BUSINESS REGULATORY

FRAMEWORK
INTRODUCTION
MODULE – I
INDIAN CONTRACT ACT 1872
Law is a basic necessity of every civilized society. Law is the bundle of rules and principles
to be followed by the members of the society. When there is a law in a country, it brings
uniformity and balance in human actions, and provides justice to the aggrieved
persons. INDIAN CONTRACT ACT 1872
The law relating contract in India is contained in the Indian contract Act, which came in to
force on the first day of Sept 1872. The act is extended to the whole of India except the state
of Jammu and Kashmir. The act as it now stands contains the general principles of contract,
contract of indemnity, surety ship, Bailment, and Agency. The law of contract deals with
those transactions or promises which create legal rights and obligations. In case of non
performance of the promise by one party, it also provides legal remedies to an aggrieved
party. CONTRACT – DEFINITION
Section 8(h) of the Indian Contract Act defines contract as an agreement which is
enforceable by law. From the above definitions of contract it is clear that a contract
essentially consists of three elements:
1. An agreement
2. Obligation, and
3. Enforceability
4. Agreement: An agreement involves a valid offer by one party a valid acceptance by the other
party.
5. Enforceability: It means contract must be legal in nature and which can be claimed in the
court of law. For example, X invites Y to a party and Y accepts the invitation, then it is only a
social agreement and not a contract. On the other hand A agrees to sell his house to B for
Rs. 5, 00,000. This is a contract.
(b) Agreement in restraint to marriage (c) Agreement in restraint of trade etc. Thus an
agreement made by parties should not fall in the above category. 8. Certainty and
possibility of performance: - The terms of the contract must be precise and certain. They
should not be vague. The terms of agreement must be capable of performance. For example
A agrees to sell one of his houses. A has four houses. Here the terms of agreement are
uncertain and the agreement is void. 9. An intention to create legal relationship:- There
should be an intention between the parties to create a legal relationship. Mere informal
promise is not to be enforced. Social agreements are not to be enforced as they do not
create any legal obligations. An oral contract is a valid contract except in those cases where
writing, registration etc. is required by some statute.
TYPES OF AGREEMENTS
Void agreements: “An agreement not enforceable by law is said to be void”. A void
agreement has no legal significance from the beginning. No contract comes out from a void
agreement ie it is void ab initio. The following agreements are examples of void
agreements:-
a) Agreement without consideration b) Agreement with persons like minors (sec) c)
Agreement made without consideration (sec) d) Uncertain agreement (sec) e) Impossible
agreements (sec) etc.
Illegal agreements: - An agreement which is either prohibited by law or otherwise against
the policy of law is an Illegal agreement. All illegal agreements are null and void but void
agreements are not illegal. All collateral transaction to an illegal agreement are also illegal.
CLASSIFICATION OF CONTRACTS
 Contracts made by the parties can be classified into different types on the following bases.
1. Formation of Contract
2. Performance of Contract
3. Extend of validity of Contract
A. ON THE BASIS OF FORMATION :- On this basis, contracts may be grouped into three
a. Express contract: - These are the contracts, which are entered into between the parties,
by words spoken or written. For example, A writes to B , “ I am willing to sell my Car to you
for Rs. 2,00,000.” B accepts A‟s offer by another letter. This is an express contract.
b. Implied contract: - Implied contracts are formed on the basis of implied promises on the
part of parties. When the proposal or acceptance is made otherwise than in words, the
contract formed is called implied contract. Thus in implied contract, making an offer and
giving acceptance to it is manifested by the act on the part of party. For example, X gets into
a public bus, and then he enters into an implied contract with the authorities of the bus that
he wishes to travel in the bus.
c. Quasi contracts:- In certain circumstances law itself creates legal rights and obligations
against the parties. These obligations are known as quasi contracts. It is also known as
constructive contract. For example, the finder of lost goods is under an obligation to find out
the owner and return the goods. Section 68 to 72 of Indian Contract Act deal with the cases
of quasi contracts.
B. ON THE BASIS OF PERFORMANCE :- It includes
a. Executed Contract:- Executed contract is one that has been performed. If both parties of
a contract have performed their respective obligations, contract is known as executed
contract. For example, A sells a Car to B for Rs. 1,00,000. B pays the price. This is an
executed contract.
b. Executory contract :- An executor contract is one in which both the parties have not yet
performed their obligations either wholly or partly. For example, A makes an agreement for
buying a car from a car dealer and has made payment. The car has been delivered, but the
ownership is yet to be transferred.
C. ON THE BASIS OF EXTEND OF VALIDITY:- On this basis contract may be classified as
under
a. Valid contract:- Contract is said to be valid if it satisfies all conditions required for its
enforceability. In other words an agreement enforceable by law is a valid contract. For
Right The defects of a void agreement are incurable
The defects in the case of a voidable agreement are curable and may be condoned.
“All contracts are agreements but all agreements are not contracts” According to
section 2 (h) of the Indian Contract Act, “an agreement enforceable by law is a contract”.
That is all agreements are not contract. An agreement, in order to become a contract must
satisfy certain conditions which are the essential elements of a contract. For example, if an
agreement is not indented to create legal relationship, agreement not made with the free
consent of the parties, agreement not made for a lawful object etc. These agreements are
not valid contracts. An agreement which does not create legal obligation is also not a
contract. Thus all contracts are agreements but all agreements are not contracts. OFFER
AND ACCEPTANCE Offer or Proposal According to sec. 2 (a) of the Contract Act, “When
one person signifies to another his willingness to do or 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.” Elements of an Offer:
1. In an offer one party must express his willingness for doing or not doing a thing
2. It must be made to another person
3. Offer is made with a view to know the assent of the other person.
4. There must be an intention to create legal relationship. **Classification of offer:
5. Specific offer: -** When an offer is made to a specific person or class of persons, such offer
is known as specific offer. The specific offer can be accepted only by that particular person
or organization. 2. General offer : It is an offer which is made to a group of people or public
at large. Such offer can be accepted by any member of that group. 3. Cross offer: - When
two parties exchange identical offers with each other, in ignorance of each other‟s offer, the
offers are cross offer.
4. Counter offer : Incomplete and conditional acceptance of an offer is known as counter
offer. In other words, when an original offer is rejected and a new offer is made, it is known
as counter offer.
5. Standing offer (Tender):- An offer for a continuous supply of a certain article at a certain
rate over a definite period is called a standing offer.
ESSENTIALS OF VALID OFFER
The following characteristics are necessary to create a valid offer.
1. The terms of an offer must be clear and certain: - The terms of an offer should not be
indefinite, vague or loose. The vagueness of an offer will not create any contractual
relationship. For example, A says to B “ I will sell you a Car” as A owns four cars, the offer is
not definite.
2. Offer may be express or implied: - An express offer is one which may be made by
words spoken or written. An implied offer is one which may be gathered from the conduct of
the party or the circumstances of the case.
3. The offer must be communicated to the offeree: - An offer must be communicated to
the offeree. Until an offer is made known to the offeree, he does not know what he has to
accept.
4. An offer must be made with an intention of creating legal obligations: - A proposal
will not become a promise even after it has been accepted unless it was made with a view to
create legal obligations. An offer to perform social or moral acts, without any intention of
crating legal relations, will not be a valid offer.
5. Offer may be conditional: - An offer can be made subject to a condition. It can be
accepted only subject to those conditions. If the condition is not accepted, the conditional
offer lapses.
6. Offer must be made with a view to obtaining the assent of the other party
7. Invitation to an offer is not an offer:- Offer is different from invitation to an offer.
Quotations, catalogues of goods, advertisement for tender etc are not actual offer. They are
mere invitation to offer.
ACCEPTANCE
According to section 2(b) a proposal or offer is said to have been accepted when the person
to whom the proposal is made, signifies his assent to the proposal. An offer when accepted
becomes a promise.
ESSENTIALS OF A VALID ACCEPTANCE:-
1. Acceptance must be absolute and unconditional: - Partial and conditional or qualified
acceptance will not be a valid acceptance. That is the acceptor either should accept the item
of the offer in toto or should reject it in toto. There should not be any variation in terms while
accepting the proposal.
2. Acceptance must be given in a prescribed mode or manner: - If the acceptance is not
made according to the mode prescribed, the offeror may intimate to the offeree within a
reasonable time that the acceptance is not according to the mode prescribed , and may
insist that the offer must be accepted in the mode prescribed. But if still it is not followed, the
offeror can reject that acceptance.
3. Time of Acceptance: - Acceptance must be made within the time allowed. When no time
is specified, acceptance must be given within reasonable period of time.
4. Acceptance must be communicated: Acceptance to be legally effective must be
communicated and brought to the knowledge of the offeror. Even if the acceptor has
accepted the offer but if it is not communicated properly, it would not result into an
agreement.
5. Acceptance may be express or implied: - When an acceptance is made by words
spoken or written, it is an express acceptance. If it is accepted by conduct, it is an implied
acceptance. For example when a person goes to a Restaurant and has some food, he
impliedly accepts to pay for it.
6. Acceptance must be made before offer is revoked: - The acceptance of an offer must
be done before the offer lapses or is withdrawn or cancelled. Once an offer is dead due to
any reason it is dead for ever.
7. Acceptance must be made by the offeree: - Acceptance must be made only by the
person to whom the offer is made and not by others.
8. Acceptance is not implied from silence of the party: - Generally, silence on the part of
offeree regarding the offer in no case may amount to acceptance.

CONSIDERATION
Consideration is one of the essential elements of valid contract. According to sec. 25 of the
Indian Contract Act, an agreement made without consideration is void. Every agreement
must be supported by consideration to become a contract. In true sense consideration
means “something in return” to the promisor (quid proquo). The term consideration is defined
in sec (d) of the Indian Contract Act as,”when at the desire of the promisor, the promisee or
any other person has done or abstained from doing, or promise to do or to abstain from
doing something, such act, abstinence or promise is called a consideration for the promise.”
Essentials of Consideration:-
1. Consideration must move at the desire of the promisor: - It is essential that promisee
should perform his part of the promise only at the desire of the promisor. The desire of the
promisor may be express or implied. For example, ‟A‟ buys a book for his friend „B‟. Later
on „B‟ promises to pay Rs. 75 to „A‟. Since „A‟ has bought the book voluntarily without the
desire of „B‟, it cannot be valid consideration for the promise of „B‟.
2. Consideration may move from the promisee or any other person :- According to
Indian law, the consideration may proceed either from the promisee or any other person.
Under the English law, consideration must move from the promisee.
3. Consideration may be past, present or future: - If the promisor had received the
consideration before the date of the promise, it is known as past consideration. If the
promisor receives consideration simultaneously with his promise, it is known as present
consideration. When the consideration on both sides is to move at a future date, it is called
future consideration. However, according to English Mercantile law, consideration may be
present or future only.
4. Consideration need not be adequate:- According to Indian contract Act, it is not
necessary that the value of promise should be equal to the value of consideration. Even if
the value of consideration is less than the value of promise, the contract is valid.
4. Estoppels to acknowledgment:- When a party admits liability in a contract to third party,
then if he denies it on any ground, he will be stopped from doing so. His liability would
continue towards third party. 5. Charges created on immovable property: - Agreement
creating charge on immovable property in favour of third party for his benefit can be enforced
by third party.
EXCEPTION TO THE RULE „NO CONSIDERATION NO CONTRACT‟
Generally a promise without consideration is null and void. It is a „naked promise‟ or „Nudum
Pactum‟. But sec. 25 of the contract Act given some exceptions to this rule.
1. Agreement based upon love and affection:- Here the essentials of the agreements
includes:
a. It must be expressed in writing b. It should be registered under the law for the time being
in force c. It should be made on account of natural love and affection, and d. The parties
should stand in a near relation to each other.
If an agreement fulfils the above conditions, it is valid and enforceable even though it is not
supported by consideration. 2. Promise to compensate for Past voluntary services: - If a
person has already voluntarily done something for the promisor and the promisor agrees to
compensate wholly or in part, the agreement is valid even though it is without consideration.
 For example „A‟ find „B‟s purse and hand it over to him. B, in return promise to give A Rs.
50. It is a valid contract. 3. Agreement to pay time barred debt:- A promise by a debtor to
pay a time barred debt is enforceable provided it is made in writing and is signed by the
debtor or by his agent authorized in that behalf. An oral promise to pay a time barred debt is
unenforceable. 4. Agency: - According to sec 185 of the Indian Contract Act, no
consideration is necessary to create an agency. 5. Completed gifts: - Gift once made
cannot be recovered on the ground of absence of consideration.
CAPACITY OF PARTIES
According to section 10 of the contract Act, parties making an agreement must have the
contractual capacity. Section 11 of the Act states that “every person is competent to
contract who is of a gage of majority according to law to which he is subject, and who is of a
sound mind and is not declared disqualified from contracting by law to which he is subject.”
Thus every person is competent to enter into a contract if, a. He has attained the age of
majority b. He is of sound mind, and c. He is not disqualified by any law from contracting
MINOR A person who has not attained the age of majority is a minor. According to the Indian
Majority Act 1875, a person who has not completed his 18th year of age is considered to be
a minor. But if a minor is under the care and custody of the court and a guardian is
appointed by the court for the minor, then the minor becomes major only on the completion
of the age of 21 years.
Law regarding Minor‟s Agreement:- 1. An agreement with a minor is void ab initio : A
minor does not have the contractual capacity and when he makes agreements, such
agreements are void and cannot be enforced in the court of law. 2. Minor can be a
promisee or beneficiary: - A minor cannot be stopped from getting benefits in an
agreement. If in a contract, minor is a beneficiary or suffered loss or he is a promisee, he
can demand the enforcement of agreement. 3. Ratification on attaining the majority is
not allowed: A minor cannot ratify a promise entered into during his minority, after attaining
majority. 4. Minor is not bound to return the benefits received: - If a minor retained any
benefit under the agreement, he is not liable for repay or compensate the same. The reason
is that the original contract is void in the beginning itself. 5. The principles of estopel is not
applicable to minor: - The general principle of estopel is not applicable to a minor. 6. A
minor is liable for necessaries supplied: According to sec 68, “if a person, incapable of
entering into a contract or any one whom he is legally bound too support, is supplied by
another person with necessaries suited to his condition in his life, the person who has
furnished such supplies, is entitled to be reimbursed from the property of such incapable
person.
central government is to be obtained. 3. Insolvents: When a debtor is adjudged as insolvent
his property vests in the official Receiver and thereby he cannot enter into a contract. This
disqualification is automatically removed after he is discharged. 4. Convicts:- A convict
when undergoing imprisonment is incapable of entering in to a contract. When the period of
sentence expires, the incapacity to contract disappears. 5. Corporations: A company or
corporation can enter into contracts only through its agents, such as Board of Directors,
Managing Directors etc in accordance with its Memorandum of Associations. Any contract
beyond the Memorandum is not valid. 6. Married women : They are competent to enter into
a contract with respect to their separate properties. But she cannot enter into contracts with
respect to their husbands‟ property. FREE CONSENT
According to Sec13 of the Contract Act defined consent as, “two or more persons are said to
consent when they agree upon the same thing in the same sense.” Without free consent of
the parties, an agreement does not acquire legal sanctity and consequences. Section 14 of
this act states that, „Consent is said to be free when it is not caused by,
1. Coercion
2. Undue influence
3. Mis representation
4. Fraud
5. Mistake In the first four cases, the contract is voidable, but in the last case, the contract is
void ab initio
ELEMENTS OF FREE CONSENT
A. COERCION
Coercion implied use of some kind of physical force by doing some act forbidden law to seek
consent of the other party. If the consent to an agreement is obtained by coercion, the
contract is voidable at the option of the party whose consent is so obtained. It includes:
a. The committing of any act forbidden by the Indian Penal Code b. The unlawful detention
of any property of another person c. Threatening to detain the property of another person.
B. UNDUE INFLUENCE: It is the improper use of any power possessed over the mind of the
contracting party. Section 16(1) of the Contract Act defines undue influence as follows:-“ A
contract is said to be induced by undue influence, where the relations subsisting between
the parties are such that one of the parries is in a position to dominate the will of the other
and uses that position to obtain an unfair advantage over the other”.. Effect of Undue
influence: - An agreement caused by undue influence shall be voidable at the option of the
party whose consent has been so obtained. In such cases the court may either set aside the
contract absolutely or it may direct the person, who wants to avoid the contract to refund the
benefit which he actually obtained.
Difference between Coercion and Undue influence: 1. Coercion implies the use of
physical force or threat to cause consent. While undue influences involve use of moral or
mental pressure to cause consent. 2. Coercion involves a criminal act while there is no
criminal act in undue influence. 3. When the consent of the promisor is obtained by coercion
the contract is voidable at the option. When the consent is obtained by undue influences the
contract is voidable or the court may set aside it. 4. In case of coercion, the threat may come
from a third party who is a stranger to the contract. While on the other hand, the undue
influence must be exercised by or against a person who is a party to the contract.
C. FRAUD: When a wrong representation is made by a party with the intention to deceive
the other party or to cause him to enter in to a contract, it is said to be fraud. According to
Sec, Fraud includes any of the following acts,
a. A false suggestion as to a fact known to be a false b. A promise made without any
intention of performing it. c. Doing any act filled with deceive d. The active concealment of
fact with knowledge of the fact, and
LEGALITY OF OBJECT
The contract to be legally valid must contain lawful object. According to section 10 of the act,
“all agreements are contract if they are for lawful consideration and with a lawful object.
Lawful object means, intention to do something permissible within the provisions of law”. For
example, A in consideration of Rs. 10 lac from B agrees to Kill C. The object of this
agreement is killing, which is illegal and punishable under Indian Penal Code. Unlawful
Consideration and Unlawful Object: Under the following circumstances an agreement would
be unlawful: 1. It is forbidden by law:- If the object or consideration of an agreement is
forbidden by law, the agreement is void. For example, A agrees to sell certain goods to B
after knowing very well the goods are to be smuggled out of the country. Here the object is
forbidden by law. 2. It defeats the provisions of any other law:- Where the enforcement of
a particular is of such a nature that it would defeat the provisions of any statutory law which
is in force, the agreement is void. 3. It is fraudulent: - Fraud is punishable under the
provisions of the law. Thus an agreement made with an object of defrauding or deceiving
another will be void. 4. It involves an injury to a person or property of
other:- Agreements made with an object of putting some person in to criminal or wrongful
harm or damaging his property or reputation is void. 5. It is Immoral: - If the object of an
agreement is considered as immoral in the opinion of the court, such agreement will be void
on account of unlawful object. 6. It is against public policy: - Any agreement which goes
against public policy and adversely affect public welfare public decency and public interest
will be void. The court has declared the following agreements oppose to public policy.
 a. Trading with alien enemy b. Trafficking in public office c. Interfering with course of justice
d. Marriage brokerage agreements e. Agreement creating interest against professional duty.
f. Agreement in restraint of parental duty. g. Agreement in restraint of Trade
WAGERING AGREEMENT
Wagering agreement is one in which money is to be paid by one to another party or vice
versa on the happening or non happening of future uncertain event.
Essentials of wagering agreement:
1. Mutual gain or losses: - There are two parties in wagering agreement. One of the parties
will win and another party will lose.
2. Uncertain event: - The performance of wagering agreement depends on happening or non
happening of a future uncertain event.
3. Interest of the parties: - The parties must not have any other interest in the happening of
the event except the sum of money which either of them will win or lose.
4. Control over the event:- Neither of the parties should have any control over the event.
5. Payment of money: - The two person agree that dependent on the determination of that
event in one way, one shall pay money to the other and vice versa.
Effect of wagering agreements:
1. Wagering agreements are void. Therefore the winner cannot recover amount which other
party had to pay.
2. Agreement by way of wager is just void and unenforceable. The collateral transactions
based on such agreement are not affected and thus are valid.
CONTINGENT CONTRACT
A contract is said to be contingent when its performance depends upon the happening or
non happening of a future event. According to section 31 of the Indian Contract Act, “a
contingent contract is a contract to do or not to do something, if some event collateral to
such contract does or does not happen.”
Essentials of a Contingent Contract:-
1. The performance of a contingent contract will depend upon a future event.
2. The happening of the event must be uncertain
3. The happening or non happening of such future events should not form an essential part of
the contract, but it should only be collateral to it.