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1. Meaning and Definition of Business Laws

a) Business: - Business is an economic activity, which is related with continuous and regular
production and distribution of goods and services for satisfying human wants.
b) Law: - The Oxford English Dictionary defines the word Law as the rule made by authority
for the proper regulation of a community or society or for correct conduct in life.
c) The terms Business, Commercial, and Mercantile, in relation to law, are used in the same
sense.
d) Business Law is defined as Business Law is that branch of law, which comprises laws
concerning trade, industry and commerce. Business law refers to those rules and
regulations, which govern the formation and execution of business transactions made by
various persons in the society.
2. Sources of Law: Source` means `origin` which something is ultimately derived and often
refers to the causes operating before the thing itself comes into being. Jurists (legal expert)
differ widely s to the origin of law. One of the legal commentator traces its origin in general
awareness of the people at any point of time. The main sources of business law in India are
shown in the table and briefly discussed thereafter:
a) English Law: Indian business law is modelled on the lines of English mercantile law, as
India was under British rule before its independence. The differences in the laws of India and
England are primarily on account of their different business environment, customs, and
trade practices.
b) Customs or Usage: Custom is the most ancient of all the sources of law and has held the
most important place in the past though it is importance is now diminishing with the growth
of legislation and precedent. Custom is a habitual course of conduct observed uniformly and
voluntarily by the people concerned. No custom shall have the force of law if it in manner
violates the Fundamental Rights.
c) Judicial Precedents or Decisions:
The judicial decisions, usually referred to as
precedents, are binding on all courts having jurisdiction lower to that of the court, which
gave the judgement. This is also called judge made law. In the other words decision taken by
a court (Supreme Court, High court and District court) in the past can become a law in that
particular country.
d) Statute Law: The statute law refers to the law laid down in the Acts of Parliament. It is
superior to and overrides any rules of the common law, equity or law merchant. The courts
of law interpret the meaning of such enactments and apply them. In the other words the bill
passed at a parliament by its members can become a part of law system in a country. The
constitution of India confers power to enact law on its parliament and legislatures of states.
When a bill is passed by the parliament/state legislatures and assented to by the President
or Governor of a state, it becomes an Act or Statute. The bulk of Indian Mercantile Law is
statute law. The Indian Contract Act, 1872, The Negotiable Instruments Act, 1881, The Sale
of Goods Act, 1930, The Indian Partnership Act, 1932, The Companies Act, 1956 are
instances of the statute law.
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e) Personal Law: These are laws as per community/ casts available in a country. It includes
provisions prescribing Hindu law for Hindus and Islamic law for Muslims, for litigation relating
to personal matters. Example: Hindu Law and Muslim Law.

3. The Indian Contract Act, 1872

3.1 Introduction
The law of contracts is the basis upon which the super structure of all business is built. It affects
every person in one way or the other, as all of us enter into some kind of contract every day. All
contracts are based on agreements, which are either express or implied. Every one of us enters into
a number of contracts almost every day. Most of the time any person does so without realising
he/she is doing that from the view point of law. A person seldom realises that when he gives clothes
for dry cleaning, or when he buys milk, bread or biscuits, or when he goes to the auditorium to see
a movie, he is entering into a contract. In business transactions, normally, first promises are made
followed by performance. If parties were free to go back on their promises without incurring any
liability, it would be impossible to carry on any trade, industry or commerce. Hence, the law of
contract was made laying down rules for performance and discharge of a contract, and the
remedies available to the aggrieved party in case of breach of contract.
The Indian Contract Act, 1872, was enacted from the 1st day of September, 1872. It applies to the
whole of India except the state of Jammu and Kashmir. At the time of inception, the act comprised
of 266 sections in total which could be broadly divided in to the following categories:

Sec.1-75:- General principle of the law of contract

Sec.76-124:- Contract relating to sale of goods
Sec. 125-238:- Special kinds of contracts namely indemnity, guarantee, bailment, pledge
and agency
Sec.239-266:- Contract relating to partnership

Indian Contract Act 1872 is the main source of law regulating contracts in Indian law.
It determines the circumstances in which promise made by the parties to a contract shall be legally
binding on them. Each contract creates some right and duties upon the contracting parties. Indian
contract deals with the enforcement of these rights and duties upon the parties.
3.2 Meaning and Definition of Contract
The word contract is derived from the Latin Contractum meaning drawing together.
According to Section 2(h) of the Indian Contract Act, 1872, a Contract is An agreement
enforceable by law". In the other words an agreement which can be enforced in a court of law is
known as contract.
An analysis of these definitions would show that a contract must have the following two elements:
(a) An agreement, and
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(b) Its enforceability (legal obligation, in case of non-performance legal action can be taken by party
of contract)
In the form of an equation, it can be shown as under:
Contract = Agreement + Enforceability at Law
(a) According to section 2(e) of Indian Contract Act, 1872, an Agreement is "every promise and
every set of promises, forming the consideration for each other." In equation format
an agreement is:

Agreement = Promise + Consideration

According to Section 2(b) Acceptance / promise is when the person to whom the proposal is
made signifies his assent thereto, the proposal is said to be accepted. Proposal when accepted
becomes a promise." In equation format a promise is:
Promise = Proposal/Offer + Acceptance
According to Section 2 (a) Proposal /Offer, When one person 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, he is said to make a proposal.
Example: A offers to sell his house for Rs. 50, 00, 000 to Y, Y accepts this offer. This offer after
acceptance becomes promise and this promise is treated as an agreement between X and Y.
In the other words, an agreement consists of an offer by one of one party and its acceptance by the
other. In the equation format an agreement is:
Agreement = Proposal (or Offer) + Acceptance of Proposal (or Offer) + Consideration
How an agreement comes into being;

A person makes proposal to another person say X offers to Y to sell his (X) car for Rs. 50000.

The other person to whom the proposal is made accepts it say Y accepts the offer.

With the acceptance of the proposal, promise comes into being, say now the X has promised
to sell his car to Y for Rs. 50000 and Y has promised to pay Rs.50000 for Xs car.

Every promise is forming a consideration (something in return) for each other, say the
consideration which X will receive for his car is Rs. 50000 and the consideration which the
Y will receive for his Rs.50000 is Xs car.

An agreement has come into existence, where X made an offer to Y, Y accepted the offer,
the promises so made by X and Y are forming consideration for each other.

(b) Enforceability of Law of an Agreement

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An agreement is said to be enforceable by law if it creates some legal obligations. In

the other words the parties to an agreement must be bound to perform their
promises and in case of default/ non-performance by either of them, must intend to
sue (claim in court).
In commercial or business agreements it is normally presumed (thinking) that the
contracting parties are intend to create legal relations.
In case of social, domestic and religious agreements the generally it is presumed that
contracting parties do not intend to create legal relations.
Example: X offers to sell his car to Y in Rs. 1, 50, 000. Y accepts this offer. Such an
agreement, between X and Y is a contract because it creates legal obligations. In this
agreement, if X refuses to sell or Y refuses to buy car, the other party can file a suit
in the court of law for the breach (cancel) of the contract.
Example: X invites his friend Y to a dinner and Y accepts the invitation. If Y fails to
turn up for dinner (not reached for dinner). X cannot go to the court for claim his loss.

Now, Contract is: An Agreement

Enforceable by law
Made between at least two parties
By which rights are acquired by one
Obligations are created on the part of another
And on failure, the other party has a remedy

3.3Essential Elements of a Valid (Legal) Contract

As discussed earlier, an agreement enforceable by law is a contract; it means that to be
enforceable by law an agreement must possess the essential elements of a valid contract. The
validity of an enforceable agreement depends upon whether the agreement satisfies the essential
requirements laid down in the Indian Contract Act, 1872. Section 10 of the Act provides for some
elements which are essential in order to constitute a valid contract. According to Section 10 of
Indian Contract Act, 1872, All agreements are contracts if they are made by free consent of parties,
competent to contract, for a lawful consideration and with a lawful object and are not hereby
expressly declared to be void. The analysis of the provisions of Section 10 shows that a valid
contract must have the following essential elements:
i.

Lawful offer and acceptance,

ii.

Creating legal relationship

iii.

Lawful consideration

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iv.

Capacity of parties

v.

Free consent

vi.

Lawful object

vii.

Possibility of Performance

viii.

Completion of legal formalities

ix.

Certainty of meaning

x.

Agreement not expressly d

Lawful Offer and Acceptance: - In order to create a valid contract there must be an
agreement between two parties, i.e., lawful offer of one party followed by a lawful
acceptance of that offer by another party. There must be a lawful proposal and a lawful
acceptance of that proposal, thus resulting in an agreement. The word lawful before offer
and acceptance signifies that proposal and acceptance must satisfy the requirements of the
law of contract.
There must be two parties to an agreement, i.e. one party making the proposal and the
other party accepting it. Such offer any acceptance must be valid. An offer to be valid must
fulfill certain conditions, such as it must intend to create legal relations, its term, must be
certain and unambiguous, it must be communicated to the person to whom it is made, etc.
An acceptance to be valid must folds certain conditions, such as it must be absolute and
unqualified, it must be made in the prescribed manner, and it must be communicated by an
authorized person before the offer lapses.
Example: A say to B that he will sell his cycle to him for Rs.2000. This is an offer. If B
accepts this offer, there is an acceptance.

ii.

Creating Legal Relations: - There must be an Intention among the parties that the
agreement should be attached by legal consequences and create legal obligations or legal
relationship. If there is no such intention on the part of the parties, there is no contract
between them. Agreements of a social or domestic nature do not contemplate legal
relationship.
Example: A husband agreed to pay 30 to his wife every month while he was abroad. As he
failed to pay the promised amount, his wife sued him for the recovery of the amount. Held:
She could not recover as it was a social agreement and the parties did not intend to create
any legal relations [Balfour v. Balfour (1919)2 K.B.571].
Example: A father promises to pay his son Rs.500 every month as pocket money. Later, he
refuses to pay. The son cannot recover as it is a social agreement and does not create legal
relations.
Example: X is an oil trader and Y offers him to purchase 100 liter of eatable oil on a certain
date and rate. X accepts this offer and received payment for this but refuse to deliver oil to
Y. Now, Y can create a suit on X in case of nonperformance by X.

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In the other words, if the parties are intending to create a legal completion for contact
performance than only it is a legal or valid contract otherwise not.
iii.

Lawful Consideration: - An agreement must be supported by lawful consideration.

Consideration means an advantage or benefit moving from one party to the other. It is the
essence of a bargain. In simple words, it means something in return. The agreement is
legally enforceable only when both the parties give something and get something in return.
A promise to do something, getting nothing in return, is usually not enforceable by law.
Consideration need not necessarily be in cash only, it may be an act, or might anything
which is acceptable by both the parties and have value in the eye of law. It may be for to
do something or abstinence to not do something.
According to section 23, Consideration is lawful, it means that, it must not be forbidden/
restricted by Indian law, it must not be against public/civil policy of India, it must not be any
act to harm/injury to any person or any persons property, it must not be fraud.
In the other words, for a lawful agreement the consideration must neither be unlawful nor
opposed to public policies.
Example: X promises to deliver his goods to Y and Y promises to pay Rs. 1000 on delivery.
In this case, the consideration for each of these promises is: for X , Ys promise to pay Rs.
1000 on delivery and for Y, Xs promise to deliver his goods. Both the parties are promising
consideration for each other.
Example: X promises Y to pay Rs. 1000 to beat Z. Y beats Z and claims Rs. 1000 from X. X
refuses to pay. Y cannot recover because the agreement is void (invalid) on the ground of
unlawful consideration.
Example: X promises Y to obtain an employment in the public/government service and Y
promise to pay Rs. 100000 to X. The agreement is void on the ground of unlawful
consideration.

iv.

Capacity of parties to contract: - (sec.11) The parties to an agreement must be

competent to contract; otherwise it cannot be enforced by a court of law. Competent means,
the person whosoever is entering into a particular contract must possess certain qualities
like maturity to take right decision, understandability of all contracting terms and conditions
and eligibility to enter into a contract.
Under Indian Contract Act, 1872, Section 11 provides that Every person is competent to
contract who is the age of majority according to the law to which he is subject, and who is of
sound mind, and is not disqualified from contracting by any law to which he is subject.
Thus, incapacity to contract may arise from:
a) Minority: the law protects the rights of minor because they are not mature enough
and may not possess the capacity to judge what is good and bad for them. According
to Section 3 of the Indian Majority Act, 1875, a minor is a person who has not
completed 18 years of age. It means that the person who is under the age of 18 or

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not completed age of 18 at the time of entering into contract are not eligible to enter
into a contract and that contract will be a void (invalid) contact.
Example: X minor borrowed Rs 8,000 from Y and executed mortgage of his property
in favour of the lender. This was not a valid contract because X is not competent to
contract. Therefore, the mortgage was not valid and the money advanced to minor
could not be recovered.
b) Mental incompetence (Unsound mind): according to section 12 a person is said
to be of sound mind for the purpose of making a contract, if at the time when he
makes it is capable to understand the terms of contact and form a rational judgment
as to its effect upon his interest. Thus, if person is not capable of both, he is said to
have suffered from unsoundness of mind.
Position of a person who is usually of unsound mind and occasionally of
sound mind: A person, who is usually of unsound mind, but occasionally of sound
mind, may make a contract when he is of sound mind.
Position of a person who is usually of sound mind and occasionally of
unsound mind: A person, who is usually of sound mind, but occasionally of
unsound mind, may not make a contract when he is of unsound mind.
In short, if the person is of sound mind at the time of formation or entering into a
contract he/she is capable enough to entre and can create a valid contract otherwise
it a void contact.

ICA, 1872, includes the following persons under the unsoundness of mind:

Lunatic (mentally ill): A person who is mentally deranged (mad, insane) due to
some mental force/tension or other personal experience but who has some lucid
interval (the term that describes a period in a mentally unbalanced person's life
where they act normally) of sound mind. It means that, when after a particular period
of unsoundness of mind person is normal can make a contract when he is of sound
mind and it will consider as a lunatic person under law.

Idiots: A person who is permanently of unsound mind. It means that there are no
mental faculties available to think, learn and understand anything to that person.
According to ICA, 1872, such a person is not at all eligible to enter into a contract
because of permanent incapability. Idiots are the persons who suffer from Unsound
mind from birth itself. Therefore they cannot enter into Contracts throughout their
life. In such a way they suffer from permanent Incapacity.

Drunken or Intoxicated Person: A person who is drunk, intoxicated or delirious

from fever so as to be incapable of understanding the nature and effect of an
agreement or to form a rational judgment as to its effect on his interests cannot enter
into valid contracts whilst such drunkenness or delirium lasts. According to ICA, 1872,

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such a person is not at all mentally available to understand terms of contract while
entering into a particular contract. It means that this category persons suffers from
unsoundness of mind temporary after getting recovered from the effect, they can
enter into Contracts.
Examples: A patient, in a lunatic asylum, who is at intervals, of sound mind, may
contract during those intervals.
Example: A sane man, who is delirious from fever or who is so drunk that he cannot
understand the terms of a contract or form a rational judgment as to its effect on his
interest, cannot contract whilst such delirium or drunkenness lasts.
c) Status/ Person Disqualified by Law: Besides minor and person of unsound mind,
there are others who are disqualified from contracting under the provisions of some
other laws, such person have been discussed below:

v.

Alien Enemies (Political Status) : An alien (citizen of a foreign state) is a person

who is not a citizen of India. When there is a war between India and another country,
that countrys citizen becomes an alien enemy and cannot enter into contract.

Foreign Sovereigns and Ambassadors: They can enter into contracts and enforce
those contracts in our courts but they cannot be sued in our courts without the
sanction of the Central Government unless they choose to submit themselves to the
jurisdiction of our courts.

Convict: A convict is one who is found guilty by a court and is undergoing sentence
of imprisonment. During the period of his imprisonment, he is incompetent to
contract and also to sue on contract made before conviction.

Company or Corporation: A company/corporation is an artificial person created by

law. It cannot enter into contract outside the powers, conferred upon it by its
Memorandum of Association (object clause) or by the provisions of its Special Act.

Insolvents: When a persons debts exceed his assets, he is adjudged insolvent and
his property stands vested in the Official Receiver or Official Assignee appointed by
the court. Such a person cannot enter into contracts relating to his property.

Free consent: - (sec.14) It is essential to the creation of every contract that there must be
a free and genuine consent of the parties to the agreement.
According to section 23 of ICA, 1872 consent means two or more people are said to be
consent when they are agree upon the same thing in the same sense. Thus consent
involves identity of minds in respect of the subject matter of the contract. When there is no
consent at all, the agreement is void (invalid) and not enforceable at the option of either
party.
Example: X has one Maruti car and one Fiat car. He wants o sell Fait car. Y does not know
that X has two cars. Y offers to buy Xs Maruti car for Rs. 50000. X accepts, the offer thinking

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it to be an offer for his Fiat car. Here there is a no identity of minds in respect of subject
matter i.e. car.
The consent of the parties is said to be free when they are of the same mind on all the
material terms of the contract. The parties are said to be of the same mind when they agree
about the subject-matter of the contract in the same sense and at the same time.
Free Consent: According to Section 14 of ICA, 1872, Consent is said to be free when it is not
caused by (i) Coercion, (ii) Undue influence, (iii) Fraud, (iv) Misrepresentation, or (v)
Mistake.
In the other words, if consent comes with one of the above mentioned element it will not be
considered as a free consent by contracting party and will be formed a void contract.

Coercion: threatening someone to enter into a contract or compelling to enter into a

contract with force and with intension to detain their property.
Example - A Hindu widow was forced to adopt a boy under threat that her husbands
dead body would not be allowed to be removed if she does not adopt the boy, She
adopted the boy. Here, Widows consent has been obtained by co-ercion because
preventing the dead body from being removed for cremation is an offence under
section 297 of the Indian Penal Code. (Ranganayakamma V. Alwar Setti).

Undue Influence: (unfair/inappropriate use of power) It means, dominating the will

of the other person to obtain an unfair advantage over the other.
Example: A poor hindu widow agreed to pay interest at 100% per annum because
she needed the money for her maintenance to money lender. As lender is in a
position to dominate will of her.
Example: A devotee gifted her property to her spiritual guru to secure benefits to
her soul in the next world. As in this contract the spiritual guru is in position to
dominate her will.

Fraud: (Intentionally wrong representation to cheat someone) It means a false

representation of fact made wilfully with a view to deceive (harm) the other party.
Under fraud one part has to present/express about the fact which is false.
Example: X offer Y to sell his Cannon printer at price of Rs. 3000, he offered that
printer is of good quality and new. Y believed on him and purchased his printer. On
the other hand, X was aware that printer is old and the quality is not good. This will
be case of a fraud.

Misrepresentation: (innocent wrong representation to just get assent of other

party) it means a false representation of fact made innocently or non-disclosure of a
material fact without any intention to deceive the other party.
Example: X wants to sell his factory to Y and made an offer that his factory yearly
capacity to produce is 1000 units and he was not aware about the actual production

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capacity, he just want assent of Y to purchase factory. Y purchased factory. Here the
intention of X was not to deceive Y but to just get him entre into contract.

Mistake: (erroneous belief or concept) a mistake is said to be occurred where the

parties intending to do one thing by error do something else.
Example: A agrees to buy from B a certain horse. It turns out that the horse was
dead at the time of the bargain, though neither party was aware of the fact. The
agreement is void.

vi.

Lawful object: - (Sec.23) The object of an agreement must be lawful. The object is
considered lawful unless it is forbidden by law or is fraudulent or involves or implies injury to
the person or property of another or is immoral or is opposed to public policy.
Example: A promise to pay B Rs.5 thousand if B beats C. The agreement is illegal as its
object is unlawful.

vii.

Possibility of performance: - (sec.56) The valid contract must be capable of

performance section 56 lays down that. An agreement to do an act impossible in itself is
void. If the act is legally or physically impossible to perform, the agreement cannot be
enforced at law.
Example: A agrees with B to discover treasure by magic, the agreement is not
enforceable.
Example: A agrees with B to put life into Bs dead brother. The agreement is void as
it is impossible of performance.
Example: X agrees with Y to enclose some areas between two parallel lines and Y
agrees to pay Rs. 1000/- to X. This agreement is void because it is an agreement to do an
impossible act.

viii.

Completion of legal formalities: - A contract may be oral or in writing. As regards the

legal effects, there is no difference between a contract in writing and a contract made by
word of mouth. It is, however, in the interest of the parties that the contract should be in
writing. There are some other formalities also which have to be complied with in order to
make an agreement legally enforceable. In some cases, the document in which the contract
is incorporated is to be stamped. In some other cases, a contract, besides being a written
one, has to be registered.
Example: A Verbally promises to sell his book to y for Rs.200 it is a valid contract because
the law does not require it to be in writing.
Example: A verbally promises to sell his house to B it is not a valid contract because the
law requires that the contract of immovable property must be in writing.

ix.

Certainty of meaning:- In order to give rise to a valid contract the terms of the agreement
must not be vague or uncertain. If it is vague and it is not possible to ascertain its meaning,
it cannot be enforced. According to Section 29 of the Contract Act, Agreements the meaning

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of which are not certain or capable of being made certain are void. In order to give rise to a
valid contract the terms of the agreement, must not be uncertain. For a valid contract, the
terms and conditions of an agreement must be clear and certain.
Example: A promised to sell 20 books to B. It is not clear which books A has promised to
sell. The agreement is void because the terms are not clear.
Example: A agrees to sell B a hundred tons of oil. It is not clear what is the kind of oil. The
agreement is void because of it uncertainty.
Example: A agreed to purchase a van from B on hire-purchase terms. The price was to be
paid over two years. Held there was no contract as the terms were not certain about rate of
interest and mode of payment.
x.

Agreement not expressly declared void: - (sec.24 to 30) the agreement must not
have been expressly declared to be void, under the Section 24 to 30 of ICA, 1872.
This includes: Agreement in restraint of marriage (to stop someone to get marry),
agreement in restraint of trade (to stop someone to trade with any one), agreement in
restraint of legal proceedings (to stop someone to not take legal action against someone)
and agreement by way of wager (bet or gamble) have been expressly declared void.
In the other words, ICA, 1872, already mentioned some of the agreements which cannot be
enforceable by law, which are void. If an agreement is need to be valid must not include any
feature of these void agreements.
Example: X promised to marry none else except Y and in default pay her Rs 1,00,000. X
married to Z and Y sued X for the recovery of Rs 1,00,000. It was held that Y was not entitled
to recover anything because this agreement was in restraint of marriage and as such void.
Example: A promise to close his business against the promise of B to pay him Rs.2 lac is a
void agreement because it is restraint of trade.
Example: A and B mutually agree that if it rains today A will pay B Rs 100 it does not rain B
will pay A Rs 100 or where C and D enter into agreement that on tossing up a coin, if it falls
head upwards C will pay O and if it falls tail upwards D will pay C Rs 50; there is, a wagering
agreement.
A wager can be described as, follows: The agreement of gaming and wagering is that one
party is to win and the other e upon a future every which at the time C the contract is of an
a in nature - that is to say, if the event turns out one way A will lose; I it turns out the other
way he will win.

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3.4 Types of Contracts

There are various basis on which contract can be classified are as follows:
1. On the basis of Validity( lawful enforceability)
a) Valid Contract, (all essentials are present)
b) Void Contract, (valid at the time of formation but due to subsequent
events became void)
c) Void Agreement, (void from the beginning or formation)
d) Voidable Contract, (without free consent under which according to
aggrieved party contract can be set aside)
e) Illegal Agreement , and (when objective of contract is unlawful)
f)

Unenforceable Contract. (valid but cant be enforced by law due to

technical defects i.e., in written)

2. On the basis of Formation/ Creation (how a contract came into existence or the way it has
been framed)
a) Express Contract, (by words)
b) Implied Contract, and (without words)
c) Quasi Contract. (by law)
3. On the basis of Performance/ Execution (task allotted between both the parties)
a) Executed Contract,
b) Executory Contract,
c) Partly Executed and Partly Executory Contract,
d) Unilateral Contract, and
e) Bilateral Contract.
1. On the basis of validity
a) Valid Contract: If a contract satisfies all the conditions/essentials prescribed by
section 10 of ICA, 1872, is a valid contract. If one or more these aligned essentials of a
valid contract is missing than the contract will be void, voidable, illegal or
unenforceable.
Example: X offers marry to Y, Y accepts Xs offer. This is a valid contract.
Example: X offers to sale his car to Y, Y accepts his proposal, this is a valid contract.

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b) Void Contract: (void null, empty, not valid, invalid, ineffective or not have value in
the eyes of law) According to section 2 (j) of the ICA, 1872, A contract which ceases
to be enforceable by law becomes void when it ceases to be enforceable. Ceases
means finish, discontinue, come to the end, terminate or when in a contract none of
the party of a contract is willing or able to performed assigned tasks.
In the other words, when a contract is valid at the time of formation but which
subsequently became void due to impossibility of performance because of non
existence of subject matter (destroy or damage of subject matter) or illegality (change
of law) of contract performance or any other reason.
It means that void contract is a contract which is valid when parties are entering into
a contract but due to some future events parties are not able to perform contract than
that valid contract will become void.
Example: A offers on December 1, 2016 to sale his house in Rs. 40,00,000 to B on 30
December, 2016. B accepts his offer. This is a valid contract. Suddenly, house of A
destroyed by earthquake on December 15, 2016. In this case contract among both of
them was valid at the time of formation but due to non existence of subject matter
(house) it has became impossible to sale that house or to complete the performance
of contract.
Example: A trader from China X offers Indian Y to purchase toys from him on
November 2016. Y accepts his proposal. This is a valid contract because there is a
peaceful relationship between both countries at the time of contract formation. In the
month of October, China declared war with India and stopped all trade between both
countries. Under this condition a valid contract between X and Y will come to the end
due to change of law and became void contract.
Example: Mr. X agrees to write a book for a publisher. After few days, X dies in an
accident. Here a valid contract becomes void due to the impossibility of performance
of contract.
c) Void Agreement: According to Section 2 (g), an agreement not enforceable by law
is said to be void, such agreements are void from the beginning/ from the time of its
formation (void-ab-initio), which means that they are unenforceable right from they
are made.
In the other words, agreement without legal effects is known as void agreement. For
example an agreement with minor or with unsound mind person is void from the
beginning (void-ab-inito) because minor and unsound mind person are not competent
to enter into a contract as per ICA, 1972. Thus a void agreement never matures into a
contract.
Example: X is a minor borrowed Rs.2, 00, 000 from Y a majors and promised to repay
after 1 month. This is a void agreement as per ICA, 1872.
d) Voidable Contract: According to Section 2 (i) of ICA, 1872, an agreement which is
enforceable by law at the option of one or more of the parties thereto, but not at the
option of others is a voidable contracts. (voidable: capable of being made void,
whose performance can be avoided and which can be legally inactive) In the other
words, a voidable contract is a contract which can be set aside or repudiate (cancel)
or avoided at the opinion of the aggrieved party (contract party who has been unfairly
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treated by other one). Until the contract is set aside or repudiate by aggrieved party,
it remains a valid contract.
In simple words, when one party of contract in the position to avoid performance on
his part then the agreement is treated to be voidable. Such a right may be arising
when one of the party consent has been taken with coercion, undue influence,
misrepresentation, and fraud. It means that the party whose consent was not free at
the time of formation of contract (which is called as aggrieved party) will be able to
cancel the contract and ignore the performance. If the aggrieved party is not willing to
cancel contract, the contract will remained valid in the eye of law. Generally, a
contract formed under mistake will be void.
Example: . B threatens to kill to C if he does not sell his imported scooter to D for Rs.
5000. C agrees. Here the consent of C has been obtained through coercion. Under this
contract if C wants, he can cancel performance of contract i.e., transfer of scooter to
D. it means that, according to C a contract is voidable but D is considering this
contract as valid. This is voidable contract.
e) Illegal Agreement: an illegal agreement is one the object of which is unlawful. Such
an agreement cannot be enforced by law. Thus, illegal agreements are always voidab-initio (void from very beginning). These are also considered as void agreements.
Example: X agrees Y to appoint him in government jog and will charge of Rs. 200000
for the same. This is unlawful consideration between both parties.
f)

Unenforceable contract: - An unenforceable contract is a valid contract in law, but

due to the fact that it is incapable of proof, or because of some technical defect
therefore it cannot be enforced in a Court of Law. For instance, an agreement which is
required to be stamped will be unenforceable if the same is not stamped at all or is
under-stamped. In such a case, if the stamp is required merely for revenue purposes,
as in the case of a receipt for payment of cash, the required stamp may be affixed on
payment of penalty and the defect is then cured and the contract becomes
enforceable. If, however, the technical defect cannot be cured the contract remains
unenforceable, e.g., in the case of an unstamped bill of exchange or promissory note
or land trade.
Example: A offers to sale his land in Rs. 2000000 to B and contract is orally done.
Afterwards, A refuses to sale his land to B, this is valid contract but due to absence of
written document this contract is not enforceable at law. So, B will not be able to suit
on A.

2. On the basis of Formation:

a) Express Contract: - According to Section 9of ICA, 1872, when the terms of a
contract are introduced in writing or are agreed upon by spoken words at the time
of its formation, the contract is express contract. It means contract specified and
formed with the use of words whether oral or written is called express contract.

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Example: A says to B that he will sell his car to him for Rs. 80,000 and B agrees and
say yes. This is a spoken express proposal.
b) Implied Contract: A contract inferred by the conduct (act) of a person or the
circumstances (situation) of a case is called implied contract. Or, when contract is
being framed otherwise than the use of words (not oral and written) is called as
implied contract.
Example: The Delhi Transport Corporation (D.T.C) runs Omni buses on different
routes to carry passengers at the scheduled fares. This is an implied proposal by
the DTC and accepted by those who travel in DTC.
Example: A stops a taxi by waving his hand and takes his seat. There is an implied
contract that A will pay the prescribed fare.
c) Quasi Contract: Quasi contracts are the contracts which are not created by words
or otherwise (by act or condition), these contract comes into existence by the law.
Under section 68-72, Constructive or Quasi contracts arise out of obligations
enjoyed by one person from the voluntary acts of the other which are intended to
be performed only on the happening of some future uncertain event.
Generally a contract comes into existence as a result of offer made by one party
and its acceptance by the other party, with free will of both the parties. However
under certain conditions even though no will is expressed by both the parties for
creating contractual relations, the law creates and enforces legal rights and
obligations. Such contracts are known as Quasi Contracts. The principle behind
Quasi Contracts is that a person shall not be allowed to enrich himself at the
expense of another.
Court creates quasi contract to avoid the unjust enrichment of a party in a dispute
over payment for goods or services. In some cases a party who has suffered from a
loss in a business relationship may not be able to recover for the loss without
evidence of a contract. To avoid this unjust result, courts create a fictitious
agreement where no legal enforcement exists.
Example: A, a tradesman, leaves goods at Bs house by mistake. B treats the
goods as his own. B is bound to pay A for them.
Example: A and B jointly owe Rs.5,000 to C. A alone pays this amount to C. B not
knowing this again pays Rs.5,000 to C. In this case C is bound to repay Rs.5,000 to
B as this amount is paid to him by mistake.
3. On the basis of Performance/ Execution (task allotted/ performance done
between both the parties)
a) Executed Contract: Where both the parties have performed their obligations, it is an
executed contract.
Example: A contracts to buy a bicycle from B for cash. A pays cash. B delivers the bicycle.

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b) Executory Contract: Where neither party to the contract has performed his share of the
obligation, i.e. both the parties have yet to perform their promises, the contract is executory.
Example: On June 1, A agrees to buy a bicycle from B. The contract is to be performed on June
15.
c) Partly Executed and Partly Executory Contract: it is a contract where one of the parties
to the contract has performed his obligation and the other party has still to perform his
obligation.
Example: X offer to sell his car to Y for Rs.100000 on a credit of one month. Y accepts Xs
offer. X delivered car to Y. Here the contract is executed as to X and executory as to Y.
d) Unilateral Contract: it is a one side contract in which only one party has to perform his
promise or obligation to do.
e) Bilateral Contract: A bilateral contract is one in which both the parties have to perform
their respective promises or obligations to do.

3.5 Discharge of Contract

Meaning
Discharge of a contract means discontinuation of the contractual relations between the
parties. When the rights and obligations arising out of a contract are extinguished, the
contract is said to be discharged or terminated.
Mode of Discharge
A contract may be discharged in any of the following ways:
a) Discharge by Performance: A contract can be discharged by performance, which can
be:
i. Actual - When the parties to the contract perform their promises in accordance with the
terms of the contract.
ii. Attempted - When the promisor has made an offer of performance to the promisee but the
offer has not been accepted by the promisee.
b) Discharge by Mutual Consent or Agreement: Since a contract is created by mutual
agreement, it can also be discharged by mutual agreement. Discharge by mutual agreement
can be done in any of the following ways:
i. Novation - Novation means the substitution of a new contract for the original contract
either between the same parties or between different parties.
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ii. Rescission - Rescission means cancellation of the contract by any party or all the parties
to a contract.
iii. Alteration - Alteration means a change in the terms of a contract with the mutual
consent. Alteration discharges the original contract and creates a new contract.
iv. Remission - Remission is the acceptance of a lesser sum than what was contracted for or
a lesser fulfillment of the promise made.
v. Waiver - Waiver means intentional relinquishment of a right under the contract.
c) Discharge by Subsequent or Supervening Impossibility or Illegality:
1. Cases where the doctrine of supervening impossibility applies
i. Destruction of subject matter.
ii. Death or personal incapacity of promisor.
iii. Outbreak of war.
iv. Change of law.
v. Non-existence or non-occurrence of a particular state of things (failure of ultimate
purpose).

2. Cases not covered by supervening impossibility i. Difficulty of performance or less profitable.

ii. Commercial impossibility.
iii. Default of a third person.
iv. Strikes, lockouts and civil disturbances.
v. Partial impossibility or failure of one of the objects.
d) Discharge by Lapse of Time - A contract is discharged if it is not performed or
enforced within a specified period, called period of limitation. The Limitation Act, 1963 has
prescribed the different periods for different contracts, e.g. period of limitation for exercising
right to recover a debt is 3 years.
e) Discharge by Operation of Law:
i. By death of the promisor.
ii. By insolvency.
iii. By merger.

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iv. By unauthorized material alteration.

f) Discharge by Breach of Contract - A contract is said to be discharged by breach of
contract if any party to the contract refuses or fails to perform his part of the contract or
by his act makes it impossible to perform his obligation under the contract. A breach of
contract may occur in the following two ways:
i. Anticipatory breach of contract - It occurs when the party declares his intention of not
performing the contract before the performance is due.
ii. Actual breach of contract - It can occur either on due date of performance or during the
course of performance.
3.6 Remedies for Breach of Contract
Meaning of Breach of Contract: A breach of contract occurs if any party refuses or fails to
perform his part of the contract or by his act makes it impossible to perform his obligation under
the contract. In case of breach, the aggrieved party (i.e. the party not at fault) is relieved from
performing his obligation and gets a right to proceed against the party at fault.
Remedies of Breach of Contract: A remedy is the courses of action which are available to an
aggrieved party for the enforcement of a right under a contract. The various remedies available are:
a) Rescission of Contract: Rescission means a right not to perform obligations. In case of
breach of a contract, the promisee may put an end to the contract. In such a case, the
aggrieved party is discharged from all the obligations under the contract and is entitled to
claim compensation for the damage which he has sustained because of the nonperformance of the contract.
b) Suit for Damages: Damages are monetary compensation allowed for loss suffered by
the aggrieved party due to breach of contract. Damages may be of five kinds:
i. Ordinary or General or Compensatory Damages: (i.e. damages arising naturally from
the breach).
ii. Special Damages: (i.e. damages in contemplation of the parties at the time of contract).
iii. Exemplary, Punitive or Vindictive Damages: (i.e. damages which are in the nature
of punishment).
iv. Nominal Damages: (i.e. awarded only for the name sake).
v. Liquidated Damages: means a sum fixed up in advance, which is a fair and genuine
pre-estimate of the probable loss that is likely to result from the breach.
c) Suit for Specific Performance: means demanding the courts direction to the
defaulting party to carry out the promise according to the terms of the contract. For example
- X agreed to sell an old painting to Y for Rs. 50000. Subsequently X refused to sell the
painting. Here, Y may file a suit against X for the specific performance of the contract.

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d) Suit for Injunction: means demanding courts stay order Injunction means an order of
the court which prohibits a person to do a particular act. For example -W agreed to sing at
Ls theatre only during the contract period. During the contract period, W made contract
with Z to sing at another theatre and refused to perform the contract with L. It was held that
W could be restrained by injunction from singing for Z.
e) Suit for Quantum Meruit: Quantum - meruit means as much as is earned. In this suit,
claim is made to compensate for the work already done. For example -C an owner of a
magazine engaged P to write a book to be published by installments in his magazine. After a
few installments were published, the publication of the magazine was stopped. It was held
that P could claim payment for the part already published.

3.7 Case Studies on ICA, 1872

1) Mukesh of Mussourie invites Mradul of Mumbai to stay with him during summer vacation.
Mradul accepts the invitation and informs Mukesh accordingly. When Mradul reaches
Mukeshs home, he finds it locked and he has to stay in a hotel. Can Mradul claim damages
from Mukesh?
Ans.............................................................................................................................................
...................................................................................................................................................
...................................................................................................................................................
...................................................................................................................................................
...................................................................................................................................................
...................................................................................................................................................
................................................ .
2)

Amar sold his business to Bharat but this fact was not known to an old customer Chander.
Chander placed an order for certain goods to Amar by name. Bharat supplied the goods to
Chander. Is there a valid contract?
Ans.............................................................................................................................................
...................................................................................................................................................
...................................................................................................................................................
...................................................................................................................................................
...................................................................................................................................................
...................................................................................................................................................
................................................ .

3) Kuber gifted Rs. 50000 to Sundari his neighbours wife by executing a registered gift deed
without any consideration. There is no near relation between Kuber and Sundari. Is this gift
valid?
Ans.............................................................................................................................................
...................................................................................................................................................
...................................................................................................................................................
...................................................................................................................................................
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...................................................................................................................................................
...................................................................................................................................................
................................................ .
4) A gifted whole of his property to his daughter on the condition that she should pay Rs.200
per month to her uncle (fathers brother). Later she refused to pay her uncle on the ground
that she did not receive any consideration from her uncle. Is she justified?
Ans.............................................................................................................................................
...................................................................................................................................................
...................................................................................................................................................
...................................................................................................................................................
...................................................................................................................................................
...................................................................................................................................................
................................................
5) Ramesh a minor, by misrepresenting himself to be of 19 years, obtains a loan of Rs. 10000
from suresh stating that the amount was badly needed by him to complete his education.
Suresh, without making any further enquiry, lent the amount to ramesh. Can suresh recover
the amount from ramesh?
Ans.............................................................................................................................................
...................................................................................................................................................
...................................................................................................................................................
...................................................................................................................................................
...................................................................................................................................................
...................................................................................................................................................
................................................
6) A sells, by auction, to B, a horse which A knows to be unsound. A says nothing to B about
the horse's unsoundness. Is it a case of fraud? What kinds of remedies are available for B?
Ans.............................................................................................................................................
...................................................................................................................................................
...................................................................................................................................................
...................................................................................................................................................
...................................................................................................................................................
...................................................................................................................................................
................................................

*****************End of ICA, 1872*****************

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