ASSIGNMENTS- MBA Semester-3

Subject code MB0035

LEGAL ASPECTS OF BUSINESS

Submitted to

SIKKIM MANIPAL UNIVERSITY

By

Ajay Vilakkumadathil
Reg # 520921832
Q1. ‘All contracts are agreements but all agreements are not contracts.’ Discuss
Ans:
Contract: An agreement enforceable by law is a contract. To make a contract, there must be (I) an agreement
and (ii) the agreement should be enforceable by law.

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

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

All contracts are agreements but all agreements need not be contracts. The agreements that create legal
obligations only are contracts. The validity of an enforceable agreement depends upon whether the agreement
satisfies the essential requirements laid down in the Act. Section 10 of Indian Contract Act lays down that ‘all the
agreements are contracts if they are made by the free consent of the parties competent to contract for a lawful
object and are not hereby expressly declared to be void’.

Q2. ‘ Not all persons have the capacity to enter into a contract.’ Discuss this statement.
Ans:

Contractual capacity: The parties entering into an agreement must have legal competence. In other words, they
must have attained the age of majority, should be of sound mind and should not be disqualified under the law of
the land. A contract entered into between the parties having no legal capacity is nullity in the eyes of law.

Legal disability of the parties would render the agreement entered into between them unenforceable in a court of
law. In fact, even a desirable person may enter into an agreement. Law does not infringe his freedom of making
an agreement with anybody he likes. But by declaring certain classes of persons having no contractual capacity,
law seeks to protect their interests from being exploited by unscrupulous persons.

Definition: Section II lays down that “Every person is competent to contract who is of the age of majority according
to the law to which he is subject and who is of sound mind and is not disqualified from contracting by any law to
which he is subject.” This section declares following persons to be incompetent:
(1) Minors: A minor is a person who has not attained the age of majority. According to Indian Majority Act,
1875 the age of 18 years is a major. However, if a guardian is appointed by the court or if the minor or his
property is under the supervision of a court of wards, the age of majority is 21 years.
(2) persons of unsound mind:A person is said to be of sound mind for the purpose of making a contract if
at the time when he makes it, he is capable of understanding it and of forming a rational judgement as to its
effects upon his interests. A person who is usually of sound mind but occasionally of unsound mind may not make
a contract when he is of unsound mind
(3) persons disqualified by law to which they are subject.

Q3. Discuss how a contract can be discharged by breach.

Ans:
Breach of contract by a party thereto is a method of discharge of a contract, because “breach” brings to an end
the obligations created by a contract on the part of each of the parties. The aggrieved party i.e., the party not at
fault can sue for damages for breach of contract as per law; but the contract as such stands terminated.

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

Anticipatory breach: An anticipatory breach of contract is a breach of contract occurring before the time fixed for
performance has arrived. It may take place in two ways: (a) Expressly by words spoken or written. Here a party to
the contract communicates to the other party, before the due date of performance, his intention not to perform it.
(b) Impliedly by the conduct of one of the parties. Here a party by his own voluntary act disables himself from
performing the contract. When a party to a contract has refused to perform or disabled himself from performing,
his promise in its entirety, the promisee may put an end to the contract, unless he has signed, by words or
conduct his acquiescence in its continuance.
Actual breach: Actual breach may also discharge a contract. It occurs when a party fails to perform his obligations
upon the date fixed for performance by the contract. Actual breach entitles the party not in default to elect to treat
the contract as discharged and to sue the party at fault for damages for breach of contract.

Remedies for Breach of Contract

Whenever there is breach of a contract, the injured party becomes entitled to any one or more of the following
remedies against the guilty party:
 Rescission of the contract.
 Suit for damages.
 Suit upon quantum merit.
 Suit for specific performance of the contract.
 Suit for an injunction.

Q4. Discuss the essentials of a contract of guarantee.

Ans:
Contract of Guarantee is a contract to perform the promise or discharge the liability of a third person in case of his
default. Surety is a person who gives the guarantee. The person in respect of whose default the guarantee is
given is called ‘principal debtor.’ The person to whom the guarantee is meant for is called the ‘Creditor’.

Essential of Contract of Guarantee:

1. From: A contract of guarantee is just like any other contract which may be either oral or in writing.
2. Tripartite agreement: Every contract of guarantee involves three agreements between (i) the creditor and
principal debtor, (ii) the surety and the creditor, and (iii) the surety and the principal debtor.
Consent of the parties: There must be consent of all the three parties.
3. Secondary Liability: The test which applied to determine whether the contract is one of guarantee or indemnity
is whether the obligation has been undertaken at the debtor’s request in which case the contract is one of
guarantee. If the obligation is undertaken without any request of the debtor, the contract is one of indemnity. The
intention of the parties is also important whether one making oneself primarily or collaterally liable. Hence, the
promise to be primarily and independently liable is not a guarantee, though it may be an indemnity. Hence in a
contract of guarantee, the primary liability is with the principal debtor.
4. Existing liability: It is not necessary that the principal contract must be in existence at the time the contract of
guarantee is made; the original contract by which the principal debtor undertakes to repay the money to the
creditor may be about to come into existence.

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

Q5. How can negotiable instruments be endorsed? Discuss in detail.

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

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

Indorsements may be of the following kinds:

Blank or general indorsement: If the indorser signs his name only and does not specify the name of the
indorsee, the indorsement is said to be in blank. The effect of a blank indorsement is to convert the order
instrument into bearer instrument which may be transferred merely by delivery.
Indorsement in full or special indorsement: If the indorser, in addition to his signature, also adds a direction to pay
the amount mentioned in the instrument to, or to the order of, a specified person, the indorsement is said to be in
full.
Partial indorsement: Section 56 provides that a negotiable instrument cannot be indorsed for a part of the
amount appearing to be due on the instrument. In other words, a partial indorsement which transfers the right to
receive only a part payment of the amount due on the instrument is invalid.
Restrictive indorsement: An indorsement which, by express words, prohibits the indorsee from further
negotiating the instrument or restricts the indorsee to deal with the instrument as directed by the indorser is called
‘restrictive’ indorsement. The indorsee under a restrictive indorsement gets all the rights of an indorser except the
right of further negotiation.
Conditional indorsement: If the indorser of a negotiable instrument, by express words in the indorsement,
makes his liability, dependent on the happening of a specified event, although such event may never happen,
such indorsement is called a ‘conditional’ endorsement.
In the case of a conditional indorsement the liability of the indorser would arise only upon the happening of the
event specified. But the indorsee can sue other prior parties, e.g., the maker, acceptor etc., if the instrument is not
duly met at maturity, even though the specified event did not happen.

Q6. Why do you think an agreement to take a person to moon for a holiday cannot be a
contract?
Ans:
Contract is an agreement enforceable by law is a contract. To make a contract, there must be (I) an agreement
and (ii) the agreement should be enforceable by law.
Agreement is defined as ‘every promise and every set of promises forming consideration for each other ‘. A
promise is defined as “an accepted proposal.” Thus, every agreement in its ultimate analysis is made of a
proposal from one side and its acceptance by the other.
The following are the essentials of a contract:
a) Agreement : An agreement which is preliminary to every contract is the outcome of offer and acceptance. An
offer to do or not to do a particular act is made by one party and is accepted by the other to whom the offer is
made. Then we say that there is a meeting of the minds of the parties. Such a position is known as consensus ad
idem.
b) Free consent : The parties should agree upon the same thing in the same sense and their consent should be
free from all sorts of pressure. In other words it should not be caused by coercion, undue influence,
misrepresentation, fraud or mistake.
c) Contractual capacity: The parties entering into an agreement must have legal competence. In other words, they
must have attained the age of majority, should be of sound mind and should not be disqualified under the law of
the land. A contract entered into between the parties having no legal capacity is nullity in the eyes of law.
d) Lawful consideration: There must be consideration supporting every contract. Consideration means something
in return for something. It is the price for the promise. An agreement not supported by consideration becomes a
‘nudum pactum’ i.e., naked agreement. The consideration should be lawful and adequate. However, there are
certain exceptions to this rule.
e) Lawful object : The object or purpose of an agreement must be lawful. It should not be forbidden by law, should
not be fraudulent, should not cause injury to the person or property of another, should not be immoral or against
public policy.
f) Not expressly declared void: The statute should not declare an agreement void. The Act itself has declared
certain types of agreements as void. E.g., agreements in restraint of marriage, trade, legal proceedings. In such
cases, the aggrieved party can’t seek any relief from the court of law.
g) Possibility of performance: The agreement should be capable of being performed. e.g., Mr. A agrees with Mr. B
to discover treasure by magic. Mr. B can’t seek redressal of the grievance if Mr. A fails to perform the promise.
h) Certainty of terms: The terms of the agreement should be certain. E.g., Mr. A. agrees to sell 100 tons of oil. The
agreement is vague as it does not mention the types of oil agreed to be sold.
i) Intention to create legal obligation: Though Sec. 10 is silent about this, under English law this happens to be an
important ingredient. Therefore, Indian courts also recognise this ingredient. An agreement creating social
obligation can’t be enforced.
j) Legal formalities: Indian Contract Act deals with a simple contract supported by consideration. Agreements
made in India may be oral or written. However, Sec. 10 states that where the statute states that the contract
should be in writing and should be witnessed or should be registered, the same must be observed. Otherwise, the
agreement can’t be enforced e.g., Under Indian Companies Act, the Memorandum of Association and Articles of
Association must be registered.

All contracts are agreements but all agreements need not be contracts. The agreements that create legal
obligations only are contracts. So an agreement to take a person to moon cannot be contract.