PGPM -II SEM Business Law (107)

Unit 1 Indian Contract Act, 1872

Introduction
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.

Introduction
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.

Contract- Definition
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.

Nature of Contract
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.

Essentials of Valid Contract

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.

Essentials of Valid Contract

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]

Essentials of Valid Contract

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 Express contract Implied contract Quasi contract Executed contract Executory contract

2. Classification according to mode of formation

3. Classification according to the extent of execution

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
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 byCoercion, 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
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.

Consideration
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.

Contract of Indemnity
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.

Contract of Indemnity
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.

Contract of Guarantee
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.

Contract of Guarantee
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.

Bailment
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.

Bailment
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 or Pawn
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.

Pledge or Pawn
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.

Agency
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!