BUSINESS LAW NOTE UNIT- 1A

 

A.  Contract – meaning, characteristics and kinds   Visit my youtube channel RKD Commerce and Arts Coaching

 

 

Q.1. Define the term contract.

Ans: A contract is a legally enforceable agreement between two or more parties with mutual obligations. The Indian contract Act 1872, section 2(h) defines the term contract as “an agreement legally enforceable by law”.

Q.2. What are the essentials of a contract?

Ans: The essentials of a contract are:

1.     There must be an agreement between two or more persons.

2.     The parties must intent that their agreement will result in legal relations.

3.     The contract must comply with any required statutory formalities.

4.     The agreement must be genuine and not be affected by factors such as mistake, misrepresentation, fraud and undue influence.

5.     The parties to the agreement must have ‘legal capacity’ to contract. For example, a contract with a person who is mentally unsound is not valid.

6.     The agreement must be for a purpose of object which is not illegal or contrary to public policy.

Q.3. What are the elements of a valid contract?

Ans: Following are the essential elements of a valid contract:

a.     Proper offer and its acceptance.

b.     Lawful object.

c.      Agreement not expressly declared Void.

d.     Intention to create legal relationship.

e.     Free consent.

f.       Capacity of parties to contract.

g.     Certainty of meaning

h.     Lawful consideration.

i.        Legal formalities.

Q.4. what is void contract?

Ans: Section 2(j) of the Act states that, “the void contract is a contract which ceases to be enforceable by law. Void contracts cannot be enforced. It is a contract without any legal effects and nullity.”

Question 1. What is a contract? What are its different kinds?

Answer: A contract is a promise or set of promises for the breach of which the law gives a remedy or the performance of which the law in some way recognize as duty. In other words, a contract is an agreement the object of which is to create a legal obligation. The contract consists of two elements:

1. An agreement and

2. Legal Obligation i.e. enforceability by law.

Contract = an Agreement + enforceability by law.

According to Section 2(h) of the Indian Contract Act 1872 “An agreement enforceable by law is a contract.”

Contracts may be classified on the basis of their validity, formation and Performance.

A.   Types of Contracts On The Basis Of Validity: Chapter 2 of the Indian Contract Act, 1872 discusses the voidable contracts and void agreements. On the basis of validity or enforceability, there are five different types of contracts as given below.

a.     Valid Contracts: The Valid Contract as discussed in the topic on “Essentials of a Contract” is an agreement that is legally binding and enforceable. It must qualify all the essentials of a contract.

b.     Void Contract or Agreement: The section 2(j) of the Act defines a void contract as “A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable”. This makes all those contracts that are not enforceable by a court of law as void. We have already stated examples of these kinds of contracts in the “Essentials of a Contract”.

c.      Voidable Contract: These types of Contracts are defined in section 2(i) of the Act: “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.” A voidable contract is a Valid Contract. In a voidable contract, at least one of the parties has to be bound to the terms of the contract.

d.     Illegal Contract: An agreement that leads to one or all the parties breaking a law or not conforming to the norms of the society is deemed to be illegal by the court. A contract opposed to public policy is also illegal.

e.      Unenforceable Contracts: Unenforceable contracts are rendered unenforceable by law due to some technical. The contract can’t be enforced against any of the two parties.

 

B.   Types of Contract – Based on Formation

a.     Express Contract: The Section 9 of the Act defines what is meant by the term express: “Promises, express and implied —In so far as the proposal or acceptance of any promise is made in words, the promise is said to be express.” This means that if a proposal or a promise is expressed by listing the terms in words – in writing or orally is said to be an Express Contract as long as it gets acceptance from the other party.

b.    Implied Contracts: The second part of section 9 of the Act defines what is meant by an implied contract: “In so far as such proposal or acceptance is made otherwise than in words, the promise is said to be implied.” Going by the definition we can say that a contract in which the terms of the agreement are not expressed in written or oral form is an implied contract.

c.      Quasi-Contract: They are not contracts in the sense that no agreements are made between any of the parties. In fact, there is no contract prior to some court order. A quasi-contract is not agreed upon by the two parties but it comes into existence by a court order. It is thus enforced by the law which also creates it. Most of the times the quasi-contract is created to stop any of the parties from taking an unfair advantage of the other.

d.    E-Contract: When a contract is formed by the use of electronic devices and means, it is called an electronic contract or an e-contract. The electronic means and devices may include emails, tests, telephones, digital signatures etc. They are also known as the Cyber contracts, the EDI contracts or the Electronic Data Interchange contracts. The terms of the contract are listed by electronic means or implied by the actions of the users.

C.   Types of Contract – Based on Performance: There are various types of contract, one such type are contacts based on their performance. The basis for this type is whether the contract is performed or still to be performed. Accordingly, the two types are known as executed contracts and executory contracts.

a.     Executed Contracts: A contract between two or more parties is said to be executed when the act or forbearance promised in the contract has been performed by one, both or all parties. Basically, it means that whatever the contract stipulated, has been carried out. Thus the contract has been executed. In most executed contracts the promises are made and then immediately completed. The buying of goods and/or services usually falls under this category.

b.     Executory Contracts: In an executory contract, the consideration is either the promise of performance or an obligation. In such contracts, the consideration can only be performed sometime in the future, hence the name executory contract. Here the promises of consideration simply cannot be performed immediately.

c.      Unilateral Contracts: As the name suggests these are one-sided contracts. It usually comes into existence when only one party makes a promise, which is open and available to anyone who wishes to or can fulfill the said promise. The contract will only be fulfilled once someone fulfills the promise.

d.     Bilateral Contracts: By contrast, a bilateral contract is one that has two parties. It is a traditional type of contract most commonly known and occurring. Here both parties agree to the terms of the agreement and thus enter into a contract. Hence it is also known as a reciprocal contract. In bilateral contracts, both parties have usually agreed to a time frame to carry out the said contract.

Question 3. Distinguish between the following:

a.     Agreement and Contract

b.    Void Agreement and Void Contract

c.      Void Agreement and Voidable Contract

d.    Void Contract and Voidable Contract

e.      Void Agreement and Illegal Agreement

Answer: a. Distinction between Agreement and Contract

S.No.	Basis of distinction	Agreement	Contract
1	Definition	Every promise and every set of promises forming consideration for each other is an agreement	An agreement enforceable by law is a contract
2	Creation	An agreement is created by acceptance of an offer.	Agreement and its enforceability together create a contract.
3	legal rights and obligations	An agreement may not create legal rights and obligations of the parties	A contract creates legal rights and obligation between the parties.
4	Necessity	No contract is required to make an agreement	Valid agreement is necessary for making a contract.
5	Legally binding	An agreement is not a concluding or legally binding contact.	A contract is a concluding or legally binding on the parties.
6	Concept	Agreement is a wider concept and includes contacts.	Contract is a narrow concept and it is only a specific of agreement.

  Visit my youtube channel RKD Commerce and Arts Coaching

a.     Differences between Void Agreement and Void Contract

S.No.	Basis of distinction	Void Agreement	Void Contract
1	Definition	An agreement not enforceable by law is said to be void. [Sec. 2(g)]	A contract which cases to be enforceable by law becomes void when it ceases to be enforceable [Sec. 2(j)]
2	Time when becomes void	It is void from very beginning.	It becomes void subsequently due to change in law or change in circumstances.
3	Restitution	Generally no restitution is granted, however, the Court may on equitable grounds grant restitution in case of fraud or misrepresentation by minors.	Restitution may be granted when the contract is discovered to be void or becomes void.
4	Description in the Act	Such agreements have been mentioned as void in the Act. Agreements without consideration, agreements with lawful object or consideration and some other agreements have expressly been declared to be void.	There is no mention of cases of void contracts in the Act. They are created by circumstances and law Courts decide whether they have become void or not.

 

b.    Differences between Void Agreement and Voidable Contract

S.No	Basis of distinction	Void Agreement	Voidable Contract
1	Definition	An agreement not enforceable by law is said to be void.	A contract enforceable by law at the option of the aggrieved party, is a voidable contract.
2	Period of validity	It is void from the beginning i.e. void ab initio	It is valid till it is avoided by the aggrieved party to the contract
3	Legal existence	It is nullity, hence, does not exist in the eye of law.	It has its existence in the eye of law till it is repudiated
4	Change in status	Status of void agreement does not change with the change in circumstances.	Status of such contract change when the aggrieved party elects to avoid it within a reasonable time. It becomes void when the aggrieved party elects to rescind it
5	Causes	Any agreement is void when it is made with incompetent parties or for unlawful objects and consideration, or without consideration, or without consideration or it is expressly declared to be void under the law.	A contract is voidable when the consent of the party is caused by coercion or undue influence or fraud or misrepresentation.
6	Transfer of title	The party obtaining goods under void agreement cannot transfer a good title to the third party	The party obtaining goods under voidable agreement can transfer a good title to the third party if the third party obtains it in good faith and for consideration and the aggrieved party has not avoided the contract before such transfer.
7	Restitution	Parties do not have right to restore the benefits passed on to the other unless the parties were unaware of the impossibility of performance at the time of agreement or the party to the agreement was minior.	Generally, right restitution is available if the party elects to avoid the contract.
8	Damages	No party as a right to get compensation for damages because such agreement has no legal effect.	If a party rightfully rescinds (i.e. puts and end) the contract, he can claim compensation, he can claim compensation of damages sustained by him due to non-fulfillment of the promise.

  Visit my youtube channel RKD Commerce and Arts Coaching

c.      Differences between Void Contract and Voidable Contract

	Basis of distinction	Void Contract	Voidable Contract
1	Definition	A contract which ceases to be enforceable by law becomes void, when it ceases to be enforceable.	A contract which is enforceable by law at the option of the aggrieved party is a voidable contract.
2	Period of validity	It remains valid till it does not cease to be enforceable.	It remains valid if the aggrieved party does not elect to avoid it within a reasonable time.
3	Will of the party	Its validity is not affected by the will of any party. It is decided by the Law Court.	Its validity is affected by the will of the aggrieved party. Aggrieved party has option to treat it either binding or repudiate it.
4	Causes	Contracts become void due to change in circumstances or in the law of land.	Contract is voidable when the consent of the party is caused by coercion, undue influence, fraud or misrepresentation. Sometimes, it may be voidable under the provisions of the Secs. 39, 53 and 55.

 Visit my youtube channel RKD Commerce and Arts Coaching

d.    Differences between Void Agreement and Illegal Agreement

S.No.	Basis of distinction	Void Agreement	Illegal Agreement
1	Definition	An agreement not enforceable by law is void.	An agreement which is expressly or impliedly prohibited by law, is illegal.
2	Effect on collateral agreement	The agreement collateral to the void agreement is not necessarily void.	The agreement collateral to an illegal agreement is always void.
3	Scope	All void agreements need not necessarily be illegal agreements. Hence, the scope is wider than that of the illegal agreements.	All ill agreements are void.
4	Restitution	The Court may grant restitution of money advanced if is minor or if the parties were unaware of the impossibility of performance of the agreement	Restitution of money is not granted in case of an illegal agreement.