1. MODULE-2(A) BUSINESS CONTRACTS ( Indian Contract Act, 1872)
BUSINESS LAW
MODULE-2(A)
BUSINESS CONTRACTS
( Indian Contract Act, 1872)

2. TOPICS
Elements of Contracts – Parties – Offer – Acceptance – Consideration
Free consent – Legality of object and consideration
Types of Contracts – Valid and Voidable Contracts – Discharge of Contracts & Remedies -  Concept of damages
Case discussion. 

3. CONTRACT Definition: An agreement enforceable by law Is a contract.
Two elements:
1. Agreement
2. Enforceability (Legal Obligation)

4. Agreement Definition:
Every Promise and every set of promises, forming the consideration for each other is an agreement.

5. Promise
When a 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.

6. Characteristics of an Agreement
Plurality of persons
Consensus-ad-idem

7. Legal obligations. No legal obligations:
Agreements of moral, religious or social nature
Legal obligations:
Business agreements if made
By free consent of parties competent to contract
Lawful consideration
Lawful object

8. Problems:
A invites B to a dinner. B accepts the invitation. A made elaborate arrangements. But B failed to turn up. Can A sue B for the loss he has suffered.
M agrees to pay N Rs.100 if N writes 100 pages within five minutes. Is it a valid contract?

9. Solution:
1. A cannot sue B for the loss he has suffered because the agreement was of a social nature; hence lacked the intention to create legal relationship – an essential element of a valid contract.
2. No. it is not a valid contract. It is a void agreement because “an agreement to do an impossible act in itself is void.”

10. Agreements and Contracts
Agreement is a wider term.
All agreements are not contracts.
Only those agreements giving rise to legal obligations are contracts.
Agreements of moral, religious and
social nature are not contracts.

11. VALID CONTRACT – ESSENTIAL ELEMENTS
Offer and acceptance
Intention to create legal obligations
Lawful consideration
Competency of parties
Free consent
Lawful object
Writing and registration
Certainty
Not impossible
Not declared void

12. Intention to create legal obligations Leading Case: Balfour vs. Balfour
Facts: The defendant Mr.Balfour was a Civil servant stationed in Ceylon. Mr.Balfour and his wife were enjoying leave in England. On the due date of return to Ceylon, Mrs. Balfour could not accompany
As she was unwell and had to stay back in England. The defendant agreed to send £30 as maintenance expenses during the period they were forced to live apart.
Mrs. Balfour sued for breach of this agreement.

13. Judgment
The plaint was dismissed on the ground that no legal relations had been contemplated. Therefore, there was no contract.

14. Rose & Frank Co. Vs. Crompton & Brothers Ltd.
Rose & Frank entered into an Agency agreement with Crompton & Bros. One clause in the agreement read:
“This agreement is not entered into as a formal or legal agreement and shall not be subject to legal jurisdiction in the law courts.”
R&F in their plaint claimed that there was
a binding legal contract of Agency and hence Crompton are liable.

15. Judgment:
It was held that there was no intention to create legal relations on the part of the parties to the agreement and hence there was no contract.

16. KINDS OF CONTRACTS Points of view of 1.Enforceability
2. Mode of Creation
3.Extent of Execution

17. Enforceability 1. Valid contract 2. Voidable contract 3. Void contract
– Void agreement
4. Unenforceable contract
5. Illegal or Unlawful contract
- Illegal and void agreements

18. Mode of Creation
1. Express Contract
2. Implied Contract

19. Extent of Execution 1. Executed contract 2. Executory contract
3. Uni-lateral contract
4. Bi-lateral contract.

20. The 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’.

21. Three essentials of a Proposal
1. expression of willingness
2. to another person
3. with a view to obtaining the assent

22. Legal Rules Regarding a Valid Offer
1. An offer may be ‘express’ or ‘implied’.
2. An offer must contemplate legal consequences - creating legal relations.
3. The terms must be certain and not vague.
4. An invitation to offer is not an offer.
5. An offer may be ‘specific’ or ‘general’.
6. An offer must be communicated .

23. General Offer: Leading case: Carlill Vs. Carbolic Smoke Ball Co.(1893)
Carbolic Smoke Ball Co. issued an advertisement in which the Company offered to pay ₤100 to any person who contacts influenza, after using their smoke balls three times daily for two weeks, according to the printed directions given in the advertisement. Mrs. Carlill on the faith of the advertisement bought and used the Balls according to the directions, but she nevertheless subsequently suffered from influenza. She sued the company for the promised reward.

24. Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256 Court of Appeal

25. Legal rules regarding a Valid Offer
7. An offer should not contain a term the non- compliance of which would amount
to acceptance.
8. An offer can be made subject to any terms and conditions.
9. Two identical cross- offers do not make a contract.

26. Leading Cases: Lalman Shukla vs. Gauri Dutt (26)501
Handerson Vs. Stevenson (26)
Parker Vs. South Eastern Railway (26)

27. Lapse and Revocation of an Offer
1. After stipulated time or reasonable time.
2. not accepted in the prescribed mode.
3. by rejection.
4. by death or insanity of offeror or offeree before acceptance.
5. by revocation
6. non-fulfilment of a condition precedent.
7. by subsequent illegality or destruction of subject-matter.

28. The Acceptance
‘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’.

29. Rules Regarding Valid Acceptance
1. Only by the person to whom it is made.
2. absolute and unqualified
3. usual manner unless
prescribed
4. communicated by the acceptor.
5.within reasonable time before revocation
6. Acceptance must succeed offer
7. Rejected offers can be accepted only if renewed.

30. Communication - Offer, Acceptance, Revocation
Communication of offer is complete
when it comes to the knowledge of the offeree.
Communication of acceptance is complete
as against the proposer when it is in course of transmission to him -
as against the acceptor, when it comes to the knowledge of the proposer.
Communication of revocation is complete as against the person revoking, when it is put in the course of transmission to the other person –
as against the person to whom it is made, when it comes to his knowledge.

31. When can offer or acceptance be revoked?
“ A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards.
An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor but not afterwards.”

32. “Acceptance is to an offer, what a lighted match is to a train of gun powder. It produces something which cannot be recalled or undone.”-Anson.

33. Consideration
‘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 abstains from doing, something, such act or abstinence or promise is called a consideration for the promise’

34. Rules Regarding Consideration
1. must move at the desire of the promisor
2. may move from the promisee or any other person;
i.e.a stranger to consideration may maintain a suit.
3. A stranger to a contract cannot maintain a suit.
4. may be past, present or future.
5. must be something of value; need not be adequate..
6. must be legal.

35. An agreement made without consideration is void
“No consideration No contract”
Exceptions:
Natural love and affection.
Compensation for past voluntary service.
To pay time-barred debt.
Completed Gift.
Contract of Agency.
Remission by promisee of performance
Contribution to Charity.

36. Capacity of Contracting Parties
“Every person is competent to contract
Who is of the age 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.”

37. Minor
Every person who has completed the age of 18 years becomes a major.
But
Minors of whose person or property or both
a guardian is appointed by a court and minors whose property superintendence has been assumed by a Court of Wards, attain majority at the age of 21 years.

38. Minor’s liability in agreements
An agreement by a minor is absolutely void and inoperative as against him.
Beneficial agreements are valid contracts.
No ratification on attaining majority.
Rule of estoppel does not apply to a minor.
Minor’s liability for necessaries.
Specific performance.

39. Minor’s liability (contd.)
7. Minor Partner – benefits of Partnership.
8. Minor Agent – not liable for negligance or breach of duty.
9. Minor cannot be adjudicated insolvent.
10.Minor and adult – only adult liable.
11.Surety for a minor – adult surety is liable not the minor.
12.Minor’s parents.
13.Minor shareholder.
14.Minor’s liability in tort.

40. Persons of Unsound Mind
“A person is said to be of unsound mind for the purpose of making a contract, if, at the time when he makes it, he is capable of understanding it and of forming a rational judgment as to its effects upon his interests.
Agreements treated on the same footing as minor’s.

41. Disqualified Persons
Alien – Alien friend can contract but not alien enemies.
Foreign sovereigns and ambassadors – they can sue but cannot be sued upon.
Convict – incompetent during imprisonment.
Married woman – can contract separate property not husband’s.
Insolvent – can contract after discharge, otherwise suffers from several disqualifications.
Joint Stock Company & Corporations – powers of contract limited by Memorandum – no personal contracts.

42. Free Consent
Consent: ‘Two or more persons are said to consent when they agree upon the same thing in the same sense.’ Consent involves identity of minds or consensus ad-idem.
Consent is said to be ‘free’ when not caused by
1. Coercion
2. Undue Influence
3. Fraud
4. Misrepresentation
5. Mistake

43. Coercion
‘Coercion is the committing or threatening to commit, any act forbidden by the Indian Penal Code, or
the unlawful detaining or threatening to detain, any property, to the prejudice of any person whatever,
with the intention of causing any person to enter into an agreement’.
A contract brought about by coercion is voidable at the option of the party whose consent was so caused.

44. Undue Influence
“A contract is said to be induced by undue influence where,
The relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other, and
He uses the position to obtain an unfair advantage over the other.”
“When consent is caused by undue influence, the agreement is a contract voidable at the option of the party whose consent was so caused…If the party entitled to avoid it has received any benefit, upon such terms and conditions as the court may deem just.”

45. Presumption of Undue Influence
Father and son
Doctor and patient
Solicitor and client
Guardian and Ward
Trustee and Beneficiary
Spiritual Guru and Disciple
Old illiterate person
Pardanishin woman

46. No presumption of Undue Influence
Husband and wife
Mother and daughter
Grandson and Grandfather
Landlord and Tenant
Creditor and Debtor
Master and Servant

47. ‘When the consent is caused by undue influence, the agreement is a contract voidable at the option of the party whose consent was so caused’.
‘Any such contract may be set aside either absolutely or, if the party who was entitled to avoid it has received any benefit thereunder, upon such terms and conditions as the court may seem just’

48. Fraud
“Fraud means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive or to induce another party thereto or his agent, to enter into the contract:
1. The suggestion, as a fact of that which is not true by one who does not believe it to be true.
2. The active concealment of a fact by a person who has knowledge or belief of the fact.
3. A promise made without any intention of performing it.
4. Any other act fitted to deceive.
5. Any such act or omission as the law specifically declares to be fraudulent.

49. Effect of Fraud: A party who has been induced to enter into a
Contract by fraud, has the following remedies:
He can rescind the contract.
2. He can ask for restitution and insist that the contract shall be performed.

50. Misrepresentation
the positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true.
Any breach of duty which, without an intent to deceive, gains an advantage to the person committing it, or any one claiming under him, by misleading another to his prejudice or to the prejudice of any one claiming under him; or
Causing, however, innocently, a party to an agreement, to make a mistake as to the substance of the thing which is the subject of the agreement.

51. Remedies in case of Misrepresentation:
The aggrieved party has two options:
1. He can rescind the contract.
2. He may affirm the contract and
insist on its performance
3. No Damages.
Misrepresentation does not entitle the aggrieved party to claim damages.

52. Distinction between Fraud and Misrepresentation
1. Intention to deceive,
Deliberate and willful
2. Civil wrong – party entitled to claim damages.
3. Contract is voidable even if party had means of finding truth with ordinary diligence.
MISREPRESENTATION
1. Innocent. No intention to deceive.
2. Right only to avoid contract. No suit for damages.
3. If party had means of finding truth with ordinary diligence, cannot avoid contract.

53. Loss of Right of Rescission
1. Affirmation
2. Restitution not possible.
3. Lapse of time
4. Rights of third parties

54. Mistake Erroneous belief concerning something. 1. Mistake of Law
(a) Mistake of Law of the country
(b) Mistake of foreign law.
‘Ignorantia juris non-excusat’ – Ignorance of law is no excuse.
“a contract is not voidable because it was caused by mistake as to any law in force in India”
Mistake of Foreign Law is treated on the same footing as ‘mistake of fact’.

55. 2. Mistake of Fact a) Bilateral Mistake b) Unilateral Mistake
‘Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void”.
‘A contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact’.

56. Consideration Unlawful in Part
“When an agreement contains several distinct promises to do things legal and also other things illegal, and the legal part cannot be separated from the illegal part (i.e. the consideration for different promises is a single sum of money), the whole agreement is illegal and void”.

57. “Where there is a reciprocal promise to do things legal and also other things illegal, and the legal part can be separated from the illegal part (i.e. there is a separate consideration for different promises), the legal part is a contract and the illegal part is a void agreement.

58. Illegal Agreements
Parties to an illegal agreement cannot get any help from a court of law.
“No polluted hand shall touch the pure fountain of justice.”

59. Void Agreements Agreements are void if made
1. by a minor or a person of unsound mind
2. by a bilateral mistake of fact material to the agreement.
3. the consideration or object is unlawful.
4. part consideration is unlawful, and the legal and illegal parts are inseparable.
5. without consideration.

60. Expressly Declared Void Agreements
1. Agreements in restraint of marriage
2. Agreements in restraint of trade
3. Agreements in restraint of legal proceedings
4. Agreements the meaning of which is uncertain.
5. Agreements by way of wager
6. Agreements contingent of impossible events.
7. Agreements to do impossible acts.
“ No restitution of the benefit received is allowed in the case of expressly declared void agreements.”

61. Cases decided as being against Public Policy:
Trading with an alien enemy.
Agreements to promote hostile action in a friendly State.
Agreements interfering with course of justice.
Agreements in restraint of legal proceedings.
Agreements for stifling criminal prosecution.
Agreements tending to an abuse of legal process.
Agreements to oust the jurisdiction of courts.
Agreements to vary periods of limitation.
Agreements for the sale or to influence of public offices/ titles/honours.
Agreements to influence election to public offices.
Agreements tending to create interest opposed to duty.
Agreements tending to create monopolies.

62. Cases declared against Public Policy (Contd.)
13. Agreement in restraint of parental rights.
14. Agreements restricting personal liberty.
15. Agreements in restraint of marriage.
16. Marriage brokerage agreements.
17. Agreements interfering with marital duties.
18. Agreement in fraud of creditors.
19. Agreements to defraud revenue authorities.
20. Agreements in restraint of profession.
21. Agreements in restraint of trade.

63. Performance of Contracts
General Rule:
“A person cannot acquire rights under a contract to which he is not a party”.

64. By whom contracts must be performed
1. By the promisor himself.
2. By the promisor or his agent.
3. By the legal representatives.
4. Performance by a third person.

65. Assignment of Contracts
1. Contracts involving skill cannot be assigned.
2. Obligations cannot be assigned except with the consent of the promisee, in which case it becomes ‘novation’ – substitution of liabilities.
3. Rights and benefits are assignable except
Contracts of personal nature, involving skill.
An ‘actionable claim’ can be assigned but must be an instrument in writing.
4. Assignment by operation of law –
By death or insolvency. On death to legal representatives
In insolvency, to Official Assignee or receiver.

66. Remedies for Breach of Contract
1. Rescission of the contract.
2. Suit for damages.
3. Suit upon quantum meruit.
4. Suit for specific performance.
5. Suit for injunction.

67. Suit for damages Different kinds of Damages:
1. Ordinary, General or Compensatory damages
2. Special damages
3. Exemplary, Punitive or Vindictive damages
4. Nominal damages.

68. Rules regarding the Measure of Damages
1. Damages are compensation for loss
Not punishment of the guilty.
2. Injured party to be put in the same position as though contract was performed.
3. Only the actual loss arising out of breach.
4. Special or remote damages are allowed only if it was in the knowledge of both the parties.
5. Difficulty of assessment of damages does not prevent their recovery.

69. Rules for measure of damages (contd.)
6. If no real loss arises from breach, only nominal damages awarded.
7. If sum payable in case of breach is fixed in advance, reasonable compensation not exceeding such amount is allowed.
8. Exemplary damages allowed only for breach of marriage contract and bank’s wrongful refusal to honor customer’s Cheque.
9. Injured party’s duty to minimise damage.
10.Costs of decree allowed to injured party.