Essential Elements of a Valid Contract

Business Law Notes for BBA I Year Complied by Komal Singh
Notes can be download from---------------------------------www.komalsinghchauhan.webs.com

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What is law
The Oxford English Dictionary defines the word Law as the rule made by authority for the proper regulation
of a community or society or for correct conduct in life. The term law has been defined by some of the legal
scholars in the following words:

A law is a rule of conduct imposed and enforced by the sovereign. - Austin
Law is the body of principles recognized and applied by the state in the administration of justice.
Salmond

Law is rule of external human actions enforced by Sovereign Political authority. - Holland

Hence law is a set of rules laying down rights and obligations, which the state enforces. It includes rules and
principles, which regulate our relations with other individuals and with the state.

Define contract? Discuss the essential elements of a valid contract?
or
The parties to a contract in a essence make the law for themselves?
or
What is the nature and the object of contract?

ANSWER -

Meaning Of Contract - The word contract is derived from the Latin Contractum meaning drawing together.
According to the Act, An Agreement enforceable by law is a contract Some authors have defined contract in
the following words:

"Every agreement and promise enforceable at law is a contract". - Sir Frederick Pollock
"An agreement creating and defining obligations between the parties".- Salmond
"A contract is an agreement enforceable at law made between two or more persons, by which rights are
acquired by one or more to acts or forbearance's on the part of the other or others". - Sir William Anson.

In the form of an equation, it can be shown as Contract = An Agreement + Its Enforceability

Essential Elements Of Valid Contract:

According to section 10, All agreements are contracts if they are made by the free consent of the parties
competent to contract, for a lawful consideration and with a lawful object and not here by expressly declared to
be void. In order to become a contract an agreement must have the following essential elements, they are
follows:
1) Offer And Acceptance:

To constitute a contract there must be an offer and an acceptance of that offer.
The offer and acceptance should relate to same thing in the same sense.
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There must be two (or) more persons to an agreement because one person cannot enter into an agreement with
himself.

2) Intention To Create Legal Relationship:

The parties must have intention to create legal relationship among them. Generally, the agreements of social,
domestic and political nature are not a contract. If there is no such intention to create a legal relationship among
the parties, there is no contract between them.

Facts: A husband promised to pay his wife a household allowance of Rs 10,000 every month. Later the parties
separated and the husband failed to pay the amount. The wife sued for allowance.

Judgment: Agreements such as there were outside the realm of contract altogether. Because there is no intention
to create legal relationship among the parties.

3) Free And Genuine Consent:

The consent of the parties to the agreement must be free and genuine.
Free consent is said to be absent, if the agreement is induced by
(a). Coercion,
(b). Undue-influence,
(c). Fraud,
(d). Mis-representation,
(e). Mistake.

4) Lawful Object:

The object of the agreement must be lawful. In other words, it means the object must not be
(a) Illegal, (b) immoral, (c) opposed to public policy.
If an agreement suffers from any legal flaw, it would not be enforceable by law.

5) Lawful Consideration:

An agreement to be enforceable by law must be supported by consideration.
Consideration means an advantage or benefit moving from one party to other. In other words
something in return.
The agreement is enforceable only when both the parties give something and get something in return.
The consideration must be real and lawful.

6) Capacity Of Parties: (Competency)

The parties to a contract should be capable of entering into a valid contract.
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Every person is competent to contract if
(a). He is the age of majority.
(b). He is of sound mind and
(c). He is not dis-qualified from contracting by any law.
The flaw in capacity to contract may arise from minority, lunacy, idiocy, drunkenness, etc..,

7) Agreement Not To Be Declared Void

The agreements must not have been expressly declared to be void under section 24 to 30 of the act.
Example: Agreements in restraint of trade, marriages, legal proceedings, etc..,

8) Certainty

The meaning of the agreement must be certain and not be vague (or) indefinite.
If it is vague (or) indefinite it is not possible to ascertain its meaning.
Example: Amar agrees to sell Bharat hundred tons of oil. This agreement is void on the ground of uncertainty
because it is not clear what kind of oil is intended to be sold.

9) Possibility Of Performance

The terms of an agreement should be capable of performance.
The agreement to do an act impossible in itself is void and cannot be enforceable - Section 56
Example: X agrees with Y to enclose some areas between two parallel lines and Y agrees to pay Rs. 1000/- to
X. This agreement is void because it is an agreement to do an impossible act.

10) Necessary Legal Formalities

According to Indian contract Act, oral (or) written are perfectly valid.
There is no provision for contracting being written, registered and stamped.
But if is required by law, that it should comply with legal formalities and then it should be complied with all
legal (or) necessary formalities for its enforceability.

Define contract? Discuss the essential elements of a valid contract?
or

The parties to a contract in a essence make the law for themselves?
or

What is the nature and the object of contract?

Meaning Of Contract - The word contract is derived from the Latin Contractum meaning drawing
together. According to the Act, An Agreement enforceable by law is a contract

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Some authors have defined contract in the following words:

"Every agreement and promise enforceable at law is a contract". - Sir Frederick Pollock
"An agreement creating and defining obligations between the parties".- Salmond
"A contract is an agreement enforceable at law made between two or more persons, by which rights are
acquired by one or more to acts or forbearance's on the part of the other or others". - Sir William Anson.

In the form of an equation, it can be shown as Contract = An Agreement + Its Enforceability

Essential Elements Of Valid Contract:

According to section 10, All agreements are contracts if they are made by the free consent of the parties
competent to contract, for a lawful consideration and with a lawful object and not here by expressly declared to
be void. In order to become a contract an agreement must have the following essential elements, they are
follows:

1) Offer And Acceptance:

To constitute a contract there must be an offer and an acceptance of that offer.
The offer and acceptance should relate to same thing in the same sense.
There must be two (or) more persons to an agreement because one person cannot enter into an agreement with
himself.

2) Intention To Create Legal Relationship:

The parties must have intention to create legal relationship among them. Generally, the agreements of social,
domestic and political nature are not a contract. If there is no such intention to create a legal relationship among
the parties, there is no contract between them.

Facts: A husband promised to pay his wife a household allowance of Rs 10,000 every month. Later the parties
separated and the husband failed to pay the amount. The wife sued for allowance.

Judgment: Agreements such as there were outside the realm of contract altogether. Because there is no intention
to create legal relationship among the parties.

3) Free And Genuine Consent:
The consent of the parties to the agreement must be free and genuine.
Free consent is said to be absent, if the agreement is induced by
(a). Coercion,
(b). Undue-influence,
(c). Fraud,
(d). Mis-representation,
(e). Mistake.
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4) Lawful Object:

The object of the agreement must be lawful. In other words, it means the object must not be
(a) Illegal, (b) immoral, (c) opposed to public policy.
If an agreement suffers from any legal flaw, it would not be enforceable by law.

5) Lawful Consideration:

An agreement to be enforceable by law must be supported by consideration.
Consideration means an advantage or benefit moving from one party to other. In other words something in
return.
The agreement is enforceable only when both the parties give something and get something in return.
The consideration must be real and lawful.

6) Capacity Of Parties: (Competency)

The parties to a contract should be capable of entering into a valid contract.
Every person is competent to contract if
(a). He is the age of majority.
(b). He is of sound mind and
(c). He is not dis-qualified from contracting by any law.
The flaw in capacity to contract may arise from minority, lunacy, idiocy, drunkenness, etc..,

7) Agreement Not To Be Declared Void

The agreements must not have been expressly declared to be void under section 24 to 30 of the act.
Example: Agreements in restraint of trade, marriages, legal proceedings, etc..,

8) Certainty

The meaning of the agreement must be certain and not be vague (or) indefinite.
If it is vague (or) indefinite it is not possible to ascertain its meaning.
Example: Amar agrees to sell Bharat hundred tons of oil. This agreement is void on the ground of uncertainty
because it is not clear what kind of oil is intended to be sold.

9) Possibility Of Performance

The terms of an agreement should be capable of performance.
The agreement to do an act impossible in itself is void and cannot be enforceable - Section 56
Example: X agrees with Y to enclose some areas between two parallel lines and Y agrees to pay Rs. 1000/- to
X. This agreement is void because it is an agreement to do an impossible act.
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10) Necessary Legal Formalities

According to Indian contract Act, oral (or) written are perfectly valid.
There is no provision for contracting being written, registered and stamped.
But if is required by law, that it should comply with legal formalities and then it should be complied with all
legal (or) necessary formalities for its enforceability.

All contracts are agreements but all agreements are not contracts - explain.

All contracts are agreements but all agreements are not contracts- the statement has two parts.

(a) All contracts are agreement: As per section 2(h) of Indian contract Act, A contract is an agreement
enforceable by law. Obviously an agreement is a pre requisite (i.e.., essential elements) for formation of
contract. An agreement clubbed with enforceability by law and several other features (i.e.., free consent,
consideration, etc..,) will create a valid contract. Therefore, obviously all contracts will be agreements.

(b) All agreements are not contracts: As per section 2(e) of Indian contract act, An agreement is a promise and
every set of promises, forming consideration for each other. Thus, a lawful offer and a lawful acceptance
create an agreement only. Therefore all agreements are not contracts.

Conclusion:
Contract = Agreement + Enforceability by law.
Agreement = Offer + Acceptance.

Thus, all agreements are contracts but all agreements are not necessarily contracts.

Offer and Acceptance

Offer Definition:
According to section 2(a) of Indian contract act, 1872, defines offer as 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 his said to make a proposal.

Legal rules (OR) Essential elements of a valid offer / proposal:

1) Offer must be capable of creating legal relations: A social invitation, even if it is accepted does not create
legal relationship because it is not so intended to create legal relationship. Therefore, an offer must be such as
would result in a valid contract when it is accepted.

2) Offer must be certain, definite and not vague: If the terms of the offer are vague, indefinite, and uncertain, it
does not amount to a lawful offer and its acceptance cannot create any contractual relationship.

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3) Offer must be communicated: An offer is effective only when it is communicated to the person whom it is
made unless an offer is communicated; there is no acceptance and no contract. An acceptance of an offer, in
ignorance of the offer can never treated as acceptance and does not create any right on the acceptor.

Example: LALMAN SHUKLA (VS) GAURI DATT. (1913)

4) Offer must be distinguished from an invitation to offer: A proposer/offer must be distinguished from an
invitation to offer. In the case of invitation to offer, the person sending out the invitation does not make any
offer, but only invites the party to make an offer. Such invitations for offers are not offers in the eyes of law and
do not become agreement by the acceptance of such offers.

Example: Pharmaceutical society of great Britain (vs) Boots cash chemists (1953).

5) Offer may be expressed (or) implied: An offer may be made either by words (or) by conduct. An offer which
is expressed by words (i.e.., spoken or written) is called an express offer and offer which is inferred from the
conduct of a person (or) the circumstances of the case is called an implied offer.

6) Offer must be made between the two parties: There must be two (or) more parties to create a valid offer
because one person cannot make a proposal/offer to him self.

7) Offer may be specific (or) general: An offer is said to be specific when it is made to a definite person, such
an offer is accepted only by the person to whom it is made. On the other hand general offer is one which is
made to a public at large and maybe accepted by anyone who fulfills the requisite conditions.

Example: Carilill (vs) Carbolic Ball company (1893).

8) Offer must be made with a view to obtaining the assent: A offer to do (or) not to do something must be made
with a view to obtaining the assent of the other party addressed and it should not made merely with a view to
disclosing the intention of making an offer.

9) Offer must not be statement of price: A mere statement of price is not treated as an offer to sell. Therefore, an
offer must not be a statement of price.

Example: HARVEY (VS) FACEY (1893):

10) Offer should not contain a term the non-compliance of which may be assumed to amount to acceptance.

Communication of Proposal, Acceptance and Revocation

Communication of a Proposal: The communication of proposal is complete when it comes to the knowledge of
the person to whom it is made, i.e. when the letter containing the proposal reaches the propose.
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Communication of an Acceptance: The communication of acceptance is complete at different times for the
proposer and acceptor. The communication of acceptance is complete:

as against the proposer, when it is put in a course of transmission to him, so as to be out of the power of the
acceptor, i.e. when the letter of acceptance is duly posted.
as against the acceptor, when it comes to the knowledge of the proposer i.e. when the letter of acceptance is
received by the proposer.

Communication of a Revocation: The term revocation means taking back or withdrawal. The
communication of revocation is complete:

as against the person who makes it, when it is put into a course of transmission to the person to whom it is
made, so as to be out of the power of the person revoking, i.e. when the letter of revocation is posted, and
as against the person to whom it is made, when it comes to his knowledge, i.e. when the letter of revocation is
received by him.

Time During Which an Offer or Acceptance can 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.

Lapse and Revocation of Proposal
A proposal lapses and becomes invalid in the following circumstances:

1. An offer lapses after stipulated or reasonable time.
2. A proposal lapses by not being accepted in the mode prescribed, or if no mode is prescribed, in some
usual and reasonable manner.
3. A proposal lapses by rejection by the proposee.
4. A proposal lapses by the death or insanity of the proposer or the proposee before acceptance.
5. A proposal lapses by recovation by the proposer before acceptance.
6. Revocation by non-fulfillment of a condition precedent to acceptance.
7. A proposal lapses by subsequent illegality or destruction of subject matter.

Define acceptance? Explain the rules regarding a valid acceptance?

Acceptance Definition:
According to section 2(b) of the Indian contract Act, 1872, defines an acceptance is when the person to whom
the proposal is made signifies is assent thereto, the proposal is said to be accepted becomes a promise.

On the acceptance of the proposal, the proposer is called the promisor/offeror and the acceptor is called the
promise/offeree.
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Legal rules as to acceptance: A valid acceptance must satisfies the following rules:-

1) Acceptance must be absolute and unqualified:

An acceptance to be valid it must be absolute and unqualified and in accordance with the exact terms of the
offer.
An acceptance with a variation, slight, is no acceptance, and may amount to a mere counteroffer (i.e.., original
may or may not accept.)

2) Acceptance must be communicated to the offeror:

For a valid acceptance, acceptance must not only be made by the offeree but it must also be communicated by
the offeree to the offeror.
Communication of the acceptance must be expressed or implied.
A mere mental acceptance is no acceptance.

3) Acceptance must be according to the mode prescribed (or) usual and reasonable
manner:
If the offeror prescribed a mode of acceptance, acceptance must given according to the mode prescribed.
If the offeror prescribed no mode of acceptance, acceptance must given according to some usual and reasonable
mode.
If an offer is not accepted according to the prescribed (or) usual mode. The proposer may within a reasonable
time give notice to the offeree that the acceptance is not according to the mode prescribed.
If the offeror keeps quite he is deemed to have accepted the acceptance.

4) Acceptance must be given with in a reasonable time:

If any time limit is specified, the acceptance must be given with in that time.
If no time limit is specified, the acceptance must be given with in a reasonable time.
Example: Ramsgate victoria Hotel Company (vs) Monteflore (1886)

5) It cannot precede an offer:

If the acceptance precedes an offer, it is not a valid acceptance and does not result in a contract.
In other words acceptance subject to contract is no acceptance.
6) Acceptance must be given by the parties (or) party to whom it is made:
An offer can be accepted only by the person (or) persons to whom it is made.
It cannot be accepted by another person without the consent of the offeror.
Example: Boulton (vs) Jones (1857).

7) It cannot be implied from silence:

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Silence does not amount to acceptance.
If the offeree does not respond to offer (or) keeps quite, the offer will lapse after reasonable time.
The offeror cannot compel the offeree to respond offer (or) to suggest that silence will be equivalent to
acceptance.

8) Acceptance must be expressed (or) implied:

An acceptance may be given either by words (or) by conduct.
An acceptance which is expressed by words (i.e.., spoken or written) is called expressed acceptance.
An acceptance which is inferred by conduct of the person (or) by circumstances of the case is called an implied
or tacit acceptance.
Example: Carilill (vs) Carbolic Ball company (1893).

9) Acceptance may be given by performing some condition (or) by accepting some consideration.

10) Acceptance must be made before the offer lapses (or) before the offer is withdrawn.

Consideration

Define consideration? What are the rules as to consideration?

Consideration Definition:

Consideration is one of the essential elements of a valid contract. When a person promises to do something, he
must get something in return. If he does not get something in return, the contract is, generally, not valid. This
something is known as consideration. In other words, consideration is the price for which the promise of the
other party is bought.

A agrees to sell his house to B for Rs. 5,00,000. Here As promise to sell his house is for Bs consideration to
pay Rs. 5,00,000. Similarly, Bs promise to pay Rs. 5,00,000 is for As consideration to sell his house to B.

Essentials of a Valid Consideration

a) Consideration Must Move at the Desire of the Promisor: The act or abstinence forming the Consideration
must be done at the desire or request of the promisor. If it is done at the instance of the third party or without the
desire of the promisor it is not consideration.

Example - Amar sees Bhushans house on fire and helps in extinguishing it. Amar cannot demand payment for
his services because Bhushan never asked him to come for help.

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b) Consideration May Move from the Promisee or any other Person: The consideration need not move from the
promisee alone but may proceed from any third person. Thus, as long as there is a consideration for a promise,
it is immaterial who has furnished it. This means that even a stranger to the consideration can sue on a contract,
provided he is a party to the contract. This is also called as Doctrine of Constructive Consideration.

c) Consideration may be past, present or future.

d) Consideration Must be Something of Value (The consideration need not be adequate to the promise but it
must be of some value in the eye of the law).

e) Consideration must be legal.

f) Consideration may be doing something, or abstaining from doing something (positive, or negative act) or a
promise to do something.

No Consideration No Contract

The general rule is that an agreement made without consideration is void. But there are a few exceptions to
this rule. These exceptions are as follows:

Agreement Made on Account of Natural Love and Affection: An agreement made without consideration is
enforceable if, it is

Made on account of natural love and affection.
Between parties standing in a near relation to each other.
Expressed in writing.
Registered as per law.

Agreement to Compensate for past Voluntary Service: Example - A finds Bs purse and gives it to B. B
promises to give A Rs. 100/-. This is a Contract.

Agreement to Pay a Time Barred Debt: Where there is an agreement, made in writing and signed by the debtor
or his authorised agent, to pay wholly or in part a debt barred by the law of limitation, the agreement is valid
even though it is not supported by any consideration.

Completed Gift: A completed gift does not require consideration in order to be valid.

Contract of Agency: No consideration is necessary to create an agency.

Remission by the Promisee, of Performance of the Promise: For compromising a due debt, i.e. agreeing to
accept less than what is due, no consideration is necessary.

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Contribution to Charity: A promise to contribute to charity, though gratuitous, would be enforceable, if on the
faith of the promised subscription, the promisee takes definite steps in furtherance of the object and undertakes
a liability, to the extent of liability incurred, not exceeding the promised amount of subscription.
A stranger to a consideration can sue - Are there any exceptions to this rule?

There is a general rule of law is that only the parties to a contract can sue. In other words, if a person not a party
to a contract, he cannot sue. This rule is known as the Doctrine of privity of contract. Privity of contract
means relationship subsisting between the parties who have entered into contractual obligations.

There are two consequences of doctrine of privity of contract they are follows:

A person who is not a party to a contract cannot sue even if the contract is for his benefit and he
provided consideration. (Or) A stranger to a contract cannot sue.
A contract cannot provide rights (or) impose obligations arising under it on any person other than the
parties to it. (Or) A stranger to a contract can sue.

Example: Dunlop Pneumatic Tyre Co.Ltd (vs) Selfridge & Co.Ltd (1915).

Exceptions:

Trust: In trust deed beneficiaries is allowed to sue the trustee for enforcement of trustees duties even though
they are not contracting party. However, the name of the beneficiary must be clearly mentioned in the contract.
Example: Gandy (vs) Gandy (1884):

Marriage settlements, partition (or) other family arrangements: When an agreement is made in connection of
marriage settlements, partitions (or) other family arrangements and a provision is made for the benefit of a
person, he may sue although he is not a party to the agreement.
Example: Daropti (vs) Jaspat Rai (1905):

Acknowledgement (or) Estoppel: The person, who becomes an agent of a third party by acknowledgement (or)
Estoppel, can be sued by such third party.

Assignment of contract: Assignment means voluntary transfer of the rights by a person to another. In such a
case an assignee becomes entitled to sue and enforce the rights which are assigned to him.

Contracts entered into through an agent: The principal enforce the contract entered into by his agent provided
the agent act within the scope of his authority and in the name of the principal.

Covenants running with the land: In case of transfer of immovable property, the purchaser of land (or) the
owner of the land is bound by certain conditions (or) covenants created by an agreement affecting the land.
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Competency Of Parties

Business Law - Define Minor ? Legal rules regarding an agreement by a minor ?

Minor Definition:
According to section 3, of the Indian majority act, 1875 A minor is a person who has not completed 18 years
of age. However, minority will continue up to 21 years in case, if Hon.court has appointed guardian for a
minors property.

Legal rules regarding an agreement by a minor:

A minor is incompetent to contract u/s 11 of the Indian contact act, 1872. Minors incompetence is not a
punishment but it is a protection given to minors by law. The law becomes the guardian of minors to protect
their rights because their mental capacity is not well developed. The following are the legal rules regarding
minors agreement are as follows:-

1. An agreement by minor is absolutely void: Where a minor is charged with obligations and the other
contracting party seeks to enforce these obligations against minor, in such a case the agreement is deemed as
void-ab-initio.

Example: Mohiri Bibi (vs) Dharmodas Ghose (1903).

2. He can be a promisee (or) a Beneficiary: Any agreement which is some benefit to the minor and under which
he is required to bear no obligation is valid. Thus, a minor can be a beneficiary (or) a promisee.

3. His agreement cannot be ratified by him an attaining the age of majority: An agreement by minor is void-ab-
initio and therefore ratification by minor is not allowed. There is a fundamental principal in law (i.e.., an
agreement Void-ab-initio cannot be validated by subsequent action).

4. If he has received any benefit under a void agreement, he cannot asked to compensate (or) pay for it: Under
section 64 and 65 of the act, provides a minor cannot be ordered to make compensation for a benefit obtained in
a void agreement. Because section 64 and 65, which deals with restitution of benefit.

5. Minor can always plead minority: A minors contract being void, any money advanced to a minor on
a promissory note cannot be recovered even though a minor procures (or) take aloan by falsely representing that
he is of full age it will not stop him from pleading his minority in a suit, to recover the amount and the suit will
be dismissed. The rule of estoppel cannot be applied against a minor.

Example: Leslie (vs) Shiell (1914).

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6. There can be no specific performance of the agreement entered into by him as they are void-ab- initio: A
contract entered into, on behalf of a minor by his parent/guardian (or) the manager of his estate can be expressly
enforced by (or) against the minor, provide the contract is

With in the authority of the guardian and
For the benefit of the minor.

7. He cannot enter into a contract of partnership: A minor being incompetent to contract but be a partner of a
partnership firm, but u/s 30 of the Indian partnership Act, provides he can be admitted for the benefits of a
partnership with the consent of all the partners.

8. He can be an agent: A minor can be an agent. It is so because the act of the agent is the act of the principal
and therefore, the principal is liable to the third parties for the act of a minor agent.

9. His parents/guardian is not liable for the contracts entered into by him: The parents/guardian is not liable for
the contract entered into by minor. The parents can held liable for contracts for their minor children only when
they are acting as agent.

10. A minor is liable in tort ( A civil wrong): Minors are liable for negligence causing injury (or) damage to the
property that does not belongs to them.

11. A minor is liable for necessaries: Minors estate is liable for necessaries supplied to minor during minority.
Minor does not personally liable for the supply of necessaries. The necessaries such as food, clothing, and
shelter etc.., necessaries also include goods and services.

Business Law - Person Of Unsound Mind & Person Disqualified By Law

1. Person Of Unsound Mind

According to section 12 of the Indian contract Act, 1872 A person is said to be of sound mind for the purpose
of making a contract if, at the time when he makes it, he his capable of understanding it and of forming a
rational judgment as to its effects upon his interests.

Soundness of mind of a person depends on two facts:

1. Ability to understand the contract at the time of making.
2. Ability to form a rational judgment about the effect of the contract on his interest.

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Unsoundness may arise from idiocy, lunacy, drunkenness, hypnotism, mental decay because of old age and
delirium (high temperature) etc..,

Lunatics: A lunatic is a person who is mentally deranged due to some mental strain or other personal
experience. He suffers from intermittent intervals of sanity and insanity. He can enter into contracts during the
period when he is of sound mind.
Idiots: An idiot is a person who has completely lost his mental powers. Idiocy is permanent whereas
lunacy denotes periodical insanity with lucid intervals. An agreement of an idiot is void.
Drunken/Intoxicated Persons: A drunken or intoxicated person suffers from temporary incapacity to
contract, i.e. at the time when he is so drunk or intoxicated that he is incapable of forming a rational judgement.
The position of a drunken or intoxicated person is similar to that of a lunatic.
Agreements Entered into by Persons of Unsound Mind are Void: However, there is one exception.
Persons of unsound mind are liable for necessities supplied to them or to anyone whom they are legally bound
to support. But even in such cases, no personal liability attaches to them. It is only their estate (property) which
is liable.

2. Person Disqualified By Law

Besides minors and persons of unsound mind, there are also other persons who are disqualified from contracting
partially (or) wholly. So, the contracts by such persons are void. If, by any provisional legislation, a person is
declared disqualified proprietor, he is not competent to enter into any contract in respect of the property.

The following persons are disqualified from contracting;
Alien Enemies: An alien (citizen of a foreign state) is a person who is not a citizen of India. When there
is a war between India and another country, that countrys citizen becomes an alien enemy and cannot enter into
contract.
Foreign Sovereigns and Ambassadors: They can enter into contracts and enforce those contracts in our
courts but they cannot be sued in our courts without the sanction of the Central Government unless they choose
to submit themselves to the jurisdiction of our courts.
Convict: A convict is one who is found guilty by a court and is undergoing sentence of imprisonment.
During the period of his imprisonment, he is incompetent to contract and also to sue on contract made before
conviction.
Company or Corporation: A company/corporation is an artificial person created by law. It cannot enter
into contract outside the powers, conferred upon it by its Memorandum of Association (object clause) or by the
provisions of its Special Act.
Insolvents: When a persons debts exceed his assets, he is adjudged insolvent and his property stands
vested in the Official Receiver or Official Assignee appointed by the court. Such a person cannot enter into
contracts relating to his property.

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Free Consent
Business Law - Free Consent - (Coercion, Undue Influence, Fraud, Misrepresentation, Mistake And Their
Essentials)

Meaning of Consent
Consent means an act of assenting to an offer. Two or more persons are said to consent when they
agree upon the same thing in the same sense.

Free Consent
Consent is said to be free when it is not caused by:

a) Coercion, or
b) Undue Influence, or
c) Fraud, or
d) Misrepresentation, or
e) Mistake.

Effect of Absence of Free Consent
When there is consent but it is not free (caused by coercion, undue influence, fraud or misrepresentation), the
contract is voidable, at the option of the party whose consent was so caused. When consent is caused by
bilateral mistake as to a matter of fact essential to the agreement, the agreement is void.

1. Coercion
Coercion means compelling a person to enter into a contract under a pressure or a threat. The Act defines
Coercion as follows:

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.

Example - A Hindu widow was forced to adopt a boy under threat that her husbands dead body would not be
allowed to be removed if she does not adopt the boy, She adopted the boy.

Essentials of Coercion

Coercion may proceed from any person and it is not necessary that it must be exercised by a party to the
contract.
It may be directed against any person and not necessarily against the other contracting party.
Coercion may be an act causing physical hardship or unlawful detention of property belonging to
another. It may also include those cases where the party is subjected to mental agony.

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2. 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 uses that position to obtain an
unfair advantage over the other.

3. Fraud
According to the Act, Fraud means and includes any of the following acts committed by the party to a contract,
or with his connivance, or by his agents, with intent to deceive another party there to or his agent, or to induce
him to enter into the contract:

a) The suggestion as a fact, of that which is not true, by one who does not believe it to be true;
b) The active concealment of a fact by one having knowledge or belief of the fact;
c) A promise made without any intention of performing it;
d) Any other act fitted to deceive; and
e) Any such act or om-mission as the law specially declares to be fraudulent.

Essential Elements

a) The fraud must be committed by a party to a contract or by anyone with his connivance or by his agent.
b) There must be a false representation and it must be made with the knowledge of its falsehood.
c) The representation must relate to a fact.
d) The fraud must have actually deceived the other party.
e) The party acting on the representation must have suffered loss.

4. Misrepresentation
The Act, defines the term misrepresentation, as follows:
a) The positive assertion, in a manner not warranted by the information to the person making it, of that which is
not true, though he believes it to be true.
b) Any breach of duty which, without an intent to deceive, gains an advantage to the person committing it, or
anyone claiming under him, by misleading another to his prejudice or to the prejudice of anyone claiming under
him.
c) 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.

Essential Elements
a) By a Party to a Contract: The representation must be made by a party to a contract or by anyone with his
connivance or by his agent.
b) False Representation: These must be a false representation and it must be made without knowledge of its
falsehood.
c) Representation as to Fact: The representation must relate to a fact. In other words, a mere opinion, a
statement of expression or intention does not amount to misrepresentation.
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d) Object: The representation must be made with a view to inducing the other party to enter into contract but
without the intention of deceiving the other party.
e) Actually Acted: The other party must have acted on the faith of the representation.

5. Mistake
According to section 20,21,22 erroneous belief about something.

Example - Making mistake in exam
Unilateral mistake - if only one person is under the mistake. Unilateral mistake is valid.
Bilateral Mistake - if both person is under the mistake. Unilateral mistake is void.
Mistake as to Indian law is valid
Mistake as to foreign law is void.

Contingent Contracts
Business Law - Contingent Contract, Essentials Of Contingent Contract

Contingent Contract Meaning

A contingent contract is a contract to do or not to do something, if some event collateral to such contract does
or does not happen.55 Example - A contracts to indemnify B upto Rs. 20,000 in consideration of B paying Rs.
1,000 annual premium, if Bs factory is burnt. This is a contingent contract. Contracts of insurance and
contracts of indemnity and guarantee are other examples of contingent contracts.

Essentials of Contingent Contract

a) Dependence on a Future Event: The performance of a contingent contract depends upon the happening or non
happening of some future event.
b) Collateral Event: The event must be collateral (i.e. incidental) to the contract.
c) Uncertain Event: The event must be uncertain.

Enforcement Or Rules Regarding Contingent Contracts

a) Enforcement of Contracts Contingent on Happening of a Future Uncertain Event:Contingent contracts to do
or not to d o anything if an uncertain future event happens can be enforced only when the event happens.

b) Enforcement of Contracts on the Non-happening of a Future Uncertain Event:Contingent contracts to do or
not to do anything if an uncertain future event does not happen can be enforced only when the happening of the
event becomes impossible, and not before.

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c) Contracts Contingent on Future Conduct of a Living Person: If the future event on which a contract is
contingent is the way in which a person will act at an unspecified time, the event shall be considered to become
impossible when such person does anything which renders it impossible that he should so act within
any definite time, or otherwise than under future contingencies.

d) Contracts Contingent on a Specified Event Happening Within a Fixed Time: Contracts contingent to do or
not to do anything if a specified uncertain event happens within a fixed time would become void if, at the
expiration of the time fixed, such event does not happen or if before the time fixed, such event becomes
impossible.

e) Enforcement of Contingent Contracts on Specified Event not Happening Within a Fixed Time: Contingent
contracts to do or not to do anything if a specified uncertain event does not hapen within a fixed time, may be
enforced when such event has not happened, or shall not happen within the time fixed.

f) Agreements Contingent on Impossible Events: Contingent agreements to do or not to do anything if an
impossible event happens, are void.

Discharge Of Contract

Business Law - Discharge of Contract And Modes Of Discharge Of Contract

Meaning
Discharge of a contract means discontinuation of the contractual relations between the parties. When the rights
and obligations arising out of a contract are extinguished, the contract is said to be discharged or terminated.

Mode of Discharge
A contract may be discharged in any of the following ways:

a) Discharge by Performance: A contract can be discharged by performance, which can be:

Actual - When the parties to the contract perform their promises in accordance with the terms of the
contract.
Attempted - When the promisor has made an offer of performance to the promisee but the offer has not
been accepted by the promisee.

b) Discharge by Mutual Consent or Agreement: Since a contract is created by mutual agreement, it can also be
discharged by mutual agreement. Discharge by mutual agreement can be done in any of the following ways:

Novation - Novation means the substitution of a new contract for the original contract either between the
same parties or between different parties.
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Rescission - Recission means cancellation of the contract by any party or all the parties to a contract
Alteration - Alteration means a change in the terms of a contract with the mutual consent. Alteration
discharges the original contract and creates a new contract.
Remission - Remission is the acceptance of a lesser sum than what was contracted for or a lesser
fulfillment of the promise made.
Waiver - Waiver means intentional relinquishment of a right under the contract.

c) Discharge by Subsequent or Supervening Impossibility or Illegality:

Cases where the doctrine of supervening impossibility applies
Cases not covered by supervening impossibility -

d) Discharge by Lapse of Time - A contract is discharged if it is not performed or enforced within a specified
period, called period of limitation. The Limitation Act, 1963 has prescribed the different periods for different
contracts , e.g. period of limitation for exercising right to recover a debt is 3 years.

e) Discharge by Operation of Law:

By death of the promisor.
By insolvency.
By merger.
By unauthorized material alteration.

f) Discharge by Breach of Contract - A contract is said to be discharged by breach of contract if any party to the
contract refuses or fails to perform his part of the contract or by his act makes it impossible to perform his
obligation under the contract. A breach of contract may occur in the following two ways:

Anticipatory breach of contract - It occurs when the party declares his intention of not performing the
contract before the performance is due.
Actual breach of contract - It can occur either on due date of performance or during the course of
performance.

Remedies For Breach Of Contract

Business Law - Meaning of Breach of Contract and Remedies of Breach of Contract

Meaning of Breach of Contract
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A breach of contract occurs if any party refuses or fails to perform his part of the contract or by his act makes it
impossible to perform his obligation under the contract. In case of breach, the aggrieved party (i.e. the party not
at fault) is relieved from performing his obligation and gets a right to proceed against the party at fault. Breach
of contract may either be anticipatory or actual.

Remedies of Breach of Contract
A remedy is the courses of action which are available to an aggrieved party for the enforcement of a right under
a contract. The various remedies available are:

a) Rescission of Contract: Rescission means a right not to perform obligations. Incase of breach of a contract,
the promisee may put an end to the contract. In such a case, the aggrieved party is discharged from all the
obligations under the contract and is entitled to claim compensation for the damage which he has sustained
because of the non-performance of the contract.

b) Suit for Damages: Damages are monetary compensation allowed for loss suffered by the aggrieved party due
to breach of contract. Damages may be of five kinds:

Ordinary or General or Compensatory Damages: (i.e. damages arising naturally from the breach).
Special Damages: (i.e. damages in contemplation of the parties at the time of contract).
Exemplary, Punitive or Vindictive Damages: (i.e. damages which are in the nature of punishment).
Nominal Damages: (i.e. awarded only for the name sake).
Liquidated Damages: means a sum fixed up in advance, which is a fair and genuine pre-estimate of the
probable loss that is likely to result from the breach.

c) Suit for Specific Performance: Means demanding the courts direction to the defaulting party to carry out the
promise according to the terms of the contract.

d) Suit for Injunction: Means demanding courts stay order Injunction means an order of the court which
prohibits a person to do a particular act.

e) Suit for Quantum Meruit: Quantum - Meruit means as much as is earned. In this suit, claim
is made to compensate for the work already done.

Contract of Indemnity
Business Law - Contract of Indemnity

Contract of Indemnity

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Meaning

The term Indemnity means to make good the loss or to compensate the party who has suffered some loss. 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, is called a contract of indemnity. For example - A and B go
into a shop. B says to the shopkeeper Let A have the goods, I will see you paid. The contract is one of
Indemnity.

Parties
The person who promises to make good the loss is called the Indemnifier (promisor), and the person whose
loss is to be made good is called the Indemnified or Indemnity holder (promisee).

Contract of Guarantee

Meaning

A contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case
of his default. For example - A and B go into a shop. A says to the shopkeeper, C, Let B have the goods, and
if the does not pay, I will. This is a contract of guarantee.

Parties to a Contract of Guarantee
There are three parties to a contract of guarantee.

Principal Debtor: The person in respect of whose default the guarantee is given is called the principal
debtor. In the above example B is the principal debtor.
Creditor: The person to whom the guarantee is given is called the creditor. C is the creditor in the
above said example.
Surety: The person who gives the guarantee is called the surety A is the surety in the above said
example.

Kinds of Guarantee
Guarantee may be classified under the following two categories:

Specific Guarantee: A guarantee which extends to a single debt or specific transaction is called a
specific guarantee. The liability of the surety comes to an end when the guaranteed debt is duly discharged or
the promise is duly discharged.
Continuing Guarantee: A guarantee which extends to a series of transactions is called a continuing
guarantee. A suretys liability continues until the revocation of the guarantee.

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Discharge of Surety from Liability

A surety is said to be discharged when his liability as surety comes to an end. A surety is freed from

his obligation under a contract of guarantee under any of the following circumstances:

a) Notice of Revocation: A specific guarantee cannot be revoked once it is acted upon. But a continuing
guarantee may at any time, be revoked by the surety as to future transactions by giving notice to the creditor.

b) Death of Surety: In case of a continuing guarantee the death of a surety also discharges him from liability as
regards transactions after his death, unless there is a contract to the contrary.

c) Variance in Terms of Contract: Any variance made without the suretys consent, in the terms of the contract
between the principal debtor and the creditor, discharges the surety as to transactions subsequent to the
variance.

d) Release or Discharge of Principal Debtor: The surety is discharged by any contract between the creditor and
the principal debtor, by which the principal debtor is released, or by any act of omissions of the creditor, the
legal consequence of which is the discharge of the principal debtor.

e) Arrangement by Creditor with Principal Debtor without Suretys Consent: A contract between the creditor
and principal debtor, by which creditor makes a composition with, or promises to give time to, or not to sue the
principal debtor, discharges the surety, unless the surety assents to such contract.

f) Creditors Act or Omission Impairing Suretys Eventual Remedy: If a creditor does any act which is
inconsistent with the rights of the surety, or omits to do any act, which is his duty to the surety requires him to
do, and the eventual remedy of the surety himself against the principal debtor is thereby impaired, the surety is
discharged.

g) Loss of Security: If the creditor loses (by negligence or carelessness) or without the consent of the surety,
parts with security given to him, the surety is discharged from liability to the extent of the value of security.

h) Invalidation of the Contract of Guarantee: (In between the creditor and the surety) A surety is also discharged
from liability when the contract of guarantee (in between the creditor and the surety) is invalid. A contract of
guarantee is invalid where such a contract has been obtained by means of misrepresentation or fraud or keeping
silence as to material part of the transaction, by the creditor or with creditors knowledge or assent. Failure of
co-surety to join a surety also makes the guarantee invalid.

Bailment & Pledge

Business Law - Bailment And Pledge

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Meaning of Bailment
The word Bailment is derived from the French word baillier which means to deliver. According to the Act.
A 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 direction of the person
delivering them.

The person delivering the goods is called the bailor. The person to whom the goods are delivered is called the
bailee.

Essential Features of Bailment
A bailment has the following characteristic features:

It is the delivery of movable goods.
The goods are delivered for some purpose.
Return of specific goods - The goods which form the subject matter of a bailment must be returned to
the bailor or otherwise disposed of according to the directions of the bailor, after the accomplishment of purpose
or after the expiry of period of bailment.

Kinds of Bailment
Bailment may be classified from the point of view of benefit or reward. The benefit may be exclusive
to the bailor or bailee or mutual. Bailment on the basis of reward may be:

1. Gratuitous: Neither the bailor nor the bailee is entitled to any remuneration i.e. loanof book to a
friend, depositing of goods for safe custody. It is for the exclusive benefit of the bailor or bailee.
2. Non Gratuitous: Here the goods are given for reward, remuneration or for some consideration,
e.g. car let out on hire, goods given for repairs or tailoring for charges.
3. Pawn or Pledge: Goods delivered to another as a security for money borrowed is called Pledge.

Bailment, Sale and License
In Sale the ownership is transferred to the buyer, whereas in the bailment the ownership in goods
is not transferred. In a contract of License, one party is permitted to place his goods in the premises
belonging to other person. Thus in a contract of license, the goods are not delivered to the licensor,
while in bailment the goods are delivered to the bailee for safe custody.

Duties of Bailee
His duties are as follows:

a) To take reasonable care of goods delivered to him.
b) Not to make unauthorised use of goods entrusted to him.
c) Not to mix goods bailed with his own goods.
d) To return the goods.
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e) To return accretions to the goods.
f) Not to set up any adverse title.

Duties of Bailor
His duties are as follows:

a) To disclose faults / defects in goods bailed.
b) To repay necessary expenses in case of gratuitous bailment.
c) To repay any extra ordinary expenses in case of non-gratuitous bailment.
d) To indemnify bailee.
e) To receive back the goods.

Rights of Bailee
His rights are as follows:

a) Enforcement of bailors duties.
b) To deliver goods to one of several joint bailors.
c) To deliver goods, in good faith, to bailor without title.
d) Lien - is of two types - general or particular. Bailee has particular lien unless the contract provides otherwise.
Particular lien means the right to retain that particular property in respect of which the charge is due. General
lien means the right to retain all the goods of the other party until all the claims of the holder against the party
are satisfied.

Rights of Bailor
His rights are as follows:

a) Enforcement of bailees duties.
b) To terminate bailment if the bailee uses the goods wrongfully.
c) To demand return of goods at any time in case of gratuitous bailment.

Pledge or Pawn
The bailment of goods as security for payment of a debt or performance of a promise is called pledge. The
bailor in this case is called the pawner. The bailee is called the pawnee.84 Pledge is therefor a kind of
bailment.

Agency
Business Law - Meaning Of Agency, Rights and Duties Of Agent

Definitions of Agent and Principal
An agent is a person employed to do any act for another or to represent another in dealings with third persons.
The person for whom such act is done, or who is represented, is called the principal.The contract which creates
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the relationship of principal and agent is called an agency. For example - X appoints Y to buy ten bags of
wheat on his behalf, X is the principal, Y is the agent and the contract between the two is agency.

General Rules of Agency
There are two important general rules regarding agency, viz:

What one person can himself lawfully do, can as well get it done by any other person. This rule is of
course, subject to some exceptions, e.g. in case of acts required to be performed personally like marriage.
What a person does by another, he does by himself. In other words the acts of the agent are,for all legal
purposes, the acts of the principal.

Who May Employ an Agent?
Any person who is competent to contract may employ an agent. A minor or a person of unsound mind cannot
employ an agent.

Who May be an Agent?
The Act lays down that as between the principal and third persons any person may become an agent. Thus
even a minor or a person of unsound mind can be appointed as agent, but in such a case the principal shall be
liable.

Creation of Agency
An agency may be created in any one of the following ways:

a) Agency by Express Agreement: An agency by express agreement is created when by spoken or written words
an express authority is given to an agent.

b) Agency by Implied Agreement: Implied agency arises when agency is inferred from the circumstances of the
case, or from the conduct of the parties on a particular occasion, or from the relationship between
parties.Implied agency includes the following:
Agency by Estopped: Agency by estopped arises where a person by his words or conduct induces third
persons to believe that a certain person is his agent. The person who induces as such is estopped or prevented
from denying the truth of agency.
Agency by Holding Out: This is a type of agency by estopped. Such agency arises when a person by his
past affirmative and positive conduct leads third person to believe that person doing some act on his behalf is
doing with authority.
Agency by Necessity: Agency by necessity arises under the following two conditions:
1. There is an actual and definite necessity for acting on behalf of the principal, and
2. It is impossible to obtain the consent of the principal.

c) Agency by Ratification: Where acts are done by one person on behalf of another, but without his knowledge
or authority, the latter may elect to ratify (adopt and accept) or to disown such acts. If he ratifies them, the same
effect will follow as if they had been performed by his authority.(Section 196) Ratification may be express or
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implied in the conduct of person on whose behalf the acts are done.

d) Agency by Operation of Law: Agency by operation of law is said to arise where the law treats one person as
an agent of another.

Meaning of Sub Agent
A sub-agent is a person employed by, and acting under the control of, the original agent in the business of the
agency.91 Thus a person employed by an agent is called sub-agent.

Meaning of Substituted Agent
An agent names or appoints a substituted agent at the request of the principal and thereafter drops out altogether
from the scene. Such person is an agent of the principal.

Duties of Agent
An agent has the following duties towards the principal:

a) To follow principals directions or customs.
b) To carry out the work with reasonable skill and diligence.
c) To render accounts.
d) To communicate, in case of difficulty.
e) Not to deal on his own account in the business.
f) Not to make any profit out of his agency except his remuneration.
g) On termination of agency by principals death or insanity to protect and preserve the interests entrusted to
him.
h) Not to delegate authority.

Right of Agent
An agent has the following rights against the principal:

a) To receive remuneration.
b) Retainer - out of any sums received on account of the principal.
c) Lien - to retain goods. Agent has a particular lien unless the contract provides otherwise.
d) To be indemnified against consequences of lawful acts.
e) To be indemnified against consequences of acts done in good faith.
f) To compensation for injuries sustained by him due to principals neglect or want of skill.
g) Stoppage of goods in transit.

Duties of Principal
The duties of principal are indirectly the rights of an agent.

Rights of Principal
The rights of principal are indirectly the duties of an agent.

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Essential Elements of a Valid Contract

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Business Law Notes for BBA I Year Complied by Komal Singh

Notes can be download from---------------------------------www.komalsinghchauhan.webs.com

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