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Legal & Tax Aspects of Business

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THE INDIAN CONTRACT ACT , 1872
Law in its legal sense means those principles & rules that

govern & regulate social conduct & the observance of which can be enforced in courts. Law is a rule of civil conduct, prescribed by the supreme power of a State, commanding what is right & prohibiting what is wrong. - Blackstone Law is the body of principles recognised & applied by the State in the administration of justice. - Salmond

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Need For Law
Justice
Continuity & Uniformity

Impartiality
Rule of Law

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Definition of Contract
An agreement which creates legal obligations is a contract.

The obligation is an undertaking to do or abstain from doing some definite act or acts. Section 2(h) of the Indian Contract Act 1872 defines contract as follows: An agreement enforceable by law is an contract. -An Agreement -Enforceable by law.

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Section 2(e) of the Indian Contract Act defines an agreement as :

Every promise & every set of promises, forming consideration for each other, is an agreement. Section 2(b) of the Indian Contract Act defines a promise as : A proposal when accepted, becomes a promise. Thus, an agreement is an accepted proposal. Consensus ad idem means identity of mind. Agreement= Offer+Acceptance
* In social, domestic, moral or religious agreements, the usual presumption is that the parties do not intend to create legal obligations ; so they dont form part of law of contract.

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Features Of Indian Contract Act, 1872
Enforcement of the Act:

- 1 september 1872 -not retrospective -applies to whole of India except Jammu & Kashmir Lays Down the Principles, not the Rights & Duties of the Parties: -formation, novation, alteration, performance & discharge of contract -principles within which parties are free to make their own terms & conditions of a contract subject to provisions of the law of the land.

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Act is not Complete & Exhaustive:

-it does not incorporate law relating to all kinds of contracts. Eg. Sale of Goods, Partnerships, Negotiable Instruments, Insurance Creates Right in Personam: -The Right in Personam or Jus in Personam means a right against a particular person or persons. -The right in Rem or Jus in Rem implies a right available to a person against the whole world.
* The rights created by a contract are purely personal in nature & only enforceable by action against the party in default.

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Essential Features Of A Valid Contract
Offer &Acceptance
Intention to Create Legal Relations

(Balfour Vs Balfour 1919)

Lawful Consideration Capacity of Parties

Free & Genuine Consent

Lawful Object

Agreement not declared V oid

Certainity & Possibility of Performance Legal Formalities

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CLASSIFICATION OF CONTRACTS

According to According to Enforceability Formation (legal validity) (mode of creation) -Valid Contract -Express Contract -Void agreement -Implied Contract -Void Contract -Quasi Contract -Voidable Contract -Illegal agreement -Unenforceable Contract

According to Performance -Executed Contract -ExecutoryContract -Unilateral Contract -Bilateral Contract

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Classification Acc. To Legal Validity

Valid Contract: A contract which satisfies all the legal requirements

laid down in sec. 10 of the act, is known as a valid contract.

Void Agreement : An agreement not enforceable by law is said to be

void.
Void Contract: A contract which is enforceable by law at the time it

was made, but later on if it becomes legally unenforceable due to some reasons. Voidable Contract: An agreement which is enforceable by law at the option of one or more of the parties thereon, but not at the option of the other or others, is a voidable contract.

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Illegal Agreement : An agreement is illegal & void if its object or

consideration is: -is forbidden by law -is of such nature that,if permitted, it would defeat the provisions of any law -is fraudulent -involves or implies injury to the person or property of another -the court regards it as immoral, or opposed to public policy (Sec.23) Unenforceable Contract :These cannot be enforced in a court of law because of some technical defects.

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Classification Acc. To Formation
Express Contract: When the proposal or acceptance of any

promise is made in words(spoken or written), the promise is said to be express. Implied Contract: When the proposal or acceptance of any promise is made otherwise than in words, the promise is said to be implied. Quasi Contracts: It is an obligation which the law creates in the absence of any agreement.

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Classification Acc. To Performance
Executed Contract : When both the parties have completely

performed their respective obligations, under the contract.

Executory Contract: In this contract the obligations of the

parties are to be performed at a later time.

Unilateral Contract: In this one party has to fulfil his

obligations, whereas the other party has already performed his obligations. Also known as unilateral, one sided contract or contract with executed consideration. Bilateral Contract: In this the obligation on the part of both the parties to the contract are outstanding at the time of formation of the contract.

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Offer & Acceptance
Offer or Proposal: Acc. to Sec. 2 (a) of the Indian Contract Act When one person signifies to another his willingness to do or 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. - The person making the proposal or offer is called proposer, offeror or promisor. - The person to whom the offer or proposal is made is called proposee or offeree. - When the offeree accepts the offer, he is called promisee or acceptor.

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How An Offer is Made
An offer may be express or implied.

An offer may be general or specific.

An offer may be cross offer or counter-offer or standing offer

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Essential & Legal Rules For a Valid Offer

The offer must be communicated to the other party.

(Lalman ShuklaVs Gauri Dutt 1913) The terms of the offer must be definite & clear. The offer must be capable of creating legal relationship. (Balfour Vs. Balfour 1919) The offer must be made with a view to obtain acceptance. (HarrisVs. Nickerson 1873) An offer may be positive or negative. The offer should not contain any term the non-compliance of which amounts to acceptance.

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Special terms & conditions of the offer be communicated.

(HendersonVs. Stevenson 1875) (Parker Vs. South Eastern Railway Co. 1877) Two identical cross-offers do not result in a contract.

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Acceptance
Sec. 2(b) defines acceptance as When one person to whom

the proposal is made signifies his assent thereto, the proposal is said to be accepted. An offer can be accepted only by the person or persons for whom the offer is intended. (Boulton Vs. Jones 1857)

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Essential & Legal Rules For a Valid Acceptance

Acceptance must be absolute & unqualified.
Acceptance must be communicated to the offeror.

(Mere mental acceptance is no acceptance)

The acceptance must be in the prescribed manner. The acceptance must be in response to offer.

The acceptance must be by the offeree. The acceptance must be given before the offer lapses or is

revoked.
Acceptance may be express or implied.

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Revocation of An Offer
By notice
By lapse of time

After expiry of reasonable time

By death or insanity By non-fulfillment of conditions

By counter-offer By rejection by offeree

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Revocation of Acceptance
An acceptance may be revoked at any time before the

communication of the acceptance is complete as against the acceptor but not afterwards.(Sec 5)

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Consideration
Section 2 (d) of The Indian Contract act defines consideration

as follows 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.

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Essential & Legal rules For a Valid Consideration

The consideration must move at the desire of the promisor
The consideration may move from the promisee or any other

person.
The consideration may be past, present or future.

The consideration need not be adequate.

The consideration must be real & not illusory. The consideration must be Lawful

The consideration must be something which the promisor is

not already bound to do

The consideration may be either positive or negative.

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No Consideration No Contract Exceptions

Agreement on account of natural love & affection.
Compensation for past voluntary service.

Promise to pay a time-barred debt.

Contract of agency Completed gift.

Remission. Contract of guarantee

Contract of gratuitous bailment.

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Capacity to Contract
Sec.11 of the Indian contract Act :

Every person is competent to contract who is of the age of the majority according to the law to which he is subject, & who is of sound mind, & is not disqualified from contracting by any law to which he is subject. Hence, exceptions are: -Minors -Persons of Unsound Mind -Persons disqualified by any law to which they are subject.

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Minor
Sec 3 of the Indian Majority Act 1875 defines A minor is a

person who has not completed 18 years of age.

Minors Agreement:

-An agreement with a minor is void ab-initio.(Mohiri Bibi v. DharmodasGhose 1903) -He can be a promisee or beneficiary. -His agreement cannot be ratified by him on attaining the age of majority. -If he has received any benefit under a void agreement, he cannot be asked to compensate or pay for it. -He can always plead minority

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There can be no specific performance of the agreements entered

into by him as they are void ab initio.

He cannot enter into a contract of partnership.

He cannot be adjudged insolvent. He is liable for necessaries.

He can be an agent. His parents/ guardian are/ is not liable for the contract entered

into by him.
A minor is liable in tort.

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There can be no specific performance of the agreements entered

into by him as they are void ab initio.

He cannot enter into a contract of partnership. He cannot be adjudged insolvent.

He is liable for necessaries supplied or necessary services

rendered to him or anyone whom he is legally bound to support.

He can be an agent.

His parents/ guardian are/ is not liable for the contract entered

into by him even though the contract is for the supply of necessaries to the minor. A minor is liable in tort(civil wrong).

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Persons of Unsound Mind
Sec.12 lays down a test of soundness of mind. It read as

follows: A person is said to be of sound mind for the purpose of making a contract if, at the time when he makes it, he is capable of understanding it & of forming a rational judgement as to its effect upon his interests. *A person who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound 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.

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Persons of unsound mind:

-Lunatics -Idiots -Drunken or intoxicated persons. *Agreements entered into by persons of unsound mind are void. But however they are liable for necessaries supplied to them or to anyone whom they are legally bound to support.

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Persons Disqualified By Law
Alien Enemies
Foreign Sovereigns &Ambassadors

Convicts
Insolvents Professional Persons (England)

Corporations & Companies

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Free Consent
Two or more persons are said to consent when they agree

upon the same thing in the same sense. (Sec 13)

Acc to Sec 14 consent is said to be free when it is not caused

by: -Coercion -Undue Influence -Fraud -Misrepresentation -Mistake

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Coercion : Consent is said to be caused by coercion when it is

obtained by: -Committing or threatening to commit any act forbidden by the Indian Penal Code,1860. -Unlawful detaining or threatening to detain any property. * When contract to an agreement is caused by coercion, the agreement is a contract voidable at the option of the party whose consent was so caused .

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Undue Influence:

A contract is said to be induced by undue influence where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other & uses that position to obtain an unfair advantage over the other.
- Authority, Fiduciary Relation, Mental Capacity

*When contract to an agreement is obtained by undue influence, the agreement is a contract voidable at the option of the party whose consent was so obtained .

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Misrepresentation: It is a false statement which the person

making it honestly believes to be true or which he does not know to be false. It also includes non-disclosure of a material fact or facts without any intent to deceive the other party. It must be false, but the person who made it honestly believes it to be true. It must relate to the material facts of the contract It must have been made without any intention to deceive the other party. The other party must have believed in it & acted upon It must induce the other party to make a contract. It must have been made before conclusion of contract It may be caused by representing half truth It must subsequently become false.

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When contract to an agreement is caused by

misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused . The aggrieved party may Avoid or rescind Accept the contract but insist that he shall be placed in the position in which the would have been if the representation made had been true.(Sec 19)

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Fraud
Acc to Sec 17 fraud means & includes any of the following acts

committed by a party to a contract, or with his connivance(intentional active), or by his agent with intent to deceive or to induce a person to enter into a contract: -the suggestion that a fact is true when it is not true & the person making the suggestion does not believe it to be true. -the active concealment of a fact by a person having knowledge or belief of the fact -a promise made without any intention of performing it. -any other act fitted to deceive. -any such act or omission as the law specially declares to be fraudulent.

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There must be false representation
It must relate to material fact

Made before conclusion of contract with intention to deceive.

Statement made with knowledge of its falsity.

Other party induced to act upon representation.

Other party must have relied upon representation Other party must have suffered some loss acting on

representation.
When contract to an agreement is caused by fraud, the agreement

is a contract voidable at the option of the party whose consent was so caused .

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Mistake
Mistake may be defined as an incorrect belief which leads one

party to misunderstand the other.

Sec 20 lays down that, where both the parties to an

agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void. Mistake of law of the land Mistake of Foreign Law

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Discharge of Contracts
When the rights & obligations arising out of a contract are

extinguished, the contract is said to be discharged or terminated. Thus the discharge means that the parties are no more liable under the contract. V arious Modes Of Discharge -By Performance -By Agreement -By Impossibility of Performance -By Lapse of Time -By Operation of Law -By Breach of Contract

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Discharge by Performance of Contract
By Actual Performance
By attempted Performance

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By Agreement
Novation
Rescission

Alteration
Remission Waiver

Accord & Satisfaction Merger

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By Impossibility of Performance
Initial Impossibility (at beginning)
Subsequent Impossibility

-destruction of subject matter

-death or personal incapacity Change of law

Declaration of war Failure of pre-condition

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By Lapse of Time
If the contract is not performed & if no action is taken by the

promisee in the Court of Law within the specified period, he is debarred from enforcing the contract.

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By Operation of Law
Unauthorised Material Alteration
Death

Insolvency
Merger

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By Breach of Contract
Actual Breach of Contract

- at the time when the performance is due -during the performance of the contract Anticipatory Breach of Contract