Introduction to Business

Law

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Law – Meaning & Definition
• Law: The rules which regulate the relations between individuals and
individuals, individuals and society and individuals and government.
• According to Salmond “Law is the body of principles recognised and
applied by the state in the administration of justice”
 HOW LAWS ARE MADE INDIA ?
• The basic function of the parliament is to make laws- Union
Government
• Bill is a draft that is prepared
• A bill becomes an Act when it is approved by both the houses of
the
parliament and receives the assent of the president.
• A bill goes through three readings
• A bill might also be referred to the Select or Joint Committee

Reference :
http://164.100.47.194/Loksabha/Legislation/Legislation.aspx
Characteristics of law
• Law is a body of rules
• Law is for the guidance or conduct of persons – both human and
artificial
• Law is imposed
• Law is enforced
• The State
• Content of law
• Law is made to serve some social, economic or political purpose
“Ignorantia juris non excusat”
Ignorance of the law excuses no one
Why contracts are important in business?
• It is the foundation upon which the superstructure of modern
business is built.
• As we all are aware that in business transactions quite often promises
are made at one time and performance follows later.
• In such situation if either of the parties fail to perform their promises,
this will create endless complications and it would be impossible to
carry trade and commerce.
• Hence law of contract was enacted which lays down the legal rules
relating to promises; their formation, their performance and their
enforceability.
Purpose of law
• Justice
• Continuity and uniformity
• Impartiality
• Rule of law
Sources of Indian Law
• English Common law
• Customs or customary law
• Judicial decisions or law by precedents
• Statute law or legislation
• Personal law of the parties, e.g., Hindu Law, Muhammedan law
 Mercantile or Business Law
That branch of law which prescribes a set of rules for the governance of
certain transactions and relations between
i. Business persons themselves
ii. Business persons and their customers, dealers, suppliers etc
iii. Business persons and the state
Sources of Indian Business Law
• Statutes – such as Indian Contract Act 1872, Sale of Goods Act 1930,
Indian Partnership Act 1932, The Negotiable Instruments Act 1881,
The Insurance Act 1938 etc
• Common Law
• Customs and Usages
• Precedents
• Justice, equity and good conscience
Indian Contract Act
1872
Introduction
• The law relating to contracts is contained in The Indian
Contracts Act 1872 received its assent on 25th April 1872
which came into force on 1st September 1872.
• It applies to the whole of India.
• At its formation, it contained 266 sections
• Later, in 1930 Sec. 76 to 123 were separated to form the
sale of Goods Act and in 1932, Sec 239 to 266 were
separated to form The Indian Partnership Act.
• Presently, Sec 1 – 75 deals with the General principles of
the contract.
• Whereas Sec. 124 to 238 covers some special contracts
viz., bailment, indemnity and guarantee, pledge and
agency
 What is a Contract?
• "Contract" is derived from the Latin words meaning to
drag or draw together (cum and trahere). The word
"tractor" has the same derivation and also carries the
sense of dragging.
• a: A binding agreement between two or more persons
or parties especially : one legally enforceable If he
breaks the contract, he'll be sued.
• b : A business arrangement for the supply of goods or
services at a fixed price make parts on contract.
Contract - Definition
Section 2(h) of the Act defines the term contract as "an agreement
enforceable by law".

Contract consists of essentially two elements:

1. Agreement
2. Its enforceability of law
Agreement
• Section 2(e) defines agreement as "every promise
and every set of promises, forming the consideration
for each other.”
• A proposal when accepted becomes a promise.
• Thus Agreement = Offer + Acceptance
Promise
• Section 2(b) defines promise as: "when the person to
whom the proposal is made signifies his assent
thereto, the proposal is said to be accepted. Proposal
when accepted, becomes a promise.”
Enforceable at law
• An agreement to become a contract must give rise to legal obligation.
• The common acceptance formed and communicated between the
two parties create legal relations and not merely social or domestic
nature.
 Agreement Legal Obligation

Contract
“All contracts are agreement but
all
agreements are not contracts

CONTRACT = AGREEMENT +
ENFORCIBILITY BEFORE LAW
Consensus ad idem- Latin phrase signifying a
“meeting of the minds”, which is a legal concept
describing agreement between parties as to the
exact meaning of the terms of a contract. To
have consensus ad idem, and thus form a valid
contract, all parties must have the same
understanding of the contract being formed.

Obligation- an act or course of action to which a

person is morally or legally bound; a duty or
commitment.
“All contracts are agreements but all
agreements are not contracts.”
• Agreement is a wide term and contract is a narrower
term.
• Agreement is of two types - Social Agreement
- Legal Agreement.
Case Study: Balfour Vs. Balfour
• Mr. Balfour was employed in Ceylon. Mrs. Balfour owing to ill
health had to stay in England and could not accompany him to
Ceylon.
• Mr. Balfour promised to send her £ 30 per month while he was
away. But Mr. Balfour failed to pay that amount.
•  Mrs. Balfour filed a suit against her husband to recover the said
amount.  The court held that it was a mere domestic agreement
and that the promise made by the husband, in this case, was not
intended to be a legal obligation.
Law of contracts create jus in personam as
distinguished from jus in rem

Jus in personam – Right against / in respect of a particular person /

persons
Examples of Right in Personam
Mr. A takes a loan of 1000 from Mr. B. Mr. B has the right to
recover the loan from Mr. A. The right of B against A is a personal
right. It is called right in personam as it is available to B alone and
no one else.
Jus in rem – Right against / in respect of a thing against the whole
world.
Example of Rights in Rem
X purchased a house from Y. X is the owner of the house. So he
has a right of possession and enjoyment against the whole world
and not against Y alone. It is called right in rem. Law of Contract
does not create right in rem, it creates right in personam.
 Essential Elements of contract (Sec 10)
All agreements are contracts if they are made by the free
consent of parties competent to contract, for a lawful
consideration and with a lawful object and are not
expressly declared to be void..
1. Proper Offer and 5. Agreement not
Proper Acceptance with declared Void or Illegal
Intention to create a 6. Certainty of meaning
legal relationship.
7. Possibility of
2. Lawful Consideration performance of an
and lawful object agreement
3. Capacity of Contract 8. Necessary Legal
4. Free consent formalities
1. Intention to create legal relationship:
The parties ought to have the intention to create an legal obligation
between them through the form of offer and acceptance. They should
have intention to impose duty on the promisor to fulfill the promise and
bestow a right on the promisee to claim its fulfillment. It must not be
merely a moral one but it must be legal. If such intention on the part of
the parties is lacking at the time of making the contract, there will be no
valid contract between them.

Example: A husband agreed to pay to his wife certain amount as

maintenance every month while he was abroad. Husband failed to pay
the promised amount. Wife sued him for the recovery of the amount.
Here in this case wife could not recover as it was a social agreement and
the parties did no intend to create any legal relations (Balfour v.Balfour)
2. "Lawful consideration" and "Lawful object" is an
essential element of a valid contract. Consideration is a technical word
meaning thereby quid pro quo i..e. something in return. It must result in
benefit to one party and detriment to the other party or a detriment to
both.

Example: A agrees to sell his books to B for 100, B's promise to pay 100
is the consideration for A's promise to sell his books and A's promise to
sell the books is the consideration for B's promise to pay 100, Also, the
object of the agreement must be lawful. It must not be illegal, immoral,
or opposed to public policy.

Example: A promises to drop prosecution instituted against 'B' for

robbery and 'B' promises to restore the value of the things taken. The
agreement is void, as its object is unlawful.

If the two essential elements are there we can say that there is a
contract which prima-facie will hold good; or at least we can say that
there is an existence of contract, although some more necessary
elements of validity may be wanting.
3. Capacity to Contract /Competent parties: The
parties to a contract must have capacity (legal ability) to make valid
contract. In every case of there must be assent of the parties. If,
therefore, either of the parties to an agreement is deprived of the use
of his understanding or if he be deemed by law not to have attained it,
there can be no such agreement which shall bind him. Section 11 of the
Indian Contract Act specifies that every person is competent to contract
provided,

(a) is of the age of majority according to the law to which he is subject,

and
(b) who is of sound mind, and
(c) is not disqualified from contracting by any law to which he is subject.

In other words (a) a minor, (b) a person of unsound mind (a person of

unsound mind can enter into a contract during his lucid intervals) and
(c) a person disqualified from contracting by any law to which he is
subject, e.g. an alien enemy, foreign sovereigns and accredited
representatives of a foreign state, insolvents and convicts, are not
competent to contract.
4. Free Consent- 'Consent' means the parties must have agreed upon
the same thing in the same sense.

According to Sec. 13, "Two or more person are said to consent when they agree
upon the same thing in same sense." This is called Consensus ad idem in English
Law.

Example: A threatened to shoot B if he (B) does not lend him? 2,000 and B
agreed to it. Here the agreement is entered into under coercion and hence
voidable at the option of B.

EXAMPLE: A who owns two cars, one Maruti and the other Santro, offers to sell
B one car. A intending it to be the Maruti car. B accepts the offer thinking that it
is the Santro. There is no consensus and hence no contract.

According to Section 14, Consent is said to be free when it is not caused by

1. Coercion, Or 2. Undue Influence, Or 3. Fraud, Or
4. Mis- Representation, Or 5. Mistake.
5. NOT expressly declared void:
There are certain agreements which have been declared to be void by
the law of a country, and then such agreement, if entered into, shall not
be enforceable by the court even if the agreement possesses all other
essential elements of valid contract. There are agreements which have
expressly been declared void as these agreements are not in public
interest such as agreement in restraint of trade, marriage, legal
proceedings etc.

Example: Amar promises to pay ₹50,000 to Akbar if Akbar does not

marry at all. This agreement is void as marriage is right of every
individual. Restrain of marriage is expressly declared void by the law.

6. Certainty of meaning: The agreement must be certain and

not vague or indefinite.
Example: A agrees to sell to B a hundred tons of oil. There is nothing
certain in order to show what kind of oil was intended for.
7. Possibility of performance of an agreement: The terms of
agreement should be capable of performance. An agreement to do an
act impossible in itself cannot be enforced.

Example: A agrees with B to discover treasure by magic. The agreement

cannot be enforced as it is not possible to be performed.

8. Compliance of necessary legal formalities: Wherever a

particular type of contract requires by law to be in writing and
registered, it must comply with the necessary formalities as to writing,
attestation and registration otherwise unenforceable.

Example: Where it requires an agreement to make a gift for natural love

and affection, there it must be in writing and registered, to be valid.
Classification of contracts
 Types of Contracts on the Basis of

Validity Formation
Valid Contract
Performation
Express
Executed Contract
Void Contract Contract
Executory Contract
Voidable Implied/Tacit
Unilateral Contract
Contract Contract
Bilateral Contract
Illegal Contract Quasi Contract
Unenforceable E- Contract
Contract
1. Classification according to validity
1. Valid Contract: An agreement which is binding and
enforceable is a valid contract. It contains all the essential
elements of a valid contract.

2. Void Contract: It is a contract without any legal effect and

cannot be enforced in a Court of Law. Section 2(j) defines a
void contract as "a contract which ceases to be enforceable
by law becomes void when it ceases to be enforceable".
• Example: A contracts with B (owner of the factory) for the
supply of 10 tons of sugar, but before the supply is effected,
the fire caught in the factory and everything was destroyed.
Here the contract becomes void.
A contract when originally entered into may be valid
but may subsequently become void due to some
reasons which are :
•Destruction of subject matter
• Contract becoming unlawful
• Death of Parties
• Parties becoming unsound mind
• Party becoming Alien enemy

Voidable contract
According to section 2(i), “an agreement which
is enforceable by law at the option of one or
more of the parties but not at the option of the
other or others, is a voidable contract.”
• Voidable when free consent is missing i.e., when the consent of
one of the parties to the contract is obtained by coercion,
undue influence, misrepresentation or fraud.
• When one party prevents the other from performing his
promise
• When a party to the contract promises to do a certain thing
within a specified time, but fails to do it.
• Example: Amar promises to sell his horse to Akbar for 10 and
Amar's consent was obtained forcefully. The contract is
voidable at the option of Amar. If he fails to avoid, the contract
remains valid.
 Void and Voidable contracts:
Distinction
Void Contract
•Definition: Contract ceases to be
enforceable by law.
•Nature: Contract becomes void
either because of sudden and
unexpected events or of law
changes, before the performance
becomes due.
•Rights: Does not provide any legal
remedy for the parties to the
contract.
Voidable Contract
•Definition: Contract is enforceable
at the option of the aggrieved party.
•Nature: Contract becomes voidable
when it is caused by coercion, undue
influence, fraud and
misrepresentation.
•Rights: The aggrieved gets a right to
rescind the contract and to declare it
void otherwise it remains valid.
Illegal Contract: It is a contract which the law forbids to be made.
The court will not enforce such a contract but also the connected
contracts. All illegal agreements are void but all void agreements or
contracts are not necessarily illegal.

Examples: Contract to commit crime. Contract that is immoral or

opposed to public policy are illegal in nature. Similarly, R agrees with S,
to purchase brown sugar is an illegal agreement.

According to Section 2 (g) of the Indian Contract Act, an agreement not

enforceable by law is void. The Act has specified various factors due to
which an agreement may be considered as void agreement. One of
these factors is unlawfulness of object and consideration of the contract
i.e. illegality of the contract which makes it void. Despite the similarity
between an illegal and a void agreement that in either case the
agreement is void and cannot be enforced by law, the two differ from
each other in the following two respects:
 Void and Illegal Agreements: Distinction
Void Agreement
• Scope: A void agreement is not necessarily
illegal.
• Nature: Not forbidden under law.
• Punishment: Parties are not liable for any
punishment under the law.
• Collateral Agreement: It's not necessary that
agreements collateral to void agreements
may also be void. It may be valid also.
• Effects: Void agreement is not void-ab-initio • Effects : All illegal agreements are
but may subsequently become void.
Illegal Agreement
• Scope : An illegal agreement is
always void.
• Nature : Are forbidden under law.
• Punishment :Parties to illegal
agreements are liable for
punishment.
• Collateral Agreement Agreements
collateral to illegal agreements are
always void.
void from the very beginning.
5. Unenforceable Contract: Where a contract is good in
substance but because of some technical defect i.e. absence in writing, barred
by limitation etc. one or both the parties cannot sue upon it, it is described as
an unenforceable contract.

On the basis of the formation of contract

6. Express Contracts: A contract which is made by words either

spoken or written is said to be an express contract. According to Section 9 in so
far as the proposal or acceptance of any promise is made in words, the promise
is said to be express.
Example: A tells B on telephone that he offers to sell his house for 2 lacs and B
in reply informs A that he accepts the offer, this is an express contract.

7. Implied Contract: By implied contract means implied by law (i.e.)

the law implies a contract though parties never intended. According to Section
9 insofar as such proposal or acceptance Vis made otherwise than in words, the
promise is said to be implied.
For example, A delivers by mistake goods at B's warehouse instead of at C's
place. Here there is an obligation on the part of B to return the goods to A,
though they never intended to enter into a contract.
8. Tacit Contract is said to be tacit when it has to be inferred from the conduct of
the parties.
Examples: Obtaining cash through automatic teller machine, sale by fall of hammer at
an auction sale.

9. Quasi-Contract: A quasi-contract is not an actual contract but it resembles to a

contract. It is created by law under certain circumstances the law creates and enforces
legal rights and obligations when no real contract exists. Such obligations are known as
quasi-contracts.
Example: Obligation of finder of lost goods to return them to the true owner or
liability of person to whom money is paid under mistake to repay it back cannot be said
to arise out of a contract even in its remotest sense, as there is neither offer and
acceptance nor consent. These are said to be quasi-contracts.

On the basis of the performance of the contract

10. Executed Contract: If the consideration for the promise in a contract (i.e., any
act or forbearance) is given or executed, such type of contract is called contract with
executed consideration. Example: When a grocer sells a sugar on cash payment it is an
executed contract because both the parties have done what they were to do under the
contract.
11. Executory Contract: It is so called because the reciprocal promises or
obligation which serves as consideration is to be performed in future.
Example: Where G agrees to take the tuition of H, a pre-engineering student, from the
next month and H in consideration promises to pay G 1,000 per month, the contract is
executory because it is yet to be carried out.
12. Unilateral Contract: A unilateral contract is a one-sided contract in which
only one party has to perform his promise or obligation to do or forbear.
Example: M advertises of payment of a reward of 500 to anyone who finds his missing
boy and brings him. As soon as B traces the boy, there comes into existence an
executed contract because B has performed his share of obligation and it remains for
M to pay the amount of reward to B. This type of executed contracts are also called
unilateral contract.
13. Bilateral Contract: Where the obligation or promise in a contract is
outstanding on the part of both the parties, it is known as bilateral contract. OR A
bilateral contract is a contract in which both parties exchange promises to perform.
One party's promise serves as consideration for the promise of the other. As a result,
each party is an obligor on that party's own promise and an obligee on the other's
promise.
Example: A car buyer may agree to pay the seller a certain amount of money in
exchange for the title to the car. The seller agrees to deliver the car title in exchange
for the specified sale amount.
 OFFER And
ACCEPTANCE
Offer / Proposal
According to Section 2 (a) of the Indian Contract Act, 1872
defines a proposal as follows:
“When one person signifies to another his willingness, to do
or to abstain from doing anything ,with a view to obtaining
the assent of that 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.
The person making the proposal is called the ‘promisor or
offeror’. The person to whom the proposal is made is called the
‘promisee or offeree’.
EXAMPLE: A offers to sell his motor cycle to B for 3,000. B
agrees to pay A 3,000 for the motor cycle. Here A is called the
offeror or promisor and B the offeree or promisee.
 What is an Offer

• It is the starting point in the formation of contract.

CONSIDERATIO
OFFER ACCEPTANCE
N

• An offer is an expression of will or intention to do or abstain from

doing anything with a view to obtaining the assent of that other.
Essentials of a valid offer
1. Offer must be capable of creating legal relations -(Balfour Vs. Balfour)

2. Offer must be certain, definite and not vague -(Taylor Vs Portington 1855)

3. Offer must be communicated to the offeree-( Lalman Shukla Vs V Gauri Dutt 1913)

4. Offer must be made with a view to obtaining the assent of the other party (Harris Vs
Nickerson 1873)

5. An Offer may be conditional( Thomason Vs L.M & S Railway 1930)

6. Offer should not contain a term the non-compliance of which would amount to
acceptance

7. Lapse of an offer

8. An invitation to offer is not an offer

An offer lapses:
a. If either offeror or offeree dies before acceptance
b. If it is not accepted within
1. the specified time
2. a reasonable time
c. If the offeree does not make a valid acceptance
d. An offer can also lapse by revocation
TYPES OF OFFER
▪Express offer
▪Implied offer
▪Specific offer
▪General offer
▪Cross offer
▪Counter offer
▪Standing offer
Express offer - When offer is given to another person either in writing or
in oral. OR
An offer which is made by words spoken or written such as letter, telegram, fax
message or through e-mail.
Implied offer - When offer is given to another person neither in writing nor
in oral. OR
It may be gathered from the conduct of the party or the circumstances of the
case.
Specific offer - When offer is given to a specific person.
OR
If offer is made particularly to one person, it is called specific offer.
General offer - When offer is given to entire world at a large.(Carlill Vs.
Carbolic smoke ball Co.,) OR
If offer is made to a group of persons, it is called general offer. General offer
also is so powerful as specific offer.
Cross offer - When both the persons are making
identical offers to each other in ignorance of other’s offer.
Counter offer - When both the persons are making
offers to each other which are not identical in ignorance of
other’s offer.
Standing offer - An offer which remains continuously
enforceable for a certain period of time.
Acceptance
• Acceptance is an expression by the offeree of his willingness to be
bound by the terms of the offer.
• Sir William Anson compared the proposal (offer in English Common
law) to a train of gun-powder and the acceptance to a lighted match.

• Who can accept?

Essentials of a valid acceptance
1. It must be communicated
2. It must be absolute and unqualified
3. It can be express or implied
4. It must be according to the mode prescribed or usual and
reasonable mode
5. It must be given within a reasonable time
6. It cannot be implied from silence
7. It cannot precede an offer
8. It must be given before the offer lapses or before the offer is
withdrawn
9. It must be given by the party or parties to whom the offer is
made
Communication of offer, acceptance and revocation
Mode of communication
• By Act
• By Omission, of the party offering, accepting or
revoking. Such act or omission must however have
the effect of communicating such offer, acceptance or
revocation.
• In other words, offer, acceptance or revocation may
be communicated by words spoken or written, or by
conduct.
When is communication complete?
• Offer - when it comes to the knowledge of the person to whom it is
made
• Acceptance:
• As against the proposer – when it is put in the course of transmission to him,
so as to be out of the power of the acceptor
• As against the acceptor – When it comes to the knowledge of the proposer
• Revocation:
• As against the person who makes it - when it is put in the course of
transmission to him, so as to be out of the power of the person who makes it
• As against the person to whom it is made - When it comes to his knowledge
Time for revocation of offer and acceptance
• Offer –May be revoked at any time before the communication of
acceptance is complete as against the proposer(i.e., before the
communication is posted)
• Acceptance - May be revoked at any time before the communication
of acceptance is complete as against the acceptor (i.e., before the
offeror comes to know about the acceptance)
Revocation of offer/proposal
• Revocation of offer at Auction sale
• Revocation of Standing offers
• Revocation of general offers
When does an offer comes to an end?
(Sec. 6 deals with various modes of revocation of
offer) • By notice of revocation
• By lapse of time
• By non-fulfilment of condition precedent
• By the non acceptance of the offer according to the
prescribed or usual mode
• An offer lapses by rejection
• Express rejection or
• Implied rejection – by making a counter offer or by giving a
conditional acceptance
• By death or insanity
• By subsequent illegality
Consideration
Consideration
• Consideration is a technical term used in the sense of quid
pro quo (i.e., something in return). When a party to an
agreement promises to do something, he must get
"something" in return. This "something" is defined as
consideration.

• In the words of Pollock, "consideration is the price for

which the promise of the other is bought, and the promise
thus given for value is enforceable." [Pollock on Contracts,
13th ed., p. 113].

• Example: A agrees to sell his car to B for 750,000. Car is

the consideration for B, and the price is the consideration
for A.
 Definition
Section 2 (d) of the Indian Contract Act defines consideration as
(a) when at the desire of the promisor,
(b) the promisee or any other person,
(c) has done or abstained from doing, or does or abstains from doing,
or promises to do or abstain from doing,
(d) something, such act or abstinence or promise is called a
consideration for the promise.

According to Lush J, "A valuable consideration in the sense of

the law may consist either in some right, interest, profit or benefit
accruing to one party, or some forbearance, detriment, loss or
responsibility given, suffered or undertaken by the other. But to this
definition there should be added that "the benefit accruing or the
detriment sustained was in return for a promise given or received."
ESSENTIALS OF VALID CONSIDERATION

1. Consideration must move at the desire of the promisor.

A gratuitous service rendered by the promisee without any

request of the promisor is not considered enforceable at law.

Example: A sees B drowning and saves his life. A cannot demand

payment for his service.
CASE LAW: DURGA PRASAD VS.BALDEO

Mr. D promised to pay Mr. P a commission on articles sold by him

in a Bazar in which he occupied a shop.
The commission was paid as a consideration to P as he had
constructed the Bazar.
The Bazar was constructed by P at the request of the District
Collector.
D stopped paying the commission and P filed a suit against D
The court held that there was no consideration for the promise
made by D and hence no contract.

Cases: Durga Prasad Vs. Baldeo (1880), Kedar Nath Vs. Gori
Mohammed (1886), Abdul Aziz Vs. Mazul Ali (1914)
2. Consideration must move from the promisee or any other
person

The consideration may move from the promisee or any other

person if the promisor has no objection.

Consideration may move from the stranger, but it must flow at

the desire of the promisor.
CASE LAW: CHINNAYYA VS RAMAYYA

An old lady made a gift of her property to her daughter with the
direction to pay a certain sum of money to her uncle by way of
an annuity.
On the same day, the daughter executed writing in favor of the
brother agreeing to pay the annuity.
The daughter did not pay the annuity to the uncle.
Uncle sued to recover the annuity.
It was held that there was sufficient consideration for the uncle
to recover the money from the daughter.
3. Consideration may be past, present, or future.

PAST CONSIDERATION: When the consideration for a promise was

given before the date of the promise.

Example: A looks after the children of B at B’s request. One year

later B agrees to pay A the sum of Rs 1000 for his services. For the
promise of B, the service rendered by A will be taken as past
consideration.
PRESENT CONSIDERATION: When consideration is given
simultaneously.

Example: X sells computer to Y for Rs. 50000. Y in return pays Rs

50000 to X.

FUTURE CONSIDERATION: A future or executory consideration is a

promise to do or give something in the future.

Example: D promises to deliver a good to P after a week. P

promises to pay the price after a fortnight.
4. Consideration need not be Adequate
Adequacy of the consideration is decided by the parties at the
time of entering into the agreement.

Consideration need not necessarily be equal in value to

something given.

Example: A agrees to sell his house worth Rs 1000000 to B for

Rs.10000. The consent to the agreement was freely given. The
agreement can be enforced to form a contract.
5. Consideration must be Real
Consideration must be real and not illusionary.

If the consideration is physically impossible

vague or legally impossible the contract cannot
be enforced.
6. Lawful Consideration

Consideration for the agreement should be lawful.

Consideration of an agreement is not lawful:
▪ If it is forbidden by law
▪ Is of such nature that if permitted it would defeat the provisions
of any law
▪ If it is fraudulent
▪ Involves or implies injury to the person or property of another
▪ The court regards it as immoral or opposed to public policy.
7. It must be something which the promisor is not already bound to
do

Example: A promised to pay money to a police officer to investigate

a crime. The agreement was held invalid because the officer is
already under the duty to do so by law.
STRANGER TO CONSIDERATION
Under the Indian Contract Act, 1872 consideration for a contract
may move from the promise or any other person.

CASE LAW: CHINAYYA VS RAMAYYA

Under English Law, the consideration for the contract must move
from the promise, and a stranger to consideration cannot
enforce it.
STRANGER TO CONTRACT OR PRIVITY OF CONTRACT
It is a general rule of law that only parties to a contract may
sue and be sued on that contract.

This rule is known as the doctrine of privity of contract.

"Privity of contract"

A person who is not a party to a contract cannot sue upon it

even though the contract is for his benefit and he provided
consideration.
A contract cannot confer rights or impose obligations
arising under it on any person other than the parties to it.
Thus, if there is a contract between A and B, C cannot
enforce it.
CASE LAW: DUNLOP PNEUMATIC TYRE Co. VS SELFRIDGE
A sold a large number of tyres to B at a certain price on entering
into a covenant not to sell the tyres below the price mentioned
in the price list supplied by A.

B sold the tyres to C a retail dealer under a contract stipulating

the same covenant as between A and B.

C sold the tyres at a less than the list price

A sued C for the breach.

It was held that A could not sue C as A was not a party to the
contract between B and C
EXCEPTIONS TO PRIVITY OF CONTRACT

1. TRUST

In case of trust, the beneficiary may enforce the contract even

though he is a stranger.

Stranger can sue when he is a beneficiary under the obligation

amounting to trust arising out of the contract
CASE LAW: M.K RAPAI VS. JOHN

A agrees to transfer certain properties to be held by T in trust

for the benefit of B.

B can enforce the agreement even though he is not a party to

the agreement.
2. Where provision is made in a marriage settlement

Where an agreement is made in connection with marriage and a

provision is made for the benefit of a person he may take
advantage of the agreement even though he is not a party to the
agreement.
CASE LAW : KHWAJA MOHD V HUSSANI BEGUM

D ( The father in law) agreed with P’s father (P is the Wife) that D
would pay Rs 500 per month as Kharch i Pandan if P marries D’s
son.

The allowance was stopped sometimes after the marriage.

P sued her father-in-law for Rs 1500 as arears of allowance.

It was held that P could recover the money even though she was
not a party to the contract.
3. Where provision is made in a partition or family settlement

CASE LAW: SHUPPUAMMAL Vs SUBRAMANYAN

Two brothers in a partition deed agreed to pay Rs 300 in equal

shares to their mother for maintenance.

The brothers subsequently refused to pay the amount.

It was held that the mother could enforce the promise even
though she was a stranger to the contract.
4. Where a charge is created in favour of a stranger on a specific
immovable property

A stranger to a contract can sue for the money made payable to

him by it where the money is charged on the immovable property.
NO CONSIDERATION NO CONTRACT – EXCEPTIONS SECTION 25

An agreement without consideration is void

Section 25 specifies the cases where an agreement made without

consideration is valid.
1. Natural Love and Affection

An agreement without consideration will be valid under the

following conditions

✔ If it is expressed in writing
✔ If it is registered under the law for the time being in force
✔ It is made on account of natural love and affection
✔ It is between parties standing in near relation to each other
2. Compensation for Services rendered

An agreement made without consideration may be valid if it is a promise to

compensate wholly or in part a person who has already voluntarily done
something for the promisor.

▪ The act must have been done voluntarily

▪ For the promisor or it must be something which was the legal obligation of
the promisor
▪ The promisor must be in existence at the time when the act was done
▪ The promisor must agree now to compensate the promise
3. Time-barred debt
Time-barred debt is money a consumer borrowed and didn't
repay but which is no longer legally collectible because a
certain number of years have passed.

Time-barred debt is also known as debt that is beyond the

statute of limitations.

An oral promise to pay a time-barred debt is unenforceable it

should be a written promise.
EXAMPLE: Raj owes Murali Rs 10000. The debt is time-barred
by the Limitation Act Even then Raj promises in writing to pay
Murali 4500
4. Completed Gifts

5. Agency: No consideration is required to create an agency

6. Guarantee: A contract of guarantee is made without

consideration.

7. Remission: No consideration is required for an agreement to

receive less than what is due. This is known as remission.
8. Doctrine of Promissory Estoppel

Estoppel: Not changing your mind

The person making the representation or promise becomes

bound by the same if the other person has acted on the faith of
such promise.

The promise can ask for enforcing the same even if there is no
consideration
CASELAW: UNION OF INDIA Vs GODFREY

Mr. X establishes an industrial unit on faith of tax concession

announced by State Gov.
The state is bound by estoppel and cannot withdraw tax
concession earlier than promised by it
Capacity to contract
Meaning
Capacity means competence

Persons incompetent to contract (Sec 11)

• Minor

• Persons of unsound mind

• Persons disqualified by any law to which they are

subject .
MINORS
According to Section 3 of the Indian Majority Act, 1875 a minor is a
person who has not completed 18 of age.

In the following two conditions he will attain a majority after 21

years of age:
▪ Where a guardian of a minor’s person or property has been
appointed under the Guardians and Wards Act, 1890

▪ Where the superintendence of a minor’s property is assumed by a

Court of Wards
An amendment to this Act was made by the Indian Majority
act 2000, which fixed the uniform age of majority as 18 years
irrespective of the fact whether any guardian has been
appointed.
Why should Minors be protected?

• A minor has an immature mind and can not think

what is good or bad for him or her .

• Minors are often exploited

EFFECTS OF MINORS AGREEMENT
An agreement with or by a minor is void and inoperative ab initio

CASE LAW: MOHORI BIBI VS DARMO DAS GHOSE

A minor borrowed Rs 20000 from B and as a security for the same executed
a mortgage in his favor.

He became a major in a few months

He filed a suit for the declaration that the mortgage executed by him during
his minority was void.
It was held that a mortgage by the minor was void and B was
not entitled to get the repayment.
A minor can be a promise or a beneficiary

If a minor has received any benefit under a void agreement, he

cannot be asked to compensate for it or pay for it.

He or She can always plead minority

Free consent
“Two or more persons are said to consent when they agree upon the
same thing in the same sense”.
Consent is said to be free when it is not caused by
• Coercion (Sec 15)
• Undue influence (Sec 16)
• Fraud (Sec 17) Error in
consensus
• Misrepresentation (Sec 18)
• Mistake (Sec 20,21 and 22)
• When consent to an agreement is caused by coercion, undue
influence, misrepresentation or fraud the contract is voidable at the
option of the party whose consent was so caused.
• When consent is caused by mistake the agreement is void.
The threat amounting to coercion need not necessarily be from
a party to contract , it may also proceed from a stranger to the
contract.
Cases
• Chikkim Ammiraju vs. Seshamma (Suicide)
• Ranganayakamma vs. Alwar Setty (13 year old widow)
• Muthia vs. Muthu Karuppa (Agent)
• Bansraj vs. Secretary of State (Govt)
CASE LAW : RANGANAYAKA VS ALWAR SETTY

A young girl of 13 years was forced to adopt a boy to her

husband who had just died by the relatives of the husband who
prevented the removal of his body for cremation until she
consented.
It was held that the consent was not free but was induced
by coercion.

Consequently, the adoption was set aside.

FRAUD

Includes all acts committed by a person with an

intention to deceive another person.

According to Sec 17, fraud includes any of the

following acts done with an intent to deceive or
induce a person to enter into the contract.
DOES SILENCE AMOUNT TO FRAUD ?

Mere silence is not a fraud. (Doctrine of Caveat

Emptor(the principle that the buyer alone is
responsible for checking the quality and suitability
of goods before a purchase is made))
CASE LAW: Word Vs Hobhs

H sold to W some pigs which were to his

knowledge suffering from fever.
H did not disclose the fact of fever to w
SITUATIONS WHERE SILENCE AMOUNTS TO FRAUD

1. Fiduciary Relationships: A person is under the duty to act

with utmost good faith and make full disclosure of all
material facts concerning the agreements.

2. Contracts of Insurance: In the case of marine, fire and life

insurance there is implied condition that full disclosure of
material facts shall be made other wise the insurer can avoid
the contract.
4. Contract of Marriage: Every fact must be disclosed by the
parties to a contract of marriage (Hazi Ahmed Vs.Abdul Gassi).

5. Contract of Family Settlements: These contracts require full

settlement.

6. Share Allotment Contracts: Companies issuing prospectus at the

time of public issue of shares have to disclose all the material facts.
MISREPRESENTATION
Misrepresentation is a false statement that the
person making it honestly believes to be true or
which he does not know to be false.

If a false statement is known to be false by the

person making it is called fraudulent
misrepresentation or fraud.
MISTAKE
Mistake maybe defined as an erroneous
belief concerning something .
 MISTAKE

Mistake of law Mistake of fact

Of the Of the foreign

country country Bilateral mistake Unilateral mistake

Mistake as to subject matter Mistake as to As to As to

possibility person nature

Physical impossibility Legal impossibility

existence identity quality quantity title price

 A .MISTAKE OF LAW
1. Mistake of General Law

The contract is binding because everybody is supposed to know

the law of the country

Ignorantia juris not excusat

The contract is not voidable because it was caused by a mistake as

to any law in force in India
2. Mistake of Foreign Law

The agreement will be voidable in the case of Unilateral mistake

The agreement will be void in case of a bilateral mistake

B. MISTAKE OF FACT

1. Bilateral Mistake

A mistake of fact in the minds of both the parties of the

contract.

Where both the parties to an agreement are under a mistake

as to the matter of fact, essential to the agreement the
agreement is void.
1. MISTAKE AS TO THE SUBJECT MATTER

Mistake under subject matter falls into 6 categories

a. Mistake as to the Existence of the subject matter

Example : There is an agreement between A and B for the purchase

of a certain horse, but the horse is dead at the time of the
contract.
B. MISTAKE OF FACT

1. Bilateral Mistake

A mistake of fact in the minds of both the parties of the

contract.

Where both the parties to an agreement are under a mistake

as to the matter of fact, essential to the agreement the
agreement is void.
1. MISTAKE AS TO THE SUBJECT MATTER

Mistake under subject matter falls into 6 categories

a. Mistake as to the Existence of the subject matter

Example : There is an agreement between A and B for the purchase

of a certain horse, but the horse is dead at the time of the
contract.
b. Mistake as to the identity of the subject matter

In this case one party had one subject in mind and the other
party and another subject matter in mind.

It prevents consenus ad idem and invalidates the agreement.

c. Mistake as to the title of the subject matter

Where unknown to the parties the buyer is already the owner of that
which the seller wants to sell him.

CASE LAW : COOPER VS PHIBBAS

A agreed to take a lease of fishery from B.

Though contrary to the belief of both parties at that time, A was a
tenant for life by inheritance of fishery and B had no title at all.
It was held that the lease agreement was void
d. Mistake as to the price as to the subject matter

e. Mistake as to the quantity of the subject matter

f. Mistake as to the quality of the subject matter

Example: A contract for the sale of horse believed to be a race

horse would be void if it turns out to be a cart horse.
2. Mistake as to the possibility of performing the contact

a. Physical Impossibility

Example: A hires a room from B to watch the coronation

procession of King Edward. Unknown to both the parties the
procession had already been canceled. The contract is void.

a. Legal Impossibility

Example: A person cannot take a lease of his own land.

2. Unilateral Mistake

if One party alone is under a mistake of fact the contact is not

rendered voidable.

Unilateral mistakes do not affect the validity of the contract

unless they concern some fundamental fact

Mistake as to the nature of the contract

Mistake as to the identity of the person
a. Mistake as to the nature of contract.

CASE LAW: FOSTER VS. MACKINNON

Mr. A an illiterate old man, was made to put his signature on a

document which was a pronote.

A thought the document was a will where is signature was

required.

Mr. A signed under this presumption that it was a will.

B endorsed the pronote to C

C sued A on the pronote

It was held that A was not bound by it.

b. Mistake as to the identity of the person contracted with

Example : A intends to contract only with B, but enters into a

contract with C believing him to be B.
Legality of object
Introduction
An agreement of which the object or consideration is unlawful is void
(Sec 23)

Object – Purpose or design of the contract

Lawful – permitted by law

When the object is unlawful
• It is forbidden by law
• Punishable by the criminal law of the country
• When it is prohibited by special legislation or regulations made
by a competent authority under powers derived from the
legislature
• It is such that if allowed, it would defeat the provision of
law
• It is fraudulent
• It causes injury to a person or his property
• It is of immoral nature
• Sexual immorality
• Furtherance of sexual immorality
• Interference with marital relations
• If the court regards it as opposed to public policy
Agreement to restraint of trade is void - Exceptions
1. Statutory Exceptions
*Sale of goodwill
*Partners’ agreements:
• Partner’s competing business
• Rights of outgoing partner
• Partner’s similar business on dissolution
• Sale of business
2.Exemtions under Common Law:
*Service agreements
• During employment
*Trade combinations
*Agreement in restrain of legal precedings.
 Void Vs. Illegal agreements
All illegal agreements are void but all void agreements are not illegal

Void agreements Illegal agreements

• Broader in scope. • Narrow scope
• Parties may not be • Parties may be liable for
punished punishment
• Collateral transactions • Collateral transactions
may be enforceable by are also illegal and
law therefore void
 Wagering agreements or Wager (Sec 30)

Definition.
Wager means a 'bet’.

Anson's Law of contract defines a 'wager' as a "promise to give

money or money's worth upon the determination or ascertainment
of an uncertain event."

*Agreements by way of wager are void.

• A wager may be defined as an agreement to pay money or
money's worth on the happening of a specified uncertain event.
It is a game of chance in which the chance of either winning or
losing is wholly dependent on an uncertain event. Each party
stands equally to win or lose the bet.
Essentials of a wagering agreement
• Promise to pay money or money’s worth
• Uncertain event
• Each party must stand to win or lose
• No control over the event
• No other interest in the event except for stake.
IS INSURANCE AN WAGER CONTRACT ?
WAGER AND INSURANCE

A contract of insurance is not a wagering contract

In case of insurance the party has an insurable interest

If insurable interest is not present then the insurance

contract is void
IS SALE AND PURCHASE OF LOTTERY TICKET A WAGERING
CONTRACT ?
The sale and purchase of lottery ticket is a wagering contract as
per section 30 of the Contract Act.

As per the constitution of India lotteries come under the Entry

40 List 1 Union List and betting and gambling comes under Entry
34 List II State List.

Therefore the union or state government have the power to

legislate on lotteries

The Act governing lotteries is Lottery Regulation Act 1998.

CONTINGENT CONTRACT
Contingent means dependent on something.

Section 31 defines a contingent contract as “ A contract to do or

not to do something if some event collateral to such contract
does not happen.

Example: A agrees to B that A will sell his car to B. for 10000 on

15th January if A gets a new car by 12th January.

In a contingent contract the performance of the contract is

dependent on an event that is collateral to the contract.
Differences between a wagering agreement and a
contingent contract

Wagering agreement Contingent contract

• Consists of reciprocal promises • May not contain reciprocal
promises
• Essentially of a contingent nature
• May not be of a wagering
• Void nature
• Game of chance – parties have no • Valid
other interest than winning or
losing money of wager • Parties have interest in the
contract
• Future event is the sole
determining factor • Future event is only collateral
Discharge of contract
Discharge of a contract
A contract may be discharged or terminated by any of the following
means:
1. By performance (Sec 37,38)
2. By agreement or consent(Sec 62,63)
3. By impossibility(Sec 56)
4. By lapse of time
5. By operation of law
6. By breach of contract(Sec 39)
Discharge by agreement or consent
a. Novation – substitution of old contract with a new one between the
same parties or between different parties
Essentials of novation:
• Consent of all parties
• New contract must be enforceable by law
• Must be made before the expiry of the old contract
b. Alteration: change in one or more of the terms of the
contract - Consent of all parties needed - No change of
parties but only change in terms
c. Rescission: cancellation of the contract
• By mutual consent
• By the aggrieved party
• By the party whose consent is not free
d. Remission: Acceptance of lesser amount or lesser
degree of performance than what was actually due
under the contract
e. Waiver: abandonment of right which a person is
entitled to. A party to a contract may waive his rights
under the contract, whereupon the other party is
released from his obligations.

f. Merger: takes place when an inferior right accruing

to a party under a contract merges into a superior
right accruing to the same party under the same or
some other contract.
Discharge by operation of law
• Insolvency
• Merger
• Alteration
• Death
Discharge by impossibility of performance
• Impossibility existing at the time of agreement –
--Known to parties
• Unknown to parties
• Impossibility arising subsequent to the formation of
contract – supervening impossibility
• Destruction of subject matter of contract
• Non existence or non occurrence of a particular state of
things (frustration of the contract)
• Death or incapacity for personal service
• Change of law or stepping in of a person with statutory
authority
• Outbreak of war
Impossibility of performance – not an excuse (
Exception to impossibility of performance)
• Difficulty of performance
• Commercial impossibility
• Impossibility due to the failure of the third person
• Strikes, lock-outs and civil disturbances
• Failure of one of the objects
Effect of impossibility

• Contract becomes void

• Benefit to be restored
• Compensation for non performance
Discharge by breach of contract

If any of the parties fails to perform his contractual obligation. It can be

• Actual breach
• At the time when the performance is due
• During the performance of the contract
• Anticipatory or Constructive breach
• By expressly renouncing his obligation under the contract
• By doing some act so that the performance of his promise becomes
impossible
Actual breach
Anticipatory or Constructive breach