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What are the essentials for a Valid Contract? Describe them in details. Essential of a Valid Contract All contracts are agreement but all agreements need not be contracts. The agreements that create legal obligation only are contracts. This validity of an enforced able agreement depends upon whether the agreement satisfies the essential requirements laid down in the acts. Section 10 lays down that ‘all the agreement are contracts if they are made by the free consent of the parties competent to contract for a lawful object and are not hereby expressly declared to the void’. The following are the essentials: a) Agreement: An agreement which is preliminary to every contract is the outcome of offer and acceptance. An offer to do or not to do a particular act is made by one party and is accepted by the other to whom the offer is made the we say that there is meeting of the mind of the parties. Such a position is know as consensus ad idem. b) Free consent: The parties should agree upon the same thing in the same sense and their consent should be free from all sorts of pressure. In other words it should not be caused by coercion, undue influence, misrepresentation, fraud or mistake. c) Contractual capacity: The parties entering into an agreement must have legal competence. In other word they must have attained the age of majority should be of sound mind and should be
disqualified under the law of the land. A contract entered into between the parties having no legal capacity is nullity in the eyes of laws. d) Lawful consideration: There must be consideration supporting every contract. Consideration means something in return for something. It is the price for the promise. An agreement not supported by consideration becomes a nudum pactum that is naked agreement. The consideration should be lawful and adequate how ever there are certain exception to this rule. e) Lawful object: The object or purpose of an agreement must be lawful. It should not be forbidden by law, should not be fraudulent, Should not cause injury to person or property of another, should not be immortal or against public policy. f) Not expressly declared void: The Statue should not declared an agreement void. The act itself has declared certain type of agreement as void. Example agreement is restraint of marriage, trade, legal proceeding. In such cases, the aggrieved parties can’t seek any relief from the court of law. g) Possibility of performance: The agreement should be capable of being perform. E.g. Mr A agrees with Mr B to discover treasure by magic Mr B can’t see redressal of the grievance if Mr A fails to performed the promise. h) Certainty of terms : the terms of the agreement should be certain. Eg- Mr. A agrees to sell 100 tons oil. The agreement is vague as it does not mention the type of oil agreed to be sold. i) Intention to create legal obligation: Though section 10 is silent about this, under English law this happen to be an important ingredient. Therefore, Indian courts also recognized this ingredient. An agreement creating social obligation can’t be enforced. j) Legal formalities: India contract act deals with the a simple contract supported by consideration. Agreement made in India may
be oral or written. However section 10 states that where the statue states that the contract should be in writing and should be witnessed or should be registered the same must be observed. Otherwise the agreement can’t be enforced. 2. What are the rules regarding the acceptance of a proposal? Describe them in details. Rules regarding the acceptance of a proposal a) An offer can be accepted only by the person to whom it is made: The offeree only has to accept the offer. In case it is accepted by any other person no agreement is formed. However in case authority is given to another person to accept the offer on the behalf of the person to whom it is made, It is valid acceptance. b) Acceptance should be unconditional and absolute: Section 7 (i) states that acceptance should be absolute and unconditional. The acceptor should accept the offer in toto it is qualified or conditional, it ceases to be valid. In fact, A qualified or conditional acceptance is nothing but a counter offer. c) Acceptance should be communicated: The party accepting the offer must communicate his acceptance to the offeror. Acceptance is not mental resolve but some external manifestation. The acceptance can be communicated in writing or word of mouth or also by conduct. An agreement does not result for mere state mind. As regards unilateral contracts, it is impossible to the offeree to communicate his acceptance otherwise then by performing the contract. In the case of bilateral contracts acceptance must be communicated. The offeror can’t forced a contracted on offeree by fixing the mode of refusal. d) Acceptance should be according to the prescribed form: Unless specified in the offer the acceptance must be in some usual and reasonable manner. The proposer has a right to prescribed the manner of acceptance he can also waive his right or may ask the
offeree to express acceptance by some gesture ones he prescribes the mode of communication later he can’t say that it was insufficient. If the offeree doesn’t signify his accent to the offeror according to the mode prescribed it becomes deviated acceptance and strictly speaking it is no acceptance at all. However such a regid rule is not followed in India in the case of the deviated acceptance the proposer may insist for the acceptance in the prescribed manner. Otherwise it will be presumed that the proposal has accepted the deviated acceptance. e) Acceptance must be provoked by offer: the acceptor must be aware of the offer. Even if he fulfills the conditions mention in the offer, if he is ignorant of the offer itself, he can’t give valid acceptance. f) Acceptance must be given before the offer lapses or is revoked: where a time limit has been fixed the acceptor has to accept the offer with in such time. Where no time limit is prescribe the acceptance had to occur in fair time. An offer one dead can’t be accepted unless there is fresh offer. g) Provisional acceptance is no acceptance: A Provisional acceptance doesn’t make a binding agreement unless a final agreement is given. The offer may be withdrawn before giving final approval. However, Whether an agreement is provisional or final depends upon the intention of the parties. 3. What is the difference between fraud and misinterpretation? What do you understand by mistake? The difference between fraud and misinterpretation: 1. In Misrepresentation the person making the false statement honestly believes it to be true. In fraud, the false statement is made by person who knows that it is false or he does not care to know whether it is true or false.
2. There is not intention to deceived the other party when there is misrepresentation of fact. The very purpose of fraud is to deceive the other party to the contract. 3. Misrepresentation renders the contract voidable at the option of the party whose consent was obtained by misrepresentation. In the case of fraud the contract is voidable. It also gives rise to an independent action in tort for damages. 4. Misrepresentation is not an offence under Indian Penel Code and hence not punishable. Fraud, in certain cases is a punishable offence under Indian Penel code. 5. Generally, silence is not fraud except where there is a duty to speak or the relation between parties is fiduciary. Under no circumstances can silence be considered as misrepresentation. 6. The party complaining of misrepresentation can’t avoid the contract if he had the means to discover the truth with ordinary deligance. But in the case of fraud, the party making a false statement cannot say that the other party had the means to discover the truth with ordinary deligance. Mistake: Usually, mistake refers to mis-understanding or wrong thinking or wrong belief. But legally its meaning is restricted and is to mean” operative mistake”. Courts recognize only such mistakes which invalidate the contract. Mistake may be mistake of fact (either unilateral or bilateral) or mistake of law (either Indian law or foreign law). Sec.20 “Where both parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void.” Sec.21 “A contract is not voidable because it was caused by a mistake as to a law not inforce in India has the same effect as a mistake of fact.” Bilateral mistake: Sec.20 deals with bilateral mistake. Bilateral mistake is one where there is no real correspondence of offer and acceptance.
The parties are not really in consensus-ad-idem. Therefore there is no agreement at all. A bilateral mistake may be regarding the subject matter or the possibility of performing the contract. Mistake as to the subject matter: This mistake arises when the parties to the contract assume at the time of making the contract that a certain state of things exists, but in reality it does not exist. Such a mistake may not relate toI. Existence of the subject matter: Two parties may enter into the contract on the assumption that the subject matter exists at the time contract. But actually it may have ceased to exist or has never existed at all. Then the contract becomes void. II. Identity of the subject matter: A mutual mistake as to the identity of subject matter renders the contract void. III. A mistake as to the quality of the subject matter will not render the agreement void owing to the application of the principle of ‘caveat emptor’ unless there is misrepresentation or guarantee by the seller. IV. Price of the subject matter: An explanation to sec.20 provides that “an erroneous opinion as to the value of the thing which forms the subject matter of the agreement is not to be deemed a mistake as to matter of Fact.” A mistaken notice about the value of the thing bought or sold may be unilateral or bilateral. If it is unilateral, the buyer or seller has to presume that he has made a bad bargain. 4. What are the different ways in which a contract can be discharged? Describe these ways in details. Ways of discharge of contract
When the rights and obligation arising out of a contract are extinguished, the contract is said to be discharged or terminated. A contract may be discharged in any of the following ways: 1. By Performance-actual or attempted 2. By Mutual consent or agreement. 3. By subsequent or supervening impossibilities or illegality. 4. By lapse of time. 5. By operation of law. 6. By breach of contract. Discharge by performance: When a contract is duly performed by both the parties, the contract is discharged or terminated by due performance. But if one Party only perform his promise, he alone is discharged. Such a party gets a right of action against the other party who is guilty of breach. Performance may be: (1) Actual performance; or (2) Attempted performance or Tender. (1) Actual performance: When each party to a contract fulfils his obligation arising under the contract with in the time and in the manner prescribed, it amounts to actual performance of the contract and the contract comes to an end. (2) Attempted performance or tender: When the promisor offer to perform his obligation under the contract, But is unable to do so because the promise does not accepted the performance, it is called “attempted performance” or “tender”. Thus “tender” is not a actual performance but is only an “offer to perform” the obligation under the contract. A valid tender of performance is equivalent to performance. Essentials of a valid tender. A valid “tender” or offer of performance must fulfil the following conditions: 1) It must be unconditional. A conditional tender is not a tender. 2) It must be made at proper time and place. A tender before or after the due date or at a place other than agreed upon is not a valid tender.
3) It must be of the whole obligation contracted for and not only of the part. 4) If the tender relates to delivery of goods. It must give a reasonable opportunity to the promise for inspection of goods so that he may be sure that the goods tendered are of contract description 5) It must be made by a person who is in a position and is willing to perform the promise. A tender by a minor or idiot is not a valid tender. 6) It must be made to the proper person i.e., the promisee or his duly authorized agent. Tender made to a stranger is invalid. 7) If there are several joint promises, an offer to any one of them is a valid tender. 8) In case of tender of money, exact amount should be tendered in the legal tender money. Tendering a smaller or larger amount is an invalid tender. Similarly, a tender by a cheque is invalid as it is not legal tender but if the creditors accepts the cheque, he cannot afterwards raise an objection. Effect of refusal to accept a valid tender (Sec. 38): The effect of refusal to accept a properly made “offer of performance” is that the contract is deemed to have been performed by the promisor i.e., tenderer and the promisee can be sued for breach of contract. A valid tender, thus, diacharges the contract. Exception: Tender of money, however, does not discharge the contract. The money will have to be paid even after the refusal of tender of course without interest from the date of refusal. In case of a suit, cost of defence can also be recovered from the plaintiff, if tender of money is proved. Discharge by Mutual Consent or Agreement Since a contract is created by means of an agreement, It may also but discharged by another agreement between the same parties. Sections 62 and 63 provide for the following methods discharged a contract by mutual agreement:
1. Novation: “Novation occurs when a new contract is substituted for an existing contract, either between the same parties or between different parties, the consideration mutually being the discharge of the old contract.” When the parties, to a contract agree for “novation,” the original contract is discharged and need not be performed. The following point are also worth-notng in connection with novation: a) Novation cannot be compulsory, it can only be with the mutual consent of all the parties. b) The new contract must be valid and enforceable. If it suffers from any legal flaw on account of which it becomes unenforceable, then the original contract revives. Alteration: Alteration of a contract means change in one or more of the material terms of a contract. If a material alteration in a written contract is done by mutual consent, the original contract is discharged by alteration and the new contract in its altered form takes its place. A material alteration made in a written contract by one party without the consent of the other, will, make the whole contract void and no person can maintain an action upon it. Rescission: A contract may be discharged, before the date of performance, by agreement between the parties to the effect that it shall no longer bind them. Such an agreement amounts to “rescission” or cancellation of the contract, the consideration for mutual promises being the abandonment by the respective parties of their rights under the contract. An agreement of rescission releases the parties from their obligations arising out of the contract. There may also be an implied rescission of a contract e.g., where there is non-performance of a contract by both the parties for a long period, without complaint, it amounts to an implied rescission. Remission: Remission may be defined “As the acceptance of a lesser sum than what was contracted for or a lesser fulfilment of the promise made.” Section 63 lays down that a promisee may give up wholly or in part, the performance of the promise made to him and a promise to do so is binding even though there is no consideration for it. An agreement to extend the time for the performance of a promise also does not require consideration to support it on the ground that it is a partial remission of performance. Waiver: Waiver means the deliberate abandonment or giving up of a right which a party is entitled to under a contract, whereupon the other party to the contract is released from his obligation. Discharge by subsequent or supervening impossibility or illegality: Impossibility at the time of contract: There is no question of discharge of a contract which is entered into to perform something that is obviously impossible, e.g., an agreement to discover treasure by magic, because, in
such a case there is no contract to terminate, it being an agreement void abinitio by virtue of Section 56, Para 1, which provides: “An agreement to do an act impossible in itself is void.” Subsequent impossibility: Section 56, Para 2, declares: “A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.” The following conditions must be fulfilled: (1) that the act should have become impossible; (2) that impossibility should be by reason of some event which the promisor could not prevent; and (3) that the possibility should not be self-induced by the promisor or due to his negligence. Thus, under Section 56 (Para 2), where an extent which could not Reasonably have been in the contemplation of the parties when the contract was made, renders performance impossible or unlawful, the contract becomes void and stands discharged. This is known as frustration of the contract brought about by supervening impossibility. It is also known as the doctrine of supervening impossibility. The rationale behind the doctrine is that if the performance of a contract becomes impossible by reason of supervening impossibility or illegality of the act agreed to be done, it is logical to absolve the parties from further performance of it as they never did promise to perform an impossibility. The doctrine of supervening impossibility as enunciated in Section 56 (Para 2), is wider than the “doctrine of frustration” known to the English law. The doctrine of frustration is an aspect or part of the law of discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done. In the case of subsequent impossibility or illegality, the dissolution of the contract occurs automatically. It does not depend on the choice of the parties. Cases where the doctrine of supervening impossibility applies: A contract will be discharged on the ground of supervening impossibility in the following cases: Destruction of subject-matter: When the subject-matter of a contract, subsequent to its formation, is destroyed, without the fault of the promisor or promisee, the contract is discharged. It is so only when specific property or goods are destroyed which cannot be regained. Failure of ultimate purpose: Where the ultimate purpose for which the contract was entered into fails, the contract is discharged, although there is no destruction of any property affected by the contract and the performance of the contract remains possible. Death or personal incapacity of promisor: Where the performance of a contract depends upon the personal skill or qualification or the existence of a given person, the contract is discharged on the illness or incapacity or the death of that person. Change of law: A subsequent change in law may render the contract illegal and in such cases the contract is deemed discharged. The law may actually forbid the doing of some act undertaken in the contract, or it may take from the control of the promisor something in respect of which he has contracted to act or not to act in a certain way.
Cases not covered by supervening impossibility: “He that agrees to do an act must do it or pay damages for not doing it” is the general rule of the law of contract. Thus, unless the performance becomes absolutely impossible (as discussed above), a person is bound to perform any obligation which he has undertaken, and cannot claim to be excused by the mere fact that performance has subsequently become unexpectedly burdensome, more difficult or expensive. Some of the cases where impossibility of performance is not an excuse are as follows: Difficulty of performance: Increased or unexpected difficulty and expense do not, as a rule, excuse from performance Commercial impossibility: When in a transaction profits dwindle to a very low level or actual loss becomes certain, it is said that the performance of the contract has become commercially impossible. Commercial impossibility also does not discharge a contract. Impossibility due to the default of a third person. The doctrine of supervening impossibility does not cover cases where the contract could not be performed because of the impossibility created by the failure of a third person on whose work the promisor relied. Strikes and lock-outs: A strike by the workmen or a lock-out by the employer does not excuse performance because the former is manageable and the latter is self-induced. Where the impossibility is not absolute or where it is due to the default of the promisor himself, Section 56 would not apply. As such these events also do not discharge a contract. Failure of one of the objects: When a contract is entered into for several objects, the failure of one of them does not discharge the contract. Discharge by lapse of time: The Limitation Act lays down that in case of breach of a contract legal action should be taken within a specified period, called the period of limitation. Otherwise the promisee is debarred from instituting a suit in a court of law and the contract stands discharged. Thus in certain circumstances lapse of time may also discharge a contract. Where “time is of essence in a contract” if the contract is not performed at the fixed time, the contract comes to an end, and the party not at fault need not perform his obligation and may sue the other party for damages. Discharge by operation of law: A contract terminates by operation of law in the following cases: a) Death: Where the contract is of a personal nature, the dealth of the promisor discharges the contract. In other contracts the rights and liabilities of the deceased person pass on to the legal representatives of the dead man. b) Insolvency: A contract is discharged by the insolvency of one of the parties to it when an insolvency court passes an “order of discharge” exonerating the insolvent from liabilities on debts incurred prior to his adjudication. c) Merger: Where an inferior right contract merges into a superior right contract, the former stands discharged automatically.
d) Unauthorised material alteration: A material alteration made in a written document or contract by one party without the consent of the other, will make the whole contract void. Discharge by breach of contract: Breach of contract by a party thereto is also a method of discharge of a contract, because “breach” also brings to an end the obligations created by a contract on the part of each of the parties. Of course the aggrieved party i.e., the party not at fault can sue for damages for breach of contract as per law; but the contract as such stands terminated. Breach of contract may be of two kinds: (1) Anticipatory breach; and (2) Actual breach 1. Anticipatory breach: An anticipatory breach of contract is a breach of contract occurring before the time fixed for performance has arrived. It may take place in two ways: (a) Expressly by words spoken or written. Here a party to the contract communicates to the other party, before the due date of performance, his intention not to perform it. (b) Impliedly by the conduct of one of the parties. Here a party by his own voluntary act disables himself from performing the contract. When a party to a contract has refused to perform or disabled himself from performing, his promise in its entirety, the promise may put an end to the contract, unless he has signed, by words or conduct his acquiescence in its continuance. 2. Actual breach: Actual breach may also discharge a contract. It occurs when a party fails to perform his obligations upon the date fixed for Performance by the contract. Actual breach entitles the party not in default to elect to treat the contract as discharged and to sue the party at fault for damages for breach of contract.
5. What do you understand by Discharge of Instrument? What are the different ways in which one or more parties to a negotiable instrument are discharged? Discharge of Negotiable Instruments A negotiable instrument may be dishonoured by (i) non-acceptance or (ii) non-payment. As presentment for acceptance is required only in case of bills of exchange, it is only the bills of exchange which may be dishonoured by non-acceptance. Dishonour by Non-acceptance: A bill of exchange is said to be dishonoured by non-acceptance when the drawee makes default in acceptance upon being duly required to accept the bill.
Dishonour by Non-payment: A promissory note, bill of exchange or cheque is said to be dishonoured by non-payment when the maker of the note, acceptor of the bill or drawee of the cheque makes default in payment upon. Effect of Dishonour As soon as a negotiable instrument is dishonoured (either by nonacceptance or by non-payment) the holder becomes entitled to sue the parties liable to pay thereon. The drawer of cheque, maker or note, acceptor and drawer of bill and all the indorsers are liable severally and jointly to a holder in due course. The holder must, however, give ‘notice of dishonour’ to all parties against whom he intends to proceed. He may (at his option) also have the instrument ‘noted and protested’ before a notary public. Discharge of the Instrument and the Parties The term ‘discharge’ in relation to negotiable instruments has two connotations, viz., (1) discharge of instrument, and (2) discharge of one or more parties from liability on the instrument. Discharge of the Instrument A negotiable instrument is said to be discharged when it becomes completely useless, i.e., no action on that will lie, and it cannot be negotiated further. After a negotiable instrument is discharged the rights against all the parties thereto comes to an end, and no party, even a holder in due course, can claim the amount of the instrument from any party thereto. Discharge of the party primarily and ultimately liable on the instrument results in the discharge of the instrument itself. For example, in the following cases and instrument is deemed to be discharged: 1. When the party primarily liable on the instrument (i.e., the maker of the note, acceptor of the bill or drawee bank) makes the payment in due course to the holder at or after maturity. A payment by a party who is secondarily liable does not discharge the instrument because in that case the payer holds it to enforce it against prior indorser and the principal debtor. 2. When a bill of exchange which has been negotiated is, at or after maturity, held by the acceptor in his own right, the instrument is discharged 3. When the party primarily liable becomes insolvent, the instrument is discharged and the holder cannot make any other prior party liable thereon. Similarly, an instrument stands discharged when the primary party liable is discharged by material alteration in the instrument or by lapse of time making the debt time barred under the Limitations Act. 4. When the holder cancels the instrument with an intention to release the
party primarily liable thereon from the liability, the instrument is discharged and ceases to be negotiable. Discharge of One or More Parties A party is said to be discharged from his liability when his liability on the instrument comes to an end. When only some of the parties to a negotiable instrument are discharged, the instrument continues to be negotiable and the undischarged parties remain liable on it. One or more parties to a negotiable instrument are are discharged from liability in the following ways: 1. By cancellation: When the holder of a negotiable instrument deliberately cancels the name of any of the party liable on the instrument deliberately cancels the name of any of the party liable on the instrument indorsers subsequent to him, who have a right of action against the party whose name is so cancelled, are discharged from liability. If the name of an indorser has been cancelled then all the indorsers subsequent to him will be discharged but those prior him will remain liable. Where the cancellation is done under a mistake or without the authority of the holder if will not discharge any party. 2. By release: If the holder of a negotiable instrument releases any party to the instrument by any method other than cancellation of names (i.e., by a separate agreement of waiver, release or remission), the party so released and all parties subsequent to him, who have a right of action against the party so released, are discharged from liability. 3. By payment: When the party primarily liable on the instrument makes the payment in due course to the holder at or after maturity, all the parties to the instrument stand discharged. 4. By allowing drawee more than 48 hours to accept: If the holder of a bill of exchange allows the drawee more than forty-eight hours, to consider whether he will accept the same, all previous parties not consenting to such allowance are thereby discharged from liability to such holder. 5. By taking qualified acceptance: If the holder of a bill agrees to a qualified acceptance all prior parties whose consent is not obtained to such an acceptance are discharged from liability. 6. By not giving notice of dishonuour: Any party to a negotiable instrument (other than the party primarily liable) to whom notice of dishonour is not sent by the holder is discharged from liability as against the holder, unless the circumstances are such that no notice of dishonour is required to be sent.
7. By non-presentment for acceptance of a bill: When a bill of exchange is payable certain period after sight, its holder must present it for acceptance to the drawee within a reasonable time after it is drawn. If he makes a default in making such presentment the drawer and all indorsers who were liable towards such a holder are discharged from their liability towards him. 8. By delay in presenting cheque: It is the duty of the holder of a cheque to present it for payment within reasonable time of its issue. If he fails to do and in the meanwhile the bank fails. 6. What do you understand by Arbitration? What are the objectives of the Arbitration Act? What are the essentials for Arbitration Agreement? Arbitration- (The Arbitrator decides): Arbitration is a dispute resolution process where the opposing parties select or appoint an individual called an Arbitrator. Upon appointment, the Arbitrator will arrange the process to hear and consider the evidence, review arguments and afterwards will publish an award in which the items of dispute are decided. In some cases the Arbitrator can conduct the arbitration on documents evidence only. When published the Arbitrator's decisions are final and binding on the parties. It is rare for an arbitration to be appealed to the courts. Arbitration may comprise a sole Arbitrator, or may be a panel of Arbitrators. Costs of the arbitration are disposed of in the Arbitrator's award, unless the parties have some agreement to the contrary. Arbitration is a settlement of dispute by the decision of one or more persons called arbitrators. It is an arrangement for investigation and settlement of a dispute between opposing parties by one or more unofficial persons chosen by the parties. In arbitration some dispute is referred by the parties for settlement to a tribunal of their own choosing. The dispute is not submitted for decision to the ordinary courts but a domestic tribunal. It is thus a method of settling the disputes in a quasi-judicial manner. The essence of arbitration is that the arbitrator decides the case and his award is in the nature of a judgement. Arbitration is a speedy and inexpensive method of settling the disputes between the parties. In lines with the international trend, the Government of India has also enacted the Arbitration and Conciliation Act, 1996 and repealed the three earlier enactments namely, the Arbitration (Protocol and Convention) Act, 1937; the Arbitration Act, 1940; and the Foreign Award (Recognition and Enforcement) Act, 1961. Objectives of the Act The main objectives of the Act are as under i) To comprehensively cover international commercial arbitration and conciliation as also domestic arbitration and conciliation.
ii) To make provision for an arbitral procedure which is fair, efficient and capable of meeting the needs of the specific arbitration. iii) To provide that the arbitral tribunal gives reasons for its arbitral award. iv) To ensure that the arbitral tribunal remains with in the limit of jurisdiction. v) To minimize the supervisory role of courts in the arbitral process. vi) To permit an arbitral tribunal to use mediation, conciliation or other procedures during the arbitral proceedings to encourage settlement of disputes. vii) To provide that every final arbitral award is enforced in the same manner as if it were a decree of the court. viii) To provide that a settlement agreement reached by the parties as a result of conciliation proceedings will have the same status and effect as an arbitral award on agreed terms on the substance of the dispute rendered by an arbitral tribunal. ix) To provide that, for purposes of enforcement of foreign awards, every arbitral award made in the country to which one of the two international Conventions relating to foreign arbitral awards to which India is a party applies, will be treated as a foreign award. Essentials of Arbitration Agreement 1. It must be in writing [Section 7(3)]: Like the old law, the new law also requires the arbitration agreement to be in writing. It also provides in section 7(4) that an exchange of letters, telex, telegrams, or other means of telecommunications can also provide a record of such an agreement. Further, it is also provided that an exchange of claim and defence in which the existence of an arbitration agreement is alleged by one party and not denied by the other, will also amount to be an arbitration agreement. It is not necessary that such written agreement should be signed by the parties. All that is necessary is that the parties should accept the terms of an agreement reduced in writing. The naming of the arbitrator in the arbitration agreement is not necessary. No particular form or formal document is necessary. 2. It must have all the essential elements of a valid contract: An arbitration agreement stands on the same footing as any other agreement. Every person capable of entering into a contract may be a party to an arbitration agreement. The terms of the agreement must be definite and certain; if the terms are vague it is bad for indefiniteness. 3. The agreement must be to refer a dispute, present or future, between the parties to arbitration: If there is no dispute, there can be no right to demand arbitration. A dispute means an assertion of a right by one party and repudiation thereof by another. A point as to which
there is no dispute cannot be referred to arbitration. The dispute may relate to an act of commission or omission, for example, with holding a certificate to which a person is entitled or refusal to register a transfer of shares. Under the present law, certain disputes such as matrimonial disputes, criminal prosecution, questions relating to guardianship, questions about validity of a will etc. or treated as not suitable for arbitration. Section 2(3) of the new Act maintains this position. Subject to this qualification Section 7(1) of the new Act makes it permissible to enter into an arbitration agreement “in respect of a defined legal relationship whether contractual or not”. 4. An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement [Section 7(2)]. Appointment of Arbitrator : The parties can agree on a procedure for appointing the arbitrator or arbitrators. If they are unable to agree, each party will appoint one arbitrator and the two appointed arbitrators will appoint the third arbitrator who will act as a presiding arbitrator [Section 11(3)]. If one of the parties does not appoint an arbitrator within 30 days, or if two appointed arbitrators do not appoint third arbitrator within 30 days, the party can request Chief Justice to appoint an arbitrator [Section 11(4)]. The Chief Justice can authorize any person or institution to appoint an arbitrator. [Some High Courts have authorized District Judge to appoint an arbitrator]. In case of international commercial dispute, the application for appointment of arbitrator has to be made to Chief Justice of India. In case of other domestic disputes, application has to be made to Chief Justice of High Court within whose jurisdiction the parties are situated [Section 11(12)] Challenge to Appointment of arbitrator: An arbitrator is expected to be independent and impartial. If there are some circumstances due to which his independence or impartiality can be challenged, he must disclose the circumstances before his appointment [Section 12(1)]. Appointment of Arbitrator can be challenged only if (a) Circumstances exist that give rise to justifiable doubts as to his independence or impartiality (b) He does not possess the qualifications agreed to by the parties [Section 12(3)]. Appointment of arbitrator cannot be challenged on any other ground. The challenge to appointment has to be decided by the arbitrator himself. If he does not accept the challenge, the proceedings can continue and the arbitrator can make the arbitral award. However, in such case, application for setting aside arbitral award can be made to Court. If the court agrees to the challenge, the arbitral award can be set aside [Section 13(6)]. Thus, even if the arbitrator does not accept the challenge to his appointment, the other party cannot stall further arbitration proceedings by rushing to court. The arbitration can continue and challenge can be made in Court only after arbitral
award is made. Conduct of Arbitral Proceedings : The Arbitral Tribunal should treat the parties equally and each party should be given full opportunity to present his case [Section 18]. The Arbitral Tribunal is not bound by Code of Civil Procedure, 1908 or Indian Evidence Act, 1872 [Section 19(1)]. The parties to arbitration are free to agree on the procedure to be followed by the Arbitral Tribunal. If the parties do not agree to the procedure, the procedure will be as determined by the arbitral tribunal. Law of Limitation Applicable: Limitation Act, 1963 is applicable. For this purpose, date on which the aggrieved party requests other party to refer the matter to arbitration shall be considered. If on that date, the claim is barred under Limitation Act, the arbitration cannot continue [Section 43(2)]. If Arbitration award is set aside by Court, time spent in arbitration will be excluded for purpose of Limitation Act. So that case in court or fresh arbitration can start. Flexibility in respect of procedure, place and language: Arbitral Tribunal has full powers to decide the procedure to be followed, unless parties agree on the procedure to be followed [Section 19(3)]. The Tribunal also has powers to determine the admissibility, relevance, materiality and weight of any evidence [Section 19(4)]. Place of arbitration will be decided by mutual agreement. However, if the parties do not agree to the place, the same will be decided by tribunal [Section 20]. Similarly, language to be used in arbitral proceedings can be mutually agreed. Otherwise, Arbitral Tribunal can decide [Section 22]. Submission of statement of claim and defence: The claimant should submit statement of claims, points of issue and relief or remedy sought. The respondent shall state his defense in respect of these particulars. All relevant documents must be submitted. Such claim or defense can be amended or supplemented any time [section 23]. Hearings and Written Proceedings: After submission of documents and defense, unless the parties agree otherwise, the Arbitral Tribunal can decide whether there will be oral hearing or proceedings can be conducted on the basis of documents and other materials. However, if one of the parties requests the hearing shall be oral. Sufficient advance notice of hearing should be given to both the parties [Section 24]. [Thus, unless one party requests, oral hearing is not compulsory]. Settlement during Arbitration: It is permissible for parties to arrive at Mutual settlement even when arbitration is proceeding. In fact, even the Tribunal can make efforts to encourage mutual settlement. If parties settle he dispute by mutual agreement, the arbitration shall be terminated. However, if both parties and the Arbitral Tribunal agree, the settlement can be recorded in the form of an arbitral award on agreed terms. Such Arbitral Award shall have the same force as
any other Arbitral Award [Section 30]. Arbitral Award: Decision of Arbitral Tribunal is termed as 'Arbitral Award'. Arbitrator can decide the dispute ex aqua et bono (In justice and in good faith) if both the parties expressly authorize him to do so [Section 28(2)]. The decision of Arbitral Tribunal will be by majority. The arbitral award shall be in writing and signed by the members of the tribunal [Section 29]. The award must be in writing and signed by the members of Arbitral Tribunal[Section 31(1)]. It must state the reasons for the award unless the parties have agreed that no reason for the award is to be given [Section 31(3)]. The award should be dated and place where it is made should be mentioned. Copy of award should be given to each party. Tribunal can make interim award also [Section 31(6)]. Cost of Arbitration: Cost of arbitration means reasonable cost relating to Fees and expenses of arbitrators and witnesses, legal fees and expenses, administration fees of the institution supervising the arbitration and other expenses in connection with arbitral proceedings. The tribunal can decide the cost and share of each party [Section 31(8)]. If the parties refuse to pay the costs, the Arbitral Tribunal may refuse to deliver its award. In such case, any party can approach Court. The Court will ask for deposit from the parties and on such deposit, the award will be delivered by the Tribunal. Then Court will decide the costs of arbitration and shall pay the same to Arbitrators. Balance, if any, will be refunded to the party [Section 39]. Intervention by Court One of the major defects of earlier arbitration law Was that the party could access court almost at every stage of arbitration Right from appointment of arbitrator to implementation of final award. Thus, the defending party could approach court at various stages and stall the proceedings. Now, approach to court has been drastically curtailed. In some cases, if an objection is raised by the party, the decision on that objection can be given by Arbitral Tribunal itself. After the decision, the arbitration proceedings are continued and the aggrieved party can approach Court only after Arbitral Award is made. Appeal to court is now only on restricted grounds. Of course, Tribunal cannot be given unlimited and uncontrolled powers and supervision of Courts cannot be totally eliminated. Arbitration Act has Over-Riding Effect : Section 5 of Act clarifies that notwithstanding anything contained in any other law for the time being in force, in matters governed by the Act, the judicial authority can intervene only as provided in this Act and not under any other Act.
ASSIGNMENTS MB0035 LEGAL ASPECTS OF BUSINESS (3 credits) Set II Marks 60 Each question carries 10 marks 1. What do you understand by the Offer of Proposal? What are the essentials of a Valid Offer? Offer or Proposal Sec. 2 (a) defines offer as follows: “When one person signifies to another his willingness to do or to abstain from doing anything with a view to obtaining the assent of that other person to such act or abstinence, he is said to make a proposal” The person making the proposal is called ‘promisor’ and the person accepting it is called ‘promisee’. Essentials of a Valid Offer: a) An offer may be general or specific: According to Sec. 2 (a) an offer must be made to a specific person. An offer may be made to the world at large. But the contract is made only with the person who accepts and fulfills the conditions of the proposal. In the words of Anson, ‘An offer need not be made to an ascertained person, but no contract can arise until it has been accepted by an ascertained person’. In Carlill Vs Carbolic Smoke Ball Co. (1893) , a Company offered by advertisement to pay £100 to any one who contacts the increasing epidemic influenza, cold or any disease caused by taking cold after having used the ball as per printed directions. It was added that ‘£1000 is deposited with the Alliance Bank showing our sincerity in the matter’. The plaintiff used the smoke mokeball as per the directions but subsequently suffered from influenza. She was held entitled to recover the promised reward. b) An offer should be made with an intention of creating legal obligation: This principle of English law though not incorporated specifically under Section 10, is generally accepted as vital to form a legal agreement. Social, moral or religious agreements are not legally enforceable. For example, Mr. A invites Mr. B to dinner. Mr. B fails to attend. Mr. A cannot sue Mr. B for unconsumed food. Whether the offeror intended to enter into legal obligations or not could be known from the nature of the agreement and the surrounding
circumstances. The court has to ascertain the intention of the parties. The test of contractual intention is objective and not subjective. What is considered is not what the parties had in mind but what a reasonable person would think in the circumstances their intentions to be. c) An offer must be definite and certain: The terms of an offer should not be uncertain and ambiguous. Anson expressed ‘The law requires the parties to make their own contract, it will not make a contract for them out of terms which are indefinite or illusory ’. This is so because the courts cannot say what the parties to the contract are to do and whether there is violation of the contract. However, all the terms of an offer need not be expressed. If some of the essential terms of a bargain may not be specified but are capable of being determined by some method other than by a future agreement there will be a good contract between the parties. d) A statement of intention and an invitation to offer are not offers: Preliminary negotiations are likely to take place before entering into an agreement. In the course of such negotiations one party may make some declarations regarding his intention of doing something. Such a declaration by itself does not become an offer. e.g., A tells B ‘I want to sell my car’. This is not an offer. An invitation to offer is not an offer. An advertisement for tenders for sale of goods by auction, an announcement about the stock of goods for sale, display of goods in shop windows, prospectus of a company. catalogue, price-lists, loudspeaker announcements etc. are merely invitations to offer or offers. e) An offer must be communicated to the offeree: An offer becomes operative only when it has been communicated to the person to whom the offer is made. Communication is necessary whether the offer is specific or general. Under Section 4 ‘the communication of a proposal is complete when it comes to the knowledge of the person to whom it is made ’. However, mere knowledge of a proposal does not amount to communication unless the offeree acquires it with express or implied intention of the offeror. The Act does not indicate the mode of communication. The offeror may communicate the offer by choosing any available means. However, a letter containing an offer which is never mailed is not an offer even if the contents are known by the offeree in some manner. General offers are communicated to public through notice and advertise-ments. But as regards reward cases the question arises whether the person performing the conditions of the offer can claim the reward even if he is ignorant of the offer. In Lalman Shukla Vs. Gouri Dutt case it was held that knowledge of the offer is essential. There can be no acceptance unless there is knowledge of the offer. When the offer is not communicated silence on the part of the offeree. does not amount to consent since he does not have the opportunity to reject the offer. E.g., A works for B without the request or knowledge of B. A can’t sue B for remuneration since B’s consent can’t be
presumed from his silence. f) The terms and conditions of offer should also be communicated: An agreement is a two-sided bargain based on freedom of contract. However, in modern times the buyer of an article is in an unfavourable position. Freedom of contract becomes one-sided in the case of agreements with common carriers, dry cleaners, tailors, insurance companies, landlords, public utilities etc. It is also difficult to draw up a separate agreement with each individual. Therefore, printed forms of agreements known as ‘standard form contracts’ are used. Such forms contain large number of terms and conditions very often small in print absolving the dominant party of all liability. The economically weaker party has to accept all such terms and conditions irrespective of whether he likes them or not. The Court too finds it difficult at times to protect the interest of the weaker party. Therefore the courts have evolved certain methods. When the offer contains special terms and conditions the offeror must communicate all the terms and conditions either before or at the time of contracting in order to bind the acceptor. On the other hand if the acceptor knew that there was writing and knew or believed that the writing contained conditions he is then bound by the conditions even though he did not read them. It is enough if the offeror has done all that can be considered necessary to give notice to the acceptor. g) Two identical offers do not make a contract: An offer made by a person may cross a similar one made by another person of course in the course of transit. They are just two identical or cross offers, though there seems to be identity of mind. h) An offer should not contain any term the non-compliance of which amounts to acceptance: There may be any number of terms and conditions in an offer. The acceptor can accept or reject them. While the offeror can prescribe mode of acceptance, he can’t prescribe the form or time of refusal so as to fix a contract upon the acceptor. He can’t say, for example, that if the offeree does not communicate before a given time, he is deemed to have accepted the offer. 2. What are the effects of Minor’s Agreement? State in details. Effects of minor’s agreement: A minor’s agreement is void-ab-initio Where there is no contract, there should be no contractual obligation on either side. Hence, the effects of a minor’s agreements are worked out independently of any contract. 1. No estoppel against minor: A minor who has made an agreement by misrepresentation of his age may disclose his real age. There is no estoppel against him. 2. No liability in contract or tort arising out of contract: A minor is, in law, incapable of giving consent. Hence, there could be no change in the character or status of the parties. A minor who misrepresents his age to obtain a contract cann’t be sued for deceit. ‘You cann’t convert a
contract into a tort to enable you to sue an infant.’ This principle has Where, however, the tort is independent of contract the mere fact that a contract is also involved will not absolve the minor from liability. 3. Doctrine of restitution: If a minor obtains property or goods by misrepresentating his age, he can be compelled to restore it but only so long as the same is traceable in his possession. This is known as the equitable doctrine of restitution. Suppose the minor has sold the goods he can’t be made to repay the value of the goods because that would amount to enforcing a void contract. However, when a minor invites the aid of the court for the cancellation of his contract the court may grant relief subject to the condition that he shall restore all benefits obtained by him under the contract or make suitable compensation to the other party. But the court will not compel any restitution by a minor even when he is a plaintiff, where the other party was aware of the infancy so that he was not deceived or where the other party was unscrupulous in his dealings with the minor. 4. Beneficial contracts: The law that a minor’s agreement is absolutely void has been confined to the cases where a minor is charged with obligations and the other party seeks to enforce them. On the other hand a minor is allowed to enforce a contract which is of some benefit to him and under which he is required to bear no obligations. A minor is capable of purchasing immovable property and he may sue to recover the possession of the property purchased by tendering the purchase money. A minor can be a beneficiary e.g., a payee, an endorsee, or a promisee under a contract. A promissory note executed in favour of a minor is valid and can be enforced in a court. 5. Ratification: On attaining majority, a person can’t ratify an agreement made by him when he was a minor. Ratification relates back to the date of making of the contract. Therefore, a contract which was void originally can’t be made valid by subsequent ratification. If it is necessary, a fresh contract should be made on attaining majority. A new contract requires a fresh consideration. The consideration which passed under the earlier contract can’t be implied into the contract into which the minor enters on attaining majority. 6. Liability for necessaries (Sec. 68): Persons incompetent to contract are made liable for necessaries supplied to them. Sec. 68 reads “If a person incapable of entering into a contract or any one whom he is legally bound to support is supplied by another person with necessaries suited to his conditions in life, the person who has furnished such supplies is entitled to be reimbursed from the property of such incapable person.” The liability is only for necessaries. But what is ‘necessary’ is not defined by the Act. We have to depend upon judicial decisions. Things necessary are those without which an individual cann’t reasonably exist such as food, raiment, lodging etc. What may be necessary for one class may be luxury for another. Therefore, the class has to be ascertained and then whether a thing is a necessity or not has to be
determined. To render an infant’s estate liable for necessaries, two conditions must be satisfied: (1) The contract must be for goods reasonably necessary for his support in his state of life and (2) he must not have already a sufficient supply of these necessaries. The supplier has to prove not only that the goods supplied were suitable to the conditions in life of the minor but that he was not sufficiently supplied with the goods of that class. Thus, the liability for supply of necessaries attaches only to the estate of a minor and he does not incur any personal liability. 3. What do you understand by Consideration? What are the rules governing Consideration? Consideration Consideration means something in return.It is one of the essentials of valid contract. ‘Ex Nudo Pacto Non Oritar Actio’ means ‘out of bare promise no action arises’. Definition: Blackstone defined consideration as “the recompense given by the party contracting to the other.” In the words of Pollack, “Consideration is the price for which the promise of the other is bought and the promise thus given for value is enforceable.” Sec. 2 (d) of the Act defines consideration in the following terms: “When at the desire of the promisor the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or abstain from doing something, such act or abstinence or promise is called a consideration for the promise.” Rules Governing Consideration: i) Consideration should be furnished at the desire of the promisor. The consideration should be the outcome of the desire of the promisor. The desire may be express or implied. The act done at the instance of third party or gratuitously does not become consideration. e.g. A’s house catches fire. B goes and helps in extinguishing it. B later cannot ask for any payment for his services. Even spiritual promises or mental satisfaction are not enforceable. The question arises whether a promise of a subscription to a public or charitable trust becomes legal. (Kedarnath Vs Gorie Mohammed). A mere promise is not enough. The promisee must have done some act or incurred expenses on the strength of the promise. (Abdul Aziz Vs Maznoon Ali). ii) Consideration may move from the promisee or any other person: Sec. 2 (d) provides that the consideration may be furnished by the promisee or any other person. At this point Indian law differs from English law according to which the consideration must move from the promisee only and not from the third party. However, there is a doctrine known as constructive consideration under which if the person who was to take a benefit under the contract was nearly related by blood to the promisee, a right of action would vest to him. But this doctrine is no more valid.
iii) Consideration may be past, present or future: Past consideration is something done or not done at the request of the promisor, before the making of the agreement. Under English Law, past consideration is no consideration. Nevertheless, past consideration will support a subsequent promise of the promisor. If services are rendered under circumstances which raise an implication of a promise to pay for them, the subsequent promise to pay is merely fixing a reasonable compensation for the services. In India past consideration is sufficient to support a promise provided it is made at the request of the promisor. Present consideration refers to one furnished at the time of the promise. Where both the parties to a contract promise to each other of doing or not doing something the consideration on both sides moves to a future date and is known as future consideration. Present and future considerations are also known as executed and executory consideration respectively. iv) Consideration need not be adequate: The law does not expect that the consideration should be adequate. It is the lookout of the promisor. The parties as between themselves can determine adequate consideration. The consideration which the contracting parties give to each other need not be of equal value. However, explanation 2 to Sec. 25 provides that the agreement to which the consent of the promisor is given is not void merely because the consideration is inadequate; but the inadequacy of the consideration may be taken into consideration by the court in determining whether the consent of the promisor was freely given. v) Consideration should be valuable: The consideration should not be unreal or illusory or of the nature of moral obligation. It should be valuable, though the value of the consideration need not be the same as the value of the promise which it supports. vi) The discharging of a pre-existing obligation is not consideration: The aw may compel a person to do an act. Then the mere doing of such act can’t become consideration for another’s promise. However, doing or agreeing to do more than what a person is legally bound amounts to good consideration. In the same way performing or promising to perform an existing obligation imposed by a previous contract will not form consideration. vii) Consideration should be certain and lawful: Consideration should not be illusory or uncertain or impossible. Discovering a treasury by magic, for example, cannot form consideration. 4. What do you understand by the ‘Negotiable Instruments Act’? What are the different characteristics of the Negotiable Instruments? Negotiable Instruments Act The law relating to “Negotiable Instruments” is contained in the Negotiable Instruments Act, 1881, as amended up-to-date. It deals with three kinds of negotiable instruments, i.e., Promissory Notes, Bills of Exchange and
Cheques. The provisions of the Act also apply to ‘hundis’ (an instrument in oriental language), unless there is a local usage to the contrary. Other documents like treasury bills, dividend warrants, share warrants, bearer debentures, port trust or improvement trust debentures, railway bonds payable to bearer etc., are also recognised as negotiable instruments either by mercantile custom or under other enactments like the Companies Act, and therefore, Negotiable Instruments Act is applicable to them. The word ‘negotiable’ means ‘transferable by delivery’, and the word ‘instrument’ means ‘a written document by which a right is created in favour of some person’. Thus, the term ‘negotiable instrument’ literally means ‘a written document transferable by delivery’. According to Section 13 of the Negotiable Instruments Act, “a negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer.” The Act, thus, mentions three kinds of negotiable instruments, namely notes, bills and cheques and declares that to be negotiable they must be made payable in any of the following forms: Payable to order: A note, bill or cheque is payable to order which is expressed to be ‘payable to a particular person or his order’. But it should not contain any words prohibiting transfer, e.g., ‘Pay to A only’ or ‘Pay to A and none else’ is not treated as ‘payable to order’ and ‘therefore such a document shall not be treated as negotiable instrument because its negotiability has been restricted. There is, however, an exception in favour of a cheque. A cheque crossed “Account Payee only” can still be negotiated further, of course, the banker is to take extra care in that case. Payable to bearer: ‘Payable to bearer’ means ‘payable to any person whom so ever bears it.’ A note, bill or cheque is payable to bearer which is expressed to be so payable or on which the only or last endorsement is an endorsement in blank. The definition given in Section 13 of the Negotiable Instruments Act does not set out the essential characteristics of a negotiable instrument. Possibly the most expressive and all encompassing definition of negotiable instrument had been suggested by Thomas which is as follows: “A negotiable instrument is one which is, by a legally recognised custom of trade or by law, transferable by delivery or by endorsement and delivery in such circumstances that (a) the holder of it for the time being may sue on it in his own name and (b) the property in it passes, free from equities, to a bonafide transferee for value, notwithstanding any defect in the title of the transferor." Characteristics of Negotiable Instruments: An examination of the above definition reveals the following essential characteristics of negotiable instruments which make them different from an ordinary chattel: Easy negotiability: They are transferable from one person to another without any formality. In other words, the property (right of ownership) in these instruments passes by either endorsement and delivery (in case it
is payable to order) or by delivery merely (in case it is payable to bearer), and no further evidence of transfer is needed. Transferee can sue in his own name without giving notice to the debtor: A bill, note or a cheque represents a debt, i.e., an “actionable claim” and implies the right of the creditor to recover something from his debtor. The creditor can either recover this amount himself or can transfer his right to another person. In case he transfers his right, the transferee of a negotiable instrument is entitled to sue on the instrument in his own name in case of dishonour, without giving notice to the debtor of the fact that he has become holder. Better title to a bonafide transferee for value: A bonafide transferee of a negotiable instrument for value (technically called a holder in due course) gets the instrument ‘ free from all defects.’ He is not affected by any defect of title of the transferor or any prior party. Thus, the general rule of the law of transfer applicable in the case of ordinary chattels that ‘nobody can transfer a better title than that of his own’ does not apply to negotiable instruments. 5. What do you understand by Company? What are the characteristics of a Company? What are the different types of company? Definition: The term ‘company’ implies an association of a number of persons for some common objective e.g. to carry on a business concern, to promote art, science or culture in the society, to run a sport club etc. Every association, however, may not be a company in the eyes of law as the legal import of the word ‘company’ is different from its common parlance meaning. In legal terminology its use is restricted to imply an association of persons, ‘registered as a company’ under the law of the land. The following are some of the definitions of company given by legal luminaries and scholars of law: “Company means a company formed and registered under this Act or an existing company. Existing company means a company formed and registered under the previous company laws.” – Companies Act, 1956 Sec. 3(i & ii) “A joint stock company is an artificial person invisible, intangible and existing only in the eyes of law. Being a mere creature of law, it possesses only those properties which the charter of its creation confers upon it, either expressly or as incidental to its very existence.” – Justice Marshall “A company is an association of many persons who contribute money or money’s worth to a common stock and employ it in some common trade or business and who share the profit or loss arising therefrom. The common stock so contributed is denoted in terms of money and is the capital of the company. The persons who contribute it or to whom it belongs are members. The proportion of capital to which each member is entitled is his share. Shares are always transferable although the right to transfer them is often more or less restricted.” – Lord Lindley
Characteristics of Company The various definitions reveal the following essential characteristics of a company: 1. Artificial Person: A company is an association of persons who have agreed to form the company and become its members or shareholders with the object of carrying on a lawful business for profit. It comes into existence when it is registered under the Companies Act. The law treats it as a legal person as it can conduct lawful business and enter into contracts with other persons in its own name. It can sell or purchase property. It can sue and be sued in its name. It cannot be regarded as an imaginary person because it has a legal existence. Thus company is an artificial person created by law. 2. Independent corporate existence: A company has a separate independent corporate existence. It is in law a person. Its entity is always separate from its members. The property of the company belongs to it and not to the shareholders. The company cannot be held liable for the acts of the members and the members can not be held liable for the acts or wrongs or misdeeds of the company. Once a company is incorporated, it must be treated like any other independent person. As a consequence of separate legal entity, the company may enter into contracts with its members and vice-versa. 3. Perpetual existence: The attribute of separate entity also provides a company a perpetual existence, until dissolved by law. Its life remains unaffected by the lunacy, insolvency or death of its members. The members may come and go but the company can go on for ever. It is created by law and the law alone can dissolve it. 4. Separate property: A company, being a legal entity, can buy and own property in its own name. And, being a separate entity, such property belongs to it alone. Its members are not the joint owners of the property even though it is purchased out of funds contributed by them. Consequently, they do not have even insurable interest in the property of the company. The property of the company is not the property of the shareholders; it is the property of the company. 5. Limited liability: In the case of companies limited by shares the liability of every member of the company is limited to the amount of shares subscribed by him. If the member has paid full amount of the face value of the shares subscribed by him, his liability shall be nil and he cannot be asked to contribute anything more. Similarly, in the case of a company limited by guarantee, the liability of the members is limited up to the amount guaranteed by a member. The Companies Act, however, permits the formation of companies with unlimited liability. But such companies are very rare. 6. Common seal: As a company is devoid of physique, it can’t act in person like a human being. Hence it cannot sign any documents personally. It has to act through a human agency known as Directors. Therefore, every company must have a seal with its name engraved on it. The seal of the
company is affixed on the documents which require the approval of the company. Two Directors and the Secretary or such other person as the Board may authorize for this purpose, witness the affixation of the seal. Thus, the common seal is the official signature of the company. 7. Transferability of shares: The shares of a company are freely transferable and can be sold or purchased through the Stock Exchange. A shareholder can transfer his shares to any person without the consent of other members. Under the articles of association, even a public limited company can put certain restrictions on the transfer of shares but it cannot altogether stop it. A shareholder of a public limited company possessing fully paid up shares is at liberty to transfer his shares to anyone he likes in accordance with the manner provided for in the articles of association of the company. However, private limited company is required to put certain restrictions on transferability of its shares. But any absolute restriction on the right of transfer of shares is void. 8. Capacity to sue and be sued: A company, being a body corporate, can sue and be sued in its own name. Types of Companies Companies may be classified into various categories as shown in the chart below: Companies Royal or Chartered Companies Companies Companies Limited by Shares Unlimited Companies Statutory Companies Registered Companies Limited by guarantee
6. What do you understand by Cyber Crime? Explain the importance of the IT Act 2000. Definition of Cyber Crime: Cyber crime refers to all the activities done with criminal intent in Cyberspace or using the medium of Internet. These could be either the criminal activities in the conventional sense or activities, newly evolved with the growth of the new medium. Any activity, which basically offends human sensibilities, can be included in the ambit of Cyber crimes. Because of the anonymous nature of Internet, it is possible to engage in a variety of criminal activities with impunity, and people with intelligence, have been grossly misusing this aspect of the Internet to commit criminal activities in cyberspace. The field of cyber crime is just emerging and new forms of criminal activities in cyberspace are coming to the forefront each day. For example, child pornography on Internet constitutes one serious cyber crime. Similarly, online pedophiles, using Internet to induce minor children into sex, are as much
cyber crimes as any others.