Business Law

INDIAN CONTRACT ACT

British mercantile law, Indian culture and society. Leading cases Indian
decision in supreme court.

Contract Act 1972

Sec. 10 of Indian contract act defines the essential characteristics of a
contract. They are:
i) Offer and acceptance - The offer should be a legal one. only
then there will be acceptance.
ii) Consideration - Both parties should give something and get
something in return.
iii) Capacity of parties - Minor doesn't have the power to enter a
contract, A person of unsound mind, a person under the
influence of alcohol drugs, Convicts
iv) Free consent - Willingness to perform is consent. There
should be no coercion. There should be no undue influence or
physical pressure.
v) Legality of objects - Object means purpose. The purpose for
getting into the contract should be a legal one.
vi) Possibility of performance - The offer in the agreement should
have the possibility of being performed.
vii) Intention to create legal relationship - The parties. should be
willing to create a legal and not a social relationship among
them.
 viii) Legal formalities - The law says that a contract can be oral or
written. For the benefit of the parties, it is better for the
agreement to be written and registered.

Offer and Acceptance

Offer See 2 (a) - When a person signifies to another, his willingness to

do or not to do something with the intention of obtaining the other
party’s assent to it, it means he is making an offer. Person who makes
the offer in the offerer and the person to whom the offer is made is
the offeree Offer can be specific or general.

Types of Offer.

Express offer - Written or spoken

Implied offer - It is to be understood by the conduct of the other party
that an offer is being made.

Rules regarding offer

i) offer should be clear definite & free from ambiguity

ii) offer must be communicated to party for whom it is intended
(Lalman Vs Gauri Dutt)
iii) A declaration of intention doesn't amount to offer (Executive
Engineer Sundargad vs. Mohan Prasad Sahoo).
iv) offer should not contain any such terms, the non-fulfilment of
which will be taken as acceptance.
 v) Any terms regarding the offer should be communicated to
offeree when the offer is made
vi) An invitation to offer is not an offer. (Harvey vs Facey)

Sec 2(b) Acceptance - When the offeree gives his assent to the offer
made to him, it means he has accepted the offer. If the offer is
accepted offerer becomes promiser and offeree becomes Promisee.

Types of acceptance.
Express - When acceptance is written or spoken it is express.
Implied offer - When it is to be understood by the conduct of the party
it is an implied acceptance.

Rules regarding acceptance.

i) See 7(1) Acceptance must be absolute A unqualified.

ii) Sec 7(2) Acceptance must be according to the prescribed
mode.
iii) Acceptance must be communicated (Bhagian Das Kedigo vs
Girdhari Lal)
iv) Silence doesn't amount to acceptance
v) Acceptance must be made within a reasonable time.
vi) Acceptance must be made by the party to whom the offer is
made
vii) Acceptance must be done before the offer is withdrawn or
cancelled.
 *(Sec 4) - Communication of offer is completed when party for
whom it is intended comes to know of it.
-> Communication of letter of acceptance is complete against the
offerer when the letter of acceptance is sent by the acceptor
-> Communication of letter of acceptance is complete against the
acceptor when the letter of acceptance reaches the offerer.

Revocation of cancellation of offer (Sec 6).

i) The offerer by giving a notice to the offeree can withdraw the
offer but before the offer is accepted.
ii) The offer must be accepted within time limit given in the
offer. On the expiry of time limit offer lapses.
iii) On the death or insanity of offerer the offer comes to an end
but the news of death or insanity must be known to the
offeree before acceptance.
iv) Non fulfilment of any condition attached to the offer will also
cancel the offer.
v) When a counter is made, original offer comes to an end
vi) When the law is changed offer which was possible to perform
becomes impossible to perform.
vii) When the acceptance is not accepted through the prescribed
mode

Consideration (Sec 2 (d)) - When at the desire of the promiser, the

promises or any other person has done or abstaining from doing,
promises to do or abstains from doing something, such act of
abstinence is called consideration for the promise (Abdul Aziz vs.
Masoom Ali)
Rules of consideration.
i) Must move at the desire of the promiser (Durga Prasad vs.
Baldev).
ii) Consideration may move from the promisee or any other
person (Tweddl vs Atkinson) (Chinaya us Pamaya)
iii) Consideration may be an activity or a non-activity i.e. a I
promise to do and in return a promise not to do is
consideration.
iv) Consideration may be past, present or future.
v) Consideration may not be adequate. (Bolton vs Madden)
vi) Consideration should not be imaginary It should be real.
vii) Consideration should not be something that the promiser
is already bound to do
viii) Consideration should not be illegal should not be against
public policy

Exceptions to the rule

i) Natural love and affection. When parties stand in near
relationship to each other & when there is natural love &
affection between them, in such a case one party's promise
to pay another party without consideration is valid
provided it is written and registered under the law.
ii) Compensation for voluntary services
iii) Promise to pay a time barred debt. (Sec 25(3))
iv) In case of gift, it is a valid promise.
v) Sec 185 - Creation of agency does not require any
consideration.
vi) Contribution towards charitable purpose (Kedarnath vs
Gauri Mohammed)
Capacity of Parties
i) Minor - According to See 3 of Indian Majority Act 1875 a
person below the age of 16 is treated as a minor. Rules
regarding minor's agreement
a) (Mohiri Bibi vs Dharmodas Ghosh) Any
agreement with the minor is void from the
beginning. ab initio
b) Minor can be a beneficiary. He/she will always
be on receiving end of the agreement.
c) Any agreement entered by the minor during his
minority cannot be ratified after attaining
majority
d) Minor cannot be asked to return any benefit
which he might have received in an agreement.
e) Minor cannot be a partner in a partnership
business. The minor can enjoy the benefits of
partnership after the formation of partnership
f) Minor can be an agent.
g) Any necessaries of life which is supplied to a
minor, minor is not personally liable to pay for
it. Minor’s property if any will be liable to pay
for it.
ii) Sec 12 Persons of unsound mind
iii) Persons disqualified by law - They are neither minors nor
people of unsound mind:
a. Person under imprisonment.
b. Alien People of different countries.
c. Corporation
d. Foreign nationals / diplomats staying in India Insolvent.
e. Insolvent
Free Consent - Willingness to perform
Mere existence of consent would not be enough to make an
agreement enforceable. It is also necessary that the consent should
be devoid of any force or pressure. In the Indian Contract, definition
of consent is given in sec 13 which states that, ‘It is when 2 or more
persons agree upon the same thing in the same sense. Section 14 or
Indian Contract Act says that consent is Free when it is not
caused/affected.
i) Coercion- It is an act of committing or threatening to commit any
activity forbidden by the IPC 1860. Detaining or threatening to
detain any person or property whatsoever in order to get
consent of the other party amounts to coercion (Sec 15)
(Ranganayak Kamma vs. Alwar setti). Effects are Coercion (Sec
19) - It is a voidable contract Party has right to accept the
contract or avoid it.
ii) Undue Influence (Sec 16) - When the relation between the Two
parties is such that one party is in a position to dominate the
other party, and uses such influence to obtain unfair advantage
over the other party, it is called as undue influence Relationships
where undue influence is likely to be present.
a. when one person holds real authority over the other
b. when there is a relationship of trust and confidence
between the 2 parties (Fiduciary relationship)
Effects are undue Influence - It is a voidable contract. and the
party whose consent has been taken under undue influence can
accept or avoid the contract. Till the time he/she avoids, it is a
good contract. (Sec. 19)
iii) Fraud (Sec 17) and & Misrepresentation (Sec 18)
Rules of Fraud.
a. There is a representation made by one party to the other
 b. Representation relates to the subject matter of the contract.
c. Representation happens to be a wrong one.
d. The party who has made such wrong representations
Knowingly or intentionally has given wrong representation to
the other party with the intention to cheat.
e. The other party believed on such representation and entered
into the contract
f. By entering in contract, he has suffered some biases. under
such situations, the wrong representation is taken as fraud.
Rules of Misrepresentation
i) There is a wrong statement given by one party to the other
ii) The statement relates to the subject matter of a contract
iii) The statement is Wrong but the party who has given it has done
it innocently.
iv) He believes that wrong representation is correct but is incorrect
v) By entering into the contract, he has suffered some losses.
Under such situations, the wrong representations are taken as
misrepresentation.

Effects of Fraud and Misrepresentation

i) It is a voidable contract.
ii) Party has a right to accept as well as avoid
iii) The party suffering losses in can claim damages or compensation

*Only for Fraud.

*Mistake is an erroneous belief that is innocent in nature It leads to
misunderstanding between 2 parties
Sec 20
Mistake: There are 2 types of mistakes.
i) Mistakes of law:
a. mistake the law of your own country (Ignorance of law is
unacceptable
b. mistake the law of a foreign country (Sec 21).
ii) Mistake of Fact - This is when both parties misunderstand each
other leaving them at crossroads Such a mistake can be because
of an error in understanding or ignorance or omission, etc. These
mistakes can either be bilateral or unilateral
a. Bilateral - When both parties of contract are under a
mistake of fact essential to the agreement, such a mistake
is called bilateral mistake In a bilateral mistake, the
agreement is void.
b. Unilateral - A unilateral mistake is when only one party to
the contract is under a mistake In such a case, contract is
not void (valid)
Legality of objects (Sec 23) - For a contract to be valid, lawful object
and lawful consideration are mandatory: Object is said to be lawful
unless:
a. When the law forbids such type of activities
b. Where the purpose is fraudulent.
c. Where it involves an injury to any person or property.
d. Where the purpose is to do an immoral activity.
e. Where the purpose is to da an activity against public policy
Agreements which are already declared as opposed to public policy:
a. Agreement to trade with enemy.
b. Agreements interfering in the course of justice.
c. Agreements interfering in legal proceedings
d. Trafficking in public offices and titles.
e. Agreement restricting personal liberty
f. Agreement restricting trade, profession or business. It has

*Public Policy - Any rules or code of conduct which is applicable to

members of society is known as your public policy.

Exceptions
a. Service contract Employer puts on restriction on the employee
that during the time of his employment he can't work anywhere
else.
b. Trade combinations/Trade associations e.g. MCC1A putting a
restriction an trading on a particular day
c. Sale of Goodwill e.g. Distribution of movies, Franchisees.
d. Partnership A partner can't do another business competing with
existing business.

* Performance of Contract
i) who can perform the promise? – Promiser must fulfil the
promise First (See 40) when nature of contract says so. In such
cases, death of promisor puts an end to contract
ii) (Ser 40) By the agent of the promiser - When it does not require
any skill on the part of the promisor, the promise can be
performed by an agent appointed by promisor.
 iii) Legal Representative - Promise can be fulfilled by the legal
representative of the promiser when it does not involve require
any skill of labour on the part of the promiser
iv) when the performance of a promise is accepted by a third party
it is accepted as a good performance
v) Joint Promisors - When there are more than one promises to
fulfil the promise they are known as joint promisers. In case of
Joint Promisors, following rules will apply (Sea 42).
a. If any joint promisor dies, his legal representative must,
jointly with surviving promisors Fulfil the promise. If all
them die, legal representatives of all of them must fulfil
pop the promise jointly.
b. Any one of the joint promisors may be compelled to
perform the promise
c. In this case, the compelled promisor may compel every
other joint promisor to contribute: equally with himself to
perform the promise
d. Sharing of loss arising from default of joining promisors If
any one of the JP makes default in such contribution, the
remaining JP must hear the loss arising from such default
in equal shares.
Release of Joint Promisor - When two or more persons have
made a joint promise, a release of one of the JP does not
discharge the other joint promisor (Sec 44) But it does reduce
the lability.

Appropriation of Payment.
When the debtor has taken a no. of loans from one creditor and now,
he makes a payment which is not the total amount of all loans taken
together, in such a case, loan payment is to be adjusted towards the
loan under following Provisions:
 i) (See 59) when the debtor has given some express instruction for
the adjustment of payment, the creditor has to adjust as per the
instructions of the debtor
ii) (Sec 59) When the debtor fails or doesn't give any instruction to
adjust the payment, the creditor has to adjust the payment
towards that loan as per the circumstances.
iii) (Sec 60) When the debtor hasn't given any instruction neither
the circumstances make the picture clear, in such a case
payment is to be adjusted at the discretion of the creditor
iv) (Sec 61) when debtor has not given any instruction and the
circumstances do not make the picture clear and the creditor
does not want to use his discretion, in such a. case the payment
must be adjusted to the loan Serially it in order in which they
were created
v) Appropriation between principal and interest Payments to made
first to the interest & then to the principal.

Reciprocal premises Sec 2(f).

Where performance of one's promise depends upon the performance
of the other party's promise or vice versa, is known as Reciprocal
promise

Rules (Sec51)
i) In case of reciprocal promises, it must be performed
simultaneously
ii) Order of performance is to be decided by the parties
iii) When the 1st party fails to perform his promise, he can't
complete 2nd party to fulfil their promise
Assignment of contract.
In a contract, there are contractual rights and obligations for bath the
parties Such contractual rights & obligations can be assigned
/transferred when it does not involve any amt of personal skill or
labour for its performance (Sec 40)
Discharge of Contract
A contract creases certain obligations Discharge of contract happens
when these allegations come to an end. Discharge scenario:
i) By Agreement or consent
a. Novation (Sec 62) - Replacing an old contract with a new
contract by mutual agreement (explain)
b. Remission (Sec63) - Remission is said to be done where a
party to contrast agrees to
i. dispense/waive the performance
ii. Accept a lesser amount or lesser degree of the
performance
iii. Extends time and performance
c. By Waiver - Waiver means ‘abandoning’ the rights When a
party to the contract abandons or waives his right, the
Contract is discharged. Here, both the parties mutually
agree that they shall no longer be bound by the contract
*Supervening- Subsequent
d. By Merger - When a contract of inferior right merges with
a contract of superior right, contact of inferior right is
dropped because superior right takes over e.g. tenant
buying a house
ii) Discharge of contract by performance - When both the parties
to the contract have performed their part, the contract is said to
have been completed and comes to an end.
iii) Discharge of contract by lapse of time (limitation Act,1963)As
per the limitation Act 19 63, every Contract is required to be
 performed within the prescribed time limit. If the Contract is not
performed within that time limit, the contract comes to an end
iv) Breach of contract - if a party to a contract fails to perform his
obligation ate to the time and place specified, then be is said to
have committed a breach of contract Breach is of 2 types. Actual
beach and anticipatory breach.
a. actual - If a party, fails to perform the promise on the date
of performance or during performance, as so actual breach
of contract.
b. anticipatory - If a party, before the date of performance
informs the other party regarding his inability to perform
the premise it is known as anticipatory breach of contract.
v) By impossibility in performance - It is impossible for any of the
parties to the contract in perform their promises then
impossibility of performance leads to a discharge of the contract
an agreement to do an impossible act is void. Discharge of
contract by subsequent impossibility (sec 56) - In situations
when a contrast becomes a void contract
a. Destruction of subject matter.
b. Outbreak of war
c. change in law.
d. Non-existence of the same state of things

Cases where impossibility of performance cannot be taken as an

excuse to not perform.
i) Difficulty in performance
ii) Commercial impossibility
iii) When a contract is entered for more than one purpose, If one of
the purposes is me completed, it can't be an excuse to not
perform the other promise.
iv) Strikes, lockouts and civil disturbances