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PGPM -II SEM

Business Law (107)

Unit 1

Indian Contract Act, 1872

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IntroductionThe success and security of business depends upon the

fulfillment of the contracts made. The law ofcontracts ensures proper performance of contracts.

Corley and Robert , Justas the safety of persons and ofproperty depends upon the rules of criminal law, so

the security and stability of business world are

dependent upon the law of contracts.

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IntroductionThe law of contracts is fundamental to the very existence of

the business world. Without this total business as well asentire economic system may collapse. It assures every party to

a contract that his lawful expectations will come true and his

rights will be safeguarded.

The Indian Contract Act 1872 sections 1-75 came into force on

1 September 1872. It applies to the whole of India except the

state of Jammu and Kashmir. It is not a complete and

exhaustive law on all types of contracts.

http://en.wikipedia.org/wiki/1872http://en.wikipedia.org/wiki/1872

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Contract- Definitionection 2 h) of the Act defines the term contract as "an agreement

enforceable by law".Section 2 e) defines agreement as "every promise and every set ofpromises, forming the consideration for each other.

Again Section 2 b) defines promise in these words: "when the personto whom the proposal is made signifies his assent thereto, the

proposal is said to be accepted. Proposal when accepted, becomes a

promise.

A contract is an agreement between competent parties, with free

consent, upon a legal consideration and with a lawful object, to do or

to abstain from doing something which gives rise to legal obligations

of the parties.

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Nature of ContractWhen parties intend to enter legal agreements, and meet certain criteria

in the process of defining the nature of such agreements, contracts are

formed. A contract is a process of negotiation of private rights and

obligations between parties to a contract. These agreements may be

written or verbal, or may be completed through actions of the parties

involved.

Individuals form contracts when they undertake common consumer

transactions, whether as buyers or sellers or renters. The purpose of the

law of contracts is to protect the reasonable expectations of the partiesinvolved in an agreement, through application of contract law, and to

provide an avenue for dispute settlement according to the rule of law.

Under common law, only parties to a contract are entitled to

contractual rights.

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Essentials of Valid Contract1. Plurality of parties:- the first and foremost requirement to form

a contract is two or more persons. A person cannot make acontract with himself.

2. Agreement i.e., proposal and acceptance:- Agreement is the

foundation of a contract. An agreement comes into existence by

acceptance of an offer. Therefore, for making of an agreement,

one party should make an offer to another party and the other

should accept it.

3. Intention to create legal relations:- For an agreement to be acontract, it must be able to create legal relations. Agreements

which do not create legal relations are not legally enforceable.

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Essentials of Valid Contract4. Contractual Capacity:- Valid agreement can be made only by

legally competent persons. The law presumes that every personis competent to enter into contract if he fulfills the following

conditions:

He is a major.

He is of sound mind.

He is not disqualified from contracting by any law of the land

to which he is a subject. [Sec. 11]

5. Free Consent:- A simple consent is not enough for making acontract. That too must be free. Consent is said to be free when

it is not caused by undue influence, fraud or misrepresentation

or mistake. [Sec.14]

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Essentials of Valid Contract6. Consideration:- Every agreement to be enforceable by law must be

supported by consideration. An agreement without consideration

is void. Consideration means something which the promisor

receives from the promisee in return for his promise.

7. Possibility of performance:- an agreement to be valid contract mustalso be possible to be performed. The terms of the agreement mustalso be capable of performance physically as well as legally.

8. Compliance of legal formalities:- Generally no legal formalities arerequired to be complied with for making a valid contract. a contract

may be written or oral. But Section 10 of the Act states that acontract should be made in writing or in the presence of witnesses

or be registered, if required by any law.

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Classification of Contracts/Agreement1. Classification according to Enforceability/Legality

Valid agreement, i.e. contract

Void agreement Void contract

Voidable contract

Illegal agreement

Unenforceable contract

2. Classification according to mode of formation Express contract

Implied contract Quasi contract

3. Classification according to the extent of execution

Executed contract

Executory contract

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Classification according to Enforceability/Legality

1. Valid agreement i.e. contract:- a valid agreement is acontract and A contract is an agreement enforceable bylaw.

2. Void agreement:- an agreement not enforceable by law issaid to be void.3. Void contract:- a contract which ceases to be enforceableby law becomes void when it ceases to be enforceable.

4. Voidable contract:- an agreement which is enforceable bylaw at the option of one or more of the parties thereto, but

not at the option of the other or others, is a voidable

contract.

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Classification according to Enforceability/Legality

5. Illegal agreement:- an agreement which is expressly orimpliedly prohibited or forbidden by law is an illegal

agreement.

6. Unenforceable contract:- a contract which is good insubstance but cannot be enforced in a law court due to

some technical defects, is said to be unenforceable contract.

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Classification according to mode of formation

1. Express contract:- a contract is express when the partiesstate its terms and conditions and show their assent bywords, either oral or written.

2. Implied contract:- a contract made otherwise than inwords, is called implied contract. An implied contract isinferred from the acts or conduct of the parties or by their

surroundings circumstances but not by the written or

spoken words of the parties.

3. Quasi-contract:- a quasi contract is a contract implied bylaw. It is not made by the parties but imposed upon the

parties by the law on the ground of principle of equity.

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Classification according to the extent of execution

1. Executed contract:- a contract in which all the parties tothe contract have performed their respective obligations, is

known as executed contract.

2. Executory contract:- an executory contract is one in whichall or something still remains to be performed by the

parties.

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PROPOSAL OR OFFERWhen one person signifies to another his willingness to do or to

abstain from doing anything ,with a view to obtaining the assent ofthat other to such act or abstinence, he is said to make a

proposal.[Sec.2 a)]A proposal or offer is an expression of willingness by one person

to another to enter into an agreement on the terms stated by him

with an intention to obtain the assent of the other.

Illustration :A says to B,I want to buy your Nolakhahaar for

Rs.nine lakh.Will you sell it?Here,A is expressing his willingness

to B to buy the Nolakhahaarat his terms i.e.for Rs. nine lakh with

a view to obtaining his assent to it. This is a proposal from A to B.

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ACCEPTANCEAcceptance is the assent of the of offeree to an offer made

to him. It is a communication of his intention to be bound

by the terms of the offer. According to Sec.2 b) when theperson to whom the proposal is made Signifies his assent

thereto, the proposal is said to be accepted. A proposal whenaccepted becomes a promise.

Thus, acceptance is the assent to the proposal and toits terms by the party to whom proposal has been made. On

acceptance of the proposal, the proposer is called promisor

whereas the offeree is called the promisee.[Sec.2 c)]

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CAPACITY TO CONTRACTCapacity or competence to contract means legal capacity of

parties to enter into a contract. In other words, it is the

capacity of parties to enter into a legally binding contract.

Who are competence to contract ?:Section 11 specifies the persons who are competent to

contract. Section 11 reads, Every person is competent tocontract who is of majority according to the law to which

he is subject and who is of sound mind and is notdisqualified from contracting by any law to which he is

subject.

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Free ConsentFree consent is the consent given by the sweet will of the

parties and not caused by any form of physical or mental forceor any kind of mistake.

According to Section 14, consent is said to be free when it isnot caused by-Coercion, as defined in section 15

Undue influence, as defined in section 16

Fraud, as defined in section 17

Misrepresentation, as defined in section 18

Mistake, subject to the provisions of sections 20, 21 and 22.

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ConsiderationConsideration consists of promises or performance that theparties to a contract exchange with each other. It is an sense

the price that the promisee pays for the promise or

performance of the promisor.

According to Blackstone, Consideration is the recompensegiven by the party contracting to the other.

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ConsiderationIllustration:Anta offers Banta to sell his car for Rs. 1 lakh and Bantaaccepts. Both the parties have agreed to provide consideration

to each other. Here, both the parties are exchanging something

to each other and that something is consideration for eachother . Antas consideration is Rs. One lakh and Bantas

consideration is the car.

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Legality of object and considerationSection 10 implies that an agreement enforceable by law must

be for a lawful consideration and with a lawful object. Everyagreement of which the object or consideration is unlawful, is

void.

Illustrations:A promises to obtain for B an employment in public services

and B promises to pay Rs. 10,000 to A. Here Aspromise to

obtain for B an employment in public services is theconsideration for Bs promise to pay Rs. 10,000. the

consideration is against the public interest, and therefore

unlawful and void.

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Agreement declared VoidAn agreement not enforceable by law is said to be void.[sec.2 g)]Following are the agreements which have been expressly declared as

void under the Act:

1.Agreement by incompetent persons e.g. minors, persons of unsound

mind and persons disqualified by law of the land.[sec.11]

2.Agreement made under bilateral mistake as to material fact. [sec.20]

3.Agreement of which the consideration or the object is

unlawful.[sec.23]

4. Agreement of which the consideration or the object is unlawful inpart and cannot be separated from the lawful part. [sec.24]

5. Agreements made without consideration with certain exceptions.

[sec.25]

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Agreement declared Void6. Agreement in restraint of marriage.[sec.26]

7. Agreement in restraint of trades.[sec.27]

8. Agreement in restraint of legal proceedings. [sec.28]

9. Agreements the meaning of which is uncertain.[sec.29]

10. Agreements by way of wager. [sec.30]

11. Agreements contingent on impossible event. [sec.36]

12. Agreements to do impossible acts. [sec.56]13.Reciprocal promises to do thing illegal. [sec.57]

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Performance of ContractPerformance of contract means performing all thepromises and fulfilling all the obligations required by

the contract.

The contract act prescribes the modes or types operformance of contracts. Accordingly parties to a

contract must either perform or offer to perform their

respective promises, unless such performance isdispensed with or excused under the provisions of the

contract act or of any other law.

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Discharge of ContractA contract is discharged when parties to a contract nolonger have any obligation under the contract.

In other words, a contract is said to be discharged when

both the parties to a contract either perform or

extinguish their respective obligations under the

contract. Consequently, the contractual relations

between the parties to a contract come to an end.

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Remedies for breach of contractA contract is sometimes discharged by its breach. Generally,

breach of contract means refusal or failure of any oneparty to perform his contractual obligations under thecontract .

On breach of contract, the aggrieved party has any one or more

of the following remedies:-

1. Rescission of the contract:- if one party has broken hispart of the promise under a contract, the aggrieved partymay also rescind the contract. The aggrieved party neednot perform his part of promise under the contract.

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Remedies for breach of contract2. Suit for damages:- the aggrieved party is entitled to file a

suit for compensation of damages caused to him by thebreach of contract.

3. Suit for quantum Meruit:- when an aggrieved party haspartly performed a contract, he can sue for the value ofsuch part of performance. In case of breach of contractthis suit is known as suit on quantum meruit i.e. for asmuch as earned by the party.

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Remedies for breach of contract4. Suit for specific performance:- when for the breach of

contract, damages are inadequate remedy, the court mayorder the party for specific performance of the contract.

5. Suit for injunction:- an aggrieved party can sue forinjunction and court may issue an injunction against the

party to a contract. Injunction prohibits a party from

doing or continuing to do something which amounts tobreach of contract.

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Contract of IndemnityA contract of indemnity is a contract by which one party

promises to save the other from loss caused to him by theconduct of the promisor himself or by the conduct of any

other person.[sec.124]In a contract of indemnity there are two parties. The party

who promises to save the other from loss is known as

indemnifier. The party who is promised to be saved orprotected against loss is known as the indemnity-holder or

indemnified.

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Contract of IndemnityIllustration:A, a shareholder of a company, lost his share certificate

and applied for a duplicate copy. The company issue

a duplicate certificate on agreeing by A to compensate

the company against loss in case any other genuine

holder produces the original certificates. This is a

contract of indemnity between A and the company.

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Contract of GuaranteeA contract of guarantee is a contract to perform the

promise or discharge the liability, of a third person incase of his default.[sec. 126]

There are three parties in a contract of guarantee. The

person who gives the guarantee is called the surety.

The person in respect of whose default the guaranteeis given is called the principaldebtor. the person to

whom the guarantee is given is called the creditor.

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Contract of GuaranteeIllustration:C requests A to lend Rs. 1,00,000 to B and agrees that

if B fails to repay the amount, he will pay. This is a

contract of guarantee. Here, C is the surety or

guarantor, A the creditor and B the principal debtor.

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BailmentThe word bailment is derived from the French word baillier

which means todeliver.

According to section 148, bailmentis the delivery of goods byone person to another for some purpose, upon a contractthat they shall, when the purpose is accomplished, bereturned or otherwise disposed of according to the directionsof the person delivering them.

Bailor:-the person delivering the goods is called the bailor.Bailee:-the person to whom the goods are delivered under the

contract of a bailment is a bailee.

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BailmentIllustrations:In each of the following cases, there is a contract of bailment

between A and B and A is the bailor and B is the bailee:

When A lends his video cassette to B.

When A delivers his clothes to B for dry-cleaning. When A books his goods for carriage with a transporter, B.

When A hands over key of his car to B for a long drive.

When A delivers a diamond to B for being studded in hisring.

When A parks his car in a parking centre of B for apayment.

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Pledge or PawnPledge is a special kind of bailment. Section 172 defines the

bailment of goods as security for payment of a debt orperformance of a promise is called pledgeor pawn.

Thus a pledge is a delivery of goods by the pledger to the

pledgee by way of security upon a contract that they shallwhen the debt is discharged or promise is performed, bereturned or otherwise be disposed of according to thedirections of the pledger.

Pawnor:- the person pledging the goods as security forpayment of a debt or performance of a promise is called thepawnoror pledger.

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Pledge or PawnPawnee:- the person receiving the goods as security for

payment of a debt or performance of a promise is called thepawneeor pledgee.

Illustration:- Anta borrows Rs. 10,000 from banta anddelivers the necklace of his wife to banta as security. The

bailment of necklace is a pledge as security for the money

borrowed. Here, anta is pawnor and banta is the pawnee.

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AgencyAn agency is the relation between an agent and his principal

created by an express or implied agreement whereby anagent is authorized by his principal to represent him and

establish contractual relations with third parties.

An agentis a person employed to do any act for another or torepresent another in dealings with third person. [sec.182]

The person for whom such act is done, or who is represented ,

is called the prin ip l.[sec.182]

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Thank You!