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ASSIGNMENT SET 1

MB0035
LEGAL ASPECTS OF BUSINESS

1. Explain the essential of contract and acceptance.

Ans: 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 redressal 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.

Acceptance

According to Sec. 2 (b) “When the person to whom the proposal is


made signifies his willingness thereto the proposal is said to be
accepted. A proposal, when accepted, becomes a promise.”

By accepting the offer, the acceptor expresses his willingness to be


bound by the terms and conditions of the offer. Regarding an offer and
its acceptance, Anson has given an analogy of a lighted match stick.
“Acceptance is to an offer what a lighted match is to a train of
gunpowder. It produces something which can’t be recalled or undone.”
An acceptance turns the offer into a binding obligation.

Rules Regarding Acceptance:

a) An offer can be accepted only by the person to whom it is


made: The offeree 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 toto. 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 regid 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. [Lalmann Shukla V, Gouridutt].

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.

2. Explain the provisions relating to the methods of discharging a contract by


mutual agreement.

Ans: Since a contract is created by means of an agreement, it may


also be discharged by another agreement between the same parties.
Sections 62 and 63 provide for the following methods of discharging a
contract by mutual agreement:

1. Novation: “Novation occurs when a new contract is substituted


for an existing contract, either between the same parties or
between different parties, the consideration mutually being the
discharge of the old contract.” When the parties to a contract
agree for “novation,” the original contract is discharged and
need not be performed. The following points are also worth-
notng in connection with novation:
1. Novation cannot be compulsory; it can only be with the
mutual consent of all the parties.
2. The new contract must be valid and enforceable. If it
suffers from any legal flaw on account of which it becomes
unenforceable, then the original contract revives.

2. Alteration: Alteration of a contract means change in one or


more of the material terms of a contract. If a material alteration
in a written contract is done by mutual consent, the original
contract is discharged by alteration and the new contract in its
altered form takes its place. A material alteration made in a
written contract by one party without the consent of the other,
will, make the whole contract void and no person can maintain
an action upon it.

3. Rescission: A contract may be discharged, before the date of


performance, by agreement between the parties to the effect
that it shall no longer bind them. Such an agreement amounts to
“rescission” or cancellation of the contract, the consideration for
mutual promises being the abandonment by the respective
parties of their rights under the contract. An agreement of
rescission releases the parties from their obligations arising out
of the contract. There may also be an implied rescission of a
contract e.g., where there is non-performance of a contract by
both the parties for a long period, without complaint, it amounts
to an implied rescission.

4. Remission: Remission may be defined “As the acceptance of a


lesser sum than what was contracted for or a lesser fulfilment of
the promise made.” Section 63 lays down that a promisee may
give up wholly or in part, the performance of the promise made
to him and a promise to do so is binding even though there is no
consideration for it. An agreement to extend the time for the
performance of a promise also does not require consideration to
support it on the ground that it is a partial remission of
performance.

5. Waiver: Waiver means the deliberate abandonment or giving up


of a right which a party is entitled to under a contract,
whereupon the other party to the contract is released from his
obligation.

3. Discuss the rights of surety against the creditor ant the principal debtor.

Ans: Rights of Surety

Rights of Surety

A. Rights of Surety against the Creditor

1. Ask the creditor to sue the debtor: On the guaranteed debt having fallen due for
payment, the surety may ask the creditor to sue the debtor to collect the due
amount, but he cannot compel him to do so. But he must then indemnify the
creditor against any risk or delay arising as a consequence.
2. Require the creditor to terminate the debtor’s services: In the case of the
fidelity guarantee, if the principal debtor’s dishonesty comes to light, the surety
can require the creditor to terminate the principal debtor’s services so as to save
him from further loss.

3. Claim to any set off: The surety on being called upon to pay, can claim any set-
off to which the principal debtor is entitled from the creditor.

4. Access to the securities of the debtor with the creditor: The surety can, after
paying the guaranteed debt, compel the creditor to assign to him all the securities
taken by the creditor either before or at the time of the contract of guarantee,
whether the surety was aware of them or not.

5. Right to Share Reduction: On debtor’s insolvency the surety is entitled to claim


the proportionate reduction of his liability by the amount of dividend claimed by
the creditor (from the Official Receiver of the Principal debtor). Similarly,
debtor’s debt obligation is scaled down by subsequent legislation; the creditor is
entitled to claim proportionate reduction in his liability.

B. Against the Principal Debtor

6. Right of subrogation: After paying the guaranteed debt, the surety steps into the
shoes of the creditor and acquires all the rights which the latter had against the
principal debtor (i.e., he gets subrogated to all the rights and remedies available to
the creditor) (Sec. 140). If the creditor has the right to stop goods in transit or has
a lien, the surety, on payment of all he is liable for, will be entitled to exercise
these rights.

7. Right as to securities with the creditor: The surety has the right to proceed
against such securities of the principal debtor, as the creditor could himself
proceed.

8. Right of indemnity: The surety is entitled to be indemnified by the principal


debtor for all payments rightfully made by him (Sec. 145).

9. Compel the principal debtor to perform the promise: The surety has also the
right to insist the principal debtor to perform the promise. The surety can, before
making payment, compel the debtor to relieve him from liability by paying of the
debt, provided that liability is an ascertained and subsisting one.

10. Prove the debt in case of bankruptcy of the debtor: In case of the bankruptcy
of the principal debtor, the surety may prove the debt in respect of contingent
ability even if he has not been called upon to pay a definite amount.

4. Discuss the rights and liabilities of co-sureties.

Ans: Rights of Co-sureties among themselves


1. Co-sureties have liabilities among themselves under Sec. 132: Where two
persons contract with a third person to undertake a certain liability, and also contract with
each other that one of them shall be liable only on the default of the other, the third party
not being a party to such a contract, the liability of each of such two persons to the third
person under the first contract is not affected by the existence of the second contract,
although such third person may have been aware of its existence.

2. Release: Where there are co-sureties, a release by the creditor of one of them does
not discharge the other neither does it free surety so released from responsibility to other
sureties (Sec.138).

3. Contribution: Co-sureties are liable to contribute equally if there is more than


one surety in respect of one debt, though contracted on different dates unless contracted
otherwise (Sec. 146).

4. Equality: Where the sureties are bound in different sum, they are bound to pay
equally as far as the limits of their respective obligations permit (Sec. 147).

Liabilities of Co-sureties

Co-sureties are jointly and severally liable in India. The discharge of one co-surety from
his liability does not release the other co-sureties from their liability. They are liable to
bear the loss equally, subject to the limit of the debt guaranteed by him. As mentioned
earlier, if one of them has paid more than his share, he can claim contribution from
others. Where the co-sureties have limited their liabilities to different sums, they should
contribute equally and not exceeding their respective limits.

Illustration: A, B and C are sureties for D guaranteeing different sums namely, A


Rs.10,000, B Rs.20,000 and C Rs.20,000. In case of default by D the liabilities of the co-
sureties would be as under:

i) D makes default in payment to the extent to of Rs.30,000. Liabilities of A, B and


C is Rs.10,000 each.

ii) D makes default to the extent to Rs.40,000. Liability shall be as of A’s 10,000
(maximum obligation), as of B and C, Rs.15,000 each being equal contribution.

D makes default of Rs.70,000 A, B and C will pay the full amount of guarantee.