Microsoft Word - lecture-01

Page 1 of 10

UNIT I LESSON 1: INTRODUCTION TO LAW AND THE MEANING AND ESSENTIALS OF CONTRACT Learning Outcomes
At the end of this chapter, you will be able to know: The meaning of law The main sources of mercantile law The meaning of contract The essential elements of valid contract English/ Foreign law Precedents(previous judgments of the courts.) Customs and usage I must tell you that most of the Indian Mercantile Law is contained in the statutes. The prime legislation is the Indian Contract Act 1872 but it is not exhaustive to deal with all kinds of contracts. In addition to this there are the Sale of Goods Act, 1930, The Indian Partnership Act 1932, The Negotiable Instruments Act 1881 etc. wherever the Indian Contract Act is silent, the Indian courts may apply the principles of the English Common Law. It is interesting to know that in England there is no English Contract Act in the form of a statute. It has been derived from common law, the usage of merchants and traders in different spheres of trade, substantiated or ratified by decisions in the court of law. The judicial precedents are an important source of law. Sometimes, there is no provision, which can answer a particular question of law. In such cases the court will look into the previous decisions on similar matters to find the relevant law. Custom and usage of a trade play an important role in business dealings of that trade. To have a binding force, the custom or usage must be certain, reasonable and well known. Now it is more than a century that that the mercantile laws are governing trade and commerce. The law of contract is the foundation upon which the superstructure of modern business is built. It is common knowledge that in business transactions quite often promises are made at one time and the performance follows later. In such a situation if either of the parties were free to go back on its promise without incurring any liability, there would be endless complications and it would be impossible to carry on trade and commerce. Hence the law of contract was enacted which lays down the legal rules relating to promises, their formation, their performance, and their enforceability. Explaining the object of the law of contract Sir William Anson observes. The law of contract is intended to ensure that what a man has been led to expect shall come to pass, that what has been promised to him shall be performed. The law of contract is applicable not only to the business community but also to others. Every one of us enters into a number of contracts almost everyday, and most of the time we do so without even realizing what we are doing from the point of law. A person seldom realizes that when he entrusts his scooter to the mechanic for repairs, he is entering into a contract of bailment; or when he buys a packet of cigarettes, he is making a contract of the sale of good; or again when he goes to the cinema to see a movie, he is making yet another contract; and so on.

Introduction
Business laws are essential for the students of management to understand the legal rules and aspects of business. Just like any other study even business management is incomplete without a proper study of its laws. Any form of business needs legal sanction. Therefore, it is imperative that a manager understands the various ways in which businesses can be organized. This subject introduces some of the common forms of business organizations, including some forms unique to India like the Joint Hindu Undivided Family firm. Different types of organizations like Sole Ownership, Partnership, Private Limited Company, Public Limited Company, Joint Stock Company along with the rationale for adopting these forms are explored. What form of business organization is the best under a particular set of conditions? What advantage or disadvantage does it have over other forms of business? Formalities to be gone through and some the quasi-legal processes required for starting a business will be discussed in detail in this subject. For the proper working of the society, there must exist a code of conduct. As you all know, in the ancient times the society was not organized. The rights of the individuals were not recognized. Gradually, the society evolved and the state came into being. As we all know, to regulate the state, there should be a specific code of conduct, which should be followed by everyone. As a result of which law evolved as a system of rights and obligations including all the rules and principles, which regulate our relations with other persons and with the state. These rules and regulations took the form of statutes. To enforce the law and to resolve the conflicts arising there from, courts of law were setup by the state. Laws were made to govern almost every walk of life. You all must know that criminal laws were made to control criminal activities in the society like Indian Penal Code, which enumerates which activities are considered criminal and what will be the punishment for committing a crime. Likewise, mercantile law was evolved to govern and regulate trade and commerce. Hence, the term mercantile law can be defined as that branch of law, which comprises laws concerning trade, industry and commerce. It is an ever-growing branch of law with the changing circumstances of trade and commerce. Now the question arises as to what are the sources of mercantile law in India. The answer is The Indian statutes on mercantile law

11.555

http://dc374.4shared.com/doc/aIIzBWdc/preview.html

10/21/2011

Microsoft Word - lecture-01

Page 2 of 10

Besides, the law of contract furnishes the basis for the other branches of mercantile law. The enactments relating to sale of goods, negotiable instruments, insurance, partnership and insolvency are all founded upon the general principles of contract law. That is why the study of the law of contract precedes the study of all other sub-division of mercantile law. The Indian contract act was enacted from the 1
st

1.

day of September; 1872.it is

applicable to the whole of India except the state of Jammu and Kashmir. There may be some occasions where Indian law disagrees with the English laws. In such cases, the Indian law will prevail. Now we will move on to the definition and concept of the contract.

The Indian Contract Act, 1972

The law of contract in India is contained in the Indian Contract Act 1872. This Act is based mainly on English common law, which is to a large extent made up of judicial precedents. (there being a separate contract act in England). It extends to the whole of India except the state of Jammu and Kashmir and came into force on the first day of September 1872(Sec.1 Indian Contract Act 1872). The act is not exhaustive. It does not deal with all the branches of the law of contract. There are separate acts, which deal with contracts relating to negotiable instruments, transfer of property, sale of goods, partnership, insurance, etc. Again the act does not affect any usage or custom of trade (Sec.1). 2.

Agreement. As per section 2 (e): Every promise and every set of promises, forming the consideration for each other, is an agreement. Thus it is clear from this definition that a promise is an agreement. What is a promise? the answer to this question is contained in section 2 (b) which defines the term. 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. An agreement, therefore, comes into existence only when one party makes a proposal or offer to the other party and that other party signifies his assent (i.e., gives his acceptance) thereto. In short, an agreement is the sum total of offer and acceptance. On analyzing the above definition the following characteristics of an agreement become evident:
(a) At least two persons. There must be two or more persons to make an agreement because one person cannot inter into an agreement with himself.

(b) Consensus-ad-idem. Both the parties to an agreement must agree about the subject matter of the agreement in the same sense and at the same time.
Legal obligation. As stated above, an agreement to become a contract must give rise to a legal obligation i.e., a duty enforceable by law. If an agreement is incapable of creating a duty enforceable by law. It is not a contract. Thus an agreement is a wider term than a contract. All contracts are agreements but all agreements are not contracts, Agreements of moral, religious or social nature e.g., a promise to lunch together at a friends house or to take a walk together are not contracts because they are not likely to create a duty enforceable by law for the simple reason that the parties never intended that they should be attended by legal consequences. I shall give you a very simple example to explain this point. An agreement to sell a car may be a contract but an agreement to go for lunch may be a mere agreement not enforceable by law. Thus all agreements are not contracts. In business agreements the presumption is usually that the parties intend to create legal relations. Thus an agreement to buy certain specific goods at an agreed price e.g., 200 bags of rice at Rs.100 per bag is a contract because it gives rise to a duty enforceable by law, and in case of default through a court provided other essential elements of a contract was made by free consent of the parties competent to contract, for a lawful consideration and with a lawful object . Thus it may be concluded that the Act restricts the use of the word contract to only those agreements, which give, rise to legal obligations between the parties. It will be appropriate to point out here that the law of contract deals only with such legal obligations which arise form agreements, obligations which are not contractual in nature are outside the purview of the law of contract. Before moving further we must know the conditions which must be satisfied for the contract to become valid.

Scheme of the Act.

The scheme of the Act may be divided into two main groups. 1. 2. General principles of the law of contract (Secs. 1-75). Specific kinds of contracts, Viz; (a) Contracts of indemnity and Guarantee (Secs. 124-147).

(b) Contracts of Bailment and pledge (Secs. 148-181).

(c) Contracts of Agency (Secs. 182-238). Before 1930 the Act also contained provisions relating to contracts of sale of goods and partnership. Sections 76-123 relating to sale of goods were repealed in 1930 and a relating to partnership were repealed in 1932 when the Indian separate Act called the Sale of Goods Act was enacted. Similarly, sections 239-266 partnership Act was passed. But we will not study the specific kinds of contracts for the time being but only concentrate on contracts generally. Before we take up the discussion of the various provisions of the Indian contract Act. It will be proper to see some of the basic assumptions underlying the Act. Definition of contract According to section 2(h) of the Indian Contract Act: An agreement enforceable by law is a contract. A contract therefore, is an agreement the object of which is to create a legal obligation i.e., a duty enforceable by law. From the above definition, we find that a contract essentially consists of two elements: (1) An agreement and (2) Legal obligation i.e., a duty enforceable by law. We shall now examine these elements detail.

11.555

http://dc374.4shared.com/doc/aIIzBWdc/preview.html

10/21/2011

Microsoft Word - lecture-01

Page 3 of 10

Essential Elements of a Valid Contract A contract has been defined in section 2(h) as an agreement enforceable by law. To be enforceable by law, an agreement must possess the essential elements of a valid contract as contained in sections 10, 29 and 56. According to section 10, all agreements are contracts if they are made by the free consent of the parties, competent to contract, for a lawful consideration, with a lawful object, are not expressly declared by the Act to be void, and where necessary, satisfy the requirements of any law as to writing or attention or registration. As the details of these essentials form the subject matter of our subsequent chapters, we propose to discuss them in brief here. The essential elements of a valid contract are as follows. 1. Offer and acceptance. There must a lawful offer and a lawful acceptance of the offer, thus resulting in an agreement. The adjective lawful implies that the offer and acceptance must satisfy the requirements of the contract act in relation thereto. Intention to create legal relations. There must be an intention among the parties that the agreement should be attached by legal consequences and create legal obligations. Agreements of a social or domestic nature do not contemplate legal relations, and as such they do not give rise to a contract. An agreement to dine at a friends house in not an agreement intended to create legal relations and therefore is not a contract. Agreements between husband and wife also lack the intention to create legal relationship and thus do not result in contracts.

Crompton & Brothers Ltd. Provides a good illustration on the point. Illustration In the above case R Company entered into an agreement with C Company. By means of which the former was appointed as the agent of the latter. One clause of the agreement was as follows. This arrangement is not entered into as a formal or legal agreement. And shall not be subject to legal jurisdiction in the law courts. It was held that there was no intention to create legal relations on the part of parties to the agreement and hence there was no contract. Now let us go to the third essential of a contract i.e. 3. Lawful consideration. The third essential element of a valid contract is the presence of consideration. Consideration has been defined as the price paid by one party for the promise of the other. An agreement is legally enforceable only when each of the parties to it gives something and gets something. The something given or obtained is the price for the promise and is called consideration subject to certain exceptions; gratuitous promises are not enforceable at law.

2.

Try to work out the solution in the following cases and then go to the answer. Illustrations. (a) M promises his wife N to get her a necklace if she will sing a song. N sang the song M did not bring the necklace for her. (b) The defendant was a civil servant in Ceylon. He and his wife were enjoying leave in England. When the defendant was due to return to Ceylon, his wife could not accompany him because of her health. The defendant agreed to send her 30 a month as maintenance expenses during the time they were thus forced to live apart. She sued for breach of this agreement. Answers (a) N cannot bring an action in a court to enforce the agreement as it lacked the intention to create legal relations. (b) Her action was dismissed on the ground that no legal relations had been contemplated and therefore there was no contract.(Balfour vs. Balfour) In commercial agreements an intention to create legal relations is presumed. Thus, an agreement to buy and sell goods intends to create legal relationship hence is a contract, provided other requisites of a valid contract are present. But if the parties are under a legal obligation, even a business agreement does not amount to a contract. The case of Rose & Frank co, vs.

The consideration may be an act (doing something) or forbearance (not doing something) or a promise to do or not to do something. It may be past, present or future. But only those considerations are valid which are lawful. The consideration is lawful. unless it is forbidden by law; or is of such a 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 is immoral; or is opposed to public policy (sec.23). 4. Capacity of parties. The parties to an agreement must be competent to contract. But the question that arises now is that what parties are competent and what are not. The contracting parties must be of the age of majority and of sound mind and must not be disqualified by any law to which they are subject (sec.11). If any of the parties to the agreement suffers form minority, lunacy, idiocy, drunkenness etc. The agreement is not enforceable at law, except in some special cases e.g., in the case of necessaries supplied to a minor or lunatic, the supplier of goods is entitled to be reimbursed from their estate (sec 68). Free consent. Free consent of all the parties to an agreement is another essential element. This concept has two aspects.(1) consent should be made and (2) it should be free of any pressure or misunderstanding. Consent means that the parties must have agreed upon the same thing in the same sense (sec. 13). There is absence of free consent, if the agreement is induced by (i)coercion, (ii) undue influence, (iii) fraud, (iv) mis-representation, or (v) mistake (sec. 14). If the agreement is vitiated by any of the first four factors, the contract would be voidable and cannot be enforced by the party guilty of coercion, undue influence etc. The other party (i.e., the aggrieved party) can either reject the contract or accept it, subject to the rules laid down in the act. If the agreement is induced by mutual mistake which is material to the agreement, it would be void (sec. 20)

5.

11.555

http://dc374.4shared.com/doc/aIIzBWdc/preview.html

10/21/2011

Microsoft Word - lecture-01

Page 4 of 10

6.

Lawful object. For the formation of a valid contract it is also necessary that the parties to an agreement must agree for a lawful object. The object for which the agreement has been entered into must not be fraudulent or illegal or immoral or opposed to public policy or must mot imply injury to the person or the other of the reasons mentioned above the agreement is void. Thus, when a landlord knowingly lets a house to a prostitute to carry on prostitution, he cannot recover the rent through a court of law or a contract for committing a murder is a void contract and unenforceable by law. Writing and registration. According to the Indian contract Act, a contract to be valid, must be in writing and registered. For example, it requires that an agreement to pay a time barred debt must be in writing and an agreement to make a gift for natural love and affection must be in writing and registered to make the agreement enforceable by law which must be observed. Certainty. Section 29 of the contract Act provides that Agreements, the meaning of which is not certain or capable of being made certain, are void. In order to give rise to a valid contract the terms of the agreement must not be vague or uncertain. It must be possible to ascertain the meaning of the agreement, for otherwise, it cannot be enforced

3.

A invites B to see a picture with him. B accepts the offer. A purchase a ticket for B and waits for him outside the cinema hall. B does not turn up has A any cause of action against B. [Hint: No] A agrees with B to murder C for Rs. 10,000. Is this a valid contract? [Hint: No]

4.

5. 6. 7.

X agrees to pay Y Rs. 1000 if Y writes 100 pages for him in one minute. Is it a valid contract? [Hint: No] State whether there is any valid contract in the following cases? (i) X boards a DTC bus at Mayur Vihar for Shalimar Bagh. (ii) X and Y agree to go for fishing (iii) X buys an evening paper (iv) X a minor borrows Rs. 5000 from Yand agreed to repay back the same within a week.

7.

8.

References
Kapoor, N.D. (2003), Elements of Mercantile Law, Sultan Chand and Sons, New Delhi. http://www.indialawinfo.com/bareacts/soga.html M.C. Kucchal ( 2002), Business Law, Vikas Publishing House Pvt. Ltd, Delhi. P.C. Tulsian (2002), Business Law, Tata Mc. Graw Hill Pvt. Ltd, Delhi.

Illustation. A, agrees to sell B a hundred ton of oil there is nothing whatever to show what kind of oil was intended. The agreement is void for uncertainly. 9. Possibility of performance. Yet another essential feature of a valid contract is that it must be capable of performance. Section 56 lays down that An agreement to do an act impossible in itself is void. If the act is impossible in itself, physically or legally, the agreement cannot be enforced at law.

Notes:

Illustration. A agrees with B, to discover treasure by magic. The agreement is not enforceable. 10. Not expressly declared void. The agreement must not have been expressly declared to be void under the Act. Sections 24-30 specify certain types of agreements that have been expressly declared to be void. For example, an agreement in restraint of marriage, an agreement in restraint of trade, and an agreement by way of wager have been expressly declared void under sections 26, 27 and 30 respectively. Before dealing with the various essentials of a valid contract one by one in detail, it will be appropriate to discuss the kinds of contracts. First, because we shall be using the terms like voidable contract, void contract, void agreement, etc. very often in the course of our discussion. Here we end our discussion on essentials of a valid contract. Now attempt the following questions for a better understanding: 1. 2. Comment that the all contracts are agreements but all agreements are not contract. What are the essential elements of a valid contract?

11.555

http://dc374.4shared.com/doc/aIIzBWdc/preview.html

10/21/2011

Microsoft Word - lecture-01

Page 5 of 10

Learning Outcomes LESSON 2 KINDS OF CONTRACTS

By the end of the lecture we should be able to answer the following questions: The different types of contracts with respect to performance, enforceability, validity and formation other circumstances under which a contract becomes voidable. The Indian contract act has laid down certain other situations also under which a contract becomes voidable. For example. (i) When a contract contains reciprocal promises, and one party to the contract prevents the other from performing his promises, then the contract becomes voidable at the option at the party so prevented (sec. 53). Illustration. A. Contracts with B that A shall whitewash Bs house for Rs. 100. A. is ready and willing to execute the work accordingly, but B prevents him from doing so. The contract becomes voidable at the option of A. (ii) When a party to the contract promises to do a certain thing within a specified time, but fails to do it, then the contract becomes voidable at the option of the promisee. If the intention of the parties was that time should be of the essence of the contract. (sec.55) Illustration. X Agrees to sell and deliver 10 bags of wheat to Y for Rs. 2,5000 within one week. But X does not supply the wheat within the specified time. The contract becomes voidable at the option of Y. Consequences of rescission of voidable contract. Section 64 lays down the rights and obligations of the parties to a voidable contract after it is rescinded. The section states that when a person at whose option a contract has become has received any benefit from another party to such contract, he must restore such benefit. If an amount has been received as a security for the due performance of the contract, such earnest money deposit is not to be returned if the contract becomes voidable under section 55 on account of the promisors failure to complete the contract at the time agreed and has been rescinded by the promisee because it is not a benefit received under the contract. 3. Void contract. Literally the word void means not binding in law. Accordingly the term. void contract implies a useless contract which has no legal effect at all. Such a contract is a nullity, as for there has been no contract at all. Section 2(j) defines: A contract which ceases to be enforceable by law becomes void, when it ceases to be enforceable. It follows form the definition that a void contract is not void from its inception and that it is valid and binding on the parties when originally entered but subsequent to its formation it becomes invalid and destitute of legal effect because of certain reasons. The reasons which transform a valid contract into a void contract, as given in the contract Act. Are as follows. (a) Supervening impossibility (sec. 56) A contract becomes void by impossibility of performance after the formation of the of contract for example, A and B contract to marry

Introduction
First of all we will study [I] Kinds of contracts from the point of view of Enforceability Valid contract Voidable contract. Void contract Unenforceable contract Illegal or unlawful contract

From the point of view of enforceability a contract may be valid, voidable, void, unenforceable or illegal. 1. Valid contract. According to section 2(i), it isan agreement enforceable by law, an agreement becomes enforceable by law when all the essential elements of a valid contract as were enumerated in the last lesson are present.

If one or more of these elements is/are missing the contract is either void, voidable, illegal or unenforceable. 2. Voidable contract. According to 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 the other or others, is a voidable contract. Thus, a voidable contract is one which is enforceable by law at the option of one of the parties only. Until it is avoided or rescinded by the party entitled to do so by exercising his option in that behalf, it is a valid contract.

Usually a contract becomes voidable when the consent of one of the parties to the contract is obtained by coercion, undue influence, misrepresentation or fraud. Such a contract is voidable at the option of the aggrieved party i.e., the party whose consent was so caused (secs. 19 and 19A). but the aggrieved party must exercise his option of rejecting the contract (i) within a reasonable time, and (ii) before the rights of third parties intervene, otherwise the contract cannot be repudiated. Illustration. (a) A : threatens to shoot B if he does not sell his new Bajaj scooter to A for Rs. 2,000. B agrees. The contract has been brought about by coercion and is voidable at the option of B. (b) A. intending to deceive B. falsely represents that five hundred quintals of indigo are made annually at As factory, and thereby induces B to buy the factory. The contract has been caused by fraud and is voidable at the option of B.

11.555

http://dc374.4shared.com/doc/aIIzBWdc/preview.html

10/21/2011

Microsoft Word - lecture-01

Page 6 of 10

each other. Before the time fixed for the marriage, A goes mad. The contract to marry becomes void. (b) Subsequent illegality (sec, 56) A contract also becomes void by subsequent illegality. For example, A agrees to sell B 100 hags of wheat at Rs. 650 per bag. Before delivery the government bans private trading in wheat. The contract becomes void.
(c) Repudiation of a voidable contract. A voidable contract becomes void, when the party, whose consent is not free, repudiates the contract. For example, M by threatening to murder Bs son, makes B agree to sell his car worth Rs. 30,000 for a sum of Rs. 10,000 only. The contract, being the result or coercion, is voidable at the option of B. B may either affirm or reject the contract. In case B decides to rescind the contract, it becomes void.

to sell his horse to him. It turns out that the horse was dead at the time of the bargain, through neither party was aware of the fact. In this case the agreement is discovered to be void and B must repay to A Rs. 1,000. it should, however, be noted that agreements which are known to be void or illegal, when they are entered into, are excluded from the purview of this section. Thus, if L pays Rs. 10,000 to M to murder Z, the money cannot be recovered. Similarly, nothing can be recovered in the case of expressly declared void agreements, of course, subject to the following exceptions. (i) In the case of an agreement caused by bilateral mistake of essential fact (although it is expressly declared void under section 20) restitution is allowed as it comes under the category of an agreement discovered to be void. (ii) In the case of an agreement with a minor who commits fraud by misrepresenting his age (although agreement with a minor is known to be void.) restoration is allowed in specie on equitable grounds because a minor cannot be allowed to cheat people, and also because the other party has not lost his title to the thing in question. (b) When a contract becomes void, restitution is also allowed in the case of a void contract. For example, A agrees to sell B after one month 10 quintals of wheat at Rs. 625 per quintal and receives Rs. 500 as advance. Soon after the contract, private sales of wheat becomes void but A must return the sum of Rs. 500 to B. Similarly, where after accepting Rs. 1,000 as advance for singing at a convert for B, A is too ill to sing. A is not bound to make compensation to B for the loss of the profits which B would have made if A would have been able to sing, but A must refund to B the 1,000 rupees paid in advance. 4. Unenforceable contract. An unenforceable contract is one which is valid in itself, but is not capable of being enforced in a court of law because of some technical defect such as absence of writing, registration, requisite stamp, etc., or time barred by the law of limitation. For example, an oral arbitration agreement is unenforceable because the law requires an arbitration agreement to be in writing. Similarly, a bill of exchange or promissory note, though valid in itself, becomes unenforceable after three years from the date the bill or note falls due, being time barred under the limitation act. Illegal or unlawful contract. The word illegal means contrary to law and the term contract means an agreement enforceable by law. As such to speak of an illegal contract involves a contradiction in terms, because it means something like this an agreement enforceable by law and contrary to law. There is apparent contradiction in terms. Moreover, being of unlawful nature, such an agreement can never attain the status of a contract. Thus, it will be proper if we use the term illegal agreement in place of illegal contract an illegal agreement is void ab-initio.

(d) In the case of a contract contingent on the happening of an uncertain future event, if that event becomes impossible. A contingent contract to do or not to do something on the happening of an uncertain future event, becomes void, when the event becomes impossible (sec.32). for example, A contracts to give Rs. 1,000 as loan to B marries C. C dies without being married to B. the contract becomes void. Void agreement- An agreement not enforceable by law is said to be void [sec.2 (g)]. Thus, a void agreement does not give rise to any legal consequences and is void agreement does not give rise to any legal consequences and is void ab-initio. In the eye of law such an agreement is no agreement at all from its very inception. There is absence of one or more essential elements of a valid contract, except that of free consent, in the case of a void agreement. Thus, an agreement with a minor is void abinitio as against him, because a minor lacks the capacity to contract. Similarly, an agreement without consideration is void ab-initio, of course with certain exceptions as laid down in section 25. Certain agreements have been expressly declared void in the contract act e.g., agreements which are in restraint of trade or of marriage or of legal proceedings or which are by way or wager. A void agreement should be distinguished from a void contract. A void agreement never amounts to a contract as it is void ab-initio. A void contract is valid when it is entered into, but subsequent to its formation something happens which makes it unenforceable by law, notice that a contract cannot be void ab-initio and only an agreement can be void ab-initio. Obligation of person who has received advantage under void agreement or contract that becomes void. In this connection section 65 lays down that when an agreement is discovered to be void or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it. Thus, this section provides for restitution of the benefit received. Thus both parties may stand uneffected by the transaction in the following two cases. (a) When an agreement is discovered to be void. In other words, when an agreement is void being discovered at a later stage. For example, A pays B Rs. 1,000 for Bs agreeing 5.

Some important comparisons

11.555

http://dc374.4shared.com/doc/aIIzBWdc/preview.html

10/21/2011

Microsoft Word - lecture-01

Page 7 of 10

Agreement and Contract

An agreement is a promise or set of promises (s).

agreement with a minor is void as against him but not

A contract is essentially an agreement, i.e., a promise or set of promise (s).

illegal. Again, an agreement the terms of which are uncertain is void but such an agreement the terms of which are uncertain is void an agreement is not illegal.

Differences Enforceability An agreement may or my not be enforceable at law. For example, social agreements are generally not enforceable while business agreements are enforceable at law. Effect An agreement is not always a binding on the concerned parties. Scope All agreements are not contracts.

A contract is an agreement which is enforceable at law.

(ii)

An illegal agreement is wider in effect in relation to collateral transactions than a void agreement. When an agreement is illegal, other agreement which are incidental or collateral to it are also

A contract is always concluded and binding on the concerned parties, All contracts are agreements.

Agreement

Contract

tainted with illegality, hence void, provided the third parties have the knowledge of the illegal or immoral design of the main transaction. The reason underlying this rule is that no person shall be allowed to invoke the aid of the

Illegal and Void Agreements

Similarities These agreements are not enforceable at law. Differences Scope- These agreements are narrower in scope. All illegal ag reements are void. Effect on collateral transaction Collateral transaction of an illegal contract also becomes illegal and contract not be enforced. Punishment Parties may be punished for making illegal agreement.

These agreements are not enforces able at law. These agreements are wider in scope. An agreement may be void because of a reason other than illegality. Collateral transaction of an agreement which is void for a reason other than illegality are enforceable at law. Being void does not make a contract punishable.

court if he is himself implicated in the illegality. On the other hand, when an agreement is void (but not illegal), agreements which are collateral to it are not invalidated and remain valid. Illustrations. (a) A engages B to Murder C and borrows Rs. 5,000 from D to pay B. D is aware of the

Illegal agreement

Void agreement

purpose of the loan. Here the agreement between A and B. D is aware of the purpose of the loan. Here the agreement between A and B is illegal and the agreement between A and D is collateral to an illegal agreement. As such the loan transaction is illegal and void and D cannot recover the money. But the position will change if D is not aware of the purpose of the loan. In that case the loan transaction is not collateral to the illegal agreement and is a valid contract. Void and Voidable Contract Void Agreement and Void Contract

Despite the similarity between an illegal and a void agreement that in either case the agreement is void ab- initio and cannot be enforced by law, I will explain the above points in detail now. (i) An illegal agreement is narrower in scope than a void agreement. all illegal agreements are void but all void agreements are not necessarily illegal. The object or consideration of an agreement way not be contrary to law but may still be void. For example, an agreement may not be contrary to law but may still be void. For example, an

Similarities Restitution If any benefit is passed between the parties, it may be restored back. Differences Definition When a contract ceases to be enforceable at law, it becomes void contract. Status A void contract cannot create any legal rights. It is a total nullity. Nature A void contract is valid when it is made. But subsequently it becomes void due to one reason or the other. Rights A void contract is valid when it is made. But subsequently it becomes void due to one reason or the other. Effect When a contract is void because of illegality, its collateral transactions also becomes void.

If any benefit is passed between the parties, it may be restored back. It is a contract which is enforceable by law at the option of one or more parties thereof, but not at the option of others.

A voidable contract takes its full and proper legal effect unless it is disputed and set aside by the person entitled to do so.
A contract may be voidable since very beginning, or may subsequently become voidable. A voidable contract gives rights to the aggrieved party to rescind the contract, and claim the damages, etc. in certain cases. A voidable contract does not effect the collateral transactions.

11.555

http://dc374.4shared.com/doc/aIIzBWdc/preview.html

10/21/2011

Microsoft Word - lecture-01

Page 8 of 10

Similarities A void agreement cannot create any legal rights. It is a total nullity. Differences It is an agreement. It never takes form of a contract. It is a nullity since very beginning. Kinds of contracts from the point of view of mode of creation From the point of view of mode of creation a contract may be express or implied or constructive. 1. Express contract. Where both the offer and acceptance constituting an agreement enforceable at law are made in words spoken or written, it is an express contract. For example. A tells B on telephone that he offers to sell his car for Rs. 20,000 and B in reply informs A that he accepts the offer, there is an express contract. Implied contract. Where both the offer and acceptance constituting an agreement enforceable at law are made otherwise than in words i.e., by acts and conduct of the parties, it is an implied contract. Thus, where A, a coolie in uniform takes up the luggage of B to be carried out of the railway station without being asked by B, and B, allows him to do so, then the law implies that B agrees to pay for the services of A, and there comes into existence an implied contract and N is under obligation to pay to M.

A void contract cannot create any legal rights. It is a total nullity.

It is a contract. When it is formed it is perfectly valid. Subsequently it becomes a nullity. example, and A says to B, If you dig my garden next Sunday, I will pay you Rs. 500. B makes no commitment, but says, I am not sure that I shall be able to, but if I do, I shall be happy to take Rs. 500. This arrangement is not bilateral. A has committed himself to pay Rs. 500 in certain circumstances, but B has made no commitment at all. He is totally free to decide whether he wants to dig As garden or not. If B does not turn up on Sunday to dig the garden, A cannot do anything about is. If, however, B reaches to As place on Sunday to do the work, it will amount to his acceptance a contract will be formed where both parties will be bound by their performance. Before I end the discussion on kinds of contracts I would like to discuss another kind of contract called the Standard Form Contract When a large number of contracts have got to be entered into by a person, from a practical point of view and for the sake of convenience, a standard form for the numerous contracts may be used. An insurance policy, shares or a railway ticket are few examples of such standardized contracts. The special terms and conditions become binding as part of the contract only if they are brought to the notice of the acceptor before or at the time of the contract. In view of the unequal bargaining power of the two parties, the courts and the legislature have evolved certain rules to protect the interest of the weaker party:-(1) Reasonable notice e.g. by printing on a ticket, For conditions see back, or obtaining signatures on the document containing terms, or otherwise explaining the the terms,. Where an adequate notice is not given the offeree is not bound by the terms. (2) Notice should be contemporaneous with the contract if a party to the contract wants to have exemption from liability he must give a notice about the exemption while the contract is being entered into and not thereafter ( Olley Vs. Marlborough Court. Ltd.) Terms of contract should be reasonable if the terms of the contract are unreasonable and opposed to public policy, they will not be enforced. Fundamental breach of contract no exemption clause is allowed to permit the non-compliance of the basic contractual obligation i.e. obligation which is fundamental or core of the contract. Thus, the dry cleaner has to be answerable , even if the contract contains all sorts of exemption clauses, if the cloth is altogether lost. Strict construction a strict construction shall be applied to exemption clause, and any ambiguity is to be resolved in favour of the weaker party. Statutory protection The English Unfair Contract Terms Act, 1977 severely limits the right of the contracting parties

2.

It is relevant to state in respect of mode of creation, certain contracts may be a mixture of the express and implied types of contracts, that is, where out of the two components of an agreement, namely, offer and acceptance, one is expressed in words and the other is implied from acts and circumstances. Such contracts may be called as contracts of mixed character. For example, A offers to buy Bs scooter for Rs. 4,000 and B accepts the offer by sending the scooter itself. Here As offer is expressed in words and Bs acceptance is implied form his conduct. It is a contract of mixed character. 1. Constructive or quasi contract. The term constructive or quasi contract is a misnomer, the cases grouped under this type of contracts have little or affinity with contract. Such a contract does not arise by virtue of any agreement, express or implied between the parties but the law infers or recognizes a contract under certain special circumstances. For example, obligation to finder of lost goods to return them to the true owner or liability or person to whom money is paid under mistake to repay it back cannot be said to arise out of a consent, but these are very mush conversed under quasi contracts as per sections 71 and 72 respectively. The contract act has rightly named such contracts as certain relations resembling those created by contract. A quasi contract is based upon the equitable principle that a person shall not be allowed to retain unjust benefit at the expense of another. Sections 68-72 of the contract act describe the cases which are to be deemed quasi contracts. Now we come to-

(3)

(4)

(5)

(6)

11.555

http://dc374.4shared.com/doc/aIIzBWdc/preview.html

10/21/2011

Microsoft Word - lecture-01

Page 9 of 10

to exclude or limit their liability through exemption clauses in the agreement. India lacks such an Act.

was discovered that the horse was dead at the time of making the contract. Advise the parties. Solution:. The agreement is void because both the parties were under a mistake of fact regarding existence of the subject matter.
8. X agrees to let his flat to Y for use as a gambling den on a monthly rent of Rs 10,000. After 3 months, Y stops making the payment of rent. Advise X.

Practical Problems
Attempt the following problems, giving reasons for your answers. 1. A invites B to a dinner. B accepts the invitation. A made elaborate arrangement but B failed to turn up. Can A sue B for the loss he has suffered?. [Hint. No, A cannot sue B for the loss he suffered because the agreement was of a social nature and hence lacked the intention to create legal relationship one of the essentials of a valid contract.] 2. M agrees to pay N Rs. 100 and in consideration N agrees in write for him 100 pages within five minutes. Is it a valid contract? [Hint. No, it is not valid contract. It is a void agreement because as per section 56 an agreement to do an act impossible in itself is void.] 3. 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 A Rs. 50 in cash for his services. Is the agreement between A and C (a) Express or implied

Solution: X cannot recover anything. The agreement between X and Y is void because the object of the agreement is unlawful. 9. X threatens to kill Y if he does not sell his house to X for Rs 1,00,000. Y agrees. X borrows Rs 1,00,000 from Z who is also aware of the purpose of the loan. What is the nature of the agreement between X and Y, and X and Z? Solution: The contract between X and Y is a contract which is voidable at the option of Y because Ys consent is not free as it has been obtained by coercion. The contract between X and Z is a valid contract because the object of contract (i.e. borrowing for the purchase of a house) is lawful. 10. X agrees to pay Y Rs 1,00,000 if Y kills Z. To pay Y, X borrows Rs 1,00,000 from W who is also aware of the purpose of the loan. Y kills Z but X refuses to pay. X also refuses to repay the loan to W. Advise Y and W. Solution: The agreement between X and Y is an illegal agreement because its object is unlawful. Hence, Y cannot recover anything from X. Since the main agreement between X and Y is illegal, the agreement between X and W which is collateral to the main agreement is also void and hence W cannot recover anything from X.

(b) Executed or executory

(c) Valid, voidable or void 6. A promises to pay B Rs.500 if beats C.B beats C but A refuses to pay. Can B recover the amount? ( Hint : No as the agreement is illegal.) 4. X invites Y to dinner. Y accepts the invitation but fails to turn up. Can X sue Y for the damage?

Solution: X cannot claim any damages from Y because the agreement between X and Y is not enforceable by law. It is a social agreement and the usual presumption in such agreement is that the parties do not intend to create legal relationship. 5. X makes a promise to his wife Y to give her pocket money of Rs 1,000 per month. After 6 months, he stops making the payment. Can Y claim damages from X

References Kapoor, N.D. (2003), Elements

Chand and Sons, New Delhi.

of Mercantile Law, Sultan

http://www.indialawinfo.com/bareacts/soga.html
M.C. Kucchal ( 2002), Business Law, Vikas Publishing House Pvt. Ltd, Delhi. P.C. Tulsian (2002), Business Law, Tata Mc. Graw Hill Pvt. Ltd, Delhi. Rohini Aggarwal(2003), Students Guide To Mercantile And Commercial Laws, Tata Mc. Graw Hill Pvt. Ltd, Delhi.

Solution: Y cannot claim any damages from X because the agreement between X and Y is not enforceable by law. It is a social agreement and the usual presumption in such agreement is that the parties do not intend to create legal relationship. 6. X promises Y to give a diamond ring at the time of his marriage. X fails to give the ring. Can Y claim the ring? Solution: Y cannot claim the diamond ring because there is no consideration from Y .

Notes:

7.

X polished Ys shoes without being asked by Y to do so. Y does not make any attempt to stop X from polishing the shoes. Is Y bound to make payment to X?

Solution: Y is bound to pay because he has accepted X s implied offer by conduct (i.e. by not stopping X from polishing the shoes). 9. X agreed to sell a particular horse to Y. Later on, it

11.555

http://dc374.4shared.com/doc/aIIzBWdc/preview.html

10/21/2011

Microsoft Word - lecture-01

Page 10 of 10

LESSON 3: ACCEPTANCE Learning Outcomes

After todays class you should be able to answer the following questions:

The meaning of offer and acceptance The communication of offer and acceptance

The person making the proposal or offer is called the promisor or offeror, the person to whom the offer is made is called the offeree, and the person accepting the offer is called the promisee or acceptor. Legal Rules Regarding a Valid Offer A valid offer must be in conformity with the following rules: 1. An offer may be express or implied. An offer may be made either by words or by conduct. An offer which is expressed by words, spoken or written is called an express offer and the one which is inferred form the conduct of a person or the circumstances of the case is called an implied offer. Thus stepping into a taxi and consuming eatables at a restaurant both create implied promise to pay for benefits employed. In Upton Rural District Council v Powell, a fire broke out in the defendants farm . believing that he was entitled to the free service of Upton Fire Brigade (which he was not) he summoned it. Upton claimed compensation for its services. Held services were rendered on an implied promise to pay for them. I will give a few more illustrations in this regard. Illustration (a) (b) (a) M says to N that he is willing to sell his motorcycle to him for Rs. 20,000. this is an express offer. X writes to Y he offers to sell his house to him for Rs. 80,000. there is an express offer. The Delhi Transport Corporation runs omnibuses on different routes to carry passengers at the scheduled fare. This is an implied offer by the D.T.C. A shoe shiner starts shining some ones shoes, without being asked to do so, in such circumstances that any reasonable man could guess that he expects to be paid for this, he makes an implied offer.

The revocation of offer and acceptance

Introduction
By now you must be aware of the essentials of a contract. In todays lecture we shall do a detailed study of the concept of offer The four basic elements of a contract are offer, acceptance, consideration and contractual capacity out of which we shall study the first one in this lesson. While discussing the essential elements of a valid contract in the preceding chapter we observed that as a first step in the making of a contract there must be a lawful offer by one party and a lawful acceptance of the offer by the other party, thus where A, offers to sell a wrist watch to B for Rs. 200 and B accepts the offer, a contract comes into being provided other essentials of a valid contract like that of competency of parties to contract, etc. are present. We propose to discuss now the legal rules relating to a lawful offer. The Proposal or Offer The words proposal and offer are synonymous and are used interchangeably. Section 2 (a) of the Indian contract act defines a proposal as, when one person signifies to another his willingness to do or to abstain form doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal. This definition reveals the following three essentials of a proposal. (i) One person signifies to another; it must be an expression of the willingness to do or to abstain from doing something. According to section 3 to signify means that the proposal must be communicated to the other party. (ii) The expression of willingness to do or to abstain form doing some thing must be to another person. There can be no proposal by a person to himself (iii) The expression of willingness to do or to abstain from doing some-thing must be made with a view to obtaining the assent of the other person to such act or abstinence. Thus a casual enquiry do you intend to sell your motorcycle? is not a proposal. Similarly, a mere statement of intention I may sell my motorcycle if I can get Rs. 14,000 for it is not a proposal. But if M says to N, will you buy my motorcycle fro Rs. 14,000, or I am willing to sell my motorcycle to you for Rs. 14,000, we have a proposal as it has been made with the object of obtaining the assent of N.

(b)

The second essential of a valid offer is intention. 2. An offer must contemplate to give rise to legal consequences and be capable of creating legal relations.

If the offer does not intend to give rise to legal consequences, it is not a valid offer in the eyes of law. An offer to a friend to dine at the offerors place, or an offer to ones wife to show her a movie is not a valid offer and as such cannot give rise to a binding agreement, even though it is accepted and there is consideration, because in social agreements or domestic arrangements the presumption is that the parties do not intend legal consequences to follow the breach of agreement. But in the case of agreements regulating business agreements it is taken for granted that parties intend legal consequences to follow. Even in the case of a business agreement if the parties agree that the breach of the agreement would not confer on either of the parties a right to enforce the agreement in a court

10

11.555

http://dc374.4shared.com/doc/aIIzBWdc/preview.html

10/21/2011