Business Legislation

“Laws, like houses lean on each other” Edmund Burke

 What is Law ?
• The law is a set of legal rules that governs the way members of
a society act towards one another.

• Law is “ that portion of the established habit and thought of

mankind which has gained distinct and formal recognition in
the shape of uniform rules backed by the authority and power
of the Government”.
• – Woodrow Wilson

• Laws are required in society to regulate the behaviour of the

individual, to correspond with what is acceptable to the
majority of individuals,
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 NEED FOR LAW

• Without law, life and business would become a matter of

survival, not only of the fittest but also of the most ruthless.

• Laws are required in society to regulate the behaviour of the

individual, to correspond with what is acceptable to the
majority of individuals,

• Law is the potential tool of social change. In fact law and society
are complementary. No society can exist without law. It is
essential for up keeping of peace in the society.
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 BRANCHES OF LAW
• CONSTITUTIONAL LAW
• ADMINISTRATIVE LAW
• CRIMINAL LAW
• CIVIL LAW,
• COMMERCIAL LAW

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 SCOPE OF BUSINESS LAW
The scope of the business law has enormously widened
due to the increasing complexities of the modern
business world.

It usually covers topics of contracts, bailment, Agency,

sale of goods, partnerships, companies, negotiable
instruments, insurance, pollution control etc.

These and other topics are covered by legislations

enacted by Central and State Governments.

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 Business Legislation (Law)
Business Law also referred to as “Mercantile law ” , comprises a
set of laws pertaining to :
– Contracts
– Sale of goods
– Partnership
– Companies
– Negotiable instruments
– Insurance
– Consumer protection
– Payment of bonus
– Payment of gratuity
– Minimum wages
– Carriage of goods
– Insolvency and
– Arbitration .
 Source of Business Law in India
Judicial
Customs and Indian Statutes
English Law Decisions or
usages /constitution
case law
 The Indian Contract Act of 1872
• Essentials of a valid contract
• Discharge of contract
• Remedies for breach of a contract
• Contracts of indemnity
• Guarantee
• Bailment
• Pledge
• Agency
 Contract
• In India, the law of contract is contained in the
Indian Contract Act, 1872, hereinafter referred
to as the Act.
• It extends to whole of India except the State of
J&K and came into force on the first day of
September, 1872.
• The word ‘contract’ is derived from the Latin ‘Contractum’
meaning drawing together. According to the Act, “An
Agreement enforceable by law is a contract”
• Some authors have defined contract in the following words:
• “Every agreement and promise enforceable at law is a
contract”. — Sir Frederick Pollock
• “An agreement creating and defining obligations between the
parties”. — Salmond
• “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 forbearances on the part of the
other or others”.
• — Sir William Anson
• An analysis of these definitions would show
that a contract must have the following two
elements:
(a) An agreement, and
(b) Its enforceability (legal obligation)
• In the form of an equation, it can be shown as
under:
• Contract = An agreement + its enforceability
 What is an Agreement ?
• According to the Act, “Every promise and every set of
promises forming the consideration for each other is an
agreement .
• An analysis of the definition of the term agreement
shows the following two characteristics of agreement:
(a) Plurality of Person: There must be two or more
persons to make an agreement.
(b) Consensus-ad-idem: Both the parties to an
agreement must agree about the subject matter of the
agreement in the same sense and at the same time.
 Essentials of a valid contract
• The Act (sections 10, 29 and 56) provides that
all agreements are contracts if they are made
by the free consent of the parties, competent
to contract, for a lawful consideration, with a
lawful object, are not expressly declared to be
void, and where necessary, satisfy the
requirements of any law as to writing or
registration.
 The essential elements of a valid contract are the following:

a) Proposal (offer) and Acceptance

b) Intention to Create Legal Relations
c) Lawful Considerations
d) Capacity of Parties
e) Free Consent
f) Lawful Object
g) Writing and Registration
h) Certainty
i) Possibility of Performance
j) Agreement not expressly declared void
• ‘Proposal’ of the Act is synonymous with the
term ‘offer’ of the English Law. The words
‘proposal’ and ‘offer’ are used inter-
changeably.
• “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 to such act or abstinence, he is
said to make a ‘proposal’.
The definition of the word proposal given in
the Act reveals the following three essentials
of a ‘proposal’.
a) The expression of willingness to do or to
abstain from doing something.
b) This expression must be to another person.
c) This must be made with a view to obtaining
the assent of the other person.
• A contract as already observed, emerges from
the acceptance of an offer. Acceptance is
defined when the person to whom a proposal
is made signifies his assent thereto the
proposal is said to be accepted.
• A proposal when accepted becomes a promise.
• The person making the proposal is called the
Promisor, and the person accepting the
proposal is called the Promisee.
 Who is Competent to Contract?
According to the Act every person is competent
to contract, who:
a) Is of the age of majority, according to the
law to which he is subject,
b) Is of sound mind, and
c) Is not disqualified from contracting by any law
to which he is subject.
 Who is a Minor?
As per the Indian law, a person domiciled in
India, who is under 18 years of age is a minor.
Accordingly every person who has completed
the age of 18 years becomes a major. Only
when a person is under the guardian ship of
court of wards or under a person appointed
under the Guardians and Wards Act, then he
attains majority on completion of 21 years of
age.
 Persons of Unsound Mind

• For a valid contract, it is necessary that each

party to it must have a ‘sound mind’.
• The Act provides “A person is said to be of
sound mind for the purpose of making a
contract, if at the time when he makes it, he is
capable of understanding it and of forming a
rational judgment as to its effects upon his
interests.
• 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.”
 Position of Agreement with Persons of
Unsound Mind
a) Lunatics: A lunatic is a person who is mentally
deranged due to some mental strain or other
personal experience. He suffers from intermittent
intervals of sanity and insanity. He can enter into
contracts during the period when he is of sound
mind.
b) Idiots: An idiot is a person who has completely lost
his mental powers. Idiocy is permanent whereas
lunacy denotes periodical insanity with lucid
intervals. An agreement of an idiot is void.
c) Drunken/Intoxicated Persons: A drunken or
intoxicated person suffers from temporary
incapacity to contract, i.e. at the time when he is so
drunk or intoxicated that he is incapable of forming
a rational judgement. The position of a drunken or
intoxicated person is similar to that of a lunatic.
d) Agreements Entered into by Persons of Unsound
Mind are Void: However, there is one exception.
Persons of unsound mind are liable for necessities
supplied to them or to anyone whom they are
legally bound to support. But even in such cases,
no personal liability attaches to them. It is only
their estate (property) which is liable
 Persons Disqualified by Law
a) Alien Enemies: An alien (citizen of a foreign state) is a
person who is not a citizen of India. When there is a war
between India and another country, that country’s citizen
becomes an alien enemy and cannot enter into contract.
b) Foreign Sovereigns and Ambassadors: They can enter into
contracts and enforce those contracts in our courts but
they cannot be sued in our courts without the sanction of
the Central Government unless they choose to submit
themselves to the jurisdiction of our courts.
c) Convict: A convict is one who is found guilty by a court
and is undergoing sentence of imprisonment. During the
period of his imprisonment, he is incompetent to contract
and also to sue on contract made before conviction.
d) Company or Corporation: A company/corporation
is an artificial person created by law. It cannot
enter into contract outside the powers, conferred
upon it by its Memorandum of Association (object
clause) or by the provisions of its Special Act.
e) Insolvents: When a person’s debts exceed his
assets, he is adjudged insolvent and his property
stands vested in the Official Receiver or Official
Assignee appointed by the court. Such a person
cannot enter into contracts relating to his property.
 Free Consent
• Consent means an act of assenting to an offer. Two
or more persons are said to consent when they
agree upon the same thing in the same sense.
• Consent is said to be free when it is not caused by:
a) Coercion, or
b) Undue Influence, or
c) Fraud, or
d) Misrepresentation, or
e) Mistake.
 Legality
• The object and the consideration of an agreement must
be lawful, otherwise the agreement is void. According to
the Act, the consideration or the object of an agreement
is unlawful in the following cases:
a) If it is Forbidden by Law:
b) If it is of such a Nature that, if Permitted it would Defeat
the Provisions of any Law: Such an agreement is void. For

Example - Nirdhan borrowed Rs. 1 lakh from Kuber and

agreed not to raise any objection as to the limitation and
that Kuber may recover the amount even after the expiry
of limitation period (i.e. three years). This agreement is
void as it defeats the provisions of Limitation Act.
c) If it is Fraudulent
d) If it Involves or Implies Injury to a Person or
Property of Another.
e) If the Court Regards it as ‘Immoral or
Opposed to Public Policy.
 Discharge of Contract
• Discharge of a contract means discontinuation
of the contractual relations between the
parties . When the rights and obligations
arising out of a contract are extinguished, the
contract is said to be discharged or
terminated.
 Mode of Discharge

• A contract may be discharged in any of the

following ways:
a) Discharge by Performance: A contract can be
discharged by performance, which can be:
i. Actual - When the parties to the contract perform
their promises in accordancewith the terms of the
contract.
ii. Attempted - When the promisor has made an offer
of performance to the promisee but the offer has
not been accepted by the promisee.
b) Discharge by Mutual Consent or Agreement:
Since a contract is created by mutual
agreement, it can also be discharged by mutual
agreement. Discharge by mutual agreement
can be done in any of the following ways:
i. Novation - Novation means the substitution of
a new contract for the original contract either
between the same parties or between
different parties.
ii. Rescission - Recission means cancellation of
the contract by any party or all the parties to a
contract.
iii. Alteration - Alteration means a change in the
terms of a contract with the mutual consent.
Alteration discharges the original contract and
creates a new contract.
iv. Remission - Remission is the acceptance of a
lesser sum than what was contracted for or a
lesser fulfillment of the promise made.
v. Waiver - Waiver means intentional
relinquishment of a right under the contract.
 c) Discharge by Subsequent or Supervening Impossibility or
Illegality:

1. Cases where the doctrine of supervening impossibility

applies
i. Destruction of subject matter.
ii. Death or personal incapacity of promisor.
iii.Outbreak of war.
iv. Change of law.

2. Cases not covered by supervening impossibility -

i. Difficulty of performance or less profitable.
ii. Commercial impossibility.
iii.Default of a third person.
iv. Strikes, lockouts and civil disturbances.
d) Discharge by Lapse of Time - A contract is
discharged if it is not performed or enforced
within a specified period, called period of
limitation. The Limitation Act, 1963 has
prescribed the different periods for different
contracts , e.g. period of limitation for
exercising right to recover a debt is 3 years.
e) Discharge by Operation of Law:

i. By death of the promisor.

ii. By insolvency.
iii. By merger.
iv. By unauthorised material alteration.
f) Discharge by Breach of Contract - A contract is said to
be discharged by breach of contract if any party to the
contract refuses or fails to perform his part of the
contract or by his act makes it impossible to perform
his obligation under the contract. A breach of contract
may occur in the following two ways:
i. Anticipatory breach of contract - It occurs when the
party declares his intention of not performing the
contract before the performance is due.
ii. Actual breach of contract - It can occur either on due
date of performance or during the course of
performance.
 Remedies for Breach of Contract
• A breach of contract occurs if any party
refuses or fails to perform his part of the
contract or by his act makes it impossible to
perform his obligation under the contract.
• In case of breach, the aggrieved party (i.e. the
party not at fault) is relieved from performing
his obligation and gets a right to proceed
against the party at fault.
 Remedies of Breach of Contract
a) Rescission of Contract: Rescission means a right not to
perform obligations.
b) Suit for Damages: Damages are monetary compensation
allowed for loss suffered by the aggrieved party due to
breach of contract.
i. Ordinary or General or Compensatory Damages: (i.e. damages arising
naturally from the breach).
ii. Special Damages: (i.e. damages in contemplation of the parties at the
time of contract).
iii. Exemplary, Punitive or Vindictive Damages: (i.e. damages which are in
the nature of punishment).
iv. Nominal Damages: (i.e. awarded only for the name sake).
v. Liquidated Damages: means a sum fixed up in advance, which is a fair
and genuine pre-estimate of the probable loss that is likely to result
from the breach.
d) Suit for Injunction: means demanding court’s
stay order Injunction means an order of the court
which prohibits a person to do a particular act.
e) Suit for Quantum Meruit: Quantum - meruit
means as much as is earned. In this suit, claim is
made to compensate for the work already done.
c) Suit for Specific Performance: means demanding
the court’s direction to the defaulting party to
carry out the promise according to the terms of
the contract.
 Indemnity
• The term ‘Indemnity’ means to make good the loss
or to compensate the party who has suffered some
loss.
• “A contract by which one party promises to save
the other from loss caused to him by the conduct
of the promisor himself, or by the conduct of any
other person, is called a contract of indemnity”.
• For example - A and B go into a shop. B says to the
shopkeeper “Let A have the goods, I will see you
paid”. The contract is one of Indemnity.
• The person who promises to make good the
loss is called the ‘Indemnifier’ (promisor), and
the person whose loss is to be made good is
called the ‘Indemnified or Indemnity holder’
(promisee).
 Guarantee
• “A contract of guarantee is a contract to
perform the promise or discharge the liability
of a third person in case of his default”.
• For example - A and B go into a shop. A says to
the shopkeeper, C, “Let B have the goods, and
if the does not pay, I will”. This is a contract of
guarantee.
 Parties to a Contract of Guarantee

• There are three parties to a contract of gaurantee.

i. Principal Debtor: The person in respect of whose
default the guarantee is given is called the principal
debtor. In the above example B is the principal debtor.
ii. Creditor: The person to whom the guarantee is given is
called the ‘creditor’. C is the creditor in the above said
example.
iii. Surety: The person who gives the guarantee is called
the ‘surety’ A is the surety in the above said example.
 Guarantee may be classified under the following two categories:

a) Specific Guarantee: A guarantee which extends to

a single debt or specific transaction is called a
‘specific guarantee’. The liability of the surety
comes to an end when the guaranteed debt is
duly discharged or the promise is duly discharged.
b) Continuing Guarantee: A guarantee which
extends to a series of transactions is called a
‘continuing guarantee’. A surety’s liability
continues until the revocation of the guarantee.
 Discharge of Surety from Liability
a) Notice of Revocation: A specific guarantee cannot be
revoked once it is acted upon. But a continuing guarantee
may at any time, be revoked by the surety as to future
transactions by giving notice to the creditor.
b) Death of Surety: In case of a continuing guarantee the death
of a surety also discharges him from liability as regards
transactions after his death, unless there is a contract to the
contrary.
c) Variance in Terms of Contract: “Any variance made without
the surety’s consent, in the terms of the contract between
the principal debtor and the creditor, discharges the surety
as to transactions subsequent to the variance”.
d) Release or Discharge of Principal Debtor: The surety is
discharged by any contract between the creditor and the
principal debtor, by which the principal debtor is released,
or by any act of omissions of the creditor, the legal
consequence of which is the discharge of the principal
debtor.
e) Arrangement by Creditor with Principal Debtor without
Surety’s Consent.
f) Creditor’s Act or Omission Impairing Surety’s Eventual
Remedy79: If a creditor does any act which is inconsistent
with the rights of the surety, or omits to do any act, which
is his duty to the surety requires him to do, and the
eventual remedy of the surety himself against the principal
debtor is thereby impaired, the surety is discharged.
g) Loss of Security :If the creditor loses (by negligence or
carelessness) or without the consent of the surety, parts
with security given to him, the surety is discharged
from liability to the extent of the value of security.
h) Invalidation of the Contract of Guarantee: (In between
the creditor and the surety) A surety is also discharged
from liability when the contract of guarantee (in
between the creditor and the surety) is invalid. A
contract of guarantee is invalid where such a contract
has been obtained by means of misrepresentation or
fraud or keeping silence as to material part of the
transaction, by the creditor or with creditor’s
knowledge or assent
 Distinction between Indemnity and
Guarantee
Points of Indemnity Guarantee
Distinction
1. Number of There are two parties – the There are three parties the
Parties indemnifier and the indemnity creditor, the principal debtor and
holder the surety

2. Object or For the reimbursement of loss For the security of a debt or good
purpose conduct of an employee

3. Number of Only one contract between the Three contracts- one between the
Contracts indemnifier and the indemnified principle debtor and creditor ,
second between the creditor and
the surety , and the third between
the surety and the principle debtor
 Distinction between Indemnity and
Guarantee
Points of Indemnity Guarantee
Distinction
4. Nature of The liability of the indemnifier is The liability of the surety is
liability primary in nature . secondary , i.e. the surety is liable
only on default of the principle
debtor .

5. Request The indemnifier acts independently It is necessary that the third party
by debtor without any request of the should give the guarantee at the
indemnity holder or the third party request of the debtor

6. Existing In most cases there is no existing There is an existing debt or duty ,

debt or duty debt or duty . the performance of which is
guaranteed by the surety .

7. Right to The indemnifier cannot sue the The surety after he discharges the
sue third party for the loss in his own debt owing to the creditor can
name because there is no privity of proceed against t he principle
contract . He can only do so if there debtor in his own right.
is a favor in his name .
 Agency
• It is not always possible for a person to do
everything himself, hence it becomes
necessary to delegate some of the acts to be
performed by another person.
• Such other person is called an AGENT.
• “An agent is a person employed to do any act for
another or to represent another in dealings with
third persons.
• The person for whom such act is done, or who is
represented, is called the principal”.
• The contract which creates the relationship of
‘principal’ and ‘agent’ is called an ‘agency’.
• For example - X appoints Y to buy ten bags of
wheat on his behalf, X is the principal, Y is the
agent and the contract between the two is
‘agency’.
 General Rules of Agency
There are two important general rules regarding
agency:
a) What one person can himself lawfully do, can as
well get it done by any other person. This rule is
of course, subject to some exceptions, e.g. in
case of acts required to be performed personally
like marriage.
b) What a person does by another, he does by
himself. In other words the acts of the agent are,
for all legal purposes, the acts of the principal.
 Who May Employ an Agent?
• Any person who is competent to contract may employ
an agent. A minor or a person of unsound mind cannot
employ an agent.

Who May be an Agent?

• The Act lays down that “as between the principal and
third persons any person may become an
agent”.
• Thus even a minor or a person of unsound mind can be
appointed as agent, but in such a case the principal shall
be liable.
 Creation of Agency
An agency may be created in any one of the
following ways:
a) Agency by Express Agreement: An agency by
express agreement is created when by
spoken or written words an express authority
is given to an agent.
For example - X who owns a shop, appoints Y to
manage his shop by executing a power of
attorney in Y’s favor.
b) Agency by Implied Agreement: Implied
agency arises when agency is inferred from
the circumstances of the case, or from the
conduct of the parties on a particular
occasion, or from the relationship between
parties.
Implied agency includes the following:
i. Agency by Estopped: Agency by estopped arises
where a person by his words or conduct induces
third persons to believe that a certain person is his
agent. The person who induces as such is estopped
or prevented from denying the truth of agency.
For example - X tells Y in the presence and hearing of Z
that he (X) is Z’s agent. Z does not contradict this
statement. Later on Y enters into a contract with X
believing that X is Z’s agent. In such a case, Z is
bound by this contract and in a suit between Z and
Y, Z cannot be permitted to say that X was not his
agent, even though X was not actually his agent.
ii. Agency by Holding Out: This is a type of agency
by estopped. Such agency arises when a person
by his past affirmative and positive conduct leads
third person to believe that person doing some
act on his behalf is doing with authority.
For example - X allows Y, his servant to purchase
goods for him on credit from Z, and later on pays
for them, one day X pays cash to Y to purchase
goods. Y misappropriates the money and
purchases goods on credit from Z. Z can recover
the price of goods from X because X had held out
before Z that Y is his agent
iii. Agency by Necessity: Agency by necessity arises under the following two conditions:

a. There is an actual and definite necessity for

acting on behalf of the principal, and
b. It is impossible to obtain the consent of the
principal. For example - X consigned some
vegetables from Delhi to Mumbai by a truck.
The truck met with an accident. The vegetables
being perishable were sold by the transporter.
This sale is binding on X. In this case the
transporter became an agent by necessity
c) Agency by Ratification: Where acts are done by one
person on behalf of another, but with out his
knowledge or authority, the latter may elect to ratify
(adopt and accept) or to disown such acts. If he
ratifies them, the same effect will follow as if they
had been performed by his authority.(Section 196)
Ratification may be express or implied in the conduct
of person on whose behalf the acts are done.
For example - A, without authority, buys goods for B.
After wards B sells them to C on his own account.
B’s conduct implies a ratification of the purchases
made for him by A.
d) Agency by Operation of Law: Agency by
operation of law is said to arise where the law
treats one person as an agent of another.
For example - on formation of a partnership,
every partner becomes the agent of other
partners. Such agency is said to arise by
operation of law.
 Meaning of Sub Agent

• “A sub-agent is a person employed by, and

acting under the control of, the original agent
in the business of the agency”.
• Thus a person employed by an agent is called
sub-agent.
 Duties of Agent
An agent has the following duties towards the principal:
a) To follow principal’s directions or customs.
b) To carry out the work with reasonable skill and diligence.
c) To render accounts.
d) To communicate, in case of difficulty.
e) Not to deal on his own account in the business.
f) Not to make any profit out of his agency except his
remuneration.
g) On termination of agency by principal’s death or insanity
to protect and preserve the interests entrusted to him.
h) Not to delegate authority.
 Right of Agent
An agent has the following rights against the principal:
a) To receive remuneration.
b) Retainer - out of any sums received on account of the
principal.
c) Lien - to retain goods. Agent has a particular lien unless
the contract provides otherwise.
d) To be indemnified against consequences of lawful acts.
e) To be indemnified against consequences of acts done in
good faith.
f) To compensation for injuries sustained by him due to
principal’s neglect or want of skill.
g) Stoppage of goods in transit.
 Termination of Agency
• By Act of Parties • By Operation of Law
a. Agreement a. Completion of Business of
agency
b. Revocation by the b. Expiry of time
Principal c. Death of Principal or Agent
c. Renunciation by the d. Insolvency of the Principal
Agent e. Destruction of the subject
matter
f. Principal or Agent
becoming alien enemy
g. Dissolution of Company
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