LEGAL ASPECTS OF BUSINESS

UNIT - I

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.

LAW OF CONTRACT

It is that branch of law which determines the circumstances in which promises made by the parties to a contract shall be legally binding on them.

INDIAN CONTRACT ACT, 1872

Deals with: The general principles of the law of

contract Some of the special contracts

(indemnity and guarantee, bailment and pledge)

CONTRACT

A contract is an agreement made between two or more parties which the law will enforce.

Sec 2 (h ) defines contract as follows: Contract is an agreement enforceable

by law.

ELEMENTS OF CONTRACT

Agreement Its enforceability by law.

AGREEMENT

Every promise and every set of promises , forming consideration for each other.

AGREEMENT = OFFER + ACCEPTANCE

PROMISE

When the person to whom the proposal is made signifies his assent thereto , the proposal is said to be accepted. A proposal when accepted becomes a promise.

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

Offer and acceptance Intention to create legal relationship Lawful consideration Capacity of parties – competency Free and genuine consent Lawful object Agreement not declared void Certainty and possibility of performance Legal formalities

CLASSIFICATION OF CONTRACTS

Classification according to validity Classification according to formation Classification according to performance

CLASSIFICATION ACCORDING TO VALIDITY

Voidable contract Void agreement Void contract Illegal agreement Unenforceable contract

CLASSIFICATION ACCORDING TO FORMATION

Express contract Implied contract Quasi-contract E-commerce contract

CLASSIFICATION ACCORDING TO PERFORMANCE

Executed contract Executory contract Unilateral or one – sided contract Bilateral contract

VOID AGREEMENTSA void agreement is one which is not

enforceable by law. Agreements the meaning of which is

uncertain Wager agreements or wagerFollowing agreements are declared

void: Agreement by incompetent parties Agreements to do impossible acts Agreements in restraint of trade Agreement in restraint of marriage

ESSENTIALS OF A WAGERING AGREEMENT

Promise to pay money Uncertain event Each party must stand to win or lose No control over the event No other interest in the event

PERFORMANCE OF CONTRACT

Performance of a contract takes place when the parties to the contract fulfill their obligations arising under the contract within the time and in the manner prescribed

OFFER TO PERFORM

Where a promisor has made an offer of performance to the promisee, and the offer has not been accepted the promisor is not responsible for non performance , nor does he thereby lose his rights under the contract.

BY WHOM MUST CONTRACTS BE PERFORMED?

Promisor himself Agent Legal representatives Third persons Joint promisors

WHO CAN DEMAND PERFORMANCE?

It is only the promisee who can demand performance of the promise under a contract.

TIME AND PLACE OF PERFORMANCE

Where no application is to be made and no item is specified

Where time is specified and no application is to be made

Application for performance on a certain day and place

Application by the promisor to the promisee to appoint place

Performance in manner or at time prescribed or sanctioned by the promisee

RECIPROCAL PROMISESPromises which form the consideration

or part of the consideration for each other are called reciprocal promises.

They are classified as follows: Mutual and independent Conditional and dependent Mutual and concurrent

RULES REGARDING PERFORMANCE OF RECIPROCAL PROMISES

Simultaneous performance of reciprocal promises

Order of performance of reciprocal promises

Effect of one party preventing another from performing promise

Effect of default as to promise to be performed first

Reciprocal promise to do things legal an also other things illegal

TIME AS THE ESSENCE OF CONTRACT

It means that the performance of the promise by a party to the contract is essential within the specified period, in order to entitle him to enforce performance from the other party.

When time is of the essence When time is not of the essence

APPROPRIATION OF PAYMENTS Where the debtor intimates Where the debtor does not intimate

and the circumstances are not indicative

Where the debtor does not intimate and the creditor falls to appropriate

BREACH OF CONTRACT

Breach of contract means breaking of the obligation which a contract imposes.

It may be: Actual breach of contract Anticipatory or constructive breach of

contract

REMEDIES FOR 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 has one or more of the following remedies:

Rescission of the contract Suit for damages Suit upon quantum meruit Suit for specific performance of the

contract Suit for injunction.

QUASI - CONTRACTSUnder certain circumstances, a person

may receive a benefit to which the law regards another person as better entitled, or for which the law regards another person as better entitled , or for which the law considers he should pay to the other person, even though there is no contract between the parties.

Such relationships are termed as quasi-contracts.

Law of quasi-contracts is also known as the law of restitution.

KINDS OF QUASI - CONTRACTS Supply of necessaries Payment by an interested person Obligation to pay for non – gratuitous

acts Responsibility of finder of goods Mistake or coercion

QUANTUM MERUIT Means “as much as earned” or “ as much as is

merited” The claim for quantum meruit arises in the

following cases: When an agreement is discovered to be void When something is done without any intention to do

so gratuitously When there is an express or implied contract to

render services but there is no agreement as to remuneration.

When the completion of the contract has been prevented by the act of the other party to the contract

When a contract is divisible

SALE OF GOODS ACT , 1930

CONTRACT OF SALE OF GOODS

A contract of sale of goods is a contract whereby the seller transfer the property to goods to the buyer for a price.A contract of sale may be absolute or conditional.

SALE AND AGREEMENT TO SELL Where under a contract of sale, the

property of goods is transferred from the seller to the buyer, the contract is called “sale”, but where the transfer of the property in the goods is to take place at a future time or subject to some conditions thereafter to be fulfilled, the contract is called an “agreement to sell”.

ESSENTIALS OF A CONTRACT OF SALE Two parties Goods Price Transfer of general property Essential elements of a valid contract

SALE AND AGREEMENT TO SELL-DISTINCTION

SALE AGREEMENT TO SELL

TRANSFER OF PROPERTY

EXECUTED CONTRACT EXECUTARY CONTRACT

TYPE OF GOODS EXISTING AND SPECIFIC GOODS ONLY

FUTURE AND CONTINGENT GOODS

RISK OF LOSS LOSS FALLS ON BUYER

LOSS FALLS ON THE SELLER

CONSEQUENCES OF BREACH

SELLER CAN SUE FOR THE PRICE

SELLER CAN SUE FOR DAMAGES

RIGHT TO RE-SELL SELLER CANNOT RESELL THE GOODS

RESALE IS POSSIBLE

GENERAL AND PARTICUALR PROPERTY

CONTRACT PLUS CONVEYANCE

MERELY A CONTRACT

INSOLVENCY OF BUYER

SELLER MUST PAT TO BUYER

SELLER DOES NOT PART WITH THE GOODS

INSOLVENCY OF SELLER

BUYER CAN RECOVER GOODS FROM SELLER

BUYER CAN CLAIM RERATEABLE DIVIDEND

HIRE – PURCHASE AGREEMENT

A hire-purchase agreement is a contract whereby the owner of the goods lets them on hire to another person called hirer or hire purchaser on payment of rent to be paid in installments and upon an agreement that when a certain number of installments are paid, the property in the goods will pass to the hirer.

DISTINCTION BETWEEN SALE AND HIRE-PURCHASESALE HIRE – PURCHASE

OWNERSHIP IS TRANSFERRED FROM THE SELLER TO THE BUYER

OWNERSHIP IS TRANSFERRED FROM SELLER TO THE HIRE PURCHASER

POSITION OF BUYER IS THAT OF OWNER

POSITION OF HIRE PURCHASER IS THAT OF BAILEE

BUYER CANNOT TERMINATE THE CONTRACT

HIRE PURCHASER HAS AN OPTION TO TERMINATE THE CONTRACT

IF BUYER MAKES THE PAYMENT IN INSTALLMENTS, AMOUNT PAYABLE GETS REDUCED

INSTALLMENTS PAID BY THE HIRE-PURCHASER ARE REGARDED AS HIRE CHARGES

SUBJECT MATTER OF CONTRACT OF SALE

•Goods form the subject-matter•Actionable claims and money, are not goods CLASSIFICATION OF GOODS•EXISTING GOODS Specific goods ascertained goods Unascertained or generic goods•FUTURE GOODS•CONTINGENT GOODS

EFFECT OF DESTRUCTION OF GOODS Goods perishing before making of

contract Goods perishing after the agreement

to sell but before the sale is effected

THE PRICE

Ascertainment of price Agreement to sell at valuation

STIPULATIONS AS TO TIME

Stipulations relating to time of payment

Stipulations not relating to time of payment

CONDITION

A condition is a stipulation which is essential to the main purpose of the contract.

Its non-fulfillment upsets the very basis of the contract.

WARRANTY

It is a stipulation which is collateral to the main purpose of the contract.

It is not of vital importance as a condition is.

CONDITION AND WARRANTY - DIFFERENCE

CONDITION WARRANTY

DIFFERENCE AS TO VALUE

ESSENTIAL TO THE MAIN PURPOSE OF THE CONTRACT

COLLATERAL TO THE MAIN PURPOSE OF THE CONTRACT

DIFFERENCE AS TO BREACH

IN CASE OF BREACH THE AGGRIEVED PARTY CAN REPUDIATE THE CONTRACT OF SALE

THE AGGRIEVED PARTY CAN CLAIM DAMAGES ONLY

DIFFERENCE AS TO TREATMENT

BREACH OF CONDITION IS TREATED AS BREACH OF WARRANTY

BREACH OF WARRANTY CANNOT BE TREATED AS BREACH OF CONDITION

IMPLIED CONDITIONS Condition as to title Sale by description Condition as to quality or fitness Condition as to merchantability Condition implied by custom Sale by sample Condition as to wholesomeness

IMPLIED WARRANTIES Warranty of quiet possession Warranty of freedom from

encumbrances Warranty as to quality or fitness by

usage of trade Warranty to disclose dangerous

nature of goods

CAVEAT EMPTOR

This means “let the buyer beware”, i.e., in a contract of sale of goods the seller is under no duty to reveal unflattering truths about the goods sold.

TRANSFER OF PROPERTY

STAGES IN PERFORMANCE OF A CONTRACT OF SALE OF GOODS

•The transfer of property in the goods•The transfer of possession of the goods•The passing of the risk

PASSING OF PROPERTY

Rules for ascertaining when the property in goods passes to the buyer:

Goods must be ascertained Intention of the parties

PERFORMANCE OF CONTRACT

PERFORMANCE OF CONTRACT

Performance of contract of sale means as regards the seller, delivery of the goods to the buyer, acceptance of the delivery of the goods and payment for them, in accordance with the terms of the contract of sale.

DELIVERY OF GOODS

It means voluntary transfer of possession of goods from one person to another.

TYPES OF DELIVERY Actual delivery Symbolic delivery Constructive delivery or delivery by

attornment

RULES AS TO DELIVERY OF GOODS Mode of delivery Delivery and payment concurrent conditions Effect of part delivery Buyer to apply for delivery Place of delivery Time of delivery Goods in possession of third party Cost of delivery Delivery of wrong quantity Installment deliveries Delivery to a carrier or wharfinger

RIGHTS OF THE BUYER Right to have delivery as per contract Right to reject the goods Right to repudiate Right to notice of insurance Right to examine Rights against the seller for breach of

contract suit for damages suit for price Suit for specific performance Suit for breach warranty

DUTIES OF THE BUYER Duty to accept the goods and pay for them in

exchange for possession Duty to apply for delivery Duty to demand delivery at a reasonable hour Duty to accept installment delivery and pay

for it Duty to take risk of deterioration in the course

of transit Duty to intimate the seller where he rejects

the goods Duty to take delivery Duty to pay price Duty to pay damages for non-acceptance

RIGHTS OF AN UNPAID SELLER

AN UNPAID SELLER

A seller of goods is deemed to be an unpaid seller when – • the whole of the price has not been paid or tendered• a bill of exchange or other negotiable instrument has been received as a conditional payment, and the condition on which it was received has not been fulfilled by reason of the dishonor of the instrument or otherwise.

RIGHTS OF AN UNPAID SELLER Rights of an unpaid seller against the

goods right of lien right of stoppage in transmit right of re-sale Rights of an unpaid seller against the

buyer personally suit for price suit for damages for non-acceptance repudiation of contract before due

date suit for interest

REMEDIES FOR BREACH OF CONTRACT OF SALE

Seller’s suits Suit for price Suit for damages for non-acceptance of the goods Suit for damages for repudiation of contract by

the buyer before due date Suit for interest Buyer’s suits suit for damages for non-delivery of the goods suit for specific performance suit for breach of warranty suit for repudiation of contract by the seller before

due date suit for interest

NEGOTIABLE INSTRUMENTS

A negotiable instrument is a document which entitles a person to a sum of money and which is transferable from one person to another by mere delivery or by indorsement and delivery

CHARACTERISTICS OF NEGOTIABLE INSTRUMENT

Freely transferable Title of holder free from all defects Recovery presumptions

TYPES OF NEGOTIABLE INSTRUMENTS

Negotiable by statute – promissory notes, bills of exchange, cheque

Negotiable by custom or usage - exchequer bills, bank notes, debentures, circular notes

PROMISSORY NOTE

A promissory note is an instrument in writing containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or to order of, a certain person, or to the bearer of the instrument

ESSENTIAL ELEMENTS OF PROMISSORY NOTE

Writing Promise to pay Definite and unconditional Signed by the maker Certain parties Certain sum of money Promise to pay money only Bank note or currency note is not a promissory

note Formalities like number, date, place,

consideration It may be payable on demand It cannot be made payable to bearer on demand

BILL OF EXCHANGE

A bill of exchange is 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

PARTIES TO THE BILL: DRAWER DRAWEE PAYEE

ESSENTIAL ELEMENTS 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 the parties must be certain It must be signed by the drawer The sum payable must be certain It must contain an order to pay money It must be affixed with the necessary

stamp

CHEQUE

A cheque is a bill of exchange drawn upon a specified banker and payable on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.

CROSSING OF CHEQUES

A crossed cheque is one on which two parallel transverse lines with or without the words “& Co” are drawn.

TYPES OF CHEQUES: open cheques crossed cheques

TYPES OF CROSSING

General crossing Special crossing Restrictive crossing

CLASSIFICATION OF NEGOTIABLE INSTRUMENTS

Bearer and order instruments Inland and foreign instruments Instruments payable on demand Time instruments

PARTIES TO A NEGOTIABLE INSTRUMENT

CAPACITY OF PARTIES

Every person is competent to contract who is of the age of the majority according to the law to which he is subject, and is of sound mind and is not disqualified from contracting by any law to which he is subject

PARTIES TO A BILL OF EXCHANGE

Drawer Drawee Acceptor Payee Holder Indorser Indorsee Drawee in case of need Acceptor for honour

PARTIES TO A PROMISSORY NOTE Maker Payee Holder Indorser Indorsee

PARTIES TO A CHEQUE

Maker Drawee Payee Holder Indorser Indorsee

HOLDER

Any person entitled in his own name(1) To the possession thereof(2) To receive or recover the amount due

thereon from the parties thereto.

HOLDER IN DUE COURSEAny person is a holder in due course if

he fulfills the following conditions:(1) That for consideration he became the

possessor or the payee or indorsee(2) That he became the holder of the

instrument before its maturity(3) That he became the holder of the

instrument in good faith

PRIVILEGES OF A HOLDER IN DUE COURSE

Inchoate stamped instrument Liability of prior parties Fictitious payee Negotiable instrument without consideration Conditional delivery Instrument cleansed of all defects Instrument obtained by unlawful means or for unlawful

consideration Every holder is a holder in due course Estoppel against denying original validity of instrument Estoppel against denying capacity of payee to indorse Indorser not permitted to deny the capacity of prior

parties

LIABILITY OF PARTIES TO NEGOTIABLE INSTRUMENTS

Liability of drawer Liability of drawee of cheque Liability of maker of note and acceptor

of bill Liability of indorser Liability of prior parties to a holder in

due course General rules regarding liability Acceptor’s liability on a forged

indorsement Acceptor’s liability for a bill in a

fictitious name

TRANSFER OF NEGOTIABLE INSTRUMENT

Transfer by negotiation negotiation by delivery negotiation by indorsement and

delivery Transfer by assignment

INDORSEMENT

It means writing on an instrument Indorser – person who so signs the

instrument Indorsee – person to whom the

instrument is indorsed

DISCHARGE OF A NEGOTIABLE INSTRUMENT

The term discharge is used in two senses:

(1) Discharge of the instrument(2) Discharge of one or more of the

parties from liability thereon An instrument is said to be

discharged when all rights of action under it are completely extinguished and when it ceases to be negotiable.

MODES OF DISCHARGE OF AN INSTRUMENT

By payment in due course By party primarily liable becoming

holder By express waiver By cancellation By discharge as a simple contract

DISCHARGE OF A PARTY By payment By cancellation By release By allowing drawee more than forty-eight hours By non-presentment of cheque Cheque payable to order Draft drawn by one branch on another Parties not consenting discharged by qualified

acceptance By operation of law By material alteration Discharge by payment of altered instrument

AGENCY

AGENT AND PRINICIPAL - DEFINITION

•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.

ESSENTIALS OF RELATIONSHIP OF AGENCY

Agreement between the principal and the agent

Intention of the agent to act on behalf of the principal.

RULES OF AGENCY Whatever a person can do

personally, he can do through an agent

He who does not act through another does it by himself

CREATION OF AN AGENCY By express agreement By implied agreement By ratification By operation of law

CLASSIFICATION OF AGENTS Special agent General agent Universal agent Commission agent Del credere agent

DUTIES OF AGENT To carry out the work undertaken according to the

directions given by the principal To carry out the work with reasonable care, skill and

diligence To render proper accounts to his principal To communicate with the principal in case of difficulty Not to deal on his own account To pay sums received for the principal To protect and preserve the interests of the principal in

case of his death or insolvency Not to use information obtained to the course of the

agency against the principal Not make secret profits Not to set up an adverse title Not to put himself in a position where the interest and duty

conflict Not to delegate authority

RIGHTS OF AN AGENT

Rights of retainer Right to receive remuneration Right of lien Right of indemnification Right of compensation Right to stoppage in transit

DUTIES OF PRINCIPAL

To indemnify the agent against the consequences of all lawful acts

To indemnify the agent against the consequences of acts done in good faith

To indemnify agent for injury caused by principal’s neglect

RIGHTS OF PRINCIPAL

To recover damages To obtain an account of secret profits

and recover them and resist a claim To resists agent’s claim for indemnity

against liability incurred

AGENT’S AUTHORITY Actual or real authority Ostensible or apparent authority

POSITION OF PRINCIPAL AND AGENT IN RELATION TO THIRD PARTIES

The relationship is discussed under three heads:

Where the principal is named Where the principal is unnamed Where the principal is undisclosed

NAMED PRINCIPAL

The position of the named principal for the acts of his agent are as follows:

Acts of the agent are the acts of the principal

When the agent exceeds his authority Notice given to agent as notice to

principal Principal inducing belief that agent’s

unauthorized acts were authorized Misrepresentation or fraud of agent

UNNAMED PRINCIPAL

When an agent contracts as an agent for a principal but does not disclose his name, the principal is liable for the contract of the agent, unless there is a trade custom or a term, express or implied, to the effect which makes the agent personally liable.

UNDISCLOSED PRINCIPAL

An agent not only conceals the name of the principal but also the fact that he is an agent.

PERSONAL LIABILITY OF AGENT When the contract expressly provides When the agent acts for a foreign capital When he acts for an undisclosed principal When he acts for a principal who cannot be sued Where he signs a contract in his own name Where he acts for a principal not in existence Where he is liable for breach of warranty of

authority Where he receives or pays money by mistake or

fraud Where his authority is coupled with interest Where the trade usage or custom makes him

personally liable

TERMINATION OF AGENCY Termination of agency by act of the parties agreement revocation by the principal revocation by the agentTermination of agency by operation of law performance of the contract expiry of time death and insanity destruction of subject matter principal becoming an alien enemy dissolution of a company termination of sub-agent’s authority

IRREVOCABLE AGENCY

When an agency cannot be terminated or put an end to, it is said to be an irrevocable agency

An agency is irrevocable in the following cases:

Where the agency is coupled with interest

Where the agency has incurred a personal liability

Where the agent has partly exercised the authority