CONTRACT AND ITS ESENTIALS

“Every agreement and promise enforceable at law is a contract”

Pollack
“A contract is an agreement creating and defining obligation between two or
more persons by which rights are acquired by one or more to acts or forbearance
on the part of others”
Salmond
“A legally binding agreement between two or more persons by which rights are
acquired by one or more to acts or forbearance on the parts of others”
Sir William Anson
Acc. to contract Act section 2(h) “An agreement which is enforceable by Law”

Now after examining the definitions of contract, we can say that-

Contract = Agreement + Enforceability

Essential Elements of a Valid Contract

The essential elements of the contract are as under:

1. Offer and Acceptance

For an agreement there must be a lawful offer by one party and lawful
acceptance of that offer from the other party. The term lawful means that the
offer and acceptance must satisfy the requirements of the contract Act. The offer
must be made with the intention of creating legal relations, otherwise there will
be no agreement.

2. Intention to Create Legal Relationship

The intention of the parties to a contract must be to create a legal relationship
between them. The parties to the agreement must make it clear while entering
into a contract that they want to create a legal relationship. Agreements of a
social or domestic nature do not create legal relations and so cannot give rise to
a contract. It is presumed in commercial agreement that parties intend to create
legal relations.
 3. Lawful Consideration
The third essential of a valid contract is the consideration. Consideration means
something in return. An agreement is enforceable only when both the parties get
something and give something. The something given or obtained is called
consideration. Only those considerations are valid which are lawful

4. Free Consent
It is another essential of a valid contract. it conveys a meaning to the parties that
both the parties to the contact have agreed upon the same thing in the same
sense. For a valid contract, it is necessary that the consent of parties to the
contract must be free. a consent is said to be free when it is not obtained by
coercion, under influence, fraud, misrepresentation or mistake.

5. Lawful Object
it is also necessary that agreement should be made for a lawful purpose and the
objective for which the parties is making an agreement must not be fraudulent,
illegal, immoral, opposed to public policy, imply injury to the person or
property of other. Every agreement, of which the object or consideration is
unlawful, is illegal and therefore void.

6. Writing and Registration

a contract may be oral or written, it is always in the interest of the parties that
the contract should be in writing because it is easy to prove in the court. a verbal
agreement is as good as written agreement. it is essential for the validity of a
contract that it is must be in writing, signed and witnesses by the witnesses and
registered if required by the law.

7. Certainty of Terms
the meaning of the agreement should be certain or capable of being made
certain if the meaning of the contract is not certain then the agreement would be
void. The terms of agreement must be clear, complete a certain. If the terms of
the agreement are uncertain, it cannot be enforceable by a court of law.

8. Possibility of Performance
The valid contract must be capable of being performed. An agreement that is
relating to perform any act that is impossible in nature is void. In case if the act
is legally or physically impossible to perform, the agreement cannot be enforced
at law.
 COMPANY AND ITS CHARECTERSTICS

According to Justice James, “A company is an association of persons united for

a common object.”

Prof. Haney- “A company is an artificial person created by law having a

separate entity with a perpetual succession and a common seal”.

“Company” means a company incorporated under this Act or any previous

company law;
-Companies Act 2013

A company is a legal entity formed by a group of individuals to engage in and

operate a business—commercial or industrial—enterprise.

Characteristics of Company:

1. An Artificial Person Created by Law:

A company is a creation of law, and is, sometimes called an artificial person. It
does not take birth like natural person but comes into existence through law. It
is considered as a legal person which can enter into contracts, possess properties
in its own name, sue and can be sued by others

2. COMPANY IS NOT A CITIZEN:

The company, though a legal person, is not a citizen under the Citizenship Act,
1955 or the Constitution of India.
3. Separate Legal Entity:
A company exists as a separate legal entity which is different from its
shareholders and members. It has its own legal existence independent of its
members. It has own name. Due to this feature, shareholders can enter into a
contract with the company and can also sue the company and be sued by the
company. A shareholder cannot be held liable for the acts of the company even
if he holds virtually the entire share capital.

4. Perpetual Succession:
A company is a legal entity with perpetual succession. It never dies. The life of
company is not related with the life of members. Law creates the company and
dissolve it. Perpetual succession, means that the membership of a company may
keep changing from time to time, but that shall not affect its continuity.
 5. Common Seal:
Every company is required by law to have a common seal. The common seal of
the company is of great importance. It acts as the official signature of the
company. The name of the company must be engraved on the common seal. As
the company has no physical form, it cannot sign its name on a contract.

6. Limited Liability:
The limited liability is another important feature of the company. If anything
goes wrong with the company his risk is only to the extent of the amount of his
shares and nothing more. A member is liable to pay only the uncalled money
due on shares held by him.

7. Transferability of Shares:
Shares in a company are freely transferable, subject to certain conditions. A
shareholder can transfer his shares to any person without the consent of other
members. Section 44 of the Companies Act, 2013 enunciates the principle by
providing that the shares held by the members are movable property and can be
transferred from one person to another in the manner provided by the articles.

8. CAPACITY TO SUE AND BE SUED:

A company being a body corporate, can sue and be sued in its own. All legal
proceedings against the company need to be instituted in the name of that
company.
9. Separate Management:
A company is administered and managed by its managerial personnel i.e. the
Board of Directors. The shareholders are simply the holders of the shares in the
company and need not be necessarily the managers of the company. In other
words, the company is administered and managed by its managerial personnel.

10.Limitation of work–
Company can’t go beyond the powers stated in the Memorandum of
Association. The Memorandum of Association limits the scope and objects of
the company.
 DOCTRINE OF INDOOR MANAGMENT

The doctrine of indoor management, also known as Turquand rule which

protects the outsiders against the actions done by the company.

The role of the doctrine of indoor management is opposed to the role of the
doctrine of constructive notice.

According to this doctrine, persons dealing with the company need not inquire
whether internal proceedings relating to the contract are followed correctly,
once they are satisfied that the transaction is in accordance with
the memorandum and articles of association. In simple words, the doctrine of
indoor management means that a company’s indoor affairs are the company’s
problem.

This doctrine was laid down in the case of Royal British Bank V. Turquand,

Exceptions to the Doctrine of Indoor Management

1. Knowledge of an irregularity
This rule does not apply to circumstances where the person affected has actual
or constructive notice of the irregularity. In such cases, the rule of indoor
management does not offer protection to the outsider dealing with the said
company.
Case law - Howard v. Patent Ivory Co
2. Negligence
The rule of Indoor management does not protect a person dealing with a company
if he does not initiate an inquiry despite suspecting an irregularity. Further, this rule
does not offer protection if the circumstances surrounding the contract are
suspicious.
Case law - B. Anand Behari Lal v. Dinshaw & Co. (Bankers) Ltd.
3. Forgery
The rule does not apply to the transaction involving forgery or illegal or
transactions which are void
Case law- Kreditbank Cassel v. Schenkers Ltd
CONCLUSION
The doctrine of indoor management is evolved as a reaction to the doctrine of
constructive notice. It puts a Barr on the doctrine of constructive notice and it
protects the third party who acted in the act in the good faith. This doctrine
protects outsiders dealing with a company, It was analysed that the doctrine does
not operate in an arbitrary manner, there are some restriction imposed on it like
forgery, third party having knowledge of irregularity, negligence and the doctrine
will not apply where the question is regarding of to the very existence of the
company.

DOCTRINE OF ULTRA VIRES

The term Ultra Vires means ‘Beyond Powers’.

The doctrine of ultra-vires first time originated in the classic case of Ashbury
Railway Carriage and Iron Co. Ltd. v. Riche, (1878)

The Doctrine of Ultra Vires is a fundamental rule of Company Law. It states that the
objects of a company, as specified in its Memorandum of Association, can be
departed from only to the extent permitted by the Act. Hence, if the company enters
into a contract beyond the powers of the directors or the company itself, then the said
contract is void and not legally binding on the company

What is the purpose of the doctrine of ultra-vires?

This doctrine assures the creditors and the shareholders of the company that the
funds of the company will be utilized only for the purpose specified in the
memorandum of the company. This doctrine draws a clear line beyond which
directors of the company are not authorized to act. It puts a check on the activities
of the directors and prevents them from departing from the objective of the
company.

Types of ultra-vires acts and when can an ultra-vires act be ratified?

Ultra-vires acts can be generally of four types:
1. Acts which are ultra-vires to the Companies Act.
2. Acts which are ultra-vires to the Memorandum of the company.
3. Acts which are ultra-vires to the Articles of the company but intra-
vires the company.
4. Acts which are ultra-vires to the directors of the company but intra-
vires the company.
Conclusion
Directors of the company can act only within the purview of the authority
provided to them under Memorandum of Association. If any borrowing is made
beyond the authority provided by these objectives mentioned in the
memorandum, it will be considered as ultra-vires. Any borrowing which is
made through an ultra-vires act is void-ab-initio, and hence, directors are
personally responsible for these acts. However, if such borrowings are ultra-
vires only to the articles of the company or ultra-vires directors, then they can
be ratified by the shareholders. Then after such ratification, they will be
considered valid.

FACTORY
In general terms ‘Factory’ is a building or buildings where people use machines to
produce goods. But whenever a thing becomes extremely complex and important,
general terms are no longer valid.
Section 2(m) of the Factories Act, 1948 defines “factory” to mean:
Any premises including the precincts thereof
• whereon ten or more workers are working, or were working on any day of
the preceding twelve months, and in any part of which a manufacturing
process is being carried on with the aid of power, or is ordinarily so
carried on.
• whereon twenty or more workers are working, or were working on any
day of the preceding twelve months, and in any part of which a
manufacturing process is being carried on without the aid of power, or is
ordinarily so carried on.
but does not include a mine subject to the operation of [the Mines Act, 1952 (35 of
1952)], or [a mobile unit belonging to the armed forces of the Union, a railway
running shed or a hotel, restaurant or eating place].
 Manufacturing Process
The expression “manufacturing process” has been defined in Section 2(k) to
mean any process.
• making, altering, repairing, ornamenting, finishing, packing, oiling,
washing, cleaning, breaking up, demolishing, or otherwise treating or
adapting any article or substance with a view to its use, sale, transport,
delivery or disposal; or
• pumping oil, water, sewage, or any other substance; or
• generating, transforming or transmitting power; or
• composing types for printing, printing by letter press, lithography,
photogravure or other similar process or book binding; or
• constructing, reconstructing, refitting, finishing or breaking up ships or
vessels; or
• preserving or storing any article in cold storage

Lock Out
Definition of Lockout
Section 2(1) of the Industrial Dispute Act,1947 defines Lockout - “Lock-out”
means the temporary closing of a place of employment, or the suspension of
work, or the refusal by an employer to continue to employ any number of
persons employed by him.

Meaning of Lockout
Lockout means temporary shutdown of the factory by the employer, but not
winding up (permanent) of the factory. Lockout of the factory is a major issue,
which affects workers as well as management and cannot be initiated for a
simple reason. Factory lockout is the ultimate weapon in the hands of the
management when an uncontrollable situation arises in the factory.
The Reasons Behind Lockouts
• Disputes or clashes in between workers and the management.
• Unrest, disputes or clashes in between workers and workers.
• Illegal strikes, regular strikes or continuous strikes by workers may lead
to lockout of factory or industry.
• External environmental disturbance due to unstable governments, may
lead to lockouts of factories or industries.
• Continuous or accumulated financial losses of factory or industry, may
lead to opt lockout by the management.
 • Maybe lockout, if any company involves in any fraudulent or illegal
activities.
• Failure in maintaining proper industrial relations, industrial peace and
harmony.

PROCEDURE OF LOCKOUTS
According to Sec. 22(2)
No person employed in a public utility service shall go on Lockout in breach of
contract-
(a) without giving to the employer notice of Lockout, as hereinafter
provided, within six weeks before lockout; or

(b) within fourteen days of giving such notice; or

(c) before the expiry of the date of lockout specified in any such notice as
aforesaid; or

(d) during the pendency of any conciliation proceedings before a

conciliation officer and seven days after the conclusion of such
proceedings.

Penalty for illegal lock-outs.

[Section 26] of the Industrial Dispute Act 1947.
Any employer who commences, continues, or otherwise acts in furtherance of a
lock-out which is illegal under this Act, shall be punishable with imprisonment
for a term which may extend to one month, or with fine which may extend to
one thousand rupees, or with both.
 Layoff
The Term Lay-off is defined in section 2(kkk) of the Industrial Dispute Act, 1947
as follows -
“Lay-off” (with its grammatical variations and cognate expressions) means the
failure, refusal or inability of an employer on account of shortage of coal, power or
raw materials or the accumulation of stocks or the breakdown of machinery or
natural calamity or for any other connected reason to give employment to a
workman whose name is borne on the muster rolls of his industrial establishment
and who has not been retrench
Thus, the following are the essentials of lay-off:
(i) There must be failure, refusal or inability on the part of the employer to give
employment to a workman.
(ii) The failure, refusal or inability should be on account of shortage of coal, power
or raw materials or accumulation of stocks or breakdown of machinery, or natural
calamity, or any other connected reason.
(iii) The workman’s name should be on the muster rolls of the industrial
establishment.
(iv) The workman should not have been retrenched.