Business Law

INDIAN CONTRACT ACT

 INDIAN CONTRACT ACT 1872

 Introduction Law of contract – Foundation upon which the— superstructure of modern             business is built Business – promise— made between parties – performance follows later      Breaking of a— promise – without incurring liability – endless complications2 08/30/12

 Indian Contract

·         Act Law of contract lays down legal rules relating to promises , their formation, performance and enforcement.

·         These rules are not only applicable to business community but others

CONTRACT Sec 2(h)

 “An agreement enforceable by law is a contract”

Proposal:-

o   When one person signifies to another his willingness to— do or abstain from doing anything with a view to obtain his assent on such act or abstinence, he is making proposal.

·         A goes to a— hotel and orders tea. He is making proposal.

Acceptance

·         When one person signifies his assent thereto on the— proposal made he is said to accept the proposal.

·         When A orders tea and B supplies tea it is understood that the proposal made by A is accepted by B

Promise

·         When a person to whom proposal is made signifies his— assent thereto, the proposal is said to be accepted.

·         An accepted proposal is known as a promise.

·         When A asks B to lend him a book and B gives his assent to lend him a book . This is a promise i.e. Proposal by A to lend the book Acceptance by B by lending the book

Consideration

·         Something in return.

·         A offers B to sell his car at Rs.1,00,000 /- B accepts the same. Now for A consideration is Rs.1,00,000/- and for B consideration is a Car.

·         Until and unless there is no consideration there cannot be an agreement.

Agreement

·         When the proposal is accepted it becomes promise and— the promise, when accompanied with consideration it becomes agreement.

·         A offers to sell his car for Rs.1,00,000/- to B. B— accepts his offer. This offer after acceptance becomes promise and this promise is treated as an agreement between A & B.

 Enforceability

·         An agreement is said to be enforceable by law if it creates legal obligation.

·         Obligation is a legal tie which— imposes upon determinate person or persons the necessity of doing or abstaining from doing a definite act or acts

·         If an agreement is incapable of creating a duty enforceable by law, it is not a contract.

CONTRACT

·         Proposal + Acceptance = Promise.

·         Promise + Consideration = Agreement.

·         Agreement + Enforceability = CONTRACT.

Contract Act

·         “All contracts are agreement but all agreements— are not contracts”.

·         Agreements of moral, religious or social nature are not contracts :-

Ø  they are not likely to create a duty enforceable by law

Ø  parties never intend to create a legal obligation.13 08/30/12

Contd –

 Ex;-

Ø  X invites his friend Y to a dinner and Y accepts the invitation. If Y fails to turn up for the dinner. Can he take his friend to Court????

Ø  X cannot go to the court to claim his loss.

·         A father promises to pay his daughter Rs 1000 as pocket allowance. Later he refuses to pay. Can the daughter recover the Amount???

·         The daughter cannot recover as its is a domestic agreement and there is no intention on the part of the parties to create legal relations

Case Balfour vs Balfour [(1919) 2 K.B. 571]

·         A promise by the husband to pay his wife 30 pounds every month . Later Husband refuses to pay. Wife goes to court.

·         Held: unenforceable as parties never intended it to be bound by legal obligations.

Contd

·         In commercial or business agreements an intention to create legal relations is presumed. Thus, an agreement to buy and sell goods intends to create legal relationship, hence is a contract, provided other requisites of a valid contract are present. But if the parties have expressly declared their resolve is not to create a legal obligation, even a business agreement does not amount to a contract.

 Case Rose&Frank Co. vs Corruption Bros [1925 AC 445]

·         There was an agreement between R company and C company by means of which the former was appointed as the agent of the latter. One clause in the agreement was: ”This agreement is not entered into….as a formal or legal agreement and shall not be subject to legal jurisdiction in the law courts.”

·         HELD - There was no binding contract as there was no intention to create legal relationship

Distinction between an agreement and a contract

Agreement	Contract
Offer and its acceptance constitute an agreement	Agreement and its enforceability constitute a contract
An agreement may or may not create a legal obligation	A contract necessarily create a legal obligation
Every agreement need not necessarily be a contract	All contracts are necessarily agreements
◦ Agreement is not concluded or binding contract	Contract is concluded and binding on the concerned parties18

CONTRACTS ON THE BASIS OF CREATION

EXPRESS IMPLIED	CONTRACT CONTRACT
Express contract is one which is made by the words spoken or written.	An implied contract is one which is inferred from the conduct of a person or circumstances of a particular case.

Essential elements of a valid contract

·         Proper offer and its proper acceptance 

·         Intention to create legal relationship

·         Free Consent 

·         Capacity to contract 

·         Lawful consideration

·         Lawful object

·         Agreement not expressly declared void

·         Certainty of meaning 

·         Possibility of performance 

·         Legal formalities

Offer / PROPOSAL

                                          When one person signifies to— another his willingness to do or abstain from doing anything with a view to obtain his assent on such act or abstinence, he is making proposal.24 08/30/12

 Contd-     

 Intention to create legal relationship

An offer must be such that when it is accepted it will create a legal relationship

Certain and unambiguous terms

If the terms of the offer are vague or indefinite, its acceptance cannot create any contractual relationship.

Contd –

 Different from a mere declaration of intention

·         Mere declaration of intention indicates that an offer will be made or invited in the future

·         A declaration of intention by a person does not give right of action to another.

 Case

 Harrison vs Nickerson

·         An auctioneer advertised in a newspaper that a sale of office furniture would be held. A broker came from a distant place to attend that auction, but all the furniture was withdrawn. The broker thereupon sued the auctioneer for his loss of time and expenses.

·         Held - A declaration of intention to do a thing did not create a binding contract with those who acted upon it, so that the broker could not recover.

Contd –

·         Different from an invitation to offer

ü  In an invitation to offer the person making an invitation invites others to make an offer to him

ü  It is prelude to an offer inviting negotiations or preliminary discussions

Case –

ü  Pharmaceutical Society of Great Britian vs Boots cash chemists Ltd (1953) 1 QB 401

ü  Harvey vs facey

 Contd-

 Offer must be communicated

·         An offer must be communicated to the person to whom it is made.

·         An offer is complete only when it is communicated to the offeree

·         Acceptance is not possible unless offer is brought to the knowledge of the offeree ie, One can accept the offer only when he knows about it.

·         Acceptance in ignorance of offer confers no right. ie, An offer accepted without its knowledge does not confer any legal rights on the acceptor.

·         Case: Lalman Shukla vs Gauri Dutt

Contd –

 No term of non-compliance of which amounts to acceptance

·         The offer must not contain a term, the non-compliance of which amount to acceptance

·         Ex: A offers by post to sell his horse to B for Rs 2000. He writes, “ If you do not reply, I shall assume you have accepted the offer.” There would be no contract even if B does not reply

Contd

 While making the offer, the offeror cannot say that i the offer is not accepted before a certain date, it will be presumed to have been accepted

Communication of special terms or standard terms of contract

·         Special terms of the offer must also be communicated along with the offer.

·         If the special terms of the offer are not communicated, the offeree will not be bound by those terms.

Acceptance

·         Acceptance means giving consent to the offer.

·         It is an expression by the offeree of his willingness to be bound by the terms of the offer.  Sec 2(b) – “ A proposal is said to be accepted when the person to whom the proposal is made signifies his assent thereto.

·         A proposal when accepted becomes a promise.” Acceptance is the consent given to offer.

Contd-

Who can accept

 In case of a specific offer –

To be accepted by that definite person or that— particular group of persons to whom it has been made and non else.

In case of general offer –

 An offer made to the world at large or— public in general can be accepted by any person having the knowledge of the offer by fulfilling the terms of the offer.(Carlil v. Carbolic Smoke Ball Co.)

Contd –

 How to make acceptance –

Express acceptance –

·         An express acceptance is one in which is made by words spoken or written

Implied acceptance –

·         An implied acceptance is one which is made otherwise than in words.

·         It is inferred from the conduct of the parties or the circumstances of a particular case

Legal rules of valid acceptance

·          Absolute and unqualified

·         Manner

·         Communication

·         By whom

·         To whom

·         Before the laps of the offer

CAPACITY OF PARTIES

 Sec.11 says

“Every person is competent to contract who is of age of majority according to the law to which he is subject, And who is of sound mind, And who is not disqualified from contracting by any law to which he is subject. ”

 Thus, all the three tests must be applied to determine whether a person is competent to contract or not

Who is a MINOR ?

Who is a Person of Unsound Mind?

According to Sec 12 of the Indian Contract Act,

·         “A person is said to be of sound mind for the purpose of making contract, if at the time when he makes it, is capable –

·         To understand terms of contract

·         To form rational judgment to its effect upon his interests”

CONSIDERATION

 Sec. 2(d) of the Indian Contract Act defines consideration as under :

“when at the desire of promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing , or promises to do or abstain from doing something, such act or abstainence or promise is called a consideration for the promise"

Essential elements of valid Consideration

·         It must move at the desire of promisor

·         It may move from any person

·         It may be past, or present, or future

·         It must be of some value

·         It must be real and not illusory vi. Something other than promisor’s existing Obligation

CONSENT

 Sec.13 says

“Two or more persons are said to consent when they agree on same thing in same sense”

In English Law, this is called ‘consensus-ad-adem’

FREE CONSENT

·         According to Sec.14 consent is said to be free when it is caused by

·         Coercion, or

·         Undue influence, or

·         Fraud, or

·         Misrepresentation, or

·         mistake

CONSENT

Coercion means compelling a person to enter into a contract under a pressure or a threat. According to Section15, a contract is said to be caused by coercion when it is obtained by—

·         Committing an act which is forbidden by the Indian Penal Code; or

·         Threatening to commit any act which is forbidden by Indian Penal Code; or

·         Unlawful detaining of any property; or

·         Threatening to detain any property.

Undue Influence

 The term ‘undue influence’ means dominating the will of other person to obtain an unfair advantage over the other

Sec 16(1) says a contract is influence by undue influence—

a)      Where the relations subsisting between the parties are such that one of the is in position to dominate the will of another, and

b)      The dominant party uses that position to obtain an unfair advantage over the other

Fraud

The term fraud means a false representation of fact made willfully with a view to deceive the other party.

 Essential elements of fraud :

·         By a party to a contract

·         False representation

·         Representation as to fact

·         Actually deceived

·         Suffered loss