BUSINESS LAW UNIT 1: Essentials of a valid contract
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Question 2. Discuss the essential elements
of a valid contract.
Answer: Essential Elements of a valid Contract:
1. Offer and Acceptance: There must be a “lawful offer” and a “lawful acceptance” of the offer, thus resulting in an agreement.
2. Intention to create legal relation: There must be an intention among the parties that the agreement should be attached by legal consequences and create legal obligations. Social agreements do not contemplate legal relations, and so they do not give rise to a contract.
3. Lawful Considerations: An agreement is legally enforceable only when each of the parties to it, give something and get something. This something is the price for the promise and is called “Consideration”. Only those considerations are valid which ‘Lawful’
4. Capacity of parties: The parties to an agreement must be competent to contract otherwise it cannot be enforced by a court. To be competent, the parties must be on majority age and of sound mind and must not be disqualified from contracting by any law to which they are subject.
5. Free Consent: “Consent “means that the parties must have agreed upon the same thing in the same sense. Consent is not enough for making a contract, that to must be free. It is said to be free when it is not caused by-
(i) Coercion, or
(ii) Undue influence, or
(iii) Fraud, or
(iv) Misrepresentation, or
(v) Mistake.
6. Lawful object: For the formation of a valid contract, it is also necessary that the parties to an agreement must agree for a lawful object. The object must not be fraud or illegal or immoral or must not imply injury to the person or property of other.
7. Writing and Registration: Generally the contracts may be oral or written. But in special cases, it lays down that the agreement must be in writing or registered to be valid.
8. Certainty: Any agreement can be enforced if its meaning is certain or capable of being made certain agreements the meaning of which is not certain, are void.
9. Possibility of performance: The terms of the agreement must also be capable of performance physically as well as legally.
10. Not expressly declared void: The agreement must not have been expressly declared void under the act. There are some types of agreements which have been expressly declared to be void.
Question 3. What is
an offer or proposal? What are the essentials of a valid offer or rules
regarding valid offer?
Answer: Section 2(a) defines an offer as, “a proposal made by one
person to another to do an act or abstain from doing it.” The person who makes
the offer is known as the promisor or offer or and the person to whom an offer
is made is known as the promisee or the offeree.
Essentials of a valid offer or rules regarding valid
offer
1.
The offer must disclose an intention to
create legal relations: If the offer
does not contemplate to give rise to legal relationship, it is no offer in the
eyes of law, e.g. invitation to a dinner which has no intention to create
relationship. An offer must impose some legal duty on the party making it.
2.
The terms of offer must be clear and certain
and not indefinite, lose or ambiguous:
The terms of the offer must be definite, unambiguous, clear and certain and not
lose and vague. The offer must not be based on a condition which is uncertain
or incapable of performance.
3.
Offer may be general or specific: An offer may be made to definite person or persons or
to the world at large. When it is made to some specific person or persons it is
called a specific offer. When it is made to the world at large it is called a
General offer. A specific offer can be accepted only by the person to whom the
offer has been made and in the manner, if any specified in the terms of the
offer.
4.
Offer may be express or implied: An offer made by words, spoken or written is termed as
an ‘express offer’.
5.
Offer must be communicated: The offer, to be valid must be communicated to the
offeree. An offer becomes effective only when it has been communicated to the
offeree so as to give him an opportunity to accept or reject. An acceptance of
the offer, in ignorance of the offer, is no acceptance and, therefore, no valid
contract can arise.
6.
Offer must be made with a view to obtain the
consent: The offer must be made with a
view to obtain the consent of the other party and not merely with a view to
disclosing the intention of making an offer. A proposer cannot also dictate
terms under which the offer can be refused. At best, he can lay down the mode
of acceptance.
7. Offer should not contain a term the noncompliance of which would amount to acceptance: The offer should not contain a term the non-compliance of which would amount to acceptance for example a person cannot make such an offer that if the acceptance of the offer is not received upto Monday, the offer would be presumed to have been accepted.
8.
Special conditions attached to an offer must
also be communicated: Though an offeror
is free to lay down any terms and conditions in his offer, but it is the
responsibility of the offeror to bring all the terms of the offer to the notice
of the other party, the acceptor is bound only for those conditions which (i)
have expressly communicated to him or (ii) have so clearly been written that he
ought to have known them or (iii) have reasonable notice of the existence of
those terms.
Question 4.What is Acceptance in relation
to a contract? Discuss the essentials of a valid acceptance.
Answer: When the person to whom the proposal is made signifies his assent, it is an acceptance of the proposal. An accepted proposal is called a promise or an agreement [Section 2(b)]
Essentials of valid Acceptance
1. Acceptance must be absolute and unconditional: An acceptance must be unconditional and unqualified. Accepting an offer with conditions, variations and reservations amounts to counter offer and rejection of the original offer.
2. Acceptance must be communicated to the offeror: Acceptance must be communicated to the offeror himself. A communication to another persona is an ineffectual as if no communication has been made.
3. Acceptance must be made within a reasonable time: Acceptance to be valid must be made within the time allowed by the offeror and if no time is specified, it must be made within a reasonable time.
4. It must be according to the mode prescribed
or usual or reasonable mode: Acceptance has to be made in the manner
prescribed or indicated by the offeror. Section 7(2) states that if the
acceptance is not made in the manner prescribed, the proposer may within a
reasonable time after the acceptance is communicated to him, insist that the
acceptance must be made in the manner prescribed.
5. The acceptor must be aware of the proposal at the time of the offer: Acceptance follows offer. If the acceptor is not aware of the existence of the offer and conveys his acceptance, no contract comes into being.
6. Acceptance must be given before the offer
lapses or before the offer is revoked: It means that acceptance must be
made while the offer is in force i.e. before the offer has been revoked or
offer has lapsed.
7. Acceptance cannot be implied from silence: No
contract is formed if the offeree remains silent and does nothing to show that
he has accepted the offer.
Question 5. What are the various modes of
revocation or lapse of an offer? Discuss.
Answer: Modes of Revocation or lapse of offer
Sec.6 deals with various modes of
revocation of offer, these cases are as follows:
1. By communication of the notice of revocation:An offer may be revoked by the communication of the notice of revocation. It may be revoked only before its acceptance is complete as against the offeror. The acceptance is complete as against the offeror when the letter of acceptance is put in transmission to him. Notice of revocation will take effect only when it comes to the knowledge of the offeree.
2. By lapse of specified time: If time is mentioned in the offer for
its acceptance, it is revoked by the lapse of time. If no time is mentioned
then it lapses on the expiry of reasonable time.
3. By the failure of the acceptor to fulfil a
condition precedent to the acceptance: An offer lapses if the offeree fails to fulfil a
condition precedent to the acceptance.
4. By the death or insanity of the
proposer. The death of
the proposer puts an end to the offer, provided the fact of death or nstantly
comes to the knowledge of the acceptor before acceptance. If the proposer dies
after the acceptance of the offer, the legal representatives of the proposer
shall be bound by the contract.
5. By Counter offer: An offer comes to an
end when the offeree makes a counter offer or rejects the offer. Where an offer
is accepted with some modification in the terms of the offer or with some other
condition not forming part of the offer, such qualified acceptance amounts to a
counter offer. An offer once rejected cannot be revived.
6. By the non-acceptance of the offer according to the prescribed or usual
mode: The offer will also stand revoked if it has not been accepted
according to the mode prescribed.
7. By subsequent illegality: An offer lapses if it becomes illegal
after it is made and before it is accepted.
Question 6. Define consideration. Discuss
its essential elements.
Answer: Consideration is one of the essential elements of a valid contract. The law enforces only those promises which are made for consideration. Where one party promises to do something, it must get something in return. This ‘something in return’ is called consideration. Consideration is the very life-blood of every contract.
Section 2(d) of the Indian Contract act, 1872 defines Consideration as follows: “ When, at the desire of the promiser ,the promisee or any other person has done or abstained from doing, or does or abstains from doing ,or promises to do or abstain from doing something, such act or abstinence or promise is called a consideration for the promise.”
Essential elements of a valid
Consideration
a. It must move at the desire of the promisor: Consideration must have been done at the desireØ or request of the promisor & not at the desire of a third party or without the desire of the promisor.
b. It must move from the promise or any other person: An act constituting consideration may beØ done by the promise himself or any other person. Thus, it is immaterial who furnishes the consideration & therefore may move from the promisee or any other person. This means that even a stranger to the consideration can sue on a contract, provided he is a party to the contract.
c. It may be Past , Present or Future:Ø
i. Past Consideration: The consideration which has already move before the formation of agreement.
ii. Present consideration: The consideration which moves simultaneously with the promise.
iii. Future Consideration: The consideration which is to be moved after the formation of agreement.
d. It must be of some value: The consideration need not be adequate to the promise but it must be ofØ some value in the eye of the law.
e. It must be realØ & not illusory: Ex. A promise to put life into the B’s dead wife & B promises to pay Rs 10,000. This agreement is void because consideration is physically impossible to perform.
f. Must be Something other than the promisor’s Existing obligation: Consideration must beØ something which the promisor is not already bound to do because a promise to do what a promisor is already bound to do adds nothing to the existing obligation.
g. It must not be illegal, immoral or opposed to public policy.
Question 7. “No Consideration, No
Contract”. Explain the exceptions to this rule.
Or
“A contract without
consideration is void”. Explain the exceptions to this rule.
Answer: The general rule is “An Agreement made without consideration is void”. Sec 25 & 185 deals with the Exceptions to this rule. These cases are:
1) Natural Love & Affection: A written & registered agreement based on natural love & affection between near relatives is enforceable even if it is without consideration. Ex: X, for natural love & affection, promises to give his son, Y, Rs 1000. X puts his promise to Y in writing & registers it. This is a contract.
2) Compensation for voluntary services: A promise to compensate wholly or partly, a person who has already voluntarily done something for the promisor, is enforceable even without consideration. Ex: A finds B’s purse & gives it to him. B promises to give Rs 50 to A. This is a contract.
3) Promise to pay a Time barred debt: A promise by a Debtor to pay a time-barred debt if it is made in writing & is signed by the debtor or by his agent is enforceable.
4) Completed gifts: There need not be consideration in case of completed gifts.
5) Agency: No consideration is necessary to create an Agency.
6) Guarantee: A contract of guarantee is made without consideration.
7) Remission: No consideration is required for an agreement to receive less than what is due. This is called remission in the law.
Question 8. Write down the meaning of
capacity to contract. Who are competent to contract?
Answer: Meaning of Capacity to Contract: Capacity or competence to contract means legal capacity of parties to enter into a contract. In other words, it is the capacity of parties to enter into a legally binding contract. Section 11 of the Contract Act deals with the competency of parties and provides that “every person is competent to contract who is of sound mind and is not disqualified from contracting by any law to which he/she is subject”
Every person is legally competent to contract if he fulfills the following three conditions:
i. He has attained the age of majority;
ii. He is of sound mind; and.
iii. He is not disqualified from contracting by any other law to which he is subject.
Question 9. Discuss the provision of law relating to contracts
by minors.
Answer: Any person, who has not attained the age of majority prescribed by law, is known as minor. Section 3 of the Indian Majority Act prescribes the age limit for majority and says a minor is a person who has not completed eighteen years of age. But the same Act also mentions that in the following two cases a person attains majority only after he completes his age of twenty one years:
(i) Where a Court has appointed guardian of a minor’s person or property or both (under the Guardians and Wards Act, 1890); or
(ii) Where the minor’s property has been placed under the superintendence of a Court of wards.
Rules /effects as to or Nature of Minor’s Agreements:
1. Void ab-initio: Minor’s agreement is absolutely void from very beginning, i.e. void ab- initio. It is nullity in the eye of law. An agreement with minor, therefore, can never be enforced by law.
2. Minor can be a promise or beneficiary: A minor can enforce such agreements in which he is a beneficiary or promise and does not create any obligation on his part.
3. No ratification: A minor cannot be ratifying even after attaining the age majority because void agreement cannot be ratified.
4. Restitution/ Compensation possible: If a minor has received benefits under an agreement from the other party, the Court may require the minor to restore the benefit (so far as may be), to the other party at the time of rescission of the agreement. The minor may be asked to restore the benefit to the extent he or his estate has been benefited.
5. Contract by parent/ guardian/ manager: - A minor’s parent/ guardian/ manager can enter into contract on behalf of the minor provided:
i. The parent/ guardian/ manager acts within the scope of his authority; and
ii. The contract is for the benefit of the minor.
6. No liability of parents: - The parents (guardian) of a minor are not liable for agreements made by their minor ward. However, they can be held liable if the minor makes agreement as their authorized.
7. Minor as an agent: - A minor is not entitled to employ an agent; he can be an agent himself for someone else. As an agent he can represent the principal, and bind him for his acts done in the course of agency. But the minor is not responsible to the principal for his acts.
8. Minor and insolvency: - A minor cannot be declared insolvent because he is not competent to contract.
9. Minor as joint Promisor: - A minor can be a joint promisor with a major, but the minor cannot be held liable under the promise to the promises as well as to his co-promisor. But the major promise cannot escape liability. The major joint promisor can be forced to perform the promise.
10. Minor shareholder: - A minor can become a shareholder or member of a company if (a) the shares are fully paid up and (b) the articles of association do not prohibit so.
11. Liability for necessaries of life: - A minor is incompetent to contract. A minor, therefore, is not personally liable for the payment of price of necessaries of life supplied to him or to his legal dependents. However, the person who has furnished such supplies is entitled to be reimbursed from the property of the minor.
12. Minor Partner: - According to the Partnership Act, 1932, a minor cannot make a contract of partnership though he may be admitted to its benefits with the consent of all the partners. A minor partner cannot be made personally liable for any obligation of the firm, but his share in the firm’s property can be made liable.
13. No estoppels against minor: - The term ‘estoppels’ means prevention of a claim. When a minor enter into contract, representing that he is a major, but in reality he is not, then later on he can plead his minority as a defence and cannot be estopped (prevent) from doing so.
Question 10. Discuss the law relating to
contracts by persons of unsound mind.
Answer: As per section 11 of Contract Act, for a valid contract each party to the contract must have a sound mind. Contracts made by persons of unsound mind are void. The reason is that a contract requires assent of two minds but a person f unsound mind has nothing which the law recognises as a mind.
Section 12 of Contract Act lays down that, “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 and of forming a rational judgement as to its effect upon his interests.” This section further states that:
a. A person who is usually of unsound mind but
occasionally of sound mind may make a contract when he is of sound mind.
b. A person who is
usually of sound mind but occasionally of unsound mind is not considered
competent to make a contract when he is of unsound mind.
The question whether a party to contract is of sound mind or not
has to be decided by the courts. If the unsoundness of mind is cited as ground
for incompetency to enter into a contract, he/she must prove that he/she was of
unsound mind at the time of entering into contracts.
Unsoundness of mind of mind does not mean weakness of mind or
loss of memory. It means not only lack of understand the terms of the contract
but also lack of understanding to realise the effect of the term of the
contract.
Question 5. What is free consent? Explain
when a consent is not said to be free.
Answer: Free consent is an essential requisite of a valid contract. Free consent is the consent which has been obtained by the free will of the parties out of their own accord. Two or more persons are said to consent when they agree upon the same thing in the same sense at the same time. It means that there is no contract if the parties have not agreed upon the same thing in the same sense.
Sec. 14 describes the cases when the consent is not free. It lays down that consent is not free if it is caused by coercion, undue influence, fraud, misrepresentation, etc. if the consent is not free, the agreement is avoidable at the option of the party whose consent was not free.
1) Coercion: Coercion simply means forcing a person to enter in to a contract. Sec. 15 defines coercion as, “Committing or threatening to commit, any act forbidden by the Indian Penal Code, or unlawful 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”.
2) Undue Influence: It is kind of moral coercion. Sec. 16(1) defines undue influence as, “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 other and uses that position to obtain an unfair advantage over the other”.
3) Misrepresentation As per Sec. 18, misrepresentation is a wrong statement of fact made innocently, i.e., without any intention to deceive the other party. It may be caused. (1) By positive statement. (2) By breach of duty. (3) By mistake regarding the subject matter of the agreement.
4) Fraud: Sec. 17 defines fraud as, any of the following acts committed by a party to a contract (or with his convenience or by his agent) with intention to deceive another party thereto (or his agent) or to induce him to enter into the contract.
(a) The suggestion that a fact is true when it is not true by a person who does not believe it be true.
(b) The active concealment of the fact by a person having knowledge or belief of the fact.
(c) A promise made without any intention to perform it.
(d) Any other act fitted to deceive.
(e) Any such act or omission as the law specifically declares to be fraudulent.
5) Mistake: Acc. To Sec. 20 mistake means erroneous belief concerning some fact. The parties are said to consent when they agree upon the same thing in the same sense. If they do not agree upon the agreement in the same sense, there will be no contract. When the consent of one or both the parties to a contract is caused by misconception or erroneous belief, the contract is said to be induced by mistake. Mistake may be of following types:
(1) Mistake of law,
(a) Mistake of law of the country.
(b) Mistake of foreign law.
(c) Mistake of private rights of the parties
(2) Mistake of fact,
(A) Bilateral Mistake:
· Mistake as to subject matter
(a) Mistake regarding existence
(b) Mistake regarding identity
(c) Mistake regarding title.
(d) Mistake regarding price
(e) Mistake regarding quality
(f) Mistake regarding quantity
·
Mistake
as to the possibility of performance
(a) Physical impossibility
(b) Legal impossibility
(B) Unilateral Mistake:
(1) Mistake as to identify of the person contracted with.
(2) Mistake as to the nature of contract.
Question 6. What is coercion? What are its
essential elements?
Answer: Coercion
simply means forcing a person to enter in to a contract. Sec. 15 defines
coercion as, “Committing or threatening to commit, any act forbidden by the
Indian Penal Code, or unlawful 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”.
The essential
elements of coercion are:
(1)
Committing or threatening to commit any act forbidden by Indian Penal Code.
(2) Unlawful
detaining or threatening to detain any property.
(3) The act
of coercion may be directed at any person and not necessarily at the other
party to the agreement.
(4) The act of coercion must be done with the object of inducing or
compelling any person to enter into an agreement.
Question 7. What do you mean by Undue
influence in relation to a contract? Mention some situation in which a contract
is said to be influenced by undue influence.
Answer: Undue Influence: It is kind of moral coercion. Sec. 16(1) defines undue influence as, “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 other and uses that position to obtain an unfair advantage over the other”.
In the following cases a contract is said to be influenced by undue influence:
(a) Where he holds a real or apparent authority over the other e.g., in the relationship between master and servant.
(b) Where he stands in fiduciary relation to the other. It implies a relationship of mutual trust and confidence.
(c) Where a contract is made with a person whose mental capacity is affected by reason of age, illness, or mental or bodily distress.
Question 8. Distinguish between Coercion
and Undue Influence.
Answer: The following are the main points
of differences between Coercion and Undue Influence
|
|
Basis
of distinction |
Coercion |
Undue
influence |
|
1 |
Definition |
Coercions
the committing or threatening to commit, any act forbidden by the I.P.C. or
unlawful detaining or threatening to detain any property with the intention
of causing any person to enter into an agreement. |
Undue
influence is an influence which arises 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 and uses that position to obtain an unfair advantage over
the other. |
|
2 |
Relations |
In
case of coercion, relation between the parities is immaterial. |
In
case of undue influence, in the relation between the parties the parties must
be such that one of them is in a position to dominate the will of other. |
|
3 |
Intention |
Coercion
is applied with the intention of causing any person to enter into an
agreement. |
It
is exerted with the intention to obtain an unfair advantage over the other
party. |
|
4 |
Nature
of force |
It
involves physical force. |
It
involves moral force. |
|
5 |
Kind
of act |
It
involves criminal act. |
It
does not involve criminal act. |
|
6 |
Direction |
The
coercion may be directed against any person including a stranger. |
Under
influence is used against the weaker party only. |
|
7 |
Who
exercise |
It
can be exercised by any person. Even a stranger to contract can exercise it |
It
is employed by the person who is in a position to dominate the will of the
other. |
|
8 |
Remedies |
It
is employed by the person who is in a position to dominate the will of the
other. |
It
is employed by the person who is in a position to dominate the will of the
other conditionally. [Sec. 19 A] |
Question 8. What is Misrepresentation? What
are its causes? Mention its essentials?
Answer: Any innocent or unintentional false statement or assertion of fact made by one party to the other during the course of negotiation of a contract is called a misrepresentation. As per Sec. 18, misrepresentation is a wrong statement of fact made innocently, i.e., without any intention to deceive the other party. It may be caused.
a. By
positive statement.
b. By breach
of duty.
c. By mistake regarding the subject matter of the agreement.
Essential of misrepresentation
(1) There
must be a representation or omission of a material fact.
(2) The
representation or omission of duty must be made with a view to inducing the
other party to enter into contract.
(3) The
representation or omission of duty must have induced the party to enter into
contract.
(4) The representation must be wrong but the party making the
representation should not know that it is wrong.
Question 9. Write a brief note on Fraud and
Mistake.
Answer: Fraud: Sec. 17 defines fraud as, any of the following acts committed by a party to a contract (or with his convenience or by his agent) with intention to deceive another party thereto (or his agent) or to induce him to enter into the contract.
(a) The suggestion that a fact is true when it is not true by a person who does not believe it be true.
(b) The active concealment of the fact by a person having knowledge or belief of the fact.
(c) A promise made without any intention to perform it.
(d) Any other act fitted to deceive.
(e) Any such act or omission as the law specifically declares to be fraudulent.
Mistake: Acc. To Sec. 20 mistake means erroneous belief concerning some fact. The parties are said to consent when they agree upon the same thing in the same sense. If they do not agree upon the agreement in the same sense, there will be no contract. When the consent of one or both the parties to a contract is caused by misconception or erroneous belief, the contract is said to be induced by mistake. Mistake may be of following types:
(1) Mistake of law:
(a) Mistake of law of the country.
(b) Mistake of foreign law.
(c) Mistake of private rights of the parties
(2) Mistake of fact,
(A) Bilateral Mistake:
· Mistake as to subject matter
(a) Mistake regarding existence
(b) Mistake regarding identity
(c) Mistake regarding title.
(d) Mistake regarding price
(e) Mistake regarding quality
(f) Mistake regarding quantity
·
Mistake
as to the possibility of performance
(a) Physical impossibility
(b) Legal impossibility
(B) Unilateral Mistake:
(1) Mistake as to identify of the person contracted with.
(2) Mistake as to the nature of contract.
Question 10. Distinguish between Fraud and
Misrepresentation.
Answer: Following are the main points of
differences between Fraud and Misrepresentation
|
S.No |
Basis
of distinction |
Fraud |
Misrepresentation |
|
1 |
Meaning |
A
fraud is an international misrepresentation or concealment of material fact
to include the other party to enter into a contract. |
An
innocent or unintentional misrepresentation of material facts by one party
fact by one party include the other party to enter into a contract. |
|
2 |
Intention |
Fraud
is committed with an intention to deceive |
There
is no such intention. |
|
3 |
Belief
in the facts |
The
person committing of a fraudulent act does not believe it to be true |
The
person making misrepresentation believes in its facts to be true |
|
4 |
Suit
for damage |
The
aggrieved party has right to sue the other party for damages |
The
aggrieved party cannot sue for damages. |
|
5 |
Defence |
A
party cannot set up a defence that the aggrieved party had means of
discovering the truth except in case of fraud by concealment or by silence. |
In
case of misrepresentation the other party always set up a defence that the
aggrieved party that the aggrieved party had means of discovering the truth. |
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