Legal Aspects of Business Assignment | Ben Bose

1. Define a contract. Explain the essential elements of a valid contract. (15)

CONTRACT

A contract is an agreement made between, two or more persons to do or to abstain from doing a
particular act.

According to Section 2(h) of the Indian Contract Act, 1872, An agreement enforceable by law is a
contract. A contract is an agreement, creating and defining the obligation between parties. A
contract is an agreement enforceable at law made between two or more persons by which rights are
acquired by one or more to acts or for bearances on the part of others.

Agreement: According to Section 2(e) every promise and set of promises forming the consideration
for each other is agreement. This means that in an agreement there can be one or more than one
promises given in return for each other. Promise is defined in Section 2 (b) in these words.

When the person to whom the proposal is made signifies his assent thereto, the proposal is said to
be accepted. A proposal, when accepted, becomes a promise. Therefore, every agreement, is
composed of a proposal from one side and its acceptance from the other. To sum up:

OFFER

Agreement
ACCEPTANCE

The agreement must give rise to legal obligation: i.e., it should be enforceable by law: An agreement
to become a contract must be coupled with obligation. An obligation is the legal duty to do or
abstain from doing something.

All contracts are agreements, but all agreements are not contracts. All agreements are not contracts.
An agreement may or may not create a legal obligation. If no legal binding is intended, a contract
does not arise.

Legal
Agreement CONTRACT
Obligation

VITAL ELEMENTS OF CONTRACT

A contract has the following vital elements so that it will be valid which are 1) offer, 2) acceptance, 3)
consideration, 4) intention to create legal relation, 5) certainty and 6) capacity.

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Offer

Capacity Aceptance

CONTARCT

Considera
Certainity tion
Intention to
create Legal
Relation

If these main elements are not present in a contract, it would be considered an invalid contract.

Offer and Acceptance:

There must be at least two parties in order to create a valid contract, one making the offer and the
other accepting it. An offer from one party to do or abstain from doing a particular act and its
acceptance by the other party are two basic elements of an agreement. Such offer and acceptance
must be valid. Therefore, the offer is the starting point of a contract. Unless there is an offer from
one party and it is accepted by other, no agreement can arise. Not only this the offer must be certain
and must be communicated to the, Similarly, acceptance must be absolute and unconditional, it
must be given in the mode prescribed and should be communicated.

Intention to create legal relationship:

The agreement must be capable of creating legal obligation among the parties. If it does not do that
it is not a contract. In some case of social or domestic agreements, the usual presumption is that the
parties do not intend to create legal relationship however in commercial or business agreements,
the usual presumption is that the parties intend to create legal relationship unless otherwise agreed
upon.

Free consent:

It is essential that there must be free and genuine consent of the parties to the contract to create a
valid contract. According to Section 14, Consent is said to be free when it is not caused by:

 Coercion
 Undue influence
 Fraud
 Misrepresentation
 Mistake

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The contract is voidable at the option of the aggrieved party if the consent is obtained by any of the
above four factors.

Capacity:

The parties to the contract must be capable of entering into a contract. The contract is not valid if
any of the parties in not competent to contract. According to Section 11 of the Act, which states
that, every person is competent to contract who is of the age of majority according to the law to
which he is subject and who is of sound mind and is not disqualified from contracting by any law to
which he is subject.

Consideration: The agreement must be based on a consideration. Consideration means something in

return. In other words, it is the price paid by one party to buy the promise of the other. The
consideration may be past, present or future, however it must be real.

Lawful object: An agreement which is made for any act which is prohibited by law is not valid. That is
the object of an agreement must be lawful.

Agreements not expressly declared void:

 Sections 24 to 30 clearly specify certain types of agreements which have been expressly
declared void.
 Section 25 of the act which says that all those agreements which are without consideration
are void, unless it is in writing and registered or is a promise to compensate for something
done or is a promise to pay a debt barred by limitation law.
 Section 11 prescribes people who can enter a valid contract which includes person who is of
the age of majority according to the law to which he is subject, and who is of sound mind
and is not disqualified from contracting by any law to which he is subject.
 Section 23 provides that those agreements, considerations and objects of which are
unlawful i.e. forbidden by law; or are of such nature that, if permitted it would defeat the
provision of any law or is fraudulent; or involves or implies, injury to the person or property
of another; or the Court regards it as immoral, or opposed to public policy, are void in
nature.
 On the other hand, Section 26 of the act considers agreements in restraint of marriage void
unless the marriage is of a minor and hence it has not been expressly declared void.

Certainty:

The terms of the contract must be certain and unambiguous. As per Section 29 of the Indian
Contract Act, agreements the meaning of which is not certain or capable of being made certain are
void.

Possibility of performance:

The terms of the agreement must be such are capable of performance. According to Section 56, an
agreement to do an impossible act is void.

Legal formalities:

The agreement must comply with the required formalities as to writing, registration, stamping, etc.
so necessary to make it enforceable at law.

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2. What do you understand by “capacity to Contract”? Who are the persons disqualified by law
from entering into a contract? (15)

Answer:

Capacity to contract means a party has the legal ability to enter a contract. Capacity also means a
person must be competent as defined by law. Someone's capacity is determined by whether they
have reached the age of majority and if they are mentally capable of understanding the applicable
contract terms.

According to Section 11 of the Act, which states that, every person is competent to contract who is
of the age of majority according to the law to which he is subject and who is of sound mind and is
not disqualified from contracting by any law to which he is subject.

India Contract Act has defined who shall be able to contract and who are either temporarily barred
or permanently barred. It has been described in Section 11 of the Act.

The section states, “Every person is competent to contract who is of the age of majority according to
the law to which he is subject, and who is of sound mind and is not disqualified from contracting by
any law to which he is subject. —Every person is competent to contract who is of the age of majority
according to the law to which he is subject, and who is of sound mind and is not disqualified from
contracting by any law to which he is subject”.

The persons who can enter into a contract are of:

Age of Majority

Sound Mind

Not disqualified
Age of Majority:

In general, anyone under 18 years old lacks capacity. The first aspect regarding infancy is the
determination of the age of infancy. This now is regulated as per the Indian Majority Act, wherein
section 3 of the Act states that every person living in India shall be deemed to have attained majority
only when he shall have completed 18 years of age.

This section can be analysed in two ways: a) either minor is incompetent to contract, in which case
the agreement shall be treated as void agreement, or, that he is incompetent to contract only which
means that the is not liable on the contract through the other party is, in which case there is
voidable contract.

Sound Mind:

If a person is not cognitively able to understand his or her responsibilities and rights under the
agreement, then they lack the mental capacity to form a contract. Many states define mental
capacity as the ability to understand all terms of the contract, while a handful of others use a
motivational test to discern whether someone suffers from mania or delusions.

Disqualified from entering a contract:

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Now the essential aspect of Capacity to Contract i.e. disqualification of person to contract can be
broken down into 3 considerations: -

 Disqualification because of infancy

 Disqualification because of insanity
 Other methods of disqualification as prescribed by law.

Disqualification because of Infancy

a) Age of majority

The first aspect regarding infancy is the determination of the age of infancy. This now is
regulated as per the Indian Majority Act, wherein section 3 of the Act states that every person
living in India shall be deemed to have attained majority only when he shall have completed 18
years of age.

b) Infancy

Now, to solve the discrepancy, the provisions of the section were compared to that of Common
law, as the act was inspired by that. Under the common law, the contract with minor was a
voidable agreement at his option, if it appears to the court that the agreement was entered into
for the benefit of the minor and that it may be binding and especially if the contract was for the
supply of necessities.

This principle was reiterated by the Judicial Committee in 1903, where they specifically declared
that present section requires the age of majority be according to one’s personal law and
suggested it was done to give effect to the Hindu law on the same subject matter.

c) Agreement on behalf of the minor

Another aspect of the minor agreement is the agreement entered on behalf of the minor which
includes formal contracts of getting married by their parents and/or guardians have been upheld
on the ground of the custom of the community.

Contracts on behalf of minors in respect of their property have been upheld provided it is
competent for the guardians of the estate to do so and the transactions are for the legal
necessity or for the minor benefit.

d) Executed contract

Contracts which are completely executed on the minor’s side so that there are no further
liabilities on his part can be enforced by the minor because nothing further remains to be done
by him. The court in such circumstances only operates to enforce the rights of the minors, not
the liabilities to protect the interest of the minor.

e) Necessaries

This aspect is further supplemented through section 68 of the Indian Contract Act, which deals
with the supply of necessities to a person incapable of entering of contract on their own. Now a
minor is unable to enter into a contract of their own and therefore minor property shall be used
in paying the cost of necessities, but no personal liability shall be incurred by the minor. The
scope of necessity includes things which minor needs and luxury.

f) Other miscellaneous provisions regarding the minor right to contract

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1. Lease to minor: – A lease issued to minor shall be treated as void as a lease imports an
agreement requiring minor to pay certain considerations like rent and imposes other
different types of reciprocal obligations. Furthermore, the amendment to section 107 of the
TOPA makes it clear that a lease both by and to minor must be void.
2. A gift to minor: – a minor donee is competent to accept a gift. But acceptance of the onerous
gift, i.e. gifts which are coupled with obligations cannot bind the minor unless upon being
competent to contract and being aware of such obligations he retains the gifts as specified in
sections 122-127 of Transfer of Property Act.
3. Partnership with Minor: – a partnership agreement entered to admit minor as a full-time
partner would be invalid. But if, minor is admitted to the benefit of a partnership by his
guardian provided it is supported by necessity or benefit then in that case that agreement is
allowed by law.
4. Joint Documents: – Now, if documents are executed jointly by both minor and adult then, in
that case, it would be considered void in case of a minor, but it shall be considered as a valid
contract against the adult person provided there was a joint promise to perform certain
obligations.
5. Ratification by minor: – as minor’s agreement is considered void from the beginning, so
logically, it can’t be ratified by the minor, nor can it constitute valid consideration for a
subsequent agreement.

Disqualification by insanity

One of the important considerations to enter into the covenant is that the person should be of sane
& competent mind. Section 12 of the Act provides a test of the soundness of mind for the purpose of
making of a contract.

This section states, “A person is said to be of sound mind for the propose of making a contract, if, at
the time when he makes it, he is capable of understanding it and of forming a rational judgement as
to its effect upon his interest. A person, who is usually of unsound mind, but occasionally of sound
mind, may make a contract when he is of sound mind. A person, who is usually of sound mind, but
occasionally of unsound mind, may not make a contract when he is of unsound mind.”

Now there is a different category of insanity which has to be analysed differently to understand
whether they fall under the blanket protections this act provides.

Idiots – are those people who are devoid of thinking capacities and thus are unable to make rational
judgements. Contracts with such person are void, except for the necessary ones.

Lunatics– these are the persons whose mental faculties are deranged. These types of persons don’t
have lunatic periods for a continuous period of time, but it exists for a sporadic moment. The
contracts with them are void, except if it can be proved that it was entered when the person was
having sound mind or contracts made for is necessities, in which case his estate will be liable.

Drunkards– a person who is under the impression of alcohol or drugs stands on the same footing as
a lunatic person as above. The fact that a person was drunk affords no ground for resisting a suit for
the contract. But where the judgement of either party was affected because of the alcohol, then
following the principles of equity-specific performance of the contract will generally be refused; this
is the case for voluntary drunkenness. In the case of involuntary drunkenness, then if the terms of
the contract are disproportionate, then it can be set aside.

Other special disqualification prescribed by law:

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Following are the list of persons who are not in the Capacity to Contract or were disqualified by law
to make a contract-

1. Alien enemy: – as per section 83 of civil procedure code no person shall enter a contract
with an alien during the subsistence if war unless the prior permission of the government
has been sought.
2. Foreign sovereigns: – as per section 86 of the Civil Procedure Code diplomatic staff of the
government enjoys certain privileges in the aspect of the contractual agreement. It’s stated
that diplomatic people can enter a contract but with special privileges, which is they can sue
the party for contractual failure, but they can’t be sued unless special permission is sought
by the government, or they voluntarily submit themselves to the court.
3. Corporations: – Companies, which includes local bodies and city corporations, are legal
persons and because of which they can acquire property, transact their business and can sue
and being sued. But they cannot do so without their seals as per section 21 of Companies
Act. Further, a contract entered by a statutory corporation is required to be within the
object of the company, if it’s outside its object, then its ultra vires as per section 4 of
Companies Act, 2013.
4. Insolvents: – an insolvent person cannot be subject to any contractual agreement. When
any sundry debtor is declared as insolvent his property is vested with the official assignee.
He can only enter in a contract relating to that property as per section 141 (1) (b) of
Insolvency & Bankruptcy Code, 2016.
5. Governments: – Contract with the government is required to comply with certain
formalities, if such formalities are not complied with, such contract would be void. The same
principles apply to municipalities. It can be found in Article 299(1) of the Indian Constitution.
6. Professional persons: – this restriction is only applicable in England, where the barristers
don’t have the authority to sue their clients for their non-payment of their professional fees.
In India, no such restriction in this regard exists.

So, it can be concluded that law has provided different bars for different sets of people in order to
make them able to enter a contract. This has been made by considering the public policy, their own
benefits as chances are that their right may get affected.

Of all the three categories mentioned, minors are more likely to get exploited and laws have
especially craved to make sure that their interest is not affected in any sense. In can be said that
certain differentiation has been created by law to make sure that different sects of people’s interest
get secured.

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Attempt the following problems giving reasons for your answers.

1. A minor fraudulently represented to a money lender that he was a major and

executed a mortgage deed for Rs 20,000/-. Has the moneylender any right of
action against the minor for the money lent?
(5)

Answer:

The minor’s contract is void and not merely voidable based on section 10, 11, 183, 184 and old
sections 246 and 247(now section 30 of the Partnership Act). The combine effect of these sections
and particularly section 10 and 11 renders the minor contact completely void.

Section 11 should be literally construed and that only a person who is of the age of the majority is
competent to contract. A minor’s contract is, therefore, wholly void. In the view of the Privy Council,
this was also in accordance with the Hindu Notion of a minor’s incompetence to contract. Section 10
of the Contract Act requires that the parties must be competent to contract. Competence to
contract is defined in Section 11.

Section 11: Who are competent to contract- Every person is competent to contract who is of the age
of majority according to law to which he is subject, and who is of sound mind, and is not disqualified
from contracting by any law to which he is subject.

If a minor obtains some property by fraudulently misrepresenting his age, he can be ordered to
restore the property or goods thus obtained. This is called the equitable doctrine. Under the English
law, a minor may be compelled to restore the goods or property so long as they are traceable.
Money being generally not traceable, a minor cannot be asked to restore it.

The term ‘estoppel’ may be defined as prevention of a claim or assertion by law. In other words,
when someone makes another person to believe that a particular thing or fact is true, then later he
cannot be allowed to deny the truth of that thing. It will be interesting to know that there is no such
estoppel against the minor. In other words, when a minor fraudulently enters into a contract,
representing that he is a major, but in reality, he is not, then later on he can plead his minority as a
defence and cannot be stopped from doing so.

2. A tells his wife that he would commit suicide, if she did not transfer her personal
assets to him. She does so under this threat. Can the wife avoid the contract?
(5)

Answer:

The wife can avoid the contract. The contract has been made without considering the needs of the
wife, but instead, there was use of threats. This would be one of the ways through which the
contract would be voided. Coercion is defined (Contract Act, Section 15) as "committing, or
threatening to commit, any act forbidden by the Indian Penal Code, or the unlawful detaining, or
threatening to detain any property to the prejudice of any person whatever, with the intention of
causing any person to enter into an agreement.

It can be found that the deed in question was obtained by coercion, the coercion consisting in a
threat by the husband to his wife and son that he would commit suicide if they did not execute the
document.

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