Taxmann’s Economic Business & Commercial Laws (EBCL) | Study Material

Topic-wise Marks Distribution

Note: J-June; D-December

CONTENTS

DEFINITIONS & ESSENTIAL ELEMENTS OF VALID CONTRACT

Contract [Section 2(h)]

Agreement [Section 2(e)]

Promise [Section 2(b)]

Consensus ad idem

Jus in personam & Jus in rem

Social Agreement

E-Contract

What agreements are contracts [Section 10]

Classification of contracts/agreements

OFFER & ACCEPTANCE

Proposal [Section 2(a)]

Kinds of offer

Rules relating to an offer

Cross Offer

Counter Offer

Special terms in contract

Acceptance [Section 2(b)]

Rules regarding acceptance of an offer

Communication when complete [Section 4]

Various modes of revocation of offer

CONSIDERATION

Consideration [Section 2(d)]

No Consideration no contract [Section 25]

Legal rules as to consideration

Privity of contract

Exception to the doctrine of privity of contract

CAPACITY TO CONTRACT

Who are competent to contract [Section 11]

Position of minor as regards his agreements

Legal position of a minor for necessaries supplied to him

Position of unsound mind minor as regards his agreements

Contractual capacity of Body corporate/ companies

Contractual capacity of Alien Enemies

Contractual capacity of Corporations

Legal position regarding transaction with parda-nishin woman FREE CONSENT

Consent

Main flaws in a contract

Coercion defined [Section 15]

Effect of Coercion

Undue influence defined [Section 16(1)]

Presumption of undue influence

Essentials of under influences

Effect of undue influence

Misrepresentation [Section 18]

Fraud [Section 17]

Silence of the party - Whether amount to fraud?

Cases in which the aggrieved party lose the right to rescind the contract for misrepresentation or fraud

Mistake

LEGALITY OF OBJECT, AGREEMENTS OPPOSED TO PUBLIC POLICY

What consideration and objects are lawful, and what not [Section 23]

Unlawful Agreement

Illegal Agreement

Reciprocal promise to do things legal, and also other things illegal [Section 57]

Alternative promise, one branch being illegal [Section 58]

Agreement opposed to public policy

Maintenance & Champerty

Agreement in restraint of trade, void [Section 27]

VOID AGREEMENTS, WAGERING AGREEMENTS & CONTINGENT CONTRACT

A void agreement [Section 2(g)]

Agreement to do impossible acts [Section 56]

Agreements void for uncertainty [Section 29]

Agreements by way of wager, void [Section 30]

Absolute Contract

Contingent Contract [Section 31]

Rules relating to contingent contracts

PERFORMANCE OF CONTRACT

Performance of contract

Tender or Attempted Performance

Who can perform the contract [Section 40]

Performance of joint promise[Section 43]

Who can demand performance of contract?

Time and place of performance

Reciprocal Promise [Section 2(f)]

Simultaneous performance of reciprocal promises [Section 51]

Order of performance of reciprocal promises [Section 52]

Liability of party preventing event on which contract is to take effect [Section 53]

Effect of default as to the promise which should be performed, in contract consisting or reciprocal promises [Section 54]

Reciprocal promise to do things legal, and also other things illegal [Section 57]

Time as essence of the contract [Section 55]

First choice is with debtor to intimate for which particular debt payment is to applied [Section 59]

Second choice is of creditor if debt to be discharged is not indicated [Section 60]

First in first out in other cases [Section 61]

Assignments of contracts

DISCHARGE OF CONTRACT

Various methods of termination of contracts

Discharge by performance

Discharge by agreement or consent

Discharge by lapse of time

Discharge by operation of law

Actual breach of contract

Anticipatory breach of contract

Types of Anticipatory breach of contract

Right of the aggrieved party in case of anticipatory breach

Discharge by supervening impossibility

Impossibility of performance – not an excuse

REMEDIES FOR BREACH OF CONTRACT

Various remedies available to aggrieved party in case of breach of contract

Rescission of a contract

Damages for breach of contract

Meaning of damages

Ordinary damages

Special Damages

Exemplary/Vindictive/Punitive damages

Nominal Damages

Damages for inconvenience/discomfort etc.

Damages, which are agreed upon in advance

Specific performance

Injunction

Doctrine of quantum meruit

QUASI CONTRACTS

Quasi Contracts

Supply of necessaries to persons incapable of contracting [Section 68]

Reimbursement of person paying money due by another, in payment of which he is interested [Section 69]

Obligation of a person enjoying benefits of non-gratuitous act [Section 70]

Finder of goods [Section 71]

Responsibility of finder of goods

Rights of finder of goods

Liability for money paid or thing delivered by mistake or under coercion [Section 72]

INDEMNITY & GUARANTEE

Contract of indemnity [Section 124]

Right of indemnity-holder when sued [Section 125]

“Contract of guarantee”, “surety”, “principal debtor” & “creditor” [Section 126]

Contracts of uberrimae fidei

Specific Guarantee

Continuing guarantee [Section 129]

Revocation of a continuing guarantee

Method of revoking continuing guarantee

Surety’s Liability [Section 128]

Rights of surety against principal debtor

Rights of surety against creditor

Rights of surety against other co-sureties

Discharge of surety

When contract of guarantee is invalid

Discharge of surety by variance in terms of contract [Section 133]

Release or discharge of principal debtor [Section 134]

Compounding with principal debtor [Section 135]

Impairment of surety’s eventual remedy [Section 139]

Loss of security [Section 141]

Agreement with third party to grant time to principal debtor [Section 136]

Creditor’s forbearance to sue [Section 137]

Release of one co-surety [Section 138]

BAILMENT

‘Bailment’, ‘bailor’ & ‘bailee’ defined [Section 148]

Essentials of bailment

Types of bailment

Duties of the bailor

Duties of bailee

Right of lien of bailee

PLEDGE

Rights of Pawnee/Pledgee

Rights of a pawnor

Situations in which even non-owner can create a valid pledge

LAW OF AGENCY

Contract of agency

Various modes by which an agency may be created

Types of agents

Liability of pretended agent [Section 235]

Sub-agent

Substituted Agent

Nature and extent of authority of an agent

Agency by ratification [Section 197]

Duties of an agent

Responsibility of principal to third parties

When an agent is personal liable for the acts of his principal Rights of an agent

Circumstances under which an agency comes to an end

Irrevocable Agency

INTRODUCTION: The Law of Contract constitutes the most important branch of Mercantile or Commercial Law. It affects everybody, more so, trade, commerce and industry. It may be said that the contract is the foundation of the civilized world. Therefore, it is essential for the students to be familiar with the law relating to Contract. The Contract Act came into force on 1st September, 1872. The Act does not affect the usage or custom of trade. A Contract is an agreement made between two or more parties, which the law will enforce.

Contract [Section 2(h)]

Agreement [Section 2(e)]

Promise [Section 2(b)]

Consensus ad idem

DEFINITIONS & ESSENTIAL ELEMENTS OF VALID CONTRACT

A Contract is an agreement which is enforceable by law.

Every promise and every set of promises forming the consideration for each other is an agreement.

An agreement comes into existence by the process of offer by one party and its unqualified acceptance by the other party.

When the person to whom the proposal is made signifies his assent, the proposal is said to be accepted. Proposal when accepted becomes a promise.

The parties who enter into an agreement must agree upon the subject-matter in the same sense and at the same time, i.e. there must be consensus ad idem

Example 1: X owns two horses, one is white & other is black. X wants to sale white horse to Y. Y thinks that he is purchasing black horse. There is no contract as there no consensus ad idem

Example 2: Arun has two cars – one of white colour and another of red colour. He offers to sell one of the cars to Basu thinking that he is selling the car which has white colour. Basu agrees to buy the car thinking that Arun is selling the car which has red colour. Will this agreement become a valid contract? Give reasons.

The parties who enter into an agreement must agree upon the subject-matter in the same sense and at the same time, i.e. there must be consensus ad idem. In the given problem, the agreement between Arun and Basu will not become a valid contract because there is no consensus ad idem

Jus in personam & Jus in rem

Jus in personam means right against specific person.

Example: Baban owes ` 5,000 to Sameer. Sameer has right to recover ` 5,000 from Baban. In this case right of Sameer is against specific person i.e. Baban. Hence this right is called as jus in personam

Jus in rem means a right against whole world.

Example: Arun is the owner of a plot of land. He has right to have quit possession and enjoyment of that land against every member of public. This right of Arun is jus in rem.

Social Agreement An agreement may be a social agreement or a legal agreement. A social agreement is that which does not give rise to legal consequences. In case of its breach the parties cannot go to the Law Court to enforce a right.

A legal agreement is that which gives rise to legal consequences and remedies in the Law Court in case of its breach.

Example: A invites his friend B to take dinner. When B came, A refuses to perform his obligation. B has no remedy as obligation of A is social obligation & not a legal or contractual.

E-Contract

Electronic contracts are not paper based but rather in electronic form are born out of In the electronic age, the whole transaction can be completed in seconds, with both that arise in electronic contracts.

The Information Technology Act, 2000 solves some of the peculiar issues that arise in the formation and authentication of electronic contracts.

element of contract laid down in Section 10 of the Indian Contract, 1872. What agreements are contracts

All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not expressly declared to be void.

Essential elements of a valid contract are as follows:

(1) There must be an agreement. This involves two parties, one party making the offer and the other party accepting it.

(2) The parties must intend to create legal relationship.

(3) The parties must be capable of entering into an agreement as regards age and understanding. Thus, person making contract should not be minor, idiot or lunatic.

(4) The agreement must be supported by consideration on both sides.

(5) The consent of the parties must be free and genuine.

(6) The object of the agreement must be lawful.

(7) The terms of the agreement must be certain and capable of performance.

(8) The agreement must not have been expressly declared as void.

Classification of contracts/ agreements

Void Agreement [Section 2(g)]: An agreement not enforceable by law.

Example: A agrees to give B ` 10,000 if he beats C. B accept it. This is void agreement. Void Contract [Section 2(j)]: A contract which, ceases to be enforceable by law. Thus, A contract which is valid initially however, ceases to enforceable subsequently become void when it ceases be enforceable.

Example: A enters into contract with P of Pakistan to sale 10,000 kg of wheat. P accepts it. But subsequently Government of India declares war with Pakistan. Now the contract will become void contract.

Voidable Contract [Section 2 (i)]: A Contract, which is enforceable by law at the option of one party thereto, but not at the option of the other.

Example: Sachin at point of pistol ask Arun to sign the documents for transfer of house. This is voidable contract at the option of Arun because Arun can go into Court of law but not Sachin.

Unlawful Agreement: An unlawful agreement is agreement, which is not enforceable by law. It is void ab initio. It affects immediate parties only and has no further consequences.

Illegal Agreement: An agreement, which involves the transgression of, some rule of basic public policy and is criminal in nature or immoral. It is not only void as between the immediate parties but it also taints the collateral transactions with illegality.

Express Contract: A contract is which the terms are stated in words (written or spoken) by the parties.

Implied Contract: A contract which is inferred from the circumstances of the case or from the conduct of the parties is known as implied contract.

Tacit Contract: Where a contract has to be inferred from the conduct of parties.

Example: Drawing cash from ATM, Sale by fall of hammer at auction sale etc.

Quasi Contract: An obligation created by law, regardless of agreement.

Executed Contract: A contract which is wholly performed by both the parties.

Executory Contract [Bilateral Contract]: A contract in which the promises of both the parties have yet to be performed.

Partly executory, partly executed [Unilateral Contract]: A contract in which one party has performed his obligation, but the other party has yet to perform his obligation.

Distinction between: Agreement & Contract

Points Agreement Contract

Meaning Every promise and every set of promises forming the consideration for each other.

Enforceability An agreement may or may not be enforceable at law.

For example, social agreements are generally not enforceable while business agreements are enforceable at law.

A contract is an agreement which is enforceable by law.

A contact is enforceable at law.

Effect An agreement is not always a binding on the concerned parties. A contract is always concluded and binding on the concerned parties.

Scope All agreements are not contracts. All contracts are agreements.

Distinction between: Void Agreement & Void Contract Points

Void Agreement

Meaning An agreement not enforceable by law is known as void agreement.

Void Contract

When a contract ceases to be enforceable at law, it becomes a void contract.

What is It is an agreement. It is a contract.

Status It never takes form of a contract. It is a nullity since from the very beginning.

When it is formed it is perfectly valid. Subsequently it becomes a nullity.

PAST EXAMINATION QUESTIONS

Question 1: Ram employed in Mumbai promised to pay ` 8,000 per month to his wife Sunita. She was living in Delhi. On receiving information that she has become unfaithful to him, Ram stopped the payment of ` 8,000 to Sunita. Sunita approaches to file a case against Ram. Advise her with reference to the Indian Contract Act, 1872. [Dec. 2013 (5 Marks)], [June 2019 (4 Marks)]

Answer: An agreement may be a social agreement. A social agreement is that which does not give rise to legal consequences. In case of its breach the parties cannot go to the Law Court to enforce a right. Agreement between husband and wife is social agreement and do not create any binding legal relations. Hence, Sunita cannot file suit against her husband for non-payment of ` 8,000 to her every month.

Question 2: A invites B to stay with him during the winter vacation at his residence. B accept the invitation and informs A accordingly. When B reaches A’s house, he finds it locked and he has to stay in a hotel. Can B claim damages from A? [June 2017 (3 Marks)]

Answer: A contract is an exchange of promises by two or more persons, resulting in an obligation to do or abstain from doing a particular act, where such obligation is recognized and enforced by law. Agreements in which the idea of bargain is absent and there is no intention to create legal relations are not contracts. An agreement between two persons to go together to the cinema, or for a walk, does not create a legal obligation on their part to abide by it. Similarly, if I promise to buy you a dinner and break that promise, I do not expect to be liable to legal penalties. There cannot be any offer and acceptance to hospitality. Keeping in view of above discussion, it can be concluded that there is no contract if Mr. A invites to Mr. B to stay with him during winter vacation at his residence as it is a social contract and offer and acceptance to hospitality does not create contract.

Question 3: Write a short note on: E-Contract [June 2014 (3 Marks)]

Hint: Refer Topic E-Contract.

Question 4: What are the essential elements of valid contract? [Dec. 2013 (5 Marks)]

Hint: Refer to Section 10 of the Contract Act, 1872.

Question 5: Write a short note on: Executed & Executory Contract? [Dec. 1998 (5 Marks)]

Hint: Refer Topic Executed & Executory Contract.

QUESTIONS FOR PRACTICE

Question 1: Distinguish between: Agreement & Contract

Hint: Refer Topic Distinguish between Agreement & Contract.

Question 2: Distinguish between: Void Agreement & Void Contract

Hint: Refer Topic Distinguish between Void Agreement & Void Contract.

OFFER & ACCEPTANCE

Proposal [Section 2(a)]

A person is said to have made a proposal, when he 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.

The person making the offer is known as the offeror, proposer or promisor

The person to whom the offer is made is called as offeree, proposee or promisee.

Kinds of offer

Express Offer: When offer is made by express words, spoken or written it is known as express offer.

Implied Offer: An offer may be inferred from the circumstance of the case or conduct of the parties. This is known as implied offer.

Specific Offer: When offer is made to definite person or definite group of persons it is known as specific offer. Specific offer is also known as special offer.

General Offer: When an offer is made to public or world at large it is called as general offer.

Rules relating to an offer

Following are various rules relating to valid offer:

(1) Offer must be capable of creating legal relationship: Social invitation cannot be called as offer in legal terms because they create social obligation which are not enforceable by law.

(2) Offer must be in clear words: create any contractual relationship.

(3) An offer may be distinguished from

- A declaration of intention or an announcement.

- An invitation to make an offer or to do business.

(4) Offer must be communicated: There can be no acceptance unless the offer is communicated to the offeree by the offeror.

(5) Offer must be made with a view of obtaining the assent.

(6) Offer should not contain a term the non-compliance of which may be assumed to amount to acceptance.

Example 1: Pratap goes to super market to buy a washing machine. He selects a branded washing machine having a price tag of ` 15,000 after a discount of ` 3,000. Pratap reaches at cash counter for making the payment, but cashier says, “Sorry sir, the discount was up to yesterday. There is no discount from today. Hence you have to pay ` 18,000.” Pratap got angry and insists for ` 15000. State with reasons whether under the Contract Act, 1872, Pratap can enforce the cashier to sale at discounted price i.e. ` 15,000.

An offer may be distinguished from – An invitation to make an offer or to do business. Quotations, menu cards, price tags, advertisements in newspaper for sale are not offer. These are merely invitations to public to make an offer.

Thus, price tag with washing machine was not offer. It is merely an invitation to offer. Hence, it is the Pratap who is making the offer not the super market. Cashier has right to reject the Pratap’s offer. Therefore, Pratap cannot enforce cashier to sale at discounted price.

Example 2: Shambhu Dayal started? “self service” system in his shop. Smt. Prakash entered the shop, took a basket and after taking articles of her choice into the basket reached the cashier for payments. The cashier refuses to accept the price. Can Shambhu Dayal be compelled to sell the said articles to Smt. Prakash? Decide.

An offer may be distinguished from – An invitation to make an offer or to do business. Display of goods by a shopkeeper in his window, with prices marked on them, is not offer but merely an invitation to the public to make an offer.

When Smt. Prakash articles of her choice into the basket reached the cashier for payments it amount to offer and when cashier accepts money it will become contract. As cashier refuses to accept the price there is not contract and hence Shambhu Dayal cannot be compelled to sell the said articles to Smt. Prakash.

Distinction between: Offer & An invitation to offer

Points Offer

Meaning A person is said to have made a proposal, when he 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.

Defined ‘Offer’ is defined in Section 2(a) of the Contract Act, 1872.

An invitation to offer

Something by which a person is invited to make an offer is known as invitation to make an offer.

‘An invitation to offer’ is not defined in the Contract Act, 1872.

Effect Offer when accepted become agreement. An invitation to offer when responded results into offer.

Example Kiran say to Gopal, “Will you purchase my motor bike for ` 15,000”. In this case Kiran is making offer to Gopal as Kiran signifies his willingness to Gopal to sell his motor bike for ` 15,000.

Display of goods by a shopkeeper in his window, with prices marked on them, is not offer but merely an invitation to the public to make an offer.

Cross Offer When two parties make identical offers to each other, in ignorance of each others offer, the offers are cross offers.

Making cross offers does result into valid contract, as there is only offer by each party but there absence of acceptance to offer.

Counter Offer Offer to an original offer is known as counter offer. When counter offer is made original offers come to an end.

Example 1: Pavan says to Chetan will you purchase my car for ` 50,000. Chetan replies – “will you sale it for ` 45,000?” Reply of Chetan is counter offer and original offer of Pavan comes to an end.

Example 2: ‘B’ offered to sell his car to ‘A’ for ` 75,000. ‘A’ accepts to purchase at ` 74,950. ‘B’ refuses. Subsequently ‘A’ agrees to purchase at ` 75,000 but ‘B’ refused. ‘A’ sued ‘B’ for specific performance of the contract. State legal position.

Offer to an original offer is known as counter offer. When counter offer is made original offers come to an end.

In given case when B makes offer to A, to which A makes counter offer and hence original offer of B comes to end. Again when A makes offer, there is only offer and no acceptance as offer previously made by B already come to end by the counter offer of A and hence there is no contract at all between parties. B is not liable to sell the car to A.

Special terms in contract

(1) Where any special terms are to be included in a contract, these must be duly brought to the notice of the offeree at the time when the proposal is made. If it is not done and if the contracts subsequently entered into, the offeree will not be bound by them. Also these terms should be presented in such a manner that a reasonable man can become aware of them before he enters into a contract.

(2) Certain conditions are attached to transactions like purchase of a ticket for a journey or deposit of luggage in a clock room. Wherever on the face of a ticket the words “For conditions see back” are printed, the person concerned is as a matter of law held to be bound by the conditions subject to which the ticket is issued whether he takes care to read them or not. The fact that he did not or could not read does not alter the legal position.

Example 1: A hotel put a notice in bed room, exempting the proprietor from liability for the loss of client’s goods. Held, the notice was not effective as it came to the knowledge of the client only when the contract to take a room had already been entered into. [Olley v. Marlborough Court Ltd.]

Example 2: Parag Deshpande deposited a bag in the clock room of railway company station. On the face of the ticket, issued to him, was written, “see back”. One of the printed conditions limited the liability of the company for loss of a package to ` 100. The bag was lost and Parag Deshpande claimed ` 2,450 as its value. Parag Deshpande is bound by the conditions on the back of the ticket even if he had not read them and can claim damage up to ` 100 only.

Acceptance

[Section 2(b)]

A proposal or offer is said to have been accepted when the person to whom the proposal is made signifies his assent to the proposal to do or not to do something.

Offer is a train of gunpowder while acceptance is lighted match: After offer is accepted then only it becomes contract. So an offer may laps for want of acceptance or be revoked before acceptance.

Rules regarding acceptance of an offer

Following are the rules for valid acceptance:

2. Acceptance must be communicated to the offeror. Mere mental acceptance is not acceptance.

3. Acceptance must be according to the mode prescribed/usual and reasonable mode.

4. Acceptance must be given within a prescribed time. Acceptance cannot precede an offer. promise.

Communication when complete

[Section 4]

6. Acceptance must be given by the party to whom the offer is made.

7. Acceptance must be given before the offer lapses or offer comes to an end.

8. Acceptance cannot be implied from silence.

Example: A offers to sell 80 quintals of sugar to B at a certain price. B accepts to buy 50 quintals only. Is it valid contract?

Acceptance must be absolute and unqualified. Acceptance by B is not valid and there is no concluded contract between A and B.

The communication of a proposal is complete when it becomes to the knowledge of the person to whom it is made.

Example 1: Anish proposes by a letter to Gauri, to sell a house at ` 50,000. The letter is posted on 10th July 2022. It reaches to Gauri on 12th July 2022. The communication of the offer is complete when Gauri receives the letter i.e. on 12th July 2022.

The communication of an acceptance is complete –

As against the proposer: When it is put in a course of transmission to him so at to be out of the power of the acceptor.

As against the acceptor: When it comes to the knowledge of the proposer.

Example 2: Suppose in above example Gauri sends a letter on 14th July 2022 accepting the offer of Anish, which reach in the hands of Anish on 16th July 2022, then communication of acceptance is compete.

- As against Anish (Offeror): 14th July 2022

- As against Gauri (Accepter): 16th July 2022

The communication of a revocation is complete –As against the person who makes it, when it is put into a course of transmission to the person to whom it is made, so as to be out of the power of the person who makes it. As against the person to whom it is made, when it comes to his knowledge.

Example 3: A proposes by a letter to B, to sell his house and sends letter on 27th September 2022. Letter reaches to B on 5th October 2022. Thus, A can revoke his offer before communication of offer completed i.e. before 5th October 2022.

Example 4: A offers to sale his house to B. The letter of acceptance was send by B on 25th November 2022 and it reaches to A on 4th December 2022. In this case B can revoke his acceptance before 4th December 2022.

Example 5: Ramaswami proposed to sell his house to Ramanathan. Ramanathan sent his acceptance by post. Next day, Ramanathan sends a telegram withdrawing his acceptance. Examine the validity of the acceptance in the light of the following:

(i) The telegram of revocation of acceptance was received by Ramaswami before the letter of acceptance.

(ii) The telegram of revocation and letter of acceptance both reached together. The revocation of acceptance is valid. The acceptance can be revoked at any time before the letter of acceptance is received by the offerer. In the case, A withdrew his acceptance by a telegram which reached B earlier than the letter of acceptance. Hence, it is a valid revocation and A is not bound to purchase the house.

It the letter of acceptance and the telegram cancelling acceptance reach B at the same time, which of the two is opened first decides the issue. If B opens the telegram first and reads it, revocation is valid but if the letter is read first, revocation is not possible. Ordinarily, if a letter and a telegram reach simultaneously, a person is more likely to open the telegram first,

Offer may lapse or come to an end by various modes as given below:

for a telegram is supposed to convey more significant message than a letter. If, therefore, it is assumed that the telegram is read first (which is a normal thing), the revocation is valid. Thus, there would be no change in the answer if the two reach together. Various modes of revocation of offer

1. Offer may come to an end by communication of notice of revocation by the offeror at any time before acceptance.

2. If the offeree does not accept the offer within given time or if no time is given, then within reasonable time.

4. Offer may come to an end by death or insanity of the offeror.

5. When counter offer is made original offers come to an end.

6. If an offer is not accepted according to the prescribed mode.

7. Offer may come to an end due to change in law.

PAST EXAMINATION QUESTIONS

Question 1: Gamaxo Ltd. offered a reward of ` 10,000 by advertisement to anyone who infected influenza after using their smoke ball in the specified manner. Mr. Upma uses smoke ball in the specified manner, but still infected by influenza. She claims the reward. Decide the case with the help of leading case laws and related sections of the Contract Act, 1872. [June 2018 (5 Marks)]

ABZ company offered by an advertisement, a reward of ` 1,000 to anyone who contacted influenza after using smoke ball in the specified manner. Amita used the smoke ball in the specified manner, but was attacked by influenza. She filed the suit against ABZ company and claimed the reward. Decide whether the suit is maintainable. [Dec. 2018 (5 Marks)]

Answer: When an offer is addressed to an uncertain body of individuals i.e. the world at large, it is a general offer and can be accepted by any member of the general public by fulfilling the condition laid down in the offer. The leading case on the subject is Carlill v. Carbolic Smoke Ball Co. The company offered by advertisement, a reward of £100 to anyone who contacted influenza after using their smoke ball in the specified manner. Mrs. Carlill did use smoke ball in the specified manner, but was attacked by influenza. She claimed the reward and it was held that she could recover the reward as general offer can be accepted by anybody.

Question 2: Distinguish between: Offer & An invitation to offer. [Dec. 2011 (5 Marks)]

Hint: Distinguish between: Offer & An invitation to offer.

Question 3: An auctioneer advertised in the newspaper that a sale of office furniture will be held at Bangalore. Mr. Smart, a broker of Mumbai, reached Bangalore on the appointed date and time. But the auctioneer withdrew all the office furniture from the auction sale. The broker sued for his loss of time and expenses. Will he succeed? [Dec. 2003 (5 Marks)]

Answer: No. Such an auction is not an offer; it is only an invitation to offer. In a decided case of Harris v. Nickerison, an advertisement for an auction sale does not even bind the auctioneer to hold the auction and the prospective bidders have no legal right to complaint for loss of time and money in coming to the advertised place of the sale. In the given problem also, Mr. Smart will not succeed in getting compensation from the auctioneer.

Question 4: Aman hired a room in a hotel and paid a week’s rent in advance. After registering, he went up to occupy the room. Aman found a notice on the wall that “The proprietor will not be responsible for articles lost or stolen, unless handed over to the manager of the hotel for safe custody.” Owing to the negligence of the hotel staff, a thief gained access to the room and stole some goods of Aman. State whether the proprietor of the hotel is liable for the loss caused to Aman? State also which type of contract it is? [June 2017 (5 Marks)]

Answer: Where any special terms are to be included in a contract, these must be duly brought to the notice of the offeree at the time when the proposal is made. If it is not done and if the contracts subsequently entered into, the offeree will not be bound by them. Also these terms should be presented in such a manner that a reasonable man can become aware of them before he enters into a contract. [Olley v. Marlborough Court Ltd.]

As per facts given in case, hotel has failed to brought to the notice of Aman special term that hotel will not be responsible for article lost or stolen in hotel at the time of entering into contract and hence hotel cannot escape its liability as special terms in contract should be presented in such a manner that a reasonable man can become aware of them before he enters into a contract.

Question 5: Describe the general rules regarding ‘acceptance of an offer’. [June 2001 (6 Marks)] Hint: Refer Topic Rules regarding acceptance of an offer.

Question 6: Amar offers by advertisement a reward of ` 1,000 to anyone who returns his lost bag. Bahadur finds the bag and brings it to Amar, without having knowledge of the offer of reward. Is Bahadur entitled to the reward? Give reasons. [June 2009 (5 Marks)], [Dec. 2019 (4 Marks)]

Answer: An offer can be accepted only by a person who knows about it. In case of general offer, it could be accepted by anyone, provided the person was aware about the offer. Bahadur restored the bag but knew nothing about the offer of reward. He, therefore, could not have been accepted it and hence he cannot claim the reward.

Question 7: A young boy ran away from his father’s home. His father issued a pamphlet offering a reward of ` 5 lakh to anybody who would bring the boy home. Arun saw the boy at a railway station and sent an e-mail to the boy’s father.

(i) Is Arun entitled for reward?

(ii) In the light of the above case, explain the rules governing offer. [Dec. 2016 (5 Marks)]

Answer: The communication of the offer may be general or specific. Where an offer is made to a specific person it is called specific offer and it can be accepted only by that person. But when an offer is addressed to an uncertain body of individuals i.e. the world at large, it is a general offer and can be accepted by any member of the general public by fulfilling the condition laid down in the offer. A young boy ran away from his father’s home. The father issued a pamphlet offering a reward of ` 500 to anybody who would bring the boy home. The plaintiff saw the boy at a railway station and sent a telegram to the boy’s father. It was held that the handbill was an offer open to the world at large and was capable to acceptance by any person who fulfilled the conditions contained in the offer. [Harbhajan Lal v. Harcharan Lal]

The plaintiff substantially performed the conditions and was entitled to the reward offered. Same rule will also apply for reply through e-mail and thus Arun is entitled to reward.

Question 8: What are the various modes of revocation of offer as per Indian Contract, 1872?

[Dec. 2014 (5 Marks)]

Hint: Refer Topic Various modes of revocation of offer.

Question 9: State the difference in rules of making offer and acceptance when the mode of making the same varies from post to telephone. [Dec. 2016 (5 Marks)]

Answer: Contracts by Post: Contracts by post are subject to the same rules as others, but because of their importance, these are stated below separately:

(

a) An offer by post may be accepted by post, unless the offeror indicates anything to the contrary.

(

b) An offer is made only when it actually reaches the offeree and not before, i.e., when the letter containing the offer is delivered to the offeree.

(

c) An acceptance is made as far as the offeror is concerned, as soon as the letter containing the acceptance is posted, to offerors correct address; it binds the offeror, but not the acceptor. An acceptance binds the acceptor only when the letter containing the acceptance reaches the offeror. The result is that the acceptor can revoke his acceptance before it reaches the offeror.

(

d) An offer may be revoked before the letter containing the acceptance is posted. An acceptance can be revoked before it reaches the offeror.

Contracts over the Telephone: Contracts over the telephone are regarded the same in principle as those negotiated by the parties in the actual presence of each other. In both cases an oral offer is made and an oral acceptance is expected. It is important that the acceptance must be audible, heard and understood by the offeror. If during the conversation the telephone lines go ‘dead’ and the offeror do not hear the offerees word of acceptance, there is no

contract at the moment. If the whole conversation is repeated and the offeror hears and understands the words of acceptance, the contract is complete. [Kanhaiyalal v. Dineshwarchandra]

Question 10: Amit’s son absconded. He sent Suresh, his servant in search of the boy. When Suresh had left, Amit, by hand bills, offered to pay ` 5,001 to anyone finding his son. Suresh found the son and after coming to know about the offer, claimed the amount. Examine the validity of claim raised by Suresh. [Dec. 2020 (4 Marks)]

Answer: An acceptance never precedes an offer. There can be no acceptance of an offer which is not communicated. Similarly, performance of conditions of an offer without the knowledge of the specific offer, is no acceptance. Thus, where a servant brought the boy without knowing of the reward, he was held not entitled to reward because he did not know about the offer. [Lalman Shukla v. Gauri Dutt]

Question 11: In pandemic of Covid-19 a drug company made an offer by advertisement, a reward of ` 10,000 to anyone suffering from Covid-19 after using their drug in prescribed manner. Mrs. Romila having taken the drug as per prescription could not be cured. She claimed for the money. Will she succeed? [June 2022 (4 Marks)]

Hint: Refer to case law – Carlill v. Carbolic Smoke Ball Co.

QUESTIONS FOR PRACTICE

Question 1: Write a short note on: Kinds of offer

Hint: Refer Topic Kinds of Offer.

Question 2: Explain the rules relating to an offer, as provided in the Contract Act, 1872.

Hint: Refer Topic Rules relating to an offer.

Question 3: Write a short note on: Cross Offer & Counter Offer

Hint: Refer Topic Cross Offer & Counter Offer.

Consideration [Section 2(d)]

CONSIDERATION

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.

In simple words we can say that – Consideration means, “Something in return” (quid pro quo). Without consideration there is no contract. Contract without consideration is known as nudum pactum.

A valuable consideration in the sense of the law may consist either in some:

- Right

- Interest

- Forbearance

- Detriment

- Loss

- Responsibility

Example: X, the uncle of Y, promised to pay ` 2,00,000 to Y if he refrained from drinking for two years, Y does not drink for two years and thereby saves his money. Can he now claim ` 2,00,000 from X?

In this case, Y restricted his lawful freedom of action upon the promise of his uncle to pay ` 2,00,000. This is the consideration which is moving from him to support the promise of his uncle to pay him and in law mere abstinence of an act is a lawful consideration. The agreement is made between competent parties; the object is lawful and is made with free consent. This is, therefore, a contract. Now having fully performed his part of the agreement, Y is entitled to ` 2,00,000. It is of no significance whether this turns out to be a benefit to Y in the form of saving of his money.

Consideration is one of essential element of valid contract. Without consideration there is contract.

Contract without consideration is known as nudum pactum. In following cases even if there is no consideration contracts are valid:

(1) Agreement made on account of natural love and affection. If they are written & duly registered.

(2) Compensation for voluntary services.

(3) Promise to pay time barred debt made in writing and signed by the person liable to pay the amount.

(4) Completed gifts.

(5) No consideration is required to make an agency.

(6) In case of charitable subscription, if a person (promisor) promises to pay certain amount and on the basis of that promise, other person (promise) incurs liability, then promisor is bound to pay the amount promised, even if there is absence of consideration.

Example 1: Father promised to pay his son a sum of ` 1 lakh if the son passed CS Executive examination in the first attempt. The son passed the examination in the first attempt, but father failed to pay the amount as promised. Son files a suit for recovery of the amount. State along with reasons whether son can recover the amount under the Contract Act, 1872.

One of the essential elements of contract is that there should be an intention to create legal relationship. Agreements of a social nature or domestic nature do not contemplate legal relationship and as such are not contracts.

However, as per Section 25 of the Contract Act, 1872, agreement made on account of natural love and affection is valid contract if it is written & duly registered. In given case fathers promise though made on account natural love and affection is not written and duly registered and hence son cannot recover the amount of ` 1 lakh from father.

Example 2: Madhuri gets into difficulties while swimming in public swimming pool and cries for help. Anil hears the cry, removes his coat and dives into water and rescues Madhuri. Madhuri, who is full of gratitude, promises to pay Anil ` 20,000 but fails to do so. The promise of Madhuri is not in writing. Advise Anil.

As per Section 25 of the Contract Act, 1872, a promise to compensate for voluntary acts done by a party is valid even though promise is not supported by consideration and is not in writing. Anil helped Madhuri voluntarily but if she promised to pay Anil for that voluntary work; she cannot avoid her liability later on. Hence, Anil is advised to register a case for recovery of money due to him.

Example 3: A person verbally promised the Secretary of the Mosque Committee to subscribe ` 5,000 for rebuilding a mosque. Later, he declined to pay the said amount?

As per Section 25 of the Contract Act, 1872, in case of charitable subscription, if a person promises to pay certain amount and on the basis of that promise, other person incurs liability, then promisor is bound to pay the amount promised, even if there is absence of consideration.

As per facts given case, the promise was not enforceable because there is no consideration for promisor. However, if Mosque Committee incurs liability, on the basis of that promise, then promisor is bound to pay the amount promised, even if there is absence of consideration.

Legal rules as to consideration Legal rules as to consideration are as follows:

(1) Consideration must move at the desire of the promisor.

(2) Consideration may move from the promisee or any other person.

(3) Consideration may be in form of an act, abstinence or forbearance or a return promise.

Privity of contract

(4) Consideration may be past, present or future.

(5) Consideration need not be adequate.

(6) Consideration must be real and not illusory.

(7) Consideration must not be something which the promisor is already bound to do.

(8) Consideration must not be illegal or opposed to public policy.

Example: Singh, an old man, by a registered deed of gift, granted certain landed property to A, his daughter. By the terms of the deed, it was stipulated that an annuity of ` 20,000 should be paid every year to B, who was the brother of Singh. On the same day A made a promise to B and executed in his favour an agreement to give effect to the stipulation. A failed to pay the stipulated sum. In an action against her by B, she contended that since B had not furnished any consideration, he has no right of action. Whether the contention of A is valid?

Consideration may move from the promisee or any other person. It is not necessary that the consideration must be from promisee. It is immaterial who has furnished it, whether promisee, or any other person. In the given case, consideration is moving from Mr. Singh to her daughter for the promise to pay ` 20,000 to uncle (B). Therefore, his daughter (A) is not justified.

When a contract is created between two or more person it confers rights or impose obligation under it on the person executing the contract. A contract never bins third party. It is binding only party to contract.

A stranger to a contract cannot sue both under the English and Indian law for want of privity of contract.

In Dunlop Pneumatic Tyre Co. v. Selfridge Ltd., D supplied tyres to a wholesaler X, on condition that any retailer to whom X re-supplied the tyres should promise X, not to sell them to the public below Ds list price. X supplied tyres to S upon this condition, but nevertheless S sold the tyres below the list price.

Held: There was a contract between D and X and a contract between X and S. Therefore, D could not obtain damages from S, as D had not given any consideration for Ss promise to X nor was he party to the contract between D and X.

Thus, a person who is not a party to a contract cannot sue upon it even though the contract is for his benefit. A, who is indebted to B, sells his property to C, and C the purchaser of the property, promises to pay off the debt to B. In case C fails to pay B, B has no right to sue C for there is no privity of contract between B and C. The leading English case on the point is Tweddle v. Atkinson. In this case, the father of a boy and the father of a girl who was to be married to the boy, agreed that each of them shall pay a sum of money to the boy who was to take up the new responsibilities of married life. After the demise of both the contracting parties, the boy (the husband) sued the executors of his father-in-law upon the agreement between his father-in-law and his father.

Held: The suit was not maintainable as the boy was not a party to the contract.

Exception to the doctrine of privity of contract

Both the Indian law and the English law recognize certain exceptions to the rule that a stranger to a contract cannot sue on the contract. In the following cases, a person who is not a party to a contract can enforce the contract:

upon the agreement, though not a party to it, for the enforcement of the trust so as to

In Khawaja Muhammad v. Hussaini Begum, it was held that where a Mohammedan lady sued her father-in-law to recover arrears of allowance payable to her by him under an agreement between him and her own father in consideration of her marriage, she

under such settlement.

(2) Assignee: An assignee under an assignment made by the parties, or by the operation of law (e.g. in case of death or insolvency), can sue upon the contract for the enforcement of his rights, title and interest. But a mere nominee (i.e. another has insured his own life) cannot sue on the policy because the nominee is not an assignee.

In cases of family arrangements or settlements between male members of a Hindu family which provide for the maintenance or expenses for marriages of female members, the latter though

(4) Agency: Principal can sue in case of contract entered through agent.

PAST EXAMINATION QUESTIONS

Question 1: State the exception to the rule is that: No Consideration no contract. Discuss. [Dec. 2002 (4 Marks)], [June 2003 (5 Marks)] [Dec. 2015 (5 Marks)]

Hint: Refer to Section 25 of the Contract Act, 1872.

Question 2: X and Y are husband and wife, respectively. X, by a registered document, after referring to quarrels and disagreement between himself and his wife Y, promised to pay his wife, a sum of money for her maintenance and separate residence. Whether this document is a contract enforceable by law? Give reasons with reference to decided case law, if any. [Dec. 2015 (5 Marks)]

Answer: Consideration is one of essential element of valid contract. Without consideration there is contract. Contract without consideration is known as nudum pactum. However, there are certain exception to the rule that “no consideration, no contract”.

One of the exceptions is “agreement made on account of natural love and affection which are written & duly registered”. As per facts given in case husband had promised to pay wife a sum of money for her maintenance and separate residence which is duly registered but frequent quarrels between them show absence of natural love and affection and hence it is not valid contract enforceable by law.

Question 3: “Gratuitous promises are not enforceable by law.” Explain the statement.

[June 2005 (5 Marks)]

Answer: A promise to contribute to charity, though gratuitous, would be enforceable, if on the faith of the promise, the promisee is put to some detriment and the promisor was aware of the fact. In such case promisor is liable to pay promised amount of subscription. [Kedar Nath v. Gorie Mohan]

Question 4: Anurag promises to pay ` 11,000 to the management committee of a school by way of a donation. The management committee, on the basis of Anurag’s promise, gets a Water Purifier System (Aquaguard) installed in the school at a cost of ` 8,000 on credit. Now, Anurag refuses to pay the donation. What is the remedy available to the management committee of the school? Give reasons.

[Dec. 2005 (5 Marks)]

Answer: In case of charitable subscription, if a person (promisor) promises to pay certain amount and on the basis of that promise, other person (promise) incurs liability, then promisor is bound to pay the amount promised, even if there is absence of consideration. The contract is binding on Anurag because the management committee has undertaken liability on the faith of Anurag’s promise.

Question 5: Fire breaks out in A’s building, B, a passerby, brings some buckets of water and saves A’s Property from fire, intending to do so gratuitously. Later on, B claims compensation from A on the ground that A has enjoyed the benefit of his service. Will B succeed? Give reasons. [Dec. 1998 (5 Marks)]

Answer: No, B will not succeed because, consideration must move at the desire of the promisor. In this case, B has saved A’s property without any intention of charging for his services. He cannot claim any compensation.

Question 6: Ajay gifted whole of his property to his daughter on the condition that she should pay ` 200 per month to her uncle (father’s brother). Later, she refused to pay her uncle on the ground that she did not receive any consideration from her uncle. Is she justified? [Dec. 2001 (4 Marks)]

Answer: Consideration may move from the promisee or any other person. It is not necessary that the consideration must be from promisee. It is immaterial who has furnished it, whether promisee, or any other person. In the given case, consideration is moving from Ajay to daughter for the promise to pay ` 200 to uncle. Therefore, his daughter is not justified.

Question 7: Anand is a heart patient. He goes to a heart institute and deposits ` 2 lakh, the fixed charges for the operation. But before operation, the concerned doctor informs him that he will operate upon him correctly only if the patient promises to pay him ` 50,000 more. Anand agrees to pay. However, after successful operation, Anand refuses to pay this extra amount. Now the doctor files a suit against the patient for breach of contract. Will the doctor succeed? Give reasons. [Dec. 2004 (5 Marks)]

Answer: Consideration must not be something which the promisor is already bound to do. The performance of legal obligation is no consideration. In the given case, the doctor having accepted to perform the operation is bound to render his best professional services. Thus, if there is a pre-existing obligation between the promisor and promisee, a fresh promise to perform the existing obligation will be void for want of valid consideration.

Question 8: What is meant by ‘privity of contract’? Discuss briefly State the exception to privity of contract. [Dec. 2015 (5 Marks)]

“Contract cannot confer rights or impose obligation arising under it on any person or agent except the parties to the contract”. Critically analyze this statement. [Dec. 2017 (5 Marks)]

Answer: Refer Topic Privity of contract and Exception to the doctrine of privity of contract.

Question 9: F, for natural love and affection, promises to give her daughter D ` 1,00,000. But after some time F refuses to fulfil his promise. Advice D what she should do? [Dec 2021 (4 Marks)]

Hint: Refer to Section 25 of the Contract Act, 1872.

QUESTIONS FOR PRACTICE

Question 1: Discuss the legal rules as to consideration.

Hint: Refer Topic Legal rules as to consideration.

Question 2: State the exception to the doctrine that a stranger to contract cannot maintain a suit.

Hint: Refer to section 25 of the Contract Act, 1872.

CAPACITY TO CONTRACT

Who are competent to contract [Section 11]

One of the essential elements of valid contract is that, the parties must be competent to contract. Capacity to contract means competence of persons to enter into a valid contract. Every person is competent to contract if he fulfils all following three qualifications:

(a) He is major.

(b) He is of sound mind. (c

Position of minor as regards his agreements may be summed up as under:

An agreement with or by a minor is void and in-operative ab initio. Minor cannot be promisor.

Any person who does not fulfil the above conditions is disqualified from entering into contract. Position of minor as regards his agreements

Minor cannot rectify the agreement, which was entered during the minority on attaining the age of majority.

Minor can always plead minority.

Minor cannot enter into a contract of partnership. But he may be admitted to the

ECONOMIC BUSINESS & COMMERCIAL LAWS STUDY MATERIAL

AUTHOR : N.S. ZAD , DIVYA BAJPAI

PUBLISHER : TAXMANN

DATE OF PUBLICATION : JANUARY 2023

EDITION : 4th Edition

ISBN NO : 9789356226098

NO.OF PAGES : 670

BINDING TYPE : PAPERBACK

DESCRIPTION

Rs. 925 USD 46

This book is prepared exclusively for the Executive Level of Company Secretary Examination requirement. It covers the entire revised syllabus as per ICSI. This book aims to systematically represent the subject matter so that the students do not have to consciously mug up provisions. The Present Publication is the 4th Edition & updated till 30th November 2022 for CS-Executive | June/Dec. 2023 Exams. This book is authored by CS N.S. Zad & CS Divya Bajpai with the following noteworthy features:

• Strictly as per the New Syllabus of ICSI

• ['Topic-wise' Tabular Presentation] of the subject matter

• [Easy to Understand Language] used throughout the book for easy learning

• [Examples, Comments & Explanatory Notes] for complicated provisions

• [Most Amended & Updated] This book covers the latest applicable provisions and amendments under the respective laws

• Coverage of this book includes:

• Past Exam Questions (Topic-wise), including the Dec. 2022 Exam

• [Practice Questions] with Hints

• [Topic-wise Marks Distribution] from June 2012 onwards

• [Student-Oriented Book] The authors have developed this book keeping in mind the following factors:

• Interaction of the authors with their students, with specific emphasis on difficulties faced by students in the examinations

• Shaped by the author's experience of teaching the subject matter at different levels

• Reaction and responses of students have also been incorporated at different places in the book

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