RBSE Class 12 Business Studies Notes Chapter 10 Contract: Legal Provisions

Rajasthan Board RBSE Class 12 Business Studies Notes Chapter 10 Contract: Legal Provisions

Legal provisions related with proposal/offer :

There must be at least two parties for the offer.
Proposal may be negative or positive.
Proposal can be implied or expressed, specific or general.
Made to create legal relationship.
Capable of being accepted by law and giving rise to legal relationship.
Offer must be distinguished from :
- a declaration of intention
- an invitation to make an offer to do business.
Offer must be definite, unambiguous, certain, not loose and vague.
Acceptance of the offer must be there, and for it, and offer should be communi-cated properly.
Offer must be made with a view to obtain assent.
Offer should not contain a term, the non-compliance of which may be assumed to amount to an acceptance.
The intention to make an offer is not taken as an offer and an invitation to make an offer does not constitute an offer.

Legal Provisions Related to Acceptance :

It must be absolute and unqualified.
It must be communicated to the offerer in some perceptible form.
Acceptance can be given in oral or in writing or by conduct.
It must be given within time limit or a reasonable time if any time limit is given.
If an acceptance is given without any offer made, it is not deemed to be accepted and it holds no importance.
It must be given to the party or parties to whom the offer is made.
The acceptance of an offer cannot be implied from the silence of offeree or his failure to answer unless that offeree has indicated that his silence means that he accepts.
The communication of the acceptance should be made by a suitable person who has authority to communicate.
It cannot precede an offer. If it does, it is not a valid acceptance.
It must show an intention on the part of the acceptor to fulfil the terms of the promise.

Legal Provisions Related to Contractual Capacity :

Contractual capacity means competence of the parties to ent^t into a valid contract. According to Sec. 11, every person is competent to contract:

Who has the age of maturity.
Who is of sound mind.

Is not disqualified from contracting by any law to which he is subject.

Thus, Sec. 11. declares the following persons to be incompetent to contract :

Minors
Persons of unsound mind
Persons disqualified by any law.

1. Minor Agreements

An agreement with, or by a minor, is void and inoperative ab initio.
Minors generally can’t enter into a contract for taking loans or buying any current or fixed assests for profits, but they can take loans to obtain the necessities of life.
He can’t enter into a contract of partnership, but he may be admitted to the benefits of an already-existing partnership with the consent of the other partners.
He cannot be adjudged insolvent as he is incapable of contracting debts.
A minor can be an agent
His parents/guardians are/is not liable for the contracts entered into by him even though the contract is for the supply of necessities to the minor.
He can be a promisee or beneficiary.
He can always plead minority.
It he has received any benefit under a void agreement, he cannot be asked to compensate or pay for it.
His agreement cannot be ratified by him on attaining the age of maturity.

2. Persons of Unsound Mind

One of the essential conditions of competency of parties to a contract is that they should be of sound mind.
A person is said to be of unsound mind for the purpose of making a contract, if at the time when he makes it, he is incapable of understanding it and is unable in making a rational judgement as to its effect upon his interest.
Entered into an agreement by person of unsound mind-lunatics, idiots, drunken or intoxicated persons are void.

3. Persons disqualified by Law

Some persons are declared disqualified by the law to enter into a contract by contract Act or any other law, due to their legal, professional or political status.

Legal Provisions Related with Free Consent

According to section 14, consent is said to be free when it is not caused by –

Coercion as defined in Sec. 15.
Undue influence.
Fraud.
Misrepresentation.
Mistake.

Legal rules as to coercion :

Coercion is the committing or threatening to commit any act forbidden by the IPC.
Unlawful detaining of any property, threat to shoot, murder, threat to hurt, rape, etc. indicates coercion.
The intention behind applying coercion is to induce the other party to enter into a contract.
Coercion may move from any person and can be directed towards any person.
Threats not amounting to coercion :
Threat to sue
Statutory compulsions
Threats to strike
Detaining property under mortgage.
It is immaterial whether the IPC is in force or not in force where coercion is com-mitted.

Undue Influence :

A person is deemed to be in a position to dominate the will of another :
Where he holds a real or apparent authority over the other.
Where he stands in a fiduciary relation to the other.
Where he makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, etc.
Relationships which rise above presumption of undue influence are parent and child, guardian and ward, trustee and beneficiary.
When consent to an agreement is obtained by undue influence, it is said to be a voidable contract at the option of the party whose consent was so obtained.

Legal Provisions Related to Fraud

According to sec. 17, fraud means any of the following acts committed by a party to a contract, or with his connivance or by his agent, with the intent to deceive or to induce a person to enter into a contract :

Suggestion to make a fact true when it is not.
The active concealment of a fact by a person.
A promise made without any intention of performing it.
Any other act built to deceive.
Any such act or omission as the law specially declares to be fraudulent.

Provisions Related to Misrepresentation

According to Sec. 18, misrepresentation is –
When a person positively asserts that a fact is true when his information does not warrant it to be.
When there is a breach of duty by a person.
When a party causes, however innocently, the other party to the agreement to make a mistake.

Provisions Related to Mistake :

Mistakes are an erroneous belief about something. It is, in fact, an incorrect belief which leads one party to misunderstand the other.

It generally takes place where the concerned parties are not fully aware of the terms of the agreement, and they take the terms in different sense.

Legal Provisions Related to Consideration

It must move at the desire of the promisor.
It is not essential that only promisor must gain or lose from consideration.
Consideration may move from the promisee or any other person.
It can be in the form of an act or an abstinence or forbearance can be a return promise.
It may be present, past or future.
Every contract must have some consideration.
It must be real, competent and not illusory.
Consideration must be legal/lawful – illegal, immoral or considerations opposed to public policy makes a contract void.
It must be something which the promisor is not already bound to do.
It is a rule that an agreement made without consideration is void.

Legal Provisions Related with Legality df Obejective and Consideration

If the consideration or object is unlawful (Sec. 23), it makes the agreement illegal –

If it is forbidden by law.
If it is of such nature, that if it permitted, would defeat the provisions of any law.
If it is fraudulent.
If the court regards it as immoral.
If it is opposed to public policy.

Legal Provisions Related with Void Agreements

Agreements between incompetent parties – minor, lunatic, etc.
Agreements made under a mutual mistake of fact.
Agreements, the consideration or object of which is unlawful in part.
Agreements, the consideration or object of which is unlawful.
Agreements made without consideration.
Agreement in restraint of trade.
In restraint of legal proceedings.
Agreement in restraint of marriages.
Agreements the meaning of which is uncertain.
Agreement by way of wager.
Agreement contingent on impossible events.
In case of reciprocal promises to do things legal.

Legal Provisions Regarding Contingent Contracts

Contingent contracts depend on the happening of an uncertain future event and cannot be enforced till the event has happened.
In a contigent contract, the event must be uncertain.
In a contigent contract, the event must be collateral, i.e. incidental to the contract.
It should have all the essential elements of a simple contract.
A wagering contract is essentially of a contigent nature but they are declared void in public interest.

Legal Provisions Related with Performance of Contract:

Performance of a contract takes place when the parties to the contract fulfil their obligations arising under the contract within the time and in the manner prescribed.
If the party to the contract dies before the performance of the contract, then the other party can compel that party’s legal heir for its performance, if the performance does not require special skills or ability.
Performance of the contract can be done in two ways –

Actual performance : Where a party to a contract has done what he had under-taken to do.
Offer to perform : It may happen sometimes when the performance becomes due, the promisor offers to perform his obligation, but the promisee refuses to accept the performance.

A coiftract need not to be performed –
When its performance becomes impossible or when the parties to it agree to substi-tute a new contract for it or rescind it.

When the contract is illegal.

Legal Provisions Related with End of Contract

A contract may be discharged in following ways:

By performance
Discharge by agreement or consent
Discharge by impossibility of performance
Discharge by lapse of time
Discharge by operation of law
Discharge by breach of contract.

Legal Provisions Related with Breach of Contract

When a contract is broken by one of the party to a contract, the other party (promisee/ party not in breach) can treat the contract as discharged (termination of contract).

When there is breach of contract, the injured party or the party who is not in breach has one or more of following remedies :

Recision of contract
Suit for damages
Suit upon quantum mercuit
Suit for specific performance of the contract
Suit for injunction.

Legal Provisions Related to Quasi Contract

Quasi contract or constructive contract rests upon the maxim, “No man can just grow rich out of another person’s loss.” Quasi contracts are created by law.

Legal Provisions Related to Contract of Indemnity

According to section 124, 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’.

The person who promises to make good the loss is called an Indemnifier (promisor) and the person whose loss is to be made good is called the indemnified on indemnity holder.

An idemnity holder is entitled to recover from the indemnifier all damages, all costs and all sums which he may have paid under the terms of any compromise of any such suit. Legal Provisions Related to Contract of Guarantee

According to Section 126, a contract of ‘guarantee’ is a contract to perform the promise or discharge the liability of a third person in case of his default.

The person who gives the guarantee is called ‘Surety’, the person in respect of whose default the guarantee is given is called the ‘Principal Creditor’.

The contract of guarantee may be required basically for 3 reasons :

For repayment of debt
For the payment of the price of the goods sold on credit
For the good conduct or honesty of a person employed in a particular office.

Essential Features of Contract of Guarantee

The undertaking to be given by surety must be on the request of principal debtor.
The primary liability is that of the principal debtor.
It is essential that creditor must reveal all the facts related to principal debtor, which may affect the liability of surety.
It may be oral or written or both.
If guarantee given by surety is not at the request of principal debtor, in such a case, the contract is not taken as a valid one.
The lunancy of the surety will discharge him of his future liability towards the guaran¬tee given.
If any changes are made by principal creditor, without informing surety, in such case surety is discharged of his liability.
Liability of surety remains same when the contract between creditor and the principal debtor is void or voidable.

Legal Provisions Related to Bailment

Section 148 defines bailment as the delivery of the goods by one person to another, for some purpose upon a contract, that they shall, when the purpose is accomplished, be re-turned or otherwise disposed of according to the directions of the person delivering them.

The person delivering the goods is called the ‘bailor’ and the person to whom they are delivered is called the ‘bailee’.

Important Features of Bailment

The bailment is concerned only with moveable goods.
It is only possession of goods which passes from the bailor to the bailie, not ownership.
Bailment is done for some purpose.
It is agreed between bailor and bailee that as soon as the purpose is achieved, the goods shall be returned or disposed off according to directions of the bailor.
Money deposited in a bank account is not a contract of bailment, but if person keeps valuables, bonds, securities, etc. in bank locker, it is a bailment contract.
Bailment are classified as
- Gratituous bailment
- Non-gratituous bailment.

Duties of Bailor :

To take reasonable care of the goods bailed.
Not to make any unauthorised use of goods.
Not to mix the goods bailed with his own goods.
Not to set up adverse titles.
To return any accretion to the goods.
To return the goods at the expiry of bail.
To pay compensation, if goods are not returned on time.

Duties of Bailor :

To disclose the known faults about the goods bailed.
To bear extraordinary expenses of bailment.
To receive back the goods.
To indemnify the bailee.
To pay agreed consideration to bailee.
When a person finds goods belonging to other, a relationship is automatically created between the finder and the owner.
The finder of the goods can retain the possession of goods unless he is compensated for expenses incurred and risk reward from the owner of such goods.

Legal Provisions Related to Contract of Pledge

The bailment of goods as a security for payment of a debt or performance of a promise is called “pledge”. The bailor is, in this case, called the ‘pledger’ or ‘pawnor’, and the bailee is called the ‘pledgee’ or ‘pawnee’.

Any kind of moveable properly can be pledged. But delivery is necessary to complete a pledge.

Rights of Pawnee :

Right to retain the goods pledged
Right to retain for subsequent advances
Right to extraordinary expenses
Right against true owner, when the pawnor’s title is defective
Pawner’s right to file a suit against the pawnor.

Duties of Pawnee :

To take reasonable care of goods pledged.
Not to make unauthorised use of goods.
To return the goods after receiving the amount of debt.
To act according to the terms of pledge.
Not to mix the goods pledged with his own goods.

Duties of Pawnor :

To disclose known faults or facts
To return the debts timely
To redeem-the goods pledged.

Rights of Pawnor

Right to receive the pledged goods.
Right to be indemnified against any damage.
Rights of an ordinary debtor.
Right to receive notice of sale.
The owner and if owners are many, then with the consent of all owners, any one owner can pledge the goods.

Legal Provisions Related to Agency

The relationship between a principal and an agent is known as “Agency.”
Indian Contract Act has not defined agency, but sections 182 to 238 deal with agency relationships only.

Essentials of Relationship of Agency :

Agency depends on agreement between the principal and the third person.
Even a minor may be an agent.
No consideration is necessary to create an agency.
Intention of the agent to act on behalf of the principal is essential for agency relationship.

Who Can Employ an Agent ?

Any person who is :

not a minor
of sound mind
not disqualified by any law of any nation
any company or corporation
guardian or any person appointed by law.

Who May be an Agent

Any person who is authorised to act as such may be an agent.
As agent does not make contracts on his own behalf, it is not necessary that he should have contractual capacity.
Even a minor, a person of unsound mind, may be an agent.

Rights of An Agent Against Principal

Right to receive remuneration.
Right of lien.
Right of indemnification against all consequences of all lawful acts done by him.
Right of compensation for injuries sustained by him.
Right of stoppage of goods in transit, in respect of his payments against principal.

Rights of Principal Against Agent

To get the work done according to the direction given.
To receive secret profits if any, made by the agent.
To accept or disappove any unauthorised acts of agents.
To expand, reduce or terminate the rights of agent.
To refuse to pay remuneration to agent in the case of misconduct by agent.
To get compensation for any losses suffered due to agent’s negligence.

Important Glossary

Lunatics : Persons whose mental ability to take any decisions is not normal and whose thinking ability is not sound, such persons are called lunatics. Any agreement with such kind of person is void.
Idiots: A person whose mental ability is lost since birth and he can’t understand small and generalised things is known as an idiot.
Drunkard or Delirious Person: Any person who is totally drunk and who is suffering from any disease, at the time of making a contract, he is not capable of entering into any contract.
Consent: When two or more than two persons gave their acceptance for same thing in the same manner, it is known-as consent.
Misrepresentation : It is a false statement which the person making it honestly believes to be true or which he does not know to be false.
Mistake : It is an erroneous belief about something, or it is an incorrect belief which leads one party to misunderstand the other.
Surety: Person who indemnifies or gives guarantee for the payment of debt on behalf of the principal holder.
Principal debtor : The person in respect of whose default the guarantee is given is called the principal debtor.