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Assignment On Corporate legal environment

Submitted To:

U.S Wahe
Submitted By:

Gurbachan Singh PM-3 PTU july-10

Q 1. An agreement enforceable by law is a contract Discuss the definition and explain the essentials of a valid contract. Ans: In our regular day to day life we make several comments and statements. We say several things to people whom we talk to. Most of these are not with any intention to create any legal obligation. For example, if we say to someone that we will go to lunch with him, it is not a legal obligation. But some, which are related to business or civil matters, are understood to be in a serious mood and have a potential to be legally enforceable. For example, when we hire an Auto-rickshaw for going from point A to point B, we are legally bound to pay and the driver is legally bound to take us from A to B. Indian Contract Act 1872 defines these activities in precise terms in Section 2. Definition of Terms Sec. 2 (a) When a person signifies to the other, to do something or to abstain from doing something, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a Proposal. Sec. 2 (b) When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. An accepted proposal becomes a promise. Sec. 2 (c) The person making the promise is called Promisor, while the person accepting the promise is called

Promisee. Sec. 2 (d) When, at the desire of the Promisor, the Pomisee 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 promise. Sec. 2 (e) Every Promise and every set of Promises forming a consideration for each other, is an Agreement. Sec. 2 (f) Promises which form the consideration or part of consideration for each other are "Reciprocal Promises". Sec. 2 (g) An agreement not enforceable by law is void. Sec. 2 (h) An agreement enforceable by law is a Contract. Sec. 2 (i) An agreement that is enforceable by law at the option of one or more of the parties thereto but not at the other or others is a voidable Contract. Sec. 2 (j) A Contract that ceases to be enforceable by law becomes void when it ceases to be enforceable by law. From sec 2(e) and 2(h)

it is clear that Agreement and Contract are two different things. For an agreement to become a contract, it has to be enforceable by law.

Section 10 states that all agreements that are made by free consent of the people who are competent to contract, for a legal object and legal consideration, and are not hereby expressly declared to by void, are contracts and are thus legally enforceable. Thus, there are five factors that determine whether an agreement can be legally enforced or not. These are discussed below:

Q2: Define and explain fully the term consideration, with suitable illustrations. Ans:
Consideration is an essential element for the formation of a contract. It may consist of a promise to perform a desired act or a promise to refrain from doing an act that one is legally entitled to do. In a bilateral contractan agreement by which both parties exchange mutual promiseseach promise is regarded as sufficient consideration for the other. In a unilateral contract, an agreement by which one party makes a promise in exchange for the other's performance, the performance is consideration for the promise, while the promise is consideration for the performance. Consideration must have a value that can be objectively determined. A promise, for example, to make a gift or a promise of love or affection is not enforceable because of the subjective nature of the promise. Traditionally, courts have distinguished between unilateral and bilateral contracts by determining whether one or both parties provided consideration and at what point they provided the consideration. Bilateral contracts were said to bind both parties the minute the parties exchanged promises, as each promise was deemed sufficient consideration in itself. Unilateral contracts were

said to bind only the promisor and did not bind the promisee unless the promisee accepted by performing the obligations specified in the promisor's offer. Until the promisee performed, he or she had provided no consideration under the law. For example, if someone offered to drive you to work on Mondays and Tuesdays in exchange for your promise to return the favor on Wednesdays and Thursdays, a Bilateral Contract would be formed binding both of you once you provided consideration by accepting those terms. But if that same person offered to pay you $10 each day you drove him to work, a unilateral contract would be formed, binding only upon the promisor until you provided consideration by driving him to work on a particular day. Modern courts have de-emphasized the distinction between unilateral and bilateral contracts. These courts have found that an offer may be accepted either by a promise to perform or by actual performance. An increasing number of courts have concluded that the traditional distinction between unilateral and bilateral contracts fails to significantly advance legal analysis in a growing number of cases where performance is provided over an extended period of time. Suppose: you promise to pay someone 50000.00 to paint your house. The promise sounds like an offer to enter a unilateral contract that binds only you until the promisee accepts by painting your house. But what constitutes lawful performance under these circumstances? The act of beginning to paint your house or completely finishing the job to your satisfaction?

Most courts would rule that the act of beginning performance under these circumstances converts a unilateral contract into a bilateral contract, requiring both parties to fulfill the obligations contemplated by the contract. However, other courts would analyze the facts of each case so as not to frustrate the reasonable expectations of the parties. In neither of these cases are the legal rights of the parties ultimately determined by courts by applying the concepts of unilateral and bilateral contracts. In still other jurisdictions, courts have simply expressed a preference for interpreting contracts as creating bilateral obligations in all cases where no clear evidence suggests that a unilateral contract was intended. The rule has been stated that in case of doubt an offer will be presumed to invite the formation of a bilateral contract by a promise to perform what the offer requests, rather than the formation of a unilateral contract commencing at the time of actual performance. The bottom line across most jurisdictions is that as courts have been confronted by a growing variety of fact patterns involving complicated contract disputes, courts have turned away from rigidly applying the concepts of unilateral and bilateral contracts and moved towards a more ad hoc approach.

Q3:Parties to the contract must be competent to contract. Explain


Ans: All the parties doing the agreement must be competent to contract. Section 11 determines who are competent to contract. As per this section, person who has attained the age of majority according to the law to which is subject, who is of sound mind, and who is not prohibited/disqualified from contracting by law to which he is subject. Majority is 18 years except when a guardian is appointed by the court in which case it is 21 yrs. In the case of Mohoribibee vs Dharmodas Ghosh in 1903, a minor had taken a loan and then he sued to avoid the contract. Privy Council council held that any contract with a minor is void ab initio and so the loaner cannot get any money that he gave as advance back. This rule is adopted all over India whether or not it benefits the minor. In the case of Mir Sarwarjan vs Fakhruddin Mohd. Chaudhary 1912, a contract to purchase a property was

done on behalf of minor. It was held that the minor could not sue for getting the possession of property. However, since in today's times minors are coming a lot in public life, it is not always possible to consider an agreement with a minor to be always void. Therefore, in the case of Srikakulam Sbhramanyam vs Kurra Sabha Rao 1949, Privy Council held that a sale of inherited property of a minor to pay off inherited debt effected by the guardian was binding on the minor.

Protections offered to minors:


No estoppel against minor - It has now been settled that a minor who enters into a contract by misrepresenting his age can later on tell his correct age and avoid the contract. No liability in tort or in contract arising out of a contract If a minor enters into a contract, he can neither be held liable in contract nor in torts. In the case of Jennings vs Rundall 1799, when an infant hired a horse for riding short distance but rode it for long distance resulting in injury to horse, he was not held liable because it was a contractual obligation. In the case of Hari Mohan vs Dulu Mia 1934, Calcutta HC held minor not liable in tort for money lent on bond. However, in absence of a contract, a minor may be liable in tort. Thus, in the case of Burnard vs Haggis 1863, when a minor "borrowed" a mare only for riding and then lent it to a friend who jumped her and killed her, he was held liable in tort.

Doctrine of restitution - If a minor obtains

property or goods by misrepresenting his age, he can be forced to return it but only as long as the goods are traceable in the minor's possession. This is called doctrine of equitable restitution. If the minor sells or converts the property, the value of the goods cannot be retrieved because that would amount to enforcing a void contract. In the case of Leslie vs Sheill, a minor got 400 pounds from money lenders by misrepresenting his age. The money lenders could not recover it under any of fraud, quasi-contract, or doctrine of restitution. This was followed in the case of Mohoribibee vs Dharmodas Ghosh as well..

Beneficial Contracts
In contract where a minor has already supplied consideration, the minor can enforce the contract. Thus, in the case of Ulfat Rai vs Gauri Shakar 1911, it was held that a minor can sue to take possession of a property for which he has already paid. But where the contract is still executor and consideration has not been given, the principle adopted in Mohoribibee will prevail. Thus, in the case of Raj Rani vs Prem Adib 1949, it was held that the film producer was not bound by a contract with minor's father to give a role to minor in his movie. This is because minor could not be forced to give consideration and father had not given any consideration. However, a contract of marriage of a minor enter into by the father is not void for want of consideration because it is for the benefit of the minor.

Liabilities for necessities (Section 68) - If


a minor is supplied with necessaries that are in accordance with his living standard, the supplier can get paid through the minors property.

Persons of unsound mind:


Section 12 says that a person is of sound mind for the purpose of contracting if at the time of contracting, he is capable of understanding the contract and capable of making a rational judgement as to the effects of the contract upon his interests. A person who is usually of sound mind but sometimes of unsound mind may not make a contract when he is of unsound mind, while a person who is usually of unsound mind but sometime of sound mind may make a contract when he is of sound mind. Thus, a person, who is too drunk, or who is temporarily delirious due to sickness such as high fever, may not make a contract at that time. A patient in a lunatic asylum, who is at intervals of sound mind may make a contract when he is of sound mind. In India, a contract done by a person of unsound mind is absolutely void ab initio. In the case of Indersingh vs Parmeshwardhari Singh Patna HC in 1957 held that a contract to sell property worth 25000 in 7000, was voidable because the mother claimed that her son was of unsound mind and did not understand the implications.

2. Consent and Free Consent:


Section 13 defines that two or more people are said to consent when they agree upon the same thing in the same sense. However, many a times, a consent may not reflect the true intentions of a party. For example, one party may give consent because of being financially pressured or criminally threatened. Thus, such a consent should not make the agreement enforceable. Section 14 determines what factors can vitiate a consent and

when a consent is considered free of any complication that affects the enforceability of an agreement . It states that a consent that is not obtained through coercion, undue influence, fraud, misrepresentation, or mistake subject to section 20, 21, and 22, is a free consent. a. Coercion (Sec 15): Coercion is committing or threatening to commit any act forbidden by the Indian Penal Code, or unlawful detaining or threatening to detain the property, to the prejudice of any other person, with an intention to cause that other person to enter into an agreement. It is immaterial whether IPC is or is not in force where coercion is applied. Thus, an act that is unlawful as per IPC but not as per England law and that has been used to induce the consent, will be considered coercion. A clear example would be force someone to consent on gun point or by hurting or threatening to hurt. In Chikham Amiraju vs Chikham Seshamma Madras HC 1912 held that threatening to commit suicide is coercion. In the case of Astley vs Reynolds 1771, the plaintiff had pledged his plate for #20 and when he went to claim it back, the defendant asked for #10 more as interest. To redeem his plate, the plaintiff paid the money but later sued to recover #10. The court allowed it. b. Undue Influence (Sec 16): Undue influence occurs when because of the nature of the relationship that exists between the parties, one party is able to dominate the will of the other and uses this dominance to obtain unfair advantage over the other. A person is in a dominant position when he holds a real or apparent position of authority for example manager employee, or stands in a fiduciary relationship with the other for example money

lender and loanee. A person could also be in a dominant position if the mental capacity of other party is temporarily or permanently effected due or illness, age, or distress. The burden of proof that undue influence has not occurred is on the person who is in the dominant position, if the agreement is unconscionable otherwise it is on the party that alleges undue influence. Examples: Father (A) give some money to son (B) when B was a minor. Upon majority, A makes B execute a bond for a much larger amount. A person (A) who is old and sick is induced into paying an unreasonably large amount of sum to his doctor (B). A village moneylender (A) lends money to a villager (B), who is already in debt, at a very high interest. It lies on A to prove that he has not used undue influence to induce the contract. At a time of financial crises, a bank manager gives loan to a person at a substantially higher rate. This is not considered to be undue influence but a simple business transaction. In Mannu singh vs Umadat Pandey Allahbad HC 1890, a guru induced his devotee into giving all the devotee's property to himself. This was considered undue influence. c. Fraud (Sec 17): When a person intentionally tries to cheat another person, it is called as fraud in a general sense. Section 17 defines fraud precisely as such - Fraud means and includes any of the following activities done by a party or by his connivance or by his agent, with an intent to deceive another party or his agent, or as to induce the other party to enter into the contract.

the suggestion of a fact, of that which is not true, by the one who does not believe it to be true. active concealment of a fact by one who knowledge or belief of the fact. making a promise without an intention to perform. any act fitted to deceive any such act or omission that the law declares to be fraudulent. Mere silence as to facts likely to affect the willingness of a person to enter into the contract is not fraud unless, according to the circumstances of the case, it is the duty of the person keeping silence to speak or unless his silence itself is considered as speech. Examples: A sells a horse to B by auction without telling B that horse is unsound. This is not fraud. B is A's daughter who has just come off age, then it is A's duty to tell B about the fact. So this is fraud. B says to A, "if you do not deny it, I will assume that horse is sound". Here, silence is considered as speech so this is fraud. A and B, being traders, enter into a contract. A has private pricing information that will cause B to not enter the contract. A is not bound to inform this to B. This is not fraud. Concealing the disease history while obtaining insurance is fraud because it is the duty of the insured to give this information to the insurer. Derry vs Peek 1889 was not fraud, because the company honestly believed in what they said and there was no intentional misrepresentation, which is the essence of fraud. Sri Krishan vs. Kurukshetra Univ., AIR 1976 SC the

student was not found to be fraud. Even though he knew that he was short on attendance, he did not disclose it on examination form. He was let off because 'mere silence' is not fraud. d. Misrepresentation (Sec 18): When a person makes an unwarranted statement, however innocently, which the person believes to be true, and which turns out to be false, it is misrepresentation. Any breach of duty, without an intention to deceive, that gains an advantage to the person committing it or to the person claiming under him, by misleading the other person to his prejudice or to person claiming under him, is also misrepresentation. Further, causing a party to an agreement to make a mistake regarding the subject matter of the agreement, however innocently, is also misrepresentation. Examples: A claimed to B that the ship being considered under an agreement was below 2800 tonnage. But in reality it turned out to be more than 3000 tonnage. It was held to be misrepresentation and B was entitled to avoid the contract.Oceanic Steam Navigation vs Soonderdas Dharmasey. Bom HC 1980. A land was purchased expressly for constructing duplexes. The seller claimed that he saw no permissioning problems. However, later on the permission was denied. This was held to be misrepresentation and even though the claim was innocent, the buyer was allowed to avoid the sale Where the seller of a car stated the mileage of the car to be 20000, which turned out to be wrong, the buyer of the car was allowed to recover compensation for

misrepresentation. Section 19: declares that a contract induced due to coercion, fraud, or misrepresentation is voidable at the option or the party whose consent was obtained by coercion. An exception is that when the consent is obtained by silence fraudulent under sec 17, and when the affected party had the means of discovering the truth with ordinary diligence. In this case, the contract is not voidable. Further, if the fraud or misrepresentation did not cause the party on which they were practiced to give consent, then the contract will not be voidable. Section 19A declares that the party whose consent was obtained by undue influence has the option to avoid the contract. 3. and 4. Legal Object and Legal Consideration When four dacoits enter into an agreement to share the loot equally and if two of them take more share than the other two, there is nothing that law can do, except arrest them for dacoity. Needless to say, the objects and considerations involved in the the agreement have to be legally valid. Section 24 declares that agreements are void if consideration and object are unlawful in part. If any part of a single consideration for one or more objects, or any one or any part of one of several considerations for a single object, is unlawful, the agreement is void. Thus, if the unlawful part cannot be severed from the object or consideration, the whole agreement becomes void. However, if the unlawful part can be severed, the remaining part can still be enforced. For example, A enters into an agreement with B to get 1 Gram of Cocain with 1 Kg or Rice for 10 Rs for rice and 1000 Rs for

Cocain, then a part of the object that is 1 gm of cocain and 1000Rs is severable from the agreement without affecting the lawful part. In this case, the agreement can be enforced partially. In another example, A man enters into an agreement with a married women to clean his house and live with him in adultery, which is unlawful, for a sum per month, the whole agreement is void because it is not possible to divide the sum properly between lawful and unlawful objects. What objects or considerations are unlawful Section 23 declares that any object or consideration is lawful, unless - it is forbidden by law, or is of the nature that if permitted, defeats the provisions of any law , or is fraudulent, or implies or involves injury to the person or property of another, or is determined by the court to be immoral or against public policy. Thus, an agreement to rent an apartment for prostitution or gambling is void. 5. Agreements expressly declared to be void by this act Some other agreements that satisfy all the four conditions given is section 10 can still be void. Such agreements are: Sec 20 : when both the parties are under mistake as to the matter of fact, the agreement is void. Sec 24 : agreement in which any part of a single consideration for one or more objects, or any consideration or part of a consideration out one or more considerations for a single object is unlawful, is void. Sec 25 :

agreement without any consideration except if it is registered, or a promise to pay for something already done, or is a promise to pay time barred debt. Sec 26: agreement in restraint of marriage. Sec 27 : agreement in restraint of trade. Sec 28 : agreement against legal proceedings. Sec 29 : agreement that is uncertain Sec 30 : agreement by way of wager. Sec 56 : agreement to do impossible act is void. If an act becomes impossible after the contract it done, the contract becomes void when the act becomes impossible to do. Legal formalities: Certain agreements such as agreement for the sale of immovable property, or agreement for insurance become a contract only when they are properly registered. For such agreements, the procedure prescribed by law must be followed to make them a contract.

Q4: Discuss the term undue influence and coercion as understood in the law of contract. Ans:

Undue influence
Undue influence defined.(1) A contract is said to be induced by "under 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) In particular and without prejudice to the generally of the foregoing principle, a person is deemed to be in a position to dominate the will of another (a) where he hold 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 adduced, to be unconscionable, the burden of proving that such contract was not induced by undue influence shall be upon the person in a position to dominate the will of the other. Nothing in the sub-section shall affect the provisions of section 111 of the Indian Evidence Act, 1872 (1 of 1872) 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 employes undue influence. (c) A, being in debt to B, the money-lender of his village, contracts a fresh loan on terms which appear to be unconscionable. It lies on B to prove that the contract was not induced by undue influence. (d) A applies to a banker for a loan at a time when there is stringency in the money market. The banker declines to make the loan except at an unusually high rate of interest. A accepts the loan on these terms. This is a transaction in the ordinary course of business, and the contract is not induced by undue influence.] COMMENTS Unconsiderable transaction The circumstance that a grandfather made a gift of a portion of his properties to his only grandson a few years before his death is not on the face of it an unconscionable transaction; Subhas Chandra Das Mushib v. Ganga Prasad Das Mushib, AIR 1967 SC 878. Undue influence Merely because the parties were nearly related to each other no presumption of undue influence can arise; Subhas Chandra Das Mushib v. Ganga Prasad Das Mushib, AIR 1967 SC 878. Undue influence and fraud

(i) Undue influence is said to be a subtle species of fraud whereby mastery is obtained over the mind of the victim, by insidious approaches and seductive artifices; Mahboob Khan v. Hakim Abdul Rahim, AIR 1964 Raj 250. (ii) Where pardanashin and illiterate woman acting under full confidence of the defendant who projected a false impression of the contents of a documents, put this thumb impression on such documents, their comment is a vitiated one; Kharbuja Kuer v. Jangbahadur Rai, AIR 1963 SC 1203. What to proveBurden of proof If the transaction appears to be unconscionable then the burden of proving that the contract was not induced by undue influence is to lie upon the person who was in a position to dominate the will of the other; Shrimati v. Sudhakar R. Bhatkar, Air 1998 Bom 122.

Coercion
Coercion" is the committing, or threatening to commit, any act forbidden by the Indian Penal Code, or the unlawful detaining, or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement. (45 of 1860.) Explanation.-It is immaterial whether the Indian Penal Code is or is not in force in the place where the coercion is employed. (45 of 1860.)
"

Illustration

A, on board an English ship on the high seas, causes B to enter into an agreement by an act amounting to criminal intimidation under the Indian Penal Code. (45 of 1860.) A afterwards sues B for breach of contract at Calcutta. A has employed coercion, although his act is not an offence by the law of England, and although section 506 of the Indian Penal Code was not in force at the time when or place where the act was done.(45 of 1860.)