MB 0035

LEGAL ASPECTS OF BUSINESS

ASSIGNMENT – 1

Q.1. What are the essentials for a Valid Contract? Describe

them in details.

Ans.1. Essentials Of A Valid Contract :- All

contracts are agreements but all agreements need not be
contracts. The agreements that create legal obligations
only are contracts. The validity of an enforceable
agreement depends upon whether the agreement
satisfies the essential requirements laid down in the Act.
Section 10 lays down that ‘all the agreements are
contracts if they are made by the free consent of the
parties competent to contract for a lawful object and are
not hereby expressly declared to be void’.

The following are the essentials:-

a) Agreement :- An agreement which is preliminary

to every contract is the outcome of offer and
acceptance. An offer to do or not to do a particular act
is made by one party and is accepted by the other to
whom the offer is made. Then we say that there is a
meeting of the minds of the parties. Such a position is
known as consensus ad idem.
b) Free Consent :- The parties should agree upon the
same thing in the same sense and their consent should
be free from all sorts of pressure. In other words it
should not be caused by coercion, undue influence,
misrepresentation, fraud or mistake.

c) Contractual Capacity:- The parties entering into

an agreement must have legal competence. In other
words, they must have attained the age of majority,
should be of sound mind and should not be disqualified
under the law of the land. A contract entered into
between the parties having no legal capacity is nullity
in the eyes of law.
d) Lawful Consideration:- There must be
consideration supporting every contract. Consideration
means something in return for something. It is the
price for the promise. An agreement not supported by
consideration becomes a ‘nudum pactum’ i.e., naked
agreement. The consideration should be lawful and
adequate. However, there are certain exceptions to
this rule.
e) Lawful Object :- The object or purpose of an
agreement must be lawful. It should not be forbidden
by law, should not be fraudulent, should not cause
injury to the person or property of another, should not
be immoral or against public policy.

f) Not Expressly Declared Void:- The statute

should not declare an agreement void. The Act itself
has declared certain types of agreements as void. E.g.,
agreements in restraint of marriage, trade, legal
proceedings. In such cases, the aggrieved party can’t
seek any relief from the court of law.
g) Possibility Of Performance:- The
agreement should be capable of being performed. e.g.,
Mr. A agrees with Mr. B to discover treasure by magic.
Mr. B can’t seek redressed of the grievance if Mr. A
fails to perform the promise.

h) Certainty Of Terms:- The terms of the agreement

should be certain. E.g., Mr. A. agrees to sell 100 tons
of oil. The agreement is vague as it does not mention
the types of oil agreed to be sold.

i) Intention To Create Legal Obligation:- Though

Sec. 10 is silent about this, under English law this
happens to be an important ingredient. Therefore,
Indian courts also recognize this ingredient. An
agreement creating social obligation can’t be
enforced.
j) Legal Formalities:- Indian Contract Act deals with
a simple contract supported by consideration.
Agreements made in India may be oral or written.
However, Sec. 10 states that where the statute states
that the contract should be in writing and should be
witnessed or should be registered, the same must be
observed. Otherwise, the agreement can’t be enforced
e.g., Under Indian Companies Act, the Memorandum of
 Association and Articles of Association must be
registered.

Q.2. What are the rules regarding the acceptance of a

proposal? Describe them in details.

Ans.2. Rules Regarding Acceptance:-

a) An Offer Can Be Accepted Only By The Person

To Whom It Is Made:- The offered only has to
accept the offer. In case it is accepted by any other
person no agreement is formed. However, in case
authority is given to another person to accept the offer
on behalf of the person to whom it is made, it is a valid
acceptance.
b) Acceptance Should Be Unconditional And
Absolute:- Sec. 7 (I) states that the acceptance
should be absolute and unconditional. The acceptor
should accept the offer in toot. If it is qualified or
conditional, it ceases to be valid. In fact, a qualified or
conditional acceptance is nothing but a counter-offer.

c) Acceptance Should Be Communicated:- The

party accepting the offer must communicate his
acceptance to the offeror. Acceptance is not a mental
resolve but some external manifestation. The
acceptance can be communicated in writing or word of
mouth or also by conduct. An agreement does not
result from a mere state of mind.

As regards unilateral contracts (e.g., offer of reward) it

is impossible to the offeree to communicate his
acceptance otherwise than by performing the contract.
In the case of bilateral contracts acceptance must be
communicated. The offeror can’t force a contract on
offeree by fixing the mode of refusal. Further,
acceptance should be communicated only to the
offeror and not to somebody else.

d) Acceptance Should Be According To The

Prescribed Form:- Unless specified in the offer
the acceptance must be in some usual and reasonable
manner. The proposer has the right to prescribe the
manner of acceptance. He may require it to be oral or
 in writing or to be communicated to him by phone or
telephone etc. He can also waive his right or may ask
the offeree to express acceptance by some gesture.
Once he prescribes the mode of communication later
he can’t say that it was insufficient.

If the offeree does not signify his assent to the offeror

according to the mode prescribed it becomes ‘deviated
acceptance’ and strictly speaking it is no acceptance
at all. However, such a rebid rule is not followed in
India. In the case of deviated acceptance the proposer
may insist for the acceptance in the prescribed
manner. He then has to do this within a reasonable
time after communication of acceptance to him.
Otherwise it will be presumed that the proposer has
accepted the deviated acceptance. Sec. 7 of the Act
does not tell that deviated acceptance is no
acceptance.

e) Acceptance Must Be Provoked By Offer:- The

acceptor must be aware of the offer. Even if he fulfills
the conditions mentioned in the offer, if he is ignorant
of the offer itself, he can’t give a valid acceptance.

f) Acceptance Must Be Given Before The Offer

Lapses Or Is Revoked:- Where a time limit has
been fixed the acceptor has to accept the offer within
such time. Where no time limit is prescribed the
acceptance has to be within the reasonable time. An
offer once dead can’t be accepted unless there is a
fresh offer.
g) Provisional Acceptance Is No Acceptance:- A
provisional acceptance does not make a binding
agreement unless final approval is given. The offer
may be withdrawn before giving final approval.
However, whether an agreement is provisional or final
depends upon the intention of the parties.

Q.3. What is the difference between fraud and

misinterpretation? What do you understand by mistake?

Ans.3. Distinction Between Fraud And

Misrepresentation:-
1. In misrepresentation the person making the false
statement honestly believes it to be true. In fraud, the
false statement is made by person who knows that it is
false or he does not care to know whether it is true or
false.

2. There is no intention to deceive the other party when

there is misrepresentation of fact. The very purpose of
fraud is to deceive the other party to the contract.

3. Misrepresentation renders the contract voidable at the

option of the party whose consent was obtained by
misrepresentation. In the case of fraud the contract is
voidable. It also gives rise to an independent action in
tort for damages.

4. Misrepresentation is not an offence under Indian Penal

Code and hence not punishable. Fraud, in certain cases
is a punishable offence under Indian Penal Code.

5. Generally, silence is not fraud except where there is a

duty to speak or the relation between parties is
fiduciary. Under no circumstances can silence be
considered as misrepresentation.

6. The party complaining of misrepresentation can’t

avoid the contract if he had the means to discover the
truth with ordinary diligence. But in the case of fraud,
the party making a false statement cannot say that the
other party had the means to discover the truth with
ordinary diligence.

Mistake:-

Usually, mistake refers to miss-understanding or wrong

thinking or wrong belief. But legally, its meaning is
restricted and is to mean “operative mistake”. Courts
recognize only such mistakes which invalidate the
contract. Mistake may be mistake of fact (either
unilateral or bilateral) or mistake of law (either Indian
law or foreign law).
Sec. 20 “Where both parties to an agreement are under a
mistake as to a matter of fact essential to the agreement,
the agreement is void.”

Sec. 21 “A contract is not voidable because it was caused

by a mistake as to any law in force in India; but a mistake
as to a law not in force in India has the same effect as a
mistake of fact.”

Bilateral mistake: Sec. 20 deals with bilateral mistake.

Bilateral mistake is one where there is no real
correspondence of offer and acceptance. The parties are
not really in consensus-ad-idem. Therefore there is no
agreement at all.

A bilateral mistake may be regarding the subject matter

or the possibility of performing the contract.

Mistake As To The Subject Matter:-

This mistake arises when the parties to the contract

assume at the time of making the contract, that a certain
state of things exists, but in reality it does not exist.
Such a mistake may relate to : –

(i ) Existence of the subject matter: Two parties may

enter into the contract on the assumption that the
subject matter exists at the time contract. But actually it
may have ceased to exist or has never existed at all.
Then the contract becomes void.

(ii) Identity of the subject matter: A mutual mistakes as

to the identity of subject matter renders the contract
void.

(iii) A mistake as to the quality of the subject matter

will not render the agreement void owing to the
application of the principle of ‘caveat emptor’ unless
there is misrepresentation or guarantee by the seller.

(iv) Price of the subject matter: An explanation to Sec.

20 provides that “an erraneous opinion as to the value of
the thing which forms the subject matter of the
agreement is not to be deemed a mistake as to a matter
of fact.” A mistaken notion about the value of a thing
bought or sold may be unilateral or bilateral. If it is
unilateral, the buyer or seller has to presume that he has
made a bad bargain.

Where the mistake is mutual and the parties enter into

the contract with false assumption and mistake as to the
value of the subject matter is the basis of their
agreement, there can’t be an enforceable contract
between them.

(v) Title of the subject matter: If a person agrees to

purchase property which is unknown to himself and the
seller is his own already, the contract may be void. A
mistake as to the title does not invalidate a contract
since Sec. 14 of the Sale of Goods Act imposes an implied
condition as to the title of the seller. Where there is no
such warrantee or the buyer purchases his own property
the agreement will be void-ab-initio.

(vi) A false and fundamental assumption: A false and

fundamental assumption going to the root of the contract
would render the contract invalid.
 ASSIGNMENT – 2

Q.1. What do you understand by the Offer of Proposal? What

are the essentials of a Valid Offer?

Ans.1. Offer or Proposal:- Sec. 2 (a) defines

offer as follows: “When one person signifies to another
his willingness to do or to abstain from doing anything
with a view to obtaining the assent of that other person
to such act or abstinence, he is said to make a proposal.”

The person making the proposal is called ‘promisor’ and

the person accepting it is called ‘promisee’.

Essentials of a Valid Offer:-

a) An Offer May Be General Or Specific:-

According to Sec. 2 (a) an offer must be made to a
specific person. An offer may be made to the world at
large. But the contract is made only with the person
who accepts and fulfills the conditions of the proposal.

In the words of Anson, ‘An offer need not be made to

an ascertained person, but no contract can arise until
it has been accepted by an ascertained person‘.

In Carlill Vs Carbolic Smoke Ball Co. (1893), a Company

offered by advertisement to pay £100 to anyone who
contacts the increasing epidemic influenza, cold or any
disease caused by taking cold after having used the
ball as per printed directions. It was added that ‘£1000
is deposited with the Alliance Bank showing our
sincerity in the matter’. The plaintiff used the smoke
makeable as per the directions but subsequently
suffered from influenza. She was held entitled to
recover the promised reward.

b) An Offer Should Be Made With An Intention Of

Creating Legal Obligation:- This principle of
 English law though not incorporated specifically under
Section 10, is generally accepted as vital to form a
legal agreement. Social, moral or religious agreements
are not legally enforceable. For example, Mr. A invites
Mr. B to dinner. Mr. B fails to attend. Mr. A cannot sue
Mr. B for unconsumed food.

Whether the offeror intended to enter into legal

obligations or not could be known from the nature of
the agreement and the surrounding circumstances.
The court has to ascertain the intention of the parties.
The test of contractual intention is objective and not
subjective. What is considered is not what the parties
had in mind but what a reasonable person would think
in the circumstances their intentions to be.

c ) An Offer Must Be Definite & Certain:- The terms

of an offer should not be uncertain and ambiguous.
Anson expressed ‘The law requires the parties to make
their own contract, it will not make a contract for them
out of terms which are indefinite or illusory ‘. This is so
because the courts cannot say what the parties to the
contract are to do and whether there is violation of the
contract.

However, all the terms of an offer need not be

expressed. If some of the essential terms of a bargain
may not be specified but are capable of being
determined by some method other than by a future
agreement there will be a good contract between the
parties.

d) A Statement Of Intention & An Invitation To

Offer Are Not Offers:- Preliminary negotiations
are likely to take place before entering into an
agreement. In the course of such negotiations one
party may make some declarations regarding his
intention of doing something. Such a declaration by
itself does not become an offer. e.g., A tells B ‘I want
to sell my car’. This is not an offer.

An invitation to offer is not an offer. An advertisement

for tenders for sale of goods by auction, an
announcement about the stock of goods for sale,
display of goods in shop windows, prospectus of a
 company, catalogue, price-lists, loudspeaker
announcements etc. are merely invitations to offer or
offers.

e ) An Offer Must Be Communicated To The

Offeree:- An offer becomes operative only when it
has been communicated to the person to whom the
offer is made. Communication is necessary whether
the offer is specific or general. Under Section 4 ‘the
communication of a proposal is complete when it
comes to the knowledge of the person to whom it is
made‘. However, mere knowledge of a proposal does
not amount to communication unless the offeree
acquires it with express or implied intention of the
offeror.

The Act does not indicate the mode of communication.

The offeror may communicate the offer by choosing
any available means. However, a letter containing an
offer which is never mailed is not an offer even if the
contents are known by the offeree in some manner.

General offers are communicated to public through

notice and advertise-ments. But as regards reward
cases the question arises whether the person
performing the conditions of the offer can claim the
reward even if he is ignorant of the offer. In Lalman
Shukla Vs. Gouri Dutt case it was held that knowledge
of the offer is essential. There can be no acceptance
unless there is knowledge of the offer.

When the offer is not communicated silence on the

part of the offeree does not amount to consent since
he does not have the opportunity to reject the offer.
E.g., A works for B without the request or knowledge
of B. A can’t sue B for remuneration since B’s consent
can’t be presumed from his silence.

f) The Terms & Conditions Of Offer Should Also

Be Communicated:- An agreement is a two-sided
bargain based on freedom of contract. However, in
modern times the buyer of an article is in an
unfavorable position. Freedom of contract becomes
one-sided in the case of agreements with common
carriers, dry cleaners, tailors, insurance companies,
 landlords, public utilities etc. It is also difficult to draw
up a separate agreement with each individual.
Therefore, printed forms of agreements known as
’standard form contracts’ are used. Such forms contain
large number of terms and conditions very often small
in print absolving the dominant party of all liability.
The economically weaker party has to accept all such
terms and conditions irrespective of whether he likes
them or not. The Court too finds it difficult at times to
protect the interest of the weaker party. Therefore the
courts have evolved certain methods. When the offer
contains special terms and conditions the offeror must
communicate all the terms and conditions either
before or at the time of contracting in order to bind
the acceptor.

On the other hand if the acceptor knew that there was

writing and knew or believed that the writing
contained conditions he is then bound by the
conditions even though he did not read them. It is
enough if the offeror has done all that can be
considered necessary to give notice to the acceptor.

g) Two Identical Offers Do Not Make A Contract:-

An offer made by a person may cross a similar one
made by another person of course in the course of
transit. They are just two identical or cross offers,
though there seems to be identity of mind.

h) An Offer Should Not Contain Any Term The

Non-Compliance Of Which Amounts To
Acceptance:- There may be any number of terms
and conditions in an offer. The acceptor can accept or
reject them. While the offeror can prescribe mode of
acceptance, he can’t prescribe the form or time of
refusal so as to fix a contract upon the acceptor. He
can’t say, for example, that if the offeree does not
communicate before a given time, he is deemed to
have accepted the offer.

Q.2. What are the effects of Minor’s Agreement? State in

details.
Ans.2. Effects of minor’s agreement:-

A minor’s agreement is void-ab-initio. Where there is

no contract, there should be no contractual obligation
on either side. Hence, the effects of a minor’s
agreements are worked out independently of any
contract.

1. No Estoppel Against Minor:- A minor who has

made an agreement by misrepresentation of his age
may disclose his real age. There is no estoppel against
him.
2. No Liability In Contract Or Tort Arising Out Of
Contract:- A minor is, in law, incapable of giving
consent. Hence, there could be no change in the
character or status of the parties. A minor who
misrepresents his age to obtain a contract cann’t be
sued for deceit. ‘You cann’t convert a contract into a
tort to enable you to sue an infant.’ This principle has
been followed in India.

Where, however, the tort is independent of contract

the mere fact that a contract is also involved will not
absolve the minor from liability.

3. Doctrine Of Restitution:- If a minor obtains

property or goods by misrepresent ting his age, he can
be compelled to restore it but only so long as the same
is traceable in his possession. This is known as the
equitable doctrine of restitution. Suppose the minor
has sold the goods he can’t be made to repay the
value of the goods because that would amount to
enforcing a void contract.

However, when a minor invites the aid of the court for

the cancellation of his contract the court may grant
relief subject to the condition that he shall restore all
benefits obtained by him under the contract or make
suitable compensation to the other party. But the
court will not compel any restitution by a minor even
when he is a plaintiff, where the other party was
aware of the infancy so that he was not deceived or
where the other party was unscrupulous in his
dealings with the minor.
4. Beneficial Contracts:- The law that a
minor’s agreement is absolutely void has been
confined to the cases where a minor is charged with
obligations and the other party seeks to enforce them.
On the other hand a minor is allowed to enforce a
contract which is of some benefit to him and under
which he is required to bear no obligations. A minor is
capable of purchasing immovable property and he may
sue to recover the possession of the property
purchased by tendering the purchase money.

A minor can be a beneficiary e.g., a payee, an

endorsee, or a promisee under a contract. A
promissory note executed in favour of a minor is valid
and can be enforced in a court.

5. Ratification:- On attaining majority, a person

can’t ratify an agreement made by him when he was a
minor. Ratification relates back to the date of making
of the contract. Therefore, a contract which was void
originally can’t be made valid by subsequent
ratification. If it is necessary, a fresh contract should
be made on attaining majority. A new contract
requires a fresh consideration. The consideration
which passed under the earlier contract can’t be
implied into the contract into which the minor enters
on attaining majority.

6. Liability For Necessaries (Sec. 68):- Persons

incompetent to contract are made liable for
necessaries supplied to them. Sec. 68 reads “If a
person incapable of entering into a contract or any one
whom he is legally bound to support is supplied by
another person with necessaries suited to his
conditions in life, the person who has furnished such
supplies is entitled to be reimbursed from the property
of such incapable person.”

The liability is only for necessaries. But what is

‘necessary’ is not defined by the Act. We have to
depend upon judicial decisions. Things necessary are
those without which an individual can’t reasonably
exist such as food, raiment, lodging etc. What may be
necessary for one class may be luxury for another.
Therefore, the class has to be ascertained and then
 whether a thing is a necessity or not has to be
determined. To render an infant’s estate liable for
necessaries, two conditions must be satisfied: (1) The
contract must be for goods reasonably necessary for
his support in his state of life and (2) he must not have
already a sufficient supply of these necessaries. The
supplier has to prove not only that the goods supplied
were suitable to the conditions in life of the minor but
that he was not sufficiently supplied with the goods of
that class.

Thus, the liability for supply of necessaries attaches

only to the estate of a minor and he does not incur any
personal liability.

Q.3. What do you understand by Consideration? What are the

rules governing Consideration?

Ans.3. Definition:-Blackstone defined consideration as “the

recompense given by the party contracting to the other.”
In the words of Pollack, “Consideration is the price for
which the promise of the other is bought and the promise
thus given for value is enforceable.”

Sec. 2 (d) of the Act defines consideration in the

following terms: “When at the desire of the promisor the
promisee or any other person has done or abstained from
doing, or does or abstains from doing, or promises to do
or abstain from doing something, such act or abstinence
or promise is called a consideration for the promise.”

Rules Governing Consideration:-

(i) Consideration Should Be Furnished At The

Desire Of The Promisor:- The consideration
should be the outcome of the desire of the
promisor. The desire may be express or implied.
The act done at the instance of third party or
gratuitously does not become consideration. e.g.
A’s house catches fire. B goes and helps in
extinguishing it. B later cannot ask for any payment
for his services. Even spiritual promises or mental
satisfaction are not enforceable. The question
 arises whether a promise of a subscription to a
public or charitable trust becomes legal.
(Kedarnath Vs Gorie Mohammed). A mere promise
is not enough. The promisee must have done some
act or incurred expenses on the strength of the
promise. (Abdul Aziz Vs Maznoon Ali).

(ii) Consideration May Move From The Promisee

Or Any Other Person:- Sec. 2 (d) provides that
the consideration may be furnished by the
promisee or any other person. At this point Indian
law differs from English law according to which the
consideration must move from the promisee only
and not from the third party. However, there is a
doctrine known as constructive consideration under
which if the person who was to take a benefit under
the contract was nearly related by blood to the
promisee, a right of action would vest to him. But
this doctrine is no more valid.

(iii) Consideration May Be Past, Present or

Future:- Past consideration is something done or
not done at the request of the promisor, before the
making of the agreement. Under English Law, past
consideration is no consideration. Nevertheless,
past consideration will support a subsequent
promise of the promisor. If services are rendered
under circumstances which raise an implication of a
promise to pay for them, the subsequent promise
to pay is merely fixing a reasonable compensation
for the services.In India past consideration is
sufficient to support a promise provided it is made
at the request of the promisor.

Present consideration refers to one furnished at the

time of the promise. Where both the parties to a
contract promise to each other of doing or not doing
something the consideration on both sides moves to
a future date and is known as future consideration.
Present and future considerations are also known as
executed and executory consideration respectively.

(iv) Consideration Need Not Be Adequate:- The

law does not expect that the consideration should
be adequate. It is the lookout of the promisor. The
 parties as between themselves can determine
adequate consideration. The consideration which
the contracting parties give to each other need not
be of equal value. However, explanation 2 to Sec.
25 provides that the agreement to which the
consent of the promisor is given is not void merely
because the consideration is inadequate; but the
inadequacy of the consideration may be taken into
consideration by the court in determining whether
the consent of the promisor was freely given.

(v) Consideration Should Be Valuable:- The

consideration should not be unreal or illusory or of
the nature of moral obligation. It should be
valuable, though the value of the consideration
need not be the same as the value of the promise
which it supports.
(vi) The Discharging Of A Pre-Existing Obligation
Is Not Consideration:- The law may compel a
person to do an act. Then the mere doing of such
act can’t become consideration for another’s
promise. However, doing or agreeing to do more
than what a person is legally bound amounts to
good consideration. In the same way performing or
promising to perform an existing obligation
imposed by a previous contract will not form
consideration.
(vii) Consideration Should Be Certain & Lawful:-
Consideration should not be illusory or uncertain or
impossible. Discovering a treasury by magic, for
example, cannot form consideration.