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UNIT I LESSON 1: INTRODUCTION TO LAW AND THE MEANING AND ESSENTIALS OF CONTRACT Learning Outcomes
At the end of this chapter, you will be able to know: · · · · The meaning of law The main sources of mercantile law The meaning of contract The essential elements of valid contract English/ Foreign law Precedents(previous judgments of the courts.) Customs and usage I must tell you that most of the Indian Mercantile Law is contained in the statutes. The prime legislation is the Indian Contract Act 1872 but it is not exhaustive to deal with all kinds of contracts. In addition to this there are the Sale of Goods Act, 1930, The Indian Partnership Act 1932, The Negotiable Instruments Act 1881 etc. wherever the Indian Contract Act is silent, the Indian courts may apply the principles of the English Common Law. It is interesting to know that in England there is no English Contract Act in the form of a statute. It has been derived from common law, the usage of merchants and traders in different spheres of trade, substantiated or ratified by decisions in the court of law. The judicial precedents are an important source of law. Sometimes, there is no provision, which can answer a particular question of law. In such cases the court will look into the previous decisions on similar matters to find the relevant law. Custom and usage of a trade play an important role in business dealings of that trade. To have a binding force, the custom or usage must be certain, reasonable and well known. Now it is more than a century that that the mercantile laws are governing trade and commerce. The law of contract is the foundation upon which the superstructure of modern business is built. It is common knowledge that in business transactions quite often promises are made at one time and the performance follows later. In such a situation if either of the parties were free to go back on its promise without incurring any liability, there would be endless complications and it would be impossible to carry on trade and commerce. Hence the law of contract was enacted which lays down the legal rules relating to promises, their formation, their performance, and their enforceability. Explaining the object of the law of contract Sir William Anson observes. “The law of contract is intended to ensure that what a man has been led to expect shall come to pass, that what has been promised to him shall be performed”. The law of contract is applicable not only to the business community but also to others. Every one of us enters into a number of contracts almost everyday, and most of the time we do so without even realizing what we are doing from the point of law. A person seldom realizes that when he entrusts his scooter to the mechanic for repairs, he is entering into a contract of bailment; or when he buys a packet of cigarettes, he is making a contract of the sale of good; or again when he goes to the cinema to see a movie, he is making yet another contract; and so on.

Introduction
Business laws are essential for the students of management to understand the legal rules and aspects of business. Just like any other study even business management is incomplete without a proper study of its laws. Any form of business needs legal sanction. Therefore, it is imperative that a manager understands the various ways in which businesses can be organized. This subject introduces some of the common forms of business organizations, including some forms unique to India like the Joint Hindu Undivided Family firm. Different types of organizations like Sole Ownership, Partnership, Private Limited Company, Public Limited Company, Joint Stock Company along with the rationale for adopting these forms are explored. What form of business organization is the best under a particular set of conditions? What advantage or disadvantage does it have over other forms of business? Formalities to be gone through and some the quasi-legal processes required for starting a business will be discussed in detail in this subject. For the proper working of the society, there must exist a code of conduct. As you all know, in the ancient times the society was not organized. The rights of the individuals were not recognized. Gradually, the society evolved and the state came into being. As we all know, to regulate the state, there should be a specific code of conduct, which should be followed by everyone. As a result of which law evolved as a system of rights and obligations including all the rules and principles, which regulate our relations with other persons and with the state. These rules and regulations took the form of statutes. To enforce the law and to resolve the conflicts arising there from, courts of law were setup by the state. Laws were made to govern almost every walk of life. You all must know that criminal laws were made to control criminal activities in the society like Indian Penal Code, which enumerates which activities are considered criminal and what will be the punishment for committing a crime. Likewise, mercantile law was evolved to govern and regulate trade and commerce. Hence, the term mercantile law can be defined as that branch of law, which comprises laws concerning trade, industry and commerce. It is an ever-growing branch of law with the changing circumstances of trade and commerce. Now the question arises as to what are the sources of mercantile law in India. The answer is The Indian statutes on mercantile law

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Viz.com/doc/aIIzBWdc/preview.e. etc. an agreement to become a contract must give rise to a legal obligation i. which deal with contracts relating to negotiable instruments. 200 bags of rice at Rs. It will be appropriate to point out here that the law of contract deals only with such legal obligations which arise form agreements. day of September. (c) Contracts of Agency (Secs. which give. when accepted. forming the consideration for each other. A proposal. comes into existence only when one party makes a proposal or offer to the other party and that other party signifies his assent (i.e.” An agreement. and in case of default through a court provided other essential elements of a contract was made by free consent of the parties competent to contract. Sections 76-123 relating to sale of goods were repealed in 1930 and a relating to partnership were repealed in 1932 when the Indian separate Act called the Sale of Goods Act was enacted. The Indian Contract Act. Both the parties to an agreement must agree about the subject matter of the agreement in the same sense and at the same time. It will be proper to see some of the basic assumptions underlying the Act. On analyzing the above definition the following characteristics of an agreement become evident: (a) At least two persons. 1-75). partnership and insolvency are all founded upon the general principles of contract law. Again the act does not affect any usage or custom of trade (Sec. 1.100 per bag is a contract because it gives rise to a duty enforceable by law. is an agreement the object of which is to create a legal obligation i. 182-238). a promise to lunch together at a friend’s house or to take a walk together are not contracts because they are not likely to create a duty enforceable by law for the simple reason that the parties never intended that they should be attended by legal consequences..html 10/21/2011 . rise to legal obligations between the parties. Similarly. The Indian contract act was enacted from the 1 st 1... Agreement. obligations which are not contractual in nature are outside the purview of the law of contract. Now we will move on to the definition and concept of the contract. sale of goods. There must be two or more persons to make an agreement because one person cannot inter into an agreement with himself. a duty enforceable by law. we find that a contract essentially consists of two elements: (1) An agreement and (2) Legal obligation i. (a) Contracts of indemnity and Guarantee (Secs. Thus an agreement to buy certain specific goods at an agreed price e. The act is not exhaustive. The scheme of the Act may be divided into two main groups.1 Indian Contract Act 1872). 1972 The law of contract in India is contained in the Indian Contract Act 1872.” Agreements of moral. therefore. insurance.e.. is an agreement. Before 1930 the Act also contained provisions relating to contracts of sale of goods and partnership.e.” A contract therefore. transfer of property. becomes a promise. As per section 2 (e): “ Every promise and every set of promises. partnership. This Act is based mainly on English common law.1).Microsoft Word . The enactments relating to sale of goods. Thus all agreements are not contracts. There are separate acts. (b) Contracts of Bailment and pledge (Secs.. It does not deal with all the branches of the law of contract. the law of contract furnishes the basis for the other branches of mercantile law. negotiable instruments. gives his acceptance) thereto. 2. In short.555 http://dc374. Thus it may be concluded that the Act restricts the use of the word contract to only those agreements. But we will not study the specific kinds of contracts for the time being but only concentrate on contracts generally. the Indian law will prevail.. In business agreements the presumption is usually that the parties intend to create legal relations. Before we take up the discussion of the various provisions of the Indian contract Act. (b) Consensus-ad-idem. sections 239-266 partnership Act was passed. Legal obligation. Definition of contract According to section 2(h) of the Indian Contract Act: “ An agreement enforceable by law is a contract. a duty enforceable by law.it is applicable to the whole of India except the state of Jammu and Kashmir. religious or social nature e. “ All contracts are agreements but all agreements are not contracts. Specific kinds of contracts. Scheme of the Act.” Thus it is clear from this definition that a ‘promise’ is an agreement. 1872. That is why the study of the law of contract precedes the study of all other sub-division of mercantile law.g. An agreement to sell a car may be a contract but an agreement to go for lunch may be a mere agreement not enforceable by law. which is to a large extent made up of judicial precedents. It extends to the whole of India except the state of Jammu and Kashmir and came into force on the first day of September 1872(Sec. for a lawful consideration and with a lawful object . There may be some occasions where Indian law disagrees with the English laws. 124-147). an agreement is the sum total of ‘offer’ and ‘acceptance’. a duty enforceable by law. Thus an agreement is a wider term than a contract. In such cases. As stated above. I shall give you a very simple example to explain this point.” When the person to whom the proposal is made signifies his assent thereto the proposal is said to be accepted. From the above definition. insurance. What is a ‘promise’? the answer to this question is contained in section 2 (b) which defines the term.g.4shared. Before moving further we must know the conditions which must be satisfied for the contract to become valid. 2 11. General principles of the law of contract (Secs. It is not a contract. 148-181). 2. We shall now examine these elements detail.lecture-01 Page 2 of 10 Besides. (there being a separate contract act in England). If an agreement is incapable of creating a duty enforceable by law.

He and his wife were enjoying leave in England. all agreements are contracts if they are made by the free consent of the parties. (b) Her action was dismissed on the ground that no legal relations had been contemplated and therefore there was no contract. or is opposed to public policy (sec.e.(Balfour vs. But if the parties are under a legal obligation.html 10/21/2011 . Intention to create legal relations. Consideration has been defined as the price paid by one party for the promise of the other. An agreement to dine at a friend’s house in not an agreement intended to create legal relations and therefore is not a contract. an agreement to buy and sell goods intends to create legal relationship hence is a contract. If the agreement is induced by mutual mistake which is material to the agreement. vs. Crompton & Brothers Ltd. for a lawful consideration. competent to contract. Agreements between husband and wife also lack the intention to create legal relationship and thus do not result in contracts. According to section 10. (iii) fraud. Offer and acceptance. (ii) undue influence. The ‘consideration’ may be an act (doing something) or forbearance (not doing something) or a promise to do or not to do something. subject to the rules laid down in the act. If the agreement is vitiated by any of the first four factors. There is absence of ‘free consent. One clause of the agreement was as follows. and where necessary. the contract would be voidable and cannot be enforced by the party guilty of coercion. drunkenness etc. except in some special cases e. An agreement is legally enforceable only when each of the parties to it gives something and gets something. even a business agreement does not amount to a contract. idiocy. N sang the song M did not bring the necklace for her. and as such they do not give rise to a contract. Free consent of all the parties to an agreement is another essential element. or is of such a nature that. The case of Rose & Frank co.Microsoft Word . Agreements of a social or domestic nature do not contemplate legal relations. an agreement must possess the essential elements of a valid contract as contained in sections 10. The agreement is not enforceable at law. There must be an intention among the parties that the agreement should be attached by legal consequences and create legal obligations. When the defendant was due to return to Ceylon. 11. Answers (a) N cannot bring an action in a court to enforce the agreement as it lacked the intention to create legal relations. undue influence etc.” It was held that there was no intention to create legal relations on the part of parties to the agreement and hence there was no contract. The adjective ‘lawful’ implies that the offer and acceptance must satisfy the requirements of the contract act in relation thereto. or involves or implies injury to the person or property of another. The defendant agreed to send her £ 30 a month as maintenance expenses during the time they were thus forced to live apart. “This arrangement is not entered into as a formal or legal agreement. present or future. Lawful consideration. If any of the parties to the agreement suffers form minority. we propose to discuss them in brief here. The parties to an agreement must be competent to contract. lunacy. This concept has two aspects. The contracting parties must be of the age of majority and of sound mind and must not be disqualified by any law to which they are subject (sec. 1. Illustration In the above case R Company entered into an agreement with C Company. And shall not be subject to legal jurisdiction in the law courts. There must a ‘lawful offer’ and a ‘lawful acceptance’ of the offer. By means of which the former was appointed as the agent of the latter. or is immoral. provided other requisites of a valid contract are present. She sued for breach of this agreement. gratuitous promises are not enforceable at law.(1) consent should be made and (2) it should be free of any pressure or misunderstanding. Illustrations.” To be enforceable by law. The something given or obtained is the price for the promise and is called ‘consideration’ subject to certain exceptions. Balfour) In commercial agreements an intention to create legal relations is presumed. 20) 5.com/doc/aIIzBWdc/preview.lecture-01 Page 3 of 10 Essential Elements of a Valid Contract A contract has been defined in section 2(h) as “an agreement enforceable by law. are not expressly declared by the Act to be void. Thus.11). 4. in the case of necessaries supplied to a minor or lunatic. 2. with a lawful object.555 3 http://dc374. The essential elements of a valid contract are as follows. Provides a good illustration on the point. The third essential element of a valid contract is the presence of ‘consideration’. if permitted it would defeat The provisions of any law.4shared. The consideration is ‘lawful’. (a) M promises his wife N to get her a necklace if she will sing a song. Capacity of parties.’ if the agreement is induced by (i)coercion. or (v) mistake (sec. satisfy the requirements of any law as to writing or attention or registration. thus resulting in an agreement. ‘Consent’ means that the parties must have agreed upon the same thing in the same sense (sec. But the question that arises now is that what parties are competent and what are not. Now let us go to the third essential of a contract i.23). Try to work out the solution in the following cases and then go to the answer. or is fraudulent. the supplier of goods is entitled to be reimbursed from their estate (sec 68). Free consent. But only those considerations are valid which are ‘lawful’. It may be past. his wife could not accompany him because of her health. unless it is forbidden by law.. 29 and 56.e.g. (iv) mis-representation.. the aggrieved party) can either reject the contract or accept it. it would be void (sec. 13). The other party (i. 14). (b) The defendant was a civil servant in Ceylon. 3. As the details of these essentials form the subject matter of our subsequent chapters.

to discover treasure by magic.C. 10.” In order to give rise to a valid contract the terms of the agreement must not be vague or uncertain. A invites B to see a picture with him. an agreement in restraint of trade. (2003). a contract to be valid. Certainty. What are the essential elements of a valid contract? 4 11. must be in writing and registered. 9.com/doc/aIIzBWdc/preview. For example. 5. Before dealing with the various essentials of a valid contract one by one in detail. Is it a valid contract? [Hint: No] State whether there is any valid contract in the following cases? (i) X boards a DTC bus at Mayur Vihar for Shalimar Bagh. Possibility of performance. etc.555 http://dc374. First. and an agreement by way of wager have been expressly declared void under sections 26. physically or legally. It must be possible to ascertain the meaning of the agreement. because we shall be using the terms like ‘voidable contract’. Tata Mc.html M. Graw Hill Pvt. The agreement must not have been expressly declared to be void under the Act. Section 29 of the contract Act provides that “ Agreements. Vikas Publishing House Pvt. 7. The agreement is void for uncertainly. “ Business Law”. Ltd. Sections 24-30 specify certain types of agreements that have been expressly declared to be void. Here we end our discussion on essentials of a valid contract. Is this a valid contract? [Hint: No] 4. A. the meaning of which is not certain or capable of being made certain. B does not turn up has A any cause of action against B. Tulsian (2002). Illustation. ‘void contract’. 7. The object for which the agreement has been entered into must not be fraudulent or illegal or immoral or opposed to public policy or must mot imply injury to the person or the other of the reasons mentioned above the agreement is void. it will be appropriate to discuss the ‘kinds of contracts’. References · · · · Kapoor.com/bareacts/soga. A purchase a ticket for B and waits for him outside the cinema hall. Kucchal ( 2002). For the formation of a valid contract it is also necessary that the parties to an agreement must agree for a lawful object. Thus. it requires that an agreement to pay a time barred debt must be in writing and an agreement to make a gift for natural love and affection must be in writing and registered to make the agreement enforceable by law which must be observed. A agrees with B. Lawful object. Section 56 lays down that “An agreement to do an act impossible in itself is void”.lecture-01 Page 4 of 10 6.D. an agreement in restraint of marriage. are void. New Delhi. (ii) X and Y agree to go for fishing (iii) X buys an evening paper (iv) X a minor borrows Rs. According to the Indian contract Act. For example. B accepts the offer. P. 5000 from Yand agreed to repay back the same within a week. 10. http://www. 27 and 30 respectively. Delhi. N. Not expressly declared void. If the act is impossible in itself. “ Business Law”. Delhi.C. 8. “Elements of Mercantile Law. 2. Comment that the all contracts are agreements but all agreements are not contract. the agreement cannot be enforced at law. very often in the course of our discussion. The agreement is not enforceable. ‘void agreement’. when a landlord knowingly lets a house to a prostitute to carry on prostitution.indialawinfo. [Hint: No] A agrees with B to murder C for Rs. for otherwise. Notes: Illustration. it cannot be enforced 3. Writing and registration.html 10/21/2011 . he cannot recover the rent through a court of law or a contract for committing a murder is a void contract and unenforceable by law. 1000 if Y writes 100 pages for him in one minute.Microsoft Word . 6. Ltd. X agrees to pay Y Rs.” Sultan Chand and Sons.000. Now attempt the following questions for a better understanding: 1.4shared. agrees to sell B “ a hundred ton of oil” there is nothing whatever to show what kind of oil was intended. Yet another essential feature of a valid contract is that it must be capable of performance.

” Thus. Illustration. “an agreement which” is enforceable by law at the option of one or more of the parties thereto. Are as follows. According to section 2(i).4shared. (ii) When a party to the contract promises to do a certain thing within a specified time. A. enforceability. Such a contract is voidable at the option of the aggrieved party i. Void contract Unenforceable contract Illegal or unlawful contract From the point of view of enforceability a contract may be valid. otherwise the contract cannot be repudiated. but B prevents him from doing so. he must restore such benefit. a voidable contract is one which is enforceable by law at the option of one of the parties only. voidable.. void. 2. the party whose consent was so caused (secs. but fails to do it.lecture-01 Page 5 of 10 Learning Outcomes LESSON 2 KINDS OF CONTRACTS By the end of the lecture we should be able to answer the following questions: · The different types of contracts with respect to performance. it is a valid contract. Section 2(j) defines: A contract which ceases to be enforceable by law becomes void. Valid contract. But X does not supply the wheat within the specified time. ‘void contract’ implies a useless contract which has no legal effect at all. The contract becomes voidable at the option of A. Literally the word ‘void’ means ‘not binding in law’. If an amount has been received as a security for the due performance of the contract. If the intention of the parties was that time should be of the essence of the contract. illegal or unenforceable. A and B contract to marry Introduction First of all we will study [I] Kinds of contracts from the point of view of Enforceability · · · · · Valid contract Voidable contract. 53). Until it is avoided or rescinded by the party entitled to do so by exercising his option in that behalf. The contract has been caused by fraud and is voidable at the option of B. (b) A. B agrees. A. 11. and (ii) before the rights of third parties intervene. (sec. The contract has been brought about by coercion and is voidable at the option of B. and one party to the contract prevents the other from performing his promises. as for there has been no contract at all. The contract becomes voidable at the option of Y. then the contract becomes voidable at the option at the party so prevented (sec. X Agrees to sell and deliver 10 bags of wheat to Y for Rs. According to section 2(i). 100. it is”an agreement enforceable by law”.000. The reasons which transform a valid contract into a void contract. when it ceases to be enforceable. undue influence. Accordingly the term. Consequences of rescission of voidable contract. 56) A contract becomes void by impossibility of performance after the formation of the of contract for example. (i) When a contract contains reciprocal promises. an agreement becomes enforceable by law when all the essential elements of a valid contract as were enumerated in the last lesson are present. If one or more of these elements is/are missing the contract is either void. but the aggrieved party must exercise his option of rejecting the contract (i) within a reasonable time. (a) Supervening impossibility (sec. Void contract. as given in the contract Act. Illustration. (a) A : threatens to shoot B if he does not sell his new Bajaj scooter to A for Rs.com/doc/aIIzBWdc/preview. voidable. Usually a contract becomes voidable when the consent of one of the parties to the contract is obtained by coercion. is a voidable contract. validity and formation other circumstances under which a contract becomes voidable.e.555 5 http://dc374. and thereby induces B to buy the factory. Section 64 lays down the rights and obligations of the parties to a voidable contract after it is rescinded. Such a contract is a nullity.5000 within one week.html 10/21/2011 . is ready and willing to execute the work accordingly. unenforceable or illegal. 3. such earnest money deposit is not to be returned if the contract becomes voidable under section 55 on account of the promisor’s failure to complete the contract at the time agreed and has been rescinded by the promisee because it is not a benefit received under the contract. For example. misrepresentation or fraud. falsely represents that five hundred quintals of indigo are made annually at A’s factory. intending to deceive B. The section states that when a person at whose option a contract has become has received any benefit from another party to such contract. 1.Microsoft Word . Voidable contract. but not at the option of the other or others. 2.55) Illustration.” It follows form the definition that a void contract is not void from its inception and that it is valid and binding on the parties when originally entered but subsequent to its formation it becomes invalid and destitute of legal effect because of certain reasons. then the contract becomes voidable at the option of the promisee. 2. The Indian contract act has laid down certain other situations also under which a contract becomes voidable. 19 and 19A). Contracts with B that A shall whitewash B’s house for Rs.

Similarly. 1. A is not bound to make compensation to B for the loss of the profits which B would have made if A would have been able to sing. any person who has received any advantage under such agreement or contract is bound to restore it. A contingent contract to do or not to do something on the happening of an uncertain future event. agreements which are in restraint of trade or of marriage or of legal proceedings or which are by way or wager. when the party. when the event becomes impossible (sec. There is apparent contradiction in terms. Void agreement. In this case the agreement is discovered to be void and B must repay to A Rs. 650 per bag. where after accepting Rs. For example. when an agreement is void being discovered at a later stage. In the eye of law such an agreement is no agreement at all from its very inception. it becomes void.000. A agrees to sell B 100 hags of wheat at Rs. M by threatening to murder B’s son. A voidable contract becomes void. requisite stamp. but subsequent to its formation something happens which makes it unenforceable by law. The contract to marry becomes void.g. except that of ‘free consent. repudiates the contract. are excluded from the purview of this section. Unenforceable contract. an agreement with a minor is void abinitio as against him. (b) When a contract becomes void.000 as loan to B marries C. it will be proper if we use the term ‘illegal agreement’ in place of ‘illegal contract’ an illegal agreement is void ab-initio. however. 4.2 (g)]. (d) In the case of a contract contingent on the happening of an uncertain future event. restitution is also allowed in the case of a void contract. It turns out that the horse was dead at the time of the bargain. if L pays Rs. Certain agreements have been expressly declared void in the contract act e. C dies without being married to B. through neither party was aware of the fact. There is absence of one or more essential elements of a valid contract. Thus. B may either affirm or reject the contract. The word ‘illegal’ means ‘contrary to law’ and the term ‘contract’ means ‘an agreement enforceable by law’.) restoration is allowed in specie on equitable grounds because a minor cannot be allowed to cheat people. notice that a contract cannot be void ab-initio and only an agreement can be void ab-initio. A ‘void contract’ is valid when it is entered into. An unenforceable contract is one which is valid in itself. For example. but is not capable of being enforced in a court of law because of some technical defect such as absence of writing. private sales of wheat becomes void but A must return the sum of Rs. an agreement without consideration is void ab-initio. because it means something like this an agreement enforceable by law and contrary to law. registration.000 rupees paid in advance. For example. Similarly. (c) Repudiation of a voidable contract. Thus. makes B agree to sell his car worth Rs. In this connection section 65 lays down that when an agreement is discovered to be void or when a contract becomes void. but A must refund to B the 1.Microsoft Word . Thus. Before delivery the government bans private trading in wheat. 30. of course. is voidable at the option of B.. being of unlawful nature.lecture-01 Page 6 of 10 each other. In case B decides to rescind the contract. Before the time fixed for the marriage. 625 per quintal and receives Rs. A pays B Rs. (a) When an agreement is discovered to be void.000 to M to murder Z.000 only. subject to the following exceptions.000 for a sum of Rs. nothing can be recovered in the case of expressly declared void agreements. Thus. A contracts to give Rs. Soon after the contract. an oral arbitration agreement is unenforceable because the law requires an arbitration agreement to be in writing. The contract becomes void. etc. when they are entered into. In other words. 500 as advance. (i) In the case of an agreement caused by bilateral mistake of essential fact (although it is expressly declared void under section 20) restitution is allowed as it comes under the category of ‘an agreement discovered to be void. the contract becomes void. because a minor lacks the capacity to contract. For example. A is too ill to sing. such an agreement can never attain the status of a contract.4shared. The contract. of course with certain exceptions as laid down in section 25. As such to speak of an ‘illegal contract’ involves a contradiction in terms. a bill of exchange or promissory note.000 for B’s agreeing 5. A ‘void agreement ‘ never amounts to a contract as it is void ab-initio.’ in the case of a void agreement.com/doc/aIIzBWdc/preview. a void agreement does not give rise to any legal consequences and is void agreement does not give rise to any legal consequences and is void ab-initio. Similarly. Obligation of person who has received advantage under void agreement or contract that becomes void. For example. or time barred by the law of limitation.555 http://dc374. Similarly. and also because the other party has not lost his title to the thing in question. (b) Subsequent illegality (sec. Some important comparisons 6 11. becomes unenforceable after three years from the date the bill or note falls due. it should. A goes mad. Thus both parties may stand uneffected by the transaction in the following two cases.’ (ii) In the case of an agreement with a minor who commits fraud by misrepresenting his age (although agreement with a minor is known to be void. Illegal or unlawful contract. A agrees to sell B after one month 10 quintals of wheat at Rs. Thus..html 10/21/2011 . whose consent is not free.“An agreement not enforceable by law is said to be void” [sec. becomes void. A ‘void’ agreement should be distinguished from a ‘void contract’. 1. 500 to B. 1. 10. though valid in itself. 56) A contract also becomes void by subsequent illegality. 10. to sell his horse to him. be noted that agreements which are known to be void or illegal. the money cannot be recovered. being time barred under the limitation act. if that event becomes impossible. being the result or coercion. 1.000 as advance for singing at a convert for B. Moreover.” for example.32). this section provides for restitution of the benefit received.

A voidable contract gives rights to the aggrieved party to rescind the contract. A contract is an agreement which is enforceable at law. provided the third parties have the knowledge of the illegal or immoral design of the main transaction. Illustrations. agreements which are collateral to it are not invalidated and remain valid. but not at the option of others. But subsequently it becomes void due to one reason or the other. 11. Here the agreement between A and B is illegal and the agreement between A and D is collateral to an illegal agreement. But the position will change if D is not aware of the purpose of the loan. a promise or set of promise (s). (a) A engages B to Murder C and borrows Rs. These agreements are not enforces able at law. Scope – All agreements are not contracts. other agreement which are incidental or collateral to it are also A contract is always concluded and binding on the concerned parties. It is a contract which is enforceable by law at the option of one or more parties thereof. Void and Voidable Contract Void Agreement and Void Contract Despite the similarity between an illegal and a void agreement that in either case the agreement is void ab. But subsequently it becomes void due to one reason or the other. A voidable contract does not effect the collateral transactions. when an agreement is void (but not illegal). it may be restored back. If any benefit is passed between the parties. court if he is himself implicated in the illegality. The reason underlying this rule is that no person shall be allowed to invoke the aid of the Illegal and Void Agreements Similarities These agreements are not enforceable at law. in certain cases. ‘all illegal agreements are void but all void agreements are not necessarily illegal. its collateral transactions also becomes void. Differences Enforceability – An agreement may or my not be enforceable at law. hence void. (i) An illegal agreement is narrower in scope than a void agreement.’ The object or consideration of an agreement way not be contrary to law but may still be void. For example. Rights – A void contract is valid when it is made.lecture-01 Page 7 of 10 Agreement and Contract An agreement is a promise or set of promises (s).html 10/21/2011 . Effect – When a contract is void because of illegality. On the other hand. (ii) An illegal agreement is wider in effect in relation to collateral transactions than a void agreement. When an agreement is illegal. Being void does not make a contract punishable. social agreements are generally not enforceable while business agreements are enforceable at law. etc.e.initio and cannot be enforced by law. As such the loan transaction is illegal and void and D cannot recover the money. A voidable contract takes its full and proper legal effect unless it is disputed and set aside by the person entitled to do so. Differences Scope.000 from D to pay B. an agreement may not be contrary to law but may still be void. Punishment – Parties may be punished for making illegal agreement. It is a total nullity. Collateral transaction of an agreement which is void for a reason other than illegality are enforceable at law. illegal. Nature – A void contract is valid when it is made. For example. agreement with a minor is void as against him but not A contract is essentially an agreement. it becomes void contract. All contracts are agreements.. or may subsequently become voidable. For example. I will explain the above points in detail now. Again.555 7 http://dc374. An agreement may be void because of a reason other than illegality. Here the agreement between A and B. Effect – An agreement is not always a binding on the concerned parties. D is aware of the Illegal agreement Void agreement purpose of the loan. All illegal ag reements are void. an agreement the terms of which are uncertain is void but such an agreement the terms of which are uncertain is void an agreement is not illegal.These agreements are narrower in scope. D is aware of the purpose of the loan. Agreement Contract tainted with illegality.com/doc/aIIzBWdc/preview. it may be restored back. A contract may be voidable since very beginning.4shared. 5.Microsoft Word . In that case the loan transaction is not collateral to the illegal agreement and is a valid contract. i. and claim the damages. an Similarities Restitution – If any benefit is passed between the parties. Status – A void contract cannot create any legal rights. Effect on collateral transaction – Collateral transaction of an illegal contract also becomes illegal and contract not be enforced. These agreements are wider in scope. Differences Definition – When a contract ceases to be enforceable at law.

“For conditions see back”. It is a contract of mixed character. shares or a railway ticket are few examples of such standardized contracts. by acts and conduct of the parties. certain contracts may be a mixture of the ‘express’ and ‘implied’ types of contracts. from a practical point of view and for the sake of convenience. Where both the offer and acceptance constituting an agreement enforceable at law are made otherwise than in words i. Statutory protection – The English Unfair Contract Terms Act. A quasi contract is based upon the equitable principle that a person shall not be allowed to retain unjust benefit at the expense of another. Where an adequate notice is not given the offeree is not bound by the terms. It is a nullity since very beginning.000 and B accepts the offer by sending the scooter itself. Thus. and there comes into existence an implied contract and N is under obligation to pay to M. express or implied between the parties but the law infers or recognizes a contract under certain special circumstances. He is totally free to decide whether he wants to dig A’s garden or not. Such a contract does not arise by virtue of any agreement. offer and acceptance. a standard form for the numerous contracts may be used. Kinds of contracts from the point of view of mode of creation From the point of view of mode of creation a contract may be express or implied or constructive. B reaches to A’s place on Sunday to do the work. An insurance policy. obligation to finder of lost goods to return them to the true owner or liability or person to whom money is paid under mistake to repay it back cannot be said to arise out of a consent. It is a total nullity. but these are very mush conversed under quasi contracts as per sections 71 and 72 respectively. however. Here A’s offer is expressed in words and B’s acceptance is implied form his conduct. If. For example. It is a contract. and B.’ B makes no commitment. the dry cleaner has to be answerable . 500 in certain circumstances. Such contracts may be called as contracts of mixed character. if the cloth is altogether lost. even if the contract contains all sorts of exemption clauses. but says.) Terms of contract should be reasonable – if the terms of the contract are unreasonable and opposed to public policy. the cases grouped under this type of contracts have little or affinity with contract. they will not be enforced. A tells B on telephone that he offers to sell his car for Rs. Constructive or quasi contract. Sections 68-72 of the contract act describe the cases which are to be deemed ‘quasi contracts’”.html 10/21/2011 .lecture-01 Page 8 of 10 Similarities A void agreement cannot create any legal rights. I will pay you Rs. Implied contract. there is an express contract. namely. 4. Fundamental breach of contract – no exemption clause is allowed to permit the non-compliance of the basic contractual obligation i. In view of the unequal bargaining power of the two parties. 500. obligation which is fundamental or core of the contract. It is relevant to state in respect of mode of creation. allows him to do so. For example. by printing on a ticket. Marlborough Court. (2) Notice should be contemporaneous with the contract – if a party to the contract wants to have exemption from liability he must give a notice about the exemption while the contract is being entered into and not thereafter ( Olley Vs. it will amount to his acceptance a contract will be formed where both parties will be bound by their performance. 1. When it is formed it is perfectly valid.e. or otherwise explaining the the terms.g. A void contract cannot create any legal rights. Strict construction – a strict construction shall be applied to exemption clause.Microsoft Word . 1. Now we come to- (3) (4) (5) (6) 8 11. Thus. For example.555 http://dc374. A has committed himself to pay Rs. it is an implied contract. Where both the offer and acceptance constituting an agreement enforceable at law are made in words spoken or written. The contract act has rightly named such contracts as “ certain relations resembling those created by contract”. where out of the two components of an agreement. I am not sure that I shall be able to. The “special terms and conditions” become binding as part of the contract only if they are brought to the notice of the acceptor before or at the time of the contract.4shared. 1977 severely limits the right of the contracting parties 2.e.. and any ambiguity is to be resolved in favour of the weaker party. If B does not turn up on Sunday to dig the garden. the courts and the legislature have evolved certain rules to protect the interest of the weaker party:-(1) Reasonable notice – e. then the law implies that B agrees to pay for the services of A. 20. but if I do. and A says to B. Ltd. Express contract. Subsequently it becomes a nullity. A cannot do anything about is. or obtaining signatures on the document containing terms. I shall be happy to take Rs. it is an express contract. that is. The term ‘constructive or quasi contract is a misnomer. It never takes form of a contract. This arrangement is not bilateral.000 and B in reply informs A that he accepts the offer. where A.com/doc/aIIzBWdc/preview. It is a total nullity. Before I end the discussion on kinds of contracts I would like to discuss another kind of contract called the Standard Form Contract When a large number of contracts have got to be entered into by a person. Differences It is an agreement. but B has made no commitment at all. If you dig my garden next Sunday.. a coolie in uniform takes up the luggage of B to be carried out of the railway station without being asked by B. 500. one is expressed in words and the other is implied from acts and circumstances. A offers to buy B’s scooter for Rs. example.

it 11.00. Vikas Publishing House Pvt. Delhi. It is a void agreement because as per section 56 “ an agreement to do an act impossible in itself is void. The agreement is void because both the parties were under a mistake of fact regarding existence of the subject matter.e. Advise the parties. After 3 months. an auto mechanic. Advise X.D. Tulsian (2002).000 from Z who is also aware of the purpose of the loan. Y cannot recover anything from X. 9.html 10/21/2011 . No. Can A sue B for the loss he has suffered?. Ltd. Later on.000. (b) Executed or executory (c) Valid. X threatens to kill Y if he does not sell his house to X for Rs 1. To pay Y.000. Is Y bound to make payment to X? Solution: Y is bound to pay because he has accepted X’ s implied offer by conduct (i. X borrows Rs 1. (2003). After 6 months. B accepts the invitation. Is it a valid contract? [Hint.] 2. X invites Y to dinner.00. 8.) 4.50 for testing a used car which C was about to purchase from D. X borrows Rs 1. Delhi. 6. Rs. Graw Hill Pvt. X makes a promise to his wife Y to give her pocket money of Rs 1. 9. Rohini Aggarwal(2003). It is a social agreement and the usual presumption in such agreement is that the parties do not intend to create legal relationship.e. C paid A Rs. Delhi. Y does not make any attempt to stop X from polishing the shoes. Graw Hill Pvt. “Student’s Guide To Mercantile And Commercial Laws. Y accepts the invitation but fails to turn up. 1. A agreed and tested the car. C orally offered to pay A. X also refuses to repay the loan to W.000 if Y kills Z. A promises to pay B Rs.C.”] 3. X agrees to let his flat to Y for use as a gambling den on a monthly rent of Rs 10. by not stopping X from polishing the shoes). “ Business Law”.00. Y kills Z but X refuses to pay. he stops making the payment.500 if beats C. Can X sue Y for the damage? Solution: X cannot claim any damages from Y because the agreement between X and Y is not enforceable by law. Solution: Y cannot claim any damages from X because the agreement between X and Y is not enforceable by law.indialawinfo.com/doc/aIIzBWdc/preview. X fails to give the ring. Kucchal ( 2002).” Tata Mc. Since the main agreement between X and Y is illegal.” Sultan • • • • http://www. Notes: 7.Microsoft Word . What is the nature of the agreement between X and Y. Is the agreement between A and C (a) Express or implied Solution: X cannot recover anything.555 9 http://dc374. P. Y agrees. the agreement between X and W which is collateral to the main agreement is also void and hence W cannot recover anything from X. X agreed to sell a particular horse to Y. Can B recover the amount? ( Hint : No as the agreement is illegal. A invites B to a dinner. Ltd. and X and Z? Solution: The contract between X and Y is a contract which is voidable at the option of Y because Y’s consent is not free as it has been obtained by coercion. “Elements Chand and Sons. 50 in cash for his services. voidable or void 6. X promises Y to give a diamond ring at the time of his marriage.4shared.B beats C but A refuses to pay. 5. was discovered that the horse was dead at the time of making the contract. A cannot sue B for the loss he suffered because the agreement was of a social nature and hence lacked the intention to create legal relationship— one of the essentials of a valid contract. giving reasons for your answers.000 from W who is also aware of the purpose of the loan. [Hint. N. A made elaborate arrangement but B failed to turn up. Can Y claim damages from X References • Kapoor. India lacks such an Act. Hence. Solution:. it is not valid contract. Practical Problems Attempt the following problems. Tata Mc. X agrees to pay Y Rs 1. Y stops making the payment of rent. No. Solution: The agreement between X and Y is an illegal agreement because its object is unlawful. New Delhi. Can Y claim the ring? Solution: Y cannot claim the diamond ring because there is no consideration from Y . The agreement between X and Y is void because the object of the agreement is unlawful. borrowing for the purchase of a house) is lawful.00. M agrees to pay N Rs. Ltd.html M.com/bareacts/soga. Advise Y and W. It is a social agreement and the usual presumption in such agreement is that the parties do not intend to create legal relationship.lecture-01 Page 9 of 10 to exclude or limit their liability through exemption clauses in the agreement. of Mercantile Law. X polished Y’s shoes without being asked by Y to do so. 100 and in consideration N agrees in write for him 100 pages within five minutes.C. The contract between X and Z is a valid contract because the object of contract (i. “ Business Law”. 10.000 per month.

and the person accepting the offer is called the ‘promisee’ or ‘acceptor’.4shared. a contract comes into being provided other essentials of a valid contract like that of competency of parties to contract. he makes an implied offer. Section 2 (a) of the Indian contract act defines a ‘proposal’ as. (b) The second essential of a valid offer is intention. I will give a few more illustrations in this regard.000. 14. 80. But if M says to N. Legal Rules Regarding a Valid Offer A valid offer must be in conformity with the following rules: 1.000. or an offer to one’s wife to show her a movie is not a valid offer and as such cannot give rise to a binding agreement. (i) One person signifies to another.lecture-01 Page 10 of 10 LESSON 3: ACCEPTANCE Learning Outcomes After todays class you should be able to answer the following questions: • • • The meaning of offer and acceptance The communication of offer and acceptance The person making the ‘proposal’ or ‘offer’ is called the ‘promisor’ or ‘ offeror’. a fire broke out in the defendant’s farm . he is said to make a proposal”. Held services were rendered on an implied promise to pay for them. spoken or written is called an ‘express offer’ and the one which is inferred form the conduct of a person or the circumstances of the case is called an ‘implied offer. 14. 200 and B accepts the offer. According to section 3 to signify means that the proposal must be communicated to the other party. This definition reveals the following three essentials of a ‘proposal’. “ when one person signifies to another his willingness to do or to abstain form doing anything. we have a ‘proposal’ as it has been made with the object of obtaining the assent of N.html 10/21/2011 . it is not a valid offer in the eyes of law. believing that he was entitled to the free service of Upton Fire Brigade (which he was not) he summoned it. Even in the case of a business agreement if the parties agree that the breach of the agreement would not confer on either of the parties a right to enforce the agreement in a court 10 11. even though it is accepted and there is consideration.” or “ I am willing to sell my motorcycle to you for Rs. “ will you buy my motorcycle fro Rs. We propose to discuss now the legal rules relating to a ‘lawful offer’. The revocation of offer and acceptance Introduction By now you must be aware of the essentials of a contract. While discussing the essential elements of a valid contract in the preceding chapter we observed that as a first step in the making of a contract there must be a ‘lawful offer’ by one party and a ‘lawful acceptance’ of the offer by the other party. Thus a casual enquiry “ do you intend to sell your motorcycle?” is not a ‘proposal’. without being asked to do so. (ii) The expression of willingness to do or to abstain form doing some thing must be to another person. Upton claimed compensation for its services.com/doc/aIIzBWdc/preview. thus where A. it must be an expression of the willingness to do or to abstain from doing something. If the offer does not intend to give rise to legal consequences. consideration and contractual capacity out of which we shall study the first one in this lesson.000. there is an express offer. The Delhi Transport Corporation runs omnibuses on different routes to carry passengers at the scheduled fare.000 for it” is not a ‘proposal’. An offer may be’ express’ or ‘implied’. The Proposal or Offer The words ‘ proposal’ and ‘offer’ are synonymous and are used interchangeably. A shoe shiner starts shining some one’s shoes.C. because in social agreements or domestic arrangements the presumption is that the parties do not intend legal consequences to follow the breach of agreement.T. offers to sell a wrist watch to B for Rs. acceptance. with a view to obtaining the assent of that other to such act or abstinence. 2. a mere statement of intention” I may sell my motorcycle if I can get Rs. An offer to a friend to dine at the offeror’s place. in such circumstances that any reasonable man could guess that he expects to be paid for this. Similarly. But in the case of agreements regulating business agreements it is taken for granted that parties intend legal consequences to follow. An offer which is expressed by words. this is an express offer. Illustration (a) (b) (a) M says to N that he is willing to sell his motorcycle to him for Rs.Microsoft Word . In today’s lecture we shall do a detailed study of the concept of offer The four basic elements of a contract are offer. X writes to Y he offers to sell his house to him for Rs. This is an implied offer by the D. etc.’ Thus stepping into a taxi and consuming eatables at a restaurant both create implied promise to pay for benefits employed. An offer must contemplate to give rise to legal consequences and be capable of creating legal relations. 14.555 http://dc374. An offer may be made either by words or by conduct. There can be no ‘proposal’ by a person to himself (iii) The expression of willingness to do or to abstain from doing some-thing must be made with a view to obtaining the assent of the other person to such act or abstinence. are present. In Upton Rural District Council v Powell. the person to whom the offer is made is called the ‘offeree’. 20.000”.