MERCANTILE LAW CA POOJA SHARMA

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THE INDIAN CONTRACT ACT, 1872

CHAPTER 1- NATURE OF CONTRACT

The law of contract is that branch of law which determines the circumstances
in which promise made by the parties to a contract shall be legally binding on them. All of us
enter into a number of contracts everyday knowingly or unknowingly. Each contract creates
some right and duties upon the contracting parties. Indian contract deals with the
enforcement of these rights and duties upon the parties. Indian Contract Act, 1872 came
into effect from 1st September, 1872. It extends to the whole of India except the state of
Jammu and Kashmir.

CONTRACT [SECTION 2(h)]: A contract is “an agreement enforceable by law”. Thus,

CONTRACT = AGREEMENT (+) ENFORCEABILITY BY LAW

“All contracts are agreements but all agreements are not contracts”

AGREEMENT [SECTION 2(e)]: An agreement means, “Every promise or every set of promises,
forming consideration for each other”.

AGREEMENT = PROMISE(S) BY ONE PARTY (+) PROMISE(S) BY THE OTHER

PARTY

PROMISE [SECTION 2(b)]: “When the person to whom the proposal is made signifies his
assent thereto, the proposal is said to be accepted. A proposal when accepted becomes a
promise.”

PROMISE = PROPOSAL + ACCEPTANCE

PROPOSAL/OFFER [SECTION 2(a)]: A person is said to make a proposal when “he signifies to
another his willingness to do or to abstain from doing anything with a view to obtaining
assent of that other to such act or abstinence”

PROPOSAL = WILLINGNESS TO DO OR ABSTAIN FROM DOING

(+) WILLINGNESS’ TO OBTAIN ASSENT OF THE OTHER PARTY TO
SUCH ACT OR ABSTINENCE

CONSIDERATION [SECTION 2(d)]: “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 to abstain from doing something, such cat or abstinence is called consideration”. In
other words, consideration is something in return.
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THE INDIAN CONTRACT ACT, 1872

ESSENTIAL ELEMENTS OF A VALID CONTRACT [Section 10]:

According to Section 10, “All agreements are contracts if they are made by
free consent of parties, competent to contract, for a lawful consideration and with a
lawful object and are not hereby expressly declared to be void”. The essential elements of
a valid contract are:
™ Agreement: To constitute a contract there must be an agreement. There must be two
parties to an agreement, i.e. one party making an offer (offeror) and the other party
accepting the offer (offeree). The terms of the offer must be definite and acceptance
must be absolute and unconditional. The acceptance must be according to the mode
prescribed and must be communicated to the offeror.
™ Consensus-ad-idem (meeting of minds): To constitute a valid contract, there must be
meeting of minds i.e. consensus-ad-idem. The parties should agree to the same thing in
the same sense and at the same time.
™ Intention to create legal relationship: When the two parties enter into an agreement,
there must be an intention by both parties to legally bind the other as a result of such
agreement. Thus, agreements of social or household nature are not contracts.
™ Capacity of parties (competence): The parties to the agreement must be capable of
entering into a valid contract. According to Section 11, every person is competent to
contract if he or she,
1. is of the age of majority;
2. is of sound mind; and
3. is not disqualified from contracting by any law to which he is subject.
™ Lawful Consideration: An agreement to form a valid contract should be supported by
consideration. Consideration means “something in return” (quid pro quo). It can be cash,
kind, an act or abstinence. It can be past, present or future. However, consideration
should be real and lawful.
™ Free consent: To constitute a valid contract there must be free and genuine consent of
the parties to the contract. It should not be obtained by misrepresentation, fraud,
coercion, undue influence or mistake.
™ Lawful object: The object of the agreement must not be illegal or unlawful.
Section 23: According to Section 23, the consideration or object of an agreement is
lawful, unless-
• It is forbidden by law; or
• Is of such nature that, if permitted it would defeat the provisions of any law or is
fraudulent; or
• Involves or implies, injury to the person or property of another; or
• The court regards it as immoral, or opposed to public policy.
™ Agreement not declared void or illegal: Agreements which have been expressly declared
void or illegal by law are not enforceable at law; hence does not constitute a valid
contract.
™ Certainty and possibility of performance: The terms of agreement must be certain and
not vague. If it is not possible to ascertain the meaning of the agreement, it is not
enforceable at law. Also, agreements to do impossible acts cannot be enforced.
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THE INDIAN CONTRACT ACT, 1872
™ Legal formalities: A contract may be oral or in writing. If, however, the law requires for
a particular contract, it should comply with all the legal formalities as to writing,
registration and attestation.

TYPES OF CONTRACTS:
CLASSIFICATION OF CONTRACTS

On the basis of On the basis of On the basis of

Validity Formation Performance

1. Valid contract 1. Express contract 1. Executed contract

2. Void contract 2. Implied contract 2. Executory contract
3. Voidable contract 3. Quasi Contracts 3. Unilateral contract
4. Void agreement 4. Bilateral contract

• Valid contract: An agreement which has all the essential elements of a contract is
called a valid contract. A valid contract can be enforced by law.

• Voidable contract [Section 2(i)]: An agreement which is enforceable by law at the

option of one or more of the parties thereto, but not at the option of other or others,
is a voidable contract. If the essential element of free consent is missing in a
contract, the law confers right on the aggrieved party either to reject the contract or
to accept it. However, the contract continues to be good and enforceable unless it is
repudiated by the aggrieved party.

• Void contract [Section 2(j)]: A void contract is a contract which ceases to be

enforceable by law. A contract when originally entered into may be valid and binding
on the parties. It may subsequently become void.

• Void agreement: An agreement not enforceable by law is said to be void. Such

agreement does not confer any right to any of the parties to it. The agreement, in
such a case, is void-ab-initio (from the very beginning). Such an agreement does not
result in a contract at all.

• Unenforceable contracts: Where a contract is good in substance but because of some

technical defect cannot be enforced by law is called unenforceable contract. These
contracts are neither void nor voidable.

• Illegal agreement: An agreement is illegal if it is forbidden by law; or is of such

nature that, if permitted, would defeat the provisions of nay law or is fraudulent; or
involves or implies injury to a person or property of another, or court regards it as
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THE INDIAN CONTRACT ACT, 1872
immoral or opposed to public policy. These agreements are punishable by law. These
are void-ab-initio.
“All illegal agreements are void agreements but all void agreements are not
illegal.”

• Express contract: Where the terms of the contract are expressly agreed upon in
words (written or spoken) at the time of formation, the contract is said to be express
contract.

• Implied contract: An implied contract is one which is inferred from the acts or
conduct of the parties or from the circumstances of the cases. Where a proposal or
acceptance is made otherwise than in words, promise is said to be implied.

• Quasi contracts: A quasi contract is created by law. Thus, quasi contracts are strictly
not contracts as there is no intention of parties to enter into a contract. It is legal
obligation which is imposed on a party who is required to perform it. A quasi contract
is based on the principle that a person shall not be allowed to enrich himself at the
expense of another.

• Executed contract: An executed contract is one in which both the parties have
performed their respective obligation.

• Executory contract: An executory contract is one where one or both the parties to
the contract have still to perform their obligations in future. Thus, a contract which is
partially performed or wholly unperformed is termed as executory contract.

• Unilateral contract: A unilateral contract is one in which only one party has to
perform his obligation at the time of the formation of the contract, the other party
having fulfilled his obligation at the time o the contract or before the contract comes
into existence.

• Bilateral contract: A bilateral contract is one in which the obligation on both the
parties to the contract is outstanding at the time of the formation of the contract.
Bilateral contracts are also known as contracts with executory consideration.
MERCANTILE LAW
THE INDIAN CONTRACT ACT, 1872
CHAPTER-1 NATURE OF CONTRACT
OBJECTIVE TYPE QUESTIONS
Q1. Which one of the following is correct?
(a) Indian Contract Act, 1882
(b) Indian Contract Act, 1972
(c) Indian Contract Act, 1872
(d) Indian Contract Act, 1888.
Q2. An agreement consists of reciprocal
promises between at least
(a) Four parties
(b) Six parties
(c) Three parties
(d) Two parties.
Q3. Every contract is an agreement but
every agreement is not a contract. This
statement is -
(a) Wrong
(b) Correct
(c) Correct subject to certain exceptions
(d) Partially correct.
Q4. An Agreement is -
(a) Offer
(b) Offer + Acceptance
(c) Offer + Enforceability
(d) Contract.
Q5. A contract is-
(a) A promise to do something or abstain
from doing something
(b) A communication of intention to do
something or abstain from doing something
(c) A set of promise
(d) An agreement enforceable by law.
Q6. K owns a residential flat in Chennai. He
is entitled to quiet possession and
enjoyment of his property. This is called -
(a) Rights in Personam
(b) Rights in Rem
(c) Constitutional Right
(d) There is no right at all.
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Q7. Valid Contracts -
(a) are made by free consent
(b) are those where the parties to the
contract are competent to enter into an
agreement
(c) have lawful consideration & lawful object
(d) all of the above.
Q8. Which one of the following is an
essential element of a valid contract?
(a) Consideration
(b) Free Consent
(c) Competent Parties
(d) all the above.
Q9. An agreement to commit a crime or a
tort is-
(a) Void
(b) Voidable
(c) Valid
(d) Unenforceable.
Q10. L promises to give Rs.5,000 per
month pocket money to his son M. If L does
not give the pocket .money -
(a) M can sue his father .
(b) M has no remedy against L
(c) M can accept a lower pocket money
(d) M has to give Rs.5,000 to his father.
Q11. One of the clauses in an agreement
was - "This, agreement shall not be legally
enforceable, but binding in honor only". In
such case, the agreement is -
(a) Invalid
(b) Valid
(c) Illegal
(d) Voidable
Q12. A void agreement is one which is-
(a) Enforceable at the option of one party.
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THE INDIAN CONTRACT ACT, 1872
(b) Enforceable at the option of both the Q19. A voidable agreement is enforceable
parties. by:
(c) Valid but not enforceable. (a) none of the parties
(d) Not enforceable in a court of law. (b) only one of the parties
(c) one or more but not by the other or
Q13. The Indian Contract Act applies to others
(a) whole of India (d) all the parties to the contract.
(b) whole of India excluding Jammu and
Kashmir Q20. An illegal agreement is:
(c) states notified by central Government (a) void ab initio
from time to time. (b) becomes void
(d) States notified by the state (c) void ab initio as well as punishable
Government from time to time. (d) voidable

Q14. The term ‘contract’ is defined in Q23. An executoy contract is:

which of the following sections of Indian (a) wholly unperformed
Contract Act, (b) may be partially performed or
(a) Section 2 (a) wholly unperformed
(b) Section 2 (b) (c) wholly performed
(c) Section 2 (e) (d) none of the above
(d) Section 2 (h)
Q24. Law of contract is:
Q15. A proposal when accepted became a (a) the whole law of agreements
(a) promise (b) the whole law of obligations
(b) offer (c) neither the whole law of
(c) contract agreements nor the whole law of
(d) acceptance obligations
(d) none of the above
Q16. A contract is
(a) offer + acceptance Q25. The transactions collateral to an
(b) Agreement + Enforceability illegal agreement are:
(c) Offer + Enforceability (a) not affected in any manner
(d) Offer + legal obligations. (b) also illegal
(c) voidable at the option of the
Q17. The law of contract creates the right plaintiff
(a) just in rem (d) void
(b) just in personam
(c) consensus ad idem Q26. A contract:
(d) none of these (a) may be void as originally entered
into
Q18. A just in personam means a right (b) may became void subsequent to its
against formation
(a) a specific person (c) cannot became void under any
(b) the public at large circumstances
(c) a specific thing (d) may became void at the will of a
(d) none of these party.
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THE INDIAN CONTRACT ACT, 1872
(c) in both the situations
Q27. A contract may be: (d) in none of the situations
(a) express
(b) implied Q34. Which of these obligations are
(c) a or b imposed by the general law of land and
(d) a and b not by the contractual agreements?
(a) quasi contracts
Q28. An agreement with a minor is: (b) judgment of the court
(a) void (c) status obligations
(b) void ab initio (d) in all the three situations
(c) voidable
(d) valid Q35. Which of the following persons can
enter into a valid contract?
Q29. The object of an agreement must be (a) minor
(a) beneficial for the society (b) person of unsound mind
(b) may be illegal (c) illiterate person
(c) lawful (d) persons disqualified by nay law to
(d) may be immoral which they are subject to

Q30. Consideration may be:
(a) present
(b) past
(c) present or past but not future
(d) present, past or future
Q31. An agreement enforceable by law
under Indian Contract Act may be:
(a) in writing
(b) oral
(c) a and b
(d) a or b
Q32. Which of these statements are true?
(a) an agreement is a wider tern than
contract
(b) all agreements are contracts but
all contracts are not agreements
(c) all legal obligations are contracts
(d) the Indian Contract Act applies to
whole of India.
Q33. In which of these situations a
contract becomes void:
(a) supervening impossibility of an act
(b) contract contingent on happening of
an uncertain event
Q36. State which of these statements are
true
(a) A proposal when accepted always
becomes a contract
(b) All kinds of obligations created
between the parties form part of
the contract
(c) An agreement to agree in future is
not a contract.
(d) None of these.
Q37. In a voidable contract:
(a) parties are incompetent to contract
(b) free consent of the parties is
missing
(c) consideration is inadequate
(d) the object is expressly declared
void by the act itself.
Q38. Which of these is a source of Indian
Contract Act?
(a) American mercantile law
(b) Vedas and Puranas
(c) Law of merchants
(d) English mercantile law
Q39.
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THE INDIAN CONTRACT ACT, 1872