 LEGAL ENVIORNMENT OF BUSINESS

 INDIAN CONTRACT ACT, 1872

-------------------------------------
 BY

PROF. (CS) MONICA SURI

Fellow Member of the Institute of Company
Secretaries of India
• In today’s world, environment plays a very important
role in manager’s success in any organization he
works.
• Manager has work and takes decisions while taking
care of the environment in which he is a working.
• LEGAL ENVIRONMENT =
ENVIRONMENT+BUSINESS+LEGAL PARAMETERS
FEATURES OF BUSINESS ENVIRONMENT

On the basis of the above discussion the features of

business environment can be summarised as
follows.

 Business environment is the sum total of all

factors external to the business firm and that
greatly influence their functioning.
 It covers factors and forces like customers,
competitors, suppliers, government, and the
social, cultural, political, technological and legal
conditions.
 The business environment is dynamic in nature,
that means, it keeps on changing.
 The changes in business environment are
unpredictable. It is very difficult to predict
 What is
law

Social Historical Political

perspective Perspective Perspective

LAW
is a set of rules and regulations governing the society to improve
co-operation of members in the society and
thereby avoiding differences.
• School of Thoughts:

Scholar Salmond says

” Law is a body of principles recognised and
applied by the state in administration of
justices.

- Scholar AUSTIN says”

“ Law is a rule of conduct imposed and
enforced by soverign”.
• NEED FOR STUDY OF THE
STREAM:

• IGNORANTIA JURIS NON

EXCUSAT
This maxim implies ignorance of
Law is no excuse.

We need to study, the law of

land.
 SOURCES

OF

LAW

SECONDARY
PRINCIPAL
•Customs •Justice
•Judicial
Decisions(Precedence) •Equity
•Statutes
•Personal Law •Good Conscience
(Goverened by Vedas,Quran)
 INDIAN CONTRACT ACT, 1872

Contract:
Section 2 (h) : “ Every agreement and promise enforceable at law is a
contract.”
Contract = agreement + enforceability at law.

Agreement :
Section 2(e) : “every promise and every set of promise forming
consideration for each other is an agreement.”
agreement = offer + acceptance
agreement = social agreement / legal agreement
 ESSENTIAL ELEMENTS OF A
CONTRACT

1. Offer and Acceptance

2. Legal Relationship
3. Lawful Consideration
4. Competency to contract
5. Consent between the parties
6. Legality of Objects
7. Certainity of Objects
8. Possibility of Performance/
Discharge of Contract
9. Legal formalities
1. On the basis of Formation

Express Contracts: The Contracts where there is expression or conversation are called
Express Contracts.
A has offered to sell his house and B has given acceptance. It is Express Contract.

Implied Contract: The Contracts where there is no expression are called implied
contracts.
Sitting in a Bus can be taken as example to implied contract between passenger and
owner of the bus.

Quasi Contract: In case of Quasi Contract there will be no offer and acceptance so,
Actually there will be no Contractual relations between the partners.
2. On the basis of Nature of Consideration

On this base, Contracts are of two types. Namely Bilateral Contracts and Unilateral
Contracts.

Bilateral Contracts: If considerations in both directions are to be moved after the

contract, it is called Bilateral Contract.

Example: A Contract has got formed between X and Y on 1st Jan, According to
which X has to deliver goods to Y on 3rd Jan and Y has to pay amount on 3rd Jan.
It is bilateral contract.

Unilateral Contract: If considerations is to be moved in one direction only after the

Contract, it is called Unilateral Contract.
3.Types of Contracts on the basis of Execution

On this base Contracts can be classified into two groups.

 Executed and

 Executory Contracts.

If performance is completed, it is called executed contract. E.g.. Sale in a

showroom and Payment made across Counter

In case where contractual obligations are to be performed in future, it is

called executor contract. Eg
❖ On this base Contracts can be classified into 5 groups.
❖ Valid,
❖ Void,
❖ Voidable,
❖ Illegal and
❖ Unenforceable Contracts.

❖ Valid: The Contracts which are enforceable in a court of

law are called Valid Contracts.
❖ Void: A Contract which is not enforceable in a court of law is
called Void Contract. If a Contract is deficient in any one or
more of the valid contract features (Except free consent and
legal formalities). It is called Void Contract.

❖ Example: there is a Contract between X and Y where Y is a

minor who has no capacity to contract. It is Void Contract.

❖ Voidable: A Contract which is deficient in only free consent,

is called Voidable Contract. That means it is a Contract which is
made under certain pressure either physical or mental.

❖ At the option of suffering party, a voidable contract may

become either Valid or Void in future. For example: there is a
Contract between A and B where B has forcibly made A involved
in the Contract. It is voidable at the option of A.
Illegal: If the contract has unlawful object it is called Illegal Contract.

Example: There is a contract between X and Z according to which Z has to

murder Y for a consideration of Rs. 10000/- from X. It is illegal contract.

Unenforceable: A contract which has not properly fulfilled legal formalities is

called unenforceable contract. That means unenforceable contract suffers from
some technical defect like insufficient stamp etc. After rectification of that
technical defect, it becomes enforceable or valid contract.

Example: A and B have drafted their agreement on Rs. 10/- stamp where it is
to be written actually on Rs. 100/- stamp. It is unenforceable contract.
 LET TEST OUR UNDERSTANDING
 Q1. Purchase of a refrigerator on Cash
Payment
 2. Offer letter given by employer
 3. Contract with inadequate stamp duty
 4. Contract by a minor
 5. Contract with all formalities between a
Company and vendor
 Executed Contract

 2.Executory

 3. Unenforceable

 4. Void

 5. Valid
 Section 2 ( a): When a person signifies to another his willingness to do or to
abstain from doing anything, with a view to obtaining the ascent of that other to
such act or abstinence he is said to make a proposal.
RULES OF OFFER
• Must be clear,definite , complete and final. It must not be vague .
Eg. A monetary dealing
• Must be communicated to the offeree. An opportunity of making
him accept or reject must be given.
• May be by express words oral or written. Or implied by conduct.
Eg : Offer for sale of car, a chartered bus for passengers.
• May be general or specific. Eg : IPO to General Public, Specific
tender bids.*It Must be distinguished from :Invitation to make an offer . eg
auction.
 FACTS OF THE CASE
 Carbolic Smoke ball company , a pharmaceutical company.
During contemporary period of this case a fever called
`Influenza` was in existence.
 On that occasion the company has invented capsules to cure
influenza.
 Here the company makes a general offer saying that those
capsules can cure influenza very quickly and prior consumption
of their capsules will avoid attack by influenza. In addition to it
the company says that if any person gets attacked by influenza
even after prior consumption, the company will pay 100 pounds
to such person.
 Mrs. Carlil makes prior consumption & gets attacked by that
fever.
 JUDGEMENT
 Court decides that general offer also is valid and hence the
company is under obligation to pay 100 pounds to her.
FACTS OF THE CASE
 Gowridutt s son goes missing from the house.
 Lalman is Gowridutt`s servant. Gowridutt sends Lalman to
search for the missed boy.

 LaLman`s departure, Gowridutt makes an offer according to

which he will give a reward to the person who brings the boy
back. Thereafter the boy is found back by Lalman himself.
 After sometime Lalman comes to know about the reward and
claims that reward.
 JUDGEMENT
Court decides that Lalman has no knowledge of the offer and
hence he cannot claim the reward. Offer must be Communicated
 If not
accepted
on time
Makes a
counter not
offer accepted
in mode
prescribed
Revoca
tion of
OFFER

Non-
fulfillment
of Offeree
condition rejects
Offeree
dies
before
acceptance
 Acceptance

Rules of acceptance
-May be expressed by words written or
spoken or implied from the conduct.

-Must be in the mode prescribed . eg : fax,

e- mail.

-Must be unqualified and absolute

-Must be communicated to the Offeror

-Mere silence does not amount to

acceptance

-Must be made within a reasonable time

and before the offer lapsed is revoked.

-If the offer requires action, no verbal

acceptance will work. Eg : locating the
missing dog .

Standing Offers: Implies supplying specific

quantity at a specific time to a specific
2. Legal Relationship:

• Intention among the parties

that the agreement should be
attached by legal consequences and
create legal obligations.

• Intentions of both the parties

are taken into consideration.

• Not a social agreement

3.Lawful Consideration
Section 2 (d) : “ When at the desire of the promisor , promise or any other
person has done or abstained from doing or promises to do abstains from
doing such act or abstinence is called a consideration fro the promise.”

Consideration is at the desire of the promisor

Consideration may move from promise or any other person.

*Rules
-Every contract must be supported by consideration
-May be an act of abstinence or promise.
-Must be mutuality
-Must be real and not vague.
-Must be full return for the promise.
-Must be something person is bound to perform for the promise.

*When not necessary

-Made out of natural love and affection
-Done as voluntary act.
-To pay a time barred debt.
 TYPES OF CONSIDERATION

PAST PRESENT FUTURE

|

CONTRACT IN PAST CONTRACT AND CONTRACT AND CONSIDERATION

CONSIDERATION IN CONSIDERATION IN FUTURE
PRESENT IN PRESENT
 Case in point :
Chinnaya Vs Ramayya

*Facts of the case:

• Mother gifted property to daughter (Ramayya) on the

premise that an annuity be given by her to her aunt ( Chinnaya )
annually.

• Same day she wrote a letter and communicated the same

to her aunt.

• Latter, Ramayya refused to give the payment stating that

no consideration had moved from Chinnaya to her.

• Chinnayya sued her

COMPETENCY TO CONTRACT
*SECTION 10 :

Following persons are qualified to contract:

*Must be a major
*Must be of Sound Mind
*Must not be disqualified by law from contracting to which they are subject.

Minors

*Minors agreement is void abinitio.

*Can be a beneficiary or a Promisee.
*Cannot be ratified on attaining Majority
*No compensation awarded under the agreement.
*No specific performance allowed.
*Parents Guardian not liable
  Mohiri Bibi
 Vs
 Dharmodas Ghosh
 FREE CONSENT

Undue
influence
(SEC 16)

Mistake
Coercion
(SEC 20 &
( SEC 17)
21)
Free
consent

Misrepresen
Fraud
tation
(SEC 17)` ( SEC 18)
Misrepresentation :

Is unintentional and has the following features:

A representation or assertion

Such assertion induced the party to act.

Statement was made with a honest belief turned to be untrue.

Assertion related to a matter of fact.

Eg : A detergent : “ washes whiter than whitest”

Fraud :

Main constituents are :

A false representation.

Intentions that the other party should Act.

The party being deceived must be indeminified because there no

other relief.

The statement must have been made after the belief that it was
actually false.

Eg : Sale of an unfit horse

Coercion :

Doing of any Act forbidden by Indian Penal Code.

*Main Components:

There must be a Contract made .

Contract must be made to under threat.

Can be rescinded because it is executed under threat.

Eg : agreement under a gun point.

UNDUE Influence:
“Relations between the parties are such that one of the parties is
in a position to dominate the other and uses that position to
obtain unfair advantage over the other.”
Eg : Undue Influence in Relations

Mistake :

Mistake could be mistake of law / mistake of fact.

( Mistake of law deals with law of land and latter with foreign law and
pvt. Law.)

To render the contract void :

Mistake must be of law not opinion
Must be essential to the agreement.
Must be on part of both the parties.

Eg : if price is paid in excess of true value , there is a mistake.

LEGAL GLOSSARY

Uberimae Fidae: Special duty to act with utmost good

faith.

Consensus –ad-idem : Consenting to do the same thing

at the same point and at the same time.

De- Facto : In Fact

Ratio Decidendi : The underlying principle of a judicial

decision which is authoritative.

Obiter Dicta: In due course of decision.

Legality OF Objects
-Every agreement of which object is unlawful is forbidden by
law.
-Could be either when :
-Forbidden under any Statutes
-Implies Injury to any person / Property
-Court Regards it immoral or opposed to Public Policy .

AGREEMENTS OPPOSED TO PUBLIC POLICY ARE :

-RELATED TO TRADING WITH ENEMY
-COMMIT CRIME
-INTERFERENCE WITH ADMINISTARTION OF JUSTICE
-RELATED TO RESTRAINT OF LEGAL PROCEEDINGS.
-RELATED TO SALE OF PUBLIC OFFICES.
-RESTRAINT OF PARENTAL RIGHTS.
-RESTRICTING PERSONAL LIBERTY
-RESTRAINT OF MARRIAGE( LOWE VS PEERS)
-MARRIAGE BROKERAGE AGREEMENTS.
-INTERFERING WITH MARITAL DUTIES .
-RESTRAINT OF REVENUE AUTHORITIES.
-RESTRAINT OF TRADE (S.B. FRASER &CO. VS BOMBAY ICE MFG. CO.)

CERTAINITY OF OBJECTS
DISCHARGE OF CONTRACT / PERFORMANCE OF CONTRACT

A CONTRACT IS TERMINATED OR DISCHARGED BY :

-PERFORMANCE ( FULFILLMENT OF DUTIES)

-MUTUAL CONSENT OR AGREEMENT

-LAPSE OF TIME

-OPERATION OF LAW

-IMPOSSIBILTY OF PERFORMANCE

-THRU A BRANCH OF CONTRACT.

1. PERFORMANCE OF CONTRACT

RULES OF PERFORMANCE:

• CONTRACT TO BE PERFORMED BY THE PROMISOR , IN CASE OF

DEATH BY THE LEGAL HEIR OR REPRESENTATIVES.

• A STRANGER TO A CONTRACT CANNOT SUE FOR PERFORMANCE.

MUST BE DEMANDED BY THE PARTY TO WHOM THE PROMISE IS MADE.

• WHEN THE PROMISEE HAS REFUSED TO PERFORM HIS SIDE OF

PROMISE, IT CAN BE PUT TO AN END BY THE PROMISOR.( ARTIST
PERFORMANCE).

• MUST BE PERFORMED BY THE PROMISOR/ PROMISEE (IN CASE OF

ARTIST)

• DEVOLUTION OF JOINT RIGHTS

DISCHARGE BY MUTUAL AGREEMENT
COULD BE :
-Thru novation: substitution of a new contract
-Alteration
-Recission :discharge at any other time before end
-Remission acceptance of a lesser sum
-Waiver : abandon

DISCHARGE BY LAPSE OF TIME

Time barred debt to be accounted

DISCHARGE BY OPERATION OF LAW

-By merger
-By unauthorized alteration of items of a written document
-By insolvency

DISCHARGE BY IMPOSSIBILTY
-Could be at the time of contract ( eg : act of magic)
-Or supervining impossibility ( eg : singer falls ill)

Exceptions :
-Difficulty of performance
-Commercial impossibility( higher profits not realized)
Strikes, lockouts
DISCHARGE BY BREACH

COULD BE :
ACTUAL OR ANTICIPATORY

Case in point :

HOCESTER
VS
DE LA TOUR

Facts of the case :

-De la tour hired hocester as their courier agents in month of april.
-Contract was signed and to be commenced from the month of june.
-During the month of may they sent a letter and repudiated the contract .
-Hocester sued them for breach of contract
 BREACH OF CONTRACT AND ITS REMEDIES
WHEN THE CONTRACT IS BROKEN SEVERAL REMEDIES ARE AVAILABLE :

RESCIND
THE
CONTRAC
T

SUE ON SUE
FOR
“QUANTU
M DAMAGE
REMEDIES
MERUIT” S
FOR

BREACH

SUE SUE
FOR FOR
SPECIFI
AN C
INJUNC PERFOR
T-ION M-ANCE
*Sue for damages
Underlying principle: Damages to be made good by the party who
has broken the contract.

Case in point :
HADLEY
VS
BAXENDALE

-Hadley sent a broken mill shaft to the repairman through a courier

Baxendale.
-He did not reveal to him that the delay would result in loss of
revenue to the mill.
-By some neglect delivery of shaft was delayed and therefore took a
longer time in repair and delivery.
-Hadley sued Baxendale.
 Types of Damages

UNLIQUIDATED
LIQUIDATED

ORDINARY SPECIAL EXEMPLARY NOMINAL

EG : SALE EG :
EG : EG : NO
MARRIAGE /
OF GOODS RAILWAYS ACTUAL
CHQ.
DISHONOUR LOSS

*LIQUIDATED DAMAGES : WHERE THE

CONTRACTING PARTIES AGREE THE ADVANCE
SUM TO BE PAID IN CASE OF LOSS DUE TO
EITHER PARTY’S ACTION.

*UNLIQUIDATED DAMAGES : WHERE THE COURT

DECIDES THE EXTENT AND AMOUNT OF
DAMAGES.
SPECIFIC PERFORMANCE :
GRANTED IN CASES WHERE
PERFORMANCE TO BE CARRIED EG :
PURCHASE OF PLOT , SHARES
DEBENTURES , ARTIST PERFORMANCE.

IS NOT ORDERED WHERE:

• MONETARY COMPENSATION IS
ENOUGH
•CONTRACT NOT CERTAIN
•IS OF PERSONAL NATURE
•MADE BY COMPANY IN EXCESS OF
POWERS.
• REQUIRES CONTINOUS
SUPERVISION OF THE COURT.
INJUNCTION : AN ORDER OF A PERSON RESTRAINING HIM FROM DOING A
PARTICULAR ACT . IT COULD BE PROHIBITORY OR MANDATORY. IS A
MODE OF SECURING SPECIFIC PERFORMANCE OF NEGATIVE TERMS OF
THE CONTRACT
Case in Point
Luney
Vs
Wagner

Facts of the Case :

-W agreed to sing a t l’s theatre and nowhere else
-W in breach of contract agreed to sing for Z.
-SUED W.
DECIDE!!!
( handle specific performance and Injunction)
Quantum Meruit :
“Means as much as earned or reasonable remuneration”.

(Principle:
Person claims reasonable remuneration for the services rendered by him
where there is no express promise to pay the same.
• Eg : worker on daily piece rate system.
• Supply of 100 kg of raw material instead of 200 kg.

QUASI CONTRACTS:
Inspite of the fact there was no legal relationship, contract entered but the
conduct and relationship of the parties impose a obligation on one party
and conferring a right on the other.
Eg : finder of the lost goods
 Pick up any Company or Case ( Preferably not
beyond year 2000)
 Project Report should comprise of :
 1. Background of Company
 2. Board of Directors
 3. Facts of Case
 4. Judgement if given
 5. Group Learnings
 6. Group Recommendations for handling similar
cases in Companies in future
 7. Limitations , if any.
 Thank you