SRM INSITITUTE OF SCIENCE AND TECHNOLOGY

FACULTY OF MANAGEMENT – I MBA BATCH 2024 – 2025

LEGAL AND ETHICAL BUSINESS ENVIRONMENT –MBG24106T
Unit I
Contract Act: Introduction to Agreement and Contract - Essential of a valid contract - Formation of a
contract - Performance of contracts - Breach of contract and its remedies - Special Contracts –
indemnity - Special Contracts – guarantee - Special Contracts – bailment - Special Contracts - pledge
and agency - The Sales of Goods Act – Case Study

Contract Act: Introduction to Agreement and Contract

The Indian Contract Act, 1872 provides the guidelines for forming a valid Contract. It plays
an important role wherever there is an agreement or a Contract. The Contract Act defines the
term ‘Contract’ under its section 2 (h) as ‘An agreement enforceable by law’.

This definition has two key elements: agreement and enforceable by law.
• Agreement- An agreement is every promise or the set of promises that form the
consideration for each other.
• Enforceable by law- When these promises are held valid in the court of law and the
parties of the Contract can be held liable to complete their promises, the Contract is
enforceable by law.
• Promise- Section 2(b) of the Indian Contract Act, 1872 defines a promise as: ‘when
the person to whom the proposal is made signifies his assent thereto, the proposal
becomes an accepted proposal. A proposal when accepted becomes a promise’. A
promise to do or abstain from doing something becomes an agreement when it is
accepted by all the parties involved in the agreement.
Meaning of Contract
An agreement enforceable by law is called a Contract. An agreement cannot be said as a
Contract unless and until it is enforced by law. A Contract is an agreement that is accepted by
both parties and is enforceable by law. It gives certain rights to all the parties involved and
also bestows on them certain obligations that they must fulfill. A Contract is an agreement
but not all agreements are Contracts.

Essentials of a Valid Contract

For a Contract to be valid, it must be enforceable by law and must include the following
essentials given under Section 10 of the Indian Contract Act.
• Two Parties- A valid Contract must include a minimum of two parties; one that
makes the offer and the other to whom the offer has been made and who must accept
the proposal for it to become enforceable.
• Legal Obligation- The parties entering into a Contract must have the intention of
entering into a legal obligation. Social agreements and obligations are not considered
a Contract as they do not create any legal obligations on any party.
• Certain Terms- A legal Contract must have certainty of meaning.
Example- A agrees to buy B’s house for a reasonable amount. A valid Contract must
define the exAct amount that A intends to pay B for buying his house.
 • Possibility of Performance- A Contract is considered valid only when it does not
involve the performance of an impossible Act.
Example- A enters into a Contract with B to bring back to life B’s father for ten
thousand rupees. Since the Contract involves the performance of an impossible Act, it
is not a valid Contract

• Free Consent- The parties entering into a Contract must give their free consent to the
Contract.
• Competency- The parties must be legally competent to enter into a Contract.
According to Section 11 of the Indian Contract Act, people who are considered
competent to enter into a Contract include: a person who is of the age of majority as
per law, of sound mind, and not disqualified by law from entering into a Contract (this
includes convicts, alien enemy, foreign national, etc)
• Consideration- The Contract must involve consideration as per the principle of ‘quid
pro quo’ or something in return. A valid Contract must include a consideration that
must be something of value.
• Legal Consideration- Section 23 of the Contract Act defines a legal consideration as
something not forbidden by law.

Types of Contract
1. Valid Contract - A Contract is said to be a valid Contract when the Contract has all
the essential ingredients present in it.
2. Void Contract - A Contract is said to be void when a Contract is void from the
beginning when it was made, and which cannot be enforceable by law. It lacks
enforceability.
3. Voidable Contract - A voidable Contract is a Contract, not a void Contract. This
contAct can be affirmed or rejected by the parties. This Contract starts as valid but
later there will be an option for the parties to move forward with it or deny it. It can be
declared invalid at the request of any party because of any defect.
4. Illegal Contracts - When the subject matter or the terms or conditions are not
accepted by society and it is already unlawful then it becomes an illegal Contract.

Meaning of Agreement
An agreement is a promise or commitment given by one party to another party. It includes an
offer that is made by one person and accepted by the other person. In simple words, an
agreement happens when an offer is made by one person and accepted by another person. It
consists of two or more parties. It becomes an agreement only if the essential ingredients are
fulfilled. There must be a consideration.

Essentials of Forming an Agreement:

• Parties - There must be two or more parties to form an agreement.
• Offer or proposal - The proposal must be made by one party to the other.
• The person(s) to whom the proposal has been made must clearly understand all the
aspects and terms of the proposal
• Acceptance - The offeree or the person to whom the offer has been made, must
accept the proposal and give his assent to all its terms
 • Promise - When the proposal is accepted it becomes an accepted proposal or a
promise. A proposal is not synonymous to a promise but becomes one only after its
acceptance
• Consideration - An agreement is accepted with a consideration which is the price for
the promise made to be paid as a consideration.

Types of Agreement
Written agreement - Agreements are done by writing in a special layout called written
agreement. It contains certain terms and conditions which are accepted by the parties with
consideration.
Oral Agreement - An agreement that has a set of gestures and terms agreed via spoken or by
spoken communication.

To Sum it Up:

• Offer + Acceptance= Agreement

• Agreement / Accepted Promise +Enforceable by Law= Contract

Formation of Contract
https://gyansanchay.csjmu.ac.in/wp-content/uploads/2023/09/Formation-of-a-contract-
%E2%80%93-Legal-Study-Material.pdf
Performance of Contracts
▪ The term ‘performance’ in its literal sense means the performance of a task or action.
In its legal sense “performance” means the fulfilment or the completion of
the obligations which they have towards the other party by virtue of the contract entered by
them.
▪ For example, ‘A’ and ‘B’ enter a contract, the terms of the contract state that A must
deliver a book to B on payment of the consideration of five hundred rupees. Here, B pays five
hundred rupees to A and as stipulated in the contract, A delivers him the book.

Definition
▪ According to Section 37 of the Indian Contract Act,1872 “The parties to a contract must
either perform, or offer to perform, their respective promises, unless such performance
is dispensed with or excused under the provisions of the act, or any other law.
▪ Promises bind the representatives of the promisors in case of the death of
such promisors before performance, unless a contrary intention appears in the contract.
▪ Thus, it is the primary duty of each contracting party to either perform or offer to
perform its promise.
Types of Performance
▪ Actual performance
 ▪ When a promisor has made an offer of performance to the promisee and the offer
has been accepted by the promisee, it is called an actual promisee. The contractual
obligations are actually performed whereby the liability of a party under the contract
comes to an end.
▪ Attempted performance or tender of performance
▪ Where the promisor has made an offer of performance to the promisee, and the
offer has not been accepted by the promisee, it is called
an attempted performance [Section 38]. Such refusal to accept offer of
performance by promisee discharges the party from its liability and from its
performance.
Types of Tenders
▪ Tender of goods and services: The discharge of the contract to deliver goods and
services is completed when the goods are tendered for acceptance in accordance with the
terms of the contract. If the goods and services so tendered are not accepted, they are to
be taken back by the offeror and he is discharged from his liability.
▪ Tender of money: Where the debtor tenders the money, which is to be paid to
the creditor, but the creditor refuses to accept the money. The debtor is not discharged
from the liability to pay back the money. Therefore, a tender of money can never result
in the discharge of debt.
Offer of Performance/Tender
▪ The essentials of a valid offer of performance are stated under Section 38 of the Indian
Contract Act, 1872:
o The offer should be unconditional.
o It must be made at a proper time and place so as to allow the party to have a reasonable
time to ascertain that the person who is making the offer to him is competent to enter into a
contract.
o If the offer to the offeree is such as to deliver some goods addressed to the offeree, then it
is the duty of the offeror to provide reasonable time to the offeree in which he can ascertain
that the goods offered to him is the same by which the offeror is bound under the terms of
the contract.
Rules Regarding Time and Place of Performance of Contract
Time for performance of promise, where no application is to be made and no time is specified
(Section 46 of Indian Contract Act, 1872):
o Where a promisor has to perform his promise without application by the promisee and no
time is specified for performance, the engagement or promise must be performed within
a reasonable time.
 Time and place for performance of promise, where time is specified and no application to be
made (Section 47):
o When a promise is to be performed on a certain day without application by the promisee,
the promisor may perform at any time during the usual working hours on such a day.
Application for performance on a certain day to be at proper time and place (Section 48):
o When a promise is to be performed on a certain day the promisor may undertake to perform
it after the application by the promisee to that effect. In such a case it is the duty of the
promisee to apply for performance at a proper place and time within usual business hours.
Place for the performance of promise, where no application to be made and no place fixed
for performance (Section 49):
o When a promise is to be performed without application by the promisee and no place
is fixed for the performance, it is the duty of the promisor to apply to the promisee to
appoint a reasonable place for the performance of the promise and perform the promise at
such place.
Performance in manner or at the time prescribed or sanctioned by the promisee(Section 50):
o The performance of any promise may be made in any manner or at any time which
the promisee prescribes or sanctions. A contract can also exist in which the promisor agrees
to perform the contract in a manner and at a place and time prescribed by the promisee.
By Whom must Contracts be Performed?
Section 40 of the Contract Act, 1872 contains provisions regarding the performance of the
contract. The section provides that if by the terms of the contract it appears that
the intention of the parties to the contract was such that any promise contained in it
must essentially be performed by the promisor himself and no other person on his behalf
can perform his promise.
▪ In all the other contracts the terms of which do not indicate any similar intention then in
the absence of the promisor for the performance of the promise any other competent person
can perform the promise on his behalf.
Effect of Refusal of Party to Perform Promise
When a party to a contract has refused to perform or disabled himself from performing
his promise in its entirety, the promisee may put an end to the contract, unless he
has signified, by words or conduct, his acquiescence in its continuance.
▪ Promisee– Stranger can’t demand performance of the contract.
▪ Legal Representative– In case of death of the promisee, the legal
representative can demand performance unless a contrary intention appears from the
contract, or the contract is of personal nature.
▪ Third party– A third party can also demand performance of the contract in
some exceptional cases like beneficiary in case of trust, the person for whose benefit the
provision is made in a family arrangement. This is an exception to the doctrine that a stranger
to a contract cannot enforce a contract.
▪ Joint Promisee- In case of several promises, unless a contrary intention appears from the
contract, the following persons must perform the promise-
o In case all the promisee are alive- All the promisee jointly can demand performance.
o In case of death of any of the joint promisees- Representatives of deceased promisee jointly
with the surviving promisee can demand performance of promise.
o In case of death of all joint promisee- Representatives of all of them jointly can demand
performance of the promise.
Breach of Contract
Breach of Contract occurs when one of the parties fails to abide by the terms and conditions
accepted in the Contract. It can happen by the non-performance of certain terms and
conditions as mentioned in the Contract. The breach of Contract can be resolved among the
parties and if it is still not resolved then they can approach the court.

There Are Three Conditions to Breach of Contract -

• If party fail to deliver certain conditions in a certain duration of time
• If the party does not meet the terms of the Contract
• If the party fails to perform.

Breach of Contract is a civil wrong. One who breaches the Contract may face legal Actions.

Damages for Breach of Contract

The resolution of a breach can be achieved through compelling the breaching party to
fulfill their contractual obligations, thereby completing the tasks they have initiated.
However, this course of action may not be a feasible option for numerous individuals who
have suffered from the breach.
A fundamental breach of any contract differs from a minor breach, as previously
discussed. In certain instances, the injured party may be disinclined to continue pursuing the
remaining terms of the agreement.
Depending on the kind of breach, the court may opt to grant monetary compensation
as a means of redress.
1. Restitution
• Restitution, in the context of a breach of contract, is a legal remedy that aims to
restore one party to the contract to the position they were in before the contract was
formed or to prevent the unjust enrichment of the party who breached the contract.
 • It is distinct from compensatory damages, which are designed to compensate the non-
breaching party for their actual losses. Restitution is typically awarded when the
contract itself is unenforceable, void, or when it has been rescinded.
2. Compensatory Damages
• Compensatory damages, also known as actual or direct damages, are a type of
monetary compensation awarded to a party who has suffered financial losses as a
result of a breach of contract.
• When one party to a contract fails to fulfill their obligations as specified in the
contract, the other party may be entitled to compensatory damages to make them
whole, or put them in the position they would have been in had the contract been
performed as agreed.

3. Punitive Damages
• In a breach of contract case, the primary remedy is typically compensatory damages,
which are meant to compensate the non-breaching party for actual financial losses
they suffered due to the breach.
• The purpose of contract law is to enforce agreements and ensure that parties receive
what they are entitled to under the contract. Punitive damages are generally
inconsistent with this principle because they go beyond mere compensation and are
reserved for situations involving a higher degree of misconduct.
• However, there may be rare exceptions where punitive damages could be awarded in
a breach of contract case if the breach involves elements of fraud, malice, or when
compensatory damages are insufficient to compensate the plaintiff for his or her
losses.
4. Liquidated Damages
• Liquidated damages are specific, predetermined, and typically fixed sums of money
agreed upon by the parties in a contract to be paid by one party to the other in the
event of a breach of contract. These damages are intended to compensate the non-
breaching party for the anticipated losses resulting from the breach.
• In a breach of contract case, when a liquidated damages clause is present and
enforceable, the non-breaching party is entitled to the predetermined amount specified
in the contract. This amount is paid regardless of the actual losses incurred by the
non-breaching party. In contrast, without a liquidated damages clause, the non-
breaching party would have to prove the actual damages suffered, which can be more
challenging and uncertain.
Remedies for Breach of Contract
1. Suit for Damages
• The party may claim compensation for any loss or damage caused by the breach of
contract. Remedy by way of damages is the most common remedy available to the
injured party.
• Ordinary damages, special damages, exemplary damages, nominal damages, delay
damage, and pre-fixed damages are all possible. The “Hadley vs. Baxendale” rule is
important in a Suit for Damage. It simply states that if the contract includes any prior
notice of special damages, the injured party may only sue the other party for ordinary
damages.
2. Suit for Specific Performances
When monetary compensation is insufficient to cover the loss caused by the breach of
contract, the non-breaching party can ask the court to force the breaching party to perform as
promised.
3. Eliminate the Contract
When a contract is breached, the promisee can stop doing the performance they are obligated
to do and claim compensation from the promiser.
4. Rescission of Contract
Rescission of a contract is a legal remedy that involves the cancellation or annulment of a
contract as a result of a breach or other valid legal reasons. In the context of contract breach,
rescission allows the innocent party to treat the contract as if it never existed. This remedy is
available when one party has materially breached the contract or when there are legal grounds
to void the contract.
5. Suit for Quantum Meruit
• A suit for quantum meruit is a legal action that allows a party to recover the
reasonable value of goods or services they provided to another party when there was
no express contract or when the contract did not specify the amount of compensation.
• Quantum meruit, which is Latin for “as much as he deserves,” is a legal doctrine
that aims to prevent unjust enrichment and ensure that someone who benefits from
goods or services must pay a reasonable value for them.
This allows non-breaching party to sue for the amount of money that must be paid to the
injured party for the work they had done till the breach of contract happened.
6. Liquidated Damages and Penalty
• Liquidated Damages − Liquidated damages are a pre-estimated, fixed amount of
money specified in the contract that a breaching party is obligated to pay the non-
breaching party in the event of a contract breach.The primary purpose of liquidated
damages is to provide a measure of certainty and predictability in cases where it is
difficult to ascertain the actual damages resulting from a breach
• Penalty − Penalties in a contract are provisions that impose excessive or punitive
financial consequences on the breaching party. These penalties are not intended to
compensate the non-breaching party for their actual losses but rather to punish the
breaching party.
Special Contracts – indemnity - Special Contracts – guarantee - Special Contracts – bailment -
Special Contracts - pledge and agency

https://gargicollege.in/wp-content/uploads/2020/03/Unit-2-Special-Contracts.pdf

Case Study

https://www.bimkadapa.in/mbamaterials/BE&LAW%20CASE%20STUDIES.pdf