MBA-SEM III

MB0035 – Legal Aspects of Business - 4 Credits

(Book ID: B0764)

Assignment Set- 1 (60 Marks)

Question1: ‘All contracts are agreements but all agreements are not contracts.’ Discuss
Answer 1:
Contract: Sec. 2 (h) ‘An agreement enforceable by law is a contract’. To make a
contract, there must be (I) an agreement and (ii) the agreement should be enforceable by
law.

Agreement: Agreement is defined as ‘every promise and every set of promises forming
consideration for each other ‘. A promise is defined as “an accepted proposal.” Thus,
every agreement in its ultimate analysis is made of a proposal from one side and its
acceptance by the other.

To become a contract an agreement must be enforceable by law. Sec. 10 of the Act lays
down the condition of enforceability. An agreement becomes enforceable only when it is
coupled with obligation. An obligation is the legal bond, which binds the parties to a
contract. The obligations springing from agreements should be legal obligations and not
moral, social or religious obligations.

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.

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
recognize 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.
Question 2: ‘Not all persons have the capacity to enter into a contract.’ Discuss this
statement.
Answer 2:

Legal disability of the parties would render the agreement entered into between them
unenforceable in a court of law. In fact, even a desirable person may enter into an
agreement. Law does not infringe his freedom of making an agreement with anybody he
likes. But by declaring certain classes of persons having no contractual capacity, law
seeks to protect their interests from being exploited by unscrupulous persons.
Definition:
Section II lays down that “Every person is competent to contract who is of the age of
majority according to the law to which he is subject and who is of sound mind and is not
disqualified from contracting by any law to which he is subject.” This section declares
following persons to be incompetent: (1) Minors (2) persons of unsound mind and (3)
persons disqualified by law to which they are subject.
Minors: A minor is a person who has not attained the age of majority. According to
Indian Majority Act, 1875 the age of 18 years is a major. However, if a guardian is
appointed by the court or if the minor or his property is under the supervision of a court
of wards, the age of majority is 21 years.
Principles governing minor’s contracts: The law protects minor’s persons, preserves
either their rights or estates, excuses their shortcomings and negligences and assists them
in their pleadings, the judges are their counsellors, the jury are their servants and law is
their guardian.
In pursuing the above objective, the law should not cause unnecessary hardship to those
who deal with minors.
Sec. II of the Act is silent as regards the legal effects of an agreement entered into by or
with a minor. In Mohari Bibi Vs. Dharmo Das Ghosh case it was held that a minor’s
agreement is void-ab-initio.
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.
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.
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.
Question 3: Discuss how a contract can be discharged by breach.
Answer 3:

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.

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 acquiescence 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.

Remedies for Breach of Contract

Whenever there is breach of a contract, the injured party becomes entitled to any one or
more of the following remedies against the guilty party:

1. Rescission of the contract.

2. Suit for damages.
3. Suit upon quantum merit.
4. Suit for specific performance of the contract.
5. Suit for an injunction.

As regards the last two remedies stated above, the law is regulated by the Specific Relief
Act, 1963.
Question 4: Discuss the essentials of a contract of guarantee.
Answer 4:

Essential of Contract of Guarantee:

1.    From: A contract of guarantee is just like any other contract which may be either
oral or in writing.

2.    Tripartite agreement: Every contract of guarantee involves three agreements

between (i) the creditor and principal debtor, (ii) the surety and the creditor, and (iii)
the surety and the principal debtor.

Consent of the parties: There must be consent of all the three parties.

Example: X sells and delivers goods to Y. X afterwards requests Z to pay in default of

Y. Z agrees to do so. Here, Z cannot become surety without the consent of Y.

3.    Secondary Liability: The test which applied to determine whether the contract is
one of guarantee or indemnity is whether the obligation has been undertaken at the
debtor’s request in which case the contract is one of guarantee. If the obligation is
undertaken without any request of the debtor, the contract is one of indemnity. The
intention of the parties is also important whether one making oneself primarily or
collaterally liable. Hence, the promise to be primarily and independently liable is not
a guarantee, though it may be an indemnity. Hence in a contract of guarantee, the
primary liability is with the principal debtor.

4. Existing liability: It is not necessary that the principal contract must be in

existence at the time the contract of guarantee is made; the original contract by which
the principal debtor undertakes to repay the money to the creditor may be about to
come into existence.

Example: X took a loan of Rs.10,000 from Y on 1 st Jan. 1999 and paid nothing on
account of interest and principal. On 2nd Jan. 2002, Z gave the guarantee to Y for the
payment of Rs.10,000 due from X. This is not a valid contract of guarantee because
the primary liability between X and Y is a time barred debt which is not enforceable
by law.

1. The promise to pay must be conditional: In other words, the liability of the
surety should arise only when the principal debtor makes a default.
2. Consideration: Something done for the benefit of the principal debtor is
considered as consideration for the guarantee to make the contract valid. The legal
detriment incurred by the promisee at the promisor’s request is sufficient to
constitute the element of consideration.
 3. Competency: The principal debtor, surety and creditor must be a person
competent to contract. However, under certain circumstances, a surety is liable
though the principal debtor is not i.e. the original contract is void as is the case of
a contract with a minor in which the surety is liable not only as surety but also as
principal debtor. A person of unsound mind or an undischarged insolvent cannot
give a valid guarantee.
4. Consent: There must be free consent; otherwise the contract of guarantee may
become void or voidable. Generally a contract of guarantee is not the contract of
utmost good faith i.e., uberrimae fidei, but it is sometimes a first cousin to it.
Mere non-disclosure will not effect the contract of surety unless there is an
intentional concealment.

Example: I: A engages B as clerk to collect money from him. B fails to account

for some of his receipts, and A in consequence calls upon him to furnish security
for his duty accounting. C gives his guarantee for B’s duty accounting. A does not
acquaint C with B’s previous conduct. B afterwards makes a default. The
guarantee is invalid.

Example: II: A guarantees to C payment for iron to be supplied by him to B to

the amount of 2000 tons. B and C have privately agreed that we should pay
Rs.500 per ton beyond the market price, such excess to be applied on liquidation
of an old debt. This agreement is concealed from A. A is not liable as a surety.

Kinds of Guarantee

A contract of guarantee may be either ‘retrospective’ e.g., for an existing debt or

‘prospective’ i.e. for a future debt. Guarantee are further divided into ’specific’ also
known as simple or single guarantee and ‘continuing’. When the guarantee is given for a
single or particular debt, it is called a ’specific guarantee’ and it comes to an end when
the debt guaranteed has been paid. A guarantee which extends to a series of transactions
is called a continuing guarantee. (Sec. 129 of the Indian Contract Act).
Question 5: How can negotiable instruments be endorsed? Discuss in detail.
Answer 5:

Section 15 defines indorsement as follows: “When the maker or holder of a negotiable

instrument signs the same, otherwise than as such maker, for the purpose of negotiation,
on the back or face thereof or on a slip of paper annexed thereto, or so signs for the same
purpose a stamped paper intended to be completed as negotiable instrument, he is said to
indorse the same, and is called the indorser.”

Thus, an indorsement consists of the signature of the holder usually made on the back of
the negotiable instrument with the object of transferring the instrument. If no space is left
on the back of the instrument for the purpose of indorsement, further indorsements are
signed on a slip of paper attached to the instrument. Such a slip is called ‘allonge’ and
becomes part of the instrument. The person making the indorsement is called an
‘indorser’ and the person to whom the instrument is indorsed is called an ‘indorsee.’

Kinds of Indorsements: Indorsements may be of the following kinds:

1. Blank or general indorsement: If the indorser signs his name only and does not
specify the name of the indorsee, the indorsement is said to be in blank. The effect
of a blank indorsement is to convert the order instrument into bearer instrument
which may be transferred merely by delivery.
2. Indorsement in full or special indorsement: If the indorser, in addition to his
signature, also adds a direction to pay the amount mentioned in the instrument to,
or to the order of, a specified person, the indorsement is said to be in full.
3. Partial indorsement: Section 56 provides that a negotiable instrument cannot be
indorsed for a part of the amount appearing to be due on the instrument. In other
words, a partial indorsement which transfers the right to receive only a part
payment of the amount due on the instrument is invalid.
4. Restrictive indorsement: An indorsement which, by express words, prohibits the
indorsee from further negotiating the instrument or restricts the indorsee to deal
with the instrument as directed by the indorser is called ‘restrictive’ indorsement.
The indorsee under a restrictive indorsement gets all the rights of an indorser
except the right of further negotiation.
5. Conditional indorsement: If the indorser of a negotiable instrument, by express
words in the indorsement, makes his liability, dependent on the happening of a
specified event, although such event may never happen, such indorsement is
called a ‘conditional’ indorsement.

In the case of a conditional indorsement the liability of the indorser would arise only
upon the happening of the event specified. But the indorsee can sue other prior parties,
e.g., the maker, acceptor etc., if the instrument is not duly met at maturity, even though
the specified event did not happen.

 
Question 6: Why do you think an agreement to take a person to moon for a holiday
cannot be a contract?
Answer 6:

The essentials of valid contract states that” the terms of agreement should be capable of
being performed & must be certain.” Taking a person to moon for a holiday cannot be a
valid contract because neither the activity is being capable of being performed in near
future nor it is certain that someone making such kind of promise will be able to fulfill.
We all know that moon missions are multi-billion projects & all are funded by
Government, so someone making such a promise would only be a fraud. The government
laws have also not yet authorized any agency or person to make such contracts so any
agency or person promising a holiday on moon is unlawful which is also an essential
term of valid Contract.