BA 9207 - LEGAL ASPECTS OF BUSINESS

UNIT 1 MERCANTILE ANA COMMERCIAL LAW

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TOPICS COVERED : The Indian Contract Act 1872

Essential of valid contract – Void agreement, Definition of contract – Formation of contract,Performance of contract – Breach of contract and its remedies, Quasi Contract

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DEFINITION OF CONTRACT

According to section 2(h) of the Indian Contract Act: “An Agreement enforceable by law is a contract”. A Contract therefore, is an agreement, the object of which is to create a legal Obligation i-e a duly enforceable by law.

DEFINITION OF AGREEMENT

When an offere made by one (offerer) is accecpted by the other, it becomes a promise. Sec 2 (e) of the Indian contract act stats that every promise and every set of promises, forming the consideration for each other, is an agreement. It implies that an agreement is an accepted proposal. It follows that every agreement is made of a proposal from one side and its acceptance by the other.

1. VOID AGREEMENT

An Agreement not enforceable by law is said to be void.(section (g)).

2. VOLID (legal) ARGEEMENT

An Agreement enforceable by law. It is the sum of a an agreement and an intention to create legal obligation. Obligation (commitment) requires the parties must do or abstain (withdraw) from doing something. However such abstainence may relate to social and legal matters.

3. VOIDABLE AGREEMENT

A voidable agreement one which is enforceable by law at the option of one or more of the parties thereto, but not at the option of others.

4. ILLEGAL AGREEMENT

An illegal agreement is one which is against the provision of law.

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ESSENTIAL ELEMENTS OF A VALID CONTRACT:

- All agreements are not contracts. Only that agreement which is enforceable at law is a contract.

- An agreement which is not enforceable at law cannot be a contract. Thus, the term agreement is wider in scope than contract.

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

- An agreement, to be enforceable by law, mist possesses the essential elements of a valid contract as contained in Section 10 of the Indian Contract Act.

- 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 are not expressly declared to be void”AGREEMENT = OFFERE + ACCEPTANCECONTRACT = AGREEMENT + ENFORCEBILITY BY LAW

The following are the essential elements of a valid contract:

1. Offer and Acceptance: In order to create a valid contract, there must be a ‘lawful offer’ by one party and ‘lawful

acceptance’ of the same by the other party.

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The adjective ‘lawful’ means ‘offer and its acceptance’ must confirm to the rules laid down in the Indian Contract Act regarding valid ‘offer and acceptance’ and ‘its communication’.

2. Intention to Create Legal Relationship: In case, there is no such intention of the part of parties, there is no contract. Agreements of

social or domestic nature do not contemplate legal relations. The leading case on this point is Balfour vs. Balfour(1919)

Example:An agreement to have lunch at a friend’s house is not an ‘agreement intending to create legal relations, Agreements between husband and wife, generally lack the intention to create legal relations.

3. Lawful Consideration: Consideration has been defined in various ways. According to Blackstone, “Consideration is

recompense given by the party contracting to another.” In the word of Pollock, “Consideration is the price for which the promise of another is brought.” Consideration is known as quid pro-quo. It is an essential element in a contract. Promises made for nothing are enforceable under the

Indian Contract Act. The law enforces only those promises which are made for consideration. An agreement without consideration subject to certain exception is void.

4. Capacity of Parties: The parties to an agreement must be competent to contract. If either of the parties does not have the capacity to contract, the contract is not valid. According to Section 11, “every person is competent to contract, who is of the age of majority

according to the law to which he is subject, and who is of sound mind and is not disqualified from contracting by any law to which he is subject.

Accordingly the following persons are incompetent to contract.a) Minorsb) Persons of unsound mindc) Persons disqualified by law to which they are subject.

5. Free Consent: Consent means the parties must have agreed upon the same thing in the same sense. According to Sec. 13, “Two or more person are said to consent when they agree upon the same

thing in same sense.” This is called consensus ad idem in English Law.Example:‘A’ who owns two cars, one Maruti and other Santro, offers to sell ‘B’ one car. ‘A’ is intending it to be the Maruti car. ‘B’ accepts the offer thinking that it is the Santro. There is no consensus and hence no contract.

According to Sec. 14, Consent is said to be free when it is not caused by1) Coercion2) Undue influence3) Fraud

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4) Miss-representation5) Mistake.

6. Lawful Object: The object of an agreement must be lawful; Object has nothing to do with consideration. It means the purpose or design of the contract; The object is said to be unlawful if;

I. It is forbidden by law,II. It is of such nature that if permitted it would defeat the provisions of any law;

III. It is fraudulent;IV. It involves an injury to the person or property of any other;V. The court regards it as immoral or opposed to public policy.

7. Certainty of Meaning: According to Section 21, “Agreements the meaning of which is not certain or capable of being

made certain are void.” The terms of the contract must be precise and certain. It cannot be left vague. A contract may be void on the ground of uncertainty.

8. Possibility of Performance: If the act is impossible in itself, physically or legally, it cannot be enforced at law. For example, Mr. A agrees with B to discover treasure by magic. Such Agreements is not

enforceable.9. Not Declared to be Void or Illegal:

The agreement though satisfying all the conditions for a valid contract must not have been expressly declared void by any law in force in the country.

Agreements mentioned in Section 24 to 30 of the Act have been expressly declared to be void for example agreements in restraint of trade, marriage, legal proceedings etc.

10. Legal Formalities: An oral contract is a perfectly valid contract, except in those cases where writing, registration

etc. is required by some statute. In India writing is required in cases of sale, mortgage, lease and gift of immovable property,

negotiable instruments; memorandum and articles of association of a company, etc. Registration is required in cases of documents coming within the scope of section 17 of the

Registration Act.

CALSSIFICATION OF CONTRACTS:

- Contracts may be classified on the basis of their a) Validityb) Formation orc) Performance.

A) Validity or Enforceability:

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Valid contracts Void contracts Void agreements Voidable contracts Unenforceable contracts Illegal Agreements

B) Formation: Express contracts Implied contracts Quasi contracts E.corn. contracts

C) Performance: Executed contracts Executor contracts or

I. Unilateral contractsII. Bilateral contracts

1. Valid Contract:- An agreement enforceable at law is a valid contract.

- An agreement becomes a contract when all the essentials of a valid contract as laid down in Section 10

are fulfilled.

2. Void contract:- An agreement which was legally enforceable when entered into but which has become void due to

supervening impossibility of performance for example a contract between a citizen of Pakistan and India is a valid contract during peace but if war breaks out between the two countries, the agreement will become void contract.

- A void contract is not necessarily unlawful, but is destitute of legal effects.

- The law will not enforce such a contract, nor can it be made valid by the parties.

3. Void Agreement:- Accord to section 2(g), “An agreement which is not enforceable by law by either of the parties is void.”

- No legal rights or obligations can arise out of a void agreement.

- It is void ab initio i.e. from its very inception, for example an agreement without consideration or with minor.

4. Voidable Contract:- According to section 2(i), “An agreement which is enforceable by law at the option of one or more of

the parties but not at the option of the other or others is voidable contract.”- Note that the word used here is ‘contract’ and not just ‘Agreement’.

- This is the result of absence of free consent in the contract.

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- This is so because the rights and duties are created and the contract is valid until the option to avoid it is exercised by the person whose consent to the agreement was not free but was obtained by coercion, undue influence, fraud or misrepresentation.

- Thus avoidable contract is valid and enforceable until it is repudiated by the party entitled to avoid it.Example:A, a person of weak intelligence made a gift of his entire property to B, who was in a position to dominate him. The gift having been obtained by undue influence is voidable at the option of A.

5. Unenforceable Contacts:- It is contract which is otherwise valid, but cannot be enforced because of some technical defect like

absence of a written form or absence of a proper stamp.- Such contracts must be sued upon by one or both of the parties.

- Such contracts cannot be proved in the court.

- Such contracts will not be enforced by the courts until and unless the defect is rectified.Example:A borrows Rs.10,000 from b and makes a promissory note and a one rupee stamp is pasted on the promote. The agreement though complete is unenforceable because of the technical defect i.e., promissory note being under stamped.

6. Illegal Agreement:- A contract which is either prohibited by law or otherwise against the policy of law is an illegal

agreement.- It is void ab initio.

- Thus, a contract to commit dacoit is an illegal contract and cannot be enforced at law.

- An illegal contract should be distinguished from a void contract.

- All illegal agreements are void but all void agreements or contracts are not necessarily illegal.

- Agreement with a minor is void but not illegal.

- Every void agreement is not illegal unless its object or consideration isa) Immoralb) Opposed to public policy etc.

- A void contract does not affect a collateral contract.

- An illegal agreement is like an infectious disease and is fatal not only to the main contract as well.Example:X borrows 50,000 from Y for the purpose of smuggling goods. Y knows of the purpose of the loan. The agreement between X and Y is collateral to the main agreement which is illegal. The collateral agreement is also illegal.

Contracts classified according to formation:

1. Express contract:- An express contract is one entered into by words which may be either spoken or written.

- Where the proposal and acceptance is made in words, it is an express contract.

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2. Implied contract:- Where the proposal or acceptance is made otherwise than in works, it is an implied contract.

- Implied contracts can be smelled out of the surrounding circumstances and the conduct of the parties who made them.

- So where a person employs another to do some work the law implies that the former agrees to pay for the work.

3. Constructive or quasi- contract:- It is a contract in which there is no intention on either side to make a contract, but the law imposes a

contract.- In such a contract rights and obligations arise not by any agreement between the parties but by

operations of law.- Thus, a finder of lost goods is under an obligation to find out the true owner and return the goods.

- Similarly, where certain books are delivered to a wrong addressee, the addressee is under an obligation either to pay for them or return them.

4. E-Com Contracts/Contracts over Internet:- These contracts are entered into between the parties using internet.

- In electronic commerce, different parties/persons create networks which are linked to other networks through EDI (Electronic Data Inter-change).

- This helps in doing business transactions using electronic mode.

Classification on the basis of Performance:

Contracts may be classified on the basis of extent of their performance. Such contracts may be:

1. Executed Contract:- An executed contract is one where both the parties have performed their obligations or carried out the

terms of the contracts.- In other words, it is a completed contract.

Example:A sell a TV set to B for Rs. 20,000. B pays the price and A hands over TV set to B.

2. Executory contract:- Where the contract is yet to be performed either wholly or partially or one or both the parties have yet to

perform their obligations, the contract is executor contract.Example:A agrees to make furniture for B for Rs. 5,000 Mr. A has yet to make furniture and Mr. B has not made the payment. So, both A & B are yet to perform their obligations. Suppose A has make the furniture but B has yet to make payment, it is executed on A’s part by executory on B’s part.

- Thus, executory contract may bea) Unilateralb) Bilateral

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1. Unilateral Contract:- A unilateral contract is one in which a promise on one side is exchanged for an act on the other side.

- A contract is said to be unilateral where one party has discharged his obligation either before or at time of entering into contract.

Example:Mr. A, a worker does manual labor at the request of Mr. B on a particular day. On completion of work it is B’s obligation to pay him wages because A has already performed his obligation.

2. Bilateral Contract:- These are the contracts where a promise on one side is exchanged for a promise on the part of other

party.

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PERFORMANCE OF CONTRACT:

- The performance of a contract consists in doing or causing to be done what the promisor has promised to do.

- “Sec 73 Act provides that the parties to a contract must eitheri. Perform their respective promise.

ii. Offer to perform the same.”- Promise bind the representatives of the promisor in case of death of such promisors before performance.

Example:A promise to deliver goods to B on a certain day on payment of Rs. 1000. A dies before that day

A’s representative are bound to deliver the goods to B, and B is bound to pay Rs. 1000 to A’s represented.

- Such offer to perform one’s obligation under a contract is called tender.

TIME AND PLACE OF PERFORMANCE:

1. Where a contract does not specify any time for performance and the promise is not supposed to ask for performance the promisor must perform it within a reasonable time.

2. When a contract is to be performed on a particular day without any application of the promise being required the promisor may perform contract on that particular day during the usual hours of the business on such day and the place at which promise ought to be performed(sec. 47).Example:‘A’ promises to deliver goods at B’s ware house on the 1st day January. On that day ‘A’ brings the goods to B’s ware house, but after the usual hour for closing it and they are not received. ‘A’ has not performed his promise.

3. When a promise is to be performed without application by the promise and no place is fixed for the performance of it. It is the duty of the promisor to apply to the promise to appoint a reasonable place for the performance of the promise, and to perform it at such place (sec. 49).Example:

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‘A’ undertakes to deliver a thousand mounds of jute to ‘B’ on a fixed day. ‘A’ must apply to ‘B’ it appoint a reasonable place for the purpose of receiving it and must deliver to him at such place.

4. Manner of performance:

A contract should be performed in the manner and at the time prescribed in the contract (sec. 50).

BY WHO CONTRACTS MUST BE PERFORMED:

1. By the promisor: As a general rule, a contract may be performed by the promisor either personally or through any other

competent person. But where personal considerations are the foundation of the contact, it has to be performed by the

promisor himself.e.g., A promises to paint a picture for B. The promise must be performed by A himself.

2. By the agent: Where personal skill is not necessary and the work could be done by anyone, the promisor or his

representation.

3. By the representative: In the event of the death of the promisor before performance, their representatives are bound by the

promise.Example:‘A’ promises to deliver goods to ‘B’ on a certain day on payment of Rs. 1000. ‘A’ dies before that day. A’s representative are bound to deliver the goods to ‘B’, and ‘B’ is bond to pay Rs. 1000 to A’s representative.

4. By third person: If the promise accepts performance of the promise from a third party, there is a discharge of the contract.

Once the third party performs the contact, and that is accepted by the promise there is an end of the matters and the promisor id there by discharged.

A promisor is discharged from liability if he performs the promise in a manner or at a time prescribed or sanctioned by the promise.

Contract which need not be performed:

Sec. 62 to 67 of the contract act deal with contracts which need not be performed.

1. When a voidable contact is rescinded, the other party need not perform his promise (sec. 64).2. Where the failure of performance has been caused by the promise’s neglect or refusal the promisor will

be excused (sec. 67).3. When a promisor is excused by any other law e.g., the limitation Act.

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BREACH OF CONTRACT AND ITS REMEDIES

Breach of contract:

Parties to a contract are expected to perform their respective promises. If a party breaks his obligation which the contract imposes, there take place “breach of contract.”

- If the contract is bilateral, the party who suffers, by breach has one remedy.

- He can claim relief for breach.

- If the contract is unilateral, the only remedy available to the party who suffers by breach is to claim relief for the breach.

Remedies in case of Breach of contract:

1. SUIT FOR DAMAGES:

The term “damages” may be defined as the monetary compensation payable by the defaulting party to the aggrieved party for the loss suffered by him.

- The fundamental principle underlying damages is not punishment by compensation.

- Compensation for loss or damage caused by Breach of contract (sec 73). Such damages which naturally arose in the usual course of things from such breach. It related to

ordinary damages.

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Such damages which the parties knew, when they made the contract to be likely to result from the breach-special damages.

- Kinds of damages:1) Ordinary or general damages.2) Special damages.3) Exemplary damages.4) Nominal damages.

a) ORDINARY DAMAGES: Ordinary damages are those which flow as a natural consequence is the usual course of things

from the breach (i.e.) damages which the parties may be deemed to have known as likely to arise on a breach, even at the time of entering into a contract. It is compensatory in nature.Example:

A agreed to sell B two bales of cotton at Rs.1000 per bale, the delivery to be given on 15 th

January. A failed to deliver to goods. The remedy for B would be claim the difference between the market price and the contract price for the same quality of cotton in case the market price is higher than the contract price.

b) SPECIAL DAMAGES: Special damages are those resulting from a breach of contract under some special circumstances. It must have been known to both the parties. Unlike ordinary damages, special damages cannot be claimed as a matter of right.

Example:There was a book exhibition at Madurai on 10 June. A publisher handed over books to

the carries and informed them that the book must reach Madurai on or before the date of exhibition. The carrier delivered the book after the exhibition. The publisher is entitled to claim compensation as special damages.

c) EXEMPLARY DAMAGES: These damages are intended to show the court’s strong disapproval of the conduct of the

defendant (one sued at court (law)) in committing the wrong. These damages are of punishment in nature which is awarded with a view to punish the guilty

party for the breachi. In case of breach of promise to marry.

ii. Where a banker refuses to honor the cheque in spite of having enough funds with him belonging to the person issuing the cheque. The smaller the amount for which the cheque is dishonored, the greater the insult done, and so more the damages awarded.

It also known as vindictive or punitive damage.

d) NOMINAL DAMAGES: Nominal damages are those which are awarded only for name sake, where the injured party has

not in fact suffered any boss, the damages awarded for the breach of contract are nominal.

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Example:Where in a contract of sale of goods, if the contract price and the market price is almost

the same at the date of breach of the control, then the aggrieved party is entitled only to nominal damages.

Example:

D contracted to purchase a Vespa scooter from a dealer E. but he failed to purchase the scooter. However, the demand for Vespa scooter far exceeded the supply and the scooter dealer could sell the scooter agreed to be purchased without loss of profits. The dealer is entitled only to nominal damages.

2. SUIT FOR RESCISSION:- Rescission means a right not to perform obligation.

- Incase of breach of contract, the promise may put an end to the contract.

- In such case, the aggrieved party is discharged from all the obligation under the contract and is entitle to claim compensation for the damages which he has sustained because of the non-performance of the contract.Example:

A contracts to supply 100kg of tea leaves for Rs. 8000 to B on 15 th April. If A does not supply the tea leaves on the agreed day, B need not pay the price. B may treat the contract as rescinded and B may also file a suit for rescission and claim damages.

3. SUIT FOR ON INJECTION:- Injection is an order of a court restraining a person from doing a particular act.

- It is a mode of securing the specific performance of the negative term of the contract.

- Injection is a “preventive relief.” It may be mandatory or prohibitory.

- To put it differently, where a party is in breach of negative term of contract, the court may be issuing an injection (order) restrain him from doing, what he promised not to do.

4. SUIT FOR SPECIFIC PERFORMANCE:- The term “specific performance” may be defined as the actual carrying out the respective obligations of

both the parties.- Sometimes, the damages are not an adequate remedy for breach of the contract. In such cases, the party

aggrieved by the breach may bring an action for special performance of the contract.Example:

A agreed to sell an old painting Mughal price to b for Rs. 5000. But subsequently A refused to sell the painting. In this case B may file a suit against A for the specific performance of the contract. And the court may order A to sell the painting to B as agreed.

- It may however, be noted that the party who bring an action for specific performance of the contract may prove the following:

That he was ready and willing, at all material dates to perform his part of the contract.

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- There certain cases as listed below, in which specific performance of the contract shall not be allowed by the court.

- Where the compensation in terms of money is an adequate relief for the non-performance of the contract.

- Where the contract is not fair and just.

Example:A contracted to sell 10 pieces of ceiling fans to B. but on the due date of performance. A refused

to sell the fans. In this case, B cannot obtain the specific performance of the contract as he can easily buy the ceiling fan from some other dealers. Moreover, the compensation in terms of money is also an adequate relief for the non-performance of the contract.

5. SUIT UPON QUANTUM MERIT:- Literally the expression” quantum merit” means “as much as earned” in legal sense, it means the

‘payment in proportion to the work done (i.e.) a person recover compensation in proportion to the work done by him.

- The person can claim reasonable remuneration for the services rented by him.

- A general rule, in this connection is that where a party to a contract has not fully performed what the contract demands, a person may recover compensation on the basis of “quantum merit.”

- The claim on quantum merit must be brought by a party who is not in default.Example:

In this case A, a firm of printers, agreed to print 1000 copies of book for B, a firm of publishers. Most of the printing refused to complete the work because part of that book contained libelous (defamatory) matter. The publisher refused to pay the price for the work done. The court held that printer could recover the printing charges on quantum merit from the publisher.

Reference:

1. Kuberdharan (1.46-1.50).2. P.S. Gogna (182-187).3. Saravanavel sumathy (9.1-9.9).

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QUASI- CONTRACTS

Definition:

- Quasi contracts are the contracts which are not founded on actual promises.

- These contracts are created by the circumstances, where one person has done something for another or paid money on his behalf, and the other person enjoyed the benefit of the same.

- It is a kind of contract by which one party is bound to pay money in consideration of something done or suffered by the other party.

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- Though no contractual relation exists between the parties, law makes out a contract for them and such a contract is called a quasi-contract.

TYPES OF CONTRACT:

1. CLAIMS FOR NECESSARIES SUPPLIED (SECTION 68): If a person incapable of entering into a contract or any one whom he is legally bound to support,

is supplied by another person with necessaries suited to his condition in life, the supplier is entitled to recover the price from the property of the incapable person.Example:A supplies to B, a lunatic, with necessaries suitable to his condition in life. A is entitled to be re-imbrued from B’s property.

A contract by a minor is wholly void and unenforceable. He cannot even ratify it on attaining majority. But section 68 of the Act provides an exception to this rule and makes the estate of the minor liable for necessaries supplied to him. In order to make an infant liable for necessaries supplied, the plaintiff must prove,

1) That the goods supplied were necessary for supporting a person in his position, and2) That the infant had not already a sufficient supply of these necessaries.

Even money advanced for purchase of necessaries can be claimed. It may, however, be noted that the remedy is not personal but against the estate only. The obligation under section 68 is to pay a reasonable and not the agreed price for the goods. The creditor is entitled to the value of the necessaries but not the interest thereon.

2. PAYMENT BY AN INTERESTED PERSON (SECTION 69): This section provides that a person who is interested in the payment of money which another is

bound by law to pay and who, therefore, pays it, is entitled to be reimbursed by the other.Example:

B holds land in Bengal on a lease granted by A, the Zamindar. The revenue payable by A to the Government being in arrear, his advertised for sale by annulment of B’s lease. B to prevent the sale and the consequent annulment of his own lease pays to the Government the sum due from A. a is bound to make good to B the amount so paid.

In order that section 69 may apply, the following conditions must be satisfied.1) A person must by law be bound to pay some money.2) Another person must be interested in the payment of that money.3) The other person must have paid the money because of such interest. Interest should

exist at the time of payment.4) The payment must be made bona fide for the protection of one’s own interest.

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3. OBLIGATION OF A PERSON ENJOYING BENEFIT OF NON-GRATUITOUS ACT (SECTION 70):

Where a person lawfully does anything for another person or delivers anything to him, not intending to do so gratuitously, and such other person enjoys the benefit thereof the latter is bound to make compensation to the former in respect of, or to restore the thing so done or delivered.Example:

A, a tradesman leaves goods at B’s house by mistake. B treats the goods as his own. He is bound to pay A for them.

For the application of this section, the following conditions must be fulfilled.1) The thing must have been done lawfully.2) It must have been done by a person not intending to act gratuitously.3) The person for whom the act is done must have enjoyed the benefit of it.

4. RESPONSIBILITY OF FINDER OF GOODS (SECTION 71): A person who finds goods belonging to another and takes them into his custody, is subject to the

same responsibility as a bailee. The finder, however, can retain the goods in the following cases.

I. Where the thing found is in danger;II. Where the owner cannot with reasonable diligence be found out;

III. Where the owner is found out, but refuses to pay lawful charges of the finder;IV. Where the lawful charges of the finder, in respect of the thing found, amount to two-third

of the value of thing found.

5. MONEY PAID BY MISTAKE OR UNDER COERCION (SECTION 72): A person to whom money has been paid or anything delivered by mistake or under coercion must

repay or return it.Example:

A person purchased a care at a price which it was represented by the seller to be controlled price, but afterwards the vendee came to know that he paid more than the controlled price, upon the false representation of the seller. It was held that the excess payment was a payment made by mistake and the vendee could recover it.

PREPARED BY: D.ANITHA KUMARI.(SREC-MBA LECTURER)

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