Course: Mercantile Law (460)

Semester: Spring, 2019

Level: BA/B. Com
ASSIGNMENT No. 1
(Units: 1–4)
Q. 1 Keeping in view the Contract Act 1872, explain the following terms with one example
for each: (20)
i. Contract
This Act may be called the Contract Act, 1872.

Contract Act

The Indian Contract Act, 1872 defines the term “Contract” under its section 2 (h) as “An agreement
enforceable by law”. In other words, we can say that a contract is anything that is an agreement and
enforceable by the law of the land. This definition has two major elements in it “agreement” and
“enforceable by law”. So in order to understand a contract in the light of The Indian Contract Act,
1872 we need to define and explain these two pivots in the definition of a contract.

For example:
Josh agrees to deliver 300 pavers to Charles at his home on Monday, for $150.00. Charles pays
Josh the full amount up front, but Josh fails to deliver the pavers on Monday. When the pavers still
haven’t been delivered on Wednesday, Charles is angry and simply wants his money refunded.
Josh has committed an actual breach of his contract with Charles.
ii. Agreement

The Indian Contract Act, 1872 defines what we mean by “Agreement”. In its section 2 (e), the Act
defines the term agreement as “every promise and every set of promises, forming the consideration
for each other”. Now that we know how the Act defines the term “agreement”, there may be some
ambiguity in the definition of the term promise.

In other words, an agreement is an accepted promise, accepted by all the parties involved in the
agreement or affected by it. This definition thus introduces a flow chart or a sequence of steps that
need to be triggered in order to establish or draft a contract. The steps may be described as under:

i. The definition requires a person to whom a certain proposal is made.

ii. The person (parties) in step one have to be in a position to fully understand all the aspects of a
proposal.

iii. “Signifies his assent thereto” – means that the person in point one accepts or agrees with the
proposal after having fully understood it.
iv. Once the “person” accepts the proposal, the status of the proposal changes to “accepted
proposal”.

v. “Accepted proposal” becomes a promise. Note that the proposal is not a promise. For the
proposal to become a promise, it has to be accepted first.
Thus, in other words, an agreement is obtained from a proposal once the proposal, made by one or
more of the participants affected by the proposal, is accepted by all the parties addressed by the
agreement. To sum up, we can represent the above information below:

Agreement = Offer + Acceptance.

iii. Void Agreement

A void agreement definition would be an agreement with no legal value. Legally, a void agreement
means the contract or agreement is no longer enforceable.3 min read
A void agreement definition would be an agreement or contract with no legal value. Legally, a
void agreement means the contract or agreement is no longer enforceable. While precise
definitions vary by jurisdiction, void agreements are generally categorized as being void from the
beginning and were never valid at any point. On the other hand, void contracts are generally
defined to have been valid at one time, but are now invalid. However, despite those precise
definitions existing, the terms are most often used interchangeably.

A Void Agreement Never Valid

An agreement that was void from the beginning is said to be abs-initio. In order to be valid, the
agreement must contain all of the elements listed in the Indian Contract Act of 1872, Section 10.
Abs-initio agreements violated the Indian Contract Act from the beginning and are not valid.
Examples of an agreement that would never be valid include those that:

• Cannot be executed, such as a street vendor selling the Brooklyn Bridge to a tourist
• Were made without consideration
• Require breaking the law
• Go against current public policy
• Include a party that is a minor, intoxicated, or legally insane at the time of signing

Essentially these agreements have no legal effects and in the eyes of the law they never existed.

A Void Contract Once Valid But No Longer

A void contract is a contract or agreement that ceases to have a legal effect. Unlike an abs-initio,
these contracts did at one point contain the elements listed in the Indian Contract Act, and therefore
at least initially are considered valid legal agreements binding to both parties. A few ways a
contract could become legally void are:

• The contract becomes impossible to fulfill due to external circumstances

• Laws change since the initial agreement, and the agreement now requires breaking the law
 • Fulfilling the contract will result in something unlawful
• The contract was contingent on circumstances that cannot come to pass
• One party failed to disclose key information or provided inaccurate information

Technically speaking, a fulfilled contract is also a void contract, as the parties involved are no
longer bound by the contract and therefore it has no legal effect.

Examples of Void Agreements

The most straightforward type of void agreement is one that requires breaking the law. A gang of
thieves may make an agreement to steal a valuable painting and split the proceeds evenly. But if
one party in the agreement does not receive a fair share, he cannot take the others to court for not
fulfilling the contract, since the contract is considered legally void.
A common example of a void contract is one in which a performer agrees to a set of shows, but
then becomes injured and cannot perform after all. In these circumstances, the contract was valid
initially, but is now impossible to fulfill.
iv. Illegal Contract
An illegal contract is a contract that was made for an illegal purpose and, consequently, violates
the law. Contracts are illegal if the performance or formation of the agreement will cause the
parties to engage in activity that is illegal. The illegality must relate directly to the subject matter
creation of the contract and not some intervening circumstance.

Technically, an illegal contract or agreement is not a contract at all, and courts will not enforce
them. Thus, they are said to be void or “unenforceable”- it is as if the contract never existed, and
the parties will not be entitled to relief if either party breaches the contract.

Examples of Illegal Contracts

Other common examples of illegal contracts include:

• Contracts for the sale or distribution of controlled substances such as drugs or paraphernalia
• Contracts for illegal activities including prostitution or gambling
• Employment contracts for the hiring of underage workers
Sometimes a contract will deal with a subject matter that is not specifically prohibited by law, but
is nonetheless against public policy and principles of fair dealing. These contracts will also fall
under the category of “illegal contracts” and are also unenforceable as they are against public
policy.

Examples of contracts that are void because they violate public policy include contracts which
would lead a party to perform labor that would essentially force them to be a slave and certain
covenants not to compete. Even though the subject matter of these agreements may not be
specifically covered in any statute, a court will still treat them as though they are illegal. These
contracts will therefore be unenforceable in a court of law.
 vi. Quasi Contract
A quasi contract example involves an agreement between at least two parties who had no prior
obligation to each other.
Example involves an agreement between at least two parties who had no prior obligation to each
other. It is a contract that's legally recognized in a court of law. More specifically, this type of
contract is created by court order, not between the parties in question.
Quasi contracts arise when a dispute exists over payment for goods and services. What's difficult
about these circumstances is that no official agreement has been created between the parties
involved. The court steps in to prevent what's known as unjust enrichment. In essence, it's trying
to correct a situation where one party has acquired something to the detriment of the other party.
Quasi contracts are also referred to as implied-in-law contracts. They're a special kind of contract,
lacking mutual assent, but ordered by the court to avoid an injustice. When these were first
instituted into the American legal system, they were typically used to enforce an obligation to
restitution.

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Q. 2 every contract involves a mechanism of offer and acceptance in a business. Explain in
detail the legal provisions of offer and acceptance under the Contract Act 1872.(20)
Acceptance

The Indian Contract Act 1872 defines acceptance in Section 2 (b) as “When the person to whom the
proposal has been made signifies his assent thereto, the offer is said to be accepted. Thus the proposal
when accepted becomes a promise.”

So as the definition states, when the offered to whom the proposal is made, unconditionally accepts
the offer it will amount to acceptance. After such an offer is accepted the offer becomes a promise. Say
for example an offers to buy B’s car for rupees two laces and B accepts such an offer. Now, this has
become a promise.

When the proposal is accepted and it becomes a proposal it also becomes irrevocable. An offer does
not create any legal obligations, but after the offer is accepted it becomes a promise. And a promise
is irrevocable because it creates legal obligations between parties. An offer can be revoked before it
is accepted. But once acceptance is communicated it cannot be revoked or withdrawn.

Rules regarding Valid Acceptance

1. Acceptance can only be given to whom the offer was made

In case of a specific proposal or offer, it can only be accepted by the person it was made to. No third
person without the knowledge of the offered can accept the offer. Let us take the example of the case
study of Bolton v. Jones. Bolton bought Brocklehurst’s business but Brocklehurst did not inform all
his creditors about the same. Jones, a creditor of Brocklehurst placed an order with him. Boulton
accepted and supplied the goods. Jones refused to pay since he had debts to settle with Brocklehurst.
It was held that since the offer was never made to Boulton, he cannot accept the offer and there is no
contract.

When the proposal is a general offer, then anyone with knowledge of the offer can accept it.

2. It has to be absolute and unqualified

Acceptance must be unconditional and absolute. There cannot be conditional acceptance that would
amount to a counter offer which nullifies the original offer. Let us see an example. An offers to sell
his cycle to B for 2000/-. B says he accepts if A will sell it for 1500/-. This does not amount to the
offer being accepted, it will count as a counteroffer.

Also, it must be expressed in a prescribed manner. If no such prescribed manner is described then it
must be expressed in the normal and reasonable manner, i.e. as it would be in the normal course of
business. Implied acceptance can also be given through some conduct, act, etc. However, the law does
not allow silence to be a form of acceptance. So the offer or cannot say if no answer is received the
offer will be deemed as accepted.

3. Acceptance must be communicated

For a proposal to become a contract, the acceptance of such a proposal must be communicated to the
promisor. The communication must occur in the prescribed form, or any such form in the normal
course of business if no specific form has been prescribed. Further, when the offered accepts the
proposal, he must have known that an offer was made. He cannot communicate acceptance without
knowledge of the offer.

So when A offers to supply B with goods, and B is agreeable to all the terms. He writes a letter to
accept the offer but forgets to post the letter. So since the acceptance is not communicated, it is not
valid.

4. It must be in the prescribed mode

Acceptance of the offer must be in the prescribed manner that is demanded by the offer or. If no such
manner is prescribed, it must be in a reasonable manner that would be employed in the normal course
of business. But if the offer or does not insist on the manner after the offer has been accepted in
another manner, it will be presumed he has consented to such acceptance.

So A offers to sell his farm to B for ten lakhs. He asks B to communicate his answer via post. B e-
mails A accepting his offer. Now A can ask B to send the answer through the prescribed manner. But
if A fails to do so, it means he has accepted the acceptance of B and a promise is made.
5. Implied Acceptance
Section 8 of the Indian Contract Act 1872, provides that acceptance by conduct or actions of the
promise is acceptable. So if a person performs certain actions that communicate that he has accepted
the offer, such implied acceptance is permissible. So if A agrees to buy from B 100 bales of hay for
1000/- and B sends over the goods, his actions will imply he has accepted the offer.

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Q. 3 all contracts need to have consideration for their validity. What is meant by the term
consideration? Explain the various legal provisions regarding the consideration.
(20)
Consideration: Every Contract Needs It
Under basic principles of contract law, consideration is the answer to the question, "Why are you
entering this contract?" or "What are you receiving for being a party to this contract?"
In order for any agreement to be deemed legally binding, it must include consideration on the part
of every person or company that enters the contract. This article covers the basics of the
consideration requirement, including real-world examples of consideration
Meant by the term consideration
Consideration is the benefit that each party gets or expects to get from the contractual deal -- for
example, Victoria's Secret gets your money; you get the cashmere robe.
In order for consideration to provide a valid basis for a contract -- and remember that every valid
contract must have consideration -- each party must make a change in their "position."
Consideration is usually either the result of:

• a promise to do something you're not legally obligated to do, or

• A promise not to do something you have the right to do (often, this means a promise not to
file a lawsuit).
Sometimes this change in position is also called a "bargained-for detriment."
How does consideration work in the real world? Let's say you backed into your neighbor's golf
cart and damaged it. Your neighbor is legally permitted to sue you for the damage but instead
agrees not to sue you if you pay him $1,000. This agreement provides adequate consideration for
the contract, because each party is giving up something in the exchange -- you're giving up some
of your money while your neighbor is giving up the right to sue you.
Legal Rules Regarding Consideration
Enforcing any legal contract requires it to have an element of consideration included in it. In simple
words, it is nothing but a price that the promise agrees to pay to the promisor. Now, this price can be
paid as a benefit to the promisor and/or a loss or detriment to the promise. In this article, we will look
at this dual aspect of consideration in detail.
Basic Understanding of Consideration

According to Section 2(d) of the Indian Contract Act, 1872, consideration is defined as follows:

“When at the desire of the promisor, the promise or any other person has done or abstained from
doing, or does or abstains from doing, or promises to do or abstain from doing something, such act or
abstinence is called a consideration for the promise.”

This is a complex sentence. Let’s break it down for further understanding and rewrite it as follows:

At the desire of the promisor if the promise either

• Does something (in the past, present or future) OR

• Abstains from doing something (in the past, present or future)

Then, this act of doing or abstinence is called Consideration. Now, it has two aspects, either doing
some act or abstaining from doing something. Let’s look at some examples:

Example 1 – Doing something

Peter and John enter into a contract where Peter promises to deliver 15 curtains to John in one month’s
time. Also, John promises to pay Peter an amount of Rest 3,000 on delivery. In this contract, John’s
promise to pay Rest 3,000, on delivery, is the consideration for Peter’s promise. Also, Peter’s promise
of delivering 15 curtains is the consideration of John’s promise to pay.

Example 2 – Not doing something

Peter has taken a loan from his friend John. However, he has not repaid the loan yet. John promises
not to file a suit against Peter if he promises to repay the loan within a week. In this case, abstinence
on the part of John is due to the consideration of Peter’s promise of repayment of the loan.

Rules Regarding Consideration

According to Section 2(d) of the Indian Contract Act, 1872, the follows features are essential for a
valid consideration:

(I) Consideration must move at the desire of the promisor

Consideration can be offered by the promise or a third-party only at the request or desire of the
promisor. If an action is initiated at the desire of the third-party, it is not a consideration.
Peter is going back home from work. On his way, he sees that his neighbor John’s house is on fire.
He immediately arranges for a water hose and manages to douse the fire. Peter cannot claim any
reward for his effort because it was a voluntary act and was not done at the desire of John (promisor).

(ii) Consideration may move from the promise to any other person
If you look at the definition of consideration according to section 2 (d) of the Indian Contract Act.
1872, it explicitly states the phrase ‘promise or any other person…’ This essentially means that in
India, consideration may move from the promise to any other person. However, it is important to note
that there can be a stranger to consideration but not a stranger to the contract.

Peter gifted his son, Oliver an apartment in the city with a condition that he pays a fixed amount of
money to his uncle, John, every year. On the same day, Oliver executed a deed to pay a fixed amount
of money to John every year. However, Oliver failed to pay and John filed a suit for recovery. Oliver
pleaded that he was not liable since no consideration had moved from John. However, the court held
the words ‘promise or any other person…’ and allowed John to maintain his suit for recovery.

(iii) It can be in the past, present or future

a. Past
Since consideration is the price of a promise, it is normally given to induce the promise. However, it
can be given before the promise is made by the promisor. This is past consideration. It is important to
note that past consideration is not considered for a new promise since it is not been given in lieu of
the promise. According to Indian law, ‘past considerations’ is ‘good consideration’ if it was given at
the desire of the promisor.

Peter employs John to work on his field during the months of agricultural harvesting. He promises to
pay John an amount of Rest 5,000 for his services when he sows the new crop in the fields. The
services of John in the past constitute a valid consideration.

A.1. Past Voluntary services

At times, a person might render voluntary services without any request or promise from another. If
the person receiving the services makes a subsequent promise to pay for the services, then such a
promise is enforceable in India under Section 25(2) of the Indian Contract Act, 1872 which states:

‘An agreement made without consideration is void, unless it’s a promise to compensate, wholly or in
part, a person who has already voluntarily done something for the promisor, or something which the
promisor was legally compellable to do; or unless.’

Peter finds John’s wallet on the road. He returns it to him and John promises to pay Peter Rest 500
for his services. This is a valid contract.
b. Present
If the promise and consideration take place simultaneously then it is present or executed consideration.
An example is Peter goes to a shop, buys a bag of chips and pays for the same on-spot.

c. Future
When the consideration for a promise moves after the contract is formed, it is a future or executor. It
is also valid if it depends on the condition.

Peter promises to create architectural plans for John’s new house. John promises to pay Peter an
amount of Rest 50,000 provided the plans are approved by his wife.

(iv) It must have value in the eyes of the law

While the law allows the parties to decide an ‘adequate’ consideration for them, it must be real and
have value in the eyes of law. While the Court will not consider inadequacy, it will look at it to
determine if the consent was given by the party with free-will or not.Peter’s wife agrees to withdraw
the suit she has filed against him in return for his promise to pay her a monthly maintenance amount.
This is a good consideration and holds value in the eyes of law.

(v) It should be over and above the Promisors’ existing obligations

If the promisor is already obligated either by his promise or law to perform or abstain from a certain
act, then it is not a good consideration for a promise.

Peter receives a summons from the Court to appear before it as a witness for John. John promises to
pay him Rs 10,000 to appear in the Court. This contract is not valid because Peter is obligated by law
to appear in the Court on receiving a summons.

(vi) It cannot be Unlawful

A consideration that is against the law or public policies is not valid.Peter offers Rs 10,000 to John to
beat up his business rival. John beats him up but Peter refuses to pay him. John cannot file a suit for
recovery since the consideration is against the law.

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Q. 4 What is meant by performance of contract? Who can demand performance of

contract? Explain in detail with examples the legal provisions regarding the
performance of contract. (20)
What is Performance of Contract?
The term ‘Performance of contract‘ means that both, the promisor, and the promisee have
fulfilled their respective obligations, which the contract placed upon them. For instance, A visits a
stationery shop to buy a calculator. The shopkeeper delivers the calculator and A pays the price.
The contract is said to have been discharged by mutual performance.

DEMAND OF PERFORMANCE:

Following persons can demand performance of the contract.

(I) PROMISEE:

Promise can demand the performance of the contract.

> Example:

A promise to B to pay 1000 Rs to C. If A does not Pay the amount to C. It is only B who can
demand performance of Contract By A who made promise.

(II) LEGAL REPRESENTATIVE:

If promise dies, his legal representative can demand the performance of the contract.

> Example:

A borrowed some money from B. B died - 1 The legal representative of B can demand the
performance of the contract.

4. BY WHO CONTRACT MUST BE PERFORMED:

Contract must be performed by the following persons.

(I) THE PROMISER HIMSELF:

Contract may be performed by the promiser. Either himself or through other competent person.

> Example:

A promises to paint a picture for B. A must perform the promise himself.

(II) AGENT:

Contract may be performed by Agent of the promisor.

> Example:

A promise B to sell goods A may perform his promise himself or through his agent.

(III) LEGAL REPRESENTATIVE:

Contract may be performed by legal representative.

> In Case of Personal Skill:

In case of contract involving personal skill, the legal representative of deceased arc not bound to
perform the contract.

> In Case of Not Personal Skill:

In case of contract not involving personal skill but impersonal nature the legal representative are
bound to perform the contract.

(IV) THIRD PERSON:

When a promise accepts performance of contract form a third person he can not afterward enforce
it against the promisor.

> Example:

A borrows Rs 5 Lac from B and promises to repay within a year. After few months C the brother
of A pays Rs 5 Lac to B. B accepts the money. A is discharge from the liability to pay.

legal provisions regarding the performance of contract

Section 37 lays down that the parties to a contract must either perform, or offer to perform, their
respective promises, unless such performance is dispensed with or excused under the provisions
of this Act, or of any other law. Promises bind the representatives of the promisors in case of death
of such promisors before performance, unless a contrary intention appears from the contract.

Illustrations

(a) A promises to deliver goods to B on a certain day on payment of Rs. 1,000. A dies before that
day. A’s representatives are bound to deliver the goods to B, and B is bound to pay Rs. 1,000
to A’s representatives.

(b) A promises to paint a picture for B by a certain day, at a certain price. A dies before the day.
The contract cannot be enforced either by A’s representative or by B [section 37]. The
performance can be ‘actual performance’ or ‘attempted performance’, i.e. ‘offer to perform’.

Section 38 specifies that where a promisor has made an offer of performance to the promisee, and
the offer has not been accepted, the promisor is not responsible for non-performance, nor does he
thereby lose his rights under the contract.

Every such offer must fulfill the following conditions:

(1) It must be unconditional;

(2) It must be made at a proper time and place, and under such circumstances, that the person to
whom it is made may have a reasonable opportunity of ascertaining that the person by whom
it is made is able and willing there and then to do the whole of what he is bound by his
promise to do;

(3) If the offer is an offer to deliver anything to the promisee, the promisee must have a reasonable
opportunity of seeing that the thing offered is the thing which the promisor is bound by his
promise to deliver.

An offer to one of several joint promisees has the same legal consequences as an offer to all
of them.

Effect of refusal of party to perform promise wholly (Section 39) When a party to a contract has
refused to perform, or disabled himself from performing, his promise in its entirety, the promisee
may put an end to the contract, unless he has signified, by words or conduct, his acquiescence in
its continu-ance.
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Q. 5 How a contract of agency is created and how it can be terminated under the Contract Act
1872? (20)

Creation of Agency

Agency system is very popular in the current business scenario. There are two parties in the agency system
one is the principal and another the agent. An agent is a person acting on behalf of his principal. It’s a
connecting link between the principal and the third party. Herein we will discuss the creation of agency
under Indian Contract Act, 1872.

Creation of Agency

A contract of agency may be express or implied. Consideration is not an essential element in agency
contract. Agency contract may also arise by estoppel, necessity or ratification.

Types of an Agency Contract

Express Agency

A contract of agency can be made orally or in writing. Example of a written contract of agency is the Power
of Attorney that gives a right to an agency to act on behalf of his principal in accordance with the terms and
conditions therein.

A power of attorney can be general or giving many powers to the agent or some special powers, giving
authority to the agent for transacting a single act.

2. Implied Agency
Implied agency arises when there is any conduct, the situation of parties or is necessary for the case.

a. Agency by Estoppel (Section 237)

Estoppel arises when you are precluded from denying the truth of anything which you have represented as
a fact, although it is not a fact.

Thus, where P allows third parties to believe that A is acting as his authorized agent, he will be estopped
from denying the agency if such third-parties relying on it make a contract with an even when A had no
authority at all.

b. Wife as Agent

Where a husband and wife are living together, we presume that the wife has her husband’s authority to
pledge his credit for the purchase of necessaries of life suitable to their standard of living. But the husband
will not be liable if he shows that:

(i) he had expressly warned the tradesman not to supply goods on credit to his wife;

Termination of Agency

Agency means a relationship between one person and another, where the first person brings the second
mentioned person in a legal relationship with others. There are different modes of the creation of agency
and termination of agency.

Termination of Agency

An agent is a person employed to do any act or enter into a contractual relationship with others (third
parties) on behalf of his principal. An agent acts as a connecting link between his principal and third
parties.

While representing his principal, an agent acts in the same capacity as of his principal. An agent is
authorized by his principal to act on his behalf. An agent binds his principal legally in business
transactions with third parties due to their agency relationship.

According to Section 201 of Indian Contract Act, 1872, Termination of agency takes place in the
following circumstances: –

1. By revocation of authority by the principal.

2. By renunciation of his authority by the agent.

3. On the performance of the contract of agency.

4. On the death of either principal or agent.

5. By insanity of either principal or agent.

 6. With the expiration of time period fixed for the contract of agency.

7. By an agreement made between principal and his agent.

8. With the insolvency of principal or agent (in few cases).

9. When the principal and his agent is an incorporated company, by its dissolution

10. With the destruction of the subject matter. (section 56)

When an Agency is Irrevocable
When the agency cannot be terminated, it is known as an irrevocable agency. There are some
situations when revocation of an agency by the principal is not possible, as follows:-

1. When the agency is coupled with interest then this is a case where an agent has interest in the
subject matter of such agency. Where the agency is coupled with an interest, it does not come
to an end even in the case of death or insanity or insolvency of the principal.

2. When an agent has incurred personal liability, then the principal cannot revoke the agency, the
agency becomes irrevocable. For Example – P appoints Q as his agent. Q purchases some
wheat as per the instructions of P in his personal name. Now, in such a case P cannot revoke
the agency.

3. Where the agent has partly exercised the authority, and it is irrevocable with regard to liabilities
which arises from the acts performed. (section 204) For Example – Mr. X appoints Mr. Y as
his agent. On Mr. X’s direction, Mr. Y purchases 100kg cereals in the name of his principal
‘Mr. X’. Now, in such a case Mr. X cannot revoke the agency.
Termination takes Effect
Termination of an agency takes its effect when it becomes known to an agent. When the principal
revokes the agency, it comes into effect only when it is known to the agent. However, in the case of
third parties, termination comes into effect only when such termination of agency comes to their
knowledge.According to Section 210 of Indian Contract Act, 1872 termination of an agent’s authority
also terminates the sub-agents authority appointed by the agent. A per Section 209 of
Indian Contract Act, 1872 it is the duty of an agent to protect his principal’s interest in case his
principal becomes of unsound mind or dies.

It is the duty of an agent that on the termination of an agency due to death of the principal or his
becoming insane, to take all the reasonable steps on behalf of his late principal or dying principal to
protect the interest that the latter entrusts to him.