MS EDUCONZ PVT. LTD.

LAW& AUDIT

What is Law?
Law means a ‘set of rules’ which governs our behaviours and relating in a civilized society. So
there is no need of Law in a uncivilized society.

Why Should One Know Law?

One should know the law to which he is subject because ignorance of law is no excuse.
Sources of Mercantile Law in India

English Indian Status Judicial Customs and

Mercantile Law Decisions Usages

STUDY NOTE – 1 : INDIAN CONTRACT ACT, 1872

Section 1:- Commencement and applicability:-

Short Title Extent and commencement

The Indian Applicable to First day of

contract Act whole Indian September
1872 except the state 1872(1st Sept.
of Jammu & 1872)
Kashmir

¾ Prior to this English law of contract was followed in India.

¾ It has XI chapter.
¾ Law of contract creates jus in personem and not in jus in rem.
¾ The Indian Contract Act consists of the following two parts:
(a) General principals of the Law of Contract.
(b) Special kinds of contracts.
¾ The general principals of the Law of Contract are contained in Sections 1 to 75 of the
Indian Contract Act. These principles apply to all kinds of contracts irrespective of their
nature.
¾ Special contracts are contained in Sections 124 to 238 of the Indian Contract Act. These
special contracts are Indemnity, Guarantee, Bailment, pledge and Agency.
Note: In our discussion on this part of the book, unless otherwise stated, the sections mentioned
are those of the Indian Contract Act, 1872.

Contracts as Defined by Eminent Jurists

1. “Every agreement and promise enforceable at law is a contract.” – Pollock
2. “A Contract is an agreement between two or more persons which is intended to be
enforceable at law and is contracted by the acceptance by one party of an offer made to
him by the other party to do or abstain from doing some act.” – Halsbury
3. “A contract is an agreement creating and defining obligation between the parties” –
Salmond
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DEFINITIONS (Sec 2)
1. Offer(i.e. Proposal) [section 2(a)]:-When one person signifies to another his
willingness to do or to abstain from doing anything, with a view to obtaining the
assent of that other person either to such act or abstinence, he is said to make a
proposal.

2. Acceptance 2(b):- When the person to whom the proposal is made, signifies his
assent there to , the proposal is said to be accepted.

3. Promise 2(b) :- A Proposal when accepted becomes a promise. In simple words,

when an offer is accepted it becomes promise.

4. Promisor and promise 2(c) :- When the proposal is accepted, the person making the
proposal is called as promisor and the person accepting the proposal is called as
promisee.

5. Consideration 2(d):- When at the desire of the promisor, the promisee or any other
person has done or abstained from doing something or does or abstains from doing
something or promises to do or abstain from doing something, such act or
abstinence or promise is called a consideration for the promise.

™ Price paid by the one party for the promise of the other Technical word meaning QUID-
PRO-QUO i.e. something in return.

6. Agreement 2(e) :- Every promise and set of promises forming the consideration for
each other. In short, agreement = offer + acceptance.

7. Contract 2(h) :- An agreement enforceable by Law is a contract.

8. Void agreement 2(g):- An agreement not enforceable by law is void.

9. Voidable contract 2(i):- An agreement is a voidable contract if it is enforceable by Law

at the option of one or more of the parties there to (i.e. the aggrieved party), and it is
not enforceable by Law at the option of the other or others.

10. Void contract :- A contract which ceases to be enforceable by Law becomes void
when it ceases to be enforceable.

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ESSENTIALS OF A VALID CONTRACT

“All agreements are contracts, if they are made –

¾ by free consent of the parties, competent to contract,
¾ for a lawful consideration and
¾ with a lawful object, and
¾ not hereby expressly declared to be void.” - Sec.10.

ESSENTIALS OF VALID CONTRACT

Offer + acceptance = Promise

+
consideration
=
Agreement
+
enforceability By Law

Contract

1. Proper offer and proper acceptance with intention to create legal relationship.
Cases;- A and B agree to go to a movie on coming Sunday. A does not turn in resulting
in loss of B’s time B cannot claim any damages from B since the agreement to watch a
movie is a domestic agreement which does not result in a contract.
¾ In case of social agreement there is no intention to create legal relationship and
there the is no contract (Balfour v. Balfour)

¾ In case of commercial agreements, the law presume that the parties had the
intention to create legal relations.
¾ [an agreement of a purely domestic or social nature is not a contract ]

2. Lawful consideration :- consideration must not be unlawful, immoral or opposed to

the public policy.

3. Capacity:- The parties to a contract must have capacity (legal ability) to make valid
contract.
Section 11:- of the Indian contract Act specify that every person is competent to
contract provided.
(i) Is of the age of majority according to the Law which he is subject, and
(ii) Who is of sound mind and
(iii) Is not disqualified from contracting by any law to which he is subject.

¾ Person of unsound mind can enter into a contract during his lucid interval.
¾ An alien enemy, foreign sovereigns and accredited representative of a foreign
state. Insolvents and convicts are not competent to contract.

4. Free consent :- consent of the parties must be genuine consent means agreed upon
samething in the same sense i.e. there should be consensus – ad – idem. A consent is

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said to be free when it is not caused by coercion, undue influence, fraud,

misrepresentation or mistake.

5. Lawful object
• The object of agreement should be lawful and legal.
• Two persons cannot enter into an agreement to do a criminal act.
• Consideration or object of an agreement is unlawful if it
(a) is forbidden by law; or
(b) is of such nature that, if permitted, would defeat the provisions of any
law; or
(c) is fraudulent; or
(d) Involves or implies, injury to person or property of another; or
(e) Court regards it as immoral, or opposed to public policy.

6. Possibility of performance:
• The terms of the agreement should be capable of performance.
• An agreements to do act, impossible in itself cannot be enforced.
Example : A agrees to B to discover treasure by magic. The agreement is void because
the act in itself is impossible to be performed from the very beginning.

7. The terms of the agreements are certain or are capable of being made certain [29]
Example : A agreed to pay Rs.5 lakh to B for ultra-modern decoration of his drawing
room. The agreement is void because the meaning of the term “ ultra – modern” is not
certain.

8. Not declared Void

• The agreement should be such that it should be capable or being enforced by law.
• Certain agreements have been expressly declared illegal or void by the law.

9. Necessary legal formalities

• A contract may be oral or in writing.
• Where a particular type of contract is required by law to be in writing and
registered, it must comply with necessary formalities as to writing, registration
and attestation.
• If legal formalities are not carried out then the contract is not enforceable by law.
Example : A promise to pay a time. Barred debt must be in writing.

™ Agreement is a wider term than contract where as all contracts are agreements. All
agreements are not contracts.

All Contracts are Agreements, but all Agreements are not Contracts

The various agreements may be classified into two categories:

Agreement not enforceable by law Agreement enforceable by law

Any essential of All essentials of

a valid contract a valid contract
is not available. are available

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Conclusion:
Thus we see that an agreement may be or may not be enforceable by law, and so all agreement
are not contract. Only those agreements are contracts, which are enforceable by law, In short.

Contracts = Agreement + Enforceability by Law

Hence, we can conclude “All contracts are agreement, but all agreements are not contracts.”

Distinction between Contract & Agreement

Basis Contract Agreement
1. Section : Sec. 2(h) Sec. 2(e)
2. Definition : A contract is an agreement Every promise or every set of
enforceable by law. promises forming consideration for
each other is an agreements.
3. Enforceability : Every contract is enforceable Every promise is not enforceable.
4. Interrelationship A contract includes an agreement. An agreement does not include a
contract.
5. Scope : The scope of a contract is limited, as Its scope is relatively wider, as it
it includes only commercial includes both social agreement and
agreements. commercial agreements.
6. Validity : Only legal agreements are called An agreement may be both legal
contracts. and illegal.
7. Legal : Every contract contains a legal It is not necessary for every
Obligation obligation. agreement to have legal obligation.

Types of contracts :-

(1) (2) (3) (4)

On the Basis On the Basis of On the Basis of On the Basis
of creation Validity execution of Liability
a. Express contract a. Valid contract a. Executed contract a. Bilateral contract
b. Implied contract b. Void contract b. Executed contract b. Unilateral
c. Tacit contract c. Voidable contract c. Partly executed and contract
d. Quasi contract d. Unenforceable party executory
e. E contract contract
e. Illegal contract

(a) Express contract :- A contract made by word spoken or written. According to sec 9 in
so for as the proposal or acceptance of any promise is made in words, the promise is said
to be express.
Example : A says to B ‘will you purchase my bike for Rs.20,000?” B says to A “Yes”.

(b) Implied contract:- A contract inferred by

™ The conduct of person or
™ The circumstances of the case.

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By implies contract means implied by law (i.e.) the law implied a contract through
parties never intended. According to sec 9 in so for as such proposed or acceptance is
made otherwise than in words, the promise is said to be implied.
Example:
A stops a taxi by waving his hand and takes his seat. There is an implied contract that A
will pay the prescribed fare.

(c) Tacit contract: - A contract is said to be tacit when it has to be inferred from the
conduct of the parties. Example obtaining cash through automatic teller machine, sale
by fall hammer of an auction sale.

(d). Quasi Contracts are contracts which are created -

• Neither by word spoken
• Nor written
• Nor by the conduct of the parties.
• But these are created by the law.
Example:
If Mr. A leaves his goods at Mr. B’s shop by mistake, then it is for Mr. B to return the
goods or to compensate the price. In fact, these contracts depend on the principle that
nobody will be allowed to become rich at the expenses of the other.

(e). e – Contract: An e – contract is one, which is entered into between two parties via the
internet.

(a) Valid contract:- An agreement which satisfies all the requirements prescribed by law
On the basis of creation

(b) Void contract (2(j)):- a contract which ceases to be enforceable by law because void
when of ceased to be enforceable
When both parties to an agreement are:-
Under a mistake of facts [20]
Consideration or object of an agreement is unlawful [23]
Agreement made without consideration [25]
Agreement in restrain of marriage [26]
Restraint of trade [27]
Restrain legal proceeding [28].
Agreement by wage of wager [30]

(c) Voidable contract 2(i) :- an agreement which is enforceable by law at the option of
one or more the parties but not at the option of the other or others is a voidable
contract.
Result of coercion, undue influence, fraud and misrepresentation.

(d) Unenforceable contract: - where a contract is good in substance but because of some
technical defect i.e. absence in writing barred by imitation etc one or both the parties
cannot sue upon but is described as unenforceable contract.
Example: Writing registration or stamping.

Example: An agreement which is required to be stamped will be unenforceable if the

same is not stamped at all or is under stamped.
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(e) Illegal contract:- It is a contract which the law forbids to be made. All illegal
agreements are void but all void agreements or contracts are not necessary illegal.
Contract that is immoral or opposed to public policy are illegal in nature.
™ Unlike illegal agreements there is no punishment to the parties to a void agreement.
™ Illegal agreements are void from the very beginning agreements are void from the very
beginning but sometimes valid contracts may subsequently becomes void.

(a) Executed contract :- A contract in which both the parties have fulfilled their obligations
under the contract.
Example: A contracts to buy a car from B by paying cash, B instantly delivers his car.

(b) Executory contract:- A contract in which both the parties have still to fulfilled their
obligations.
Example : D agrees to buy V’s cycle by promising to pay cash on 15th July. V agrees to
deliver the cycle on 20th July.

(c) Partly executed and partly executory:- A contract in which one of the parties has
fulfilled his obligation but the other party is yet to fulfill his obligation.
Example : A sells his car to B and A has delivered the car but B is yet to pay the price.
For A, it is excuted contract whereas it is executory contract on the part of B since the
price is yet to be paid.
On the basis of liability for performance:-

(a) Bilateral contract:- A contract in which both the parties commit to perform their
respective promises is called a bilateral contract.
Example : A offers to sell his fiat car to B for Rs.1,00,000 on acceptance of A’s offer by
B, there is a promise by A to Sell the car and there is a promise by B to purchase the car
there are two promise.

(b) Unilateral contract:- A unilateral contract is a one sided contract in which only one
party has to perform his promise or obligation party has to perform his promise or
obligation to do or forbear.
Example :- A wants to get his room painted. He offers Rs.500 to B for this purpose B says to A
“ if I have spare time on next Sunday I will paint your room”. There is a promise by A to pay Rs
500 to B. If B is able to spare time to paint A’s room. However there is no promise by B to Paint
the house. There is only one promise.
Difference Between Void and Voidable Contract
Matter Void contract Voidable contract
Definition It means contract which cease to
It means an agreement enforceable
be enforceable. by law by one or more parties.
Nature Valid when made subsequentlyIt remains voidable until cancelled by
becomes unenforceable. party.
Rights or remedy No legal remedy. Aggrieved party has remedy to
cancel the contract.
Performance of Party can’t demand performance If aggrieved party does not cancel it
contract of contract within reasonable time, performance

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can be demanded.
Reason Due to change in law or If consent is not obtained freely.
circumstances
Damages Not available Can demand in certain cases.

Difference between Void and illegal Agreement

Matter Void agreement Illegal agreement
What Void agreement is not prohibited It is prohibited by law.
by law.
Effect on collateral Enforced Not enforced.
transaction
Punishment No Yes
Void ab initio May not be void ab initio Always void initio

Contract of record:
It is either a judgment of a court of a Recognizance.
A Judgment is an obligation imposed by a Court upon one or more persons in favour of
another or others. In real sense, it is not a contract, as it is not based upon any agreement
between two parties.
Recognizance is a Bond by which a person undertakes before a Court of Magistrate to
observe some condition e.g. to appear on summons.
Contracts of record derive their binding force from the authority of the Court.

Contract under Seal:

(a) A contract under Seal is one which derives its binding force from its form alone.
(b) It is in writing and signed, sealed and delivered by the parties.
(c) It is also called a Deed or a Specialty contract.

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