Business Laws - III B.Com (MKU)

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BUSINESS LAW
Mrs. R. Senthil Lakshmi
Assistant Professor
S.B.K.College
Aruppukottai
Unit – I
Law of contracts – definition – elements of a valid contract – classifications – offer –
acceptance – communication and revocation of offer and acceptance – consideration –
capacity of parties – free consent.
What is law?
The word “law” is a general term. It has different meaning for different people.
For example:
1. A citizen may think of law as a set of rules which he must obey.
2. A lawyer who practices law thinks of law as a vocation.
3. A legislator may look at law as something created by him.
4. A judge may think of law as guiding principles to be applied in making decisions.
Definition of law:
It is not possible to give an accurate definition of law. However, it can be defined in
a legal sense.
1. Accordingly, law includes all the rules and principles which regulate our relations
with other individuals and with the state.
2. In the words of Salmond, “law is the body of principles recognized and applied by
the state in the administration of justice”.
3. “Law is a rule of external human action enforce by the sovereign political
authority” – Holland
Needfor law:
Ignorance of law is no excuse. It is true that a layman cannot learn branch of law.
Yet it would be advantageous to each member if he acquaints himself with the general
principles of law. Particularly knowledge of mercantile law or commercial law or business
law is of importance to people engaged in commercial activities.
People feel that law is matter of great intricacy. Businessman would solve legal
decisions affecting his business with expert legal advice. There are certain elements of law
which indicate where difficulty is likely to arise and where legal advice is desirable.
Businessman comes into business contact with more number of persons. A general
knowledge of important legal principles enables the businessman to avoid conflict in
business contacts.
Contract:
Introduction:
The law relating to contract is contained in the Indian contract Act, 1872, the
English common law was applied by the British Indian courts. After 1781 the courts at

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Madras, Bombay and Calcutta applied Hindu law, where the parties were Hindus.
Similarly, where the parties were Mahomedans, Mahomedan law was applied and the law
of the defendant, where the parties belonged to different religions.
Indian contract Act came into force on 1st September, 1872. It substantially
embodies the principles of the English law. It extends to the whole of India except Jammu
and Kashmir. The principal relating to contract is general and certain special contracts
namely Bailment, Indemnity, Guarantee and Agency.
Objects of the law of contract:
The law of contract is that branch of law which determines the circumstances in
which promises made by the parties to a contract shall be legally binding on them. This law
lays down the remedies that are available against a person who fails to perform a contract.
The law of contract is of particular importance to people engaged in trade and commerce
and industry. These are the fields where sulk of transactions are based on contracts.
The law of contract consists of a number of limiting principles. According to these
principles parties may create rights and duties for themselves which the law will enforce.
Parties can create their own contractual rights and obligations without violating the
restrictions imposed by law. Thus the law of contract is that branch of law which
determines the circumstances in which promises made by the parties to a contract shall be
legally binding on the person making it.
Definition of contract:
1. Sir William Anson
“A legally binding agreement between two or more persons by which rights are
acquired by one or more to acts or forbearances on the part of the other or others”.
2. Pollock:
“Every agreement and promise enforceable at law is a contract”.
3. Salmond
“An agreement creating and defining obligations between the parties”
4. Section 2 (h) of the Indian contract Act, 1872
“An agreement enforceable by law’. In Section 2 (h) an agreement is defined as
“every promise or set of promises , forming consideration for each other”.
Features of contracts:
1. Agreement and enforceability:
The contract consists of two elements namely, an agreement and its enforceability by
law.
Section 2 (e) defines an agreement as every promise or set of promises forming
consideration for each other. A promise is defined under section 2 (b) when the person to
whom the proposal is made signifies his assets thereto, the proposal is said to be accepted.
A proposal when accepted becomes a promise. This means that an agreement is an
accepted proposal or offer. To form an agreement there must be an offer by one party and
its accepted by the other. Agreement = Offer + Acceptance

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2. Consensus ad idem:
Consensus ad idem is the essence of an agreement. It is the meeting of the minds of the
parties in full and final agreement. The parties to the agreement must have agreed about
the subject matter of the agreement in the same sense and at the same time.
Example: A owns two cars, one is ambassador and the other is Mauruti. He is selling
ambassador car to B. But B thinks he is purchase Mauruti. There is no consensus ad idem
and consequently no contract. To determine the existence of consensus ad idem it is usual
to employ the language of offer and acceptance. A says to B “will you purchase my Mauruti
car for Rs 400000?” If B says “yes” to it, there will be Consensus ad idem
3. Obligation:
To become a contract, and agreement must give rise to a legal obligation or duty. An
obligation is a legal tie which imposes upon definite persons the necessity of doing or
abstaining from doing a definite act. The obligation may relate to social or legal matters.
When an agreement gives rise to a social obligation, it is not a contract.
Examples: A agrees to sell his car to B for Rs 500000. A has an obligation to deliver the
car to B. similarly, B has the obligation to pay Rs 500000 to A as this agreement gives rise
to legal obligation it is called a contract.
A promises to sell his car to B for Rs 500000 received by him as the price of the car. In
this, there is an obligation of the part of A to deliver the car to B. So this agreement is a
contract.
4. Agreement is a wide term:
The term agreement is very wide. An agreement may be a social agreement or a legal
agreement.
Example: A invites B to a dinner on the eve of the New Year. B accepts the invitation.
Unfortunately A fall ill on that day and A cannot host a dinner to B. B cannot claim any
compensation from A as the agreement is a social one. A social agreement is not
contractual. So it is not enforceable in the court of law.
Essential elements of valid contract (or) All contracts are agreements but all agreements
are not contracts:
Section 2(h) of the Indian contract Act, 1872 states that a, contract is an agreement
enforceable by law. The agreements are two types: those that are enforceable by law and
those that are not. There may be an agreement which is not contract because the law does
not enforce it. There is the other type which will be called a contract, being enforceable by
law. Thus it is true to say that all contracts are agreements but all agreements are not
contracts. Contract = Agreement + Enforceability by law
To be enforceable an agreement must contain certain elements. These elements are
known as the essential elements of a valid contract. Such as follows:

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1. Offer and acceptance:
There must be two parties to an agreement. One party is making the offer and the
other party accepting it. It is essential that the terms of the offer must be definite.
Acceptance of the offer must be absolute and unconditional. The acceptance must be
according to the mode prescribed. Acceptance must be communicated to the offeror.
For example: A proposes to sell his bike to B for Rs 50000 and B conveys his acceptance.
The agreement comes into existence.
2. Intention to create legal relationship:
The intention of the parties entering into an agreement must be to create legal
relationship between them. Agreements of social or domestic nature do not contemplate
legal relationship.
Example: In Balfour vs Balfour a husband promised to pay his wife a household
allowance (£50) every month. Later the parties separated and the husband failed to pay the
amount. The wife sued for the allowances. It was decided that the agreement was outside
the realm of the contracts.
3. Lawful consideration:
Each party must give lawful consideration for the promise made by the other.
Section 20 (d) defines consideration. Consideration means advantage or benefit moving
from one party to the other. It is the essence of a bargain. It means something in return.
Consideration need not necessarily be in cash or kind. It may be an act or abstinence or
promise to do or not to do something. It may be past, present or future. But it must be real
and lawful.
Example: If A offer to sell his scooter to B for Rs 25000 and B accepts the offer, then for A
Rs 25000 is the consideration and for B the scooteris the consideration.
4. Competency:
There are least two parties to an agreement. The parties must be capable of entering
into a valid contract. They must have legal capacity to enter into contract. Under section 11
a person becomes competent:
i.Is of the age of majority, ii. Is of sound mind, iii. Is not disqualified from contracting by
any law to which he is subject.
That flaw in capacity to contract may arise from minority, lunacy, idiocy, drunkenness etc.
5. Free and genuine consent:
The consent of the parties to the agreement must be free and genuine. The consent
of the parties should not be obtained by coercion, undue influence, fraud,
misrepresentation, mistake. If the consent is obtained by any of these flaws, then the
contract is not valid.
6. Lawful object:
The object for which the agreement has been entered must not be illegal or immoral
or opposed to public policy. That is, the object of the agreement must be lawful and not one
of which the law disapproves.

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7. Agreement not declared void:
The agreement must not have been expressly declared to be void by any law in
force.
8. Certainty and possibility of performance:
The agreement must be certain and not vague or indefinite. If it is not possible to
ascertain its meaning it cannot be enforced.
Example: A agrees to sell 100 liters of oil to B for Rs20000. The agreement is uncertain
because the type of oil is not specified.
9. Legal formalities:
The contract should be in writing. Also some other formalities should be complied
with. The document in which the contract is to be incorporated is to be stamped. In some
other cases, the contract has to be registered. Thus required statutory requirement should
be complied with.
Classification of contracts:
Classification of contracts
Validity Formation Performance
Void Voidable Illegal Unenforceable
Express Implied Quasi
Contract Contract Contract
Executed Executory
Contract Contract
According to validity:
On the basis of validity contract can be divided into the following:
a. Void contract:
According to section 2 (i), a contract which ceases to be enforceable by law becomes
void. A void contract is a nullity from its inception. No rights accrue there under.
Sometimes a contract may be valid when entered into. But subsequently due to change in
the circumstances, it may become void.
For example: A promised to marry B. later on B died. In this case, the contract becomes
void on the death of B.
b. Voidable contract:
An agreement which is enforceable by law at the option of one or more of the parties
thereto is a voidable contract. Section 2 (i). All voidable contracts are those induced by
coercision, undue influence, fraud, misrepresentation. The person whose consent is not
freely given may avoid a contract.

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For example: A agreed to sell his car to B for Rs 50000. The consent was obtained by use of
force. The contract is voidable at the option of A. A can put an end to this contract, if he so
decides.
c. Illegal contract:
All illegal agreements are void.
For example: B borrows Rs 50000 from A and enters into a contract with an alien to
import prohibited goods. A knows of the purpose of the loan. The transaction between B
and A is collateral to the main agreement. It is illegal since the main agreement is illegal.
d. Unenforceable contract:
An unenforceable contract cannot be enforced in a court of law. It is because of
some technical defect absence of writing, the remedy has been barred by the lapse of time.
For example: the law recognizes the validity of the promissory note. But it cannot entorce
the same due to it being insufficiently stamped.
According to formation:
On the basis of formation, contract can be divided into the following:
a. Express contracts:
The contract is express, when the terms of the contract are reduced in writing or are
agreed upon by spoken words at the time of its formation.
According to section 9 where the offer or acceptance of any promise is made in
words, the promise is said to be express. An express promise results in an express contract.
For example: A writes a letter to B that he offers to sell his car for Rs 60000 and B in reply
informs A that he accepts the offer. This is an express contract.
b. Implied contracts:
The terms of the contract are inferred from the conduct or dealing between the parties.
For example: A boards a bus. It is implied from his conduct that A has entered into an
implied promise to purchase a ticket.
c. Quasi contract:
Certain relation resemble those created by a contract. A quasi contract is not a contract
at all. A quasi contract is created by law. It promises a legal obligation on a party who is
required to perform it. It is based on the equity that a person shall not be allowed to enrich
himself unjustly at the expense of another.
For example: A trade man leaves goods at B’s house by mistake. B treats the goods as his
own. B is bound to pay for the goods.
According to performance:
On the basis of performance, contract can be divided into the following:
a. Executed contract:
Executed means that which is done. In this type of contract both the parties have
performed their respective obligations.
For example: A has agreed to paint a picture for B for Rs5000. When A paints the picture
and B pays the price the contract is said to be executed

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b. Executory contract:
It is the type of contract in which both the parties have yet to perform their obligations.
For example: A agrees to engage B as his servant from the next month. The contract is
executory.
Difference between agreement and contract:
Agreement Contract
Offer and acceptance together constitute an
agreement
Agreement and enforceability together
constitute a contract
Every promise and every set of promises
forming consideration for each other is an
agreement.
A contract is an agreement enforceable by
law
Agreement may not create any legal
obligation
A contract necessarily creates a legal
obligation
An agreement is a wider concept Contract is a species of an agreement
Agreement is not a concluded or a binding
contract
Contract is concluding and binding.
Offer:
In order to make an agreement one of the parties must go to the other with an offer.
If the other party accepts the offer there is an agreement.
What is an offer?
Under section 2(a) of the Indian contract Act, 1872, an offer is known as a proposal.
An offer is a proposal by one party to another to enter into a legally binding agreement
with him. When one person signifies to another his willingness to do or abstain from doing
anything, he is said to make a proposal. The person making the offer is called the promisor
or offeror. Similarly, the person to whom it is made is the promise or the offeree.
For example: A says to B, “will you purchase my car for Rs 300000? In this case, A making
an offer to B. he signifies to B his willingness to sell his car.
How to make an offer?
An offer may be an express offer or implied offer. Also it may be a specific offer or
general offer.
Express offer:
When an offer is made by express words, spoken or written it is known as express
offer. For example: A say to B,” will you purchase my house in Chennai for Rs 2000000?
This is an express offer.
Implied offer:
An implied offer is one which is implied from the conduct of the parties or the
circumstances of the case.
For example: a transport company running a bus on a particular route makes an implied
offer. That is, it offers to carry passengers for a certain fare. When a passenger boards the

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bus, the acceptance of the offer becomes complete. (wilkie vs London passenger transport
board)
Specific offer:
Specific offer is one which is made to a definite person. It is accepted only by a
person to whom it is made.
For example: Mr. A makes an offer to B to sell his car for Rs 200000. The offer has been
made to a definite person, i.e., B. And B alone can accept it. This is a specific offer.
General offer:
When an offer is made to the world at large, it is called general offer.
Example: Cartill vs carbolic smoke ball company. The company advertised in newspapers
that a reward (£200) would be given to any person who contracted influenza after using the
smoke ball of the company according to its printed directions. One Mrs.Cartill used the
smoke balls according to the directions of the company. But she contracted influenza. It
was held she could recover the amount. It is on the ground that by using the smoke balls
she had accepted the offer.
What constitutes an offer?
Every proposal made by offeror dose not becomes an offer. The following are the tests
to determine whether or not an offer has actually been made.
1. Obvious intention:
It is essential that the offeror must show an obvious intention to be bound by it. The
offeror must signify to the offeree his willingness to do or abstain from doing
something. For example: A jokingly offers B to sell his house for Rs 500. B knowing
that A is not serious says “I accept”. A’s proposal does not constitute an offer.
2. Objective of the offer:
Offer must be made to obtain the assent of the offeree to such act or abstinence.
3. Definiteness of the offer:
The offer must be definite.
4. Communication of the offer:
The offer must be communicated to the offeree.
Rules as to offer:
An offer, in order to be regarded as lawful, must be made according to the following
rules.
1. Definiteness of offer:
The terms of offer must be definite and certain. If the term of an offer is vague, it
cannot create any contractual relationship. For example: A has two horses. One is white
and the other is brown. An offer to sell his white horse or his brown horse for Rs200000.
The offer is uncertain and void.
In Tayler vs portington, it was held that the offer was too vague to result in a
contractual relation. An offered to take a house on lease for three years at £285 per annum,

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if the house was “put into through repair and drawing rooms handsomely decorated
according to the present style”. Held, the offer was vague.
A owns three different cars. A says to B “I will sell you a car for Rs 200000. The
offer is not definite.
2. Offer vs invitation and statement:
An offer must be distinguished from an invitation. Display of goods by a shopkeeper
in his window is not an offer. It is merely an invitation to the public to make an offer.
Similarly, quotations, catalogues, advertisements etc. in the newspaper for sale of an article
do not constitute an offer. They are an invitation to the public to make an offer.
Example: Goods are sold under the self service system. Customer selects the goods
in the shop and takes them to the cashier for the payment of price. The contract is made
only when the cashier accepts the offer to buy and receives the price.
3. Communication of an offer:
An offer must be communicated to the offeree. Section 3 of the act states that the
offer may be communicated in any manner that shows the intention of the offeror to make
the offer. Or else the manner of communicating the offer is not communicated to the
offeree by the offeror, there can be no acceptance of it.
For example: In lalman vs Gauri dutt, S sent his servant L, to trace his missing nephew. He
then announced that anybody who traced his nephew would be entitled to a certain reward.
L traced the boy in ignorance of this announcement. Subsequently, when he came to know
of the reward, he claimed it. Held, he was not entitled to the reward. Thus an acceptance of
an offer, in ignorance of the offer, is no acceptance. It does not confer any right on the
acceptor.
4. Object of obtaining the assent:
Offer must be made with a view to obtaining the assent of the other party. An offer
made merely with a view to disclosing the intention of making an offer is not valid.
5. Personal offer, class offer and public offer:
When an offer is made to a definite person, it is a personal offer. If it is made to a
class of persons, like a group of scientists, it is a class offer. A public offer is made to the
world at large, that is to any member of the public.
For example: There is a public offer when A loses his dog. He advertises a reward for the
finder of the lost dog.
6. No term of non- compliance:
Offer should not contain a term the non- compliance of which may be assumed to
amount to acceptance. For example: A writes to B, “I will sell you my house for Rs 500000
and if you do not reply, I shall assume you have accepted the offer. In this case, the offer
cannot be considered as accepted if B does not reply.
7. Cross offers:
Suppose two parties make identical offer to each other, in ignorance of each other’s
offer. These are called cross offers.

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Acceptance:
When the person to whom the proposal is made signifies his or her assent thereto,
the proposal is said to be accepted. A proposal when accepted becomes a promise. Such
promise is commonly known as acceptance of an offer. A contract emerges from the
acceptance of an offer.
Meaning of acceptance:
Acceptance is the act of assenting by the offeree to an offer. It is the manifestation
by the offeree of his willingness to be bound by the terms of the offer. It is “to an offer what
a lighted match is to a train of gun powder. It produces something which cannot be recalled
or undone”. This means when the offeree signifies his assent to the offeror, the offer is said
to be accepted.
Express and implied acceptance:
Acceptance may be express or implied. It is express when it is communicated by
words spoken or written or by going some required act. It is implied whe n it is to be
gathered from the surrounding circumstances or the conduct of the parties. For example:
an auction sale, S is the highest bidder. The auctioneer accepts the offer by striking the
hammer on the table. This is an implied acceptance.
In Rao vs Rao, a widow promised to settle some immovable property on her niece if
the niece stayed with her in her residence. The niece stayed withers in her residence till her
death. Held, the niece was entitled to the property.
Who can accept?
Who can accept an offer depends upon the type of offer made. Generally acceptance
may be of particular offer or general offer or class offer.
Acceptance of a particular offer:
When an offer is made to a particular person, it can be accepted by him alone. If it
is accepted by any other person, there is no valid acceptance. If one proposes to make
contract with A, B cannot substitute himself for A without his consent.
For example: In Boulton v Jones, J offered to buy goods from a business owned by X, with
whom he had regular business. J did not know that the business had changed hands and B
became the new owner. The court held that J wanted to make his offer to X, and B had no
right to accept the offer.
So a personal offer must necessarily be accepted by the named offeree and by no
other person.
Acceptance of general offer:
A public offer is one which is made to world at large. Such offer may be accepted by
any member of the public.
Acceptance of class offer:

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If an offer is made to a class of persons, like a group of scientists, to cricketers or to
actors, it is a class offer. So a class offer must be accepted by a member of that class only.
How is an offer accepted? Or Legal rules as to acceptance:
1. Absolute and unconditional:
Under section 7(1) of the Act, acceptance must be absolute and unconditional. It means
that the offeree must accept the entire offer and not a part of it. He must not add a new
condition to it. If the acceptance is partial, qualified or conditional, it is treated not as valid.
In fact such acceptance becomes counter offer. Moreover, the original comes to an end.
For example: In Neale v Merrett the offeree accepted an offer fully but said that the he
would not pay in installments. The court held that his acceptance was conditional and
therefore, not valid.
In Routledge v Grant A made an offer to B to purchase a house with possession from 25th
July. The offer was followed by an acceptance suggesting possession from 1st August. Held,
there was no concluded contract.
2. Communicated to the offeror:
The acceptance must be communicated in some perceptible form. There must be an
external manifestation of the intention to do so. Mere mental determination on the part of
the offeree to accept an offer does not become valid. Acceptance must be communicated in
the usual manner or in a reasonable manner. For example: A transport company’s offer to
carry passengers may be usually accepted by stepping into the bus. The auctioneer accepts
by letting his hammer fall to the best bid.
3. Mode prescribed:
Acceptance must be according to the mode prescribed. For example: A makes an offer
to B and says: “if you accept the offer, reply by wire”. B sends the reply by post. It will be a
valid acceptance unless A informs B that the acceptance is not according to the mode
prescribed.
4. Reasonable time:
If any time limit is specified, the acceptance must be given within that time. If no time
limit is specified, it must be given within a reasonable time.
For example: On June 8, M offered to take shares in R Company. He received a
letter of acceptance on November 23. He refused to take the shares. Held, M was entitled to
refuse as his offer had lapsed. The reasonable period during which it could be accepted had
lapsed.
5. Acceptance cannot precede offer:
An acceptance which precedes the offer does not result in a contract.
For example: In a company shares were allotted to a person who had not applied for them.
Subsequently, when he applied for shares he was unaware of the previous allotment. The
allotment of shares previous to the application is invalid.
6. Acceptance cannot be implied from silence:

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The acceptance of an offer cannot be implied from the silence of the offeree.
For example: A wrote to B, “I offer you my car for Rs 300000. If I don’t hear from you
in sevendays, I shall assume that you accept. B did not reply at all. There is no contract.
Acceptance can be given only by the offeree or by his authorized agent. So
information received from unauthorized person is ineffective.
Communication of offer, acceptance and revocation:
To be complete an offer, its acceptance and their revocation must be communicated.
When the contracting persons are face to face, a contract comes into existence the moment
the offeree gives his absolute acceptance. But when they are at a distance, the offer, its
acceptance and their revocation are made through post.
Mode of communication (section 3):
Offer, acceptance or revocation may be communicated by words spoken, written.
For example: Installation of a weighing machine at a public place is an offer. Putting the
coin in the slot of the machine is the acceptance of the offer. Switching off the machine is
revocation of the offer.
When communication becomes complete? (section 4)
The communication of an offer becomes complete when it comes to the knowledge of
the person to whom it is made.
For example: A proposes by a letter to sell a house to B at a certain price. The letter is
posted on 10th July. It reaches B on 11th July. The communication of the offer is completed
on 11th July when B receives the letter.
Communication of acceptance (section 4):
The communication of acceptance becomes complete in the following circumstances:
a. It is put into course of transmission so as to be out of the power of the acceptor.
b. It comes to the knowledge of the proposer.
For example: B accepts A’s proposal. B sends his acceptance by a letter posted on 12th July.
The letter reaches A on July 14. The communication of the acceptance is completed as
against A when the letter is posted on 12th July.
Revocation of an offer:
Section 6 has described the modes in which an offer lapses. An offer comes to an
end, and is no longer open to acceptance under the following circumstances:
1. By notice: An offer may be revoked any time before acceptance but not afterwards.
An offer lapses when a notice of revocation has been given any time before its
acceptance is complete as against the offeror.
2. By lapse of time: When the proposer prescribes a time within which the proposal
must be accepted, the proposal lapses as soon as the time expires.
3. After expiry of reasonable time: If no time has been prescribed, the proposal lapses
after expiry of reasonable time.
4. By death or insanity: the offer lapses by death of the offeror provided that the
offeree comes to know about it before acceptance.

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5. By non- fulfillment of conditions: If the offeree fails to fulfil a condition precedent to
acceptance, the offer lapses.
6. By counter – offer: An offer also lapses, if a counter – offer is made to it.
7. By rejection by offeree: When offeree rejects the offer, it comes to an end. Similarly,
a proposal once refused is dead and cannot be revived by its subsequent acceptance.
Revocation of an acceptance:
“An acceptance may be revoked at any time before the communication of the
acceptance is complete as against the acceptor but not afterwards”. In fact, revocation
of acceptance amounts to withdrawal of the acceptance to a proposal by the offeree
himself. For example: A proposes, by a letter sent by post, to sell his house to B. B
accepts the proposal by a letter sent by post. B may revoke his acceptance any time
before the letter communicating it reaches A but not afterwards.
Consideration:
Introduction:
Consideration is one of the essential elements of a contract. An agreement made
without consideration is void.
The term consideration means something in return. That is, a person gives in an
agreement to the other party in return for such other party’s promise. For example: A
promise to sell a property to B. the price that B pays is his consideration for A’s
promise.
Definition of consideration:
1. In currie v. Misa the term consideration was defined as follows:
“ A valuable consideration in the sense of the law may consist either in some right,
interest, profit or benefit accruing to one party or some forbearance, detriment, loss or
responsibility given, suffered or undertaken by the other”
“The benefit accruing or the detriment sustained was in return for a promise given
or received”.
2. Justice Patterson defines consideration in the following words:
“Consideration means something which is of some value in the eye of law. It may be
some benefit to the plaintiff or some detriment to the defendant”.
3. Section 2(d) defines consideration as follows:
“When at the desire of the promisor, the promisee or any other person has done or
abstained from doing something, such as act or promise is called a consideration for the
promise.
4. Sri Fredrick Pollock defines consideration as follows:
“An act or forbearance of one party or the promise thereof, is the price for which
the promise of the other is brought and the promise thus given for value is enforceable”.
a. Positive act:
Consideration may be a positive act like doing something, paying money etc. In this
sense, consideration is in an affirmative form. For example: A promise B to guarantee

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payment of price of the goods which B sells on credit to C. In this case sale of goods by B to
C is consideration for A’s promise.
b. A return promise:
For example: A agrees to sell his car to B for Rs 150000. In this case, B’s promise to
pay the sum of Rs 150000 is the consideration for A’s promise to sell the car. Similarly, A’s
promise to sell the car is the consideration for B’s promise to pay the sum of Rs 150000.
Essentials and legal rules for a consideration:
1. Consideration must be given at the desire of the promisor:
It is essential that consideration must be given at the desire of the promisor. It means
that whatever the promise gives as the consideration must be a benefit done to the
promisor for the sacrifice made by him. If an act is done at the instance of a third party it
will not be a good consideration.
For example: In Durga Prasad v. Baldeo B promised to make some repairs for D. D in turn
promised to allow B a discount on any purchases made by B from his shop. It was found
later that B was already ordered by the collector of the district to make the repairs. Held
that B was promising to perform his legal duty. So he was giving no consideration for D’s
promise.
There is a reward advertised for the finder of a lost boy. A policeman on duty finds
the boy. He cannot claim the reward as he has performed his legal duty only.
2. Consideration may be given by the promise or by another person:
Consideration may be given by the promise or by another person. In England, however,
consideration must be given by the promise only and by no other person. Hence, if A agrees
to sell goods to B and B agrees to buy them. Every other person will be called a stranger to
contract and also stranger to consideration. Such a person gets no rights, not even
liabilities, under the contact.
In India consideration can be given by the promise or any other person. The term
stranger to consideration has a different meaning. If consideration is given by a person
other than the promise, the promise is the stranger to consideration. For example: A sell a
car to B. If C gives consideration, B will be called the stranger to consideration, but not a
stranger to contract.
3. Consideration may be an act, abstinence or forbearance or a return promise:
In Debi Radha Rani vs. Ram Dass, D was ready to sue her husband for maintenance
allowance. As husband agreed to pay her a monthly allowance by way of maintenance, she
forbears to sue. Held forbearance on the part of D to file a suit is a sufficient consideration.
4. Consideration may be present, future or past:
a. Present consideration:
Present consideration is also known as executed consideration. It is given with the
promise as soon as the contract is made. For example: contract to travel by a bus is an
agreement with present consideration.

15. 15
b. Future or executor consideration:
Future or executor consideration is given after the promise. That is consideration
passes subsequently to the making of the contract. For example: If goods are bought on
credit, the buyer gives future consideration.
c. Past consideration:
When consideration is given before the contract is made, it is known as past
consideration. For example: A saves B’s house from destruction by fire. This is purely
voluntary act. As such there is no agreement between A and B. Later B promises to give A
reward for his work. B’s promise becomes a new agreement in which A’s voluntary act is
regarded as past consideration.
5. Consideration need not be adequate:
Consideration means something in return. It need not necessarily be equal in value to
something given. For example: A promises to deliver a watch worth Rs 1000 for Rs 50. The
inadequate of the price by itself is not a ground for A’s avoiding the contract.
6. Consideration must not be illusory:
Consideration must be real. Physical or legal impossibility of the thing promised makes
it unreal consideration. For example: a man promises to make two parallel lines meet or to
discover treasure by magic. This is illusory consideration. Consideration should not be
vague.
7. Consideration must be legal:
The legality of consideration is the essential element of contract. When the
consideration is unlawful, the courts do not allow an action on the agreement. Unlawful
consideration makes the contract.
Stranger to contract:
The Latin maxim says that a third party to a contract has no rights and no liabilities
under it. The general rule of law states that only parties to contract may sue and be sued on
the contract. For example: In Jamuna Das vs. Ram Autar, X mortgaged his property to J.
later X agreed to sell the property to R. R promised that he would pay the mortgaged
money directly to J out of the amount to be paid by him as the price. R did not pay the
amount and a suit was filed against him by J. the court held that as there was no contract
between J and R, J could not file a suit against him.
Consequences of the doctrine of privity:
The following are the consequences of the doctrine of privity.
a. A person who is not a party to a contract cannot sue upon it. Even if the contract is for
his benefit and he provided consideration he cannot sue upon the contract.
b. A contract cannot confer rights on a person who is not a party to that contract.
Exceptions:

16. 16
In the following cases, a stranger to a contract can enforce certain rights promised
under a contract.
a. Assignment of a contract:
A party to a contract may assign his rights to a third party. Such assignee may enforce
the right. For example: S sells goods to B and is entitled to receive price. S may send notice
to B assigning his right to receive the price in favour of a third party X. X, the assignee may
sue for the price of the goods.
b. Transfer of a negotiable instrument:
A negotiable instrument executed between certain persons may be transferred. Then
the transferee acquires the rights as also the liabilities, attached to the instrument.
c. Trust:
A person may make a trust of his property. Then there is an agreement between him
and the trustee. The beneficiaries under a trust may compel the trustee to perfume the
terms of the trust. For example: A makes a trust of his properties for his children B, C and
D. technically the children are not parties to the contract. But they are the beneficiaries
under the trust created by A. so they have the right to enforce the terms of the trust.
d. Family settlement:
A beneficiary under a family settlement may enforce its terms. In Shuppu ammal vs.
Subramanian two brothers settled their dispute through a family settlement in writing. In
the family settlement they promised to give maintenance amount to their mother. The court
held that the mother acquired the right to enforce the right to receive the amount.
e. Marriage settlement:
Guardians are allowed by social and religious laws to make marriage contracts for their
minor wards. Any marriage settlement made by them may be enforced by such minor
persons. In Khwaja Mohamed Khan vs. Husaini begum the father- in -law promised to pay
an amount as kharchi – I – pandan to the daughter – in – law. The daughter – in – law
could enforce the promise though it was made to her father.
Rule (or) Exceptions to contract without consideration:
There are certain exceptions to the rule that a contract without consideration is void. In
such cases agreement are enforceable eventhough they are made without consideration.
1. Natural love and affection: Section 25 (1)
A promise given out of natural love and affection is enforceable through there is no
consideration. But all the conditions must be, fulfilled. That is, the promise must be written
and registered; the parties must be near relatives and they must have natural love and
affection between themselves.
For example: In Rajlukhy vs. Bhootnath the husband promised a properly to the wife
in order to make an arrangement. Subsequently, they were having serious differences and
quarrels. The court held that there was no natural love and affection between the parties
and the agreement was void for absence of consideration.

17. 17
2. Voluntary compensation:
A promise to compensate a voluntary act shall be enforceable without consideration.
For example: X help Yin some way. Y promises to pay some money in return to X. The
agreement is valid. This is so because X’s good work will be treated as past consideration
for Y’s promise.
3. Time barred debt:
A promise by a debtor to pay a time – barred debt is enforceable that it is made in
writing and is signed by the debtor or by his agent. The promise may be to pay whole or
part of the debt. Here it may be mentioned that a debt becomes time barred if it is not
claimed for a period of three years from the date it becomes due.
For example: D owes C Rs 1000 but the debt is barred by the limitation Act. D signs a
written promise to pay C Rs 500 on account of the debt. This is a contract.
4. Contemplated gift: Section 25
A contemplated gift cannot be avoided for absence of consideration. For example: R
promises to make a gift S. The promise is void because S gives no consideration for it. But if
R has already given the promised article to S, he cannot take it back.
5. Agency: Section 185
No consideration is required between the principal and agent to create an agency.
For example: Mohamed Moinuddin vs. Ahmed Ali the court interpreted the meaning of
this section. If the principal does not wish to give any consideration to the agent, the fact
must be stated in the contract.
Capacity to contract:
What is capacity?
The term “Capacity to contract” is defined in Section 11 of the Indian contract Act
1872.
“Every person is competent to contract who is of the age of the 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”.
Who are incompetent to contract?
According to section 11, the following persons are incompetent to contract:
1. Minors
2. Persons of unsound mind
3. Persons disqualified by any law to which they are subject.
1. Minor:
A minor is a person who has not attained the age of majority. For the purpose of
entering into contract, “the age of majority” is eighteenyears.
Section 3 the Indian Majority Act, 1875 states that
A person becomes a major on completion of his 18th year of age. However, in the
following cases he is a major on completion of his 21st year of age.
i. When the court of wards appoints a legal guardian for him and his property.

18. 18
ii. Any other court appoints a guardian when the parents are divorced.
Agreements made by minors are void:
In Mohair Bibee vs. Dharmodas Ghose the privy council stated that in India
minor’s agreement is absolutely void. In this case, D promised to mortgage his property to
Braham Dutt for a loan to be taken by him. D was a minor. So the court held that the
agreement could not be enforced. Any amount that was given to the minor as a part of the
proposed loan could not be claimed back by D. On a void agreement the court would not
order the minor to pay any money.
Cases where agreement made by minor will be enforced for limited purpose only:
In India all agreement made by a minor is void. However, an agreement made by a minor
is enforceable for limited purpose only.
1. Liability for necessaries.
2. Minor as agent.
3. Can be a party to a negotiable instrument.
4. Can be partner for profit only
5. Right of membership in a company.
6. Benefit under an agreement.
7. Agreement for the minor’s education on training.
2. Persons of unsound mind:
The parties to the contract should be of sound mind. Section 12 deals with
soundness of mind. “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 is capable of understanding it and of forming.
“A person, who is usually of unsound mind but occasionally of sound mind, may
make a contract when he is of sound mind. A person who is usually of sound mind but
occasionally of unsound mind may not make a contract when he is of sound mind”.
For example: Idiots, Lunatics, Durunken.
Meaning of soundness of mind:
Soundness of mind of a person depends on two facts:
a. His capacity to understand the contract of the business concerned, and
b. His ability to form a rational judgment as to its effect upon his interests.
3. Other persons:
Person disqualified by law include the following:
a). Alien enemies b).Foreign sovereigns and Ambassadors c). Corporations and companies
d). Insolvents e). Convicts. f). married Women g). professional persons.
Free consent:
Meaning:
Consent: Section 13

19. 19
Consent means acquiescence or 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”. For example:
A had two cars, one is of green color and the other is white. A offered to sell his green car
to B for Rs 200000. B accepted the offer believing it to be for the white one. In this case, no
contract arises between A and B as there is no real consent of the parties.
Free consent:
In a valid contract the consent of the parties must be freely given.
Section 14 of the Act states that consent is said to be free when it is not caused by-
a. Coercion section 15
b. Undue influence section 16
c. Fraud section 17
d. Misrepresentation section 18
e. Mistake section 20, 21 and 22
Coercion: section 15
Meaning:
Coercion means that one of the parties has got the consent of the other to the
agreement by-
i.Committing an act prohibited by the Indian penal code, that is a crime.
ii. Threatening to commit it.
iii.Detailing property or
iv.Threatening to detain it.
For example: Ranganayakamma vs. Alwar setty, a young widow of 13 years was forced to
agreed to adopt a boy to her husband under the threats of preventing the dead body of her
husband from being removed for cremation. The widow adopted the boy and subsequently
applied for cancellation of the adoption. Because her consent was not free but induced by
coercion.
In Muthiah chettiar Vs. Karuppan chetty, an accountant held back from his master
certain important papers until the master promised to release him from certain charges of
misappropriation. The court held that the release could be cancelled on the ground of
coercion.
When coercion can be established? – essentials:
1. There must not be merely a threat. The act should be such as to be punishable
under the Indian penal code.
For example: Amiraju vs. Seshana a husband threatened to commit suicide if his
son and wife refused to executed a release in consequence of that threat. It was held
that the release was obtained by coercion.
2. Coercion may proceed from anybody. Even a person who is not a party to the
contract may employ coercion.
3. Coercion includes physical compulsion, fear and evenmenace to goods.

20. 20
4. The act must have been done or threatened with the intention of causing any person
to enter into a contract.
5. It does not matter whether the Indian penal code is or is not in force in the place
where the coercion is employed.
Effect coercion:
The effect of coercion is explained in section 19, when consent to agreement is caused by
coercion, fraud or misrepresentation, the agreement is a contract voidable at the option of
the party whose consent was so caused.
For example: a railway employee refuses to deliver up certain goods to the consignee. The
intention was to obtain an illegal charge for the carriage. The consignee paid the charge
and obtained the goods. It was held that he was entitled to recover so much of the charge as
was illegally excessive.
Undue influence: Section 16
Definition:
Undue influence as follows; “A contract is said to be induced by undue influence
where the relations subsisting between 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”.
So undue influence happens when:
i. One of the parties is in a position to dominate the will of the other.
ii. He obtains an unfair advantage over the other.
Presumption as to undue influence or when a person is deemed to be in a position to
dominate the will of the other?
According to section 16(2). A person is deemed to be in a position to dominate the will
of the another in the following cases.
i. Where he holds a real or apparent authority over the other.
ii. Where he stands in a fiduciary relation to the other.
iii. Where he makes a contract with a person whose mental capacity is temporarily
or permanently affected by reason of age, illness, or mental, or bodily distress”.
Effect of undue influence:
Section 19, A states that a contract affected by undue influence is voidable at the option
of the aggrieved party. For example: Mannu singh vs. Umadai pande a promise by a
disciple to give all his properties to ‘guru’ was avoided on the ground of undue influence.
Difference between coercion and undue influence:
Coercion Undue influence
1. Coercion means physical pressure.
2. Coercion can be an act of crime. It
may be punishable under criminal
law.
3. Coercion can be directed against a
third party.
1. Undue influence is mental pressure.
2. Undue influence is not a criminal
act.
3. Undue influence must be exercised
upon the other party to the

21. 21
4. The complainant must give proof of
Coercion
contract.
4. The law presumes Undue influence.
The complainant is not required to
give any proof of it.
Fraud: Section 17
“Fraud means and includes any of the following acts committed by-
a. A party to a contract, or
b. With his connivance; or
c. By his agent, with intent to deceive another party thereto or his agent, or to induce
him to enter into the contract.
i. The suggestion, as to fact, of that which is not true by one who does not
believe it to be true;
ii. The active concealment of a fact by one having knowledge or belief of the
fact;
iii. A premise made without any intention of performing it;
iv. Any other act fitted to deceive
v. Any such act or omission as the law specially declares to be fraudulent.
When contract is not voidable? (Exception)
1. Deceit which does not deceive is no fraud.
2. Negligence is no fraud.
3. Ignorance is no fraud.
4. Waiver.
Whether silence is fraud?
Section 17 explains that silence as to facts will not be taken as fraud. In this context
the following rules are studied.
1. Mere silence without any duty to speak does not amount to fraud.
2. Mere silence as to facts likely to affect the willingness of a person to enter into a
contract, is not fraud.
3. Silence is fraudulent where-
a. Regard being had to the circumstances of the case, it is the duty of the person
keeping silence to speak, or
b. The silence is in itself equivalent to speech.
4. Where there is a duty to speak, non-disclosure amounts to breach of duty. If it is
made with an intent to deceive, it is fraudulent. If it is made without such intention,
it is misrepresentation.
Effects of fraud:
When a party is induced to enter into a contract by fraud, the following remedies
are available:
1. The contract is voidable at the option of the party whose consent was so caused.

22. 22
2. He may insist that the contract shall be performed. He may also insist that he shall
be put in the position in which he would have been if the representation made had
been true.
3. He may rescind the contract within reasonable time.
4. He has a right to sue for damages.
Misrepresentation:
A representation means a statement of fact made by one party to the other relating
to some matter essential to the formation of the contract. The purpose of representation is
to induce the other party to enter into the contract. But a representation when wrongly
made is termed as a misrepresentation.
Definition of misrepresentation: Section 18
Misrepresentation – is a false statement of fact made by a party to a contract, but
a). believing it to be true or without knowing it to be false; or
b). innocently and negligently in breach of any duty or c). innocently and thereby
causing the other party to make a mistake about the subject matter of the agreement.
Meaning of misrepresentation:
Misrepresentation may be either innocent or intentional or deliberate with an intent
to deceive the other party.
For example: in Johnson vs. Crowe, the seller of a boiler misled the buyer by negligently
stating that there was a through road connection between the buyer’s town and that of the
seller. The court held that the contract could be cancelled on the ground of
misrepresentation.
Requirements of misrepresentation:
a. Mere expression of opinion does not amount to misrepresentation. It should a
representation of a material fact.
b. Misrepresentation must be made before or at the time of formation of a contract.
c. Misrepresentation should be made to induce the other party to enter into a contract.
It must actually have been acted upon.
d. It must be wrong but the person who made it honestly believed it to be true.
e. It must not have been made to deceive the other party.
Effects of misrepresentation:
The party whose consent is caused by misrepresentation can –
a. Avoid the contract.
b. Rescind the contract within a reasonable time.
c. May insist that the contract shall be performed and that he shall be put in a position
in which he would have been if the representation made had been true.
Difference between misrepresentation and fraud:
Misrepresentation Fraud
1. There is no intention to deceive. There is intention to deceive.
2. A false innocent statement without A false statement deliberately made to

23. 23
any intention to deceive is
misrepresentation
deceive is fraud.
3. The person making the statement
believes it to be true.
The person making the statement does not
believe it to be true.
4. It makes the contract voidable at
the option of the party injured.
Besides making the contract voidable at
the option of the party injured, it gives
right to an independent action in tort.
5. The contract cannot be avoidable if
aggrieved the party could have
discovered the true.
This plea cannot be raised in case of fraud
except in cases where silence amounts to
fraud.
Mistakes: (section20 and 22)
Mistake means a wrong belief in something, whether it is a point of fact or a point of
law. Thus mistake may be a i). mistake of law ii). mistake of fact.
Mistake of fact:
A mistake of fact may be a bilateral mistake or a unilateral mistake.
1. Bilateral mistake:
A mistake of fact is bilateral when both the parties are under mistake. Such mistake
relates to a matter essential to the agreement. Bilateral mistake renders the agreement
void. For example: P is entitled to an estate for the life of Q. P agrees to sell it to R. Q was
dead at the time of agreement. But both the parties were ignorant of the fact. The
agreement is void.
2. Unilateral mistake:
In unilateral mistake only one party is under a mistake as to a matter of fact. The
agreement is not rendered void. For example: Haji Abdul Rahman vs. Bombay & Persia
Steam Navigation Company, R wanted to charter a ship for the 15th day after Haj.
According to him the date in English calendar was 10th August. Later, he came to know
that the correct date would be 19th July. The court held that since only one party made the
mistake, the agreement could not be avoided.
Mistake as to identity of a person:
Mistake as to identity of the other person will make a contract void. This is
particularly true when the intention was to enter into a contract only with a particular
person other than the person with whom the contract has been enter into. A mistake as to
the identity of a person contracted with would invalidate the contract when such identity is
essential to the contract.
For example: King’s Nortan Metal Co., vs Edridge Merrett & Co., the plaintiff were metal
manufacturers. They received a latter from “Hallam & Co.” But it was fabricated by
Mr.Wallis who obtained the wire and sold it to the defendants. The plaintiffs sued the
defendants claiming that the contract with Hallam and company was void and that the
wire was still their property. The court held that the contract was not voidable on the
ground of mistake but it was only voidable for fraud.
Mistake as to subject matter:

24. 24
Sometimes both the parties believe in existence of certain state of things which in
reality do not exist. Such contract shall be void. Suppose two persons contract for the sale
of an article, each having a different article in mind. The contract is void on the ground of
mistake as to the subject matter of a contract. Similarly, the article may not be in existence
at the time of the contract. The parties are ignorant of the fact. The agreement is void.
In Raffles vs. Wichelhaus, a contract was entered, into for the sale of cargo to arrive Ex.
Peerless from Bombay. There were two ships by that name sailing from Bombay. Each
party had different ship in mind. The contract was held to be void for mutual mistake.
Mistake of law:
Mistake of law is of three kinds. They are-
1. Mistake as to Indian law:
Every person is expected to know the law of his country in which he is living. He is
expected to be conversant with the law of his country. Hence the maxim-“ignorance of law
is no excuse”. Therefore, mistake of law is no excuse. It does not give right to the parties to
avoid the contract. The effect of mistake of law has been stated in section 21. “A contract is
not voidable because it was caused by a mistake as to any law in force in India”.
For example: M and N make a contract on the erroneous belief that a particular debt is
barred by the Indian law of limitation. The contract cannot be avoided on the ground of
mistake. Because each one of them is expected to know the law of his own country.
2. Mistake as to foreign law:
Mistake as to a foreign law the same effect as a mistake of fact. Therefore the contract
cannot be avoided.
For example: M and N purchase and sell a plot of land of 195sq. meters in Duflin believing
that a house can be constructed over it. Actually in Duflin no house can be constructed on a
plot less than 200sq. meters. The contract can be avoided.
3. Mistake as to private right of the party:
Existence of private right is a matter of fact. A mistake about such right is considered
as a mistake of fact. Therefore contracted can be avoided on that basis.
For example: M purchase a land from N. After building a house on that land M discovered
that the real owner of the land was Q. This fact was also unknown to N. He had sold the
land on an honest belief that the land did belong to him. It was held that the contract was
void on account of mutual mistake. M was entitled to the return of the consideration paid
by him.