UNIT-1

Code: UB05CCOM05

BUSINESS LAW- 1

Before learning the contract, it is necessary to understand the meaning of law first, Law
consist of rules that regulate the conduct of individual, business and other organizations within
the society low means any rule of conduct, standard or pattern, to which actions are required to
conform. The main objects of law are as follows.

Object of the law is the creation and protection of legal rights to maintain order in the
society.
Keeping the peace
Shaping the moral standards
Promoting social justice
Maintaining the status quo
Facilitating orderly change
Maximizing individual freedom

IGNORTIA JURIS NOT EXCUSANT

Every member of the society is expected that the actions conform to a set pattern or standard as
reflected in legal rules. For this purpose he is presumed to know the legal rules. He cannot take
the plea that he did not know them.

Business Law

Business law is also termed as commercial law or mercantile law. Business law is generally used
to denote that portion of law which deals with rights and obligations arising out of transactions
between mercantile persons.

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Introduction to the Indian Contract Act, 1872

A contract may be defined as a legally binding agreement or, in the words of Sir Frederick
Pollock: A promise or set of promises which the law will enforce.

Section 2(h) of Indian Contract Act, 1872 defines contract as An agreement enforceable by
law. Thus, formation of a contract there must be an agreement, and the agreement should be
enforceable by law.

The agreement will create rights and obligations that may be enforced in the courts. The normal
method of enforcement is an action for damages for breach of contract, though in some cases the
court may order performance by the party in default.

What is Contract?
An Agreement is a promise or a commitment or set of reciprocal promises or commitments. An
Agreement involves an offer or proposal by one person and acceptance of such offer or proposal
by another person. If the agreement is capable of being enforced by law then it is a contract.

The Act deals with-

1) The general principles of the law of contract: The definition of contract, various kinds of
contract, capacity to enter into contracts, free consent, consideration, discharge of
contracts and the remedies for breach of contract.
2) Special contract: Contract of indemnity and guarantee, contract of bailment and pledge
and contract of agency.

Section 2(e) defines an agreement as every promise and every set of promises forming
consideration for each other

An offer/proposal when accepted becomes a promise. An agreement consists an offer by one

party and its acceptance by the other. A person cannot enter into an agreement with himself.

Agreement= Offer+ Acceptance

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Classification of Contracts

Contracts

On the basis of On the basis of On the basis of

Creation Execution Enforceability

Express Unilateral Valid

Implied Bilateral Void
Quasi Executed Voidable
Executory
1. On the basis of creation
a) Executed : A contract where both the parties have fulfilled their respective obligation
Eg : A writes to B I am willing to sell my house for Rs. 12 lakhs B accepts the offer
by telegram. It is an express contract
b) Implied: A contract inferred from the conduct of the parties or circumstances of the case
Eg : A takes a seat in bus. There is an implied contract that he will pay the prescribed
fare for taking him to the destination
c) Quasi: In such a contract, the rights and obligations arise not by an agreement but by
operation of law.
Eg : A trader, by mistake left certain goods in Xs house. X created the goods as his own
and consumed the,. X is bound to pay for the goods even though he had not asked for
them.
2. On the basis of execution
a) Express : A contract made in writing or by word of mouth
Eg : A agreed to buy a fridge from B for cash. A pays the cash and B delivers the fridge.
It is an executed contract.

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b) Executory: A contract where either or both parties are yet to fulfill their part of the
obligation.
Eg : A agrees on 01/06/2017 to buy Bs Car. The delivery is to be on 25/06/2017. It is an
Executory contract.
c) Unilateral: A contract where, at the time of formation, only party has to perform his part
of the obligation (the other has already executed his part).
Eg : X permits a porter to carry luggage up to his railway compartment. A contract
comes into existence as soon as the luggage is lifted and placed in the compartment. As
the porter has already performed his obligation, it is now Xs turn to fulfill his obligation
Viz., paying some charges
d) Bilateral: A contract where, at the time of formation, the obligation of both the parties
are outstanding. It is similar to Executory Contract.
Eg : P agrees to sell his next sugarcane harvest to a local sugar mill Y ltd, who promises
to pay the price after his delivery. This is bilateral contract.
3. On the basis of enforceability
a) Valid Contract: A contract which satisfies all the conditions prescribed by law is a valid
contract. If one or more of these elements is/are missing, the contract becomes
void/voidable/ illegal or unenforceable.
b) Void: A contract which ceases to be enforceable by low becomes void when it ceases to
be enforceable (Sec. 2j). In other words, a contract which is not enforceable by law is a
void contract. It is nullity. There are a number of contracts which are declared void on
grounds of morality, social considerations or impracticability.
Eg : A promises to give his house on rent to B to be used as a gambling den. It is a void
contract.
c) Voidable Contract: An agreement which is enforceable by law 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. Thus, a voidable contract is one which can be set aside or repudiated at the
option of the aggrieved party. Until it is set aside or avoided by the party entitled to do so.
It remains a valid contract.

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Offer and Acceptance

Offer and acceptance are elements required for the formation of a legally binding contract: the
expression of an offer to contract on certain terms by one person (the "offeror") to another person
(the "offeree"), and an indication by the offeree of its acceptance of those terms. The other
elements traditionally required for a legally binding contract are

Consideration and
An intention to be legally bound.

Offer and acceptance analysis is a traditional approach in contract law. The offer and acceptance
formula, developed in the 19th century, identifies a moment of formation when the parties are of
one mind. This classical approach to contract formation has been weakened by developments in
the law of estoppels, misleading conduct, misrepresentation and unjust enrichment.

Section 2(a) of Indian Contract Act defines offer as when one person signifies to another his
willingness to do or to abstain from doing something with a view to obtaining the assent of other,
such act or abstinence is said as proposal

Legal rules regarding valid offer

1) An offer may be express or implied

2) It should give rise to legal consequences and be capable of creating legal relations.
3) The term of the offer must be certain
4) An offer can be made subject to any terms and conditions.
5) It should be made with a intent to obtain an ascent of the other party.
6) An offer should not contain a term the non compliance of which would amount to
acceptance.
7) Two identical cross offer do not make a contract.
8) An invitation of offer is not an offer

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Section 2(b) states that A proposal when the person to whom the proposal is made signifies his
assent thereto the proposal is said to be accepted.

Legal rules regarding acceptance

1) Acceptance must be given only by the person to whom the offer is made.
2) Acceptance must be absolute and unqualified
3) It should be communicated by the acceptor.
4) It should be given within reasonable time stipulated
5) Acceptance must succeed the offer.

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Consideration Section 2 (d)

The term consideration is used in the sense of quid pro quo meaning something in return.

The act defines consideration as when at the desire of the promisor, the promisee or any other
person has done or abstained from doing, does or promises to abstain from doing something,
such act or abstinence or promise is called consideration for the promise.

Consideration consists of BENEFIT to the promisor. It may consist of a DETRIMENT to the

promise. The determint may be loss or responsibility to the promisee

Eg:

X agrees to sell his house to B for Rs. 15 Lakhs. Here Bs Promise to pay Rs. 15 Lakhs is
the consideration for Xs Promise to sell the house and Xs promise to sell the house is
consideration for Bs promise to pay Rs. 15 Lakhs.
A promises to type the manuscript of Bs book and in return B promises to teach him for
a month. The promise of each party is the consideration for the promise of the other.
P promises not to file a suit aginst Q if he pays him Rs. 5000. The abstinence of P is the
consideration for Qs payment.

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Legal rules as to Valid Consideration

1. Consideration must move at the desire promisor

2. Consideration may move from the promi see or any other person
3. Consideration may be past, present or future
4. Consideration need not be adequate
5. Consideration must be real
6. Consideration must be lawful
7. Consideration must be something which the promisor is not already bound to do.
1. Consideration must move at the desire of the promisor

Consideration must have been given at the desire of the promisor. The desire of the promisor
may be express or implied. The act done or loss suffered by the promise must have been done or
suffered at the desire of the promisor. Acts done voluntarily or at the request of the third party
would not be valid consideration. Eg: As son is lost and B voluntarily goes in search of him. B
cannot claim any reward for finding him as he has not done at As request.

2. Consideration may move from the promise or any other person.

Consideration may be given by the promise or any person on his behalf. So a stranger to
consideration can sue on the agreement. This is called Doctrine of constructive consideration.

Eg: X purchases a car from M/s. Auto mart, dealer of Suzuki vehicles. The car is financed by
M/s. ICICI on hire purchase and accordingly ICICI pays consideration to auto mart for the sale
of vehicle by auto mart to X.

3. Consideration may be past, present or future

X finds Ys lost child. Y promises to pay Rs. 5 lacs for finding his child. The
consideration of Rs. 5 lakhs is for "past action of X.
Cash sales: goods sold and cash paid- present or executed consideration.
A Promises B to deliver him 100 bags of wheat next week and payment to be made
later after a month- future or Executory consideration.

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4. Consideration need not be adequate

Consideration need not be adequate but must be of some value in the eyes of law. Eg: A agrees
to sell his watch worth Rs. 1000 for Rs.10. the agreement is a contract notwithstanding the
adequacy of consideration, provided there exists free consent.

5. Consideration must be real

Consideration must not be illegal, impossible or illusionary. Hence, a promise to create treasure
by magic is not a valid consideration.

A. Physical impossibility: P promises to G to run at a speed of 200 km an hour of Q pays

him Rs. 5000. Ps promise is physically impossible of performance.
B. Legal impossibility: X who owes Rs.1000 to Y promises to pay Rs.200 to Z., the servant
of Y, who return promises to discharge X from the debt. This is legally impossible
because Z cannot give discharge for a debt due to Y, his master
C. Uncertain consideration: A engages B for doing a certain work and promises to pay a
reasonable sum. There is no recognized method of ascertaining the reasonable
remuneration. The promise is uncertain and hence unenforceable.
D. Illusory consideration:

6. Consideration must be lawful

Consideration must not be illegal, immoral or opposed to public policy. If so, it cannot be
enforced.

7. Consideration must be something which the promisor Is not already bound to do

Where a person is already bound to do something, new consideration to perform the pre-existing
contract is not valid.

Eg: As promise to pay money to a policy officer to investigate a crime is not valid as the police
officer is already under a duty to do so.

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Capacity of Parties (Section-11)

Meaning:

Capacity of contract means competence of the parties to enter into valid contract.

Sec.10 requires parties to be competent to contract. Sec.11 lays down that every
person is competent to contract who is of the age of majority according to the law
to which he is subject and who is of sound mind and is not disqualified from
contracting by any law to which he is subject

Thus a person is incompetent to contracting by any law to which he is subject.

1) If he is minor;
2) If he is of unsound mind;
3) If he is disqaulifed from contracting by any law to which he is subject.

Reasons for incapacity:

1) Status
a. Foreign sovereign
b. Alien enemy
c. Convict
d. Corporation
e. Insolvent person
2) Mental deficiency
3) Unsound mind

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Contracts by a Minor:

Law protects the minor against his own inexperience and the improper designs of those advanced
in years. The judges are his counselors, the jury are his servant and the law is his guardian.

The act has given a privileged position to the minor. Minors bind others but are never bound by
others. He cannot be held personally liable for any of his wrongs. The following govern
agreement made with a minor

1) Void: A minor is not a competent to contract. Hence an agreement with a minor is void
ab initio. It is nullity
2) No ratification possible: since a contract by a minor is absolutely void, he cannot ratify
contracts entered into by him as a minor, even after he has attained majority. There can
be no ratification of a contract ab initio, because ratification acts retrospectively.
3) No estoppels against minor: A minor is not bound by his misrepresentations. But if a
minor enters into a contract by fraudulently representing himself to be a major, he cannot
be prevented from pleading minority as defence. The rule of estoppels cannot be applied
against a minor.
4) Enforceability of contracts by a minor: A minor cannot be a promisor but he can be a
promise or beneficiary. Contracts which are beneficial to a minor can be enforced by him.
5) Minor and insolvency: A minor cannot be declared insolvent as he is not personally liable
even for the necessities of life supplied to him
6) Minor and partnership: A minor cannot be a partner in a firm since partnership arises on
the basis of a contract. He can, however be admitted to the benefits of partnership. His
liability is limited to the extent of his interest in the firm.
7) Minor and agency: A minor can be appointed as an agent. The principal will be
responsible to third parties for the acts of his minor agent. However, the principal cannot
hold the minor agent personally liable for any wrongful acts.
8) Minor and negotiable instrument: a minor can draw, deliver and endorse negotiable
instruments without being liable.

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9) Minor as a member of a company: A minor cannot become a member of a company as he

is incompetent to contract. He cannot purchase share in the company. Where he inherits
shares, the name of his guardian will be entered in the register of members.
10) Position of minors parents: The parents can be held liable for contracts of their minor
children only when they are acting as agents.
11) Minors liability for necessities: A minor is liable for the necessities supplied to him or
his dependents. The liability of a minor for necessities supplied to him is only quasi-
contractual and not contractual. A minor is not personally liable. Only his estate or
property is liable.
12) No specific performance: the court will never direct specific performance of an
agreement with a minor, it being void.

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What is legality of object ?

Another essential element of a contract that is legality of object and consideration

The object of 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 for one or the other of the
reasons mentioned in Section 23, the agreement is illegal and therefore void (Sec. 23).

The use of the word illegal is somewhat a misnomer 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 (Jajlar Meher Ali vs
Budge Budge Jute Mills Co. ).

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.

Meaning of Consent and Free Consent

If there is a mistake in an agreement it becomes a void contract. It is not enforceable by law. The
reason for this is that a mistake means that there is no consensus between the parties entering
into a contract.

When consent is not free it is called error in causa. This makes the contract voidable at the option
of that person whose consent in the contract is not free. However, the contract continues to be a
valid contract until it is repudiated by the person whose consent is not free

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Error in consensus and error in causa can exist together in a contract because the contract can
have both the properties of mistake and fraud present in the agreement.
Illustration
Anita had to sign her property papers in favour of her children because of their undue influence
on her. They threatened her that they would put her in a lunatic asylum if she did not agree. In
this case the consent is not free. The contract is voidable if she repudiates it. Until then it is a
valid contract.

Illustration
Jeetendra was suffering from severe pain in his stomach. His family doctor Dr Geetha diagnosed
this as due to stones in his gall bladder. She advised Jeetendra to go for an operation. Jeetendra
happily gave his consent to get himself operated. This is a case of free consent without undue
influence.

Coercion

According to section 15, coercion means the use of force to make another person agree to the
terms and conditions while entering into a contract. A contract is caused by coercion in the
following cases:

1. When any act is done that is forbidden by Indian Penal Code.

2. When there is a threat to commit an act forbidden by Indian Penal Code
3. When property is unlawfully detained by using force or physical pressure on another
person.
4. When another person is threatened for detaining the property

Illustration
The gangster made the property owner sign the papers for his ownership at pistol point. This is
coercion it is forbidden by Indian Penal Code. The contract is voidable at the option of the
property dealer as force was used for obtaining property.

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Who exercises coercion and against whom?

Coercion can proceed from any person. It can be directed against another person including a
stranger.
Illustration
Manju threatens to kill Munna, who is Ranis son, if Rani does not give the entire property to
her. The consent given by Rani is due to coercion by Manju. The coercion is directed against
Munna who is a stranger to the contract.

What would be the effect of a threat to file a suit?

The India Penal Code forbids any threat to file a suit against any person under false charges as
this amount to coercion.

When a person threatens that he will file a civil / criminal suit it cannot be called coercion.
However, if the suit is to be filed on a false charge it will be an act of coercion.

Figure: Threat to File a Suit

Illustration
Hina threatened Beena that she would file a suit against her for not making a payment of Rs.
10,00,000 if she does not give her the rights of her building where she wanted to open an office.
As this was a false charge, it was an act of coercion on a false charge and hence it is caused by
coercion.

What would be the effect of a threat to commit suicide?

According to the Indian Penal Code suicide and threat to commit suicide are not punishable, but
if an attempt is made to commit suicide it will become punishable

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Meaning of Consent and Free Consent

Free Consent is one of the essential elements of a valid contract. The essence of this requirement
is that a person should enter into an agreement with a free as well as an open mind and without
any fear. If anyone has not allowed the other party the freedom of expression, the agreement will
not be fair. No person under law is compelled to enter into a contract and be bound by any
obligations pertaining to it without his / her free consent.

Consent When two or more persons agree upon something it is said that there is a consensus
between them. According to section 13 of the Indian Contract Act this means that the people
agree on the same thing and in the same sense. It also means that there is consent on the
acceptance of an offer. When there is no consent, there cannot be a contract.

Ex. Braj has two televisions. One is of L.G. make and the other is of Sony make. His friend Ashu
offers to buy the L.G. product. Braj thinks he is selling the Sony television. This agreement is
void ab initio because there is no consent since both of them have not understood the same thing
in the same way. There is no agreement of minds.

Free Consent

Section 10 of the Indian Contract Act states that a valid contract should have the free consent of
both the parties entering into the contract. This means that in a contract not only should there be
consent but it should also be free consent.

All agreements are contracts if they are made by the free consent of the parties.

Extra: Free ConsentFree consent according to section 14 is when a contract is made without
coercion, fraud, undue influence, misrepresentation or mistake. Therefore, if a contract is
influenced by any of these elements there cannot be free consent. Salmond has described this
as an error in consensus.An agreement, which is made by coercion, fraud, undue influence
and misrepresentation, is voidable at the option of that party whose consent was not free
(Section 19)

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