CENTRE FOR DISTANCE AND ONLINE EDUCATION

CENTRE FOR DISTANCE AND ONLINE EDUCATION

Live Session – Session No.

BCOM103 – Corporate Legal Environment

Unit No. 2: INDIAN CONTRACT ACT, 1872
B.Com. Semester-I
SURAJ AGARWAL
M.COM, M.B.A, UGC NET
(Qualified)
FACULTY CDOE, SMU
Learning Outcomes

1 2 3 4
Describe joint Describe the Distinguish between Know accounting
venture. features of joint joint ventures and treatment in joint
ventures. consignment sales. ventures.
Meaning of Contract

According to the ICA, “an agreement enforceable by law is a contract.” A

contract, thus, is an agreement between two parties to do something or
abstain from doing something for each other subject to certain terms and
conditions.
Thus, a contract has two main elements:
i) An agreement between two parties.
ii) Enforceability of the agreement by a court of law.
According to the ICA, “every promise and every set of promises forming the
consideration for each other is an agreement.”
A proposes (offer) to B. When B accepts the proposal and communicates
his agreement to A, it becomes a promise.
a) An agreement between two
persons to go together to
the cinema, or for a walk,
or for a dinner is an
agreement of social nature An agreement giving
rise to social obligation
and not covered under
is not a contract.
Indian Contract Act, 1872.
b) Domestic agreement
between husband and wife
is also not a contract
Essential Elements Of Valid Contract

Proper offer and acceptance Consideration for promise

Intention to create a legal relationship Lawful object and consideration
Free consent Agreement not declared void
Capacity to contract Certainty of meaning
Legal formalities Possibility of promise
Offer or Proposal
According to Section 2 (a) of the ICA, a person is said to have made a
proposal when he signifies to another his willingness to do or to abstain
from doing anything with a view to obtaining the assent of that other
person to such act or abstinence. The person making the offer is called the
‘promisor’ or ‘offeror’.
A valid offer must have the following elements:
i) Intention to enter into a legal relationship.
ii) Clear, certain and unambiguous terms.
iii) Should not be an invitation to an offer from someone else.
iv) Should be communicated to the person concerned.
v) Must not contain a clause that assumes automatic acceptance.
Acceptance of Proposal

A proposal is said to be accepted when the offeree signifies his/her assent.

A proposal, when accepted, becomes a promise. The offeree agrees to be
bound by the terms of the offer by accepting it. Acceptance of the offer
must fulfil the following conditions:
i) It must be absolute, unqualified and unconditional.
ii) Only the offeree himself or a person authorised by him can accept the
offer.
iii) It must be communicated to the offeror.
iv) Acceptance communicated to an unauthorised person is not valid.
v) It must be expressed in some usual and reasonable manner.
vi) It must be made in the manner specified in the offer;
vii) Conditional acceptance or qualified acceptance is no acceptance.
Revocation of Offer
The promisor may revoke an offer at any time before it has been accepted.
However, once acceptance has been made, the offer cannot be revoked
except in the following circumstances:
i) If acceptance is not made and communicated within the specified time.
ii) Death or insanity of either party.
iii) Non-fulfilment of the conditions of the offer.
iv) A counter (fresh) offer that nullifies the first one.
v) Acceptance not made in the prescribed or usual mode.
vi) Offer contravening legal limits.
CAPACITY OF PARTIES
Minors
According to the Indian Majority Act, 1875, a person, domiciled in India,
who is under 18 years of age, is a minor.
An agreement made by a minor is treated as follows:
i) It is considered void ab initio and, hence, inoperative.
ii) A minor can be a beneficiary under a contract, provided that he is not
required to bear any obligation.
iii) A minor cannot enter into a partnership except through his legal
guardian and with the consent of the other partners.
iv) A minor can be an Agent, but he cannot be held personally liable for any
negligence or breach of contract.
CAPACITY OF PARTIES
Persons of unsound mind:
According to the ICA, “a person is said to be of sound mind for the purpose
of making a contract, if, at the time when he makes it, he is capable of
understanding it and of forming a rational judgment as to its effects upon
his interests.”
The following people are not considered to be of sound mind:
i) An idiot who has completely lost his mental faculties.
ii) A lunatic whose mental powers are deranged due to some mental
sickness or abnormality.
iii) A person who is drunk or in a state of intoxication and therefore
incapable of making a contract during such state.
CAPACITY OF PARTIES
Disqualified person:
i) An alien friend can contract, but an alien enemy cannot. It means that a
foreigner living in India can enter into a contract during peacetime
between his country and India. But he cannot do so if his country is at war
with India.
ii) Foreign ambassadors or diplomats can enter into a contract, and can
sue others to enforce the contract, but they cannot be sued without
obtaining prior sanction of the Central Government.
iii) A convicted and imprisoned person is incompetent to make a contract
or to sue on contracts made before his conviction.
iv) A person declared insolvent cannot enter into a contract relating to his
property.
TYPES OF CONTRACTS
According to enforceability by law
i) Valid contract: A contract or an agreement between two parties becomes valid and
enforceable by law when it fulfils all the essential elements of a valid contract.
ii) Voidable contract: A contract that can be nullified at the option of a party under
certain circumstances is called a voidable contract.
iii) Void contract: Void means null. A void contract is a contract which has no legal
validity. According to the ICA, ‘a contract which ceases to be enforceable by law becomes
void when it ceases to be enforceable.’
iv) Unenforceable contract: An unenforceable contract is one which is valid in itself, but
is not capable of being enforced in a court of law because of some technical defect such
as absence of writing, registration, requisite stamp, etc.
v) Illegal or unlawful contract: A contract which violates the law of the land is considered
void ab initio (void since the inception).
TYPES OF CONTRACTS

According to the extent of execution

i) Executed contract: When both the parties to a contract have completely performed their share of
obligations, the contract is said to be executed.
ii) Executory contract: A contract is said to be executory when all the obligations and terms have not yet
been fully carried out by either or both the parties to a contract, but will be carried out in future.
According to the mode of creation
i) Express contract: When both the offer and the acceptance constituting an agreement enforceable by law
are made in spoken or written words, they form an ‘Express Contract’.
ii) Implied contract: Where both the offer and acceptance constituting an agreement enforceable by law
are made other than in words, i.e., by acts and conduct of the parties, it is an implied contract.
iii) Constructive or Quasi contract: When the law infers or recognises a contract under certain special
circumstances even though the parties have not made an agreement, express or implied, it is called a Quasi
or Constructive Contract.
iv) Wagering and Contingent contract: A wager is a bet. A wagering contract promises to give money or
money’s worth upon the determination of an uncertain event like a lottery.
MODES OF DISCHARGE OF A CONTRACT
When the rights and obligations arising out of a contract are fulfilled by both parties, the contract is said
to be discharged or terminated. A contract may be discharged in the following ways:
By performance
i) Actual performance: When each party to a contract fulfils his obligation as per the stipulations of the
contract, it amounts to actual performance, and the contract stands discharged.
ii) Attempted performance or tender: When the promisor offers to perform his obligation under the
contract, but is unable to do so because the promisee has not yet accepted the performance, it is called
‘attempted performance’ or ‘tender.’
By mutual agreement
A contract may be discharged by mutual consent through:
i) Novation: When a new contract is substituted for the original one, the latter stands discharged.
ii) Rescission: When one or all the parties cancel the contract, it is called rescission.
iii) Alteration: When alterations are made to the original contract with mutual consent of both parties, the
original contract stands discharged.
iv) Remission: Remission means acceptance by a promisee of a lesser amount, or lesser degree of
performance than what was contracted for.
v) Waiver: Waiver is the willing relinquishment of rights by any one of the parties to the contract.
MODES OF DISCHARGE OF A CONTRACT
When the rights and obligations arising out of a contract are fulfilled by both parties, the contract is said
to be discharged or terminated. A contract may be discharged in the following ways:
By subsequent or supervening impossibility or illegality :
i) Initial impossibility: If a contract stipulates the performance of an act that is obviously impossible at the
time the contract is made, it is not considered valid.
ii) Subsequent or Supervening impossibility: If the act stipulated in the contract becomes impossible
subsequent to the forming of the contract, it becomes void.
The Defendant agreed to sell a specified quantity of potatoes grown on his farms. The crop failed largely
due to disease and was not within the Defendant’s control. Held, contract is discharged.

By lapse of time
The suffering party can initiate legal action within a specified period, called the period of limitation. If he
does not do so, the case becomes time-barred, and the contract cannot be enforced.

By breach of contract
When a party to the contract defaults in fulfilling its part of the agreement, the contract stands breached,
and hence, terminated. The aggrieved party has the right to sue for damages for breach of contract as per
law.
MODES OF DISCHARGE OF A CONTRACT
When the rights and obligations arising out of a contract are fulfilled by both parties, the contract is said
to be discharged or terminated. A contract may be discharged in the following ways:
By operation of law: A contract terminates by operation of law in the following cases:
i) Death: The death of the promisor discharges the contract that is of a personal nature. In other contracts,
the rights and liabilities of the deceased person pass onto the legal representatives of the dead man.
ii) Insolvency: When a party of the contract is declared insolvent by law, and the court passes an ’order of
discharge’ exonerating the insolvent from liabilities on debts incurred prior to his being declared insolvent,
the contract is discharged.
iii) Merger: Where an inferior right accruing to a person merges with a superior right vesting in the same
person, the contract pertaining to the inferior right stands automatically discharged.
iv) Unauthorised material alteration: Any alteration made in a written document or contract by one party
without the consent of the other renders the whole contract void.
REMEDIES FOR BREACH OF CONTRACT

Rescission: The aggrieved party may decide not to take any legal action against the guilty party,
but they can rescind the contract and need not perform their part of obligations under the
contract.
Suit for damages: Damages are monetary compensation allowed for the loss suffered by the
aggrieved party as a result of the breach of contract.
Suit for specific performances: The aggrieved party may file a suit to seek the court’s direction to
compel the defaulting party to perform his/her part of the contract.
Suit for an Injunction: An ‘Injunction’ is an order from the court directing a party to do a certain
act or to restrain the party from doing a certain act.
Suit upon quantum meruit: It is a claim for equitable compensation for partial performance of
the contract. ‘Quantum Meruit’ literally means ‘as much as is earned’ or ‘in proportion to the
work done’. A party can claim compensation for the work already done.
Miscellaneous
Free consent – a) There shall be free consent between the parties to the
contract b) Consent is said to be free when the following elements are
absent (Section 14) - Coercion (Section 15) - Undue influence (Section 16) -
Fraud (Section 17) - Misrepresentation (Section 18) - Mistake (Section 20,
21, 22)

Competent (capacity) to contract – Section 11 a) The parties to the

contract shall be competent to contract b) For a person to become
competent to contract – - Such person should be major (18+) - Such person
should be of sound mind (Section 12) - Such person should not be
disqualified by law
Miscellaneous
Consideration: Exceptions - Under following cases, a contract will be valid
even without consideration 1) Promise made on account of natural love
and affection 2) Promise to compensate for voluntary services 3) Promise
made to pay a time barred debt 4) Completed Gifts 5) Creation of agency
6) Contract of Guarantee

DOCTRINE OF PRIVITY OF CONTRACT / STRANGER TO CONTRACT –

Beneficiary of a trust
Provision in marriage settlement –Provision for maintenance or marriage
expenses of female members under a family arrangement – Assignee of a
contract –Acknowledgement of liability –Agency contract –
Human resources slide 9

Thank
You