Bachelor of Commerce

Commercial Law

THE INDIAN CONTRACT ACT, 1872 DISCOVER . LEARN . EMPOWER

 Contract Act
1872
Course Outcome
CO Title Level
Number
CO-1 The student will be able to demonstrate the acquaintance Understanding
of himself/ herself with Legal Process and negotiable
instruments
CO-2 The student will be able to explain the new and Understanding
contemporary developments in Indian Corporate Law
CO-3 The student will be able to analyse the Understanding
differencebetween the negotiable instruments and also
about the responsibility of the business towards the
society.

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Introduction
• Simply stated, ‘law’ operates to regulate the actions of persons with
respect to one another and entire group or society and the State.
• Various branches of law concerning specific aspects are:
• Civil, criminal, administrative, constitutional, business, labour laws
etc.
• All business activities may basically be divided into two classes, i.e.,
Commercial and Industrial and the LAW which relates to the conduct
of business is known as Mercantile law or Business law.
• Mercantile or Business Laws include law relating to Contracts, Sale of
Goods, Negotiable instruments, Partnership, Companies, Insurance, 3
Law of Contract
• As contracts are the basis of most of the business
transactions, the law of contract is of great significance to all
mercantile persons engaged in the commercial activity.
• Law of Contract is covered under the Indian Contract Act,
1872.

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History of Indian Contract Act, 1872
• The Act came into force with effect from (w.e.f.) September 1, 1872.
• It is applicable to the whole of India except the state of J & K.
• The Act as enacted originally had 266 Sections divided into following
groups:

Sections
1. General Principles of Law of Contract 1 to 75
2. Contracts relating to Sale of Goods 76 to 124
3. Special kinds of Contracts (e.g. Indemnity, Guarantee, 125 to 238
Bailment & Pledge)
4. Contracts relating to Partnership 239 to 266

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Present Indian Contract Act, 1872
• Contracts relating to ‘Sale of Goods’ and Contracts relating to ‘Partnership’ have
been repealed from the Contract Act, 1872.
• New acts were enacted for the same:
• Sale of Goods Act, 1930
• Partnership Act, 1932
• Presently, the Indian Contract Act is divided into two parts:
• First part (Sections 1 to 75) deals with the general principles of law of
Contract which apply to all types of contracts irrespective of their nature.
• Second Part (Sections 124 to 238) deals with special types of contracts
(Indemnity, Guarantee, Bailment, Pledge, Agency etc.)

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Contract
• Two essential elements of a Contract:
1) An Agreement
2) Its enforceability at law

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1) Agreement
• An agreement :
• Involves proposal or offer by one party
• And acceptance of the same by other party.
• Plurality of persons
• Common intension about the subject matter
Agreement = Offer + Acceptance

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Parties to a Contract
•• Offeror
Offeror––The
Theparty
partywho
whomakes
makesan
anoffer
offerto
toenter
enterinto
intoaacontract
contract

•• Offeree
Offeree––The
Theparty
partyto
towhom
whoman
anoffer
offerto
toenter
enterinto
intoaacontract
contractisismade
made

Offer
Offeror Offeree

Acceptance
Offeror makes an offer to Offeree has the power to
the offeree accept the offer and create a
contract
2) Enforceable at Law
• The agreement must create legal relations
• Not merely the relations which are purely social or domestic
in nature
Mr. Mukesh invites Mr. Vijay to a dinner at his house. Mr. Vijay accepts the
invitation. It is purely social agreement. If Mr. Vijay fails to arrive at the dinner or
Mr. Mukesh has to go out and is not available at his place at the dinner time due to
some important work, either of the parties cannot sue other for not fulfilling the
promise, the reason being, there was no intention between two parties to create
any legal obligation.

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Contract = Agreement + Enforceability at
Law
• Leading Case: Balfour Vs. Balfour
Mr.Balfour was employed in Ceylon. Mrs. Balfour, owing to
ill health, had to stay in England and could not accompany
him to Ceylon. Mr.Balfour promised to send her £ 30 per
month while he was abroad. But Mr.Balfour failed to pay that
amount. So Mrs.Balfour filed a suit against her husband for
recovering the said amount. The court held that it was a mere
domestic agreement and that the promise made by the
husband in this case was not intended to be a legal
obligation. 11
 ESSENTIAL ELEMENTS OF A VALID CONTRACT
(Sec.10)
1) Offer & acceptance.
2) Intention to create legal relationship.
3) Lawful Consideration
4) Capacity of Parties.
5) Free consent.
6) Lawful object.
7) Certainty of Meaning.
8) Possibility of Performance.
9) Not declared to be Void or illegal
10)Legal Formalities 12
1) Offer & Acceptance
• Lawful offer
• Lawful Acceptance
2) Intention to create legal relationship
• No social or domestic relation
• Leading case: Balfour vs. Balfour
3) Lawful Consideration
• Consideration means “QUID PRO QUO” i.e. “Something in return”.
• In the form of money, goods, services, promise etc.
• May be past, present or future
• Must be real and lawful
• E.g Mr. X promises to obtain a govt job for Mr. Y and in return Mr. Y
promises to pay Mr. X Rs.10 Lakh. Such an agreement is void agreement.
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4) Capacity of Parties
• Following persons are incompetent to contract:
a) Minors
b) Persons of unsound mind
c) Persons disqualified by law
5) Free consent
• Consent is said to be free when it is not caused by:
a) Coercion – Consent obtained by physical threat.
b) Undue influence – Consent obtained by mental threat.
c) Fraud – Consent obtained by intentionally deceiving the other.
d) Misrepresentation – Consent obtained by un-intentionally deceiving the
other.
e) Mistake – Consent obtained by committing a mistake/error.
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6) Lawful object
• Object is said to be unlawful if:
a) It is forbidden by law;
b) It may defeat the provisions of any law;
c) It is fraudulent;
d) It involves an injury to the person or property of any other;
e) It is immoral or opposed to public policy.
f) E.g. A tenant takes a room on rent for doing smuggling. Such an
agreement is an illegal agreement because the object of the agreement is
unlawful.
7) Certainty of Meaning
• Terms and conditions must be clear and must not vague.
• Consider this statement “I agree to pay Mr. X a desirable amount for his
house on 29th August”. 15
8) Possibility of Performance
• Must be possible physically or legally
• E.g. Mr. A agrees with B to discover treasure by magic.
9) Legal Formalities
• Common formality requirements include:
• Agreement in Writing
• Agreement in Prescribed form
• Agreement attested
• Agreement Registered
• Paid any stamp duty
10) Not declared to be Void
• Must not be expressly declared void as mentioned in sections 24
to 30 viz. Agreement without consideration, restraint of trade, 16
Basis for classification of
contracts

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Contract on the Basis of Validity
• Valid Contract:
• An agreement becomes a contract when all the essentials of a valid contract
as laid down in section 10 are fulfilled.
• Void Contract:
• Which was a valid contract when formed.
• But become void due to supervening impossibility of performance.
• It may be due to any change of law or destruction of subject matter or death of
a party.
• E.g. A contract between citizen of Pakistan and India is a valid contract
during peace but if war breaks out between the two countries, it will become
void contract.

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• Unenforceable Contract:
• Otherwise a Valid contract but cannot be enforced because of some technical
defect like absence of written form or absence of proper stamp.
• Illegal Agreement:
• An agreement the object or purpose of which is unlawful or otherwise against
the policy of law.
• It is void ab initio.

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• Void Agreement:
• Not enforceable by law
• It is void ab initio i.e. from its very inception.
• E.g. An agreement without consideration or with a minor
• Voidable Contract:
• It is enforceable by law at the option of one or more parties but not at the
option of other.
• This is just because of absence of Free Consent.
• E.g Mukul threatened to kill Raghav if Raghav did not agree to sell his house
(worth Rs.2 Crore) for Rs.20 lakhs only. Being threatened, Raghav entered
into the contract. Later Raghav filed a case against Mukul to cancel the
contract on the grounds of coercion. Held, Raghav can avoid this contract as
it is voidable at the option of the aggrieved party (Raghav).

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 Contract on the Basis of Formation
• Express Contract
• Expressed by words either spoken or written.
• Implied Contract
• A contract which is not expressed in words but is implied from the circumstances of
the case or the conduct of the parties.
• E.g. after eating food in a restaurant, it is implied to pay the bill; On boarding a bus,
it is implied to buy ticket.
• Quasi Contract
• Contract in which there is no intention on either side to make a contract, but the law
imposes a contract.
• E.g. a finder of lost goods is under an obligation to find out the true owner and return
the goods.
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• E-Commerce Contract
Contract on the Basis of Performance
• Executed Contract:
• Both the parties have performed their obligation
• Executory Contract:
• Obligation is yet to be performed either wholly or partially or by
one or both the parties.

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Case Study
• C orally offered to pay A, an auto mechanic, Rs.50 for testing a used car
which C was about to purchase from D.
• A agreed and tested the car.
• C paid Rs.50 to A in cash for his services.

• Is the agreement between C and A:

1) Express or Implied?
2) Executed or Executory?
3) Valid, void, voidable or unenforceable?
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THANK YOU

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