Assignment: MBA – SEM III

Subject Code: MB0035

Legal Aspects of Business

Set I
Question1. ‘All contracts are agreements but all agreements are not contracts.’
Discuss.

Answer: ‘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 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 outcome which is preliminary to every contract is the

outcome of offer and acceptance.
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.
c) Contractual Capacity: The parties entering into an agreement must
have legal competence.
d) Lawful Consideration: There must be consideration supporting every
contract. Consideration means something in return for something.
e) Lawful Object: The object or purpose of an agreement must be lawful.
f) Not expressly declared void: The statute should not declare an
agreement void.
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 doesn’t
mention the types of oil to be sold.
i) Intention to create legal obligation: An agreement creating social
obligation can’t be enforced.
j) Legal formalities: 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.

Question2. ‘Not all persons have the capacity to enter into a contract.’ Discuss
this statement.

Answer: ‘Not all persons have the capacity to enter into a contract.’
Section II lays down that – “Every person is competent to contract who is of the
age of majority according to the law to which he is subject and who is of sound
mind and is not disqualified from contracting by any law to which he is subject”.
This section declares following persons to be incompetent:

 Minors: A minor is a person who has not attained the age of majority.
According to the 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.
  Persons of unsound mind: A person is said to be of sound mind for the
purpose of making a contract if at the time when he makes it, he is
capable of understanding it and of forming a rational judgement as to its
effects upon his interests. A person who is usually of sound mind but
occasionally of unsound mind may not make a contract when he is of
unsound mind (Sec. 12).

 Persons disqualified by law to which they’re subject

Question3. Discuss how a contract can be discharged by breach.

Answer: 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 can be of following two types:

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 (b)
Impliedly by the conduct of one of the parties.

2. Actual Breach: 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.

Question4. Discuss the essentials of a contract of guarantee.

Answer: Essentials of Contract of Guarantee:

1. From: A contract of guarantee is just like any other contract which maybe
either oral or in writing.
2. Tripartite Agreement: Every contract of guarantee involves three
agreements between (i) the creditor and principal debtor (ii) The surety
and the creditor, and (iii) the surety and the principal debtor
3. Secondary Liability: The test which is applied to determine whether the
contract is one of guarantee or indemnity is whether the obligation has
been undertaken at the debtor’s request in which case the contract is one
of guarantee. If the obligation is undertaken without any request of the
debtor, the contract is one of indemnity.
4. Existing Liability: It is not necessary that the principal contract must be
in existence at the time the contract of guarantee is made; the original
contract by which the principal debtor undertakes to repay the money to
the creditor may be about to come into existence.
5. The promise to pay must be conditional: In other words, the liability
of the surety should arise only when the principal debtor makes a default.
6. Consideration: Something done for the benefit of the principal debtor is
considered as the consideration for the guarantee to make the contract
valid.
 7. Competency: The principal debtor, surety and creditor must be a person
competent to contract.
8. Consent: There must be free consent; otherwise the contract of
guarantee may become void or voidable.

Question5. How can negotiable instruments be endorsed? Discuss in detail.

Answer: Endorsement: Section 15 defines endorsement as follows: “ When the

maker or holder of a negotiable instrument signs the same, otherwise than as
such maker, for the purpose of negotiation, on the back or face thereof or on a
slip of paper annexed thereto, or so signs for the same purpose a stamped paper
intended to be completed as negotiable instrument, he is said to endorse the
same and is called the endorser.”

Kinds of Endorsements:
 Blank or general endorsement: If the endorser signs his name only
and does not specify the name of the endorsee, the endorsement is said
to be in blank.
 Endorsement in full or special endorsement: If the endorser, in
addition to his signature, also adds a direction to pay the amount
mentioned in the instrument to, or to the order of, a specified person, the
endorsement is said to be in full.
 Partial Endorsement: Section 56 provides that a negotiable instrument
cannot be endorsed for a part of the amount appearing to be due on the
instrument. In other words, a partial endorsement which transfers the
right to receive only a part payment of the amount due on the instrument
is invalid.
 Restrictive Endorsement: An endorsement which, by express words,
prohibits the endorsee from further negotiating the instrument or restricts
the endorsee to deal with the instrument as directed by the endorser is
called “restrictive endorsement”. The endorsee under the restrictive
endorsement gets all the rights of an endorser except the right of further
negotiation.
 Conditional Endorsement: If the endorser of a negotiable instrument,
by express words in the endorsement, makes his liability, dependent on
the happening of a specified event, although such event may never
happen, such endorsement is called a ‘conditional’ endorsement.

Question6. Why do you think an agreement to take a person to moon for a

holiday cannot be a contract?

Answer: An agreement to take a person to moon for a holiday cannot be

a contract on account of the following reasons:

 There should be an agreement of the proposal, i.e., to take a person to

moon for a holiday, from one side and its acceptance by the other which
cannot be achieved in this case.
 The agreement to take a person to moon for a holiday cannot be
enforceable by law.
 The obligations springing from agreements should be legal obligations and
not moral, social or religious obligations as discussed above.