LEGAL ASPECTS OF BUSINESS (LAB)

MODULE 1
INDIAN CONTRACT ACT 1872
AND

SPECIFIC CONTRACTS (SEC 124 TO 238)

GENERAL PRINCIPLES OF CONTRACT ACTINTRODUCTION

Consider the following actions of Abhay:

1.
2.
3.

4.

Abhay decided to go to office by his car, rather than by

public transport.
He was driving the car on the left side of the road.
He stopped at a cross section when the light turned red.
While he was waiting for the light to turn green, a
colleague from his office approached him and Abhay gave
him a lift.
A special traffic police squad was checking compliance of
automobiles with the pollution standards. Abhay took out
a certificate. However, the validity of the certificate had
expired. Abhay was fined Rs. 500, which he had to pay.

Q. How are the above four actions different from each other?

Definition of Law:
Law includes all the rules and principles which regulate our
relations with other individuals and with the state.
Law is the body of principles recognized and applied by the state in
the administration of justice.
- Salmond

That portion of the establishment habit and thought of mankind

which has gained distinct and formal recognition in the shape of
uniform rules backed by the authority and power of the government.
- Woodrow wilson

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.
The contract act came into force on 1 sep. 1872. The act is applicable
to the whole India except for the state of Jammu and Kashmir.

AGREEMENT AND CONTRACT

Definition of contract:

A contract is an agreement made between two or more

parties which the law will enforce.
Sec 2(h) defines contract as an agreement enforceable by
law.
A contract is an agreement, enforceable by law, made
between at least two parties by which rights are acquired by
one and obligations are created on the part of another. If
the party, which had agreed to do something, fails to do
that, then the other party has a remedy.
Anson

- Sir William

Examples of contract:

Taking a seat in a bus/train.

Putting a coin in weighing machine.

Going restaurent and taking snacks. Etc.

Law of contract creates jus in personam and jus in rem.

Jus in personam: A right against or in respect of a specific person.

Jus in personam is available only against particular persons.

Example: A owes a certain sum of money to B. B has a right to

recover this amount from A. this right can be exercised only by B
and by none else against A.

Jus in rem: A right against or in respect of a thing.

jus in rem is available against the world at large.

Example: X is the owner of a plot of land. He has aright to have a

quiet possession and enjoyment of that land against every
member of the public. Similarly every member of the public is
under an obligation not to disturb Xs possession or enjoyment.

Definition of Agreement:
An agreement is defined as every promise and every set of
promises, forming consideration for each other [sec 2 (e)].
Definition of promise:
When the person to whom the proposal is made signifies
his assent thereto, the proposal is said to be acceped. A
proposal, when accepted becomes a promise. [sec 2(b)].
The person making the proposal is called Promisor and
the person accepting the proposal is called the Promisee.
Agreement = Offer + Acceptance

Consensus ad idem: The parties to the agreement must

have agreed about the subject matter of the agreement in
the same sense and at the same time.
Unless there is consensus ad idem, there can be no
contract.
Example: Ajay, who owns two horses named Rajhans and
Hansraj, is selling horse Rajhans to Vijay. Vijay thinks he
is purchasing horse Hansraj. There is no consensus ad idem
and consequently no contract.

Definition of Obligation:
A legal tie which imposes upon a definite person or persons
the necessity of doing or abstaining from doing a definite
act or acts.
An agreement which gives rise to a social obligation is not
a contract. It must give rise to a legal obligation in order to
become a contract.
Example:

i.

Ajay agrees to sell his car to Vijay for Rs. 50,000. the
agreement gives rise to an obligation on the part of Ajay
to deliver the car to Vijay and on the part of Vijay to pay
Rs. 50,000 to Ajay. This agreement is a contract.

ii.

A invites his friend B to come and stay with him for a

week . B accepts the invitation but when he comes to A, A
cannot accommodate him as his wife had died the day
before. B cannot claim any compensation from A as the
agreement is a social one.
Contract = Agreement + Enforceability at law

Distinguish between an agreement and a

contract:

Matter

Agreement

contract

Meaning

Every promise or a set of

promises forming
consideration for each other
is an agreement.

Agreement enforceable by
law is a contract.

One in
another

All agreements are not

contracts.

All contracts are

agreements.

Enforceable
at law

May or may not be

enforceable

Always enforceable by law

Rights to
parties

It does not always grant

right.

It always grants rights.

ESSENTIAL ELEMENTS OF A VALID CONTRACT

1.

Offer and Acceptance

2.

Intention to create legal relationship

3.

Lawful consideration
consideration: it is an advantage or benefit moving from one party to
the other. In simple words something in return.

4.

Capacity of parties competency

5.

Free and genuine consent

6.

Lawful object

7.

Agreement not declared void

8.

Certainty and possibility of performance.

9.

Legal formalities

TYPES OF CONTRACT OR CLASSIFICATION

OF CONTRACT
On the basis of

On the basis of

On the basis of

Mode of Formation Performance

Validity or

Express contract

Executed contract

Valid contract

Implied contract

Executory contract

Void contract

Quasi contract

Partly executed and

partly executory

Voidable contract

E commerce contract Unilateral contract

Bilateral contract

Enforceability

Illegal agreement
Unenforceable
contract

Classification on the basis of mode of

formation:
Express contract: An express contract made by the
use of words spoken or written.
Example: A says to B Will you purchase my bike for
Rs 20,000? B says Yes to A.
Implied contract: An implied contract is one which
is inferred from the acts or conduct of the parties or
course of dealings between them.
Example: Gets into public bus, takes a cup of tea in
restaurant.

Classification on the basis of mode of formation:

Quasi contract: It is not a real or a true contract in
the sense of law. The quasi contract is created by law
without any enforceable agreement. It is not based on
the express or implied intentions of the parties.
Example: T, a tradesman, leaves goods at Cs house
by mistake. C treats the goods as his own. C is bound
to pay for the goods.
E commerce contract: An contract is one which is
entered into between two parties via Internet or
through any other electronic mode.

Classification on the basis of performance:

Executed Contract: In a contract where both the
parties have performed their obligation, there is
remaining nothing to perform.
Example: A sells his car to B for Rs. 1 lakh. A
delivered the car and B paid the price.
Executory Contract: In a contract where both the
parties are yet to perform their obligation.
Example: A sells his car to B. if A is still to deliver the
car and B is yet to pay the price, it is an executory
contract.

Classification on the basis of performance:

Partly executed and partly executory contract:
one party has already performed his promise and the
other party has yet to execute his promise.
Unilateral contract: A contract in which only one
party has to fulfill his obligation at the time of the
formation of the contract, the other party having
fulfilled his obligation at the time of the contract or
before the contract comes into existence.
Example: Alap promises to pay Rs. 1000 to anyone
who finds his lost cellphone. Bansi finds and terturn
it to Alap. From the time Bansi found the cell phone,
the contract came into existence. Now Alap has to
perform his promise i.e. the payment of Rs. 1000.

Classification on the basis of performance:

Bilateral Contract: In a bilateral contract both the
parties have to perform their respective promises.
Here, the obligation is outstanding on the part of both
the parties.
Example: A promises to sell his car to B for Rs. 1 lakh
and agrees to deliver the car on the receipt of the
payment by the end of the week. The contract is
bilateral as both the parties have exchanged a promise
to be performed within a stipulated time.

Classification on the basis of Validity or

Enforceability:
Valid contract: If the contract entered into by the
parties and satisfies all the elements of a valid
contract as per the act, it is said to be a valid contract.
Void contract: A contract which ceases to be
enforceable by law is known as a void contract. A void
contract is not enforceable by the court.
Example: A contract to import goods from a foreign
country. When a war breaks out between the
importing county and the exporting country, it will
subsequently become void.

Classification on the basis of Validity or

Enforceability:
Voidable contract: when the contract is entered into
without the free consent of party i.e. caused by
coercion, undue influence, misrepresentation of fraud,
it is considered as a voidable contract. By definition: A
voidable contract is enforceable by law at the option of
one or more parties but not at the option of the other
or others.
Example: A promises to sell his car to B for Rs. 20,000.
His consent is obtained by use of force. The contract is
avoidable at the option of A. He may avoid the contract
or elect to be bound by it.

Distinguish between void and voidable contract:

Matter

Void Contract

Voidable contract

Definition

It means contract which

ceases to be enforceable

It means an agreement
enforceable by law, by one
or more parties.

Nature

Valid when made but

subsequently becomes
unenforceable.

It remains as voidable
until cancelled by the
party.

Rights or remedy

No legal remedy is available

for the void contract

Aggrieved party has a

remedy to cancel the
contract.

Performance

Party cannot demand the

performance of contract

If aggrieved party does

not cancel it within a
reasonable time,
performance can be
demanded.

Reason

Contract becomes void due to

change in law or
circumstances.

If consent is not obtained

freely then it is regarded
as a voidable contract.

Classification on the basis of Validity or

Enforceability:
Illegal agreement: An illegal agreement is one which
transgresses some rule of basic public policy or which
is criminal in nature or which is immoral. All illegal
agreements are void ab initio.
Example: B borrows Rs. 5000 from A and enters into a
contract with an alien to import prohibited goods. A
knows 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.
Unenforceable contract: A contract which cannot be
enforced in a court of law because of some technical
defect such as absence of writing or where the remedy
has been barred by lapse of time.

Distinguish between void and illegal agreement

Matter

Void agreemetnt

Illegal agreement

What

Void agreement is not

prohibited by law.

It is prohibited by
law.

Effect on collateral
transaction

Any agreement which

is collateral to the
void agreement is
enforceable.

Any agreement or
transaction which is
collateral to illegal
agreement is not
enforceable.

Punishment

It is not punishable

It is punishable.

Void ab initio

May not be void ab

initio.

Always void ab initio.