412 - Legal Aspects Of Business.

(Assignment) Aug2020_Nov2020
Ramananda. G

I. Answer the below two questions:

1. Define a contract. Explain the essential elements of a valid contract. (15)

Answer 1:
Contract Definition:
Contract is an agreement enforceable by law, made between two or more persons by which
rights are acquired by one or more to act or forbearance on the part of the other or others.”
According to Sir Fredrick Pollock, “Every agreement and promise enforceable by law is a
Contract” Section 2(h) of Indian Contract Act, 1872 gives a very short but exhaustive
definition of the Contract which is, “An agreement enforceable by law is a Contract.”
As per the above definition of Contract it can be concluded that a Contract contains two
basic elements
(i) An agreement,
(ii) Enforceability by law.
Elements of a Valid Contract - An agreement can be enforced through law when it contains
the elements of a Valid Contract. If there is want of any of the elements of a Valid Contract it
will be treated as void agreement. An agreement to be enforceable in law must satisfy the
conditions laid down in Section 10 of the Indian Contract Act. Section 10 provides:

“All agreements are contracts, if they are made by the free consent of parties competent to
Contract, for a lawful consideration and with a lawful object and are not hereby declared
void.”

Essential elements of a valid contract.

A Valid Contract consist of the following elements ;

1. Proposal
2. Acceptance} Proposal + Acceptance = Agreement;
3. Free consent;
4. Competent parties;
5. Lawful consideration;
6. Lawful Object;
7. Not expressly declared void by law;
8. Legal formalities.
1. Proposal - Section 2(a) defines proposal as ‘when one person signifies to another his
willingness to do or to abstain from doing anything, with a view to obtaining the assent of
that other to such act or, self-discipline, he is said to make a proposal.
For example - A says to B that he wants to sell his house for thousand rupees, here ‘A’
proposes to sell house.
2. Acceptance - According to Section (2)(b) when the person to whom the proposal is
made signifies his assent thereto, the proposal is said to be accepted. A proposal when
accepted becomes a promise.
Meaning: when an offer or proposal is accepted by other party, it becomes an
 agreement. A valid acceptance is which is absolute and unqualified and it is given in the
mode prescribed by the proposer, A valid acceptance must be given in stipulated or
reasonable time and to create a binding contract acceptance must be communicated to
the offerer, mere mental acceptance not evidenced by words of Contract is in the eyes
of law no acceptance.
3. Free Consent - According to Section 10 the next element Valid Contract is free consent.
Consent means ‘when two or persons agree upon the same thing in the same sense.’
For a valid Contract mere consent is not enough, but it should be free. Where there is
consent but not free consent, there is generally a contract revocable at the option of the
party whose consent was not free. Consent is said to be free when it is not caused by,
enforcement, unreasonable influence, fraud misrepresentation or mistake.
4. Competent parties - For the formation of a Valid Contract, there should be at least two
parties and they must be capable to enter into a contract. Contract entered into with an
incapable person is invalid.
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 making
contract by any law to which he is subject. Every person legal residence in India shall be
deemed to have attained his majority when he shall have completed his age of 18 years,
and in case of a minor whose person or property or both are under the superintendence
of the Court of ward, shall be deemed to have attained his majority when he shall have
completed his age of 21 years and not before.
5. Lawful consideration - Consideration is the next essential elements for the formation of a
Valid Contract. Consideration is the price paid by the promisee for the obligation of the
promise. Consideration may be described as something accepted or agreed upon as a
return for the promise made. Section 2(d) define consideration “when at the desire of the
promisor, promisee or any other person has done or abstained from doing or does or
abstrains from doing or promises to do or to abstain from doing something, such, act or
abstinence or promise is called consideration for the promise”.
6. Lawful object - The object of the agreement should not be against the law of the land or
it should not be prohibited by the Law of the Land. If the object of the agreement is
illegal, or fraudulent, or immoral, or against public policy it will not be enforceable by law,
and it will not be treated as Valid Contract.
7. Not expressly declared void by law - Indian Contract Act declares certain agreements as
void which are included in Section from 24 to 30. If an agreement is not expressly
declared void it cannot be treated as Valid Contract.
8. Legal formalities - Certain contracts are enforceable only when legal formalities are
complied with e.g., for the sale of immovable property contract must be in written form.
In certain cases evidence of two persons is essential and so on.
2. What do you understand by “capacity to Contract”? Who are the persons
disqualified by law from entering into a contract? (15)
Answer2:
Capacity to Contract:

According to Section 11, “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.”

So, we have three main aspects:

1. Attaining the age of majority

2. Being of sound mind
3. Not disqualified from entering into a contract by any law that he is subject to
capacity to contract

1. Attaining the Age of Majority

According to the Indian Majority Act, 1875, the age of majority in India is defined as 18 years.
For the purpose of entering into a contract, even a day less than this age disqualifies the
person from being a party to the contract. Any person, domiciled in India, who has not
attained the age of 18 years is termed as a minor.

Let’s look at certain laws governing a minor’s agreement:

A Contract made with a Minor is Void

Since any person less than 18 years of age does not have the capacity to contract, any
agreement made with a minor is void ab-initio (from the beginning).

Example, Peter is 17 years and 6 months old. He needs some money to go on vacation with
his friends. He approached a moneylender and borrows Rs 25,000. As security, he signs
some papers mortgaging his laptop and motorcycle. Six months later, when he attains the
age of majority, he files a suit declaring that the mortgage executed by him when he was a
minor is void and should be cancelled. The Court agrees and relieves Peter of all liability to
repay the loan.

Also, if a minor enters into a contract, then he cannot ratify it even after he attains majority
since the contract is void ab-initio. And, a void agreement cannot be ratified.

2. Person of Sound Mind:

According to Section 12 of the Indian Contract Act, 1872, for the purpose of entering into a
contract, a person is said to be of sound mind if he is capable of understanding the contract
and being able to assess its effects upon his interests.

It is important to note that a person who is usually of an unsound mind, but occasionally of a
sound mind, can enter a contract when he is of sound mind. No person can enter a contract
when he is of unsound mind, even if he is so temporarily. A contract made by a person of an
unsound mind is void.

3. Disqualified Persons:
Apart from minors and people with unsound minds, there are other people who cannot enter
into a contract. i.e. do not have the capacity to contract. The reasons for disqualification can
include, political status, legal status, etc. Some such persons are alien enemy, foreign
sovereigns and ambassadors, convicts, professional person. Corporations, Married women.

Persons who are disqualified by law from entering into a contract are given below:

1. Alien enemy:
All persons other than Indian citizens are aliens. When the sovereign or the state of that
alien is at peace with India, he is an alien friend. Contrary to it, he will be an alien enemy.

An alien friend living in India has full contracting competency subject to certain restrictions,
which may be imposed by the Government of India, e.g., an alien cannot acquire any
ownership interest in Indian shipping.

In case of outbreak of war between India and the alien country, the following rules apply for
the performance of agreements:-

No contract can be made with an alien enemy during the subsistence of war, except with the
prior approval of the Government of India.

Performance of the contracts made before the outbreak of war will be suspended during the
course of war. They can be performed only when the war is over. Even then, the government
can put restrictions on the performance of such contracts, if it considers them necessary for
national interest.

2. Foreign sovereigns and ambassadors:

Foreign sovereigns and accredited representatives of a foreign state or ambassadors enjoy
special privilege, by which they cannot be sued in Indian courts. However, they can, if they
choose, enter into contracts and can enforce such contracts in Indian court.

Ex-kings are not entitled to this privilege and therefore, can be sued in Indian courts just as
ordinary citizens.

In India, under Sec. 86 of the Civil Procedure Code, previous sanction of the Central
Government is to be obtained, for suing the rulers of foreign states, ambassadors and
envoys.

3. Convicts:
A convict is a person, who is sentenced by a competent court to the death sentence or
imprisonment. A convict cannot enter into a valid contract while undergoing sentence, nor
can sue. His incompetency is over, when the period of his sentence is over or he is
pardoned.

Thus, the competency right to make a contract or sue is only suspended during the course of
his sentence and is not lost. Whenever he is freed, he regains such rights.

4. Professional persons:
It is only in England, where the barristers cannot sue their clients for their professional fees.
In India, no such rule exists.

In India, every barrister, who has got himself enrolled as an advocate of an Indian High
Court can sue his clients for his fees. Under Indian Bar Councils Act, 1927, enrolment of an
advocate is necessary before he can practice.

5. Corporations:
Corporations include registered companies, local bodies and city corporations. Corporations
are legal artificial persons. Since they have legal existence, they can acquire property,
transact their business and are capable of suing and being sued. But they cannot do so
without their seals.

Powers of a corporation are limited by its Memorandum of Association, beyond which it

cannot do anything. This is because contracts which are ultra vires of the objects of the
company, shall not be binding. Even such contracts cannot be ratified by passing a
resolution in the general meeting of the company members.

6. Married women:
Law has not made any distinction regarding contractual capacity of males and females. A
woman, whether married or unmarried, enjoys the same contractual capacity as a man.
Whatever property a woman possesses, she has absolute ownership over it.

She is free to deal with her personal property in the way in which she likes. Her husband is
not at all responsible for her contracts.
 I. Attempt the following problems giving reasons for your answers.

1. A minor fraudulently represented to a money lender that he was a major

and executed a mortgage deed for Rs 20,000/-. Has the moneylender any right
of action against the minor for the money lent?
(5)
Answer1:
According to section 10 and 11 of Contract Act of 1872 make the minors agreement void and
therefore the mortgage was not valid.
Money advanced to minor can't be recovered because minor's agreement was void.
In the given case, minor who borrowed a sum of Rs 20,000 from lender by mortgaging.
But as per the provisions, Minor is not competent to contract and any contract entered will be void
and hence, the mortgage here is not valid. Also, due to the void contract Hence Money lender do
not have any right to take action on minor.
Here money lender has one more chance that, a minor represented as
major, with that age proof, he can file a legal cheating case against him
and send notices to his guardians and can recover money.

2. A tells his wife that he would commit suicide, if she did not transfer her
personal assets to him. She does so under this threat. Can the wife avoid the
contract? (5)

Answer2:

Law reference: As per contract act 1872

Married women is one of disqualification by law from entering into a contract:

A woman, whether married or unmarried, enjoys the same contractual capacity as a man.
Whatever property a woman possesses, she has absolute ownership over it.

She is free to deal with her personal property in the way in which she likes. Her husband is
not at all responsible for her contracts.

Wife can avoid the threat.

It is in fact a personal choice she can transfer on humanitarian basis and wife can also have
legal approach and take a good decision.

END of assignment