Ms.

Shruti Bhuttani

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BUSINESS LAW
UNIT 1

Shruti Bhuttani

Ms.Shruti Bhuttani

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WHAT IS CONTRACT?

According to section 2(h) An

agreement enforceable by law is a
contract.
Contract essentially consist of two
elements:
a) Agreement
b) Legal Obligation

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COMMENT ON THE GIVEN BELOW STATEMENT:

All contracts are

agreement but all
Agreements are not
contract
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CLASSIFICATION OF CONTRACTS
1.

On the basis of validity or enforceability:

Valid Contract : An Agreement enforceable by law and
satisfy al essential elements of valid contract.
Voidable Contract :An agreement enforceable by law
at the option of one or more party only but not at the
option of the other or others party in a voidable
contract.
Void Contract: It implies a contract which was legally
enforceable when entered into but it has become void
due to the supervening impossibility of its performance.

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CLASSIFICATION OF CONTRACTS

Void agreement : A contract which has no

existence in the eyes of law can not be
enforceable in court of law. for eg- an
agreement with a minor. A void agreements
never becomes a contract.
Unenforceable contract : It is a contract
which is otherwise valid, but cannot be
enforceable because of some technical
defect like absence of a written form or
absence of a proper stamp.
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CLASSIFICATION OF CONTRACTS
2. On the basis of its formation:

Expressed contract: A contract which has been

entered into with words either spoken or written.

Implied contract: A contract which has been

entered by its actions or expressions otherwise
than in words. In such a contract law implies that
the former agrees to pay for the price.
Quasi contract or constructive contract:
under such a contract rights and obligation
between the parties arises not only by any
agreement but by operation of law.
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CLASSIFICATION OF CONTRACTS
3 . On the basis of performance:
Executed contract: is the one in which
both the parties have performed their
obligations.
Executory contract : where a contract
is yet to be performed either wholly or
partially by one or both the parties.

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ESSENTIAL ELEMENTS OF CONTRACT

1) Offer And Acceptance :
There must be lawful offer and Lawful
acceptance for the same.
2) Intention To create Legal Relation:
There must be intention among both the
parties to create a legal obligation. Contract
of social or domestic nature are generally
presumed not to carry any legal obligation.
CASE: BALFOUR V/S BALFOUR
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ESSENTIAL ELEMENTS OF CONTRACT

3) Lawful Consideration: Consideration

is the price paid by one party for the
promise of other.
The consideration is unlawful under
following conditions:
a) If it is forbidden by law:

Any act punishable by criminal law.

Any Act Probhited by special legislation or
regulation.
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ESSENTIAL ELEMENTS OF CONTRACT

b) If permitted it would defeat the

provision of any law.
c) If act is only fraudulent:
d) If court regard its immoral.

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ESSENTIAL ELEMENTS OF CONTRACT

4) Capacity of Parties:
Following persons are incompetent to enter into contract:
a) Minor
b) Unsound Mind: Various Types of Unsoundness
of mind is:

Idiocy: It is god given and permanent with no interval of

saneness.
Lunacy :It is disease of brain .Lunatic loses the thinking
power of his brain due to some strain or disease.
Drunkenness:
Hypnotism:
Mental Decay: This is on account of old age.
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ESSENTIAL ELEMENTS OF CONTRACT

C) Disqualified Person:
Following persons are disqualified to
enter into contract:

Alien Enemies:
Foreign Sovereign and ambassador.
Convict
Married Women

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ESSENTIAL ELEMENTS OF CONTRACT

5) Free Consent: Section 14 lays there is a
absence of free consent under following
conditions:
a) Coercion: is threatening to convict any act.
b) Under Influence: Such a contract where
relation existing between the parties is
such that one dominate the will of other.
Eg: relationship between master and
servant.
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ESSENTIAL ELEMENTS OF CONTRACT

c) Misrepresentation: A representation means a
statement of fact made by one party to the other,
either before or at the time of contract. A
representation when wrongly made ,either innocently
or intentionally is termed as a misrepresentation.
Eg: A says to B who intends to purchase his land my
land produces 10 quintals of wheat per acre A,
believes the statement to be true, although he doesnt
not sufficient grounds for the belief .Later on ,it
transpires that the land produces only 7 quintals of
wheat per acre. This is misrepresentation.

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ESSENTIAL ELEMENTS OF CONTRACT

d) Fraud: It includes all acts committed by a person
with an intention to deceive another person.
For Eg: A sells a horse to B which he knows is
of unsound mind but unsoundness is during
intervals. so he sold the horse during the
time when horse was of sound mind. He
hided the fact to make B enter into the
agrreement.later when B realized he can file
a case of fraud against A and can claim
damage caused for the same.
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FRAUD V/S MISREPRESENTATION

FRAUD
Implies on intention
to deceive, hence it
is intentional or
willful wrong.

Misrepresentati
on

Is an innocent wrong
without any
intention to deceive.
The person making
the statement
believes it to be
true.
A civil wrong which
Gives only the right
entitles a party to claim to rescind the
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ESSENTIAL ELEMENTS OF CONTRACT

6) Lawful Object : The object for which
agreement has been entered into it must not
be fraudulent or illegal or immoral or imply
injury to the person than such a agreement
cannot be treated as a valid contract.
For eg.: A rents out his house for the business
of prostitution or for making bomb, the acts
performing there are unlawful. Hence such
agreement cannot be treated as a valid
contract.
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ESSENTIAL ELEMENTS OF CONTRACT

7) Writing and Registration :The contract act
does not insist that the agreement must be in
writing, it could be oral. But, in some cases the
law strictly insist that the agreement must be in
writing like agreement to sell immovable
property must be in writing and should be
registered under the Transfer of Property Act,
1882. These agreement are valid only when
they fulfill the formalities like writing,
registration, signing by both the parties are
completed.
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ESSENTIAL ELEMENTS OF CONTRACT

8) Agreement not expressly declared
void:Section 24 to 30 specify certain types of
agreement which have been expressly declared
void.
For eg- If John promises to pay $50 to Mary if she
does not marry throughout her life and Mary
promise not to marry at all. But this agreement
cannot be treated as a valid contract owing to the
fact that, under sec 26 restraint of marriage
expressly declared void.
agreement in restraint of trade (Sec 27)
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ESSENTIAL ELEMENTS OF CONTRACT

9)Certainty of meaning:Wording of
the agreement must be clear and not
uncertain or vague.
Suppose John agrees to sell 500 tones of
oil to Mathew. But, what kind of oil is
not mentioned clearly. So on the
ground of uncertainty, this agreement
stands void.
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ESSENTIAL ELEMENTS OF CONTRACT

10) Possibility of performance:As

per section 56, if the act is impossible
of performance, physically or legally,
the agreement cannot be enforced by
law.
Impossible agreements like one claims
to run at a speed of 1000km/hour or
Jump to a height of 100feet etc. would
not create a valid agreement
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Shruti Bhuttani

Discharge of Contract

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Contract can be discharged in

following manners:
1)

Discharge by Performance: There

are two types of performance:

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Actual Performance
Attempted Performance

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Contract can be discharged in

following manners:
2) Discharge By Mutual consent :Can
be done under the following ways:
Novation: when a new contract is
substituted for a existing contact ,either
between the Same parties or between
different parties, the consideration
mutually being discharged for old
contract.
Alteration: means change in one or
more material terms of the contract.
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Contract can be discharged in

following manners:
Rescission: A contract may be
discharged ,before the date of performance
by agreement between the parties to the
effect that is shall no longer bind them .
Remission: means acceptance of a lesser
fulfillment of the promise made.
Waiver: When the parties to a contract
agree that they shall no longer be bound by
the contract. Consideration is not necessary
for waiver.

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Contract can be discharged in

following manners:
3) Discharge by impossibility:
a) Impossibility Existing at time of agreement
b) Impossibility arising subsequent to the
formation of contract known as
SUPERVENING IMPOSSIBILTY
Discharge in case of supervening impossibly:
Destruction of Subject Matter: When the
subject matter of a contract, subsequent to its
formation, is destroyed without any fault of the
parties to the contract, the contract is
discharged.
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Contract can be discharged in

following manners:
Non Existence or Non Occurrence of a
particular state of things: Sometimes
contract is entered between two parties on the
basis of a continued existence or occurrence of
a particular state of things and if that state of
thing does not occur, the contract is discharged.
Death or Incapacity for personal
experience: Where the performance of
contract depends on the personal skills of a
party, the contract stands to be discharged on
his death or illness as incapacity to perform.

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Contract can be discharged in

following manners:
Change of law : When subsequent
to the formation of contract, change
of law takes place under such a
situation contract stands to be
discharged.
Outbreak of War: A contract
entered into with an alien enemy
before the war stands to be
discharged during a period of war.

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Cases not covered under

supervening impossibility
Difficulty of Performance :
Commercial Impossibility: When
in a transaction profits dwindle to a
very low ,therefore it becomes
commercial impossible.
Impossible due to the default of
third person
strikes and lockouts
Failure of one of the object.

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Contract can be discharged in

following manners:
4) Discharge by lapse of time: The
limitation act1963 lays down that a contract
should be performed within a specific period,
called period of limitation.
5) Discharge by operation of Law:
Death: In contracts involving personal skill
or ability ,the contract is terminated on
death of the promisor. In other contracts, the
right and liabilities of a deceased person
pass on to the legal representatives of the
deceased person.
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Contract can be discharged in

following manners:
Merger : Where an inferior right
contract merges into a superior right
contract, the former stands
discharged.
Unauthorized Material
Alteration: A material alteration
made in written document or
contract by one party without the
consent of the other will make the
whole contract void.

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Contract can be discharged in

following manners:
6) Discharge by breach of contract:
Anticipatory Breach : Breach of

contract arising before the time

fixed for performance has arrived.
Actual breach: It occurs when a
party fails to perform his obligation
upon the date fixed for the
performance.

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REMEDIES FOR
BREACH OF
CONTRACT
Shruti Bhuttani

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REMEDIES FOR BREACH

A contract, stands to be discharged
when it is performed resulting
contracting party got free from its
obligations.
But in case contracting party fails to
perform the contract than there is
breach of contract.
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REMEDIES FOR BREACH

The party committing breach
of contract is called the
guilt party and the other
party is called the injured
or aggrieved party

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The remedies are:

Following
remedies are available to aggrieved party
against the guilty party:

1.
2.
3.
4.
5.

Suit
Suit
Suit
Suit
Suit

Ms.Shruti Bhuttani

for
for
for
for
for

rescission,
damages,
quantum meruit,
specific performance,
injunction.
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1).

Suit for Rescission

The breach of contract no doubt

discharges the contract, but the
aggrieved party may sometimes need
to approach the court to grant him a
formal rescission, i.e. cancellation, of
the contract. This will enable him to be
free from his own obligations under the
contract.
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2. Suit for Damages

The word damages means
monetary compensation for loss
suffered. Whenever a breach of
contract takes place, the remedy of
damages is the one that comes to
mind immediately as the
consequence of breach.
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A breach of contract may put the

aggrieved party to some disadvantage
or inconvenience or may cause a loss
to him. The court would desire the
guilty part to accept responsibility for
any such loss of the aggrieved party
and compensate him adequately.
The quantum of damages is determined by
the magnitude of loss caused by breach

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Types of Damages (Sec.73)

When the aggrieved party claims
damages as a consequence of breach,
the court takes into account the provisions of
law in this regard and the circumstances
attached to the contract.
The amount of damages would depend
upon the type of loss caused to the
aggrieved party by the breach.
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The court would first identify the

losses caused and then assess
their monetary value.
Sec.73 of the Act lays down the
basic
guidelines for identifying the
losses.
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(a)

General or ordinary damages:

Such losses would be called the general or

ordinary losses which can be seen as arising
naturally and directly out of the breach in the
usual course of the things.
They would be the unavoidable and logical
consequence of the breach. The damages for such
losses are called general or ordinary damages. An
aggrieved partys right to damages applies most
naturally for the direct or general losses. There
can be no damages for indirect and remote losses

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(b)

Special damages:

Special damages would be

the compensation for the special losses caused to the
aggrieved party by the special circumstances attached to
the contract. At the time of making the contract, a part
may place before the other party some information about
the special circumstances affecting him and tell him that
if the contract is not performed properly, he would suffer
some particular types of losses because of those special
circumstances. If the other party still proceeds to make
the contract, it would imply that he has agreed to be
responsible for the special losses that may be caused by
an improper performance of his obligation. Compensation
for such special losses is called special damages
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The two types of losses that have been

put under two separate points above,
the ordinary losses and the special
losses, are in reality based on one
common idea only. And that idea is that
the level of knowledge of
circumstances at the time of making
the contract would determine what
losses shall be compensated by the
guilty party.
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Exemplary or vindictive
damages: Sometimes, the courts
(c)

award damages for mental or

emotional suffering also caused by the
breach. Such damages are called
exemplary or vindictive damages.
These may be taken as an exception to
the general principle that damages are
awarded only for the financial loss
caused by breach of contract.
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the court stated that in three

cases mental suffering and pain of the
aggrieved party can also be taken into
account:
(i) Unjustified dishonour of a cheque,
(ii) Breach of promise of marriage,
and

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(d)

Nominal damages:

If the breach of contract

causes no loss to the

aggrieved party, no damages need be
awarded to him. However, in order to
record the fact of breach by guilty party,
the courts may award nominal or token
damages, e.g. a compensation of
Rs.10. They would be called nominal
damages.

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Rules Regarding Award of

Damages
(i) Compensation not penalty:
The fundamental purpose of awarding
damages is to compensate the
aggrieved party for any loss suffered
and not to punish the guilty party for
causing breach.

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(ii) Limited damages: The aim of the

courts, in awarding damages, would be
to place the aggrieved party, as far as
money can do it, in the same position in
which he would have been, had the
contract been properly performed.

(iii) Damages for attributable losses:

Damages are awarded for the

losses
which can be attributed to the
breach.
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(iv) Mitigation of losses:

The aggrieved party is expected to

make sincere efforts to minimize
the losses that are resulting out of
breach of contract.

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(v) Stipulation for liquidated

damages or penalty:
Sometime, the parties to contract may
themselves
stipulate an amount in the contract to be
payable by the guilty party to the aggrieved
party as damages for breach of contract.
This stipulation of the amount may be by
way of liquidated
damages or by way of penalty.
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(vi) Cost of suit:

The breach of contract by a party

forces the other to initiate legal
action against the guilty party.
This necessarily entails
expenditure. This cost of suit can
be recovered from the guilty party
only at the discretion of the court.
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Suit for quantum meruit

The term quantum meruit means

as
much as earned. It implies a
payment
deserved by a person for the
reason of
actual work done.
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Suit for quantum meruit

When a party has done some work
under a contract, and the other party
repudiates the contract or somehow the
full performance of the contract
becomes impossible, then the party
who has done the work can claim
remuneration for the work under a suit
for quantum meruit.
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Suit for specific performance

In certain cases of breach of a contract,
damages may not be an adequate remedy.
Then the Court may direct the party in
breach to carry out his promise according to
the terms of the contract. This is a direction
by the Court for specific performance of the
contract at the suit of the party not in breach.
But in general, Courts do not wish to compel
a party to do that which he has already
refused to do.

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Suit for injunction

It means order of court restraining a person
from doing something. The injunction can be
granted where the contract is of negative
character i.e. where the party has promised not
to do something but he does it thereby he makes
breach of contract.
CASE: Metropolitian Electric Supply Company VS
Ginder.

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GUARANTEE
57

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INDEMNITY AND

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Shruti Minocha

INDEMNITY
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The contract of indemnity is a CONTRACT where

one part promises to save the other from loss
caused to him by the conduct of promisor himself or
by conduct of any other person, is called as contract
of indemnity.
The person who promises to make good the loss is
known as INDEMNIFIER(Promisor)
The person to whom promise is made or whose loss
is to be made good is know as Indemnified or
Indemnity Holder (Promisee)

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RIGHTS OF INDEMNITY HOLDER

WHEN SUED
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He is entitled to recover all damages which he

may be compelled to pay in respect of suit to
which the promise to indemnify applies.
He is entitled to recover all costs reasonably
incurred ,in bringing or defending such suit,
provided he acted prudently or with the
authority of promisor ( Indemnifier).
He is also entitled to recover all sums which he
may have paid under the terms of any
compromise of any such suit, provided the
compromise was authorized by promisor
( Indemnifier).

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CONTRACT OF GUARANTEE
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A contract of Guarantee is contract to perform

the promise ,or discharge the liability ,of a third
person in case of his default.
The person who gives the guarantee is know as
Surety.
The person in whose default guarantee is given
is known as Principal Debtor.
The person to whom guarantee is given is known
as Principal Creditor.

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DISTINCTION BETWEEN CONTRACT OF

INDEMNITY AND GUARANTEE
GUARANTEE

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INDEMNITY

There are three parties to

contract

There is only one contract

There are three contracts

It is for reimbursement of
loss

It is for security of debt

The Primary liability can

be on indemnifier himself.

The liability of surety is

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secondary it arises only on
default at part of principal

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There are two parties to

contract

DISTINCTION BETWEEN CONTRACT OF

INDEMNITY AND GUARANTEE

GUARANTEE

The liability of
indemnifier arises only
on happening of certain
thing In future. There is
no existing debt .

This is usually an
existing debt or duty,
the performance of
which is guaranteed by
surety.

An indemnifier
cannot sue the third

A surety can approach

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the principal debtor in
his own rights after he

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INDEMNITY

Ms.Shruti Bhuttani

DISTINCTION BETWEEN CONTRACT OF

INDEMNITY AND GUARANTEE

GUARANTEE

In this Indemnifier acts

independently without
any request of the
debtor or the third
party.

The person must stand

as surety for the
principal debtor at the
request of a debtor only.

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INDEMNITY

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KINDS OF GUARANTEE

Continuing Guarantee : Guarantee which

extends to a series of transactions. It is intended
to cover a number of transactions over a period of
time.
For eg: A guarantees to C for Bs purchase from
C for six months to the extent of Rs.5,000/. This
is a continuing Guarantee.

Ms.Shruti Bhuttani

Specific Guarantee : Is given in respect of a single

debt or specific transaction. It comes to an end as
soon as the liability under the transaction ends.

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