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Subject: Business Law
Reg. Number: 200313028
Name: P. Shankar
Course: PGDBA (Finance)
Q1.
Define a contract and explain in detail the essential elements of a valid contract.
Definition

Contract is the result of the combination of two important elements i.e. agreement and obligation. A contract creates rights and obligations between the parties entering into a contract. Refusal by any one party to a contract to honor contracted obligations gives right of action to another party.

Essential Elements of a valid contract
i.

There must be an agreement: An agreement is very essential condition of a contract. Every promise and every set of promises, forming the consideration for each other, is an agreement. At least, there must be two parties to an agreement.

ii.

Parties to a contract must be competent: As already mentioned that there must be at least two parties for every contract and parties to a valid contract must be competent. Every Person is competent to contract a) who is of the age of majority according to law to which he is subject, and b) who is sound mind and c) who is not disqualified from contracting by any law to which he is subject.

iii.

There should be an intention to create a legal relationship: If there is no intention to create any legal relationship that contract is valid. Agreements of social, moral, religious nature do not contemplate legal relations. To create legal relationship implies the desire of the parties to the contract to seek for the help of law court in the case of breach of a contract.

iv.

There should be free consent of parties to the agreement: For the purpose of creating a valid contract, the consent of the parties of the agreement must be free. The term \u2018consent\u2019 is defined in section 13 which states that two or three persons are said to have consent when they agree upon the same thing in the same sense.

v.

Lawful Consideration: Consideration is an act done or to be done at the request of the promisor by the promisee or by any other person. For a valid contract, such consideration must be lawful. Consideration is really an essence of a bargain.

vi.

Legal or lawful object: The object of the agreement must essentially be legal. The agreement to be entered into must relate to a thing, which must not be contrary to the provision of any law in existence.

vii.
Agreement not expressly declared void by law: The agreement to be entered into must not have
been expressly declared void by any law in force in the country.
viii.

Compliance with legal formalities: It is not necessary that a contract must be in writing. It can be made by word of mouth. However, in the interest of the parties to a contract, it should be in writing. Of course, there are certain formalities to be complied with in order to make an agreement

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Subject: Business Law
Reg. Number: 200313028
Name: P. Shankar
Course: PGDBA (Finance)
legally enforceable e.g. Certain documents are required to be stamped properly, certain documents
are required to be registered and in such cases the contracts must be in writing.
Q3. What do you mean by discharge of a contract? What are various ways in which a contract may
be discharged?

A contract is said to be discharged, terminated or dissolved when the rights and obligations created by contract come to an end. In simple words, discharge of contract means termination of the relationship between the parties to a contract.

A contract may be discharged in any one of the following:
i.

Discharge of a contract by performance: When parties to a contract fulfil their obligations and promises arising under the contract within the specified time and in the manner prescribed, the contract is said to have been performed and discharged.

ii.

Discharge of a contract by agreement or consent: Since entering into agreement creates a contract, it can also be discharged by another agreement between the parties to the contract and such agreement may be express or implied.

This may happen in one of the following ways so far as the discharge of a contract is concerned
a. Discharge of contract by novation: Novation of contract means a substitution of a new
contract in the place of old existing contract. Novation discharges the original contract.
b. Discharge of contract by rescission: Rescission simply means cancellation of the contract. It
takes place when all or some of the terms and conditions of the contract are cancelled.
c. Discharge of contract by alteration: Alternation of a contract means change in one or more of
the terms and conditions of the contract by mutual consent of the parties to the contract.
d. Discharge of contract by remission: Remission refers to the acceptance of a lesser
performance or the fulfillment of the promise made that what was actually contracted.

e. Discharge of contract by waiver: Waiver means the deliberate abandonment of a right by a party to a contract. Sometimes, the parties to a contract decide that they shall not be bound any longer by the contract.

f. Discharge of contract by merger: In merger, an inferior right accruing to one of the parties to a contract merges into a superior right accruing to the same party under the same or other contract

g. Discharge of contract by owning to the occurrence of an event: If it is agreed that on happening of a particular event, all rights and liabilities should cease and if that event occurs, the contract is discharged.

2
Subject: Business Law
Reg. Number: 200313028
Name: P. Shankar
Course: PGDBA (Finance)
iii.

Discharge of contract by lapse of time: Every contract must be performed within a specified period or within a reasonable time if the time is not specified. Laps of time discharges the contract. This means after the lapse of time, a contract cannot be enforced in the court of law.

iv.
Discharge of contract by operation of law: A contract is terminated by the operation of law in the
following case:
a. Death: In contracts where personal skill or taste or ability is required, the death of the
promisor results in termination of contracts.
b. Insolvency: When a person declared insolvent, he is released from performing his part of the
contract by law.

c. Merger: We have already studied the meaning of merger. It implies that an inferior right accruing to the party to a contract merges into a superior right accruing to the same party under the same or other contract.

d. Complete loss of evidence: If the evidence proving the existence of a contract is lost, it stands
terminated.
e. When the rights and liabilities vest in one and the same person, a contract stands terminated.
v.

Discharge of contract by breach made by one of the parties to a contract: Meaning of breach is failure of a party to a contract to perform his obligations under a contract. Breach of contracts arises in the following ways.

a. Actual Breach: It means breach committed by either at the time when the performance of the
contract is due or during its performance. Actual breach is also known as present breach.
b. Anticipatory Breach: It implies repudiation of an integral part of the contract by the promisor
before the actual date of performing the contract.
vi.

Discharge of contract by assignment: Assignment of contract is nothing but the transfer of rights or benefits under a contract in existence. We have already studied the assignment of contract under the heading performance of contract.

vii.

Discharge of contract by impossibility of performance: A contract to do an act which, after contract is made, becomes impossible, or by reason of some event which the promisor could not prevent, unlawful, becomes void when the act become impossible or unlawful.

viii.

Discharge of contract by material alternation: If the promisee intentionally makes any material alteration in a written contract without the consent of the promisor, the promisor is entitled to regard the contract as rescinded.

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