MBA – III SEM

Legal Aspects of Business - MB0035

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Q. 1. What do you mean by free consent? Under what circumstances

consent is considered as free? Explain.
Answer: Free consent: One of the essential of a valid contract is free consent. Sec. 13
of the act defense consent has two or more persons are said to consent where they
agree upon think in the same sense. There should be consents at the ad idem or identity
of minds. The validity of consent depends not only on consents parties but their
consents must also be free. According to section 14, consent is said to be free when it is
not caused by:

1) Coercion has defined under sec.15 or

2) Undue influence as defined under sec. 16 or

3) Fraud has defined under sec. 17 or

4) Mis-representation or defined under sec. 18 or

5) Mistake subject to the probations of sec. 21& 22.

1) Coercion:- Sec. 15 “coercion is the committing or threatening to commit any act

forbidden by the Indian penal code or the unlawful detaining or threatening to detain any
property, to the prejudice of any person whatever, with the intention of causing any
person to enter into an agreement. “ It is immaterial weather the Indian penal code is or
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is not in force in the place where the coercion is employed. Under English Law, coercion
must be applied to one’s person only whereas under Indian Law it can be one’s person
or property. So also under English Law, the subject of it must be the contracting party
himself or his wife, parent, child or other near relative. Under Indian Law, the act or
threat may be against any person. It is to be noted that he act need not be committed in
India itself. Unlawful detaining or threatening to detain any property it also coercion.
While threat to sue does not amount to coercion threat to file a false suit amounts to
coercion since Indian Penal Code forbids such an act.

2) Undue influence:- In the words of Holland,” Undue influence refers to “the

unconscious use of power over another person, such power being obtained by virtue of
a present or previously existing dominating control arising out of relationship between
the parties.” According sec. 16(1) “ A contract is said to be induced by undue influence
where the relation subsisting between the parties are such that one of the parties is in a
position to dominate the will of the other and uses that position to obtain an unfair
advantage over the other.” A person is deemed to be in a position to dominate the will of
other.

(a) Where he holds a real or apparent authority over the other or where he stands in a
fiduciary relation to the other; or

(b) Where he makes a contract with a person whose mental capacity is temporarily or
permanently affected by reason of age, illness or mental or bodily distress:

(c) Where a person, who is in a position to dominate the will of another, enters into a
contract with him and the transaction appears to be unconscionable. The burden of
proving that such contract was not by undue influence shall lie upon the person in a
position to dominate the will of the other. Both coercion and undue influence are closely
related. What contributes coercion or undue influence depends upon the facts of each
case. Sec. 16(i) provides that two elements must be present. The first one is that the
relations subsisting between the parties to a contract are such that one of the m is in a
position to dominate the will of the other. Secondly, he uses that position to obtain unfair
advantage over the other. In other words, unlike coercion undue influence must come
from a party to the contract and not a stranger to it. Where the parties are not in equal
footing or there is trust and confidence between the parties, one party may be able to
dominate the will of the other and use the position to obtain an unfair advantage.
However, where there is no relationship shown to exit from which undue influence is
presumed, that influence must be proved.

3) Fraud:- A false statement made knowingly or without belief in its truth or recklessly
careless whether it be true or false is called fraud. Sec. 17 of the act instead of defining
fraud gives various acts which amount to fraud. Sec. 17: Fraud means and includes any
of the following acts committed by a party to a contract or with his connivance or by his
agent to induce him to enter in to contract:

a) The suggestion that a fact is true when it is not true by one who does not believe it to
be true. A false statement intentionally made is fraud. An absence of honest belief in the
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truth of the statement made is essential to constitute fraud. The false statement must be
made intentionally.

b) The active concealment of a fact by a person who has knowledge or belief of the fact.
Mere non-disclosure is not fraud where there is no duty to disclose.

c) A promise made without any intention of performing it.

d) Any other act fitted to deceive. The fertility of man’s invention in devising new
schemes of fraud is so great that it would be difficult to confine fraud within the limits of
any exhaustive definition.

e) Any such act or omission as the law specially declares to be fraudulent.

4) Misrepresentation:- Before entering into a contract, the parties will may certain
statements inducing the contract. Such statements are called representation. A
representation is a statement of fact made by one party to the other at the time of
entering into contract with an intention of inducing the other party to enter into the
contract. If the representation is false or misleading, it is known as misrepresentation. A
misrepresentation may be innocent or intentional. An intentional misrepresentation is
called fraud and is covered under section 17 sec. 18 deals with an innocent
misrepresentation.

5) Mistake:- Usually, mistake refers to misunderstanding 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 or mistake of 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-item. Therefore there is no agreement at all. A bilateral mistake
may be regarding the subject matter or the possibility of performing the contract.

Q. 2. Define negotiable instrument. What are its features and

characteristics? Which are the different types of negotiable instruments? If
Mr. A is the holder of a negotiable instrument, under what situations
i. Will he be the Holder in due course?
ii. He has the right to discharge?
iii. He can make indorsements?

Answer:

Meaning of Negotiable Instruments:- To understand the meaning of negotiable

instruments let us take a few examples of day-to-day business transactions. Suppose

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pitamber, a book publisher has sold books to Prashant for Rs 10,000/- on three months
credit. To be sure that Prashant will pay the money after three months, Pitamber may
write an Order addressed to Prashant that he is to pay after three months, for value of
goods received by him, Rs.10, 000/- to Pitamber or anyone holding the order and
presenting it before him (Prashant) for payment. This written document has to be signed
by Prashant to show his acceptance of the order. Now, Pitamber can hold the document
with him for three months and on the due date can collect the money from Prashant. He
can also use it for meeting different business transactions. For instance, after a month, if
required, he can borrow money from Sunil for a period of two months and pass on this
document to Sunil. He has to write on the back of the document an instruction to
Prashant to pay money to Sunil, and sign it. Now Sunil becomes the owner of this
document and he can claim money from Prashant on the due date. Sunil, if required,
can further pass on the document to Amit after instructing and signing on the back of the
document. This passing on process may continue further till the final payment is made.
In the above example, Prashant who has bought books worth Rs. 10,000/- can also give
an undertaking stating that after three month he will pay the amount to Pitamber. Now
Pitamber can retain that document with himself till the end of three months or pass it on
to others for meeting certain business obligation (like with Sunil, as discussed above)
before the expiry of that three months time period. You must have heard about a
cheque. What is it? It is a document issued to a bank that entitles the person whose
name it bears to claim the amount mentioned in the cheque. If he wants, he can transfer
it in favour of another person. For example, if Akash issues a cheque worth Rs. 5,000/ -
In favour of Bidhan, then Bidhan can claim Rs. 5,000/- from the bank, or he can transfer
it to Chander to meet any business obligation, like paying back a loan that he might
have taken from Chander. Once he does it, Chander gets a right to Rs. 5,000/- and he
can transfer it to Dayanand, if required. Such transfers may continue till the payment is
finally made to somebody. In the above examples, we find that there is certain
documents used for payment in business transactions and are transferred freely from
one person to another. Such documents are called Negotiable Instruments. Thus, we
can say negotiable instrument is a transferable document, where negotiable means
transferable and instrument means document. To elaborate it further, an instrument, as
mentioned here, is a document used as a means for making some payment and it is
negotiable i.e., its ownership can be easily transferred. Thus, negotiable instruments are
documents meant for making payments, the ownership of which can be transferred from
one person to another many times before the final payment is made.

Definition of Negotiable Instrument According to section 13 of the Negotiable

Instruments Act, 1881, a negotiable instrument means “promissory note, bill of
exchange, or cheque, payable either to order or to bearer”. Types of Negotiable
Instruments According to the Negotiable Instruments Act, 1881 there are just three types
of negotiable instruments i.e., promissory note, bill of exchange and cheque. However
many other documents are also recognized as negotiable instruments on the basis of
custom and usage, like hundis, treasury bills, share warrants, etc., provided they
possess the features of negotiability. In the following sections, we shall study about
Promissory Notes (popularly called pronotes), Bills of Exchange (popularly called bills),
Cheque and Hundis (a popular indigenous document prevalent in India), in detail.

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i. Promissory Note:- Suppose you take a loan of Rupees Five Thousand from your
friend Ramesh. You can make a document stating that you will pay the money to
Ramesh or the bearer on demand. Or you can mention in the document that you would
like to pay the amount after three months. This document, once signed by you, duly
stamped and handed over to Ramesh, becomes a negotiable instrument. Now Ramesh
can personally present it before you for payment or give this document to some other
person to collect money on his behalf. He can endorse it in somebody else’s name who
in turn can endorse it further till the final payment is made by you to whosoever presents
it before you. This type of a document is called a Promissory Note. Section 4 of the
Negotiable Instruments Act, 1881 defines a promissory note as ‘an instrument in writing
(not being a bank note or a currency note) containing an unconditional undertaking,
signed by the maker, to pay a certain sum of money only to or to the order of a certain
person or to the bearer of the instrument’. Specimen of a Promissory Note Rs. 10,000/-
New Delhi September 25, 2002 On demand, I promise to pay Ramesh, s/o RamLal of
Meerut or order a sum of Rs 10,000/- (Rupees Ten Thousand only), for value received.
To, Ramesh Sd/ Sanjeev Address… Stamp Features of a promissory note Let us know
the features of a promissory note.

a). A promissory note must be in writing, duly signed by its maker and properly stamped
as per Indian Stamp Act.

b). It must contain an undertaking or promise to pay. Mere acknowledgement of

indebtedness is not enough. For example, if someone writes ‘I owe Rs. 5000/- to Satya
Prakash’, it is not a promissory note.

c). The promise to pay must not be conditional. For example, if it is written ‘I promise to
pay Suresh Rs 5,000/- after my sister’s marriage’, is not a promissory note.

d). It must contain a promise to pay money only. For example, if someone writes ‘I
promise to give Suresh a Maruti car’ it is not a promissory note.

e). The parties to a promissory note, i.e. the maker and the payee must be certain.

f). A promissory note may be payable on demand or after a certain date. For example, if
it is written ‘three months after date I promise to pay Satinder or order a sum of rupees
Five Thousand only’ it is a promissory note.

g). The sum payable mentioned must be certain or capable of being made certain. It
means that the sum payable may be in figures or may be such that it can be calculated.

ii. Bill of Exchange:-

Suppose Rajeev has given a loan of Rupees Ten Thousand to Sameer, which
Sameer has to return. Now, Rajeev also has to give some money to Tarn. In this case,
Rajeev can make a document Directing Sameer to make payment up to Rupees Ten
Thousand to Tarn on demand or after expiry of a specified period. This document is
called a bill of exchange, which can be transferred to some other person’s name by

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Tarn. Section 5 of the Negotiable Instruments Act, 1881 defines a bill of exchange as ‘an
instrument in writing containing an unconditional order, signed by the maker, directing a
certain person to pay a certain sum of money only to or to the order of a certain person,
or to the bearer of the instrument’. Specimen of a bill of exchange Rs. 10,000/New Delhi
May 2, 2001 Five months after date pay Tarn or (to his) order the sum of Rupees Ten
Thousand only for value received. To Sameer Address Accepted Sameer Stamp S/d
Rajeev

iii. Cheques:-
Cheque is a very common form of negotiable instrument. If you have a savings
bank account or current account in a bank, you can issue a cheque in your own name
or in favour of others, thereby directing the bank to pay the specified amount to the
person named in the cheque. Therefore, a cheque may be regarded as a bill of
exchange; the only difference is that the bank is always the drawee in case of a cheque.
The Negotiable Instruments Act, 1881 defines a cheque as a bill of exchange drawn on
a specified banker and not expressed to be payable otherwise than on demand.
Actually, a cheque is an order by the account holder of the bank directing his banker to
pay on demand, the specified amount, to or to the order of the person named therein or
to the bearer.

iv. Hundis
A Hundi is a negotiable instrument by usage. It is often in the form of a bill of
exchange drawn in any local language in accordance with the custom of the place.
Sometimes it can also be in the form of a promissory note. A Hundi is the oldest known
instrument used for the purpose of transfer of money without its actual physical
movement. The provisions of the Negotiable Instruments Act shall apply to hundis only
when there is no customary rule known to the people. Types of Hundis There are a
variety of hundis used in our country. Let us discuss some of the most common ones.

Shah-jog Hundi: one merchant draws this on another, asking the latter to pay the
amount to a Shah. Shah is a respectable and responsible person, a man of worth and
known in the bazaar. A shah-jog Hundi passes from one hand to another till it reaches a
Shah, who, after reasonable enquiries, presents it to the drawee for acceptance of the
payment.

Darshani Hundi: This is a Hundi payable at sight. The holder must present it for
payment within a reasonable time after its receipt. Thus, it is similar to a demand bill.

Muddati Hundi: A Muddati or miadi Hundi is payable after a specified period of time.
This is similar to a time bill. There are few other varieties like Nam-jog Hundi, Dhani-jog
Hundi, and Jawabee Hundi, Jokhami Hundi, Fireman-jog Hundi, etc. Features of
Negotiable Instruments After discussing the various types of negotiable instruments let
us sum up their features as under.

1. A negotiable instrument is freely transferable:- Usually, when we transfer any

property to somebody, we are required to make a transfer deed, get it registered, pay
stamp duty, etc. But, such formalities are not required while transferring a negotiable
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instrument. The ownership is changed by mere delivery (when payable to the bearer) or
by valid endorsement and delivery (when payable to order). Further, while transferring it
is also not required to give a notice to the previous holder.

2. Negotiability confers absolute and good title on the transferee:- It means that a
person who receives a negotiable instrument has a clear and undisputable title to the
instrument. However, the title of the receiver will be absolute, only if he has got the
instrument in good faith and for a consideration. Also the receiver should have no
knowledge of the previous holder having any defect in his title. Such a person is known
as holder in due course. For example, suppose Rajeev issued a bearer cheque payable
to Sanjay. A person, who passed it on to Girish, stole it from Sanjay. If Girish received it
in good faith and for value and without knowledge of cheque having been stolen, he will
be entitled to receive the amount of the cheque. Here Girish will be regarded as ‘holder
in due course’.

3. A negotiable instrument must be in writing:- This includes handwriting, typing,

computer printout and engraving, etc.

4. In every negotiable instrument there must be an unconditional order or promise for

payment.

5. The instrument must involve payment of a certain sum of money only and nothing
else. For example, one cannot make a promissory note on assets, securities, or goods.

6. The time of payment must be certain:- It means that the instrument must be
payable at a time which is certain to arrive. If the time is mentioned as ‘when convenient’
it is not a negotiable instrument. However, if the time of payment is linked to the death of
a person, it is nevertheless a negotiable instrument as death is certain, though the time
thereof is not.

7. The payee must be a certain person:- It means that the person in whose favour the
instrument is made must be named or described with reasonable certainty. The term
‘person’ includes individual, body corporate, trade unions, even secretary, director or
chairman of an institution. The payee can also be more than one person.

8. A negotiable instrument must bear the signature of its maker:- Without the
signature of the drawer or the maker, the instrument shall not be a valid one.

9. Delivery of the instrument is essential:- Any negotiable instrument like a cheque or

a promissory note is not complete till it is delivered to its payee. For example, you may
issue a cheque in your brother’s name but it is not a negotiable instrument till it is given
to your brother.

10. Stamping of Bills of Exchange and Promissory Notes is mandatory:- This is

required as per the Indian Stamp Act, 1899. The value of stamp depends upon value of
the promote or bill and the time of their payment. Negotiation and Indorsement Persons
other than the original obligor and obligee can become parties to a negotiable
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instrument. The most common manner in which this is done is by placing one’s
signature on the instrument (“indorsement”): if the person who signs does so with the
intention of obtaining payment of the instrument or acquiring or transferring rights to the
instrument, the signature is called an indorsement. There are four types of indorsements
contemplated by the Code: • • • •.
An indorsement which purports to transfer the instrument to a specified person is
a special indorsement; An indorsement by the payee or holder which does not contain
any additional notation (thus puporting to make the instrument payable to bearer) is an
indorsement in blank; An indorsement which purports to require that the funds be
applied in a certain manner (i.e. "for deposit only", "for collection") is a restrictive
indorsement; and, An indorsement purporting to disclaim retroactive liability is called a
qualified indorsement (through the inscription of the words "without recourse" as part of
the indorsement on the instrument or in allonge to the instrument).

If a note or draft is negotiated to a person who acquires the instrument.

a. in good faith;

b. for value;

c. without notice of any defenses to payment, the transferee is a holder in due course
and can enforce the instrument without being subject to defenses which the maker of
the instrument would be able to assert against the original payee, except for certain real
defenses. These real defenses include:

(1) Forgery of the instrument;

(2) Fraud as to the nature of the instrument being signed;

(3) Alteration of the instrument;

(4) Incapacity of the signer to contract;

(5) Infancy of the signer;

(6) Duress;

(7) Discharge in bankruptcy; and,

(8) The running of a statute of limitations as to the validity of the instrument:- The holder-
in-due-course rule is a rebuttable presumption that makes the free transfer of negotiable
instruments feasible in the modern economy.

A person or entity purchasing an instrument in the ordinary course of business

can reasonably expect that it will be paid when presented to, and not subject to dishonor
by, the maker, without involving itself in a dispute between the maker and the person to
whom the instrument was first issued (this can be contrasted to the lesser rights and
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obligations accruing to mere holders). Article 3 of the Uniform Commercial Code as
enacted in a particular State’s law contemplate real defenses available to purported
holders in due course. The foregoing is the theory and application presuming
compliance with the relevant law. Practically, the obligor-payor on an instrument who
feels he has been defrauded or otherwise unfairly dealt with by the payee may
nonetheless refuse to pay even a holder in due course, requiring the latter to resort to
litigation to recover on the instrument.

Q. 3.a. Distinguish between guarantee and indemnity.

Answer:
Indemnity Comprise only two parties:- the indemnifier and the indemnity holder.
Guarantee There are three parties namely the surety, principal debtor and the creditor
The liability of the surety is secondary. The surety is liable only if the principal debtor
makes a default. The primary liability being that of the principal debtor. The surety give
guarantee only at the request of the principal debtor. Liability of the indemnifier is
primary. The indemnifier need not necessarily act at the request of the indemnified. The
possibility of any loss happening is the only contingency against which the indemnifier
undertakes to indemnify.
a. There is an existing debt or duty, the performance of which is guarantee by the
surety.

b. Give a short note on Rights of Surety.

Answer: Joint sureties or debtors: Where several persons are bound together in any
bond, bill or other writing as joint debtors or as joint sureties, in any sum of money made
payable to any person, his/her executors, administrators, order or assign and such
bond, bill, or other writing shall be paid by any of such joint debtors or joint sureties, the
creditor shall assign such bond, bill, or other writing, to the person paying the same; and
such assignee shall, in his/her own name, as assignee, or otherwise, have such action
or remedy as the creditor himself/herself might have had against the other joint debtors,
or sureties, or their representatives, to recover such proportion of the money, so paid, as
may be justly due from the defendants. Defense of infancy to joint sureties or debtors:
Where several persons are bound together in any bond, bill or other writing or judgment
as joint debtors or as joint sureties, in any sum of money, made payable to any person
or corporation, the executors, administrators, successors, order or assigns, and 1 or
more of such persons was, at the time of making, signing or executing the same, or at
the time of the rendition of such judgment, an infant, such fact shall be no defense in
any action, proceeding or suit for the enforcement of the liability of those bound there
under, excepting as regards the person who was an infant at the time of making, signing
or executing such bond, bill or other writing, or who was an infant at the time such
judgment was rendered. Rights of surety or of joint debtor on payment of judgment:

(a) If a judgment recovered against principal and surety shall be paid by the surety, the
creditor shall mark such judgment to the use of the surety so paying the same; and the
transferee shall, in the name of the plaintiff, have the same remedy by execution or
other process against the principal debtor as the creditor could have had, the transfer by

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marking to the use of the surety being first filed of record in the court where the
judgment is.

(b) Where there is a judgment against several debtors or sureties and any of them shall
pay the whole, the creditor shall mark such judgment to the use of the persons so
paying the same; and the transferee shall, in the name of the plaintiff, be entitled to an
execution or other process against the other debtors or sureties in the judgment, for a
proportion able part of the debt or damages paid by such transferee; but, no defendant
shall be debarred of any remedy against the plaintiff or the plaintiff’s representatives or
assigns by any legal or equitable course of proceeding whatever.

Q. 4. a. Mention the remedies for breach of contract. How will the injured
party claim it?
b. What is the difference between anticipatory and actual breach?

Answer: Breach of Contract & Remedies:-

Nature of breach:- A breach of contract occurs where a party to a contract fails
to perform, precisely and exactly, his obligations under the contract. This can take
various forms for example, the failure to supply goods or perform a service as agreed.
Breach of contract may be either actual or anticipatory. Actual breach occurs where one
party refuses to form his side of the bargain on the due date or performs incompletely.
For example: Poussard v Spiers and Bettini v Gye. Anticipatory breach occurs where
one party announces, in advance of the due date for performance, that he intends not to
perform his side of the bargain. The innocent party may sue for damages immediately
the breach is announced. Hochster v De La Tour is an example. Effects of breach A
breach of contract, no matter what form it may take, always entitles the innocent party to
maintain an action for damages, but the rule established by a long line of authorities is
that the right of a party to treat a contract as discharged arises only in three situations.
The breaches, which give the innocent party the option of terminating the contract, are:

(a) Renunciation:- Renunciation occurs where a party refuses to perform his

obligations under the contract. It may be either express or implied. Hochster v De La
Tour is a case law example of express renunciation. Renunciation is implied where the
reasonable inference from the defendant’s conduct is that he no longer intends to
perform his side of the contract. For example: Omnium D’Enterprises v Sutherland.

(b) Breach of condition:- The second repudiator breach occurs where the party in
default has committed a breach of condition. Thus, for example, in Poussard v Spiers
the employer had a right to terminate the soprano’s employment when she failed to
arrive for performances.

(c) Fundamental breach:- The third repudiator breach is where the party in breach has
committed a serious (or fundamental) breach of an in nominate term or totally fails to
perform the contract.

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1. A repudiator breach does not automatically bring the contract to an end. The innocent
party has two options: He may treat the contract as discharged and bring an action for
damages for breach of contract immediately. This is what occurred in, for example,
Hochster v De La Tour. He may elect to treat the contract as still valid, complete his side
of the bargain and then sue for payment by the other side. For example, White and
Carter Ltd v McGregor.

2. Introduction to remedies Damages are the basic remedy available for a breach of
contract. It is a common law remedy that can be claimed as of right by the innocent
party. The object of damages is usually to put the injured party into the same financial
position he would have been in had the contract been properly performed. Sometimes
damages are not an adequate remedy and this is where the equitable remedies (such
as specific performance and injunction) may be awarded.

3. Damages:-

(i) Nature:- The major remedy available at common law for breach of contract is an
award of damages. This is a monetary sum fixed by the court to compensate the injured
party.
In order to recover substantial damages the innocent party must show that he has
suffered actual loss; if there is no actual loss he will only be entitled to nominal damages
in recognition of the fact that he has a valid cause of action. In making an award of
damages, the court has two major considerations: Remoteness – for what on sequences
of the breach is the defendant legally responsible? The measure of damages – the
principles upon which the loss or damage is evaluated or quantified in monetary terms.
The second consideration is quite distinct from the first, and can be decided by the court
only after the first has been determined.

(ii).Remoteness of loss:- The rule governing remoteness of loss in contract was

established in Hadley v Baxendale. The court established the principle that where on
e party is in breach of contract, the other should receive damages which can fairly and
reasonably be considered to arise naturally from the breach of contract itself (‘in the
normal course of things’), or which may reasonably be assumed to have been within the
contemplation of the parties at the time they made the contract as being the probable
result of a breach. Thus, there are two types of loss for which damages may be
recovered:

1. What arises naturally; and

2. What the parties could foresee when the contract was made as the likely result of
breach. As a consequence of the first limb of the rule in Hadley v Baxendale, the party in
breach is deemed to expect the normal consequences of the breach, whether he act
ually expected them or not. Under the second limb of the rule, the party in breach can
only be held liable for abnormal consequences where he has actual knowledge that the
abnormal consequences might follow or where he reasonably ought to know that the
abnormal consequences might follow – Victoria Laundry v Newman Industries.

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3. The measure (or quantum) of damages:- In assessing the amount of damages
payable, the courts use the following principles: The amount of damages is to
compensate the claimant for his loss not to punish the defendant. Damages are
compensatory – not restitutionary. The most usual basis of compensatory damages is to
put the innocent party into the same financial position he would have been in had the
contract been properly performed. This is sometimes called the ‘expectation loss’ basis.
In Victoria Laundry v Newman Industries, for example, Victoria Laundry were claiming
for the profits they would have made had the boiler been installed on the contractually
agreed date. Sometimes a claimant may prefer to frame his claim in the alternative on
the ‘reliance loss’ basis and thereby recover expenses incurred in anticipation of
performance and wasted as a result of the breach – Anglia Television v Reed. In a
contract for the sale of goods, the statutory (Sale of Goods Act 1979) measure of
damages is the difference between the market price at the date of the breach and the
contract price, so that only nominal damages will be awarded to a claimant buyer or
claimant seller if the price at the date of breach was respectively less or more than the
contract price. In fixing the amount of damages, the courts will usually deduct the tax (if
any) which would have been payable by the claimant if the contract had not been
broken. Thus if damages are awarded for loss of earnings, they will normally be by
reference to net, not gross, pay. Difficulty in assessing the amount of damages does not
prevent the injured party from receiving them: Chaplin v Hicks. In general, damages are
not awarded for non-pecuniary loss such as mental distress and loss of enjoyment.
Exceptionally, however, damages are awarded for such losses where the contract’s
purpose is to promote happiness or enjoyment, as is the situation with contracts for
holidays – Jarvis v Swan Tours. The innocent party must take reasonable steps to
mitigate (minimize) his loss, for example, by trying to find an alternative method of
performance of the contract: Brace v Calder.

4. Liquidated damages clauses and penalty clauses:- If a contract includes a

provision that, on a breach of contract, damages of a certain amount or calculable at a
certain rate will be payable, the courts will normally accept the relevant figure as a
measure of damages. Such clauses are called liquidated damages clauses. The courts
will uphold a liquidated damages clause even if that means that the injured party
receives less (or more as the case may be) than his actual loss arising on the breach.
This is because the clause setting out the damages constitutes one of the agreed
contractual terms – Cellulose Acetate Silk Co Ltd v Widnes Foundry Ltd. However, a
court will ignore a figure for damages put in a contract if it is classed as a penalty clause
– that is, a sum which is not a genuine pre-estimate of the expected loss on breach. This
could be the case where:

(a). The prescribed sum is extravagant in comparison with the maximum loss that could
follow from a breach.

(b). The contract provides for payment of a certain sum but a larger sum is stipulated to
be payable on a breach.

(c). The same sum is fixed as being payable for several breaches, which would be likely
to cause varying amounts of damage. All of the above cases would be regarded as
SET-1 12
penalties, even though the clause might be described in the contract as a liquidated
damages clause. The court will not enforce payment of a penalty, and if the contract is
broken only the actual loss suffered may be recovered (Ford Motor Co (England) Ltd v
Armstrong).

b. What is the difference between anticipatory and actual breach?

Answer: Anticipatory Breach:- A seller and a buyer have entered into a contract. Prior
to the start of the contract, the buyer informs the seller that he no longer requires his
goods. The seller writes back stating his intention to store the goods until the contract
expires and then sue for a breach of contract. The buyer replies with an angry letter
stating that he could just sell the goods to someone else. Advise all parties.

Actual breach:- A breach of contract occurs where a party to a contract fails to perform,
precisely and exactly, his obligations under the contract. This can take various forms for
example, the failure to supply goods or perform a service as agreed. Breach of contract
may be either actual or anticipatory. Actual breach occurs where one party refuses to
form his side of the bargain on the due date or performs incompletely. For example:
Poussard v Spiers and Bettini v Gye.

Q. 5 a. Explain the term Privity of contract.

b. Define a company? What are the features of Joint Stock Company?

Answer: Privity of contract:- The doctrine of privity in contract law provides that a
contract cannot confer rights or impose obligations arising under it on any person or
agent except the parties to it. The premise is that only parties to contracts should be
able to sue to enforce their rights or claim damages as such. However, the doctrine has
proven problematic due to its implications upon contracts made for the benefit of third
parties who are unable to enforce the obligations of the contracting parties. Third-party
rights: Privity of contract occurs only between the parties to the contract, most
commonly contract of sale of goods or services. Horizontal privity arises when the
benefits from a contract are to be given to a third party. Vertical privity involves a
contract between two parties, with an independent contract between one of the parties
and another individual or company. If a third party gets a benefit under a contract, it
does not have the right to go against the parties to the contract beyond its entitlement to
a benefit. An example of this occurs when a manufacturer sells a product to a distributor
and the distributor sells the product to a retailer. The retailer then sells the product to a
consumer. There is no privity of contract between the manufacturer and the consumer.
This, however, does not mean that the parties do not have another form of action e.g.
Donoghue v. Stevenson – here a friend of Ms. Donoghue bought her a bottle of ginger
beer, which was defective. Specifically, the ginger beer contained the partially
decomposed remains of a snail.

SET-1 13
Since the contract was between her friend and the shop owner, Mrs. Donoghue could
not sue under the contract, but it was established that the manufacturer has a duty of
care owed to their consumers and she was awarded damages in tort. Privity is the legal
term for a close, mutual, or successive relationship to the same right of property or the
power to enforce a promise or warranty.

b. Define a company? What are the features of Joint Stock Company?

Answer: Company:- The term ‘company’ implies an association of a number of
persons for some common objective e.g. to carry on a business concern, to promote art,
science or culture in the society, to run a sport club etc. Every association, however,
may not be a company in the eyes of law as the legal import of the word ‘company’ is
different from its common parlance meaning. In legal terminology its use is restricted to
imply an association of persons,’ registered as a company under the law of the land.
�

The following are some of the definitions of the company given by legal luminaries and
scholars of law. “Company means a company formed and registered under this Act or an
existing company. Existing company means a company formed and registered under the
previous company laws.” Companies Act, 1956 Sec. 3(i & ii) A joint stock company is an
artificial person invisible, intangible and existing only in the eyes of law. Being a mere
creature of law, it possesses only those properties which the charter of its creation
confers upon it, either expressly or as incidental to its very existence.” – Justice Marshall
“A company is an association of many persons who contribute money or money’s worth
to a common stock and employ it in some common trade or business and who share the
profit or loss arising there from. The common stock so contributed is denoted in terms of
money and is the capital of the company. The persons who contribute it or to whom it
belongs are members. The proportion of capital to which each member is entitled is his
share. Shares are always transferable although the right to transfer them is often more
or less restricted." - Lord Lindley From the above definitions it is clear that a company
has a corporate and legal personality. It is an artificial person and exists only in the eyes
of law. It has an independent legal entity, a common seal and perpetual succession.
Sometimes, the term ‘corporation’ (a word derived from
the Latin word ‘corpus’ which means body) is also used for a company. At present the
companies in India are incorporated under the Companies Act, 1956.

Characteristics of Joint Stock Company:- The various definitions reveal the following
essential characteristics of a company

1. Artificial Person:- A company is an association of persons who have agreed to form

the company and become its members or shareholders with the object of carrying on a
lawful business for profit. It comes into existence when it is registered under the
Companies Act. The law treats it as a legal person as it can conduct lawful business and
enter into contracts with other persons in its own name. It can sell or purchase property.
It can sue and be sued in its name. It cannot be regarded as an imaginary person
because it has a legal existence. Thus company is an artificial person created by law.

2. Independent corporate existence:- A company has a separate independent

corporate existence. It is in law a person. Its entity is always separate from its members.
SET-1 14
The property of the company belongs to it and not to the shareholders. The company
cannot be held liable for the acts of the members and the members cannot be held liable
for the acts or wrongs or misdeeds of the company. Once a company is incorporated, it
must be treated like any other independent person. As a consequence of separate legal
entity, the company may enter into contracts with its members and vice-versa.

3. Perpetual existence:- The attribute of separate entity also provides a company

a perpetual existence, until dissolved by law. Its life remains unaffected by the lunacy,
insolvency or death of its members. The members may come and go but the company
can go on forever. Law creates it and the law alone can dissolve it.

4. Separate property:- A company, being a legal entity, can buy and own property
in its own name. And, being a separate entity, such property belongs to it alone. Its
members are not the joint owners of the property even though it is purchased out of
funds contributed by them. Consequently, they do not have even insurable interest in the
property of the company. The property of the company is not the property of the
shareholders; it is the property of the company.

5. Limited liability:- In the case of companies limited by shares the liability of every
member of the company is limited to the amount of shares subscribed by him. If the
member has paid full amount of the face value of the shares subscribed by him, his
liability shall be nil and he cannot be asked to contribute anything more. Similarly, in the
case of a company limited by guarantee, the liability of the members is limited up to the
amount guaranteed by a member. The Companies Act, however, permits the formation
of companies with unlimited liability. But such companies are very rare.

6. Common seal:- As a company is devoid of physique, it can’t act in person like a

human being. Hence it cannot sign any documents personally. It has to act through a
human agency known as Directors. Therefore, every company must have a seal with its
name engraved on it. The seal of the company is affixed on the documents, which
require the approval of the company. Two Directors and the Secretary or such other
person as the Board may authorize for this purpose, witness the affixation of the seal.
Thus, the common seal is the official signature of the company.

7. Transferability of shares:- The shares of a company are freely transferable and can
be sold or purchased through the Stock Exchange. A shareholder can transfer his
shares to any person without the consent of other members. Under the articles of
association, even a public limited company can put certain restrictions on the transfer of
shares but it cannot altogether stop it. A shareholder of a public limited company
possessing fully paid up shares is at liberty to transfer his shares to anyone he likes in
accordance with the manner provided for in the articles of association of the company.
However, private limited company is required to put certain restrictions on transferability
of its shares. But any absolute restriction on the right of transfer of shares is void

8. Capacity to sue and be sued:- A company, being a body corporate, can sue and be
sued in its own name.

SET-1 15
Q. 6. Om is enrolled in a managerial course. He has to write an assignment on
company management and various types of meetings that a company holds. You
are asked to help him in preparing the assignment.

Answer: There are many types of businesses, and because of this,

businesses are classified in many ways. One of the most common
focuses on the primary profit-generating activities of a
business: Agriculture and mining businesses are concerned with
the production of raw material, such as plants or minerals.
Financial businesses include banks and other companies that
generate profit through investment and management of capital.
Information businesses generate profits primarily from the resale
of intellectual property and include movie studios, publishers
and packaged software companies. Manufacturers produce products,
from raw materials or component parts, which they then sell at a
profit. Companies that make physical goods, such as cars or
pipes, are considered manufacturers.

Real estate businesses generate profit from the selling, renting,

and development of properties, homes, and buildings. Retailers
and Distributors act as middlemen in getting goods produced by
manufacturers to the intended consumer, generating a profit as a
result of providing sales or distribution services. Most
consumer-oriented stores and catalogue companies are distributors
or retailers. See also: Franchising Service businesses offer
intangible goods or services and typically generate a profit by
charging for labor or other services provided to government,
other businesses, or consumers. Organizations ranging from house
decorators to consulting firms, restaurants, and even
entertainers are types of service businesses. Transportation
businesses deliver goods and individuals from location to
location, generating a profit on the transportation costs
Utilities produce public services, such as heat, electricity, or
sewage treatment, and are usually government chartered. There are
many other divisions and subdivisions of businesses. The
authoritative list of business types for North America is
generally considered to be the North American Industry
Classification System, or NAICS. The equivalent European Union
list is the Statistical Classification of Economic Activities in
the European Community (NACE). Management The efficient and
effective operation of a business, and study of this subject, is

SET-1 16
called management. The main branches of management are financial
management, marketing management, human resource management,
strategic management, production management, operation
management, service management and information technology
management. Reforming State Enterprises In recent decades, assets
and enterprises that were run by various states have been modeled
after business enterprises. In 2003, the People s Republic of
�

China reformed 80% of its state owned enterprises and modeled

them on a company-type management system. Many state institutions
and enterprises in China and Russia have been transformed into
joint-stock companies, with part of their shares being listed on
public stock markets.

Organization and government regulation:- Most legal jurisdictions

specify the forms of ownership that a business can take, creating
a body of commercial law for each type. The major factors
affecting how a business is organized are usually: The Bank of
England in Thread needle Street, London, England. • The size,
scope of the business firm and its structure, management, and
ownership, broadly analyzed in the theory of the firm. Generally
a smaller business is more flexible, while larger usinesses, or
those with wider ownership or more formal structures, will
usually tend to be organized as partnerships or (more commonly)
corporations. In addition a business that wishes to raise money
on a stock market or to be owned by a wide range of people will
often be required to adopt a specific legal form to do so.

The sector and country:- Private profit making businesses are

different from government owned bodies. In some countries,
certain businesses are legally obliged to be organized in certain
ways.

Limited liability:- Corporations, limited liability partnerships,

and other specific types of business organizations protect their
owners or shareholders from business failure by doing business
under a separate legal entity with certain legal protections. In
contrast, unincorporated businesses or persons working on their
own are usually not so protected.

Tax advantages:- Different structures are treated differently in

tax law, and may have advantages for this reason.

SET-1 17
Disclosure and compliance requirements:- Different business
structures may be required to make more or less information
public (or reported to relevant authorities), and may be bound to
comply with different rules and regulations. Many businesses are
operated through a separate entity such as a corporation or a
partnership (either formed with or without limited liability).
Most legal jurisdictions allow people to organize such an entity
by filing certain charter documents with the relevant Secretary
of State or equivalent and complying with certain other ongoing
obligations. The relationships and legal rights of shareholders,
limited partners, or members are governed partly by the charter
documents and partly by the law of the jurisdiction where the
entity is organized. Generally speaking, shareholders in a
corporation, limited partners in a limited partnership, and
members in a limited liability company are shielded from personal
liability for the debts and obligations of the entity, which is
legally treated as a separate "person." This means that unless
there is misconduct, the owner s own possessions are strongly
�

protected in law, if the business does not succeed. Where two or

more individuals own a business together but have failed to
organize a more specialized form of vehicle, they will be treated
as a general partnership.
The terms of a partnership are partly governed by a
partnership agreement if one
is created, and partly by the law of the jurisdiction where the
partnership is located. No paperwork or filing is necessary to
create a partnership, and without an agreement, the relationships
and legal rights of the partners will be entirely governed by the
law of the jurisdiction where the partnership is located. A
single person who owns and runs a business is commonly known as a
sole proprietor, whether he or she owns it directly or through a
formally organized entity. A few relevant factors to consider in
deciding how to operate a business include:

a. General partners in a partnership (other than a limited

liability partnership), plus anyone who personally owns and
operates a business without creating a separate legal entity, are
personally liable for the debts and obligations of the business.

SET-1 18
b. Generally, corporations are required to pay tax just like
"real" people. In some tax systems, this can give rise to so-
called double taxation, because first the corporation pays tax on
the profit, and then when the corporation distributes its profits
to its owners, individuals have to include dividends in their
income when they complete their personal tax returns, at which
point a second layer of income tax is imposed.

c. In most countries, there are laws which treat small

corporations differently than large ones. They may be exempt from
certain legal filing requirements or labor laws, have simplified
procedures in specialized areas, and have simplified,
advantageous, or slightly different tax treatment.

d. To "go public" (sometimes called IPO) -- which basically means

to allow a part of the business to be owned by a wider range of
investors or the public in general—you must organize a separate
entity, which is usually required to comply with a tighter set of
laws and procedures. Most public entities are corporations that
have sold shares, but increasingly there are also public LLCs
that sell units (sometimes also called shares), and other more
exotic entities as well (for example, REITs in the USA, Unit
Trusts in the UK). However, you cannot take a general partnership
"public." Types of meetings: Common types of meeting include:

1. Status Meetings, generally leader-led, which are about

reporting by one-way communication.

2. Work Meeting, which produces a product or intangible result

such as a decision.

3. Staff meeting, typically a meeting between a manager and those

that report to the manager.

4. Team meeting, a meeting among colleagues working on various

aspects of a team
project.

5. Ad-hoc meeting, a meeting called for a special purpose.

6. Management meeting, a meeting among managers.

SET-1 19
7. Board meeting, a meeting of the Board of directors of an
organization.

8. One-on-one meeting, between two individuals.

9. Off-site meeting, also called "offsite retreat" and known as

an Away day meeting in
the UK.

10. Kickoff meeting, the first meeting with the project team and
the client of the project to discuss the role of each team
member.

11. Pre-Bid Meeting, a meeting of various competitors and or

contractors to visually inspect a jobsite for a future project.
The meeting is normally hosted by the future customer or engineer
who wrote the project specification to ensure all bidders are
aware of the details and services expected of them. Attendance at
the Pre-Bid Meeting may be mandatory. Failure to attend usually
results in a rejected bid.

SET-1 20