ASSIGNMENTS

MB0035
LEGAL ASPECTS OF BUSINESS
(3 credits)
Set I
Marks 60
Each question carries 10 marks
1. What are the essentials for a Valid Contract? Describe them in details.
2. What are the rules regarding the acceptance of a proposal? Describe them
in details.
3. What is the difference between fraud and misinterpretation? What do you
understand by mistake?
4. What are the different ways in which a contract can be discharged? Descr
ibe these ways in details.
5. What do you understand by Discharge of Instrument? What are the differen
t ways in which one or more parties to a negotiable instrument are discharged?
6. What do you understand by Arbitration? What are the objectives of the Ar
bitration Act? What are the essentials for Arbitration Agreement?

1. What are the essentials for a Valid Contract? Describe them in details.
Ans:
Essentials of a Valid Contract:
All contracts are agreements but all agreements need not be contracts. The agree
ments that create legal obligations only are contracts. The validity of an enfor
ceable agreement depends upon whether the agreement satisfies the essential requ
irements laid down in the Act. Section 10 lays down that ‘all the agreements are c
ontracts if they are made by the free consent of the parties competent to contra
ct for a lawful object and are not hereby expressly declared to be void’.
The following are the essentials:
a) Agreement: An agreement which is preliminary to every contract is the outcome
of offer and acceptance. An offer to do or not to do a particular act is made b
y one party and is accepted by the other to whom the offer is made. Then we say
that there is a meeting of the minds of the parties. Such a position is known as
consensus ad idem.
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. In other words it s
hould not be caused by coercion, undue influence, misrepresentation, fraud or mi
stake.
c) Contractual capacity: The parties entering into an agreement must have legal
competence. In other words, they must have attained the age of majority, should
be of sound mind and should not be disqualified under the law of the land. A con
tract entered into between the parties having no legal capacity is nullity in th
e eyes of law.
d) Lawful consideration: There must be consideration supporting every contract.
Consideration means something in return for something. It is the price for the p
romise. An agreement not supported by consideration becomes a ‘nudum pactum’ i.e., n
aked agreement. The consideration should be lawful and adequate. However, there
are certain exceptions to this rule.
e) Lawful object: The object or purpose of an agreement must be lawful. It shoul
d not be forbidden by law, should not be fraudulent, should not cause injury to
the person or property of another, should not be immoral or against public polic
y.
f) Not expressly declared void: The statute should not declare an agreement void
. The Act itself has declared certain types of agreements as void. E.g., agreeme
nts in restraint of marriage, trade, legal proceedings. In such cases, the aggri
eved party can’t seek any relief from the court of law.
g) Possibility of performance: The agreement should be capable of being performe
d. e.g., Mr. A agrees with Mr. B to discover treasure by magic. Mr. B can’t seek r
edressed of the grievance if Mr. A fails toper form 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 does not mention t
he types of oil agreed to be sold.
i) Intention to create legal obligation: Though Sec. 10 is silent about this, un
der English law this happens to be an important ingredient. Therefore, Indian co
urts also recognize this ingredient. An agreement creating social obligation can’t
be enforced.
j) Legal formalities: Indian Contract Act deals with a simple contract supported
by consideration. Agreements made in India may be oral or written. However, 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. Oth
erwise, the agreement can’t been forced e.g., Under Indian Companies Act, the Memo
randum of Association and Articles of Association must be registered.

2. What are the rules regarding the acceptance of a proposal? Describe them in d
etails.
Ans:
Rules Regarding Acceptance:
a) An offer can be accepted only by the person to whom it is made:
The offeree only has to accept the offer. In case it is accepted by any other pe
rson no agreement is formed. However, in case authority is given to another pers
on to accept the offer on behalf of the person to whom it is made, it is a valid
acceptance.
b) Acceptance should be unconditional and absolute: Sec. 7 (I) states that the a
cceptance should be absolute and unconditional. The acceptor should accept the o
ffer in Toto. If it is qualified or conditional, it ceases to be valid. In fact,
a qualified or conditional acceptance is nothing but accouter-offer.
c) Acceptance should be communicated: The party accepting the offer must communi
cate his acceptance to the offeror. Acceptance is not a mental resolve but some
external manifestation. The acceptance can be communicated in writing or word of
mouth or also by conduct. An agreement does not result from a mere state of min
d. As regards unilateral contracts (e.g., offer of reward) it is impossible to t
he offeree to communicate his acceptance otherwise than by performing the contra
ct. In the case of bilateral contracts acceptance must be communicated. The offe
ror can’t force a contract on offeree by fixing the mode of refusal. Further, acce
ptance should be communicated only to the offeror and not to somebody else.
d) Acceptance should be according to the prescribed form: Unless specified in th
e offer the acceptance must be in some usual and reasonable manner. The proposer
has the right to prescribe the manner of acceptance. He may require it to be or
al or in writing or to be communicated to him by phone or telephone etc. He can
also waive his right or may ask the offeree to express acceptance by some gestur
e. Once he prescribes the mode of communication later he can’t say that it was ins
ufficient.

If the offeree does not signify his assent to the offer or according to the mode
prescribed it becomes ‘deviated acceptance’ and strictly speaking it is no acceptan
ce at all. However, such a rigid rule is not followed in India. In the case of d
eviated acceptance the proposes may insist for the acceptance in the prescribed
manner. He then has to do this within a reasonable time after communication of a
cceptance to him. Otherwise it will be presumed that the proposes has accepted t
he deviated acceptance. Sec. 7 of the Act does not tell that deviated acceptance
is no acceptance.
e) Acceptance must be provoked by offer: The acceptor must be aware of the offer
. Even if he fulfills the conditions mentioned in the offer, if he is ignorant o
f the offer itself, he can’t give a valid acceptance. [Lalmann Shukla V, Gouridutt
].
f) Acceptance must be given before the offer lapses or is revoked:
Where a time limit has been fixed the acceptor has to accept the offer within su
ch time. Where no time limit is prescribed the acceptance has to be within the r
easonable time. An offer once dead can’t be accepted unless there is a fresh offer
.
g) Provisional acceptance is no acceptance: A provisional acceptance does not ma
ke a binding agreement unless final approval is given. The offer may be withdraw
n before giving final approval. However, whether an agreement is provisional or
final depends upon the intention of the parties.

3. What is the difference between fraud and misinterpretation? What do you under
stand by mistake?
Ans:
Distinction between fraud and misrepresentation:
1. In misrepresentation the person making the false statement honestly bel
ieves it to be true. In fraud, the false statement is made by person who knows t
hat it is false or he does not care to know whether it istrue or false.
2. There is no intention to deceive the other party when there is misrepre
sentation of fact. The very purpose of fraud is to deceive the other party to th
e contract.
3. Misrepresentation renders the contract avoidable at the option of the party w
hose consent was obtained by misrepresentation. In the case of fraud the contrac
t is void able. It also gives rise to an independent action in tort for damages.
4. Misrepresentation is not an offence under Indian Penal Code and hence not
punishable. Fraud, in certain cases is a punishable offence under Indian Penal
Code.
5. Generally, silence is not fraud except where there is a duty to speak or
the relation between parties is fiduciary. Under no circumstances can silence be
considered as misrepresentation.
6. The party complaining of misrepresentation can’t avoid the contract if he h
ad the means to discover the truth with ordinary diligence. Butin the case of fr
aud, the party making a false statement cannot say that the other party had the
means to discover the truth with ordinary diligence.
Mistake:
Usually, mistake refers to mis-understanding or wrong thinking or wrong belief.
But legally, its meaning is restricted and is to mean “operative mistake”. Courts re
cognize only such mistakes which invalidate the contract. Mistake may be mistake
of fact (either unilateral or bilateral) or mistake of law (either Indian law o
r foreign law). Sec. 20 “Where both parties to an agreement are under a mistake as
to a matter of fact essential to the agreement, the agreement is void.”
Sec. 21 “A contract is not void able because it was caused by a mistake as to any
law in force in India; but a mistake as to a law not in force in India has the s
ame effect as a mistake of fact.”
Bilateral mistake: Sec. 20 deals with bilateral mistake. Bilateral mistake is on
e where there is no real correspondence of offer and acceptance. The parties are
not really in consensus-ad-idem. Therefore there is no agreement at all.
A bilateral mistake may be regarding the subject matter or the possibility of pe
rforming the contract. Mistake as to the subject matter: This mistake arises whe
n the parties to the contract assume at the time of making the contract that a c
ertain state of things exists, but in reality it does not exist. Such a mistake
may relate to –
(i ) existence of the subject matter: Two parties may enter into the contract on
the assumption that the subject matter exists at the time contract. But actuall
y it may have ceased to exist or has never existed at all. Then the contract bec
omes void.
(ii) Identity of the subject matter: A mutual mistakes as to the identity of sub
ject matter renders the contract void.
(iii) A mistake as to the quality of the subject matter will not render the agre
ement void owing to the application of the principle of ‘caveat emptor’ unless there
is misrepresentation or guarantee by the seller.
(iv) Price of the subject matter: An explanation to Sec. 20 provides that“an erron
eous opinion as to the value of the thing which forms the subject matter of the
agreement is not to be deemed a mistake as to a matter of fact.” A mistaken notion
about the value of a thing bought or sold may be unilateral or bilateral. If it
is unilateral, the buyer or seller has to presume that he has made a bad bargai
n.
Where the mistake is mutual and the parties enter into the contract with false a
ssumption and mistake as to the value of the subject matter is the basis of thei
r agreement, there can’t be an enforceable contract between them.
(v) Title of the subject matter: If a person agrees to purchase property which i
s unknown to him and the seller is his own already, the contract may be void. A
mistake as to the title does not invalidate a contract since Sec. 14 of the Sale
of Goods Act imposes an implied condition as to the title of the seller. Where
there is no such warrantee or the buyer purchases his own property the agreement
will be void-ab-initio.
(vi) A false and fundamental assumption: A false and fundamental assumption goin
g to the root of the contract would render the contract invalid.

4. What are the different ways in which a contract can be discharged? Describe t
hese ways in details.
Ans:
Ways of Discharge of Contract when the rights and obligations arising out of a c
ontract are extinguished, the contract is said to be discharged or terminated.
A contract may be discharged in any of the following ways:
1. By performance – actual or attempted.
2. By mutual consent or agreement.
3. By subsequent or supervening impossibility or illegality.
4. By lapse of time.
5. By operation of law.
6. By breach of contract.
1. Discharge by performance:
When a contract is duly performed by both the parties, the contract is discharge
d or terminated by due performance. But if one party only performs his promise,
he alone is discharged. Such a party gets a right of action against the other pa
rty who is guilty of breach. Performance may be:(1) Actual performance; or (2) A
ttempted performance or Tender.
 1. Actual performance: When each party to a contract fulfills his obligatio
n arising under the contract within the time and in the manner prescribed, it am
ounts to actual performance of the contract and the contract comes to an end.
2. Attempted performance or tender: When the promisor offers to perform his
obligation under the contract, but is unable to do so because the promisee does
not accept the performance, it is called” attempted performance” or “tender”. Thus “tende
r” is not actual performance but is only an “offer to perform” the obligation under th
e contract. A valid tender of performance is equivalent to performance. Essentia
ls of a valid tender. A valid tender or offer of performance must fulfill the fo
llowing conditions:
1. It must be unconditional. A conditional tender is not a tender.
2. It must be made at proper time and place. A tender before or after the due da
te or at a place other than agreed upon is not a valid tender.
3. It must be of the whole obligation contracted for and not only of the part.
4. If the tender relates to delivery of goods, it must give a reasonable op
portunity to the promisee for inspection of goods so that he may be sure that th
e goods tendered are of contract description.
5. It must be made by a person who is in a position and is willing to perform th
e promise. A tender by a minor or idiot is not a valid tender.
6. It must be made to the proper person i.e., the promisee or his duly authorize
d agent. Tender made to a stranger is invalid.
7. If there are several joint promisees, an offer to any one of them is a valid
tender.
8. In case of tender of money, exact amount should be tendered in the lega
l tender money. Tendering a smaller or larger amount is an invalid tender. Simil
arly, a tender by a cheque is invalid as it is not legal tender but if the credi
tor accepts the cheque, he cannot after wards raise an objection.
Effect of refusal to accept a valid tender (Sec. 38): The effect of refusal to a
ccept a properly made “offer of performance” is that the contract is deemed to have
been performed by the promisor i.e., tendered and the promisee can be sued for b
reach of contract. A valid tender, thus, discharges the contract.
Exception: Tender of money, however, does not discharge the contract. The money
will have to be paid even after the refusal of tender of course without interest
from the date of refusal. In case of a suit, cost of defense can also be recove
red from the plaintiff, if tender of money is proved.
2. Discharge by Mutual Consent or Agreement
Since a contract is created by means of an agreement, it may also be discharged
by another agreement between the same parties. Sections 62 and63 provide for the
following methods of discharging a contract by mutual agreement:
i. Novation: “Novation occurs when a new contract is substituted for an existing c
ontract, either between the same parties or between different parties, the consi
deration mutually being the discharge of the old contract.” When the parties to a
contract agree for “novation,” the original contract is discharged and need not be p
erformed. The following points are also worth-noting in connection with novation
:
1. Novation cannot be compulsory; it can only be with the mutual consent of all
the parties.
2. The new contract must be valid and enforceable. If it suffers from any
legal flaw on account of which it becomes unendorsed able, then the original con
tract revives.
I. Alteration: Alteration of a contract means change in one or more of
the material terms of a contract. If a material alteration in a written contract
is done by mutual consent, the original contract is discharged by alteration an
d the new contract in its altered form takes its place. A material alteration ma
de in a written contract by one party without the consent of the other, will, ma
ke the whole contract void and no person can maintain an action upon it.
II.Rescission: A contract may be discharged, before the date of performance, by
agreement between the parties to the effect that it shall no longer bind them. S
uch an agreement amounts to “rescission” or cancellation of the contract, the consid
eration for mutual promises being the abandonment by the respective parties of t
heir rights under the contract. An agreement of rescission releases the parties
from their obligations arising out of the contract. There may also be an implied
rescission of a contract e.g., where there is non-performance of a contract by
both the parties for a long period, without complaint, it amounts to an implied
rescission.
III.Remission: Remission may be defined “As the acceptance of a lesser sum than wh
at was contracted for or a lesser fulfillment of the promise made.” Section 63 lay
s down that a promisee may give up wholly Orin part, the performance of the prom
ise made to him and a promise to do so is binding even though there is no consid
eration for it. An agreement to extend the time for the performance of a promise
also does not require consideration to support it on the ground that it is a pa
rtial remission of performance.
IV.Waiver: Waiver means the deliberate abandonment or giving up of a right which
a party is entitled to under a contract, whereupon the other party to the contr
act is released from his obligation.
3. Discharge by subsequent or supervening impossibility or illegality:
Impossibility at the time of contract: There is no question of discharge of a co
ntract which is entered into to perform something that is obviously impossible,
e.g., an agreement to discover treasure by magic, because, in such a case there
is no contract to terminate, it being an agreement void ab-initio by virtue of S
ection 56, Para 1, which provides: “An agreement to do an act impossible in itself
is void.”
Subsequent impossibility: Section 56, Para 2, declares: “A contract to do an act w
hich, after the contract is made, becomes impossible, or, by reason of some even
t which the promisor could not prevent, unlawful, becomes void when the act beco
mes impossible or unlawful.” The following conditions must be fulfilled: (1) that
the act should have become impossible; (2) that impossibility should be by reaso
n of some event which the promisor could not prevent; and (3) that the possibili
ty should not be self-induced by the promisor or due to his negligence.
Thus, under Section 56 (Para 2), where an extent which could not reasonably have
been in the contemplation of the parties when the contract was made, renders pe
rformance impossible or unlawful, the contract becomes void and stands discharge
d. This is known as frustration of the contract brought about by supervening imp
ossibility. It is also known as the doctrine of supervening impossibility. The r
ationale behind the doctrine is that if the performance of a contract becomes im
possible by reason of supervening impossibility or illegality of the act agreed
to be done, it is logical to absolve the parties from further performance of it
as they never did promise to perform impossibility. The doctrine of supervening
impossibility as enunciated in Section 56 (Para 2), is wider than the “doctrine of
frustration” known to the English law. The doctrine of frustration is an aspect o
r part of the law of discharge of contract by reason of supervening impossibilit
y or illegality ofthe act agreed to be done. In the case of subsequent impossibi
lity or illegality, the dissolution of the contract occurs automatically. It doe
s not depend on the choice of the parties.
Cases where the doctrine of supervening impossibility applies: A contract will b
e discharged on the ground of supervening impossibility in the following cases:

1. Destruction of subject-matter: When the subject-matter of a

contract, subsequent to its formation, is destroyed, without the fault of the pr
omisor or promisee, the contract is discharged. It is so only when specific prop
erty or goods are destroyed which cannot be regained.
2. Failure of ultimate purpose: Where the ultimate purpose for which the contrac
t was entered into fails, the contract is discharged, although there is no destr
uction of any property affected by the contract and the performance of the contr
act remains possible.
3. Death or personal incapacity of promisor: Where the performance
of a contract depends upon the personal skill or qualification or the existence
of a given person, the contract is discharged on the illness Orin capacity or th
e death of that person.
4. Change of law: A subsequent change in law may render the contract illegal and
in such cases the contract is deemed discharged. The law may actually forbid th
e doing of some act undertaken in the contract, or it may take from the control
of the something in respect of which he has contracted to act or not to act in a
certain way.
Cases not covered by supervening impossibility: “He that agrees to do anact must d
o it or pay damages for not doing it” is the general rule of the law of contract.
Thus, unless the performance becomes absolutely impossible (as discussed above),
a person is bound to perform any obligation which he has undertaken, and cannot
claim to be excused by the mere fact that performance has subsequently become u
nexpectedly burdensome, more difficult or expensive. Some of the cases where imp
ossibility of performance is not an excuse are as follows:
1. Difficulty of performance: Increased or unexpected difficulty and expense do
not, as a rule, excuse from performance.
2. Commercial impossibility: When in a transaction profits dwindle to a very low
level or actual loss becomes certain, it is said that the performance of the co
ntract has become commercially impossible. Commercial impossibility also does no
t discharge a contract.
3. Impossibility due to the default of a third person. The doctrine of supe
rvening impossibility does not cover cases where the contract could not be perfo
rmed because of the impossibility created by the failure of a third person on wh
ose work the relied.
4. Strikes and lock-outs: A strike by the workmen or a lock-out by the employer
does not excuse performance because the former is manageable and the latter is s
elf-induced. Where the impossibility is not absolute or where it is due to the d
efault of the him, Section 56 would not apply. As such these events also do not
discharge a contract.
5. Failure of one of the objects: When a contract is entered into for several ob
jects, the failure of one of them does not discharge the contract.
4. Discharge by lapse of time: The Limitation Act lays down that in case of brea
ch of a contract legal action should be taken within a specified period, called
the period of limitation. Otherwise the promisee is debarred from instituting a
suit in a court of law and the contract stands discharged. Thus in certain circu
mstances lapse of time may also discharge a contract. Where “time is of essence in
a contract” if the contract is not performed at the fixed time, the contract come
s to an end, and the party not at fault need not perform his obligation and may
sue the other party for damages.
5. Discharge by operation of law: A contract terminates by operation of law in t
he following cases:
a) Death: Where the contract is of a personal nature, the death of the discharge
s the contract. In other contracts the rights and liabilities of the deceased pe
rson pass on to the legal representatives of the dead man.
b) Insolvency: A contract is discharged by the insolvency of one of the parties
to it when an insolvency court passes an “order of discharge “exonerating the insolv
ent from liabilities on debts incurred prior to his adjudication.
c) Merger: Where an inferior right contract merges into a superior right contrac
t, the former stands discharged automatically.
d) Unauthorized material alteration: A material alteration made in a written doc
ument or contract by one party without the consent of the other, will make the w
hole contract void.
6. 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 may be of two kinds:
1. Anticipatory breach: An anticipatory breach of contract is a breach of contra
ct occurring before the time fixed for performance has arrived. It may take plac
e in two ways:
(a) Expressly by words spoken or written. Here a party to the contract communica
tes to the other party, before the due date of performance, his intention not to
perform it.
(b)Impliedly by the conduct of one of the parties. Here a party by his own volun
tary act disables himself from performing the contract. When a party to a contra
ct has refused to perform or disabled himself from performing, his promise in it
s entirety, the promisee may put an end to the contract, unless he has signed, b
y words or conduct his acquiescence in its continuance.
2. Actual breach: Actual breach may also discharge a contract. It occurs when a
party fails to perform his obligations upon the date fixed for performance by th
e contract. Actual breach entitles the party not in default to elect to treat th
e contract as discharged and to sue the party at fault for damages for breach of
contract.
5. What do you understand by Discharge of Instrument? What are the differe
nt ways in which one or more parties to a negotiable instrument are discharged?
Ans:
Discharge of the Instrument a negotiable instrument is said to be discharged whe
n it becomes completely useless, i.e., no action on that will lie, and it cannot
be negotiated further. After a negotiable instrument is discharged the rights a
gainst all the parties thereto comes to an end, and no party, even a holder in d
ue course, can claim the amount of the instrument from any party there to.
Discharge of the party primarily and ultimately liable on the instrument results
in the discharge of the instrument itself. For example, in the following cases
and instrument is deemed to be discharged:
1. When the party primarily liable on the instrument (i.e., the maker of t
he note, acceptor of the bill or drawee bank) makes the payment in due course to
the holder at or after maturity. A payment by a party who is secondarily liable
does not discharge the instrument because in that case the payer holds it to en
force it against prior indorser and the principal debtor.
2. When a bill of exchange which has been negotiated is, at or after matur
ity, held by the acceptor in his own right, the instrument is discharged.
3. When the party primarily liable becomes insolvent, the instrument is di
scharged and the holder cannot make any other prior party liable thereon. Simila
rly, an instrument stands discharged when the primary party liable is discharged
by material alteration in the instrument or by lapse of time making the debt ti
me barred under the Limitations Act.
4. When the holder cancels the instrument with an intention to release the
party primarily liable thereon from the liability, the instrument is discharged
and ceases to be negotiable.
Discharge of One or More Parties
A party is said to be discharged from his liability when his liability on the in
strument comes to an end. When only some of the parties to a negotiable instrume
nt are discharged, the instrument continues to be negotiable and the un discharg
ed parties remain liable on it.
One or more parties to a negotiable instrument are discharged from liability in
the following ways:
1. By cancellation: When the holder of a negotiable instrument deliberately canc
els the name of any of the party liable on the instrument with an intent to disc
harge him from liability thereon, such party and all endorsers subsequent to him
, who have a right of action against the party whose name is so cancelled, are d
ischarged from liability. If the name of an indorser has been cancelled then all
the indorser subsequent to him will be discharged but those prior him will rema
in liable. Where the cancellation is done under a mistake or without the authori
ty of the holder if will not discharge any party.
2. By release: If the holder of a negotiable instrument releases any party to th
e instrument by any method other than cancellation of names (i.e., by a separate
agreement of waiver, release or remission), the party so released and all parti
es subsequent to him, who have a right of action against the party so released,
are discharged from liability.
3. By payment: When the party primarily liable on the instrument makes the payme
nt in due course to the holder at or after maturity, all the parties to the inst
rument stand discharged.
4. By allowing drawee more than 48 hours to accept: If the holder of a bill of e
xchange allows the drawee more than forty-eight hours, to consider whether he wi
ll accept the same, all previous parties not consenting to such allowance are th
ereby discharged from liability to such holder.
5. By taking qualified acceptance: If the holder of a bill agrees to a qualified
acceptance all prior parties whose consent is not obtained to such an acceptanc
e are discharged from liability.
6. By not giving notice of dishonor: Any party to a negotiable instrument (other
than the party primarily liable) to whom notice of dishonor is not sent by the
holder is discharged from liability as against the holder, unless the circumstan
ces are such that no notice of dishonor is required to be sent.
7. By non-presentment for acceptance of a bill: When a bill of exchange is payab
le certain period after sight, its holder must present it for acceptance to the
drawee within a reasonable time after it is drawn. If he makes a default in maki
ng such presentment the drawer and all indorser who were liable towards such a h
older are discharged from their liability towards him.
8. By delay in presenting cheque: It is the duty of the holder of a cheque to pr
esent it for payment within reasonable time of its issue. If he fails to do and
in the meanwhile the bank fails.

6. What do you understand by Arbitration? What are the objectives of the Arbit
ration Act? What are the essentials for Arbitration Agreement?
Ans:
Arbitration- (The Arbitrator decides):
Arbitration is a dispute resolution process where the opposing parties selector
appoint an individual called an Arbitrator. Upon appointment, the Arbitrator wil
l arrange the process to hear and consider the evidence, review arguments and af
terwards will publish an award in which the items of dispute are decided.
In some cases the Arbitrator can conduct the arbitration on documents evidence o
nly. When published the Arbitrator’s decisions are final and binding on the partie
s. It is rare for an arbitration to be appealed to the courts. Arbitration may c
omprise a sole Arbitrator, or may be a panel of Arbitrators.
Objectives of the Act
The main objectives of the Act are as under:
i) To comprehensively cover international commercial arbitration and conciliatio
n as also domestic arbitration and conciliation.
ii) To make provision for an arbitral procedure this is fair, efficient and capa
ble of meeting the needs of the specific arbitration.
iii) To provide that the arbitral tribunal gives reasons for its arbitral award.
iv) To ensure that the arbitral tribunal remains with in the limit of jurisdicti
on.
v) To minimize the supervisory role of courts in the arbitral process.
vi) To permit an arbitral tribunal to use mediation, conciliation or other proce
dures during the arbitral proceedings to encourage settlement of disputes.
vii) To provide that every final arbitral award is enforced in the same manner a
s if it were a decree of the court.
viii) To provide that a settlement agreement reached by the parties as a result
of conciliation proceedings will have the same status and effect as an arbitral
award on agreed terms on the substance of the dispute rendered by an arbitral tr
ibunal.
ix) To provide that, for purposes of enforcement of foreign awards, every arbitr
al award made in the country to which one of the two international conventions r
elating to foreign arbitral awards to which India is a party applies, will be tr
eated as a foreign award.
Essentials of Arbitration Agreement
1. It must be in writing [Section 7(3)]:
2. It must have all the essential elements of a valid contract:
3. The agreement must be to refer a dispute, present or future, between the part
ies to arbitration:
4. An arbitration agreement may be in the form of an arbitration clause in a con
tract or in the form of a separate agreement