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(3 credits)
Set I
Marks 60

Q1. What are the essentials for a Valid Contract? Describe them in details.
All contracts are agreements but all agreements need not be contracts. The agreements that create legal
obligations only are contracts. The validity of an enforceable agreement depends upon whether the
agreement satisfies the essential requirements laid down in the Act. Section 10 lays down that ‘all the
agreements 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 be 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. Then we say that there is a meeting of the minds of the parties. Such a
position is known 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
words, they must have attained the age of majority, should be of sound mind and should not 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 law.
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’ i.e., naked agreement. The consideration should be lawful and
adequate. However, there are certain exceptions 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 the person or property of another, should not be
immoral or against public policy.
f) Not expressly declared void: The statute should not declare an agreement void. The Act itself has
declared certain types of agreements as void.
E.g., agreements in restraint of marriage, trade, legal proceedings. In such cases, the aggrieved party can’t
seek any relief from the court of law.
g) Possibility of performance: The agreement should be capable of being performed. e.g., Mr. A agrees
with Mr. B to discover treasure by magic. Mr. B can’t seek redressal of the grievance if Mr. A fails to
perform the promise.
h) Certainty of terms: The terms of the agreement should be certain. E.g., Mr. A. agrees to sell 100 tons
of oil. The agreement is vague as it does not mention the types of oil agreed to be sold.
i) Intention to create legal obligation: Though Sec. 10 is silent about this, under English law this
happens to be an important ingredient. Therefore, Indian courts also recognise this ingredient. An
agreement creating social obligation can’t be enforced.
j)Legal formalities: Indian Contract Act deals with a simple contract supported by consideration.
Agreements made in India may be oral or written. However, Sec. 10 states that where the statute 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 e.g., Under Indian Companies Act, the
Memorandum of Association and Articles of Association must be registered.

Q2. What are the rules regarding the acceptance of a proposal? Describe them in details.
According to law “When the person to whom the proposal is made signifies his willingness thereto the
proposal is said to be accepted. A proposal, when accepted, becomes a promise.” By accepting the offer,
the acceptor expresses his willingness to be bound by the terms and conditions of the offer. Regarding an
offer and its acceptance, Anson has given an analogy of a lighted match stick. “Acceptance is to an offer
what a lighted match is to a train of gunpowder. It produces something which can’t be recalled or
undone.” An acceptance turns the offer into a binding obligation.

Rules Regarding Acceptance:
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 behalf of the person to whom it is made, it is a valid
b) Acceptance should be unconditional and absolute: Sec. 7 (I) states that the acceptance should be
absolute and unconditional. The acceptor should accept the offer in toto. If 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 a 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 from a mere state of mind. As regards unilateral contracts (e.g., offer of reward) it is impossible to
the offeree to communicate his acceptance otherwise than by performing the contract. In the case of
bilateral contracts acceptance must be communicated. The offeror can’t force a contract on offeree by
fixing the mode of refusal. Further, acceptance should be communicated only to the offeror and not to
somebody else.
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 the right to prescribe the
manner of acceptance. He may require it to be oral or in writing or to be communicated to him by phone
or telephone etc. He can also waive his right or may ask the offeree to express acceptance by some
gesture. Once he prescribes the mode of communication later he can’t say that it was insufficient. If the
offeree does not signify his assent 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 deviated acceptance the proposer may insist for the acceptance in the prescribed
manner. He then has to do this within a reasonable time after communication of acceptance to him.
Otherwise it will be presumed that the proposer has accepted the deviated acceptance. Sec. 7 of the Act
does not tell that deviated acceptance is no acceptance.

e) Acceptance must be provoked by offer: The acceptor must be aware of the offer. Even if he fulfills
the conditions mentioned in the offer, if he is ignorant of the offer itself, he can’t give a valid acceptance.

[Lalmann Shukla V, Gouridutt]. 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 within such time. Where no time limit is
prescribed the acceptance has to be within the reasonable time. An offer once dead can’t be accepted
unless there is a fresh offer.
g) Provisional acceptance is no acceptance: A provisional acceptance does not make a binding
agreement unless final approval 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. Contract
by post: No problem arises where there is instantaneous communication of offer and acceptance which is
possible when the parties are face to face. But how to determine the point of time when the contract is
complete if the parties are at distance by each other ? As regards the point of time when the contract is
complete, there is fundamental difference between English Law and Indian Law. Under English Law, the
proposer is legally bound by the acceptance effected through postal medium when the letter is prepared,
addressed, stamped and mailed eventhough it is delayed or lost in transit.

Indian Law (Sec. 4) lays down that ‘the communication of an acceptance is complete as against the
proposer when it is put in a course of transmission to him so as to be out of the power of the acceptor; as
against the acceptor when it comes to the knowledge of the proposer ’. The distinction between English
Law and Indian Law lies with regard to the position of the acceptor. While under English Law, the
acceptor is bound by acceptance the moment the letter is mailed properly, under Indian Law the
communication of acceptance is complete as against, the acceptor only when it comes to the knowledge
of the proposer.

Termination of offer: Following are the circumstances under which an offer is terminated.
(a) Lapse : An offer lapses because of passage of time, death or insanity of the proposer. In case time
limit for acceptance is prescribed by the offeror, offer lapses if not accepted within that time. In the
absence of any stipulation of time, it has to be accepted within a reasonable time depending upon the
circumstances of each case. A proposal is revoked by the death or insanity of the proposer, if the fact of
his death or insanity comes to the knowledge of the acceptor before acceptance. An acceptance is not
effective if it is communicated to the legal representatives of the proposer. But in case the offeree is
ignorant of the offeror’s death, it can be accepted.

(b) Failure to fulfill a condition procedent: Sec. 6 (3) provides that an offer is terminated by the failure
of the acceptor to fulfil a condition precedent to acceptance. e.g., A offers to sell his car to B for Rs.
1,00,000 on the condition that B has to show his driving licence to A. B has to comply with this condition
if he has to accept the offer.
(c) Rejection: By rejecting the offer offeror can terminate an offer. This rejection may be express or
implied. A counter offer has the same effect as rejection.

(d) Destruction of the subject matter or illegality : If the thing offered is destroyed or can’t be bought
and sold due to operation of law, the offer itself lapses.

(e) Revocation: The withdrawal of an offer by the offeror is known as revocation. Till the acceptance of
the offer, the offeror can revoke it. Sec. 5 provides that a proposal may be revoked by the proposer at any
time before the communication of its acceptance is complete. Communication of acceptance as against
the proposer is complete where it is put in the course of transmission to him so as to be out of the reach of
the acceptor. In England, an acceptance can’t be revoked.
Q3: What is the difference between fraud and misinterpretation? What do you understand by mistake?
Distinction between fraud and misrepresentation:
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 no intention to deceive 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 Penal Code and hence not punishable. Fraud, in
certain cases is a punishable offence under Indian Penal 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 cann’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.

5. 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 recognise 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 any law in force in India; but 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 relate to –
(i) existance 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 mistakes 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 erraneous 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 a
matter of fact.” A mistaken notion about the value of a 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. Where the mistake is
mutual and the parties enter into the contract with false assumption and mistake as to the value of the
subject matter is the basis of their agreement, there can’t be an enforceable contract between them.

(v) Title of the subject matter: If a person agrees to purchase property which is unknown to himself and
the seller is his own already, the contract may be void. A mistake as to the title does not invalidate a
contract since Sec. 14 of the Sale of Goods Act imposes an implied condition as to the title of the seller.
Where there is no such warrantee or the buyer purchases his own property the agreement will be void-ab-
vi) A false and fundamental assumption: A false and fundamental assumption going to the root of the
contract would render the contract invalid. Mistake as to the possibility of performance: There may not
be any possibility of the performance of the contract. This impossibility of performance may be physical
or legal impossibility. However, impossibility of performance cannot be included under the head bilateral
mistake as there is Sec. 56 which lays down a positive rule of law regarding responsibility. Unilateral
mistakes: Mistake of one of the parties to a contract as to a matter of fact is known as unilateral mistake.
Sec. 22 provides that a contract is not voidable merely because it was caused by unilateral mistake.
A person is bound by an agreement to which he has expressed a clear assent unless the unilateral mistake
is caused by misrepresentation or fraud. However, where consent to an agreement is given by a party to it
under mistake which prevents the formation of a contract, the unilateral mistake multifies the consent and
the contract becomes void. The following are such exceptional cases:
(a) Mistake as to identity: It is a rule of law that if a person intends to contract with A, B cannot give
himself any right under it. An offer can be accepted only by the person to whom it is offered. If it is
accepted by some one else, there arises a unilateral mistake rendering the contract void. Mistake as to
identity is of two types: (i) where the parties are dating with each other from a distance (ii) where they are
face to face with each other.
b) Mistake as to the character of a written document: If a person signs a document under the mistaken
impression that he is signing a document of a different nature altogether he may escape liability in the
document signed by him, provided he can prove that the nature of the document is different from what it
is supposed to be. One party to a contract may not disclose to the other the nature of the document and
induce the other to sign the same. The other party may sign it presuming it to be a document of different
nature. In such a case, the contract becomes wholly void for want of concent. Mistake of law: A mistake
of law may be of law of land or of foreign law. Mistake as to the law of the land doesnot render the
contract voidable as ‘ignorance of law is no excuse’.

Q4.What are the different ways in which a contract can be discharged? Describe these ways in
When the rights and obligations 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 impossibility or illegality.
4. By lapse of time.
5. By operation of law.
6. By breach of contract.

1. 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 performs 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 fulfills his obligation arising under the
contract within 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 offers to perform his obligation under
the contract, but is unable to do so because the promisee does not accept the performance, it is
called “attempted performance” or “tender”. Thus “tender” is not 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 promisee
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 authorised agent. Tender
made to a stranger is invalid.
7) If there are several joint promisees, 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 creditor accepts the cheque, he cannot afterwards raise an
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

2. Discharge by Mutual Consent or Agreement

Since a contract is created by means of an agreement, it may also be discharged by another
agreement between the same parties. Sections 62 and 63 provide for the following methods of
discharging 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 points 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.
2. 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.
3. 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.
4. 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.
5. 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

3. 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;
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 dischraged. 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:

1. 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.
2. 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.
3. 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.
4. 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:
1. Difficulty of performance: Increased or unexpected difficulty and expense do not, as a rule,
excuse from performance.
2. 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.

3. 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.
4. 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, Section56
would not apply. As such these events also do not discharge a contract.
5. 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.
4. 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.
5. 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.
6. 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 entirity, the promisee may put an end to the contract, unless he has signed, by
words or conduct his acquiscence 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.

Q5 : 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?
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.
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 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 with an intent to discharge him from liability thereon, such party and all
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.

Q6 : 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
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.

Arbitration Agreement: The foundation of arbitration is the arbitration agreement between the parties to
submit to arbitration all or certain disputes which have arisen or which may arise between them. Thus,
the provision of arbitration can be made at the time of entering the contract itself, so that if any dispute
arises in future, the dispute can be referred to arbitrator as per the agreement. It is also possible to refer a
dispute to arbitration after the dispute has arisen. Arbitration agreement may be in the form of an
arbitration clause in a contract or in the form of a separate agreement.
The agreement must be in writing and must be signed by both parties. The arbitration agreement can be
by exchange of letters, document, telex, telegram etc [section 7].
Court must refer the matter to arbitration in some cases: If a party approaches court despite the arbitration
agreement, the other party can raise objection. However, such objection must be raised before submitting
his first statement on the substance of dispute. Such objection must be accompanied by the original
arbitration agreement or its certified copy. On such application the judicial authority shall refer the parties
to arbitration. Since the word used is “shall”, it is mandatory for judicial authority to refer the matter to
arbitration [Section 8]. However, once first statement to court is already made by the opposite party, the
matter has to continue in the court. Once an application is made by other party for referring the matter to
arbitration, the arbitrator can continue with arbitration and even make an arbitral 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)].

(3 credits). Set II
Marks 60

Q1: What do you understand by the Offer of Proposal? What are the essentials of a Valid Offer?
“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
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.

Q2: What are the effects of Minor’s Agreement? State in details.

A minor is a person who has not attained the age of majority. According to Indian Majority Act, 1875 the
age of 18 years is a major. However, if a guardian is appointed by the court or if the minor or his property

is under the supervision of a court of wards, the age of majority is 21 years. Principles governing minor’s
contracts: The law protects minor’s persons, preserves either their rights and estates, excuses their
shortcomings and negligences and assists them in their pleadings, the judges are their counsellors, the
jury are their servants and law is their guardian.

In pursuing the above objective, the law should not cause unnecessary hardship to those who deal with
minors. Sec. II of the Act is silent as regards the legal effects of an agreement entered into by or with a
minor. In Mohari Bibi Vs. Dharmo Das Ghosh case it was held that a minor’s agreement is void-ab-
initio. 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 been followed in India. Where, however, the tort is
independent of contract the mere fact that a contract is also involved will not absolve the minor from
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 promise 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.

Q3: What do you understand by Consideration? What are the rules governing 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 law 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.

Q4: What do you understand by the ‘Negotiable Instruments Act’? What are the different characteristics
of the Negotiable Instruments?
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:

a) 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.
b) 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:
1. 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.
2. 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.
3. 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.
Examples of Negotiable Instruments: The following instruments have been recognized as negotiable
instruments by statute or by usage or custom: (i) Bills of exchange; (ii) Promissory notes; (iii) Cheques;
(iv) Government promissory notes; (v) Treasury bills; (vi) Dividend warrants; (vii) Share warrants; (viii)
Bearer debentures; (ix) Port Trust or Improvement Trust debentures; (x) Hundis; (xi) Railway bonds
payable to bearer, etc. Examples of Non-negotiable Instruments: These are: (i) Money orders; (ii) Postal
orders; (iii) Fixed deposit receipts; (iv) Share certificates; (v) Letters of credit.

Q5: What do you understand by Company? What are the characteristics of a Company? What are the
different types of company?
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
From the above definitions it is clear that a company has a corporate and legal personality. It is an
artificial person and exists only in the eyes of law. It has an independent legal entity, a common seal and
perpetual succession. Sometimes, the term ‘corporation’ (a word derived from the Latin word ‘corpus’
which means body) is also used for a company.
At present the companies in India are incorporated under the Companies Act, 1956.
Characteristics of Company
The various definitions reveal the following essential characteristics of a
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:
Royal or Chartered Companies
Statutory Companies
Registered Companies
Companies Limited by Shares

Companies Limited by guarantee
Unlimited Companies :
Royal or Chartered Companies: These companies are incorporated under a special charter such as the
East India Company, the Bank of England. A chartered company is regulated by the charter incorporating
it and the Companies Act does not apply to it. These companies are created and regulated by the king or
queen in exercise of an ancient prerogative vested in the crown. Such companies are formed in England
and do not exist in India.
Statutory Company: These companies are formed under a special Act of Parliament or the state
legislature e.g. the Reserve Bank of India, the State Bank of India, IFCI, Life Insurance Corporation, Unit
Trust of India. The powers which are to be exercised by such companies are defined by the Acts
constituting them and therefore, they are not required to have a memorandum of association. Although
each statutory company is governed by the provisions of its special Act, the provisions of the Companies
Act, 1956 also apply to them, in so far as the said provisions are not inconsistent with the provisions of
the Special Acts under which these companies are formed.
These companies are mostly public undertakings and are formed with the main object of public utilities
and not for profit. They also need not use the word limited with their names.
Registered Companies: A registered company is one which is formed and registered under the Indian
Companies Act, 1956 or under any earlier Companies Act in force in India. The two basic types of
companies which may be registered under the Act are:
(a) Private Companies; and (b) Public Companies. These companies may
(i)Companies limited by shares;
(ii) Companies limited by guarantee;
(iii) Unlimited companies.

Companies may also be classified as:
(1) Association not for profit having licence under Section 25 of the Act;
(2) Government companies;
(3) Foreign companies;
(4) Holding and Subsidiary companies.
A brief description of each type of company is given below:
1. Private Company: A ‘Private Company’ is defined by Section 3(1) (iii) of the Act as a company which,
by its articles of association: (a) Restricts the right of the members to transfer shares, if any, (b) Limits
the number of its members to fifty, excluding members who are or were in the employment of the
company and (c) Prohibits any invitation to the public to subscribe for any shares in, or debentures of the
company. Section 26 of the Companies Act, provides that a private limited company must necessarily
have articles of its own.
2. Public Company: The Companies Act does not provide any positive definition of a ‘Public Company’.
Section 3(1) (iv) defines it as, “A public company means a company which is not a private company”.
Elaborating the above definition, a ‘Public Company’ is one which:
(i) does not have any restriction on the transfer of shares;
(ii) does not limit the maximum number of members and
(iii) can invite public for the subscription of its shares and debentures.
The minimum number of members required to form a public company is
seven. There are no restrictions with regard to the maximum number of
members in a public company.
3. Companies Limited by Shares: When the liability of the members of a company is limited up to the
unpaid value of their shares, it is called a limited liability company or a company limited by shares. This
liability or unpaid amount may be called up at any time during the life time of the company or at the time
of its winding up. Such a company must have share capital since the extent of liability is determined on
the basis of the face value of shares. This company may be a public company or a private company.
4. Companies Limited by Guarantee: The liability of a member in these companies is limited to the
amount undertaken to be contributed by him at the time of winding up of the company. The amount of
guarantee is mentioned in the memorandum of association. Such companies are formed for non-trading
purposes such as charity, promotion of sports, science, art, culture etc. These companies may or may not
have any share capital. If these companies do not have any share capital, the members can be required to

pay the amount of guarantee undertaken by them and that too in the event of liquidation. But if these
companies have any share capital, the members are liable to pay the amount which remains unpaid on
their shares together with the amount payable under the guarantee. A company limited by guarantee and
having a share capital may be a public company or a private company.
5. Unlimited Companies: An unlimited company is that company which has no limit on the liability of its
members. It means that its members are liable to contribute to the debts of the Company in proportion to
their respective interests. In case a member is unable to contribute his share, his deficiency is shared by
the rest of the members in proportion to their capital in the company. If the assets of such a company are
not sufficient to pay off its liabilities, the private assets of the members can be utilised for this purpose.
Such a company may or may not have share capital. In case, it has a share capital, it can be either a public
company or a private company. It is essential for this type of company to have its Articles of Association
which must state the number of members with which the company is to be registered. However, under
Section 32 of the Act, it is provided that an unlimited company can be converted into a limited company
by passing a special resolution for this purpose.
6. Holding Company & Subsidiary Company: A company which controls another company is known as
‘holding company’ and the company so controlled is termed a ‘subsidiary company’. 7. Government
Company: The Companies Act defines a government company as a company in which not less than 51
percent of the paid up share capital is held by:
(a) The Central Government; or
(b) Any State Government; or
(c) Partly by the Central Government and partly by one or more State
Government. A company which is a subsidiary of a government
company shall be considered a government company.
8. Foreign Companies: Foreign companies are those companies which are incorporated outside India but
which have a place of business within India. Place of business here means an identifiable place where it
carries on business such as office, store house, go down, etc. If 50 percent or more of the paid up share
capital of a foreign company is held by Indian citizens and or by companies incorporated in India
whether singly or jointly, it shall be treated as an Indian company in respect of its business in India. It
means that such a company has to comply with the provisions of the Companies Act as if it were an
Indian Company.

9. Licensed Companies or Associations not for profit: The Companies Act permits the registration
under a licence granted by the Central Government of an association not for profit with limited liability.
However, such a company can not use the word ‘Ltd.’ or the words ‘Pvt. Ltd.’ with its name. This type of
association or company is formed for the promotion of charity, science, commerce, sports, art or culture
etc. Naturally, such associations are not of a commercial nature and do not aim at earning profits.

Q6: What do you understand by Cyber Crime? Explain the importance of the IT Act 2000.
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.
Categories of cyber crimes:
Cyber crimes can be basically divided in to three major categories:
1. Cyber crimes against persons;
2. Cyber crimes against property; and
3. Cyber crimes against government.
1. Cyber crimes against persons: Cyber crimes committed against persons include various crimes like
transmission of child-pornography, harassment of any one with the use of a computer and cyber stalking.
The trafficking, distribution, posting, and dissemination of obscene material including pornography,
indecent exposure, and child pornography constitute the most important cyber crimes known today.
These threaten to undermine the growth of the younger generation and also leave irreparable scars on the
minds of the younger generation, if not controlled.
Similarly, cyber harassment is a distinct cyber crime. Various kinds of harassments can and do occur in
cyberspace, or through the use of cyberspace. Harassment can be sexual, racial, religious, or of any other

nature. Cyber harassment as a crime also brings us to another related area of violation of privacy of
citizens. Violation of privacy of online citizens is a cyber crime of a grave nature. Cyber stalking: The
Internet is a wonderful place to work, play and study. The net is merely a mirror of the real world, and
that means it also contains electronic versions of real life problems. Stalking and harassment are
problems that many persons especially women, are familiar within real life. These problems also occur
on the Internet, in the form of “cyber stalking” or “online harassment”.
2. Cyber crimes against property: The second category of Cyber crimes is Cyber crimes against all forms
of property.
unauthorized computer trespassing through These crimes include cyberspace, computer vandalism, and
transmission of harmful programs and unauthorized possession of computerized information.
3. Cyber crimes against Government: The third category of Cyber crimes is Cyber crimes against
Government. Cyber Terrorism is one distinct kind of crime in this category. The growth of Internet has
shown that the medium of cyberspace is being used by individuals and groups to threaten international
governments as also to terrorize the citizens of a country.
This crime manifests itself into Cyber Terrorism when an individual “cracks” into a government or
military maintained website, for the purpose of perpetuating terror. Since Cyber crime is a newly
emerging field, a great deal of development has to take place in terms of putting into place the relevant
legal mechanism for controlling and preventing cyber crime. The courts in United States of America have
already begun taking cognizance of various kinds of fraud and cyber crimes being perpetrated in
cyberspace. However, much work has to be done in this field. Just as the human mind is ingenious
enough to devise new ways for perpetrating crime, similarly, human ingenuity needs to be canalized into
developing effective legal and regulatory mechanisms to control and prevent cyber crimes.
A criminal mind can assume very powerful manifestations if it is used on a network, given the
reachability and size of the network.

Explain the importance of the IT Act 2000

• Enables Legal recognition to Electronic Transaction / Record

• Facilitates Electronic Communication by means of reliable electronic

• record
• Provides for acceptance of contract expressed by electronic means
• Facilitates Electronic Commerce and Electronic Data interchange.
• Facilitates Electronic Governance.
• Facilitates electronic filing of documents.
• Enables retention of documents in electronic form.
• Where the law requires the signature, digital signature satisfies the
• requirement.
• Ensures uniformity of rules, regulations and standards regarding the
• authentication and integrity of electronic records or documents.
• Facilitates Publication of Official Gazette in the electronic form.
• Enables interception of any message transmitted in the electronic or
• encrypted form.
• Prevents Computer Crime, forged electronic records, international
• alteration of electronic records fraud, forgery or falsification in Electronic
• Commerce and electronic transaction.