ASSIGNMENTS

MB 0035
LEGAL ASPECTS OF BUSINESS
Set I

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

details.

Essentials of a Valid Contract :

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 and acceptance. An offer to do or not to do a
particular act is made by one party and is accepted by the other to whom
the offer is made. Then we say that there is a meeting of the minds of the
parties. Such a position is known as consensus 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.

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d) Lawful consideration: There must be consideration supporting every
contract. Consideration means something in return for something. It is the
price for the promise. An agreement not supported by consideration
becomes 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 can’t seek any relief from
the court of law.

g) Possibility of performance: The agreement should be capable of

being performed. e.g., Mr. A agrees with Mr. B to discover treasure by
magic. Mr. B can’t seek 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 can’t be enforced.

j) Legal formalities: Indian Contract Act deals with a simple contract

supported by consideration. Agreements made in India may be oral or
written. However, Sec. 10 states that where the statute states that the
contract should be in writing and should be witnessed or should be
registered, the same must be observed. Otherwise, the agreement can’t be
enforced e.g., Under Indian Companies Act, the Memorandum of
Association and Articles of Association must be registered.

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2. What are the rules regarding the accpetange of a proposal?
Describe them in details.

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 can’t 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 can’t say that it was
insufficient.

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 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 can’t give a valid acceptance. [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 can’t 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.

3. What is the difference between fraud and misinterpretation?

What do you understand by mistake?

Distinction between fraud and misrepresentation:

1. In misrepresentation the person making the false statement honestly

believes it to be true. In fraud, the false statement is made by person
who knows that it is false 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.

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 3. Misrepresentation renders the contract voidable at the option of the
party whose consent was obtained by misrepresentation. In the case of
fraud the contract is voidable. It also gives rise to an independent
action in tort for damages.
4. Misrepresentation is not an offence under Indian Penal Code and
hence not punishable. Fraud, in certain cases is a punishable offence
under Indian Penal Code.
5. Generally, silence is not fraud except where there is a duty to speak or
the relation between parties is fiduciary. Under no circumstances can
silence be considered as misrepresentation.
6. The party complaining of misrepresentation cann’t 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.

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.

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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 can’t be an enforceable contract between
them.

(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.

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

Ways of Discharge of Contract

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 party gets a right of
action against the other party who is guilty of breach. Performance may be:
(1) Actual performance; or (2) Attempted performance or Tender.

1. Actual performance: When each party to a contract fulfills his

obligation arising under the contract within the time and in the manner
prescribed, it amounts to actual performance of the contract and the
contract comes to an end.
2. Attempted 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 only an “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.

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 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. A tender 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 an objection.

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 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 is proved.

2. Discharge by Mutual Consent or Agreement

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

discharged by another agreement between the same parties. Sections 62 and
63 provide for the following methods of discharging a contract by mutual
agreement:

i. 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

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 original contract is discharged and need not be performed. The
following points are also worth-notng in connection with novation:
1. Novation cannot be compulsory, it can only be with the mutual
consent of all the parties.
2. 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.
ii. Alteration: Alteration of a contract means change in one or more of
the material terms of a contract. If a material alteration in a written
contract is done by mutual consent, the original contract is discharged
by alteration and the new contract 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.
iii. Rescission: A contract may be discharged, before the date of
performance, by agreement between the parties to the effect that it
shall no longer bind them. Such an agreement amounts to “rescission”
or cancellation of the contract, the consideration for mutual promises
being the abandonment by the respective parties of their rights under
the contract. An agreement of rescission 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.
iv. 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
do so 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.
v. Waiver: Waiver means the deliberate abandonment or giving up of a
right which a party is entitled 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

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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 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; and (3) 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 or unlawful, 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 agreed to 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 of supervening 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
depend on the choice of the parties.

Cases where the doctrine of supervening impossibility applies: A contract

will be discharged on the ground of supervening impossibility in the
following cases:

1. Destruction of subject-matter: When the subject-matter of a

contract, subsequent to its formation, is destroyed, without the fault of
the promisor or promisee, the contract is discharged. It is so only
when specific property or goods are destroyed which cannot be
regained.

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 2. Failure of ultimate purpose: Where the ultimate purpose for which
the contract was entered into fails, the contract is discharged, although
there is no destruction of any property affected by the contract and the
performance of the contract remains possible.
3. Death or personal incapacity of promisor: Where the performance
of a contract depends upon the personal skill or qualification or the
existence of a given person, the contract 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 cases the 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 the general 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 become unexpectedly burdensome, more
difficult or expensive. Some of the cases where impossibility of performance
is not an excuse are as follows:

1. Difficulty of performance: Increased or unexpected 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.
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,
Section 56 would not apply. As such these events also do not
discharge a contract.

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 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. Where “time 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 the contract. 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 debts incurred prior to his
adjudication.

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

contract, the former stands discharged automatically.

d)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 of discharge 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.

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Breach of contract may be of two kinds: (1) Anticipatory breach; and (2)
Actual breach.

1. Anticipatory breach: An anticipatory breach of contract is a breach of

contract occurring before the time fixed for performance has arrived.
It may take place in two ways: (a) Expressly by words spoken or
written. Here a party to the contract communicates to the other party,
before the due date of performance, his intention not to perform it. (b)
Impliedly by the conduct of one of the parties. Here a party by his
own voluntary act 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.

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

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

Discharge of the Instrument

A negotiable instrument is said to be discharged when it becomes

completely useless, i.e., no action on that will lie, 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 party thereto.

Discharge of the party primarily and ultimately liable on the instrument

results 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

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 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 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.

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 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.

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

of the Arbitration Act? What are the essentials for Arbitration
Agreement?

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

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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.

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.

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

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Conventions relating to foreign arbitral awards to which India is a party
applies, will be treated as a foreign award.

Essentials of Arbitration Agreement

1. It must be in writing [Section 7(3)]:

2. It must have all the essential elements of a valid contract:

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

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
MB 0035
LEGAL ASPECTS OF BUSINESS
Set II

1. What do you understand by the Offer of Proposal? What are the

essentials of a Valid Offer?

Offer or Proposal

Sec. 2 (a) defines offer as follows: “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.

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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.

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

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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.

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 can’t sue B for remuneration since B’s consent can’t 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

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 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 can’t prescribe the form or time of refusal
so as to fix a contract upon the acceptor. He can’t say, for example, that if
the offeree does not communicate before a given time, he is deemed to have
accepted the offer.

2. What are the effects of Minor’s Agreement? State in details.

Effects of minor’s agreement: A minor’s agreement is void-ab-initio.

Where there is no contract, there should be no contractual obligation on
either side. Hence, the effects of a minor’s 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 cann’t be sued for deceit. ‘You cann’t convert
a contract into a tort to enable you to sue an infant.’ This principle has
been followed in India.

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 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 can’t 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 minor’s 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 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 promisee

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 can’t 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 can’t 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 can’t be implied into the
contract into which the minor enters on attaining majority.

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 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 cann’t
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 infant’s 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.

3. What do you understand by Consideration? What are the rules

governing Consideration?

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

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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. A’s 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.

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 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
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 can’t become consideration for another’s 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.

4. What do you understand by the ‘Negotiable Instruments Act’?

What are the different characteristics of the Negotiable
Instruments?

Definition & Features

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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:

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:

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 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 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.
5. What do you understand by Company? What are the
characteristics of a Company? What are the different types of
company?

Definition:

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)

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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.
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

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 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 can’t 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:

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

Definition of Cyber Crime:

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.

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IMPORTANCE OF IT ACT 2000:

The Information Technology Act:

• Enables Legal recognition to Electronic Transaction / Record

• Facilitates Electronic Communication by means of reliable electronic
record
• Provides for acceptance of contract expressed by electronic means
• Facilitates Electronic Commerce and Electronic Data interchange.
• Facilitates Electronic Governance.
• Facilitates electronic filing of documents.
• Enables retention of documents in electronic form.
• Where the law requires the signature, digital signature satisfies the
requirement.
• Ensures uniformity of rules, regulations and standards regarding the
authentication and integrity of electronic records or documents.
• Facilitates Publication of Official Gazette in the electronic form.
• Enables interception of any message transmitted in the electronic or
encrypted form.
• Prevents Computer Crime, forged electronic records, international
alteration of electronic records fraud, forgery or falsification in
Electronic Commerce and electronic transaction.

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