Legal & Business Environment- Module 1

LEGAL AND BUSINESS ENVIRONMENT
18MBA24
By:
Dr.LAKSHMINARAYANA REDDY.K
MBA, M.Phil, Ph.D

Module-1
• Indian Contract Act, 1872-
Meaning of contract, agreement,
essential elements of a valid
contract.
• Law of agency-meaning, creation
and termination of agency.
Dr.Lakshminarayana Reddy.K

Introduction
• If your business is going to succeed you need to ensure that
it is legally sound. This means that you need to get legal
advice from a registered law firm or solicitor.
• Law is a rule of conduct enforced by the state.
• A law is a rule of conduct imposed and enforced by the
sovereign – Austin.
• The body of principles recognized and applied by the state in
the administration of justice – Salmand.
• Rule of external human actions enforced by a sovereign
political authority – Holland.
• A code of conduct or a set of rules is expected to observe for
welfare of state and its people.
• “Laws refer to a set of rules (Code of Conduct) which a
citizen must obey.” Dr.Lakshminarayana Reddy.K

• What is Business Law? The terms „Business Law,
Commercial Law and Mercantile Law are synonymous
(i.e. one and the same).
• Business Law is the branch of general (Civil) law
dealing with rights and obligations of business person
arising out of business transaction in respect of property.
• TYPES OF LAW: Civil Law, Criminal Law, Mercantile
Law, Industrial Law, International Law etc,.
• Source of Business law :
- English Mercantile Law
- Acts enacted by Indian Legislature
- Judicial Decisions
- Customs and trade Usages

Indian Contract Act 1872
• The Indian Contract Act, 1872 prescribes the law relating to contracts in
India and is the key act in regulating Indian contract law.
• Enacted in 25th April 1872 and Commenced in 1st September 1872.
• The Act is based on the principles of English Common Law. It is
applicable to all the states of India.
• It determines the circumstances in which promises made by the parties
to a contract shall be legally binding.
• Under Section 2(h), the Indian Contract Act defines a contract as an
agreement which is enforceable by law.
• At present the Indian Contract Act may be divided into two parts:
Part 1: deals with the General Principles of Law of Contract Sections 1 to
75.
Part 2: deals with Special kinds of Contracts such as: Contract of
Indemnity and Guarantee, Contract of Bailment and Pledge, Contract of
Agency. 76-266.

Important Terms Sections 2(a) to 2(j) interrelated.
1. Offer 2(a): 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
to such act or abstinence, he is said to make a proposal.
2. Acceptance 2(b): When the person to whom the proposal is made, signifies
his assent there to, the proposal is said to be accepted.
3. Promise 2(b): A Proposal when accepted becomes a promise. In simple
words, when an offer is accepted it becomes promise.
4. Promisor and promisee 2(c): When the proposal is accepted, the person
making the proposal is called as promisor and the person accepting the
proposal is called as promisee.
5. Consideration 2(d): When at the desire of the promisor, the promisee or
any other person has done or abstained from doing or does or abstains from
doing or promises to do or to abstain from doing something such act or
abstinence or promise is called a consideration for the promise. Price paid
by one party for the promise of the other Technical word meaning QUID-
PRO-QUO i.e. something in return.Dr.Lakshminarayana Reddy.K

6. Agreement 2(e): Every promise and set of promises forming the
consideration for each other. In short,
{agreement=promise+consideration}
• Agreement= Offer + Acceptance.
7. Contract 2(h): An agreement enforceable by Law is a contract.
Therefore, there must be an agreement and it should be
enforceable by law/ obligation.
8. Reciprocal Promises 2(f): Promises which form the
consideration or part of the consideration for each other are
called 'reciprocal promises'.
9. Void agreement 2(g): An agreement not enforceable by law is
void.
10. Voidable contract 2(i): An agreement is a voidable contract if it
is enforceable by Law at the option of one or more of the parties
there to (i.e. the aggrieved party), and it is not enforceable by
Law at the option of the other or others.
11. Void contract 2(j): A contract becomes void when it ceases to
be enforceable by law. Dr.Lakshminarayana Reddy.K

Elements of Contract
• Agreement
• Legal obligation/ Enforceable bylaw.
Contract= Agreement + Legal obligation/
Enforceable bylaw.
Elements of Valid offer
1) There must be Two parties , 2) Every proposal must be
communicated, 3) It must create Legal Relations, 4) It must
be Certain and definite, 5) It may be specific or Public

Agreement
Agreement 2(e): Every promise and set of promises forming the
consideration for each other. In short, {agreement=
promise+consideration}.
• Agreement= Offer + Acceptance.
• Agreements comes in to existence only when one party makes the
proposal to other, the other party signifies his assent there to.
• Agreement is the sum total of offer and acceptance.
• Agreement is an accepted proposal.
• A contract is an agreement, an agreement is a promise and a promise is
an accepted proposal.
• Characteristics of Agreement:
- Plurality of persons
- Consensus –ad-idem (It means meeting of minds i.e. there should be an
agreement b/w the parties to contract a subject matter of the contract in
the same sense.) Free Consent.Dr.Lakshminarayana Reddy.K

Kinds Of Agreements:
• Social Agreements : Do not enjoy the benefit of law, are
not contracts.
Case Law: CASE LAW: BALFOUR V/S BALFOUR
A husband promised his wife to pay monthly allowance of 30
pounds. When both repeated the husband refused to pay for
the same. The wife cannot sue the husband for the same
since it is a social agreement.
• “All agreements are not contracts but all contracts are
agreements”. Because there are certain agreements which
lacks enforceability at the court of law and are not contracts.
• Legal Agreements: Intention to create legal obligation.
• Express Agreements: Made on oral or written declaration.
• Implied Agreements: Evidenced by acts and conduct of
person.

OBLIGATION/ Enforceable bylaw
• Obligation is a legal tie which imposes upon a determinant
person/persons the necessity of doing or to abstain from
doing a definite act or acts
• If an agreement is incapable of creating a duty enforceable
by law is not a contract
• An agreement is wider term then contract.
• All contracts are agreements but all agreements are not
contracts.
• Agreements which are not contracts:
1. Relating to social matters.
2. Domestic arrangement between husband and wife. Balfour
vs Balfour. Dr.Lakshminarayana Reddy.K

Essential elements of a valid Contract
1. Agreement.
2. Intention to create legal relationship.
3. Free and genuine consent.
4. Parties competent to contract/ Capacity of the
parties.
5. Lawful consideration.
6. Lawful object.
7. Agreements not declared void or illegal.
8. Certainty of meaning.
9. Possibility of performance.
10. Necessary Legal Formalities.

4. CAPACITY OF PARTIES: Sec.11, 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 ”Minor,
Unsound mind, Disqualified persons Ex. Alien Enemies,
Convict, Insolvent.

10. Necessary legal formalities : A contract may
be oral or in writing. If, however, a particular
type of contract is required by law to be in
writing, it must comply with the necessary
formalities as to writing, registration and
attestation, if necessary. If these legal
formalities are not carried out, then the
contract is not enforceable at law.

Classification/Types of Contracts
1. From the point of view of enforceability
(a) Valid contracts, (b) Voidable contracts,
(c) Void contracts or agreements- Void ab-initio – Absence of one or more
essential elements of contract except free consent. Ex. Contract
with Minor, with out consideration, agreement in restraint of trade
or marriage.
(d) Illegal agreements , (e) Unenforceable Agreements (Certain contracts must
be in writing)
2. According to Mode of Formation
(a) Express contract- The terms of a contract may be stated in words (written or
spoken) this is an express contract.
(b) Implied contract- the terms of a contract may be inferred from the conduct
of the parties or from the circumstances of the case this is an implied
contract (Section 9).

(c) Quasi-contracts -It is a situation in which law imposes
upon one person, on the grounds of natural justice, an
obligation similar to that which arises from a true
contract, although no contract, express or implied has in
fact been entered into by them. Sec-68.
Classification according to performance
• An executed contract is one wholly performed. Nothing
remains to be done in terms of the contract.
• A Unilateral Contract is one wherein at the time the
contract is concluded there is an obligation to perform
on the part of one party only.

“No consideration No contract”
A promise without consideration cannot create a legal
obligation
Exceptions to the rule:
1. Agreement made on account of natural love and affection
2. Agreement to compensate for past voluntary service
3. Agreement to pay time barred debt
4. Contract of agency
5. Contract of completed gift
6. Any contribution to charitable institution
7. Contract under seal.

Discharge of a contract
• Discharge of a contract implies termination of
contractual obligations. This is because when the
parties originally entered into the contract, the rights
and duties in terms of contractual obligations were
set up.
• Consequently when those rights and duties are put
out then the contract is said to have been
discharged. Once a contract stands discharged,
parties to it are no more liable even though the
obligations under the contract remain incomplete.

Modes of Discharge of a contract
• Discharge by performance.
• Discharge of Contract by Substituted Agreement/ Mutual
Consent- Alteration, Rescission, Remission, Waiver, Novation.
• Discharge by lapse of time.
• Discharge by operation of law- Death, Insolvency, Merger,
Unauthorized materials alteration
• Discharge by Impossibility of Performance.
• Discharge by Accord and Satisfaction.
• Discharge by breach- Anticipatory Breach & Actual BreachDr.Lakshminarayana Reddy.K

LAW OF AGENCY
Sec.182
• An AGENT is a person employed to do any act for
another in dealings with third persons.
• The person for whom such act is done or who is
so represented is called the PRINCIPAL.
• The relationship between the agent and the
principal is called AGENCY.

ESSENTIALS OF AGENT
- Appointment
- Confer Authority
- The authority conferred should be such that it will
make the principal answerable to third parties
- The object of appointment must be to establish
relationship between principal and third parties.
- The relationship between the principal and agent is
based on confidence and hence no consideration is
not necessary

.
ESSENTIAL RELATIONSHIP OF AGENCY
- Agreement between the principal and the agent
Any person may become the agent – minor and unsound mind
person can also become agent – the principal is liable for the acts
of such an agent.
- Intention of the agent to act on behalf of the principal
Agency may arise through an intention, although there is no
contractual relation.
Agency depends on agreements and not necessarily on contract
Sec.184 - Any person may become an agent.
Sec.185 – No consideration is necessary to create agency

RULES OF AGENCY
- Whatever a person can do personally, he can do
through an agent.
- He who does an act through another does it by himself.
“Qui facit per alium facit per se” (It is a Latin legal
term that means, "He who acts through another does
the act himself.“).
An act of agent is the act of principal
Sec. 226.
Contracts entered into through an agent and
obligations arising from the acts done by any agent,
may be enforced in the same manner and will have the
same legal consequences as if the contracts had been
entered into and the acts had been done by the
principal in person. Dr.Lakshminarayana Reddy.K

KINDS OF AGENT
Classification as to the extent of their authority.
- General Agent
Appointed to do all general acts concerning to a
particular trade, appointed through general power of
attorney.
- Special Agent
Appointed to do specific/special acts, appointed
through special power of attorney, terminates on
performance of specific act.
- Universal Agent
Who has right to perform all business functions on
behalf of principal. He has unlimited authority.

Classification based on the nature of work
performed by agent
1. Mercantile Agent
- Factor
Entrusted with possession of goods with discretionary
authority to sell, has general lien on goods for the money due
- Broker
He brings two parties together, no possession of goods, buys
or sells on behalf of other , he can not sue in his own name.
- Auctioneer
Who sells the goods at public action, no credit, accept only
cash, has right on particular lien on goods, can sue the buyer
in his own name.

- Commission Agent.
Buys/sells goods for the buyer/seller receives
commission. May/may not have possession of
goods
- Del Credere Agent/ Guarantor
Guarantees the performance of the contract by
the third person with whom he enters in to the
contract on behalf of principal. he becomes
responsible if other do not perform, liability is
secondary, gets extra commission.
2. Non Mercantile Agent
Counsel, Solicitor, Guardian, Promoter,Wife and
Receiver

METHODS OF CREATING AGENCY
By Express
Agreement
By Implied
Agreement
By Ratification
By Estopple
By Holding Out
By Operation of Law
By Necessity
In Emergencies By safety of principal Husband and wife

• Agency by Express Agreement :
when principal appoints an agent either by
words spoken or written to represent and act
for him. No particular forms are required.
• Agency by Implied Agreement:
The implied agency arises when there is no
express agreement, it arises from the conduct
of the parties or inferred from the
circumstances of the case.

• Agency by Estoppel
Where a person by his conduct or by words spoken
leads willfully another person to believe that a certain
state of affairs exists and induces him to act on that
behalf so as to alter his previous position, he is
estopped from denying subsequently the fact of that
state of affairs.
• Agency by Holding Out :
Where a person permits another by a long course of
conduct to pledge his credit for certain purpose, he is
bound by the act of such person in pledging his credit
or similar purposes.

Agency by Necessity
Law confers an authority on one person to act as agent for
another without any regard to the consent of the principal
under certain conditions. - a real necessity, could not able
to communicate within the time available, act bonfide in
the interest of principal.
Cases:
- Where the agent exceeds his authority, bonafied, in an
emergency
- Where the carrier of goods acting as a bailee, does
anything to protect the goods in an emergency.
- Where a husband improperly leaves his wife without
providing proper means for her sustenance.

• Agency by Ratification: Sec 196
where acts are done by one person on behalf
of another, but without his knowledge or
authority, he may elect to ratify or to disown
such acts, if he ratifies them ,the same effects
will follow as if they had been performed by
his authority.
- Ratification relates back to the time of
contract
- Ratification may be express or implied

DUTIES OF AN AGENT
1.Duty to follow and act according to principal’s
directions – Sec 211
2.Duty to carry out the work with reasonable skill and
diligence – Sec 212
3.Duty to render accounts – Sec 213
4.Duty to communicate with the principal in case of
difficulty – Sec 214
5.Duty not to deal on his own account –Sec 215
6.Duty not to make any profit out of his agency except
his remuneration – Sec 217
7.Duty not to delegate authority – Sec 190
8. Duty not to setup adverse title

RIGHTS OF AN AGENT
1. Right to receive remuneration-Sec 219/220
2. Right of Retaining money – Sec 217
3. Right of Lien or retain the goods – Sec 221
4. Right to be indemnified against consequences of
law full acts done in good faith – Sec 222/223
5. Right to be compensated for injuries sustained by
principals neglect – Sec 225
6. Right to stoppage of goods in transit

Rights of Principal
• To repudiate/ reject contract
• To ratify agents act
• To claim loss or profit
• To claim benefits
• To revoke agents authority
• To demand accounts
• To refuse remuneration

Duties of Principal
• To indemnify the agent
• To pay remuneration & dues
• Compensate the agent for injury caused
• Notice given to agent

TERMINATION OF AGENCY
• Section 201 Termination of agency: An agency is terminated by the principal
revoking his authority, or by the agent renouncing the business of the agency;
or by the business of the agency being completed; or by either the principal
or agent dying/ disappearing or becoming of unsound mind; or by the
principal being adjudicated an insolvent under the provisions of any Act for
the time being in force for the relief of insolvent debtors.
 By act of Parties
 By agreement
- terminated at any time by mutual agreement between agent and principal
 Revocation by Principal
- Principal can revoke the agency at any time before the agent has exercised
his authority
- The continuous agency – can be revoked for future, can’t revoke acts already
done – reasonable notice to be given both to agent and third parties, if not
principal will be liable to compensate the agent for damages.
- Agency for fixed period – revoked before the expiry without sufficient notice,
agent to be compensated with loss.Dr.Lakshminarayana Reddy.K

 Revocation by Agent:
- Can be revoked by giving reasonable notice,
otherwise agent will be liable to compensate the
damage/loss.
By Operation of Law
- By Performance of Contract
- By Expiry of Time
- By Death/insanity/insolvency of either parties
- By Destruction/ demolition of the subject matter
- By Dissolution/ closure of company
- Principal or agent becoming an alien/ strange enemy.

• Minor: According to Section 3 of the Indian Majority Act,
1875, a person domiciled in India who is under the age of
eighteen years, is a minor. Minor Agreements: A Minor is
an incompetent person to enter into a contract subject to
certain exceptions.
• Coercion (Section 15): "Coercion" is the committing, or
threatening to commit, any act forbidden by the Indian
Penal Code under(45,1860), or the unlawful detaining, or
threatening to detain, any property, to the prejudice of
any person whatever, with the intention of causing any
person to enter into an agreement.
• FRAUD: According to the section 17 of Indian contract act
1872, fraud means and includes of any of the
following acts committed by a party to a contract or with
his connivance, or by his agent with intend to deceive
another party thereto or his agent, or to induce him to
enter into the contract.

• Undue Influence : Section 16 of the Indian Contract defines Undue
Influence. The Section reads as:
(1) A contract is said to be induced by “undue influence” where the
relations subsisting between the parties are such that one of the
parties is in a position to dominate the will of the other and uses
that position to obtain an unfair advantage over the other.
(2) In particular and without prejudice to the generality of the
foregoing principle, a person is deemed to be in a position to
dominate the will of another.
• The Difference between Coercion and Undue Influence
1. Coercion is defined under Section 15 of the Act whereas, Undue Influence
is defined under Section 16 of the Act.
2. In Coercion the parties may or may not be related to each other. It is not
mandatory for any kind relationship to exist between the parties. However,
in the case of undue influence the parties are in relation to each other.

3. Coercion is committed when a party obtains the consent of the
other party by committing or threatening to commit any act
which is punishable under the Indian Penal Code, 1860 to
make him enter into an agreement. Undue Influence refers to
an improper use of authority or power by one party over the
other to make him enter into an agreement.
4. In coercion use of physical force exists. In undue influence
there exists use of mental or moral pressure.
5. In coercion. when the contract is avoided, the benefit received
has to be restored or refunded to the injured part. Thus, the
injured party has to be put in his original place. When the
contract is avoided in the case of undue influence, it is the
discretion of the court whether to direct the aggrieved party to
restore or refund the benefit received.

THANKING YOU

Legal & Business Environment- Module 1

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