MBA IV Semester

BUSINESS LAW
Prof. PA Mohandas
MA, LLB, MBA, LLM[IPR], D.TECH
 Module 1

INDIAN CONTRACT ACT 1872

CONTRACT
Introduction:-For any Commercial activity, it is mandatory to have
understanding among the parties concerned. Such understanding is often
reduced in to writing to give effect to the intention of the parties. Such
formal versions are called Contracts.
INDIAN CONTRACT ACT, 1872
Nature and scope:-
It codifies legal principles that govern Contracts. It determines the circumstances in
which promises made by the parties to a contract shall be legally binding on them.
All of us enter several contracts everyday knowingly or unknowingly. Each
contract creates some rights and duties on the contracting parties. Hence this
legislation.
Indian Contract Act of 1872, deals with the enforcement of these rights and duties on
the parties in India. It also defines the rights, duties, and legal obligations of
various parties to facilitate easy performance of their contractual obligations.
CONTRACT
Meaning:- The word contract is derived from the Latin
word “Contractum”, meaning “Drawn together”. Thus,
contract is “drawing together of two or more minds to form
a common intention giving rise to an agreement”.
*****Definition:- William Blackstone defines that “A
contract is an agreement upon sufficient consideration, to do
or not to do, a particular thing/act.
What is Contract?
******Section 2(h) of 1872, provides that “an agreement which is legally
enforceable alone is a contract. It creates legal obligations between parties.
While all contracts are agreements, all agreements are not
contract
What is an Agreement
An agreement is a “promise or commitment” or “set of promises or
commitments”.
An agreement involves an offer or proposal by one person and acceptance of
such offer or proposal by another person. If such agreement is capable of
being enforced by law, then it becomes a contract.
What is a Promise?
The Indian Contract Act, 1872, Section 2(b), Defines “Promise" as:- “When a person
to whom a proposal is made signifies his assent thereto, the proposal is said to be
accepted”. A proposal when accepted becomes a “Promise”.
What is an agreement?
The Indian Contract Act, 1872, Section 2(e), defines agreements as
“every promise and every set of promises forming consideration to each other”.
SUMMARY OF CONTRACT
1. An offer or proposal when accepted becomes a Promise.
2. Every promise and every set of promises forming certain consideration to each
other is an Agreement.
3. An agreement enforceable by law is a Contract.
An agreement comes to existence when one party accepts the proposal put up by
the other party in the same spirit.
 A diagrammatical representation of a Contract.

OFFER + ACCEPTANCE

PROMISE

CONSIDERATION

AGREEMENT

Legally enforceable Legally unenforceable

CONTRACT VOID AGREEMENT

Void Contract/Voidable contract?
*******Essentials of a valid contract
*******Q-All contracts are agreements, but all agreements are not contracts.
Substantiate? OR
******Explain the essential elements of a valid contract?
OR
********“A legally enforceable agreement is called a contract". Substantiate?
******Essential elements of a Valid Contract
1. Offer (Proposal) and Acceptance.
2. Legal Relationships (An offer once accepted should create legal relations
between the parties, not social/domestic) Case Law [Balfour v Balfour]?
3. Consensus ad idem (consent at the same time/Meeting of Minds). Both
parties to an agreement should understand the subject matter in the same
sense, same spirit and in the same meaning.
4. Lawful Consideration. (Legal compensation given by both parties to a contract to
enter into the agreement to exchange mutual performances )
5. Free and Genuine Consent. (Consent given by the parties to an agreement
must be by voluntarily, freely, and intelligently. A consent is said to be free if it
is not caused by mistake, misrepresentation, undue influence, duress,
coercion etc.).
6. Capacity or Competency of the Parties. (The parties to a contract should have
the capacity and competency to do so)
7. Lawful Object. (The purpose of an agreement should be for a lawful act, and
not for an unlawful act)
8. Agreement not expressly declared to be Void.
9. Certainty and possibility. (The agreement drafting should be clear, legible,
meaningful, and should be possible for performance by human beings)
10. Legal Formalities (Stamping, registrations, witness etc)
Classification of Contracts
 Types of contract

Contracts are classified on the basis of :-

VALIDITY FORMATION PERFORMANCE

Valid contract Express contract Executed contract
Void Agreement Implied contract Executory contract
Void Contract Quasi contract Unilateral Contract
Voidable Contract Bilateral contract
Illegal Agreement
Unenforceable contract
(A) “VALIDITY”
1. Valid Contract: (Sec 10). A contract which is an agreement enforceable at law and which
fulfills all the essentials of a valid contract.
2. Void Agreement: An agreement not enforceable by law Sec 2(g)] (absence of any or all the
essentials of a valid contract)
3. Void Contract: (Sec-2(i). A legally unenforceable contract. The judiciary may declare a
contract as void contract on two occasions. (1) on any technical defects from the beginning
(ab initio) OR due to impossible conditions like change of circumstances or change of
government policy, or act of God, etc. Example?
4. Voidable Contract: A contract that is valid at the time of formation, but that can be
declared void at the request of one of the parties whose consent to the contract was not by
free and genuine in nature , Example?
5. Illegal Agreement: An agreement which involves the transgression of some rule of basic
public policy and is criminal in nature or immoral. It is not only void as between the
immediate parties but it also taints the collateral transactions with illegality.
6.Unenforceable Contract:
A contract which cannot be enforced in a court of law because of some technical Snag
(defect) such as absence of writing or where the remedy has been barred by Statute of
Limitation, Doctrine of Laches, or being unregistered or unpaid stamp duty, etc.
(B) “FORMATION”
1.Express Contract: A contract in which the terms are clearly stated in words by the
parties. Example (rental agreement or sale deed).
2. Implied or Tacit (Conveyed without word) Contract :
A contract which is inferred from the circumstances of the case or from the conduct
of the parties. Example (platform ticket to enter railway platform).
3.Quasi Contract (Constructive contract) – An obligation created by law, regardless of
agreement. (Principle of unjustified enrichment)
© “PERFORMANCE”
1.Executed Contract: A contract which is wholly performed by
both the parties. Example?
2.Executory Contract: A contract in which the promises of both
the parties yet to be performed. Example?
3.Unilateral Contract: A contract in which only one party has yet
to perform his obligation. Example?
4.Bilateral Contract: A contract in which both the parties have
yet to perform their obligations (Reciprocal in nature).
Example?
Offer or Proposal
What is an offer (Proposal) ?
Meaning:-When one signifies to another his willingness to do or to abstain from
doing anything, with a view to obtain the assent of the other, such an act is
said to be a an “Offer” or “Proposal”.
Section 2 (a), 1872, defines that the proposal has two purposes:- (a) Firstly, an
expression of the Offeror’s willingness to do or to abstain from doing
something. (b) Secondly, it is made with a view to obtain the assent of the
Offeree to the proposed act or abstinence.
Person making the proposal is the “Proposer / Offeror.
Person to whom the proposal is made is called as “Proposee/Offeree .
When the Offeree accepts the Offer, he/she is called as
“ Promisee”, and the Offeror as “Promisor”
 Legal Rules of Valid Offer
*What are the essential elements of Valid Offer?
1. It must be intended to create legal relations (Balfour Vs Balfour-1919).
2. It must be certain.
3. A declaration of intention is not an Offer.
4. Invitation to Offer or invitation to Treat is not an Offer..
5. It must be communicated to the Offeree. (Lalmon Shukla Vs Gowri Dutt)
6. It must be made with a view to obtaining the assent of the Offeree. A statement of
price is not an offer.
7. The Offeror must have the intention to act as per the terms of Offer.
Lapse of Offer
An offer lapses or comes to an end -
1. By communication of notice of termination of offer to the Offeree.
2. By lapse of the specified or reasonable time.
3. By death or insanity of the offeror.
4. By a counter-offer. Counter-offer is an offer to the original offer.
5. By not being accepted according to the prescribed or usual mode.
6. By non-fulfillment of a condition precedent.
 Communication of Offer, Acceptance and Revocation
1.The communication of a proposal (offer) is complete:-
when it comes to the knowledge of the person to whom it is made.
2.The communication of an acceptance is complete.
The communication of proposal is complete when it comes to the knowledge
of the person to whom it is made (Offeree). Besides, the communication of
acceptance is complete when it is communicated the Offeror.
3.An offeror may revoke an offer before it has been accepted, but the
revocation must be communicated to the Offeree, although not necessarily
by the offeror
Willian Anson asserted “Acceptance to an Offer is what a Lighted match
into a train of gunpowder” Discuss?
 CLASSIFICATION OF OFFER
1.SPECIFIC OFFER (Offer to a specific individual or section)
When an offer is made to a specific or an ascertained person. Example?
2. GENERAL OFFER. When an offer is not made to any specific person, but it is made
to the larger public.
*********Case law “At times, a general offer gains the significance of a specific offer.
Substantiate with a case law? OR
***********An offer need not be made to an ascertained person, but no contract can
arise until it has been accepted by an ascertained person” Substantiate with a case law?
***Case Law:-Carlill Vs Carbolic Smoke Ball Co. (1893(1) QB 256) (Smoke Ball Case)?
3.EXPRESS OFFER.
4. IMPLIED OFFER.
Acceptance
 ACCEPTANCE
Meaning: Acceptance is one person's compliance with the terms of an
offer made by another.
Essentials of valid Acceptance.
1. Acceptance must be absolute and unconditional.
2. Consensus Ad Idem.
3. Acceptance must be Communicated.
4. Acceptance must be made within responsible time or fixed time.
5. Acceptance must be made in prescribed mode or responsible mode.
6. Acceptance may be Express or Implied.
7. Acceptance must be made by the Offeree.
8.Acceptor must have an intention to be bound by the terms of
Offer.
9.********An acceptance can never precede an offer. Substantiate with
a case law? (Lalmon Sukhla Vs. Gowri Dutt).
10.Provisional acceptance is not an acceptance.
11. Silence does not amount to acceptance.
12.Mental acceptance is not an acceptance (Silence does not
amount to Acceptance)
13.The acceptance must be done before the Offer Lapses.
****CONSIDERATION
 CONSIDERATION
Meaning:- Consideration means any thing given or promised by one
party in exchange of for the promise or undertaking of another in a
contractual agreement.
Consideration is the Compensation or something of value given by both
parties to a contract to enter into the agreement to exchange mutual
performances.
Definition:-
Justice Patterson defines ‘Consideration means something which is of
some value in the eyes of the law….it may be some benefit to the
plaintiff or some detriment to the defendant.
LEGAL RULES OF CONSIDERATION

1. To become a contract every agreement must be supported with some

consideration.
2. It must move at the desire of the Promisor.
3. Privity of consideration. It may move from the Promise or any other person.
4. Consideration may be past, present or future.
5. Adequacy is not essential.
6. It must be Real/Competent. It must not be illegal, immoral or opposed to
Public Policy, or illusion.
7. Consideration should be legally valuable & It should not pertain to an act of
duty.
8. Different consideration for different contract.
 *******What are the exceptions to the rule that
“a contract without consideration is void”?
[Sec. 25 of 1872]
The following are the exceptions:-
1. A written and registered agreement based on natural love and affection between
parties standing in a near relation to each other [Sec. 25 (1)].
2. A compensation for voluntary service. To compensate, wholly or a part, a person
who has already voluntarily done something for the Promisor [Sec. 25(2)];
3. A promise by a debtor to pay a time-barred debt is enforceable if it is made in
writing and is signed by the debtor or by his agent [Sec. 25(3)];
4. Contract of an agency [Sec. 185];
5. A completed gift [Sec 25(1).
Capacity to Contract
 ****CAPACITY TO
CONTRACT
Section 11, of Indian Contract Act, 1872 provides that every person is
competent to contract, who is of the age of majority according to the law to
which he is subject, and who is of sound mind, and is not disqualified from
contracting by any law to which he is subject. Therefore, Minors, Persons of
unsound mind, and persons disqualified by law to which they are subject are
incompetent persons to contract.
1. Minor
As a rule, a minor’s (minor is a person who has not completed eighteen years of
age) agreement is absolutely void, but there are exceptions for the benefit of the
minor.

Cont……d
2. Persons of unsound mind
Lunatics. A lunatic can enter a contract when he is of sound mind.
Idiots. An agreement of an idiot like that of a minor is altogether void.
Drunken or Intoxicated persons. Their position is similar to that of lunatics.

3. Other persons.
(a) Alien enemies. During the war an Indian citizen cannot enter a contract with an alien
enemy. Contracts made before the war are either suspended or dissolved.
(b). Foreign sovereigns and accredited representatives of a foreign state. They can enter
contracts and enforce these contracts in our Courts. But they cannot be sued in our
Courts without the prior sanction of the Central Government
©. Corporations.
The contractual capacity of a statutory corporation is limited by the
Statute governing it. As regards a company registered under the
Companies Act, 2013, its contractual capacity is regulated by its MOA &
AA.
(d). Insolvents.
When a debtor is adjudged insolvent, he is deprived of his power to deal in
his property divisible among his creditors.
(e). Convicts.
A Convict when undergoing imprisonment is incapable of entering into a
contract.
******FREE
CONSENT
 *******Free & Genuine Consent
All agreements are contracts if they are made by the free consent of the parties. It is
the general & basic principle of law of contract that for a valid contract there must
be “consensus ad idem” (consent at the same time). Two or more persons are said to
consent when they agree upon the same thing in the same sense [Sec. 13.]

*****Consent is said to be free when it is not caused by:- (i) Coercion, or,
(ii) Undue influence, or (iii) Fraud, (iv) Misrepresentation, or (v) Mistake,
subject to the provisions of Secs. 20, 21, and 22 of act 1872.

****Effect of agreement without free consent.

When consent to a contract is caused by coercion, fraud, misrepresentation, mistake,
or undue influence, the contract can become Voidable Contract at the option of
the party who is not at fault or whose consent was so caused.
1. ****COERCION
“Coercion” means force or compulsion. It is the committing or threatening to commit any
act forbidden by the Indian Penal Code, 1860, or the unlawful detaining, or threatening to
detain, any property, to the prejudice of any person whatever, with the intention of
causing any person to enter into an agreement (Sec. 15). A threat to commit suicide
amounts to coercion.
Essential ingredients of coercion
1. The consent is obtained by threat of an offence, and the person is forced to give
his consent.
2. It is mainly of physical character.
3. The freedom of will is impaired.
4. It is of a violent character.
5. The agreement made by coercion is Voidable at the option of the party whose
consent was so caused.
6. The burden of proof lies upon the plaintiff.
2. ****UNDUE INFLUENCE
Meaning: In some circumstances, the parties to an agreement are so placed to each
other in position to dominate the will of the other. Consequently, the other party is
compelled to enter into an agreement against his will as a result of unfair influence.
Such an agreement is said to be induced by “undue influence” (sec 16, 1872).
Example of relations causing Undue Influence
Income tax officer-Assessee, Police officer-Accused, Spiritual guru- Devotee, Doctor
– Patient, Trustee and Beneficiary, Parent- Son, Master- Servant, Solicitor and
Client etc.
No presumptions of undue influence in the following cases:
Husband and Wife, Landlord and Tenant, Creditor and Debtor.
3. *****MISREPRESENTATION AND FRAUD
****Differentiate “Misrepresentation & Fraud”?
Misrepresentation: When a person positively asserts that a fact is true when his
information does not warrant it to be so, though he believes to be true, this is
misrepresentation.
It is a misstatement of a material fact made innocently with an honest belief as to its
truth or non-disclosure of a material fact, without any intent to deceive the
other party.

***Essential ingredients of Misrepresentation

1. Misrepresentation is a false statement without any intention to deceive.
2. It may be innocent, some time.
3. It does not involve dishonest intention.
4.The effect of agreement caused by misrepresentation is Voidable at the option of
the party whose consent has been caused.
5. It may also arise from suppression of vital facts. It should be of facts material to
the contracts.
7.A party cannot complain of misrepresentation if he had the means of discovering
the truth with ordinary diligence.
8. It must be made before the conclusion of contract with a view to inducing the
other party to enter the contract.
9. The aggrieved party has two remedies
(a) He can avoid or rescind the contract, or
(b) He can accept the contract but insist that he shall be placed in the position in
which he would have been if the misrepresentation made had been true (Sec-19).
******“FRAUD”
.
Sec,17, 1872 defines fraud. It means and includes any of the following acts
committed by a party to a Contract, or with connivance, or by his agent, with
intent to deceive the other party thereof or his agent, or to induce him to enter
the contract”:-
1.The suggestion that a fact is true when it is not true and the person
suggesting does not believe to be true.
2. The active concealment of a fact by a person having knowledge or belief of
the fact.
3. A promise made without any intention of performing it.
4. Any other act fitted to deceive.
5.Any such act or omission as the law specifically declares to be fraudulent.
6.Intentional misrepresentation which is the essence of fraud.
 LAWFUL OBJECT
(LEGALITY OF OBJECT)
 ***LEGALITY OF OBJECT
Introduction:-
An agreement is a contract if it is made for a lawful consideration and with a lawful
object. [Sec. 10].
Every agreement of which if the object (purpose) is unlawful, it is void.
****As per Sec-23, the “Consideration And the Object” of an agreement is unlawful if
–
(a) It is forbidden (not allowed) by law. (Example?)
(b) If permitted, it would defeat the provisions of Law.
(Example:- an agreement or contract is void, if its performance is not possible without
disobedience of any law.)
© If it is fraudulent.
(D) If it involves injury to person or property of another.
(E) The Court regards it as immoral, or opposed to public policy.
***********Briefly explain an Agreement opposed to “Public Policy”?
An agreement which is injurious to the public or against the interest of the society
is said to be opposed to “Public Policy”. The following agreements are, or have
been held to be, opposed to public policy:-
1. Agreements of Trading with enemy.
2. Agreement to commit a crime.
3. Agreements interfering with administration of justice.
4. **Champerty and maintenance?
5. Traffic in public office.
6. Agreements Creating Interest Against Duty
7.**WAGERING AGREEMENTS etc.
PERFORMANCE OF
CONTRACT
 PERFORMANCE OF CONTRACT
Meaning:-
Performance of Contract means “execution of the terms of a contract
as listed within the contract”, after which the involved parties are
discharged from their duties.

TIME AND PLACE OF PERFORMANCE.

Time and place of performance of a contract are matters to be determined by
agreement between the parties themselves. Where no time for
performance is specified, the Promisor must perform the promise within a
reasonable time.
.
By whom must contract be performed?
1. By Promisor himself - If that was the intention of the parties. i.e. where
personal consideration is the foundation of the contract.
2. By agent - where personal consideration is not the foundation of the contract.
3. By legal representatives - in case of death of the Promisor.
4. By joint Promisors - when two or more persons/have made a joint promise,
then unless a contrary intention appears from the contract. all such persons
must jointly fulfill the promise. If any of them dies, his legal representative
must, jointly with the surviving Promisors, fulfill the promise. If all the
Promisors die, the legal representatives of all of them must fulfill the promise
jointly.
WHO CAN DEMAND PERFORMANCE?
1. It is only the Promisee, and in case of his death, his legal
representatives. who can demand performance.
2. When a person has made a promise to several persons, then,
unless a contrary intention appears from the contract, the right to
claim performance rests with all of them.
3. When one of the Promisees dies, it rests with his legal
representatives jointly with the surviving Promisees. When all the
Promisees die, it rests with their legal representatives jointly.
TIME, PLACE AND MANNER OR PERFORMANCE
1. Section:46: If time, and place of performance has been decided by the
Promisee, the Promisor is bound to perform the same.
2. Section: 47: If the time is decided by the Promisee, but no direction from
the Promisee is mandatory, then the Promisor must perform the contract on
or before the prescribed time at the decided place.
3. Section 48: If Promisee’s Direction/consent is mandatory for the
performance of Promisor, the Promisor need not to perform until demanded
by the Promisee.
4. Section 49: If the place of performance of contract is not mentioned, the
Promisor shall take the concurrence of Promisee and perform
accordingly.
5. Section 50: The Promisor can perform the contract in any manner as
authorized by the Promisee.
Discharge of Contract
 *********Modes of Discharge of Contract
1. By performance (Ex:-Executed contract)
2.By agreement by the parties.
(a) Novation, i.e., when a new contract is substituted for an existing one (before its
execution), with full consent, either between the same parties or between one of
the parties and a third party.
(b) Alteration, i.e., when one or more of the terms of the contract is/are altered by
the mutual consent of the parties to the contract. Here no new contract forms but
the terms and conditions changes.
(c) Rescission, i.e., when all or some of the terms of the contracts are cancelled
with mutual consent of the parties, but before the execution of the first contract.
Here the parties are discharged from their rights and liabilities.
(d) Remission, i.e., acceptance of a lesser fulfillment of the promise/consideration
made between the parties to the original contract.
(e) Waiver: Waiver takes place when the parties to a contract agree that they shall no
longer be bound by the contract
(f) Merger, i.e., when an inferior right accruing to a party under a contract merges into a
superior right accruing to the same party under a new contract (a lessee merge into his
rights as an owner.)
3.By Lapse of time. (Doctrine of Laches/Law of limitation)
4. By operation of law: It includes:-
(a) By merger (By rights and liabilities becoming vested in the same person).
(b) By death
© By Insolvency
(d) By unauthorized alteration.
5. By impossibility (Doctrine of Frustration-Void Contract).
6. By breach of Contract.
(a) Actual breach?
(b) Anticipatory breach? (ex:- civil & business).
 *******REMEDIES
FOR BREACH OF CONTRACT
 ****Explain those remedies for breach of contract?
Breach of a contract :- It is an act of breaking the terms set out in a contract.
In case of breach of a contract, the injured party or aggrieved party has one or
more of the following remedies:
1. Rescission of the contract. When there is breach of a contract by a party, the
injured party may sue to treat the contract as rescinded and seek compensation. With
such court order in favor, the injured party is also absolved of all the obligations under
the contract.

2.Suit for Damages. Damages are monetary compensation awarded to the

injured party by the Court for the loss or injury suffered by the party. Sec. 73 of
the Indian Contract Act which deals with “compensation for loss or damage caused
by breach of contract” is based on the judgment in the case of Hadley v.
Baxendale.
Cont.…..d
Damages may be of FOUR TYPES
A) Ordinary damages. Damages which arise in the ordinary course of events from the
breach of contract are called ordinary damages. They are estimated based on
circumstances prevailing on the date of the breach of the contract. Example?
B) Special damages. Special damages are those which result from a breach of contract under
some special circumstances. If special loss is likely to be sustained as a result of the
breach, this should be communicated to the other party; otherwise, special damages will
not be awarded. Examples:-Damage or harm to business, reputation, Loss of operating
revenue. Example, when a business do not open on the scheduled date due to incomplete
construction.
C) Vindictive or exemplary damages. These damages are allowed in case of dishonor of a
cheques by a banker wrongfully. Or the breach of a contract to marry in civil cases.
D) Nominal damages. Where the injured party has not suffered any loss by reason of the
breach of a contract, the court may award a very nominal sum as damages, since the
actual loss is negligible. Example?
3) *******Liquidated damages and penalty.
‘Liquidated damages’ represent a sum, fixed or ascertained by the parties in
the contract, which is a fair and genuine pre-estimate of the probable loss
(normally proportionate to the damage) that might ensue as a result of the
breach, example-Late performance.
‘Penalty’ is a sum named in the contract at the time of its formation, which
is disproportionate to the damage likely to accrue as a result of the breach.

4)******Suit for Quantum Meruit.

A right to sue on a quantum Meruit (in proportionate to the work done +
compensation) arises where a contract, partly performed by one party, is
discharged by the breach of the contract by the other party. This right is based on
an implied promise by the other party arising from the acceptance of a benefit by
that party. Example?
5.********SUIT FOR SPECIFIC PERFORMANCE.
(A positive order):- In certain cases the Court may direct the party in breach of a
contract to carry out the promise, specifically according to the terms of the contract.
This is called specific performance of the contract. Example?

6. ********SUIT FOR INJUNCTION:-

(A negative order) An injunction is a legal remedy which is imposed by a court. An
injunction means that one of the parties to a contract or certain action must either do
something or refrain from doing something.
It is a mode of securing the specific performance of the negative terms of a contract.
Example?
If the party fails to adhere to the injunction, there can be stiff monetary penalties and
even imprisonment in certain instances.