BUSINESS LAW

Dr. ANANDA KUMAR

Professor & Head
Department of Mgt. Studies
Christ College of Engg. & Tech.
Puducherry, India.
Mobile: +91 99443 42433
E-mail:
searchanandu@gmail.com
UNIT - 1
Law of Contract – Agreement – Offer –
Acceptance – Consideration – Capacity of
Contract – Contingent Contract – Quasi
Contract – Performance – Discharge –
Remedies to breach of Contract.
LAW
According to Salmond, “Law is those
principles applied by the state in the
administration of justice”.

The term ‘Law’ denotes the principles and

rules that govern and regulate social
conduct and observance of which can be
enforced through courts.
Business Law
Business law refers to those rules and
regulation which govern the formation and
execution of business deals made by various
people in the society.
Commercial Law
Commercial law can be defined as “the rights
and obligations of commercial persons who
deals with commercial transactions in respect of
commercial property”.
The term commercial person means an
individual or a partnership or a company
carrying on a business. It also denotes the
aggregate body of those legal rules which are
connected with trade industry and commerce.
VALID CONTRACT
A contract is an agreement, enforceable by law,
made between at least two parties by which
rights are acquired by one and obligations are
created on the part of another. If the party,
which has agreed to do something, fails to do
that, then the other party has a remedy.
Section 2(h) of the Act defines a contract as “an
agreement enforceable by law”.
ELEMENTS OF CONTRACT
1. an agreement and
2. its enforceability by law
AGREEMENT
Section 2(e) defines an agreement as
“every promise and every set of promises
forming consideration for each other”.
 AGREEMENT

Agreement = Offer +Acceptance

AGREEMENT
An agreement may be social agreement or
a legal agreement. A social or domestic
agreement does not give rise to
contractual obligation and is not
enforceable in the court of law.

It is only those agreements which are

enforceable in the court are contracts.
KINDS OF AGREEMENTS
1. Social Agreements
2. Valid Agreements
3. Void Agreements
4. Voidable Agreements
5. Unenforceable Agreement
6. illegal Agreement
7. Agreements to agree in future
1. SOCIAL AGREEMENT
They are of social nature and do not enjoy the
benefits of law. They are not enforceable and
cannot be called ‘contracts’. An agreement to
attend a marriage or to see a movie are the
examples of social agreements.
Example:
‘A’ invites ‘B’ to a dinner and ‘B’ accepts the
invitation. It is a social agreement. This does
not give rise to contractual obligation, if ‘A’
disappoints ‘B’ on the appointed day.
2. VALID AGREEMENT
It is the sum of (i) an agreement and (ii) an
intention to create legal obligation. Obligations
require the parties must do or abstain from
doing something. However, such an act or
abstinence may relate to social or legal matters.
It is a valid agreement which is enforceable at
law.
3. VOID AGREEMENT
It is an agreement which is not enforceable by
law. (i) An agreement made without
consideration is void. For example, ‘A’
promises for no consideration, to give to ‘B’
Rs.5,000/- This contract is void. (ii) An
agreement, the consideration of which is
unlawful is void. (iii) An agreement is restraint
of marriage of any person, other than a minor is
void, etc.
4. VOIDABLE AGREEMENT
It is an agreement which is enforceable by law at
the option of one or more of the parties thereto,
but not at the option of the other or others.

Example:
‘A’ promises to sell his house to ‘B’ for Rs.2
lakhs. ‘A’ obtained ‘B’s consent by exercising
fraud on the latter. The contract is voidable at
the option of ‘B’.
While a void contract is not at all enforceable
by law, a voidable agreement is
unenforceable only when the party entitles
to the option, avoids the contract.
5. UNENFORCEABLE AGREEMENT
Unenforceable agreements are those which
cannot be enforced in a court of law, by the
reason of a technical defect in procedural
matters.
Example:
‘A’ borrows Rs. 10,000 from ‘B’ and makes a
promissory note and a one rupee stamp is
pasted on the pronote. The agreement though
complete is unenforceable because of the
technical defect i.e., promissory note being
understamped.
5. ILLEGAL AGREEMENT
Illegal agreement are those which are opposed to
the provisions of law or public morals. The
effects of an illegal agreement is that it makes the
transaction between the immediate parties void
and also render the collateral transactions void.
Example:
‘A’ borrows Rs. 10,000/- from ‘B’ for
manufacturing bombs. Manufacture of bomb is
illegal. So, if ‘A’ enters into contract with any
person for manufacture of bombs, that contract
becomes void. ‘B’ also cannot recover money,
if he knows the purpose of the loan taken by
‘A’. If he does not know the purpose, he can
recover the amount from ‘A’.
5. AGREEMENTS TO AGREE IN
FUTURE
An agreement to agree in future is a
contradiction. It is absurd to state that a man
enters into an agreement till of the contracts are
settled. Until the terms are settled, he is free to
retire from the bargain. Moreover, there can be
no binding contract unless all the material
conditions of contract have been agreed upon.
Thus agreement to agree in future is not a
contract.
 CONCLUSION
All contracts are agreements but all
agreements are not contracts

Contract = Agreement + Enforceability by law

Agreement = Offer + Acceptance

ESSENTIALS FOR FORMATION OF
VALID CONTRACT
1. Consensus-ad-idem or Identify of minds
2. Consideration
3. Capacity
4. Free consent
5. The consideration must be lawful
6. The object of the contract must be lawful
7. Agreement not declared void.
8. Certainty & Possibility of performance
9. Legal formalities
1. Consensus-ad-idem
The parties to contract must have agreed about
the subject matter of the contract at the same
time and in the same sense.
Example: ‘A’ has two houses, one at Delhi and
the other at Mumbai. He has offered to sell one
to ‘B’. ‘B’ accepts thinking to purchase the
house at Mumbai, while ‘A’, when he offers, has
in his mind to dispose of the house at Delhi.
There is no consensus-ad-idem.
2. Consideration

“Contract without consideration is void”

It means “something in return”. Every contract must be

supported by consideration. The agreement is legally
enforceable only when both the parties give something and
get something in return. A promise to do something,
getting nothing in return, is usually not enforceable by law.

Example:
‘A’ agrees to sell his house to ‘B’ for Rs.50,000. Here for
‘A’s promise, the consideration is the price and for ‘B’ the
consideration is the house.
3. Capacity
The parties to the agreement must be capable
of entering into a valid contract. Every person
is competent to contract if he (a) is of the age of
majority, (b) is of sound mind, and (c) is not
disqualified from contracting by any law to
which he is subject (Sec. 11 and 12).
For example, a contract by a minor, lunatic,
idiot or drunkard is void.
4. Free Consent
It is essential to the creation of every contract
that there must be a free and genuine consent
of the parties to the agreements. The consent
of the parties is said to be free when they are of
the same mind on all the material terms of the
contract.
5. The consideration must be lawful
The agreement to be enforceable by law must
be supported by consideration. The agreement
is legally enforceable only when both the parties
give something and get something in return.
Example: ‘A’ promises to pay Rs.500/- to ‘B’, in
consideration of ‘B’ murdering ‘C’. The
consideration is illegal.
6. The object of the contract must be
lawful
The object of the agreement must be lawful. In
other words, it must not be (a) illegal, (b) immoral,
or (c) opposed to public policy (Sec. 23). If an
agreement suffers from any legal flaw, it would
not be enforceable by law.
Example:
‘A’ promises to pay Rs.500/- for letting ‘B’s
house for running a brothel. The object is illegal.
Hence, the contract is void.
8. Certainty & Possibility of performance
The agreement must be certain and not vague or
indefinite (Sec.29). If it is vague and it is not
possible to ascertain its meaning, it cannot be
enforced.

Example: ‘A’ agrees to sell to ‘B’ “a 100 tons of

oil”. There is nothing whatever to show what kind
of oil was intended. The agreement is void for
uncertainty.
9. Legal Formalities
A contract may be made by words spoken or
written. As regards the legal effects, there is no
difference between a contract in writing and a
contract made by word of mouth. It is, however,
in the interest of the parties that the contract
should be in written.
CLASSIFICATION or TYPES OF CONTRACTS
1. Classification according to Validity: Valid &
Invalid
2. Classification according to formation
3. Classification on the basis of obligation to
perform
4. Classification on the basis of execution
CLASSIFICATION or TYPES OF CONTRACTS
1. Classification according to Validity: Valid &
Invalid
a. Void contract
b. Void agreement
c. Voidable contract
d. Illegal contract
2. Classification according to formation
a. Formal Contract
b. Express contract
c. Implied Contract
d. Quasi Contract
CLASSIFICATION or TYPES OF CONTRACTS
3. Classification on the basis of obligation to
perform
a. Unilateral contract
b. Bilateral Contract
4. Classification on the basis of execution
a. Executed Contract
b. Executory Contract
a. Void Contract
A contract which ceases to be enforceable by la
becomes void when it ceases to be enforceable
[Sec. (2j)]. It is valid when it is entered into, but
something happens subsequent to the formation
of the contract which makes it void.
b. Void Agreement
An agreement not enforceable by law is said to
be void [Sec. 2 (g)]. A void agreement does not
create any legal rights or obligations.
Example: An agreement with a minor or an
agreement without consideration.
c. Voidable Contract
An agreement which is enforceable by law at the
option of one or more of the parties thereto, but
not at the option of the other or others, is a
voidable contract [Sec. 2 (i)]. This happens when
the essential element of free consent in a contract
is missing.
Example: A promises to sell his car to B for Rs.
2,000. His consent is obtained by use of force.
The contract is voidable at the option of A. He
may avoid the contract.
d. Illegal Contract.
A contract is illegal if it involves the transgression
of some rules of basic public policy and is
criminal in nature and where it is based on
immoral. All illegal agreements are void but all
void agreements or contracts are not necessarily
illegal.
Example: B borrows Rs.5,000 from A and enters
into a contract with an alien to import prohibited
goods. A knows of the purpose of the loan. The
transaction between B and A is collateral to the
main agreement. It is illegal since the main
agreement is illegal.
a. Formal Contract
A formal contract is one to which the law gives
special effect because of the formalities or the
special language used in creating it.
The best example of formal contracts are
negotiable instruments, such as cheques. A
negotiable instrument has legal characteristic that
differ from those of ordinary contracts.
b. Express Contract
If the terms of a contract are expressly agreed
upon (whether by words spoken or written) at the
time of the formation of the contract, the contract
is said to be an express contract. Where the offer
or acceptance of any promise is made is words,
the promise is said to be express (Sec. 9). An
express promise results in an express contract.
c. Implied Contract
An implied contract is one which is inferred from
the acts or conduct of the parties or course of
dealings between them. It is not the result of any
express promise or promises by the parties but of
their particular acts. It may also result from a
continuing course o conduct of the parties.
Where the proposal or acceptance of any
promise is made otherwise than in words the
promise is said to be implied (Sec. 9). An implied
promise results in an implied contract.
c. Implied Contract
For example: ‘A’ enters a hotel, takes coffee and
pays the bill. Here, offer and acceptance are
inferred from the conduct of the parties. In the
same way, where a person enters a public bus, or
obtains a ticket from an automatic teller machine,
there is an implied contract.
d. Quasi Contract
A quasi-contract is not a contract at all. A contract
is intentionally entered into by the parties. A
quasi-contract, on the other hand is created by
law. It resembles a contract in that a legal
obligation is imposed on a party who is required
to perform it.
For example 1: ‘A’ pays the amount by mistake to
‘B’. ‘B’ should refund the amount to ‘A’.
For example 2: T, a tradesman, leaves goods at
C’s house by mistake. C treats the goods as his
own. C is bound to pay T for the goods.
a. Unilateral or One-sided Contract
A unilateral contract is one in which only one
party has to fulfill his obligation at the time o the
formation of the contract, the other party having
fulfilled his obligation at the time of the contract or
before the contract come into existence.
For example, ‘A’ permits a railway coolie to carry
his luggage and place it in a carriage. A contract
comes into existence as soon as the luggage is
placed in the carriage. But by that time the coolie
has already performed his obligation. Now only
‘A’ has to fulfill his obligation, i.e., pay the
reasonable charges to the coolie.
b. Bilateral Contract
A bilateral contract is one in which the obligations
on the part of both the parties to the contract are
outstanding at the time of the formation of the
contract. In this sense, bilateral contracts are
similar to executory contracts.
For example, X agrees to sell 100 bags of paddy
after 30 days to Y and Y agrees to pay for them
after their delivery.
a. Executed Contract

This is also called as unilateral contract in which one

party to the contract has performed his part at the time
of the contract and an obligation is outstanding only
against the other.
Example 1: A has paid Rs.5 to B in consideration of
which, B promised to delivery a book to A. B’s part to
delivery the book is outstanding which A has performed
his part. This is an executed contract.
Example 2: A sells a TV set to B for Rs.20,000. B pays
the price and A hands over TV set to B.
b. Executory contract

An executory contract is one in which both the

parties have not yet performed their obligations.
This is also called as bilateral contract, in which
both the obligations are outstanding.

Example 1: A promise to pay Rs.5 to B, in

consideration of B’s promise to deliver a book.
Both the promises are outstanding. This is called
executory contract.
Void Agreements under the Indian Contract Act
 Agreement with or by incompetent person
(Sec. 11)
 Agreement made under a bilateral mistake of
fact material to the agreement (Sec. 20)
 Agreements of which the consideration or
object are unlawful in full or in part (Sec.23)
(Sec.24)
 Agreements made without consideration
(Sec.25)
 Agreement in restraint of marriage (Sec.26)
 Agreement in restraint of trade (Sec.28)
Void Agreements under the Indian Contract Act
 Agreement in restraint of legal proceedings
(Sec.28)
 Agreement the meaning of which is uncertain
(Sec. 29)
 Agreement to do impossible acts (Sec.56)
Void Agreement & Voidable Contract
1. A void agreement is A Voidable contract can be
without any legal effect and enforced by the party at
hence cannot be enforced whose option it is voidable.
by either party.

2. A void agreement is It become unenforceable

unenforceable from the very only when the party at
beginning. whose option the contract is
voidable rescinds it.
3. The question of
Under a voidable contract
compensation in the event of
any person who has
non-performance of a void
received any benefit must
agreement does not arise,
compensate or restore it to
as it is unenforceable from
the other party.
the very beginning.
Void Agreement & Voidable Contract
4. If the agreement is void
on account of the object or
consideration being illegal or
unlawful, the collateral
agreement will also become
void
5. Third party cannot acquire
any right or title from a
person claiming title under a
void contract.
A voidable contract does not
affect collateral transaction.
Third party can acquire a
valid title from a person
claiming title under a
voidable contract provided
that title has been acquired
by the third party before the
contract is set aside by the
person entitled to do so
Void Agreement & Illegal Agreement
1. The word void is used in
broader sense, it includes
illegal aspects. All void
agreements are not
necessarily illegal
2. Void agreements are not
illegal until they are proved
to be illegal.
3. A void agreement does
not involve collateral
transactions.
4. Void agreements are not
always punishable.
Illegal as a word is used in
narrow sense, it does not
include void. All illegal
agreements are void.
Illegal agreements remains
so from the very beginning.
An illegal agreement vitiates
not only primary transactions
but also collateral
transactions.
Illegal agreements are
always punishable.
FORMATION OF A CONTRACT
1. Offer and acceptance (Sec.2-9)
2. Consideration (Sec.2(d),23-25, 185)
3. Competency to contract (Sec.10-12)
4. Free consent (Sec. 15-18)
5. Lawful object (Sec.23-24)
Offer / Proposal
An offer is a proposal by one party to another to
enter into a legally binding agreement with him.
The person making the offer is known as the
offeror, proposer or promiser and the person to
whom it is made is called the offeree or promisee.

Example: A offers to sell his motor cycle to B for

Rs. 3,000. B agrees to pay A Rs.3,000 for the
motor cycle. Here A is called the offeror or
promisor and B the offeree or promisee.
ESSENTIALS FOR A VALID OFFER
 Terms of the offer must be definite and certain.
 Offer must be communicated.
 Offer must be made to another person. A
person cannot make an offer to himself.
 The expression of willingness must be made
with a view to create legal obligations.
 The offer may be express or implied.
 The offer may be positive or negative.
 An offer may be conditional.
Modes of making an offer (or) Different
kinds of Offer

1. Express offer
2. Implied offer
3. Specific offer
4. General offer
1. Express offer: It means an offer made by
words (whether written or oral). The written offer
can be made by letters telegrams, telex
messages, advertisements, etc. The oral offer
can be made either in person or over telephone.

2. Implied offer: An offer made without using

words is called implied offer. It is derived from
the conduct of the parties. However, silence of a
party can, in no case, amounts to offer by
conduct.
3. Specific offer: An offer addressed to a
particular person with an intention of entering into
a contract only with that particular person, is
called specific offer. A specific offer can be
accepted only by that particular person.

4. General offer: The offer made to the public at

large is a general offer. In the case of general
offer any one of the public can accept it. A
contract will arise only with that particular person
who accepted the offer.
Acceptance [Sec. 2(b)]
Acceptance is an expression by the offeree of his
willingness to be bound by the terms of the offer.
When the person to whom the proposal is made
signifies his assent thereto, the proposal is said to
be accepted.
Example: A offers to sell his horse to B for
Rs.500. B accepts the offer to purchase the horse
for Rs.500. This is acceptance.
Essentials or Legal rules of Valid Acceptance
 Acceptance must be absolute and
unconditional.
 Acceptance must be the person to whom the
offer in made.
 Acceptance made after the knowledge of the
offer is valid.
 Acceptance must be communicated.
 Acceptance must be communicated by the
mode prescribed by the offeror.
 Acceptance must be made within reasonable
time.
 Acceptance may be express or implied; silence
cannot be prescribed as the mode of
acceptance.
 Acceptance must be accepted before rejection
unless the offer is renewed.
 Acceptance must be made before the offer
lapses.
Consideration
One of the essential elements for a valid contract
is the presence of lawful consideration in the
agreement. In other words, an agreement
without consideration is null and void. Such an
agreement is not enforceable by law. According
to Section 25, an agreement made without
consideration is void.
Example: A agrees to sell his house to B for
Rs.50,000. Here for A’s promise, the
consideration is the price and for B the
consideration is the house.
Legal Rules regarding Consideration
Consideration must move at the desire of the
promiser and therefore an act done by the
promisee at the desire of a third party is not a
consideration.
Consideration may move either from the
promisee or any other person.
Consideration need not be adequate. How
much consideration or payment must there be
for a contract to be valid, is always the lookout
of the promisor.
Legal Rules regarding Consideration
Consideration must be real and not illusory.
The consideration becomes illusory when the
act of forming consideration is legally or
physically impossible or is uncertain.
Consideration must be legal. Illegal
consideration renders a contract void.
A consideration may be present, past or future.
Stranger to consideration can also enforce the
contract.
Competency / Capacity to Contract
The parties who enter into a contract must have
the capacity to do so. ‘Capacity’ here means
competence of the parties to enter into a valid
contract. According to Sec.10, an agreement
becomes a contract if it is entered into between
the parties who are competent to contract.
 Minors,
 Persons of unsound mind, and
 Persons disqualified by any law to which
they are subject
Free Consent
Consent (Sec.13). “Two or more persons are
said to consent when they agree upon the same
thing in the same sense.”
Free Consent (Sec.14). Consent is said to be
free when it is not caused by:
(1) Coercion [Sec.15]
(2) Fraud [Sec. 16]
(3) Undue influence [Sec. 17]
(4) Misrepresentation [Sec. 18]
(5) Mistake [Sec. 20,21 and 22]
Free Consent
Example: A is forced to sign a promissory note at
the point of pistol. In this case A knows he is
signing but his consent is not free. The contract
in this case is voidable at his option.
(1) Coercion
According to the Indian Contract Act, coercion is
the committing or threatening to commit any act
forbidden by the Indian Penal Code. It also
includes the unlawful detaining or threatening to
detain any property, to the prejudice of any
person whatsoever.
The intention of the aforesaid act is to force the
other party to enter into an agreement. For
example, ‘A’ compels ‘B’ to sell his house a half
the market price at the point of a gun. ‘A’ has
employed coercion.
(2) Undue Influence
Sometimes a party is compelled to enter into an
agreement against his will as a result of unfair
persuasion by the other party. This happens
when a special kind of relationship exists
between the parties such that one party is in a
position to exercise undue influence over the
other.
(3) Fraud
Section 17 of the Indian Contract Act states that
‘fraud’ means and includes following acts
committed by a party to a contract, or with his
connivance, or by his agent, with intent to deceive
another party thereto or his agent, or to induce
him to enter into the contract.
(4) Misrepresentation
Misrepresentation is a false statement which the
person making it honestly believes to be true or
which he does not know to be false. It means
representation of a statement of fact which is not
true. Based upon the intention of the
misrepresentation it may be classified into (i)
innocent misrepresentation (ii) willful
misrepresentation (fraud), (iii) negligent
misrepresentation, it is voidable at the option of
that party.
(5) Mistake
Mistake may be defined as an erroneous belief
about something. It may be a mistake of law or a
mistake of fact.
Example: A agrees to buy from B a certain
house. It turns out that the house had been
destroyed by fire before the time of the bargain
though neither party was aware of the fact. The
agreement is void as there is a mistake on the
part of the parties about the existence of the
subject matter.
Questions
1. Distinction between Void Agreement and
Voidable Contract.
2. Differences between void agreement and
illegal agreement.
3. Difference between coercion and undue
influence.
4. Distinction between Misrepresentation and
Fraud.
Lawful Object
The last requirement for formation of a valid
contract is that the object of the contract must be
lawful. Object means the purpose of the contract.
If the object of a contract is against the law of the
land, the contract is unlawful or simply void.
Contingent Contract
A ‘contingent contract’ is a contract to do or not to
do something, if some event, collateral to such
contract, does or does not happen (Sec.31).
Where, for example, goods are sent on approval,
the contract is a contingent contract depending
on the act of the buyer to accept or reject the
goods.
Example: A contracts to pay Rs.10,000 if B’s
house is burnt. This is a contingent contract.
Characteristics Contingent Contract
1. Its performance depends upon the happening
or non-happening in future of some event. It is
this dependence on a future event which
distinguishes a contingent contract from other
contracts.
2. The event must be uncertain. If the event is
bound to happen, and the contract has got to
be performed in any case it is not a contingent
contract.
3. The event must be collateral, i.e., incidental to
the contract.
Case 1
A is an employee of B & Co. After leaving the
service, he agrees with B & Co. that he shall not
employ himself in any similar concern within a
distance of 700 miles of the town. Is this restraint
valid?
Case 2
A borrows Rs.500 from B to purchase certain
smuggled goods from C. Can B recover the
amount from A if he (a) knows of A’s purpose for
which he borrows money (b) does not know of
A’s purpose?
Case 3
A grants lease of certain premises at Calcutta to
B for one year, knowing that the premises will be
used for the purpose of (a) prostitution, or (b)
installing machinery for minting base coins, at a
monthly rental of Rs.500. B does not pay the
rent. Can A recover the rent?
Case 4
X promises to drop prosecution which he has
instituted against R for robbery and R promises to
restore the value of things taken. Can X enforce
this promise? If so, give reasons.
Case 5
G pays Rs.500 to A, a civil servant employed in a
government department, in consideration of A’s
promise that a government contract which is at
the disposal of his department will be placed with
G. Before this can be done, A is transferred to
another department. G now wishes to reclaim
from A Rs.500 paid to him. Will G succeed?
Case 6
A promises to pay Rs.500 to B who is an
intended witness in a suit against A in
consideration of B’s absconding himself at the
trail. B absconds but fails to get the money. Can
he recover?
Performance of Contracts
Performance of a contract takes place when the
parties to the contract fulfil their obligations
arising under the contract within the time and in
the manner prescribed. Sec. 37 (para 1) lays
down that the parties to a contract must either
perform or offer to perform, their respective
promises, unless such performance is dispensed
with or excused.
Essentials of Performance of Contracts
 Parties must perform or offer to perform their
obligations themselves.
 In the event of the death of a promisor, his
representative are under a duty to execute such
promise. The legal representatives, however, are not
obliged to perform the contract where performance
requires personal skills and qualities.
 The parties or their representatives need not perform
their obligations where such performance is dispensed
with or excused under the provisions of the Indian
Contract Act or any other law, e.g., an insolvent is not
required to pay his debts and a minor need not perform
his promise.
Assignment of Contracts
Assignment means transfer. When a party to a
contract transfer his right, title and interest in the
contract to another person or persons, he is said
to assign the contract. Assignment of a contract
can take place by (i) operation of law or (ii) an act
of parties. The example of assignment by
operation of law is by insolvency or death of the
party to the contract.
Discharge by Performance
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 come to an end. A contract may be discharged
1. By performance
2. By agreement or consent
3. By impossibilities
4. By lapse of time
5. By operation of law
6. By breach of contract
1. Discharge by Performance
Discharge by performance takes place when the
parties to a contract fulfil their obligations arising
under the contract within the time and in the manner
prescribed. In such a case, the parties are
discharged and the contract comes to an end. But if
only one party performs the promise, he alone is
discharged. Such a party gets a right of action
against the other party who is guilty of breach.
2. Discharge by Agreement or Consent
The rights and obligations created by an agreement
can be discharged without their performance by
means of another agreement between the parties
which provides for the extinguishment of the earlier
rights and obligations. The parties may agree to
terminate the existence of the contract by any of the
following ways.
3. Discharge by Impossibility or
Performance
If an agreement contains an undertaking to perform
an impossibility, is void ab initio. According to
Sec.56, impossibility of performance may fall into
either of the following categories.
 Impossibility existing at the time of agreement.
 Impossibility arising subsequent to the formation
of contract.
4. Discharge by Lapse of time
The Limitation Act, 1963 provides that a contract
should be performed within a specified period. Such
a period is called period of limitation. If the contract
is not performed, and if no legal action is taken by
the promise within the period of limitation, he is
deprived of his remedy at law. In otherwords, the
contract in such a case is terminated.
5. Discharge by Operation of Law
A contract may be discharged independently of the
wishes of the parties, (i.e.,) by operation of law. This
includes discharge
 By death
 By Merger
 By insolvency
 By unauthorized alteration of the terms of a
written agreement
 By rights and liabilities becoming vested in the
same person.
6. Discharge by Breach of Contract
Breach of contract means, breaking of the obligation
which a contract imposes. It occurs when a party to
the contract without lawful excuse does not fulfil his
contractual obligations or by his own act makes it
impossible that he should perform his obligation
under it. It confers a right of action for damages on
the injured party.
Breach of Contract
A breach of contract occurs where a party to a contract
fails to perform, precisely and exactly, his obligations
under the contract. This can take various forms for
example, the failure to supply goods or perform a
service as agreed.
In other word, Violation of any of the agreed-upon terms
and conditions of a binding contract. This breach could
be anything from a late payment to a more serious
violation, such as failure to deliver a promised asset. A
contract is binding and will hold weight if taken to court;
however, proof of the violation is imperative.
Remedies for Breach of Contract
A contract gives rise to correlative rights and obligations.
A right would be of no value if there were no remedy to
enforce that right in the Law Court in the event of its
infringement or breach of contract. A remedy is the
means given by law for the enforcement of a right.
When a contract is broken, the injured party (ie., the
party who is not in breach) has one or more of the
following remedies:
1. Rescission of the contract
2. Suit for damages
3. Suit upon quantum meruit
4. Suit for specific performance of the contract
5. Suit for injunction
1. Rescission of the contract
When a contract is broken by one party, the other
party may sue to treat the contract as rescinded and
refuse further performance. In such a case, he is
absolved of all his obligations under the contract.
Example: A promises B to supply 10 bags of heat
on a certain day. B agrees to pay the price after the
receipt of the goods. A does not supply the goods.
B is discharged from liability to pay the price.
2. Suit for damages
The word damages means compensation in money
which the party who suffers by a breach of contract
is entitled to receive from the party who has broken
the contract. The fundamental principle underlying
damages is not punishment but compensation.
3. Suit upon quantum meruit
“Quantum Meruit” literally means “as much as
earned” or “as much as merited”. When a person has
done some work under a contract, and the other
party repudiates the contract, or some event
happens which makes the further performance of the
contract impossible, then the party who has
performed the work can claim remuneration for the
work he has already done.
4. Suit for specific performance of
the contract
In certain cases of breach of a contract, damages
are not an adequate remedy. The court may, in such
cases, direct the party in breach to carry out his
promise according to the terms of the contract.
5. Suit for Injunction
Where a party is in breach of a negative term of
contract (i.e., where he is doing something which he
promised not to do) the court may, by issuing an
order, restrain him from doing what he promised not
to do. Such an order of the court is known as an
injunction”.
Quasi-Contracts
A quasi-contract has been defined as ‘a situation in which
law imposes upon one person on grounds of natural
justice, an obligation similar to that which arises from a
true contract although no contract, express or implied has
in fact been entered into by them”. A contract is
intentionally entered into by the parties. A quasi-contract,
on the other hand is created by law. It resembles a
contract in that a legal obligation is imposed on a party
who is required to perform it.
For example 1: ‘A’ pays the amount by mistake to ‘B’. ‘B’
should refund the amount to ‘A’.
For example 2: ‘A’ delivers goods to ‘B’ mistaking him to
be ‘C’. ‘B’ must reject goods or pay for them if he accepts
delivery of the goods, as law imposes an obligation upon
him to pay.
UNIT 2
Partnership – Sale of Goods – Law of Insurance.
Define a Sale
The word ‘Sale’ as used in the Sale of Goods Act
means the transfer of ownership of goods by the
seller to the buyer in exchange for a price paid or
promised. Price is the consideration for sale of
the goods
Meaning of Goods
Section 2(7) defines ‘goods’ as every kind of
movable property other than actionable claims
and money. An actionable claim means a debt or
a claim for money which a person may have
against another and which he may recover by suit
(Eg. Promissory note). Money means legal
tender money. Except these two, all other types
of movable property are ‘goods’ under the Act.
Classification/Types of Goods
1. Existing Goods
2. Future Goods
3. Contingent Goods
1. Existing Goods
These are the goods which are owned and
possessed by the seller at the time of sale. Only
existing goods can be the subject-matter of a
sale.
2. Future Goods
These are the goods which a seller does not
possess at the time of the contract but which will
be manufactured, or produced, or acquired by
him after the making of the contract of sale [Sec.
2 (6)]. A contract of present sale of future goods,
though expressed as an actual sale, purports to
operate as an agreement to sell the goods and
not a sale [Sec. 6(3)]. This is because the
ownership of a thing cannot be transferred before
that thing comes into existence.
3. Contingent Goods
According to Section 6(2) contingent goods are
the goods the acquisition of which by the seller
depends upon a contingency which may or may
not happen. Contingent goods come within the
class of future goods.
Example: A agrees to sell specific goods in a
particular ship to B to be delivered on the arrival
of the ship. If the ship arrives but with no such
goods on board, the seller is not liable, for the
contract is to deliver the goods should they arrive.
Contract of Sale
Section.4 defines a contract of sales as “a
contract whereby the seller transfer or agrees to
transfer the property in goods to the buyer for a
price”.
The term ‘Contract of Sale’ includes an actual
sale as an agreement to sell. It may be absolute
or conditional. It may be between one part-owner
and another. When the property in the goods is
transferred, the contract is called a ‘sale’. The
contract is called an ‘agreement to sell’, when the
transfer of property is to take place at a future
time or subject to fulfillment of some condition.
Essentials of a Contract of Sale
1. There must be two distinct parties i.e., a seller
and a buyer.
2. They must be competent to contract.
3. The subject matter of the sale must be a movable
property.
4. The consideration for the sale must be money.
However, it may be partly in money and party in
goods. But it should not be wholly goods.
5. It must fulfill all the essentials of a valid contract.
6. No particular form is necessary to effect a sale. It
may be express or implied.
Condition & Warranty
Condition: A condition is a term which is
essential to the main purpose of the contract and
hence is the foundation of the contract. It goes to
the root of the contract. Its non-fulfilment upsets
the very basis of the contract.
It is defined by Fletcher Moulton L.J. in Wallis v.
Prati, as an “obligation which goes so directly to
the substance of the contract, or in other words,
is so essential to its very nature that its non
performance may fairly be considered by the
other party as a substantial failure to perform the
contract at all”.
Condition & Warranty
Warranty: A warranty is a term which is
collateral to the main purpose of the contract and
hence is only a subsidiary promise. The breach
of warranty does not give right to the aggrieved
party to treat the contract as void but entitles him
to claim damage only. In the absence of contract
to the contrary time of delivery of goods is treated
as condition and for payment of price, as
warranty.
Performance of Sales Contracts
Performance of a sales contract is concerned
with duties of the seller and buyer in sales
contracts. It is the duty of the seller to deliver the
goods and of the buyer to accept and pay for
them, in accordance with the terms of sales
contracts.
Duties of the seller and buyer in
Sales Contracts
 The seller shall be ready and willing to give
possession of the goods to the buyer in
exchange of the price.
 The buyer must pay the price of the goods
according to the terms of the contract.
 If the buyer wrongfully refuses to accept
delivery must pay compensation to the seller.
 Under certain circumstances the buyer is liable
to pay interest on the unpaid price.
Unpaid Seller
A seller of goods is an unpaid seller when (i) the
whole of the price has not been paid or tendered
(ii) a bill of exchange or other negotiable
instrument has been received as conditional
payment and the condition on which it was
received has not been fulfilled by reason of the
dishonour of the instrument or otherwise. The
term seller includes any person who is in the
position of a seller, e.g., an agent of the seller to
whom a bill of lading has been endorsed, or a
consignee or agent who has paid for the goods or
is responsible for the price.
Rights of an Unpaid Seller against
Goods
Rights of an unpaid seller

Rights Against the Goods Rights Against the Buyer

1. When property in goods has passed 1. Suit for price

a. Right of lien 2. Suit for damages
b. Stoppage in transit 3. Right to repudiate the
c. Right of re-sale contract
4. Suit for interest
2. When property in goods has not
passed
a. Withholding delivery
b. Stoppage in transit
c. Re-sale
Partnership
Partnership is the relation between persons who
have agreed to share the profits of a business
carried on by all or any of them acting for all. The
law of partnership is contained in the Indian
Partnership Act, 1932, which came into force on
1’st October, 1932.
Characteristics of Partnership
1. Association of two or more persons
2. Agreement
3. Business
4. Sharing of profits
5. Mutual agency
Relations of Partners to one another
The relations of the partners of a firm to one
another are usually governed by the agreement
among them. Such an agreement may be
expressed or may be implied from the course of
dealings among them. It may be varied by
consent of all of them, and such consent may be
expressed or may be implied by a course of
dealing [Sec. 11 (1)]. Where there is no specific
agreement or where the agreement is silent on a
certain point, the relations of partners to one
another as regards their rights and duties are
governed by Secs. 9 to 17 of the Partnership Act.
Rights of a partner
1. Right to take part in business
2. Right to be consulted
3. Right of access to accounts
4. Right to share in profits
5. Right to interest on capital
6. Right to interest on advances
7. Right to be indemnified
8. Right to the use of partnership property
9. No liability before joining
10.No new partner to be introduced
Duties of a partner
1. To carry on business to the greatest common
advantage
2. To observe faith
3. To indemnify for fraud
4. Not to claim remuneration
5. To share losses
6. To hold and use property of the firm
exclusively for the firm
7. To account for personal profits
8. To act within authority
9. Not to assign his rights
Minor Partner
According to Sec.11 of the Indian Contract Act, an
agreement by or with a minor is void. As such, he is
incapable of entering into a contract of partnership.
But with the consent of all the partners for the time
being, a minor may be admitted to the benefits of
partnership [Sec. 30 (1)]. This provision is based on
the rule that a minor cannot be a promisor, but he
can be a promise or a beneficiary. It should,
however, he noted that a new partnership cannot be
formed with a minor partner. Also, there cannot be
partnership cannot be formed with a minor partner.
Contract of Insurance
A contract of insurance is a contract by which a
person, in consideration of a sum of money,
undertakes to make good the loss of another
against a specified risk, e.g. fire, or to
compensate him or his estate on happening of a
specified event, e.g., accident or death.
Kinds of Insurance
1. Life Insurance: In this case a certain fixed
amount becomes payable on the death of the
assured or on the expiry of a certain fixed period,
whichever is earlier.

2. Fire Insurance: It covers losses caused by

fire.

3. Marine Insurance: It covers all marine

losses, that is to say, the losses incidental to
marine adventure.
Kinds of Insurance
4. Personal accident insurance: In this case, the
amount payable is a compensation for any
personal injury caused to the assured.
Fundamental Elements of Insurance
1. Utmost good faith
2. Indemnity
3. Insurable interest
4. Risk must attach
5. Mitigation of loss
6. Contribution
7. Subrogation
8. Period of insurance
Premium
Premium is the consideration paid by the assured
to the insurer for the risk undertaken by the
insurer. It may be in cash or kind. But usually it
is in the form of cash. It is determined by the
insurer by taking into account the average of
losses and the contributions (in the form of
premiums) that he receives. Besides taking into
account the special circumstances affecting risk
in a particular case, the insurer also keeps a
margins for his overhead and other expenses and
profit.
 Unit - 3
Negotiable Instruments – Notes, Bills,
Cheque – Crossing – Endorsement –
Holder in due Course – Contract of
Agency.
Negotiable Instrument
A negotiable instrument is a written document
which entitles a person to a certain sum of money
and this right to receive money is negotiable
(transferable) from one person to another. As
such, these instruments are used in commercial
and noncommercial transactions to meet financial
obligations. The law pertaining to these is
contained in the Negotiable Instruments Act,
1881.
Essential features or
Characteristics of Negotiable
Instruments
 The property in it passes either by mere
delivery or by endorsement and delivery.
 The holder in due course is not affected by the
defect in the title of his transferor or any
previous party.
 The holder in due course, can sue in his own
name. He need not give notice to the debtor
that he has become the holder.
 He is not affected by certain defects like fraud
to which he is not a party.
Essential features or
Characteristics of Negotiable
Instruments
 Consideration is presumed to have passed.
 It is convenient method of discharging
payments.
 A negotiable instrument is a written document
and may be drawn by pencil, ink or could be
type-written.
Different Kinds of Negotiable
Instruments
 Promissory note
 Bill of Exchange
 Cheque
 Pay order
 Demand draft
 Railway receipt
 Delivery warrants
 Debentures
 Railway bonds payable to bearer etc.
Promissory Note
Sec. 4 of the Act defines it as “an instrument in writing (not being a bank or a currency
note) containing an unconditional undertaking signed by the marker, to pay a certain
sum of money only to, or to the order of a certain person, or to the bearer of the
instrument”. The promissory note is in short called as pronote.
Essentials of a valid promissory
note
1. Writing
2. Promise to Pay
3. The promise must be certain and unconditional
4. It must be signed and delivered by the maker
5. The amount must be certain
6. The amount promised must be Indian currency
7. Parties must be certain
8. Legal Formalities
Bill of Exchange
Section. 5 of the Negotiable Instruments Act defines it as “an instrument in writing,
containing an unconditional order, signed by the maker, directing a certain person to pay
a certain sum of money only to or to the order of, a certain person or to the bearer of the
instrument”.
The person who makes or draws the bill is called drawer. The person on whom it is
drawn is called drawee who becomes an acceptor on acceptance of the bill. The person
to whom the amount is payable is called the payee.
Essentials of bill of exchange
 It must be in writing.
 It must contain an order to pay.
 The order must be unconditional
 It requires three parties i.e., drawer, drawee
and payee.
 It must be signed by the drawer.
 The sum payable must be certain.
 The sum payable must be in legal tender
money in India.
 The formalities relating to date, place and
consideration, though usually found on bills,
are not essential in law.
Promissory note & Bill of
exchange
1. There are two parties in a 1. In a bill of exchange there are
promissory note. They are the three parties, the drawer, the
maker and payee. drawee and the payee.

2. The maker of pronote is the 2. In a bill of exchange the

debtor and he undertakes to drawee is the debtor and the
pay the amount. drawer is the creditor who
directs the drawee to pay.
3. The maker and the payee 3. The drawer and drawee may
cannot be the same person. be the same person. So also
drawer and payee may also be
the same person.
4. Pronote contains an 4. A bill contains an
unconditional promise to pay. unconditional order to pay.
Promissory note & Bill of
exchange
5. The liability of a maker of 5. The liability of the drawer of a
note is primary and absolute. bill is secondary and
conditional.

6. Pronote is signed by the 6. A bill payable after sight or

maker who is liable to pay. after certain period must be
Hence there is no need for accepted by the drawee. It
acceptance of the note. cannot be presented for
payment before it has been
7. In a note the maker stands in 7. In a bill of exchange, after
direct relationship with payee. accepted.
acceptance, the drawer stands
in direct relation with drawee
and not the payee.
Cheque
Cheque is a special kind of bill of exchange.
Sec.6 defines it as follows, A ‘Cheque’ is a bill
of exchange drawn on a specified banker and
expressed to be payable on demand. By this it is
clear that Cheque is a species of bill of
exchange. But all bill of exchanges are not
cheques. In addition to the essentials of a bill of
exchange, the Cheque should satisfy the
following conditions.
 It is always drawn on a specified banker.
 It is always payable on demand.
Bill of Exchange Cheque
1. In a bill the drawee may be 1. In a Cheque the drawee is
any person including bankers. always a banker.

2. A bill requires acceptance 2. A Cheque is always payable

from the drawee before he is on demand.
asked to pay.
3. A bill may be payable on 3. A Cheque is always payable
demand, after sight, or after the on demand.
expiry of certain period.
4. In case of dishonor of a bill 4. Protest for dishonor is not
protest is advisable. necessary.
5. The drawee is not entitled to 5. Special statutory protection is
any special statutory protection. available to the drawee banker.
Bill of Exchange Cheque
6. Three days of grace is 6. No such grace time is
allowed or payment to a bill not allowed.
expressed to be payable on
demand.
7. A bill has to be stamped 7. Stamping is not necessary in
according to the Stamp Act. the case of cheque.

8. Notice of dishonor is 8. Notice of dishonor is not

necessary. necessary.
9. No crossing is allowed. 9. Cheque may be crossed.

10. Payment of a bill cannot be 10. Payment of a Cheque can

stopped or countermanded. be stopped.
Acceptance
A bill of exchange is said to be accepted when the drawee puts his signature on it,
thereby acknowledging his liability under the bill. The usual mode of acceptance is
writing the word “accepted” across the bill and signing under it. The signature may be
put anywhere, on the face of the bill or on the back of it.
Negotiation
Section 14 of the Negotiable Instruments Act lays down that “when a promissory note,
bill of exchange or cheque is transferred to any person, so as to constitute that person
the holder thereof, the instrument is said to be negotiated”. An instrument can be
transferred either by negotiation or by assignment of the instrument as an ordinary
chose-in-action.
Indorsement
The act of a payee, drawee, accommodation
indorser, or holder of a bill, note, check, or
other negotiable instrument, in writing his
name upon the back of the same, with or
without further or qualifying words, whereby
the property in the same is assigned and
transferred to another. That which is so
written upon the back of a negotiable
instrument. One who writes his name upon a
negotiable instrument, otherwise than as a
maker or acceptor, and delivers it. With his
Kinds of Indorsements
1. Blank Indorsement
2. Special Indorsement
3. Conditional Indorsement
i. San recourse
ii. Sans Frais
iii. Faculative Indorsement
iv. Contingent Indorsement
4. Restrictive Indorsement
5. Partial Indorsement
1. Blank Indorsement
When the signature of the indorser is written without any direction to whom or to whose
order the instrument is to be payable, it is called blank indorsement or general
indorsement. By blank indorsement the instrument become payable to the bearer.
2. Special Indorsement
When the indorsement specifies that the amount must be paid to a specified person i.e.,
indorsee or the order of a specified person, it is called special indorsement. A blank
indorsement can easily be converted into a special indorsement. The holder can write
above the indorsee’s signature a direction to pay the instrument to or to the order of
himself or of some other person. Then it will become a special indorsement.
3. Conditional Indorsement
A indorser may by express words exclude his own liability or make the liability
conditional on the happening of a certain events. Such types of indorsement is called
conditional indorsement.

4. Restrictive Indorsement
It is a particular form of conditional indorsement. If the indorser, by express words,
restricts or excludes the indorsees right of further negotiation, it is called restrictive
indorsement.
5. Partial Indorsement
When a part of the amount of the instrument is endorsed, it is called partial indorsement.
It is void. But if the part of the amount of the instrument is already paid, the unpaid
balance may be endorsed.
Liability of the parties to a
Negotiable Instrument
1. Liability of Drawer (Sec.36)
2. Liability of Acceptor or Maker (Sec.32)
3. Liability of Drawee of a Cheque (Sec.31)
4. Liability of Endorser (Sec.35)
5. Liability of Prior Parties to a Holder in Due
Course (Sec.36)
6. Liability of an Agent (Sec.28)
7. Liability of Legal Representative (Sec.29)
8. Liability on an Accommodation Bill (Sec.43)
9. Drawer’s Duty to Issue a Duplicate Instrument
(Sec.45A)
10. Liability of Acceptor for Honour (Sec.111)
Holder
Section 8 defines the holder as follows, the holder of a promissory note, bill of exchange
or cheque means any person entitled in his own name to the possession thereof and to
receive or recover the amount due therein from the parties thereto.
Holder in due course
‘Holder in due course’ means any person who
for consideration and in good faith became the
possessor of a promissory note, bill of exchange
or cheque if payable to bearer, or the payee or
indorsee there of, if payable, to order before the
amount mentioned in it became ‘payable
[Sec.9]. Sec.9 gives the following conditions
for a valid holder in course.
 The holder must have taken the instrument
for valuable consideration.
Holder in due course
 The instrument must be obtained before it is matured.
 He must have taken the instrument in good faith and without notice of any defect in
the instrument or in the title of the person negotiating it to him.
Special Rights of Holder in due
 A holder in due course acquires good title of the instrument even if the title of the
course
transferor (previous holder) is defective (i.e., it was obtained by the transferor by
unlawful means).
 It will be presumed that the holder in due course has obtained the instrument for
consideration.
 In a suit by the holder in due course the maker of a promissory note, or drawer of a
cheque or bill of exchange will be stopped from denying the validity of the
instrument drawn or made.
Special Rights of Holder in due
 Every holder is deemed primafacie to be a holder in due course. The burden of
course
proving his title does not lie on him. But when is shown that the instrument is
obtained by fraud or illegality. The burden of proof of his title lies on the holder in
due course.
 A holder in due course can pass on the same rights, as he has on the instrument,
when he negotiates it to another holder [Sec.5]. Even if the holder in due course
had knowledge of any prior defects.
Material Alteration
Material alteration means tampering with the negotiable
instrument in a manner so as to alter the rights and
liabilities of parties thereto or change the character of the
instrument itself. It may be noted that it is immaterial
whether a material alteration would be beneficial or
detrimental to the interest of the concerned parties.
Example of material alteration:
 The date of the instrument is altered;
 The time of payment is altered;
 The amount is altered;
 The rate of interest is altered;
 The place of payment is altered;
 A new party is added, etc.
Dishonour
A bill may be dishonoured by non-acceptance or non-payment. An instrument is said to
be dishnoured by non-payment when it is not paid by the maker, acceptor or drawee.
Penalties for Dishonour
The negotiable instruments laws (Amendment) Act, 1988 has inserted a new Chapter
XVII in the Negotiable Instruments Act, 1881, undersections 138 to 142 provide for
criminal penalties in the event of dishnour of cheques for insufficiency of funds.
A drawer of a dishonoured cheque shall be deemed to have committed an offence. For
this offence, he shall, be punished with imprisonment for a term which may extend to
two years [increased from one year to two years by the Negotiable Instruments
(Amendment and Miscellaneous) Act, 2002.
Crossing
Crossing means drawing two parallel lines across the face of the cheque with or without
the words “and company” in between the lines. It is a direction to the drawee bank not
to pay the amount at the counter, but only through a bank. It is made to guard payment
against forgery by unscrupulous persons.
Kinds of Crossing
1. General Crossing
2. Special Crossing
1. General Crossing

1 2 3 4
2. Special Crossing

1 2 3 4
Rules of Crossing
 An uncrossed cheque may be crossed
generally or specially by the drawer or the
holder.
 A cheque crossed generally, may be crossed
specially by the holder.
 The holder may add the words “not
negotiable”.
 The banker to whom the cheque is crossed
specially, may recross it but only to another
bank as his agent for collection.
 Where an uncrossed cheque or a cheque
crossed generally is sent to a banker for
Agency
An ‘agent’ is a person employed to do any act for
another or to represent another in dealings with
third persons. The person for whom such act is
done or who is so represented, is called the
“principal”. The transaction is called ‘agency’ (or)
the status of an agent or the relation between the
agent and the principal is called agency.
Nature of Agency
 The law of agency is based on the maxim ‘Qui
facit per alium facit per se’ which means he
who does anything by another does it himself.
It means that an act done through an agent
has the same effect as if it is done by the
principal.
 An agent can create, terminated or alter the
principal’s legal relations with third persons
and thus the principal has a liability to accept
his legal relations altered.
 Agency exists whenever a person can bind
another by acts done on his behalf. When this
Nature of Agency
 The agent is authorized to establish privity of
contract between the principal and third
parties.
 An agent is one who acts according to the
instructions of the principal and can bind the
principal by entering into contracts with other
persons within the scope of his authority.
 No consideration is necessary to create an
agency. The acceptance of the office of an
agent is regarded as sufficient consideration
for the appointment.
Different classes or Kinds of
Agents
Agents may be classified as mercantile and non-mercantile agents and also as general
and special agents. A general agent is appointed to do all acts of a general class e.g.,
managing directors of a limited company. A special agent is appointed for a specific
purpose only. In either case, an agent cannot act beyond his authority and bind the
principal.
Mercantile agents
1. Auctioneer
2. Banker
3. Broker
4. Factor
5. Del credere agent
6. Commission agent
7. Indentor
8. Insurance agent
Rights of Principal
 To recover damages for losses suffered due to agent’s neglect, lack of skill or
flouting the directions of the principal.
 To obtain proper account recover secret profits made by agent and resist his claim
for remuneration.
 To resist agent’s claim for indemnity against liability incurred in case of his acting
as a principal.
Duties of Principal
 The employer of an agent is bound to indemnify him against the consequences of
all lawful acts done by such agent in exercise of the authority conferred upon him.
 The principal must make compensation to his agent in respect of injury caused to
such agent by the principal’s neglect or want of skill.
 An agent who is guilty of misconduct in the business of agency is not entitled to
any remuneration in respect of that party of the business which he has
misconducted.
Rights of an Agent
 He is entitled to remuneration and other
expenses properly incurred by him in the
agency. But if he is guilty of misconduct, he
is not entitled to receive the remuneration.
 He is entitled to retain the goods, papers and
other property movable or immovable, of the
principal for his claims.
 The agent has a right to be indemnified by
the principal for all lawful acts.
 The agent is entitled to be indemnified for the
injury caused to him by the principal’s
neglect or what of skill.
Duties of an Agent
 He should act according to the direction of
the principal and in default, indemnify the
principal for the loss, if any
 In the absence of instructions, he must act
according to the trade custom.
 In case of difficulty he must be diligent in
communicating with the principal and
obtaining his instructions.
 He must conduct the business of agency
with as much skill as is generally possessed
by persons engaged in similar business,
unless the principal has notice of his want of
Duties of an Agent
 He must render proper accounts on demand.
 He must not delegate his authority without
the consent of the principal.
 He must deliver all monies including secret
commission, to the principal. He can deduct
his remuneration and other lawful expenses
spent by him.
 He should not set up his own title or title of
third parties to the goods of the principal in
his hands.
 If, by the nature of profession, an agent is
purported to have special skill, he must
 Termination of Agency

By Act of By Operation of
Parties Law
1. Performance
1. Revocation by the 2. Expiry of time
principal 3. Death of Principal or
2. Renunciation by the agent
agent 4. Insanity of principal or
3. By agreement agent
5. Insolvency of principal
6. Agency becoming
unlawful
7. Destruction of the
Company – Formation – Memorandum –
Articles – prospective – Shares –
Debentures – Directors – Appointment –
Powers and Duties.
Company
The word ‘Company’ is used generally to mean
an association of person having common
objectives. Every association, however is not a
company in the eye of law. Legally, a company
refers to an association which is “registered as a
company” under the Companies Act, 1956.
Characteristics of a Company
 It is a voluntary association of persons.
 It is a creation of law.
 It is incorporated for specific objects only.
 It has a separate legal entity.
 Its members generally, have limited liability.
 Its capital, if any, consists of transferable shares.
 It has separation of ownership and management.
It is a juristic person with a perpetual succession.
 It acts through a common seal.
 As it is a legal person distinct from its members, it
is capable of owning, enjoying and disposing of
property in its own name, and
 It can sue and be sued in its corporate name.
Separate legal entity
A company is in law regarded as an entity
separate from its members. Any of its members
can enter into contracts with it in the same
manner as any other individual can and he
cannot be held liable for the acts of the company
even if he holds virtually the entire share capital.
The company’s money and property belong to the
company and not to the shareholders.
Perpetual succession
A company is a juristic person with a perpetual
succession. It never dies; nor does its life
depend on the life on its members. It is not in
any manner affected by insolvency, mental
disorder or retirement of any of its members.
Since it is created by a process of law, it can
be put an end to only by a process of law
members may come and go but the company
can go on for ever (until dissolved). Perpetual
succession, therefore, means that a
company’s existence persists irrespective of
Types of Companies

Statutory Companies
Classification on the
basis of incorporation Registered Companies
Companies
limited by
Companies with limited
Classification on the shares
liability Companies
basis of liability limited by
Companies with unlimited
shares
liability
Private Company
Classification on the
basis of number of
Public Company
members
Holding Company

Classification on the
basis of control Subsidiary Company

Government
Classification on the Company
basis of ownership
Non-Government Company
I –1. Statutory Companies
These companies are created by a special Act
of the Legislature. e.g., the Reserve Bank of
India, the State Bank of India, LIC, the U.T.I
etc. These companies are concerned with
public utilities, e.g., railways, gas and
electricity companies etc. The provisions of
the Companies Act, 1956 apply to them, if they
are not inconsistent with the provisions of the
special Acts under which they are formed.
I – 2. Registered Companies
This type of companies are formed and
registered under the Companies Act, 1956,
and are by far the most commonly found
companies.
II –1. Companies with limited
liability
Where the liability of the members of a
company is limited to the amount unpaid on
the shared, such a company is known as a
company limited by shares. The liability can
be enforced during the existence of the
company as also during the winding up of the
company. If the shares are fully paid, the
liability of the members holding such shares is
nil. Most of the companies in India belong to
this type.
II –2. Companies limited by
guarantee
In these companies, each member promises
to pay a fixed sum of money in the event of the
liquidation of the company. This amount is
called the guarantee. Sometimes the
members are required to buy a share of a
fixed value and also give a guarantee for a
further sum in the event of liquidation. There
is no liability to pay anything more than the
value of the share (where there is a share) and
the guarantee.
2. Unlimited Companies
A company without limited liability is known as
an unlimited company. In case of such a
company, every member is liable for the debts
of the company, as in an ordinary partnership,
in proportion to his interest in the company.
III – 1. Private Company
A private company means a company which
has a minimum paid-up capital of Rs.1,00,000
or higher and by its Articles, restricts the right
to transfer its shares, limits the number of its
members to 50, prohibits any invitation to the
public to subscribe for any shares in or
debentures of the company and prohibits any
invitation or acceptance of deposits from
persons other than its members, directors or
their relatives.
III – 2. Public Company
A public company is a company which has a
minimum paid-up capital of which is a
subsidiary of a company which is not a private
company. There is no restriction on maximum
number of members in a public company.
IV – 1. Holding Company
A company is known as the holding company
of another company; if it has control over that
other company, if that other is its subsidiary.

IV – 2. Subsidiary Company
A company is known as a subsidiary of
another company when control is exercised by
the latter (called holding company) over the
former called a subsidiary company.
V – 1. Government Company
A Government company is the one in which
not less than 51 percent of the paid-up capital
is held by
(a) The Central Government, or
(b) Any State Government, or
(c) Partly by the Central Government and
partly by one or more State Government
V – 2. Non-Government Company
A non-Government company is controlled and
operated by private capital.
 Private Company Public Company

1. Minimum paid-up Minimum paid-up capital is

capital is Rs.1,00,000 Rs.5,00,000
2. Minimum number of Minimum number of
persons required to form is persons required to form a
2. public company is 7.
3. Maximum number of There is no restriction on
members cannot exceed maximum number of
50. members.
Foreign Company
A foreign company is any company
incorporated outside India which has an
established place of business in India. In a
foreign company, a minimum of 50 percent of
the paid-up share capital is held by one or
more citizens of India or/and by one or more
bodies corporate incorporated in India,
whether singly or jointly and such foreign
company shall comply with such provisions as
may be prescribed as if it were an Indian
company
Formation of a Company
Formation of a company is concerned with a
number of business operations familiar to the
commercial world by which a company is
generally brought into existence. The whole
process of formation of a company may be roughly
divided, for convenience, into there parts. These
are:
 Promotion
 Registration and
 Floatation
Promotor
‘Promotion’ is concerned with the preliminary
steps taken or the purposed for registration
and floatation of the company. The person
who assume the task of promotion of a
company is called a ‘promotor’.
Function of a promotor
 The promotor of a company decides its
name and ascertains that it will be accepted
by the Registrar of companies.
 He settles the details of the company’s
Memorandum and Articles, the nomination
of directors, solicitors, bankers, auditors and
secretary and the registered office of the
company.
 He arranges for the printing of the
memorandum and Articles, the registration
of the company, the time of prospectus,
Duties & Liabilities of a promotor
 The promotor stands in a fiduciary (confidence
and trust) position towards the company.
 He cannot make any secret profits.
 He must disclose to the company whatever
benefits he personally secures for the
formation and floatation of the company
 If any secret profit of undisclosed financial
benefit is made by the promotor, the company
can recover it from him
 The promotor can make a profit provided he
discloses all the facts to the Broad of Directors
of the proposed company.
 Cont…..
 The promotor must give to the company the
benefit of any negotiations or contracts into
which he enters in respect of the company
 The promotor must not make an unfair or
unreasonable use of his position and must take
care to avoid anything which has the
appearance of undue influence or fraud.
 A promotor cannot relieve himself of his liability
by making provisions to that effect in the
Articles of the company
 The promotor must see that the prospectus
contains the necessary particulars and does
Memorandum of Association
The Memorandum of Association of a
company is its character which contains the
fundamental conditions upon which along the
company can be incorporated. It tells us the
objects of the company’s formation and the
utmost possible scope of its operations
beyond which its actions cannot go. Thus, it
defines as well as confines the powers of the
company. If anything is done beyond these
powers, that will ultra vires (beyond powers of)
the company and so void.
Contents of Memorandum of
Association
 The name of the company with the word
“limited” at the end of the name of a public
company and the words “private limited” at
the end of the name of a private company.
 The name of the State in which the
registered office of the company is to be
situated.
 Except in the case of trading corporations
the State or States to whose territories the
objects extend.
 The nature of the liability of the members
Doctrine of Ultra Vires
A company cannot go beyond its objects
mentioned in its memorandum. The
company’s activities are confined strictly to the
objects mentioned in memorandum and if they
go beyond these objects, then such acts will
be ultra vires. The object of declaring such act
as ultra vires is to protect the interests of
shareholders and all others who deal with the
company.
Alteration of Memorandum
Section 16 provides that the company cannot alter
the conditions contained in memorandum except in
the following cases as provided in the Act.
 Change of name of a company by passing a
special resolution.
 Change of registered office of a company
 Alteration of objects clause by a special
resolution
 Alteration of capital clause by an ordinary
resolution
 Alteration of liability clause
Articles of Association
The articles of association of a company and
its bye laws are regulations which govern the
management of its internal affairs and the
conduct of its business. They define the
duties, rights, powers and authority of the
shareholders and the directors in their
respective capacities and of the company and
the mode and form in which the business of
the company is to be carried out.
Subject matter of Articles of
 The business of the company.
Association
 Share capital rights of shareholders,
variation of these rights, payment of
commissions, share certificates.
 The allotment of shares; calls and forfeiture
of shares for non-payment of calls
 Transfer and transmission of shares
 Conversion of shares into stock
 Share warrants
 Exercise of borrowing powers including
issues of debentures
Subject matter of Articles of
Association
 General meetings notices, quorum, proxy,
poll, voting, resolutions, minutes etc
 Number, appointment and powers of
directors
 Dividends and reserves
 Manager and secretary-their appointment
 Accounts and audit
 Keeping of books – both statutory and
others
 Winding up
 Memorandum
1. It is the charter of the
company and defines the
company’s relationship with
outside world.
2. It defines the scope of the
activities of the company,
beyond which the actions of the
company cannot go.
3. It, being the charter of the
company, is the supreme
document
4. Every company must have
its own Memorandum
5. There are strict restrictions own.
on its alteration.
Articles
They are the regulations for the
internal management of the
company.
They are the rules for carrying
out the objects of the company
as set out in the memorandum
They are subordinate to the
memorandum.
A company limited by shares
need not have Articles of its
They can be altered by a
special resolution, to any extent
provided they do not conflict
with the Memorandum and the
Prospectus
A prospectus has been defined in Sec.2(36) of
the Act as “any document described or issued
as a prospectus and includes any notice,
circular advertisement or other document
inviting deposits from the public or inviting
offers from the public for the subscription or
purchase of any shares in or debentures of a
body corporate.
Contents of Prospectus
Part I of Schedule II
1. General Information
2. Capital Structures of the Company
3. Terms of the Present issue
4. Particulars of the Issue
5. Company, management and project
6. Particulars in regard to the company
and other listed companies under the
same management which made any
capital issue during the last 3 years
7. Outstanding Litiation Pertaining
8. Management perception of risk factors
Contents of Prospectus
Part II of Schedule II
1. General Information
2. Financial Information
a. Report by the auditors
b. Reports by the accountants
c. Statutory and other information
 Liability for Misstatements in
Prospectus
Civil liability Criminal
liability

Against the Against the

company directors,
promotors and
experts
Recession Claim for Damages Compensati Damages
of contract damages on under for non-
Sec.62 with complian
Sec.56 ce

For fraudulent For innocent

misrepresentati misrepresentati
Director
The Companies Act, 1956, in Section 2 (13)
defines the term ‘director’ as including any
person occupying the position of a director, by
whatever name called. A person is said to be
occupying the position of a director if he has
been charged, with the responsibility of
managing the affairs of a company and, as
such, performs the duties and functions of
director specified at random in the Companies
Act. A director is also a member of the
governing body of a company (called Board of
Appointment of Director
1. First Directors
2. Appointment by the Company
3. Appointment by Director
a. Additional directors
b. In a casual vacancy
c. An alternate director
4. Appointment by Third Parties
5. Appointment by proportional representation
6. Appointment by the Central Government
Removal of Directors
1. By shareholders
2. By Central Government
3. By Tribunal
Provision regarding powers of
directors
1. Powers Exercisable at Board’s Meetings only
2. Powers Exercisable with Consent of General
Meeting
3. Power Exercisable under Articles
4. Power Exercisable with Consent of Central
Government
Duties of directors
1. Duties under the Companies Act, 1956
2. Duties under Common Law
a. Fiduciary Duties
b. Duties of care, skill and deligence
Provision regarding Liabilities of
directors
1. Liability to third parties
2. Liability to the company
3. Liability for breach of statutory duties
4. Liability for acts of his co-directors
Shares
The capital of a company is divided into
certain indivisible units of a fixed amount.
These units are called shares. ‘Share’ means
share in the share capital of a company. It
includes stock except where a distinction
between stock and share is expressed or
implied [Sec2 (46)].
A share is evidenced by a share certificate. A
share certificate is issued by a company under
its common seal. It specifies the shares held
by a member and is prima facie evidence of
Shares
Types of Shares
1. Preference share
a. Cumulative preference shares
b. Non-cumulative preference shares
c. Participating preference shares
d. Non-participating preference shares
e. Convertible preference shares
f. Non-convertible preference shares
g. Redeemable preference shares
2. Equity shares
1. Preference shares
Preference shares, with reference to any
company limited by shares, are those which
have two characteristics, viz., (a) they have a
preferential right to be paid dividend during the
lifetime of the company and (b) they have a
preferential right to the return of capital when
the company goes into liquidation [Sec.85 (1)]
a. Cumulative preference shares
The dividend payable on these shares goes on
accumulating till it is fully paid off. The
company is, however, bound to pay dividend
only if it has sufficient profits available for
distribution. If it goes into liquidation, no
arrears of dividends are payable unless such
dividends have been declared, or unless the
Articles contain express provisions to this
effect.
b. Non-Cumulative preference
shares
These are the shares on which the dividend
does not go on accumulating. If there are no
profits or there are inadequate profits in any
year, these shares get no divided or get a
partial dividend. They cannot claim arrears of
dividends of any year out of the profits of the
subsequent years. Preference shares are
presumed to be cumulative, unless specially
stated to be otherwise.
c. Participating preference shares
These shares are not only entitled to a fixed
rate of dividend, but also to a share in the
surplus profits which remain after the claim of
the equity shareholders (up to a limit, say 15
per cent) have been met. The surplus profits
are distributed in a certain agreed ratio
between the holders of participating
preference shares and equity shares.
d. Non-participating preference
shares
These shares are entitled to only a fixed rate
of dividend and do not share in the surplus
profits which go to the equity shareholders.

e. Convertible preference shares

The holders of these share have a right to
convert them into equity shares within a
certain period.
f. Non-convertible preference
share
The preference shares without a right of
conversion into equity shares within a certain
period.

g. Redeemable preference shares

A company limited by shares may, if so
authorized by its Articles, issue preference
shares which are to be redeemed.
Debentures
The most usual form of borrowing by a
company is by the issue of debentures.
According to Sec.2(12), ‘debenture’ includes
debenture stock, bonds and any other
securities of a company, whether constituting a
charge on the assets of the company, or not.
Sec.2 (12) does not explain as to what a
debenture really is. In simply words,
‘debenture’ means a document which either
creates a debt or acknowledges it.
Debentures are commonly issued in a manner
similar to the issue of shares through a
Debentures
Kinds of debentures
1. Bearer or unregistered debentures
2. Registered debentures
3. Secured debentures
4. Unsecured or naked debentures
5. Redeemable debentures
6. Perpetual debentures
7. Convertible debentures
1. Bearer or unregistered
debentures
There are debentures which are payable to
bearer. These are regarded as negotiable
instruments and are transferable by delivery,
and a bona fide transferee for value is not
affected by the defect in the title of the prior
holder.
2. Registered debentures
These are debentures which are payable to
the registered holders. A registered holder is
one whose name appears both on the
debenture certificate and in the company’s
register of debentures reuired to be
maintained under Sec.152. He can transfer
them like shares (Sec.108), but a transfer to
be complete has to be registered with the
company. Registered debentures are not
negotiable instruments.
3. Secured debentures
Debentures which create some charge on the
property of the company are known as
secured debentures. The charge may be a
fixed charge or a floating charge.
4. Unsecured or naked debentures
Debentures which do not have any charge on
the assets of the company are known as
unsecured or naked debentures. The holders
of these debentures like unsecured creditors
may sue the company on debentures for the
recovery of the debt.
5. Redeemable debentures
Debentures are usually issued on the
condition that they shall be redeemed after a
certain period. Such debentures are known as
redeemable debentures. They may be re-
issued after redemption in accordance with the
provisions of Sec.121.
6. Perpetual debentures
When debentures are irredeemable, they are
called perpetual debentures. A debentures will
be treated as irredeemable where either there
is no period fixed for payment of the principal
amount or repayment of it is made conditional
on the happening of an event which may not
happen for an indefinite period or may happen
only in certain specified and contingent events,
e.g., the winding up of the company.
7. Convertible debentures
These debentures give an option to the
holders to convert them into preference or
equity shares at stated rates of exchange,
after a certain period. If the holders exercise
the right of conversion, they cease to be
lenders to the company and become members
instead.
Company Administration – Borrowing
Powers, Management and Administration,
Meetings, resolutions, Proceedings –
Management – Accounts – Audit –
Oppression and Mismanagement –
Winding up
Borrowing Powers
As such, every trading company, unless
prohibited by the Memorandum or the Articles,
has implied power to borrow money for the
purposes of its business. It has also the power to
give security for the loan by creating a mortgage
or change on its property. Thus power to borrow
is incidental to the objects of a trading company.
The ground for the rule is that “the exigencies of
commerce render such a power necessary”. A
non-trading company requires express power to
borrow. This power, in case of such a company,
must be taken in the Memorandum or the Articles.
Ultra Vires Borrowing
Borrowing by a company may be a borrowing
which is -
1. ultra vires the company, or
a. Injunction
b. Subrogation
c. Identification and tracing
d. Recovery of damages
2. intra vires the company but ultra vires the
directors
Classification of Meeting
1. Meeting of Shareholders – General
Meetings
a. Statutory report
- Total shares allotted
- Cash received
- Abstract of receipts and payments
- Directors and auditors
- Contracts & underwriting contracts
- Arrears of calls
b. Annual general meetings
c. Extraordinary meetings
2. Class Meetings
3. Meeting of directors
Requisites of a Meeting
1. Proper authority
2. Notice of meeting
3. Quorum for meeting
4. Chairman of meeting
5. Minutes of the meeting
Proxies
A member entitled to attend and vote at a
meeting may vote either in person or by proxy. A
proxy is an authority to represent and vote for
another person at a meeting. It is also an
instrument appointing a person as proxy. The
person so appointed is also called a proxy. A
proxy has no right to speak at the meeting.
Further, he is not entitled to vote except on a poll,
unless the Articles provide otherwise.
Voting and Poll
The resolutions proposed in a general meeting of
a company are decided on the votes of the
members of the company. Every member whose
name appears in the register of members has a
right to vote at a general meeting. A
shareholder’s vote is a right of property. He may
use it in any manner he likes. He is not bound to
exercise it in the best interests of the company.
Resolutions
The questions which generally come for
consideration at the general meetings of a
company are presented in the form of motions. A
motion may be proposed by the chairman of the
meeting or by any other member of the company.
It is then placed before the meeting by the
chairman. Then discussion on the motion takes
place. But before this is done the motion must be
seconded by someone. The motion, after the
close of discussion, is formally put to vote by
show of hands. It may either be carried or
rejected.
Kinds of Resolutions
1. Ordinary resolutions
2. Special resolutions
3. Resolutions requiring special
notice
Books of Account
As required by Sec.209, every company must keep at
its registered office proper books of account with
respect to –
a) all receipts and disbursements of money and the
matters in respect of which the receipts and
disbursements take place;
b) all sales and purchases of goods by the company;
c) the assets and liabilities of the company; and
d) In the case of a company engaged in production,
processing, manufacturing or mining activities,
such particulars relating to utilization of material or
labour or to other items of cost as may be
Auditors
The audit of a joint stock company is intended for
the protection of the shareholders and the auditor
is expected to examine the accounts maintained
by the directors with a view to informing the
shareholders of the true financial position of the
company.
Appointment of Auditors
Every company must, at each annual general
meeting, appoint an auditor or auditors to hold
office from the conclusion of the meeting to the
conclusion of the next annual general meeting .
The company must, within seven days of the
appointment give intimation thereof to every
auditor so appointed. But before any
appointment or re-appointment of any auditor is
made by the company at any annual general
meeting, a written certificate has to be obtained
by the company from the auditor proposed to be
appointed to the effect that appointment or re-
Oppression
 According to the Dictionary meaning of word, is
any act exercised in a manner burdensome, harsh &
wrongful.

 The term ‘oppression’ has been explained by Lord

Cooper as, “The essence of the matter seems to be
that the conduct complained of should at the lowest
involve a visible departure from the standards of fair
dealing, and a violation of the conditions of fair play
on which every shareholder who entrusts his money
to the company is entitled to rely.”
Mismanagement
When the affairs of the company are being
conducted in a manner prejudicial to the public
interest or the company's interest.
OR
When by a reason of material change in the
management or control of he company the affairs
of the company are likely to be conducted in a
manner prejudicial to the public interest or the
company's interest.
Winding Up of Companies
A company comes into existence by a legal
process known as ‘incorporation’ and likewise
ceases exist also by another legal process
called ‘winding-up’ “winding-up of a company
is the process whereby its life is ended and its
property administrated for the benefit of its
creditors and members. An administration
called a liquidator is appointed and he takes
control of the company, collects its assets,
pays its debts and finally distributes any
surplus among the members in accordance
Modes of Winding Up
 Compulsory winding up by the court.
 Voluntary winding up by members as well as
creditors of the company.
 Winding up under the supervision of the
court.