College of Engineering Pune

 SUBJECT: Business Law and Ethics

Q.1 Explain essentials of valid contract

Ans:
Contract Act defines a Contract as “An agreement which is enforceable by Law”

An Agreement is a settlement between two parties, which contains obligations or promises which
both parties need to fulfil. When such an agreement is made binding by Law it becomes a Contract.

For Example

Ramesh and Suresh, in which Ramesh proposed to buy a car from Suresh for Rs. 4,00,000, Suresh
accepts the proposal. The agreement is said to be a contract as it is enforceable by law. Concisely,
Contract= Agreement(accepted proposal) +Enforceable by law (defined inside the purview of law).

According to Sec. 10, “All agreements are contract if they are made by the free consent of parties
competent to contract for a lawful consideration and with a lawful object and are not expressly
declared to be void.”

Thus, Sections 2(h) and 10 of the Act state that there are some essential elements of a valid contract. If
any of these elements is not satisfied by an agreement, it will affect the validity and will not form a
valid contract.

Indian Contract Act, has stipulated following ten essential elements to “Valid Contract”:

1.Offer and acceptance- The first and basic element of the valid contract is offer and acceptance,
without offer and acceptance a contract can not arise. According to section 2 (a), the offer is defined as
''When one person signifies his willingness with another person to do or to abstain from doing
something to obtain the assent of the other to such act or abstinence. He said to make a
proposal/offer." According to section 2 (b), acceptance is defined as "When the person to whom the
offer is made, signifies his willingness through his consent and gives acceptance to the offer. He said to
make an acceptance to the offer." And, when the offer is accepted becomes a promise.

Accordingly, the offer or promise must be made by an offer or promisor (the party who makes an
offer) and the acceptance of that offer must be made by the who give offer or promise or acceptor (the
party for whom the offer is made) is essential to constitute an agreement.

2.Legal relationship- Intention to create legal relation is a necessary and independent element in
The making of a contract. As far as the common law is concerned, the very presence of consideration
often leads to the inference that an intention to create legal relations exists. However, in some cases, a
mere presence of consideration does not automatically give rise to the presence of intention to create
legal obligations.

For example, suppose in an agreement between a husband and a wife, the husband agrees to buy his
wife a bracelet if she types a manuscript for him, probably represents consideration in the literal
sense but is lacking an intention to create legal obligations. Therefore, evidence should establish that
the intention of the parties is to enter into contract. Thus, purely domestic or social arrangements do
not contemplate to give rise to legal consequences. For instance, an invitation to a feast is not
intended to create legal obligations and therefore does not result in a contract if the invitation is
accepted.

3. Capacity of Parties-The parties must be legally capable of entering into a contract. But how
can the competency of contracting parties be determined? In this regard, Section 11 specifies that
every person is competent to contract who has attained the age of majority as per the law of his
country, who is of sound mind, and who is not disqualified from contracting by any of his domestic
laws. Simply put, a minor; a mentally unsound, or mentally challenged person; and a person
otherwise
 disqualified from contracting by any law,for example, an alien enemy, insolvent, and
convicts are not competent to contract..

4. Free consent. The parties entering into a contract must give the offer and acceptance at their
own will and consent without any external factors or external forces.
The term 'Consent' as Two or more persons are said to have consented that when they agree upon the
same thing in the same sense.

This is also stated as the identity of minds or in Latin terms stated as 'consensus-ad-idem. Section 14
of the Indian Contract Act, defines The term 'Free Consent' as "The consent is Said to be free when it is
not caused by';

A) Coercion (Sec.15)

The coercion is defined under section 15 of The Indian Contract Act, 1872 as "The Coercion Is the
committing, or threatening to commit, or Any act which is forbidden by the Indian Penal Code, 1860
or unlawful detaining or threatening To detain any property, to the prejudice of any Person to enter
into an agreement".

B) Undue Influence (Sec.16)

The undue influence is defined under section16 of the Indian Contract Act, 1872 as "A Contract is said
to be induced by the undue Influence when the relations 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".

C) Fraud (Sec. 17)

The fraud has been defined under section 17 of the Indian Contract Act, 1872 as the term Fraud
includes any of the following acts Committed by a party to a contract, or with his Connivance, or by his
agent with intent to Deceive another party or his agent or to induce Him to enter into the contract;

I) The suggestion, which is not true, by one who Does not believe it to be true.

ii) The active concealment of a fact by one Having knowledge of the fact or belief of the Fact.
iii) A promise made without any intention of Performing it.

iv)Any other act or omission fitted to deceive.

v) Any such act or omission as the law specially Declares to be fraudulent.

D) Misrepresentation (Sec. 18)

The misrepresentation is defined Under section 18 under the Indian Contract Act, 1872 as "The
misrepresentation means, one Party presenting the false representation of the Facts without any
wrong intentions or to deceive The other party. In misrepresentation, the party who presented The
false facts is innocent and has done the act Without knowing it and without any intention to Deceive
the other party.

E) Mistake (Sec. 20-22)

When one of the parties in the contract has Given its consent to the contract under some Kind of
mistake, misunderstanding or Misinterpretation, then the consent is said to be have been given by
mistake. At this point, the contract is voidable at the Option of the party whose consent was obtained
By mistake.

Example: Akash wanted to enter into a contract With Suresh but mistakenly enters into a Contract
with Ramesh believing him to be Suresh. Under contract law, there are two kinds of Mistakes;
1) Mistake of Law 2) Mistake of Fact

Thus, the above example is amounting to a Contract without free consent and the contracts Which are
signed without free consent are Voidable contracts.

5. Lawful consideration and Lawful object- Consideration The definition of consideration has been
provided under section 2(d) of the Indian Contract Act, 1872, the consideration is defined as "When at
the desire of the promisor, the promisor or any other person has done or abstained from doing, or
does or abstains from doing, or promises to do or abstain from doing something, such act or
abstinence is called a consideration for the promisor ".When the consideration is at the desire of the
promisor means at the will of the promisor. The promisor or other person either does something (in
present, past or future) or abstains from doing something (in present, past or future). Such an act or
abstinence is known as consideration.

Example: Ramesh makes an offer to sell his bike for Rs. 1,00,000/- and Suresh accepts it. Here, the
bike is the consideration for Suresh and the price paid for the bike i.e. Rs. 1,00,000/- is the
consideration for Ramesh.

As per Section 23, the object of an agreement must not be forbidden by law, fraudulent, immoral,
opposed to public policy, or must not involve or imply injury to the person or to
 the property of
another person. If the object is unlawful for any of the above reasons, the agreement shall be void.
Thus, if a person at the behest of another person threatens to kill someone for a ransom, he cannot
recover the sum through a court of law.

6. Not declared to be void- Certain types of agreements have been expressly declared void under the
Act. These are: agreements in restraint of marriage, trade, or legal proceedings and agreements by
way of wager
7. Certainty- The terms of a contract must be reasonably certain. Section 29 provides ‘agreements,
the meaning of which is not certain or capable of being made certain, are void’. Thus, in order to give
rise to a valid contract, the terms of agreement must be clear and not vague or uncertain. A contract
may also be declared void on the ground of uncertainty or ambiguity.

For example - Ramesh agreed to sell 10 metres of cloth to Balu Here ,it is not clear what kind of fabric
was intended to be sold. Hence, the agreement is void for lack of certainty of the subject-matter.

8. Possibility of performance- The agreement should be capable of being performed. As per section
56, ‘an agreement to do an act impossible in itself is void’. The agreement in question must be
performable not only physically but also legally, failing which it will not result in a contract.
Impossibility of performance may arise from the very nature of contract or due to change of the law
subsequently.

9. Legal formalities - The Indian Contract Act does not insist upon a written contract. For day-today
transactions which are in bulk, written agreements would be burdensome and time-consuming and
simply redundant. However, in some cases, certain formalities (writing, registration, etc.) must be
observed. For instance, an agreement to make a gift for natural love and affection must be contained
in the form of a deed, or else the agreement will be unenforceable. The obvious reason why some
contracts should be in writing is that writing will not only stand as evidence of the transaction should
anyone question its existence or validity, but it is likely to help the parties focus more precisely on
what each promised to the other and avoid a ‘he said, she said’ dispute. Thus, good intentions do not
always make a good contract. Proper documentation helps. Contracts Where Writing Is Necessary The
types of agreements that require formal record and/or registration for making the transaction
binding include the following:

1. An agreement to pay a time-barred debt; 2. Transfer of share certificate;

3. Hire–purchase agreement; 4. An assignment of assignment of copyright;

5. Cheques, bills of exchange, and promissory notes under the Negotiable Instruments Act, 1881; and

6. An agreement to sell land, building, etc. Failure to comply with any of the statutory
 requirements
(including writing and registration) would render these contracts invalid and unenforceable

10. Expressly Declared Void by Law -Apart from minors and unsound mind person, the person who
is disqualified or barred from entering into a contract by the law of land, Such a person cannot form or
enter into a contract. Therefore contract made by or with the person who is disqualified by law from
entering into a contract is void. Thus, a minor, unsound mind person or a person who is disqualified
by law to enter into a contract are not competent persons to the contract. If there is any contract
formed with these incompetent persons then the contract is null and void.
Question no 2. Explain the features of a Company

Ans:
A company is considered as a unit that consists of a corporate legal entity. A company itself has
different legal entities and possesses a common authentication that is used for its signature. This
licence is shared across one or more members of a company depending upon its own and designations
of the members.

These important features of a company are-

1. Incorporated Association:
Company is an incorporated association of persons created by the law of the country. In India
companies are formed and registered under the Companies Act 1956. Incorporation of a company
requires registration of formal documents with the Registrar of Companies.

Memorandum of Association is the important document which contains the fundamental conditions
and purposes for which a company is formed. In fact, a company does not have its existence beyond its
memorandum of association. The other important document is the Articles of Association which lay
down the rules and regulations for governance of the company. The ‘Registration Certificate’ or the
‘Certificate of Incorporation, grants a legal entity to a company enabling it to discharge functions such
as entering into contract, purchasing, owning and holding of properties. A company may be held liable
for breach of law. It can sue and be sued in its name.

2. Independent Legal Entity:

A company has a legal entity distinct and separate from its constituent members (shareholders). It is
an autonomous body, self-controlling and self-governing. It can hold and deal with any type of
property of which it is the owner, in any way it likes. It can enter into contracts, open a bank account
in its own name, sue and be sued by its members as well as outsiders.

The rights and obligations of a company are distinct from its constituent members. “Shareholders are
not, in the eyes of the law, part owners of the undertaking. The undertaking is something different
from the totality of the shareholders.” Shareholders cannot be held liable for the wrongs or misdeeds
of the company.

A company has a nationality, domicile and residence but cannot ask for the enforcement of those
fundamental rights which are exclusively available to national citizens. The nationality of the
company, however, does not depend upon the nationality of its shareholders.

A company can enter into partnership with one or more individuals or another company. It can buy
shares or debentures of another company. A company can form other companies by subscribing to
their Memorandum of Association. A director of a company can be the office bearer of the trade union
of the workers of the same company. A shareholder, if qualified as a chartered accountant, can be the
auditor of the same company.

A director or a managing director cannot be held personality liable for the payment of arrears of taxes
or salaries of employees due by the company. A company can sue for libel or slander effecting its
business reputation. A company can be held liable for criminal acts. It can be held liable for breach of
law and can be made to pay fine. However, no imprisonment of a company is possible. It can be
charged with conspiracy to defraud or may be convicted of making use of false documents with intent
to deceive. It can also be held liable for torts committed by its employees in the course of their
employment.

On account of this independent corporate existence the creditors of a company are creditors of the
company alone and their remedy lies against the company and its property only and not against any of
its members. Law recognizes the existence of the company quite irrespective of the motives,
intentions, scheme or conduct of the individual shareholders.

3. Separate Property:

The corporate property is clearly distinguished from the members’ property and members have no
direct proprietary rights to the company’s property but merely their ‘shares’. Change in the
constitution of the company’s membership will not cause any realization or slitting of its property.

Company cannot be the property of the person who owns all the shares in the company, nor can it be
considered to be his agent. No member can either individually or jointly claim any ownership rights in
the assets of company during its existence or on its winding up.

“No shareholder has any right to any item of property owned by the company, for he has no legal or
equitable interests therein.” A member cannot have any insurable interest in the property of the
company. The leading case is:

Macaura v. Northern Assurance Co. Ltd. (1925):

Mr. Macaura was the holder of nearly all the shares, except one, of a timber company. He was also the
substantial creditor. He insured the company’s timber in his own name.

The timber was destroyed by fire. It was held that the insurance company was not liable to
compensate as Macaura had no insurable interest in the property which belonged to the company
only.

4. Perpetual Existence:

A company has a perpetual, succession. It has no allotted span of life. The mode of incorporation and
dissolution of a company and the right of the members to transfer shares freely guarantee the
continuity of the existence of the company quite independent of the life of the members. The existence
of a company can be terminated only by law.

Being an artificial person, it cannot die irrespective of the fact that its members, even the founders or
subscribers to the Memorandum, may die or go out of it. Moreover, in spite of the changes in the
membership of the company, it can perform its contracts and enter into future agreements. Thus,
members may come and go but the company can go on forever.

5. Common Seal:

Though a company has an artificial personality, it acts through human beings, who are called as
directors. They act as agents to the company but not to its members. All the acts of the company are
authorized by its “common seal”. The “common seal” is the official signature of the company. A
document not bearing the common seal of the company will not be binding on the company.
6. Separation of Ownership and Management:

A company is owned by a number of shareholders which is too large a body to manage the affairs of
the company. Shareholders set the objectives of the company and appoint their representatives or
agents (known as directors) to manage the affairs of the company on their behalf to pursue their
objectives.

The directors, in turn, hire professional managers (executives) to run the day-to-day operations of the
company under their supervision and control. This striking feature of separation of ownership and
management has raised many issues which give rise to evolution of corporate governance as the focal
point of modern corporations.

7. Limited Liability:

The liability of shareholders of a company is different from the liability of the company. Shareholders
generally have limited liability- limited to the extent of unpaid value of shares held up. Shareholders
have no obligation to the company once they have paid full amount on the shares held by them. In
cases of losses, shareholders are not called upon to make good the losses.

Creditors cannot claim from the personal wealth of the shareholders. In the case of a guarantee
company, the members are liable to contribute a specified agreed sum to the assets of the company in
the event of the company being wound up.

8. Transferability of Shares:

One can sell one’s share of ownership rights to an interested buyer as the shares of a company are
transferable. While in case of public companies shares are freely transferable which is provided by the
law, there are some restrictions in the transferability of shares of private companies. In fact
transferability of shares and limited liability are the enabling factors for the tremendous rise of
companies all over the world.