PGPM -II SEM

Business Law (107)

Unit 1
The success and security of business depends upon the
fulfillment of the contracts made. The law of
contracts ensures proper performance of contracts.


Corley and Robert , Just as the safety of persons and of
property depends upon the rules of criminal law, so
the security and stability of business world are
dependent upon the law of contracts.

The law of contracts is fundamental to the very existence of
the business world. Without this total business as well as
entire economic system may collapse. It assures every party to
a contract that his lawful expectations will come true and his
rights will be safeguarded.

The Indian Contract Act 1872 sections 1-75 came into force on
1 September 1872. It applies to the whole of India except the
state of Jammu and Kashmir. It is not a complete and
exhaustive law on all types of contracts.




Section 2(h) of the Act defines the term contract as "an agreement
enforceable by law".

Section 2(e) defines agreement as "every promise and every set of
promises, forming the consideration for each other.

Again Section 2(b) defines promise in these words: "when the person
to whom the proposal is made signifies his assent thereto, the
proposal is said to be accepted. Proposal when accepted, becomes a
promise.
A contract is an agreement between competent parties, with free
consent, upon a legal consideration and with a lawful object, to do or
to abstain from doing something which gives rise to legal obligations
of the parties.





When parties intend to enter legal agreements, and meet certain criteria
in the process of defining the nature of such agreements, contracts are
formed. A contract is a process of negotiation of private rights and
obligations between parties to a contract. These agreements may be
written or verbal, or may be completed through actions of the parties
involved.

Individuals form contracts when they undertake common consumer
transactions, whether as buyers or sellers or renters. The purpose of the
law of contracts is to protect the reasonable expectations of the parties
involved in an agreement, through application of contract law, and to
provide an avenue for dispute settlement according to the rule of law.
Under common law, only parties to a contract are entitled to
contractual rights.


1. Plurality of parties:- the first and foremost requirement to form
a contract is two or more persons. A person cannot make a
contract with himself.
2. Agreement i.e., proposal and acceptance:- Agreement is the
foundation of a contract. An agreement comes into existence by
acceptance of an offer. Therefore, for making of an agreement,
one party should make an offer to another party and the other
should accept it.
3. Intention to create legal relations:- For an agreement to be a
contract, it must be able to create legal relations. Agreements
which do not create legal relations are not legally enforceable.

4. Contractual Capacity:- Valid agreement can be made only by
legally competent persons. The law presumes that every person
is competent to enter into contract if he fulfills the following
conditions:
He is a major.
He is of sound mind.
He is not disqualified from contracting by any law of the land
to which he is a subject. [Sec. 11]
5. Free Consent:- A simple consent is not enough for making a
contract. That too must be free. Consent is said to be free when
it is not caused by undue influence, fraud or misrepresentation
or mistake. [Sec.14]


6. Consideration:- Every agreement to be enforceable by law must be
supported by consideration. An agreement without consideration
is void. Consideration means something which the promisor
receives from the promisee in return for his promise.
7. Possibility of performance:- an agreement to be valid contract must
also be possible to be performed. The terms of the agreement must
also be capable of performance physically as well as legally.
8. Compliance of legal formalities:- Generally no legal formalities are
required to be complied with for making a valid contract. a contract
may be written or oral. But Section 10 of the Act states that a
contract should be made in writing or in the presence of witnesses
or be registered, if required by any law.
Classification of Contracts/Agreement
1. Classification according to Enforceability/Legality
Valid agreement, i.e. contract
Void agreement
Void contract
Voidable contract
Illegal agreement
Unenforceable contract
2. Classification according to mode of formation
Express contract
Implied contract
Quasi contract
3. Classification according to the extent of execution
Executed contract
Executory contract




Classification according to Enforceability/Legality
1. Valid agreement i.e. contract:- a valid agreement is a
contract and A contract is an agreement enforceable by
law.
2. Void agreement:- an agreement not enforceable by law is
said to be void.
3. Void contract:- a contract which ceases to be enforceable
by law becomes void when it ceases to be enforceable.
4. Voidable contract:- 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.
Classification according to Enforceability/Legality

5. Illegal agreement:- an agreement which is expressly or
impliedly prohibited or forbidden by law is an illegal
agreement.

6. Unenforceable contract:- a contract which is good in
substance but cannot be enforced in a law court due to
some technical defects, is said to be unenforceable contract.
Classification according to mode of formation
1. Express contract:- a contract is express when the parties
state its terms and conditions and show their assent by
words, either oral or written.
2. Implied contract:- a contract made otherwise than in
words, is called implied contract. An implied contract is
inferred from the acts or conduct of the parties or by their
surroundings circumstances but not by the written or
spoken words of the parties.
3. Quasi-contract:- a quasi contract is a contract implied by
law. It is not made by the parties but imposed upon the
parties by the law on the ground of principle of equity.
Classification according to the extent of execution

1. Executed contract:- a contract in which all the parties to
the contract have performed their respective obligations, is
known as executed contract.

2. Executory contract:- an executory contract is one in which
all or something still remains to be performed by the
parties.
PROPOSAL OR OFFER

When one person signifies to another his willingness to do or to
abstain from doing anything ,with a view to obtaining the assent of
that other to such act or abstinence, he is said to make a
proposal.[Sec.2(a)]

A proposal or offer is an expression of willingness by one person
to another to enter into an agreement on the terms stated by him
with an intention to obtain the assent of the other.

Illustration :A says to B,I want to buy your Nolakhahaar for
Rs.nine lakh.Will you sell it? Here,A is expressing his willingness
to B to buy the Nolakhahaar at his terms i.e.for Rs. nine lakh with
a view to obtaining his assent to it. This is a proposal from A to B.



ACCEPTANCE


Acceptance is the assent of the of offeree to an offer made
to him. It is a communication of his intention to be bound
by the terms of the offer. According to Sec.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.

Thus, acceptance is the assent to the proposal and to
its terms by the party to whom proposal has been made. On
acceptance of the proposal, the proposer is called promisor
whereas the offeree is called the promisee.[Sec.2(c)]



CAPACITY TO CONTRACT


Capacity or competence to contract means legal capacity of
parties to enter into a contract. In other words, it is the
capacity of parties to enter into a legally binding contract.
Who are competence to contract ?:
Section 11 specifies the persons who are competent to
contract. Section 11 reads, Every person is competent to
contract who is 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.





Free consent is the consent given by the sweet will of the
parties and not caused by any form of physical or mental force
or any kind of mistake.
According to Section 14, consent is said to be free when it is
not caused by-
Coercion, as defined in section 15
Undue influence, as defined in section 16
Fraud, as defined in section 17
Misrepresentation, as defined in section 18
Mistake, subject to the provisions of sections 20, 21 and 22.




Consideration consists of promises or performance that the
parties to a contract exchange with each other. It is an sense
the price that the promisee pays for the promise or
performance of the promisor.


According to Blackstone, Consideration is the recompense
given by the party contracting to the other.





Illustration:
Anta offers Banta to sell his car for Rs. 1 lakh and Banta
accepts. Both the parties have agreed to provide consideration
to each other. Here, both the parties are exchanging something
to each other and that something is consideration for each
other . Antas consideration is Rs. One lakh and Bantas
consideration is the car.


Legality of object and consideration


Section 10 implies that an agreement enforceable by law must
be for a lawful consideration and with a lawful object. Every
agreement of which the object or consideration is unlawful, is
void.
Illustrations:
A promises to obtain for B an employment in public services
and B promises to pay Rs. 10,000 to A. Here As promise to
obtain for B an employment in public services is the
consideration for Bs promise to pay Rs. 10,000. the
consideration is against the public interest, and therefore
unlawful and void.



Agreement declared Void


An agreement not enforceable by law is said to be void.[sec.2(g)]
Following are the agreements which have been expressly declared as
void under the Act:
1.Agreement by incompetent persons e.g. minors, persons of unsound
mind and persons disqualified by law of the land.[sec.11]
2.Agreement made under bilateral mistake as to material fact. [sec.20]
3.Agreement of which the consideration or the object is
unlawful.[sec.23]
4. Agreement of which the consideration or the object is unlawful in
part and cannot be separated from the lawful part. [sec.24]
5. Agreements made without consideration with certain exceptions.
[sec.25]




Agreement declared Void


6. Agreement in restraint of marriage.[sec.26]
7. Agreement in restraint of trades.[sec.27]
8. Agreement in restraint of legal proceedings. [sec.28]
9. Agreements the meaning of which is uncertain.[sec.29]
10. Agreements by way of wager. [sec.30]
11. Agreements contingent on impossible event. [sec.36]
12. Agreements to do impossible acts. [sec.56]
13.Reciprocal promises to do thing illegal. [sec.57]





Performance of Contract

Performance of contract means performing all the
promises and fulfilling all the obligations required by
the contract.
The contract act prescribes the modes or types of
performance of contracts. Accordingly parties to a
contract must either perform or offer to perform their
respective promises, unless such performance is
dispensed with or excused under the provisions of the
contract act or of any other law.

Discharge of Contract
A contract is discharged when parties to a contract no
longer have any obligation under the contract.

In other words, a contract is said to be discharged when
both the parties to a contract either perform or
extinguish their respective obligations under the
contract. Consequently, the contractual relations
between the parties to a contract come to an end.
Remedies for breach of contract
A contract is sometimes discharged by its breach. Generally,
breach of contract means refusal or failure of any one
party to perform his contractual obligations under the
contract .
On breach of contract, the aggrieved party has any one or more
of the following remedies:-

1. Rescission of the contract:- if one party has broken his
part of the promise under a contract, the aggrieved party
may also rescind the contract. The aggrieved party need
not perform his part of promise under the contract.

Remedies for breach of contract

2. Suit for damages:- the aggrieved party is entitled to file a
suit for compensation of damages caused to him by the
breach of contract.


3. Suit for quantum Meruit:- when an aggrieved party has
partly performed a contract, he can sue for the value of
such part of performance. In case of breach of contract
this suit is known as suit on quantum meruit i.e. for as
much as earned by the party.


Remedies for breach of contract
4. Suit for specific performance:- when for the breach of
contract, damages are inadequate remedy, the court may
order the party for specific performance of the contract.

5. Suit for injunction:- an aggrieved party can sue for
injunction and court may issue an injunction against the
party to a contract. Injunction prohibits a party from
doing or continuing to do something which amounts to
breach of contract.
A contract of indemnity is a contract by which one party
promises to save the other from loss caused to him by the
conduct of the promisor himself or by the conduct of any
other person. [sec.124]

In a contract of indemnity there are two parties. The party
who promises to save the other from loss is known as
indemnifier. The party who is promised to be saved or
protected against loss is known as the indemnity-holder or
indemnified.

Illustration:
A, a shareholder of a company, lost his share certificate
and applied for a duplicate copy. The company issued
a duplicate certificate on agreeing by A to compensate
the company against loss in case any other genuine
holder produces the original certificates. This is a
contract of indemnity between A and the company.

A contract of guarantee is a contract to perform the
promise or discharge the liability, of a third person in
case of his default. [sec. 126]

There are three parties in a contract of guarantee. The
person who gives the guarantee is called the surety.
The person in respect of whose default the guarantee
is given is called the principal debtor . the person to
whom the guarantee is given is called the creditor.
Illustration:

C requests A to lend Rs. 1,00,000 to B and agrees that
if B fails to repay the amount, he will pay. This is a
contract of guarantee. Here, C is the surety or
guarantor, A the creditor and B the principal debtor.

The word bailment is derived from the French word baillier
which means to deliver.

According to section 148, bailment is the delivery of goods by
one person to another for some purpose, upon a contract
that they shall, when the purpose is accomplished, be
returned or otherwise disposed of according to the directions
of the person delivering them.

Bailor:- the person delivering the goods is called the bailor.
Bailee:- the person to whom the goods are delivered under the
contract of a bailment is a bailee.
Illustrations:
In each of the following cases, there is a contract of bailment
between A and B and A is the bailor and B is the bailee:
When A lends his video cassette to B.
When A delivers his clothes to B for dry-cleaning.
When A books his goods for carriage with a transporter, B.
When A hands over key of his car to B for a long drive.
When A delivers a diamond to B for being studded in his
ring.
When A parks his car in a parking centre of B for a
payment.
Pledge is a special kind of bailment. Section 172 defines the
bailment of goods as security for payment of a debt or
performance of a promise is called pledge or pawn.

Thus a pledge is a delivery of goods by the pledger to the
pledgee by way of security upon a contract that they shall
when the debt is discharged or promise is performed, be
returned or otherwise be disposed of according to the
directions of the pledger.

Pawnor:- the person pledging the goods as security for
payment of a debt or performance of a promise is called the
pawnor or pledger.

Pawnee:- the person receiving the goods as security for
payment of a debt or performance of a promise is called the
pawnee or pledgee.

Illustration:- Anta borrows Rs. 10,000 from banta and
delivers the necklace of his wife to banta as security. The
bailment of necklace is a pledge as security for the money
borrowed. Here, anta is pawnor and banta is the pawnee.

An agency is the relation between an agent and his principal
created by an express or implied agreement whereby an
agent is authorized by his principal to represent him and
establish contractual relations with third parties.

An agent is a person employed to do any act for another or to
represent another in dealings with third person. [sec.182]

The person for whom such act is done, or who is represented ,
is called the principal. [sec.182]
Thank You!