CA Foundation · Business Laws

Indian Regulatory Framework: formula sheet

Full chapter guide

Key formulas

Agreement: Agreement = Offer (proposal) + Acceptance (promise); Every promise and every set of promises forming the consideration for each other is an agreement (S.2(e)).
Contract: Contract = Agreement + Enforceability by law; Every contract is an agreement, but not every agreement is a contract.
Essentials of a valid contract: Offer and acceptance + intention to create legal relations + lawful consideration + capacity + free consent + lawful object + not declared void + certainty + possibility of performance + legal formalities where required; If any one essential is missing, the agreement is not a valid contract.
Void agreement: Void agreement = not enforceable by law from the start; It creates no legal rights for either party (S.2(g)).
Voidable contract: Voidable contract = enforceable at the option of the aggrieved party; It stays valid until that party rejects it. Typical causes are coercion, undue influence, fraud and misrepresentation (S.2(i)).
Void contract: Void contract = enforceable when made, later becomes void; An example is a contract that later becomes impossible to perform or unlawful (S.2(j), S.56).
Unenforceable contract: Unenforceable contract = valid in substance but barred by a technical defect; Examples are missing formalities or a time-barred claim. This is a textbook label, not defined in the Act.
Section 56: impossibility: Act impossible in itself = agreement void from the start. Act becomes impossible or unlawful later = contract void when the act becomes impossible; This is the base of the doctrine of frustration. Hardship or higher cost is not impossibility. A promisor who knew of the impossibility must compensate the promisee, and under Section 65 any advantage received must be restored.
Modes of discharge: Performance | Agreement | Impossibility | Lapse of time | Operation of law | Breach; Use this list as the opening line of any discharge answer.
Novation vs rescission: Novation = old contract replaced by a new one. Rescission = contract cancelled, nothing replaces it; Novation needs a new contract, and consent of all parties.
Anticipatory breach: Refusal or disabling act before due date = innocent party may sue at once or wait for due date; If the innocent party waits, the contract stays alive for both sides.
Measure of damages: Damages = loss that arises naturally from the breach, or that the parties knew was likely when contracting; Remote or indirect loss is not recoverable. The injured party must also try to reduce the loss.
Quantum meruit: Claim = reasonable remuneration for work done before the contract was stopped; Available when a contract is stopped after part performance, for example by the other party's breach. It is not limited to cases of prevention.
Separate legal entity: Company ≠ its members; The company owns its assets and owes its debts. Members are not personally liable beyond their share liability. Mention this first in any corporate personality answer.
Private company minimum and maximum members: Minimum 2 members; maximum 200 (excluding employee-members and ex-employee-members who were members while employed); Joint holders of shares are counted as one member. Also restricts share transfer and prohibits invitation to the public to subscribe to securities.
Public company minimum members and directors: Minimum 7 members; minimum 3 directors; No upper limit on members. Shares are freely transferable, subject to the Act and the company's articles (listed companies also follow SEBI rules).
One Person Company: 1 member (a natural person who is an Indian citizen and resident); 1 nominee required; private company; Check the study material for current conditions such as conversion thresholds. Always name the nominee requirement.
Minimum directors in a private company: Minimum 2 directors; OPC minimum 1 director; A public company needs 3.
Order of superiority of documents: Companies Act > MOA > AOA; An act beyond the MOA is ultra vires and void. An act beyond the AOA but within the MOA can be ratified by members, by altering the AOA through a special resolution if needed.
Contents of MOA: Name, Registered office (state), Objects, Liability, Capital, Association clause; Use as a checklist. Alter each clause only by the procedure set in the Act.
Ground for lifting the veil: Fraud / evasion of law / sham or improper use of company → veil lifted; Also statutory cases such as fewer than the minimum members or misdescription. State only the grounds you are sure of.

Quick revision

A valid contract needs an agreement, enforceability by law, and the other essentials set out in the Contract Act.
Offer and acceptance must be communicated, and acceptance must be absolute and unconditional.
Consideration is something in return, and it may be past, present or future in Indian law.
A minor's agreement is void ab initio, that is, void from the start (Mohori Bibee v. Dharmodas Ghose). A person must also be of sound mind and not disqualified by law to contract.
Free consent is absent where there is coercion, undue influence, fraud, misrepresentation or mistake.
A void agreement is not enforceable at all, whereas a voidable contract can be avoided by the party whose consent was not free.
A contract is discharged by performance, mutual agreement or consent, impossibility, lapse of time, operation of law or breach. Breach also gives rise to remedies, including damages.
In sale of goods, a condition is essential to the contract, while a warranty is collateral and gives only a claim for damages.
Under the Partnership Act, partners are jointly and severally liable, without limit, for all acts of the firm done while they are partners (s.25).
An LLP is a separate legal entity, and a partner's liability is generally limited to the agreed contribution.
A company is a separate legal person from its members, and this is the basis of limited liability.
Always write the rule, apply it to the given facts, and end with a clear conclusion.

Common mistakes

Saying every agreement is a contract. Fix: Write that every contract is an agreement, but only agreements enforceable by law are contracts. Give a social agreement as an example.
Mixing up void and voidable. Fix: Void means no legal effect at all. Voidable means valid until the aggrieved party chooses to cancel it.
Treating novation and rescission as the same thing. Fix: Remember that novation always brings in a new contract. Rescission only cancels the contract.
Claiming frustration because the contract became costly or difficult. Fix: Check whether performance is truly impossible or unlawful, or whether the basis of the contract has gone. If it is only costly, the contract stands.
Saying the AOA overrides the MOA Fix: Remember the order: Act, then MOA, then AOA. The AOA is subordinate and cannot go beyond the MOA.
Treating members and the company as the same person Fix: In law, the company is separate. Say that the company owns the property and is liable for its debts, not the members.

Exam tips

For a 'distinguish' question, write at least three clear points and finish with an example.
For case-study questions, name the essential that fails before you name the label of the agreement.
Learn the labels (valid, void agreement, voidable, void contract, illegal, unenforceable) with one-line examples. Know that only void agreement, voidable contract and void contract are defined in the Act.
Keep every answer in the order of provision, facts, conclusion. Do not copy long definitions without applying them.
No negative marking in this paper, so always attempt every question and write something relevant.
For 'difference between' questions, use short points: meaning, effect, need for a new contract, and an example.
Always list the modes of discharge first, then explain only the one the facts point to.
In case-style problems, name the party and quote one fact from the question in your application step.