ASSIGNMENTS

MB0035
LEGAL ASPECTS OF BUSINESS
(3 credits)
Set I
Marks 60
Each question carries 10 marks

1. 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 to-
I. 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 ab-
initio 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 non-
acceptance 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 Statutory Companies Registered

Companies

Companies Limited by Shares Companies Limited by guarantee

Unlimited Companies

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.