BUSINESS LAW MODULE I

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LAW:

LAW It is a rule of external human action enforced by the sovereign political authority Law is the body of principles recognized and applied by the state in administration of justice Democracy can remain in a society of equals. The concept of equality of all persons in the eye of law is the basis of what is called Rule of Law

Business Manager:

Business Manager A Business Manager is always under Legal obligations A practicing manager must know the Business laws A manager is effective in managing the affairs of business, only if, he is aware about the laws to which he is subject to

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Business laws to which you are subject to as managers are : Indian Contract Act, 1872 Sale of Goods Act, 1930 Negotiable Instruments Act, 1881 Companies Act, 1956 FEMA, Imports & Exports Laws Tax Laws Labour & Social Security Laws Patents & Trade Mark Laws Transfer of Properties Act Environmental Laws etc….

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You…………. Buy groceries Board a train Hire a cab Consult a doctor or solicitor Give your any household gadget for repair Ever realised! In each of the above and numerous such situations you enter into a contractual obligation.

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An agreement enforceable by law is a contract. Section 2(h) Contract = Agreement + Legal Obligation Agreement: Every promise and every set of promises, forming the consideration for each other. A proposal (offer) when accepted becomes a promise. Mutuality is the very base of an agreement. Legal obligation: To become a contract , an agreement must be enforceable by law.

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Elements. An agreement consists of an offer and its subsequent acceptance, whereas a contract is composed of an agreement and its legal enforceability. Essence of a legal relationship. An agreement may not create legal relationship. Parties entering into a contract essentially have a common intention of entering into legal obligation. Scope. All agreements may not be contracts but all contracts are primarily agreements. Enforceability by law. A contract is legally enforceable, whereas an agreement is not necessarily so.

Essentials of Contract (Sec. 10,29,56):

Essentials of Contract (Sec. 10,29,56) Offer & Acceptance Intention to create legal relation Lawful consideration Capacities of parties or competence Free consent Lawful object Not expressly declared to be void Writing & Registration – Legal formalities Certainty & Possibility of performance

Difference Between Void and Voidable Contracts:

Difference Between Void and Voidable Contracts S. No. Point of difference Void contract Voidable contract 1 Definition A contract, which ceases to be enforceable by law, becomes void when it ceases to be enforceable [Section 2 (j)]. A voidable contract is an agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other(s) [Section 2 ( i )]. 2 Nature & validity A void contract is valid and binding upon the parties when entered into, but subsequent to its formation, it becomes unenforceable due to certain reasons. A voidable contract is repudiate at the option of the aggrieved party. It remains a valid contract until it is set aside or rescinded by the party entitled to do so. 3. Factors responsible A valid contract may become void due to supervening impossibility; change of law; a contingent contract due to emergence of an uncertain event etc. Coercion, undue influence, error, fraud, misrepresentation are the main factors responsible for rendering a contract voidable. 4 Enforceability It cannot be enforced by either party. It may be enforced or set aside at the option of the aggrieved party.

Difference Between Void and Voidable Contracts:

Difference Between Void and Voidable Contracts 5. Relationship A void contract under no circumstances results in a voidable contract. When a voidable contract is rejected by the aggrieved party it results in a void contract. 6. Rights of third party A void contract confers no rights or legal remedies to the third party. Rights acquired under voidable contract by an innocent third party are not wiped out by such subsequent avoidance of the contract. 7. Compensation In case of void contract question of compensation or damages does not arise on the non-performance of such contract. In case of voidable contract, the party rescinding the contract can also claim damages. 8. Effect of lapse of time Lapse of reasonable time does not render a void contract enforceable. It always remains void i.e., unenforceable. If a voidable contract is not rescinded by the aggrieved party within reasonable time it may become enforceable at the option of the other party ( i.e , who induced the contract).

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An offer is a medium through which a person expresses his intention to enter into a contractual obligation against a promise. Section 2(a)

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Offer can be expressed or implied Offer can be made to an individual or group of individuals or public at large. It must be to create a legal relationship It must be communicated to Offeree It can be conditional Bargaining gives rise to Counter Offer It must be made to create a legal relationship

Firm Offer Vs Invitation to Treat:

Firm Offer Vs Invitation to Treat

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An acceptance is a expression of assent to the terms of the offer. When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise. Section 2(b) Acceptance to an offer is what a lighted match to is to a train of gunpowder. Thus, an offer becomes irrevocable upon its acceptance.

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Must be made by the offeree Must be unconditional Must be communicated to the offeror May be in any form, oral or written Must be in the mode prescribed by the offeror Must be given within a reasonable time, if no time limit is set Must be given while the offer is in force

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Acceptance can be revoked at any time before it is communicated to Offeror

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Gourav owned a house at Calcutta. Nibedita offered to buy that house for Rs.2 lacs and Gourav’s agent Debendra to whom the offer was given cabled to Gourav: “Have had offer for the house for Rs.2 lacs”. Then the agent got the reply from Gourav: “Will not accept less than Rs.3 lacs” Then Nibedita accepted Gourav’s price of Rs.3 lacs and confirmed the acceptance by a letter to the agent. But Gourav sold the the house for a higher price to Purnendu. Nibedita then sued Gourav for damages for breach of contract. Decide the case There was no offer, but an invitation to an offer;

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The Managing Committee of a college in response to Prof. Ravi Ranjan”s application for the post of principal passed a resolution appointing Prof. Ravi to the post. But this decision was not communicated to Prof. Ravi. However Prof. Ravi came to know about this decision from one of the member of the Managing Committee. After waiting for six months, Prof. Ravi filed a case against the Managing Committee for breach of contract. Decide the case Prof. Ravi will not succeed since there were no communication of the acceptance to him

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Dinesh agrees to pay Rs.5000 if Jagmohan marries Aishariya. But Aishariya marries Abhisek. Subsequently Abhisek divorced Aishariya and Jagmohan married Aishariya. Now Jagmohan claims Rs.5000 from Dinesh which he refuses. Decide Jagmohan will fail. Contract became void on the ground of impossibility as soon as Aishariya married Abhisek.

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Priyanka promised to repay a loan of Rs.5000 to Manasi by 5 equal installments. She further agreed that if she defaults to pay any one installment then the whole amount of Rs.5000 will become due. Decide? It is a void contract since the sum mentioned amounts to penalty which is not allowed under contract Act

Chandramuli agrees to buy a certain horse from Biswajit. It turns out that the horse was dead at the time of bargain, though neither party was aware of the fact. Is the agreement valid?:

Chandramuli agrees to buy a certain horse from Biswajit . It turns out that the horse was dead at the time of bargain, though neither party was aware of the fact. Is the agreement valid? No the agreement is void . sec. 20(Mistake)

Prashant promises to obtain for Pritam an employment in the public service and Pritam promises to pay Rs. 1 lac to Prashant. Is this a valid contract?:

Prashant promises to obtain for Pritam an employment in the public service and Pritam promises to pay Rs. 1 lac to Prashant . Is this a valid contract? No, it is void as the consideration is unlawful. Sec. 24(unlawful consideration)

A agrees to pay B a sum of money if B marries C. C married D. B is still willing to marry C when D dies. What is the consequence?:

A agrees to pay B a sum of money if B marries C. C married D. B is still willing to marry C when D dies. What is the consequence? Now marriage of B to C shall be considered impossible vide sec. 34. Hence the contract is void

A promise to deliver 50 rice bags at B’s warehouse on 1st January. A brings the goods as promised but after the usual business hours. Decide :

A promise to deliver 50 rice bags at B’s warehouse on 1 st January. A brings the goods as promised but after the usual business hours. Decide A has not performed his part of the promise. It is voidable at the option of B

P promised to marry L and L only. P further promised to pay L a sum of Rs. 2 lac in case P broke the promise. P broke promise and married X. Can L recover the sum promised?:

P promised to marry L and L only. P further promised to pay L a sum of Rs. 2 lac in case P broke the promise. P broke promise and married X. Can L recover the sum promised? No. Agreements in restraint of marriage is opposed to public policy.

Aditya, a merchant of Agra, made a contract to despatch 100 quintals of gur to Akhil at Delhi at a certain price and Akhil paid Rs.5000 as earnest money. None of the parties had knowledge that gur transport from state to state is prohibited by Govt. Aditya owing to such prohibition could not transport the goods. Akhil claims damages for non performance as well as refund of earnest money. Is he entitled to these remedies? :

Aditya , a merchant of Agra, made a contract to despatch 100 quintals of gur to Akhil at Delhi at a certain price and Akhil paid Rs.5000 as earnest money. None of the parties had knowledge that gur transport from state to state is prohibited by Govt. Aditya owing to such prohibition could not transport the goods. Akhil claims damages for non performance as well as refund of earnest money. Is he entitled to these remedies? The agreement is void ab initio. Akhil can claim refund of earnest money but not damages

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Consideration is elemental to a contract. A promise is not binding unless made for something in return - consideration . For instance the seller of goods undertakes to transfer ownership in the goods for a price to be paid by the buyer for acquiring the ownership.

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Consideration simply means that both the contracting parties are bound to give something (of value) to each other . Thus, the term ‘consideration’ is used in the sense of quid pro quo , meaning thereby something in return. It may involve a positive act (i.e., doing something) or an abstinence (i.e., something given up ). Consideration may be in the form of some right, interest, profit, or benefit accruing to one party, or some forbearance, detriment, loss, or responsibility given, suffered or undertaken by the other.

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1. A offers to sell his plasma TV set to B for Rs 50,000. B accepts the offer. Here, B’s promise to pay Rs 50,000 is the consideration for A’s promise to sell the TV and A’s promise to sell the TV is the consideration for B’s promise to pay Rs 50,000. 2. X applies for a loan from Y , who is unwilling to advance the amount, unless S guarantees the repayment of the loan if X defaults and thereupon Y advances money to X . In this case, the benefit conferred on X by Y at the surety of S is a sufficient consideration on the part of Y as against the promise of S to repay the loan. In other words, the detriment which Y may not suffer by advancing loan to X due the guarantee of S is sufficient consideration on the part of Y in respect of the promise of S to repay the loan. 3. A promises to maintain B’s child, and B promises to pay A Rs 1,000 annually for the purpose. Here, the promise of each party is the consideration for the promise of the other party. (Illustration appended to Section 23) 4. A promises Y, his debtor, not to file a recovery suit against him on B’s agreeing to repay the amount of loan along with a compound interest @ 12% p.a. within a year. A’s abstinence is the consideration for Y based on B’s promise to pay.

RULES GOVERNING CONSIDERATION :

RULES GOVERNING CONSIDERATION 1. Simple Contracts must be supported by Consideration In the absence of a valid consideration passing between the parties the general rule is that the agreement they have made will be of no legal effect. The existence of a consideration implies that the parties have devoted some reflection to the matter, and seriously desire their promises to have legal consequences. 2. Consideration Must Move at the Desire of the Promisor (Promissory Estoppels) Whatever is done must be done at the desire or request of the promisor and not voluntarily or at the desire of a third party. For instance, if A rushes to the rescue of B whose house has been trapped in fire, it is not a consideration but a voluntary act on the part of A . He cannot ask B to compensate him for the services rendered by him as B had never requested him to help. However, if A goes to B’s rescue at the latter’s express request, this will be regarded as consideration as A did not wish to do the act voluntarily.

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In Durga Prasad vs Baldeo , ‘D’ the claimant had constructed, at his own expense, a market at the instance of the Collector of the District. The occupants of the shops i.e., shopkeepers in the market promised to pay the plaintiff a commission on the articles sold through their shops. Subsequently the shopkeepers refused to pay any commission. ‘D’ sued the shopkeepers against their alleged default. It was held that there was no consideration because the plaintiff (the promisee) had constructed market not at the desire or request of the defendants (the promisors), but at the desire of a third person (i.e., the Collector) to oblige him and thus, the contract between D and the shopkeepers was void.

Rules Governing Consideration:

Rules Governing Consideration 3. Consideration May Move From the Promisee or Any Other Person This means that as long as there is a consideration for the promise, it is immaterial who has furnished it. This is sometimes referred to as Doctrine of Constructive Consideration . It may proceed from the promisee, or if the promisor has no objection, from any other person who is not a party to the contract. But the English Law on this point is different. In the United Kingdom  a person to whom a promise was made can enforce it only if he himself provided the consideration for it. He cannot sue of  the consideration for the promise moved from a third party.

Rules Governing Consideration:

Rules Governing Consideration Consideration must have some Value ‘Something of value’ must be given for a promise in order to make it enforceable as a contract. An informal unnecessary promise therefore does not amount to a contract. A person or body to whom a promise of gift is made from purely charitable or sentimental motive gives nothing for the promise. Consideration means something which is of some value in the eyes of the law. It may be some benefit to the plaintiff or some detriment to the defendant.

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Past, Present or Future Consideration Depending upon the circumstances and facts of each case in India consideration may be in the past, present or future. Past Consideration Past consideration means a past act or forbearance which took place and is complete (wholly executed) before the agreement is made. Past consideration may consist of services rendered at request but without any promise at the time or it may consist of voluntary services

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Consideration Need not be Adequate But It Must Be Sufficient Sufficiency of consideration is not the same thing as adequacy of consideration, at least in law. The word adequate in this context refers to fairly equal to the promise given. On the contrary, sufficiency is used here as a legal term, and it means that what is promised must be real, tangible and have some actual value. Adequacy will be decided by the parties themselves.

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Present or Executed Consideration A consideration, which consists in the performance of an act or forbearance, is said to be executed at present. For instance A pays Rs 1000 to B , and B promises to deliver a certain quantity of wheat the following day. In this case, A pays the amount but B has merely made a promise. Therefore, the consideration paid by A is executed, whereas the consideration promised by B is executory . If A pays the price and B delivers the goods at the same time, consideration is said to be executed by both the parties Future or Executory Consideration An example is an agreement in which the seller promises to deliver goods next week, and the buyer agrees to pay for them on delivery. However, consideration on part of one party may be executed and in respect of the other executory .

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Consideration must be Legal It must not involve an illegal act. For example, promising to pay money to a witness to turn hostile. An illegal consideration makes the whole contract invalid. It should be noted that attempting to enter into an illegal contract might itself give rise to criminal liability. Moreover, consideration should not be physically impossible or illusory. For example, promise to double the money by magic or to make a dead man alive, are impossible acts and therefore such promises constitute no consideration.

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A stranger to a contract is one who is not a party to the contract. The rule that consideration ‘may move from the promisee or any other person’ implies that the consideration is permitted to be supplied by a third person (i.e., stranger)  as well, thereby need not necessarily be supplied by the promisee himself. In other words, as long as there is a consideration in exchange of a promise, it is immaterial who has furnished it. Thus, a stranger to the consideration may maintain a suit. But the English Law on this point is different. Nonetheless, a stranger to a contract cannot sue upon a contract both under the British Law as well as the Indian Law. From this arises the doctrine of privity of contract, discussed below.

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1 . A is indebted to B. A sells his property to C who undertakes to discharge his debt vis-à-vis B . In case C fails to keep his promise, B has no right to sue C because of privity of contract between B and C . C is a stranger to the contract (between A and B ) the example is based on Jamna Das vs Ram Autar .

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The Indian Contract Act contains certain exceptions, which make a promise without consideration valid and binding, stated as under. Natural Love and Affection An agreement without consideration is valid if it is made in writing, registered, made out of natural love and affection, and between the parties standing in near relation to each other [Section 25 (1)] In Rangaswamy an elder brother, on account of natural love and affection, promised to pay off the debts of his younger brother. The agreement was put into writing and was registered. The court held the agreement as valid and binding. Promise to Compensate for Past Voluntary Services As per Section 25 (2) a promise to compensate, wholly or in part, a person who has already done something voluntarily for the promisor, or something, which the promisor was legally compellable to do, is enforceable.

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Illustrations: Compensation for Past Voluntary Services Example 1 A finds B’s purse and, gives it to him. B promises to give A Rs 50. This is a valid contract. Example 2 A supports B’s infant son. B promises to pay A’s expenses in doing so. This is a valid contract. Promise to Pay Time-barred Debt A promise made in writing and signed by the person to be charged therewith, or by his agent to pay a debt (wholly or in part) barred by the law of limitation is valid without consideration [S 25 (3)].

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Completed Gift In case of completed gifts (i.e., gifts actually made), the rule no consideration no contract does not apply. Here nearness of relation between the parties is immaterial and even if it, there may not be any natural love and affection between them. Agency As per Section 185 of the Indian Contract Act, no consideration is required to create an agency. Guarantee In a contract of guarantee there is no consideration between the creditor and the surety [Section 127].

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