DBA 5107 LEGAL ASPECTS OF BUSINESS

UNIT - I

1. THE INDIAN CONTRACT ACT, 1872

INTRODUCTION

The Indian Contract Act, 1872 came into force on 1st September 1872. It extends to the whole
of India. The Act was mainly enacted with a view to ensure reasonable fulfillment of expectation
created by the promises of the parties and also enforcement of obligation prescribed by an
agreement between the parties.

The basic equation which explains the contract is:

Whereas:
O = OFFER
A= ACCEPTANCE
C = CONTRACT

Definition Of Contract

According to Sec. 2(h) of the Act, The term Contract may be defined as, “Any agreement which
is enforceable by law”

Essential Elements Of Valid Contract:

 Offer and Acceptance.

 Intention to Create Legal Relationship.
 Lawful Consideration.
 Capacity of Parties.
 Free and Genuine Consent.
 Lawful Object.
 Agreement Not Declared Void.
 Certainty and Possibility of Performance
 Legal Formalities.

 Offer And Acceptance:

There must be two parties to an agreement. One party making the offer and the other party
accepting it. The acceptance must be communicated to the offerer. (O+A=C)
Example: Ram wants to sell his house to Raj and Raj is accepting the offer. Hence Contract is
made between these two parties.
 Intention To Create Legal Relationship:
When two parties enter into an agreement, their intention must be to create legal relationship
between them. If there is no legal relationship then it is not a contract.
 Lawful Consideration:
An agreement must be supported by consideration. Consideration means an advantage. In simple
terms, Consideration means something in return. The agreement is legally enforceable only when
both the parties give and get something in return.

 Capacity of Parties:
The parties to the agreement must be capable of entering into a valid contract. The following
persons are not eligible to enter into Contract:
 Minor
 Un-Sound mind
 Drunken
 Alien Enemy
 Free and Genuine Consent:
The parties to the contract, should enter into a contract with a free and genuine consent with same
mind set on all the material terms of contract. That is there should not be any undue influence,
misrepresentation, fraud and mistake by both the parties.
 Lawful Object:
The object of the agreement must be lawful. That is the agreement must not be illegal, immoral or
opposed to public policy. That is the parties to the contract must not involve in any kind of illegal
activities.
 Agreement Not Declared Void:
 When the parties enter into an agreement, it must not have been declared void by law. That is the
agreement should not be declared as invalid.
 Certainty and Possibility of Performance:
The agreement must be certain and not vague. If it is vague, it is not acceptable by law.
Example: A agrees to sell B hundred tons of oil. This contract is void. Because, the agreement
does not mention what kind of oil.

 Legal Formalities:
Each and every contract should fulfill all the legal formalities before the parties enter into
contract. The following are the legal formalities.:
 The contract should be in writing.
 The document of the contract should be stamped.
 Contract besides being written one, it should be registered.

These are the essential elements of a valid contract. The parties to the contract should fulfill all
the essential elements before entering into a contract.

TYPES OF CONTRACT/CLASSIFICATION OF CONTRACT:

Contract may be broadly classified into 3 types:

 CLASSIFICATION IN TERMS OF VALIDITY:

In terms of Validity, the Contract can be further divided into:

 Valid Contract: It is an agreement which is enforceable by law.
 Void Contract: It is an agreement legally enforceable when entered into, but has become void due
to supervening impossibility of performance.
Example: War between import country and export country – this is void
 Void Agreement: An agreement which is not enforceable by law by either of the parties. Example:
Contract with a minor or Contract without consideration.
 Voidable Contract: A contract becomes voidable when the consent of the parties has been
obtained by force. Example: Amar promises to sell his car Bala for Rs. 2000/-. His consent was
obtained by force. So this is voidable.
 Unenforceable Contract: Contract is valid, but cannot be entered due to some technical defects.
Example: Contract is not in writing.
 Illegal Agreement: These are the agreements prohibited by the law.
Example: Contract with alien to import prohibited goods.

 CLASSIFICATION ACCORDING TO FORMATION:

According to formation, Contract can be further classified into:
 Express Contract: The terms of the contract may be stated in words. That is the written contract.
 Implied Contract: The terms of the contract may be inferred from the conduct of the parties or
from the circumstances of the case.
Example: Taking a seat in a bus.
 Quasi Contract: This is not at all a contract. That is it is a contract unintentionally entered into by
the parties. Example: Raju a fruit seller leaves a basket of fruits by mistake in Ramu’s house. Ramu
treats the fruits as his own and consumed the fruits. Now Ramu is bound to pay for the fruits he
consumed. This is known as quasi contract.

 CLASSIFICATION ACCORDING TO PERFORMANCE:

According to Performance, Contract can be further divided into:
 Executed Contract: It is a wholly performed by both the parties.
Example: Vijay wants to buy bicycle from Ajith for cash. Vijay pays the cash and Ajith delivers
the bicycle. Here the contract is wholly performed.
 Executory Contract: It is a contract which is either partly performed or unperformed. Example:
On June 1st A agrees to buy a Car from B. While B has to deliver it on June 15th and A has to pay
the price on July 1st. Here the contract is still executory, because something is remaining to be done
according to the terms of the contract.
 Unilateral or One Sided Contract: The Unilateral contract is one in which one party has to fulfill
the obligation at the time of formation of contract. Whereas, the other party has fulfilled his/her
obligation. Example: Shankar makes payment for bus journey from Chennai to Mumbai. He has
performed his obligation by buying a ticket, Now the transport company should perform the
obligation of reaching Mumbai.
 Bilateral Contract: A Bilateral Contract is one in which the obligation on the part of both the
parties to the contract are outstanding at the time of formation of the contract. Bilateral Contract is
similar to executory contract. Example: A Passenger standing in a queue to buy a rail ticket. Here
 passenger also not performed his obligation of buying ticket and the railway authority has also not
issued a ticket.
These are the various types/classification of contract in terms of Validity, formation and
performance.

 BREACH OF CONTRACT AND ITS REMEDIES

What is Breach of Contract?

Breach of Contract means breaking the obligation which a contract imposes. It confers the right
of action for damages on the affected party.

Remedies for Breach of Contract

o Recession of the Contract.
o Suit for Damages
o Suit upon Quantum Meruit.
o Suit for Specific Performance of the Contract.
o Suit for Injunction.
o Recession of Contract: When a contract is broken by one party, the other party may sue to treat
the contract as a rescinded and refuse further performance. In such a case, he is absolved of all his
obligations under the contract. Example: A promises B to supply ten bags of Cement on a certain
day. B agrees to pay the price after the delivery of the goods. But A does not supply goods. B is
discharge from paying the price to A.
o Suit for Damages: Damages are the monitory compensation allowed to injured party by the court
for the loss suffered by him. The object of awarding compensation is to put the injured person at
the same position.
Rules Relating to Damages:
1. Damages arising naturally.
2. Damages for loss of Reputation.
3. Damages for inconvenience and discomfort.
4. Mitigation of Damages.
5. Difficulty of Assessment.
o Suit for Quantum Meruit: The term Quantum Meruit means, “As much as Earned”. This damage
claim arises when one party partly performs his obligation, but he has been discharged. Example:
Passenger travelling in Flight from Chennai to Singapore. Flight Cancelled/Returned back to
Chennai due to Bad Weather.
o Suit for Specific Performance of Contract: In certain case of breach of contract, paying damages
are not adequate remedy. In such cases, Specific performance will be granted, where Court will
order the party to continue the contract. Example: Government Tender.
o Suit for Injunction: Injunction occurs when a party is in breach of negative terms of contract, the
court may issue the order restraining him/her from doing what he/she is not supposed to do.
Example: Neha a film actress, agreed to act exclusively for Shankar for 1 year and not for anyone
else. During the year, she contracted to act for Vasu. Now she could be restrained by Injunction
from acting for Vasu.

QUASI CONTRACT

What is Quasi Contract?

This is not at all a contract. That is it is a contract unintentionally entered into by the parties.
Example: Raju a fruit seller leaves a basket of fruits by mistake in Ramu’s house. Ramu treats the
fruits as his own and consumed the fruits. Now Ramu is bound to pay for the fruits he consumed.
This is known as quasi contract.

Kinds of Quasi Contract:

 Supply of Necessaries.
 Payment by an Interested Person.
 Obligation to Pay for Non-Gratuitous Acts.
 Responsibility of finder of goods.
 Mistake or Coercion

AGENCY
 INTRODUCTION TO AGENCY

Agency is a Contractual relationship between two parties created by agreement, whether

express or implied. The relationship of agency arises wherever one person called “Agent” who is
having authority to act on behalf of another person called the “Principal”.

ESSENTIALS OF CONTRACT OF AGENCY

The following are the essentials of Contract of Agency:

 There should be the appointment of the Agent by the Principal.

 The Principal should confer authority on the Agent to act for him.
 The Principal is answerable for the authority conferred to the Agent.
 The object of the appointment of Agent must be to establish a relationship between the Principal
and third parties.

CLASSIFICATION OF AGENTS/TYPES OF AGENTS

Agents may be broadly classified into 3 types:

1. Special Agent
2. General Agent
3. Universal Agent

CREATION OF AGENCY

An agency may be constituted in four ways:

 Agency by Express Agreement

 Agency by Implied Agreement
 Agency by Ratification
 Agency by Operation of Law
 AGENT AUTHORITY

Concept:
An agent is appointed with some authority by which he can bind the principal with third parties.

Various Types of Agent’s Authority:

 Express Authority: An authority is said to be expressed, when it is given by written.
 Implied Authority: The implied authority is to be inferred from the circumstances of business.
 Ostensible or Apparent Authority: The apparent authority of an agent is that, When an agent is
employed for particular business, the third parties dealing with him should presume that he has
authority to do all acts that are necessary to business.
 Emergency Authority: An agent will be given an emergency authority for the purpose of
protecting his principal from loss.

RIGHTS, DUTIES AND LIABILITIES OF AN AGENT

Rights Of An Agent

 An agent is having right to receive agreed remuneration.

 Agent may retain certain sum of money which he received on behalf of principal in the business of
agency.
 In the absence of contract, the agent can retain goods, documents, property of principal, until the
amount is due to him.
 Under certain circumstances, the agent is having right to stop the goods in transit.
 The principal must pay compensation to his agent in respect of injury caused to agent.

Duties Of An Agent:

 To follow the instructions of the principal.

 To work with reasonable skill and diligence.
 To render proper accounts.
 To communicate with principal in difficult situations.
 Not to act on his own account.
 To pay all sums to his principal.
 Not to set up adverse title.
 Not to delegate his authority to someone else.
 Not to use the agency information against principal.
 Agent should terminate agency on the principal’s death.

Liabilities Of Agent:

 Where the agent acts for a foreign principal.

 Where an agent acts for the undisclosed principal.
 Where an agent acts for the disclosed principal, who cannot be sued.
 Where an agent’s authority is coupled with interest.
 Where an agent receives or pays money by mistake or fraud.
 Where the agent signs the Negotiable Instrument in his own name.
 Where the agent exceeds his authority.
 Where an agent acts for a non-existing principal.

TERMINATION OF AGENCY
An agency can be terminated in two cases:

Termination By Operation Of Law

o By performance of contract of agency.

o By lapse of time.
o By death or insanity of agent or principal.
o By insolvency of principal and in some cases, insolvency of agent.
o By the destruction of subject matter.
o Where the principal or agent dissolute the business.
o By the principal becoming an alien enemy.
o By termination of sub-agent’s authority.
Termination Of Agency By Act Of The Parties

 By agreement between the principal and agent.

 By revocation of agent’s authority by principal.
 By renunciation of business by agent by giving a notice to principal.

Cases Where Agency Cannot Be Terminated

 Where the agency is coupled with interest.

 Where the agent has included a personal liability.
 Where the agent has partly exercised his authority.

THE SALE OF GOODS ACT, 1930

INTRODUCTION
 According to Sec.4 (1), “A contract of sale of goods is a contract. Whereby the seller transfers or
agrees to transfer the goods to the buyer for price.
The term “Contract of Sale” includes both Sale and Agreement to Sell.

Sale: A contract of sale is a contract in which, the seller transfer the goods to the buyer for price.

Agreement to Sell: When property in the goods is to be transferred at some future date and not at
the time of contract is termed as an Agreement to Sell.
ESSENTIALS OF CONTRACT OF SALE

The following are the essentials of Contract of Sale:

 Two parties.
 Goods.
 Price/Consideration.
 Transfer of Property.
 A Contract in which all essentials of valid contract applicable.

Definition of Goods
According to Sec.2 (7), “Goods means every kind of movable property other than actionable
claims and money and includes stocks and shares, growing crops, etc.

Classification Of Goods/Various Types Of Goods:

 Existing Goods.
 Future Goods.
 Contingent Goods.

TRANSFER OF TITLE AND RISK OF LOSS

A. Transfer Of Title:

Concept:
 A document of title to goods is one, which enables its possessor to deal with the goods described
in it. It is used in ordinary course of business as a proof for possession or control of goods. It
authorises its possessor to transfer or receive the goods.

Conditions To Be Fulfilled By A Document of Title Of

Goods:
o It must be used in the ordinary course of business.
o The undertaking to deliver the goods to the possessor of document must be unconditional.
o The possessor of the document must be entitled to receive the goods unconditionally.

Various Documents Of Title Of Goods

The following are the various documents of title of goods:

 Bill of Lading
 Dock Warrant
 Warehouse Keeper’s Certificate/ Wharfinger Certificate
 Railway or Lorry Recipt
 Delivery Order

B. TRANSFER OF PROPERTY:

(i) Concept:
Transfer of property in goods from seller to the buyer is the main object of contract of sale. The
term property in goods must be distinguished from possession of goods. Property in goods means
ownership of goods, Whereas possession of goods refers to the custody and control of goods.

(ii) Passing Of Property:

The primary rules to be followed when property in goods passes to the buyer:
 Goods must be ascertained
  Intention of the parties

CONDITIONS AND WARRANTIES

Concept:
What are the various conditions and warranties need to be fulfilled by both the parties of sales
contract.
Condition:
A condition is a stipulation which is essential to the main purpose of the contract. It is the base
of the contract. Example: Conditions imposed when selling household goods on instalment – Buyer
should pay EMI every month.
Warranty:
A warranty is a stipulation which is collateral to the main purpose of the contract. It is not of
such vital importance like condition.
Example: Mobile Phone Manufacturers give warranty for Accessories like battery, Ear phone, etc.

RIGHTS OF AN UNPAID SELLER

The Rights of an Unpaid Seller is broadly classified into two types:

Right Against The Goods

It is further divided into two types:

(i) Where The Property In Goods Has Passed:

 Right of Lien
 Right of Stoppage in Transit
 Right of Re-Sale

(ii) Where The Property In Goods Has Not Passed:

 Right of Withholding delivery
 Right of Stoppage in Transit

Right Against The Buyer Personally:

It is further classified into four types:
 Suit for Price
 Suit for Damages
 Repudiation of Contract
 Suit for Interest

These are the various rights of an unpaid seller.

NEGOTIABLE INSTRUMENTS ACT, 1881

INTRODUCTION
The term “Negotiable” means transferable from one person to another person in return for
consideration.
The term “Instrument” means any written document by which a right is created in favor of some
person.

Definition Of Negotiable Instrument:

 According to Sec. 13(a), “Negotiable Instrument (NI) means a Promissory Note, Bill of Exchange
or a Cheque payable either to order or bearer.
An Instrument may be negotiable either by:
(i) Statute (Written Law)
(ii) Usage of Promissory Note, Bill of Exchange or Cheque.

Types of Negotiable Instrument

There are 3 types of Negotiable Instrument:
 Promissory Note
 Bill of Exchange
 Cheque

(i) PROMISSORY NOTE:

Definition:
Promissory Note may be defined as, “An instrument in writing containing an unconditional order
signed by the maker to pay a certain sum of money to certain person or to the bearer of the
instrument”
It is signed by the maker.
Essential Requirements of Promissory Note:

The following are the essential requirements of Promissory Note:

 Promissory Note must be in writing.
 It should contain unconditional order.
 It should be signed and delivered by the maker.
 Amount payable must be mentioned.
 Promise must be a kind in money only.
 It shall fulfill legal formalities.
 It must be stamped.

(ii) BILL OF EXCHANGE:

Definition of Bill of Exchange:

 A Bill of Exchange may be defined as, , “An instrument in writing containing an unconditional
order signed by the maker to pay a certain sum of money to certain person or to the bearer of the
instrument”
It is signed by the maker.

ESSENTIALS OF BILL OF EXCHANGE:

o Bill of Exchange must be in writing.

o Order to Pay.
o It should be unconditional.
o It requires three parties – Drawer, Drawee and Payee.
o Amount payable must be certain.
o In case of dishonor, the notice has to be issued by the concerned party.

(iii) CHEQUE:

DEFINITION OF CHEQUE:
“A Cheque is a bill of exchange drawn upon a specified banker and payable on demand”

FEATURES OF CHEQUE:
 It always specifies the Bank.
 It is payable on demand.

SPECIAL RULES FOR CHEQUES AND DRAFTS:

What is the Obligation of a Banker to a Customer:
 Obligation to honor cheques.
 Obligation to maintain secrecy of Account information.
 Obligation to keep proper records of transaction.
 Obligation to abide by customers instructions.

GENERAL TOPICS UNDER NEGOTIABLE INSTRUMENT:

RULES APPLICABLE IN CASE OF LOST NEGOTIABLE INSTRUMENT:
 When a Negotiable Instrument has been lost before it is overdue, the holder may apply to the
drawer (maker) to give him another bill of the same amount.
 The finder of the lost instrument gets no title.
 When a Negotiable Instrument is lost, the holder should inform to parties liable on it and should
also give public notice by advertisement in news paper.

HOLDER IN DUE COURSE:

Meaning Of Holder In Due Course:

“Holder in Due Course” means any person who holds the possession of Promissory Note, Bill of
Exchange or a Cheque for Consideration.

Discharge Of Negotiable Instrument

A Negotiable Instrument is said to be discharged when it becomes completely useless.
A Negotiable Instrument is also said to be discharged when the rights and liabilities of all the
parties connected comes to an end.

A Negotiable Instrument is discharged in the following cases:

 By Payment in due course.
 By Party Primarily Liable Became Holder.
 By Express Waiver.
 By Cancellation.
 By Material Alteration.