bl_nim_ses5_bcon 6-jan-10

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LEGAL ENVIRONMENT OF

BUSINESS IBSSEMESTER II

MBA PROGRAM

DIPESH SHAH

COMPANY SECRETARYPGDBM (MBA FINANCE)

ICSA UK (CORPORATE LAW)


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LEGAL ELEMENTS OF CONTRACT

Introduction

Daily life governed by innumerable agreements (eg bus ticket, vehiclerepair)

Contract creates self imposed obligations

Result of promise

Contract creates legal bond

Arises only when party intend to create contract

Parties liable for loss suffered by aggrieved party Casual agreements between friends and family not contract

(case: Balfour vs. Balfour)


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LEGAL ELEMENTS OF CONTRACTBasic Concept:

Must be binding agreement

Promise that law will enforce

Agreement between two or more parties that establishes anenforceable legal relationship

All contracts are agreements bur not all agreements are cont

If agreement imposes legal obligation, it results in enforceablecontract

If imposes merely a social or moral obligation not a contract

Two basic requirement of contract:

An agreement

Legal enforceability


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Definition:

Only those agreements which are enforceable at law are

contracts. What is a contract:

when the person to whom a proposal is made signifies hisassent thereto, the proposal is said to be accepted. Proposalwhen accepted becomes a promise.


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Agreement: Agreement if an offer coupled with acceptance

More than one person

Meeting of minds (e.g. sale of car A & B)

Formation of Contracts:

Requirement of valid contracts

- (All agreements are contracts) if they are (made by the free

consent) of the (parties competent to contract) for a (lawfulconsideration) and (with a lawful object), and (not herebyexpressly declared to be void).

- Competent parties, valid consideration, free consent andlegal object


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Essentials of valid contract:

Free consent

Offer & Acceptance

Capacity

Consideration

Lawful Object

Certainty & Possibility of performance

Term of contract should be clear Agreement must not be declared void

Legal Formalities


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LEGAL ELEMENTS OF CONTRACT Free Consent: not by force, undue influence, fraud,

misrepresentation, mistake etc.

Capacity of Parties: to be major, of sound mind & not

disqualified under any existing law in force. Offer & Acceptance:

-Agreement presupposes an offer by one party which isaccepted by another party.

-lawful offer & lawful acceptance

-valid offer: made with a view to obtain consent of otherperson not a mere statement.


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LEGAL ELEMENTS OF CONTRACTKinds ofOffer:

General or Specific: public vs. individual

Express or Implied

Positive or negative

Counter-offer: it implies rejection of the original offer


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Acceptance:

It must be made by the offeree

Absolute & unqualified

In a prescribed form

Within specified time

Communication of acceptance

During the course of negotiation

Must be positive


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CLASSIFICATION OF CONTRACTS

Contracts may be classified in terms of their

(1) validity or enforceability,

(2) mode of formation, or(3) performance.

1. Classification according to validity or enforceability:

Contracts may be classified according to their validity as(i) valid, (ii) voidable, (iii) void, (iv) illegal or (v)

unenforceable.


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EXAMPLE:

A, a man enfeebled by disease or age, is induced by Bs

influence over him as his medical attendant to agree topay B an unreasonable sum for his professional services.

B employs undue influence. As consent is not free; he

can take steps to set the contract aside.

A and B contract to marry each other. Before the time fixed

for the marriage, A goes mad. The contract becomes

void.


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CLASSIFICATION OF CONTRACTSAn illegal agreement is one of the consideration or object of which

(1) is forbidden by law; or (2) defeats the provisions of any law;

or (3) is fraudulent; or (4) involves or implies injury to the person

or property of another; or (5) the court regards it as immoral, oropposed to public policy.

EXAMPLE:

A, B and C enter into an agreement for the division among them of

gains acquired or to be acquired, by them by fraud. Theagreement is illegal.

A promises to obtain for B an employment in the public service,

and B promises to pay rupees 1,000 to A. The agreement is

illegal.


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An unenforceable contract is neither void nor voidable,

but it cannot be enforced in the court because it lacks

some item of evidence such as writing, registration or

stamping. For instance, an agreement which is

required to be stamped will be unenforceable if the

same is not stamped at all or is under-stamped.


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CLASSIFICATION OF CONTRACTS2. Classification According to Mode of Formation: There are different

modes of formation of a contract. The terms of a contract may be

stated in words (written or spoken). This is an express contract. Also

the terms of a contract may be inferred from the conduct of the partiesor from the circumstances of the case. This is an implied contract.

Example:

If A enters into a bus for going to his destination and takes a seat, the

law will imply a contract from the very nature of the circumstances,

and the commuter will be obliged to pay for the journey.A, a tradesman, leaves goods at Bs house by mistake. B treats the

goods as his own. B is bound to pay A for them.

In all the above cases, the law implies a contract and a person who has

got benefit is under an obligation to reimburse the other.


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3. Classification According to Performance: Another method ofclassifying contracts is in terms of the extent to which they havebeen performed. Accordingly, contracts are: (1) executed, and(2) executory or (1) unilateral, and (2) bilateral.

An executed contractis one wholly performed. Nothing remains tobe done in terms of the contract.

Example

A contracts to buy a bicycle from B for cash. A pays cash. Bdelivers the bicycle.

An executory contract is one which is wholly unperformed, or inwhich there remains something further to be done.

Example

On June 1, A agrees to buy a bicycle from B. The contract is to be

performed on June 15.


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Void Agreements:

Void Agreements:

An agreement not enforceable by law is said to be void

Agreements by incompetent parties

Agreements under mutual mistake of fact material to theagreement (e.g. sale of bike & same destroyed on the day ofcontract, no knowledge to either party agreement is void)

Agreements with unlawful consideration or object (e.g. A, B and Center into an agreement for the division among them of gains acquired or to

be acquired, by them by fraud. The agreement is illegal)

Agreement is unlawful in part (e.g. two promises one legal, otherillegal & consideration paid for one agreement void)

Agreements without consideration

Agreement in restrain of trade (e.g. paying rival to close business)


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Void Agreements:

Void Agreements:

An agreement not enforceable by law is said to be void Agreement in restrain of legal proceedings (e.g. A & B agree

that A will never realize the price by a suit in any court forgoods sold to B), however clause of arbitration is allowed.

Agreements which are uncertain and ambiguous

Agreement by way of bet

Agreement to do impossible act (e.g. Vivek has entered intoagreement with Class to show sun in the night)


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COMMUNICATION OF OFFER, ACCEPTANCEAND

REVOCATION

COMMUNICATION OF OFFER, ACCEPTANCE AND REVOCATION

As mentioned earlier that in order to be a valid offer and acceptance.

(i) the offer must be communicated to the offeree, and(ii) the acceptance must be communicated to the offeror.

Similarly, revocation of offer by the offeror to the offeree and revocation of

the acceptance by the offeree to the offeror must be communicated.

According to Section 4, the communication of a proposal is complete when

it comes to the knowledge of the person to whom it is made.


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REVOCATION

The completion of communication of acceptance has two aspects, viz:

(i) as against the proposer, and

(ii) as against the acceptor.

The communication of acceptance is complete:(i) as against the proposer, when it is put into a course of transmission to

him, so as to be out of the power of the acceptor;

(ii) as against the acceptor, when it comes to the knowledge of the

proposer

A proposes, by letter, to sell a house to B at a certain price. B accepts As

proposal by a letter sent by post. The communication of acceptance is

complete: (i) as againstA, when the letter is posted by B; (ii) as against

B, when the letter is received by A.


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REVOCATION

The communication of a revocation (of an offer or an acceptance) is

complete:

(1) as against the person who makes it, when it is put into a course of

transmission to the person to whom it is made, so as to be out of the

power of the person who makes it.

(2) as against the person to whom it is made when it comes to his

knowledge.

Example

A proposes by letter, to sell a house to B at a certain price. B accepts the

proposal by a letter sent by post.A revokes his proposal by telegram. The revocation is complete as against

A, when the telegram is dispatched. It is complete as against B, when B

receives it.

B revokes his acceptance by telegram. Bs revocation is complete as

against A, when the telegram is dispatched


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Caselet Bhagwandas Goverdhandas Kedia

CONTRACTS OVER TELEPHONE


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Messrs. Girhdarilal Parshottamdas and Company - hereinafter called "theplaintiffs" - commenced an action in the City Civil Court at Ahmedabad againstthe Kedia Ginning Factory and Oil Mills of Khamgaon - hereinafter called "thedefendants" for a decree for Rs. 31,150 on the plea that the defendants hadfailed to supply cotton seed cake which they had agreed to supply under an

oral contract dated July 22, 1959 negotiated between the parties byconversation on long distance telephone.

The plaintiffs submitted that the cause of action for the suit arose atAhmedabad, because the defendants had offered to sell cotton seed cakewhich offer was accepted by the plaintiffs at Ahmedabad, and also becausethe defendants were under the contract bound to supply the goods atAhmedabad, and the defendants were to receive payment for the goodsthrough a Bank at Ahmedabad.

The defendants contended that the plaintiffs had by a message communicatedby telephone offered to purchase cotton seed cake, and they (the defendants)had accepted the offer of Khamgon, that under the contract delivery of thegoods contracted for was to be made at Khamgon, price was also to be paid atKhamtgaon and that no part of the cause of action for the suit had arisenwithin the territorial jurisdiction of the City Civil Court, Ahmedabad.


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The defendants contend that in the case of contract by conversation ontelephone, the place where the offer is accepted is the place wherethe contract is made, and that Court alone has jurisdiction withinthe territorial jurisdiction of which the offer is accepted and the

acceptance is spoken into the telephone instrument.

The plaintiffs on the other hand contend that making of an offer is apart of the case of action in a suit for damages for breach ofcontract, and the suit lies in the Court within the jurisdiction ofwhich the offeror has made the offer which on acceptance hasresulted into a contract. Alternatively, they contend that intimation

of acceptance of the offer being essential to the formation of acontract, the contract takes place where such intimation is receivedby the offeror.


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Making of an offer at a place which has been accepted elsewhere doesnot form part of the cause of action in a suit for damages for breachof contract. Ordinarily it is the acceptance of offer and intimation ofthat acceptance which result in a contract.

By intimating an offer, when the parties are not in the presence of eachother, the offeror is deemed to be making the offer continuously tillthe offer reaches the offeree. The offeror thereby merely intimateshis intention to enter into a contract on the terms of the offer.

The offeror cannot impose upon the offered an obligation to accept,nor proclaim that silence of the offeree shall be deemed consent.

A contract being the result of an offer made by one party andacceptance of that very offer by the other, acceptance of the offerand intimation of acceptance by some external manifestation whichthe law regards as sufficient is necessary.


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If there be no "meeting of minds" no contract may result.There should, therefore, be an offer by one party, express orimplied, and acceptance of that offer by the other in thesame sense in which it was made by the other.

But an agreement does not result from a mere state of mind;intent to accept an a offer does not given rise to a contract.There must be intention to accept and some texturalmanifestation of that intent by speech, writing or other act,and acceptance must be communicated to the offeror,unless he has waived such intimation.

See slide Communication, Acceptance & Revocation


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When a contract is made by post it is clear law throughout the commonlaw countries that the acceptance is complete as soon as the letteris put into the post box, and that is the place where the contract ismade. But there is no clear rule about contracts made by telephone

or by Telex Communications by these means are virtuallyinstantaneous and stand on a different footing".

and after examining the negotiations made an a contract arrived at bytelephonic conversation in different stages. Denning L. J. observedthat in the case of a telephonic conversation the contract is onlycomplete when the answer accepting the offer was made and thatthe same rule applies in the case of a contract by communication by

Telex. He recorded his conclusion as follows:that the rule about instantaneous communications between the parties

is different from the rule about the post. The contract is onlycomplete when the acceptance is received by the offeror: and thecontract is made at the place where the acceptance is received."


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It appears that in a large majority of European countries therule based on the theory of consensus idem, is that acontract takes place where the acceptance of the offer iscommunicated to the offeror, and no distinction is made

between contracts made by post or telegraph and bytelephone or Telex. In decisions of the State Courts in theUnited States, conflicting views have been expressed, buythe generally accepted view is that by "the technical law ofcontracts the contract is made in the district where theacceptance is spoken". This is based on what is called "the

deeply rooted principle of common law that where theparties impliedly or expressly authorised a particularchannel of communication, acceptance is effective when andwhere it enters that channel of communication".


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Obviously the draftsman of the Indian Contract Act did not envisageuse of the telephone as a means of personal conversation betweenparties separated in space, and could not have intended to makeany rule in that behalf.

The question then is whether the ordinary rule which regards acontract as completed only when acceptance is intimated shouldapply, or whether the exception engrafted upon the rule in respectof offers and acceptances by post and by telegrams is to beaccepted.

If regard be had to the essential nature of conversation by telephone,it would be reasonable to hold that the parties being in a sense in

the presence of each other, and negotiations are concluded byinstantaneous communication of speech, communication ofacceptance is a necessary part of the formation of contract, and theexception to the rule imposed on grounds of commercial expediencyis inapplicable.


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The Trial Court was, therefore, right in the view which it hastaken that a part of the cause of action arose within the

jurisdiction of the City CivilCourt, Ahmedabad, whereacceptance was communicated by telephone to theplaintiffs.

The appeal, therefore, fails and is dismissed with costs.


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Caselet IS a contract entered into by a minor

valid?


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Caselet IS a contract entered into by a minor

valid?A contract with or by a minor is void and a minor, therefore, cannot, bind himself by a

contract. A

minor is not competent to contract. In English Law, a minors contract, subject to certain

exceptions, is

only voidable at the option of the minor.

In 1903 the Privy Council in the leading case ofMohiri Bibi v. Dharmodas Ghose (190, 30

Ca. 539) held that in India minors contracts are absolutely void and not merely

voidable.

The Privy Council had to ascertain the validity of the mortgage. Under Section 7 of theTransfer of Property Act, every person competent to contract is competent to

mortgage. The Privy Council decided that Sections 10 and 11 of the Indian Contract

Act make the minors contract void.

The mortgagee prayed for refund of Rs. 8,000 by the minor. The Privy Council further held

that as a minors contract is void, any money advanced to a minor cannot be recovered.


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Caselet Can Advertisements create a

Contract?


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Caselet Can Advertisements create a

Contract?

A contract is an agreement enforceable by law and is the result of proposal andacceptance of the proposal. The proposal when accepted becomes apromise. Now it may be conceded, that, as Bown L. J. said in Carlill v.

Carbolic Smoke Ball Co. (1893) 1 QB 256 ." as an ordinary rule of law an acceptance of an offer made ought to be notified

to the person who makes an offer, in order that the two minds may cometogether"


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QUIZ


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Introduction to Legal Environment

HOME ASSIGNMENT I

8 Group of 5 each & 2 group of 6 each Name of Group with members by 31stOct 07

Start Date of Assignment 1stNovember

Mid review post diwali

Submission 30th November


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Introduction to Legal EnvironmentHOME ASSIGNMENT I

Topics

Pre Initial Public Offer (IPO) Procedure

Formation of Company in India Law & Procedure Foreign Exchange Law & its impact on business

Various forms of business & basis for deciding any particular form

Various laws and its implication on Banking business

Study of EDIFAR filing system of SEBI

Various Corporate filing with stock exchanges and its implication / benefits Study of Clause 49 of Listing Agreement on Corporate Governance with study

of 3 companies

Opening Company / branch / rep. Office outside India theory & practicalaspects

Law relating to credit cards in India

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