By

Malavika Sharma
Compiled from Bare Acts

With descriptions and explanations

Business Law

Compiled by Malavika Sharma

Units 1 and 2

 Unit 1: Contract Act of India 1872

 Unit 2: Special Contracts (Under the Contract
Act of India 1872)

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Unit 1: Contract Act of India 1872

 What is a contract?
 “Essentials of a Valid Contract”
▪ Who can enter into a contract?
▪ Reverse – who cannot enter into a contract
 Types of Contract
 Performance and Discharge of a Contract
 Remedies for Breach of Contract

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What is a Contract?

A contract is an agreement enforceable by

law.

An Agreement:
 Every promise and set of promises forming
the consideration for each other.
 Promise + Consideration = Agreement

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 “Essentials of a Valid Contract”
1. Two or more Parties need to be there
2. Intent Of Legal Obligations – they should wish to enter into a legal relationship
3. Case Specific Contracts
 Some contracts have special conditions that if not observed would render them invalid or void
 Similarly, in the case of contracts like contracts for immovable properties, registration of contract is
necessary under the law for these to be valid.
4. Certainty of Meaning – the contract should be “meaningful and not deal in abstracts”
5. Possibility Of Performance Of an Agreement – the performance of the agreement should be
something which can actually be done. Eg someone promises to bring some dead relative back as
a part of the agreement?
6. Free Consent – ie no one was forced into the contract.
7. Competency Of the Parties – ie all parties are “competent to enter into a contract” (Sec 11)
8. Consideration – for a contract to be Valid there has to be “something in return” given ie
consideration
9. Lawful Consideration – Under Sec 23 – the Consideration has to be legal one
 it is forbidden by law . Eg Buying and selling of Liquor in Bihar and GUjrat
 is of such a nature that, if permitted, it would defeat the provisions of any law, or is fraudulent.
 involves or implies, injury to the person or property of another . Eg X enters into a contract to give his house to
Y, if Y burns the property of Z
 the Court regards it as immoral or opposed to public policy

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Who can enter into a contract?
(Under Sec 11)

1. He should not be a minor – ie he / she

should be above 18 years or more
 In case he / she is a minor, a valid contract
can only be made by a “Legal Guardian”
▪ If the individual doesn’t have a “Legal
Guardian”, the court shall appoint an
appropriate “Legal Guardian”
 Further the Courts / legal authorities should
be satisfied that the “contract is in favour of
the minor”
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Who can enter into a contract?
(Under Sec 11) contd.
2. He / She should be of sound mind while making a
contract.
 If a person is normally of unsound mind – but during the
period of contracting, he is medically proven to be of
sound mind.
▪ Proving mental conditions can only be done by a Govt Recognized
Hospital / Medical facility

 If a person is normally of sound mind, but is of unsound

mind during the contracting – the person shall not be valid
to enter into a contract.
▪ Proving mental conditions can only be done by a Govt Recognized
Hospital / Medical facility
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Who can enter into a contract?
(Under Sec 11) contd.
3. He / She is not disqualified from contracting
by any other law to which he is subject
 There are other laws of the land that disqualify
certain persons from contracting. They are:-
▪ He/she is a convict under the law.
▪ Insolvent person – one who has filed for insolvency
under the law
▪ Alien Enemy – as defined by law
▪ Foreign Nations – sovereigns – diplomatic staff etc

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Types of Contract

Contracts are defined into types based on

the following 3 criterions:

I. On the basis of its enforcement

II. On the basis of mode of creation
III. On the basis execution

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Types of Contract
I. On the basis of its enforcement

A. Valid Contract
▪ An agreement enforceable by law is a “Valid Contract”
▪ They should have the following elements
▪ There is some consideration for it.
▪ The parties are competent to contract
▪ Their consent is free.
▪ Their object is lawful

B. Voidable Contract
▪ A voidable contract remains valid until rescinded. Ie once any of the parties rescinds, it is
deemed Void
C. Void Contract
▪ A void agreement is not enforceable at the option of either party.
D. Unenforceable Contract
▪ A valid contract which cannot be enforced due to an error or a technicality. Correction of this
error then makes it enforceable
E. Illegal/unlawful Contract
 Anything which contracts to do an “unlawful act” or illegal act as an object or consideration
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Types of Contract
II. On the basis of mode of creation

A. Express Contracts
▪ That which is defined in terms of Object, Consideration and Performance.
This maybe both verbal or written
B. Implied Contracts
▪ These are “implied” by virtue of behavior. Eg when you buy a plane ticket –
your seat, behavior etc are defined implicitly – and in turn the service by the Air
Plane staff is implicit
C. Quasi-Contract
▪ A contract which does not arise by virtue of any agreement between the
parties, but due to certain special circumstances, the law recognizes it as
a contract.

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Types of Contract
III. On the basis execution

A. Executed Contracts
▪ When both parties have performed their obligations
B. Executory Contract
▪ A contract in which one or both parties are still to perform their
obligations.
C. Unilateral Contract
▪ A one sided contract
D. Bilateral Contracts
▪ A legally binding contract formed by the exchange of
reciprocal promises.

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Performance and Discharge of a Contract

 Discharge of Contract by Performance

▪ When the parties to a contract perform their respective promises, the
contract is said to have been performed. This is the normal and natural
mode of discharging a contract.
▪ Actual Performance: The contract is said to have been performed, if both the
parties to the contract have performed their respective promises.
▪ Offer to Perform or Tender: Tender is an offer to perform the obligation under the
contract. When one party offers to perform its part of the promise and the other
party refuses to accept the performance, the first party is discharged from its
obligation provided the offer or tender to perform the contract was valid.

 Discharge of Contract by Mutual Agreement

▪ If both the parties to the contract, expressly or impliedly, agree to
terminate the contract, the contract is said to have been discharged by
mutual consent.
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Remedies for Breach of Contract

When a promise or agreement is broken by any of the

parties we call it a breach of contract.

1] Recession of Contract
 If one side does not perform its side of the contract, the other side can rescind.
2] Sue for Damages
 If a Contract isn’t performed - the other party has the right to sue in court
3] Sue for Specific Performance
 If a Contract isn’t performed - the other party has the right to sue for specific performance of the
contract
4] Injunction
 An injunction is a court order restraining a person from doing a particular act.
5] Quantum Meruit
 It literally translates to “as much is earned”. At times when one party of the contract is prevented
from finishing his performance of the contract by the other party, he can claim quantum meruit.

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Unit 2: Special Contracts
 Indemnity
 Concepts
 Rights and Duties of Parties
 Guarantee
 Concepts
 Difference between Indemnity and Guarantee
 Bailment
 Concepts
 Sale, Rights and Duties of Parties
 Pledge
 Concepts
 Rights and Duties of Parties
 Agency
 Intro and Essentials
 Nature of Relationship - Test of Agency
 Agent Vs Employee
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Indemnity

 Concepts
 ‘Indemnity’ literally means security against loss. Indemnification refers to the act
of being held not liable or being protected from costs by shifting them to another
party.
 If a person is promised by another that he will be protected or compensated in
case of loss or damage, he is said to be indemnified.

 Rights and Duties of Parties

 Rights of an Indemnity Holder
▪ The indemnifier will have to pay damages which the indemnity holder will claim in a suit.
▪ The indemnity holder can even compel the indemnifier to pay the costs he incurs in litigating
the suit.
▪ If the parties agree to legally compromise the suit, the indemnifier has to pay the compromise
amount.
 Duties of the indemnity-holder are:
▪ To act prudently.
▪ To act carefully and not negligently.
▪ To act with good intention and.
▪ To follow the direction orbytoMalavika
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the authority of the indemnifier.
Guarantee

 Concepts
▪ Defined under Sec 126
▪ A contract of guarantee as a contract to perform the promise or
discharge the liability of the defaulting party in case he fails to fulfill
his promise.
 Difference between Indemnity and Guarantee
▪ The main difference between guarantee and warranty lies in the
dissimilarity of expectations in both the cases.
▪ Generally, it is believed that one can get his money back with the
strength of a guarantee, if the product is defective or does not
provide the assured standard.

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Difference between Indemnity and Guarantee
Basis for Comparison Indemnity
Meaning A contract in which one party
promises to another that he will
compensate him for any loss
suffered by him by the act of the
promisor or the third party.
Defined in Section 124 of Indian Contract
Act, 1872
Parties Two, i.e. indemnifier and
indemnified
Number of Contracts One
Degree of liability of the Primary
promisor
Purpose To compensate for the loss
Maturity of Liability When the contingency occurs.
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Guarantee
A contract in which a party
promises to another party that he
will perform the contract or
compensate the loss, in case of the
default of a their person, it is the
contract of guarantee.
Section 126 of Indian Contract Act,
1872
Three, i.e. creditor, principal debtor
and surety
Three
Secondary
To give assurance to the promisee
Liability already exists.
Bailment

 Concepts
▪ Sec 148
▪ It is the delivery of goods by one person to another for some
purpose, upon a contract, that they shall, when the purpose is
accomplished be returned or otherwise disposed of according to
the directions of the person delivering them. The person
delivering the goods is called bailor and the person to whom they
are delivered is called bailee
 Sale, Rights and Duties of Parties

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 Bailment Contd.
A contract of bailment has the following essential’ features;
 1. CONTRACT
The first condition is that there must be a contract between the two parties for the delivery of
goods. Such contract may be express or implied, written or oral. ,
2. DELIVERY OF GOODS
This contract is for the delivery of some movable goods from one person (bailor) to another
person (bailee) or to his authorized agent. If the goods are immovable the contract will not be
a contract of bailment.
3. CHANGE OF POSSESSION
The possession of goods must be affected by such contract. Mere custody without possession
is not a contract of bailment.
4. PURPOSE OF DELIVERY
The delivery of the goods is for temporary purposes. It may be for safe-custody, repair,
carriage or for gratuitous use by the bailee.
5. NUMBER OF PARTIES
There is two parties tinder such contract e.g., the bailor and bailee. The person delivering the
goods is called the bailor and the person to whom the goods are bailed is called the bailee.

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Bailment Contd.
 6. RIGHT OF OWNERSHIP
In a contract of bailment, the right of ownership remains with an owner
(bailor) and is not changed. If the ownership is transferred, the contract will
be a contract of sale and is not of bailment.
7. CHANGE OF FORM
If the goods bailed are altered in form by the bailee, such as cloth. is
converted into a shirt still, the contract is one of bailment.
8. GOODS IN POSSESSION OF BAILEE
The delivery of the goods is not essential if the goods are already in the
possession of the person who enters into the contract as bailee.
9. REDELIVERY OF GOODS
Under such contract, the goods are redelivered to the bailor or according to
his directions upon the fulfillment of the purpose by the bailee.
 10.RIGHT OF REWARD
In a contract of bailment, both the parties bailor and the bailee can get a
reward but it depends on the nature of the transaction.
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 Bailment Contd.
RIGHTS OF THE BAILOR
1. RIGHT TO GET BACK THE GOODS
The bailor has a right to get back the goods bailed by him as soon as the purpose of bailment is accomplished. If the
bailee fails to do so, is entitled to get reasonable compensation from the bailee due to
2. RIGHT TO TERMINATE THE CONTRACT
The bailor has a right to terminate the contract of bailment if the bailee does any act with the goods bailed to him.
which is inconsistent with the terms of the contract. For example-bailor gives his tonga to bailee for his personal use,
but he uses it for carrying passengers.
3. EXPENSES OF SEPARATION
If the bailee has mixed the goods of bailor with someone other goods not belonging to bailor without the consent of
the bailor, the bailor has a right to get from bailee the expenses which he has to bear for the separation of his goods
from others.
4. COMPENSATION FOR GOODS:
If the bailee has mixed the goods of the bailor with someone other goods not belonging to bailor without the consent
of the bailor and bailors goods cannot be separated from the other goods, the bailor has a right 10 get reasonable
compensation from bailee tor his goods.
5. COMPENSATION FOR UNAUTHORISED USE
If the bailee make’s any use of the goods bailed, which is not in accordance to the conditions of the bailment, the bailor
has a right to get Compensation from the bailee for any damage arising to the goods from or during such unauthorized
use of the goods.
6. COMPENSATION FOR DELAY IN TIME
According to The Contract Act, the bailee is responsible to return, deliver or to tender the goods to the bailor at a
proper time. If he fails to do the bailor has a right to get compensation from bailee for any loss, destruction or
deterioration of the goods due to such delay in time.
7. RIGHT TO SHARE PROFIT
The bailor has a right to share with bailee any profit earned from the goods bailed if it is so provided by the contract.
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Bailment Contd.
DUTIES OF THE BAILOR

 DUTIES OF THE BAILOR

 The duties and liabilities of the bailor with regard to the contract of bailment are as under:
 1. TO DISCLOSE FAULTS
The bailor is bound to disclose to the bailee faults in the goods bailed, of which the bailor is aware, and which
materially interfere with the use of them or expose the bailee to extraordinary risks; and if he does not make such
disclosure, he is responsible for damage arising to the bailee directly from such faults Sec. 150.
Illustration; A lends a horse, which he knows to be vicious to B. He does not disclose the fact that the horse is
vicious. The horse runs away. B is thrown and injured. A is responsible to B for damage sustained.
2. TO REPAY NECESSARY EXPENSES
Where under the contract of bailment, the goods have been carried by the bailee or he has done some work upon
them for the bailor and the bailee has received no remuneration, the bailor must repay to the bailee necessary
expenses incurred by him for the purpose of bailment.
Illustration; A is a friend of B and repairs B is television set free of cost. On this repair, he bears Rs. 500 actual
Expenses due to a replacement of parts. B is bound by law to pay Rs. 500, the actual cost of repair to A.
3. TO REPAY EXTRA-ORDINARY EXPENSES
When the contract of bailment is for reward but bailee does some work for the benefits of the bailor and bears
extraordinary expenses, the bailor is bound to repay these extraordinary expenses in excess of the original reward.
Illustration; A keeps his bicycle for safe custody with B for reward the bicycle gets punctured without the negligence
of B and B repairs it. Now A is bound to pay these repair expenses to B in excess of the original amount.
4. TO INDEMNIFY BAILEE
The bailor is responsible to the bailee for any loss which the bailee may sustain by reason that the bailor was not
entitled to make the bailment, or to receive back the goods, or to give direction respecting.
Illustration; A gives B’s car for use to C without the permission of B. Later on, B gets compensation from C. Now C’
has legal right 10 be indemnified by A.
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Bailment Contd.
RIGHTS OF THE BAILEE

 The rights of the bailee in respect of bailment are as follows:

 1. TO RECOVER DAMAGES
The bailee is entitled to recover all the damages and losses suffered by the bailee due to the
defects in the goods bailed to him with the knowledge of the bailor.
2. RECOVERY OF EXPENSES
The bailee is also entitled to recover all the expenses incurred for the purpose of bailment and
for providing services 10 the bailor.-
3. RECOVERY OF COMPENSATION
The bailee can also recover compensation from the bailor for any loss caused to him due to any
defect in the bailor’s title.
4. RIGHT OF ACTION AGAINST THE THIRD PARTY
The bailee has a right to take legal action as an owner of the goods, against the third party who
wrongfully deprives the bailee of the use of goods bailed or does them any injury. The
compensation received from such claims must be dealt between the bailor and bailee in
accordance with their respective interests.
 5. RIGHT OF LIEN
When the bailee has rendered any service involving the exercise of labour or skill in respect of
the goods bailed, he has in the absence of a contract to the contrary, a right to retain such
goods until he receives due remuneration for the services he has rendered in respect of them.
Sec 170.
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Bailment Contd.
DUTIES AND LIABILITIES OF THE BAILEE

 1. TO TAKE CARE OF GOODS

According to section 151, the bailee is bound to take as much care of the goods bailed to him as a common person takes off his
own goods.
2. EXPENSES OF SEPARATION
If the bailee without the consent of the bailor mixes the goods of the bailor with his own goods, and goods can be separated or
divided, the bailee is bound to bear the expenses of separation or division, and any damage arising from the mixture. Sec 156.
3. UNAUTHORISED USE OF GOODS
If the bailee makes any use of the goods bailed, which is not according to the conditions of the bailment, he is liable to make
compensation to the bailor for any damage arising to the goods from or during such use of them. Sec 154.
4. INCONSISTENT ACT
A contract of bailment is voidable at the option of the bailor, if the bailee does any act with regard, to the goods bailee
inconsistent with the conditions of the bailment. Sec 153.
5. COMPENSATION
If the bailee without the consent of the bailor mixes the goods of the bailor with his own goods in such a manner that it is
impossible to separate the goods bailed from the other goods and deliver them back, the bailor is entitled to be compensated
by the bailee for the loss of the goods. Sec 157.
 6. RETURN OF GOODS
It is the duty of the bailee to return or deliver, according to the bailor’s directions the goods bailed, without demand, as soon as
the time for which they were bailed has expired, or the purpose for which they were bailed has been accomplished; Sec. 160.
7. RETURN OF GOODS AT PROPER TIME
The bailee is responsible to return, deliver or tender the goods to the bailor at a proper time. If he fails to do so, he is
responsible to the bailor for any loss, destruction or deterioration of the goods from that time. Sec 161.
8. RETURN OF PROFIT
In the absence of any contract to the contrary, the bailee is bound to deliver to the bailor, or according to his directions, any
increase or profit which may have accrued from the goods bailed Sec 163.

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Pledge - Concepts

 Concepts
▪ A pledge is only a special kind of bailment, and chief
basis of distinction is the object of the contract. Where
the object of the delivery of goods is to provide a
security for a loan or for the fulfilment of an obligation,
that kind of bailment is pledge. Under Indian Contract
Act, 1872 the ‘Pledge’ has been defined in section 172 as:
▪ S 172. “Pledge”, “pawnor”, and “Pawnee” defined.-
▪ The bailment of goods as security for payment of a debt
or performance of a promise is called “pledge”. The
bailor is in this case called the “Pawnor”. The Bailee is
called the “Pawnee”.
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Pledge Contd.
– Rights and Duties of Parties
Rights of a Pawnee

1. Right of retainer (Section 173- 174) – As per section 173, the pawnee may retain
the goods pledged, not only for a payment of a debt or the performance of the
promise, but also for the interest of the debt, and all necessary expenses incurred
by him in respect of the possession or for the preservation of the goods pledged.

2. Right to extra ordinary expenses (Section 175) – As per section 175, the pawnee
is entitled to receive from the pawner extra ordinary expenses incurred by him for
the preservation of the goods pledged.

3. Right of sale (Section 176) – As per section 176 (Pawnee’s right where pawnor
makes default) – If the pawnor makes default in payment of the debt or
performance at the stipulated time, of the promise, in respect of which the goods
were pledged, the pawnee may bring a suit against the pawnor upon the debt or
the promise and retain the goods pledged as a collateral security; or he may sell
the thing pledged, on giving the pawnor reasonable notice of the sale.
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Pledge Contd.
– Rights and Duties of Parties
Duties of a Pawnee

1. Duty to take reasonable care

2. Duty to give back the goods after repayment of
the loan
3. Duty not to make unauthorized use of goods
4. Duty to give back the owner any increment in the
goods
5. Duty not to mix the goods

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Pledge Contd.
– Rights and Duties of Parties
Rights of a Pawner

1. Right to redeem goods

2. Right to claim damages or compensation

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Pledge Contd.
– Rights and Duties of Parties
Duties of a Pawner

1. Duty to pay the loan

2. Duty to pay extraordinary expenses

incurred by Pawnee.

3. Duty to pay claims and damages or

compensation to Pawnee
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Agency

 Intro and Essentials

▪ When one party delegates some authority to another party whereby the latter performs his
actions in a more or less independent fashion, on behalf of the first party, the relationship
between them is called an agency. Agency can be express or implied.
Who is an Agent?
▪ The Indian Contract Act, 1872 defines an ‘Agent’ in Section 182 as a person employed to do any
act for another or to represent another in dealing with third persons.
Who is a Principal?
▪ According to Section 182, The person for whom such act is done, or who is so represented, is
called the “principal”. Therefore, the person who has delegated his authority will be the principal.
Who can appoint an Agent?
▪ According to Section 183, any person who has attained the age of majority and has a sound mind
can appoint an agent. In other words, any person capable of contracting can legally appoint an
agent. Minors and persons of unsound mind cannot appoint an agent.
Who may be an Agent?
▪ In the same fashion, according to Section 184, the person who has attained the age of majority
and has a sound mind can become an agent. A sound mind and a mature age is a necessity
because an agent has to be answerable to the Principal.

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Agency Contd.
Nature of Relationship - Test of Agency

Creation of Agency - An agency can be created by:

Direct (express) appointment–

 The standard form of creating an agency is by direct appointment. When a person, in writing or speech
appoints another person as his agent, an agency is created between the two.
Implication–
 When an agent is not directly appointed but his appointment can be inferred from the circumstances, an
agency by implication is created.
Necessity–
 In a situation of necessity, one person can act on behalf of another to save the person from any loss or
damage, without expressly being appointed as an agent. This creates an agency out of necessity.
Estoppel–
 An agency can also be created by estoppel. In a situation where one person behaves in such a manner in
front of a third person, as to make someone believe he is an authorized agent on behalf of someone, an
agency by estoppel is created.
Ratification–
 When an act of a person, who acted as another person’s agent (on his behalf) without his knowledge is
later ratified by that person, this creates an agency by ratification between the two.

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Agency Contd.
Types of Agents

1. Special Agent- Agent appointed to do a singular specific act.

2. General Agent- Agent appointed to do all acts relating to a specific job.
3. Sub-Agent-An agent appointed by an agent.
4. Co-Agent- Agents together appointed to do an act jointly.
5. Factor- An agent who is remunerated by a commission (one who looks
like the apparent owner of the things concerned)
6. Broker- An agent whose job is to create a contractual relationship
between two parties.
7. Auctioneer- An agent who acts a seller for the Principal in an auction.
8. Commission Agent- An appointed to buy and sell goods (make the best
purchase) for his Principal
9. Del Credere- An agent who acts as a salesperson, broker and guarantor
for the Principal. He guarantees the credit extended to the buyer.
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Agency Contd.
Authority of an Agent - Authority of an agent can be both express or implied.

Express authority
 According to Section 187, the authority is said to be express when it is given by words spoken or written.

Implied authority
 According to Section 187, authority is said to be implied when it is to be inferred from the facts and circumstances of the
case. In carrying out the work of the Principal, the agent can take any legal action. That is, the agent can do any lawful
thing necessary to carry out the work of the Principal.

Implied authority is of four main types

1. Incidental authority- doing something that is incidental to the due performance of express authority
2. Usual authority- doing that which is usually done by persons occupying the same position
3. Customary authority- doing something according to the pre-established customs of a place where the
agent acts
4. Circumstantial authority- doing something according to the circumstances of the case

Illustration
 Ali owns a shop in Bihar but lives in Mumbai. His shop is managed by a person named John. John takes care of
the deals regarding the shop and buys goods from a person named Ram, with Ali’s knowledge. In this case,
John has implied authority from Ali to buy these goods.
 Soham employed Abhay, who is a shipbuilder to build ships for him. In doing so, Abhay may legally buy all the
material necessary to build the ships.
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Agency Contd.

Termination of Agency
An agency can be terminated or is terminated in 5
different ways:

1. When the agent’s authority is revoked by the Principal

2. When the agent renounces the business of the agency
3. When the business of the agency is completed
4. When either of the parties dies or becomes mentally
disabled
5. When the Principal is adjudicated an insolvent

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Agency Contd.
Rights of an Agent - An agent has the following 5 rights:

1. Right of retainer– An agent has the right to retain any remuneration or

expenses incurred by him while conducting the Principal’s business.
2. Right to remuneration– An agent, when he has wholly carried out the
business of the agency has the right to be remunerated of any expenses
suffered by him while conducting the business.
3. Right of Lien on Principal’s property- The agent has the right to hold
(keep with himself) any movable or immovable property of the Principal
until his due remuneration is paid to him by the Principal.
4. Right to be Indemnified– The agent has the right to be indemnified
against all the lawful acts done by him during the course of conducting the
Principal’s business.
5. Right to Compensation– The Agent has the right to be compensated for
any injury or loss suffered by him due to the lack of skill and competency of
the Principal.
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Agency Contd.

Agent Vs Employee
 An agent is one who is authorized to do some act for or on behalf of
the principal.

 An employee is a on the payroll working for the principal / employer.

Note – at the behest of the employer, an employee can be
appointed an Agent to act on behalf of the employer (who shall then
be called principal)
 Sometimes the employee is asked to be Agent for "select" items / works

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 Units 3,4 shall follow 

Ask Queries when you have doubts!

Also answer your final Question Papers after

reading the questions…

Note 1 – Attempt Sec B first and then Sec A of your Final

Question Paper 

Note 2 – Keep an eye on the watch when you answer the paper

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