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Notes of Business Law (Specially for B.Com students)
DEFINITION OF CONTRACT
Contract is an agreement between two or more persons creating rights and duties between them and which is enforceable by law.
Pollack defines contract as, “every agreement and promise enforceable at law is a contract.”
According to Section 2(h) of the Contract Act, “an agreement enforceable by law is a contract.”
From the above definitions it is clear that a contract consists of two elements:
(1) An agreement.
(2) The agreement should be enforceable by law.
(1) AGREEMENT
According to Section 2(e) “Every promise and every set of promise forming the consideration for each other, is an agreement.”
An agreement, therefore, comes into existence only when one party make a proposal or offer to the other and that other signifies his assent (i.e. gives his acceptance).
From the above definitions it is clear that for an agreement there must be:
(a) Plurality of Persons
There must be two or more persons to make an agreement because one person cannot enter into an agreement with himself.
(b) Consensus ad idem
It means that both the parties to an agreement must agree about the subject matter of the agreement in the same sense and the same time. The term consensus means identity of minds.
EXAMPLE:
A own two cycles Sohrab and Eagle. A is selling Sohrab cycle to B. B. thinks he is buying Eagle cycle. There is no consensus ad idem and consequently no contract.
- Enforceability
Enforceability is the second requirement of contract. An agreement is said to be enforceable if it is recognized by courts. In order to be enforceable by law, the agreement must create legal obligations between the parties. If an agreement does not create legal obligations, it is not contract. ‘All contracts are agreements but all agreements are not contracts. Agreements are of two types:
(a) Social agreements
(b) Legal agreements
1. VALID CONTRACT:
DEFINITION:
A valid contract, is an agreement enforceable by law. An agreement becomes enforceable by law when all the essentials of a valid contract as explained by section 10 are present. If even one is missing, there, is no valid contract.
OBLIGATION OF PARTIES
In valid contract all the parties to the contract are legally responsible for the performance of a contract, if one of the parties breaks the contract, the other party has a right to take action against the guilty party. The contract can be enforced through the court also.
EXAMPLE:
A Proposes to sell his car to B for Rs.2 lac and B accepts the proposal. If A and B both possess contractual capacity and B is consent is free, thee is a valid contract between A and B.
If A fails to deliver the car, B can sue him in the court for delivery and if B fails to make the payment, A can sue him for recovery of price.
2. VOIDABLE CONTRACT
DEFINITION:
According to Section 2(i) “An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is avoidable.
Generally, avoidable contract takes place when the consent of one of the parties is not free. It is a valid contract until it is avoided by the party having the right to avid it. Once it is avoided it becomes void. But if the party chooses to affirm it, the contract continuous to be valid.
CIRCUMSTANCES UNDER WHICH
A CONTRACT BECOMES VOIDABLE
The following are the circumstances under which a contract becomes voidable.
- A contract becomes voidable when the consent of one of the parties to the contract is obtained by coercion undue influence, misrepresentation or fraud. (Sec 19).
DEFINITION:
The word void means not binding in law. A contract, -which cannot be enforced by either party, is called a void contract Section 2(j) defines “A contract which ceases to be enforceable by law becomes void, when it ceases to be enforceable.”
From this definition, it is clear that a void contract is not void from the very beginning. It is valid contract and binding on the parties when it is originally made but after its formation it become void due to certain reasons.
FORMATION:
According to formation, a contract can be divided into the following three kinds:
1. EXPRESS CONTRACT
Where the offer or acceptance is made in words spoken or written, it is an express contract.
It can also be defined in this way that an express contract is one in which the parties directly state the terms of the contract orally or in writing at the time the contract is made.
EXAMPLE:
A tells on telephone to B that he wants to sell his car for Rs.3 lac and B informs A that he agrees to purchase the car, there is an express contract.
2. IMPLIED CONTRACT
Where the offer or acceptance is made, otherwise than in words, it is an implied contract.
Implied contract is one, which is not made by words, written or spoken, but by the acts and conduct of the parties thereto. It arises when one person, without being requested to do so, renders services under circumstances indicating that he expects to be paid for them, and the other person, known such circumstances, accepts the benefit of those services.
EXAMPLE
(a) A, a Railway Coolie carries the luggage of B in order to carry it out of the railway station without being asked by B, and B allows him to do so. The conduct of B shows that he is a ready to pay to A for the services. It is an implied contract.
(b) M, a professional shoes shiner starts polishing the shoes of W without being asked to do so, and W allows him to do so. It is an implied contract and W is under obligation to pay to M.
3. CONSTRUCTIVE OR QUASI CONTRACT
Such a contract does not arise due to express or implied agreement between the parties but the law imposes a contract under certain special circumstance. A quasi Contract is based upon the principle of equity that a person shall not be allowed to get benefit at the expense of another.
(b) A agrees to paint a picture for B for Rs.2,000. When A paints the picture and B pay the price, the contract is said to be executed.
2. EXECUTORY CONTRACT
Executory means that which remains to be done. In an executory contract something remains to be done. In other words a, contract is said to be executory when both the parties to a contract have yet to perform their obligations.
EXAMPLE
(a) M promise to sell his car to N for Rs.2 lac and N pays only Rs.50,000 as advance money and promise to pay the balance later. M gives the possession of car to N and promises to transfer ownership on receipt of full amount. The contract between M and N is executory because there remains something to be done on both sides.
(b) A agrees to teach B, from the next month and B promises to pay Rs.800 to A. It is an executory contract because the promises are yet to be performed.
- UNILATERAL CONTRACT
Unilateral contract is one in which only one party has to fulfill his obligations at the time of formation of the contract, the other party has already fulfilled his obligations by doing some acts at the time of the contract or before the contract comes into existence. Such contract is also known as contract with executed consideration.
EXAMPLE
A promised to pay Rs.1,000 to any one who found his lost bag. B found the bag and returned it to A. It is an unilateral contract which comes into existence when the bag is found. Now A has to pay as B as already performed his obligation by finding the bag.
4. BILATERAL CONTRACT
A bilateral contract is one in which die obligations of both the parties to the contract are outstanding at the time of the formation of the contract. In other words it is a contact in which both the parties have yet to perform their obligations.
It is similar to executory contract and is also known as contract with executory consideration.
EXAMPLE
A Promises to paint the picture for B and B promises to pay Rs.5,000 to A.
ESSENTIALS OF A VALID CONTRACT:
A valid contract is an agreement, which is binding and enforceable. In valid contract all the parties are legally bound to perform the contract.
According to Section 2 (h) of the Contract Act, “an agreement enforceable by law is a contract.”
It means an agreement is regarded as a control when it is enforceable by law. It is a contract, which can be enforced by either of the parties to the contract. If one of the parties refuses to perform the contract, the other party can take an action in a court of law against such party. To be enforceable by law, an agreement must possess some essentials of a valid contract, which are stated in section 10.
2) LEGAL RELATIONSHIP
The parties to an agreement must create legal relationship. It arises when parties know that if one for the failure of a contract. Agreements of a social or domestic nature do not create legal relations and as such cannot give rise to a contract. It is presumed in commercial agreements that parties intend to create legal relations.
EXAMPLE:
(i) A father promises to pay his son Rs.500 every month as pocket money. Later, he refuses to pay. The son cannot recover as it is a social agreement and does not create legal relations.
(ii) A offers to sell his watch to B for Rs.200 and B agrees to buy it at the same price, there is a contract as it creates legal-relationship between them.
(iii) A husband promised to pay his wife a household allowance of 30 pounds every month. Later, the parties separated and the husband failed to pay. The wife used for allowance. Held that the wife was not entitled for the allowance as the agreement was social and did not create any legal obligations.
3. LAWFUL CONSIDERATION
The third essential of a valid contract is the presence of consideration. Consideration is “something in return.” It may be some benefit to the party. Consideration has been defined as the price paid by one party for the promise of the other. An agreement is enforceable only when both the parties get something and give something. The something given or obtained is the price of the promise and is called consideration.
EXAMPLE:
(i) A agrees to sell his house to B for Rs.10 Lac is the consideration for A’s promise to sell the house, and A’s promise to sell the house is the consideration for B’s promise to pay Rs. Lac. These are lawful considerations.
(ii) A promise to obtain for B employment in the public service, and B promise to pay 10,000 rupees to A. the agreement is void, as the consideration for it is unlawful.
4. CAPACITY OF PARTIES
An agreement is enforceable only if it is entered into by parties who possess contractual capacity. It means that the parities to an agreement must be competent to contract. According to Section 11, in order to be competent to contract the parties must be of the age of majority and of sound mind and must not be disqualified from contracting by any law to which they are subject. A contract by a person of unsound mind is void ab-initio (from the beginning).
If one of the parties to the agreement suffers from minority, madness, drunkenness etc., the agreement is not enforceable at law, except in some cases.
EXAMPLE:
to public policy or must not imply injury to the person or property of another. Every agreement of which the object or consideration is unlawful is illegal and the therefore void.
EXAMPLE:-
A promise to pay B Rs.5 thousand if B beats C. The agreement is illegal as its object is unlawful.
(7) WRITING AND REGISTRATION
According to Contract Act, a contract may be oral or in writing. Although in practice, it is always in the interest of the parties that the contract should be made in writing so that it may be convenient to prove in the court. However, a verbal contract if proved in the court will not be considered invalid merely on the ground that it not in writing. It is essential for the validity of a contact that it must be in writing signed and attested by witness and registered if so required by the law.
EXAMPLE:
(i) A Verbally promises to sell his book to y for Rs.200 it is a valid contract because the law does not require it to be in writing.
(ii) A verbally promises to sell his house to B it is not a valid contract because the law requires that the contract of immovable property must be in writing.
(8) CERTAINITY
According to Section 29 of the Contract Act, “Agreements the meaning of which are not certain or capable of being made certain are void.” In order to give rise to a valid contract the terms of the agreement, must not be vague or uncertain. For a valid contract, the terms and conditions of an agreement must be clear and certain.
EXAMPLE:
(i) A promised to sell 20 books to B. It is not clear which books A has promised to sell. The agreement is void because the terms are not clear.
(ii) A agrees to sell B a hundred tons of oil. It is not clear what is the kind of oil. The agreement is void because of it uncertainty.
(iii) O agreed to purchase a van from S on hire-purchase terms. The price was to be paid over two years. Held there was no contract as the terms were not certain about rate of interest and mode of payment.
(9) POSSIBILITY OF PERFORMANCE
The valid contract must be capable of performance section 56 lays down that. “An agreement to do an act impossible in itself is void.” If the act is legally or physically impossible to perform, the agreement cannot be enforced at law.
EXAMPLE:-
OFFER AND ACCEPTANCE:
The first essential of a valid contract is an agreement i.e., offer and acceptance. The agreement result from an exchange of promises by the parties involved. An agreement arises when one party, the offer or, makes an offer and the other party to whom the offer is made i.e. the offeree accepts it. In every case, there must be both an offer and an acceptance. If either is lacking there is no agreement. In order to make a contract there must be a lawful offer by one party and lawful acceptance of the offer by the other party.
OFFER / PROPOSAL
DEFINITION:
The words proposal and offer are synonymous and are used interchangeably. Section 2(a) defines a proposal as “when one person signifies to another his willingness to do or to abstain from doing any thing, with a view to obtaining the assent of that other to such act or abstinence he is said to make a proposal.”
This definition of an offer consists of two parts.
(1) There must be an expression of the willingness by one to another to do or to abstain from doing something.
(2) The expression of willingness must be made to obtain the assent of the other person to such act or abstinence.
The offer must be made with the intention of creating legal relations; otherwise, there will be no agreement.
EXAMPLE:-
(i) A offer to sell his watch to B for Rs.100 A is making an offer to B.
(ii) A says to B I am willing to sell my car for Rs.3 Lac Are you interested to buy it. “A makes an offer to B.
DEFINITIONS:
OFFEROR:
The person making the offer is called the offeror or promisor or proposer.
OFFEREE:
The person to whom the offer is made is called the offeree or proposer.
