Learn The Truth About Overview To Indian Contract Act 1872 In The Next 60 Seconds

The Law of Contract is a very important part of the mercantile or commercial law in India. It mostly affects people from trade and commerce and industry.

Introduction To Indian Contract Act, 1872

The Indian Contract Act, 1872 is the law which governs contracts in India. It entered into force in the year 1872. It is enforceable in all the states except the State of Jammu and Kashmir. It determines the situations in which the promises made by the parties to a contract shall be legally binding on them.

Provisions

• General Principles of Law and Contract  —– Section 1 – 75
• Contracts relating to the Sale of Goods ——– Section 76 to 129
• Special Contracts ——- Section 125 to 238
• Contracts relating to Partnership —— Section 239 to 266

Previously, the Indian Contract Act, 1872 contained provisions relating to Sale of Goods (Movable Property) and Partnership. But now these two provisions have been removed from the Act and are placed in two separate acts known as the Sale of Goods Act, 1930 and the Indian Partnership Act, 1932. So at present, the Indian Contract Act includes the General Principles of Contract and Special Contracts only.

The Rights are available under the Indian Contract Act –

There are two kinds of rights, one is Right in rem, and the other is Right in personam.

The Indian Contract Act, 1872 provides right in personam to the parties who have bound their promises in a contract. Thus, the parties in such a situation can only enforce their contractual rights against each other only and not against the world at large.

Example – X and Y enter into a contract for delivering ten books on a specified date. If Y fails to deliver the same to X, then X can sue only Y and not anybody else. The rest of the world is concerned with this contract.

Read Also: Validity of Stamp Papers

Definition of a Contract –

Section 2(h) of the Indian Contract Act defines the term contract as “an agreement enforceable by law is a contract.” So, a contract is an agreement plus legal enforceability.

Important Terminologies –

• Agreement – Section 2(e) defines agreement. An agreement results when two minds meet upon a common purpose. They agree to the same thing in the same sense. Section 2(e) defines the term agreement as “every promise and every set of promise, forming the consideration for each other.” An agreement only happens when there is an offer by one party and acceptance by the other party. Therefore, offer + acceptance = agreement.
• Offer – Section 2(a) defines the term offer or proposal as, “When one party signifies to another his willingness to do or to abstain from doing anything, to obtain the assent of that other to such act or abstinence, he is said to propose.” Offer is the first step for agreeing. An offer can be made to a person or the public at large, known as general offers.
• Acceptance – When the person to whom the offer is made signifies his assent for the same, then the offer is said to be accepted. Section 2(b) defines the same.
• Promise –  Offer + Acceptance = Promise. So, when the offer is accepted, it becomes a promise. Section 2(b) defines the same.
• Consideration – Consideration refers to getting “something in return.” In India, consideration can be past, present or future. A contract without consideration is void. The consideration must be lawful and real, and it need not be adequate.
• Free Consent – A contract can only be made when there is free consent between the parties. A contract without free consent is voidable, and a contract without consent is void. A contract has to be free of coercion, undue influence, fraud, misrepresentation or mistake.
• Contract of Indemnity – A contract of indemnity is a contract wherein, one party promises to protect the other party from causing loss to him by the conduct of the promisor himself, or by the conduct of any other person.
• Bailment –  Bailment refers to transactions whereby one person delivers goods to the other for some purpose based upon a contract that they are when the purpose is accomplished to be returned or otherwise disposed of according to the directions of the person delivering them.

Read Also: Non-Compete Clause in Employment Agreement

Classification of Contracts –

Contracts can be classified into three broad branches –

1. Based on Enforceability –

•  Contract
• Voidable agreement
• Void Agreement
• Agreement
• Illegal agreement
• Voidable contract

2. Based on formation –

• Express contract
• Tacit contract
• Implied/Quasi contract

3. Based on performance –

• Executed contract
• Executory contract  —- a) Unilateral contract             b) Bilateral contract

Remedies for Breach of Contract –

In case of a breach of contract, the injured party has the option to –

• Rescind the contract and refuse further performance of the same
• Sue for damages
• Sue for specific performance
• Sue for an injunction
• Sue on quantum meruit

CONCLUSION –

Every man in his day to day life makes contracts. Man’s contract making ability increases with increasing trade, commerce and industry in modern society. The conferment and protection of the law enable people to strike the best bargain for the contract making purpose. People are permitted to regulate and define their relations in the best possible manner they choose. In India, these general principles are statutorily presented in the Indian Contract Act, 1872. This helps contracts to function legitimately and also provide remedies to the ones affected by it. Therefore, the Indian Contract Act, 1872, is undoubtedly one of the most important statutes in India.

Concept Of Lifting Of Corporate Veil Has The Answer To Everything

WHAT ARE ARTICLES OF ASSOCIATION

Articles of Association (AOA) is the Company’s essential Rule Book which contains the set of guidelines and regulations necessary for every Company to function. The document is set to define the Company’s purpose as an organization and the tasks it is supposed to accomplish internally; ie. handling official financial records; handling company meetings along with defining the role and the powers of the Directors of the Company. The Articles also manage and maintain the rights of the shareholders as well as their relationship with the Directors. Companies who need mandatory Articles of Association are Unlimited Companies, Companies Limited by Guarantee and Private Companies Limited by Shares.

CONTENTS OF ARTICLES OF ASSOCIATION

It is important to pay extra attention to the Contents of the Articles of Association (AOA) at the initial phase since they are important for the ability of the Company to make profits and keep their shareholders satisfied. It is also important to make sure that they are as per the Company’s interests because amending the Articles later require a two-thirds majority of the votes at the general meeting of shareholders.

The following are the contents that a Company’s Articles of Association (AOA) usually possesses:

DIRECTORS

The AOA defines the guidelines of the Directors’ appointment; their qualifications for appointment; their remuneration once appointed and the powers of the Board of Directors in the Company meetings.

GENERAL MEETINGS

The AOA provides the basic framework of all the General Meetings to be conducted as well as all the provisions that are related to the functioning of the General Meetings in any manner.

ACCOUNTING AND AUDITING

The provisions in AOA will define the guidelines subjected to the Auditing of the accounting of the Company.

SHAREHOLDERS

The AOA streamlines the sub-division of the Share capital of the Company including the rights of the Shareholders and the relationship of these rights with other elements of the Company. The shareholders have to pay the whole or part of the remaining unpaid amount on each share purchased on the Company’s demand; i.e Call on Shares.

LIEN OF SHARES

The Company is eligible to retain the Shares of any member of the Company in case they fail to pay the debt to the Company. The member will not be allowed to transfer their shares unless they pay their debt.

TRANSFER AND TRANSMISSION OF SHARES

The AOA defines the procedure during the process of transfer of shares between the transferee and the shareholders. Transmission of shares comes into effect with death, insolvency, marriage, succession, etc. It is also a part of AOA despite being involuntary.

FORFEITURE AND SURRENDER OF SHARES

The AOA provides for the rules of forfeiture of shares if the member is not able to meet the purchase payments like paying call money or any allotment on the Shares. Shareholders may choose to surrender or voluntary return their shares to the Company pertaining to the guidelines of the AOA.

CONVERSION OF SHARES IN STOCK

The Company can pass an ordinary resolution in a General Meeting to convert their shares into stock. The management of the decision and resolution passed should be in accordance with the AOA.

ISSUING SHARE WARRANT

Public Limited Companies are eligible to issue a share warrant staying within the provisions mentioned in AOA. A share warrant is a bearer document which is related to the title of shares issued by the Company.

ALTERATION OF CAPITAL

Similar to the conversion of Shares into Stock, AOA provides the rules of the procedure to alter capital as per the Company’s interests. The Company can decide to increase, decrease or rearrange the Capital.

VOTING RIGHTS

The AOA notes down the specific Company matters which calls for voting by members as well as the procedure of voting whether by a poll or through proxies.

DIVIDENDS AND RESERVES

The AOA also provides the distribution of dividends among the Shareholders of the Company.

WINDING UP

Winding up of the Company means the liquidation of all the assets of the Company to pay its debt. The remaining monies left after the payment of all debt and expenses are distributed among the shareholders of the Company. The AOA also provides the provisions and procedure related to the Winding Up of the Company and has to proceed in accordance with the AOA.

ALTERING ARTICLES OF ASSOCIATION

SPECIAL RESOLUTION AND IT’S PROVISIONS

A Company can alter its Association of Articles if the need arises. The Company has to pass a Special Resolution (a 2/3rd majority of members present in the General Meeting) in order to alter its provisions. It is also important to remember that the Court does not have the power to alter the AOA. These are the specific guidelines that a company has to adhere to achieve a successful alteration:

1. The copy of Special Resolution has to be filed with the Registrar within 30 Days of its Passing.
2. The proposed should not go against the provisions of the Companies Act or the established Memorandum of Association (MOA).i.e. a document that is prepared during the formation of a Company and defines the Company’s relationships with the shareholders.
3. The Company should not propose any illegal activity.
4. The alteration proposed cannot be bonafide for the benefit of the Company.
5. The alteration should not increase the liability of the existing members in any manner.

ENTRENCHMENT CLAUSE

The Company can choose to include Entrenchment Provisions in their Articles of Association under Section 5(3) Of Companies Act, 2013.  An Entrenchment Clause refers to the effect that a Company may choose to apply to its certain provisions. These provisions, then, can be altered only after meeting specified conditions that are more restrictive than the normal passing of a 2/3rd majority special resolution. The Entrenchment Clause renders the provision difficult or impossible to alter.

Under Section 5(4) and Section (5), Companies Act,2013, the Company can choose to include the Entrenchment Clause in the AOA during the incorporation of the Company, or through an amendment to the AOA of the Company later.

DIFFERENCE BETWEEN MEMORANDUM OF ASSOCIATION (MOA) AND ARTICLES OF ASSOCIATION (AOA)

Memorandum of Association is a document that consists of all the data essential for the incorporation of the Company. On the contrary, the Articles of Association are provisions and rules set up the regulate and govern the Company. The Company has to register the MOA at the time of the incorporation of the Company.  The Company is not bound to register the AOA during the time of incorporation.

The Memorandum of Association restraints the powers of the organization while the Articles of Association only demonstrate the rights, obligations that the members of the organization are responsible to follow and adhere.

The Articles of Association is subordinate to the Memorandum which holds the Supreme status in the hierarchy of the documents of the Company while

The Memorandum of Association must contain six clauses in total but the Articles of Association can have clauses according to the decision of the Company, given it does not go against the Companies Act, 2013.

The Memorandum specifies the objectives of the Company while the Articles of Association specifies the rules through which the objectives are to be fulfilled by the Company.

Any provisions of the AOA that goes against the Memorandum is rendered invalid and the Memorandum of Association controls the Articles. 

IMPORTANCE OF THE ARTICLES OF ASSOCIATION

The Articles of Association is one of the most important documents in the organization.

The importance of the AOA rests in the important guidelines it provides for handling financial affairs of the Company, managing the powers and responsibilities of the Directors and their relationship with the Shareholders of the Company.

The Articles details the voting rights of the members as well as the procedure of the voting. The Articles of Association protects the interests of the investors and the Shareholders. It keeps the interests of the Directors in any competing business and prevents from any conflict of interest if the Articles specifies that in its provisions.

In conclusion, the Articles of Association are important for the welfare of the Company as an organization and for its smooth functioning in fulfilling its objectives as an organization.

Original blog is published at LEGODESK  please read the blog for more content and for legal help

Legodesk is a legal practice management tool using which lawyers can manage their matters, win new clients and do their legal research all in one platform. Legodesk’s unique case management features helps to keep your legal practice organized and accessible everywhere.