Business Law Notes

Module 1

The Indian Contract Act, 1872

-​ “Law of contract creates rights jus in personam rather than jus in rem.” Jus in personam refers to a
right against a specific person, while jus in rem refers to a right against a specific thing or
property

-​ Section 2(h) defines a contract as an agreement enforceable by law, meaning it’s more than just
a promise—it creates a legal obligation.

-​ While all contracts are agreements, only those with legal significance (like lawful purpose,
consideration, and consent) are binding.

-​ Social or informal promises, without legal enforceability, are not contracts.

Example of a Contract: A agrees to supply 100 chairs to B for ₹1,00,000. B accepts the offer. This
is an agreement with legal enforceability—hence, a contract.

Example of a Non-Contractual Agreement: X promises to give a watch to Y on his birthday.

Later, X changes his mind. Y cannot legally enforce this promise because there’s no consideration
or legal obligation.

For an agreement to become a contract, it must fulfill the essential elements of a valid contract according
to section 10 of The Indian Contract Act, 1872;

-​ Offer and Acceptance: A lawful offer and its lawful acceptance.

-​ Intention to Create Legal Relationship:

-​ Lawful Consideration: Something of value exchanged between the parties.

-​ Capacity of the Parties: Parties must be competent (age, sound mind, not disqualified).

-​ Free Consent: No coercion, undue influence, fraud, misrepresentation, or mistake.

-​ Lawful Object: The purpose of the contract must be legal.

-​ Agreement Not Declared Void:

-​ Certainty and Possibility of Performance

-​ Legal Formalities
Types of Contracts

Basis Type Description Example

Validity Valid Meets all legal requirements and is A signed sale agreement.
enforceable by law.

Voidable Valid initially but can be voided by one A contract signed under
party due to issues like coercion. undue influence.

Void Not enforceable by law from the A contract for illegal

beginning or becomes void later. activities.

Illegal Involves activities prohibited by law, A contract for smuggling

hence void from the start. goods.

Unenforceable Valid in nature but cannot be enforced An oral contract where

due to legal technicalities. written proof is required.

Formation Express Terms are clearly stated, either orally or A written job offer.
in writing.

Implied Formed through actions or conduct, Ordering food at a

without explicit terms. restaurant.

Quasi Created by law to prevent unjust Receiving goods by mistake

enrichment, not a real contract. and paying for them.

Performance Executed Both parties have fully performed their A completed car sale.
obligations.

Executory Some or all contractual obligations are A contract for future

yet to be performed. delivery of goods.

Unilateral One party makes a promise; the other A reward contract for
accepts by performing an act. finding a lost pet.

Bilateral Mutual promises made by both parties A house sale contract with
to perform certain obligations. payment terms.
Offer and Acceptance

An offer is a proposal made by one party (the offeror) to another (the offeree), expressing a willingness to
enter into a legally binding contract on specific terms.

-​ An offer/acceptance can be either Express (through words) or Implied (through Actions). It can
also be an Specific offer or an General offer

Legal Rules to Offer

1.​ An Offer Must Create a Legal Relationship: For an offer to be valid, it must be intended to
create legal obligations, not just social or domestic promises.

2.​ Offer Should Be Clear and Definite: The offer must be specific and leave no room for
ambiguity.

3.​ Offer is Different from a Declaration of Intention: A mere statement of future plans is not an
offer but a declaration of intention.

-​ Farina v. Fickus (1900): A father wrote a letter stating he would give property to his
daughter and son-in-law. The court ruled it was a mere statement of intention, not a
binding contract, as there was no legal obligation or enforceable promise.

4.​ Offer is Not the Same as an Invitation to Offer: An invitation to offer invites others to make an
offer and is not an offer itself.

5.​ Offer Must Be Communicated: The offeree must be aware of the offer to accept it.

-​ Fitch v. Snedaker (1868): A reward was offered for information leading to an arrest, but
Fitch provided the information without knowing about the reward. He later claimed it, but
the court denied his claim, ruling that an offer must be known before acceptance.

6.​ Offer Should Aim to Get Agreement: An offer must be made with the intention of receiving
acceptance to form a contract.

7.​ Silence Cannot Be Treated as Acceptance: Silence cannot be imposed as acceptance unless
previously agreed upon.

8.​ An Offer Can Have Conditions: An offer can include conditions that must be fulfilled for
acceptance to be valid.

9.​ Just Quoting a Price Isn’t an Offer: A statement of price is not an offer but a piece of
information. (Harvey vs. Facey)
10.​No Contract on Cross Offers: When identical offers are made simultaneously without awareness
of the other, no contract is formed.

11.​Special Terms Must Be Communicated Clearly: Special terms must be communicated before or
at the time of contract formation.

Acceptance
Acceptance is the act of assenting by the offeree to the offer. An offer when accepted becomes a promise

Legal Rules to Acceptance

1.​ Acceptance Must Be Absolute and Unqualified: Acceptance must match the terms of the offer
exactly, without adding conditions or changes.

-​ Neale v. Merrett (1930): Merrett offered to sell property to Neale for £280. Neale sent £80
as part payment and requested to pay the rest later. The court ruled Neale’s response was a
counteroffer, not acceptance, breaking the contract.

2.​ Acceptance Must Be Communicated to the Offeror: The acceptance must be clearly conveyed
to the person who made the offer.

3.​ Acceptance Must Be According to the Prescribed Mode or Usual and Reasonable Mode: If
the offer specifies a mode of acceptance, it must be followed. If not, any usual and reasonable
method is acceptable.

4.​ Acceptance Must Be Given Within a Reasonable Time: If no time is specified, acceptance
should be made within a reasonable period depending on the nature of the contract.

5.​ Acceptance Cannot Precede an Offer: There must be an existing offer before acceptance can
occur. You cannot accept something that hasn’t been offered yet.

6.​ Acceptance Must Show Intention to Fulfill the Terms of the Promise: The acceptor must
genuinely intend to be bound by the contract’s terms.

7.​ Acceptance Must Be Given by the Person to Whom the Offer Is Made: Only the person to
whom the offer is directed can accept it.

8.​ Acceptance Must Be Given Before the Offer Lapses or Is Withdrawn: An offer must be
accepted while it is still valid and before it is revoked.

9.​ Acceptance Cannot Be Implied from Silence: Silence cannot generally be treated as acceptance
unless the offeree has previously agreed that silence will count as acceptance.
Privity of Contract
The doctrine of Privity of Contract states that only the parties involved in a contract can sue or be
sued upon it. A third party, who is not part of the contract, has no legal rights to enforce the contract or
claim benefits from it, even if the contract was made for their benefit.

Exceptions

-​ Trusts: Even if you're not the person who made the trust, if you're a beneficiary (someone who
benefits from the trust), you can still enforce the terms of the trust.

-​ Family Settlements: In family agreements, if a third person (like a child or relative) is supposed to
benefit, they can enforce that agreement, even though they didn't make it.

-​ Agency Contracts: If someone (the agent) makes a contract on behalf of another person (the
principal), the principal can still enforce that contract, even though they weren’t directly involved
in making it.

-​ Assignment of Contracts: Sometimes, you can pass on your rights in a contract to someone else.
If you do, that person can enforce the contract as if they were the original party.

-​ Acknowledgment

-​ Contract of Labor

Consideration in Contract Law

Consideration is something of value that is exchanged between parties when entering into a contract. It
can be money, goods, services, or even a promise to do (or not do) something. For a contract to be legally
valid, there must generally be valid consideration. “A contract without consideration is void, meaning
it has no legal effect.:

Exceptions;

1.​ Natural Love and Affection: A written, registered agreement between close relatives is valid.
(Reason: Emotional bond ensures commitment)

2.​ Past Voluntary Service: A promise to compensate for a past voluntary act is enforceable. (Reason:
Encourages goodwill and fairness)

3.​ Promise to Pay Time-Barred Debt: A written, signed promise to repay an expired debt is valid.
(Reason: Honors past financial obligations)
4.​ Completed Gifts: Gifts given without consideration are legally valid once delivered. (Reason:
Voluntary generosity needs no return)

5.​ Agency Contracts: No consideration is needed to create a valid agency relationship. (Reason:
Agency is based on trust, not exchange)

6.​ Contribution to Charity: A promise to donate to charity is enforceable if acted upon. (Reason:
Prevents fraud and ensures public benefit)

7.​ Contract of Bailment: Bailment contracts are valid without consideration if goods are voluntarily
delivered. (Reason: Protects mutual benefit in safekeeping)

Legal Rules to Consideration

1. Consideration Must Move at the Desire of the Promisor: The act or promise must be done at the
request of the promisor. If done voluntarily or at someone else's request, it is not a valid consideration.

2. Consideration May Move from the Promisee or Any Other Person: Consideration can come from
the promisee or even a third party. It is not necessary that the person receiving the promise provides the
consideration.

3. Consideration May Be an Act, Abstinence, or a Promise: Consideration can involve doing

something (an act), refraining from doing something (abstinence/forbearance), or making a promise to do
or not do something in the future.

4. Consideration May Be Past, Present, or Future: Consideration can be something already done
(past), something currently being done (present), or something promised to be done in the future.

5. Consideration Need Not Be Adequate: The value of consideration doesn’t have to be equal or fair
compared to what is received. Courts are not concerned with the fairness of the deal as long as there is
some consideration.

6. Consideration Must Be Real and Not Illusory: Consideration must be real, possible, and certain. It
cannot be vague, impossible to perform, or based on imaginary promises.

-​ Stilk v. Myrick (1809): The court ruled that the promise of extra wages was illusory because Stilk
was already contractually obligated to complete the work. For consideration to be valid, it must be
real and not illusory, meaning it must involve something new or additional beyond an existing duty.

7. Consideration Must Be Something the Promisor Is Not Already Bound to Do: If someone is
already legally obligated to perform an act, promising to do it again is not valid consideration.
8. Consideration Must Not Be Illegal, Immoral, or Against Public Policy: Consideration cannot
involve illegal activities, immoral acts, or anything that goes against public policy. Such contracts are void.

Capacity to Contract

1.​ Minors: These are individuals below 18 years that lack the contractual capacity. An agreement
with a minor is considered as void and inoperative ab initio (invalid from the beginning). (Mohiri
Bibi Vs. Dharmodas Ghose (1903))

-​ A Minor can be a beneficiary and/or an agent but not a direct party of the contract.

2.​ Persons of Unsound Mind: A contract is valid only if the person is of sound mind at the time of
making the contract as he is capable of understanding and of forming a rational judgment

-​ Unsound Mind; Lunatics, Idiots, Drunkards

-​ A person who is usually of unsound mind but occasionally becomes sound can contract
during their lucid intervals. Example: A person with mental illness can enter into a contract
when they are mentally stable.

-​ A person usually of sound mind but temporarily affected (due to illness, intoxication, etc.)
cannot contract during such periods. Example: A drunk person cannot form a valid
contract while intoxicated.

3.​ People Disqualified by Law from Entering into Contracts

-​ Alien Enemies: Cannot contract with Indian citizens during wartime without government
permission.

-​ Foreign Sovereigns & Ambassadors: Can contract but cannot be sued in India without
government consent.

-​ Convicts: Cannot contract while imprisoned but regain capacity after release or pardon.

-​ Insolvent Persons: Cannot contract over their property; control lies with the official
receiver.

-​ Corporations & Companies: Can contract only within the powers defined in their MOA
and AOA.

-​ Married Women: Can contract unless restricted by specific personal or customary laws.

-​ Judges & Public Officers: Cannot enter contracts that conflict with their official duties.
Consent (Section 13 & 14)
-​ Two or more persons are said to consent when they agree upon the same thing in the same sense

Consent is said to be free when it is not caused by coercion, undue influence, fraud, misrepresentation, or
mistake

-​ Coercion: Using threats or unlawful force to make someone enter a contract; such contracts are
voidable by the victim.

-​ Undue Influence: Exploiting a position of power to unfairly influence another’s decision; the
contract becomes voidable if proven.

-​ Fraud: Intentionally deceiving someone to gain consent; the contract is voidable, and damages can
be claimed.

-​ Misrepresentation: Giving false information without intent to deceive, causing someone to

contract; it’s voidable, but no damages unless fraud exists.

-​ Mistake: A wrong belief about key facts; if bilateral, the contract is void, but if unilateral, it’s
usually valid unless involving fraud.

Void Agreements (Section 2(g) of the Indian Contract Act, 1872)

1.​ Agreement with Unlawful Consideration: Contracts with illegal, immoral, or harmful
purposes are void. Example: A contract to smuggle goods—void due to illegality.

2.​ Agreements Without Consideration: A contract without consideration is void unless legally
exempted. Example: A promises to give B ₹10,000 without return—void.

3.​ Agreements in Restraint of Marriage: Any contract restricting marriage (except minors) is void.
Example: A promises B ₹50,000 if B never marries—void.

4.​ Agreements in Restraint of Trade: Contracts preventing lawful business or profession are void.
Example: A contract forbidding B from starting a business—void.

5.​ Agreements in Restraint of Legal Proceedings: Contracts restricting court access are void.
Example: A contract stating disputes cannot go to court—void.

6.​ Uncertain Agreements: Agreements with vague or unclear terms are void. Example: A agrees to
sell B "some land" without details—void.

7.​ Wagering Agreements: Betting or gambling contracts are void under Indian law. Example: A
bets ₹10,000 with B on a cricket match—void.
8.​ Impossible Agreements: Contracts requiring an impossible act are void. Example: A agrees to
bring a dead person back to life—void.

Quasi Contracts
A quasi contract is a situation where the law imposes an obligation on one party to benefit another, even
though there was no actual agreement between them. The purpose is to prevent unjust enrichment of any
party.

1.​ Section 68: Supply of Necessaries: If a person provides essential goods or services to someone
who cannot legally contract (like a minor or a person of unsound mind), the supplier can claim
payment from the person’s guardian or estate.
Example: A supplies food to a minor, and A can claim payment from the minor's guardian as the
minor cannot contract.

2.​ Section 69: Payment of Money Due by Another: If a person makes a payment to settle a debt
that another person owes to someone else, they can seek reimbursement from the debtor, provided
the payment was made in good faith and was due.
Example: A pays ₹5,000 to settle B's debt with C. B must reimburse A as the money was owed by
B.

3.​ Section 70: Obligations of a Person Doing Something for Another's Benefit: If a person
voluntarily performs an act for the benefit of another person, they are entitled to claim
compensation, even if there was no agreement between the two parties.
Example: A repairs B's car without being asked. B must pay for the repairs since A performed the
service for B’s benefit.

4.​ Section 71: Finder of Goods: When a person finds goods that belong to someone else, they must
take reasonable care of them. If the owner asks for them, the finder can claim reasonable
compensation for keeping them safe.
Example: A finds a lost wallet and keeps it safe. When B, the owner, comes to claim it, A can ask
for a reasonable reward.

5.​ Section 72: Payment Made by Mistake or Coercion: If money is paid by mistake or under
duress, the person who received the money must return it to the payer. This is to avoid unjust
enrichment.
Example: A mistakenly pays ₹5,000 to B, thinking it’s owed to him. A can claim the money back
from B since it was paid by mistake.
Case Laws (Module 1)

Case Name Explanation Significance in Contract Law

Balfour v. A husband promised to pay his wife an allowance Establishes that social/domestic
Balfour (1919) while he was away for work. Later, he stopped agreements are generally not
payments, and the wife sued for breach of legally enforceable contracts
contract. The court ruled that such domestic unless there is an intention to
agreements lack legal intent and are not create legal relations.
enforceable in court.

Harvey v. Facey Harvey asked Facey for the lowest price of his Differentiates between an offer
(1893) property, and Facey replied with a price but did and an invitation to treat. A
not express willingness to sell. Harvey claimed mere statement of price does
this was an acceptance, but the court held that not amount to an offer.
Facey's response was only an invitation to treat,
not an offer.

Carlill v. The company advertised a £100 reward for Established the validity of
Carbolic Smoke anyone who used its product and still got sick. unilateral contracts and clarified
Ball Co. (1893) Carlill used it as directed, got sick, and claimed that clear promises in
the reward. The company refused, but the court advertisements can create
ruled that their advertisement constituted a binding obligations.
unilateral contract, making it legally enforceable.

Lalman Shukla v. A servant was sent to find his master's lost A contract requires acceptance
Gauri Dutt nephew without knowing that a reward had been with knowledge of the offer;
(1913) offered. After successfully finding the boy, he one cannot claim a reward
later claimed the reward, but the court denied his without being aware of it
claim, ruling that acceptance of an offer requires beforehand.
prior knowledge of it.

Chinnayya v. A mother gifted land to her daughter with the Highlights the doctrine of
Ramayya (1882) condition that she must pay an annuity to her privity of contract and the
uncle. After receiving the land, the daughter principle that consideration can
refused to pay, arguing lack of direct move from a third party.
consideration. The court ruled in favor of the
uncle, enforcing the contract.