Contents

UNIT 1: INTRODUCTION TO CONTRACT LAW ___________________________________________ 1

UNIT 2: OFFER AND ACCEPTANCE ___________________________________________________ 19

UNIT 3: CONSIDERATION __________________________________________________________ 37

UNIT 4: CAPACITY TO CONTRACT ___________________________________________________ 49

UNIT 5: FREE CONSENT____________________________________________________________ 63

UNIT 6: VOID AGREEMENTS ________________________________________________________ 83

UNIT 7: PERFORMANCE OF CONTRACT _______________________________________________ 89

UNIT 8: DISCHARGE OF CONTRACT __________________________________________________ 96

UNIT 9: REMEDIES FOR BREACH OF CONTRACT _______________________________________ 113

UNIT 10: SPECIAL CONTRACTS _____________________________________________________ 118

UNIT 11: BAILMENT AND PLEDGE __________________________________________________ 131

UNIT 12: CONTRACT OF AGENCY ___________________________________________________ 146

UNIT 13: COMPANY ACT _________________________________________________________ 155

UNIT 14: PARTNERSHIP ACT _______________________________________________________ 171

UNIT 15: SALE OF GOODS ACT _____________________________________________________ 179

UNIT 16: CONSUMER PROTECTION ACT _____________________________________________ 187

1 SHOOLINI UNIVERSITY

UNIT 1: INTRODUCTION TO CONTRACT LAW

CONTENT:
▪ Objectives
1.1 Meaning
1.2 Essentials of a contract
1.3 Classification of Contract
1.4 Contract based on validity
1.5 Contracts based on Formation
1.6 Contracts based on Performance
1.7 Difference between Void and Voidable Contracts
1.8 Summary
1.9 Keywords
1.10 Review Questions
1.11 Further Readings

OBJECTIVES
After studying this Chapter, you will be able to:

1. To understand the importance of contract law in business

2. To understand what is a contract
3. What are the essentials of a contract
4. Understand various classifications of contract
2 LEGAL ASPECTS OF BUSINESS

India has numerous laws. These laws are varied and complex in scope and treatment . Law can
be grouped in two categories, civil and criminal. On the basis of the nature of the rights and
liabilities of the parties. Criminal law finds its roots in the past , in the monarchic states. The
King required the obedience of his subjects to his directives. A failure to fulfil his directives
attracted the punishment of seizure and confiscation of property., and bodily punishment.
Broadly speaking, any law which prescribes a punishment , can be termed as Criminal Law

Civil law is related to the rights , duties and obligations of individuals towards each other. It
also includes all contractual relationships . The most of the areas in the field of trade, commerce
and business are covered by civil laws. Some of the categories of civil laws would be the laws
dealing with family, property, contract, commerce and business and employment. Under civil
law, individuals go to the court against other individuals, for the enforcement of their rights.
For Example , A consumer moving a consumer forum is an example of the enforcement of civil
law.

Business laws rest on the foundations of contract law. Contract law evolved first. Other
business relations for example sale of goods , bailment pledge guarantee agency and
partnership are specialised forms of Contract. The law for these fields developed by working
with the principles of contract law. The core part of the company law derives from principles
governing contracts. The principles of contract law and special forms of contract become the
basis for the laws regulating business.

Law defines all aspects of business practices. In the changed context of liberalisation and
globalisation of the Indian economy , law has become even more central in regulating and
fostering competition .Thus it is important to study the legal aspect of business .

The Indian Contract Act,1872

Business law developed with the changing practices of trade and commerce. Contract law was
the first business law to emerge. It was general law dealing with all business transactions.

The Indian Contract Act was passed in the year 1872 and it came into force on the 1st day of
September, 1872. Broadly speaking, The Indian Contract Act deals with all facets of contract,
3 SHOOLINI UNIVERSITY

more particularly the stages of formation of a contract, the elements of a contract, the
performance of a contract, breach of contract and available remedies when there is a breach of
contract.

1.1 MEANING
An agreement enforceable by law is a contract. As per Indian Contract Act 1872 “An agreement
is an accepted proposal”. Thus it can be said that a contract is an agreement; an agreement is a
promise and a promise is an accepted proposal. Every agreement in its ultimate analysis, is the
result of a proposal from one side and its acceptance by the other. Hence it is a bilateral
transaction.

Agreement + Enforceability

Offer Acceptance

Will you purchase my Yes, I will buy your car

car for 5 k for 5k

Mr. A Consideration Mr. B

(OFFEREOR) (Offereror/Acceptor

Figure 1.1

1.2 Definitions under The Contract Act,1872(Sec 2)

1. Proposal/Offer [Sec 2(a)]: 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;

2. Promise [Sec 2(b)]: When the person to whom the proposal is made signifies his assent
thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a
promise;
4 LEGAL ASPECTS OF BUSINESS

3. Reciprocal Promises [Sec 2(f)]:: Promises which form the consideration or part of the
consideration for each other are called Reciprocal promises;

4. Promisor and Promisee [Sec 2(c)]: The person making the proposal is called the
“promisor”, and the person accepting the proposal is called the “promisee”;

5. Consideration: [Sec 2(d)]: When, at the desire of the promisor, the promisee or any
other person has done or abstained from doing, or does or abstains from doing, or
promises to do or to abstain from doing, something, such act or abstinence or promise
is called a consideration for the promise;

6. Agreement : [Sec 2(e)]: Every promise and every set of promises, forming the
consideration for each other, is an agreement;

7. Contract: : [Sec 2(h)]: An agreement enforceable by law is a contract;

8. Voidable Contract: [Sec 2(i)]: An agreement which is enforceable by law at the option
of one or more of the parties thereto, but not at the option of the other or others, is a
voidable contract;

9. Void Agreement: [Sec 2(g)]: An agreement not enforceable by law is said to be void;

1.2 ESSENTIAL ELEMENTS OF CONTRACT

Figure 1.2
5 SHOOLINI UNIVERSITY

For a contract to be valid, it must contain certain essential elements. These elements are crucial
for the formation and enforceability of a contract. Here are the essential elements of a contract:

Offer:

An offer is a clear and definite proposal made by one party (the offeror) to another party (the
offeree) with the intention of creating a legal relationship.

The terms of the offer must be specific and capable of acceptance.

Acceptance:

Acceptance is the unqualified agreement to the terms of the offer.

It must be communicated to the offeror, and it should mirror the terms of the original offer.

Intention to Create Legal Relations:

Both parties must intend to create a legally binding contract. This distinguishes a contract from
a social arrangement or a mere statement of intent.

Legal Capacity:

Parties entering into a contract must have the legal capacity to do so. This means they must be
of sound mind and not be under the influence of drugs or alcohol.

Minors, mentally incapacitated individuals, and those under the influence of certain substances
may lack legal capacity.

Legal Purpose:

The purpose of the contract must be legal and not against public policy. Contracts with illegal
objectives or those that involve illegal activities are void.
6 LEGAL ASPECTS OF BUSINESS

Certainty and Possibility of Performance:

The terms of the contract must be clear and certain so that both parties understand their rights
and obligations.

The performance of the contract must be possible and not dependent on speculative events.

Consideration:

Consideration is something of value exchanged between the parties. It can be money, goods,
services, or a promise to do or refrain from doing something.

Consideration is essential for the mutuality of obligation, indicating that both parties are bound
by the contract.

Legal Formalities:

While many contracts can be formed orally, certain types of contracts may require specific
formalities, such as being in writing or signed by the parties.

Statute of Frauds, for example, may require written evidence for certain types of contracts, like
those involving real estate or agreements that cannot be performed within one year.

Possibility of Performance:

The contract must be capable of being performed. If the performance is impossible or illegal,
the contract may be void.

Mutual Consent:

There must be a meeting of the minds, meaning both parties must understand and agree to the
terms of the contract.
7 SHOOLINI UNIVERSITY

If any of these essential elements is missing or not fulfilled, the contract may be deemed void,
voidable, or unenforceable. It's crucial for parties entering into a contract to ensure that all these
elements are present to have a valid and legally binding agreement. Additionally, the laws
regarding contracts may vary by jurisdiction, so parties should be aware of the applicable legal
principles in their specific location.

1.3 CLASSIFICATION OF CONTRACTS

Contracts may be classified according to them

1. Validity
2. Formation
3. Performance

1.4 CLASSIFICATION ACCORDING TO VALIDITY

Category Description Example

Valid Contract Agreement fulfilling all legal A written contract for goods
requirements, enforceable by law. with clear terms and
consideration.

Void Contract Agreement with no legal effect, A contract to sell illegal drugs.
cannot be enforced.

Voidable Valid contract one party can cancel A contract signed under duress.
Contract under specific circumstances.

Illegal Contract Agreement for illegal activity, A contract to commit fraud.

unenforceable and potentially
punishable.
8 LEGAL ASPECTS OF BUSINESS

Unenforceable Valid agreement technically, but A contract not in writing when

Contract enforcement hindered by legal required by law.
technicalities.

Contracts can be classified based on their validity, which refers to whether a contract is legally
binding and enforceable. The classification of contracts according to validity includes four
main categories: valid contracts, void contracts, voidable contracts, and unenforceable
contracts.

A) Valid Contracts:

A valid contract is one that contains all the essential elements required by law. These contracts
meet all the legal requirements for formation, and they are binding and enforceable by the
parties involved. Valid contracts have a genuine offer and acceptance, consideration, legal
capacity of the parties, legal purpose, and proper form (if required). As long as these elements
are present, the contract is considered valid.

• Section 10: What Agreements are Contracts - This section defines the essentials of
a valid contract. An agreement becomes a contract if it is made by the free consent of
the parties, for a lawful consideration and a lawful object, with the intention to create a
legal relationship.

Example: A promises to sell his laptop to B for a certain amount, and B agrees to pay the
amount. This agreement, if meeting all the essential elements, forms a valid contract.

B) Void Contracts:

A void contract is one that lacks one or more of the essential elements required by law, making
it invalid from the outset. A void contract is essentially treated as if it never existed, and neither
party has any legal obligations.
9 SHOOLINI UNIVERSITY

Common reasons for a contract to be void include illegality of the object, lack of legal capacity
of the parties, or the contract being against public policy.

C) Void Contracts (Sections 2(g), 20, 23, 24, 30):

• Section 2(g): Definition of Void Agreement - A void agreement is one that is not
enforceable by law.

• Section 20: Agreement Void If Consideration and Object Unlawful - An agreement

is void if the consideration or object of the agreement is unlawful.

• Section 23: What Consideration and Objects are Lawful, and What Not - An
agreement with an unlawful object or consideration is void.

• Section 24: Agreements void if considerations and objects are unlawful in part - If
any part of a single consideration for one or more objects, or any one or any part of any
one of several considerations for a single object, is unlawful, the agreement is void.

• Section 30: Agreements by way of wager void - Agreements contingent on the

happening of an uncertain event, often termed as wagers, are void.

Example: A agrees to pay B a sum of money in exchange for illegal drugs. Such an agreement
is void.

D) Voidable Contracts:

A voidable contract is initially valid but has some defect that allows one of the parties to choose
whether to enforce or void the contract. The party with the power to void is usually the one
who was unfairly influenced, deceived, lacked legal capacity, or was under duress at the time
of contract formation.

Until the aggrieved party exercises the right to void the contract, it remains valid and binding.
If the right is exercised, the contract becomes voidable and can be rescinded.
10 LEGAL ASPECTS OF BUSINESS

E) Voidable Contracts (Sections 10, 19, 19A, 19B, 20, 64):

• Section 19: Voidability of agreements without free consent - An agreement is

voidable if it is entered into without the free consent of a party.

• Section 19A: Power to set aside contract induced by undue influence - The party
whose consent was obtained by undue influence may have the contract set aside.

• Section 19B: Agreements voidable for mistake of fact - A contract can be voidable
if both parties are mistaken about a fundamental fact.

• Section 20: Agreement void where both parties are under mistake as to matter of
fact - If both parties are under a mistake as to a matter of fact essential to the agreement,
the agreement is void.

• Section 64: Agreement voidable at the option of the party whose consent was
caused by fraud - A contract induced by fraud is voidable at the option of the party
defrauded.

Example: A, through misrepresentation, induces B to enter into a contract. B, upon discovering

the misrepresentation, can choose to void the contract.

F) Unenforceable Contracts:

An unenforceable contract is one that may have all the essential elements and is valid in theory,
but it cannot be enforced by a court due to some legal technicality. The lack of enforceability
is often related to a failure to meet certain formalities required by law.

Common examples of unenforceable contracts include those not properly evidenced in writing
when required by the statute of frauds or contracts that exceed the time limitation specified by
law.
11 SHOOLINI UNIVERSITY

• Section 25: Agreement without consideration void unless it is in writing and

registered, or is a promise to compensate for something done, or is a promise to
pay a debt barred by limitation law - Certain agreements, even if without
consideration, are unenforceable unless they are in writing and registered, or fall under
specific exceptions.

Example: A agrees to pay B a certain amount for services rendered, but this agreement is not
in writing and registered as required by law, making it unenforceable.

1.5 CLASSIFICATION ACCORDING TO FORMATION

Category Description Example

Express Contract Agreement clearly stated in A signed employment contract.

writing or words.

Implied Contract Agreement inferred from Paying for a meal at a restaurant

conduct or circumstances. without a spoken agreement.

Formal Contract Requires specific form (e.g., A deed for transferring property.
written, sealed) for validity.

Informal Contract No specific form required for A verbal agreement to buy

validity. groceries.

Contracts can be classified based on their formation, considering the manner in which they
come into existence. Here are some classifications along with examples:

A) Express Contracts:

• Definition: An express contract is one in which the terms are explicitly agreed
upon by the parties, either orally or in writing.
12 LEGAL ASPECTS OF BUSINESS

• Example: A and B enter into a written agreement where A agrees to sell a car
to B for a specified amount of money. The terms of the contract are clearly
stated in the written document.

B) Implied Contracts:

• Definition: Implied contracts are formed by the conduct or actions of the

parties, where the terms are not explicitly stated but can be inferred from their
behavior.

• Example: A visits a restaurant, orders food, and eats. Although there is no

explicit agreement, an implied contract is formed where A agrees to pay for the
food he consumed.

C) Unilateral Contracts:

• Definition: In a unilateral contract, one party makes a promise or performs an

act, and the other party accepts the offer by completing a specific act or
performance.

• Example: A offers a reward to anyone who finds and returns his lost dog. B,
upon hearing the offer, finds the dog and notifies A, completing the required act
to accept the offer.

D) Bilateral Contracts:

• Definition: Bilateral contracts involve mutual promises between the parties,

where each party is obligated to perform a specific act.

• Example: A agrees to sell his bicycle to B for a certain amount, and B agrees
to pay the agreed-upon price. Both parties have made promises to each other,
forming a bilateral contract.
13 SHOOLINI UNIVERSITY

E) Executed Contracts:

• Definition: An executed contract is one in which both parties have fulfilled their
obligations, and the contract is completed.

• Example: A hires B to paint a mural in A's office. Once B completes the mural,
and A pays the agreed-upon amount, the contract is considered executed.

F) Executory Contracts:

• Definition: An executory contract is one in which one or both parties are yet to
fulfill their obligations.

• Example: A hires B to build a website. B has started the work, but the website
is not yet complete. Until B finishes the website, the contract remains executory.

G) Formal Contracts:

• Definition: Formal contracts are contracts that require a specific form or format
for their validity.

• Example: Contracts for the sale of land often require a written document to be
valid. Failure to adhere to the required form may render the contract
unenforceable.

H) Simple Contracts (Parol Contracts):

• Definition: Simple contracts, also known as parol contracts, are contracts that
do not require a specific form and can be oral or written.

• Example: A and B agree orally that A will provide landscaping services for B's
garden in exchange for a specified payment. This oral agreement is a simple
contract.
14 LEGAL ASPECTS OF BUSINESS

1.6 CLASSIFICATION ACCORDING TO PERFORMANCE

Category Description Example

Executed Contract Both parties have fulfilled their A completed purchase of

obligations. goods with payment made.

Executory Contract Both parties have obligations yet to A contract to deliver goods
fulfill. in the future.

Unilateral Contract Only one party has an obligation. A reward offered for
finding a lost pet.

Bilateral Contract Both parties have obligations. A contract for services

exchanged for payment.

Contracts can be classified based on performance, considering whether the parties have
fulfilled, are in the process of fulfilling, or have yet to start performing their contractual
obligations. Here are some classifications with examples:

A) Executed Contracts:

• Definition: In executed contracts, both parties have fully performed their

obligations, and the contract is completed.

• Example: A hires B to deliver a specific quantity of goods. B delivers the

goods, and A pays the agreed-upon amount. The contract is executed.

B) Executory Contracts:

• Definition: Executory contracts are those in which one or both parties still have
outstanding obligations to fulfill.
15 SHOOLINI UNIVERSITY

• Example: A hires B to build a custom piece of furniture. If B has started

working on the furniture but hasn't finished it yet, the contract is executory until
B completes the work.

C) Partially Executed and Partially Executory Contracts:

• Definition: These contracts involve partial performance by one or both parties,

with remaining obligations still to be fulfilled.

• Example: A hires B to provide monthly maintenance services for a year. If B

has provided services for six months, the contract is partially executed and
partially executory because there are six more months of service to be provided.

D) Unilateral Contracts (Partly Executed and Partly Executory):

• Definition: Unilateral contracts involve one party making a promise, and the
other party fulfilling the obligation through performance. The contract is partly
executed when the act begins but is not yet completed.

• Example: A promises to pay B $100 if B paints A's fence. If B has started

painting but has not finished, the contract is partly executed and partly
executory.

E) Divisible Contracts:

• Definition: Divisible contracts are those in which the performance of each

party's obligations is divided into distinct parts, and each part is considered a
separate agreement.

• Example: A contracts with B to deliver 100 units of a product in ten monthly

installments. Each monthly delivery constitutes a separate divisible contract.
16 LEGAL ASPECTS OF BUSINESS

F) Indivisible Contracts:

• Definition: Indivisible contracts are those where the performance of one party
is essential to the entire contract, and the contract cannot be apportioned.

• Example: A hires B to provide catering services for an event. If B fails to

provide the main course, A might argue that the contract is indivisible, as the
full catering service is integral to the event.

G) Mutual and Concurrent Conditions:

• Definition: Mutual and concurrent conditions occur when both parties are
required to perform their obligations simultaneously.

• Example: A agrees to sell and deliver goods to B on a specific date, and B

agrees to make payment on the same date. Both the delivery and payment are
simultaneous conditions.

Understanding these classifications helps parties assess the current status of their contracts,
anticipate future actions, and determine any potential breaches or issues related to performance.
It also aids in clarifying the rights and obligations of the parties involved.

1.7 DIFFERENCE BETWEEN VOID AND VOIDABLE CONTRACTS

Feature Void Contract Voidable Contract

Definition Agreement with no legal Valid contract one party can cancel
effect from the start. under specific circumstances.

Enforceability Cannot be enforced by law. Can be enforced by law, but one party
can choose to cancel.
17 SHOOLINI UNIVERSITY

Example Contract to sell illegal drugs. Contract signed under duress.

Reason for Inherently illegal or violates Formed with consent that is not freely
invalidity public policy. given.

Effect of None, as the contract was Contract becomes void as if it never

cancellation never valid. existed.

Third-party rights Generally not protected. May be protected depending on the

circumstances.

1.8 SUMMARY
A contract is a legally binding agreement between two or more parties that creates mutual
obligations enforceable by law. Essential elements of a contract include offer, acceptance,
consideration, intention to create legal relations, capacity, and legality of purpose. Contracts
can be classified based on their formation, such as express contracts, formed by explicit terms
and conditions; implied contracts, inferred from the conduct of the parties; unilateral contracts,
involving a promise by one party contingent on performance by the other; and bilateral
contracts, where both parties exchange promises. Additionally, contracts may be categorized
by their enforceability, such as valid contracts, meeting all legal requirements; void contracts,
lacking legal effect from the outset; voidable contracts, potentially enforceable but with an
option for avoidance; and unenforceable contracts, failing to meet certain legal formalities.

1.9 KEYWORDS
• Agreement: Every promise and every set of promises, forming the consideration for
each other, is an agreement;
• Contract: An agreement enforceable by law is a contract;
• Void Contracts : Agreement with no legal effect from the start.
• Voidable Contracts: Valid contract one party can cancel under specific circumstances.
18 LEGAL ASPECTS OF BUSINESS

1.10 REVIEW QUESTION

1. What is a Contract?
2. What are the essentials of a valid Contract?
3. Discuss the classification of a Contract
4. What is a void Contract? How is it different from Voidable Contract.

1.11 FURTHER READINGS

1. The Contract Act 1872
2. Indian Contract Act, 1872 by R.K. Bangia, Allahabad Law Agency, 2024
3. Law of Contract" by Avtar Singh,Eastern Book Company, 2024
4. Contract Law in India" by Nilima Bhadbhade, Oxford University Press India,2019
19 SHOOLINI UNIVERSITY

UNIT 2: OFFER AND ACCEPTANCE

CONTENT:
▪ Objectives
2.1 Introduction
2.1.1 Essentials of an Offer
2.1.2 Legal Rules
2.1.3 Communication of Offer
2.1.4 When does an offer come to an end
2.1.5 Revocation of offer
2.2 Acceptance
2.2.1 Essential Elements of Acceptance
2.2.2 Legal Rules of Acceptance
2.2.3 Communication of Acceptance
2.2.4 Revocation of acceptance
2.3 Summary
2.4 Key words
2.5 Review Questions
2.6 Suggested Readings

OBJECTIVES
After studying this Chapter, you will be able to:

1. To understand what an offer is.

2. To understand what are the essentials of an offer .
3. Explain what are the legal rules as to communication of an offer and acceptance.
4. How can offer and acceptance be revoked?
20 LEGAL ASPECTS OF BUSINESS

2.1 INTRODUCTION
• An offer, as defined in the Indian Contract Act, 1872, is a proposal made by one party
(offeror) to another (offeree) expressing the willingness to enter into a contract under
specific terms with the intention that it shall become binding upon acceptance.

2.2 ESSENTIAL ELEMENTS OF AN OFFER

1. Intention to Create Legal Relations: The offeror must have a genuine intention to
create a legal relationship with the offeree.

2. Definite and Certain Terms: The offer must have clear and definite terms, leaving no
ambiguity.

3. Communication: The offer must be communicated to the offeree, either directly or

through conduct.

Modes of making Offer and Communication of Offer:

Modes of making Offer

By Doing an act By Abstinence from doing an act

Words Conduct

a) It may be a) It may be A) It is the

written or oral. made by forbearance
positive acts of a party

b) Written Offer or signs or from doing

may be made implied from something,

by letters , acts of the ie.

telegrams, fax, parties.

e-mail,
21 SHOOLINI UNIVERSITY

advertisements b) Silence Omission of

etc. cannot an act.
amount to

c) C) Oral Offer offer by B) The conduct

can be made Conduct or
either in person forbearance
or over c) Offer impled on one’s
telephone. from conduct part may be
of parties or taken by the

d) D) Example: from bother party

circumstances as his
of case is willingness
called Implied or assent.
Offer.
A proposes by letter to
C) Example: A
sell a house to B for Rs.
• D) Examples: A offers not to
25 Lakhs
travels operates buses file suit
from Mumbai to against B if
Pune.It is an offer by B pays the
conduct to take balance
A proposes over
passengers. The bus amount of
telephone to sell his car
standing at its Bay in Rs. 50,000
to B for Rs. 7,00,000
the Bus Terminus is outstanding.
with a view to taking A promises
the passengers. Once to abstain
passengers board the from suing
bus, there is B.
acceptance.
22 LEGAL ASPECTS OF BUSINESS

2.3 LEGAL RULES AS TO OFFER

A) Offer Must Be Clear and Certain:

• The terms of the offer must be clear and definite so that the parties can
understand the nature of the proposed contract.

• Example: A offers to sell "a car" to B. This offer is not clear and certain.
However, if A offers to sell a specific make and model of the car for a specified
price, it becomes a clear and definite offer.

B) Offer Must Be Communicated:

• An offer is not valid until it is communicated to the offeree or brought to their

notice.

• Example: A tells B that he is willing to sell his watch for ₹5,000. The offer is
valid when B becomes aware of it.

C) Should not be an Invitation to Offer:

Offeror should express exp[ress his final willingness to be bound by the terms , if offer is
acceptable to the other party. The intention of the offeror should not be marely an
invitation. An invitation to offer is not an offer.

• Advertisements are generally considered invitations to offer, not actual offers.

The invitation to offer invites potential customers to make an offer.

• Case Law: In the case of Carlill v. Carbolic Smoke Ball Co., an advertisement
offering a reward for using a specific product as a preventive measure against
influenza was held to be a unilateral offer that could be accepted by
performance.
23 SHOOLINI UNIVERSITY

Case Law: Carlill v. Carbolic Smoke Ball Co. (1893)

Facts:

• Carbolic Smoke Ball Company placed an advertisement stating that they would pay
£100 to anyone who used their product and still contracted influenza.

Decision:

• The court held that the advertisement was a unilateral offer, and Mrs. Carlill, who had
used the smoke ball as instructed but still got sick, was entitled to the reward.

D) Cross Offers and Counter Offers:

• A cross offer occurs when two parties make identical offers to each other in
ignorance of the other's offer. It does not result in a contract.

• A counter offer is a response to an offer where the offeree introduces new terms,
effectively rejecting the original offer and making a new proposal.

• Example: A offers to sell his laptop to B for ₹30,000. At the same time, B offers
to buy the same laptop from A for ₹25,000. No contract is formed as both parties
made cross offers.

E) Offer Can Be Revoked Before Acceptance:

• The offeror can revoke the offer at any time before acceptance unless there is a
specific agreement to keep the offer open for a specified period.

• Example: A offers to sell his car to B for ₹50,000. A can revoke this offer at
any time before B accepts it unless A has agreed to keep the offer open for a
week.
24 LEGAL ASPECTS OF BUSINESS

F) Lapse of Time:

• An offer may lapse due to the expiration of a specified time period or a

reasonable time, depending on the circumstances.

• Example: A offers to sell his bicycle to B, stating that B has one week to accept
the offer. If B does not accept within the week, the offer lapses.

G) General / Specific: Offer may be made to:

A definite person or a group of persons ( Specific Offer)

The public at large ( General Offer)

H) Conditional or Non Conditional: An offer may be conditional or Non Conditional.

It is for the offeree to agree to the conditions and covey his acceptance.

2.4 COMMUNICATION OF OFFER

a. Direct Communication:

• A offers to sell his bicycle to B for ₹500 by directly telling B about the offer.

b. Communication by Conduct:

• A posts a notice offering a reward for information leading to the recovery of his lost
dog. The act of providing the information constitutes acceptance through conduct.

c. Communication by Agent:

• A hires an agent to communicate an offer to sell his land to B. The communication

made by the agent is binding if the agent has the necessary authority.
25 SHOOLINI UNIVERSITY

d. Advertisement as an Invitation to Offer:

• A company advertises a sale on smartphones in a local newspaper. When customers

visit the store and make offers to buy the phones at the advertised prices, they are
making offers in response to the invitation in the advertisement.

e. Offer to the Public:

• A restaurant advertises a special discount for the first 50 customers on a particular

day. The offer is open to the public, and anyone who meets the conditions can
accept it.

f. Communication of Special Terms:

• A offers to sell his car to B, specifying that B must accept the offer within seven days.
A communicates this condition clearly to B.

2.5 WHEN DOES AN OFFER COME TO AN END

The termination of an offer is crucial in understanding the dynamics of contract formation. The
Indian Contract Act, 1872, provides several circumstances under which an offer comes to an
end. Let's discuss this in detail, including relevant sections, examples, and case laws:

2. Circumstances Leading to the Termination of an Offer:

a. Revocation by the Offeror (Section 5):

• The offeror can revoke or withdraw the offer at any time before it is accepted, provided
that the revocation is communicated to the offeree.

• Example: A offers to sell his car to B for ₹10,000. Before B accepts the offer,
A changes his mind and communicates the revocation to B.
26 LEGAL ASPECTS OF BUSINESS

b. Lapse of Time (Section 6):

• An offer may specify a time limit for acceptance. If not, it may lapse after a reasonable
period, considering the nature of the subject matter and the circumstances.

• Example: A offers to sell his bicycle to B, stating that B has one week to accept
the offer. If B doesn't accept within the specified time or within a reasonable
time, the offer may lapse.

c. Death or Mental Incapacity (Section 6):

• If either the offeror or the offeree dies or becomes mentally incapacitated before
acceptance, the offer comes to an end.

• Example: A offers to sell his house to B. Before B accepts, A dies. The offer is
terminated.

d. Rejection by the Offeree (Section 7):

• If the offeree rejects the offer, either expressly or through a counter-offer, the original
offer is terminated.

• Example: A offers to provide services to B. B responds, "I'm not interested."

The original offer is terminated.

e. Counter-Offer (Section 7):

• A counter-offer is a response to an offer that introduces new terms. It terminates the

original offer.

• Example: A offers to sell a laptop to B for ₹50,000. B responds, "I'll buy it for
₹45,000." B's response is a counter-offer, terminating the original offer.
27 SHOOLINI UNIVERSITY

f. Failure of Contingency (Section 33):

• If the offer is contingent upon the occurrence or non-occurrence of a specific event, and
that event fails to happen, the offer terminates.

• Example: A offers to sell his car to B if B's financing is approved. If B's

financing is not approved, the offer is terminated.

g. Impossibility of Performance (Section 56):

• If performance of the contract becomes impossible due to unforeseen circumstances,

the offer comes to an end.

• Example: A offers to deliver goods to B, but the goods are destroyed before
acceptance. The offer is terminated due to impossibility of performance.

Revocation of Offer:

Revocation refers to the withdrawal or cancellation of an offer by the offeror. Once an offer is
revoked, it is no longer available for acceptance. The Indian Contract Act, 1872, provides
specific provisions and principles regarding the revocation of offers.

a. Revocation by Communication (Section 5):

• An offer can be revoked by the offeror at any time before acceptance is communicated
to them. The communication of revocation must reach the offeree for it to be effective.

b. Revocation by Conduct (Section 5):

• An offer can be revoked through the conduct of the offeror, provided the offeree is
made aware of it.
28 LEGAL ASPECTS OF BUSINESS

c. Revocation Must Be Communicated:

• The revocation must be communicated to the offeree for it to be effective. If the offeree
is unaware of the revocation and accepts the offer, a valid contract may be formed.

d. Revocation by a Third Party:

• Generally, a third party cannot revoke an offer unless they are authorized by the offeror
to do so.

e. Communication of Revocation:

• The offeror can communicate the revocation directly or through an agent.

g. Lapse of Time (Section 6):

• If the offeree does not accept the offer within a reasonable time, the offer may be
considered as lapsed, and the offeror may be free to revoke it.

4. Important Considerations:

a. Mode of Communication:

• Revocation must be communicated in a manner similar to that of the offer.

b. Communication of Acceptance:

• If the offeree communicates acceptance before receiving the revocation, a valid contract
may be formed.

Understanding the principles of revocation is crucial for parties involved in contractual

agreements. It helps ensure fairness and clarity in the contract formation process.
29 SHOOLINI UNIVERSITY

II. Acceptance:

Definition:

• Acceptance is a clear and unambiguous expression of assent to the terms of an offer. It

is the final and unqualified agreement to the terms proposed by the offeror.

2.2.1 ESSENTIAL ELEMENTS OF ACCEPTANCE:

1. Unconditional Acceptance: The acceptance must be absolute and unconditional,
mirroring the terms of the offer.

2. Communication of Acceptance: Acceptance must be communicated to the offeror,

either by words, conduct, or any other mode specified in the offer.

2.2.2 LEGAL RULES AS TO ACCEPTANCE:

1. Unconditional Acceptance:

• The acceptance must be a mirror image of the offer, without introducing new
terms. Any deviation may be considered a counter-offer.

• Example: A offers to sell his car to B for ₹50,000. B responds, "I accept, but I
will only pay ₹45,000." This response is a counter-offer and not a valid
acceptance.

2. Communication of Acceptance:

• The acceptance must be communicated to the offeror to be valid. Silence or

inaction generally does not constitute acceptance.

• Example: A sends an offer to B by post. B must communicate their acceptance

back to A for it to be valid. If B remains silent, it is not considered acceptance.
30 LEGAL ASPECTS OF BUSINESS

3. Acceptance by Conduct:

• In some cases, acceptance can be implied through the offeree's conduct,

especially when the offeror indicates that acceptance can be through a specific
action.

• Example: A offers to pay B a reward for finding and returning A's lost dog. If
B finds the dog and returns it, B's conduct can be considered acceptance.

4. Acceptance Must Be Unambiguous:

• Acceptance should be clear and unambiguous. Vague or unclear expressions

may not constitute a valid acceptance.

• Example: A offers to sell his computer to B for ₹40,000. B responds, "I might
be interested at that price." This response is not a clear acceptance.

5. Postal Rule (Section 4 and Section 7):

• The acceptance is generally considered complete when it is communicated to

the offeror. However, the postal rule creates an exception for acceptances sent
by post.

• Example: A sends an offer by post to B. If B posts an acceptance, the

acceptance is complete as soon as it is posted, even if A hasn't received it yet.

Case Law: Adams v. Lindsell (1818)

Facts:

• The defendants wrote to the plaintiffs offering to sell them some wool and asked for a
reply "in the course of post."
31 SHOOLINI UNIVERSITY

Issue:

• The plaintiffs' acceptance was delayed due to a mistake in the address, and the
defendants had already sold the wool to someone else.

Decision:

• The court held that the acceptance was valid, and the contract was formed when the
acceptance was posted. The offer was accepted within a reasonable time.

6. Acceptance Must Be Communicated to the Offeror:

• Acceptance is effective when communicated to the offeror. If the acceptance is

not properly communicated, it may not be valid.

• Example: A offers to sell his phone to B. If B writes an acceptance but does not
send it to A, there is no valid acceptance until it is properly communicated.

7. Time of Acceptance:

• Acceptance must occur within the time specified in the offer or within a
reasonable time, depending on the circumstances.

• Example: A offers to sell his car to B, stating that B has one week to accept the
offer. If B accepts after the one-week period, the acceptance may not be valid.

2.2.3 COMMUNICATION OF ACCEPTANCE

Communication of acceptance is a fundamental aspect of contract formation under the Indian
Contract Act, 1872. For a contract to be valid, the acceptance of an offer must be effectively
communicated to the offeror.

Here's are the rules as to the communication of acceptance.

32 LEGAL ASPECTS OF BUSINESS

2. Communication of Acceptance Principles:

a. Unconditional Acceptance:

• Acceptance must be absolute and unconditional, complying with the terms of the offer.

b. Communication Must Be Made to the Offeror:

• Acceptance must be communicated to the offeror or the person who made the proposal.
Silence or acceptance communicated to someone other than the offeror is generally not
valid.

c. Communication Must Be Express or Implied:

• Acceptance can be communicated expressly through words or implied through conduct,

depending on the circumstances and the nature of the offer.

d. Communication by Conduct:

• In certain cases, acceptance can be communicated through conduct if the offeror

indicates that acceptance can be through a specific action.

• Example: A company offers a reward for finding a lost item. If someone finds
and returns the item, their conduct is considered acceptance.

e. Communication by Post (Postal Rule):

• If the offeror specifies that acceptance can be communicated by post, the acceptance is
generally complete when the offeree posts it.

• Example: A sends an offer by post to B. If B posts an acceptance, it is complete

as soon as it is posted.
33 SHOOLINI UNIVERSITY

f. Communication by Agent:

• Acceptance can be communicated through an agent, provided the agent has the
authority to act on behalf of the offeree.

• Example: A hires an agent to communicate acceptance of an offer. The

communication by the agent is binding if the agent has the necessary authority.

c. Communication Must Be Certain:

• Acceptance must be certain and not vague or unclear. An uncertain acceptance may not
be valid.

• Example: A offers to sell his car to B for ₹40,000. B responds, "I might be
interested at that price." This response is not a clear acceptance.

4. Communication of Acceptance Time:

• Acceptance must occur within the time specified in the offer or within a reasonable
time.

• Example: A offers to sell his bicycle to B, stating that B has one week to accept
the offer. If B accepts after the one-week period, the acceptance may not be
valid.

Understanding these principles and examples is essential for parties involved in contract
formation to ensure that acceptance is communicated effectively and in accordance with the
law.

2.2.4 REVOCATION OF ACCEPTANCE

Revocation of acceptance refers to the withdrawal or cancellation of an acceptance by the
offeree before it becomes binding and completes the contract. While the Indian Contract Act,
34 LEGAL ASPECTS OF BUSINESS

1872, doesn't specifically address the revocation of acceptance, certain principles can be
derived from the general rules of contract law. Let's discuss this in detail:

1. Unilateral Contracts and Complete Performance:

• In unilateral contracts where acceptance is through performance, once the offeree starts
performance, they may not have the right to revoke the acceptance.

• Example: A offers a reward for finding a lost item. Once the offeree starts
searching for the item, revoking acceptance may not be possible.

2. Communication of Revocation:

• If the acceptance is not yet communicated to the offeror, the offeree can usually revoke
it. Once communicated, it becomes binding.

• Example: A sends an offer to B, who immediately accepts it. Before B

communicates the acceptance to A, B changes their mind and revokes the
acceptance.

3. Offeror's Reliance on Acceptance:

• If the offeror relies on the acceptance to their detriment, the offeree may be prevented
from revoking the acceptance.

• Example: A sells goods to B based on B's acceptance of an offer. If B revokes

the acceptance after A has already incurred expenses in preparation for the
contract, B may be liable for damages.

4. Bilateral Contracts and Consideration:

• In bilateral contracts, where there is an exchange of promises, the acceptance is

typically irrevocable once consideration has been given.
35 SHOOLINI UNIVERSITY

• Example: A promises to sell a car to B for ₹10,000, and B promises to pay. If

B provides some consideration (e.g., pays a deposit), B generally cannot later
revoke their acceptance.

5. Counter-Offer and Revocation:

• If the offeree responds to the offer with a counter-offer, the original offer is effectively
rejected. The offeree cannot later revoke the initial acceptance.

• Example: A offers to sell a house to B for ₹500,000. B responds with a counter-

offer of ₹480,000. A cannot later revoke the initial acceptance.

6. Revocation Must Be Timely:

• To be effective, revocation must occur before the acceptance becomes legally binding.
Once the acceptance is communicated or performance begins, revocation may not be
possible.

Understanding these principles helps parties involved in contract situations to navigate the
complexities of acceptance and revocation. It's crucial to consider the specific circumstances
of each case and whether any detrimental reliance has occurred before attempting to revoke
acceptance.

2.3 SUMMARY
Legal rules governing offer and acceptance serve as the cornerstone of contract law, defining
the crucial steps that parties must adhere to in forming a binding agreement. Clear and effective
communication is imperative throughout this process, ensuring mutual understanding and
consent. An offer, once made, can be revoked prior to acceptance unless it is accompanied by
an option contract. Conversely, acceptance, which must mirror the terms of the offer, creates a
binding contract upon communication to the offeror. Revocation of an offer or acceptance must
be communicated effectively to the other party to be valid, emphasizing the significance of
precise and timely communication in the realm of contract law.
36 LEGAL ASPECTS OF BUSINESS

2.4 KEY WORDS

• Agreement: Every promise and every set of promises, forming the consideration for
each other, is an agreement;
• Contract: An agreement enforceable by law is a contract;
• 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;
• Promise When the person to whom the proposal is made signifies his assent thereto, the
proposal is said to be accepted. A proposal, when accepted, becomes a promise;
• Reciprocal Promises: Promises which form the consideration or part of the
consideration for each other are called Reciprocal promises;

2.5 REVIEW QUESTIONS

1. What is an offer? Discuss the legal rules as to offer.
2. What is General Offer? How is it different from Specific Offer.
3. What is Acceptance? Discuss legal Rules as to acceptance of an offer.
4. Discuss rules as to the communication of offer and acceptance.

2.6 FURTHER READINGS

1. The Contract Act, 1872
2. Indian Contract Act, 1872 by R.K. Bangia, Allahabad Law Agency, 2024
3. Law of Contract" by Avtar Singh, Eastern Book Company, 2024
4. Contract Law in India" by Nilima Bhadbhade, Oxford University Press India,2019
37 SHOOLINI UNIVERSITY

UNIT 3: CONSIDERATION

CONTENT:
▪ Objectives
3.1 Introduction
3.2 Essential Characteristics of Consideration
3.3 Legal Rules as to Consideration
3.4 A contract without Consideration is void- Exception
3.5 Stranger to Contract
3.5 Summary
3.6 Key words
3.7 Review Questions
3.8 Suggested Readings

OBJECTIVES:
After studying this Chapter, you will be able to:

• To understand what is a consideration as an essential ingredient of a contract

• To understand what are the essential ingredients of a contract.
• What are the legal rules as to consideration under Contract Law.
• Understand what are the consequences of absence of consideration in a contract.
38 LEGAL ASPECTS OF BUSINESS

3.1 INTRODUCTION
Consideration is a fundamental concept in contract law and is defined under Section 2(d) of
the Indian Contract Act, 1872. Consideration is one of the essential elements that make a
contract valid, and without it, a contract is generally not enforceable.

Definition of Consideration:

According to Section 2(d) of the Indian Contract Act, 1872:

"When, at the desire of the promisor, the promisee or any other person has done or abstained
from doing, or does or abstains from doing, or promises to do or to abstain from doing,
something, such act or abstinence or promise is called a consideration for the promise."

3.2 ESSENTIAL CHARACTERISTICS OF CONSIDERATION

1. Act, Abstention, or Promise: Consideration can be an act, abstention, or promise by

the promisee or any other person.

2. At the Desire of the Promisor: The act, abstention, or promise must be done at the
desire or request of the promisor.

3. Can Be Past, Present, or Future: Consideration can be something that has already
been done (past), is being done (present), or will be done in the future.
39 SHOOLINI UNIVERSITY

4. Must Be Real and Not Illusory: Consideration must have some value in the eyes of
the law. Illusory promises or vague promises may not be considered valid
consideration.

Examples:

1. Payment of Money: A promises to sell a car to B for Rs. 50,000, and B agrees to pay
the amount. Here, the payment of Rs. 50,000 is the consideration.

2. Performance of Services: A promises to repair B's computer, and B promises to pay

A Rs. 1,000 for the service. Here, the repair service and the promise of payment
constitute consideration.

3. Abstaining from Legal Action: A has a valid claim against B, but A agrees not to sue
B in exchange for B's promise to pay Rs. 10,000. Here, A's abstention from filing a
lawsuit is the consideration.

3.3 LEGAL RULES AS TO CONSIDERATION

Consideration is a key element in contract law, and several legal rules govern its validity. Here
are some legal rules related to consideration, along with examples and relevant case laws:

1. Must Be Real and Not Illusory:

• Rule: Consideration must have some value in the eyes of the law; it should not be
illusory or purely symbolic.

• Example: A promises to give B a car if B promises to give A "love and affection." In

this case, "love and affection" may not be considered valid consideration because it
lacks legal value.

• Case Law: Balfour v. Balfour (1919): The court held that promises based on domestic
arrangements and love and affection between spouses do not qualify as valid
consideration.
40 LEGAL ASPECTS OF BUSINESS

2. Must Move at the Desire of the Promisor:

• Rule: Consideration must be done or promised at the request or desire of the promisor.

• Example: A offers to pay B Rs. 1,000 if B quits smoking. If B quits smoking, A's
promise to pay Rs. 1,000 is supported by consideration.

• Case Law: Chinnaya vs. Ramayya (1882): The court emphasized that consideration
must move at the desire of the promisor.

3. Can Be Executed, Executory, or Past:

• Rule: Consideration can be an act done, something promised to be done, or something

already done (past consideration).

• Example: A promises to pay B Rs. 500 for repairing A's bicycle. If B repairs the
bicycle, the act of repair is the consideration.

• Case Law: Durga Prasad vs. Baldeo (1880): The court emphasized that consideration
can be past, present, or future.

4. Must Be Lawful:

• Rule: Consideration must be lawful and not against public policy.

• Example: A promises to pay B Rs. 1,000 for stealing a valuable document from C. The
promise is unlawful, and the consideration is void.

• Case Law: Rajlukhy Dabee vs. Bhootnath Mookerjee (1900): The court held that
consideration or object of an agreement must not be opposed to public policy.
41 SHOOLINI UNIVERSITY

5. Must Be Possible and Certain:

• Rule: Consideration must be possible and not vague or uncertain.

• Example: A promises to give B a share in the profits of A's business, but the profits
are uncertain and speculative. The consideration is void.

• Case Law: Taylor vs. Caldwell (1863): The court held that if the performance of an
act becomes impossible, the contract is void.

6. Must Consist of Something of Value even if not adequate:

• Rule: Consideration must have some value, though it need not be adequate.

• Example: A sells a rare collectible coin to B for Rs. 10. While the monetary
consideration may seem inadequate, it is still valid as long as it has some legal value.

• Case Law: Currie v. Misa (1875): The court emphasized that consideration must be
something of value in the eyes of the law.

Understanding and applying these legal rules ensures that consideration in a contract is valid
and supports the enforceability of the promises made. Courts rely on these rules to determine
the legality and sufficiency of consideration in various contractual disputes.

3.4 A CONTRACT WITHOUT CONSIDERATION IS VOID- EXCEPTIONS

General Rule: The general rule in contract law is that a contract without consideration is void,
as stated in Section 25 of the Indian Contract Act, 1872. Consideration is the price for which a
promise is bought, and it is essential for the validity of a contract.

The absence of consideration implies that the parties have not exchanged something of value,
making the contract unenforceable.
42 LEGAL ASPECTS OF BUSINESS

Exceptions to the Rule with Examples and Case Laws:

1. Natural Love and Affection:

• Exception: Agreements based on natural love and affection between parties

standing in a near relation to each other.

• Example: A father promising to give property to his son out of natural love and
affection.

• Case Law: Bai Diu vs. Hansraj (1921): The court held that a gift based on
natural love and affection between a father and daughter is valid consideration.

2. Compensation for Past Voluntary Services:

• Exception: If a person voluntarily performs services for another, and the other
person later promises to compensate for those services, the agreement is valid,
even though the consideration is past.

• Example: A voluntarily takes care of B's garden for a month. After the month
is over, B promises to pay A Rs. 5,000 for the services rendered.

• Case Law: Lampleigh v. Brathwait (1615): The court held that a promise to
pay for services already rendered can be enforceable if there is an expectation
of reward.

3. Promise to Pay a Time-Barred Debt:

• Exception: A promise to pay a debt that is barred by the law of limitation is

enforceable if it is in writing and signed by the debtor or his agent.
43 SHOOLINI UNIVERSITY

• Example: A owes money to B, but the debt is no longer legally enforceable due
to the expiration of the limitation period. A, however, signs a written promise
to pay the debt.

• Case Law: Baijnath Agarwalla vs. Kedar Nath (1916): The court held that a
promise to pay a time-barred debt can be valid consideration if it is in writing
and signed by the debtor or his agent.

4. Agency:

• Exception: When a person promises to compensate an agent for acts done

before the promise is made, the agreement is valid even if there is no
consideration.

• Example: A employs B as an agent to sell goods. After B sells the goods, A

promises to pay B a commission. The promise is valid despite the lack of
consideration.

• Case Law: Narayanan Nambiar vs. Mohd. Kutty (1914): The court held that
a promise to pay an agent for past services without fresh consideration is valid.

5. Charitable Contributions:

• Exception: Promises to contribute to a charitable cause are generally

enforceable without consideration.

• Example: A promises to donate Rs. 10,000 to a charitable organization. This

promise is enforceable even without direct consideration.

• Case Law: Gurupad Khandappa Magdum vs. Hirabai Khandappa

Magdum (1978): The court recognized the validity of a promise to make a gift
to charity without consideration.
44 LEGAL ASPECTS OF BUSINESS

6. Gifts to Charities:

• Exception: Gifts made for religious, charitable, or educational purposes are

considered valid without consideration.

• Example: A donates a significant sum of money to a charitable organization

without any expectation of direct benefit.

• Case Law: Hemraj vs. Bishamber Nath (1921): The court recognized that a
gift for religious or charitable purposes is valid even without consideration.

Understanding these exceptions is crucial for parties entering into contracts and for legal
practitioners dealing with contract disputes. It's important to note that these exceptions have
specific conditions and requirements that must be met for the agreement to be considered valid.

3.5 STRANGER TO CONTRACT

The general rule in contract law is that a stranger to a contract cannot sue. This principle is
based on the doctrine of privity of contract, which holds that only parties who are privy to a
contract (i.e., who are directly involved in the contract) have the right to enforce its terms or
bring a lawsuit in case of a breach. However, there are some recognized exceptions to this rule.

Rule:

Doctrine of Privity of Contract:

A person who is not a party to a contract cannot sue to enforce the terms of that contract.

Exceptions with Examples and Case Laws:

1. Trusts:

• Exception: A beneficiary under a trust can enforce the contract, even though
they are not a party to it.
45 SHOOLINI UNIVERSITY

• Example: A creates a trust for the benefit of B, and C promises A to pay a

certain amount for the benefit of B. B can enforce the promise made by C.

2. Covenants Running with the Land:

• Exception: In cases where a contract contains covenants that "run with the
land," successors in interest to the original parties can enforce those covenants.

• Example: A sells land to B with a covenant that B will not build anything higher
than two stories. If B sells the land to C, C can be bound by and enforce the
covenant.

3. Agency:

• Exception: A person who acts as an agent for one of the parties can sometimes
enforce the contract on behalf of that party.

• Example: A appoints B as an agent to purchase a car from C. B can enforce the

contract against C on behalf of A.

4. Assignment of Rights:

• Exception: If one of the parties assigns their rights under the contract to a third
party, the assignee can enforce those rights.

• Example: A owes money to B. A assigns the right to receive the money to C.

C can sue A to enforce the payment.

5. Statutory Exceptions:

• Exception: Certain statutes create exceptions to the privity rule, allowing third
parties to enforce contracts.
46 LEGAL ASPECTS OF BUSINESS

• Example: Consumer protection laws may allow a consumer to enforce

warranties provided by a manufacturer, even though the consumer is not a party
to the contract between the retailer and the manufacturer.

6. Marriage Settlements:

• Exception: Agreements made in the context of marriage settlements may be

enforced by individuals who are not parties to the contract.

• Example: A and B enter into a prenuptial agreement before getting married,

wherein A promises to provide financial support to B in case of a divorce. Even
though the agreement primarily concerns A and B, it may be enforced by B in
the event of a divorce.

7. Partition:

• Exception: In cases of partition of joint family property, even individuals who

are not parties to the partition agreement may have the right to enforce their
share of the property.

• Example: A and B agree to partition the ancestral property among themselves,

and C, another family member not involved in the agreement, later seeks to
enforce their rightful share.

8. Family Settlement:

• Exception: Family settlements, which are agreements made among family

members to resolve disputes and distribute family assets, can be enforced by
individuals not directly involved in the agreement.

• Example: A family agrees to divide ancestral property among siblings to

resolve potential disputes. Even family members who were not parties to the
agreement may enforce their respective shares.
47 SHOOLINI UNIVERSITY

3.5 SUMMARY
Consideration is a vital component of contract law, embodying the principle that each party
must give something of value in exchange for what they receive. The legal rules governing
consideration dictate that for a contract to be valid, there must be a mutual exchange of
promises, acts, forbearance, or goods/services between the parties involved. This ensures that
the agreement is based on a fair and bargained-for exchange, rather than being gratuitous or
one-sided. Courts generally do not delve into the adequacy of consideration, focusing instead
on its existence and legality. However, consideration cannot be illusory, illegal, or impossible.
Moreover, past consideration (actions or promises made before the contract) is generally not
valid unless it is part of a bargained-for exchange. Overall, consideration serves as the linchpin
of contractual relationships, providing a framework for fairness, reciprocity, and enforceability.

3.6 KEY WORDS

• Agreement: Every promise and every set of promises, forming the consideration for
each other, is an agreement;
• Contract: An agreement enforceable by law is a contract;

• Consideration: [Sec 2(d)]: When, at the desire of the promisor, the promisee or any
other person has done or abstained from doing, or does or abstains from doing, or
promises to do or to abstain from doing, something, such act or abstinence or promise
is called a consideration for the promise;
• Privity of Contract: A person who is not a party to a contract cannot sue to enforce the
terms of that contract.

3.7 REVIEW QUESTIONS

1. Discuss Consideration as an essential ingredient of a Contract.
2. What are the legal rules as to the Consideration?
3. Discuss the Doctrine of Privity of Contract. What are its exceptions.
4. A Contract without Consideration is Void- Discuss

3.8 SUGGESTED READINGS

• The Contract Act 1872
48 LEGAL ASPECTS OF BUSINESS

• Indian Contract Act, 1872 by R.K. Bangia, Allahabad Law Agency, 2024
• Law of Contract" by Avtar Singh,Eastern Book Company, 2024
• Contract Law in India" by Nilima Bhadbhade, Oxford University Press India,2019
• Contract Law: Commentary and Materials" by R. M. Goel,LexisNexis India, 2023
• Elements of Mercantile Law" by N. D. Kapoor,Sultan Chand & Sons,2024
• Indian Contract Act: A Study" by Dr. S. N. Misra, Central Law Agency, 2023
• Textbook on Law of Contract and Specific Relief by Avtar Singh, Eastern Book
Company, 2024
49 SHOOLINI UNIVERSITY

UNIT 4: CAPACITY TO CONTRACT

CONTENT:
▪ Objectives
4.1 Introduction
4.2 Capacity of minors to contract
4.3 Capacity of persons of unsound mind to contract
4.4 Other persons
4.5 Summary
4.6 Key words
4.7 Review Questions
4.7 Suggested Readings

OBJECTIVES
After studying this Chapter, you will be able to:

• To understand who are capable to enter in a contract

• To understand what is the capacity of a minor to enter in a contract
• To understand the capacity of person of unsound mind to enter in a contract
• Understand who all are incapable to enter into a contract
50 LEGAL ASPECTS OF BUSINESS

4.1 INTRODUCTION
The Capacity to contract refers to the legal competence of individuals to enter into contracts.
The Act lays down specific provisions regarding the capacity of certain individuals and defines
the circumstances under which a contract is voidable or void due to the lack of capacity.

According to Section 11 of the Indian Contract Act,

Every person is competent to Contract if-

1. He is of the age of majority according to the law to which he is subject, and

2. He is of sound mind, and
3. He is not disqualified from contracting by any law to which he is subject.

A person is disqualified to enter into Contract if he is-

• A Minor
• A person of Unsound mind.
• Otherwise disqualified by the law of the land to enter into contracts.
• An alien Enemy.
• An Insolvent.( Only his official Receiver can enter into contracts on his behalf.)
• A convict undergoing imprisonment .( He can enter into contracts only when the
term is completed)
• Other principles:
o A person can enter into Contracts with Foreign Sovereigns, their Diplomatic
Staff and Representatives of Foreign States who have special privilege in
the sense that they cannot be sued upon by others without permission of the
Central Government.
• A corporation cannot enter into Contracts that are ultra vires (beyond powers of) its
Memorandum of Association . Also , it can enter into contracts strictly of a personal
nature as it is only an artificial person.
51 SHOOLINI UNIVERSITY

4.2 MINORS
• According to Section 3 of the Indian Majority Act, 1875, the age of majority is 18 years.
Therefore, individuals below 18 years old are considered minors.

• Capacity: A minor is generally considered to lack the capacity to contract. Contracts

with minors are void.

• Exception: However, a minor is bound by contracts for necessaries, i.e., goods and
services essential for their support.

• Section 3 of the Indian Majority Act, 1875:

• Defines the age of majority as 18 years. Individuals below this age are
considered minors.

CONTRACTS ENTERED INTO BY A MINOR

Position of a minor:

A Minor cannot- A Minor can -

a) Enter into an agreement. If he enters a) Enter into contracts of

into an agreement, it is void ab initio, Apprenticeship, Service,
ie. From the very beginning. Education or Instruction, that
are beneficial to him.
b) Ratify any act, on attaining majority.
b) Be a Beneficiary.

c) Be forced to refund any benefits

received c) Be admitted to the benefits of
a Partnership.

d) D)Be adjudged insolvent

d) Be an Agent and bind his
Principal /Parents or Guardian
e) Be held liable even in case of acting in capacity of Principal.
fraudulent representation of age.
52 LEGAL ASPECTS OF BUSINESS

f) Become a Partner e) Plead minority.

g) Ask for specific performance of a f) Be held liable in tort, ie. Civil

contract. wrong ( However , where the
tort arises out of a contract,
minor will not be liable).
h) Parents or Guardian are not liable for
breach of contract by the Minor.
g) Minor’s Estate/ Property is
liable for supply of
necessaries including
services.

3. General Rule for Minors:

• The contract with a minor is void ab initio, meaning it is void from the
beginning.

• Case Law:

• Mohori Bibee v. Dharmodas Ghose (1903): The Privy Council emphasized

that a contract with or by a minor is void -ab-initio.

4. Exceptions to the Rule:

a. Contracts for Necessaries (Section 68):

• Section 68 of the Indian Contract Act:

• A person who supplies necessaries to a minor or a person incapable of

contracting can recover the reasonable value of those necessaries.

• Example:

• A doctor provides medical treatment to a minor. The doctor can recover the
reasonable cost of the medical services.
53 SHOOLINI UNIVERSITY

• Case Law:

• Leslie Ltd. v. Sheill (1914): The court held that contracts for necessaries are
binding on minors, and the supplier is entitled to reasonable remuneration.

b. Contracts Beneficial to the Minor:

• Guardian and Ward Relationship:

• A contract entered into for the benefit of the minor with the approval of their
guardian may be valid.

• Example:

• A guardian enters into a contract for the minor's education, which is considered
beneficial.

c. Contracts for Marriage:

• Marriage agreements, including prenuptial agreements, may be valid if they are in the
minor's interest.

• Example:

• A minor enters into a prenuptial agreement with the approval of a legal

guardian.

• Case Law:

• Jai Singh v. Shakuntala Devi (1927): The court recognized the validity of a
marriage agreement entered into by a minor with the consent of a guardian.
54 LEGAL ASPECTS OF BUSINESS

d. Minor's Agreement to Pay for Necessaries:

• If a minor agrees to pay for necessaries supplied to them, they may be held liable.

• Example:

• A minor agrees to pay for educational books provided to them.

• Case Law:

• Nash v. Inman (1908): The court held that a minor was liable for the reasonable
value of clothing suitable for his station in life.

5. Ratification upon Attaining Majority:

• A minor, upon reaching the age of majority, can ratify the contract, making it legally
binding.

• Example:

• A minor, after turning 18, chooses to affirm and continue a contract entered into
during minority.

• Case Law:

• Shashi Kumar Banerjee v. Subodh Kumar Banerjee (1949): The court held
that a minor can ratify a contract after attaining majority.

6. Consideration and Restitution:

• In certain cases, the minor may be required to restore any benefits received under the
contract.
55 SHOOLINI UNIVERSITY

• Example:

• A minor who has received goods may need to return them upon disaffirming
the contract.

3.3 PERSONS OF UNSOUND MIND

The competency to contract of persons of unsound mind is a critical aspect of contract law.
The Indian Contract Act, 1872, contains specific provisions addressing the capacity of
individuals suffering from unsoundness of mind to enter into contracts.

1. Section 12: What is Sound Mind for the Purpose of Contract:

• Section 12 of the Indian Contract Act defines what constitutes a sound mind for the
purpose of entering into a contract. According to this section, a person is considered to
be of sound mind if, at the time of making the contract, they are capable of
understanding it and forming a rational judgment.

2. Persons of Unsound Mind (Section 12):

• If, at the time of contracting, a person is incapable of understanding the contract and
forming a rational judgment due to mental illness or unsoundness of mind, they are
considered to be of unsound mind.

3. Effect of Unsoundness of Mind on Contracts:

• Contracts entered into by persons of unsound mind are generally voidable at the option
of the party who is of unsound mind.

4. Section 12, Exception 1: Drunkenness:

• Exception 1 to Section 12 deals with contracts made by a person who, though usually
of sound mind, is temporarily of unsound mind due to intoxication.
56 LEGAL ASPECTS OF BUSINESS

5. Section 12, Exception 2: Unsoundness of Mind at the Time of Contracting:

• Exception 2 to Section 12 addresses contracts made by persons who are usually of

unsound mind but occasionally of sound mind.

6. Effect on Voidable Contracts:

• Contracts with persons of unsound mind are voidable, meaning they can be affirmed or
disaffirmed at the option of the party suffering from unsoundness of mind.

7. Example Illustrating Unsoundness of Mind:

• A person suffering from schizophrenia enters into a complex financial agreement

without fully understanding its implications. The contract may be voidable due to
unsoundness of mind.

8. Case Law: Garrett v. Moore (1843):

• In this case, a person suffering from insanity entered into a contract. The court held that
if a person is incapable of understanding the nature of the transaction, the contract is
voidable.

9. Protection of Persons of Unsound Mind:

• The law provides protection to persons of unsound mind to prevent them from being
taken advantage of in contractual relationships.

10. Contractual Capacity of Guardian or Legal Representative:

• In some cases, a guardian or legal representative may have the authority to enter into
contracts on behalf of a person of unsound mind.
57 SHOOLINI UNIVERSITY

11. Restitution and Return of Benefits:

• If a contract with a person of unsound mind is voidable, the party suffering from
unsoundness of mind may be required to restore any benefits received under the
contract.

12. Practical Implications:

• Parties entering into contracts should be cautious when dealing with individuals who
may be of unsound mind.

• Contracts involving persons of unsound mind should be reviewed with legal scrutiny
to ensure validity and fairness.

13. Educational and Necessaries Exceptions:

• Similar to contracts with minors, contracts for necessaries supplied to persons of

unsound mind may be enforceable, and the party supplying necessaries may recover the
reasonable value.

Understanding the provisions of Section 12 of the Indian Contract Act and the related
exceptions is crucial for parties entering into contracts and legal practitioners dealing with
contract disputes involving individuals of unsound mind.

It ensures a balance between protecting the rights of vulnerable individuals and maintaining
the enforceability of contracts when appropriate.

4.4 OTHER PERSONS

In addition to minors and persons of unsound mind, certain other individuals are not competent
to contract under the Indian Contract Act, 1872. The Act outlines specific situations where
individuals lack the legal capacity to enter into a valid contract. Here's a detailed discussion on
other persons who are not competent to contract:
58 LEGAL ASPECTS OF BUSINESS

1. Persons Disqualified by Law:

• Section 11 of the Indian Contract Act:

• "Every person is competent to contract who is of 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."

• Examples:

• Undischarged Insolvents: Individuals declared insolvent and undischarged by

a court are disqualified from contracting for certain periods as per the
Insolvency and Bankruptcy Code.

2. Foreign Sovereigns and Ambassadors:

• Section 86 of the Indian Contract Act:

• "In the absence of a contract to the contrary, a person cannot be compelled to

perform, nor can he be compelled to take any proceedings to enforce the
performance of, any contract by which he has not obtained the age of majority
or is of unsound mind."

• Examples:

• Foreign Sovereigns and Ambassadors: Foreign sovereigns and ambassadors

may not be compelled to perform contracts in Indian courts due to their
diplomatic immunity.

3. Convicts:

• Section 69 of the Indian Contract Act:

59 SHOOLINI UNIVERSITY

• "When a person at whose option a contract is voidable rescinds it, the other
party thereto need not perform any promise therein contained in which he is the
promisor. The party rescinding a voidable contract shall, if he has received any
benefit thereunder from another party to such contract, restore such benefit, so
far as may be, to the person from whom it was received."

• Examples:

• Contracts with Convicts: Contracts entered into by individuals who are later
convicted may be voidable. If the convicted person rescinds the contract, the
other party need not perform any promise, and any benefit received should be
restored.

4. Alien Enemy:

• Section 87 of the Indian Contract Act:

• "When a person has promised to do something which he knew, or, with

reasonable diligence, might have known, and which the promisee did not know,
to be impossible or unlawful, such promisor must make compensation to such
promisee for any loss which such promisee sustains through the non-
performance of the promise."

• Examples:

• Contracts with Alien Enemies: Contracts with individuals who are citizens of
countries in a state of war with India may be affected. The contract may become
void if it involves activities contrary to the interests of the nation.

5. Insolvent Persons:

• Section 69 of the Indian Contract Act:

60 LEGAL ASPECTS OF BUSINESS

• "A person who is a party to a contract and who is competent to contract, may
employ an agent to perform it."

• Examples:

• Contracts Involving Insolvents: Contracts involving insolvent individuals

may be affected, especially if the contract is beyond the scope of their financial
capacity.

6. Persons with Limited Capacity:

• Section 12 of the Indian Contract Act:

• "A person is said to be of sound mind for the purpose of making a contract if,
at the time when he makes it, he is capable of understanding it and of forming
a rational judgment as to its effect upon his interests."

• Examples:

• Persons with Mental Disabilities: Individuals with mental disabilities may

have limited capacity depending on the severity of their condition. Their ability
to contract may vary based on the specific circumstances.

7. Illegal or Immoral Contracts:

• Section 23 of the Indian Contract Act:

• "The consideration or object of an agreement is lawful unless it is forbidden by

law; or is of such a nature that, if permitted, it would defeat the provisions of
any law; or is fraudulent; or involves or implies injury to the person or property
of another; or the court regards it as immoral, or opposed to public policy."
61 SHOOLINI UNIVERSITY

• Examples:

• Contracts Against Public Policy: Contracts that are illegal, immoral, or

against public policy are not valid. For example, contracts for illegal activities,
gambling, or any other activities prohibited by law.

Practical Implications:

1. Legal Scrutiny:

• Before entering into contracts, parties should assess the legal capacity of the
individuals involved.

2. Professional Advice:

• Seeking legal advice is crucial, especially when dealing with contracts that may
involve individuals with limited capacity or legal restrictions.

3. Contractual Clarity:

• Contracts should be drafted carefully, considering the legal capacity of the

parties involved and ensuring compliance with applicable laws.

Understanding these provisions of the Indian Contract Act is essential for individuals and
businesses entering into contracts to ensure that the agreements are legally binding and
enforceable.

4.5 SUMMARY
the capacity to contract is a fundamental principle under contract law, ensuring that individuals
have the legal competence to enter into binding agreements. According to the Indian Contract
Act of 1872, persons of sound mind and who have attained the age of majority, typically 18
years old, are considered competent to contract. However, certain exceptions exist, such as
62 LEGAL ASPECTS OF BUSINESS

individuals who are disqualified by law due to mental incapacity or those declared insolvent.
Moreover, minors, though not fully competent, can still enter into contracts for necessities,
albeit with certain limitations and protections. This framework aims to uphold the sanctity of
contracts while safeguarding the interests of vulnerable parties, promoting fairness and justice
in commercial dealings within the Indian legal system.

4.6 KEY WORDS

• Minor: A person below 18 years.
• Void

4.7 REVIEW QUESTIONS

1. Who can enter into contract under Indian Contract Act
2. Whao is Minor
3. Discuss the capacity of minor to enter into a contract
4. Who can not enter into a contract under Indian Contract Act

4.8 FURTHER READINGS

1. The Contract Act 1872
2. Indian Contract Act, 1872 by R.K. Bangia, Allahabad Law Agency, 2024
3. Law of Contract" by Avtar Singh,Eastern Book Company, 2024
4. Contract Law in India" by Nilima Bhadbhade, Oxford University Press India,2019
5. Contract Law: Commentary and Materials" by R. M. Goel,LexisNexis India, 2023
6. Elements of Mercantile Law" by N. D. Kapoor,Sultan Chand & Sons,2024
7. Indian Contract Act: A Study" by Dr. S. N. Misra, Central Law Agency, 2023
8. Textbook on Law of Contract and Specific Relief by Avtar Singh, Eastern Book
Company, 2024
63 SHOOLINI UNIVERSITY

UNIT 5: FREE CONSENT

CONTENT:
▪ Objectives
5.1 Introduction
5.2 Coercion
5.3 Undue Influence
5.4 Fraud
5.5 Misrepresentation
5.6 Mistake
5.5 Summary
5.6 Key words
5.7 Review Questions
5.8 Suggested Readings

OBJECTIVES:
After studying this Chapter, you will be able to:

1. Understand what a free consent is.

2. Understand how Coercion effects consent in the formation of a Consent
3. Explain how misrepresentation effects free consent.
4. Discuss the effect of absence of free consent in a contract.
64 LEGAL ASPECTS OF BUSINESS

5.1 INTRODUCTION
Consent plays a crucial role in the formation of a valid contract. Consent is defined in Section
13 of the Act and is considered as one of the essential elements for a contract to be legally
binding.

Definition of Consent:

According to Section 13, "Two or more persons are said to consent when they agree upon the
same thing in the same sense."

Free Consent:

For consent to be valid, it must be free. Section 14 of the Act defines free consent, emphasizing
that consent is not considered free when it is:

1. Coerced: Obtained by coercion, which includes the use of force or threat to induce
someone to enter into a contract.

2. Undue Influence: Obtained under undue influence, where one party has real or
apparent authority over the other, and misuses that position to obtain an unfair
advantage.
65 SHOOLINI UNIVERSITY

3. Fraudulent: Obtained by fraud, where one party intentionally deceives the other to
gain their consent.

4. Misrepresentation: Obtained by misrepresentation, where one party provides false

information or conceals material facts, leading to a misunderstanding.

5. Mistake: If both parties are under a mistake regarding a fundamental aspect of the
contract, it may invalidate consent.

5.2 COERCION
Coercion is one of the exceptions to the concept of free consent under the Indian Contract Act,
1872. It refers to the use of force or threats to compel someone to enter into a contract against
their will. Let's explore coercion in detail, including relevant sections, examples, and case laws:

Coercion (Section 15):

Section 15 of the Indian Contract Act defines coercion as "committing or threatening to commit
any act forbidden by the Indian Penal Code, or unlawfully detaining or threatening to detain
any property, to the prejudice of any person whatever, with the intention of causing any person
to enter into an agreement."

Elements of Coercion:

1. Act Forbidden by IPC: It includes any act that is prohibited by the Indian Penal Code.

2. Unlawful Detention: Involves the illegal withholding of someone's property.

3. Threats: Implies threatening actions or words to force someone into an agreement.

Examples of Coercion:

1. Threats of Physical Harm: A person threatening to physically harm another unless

they agree to a contract.
66 LEGAL ASPECTS OF BUSINESS

2. Blackmail: Forcing someone into a contract by threatening to reveal damaging

information.

3. Wrongful Restraint: Physically preventing someone from leaving a place until they
agree to a contract.

Section 72 - Restitution:

Section 72 of the Indian Contract Act provides for restitution in cases where a contract is
voidable due to coercion.

If the party whose consent was coerced chooses to rescind the contract, the other party must
restore any benefits received under the contract.

5.3 UNDUE INFLUENCE (SECTION 16)

Section 16 of the Indian Contract Act defines undue influence as:

1. A contract is said to be induced by undue influence where the relations subsisting

between the parties are such that one of the parties is in a position to dominate the will
of the other.

2. In a contract, if the party is in a position to dominate the will of the other, and he uses
that position to obtain an unfair advantage over the other, that would be considered
undue influence.

Elements of Undue Influence:

1. Relation of Dominance: There must be a relationship where one party has the power
to dominate the will of the other.

2. Unfair Advantage: The dominant party must use their position to obtain an unfair
advantage.
67 SHOOLINI UNIVERSITY

Examples of Undue Influence:

1. Guardian and Ward: A guardian influencing the ward to enter into a contract that
primarily benefits the guardian.

2. Doctor and Patient: A doctor exploiting the trust of a patient to secure a contract that
is advantageous to the doctor.

3. Employer and Employee: An employer pressuring an employee into a contract that is

heavily biased in favor of the employer.

Section 16(3) - Presumption of Undue Influence:

Section 16(3) establishes a presumption of undue influence in certain relationships, such as

parent and child, doctor and patient, and attorney and client. In such cases, the burden of
proving that the contract was not induced by undue influence lies with the party in the dominant
position.

In conclusion, undue influence is a crucial concept in contract law to protect individuals from
being coerced or taken advantage of due to a significant power imbalance. The Act recognizes
the need to nullify contracts tainted by undue influence to ensure fairness and justice.

Aspect Coercion Undue Influence

Definition The act of compelling someone to The unfair exertion of influence to

enter into a contract through manipulate another party into
threats or force. entering a contract.

Nature Involves direct or implied threats Involves exploiting a position of

to induce agreement. power or trust to sway the other
party's decision.
68 LEGAL ASPECTS OF BUSINESS

Consent Absence of free consent; Consent may be present but not

agreement obtained under duress. entirely voluntary or independent.

Examples Threatening physical harm, Persuasion by a dominant party due

confinement, or property damage. to a fiduciary relationship or
emotional dependence.

Legal Contracts entered into under Contracts influenced by undue

Consequences coercion are voidable at the influence may be voidable at the
option of the coerced party. discretion of the influenced party.

Burden of Proof The burden is on the coerced The burden may shift to the
party to prove coercion. influencing party to prove fair
dealing.

5.4 FRAUD
Fraud is another exception to the concept of free consent under the Indian Contract Act, 1872.
It involves intentional deception or misrepresentation with the aim of inducing someone to
enter into a contract. Let's explore fraud in detail, including relevant sections, examples, and
case laws:

Fraud (Section 17):

Section 17 of the Indian Contract Act defines fraud as:

1. "Fraud" means and includes any of the following acts committed by a party to a
contract, or with his connivance, or by his agent, with intent to deceive another party
thereto or his agent, or to induce him to enter into the contract:

a) The suggestion, as a fact, of that which is not true by one who does not believe it to be true;

b) The active concealment of a fact by one having knowledge or belief of the fact;
69 SHOOLINI UNIVERSITY

c) A promise made without any intention of performing it;

d) Any other act fitted to deceive;

e) Any such act or omission as the law specially declares to be fraudulent.

2. Any act or omission which the promisor knows to be likely to induce the promisee to
enter into the contract with him, or to do anything which he is not legally bound to do,
or to omit to do anything which he is legally entitled to do, is fraudulent.

Elements of Fraud:

1. False Representation: Making a suggestion or representation that is not true.

2. Knowledge of Falsity: The party making the representation knows that it is false or
does not believe it to be true.

3. Intent to Deceive: The intention behind the false representation is to deceive the other
party.

Examples of Fraud:

1. False Statements: A seller knowingly misrepresenting the quality or condition of a

product.

2. Concealing Material Facts: Withholding important information that would affect the
other party's decision.

3. Promise with No Intention to Perform: Making a promise without any intention of

fulfilling it.
70 LEGAL ASPECTS OF BUSINESS

Section 19 - Effect of Fraud:

Section 19 of the Indian Contract Act states that a contract induced by fraud is voidable at the
option of the party defrauded. The aggrieved party has the choice to either affirm the contract
or reject it.

In conclusion, fraud as an exception to free consent is a critical aspect of contract law that aims
to protect parties from deceitful practices. The Act provides remedies for parties who fall victim
to fraudulent inducement, allowing them to avoid or rescind the contract.

5.5 MISREPRESENTATION
Misrepresentation is another exception to the concept of free consent under the Indian Contract
Act, 1872. It occurs when one party provides false information or conceals material facts with
the intention of inducing the other party to enter into a contract. Let's explore misrepresentation
in detail, including relevant sections, examples, and case laws:

Misrepresentation (Section 18):

Section 18 of the Indian Contract Act defines misrepresentation as:

1. "Misrepresentation" means and includes—

a) the positive assertion, in a manner not warranted by the information of the person making it,
of that which is not true, though he believes it to be true;

b) any breach of duty which, without an intent to deceive, gains an advantage to the person
committing it, or anyone claiming under him; by misleading another to his prejudice or to the
prejudice of anyone claiming under him.

2. In this section, "a breach of duty" which gains an advantage to the person committing
it, or anyone claiming under him, by misleading another to his prejudice or to the
prejudice of anyone claiming under him, is a fraudulent misrepresentation.
71 SHOOLINI UNIVERSITY

Elements of Misrepresentation:

1. Positive Assertion: Making a statement that is not true, even if the person making it
believes it to be true.

2. Breach of Duty: Any breach of duty, even without the intent to deceive, that gains an
advantage by misleading another.

Examples of Misrepresentation:

1. False Statements about Product: A seller falsely claiming that a product has certain
features to induce a buyer to make a purchase.

2. Concealing Defects: Withholding information about defects in a property being sold.

3. Incorrect Financial Statements: Providing false financial information to secure a

loan.

Case Laws:

1. Derry vs. Peek (1889):

• Facts: Besides being a case for fraud, it also involved misrepresentation.

Directors of a tramway company made false statements about the company's
ability to pay dividends.

• Judgment: The court held that a false statement, even if made honestly but
without reasonable grounds for believing it to be true, can be considered
misrepresentation.

2. Atmaram vs. Gopikabai (AIR 1951 Nag 158):

• Facts: The defendant falsely represented that he was the owner of the property
being sold.
72 LEGAL ASPECTS OF BUSINESS

• Judgment: The court held that the misrepresentation was fraudulent, and the
plaintiff was entitled to rescind the contract.

3. Redgrave vs. Hurd (1881):

• Facts: A solicitor inaccurately stated the value of his practice when selling it to
another solicitor.

• Judgment: The court held that the misrepresentation was sufficient to avoid the
contract, as it induced the other party to enter into it.

Section 19A - Effect of Misrepresentation:

Section 19A of the Indian Contract Act addresses the effect of misrepresentation. It provides
that if a party has been induced to enter into a contract by misrepresentation, the contract is
voidable at the option of the party misled. The aggrieved party can choose to either affirm the
contract or reject it.

In conclusion, misrepresentation is a crucial aspect of contract law aimed at preventing parties

from entering into agreements based on false information. The Act recognizes the need to allow
parties to avoid or rescind contracts tainted by misrepresentation, ensuring fairness and justice.

5.6 MISTAKE
Mistake is another exception to the concept of free consent under the Indian Contract Act,
1872. Mistake occurs when both parties to a contract are under a misunderstanding regarding
a fundamental aspect of the agreement. Let's explore mistake in detail, including relevant
sections, examples, and case laws:

Mistake (Sections 20, 21, 22):

The Indian Contract Act addresses different types of mistakes:

73 SHOOLINI UNIVERSITY

1. Mutual Mistake (Section 20):

• When both parties to an agreement are under a mistake regarding a matter of

fact essential to the agreement.

• The contract is void if the mistake is mutual.

2. Unilateral Mistake (Sections 21, 22):

• Section 21: A contract is not voidable because it was caused by a mistake of

one of the parties to the agreement.

• Section 22: A contract is voidable if a mistake of one party at the time of making
the contract is caused by a misrepresentation or a fraud.

Examples of Mistake:

1. Mutual Mistake: A contract for the sale of a painting, both parties believing it to be a
famous original, but it turns out to be a replica.

2. Unilateral Mistake: A person purchasing a valuable antique believing it to be a cheap

imitation, and the seller knowing the real value.

Case Laws:

1. Raffles vs. Wichelhaus (1864):

• Facts: The parties entered into a contract for the sale of cotton from a ship
named "Peerless," but there were two ships with the same name.

• Judgment: The court held that there was a mutual mistake regarding the
identity of the ship, and the contract was void.
74 LEGAL ASPECTS OF BUSINESS

2. Bell vs. Lever Brothers Ltd (1932):

• Facts: A seller offered to sell goods to the buyer, and the buyer accepted, but
they were referring to different shipments.

• Judgment: The court held that there was no consensus ad idem (meeting of
minds), and the contract was void due to mutual mistake.

3. Smith vs. Hughes (1871):

• Facts: A seller offered oats, but the buyer believed they were old oats when
they were actually new oats.

• Judgment: The court held that the mistake was unilateral, and as it did not
involve a misrepresentation by the seller, the contract was valid.

Section 20(2) - Mistake of Law:

Section 20(2) states that a mistake of law is not a valid ground for avoiding a contract.
Ignorance of the law is not considered a mistake, and parties are assumed to know the law.

Section 155 - Effect of Mistake as to Law:

Section 155 provides that a mistake as to a law not in force in India has the same effect as a
mistake of fact. However, a mistake as to the law in force in India does not render a contract
voidable.

In conclusion, mistake as an exception to free consent emphasizes the importance of a shared

understanding between parties in a contract. While mutual mistakes can render a contract void,
unilateral mistakes are generally not grounds for avoiding a contract unless there is
misrepresentation or fraud involved. The law aims to balance fairness and enforceability in
contractual relationships.
75 SHOOLINI UNIVERSITY

Difference between coercion and undue influence

Coercion and undue influence are both vitiating factors that can affect the validity of a contract
under the Indian Contract Act, but they differ in nature and the elements involved. Let's explore
the key differences between coercion and undue influence:

Coercion:

1. Definition:

• Coercion is the act of using force or threats to compel someone to enter into a
contract against their will.

2. Essential Element:

• In coercion, the essential element is the use of force or the threat of force to
induce consent.

3. Nature:

• Coercion involves a direct and explicit act of pressure, such as physical harm or
the threat of harm, to force someone into an agreement.

4. Section in the Indian Contract Act:

• Coercion is explicitly defined in Section 15 of the Indian Contract Act.

5. Examples:

• Threats of physical harm, unlawful detaining of property, and any act forbidden
by the Indian Penal Code are examples of coercion.
76 LEGAL ASPECTS OF BUSINESS

6. Presumption:

• Coercion creates a stronger presumption of the absence of free consent, making

the contract voidable at the option of the coerced party.

Undue Influence:

1. Definition:

• Undue influence occurs when one party has real or apparent authority over the
other and uses that position to obtain an unfair advantage.

2. Essential Element:

• The essential element of undue influence is the relationship of dominance,

where one party has the power to dominate the will of the other.

3. Nature:

• Undue influence is often subtle and involves taking advantage of a position of

trust, authority, or dependence to manipulate the decision-making of the other
party.

4. Section in the Indian Contract Act:

• Undue influence is defined in Section 16 of the Indian Contract Act.

5. Examples:

• Relationships like guardian and ward, doctor and patient, and employer and
employee can give rise to undue influence. Exploiting these relationships for
personal gain may be considered undue influence.
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6. Presumption:

• Section 16(3) establishes a presumption of undue influence in certain

relationships, placing the burden of proof on the party in the dominant position.

Key Differences:

1. Nature of Pressure:

• Coercion involves direct and explicit pressure, often physical or threatening

harm. Undue influence is more subtle and involves the abuse of a position of
power or trust.

2. Type of Relationships:

• Coercion is not limited to specific relationships and can occur in various

situations. Undue influence often arises in relationships of trust, authority, or
dependency.

3. Presumption:

• Coercion creates a strong presumption of the absence of free consent. Undue

influence, while having a presumption in certain relationships, may also involve
an assessment of the actual impact on the influenced party.

In summary, while both coercion and undue influence involve the compromise of free consent,
they differ in the nature of pressure applied, the relationships involved, and the legal
presumptions associated with them.

Difference between fraud and misrepresentation

Fraud and misrepresentation are both vitiating factors in contract law, but they differ in terms
of intent, elements, and consequences. Let's explore the key differences between fraud and
misrepresentation:
78 LEGAL ASPECTS OF BUSINESS

Aspect Fraud Misrepresentation

Definition Intentional deception or deceit False statement or assertion, whether

with the aim of inducing another intentional or not, made to induce
party to enter into a contract. agreement.

Intent Requires deliberate intent to Can occur without intent to deceive,

deceive or mislead. but there may still be negligence or
recklessness.

Nature Involves a deliberate act of Can be innocent or negligent, where

deception or concealment of the party making the statement
material facts. believes it to be true.

Materiality Material facts are misrepresented Material facts are misrepresented, but
or concealed. there might not be concealment.

Legal Renders the contract voidable at Renders the contract voidable if the
Consequences the option of the defrauded party. misrepresentation is material and
relied upon.

Burden of The burden is on the party The burden is on the party alleging
Proof alleging fraud to prove it with misrepresentation to prove it on the
clear and convincing evidence. balance of probabilities.

Remedies Rescission of the contract, Rescission of the contract, damages

damages for losses incurred, and for losses incurred, and sometimes
in some cases, punitive damages. restitution.
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Fraud:

1. Definition:

• Fraud involves intentional deception or the deliberate misrepresentation of facts

with the intention to deceive the other party.

2. Intent:

• Fraud requires a deliberate act with the intent to deceive. The party committing
fraud knows that the statement is false or misleading and makes it with the
purpose of inducing the other party to enter into the contract.

3. Elements:

• The essential elements of fraud include a false representation, knowledge of

falsity, intent to deceive, and actual reliance by the deceived party to their
detriment.

4. Section in the Indian Contract Act:

• Fraud is explicitly defined in Section 17 of the Indian Contract Act.

5. Effect:

• A contract induced by fraud is voidable at the option of the party defrauded. The
defrauded party can choose to affirm or avoid the contract.

Misrepresentation:

1. Definition:

• Misrepresentation involves providing false information or concealing material

facts without necessarily having the intent to deceive.
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2. Intent:

• While misrepresentation may involve false statements, it does not require the
same level of deliberate intent as fraud. The party making the misrepresentation
may believe the statement is true or may be negligent in verifying its accuracy.

3. Elements:

• The essential elements of misrepresentation include a false statement, a lack of

reasonable belief in its truth, and reliance by the deceived party.

4. Section in the Indian Contract Act:

• Misrepresentation is defined in Section 18 of the Indian Contract Act.

5. Effect:

• A contract induced by misrepresentation is voidable at the option of the party

misled. The misled party can choose to affirm or avoid the contract.

Key Differences:

1. Intent:

• Fraud requires a deliberate intent to deceive, while misrepresentation may

involve false statements made without necessarily having the intent to deceive.

2. Knowledge of Falsity:

• In fraud, the party making the false statement knows it to be false. In

misrepresentation, the party making the false statement may genuinely believe
it to be true but lacks reasonable grounds for that belief.
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3. Consequences:

• Both fraud and misrepresentation render a contract voidable, but the level of
culpability and potential legal consequences may vary.

4. Severity:

• Fraud is generally considered more severe than misrepresentation due to the

intentional and deceptive nature of the act.

In summary, while both fraud and misrepresentation involve false statements that impact the
consent of the parties, fraud requires intentional deception, while misrepresentation may
involve false statements made without the same level of intent. Both can lead to the avoidance
of a contract by the party deceived.

5.5 SUMMARY
The principle of free consent is paramount, serving as the cornerstone of valid agreements.
Free consent denotes that parties must willingly and voluntarily enter into a contract without
any coercion, undue influence, fraud, misrepresentation, or mistake. Under the Indian Contract
Act of 1872, consent is deemed free when it is not caused by coercion, undue influence, fraud,
misrepresentation, or mistake. Coercion involves the threat of harm to compel someone to enter
into a contract, while undue influence arises when one party exploits a position of power to
unfairly manipulate the other. Fraud and misrepresentation involve deliberate deception or
misleading information, while mistake pertains to errors in understanding the terms or subject
matter of the contract. Upholding the principle of free consent ensures that contracts are entered
into with fairness, integrity, and mutual understanding, safeguarding the rights and interests of
all parties involved.

5.6 KEYWORDS
• Consent: Two or more persons are said to consent when they agree upon the same thing
in the same sense.
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• Coercion: Coercion is the act of using force or threats to compel someone to enter into
a contract against their will.
• Undue Influence: Undue influence occurs when one party has real or apparent
authority over the other and uses that position to obtain an unfair advantage.
• Fraud: Fraud involves intentional deception or the deliberate misrepresentation of facts
with the intention to deceive the other party.
• Misrepresentation: Misrepresentation involves providing false information or
concealing material facts without necessarily having the intent to deceive.

5.7 SUGGESTED READINGS

1. The Contract Act 1872
2. Indian Contract Act, 1872 by R.K. Bangia, Allahabad Law Agency, 2024
3. Law of Contract" by Avtar Singh,Eastern Book Company, 2024
4. Contract Law in India" by Nilima Bhadbhade, Oxford University Press India,2019
5. Contract Law: Commentary and Materials" by R. M. Goel,LexisNexis India, 2023
6. Elements of Mercantile Law" by N. D. Kapoor,Sultan Chand & Sons,2024
7. Indian Contract Act: A Study" by Dr. S. N. Misra, Central Law Agency, 2023
8. Textbook on Law of Contract and Specific Relief by Avtar Singh, Eastern Book
Company, 2024
83 SHOOLINI UNIVERSITY

UNIT 6: VOID AGREEMENTS

CONTENT:

▪ Objectives

6.1 Introduction

6.2 Characteristics of Void Agreements

6.3 Types of Void Agreements

6.4 Summary

6.5 Key words

6.6 Review Questions

6.7 Suggested Readings

OBJECTIVES:
After studying this Chapter, you will be able to:

1. To understand the importance of contract law in business

2. To understand what is a contract
3. What are the essentials of a contract
4. Understand various classifications of contract
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6.1 INTRODUCTION
Void Agreements under the Indian Contract Act, 1872

In Indian contract law, a void agreement is one that is legally unenforceable from the outset,
meaning it has no legal effect and is treated as if it never existed. The Indian Contract Act
(ICA), 1872, outlines various conditions that render an agreement void under different sections.

Sections Pertaining to Void Agreements:

1. Section 2(g):

• Defines "void agreements" as those that are not enforceable by law.

2. Sections 5 to 30:

• Various sections in the Indian Contract Act, 1872, provide specific

circumstances under which agreements are considered void.

6.2 KEY CHARACTERISTICS OF VOID AGREEMENTS

• No legal force: Parties cannot seek court intervention to enforce a void agreement.

• Ab initio void: Void from the very beginning, not from a later date.

• Restitution: In some cases, courts may order restitution of property or benefits

exchanged under the void agreement.

6.3 TYPES OF VOID AGREEMENTS

1. Agreements with Unlawful Considerations or Objects (Section 23):

o Illegal consideration: Payment for illegal activities (e.g., selling drugs).

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o Immoral consideration: Consideration opposed to morality or public policy

(e.g., agreement to commit bribery).

o Objectionable consideration: Consideration prohibited by law (e.g., agreement

to sabotage a competitor's business in violation of competition laws).

Example: A contract to assassinate someone is void due to illegal consideration.

2. Agreements without Consideration (Section 25):

o Generally void, with exceptions:

▪ Written and registered agreements (e.g., gift deeds).

▪ Promises to compensate for something done (e.g., rewarding someone

for finding lost property).

▪ Promises to pay a debt barred by the Limitation Act (reviving time-

barred debts).

Example: A verbal promise to repay a loan, without any written acknowledgement, is void.

3. Agreements in Restraint of Marriage (Section 26):

o Agreements restricting individual choice regarding marriage are void to

safeguard personal liberty.

Example: A contract between parents dictating their daughter's marriage is void.

4. Agreements in Restraint of Trade (Section 27):

o Generally void as they impede individual freedom to pursue livelihood.

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o Exceptions:

▪ Reasonable restraint ancillary to the sale of goodwill of a business.

▪ Agreements not to carry on specific trades within particular local limits.

Example: A contract preventing a seller from competing with the buyer in the entire country is
void, but a contract with geographic limitations might be valid.

5. Agreements in Restraint of Legal Proceedings (Section 28):

o Agreements barring parties from seeking legal recourse for breach of contract
are void.

o Exception: Agreements to refer disputes to arbitration.

Example: A contract stating that parties cannot sue each other for breach is void.

6. Agreements Contingent on Impossible Events (Section 36):

o Agreements contingent on events that are impossible or inherently uncertain are

void.

Example: A contract to sell a magic potion that grants immortality is void.

Additional Considerations:

• Void agreements should be distinguished from voidable contracts, which are valid until
set aside by the court (e.g., contracts induced by fraud).

• The ICA is not exhaustive, and courts may find agreements void based on principles of
public policy or established case law.
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• Consulting a legal professional is essential for specific guidance on the validity of an

agreement

5. Wagering Agreements (Section 30):

Section 30: Agreements by way of wager are void.

Example: If two parties bet on the outcome of a cricket match, and the bet is purely speculative
without any genuine interest in the outcome, the agreement is void.

6.4 SUMMARY
In the Indian Contract Act, void agreements refer to contracts that lack enforceability from
their inception due to inherent defects or violations of legal principles. Section 2(g) of the Act
defines void agreements as those that are either against public policy, involve unlawful
consideration or object, or are declared void by law. Contracts that promote illegality,
immorality, or conflict with public welfare fall under this category, such as agreements to
commit a crime or harm others. Additionally, agreements with unlawful consideration, such as
those involving illegal goods or services, are void.

Furthermore, contracts that violate specific legal provisions, like those entered into by persons
lacking contractual capacity or those with uncertain or impossible objects, are also deemed
void ab initio. Void agreements hold no legal validity and cannot be enforced by either party,
and any benefits conferred under them must be restored. Understanding these provisions is
essential for ensuring the integrity and legality of contractual engagements within the Indian
legal framework

6.5 KEY WORDS

• Void Agreements: void agreements are those agreements that are not enforceable by
law.
• Void abinitio: Void from the very beginning, not from a later date.
• Wagering Agreements: Wagering agreements involve bets or gambling contracts where
the outcome depends on uncertain events and are considered void under the Indian
Contract Act
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• Agreements in restraint of trade: Agreements in restraint of trade limit a person's

freedom to engage in lawful profession, trade, or business, and are generally void unless
they are reasonable and in the public interest.

6.6 REVIEW QUESTIONS

1. Discuss Void agreements under Contract law.
2. What are Wagering Agreements? Are they enforceable?
3. Agreements in restraint of trade are void. Are there any exceptions?

6.7 FURTHER READINGS

1. The Contract Act 1872
2. Indian Contract Act, 1872 by R.K. Bangia, Allahabad Law Agency, 2024
3. Law of Contract" by Avtar Singh,Eastern Book Company, 2024
4. Contract Law in India" by Nilima Bhadbhade, Oxford University Press India,2019
5. Contract Law: Commentary and Materials" by R. M. Goel,LexisNexis India, 2023
6. Elements of Mercantile Law" by N. D. Kapoor,Sultan Chand & Sons,2024
7. Indian Contract Act: A Study" by Dr. S. N. Misra, Central Law Agency, 2023
8. Textbook on Law of Contract and Specific Relief by Avtar Singh, Eastern Book
Company, 2024
89 SHOOLINI UNIVERSITY

UNIT 7: PERFORMANCE OF CONTRACT

CONTENT:
▪ Objectives
7.1 Introduction
7.2 Effect of refusal
7.3 Person by whom promise is to be performed
7.4 Devolution of Joint Liabilities/ rights
7.5 Time/place of performance where it is not specified
7.6 Reciprocal Promises
7.7 Summary
7.8 Keywords
7.9 Review Questions
7.10 Suggested Readings

OBJECTIVES:
After studying this Chapter, you will be able to:

1. To understand the importance of contract law in business

2. To understand how a contract can be performed.
3. Who can perform the promise under the Contract?
4. Understand various provisions under contract law for the performance of contract.
90 LEGAL ASPECTS OF BUSINESS

7.1 INTRODUCTION
The Indian Contract Act, 1872, contains several provisions regarding the performance of
contracts, outlining the rights and obligations of parties involved. Let's discuss these provisions
in detail:

Obligation of Parties to Perform:

Law of Contract mandates that parties to a contract must either perform or offer to perform
their respective promises.

Example: A contracts to deliver goods to B on a specific date. A must either deliver the goods
on the agreed date or offer to deliver them.

7.2 EFFECT OF REFUSAL TO ACCEPT OFFER OF PERFORMANCE

If one party offers to perform their part of the contract, and the other party refuses to accept it,
the former is not responsible for non-performance and can sue for performance or claim
damages.

Example: A offers to pay B the agreed price for goods, but B refuses to accept the payment.
A is not liable for non-performance and can sue B for breach of contract.

Effect of refusal of party to perform promise wholly:

If a party refuses to perform their promise entirely, the other party may rescind the contract,
sue for damages, or both.

Example: A contracts to build a house for B but refuses to continue construction midway. B
can rescind the contract, hire another contractor to complete the house, and sue A for damages.

7.3 PERSON BY WHOM PROMISE IS TO BE PERFORMED

Promises in a contract must be performed by the promisor, their representatives, or any other
person authorized by the promisee.
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Example: A contracts with B to deliver goods. A's employee delivers the goods on A's behalf.
A is responsible for the performance of the contract.

Effect of accepting performance from third person:

Acceptance of performance by a third person relieves the promisor from liability unless the
promisee reserves his rights against the promisor.

Example: A owes money to B, but C, a third party, pays the debt on A's behalf, and B accepts
the payment. A is relieved of the obligation to pay, unless B reserves the right to collect from
A.

7.4 DEVOLUTION OF JOINT LIABILITIES

If two or more persons have made a joint promise, the promisee may compel any one or more
of them to perform it.

Example: A, B, and C jointly promise to repay a loan to D. D can compel any one of them to
repay the entire loan amount.

Any one of joint promisors may be compelled to perform:

Any one of the joint promisors may be compelled to perform the whole promise if the promisee
so elects.

Example: A, B, and C jointly promise to deliver goods to D. D can compel any one of them to
deliver the entire quantity of goods.

Devolution of joint rights:

If two or more persons have a joint right, the right may be enforced against any one or more of
them.
92 LEGAL ASPECTS OF BUSINESS

Example: A and B jointly own a property. C, a creditor of A, can enforce his right against A's
share of the property.

Devolution of several liabilities in certain cases:

If two or more persons make separate promises to the same person for the same purpose, they
are each liable for the whole.

Example: A and B promise to individually deliver goods to C. If either A or B fails to deliver

the goods, they are each liable for the entire loss suffered by C.

7.5 TIME FOR PERFORMANCE OF PROMISE, WHEN NO APPLICATION IS TO BE

MADE AND NO TIME IS SPECIFIED
Where no time is specified for performance of the contract, it must be performed within a
reasonable time.

Example: A promises to deliver goods to B without specifying a delivery date. A must deliver
the goods within a reasonable time frame.

Time and place for performance of promise, where time is specified and no application
to be made:

If the contract specifies a time and place for performance, the promise must be performed at
the time and place specified without any demand from the promisee.

Example: A contract specifies that payment must be made on the 1st of every month at B's
office. A must make the payment on the specified date at the specified place.

Application for performance on certain day to be at proper time and place:

If the performance is to be made at a particular place and the application for performance is
made at a different place, it must be made during the usual hours of business at that place.
93 SHOOLINI UNIVERSITY

Example: A requests B to deliver goods at A's office on a specific date. A must make the
request during B's usual business hours.

Place for performance of promise, where no application to be made and no place is

specified:

If no place is specified for performance, the promisor must apply to the promisee to appoint a
reasonable place for performance.

Example: A contracts to deliver goods to B without specifying a delivery location. A must

request B to appoint a reasonable place for delivery.

Performance in manner or at time prescribed or sanctioned by promisee:

The performance of a promise must be made in the manner or at the time prescribed or
sanctioned by the promisee.

Example: A promises to pay B by bank transfer. A must make the payment in the manner
prescribed by B.

7.6 RECIPROCAL PROMISES

Promisor not bound to perform, unless reciprocal promisee ready and willing to perform:

The promisor is not bound to perform unless the reciprocal promisee is ready and willing to
perform their part of the contract.

Example: A promises to sell goods to B upon receipt of payment. A is not bound to deliver
the goods unless B is ready and willing to make the payment.

Order of performance of reciprocal promises:

Where the mutual promises are to be performed at the same time, they must be performed in
such order as the nature of the transaction requires.
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Example: A promises to deliver goods to B upon receipt of payment, and B promises to make
payment upon delivery of goods. The nature of the transaction requires A to deliver goods first,
followed by B's payment.

Liability of party preventing event on which the contract is to take effect:

A party who prevents the occurrence of a condition on which a contract is to take effect

7.7 SUMMARY
Under the Contract Act, performance of a contract involves the fulfillment of obligations
agreed upon by the parties involved. It encompasses the timely execution of duties, delivery of
goods or services, and compliance with terms and conditions specified within the agreement.
Performance can be either actual, where all contractual obligations are met as agreed upon, or
substantial, where the essential aspects of the contract are fulfilled even if minor details remain
outstanding. Adequate performance ensures that parties receive what they were promised and
prevents breaches of contract, while non-performance or defective performance may lead to
legal remedies such as damages or specific performance orders. Understanding the provisions
of performance under the Contract Act is essential for upholding the integrity and
enforceability of contractual agreements within the legal framework.

7.8 KEYWORDS
• 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
• Promise : When the person to whom the proposal is made signifies his assent thereto,
the proposal is said to be accepted. A proposal, when accepted, becomes a promise;
• Reciprocal Promises : Promises which form the consideration or part of the
consideration for each other are called Reciprocal promises;
• Promisor and Promisee : The person making the proposal is called the “promisor”, and
the person accepting the proposal is called the “promisee”;
• Agreement : Every promise and every set of promises, forming the consideration for
each other, is an agreement;
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• Contract: : An agreement enforceable by law is a contract.

7.9 REVIEW QUESTIONS

1. Discus the obligations of parties to perform under Contract Law.
2. By whom promise is to be performed under Contract Law
3. What are the rules of law relating to time and place of performance of a contract.

7.10 SUGGESTED READINGS

1. The Contract Act 1872
2. Indian Contract Act, 1872 by R.K. Bangia, Allahabad Law Agency, 2024
3. Law of Contract" by Avtar Singh,Eastern Book Company, 2024
4. Contract Law in India" by Nilima Bhadbhade, Oxford University Press India,2019
5. Contract Law: Commentary and Materials" by R. M. Goel,LexisNexis India, 2023
6. Elements of Mercantile Law" by N. D. Kapoor,Sultan Chand & Sons,2024
7. Indian Contract Act: A Study" by Dr. S. N. Misra, Central Law Agency, 2023
8. Textbook on Law of Contract and Specific Relief by Avtar Singh, Eastern Book
Company, 2024
96 LEGAL ASPECTS OF BUSINESS

UNIT 8: DISCHARGE OF CONTRACT

CONTENT:
▪ Objectives
8.1 Introduction
8.2 Discharge by Performance
8.3 Discharge by Impossibility performance
8.4 Discharge by lapse of time
8.5 Discharge by breach of Contract
8.6 Summary
8.7 Key words
8.8 Review Questions
8.9 Suggested Readings

OBJECTIVES:
After studying this Chapter, you will be able to:

1. To understand the various ways in which a contract may be discharged.

2. To understand discharge of contract by consent.
3. Discuss the law relating to novation of contract.
4. Understand what is impossibility of performance and the rules regarding it.
97 SHOOLINI UNIVERSITY

8.1 INTRODUCTION
Contracts may be discharged or come to an end in various ways, depending on the
circumstances and terms outlined in the contract. Here are the common methods by which a
contract may be discharged:

1. Performance:

• By Full Performance: When both parties fulfil their respective obligations as per the
terms of the contract, the contract is discharged.

• By Substantial Performance: If one party substantially performs their obligations, the

contract may be considered discharged, subject to any minor deficiencies.

• By Tender of Performance: A party offers to perform their obligations under the

contract but the other party refuses to accept it. In such cases, the offering party is
discharged from further obligations.
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2. Agreement:

• By Mutual Agreement: The parties may agree to discharge the contract by mutual
consent, either by rescission (undoing the contract) or by novation (substituting a new
contract for the old one).

• By Accord and Satisfaction: The parties agree to accept a substituted performance or

a compromise settlement in place of the original contractual obligation.

3. Frustration:

• By Frustration of Contract: If an unforeseen event occurs after the formation of the

contract, making it impossible to perform the contract or fundamentally changing the
nature of the contract, the contract may be discharged.

• By Impossibility: If performance becomes impossible due to an event beyond the

control of the parties, such as destruction of subject matter or change in law, the contract
may be discharged.

4. Breach:

• By Breach of Contract: If one party fails to perform their obligations under the
contract without a lawful excuse, the other party may treat the contract as discharged
and claim damages for the breach.

• By Anticipatory Breach: If one party clearly indicates their intention not to perform
their obligations before the performance is due, the other party may treat the contract
as discharged and claim damages.

5. Operation of Law:

• By Operation of Law: Certain events, such as bankruptcy, death, or illegality, may

lead to the automatic discharge of a contract.
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• By Limitation Period: If a party fails to enforce their rights under a contract within
the prescribed limitation period, the contract may be discharged due to the expiration
of the limitation period.

6. Performance Agreed Upon:

• By Performance Agreed Upon: Sometimes, the parties agree upon a specific event or
condition that will discharge the contract, such as the expiry of a fixed term or
completion of a specified task.

7. Rescission:

• By Rescission: A contract may be discharged by mutual agreement to rescind it, usually

due to a material mistake, misrepresentation, or fraud.

8. Lapse of Time:

• By Lapse of Time: If the contract specifies a time limit for performance, and that time
elapses without performance, the contract may be discharged.

8.2 DISCHARGE BY PERFORMANCE

Discharge of a contract by performance occurs when both parties fulfill their respective
obligations as per the terms and conditions outlined in the contract. It is one of the most
common methods of bringing a contract to its conclusion.

1. Actual Performance:

• Definition: Full performance occurs when each party to the contract fulfills all the
obligations and duties as specified in the contract within the agreed-upon time frame.

• Example: A contracts to deliver 100 widgets to B by a certain date, and B agrees to

pay the purchase price upon delivery. If A delivers the 100 widgets as specified, and B
pays the agreed-upon price upon receipt, the contract is discharged by full performance.
100 LEGAL ASPECTS OF BUSINESS

2. Substantial Performance:

• Definition: Substantial performance refers to the completion of most of the obligations

under the contract, with only minor or immaterial deviations.

• Example: A contracts with B to construct a building according to specific plans and

specifications. If A completes the construction but deviates slightly from the plans in a
non-essential way, and the building is still functional and usable, it may be considered
substantial performance.

3. Tender of Performance:

• Definition: Tender of performance occurs when one party offers to perform their
obligations under the contract but the other party refuses to accept it.

• Example: A offers to deliver goods to B as specified in their contract, but B refuses to

accept delivery. A has tendered performance, and if B's refusal is unjustified, A may be
discharged from further obligations under the contract.

Rights and Obligations:

• Rights of the Performing Party: The performing party has the right to demand
payment or other performance from the other party.

• Obligations of the Non-Performing Party: The non-performing party is obligated to

accept the performance tendered by the performing party and fulfill their own
obligations under the contract.

Legal Consequences:

• Discharge of Obligations: Once the contract is discharged by performance, both

parties are relieved of their contractual obligations under the terms of the contract.
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• Enforceability: A contract discharged by performance cannot be enforced further, as

the parties have completed their respective obligations.

DISCHARGE BY AGREEMENT OR CONSENT

Discharge of a contract by agreement or consent occurs when both parties to the contract
mutually agree to end their contractual obligations or modify the terms of the contract. This
method of discharge is based on the principle of freedom of contract, allowing parties to
negotiate and settle their disputes without resorting to legal action.

Cases under Sections 62 and 63 of the Indian Contract Act illustrate how contracts can be
discharged by mutual agreement, either by substituting a new contract for an old one, or by
accepting performance of a promise in lieu of the performance agreed upon. These sections
provide parties with flexibility to modify or terminate their contractual obligations by mutual
consent, subject to certain legal principles and requirements.

1. Modes of Discharge:

• Rescission: Rescission involves the cancellation of the contract, returning the parties
to their pre-contractual positions.

• Novation: Novation occurs when the parties agree to substitute a new contract for the
old one, with new terms and conditions.

2. Types of Agreement:

• Express Agreement: The parties explicitly agree to discharge the contract or modify
its terms through written or verbal communication.

• Implied Agreement: The conduct of the parties may imply their consent to discharge
the contract, such as when both parties stop performing their obligations.
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• Section 62 and Section 63 of the Indian Contract Act, 1872, deal with the discharge of
a contract by mutual agreement. Let's discuss various cases illustrating discharge by
mutual agreement under these sections:

• Section 62: Discharge by Agreement

• This section states that if parties to a contract agree to substitute a new contract for an
old one, or to rescind or alter it, the original contract is discharged. Here are some cases
illustrating discharge under Section 62:

• Phillips vs. Brooks (1919):

• Facts: A contract was made for the sale of a house. Later, the parties agreed to modify
the terms by extending the time for payment.

• Judgment: The court held that the original contract was discharged by mutual
agreement to alter its terms.

• Sita Ram vs. Radha Bai (1954):

• Facts: A compromise was entered into by a person who was of unsound mind.

• Judgment: The court declared the agreement void as it was entered into by a person
incapable of understanding the nature of the compromise.

• Bhimji Velji Sorathiya vs. Palanpur Spinning and Weaving Co. Ltd (1961):

• Facts: The parties to a contract agreed to extend the time for performance of the
contract.

• Judgment: The court held that the original contract was discharged by mutual
agreement to alter its terms.
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• Section 63: Discharge by Remission

• This section deals with the discharge of a contract by agreement to accept performance
of a promise in lieu of the performance agreed upon. Here are some cases illustrating
discharge under Section 63:

• Thakurji vs. Mohamed Yusuf (1897):

• Facts: A debtor, unable to pay his debt, offered to pay a smaller sum, which the creditor
accepted in full satisfaction of the debt.

• Judgment: The court held that the original debt was discharged by the agreement to
accept the smaller sum in lieu of the full payment.

• Chinna Venkatasubbamma vs. Koniki Venkata Subbamma (1914):

• Facts: A creditor accepted a smaller sum from the debtor in full satisfaction of the debt.

• Judgment: The court held that the original debt was discharged by mutual agreement
to accept the smaller sum as full payment.

• Raja Saheb of Kamta vs. Mahant Dwaraka Das (1937):

• Facts: A landlord accepted rent from the tenant for a portion of the land, which was
less than the agreed rent for the entire land.

• Judgment: The court held that the landlord's acceptance of rent for the portion of the
land discharged the tenant from the obligation to pay the full rent for the entire land.

8.3 DISCHARGE BY IMPOSSIBILITY PERFORMANCE

The discharge of a contract due to impossibility of performance, also known as frustration, is
an important legal principle that recognizes the impact of unforeseen events on contractual
104 LEGAL ASPECTS OF BUSINESS

obligations. Understanding the doctrine of frustration and its requirements is essential for
parties to assess their rights and obligations in situations where performance becomes
impossible or impracticable due to unforeseen events.

Discharge of a contract due to impossibility of performance occurs when unforeseen

circumstances arise after the formation of the contract, rendering it impossible for one or both
parties to fulfill their obligations. This doctrine, also known as the doctrine of frustration,
recognizes that it would be unfair to hold parties responsible for events beyond their control.
Let's discuss the discharge of a contract due to impossibility of performance in detail:

1. Definition of Impossibility:

• Legal Principle: Impossibility of performance refers to a situation where performance

of the contract becomes objectively impossible due to an unforeseen event or
circumstance, making it impracticable or illegal for one or both parties to fulfill their
contractual obligations.

2. Types of Impossibility:

• Physical Impossibility: Occurs when the subject matter of the contract is destroyed or
becomes unavailable, making performance impossible.

• Legal Impossibility: Occurs when a change in law or regulation renders performance

illegal or impracticable.

3. Doctrine of Frustration:

• Legal Principle: The doctrine of frustration applies when a supervening event occurs
after the formation of the contract, making performance impossible, illegal, or radically
different from what was contemplated by the parties at the time of contracting.

• Effect: Frustration operates to discharge the contract automatically, relieving both

parties of their obligations under the contract.
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4. Requirements for Frustration:

• Supervening Event: The event causing the impossibility must occur after the
formation of the contract and must be beyond the control of the parties.

• Foreseeability: The event must be unforeseeable and not within the contemplation of
the parties at the time of contracting.

• Radical Change: The event must radically alter the nature of the contractual
obligations, making performance substantially different or impossible.

5. Examples of Frustration:

• Destruction of Subject Matter: Destruction of the subject matter of the contract, such
as a building, due to fire or natural disaster.

• Change in Law: A change in law or regulation that renders performance illegal, such
as a government ban on certain activities.

6. Consequences of Frustration:

• Automatic Discharge: Frustration automatically discharges the contract, relieving

both parties of their obligations.

• Recovery of Money Paid: Money paid or property transferred before the frustration
may be recoverable under the doctrine of restitution.

7. Case Examples:

• Taylor vs. Caldwell (1863): The destruction of a music hall by fire rendered
performance of a contract for its hire impossible. The court held that the contract was
frustrated and discharged.
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• Tsakiroglou & Co Ltd vs. Noblee Thorl GmbH (1962): Closure of the Suez Canal
due to war made performance of a contract for delivery of goods through the canal
impracticable. The court held that the contract was frustrated.

8.4 DISCHARGE OF CONTRACT BY LAPSE OF TIME

Discharge of a contract by lapse of time occurs when the time limit specified in the contract
for performance expires without performance being made.

The Indian Contract Act, 1872, recognizes the discharge of a contract by lapse of time under
certain circumstances.

1. Section 46: Time for Performance

• Section 46 of the Indian Contract Act: This section states that if the contract specifies
a time for performance, it must be performed within that time frame.

• Example: A contracts to deliver goods to B within 30 days. If A fails to deliver the

goods within the specified time, the contract may be discharged by lapse of time.

2. Section 47: Time and Place for Performance

• Section 47 of the Indian Contract Act: If the contract specifies a time and place for
performance, the promise must be performed at the specified time and place without
any demand from the promisee.

• Example: A promises to pay rent to B on the 1st of every month at B's office. If A fails
to pay the rent on the specified date and place, the contract may be discharged by lapse
of time.

3. Case Examples:

1. Ramcoomar Koondoo vs. McQueen (1861):

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• Facts: A lease agreement required the lessee to exercise an option to renew the
lease within a specified time. The lessee failed to exercise the option within the
stipulated period.

• Judgment: The court held that the lessee's failure to renew the lease within the
specified time resulted in the lapse of the option, and the lease was not renewed.

2. Suresh Kumar vs. State Bank of India (2009):

• Facts: A loan agreement required the borrower to repay the loan within a
specified time frame. The borrower failed to repay the loan within the stipulated
period.

• Judgment: The court held that the borrower's failure to repay the loan within
the specified time frame resulted in the lapse of the loan agreement, and the
bank was entitled to initiate recovery proceedings.

4. Legal Consequences:

• Discharge of Contract: When the time limit specified in the contract for performance
expires without performance being made, the contract is discharged by lapse of time.

• Remedies: The non-defaulting party may be entitled to seek remedies for breach of
contract, such as damages or specific performance, depending on the circumstances of
the case.

Discharge by operation of law

Discharge of a contract by operation of law refers to situations where a contract is terminated

automatically or by legal intervention without the need for the parties to take any explicit
action. This discharge may occur due to various legal principles and circumstances recognized
by law. Let's discuss some common scenarios where contracts are discharged by operation of
law:
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1. Bankruptcy or Insolvency:

• If either party to a contract becomes bankrupt or insolvent, the contract may be

discharged by operation of law. Bankruptcy laws provide for the automatic termination
of contracts upon the bankruptcy or insolvency of one of the parties.

• Example: A contracts to sell goods to B. If A becomes bankrupt, the contract may be

automatically discharged, and B may not be able to enforce it against A's estate.

2. Death or Incapacity:

• If a party to a contract dies or becomes incapacitated, the contract may be discharged

by operation of law. In such cases, the legal representative of the deceased or
incapacitated party may not be bound by the contract.

• Example: A contracts to provide services to B. If A dies before completing the services,

the contract may be discharged, and B may not be able to enforce it against A's estate.

3. Illegality:

• If performance of a contract becomes illegal due to a change in law or regulation, the

contract may be discharged by operation of law. Contracts that involve illegal activities
or contravene public policy are void ab initio and cannot be enforced.

• Example: A contracts to sell prohibited goods to B. If the sale of such goods becomes
illegal due to a change in law, the contract may be automatically discharged.

4. Destruction of Subject Matter:

• If the subject matter of a contract is destroyed or rendered impossible to perform

without fault of either party, the contract may be discharged by operation of law. The
principle of impossibility or frustration of purpose may apply in such cases.
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• Example: A contracts to lease a property to B for a wedding reception. If the property

is destroyed by fire before the event, the contract may be discharged due to
impossibility of performance.

5. Merger:

• If the rights and obligations of a contract are subsumed into a higher form of agreement
or court judgment, the original contract may be discharged by operation of law. This
principle is known as merger.

• Example: A debtor owes money to a creditor under a contract. If the debtor obtains a
court judgment discharging the debt, the original contract may be discharged by merger
into the court judgment.

DISCHARGE BY BREACH OF CONTRACT

Discharge of a contract by breach occurs when one party fails to fulfil its obligations under the
contract.

This failure to perform, known as a breach of contract, can result in the automatic termination
of the contract and release of the non-breaching party from its obligations. Let's delve into the
discharge of a contract by breach in detail:

1. Breach of Contract:

• Definition: A breach of contract occurs when one party fails to perform its obligations
under the contract, either by non-performance, defective performance, or anticipatory
breach.

• Types of Breach: Breach of contract can be categorized into material breach

(substantial failure to perform) and minor breach (insignificant or immaterial failure to
perform).
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2. Types of Breach:

• Material Breach: Occurs when a party fails to perform a significant obligation under
the contract, which goes to the root of the contract, thereby depriving the other party of
the substantial benefit of the contract.

• Anticipatory Breach:

• Definition: Repudiatory breach, also known as anticipatory breach, occurs when one
party indicates through words or actions that it does not intend to fulfill its contractual
obligations.

Repudiatory breach gives the non-breaching party the right to treat the contract as discharged
immediately, without waiting for the actual performance date.

3. Conditions Precedent and Subsequent:

• Conditions Precedent: If a condition precedent to performance is not met, the non-

occurrence of the condition may discharge the contract automatically.

• Conditions Subsequent: If a condition subsequent occurs, it may discharge the

contract automatically, terminating the parties' obligations under the contract.

6. Case Examples:

• Hochster v. De La Tour (1853): The defendant, before the start date of his
employment contract, informed the plaintiff that he would not perform his obligations.
The plaintiff immediately treated the contract as discharged. The court upheld the
plaintiff's right to do so, recognizing the anticipatory breach.

• Hadley v. Baxendale (1854): The defendant delayed in delivering a broken mill shaft
to the plaintiff, resulting in financial losses for the plaintiff. The court awarded damages
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to the plaintiff, including those that arose from the special circumstances communicated
by the plaintiff to the defendant (known as consequential damages).

8.6 SUMMARY
Discharge of a contract under the Contract Act refers to the termination or fulfillment of
contractual obligations, thereby releasing parties from their respective duties. This can occur
through various means, including performance, agreement, impossibility of performance, lapse
of time, or operation of law. Performance entails the complete fulfillment of contractual terms
by both parties, leading to automatic discharge.

An agreement between parties to terminate the contract can also result in discharge, provided
it's supported by valid consideration. Additionally, if performance becomes impossible due to
unforeseen circumstances or events beyond the control of the parties, the contract may be
discharged. Furthermore, a contract may expire upon the lapse of a specified time period or
upon the occurrence of a specific event outlined in the agreement. Lastly, discharge by
operation of law occurs in cases such as bankruptcy, alteration of the contract's essential terms,
or the death of a party. Understanding the mechanisms of discharge is crucial for ensuring the
proper conclusion of contractual relationships within the legal framework of the Contract Act.

8.7 KEYWORDS
• Performance: When both parties fulfil their respective obligations as per the terms of
the contract, the contract is discharged.
• Frustration of Contract: If an unforeseen event occurs after the formation of the
contract, making it impossible to perform the contract or fundamentally changing the
nature of the contract.
• Impossibility: If performance becomes impossible due to an event beyond the control
of the parties, such as destruction of subject matter or change in law.
• Breach of Contract: If one party fails to perform their obligations under the contract
without a lawful excuse.
• By Anticipatory Breach: If one party clearly indicates their intention not to perform
their obligations before the performance is due.
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8.8 REVIEW QUESTIONS

1. What are the various ways in which a contract may be discharged?
2. Write a note on discharge of a contract by consent
3. Impossibility of performance is a rule not an excuse for non performance of a contract.
Discuss.
4. Discuss the effects of supervening impossibility on the performance of a contract.

8.9 FURTHER READINGS

1. The Contract Act 1872
2. Indian Contract Act, 1872 by R.K. Bangia, Allahabad Law Agency, 2024
3. Law of Contract" by Avtar Singh,Eastern Book Company, 2024
4. Contract Law in India" by Nilima Bhadbhade, Oxford University Press India,2019
5. Contract Law: Commentary and Materials" by R. M. Goel,LexisNexis India, 2023
6. Elements of Mercantile Law" by N. D. Kapoor,Sultan Chand & Sons,2024
7. Indian Contract Act: A Study" by Dr. S. N. Misra, Central Law Agency, 2023
8. Textbook on Law of Contract and Specific Relief by Avtar Singh, Eastern Book
Company, 2024
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UNIT 9: REMEDIES FOR BREACH OF

CONTRACT

CONTENT:
▪ Objectives
9.1 Introduction
9.2 Damages
9.3 Specific Performance
9.4 Rescission
9.5 Quantum Meruit
9.6 Summary
9.7 Key words
9.8 Review Questions
9.9 Suggested Readings

OBJECTIVES:
After studying this Chapter, you will be able to:

1. To understand what remedies are available to an aggrieved party on the breach of a

contract.
2. To understand the principles on which damages are awarded on the breach of a
contract.
3. To explain under what circumstances a party is entitled to specific performance.
4. To understand when does a claim on quantum meruit arise.
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9.1 INTRODUCTION
Remedies for breach of contract are legal actions available to parties to compensate for the loss
suffered as a result of the breach. The Indian Contract Act, 1872, provides various remedies
for breach of contract, and these remedies are enforced through civil courts. Let's discuss these
remedies in detail, along with relevant sections, examples, and case laws:

9.2 DAMAGES
Damages are the most common remedy awarded for breach of contract under Indian contract
law. When a party breaches a contract, damages are awarded to compensate the innocent party
for the losses suffered as a result of the breach. The primary objective of awarding damages is
to place the innocent party in the position they would have been in had the contract been
performed as agreed.

• Example: A contracts to deliver goods to B on a specific date. A fails to deliver the

goods on the agreed-upon date, causing B financial losses due to delayed production.
B may claim damages from A to compensate for the losses incurred.
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9.3 SPECIFIC PERFORMANCE (SECTION 10 AND SECTION 20)

In some cases of breach of contract , damages are not adequate remedy. The court may , in
such cases , direct the party in breach to carry out his promise according to the terms of the
contract. This is a direction by the court for specific performance of the contract at the suit of
the party not in breach.

• Example: A contracts to sell a unique piece of artwork to B. If A breaches the contract,

B may seek a court order for specific performance, i.e., compel A to sell the artwork as
per the terms of the contract.

Injunction (Section 41 and Section 42):

Where a party is in breach of a negative term of a contract (ie. Where he is doing something
which he promised not to do) , the court may, by issuing an order , restrain him from doing
what he promised not to do. Such an order of the court is known as Injunction.

• Example: A contracts with B to refrain from disclosing confidential information. If A

breaches the contract by disclosing the information, B may seek an injunction from the
court to prevent further disclosure.

9.4 RESCISSION
When a contract is broken by one party, the other party may sue to treat the contract as
rescinded and refuse further performance.In such a case, he is absolved of all the obligations
under the contact.

• Example: A contracts to sell land to B, but later it is discovered that A did not have
clear title to the land. B may rescind the contract and seek a refund of any consideration
paid to A.

9.5 QUANTUM MERUIT

The right to sue on a quantum meruit (as much as earned) arises where a contract , partly
performed by one party , has become discharged by the breach of the contract by the other
116 LEGAL ASPECTS OF BUSINESS

party. This right is founded on an implied promise by the other party arising from the
acceptance of a benefit by that party.

• Example: A agrees to build a house for B for an agreed price. A breaches the contract
before completion. B may claim compensation from A for the work done based on the
principle of quantum meruit (as much as he deserves).

9.6 SUMMARY
Remedies available for breach of contract under Indian contract law aim to compensate the
aggrieved party for the losses suffered due to the breach. These remedies include damages,
specific performance, injunctions, and quantum meruit. Damages, the most common remedy,
aim to place the non-breaching party in the position they would have been in had the contract
been performed as agreed. Specific performance is granted when monetary compensation is
inadequate, compelling the breaching party to fulfill their contractual obligations. Injunctions
prevent the breaching party from taking certain actions that would worsen the breach. Quantum
meruit allows for compensation based on the value of the work done if the contract is breached
before completion. Understanding these remedies is essential for enforcing contractual
obligations and ensuring fair outcomes in breach of contract cases under Indian law.

9.7 KEYWORDS
• Damages: Compensation for loss or damage caused by the breach of contract is known
as damages.
• Specific Performance: To carry out the promise as per the terms of the contract.
• Injunction: Mode of securing the specific performance of the negative terms of the
contract.
• Quantum meruit: Right to sue on a quantum meruit ( as much as earnrd).

9.8 REVIEW QUESTIONS

1. What remedies are available to an aggrieved party on the breach of a contract?
2. State briefly the principles on which damages are awarded on the breach of a contract.
3. Under what circumstances is party entitled to specific performance?
4. When does a claim on quantum meruit arise?
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9.9 FURTHER READINGS

1. The Contract Act 1872
2. Indian Contract Act, 1872 by R.K. Bangia, Allahabad Law Agency, 2024
3. Law of Contract" by Avtar Singh,Eastern Book Company, 2024
4. Contract Law in India" by Nilima Bhadbhade, Oxford University Press India,2019
5. Contract Law: Commentary and Materials" by R. M. Goel,LexisNexis India, 2023
6. Elements of Mercantile Law" by N. D. Kapoor,Sultan Chand & Sons,2024
7. Indian Contract Act: A Study" by Dr. S. N. Misra, Central Law Agency, 2023
8. Textbook on Law of Contract and Specific Relief by Avtar Singh, Eastern Book
Company, 2024
118 LEGAL ASPECTS OF BUSINESS

UNIT 10: SPECIAL CONTRACTS

CONTENT:
▪ Objectives
10.1 Introduction
10.2 Contract Of Indemnity
10.3 Contract Of Guarantee
10.4 Rights Of Surety
10.5 Discharge Of Surety
10.6 Difference Between Contract Of Indemnity And Contract Of
Guarantee
10.7 Summary
10.8 Keywords
10.9 Review Questions

OBJECTIVES:
After studying this Chapter, you will be able to:

1. To understand what is a contract of indemnity?

2. To explain the distinction between a contract of indemnity and a contract of
Guarantee.
3. To explain what are the rights of an indemnity-holder when sued?
4. To state the circumstances in which a surety is discharged from liability.
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10.1 INTRODUCTION
A contract of indemnity is a legal agreement where one party promises to compensate the other
party for any loss or damage incurred due to specified events. These events could include
accidents, theft, fire, or any other contingencies outlined in the contract. Here's an example:

Example: John owns a small business and wants to protect his inventory against fire damage.
He enters into a contract of indemnity with an insurance company. According to the terms of
the contract, the insurance company agrees to compensate John for any financial loss he incurs
due to fire damage to his inventory. If a fire occurs and damages his inventory, the insurance
company will reimburse John for the value of the lost inventory, up to the coverage limit
specified in the contract.

1. Contract of Guarantee:

A contract of guarantee involves three parties: the creditor (to whom a debt is owed), the
principal debtor (the person who owes the debt), and the surety (the person who guarantees
payment if the debtor defaults). The surety agrees to fulfill the obligation of the debtor if the
debtor fails to do so. Here's an example:

Example: Sarah wants to rent an apartment, but she doesn't have a strong credit history. The
landlord requires a rental guarantee to ensure that the rent will be paid on time. Sarah's friend,
Michael, agrees to act as a guarantor by signing a contract of guarantee. In this contract,
Michael promises to pay the rent if Sarah fails to do so. If Sarah defaults on her rent payments,
the landlord can demand payment from Michael, the guarantor, to cover the outstanding rent.

In both examples, the contracts provide financial security, but they operate in different ways.
The contract of indemnity compensates for losses incurred, while the contract of guarantee
ensures that an obligation will be fulfilled if the primary party fails to do so.

10.2 CONTRACT OF INDEMNITY

• A contract of indemnity is a legal agreement where one party promises to compensate
the other party for any loss or damage incurred due to specified events.
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• It is governed by the Indian Contract Act, 1872, under Section 124 to Section 147.

1. Essential Elements of a Contract of Indemnity:

• Promise to Indemnify: One party (the indemnifier) promises to compensate the other
party (the indemnitee) for any loss or damage suffered.

• Existence of a Loss: The indemnity obligation arises only if there is an actual loss or
damage.

• Voluntary Payment: The indemnifier's liability is triggered by voluntary payment

made by the indemnitee.

• Cause and Effect Relationship: There must be a direct relationship between the
indemnifier's promise and the loss suffered by the indemnitee.

2. Examples of Contracts of Indemnity:

• Insurance Policies: Insurance contracts are classic examples of contracts of indemnity.

The insurer promises to compensate the insured for any loss or damage covered under
the policy.

• Surety Bonds: Surety bonds are contracts where one party guarantees to fulfill the
obligations of another party if they fail to do so. For example, a construction company
may provide a surety bond to guarantee completion of a project.

3. Case Laws Illustrating Contracts of Indemnity:

• LIC of India vs. Asha Goel, AIR 2003 SC 3123: In this case, the Supreme Court of
India held that an insurance policy is a contract of indemnity, and the insured is entitled
to indemnification only for the actual loss suffered.
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• Shyama Charan v. Ram Charan, AIR 1971 All 268: The Allahabad High Court held
that in a contract of indemnity, the indemnifier's liability is limited to the actual loss
suffered by the indemnitee. The indemnifier cannot be held liable for speculative or
remote damages.

• Municipal Corporation of Greater Mumbai v. Abhyudaya Co-operative Bank

Ltd, 2009 (2) BomCR 460: The Bombay High Court ruled that a contract of indemnity
requires the indemnifier to compensate the indemnitee for any loss suffered due to the
indemnifier's breach of duty or negligence.

Under the Indian Contract Act, when an indemnity holder is sued due to a breach of contract,
they possess certain rights to protect themselves and seek recourse. Here's a discussion on the
rights of an indemnity holder when sued under the Contract Act, along with examples:

1. Right to Recover Damages from Indemnifier (Section 125):

• When an indemnity holder is sued due to the actions of the indemnifier or a breach of
contract by the indemnifier, they have the right to recover all damages and expenses
incurred in defending the lawsuit.

• Example: Suppose A indemnifies B against any loss arising from a contract with C. If
C sues B for breach of contract and B incurs legal expenses in defending the lawsuit, B
has the right to recover these expenses from A, the indemnifier.

2. Right to Compensation for All Losses (Section 124):

• The indemnity holder has the right to be compensated for all losses suffered as a result
of the breach of contract or other specified events covered under the contract of
indemnity.

• Example: If X indemnifies Y against any loss arising from the sale of goods to Z, and
Z fails to pay for the goods, causing a loss to Y, Y has the right to claim compensation
from X for the entire loss suffered.
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3. Right to Mitigate Losses (General Principle):

• The indemnity holder has a duty to mitigate losses to the extent possible. However, if
despite reasonable efforts, losses are unavoidable, the indemnity holder has the right to
claim indemnification for those losses.

• Example: If an indemnity holder discovers a breach of contract by the indemnifier, they

have a duty to take reasonable steps to minimize the resulting damages. For instance, if
a supplier fails to deliver goods as per the contract, the buyer may source the goods
from an alternative supplier at a higher cost. The buyer has the right to claim the
additional cost from the indemnifier.

4. Right to Sue Third Parties (Section 145):

• The indemnity holder can sue third parties to recover losses or damages suffered as a
result of the breach of contract, and they can do so in their own name or in the name of
the indemnifier.

• Example: If a contractor indemnifies a subcontractor against any losses arising from

the construction project, and the subcontractor incurs losses due to the negligence of
another subcontractor, the subcontractor has the right to sue the negligent subcontractor
for damages, either in their own name or in the name of the contractor.

5. Right to Contractual Remedies (As per the terms of the contract):

• The rights of the indemnity holder may also be governed by the specific terms of the
contract of indemnity, which may provide additional remedies or limitations.

• Example: If the contract of indemnity specifies a limitation on the amount of

indemnification or the types of losses covered, the rights of the indemnity holder will
be subject to these contractual provisions.
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In summary, the rights of an indemnity holder when sued under the Contract Act include the
right to recover damages from the indemnifier, the right to claim compensation for all losses,
the duty to mitigate losses, the right to sue third parties, and the right to contractual remedies
as per the terms of the contract of indemnity. These rights ensure that the indemnity holder is
adequately protected against losses arising from the actions of the indemnifier or other
specified events.

10.3 CONTRACT OF GUARANTEE

• A contract of guarantee is a tripartite agreement where one party (the surety) agrees to
be responsible for the debt or obligation of another party (the principal debtor) if the
debtor defaults.

• It is governed by Sections 126 to 147 of the Indian Contract Act, 1872.

Some simple examples of guarantees from India:

Example: An individual guaranteeing the rent payment for their friend's apartment. If the friend
fails to pay rent, the landlord can seek payment from the guarantor.

A bank issuing a financial guarantee to a supplier on behalf of a small business owner for the
purchase of raw materials. If the business fails to make payment, the bank is liable to
compensate the supplier.

The extent of a surety's liability refers to the maximum amount for which they are responsible
under a contract of guarantee. The liability of a surety is determined by various factors,
including the terms of the guarantee contract, the nature of the obligation being guaranteed,
and the applicable laws. Here's a discussion on the extent of surety's liability under the Indian
Contract Act, supported by relevant sections, examples, and case laws:

1. Section 128 - Liability of Surety:

• According to Section 128 of the Indian Contract Act, a surety's liability is co-extensive
with that of the principal debtor, unless otherwise provided in the contract.
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2. Section 129 - Co-Sureties Liable to the Same Extent:

• Section 129 states that co-sureties are liable to the creditor to the same extent as the
principal debtor unless otherwise provided in the contract.

3. Section 145 - Rights of Surety:

• Section 145 provides that a surety is entitled to the benefit of every security held by the
creditor against the principal debtor. This section also deals with the release of a surety
from liability when the creditor gives up or loses such security.

Extent of Surety's Liability Examples:

1. Specific Limitation in the Contract:

• Example: A contract of guarantee may specify a maximum liability amount for

the surety, stating that they are liable only up to a certain limit. For instance, a
bank guarantee may mention a specific monetary cap on the surety's liability.

2. Continuing Guarantee:

• Example: A continuing guarantee may specify a time limit within which it is

effective. If the guarantee expires after a certain period, the surety's liability
ceases once that period elapses, unless explicitly renewed.

3. Material Alteration of Contract:

• Example: If there is a material alteration in the terms of the underlying contract

without the consent of the surety, the surety may be discharged from liability to
the extent of the alteration.
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Case Laws on Extent of Surety's Liability:

1. Union of India v. Raghuram Shetty:

• Citation: AIR 1987 SC 1119

• In this case, the Supreme Court of India held that the surety's liability under a
contract of guarantee is co-extensive with that of the principal debtor unless the
contract specifies otherwise.

2. United Bank of India v. Bengal Iron Corporation:

• Citation: AIR 1984 Cal 263

• The Calcutta High Court held that the liability of a surety is to be determined
based on the terms of the guarantee contract and the obligations of the principal
debtor.

10.4 RIGHTS OF SURETY

The rights of a surety are essential protections provided under the Indian Contract Act to
safeguard their interests when entering into a contract of guarantee. Let's discuss the key rights
of a surety, supported by relevant sections, examples, and case laws:

1. Right to Subrogation (Section 140):

• According to Section 140 of the Indian Contract Act, when a surety pays off the
creditor, they are entitled to all the rights and remedies that the creditor had against the
principal debtor.

• This right ensures that the surety can recover the amount paid from the principal debtor
or any securities held by the creditor.
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• Example: If a surety pays off a loan on behalf of the principal debtor, they can step into
the shoes of the creditor and pursue legal action against the debtor to recover the amount
paid.

2. Right of Indemnity (Section 145):

• Section 145 provides the surety with the right to claim indemnity from the principal
debtor for any payment made to the creditor on their behalf.

• The surety is entitled to reimbursement for all expenses, losses, and liabilities incurred
due to the guarantee.

• Example: If a surety is required to compensate the creditor for a default by the principal
debtor, they can seek reimbursement from the debtor for the amount paid.

3. Right to Securities (Section 141):

• Section 141 grants the surety the right to claim the benefit of any securities held by the
creditor from the principal debtor.

• This right ensures that the surety is not placed in a worse position than they would have
been if they had paid the debt directly to the creditor.

• Example: If a creditor holds a mortgage or pledge from the principal debtor as security
for the debt, the surety can claim the benefit of such security to reduce their liability.

4. Right to Set-Off (Section 143):

• Section 143 allows the surety to avail themselves of any set-off or counterclaim that the
principal debtor may have against the creditor.

• This right ensures that the surety is not held liable for more than the net amount owed
by the principal debtor to the creditor.
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• Example: If the principal debtor has a valid claim against the creditor, such as a refund
or compensation, the surety can use this claim to reduce the amount they are required
to pay.

10.5 DISCHARGE OF SURETY

Discharge of a surety refers to the termination of the surety's liability under a contract of
guarantee. The Indian Contract Act, 1872, provides several provisions outlining the
circumstances under which a surety may be discharged. Let's discuss these provisions in detail,
supported by relevant sections, examples, and case laws:

1. Discharge by Performance (Section 134):

• According to Section 134 of the Indian Contract Act, a surety is discharged from
liability when the principal debtor fulfills their obligation under the contract.

• This means that if the principal debtor pays off the debt or performs the duty owed to
the creditor, the surety's obligation is extinguished.

• Example: If a surety guarantees the repayment of a loan, they are discharged from
liability once the borrower repays the entire loan amount to the lender.

2. Discharge by Revocation (Section 130):

• Section 130 provides that a surety may revoke their guarantee at any time before the
contract is concluded.

• However, revocation does not affect any liability incurred by the surety before the
revocation.

• Example: If a surety guarantees a loan but later decides to revoke the guarantee before
the loan is disbursed, they are not liable for any future defaults by the borrower.
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3. Discharge by Alteration of Contract (Section 133):

• Section 133 states that any material alteration to the terms of the contract between the
creditor and the principal debtor, without the consent of the surety, discharges the surety
from liability to the extent of the alteration.

• This provision protects the surety from being held liable for obligations beyond those
they originally agreed to.

• Example: If the creditor and the principal debtor modify the loan agreement without
informing the surety, and the modification increases the surety's liability, the surety
may be discharged from the additional liability.

10.6 DIFFERENCE BETWEEN CONTRACT OF INDEMNITY AND CONTRACT OF

GUARANTEE

Aspect Contract of Indemnity Contract of Guarantee

A contract where one party (surety) agrees

A contract where one party promises to be responsible for the debt or obligation
to compensate the other party for any of another party (principal debtor) if the
Definition loss or damage incurred. debtor defaults.

Three parties: Creditor (to whom the debt

Parties Two parties: Indemnifier (promisor) is owed), Principal debtor (who owes the
Involved and Indemnitee (promisee). debt), and Surety (guarantor).
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Aspect Contract of Indemnity Contract of Guarantee

The indemnifier's primary obligation The surety's primary obligation is to

Primary is to compensate the indemnitee for ensure that the principal debtor fulfills
Obligation losses incurred. their obligation to the creditor.

Primary liability: The indemnifier's Secondary liability: The surety's liability

Nature of liability is primary and arises directly is secondary and arises only if the
Liability from the indemnity contract. principal debtor defaults.

Loss or damage suffered by the

indemnitee due to specified events, Default by the principal debtor, such as
Triggering such as accidents, theft, or breach of failure to repay a loan or fulfill a
Event contract. contractual obligation.

Co-extensive: The indemnifier's Limited: The surety's liability may be

Extent of liability extends to the actual loss limited by the terms of the contract or by
Liability suffered by the indemnitee. statute.

The indemnitee has the right to claim The surety has rights such as subrogation,
indemnification for losses suffered indemnity, and set-off, as well as
Rights and and seek reimbursement from the remedies like discharge and release from
Remedies indemnifier. liability.

A parent guaranteeing the repayment of a

An insurance policy where the insurer loan taken by their child from a bank. If
agrees to compensate the insured for the child defaults, the parent becomes
Example any loss or damage suffered. responsible for repayment.
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10.7 SUMMARY
Contracts of indemnity and guarantee are two essential concepts under contract law, each
serving distinct purposes in managing risks and obligations between parties. A contract of
indemnity involves one party (the indemnifier) agreeing to compensate the other party (the
indemnitee) for any losses or liabilities they may incur as a result of a specified event. This
type of contract typically arises in situations where one party seeks protection against potential
losses or legal actions. On the other hand, a contract of guarantee involves a third party (the
guarantor) undertaking to fulfill the obligations of another party (the principal debtor) in case
of default. Guarantees are often used to provide security for loans or credit arrangements, where
the guarantor assures the creditor of repayment in the event that the debtor fails to fulfill their
obligations. Both contracts play vital roles in commercial transactions by providing assurance
and mitigating risks for parties involved.

10.8 KEYWORDS
• Contract of Indemnity: A contract where one party promises to compensate the other
party for any loss or damage incurred.
• Contract of Guarantee: A contract where one party (surety) agrees to be responsible for
the debt or obligation of another party (principal debtor) if the debtor defaults.
• Indemnifier: The person who promises to make good the loss.
• Indemnity- holder: The person whose loss is to be made good.
• Surety: The person who gives the guarantee.
• Principal debtor:The person in respect of whose default the guarantee is given.
• Creditor: The person to whom the guarantee is given.

10.9 REVIEW QUESTIONS

1. What is a contract of indemnity?
2. Explain the distinction between a contract of indemnity and a contract of Guarantee.
3. What are the rights of an indemnity-holder when sued?
4. State the circumstances in which a surety is discharged from liability.
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UNIT 11: BAILMENT AND PLEDGE

CONTENT:
▪ Objectives
11.1 Introduction
11.2 Bailment
11.3 Pledge
11.4 Difference Between Bailment And Pledgetop Of Form
11.5 Summary
11.5 Summary
11.6 Keywords
11.7 Review Questions

OBJECTIVES:
After studying this Chapter, you will be able to:

1. To understand what is a contract of Bailment.

2. To discuss the vrights and responsibilities of bailee.
3. To explain how bailment differ from a pledge.
4. To discuss the rights and responsibilities of a Bailor.
5. To understand what is a Pledge.
6. To discuss the rights and responsibilities of pawnor and pawnee.
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11.1 INTRODUCTION
Contracts of bailment and pledge are special class of contracts. These are dealt with in chapter
IX (Secs. 148 to 181) of the Indian Contract Act, 1872. The Contract Act, however does not
deal with all types of bailments.There are separate Acts , eg. Eg. The Carriage of goods by sea
Act, 1925, which deal with all types of bailments. There are separate Acts, eg. The Carriers
Act, 1865, the Railways Act, 1890, the Carriage of Goods by Sea Act, 1925 which deal with
Special types of bailments. The Contract Act deals with the general principles underlyinf
contracts of bailment.

11.2 BAILMENT
• Bailment is a legal relationship in which one person (the bailor) delivers goods to
another person (the bailee) for a specific purpose, with the understanding that the goods
will be returned or disposed of according to the bailor's instructions.

1. Essential Elements of Bailment:

• Delivery of Goods: The bailor must deliver possession of the goods to the bailee.

• Purpose: The goods are delivered for a specific purpose, either for safekeeping, repair,
transportation, or some other lawful purpose.

• Return of Goods: The bailee is obligated to return the goods to the bailor or dispose of
them according to the bailor's instructions after the purpose of the bailment is fulfilled.

2. Provisions in the Indian Contract Act, 1872:

• Section 148: Defines bailment as 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 instructions of the person delivering
them.

• Section 149: Specifies the rights and duties of a bailor.

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• Section 150: Specifies the rights and duties of a bailee.

3. Examples of Bailment:

• Safekeeping: Leaving valuable items with a friend for safekeeping while on vacation.

• Transportation: Hiring a moving company to transport furniture to a new home.

• Repair: Taking a watch to a jeweller for repair.

• Pledge: Depositing jewellery with a pawnbroker in exchange for a loan.

Rights of the Bailor:

1. Right to Receive the Goods Back (Section 148(a)):

• The bailor has the right to receive back the goods bailed once the purpose of the
bailment is fulfilled or the agreed-upon time period expires.

• Example: A person lends their lawnmower to a neighbor for a week. At the end
of the week, the bailor has the right to ask for the lawnmower back.

2. Right to Terminate Bailment (Section 148(b)):

• The bailor has the right to terminate the bailment if the bailee breaches their
duties or if the purpose of the bailment becomes impossible to fulfill.

• Example: A car owner lends their car to a friend for a road trip, but the friend
uses the car for racing, violating the terms of the bailment. The car owner can
terminate the bailment and demand the immediate return of the car.

3. Right to Compensation for Breach of Duty (Section 148(c)):

• If the bailee breaches their duties or if the goods are damaged due to the bailee's
negligence, the bailor has the right to seek compensation for any loss suffered.
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• Example: A person lends their laptop to a friend with the condition that it should
be handled carefully. If the friend damages the laptop due to mishandling, the
bailor can demand compensation for the repair or replacement costs.

Duties of the Bailor:

1. Duty to Disclose Faults in Goods (Section 150(a)):

• The bailor must disclose any known faults or defects in the goods bailed that
might affect their use or safety by the bailee.

• Example: A person lends a bicycle to a friend, knowing that the brakes are
faulty. The bailor has a duty to inform the friend about the brake issue before
lending the bicycle.

2. Duty to Indemnify the Bailee (Section 150(b)):

• The bailor must indemnify the bailee for any loss suffered as a result of
undisclosed defects in the goods or any faults inherent in them.

• Example: A person lends their camera to a friend without disclosing that the
camera has a tendency to overheat. If the camera malfunctions during use and
causes damage to the friend's property, the bailor is liable to indemnify the
friend for the loss.

3. Duty to Bear Necessary Expenses (Section 150(c)):

• The bailor must bear any necessary expenses incurred by the bailee for the
purpose of the bailment, such as storage or transportation costs.

• Example: A person lends their artwork to a museum for display. The bailor must
bear the expenses related to transporting the artwork to the museum and any
costs associated with its storage and exhibition.
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These rights and duties ensure that the bailor's interests are protected and that the bailment
arrangement is carried out in a fair and lawful manner.

Rights of the Bailee:

1. Right to Use the Goods (Section 151(a)):

• The bailee has the right to use the goods bailed for the agreed-upon purpose.

• Example: A person rents a car for a week to use for commuting to work. The
bailee has the right to use the car for commuting during the agreed-upon period.

2. Right to Recover Expenses (Section 151(b)):

• The bailee has the right to recover any expenses reasonably incurred in the
performance of their duties under the bailment.

• Example: A shipping company transports goods for a client and incurs expenses
for fuel, labor, and vehicle maintenance. The bailee has the right to recover these
expenses from the bailor.

3. Right to Receive Remuneration (Section 151(c)):

• If the bailment involves services rendered by the bailee, the bailee has the right
to receive remuneration if such remuneration was agreed upon in the contract.

• Example: A person hires a moving company to transport furniture to a new

home and agrees to pay a fee for the service. The bailee (moving company) has
the right to receive remuneration for their services.

Duties of the Bailee:

1. Duty to Take Reasonable Care of the Goods (Section 151(a)):

136 LEGAL ASPECTS OF BUSINESS

• The bailee must take reasonable care of the goods bailed and prevent any
damage or loss to the goods.

• Example: A person borrows a friend's laptop and must ensure that it is kept in a
safe place, handled carefully, and protected from theft or damage.

2. Duty to Use the Goods Only for the Agreed Purpose (Section 151(b)):

• The bailee must use the goods bailed only for the purpose agreed upon with the
bailor and must not use the goods for any unauthorized purpose.

• Example: A company leases office equipment from another company for use in
their office. The bailee must use the equipment only for office-related activities
and not for personal use or other unauthorized purposes.

3. Duty to Return the Goods (Section 151(c)):

• Once the purpose of the bailment is fulfilled or the agreed-upon time period
expires, the bailee must return the goods bailed to the bailor.

• Example: A person rents a bicycle for a day from a rental shop. The bailee must
return the bicycle to the rental shop at the end of the rental period.

These rights and duties ensure that the bailee uses the goods responsibly and in accordance
with the terms of the bailment agreement, while also providing the bailee with certain rights to
recover expenses and receive remuneration for services rendered.

LAW RELATING TO LIEN

Lien is a legal right granted to a person to retain possession of someone else's property until a
debt owed by the owner of the property is discharged. Let's discuss the law relating to lien in
India, supported by relevant sections of the Indian Contract Act, along with simple examples:
137 SHOOLINI UNIVERSITY

1. Definition of Lien:

• Lien is the right to retain possession of another person's property as security for a debt
or obligation owed by that person.

2. Provisions in the Indian Contract Act, 1872:

• Section 170: Defines a lien as a right to retain possession of goods until payment of a
debt or performance of a promise.

• Section 171: Specifies that a person who has lawfully obtained possession of goods has
a lien over them while they remain in their possession, provided the possession is
lawful.

• Section 172: Outlines the essential conditions for the enforcement of a lien, including
possession of goods by the person claiming the lien, possession under lawful contract,
and unpaid debt or obligation.

3. Types of Lien:

• Particular Lien: A particular lien allows the holder to retain possession of goods until
a specific debt owed by the owner of the goods is paid. For example, a jeweller may
hold a particular lien over a piece of jewellery until the customer pays for repairs.

• General Lien: A general lien allows the holder to retain possession of goods until all
debts owed by the owner, regardless of their nature, are discharged. For example, a
bank may hold a general lien over a customer's assets until all outstanding debts,
including loans and overdrafts, are repaid.

4. Conditions for the Enforcement of Lien:

• Lawful Possession: The lienholder must have obtained possession of the goods
lawfully, either through a contract or by virtue of their profession or trade.
138 LEGAL ASPECTS OF BUSINESS

• Unpaid Debt or Obligation: There must be an unpaid debt or obligation owed by the
owner of the goods to the lienholder.

Examples of Lien:

1. Garage Lien: A mechanic may retain possession of a vehicle until the owner pays for
the repairs done on the vehicle. Until the repair bill is settled, the mechanic holds a lien
over the vehicle.

2. Landlord's Lien: A landlord may retain possession of a tenant's belongings until

unpaid rent or other charges are settled. The landlord has a lien over the tenant's
belongings until the rent arrears are cleared.

3. Banker's Lien: A bank may retain possession of a customer's assets, such as deposits
or securities, until all outstanding debts, including loans and overdrafts, are repaid. The
bank holds a general lien over the customer's assets.

In summary, lien provides a legal mechanism for a person to secure payment of a debt by
retaining possession of another person's property. The Indian Contract Act outlines the
conditions for the enforcement of lien, ensuring fairness and protection for both parties
involved.

11.3 PLEDGE
Pledge, also known as pawn or hypothecation, is a type of bailment where goods or movable
property are delivered by a person (the pledgor) to another person (the pledgee) as security for
a debt or obligation. Let's discuss pledge in detail, supported by relevant sections of the Indian
Contract Act, along with examples:

1. Definition of Pledge:

• Pledge is the bailment of goods as security for a debt or obligation, with the
understanding that the goods will be returned to the pledgor once the debt is repaid.
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2. Provisions in the Indian Contract Act, 1872:

• Section 172: Defines pledge as the bailment of goods as security for payment of a debt
or performance of a promise.

• Section 173: Specifies the rights and duties of the pledgee.

• Section 176: Outlines the conditions under which the pledgee may retain possession of
the pledged goods, such as non-payment of debt or performance of promise.

3. Essential Elements of Pledge:

• Delivery of Goods: The pledgor must deliver possession of the goods to the pledgee.

• Security for Debt: The goods are delivered as security for the repayment of a debt or
the performance of a promise.

• Right of Redemption: The pledgor retains the right to redeem the pledged goods by
repaying the debt or fulfilling the promise.

Examples of Pledge:

1. Gold Loan: A person pledges their gold jewelry with a bank or a pawnbroker in
exchange for a loan. The jewelry serves as security for the loan, and the person can
redeem the jewelry by repaying the loan amount within the stipulated time period.

2. Stock Pledge: An investor pledges their shares of stock with a brokerage firm as
collateral for a margin loan. The shares serve as security for the loan, and the investor
can redeem the shares by repaying the loan amount or meeting margin requirements.

3. Vehicle Pledge: A person pledges their car with a lender to secure an auto loan. The
car serves as collateral for the loan, and the person can redeem the car by repaying the
loan amount according to the terms of the loan agreement.
140 LEGAL ASPECTS OF BUSINESS

The pawnor, also known as the pledgor, is the person who delivers goods or movable property
as security for a debt or obligation in a pledge arrangement. Let's discuss the rights and duties
of the pawnor in detail, supported by relevant sections of the Indian Contract Act, along with
examples:

Rights of the Pawnor:

1. Right to Redeem (Section 176):

• The pawnor has the primary right to redeem the pledged goods by repaying the
debt or fulfilling the obligation for which the goods were pledged.

• Example: If a person pledges their watch to a pawnbroker in exchange for a

loan, they have the right to redeem the watch by repaying the loan amount
within the agreed-upon time frame.

2. Right to Receive Surplus (Section 176):

• If the pledged goods are sold by the pledgee (pawnbroker) due to the pawnor's
default, the pawnor has the right to receive any surplus proceeds from the sale
after deducting the amount of the debt and reasonable expenses incurred by the
pledgee.

• Example: If a person pledges their jewelry for a loan and the jewelry is sold by
the pawnbroker after default, any surplus amount remaining after deducting the
loan amount and expenses must be returned to the pawnor.

Duties of the Pawnor:

1. Duty to Disclose (Section 172):

• The pawnor has a duty to disclose all material facts about the pledged goods to
the pledgee, including any defects or encumbrances.
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• Example: If a person pawns a painting to a pawnshop, they have a duty to

disclose if the painting is a reproduction and not an original artwork.

2. Duty to Repay Debt or Fulfill Obligation (Implied):

• The pawnor has a duty to repay the debt or fulfill the obligation for which the
goods were pledged within the agreed-upon time frame.

• Example: If a person pawns their laptop to a pawnbroker in exchange for a loan,

they have a duty to repay the loan amount according to the terms of the
agreement.

3. Duty to Protect Pledged Goods (Implied):

• The pawnor has an implied duty to ensure that the pledged goods are maintained
in good condition and not subjected to any risk of damage or loss.

• Example: If a person pawns their musical instrument to a pawnshop, they have

a duty to ensure that the instrument is stored safely and protected from damage.

The pawnee, also known as the pledgee or the lender, is the person who receives goods or
movable property as security for a debt or obligation in a pledge arrangement. Let's discuss the
rights and duties of the pawnee in detail, supported by relevant sections of the Indian Contract
Act, along with examples:

Rights of the Pawnee:

1. Right of Retention (Section 173):

• The pawnee has the right to retain possession of the pledged goods until the debt
or obligation for which they were pledged is discharged.
142 LEGAL ASPECTS OF BUSINESS

• Example: If a person pledges their gold jewelry to a pawnbroker for a loan, the
pawnbroker (pawnee) has the right to keep the jewelry until the borrower repays
the loan.

2. Right to Sell Pledged Goods (Section 176):

• If the pawnor defaults on the debt or fails to perform the obligation within the
agreed-upon time frame, the pawnee has the right to sell the pledged goods after
giving due notice to the pawnor.

• Example: If a borrower fails to repay a loan secured by a pledged vehicle, the

lender (pawnee) may sell the vehicle to recover the outstanding debt.

3. Right to Retain Surplus (Section 176):

• If the pledged goods are sold by the pawnee due to the pawnor's default, the
pawnee has the right to retain any surplus proceeds from the sale after deducting
the amount of the debt and reasonable expenses incurred.

• Example: If a pawnbroker sells a pledged item for more than the amount owed
by the borrower, the pawnbroker is entitled to keep the surplus amount.

Duties of the Pawnee:

1. Duty to Exercise Reasonable Care (Implied):

• The pawnee has an implied duty to exercise reasonable care in handling and
storing the pledged goods to prevent damage or loss.

• Example: A pawnbroker must store pledged jewelry securely to prevent theft or

damage.
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2. Duty to Account for Proceeds (Section 176):

• If the pawnee sells the pledged goods, they have a duty to account for the
proceeds of the sale and return any surplus amount to the pawnor after deducting
the debt and expenses.

• Example: If a lender sells a pledged vehicle, they must provide an account of

the sale proceeds to the borrower and return any surplus amount.

3. Duty to Give Notice (Implied):

• The pawnee has a duty to give reasonable notice to the pawnor before selling
the pledged goods in the event of default.

• Example: A lender must notify the borrower of their intent to sell pledged
property and provide an opportunity for the borrower to repay the debt before
proceeding with the sale.

Case Law Example:

In the case of Lakshmi Charan Sen v. Bengal National Bank, the Calcutta High Court held
that the pawnee has a duty to act in good faith and exercise reasonable care in selling the
pledged goods. The court emphasized the importance of providing proper notice to the pawnor
before selling the pledged property.

In summary, the pawnee in a pledge arrangement has certain rights, including the right to retain
possession of the pledged goods and the right to sell them in case of default, along with duties
to exercise reasonable care, account for proceeds, and provide notice to the pawnor. These
rights and duties ensure fairness and protection for both parties involved in a pledge transaction.
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11.4 DIFFERENCE BETWEEN BAILMENT AND PLEDGE

Definition Bailment involves the delivery of Pledge is a type of bailment where goods
goods by one person to another for a are delivered as security for a debt or
specific purpose, with the obligation, with the understanding that
understanding that the goods will be the goods will be returned once the debt
returned or disposed of according to is repaid or the obligation is fulfilled.
the bailor's instructions.

Purpose The purpose of bailment can vary The purpose of pledge is specifically to
and may include safekeeping, provide security for a debt or obligation
transportation, repair, or any other owed by the owner of the pledged goods.
lawful purpose.

Transfer In bailment, the ownership of the In pledge, the ownership of the goods
of Title goods remains with the bailor remains with the pledgor (owner)
(owner) throughout the bailment throughout the pledge period.
period.

Rights Both the bailor and the bailee have Both the pledgor (pawnor) and the
and rights and duties outlined under the pawnee (pledgee) have rights and duties
Duties Indian Contract Act, such as the duty outlined under the Indian Contract Act,
to take reasonable care of the goods such as the right of the pledgor to redeem
and the right to receive compensation the pledged goods and the right of the
for any breach of duty. pawnee to retain possession of the goods
until the debt is repaid.

Example A person lends their car to a friend A person pledges their jewelry to a
for a road trip. The friend is pawnbroker in exchange for a loan. The
responsible for returning the car after pawnbroker holds the jewellery as
the trip. security until the loan is repaid.
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11.5 SUMMARY
In a contract of bailment, one party (the bailor) temporarily transfers possession of goods to
another party (the bailee) for a specific purpose, with the expectation that the goods will be
returned in the same condition after the purpose is fulfilled. Bailment can occur for various
reasons, such as safekeeping, transportation, or repair. Conversely, a contract of pledge
involves the transfer of possession of goods as security for the performance of a debt or
obligation. Here, the party providing the goods (the pledgor) transfers possession to another
party (the pledgee) as collateral, with the understanding that the goods will be returned upon
fulfillment of the debt. Pledges are commonly used in financial transactions, such as loans or
mortgages, where the pledge provides security for the creditor. Both contracts involve the
temporary transfer of possession, but while bailment focuses on the safekeeping or temporary
use of goods, pledge emphasizes the provision of security for the performance of a debt.

11.6 KEYWORDS
• Bailment: Delivery of goods by one person to another for some purpose, upon a contract
, that they shall return, when the purpose is accomplished, be returned or otherwise
disposed of according to the directions of the person delivering them.
• Bailor: The person delivering the goods in a contract of bailment.
• Bailee: The person to whom goods are delivered in a contract of Bailment.
• Pledge: The bailment of goods as security for payment of a debt or performance of a
promise .
• Pawnor/ Pledger: The bailor in a pledge.
• Pawnee/ Pledge: The bailee in a pledge.

11.7 REVIEW QUESTIONS

1. Define Bailment.
2. Discuss the vrights and responsibilities of bailee.
3. Explain how bailment differ from a pledge.
4. Discuss the rights and responsibilities of a Bailor.
5. Define Pledge.
6. Discuss the rights and responsibilities of pawnor and pawnee.
146 LEGAL ASPECTS OF BUSINESS

UNIT 12: CONTRACT OF AGENCY

CONTENT:
▪ Objectives
12.1 Introduction
12.2 Who May Be An Agent
12.3 Creation Of Agency
12.4 Duties And Rights Of Agent
12.5 Duties And Rights Of Principal
12.6 Summary
12.7 Keywords
12.8 Review Questions
12.9 Further Readings

OBJECTIVE:
After studying this Chapter, you will be able to:

1. To understand what is a contract of agency.

2. To discuss the rights and responsibilities of an agent
3. Understand who may be an agent.
4. To discuss how an agency may be created.
5. To understand what are the rights and responsibilities of a Principal.
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12.1 INTRODUCTION
A contract of agency is a legal relationship in which one person, called the principal, authorizes
another person, called the agent, to act on their behalf and to create legal relations with third
parties. The agent acts within the scope of authority granted by the principal, who remains
responsible for the agent's actions. Under the Indian Contract Act, 1872, a contract of agency
is defined in Sections 182 to 238.

According to the Indian Contract Act, 1872, any person who is of sound mind and has attained
the age of majority (which is 18 years old in India) can employ an agent. This means that
individuals who meet these criteria can appoint agents to act on their behalf in various legal
and commercial matters. Here are some key points regarding who can employ an agent:

1. Natural Persons: Any individual who is of sound mind and has reached the age of
majority can appoint an agent. This includes adults who are competent to enter into
contracts.

2. Artificial Persons: Legal entities such as corporations, partnerships, and other artificial
persons recognized by law can also employ agents. These entities act through their
authorized representatives or agents to conduct their business and legal affairs.

3. Unincorporated Associations: Certain unincorporated associations, like clubs,

societies, and charitable organizations, may also appoint agents to act on their behalf,
provided it's within the scope of their objectives and in accordance with their governing
rules.

4. Government Entities: Government departments, agencies, and bodies may appoint

agents to carry out specific tasks or represent them in legal matters, subject to the
relevant laws, regulations, and administrative procedures.

5. Persons of Unsound Mind: While persons of unsound mind are generally not
competent to enter into contracts, they may still be capable of appointing agents under
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certain circumstances, such as when the appointment is made during a lucid interval or
with the assistance of a legal guardian or representative.

6. Minors: Minors, i.e., individuals below the age of majority, may not have the capacity
to appoint agents in their own right. However, a guardian, parent, or other authorized
legal representative may appoint an agent on behalf of the minor for specific purposes,
such as managing property or entering into contracts deemed beneficial for the minor.

It's important to note that while the Indian Contract Act provides the framework for agency
relationships, specific laws, regulations, and legal principles may further define who can
employ an agent in certain contexts. Additionally, the authority of the agent may vary
depending on the nature of the relationship and the scope of authority granted by the principal.

12.2 WHO MAY BE AN AGENT

According to contract law, an agent is a person who acts on behalf of another party, known as
the principal, in legal or business matters. The law recognizes various individuals or entities
who may act as agents:

1. Individuals: Any competent person who has reached the age of majority and is of
sound mind can act as an agent. This includes individuals appointed by the principal
through express or implied authority to represent their interests in dealings with third
parties.

2. Companies: Corporations or other legal entities can appoint individuals within their
organization to act as agents. These agents typically include officers, directors, or
employees authorized to conduct business on behalf of the company within the scope
of their authority.

3. Partnerships: Partners within a partnership may act as agents for the partnership and
each other, unless otherwise agreed. Partnerships may also appoint individuals outside
the partnership as agents to represent their interests.
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4. Attorneys: Lawyers or solicitors authorized to practice law can act as agents for their
clients in legal matters, including contract negotiations and litigation.

5. Fiduciaries: Trustees, executors, guardians, and other fiduciaries appointed to manage

the affairs of another person can act as agents within the scope of their fiduciary duties.

6. Government Officials: Government officials or representatives may act as agents in

their official capacities to negotiate contracts or conduct business on behalf of
governmental entities.

7. Nonprofit Organizations: Officers or representatives of nonprofit organizations can

act as agents to enter into contracts or conduct business on behalf of the organization,
subject to any limitations imposed by law or the organization's governing documents.

Overall, agents play a crucial role in facilitating legal and business transactions by representing
the interests of their principals and acting within the scope of their authority.

12.3 CREATION OF AGENCY

Agency is created when one person, known as the principal, grants authority to another person,
known as the agent, to act on their behalf in legal or business matters. There are several ways
in which agency relationships can be formed:

1. Express Agreement: The most common method of creating an agency relationship is

through an express agreement between the principal and the agent. This agreement can
be oral or written and outlines the scope of the agent's authority, duties, and
responsibilities.

2. Implied Agreement: An agency relationship may also be created implicitly through

the conduct of the parties or the circumstances of the situation. If the principal's actions
lead others to reasonably believe that the agent has authority to act on their behalf, an
agency relationship may be implied.
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3. Apparent Authority: Apparent authority arises when the principal's actions or

representations lead a third party to reasonably believe that the agent has authority to
act on behalf of the principal, even if the agent does not have actual authority. The
principal may be bound by the agent's actions if the third party reasonably relies on the
agent's apparent authority.

4. Ratification: Even if an agent acts without actual authority, the principal may choose
to ratify the agent's actions after the fact, thereby creating an agency relationship
retroactively. Ratification occurs when the principal accepts or adopts the agent's
unauthorized actions.

5. Operation of Law: In some cases, agency relationships may be created by operation

of law, such as when a parent is held liable for the actions of their minor child or when
a guardian is appointed to manage the affairs of an incapacitated person.

12.4 DUTIES AND RIGHTS OF AGENT

The duties and rights of an agent are established within the framework of the agency
relationship, which is based on principles of trust, loyalty, and fiduciary duty. Here is a
discussion of the key duties and rights of an agent:

Duties of an Agent:

1. Duty of Loyalty: Perhaps the most fundamental duty of an agent is loyalty to the
principal. This duty requires the agent to act solely in the best interests of the principal,
avoid conflicts of interest, and refrain from self-dealing or acting in a manner that may
benefit the agent at the expense of the principal.

2. Duty of Care and Skill: Agents are required to exercise reasonable care, skill, and
diligence in performing their duties. This duty encompasses responsibilities such as
following the principal's instructions, acting with competence in matters within their
expertise, and seeking the principal's guidance or consent when necessary.
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3. Duty of Obedience: Agents are obligated to follow the lawful and reasonable
instructions of the principal. This duty requires agents to act within the scope of their
authority as defined by the agency agreement and to adhere to any specific instructions
provided by the principal.

4. Duty of Disclosure: Agents have a duty to provide the principal with all relevant
information related to the agency relationship, including any material facts or conflicts
of interest that may affect the principal's interests. This duty ensures transparency and
enables the principal to make informed decisions.

5. Duty to Account: Agents are required to keep accurate records of their actions,
transactions, and expenses related to the agency relationship. This duty includes
providing the principal with an account of all funds or property received or expended
on behalf of the principal.

Rights of an Agent:

1. Right to Compensation: Agents have the right to receive compensation for their
services as agreed upon in the agency agreement. This may include a fixed fee,
commission, or other forms of remuneration.

2. Right to Reimbursement: Agents are entitled to reimbursement for any expenses

incurred in the course of carrying out their duties as authorized by the principal. This
may include travel expenses, postage, or other reasonable costs.

3. Right to Indemnification: Agents have the right to be indemnified by the principal for
any losses or liabilities incurred in the performance of their duties, provided they acted
within the scope of their authority and in accordance with the principal's instructions.

4. Right to Lien: In certain circumstances, agents may have a right to retain possession
of the principal's property until they receive payment for their services or
reimbursement for expenses incurred on behalf of the principal.
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12.5 DUTIES AND RIGHTS OF PRINCIPAL

The principal in an agency relationship also possesses certain duties and rights that govern their
interactions with the agent and third parties. Here is a discussion of the key duties and rights
of a principal:

Duties of a Principal:

1. Duty to Compensate: The principal is obligated to compensate the agent for their
services as agreed upon in the agency agreement. This duty includes paying the agent
any agreed-upon fees, commissions, or other forms of compensation in a timely
manner.

2. Duty of Reimbursement: Principals have a duty to reimburse agents for any

reasonable expenses incurred in the performance of their duties on behalf of the
principal. This may include travel expenses, communication costs, or other necessary
expenditures.

3. Duty of Indemnification: Principals are responsible for indemnifying agents for any
losses, liabilities, or expenses incurred by the agent in the course of carrying out their
duties within the scope of their authority. This duty ensures that agents are protected
from any adverse consequences resulting from their actions on behalf of the principal.

4. Duty of Cooperation: Principals are required to cooperate with agents and provide
them with the information, resources, and assistance necessary to carry out their duties
effectively. This duty includes providing agents with access to relevant documents,
facilities, and personnel as needed.

Rights of a Principal:

1. Right to Performance: Principals have the right to expect that agents will perform
their duties faithfully, competently, and in accordance with the terms of the agency
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agreement. This includes carrying out instructions promptly and efficiently and acting
in the best interests of the principal.

2. Right to Information: Principals have the right to receive accurate and timely
information from agents regarding the status of the agency relationship, including any
actions taken on behalf of the principal, expenses incurred, or transactions completed.

3. Right to Terminate: Principals retain the right to terminate the agency relationship at
any time, provided they give the agent reasonable notice or compensation as required
by the terms of the agency agreement or applicable law.

4. Right to Control: Principals have the right to exercise control over the actions of the
agent within the scope of the agency relationship. This includes the authority to give
instructions, set guidelines and limitations, and monitor the agent's performance.

12.6 SUMMARY
A contract of agency establishes a legal relationship between two parties, known as the
principal and the agent, whereby the agent is authorized to act on behalf of the principal in
various capacities. In this contract, the principal grants the agent authority to represent them in
dealings with third parties, such as entering into contracts, making purchases, or conducting
negotiations. The agent undertakes to act in the best interests of the principal, following their
instructions and adhering to any limitations or conditions outlined in the agreement. This
contract typically outlines the scope of the agent's authority, the duties and responsibilities of
both parties, the terms of compensation, and any other relevant terms and conditions. By
formalizing the agency relationship through a contract, the parties can establish clear
expectations, rights, and obligations, fostering trust and accountability in their interactions.

12.7 KEYWORDS
• Agent: Person employed to do any act for another, or to represent another in dealings
with third person.
• Principal: Person for whom such act is done, or who is so represented, is called the
Principal.
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• Special agent: Person appointed to perform a particular act or to represent his principal
in some particular transaction.
• General agent: Person who has authority to do all acts connected with a particular trade,
business or employment.
• Universal agent: Person whose authority to act for the principal is unlimited.

12.8 REVIEW QUESTIONS

1. What is a contract of agency.
2. Discuss the rights and responsibilities of an agent
3. Who may be an agent.
4. Discuss how an agency may be created.
5. What are the rights and responsibilities of a Principal.

12.9 FURTHER READINGS

1. The Contract Act 1872
2. Indian Contract Act, 1872 by R.K. Bangia, Allahabad Law Agency, 2024
3. Law of Contract" by Avtar Singh,Eastern Book Company, 2024
4. Contract Law in India" by Nilima Bhadbhade, Oxford University Press India,2019
5. Contract Law: Commentary and Materials" by R. M. Goel,LexisNexis India, 2023
6. Elements of Mercantile Law" by N. D. Kapoor,Sultan Chand & Sons,2024
7. Indian Contract Act: A Study" by Dr. S. N. Misra, Central Law Agency, 2023
8. Textbook on Law of Contract and Specific Relief by Avtar Singh, Eastern Book
Company, 2024
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UNIT 13: COMPANY ACT

CONTENT:
▪ Objectives
13.1 Introduction
13.2 Incorporation Of Company
13.3 Memorandum Of Association
13.4 Prospectus
13.5 Shares
13.6 Summary
13.7 Keywords
13.8 Review Questions
13.9 Further Readings

OBJECTIVES:
After studying this Chapter, you will be able to:

• Understand what is a Company.

• Understand what are the consequences of incorporation of a Company.
• Discuss what is a Memorandum of Association and its content.
• Explain what are Articles of Association and How can they be altered.
• Define what is a prospectus and its contents.
• Understand what is Share capital.
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13.1 INTRODUCTION
The Companies Act 2013: Meaning and types, Incorporation, Memorandum & Articles of
association, Prospectus, Issue of shares and bonus shares, rights issue, sweat equity, role of
directors, share qualification, company meetings.

Under the Companies Act, a "company" refers to an incorporated entity that is granted legal
personality, distinct from its owners (shareholders), and is capable of conducting business,
entering into contracts, owning property, and being sued in its own name. The Companies Act
outlines the regulations and provisions governing the establishment, operation, and dissolution
of companies. Let's delve into the meaning and types of companies under the Companies Act:

Meaning of Company:

A company is an artificial legal entity created by law, which exists independently of its
members (shareholders). It is characterized by limited liability, perpetual succession, and the
ability to own property, sue, and be sued in its own name. Companies are formed for various
purposes, including commerce, investment, charitable activities, and more.

Types of Companies under the Companies Act:

1. Private Company:

• A private company is defined by restrictions on the transferability of shares and

a limitation on the number of members to fifty, excluding employees and past
employees who are also members.

• These companies are often smaller in scale and are not required to publish their
financial statements or hold annual general meetings (AGMs) to the same extent
as public companies.

• "Private Limited Company" is a common form of a private company.

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2. Public Company:

• A public company is one whose shares are freely transferable and can be traded
on a stock exchange.

• There is no restriction on the maximum number of shareholders, and these

companies typically have a wider shareholder base compared to private
companies.

• Public companies are subject to more stringent regulatory requirements,

including regular disclosure of financial information and holding AGMs.

3. One Person Company (OPC):

• An OPC is a type of private company that can be formed with just one
shareholder.

• It provides the benefits of limited liability while allowing a single entrepreneur

to operate a corporate entity.

• OPCs have less stringent compliance requirements compared to other private

companies.

4. Section 8 Company (Non-Profit Company):

• These companies are formed for promoting commerce, art, science, sports,
education, research, social welfare, religion, charity, protection of the
environment, or any such other object.

• Profits, if any, are plowed back into the organization for furtherance of its
objectives rather than distributed to members.
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• Section 8 companies enjoy tax exemptions subject to certain conditions.

5. Producer Company:

• Producer companies are formed by individuals involved in the production of

goods or providing services to benefit their members.

• They are aimed at improving the standard of living of farmers, artisans, and
other producers, facilitating better access to credit, technology, and markets.

6. Foreign Company:

• A foreign company is one that is incorporated outside the jurisdiction but has
established a place of business in the country.

• These companies are subject to certain registration and regulatory requirements

to operate within the country.

7. Government Company:

• A government company is one in which the government holds a substantial

stake, either directly or through state-controlled institutions.

• These companies are often involved in sectors deemed strategic or crucial for
public welfare, such as defense, infrastructure, and utilities.

These are some of the main types of companies recognized under the Companies Act. Each
type has its own set of regulations, compliance requirements, and advantages, catering to
different business needs and objectives.

13.2 INCORPORATION OF COMPANY

Incorporating a company in India under the Companies Act involves several steps and legal
requirements. Here's a detailed overview of the process:
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1. Obtain Digital Signature Certificate (DSC):

• The first step is to obtain Digital Signature Certificates (DSCs) for all the proposed
directors of the company. DSCs are required for digitally signing the electronic
incorporation documents.

2. Obtain Director Identification Number (DIN):

• Every proposed director must apply for a Director Identification Number (DIN) from
the Ministry of Corporate Affairs (MCA). DIN is a unique identification number
required for a person to become a director of a company.

3. Name Approval:

• The next step is to select a suitable name for the company and apply for its approval to
the Registrar of Companies (ROC). The name should comply with the naming
guidelines prescribed under the Companies Act, such as uniqueness, relevance, and
non-violation of any existing trademarks.

4. Preparation of Incorporation Documents:

• Once the name is approved, the incorporation documents including the Memorandum
of Association (MOA) and Articles of Association (AOA) need to be prepared. MOA
defines the company's objectives and AOA contains the rules and regulations for the
internal management of the company.

5. Filing of Incorporation Documents:

• The signed incorporation documents along with other required forms, such as Form
SPICe (Simplified Proforma for Incorporating Company electronically), Form INC-9
(Declaration by first subscriber(s) and director(s)), and Form DIR-2 (Consent to act as
a director), need to be filed electronically with the ROC.
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6. Payment of Fees:

• The prescribed filing fees for incorporation and stamp duty (if applicable) need to be
paid online along with the submission of incorporation documents.

7. Verification and Approval:

• The ROC will verify the incorporation documents and if found in order, will issue the
Certificate of Incorporation (COI). The COI serves as conclusive evidence of the
formation of the company.

8. PAN and TAN Application:

• After obtaining the COI, the company needs to apply for Permanent Account Number
(PAN) and Tax Deduction and Collection Account Number (TAN) with the Income
Tax Department.

9. Post-Incorporation Compliance:

• Once the company is incorporated, there are certain post-incorporation compliances to

be fulfilled such as opening a bank account, issuing share certificates, appointment of
auditors, conducting statutory meetings, etc.

10. Commencement of Business:

• After incorporation, if the company intends to commence business immediately, it

needs to file a declaration of commencement of business with the ROC within 180 days
of incorporation.

Incorporating a company in India under the Companies Act involves a systematic and legal
process that requires adherence to various statutory requirements and documentation. Seeking
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professional assistance from Company Secretaries, Chartered Accountants, or legal experts can
help ensure a smooth and compliant incorporation process.

13.3 MEMORANDUM OF ASSOCIATION

The Memorandum of Association (MOA) is a foundational document of a company that
outlines the fundamental objectives, scope of activities, and the company's relationship with its
shareholders and outsiders. Under the Companies Act 2013 in India, the MOA plays a crucial
role in defining the company's existence and scope of operations.

1. Legal Definition and Importance:

• The MOA is defined under Section 4 of the Companies Act, 2013. It is essentially the
charter of the company, outlining its constitution and defining the company's objects.

• It represents a contract between the company and its members, as well as between the
company and outsiders.

2. Contents of Memorandum of Association:

• Name Clause: This clause specifies the name of the company. The name should not
resemble the name of any existing company and must comply with the naming
guidelines prescribed under the Act.

• Registered Office Clause: It states the registered address of the company, which is
used for official communication and legal purposes.

• Object Clause: This clause defines the main and ancillary objects for which the
company is formed. The objects must be lawful and within the scope of activities
permitted under the Companies Act.

• Liability Clause: It specifies the extent of liability of the company's members. In the
case of a company limited by shares, the liability of the members is limited to the
amount unpaid on their shares. In a company limited by guarantee, the liability is
162 LEGAL ASPECTS OF BUSINESS

limited to the amount that each member undertakes to contribute in the event of winding
up.

• Capital Clause: This clause states the authorized capital of the company and the
division of shares into different classes, if applicable.

3. Alteration of Memorandum:

• The MOA can be altered by special resolution passed by the shareholders and with the
approval of the National Company Law Tribunal (NCLT) in certain cases.

• Alteration can be made to change the company's name, registered office, objects, capital
clause, liability clause, etc.

4. Effect of Memorandum:

• The MOA binds the company and its members to the same extent as if they had
individually signed it.

• Any act done beyond the scope of the objects specified in the MOA is considered ultra
vires (beyond the powers) of the company and void ab initio (from the beginning).

5. Public Inspection:

• The MOA is a public document and can be inspected by anyone upon payment of a
prescribed fee. It is filed with the Registrar of Companies (ROC) during the
incorporation process.

6. Doctrine of Indoor Management:

• While the MOA is a public document, the internal management of the company is based
on the doctrine of indoor management. This means that outsiders dealing with the
company are not required to inquire into the regularity of internal proceedings.
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Articles of Association

The Articles of Association (AOA) are a vital document governing the internal management,
regulations, and administration of a company. It complements the Memorandum of Association
(MOA) by providing detailed rules and regulations for the company's internal affairs. Under
the Companies Act, 2013 in India, the AOA is mandated for all companies. Let's discuss the
Articles of Association in detail, including sections and examples:

1. Legal Definition and Importance:

• The AOA are defined under Section 5 of the Companies Act, 2013. They contain
regulations for the management of the company and for the achievement of its
objectives.

• The AOA provide rules for various matters such as the appointment and removal of
directors, conduct of meetings, transfer and transmission of shares, etc.

2. Contents of Articles of Association:

The AOA typically cover the following areas:

• Preliminary/Interpretation Clause: This clause provides definitions of terms used

throughout the AOA.

• Share Capital and Variation Clause (Section 13): This clause specifies the share
capital of the company, rights attached to each class of shares, and procedures for
altering the share capital.

• Voting Rights (Section 14): It defines the voting rights of shareholders and the
procedures for exercising such rights.
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• Directors' Powers and Duties (Section 166): This clause outlines the powers and
duties of directors, including their appointment, resignation, removal, and the
delegation of powers.

• Meetings (Section 96): This section regulates the convening, conduct, and procedures
of meetings, including general meetings, board meetings, and committee meetings.

• Dividends and Reserves (Section 123): It specifies the procedures for declaring
dividends, transfer of profits to reserves, and the distribution of assets in the event of
winding up.

• Transfer and Transmission of Shares (Section 56): This clause governs the transfer
and transmission of shares, including procedures for transfer, transmission, and
registration of transfers.

• Winding Up (Section 270): It outlines the procedures for winding up the company,
including voluntary winding up, appointment of liquidators, and distribution of assets.

3. Model Articles:

• The Companies Act, 2013 provides Model Articles for companies limited by shares,
guarantee, and unlimited companies. Companies may adopt these Model Articles in
their entirety or with modifications.

4. Alteration of Articles (Section 14):

• The AOA can be altered by passing a special resolution at a general meeting of the
shareholders.

• Any alteration must be filed with the Registrar of Companies (ROC) within 30 days of
the resolution.
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The Articles of Association are a critical document for any company as they provide the
framework for its internal governance and management. Compliance with the provisions of the
AOA is essential to ensure the smooth functioning of the company and to protect the interests
of its stakeholders. Companies must draft their AOA carefully, taking into account the specific
requirements of their business and industry sector.

13.4 PROSPECTUS
A prospectus is a legal document issued by a company that offers securities (such as shares,
debentures, or bonds) to the public for subscription or purchase. It provides essential
information about the company, its business, financial position, and the securities being
offered. The prospectus serves as a vital tool for investors to make informed decisions about
investing in the company. Under the Companies Act, 2013 in India, the issuance of a prospectus
is regulated to ensure transparency and investor protection.

1. Legal Definition and Importance:

• The prospectus is defined under Section 2(70) of the Companies Act, 2013. It includes
any document described or issued as a prospectus and invites subscriptions or
applications for securities from the public.

• The prospectus is crucial for providing potential investors with relevant information to
make informed investment decisions.

2. Contents of Prospectus:

The Companies Act mandates certain information to be included in the prospectus under
Section 26. The key contents typically include:

• Name of the Company (Section 26(1)(a)): The full name of the company issuing the
prospectus.

• Objectives of the Issue (Section 26(1)(b)): The objectives for which the funds raised
through the issuance of securities will be utilized.
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• Details of the Company's Business (Section 26(1)(c)): Information about the

company's business operations, including its history, products/services, market
presence, and future plans.

• Financial Information (Section 26(1)(d)): Financial statements, including audited

balance sheets, profit and loss statements, cash flow statements, and any other financial
information deemed relevant.

• Management and Directors (Section 26(1)(e)): Details of the company's management

team, including the board of directors, key management personnel, and their
qualifications, experience, and remuneration.

• Terms of the Issue (Section 26(1)(f)): Details of the securities being offered, including
their type, number, face value, issue price, terms of payment, and any rights or
restrictions attached to them.

• Risk Factors (Section 26(1)(g)): Disclosure of risks associated with investing in the
company, including market risks, industry risks, regulatory risks, and any other material
risks that investors should be aware of.

• Details of Lead Managers, Underwriters, etc. (Section 26(1)(h)): Information about

the lead managers, underwriters, registrars, and other intermediaries involved in the
issuance of securities.

• Legal and Other Information (Section 26(1)(i)): Legal and regulatory disclosures,
including any pending litigations, regulatory proceedings, material contracts, and other
relevant information.

3. Registration of Prospectus (Section 23):

• Before issuing a prospectus, it must be registered with the Registrar of Companies

(ROC).
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• The prospectus must be dated and signed by the company's directors, or proposed
directors, or by authorized agents.

4. Criminal Liability for Misstatements (Section 34):

• Section 34 of the Companies Act imposes criminal liability on any person who issues
a prospectus containing untrue statements or omits material facts.

13.5 SHARES
Shares are the units into which the share capital of a company is divided. They represent
ownership interests in the company and entitle the shareholder to certain rights, such as voting
rights, dividend entitlements, and rights to receive assets upon liquidation. Under the
Companies Act, 2013 in India, shares are governed by various provisions that regulate their
issue, transfer, and maintenance. Let's discuss shares in detail, including relevant sections of
the Companies Act:

1. Types of Shares:

• Equity Shares: These are the most common type of shares that represent ownership in
the company. Equity shareholders have voting rights and are entitled to dividends as
declared by the company.

• Preference Shares: Preference shareholders have a preferential right to receive

dividends at a fixed rate before any dividend is declared on equity shares. They also
have a preferential right to receive repayment of capital in the event of winding up.

2. Issuance of Shares (Section 62):

• Section 62 of the Companies Act, 2013 governs the issuance of shares. It specifies the
procedures for issuing new shares, including the issuance of bonus shares, rights shares,
and preferential allotment of shares.
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• Any issuance of shares must comply with the provisions of the Act, the Articles of
Association, and any other applicable laws.

3. Share Capital (Section 61):

• Section 61 of the Companies Act, 2013 deals with the share capital of a company. It
specifies the maximum and minimum amount of share capital that a company can issue.

• The share capital of a company is divided into shares of a fixed amount, known as the
face value or nominal value of the shares.

4. Allotment of Shares (Section 39):

• Section 39 of the Companies Act, 2013 governs the allotment of shares. It specifies the
procedures for allotting shares to applicants, including the filing of allotment letters,
share certificates, and maintaining proper records of allotments.

5. Transfer and Transmission of Shares (Section 56):

• Section 56 of the Companies Act, 2013 deals with the transfer and transmission of
shares. It specifies the procedures for transferring shares from one person to another
and for the transmission of shares upon the death or insolvency of a shareholder.

• Share transfers must be executed through proper instruments of transfer and registered
with the company.

6. Forfeiture and Surrender of Shares (Section 39 and 40):

• Section 39 and Section 40 of the Companies Act, 2013 govern the forfeiture and
surrender of shares. In case of non-payment of calls, shares may be forfeited by the
company. Surrender of shares involves returning shares to the company voluntarily.
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7. Buyback of Shares (Section 68):

• Section 68 of the Companies Act, 2013 deals with the buyback of shares. It specifies
the procedures and conditions under which a company can buy back its own shares
from shareholders.

13.6 SUMMARY
Company law in India governs the formation, operation, and dissolution of companies,
ensuring transparency, accountability, and protection of stakeholders' interests. Encompassing
various statutes, such as the Companies Act, 2013, it outlines the legal framework for corporate
governance, directors' duties, shareholder rights, and regulatory compliance. The law
prescribes procedures for company incorporation, capital structure, meetings, and financial
disclosures, fostering a conducive environment for business growth while safeguarding the
integrity of the corporate sector.

13.7 KEYWORDS
• Company: An incorporated entity that is granted legal personality, distinct from its
owners (shareholders), and is capable of conducting business, entering into contracts,
owning property, and being sued in its own name
• The Memorandum of Association (MOA): A foundational document of a company
that outlines the fundamental objectives, scope of activities, and the company's
relationship with its shareholders and outsiders.
• The Articles of Association (AOA) : A vital document governing the internal
management, regulations, and administration of a company. It complements the
Memorandum of Association (MOA) by providing detailed rules and regulations for
the company's internal affairs.
• Prospectus: A legal document issued by a company that offers securities (such as
shares, debentures, or bonds) to the public for subscription or purchase.
• Shares : The units into which the share capital of a company is divided. They represent
ownership interests in the company and entitle the shareholder to certain rights, such as
voting rights, dividend entitlements, and rights to receive assets upon liquidation.
170 LEGAL ASPECTS OF BUSINESS

13.8 REVIEW QUESTIONS

1. What is a Company?
2. What are the consequences of incorporation of a Company?
3. What is a Memorandum of Association? What are its content?
4. What are Articles of Association? How can they be altered?
5. Define prospectus. What are its contents.
6. What is Share capital?

13.9 FURTHER READINGS

1. Company Law" by Avtar Singh,Eastern Book Company,2024
2. "Company Law" by Ramaiya R. A., LexisNexis India, 2024
3. Company Law" by Dr. Avtar Singh and Dr. Harpreet Kaur, LexisNexis India, 2023
4. "Company Law: Text, Cases, and Materials" by Anurag K. Agarwal, Oxford University
Press India, 2022
5. Company Law: Lectures on Company Law by Dr. K.R. Chandratre, Snow White
Publications Pvt. Ltd., 2023
6. Company Law: Incorporating the Provisions of the Companies (Amendment) Act, 2020
by Dr. Sanjeev Kumar Jain, Wolters Kluwer India Pvt. Ltd., 2023
7. Company Law by G.K. Kapoor, Sultan Chand & Sons, 2024
8. Company Law: Procedures and Incorporation by Nisha Dhawan and J. Suresh Kumar,
Bharat Law House Pvt. Ltd., 2023
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UNIT 14: PARTNERSHIP ACT

CONTENT:
▪ Objectives
14.1 Introduction
14.2 Limited Liability Partnership Act
14.3 Difference Between Partnership And Limited Liability Partnership
Act
14.4 Summary
14.5 Keywords
14.6 Review Questions
14.7 Suggested Readings

OBJECTIVES:
After studying this unit, you will be able to:

• Define what a Partnership is

• Discuss the essential characteristics of a partnership.
• Understand the law of principal and agent.
• Explain what is Limited Liability Partnership
• How is partnership different from limited liability partnership.
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14.1 INTRODUCTION
The Partnership Act typically contains several salient features that govern the formation,
operation, and dissolution of partnerships.

Here's a detailed discussion of some key features along with relevant sections, examples, and
case laws:

1. Definition of Partnership (Section 4):

• The Act defines a partnership as "the relation between persons who have agreed
to share the profits of a business carried on by all or any of them acting for all."

Example: Two individuals agree to open a restaurant together and share the profits. This
agreement constitutes a partnership under the Act.

2. Mutual Agency (Section 18):

• Each partner in a partnership is considered an agent of the firm and of other

partners for the purpose of the business of the partnership.

Example: Partner A enters into a contract with a supplier on behalf of the partnership. This
contract is binding on the partnership and all partners.

3. Liability of Partners (Sections 10, 16):

• Partners in a general partnership have unlimited liability for the debts and
obligations of the partnership. However, in limited partnerships and LLPs, there
may be limitations on liability for certain partners.

Example: In a general partnership, if the partnership incurs debts that it cannot repay, the
partners may be personally liable for those debts.
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4. Rights and Duties of Partners (Sections 9, 12):

• Partners have certain rights, such as the right to participate in management and
share in profits, as well as duties, including the duty of loyalty, care, and
disclosure.

Example: Partners have the right to inspect partnership books and accounts and participate in
decision-making regarding the partnership's business.

5. Distribution of Profits and Losses (Section 13):

• Unless otherwise agreed, profits and losses are shared equally among partners.

Example: If there are three partners in a partnership, each partner is entitled to one-third of the
profits and is responsible for one-third of the losses.

6. Dissolution and Winding Up (Sections 39, 45):

• The Act provides for various circumstances under which a partnership may be
dissolved, such as by mutual agreement, expiration of a fixed term, death or
insolvency of a partner, or court order.

Example: If partners decide to dissolve the partnership due to irreconcilable differences, they
must follow the procedures outlined in the Act for winding up the partnership's affairs.

14.2 LIMITED LIABILITY PARTNERSHIP ACT

The Limited Liability Partnership (LLP) Act, enacted in 2008, provides a framework for a form
of limited partnership in India.

While the LLP Act primarily deals with limited liability partnerships, it does contain provisions
that allow for the formation of limited partnerships within the LLP structure. Let's discuss the
relevant provisions, examples, and case laws:
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1. Definition and Formation:

• Under the LLP Act, a limited partnership can be formed by registering a partnership as
an LLP wherein one or more partners have limited liability, similar to limited partners
in a traditional limited partnership.

Example: A group of investors wants to establish a real estate development project. They form
an LLP where some partners contribute capital as limited partners with limited liability, while
others act as general partners with unlimited liability and manage the project.

Relevant Sections: Section 58 of the LLP Act allows for the formation of limited liability
partnerships.

2. Limited Liability of Partners:

• Similar to traditional limited partnerships, limited partners in an LLP have limited

liability, meaning their personal assets are protected from the debts and obligations of
the LLP beyond their capital contribution.

Example: If the LLP defaults on a loan, creditors can only seek recourse from the assets of the
LLP, not the personal assets of the limited partners.

Relevant Sections: Section 26 of the LLP Act deals with limited liability of partners.

3. General Partners and Limited Partners:

• The LLP Act allows for the differentiation between general partners, who have
unlimited liability and manage the business, and limited partners, who contribute
capital and have limited liability but do not participate in management.

Example: In an LLP, the partners who actively manage the business and assume unlimited
liability are designated as general partners, while those who invest capital but do not participate
in management are classified as limited partners.
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Relevant Sections: Sections 7, 24, and 25 of the LLP Act outline the roles and responsibilities
of partners.

4. Filing and Compliance:

• LLPs are required to file annual returns, financial statements, and other
documents with the Registrar of Companies to ensure compliance with statutory
requirements.

Example: An LLP must file its annual accounts, annual returns, and any changes to its
registered office address or designated partners within the prescribed time frames.

Relevant Sections: Sections 34, 35, and 56 of the LLP Act deal with filing and compliance
requirements.

5. Dissolution and Winding Up:

• The LLP Act outlines the procedures for voluntary dissolution of an LLP by its
partners or through court order, as well as the process for winding up the affairs
of the LLP.

Example: If partners decide to dissolve an LLP due to business reasons, they must follow the
procedures outlined in the Act for winding up the LLP's affairs, including settling debts,
liquidating assets, and distributing remaining funds among partners.

Relevant Sections: Sections 63, 64, and 65 of the LLP Act deal with dissolution and winding
up.

While India does not have a standalone Limited Partnership Act, the Limited Liability
Partnership Act provides a framework for limited partnerships within the LLP structure. This
allows for the formation of partnerships with a combination of general partners with unlimited
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liability and limited partners with limited liability, providing flexibility for business structures
in India.

14.3 DIFFERENCE BETWEEN PARTNERSHIP AND LIMITED LIABILITY PARTNERSHIP

ACT
Aspect Partnership Act Limited Liability Partnership
(LLP) Act

Legal Structure Traditional partnership Hybrid structure combining features

of partnership and company

Legal Status Not a separate legal entity Separate legal entity

Liability of Partners Unlimited liability of Limited liability of partners

partners

Minimum Number of At least two partners At least two designated partners

Partners

Maximum Number of No maximum limit No maximum limit

Partners

Liability of Partners Partners are jointly and Partners are liable only to the extent
severally liable of their agreed contribution

Management Managed by partners Can be managed by partners or

designated partners

Legal Formalities for No formal registration Registration with the Registrar of

Registration required Companies (ROC) required
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Legal Compliance Fewer compliance More stringent compliance

Requirements requirements requirements including annual filings
and audits

Transferability of Ownership interest cannot Ownership interest can be transferred

Ownership Interest be freely transferred subject to LLP agreement

14.4 SUMMARY
The Partnership Act and the Limited Liability Partnership (LLP) Act are two significant
legislations governing business partnerships in India. The Partnership Act, established in 1932,
regulates traditional partnerships wherein partners share profits, losses, and liabilities jointly.
It outlines the rights, duties, and responsibilities of partners, the procedures for partnership
formation, and dissolution. On the other hand, the Limited Liability Partnership Act, enacted
in 2008, introduced the concept of LLPs, offering partners limited liability protection similar
to shareholders of a company while retaining the flexibility of a partnership. LLPs combine the
benefits of both partnerships and companies, allowing professionals and entrepreneurs to
operate in a corporate structure with simplified compliance requirements. These acts provide a
legal framework to facilitate business collaborations and protect the interests of partners and
stakeholders in India's dynamic business landscape.

14.5 KEYWORDS
• Partnership: The relation between persons who have agreed to share the profits of a
business carried on by all or any of them acting for all. A limited partnership can be
formed by registering a partnership as an LLP wherein one or more partners have
limited liability, similar to limited partners in a traditional limited partnership.

14.6 REVIEW QUESTIONS

1. Define Partnership.
2. Discuss the essential characteristics of a partnership.
3. The law of partnership is but an extension of the law of principal and agent. Explain
4. What is Limited Liability Partnership
5. How is partnership different from limited liability partnership.
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14.7 SUGGESTED READINGS

1. Law of Partnership in India by R.K. Agarwal, Commercial Law Publishers (India) Pvt.
Ltd., 2024
2. The Indian Partnership Act, 1932: Commentary and Case Law by N. D. Kapoor, Sultan
Chand & Sons, 2023
3. Limited Liability Partnership: Law and Practice by Dr. Avtar Singh, LexisNexis India,
2024
4. Law Relating to Limited Liability Partnership in India by Sanjay Agarwal, Bharat Law
House Pvt. Ltd., 2023
5. Partnership and LLPs: A Guide to Indian Law and Practice by Raghbir Singh, Wolters
Kluwer India Pvt. Ltd., 2024
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UNIT 15: SALE OF GOODS ACT

CONTENT:
▪ Objectives
15.1 Introduction
15.2 Negotiable Instrument Act
15.3 Summary
15.4 Keywords
15.5 Review Questions
15.6 Suggested Readings

OBJECTIVES:
1. To comprehend the Sale of Goods Act's provisions and effects on sales contracts.

2. To distinguish conditions and warranties and their breach implications.

3. To understand the rules of property transfer in goods as per the Sale of Goods Act.

4. To introduce the concept and types of negotiable instruments under the Negotiable
Instruments Act.

5. To examine the legal responsibilities of parties in negotiable instrument dealings.

180 LEGAL ASPECTS OF BUSINESS

15.1 INTRODUCTION
The Sale of Goods Act is a crucial piece of legislation that governs the sale and purchase of
goods in many jurisdictions, including India.

1. Definition of Sale and Goods:

• Section 4 of the Sale of Goods Act defines a "sale" as a contract where the seller
transfers or agrees to transfer the ownership of goods to the buyer for a price.
Goods are defined as every kind of movable property other than actionable
claims and money.

Example: A purchases a laptop from B for a specified price. This transaction constitutes a sale
under the Sale of Goods Act.

Case Law: M/s Chandulal v. Raja Ram & Sons (1959) - In this case, it was held that goods
must be movable at the time of sale to qualify under the Sale of Goods Act.

2. Conditions and Warranties:

• Sections 12-17 of the Sale of Goods Act distinguish between conditions

(essential terms) and warranties (ancillary terms) in a contract of sale. Breach
of a condition gives the buyer the right to repudiate the contract, while breach
of a warranty allows the buyer to claim damages.

Example: A purchases a refrigerator from B, with a warranty that it will be in working

condition. If the refrigerator breaks down within the warranty period, A can claim damages for
breach of warranty.

3. Transfer of Property:

• Sections 18-26 of the Sale of Goods Act deal with the transfer of property in
goods from the seller to the buyer. The Act provides rules for ascertaining the
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intention of the parties regarding when the property in the goods passes from
the seller to the buyer.

Example: A sells a car to B, but the payment is to be made in installments. The Sale of Goods
Act specifies that the property in the car will pass to B only after full payment is made.

Case Law: Ramsgate Victoria Hotel Co. v. Montefiore (1866) - In this case, the court held that
where there is an agreement to sell specific goods, the contract does not become void merely
because the seller has no goods at the time of making the contract.

4. Implied Conditions as to Quality and Fitness:

• Sections 14-17 of the Sale of Goods Act imply certain conditions into every
contract of sale, such as the goods being of merchantable quality, fit for the
purpose for which they are sold, and corresponding to their description.

Example: A purchases a bicycle from B, who fails to disclose that it is defective. A can claim
breach of implied condition as to fitness for purpose.

Case Law: Beale v. Taylor (1967) - In this case, it was held that the implied condition as to
merchantability extends to fitness for any particular purpose made known to the seller.

5. Rights and Remedies of the Buyer and Seller:

• The Sale of Goods Act provides various rights and remedies to both the buyer
and the seller in case of breach of contract, including the right to claim damages,
reject the goods, and seek specific performance.

Example: If A purchases a faulty television set from B, A can reject the goods and claim a
refund or damages under the Sale of Goods Act.
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Case Law: Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd. (1943) - In this
case, the court held that where a contract is frustrated, the innocent party is entitled to claim
restitution of any money paid under the contract.

The Sale of Goods Act provides a comprehensive framework for regulating the sale and
purchase of goods, ensuring that both buyers and sellers are protected and their rights and
obligations are clearly defined. Its provisions, along with relevant examples and case laws,
serve to uphold the principles of fairness and justice in commercial transactions.

15.2 NEGOTIABLE INSTRUMENT ACT

The Negotiable Instruments Act (NIA) of India, enacted in 1881, is a significant piece of
legislation that governs the use and transfer of negotiable instruments such as promissory notes,
bills of exchange, and cheques.

Definition of Negotiable Instruments:

Section 13 of the NIA defines negotiable instruments as instruments which are transferable
from one person to another, either by the holder's endorsement or by delivery, so as to constitute
the transferee the holder thereof.

Example: A cheque issued by A in favor of B is a negotiable instrument because B can transfer

it to C by endorsement, making C the new holder of the cheque.

Case Law: Lila ram Bherumal v. Chhotelal Motilal (1962) - In this case, it was held that a
promissory note payable to a person or bearer is a negotiable instrument within the meaning of
the NIA.

1. Types of Negotiable Instruments:

• The NIA recognizes three main types of negotiable instruments: promissory

notes, bills of exchange, and cheques.
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Example: A promissory note is a written promise by one person to pay another person a
specified sum of money. A bill of exchange is an unconditional order in writing, addressed by
one person to another, signed by the person giving it, requiring the person to whom it is
addressed to pay a certain sum of money. A cheque is a bill of exchange drawn on a specified
banker and not expressed to be payable otherwise than on demand.

Case Law: Ramachandra Iyer v. Sankara Aiyar (1939) - In this case, it was held that a
document containing a promise to pay money is a promissory note within the meaning of the
NIA.

2. Negotiability:

• Section 46 of the NIA provides that a negotiable instrument may be made

payable to two or more payees jointly, or it may be made payable to the bearer
or to order.

Example: A cheque made payable to "Mr. X or bearer" is negotiable because it can be

transferred by mere delivery, without the need for endorsement.

Case Law: Birbal Dass v. Dharam Pal (2013) - In this case, it was held that a negotiable
instrument is freely transferable, and the transferee can sue in his own name.

3. Holder in Due Course:

• Sections 9 and 20 of the NIA define a holder in due course as a person who for
consideration becomes the possessor of a promissory note, bill of exchange, or
cheque if the instrument is negotiable, before the amount mentioned in it
becomes payable, and without having sufficient cause to believe that any defect
exists in the title of the person from whom he derives his title.

Example: A purchases a promissory note from B for value without notice of any defect in B's
title. A is a holder in due course.
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Case Law: Gopal Das v. Sri Thakurji (1961) - In this case, it was held that a holder in due
course is entitled to the rights of a holder in due course, free from any defects in the title of the
transferor.

4. Liability of Parties:

• Sections 30, 31, and 32 of the NIA outline the liability of parties to negotiable
instruments. The maker of a promissory note and the acceptor of a bill of
exchange are primarily liable, while the drawer of a bill of exchange and the
endorser of a negotiable instrument are secondarily liable.

Example: A signs a promissory note promising to pay B Rs. 10,000 on a specified date. A is
primarily liable as the maker of the promissory note.

Case Law: P. P. Thomas v. P. P. George (2002) - In this case, it was held that the liability of
the maker of a promissory note is unconditional and absolute.

5. Presumptions:

• The NIA contains various presumptions regarding negotiable instruments, such

as the presumption of consideration, the presumption of regularity, and the
presumption of dishonor.

Example: If a promissory note or bill of exchange is proved to have been endorsed or accepted,
the court shall presume consideration unless the contrary is proved.

Case Law: Saraswathi v. S. Natarajan (2005) - In this case, it was held that in the absence of
evidence to the contrary, the court will presume that a negotiable instrument was made or drawn
for consideration.

These salient features of the Negotiable Instruments Act, along with relevant examples and
case laws, provide a framework for understanding the legal principles governing negotiable
instruments and their use in commercial transactions.
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15.3 SUMMARY
The Sale of Goods Act, a crucial piece of legislation governing commercial transactions in
India, encompasses several salient features aimed at ensuring fair and transparent trade
practices. Among its key provisions are those outlining the conditions and warranties implied
in contracts for the sale of goods, ensuring that buyers receive goods of satisfactory quality and
fitness for purpose. Additionally, the Act addresses aspects such as the transfer of ownership,
delivery of goods, and remedies available to both buyers and sellers in cases of breach of
contract.

The Negotiable Instruments Act provides a legal framework for negotiable instruments such as
promissory notes, bills of exchange, and cheques, facilitating smooth transactions in
commerce. It outlines the rights, duties, and liabilities of parties involved, ensuring the
enforceability and transferability of these instruments. This Act plays a crucial role in financial
transactions by establishing standards for negotiability, payment, and dispute resolution,
thereby promoting trust and reliability in commercial dealings.

15.4 KEYWORDS
• Sale" as a contract where the seller transfers or agrees to transfer the ownership of goods
to the buyer for a price. Goods are defined as every kind of movable property other than
actionable claims and money.
• A condition under the Sale of Goods Act represents an essential term in a contract that
directly impacts its performance and fulfillment.
• Warranty: A warranty under the Sale of Goods Act is a secondary term in a contract,
promising certain assurances about the quality or performance of goods, which, if
breached, entitles the injured party to claim damages but not to repudiate the contract.
• Negotiable Instrument: Instruments which are transferable from one person to another,
either by the holder's endorsement or by delivery, so as to constitute the transferee the
holder thereof.

15.5 REVIEW QUESTIONS

1. What are the implied conditions and warranties under the Sale of Goods Act regarding
the quality and fitness of goods?
186 LEGAL ASPECTS OF BUSINESS

2. What are the remedies available to a buyer in case of breach of contract under the Sale
of Goods Act?
3. What are the types of negotiable instruments recognized under the Negotiable
Instruments Act?
4. What are the rights and liabilities of parties involved in a negotiable instrument
transaction according to the Negotiable Instruments Act?

15.6 SUGGESTED READINGS

1. Sale of Goods Act, 1930: Bare Act with Short Notes, Universal Law Publishing Co.,
2024
2. Sale of Goods: Law and Practice by Avtar Singh, Eastern Book Company, 2023
3. Negotiable Instruments Act, 1881: Bare Act with Short Notes, Universal Law
Publishing Co., 2024
4. Negotiable Instruments Act, 1881 by Avtar Singh, Eastern Book Company, 2023
187 SHOOLINI UNIVERSITY

UNIT 16: CONSUMER PROTECTION ACT

CONTENT:

▪ Objectives

16.1 Introduction

16.2 The Arbitration And Conciliation Act, 1996

16.3 Summary

16.4 Keywords

16.5 Review Questions

16.6 Suggested Readings

OBJECTIVES:
1. To understand the consumer's rights and protections under the Consumer Protection
Act.

2. To learn about redressal mechanisms for consumer grievances.

3. To comprehend the role and framework of the Arbitration and Conciliation Act.

4. To explore the process of arbitration and appointment of arbitrators.

5. To grasp how arbitration serves as an alternative to traditional court litigation.

188 LEGAL ASPECTS OF BUSINESS

16.1 INTRODUCTION
The Consumer Protection Act (CPA) is a crucial legislation designed to safeguard the interests
of consumers in India.

Enacted in 1986 and amended in 2019, it aims to protect consumers from unfair trade practices
and ensure the availability of speedy and inexpensive redressal mechanisms for consumer
grievances.

1. Definition of Consumer:

• Section 2(7) of the CPA defines a consumer as any person who buys goods or
hires services for consideration, excluding goods bought for resale or
commercial purposes. The Act applies to both individuals and entities who
purchase goods or services.

Example: A purchases a refrigerator from a retail store for personal use. A is considered a
consumer under the CPA.

2. Protection Against Unfair Trade Practices:

• Section 2(1)(r) of the CPA defines unfair trade practices, including false
representation, misleading advertisements, deceptive practices, and offering
goods or services that are hazardous to life and safety.

Example: A company advertises a weight loss product claiming it can help consumers lose 10
kgs in a week without diet or exercise. If the product fails to deliver as promised, it constitutes
an unfair trade practice.

Case Law: Hindustan Unilever Limited v. State of Uttar Pradesh (2019) - In this case, the
National Consumer Disputes Redressal Commission (NCDRC) held that Hindustan Unilever's
advertisements for its water purifier misled consumers and amounted to unfair trade practices.
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3. Rights of Consumers:

The rights of consumers are outlined in Section 6 of the CPA, which includes the right to safety,
right to information, right to choose, right to be heard, right to seek redressal, and right to
consumer education.

Example: A consumer purchases a vehicle and discovers a manufacturing defect that poses a
safety risk. The consumer has the right to seek a refund, replacement, or compensation.

Case Law: Vijay Satbir Singh v. Maruti Udyog Limited (1999) - In this case, the Supreme
Court held that a consumer has the right to seek compensation for loss and suffering due to a
manufacturing defect in a vehicle.

4. Consumer Dispute Redressal Mechanisms:

The consumer dispute redressal mechanisms are established under Sections 9, 17, and 21 of
the CPA, which establish District Consumer Disputes Redressal Forums (District Forums),
State Consumer Disputes Redressal Commissions (State Commissions), and the National
Consumer Disputes Redressal Commission (NCDRC) respectively.

Example: A consumer who is dissatisfied with a product or service can file a complaint with
the appropriate District Forum, State Commission, or the NCDRC, depending on the value of
the dispute.

Case Law: Satyam Computers Services Ltd. v. Bimal Kumar Ganguly (2009) - In this case, the
Supreme Court emphasized the importance of expeditious disposal of consumer disputes and
held that delays in adjudication defeat the very purpose of consumer protection laws.

5. Product Liability:

The concept of product liability is introduced in Section 2(34) of the CPA, which holds
manufacturers, sellers, and service providers liable for any harm caused to consumers due to
defective products or deficient services.
190 LEGAL ASPECTS OF BUSINESS

Example: A consumer purchases a toy with sharp edges that injures a child during play. The
manufacturer may be held liable for producing a defective product under the CPA.

Case Law: Vijayendra Jain v. Suresh Prasad Agarwal (2006) - In this case, the NCDRC held
the manufacturer of a baby walker liable for injuries sustained by a child due to a design defect.

These salient features, along with relevant examples and case laws, demonstrate the
comprehensive framework provided by the Consumer Protection Act to protect the rights and
interests of consumers in India and ensure effective redressal of consumer grievances.

16.2 THE ARBITRATION AND CONCILIATION ACT, 1996

The Arbitration and Conciliation Act, 1996, is a comprehensive legislation governing
arbitration law in India. It embodies principles aimed at providing an effective alternative
dispute resolution mechanism, offering parties a flexible and efficient means of resolving their
disputes outside the traditional court system. Here's an elaborate discussion of the salient
features of arbitration law in India:

1. Arbitration Agreement: The Act emphasizes the importance of a written arbitration

agreement between the parties, either as a standalone document or as part of a broader
contract. This agreement delineates the scope of disputes subject to arbitration and sets
out the procedural rules governing the arbitration process.

2. Appointment of Arbitrators: Parties are given autonomy to choose arbitrators of their

preference. However, if they fail to agree on the appointment, the Act provides
mechanisms for the appointment by the parties themselves, or by the court if necessary.
This ensures impartiality and fairness in the selection of arbitrators.

3. Arbitral Proceedings: The Act provides a flexible framework for conducting arbitral
proceedings. Parties have the autonomy to agree on procedural rules, including the
language of arbitration, the place of arbitration, and the rules governing evidence and
submissions. Alternatively, in the absence of such agreement, the Act provides default
procedural rules to govern the arbitration process.
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4. Role of Courts: The Act limits the intervention of courts in arbitral proceedings,
promoting the principle of minimal judicial interference. Courts can only intervene in
specific circumstances, such as the appointment of arbitrators, assistance in evidence
collection, or setting aside or enforcement of arbitral awards. This approach ensures
expeditious resolution of disputes and upholds the finality of arbitral awards.

5. Confidentiality: Confidentiality is a key feature of arbitration proceedings under the

Act. Arbitral proceedings are private, and parties, arbitrators, and witnesses are bound
by strict confidentiality obligations. This confidentiality fosters open and candid
discussions during arbitration and protects sensitive commercial information.

6. Interim Measures and Emergency Arbitration: The Act empowers arbitrators to

grant interim measures to preserve the parties' rights and prevent irreparable harm
during the pendency of arbitration proceedings. Additionally, it provides for emergency
arbitration to address urgent matters that require immediate intervention before the
constitution of the arbitral tribunal.

7. Enforcement of Arbitral Awards: One of the significant advantages of arbitration is

the enforceability of arbitral awards. The Act provides for the enforcement of arbitral
awards both domestically and internationally, akin to a court decree. This facilitates the
swift resolution of disputes and ensures compliance with arbitral awards.

8. Challenge and Appeal of Awards: While arbitral awards are generally considered
final and binding, the Act allows parties to challenge awards before the courts on
limited grounds. Such grounds include issues related to the jurisdiction of the arbitral
tribunal, procedural irregularities, or violations of public policy. However, the grounds
for challenge are narrowly construed to uphold the sanctity and efficacy of arbitral
awards.

9. International Commercial Arbitration: Recognizing the importance of international

trade and commerce, the Act incorporates the UNCITRAL Model Law on International
Commercial Arbitration. This alignment with international standards aims to promote
192 LEGAL ASPECTS OF BUSINESS

India as an arbitration-friendly jurisdiction and enhance its attractiveness for resolving

international commercial disputes.

10. Institutional Arbitration and Alternative Dispute Resolution (ADR): The Act
encourages institutional arbitration and provides for the establishment of arbitration
institutions to administer arbitral proceedings. Additionally, it promotes the use of
alternative dispute resolution mechanisms such as mediation and conciliation as viable
options for resolving disputes outside the formal court system.

These features collectively contribute to making India's arbitration law robust, efficient, and
conducive to the resolution of disputes through arbitration. By providing parties with
autonomy, flexibility, and confidentiality, while ensuring the enforceability and finality of
arbitral awards, the Act promotes the growth of arbitration as a preferred mode of dispute
resolution in India.

16.3 SUMMARY
The Consumer Protection Act, enacted in India in 1986 and amended in 2019, is a significant
legislation aimed at safeguarding the interests of consumers and ensuring fair trade practices.
It provides consumers with various rights, including the right to be protected against unfair
trade practices, the right to information, the right to seek redressal for grievances, and the right
to consumer education. The Act establishes consumer forums at the district, state, and national
levels to adjudicate consumer disputes efficiently and affordably. Additionally, it empowers
consumers to file complaints against manufacturers, sellers, or service providers for defects in
goods or deficiencies in services, leading to the speedy resolution of disputes and the promotion
of consumer welfare. The Arbitration and Conciliation Act of 1996 governs arbitration
proceedings in India, providing a comprehensive legal framework for the resolution of disputes
outside of traditional court litigation. It facilitates the enforcement of arbitration agreements,
the appointment of arbitrators, and the conduct of arbitration proceedings. The Act emphasizes
party autonomy, allowing parties to determine the procedures for arbitration and select
arbitrators of their choice. It also regulates the conduct of arbitrators and provides mechanisms
for interim measures and enforcement of arbitral awards. Overall, the Act aims to promote
arbitration as a quick, cost-effective, and efficient alternative to traditional court litigation for
resolving commercial disputes in India.
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16.4 KEYWORDS
• Consumer : Any person who buys goods or hires services for consideration, excluding
goods bought for resale or commercial purposes. The Act applies to both individuals
and entities who purchase goods or services.
• Unfair trade practices: Including false representation, misleading advertisements,
deceptive practices, and offering goods or services that are hazardous to life and safety.
• Arbitration: Arbitration is a method of resolving disputes outside the courts, where
parties agree to submit their disagreement to a neutral third party for a binding decision.
• An arbitrator is a neutral third party appointed by disputing parties to resolve their
conflicts through arbitration.

16.5 REVIEW QUESTIONS

1. How does the Consumer Protection Act of 2019 enhance consumer rights and ensure
fair trade practices in India?
2. What are the procedures and forums available to consumers for seeking redressal of
grievances under the Consumer Protection Act?
3. How does the Arbitration and Conciliation Act of 1996 regulate arbitration proceedings
and promote alternative dispute resolution in India?
4. What are the key provisions and mechanisms provided under the Arbitration and
Conciliation Act for the appointment of arbitrators and the conduct of arbitration
proceedings?

16.6 SUGGESTED READINGS

1. Consumer Protection Law and Practice: Consumer Protection Act, 2019" by
LexisNexis Editorial Team,LexisNexis India, 2024
2. Consumer Protection: Law and Practice by S. R. Myneni, Snow White Publications
Pvt. Ltd., 2023
3. Law and Practice of Arbitration and Conciliation by R. S. Bachawat, Eastern Book
Company, 2024
4. Arbitration and Conciliation Act: A Commentary by R.K. Gupta, Universal Law
Publishing Co., 2023