LAW• It is a rule of external human action enforced by the sovereign political authority• Law is the body of principles recognized and applied by the state in administration of justice• Democracy can remain in a society of equals. The concept of equality of all persons in the eye of law is the basis of what is called Rule of Law
Business Manager• A Business Manager is always under Legal obligations• A practicing manager must know the Business laws• A manager is effective in managing the affairs of business, only if, he is aware about the laws to which he is subject to
• Business laws to which you are subject to as managers are : – Indian Contract Act, 1872 – Sale of Goods Act, 1930 – Negotiable Instruments Act, 1881 – Companies Act, 1956 – FEMA, Imports & Exports Laws – Tax Laws – Labour & Social Security Laws – Patents & Trade Mark Laws – Transfer of Properties Act – Environmental Laws etc….
THE INDIAN CONTRACT ACT, 1872
Contract: Inseparable Part of One’s LifeYou………….Buy groceriesBoard a trainHire a cabConsult a doctor or solicitorGive your any household gadget for repairEver realised!In each of the above and numerous such situations you enter into a contractual obligation.
Contract Defined Under The ActAn agreement enforceable by law is a contract. Section 2(h)Agreement: Every promise and every set of promises, forming the consideration for each other.A proposal (offer) when accepted becomes a promise.Mutuality is the very base of an agreement.Legal obligation: To become a contract , an agreement must be enforceable by law.
Contract Distinguished From AgreementElements. An agreement consists of an offer and its subsequent acceptance, whereas a contract is composed of an agreement and its legal enforceability.Essence of a legal relationship. An agreement may not create legal relationship. Parties entering into a contract essentially have a common intention of entering into legal obligation.Scope. All agreements may not be contracts but all contracts are primarily agreements.Enforceability by law. A contract is legally enforceable, whereas an agreement is not necessarily so.
Essentials of Contract (Sec. 10,29,56)• Offer & Acceptance• Intention to create legal relation• Lawful consideration• Capacities of parties or competence• Free consent• Lawful object• Not expressly declared to be void• Writing & Registration – Legal formalities• Certainty & Possibility of performance
Types of Contracts voidable and void contracts, contracts Executed contracts and executory contracts Express contracts and implied contracts Unilateral contracts and bilateral contracts Quasi contracts
Difference Between Void and Voidable ContractsS. Point of Void contract Voidable contractNo. difference1 Definition A contract, which ceases to be enforceable A voidable contract is an agreement which is by law, becomes void when it ceases to be enforceable by law at the option of one or more of enforceable [Section 2 (j)]. the parties thereto, but not at the option of the other(s) [Section 2 (i)].2 Nature & A void contract is valid and binding upon the A voidable contract is repudiate at the option of the validity parties when entered into, but subsequent aggrieved party. It remains a valid contract until it is to its formation, it becomes unenforceable set aside or rescinded by the party entitled to do so. due to certain reasons.3. Factors A valid contract may become void due to Coercion, undue influence, error, fraud, responsible supervening impossibility; change of law; a misrepresentation are the main factors responsible contingent contract due to emergence of an for rendering a contract voidable. uncertain event etc.4 Enforceability It cannot be enforced by It may be enforced or set aside at the option of the either party. aggrieved party.
Difference Between Void and Voidable Contracts5. Relationship A void contract under no When a voidable contract is rejected by the circumstances results in a aggrieved party it results in a void contract. voidable contract.6. Rights of third A void contract confers no rights or Rights acquired under voidable contract by an party legal remedies to the third party. innocent third party are not wiped out by such subsequent avoidance of the contract.7. Compensation In case of void contract question of In case of voidable contract, the party compensation or damages does not rescinding the contract can also claim arise on the non-performance of such damages. contract.8. Effect of lapse Lapse of reasonable time does not If a voidable contract is not rescinded by the of time render a void contract enforceable. It aggrieved party within reasonable time it may always remains void i.e., become enforceable at the option of the other unenforceable. party (i.e, who induced the contract).
DEFINING AN OFFERAn offer is a medium through which a personexpresses his intention to enter into acontractual obligation against a promise.Section 2(a)
Characteristics of a Valid Offer1. Offer can be expressed or implied2. Offer can be made to an individual or group of individuals or public at large.3. It must be to create a legal relationship4. It must be communicated to Offeree5. It can be conditional6. Bargaining gives rise to Counter Offer7. It must be made to create a legal relationship
Firm Offer Vs Invitation to Treat Examples of Invitations to Treat Auctions Display of goods for sale in shelf An invitation for tenders Red herring prospectus General advertisement of goods
AcceptanceAn acceptance is a expression of assent to theterms of the offer.When the person to whom the proposal ismade signifies his assent thereto, the proposalis said to be accepted. A proposal, whenaccepted, becomes a promise. Section 2(b)Acceptance to an offer is what a lighted matchto is to a train of gunpowder.Thus, an offer becomes irrevocable upon itsacceptance.
Legal Rules Governing a Valid Acceptance• Must be made by the offeree• Must be unconditional• Must be communicated to the offeror• May be in any form, oral or written• Must be in the mode prescribed by the offeror• Must be given within a reasonable time, if no time limit is set• Must be given while the offer is in force
Termination of Offer & Acceptance Revocation/withdrawal/cancellation of offer before the offeree accepts it Failure to fulfil a condition precedent to acceptance Death or insanity of either party Refusal or counter-offer Acceptance differs from the prescribed one Subsequent illegality or destruction of subject matterAcceptance can be revoked at any time before it iscommunicated to Offeror
• Gourav owned a house at Calcutta. Nibedita offered to buy that house for Rs.2 lacs and Gourav’s agent Debendra to whom the offer was given cabled to Gourav: “Have had offer for the house for Rs.2 lacs”. Then the agent got the reply from Gourav: “Will not accept less than Rs.3 lacs” Then Nibedita accepted Gourav’s price of Rs.3 lacs and confirmed the acceptance by a letter to the agent. But Gourav sold the the house for a higher price to Purnendu. Nibedita then sued Gourav for damages for breach of contract. Decide the case• There was no offer, but an invitation to an offer;
• The Managing Committee of a college in response to Prof. Ravi Ranjan”s application for the post of principal passed a resolution appointing Prof. Ravi to the post. But this decision was not communicated to Prof. Ravi. However Prof. Ravi came to know about this decision from one of the member of the Managing Committee. After waiting for six months, Prof. Ravi filed a case against the Managing Committee for breach of contract. Decide the case• Prof. Ravi will not succeed since there were no communication of the acceptance to him
• Dinesh agrees to pay Rs.5000 if Jagmohan marries Aishariya. But Aishariya marries Abhisek. Subsequently Abhisek divorced Aishariya and Jagmohan married Aishariya. Now Jagmohan claims Rs.5000 from Dinesh which he refuses. Decide• Jagmohan will fail. Contract became void on the ground of impossibility as soon as Aishariya married Abhisek.
• Priyanka promised to repay a loan of Rs.5000 to Manasi by 5 equal installments. She further agreed that if she defaults to pay any one installment then the whole amount of Rs.5000 will become due. Decide?• It is a void contract since the sum mentioned amounts to penalty which is not allowed under contract Act
Chandramuli agrees to buy a certain horsefrom Biswajit. It turns out that the horse wasdead at the time of bargain, though neitherparty was aware of the fact. Is the agreementvalid? • No the agreement is void . sec. 20(Mistake)
Prashant promises to obtain for Pritam an employment in the public service and Pritam promises to pay Rs. 1 lac to Prashant. Is this a valid contract?• No, it is void as the consideration is unlawful. Sec. 24(unlawful consideration)
A agrees to pay B a sum of money if B marriesC. C married D. B is still willing to marry Cwhen D dies. What is the consequence? • Now marriage of B to C shall be considered impossible vide sec. 34. Hence the contract is void
A promise to deliver 50 rice bags at B’swarehouse on 1st January. A brings thegoods as promised but after the usualbusiness hours. Decide • A has not performed his part of the promise. It is voidable at the option of B
P promised to marry L and L only. Pfurther promised to pay L a sum of Rs. 2lac in case P broke the promise. P brokepromise and married X. Can L recoverthe sum promised? No. Agreements in restraint ofmarriage is opposed to public policy.
Aditya, a merchant of Agra, made a contract to despatch 100quintals of gur to Akhil at Delhi at a certain price and Akhil paidRs.5000 as earnest money. None of the parties had knowledgethat gur transport from state to state is prohibited by Govt.Aditya owing to such prohibition could not transport the goods.Akhil claims damages for non performance as well as refund ofearnest money. Is he entitled to these remedies? • The agreement is void ab initio. Akhil can claim refund of earnest money but not damages
Chapter 3: Consideration Consideration is elemental to a contract. A promise is not binding unless made for something in return - consideration. For instance the seller of goods undertakes to transfer ownership in the goods for a price to be paid by the buyer for acquiring the ownership.
Consideration simply means that both thecontracting parties are bound to give something (ofvalue) to each other.Thus, the term ‘consideration’ is used in the sense ofquid pro quo, meaning thereby something in return.It may involve a positive act (i.e., doing something) oran abstinence (i.e., something given up).Consideration may be in the form of someright, interest, profit, or benefit accruing to oneparty, or some forbearance, detriment, loss, orresponsibility given, suffered or undertaken by theother.
1. A offers to sell his plasma TV set to B for Rs 50,000. B accepts the offer.Here, B’s promise to pay Rs 50,000 is the consideration for A’s promise to sellthe TV and A’s promise to sell the TV is the consideration for B’s promise to payRs 50,000.2. X applies for a loan from Y, who is unwilling to advance the amount, unless Sguarantees the repayment of the loan if X defaults and thereupon Y advancesmoney to X. In this case, the benefit conferred on X by Y at the surety of S is asufficient consideration on the part of Y as against the promise of S to repay theloan. In other words, the detriment which Y may not suffer by advancing loan toX due the guarantee of S is sufficient consideration on the part of Y in respect ofthe promise of S to repay the loan. 3. A promises to maintain B’s child, and B promises to pay A Rs 1,000 annuallyfor the purpose. Here, the promise of each party is the consideration for thepromise of the other party. (Illustration appended to Section 23)4. A promises Y, his debtor, not to file a recovery suit against him on B’sagreeing to repay the amount of loan along with a compound interest @ 12%p.a. within a year. A’s abstinence is the consideration for Y based on B’spromise to pay.
RULES GOVERNING CONSIDERATION1. Simple Contracts must be supported by Consideration In the absence of a valid consideration passing between the parties the general rule is that the agreement they have made will be of no legal effect. The existence of a consideration implies that the parties have devoted some reflection to the matter, and seriously desire their promises to have legal consequences. 2. Consideration Must Move at the Desire of the Promisor (Promissory Estoppels) Whatever is done must be done at the desire or request of the promisor and not voluntarily or at the desire of a third party. For instance, if A rushes to the rescue of B whose house has been trapped in fire, it is not a consideration but a voluntary act on the part of A. He cannot ask B to compensate him for the services rendered by him as B had never requested him to help. However, if A goes to B’s rescue at the latter’s express request, this will be regarded as consideration as A did not wish to do the act voluntarily.•
Consideration At Desire Of Third Person Not Valid In Durga Prasad vs Baldeo, ‘D’ the claimant had constructed, at his own expense, a market at the instance of the Collector of the District. The occupants of the shops i.e., shopkeepers in the market promised to pay the plaintiff a commission on the articles sold through their shops. Subsequently the shopkeepers refused to pay any commission. ‘D’ sued the shopkeepers against their alleged default. It was held that there was no consideration because the plaintiff (the promisee) had constructed market not at the desire or request of the defendants (the promisors), but at the desire of a third person (i.e., the Collector) to oblige him and thus, the contract between D and the shopkeepers was void.
Rules Governing Consideration3. Consideration May Move From the Promisee or Any Other Person This means that as long as there is a consideration for the promise, it is immaterial who has furnished it. This is sometimes referred to as Doctrine of Constructive Consideration. It may proceed from the promisee, or if the promisor has no objection, from any other person who is not a party to the contract. But the English Law on this point is different. In the United Kingdom a person to whom a promise was made can enforce it only if he himself provided the consideration for it. He cannot sue of the consideration for the promise moved from a third party.
Rules Governing Consideration• Consideration must have some Value• ‘Something of value’ must be given for a promise in order to make it enforceable as a contract.• An informal unnecessary promise therefore does not amount to a contract. A person or body to whom a promise of gift is made from purely charitable or sentimental motive gives nothing for the promise.• Consideration means something which is of some value in the eyes of the law. It may be some benefit to the plaintiff or some detriment to the defendant.
Rules Governing Consideration Past, Present or Future Consideration Depending upon the circumstances and facts of each case in India consideration may be in the past, present or future.• Past Consideration Past consideration means a past act or forbearance which took place and is complete (wholly executed) before the agreement is made. Past consideration may consist of services rendered at request but without any promise at the time or it may consist of voluntary services
Rules Governing ConsiderationConsideration Need not be Adequate But ItMust Be SufficientSufficiency of consideration is not the same thingas adequacy of consideration, at least in law.The word adequate in this context refers to fairlyequal to the promise given. On thecontrary, sufficiency is used here as a legalterm, and it means that what is promised mustbe real, tangible and have some actual value.Adequacy will be decided by the partiesthemselves.
Rules Governing ConsiderationPresent or Executed ConsiderationA consideration, which consists in the performance of an act orforbearance, is said to be executed at present.For instance A pays Rs 1000 to B, and B promises to deliver a certainquantity of wheat the following day. In this case, A pays the amountbut B has merely made a promise. Therefore, the considerationpaid by A is executed, whereas the consideration promised by B isexecutory. If A pays the price and B delivers the goods at the sametime, consideration is said to be executed by both the partiesFuture or Executory ConsiderationAn example is an agreement in which the seller promises to delivergoods next week, and the buyer agrees to pay for them on delivery.However, consideration on part of one party may be executed andin respect of the other executory.
Rules Governing ConsiderationConsideration must be LegalIt must not involve an illegal act. Forexample, promising to pay money to a witness to turnhostile. An illegal consideration makes the wholecontract invalid. It should be noted that attempting toenter into an illegal contract might itself give rise tocriminal liability.Moreover, consideration should not be physicallyimpossible or illusory. For example, promise to doublethe money by magic or to make a dead man alive, areimpossible acts and therefore such promises constituteno consideration.
STRANGER TO A CONTRACT AND STRANGER TO CONSIDERATION A stranger to a contract is one who is not a party to the contract. The rule that consideration ‘may move from the promisee or any other person’ implies that the consideration is permitted to be supplied by a third person (i.e., stranger) as well, thereby need not necessarily be supplied by the promisee himself. In other words, as long as there is a consideration in exchange of a promise, it is immaterial who has furnished it. Thus, a stranger to the consideration may maintain a suit. But the English Law on this point is different. Nonetheless, a stranger to a contract cannot sue upon a contract both under the British Law as well as the Indian Law. From this arises the doctrine of privity of contract, discussed below.
Examples on Strangers to Contracts1. A is indebted to B. A sells his property to Cwho undertakes to discharge his debt vis-à-visB. In case C fails to keep his promise, B has noright to sue C because of privity of contractbetween B and C. C is a stranger to the contract(between A and B) the example is based onJamna Das vs Ram Autar.
VALIDITY OF AGREEMENTS WITHOUT CONSIDERATION The Indian Contract Act contains certain exceptions, which make a promise without consideration valid and binding, stated as under. Natural Love and Affection• An agreement without consideration is valid if it is• made in writing,• registered,• made out of natural love and affection, and• between the parties standing in near relation to each other [Section 25 (1)]• In Rangaswamy an elder brother, on account of natural love and affection, promised to pay off the debts of his younger brother. The agreement was put into writing and was registered. The court held the agreement as valid and binding. Promise to Compensate for Past Voluntary Services As per Section 25 (2) a promise to compensate, wholly or in part, a person who has already done something voluntarily for the promisor, or something, which the promisor was legally compellable to do, is enforceable.
VALIDITY OF AGREEMENTS WITHOUTCONSIDERATION Illustrations: Compensation for Past Voluntary Services Example 1 A finds B’s purse and, gives it to him. B promises to give A Rs 50. This is a valid contract. Example 2 A supports B’s infant son. B promises to pay A’s expenses in doing so. This is a valid contract. Promise to Pay Time-barred Debt A promise made in writing and signed by the person to be charged therewith, or by his agent to pay a debt (wholly or in part) barred by the law of limitation is valid without consideration [S 25 (3)].
VALIDITY OF AGREEMENTS WITHOUT CONSIDERATION Completed Gift In case of completed gifts (i.e., gifts actually made), the rule no consideration no contract does not apply. Here nearness of relation between the parties is immaterial and even if it, there may not be any natural love and affection between them. Agency As per Section 185 of the Indian Contract Act, no consideration is required to create an agency. Guarantee In a contract of guarantee there is no consideration between the creditor and the surety [Section 127].