Mercantile Law BBA(CAM) V Semester - 2009 Notes by Ms.

Neha Raj

Unit 1 Part 1 The Companies Act, 1956 MEANING Section 3(1)(i) of The Companies Act, 1956 states that "company" means a company formed and registered under this Act or an existing company as defined in clause (ii); According to Section 3(1)(ii) "existing company" means a company formed and registered under any of the previous companies laws Some of the important definitions of company given by different authorities are as under: Lord Justice Lindley : A company is an association of many persons who contribute money or moneys worth to a common stock and employ it in some trade or business and who share the profit and loss arising therefrom. The common stock so contributed is denoted in money and is the capital of the company. The person who contribute to it or to whom it belongs are the members. The proportion of capital to which each member is entitled to is his share. Chief Justice Marshall : A corporation is an artificial being, invisible, intangible, existing only in contemplation of law. Being a mere creation of law it possesses only the properties which the charter of its creation confers upon it, either expressly or as incidental to its very existence. Prof. Haney: A company is an artificial person created by law, having separate entity, with a perpetual succession and common seal. Justice James: A company is an association of persons united for a common object. The above definitions clearly bring out the meaning of company. A company comes into existence only when it is registered under the Act. When it is registered it has a legal personality of its own, separate and distinct from its members. An unregistered company has no such separate legal existence. A company is created by law and law alone can dissolve it. Section 12 of the Companies Act permits the formation of different types of companies. These may be: (i) Companies limited by shares (ii) Companies limited by guarantee, and (iii)Unlimited companies

KINDS OF COMPANIES
Page 1

Mercantile Law BBA(CAM) V Semester - 2009 Notes by Ms. Neha Raj

On basis of Incorporation i) Chartered ii)Statutory iii)Registered

On basis of Liability of members i)Unlimited ii)Limited by shares iii)Limited by guarantee

On basis of Number of Members i)Public ii)Private

On Basis of Ownership i)Govt. ii)Non-Govt.

On basis of Intercompany relationship i)Holding ii)Subsidiary

On basis of Nationality i) Indian ii)Foreign

On Basis of Incorporation: On basis of incorporation, there are three types of companies:

1. Chartered Company: Companies which are established by the Royal Charter or under a

special order granted by a king or queen are known as chartered companies. The East India Company and The Bank of England are examples of chartered companies incorporated in England. After independence such companies find no place in India.
2. Statutory Company: A company established under a special Act passed by the Parliament

or State Legislature as the case may be. Its objects and powers are defined by the Act constituting it. Reserve Bank of India, Life Insurance Corporation of India, Unit Trust of India, Food Corporation of India are examples of such companies. Such companies are generally formed to carry on work of some special public importance.
3. Registered or Incorporated company: A company registered under the Indian Companies

Act, 1956 or under any of the previous Companies Acts is called registered or incorporated company. On the Basis of Liability of Members:
1. Unlimited Company: A company not having any limit on the liability of its members is

termed as unlimited company. The members are personally liable for the debts of the company. 2. Company Limited by Shares: Where the liability of members of a company is limited to the amount , if any, unpaid on the shares, such a company is known as company limited by shares. If the shares are fully paid the liability is nil. This is the most common type of company found in India. 3. Company Limited by Guarantee: Where the liability of the members of the company is limited to a fixed amount which the members undertake to contribute to the assets of the company in the event of its being wound up, the company is called company limited by guarantee. This amount is known as guarantee. On Basis of Number of Members:
Page 2

Mercantile Law BBA(CAM) V Semester - 2009 Notes by Ms. Neha Raj

(1) Private Limited Company According to Section 3(1)(iii) of the Companies Act, private company means a company which has a minimum paid up capital of one lakh rupees or such higher paid-up capital, as may be prescribed, and by its Articles (i) Restricts the right to transfer its shares, if any; (ii) Limits the number of its members to fifty (excluding the present or past employee members of the company); (iii)Prohibits any invitation to public to subscribe for any shares or debentures of the company; and (iv)Prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives Section 12(1) provides that a private company may be formed with a minimum of two members. Section 13(1)(a) provides that in the case of private limited company, the name of the company must end with the words Private Limited (2) Public Limited Company A public company is defined under Section 3(1)(iv) of the companies Act, 1956, to mean a company which (i) Is not a private company; (ii) Has a minimum paid-up capital of five lakh rupees or such higher paid-up capital, as may be prescribed; (iii)Is a private company, which is a subsidiary of a company, which is not a private company Minimum seven members are required to form a public limited company. There is no restriction on maximum number of members. The shares allotted to the members are freely transferable. These companies can raise funds from general public through open invitations by selling its shares or accepting fixed deposits. These companies are required to write either public limited or limited after their names. Difference between Private Limited and Public Limited Companies: Basis 1. Membership 2. Identification 3. Transferability of shares 4. Capital required 5. Raising of funds Private Limited Company Minimum - 02 Maximum - 50 Use a suffix Private Limited after its name Restricted Not less than Rs. 1 lakh Cannot give open invitation to the public to subscribe the shares
Page 3

Public Limited Company Minimum - 07 Maximum - no restriction Use a suffix Limited after its name Free Not less than Rs. 5 lakh Can raise as much money as required from public

Mercantile Law BBA(CAM) V Semester - 2009 Notes by Ms. Neha Raj

6. Issue of prospectus 7. Commencement of Business 8. Number of Directors 9. Qualification shares 10. Articles of Association On the Basis of Ownership

Need not issue and file a Must issue and file a prospectus prospectus or a statement in lieu of prospectus It can start business It can start business only after immediately on incorporation getting a certificate of commencement of business Atleast two Atleast three No qualification shares require Qualification shares have to be purchased for becoming a director Must prepare its own articles May adopt table A as given in of association the Companies Act.

1. Government Company According to Section 617, a government company is one in which 51% or more of the paid-up share capital is held by the Central Government, or by any one or more State Governments, or partly by Central Government or partly by one or more State Governments. A subsidiary of a Government company is also treated as a Government company. The government company is not a department of the State. The provisions of the Act are applicable to Government companies as they apply to any other company. Companies having less than 51% share holding by the government can also be called Government companies provided control and management lies with the government. Examples of government companies are: Mahanagar Telephone Nigam Limited, Bharat Heavy Electricals Limited. 2. Non-Government Company Companies other than government companies are covered hereunder. On Basis of Inter-company Relationship:
1. Holding Company: A holding company is one which has control over another company. 2. Subsidiary Company: Company over which control is exercised is called subsidiary

company On Basis of Nationality

1. Indian Company: A company having business operations in India and registered under the

Indian Companies Act, 1956 is called Indian Company. An Indian company may be formed as a public limited, private limited or government company. 2. Foreign Company: According to Section 591, a foreign company is a company incorporated outside India but having a place of business in India. A company has a place of business in India if it carries on business at some specified or identifiednmplace such as an office, godown or a storehouse.
Page 4

Mercantile Law BBA(CAM) V Semester - 2009 Notes by Ms. Neha Raj

FORMATION OF COMPANY The whole process of formation of a company can be divided into four parts:1. Promotion 2. Registration 3. Floatation 4. Commencement of Business
1. Promotion:

Promotion is a term of wide import denoting the preliminary steps taken for the purpose of registration and floatation of the company. The persons who assume the task of promotion are called promoters. The promoter may be an individual , syndicate , association , partnership or company. Promoter is a person who does necessary preliminary work incidental to formation of company. Promoter originates the scheme for formation of company, has memorandum and Articles prepared, executed, registered and finds the first directors, settles the terms of preliminary contracts and prospectus and makes arrangement for advertising and circulating the prospectus and placing the capital. Functions of the Promoter: The promoter of the company decides the name and ascertains that it will be accepted by Registrar of companies. He settles details of companys Memorandum and Articles for the registration of company. He also settles the details for the issue of prospectus where public issue is necessary. He is infact responsible for bringing company into existence.

2. Incorporation or Registration:

According to Section 12 of the Companies Act 1956, any seven or more persons, or where company to be formed will be a private company, two or more persons, associated for lawful purpose may, by subscribing their names to a memorandum of association and otherwise complying with the requirements of this act in respect of registration, form an incorporated company, with or without limited liability. Before approaching the registrar for the incorporation of the company, the memorandum and articles of association should be got prepared and printed and the approval of the registrar for the proposed name of the company should be obtained. Thereafter, an application may be made in prescribed form to the Registrar of Companies of the State in which the registered office of the company is to be situated, for registration of the company. According to the Companies Act, 1956, the following documents are required to be presented to the Registrar of Companies alongwith the application:
Page 5

Mercantile Law BBA(CAM) V Semester - 2009 Notes by Ms. Neha Raj

(i) (ii) (iii) (iv)

(v)

(vi) (vii) (viii)

Memorandum of Association duly signed and stamped Articles of Association, if any, duly signed and stamped The agreement, if any , which the company proposes to enter into with any individual for appointment as its managing or wholetime director or manager A Statutory Declaration made by advocate of Supreme Court or of a High Court or a Company Secretary or a Chartered Accountant in wholetime practice in India who is engaged in the formation of the company, or by a person named in the articles as director, manager or secretary of the company, stating that all the requirements of the Companies Act with regard to incorporation have been complied with In case of Public company having share capital, (a) written consent of persons who have agreed to act as first directors of the company (b) a written undertaking by each such director to take up and pay for his qualification shares, if any prescribed in the articles. A copy of the letter from the registrar in which the name of the company was approved Notice of the address of registered office of the Company Particulars of directors, manager and secretary, if any When the aforesaid documents have been filed with the Registrar and the necessary fees paid, the registrar will, if he is satisfied, enter the name of the company on the Register of Companies maintained by him and then issue a Certificate of Incorporation. On registration, the company comes into existence as a legal person distinct from its members.

3. Floatation: When a company has been registered and has received its certificate of

incorporation, it is ready for floatation, that is to say, it can go ahead with raising capital sufficient to commence business and to carry it on satisfactory. In case of private company they are prohibited from inviting public to subscribe to its share capital. Therefore when a private company is formed, the necessary capital is obtained from friends and relatives by private arrangement. In the case of a public company also, the promoters may not invite public to subscribe to its share capital and may arrange the capital privately as in the case of a private company. However by far the largest number of public companies raise their capital in the very first instance by inviting public to subscribe to its share capital Section 70 it makes it obligatory for every public company to take either of the following two steps:1) Issue a prospectus in case public is to be invited to subscribe to its capital 2) Submit a statement in lieu of prospectus in case capital has been arranged privately. It must be done at least 3 days before allotment
4. Commencement of Business: Page 6

Mercantile Law BBA(CAM) V Semester - 2009 Notes by Ms. Neha Raj

A Private Company can commence business immediately after the Certificate of Incorporation has been obtained (Section 149). It has neither to issue a prospectus nor to submit a statement in lieu of prospectus with the Registrar. It can go ahead without these formalities. In case of Public company having share capital, it is necessary to obtain a Certificate of Commencement of Business. This certificate can be obtained only after floatation of company. The procedure for obtaining the certificate varies with the fact whether the company has issued a prospectus or not. (i) Where the company has issued a prospectus, it shall not commence business or exercise any borrowing powers unless: a) Shares upto amount of minimum subscription have been allotted by the company b) Every director has paid to the company, on each of the shares taken or contracted to be taken by him and for which he is liable to pay in cash, amount in proportion to the application and allotment money payable on the shares offered to public. c) No money is or liable to be repaid to the applicants for failure to apply for, or to obtain permission for the shares to be dealt in any recognized stock exchange d) The company has filed with the Registrar a duly verified declaration by one of the directors or the secretary that clauses (a), (b) and (c) have been complied with (ii) Where the company has not issued a prospectus, it shall not commence business unless:

i. It has filed with the Registrar a statement in lieu of prospectus ii. Every director has paid to the company, on each of the shares taken or contracted to be taken by him and for which he is liable to pay in cash, amount in proportion to the application and allotment money payable on the shares offered to public iii. The company has filed with the Registrar a duly verified declaration by one of the directors or the secretary that clauses (b) have been complied with When the company has complied with these conditions, the Registrar will issue a certificate to commence business. If a public company having share capital commences business or exercises borrowing powers without obtaining certificate to commence business then every person at fault is liable to a fine which may extend to Rs. 5000 for every day of default. Certificate to commence business entitles company to commence business given in main objects clause of Memorandum of Association. No business given in other objects clause of Memorandum of Association can be commenced without obtaining prior approval of shareholders by way of special resolution. DOCUMENTS RELATED TO FORMATION OF COMPANY
Page 7

Mercantile Law BBA(CAM) V Semester - 2009 Notes by Ms. Neha Raj 1. MEMORANDUM OF ASSOCIATION:

The Memorandum of Association is the most important document of the company. It is the charter of the company which contains the fundamental conditions upon which alone the company can be incorporated. It regulates the relationship of the company with the outside world. It lays down the powers and objects of the company and the scope of operations of the company beyond which the company cannot go. Any action outside the scope of Memorandum of Association will be ultra vires (beyond powers of ) the company and so void. The object of Memorandum of Association is i) to enable the shareholders to know for what purposes their investment is going to be utilized and the risk involved in making the investment ii) to give protection to the persons dealing with the company, so that anyone dealing with the company knows whether the contractual relation into which he contemplates entering with the company is relating to matter within its corporate objects. CONTENTS OF MEMORANDUM OF ASSOCIATION 1. The Name Clause: i) Ordinarily a company is free to choose any name but it must not be undesirable or must not resemble the name of any other registered company. ii) The Memorandum of Association must state the name of the company with Limited as the last words in the name in the case of a public limited company and with Private Limited as the last words of the name in case of private limited company. This will enable the persons dealing with the company that their liability is limited.
2. The Registered Office Clause:

Every company must have its registered office to which all communications and notices be addressed. The Memorandum of Association must mention the name of the State in which the registered office of the company is to be situated.
3. The Objects Clause:

This is the most important clause in the memorandum. It defines the sphere of the companies activities, the specific objectives for the formation of the company. The company cannot do anything which is not mentioned in the objects clause. This clause is divided into two parts: i) (a) Main Objects this sub-clause contains the main objects of the company to be pursued on its incorporation; and (b) Objects Incidental or Ancillary to Main Objects - It covers the objects which are incidental or ancillary to the attainment of the main object. ii) Other Objects This sub-clause will cover any objects which are not included in the main objects.

Page 8

Mercantile Law BBA(CAM) V Semester - 2009 Notes by Ms. Neha Raj

While framing the objects clause it should be seen that the objects must not be unlawful, or against the provisions of the Companies Act, or against the public policy.
4. The Liability Clause:

This clause states the nature of liability of the members of the company. In case of a company limited by shares or by guarantee, the fact that the liability of its members is limited must be made absolutely clear.
5. The Capital Clause:

This clause states the amount of capital with which the company is to be registered. This clause should also state the number and value of shares into which the capital of the company is divided. The capital with which the company is registered is variously described as registered, or nominal or authorised. The effect of this clause is that the a company cannot issue more shares than are authorized by the Memorandum. 6. The Association or Subscription Clause: In this clause, the subscribers declare that they desire to be formed into a company and agree to take shares stated against their names. The names, addresses and occupations of the subscribers must be given. Each subscriber must sign in the presence of atleast one witness who shall attest his signature. Every subscriber must take atleast one sharein case of public company, the Memorandum of Association must be signed by atleast seven subscribers, while in private company atleast two subscribers must sign. DOCTRINE OF ULTRA VIRES: The word ultra means beyond and the word vires means powers. Thus, ultra vires means doing an act beyond the powers. Any activity done contrary to or in excess of the scope of activity of directors, articles, memorandum or companies act will be ultra vires. 2. ARTICLES OF ASSOCIATION: Articles of association are bye laws or rules or regulations that govern the management of the internal affairs of the company and conduct of its business. Articles are like partnership deed in partnership, they set out the provisions for he manner in which the company is to be administered. Articles determine how the objects of Memorandum of Association shall be achieved and how the powers are exercised. Articles of Association are subordinate and controlled by Memorandum of Association, which is dominant and contains general constitution of the company. Care has to be taken that regulation provided in articles do not exceed powers of the company laid down by its Memorandum of Association. Memorandum prevails in event of conflict.
Page 9

Mercantile Law BBA(CAM) V Semester - 2009 Notes by Ms. Neha Raj

However, Memorandum of Association and Articles of Association being contemporaneous documents must be read together and ambiguity and uncertainty in one may be removed by reference to another. If Memorandum of Association is absolutely clear, a doubt as to its meaning cannot be created by reference to articles, in such case articles are inconsistent with the memorandum and need to be disregarded. Contents of Articles of Association Articles contain provision relating to
Share Capital Right of shareholders Lien on shares Calls on shares Transfer of shares Transmission of shares Forfeiture of shares Surrender of shares Conversion of share into stock Share warrants Alteration of capital General meeting and proceedings thereat Voting of members, etc.

Companies which must have articles: (a) Unlimited Company (b) Company limited by guarantee (c) Private company limited by shares Companies required to have Articles of Association may either i) adopt the model form of Articles of Association given in The Companies Act or ii) frame its own Articles of Association or iii) partly adopt the model form of Articles of Association and partly frame its own Articles of Association DOCTRINE OF CONSTRUCTIVE NOTICE The Memorandum of Association and Articles of Association when registered with the Registrar of Companies become public documents and can be inspected by any one on payment of nominal fee. Therefore, every person who contemplates entering into contract with company or otherwise dealing with company is presumed to have read these documents and understood them in their true perspective (even if he does not have actual notice). This is known as doctrine of constructive notice. DOCTRINE OF INDOOR MANAGEMENT
Page 10

Mercantile Law BBA(CAM) V Semester - 2009 Notes by Ms. Neha Raj

This doctrine constitutes an exception to rule of constructive notice. According to this doctrine, the outsiders dealing with the company are entitled to assume that as far as the internal proceedings are concerned everything has been regularly done. This means that even if there is an irregularity in the internal proceedings the transaction made by him with company are enforceable by him on basis of doctrine of indoor management. While doctrine of constructive notice seeks to protect company against outsiders, doctrine of indoor management operates to protect outsiders against the company. As this doctrine was propagated by court in case of Royal British Bank vs. Turquand, it is also known as Turquand rule. Exception to Doctrine of Indoor Management: i) Knowledge of irregularity ii) Negligence i.e., an irregularity which could have been discovered on due inquiry iii) Forgery i.e., when person relies on a document that turns out to be forged, it is void ab initio (void from the beginning) iv) Acts outside the scope of apparent authority by officer of company, company not bound 3. PROSPECTUS According to Section 2(36) of the Companies Act, 1956, prospectus means any document described or issued as prospectus and includes any notice, circular, advertisement or other document inviting deposits from public or inviting offers from public for subscription or purchase of any shares or debentures of any body corporate. A document shall be called prospectus if it satisfies 2 things i) It invites subscription to shares or debentures or invites deposits ii) The aforesaid invitation is made to public. PART B The Contract Act, 1872 BASIC DEFINITIONS (a) When one person signifies to another, his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a Proposal (or offer); (b) When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a Promise; [Section 2(b)] (c)The person making the proposal is called the promisor, and the person accepting the proposal is called the promisee;
Page 11

Mercantile Law BBA(CAM) V Semester - 2009 Notes by Ms. Neha Raj

(d) When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a Consideration for the promise; (e) Promises which form the consideration or part of the consideration for each other are called Reciprocal Promises; (f) Every promise and every set of promises, forming the consideration for each other, is an Agreement; [Section 2(e)] (g) An agreement enforceable by law is a Contract; [Section 2(h)] (h) An agreement not enforceable by law is said to be Void Agreement; (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 the other or others, is a Voidable Contract; (j) A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable and is known as Void Contract. All contracts are agreement but all agreement are not contract According to Section 2(h) of the Contract Act, 1872 , Contract is an agreement enforceable by law. If we analyse this definition of Contract we find that it essentially consists of two elements: (1) Agreement, and (2) Its enforceability by law (1) An agreement is defined as every promise and every set of promises, forming the consideration for each other and promise is defined in section 2(b) thus : When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a Promise. Therefore, an agreement is an accepted proposal. To form an agreement, there must be a proposal or offer by one party and its acceptance by the other. Thus, Agreement = Offer + Acceptance. The essence of the agreement is the meeting of the minds of the parties in full and final agreement i.e., before there can be an agreement between two parties there must be consensus ad idem this means that the parties to the agreement must have agreed about the subject matter of the agreement in the same sense and at the same time. Unless there is consensus ad idem, there can be no agreement. (2) Enforceability by Law: However all agreements are not contracts. Only those agreements that are enforceable by law are contracts. According to Section 10 of The Contract Act, all agreements are enforceable by law 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 hereby expressly declared to be void. To conclude, Contract = Agreement + Enforceability at Law Thus all contracts are agreements but all agreements are not contracts.

Page 12

Mercantile Law BBA(CAM) V Semester - 2009 Notes by Ms. Neha Raj

ESSENTIAL ELEMENTS OF VALID CONTRACT In order to become a contract, an agreement must have following essential elements:
1. Offer and Acceptance: There must be two parties to an agreement, i.e., one party making

the offer and the other party accepting it. The terms of the offer must be definite and the acceptance of the offer must be absolute and unconditional.
2. Intention to create legal relationship: When the two parties enter into an agreement, their

intention must be to create legal relationship between them. Agreements of a social or domestic nature do not contemplate legal relationship and as such they are not contracts.
3. Lawful Consideration: An agreement to be enforceable by law must be supported by

consideration. Consideration means an advantage or benefit moving from one person to another and is generally understood in terms of quid pro quo i.e., something in return. The agreement is legally enforceable only when both the parties give something and get something in return. A promise to do something, getting nothing in return is usually not enforceable by law.
4. Capacity of Parties or Competency: The parties to the agreement must be capable of

entering into valid contract. Every person is competent to contract (a) who is of the age of majority according to the law to which he is subject, and (b) who is of sound mind, and (c) is not disqualified from contracting by any law to which he is subject.
5. Free Consent: It is essential to the creation of every contract that there must be free and

genuine consent of the parties to the agreement. Two or more persons are said to consent when they agree upon the same thing in the same sense. Consent is said to be free when it is not caused by (1) coercion, or (2) undue influence, or (3) fraud, or (4) misrepresentation, or (5) mistake,
6. Lawful Object: The object of the agreement must be lawful. In other words, it means that

the object must not be illegal, immoral, opposed to public policy, etc.
7. Agreement not declared void: The agreement must not have been expressly declared void

by law in force in the country.

8. Certainty of Meaning and Possibility of Performance: The agreement must be certain and

not vague or indefinite. If it is vague and it is not possible to ascertain its meaning it cannot be enforced. The terms of the agreement must also be such as are capable of performance. An agreement to do an act impossible in itself cannot be enforced.
9. Legal Formalities: A contract may be made orally or in written form. As regards legal

effects there is no difference between a contract in writing and contract made by word of mouth. It is however in interest of parties that the contract should be in writing. There are other formalities also which have to be complied within order to make an agreement legally enforceable. In some cases the document in which the contract is incorporated is to be stamped. In some other cases, a contract besides being a written one has to be registered.
Page 13

Mercantile Law BBA(CAM) V Semester - 2009 Notes by Ms. Neha Raj

Thus, where there is a statutory requirement that a contract should be made in writing or in the presence of witnesses or registered the required statutory formalities must be complied with. Some of the essential elements of valid contract are explained in detail hereinbelow: ESSENTIAL ELEMENTS OF VALID CONTRACT OFFER AND ACCEPTANCE A. Offer An offer is not only one of the essential elements of a contract but is the basic building block also. Essentials of Valid Offer 1. The terms offer must be definite, unambiguous and certain and not vague. 2. In law, the offer must be capable of being accepted and giving rise to legal relationship. Offer must result in valid contract when it is accepted. 3. Communication of offer is essential. Offeree must have knowledge of offer before he can accept it. If the offer is lost on the way in transit it is no offer. 4. Offer cannot contain a term the non-compliance of which may be assumed to amount to acceptance. For eg., the offeror cannot say that if offeree does not accept the offer in 2 days offer would be deemed to be accepted. 5. Offer must be made with intention to create legal relationship. 6. Offer must be with the intention of obtaining assent thereto and not merely with view to disclosing intention of making offer. If a person makes a statement without intention to create binding obligation this does not amount to offer it is mere declaration of intention to offer or an announcement. Such declaration only means offer will be made or invited in future and not that offer is made now. 7. Offer must also be distinguished from mere invitation to offer. 8. Where two parties make identical offers to each other, the offers are cross offers and does not amount to contract. B. Acceptance It is the act of assenting to offer by the offeree. Essentials of Valid Acceptance 1. It must be absolute and unqualified and according to exact terms of offer. 2. It must be communicated to the offeror. A mere mental acceptance is no acceptance. Acceptance of offer cannot be implied from silence of offeree or his failure to reply, unless offeree has by previous conduct indicated that his silence means acceptance. 3. It must be according to mode if any prescribed by offeror or reasonable mode (when no mode is prescribed. 4. Acceptance must be given within time specified or reasonable time.
Page 14

Mercantile Law BBA(CAM) V Semester - 2009 Notes by Ms. Neha Raj

5. It must be made before offer lapses or terminates, or is revoked or withdrawn. 6. When offer is made to a particular person it can be accepted by him alone if accepted by any other person there is no valid acceptance. In case of general offer acceptance can be by any member of public. C. Communication of Offer, Acceptance and Revocation Communication of proposal when complete :The communication of a proposal is complete when it comes to the knowledge of the person to whom it is made. The communication of an acceptance when complete: i) As against the proposer, when it is put in 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. The communication of a revocation is complete As against the person who makes it (i.e., offeror) , 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; as against the person to whom it is made (i.e., acceptor), when it comes to his knowledge. Revocation of proposals and acceptances A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards. An acceptance may be revoked at any time before the communication of the acceptance, is complete as against the acceptor, but not afterwards. 1. CONSIDERATION Consideration is the price for which the promise of the other is bought and promise thus given for value is enforceable. An agreement without consideration is not enforceable and therefore is void. Essentials of Valid consideration 1. Consideration must move at the desire of the promisor. An act done voluntarily or at the desire of the third party does not amount to valid consideration for contract. 2. Consideration may move from promisee or any other person. 3. Consideration may be past, present or future. However, past consideration is good consideration only if it is done at or given at the desire of the promisor. 4. Consideration need not be adequate but it must be real and competent i.e., it must be of some value in the eyes of law. 5. Consideration must not be unlawful i.e, should not be forbidden by law; or of such a nature that, if permitted, it would defeat the provisions of any law; or fraudulent; or involve or imply an injury to the person or property of another; or regarded as immoral by the Court, or opposed to public policy. Exceptions to rule No Consideration No Contract
Page 15

Mercantile Law BBA(CAM) V Semester - 2009 Notes by Ms. Neha Raj

An agreement made without consideration is void, unless

1) Agreement without consideration void, unless it is in writing and registered(Natural

2)

3)

4) 5)

Love and Affection).It is expressed in writing and registered under the law for the time being in force for the registration of documents, and is made on account of natural love and affection between parties standing in a near relation to each other, Or is a promise to compensate for something done (Past Voluntary Service). It is a promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor, or something which the promisor was legally compellable to do, or unless. Or is a promise to pay a debt barred by limitation law(Time Barred Debt). It is a promise, made in writing and signed by the person to be charged therewith, or by his agent generally or specially authorized in that behalf, to pay wholly or in part a debt of which the creditor might have enforced payment but for the law for the limitation of suits. Completed Gifts: Nothing shall affect the validity, as between the donor and donee, of any gift actually made. Agency: No consideration is required in case of an agreement between principal and agent i.e., no consideration is required to create an agency 2. CAPACITY TO CONTRACT

Who are competent to contract? Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject. In other words, the following persons are incompetent to contract: a) Minors b) Persons of unsound mind c) Persons disqualified from contracting by any law to which they are subject. 1. Minors: (i) An agreement with or by minor is void ab initio. (ii) Minor can be promisee or beneficiary i.e., minor may make contract but is not bound by the contract. (iii) His agreement cannot be ratified by him on attaining majority. (iv) Minor is liable for necessaries supplied or necessary services rendered to him or anyone he is legally bound to support. Necessaries Goods which are necessary or suitable to position and financial status of minor and to his actual requirement at the time of sale and delivery. It includes necessary services education, training,etc. it is only property of minor which is liable. He is not personally liable. (v) He cannot enter into partnership but may be admitted to benefits of partnership with consent of all partners. (vi) He can be an agent and bind the principal but has no personal liability. (vii) He can always plead minority / No estoppels against minor. (viii) If he has received any benefit under the void agreement he cannot be asked to apy for it.
Page 16

Mercantile Law BBA(CAM) V Semester - 2009 Notes by Ms. Neha Raj

2.

Persons of Unsound mind: What is a sound mind for the purposes of contracting? A person is said to be of sound mind for the purposes of making a contract if, at the time when he makes it, he is capable of understanding it and of forming a rational judgment as to its effect upon his interests. A person who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind. A person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind.

3.

Disqualified by law to contract: (i) Alien Enemy (ii) Convict during the period he undergoes punishment. (iii) Insolvent- during insolvency period until discharged by court (iv) Foreign sovereign and diplomats (v) Corporation (vi) Married women

3. FREE CONSENT One of the essential elements of a valid contract is that there should be free consent of the concerned parties to the contract. Consent means an act of assenting to offer. Two or more persons are said to consent when they agree upon the same thing in the same sense. Consent is said to be free when it is not caused by (1) coercion, or (2) undue influence, or (3) fraud, or (4) misrepresentation, or (5) mistake,
1. Coercion: Coercion is the committing or threatening to commit, any act forbidden by

the Indian Penal Code (45 of 1860), 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. 2. Undue Influence: (1) A contract is said to be induced by undue influence where 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. (2) A person is deemed to be in a position to dominate the will of another (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. (3) Where a person, who is in a position to dominate the will of another, enters into a contract with him, and the transaction appears, on the face of it or on the evidence
Page 17

Mercantile Law BBA(CAM) V Semester - 2009 Notes by Ms. Neha Raj

adduced, to be unconscionable, the burden of proving that such contract was not induced by undue influence shall lie upon the person in a position to dominate the will of the other. Illustrations (a) A, having advanced money to his son, B, during his minority, upon Bs coming of age obtains, by misuse of parental influence, a bond from B for a greater amount than the sum due in respect of the advance. A employs undue influence. (b) A, a man enfeebled by disease or age, is induced, by Bs influence over him as his medical attendant, to agree to pay B an unreasonable sum for his professional services. B employs undue influence. 3. Fraud Fraud means and 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 thereto or his agent, or to induce him to enter into the contract: (1) The suggestion, as a fact, of that which is not true by one who does not believe it to be true; (2) The active concealment of a fact by one having knowledge or belief of the fact; (3) A promise made without any intention of performing it; (4) Any other act fitted to deceive; (5) Any such act or omission as the law specially declares to be fraudulent. Explanation : Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak, or unless his silence is, in itself, equivalent to speech. Illustrations (a) A sells, by auction, to B, a horse which A knows to be unsound. A says nothing to B about the horses unsoundness. This is not fraud in A. (b) B is As daughter and has just come of age. Here, the relation between the parties would make it As duty to tell B if the horse is unsound. (c) B says to A - If you do not deny it, I shall assume that the horse is sound. A says nothing. Here, As silence is equivalent to speech. (d) A and B, being traders, enter upon a contract. A has private information of a change in prices which would affect Bs willingness to proceed with the contract. A is not bound to inform B. 4. Misrepresentation Misrepresentation means and includes (1) The positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true; (2) Any breach of duty which, without an intent to deceive, gains an advantage to the person committing it, or any one claiming under him, by misleading another to his prejudice or to the prejudice of anyone claiming under him ;
(3) Causing, however innocently, a party to an agreement to make a mistake as to the substance of the thing which is the subject of the agreement.

5. Mistake Mistake means an erroneous belief about something.

Page 18

Mercantile Law BBA(CAM) V Semester - 2009 Notes by Ms. Neha Raj

Mistake can be (a) Mistake of law, or (b) Mistake of fact. (a) Mistake of law : When a party enters into a contract, without the knowledge of law in the country, the contract is affected by such mistake but it is not void. A contract is not voidable because it was caused by a mistake as to any law in force in India. The reason here is that ignorance of law is not an excuse at all. However if a party is induced to enter into a contract by the mistake of law then such a contract is not valid. (b) Mistake of fact: Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void. Explanation : An erroneous opinion as to the value of the thing which forms the subject-matter of the agreement is not to be deemed a mistake as to a matter of fact. Contract caused by mistake of one party as to matter of fact: A contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact. Voidability of agreements without free consent When consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused. A party to a contract, whose consent was caused by fraud or misrepresentation, may, if he thinks fit, insist that the contract shall be performed, and that he shall be put in the position in which he would have been, if the representations made had been true. Exception : If such consent was caused by misrepresentation or by silence, fraudulent within the meaning of section 17, the contract, nevertheless, is not voidable, if the party whose consent was so caused had the means of discovering the truth with ordinary diligence. Explanation: A fraud or misrepresentation which did not cause the consent to a contract of the party on whom such fraud was practiced, or to whom such misrepresentation was made, does not render a contract voidable. Power to set aside contract induced by undue influence. When consent to an agreement is caused by undue influence, the agreement is a contract voidable at the option of the party whose consent was so caused. Any such contract may be set aside either absolutely, or, if the party who was entitled to avoid it has received any benefit thereunder, upon such terms and conditions as to the Court may seem just.
4. VOID AGREEMENTS

The following agreements have been expressly declared to be void by the Contract Act: 1. Agreement by incompetent parties. (Section 11) 2. Agreement made under mutual mistake of fact. (Section 20) 3. Agreements the consideration or object of which is unlawful. (Section 23) 4. Agreement the object or consideration of which is unlawful in part. ( Section 24) 5. Agreement made without consideration. (Section 25) 6. Agreement in restraint of marriage. (Section 26) 7. Agreement in restraint of trade (Section 27) 8. Agreement restraint of legal proceedings. (Section 28)
Page 19

Mercantile Law BBA(CAM) V Semester - 2009 Notes by Ms. Neha Raj

9. Agreement the meaning of which is uncertain.(Section 29) 10. Agreement by way of wager. (Section 30) 11. Agreement contingent on impossible events. (Section 36) 12. Agreement to do impossible act. (Section 56) i) Agreement in restraint of marriage void Every agreement in restraint of the marriage of any person, other than a minor, is void. ii) Agreement in restraint of trade void Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void. Exception .One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business, therein : Provided that such limits appear to the Court reasonable, regard being had to the nature of the business. iii) Agreements in restraint of legal proceedings void Every agreement, (a) by which any party thereto is restricted absolutely from enforcing his rights under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals, or which limits the time within which he may thus enforce his rights; or (b) which extinguishes the rights of any party thereto, or discharges any party thereto from any liability, under or in respect of any contract on the expiry of a specified period so as to restrict any party from enforcing his rights, is void to that extent. iv) Agreements void for uncertainty Agreements, the meaning of which is not certain, or capable of being made certain, are void. Illustrations (a) A agrees to sell to B a hundred tons of oil. There is nothing whatever to show what kind of oil was intended. The agreement is void for uncertainty. (b) A agrees to sell to B one hundred tons of oil of a specified description, known as an article of commerce. There is no uncertainty here to make the agreement void. (c) A, who is a dealer in coconut oil only, agrees to sell to B one hundred tons of oil. The nature of As trade affords an indication of the meaning of the words, and A has entered into a contract for the sale of one hundred tons of coconut oil. (d) A agrees to sell to B my white horse for rupees five hundred or rupees one thousand. There is nothing to show which of the two prices was to be given. The agreement is void. v) Agreements by way of wager void Agreements by way of wager are void; and no suit shall be brought for recovering anything alleged to be done on any wager, or entrusted to a person to abide by the result of any game or other uncertain event on which any wager is made.

Page 20

Mercantile Law BBA(CAM) V Semester - 2009 Notes by Ms. Neha Raj

A wager is an agreement between two parties by which one promises to pay money or moneys worth on happening of some uncertain event in consideration of the other partys promise to pay if the event does not happen. Essentials of Wagering Agreement: 1. Uncertain event 2. Each party must stand to win or lose 3. No control over the event 4. No other interest in the event Exceptions: Following agreements are not wagers: 1. A crossword competition involving good measure of skill for successful completion and other games of skill. 2. Share market transactions 3. A contract of insurance 4. A subscription or contribution to an agreement to subscribe or contribute toward any plate, prize or sum of money of the value of Rs. 500 or above to be awarded to the winner or winners of horse race.

Page 21