Zero Lecture

Legal Aspect of Business

KMB 207
Following Acts will be discussed in this
subject :

1. The Indian Contract Act

2. The Negotiable Instruments Act
3. The Partnership Act
4. The Companies Act
5. The Sale of Goods Act
6. The Consumer Protection Act
7. The Information Technology Act
8. The Right To Information Act
Why to Study this subject ?
The Indian Contract Act 1872

Unit I
 Proposal

• When one person signifies to another his

willingness to do or to abstain from doing
anything, with a view to obtaining the assent
of the other to such act or abstinence, he said
to make a proposal.

Ex: Ram proposes to Mohan :

Would you like to buy my car for Rs 2 Lacs ?
 Promise
• When the person to whom the proposal is made
signifies his assent to that proposal then that
proposal is said to be accepted and when a
proposal is accepted, It becomes a promise.

Ex: When Mohan accepts the proposal of Ram,

then the proposal of Ram becomes “ Promise”

• The person (Ram) making the proposal is called

the “Promisor” and the person (Mohan) accepting
the proposal is called the “Promisee”.
 Agreement
• Every promise and every set of promises, forming the
consideration for each other is called an agreement.

Consideration means “Something in return”. Car is

consideration for Mohan and Rs 2 Lacs is consideration for
Ram.

Ram ‘offers’ to sell car to Mohan while Mohan ‘accepts’ to

Pay Rs 2 Lacs to Ram

Offer + Acceptance + Consideration = Agreement

 Contract
• An agreement enforceable by law is a contract.

Agreement + Enforceability by law = Contract

When an agreement is enforceable by law ?
When an agreement is enforceable by law ?

An agreement will be enforceable by law if that agreement

satisfies some “ Conditions” .

These conditions are also known as “ Essentials of Valid

Contract ”
 Essentials of Valid Contract

An agreement will be enforceable if it satisfies following essentials of

valid contract :

1. Intention to create legal relationship

2. Two parties
3. Offer & Acceptance
4. Lawful Consideration
5. Free Consent
6. Capacity to Contract
7. Lawful Object
8. Possibility and Certainty of performance of contract
9. Agreement should not be declared VOID.
10. Registration
 Legal rules of valid Offer
1. An offer may be ‘express’ or ‘implied.

Illustrations:

(a) M says to N that he is willing to sell his motorcycle to

him for Rs 20,000. This is an express offer.

(b) A shoe shiner starts shining some one’s shoes,

without being asked to do so, in such circumstances that
any reasonable man could guess that he expects to be
paid for this, he makes an implied offer.
2. An offer must be capable of creating legal relationship.

3. The terms of the offer must be certain and not loose or

vague

Illustrations:
(a) X purchased a horse from Y and promised to buy
another, if the first one proves lucky, X refused to buy
the second horse. Y could not enforce the agreement, it
being loose and vague (Taylor vs Portington).

(b) A offers to B lavish entertainment, if B does a particular

work for him. A’s offer does not amount to lawful offer
being vague and uncertain.
4. An invitation to offer is not an offer.

For example, quotations, catalogues of prices or display of goods

with prices marked thereon do not constitute an offer. They are
instead an invitation for offer and hence if a customer asks for
goods or makes an offer, the shopkeeper is free to accept the
offer or not.

An auctioneer advertised in a newspaper that a sale of office

furniture would be held. A broker came from distant place to
attend that auction but all the furniture was withdrawn. The
broker thereupon sued the auctioneer for his loss of time and
expenses . Would the broker win ?

5. An offer may be ‘specific’ or ‘general.

Carlill vs Carbolic Smoke Ball Co.

Carbolic Smoke Ball Co., issued an advertisement in which the

Company offered to pay £ 100 to any person who contracts
influenza, after having used their Smoke Balls three times daily for
two weeks, according to the printed directions.

Mrs. Carlill, on the faith of the advertisement, bought and used

the Balls according to the directions, but she suffered from
influenza and therefore she claimed £ 100 from company but
that company denied to pay the amount and said that Offer is not
made to Mrs Carlill. Hence Mrs. Carlill filed a case against
company . Would she win the case ?
6. An offer must be communicated to the offeree

Lalman Shukla vs Gauri Dutt

Gauri dutt’s nephew absconded from home. He sent his servant (

Lalman) in search of the boy. After the servant had left, the Gauri
dutt announced a reward of Rs 501 to anybody giving information
relating to the boy.

Lalman, before seeing the announcement, had traced the boy and
informed the Gauri dutt. Later, on reading the notice of reward, the
servant claimed it but Gauri dutt denied to give reward to Lalman.

Lalman filed a case against Gauri dutt. Would he win the case ?
7. An offer should not contain a term the non-compliance of
which would amount to acceptance

8. An offer can be made subject to any terms and conditions

9. Two identical cross-offers do not make a contract.

On 15 October, 2008 A wrote to B offering to sell him

100 tons of iron at Rs 25,000 per ton. On the same day,
B wrote to A offering to buy 100 tons of iron at Rs
25,000 per ton. The letters crossed in the post. Is there
any contract between A and B ?
Legal rules of a valid acceptance
1. Acceptance must be given only by the person to whom the offer
is made.

A sold his business to his manager B without disclosing the fact to

his customers. C, a customer, who had a running account with A,
sent an order for the supply of goods to A by name. B received
the order and executed the same. C refused to pay the price.

Can B claim price ?

2. Acceptance must be absolute and unqualified

L offered to M his scooter for Rs 4,000. M accepted the offer and

tendered Rs 3,900 cash and promised to pay the balance of Rs
100 by the evening. Is this a valid acceptance ?
3. Acceptance must be expressed in some usual and reasonable
manner, unless the proposal prescribes the manner in which it is
to be accepted

4. Acceptance must be communicated by the acceptor.

In Powell vs Lee, P was a candidate for the post of headmaster in a

school. The managing committee of the school passed a resolution
selecting him for the post. A member of the managing committee,
acting in his individual capacity, informed P that he had been
selected, but P received no other intimation.
Subsequently, the resolution was cancelled, and P was not
appointed to the post. P filed a suit against the Committee for
breach of contract.

The Court held that in the absence of an authorized

communication from the Committee there was no binding
contract.
5. Acceptance must be given within a reasonable time
and before the offer lapses and or is revoked

6. Acceptance must succeed the offer.

7. Rejected offers can be accepted only, if renewed.

Abdul Aziz vs. Masum Ali (1914)
A promised M that he will contribute Rs 500 for
the repair of Mosque but later on A denied and
said he is not getting any consideration . M filed a
case against A. Would he win ?

Kedarnath vs Gauri Mohammad (1887)

A promised M that he will contribute Rs 500 for
the construction of a Hall for poor people and M
purchased raw materials but later on A denied and
said he is not getting any consideration . M filed a
case against A. Would he win ?
 Legal Rules (Essentials) to Valid Consideration

1. It must move at the desire of promisor.

2. It may move from promisee or any other
person.
3. It may be any act , abstinence or return
promise.
4. It may be past , present or future.
5. It need not to be adequate.
6. It must be real and not illusory.
7. It must not be illegal or immoral.
Durga Prasad v Baldeo (1880)

On the order of the collector of a town, Durga

Prasad (Builder) built some shops on his own
expense in a market. Due to intervention of
collector, shopkeepers who occupied these shops
promised to pay to Durga Prasad commission on
their sales but later on , shopkeepers did not pay
commission to him. Durga Prasad sued the
shopkeepers when he did not receive the
commission. Would Durga prasad win the case ?
Chinnaya v Ramayya (1882)

An old lady, made an agreement with her

daughter that she would gift her property but the
condition was that the daughter would pay her
aunt some amount regularly as maintenance
allowance. The daughter promised her aunt
(mother’s sister), the maintenance money.
However, later she stopped paying the money to
her aunt and said that she is not getting any
consideration from aunt. The aunt filed a case
against her niece for not paying the money.
Would Aunt win the case ?
 Exceptions – No consideration No contract

1. Natural Love & Affection

2. Compensation for voluntary services ( Example : If
Mr X saved life of Mr Y during an accident two months back and NOW Mr. Y offers
to give Rs 1 Lac to Mr. X and Mr X accepts it , then this contract would be valid
without consideration as Mr Y is not getting any consideration in this contract. )
3. Completed Gift ( When Doner offers to give gift and Donee accepts
gift , Contract will be valid without consideration as Doner is not getting any
consideration )
4. Contribution to charity
5. Agency ( If agent works without consideration , Contract between
agent and Principal will be valid)
Who is not capable to make contract ?
Section 10 & 11 says ,

Any agreement made with minor is Void –

ab - initio
Mohan , a minor , obtains a loan of Rs 50000/- by mortgaging his
property from money lender Sohan.

Q. Is this agreement valid ?

Q. Is Sohan liable to return the property to Mohan ?
Q. Is Mohan liable to compensate Rs 50000/- if he has spent that
money ?
Q. Can Sohan recover that Rs 50000/- by selling the property of
Mohan ?
Q. Is Mohan liable to return Rs 50000/- if he has not spent that
money ?
Q. Will this agreement be treated valid when Mohan attains the age
of majority ?
R. If Mohan wishes to make this agreement valid after attaining the
age of majority, Can he do so ?
 Rules related to Agreement with MINOR

1. An agreement with minor is void –ab – initio.

2. Minor can not ratify any agreement after achieving
the age of majority
3. Minor can be beneficiary.
4. Minor can not be make liable except his necessaries.
5. An agreement with minor for his necessaries will be
valid and minor will be liable to pay for that.
6. Minor can not become as a partner but Section 30 of
Indian partnership act says that Minor can claim
benefits of partnership.
7. Minor can be agent and make his principal liable for
his act but Minor will not be personally liable for his
negligence.
8. If any adult takes guarantee of Minor , then Adult will be
responsible for pay the debts although Minor still will not be
liable.

9. If any contract is made by minor and major jointly, then all

the burden of that contract will fall on Major.

10. The parents of minor are not liable for agreement made
by a minor , whether the agreement is for the purchase
of necessaries or not.

11. What if minor fraudulently tells other party that he is

major and other party makes a contract with minor ,
Would minor liable ?
Roberts vs Gray
G , a minor , entered into a contract with R , a famous
billiards player, to pay him a certain sum of money to learn
the game with him. R spent time and money in providing
coaching to G. Is the agreement between G & R valid ? Is G
liable to pay ?

Nash vs Inman

I , a minor , bought eleven fancy coats from N. At that time

I was having sufficient coats. Is the agreement between I &
N valid ? Is I liable to pay ?
Who is sound and who is unsound ?
 SOUNDNESS OF MIND
To determine soundness of mind for making a contract, one has to
ensure that:

The person at the time of making the contract is capable of

understanding the contract ?

Is he capable to understand the implications of that contract upon

his interest ?

Most importantly, a person who is usually of unsound mind, but

occasionally of sound mind may make contract when he is of a
sound mind.
Unsoundness has following grounds :
1. Lunacy: It is a mental disease which is curable. A lunatic person
suffers from intervals of sanity and insanity. He can enter into
contracts during the period when he is of sound mind. Insane
persons will have two states namely; state of Sanity and State of
Insanity. During state of Sanity, they can enter into Contracts.
Thus they suffer from temporary Incapacity.

2. Idiocy: An idiot is a person who has completely lost his mental

powers. He does not exhibit understanding of even ordinary
matters. Idiocy is permanent while lunacy is periodical insanity
with intervals. An agreement with such person is void. Idiots are
the persons who suffer from Unsound mind from birth itself.
Therefore they cannot enter into Contracts throughout their life.
In such a way they suffer from permanent Incapacity.
3. Drunken or intoxicated person: A Drunken or
intoxicated person suffers from temporary incapacity to
contract while he is drunk that he is incapable of forming a
rational judgment. These persons also suffer from Unsound
mind temporary after getting recovered from the effect, they
can enter into Contracts.
Persons disqualified by law

1. Alien Enemy
Note : Alien friend can make contract but Alien enemy can’t.

2. Convict (only during punishment)

3. Married woman ( in case of husband’s property)
4. Insolvent
5. Company ( If it makes contract outside its power)
 Essentials of Fraud
1. There must be representation and it must be false.
Without representation, There will be no fraud.
Silence is not fraud except when silence may itself
amount to speech.
2. The representation must have been made with a
knowledge of its falsity
3. The representation must be made with an intention to
deceive the other party.
4. The other party must have been induced to act upon
representation.
5. The other party must have relied upon representation
and must have deceived.
6. The other party is not able to discover truth with
ordinary inspection
Smith vs Chadwick
A bought shares in a company on the faith of a
prospectus which contained an untrue statement that B
was director of company . A had never heard about B but
after purchasing shares when A came to know about this
untrue statement , A filed a case against company on the
ground of fraud. Will A win the case ?

Peek vs Gurney
The prospectus of a company did not contain document
disclosing liabilities. This gave an impression that company
was prosperous. If that document was disclosed then
impression would have been different. Is this non
disclosure amounted to fraud ? Is silence a fraud ? Can
fraud exist without representation ?
 Check your knowledge
1. When offeor makes false statement to acceptor who himself does not believe
to be true to obtain the consent of acceptor, The consent of acceptor is
affected by ___________

2. 1. When offeor makes false statement to acceptor who himself believes to be

true to obtain the consent of acceptor, The consent of acceptor is affected by
___________

3. When Offeror commits or threat to commit any act forbidden by IPC for
obtaining consent of acceptor , The consent of acceptor is affected by
___________

4. When Offeror does unlawfull detention of person or property of acceptor for

obtaining his consent, The consent of acceptor is affected by ___________

5. When offeror is in position to dominate the will of acceptor and use his
position to obtain the consent of acceptor for taking some unfair advantage
from acceptor, The consent of acceptor is affected by ___________
A agreed to purchase B’s car which was lying in B’s
garage. Unknown to either party , the car and garage
were completely destroyed by fire a day earlier. Is this
agreement valid ?

H bought oats from S a sample of which was shown to H.

H erroneously thought that oats were old. However the
oats were new. Later on when H came to know about
this , H filed a case against S . Would he win the case ?
Mistake of law is divided into two parts :

1. Mistake of law of the own country ( Valid )

2. Mistake of law of the foreign country ( Void)

Mistake of fact is divided into two parts :

1. Unilateral mistake ( Valid)

2. Bilateral mistake ( Void)

Note : In case of coercion , undue influence , fraud &

misrepresentation , The contract is voidable.
 WHAT IS PERFORMANCE OF CONTRACT

• It takes place when the parties to the contract

fulfill their obligations arising under the
contract within the time and in the manner
prescribed.
• According to Sec.37, Parties to a contract
must either perform or offer to perform,
unless such performance is excused.
A contract is said to be performed when parties
make

(a) Actual performance

OR
(a) Attempted performance or Offer to perform
or Tender
 OFFER TO PERFORM (Tender)

• Sometimes promisor offers to perform his obligation

under the contract at the proper time and place but the
promisee does not accept the performance. This is
known as “attempted performance” or “tender”.

Example : A hires B to repair his washing machine

at his house on next day and for this he
promises to pay Rs 500/- . B reaches A’s house
on next day to perform his task but A refuses .
Can B ask for Rs 500/- from A ?
 Where a promisor has made an offer of
performance to the promisee, and the offer has not
been accepted, the promisor is not responsible for
non-performance, nor does he thereby lose his
rights under the contract.

 Thus, the tender of performance is equivalent to

actual performance
 Essentials of a valid Tender

1. It must be unconditional.
2. It must be made at proper time and place.
3. Tender must be whole and not of part.
4. Tender must be in proper form.
5. Tender must be to a proper person.
 CONTRACTS WHICH NEED NOT BE PERFORMED
 When its performance becomes impossible (sec.56)
 When the parties to it agree to substitute a new contract for it
or to rescind or alter it(sec.62)
 When the promisee remits promisor from performance. It may
be wholly or partially.
 When the promisee neglects or refuses to afford the promisor
reasonable facilities for the performance of his promise(sec.67)
E.g.: A contracts with B to repair B’s house. B neglects or refuses to
point out to A the places in which his house requires repairs. A is
excused for the non-performance of the contract, if it is caused
such neglect or refusal.
 When it is illegal
Discharge Of Contract

Mercantile Law
 DISCHARGE OF CONTRACT
Discharge of contract means termination of
the contractual relationship between the
parties. A contract is said to be discharged
when it ceases to operate, i.e., when the
rights and obligations created by it come to
an end.
MODES OF DISCHARGE OF
CONTRACT
A contract may be discharged –
1. By performance.
2. By agreement or consent
3. By impossibility or performance
4. By lapse of time
5. By operation of law
6. By breach of contract.
 DISCHARGE OF CONTRACT
BY PERFORMANCE

Performance of a contract is the most usual

mode of its discharge. It may be by

(1) Actual performance, or

(2) Attempted performance.
 DISCHARGE OF CONTRACT
BY AGREEMENT
Types of discharge by agreement or
consent:
(a) Novation (b) Rescission
(c) Alteration (d) Remission
(e) Merger

When new agreement takes place in lieu of old agreement,

then obligation of parties in old agreement gets discharge (
ends) and old contract(agreement) gets discharge.
 DISCHARGE OF CONTRACT BY
IMPOSSIBILITY OF PERFORMANCE
Discharge by Impossibility of Performance :

If an agreement contains a promise to perform

an impossibility, it is void ab initio.

There are two types of impossibilities :

1. Initial Impossibility
2. Subsequent Impossibility or Supervening Impossibility
 DISCHARGE BY SUPERVENING
IMPOSSIBILITY
1. Destruction of subject-matter of contract.
2. Non-existence or non-occurrence of a
particular state of things.
3. Death or incapacity for personal service.
4. Change of law
5. Outbreak of war
 IMPOSSIBILITY OF PERFORMANCE – NOT
AN EXCUSE

In the following cases, a contract is not

discharged on the ground of supervening
impossibility.
1. Difficulty of performance.
2. Commercial impossibility.
3. Impossibility due to failure of a third
person.
4. Strikes, lock-outs and civil disturbance.
5. Failure of one of the objects.
Taylor vs Caldwell
C let a music hall to T for a series of concerts for certain days .
The hall was accidentally burnt down before the date of the first
concert. Can T claim compensation from C ?

A and B contract to marry each other. Before the time fixed for
the marriage , A goes mad. Is B liable to marry with A ?

Karl Ettlinger vs Chagandas & Co.

C promised to sent some goods from Mumbai to London but
before the goods were sent , there were sharp increase in
shipping rates therefore it became very expensive for C . Is C
liable to send those goods to K ?

Hamandrai Phoolchand vs Pragdas

A , a wholesaler, entered into contract with B for the sale of cloth
to be produced by C, a manufacturer of that cloth but C did not
manufacture that cloth. Is A liable to B ?
Steam boat Co. vs Hutton

S agreed to let out a boat to H for (a) for viewing the

coronation of king and (b) to participate in boat race.
Due to illness of king , Coronation was cancelled but
boat race was held.

H argued that contract was discharged due to

impossibility of performance as coronation was
cancelled due to illness of king. Can contract be
discharged ?
 DISCHARGE BY LAPSE OF TIME
The Limitation Act, 1963 lays down that
a contract should be performed within a
specified period, called period of
limitation. If it is not performed, and if
no action is taken by the promisee
within the period of limitation. He is
deprived of his remedy at law.
DISCHARGE BY LAPSE OF TIME
The Limitation Act, 1963 lays down a period
of three years for the enforcement of most
types of rights.
 DISCHARGE BY OPERATION OF LAW
A contract may be discharged independently of
the wishes of the parties, i.e., by operation of
law. This includes discharge –
a. By death (in the case of contracts for personal
service).
b. By insolvency.
c. By unauthorised alteration of the terms of a
written agreement.
d. By rights and liabilities becoming vested in the
same person.
 DISCHARGE BY BREACH OF
CONTRACT
Breach of contract means a breaking of
the obligation which a contract
imposes. It occurs when a party to the
contract without lawful excuse does not
fulfill his contractual obligation.
 DISCHARGE BY BREACH OF
CONTRACT
Breach of contract may be –
1. Actual breach of contract, or
2. Anticipatory or constructive breach
of contract.
Peter rents John’s apartment for two years. Peter started
living in that apartment and after one year , he offers to
buy that apartmnent from John, who agrees. They make a
contract and Peter becomes the owner of the apartment.
Is the previous contract related to rent discharged ?

X placed an order for purchase of mobile phone through

Amazon and his order is processed by Amazon. Later on
he changed his mind and cancelled that order before
delivery and that cancellation request is processed by
Amazon. Is Amazon liable to deliver the mobile phone to
X?
 Breach of Contract
A contract creates rights and obligations for
both the parties of contract but when a party to
the contract without lawful excuse does not
fulfill his “ OBLIGATION” then it is called Breach
of contract.

The are two types of breach of Contract

(i) Actual Breach of Contract

(ii) Anticipatory Breach of Contract
Is there any benefit of rights if there is
no remedy to enforce those rights in
Law ?
 Remedies
for
Breach of Contract
[Where there is a right there is a remedy]
 Remedies for breach of Contract
Remedies may be divided into two categories.
Monetary Remedies Non Monetary Remedies

Suit for damages 1. Rescission of contract

i)Ordinary damage 2. Suit upon quantum meruit

ii)Special damage
iii)Nominal damage 3. Suit for specific
iv) Vindictive or performance of the contract
Exemplary or punitive
damage 4. Suit for injunction
A. Ordinary Damages
A contracts to deliver 100 bags of rice at Rs. 100
per bag to B on a future date. On then due date
he refuses to deliver. The price on that day is Rs.
110 per bag.

Now B will claim Ordinary damage of Rs 10 per

bag.
B. Special Damages

A made a contract with B to supply a machine

for A’s factory. B unreasonably delays the
delivery of the machine therefore A loses a
profitable contract with the Government.

In this case A will claim special damage in the

form of compensation.
Classification of Contract
 Classification of Contract

1. On the basis of Validity

2. On the basis of Formation
3. On the basis of performance
1. On the basis of Validity

1. Valid contract
2. Void contract
3. Voidable contract
4. Unenforceable contract
2. On the basis of Formation

1.Express contract
2.Implied Contract
3.Quasi Contract

3. On the basis of performance

1. Executed contract
2. Executory contract
Let discuss,

On the basis of performance

1. Executed contract
2. Executory contract
Case 1 : Alex goes to the local coffee shop and buys a
cup of coffee. The barista sells him the coffee in
exchange for the cash payment.

Case 2 : Alex agrees to teach tuition to some students.

Students paid him Rs 2500/- at the start of the month
but Alex has not taught students so far.
Let discuss .

On the basis of Formation

1.Express contract
2.Implied Contract
3.Quasi Contract
Peter and Oliver enter a contract under which Peter
agrees to deliver a basket of fruits at Oliver’s residence
and Oliver promises to pay Rs 1,500 after consuming all
the fruits. However, Peter erroneously delivers a basket
of fruits at John’s residence instead of Oliver’s. When
John comes back to home, he assumes that
the fruit basket is a birthday gift and consumes them.
Is John liable to pay Peter ?
Although there is no contract between Peter and John,
the Court treats this as a Quasi-contract and orders John
to either return the basket of fruits or pay Peter
 Quasi contract

It is a contract in which there is no intention either side

to make a contract, but the law created contract between
the parties.

Example : Amazon delivered certain books to a wrong

address. Now recipient is under an obligation to either
pay for them or return them.

Now Law created a quasi contract between Amazon and

Recipient. The obligation of recipient is created by law.
Mary tells Alex that she will hire him to work as a web
developer if he shifts closer to her office but They did not
make any agreement , however Mary assures Alex they'll
work out the details when he arrives.

Alex proceeds to quit his current job, move a thousand

miles away, and rent a new apartment close to Mary’s
office. When he meets with Mary, she tells him that she
doesn't have a job for him. Is Mary liable to compensate
Alex ?
Let discuss ,

On the basis of Validity

1. Valid contract
2. Void contract
3. Voidable contract
4. Unenforceable contract
Contracts may be classifi d according to their validity as (i)
Valid, (ii) Voidable, (iii) Void, (iv) Unenforceable (v) illegal

Valid contract: A contract which satisfies all essentials of

valid contract prescribed by law is called a valid contract.

Voidable Contract : A voidable contract is one which can be

avoided at the option of the aggrieved party but not at the
option of other party. It means only aggrieved party will
decide whether the contract would be valid or void……..

Until the contract is not avoided by the aggrieved party, it

remains a valid contract.
Void Contract: A void contract is a contract which is
valid when entered into but which subsequently became
void due to impossibility of performance, change of law
or some other reason.

For example, X offers to marry Y. Y accepts X’s offer and

contract is created between X and Y. Later on Y dies
before the marriage.

This contract was valid at the time of formation but

became void later on due to the death of Y.
When any valid contract becomes impossible to
perform , that valid contract becomes void contract.

Can we say that supervening impossibility makes the

contract void ?

DOES SUPERVENING IMPOSSIBILTY “ALWAYS”

DISCHARGE THE CONTRACT AND OBLIGATION OF
PARTIES GETS ENDED ?
Case 1: X gave loan to minor and Minor
mortgaged his property in favor of X.

Case 2: X booked his ticket in Shatabdi

Express but due to fog train is cancelled.

Case 3: X agreed to supply drugs to Y .

Which of the above is the example of void

agreement , which of the above is the example of
void contract and which of above example is illegal
agreement ?
Distinction between Void Agreement and
Void Contract
A void agreement is unenforceable from the very
beginning; whereas a void contract is valid at the time of its
formation but becomes void later on.

Unenforceable contract: It is contract which is actually

valid but cannot be enforced because of some technical
defect (such as not in writing, under stamped). Such
contracts can be enforced if the technical defect involved is
removed
Law of Agency
A person can make contract with other
party (i) either by himself or (ii) through
another person

When person makes

contract with other party ,
he creates agency and this another
person is called agent and that person is
called Principal.
 Relationship

THIRD
Principal Agent
PARTY
Agency agreement is in between Principal and
Agent.

This relationship is based upon an this agreement

whereby one person(agent) acts for
another(principal) in transaction with a third
person.

What does an agent do ?

Agent creates contractual relation between the

principal and a third party.
Agent is “a person employed to do any act for another or
to represent another in dealings with third person”. Thus,
agent is a person who acts in place of another.

The person for whom or on whose behalf he acts is called

the Principal.

Example : Anil appoints Bharat, a broker, to sell his Maruti

Car on his behalf. Anil is the Principal and Bharat is his
agent. The relationship between Anil(Principal) and Bharat
(Agent) is called Agency.
 Creation of Agency

A contract of agency may be created by an express

agreement or by conduct. There are two methods of
creation of agency.

1. Express agency
2. Implied agency

There are three types of Implied agency:

1. Agency by estoppel
2. Agency by holding out
3. Agency by necessity
4. Agency by ratification
Agency by Estoppel

When a person (X) induces third party(T) to believe

by his conduct that a certain person(Y) is his agent,
then that person(X) is precluded (stopped) from
denying it and that agency is created by estoppel.
Now X is Principal and Y is agent.
Agency by Holding out

“Holding out” means holding a person liable as a

PRINCIPAL

Agency by holding out is a branch of Agency by

estoppel. In case of agency by holding out,
Positive Conduct of Principal is required to
establish agency.
Agency by Necessity

In some emergency situation, Law permits

any person (X) to act as an agent for the
benefit of other person (Y) if it is not
possible to communicate with that
person(Y) then it is called agency by
necessity.
Agency by Ratification

When any person (X) acts as an agent on behalf of

other person (Y) without his consent or
knowledge and later on if other person(y) ratifies
the act of X

Then agency is created between X and Y and this

agency is called agency by ratification. In this case
X is agent and Y is Principal.

Ratification may be expressed or implied.

Case 1: A tells T within hearing of P that he
(A) is agent of P and P does not object to
this statement of A therefore T believed
that A is agent of P. Later on T supplies
certain goods to A. Now P is liable to pay
to T.
Which mode of creating agency is
applicable in creating agency between P
and A ?
a) Agency by estoppel b) ratification
c) holding out d) necessity
Case 2: A horse was sent by a train. When it
arrived at the station of destination, nobody took
its delivery therefore railway company had to feed
the horse. Later on the railway company
recovered the amount spend on feeding the horse
from sender of the horse.

Which mode of creating agency is applicable in

creating agency between sender and Railway
company ?

a)Agency by estoppel b) ratification

c) holding out d) necessity
Case 3 : P allows his servant habitually to
purchase goods for him on credit from T and
pays for them. On one occasion, he pays his
servant cash to purchase the goods but
servant misappropriates the money and
purchases the goods on credit from T. Now
P is liable to pay T .
Which mode of creating agency is applicable
in creating agency between P and Servant ?
a) Agency by estoppel b) ratification
c) holding out d) necessity
Case 4: A , without authority , buys goods
for P . Afterwards P sells those goods to T.
Which mode of creating agency is applicable in
creating agency between P and A?

a) Agency by estoppel
b) Agency by ratification
c) Agency by holding out
d) Agency by necessity
Termination of Agency
 Termination
of Agency

By act of By operation
parties of law
Classification of Agent
 Classification of Agent

On the basis of authority , Agents are

classified into three categories :

1. Special Agent ( Ex: Broker )

2. General Agent ( Ex: Manager)
3. Mercantile Agent

Mercantile agent is a person who sells or buy

goods on behalf of principal.
 Mercantile Agents
Keep goods in his Use his own
possession name for selling
goods

1. Factor ✔ ✔

2. Broker X X

3. Commission May or may not ✔

agent be
4. Auctioneer

5. Del credere agent ( Agent and guarantor both)

Example : Mahalaxmi chemicals pvt. Ltd is del

credere agent of Reliance Industries Ltd.

6. Banker
Negotiable means “transferable by
delivery”

Instrument means “a written document by

which a right is created in favour of some
person”
The term “negotiable instrument” literally
means ‘a written document which creates a
right in favour of somebody and is freely
transferable by delivery.’
What is Negotiable Instrument ?

Negotiable Instrument is a written

document which is used to create a
right in favor of a person for
receiving sum of money and which
is transferable from one party to
another by means of delivery or
endorsement & delivery.
Characteristics of Negotiable Instruments
1.Freely Transferable
2. Holder of NI can sue in case of default of
payment
3. NI holder has a better title.
4. NI is either Promise to pay(PN) or Order to
pay(BOE). This promise/order must be
unconditional
5. NI may be either bearer document or order
document. NI is payable either to payee or to
other person on the order of payee
(Endorsement).
6. NI must contain certain amount
7. NI must be in writing and signed by maker

8. Presumptions
• Consideration • Date of issue
• Time of acceptance • Duly Stamped
 Types of Negotiable Instrument
According to Section 13 (1) of the
Negotiable Instruments Act, “A
negotiable instrument means a
promissory note, bill of exchange, or
cheque payable either to order or to
bearer”.
 Types of NI
The Negotiable Instruments Act
mentions only three kinds of
negotiable instruments (Section 13).
These are:

1. Promissory Notes
2. Bills of Exchange
3. Cheque
 Promissory Note

According to Section 4 of the

Negotiable Instrument Act, 1881, A
Promissory Note is an instrument in writing
(not being a bank-note or a currency-note)
containing an unconditional undertaking
signed by the maker to pay a certain sum of
money only to, or to the order of a certain
person, or to the bearer of the instrument.
The person who makes the promissory note is
called the maker .

The person to whom payment is to be made is

called the payee.
 Characteristics of Promissory Note

1. It must be in writing
2.It must contain an unconditional promise to pay.
3.The sum payable must be certain.
4.The Promissory note must be signed by the
maker.
5.It must be payable to a certain person.
6.It should be properly stamped.

Example: Ram purchased goods from Shyam sundar

on credit and promised to pay after 3 months ( see
next slide)
BOE is made by seller and accepted by buyer
where seller gives an order to buyer to pay
amount after certain period however PN is made
by buyer where buyer promises to seller to pay
the amount after certain period

Example: Mrs Q purchased goods from Mr. P on

credit therefore P made a BOE and ordered to Mrs
Q to pay amount after three months.
(see next slide)
 PN BOE Cheque
Parties 2 (Maker & 3 ( Drawer, 3 ( Drawer,
Payee) Drawee & Drawee &
Payee) Payee)

Acceptance Not Required Required Not required

Nature of Promise Order Order
Instrument
Crossing NA NA Can be
crossed
Grace period Allowed ( 3 Allowed ( 3 Not allowed
days) days)

Stamp Required Required Not required

Negotiation
 Endorsement
It means the writing of a person’s name on the
face or back of NI for the purpose of transferring
ownership (negotiation). When holder signs the
instrument with an intention to negotiate it, it is
called an endorsement.
The person who signs the NI for negotiation is
called endorser and for whom it is signed, is called
endorsee.
First endorsement is made by payee. An
endorsement may be blank or in full. Partial
endorsement is not valid.
Presentment of
Negotiable Instrument