Business Environment and Law

Presented by :-
Gagandeep Singh Sabharwal
 Topics to be covered
 Legalityof Object
 Performance and Discharge of contract
 Breach of Contract and remedies
 Legality of object
 
The object or consideration of an agreement must be lawful , in order to make the agreement a
valid contract , for , Section 10 lays down that all agreements are contracts if made for
lawful consideration and with a lawful object. Section 23 declares what kinds of
considerations and objects are not lawful. If the object or consideration is unlawful f r one
or the other of the reasons mentioned in section 23, the agreement is “ illegal ” and
therefore void ( Section 23).
 
The use of the word “illegal” is somewhat misnomering here. It usually connotes a
punishable offence , but the parties to a so called “illegal agreement” unless it is expressly
punishable by law or amounts to a criminal conspiracy , are not liable to punishment. They
have committed no offence. They have merely concluded a transaction that will be spurned
by the courts.
 
The words ‘object’ and ‘consideration’ used in Section 23 are not synonymous. The word
‘object’ here means ‘purpose or design’. Thus , where a person , while in insolvent
circumstances , transferred his property to one of his creditors with the object of
defrauding his other creditors , it was held that the agreement was void and the transfer
was inoperative. The court observed that although the consideration of the contract was
lawful but the object was unlawful because the purpose of the parties was to defeat the
provisions of the Insolvency Law
 What What Considerations and Objects are Unlawful ?
According to section 23, every agreement of which the object or consideration is unlawful is void , and the
consideration or the object of an agreement is unlawful in the following cases :  
 If it is forbidden by law. This clause refers to agreements which are declared illegal by law. If the
consideration or object for a promise is such as is forbidden by law, the agreement is void. An act or an
undertaking is forbidden by law:
 When it is punishable by the criminal law of the country , or
 When it is prohibited by special legislation or regulations made by a competent authority under powers
derived from the legislature.
 If it is of such a nature that, if permitted, it would defeat the provisions of any law.
 This clause refers to cases where the object or consideration of an agreement is of such a nature that, though
not directly forbidden by law , it would indirectly lend to a violation of law , whether enacted or otherwise
( e.g., Hindu and Mohammedan Laws ). Such an agreement is also void.
  If it is fraudlent. An agreement whose object or consideration is to defraud others, is unlawful and hence
void.
 If it involves or implies injury to the person or property of another. If the object or consideration of an
agreement is injury to the person or property of another , it is void, being an unlawful agreement.
  If the court regards it as immoral. An agreement whose object or consideration is immoral , is illegal and
therefore void. The scope of the word ‘ immoral ‘ here extends to the following :
  Sexual immorality e.g., illicit cohabitation or concubinage or prostitution .
 Furtherance of sexual immorality .
 Interference with marital relations.
 Such acts which are against good public morals.
 If the court regards it as ‘opposed to public policy’. An agreement is unlawful if the court regards it as ‘opposed
to public policy’. It is not possible to give a precise or exact definition of the term ‘public policy’. It is rather an
elastic term and its connotation may vary with the social structure of the state. Public policy is that principle of law
which holds that no citizen can lawfully do that which is injurious to the public or is against the interests of the
society or the State. Broadly speaking, an agreement which tends to promote corruption or injustice or immorality is
said to be opposed to public policy. It is interesting to note that ‘opposed to public policy’ and ‘immoral’ , both are
very much similar in nature because what is ‘immoral’ must be ‘opposed to public policy’ and reverse is also true in
most cases. 
Public policy is an illusive concept. It has been described as an ‘untrustworthy guide’ , ‘unruly horse’ , etc., and
therefore , the doctrine of public policy is generally governed by precedents. So the courts are generally disinclined
to invent new heads of public policy.
On the basis of decided cases on the subject the following agreements have been held to be against public policy: 
 Trading with an alien enemy. It is now fully established that trading with an alien enemy ( i;e., a citizen of the other
country at war with the State) is against public policy in so far as it tends to aid the economy of the enemy country.
Such agreements are therefore illegal, unless made with the special permission of Government. It is to be noted that
an agreement to promote hostile action in a friendly state is also illegal and void as being opposed to public policy.
 Agreements interfering with the court of justice. An agreement the object of which is to interfere with the course of
justice , e;g., an agreement not to disclose misconduct to the other interested party or an agreement to influence a
judge to induce him to decide the case in a party’s favour, is obviously opposed to public policy and is void. But an
agreement to refer present or future disputes o arbitration is a valid agreement.
 Agreements for stifling criminal prosecution. It is well settled law that if a person has committed a crime , he must
be punished . hence any agreement which seeks to prevent the prosecution of a guilty party is opposed to public
policy and is void, for “ no one can be allowed to make a trade of a felony .”
 Maintenance and Champerty. ‘Maintenance’ may be defined as an agreement whereby a stranger promises to help
another person by money or otherwise in litigation in which that third person has himself no legal interest.
‘Champerty’ is an agreement whereby a person agrees to assist another in litigation in exchange of a promise to
hand over a portion of the proceeds of the action.
 Traffic in public offices. Agreements for sale or transfer of public offices or for appointments to public offices in
consideration of money are illegal, being opposed to public policy. Such agreements , if enforced , would lead to
inefficiency and corruption in public life.
 Agreements creating an interest opposed to duty. An agreement which tends to create a conflict between
interest and duty is illegal and void on the ground that it is opposed to public policy.
 Agreements unduly restraining personal liberty. Agreements which unduly restrict personal freedom have
been held to be void and illegal as being against public policy .
 Agreements interfering with parental duties. A father , and in his absence the mother , is the legal guardian
of his/her minor child. The authority of a guardian with good public morals. If , therefore, the right of
guardianship is bartered away by any agreement which is inconsistent with the duties arising out of such
custody , such an agreement shall be void on the ground of public policy.
 Marriage brokerage agreements. These are agreements for the payment of money in consideration of
procuring for another in marriage a husband or a wife. Such agreements are illegal and void being contrary
to public policy. Thus, when a ‘Prohit’ was promised Rs 200 in consideration of procuring a wife for the
defendant , the agreement was held invalid and the money could not be recovered.
 Miscellaneous cases. The following agreements have also been held against public policy:
 Agreements “tending to create monopolies” are illegal and void.
 Agreements to defraud revenue authorities are void and illegal. For ex , an agreement by which an
employee was to get , in addition to salary, an expense allowance grossly in excess of the expenses of the
expenses actually incurred by him , was held illegal because the provision as to expenses was contrary to
public policy being merely a device to defraud the income tax authorities.
 Agreements whereby money is given to induce persons to give evidences in a civil court are void because
every one is expected to perform his legal duty.

Effect of Illegal Agreements on collateral Transactions

 As we all know that the Illegal agreements are not enforceable as between the immediate parties. But an
‘illegal agreement’ has this further effect that other transactions which are incidental or collateral to it are
also tainted with illegality and therefore are not enforceable provided the parties to the collateral
transaction had the knowledge of the illegal or immoral design of the main or primary agreement.
 No restitution is allowed. Parties to an illegal agreement cannot get any help from a court of law , for , “
no polluted hand shall touch the pure fountain of justice.”. So, nothing can be recovered under an illegal
agreement and if something has been paid it cannot be recovered back , whether the illegal object has been
carried out or has been not carried is immaterial.
 Performance of Contracts
Performance of contract means fulfilling of their perspective of their respective legal obligation created
under the contract by both the promisor and the promisee. When a contract is duly performed by both
the parties , the contract comes to an happy ending and nothing more remains. 
Who can demand Performance?
It is only the promisee who can demand performance of the promise under a contract, for, general rule is
that ‘”a person cannot acquire rights under a contract to which he is not a party”.
In case of the death of the promisee, his legal representatives are entitled to enforce the performance of
contract against the promisor.
By whom Contracts must be Performed?
 By the promisor himself. In case of a contract involving personal skills , taste or credit like to paint
a picture.
 By an agent. In case of a contract of impersonal nature like contract of sale of goods or a contract to
lend a sum of money.
 By the legal representatives. In case of the death of the promisor before performance , the liability
of performance falls on his legal representatives, unless a contrary intention appears from the
contract. But in case of personal skills this cant be fulfilled.
 By a third party. Section 41 lays down that if a promisee accepts a performance of the promise from
a third person , he cannot afterwards enforce it against the promisor. Thus , when a promisee accepted
lesser amount from a third party in full satisfaction of his claim , it was held that he cannot enforce
the promise against the promisor.
 Order of performance of reciprocal promises
Promises which form the consideration of each other are called as reciprocal contracts
or mutual promises.
For ex.. A buys goods from B and pays in return a price for the goods. In these cases
there is an obligation on each party to perform his own promises and to accept
performance of other’s promise.
 Time and place for performance
Where prescribed by the promisee: Then it must be done at the specified time and place.

Where not prescribed : then it should be done within a reasonable period of time and at a
proper place.

If these contracts are not completed within the above conditions then the either party can sue
the promising party for the breach of contract.
When there is no time mentioned in the contract then it does not become void and the other
party will have to accept the delayed performance and also he cannot claim for a
compensation later on for the delayed performance.

Also a special case when time is the essence of the contract , the parties need to fulfill the
contract within a period of time like delivery of goods etc and these things need to be
clarified at the time of entering into the contract and judge that the intention of the parties
are time depedent or not. For ex , in case of land purchasing time is not a constraint as
their market price does not fluctuate rapidly but in case of gold and buying shares time is
very important due to market fluctautions.
 Appropriation of payments
Section 59 and 61 of the Contract Act these rules must be followed
(a) Debtors instructions to be followed . When a debtor has several debts to the same creditor
then his instructions should be followed
(b) His implied intention must be followed. According to the circumstances the intention is to
be decided
(c) By the creditor. If there is no instruction and the implied intentions then creditor has the
option to apply the payment to any debt due to him.
(d) By law. If the debts are of same value then the payment recd. Should be applied
proportionately else it should be based on time.
(e) When both principal and interest due. In this case firstly interest shall be
applied….followed by principal.
 Contracts which need not be performed
If parties agree to a alteration , rescission then the original contract need not be performed
due to its substitution.
If parties to a contract agree to dispense with or remit performance of promise then the
original contract stands discharged.
When a person at whose option a contract is voidable rescinds it the other party thereto need
not to perform his promise.
If any promisee neglects or refuses to afford the reasonable facilities for the performance of
his promise , the promisor is excused for the non – performance of the contract.
 Performance and Breach

 If a contractual duty has not been discharged or excused, the contracting

party owes an absolute duty (covenant) to perform the duty.

 Breach of contract – If a contracting party fails to perform an absolute

duty owed under a contract.
Types of Performance

Complete Performance

Substantial Performance

Inferior Performance
 Summary: Types of Performance

Type of Performance Legal Consequence

Complete Performance The contract is discharged.

Substantial Performance The non-breaching party may recover damages caused by

(minor breach) the breach.
Inferior Performance The non-breaching party may either:
(material breach) (1) Rescind the contract and recover restitution, or
(2) Affirm the contract and recover damages.
 Anticipatory Breach

A breach that occurs when one contracting party informs the other that he
or she will not perform his or her contractual duties when due.
 Monetary Damages

 A non-breaching party may recover monetary damages from a breaching

party.

 Monetary damages are available whether the breach was minor or material.

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 Types of Monetary Damages

Compensatory Consequential
Damages Damages

Nominal Damages Liquidated

Damages

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 Compensatory Damages

 Award of money intended to compensate a non-breaching

party for the loss of the bargain.
 They place the non-breaching party in the same position as if
the contract had been fully performed by restoring the
“benefit of the bargain.”

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 Compensatory Damages (continued)

 The amount of that will be awarded for breach of contract

depends on:
◦ The type of contract involved, and
◦ Which party breached the contract.
 Special types of contracts:

◦ Sale of Goods
◦ Construction Contracts
◦ Employment contracts

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 Consequential Damages

 Foreseeable damages that arise from circumstances outside

the contract.
 To be liable for these damages,

◦ The breaching party must know or have reason to know

that the breach will cause special damages to the other
party.

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 Liquidated Damages

 Damages to which parties to a contract agree in advance if

the contract is breached.
 To be lawful,

◦ The actual damages must be difficult or impracticable to

determine, and
◦ The liquidated amount must be reasonable in the
circumstances.

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 Liquidated Damages (continued)

 Manybusinesses include liquidated damages in their

commercial contracts, which help to:
◦ Provide certainty,
◦ Avoid lawsuits, and
◦ Provide an incentive to enter into contracts.

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 Nominal Damages

 Damages awarded when the non-breaching party sues the

breaching party even though no financial loss has resulted
from the breach.
 Usually awarded in a small amount such as $1.
 Cases involving nominal damages are usually brought on
“principle.”

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 Mitigation of Damages
 A non-breaching party is under a legal duty to avoid or reduce
damages caused by a breach of contract.

 The extent of mitigation depends on the type contract involved.

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 Enforcement of Remedies

 Ifthe breaching party refuses to pay the court ordered

judgment, the court may issue:
◦ Writ of Attachment
◦ Writ of Garnishment

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Enforcement of Remedies (continued)
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 Rescission and Restitution

Rescission
Restitution
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
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 Equitable Remedies

 Equitable remedies are available if there has been a breach of

contract that cannot be adequately compensated by a legal
remedy.
 They are also available to prevent unjust enrichment.

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 Types of Equitable Remedies (1 of 2)

Type of Equitable Remedy Description

Specific Performance Court orders the breaching party to perform the
acts promised in the contract.
The subject matter of the contract must be
unique.
Reformation Court rewrites a contract to express the parties’
true intentions.
Usually used to correct clerical errors.

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 Types of Equitable Remedies (2 of 2)

Type of Equitable Remedy Description

Quasi Contract Permits the recovery of damages for breach of an
implied-in-law contract where no actual contract
exists between the parties.
Only the reasonable value of the services or
materials may be recovered.
Injunction Court order that prohibits a party from doing a
certain act.
Available in contract actions only in limited
circumstances.

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Intentional Interference with Contractual Relations

 A tort that arises when a third party induces a contracting

party to breach the contract with another party.
 The following elements must be shown:

◦ A valid, enforceable contract between the contracting parties.

◦ Third-party knowledge of this contract.
◦ Third-party inducement to breach the contract.

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Breach of the Implied Covenant of Good Faith and Fair
Dealing
 Under this covenant:
◦ The parties to a contract are held to the express terms of the
contract, and
◦ They are also required to act in good faith and deal fairly in
all respects in obtaining the contract.
 A breach of this implied covenant is a tort for which tort
damages are recoverable.

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 Punitive Damages

 Damages that are awarded to:

◦ Punish the defendant
◦ Deter the defendant from similar conduct in the future
◦ Set an example for others
 Generally, punitive damages are not recoverable for breach
of contract.

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