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UNIT-1:-

CONTRACT LAW:-
 Essential Elements of Contract
 Agreements and Contracts
 Breach of Contract
 Quasi - Contracts
 Indemnity and Guarantee
 Sale of Goods Act
 Conditions and Warranty
 Rights of unpaid seller
 Contract of Agency
 Proposal and Acceptance:-
• The first step towards creating a contract is that
one person shall signify or make a proposal or
offer to the other, with a view to obtaining the
acceptance of that another person to whom the
offer is made.[Sec.2(a)].
• A proposal when accepted becomes a promise.
[Sec.2(b)]
• “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” [Sec.2(b)
 Consideration – lawful consideration with a
lawful object [Sec.2(d), 23 &25]
 The agreement is legally enforceable only when
both the parties give something and get
something in return.
 Consideration need not be in cash or in kind. It
may be an act or abstinence (abstaining from
doing something) or promise to do or not to do
something.
 It may be past, present or future. But it must be
real and lawful.
 The object of the agreement must be lawful. It
means that the object must not be illegal,
immoral, or opposed to public policy.
 Capacity of parties to contract – competent
parties. [Sec.11&12]:
 The parties to the agreement must be capable of
entering into a valid contract.
 Every person is competent to contract if he :
• Is of the age of majority
• Is of sound mind
• Is not disqualified from contracting by any law to
which he is subject
 Flaw in capacity to contract may arise from
minority, lunacy, idiocy, drunkenness, etc. and
status. If a party suffers from any flaw in capacity,
the agreement is not enforceable except in some
special cases.
 An agreement must not be expressly declared to
be void
• A void agreement (opposed to public policy
like agreements in restraint of trade, or in
restraint of marriage or in restraint of legal
proceedings) is not enforceable by law.
[Sec.2(g)]
• It does not give rise to any rights and
obligations
• An agreement should not be void in order to
constitute a valid contract.
 Writing and Registration, if so required by law:-
• A contract may be made by words spoken or written.
• It is, however, in the interest of the parties that the
contract should be in writing.
• There are some other formalities also which has to be
complied with in order to make an agreement legally
enforceable. In some cases, the document in which
the contract is incorporated is to be stamped. In some
other cases, a contract, besides being a written one,
has to be registered.
• Certain documents also require attestation, for
example, they are to be signed or executed in the
presence of at least two witnesses, like court
marriage, mortgage, leases etc.
 Legal Relationship:
• Agreements which create legal relations or are
capable of creating legal relations are
contracts.
• Existence of legal relationship is determined
by the intention of parties.
• There must be common intention of the
parties to create a legal relations in order to
constitute a contract like buying, selling,
marriage etc.
 Certainty:-
• The terms of contract should be clear. In other
words, the contract must not be vague.
 Possibility of Performance:-
• Contracts based on impossibility of performance
are not valid. The contracts must be capable of
being performed.
 Enforceable by law:-
• A contract in order to be valid must be
enforceable by law which element distinguishes
agreement and contract.
 Agreements and Contracts
 Agreements:-

“Every promise and every set of promises,


forming the consideration for each other is an
agreement.” [Sec.2(e)]
 Kinds of Agreements:-

• Valid Agreement
• Void Agreement
• Enforceable Agreement
• Voidable Agreement
• Unenforceable Agreement
• Illegal Agreement
 Kinds of Contracts:-
• Voidable Contract
• Void Contract
• Unenforceable Contract
• Executed Contract
• Executory Contract
• Express Contract
• Implied Contract
• Quasi-Contract
• Contingent Contract
• Contracts of Record
• Specialty Contract
• Simple Contract
• Statutory Contract
 Note: all agreements are not contracts but all
contracts are agreements.:-
Consideration – lawful consideration with a
lawful object [Sec.2(d), 23 &25]
Capacity of parties to contract – competent
parties. [Sec.11&12]:
Free Consent [Sec. 13 &14]:
An agreement must not be expressly declared
to be void
 Breach of Contract:-
In case of breach of contract, the aggrieved party has the following remedies:-
• Rescission of 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.
• Suit for specific performance:-
By specific performance, the court, directs the party committing the
breach of contract to perform the promise according to the terms of
contract. [Specific Relief Act, 1877]
• Suit for injunction:-
An injunction is an order of the court directing a person to do or refrain
from doing some act, which is the subject-matter of the contract and
which a party undertakes to do or not to do.
In cases of breach of contract, Court can on a suit restrain a party by an
order of injunction from committing the breach.
The power of the court to grant injunction is discretionary and may be
granted for a temporary or an indefinite period.
• Suit for damages, for the loss sustained:-
In case of a breach of contract, injured party can claim
damages for the loss caused by breach of contract.
Damages are given by way of restitution and as a monetary
compensation to the injured party.
The aggrieved party can recover the actual loss caused to
him by the breach of contract and not the exemplary or
unusual damages.
• Quantum Meruit:-
means “as much as earned or deserved” or “as much as is
merited”
A person can under certain circumstances claim payment for
the work done or goods supplied without any contract or
under a contract which is discharged by the breach of the
other party.
 Measure of Damages:-
It is the difference between the contract price and the market
price at the date of the breach.
It has been held that the date for fixing the damages is the last
date of the contract to be performed.
Damages are the monetary compensation allowed to the
injured party by the court for the loss or injury suffered by him
the breach of a contract.
The rules relating to damages:-
 Damage arising naturally – ordinary damages
 Damages in contemplation of the parties – special damages
 Vindictive or exemplary damages
 Nominal Damages
 Damages for loss of reputation
 Damages for inconvenience and disconfort
 Mitigation of damages
 Difficulty of assessment
 Cost of Decree
 Damages agreed upon in advance in case of
breach
 Liquidated damages and penalty
 Payment of interest
 Quasi – Contracts:-
In truth it (quasi-contract) is not a contract at all. It is an obligation
which the law creates in the absence of any agreement, when the act
of all parties or other have placed in the possession of one person,
money or its equivalent, under such circumstances that is equity and
good conscience he ought not retain it, and which ex aequo et bono
(in justice and fairness) belongs to another.
Law of quasi-contract is also known as law of restitution.
A contract is intentionally entered into. A quasi-contract, on
the other hand is created by law.
 Kinds Of Quasi-Contractual obligations :-
1. Supply of necessaries (Sec. 68)
2. Payment by an interested person (Sec. 69)
3. Obligation to pay for non-gratuitous acts (Sec. 70)
4. Responsibility of finder of goods (Sec. 71)
5. Mistake or coercion (Sec. 72)
 Contract Of Indemnity :-
A contract by which one party promises to save
the other from loss caused to him by the
conduct of the promisor himself, or by the
conduct of any person, is called a ‘contract of
indemnity’ (Sec. 124). The person who promises
to make good the loss is called the indemnifier
(promisor) and the person whose loss is to be
made good is called the indemnified or
indemnity-holder (promises). A contract of
indemnity is really a class of contingent
contracts.
 Contract Of Guarantee:-
It is a contract to perform the promise, or discharge
the liability, of a third person in case of his default.
The person who gives the guarantee is called the
‘surety’ , the person in respect of whose default the
guarantee is given is called the ‘principal debtor’
and the person to whom the guarantee is given is
called the ‘creditor’.
A guarantee may be either oral or written (sec126).
It may be express or implied and may even be
inferred from the course of conduct of the parties
concerned.
 Sales of Goods Act:-
“ A contract of sale of goods is a contract whereby the
seller transfers or agrees to transfer the property in
goods to the buyer for a price.”
A contract of sale may be absolute or conditional.
Agreement to Sell:-
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’
An agreement to sell becomes a sale when the time
elapses or the conditions, subject to which the
property in the goods is to be transferred are
fulfilled.
 Essentials of a contract of sale:
 Two parties
 Goods
 Price
 Transfer of general property
 Essential elements of a valid contract
 Distinction between Sale and Agreement to Sell:
 Transfer of property
 Type of goods
 Risk of loss
 Consequences of breach
 Right to re-sell
 General and particular property
 Insolvency of buyer
 Insolvency of seller
 Conditions and Warranties
Condition:-A condition is a stipulation which is
essential to the main purpose of the contract. It
goes to the root of the contract. Its non-
fulfillment upsets the very basis of the contract.
If there is a breach of a condition, the aggrieved
party can treat the contract as repudiated.
Warranty:- A warranty is a stipulation which is
collateral to the main purpose of the contract. It
is not of such vital importance as a condition is.
If there is a breach of warranty, the aggrieved
party can only claim damages and it has no
right to treat the contract as repudiated.
 Distinction between a condition and
warranty:
 Difference as to value
 Difference as to breach
 Difference as to treatment
 When conditions to be treated as warranty:-
 Voluntary waiver of condition
 Acceptance of goods by buyer
 Unpaid Seller:-
 The seller of goods is deemed to be an ‘unpaid seller’:-
 When the whole of the price has not been paid or tendered
 Where a bill of exchange or other negotiable instrument has
been received as a conditional payment i.e., subject to the
realisation thereof, and the same has been dishonoured.
 Characteristics of an ‘Unpaid Seller’:-
 He must sell goods on cash terms and not on credit, and he
must be unpaid.
 He must be unpaid wholly or partly
 He must not refuse to accept payment when tendered.
 Rights of an Unpaid Seller:-
 Rights of unpaid seller against the goods
 Rights of unpaid seller against the buyer personally
 Rights of unpaid seller against the goods:-
• Right of lien
• Right of stoppage of goods in transit
• Right of resale
 Rights of unpaid seller against the buyer personally
• Suit for price
• Suit for damages for non-acceptance
• Suit for special damages and interest
o Auction Sale:
In an auction sale, the auctioneer invites bids from
prospective purchasers and sells the goods to the
highest bidder.
RIGHTS OF AN UNPAID SELLER

Against the Goods


Against the Buyer Personally

Where the property in the goods Where the property in the goods
has passed has not passed

Withholding Stoppage in
Delivery Transit

Lien Stoppage to Re-sale


Transit

Suit for Price Suit for Damages Repudiation Suit for Interest
AGENT:- “ person employed to do any act for
another or to represent another in dealings
with third person”
In other words, an agent is a person who acts in
place of another,
The person for whom or on whose behalf he acts
is called the PRINCIPAL.
 To conduct the business of agency according to
the principal’s directions and not to deviate even
for the benefit of the principal
 To conduct the business with the skill and
diligence generally possessed by persons
engaged in similar business
 To render proper accounts
 In case of difficulty to communicate with the
principal
 Not to make any secret profits
 Not to deal on his own account
 Not entitled to remuneration for business mis-
conducted
 Right to receive agreed or reasonable
remuneration
 Right to retain money of the principal towards
advance made or expenses properly incurred
by him
 Right of lien
 Right of stoppage of transit
 Right to be indemnified against consequences
of all lawful acts done within the authority
 The rights of an agent are in fact the duties of
the principal
 Where acting for a foreign principal
 Where acting for a principal whose name lie does not disclose
 Where the principal cannot be sued, e.g., minor
 Where he acts without authority or exceeds authority
 Where he agrees to be personally bound
 Where he signs a negotiable instrument in his own name
 Where he is an agent with a special interest, e.g., factor or
auctioneer
 Where he is guilty of fraud in matters outside his authority
 Where trade or custom makes him personally liable
 Where agency is one coupled with interest.
 By revocation by the principal
 On the expiry of fixed period of time
 On the performance of the specific purpose
 In the event of insanity or death of the
principal or agent
 On destruction of the subject-matter of agency
 In the event of insolvency of the principal
 By renunciation of agency by the agent
 The Companies Act 1956
 Came into force with effect from 1 April 1956
 Contains 658 sections, XV schedules, a number of rules
besides Company (Court) Rules and numerous Forms.
 Special Features:-
• Provides more stringent provisions relating to the
company promoters and company managements in
order to ensure a minimum standard of good behavior
and business honesty in the promotion and
management of companies.
• Provides elaborate provisions relating to the form and
contents of a ‘prospectus’, maintenance of accounts by
companies, reduction of share capital etc., with a view
to safeguarding the interests of investors and creditors.
•It gives extensive powers to the Central Government and the
Company Law Board to intervene directly in the affairs of a
company in public interest, in recognition of the fact that a
public company should be regarded as a national asset and not
as something of exclusive concern to the shareholders or the
directors.
•Keeping in view the importance of state enterprises under
development plans, this Act recognises the institution of
‘Government Companies’ (in which government holds at least
51% share capital) and makes special provisions for them, i.e.,
they can be exempted from the application of any of the
provisions of the Act.
•In accordance with the acceptance of the principle of the
‘socialistic pattern of society’ as the objective of social and
economic policy by the govt., the Act also provides measures
calculated to disintegrate the concentration of economic power
and wealth which affects the public interest adversely.
 The Company:-
“ An incorporated association, which is an artificial
legal person, having a legal entity, with a perpetual
succession, a common seal, a common capital
comprised of transferable shares and carrying
limited liability.”
 Characteristics of a company:-

 Incorporated Association
 Artificial Legal Person
 Perpetual Existence
 Common Seal
 Limited Liability
 Transferability of Shares
 Distinction between a private and public company:-
 Minimum paid-up capital:-
 Private: Rs. 1 Lakh
 Public: Rs. 5 Lakhs
 Minimum number of members:-
 Private: 2
 Public: 7
 Maximum number of members:-
 Private: 50
 Public: Nil
 Minimum number of Directors:-
 Private: 2
 Public: 3
 Transfer of Shares:-
 Private: Restricted by AOA, requires the prior permission of
the BOD.
 Public: Allowed
 Public Subscription:-
 Private: a private company by its AOA, prohibits any
invitation to the public to subscribe for any shares in, or
debentures of, the company..
 Public: Invites public for the subscription of its shares and
debentures
 Acceptance of public deposits:-
 Private: a private company by its AOA, prohibits any
invitation or acceptance of deposits from the public.
 Public: can invite or accept public deposits from the public
 Commencement of Business:-
 Private: can commence its business immediately after getting
the certificate of incorporation
 Public: can commence its business only after getting the
certificate of commencement of business.
 Issue of Prospectus:-
 Private: Need not prepare.
 Public: must prepare and file with the Registrar
 Allotment of Shares:-
 Private: can proceed to allot shares without having
to wait for ‘minimum subscription’.
 Public: cannot allot shares without raising
‘minimum subscription’
 Statutory Meeting:-
 Private: Not required
 Public: must hold such meeting after one month
and before six months from the date of obtaining
the certificate of commencement of business.
 Provision regarding Directors:
 Private: Not required
 Public: Required to comply with the provisions and
restrictions laid down by central government
relating to managerial personnel
 Managerial Remuneration:-
 Private: No restriction, no limits
 Public: maximum managerial
remuneration is fixed at 11% of annual
net profits
 Index of members:-
 Private: Not required
 Public: must keep such an index if its
number of members exceeds fifty
 Promotion
 Registration
 Floatation
 Promotion:-
It is nothing but the preliminary steps taken for
the purpose of registration and floatation of the
company
Promoter: anyone who assists in the promotion,
e.g., by obtaining a director, or agreeing to
place shares or negotiating an agreement or
merely by putting a vendor in touch with
persons who may form a company to exploit or
purchase his goods may find himself a
promoter of a company which is subsequently
formed.”
 Registration:-
Following three documents are required to be
presented to the Registrar of Companies of the State
in which the registered office of the company is to
situate, for the purpose of registration of the
company:-
The memorandum of the company
The articles, if any
the agreement, if any, which the company proposes
to enter into with any individual for appointment
as its managing director or manager
 Floatation
When a company has been registered and has received its
certificate of incorporation , it is ready for ‘floatation’, that
is to say, it can go ahead with raising capital sufficient to
commence business and to carry it on satisfactorily.
Section-70 makes it obligatory for every public company to
take either of the following steps:-
Issue a prospectus in case public is to be invited to subscribe
to its capital
File a ‘statement in lieu of prospectus’ with the Registrar, in
case capital has been arranged privately. It must be done
atleast 3 days before allotment.
“ The MOA of a company is its charter which
contains the fundamental conditions upon
which alone 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 be ultra vires ( beyond
powers of ) the company and so void.
 The Name Clause
 The registered office clause
 The objects clause : (main object, objects
incidental or ancillary to the attainment of the
main objects and other objects)
 Liability Clause
 The capital clause
 The Association clause
 Doctrine of Ultra Vires:-
The acts of the company, going beyond the objects mentioned in its
MOA is called as ultra vires. The object of declaring such acts as
ultra vires is to protect the interests of shareholders and all
others who deal with the company.
Some points worth noting as regards doctrine of ultra vires are:-
 A company exists only for the objects which are expressly stated

in its objects clause or which are incidental to or consequential


upon these specified objects
 Any act done outside the express or implied objects is ultra vires

 The ultra vires acts are null and void ab initio


The AOA 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 and
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.
 The business of the company
 The amount of capital issued and the classes of shares into which the capital is
divided; the increase and reduction of share capital
 The rights of each class of shareholders and the procedure for variation of their
rights
 The execution of a preliminary agreement, if any;
 The allotment of shares, calls and forfeiture of shares for non payment of calls;
 Transfer of shares
 Company’s lien on shares
 Exercise of borrowing powers including issue of debentures
 General meetings, notices, voting, resolution, minutes etc
 Numbers, appointment and powers of directors
 Dividends – interim and final – and general reserves
 Accounts and audits
 Keeping of books
 Board attends to the following matters:-
 Appointment of various expert agencies such as
bankers, auditors, company secretary (in case
prescribed paid-up capital is Rs. 50 lakhs or more),
etc.
 Entering into underwriting contract, brokerage
contracts.
 Making arrangements for the listing of shares on
stock exchanges
 Drafting a prospectus for the purpose of issue to the
public.
 Underwriting:-
 The BOD enters into underwriting contracts with
underwriters. Underwriting consists of an undertaking by
some person or persons that if the public fails to take-up
the issue, he or they will do so.
 In return for this undertaking, the company agrees to pay
the underwriter a commission on all shares or debentures,
whether taken up by the public or by the underwriters.
 Sub-Underwriting:-
 Every underwriter has a certain limit up to which it
would go in for taking risk by entering into an
underwriting contract. The underwriters usually choose
to spread their risk by using sub-underwriters who agree
to take a certain number of shares for which they accept
responsibility and for which they receive a commission
out of the commission received by the underwriters.
 Overriding Commission:-
 The difference between the commission paid by the
company to the principal underwriter and the commission
paid by them to the sub-underwriters is known as
overriding commission.
 Brokerage Contracts:-
 A company may also enter into brokerage contracts with
brokers. A broker is a person who undertakes to “place”
shares, i.e., find persons who will buy shares, in
consideration of an agreed brokerage, and if he fails to
place any of the shares, he is not personally liable to take
them, nor is he entitled to any brokerage in respect of
shares not placed.
 Listing of the Shares on a Stock Exchange:-
 Shares of a public company may be sold or purchased on a
stock exchange. But for this purpose the company has to get
permission from the stock exchange authorities. Section 73
of the company’s Act, 1956 provides that it is necessary for
every public company, before issuing shares or debentures
for public subscription by issue of a prospectus, to make an
application for listing the security in one or more
recognised stock exchange(s). This is known as listing of
shares.
 Prospectus:-
Means any document described or issued as 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 debenture of a body
corporate.
Contents of a Prospectus:_
• General Information:-
• Name and address of registered office of the
company
• Names of stock exchanges where application for
listing is made
• Names and addresses of the underwriters and the
amount underwritten by them.
• Declaration about refund of the issue if
minimum subscription of 90% is not
received within 120 days from closure of the
issue
• Declaration about the issue of allotment
letters/refunds within a period of 10 weeks
and interest in case of any delay in refund at
the prescribed rate.
• Date of opening of the issue
• Date of closing of the issue
• Name and address of auditors and lead
managers.
• Capital Structure of the company:-
• Authorised, issued, subscribed and paid-up capital
• Size of the present issue, giving separately reservation for
preferential allotment to promoters and others.
• Terms of the present issue:-
• Terms of payment
• How to apply
• Any special tax benefits
• Particulars of the issue:-
• Objects
• Project cost
• Means of financing (including contribution of promoters)
• Company management and project:-
• History and main .objects and present business of the
company
• Promoters and their background
• Location of the project
• Collaboration, if any
• Nature of the product(s), export posiibilities
• Future prospects
• Stock market date
• Certain prescribed particulars in regard to the company
and other listed companies under the same management
which made any capital issue during the last 3 years
• Outstanding litigations relating to financial matters or
criminal proceedings against the company or directors
under Section XIII
• Management perception of risk factors (e.g., sensitivity to
foreign exchange fluctuations, difficulty in availability of
raw materials, etc.)
 Share:-
A share signifies the followings:-
• The interest of a shareholder in the company, the
right to receive dividend, attend meetings, vote at the
meeting and share in the surplus assets of the
company, if any, in the event of the company, being
wound up.
• The liability of the shareholder in the company to
pay calls on shares until fully paid up;
• The right of the shareholder to transfer the shares
subject to the articles of association.
 Stock:-
The term ‘stock’ may be defined as the aggregate of fully
paid-up shares of a member merged into one fund of equal
value, it is a set of shares put together in a bundle. The stock
is expressed in terms of money and not many shares.
Classes of shares are:
 Preference:-
 Redeemable and Irredeemable
 Cumulative and non-cumulative
 Equity or Ordinary share
 Deferred or Founders
 Sweat Equity Shares
 Employee Stock Option Scheme/Employee Stock Purchase
Plan
 Bonus Shares
 Rights Shares
 Share Capital:-
It means the capital of the company, or the figure in terms
of so many rupees divided into shares of fixed amount,
or the money raised by the issue of shares by a
company.
• Nominal, Authorised or Registered Capital: This is the
sum stated in the memorandum as the share capital of
a company with which it is proposed to be registered.
• Issued Capital:- It is that part of the authorised capital
which the company has issued for subscription. The
amount of issued capital is either equal to or less than
the authorised capital.
• Subscribed Capital:- It is that portion of the issued
capital which has been subscribed for by the
purchaser’s of the company’s shares.
• Called-up Capital:- The company may not call-up
full amount of the face value of the shares. Thus, the
called-up capital represents the total amount called-
up on the shares subscribed.
• Paid-up Capital:- It is the amount of money paid-up
on the shares subscribed.
 Issue of shares/Raising of Capital:-
Can be made in 3 ways:-
 By private placement of shares

 By allotting entire shares to an issue-house, which in

turn, offers the shares for sale to the public


 By inviting the public to subscribe for shares in the

company through prospectus


 Note: the capital is also raised by issue of rights

shares to the existing shareholders.


 Statutory Meeting
 Annual General Meeting
 Class Meetings
 Notice of the meeting
 Agenda of the meeting
 Proxy
 Quorum for Meeting
 Voting
 Motions, resolutions and amendments
 Point of Order
 Minutes of proceedings of meeting
 Accounts
 Audit
 Dividends
 Overheads
 Registration of stock brokers
 Management of Company:-
 Managing Director
 Manager
 Powers of the Board of Directors:-
 The power to make calls on shareholders in respect of
money unpaid on their shares;
 The power to buy-back its shares under section 77A
 The power to issue debentures
 The power to borrow money otherwise than on debentures.
 The power to invest funds of the company
 The power to make loans.
 Restrictions on Powers of Directors:-
 Sell, lease or otherwise dispose of the whole, substantially
the whole, of the undertaking of the company, or where the
company owns more than one undertaking.
 Remit or give time for the re-payment of any debt due by a
director except in the case of renewal or of continuance of
an advance made by a banking company to its director in
the ordinary course of business.
 Invest,otherwise in trust securities, the amount of
compensation received by the company in respect
of compulsory acquisition of any fixed assets of the
company.
 Borrow money exceeding the aggregate of the
paid-up capital of the company and its free
reserves.
 Contribute in any year, to charitable and other
funds not directly relating to the business of the
company or the welfare of its employees