1

Business Laws Unit I : The Indian Contract Act, 1872

1. Meaning and Definition of Business Laws

a) Business: - Business is an economic activity, which is related with continuous and regular production and
distribution of goods and services for satisfying human wants.
b) Law: - The Oxford English Dictionary defines the word Law as the rule made by authority for the proper
regulation of a community or society or for correct conduct in life.
c) The terms Business , Commercial , and Mercantile , in relation to law, are used in the same sense.

d) Business Law is defined as Business Law is that branch of law, which comprises laws concerning trade,
industry and commerce. Business law refers to those rules and regulations, which govern the formation and
execution of business transactions made by various persons in the society .

2. Sources of Law: Source` means `origin` which something is ultimately derived and often refers to the causes
operating before the thing itself comes into being. Jurists (legal expert) differ widely s to the origin of law.
One of the legal commentator traces its origin in general awareness of the people at any point of time. The
main sources of business law in India are shown in the table and briefly discussed thereafter:
a) English Law: Indian business law is modelled on the lines of English mercantile law, as India was under
British rule before its independence. The differences in the laws of India and England are primarily on
account of their different business environment, customs, and trade practices.
b) Customs or Usage: Custom is the most ancient of all the sources of law and has held the most important
place in the past though it is importance is now diminishing with the growth of legislation and precedent.
Custom is a habitual course of conduct observed uniformly and voluntarily by the people concerned. No
custom shall have the force of law if it in manner violates the Fundamental Rights.
c) Judicial Precedents or Decisions: The judicial decisions, usually referred to as precedents, are binding on
all courts having jurisdiction lower to that of the court, which gave the judgement. This is also called judge
made law. In the other words decision taken by a court (Supreme Court, High court and District court) in the
past can become a law in that particular country.
d) Statute Law: The statute law refers to the law laid down in the Acts of Parliament. It is superior to and
overrides any rules of the common law, equity or law merchant. The courts of law interpret the meaning of
such enactments and apply them. In the other words the bill passed at a parliament by its members can
become a part of law system in a country. The constitution of India confers power to enact law on its
parliament and legislatures of states. When a bill is passed by the parliament/state legislatures and assented
to by the President or Governor of a state, it becomes an Act or Statute . The bulk of )ndian Mercantile Law is
statute law. The Indian Contract Act, 1872, The Negotiable Instruments Act, 1881, The Sale of Goods Act,
1930, The Indian Partnership Act, 1932, The Companies Act, 1956 are instances of the statute law.
e) Personal Law: These are laws as per community/ casts available in a country. It includes provisions
prescribing Hindu law for Hindus and Islamic law for Muslims, for litigation relating to personal matters.
Example: Hindu Law and Muslim Law.

ShivaniSharma/BBAFT SEM I/IIMR

Page 1

Business Laws Unit I : The Indian Contract Act, 1872

3. The Indian Contract Act, 1872

3.1 Introduction
The law of contracts is the basis upon which the super structure of all business is built. It affects every person in one
way or the other, as all of us enter into some kind of contract every day. All contracts are based on agreements, which
are either express or implied. Every one of us enters into a number of contracts almost every day. Most of the time any
person does so without realising he/she is doing that from the view point of law. A person seldom realises that when
he gives clothes for dry cleaning, or when he buys milk, bread or biscuits, or when he goes to the auditorium to see a
movie, he is entering into a contract. In business transactions, normally, first promises are made followed by
performance. If parties were free to go back on their promises without incurring any liability, it would be impossible
to carry on any trade, industry or commerce. Hence, the law of contract was made laying down rules for performance
and discharge of a contract, and the remedies available to the aggrieved party in case of breach of contract.
The Indian Contract Act, 1872, was enacted from the 1st day of September, 1872. It applies to the whole of India
except the state of Jammu and Kashmir. At the time of inception, the act comprised of 266 sections in total which could
be broadly divided in to the following categories:

Sec.1-75:- General principle of the law of contract

Sec.76-124:- Contract relating to sale of goods
Sec. 125-238:- Special kinds of contracts namely indemnity, guarantee, bailment, pledge and agency
Sec.239-266:- Contract relating to partnership

Indian Contract Act 1872 is the main source of law regulating contracts in Indian law.
It determines the circumstances in which promise made by the parties to a contract shall be legally binding on them.
Each contract creates some right and duties upon the contracting parties. Indian contract deals with the enforcement
of these rights and duties upon the parties.
3.2 Meaning and Definition of Contract
The word contract is derived from the Latin Contractum meaning drawing together.
According to Section 2(h) of the Indian Contract Act, 1872, a Contract is An agreement enforceable by law". In the
other words an agreement which can be enforced in a court of law is known as contract.
An analysis of these definitions would show that a contract must have the following two elements:
(a) An agreement, and
(b) Its enforceability (legal obligation, in case of non-performance legal action can be taken by party of contract)
In the form of an equation, it can be shown as under:
Contract = Agreement + Enforceability at Law
(a) According to section 2(e) of Indian Contract Act, 1872, an Agreement is "every promise and every set of
promises, forming the consideration for each other." In equation format an agreement is:

Agreement = Promise + Consideration

ShivaniSharma/BBAFT SEM I/IIMR

Page 2

Business Laws Unit I : The Indian Contract Act, 1872

According to Section 2(b) Acceptance / promise is when the person to whom the proposal is made signifies his
assent thereto, the proposal is said to be accepted. Proposal when accepted becomes a promise." In equation format a
promise is:
Promise = Proposal/Offer + Acceptance
According to Section 2 (a) Proposal /Offer, When one person signifies to another his willingness to do or to abstain
from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a
proposal.
Example: A offers to sell his house for Rs. 50, 00, 000 to Y, Y accepts this offer. This offer after acceptance becomes
promise and this promise is treated as an agreement between X and Y.

In the other words, an agreement consists of an offer by one of one party and its acceptance by the other. In the
equation format an agreement is:
Agreement = Proposal (or Offer) + Acceptance of Proposal (or Offer) + Consideration
How an agreement comes into being;

A person makes proposal to another person say X offers to Y to sell his (X) car for Rs. 50000.

The other person to whom the proposal is made accepts it say Y accepts the offer.

With the acceptance of the proposal, promise comes into being, say now the X has promised to sell his car to Y
for Rs. 50000 and Y has promised to pay Rs.5
for X s car.

Every promise is forming a consideration (something in return) for each other, say the consideration which X
will receive for his car is Rs. 5
and the consideration which the Y will receive for his Rs.5
is X s car.

An agreement has come into existence, where X made an offer to Y, Y accepted the offer, the promises so
made by X and Y are forming consideration for each other.

(b) Enforceability of Law of an Agreement

An agreement is said to be enforceable by law if it creates some legal obligations. In the other words
the parties to an agreement must be bound to perform their promises and in case of default/ nonperformance by either of them, must intend to sue (claim in court).
In commercial or business agreements it is normally presumed (thinking) that the contracting
parties are intend to create legal relations.
In case of social, domestic and religious agreements the generally it is presumed that contracting
parties do not intend to create legal relations.
Example: X offers to sell his car to Y in Rs. 1, 50, 000. Y accepts this offer. Such an agreement,
between X and Y is a contract because it creates legal obligations. In this agreement, if X refuses to
sell or Y refuses to buy car, the other party can file a suit in the court of law for the breach (cancel) of
the contract.

ShivaniSharma/BBAFT SEM I/IIMR

Page 3

Business Laws Unit I : The Indian Contract Act, 1872

Example: X invites his friend Y to a dinner and Y accepts the invitation. If Y fails to turn up for dinner
(not reached for dinner). X cannot go to the court for claim his loss.
Now, Contract is:

An Agreement

Enforceable by law

Made between at least two parties

By which rights are acquired by one

Obligations are created on the part of another

And on failure, the other party has a remedy

3.3

Essential Elements of a Valid (Legal) Contract

As discussed earlier, an agreement enforceable by law is a contract; it means that to be enforceable by law an
agreement must possess the essential elements of a valid contract. The validity of an enforceable agreement depends
upon whether the agreement satisfies the essential requirements laid down in the Indian Contract Act, 1872. Section
10 of the Act provides for some elements which are essential in order to constitute a valid contract. According to
Section 10 of Indian Contract Act, 1872, All agreements are contracts if they are made by free consent of parties,
competent to contract, for a lawful consideration and with a lawful object and are not hereby expressly declared to be
void. The analysis of the provisions of Section 10 shows that a valid contract must have the following essential
elements:
i. Lawful offer and acceptance,
ii. Creating legal relationship
iii. Lawful consideration
iv. Capacity of parties
v. Free consent
vi. Lawful object
vii. Possibility of Performance
viii. Completion of legal formalities
ix. Certainty of meaning
x. Agreement not expressly d
i.

Lawful Offer and Acceptance: - In order to create a valid contract there must be an agreement between two
parties, i.e., lawful offer of one party followed by a lawful acceptance of that offer by another party. There
must be a lawful proposal and a lawful acceptance of that proposal, thus resulting in an agreement. The

ShivaniSharma/BBAFT SEM I/IIMR

Page 4

Business Laws Unit I : The Indian Contract Act, 1872

word lawful before offer and acceptance signifies that proposal and acceptance must satisfy the
requirements of the law of contract.
There must be two parties to an agreement, i.e. one party making the proposal and the other party accepting
it. Such offer any acceptance must be valid. An offer to be valid must fulfill certain conditions, such as it must
intend to create legal relations, its term, must be certain and unambiguous, it must be communicated to the
person to whom it is made, etc. An acceptance to be valid must folds certain conditions, such as it must be
absolute and unqualified, it must be made in the prescribed manner, and it must be communicated by an
authorized person before the offer lapses.
Example: A say to B that he will sell his cycle to him for Rs.2000. This is an offer. If B accepts this offer, there
is an acceptance.
ii.

Creating Legal Relations: - There must be an Intention among the parties that the agreement should be
attached by legal consequences and create legal obligations or legal relationship. If there is no such intention
on the part of the parties, there is no contract between them. Agreements of a social or domestic nature do
not contemplate legal relationship.
Example: A husband agreed to pay 30 to his wife every month while he was abroad. As he failed to pay the
promised amount, his wife sued him for the recovery of the amount. Held: She could not recover as it was a
social agreement and the parties did not intend to create any legal relations [Balfour v. Balfour (1919)2
K.B.571].
Example: A father promises to pay his son Rs.500 every month as pocket money. Later, he refuses to pay.
The son cannot recover as it is a social agreement and does not create legal relations.
Example: X is an oil trader and Y offers him to purchase 100 liter of eatable oil on a certain date and rate. X
accepts this offer and received payment for this but refuse to deliver oil to Y. Now, Y can create a suit on X in
case of nonperformance by X.
In the other words, if the parties are intending to create a legal completion for contact performance than only
it is a legal or valid contract otherwise not.

iii.

Lawful Consideration: - An agreement must be supported by lawful consideration. Consideration means an

advantage or benefit moving from one party to the other. It is the essence of a bargain. In simple words, it
means something in return . The agreement is legally enforceable only when both the parties give something
and get something in return. A promise to do something, getting nothing in return, is usually not enforceable
by law.
Consideration need not necessarily be in cash only, it may be an act, or might anything which is acceptable by
both the parties and have value in the eye of law. )t may be for to do something or abstinence to not do
something .

According to section 23, Consideration is lawful, it means that, it must not be forbidden/ restricted by Indian
law, it must not be against public/civil policy of India, it must not be any act to harm/injury to any person or
any person s property, it must not be fraud.
In the other words, for a lawful agreement the consideration must neither be unlawful nor opposed to public
policies.

ShivaniSharma/BBAFT SEM I/IIMR

Page 5

Business Laws Unit I : The Indian Contract Act, 1872

Example: X promises to deliver his goods to Y and Y promises to pay Rs. 1000 on delivery. In this case, the
consideration for each of these promises is: for X , Y s promise to pay Rs.
on delivery and for Y, X s
promise to deliver his goods. Both the parties are promising consideration for each other.
Example: X promises Y to pay Rs. 1000 to beat Z. Y beats Z and claims Rs. 1000 from X. X refuses to pay. Y
cannot recover because the agreement is void (invalid) on the ground of unlawful consideration.
Example: X promises Y to obtain an employment in the public/government service and Y promise to pay Rs.
100000 to X. The agreement is void on the ground of unlawful consideration.
iv.

Capacity of parties to contract: - (sec.11) The parties to an agreement must be competent to contract;
otherwise it cannot be enforced by a court of law. Competent means, the person whosoever is entering into a
particular contract must possess certain qualities like maturity to take right decision, understandability of all
contracting terms and conditions and eligibility to enter into a contract.
Under Indian Contract Act, 1872, Section
provides that Every person is competent to contract who is the
age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified
from contracting by any law to which he is subject.
Thus, incapacity to contract may arise from:

a) Minority: the law protects the rights of minor because they are not mature enough and may not
possess the capacity to judge what is good and bad for them. According to Section 3 of the Indian
Majority Act,
5, a minor is a person who has not completed
years of age. It means that the
person who is under the age of 18 or not completed age of 18 at the time of entering into contract are
not eligible to enter into a contract and that contract will be a void (invalid) contact.
Example: X minor borrowed Rs 8,000 from Y and executed mortgage of his property in favour of the
lender. This was not a valid contract because X is not competent to contract. Therefore, the mortgage
was not valid and the money advanced to minor could not be recovered.
b) Mental incompetence (Unsound mind): according to section
a person is said to be of sound
mind for the purpose of making a contract, if at the time when he makes it is capable to understand
the terms of contact and form a rational judgment as to its effect upon his interest. Thus, if person is
not capable of both, he is said to have suffered from unsoundness of mind.
Position of a person who is usually of unsound mind and occasionally of sound mind: A person,
who is usually of unsound mind, but occasionally of sound mind, may make a contract when he
is of sound mind.
Position of a person who is usually of sound mind and occasionally of unsound mind: A person,
who is usually of sound mind, but occasionally of unsound mind, may not make a contract when
he is of unsound mind.
In short, if the person is of sound mind at the time of formation or entering into a contract he/she is
capable enough to entre and can create a valid contract otherwise it a void contact.

ShivaniSharma/BBAFT SEM I/IIMR

Page 6

Business Laws Unit I : The Indian Contract Act, 1872

ICA, 1872, includes the following persons under the unsoundness of mind:

Lunatic (mentally ill): A person who is mentally deranged (mad, insane) due to some mental
force/tension or other personal experience but who has some lucid interval (the term that describes
a period in a mentally unbalanced person's life where they act normally) of sound mind. It means
that, when after a particular period of unsoundness of mind person is normal can make a contract
when he is of sound mind and it will consider as a lunatic person under law.

Idiots: A person who is permanently of unsound mind. It means that there are no mental faculties
available to think, learn and understand anything to that person. According to ICA, 1872, such a
person is not at all eligible to enter into a contract because of permanent incapability. Idiots are the
persons who suffer from Unsound mind from birth itself. Therefore they cannot enter into Contracts
throughout their life. In such a way they suffer from permanent Incapacity.

Drunken or Intoxicated Person: A person who is drunk, intoxicated or delirious from fever so as to
be incapable of understanding the nature and effect of an agreement or to form a rational judgment
as to its effect on his interests cannot enter into valid contracts whilst such drunkenness or delirium
lasts. According to ICA, 1872, such a person is not at all mentally available to understand terms of
contract while entering into a particular contract. It means that this category persons suffers from
unsoundness of mind temporary after getting recovered from the effect, they can enter into
Contracts.
Examples: A patient, in a lunatic asylum, who is at intervals, of sound mind, may contract
during those intervals.
Example: A sane man, who is delirious from fever or who is so drunk that he cannot understand
the terms of a contract or form a rational judgment as to its effect on his interest, cannot contract
whilst such delirium or drunkenness lasts.

c) Status/ Person Disqualified by Law: Besides minor and person of unsound mind, there are others
who are disqualified from contracting under the provisions of some other laws, such person have
been discussed below:

Alien Enemies (Political Status) : An alien (citizen of a foreign state) is a person who is not a citizen
of )ndia. When there is a war between )ndia and another country, that country s citizen becomes an
alien enemy and cannot enter into contract.

Foreign Sovereigns and Ambassadors: They can enter into contracts and enforce those contracts
in our courts but they cannot be sued in our courts without the sanction of the Central Government
unless they choose to submit themselves to the jurisdiction of our courts.

Convict: A convict is one who is found guilty by a court and is undergoing sentence of imprisonment.
During the period of his imprisonment, he is incompetent to contract and also to sue on contract
made before conviction.

Company or Corporation: A company/corporation is an artificial person created by law. It cannot

enter into contract outside the powers, conferred upon it by its Memorandum of Association (object
clause) or by the provisions of its Special Act.

ShivaniSharma/BBAFT SEM I/IIMR

Page 7

Business Laws Unit I : The Indian Contract Act, 1872

v.

Insolvents: When a person s debts exceed his assets, he is adjudged insolvent and his property
stands vested in the Official Receiver or Official Assignee appointed by the court. Such a person
cannot enter into contracts relating to his property.

Free consent: - (sec.14) It is essential to the creation of every contract that there must be a free and genuine
consent of the parties to the agreement.
According to section 23 of ICA, 1872 consent means two or more people are said to be consent when they
are agree upon the same thing in the same sense. Thus consent involves identity of minds in respect of the
subject matter of the contract . When there is no consent at all, the agreement is void (invalid) and not
enforceable at the option of either party.
Example: X has one Maruti car and one Fiat car. He wants o sell Fait car. Y does not know that X has two cars.
Y offers to buy X s Maruti car for Rs. 5
. X accepts, the offer thinking it to be an offer for his Fiat car. (ere
there is a no identity of minds in respect of subject matter i.e. car.
The consent of the parties is said to be free when they are of the same mind on all the material terms of the
contract. The parties are said to be of the same mind when they agree about the subject-matter of the contract
in the same sense and at the same time.
Free Consent: According to Section 14 of ICA, 1
, Consent is said to be free when it is not caused by (i)
Coercion, (ii) Undue influence, (iii) Fraud, (iv) Misrepresentation, or v Mistake .

In the other words, if consent comes with one of the above mentioned element it will not be considered as a
free consent by contracting party and will be formed a void contract.

Coercion: threatening someone to enter into a contract or compelling to enter into a contract with
force and with intension to detain their property.
Example - A Hindu widow was forced to adopt a boy under threat that her husband s dead body
would not be allowed to be removed if she does not adopt the boy, She adopted the boy. Here,
Widow s consent has been obtained by co-ercion because preventing the dead body from being
removed for cremation is an offence under section 297 of the Indian Penal Code. (Ranganayakamma
V. Alwar Setti).

Undue Influence: (unfair/inappropriate use of power) It means, dominating the will of the other
person to obtain an unfair advantage over the other.
Example: A poor hindu widow agreed to pay interest at 100% per annum because she needed the
money for her maintenance to money lender. As lender is in a position to dominate will of her.
Example: A devotee gifted her property to her spiritual guru to secure benefits to her soul in the next
world. As in this contract the spiritual guru is in position to dominate her will.

Fraud: (Intentionally wrong representation to cheat someone) It means a false representation of fact
made wilfully with a view to deceive (harm) the other party. Under fraud one part has to
present/express about the fact which is false.

ShivaniSharma/BBAFT SEM I/IIMR

Page 8

Business Laws Unit I : The Indian Contract Act, 1872

Example: X offer Y to sell his Cannon printer at price of Rs. 3000, he offered that printer is of good
quality and new. Y believed on him and purchased his printer. On the other hand, X was aware that
printer is old and the quality is not good. This will be case of a fraud.

Misrepresentation: (innocent wrong representation to just get assent of other party) it means a false
representation of fact made innocently or non-disclosure of a material fact without any intention to
deceive the other party.
Example: X wants to sell his factory to Y and made an offer that his factory yearly capacity to
produce is 1000 units and he was not aware about the actual production capacity, he just want assent
of Y to purchase factory. Y purchased factory. Here the intention of X was not to deceive Y but to just
get him entre into contract.

Mistake: (erroneous belief or concept) a mistake is said to be occurred where the parties intending to
do one thing by error do something else.
Example: A agrees to buy from B a certain horse. It turns out that the horse was dead at the time of
the bargain, though neither party was aware of the fact. The agreement is void.

vi.

Lawful object: - (Sec.23) The object of an agreement must be lawful. The object is considered lawful unless it
is forbidden by law or is fraudulent or involves or implies injury to the person or property of another or is
immoral or is opposed to public policy.
Example: A promise to pay B Rs.5 thousand if B beats C. The agreement is illegal as its object is unlawful.

vii.

Possibility of performance: - (sec.56) The valid contract must be capable of performance section 56 lays
down that. An agreement to do an act impossible in itself is void. )f the act is legally or physically impossible
to perform, the agreement cannot be enforced at law.
Example: A agrees with B to discover treasure by magic, the agreement is not enforceable.
Example: A agrees with B to put life into B s dead brother. The agreement is void as it is impossible
of performance.
Example: X agrees with Y to enclose some areas between two parallel lines and Y agrees to pay Rs.
1000/- to X. This agreement is void because it is an agreement to do an impossible act.

viii.

Completion of legal formalities: - A contract may be oral or in writing. As regards the legal effects, there is
no difference between a contract in writing and a contract made by word of mouth. It is, however, in the
interest of the parties that the contract should be in writing. There are some other formalities also which have
to be complied with in order to make an agreement legally enforceable. In some cases, the document in which
the contract is incorporated is to be stamped. In some other cases, a contract, besides being a written one, has
to be registered.
Example: A Verbally promises to sell his book to y for Rs.200 it is a valid contract because the law does not
require it to be in writing.
Example: A verbally promises to sell his house to B it is not a valid contract because the law requires that the
contract of immovable property must be in writing.

ShivaniSharma/BBAFT SEM I/IIMR

Page 9

10

ix.

Business Laws Unit I : The Indian Contract Act, 1872

Certainty of meaning:- In order to give rise to a valid contract the terms of the agreement must not be vague
or uncertain. If it is vague and it is not possible to ascertain its meaning, it cannot be enforced. According to
Section
of the Contract Act, Agreements the meaning of which are not certain or capable of being made
certain are void. )n order to give rise to a valid contract the terms of the agreement, must not be uncertain.
For a valid contract, the terms and conditions of an agreement must be clear and certain.
Example: A promised to sell 20 books to B. It is not clear which books A has promised to sell. The agreement
is void because the terms are not clear.
Example: A agrees to sell B a hundred tons of oil. It is not clear what is the kind of oil. The agreement is void
because of it uncertainty.
Example: A agreed to purchase a van from B on hire-purchase terms. The price was to be paid over two
years. Held there was no contract as the terms were not certain about rate of interest and mode of payment.

x.

Agreement not expressly declared void: - (sec.24 to 30) the agreement must not have been expressly
declared to be void, under the Section 24 to 30 of ICA, 1872.
This includes: Agreement in restraint of marriage (to stop someone to get marry), agreement in restraint of
trade (to stop someone to trade with any one), agreement in restraint of legal proceedings (to stop someone
to not take legal action against someone) and agreement by way of wager (bet or gamble) have been
expressly declared void.
In the other words, ICA, 1872, already mentioned some of the agreements which cannot be enforceable by
law, which are void. If an agreement is need to be valid must not include any feature of these void
agreements.
Example: X promised to marry none else except Y and in default pay her Rs 1,00,000. X married to Z and Y
sued X for the recovery of Rs 1,00,000. It was held that Y was not entitled to recover anything because this
agreement was in restraint of marriage and as such void.
Example: A promise to close his business against the promise of B to pay him Rs.2 lac is a void agreement
because it is restraint of trade.
Example: A and B mutually agree that if it rains today A will pay B Rs 100 it does not rain B will pay A Rs
100 or where C and D enter into agreement that on tossing up a coin, if it falls head upwards C will pay O and
if it falls tail upwards D will pay C Rs 50; there is, a wagering agreement.
A wager can be described as, follows: The agreement of gaming and wagering is that one party is to win
and the other e upon a future every which at the time C the contract is of an a in nature - that is to say, if the
event turns out one way A will lose; ) it turns out the other way he will win.

ShivaniSharma/BBAFT SEM I/IIMR

Page 10

Business Laws Unit I : The Indian Contract Act, 1872

11

3.4 Types of Contracts

There are various basis on which contract can be classified are as follows:
1.

On the basis of Validity( lawful enforceability)

a) Valid Contract, (all essentials are present)
b) Void Contract, (valid at the time of formation but due to subsequent events became
void)
c) Void Agreement, (void from the beginning or formation)
d) Voidable Contract, (without free consent under which according to aggrieved party
contract can be set aside)
e) Illegal Agreement , and (when objective of contract is unlawful)
f)

2.

Unenforceable Contract. valid but can t be enforced by law due to technical defects i.e.,
in written)

On the basis of Formation/ Creation (how a contract came into existence or the way it has been framed)
a) Express Contract, (by words)
b) Implied Contract, and (without words)
c) Quasi Contract. (by law)

3.

On the basis of Performance/ Execution (task allotted between both the parties)
a) Executed Contract,
b) Executory Contract,
c) Partly Executed and Partly Executory Contract,
d) Unilateral Contract, and
e) Bilateral Contract.
1. On the basis of validity
a) Valid Contract: If a contract satisfies all the conditions/essentials prescribed by section 10 of ICA,
1872, is a valid contract. If one or more these aligned essentials of a valid contract is missing than the
contract will be void, voidable, illegal or unenforceable.
Example: X offers marry to Y, Y accepts X s offer. This is a valid contract.

Example: X offers to sale his car to Y, Y accepts his proposal, this is a valid contract.
b) Void Contract: (void null, empty, not valid, invalid, ineffective or not have value in the eyes of law)
According to section j of the )CA,
, A contract which ceases to be enforceable by law becomes
void when it ceases to be enforceable . Ceases means finish, discontinue, come to the end, terminate
or when in a contract none of the party of a contract is willing or able to performed assigned tasks.
ShivaniSharma/BBAFT SEM I/IIMR

Page 11

12

Business Laws Unit I : The Indian Contract Act, 1872

In the other words, when a contract is valid at the time of formation but which subsequently became
void due to impossibility of performance because of non existence of subject matter (destroy or
damage of subject matter) or illegality (change of law) of contract performance or any other reason.
It means that void contract is a contract which is valid when parties are entering into a contract but
due to some future events parties are not able to perform contract than that valid contract will
become void.
Example: A offers on December 1, 2016 to sale his house in Rs. 40,00,000 to B on 30 December, 2016.
B accepts his offer. This is a valid contract. Suddenly, house of A destroyed by earthquake on
December 15, 2016. In this case contract among both of them was valid at the time of formation but
due to non existence of subject matter (house) it has became impossible to sale that house or to
complete the performance of contract.
Example: A trader from China X offers Indian Y to purchase toys from him on November 2016. Y
accepts his proposal. This is a valid contract because there is a peaceful relationship between both
countries at the time of contract formation. In the month of October, China declared war with India
and stopped all trade between both countries. Under this condition a valid contract between X and Y
will come to the end due to change of law and became void contract.
Example: Mr. X agrees to write a book for a publisher. After few days, X dies in an accident. Here a
valid contract becomes void due to the impossibility of performance of contract.
c) Void Agreement: According to Section 2 g , an agreement not enforceable by law is said to be void ,
such agreements are void from the beginning/ from the time of its formation (void-ab-initio), which
means that they are unenforceable right from they are made.
In the other words, agreement without legal effects is known as void agreement. For example an
agreement with minor or with unsound mind person is void from the beginning (void-ab-inito)
because minor and unsound mind person are not competent to enter into a contract as per ICA, 1972.
Thus a void agreement never matures into a contract.
Example: X is a minor borrowed Rs.2, 00, 000 from Y a majors and promised to repay after 1 month.
This is a void agreement as per ICA, 1872.
d) Voidable Contract: According to Section
i of )CA,
, an agreement which is enforceable by
law at the option of one or more of the parties thereto, but not at the option of others is a voidable
contracts . (voidable: capable of being made void, whose performance can be avoided and which can
be legally inactive) )n the other words, a voidable contract is a contract which can be set aside or
repudiate (cancel) or avoided at the opinion of the aggrieved party (contract party who has been
unfairly treated by other one). Until the contract is set aside or repudiate by aggrieved party, it
remains a valid contract.
In simple words, when one party of contract in the position to avoid performance on his part then the
agreement is treated to be voidable. Such a right may be arising when one of the party consent has
been taken with coercion, undue influence, misrepresentation, and fraud. It means that the party
whose consent was not free at the time of formation of contract (which is called as aggrieved party)
will be able to cancel the contract and ignore the performance. If the aggrieved party is not willing to
cancel contract, the contract will remained valid in the eye of law. Generally, a contract formed under
mistake will be void.

ShivaniSharma/BBAFT SEM I/IIMR

Page 12

Business Laws Unit I : The Indian Contract Act, 1872

13

Example: . B threatens to kill to C if he does not sell his imported scooter to D for Rs. 5000. C agrees.
Here the consent of C has been obtained through coercion. Under this contract if C wants, he can
cancel performance of contract i.e., transfer of scooter to D. it means that, according to C a contract is
voidable but D is considering this contract as valid. This is voidable contract.
e) Illegal Agreement: an illegal agreement is one the object of which is unlawful. Such an agreement
cannot be enforced by law. Thus, illegal agreements are always void-ab-initio (void from very
beginning). These are also considered as void agreements.
Example: X agrees Y to appoint him in government jog and will charge of Rs. 200000 for the same.
This is unlawful consideration between both parties.
f)

Unenforceable contract: - An unenforceable contract is a valid contract in law, but due to the fact
that it is incapable of proof, or because of some technical defect therefore it cannot be enforced in a
Court of Law. For instance, an agreement which is required to be stamped will be unenforceable if the
same is not stamped at all or is under-stamped. In such a case, if the stamp is required merely for
revenue purposes, as in the case of a receipt for payment of cash, the required stamp may be affixed
on payment of penalty and the defect is then cured and the contract becomes enforceable. If, however,
the technical defect cannot be cured the contract remains unenforceable, e.g., in the case of an
unstamped bill of exchange or promissory note or land trade.
Example: A offers to sale his land in Rs. 2000000 to B and contract is orally done. Afterwards, A
refuses to sale his land to B, this is valid contract but due to absence of written document this contract
is not enforceable at law. So, B will not be able to suit on A.

2.

On the basis of Formation:

a)

Express Contract: - According to Section 9of ICA, 1872, when the terms of a contract are
introduced in writing or are agreed upon by spoken words at the time of its formation, the contract
is express contract. It means contract specified and formed with the use of words whether oral or
written is called express contract.

Example: A says to B that he will sell his car to him for Rs. 80,000 and B agrees and say yes. This is a
spoken express proposal.
b)

Implied Contract: A contract inferred by the conduct (act) of a person or the circumstances
(situation) of a case is called implied contract. Or, when contract is being framed otherwise than
the use of words (not oral and written) is called as implied contract.
Example: The Delhi Transport Corporation (D.T.C) runs Omni buses on different routes to carry
passengers at the scheduled fares. This is an implied proposal by the DTC and accepted by those
who travel in DTC.
Example: A stops a taxi by waving his hand and takes his seat. There is an implied contract that A
will pay the prescribed fare.

c)

Quasi Contract: Quasi contracts are the contracts which are not created by words or
otherwise (by act or condition), these contract comes into existence by the law. Under section 6872, Constructive or Quasi contracts arise out of obligations enjoyed by one person from the

ShivaniSharma/BBAFT SEM I/IIMR

Page 13

Business Laws Unit I : The Indian Contract Act, 1872

14

voluntary acts of the other which are intended to be performed only on the happening of some
future uncertain event.
Generally a contract comes into existence as a result of offer made by one party and its acceptance
by the other party, with free will of both the parties. However under certain conditions even
though no will is expressed by both the parties for creating contractual relations, the law creates
and enforces legal rights and obligations. Such contracts are known as Quasi Contracts. The
principle behind Quasi Contracts is that a person shall not be allowed to enrich himself at the
expense of another.
Court creates quasi contract to avoid the unjust enrichment of a party in a dispute over payment
for goods or services. In some cases a party who has suffered from a loss in a business relationship
may not be able to recover for the loss without evidence of a contract. To avoid this unjust result,
courts create a fictitious agreement where no legal enforcement exists.
Example: A, a tradesman, leaves goods at B s house by mistake. B treats the goods as his own. B is
bound to pay A for them.
Example: A and B jointly owe Rs.5,000 to C. A alone pays this amount to C. B not knowing this
again pays Rs.5,000 to C. In this case C is bound to repay Rs.5,000 to B as this amount is paid to him
by mistake.
3. On the basis of Performance/ Execution (task allotted/ performance done between both the
parties)
a)

Executed Contract: Where both the parties have performed their obligations, it is an executed contract.

Example: A contracts to buy a bicycle from B for cash. A pays cash. B delivers the bicycle.
b)

Executory Contract: Where neither party to the contract has performed his share of the obligation, i.e.
both the parties have yet to perform their promises, the contract is executory.

Example: On June 1, A agrees to buy a bicycle from B. The contract is to be performed on June 15.
c)

Partly Executed and Partly Executory Contract: it is a contract where one of the parties to the contract
has performed his obligation and the other party has still to perform his obligation.
Example: X offer to sell his car to Y for Rs.
on a credit of one month. Y accepts X s offer. X delivered car
to Y. Here the contract is executed as to X and executory as to Y.

d)

Unilateral Contract: it is a one side contract in which only one party has to perform his promise or
obligation to do.

e)

Bilateral Contract: A bilateral contract is one in which both the parties have to perform their respective
promises or obligations to do.

ShivaniSharma/BBAFT SEM I/IIMR

Page 14

Business Laws Unit I : The Indian Contract Act, 1872

15

3.5 Discharge of Contract

Meaning
Discharge of a contract means discontinuation of the contractual relations between the parties. When the
rights and obligations arising out of a contract are extinguished, the contract is said to be discharged or
terminated.
Mode of Discharge
A contract may be discharged in any of the following ways:
a) Discharge by Performance: A contract can be discharged by performance, which can be:
i. Actual - When the parties to the contract perform their promises in accordance with the terms of the
contract.
ii. Attempted - When the promisor has made an offer of performance to the promisee but the offer has not
been accepted by the promisee.
b) Discharge by Mutual Consent or Agreement: Since a contract is created by mutual agreement, it can also
be discharged by mutual agreement. Discharge by mutual agreement can be done in any of the following
ways:
i. Novation - Novation means the substitution of a new contract for the original contract either between the
same parties or between different parties.
ii. Rescission - Rescission means cancellation of the contract by any party or all the parties to a contract.
iii. Alteration - Alteration means a change in the terms of a contract with the mutual consent. Alteration
discharges the original contract and creates a new contract.
iv. Remission - Remission is the acceptance of a lesser sum than what was contracted for or a lesser
fulfillment of the promise made.
v. Waiver - Waiver means intentional relinquishment of a right under the contract.
c) Discharge by Subsequent or Supervening Impossibility or Illegality:
1. Cases where the doctrine of supervening impossibility applies
i. Destruction of subject matter.
ii. Death or personal incapacity of promisor.
iii. Outbreak of war.
iv. Change of law.
v. Non-existence or non-occurrence of a particular state of things (failure of ultimate purpose).

ShivaniSharma/BBAFT SEM I/IIMR

Page 15

Business Laws Unit I : The Indian Contract Act, 1872

16

2. Cases not covered by supervening impossibility i. Difficulty of performance or less profitable.

ii. Commercial impossibility.
iii. Default of a third person.
iv. Strikes, lockouts and civil disturbances.
v. Partial impossibility or failure of one of the objects.
d) Discharge by Lapse of Time - A contract is discharged if it is not performed or enforced within a specified
period, called period of limitation. The Limitation Act, 1963 has prescribed the different periods for different
contracts, e.g. period of limitation for exercising right to recover a debt is 3 years.
e) Discharge by Operation of Law:
i. By death of the promisor.
ii. By insolvency.
iii. By merger.
iv. By unauthorized material alteration.
f) Discharge by Breach of Contract - A contract is said to be discharged by breach of contract if any party to
the contract refuses or fails to perform his part of the contract or by his act makes it impossible to
perform his obligation under the contract. A breach of contract may occur in the following two ways:
i. Anticipatory breach of contract - It occurs when the party declares his intention of not performing the
contract before the performance is due.
ii. Actual breach of contract - It can occur either on due date of performance or during the course of
performance.
3.6 Remedies for Breach of Contract
Meaning of Breach of Contract: A breach of contract occurs if any party refuses or fails to perform his part of the
contract or by his act makes it impossible to perform his obligation under the contract. In case of breach, the
aggrieved party (i.e. the party not at fault) is relieved from performing his obligation and gets a right to proceed
against the party at fault.
Remedies of Breach of Contract: A remedy is the courses of action which are available to an aggrieved party for the
enforcement of a right under a contract. The various remedies available are:
a) Rescission of Contract: Rescission means a right not to perform obligations. In case of breach of a
contract, the promisee may put an end to the contract. In such a case, the aggrieved party is discharged from
all the obligations under the contract and is entitled to claim compensation for the damage which he has
sustained because of the non-performance of the contract.

ShivaniSharma/BBAFT SEM I/IIMR

Page 16

17

Business Laws Unit I : The Indian Contract Act, 1872

b) Suit for Damages: Damages are monetary compensation allowed for loss suffered by the aggrieved party
due to breach of contract. Damages may be of five kinds:
i. Ordinary or General or Compensatory Damages: (i.e. damages arising naturally from the breach).
ii. Special Damages: (i.e. damages in contemplation of the parties at the time of contract).
iii. Exemplary, Punitive or Vindictive Damages: (i.e. damages which are in the nature of punishment).
iv. Nominal Damages: (i.e. awarded only for the name sake).
v. Liquidated Damages: means a sum fixed up in advance, which is a fair and genuine pre-estimate of the
probable loss that is likely to result from the breach.
c) Suit for Specific Performance: means demanding the court s direction to the defaulting party to carry out
the promise according to the terms of the contract. For example - X agreed to sell an old painting to Y for Rs.
50000. Subsequently X refused to sell the painting. Here, Y may file a suit against X for the specific
performance of the contract.
d) Suit for Injunction: means demanding court s stay order )njunction means an order of the court which
prohibits a person to do a particular act. For example -W agreed to sing at L s theatre only during the contract
period. During the contract period, W made contract with Z to sing at another theatre and refused to perform
the contract with L. It was held that W could be restrained by injunction from singing for Z.
e) Suit for Quantum Meruit: Quantum - meruit means as much as is earned. In this suit, claim is made to
compensate for the work already done. For example -C an owner of a magazine engaged P to write a book to
be published by installments in his magazine. After a few installments were published, the publication of the
magazine was stopped. It was held that P could claim payment for the part already published.

3.7 Case Studies on ICA, 1872

1) Mukesh of Mussourie invites Mradul of Mumbai to stay with him during summer vacation. Mradul accepts the
invitation and informs Mukesh accordingly. When Mradul reaches Mukesh s home, he finds it locked and he
has to stay in a hotel. Can Mradul claim damages from Mukesh?
Ans............................................................................................................................................................................................................................
....................................................................................................................................................................................................................................
....................................................................................................................................................................................................................................
....................................................................................................................................................................................................................................
.................... .
2)

Amar sold his business to Bharat but this fact was not known to an old customer Chander. Chander placed an
order for certain goods to Amar by name. Bharat supplied the goods to Chander. Is there a valid contract?
Ans............................................................................................................................................................................................................................
....................................................................................................................................................................................................................................
....................................................................................................................................................................................................................................
....................................................................................................................................................................................................................................
.................... .

ShivaniSharma/BBAFT SEM I/IIMR

Page 17

18

Business Laws Unit I : The Indian Contract Act, 1872

3) Kuber gifted Rs. 5

to Sundari his neighbour s wife by executing a registered gift deed without any
consideration. There is no near relation between Kuber and Sundari. Is this gift valid?
Ans............................................................................................................................................................................................................................
....................................................................................................................................................................................................................................
....................................................................................................................................................................................................................................
....................................................................................................................................................................................................................................
.................... .
4) A gifted whole of his property to his daughter on the condition that she should pay Rs.200 per month to her
uncle father s brother . Later she refused to pay her uncle on the ground that she did not receive any
consideration from her uncle. Is she justified?
Ans............................................................................................................................................................................................................................
....................................................................................................................................................................................................................................
....................................................................................................................................................................................................................................
....................................................................................................................................................................................................................................
....................
5) Ramesh a minor, by misrepresenting himself to be of 19 years, obtains a loan of Rs. 10000 from suresh stating
that the amount was badly needed by him to complete his education. Suresh, without making any further
enquiry, lent the amount to ramesh. Can suresh recover the amount from ramesh?
Ans............................................................................................................................................................................................................................
....................................................................................................................................................................................................................................
....................................................................................................................................................................................................................................
....................................................................................................................................................................................................................................
....................
6) A sells, by auction, to B, a horse which A knows to be unsound. A says nothing to B about the horse's
unsoundness. Is it a case of fraud? What kinds of remedies are available for B?
Ans............................................................................................................................................................................................................................
....................................................................................................................................................................................................................................
....................................................................................................................................................................................................................................
....................................................................................................................................................................................................................................
....................

*****************End of ICA, 1872*****************

ShivaniSharma/BBAFT SEM I/IIMR

Page 18