LEB MODULE FOR MBA STUDENTS SYLLABUS DETAILED PPT

LEGAL ASPECTS OF BUSINESS
KNOWLEDGE

1. MB010106 Legal Environment of Business

2. Module 1 Introduction to Legal System Sources of Law – Classification of Law-Natural Justice The Indian Contract Act 1872 - Nature and Classification of contracts Essential elements of a valid contract - Offer and Acceptance Consideration - Capacity of Parties - Provisions relating to free consent, void agreements - Provisions Relating to Performance Discharge of Contracts - Quasi contracts – Breach of Contract and its Remedies.

3. Law

4. What is Law? The body of rules whether proceeding from formal enactment or custom, which a particular State or Community recognizes as binding on its subjects or members It is a body of rules Meant for guidance or conduct of people It is imposed It is enforced Involves a State Content of Law: Dynamic Characteristics of Law

5. Characteristics of Law 1. Law is a body of rules : what can be done; what cannot be done 2. Law is for guidance/conduct : Ensure the actions of persons conform to predetermined standard or pattern 3. Law is imposed : Law is made obligatory on the members of the society 4. Law is enforced: Force can be used to secure obedience to laws 5. Involves a state: Law presupposes a state 5. Content of the Law: Law changes throughout the course of history

6. Classification of Law Public Law vs. Private law Public law: branch of law which determines and regulates the organization and functioning of states (Countries) Private law: The branch of law which regulates the organization and functioning of the relations of the citizens with one another Law of contract Law of tort Law of property Law of succession Family laws Administrative law Law of contract Law of tort Criminal Law Law of succession Municipal Law Family laws International Law Law of property Administrative law Criminal Law Municipal Law International Law Private Law Public law Question time: Identify if the following law are private or public

7. Classification of Law Criminal law and Civil law Criminal Law: The part of law that characterizes certain kinds of wrongdoings as offences against the state Civil law: Primarily concerned with the rights and duties of individuals towards each other. National law and international law International Law: Set of generally accepted rules and regulations controlling the conduct of the nations, international organizations and individuals Municipal law/National law: Internal legal rules of the country Statute law and common law Statute Law: Laws laid down in the Acts of Parliament or assemblies Common Law: Those principles, usages and rules of actions applicable to government, security of persons and property; Includes unwritten laws and usages

8. Sources of Law 1. Customs Rules of human action, established by usage and regarded as legally binding - Unwritten Should have been observed continuously for a very long time without interruption Must be supported by the general public Should not conflict with the statutory law 2. Judicial Precedents Previous decision of the court long standing decision is not over-ruled 3. Legislation Statutory laws created by legislation such as Parliament Called enacted law 4. Conventions Rules voluntarily agreed by the parties for the regulation of their conduct towards eachother Eg: bye laws of a club Sources of law: Authority from which the law derives its force or validity

9. Natural justice Three major principles Authorities are required to act with fairness and in a just and equitable manner Rules against bias Hear the other side Reasoned decision Should be impartial No man shall judge his own cause Justice should not only be done but manifested and undoubtedly seem to be done Judges should be above suspicion Notice : Before an action is taken the affected party must be given a notice to show cause Opportunity of hearing : Person who is affected Party to dispute has the right to know the result of

10. Indian Contract Act 1872

11. Meaning of contract The law of contract regulates all commercial activities by sorting out the promises that are enforceable and how they can be enforced

12. The I ndian C ontract A ct, 1872 Based on the English Common Law Came into force on 1 September 1872 Extends into the whole of India

13. Defining a contract An agreement enforceable by law is a contract [Section 2(h)] Contract Legal Obligation Agreement Every promise or set of promises forming consideration for each other Agreement Promise: An accepted offer Legal Obligation An agreement must have legal obligation to become a contract. All contracts are agreements; all agreements are not contract

14. Essentials of valid contract Agreement Agreement = offer + acceptance 2. Consensus ad idem The parties to a contract must agree upon the subject matter of the same contract in the same manner and in the same sense. Example 3. Capacity of the parties The parties must be legally capable of entering into a contract – attained the age of majority, of sound mind and not disqualified from entering into a contract 4. Free consent Mutual consent between the parties – not by coercion, under influence, fraud, misrepresentation 5. Consideration Something in return

15. 6. Lawful object The object of agreement must be lawful – Not illegal, immoral or opposed to the public policy 7. Not declared to be void The agreement might not have been expressly be declared void by any law in the country Eg: A agrees to supply liquor to B. Subsequently prohibition act comes into force. Thus all agreements to supply liquor becomes void 8. Certainty and possibility of performance Certain and precise. 9. An intention to create legal relationship Example

16. Consensus ad idem A has two Maruti cars. One is a 2005 model and the other is 2006 model. A offers to sell his 2005 model to B for Rs.50000 while B is under the impression that he is being offered the 2006 model. Is this a valid contract? This deal lacks identity of minds. The buyer and seller are thinking of different cars. Hence there is no agreement and no contract

17. Case A husband, native of England was a civil servant and was posted in Ceylon. His wife could not accompany him because of ill health. The husband had promised her to pay $ 30 per month as maintenance during the time they were away. However he failed to keep his promise. The wife filed a suit for breach of agreement Petition was dismissed on the ground that the agreement was of a domestic nature and the parties never intentioned to give legal obligation

18. Summary: Valid Contract Agreement Consensus ad idem Capacity of parties Free consent Consideration Lawful Object Not declared to be void Certainty of performance Intention to create legal relationship

19. Assignment Using examples, differentiate between an agreement and a contract

20. Classification of Contracts Based on enforceability Valid, void and voidable contracts Unenforceable and illegal contracts Based on the fulfilment of obligations Executed or executory contracts Based on how it is established Express and Implicit contracts Based on how the way in which contract arises Unilateral and bilateral contracts Quasi contracts E contracts

21. Based on enforceability Valid Contract A contract that fulfills all the legal requirements Void Contract A contract that has no binding influence on any party Section 2(j) : A contract that ceases to be enforceable by law becomes void when it ceases to be enforceable Example Voidable Contract Section 2(i) : An agreement which is enforceable by law at the option of one or more of the parties thereto but not at the option of other/others Legally enforceable unless avoided – ie, a party to the contract refuses to abide by it Example

22. Unenforceable and illegal contracts Unenforceable Contract A contract that is valid otherwise but cannot be enforced by one or both the parties because of some technical flaw (Eg: need for registration, attestation etc.) Example: A contract of insurance is unenforceable unless evidenced in writing Illegal or unlawful contract An agreement which the law forbids. Example

23. Void contract – example A promises to see his luxury car to B. If B dies or goes mad before the money changes hands, the contract would be void A, a rice merchant based in Delhi agreed to sell B, residing in Kerala, 100 bags of Basmati rice at a rate of Rs.1500 per bag But before delivery the government imposed ban on inter state trading in rice. The contract becomes void NB: Void contract need not be void from the inception of the contract. But can become void during the course

24. Voidable contract A agreed to sell his horse to B for Rs.5000. The consent of A was obtained by the use of force. The contract is voidable at the option of A. A threatens to shoot B if he does not sell his car worth Rs. 200000 for Rs.100000. B agrees. The contract is voidable at the option of B.

25. Based on fulfilment of obligations Executed contracts A contract where both the parties have done all that the contract required of them Executory Contracts A contract in which the reciprocal promises or obligations are yet to be carried out

26. Based on how it is established Express contract A contract that very lucidly conveys the purpose of the agreement; Parties state the terms and intentions in words Implied Contract Contract based on some non verbal conduct or assumed intentions or relationships between the parties When one party knowingly accepts a benefit from another party in circumstances where the benefit cannot be considered a gift

27. Based on the way in which contract arises Unilateral contracts One of the parties performs the promises at the time of making the contract and the other party promises to perform in future Eg: A tells B : “I will sell you my car if you give me Rs.50000 . Bilateral contracts Both the parties are to perform their respective promises or obligations at some future time but not necessarily at the same time

28. Quasi Contracts The act of a person, permitted by law , by which he/she obligates himself/herself towards another without any agreement between them Not a contract but an “obligation” created by law in the absence of an agreement Eg: A delivery boy by mistake delivers grocery to a wrong address. The owner of the house consumes the supply. Can he be held liable for payment? The man will be held liable for payment as the law aims to create an obligation upon a non contracting party to avoid injustice

29. E Contracts Electronically made contract Any kind of contract formed in the course of e-commerce by the interaction of two or more individuals using electronic means Traditional contract principles apply to e-contracts as well Legalized by the Information Technology Act

30. Offer and acceptance An agreement is an offer by one party and acceptance by another Offer : Medium through which a person expresses his intention to enter into a contractual obligation against a promise or an act of forbearance Expression of readiness to do or not to do something Offer is made to another party Made with the intention that the other person accepts it Acceptance : Manifestation of the assent to the offer Must be made while the offer is in force Offer becomes irrevocable upon acceptance

31. Consideration Lawful consideration is required for giving enforceability to an agreement (Section 10) Agreement made without consideration is void (Section 25) Consideration – “Something in return” When a party agrees to offer something, he should also get something in return When at the desire of the promisor, the promisee has done or abstained from doing something – such act, abstinence or promise – is called consideration

32. Essentials of consideration Consideration must move at the desire of the promisor Eg: X’s son is missing. Y voluntarily goes in search of him. Y cant claim any remuneration or reward for finding X’s son Consideration may move from promisee or any other person on behalf of the promisee Implication: A stranger to the consideration can sue Consideration may be past, present or future Consideration need not be adequate Eg: A agrees to sell his watch worth Rs.20000 for Rs. 2000 to B. Consideration must be real and not illusionary Consideration must be lawful Consideration must be something which the promisor is not already bound to do

33. Stranger to the consideration can sue? A settled her property through a gift deed to her daughter B with the direction that B should pay her uncle C a certain amount of money annually. On the same day B entered into an agreement with her uncle C to pay him the agreed amount. Later B refused to pay the amount to C on the ground that no consideration had moved from C to B. Hence C filed a case against B to recover the money It was settled that the consideration that was moved from A can be presumed as having moved from C and he was entitled to get the amount from B.

34. Consideration may be past, present or future Past X’s son was rescued from drowning by Y on 15 Aug at the request of X. On 17 th , X promised to pay Rs.500 for the service rendered. Present X agrees to sell his phone for a sum of Rs.5000 to Y. Accordingly X gives his phone and Y pays the price immediately Future X agrees to look after the child of Y. he agrees to receive all expenses incurred by him from Y at the end of the year.

35. “No consideration, No contract” – Exceptions Agreement based upon love and affection Expressed in writing; Registered; Parties should stand in a near relation to each other Agreement to pay compensation for past voluntary services Eg: A find B’s purse and hands it over to him. B, in return promises to give him Rs. 500. Agreement to pay a time-barred debt Eg: A borrows Rs.500 from B. Under the Limitation Act 1963, B must take steps to recover the money within 3 years from the date of loan. But he did not do that. Hence the debt is barred. After 3 years, A promises B by way of writing to repay the amount to B. This is a valid contract Completed gifts

36. Example, Peter and John are brothers. In his will, their father nominates Peter as the sole owner of his entire property after his death. John files a case against Peter to claim his right to the property but loses the case. Peter and John come to a mutual decision where Peter agrees to give half of the property to his brother and register a document regarding the same. Eventually, Peter didn’t fulfil his promise and John filed a suit for recovery of his share in the property. The Court held that since the agreement was made based on natural love and affection, the no consideration no contract rule didn’t apply and John had the right to recover his share.

37. Capacity to contract The legal ability of a person to enter into a valid contract Section 10 – Every person is competent to enter into a contract if He is of age of majority He is of sound mind He is not disqualified by any law from contracting Minor A person not attained 18 years of age Agreement with or by minor is void Minor is not bound to return benefits received Minor cannot ratify his act Restitution of the property from minor Principle of estoppel not applicable to minors Minor is liable for necessaries supplied Persons of unsound mind Idiots – person who has completely lost his mental powers Lunatics – whose mental powers are deranged due to some mental strain Drunken person Persons disqualified by any law Alien enemies Felons or convicts Insolvents or Bankrupts

38. Performance of contract

39. Performance of contracts Carrying out the obligations in the contract When the terms of a contract are fulfilled by the respective parties of the contract. Performance of a contract takes place The contract may be performed by The promisor Especially if the contract involves the exercise of personal skill and qualifications of the promisor Agent of the promisor When the personal skill of the promisor is not necessary Legal representative of the promisor When the promisor dies before the performance of the contract Third person If the promisee accepts performance of the promise from a third party

40. Time and place of performance It is for the parties to decide on the time and place of performance Where time is not fixed The contract must be performed in reasonable time Where time is fixed Any time during the business hours of that day Place of performance If the contract mentions a place, the contract must be performed at the place mentioned; else a reasonable place

41. Time is of the essence of the contract Sec 55 – In a contract where intention of the parties is clear that the time is the essence of the contract and if the promisor fails to perform the obligation in the time fixed, the contract becomes voidable In commercial contracts, time is of essence as prices of goods fluctuate very rapidly Sec 55 – If the intention of the parties is such that the time is not the essence of the contract, default in performing the contract by the promisor in particular time does not make the contract voidable But, in this case the promisee is entitled to compensation from the promisor for any loss incurred If the promisee accepts performance of a promise at any time other than that agreed, the promisee cannot claim compensation for any loss incurred due to non performance of the promise unless at the time of acceptance he gives notice to the promisor of his intentions to do so

42. When can the contract be not performed? A promise under an agreement which is void If the parties to contract agree to substitute a new contract for it or alter it If the person at whose option it is voidable rescinds it If the promise neglects or refuses to afford the promisor reasonable facilities for the performance of promise

43. Discharge of Contracts

44. Discharge of contract The termination of the contractual relationship between the parties By performance By agreement By time lapse By operation of law By impossibility of performance By breach of contract

45. Discharge by performance When persons who have undertaken the obligations within the time and in the manner prescribed the contract will be properly discharged Actual performance Attempted performance/Tender In order to claim performance, parties to a contract must have actually performed their part of the contract Eg: If A agreed to supply 20 bags of rice to B, when A actually supplies the 20 bags of rice the contract is discharged A person who is bound to perform a promise will be ready to perform and will also offer to perform his promise but sometimes the other party may refuse to accept the performance. This is attempted performance The promisor is discharged from the responsibility of non performance of the contract

46. Discharge by Agreement As contract emerges from an agreement of both parties, it may also be terminated by another agreement or consent of both parties By Novation By Alteration By Recession By Remission By Waiver By Merger Substitution of a new contract – A new contract in the place of the original contract. Either the contract or the parties are substituted (eg: Car loan) Change in one or more terms of the contract. Cancellation of the contract by mutual agreement. The original contract need not be performed thereafter Acceptance of a lesser performance than what was actually due under the contract When both parties, by mutual consent, agree of abandon their respective rights, the contract is discharged Merge the existing contract into a superior one. Eg: tenant becoming the owner

47. Discharge by Lapse of time Every contract must be performed within specific period – this is called the period of limitation. If the contract is not performed and the promisee fails to take any action within the period of limitation, the contract is terminated or discharged by lapse of time Example: X borrows money from Y through a promissory note. If X does not pay the amount, Y must file a suit to recover the amount in a court of law within 3 years from the date of execution of the promissory note. If no action is taken by Y within 3 years, then the promissory note is barred by limitation and Y cannot recover the amount from X.

48. A contract may be discharged by the operation of law. Law itself discharges the contract in the following circumstances By Death By Insolvency The contract, which is based on the personal skill and qualification of the promisor is terminated on the death of the promisor In other contracts, the rights and liabilities are passed on to his legal heir If a person is adjudicated insolvent by a competent court, all his rights and liabilities are vested with the official receiver and the insolvent is discharged from all his rights and liabilities arising from earlier contracts Discharge by operation of Law

49. Discharge by impossibility of performance Contract will be discharged when the performance of contract becomes impossible Impossibility at the time of formation of contract Impossibility arising subsequent to the formation of contract When both the contracting parties are aware of the impossibility of performance of the contract even at the time of formation of the contract itself, then the agreement becomes void. Example 1 When both the parties are not aware of the fact that the performance is impossible at the time of performance of the contract, then the contract becomes void when such impossibility is discovered. Example 2 Impossibility which arises subsequent to the formation of the contract is called subsequent or supervening impossibility As a general rule the impossibility of performance will not excuse the promisor and in case of non performance the promisor is liable to pay damages to the promisee But sometimes, the non performance may be due to events beyond control. Such cases the performance will be discharged. Example Destruction of subject matter Death or personal incapacity of the promisor Contract becoming illegal

50. Impossibility at the time of contract Example 1 - At the time of contract X agrees to pay Y Rs. 10,000 and Y, in return promises to bring the moon from heaven for X. In such a case the impossibility is known to the parties Example 2 – At the time of contract X agrees to sell his car to Y. But, unknown to both the parties the car had already been destroyed by fire even at the time of entering into the contract

51. Supervening impossibility Doctrine of supervening impossibility Example A and B contract to marry each other. Before the time fixed for marriage, A goes mad. This supervening factor renders the contract impossible. Thus the contract becomes void

52. Discharge by breach of contract Breach : Failure of a party to perform his obligation under a contract Actual breach of contract At the time when the performance is due If a person fails to perform his part when the contract is due, actual breach of contract occurs and is liable for breach During performance If during performance, one of the parties refuses to perform his contract in some essential respect, the other party is exonerated forth with from any further performance of his promise Anticipatory breach of contract When a party to contract refuses to perform his obligation before the due date of the performance

53. Remedies for breach of contracts 1. Rescission of Contract (Cancellation) 2. Suit for specific performance 3. Suit for Injunction 4. Suit upon Quantum Meruit 5. Suit for damages

54. Rescission of contract Annulment / revocation 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 freed from all his obligations under the court Example A promises to supply certain goods to B for a price. A does not supply the goods. B is discharged of his liability to pay the price. A person who rightfully rescinds a contract is entitled to compensation for any damage

55. 2. Restitution Return of the benefit received by one party from the other party in a void contract When an agreement is, later, discovered to be void or when a contract becomes void, any person who received any advantage under such contract is bound to restore it or to make compensation for it to the person from whom he received it Example: A pays B Rs. 50000 in consideration of B’s promise to take care of his pet dog. But the dog is dead at the time of performance. The agreement is void at the time when the death is known. So B must repay the amount

56. 3. Suit for specific performance In some cases we expect the agreement to be performed In such cases the court will grant equitable remedy Specific performance of the contract Actual performance of the particular contract as per agreement; granted when compensation is not adequate remedy or accurate damages cannot be assessed Order of injunction Injunction – order of the court restraining or preventing a person from doing a particular act. This is a mode of securing specific performance by the negative terms of a contract Example

57. Suit for injunction - Example A contracts with B to sing for twelve months at B’s theatre and further agrees that he will not sing in any other place during that period (negative term of the contract) . Subsequently A entered into a contract with C to sing in C’s theatre and refused to sing in B’s theatre. Now B can file a suit and obtain an order of injunction preventing A from singing in C’s theatre

58. 4. Suit upon ‘Quantum Meruit’ Quantum meruit – “as much as earned” or “as much as is merited” When a person has done some work under a contract and the other party repudiates the contract or some event happens which makes further performance of the contract impossible, then the party who has performed the work can claim remuneration for the work already done Cases of Quantum Meruit When an agreement is discovered to be void or when a contract becomes void any person who has received any advantage has to make compensation for it When a thing is lawfully done or goods are supplied by a person without any intention to do so gratuitously to another person and such person enjoys benefit thereof he is bound to make compensation to the former When there an express or implied contract to render service but there is no agreement on compensation, reasonable remuneration is payable When the completion of the contract has been prevented by the act, the person who did the work can recover an quantum meruit for the work done When the contract is divisible and the party not in default has enjoyed the benefits of the part performance the party in default may sue When an indivisible contract for a lump sum is completely performed but badly the party who has performed the contract can claim compensation but other party can make a deduction for bad work

59. 5. Suit for damages Damage – Monetary compensation payable by the defaulting party to the injured party in the event of breach of contract A way of compensation for the loss suffered; not for punishing the defendant for breach General or ordinary damage – injured party may suffer some damage or loss due to breach of contract Special damages – breach of contract under special conditions Exemplary or Vindictive damages – to punish the defaulting party who injured the feelings of others In the case of breach to promise to marry When the banker refuses to honour the cheque of the customer while he has funds in his account to meet it Nominal damage – in cases where the injured party is able to prove the breach of contract but he has not suffered any real and substantial loss

60. Quasi Contracts Relations or obligations resembling those created by contracts Recognized by courts of law on principles of equity and they are enforceable in the courts of law Rests on the ground of equity that a person shall not be allowed to enrich himself unjustly at the expense of another Quasi contracts are implied contract – obligations resemble original contracts Not intentionally entered into but create legal obligations

61. Differences between contracts and quasi contracts Will of parties: Contract arises from the will of parties with the view to create an obligation. Quasi contract resembles the obligation There is no agreement at all in Quasi contract. A contract is an agreement Essentials of formation of contract is absent in quasi contracts Contract is full and binding ; Quasi contract is implied

62. Kinds of quasi contracts Necessaries supplied to a person incapable of contracting Payment by an interested person Liability to pay non gratuitous act Obligation of a finder of goods Payment by mistake or under coercion

63. Necessaries supplied to a person incapable of contracting Conditions Goods supplied must be necessities Such goods to be suppled only to incapable persons like minor or lunatic or their dependents Such necessities should not b supplied out of pity or kindness Example C supplies to the wife and children of B, a lunatic, some necessaries suitable for maintenance of their life. C is entitled to be reimbursed from B’s property

64. Payment by an interested person A person who is interested in the payment of money which another is bound by law to pay and who therefore pays it, is entitled to be reimbursed by the other Conditions A person on whom the amount is paid, is bound to pay The person who pays the amount has some interest in the payment There is legal or other coercive process compelling payment Example A is a tenant and he is cultivating the lands belonging to B who is the landlord. B fails to pay taxes due and hence the said land is brought for sale by the government. Immediately A pays the arrears due on behalf of his landlord and saves the land from auction.

65. Liability to pay non-gratuitous acts Where a person lawfully does anything for another person or delivers anything to him not intending to do so gratuitously, and the other person enjoys the benefit thereof, then the latter is bound to make compensation to the former in respect of, or to restore the thing Conditions Thing must be done lawfully Must be done by a person not intending to act gratuitously Person to whom the act is done must have enjoyed the benefit Example A tradesman leaves goods at B’s house by mistake. B treats the goods as his own and consumes. A does not leave the goods as gift to B. In such a case B is bound to pay A the value of goods.

66. Finder of goods A person who finds goods belonging to another and takes them into custody (finder of goods) is subject to the same responsibility as a bailee He must try to find the true owner of the goods and he should not use the same for his personal purposes But he is entitled to receive compensation for the trouble and expenses voluntarily incurred by him to preserve the goods and finding out the owner He can also claim the reward offered by the real owner