WHAT IS LAW?

• The word “LAW” means “rule made by authority

for the proper regulation of a community or
society or for correct conduct of life.” In other
words, “LAW” may be defined as the rules of
conduct recognized and enforced by the State to
maintain peace and order in the society.
• Branches of law:
 Civil LAW
 Criminal Law
 Constitutional Law
 International Law
 Industrial Law
 Mercantile Law or Commercial Law or Business
Law
 What is Law?
• In our course we are concerned with
Business Law and Industrial Law.
• Now we will take up Business Law. Under
Business Law the first law for discussion is
the “INDIAN CONTRACT ACT, 1872.”
• The Law of contracts forms the oldest branch
of the law relating to business transactions.
It deals with the law relating to the general
principles of contract. It affects every person
in one way or the other. Every one of us
enters into a number of contracts almost
every day. When a person takes a seat in a
bus, or deposits his luggage in a railway
cloak-room, goes to a picture hall to see a
movie or entrusts the car to the mechanic for
repairs and so on, he enters into a contract,
 INDIAN CONTRACT ACT, 1872.
though he may not be aware of this fact.
Without the law of contract, it would have
been difficult to determine and enforce the
rights and obligations of the persons. For the
business community, the law of contract is of
great significance as all the business
transactions are based on the contracts. THE
law of contracts determines the
circumstances under which a promise or an
agreement shall be legally binding on the
persons making it. It also provides the
remedies, which are available in a court of law
against a person who fails to fulfill his
contract and other conditions. Legally
enforceable promises are termed contracts.
 INDIAN CONTRACT ACT, 1872.
• The Indian Contract Act, 1872 came into force on
the first day of September 1872. and it applies to
the whole of India except the State of Jammu and
Kashmir. The Act does not deal with all the
branches of Law of contracts. Other branches of
contracts are now governed by other Acts such as
the Partnership Act, the Negotiable Instruments
Act, and the Sale of Goods Act etc.
• Definition of Contract: Section 2(e)- “Every
promise and every set of promises forming the
consideration for each other, is an agreement.”
The term promise is defined in Sec. 2(b)- “ A
proposal which is accepted becomes a promise.”
Therefore, an agreement consists of a proposal
from one party and its acceptance by the other.”
Agreement= Offer+ Acceptance
INDIAN CONTRACT ACT, 1872.
• But there are certain agreements, which are
not enforceable in a court of law. An
agreement of purely social or domestic
nature is not a contract.
Example: (Balfour vs. Balfour-1919)
A husband and wife were residents in Ceylon
where the husband was employed. They went
to England on a nine months leave. At the end
of the time the husband had to return alone
as the wife was advised to remain in England
because of illness. The husband promised to
send her a maintenance allowance of 30
pounds a month until she returned to Ceylon.
The husband failed to pay the amount. The
wife sued for the allowance. It was held that
there was no binding contract. She could not
 INDIAN CONTRACT ACT, 1872.
recover the amount as it was a social
agreement and the parties did not intend to
create any legal relations.
In everyday life a number of social and
domestic arrangements are entered into and
in these cases the parties usually do not
intend to create legal relations between
themselves. For example, a promise to lunch
together at a friend’s house or to attend a
marriage function or to play a cricket match
and so on. When the two parties enter into an
agreement, their intention must be to create
legal relationship between them. If there is no
such intention, there is no contract between
them.
 INDIAN CONTRACT ACT, 1872.

• It will be interesting to know that every

agreement is not a contract. When an
agreement creates some legal obligations
and is enforceable by law, it is regarded as
contract. The conditions of enforceability are
laid down Sec. 10 of the Indian Contract Act.
• Sec.10 reads as under:-
• All agreements are contracts, if they are
made by the free consent of the parties
competent to contract for a lawful
consideration and with a lawful object, and
are not hereby expressly declared to be void.
 INDIAN CONTRACT ACT, 1872.

• An agreement becomes a contract only if the

following conditions are satisfied:
I. The agreement must be made by the free
consent of the parties.
II.The agreement must be made by the parties
who are competent to contract.
III.The agreement must be made for a lawful
consideration and with a lawful object.
IV.The agreement must not be expressly
declared to be void.
 INDIAN CONTRACT ACT, 1872.
• Now let us get into the details of the
contract.
• Essential Elements of a valid contract:
1)There must be an offer and its acceptance.
In an agreement there must be at least two
parties, one of them making the offer and the
other accepting it. The offer when accepted
becomes an agreement.
2) There must be Mutual Consent of the Parties.
The parties to an agreement must have the
mutual consent, that is, they must agree upon
the same thing and in the same sense. This
means that there must be consensus ad idem
(meeting of minds)
 INDIAN CONTRACT ACT,
1872.
• We can understand the point with an
example.
• A owned two horses, one black and the other
white. He offered to sell one horse to B. While
making the offer, A had the black horse in
mind. But B accepted the offer, thinking that
it was made for white horse. In this case
there is no consensus ad idem ie. meeting of
minds, as the parties did not agree up on the
same thing in the same sense. Thus, no
agreement came into existence.
INDIAN CONTRACT ACT, 1872.
3. There must be Legal Obligations: An
agreement must create legal obligations(i,e.,
an obligation which is enforceable by law). An
obligation is the legal duty to do or abstain
from doing a definite act or acts. Moreover,
the parties must have the intention to create
legal obligations. If the parties do not intend
to create legal obligations, there is no
contract between them. In commercial or
business transactions, the usual presumption
is that the parties intended to create legal
obligations. It may be noted that an
agreement which gives rise to a moral or
social obligation is not a contract.
Example:
 INDIAN CONTRACT ACT, 1872.
• Example: A invited B to dinner. B accepted the
invitation. It is a social agreement. If A fails to
serve dinner to B, he(B) cannot go to courts of law
for enforcing the agreement. Similarly, if B fails to
attend the dinner, A cannot go to the courts of
law for enforcing the agreement.
4. There must be free consent of the parties; The
contract must have been made with free consent
of the parties. It may be noted that the consent is
not free, when it is obtained by coercion, undue
influence, fraud, misrepresentation of facts etc. If
the consent of the parties is not free. Then no
valid contract comes into existence.
Example: A threatened to shoot B’s son unless B
signs a promissory note for Rs. 20,000 in favor of
A. B signed the promissory note under the threat.
In this, B’s consent is not free as it is obtained
under pressure and therefore the promissory note
is not valid.
 INDIAN CONTRACT ACT, 1872.
5. The parties must be competent to contract: The parties must
be capable of entering into a contract. Minors or persons of
unsound mind are not competent to contract. If the parties
are not competent to contract then no valid contract comes
into existence.
Example: A, a minor, borrowed Rs. 500 from B and agreed to
repay it within two months. This is not a valid contract as A
is not competent to contract.
6. There must be Lawful consideration: The lawful
consideration is that which is not fraudulent, forbidden by
law, immoral or opposed to public policy. If the
consideration is not lawful, then no valid contract comes
into existence.
 INDIAN CONTRACT ACT, 1872.
Example: A promised to obtain an employment
for B in a Government department, and B
promised to pay Rs.10,000 to A. In this case,
the agreement is not valid as the
consideration of it is unlawful.
7. There must be lawful object: The object of
the agreement must be lawful. A lawful object
is that which is neither fraudulent, forbidden
by law, immoral nor opposed to any public
policy. If the object is not lawful, then no
valid contract comes into existence.
Example; A,B and C entered into an agreement
for a division of gain, among them, which is to
be acquired by them by fraud. In this case,
the agreement is not valid as its object is
unlawful.
 INDIAN CONTRACT ACT, 1872.

8. The agreement must not be declared to be

void: If certain agreements have been
expressly declared to be void by any law in
force in the country, then such agreements, if
entered into, shall not be enforceable by
court of law.
Example: A agreed to pay Rs. 50,000 to B if
he(B) does not marry throughout his life. B
promised not to marry at all. In this case the
agreement is not valid because agreements
in restraint of marriage are expressly
declared to be void(not enforceable by law).
 INDIAN CONTRACT ACT, 1872.
9. The agreement must be certain: The meaning of
the agreement must be certain. In other words,
an agreement whose meaning is not certain is
not valid.
Example: A agreed to sell B “ a hundred tons of
oil”. Here it is not clear what kind of oil is
intended to be sold. In this case, the agreement
is not valid as it is not certain.
10. The performance must not be impossible: The
performance of an agreement must be possible.
An agreement to do an impossible task is not
valid.
Example: A agreed with B to discover treasure by
magic. In consideration, B agreed to pay Rs. 500
to A. In this case the performance of the
agreement is impossible, and therefore it is not
a valid agreement.
 INDIAN CONTRACT ACT, 1872.
11. Necessary Legal Formalities: A contract may
be oral or in writing. If , however, a particular
contract is required by law is to be in writing, it
must comply with the necessary formalities as
to writing, registration and attestation, if
necessary. If these legal formalities are not
carried out, then the contract is not enforceable
at law.
To sum up, Essential Elements of Valid Contract
are:-
1. There must be an offer and acceptance.
2. There must be mutual consent of the paties.
3. There must be legal obligations.
4. There must be free consent of the parties.
 INDIAN CONTRACT ACT, 1872.
5. The parties must be competent to contract.
6. There must be lawful consideration.
7. There must be lawful object.
8. The agreement must not be declared to be
void.
9. The agreement must be certain.
10.The performance must not be impossible.
11. There must be necessary legal formalities.
 INDIAN CONTRACT ACT, 1872.
 COMMUNICATION OF OFFER AND
ACCEPTANCE: Section 3.
• An offer has no legal effect unless it is
communicated to the other party. An offer
can be communicated by any act or omission
of the offeror by which he intends to
communicate it. In simple words, the offer
can be communicated in any way, which has
the effect of laying before the offeree, the
offeror’s willingness to do or abstain from
doing something. Thus, an offer can be
communicated by words, spoken or written,
or by conduct.
 Completion of communication of offer:
Section 4. The communication of the offer ls
complete when it comes to the knowledge
 INDIAN CONTRACT ACT, 1872.

Of the person to whom it is made. As a matter of

fact, an offer cannot be accepted unless and until
it is brought to the knowledge of the offeree.
When the communication of the offer is complete,
the offeror becomes bound by it ( i.e., if it is
accepted by the offeree, then the offeror cannot
retract it). It may be noted that an offer, accepted
without its complete knowledge, does not create
any legal relations.
Example: A’s nephew ran away from his house. A
sent his servant in search of the boy. When the
servant had left, A offered to pay Rs. 500 to
anybody who dis covers the boy. The servant
came to know of the offer only when he had
already traced the boy.
 INDIAN CONTRACT ACT, 1872.
Example(contd.)
The servant came to know of the offer only when he
had already traced the boy. The servant brought
an action against A to recover the amount of the
reward. His action failed, as he had no knowledge
of the offer when he traced the boy.
When an offer is made by post, its communication
will be complete when the letter containing the
offer reaches the offeree. The term ‘reaching of
letter’ means , when the message of letter
reaches and comes in the knowledge of the
offeree.
Example: A offers by letter, to sell his house to B at
a certain price. The letter is posted on 25
December. It reaches B on 27 December. Here,
the communication of the offer is complete when
B receives the letter.s
 INDIAN CONTRACT ACT, 1872.
 Communication of Acceptance: An acceptance of
an offer has no legal effect unless it is
communicated to the other party. Like, an offer,
the acceptance can be communicated by any act
or omission of the acceptor by which he intends
to communicate it, or by any act or omission
which has the effect of communicating it( Sec3).
 Completion of communication of acceptance: The
communication of an acceptance is complete at
different times for the offeror and the acceptor.
Example: A offers to sell his house to B for Rs. 15
lakhs by a letter dated 25 December. The letter
reaches B on 27Dec. B accepts the offer by a
letter posted on 28 Dec. This letter of acceptance
reaches A on 30 Dec. Her, for A, the
communication of acceptance is complete when
the letter of acceptance is posted i.e., on 28Dec.
And for B, the communication of acceptance is
complete when the letter of acceptance is
ssreceived by A i.e., on 30Dec.
 INDIAN CONTRACT ACT,
1872.
• CONCLUSION OF THE CONTRACT:
• The contract comes into existence as soon
as the communication of offer and
acceptance is complete as per the sections
of the Act mentioned above. Sometimes, the
contracting parties are face to face, and
negotiate in the presence of each other. In
such cases, the contract comes into
existence as soon as the acceptor gives his
acceptance. (eg., says “yes”).
 INDIAN CONTRACT ACT,
1872.
Revocation of offer: Sec 6 describes the modes
in which an offer lapses. These are
I. By notice-An offer may be revoked any time before
acceptance but not afterwards.
II. By lapse of time- When the proposer prescribes a
time within which the proposal must be accepted, the
proposal lapses as soon as the time expires.
III. After expiry of reasonable time- If no time has
been prescribed, the proposal lapses after the expiry of
a reasonable time. The reasonable time will depend on
the circumstances of the case.
 INDIAN CONTRACT ACT,
1872.
iv. By death or insanity- The offer lapses by death or
insanity of the offeror provided that the offeree comes to
know about it before acceptance.
v. By non-fulfillment of conditions- If the offeree fails
to fulfill a condition precedent to acceptance, the offer
lapses.
vi. By counter offer- An offer also lapses, if a counter-offer
is made to it.
vii. By rejection of offeree- When offeree rejects the
offer, it comes to an end.
Offer and acceptance can be communicated through a
telephone.
 INDIAN CONTRACT ACT,
1872.
• Consideration- consideration is one of the
essential elements of a valid contract. Section 25
of the Indian Contract Act, specifically states that,
“An agreement made without consideration is
void”.
• Definition of consideration: The term
“consideration” may be defined as the price of
the promise. This term is used in a sense of quid
pro quo (i.e., something in return). This
‘something’, which a party gets in return, is the
consideration.
 INDIAN CONTRACT ACT, 1872.
• Essentials and legal rules for valid
consideration-
1) The consideration must move(must be done or promised to
be done) at the desire of the promisor Sec2(d). Example-
On the orders of the collector of a town, A built certain shops
in the bazaar at his own expenses. These shops were
occupied by B. In consideration of A having spent money in
construction, B promised to pay some money to A. A sued B
to recover the money as promised. The agreement between A
and B to pay the money was held void being without
consideration. A’s action to recover the money was rejected.
In this case, the shops were not built at the desire of the
promisor B, but at the desire of the collector.
 INDIAN CONTRACT ACT, 1872.
2. The consideration must be lawful-Sec 23: This
Section says “ Every agreement of which the consideration is
unlawful, is void”.
Example: A promised to pay Rs. 500 to B if he beats C. The
agreement is void as the consideration involves an injury to C,
which is unlawful.
3. The consideration must be real and not illusory.
Example: A promised to pay Rs. 5000 to B if he(B) brings a star
from the sky to earth. Thee contract is void as the
consideration is illusory.
4. The consideration may be furnished by a promisee or any
other person.
 INDIAN CONTRACT ACT, 1872.
• Example-An old lady, by a deed of gift,
transferred certain landed property to
B, her daughter. By the terms of the
gift deed, B was required to pay certain
sum of money to C (sister of A),
annually. On the same day, B executed
an iqrarnama(agreement) in favor of C
promising to pay the stipulated
amount. Later on, B refused to pay the
amount to C on the plea that no
consideration had moved from C to B.
C sued B to recover the amount. It was
held that C is entitled to recover the
amount as the consideration was
validly furnished by A, the old lady.