LEGAL ASPECTS OF BUSINESS

UNIT - I
What is Law?

Lawis the rules and regulations,

enacted by state to govern and
regulate the conduct of the
people of large.
Why should we be aware
of law?
Ignorance to the law is not an
excuse.
Example: If X is caught travelling
in a train without ticket, he
cannot plead that he was not
aware of the rule.
LAW - DEFINITION

Includes all the rules and principles, which

regulate our relations with other individuals
and with the state.
Law is the body of principles recognized and
applied by the state in the administration of
justice.
What is CONTRACT?

Contract sec-2 (h): An Agreement Enforceable

by law.

Contract = Agreement + Enforceable by

Law
Agreement

Sec 2 (e) : Every Promise or set of promises forming

an consideration for each other is an agreement.

Agreement = Promise+
Consideration
Promise

Sec 2 (b) When the person to whom the proposal

is made, signifies his assent, there to Accepts the
proposal. Acceptance of proposal is a promise.

Promise = Proposal +Acceptance

Example for promise

X offers to sell his car for Rs 1Lakh

to Y. Y accepts this offer. This
offer after acceptance becomes
promise and this promise is
treated as an agreement
between X and Y.
CONTRACT ?

Section 2 (h) of the Indian contract Act 1872,

An agreement enforceable by law is a
contract.
In other words, an agreement which can be
enforced in a court of law is known as a
contract.
According to Pollock, Every agreement and
promise enforceable by law is a contract.
 On analyzing this definition of contact, it appears
that a contract must have the following two
elements:
1 An agreement and
2. Enforceability by Law.
So

Contract = Agreement + Enforceability by Law

AGREEMENT

Every promise and every set of promises , forming consideration for each
other.
AGREEMENT = OFFER + ACCEPTANCE
CONSENSUS AD IDEM

This means that the parties to the agreement

must have agreed about the subject matter of
the agreement in the same sense and at the
same time.
OBLIGATION

It is a legal tie which imposes upon a definite

person or persons the necessity of doing or
abstaining from doing a definite act or acts.
ESSENTIAL ELEMENTS OF
VALID CONTRACT
Agreement-Offer and Acceptance
Intention to create legal relation
Lawful consideration
Capacity of parties
Free and genuine consent
Lawful object
Writing and registration
Certainty
Possibility of Performance
Agreement not declared void.
1.Agreement-Offer and Acceptance

To constitute a contract there must be an

agreement and for an agreement, there must be
a lawful offer and a lawful acceptance of the
offer.
2.Intention to create Legal
Relations
There must be a intention among the parties that
the agreement should be attached by legal
consequences and create legal obligations.
Agreement to social or domestic nature do not
contemplate legal relations and such they do not
give rise to a contract.
Example: X invited Y to a dinner Y accepted the
invitation. It is a social agreement. If X fails to serve
dinner to Y, Y cannot go the court of law for
enforcing the agreement.
3.Lawful Consideration

Consideration means something in return.

It has been defined as the price paid by one
party for the promise of the other.
An agreement is legally enforceable only when
each of the parties to it gives something and gets
something.
Example:
X agrees to sell his car to Y for Rs 1,00,000.Here Ys
Promise to pay Rs1,00,000 is the consideration for
Xs promise to sell the car and Xs promise to sell
the car is the consideration for Ys promise to pay
Rs 1,00,000.
4. Capacity of Parties

The parties to an agreement must be competent to

contract. In other words, they must be capable of
entering into a contract.
According to section 11 of the Indian Contract
Act,1872 specifies that every person is competent to
contract provided:
(1) Is of the age of majority
(2)Who is sound mind
(3)Is not disqualified from contracting by any law.
In other words the following persons are not competent
to contract:
A minor, A person of unsound mine and a person
disqualified from contracting by any law.
5. Free and Genuine
Consent
There must be free consent of the parties to the
contract.
According to section 14, Consent is said to be
free when it is not caused by :
(1)Coercion, (ii)undue influence, (iii)Fraud (iv)
Misrepresentation or (v) Mistake.
Example:X threatens to kill Y if he does not sell his
house to X. in this case, Ys consent has been
obtained by coercion and therefore, it cannot be
regarded as free.
6.Lawful Object (Section
23)
The object of an agreement must be lawful,
According to Section 23 of the Indian Contract
Act 1872, the object is considered lawful unless it
if forbidden by law or is fraudulent or involves or
implies injury to the person or property of another
or is immoral or is opposed to public policy.
Example : X lets a flat on hire to Y a illegal trader,
knowing that it would be used for immoral
purposes. The agreement is void because its
object is for immoral purposes.
7. Writing and Registration

According to the Indian contract

Act, a contract may be oral or in
writing. But in certain special
cases it lays down that the
agreement, to be valid, must be
writing or/and registered.
8.Possibility of Performance

The terms of the agreement must be such as are

capable of performance. According to section 56, an
agreement to do an impossible act is void.

Example: X agrees to discover treasure by magic and Y

agrees to pay Rs 1000 to X. This agreement is void
because it is an agreement to do an impossible act.
9. Agreement not
declared void
Void means (Completely empty)
void means not valid or legally binding.
The agreement must be one, which the law
declares to either illegal or void.
A Void agreement is one, which is without any
legal effects.
Illegal agreements is an agreement expressly or
impliedly prohibited by law.
Example : Agreement is restraint of trade,
marriage.
CLASSIFICATION OF
CONTRACTS

Classification according to validity

Classification according to formation
Classification according to performance
CLASSIFICATION ACCORDING
TO VALIDITY
Valid contract
Void contract
Voidable contract
Illegal agreement
Unenforceable agreement.
 Valid contract .all the essential elements of a
valid of a contract.
Void contract:- An agreement to carry out an
illegal act is an example of a void agreement.
According to section 2(j) defines a void contract
as a contract which ceases to be enforceable
by law becomes void when it ceases to be
enforceable.
For Example, a contract between drug dealers
and buyers is a void contract simply because the
terms of the contract are illegal. In such a case,
neither party can go to court to enforce the
contract.
 3. Voidable Contract- A s per section 2(i), an
agreement which is enforceable by law at the
option of one or more the parties but not at the
option of the other or others is a voidable
contract.
Example: A contracts brought about as a result of
coercion, undueinflunece would be voidable at
the option f the person whose consent was
caused by any one of these factors.
 4 Illegal agreement- it is contract which the law forbids to be made.
The court will not enforce such a contract but also the connected
contracts.
Example: Contract to commit crime, contract that is immoral or
opposed to public policy are illegal in nature.
5. Unenforceable Agreement- where a contract is a
good in substance but because of some technical
defect i.e., absence in writing.
CLASSIFICATION ACCORDING
TO FORMATION
Express contract
Implied contract
Quasi-contract
1. Express Contract

Express contract is one which is made by words

spoken or written.
Example: X says to Y will you buy my car for Rs,
1,00,000. It is an express contract made orally.
X writes a letter to Y, I offer to sell for rs 1,00,000
to you. Y send a letter to X, Iam ready to buy
your car for 1,00,000.. It is an express contract
made in writing.
2. Implied Contract.

An implied contract is one which is made

otherwise than by words spoken or written. It is
inferred from the conduct of a person or the
circumstances of the particular case.
Example: A transport company runs buses on
different routes to carry passengers. This is an
implied offer by transport company. X hoards the
bus. This is an implied acceptance by X. Now
there is an implied contract and X is bound to pay
the prescribed fare.
3. Quasi Contract

The term quasi contract would literally mean

semi-contract.
A quasi contract is not a contract at all because
one or the other essentials for the formation of a
contract are absent.
Quasi contract are strictly not contracts as there
is no intention of parties to enter into a contract.
It is legal obligation which is imposed on a party
who is required to perform it.
Example: Finder of lost goods- X a guest found a
diamond ring at a birthday party of Y. X told Y
and other guests about it. He has performed his
duty to find the owner.
CLASSIFICATION ACCORDING
TO PERFORMANCE
Executed contract
Executory contract
Unilateral or one sided contract
Bilateral contract
1. Executed Contract

It is a contract where both the

parties to the contract have
performed their respective
obligations under the contract.
Example: X offers to sell his car to Y for Rs 1,00,000.
Y accepts Xs offer, X delivers the car to Y and Y
pays 1,00,000 to X. It is an executed contract.
2. Executory Contract

It is a contract where both the

parties to the contract have still to
perform their respective
obligations.
Example : X offers to sell his car to Y
for Rs 1,00,000 . Y accepts Xs offer.
If the car has not yet been
delivered by X and the price has
not yet been paid by Y, it is an
executory contract.
3. Unilateral Contract

An unilateral contract is one sided

contract in which only one party
has to perform his promise or
obligation to do or forebear.
Example: A makes payment for
bus fare for his journey from
Chennai to Vaniyambadi. He has
performed his promise. It is now for
the transport company to perform
the promise.
4. Bilateral Contract

A bilateral contract is one in which both the

parties have to perform their respective promises
or obligations to do or forebear.
Example: For example, a person offers their home
for sale, and a buyer agrees to pay $150,000 to
purchase the home. In this bilateral contract,
each party is required to do something: the buyer
must pay the sales price, and the seller must
transfer ownership of the home to the buyer.
Formation of Contract.

For the formation of a contract the process of

proposal or offer by one party and the
acceptance thereof by the other necessary.
This generally involves the process of negotiation
where the parties apply their minds make offer
and acceptance and create a contract.
Essentials for formation of
contract
1. Agreement. Agreement = offer +Acceptance.
2. Enforceability by Law: An agreement is said to
be enforceable by if it creates some legal
obligation. In other words, the parties to an
agreement must be bound to perform their
promises and in case of default by either of them
must intend to sue. Example: domestic or social
agreements do not create legal relations.
3. Consideration: Something in return.
Performance of Contract-
Section 37
Meaning :The term performance of contract
means fulfillment of respective obligations
created under the contract by both the promisor
and the promise.
When a contract is duly performed by both the
parties, the contract comes to a happy ending
and nothing more remains.
Performance by all the parties of the respective
obligations is the normal and natural mode of
discharging or terminating the contract.
Who may perform a
contract?
1. Promisor Himself: if there is something in the
contract to show that it was the intention of the
parties that the promise should be performed by the
promisor himself, such promise must be performed by
the promisor. (section 40)
Example: X promises to paint a picture for Y. The
promise must be performed by X himself.
2. Agent: Where personal consideration is not the
foundation of a contract, the promisor or his
representative may employ a competent person to
perform it (section .40).
3. Representatives: A contract which involves the
use of personal skill or is founded on personal
consideration comes to an end on the death of the
promisor. A s regards any other contract the legal
representative of the deceased promisor are bound
to perform it unless a contrary intention appears from
the contract (Section 37, para 2).
4. Third Person: When a promise accepts
performance of the promise from a third person, he
cannot afterwards enforce it against the promisor.
That is performance by a stranger , accepted by the
promise, produces the results of discharging the
promisor.
5. Joint Promisors: When two or more persons have
made a joint promise, then unless a contrary
intention appears from the contract, all such persons
jointly fulfill the promise. If any of them dies, his legal
representatives must, jointly with the surviving
promisors, fulfil the promise.
Discharge of Contract

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
comes to an end.
Modes of Discharge of a
Contract
By Performance

By Mutual Agreement or Consent

By Impossibility of Performance

By Lapse of Time.

Discharge by Operation of Law

Discharge by Breach of Contract.

1. By Performance

I t takes place when the parties to the contract fulfil

their obligations arising under the contract within the
time and in the manner prescribed. Discharge of
Performance may be:
1.Actual Performance: it is said to have taken place,
when each of the parties has done what he had
agreed to do under the agreement.
2. Attempted Performance (Section 38)When the
promisor offers to perform his obligation, but the
promise refuses to accept the performance, it
amount to attempted performance or tender.
2.By Mutual Agreement

Since a contract is created by mutual agreement,

it can also be discharged by mutual agreement.
A contract can be discharged by mutual
agreement in any of the following ways and
hence no need to perform the original contract:
(a) Express Consent: the express consent is the
consent expressed in word, written or oral.
(b)Implied Consent: The consent expressed
otherwise then in words, written or oral, but by the
conduct of the parties it includes the following
types:
(i) Novation section 62: (Substitution)- the Parties to a
contract may substitute a new contract for the old.
If they do so, it will be a case of novation.

(i) Rescission section 62:(Cancellation)- A contract

may be discharged, before the date of
performance, by agreement between the parties
to the effect that it shall no longer bind them.
Example: X promises Y to sell and deliver 100 Bales of
cotton on 1st October at his godown and Y promises to
pay for goods on 1 st Novemeber. X does not supply
the goods. Y may rescind the contract.
 Iii) Alteration section 62- Alternation means a
change in the terms of contract with mutual
consent of the parties. Alteration discharges the
original contract and creates a new contract.
However, parties to the new contract must not
change.
Example: X promises to sell and deliver of cotton
on 1 st October and Y promises to pay goods on
1Sst November. X and Y mutually decides that all
the goods shall be delivered in five equal
installements at Zs godown.
 Iv) Remission (section 63): It means acceptance
by the promise of a lessor fulfilment of the promise
made.
Example- A owes B Rs 5000. A pays to B and B
accepts in satisfaction on the whole debt, rs 2000
paid at the time an place at which rs 5000, were
payable. The whole debt is discharged.
 V) Waiver : It means the deliberate
abandonment or giving up of a right which a
party is entitled to under a contract. Thus it
amounts to releasing a person of certain legal
obligation under a contract.
Example: Xpromises to supply goods to Y.
Subsequently. Y exemptes X from carrying out the
promise. This amounts to waiving the right of
performance on the part of Y.
3. Discharge by Impossibility of
Performance (Section 56)

Impossibility of performance may be:

1)Initial Impossibility: when the parties agree upon
doing of something which is obviously impossible in
itself the agreement would be void.. The fact of
impossibility may be and may not be known to the
parties.
(a) If known to the parties- it is void
(b) If unknown to the parties- both the promisor and
promise are ignorant of the impossibility of
performace, the contract is void
(c) If known to the promisor only- the promise is
entitled to claim compensation
 2)Supervening Impossibility: the cases covered by
supervening impossibilities are:
a) Destruction of subject matter
b) Death or incapacity personal services
c) Deceleration/ break of war
d) Change of law
 Example: X agreed to sell his crop of wheat. The
entire crop was destroyed by fire though no fault
of the party. The contract was discharged.
Example:X contract to take in cargo for Y at a
foreign port. Xs government afterwards declares
war against the country in which the port is
situated. The contract becomes void when the
was is declared.
X agreed to sing on a specified day. X fell seriously
ill and could not perform on that day. The
contract was discharged.
4. Discharge by Lapse of
Time
A contract should be performed within a
specified period as prescribed by the limitation
Act, 1963.
If it is not performed and if no action is taken by
the promising within the specified period of
limitation, he is deprived of remedy of law.
5.Discharge by Operation
of Law
A contract may be discharge independently of
the wishes of the parties i.e., by operation of law.
This includes discharge:
BY death
By insolvency
By unauthorized material alteration
By the identity of promisor and promise.
6. Discharge by Breach of
Contract
Breach -
A Contract is said to be discharged by breach of
contract if any party to the contract refuses or
fails to perform his part of the contract or by his
act makes it impossible to perform his obligation
under the contract.
A breach of contract may occurs in following two
ways:
1. Anticipatory Breach of contract.
2. Actual breach of contract
Breach of Contract

Insimple words, a breach of

contract arises when one of the
parties to the contract, denies to
perform the acts or to fulfil the
obligations laid upon him under
the contract.
Types of Breach of
Contract

Types of
Breach of
Contract

Actual Anticipatory
Breach Breach
 Anticipatory
Breach

Impliedly by Expressly by
the conduct words
of one of spoken or
the parties. written
Anticipatory Breach
(Section 39)
Anticipatory breach of contract occurs when the
party declares his intention of not performing the
contract before the performance is due.it may
take place in two ways:
1) expressly by words spoken or written: here the
party to the contract communicates to the other
party, before the due date of performance his
intention not to perform it.
Example:
A contract with B to supply 100 bags of what for Rs
60,000 on 1 st march . On 15th February A informs B
that he will not be able to supply the wheat. There is
express rejection of the contract.
2) Impliedly by the conduct of one of the parties:
Here the party by is own voluntary act disables
himself from performing the contract. For example
A agrees to marry B but before the agreed date of
marriage she marries C. it is the anticipatory breach
of contract brought about by the conduct of one of
the parties.
 Actual Breach

During the On the due

course of date of
performance. performance
 1) on due date of performance: if any party to
contract refuses or fails to perform his part of the
contract at the time fixed for performance, it is
called an actual breach of contract on due date
of performance.
Example:X agreed to sell to Y 10 tonne of wheat
@ rs 8000 per tonne to be delivered on 20th
October. On 20th October, X refused to deliver the
goods. It is an actual breach of contract on due
date of performance.
2) During the course of performance: if any party has
performed a part of the contract and then refuses or
fails to perform the remaining part of the contract, it
is called an actual breach of contract during the
course of performance.
Example: X agreed to sell to Y 10 tonne of what @ rs
8000 per tonne on 20th October. On 20th October, X
delivered 5 tonne and refused to deliver remaining
5 tonne. It is an actual breach of contract during the
course of performance.
Remedies for Breach of
Contract
A remedy is the course of action
available to an aggrieved party
(i.e the party not at default) for
the enforcement of a right under
a contract.
Remedies available to an
aggrieved party.
Rescission of contract

Suit up on Quantum Meruit

Suit for specific performance

Suit for Injection

Suit for damages.

1. Rescission of contract
section 39
Rescission means cancellation.
Rescission means a right not to perform
obligation.
In case of breach of contract, the promisee may
put an end to the contract. In such case the
aggrieved party is discharged from all the
obligations under the contract and is entitled to
claim compensation for the damage which he
has sustained because of the non-performance
of the contract.
 Example: X agrees to supply 10 tons of sugar to Y
on 20th October. Y promises to pay for the goods
on its receipt. X does not supply the goods on the
due date. Here, Y is discharged from the liability of
paying the price, Y is entitles to rescind the
contract and to claim compensation for the
damages which he has sustained because of
non-supply of goods on the due date.
2. Suit up on Quantum
Meruit
Quantum meruit means "what one has earned
or according the quantity of work done.
When a person has begun the work and before
he could complete it, the other party terminates
the contract or does something, which makes it
impossible for the other party to complete the
contract, he can claim for the work done the
contract.
 Example: A, a singer, contract with B, the
manager of a theatre, to sing at his theatre for
two nights every week during the next two
months, and B engages to pay her Rs 1000 for
each nights performance. On the sixth night, A
willfully absents herself from the theatre and B, in
consequence, rescinds the contract must pay A
for the five nights on which she had sung.
3. Suit for specific
Performance
Where the damages are not an adequate
remedy in the case of breach of contract, the
court may in its discretion on a suit for specific
performance direct in party in breach, to carry
out his promise according to the terms of the
contract.
Specific performance will not be granted, where:
i) Damages are an adequate remedy
ii) The contract is not certain
iii) The contract is in its nature revocable
iv) The contract is of a personal nature, e.g.,
Contract to marry
4. Suit for Injunction

It means demanding Courts stay order. Injunction

means an order of the court which prohibits a
person to do a particular act.
Where a party to a contract does something
which he promised not to do, the court may issue
an order prohibiting him from doing so.
Example: W agreed to sing at L S theater only
during the contract period. During the contract
period, W made contract with Z to sing at
another theater and refused to perform the
contract with L. It was held that W could be
restrained by Injunction from singing for Z.
5. Suit for Damages

Damages are monetary compensation allowed

to the injured party for the loss or injury suffered by
him as a result of the breach of contract.
The fundamental principal underlying damages is
not punishment but compensation.
By awarding damages the court aims to put the
injured party into the position in which he would
have been.