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 parties.
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.