CHAPTER 1

LEGAL ENVIRONMENT OF BUSINESS

DEFINITION
 Poet W.H. Auden said, ‘The law is The Law’ and we tend to know it when
we see it. But it is a question that philosophers and legal theorists have
expended many pages in trying to answer.
 Prof. H.L.A. Hart in his work titled ‘The Concept of Law’ says that “few
questions concerning human society have been asked with such persistence
and answered by serious thinkers in so many diverse, strange and even
paradoxical ways as the question what is law?
LAW – INTRODUCTION

 Set of rules enforced by state to maintain peace and order in the society.
 Helps to provide security and uniformity.
 Law Keeps on changing according to the requirements.
 Ignorance of law not an excuse.
 Law is a rule of external human action enforced by sovereign political
authority- Holland .
 Body of rules, Acts of human governed by rules, sovereign political
authority enforcing law.
WHAT IS LAW FOR?
 Maintenance of public order and safety
Law is seen as the ‘glue’ that holds the fabric of society together. The law
protects us from complete social disorder and anarchy (i.e. lawlessness).
 Protection of individual rights and liberties
This is to ensure that everybody is equal before the law and that nobody is
above the law. Therefore powerful persons are all controlled by the laws in
place and this would mean that all individual rights are protected equally.

 The organization and control of the political sphere

  The law sets out the boundaries of politics by preserving the political
structure and process under which governance is possible. The best example
of the relationship between law and state is a written constitution, although
U.K. does not have a written constitution.
 The regulation of economic activity
Facilitates and encourages national and international trade in goods and
services by setting out legal frameworks by which parties can be bound.
 The regulation of human relationships
It serves to legitimize and control various aspects of interpersonal
relationships such as entering into marriages, distribution of family wealth,
regulation of the parent-child relationship etc.
 The regulation of international relations
The regulation of international relations is also done by a branch of law called
public international law. The creation of states, definition of state boundaries,
diplomacy, international humanitarian law etc.
 The preservation of a moral order
Sometimes law and morals overlap. Some morals are given the force of law.

CLASSIFICATION OF LAW
  Public law and Private law
 Civil law and Criminal law
 National Law and International Law
 Statue law and common Law
 General Law and special Law
PUBLIC LAW
 Public law is important because of the unequal relationship between
the government and the public. The government is the only body that can
make decisions on the rights of individuals and they must act within the law.
 Concerned with legal relation between state and individuals.
 All laws relating to distribution and exercise of power by state.
 Main Aim- Promotion of social objective, protection of collective interest.
PRIVATE LAW
 Part of law that determines relation between individuals in their ordinary
private capacities
 Aim- Protection of individual interest
 Eg- law of contracts
CIVIL LAW
 Deals with disputes with individuals, organization or in which compensation
is rewarded
 Compensation can be claimed
 Main intention- Eliminate or reduce the effect of the wrong thing that the
person has done
 Case filed by Plaintiff and party defending is called defendant
 CRIMINAL LAW
 Law relating to crime only
 Legal Punishment is involved in criminal law
 Main aim- To punish the wrongdoer
 Case is filled by the government. Represented by prosecutor

INTERNATIONAL LAW
  Set of rules norms or standards accepted in relation between nations
 Helps in establishing guidelines for nations to follow on certain domains
(war , trade , Human rights )
 Deals with external relationship of one country with other country
 There is no universally accepted authority to enforce it
 Eg- SAFTA (Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal,
Pakistan and Sri Lanka)
NATIONAL LAW
 Refers to internal legal rules of the country
 Also called as domestics law
 There is an accepted authority to enforce it
 In India Law is passed by the parliament consisting of Rajya sabha (245) and
Lok Sabha (545)
STATUTE LAW
 Written law passed by the legislature
 Courts uses the statutes to take decisions in specific situations
 It may forbid certain act or directs certain act
 It begins as a bill proposed by legislator
 Finally becomes the law when the majority of the parliament members
accept the bill and president signs it.
 COMMON LAW
 Judges are also given powers to make decisions which becomes new rule
 Arises when new decisions are made by judges
 Instructive in nature – ( what has to be done)
 GENERAL LAW AND SPECIAL LAWApplicable to entire state, entire
community, entire category.
 Applicable to a particular State or certain special circumstances.
OTHER CLASSIFICATION
 Natural law
 Customary Law
 Physical law and scientific Law
 Moral Laws ( Ethical Law )
 Conventional Laws
 Constitutional laws
 Administrative law
  Martial law
 Mercantile law
NATURAL JUSTICE
 Technical term for rule against bias and the right towards a fair hearing
 Main aim- To maintain public confidence towards legal system
 3 Main Principles are
 Rule against bias
 Hear the other side
 Reasoned decision
RULE AGAINST BIAS
 The administrative authority who is having a quasi judicial function should
be impartial
 Is said to be biased if:
 He has a pecuniary interest on subject mater – pecuniary bias
 He is an relative, enemy or friend of the parries – Personal Bias
 He has a general interest on subject matter – Official Bias
 Rule against bias is based on 3 Maxims (statement expressing general
truth)
 No man shall be the judge on his own case
 Justice should not only be done but manifestly and undoubtedly seem to be
done
 Judges Should be above suspicion
HEAR THE OTHER SIDE
 Person to whom an action to be taken should be given an opportunity to
defend him
 A decision taken without giving opportunity violates natural justice
 2 important things that are required
 Notice
 Opportunity of hearing
 Notice- Effected party has to be given a notice to show cause about the
proposed action and his explanation must b sought.
 Notice should contain

 Time, Place and nature of hearing proposed to be held

 Must be clear and unambiguous

  Should show in clear terms-the proposed allegations

 Reasonable time to show cause against propped action

 Opportunity of hearing- Must be given an opportunity to be heard

before any adverse action is taken against him

PRINCIPLES OF OPPORTUNITY OF HEARING

 Adjudicating Authority must give full opportunity to the affected
person to produce all the relevant.
 Adjudicating Authority must disclose all evidence or materials placed
before it in the course of proceedings.
 Evidence produced by one party cannot be used against the other
party unless the opportunity to explain is given.
 Adjudicating Authority must not take evidence in the absence of other
party

REASONED DECISION
 The order should contain reason for the decision.
 The parties of the dispute has the right to know the result of the enquiry and
the reason in support of the decision.
 This helps to safeguard against possible injustice.
 This helps the aggrieved party to raise an contention.
 It ensures fairness and also ensures clarity in decision and gives satisfaction
to the party to whom the order is made .

SOURCES OF LAW
 Legislation
 Judicial Precedents
 Customs
 Conventions
LEGISLATIONS
 Laws or Set of Laws passed by the parliament
  “ Declaration of Legal rules by a competitive authority ” by Salmond
 2 Types
 Direct Legislation- Making of a law by express declaration
 Indirect legislation – Making of law or rule in course of some other
transaction
 According to salmond 2 types
 Supreme Legislation –Legislation made by the parliament ( Soverign
Power )
 Subordinate Legislation- Legislation made by any other authority
( power given by parliament)
JUDICIAL PRECEDENT
 Precedent- Anything said or done becoming a rule
 Have high authority in England
 Doctrine (belief )of Stare decisis ( legal principle in Latin )
 Is supreme court bound by its earlier decisions
 Precedents may be
 Authoritative – Judge must follow (supreme court decisions )
 Persuasive – No obligation to follow ( Foreign judgements )
CUSTOMS
 Oldest source of law
 Custom- a rule of action which the people in a locality voluntarily follow
 An expectance of continuing the custom in future may arise
 A valid custom has following characteristics
 Practice of custom should have begun from tie immemorial
 Must be reasonable
 Should be useful and convenient to society.
 Continuously observed without interruption
 People have to voluntarily follow it
 Certain and definite
 Must not be conflict with law of the country
 Should be supported by majority

CONVENTIONS
 Voluntarily agreed by the parties for the regulation of their conduct to each
other
  Eg Partnership deed in case of partnership firm
CONTRACT
 Latin Word Contractum (drawn together)
 Agreement+ Enforceability by law = Contract, An agreement enforceable by
law
 Agreement= Promises forming consideration for each other (offer+
Acceptance )
 A contract is an agreement creating and defining obligation between two or
more persons by which rights are acquired by one or more to acts or
forbearance on the part of others” Sir William Anson
 According to Salmond. “A contract is an agreement creating and defining
obligation between two or more parties

INDIAN CONTRACT ACT 1872
 Law relating to contracts in India
 Came into effect 1 sept 1872
 Formulated basis of principle of contracts established by English courts of
common law and equity
 Except –Contract relating to partnership, sale of good , negotiable
instrument
 Indian contract act consist of
 General Principle of law of contract (Section 1 to 75 )
 Special kinds of contract (section 124 to 248 )

PROPOSAL-PROMISE-CONSIDERATION-
AGREEMENT-ENFORCEABLE BY LAW-CONTRACT
 When proposal is accepted it becomes promise
 Set of promise that forms a consideration to both parties forms a agreement
 Agreement enforceable by law is called contract
ELEMENTS OF VALID CONTRACT
1. There must be two parties- Promisor and Promise
2. There must be an agreement (Offer+ Acceptance)
 3. Intention to create legal relationship
4. Lawful Consideration has to be there
5. The parties must be competent to contract
6. Consensus ad idem or identity of mind.
7. Consensus ad idem means agreement in Latin and in contract law, it
means that there has been a meeting of the minds of all parties involved.
8. There must be free consent of parties
9. Lawful object
10.The agreement must be certain
11.. Performance must not be impossible
12.Legal formalities
13.Agreement must not be declared void
CASES
 Balfour vs Balfour (Cylon –England) –Every monthl 30 pounds
 Lalman Shukla (plaintiff ) vs Gauri Datt ( Defendant )
 Carlill vs Carbollic Smoke ball ( cold ) -1000 pound deposited.
 Vague offer - definite offer since they told if u fell ill while using the
product
 Not serious – deposited 1000 pound in Alliance bank
CLASSIFICATION OF CONTRACTS
 Contracts are classified based on 3 factors
 Legal Effects
 Valid contacts- An agreement enforceable by law
 Void contract – A contract which was valid initially becomes void
because of happening of an event . It is illegal and unenforceable
 Voidable contracts- A contract which is enforceable by one of the
party but not other . It is legal and enforceable
 Unenforceable Contract- Cannot be enforced due to technical defect
 Illegal contracts – Criminal in nature

 Based on Performance
 Unilateral Contract – Only one person has to fulfill his obligation
since the other party has already fulfilled at the time of making
contract
 Bilateral Contract – Obligation from both the parties are pending
 Executed contracts – Both fulfilled the obligation
  Executory Contracts- Obligation not fully completed, a part is pending
 On the Basis of the Formation
 Express Contract – If the terms of the contract are expressly agreed
upon each other
 Tacit Contract – Behavior and attitude of the parties will lead to an
inference that they are willing o enter into a contract
 Quasi Contract – Under certain circumstances law itself creates legal
obligation between parties
OFFER AND ACCEPTANCE
 Contract= Agreement + Enforceable by Law
 Agreement = Offer + Acceptance
st
 1 step of the contract - offer
 Offeror and offeree
 Offer is made by either by words spoken or words written
CHARACTERISTICS OF AN VALID OFFER
 Terms of an offer must be clear and certain ( 100 tons of oil )
 Offer must be communicated to the offeree ( servant and owners son )
 Offer must be made with an intention of creating legal obligation ( not social
contract )
 Invitation to an offer is not an offer ( Catalogue or brochure )
 Special terms associated to the offer must be communicated ( Hidden
conditions )
 An offer my be to an individual or to the public at large ( Adds )
 Offer may be express or implied ( person entering to bus – implied )
 Offer must be made with a view to obtaining the assent of the other party
( not ready to sell )
 An offer may be conditional
 Offer should not contain a term , the non compliance of which would
amount to acceptance
ACCEPTANCE
 Expression of willingness to the offer
 Offer and acceptance are like sides of 2 coin of contract
 Offer when accepts the offer is called acceptor
 Acceptance can be made by spoken or written
 An offer can be accepted by only to the person to whom it is made
ESSENTIALS OF A VALID ACCEPTANCE
 Acceptance must be absolute and unconditional ( cannot introduce condition
)
 Acceptance must be communicated to the offer
 Acceptance must be made in reasonable time
 Acceptance must be communicated in some usual and reasonable manner
 Acceptance may be express or implied ( implied eg : entering Bus )
 Acceptance must be made by the offer.
 Acceptor must be aware of the proposal at the time of the offer
 Acceptance can be made only after the offer is made
 Acceptance must be made before the offer is removed
CONSIDERATION
 Some thing in return
 Consideration is required for giving enforceability to an agreement
 Whether agreement is legal or not can be understood only by analyzing
the consideration involved in the agreement
A promise not supported by a consideration is known as bare promise (nudum
pactum

ESSENTIAL ELEMENTS OF CONSIDERATION

 Consideration must move at the desire of the offer
 Consideration may be past present or future
 Consideration need not be adequate
 consideration must be real not illusionary
 Consideration must be lawful
CAPACITY OF PARTIES
 Ability of a person to enter into a legal contract
 Also can be told as the legal capacity of a person to make a contract with
other parties
 Section 11 of the contract act explains who are the competent to enter into
contracts
 Conditions to be satisfied
 He is of the age of major
 He is of sound mind
  He is not disqualified from any law from contracting
FREE CONSENT
 Consent – permission for something to happen
 Free consent in contracts- Consent between contracting parties upon the
same things in the same sense on free will
 Agree on the same thing
 Agree on the same sense
 Important terms associated with consent

 Coercion-consent obtained by force or under fear caused by threat

of violence. Coercion may be directed even against third party. If
consent is obtained by coercion the contract is void.
 Under Influence – Relationship between the party is such that one
of the party can dominate the will of the other, then contract is void.
 Fraud – Is a willful representation made by a party to a contract with
the intention to deceive the other party. False statement made
knowingly or without believing it to be true
 Misrepresentation- no intention to deceive the other party, the
person who makes statement believes the wrong statement is true

VOID AGREEMENTS
 The Indian Contract Act 1872 under Section 2 (g) defines a void agreement
as “an agreement that is not enforceable by law” • A void agreement
definition would be an agreement or contract with no legal value. Legally, a
void agreement means the contract or agreement is no longer enforceable.
 Two types: Void Never valid and Valid once
AGREEMENTS NEVER VALID
 An agreement that was void from the beginning is said to be void ab-initio.
 • In order to be valid, the agreement must contain all of the elements listed in
the Indian Contract Act of 1872, Section 10.
 • Ab-initio agreements violated the Indian Contract Act from the beginning
and are not valid. Examples of an agreement that would never be valid
include those that:
  1. Cannot be executed, such as a street vendor selling the Brooklyn Bridge
to a tourist
 2. Were made without consideration
 3. Having unlawful consideration or object
 4. Include a party that is a minor, intoxicated, or legally insane at the time
of signing
 5. Uncertain Agreements
 6. Expressly given under the Act
 • Essentially these agreements have no legal effects and in the eyes of the
law they never existed.
AGREEMENTS VALID ONCE
 A void contract is a contract or agreement that ceases to have a legal effect.
 • Unlike an ab-initio, these contracts did at one point contain the elements
listed in the Indian Contract Act, and therefore at least initially are
considered valid legal agreements binding to both parties. A few ways a
contract could become legally void are:
 1. The contract becomes impossible to fulfill due to external circumstances.
 2. Laws change since the initial agreement, and the agreement now requires
breaking the law .
 3. Fulfilling the contract will result in something unlawful.
 4. The contract was contingent on circumstances that cannot come to pass.
 5. One party failed to disclose key information or provided inaccurate
information •
 Technically speaking, a fulfilled contract is also a void contract, as the
parties involved are no longer bound by the contract and therefore it has no
legal effect
DISCHARGE OF CONTRACTS
 Means Termination of contractual relationship between the parties when the
parties preform the task or when the contract becomes void
 A contract is said to be discharged when the parties are freed from the task
of performing
 Modes of discharge:
By performance of contract
 Actual performance
 Attempted performance
  By agreement –since contracts are formed by agreement it can be
discharged by another agreement
 By novation ( substitution) – One contract is substituted by
another
 By alteration – Change in one or more terms of the contract by
mutual agreement
 By recession –Cancelation of the contract by both
 By remission – Acceptance of lesser performance than what
was actually due
 Discharge by lapse of time- Every contract must be performed within
the specific period and is called period of limitation (eg Promissory
note 3 years)
 Discharge by operation of law- Law itself discharge the contract in the
following circumstances
 Death- Contract which is based on personal skills
 By insolvency
 By breach
PERFORMANCE OF CONTRACT
 A contract creates legal obligations. Performance of contract means carrying
out these legal obligations
 Every person who is bound by an obligation must be ready to perform
 At the time which he has promised
 At the place which he has promised
 And in the manner he has promised to do
 When the terms of the contract are fulfilled by the respective parties to
the contract . Performance of the contract takes place
 Who may perform the contract

 Promisor – If personal skill involved he alone has to

 Agent – Personal skill of promisor not necessary.

 Legal representative – if promisor dies before performance , his legal

representative son or daughter who inherit his property
BREACH OF CONTRACT
 Parties of contract are bound to perform their respective obligation. When
one of the parties fails to perform his part, he is said to have committed
breach
 Right of action – Remedy for the injured party
Remedies of Breach of contract are
 Rescission of contract
 Restitution
 Suit for specific performance
 Suit for injection
 Suit upon Quantum merit
 Rescission
 When all or some of the terms of the contract are cancelled
rescission takes place
 When a contract is broken by one party, the other party can refuse
further performance
  By doing recession contracts can be discharged
 A person who rightfully rescinds a contract is entitled to
compensation for any damage
 Eg- A promises to supply goods to but did not supply

 Restitution
 Return of benefits received by one party from other party in a void
contract

 Either when it becomes void or is discovered as void

 Eg agreement of selling a car which is already destroyed by fire

 Specific Performance
 Actual performance of the particular contract as per agreement
 Granted in those cases where compensation will not be a adequate
remedy
 Done when aggrieved party will not be satisfied by mere damages
 Eg sale of a land
 Suit for injection
 Preventing a person from doing a certain act.
 Suit upon Quantum Merit
 As much as earned or as much as merited
 When one party has done some work in a contract and the other
party repudiates the contract or some events happened which
made further performance impossible then the one who has
performed work can claim his benefits

QUASI CONTRACT
  Quasi means almost or apparently but not really & Contract means an
agreement enforceable by law.
 * A Quasi contract is not a contract at all , because the essential elements for
the formation of a contract are absent.
 It is an obligation imposed by law upon a person for the benefit of another
even in the absence of a contract. It is based on principle of equity.
Eg :- In case of plumber who accidently install a sprinkler system in the lawn of
the wrong house. The owner of the house had learned the previous day that his
neighbour was getting new sprinkler . That morning, he sees the plumber is
installing them in his own lawn . Pleased at the mistake , he says nothing, and then
refuses to pay when the plumber hands him the bill now it’s comes under quasi
contract because the man already knew that the sprinkler were being installed
mistakenly ,so court would may him pay because of quasi contract

SALIENT FEATURES OF QUASI CONTRACTUAL RIGHTS:

 A quasi contract is not a real contract.
 It is not based upon the offer and acceptance rule.
 It does not arise from any formal agreement but it is imposed by law.
 It is a right which is available not against the entire world, but against
particular person(s) only.
TYPES OF QUASI CONTRACT
 Supply of Necessaries to Incapable Person (Section 68)
If a person incapable of entering into a contract, or anyone whom he is legally
bound to support, is supplied by another person with necessaries, suited to his
condition in life, the person who has furnished such supplies is entitled to be
reimbursed from the property of such incapable person. Example: A supplies
B, a lunatic, with necessaries suitable to his condition in life. A is entitled to
be reimbursed from B’s property.
Payment by Interested Person (Section 69):
A person, who is interested in payment of money, which another is bound by
law to pay, and who therefore, pays it, is entitled to be reimbursed by the
other. Example: A holds land in Bengal on a lease. B is the owner of the land.
The land revenue payable by B to the government is in arrears and therefore
the government advertised the land for sale to recover the dues. To prevent the
 sale of land A pays the arrears of land revenue. In this case B is bound to
reimburse the amount to A.
 3. Payment for Non-gratuitous act (Section 70):
Where a person lawfully does anything for another person or delivers
anything to him not intending to do so gratuitously and such other person
enjoys the benefit thereof, the later is bound to make compensation to the
former in respect of, or, to restore the thing so done or delivered. Example: A,
a tradesman, leaves his good at B’s house by mistake. B treats the goods as his
own and uses them. B is bound to pay for the goods.
 4. Liability of Finder of Goods (Section 71):
 A person who finds the goods belonging to another, and takes them into his
custody is subject to same responsibility as a bailee. He must take
reasonable care of the goods and keep them in sound condition and try to
find out its true owner.
  5. Payment of Delivery by Mistake or under
Coercion(Section 72): A person to whom money has been paid or
anything delivered by mistake or under coercion must repay or return it.
Example: A and B jointly owe Rs.5,000 to C. A alone pays this amount to C.
B not knowing this again pays Rs.5,000 to C. In this case C is bound to
repay Rs.5,000 to B as this amount is paid to him by mistake.