Business Law


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Business Law

  1. 1. BUSINESS LAW Mr. A. ANANDA KUMAR Assistant Professor – Senior Grade Department of Management Studies Christ College of Engg. & Tech. Pondicherry Mobile : +91 99443 42433 E-mail :
  2. 2. UNIT - 1 Law of Contract – Agreement – Offer – Acceptance – Consideration – Capacity of Contract – Contingent Contract – Quasi Contract – Performance – Discharge – Remedies to breach of Contract.
  3. 3. LAW According to Salmond, “Law is those principles applied by the state in the administration of justice”. The term „Law‟ denotes the principles and rules that govern and regulate social conduct and observance of which can be enforced through courts.
  4. 4. Business Law Business law refers to those rules and regulation which govern the formation and execution of business deals made by various people in the society.
  5. 5. Commercial Law Commercial law can be defined as “the rights and obligations of commercial persons who deals with commercial transactions in respect of commercial property”. The term commercial person means an individual or a partnership or a company carrying on a business. It also denotes the aggregate body of those legal rules which are connected with trade industry and commerce.
  6. 6. VALID CONTRACT A contract is an agreement, enforceable by law, made between at least two parties by which rights are acquired by one and obligations are created on the part of another. If the party, which has agreed to do something, fails to do that, then the other party has a remedy. Section 2(h) of the Act defines a contract as “an agreement enforceable by law”.
  7. 7. ELEMENTS OF CONTRACT 1. an agreement and 2. its enforceability by law
  8. 8. AGREEMENT Section 2(e) defines an agreement as “every promise and every set of promises forming consideration for each other”.
  9. 9. AGREEMENT Agreement = Offer +Acceptance
  10. 10. AGREEMENT An agreement may be social agreement or a legal agreement. A social or domestic agreement does not give rise to contractual obligation and is not enforceable in the court of law. It is only those agreements which are enforceable in the court are contracts.
  11. 11. KINDS OF AGREEMENTS 1. Social Agreements 2. Valid Agreements 3. Void Agreements 4. Voidable Agreements 5. Unenforceable Agreement 6. illegal Agreement 7. Agreements to agree in future
  12. 12. 1. SOCIAL AGREEMENT Example: „A‟ invites „B‟ to a dinner and „B‟ accepts the invitation. It is a social agreement. This does not give rise to contractual obligation, if „A‟ disappoints „B‟ on the appointed day. They are of social nature and do not enjoy the benefits of law. They are not enforceable and cannot be called „contracts‟. An agreement to attend a marriage or to see a movie are the examples of social agreements.
  13. 13. 2. VALID AGREEMENT It is the sum of (i) an agreement and (ii) an intention to create legal obligation. Obligations require the parties must do or abstain from doing something. However, such an act or abstinence may relate to social or legal matters. It is a valid agreement which is enforceable at law.
  14. 14. 3. VOID AGREEMENT It is an agreement which is not enforceable by law. (i) An agreement made without consideration is void. For example, „A‟ promises for no consideration, to give to „B‟ Rs.5,000/- This contract is void. (ii) An agreement, the consideration of which is unlawful is void. (iii) An agreement is restraint of marriage of any person, other than a minor is void, etc.
  15. 15. 4. VOIDABLE AGREEMENT Example: „A‟ promises to sell his house to „B‟ for Rs.2 lakhs. „A‟ obtained „B‟s consent by exercising fraud on the latter. The contract is voidable at the option of „B‟. It is an agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others.
  16. 16. While a void contract is not at all enforceable by law, a voidable agreement is unenforceable only when the party entitles to the option, avoids the contract.
  17. 17. 5. UNENFORCEABLE AGREEMENT Example: „A‟ borrows Rs. 10,000 from „B‟ and makes a promissory note and a one rupee stamp is pasted on the pronote. The agreement though complete is unenforceable because of the technical defect i.e., promissory note being understamped. Unenforceable agreements are those which cannot be enforced in a court of law, by the reason of a technical defect in procedural matters.
  18. 18. 5. ILLEGAL AGREEMENT Example: „A‟ borrows Rs. 10,000/- from „B‟ for manufacturing bombs. Manufacture of bomb is illegal. So, if „A‟ enters into contract with any person for manufacture of bombs, that contract becomes void. „B‟ also cannot recover money, if he knows the purpose of the loan taken by „A‟. If he does not know the purpose, he can recover the amount from „A‟. Illegal agreement are those which are opposed to the provisions of law or public morals. The effects of an illegal agreement is that it makes the transaction between the immediate parties void and also render the collateral transactions void.
  19. 19. 5. AGREEMENTS TO AGREE IN FUTURE An agreement to agree in future is a contradiction. It is absurd to state that a man enters into an agreement till of the contracts are settled. Until the terms are settled, he is free to retire from the bargain. Moreover, there can be no binding contract unless all the material conditions of contract have been agreed upon. Thus agreement to agree in future is not a contract.
  20. 20. CONCLUSION All contracts are agreements but all agreements are not contracts Contract = Agreement + Enforceability by law Agreement = Offer + Acceptance
  21. 21. ESSENTIALS FOR FORMATION OF VALID CONTRACT 1. Consensus-ad-idem or Identify of minds 2. Consideration 3. Capacity 4. Free consent 5. The consideration must be lawful 6. The object of the contract must be lawful 7. Agreement not declared void. 8. Certainty & Possibility of performance 9. Legal formalities
  22. 22. 1. Consensus-ad-idem The parties to contract must have agreed about the subject matter of the contract at the same time and in the same sense. Example: „A‟ has two houses, one at Delhi and the other at Mumbai. He has offered to sell one to „B‟. „B‟ accepts thinking to purchase the house at Mumbai, while „A‟, when he offers, has in his mind to dispose of the house at Delhi. There is no consensus-ad-idem.
  23. 23. 2. Consideration “Contract without consideration is void” It means “something in return”. Every contract must be supported by consideration. The agreement is legally enforceable only when both the parties give something and get something in return. A promise to do something, getting nothing in return, is usually not enforceable by law. Example: „A‟ agrees to sell his house to „B‟ for Rs.50,000. Here for „A‟s promise, the consideration is the price and for „B‟ the consideration is the house.
  24. 24. 3. Capacity The parties to the agreement must be capable of entering into a valid contract. Every person is competent to contract if he (a) is of the age of majority, (b) is of sound mind, and (c) is not disqualified from contracting by any law to which he is subject (Sec. 11 and 12). For example, a contract by a minor, lunatic, idiot or drunkard is void.
  25. 25. 4. Free Consent It is essential to the creation of every contract that there must be a free and genuine consent of the parties to the agreements. The consent of the parties is said to be free when they are of the same mind on all the material terms of the contract.
  26. 26. 5. The consideration must be lawful The agreement to be enforceable by law must be supported by consideration. The agreement is legally enforceable only when both the parties give something and get something in return. Example: „A‟ promises to pay Rs.500/- to „B‟, in consideration of „B‟ murdering „C‟. The consideration is illegal.
  27. 27. 6. The object of the contract must be lawful The object of the agreement must be lawful. In other words, it must not be (a) illegal, (b) immoral, or (c) opposed to public policy (Sec. 23). If an agreement suffers from any legal flaw, it would not be enforceable by law. Example: „A‟ promises to pay Rs.500/- for letting „B‟s house for running a brothel. The object is illegal. Hence, the contract is void.
  28. 28. 8. Certainty & Possibility of performance The agreement must be certain and not vague or indefinite (Sec.29). If it is vague and it is not possible to ascertain its meaning, it cannot be enforced. Example: „A‟ agrees to sell to „B‟ “a 100 tons of oil”. There is nothing whatever to show what kind of oil was intended. The agreement is void for uncertainty.
  29. 29. 9. Legal Formalities A contract may be made by words spoken or written. As regards the legal effects, there is no difference between a contract in writing and a contract made by word of mouth. It is, however, in the interest of the parties that the contract should be in written.
  30. 30. CLASSIFICATION or TYPES OF CONTRACTS 1. Classification according to Validity: Valid & Invalid 2. Classification according to formation 3. Classification on the basis of obligation to perform 4. Classification on the basis of execution
  31. 31. CLASSIFICATION or TYPES OF CONTRACTS 1. Classification according to Validity: Valid & Invalid a. Void contract b. Void agreement c. Voidable contract d. Illegal contract 2. Classification according to formation a. Formal Contract b. Express contract c. Implied Contract d. Quasi Contract
  32. 32. CLASSIFICATION or TYPES OF CONTRACTS 3. Classification on the basis of obligation to perform a. Unilateral contract b. Bilateral Contract 4. Classification on the basis of execution a. Executed Contract b. Executory Contract
  33. 33. a. Void Contract A contract which ceases to be enforceable by la becomes void when it ceases to be enforceable [Sec. (2j)]. It is valid when it is entered into, but something happens subsequent to the formation of the contract which makes it void.
  34. 34. b. Void Agreement An agreement not enforceable by law is said to be void [Sec. 2 (g)]. A void agreement does not create any legal rights or obligations. Example: An agreement with a minor or an agreement without consideration.
  35. 35. c. Voidable Contract An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract [Sec. 2 (i)]. This happens when the essential element of free consent in a contract is missing. Example: A promises to sell his car to B for Rs. 2,000. His consent is obtained by use of force. The contract is voidable at the option of A. He may avoid the contract.
  36. 36. d. Illegal Contract. A contract is illegal if it involves the transgression of some rules of basic public policy and is criminal in nature and where it is based on immoral. All illegal agreements are void but all void agreements or contracts are not necessarily illegal. Example: B borrows Rs.5,000 from A and enters into a contract with an alien to import prohibited goods. A knows of the purpose of the loan. The transaction between B and A is collateral to the main agreement. It is illegal since the main agreement is illegal.
  37. 37. a. Formal Contract A formal contract is one to which the law gives special effect because of the formalities or the special language used in creating it. The best example of formal contracts are negotiable instruments, such as cheques. A negotiable instrument has legal characteristic that differ from those of ordinary contracts.
  38. 38. b. Express Contract If the terms of a contract are expressly agreed upon (whether by words spoken or written) at the time of the formation of the contract, the contract is said to be an express contract. Where the offer or acceptance of any promise is made is words, the promise is said to be express (Sec. 9). An express promise results in an express contract.
  39. 39. c. Implied Contract An implied contract is one which is inferred from the acts or conduct of the parties or course of dealings between them. It is not the result of any express promise or promises by the parties but of their particular acts. It may also result from a continuing course o conduct of the parties. Where the proposal or acceptance of any promise is made otherwise than in words the promise is said to be implied (Sec. 9). An implied promise results in an implied contract.
  40. 40. c. Implied Contract For example: „A‟ enters a hotel, takes coffee and pays the bill. Here, offer and acceptance are inferred from the conduct of the parties. In the same way, where a person enters a public bus, or obtains a ticket from an automatic teller machine, there is an implied contract.
  41. 41. d. Quasi Contract A quasi-contract is not a contract at all. A contract is intentionally entered into by the parties. A quasi-contract, on the other hand is created by law. It resembles a contract in that a legal obligation is imposed on a party who is required to perform it. For example 1: „A‟ pays the amount by mistake to „B‟. „B‟ should refund the amount to „A‟. For example 2: T, a tradesman, leaves goods at C‟s house by mistake. C treats the goods as his own. C is bound to pay T for the goods.
  42. 42. a. Unilateral or One-sided Contract A unilateral contract is one in which only one party has to fulfill his obligation at the time o the formation of the contract, the other party having fulfilled his obligation at the time of the contract or before the contract come into existence. For example, „A‟ permits a railway coolie to carry his luggage and place it in a carriage. A contract comes into existence as soon as the luggage is placed in the carriage. But by that time the coolie has already performed his obligation. Now only „A‟ has to fulfill his obligation, i.e., pay the reasonable charges to the coolie.
  43. 43. b. Bilateral Contract A bilateral contract is one in which the obligations on the part of both the parties to the contract are outstanding at the time of the formation of the contract. In this sense, bilateral contracts are similar to executory contracts. For example, X agrees to sell 100 bags of paddy after 30 days to Y and Y agrees to pay for them after their delivery.
  44. 44. a. Executed Contract This is also called as unilateral contract in which one party to the contract has performed his part at the time of the contract and an obligation is outstanding only against the other. Example 1: A has paid Rs.5 to B in consideration of which, B promised to delivery a book to A. B‟s part to delivery the book is outstanding which A has performed his part. This is an executed contract. Example 2: A sells a TV set to B for Rs.20,000. B pays the price and A hands over TV set to B.
  45. 45. b. Executory contract An executory contract is one in which both the parties have not yet performed their obligations. This is also called as bilateral contract, in which both the obligations are outstanding. Example 1: A promise to pay Rs.5 to B, in consideration of B‟s promise to deliver a book. Both the promises are outstanding. This is called executory contract.
  46. 46. Void Agreements under the Indian Contract Act  Agreement with or by incompetent person (Sec. 11)  Agreement made under a bilateral mistake of fact material to the agreement (Sec. 20)  Agreements of which the consideration or object are unlawful in full or in part (Sec.23) (Sec.24)  Agreements made without consideration (Sec.25)  Agreement in restraint of marriage (Sec.26)  Agreement in restraint of trade (Sec.28)
  47. 47. Void Agreements under the Indian Contract Act  Agreement in restraint of legal proceedings (Sec.28)  Agreement the meaning of which is uncertain (Sec. 29)  Agreement to do impossible acts (Sec.56)
  48. 48. Void Agreement & Voidable Contract 1. A void agreement is without any legal effect and hence cannot be enforced by either party. A Voidable contract can be enforced by the party at whose option it is voidable. 2. A void agreement is unenforceable from the very beginning. It become unenforceable only when the party at whose option the contract is voidable rescinds it. 3. The question of compensation in the event of non-performance of a void agreement does not arise, as it is unenforceable from the very beginning. Under a voidable contract any person who has received any benefit must compensate or restore it to the other party.
  49. 49. Void Agreement & Voidable Contract 4. If the agreement is void on account of the object or consideration being illegal or unlawful, the collateral agreement will also become void A voidable contract does not affect collateral transaction. 5. Third party cannot acquire any right or title from a person claiming title under a void contract. Third party can acquire a valid title from a person claiming title under a voidable contract provided that title has been acquired by the third party before the contract is set aside by the person entitled to do so
  50. 50. Void Agreement & Illegal Agreement 1. The word void is used in broader sense, it includes illegal aspects. All void agreements are not necessarily illegal Illegal as a word is used in narrow sense, it does not include void. All illegal agreements are void. 2. Void agreements are not illegal until they are proved to be illegal. Illegal agreements remains so from the very beginning. 3. A void agreement does not involve collateral transactions. An illegal agreement vitiates not only primary transactions but also collateral transactions. 4. Void agreements are not always punishable. Illegal agreements are always punishable.
  51. 51. FORMATION OF A CONTRACT 1. Offer and acceptance (Sec.2-9) 2. Consideration (Sec.2(d),23-25, 185) 3. Competency to contract (Sec.10-12) 4. Free consent (Sec. 15-18) 5. Lawful object (Sec.23-24)
  52. 52. Offer / Proposal An offer is a proposal by one party to another to enter into a legally binding agreement with him. The person making the offer is known as the offeror, proposer or promiser and the person to whom it is made is called the offeree or promisee. Example: A offers to sell his motor cycle to B for Rs. 3,000. B agrees to pay A Rs.3,000 for the motor cycle. Here A is called the offeror or promisor and B the offeree or promisee.
  53. 53. ESSENTIALS FOR A VALID OFFER  Terms of the offer must be definite and certain.  Offer must be communicated.  Offer must be made to another person. A person cannot make an offer to himself.  The expression of willingness must be made with a view to create legal obligations.  The offer may be express or implied.  The offer may be positive or negative.  An offer may be conditional.
  54. 54. Modes of making an offer (or) Different kinds of Offer 1. Express offer 2. Implied offer 3. Specific offer 4. General offer
  55. 55. 1. Express offer: It means an offer made by words (whether written or oral). The written offer can be made by letters telegrams, telex messages, advertisements, etc. The oral offer can be made either in person or over telephone. 2. Implied offer: An offer made without using words is called implied offer. It is derived from the conduct of the parties. However, silence of a party can, in no case, amounts to offer by conduct.
  56. 56. 3. Specific offer: An offer addressed to a particular person with an intention of entering into a contract only with that particular person, is called specific offer. A specific offer can be accepted only by that particular person. 4. General offer: The offer made to the public at large is a general offer. In the case of general offer any one of the public can accept it. A contract will arise only with that particular person who accepted the offer.
  57. 57. Acceptance [Sec. 2(b)] Acceptance is an expression by the offeree of his willingness to be bound by the terms of the offer. When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. Example: A offers to sell his horse to B for Rs.500. B accepts the offer to purchase the horse for Rs.500. This is acceptance.
  58. 58. Essentials or Legal rules of Valid Acceptance  Acceptance must be absolute and unconditional.  Acceptance must be the person to whom the offer in made.  Acceptance made after the knowledge of the offer is valid.  Acceptance must be communicated.  Acceptance must be communicated by the mode prescribed by the offeror.
  59. 59.  Acceptance must be made within reasonable time.  Acceptance may be express or implied; silence cannot be prescribed as the mode of acceptance.  Acceptance must be accepted before rejection unless the offer is renewed.  Acceptance must be made before the offer lapses.
  60. 60. Consideration One of the essential elements for a valid contract is the presence of lawful consideration in the agreement. In other words, an agreement without consideration is null and void. Such an agreement is not enforceable by law. According to Section 25, an agreement made without consideration is void. Example: A agrees to sell his house to B for Rs.50,000. Here for A‟s promise, the consideration is the price and for B the consideration is the house.
  61. 61. Legal Rules regarding Consideration Consideration must move at the desire of the promiser and therefore an act done by the promisee at the desire of a third party is not a consideration. Consideration may move either from the promisee or any other person. Consideration need not be adequate. How much consideration or payment must there be for a contract to be valid, is always the lookout of the promisor.
  62. 62. Legal Rules regarding Consideration Consideration must be real and not illusory. The consideration becomes illusory when the act of forming consideration is legally or physically impossible or is uncertain. Consideration must be legal. Illegal consideration renders a contract void. A consideration may be present, past or future. Stranger to consideration can also enforce the contract.
  63. 63. Competency / Capacity to Contract The parties who enter into a contract must have the capacity to do so. „Capacity‟ here means competence of the parties to enter into a valid contract. According to Sec.10, an agreement becomes a contract if it is entered into between the parties who are competent to contract.  Minors,  Persons of unsound mind, and  Persons disqualified by any law to which they are subject
  64. 64. Free Consent Consent (Sec.13). “Two or more persons are said to consent when they agree upon the same thing in the same sense.” Free Consent (Sec.14). Consent is said to be free when it is not caused by: (1) Coercion [Sec.15] (2) Fraud [Sec. 16] (3) Undue influence [Sec. 17] (4) Misrepresentation [Sec. 18] (5) Mistake [Sec. 20,21 and 22]
  65. 65. Free Consent Example: A is forced to sign a promissory note at the point of pistol. In this case A knows he is signing but his consent is not free. The contract in this case is voidable at his option.
  66. 66. (1) Coercion According to the Indian Contract Act, coercion is the committing or threatening to commit any act forbidden by the Indian Penal Code. It also includes the unlawful detaining or threatening to detain any property, to the prejudice of any person whatsoever. The intention of the aforesaid act is to force the other party to enter into an agreement. For example, „A‟ compels „B‟ to sell his house a half the market price at the point of a gun. „A‟ has employed coercion.
  67. 67. (2) Undue Influence Sometimes a party is compelled to enter into an agreement against his will as a result of unfair persuasion by the other party. This happens when a special kind of relationship exists between the parties such that one party is in a position to exercise undue influence over the other.
  68. 68. (3) Fraud Section 17 of the Indian Contract Act states that „fraud‟ means and includes following acts committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract.
  69. 69. (4) Misrepresentation Misrepresentation is a false statement which the person making it honestly believes to be true or which he does not know to be false. It means representation of a statement of fact which is not true. Based upon the intention of the misrepresentation it may be classified into (i) innocent misrepresentation (ii) willful misrepresentation (fraud), (iii) negligent misrepresentation, it is voidable at the option of that party.
  70. 70. (5) Mistake Mistake may be defined as an erroneous belief about something. It may be a mistake of law or a mistake of fact. Example: A agrees to buy from B a certain house. It turns out that the house had been destroyed by fire before the time of the bargain though neither party was aware of the fact. The agreement is void as there is a mistake on the part of the parties about the existence of the subject matter.
  71. 71. Questions 1. Distinction between Void Agreement and Voidable Contract. 2. Differences between void agreement and illegal agreement. 3. Difference between coercion and undue influence. 4. Distinction between Misrepresentation and Fraud.
  72. 72. Lawful Object The last requirement for formation of a valid contract is that the object of the contract must be lawful. Object means the purpose of the contract. If the object of a contract is against the law of the land, the contract is unlawful or simply void.
  73. 73. Contingent Contract A „contingent contract‟ is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen (Sec.31). Where, for example, goods are sent on approval, the contract is a contingent contract depending on the act of the buyer to accept or reject the goods. Example: A contracts to pay Rs.10,000 if B‟s house is burnt. This is a contingent contract.
  74. 74. Characteristics Contingent Contract 1. Its performance depends upon the happening or non-happening in future of some event. It is this dependence on a future event which distinguishes a contingent contract from other contracts. 2. The event must be uncertain. If the event is bound to happen, and the contract has got to be performed in any case it is not a contingent contract. 3. The event must be collateral, i.e., incidental to the contract.
  75. 75. Case 1 A is an employee of B & Co. After leaving the service, he agrees with B & Co. that he shall not employ himself in any similar concern within a distance of 700 miles of the town. Is this restraint valid? Case 2 A borrows Rs.500 from B to purchase certain smuggled goods from C. Can B recover the amount from A if he (a) knows of A‟s purpose for which he borrows money (b) does not know of A‟s purpose?
  76. 76. Case 3 A grants lease of certain premises at Calcutta to B for one year, knowing that the premises will be used for the purpose of (a) prostitution, or (b) installing machinery for minting base coins, at a monthly rental of Rs.500. B does not pay the rent. Can A recover the rent? Case 4 X promises to drop prosecution which he has instituted against R for robbery and R promises to restore the value of things taken. Can X enforce this promise? If so, give reasons.
  77. 77. Case 5 G pays Rs.500 to A, a civil servant employed in a government department, in consideration of A‟s promise that a government contract which is at the disposal of his department will be placed with G. Before this can be done, A is transferred to another department. G now wishes to reclaim from A Rs.500 paid to him. Will G succeed? Case 6 A promises to pay Rs.500 to B who is an intended witness in a suit against A in consideration of B‟s absconding himself at the trail. B absconds but fails to get the money. Can he recover?
  78. 78. Performance of Contracts Performance of a contract takes place when the parties to the contract fulfil their obligations arising under the contract within the time and in the manner prescribed. Sec. 37 (para 1) lays down that the parties to a contract must either perform or offer to perform, their respective promises, unless such performance is dispensed with or excused.
  79. 79. Essentials of Performance of Contracts  Parties must perform or offer to perform their obligations themselves.  In the event of the death of a promisor, his representative are under a duty to execute such promise. The legal representatives, however, are not obliged to perform the contract where performance requires personal skills and qualities.  The parties or their representatives need not perform their obligations where such performance is dispensed with or excused under the provisions of the Indian Contract Act or any other law, e.g., an insolvent is not required to pay his debts and a minor need not perform his promise.
  80. 80. Assignment of Contracts Assignment means transfer. When a party to a contract transfer his right, title and interest in the contract to another person or persons, he is said to assign the contract. Assignment of a contract can take place by (i) operation of law or (ii) an act of parties. The example of assignment by operation of law is by insolvency or death of the party to the contract.
  81. 81. Discharge by Performance 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. A contract may be discharged 1. By performance 2. By agreement or consent 3. By impossibilities 4. By lapse of time 5. By operation of law 6. By breach of contract
  82. 82. 1. Discharge by Performance Discharge by performance takes place when the parties to a contract fulfil their obligations arising under the contract within the time and in the manner prescribed. In such a case, the parties are discharged and the contract comes to an end. But if only one party performs the promise, he alone is discharged. Such a party gets a right of action against the other party who is guilty of breach.
  83. 83. 2. Discharge by Agreement or Consent The rights and obligations created by an agreement can be discharged without their performance by means of another agreement between the parties which provides for the extinguishment of the earlier rights and obligations. The parties may agree to terminate the existence of the contract by any of the following ways.
  84. 84. 3. Discharge by Impossibility or Performance If an agreement contains an undertaking to perform an impossibility, is void ab initio. According to Sec.56, impossibility of performance may fall into either of the following categories.  Impossibility existing at the time of agreement.  Impossibility arising subsequent to the formation of contract.
  85. 85. 4. Discharge by Lapse of time The Limitation Act, 1963 provides that a contract should be performed within a specified period. Such a period is called period of limitation. If the contract is not performed, and if no legal action is taken by the promise within the period of limitation, he is deprived of his remedy at law. In otherwords, the contract in such a case is terminated.
  86. 86. 5. 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  By death  By Merger  By insolvency  By unauthorized alteration of the terms of a written agreement  By rights and liabilities becoming vested in the same person.
  87. 87. 6. Discharge by Breach of Contract Breach of contract means, breaking of the obligation which a contract imposes. It occurs when a party to the contract without lawful excuse does not fulfil his contractual obligations or by his own act makes it impossible that he should perform his obligation under it. It confers a right of action for damages on the injured party.
  88. 88. Breach of Contract A breach of contract occurs where a party to a contract fails to perform, precisely and exactly, his obligations under the contract. This can take various forms for example, the failure to supply goods or perform a service as agreed. In other word, Violation of any of the agreed-upon terms and conditions of a binding contract. This breach could be anything from a late payment to a more serious violation, such as failure to deliver a promised asset. A contract is binding and will hold weight if taken to court; however, proof of the violation is imperative.
  89. 89. Remedies for Breach of Contract A contract gives rise to correlative rights and obligations. A right would be of no value if there were no remedy to enforce that right in the Law Court in the event of its infringement or breach of contract. A remedy is the means given by law for the enforcement of a right. When a contract is broken, the injured party (ie., the party who is not in breach) has one or more of the following remedies: 1. Rescission of the contract 2. Suit for damages 3. Suit upon quantum meruit 4. Suit for specific performance of the contract 5. Suit for injunction
  90. 90. 1. Rescission of the contract When a contract is broken by one party, the other party may sue to treat the contract as rescinded and refuse further performance. In such a case, he is absolved of all his obligations under the contract. Example: A promises B to supply 10 bags of heat on a certain day. B agrees to pay the price after the receipt of the goods. A does not supply the goods. B is discharged from liability to pay the price.
  91. 91. 2. Suit for damages The word damages means compensation in money which the party who suffers by a breach of contract is entitled to receive from the party who has broken the contract. The fundamental principle underlying damages is not punishment but compensation.
  92. 92. 3. Suit upon quantum meruit “Quantum Meruit” literally means “as much as earned” or “as much as merited”. When a person has done some work under a contract, and the other party repudiates the contract, or some event happens which makes the further performance of the contract impossible, then the party who has performed the work can claim remuneration for the work he has already done.
  93. 93. 4. Suit for specific performance of the contract In certain cases of breach of a contract, damages are not an adequate remedy. The court may, in such cases, direct the party in breach to carry out his promise according to the terms of the contract.
  94. 94. 5. Suit for Injunction Where a party is in breach of a negative term of contract (i.e., where he is doing something which he promised not to do) the court may, by issuing an order, restrain him from doing what he promised not to do. Such an order of the court is known as an injunction”.
  95. 95. Quasi-Contracts A quasi-contract has been defined as „a situation in which law imposes upon one person on 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”. A contract is intentionally entered into by the parties. A quasi-contract, on the other hand is created by law. It resembles a contract in that a legal obligation is imposed on a party who is required to perform it. For example 1: „A‟ pays the amount by mistake to „B‟. „B‟ should refund the amount to „A‟. For example 2: „A‟ delivers goods to „B‟ mistaking him to be „C‟. „B‟ must reject goods or pay for them if he accepts delivery of the goods, as law imposes an obligation upon him to pay.
  96. 96. UNIT 2 Partnership – Sale of Goods – Law of Insurance.
  97. 97. Define a Sale The word „Sale‟ as used in the Sale of Goods Act means the transfer of ownership of goods by the seller to the buyer in exchange for a price paid or promised. Price is the consideration for sale of the goods
  98. 98. Meaning of Goods Section 2(7) defines „goods‟ as every kind of movable property other than actionable claims and money. An actionable claim means a debt or a claim for money which a person may have against another and which he may recover by suit (Eg. Promissory note). Money means legal tender money. Except these two, all other types of movable property are „goods‟ under the Act.
  99. 99. Classification/Types of Goods 1. Existing Goods 2. Future Goods 3. Contingent Goods
  100. 100. 1. Existing Goods These are the goods which are owned and possessed by the seller at the time of sale. Only existing goods can be the subject-matter of a sale.
  101. 101. 2. Future Goods These are the goods which a seller does not possess at the time of the contract but which will be manufactured, or produced, or acquired by him after the making of the contract of sale [Sec. 2 (6)]. A contract of present sale of future goods, though expressed as an actual sale, purports to operate as an agreement to sell the goods and not a sale [Sec. 6(3)]. This is because the ownership of a thing cannot be transferred before that thing comes into existence.
  102. 102. 3. Contingent Goods According to Section 6(2) contingent goods are the goods the acquisition of which by the seller depends upon a contingency which may or may not happen. Contingent goods come within the class of future goods. Example: A agrees to sell specific goods in a particular ship to B to be delivered on the arrival of the ship. If the ship arrives but with no such goods on board, the seller is not liable, for the contract is to deliver the goods should they arrive.
  103. 103. Contract of Sale Section.4 defines a contract of sales as “a contract whereby the seller transfer or agrees to transfer the property in goods to the buyer for a price”. The term „Contract of Sale‟ includes an actual sale as an agreement to sell. It may be absolute or conditional. It may be between one part-owner and another. When the property in the goods is transferred, the contract is called a „sale‟. The contract is called an „agreement to sell‟, when the transfer of property is to take place at a future time or subject to fulfillment of some condition.
  104. 104. Essentials of a Contract of Sale 1. There must be two distinct parties i.e., a seller and a buyer. 2. They must be competent to contract. 3. The subject matter of the sale must be a movable property. 4. The consideration for the sale must be money. However, it may be partly in money and party in goods. But it should not be wholly goods. 5. It must fulfill all the essentials of a valid contract. 6. No particular form is necessary to effect a sale. It may be express or implied.
  105. 105. Condition & Warranty Condition: A condition is a term which is essential to the main purpose of the contract and hence is the foundation of the contract. It goes to the root of the contract. Its non-fulfilment upsets the very basis of the contract. It is defined by Fletcher Moulton L.J. in Wallis v. Prati, as an “obligation which goes so directly to the substance of the contract, or in other words, is so essential to its very nature that its non performance may fairly be considered by the other party as a substantial failure to perform the contract at all”.
  106. 106. Condition & Warranty Warranty: A warranty is a term which is collateral to the main purpose of the contract and hence is only a subsidiary promise. The breach of warranty does not give right to the aggrieved party to treat the contract as void but entitles him to claim damage only. In the absence of contract to the contrary time of delivery of goods is treated as condition and for payment of price, as warranty.
  107. 107. Performance of Sales Contracts Performance of a sales contract is concerned with duties of the seller and buyer in sales contracts. It is the duty of the seller to deliver the goods and of the buyer to accept and pay for them, in accordance with the terms of sales contracts.
  108. 108. Duties of the seller and buyer in Sales Contracts  The seller shall be ready and willing to give possession of the goods to the buyer in exchange of the price.  The buyer must pay the price of the goods according to the terms of the contract.  If the buyer wrongfully refuses to accept delivery must pay compensation to the seller.  Under certain circumstances the buyer is liable to pay interest on the unpaid price.
  109. 109. Unpaid Seller A seller of goods is an unpaid seller when (i) the whole of the price has not been paid or tendered (ii) a bill of exchange or other negotiable instrument has been received as conditional payment and the condition on which it was received has not been fulfilled by reason of the dishonour of the instrument or otherwise. The term seller includes any person who is in the position of a seller, e.g., an agent of the seller to whom a bill of lading has been endorsed, or a consignee or agent who has paid for the goods or is responsible for the price.
  110. 110. Rights of an Unpaid Seller against Goods Rights of an unpaid seller Rights Against the Goods Rights Against the Buyer 1. When property in goods has passed a. Right of lien b. Stoppage in transit c. Right of re-sale 2. When property in goods has not passed a. Withholding delivery b. Stoppage in transit c. Re-sale 1. Suit for price 2. Suit for damages 3. Right to repudiate the contract 4. Suit for interest
  111. 111. Partnership Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. The law of partnership is contained in the Indian Partnership Act, 1932, which came into force on 1‟st October, 1932.
  112. 112. Characteristics of Partnership 1. Association of two or more persons 2. Agreement 3. Business 4. Sharing of profits 5. Mutual agency
  113. 113. Relations of Partners to one another The relations of the partners of a firm to one another are usually governed by the agreement among them. Such an agreement may be expressed or may be implied from the course of dealings among them. It may be varied by consent of all of them, and such consent may be expressed or may be implied by a course of dealing [Sec. 11 (1)]. Where there is no specific agreement or where the agreement is silent on a certain point, the relations of partners to one another as regards their rights and duties are governed by Secs. 9 to 17 of the Partnership Act.
  114. 114. Rights of a partner 1. Right to take part in business 2. Right to be consulted 3. Right of access to accounts 4. Right to share in profits 5. Right to interest on capital 6. Right to interest on advances 7. Right to be indemnified 8. Right to the use of partnership property 9. No liability before joining 10.No new partner to be introduced
  115. 115. Duties of a partner 1. To carry on business to the greatest common advantage 2. To observe faith 3. To indemnify for fraud 4. Not to claim remuneration 5. To share losses 6. To hold and use property of the firm exclusively for the firm 7. To account for personal profits 8. To act within authority 9. Not to assign his rights
  116. 116. Minor Partner According to Sec.11 of the Indian Contract Act, an agreement by or with a minor is void. As such, he is incapable of entering into a contract of partnership. But with the consent of all the partners for the time being, a minor may be admitted to the benefits of partnership [Sec. 30 (1)]. This provision is based on the rule that a minor cannot be a promisor, but he can be a promise or a beneficiary. It should, however, he noted that a new partnership cannot be formed with a minor partner. Also, there cannot be partnership cannot be formed with a minor partner.
  117. 117. Contract of Insurance A contract of insurance is a contract by which a person, in consideration of a sum of money, undertakes to make good the loss of another against a specified risk, e.g. fire, or to compensate him or his estate on happening of a specified event, e.g., accident or death.
  118. 118. Kinds of Insurance 1. Life Insurance: In this case a certain fixed amount becomes payable on the death of the assured or on the expiry of a certain fixed period, whichever is earlier. 2. Fire Insurance: It covers losses caused by fire. 3. Marine Insurance: It covers all marine losses, that is to say, the losses incidental to marine adventure.
  119. 119. Kinds of Insurance 4. Personal accident insurance: In this case, the amount payable is a compensation for any personal injury caused to the assured.
  120. 120. Fundamental Elements of Insurance 1. Utmost good faith 2. Indemnity 3. Insurable interest 4. Risk must attach 5. Mitigation of loss 6. Contribution 7. Subrogation 8. Period of insurance
  121. 121. Premium Premium is the consideration paid by the assured to the insurer for the risk undertaken by the insurer. It may be in cash or kind. But usually it is in the form of cash. It is determined by the insurer by taking into account the average of losses and the contributions (in the form of premiums) that he receives. Besides taking into account the special circumstances affecting risk in a particular case, the insurer also keeps a margins for his overhead and other expenses and profit.
  122. 122. Unit - 3 Negotiable Instruments – Notes, Bills, Cheque – Crossing – Endorsement – Holder in due Course – Contract of Agency.
  123. 123. Negotiable Instrument A negotiable instrument is a written document which entitles a person to a certain sum of money and this right to receive money is negotiable (transferable) from one person to another. As such, these instruments are used in commercial and noncommercial transactions to meet financial obligations. The law pertaining to these is contained in the Negotiable Instruments Act, 1881.
  124. 124. Essential features or Characteristics of Negotiable Instruments  The property in it passes either by mere delivery or by endorsement and delivery.  The holder in due course is not affected by the defect in the title of his transferor or any previous party.  The holder in due course, can sue in his own name. He need not give notice to the debtor that he has become the holder.  He is not affected by certain defects like fraud to which he is not a party.
  125. 125. Essential features or Characteristics of Negotiable Instruments  Consideration is presumed to have passed.  It is convenient method of discharging payments.  A negotiable instrument is a written document and may be drawn by pencil, ink or could be type-written.
  126. 126. Different Kinds of Negotiable Instruments  Promissory note  Bill of Exchange  Cheque  Pay order  Demand draft  Railway receipt  Delivery warrants  Debentures  Railway bonds payable to bearer etc.
  127. 127. Promissory Note Sec. 4 of the Act defines it as “an instrument in writing (not being a bank or a currency note) containing an unconditional undertaking signed by the marker, 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 promissory note is in short called as pronote.
  128. 128. Essentials of a valid promissory note 1. Writing 2. Promise to Pay 3. The promise must be certain and unconditional 4. It must be signed and delivered by the maker 5. The amount must be certain 6. The amount promised must be Indian currency 7. Parties must be certain 8. Legal Formalities
  129. 129. Bill of Exchange Section. 5 of the Negotiable Instruments Act defines it as “an instrument in writing, containing an unconditional order, signed by the maker, directing a certain person 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 or draws the bill is called drawer. The person on whom it is drawn is called drawee who becomes an acceptor on acceptance of the bill. The person to whom the amount is payable is called the payee.
  130. 130. Essentials of bill of exchange  It must be in writing.  It must contain an order to pay.  The order must be unconditional  It requires three parties i.e., drawer, drawee and payee.  It must be signed by the drawer.  The sum payable must be certain.  The sum payable must be in legal tender money in India.  The formalities relating to date, place and consideration, though usually found on bills, are not essential in law.  A bill as originally drawn cannot be made payable to bearer on demand.  It must be stamped according to the Stamp Act 1940.
  131. 131. Promissory note & Bill of exchange 1. There are two parties in a promissory note. They are the maker and payee. 1. In a bill of exchange there are three parties, the drawer, the drawee and the payee. 2. The maker of pronote is the debtor and he undertakes to pay the amount. 2. In a bill of exchange the drawee is the debtor and the drawer is the creditor who directs the drawee to pay. 3. The maker and the payee cannot be the same person. 3. The drawer and drawee may be the same person. So also drawer and payee may also be the same person. 4. Pronote contains an unconditional promise to pay. 4. A bill contains an unconditional order to pay.
  132. 132. Promissory note & Bill of exchange 5. The liability of a maker of note is primary and absolute. 5. The liability of the drawer of a bill is secondary and conditional. 6. Pronote is signed by the maker who is liable to pay. Hence there is no need for acceptance of the note. 6. A bill payable after sight or after certain period must be accepted by the drawee. It cannot be presented for payment before it has been accepted. 7. In a note the maker stands in direct relationship with payee. 7. In a bill of exchange, after acceptance, the drawer stands in direct relation with drawee and not the payee.
  133. 133. Cheque Cheque is a special kind of bill of exchange. Sec.6 defines it as follows, A „Cheque‟ is a bill of exchange drawn on a specified banker and expressed to be payable on demand. By this it is clear that Cheque is a species of bill of exchange. But all bill of exchanges are not cheques. In addition to the essentials of a bill of exchange, the Cheque should satisfy the following conditions.  It is always drawn on a specified banker.  It is always payable on demand.
  134. 134. Bill of Exchange 1. In a bill the drawee may be any person including bankers. 1. In a Cheque the drawee is always a banker. 2. A bill requires acceptance from the drawee before he is asked to pay. 2. A Cheque is always payable on demand. 3. A bill may be payable on demand, after sight, or after the expiry of certain period. 3. A Cheque is always payable on demand. 4. In case of dishonor of a bill protest is advisable. 4. Protest for dishonor is not necessary. 5. The drawee is not entitled to any special statutory protection. 5. Special statutory protection is available to the drawee banker. Cheque
  135. 135. 6. Three days of grace is allowed or payment to a bill not expressed to be payable on demand. 6. No such grace time is allowed. 7. A bill has to be stamped according to the Stamp Act. 7. Stamping is not necessary in the case of cheque. 8. Notice of dishonor is necessary. 8. Notice of dishonor is not necessary. 9. No crossing is allowed. 9. Cheque may be crossed. 10. Payment of a bill cannot be stopped or countermanded. 10. Payment of a Cheque can be stopped. Bill of Exchange Cheque
  136. 136. Acceptance A bill of exchange is said to be accepted when the drawee puts his signature on it, thereby acknowledging his liability under the bill. The usual mode of acceptance is writing the word “accepted” across the bill and signing under it. The signature may be put anywhere, on the face of the bill or on the back of it.
  137. 137. Negotiation Section 14 of the Negotiable Instruments Act lays down that “when a promissory note, bill of exchange or cheque is transferred to any person, so as to constitute that person the holder thereof, the instrument is said to be negotiated”. An instrument can be transferred either by negotiation or by assignment of the instrument as an ordinary chose- in-action.
  138. 138. Indorsement The act of a payee, drawee, accommodation indorser, or holder of a bill, note, check, or other negotiable instrument, in writing his name upon the back of the same, with or without further or qualifying words, whereby the property in the same is assigned and transferred to another. That which is so written upon the back of a negotiable instrument. One who writes his name upon a negotiable instrument, otherwise than as a maker or acceptor, and delivers it. With his name thereon to another person in called an “in-dorser,” and his act is called “indorsement.”
  139. 139. Kinds of Indorsements 1. Blank Indorsement 2. Special Indorsement 3. Conditional Indorsement i. San recourse ii. Sans Frais iii. Faculative Indorsement iv. Contingent Indorsement 4. Restrictive Indorsement 5. Partial Indorsement
  140. 140. 1. Blank Indorsement When the signature of the indorser is written without any direction to whom or to whose order the instrument is to be payable, it is called blank indorsement or general indorsement. By blank indorsement the instrument become payable to the bearer.
  141. 141. 2. Special Indorsement When the indorsement specifies that the amount must be paid to a specified person i.e., indorsee or the order of a specified person, it is called special indorsement. A blank indorsement can easily be converted into a special indorsement. The holder can write above the indorsee‟s signature a direction to pay the instrument to or to the order of himself or of some other person. Then it will become a special indorsement.
  142. 142. 3. Conditional Indorsement A indorser may by express words exclude his own liability or make the liability conditional on the happening of a certain events. Such types of indorsement is called conditional indorsement. 4. Restrictive Indorsement It is a particular form of conditional indorsement. If the indorser, by express words, restricts or excludes the indorsees right of further negotiation, it is called restrictive indorsement.
  143. 143. 5. Partial Indorsement When a part of the amount of the instrument is endorsed, it is called partial indorsement. It is void. But if the part of the amount of the instrument is already paid, the unpaid balance may be endorsed.
  144. 144. Liability of the parties to a Negotiable Instrument 1. Liability of Drawer (Sec.36) 2. Liability of Acceptor or Maker (Sec.32) 3. Liability of Drawee of a Cheque (Sec.31) 4. Liability of Endorser (Sec.35) 5. Liability of Prior Parties to a Holder in Due Course (Sec.36) 6. Liability of an Agent (Sec.28) 7. Liability of Legal Representative (Sec.29) 8. Liability on an Accommodation Bill (Sec.43) 9. Drawer‟s Duty to Issue a Duplicate Instrument (Sec.45A) 10. Liability of Acceptor for Honour (Sec.111) 11. Liability of Banker
  145. 145. Holder Section 8 defines the holder as follows, the holder of a promissory note, bill of exchange or cheque means any person entitled in his own name to the possession thereof and to receive or recover the amount due therein from the parties thereto.
  146. 146. Holder in due course „Holder in due course‟ means any person who for consideration and in good faith became the possessor of a promissory note, bill of exchange or cheque if payable to bearer, or the payee or indorsee there of, if payable, to order before the amount mentioned in it became „payable [Sec.9]. Sec.9 gives the following conditions for a valid holder in course.  The holder must have taken the instrument for valuable consideration.
  147. 147. Holder in due course  The instrument must be obtained before it is matured.  He must have taken the instrument in good faith and without notice of any defect in the instrument or in the title of the person negotiating it to him.
  148. 148. Special Rights of Holder in due course  A holder in due course acquires good title of the instrument even if the title of the transferor (previous holder) is defective (i.e., it was obtained by the transferor by unlawful means).  It will be presumed that the holder in due course has obtained the instrument for consideration.  In a suit by the holder in due course the maker of a promissory note, or drawer of a cheque or bill of exchange will be stopped from denying the validity of the instrument drawn or made.
  149. 149. Special Rights of Holder in due course  Every holder is deemed primafacie to be a holder in due course. The burden of proving his title does not lie on him. But when is shown that the instrument is obtained by fraud or illegality. The burden of proof of his title lies on the holder in due course.  A holder in due course can pass on the same rights, as he has on the instrument, when he negotiates it to another holder [Sec.5]. Even if the holder in due course had knowledge of any prior defects.
  150. 150. Material Alteration Material alteration means tampering with the negotiable instrument in a manner so as to alter the rights and liabilities of parties thereto or change the character of the instrument itself. It may be noted that it is immaterial whether a material alteration would be beneficial or detrimental to the interest of the concerned parties. Example of material alteration:  The date of the instrument is altered;  The time of payment is altered;  The amount is altered;  The rate of interest is altered;  The place of payment is altered;  A new party is added, etc.
  151. 151. Dishonour A bill may be dishonoured by non-acceptance or non-payment. An instrument is said to be dishnoured by non-payment when it is not paid by the maker, acceptor or drawee.
  152. 152. Penalties for Dishonour The negotiable instruments laws (Amendment) Act, 1988 has inserted a new Chapter XVII in the Negotiable Instruments Act, 1881, undersections 138 to 142 provide for criminal penalties in the event of dishnour of cheques for insufficiency of funds. A drawer of a dishonoured cheque shall be deemed to have committed an offence. For this offence, he shall, be punished with imprisonment for a term which may extend to two years [increased from one year to two years by the Negotiable Instruments
  153. 153. Crossing Crossing means drawing two parallel lines across the face of the cheque with or without the words “and company” in between the lines. It is a direction to the drawee bank not to pay the amount at the counter, but only through a bank. It is made to guard payment against forgery by unscrupulous persons.
  154. 154. Kinds of Crossing 1. General Crossing 2. Special Crossing
  155. 155. 1. General Crossing 1 2 3 4
  156. 156. 2. Special Crossing 1 2 3 4
  157. 157. Rules of Crossing  An uncrossed cheque may be crossed generally or specially by the drawer or the holder.  A cheque crossed generally, may be crossed specially by the holder.  The holder may add the words “not negotiable”.  The banker to whom the cheque is crossed specially, may recross it but only to another bank as his agent for collection.  Where an uncrossed cheque or a cheque crossed generally is sent to a banker for collection, he may cross it specially to himself. But he cannot enjoy statutory protection against being sued for conversion.
  158. 158. Agency An „agent‟ is a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done or who is so represented, is called the “principal”. The transaction is called „agency‟ (or) the status of an agent or the relation between the agent and the principal is called agency.
  159. 159. Nature of Agency  The law of agency is based on the maxim „Qui facit per alium facit per se‟ which means he who does anything by another does it himself. It means that an act done through an agent has the same effect as if it is done by the principal.  An agent can create, terminated or alter the principal’s legal relations with third persons and thus the principal has a liability to accept his legal relations altered.  Agency exists whenever a person can bind another by acts done on his behalf. When this power does not exist the relationship is not one of agency.
  160. 160. Nature of Agency  The agent is authorized to establish privity of contract between the principal and third parties.  An agent is one who acts according to the instructions of the principal and can bind the principal by entering into contracts with other persons within the scope of his authority.  No consideration is necessary to create an agency. The acceptance of the office of an agent is regarded as sufficient consideration for the appointment.
  161. 161. Different classes or Kinds of Agents Agents may be classified as mercantile and non- mercantile agents and also as general and special agents. A general agent is appointed to do all acts of a general class e.g., managing directors of a limited company. A special agent is appointed for a specific purpose only. In either case, an agent cannot act beyond his authority and bind the principal.
  162. 162. Mercantile agents 1. Auctioneer 2. Banker 3. Broker 4. Factor 5. Del credere agent 6. Commission agent 7. Indentor 8. Insurance agent
  163. 163. Rights of Principal  To recover damages for losses suffered due to agent‟s neglect, lack of skill or flouting the directions of the principal.  To obtain proper account recover secret profits made by agent and resist his claim for remuneration.  To resist agent‟s claim for indemnity against liability incurred in case of his acting as a principal.
  164. 164. Duties of Principal  The employer of an agent is bound to indemnify him against the consequences of all lawful acts done by such agent in exercise of the authority conferred upon him.  The principal must make compensation to his agent in respect of injury caused to such agent by the principal‟s neglect or want of skill.  An agent who is guilty of misconduct in the business of agency is not entitled to any remuneration in respect of that party of the business which he has misconducted.
  165. 165. Rights of an Agent  He is entitled to remuneration and other expenses properly incurred by him in the agency. But if he is guilty of misconduct, he is not entitled to receive the remuneration.  He is entitled to retain the goods, papers and other property movable or immovable, of the principal for his claims.  The agent has a right to be indemnified by the principal for all lawful acts.  The agent is entitled to be indemnified for the injury caused to him by the principal’s neglect or what of skill.
  166. 166. Duties of an Agent  He should act according to the direction of the principal and in default, indemnify the principal for the loss, if any  In the absence of instructions, he must act according to the trade custom.  In case of difficulty he must be diligent in communicating with the principal and obtaining his instructions.  He must conduct the business of agency with as much skill as is generally possessed by persons engaged in similar business, unless the principal has notice of his want of skill.
  167. 167. Duties of an Agent  He must render proper accounts on demand.  He must not delegate his authority without the consent of the principal.  He must deliver all monies including secret commission, to the principal. He can deduct his remuneration and other lawful expenses spent by him.  He should not set up his own title or title of third parties to the goods of the principal in his hands.  If, by the nature of profession, an agent is purported to have special skill, he must exercise that degree of skill ordinarily expected from the members of that profession.
  168. 168. Termination of Agency By Act of Parties By Operation of Law 1. Revocation by the principal 2. Renunciation by the agent 3. By agreement 1. Performance 2. Expiry of time 3. Death of Principal or agent 4. Insanity of principal or agent 5. Insolvency of principal 6. Agency becoming unlawful 7. Destruction of the subject matter 8. Principal or agent becoming alien enemy
  169. 169. Company – Formation – Memorandum – Articles – prospective – Shares – Debentures – Directors – Appointment – Powers and Duties.
  170. 170. Company The word „Company‟ is used generally to mean an association of person having common objectives. Every association, however is not a company in the eye of law. Legally, a company refers to an association which is “registered as a company” under the Companies Act, 1956.
  171. 171. Characteristics of a Company  It is a voluntary association of persons.  It is a creation of law.  It is incorporated for specific objects only.  It has a separate legal entity.  Its members generally, have limited liability.  Its capital, if any, consists of transferable shares.  It has separation of ownership and management. It is a juristic person with a perpetual succession.  It acts through a common seal.  As it is a legal person distinct from its members, it is capable of owning, enjoying and disposing of property in its own name, and  It can sue and be sued in its corporate name.
  172. 172. Separate legal entity A company is in law regarded as an entity separate from its members. Any of its members can enter into contracts with it in the same manner as any other individual can and he cannot be held liable for the acts of the company even if he holds virtually the entire share capital. The company‟s money and property belong to the company and not to the shareholders.
  173. 173. Perpetual succession A company is a juristic person with a perpetual succession. It never dies; nor does its life depend on the life on its members. It is not in any manner affected by insolvency, mental disorder or retirement of any of its members. Since it is created by a process of law, it can be put an end to only by a process of law members may come and go but the company can go on for ever (until dissolved). Perpetual succession, therefore, means that a company‟s existence persists irrespective of the change in the composition of its membership.
  174. 174. Types of Companies Classification on the basis of incorporation Classification on the basis of liability Classification on the basis of number of members Classification on the basis of control Classification on the basis of ownership Statutory Companies Registered Companies Companies with limited liability Companies with unlimited liability Companies limited by shares Companies limited by shares Private Company Public Company Holding Company Subsidiary Company Government Company Non-Government Company
  175. 175. I –1. Statutory Companies These companies are created by a special Act of the Legislature. e.g., the Reserve Bank of India, the State Bank of India, LIC, the U.T.I etc. These companies are concerned with public utilities, e.g., railways, gas and electricity companies etc. The provisions of the Companies Act, 1956 apply to them, if they are not inconsistent with the provisions of the special Acts under which they are formed.
  176. 176. I – 2. Registered Companies This type of companies are formed and registered under the Companies Act, 1956, and are by far the most commonly found companies.
  177. 177. II –1. Companies with limited liability Where the liability of the members of a company is limited to the amount unpaid on the shared, such a company is known as a company limited by shares. The liability can be enforced during the existence of the company as also during the winding up of the company. If the shares are fully paid, the liability of the members holding such shares is nil. Most of the companies in India belong to this type.
  178. 178. II –2. Companies limited by guarantee In these companies, each member promises to pay a fixed sum of money in the event of the liquidation of the company. This amount is called the guarantee. Sometimes the members are required to buy a share of a fixed value and also give a guarantee for a further sum in the event of liquidation. There is no liability to pay anything more than the value of the share (where there is a share) and the guarantee.
  179. 179. 2. Unlimited Companies A company without limited liability is known as an unlimited company. In case of such a company, every member is liable for the debts of the company, as in an ordinary partnership, in proportion to his interest in the company.
  180. 180. III – 1. Private Company A private company means a company which has a minimum paid-up capital of Rs.1,00,000 or higher and by its Articles, restricts the right to transfer its shares, limits the number of its members to 50, prohibits any invitation to the public to subscribe for any shares in or debentures of the company and prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives.
  181. 181. III – 2. Public Company A public company is a company which has a minimum paid-up capital of which is a subsidiary of a company which is not a private company. There is no restriction on maximum number of members in a public company.
  182. 182. IV – 1. Holding Company A company is known as the holding company of another company; if it has control over that other company, if that other is its subsidiary. IV – 2. Subsidiary Company A company is known as a subsidiary of another company when control is exercised by the latter (called holding company) over the former called a subsidiary company.
  183. 183. V – 1. Government Company A Government company is the one in which not less than 51 percent of the paid-up capital is held by (a) The Central Government, or (b) Any State Government, or (c) Partly by the Central Government and partly by one or more State Government V – 2. Non-Government Company A non-Government company is controlled and operated by private capital.
  184. 184. Private Company 1. Minimum paid-up capital is Rs.1,00,000 Public Company Minimum paid-up capital is Rs.5,00,000 2. Minimum number of persons required to form is 2. Minimum number of persons required to form a public company is 7. 3. Maximum number of members cannot exceed 50. There is no restriction on maximum number of members.
  185. 185. Foreign Company A foreign company is any company incorporated outside India which has an established place of business in India. In a foreign company, a minimum of 50 percent of the paid-up share capital is held by one or more citizens of India or/and by one or more bodies corporate incorporated in India, whether singly or jointly and such foreign company shall comply with such provisions as may be prescribed as if it were an Indian company
  186. 186. Formation of a Company Formation of a company is concerned with a number of business operations familiar to the commercial world by which a company is generally brought into existence. The whole process of formation of a company may be roughly divided, for convenience, into there parts. These are:  Promotion  Registration and  Floatation
  187. 187. Promotor „Promotion‟ is concerned with the preliminary steps taken or the purposed for registration and floatation of the company. The person who assume the task of promotion of a company is called a „promotor‟.
  188. 188. Function of a promotor  The promotor of a company decides its name and ascertains that it will be accepted by the Registrar of companies.  He settles the details of the company‟s Memorandum and Articles, the nomination of directors, solicitors, bankers, auditors and secretary and the registered office of the company.  He arranges for the printing of the memorandum and Articles, the registration of the company, the time of prospectus, where a public issue is necessary.
  189. 189. Duties & Liabilities of a promotor  The promotor stands in a fiduciary (confidence and trust) position towards the company.  He cannot make any secret profits.  He must disclose to the company whatever benefits he personally secures for the formation and floatation of the company  If any secret profit of undisclosed financial benefit is made by the promotor, the company can recover it from him  The promotor can make a profit provided he discloses all the facts to the Broad of Directors of the proposed company.
  190. 190. Cont…..  The promotor must give to the company the benefit of any negotiations or contracts into which he enters in respect of the company  The promotor must not make an unfair or unreasonable use of his position and must take care to avoid anything which has the appearance of undue influence or fraud.  A promotor cannot relieve himself of his liability by making provisions to that effect in the Articles of the company  The promotor must see that the prospectus contains the necessary particulars and does not contain any untrue or misleading statements or does not omit any material fact
  191. 191. Memorandum of Association The Memorandum of Association of a company is its character which contains the fundamental conditions upon which along the company can be incorporated. It tells us the objects of the company‟s formation and the utmost possible scope of its operations beyond which its actions cannot go. Thus, it defines as well as confines the powers of the company. If anything is done beyond these powers, that will ultra vires (beyond powers of) the company and so void.
  192. 192. Contents of Memorandum of Association  The name of the company with the word “limited” at the end of the name of a public company and the words “private limited” at the end of the name of a private company.  The name of the State in which the registered office of the company is to be situated.  Except in the case of trading corporations the State or States to whose territories the objects extend.  The nature of the liability of the members i.e., whether limited by shares or by guarantee or unlimited.
  193. 193. Doctrine of Ultra Vires A company cannot go beyond its objects mentioned in its memorandum. The company‟s activities are confined strictly to the objects mentioned in memorandum and if they go beyond these objects, then such acts will be ultra vires. The object of declaring such act as ultra vires is to protect the interests of shareholders and all others who deal with the company.
  194. 194. Alteration of Memorandum Section 16 provides that the company cannot alter the conditions contained in memorandum except in the following cases as provided in the Act.  Change of name of a company by passing a special resolution.  Change of registered office of a company  Alteration of objects clause by a special resolution  Alteration of capital clause by an ordinary resolution  Alteration of liability clause
  195. 195. Articles of Association The articles of association of a company and its bye laws are regulations which govern the management of its internal affairs and the conduct of its business. They define the duties, rights, powers and authority of the shareholders and the directors in their respective capacities and of the company and the mode and form in which the business of the company is to be carried out.
  196. 196. Subject matter of Articles of Association  The business of the company.  Share capital rights of shareholders, variation of these rights, payment of commissions, share certificates.  The allotment of shares; calls and forfeiture of shares for non-payment of calls  Transfer and transmission of shares  Conversion of shares into stock  Share warrants  Exercise of borrowing powers including issues of debentures
  197. 197. Subject matter of Articles of Association  General meetings notices, quorum, proxy, poll, voting, resolutions, minutes etc  Number, appointment and powers of directors  Dividends and reserves  Manager and secretary-their appointment  Accounts and audit  Keeping of books – both statutory and others  Winding up
  198. 198. Memorandum 1. It is the charter of the company and defines the company‟s relationship with outside world. Articles They are the regulations for the internal management of the company. 2. It defines the scope of the activities of the company, beyond which the actions of the company cannot go. They are the rules for carrying out the objects of the company as set out in the memorandum 3. It, being the charter of the company, is the supreme document They are subordinate to the memorandum. 4. Every company must have its own Memorandum A company limited by shares need not have Articles of its own. 5. There are strict restrictions on its alteration. They can be altered by a special resolution, to any extent provided they do not conflict with the Memorandum and the Companies Act.
  199. 199. Prospectus A prospectus has been defined in Sec.2(36) of the Act as “any document described or issued as a prospectus and includes any notice, circular advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares in or debentures of a body corporate.
  200. 200. Contents of Prospectus Part I of Schedule II 1. General Information 2. Capital Structures of the Company 3. Terms of the Present issue 4. Particulars of the Issue 5. Company, management and project 6. Particulars in regard to the company and other listed companies under the same management which made any capital issue during the last 3 years 7. Outstanding Litiation Pertaining 8. Management perception of risk factors
  201. 201. Contents of Prospectus Part II of Schedule II 1. General Information 2. Financial Information a. Report by the auditors b. Reports by the accountants c. Statutory and other information
  202. 202. Liability for Misstatements in Prospectus Civil liability Criminal liability Against the company Recession of contract Claim for damages Against the directors, promotors and experts Damages Compensation under Sec.62 with Sec.56 Damages for non- compliance For fraudulent misrepresentation For innocent misrepresentation
  203. 203. Director The Companies Act, 1956, in Section 2 (13) defines the term „director‟ as including any person occupying the position of a director, by whatever name called. A person is said to be occupying the position of a director if he has been charged, with the responsibility of managing the affairs of a company and, as such, performs the duties and functions of director specified at random in the Companies Act. A director is also a member of the governing body of a company (called Board of Directors) and takes part in planning, conducting and controlling its affairs.
  204. 204. Appointment of Director 1. First Directors 2. Appointment by the Company 3. Appointment by Director a. Additional directors b. In a casual vacancy c. An alternate director 4. Appointment by Third Parties 5. Appointment by proportional representation 6. Appointment by the Central Government
  205. 205. Removal of Directors 1. By shareholders 2. By Central Government 3. By Tribunal
  206. 206. Provision regarding powers of directors 1. Powers Exercisable at Board‟s Meetings only 2. Powers Exercisable with Consent of General Meeting 3. Power Exercisable under Articles 4. Power Exercisable with Consent of Central Government
  207. 207. Duties of directors 1. Duties under the Companies Act, 1956 2. Duties under Common Law a. Fiduciary Duties b. Duties of care, skill and deligence
  208. 208. Provision regarding Liabilities of directors 1. Liability to third parties 2. Liability to the company 3. Liability for breach of statutory duties 4. Liability for acts of his co-directors
  209. 209. Shares The capital of a company is divided into certain indivisible units of a fixed amount. These units are called shares. „Share‟ means share in the share capital of a company. It includes stock except where a distinction between stock and share is expressed or implied [Sec2 (46)]. A share is evidenced by a share certificate. A share certificate is issued by a company under its common seal. It specifies the shares held by a member and is prima facie evidence of the title of the member to the share.
  210. 210. Shares
  211. 211. Types of Shares 1. Preference share a. Cumulative preference shares b. Non-cumulative preference shares c. Participating preference shares d. Non-participating preference shares e. Convertible preference shares f. Non-convertible preference shares g. Redeemable preference shares 2. Equity shares
  212. 212. 1. Preference shares Preference shares, with reference to any company limited by shares, are those which have two characteristics, viz., (a) they have a preferential right to be paid dividend during the lifetime of the company and (b) they have a preferential right to the return of capital when the company goes into liquidation [Sec.85 (1)]
  213. 213. a. Cumulative preference shares The dividend payable on these shares goes on accumulating till it is fully paid off. The company is, however, bound to pay dividend only if it has sufficient profits available for distribution. If it goes into liquidation, no arrears of dividends are payable unless such dividends have been declared, or unless the Articles contain express provisions to this effect.
  214. 214. b. Non-Cumulative preference shares These are the shares on which the dividend does not go on accumulating. If there are no profits or there are inadequate profits in any year, these shares get no divided or get a partial dividend. They cannot claim arrears of dividends of any year out of the profits of the subsequent years. Preference shares are presumed to be cumulative, unless specially stated to be otherwise.
  215. 215. c. Participating preference shares These shares are not only entitled to a fixed rate of dividend, but also to a share in the surplus profits which remain after the claim of the equity shareholders (up to a limit, say 15 per cent) have been met. The surplus profits are distributed in a certain agreed ratio between the holders of participating preference shares and equity shares.
  216. 216. d. Non-participating preference shares These shares are entitled to only a fixed rate of dividend and do not share in the surplus profits which go to the equity shareholders. e. Convertible preference shares The holders of these share have a right to convert them into equity shares within a certain period.
  217. 217. f. Non-convertible preference share The preference shares without a right of conversion into equity shares within a certain period. g. Redeemable preference shares A company limited by shares may, if so authorized by its Articles, issue preference shares which are to be redeemed.
  218. 218. Debentures The most usual form of borrowing by a company is by the issue of debentures. According to Sec.2(12), „debenture‟ includes debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company, or not. Sec.2 (12) does not explain as to what a debenture really is. In simply words, „debenture‟ means a document which either creates a debt or acknowledges it. Debentures are commonly issued in a manner similar to the issue of shares through a prospectus. The amount might be payable by instalments on application, allotment and calls.
  219. 219. Debentures
  220. 220. Kinds of debentures 1. Bearer or unregistered debentures 2. Registered debentures 3. Secured debentures 4. Unsecured or naked debentures 5. Redeemable debentures 6. Perpetual debentures 7. Convertible debentures
  221. 221. 1. Bearer or unregistered debentures There are debentures which are payable to bearer. These are regarded as negotiable instruments and are transferable by delivery, and a bona fide transferee for value is not affected by the defect in the title of the prior holder.
  222. 222. 2. Registered debentures These are debentures which are payable to the registered holders. A registered holder is one whose name appears both on the debenture certificate and in the company‟s register of debentures reuired to be maintained under Sec.152. He can transfer them like shares (Sec.108), but a transfer to be complete has to be registered with the company. Registered debentures are not negotiable instruments.
  223. 223. 3. Secured debentures Debentures which create some charge on the property of the company are known as secured debentures. The charge may be a fixed charge or a floating charge. 4. Unsecured or naked debentures Debentures which do not have any charge on the assets of the company are known as unsecured or naked debentures. The holders of these debentures like unsecured creditors may sue the company on debentures for the recovery of the debt.
  224. 224. 5. Redeemable debentures Debentures are usually issued on the condition that they shall be redeemed after a certain period. Such debentures are known as redeemable debentures. They may be re-issued after redemption in accordance with the provisions of Sec.121.
  225. 225. 6. Perpetual debentures When debentures are irredeemable, they are called perpetual debentures. A debentures will be treated as irredeemable where either there is no period fixed for payment of the principal amount or repayment of it is made conditional on the happening of an event which may not happen for an indefinite period or may happen only in certain specified and contingent events, e.g., the winding up of the company.
  226. 226. 7. Convertible debentures These debentures give an option to the holders to convert them into preference or equity shares at stated rates of exchange, after a certain period. If the holders exercise the right of conversion, they cease to be lenders to the company and become members instead.
  227. 227. Company Administration – Borrowing Powers, Management and Administration, Meetings, resolutions, Proceedings – Management – Accounts – Audit – Oppression and Mismanagement – Winding up
  228. 228. Borrowing Powers As such, every trading company, unless prohibited by the Memorandum or the Articles, has implied power to borrow money for the purposes of its business. It has also the power to give security for the loan by creating a mortgage or change on its property. Thus power to borrow is incidental to the objects of a trading company. The ground for the rule is that “the exigencies of commerce render such a power necessary”. A non-trading company requires express power to borrow. This power, in case of such a company, must be taken in the Memorandum or the Articles.
  229. 229. Ultra Vires Borrowing Borrowing by a company may be a borrowing which is - 1. ultra vires the company, or a. Injunction b. Subrogation c. Identification and tracing d. Recovery of damages 2. intra vires the company but ultra vires the directors
  230. 230. Classification of Meeting 1. Meeting of Shareholders – General Meetings a. Statutory report - Total shares allotted - Cash received - Abstract of receipts and payments - Directors and auditors - Contracts & underwriting contracts - Arrears of calls b. Annual general meetings c. Extraordinary meetings 2. Class Meetings 3. Meeting of directors
  231. 231. Requisites of a Meeting 1. Proper authority 2. Notice of meeting 3. Quorum for meeting 4. Chairman of meeting 5. Minutes of the meeting
  232. 232. Proxies A member entitled to attend and vote at a meeting may vote either in person or by proxy. A proxy is an authority to represent and vote for another person at a meeting. It is also an instrument appointing a person as proxy. The person so appointed is also called a proxy. A proxy has no right to speak at the meeting. Further, he is not entitled to vote except on a poll, unless the Articles provide otherwise.
  233. 233. Voting and Poll The resolutions proposed in a general meeting of a company are decided on the votes of the members of the company. Every member whose name appears in the register of members has a right to vote at a general meeting. A shareholder‟s vote is a right of property. He may use it in any manner he likes. He is not bound to exercise it in the best interests of the company.
  234. 234. Resolutions The questions which generally come for consideration at the general meetings of a company are presented in the form of motions. A motion may be proposed by the chairman of the meeting or by any other member of the company. It is then placed before the meeting by the chairman. Then discussion on the motion takes place. But before this is done the motion must be seconded by someone. The motion, after the close of discussion, is formally put to vote by show of hands. It may either be carried or rejected.
  235. 235. Kinds of Resolutions 1. Ordinary resolutions 2. Special resolutions 3. Resolutions requiring special notice
  236. 236. Books of Account As required by Sec.209, every company must keep at its registered office proper books of account with respect to – a) all receipts and disbursements of money and the matters in respect of which the receipts and disbursements take place; b) all sales and purchases of goods by the company; c) the assets and liabilities of the company; and d) In the case of a company engaged in production, processing, manufacturing or mining activities, such particulars relating to utilization of material or labour or to other items of cost as may be prescribed by the Central Government.
  237. 237. Auditors The audit of a joint stock company is intended for the protection of the shareholders and the auditor is expected to examine the accounts maintained by the directors with a view to informing the shareholders of the true financial position of the company.
  238. 238. Appointment of Auditors Every company must, at each annual general meeting, appoint an auditor or auditors to hold office from the conclusion of the meeting to the conclusion of the next annual general meeting . The company must, within seven days of the appointment give intimation thereof to every auditor so appointed. But before any appointment or re- appointment of any auditor is made by the company at any annual general meeting, a written certificate has to be obtained by the company from the auditor proposed to be appointed to the effect that appointment or re-appointment, if made, will be in accordance with the limits specified by the company act, 1974.
  239. 239. Oppression  According to the Dictionary meaning of word, is any act exercised in a manner burdensome, harsh & wrongful.  The term „oppression‟ has been explained by Lord Cooper as, “The essence of the matter seems to be that the conduct complained of should at the lowest involve a visible departure from the standards of fair dealing, and a violation of the conditions of fair play on which every shareholder who entrusts his money to the company is entitled to rely.”
  240. 240. Mismanagement When the affairs of the company are being conducted in a manner prejudicial to the public interest or the company's interest. OR When by a reason of material change in the management or control of he company the affairs of the company are likely to be conducted in a manner prejudicial to the public interest or the company's interest.
  241. 241. Winding Up of Companies A company comes into existence by a legal process known as „incorporation‟ and likewise ceases exist also by another legal process called „winding-up‟ “winding- up of a company is the process whereby its life is ended and its property administrated for the benefit of its creditors and members. An administration called a liquidator is appointed and he takes control of the company, collects its assets, pays its debts and finally distributes any surplus among the members in accordance with their right”.
  242. 242. Modes of Winding Up  Compulsory winding up by the court.  Voluntary winding up by members as well as creditors of the company.  Winding up under the supervision of the court.