BUSINESS LAW

Unit-1
The Indian Contract Act 1872

Definition of contract, essentials elements and types of a contract, Formation of

a contract, performance of contracts, breach of contract and its remedies, quasi
contracts

What is law?
According to Salmond, ”Law is those principle applied by the state in the administration
of justice”
What is business law?
Business law refers to those rules and regulation which govern the formation and
execution of business deals made by various people in the society. It is intended to infuse the
much needed ‘certainty’ in business dealings.
What is a Contract?
A Contract is an agreement enforceable by law (sec 2 (b))

1. Explain in detail the various essential elements of a valid contract with suitable
illustrations.
Describe the essential elements of a valid contract.
1. Agreement
2. Intention to create legal relationship
3. Free and Genuine consent
4. Parties competent to contract
5. Lawful consideration
6. Lawful Object
7. Agreements not declared void or illegal
8. Certainty of meaning
9. Possibility of performance
10. Necessary legal formalities
1. Agreement-[Offer and Acceptance]
 Party making the offer - Offeror
  Party to whom the offer is made – Offeree
 There are two parties to an agreement
 They both must be thinking of the same thing in the same sense
 There must be Consensus – ad – idem
Example: Where ‘A’ owns two cars X and Y and wish to sell his car “X’ for Rs. 30,000.B an
acquaintance of ‘A’ does not know that ‘A’ owns car ‘Y’ also. He thinks that ‘A’ owns only car
‘X’ and is offering to sell the same for the stated price. He gives him acceptance to buy the same.
There is no contract because the contracting parties have not agreed on the same thing at the
same time. There is no consensus – ad - idem.
2. Intention to create Legal Relationship:
An agreement of a purely social or domestic nature is not a contract.
A husband agreed to pay Dollar 30 to his wife every month while he was abroad. As he failed to
pay the promised amount his wife sued him for the recovery of the amount.
3. Free and genuine consent: The consent of the parties to the agreement must be free and
genuine. The consent of the parties should not be obtained by misrepresentation, fraud, undue
influence, Coercion or mistake. If the consent is obtained by any of these flaws, then contract is
not valid.
4. Parties competent to contract:- Every person is competent to contract if he is (i) of the age
of majority (ii) is of sound mind and (iii) is not disqualified from contracting by any law to
which he is subject.
5. Lawful consideration: - Each party of an agreement must give or promise something and
receive something or a promise in return. Consideration is the price for which the promise of the
other is sought. However the price need not be in terms of money. In case the promise is not
supported by consideration the promise will be nudum pactum (a bare promise) and not
enforceable by law. The consideration must be real and lawful.
6. Lawful object: The object of the agreement must be lawful and not one which the law
disapproves.
7. Agreement not declared illegal or void: There are certain agreements which have been
expressly declared illegal or void by the law. In such cases, even if the agreement possesses all
the elements of a valid agreement, the agreement will not be enforceable by law.
8. Certainity of meaning: - The meaning of the agreement must be certain or must be capable of
being made certain. Otherwise the agreement will not be enforceable by law. For e.g. ‘A’ agreed
to sell 10 meters of cloth. There is nothing to show, what type of cloth was intended. The
agreement is not enforceable for want of certainty of meaning.
9. Possibility of performance: - The terms of the agreement should be capable of performance.
An agreement to do an act impossible in itself cannot be enforced. For instance A agrees with B
to discover treasure by magic. The agreement cannot be enforced.
10. Necessary Legal formalities: - A contract may be in oral or in writing. If however, a
particular type of contract is required by law to be in writing, it must comply with necessary
formalities as to writing, registration and attestation if necessary. If these legal formalities are not
carried out, then the contract is not enforceable by law.

Explain the various Classification or types of contracts.( Jan 2014)

Contracts are classified on the basis of,

I- Terms of validity or enforceability
II- Mode of formation
III-Performance
 I. Classification According to Validity or Enforceability:
a. Valid Contract: A Contract which satisfies all the legal requirements is known as a
Valid Contract. A Valid Contract is an agreement which is enforceable by Law.
b. Void Agreement: An Agreement not enforceable by law is said to be Void. A Void
agreement has no legal effect. Ex: An agreement with the Minor is void from the
beginning.
c. Void Contract: A contract which is enforceable by the law at the time it was made,
but later on it becomes legally unenforceable due to some reasons.
Ex: A promised to marry B. Later on B died.
d. Voidable Contract: An Agreement which is enforceable by law at the option of one
or more of the parties thereon. Such a contract is voidable at the option of aggrieved
party.
Ex: A agreed to sell his car to B for Rs. 50,000. The consent was obtained by the
force. The contract is voidable at the option of A. A can put an end to this contract, if
he so decides.
e. Illegal Agreement: An Agreement is illegal and void if
 Is forbidden by law
 A fraudulent
 Involves any injuries to the person or property of another
 A court regards it as immoral or opposed to public policy
f. Unenforceable Contract: Unenforceable Contract are those which cannot be
enforced in the Court of Law because of some formalities to be fulfilled.

Ex: A contract must be in writing, it must be registered, it must be stamped, it must be

attested etc. If such formalities are not properly followed such contract cannot be
enforced by the Law.

II. Classification According to Mode of Formation

Express-The terms of a contract may be stated in words (written or spoken)
Ex: A writes a letter to B that he offers to sell his car for Rs.60000 to B, in reply B
informs that he accepts the offer.
Implied-Terms of a contract may be inferred from the conduct of parties or from the
circumstances of the case.
Ex: Taking a seat in a Public Transport Bus.
Quasi Contract- Sometimes obligations are created by law whereby an obligation is imposed on
a party and an action is allowed to be brought by another party. These obligations are known as
Quasi-contracts.
Ex: A supplied B, a minor and / or the wife and children of B with necessaries suitable to his
/ their condition of life. A is entitled to be reimbursed from B’s property.
III. Performance of Contracts
Classification According to Performance
Executed – Wholly performed.
A creates a contract to buy a bicycle from B for cash. A pays cash and B deliver the bicycle.
Executory – Wholly unperformed or partly performed.
1) On June 1, A agrees to buy a bicycle from B. The contract i.e., to be performed on June 15th –
and A has to pay the price on July 1.A agrees to buy the bicycle from B. The contract is to be
performed on June 15th. On 15th June, if both perform their obligations then we can say that
contract becomes executed.
(2) On June 1, A agrees to buy a bicycle from B. B has to deliver the bicycle on June 15th and A
has to pay the price on July 1. B delivers the bicycle on June 15. The contract is still executory as
something remains to be done in terms of the contract.
Unilateral: - At the time when the contract is concluded, if there is an obligation to be
performed only by one party then it is called as unilateral.
Ex:“A” makes payment, for bus journey from Mumbai to Pune. He has performed his
promise. It is now for the transport company to perform the promise.
Bilateral: - There is an obligation on the part of both to do or to refrain from doing a particular
thing. Similar to executory contracts.
Contract is a contract from the time it is made and not from the time its performance is due.

Offer and Acceptance (sections 3-9)

Offer / proposal
An Offer is the proposal by one party to another to enter into a legally binding with them.
When one person signifies to another about his willingness to do or to abstain from doing
anything with a view to obtaining the consent of other to such act or abstinence, he is said to
make a proposal
‘A’ offers to sell his book to ‘B’. A is making an offer to do something i.e. to sell his
book. It is a positive consent on the part of the proposer.
A specific offer is one which is made to a definite person or particular group of person’s .A
specific offer can be accepted only by that definite person or that particular group of persons to
whom it has been made.
A general offer is one which is not made to a definite person, but to the world at large or
public in general. A general offer can be accepted by any person by fulfilling the terms of the
offer.

Legal rules regarding a Valid Offer

1. An offer must be “expressed or implied”
2. Intention to create legal relations
3. Legal Consequences
4. Assent of other party
5. Offer must be addressed
6. Terms
7. Communication
Invitation of offerer is different from legal offer
Acceptance
Acc. to sec 2(b), :A proposal when accepted becomes a promise” and defines “acceptance as
“when the person to whom the proposal is made signifies his assent thereto, the proposal is said
to be accepted”
Legal rules regarding Acceptance:
1. Acceptance must be absolute and unqualified
2. It must be communicated
3. It must be according to the mode prescribed
4. It must be given within the time specified or within reasonable time
5. It must be in response to an offer
6. It must be made before the offer lapses
7. It must be given by the person to whom the offer is made
Termination or lapse of an offer:-
1. The offer lapses after stipulated or reasonable time
2. An offer lapses by the insanity of the offeror or the offeree before acceptance.
3. An offer terminates when rejected by the offeree
4. An offer terminates when revoked by the offerer before acceptance
5. An offer terminates by not being accepted in the mode prescribed or if no mode is prescribed
in some usual and reasonable manner.
6. A conditional offer terminates when the condition is not accepted by the offeree.
7. An offer terminates by counter offer by the offeree.

Consideration
Meaning:
Consideration implies “something in return for the promise or the price of promise”
Definition:
According to Section 2(d) of the Indian Contract Act, 1872, consideration is defined as
“When at the desire of the promisor, the promisee or any other person has done or abstained
from doing, or does or abstains from doing, or promises to do or abstain from doing something,
such act or abstinence is called a consideration for the promisee.”
Essential for a valid consideration:
(i) Consideration must move at the desire of the promisor
Consideration can be offered by the promisee or a third-party only at the request or desire of
the promisor. If an action is initiated at the desire of the third-party, it is not a consideration.

Ex: Peter is going back home from work. On his way, he sees that his neighbor John’s house
is on fire. He immediately arranges for a water hose and manages to douse the fire. Peter
cannot claim any reward for his effort because it was a voluntary act and was not done at the
desire of John (promisor).
(ii) Consideration may move from the promisee to any other person
Consideration may move from the promise to any other person.

Ex: Peter gifted his son, Oliver an apartment in the city with a condition that he pays a
fixed amount of money to his uncle, John, every year. On the same day, Oliver executed a
deed to pay a fixed amount of money to John every year. However, Oliver failed to pay and
John filed a suit for recovery. Oliver pleaded that he was not liable since no consideration
had moved from John. However, the court held the words ‘promisee or any other person…’
and allowed John to maintain his suit for recovery.
(iii) It can be in the past, present or future
a. Past
Peter employs John to work on his field during the months of agricultural harvesting. He
promises to pay John an amount of Rs 5,000 for his services when he sows the new crop in
the fields. The services of John in the past constitute a valid consideration.
b. Present
If the promise and consideration take place simultaneously then it is present or executed
consideration. Example is Peter goes to a shop, buys a bag of chips and pays for the same
on-spot.
c. Future
When the consideration for a promise moves after the contract is formed, it is a future or
executor. It is also valid if it depends on the condition.
Ex: Peter promises to create architectural plans for John’s new house. John promises to pay
Peter an amount of Rs 50,000 provided the plans are approved by his wife.

Exceptions for “No Consideration and No Contract”

1. Agreement made on account of Natural Love and affection
2. Agreement to compensate for past voluntary services
3. Contribution to Charities

Legality of Object and Consideration

The word object here means ‘purpose or design’.
The Consideration or the object of agreement is unlawful in the following cases:
 1. If it is forbidden by law
2. If it is a Fraudulent
3. If it involves injury to a person or property of another.
4. If the court regards it as immoral or illegal
5. If the court regards it has as ‘opposed to public policy’
a. trading with Alien enemy
b. agreements interfering with the course of Justice
c. agreements of stifling criminal prosecution
d. agreements creating an interest opposed to duty
e. agreements unduly restrining personal liberty
f. marriage brokerage agreement

Capacity of Persons to consent

Free Consent
“Two or more persons are said to be in consent when they agree upon the same thing in the same
sense”
Flaw in Free Consent
1. Coercion
2. Undue Influence
3. Misrepresentation
*With intention
*Without Intention or Innocent
4. Fraud
5. Mistake
6. Mistake of Law of the Country
7. Mistake of Fact
*Bilateral Mistake
*Unilateral Mistake
Capacity of Persons to Contract
“Every person is competent to enter into a Contract” except:
1. Minor
2. Persons of Unsound Mind
3. Idiocy
4. Lunacy or Insanity
5. Drunkenness
6. Hypnotism
7. Mental decay
8. Disqualified Persons
9. Alien enemies
10. Foreign Sovereigns and Ambassadors
11. Convict
12. Insolvent

3. Discuss in detail the different modes by which a contract may be discharged.

What is meant by discharge of contract? Discuss the various modes of discharging contract

Discharge of contract means termination of the contractual relationship between the parties.
A contract is said to be discharged when it ceases to operate, i.e., when the rights and obligations
created by it comes to an end.
A contract may be discharged:
1. by performance
2. by mutual agreement or consent.
3. by impossibility.
4. by lapse of time.
5. by operation of law.
6. by breach of contract.
The above said methods of discharge of contract have been explained below:
1. Performance
Performance means, the doing of that which is required by a contract. Discharge by
performance takes place, when the parties fulfill their obligations arising under the contract
within the time and in the manner prescribed. In such a case, the parties are discharged and the
contract comes to an end. If only one party performs the promise then it is considered that only
one is discharged. He gets a right against the other party who is guilty of breach.
The Performance of a contract is usually operated in two modes.1. Actual performance- when
both the parties performed their promises, the contract is discharged. Performance should be
complete, precise according to the terms of the agreement. 2. Attempted performances (or)
tender are not actual performance but it’s only an offer to perform the obligation under the
contract.
2. Mutual Agreement or Consent.
The contract makes a contractual obligation which is discharged by agreement which may be
expressed or implied. The various cases of discharge of a contract by mutual agreement are dealt
within sections 62 and 63 as discussed below:
a. Novation – it takes place when (i) a new contract is substituted for an existing one between the
same parties, or (ii) a contract between two parties is rescinded in consideration of a new
contract being entered into on the same terms between one of the parties and a third party.
Example: A owes B Rs 10,000/. A enters into an agreement with B and gives B a mortgage of
his (A’s) estate for Rs 5,000/ in place of the debt of Rs.10, 000/. This is a new contract which
extinguishes the old one.
Novation should take place before expiry of the time of the performance of the original contract.
b. Rescission- Rescission of a contract takes place when all or some of the terms of the contract
are cancelled. It may occur: (i) by mutual consent of the parties, or (ii) where one party fails
in the performance of his obligation. In such a case, the other party may rescind the contract
without prejudice to his right to claim compensation for the breach of contract.
Example: A promises to supply certain goods to B six months after date. By that time, the goods
go out of fashion. A and B may rescind the contract.
C. Alteration- Alteration of a contract may take place when one or more of the terms of the
contract is / or altered by the mutual consent of the parties to the contract. In such a case, the
old contract is discharged.
Example: A enters into a contract with B for the supply of 100 bales of cotton at his godown by
the first of the next month. A and B may alter the terms of the contract by mutual consent.
D. Remission- Remission means acceptance of a lesser fulfillment of the promise made i.e.,
acceptance of a lesser sum than, what was contracted for, in discharge of the whole of the
 debt. It is not necessary that there must be some consideration for the remission of the part of
the debt [Harichand Madangopal Vs State of Punjab, A.I.R. (1973 S.C.381].
Example: A owes B Rs.5000/. A pays to B and B accepts, in satisfaction of the whole debt,
Rs.2000/ paid at the time and place at which Rs. 5000/ were payable. The whole debt is
discharged.
E. Waiver - waiver takes place, when the parties to the contract agree that they shall no longer be
bound by the contract. This amounts to a mutual abandonment of rights by the parties to the
contract. Consideration is not necessary for waiver.
f. Merger - Merger takes place if an inferior right accruing to a party under a contract merges
into a superior right accruing to the same party under the same or some other contract.
Example: P holds a property under a lease. He later buys the property. His rights as a lessee is
merged into his rights as an owner.
3. Impossibility
If an agreement contains an undertaking to perform impossibility, it is void ab initio. It falls
into two categories they are:
a. Impossibility existing at the time of agreement. The facts of impossibility may be
(i) known to the parties, also called as absolute impossibility. (ii) Unknown to the
parties by the ignorance or any other reason.
b. Impossibility arising subsequent to the formation of contract. It is also called as
post contractual or supervening impossibility like destruction of subject matter, non-
existence or non-occurrence of a particular state of things, death or incapacity for
personal service, change of law or stepping in of a person with statutory authority or
outbreak of war.
c. Impossibility of performance- not an excuse- a contract is not discharged on the
ground of supervening impossibility like difficulty of performance, commercial
impossibility, impossibility due to failure of a third person, strikes, lock-out and civil
disturbances and failure of one of the objects.
4. Lapse of time
If the contract is not performed in time, then the contract will be considered as discharged.
5. Operation of law This includes discharge – by death, by merger, by insolvency, by
unauthorized alteration of the agreement and rights and liabilities become vested in the same
person.
6. Breach of contract
Breach of contract means a breaking of the obligation which a contract imposes. It
confers a right of action for damages on the injured party. Breach of contract may take place by
(i) actual breach of contract which takes place when the performance is due, during the
performance of the contract. (ii) Anticipatory breach of contract.

4. Define the term Breach of Contract”. Discuss the remedies available to an aggrieved
party for a breach of contract.
How is contract as breach of contract and state its remedies?

What are the remedies available to an aggrieved person in case of breach of a contract?-
Explain
Breach of contract means a breaking of the obligation which a contract imposes. It
confers a right of action for damages on the injured party. Breach of contract may take place by
(i) actual breach of contract which takes place when the performance is due, during the
performance of the contract. (ii) Anticipatory breach of contract.
A remedy is the means given by law for the enforcement of a right. When a contract is
broken the injured party is entitled to the following remedies according to the law:
1. Rescission of the contract
2. Suit for damages
3. Suit upon quantum meruit
4. Suit for specific performance of the contract
5. Suit for injunction
The above said remedies are explained as follows:
1. Rescission
When a contract is not performed by one party, the other party may sue to treat the contract as
rescinded and refuse further performance. In such a case, he is absolved of all his obligations
under the contract.
Example: A promises B to supply ten bags of cement on a certain day, B agrees to pay the price
after the receipt of the goods. A does not supply the goods. B is discharged from liability to
pay the price.
2. Suit for Damages or Compensation
Damages are a monetary compensation allowed to the injured party by the court for the loss
or injury suffered by him by the breach of the contract. The object of awarding damages for the
breach of a contract is to put the injured party to the same (original) position. This is called the
doctrine of restitution.
The rules relating to damages may now be considered as follows:
a. Damages arising naturally-ordinary damages

When the damages are proximate consequence occurred by natural and direct by the usual
course of things then it is called as ordinary damages.
b. Damages in contemplation of the parties- special damages

Any damages arising as other than the reason of normal damage then it will be considered as
special damages but special damages cannot be claimed as a matter of right.
c. Punitive or Vindictive or exemplary damages
This damage can be given away as compensation for the loss suffered, and not by way of
punishment for wrong inflicted, but in case of breach of a promise to dishonor of a cheque by
a banker wrongfully when he possesses sufficient funds to the credit of the customer, the
court may award exemplary damages.
d. Nominal damages Even though the injured party has not in fact suffered any loss by
reason of the breach of a contract, the damages recoverable by him are nominal.
 Damages for loss of reputation
 Damages for inconvenience and discomfort
 Mitigation of damages
 Difficulty of assessment

Although damages, which are incapable of assessment, cannot be recovered, the fact that
they are difficult to assess with certainty or precision does not prevent the aggrieved party
from recovering them.
3. Suit upon Quantum meruit
 It means “as much as earned”. This claim arises when one party partly performs, has
become discharged by the breach of the contract by the other party.
4. Suit for Specific Performance
In certain cases of breach of a contract, damages are not adequate remedy. In such cases
the court may direct the party in breach to carry out his promise according to the terms of the
contract. In some cases specific performance will not be granted where (i) damages are an
adequate remedy (ii) the contract is not certain (iii) the contract in its nature revocable (iv) the
contract is made by the trustees in breach of their trust (v) the contract is of a personal nature (vi)
the contract is made up by a company in excess of its power as laid down in its memorandum of
association (vii) the court cannot supervise the carrying out procedure.
5. Suit for an Injunction
Where a party is in breach of a negative term of a contract, the court may issue an order,
restraining him from doing what he promised not to do. Such an order of the court is known as
injunction.

5. Define a Quasi Contract. Explain the kinds or circumstances in which quasi-contract

arises.
What is quasi-contract?-Explain its types?
In contracts, there is always an agreement between parties. In a Contract, the consent of
the parties is essential, whereas in Quasi-Contract the parties do not necessarily give Consent.
Ex: A supplied B, a minor and / or the wife and children of B with necessaries suitable to his
/ their condition of life. A is entitled to be reimbursed from B’s property
Kinds of Quasi Contract
The Quasi-contract is discussed below:
1. Supply of necessaries-if a person, incapable of entering into a contract, or anyone whom he is
legally bound to support, is supplied by another with necessaries suited to his condition of life,
the person who has furnished such supplies is entitled to be reimbursed from the property of such
incapable person.
Example; A supplies B, a lunatic, with necessaries suitable to his condition of life. A is entitled
to be reimbursed from B’s property.
2. Reimbursement of person paying money due to another- A person who is interested in the
payment of money which another is bound by law to pay, and who therefore pays it is entitled to
be reimbursed by the other.
Example; P left his carriage on D’s premises. D’s landlord seized the carriage as distress for
rent. P paid the rent to obtain the release of his carriage. P could recover the amount from D
3. Obligation to pay for non-gratuitous acts-When a person lawfully does anything to another
person or delivers anything to him, not intending to do so gratuitously, and such other person
enjoys the benefit thereof, the latter is bound to make compensation to the former in respect of,
or restore, the thing so done or delivered.
Example: A, a tradesman, leaves goods at B’s house by mistake. B treats the goods as his own.
Then B is bound to pay for them to A.
4. Responsibility of Finder of Lost goods
A person, who finds goods belonging to another and takes them into his custody, is subject to
the same responsibility as a bailee. He is bound to take as much care of the goods as a man of
ordinary prudence would, under similar circumstances, should take care as of his own goods of
the same bulk, quality and value.
Examples: F picks up a diamond on the floor of S’s shop. He hands it over to S to keep it till
true owner is found. No one appears to claims it for quite some weeks in spite of the wide
advertisements in the newspapers. F claims the diamond from S who refuses to return. S is bound
to return the diamond to F, who is entitled to retain the diamond against the whole world except
the true owner.
5. Mistake or coercion
A person to whom money has been paid, or anything delivered, by mistake or under coercion,
must repay or return it to the person who paid it by mistake or under coercion.
Examples: A and B jointly owe Rs.100 to C. A alone pays the amount to C, and B, not knowing
this fact, pays Rs.100 over again to C, C is bound to pay the amount to B.