culture etc. These companies may or may not

have any share capital. If these companies do not have any share capital, the members can be required to

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pay the amount of guarantee undertaken by them and that too in the event of liquidation. But if these

companies have any share capital, the members are liable to pay the amount which remains unpaid on

their shares together with the amount payable under the guarantee. A company limited by guarantee and

having a share capital may be a public company or a private company.

5. Unlimited Companies: An unlimited company is that company which has no limit on the liability of its

members. It means that its members are liable to contribute to the debts of the Company in proportion to

their respective interests. In case a member is unable to contribute his share, his deficiency is shared by

the rest of the members in proportion to their capital in the company. If the assets of such a company are

not sufficient to pay off its liabilities, the private assets of the members can be utilised for this purpose.

Such a company may or may not have share capital. In case, it has a share capital, it can be either a public

company or a private company. It is essential for this type of company to have its Articles of Association

which must state the number of members with which the company is to be registered. However, under

Section 32 of the Act, it is provided that an unlimited company can be converted into a limited company

by passing a special resolution for this purpose.

6. Holding Company & Subsidiary Company: A company which controls another company is known as

holding company and the company so controlled is termed a subsidiary company. 7. Government

Company: The Companies Act defines a government company as a company in which not less than 51

percent of the paid up share capital is held by:

(a) The Central Government; or

(b) Any State Government; or

(c) Partly by the Central Government and partly by one or more State

Government. A company which is a subsidiary of a government

company shall be considered a government company.

8. Foreign Companies: Foreign companies are those companies which are incorporated outside India but

which have a place of business within India. Place of business here means an identifiable place where it

carries on business such as office, store house, go down, etc. If 50 percent or more of the paid up share

capital of a foreign company is held by Indian citizens and or by companies incorporated in India

whether singly or jointly, it shall be treated as an Indian company in respect of its business in India. It

means that such a company has to comply with the provisions of the Companies Act as if it were an

Indian Company.

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9. Licensed Companies or Associations not for profit: The Companies Act permits the registration

under a licence granted by the Central Government of an association not for profit with limited liability.

However, such a company can not use the word Ltd. or the words Pvt. Ltd. with its name. This type of

association or company is formed for the promotion of charity, science, commerce, sports, art or culture

etc. Naturally, such associations are not of a commercial nature and do not aim at earning profits.

Q6: What do you understand by Cyber Crime? Explain the importance of the IT Act 2000.

Ans:

Cyber crime refers to all the activities done with criminal intent in cyberspace or using the medium of

Internet. These could be either the criminal activities in the conventional sense or activities, newly

evolved with the growth of the new medium. Any activity, which basically offends human sensibilities,

can be included in the ambit of Cyber crimes.

Because of the anonymous nature of Internet, it is possible to engage in a variety of criminal activities

with impunity, and people with intelligence, have been grossly misusing this aspect of the Internet to

commit criminal activities in cyberspace. The field of cyber crime is just emerging and new forms of

criminal activities in cyberspace are coming to the forefront each day. For example, child pornography on

Internet constitutes one serious cyber crime. Similarly, online pedophiles, using Internet to induce minor

children into sex, are as much cyber crimes as any others.

Categories of cyber crimes:

Cyber crimes can be basically divided in to three major categories:

1. Cyber crimes against persons;

2. Cyber crimes against property; and

3. Cyber crimes against government.

1. Cyber crimes against persons: Cyber crimes committed against persons include various crimes like

transmission of child-pornography, harassment of any one with the use of a computer and cyber stalking.

The trafficking, distribution, posting, and dissemination of obscene material including pornography,

indecent exposure, and child pornography constitute the most important cyber crimes known today.

These threaten to undermine the growth of the younger generation and also leave irreparable scars on the

minds of the younger generation, if not controlled.

Similarly, cyber harassment is a distinct cyber crime. Various kinds of harassments can and do occur in

cyberspace, or through the use of cyberspace. Harassment can be sexual, racial, religious, or of any other

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nature. Cyber harassment as a crime also brings us to another related area of violation of privacy of

citizens. Violation of privacy of online citizens is a cyber crime of a grave nature. Cyber stalking: The

Internet is a wonderful place to work, play and study. The net is merely a mirror of the real world, and

that means it also contains electronic

mb0035 legal aspects of business set1 and set2

Documents