Business Law

Author

Dr. C Rani

Announcements

QUIZ (CO1)

CLICK HERE

Assignment 1

[Submitted by Written]

Assignment 2

Guidelines:

  1. Dear students, I am assigning you a task wherein you must provide an explanation for the given case. Your submission should include the Statement of the Problem, Analysis, and Solution or Action Taken. The submission deadline is 25/02/2024

  2. Every student needs to write the assignment on paper, scan those papers to create a PDF file, and upload them using the link provided below.

Note

Case Study: The Tale of the Missing Cheque

ABC Corporation, a small manufacturing company, regularly pays its suppliers using cheques. One day, the company’s accountant, Sarah, issues a cheque to XYZ Suppliers for the purchase of raw materials. The cheque is for $5,000 and is drawn on ABC Corporation’s business account at First National Bank. Sarah signs the cheque and hands it to the company’s delivery driver, Mike, with instructions to deliver it to XYZ Suppliers.

Mike takes the cheque but forgets to deliver it to XYZ Suppliers on his way back from the bank. Instead, he accidentally leaves it in his jacket pocket. Later that evening, Mike goes to a local diner and pays for his dinner using cash. However, he forgets to remove the cheque from his jacket pocket when he hangs it on the coat rack.

The next morning, the diner’s owner, Mary, finds the cheque in Mike’s jacket pocket while sorting through lost and found items. Seeing that it’s a cheque for $5,000, Mary decides to deposit it into her personal bank account at Sunshine Credit Union. She endorses the back of the cheque with her signature and “For deposit only” before depositing it and cheque was deposited into an account at Sunshine Credit Union.

Questions to Solve the Problem:

  1. What are the potential consequences for ABC Corporation if the missing cheque issue is not resolved, and What steps should ABC Corporation take to prove ownership of the cheque and recover the funds?
  2. What legal principles and regulations govern the handling and resolution of disputes involving negotiable instruments like cheques?

CLICK HERE Upload assignment file.

:::

THE INDIAN CONTRACT ACT, 1872

INTRODUCTION

The term law refers to rules of conduct enforced by the State to maintain peace and order in the society. Broadly speaking, law may be defined as the rules of conduct recognized and enforced by the state to control and regulate the conduct of people, to protect their property and contractual rights with a view to securing justice, peaceful living and social security.

0.1 Definition

Definitions of the term law by some eminent scholars are given below:

  1. According to Salmond, “Law is the body of principles recognized and applied by the state in administration of justice”.

  2. Austin says, “A law is a rule of conduct imposed and enforced by the sovereign”.

  3. In the words of Holland, “law is a rule of external human actions enforced by sovereign political authority”.

  4. According to Woodrow Wilson, “Law is that portion of the established habit and thought of mankind which has gained distinct and formal recognition in the shape of uniform rules backed by authority and power of the government”.

0.2 LAW OF CONTRACT

Law of contract is the most important and basic part of Mercantile law. It is not only the merchant or trader but every person who lives in the organised society, consciously or unconsciously enters into contracts from sunrise to sunset. The law of contract is contained in the Indian Contract Act, 1872 which —

  1. Deals with the general principles of law governing all contracts, and

  2. Covers the special provisions relating to special contracts like bailment, pledge,indemnity, guarantee and agency.

When a person buys a computer or hires a taxi or goes to video library to buy a video cassette or takes a credit card from a bank or gives loan to another or he does booking for an orchestra/DJ for marriage party, he enters into and performs a contract though he may be unaware of this fact.Such contracts create legal relations giving rise to certain rights and obligations. The law of contract is designed to enforce rights and obligations in connection with the above activities.

0.3 CONTRACT

A contract is an agreement made between two or more parties which the law will enforce. A contract is an agreement to do or not to do an act. It is a legally binding agreement, which is enforceable at law.

0.3.1 Definition

Section 2(h) of the Indian Contract Act, 1872 defines contract as an agreement enforceable by law. According to Salmond, “contract is an agreement creating and defining obligations between the parties”. In the words of William Anson, “a legally binding agreement made between two or more persons by which rights are acquired by one or more to acts or forbearances (abstaining from doing something) on the part of other or others”. Halsbury defines contract as, an agreement between two or more persons which is intended to be enforceable at law and is constituted by the acceptance by one party of an offer made to him by the other party to do or to abstain from doing some act. Sir Fredrick Pollock says, “Every agreement and promise enforceable at law is a contract”.

CONTRACT - According to sec.2(h), a contract is defined as an agreement enforceable before the law.

AGREEMENT - According to sec.2(e), every promise or set of promises forming consideration for each other.

PROMISE - According to sec.2(b), when a person made a proposal to another to whom proposal is made, if proposal is assented there to.

An agreement involves a proposal or offer by one party and acceptance of the same by the other party. It requires existence of two or more persons i.e., plurality of persons because a person cannot enter into an agreement with himself. It also implies that the parties have a common intention about the subject matter of their agreement. Two parties should be thinking of the same thing in the same sense at the same time. Thus, an agreement is the outcome of two consenting minds i.e., consensus ad idem.

Contract consists of two essential elements:

  1. Agreement and

  2. Its enforceability at law.

  1. Agreement: An agreement is defined in Section 2 (e) as every promise or every set of promises forming the consideration for each other. A promise is defined in Section 2 (b) as a proposal when accepted becomes a promise. An agreement involves a proposal or offer by one party and acceptance of the same by the other party. It requires existence of two or more persons i.e., plurality of persons because a person cannot enter into an agreement with himself. It also implies that the parties have a common intention about the subject matter of their agreement. Two parties should be thinking of the same thing in the same sense at the same time. Thus, an agreement is the outcome of two consenting minds i.e., consensus ad idem.

Thus, Agreement = Offer + Acceptance

  1. Enforceable at Law: An agreement to become a contract must give rise to a legal obligation. The common acceptance formed and communicated between the two parties must create legal relations and not merely the relations which are purely social or domestic in nature.

If the parties specify or the circumstances indicate that the parties intend to create legal relationship through it-even an agreement between husband and wife will be legally enforceable. On the other hand, if the two parties rule out legal obligation expressly the agreement will not be enforceable though it may be a trade agreement.

Thus, Contract = Agreement + Enforceability at Law

Therefore, all contracts are agreements but all agreements are not contracts.

0.3.2 ESSENTIAL ELEMENTS OF A VALID CONTRACT (Sec.10)

Offer and Acceptance: There must be a clear and definite offer made by one party, and the other party must accept that offer. The terms of the offer and acceptance should be specific and unambiguous.

Intention to Create Legal Relations: The parties involved must intend for the agreement to be legally binding. Certain social or domestic agreements may not be presumed to have this intention.

Legal Capacity: Both parties must have the legal capacity to enter into a contract. This means they must be of sound mind, not minors, and not under the influence of substances that impair their judgment.

Legality of Purpose The purpose of the contract must be legal. Contracts with illegal objectives or that involve illegal activities are generally unenforceable.

Certainty and Possibility of Performance: The terms of the contract must be clear and specific, and it must be possible to perform the obligations outlined in the agreement.

Consideration Each party must receive something of value (consideration) from the other party. This is what distinguishes a contract from a gift.

Mutual Consent (Consensus ad Idem): There must be a meeting of the minds, meaning that both parties understand and agree on the essential terms of the contract.

Writing, where required by law: Some contracts, depending on the nature of the agreement, must be in writing to be enforceable. Examples include contracts for the sale of real estate or contracts that cannot be performed within a certain timeframe.

0.3.3 Classification of Contracts

Based on Formation

  • Express Contracts: Formed through explicit agreement, either verbal or written.
  • Implied Contracts: Formed based on the conduct of the parties rather than explicit agreement.

Based on Enforceability or Formation of Validity

  • Valid Contracts: Meet all legal requirements and enforceable in court.
  • Void Contracts: Not legally binding from the beginning, often due to illegal activities or lack of essential elements.
  • Voidable Contracts: One party has the option to enforce or void due to certain circumstances.
  • Unenforceable Contracts: May have been valid at the time of formation but cannot be enforced due to legal technicalities.

Based on Performance

  • Executed Contracts: All parties have fulfilled their obligations.
  • Executory Contracts: One or more parties still have obligations to fulfill.

Based on Validity

  • Bilateral Contracts: Both parties exchange promises.
  • Unilateral Contracts: Only one party makes a promise, and the other party’s acceptance is through performance.

Based on Nature

  • Option Contracts: One party pays for the right to have the option to enter into a contract later.
  • Fixed-Term Contracts: Have a specific end date or termination condition.

Based on Subject Matter

  • Sales Contracts: For the sale of goods.
  • Service Contracts: For the provision of services.
  • Employment Contracts: Between employers and employees outlining terms of employment.
  • Lease Contracts: For the rental of property.

0.4 OFFER

According to Sec.2(a), An offer is a proposal or expression of willingness to enter into a contract on specific terms with the intention that it becomes legally binding upon acceptance. The person making the offer who makes the proposal is generally called the ‘offeror’, proposer, or promisor and the person to whom it is made is called the offeree or proposee. Thus, for a valid offer, the party making it must express his willingness ‘to do’ or ‘not to do’ something.

0.4.1 How is an Offer Made?

An offer can be made by any act which has the effect of communicating it to the other. An offer may either be an ‘express offer’ or an ‘implied offer’

Express Offer: When an offer is made by words, spoken or written, it is termed as an express offer.

Eg: When A says to B that he wants to sell his book to B for Rs. 20, it is an express offer. Similarly, when A writes a letter to B offering to sell his car to him for Rs. 40,000, it is also an express offer by A. The oral offer may be made either in person or over telephone. Section 9 of the Contract Act reads: “In so far as the proposal or acceptance of any promise is made in words, the promise is said to be express.”

Implied Offer: It is an offer which is not made by words spoken or written. An implied offer is one which is inferred from the conduct of a person or the circumstances of the particular case. An implied offer arises when the conduct or circumstances of the parties indicate a clear intention to make an offer, even though it may not be stated in words. In other words, the offer is inferred from the actions, behavior, or situation rather than being expressly communicated.

Eg: public transport like TSRTC in Telangana runs buses on different routes to carry passengers who are prepared to pay the specified fare. This is an implied offer.

Similarly, when a coolie picks up your luggage to carry it from railway platform to the taxi, it means that the coolie is offering his service for some payment. This is an implied offer by the coolie.

According to Section 9 of [relevant legal code or legislation], “Insofar as such proposal or acceptance is made otherwise than in words, the promise is said to be implied.”

0.4.2 Types of Offers

Offers in contract law can take various forms and are crucial elements in the formation of contracts. Here are some common types of offers:

Express Offer

An express offer is made explicitly, either orally or in writing, and its terms are clearly stated.

Implied Offer

An implied offer is inferred from the conduct of the parties or the circumstances of the situation rather than being expressly communicated.

Specific Offer

A specific offer is made to a particular person or group of people, and its terms are tailored to that specific situation.

General Offer

A general offer is made to the public or a large group of people, and anyone who meets the specified conditions can accept it.

Cross Offer

A cross offer occurs when both parties make identical offers to each other simultaneously, resulting in neither offer being valid because there is no clear acceptance.

Standing Offer

A standing offer, also known as an open offer, remains open for a specified period, and any party can accept it by fulfilling the stated conditions.

Counter Offer

A counter offer is a response to an original offer that introduces new terms or conditions, thereby rejecting the original offer and proposing a new one.

Unilateral Offer

A unilateral offer is made by one party, and acceptance is through performance rather than a promise. The offeror is obligated to fulfill the terms of the offer if the offeree performs the required action.

Bilateral Offer

A bilateral offer involves both parties exchanging promises to perform certain actions or provide something of value. Acceptance typically occurs through a promise rather than performance.

Continuing Offer

A continuing offer remains open until it is explicitly revoked or rejected by the offeror, allowing the offeree to accept it at any time during its existence.

Understanding these different types of offers is essential for determining their validity and the formation of contracts in accordance with contract law principles.

0.5 Termination of Offer

An offer can be terminated by rejection, expiration of the offer’s specified time period, lapse of a reasonable amount of time, or death or incapacity of either party.

Counter Offer

A counter offer terminates the original offer and creates a new offer with modified terms. The offeree becomes the offeror, and the original offeror becomes the offeree.

Silence as Acceptance

In general, silence or inaction does not constitute acceptance of an offer, except in certain circumstances where the parties have established a course of dealing where silence indicates acceptance.

Acceptance

Acceptance must be unconditional and in accordance with the terms of the offer. Any modification to the offer constitutes a counter offer, and acceptance must be communicated to the offeror.

Invitation to Treat

An invitation to treat is not an offer but an invitation for others to make offers. Examples include advertisements, price lists, and display of goods.

Special Rules for Specific Contracts

Certain types of contracts, such as auctions, unilateral contracts, and contracts involving distance selling, may have specific rules governing the formation and acceptance of offers.

Adhering to these legal rules helps ensure the validity and enforceability of offers in contract law, providing clarity and protection for both parties involved.

0.6 Acceptance

0.6.1 Definition of Acceptance in Indian Contract Act

According to Section 2(b) of the Indian Contract Act, the term ‘acceptance’ is defined as follows:

“When the person to whom the proposal is made signs his assent thereto, the proposal is said to be accepted. A proposal when accepted becomes a promise.”

Example

For example, let’s consider the following scenario:

A offers to sell his book to B for Rs. 20. B agrees to buy the book for Rs. 20. This action by B constitutes acceptance of A’s offer.

In this example: - A made the proposal by offering to sell his book for Rs. 20. - B signed his assent by agreeing to buy the book for Rs. 20. - Therefore, B’s agreement constitutes acceptance of A’s offer, and upon acceptance, A’s proposal becomes a promise.

This illustrates the concept of acceptance as defined in Section 2(b) of the Indian Contract Act.

1 who can accept?:

An offer can be accepted only by the person or persons to whom it is made. An offer made to a particular person (specific offer) can be accepted only by him and none else.

Eg: if A wants to enter into a contract with B, then C cannot substitute himself for B without A’s consent. A sold his business to B but this fact was not known to an old customer C. C sent an order for goods to A by name. B supplied the goods to C. It was held that there was no contract between B and C, because C never made any offer to B. If an offer is made to the world at large (general offer) any person can accept the offer provided he has the knowledge of the offer.

3 CONSIDERATION

4 Consideration in Contract Law

Consideration is a fundamental concept in contract law, representing something of value that is exchanged between parties to a contract. Here’s an explanation:

4.1 Meaning of “Quid Pro Quo”

  • “Quid Pro Quo” is a Latin phrase meaning “something in return.” In the context of contracts, it signifies that a party to an agreement who promises to do something must gain something in return.

4.2 Definition According to Section 2(d)

  • According to Section 2(d) of relevant legal code or legislation, consideration refers to something of value that is exchanged between parties to a contract.

4.3 Example

  • Consideration can take various forms, such as money, goods, services, promises to act, promises to refrain from acting, etc.
  • For instance, if A promises to sell their car to B for $10,000, and B promises to pay $10,000 to A, the consideration for A’s promise is the payment of $10,000, and the consideration for B’s promise is the transfer of the car.

5 Components of Consideration

Consideration in contract law may consist of the following components:

5.1 An Act

  • Consideration can involve an act that a party is legally bound to perform. This means fulfilling an obligation or duty as required by the terms of the contract.

5.2 Abstinence or Forbearance

  • Consideration can also involve abstaining or forbearing from doing something. This refers to refraining from taking certain actions or exercising certain rights as agreed upon in the contract.

5.3 A Return Promise

  • Additionally, consideration can be a return promise made by one party to the other. This means making a commitment to perform a future action or to refrain from certain actions in exchange for the promises made by the other party.

These components of consideration highlight the various forms that consideration can take in a contract, including acts, forbearance, and promises exchanged between the parties involved.

7 STRANGER TO CONTRACT

A “stranger to contract” refers to an individual or entity who is not a party to a contract but may be affected by its terms or provisions. In legal terms, a stranger to contract typically does not have any enforceable rights or obligations under the contract due to the doctrine of privity of contract. This doctrine generally restricts the enforcement of contractual rights and obligations to the parties directly involved in the contract.

8 Doctrine of Privity of Contract

The doctrine of privity of contract is a general rule in contract law stating that only parties to a contract can sue and be sued on that contract. Here’s an explanation:

8.1 Meaning of “Privity of Contract”

  • “Privity of contract” refers to the relationship that subsists between the parties who have entered into contractual obligations. It signifies the direct connection and legal relationship between the contracting parties.

8.2 Example:

  • Suppose ‘A’, a doctor, agrees to treat ‘B’, but as ‘A’ will not accept payment, ‘B’ promises ‘C’ (A’s son) that he will pay him Rs. 5,000.
  • In this scenario, ‘C’ cannot maintain a suit on the promise because he is a stranger to the consideration. Despite being the son of ‘A’, ‘C’ is not a party to the original contract between ‘A’ and ‘B’, and therefore, he lacks privity of contract.

The doctrine of privity of contract emphasizes the principle that contractual rights and obligations are generally enforceable only between the parties who have entered into the contract. This rule prevents third parties from asserting rights or liabilities under a contract to which they are not a party.

9 Exceptions to the Doctrine of Privity of Contract

While the doctrine of privity of contract generally restricts the enforcement of contractual rights and obligations to the parties directly involved in the contract, there are certain exceptions to this rule. Here are some notable exceptions:

9.1 1. Trust or Charge

  • In cases involving a trust or a charge, third parties may have enforceable rights even though they are not parties to the original contract. This allows beneficiaries of trusts or charges to enforce their rights against the relevant parties.

9.2 2. Marriage Settlement, Partition, or Other Family Arrangements

  • Agreements such as marriage settlements, partitions, or other family arrangements may create rights and obligations that can be enforced by third parties who are not parties to the original contract.

9.3 3. Estoppel

  • Estoppel can prevent a party from denying the existence of a contractual relationship with a third party, even if there is no direct privity of contract between them. This can occur when a party makes representations or promises to a third party that induce reliance, leading to an equitable estoppel.

9.4 4. Assignment of Contract

  • When a party assigns their rights under a contract to a third party, the assignee may enforce those rights against the other party to the original contract, even though the assignee was not a party to the original agreement.

9.5 5. Contract with Agent

  • Contracts made by an agent on behalf of a principal may confer enforceable rights and obligations on third parties, depending on the nature of the agency relationship and the authority granted to the agent.

These exceptions provide flexibility and fairness in certain circumstances where it is necessary to allow third parties to enforce contractual rights or be bound by contractual obligations, despite not being directly involved in the original contract.

10 Contract without consideration is void – Exceptions

11 Natural Love and Affection Agreements

An agreement without consideration may be valid under Section 25(1) of relevant legal code or legislation if certain requirements are met. These requirements typically include:

11.1 1. Written Document

  • The agreement must be made by a written document. This means that the terms of the agreement are recorded in writing to provide clarity and evidence of the agreement’s terms.

11.2 2. Registration

  • The agreement must be registered according to the law relating to registration in force at that time. Registration is necessary to ensure the validity and enforceability of the agreement, especially for certain types of transactions involving property or assets.

11.3 3. Natural Love and Affection

  • The agreement must be made on account of natural love and affection. This means that the parties involved have genuine feelings of affection towards each other, motivating the agreement.

11.4 4. Near Relation

  • The parties to the agreement must stand in a near relation to each other. This typically refers to family relationships or close personal connections between the parties.

11.4.1 Example:

An agreement entered into by a husband with his wife during quarrels and disagreement, whereby the husband promised to give some property to his wife. The agreement is void because, under the circumstances, there is no natural love and affection between the parties.

This example illustrates that for agreements based on natural love and affection to be valid, genuine affection must exist between the parties involved, and the agreement must meet all necessary legal requirements, including being made in writing and registered as per applicable laws.

12 Voluntary Compensation

Under Section 25(2) of relevant legal code or legislation, voluntary compensation occurs when one party voluntarily performs an act, and the other party subsequently promises to pay compensation for that act. Here are the key points:

  • Definition: Voluntary compensation applies when there is a voluntary act by one party, and there is a subsequent promise by the party benefited to pay compensation to the former. The term “voluntary” indicates that the act was performed “otherwise than at the desire of the promisor.”

  • Validity: This type of promise, made without any consideration, is considered valid under the law.

12.0.1 Example:

  • ‘D’ finds ’B’s baggage and voluntarily returns it to him.
  • Subsequently, ‘B’ promises to give ‘D’ Rs. 100 as compensation for finding and returning the baggage.
  • This constitutes a valid contract under Section 25(2) because ‘D’ performed a voluntary act without any desire or request from ‘B’, and ‘B’ subsequently promised compensation for that act.

This example illustrates the concept of voluntary compensation and how it can lead to a valid contract even without consideration.

13 Time-Barred Debt

Under Section 25(3) of relevant legal code or legislation, a promise by a debtor to pay, wholly or in part, a debt that is barred by the law of limitation can be enforced if the promise is made in writing and signed by the debtor or their authorized agent. Here’s what you need to know:

  • Definition: Time-barred debt refers to a debt that is no longer legally enforceable due to the expiration of the statute of limitations.

  • Enforcement: Despite being time-barred, if the debtor makes a written promise to pay, either in full or in part, the debt can be enforced under certain conditions.

  • Conditions: The promise must be made in writing and signed by the debtor or their authorized agent to be enforceable.

13.0.1 Example:

  • ‘D’ owes ‘B’ Rs. 10,000, but the debt is barred by the limitation act due to the expiration of the statute of limitations.
  • ‘D’ signs a written promise to pay ‘B’ Rs. 5,000 on account of the debt.
  • Despite the debt being time-barred, the promise made by ‘D’ in writing and signed by them to pay Rs. 5,000 is enforceable as a valid contract under Section 25(3).

This example illustrates how a time-barred debt can still be enforced through a written promise to pay, provided it meets the conditions outlined in Section 25(3) of the relevant legal framework.

14 Agency and Completed Gift

14.1 Agency:

Under Section 185 of relevant legal code or legislation, no consideration is required to create an agency. Here’s what you need to know:

  • Definition: Agency refers to a legal relationship where one party (the principal) authorizes another party (the agent) to act on their behalf and to represent them in dealings with third parties.

  • Consideration: Unlike other types of contracts, no consideration is necessary to establish an agency relationship. This means that the agent can undertake duties and obligations on behalf of the principal without the need for any consideration.

14.2 Completed Gift:

According to Section 25, the “no consideration, no contract” rule does not apply to completed gifts. Here’s what this means:

  • Definition: A completed gift refers to the transfer of certain property from one person to another without any consideration or expectation of anything in return.

  • Legal Effect: If a person transfers property to another through a written and registered deed in accordance with the provisions of the Transfer of Property Act, they cannot subsequently claim back that property on the grounds of lack of consideration.

14.2.1 Example:

  • Suppose ‘A’ transfers ownership of a house to ‘B’ through a written and registered deed, without expecting anything in return.
  • This transfer constitutes a completed gift, and ‘A’ cannot later claim the house back from ‘B’ on the grounds of lack of consideration.

This example demonstrates how the “no consideration, no contract” rule does not apply to completed gifts, as governed by Section 25 of the relevant legal framework.

15 Capacity to contract

Capacity to contract refers to the legal ability of an individual to enter into a valid contract. In other words, it involves assessing whether a person has the mental and legal competence to understand the terms of a contract, make decisions, and be bound by the contractual obligations. The capacity to contract is a fundamental principle of contract law and is crucial for ensuring that contracts are fair, voluntary, and enforceable.

15.1 Disqualified persons to enter into a contract

  1. Minor
  2. Persons of unsound mind c)Persons disqualified by any law to which they are subject

16 Age of Majority in India

According to the Indian Majority Act, 1875, the age of majority in India is defined as 18 years. Here are the key points regarding the age of majority and its implications in contracts:

  • Definition: The age of majority, as defined by the Indian Majority Act, is 18 years. This means that individuals attain full legal rights and responsibilities upon reaching this age.

  • Contractual Capacity: For the purpose of entering into a contract, even being a day less than 18 years disqualifies the person from being a party to the contract. Any person domiciled in India who has not attained the age of 18 years is termed as a minor.

  • Implications: Minors are generally not bound by contracts they enter into, and contracts with minors are voidable at the option of the minor. However, there are exceptions and certain types of contracts that minors may enter into, such as contracts for necessaries.

16.0.1 Example:

  • If an individual is 17 years and 364 days old, they are still considered a minor and cannot enter into a contract in India. Only upon reaching the age of 18 years do they attain the status of majority and gain full contractual capacity.

This legal framework ensures protection for minors in contractual matters and recognizes their limited capacity to understand and undertake legal obligations until they reach the age of majority.

17 Rights and Limitations of Minors in Contracts

17.1 Benefit of Minority

  • A minor is always given the benefit of being a minor in contractual matters. Even if a minor falsely represents himself as a major and enters into a contract or takes a loan, he can plead minority as a defense. The rule of estoppel cannot be applied against a minor, and he can plea his minority in defense.

17.2 Contract by Guardian

  • Under certain circumstances, a guardian of a minor can enter into a valid contract on behalf of the minor. Such a contract, entered into for the benefit of the minor, can also be enforced by the minor. However, guardians cannot bind a minor by a contract for buying immovable property. A contract entered into by a certified guardian of a minor, appointed by the Court, with approval from the Court for the sale of a minor’s property can be enforced.

17.3 Joint Contract by a Minor and an Adult

  • In the case of a joint contract between an adult and a minor, executed by the guardian on behalf of the minor, the liability of the contract falls on the adult. The minor is not bound by the contract, and the adult assumes full responsibility for the contractual obligations.

These principles ensure that minors are protected in contractual matters and are not unfairly burdened with obligations beyond their capacity to understand and manage.

18 Soundness of Mind in Contracts

According to Section 12 of the Indian Contract Act, 1872, the soundness of mind of a person is crucial for entering into a contract. Here are the key points regarding the soundness of mind in contracts:

  • Definition: A person is considered to be of sound mind for the purpose of entering into a contract if they are capable of understanding the contract and assessing its effects upon their interests.

  • Occasional Soundness: Even if a person is usually of unsound mind but is occasionally of sound mind, they can enter into a contract when they are of sound mind. This means that contracts entered into during periods of soundness are valid.

  • Voidability: No person can enter into a contract when they are of unsound mind, even if the unsoundness of mind is temporary. A contract made by a person of unsound mind is considered void.

These principles ensure that contracts are entered into by individuals who have the capacity to understand the terms of the contract and make informed decisions regarding their interests. Contracts made by persons of unsound mind are deemed void to protect vulnerable individuals from entering into agreements that they may not fully comprehend or be capable of fulfilling.

19 Case of Inder Singh v. Parmeshwardhari Singh

In the case of Inder Singh v. Parmeshwardhari Singh, the following circumstances were presented:

  • Property Transaction: A property valued around Rs. 25,000 was agreed to be sold for only Rs. 7,000.

  • Congenital Idiot: The plaintiff’s mother demonstrated that he was a “congenital idiot,” incapable of comprehending the transaction. The plaintiff spent much of his time wandering about, indicating his inability to understand the implications of the contract.

This case highlights the importance of assessing the mental capacity of parties involved in contractual transactions, particularly when significant disparities exist between the value of the property and the agreed-upon price. The plaintiff’s mental incapacity rendered the contract voidable, as he was unable to comprehend the nature and consequences of the transaction.

20 Position of a Person Disqualified from Contracting by Law

20.1 Alien Enemies

  • All persons other than Indian citizens are considered aliens. When the sovereign or the state of that alien is at peace with India, the individual is classified as an alien friend. However, during a state of war, the individual becomes an alien enemy.

  • Alien Friend: An alien friend living in India has full contracting competency subject to certain restrictions. They are allowed to enter into contracts like Indian citizens, but they may be subject to specific limitations or regulations.

  • Alien Enemy: During a war with the country of the alien, the individual is classified as an alien enemy. During this time, no contracts can be made with the alien enemy without the prior approval of the Government of India. This restriction ensures that contracts with individuals from enemy nations do not compromise national security or interests during times of conflict.

These provisions ensure that individuals disqualified from contracting by law, such as alien enemies during times of war, are subject to appropriate regulations to safeguard the interests of the state.

21 Convicts

21.1 Definition

  • A convict refers to a criminal who has been sentenced or pronounced ‘guilty’ by a decision of a judge in a court of law.

21.3 Suspension of Rights

  • However, when the convict’s term expires or they are pardoned, their legal incompetency ends. This means that their ability to contract is merely suspended during their term of imprisonment and not lost permanently.

21.4 Regaining Rights

  • When the convict is set free, either after completing their sentence or being granted a pardon, they regain their rights, including the ability to enter into contracts and pursue legal actions.

These legal principles ensure that while convicts are serving their sentences, their ability to engage in contractual transactions or legal proceedings is temporarily suspended. However, upon their release, they regain their legal capacity and rights.

22 Disqualification from Contracting: Drunkards and Idiots

22.1 Drunkards:

  • Drunkards are individuals who are habitually intoxicated or incapacitated due to alcohol or substance abuse.
  • Contracts entered into by drunkards may be voidable if the other party was aware of the individual’s intoxicated state and took advantage of it.
  • The intoxicated individual may have the option to void the contract upon sobering up if they can demonstrate that they lacked the capacity to understand the terms and consequences of the agreement at the time of contracting.

22.2 Idiots:

  • In legal terminology, “idiots” typically refer to individuals who have severe mental disabilities or intellectual impairments, rendering them incapable of understanding the nature and consequences of a contract.
  • Contracts entered into by individuals deemed idiots may be voidable on the grounds of lack of capacity.
  • The legal capacity of individuals categorized as idiots is typically assessed based on their ability to understand and appreciate the terms of the contract.

These legal principles regarding drunkards and idiots aim to protect individuals who lack the capacity to fully comprehend and consent to contractual agreements, ensuring fairness and equity in contract law.

24 Coercion under the Indian Contract Act

24.1 Definition of Coercion (Section 15)

  • Coercion is defined under Section 15 of the Indian Contract Act. It refers to 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, with the intention of causing that person to enter into an agreement.

24.2 Examples of Coercion

  • Example 1: ‘B’ gives his car, causing his agreement to be coerced. This implies that ‘B’ was compelled to give his car against his will due to coercion.
  • Example 2: ‘A’ threatens to hurt ‘B’ if he doesn’t give his son, ‘C’, a large sum of money. ‘B’ believes the threat and gives ‘C’ the money. In this case, the agreement is considered to be coerced because ‘B’ was forced to give the money due to the threat of harm.

These examples illustrate how coercion involves the use of force, threats, or unlawful actions to compel someone to enter into an agreement against their will, thereby undermining the voluntary nature of the contract.

25 Undue Influence under the Indian Contract Act

25.1 Definition of Undue Influence

  • Undue Influence refers to the manipulation or exertion of pressure on a person who is vulnerable or dependent on someone else. It occurs when an individual is able to persuade another’s decision due to the relationship between the parties.

25.2 Example Illustrating Undue Influence

  • Example: James, an old man suffering from cancer, is induced by Daniel, his doctor, to pay a huge amount for his treatment. James transfers the money to Daniel’s account. In this scenario, Daniel employs undue influence over James by taking advantage of their doctor-patient relationship and James’s vulnerable state due to his illness.

This example demonstrates how undue influence can occur when one

26 Fraud under the Indian Contract Act

26.1 Essentials of Fraud (Section 17)

  • Section 17 of the Indian Contract Act includes two essentials to prove that an act constitutes fraud:
    1. A person should make a false statement with knowledge that the facts are false.
    2. There should be a wrongful intention to deceive the other party.

26.2 Illustration

  • Let’s consider an illustration: Mr. A is selling a piece of land to Mr. B. Mr. A is aware that there is a legal dispute over the ownership of a part of the land, and the court’s decision is pending. However, Mr. A intentionally conceals this information from Mr. B and assures him that the entire land is free from any legal disputes.

In this scenario, Mr. A’s act of concealing the ongoing legal dispute over a part of the land and falsely assuring Mr. B about the land’s status constitutes fraud under the Indian Contract Act. Mr. A knowingly makes a false statement with the intention to deceive Mr. B, which undermines the voluntary and genuine nature of the contract.

27 Misrepresentation under the Indian Contracts Act

27.1 Definition of Misrepresentation

  • Misrepresentation refers to the misstatement of a fact that is material to the contract. It occurs when one party makes an untrue or false statement of law or fact, which induces the other party to enter into an agreement or contract.

27.2 Section 18 of The Indian Contract Act

  • Misrepresentation is defined in Section 18 of The Indian Contract Act. According to this section, a misrepresentation occurs when one party makes an untrue or false statement of law or fact, which leads the other party to enter into an agreement or contract.

Misrepresentation undermines the voluntary and genuine nature of the contract by providing false information that influences the decision-making process of the other party. It is considered a ground for the contract to be voidable at the option of the aggrieved party.

28 Mistake under the Indian Contracts Act

28.1 Definition of Mistake

  • Mistake is not explicitly defined in the Indian Contract Act. However, Sections 20, 21, and 22 of the Act deal with the concept of mistake. A mistake occurs when parties intend to do one thing but, due to error, end up doing something else.

28.2 Effect of Mistake

  • When both parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void.

28.3 Illustration

  • Let’s consider an illustration: Mr. G owns a rare and valuable antique painting that he believes to be a replica. He decides to sell the painting to Ms. H. On the other hand, Ms. H is an art collector who thinks she is buying an original masterpiece.

In this scenario, both Mr. G and Ms. H are under a mistake as to the nature of the painting. Mr. G mistakenly believes it to be a replica, while Ms. H mistakenly believes it to be an original masterpiece. Since the mistake is regarding a matter of fact essential to the agreement (the nature of the painting), the agreement between Mr. G and Ms. H would be void.

29 Legality of Object in Contract Law

29.1 Definition

  • The legality of an object refers to the requirement that the purpose or objective of a contract must be lawful for the contract to be considered valid and enforceable.

29.2 Lawful Purpose

  • A contract must have a lawful purpose, meaning that its objective must not be prohibited by law. Contracts involving illegal activities such as drug trafficking, gambling, or fraud are not enforceable because their object is unlawful.

29.3 Example

  • Let’s consider an example: Alice agrees to sell her bicycle to Bob in exchange for $100. The purpose of the contract is to transfer ownership of the bicycle in exchange for a monetary payment, which is a lawful purpose. Both parties are legally capable of entering into such a contract, and the object of the contract does not violate any laws.

In this scenario, the contract between Alice and Bob has a lawful purpose, as it involves the transfer of ownership of a bicycle for a monetary payment. Since the object of the contract is lawful, the contract is considered valid and enforceable.

30 Public Policy Considerations in Contract Law

30.1 Definition

  • Public policy considerations in contract law pertain to the principle that even if an activity is not expressly prohibited by law, a contract may still be unenforceable if its purpose violates public policy. Public policy refers to societal norms, morals, and values that the legal system seeks to protect. Contracts that are against public policy are deemed void or unenforceable.

30.2 Example

  • Let’s consider an example: Alice owns a company that manufactures and sells firearms legally. She enters into a contract with Bob, agreeing to supply him with firearms for resale in an area where firearm sales are strictly regulated and prohibited by local laws. The contract specifies that Bob will sell the firearms in an underground market to individuals without proper permits or background checks.

In this scenario, the contract between Alice and Bob violates public policy because it involves the illegal resale of firearms in an area where firearm sales are strictly regulated and prohibited by local laws. Such activities undermine public safety and security and go against societal norms and values. Therefore, the contract may be deemed void or unenforceable due to its violation of public policy.

31 Void vs. Voidable Contracts

31.1 Definition

  • In contract law, if the object of a contract is illegal or against public policy, the contract may be considered void ab initio (from the beginning), meaning it is invalid from the outset. Alternatively, if the illegality arises later or is not fundamental to the contract, the contract may be voidable, meaning it can be rescinded or canceled at the option of one or both parties.

31.2 Example

  • Let’s consider an example: Grace enters into a contract with Henry to purchase Henry’s antique watch. Later, Grace discovers that Henry misrepresented the watch’s condition, and it is not as valuable as she believed. Grace has the option to rescind the contract due to Henry’s misrepresentation, making it voidable at her discretion.

In this scenario, the contract between Grace and Henry is voidable because it can be rescinded or canceled at Grace’s option due to Henry’s misrepresentation regarding the condition of the antique watch. The contract is not automatically invalid from the outset but can be invalidated by Grace’s choice to rescind it.

32 Separability Doctrine

32.1 Definition

  • The separability doctrine is a legal principle applied in some jurisdictions where if only a part of the contract is illegal or against public policy, the remainder of the contract may still be enforceable if the illegal part can be severed or separated from the rest of the contract.

32.2 Example

  • Let’s consider an example: In a contract between Ian and Jane for the sale of a house, there is a clause stating that if any part of the contract is found to be invalid, the remainder of the contract remains enforceable. If it is later determined that a specific provision of the contract violates public policy, such as a clause requiring the buyer to commit an illegal act, the rest of the contract (e.g., the purchase price, closing date) remains valid and enforceable.

In this scenario, the separability clause in the contract allows the illegal or void provision to be severed from the rest of the contract. As a result, the remaining valid provisions of the contract, such as the purchase price and closing date, remain enforceable despite the invalidity of the specific provision that violates public policy.

33 Performance of a Contract

33.1 Definition

  • The performance of a contract refers to the fulfillment of the obligations and terms outlined within the contract by the parties involved. It involves carrying out the agreed-upon actions, delivering goods or services, making payments, or meeting any other requirements specified in the contract.

33.2 Types of Performance

33.2.1 Actual Performance

  • An actual performance is one where both parties have fulfilled their obligations as set out in the contract. It usually occurs when goods or services are delivered following the terms agreed upon.

33.2.2 Substantial or Attempted Performance

  • A substantial performance is one where only some of the obligations under a contract have been met. For example, if a contractor completes most of the work but does not finish, this would be considered a substantial performance. It is up to the courts to decide whether or not it is sufficient for one party to receive payment.

33.3 Breach of Contract

  • Breach of contract occurs when the performance by any of the parties is not done or the substantial performance is not satisfactory.

In summary, the performance of a contract can take various forms, including actual performance where all obligations are fulfilled, substantial or attempted performance where only some obligations are met, and breach of contract where obligations are not fulfilled or are unsatisfactory.

34 Discharge of a Contract

34.1 Definition

  • Discharge of a contract refers to the termination or completion of the contractual obligations and duties by the parties involved. There are several ways in which a contract can be discharged, either by mutual agreement or by operation of law.

Mode of Discharge Contract

34.2 By Performance

34.2.1 Actual Contract

Definition

An actual contract is one that has been fully formed and agreed upon by all parties involved. In this stage, all the elements required for a contract, such as offer, acceptance, consideration, and intention to create legal relations, are present.

Example

John offers to sell his car to Sarah for $10,000. Sarah accepts the offer, and they agree on the price and terms of the sale. Both parties exchange consideration, and there is a mutual intention to be legally bound by the agreement. At this point, an actual contract for the sale of the car is formed between John and Sarah.

34.2.2 Attempted Contract

Definition

An attempted contract refers to a situation where parties have engaged in negotiations or discussions with the intention of forming a contract, but one or more essential elements required for a valid contract are missing or unresolved. Despite the parties’ efforts, a contract has not yet been finalized or fully formed.

Example

Mary sees an advertisement for a used bicycle priced at $200. She contacts the seller, Alex, and expresses her interest in buying the bicycle. They discuss the price and condition of the bicycle but have not yet reached an agreement. Before they can finalize the deal, Alex decides to sell the bicycle to another buyer who offers a higher price. In this scenario, although Mary and Alex engaged in negotiations, they did not reach a mutual agreement on all essential terms (such as price) required to form a contract. Thus, no actual contract is formed, and it remains an attempted contract.

34.4 Discharge by Impossibility of Performance

34.4.1 Initial Impossibility

Initial impossibility refers to a situation where, at the time the contract is formed, it is impossible for one of the parties to fulfill their obligations. The contract is void ab initio (from the beginning).

Example:

A contract to sell moon rocks that have not yet been discovered would be initially impossible.

34.4.2 Supervening Impossibility

Supervening impossibility occurs when circumstances arise after the contract is formed, making it impossible for one or both parties to fulfill their obligations.

Example:

A contract to hold an outdoor event is frustrated by a sudden rain, making it impossible to carry out the event.

34.5 Discharge by Lapse of Time

Contracts may specify a duration or time limit. Once that time elapses, the contract is automatically discharged.

Example

A contract for services that specifies completion within six months but remains unfinished after one year due to delays.

34.6 Discharge by Operation of Law

34.6.1 Death

If a party to a contract dies, the contract may be discharged, depending on the nature of the contract and applicable laws.

Example

A contract between a homeowner and a landscaper is discharged upon the homeowner’s death.

34.6.2 Merger

Merger occurs when the obligations of a contract are merged into another, such as when a lease agreement is merged into a deed upon purchase of property.

Example

A lease agreement is merged into a deed when the property owner sells the property to the tenant.

34.6.3 Insolvency

If a party becomes insolvent, meaning they are unable to pay their debts, it may discharge certain contracts, especially if the contract involves ongoing performance or financial obligations.

Example

A construction company becomes insolvent during a large-scale project, leading to the discharge of its contracts with subcontractors.

34.6.4 Discharge by Unauthorized Material Alteration

If a material alteration is made to a contract without the consent of both parties, the contract may be discharged.

Example

Altering the terms of a contract, such as changing the price or delivery date, without the other party’s agreement.

34.6.5 Discharge by Change in Identity of Promisor or Promisee

If the identity of either the promisor or promisee changes, it may discharge the contract if the contract is based on personal skill, trust, or reputation.

Example

A contract to receive singing lessons from a specific renowned singer is discharged if the singer loses their voice permanently.

34.7 Breach of Contract

34.7.1 Actual and Anticipatory Breach

Anticipatory breach occurs when one party indicates, through words or actions, that they will not fulfill their contractual obligations before the time for performance arrives.

Example

A supplier informs a buyer that they will not be able to deliver the goods as agreed, well before the delivery date.

SALE OF GOODS ACT, 1930

34.8 Introduction

Sale of Goods Act, 1930 is crucial in understanding the legal framework governing sales transactions and establishing the rights and obligations of the parties involved. The Sale of Goods Act, 1930, provides protections for both buyers and sellers and establishes the basis for resolving disputes arising from sales transactions.

34.9 Contract of Sale

According to SECTION 4(1) of the Indian Sale of Goods act, 1930, defines the contract of sale of goods in the following manner: “A contract of sale of goods is a contract whereby the seller transfer or agrees to transfer the property in goods to the buyer for a price”.

34.9.1 Essentials of a Contract of Sale

The essentials of a contract of sale, as outlined under the Sale of Goods Act, 1930, include:

  1. Offer and Acceptance: There must be a clear offer by the seller to sell goods to the buyer, and an unambiguous acceptance of that offer by the buyer. The terms of the offer and acceptance must be definite and certain.

  2. Agreement to Sell: There must be a mutual agreement between the parties to transfer ownership of the goods in exchange for a price. This agreement may be express or implied from the conduct of the parties.

  3. Goods: The subject matter of the contract must be specific goods or property. These goods must be existing and identifiable at the time of the contract.

  4. Price: There must be a consideration or price agreed upon by the parties for the transfer of ownership of the goods. The price may be fixed, or it may be determined by the course of dealing between the parties or by the market price.

  5. Transfer of Ownership: There must be an intention to transfer ownership of the goods from the seller to the buyer. The transfer of ownership may occur immediately (in the case of a sale) or at a future date or upon the occurrence of a certain event (in the case of an agreement to sell).

  6. Delivery and Acceptance: There must be delivery of the goods by the seller and acceptance of the goods by the buyer in accordance with the terms of the contract. The goods must be delivered in a manner and at a time agreed upon by the parties.

  7. Consideration: There must be valuable consideration exchanged between the parties. This can be in the form of money, goods, services, or any other valuable benefit.

  8. Legal Capacity: Both parties must have the legal capacity to enter into a contract. They must be of sound mind, of legal age, and not disqualified by law from entering into a contract.

These essentials form the basis of a valid contract of sale, and their presence is necessary for the contract to be enforceable by law. Failure to meet any of these essentials may render the contract void or voidable.

34.9.2 Distinction between Sale and Agreement to Sell

The distinction between a sale and an agreement to sell is crucial in determining the rights and liabilities of the parties to the contract. The main points of distinction are as follows:

  1. Nature of Contract:
    • An agreement to sell is an executory contract, where no property passes immediately.
    • A sale is an executed contract plus a conveyance.
  2. Transfer of Property:
    • In a sale, the property in goods passes from the seller to the buyer immediately at the time of contract.
    • In an agreement to sell, the property in goods passes from seller to buyer at a future date or subject to certain conditions.
  3. Risk of Loss:
    • In a sale, the risk of loss falls on the buyer if the goods are destroyed, even if they were in the possession of the seller.
    • In an agreement to sell, the risk falls on the seller until ownership is transferred.
  4. Consequences of Breach:
    • Upon breach of an agreement to sell by the seller, the buyer has a personal remedy.
    • In a sale, the buyer may sue for delivery of goods or damages if the seller breaches the contract.
  5. Insolvency of Buyer:
    • In a sale, the seller must deliver the goods to the Official Receiver or Assignee if the buyer is insolvent. -In an agreement to sell, the seller may withhold delivery until paid.
  6. Insolvency of Seller:
    • In a sale, if the seller becomes insolvent before delivery, the buyer can recover the goods.
    • In an agreement to sell, if the buyer has paid and the seller becomes insolvent, the buyer may only claim a dividend.
  7. Right of Re-sell:
    • In a sale, the seller cannot resell the goods without ownership passing to the buyer.
    • In an agreement to sell, the seller may sell the goods.
  8. Right of Usage:
    • In a sale, the buyer has the right to use the goods immediately.
    • In an agreement to sell, the buyer does not gain usage rights until ownership is transferred.

These distinctions are crucial for understanding the legal implications and obligations under both types of contracts.

34.9.3 Formation of a Contract

Section 5 of the Sale of Goods Act, 1930, outlines the formalities of the contract of sale as follows:

  • A contract of sale is made by an offer to buy or sell goods for a price. The contract may provide for the immediate delivery of goods, immediate payment of the price, or both, or it may allow for delivery or payment by installments, or that delivery or payment shall be postponed.
  • A contract of sale may be made in writing, orally, partly in writing and partly orally, or may be implied from the conduct of the parties.

34.10 Rights of Unpaid Seller:

Rights of an Unpaid Seller
  1. Right of Lien:
    • An unpaid seller has the right to retain possession of the goods until payment of the price is made.
    • This right exists even if the seller has transferred the ownership of the goods to the buyer.
  2. Right of Stoppage in Transit:
    • If the seller has delivered the goods to a carrier or other bailee for the purpose of transmission to the buyer and the buyer has become insolvent, the seller may stop the goods while in transit and resume possession of them.
    • This right allows the seller to prevent the goods from reaching the buyer and retain control over them until payment is made.
  3. Right to Resell the Goods:
    • If the seller has not received payment and the goods are perishable or the seller gives notice to the buyer of their intention to resell, the seller may resell the goods.
    • The seller can resell the goods without the buyer’s consent and recover any damages suffered from the original buyer.
  4. Right to Sue for Price:
    • The seller may sue the buyer for the price of the goods if the payment is due and the buyer refuses or neglects to pay.
    • The seller can also claim damages for non-acceptance of the goods or for breach of contract.
  5. Right to Sue for Damages:
    • In addition to suing for the price, the seller may also claim damages for any loss suffered due to the buyer’s non-payment or breach of contract.
    • This may include compensation for any additional expenses incurred by the seller as a result of the buyer’s default.
  6. Right to Sue for Interest:
    • If the contract allows for it or if it is customary in the trade, the seller may claim interest on the price of the goods from the date of delivery or the date payment became due.
  7. Right of Rescission:
    • In certain circumstances, such as when the buyer repudiates the contract or is in breach of a condition, the seller may have the right to rescind the contract and treat it as void.
    • Rescission relieves the seller of their obligations under the contract and allows them to reclaim the goods.

35 Indian Partnership Act, 1932

The Indian Partnership Act, 1932(section 4) is a statute enacted by the Parliament of India to govern the partnership firms operating within the country. It provides a legal framework for the formation, operation, and dissolution of partnerships. The Act defines the rights, duties, and liabilities of partners, as well as the procedures for resolving disputes among them.

35.1 Characteristics of Partnership

Partnership, as a form of business organization, possesses several characteristics that distinguish it from other forms such as sole proprietorship or corporation. Here are some key characteristics of partnership:

  1. Voluntary Association: A partnership is formed by the voluntary agreement of two or more persons to carry on a business together with the aim of making a profit. Unlike corporations, which can be created by statute or government charter, partnerships are primarily based on the mutual consent of the partners.

  2. Agreement: Partnerships are typically governed by a partnership agreement, whether written or oral, which outlines the terms and conditions of the partnership. This agreement usually covers issues such as profit-sharing, decision-making, roles and responsibilities of partners, and procedures for admitting or withdrawing partners.

  3. Joint Ownership and Management: All partners jointly own and manage the business. Each partner has a say in the decision-making process and shares in the responsibilities of running the business. However, the extent of involvement may vary depending on the agreement among the partners.

  4. Profit Sharing: One of the fundamental aspects of partnership is the sharing of profits and losses among partners according to the terms of the partnership agreement. Unless otherwise specified, profits and losses are usually shared equally among partners.

  5. Unlimited Liability: In a general partnership, partners have unlimited personal liability for the debts and obligations of the business. This means that creditors can go after the personal assets of individual partners to satisfy business debts, which is a significant risk associated with this form of business organization.

  6. Mutual Agency: Each partner is considered an agent of the partnership and has the authority to bind the partnership in transactions with third parties. This means that partners can enter into contracts and make decisions on behalf of the partnership, and these actions are legally binding on all partners.

  7. Shared Capital and Resources: Partnerships typically involve the pooling of capital, skills, resources, and expertise of all partners to establish and operate the business. This shared investment helps distribute the financial burden and risk among partners.

  8. Continuity: Unlike corporations, which have perpetual existence, partnerships may have limited continuity. The death, withdrawal, or bankruptcy of a partner can lead to the dissolution of the partnership, unless otherwise provided for in the partnership agreement.

35.2 Formation of Partnerships

Partnerships are formed by the voluntary agreement of two or more individuals or entities to carry on a business together for profit. The process of forming a partnership typically involves several key steps:

  1. Mutual Consent: The formation of a partnership requires mutual consent or agreement among the parties involved. All partners must willingly enter into the partnership and agree to its terms and conditions.

  2. Partnership Agreement: While not always mandatory, it is highly advisable for partners to create a partnership agreement. This document outlines the rights, responsibilities, and obligations of each partner, as well as other important aspects of the partnership such as profit sharing, decision-making processes, dispute resolution mechanisms, and procedures for admitting or withdrawing partners.

  3. Selection of Business Name: Partnerships may choose to operate under a business name, which should be selected carefully and in compliance with any relevant laws or regulations regarding business names. Partners may need to register the chosen business name with the appropriate government authorities.

  4. Registration: While partnerships are not required to be registered in most jurisdictions, there may be legal or practical benefits to registration. Partnerships may choose to register with government authorities for various reasons, such as obtaining certain licenses or permits, establishing credibility with customers or suppliers, or accessing certain tax benefits or legal protections.

  5. Capital Contribution: Partnerships typically involve the contribution of capital, assets, or resources by each partner to establish and operate the business. The amount and nature of each partner’s contribution should be specified in the partnership agreement.

  6. Legal Formalities: While partnerships are generally less formal than corporations, there may be legal formalities or requirements to consider depending on the jurisdiction or the nature of the business. Partners may need to comply with certain legal formalities such as obtaining business licenses or permits, registering for taxes, or fulfilling any other regulatory requirements applicable to the business.

  7. Business Operations: Once formed, partnerships can begin operating their business activities according to the terms and conditions outlined in the partnership agreement. Partnerships typically involve shared ownership, management, and decision-making among the partners, who work together to achieve the objectives of the business.

By following these steps and considering the various aspects involved in forming a partnership, individuals or entities can establish a successful and legally compliant business partnership.

35.3 Registration of Firm:

Registration of Firms according to Indian Partnership Act, 1932:

  1. Application for Registration:
    • Partners submit an application to the Registrar of Firms of the respective state.
    • Application includes details such as firm’s name, place of business, names and addresses of partners, and duration of partnership.
  2. Submission of Documents:
    • Along with application, partners submit partnership deed signed by all partners and stamped as per Stamp Act.
  3. Verification:
    • Registrar scrutinizes application and partnership deed for compliance.
    • Corrections or additional information may be requested if deficiencies are found.
  4. Registration Fee:
    • Partners pay prescribed registration fee based on capital contribution and duration of partnership.
  5. Issuance of Certificate:
    • Upon satisfactory completion, Registrar issues Certificate of Registration.
    • Certificate serves as legal proof of partnership existence.
  6. Publication:
    • Partners publish notice regarding firm’s registration in local newspaper.
    • Notice includes relevant details from registration certificate.
  7. Renewal:
    • Registration does not have fixed duration, but any changes to partnership deed should be informed to Registrar.

36 Rights, Duties, and Liabilities of Partners

36.1 Rights of Partners

  • Right to participate in management: Unless otherwise specified in the partnership agreement, each partner generally has the right to participate in the management and decision-making processes of the partnership.
  • Right to share profits and losses: Partners typically have the right to share in the profits and losses of the partnership according to the terms outlined in the partnership agreement.
  • Right to information: Partners usually have the right to access the books and records of the partnership to keep track of its financial health and operations.
  • Right to express opinion: Partners usually have the right to express their opinions and concerns regarding partnership matters during decision-making processes.
  • Right to property: Partners may have rights to specific partnership property as outlined in the partnership agreement.

36.2 Duties of Partners

  • Duty of loyalty: Partners owe a duty of loyalty to the partnership, which includes acting in the best interests of the partnership rather than in their individual interests.
  • Duty of care: Partners owe a duty of care to the partnership and to each other, requiring them to exercise reasonable care and diligence in managing partnership affairs.
  • Duty of obedience: Partners are typically required to comply with the terms of the partnership agreement and decisions made by the partnership.
  • Duty of good faith: Partners are expected to act in good faith and deal fairly with each other and with the partnership.

36.3 Liabilities of Partners

  • Joint and several liability: In a general partnership, partners often have joint and several liability for the debts and obligations of the partnership. This means that each partner can be held personally liable for the full amount of partnership debts, regardless of their individual contributions or actions.
  • Unlimited liability: Partners in a general partnership typically have unlimited personal liability, meaning that their personal assets can be used to satisfy partnership debts and obligations.
  • Liability for wrongful acts: Partners may also be held personally liable for their own wrongful acts or breaches of duty, such as fraud or negligence.

36.4 Promissory Note

A promissory note is a legal document that contains a written promise from one party (the maker or issuer) to pay a specific sum of money to another party (the payee or holder) either on-demand or at a predetermined future date. It is a type of negotiable instrument and serves as a formal acknowledgment of a debt owed by the maker to the payee.

36.4.1 Key Elements of a Promissory Note

  1. Parties Involved: The promissory note identifies the parties involved, including the maker (the party making the promise to pay) and the payee (the party to whom the payment is promised).

  2. Principal Amount: The principal amount is the sum of money that the maker promises to repay to the payee. This amount is specified in the promissory note.

  3. Interest Rate (if applicable): If the promissory note carries interest, the interest rate and the method of calculation (simple interest or compound interest) are stated in the document.

  4. Maturity Date: The maturity date is the date on which the payment becomes due and payable to the payee. It indicates when the maker is obligated to repay the principal amount to the payee.

  5. Terms of Repayment: The promissory note may specify the terms of repayment, including the frequency and amount of installment payments (if applicable), or it may stipulate a single lump-sum payment.

  6. Default and Remedies: The promissory note may outline the consequences of default, including late payment fees, default interest rates, and any legal remedies available to the payee in the event of non-payment.

  7. Signatures: Both the maker and the payee are required to sign the promissory note to make it legally enforceable. The signatures signify the parties’ agreement to the terms and conditions outlined in the document.

Promissory notes are commonly used in various financial transactions, including loans between individuals, business transactions, and financing arrangements. They provide a formal record of the debt and serve as evidence of the borrower’s promise to repay the borrowed funds according to the agreed-upon terms.

Your browser does not support embedded presentations. Please download the presentation here.