Business Regulatory Framework

Mod 1
 Definition of Contract
• The word ‘contract’ is derived from the latin
word, ‘contractum’, which means ‘drawn
together’.
• Section 2 of Indian contract act defines a
contract as “ an agreement enforceable by law”.
• Agreement is defined as every promise from one
party to another, forming the consideration for
each other. Thus agreement involves an offer
and acceptance.
• Contract = Agreement + Enforceability by law.
 Law of contract
• Law of contract is the most important branch of Mercantile
law or Business law
• Main objective of Contract Act is to ensure that the rights
and obligations arising out of a contract are honored and
that legal remedies are made available to an aggrieved
party against the party not honoring his part of agreement.
• Indian Contract Act 1872 defines ‘contract’ as an
agreement which is enforceable at law.
• All contracts are agreements, but all agreements are not
contract.
• A contract consists of 2 elements-Agreement and Legal
obligation.
 Elements of a valid contract
• 1. There must be two parties – Offeror & Offeree
• 2. Agreement (= offer + acceptance)
• An agreement involves a valid offer by one party and a valid
acceptance by the other party.
• The offer when accepted becomes agreement.
• 3. Consensus ad idem – means there must be identity of minds
among the parties regarding the subject matter.
• The parties must agree upon the same thing and in the same sense.
• 4. Capacities of parties- The parties must have legal capacity to
enter contract, i.e, age of 18 years and a sound mind
• 5. Free consent of both parties.
• Consent is said to be when it is not caused by coercion , undue
influence, fraud etc.
• 6. Consideration –
• Means something in return, i.e, an advantage or benefit
moving from one party to another.
• A contract without consideration is not a contract at all.
• 7. Lawful object – object & consideration of the agreement
must not be illegal or immoral.
• 8. Not declared to be void- the agreement might not have
been expressly declared void by any law in the country.
• 9. Certainty and possibility of performance – The terms of
contract must be capable of performance.
• 10.Intention to create legal relationship between two
parties – Example: agreement to have a dinner is not
enforceable at law.
 Difference between agreement and
contract
Agreement
Every Offer and and its acceptance
constitute an agreement.
Every agreement need not be a contract
Agreement need not create a legal
obligation
Agreement is not a concluding or a
binding contract
Contract
Contract is an agreement enforceable by
law.
All contracts are agreements.
A contract necessarily creates a legal
obligation
Contract is concluding and binding on
concerned parties.
 Classification of Contract
• Contracts may be classified based on their legal effects or enforceability
into the following types
• 1. Valid contract - is an agreement enforceable at law, which possess all
essentials of a contract.
• 2. Voidable contract – is one which is enforceable by law at the option of
one of the parties.
• When the free consent of a party is not there(i.e, it is caused by coercion,
misrepresentation or fraud), the contract is voidable at his option.
• 3. Void contract – implies a useless contract which has no legal effects at
all.
• 4. Unenforceable contract – is one which is valid in itself, but not capable
of being enforced in a court of law because of some technical defect.
• Eg : 1.Bill of exchange becomes unenforceable after three years from the
date of bill, 2. A contract which is not attested/stamped, it is
unenforceable.
• 5. Illegal contract – Object is illegal.
 Cont…..
• On the basis of mode of creation, contracts
are classified into following
• 1.Express contract – through writing or words
spoken
• 2.Implied(Tacit contract) – by act or conduct
of parties.
• Example- A takes a cup of tea in a hotel, there
is an implied contract that he will pay for the
tea.
 Cont…..
• On the basis of the extent of execution, contracts are
classified into,
• Executed contract – here both parties have completely
performed their share of obligation.
• Executory (Bilateral contract) – here both or either
one obligations are outstanding. That is, one or both
the parties to the contract have still to perform their
obligation in future.
• Example- A agree to sell his car to B for Rs 2 lakh. If A
has sold his car to B and B has not paid the price, the
contract is executed to A and is executory to B.
 Previous Questions
• 1. Quasi contract
• 2. Who is promisor and promisee / Who is offeror and
offeree
• 3. Define executory contract
• 4. Define Voidable contract
• 5. Define privity of contract
• 6. Give any two similarities between fraud and
misrepresentation.
• 7. What is coercion
• 8. Define duress
• 9. Consensus ad idem(identity of minds)
• 10. What is contingent contract. Its characteristics(4marks)
• 11. Who is a minor
• 12. Define consideration. Give two rules
• 13. Explain agreement and its elements.
• 14. Who are the persons of unsound mind(4 marks)
• 15. Explain free consent(4marks)
• 16. Define Consideration. State the exception to the
general rule no consideration no contract.
• Essays
• Discharge of contract
• Types of contract
 Previous Questions
• 1. What is quasi contract
• A quasi contract is an agreement between
two parties without previous obligations to
one another that has been created.
• This contract is arranged and imposed by a
judge to correct a circumstance in which one
party acquires something at the expense of
the other party.
 Quasi Contract
• Example- consider a pizza that is delivered to the
wrong address. The pizza has already been paid for. If
the individual does not correct the delivery man and
instead keeps the pizza, the court system could issue a
quasi contract that would require the individual to pay
back the amount of the pizza to the party that
purchased the pizza.
• Here, the contract created between the pizza paid
person and pizza delivered person is a quasi contract.
• 2. Who is promisor and promisee
• The promisor(Offeror) is the person making
the proposal or offer in an agreement and the
person accepting the proposal is called
acceptor.
• Example- A sends an offer to B to buy his
house. Here A is the promisor/offeror
• When B accepts this offer, then B is known as
promisee or offeree.
• 5.Define Privity of contract
• Privity of contract is a common law principle
which provides that a contract cannot confer
any rights or impose obligations upon any
person who is not a party to the contract.
• Thus, a contract creates rights and obligations
only as between the parties to such contract.
 Discharge of Contract
• Discharge of contract means termination of
the contractual relationship between the
parties.
• When a contract is discharged, all the rights
and liabilities of the contracting parties are
extinguished, and their relationship comes to
an end.
 Various modes of discharge
• A contract may be discharged in the following
ways.
• 1. By performance of contract
• 2. By mutual consent or agreement
• 3. By lapse of time
• 4. By impossibility of performance or Illegality
• 5. By operation of law
• 6. By breach of contract
 By performance of contract
• When parties in contract have undertaken their obligation within
the time and in the manner prescribed, contract will be properly
discharged.
• By sec 37 of contract act, the parties to a contract must either
perform or offer to perform their promises.
• Thus Performance may be actual performance or attempted
performance.
• 1. actual performance – In order to claim performance, the parties
to a contract must have actually performed their promises
• 2. attempted performance or tender – here promisor will be ready
to perform his promise, but sometimes the promisee may refuse to
accept that performance. Here, the promisor is discharged from his
liability.
 By mutual consent or agreement
• A contract can be terminated by mutual
consent in any of the six ways
• By NOVATION (Sec 62): New contract substituted for old
contract with the same or different parties
• By RESCISSION (Sec 62) : When some or all terms of a
contract are cancelled, thus some obligations of the parties
get terminated
• By ALTERATION (Sec 62): When one or more terms of
• a contract is/are altered by the mutual consent of the
parties to the contract
• By REMISSION (Sec 63) : Acceptance of a lesser
performance of the promise made. Eg : A owes B Rs 5000.
A pas to B Rs 1000, and B accepts. This payment discharges
whole claim
• By Waiver : Mutual abandonment of the right by
the parties to contract.
• Eg : A agrees to supply 10kg rice to B. B in return,
agrees to supply 1o kg wheat. Then both A & B
agree to abandon their respective rights. This is
Waiver
• By Merger : When an inferior right accruing to a
party to a contract merges into a superior right
accruing to the same party.
• Eg : Y is a owner of a house, where X is residing
as a tenant. Then, X buys the house from Y. Thus,
X’s lesser right as lessee will be merged into his
superior right as owner.
 By lapse of time
• The act clearly states that a contract should be
performed within a specified time called period of
limitation.
• If the promisee takes no action within the limitation
time, then the contract is discharged.
• Example – X borrows Rs 5000 from Y through a
promissory note. If X does not pay the amount to Y
within the date of execution mentioned in the
promissory note, Y can file suit within 3 years from the
date of execution. If Y takes no action in that 3 years, Y
cant recover the amount from X. Thus, X is discharged
from the contract by lapse of time.
 By impossibility of performance or
Illegality
• Contract will be discharged when the
performance of contract becomes impossible.
• Impossibility may exist in the following
situations,
• 1. Impossibility at the time of formation of
contract
• 2. Impossibility which arises subsequent to the
formation of contract (supervening
impossibility) – This is due to some events or
factors beyond the control of parties.
• Eg :A & B contract to marry each other. Before
the time fixed for marriage, A goes mad. This
supervening factor renders the contract
impossible
• Supervening impossibility is an excuse for the
non-performance of the contract in the
following cases.
• Destruction of subject matter
• Death or personal incapacity of the promisor
• Change of law
• Subsequent impossibility is known as doctrine of
frustration under the English Law.
 By breach of contract
• Actual breach :
At the time when performance is due on the
date of performance.
• Anticipatory breach – when a party to a
contract refuses to perform his obligation
before the due date of performance, it is called
anticipatory breach
 By operation of law
Here, law itself discharges the contract in the
following circumstances.
• 1. by death of promisor- especially for a
contract involving personal skills and taste of
promisor.
• 2. by Insolvency- If a person is adjudicated
insolvent by a court, he is discharged from all
his rights and liabilities arising out of a
contract.
 Breach of contract
• A breach of contract is one party’s failure to meet his
promise in a contract, without a legal excuse.
• Actual breach : It happens when a person a party in a
contract does not perform his part of the contract at the
stipulated time.
• This happens when
• (1) the performance of one party is due on the pre
determined date of performance,
• (2) the performance of one party discontinued during the
performance of contract.
• Example – A agrees to sell B 50 bags of rice. A has delivered
20 bags. But B subsequently refuses to take any more rice.
Here, breach takes place during performance. Thus A is
dischaged from delivering further 30 bags of rice .
• Anticipatory breach – when a party to a contract
refuses to perform his obligation before the due
date of performance, it is called anticipatory
breach.
• Example- A agrees to supply 50 kg of sugar to B
on the 1st march 2018. But in september 2017, A
informs B that he is not going to supply the sugar.
Here B sue against A against for anticipatory
breach of contract.
• This breach is also known as breach by
repudiation.
 Remedies for Breach of Contract
• 1. Rescission of contract(cancellation)
• 2. Suit for specific performance
• 3. Suit for injunction
• 4. Suit for Quantum Meruit
• 5. Suit for damages
• 1. Rescission of contract(cancellation)
• It is the cancellation of contract
• When a contract is broken by one party, the other
party may sue to treat the contract as cancelled and
hence he is discharged from his liabilities/obligations in
the contract
• The court may grant rescission where the contract is
voidable at the option of the aggrieved party.
• Also the aggrieved party is entitled to receive
compensation for the damages due to the non
fulfillment of the contract.
• 2. Suit for specific performance
• In some cases, the aggrieved party will not be satisfied
by damages.
• In such cases, court will direct to make the specific
performance of the parties as per agreement.
• For example, a court may direct the specific
performance of the seller of antique goods, who has
breached his position as a promisor in a contract of
sale, to sell some goods to a buyer. Here, specific
performance may be granted as the monetary
compensation is not an adequate relief.
• 3. Suit for injunction
• Injunction is an order of the court preventing a
person from doing a particular act.
• It is a preventive relief to the aggrieved party.
• For example, a film star who has agreed to act
exclusively for a particular producer for one year,
breached this contract by acting for some other
producer. Here, court can issue an order of
injunction, restraining the actor to do so.
• 4. Suit for damages
• Damage means monetary compensation payable
to the injured party by the defaulting party.
• This suit is to put the aggrieved party in the same
financial position, if the contract will be
performed.
• Thus, damages are to be awarded for the losses
to the aggrieved party due to breach of contract.
• 5. Suit for Quantum Meruit
• The term quantum meruit means “as much as is merited”.
That is, payment in proportion to the work done.
• The general rule is that, when a party to the contract has
not fully performed what the contract demands, he is not
liable to receive any payment.
• In certain cases, a person can recover compensation on the
basis of ‘quantum meruit’.
• He can recover payment in proportion to the work he has
done. Also, he is prevented from completing the full work.
• A right to sue on a ‘quantum meruit’ arises where a
contract partly performed by one party has become
discharged by the breach of other party.
• The claim on quantum meruit arises in the
following cases,
• 1. When a contract is discovered to be un
enforceable : Example, A pays Rs.100 to B in
consideration of B’s promising to deliver his
dog. The dog is dead at the time of the
promise. This makes the agreement as void,
and B must repay A the sum of 1000 Rs.