Business Laws - B.Com (Hons.) - 2021 PDF

i BUSINESS LAWS ii  iii BUSINESS LAWS B.Com. (Hons.): Semester I (CBCS) Paper BCH 1.3 Dr. Rajni Jagota Associate Professor Department of Commerce P.G. D.A.V College University of Delhi SCHOLAR...

i BUSINESS LAWS ii  iii BUSINESS LAWS B.Com. (Hons.): Semester I (CBCS) Paper BCH 1.3 Dr. Rajni Jagota Associate Professor Department of Commerce P.G. D.A.V College University of Delhi SCHOLAR Tech Press  iv All Rights Reserved : No part of this book, including its style and presentation, may be reproduced, stored in a retrieval system, or transmitted in any form or by any means— electronic, mechanical photo-copying, recording or otherwise without the prior written consent of the author. Warning : The doing of an unauthorised act in relation to a copyright work may result in both civil claim for damages and criminal prosecution. Special Note : Photocopy or Xeroxing of educational books without the written permission of publisher is illegal and against Copyright Act. General : While every effort has been made to present authentic information and avoid errors, the author and the publisher are not responsible for the consequences of any action taken on the basis of this book. SCHOLAR Tech Press An Imprint of MKM PUBLISHERS Pvt. Ltd. New Delhi  Sales Office : MKM Publishers Pvt. Ltd. 4782, 23 Darya Ganj, New Delhi-110002 Phones : 011- 40224951, Mob: 9810153571  © Author  First Edition : July 2016 Sixth Revised and Updated Edition : 2021  Printed in India at : Nisha Enterprises Sahibabad Ghaziabad, U.P.  ISBN : 978-93-82209-44-7  v PREFACE TO THE SIXTH EDITION It gives me immense satisfaction to present this revised and updated edition of Business Laws for students of B.Com (Hons) Semester I (CBCS). The book has been written strictly as per revised syllabus (2019) by University of Delhi. Highlights of the Present Edition In Indian Contract Act, 1872 In the context of e-contracts, case providing clarity on admissibility of Electronic Evidence; Case providing clarity on Exception added to Sec. 28 by the Banking Laws (Amendment) Act, 2012 implemented w.e.f. January, 2013 have been added. Some more examples have been included for easy comprehension of provisions. Positive feedback from users has given encouragement to include more knowledge points at relevant places. In LLP Act, case relating to LLP being a separate legal entity has been incorporated. LLP (Amendment) Act, 2021 has been discussed with important provisions at length though it has been made clear at the outset that this Amendment Act is yet to be enforced. None of the provisions of this Amendment Act has been made effective yet (as on 10th October, 2021), when this book goes to press. Pre-packaged Insolvency Resolution Process (PPIRP) has been discussed but not as part of modes of winding-up as there is no liquidation order in case of PPIRP. In Information Technology Act, information regarding Certifying Authorities has been updated as on 10th October, 2021. Amendments in Second Schedule by notification dated 29th September, 2020 have been discussed at relevant place. ‘Social Intermediary’ and ‘Significant Social Intermediary’, definitions as specified under newly announced Rules have been incorporated. Since Sec.79 is beyond the scope of syllabus of B.Com  vi (H), Delhi University, so detailed discussion of ‘due diligence requirements’ relating to social intermediaries has not been done. Readers may please note that Class 1 Digital Signatures (DS) run a high risk and are not accepted by authorities. Class-2 DS have been merged with Class- 3 DS, therefore fresh Class-2 DS are not being issued since 1st January, 2021. Apart from Bare Acts and Case Laws, Government websites such as mca.gov.in, cca.gov.in, meity.gov.in, have been used extensively for content enrichment. Suggestions from readers are solicited for the improvement of the book. I would like to place my sincere thanks to Dr. Renu Aggarwal (DDU), Dr. Anand Saxena (DDU), Dr. Manoj Kumar Sinha (PGDAV) for their invaluable support and discussions. I acknowledge the fruitful discussions with some of my colleagues teaching this paper at different colleges. Special thanks to my family members for their co-operation. I am grateful to Publisher for bringing book in time. Mr. Atul Malik of Scholar Tech Press can be contacted on his mobile no. 9810153571 for specimen copy. Dr. Rajni Jagota [email protected] [email protected] Mob. : 9811069079 10th October, 2021  vii SYLLABUS B.Com. (Hons.): Semester I Paper BCH 1.3: Business Laws Unit I: The Indian Contract Act, 1872 Contract – meaning, characteristics and kinds, Essentials of valid contract - Offer and acceptance, consideration, contractual capacity, free consent, legality of objects. Void agreements. Discharge of contract – modes of discharge including breach and its remedies. Unit II: Special Contracts Quasi – contracts, Contract of Indemnity and Guarantee, Contract of Bailment and Pledge Contract of Agency Unit III: The Sale of Goods Act, 1930 Contract of sale, meaning and difference between sale and agreement to sell. Conditions and warranties. Transfer of ownership in goods including sale by non-owners. Performance of contract of sale. Unpaid seller – meaning and rights of an unpaid seller against the goods. Unit IV: The Limited Liability Partnership Act, 2008 Salient Features of LLP, Difference between LLP and Partnership, LLP and Company LLP Agreement. Nature of LLP, Partners and Designated Partners, Incorporation Document Incorporation by Registration, Registered office of LLP and change therein. Change of name, Partners and their Relations. Extent and limitation of liability of LLP and partners. Whistle blowing. Taxation of LLP. Conversion into LLP. Winding up and dissolution of LLP.  viii Unit V: The Information Technology Act 2000 Definitions under the Act. Digital signature. Electronic governance. Attribution, acknowledgement and dispatch of electronic records. Regulation of certifying authorities. Digital signatures certificates. Duties of subscribers under the Act. Penalties and adjudication. Offences as per the Act.  ix Contents Page Unit -I : The Indian Contract Act, 1872 1. Nature and Types of Contracts 1.1-1.18 Definition of Contract 1.2 Essential Elements of a Valid Contract 1.4 Kinds of Contracts 1.8 2. Offer and Acceptance 2.1-2.18 The Proposal or Offer 2.1 Some Important Concepts with Regard to Offer 2.2 Legal Rules Regarding a Valid Offer 2.5 Lapse and Revocation of Offer 2.8 The Acceptance 2.9 Legal Rules Regarding a Valid Acceptance 2.9 Communication of Offer, Acceptance and Revocation 2.11 3. Consideration 3.1-3.13 Definition of Consideration 3.1 Essentials of Valid Consideration 3.2 Stranger to a Contract and Stranger to Consideration 3.6 Doctrine of Privity of Contract 3.6 A Stranger to a Contract cannot Sue and its Exceptions 3.6 The Rule, “No Consideration, No Contract” and its Exceptions 3.7 4. Capacity of Parties 4.1-4.16 Meaning of Contractual Capacity 4.1 Minor 4.1 Nature of Minor’s Agreements 4.1 Law Relating to Minor’s Agreements 4.2 Persons of Unsound Mind 4.9 Types of Unsound Mind 4.10 Disqualified Persons 4.11  x 5. Free Consent 5.1-5.24 Definition of Consent (Sec.13) 5.1 Definition of Free Consent (Sec.14) 5.1 Coercion (Sec.15) 5.2 Undue Influence (Sec.16) 5.5 Misrepresentation (Sec.18) 5.10 Fraud (Sec.17) 5.11 Does Silence Amount to Fraud? (Explanation to Sec.17) 5.13 Loss of Right of Rescission 5.16 Mistake 5.17 Mistake of Law 5.17 Mistake of Fact 5.17 Bilateral Mistake 5.17 Unilateral Mistake 5.19 6. Legality of Object and Consideration 6.1-6.11 Unlawful Consideration and Objects 6.1 Grounds Considered to be ‘Opposed to Public Policy’ 6.4 Object or Consideration Unlawful in Part 6.8 Effects of Illegal Agreements 6.9 7. Void Agreements 7.1-7.13 Agreements Expressly Declared to be Void 7.1 Agreements in Restraint of Marriage (Sec.26) 7.2 Agreements in Restraint of Trade (Sec.27) 7.2 Franchise Agreements not Regarded as in Restraint of Trade 7.5 Agreements in Restraint of Legal Proceedings (Sec.28) 7.6 Uncertain Agreements (Sec.29) 7.7 Wagering Agreements (Sec.30) 7.7 Agreements Contingent on Impossible Events (Sec.36) 7.11 Agreements to do Impossible Acts are Void (Sec.56) 7.11  xi 8. Quasi-Contract 8.1- 8.7 Meaning of Quasi-contract 8.1 Types of Quasi-contract (Secs. 68 to 72) 8.2 9. Discharge of Contract 9.1- 9.13 Discharge and Modes of Discharge 9.1 Discharge by Performance 9.1 Discharge by Mutual Consent or Agreement 9.2 Discharge by Subsequent or Supervening Impossibility 9.4 or Illegality Discharge by Lapse of Time 9.9 Discharge by Operation of Law 9.9 Discharge by Breach of Contract 9.10 10. Remedies for Breach of Contract 10.1-10.11 Remedies for Breach of Contract 10.1 Rescission of the Contract 10.1 Suit for Damages and Rules Regarding Assessment of Damages 10.2 Suit upon Quantum Meruit (Secs. 65 and 70) 10.7 Suit for Specific Performance 10.8 Suit for an Injunction 10.9 Unit -II : Special Contracts 11. Indemnity and Guarantee 11.1-11.15 Contract of Indemnity 11.1 Contract of Guarantee 11.2 Distinction between Contract of Indemnity and Guarantee 11.5 Nature and Extent of Surety’s Liability 11.7 Rights of Surety 11.9 Discharge of Surety 11.11 12. Contract of Bailment and Pledge 12.1-12.13 Meaning of Bailment 12.1 Kinds of Bailment 12.2  xii Duties of Bailor 12.4 Duties of Bailee 12.5 Rights of Bailor 12.6 Rights of Bailee 12.7 Finder of Goods 12.9 Meaning of Pledge 12.9 Difference between Bailment and Pledge 12.9 Rights and Duties of Pawnee 12.10 Rights and Duties of Pawnor / Pledgor 12.11 Pledge by Non-Owner 12.11 13. Contract of Agency 13.1-13.18 Contract of Agency 13.1 Essential Feature of a Contract of Agency 13.2 Modes of Creation of Agency 13.3 Extent of Agent’s Authority 13.7 Duties of Agent 13.10 Rights of Agent 13.12 Liability of the Principal for the Acts of the Agent to 13.13 the Third Parties Personal Liability of Agent (Sec. 230) 13.15 Termination of Agency 13.17 Unit -III : The Sale of Goods Act, 1930 14. Contract of Sale of Goods 14.1-14.10 Definition of Contract of Sale of Goods 14.1 Characteristics of a Contract of Sale 14.1 ‘Sale’ and ‘Agreement to Sell’ 14.4 Kinds of Goods 14.5 Distinction between Future Goods and Contingent Goods 14.7 Effect of Perishing of Specific Goods 14.7 Ascertainment of Price (Sec.9, 10) 14.7 Stipulations as to Time (Sec.11) 14.8  xiii Document of Title to the Goods 14.8 Difference between Sale and Hire-Purchase Agreement 14.9 Difference between Sale and Contract for Work and Labour 14.9 Distinction between Bailment and Sale 14.9 15. Conditions and Warranties 15.1-15.16 Conditions and Warranties 15.1 Express and Implied Conditions and Warranties 15.3 Implied Conditions 15.4 Implied Warranties 15.10 Doctrine of Caveat Emptor and its Exceptions 15.12 16. Transfer of Property 16.1-16.15 Time of Passing of Property and its Importance 16.1 Transfer of Property in Specific or Ascertained Goods 16.3 Transfer of Property in Unascertained and Future Goods 16.7 General Rule as to Transfer of Title (Sec. 27) 16.9 Transfer of Title by Non-Owners 16.9 17. Performance of Contract of Sale 17.1-17.8 Performance of Contract of Sale (Sec.31) 17.1 Meaning of Delivery of Goods [Sec.2(2)] 17.1 Modes of Delivery 17.1 Rules as to Delivery of Goods 17.2 Acceptance of Goods by Buyer 17.7 18. Unpaid Seller and his Rights 18.1-18.10 Definition of Unpaid Seller 18.1 Rights of Unpaid Seller Against the Goods 18.2 Unit -IV : The Limited Liability Partnership Act, 2008 19. Introduction to Limited Liability Partnership 19.1-19.14 Introduction to Limited Liability Partnership 19.1 Administrative Mechanism of LLP Act 19.2 Amendments in LLP Act, 2008 19.2 Salient Features of LLP 19.6  xiv Difference between LLP and Traditional Partnership Firm 19.9 Difference between Limited Liability Company and LLP 19.11 20. Incorporation of LLP 20.1-20.10 Registration of LLP 20.1 LLP Agreement 20.3 Incorporation Document 20.4 Effect of Registration (Sec. 14) 20.6 Provisions Relating to Name of LLP and Changes therein 20.6 Registered Office of LLP and Change therein (Sec. 13) 20.8 21. Partners, their Relations and Liabilities 21.1-21.13 Partner 21.1 Designated Partners 21.2 Partners and their Relations 21.5 How can an Existing Partner Cease to be a Partner 21.8 of a LLP? (Sec. 24) Consequences of Cessation of Partnership Interest 21.8 Registration of Changes in Partners (Sec. 25) 21.9 Extent and Limit of Liability of LLP and 21.9 Partners (Secs. 26 and 27) Extent of Liability of Partner (Sec. 28-30) 21.10 Whistle Blowing (Sec. 31) 21.11 Favourable Legal Mechanism for Whistle Blower 21.12 under LLP Act 22. Taxation of LLP 22.1-22.4 Taxation of LLP 22.1 Rules Regarding Taxation of LLP 22.2 23. Conversion to LLP 23.1-23.13 Procedure of Conversion into LLP 23.2 Effects of Registration of Conversion 23.2 Conversion from Partnership Firm into LLP (Sec. 55) 23.3 Conversion from Private Company into LLP (Sec. 56) 23.5 Conversion from Unlisted Public Company into LLP (Sec. 57) 23.9  xv 24. Winding Up and Dissolution of LLP 24.1-24.11 Meaning of Winding Up 24.1 Modes of Winding Up (Sec. 63) 24.2 Winding up by the Tribunal under the LLP Act 24.2 Petition for Winding-up 24.2 Insolvency and Bankruptcy Code 24.3 Voluntary Winding Up 24.7 Unit -V : The Information Technology Act, 2000 25. Introduction to Information Technology Act 25.1-25.9 Need and Objectives 25.1 Scope or Extent of the Act 25.3 Non-applicability of Act [Sec.1(4)] 25.3 Amendments to the IT Act, 2000 25.4 Key Definitions (Sec.2) 25.5 26. Digital Signature 26.1-26.8 Physical Signatures and Signatures under the IT Act, 2000 26.1 Journey of Signatures under the IT Act so far 26.1 Phase I: Digital Signatures (year 2000 onwards) 26.1 Phase II: Electronic Signatures (year 2008 onwards) 26.4 Phase III: E-sign Service or E-hastakshar 26.5 (Sept. 2016 onwards) Digital Signature (End Entity Rules) 2015 26.7 27. E-Governance 27.1-27.7 Meaning of E-governance 27.1 E-Governance is a SMART Governance 27.2 Provisions to Facilitate E-Governance 27.2 28. Attribution, Acknowledgement and Dispatch of 28.1-28.7 Electronic Records Introduction 28.1 Attribution of Electronic Records to the Originator (Sec. 11) 28.2 Acknowledgement of Receipt of Electronic Records by the 28.2 Addressee or Receiver (Sec. 12)  xvi Determination of Time and Place of Dispatch and Receipt of 28.3 Electronic Record (Sec. 13) Validity of Contracts Formed through Electronic Means 28.5 Communication of Offer, Acceptance and Revocations in 28.6 case of E-Contract 29. Regulation of Certifying Authorities 29.1-29.16 Hierarchy of Administrative Mechanism for Digital 29.1 Signature Certificate I. Controller of Certifying Authority (CCA) 29.2 II. Certifying Authority 29.8 III. Subscriber 29.13 30. Cyber Contraventions and Offences 30.1-30.10 Distinction between Contraventions and Cyber Offences 30.1 Penalties and Compensation for Contraventions 30.2 Offences and its Kinds 30.5 31. Adjudication and Appellate Tribunal 31.1-31.6 Justice System for Cyber Crimes under Information 31.1 Technology Act I. Resolution of Conflict by CCA 31.2 II. Adjudication on Contraventions by Adjudicating Officer 31.2 III. The Appellate Tribunal (AT) 31.3 IV. Appeal to High Court 31.6 Examination Papers (2018-2019) Q.1-Q.6 Bibliography B.1 - B.2  Chapter NATURE AND TYPES OF CONTRACTS Business laws comprise laws concerning trade, industry and commerce. The Indian Contract Act, 1872 is one of the important Acts under the ambit of business laws. Business Laws deal with rights and obligations emerging from commercial transactions. These laws bring seriousness and definiteness in business dealings. It codifies the legal principles that govern contracts. The Indian Contract Act, 1872, came into force with effect from 1st September, 1872. It applies to the whole of India. The Indian Contract Act, 1872, lays down the law relating to contracts. The law of contract seeks to regulate the conduct of persons who make contracts. It determines the circumstances under which an agreement shall be legally binding on the person making it. It also provides the remedies available in the court of law against the person who fails to fulfil his obligations under a contract. The Indian Contract Act in its present form deals with the following: 1. How and when does a contract get formed? (Formation of a contract) 2. How does a contract get discharged? (Discharge of a contract) 3. What are the remedies for breach of contract? (Remedies for breach of a contract). At present the Indian Contract Act is divided into two parts: (a) Part I deals with the general principles of Law of Contract (Secs. 1 to 75), Chapter I to VI of the Act. (b) Part II deals with special kinds of contracts (Secs. 124 to 238), such as: (i) Contracts of Indemnity and Guarantee (Secs.124 to 147), Chapter VIII of the Act. 1.2 Business Laws (ii) Contracts of Bailment and Pledge (Secs.148 to 181), Chapter IX of the Act. (iii) Contract of Agency (Secs.182 to 238), Chapter X of the Act. Secs. 76 to 123, (Chapter VII) relating to sale of goods were repealed in 1930 and the Sale of Goods Act, 1930 was passed. Similarly, Secs. 239 to 266, (Chapter XI) were repealed in 1932 and the Partnership Act, 1932 was passed. Indian Contract Act is not exhaustive. It does not deal with all the branches of law of contract. There are separate Acts relating to negotiable instruments, transfer of property, sale of goods, insurance, partnership etc. Sec. 1 of the Indian Contract Act has laid down that, “Nothing herein contained shall affect the provisions of any Statute, Act or Regulation not hereby expressly repealed, nor any usage or custom of trade, nor any incident of any contract, not inconsistent with the provisions of this Act.” No major amendments have been made in the Indian Contract Act, 1872. However, a minor amendment was made in Sec. 28 of the Act by Amendment Act, 1996. The same Section has again been amended by the Banking Laws (Amendment) Act, 2012 w.e.f. 18th January, 2013. The Specific Relief Act, 1963 has been amended recently. By virtue of the Specific Relief (Amendment) Act, 2018 (w.e.f. 01/10/2018) the remedies available for breach of contract have been effected. Now in case of breach of contract the remedy of Specific Performance ‘shall’ be granted by the Court subject to certain exceptions. Earlier the remedy of Specific Performance was granted at the ‘discretion of the Court’. Another change is regarding the remedy of ‘injunction’ relating to infrastructure projects specified in the Schedule. (For details refer to Chapter 10) Note: By virtue of Jammu & Kashmir Reorganisation Act, 2019, (w.e.f 31st October, 2019) the Indian Contract Act is applicable to the whole of India. Prior to this the Indian Contract Act was applicable to the whole of India ‘except the State of Jammu & Kasmir’. DEFINITION OF CONTRACT Sec. 2(h) of the Indian Contract Act, 1872 defines a contract as follows: “An agreement enforceable by law is a contract”. Thus a contract consists of the following two elements: (1) An agreement, and (2) Legal obligation i.e. duty enforceable by law. Nature and Types of Contracts 1.3 An agreement is enforceable by law if it creates a legally binding obligation between parties. It is also essential that the legal obligation must arise out of an agreement. These two elements are as follows: (1) Agreement. According to Sec. 2(e) “Every promise and every set of promises, forming consideration for each other, is an agreement,” An agreement is a promise or a set of promises. Sec. 2(b), lays down that “a proposal when accepted, becomes a promise.” Thus an agreement is an accepted proposal. It means that there must be a proposal or offer by one party and acceptance of the same by the other party. There must be consensus ad idem or identity of minds. The parties must agree about the same thing in the same sense. An agreement may be oral or written or it may be implied from the conduct of the parties. The person making the proposal is called the ‘promisor’, and the person accepting the proposal is called the ‘promisee’. (2) Legal Obligation. An agreement to be a contract must give rise to a legal obligation. A legal obligation means duty enforceable by law. If an agreement does not create a duty enforceable by law, it is not a contract. An agreement is a wider term than a contract. Agreements which give rise to social obligations are simply agreements and not contracts. Example: ‘A’ promises to go for a movie with ‘B’ on first day of college after the college is over. But on due date ‘A’ refuses (as he is not in a mood to go for a movie), then ‘B’ can not take any legal action against ‘A’ as agreeing to go for a movie is simply a social agreement and not legally enforceable. In business agreements, there is usual presumption that the parties intend to create legal obligations. Some Important Statements: I. All contracts are agreements but all agreements are not contracts. Only those agreements are contracts which give rise to legal obligations. Table 1.1 : Difference between Agreement and Contract Basis Agreement Contract 1. Meaning Agreement = offer + acceptance Contract = agreement + enforceability by Law 2. Creation of legal An agreement does not create A contract necessarily creates legal obligations and legal obligations and rights. obligations and rights. rights 3. Scope The term agreement is wider Every contract is an agreement. than contract. But all agreements are not contracts. 1.4 Business Laws Justice Salmond said, “The Law of Contract is not the whole law of agreements nor is it the whole law of obligations. It is the law of those agreements which create obligations, and of those obligations which have their source in agreements.” It excludes from its purview agreements which are social in nature and all obligations which are not contractual in nature. II. The law of contract is not the whole law of agreements: The law of contract is the law of those agreements which create legal obligations. A large number of agreements remain as agreements only because they cannot be enforced by law. In other words, the law of contract is concerned with only those agreements where the parties have intention to create legal obligations. An intention to create legal relations is essential to the formation of a contract. Examples: (i) A invites B to his wedding party. B accepts the invitation. B does not turn up. A cannot sue B because in this agreement there is no intention to create legal obligation. It is only an agreement and not a contract. (ii) A offers to sell his bike to B for ` 50,000. B accepts the offer. In this agreement if there is default by either party, then the other party can file a suit for breach of contract provided all the essential elements of a valid contract are present. III. The law of contract is not the whole law of obligations: All legal obligations are not contracts. Only those legal obligations constitute contract which arise out of agreement. The obligations may result from (a) judgements of court, i.e., Contracts of Records (derive their binding force from the authority of court). Obligations imposed by judgement of courts and entered in court records do not have their source in agreements; (b) tort or civil wrong. A tortuous liability is imposed by the general law of the land; (c) quasi-contract (relationship resembling to that of contract but not a contract in real sense) and (d) status obligations for example, relationship between husband and wife, trustee and beneficiary. In above cases obligations arise in the absence of contracts. The law of contract deals only with those obligations which arise out of contract and not otherwise. ESSENTIAL ELEMENTS OF A VALID CONTRACT According to Sec.10, “All agreements are contracts if they are made by the free consent of the parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void.” Accordingly all contracts are agreements, but all agreements are not contracts. The term agreement is much wider than the term contract. Only Nature and Types of Contracts 1.5 those agreements which satisfy the essentials laid down in this section, become contracts. The essentials for the valid contract are : (a) An agreement. An agreement is an outcome of offer and acceptance. In agreement there are two parties—one making the offer and other accepting it. Offer can be made subject to any terms and conditions but the terms of an offer must be certain and not loose or vague. The acceptance must be absolute and unqualified. Conditional acceptance is no acceptance. Acceptance must be expressed in some usual and reasonable manner, unless the proposal prescribes the manner in which it is to be accepted. (b) Intention to create legal relations. Intention to create legal relations means the intention to be legally bound. Parties entering into a contract must intend to create legal relations between themselves. If the intention is not to create legal relations, it will not give rise to a contract. “The doctrine of intention to create legal relations marks boundary of contract law”. Case Laws : Balfour v. Balfour Mr. Balfour, who was serving the Government of Ceylon, went to England with his wife on leave. After the expiry of the period of leave, Mr. Balfour had to go back to Ceylon, but his wife could not accompany him for medical reasons. Consequently, he promised orally to pay an allowance of £30 a month until she rejoined him. On his failure to make the payment, the wife sued him for the recovery of the promised amount. Her suit was dismissed by the court on the ground that the agreement was only an arrangement between the two, and the parties never intended to create legal relations or obligations. It was an agreement of domestic nature. Lord ATKIN explained : “There are agreements between parties which do not result in contract within the meaning of that term in our law. The ordinary example is where two parties agree to take a walk together, or where there is an offer and acceptance of hospitality. Nobody would suggest in ordinary circumstances that these agreements result in what we know as contracts, and one of the most usual forms of agreements which does not constitute a contract appears to be the agreements which are made between husband and wife. These arrangements do not result in contracts at all, even though they may be what would constitute consideration for the agreement. They are not contracts because parties did not intend that they shall be attended by legal consequences.” In a nutshell, it can be said that in social engagements and family arrangements, parties do not intend that they shall be attended by legal 1.6 Business Laws consequences. Social, domestic, religious and moral agreements are simply agreements and not contracts. Because intention to create legal relation is missing. In other words non-market transactions entail no intention to create legal relations. While in the case of business agreements, the assumption is that the parties intend to create legal relations and therefore it is a contract. Sometimes, the parties to a business agreement may explicitly state that they do not intend to create legal obligation. In such a case, the promise will be binding in honour only and not in law. Case Law : Rose & Frank Co. v. J.R. Crompton & Bros. Ltd. Two firms entered into a written contract for the sale and purchase of tissue paper. The agreement contained a clause to the effect that ‘this arrangement is not entered into, nor is this memorandum written, as a formal or a legal document and shall not be subject to legal jurisdiction in the law court’. The goods were not delivered and therefore, the buyers brought an action for non-delivery. It was held that there was no intention to create legal relations on the part of the parties to the agreement and thus there was no contract. (c) Free consent. For an agreement to become enforceable by law, there must be consensus ad idem. i.e. parties agree upon the same thing in the same sense (simply called consent). There must be consent and it must also be free. Consent must also be free. Consent is said to be free when it is not caused by coercion, undue influence, fraud, misrepresentation or mistake. If the consent is obtained by any of the first four elements, the contract would be voidable at the option of the party whose consent has been so obtained. Example: Mr. A at gunpoint (or knifepoint) asks Mr. B to sell his new bike for ` 1,000, Mr. B does so. The agreement is voidable at the option of Mr. B, whose consent has been obtained by coercion. (d) Contractual capacity. For a valid contract the parties entering into an agreement must be legally competent to contract. According to Sec. 11, a person is not competent to contract who is not of the age of majority, and who is not of sound mind and who is disqualified to contract by any law to which he is subject. Thus, minors, persons of unsound mind and persons disqualified from contracting by any other law are incompetent to contract. An agreement entered into with a person who is not competent to contract at the time of entering into the agreement is void ab-initio i.e., from the very beginning and thus not enforceable. Nature and Types of Contracts 1.7 (e) Lawful consideration. A contract without consideration is void, i.e., not enforceable. Consideration means ‘compensation’ for doing or omitting to do an act. Consideration is quid pro quo i.e., ‘something in return’ for the promise. Both the parties must give something and get something in return. Consideration is the price for the promise. Consideration may be past, present or future. It may be positive or negative. It need not be adequate. But it must be real and valuable in the eyes of law. It must not be illusory. Example: A agrees to sell narcotics to B for a sum of ` 1,00,000. This agreement is not valid as the consideration is unlawful. (f) Lawful object. The object of an agreement must be lawful. The object would be unlawful if it is forbidden by law; or is of such a nature that, if permitted, it would defeat the provisions of any law; or is fraudulent; or involves or implies injury to the person or property of another; or the court regards it as immoral, or opposed to public policy (Sec. 23). (g) Not expressly declared void. Certain types of agreements have been expressly declared to be void by law itself. For example, agreements in restraint of marriage, in restraint of trade, in restraint of legal proceeding, uncertain agreements, wagering agreements and impossible agreements. These agreements are void and therefore, the aggrieved party cannot seek any relief from the court. (h) Certainty of Terms. The terms of the agreement must be certain or at least capable of being made certain to give rise to a valid contract (Sec. 29). If A agrees to sell ‘a hundred tons of oil’ and there is nothing to show what kind of oil (e.g. coconut or mustard oil) was intended. The agreement being uncertain shall not be enforceable. (i) Possibility of performance. As per Sec.56, agreements to do an act impossible of performance cannot be enforced. Example: (1) A promise to make a dead man alive. The agreement is not enforceable because the act in the agreement is not possible. (2) A promise to discover treasure by magic. The agreement is not enforce- able. (3) A promise to write 100 pages in a minute. The agreement is not enforce- able. (j) Legal formalities. Agreements may either be oral or written. However, certain agreements are required to be in writing or registered under particular law to which such agreement is subject. Therefore an 1.8 Business Laws agreement must fulfil the necessary legal formalities as to writing, registration, stamping etc., if any, required in order to make it enforceable. Examples: (1) Partnership deed must be stamped under the Indian Stamp Act, 1899. (2) An agreement to pay a time-barred debt must be in writing. (3) The Transfer of Property Act has made the writing and registration compulsory for contracts relating to transfer of immovable properties. It is clear from the above discussion that Agreement, Consent, Capacity (of parties), Certainty (of terms), Consideration, Completion (of legal formalities), Legality of object, Possibility (of performance), Non-coverage by list of void agreements and most importantly Intention to create legal relations are ‘musts’ of a valid contract. Some Important Terms (Seven ‘Rs’) 1. Revocation: means cancellation. 2. Restitution: means restoration of a previous state or original position in which the parties were before the contract was made. 3. Remission: means acceptance of lesser performance than what is due under the contract. 4. Ratification: means subsequent adoption of an unauthorized act. 5. Rescission: means unmaking of a contract between parties. 6. Relinquishment: means to abandon or renounce. 7. Reasonableness: means fairness and the terms are not unconscionable. KINDS OF CONTRACTS 1. On the Basis of Enforceability From the point of view of enforceability a contract may be valid or voidable or void or unenforceable or illegal. (a) Valid contract. A valid contract is an agreement enforceable by law. An agreement becomes enforceable by law when it has all the essential elements of a valid contract as specified under Sec.10 of the Indian Contract Act. (b) Voidable contract. According to Sec. 2(i), “an agreement which is enforceable by law at the option of one or more of the parties thereto, Nature and Types of Contracts 1.9 but not at the option of the other or others, is a voidable contract.” Thus, a voidable contract is one which is enforceable by law at the option of one of the parties. Until it is rescinded (avoided) by the party entitled to do so by exercising his option in that behalf, it is a valid contract. A contract is voidable when the consent of one of the parties to the contract is obtained by coercion, undue influence, misrepresentation or fraud. Such a contract is voidable at the option of the aggrieved party i.e., the party whose consent was so obtained. If the aggrieved party opts not to avoid the contract, it is as good as any other valid contract. Example: ‘A’ threatens to shoot ‘B’ if he does not sell his car to A for ` 10,000. B agrees. The contract has been made by coercion and is voidable at the option of B. (c) Void contract. Sec. 2(j) defines: “A contract which ceases to be enforceable by law becomes void, when it ceases to be enforceable.” It is clear from the definition that a void contract is not void from its inception and that it is valid and binding on the parties when originally made but subsequent to its formation it becomes void because of certain happenings. A valid contract becomes a void contract in the following situations: (i) Supervening impossibility. Supervening means unexpected significant development that greatly changes an existing situation. Here contract becomes void by impossibility of performance after the formation of the contract. Examples: (1) A and B contract to marry each other. Before the time fixed for the marriage, A dies. The contract to marry becomes void. (2) X, a singer agreed to sing for a particular music company. But after a few days she suffered from severe throat problem and diagnosed with vocal nodules and advised complete voice rest by her doctor. The contract becomes void. (ii) Subsequent illegality. Subsequent illegality means illegality which arises after the formation of a contract. A contract becomes void by subsequent illegality. For example, (1) A agrees to sell B, a particular quantity of product to be manufactured in India, using an imported ingredient and the Government of India bans the import of that particular ingredient then the contract shall become void due to subsequent illegality; (2) A agrees to sell B 1.10 Business Laws 100 bags of rice at ` 1000 per bag. Before delivery, the Government bans private trading in rice. The contract becomes void. Table 1.2 : Distinction Between Void and Voidable Contract Basis Void contract Voidable contract 1. Meaning A contract which ceases to be An agreement, which is enforceable by law becomes enforceable by law at the option void when it ceases to be of one or more of the parties enforceable. thereto, but not at the option of the other or others, is a voidable contract. 2. Rights A void contract does not The party whose consent was grant any right to any party. not free has the right to rescind the contract. 3. Performance of A void contract cannot be If the aggrieved party does not, contract performed. It stands exercise his right to avoid the discharged. contract within reasonable time, any party can sue the other for performance of the contract. 4. Cause A contract becomes void due A contract is voidable contract to subsequent illegality or if the consent of a party was not supervening impossibility. free. Void agreement. “An agreement not enforceable by law is said to be void” [Sec. 2(g)]. Thus, a void agreement is void ab-initio i.e. from the beginning. It does not give rise to any legal consequences. In the eye of law such an agreement is no agreement at all. It is to be noted that in void agreement there is absence of one or more essential elements of a valid contract as listed under Sec. 10 (except that of ‘free consent’). Examples: (a) An agreement with a minor is void ab-initio as against him, because a minor is incompetent to contract. (b) An agreement without consideration is void ab-initio, (with exceptions as laid down in Sec. 25). (c) Agreements expressly declared to be void such as agreements which are in restraint of marriage or of trade or of legal proceedings etc. A ‘void agreement’ is different from a ‘void contract’. A ‘void agreement’ is void ab-initio. Thus, a void agreement never matures into a contract. A ‘void contract’ is valid when it is made, but subsequent to its formation Nature and Types of Contracts 1.11 something happens which makes it unenforceable by law. It is important to note that a contract cannot be void ab-initio and only an agreement can be void ab-initio. Table 1.3 : Distinction between Void Agreement and Void Contract Basis Void Agreement Void Contract 1. Meaning An agreement not enforceable A contract which ceases to be by law is said to be void, i.e. a enforceable by law becomes void void agreement. when it ceases to be enforceable. 2. Legal status at All the essentials of the contract All the essentials of the contract the time of are not satisfied at the time of are satisfied at the time of formation formation of a void agreement. formation of a contract, which Thus, it is a nullity since subsequently becomes void. inception. Thus, at the time of formation, it is a valid contract. 3. R e s t i t u t i o n No restitution is allowed in case Restitution is allowed in case of (restoration of a of expressly declared void a void contract. In other words, previous state) agreements, or if the object or any party who has obtained any consideration of an agreement benefit under a void contract, is unlawful. must restore it back to the other party. 4. Legal obligations A void agreement does not Legal obligations created come create any legal obligations to an end when the contract between the parties from the very becomes void. beginning. (d) Unenforceable contract. An unenforceable contract is one which is valid in itself, but cannot be enforced in a court because of some technical defect. Technical defect may relate to requirements of writing, registration, stamping, etc. as per the requirements of different laws. Such contracts shall become binding once the technical defect is removed. Examples: (a) An oral arbitration agreement is unenforceable because the Arbitration Act, 1996 requires it to be in writing. (b) Contract of marine insurance must be always in writing. (c) Negotiable instrument (other than cheque), Power of Attorney, creation of trust, execution of will, sale of immovable property to be enforceable are required to be authenticated by the handwritten (manual) signa- tures, as per Schedule I of the Information Technology Act, 2000. (e) Illegal or unlawful agreement. The word ‘illegal’ means ‘contrary to law’. An agreement is illegal and void if its object or consideration: 1.12 Business Laws (a) is forbidden by law; or (b) is of such a nature that, if permitted, it would defeat the provisions of any law; or (c) is fraudulent; or (d) involves or implies injury to the person or property of another; or (e) the court regards it as immoral, or opposed to public policy (Sec. 23). Thus, an agreement to commit murder or throw acid would be illegal and void ab-initio. An illegal agreement not only vitiates the primary transaction but also collateral transaction. Table 1.4 : Distinction between Void Agreement and Illegal Agreement Basis Void agreement Illegal agreement 1. Meaning An agreement not enforce- An agreement which is forbidden by able by law is said to be a void any law for the time being in force, is agreement. an illegal agreement. 2. Mutuality All void agreements are not An illegal agreement is always void illegal e.g. an agreement with a e.g., smuggling. minor is void as against him but not illegal. 3. Punishment The parties are not liable to be In case of an illegal agreement, the punished. parties are criminally liable. 4. Effect on A transaction which is collateral A transaction which is collateral to an collateral to a void agreement, is not void. illegal agreement, is also illegal. transactions Examples: (a) An agreement for bomb blast is illegal. Further any person funding such activity being collateral to main transaction of bomb blast shall also be tainted with illegal- ity and money shall not be recoverable by the party having knowledge of illegal purpose of loan. (b) Where, A gives loan to B to smuggle goods. Smuggling is the main transaction and loan is collateral to it. Loan transaction is also tainted with illegality and A will not be able to recover his money provided he knew the purpose of loan. (c) A engages B to murder C and borrows ` 50,000 from D to pay B. D is aware of the purpose of the loan. Here the agreement between A and B is illegal and the agreement between A and D is collateral to an illegal agreement. As such the loan transaction is illegal and void and D cannot recover the money. But the position will be different if D is not aware of the purpose of the loan. In that case the loan transaction is valid. (d) If A borrows from B to pay his wagering debts (a wagering agreement is void under Sec. 30), the contract between A and B would not have been affected, even if B is aware of the purpose of the loan because an agreement collateral to a void agreement is perfectly valid. The distinction between illegal and void agreements is very thin but it is Nature and Types of Contracts 1.13 there. Agreement is illegal when it is forbidden by law. Agreement is void when law says that if it is made the courts will not enforce it. 2. On the basis of Mode of Creation Are only written contracts enforceable? The answer is no because from the point of view of mode of creation a contract may be express or implied or quasi-contract. (a) Express contract. When the offer and acceptance are made by words spoken or written, it is an express contract. For example, A tells B that he offers to sell his car for ` 1,00,000 and B in reply tells A that he accepts the offer, there is an express contract. Express contracts also include e- contracts. Sec.10A, which has been incorporated in Information Technology Act, 2000 by Information Technology (Amendment) Act, 2008 confers the validity on contracts made in electronic form. Electronic records have evidentiary value in Court of law under Sec. 65B (relating to Admissibility of Electronic Records) of Indian Evidence Act. Case Law : On Admissibility of Electronic Evidence Khotkar v. Gorantyal & ors. (14.7.2020) It provided clarification on Admissibility of Electronic Evidence: 1. “If the original digital device in which original information is first stored is physically produced in court with its owner/operator stepping into the witness box, no certificate under Section 65B(4) is necessary as the original document itself stands is produced in the court, but 2. If the original digital device in which original information is first stored is part of a ‘computer system’ or ‘computer network’ incapable of being physically produced before the court, the only way of proving the said information is in accordance with Section 65B(1), together with the requisite certificate under Section 65B(4).” Knowledge Point In the light of recent judgement of (Bench of Chief Justice Ramana and Justice Bopana) Supreme Court (July 2021) regarding evidential value of whatsApp message in business partnership administered by agreements, it is advisable to use electronic mail system rather than whatsApp messaging services. (b) Implied contract. Where both the offer and acceptance are made by acts and conduct of the parties rather than words spoken or written, it is an implied contract. 1.14 Business Laws Examples: (a) Where A parks car in paid parking lot, it is implied that A agrees to pay for the services and there is an implied contract. (b) Where A, boards the bus run by Delhi Transport Corporation (DTC) on a particular route then the law implies that A agrees to pay for the services of DTC and there is an implied contract. Lord Greene in Wilkie v. London Passenger Transport Board said that contract is made when a passanger puts himself inside the bus. (c) Quasi contract or Constructive contract. In quasi contract there is no contractual relationship between parties but the law infers a contract under certain special circumstances. For example, obligation of finder of lost goods to return them to the true owner. A quasi-contract is based upon the equitable principle that a person shall not be allowed to enrich himself at the expense of another. Secs. 68-72 of the Contract Act pertain to ‘quasi- contracts’. 3. On the basis of Extent of Execution From the point of view of the extent of execution a contract may be executed or executory. (a) Executed contract. A contract is said to be executed when both the parties to a contract have, completely performed their share of obligation and nothing remains to be done by either party. Example: X offers to sell his bike to Y for ` 20,000. Y accepts the offer. X delivers the bike to Y and Y pays ` 20,000 to X. It is an executed contract. (b) Executory contract. A contract is said to be executory when both the parties to a contract have still to perform their obligations. Example: X offers to sell his bike to Y for ` 20,000. Y accepts the offer. If bike has not been delivered by X and the price has not been paid by Y, it is an executory contract. (c) A contract may sometimes be partly executed and partly executory. If in the above example X delivers the bike and Y is yet to pay the price or vice versa, it is an executory contract. (d) Unilateral contract (A promise conditional on an act). Unilateral contract is a one-sided contract. Here obligation of one party shall Nature and Types of Contracts 1.15 arise only when the other party has already performed his part e.g. the reward for finding the lost dog shall be due only when it has been done by the other party. In a unilateral contract the requested act (e.g. finding the lost dog) is both the acceptance and the consideration for the promise. (refer to ‘Smoke Ball case’ on page 2.3) (e) Bilateral contract (promise for a promise). Where the obligation or promise in a contract is outstanding on the part of both the parties, it is known as bilateral contracts. Most of the contracts are bilateral. It means when the contract is entered or formed the obligations of both the parties arise and become due e.g. in a contract of sale, seller is under obligation to deliver goods and buyer to pay for the same. While in case of unilateral contracts it is optional for the party (e.g. the person may try to find the lost dog or not) whether to perform or not and then creating an obligation for the other party. INDIAN CONTRACT ACT, 1872 Chapters in the Act with Sections covered (in the context of Syllabus of B.Com(H), Delhi University) Chapters Sections Contents Preliminary Sec. 1 Title, Extent, Commencement Sec. 2 Interpretation Clause I Secs. 3-9 Communication, Acceptance and Revocation of Proposals II Secs. 10-23 Contracts, Voidable Contracts Secs. 24-30 Void Agreements IV Performance of Contract Sec. 56 Agreement to do Impossible act, Supervening Impossibility (Doctrine of Frustration) Relevant Secs. Secs. 57, 58 Discussed in Chapter 6 in book as per Syllabus Secs. 62,63 etc. 1.16 Business Laws V Secs. 68-72 Certain Relations resembling those created by contracts (Quasi Contracts) VI Secs. 73-75 Consequences of Breach of Contract (Remedies for Breach of Contracts) VIII Secs. 124-147 Indemnity and Guarantee IX Secs. 148-181 - Bailment (Secs. 148-171) - Pledge (Secs. 172-181) X Secs. 182-238 Agency Questions 1. What is a contract? Explain the essential elements of a valid contract. 2. “All contracts are agreements, but all agreements are not contracts”. Explain. 3. “The law of contract is not the whole law of agreements, nor is it the whole law of obligations”. Comment. 4. Distinguish between: (a) Agreement and contract (b) Void and illegal agreements [B. Com (Hons) 2014] (c) Void agreement and void contract (d) Void agreement and voidable contract (e) Executed and executory contracts (f) Express and Implied contracts (g) Unilateral and Bilateral contracts 5. Write short notes on: (a) Unenforceable contracts (b) Implied contract 6. “The doctrine of intention to create legal relations marks boundary of contract law.” Comment giving examples. Nature and Types of Contracts 1.17 Practical Problems 1. A promises his wife B to get her a saree if she sings a song. B sang a song but A did not bring saree for her. Can B take an action against A in court to enforce agreement under the Indian Contract Act, 1872. {Hint: No, it is an agreement of social nature. There is no intention to create legal relationship. See Balfour v. Balfour (Husband and Wife relationship)} 2. A invites B for dinner. B accepts the offer. A hires a taxi but B does not turn up. A has to give the driver compensation. Can A recover it from B? (Hint: No, it is a social agreement. There is no intention to create legal relationship) 3. ‘A’ invites ‘B’ to stay with him during winter vacation. ‘B’ accepts 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’? (Hint: ‘B’ cannot claim any damages from ‘A’; it is a social agreement and there is no intention to create legal relationship.) 4. ‘A’ makes a promise to his son to give him pocket money of Rupees one hundred every month. After three months, ‘A’ stops making the payment. Advise the son. (Hint: Son cannot compel his father as there was no intention to create legal relationship.) 5. A company agrees to lease the land to Mr. X for indefinite period. Is it a valid contract? (Hint: No, as the period of lease is not specified so the terms are not certain.) Statement Based Problems State with reasons whether the following statements are True or False: 1. All agreements are contracts. 1.18 Business Laws 2. In social agreements, there is a presumption that the parties intend to create legal obligations. 3. In business agreements, there is a presumption that the parties do not intend to create legal obligations. 4. A void contract is void from its inception. 5. A voidable contract may remain valid. [B. Com (Hons) 2016] 6. Collateral transactions to a void agreement also become void. 7. Collateral transactions to an illegal agreement do not become void. [B. Com (Hons) 2012, 2018] 8. An unenforceable contract can be enforced if the technical defect is removed. 9. A void contract is one which is void ab initio. [B. Com (Hons) 2011] 10. A voidable contract is one which cannot be enforced in a court of law. [B. Com (Hons) 2012] 11. Every illegal agreement is void but every void agreement is not illegal. [B. Com (Hons) 2013] 12. In commercial and business agreements, the presumption is that the parties intend to create legal relation. [B. Com (Hons) 2015] 13. Collateral transactions to an illegal agreement are void. [B. Com (Hons) 2016] 14. All illegal agreements are void but all void agreements are not necessarily illegal. [B. Com (Hons) 2017] 15. A voidable contract can be enforced by a stranger. [B. Com (Hons) 2017] 16. Void contracts and voidable contracts are one and the same thing. [B. Com (Hons) 2019] Ans. : (1)-F, (2)-F, (3)-F, (4)-F, (5)-T, (6)-F, (7)-F, (8)-T, (9)-F, (10)-F, (11)-T, (12)-T, (13)-T, (14)-T, (15)-F, (16)-F.  Chapter OFFER AND ACCEPTANCE THE PROPOSAL OR OFFER Sec. 2(a) of the Indian Contract Act defines a ‘proposal’ as, “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”. The terms proposal and offer are used interchangeably. An offer is not merely a request or piece of information or statement of intention. It is much more than all these. Therefore essential elements of a ‘proposal’ or an ‘offer’ are: (a) It must be made to another person. There cannot be a ‘proposal’ by a person to himself. (b) It may be made to do something or abstain from doing something. This means that offer may be positive or negative e.g., (a) The finance company offers not to confiscate car (i.e., negative offer) if the customer promises to repay the outstanding amount before the agreed day, (b) It may be an offer to construct a wall to provide privacy (positive offer) or not to construct a wall (negative offer) so that free passage of light and air may not be obstructed. (c) It must be an expression of the willingness to do or to abstain from doing something. Examples: 1) A casual enquiry e.g. ‘Do you intend to sell your car?’ is not a ‘proposal’. 2) A mere statement of intention e.g. ‘I may sell my car if I can get `1 lakh for it’ is not a proposal. 3) An advertisement to hold an auction is merely a declaration of intention or invitation to an offer. 2.2 Business Laws 4) Likewise, an announcement of a beauty competition by a beauty parlour or a scholarship examination by a college is not an offer. 5) ‘I am willing to sell my bike to you for ` 25,000’ is a ‘proposal’. (d) It must be made with a view to obtaining the assent of the other person to such act or abstinence. Intention must be to obtain consent of other person. Example 5 above is a ‘proposal’ as it is an expression of willingness to sell a bike and has been made with the object of obtaining the assent of other party. The person making the ‘proposal’ or ‘offer’ is called the ‘promisor’ or ‘offeror’, the person to whom the offer is made is called the ‘offeree’ and the person accepting the offer is called the ‘promisee’ or ‘acceptor’. SOME IMPORTANT CONCEPTS WITH REGARD TO OFFER 1. An offer may be ‘express’ or ‘implied’. An offer may be made either by words or by conduct. Express Offer: An offer which is made by words, spoken or written is called an ‘express offer’. Examples: Express offer: (a) A says to B, ‘Will you purchase my car for ` 1,00,000?’ (b) A advertises in the newspaper that I will pay ` 10,000 to anyone who traces my missing dog. Implied Offer: An offer which is concluded from the conduct of a person or the circumstances of the case is called an ‘implied offer’. Examples: Implied offer: (a) A transport company runs buses on different routes to carry passengers. This is an implied offer by the transport company to carry passengers for a certain fare. (b) DMRC running metro on a particular route. (c) A weighing machine kept at railway station is an implied offer to use the machine by inserting the necessary coin. Automatic vending machine is also an implied offer to sell the goods. In Thornton v. Shoe Lane Parking Ltd., Lord Denning makes it clear that the offer is made when the proprietor of the machine holds it out as being ready to receive the money. The acceptance takes place when the customer puts his money into the slot. Offer and Acceptance 2.3 2. An offer may be ‘specific’ or ‘general’. Specific Offer: An offer is said to be ‘specific’ when it is made to a definite person or group of persons. Such an offer can be accepted only by the person or group of persons to whom it is made. Thus, where A makes an offer to B to sell his car for ` 60,000, there is a specific offer and B alone can accept it. General Offer: A ‘general offer’ is one which is made to the world at large or public in general. It may be accepted by any person by fulfilling the required conditions. The landmark case of ‘general offer’ is that of Carlill v. Carbolic Smoke Ball Co. popularly known as Smoke Ball case. Case Law: Carlill v. Carbolic Smoke Ball Co. (Smoke Ball case) The Carbolic Smoke Ball Co. issued an advertisement in which the Company offered to pay 100 pounds to any person who catches influenza, after having used their Smoke Balls (medical preparation called ‘The Carbolic Smoke Balls’) three times daily for two weeks, according to the printed directions. Mrs Carlill, on the faith of the advertisement, bought and used the Balls according to the directions, but she nevertheless subsequently suffered from influenza. She sued the company for the promised reward. The company was held liable. Here performance as per the printed directions was held to be sufficient acceptance. In such unilateral contract the offer demands an action so notification of acceptance is dispensed with. Until such general offer is retracted or withdrawn, it can be accepted by anyone at any time as it is a continuing offer. Reward Poster or Advertisement of Reward: Advertisement of reward addressed to the public at large, for the restoration of lost article is a general offer. Such offer may be accepted by any person acting as per the terms of the offer in order to give rise to a contractual obligation to pay the reward. In such cases communication of acceptance is not necessary. Case Law: Harbhajan Lal v. Harcharan Lal X advertised in the newspaper that he would pay ` 5,000 to anyone who traces his missing boy. Y who knew about the reward traced that boy and sent a telegram to X that he had found his boy. It was held that Y was entitled to receive the amount of reward. Such offer is automatically closed as soon as the first information comes in. 3. An invitation to offer is not an offer. An offer must be distinguished 2.4 Business Laws from an ‘invitation to offer’ (invitation to treat). The Latin phrase ‘Invitatio ad offerendum’ means inviting the offer. In the case of an ‘invitation to offer’ the person sending out the invitation does not make an offer but only invites the other party to make an offer. It is prelude to an offer inviting negotiations or preliminary discussions. Invitation to offer is an inducement or attraction to the other party to make an offer against such attraction and inducement. The objective is merely to circulate information. Such invitations for offers are therefore not offers in the eye of law. They are simply invitations to negotiate. For example, (a) display of time table by railway, (b) advertisement to let-out office space, (c) brochure issued by development authority announcing a scheme for allotment of plots (Ghaziabad Development Authority v. Union of India) (d) prospectus issued by the company, (e) menu card handed over to a customer in a restaurant (f) catalogues of prices or display of goods with prices marked thereon do not constitute an offer. They are simply an invitation for offer and hence if a customer asks for goods or makes an offer, the shopkeeper is free to accept the offer or not. Case Laws: Pharmaceutical Society of Great Britain v. Boots Cash Chemists Ltd. (Mere invitation to an offer) The ‘when and where’ does the sale take place in a self service store was resolved by this landmark judgement. Goods were displayed in the shop for sale with price tags attached on each article and self-service system was there. One customer selected the goods but the owner refused to sell. It was held that the display of goods was only an invitation to offer and the selection of goods was an offer by the customer to buy and refusal by owner was rejection of the offer and hence there was no contract and customer had no right to sue the owner. Harvey v. Facey (Mere statement of the lowest price) In this case the quotation of the price was held not to be an offer. A mere statement of price is not to be construed as an offer. Harris v. N. Nickerson (Mere statement of intention) An auctioneer advertised in a newspaper that a sale of office furniture will be held on a particular day. Mr. X with the intention to buy furniture came from a distant place for the auction but the auction was cancelled. It was held that Mr. X cannot file a suit against the auctioneer for his loss of time and expenses because the advertisement was merely an ‘invitation to offer’ and not an offer to sell. Offer and Acceptance 2.5 In a nutshell, it can be concluded that offer is different from an invitation to an offer, statement of the lowest price and a statement of intention. 4. No contract is entered into on cross offer. When two parties make identical offers to each other, in ignorance of each other’s offer, the offers are ‘cross-offers’. ‘Cross-offers’ do not constitute acceptance of one’s offer by the other. Case Law: Tinn v. Hoffman & Co. A company wrote to X offering to sell 800 tons of iron at 69 shilling per ton. On the same day, X wrote to the company offering to buy 800 tons at 69 shilling per ton. The letters crossed in post and neither of them knew anything about the offer of the other. X contended that it was a good contract. Held that there was no contract and the company would not be bound, as cross offers do not make a contract. 5. Standing offer or tender. (i) A tender notice is not an offer. It is only an invitation extended to contractors for making offers. (ii) A tender (i.e., tender submitted) is however an offer and when a tender is to supply specific goods for a certain period at certain price it is known as standing offer or continuing offer. (iii) The offeror is free to revoke the standing offer with regard to further supply, any time, by giving a notice. (iv) In case of standing offer a contract is said to have been entered into only when an order is placed on the basis of a tender. Case Law: Vithaldas v. Parashram In case of standing offer it was held by the Supreme Court of India that when an order is placed a contract arises and until then there is no contract. Also, each separate order and acceptance constitutes a different and distinct contract. If the offeree gives no order or fails to order the full quantity of goods set out in a tender, there shall be no breach of contract. LEGAL RULES REGARDING A VALID OFFER Essential elements of valid offer are: 1. An offer must contemplate to give rise to legal consequences. A valid offer is one which is made with an intention to give rise to legal consequences. An offer to one’s wife to visit a mall and dine outside is not a valid offer and it cannot give rise to a binding agreement because 2.6 Business Laws in domestic agreements the presumption is that the parties do not intend legal consequences. While in the case of business agreements the presumption is that parties intend legal consequences on default. 2. The terms of the offer must be certain and not loose or vague. In order to constitute a valid offer the terms of the offer must be definite and certain e.g., an agreement to agree in future is not a contract, because the terms of agreement are uncertain. A promise to favourably consider an application for renewal of contract does not create any legal obligation for being vague (Montreal Gas Co. v. Vasey). Case Laws: Taylor v. Portington A offered to take house on lease if the house was put into thorough repair and decorated according to present style. Held, the offer was too vague to result in a contractual relation. Guthing v. Lynn L purchased a horse from G and he promised to buy another or pay 45 pounds if the horse proved lucky. He did neither. G could not enforce, the agreement being loose and vague. 3. An offer to be valid must be communicated. Offer cannot be accepted in its ignorance. Knowledge of the offer is essential for acceptance as was established in the following case: Case Law: Lalman Shukla v. Gauri Dutt G sent his servant, in search of his lost nephew. After the servant had left, G announced a reward to anybody giving information relating to the boy. The servant, before seeing the announcement, had traced the boy and informed G. Later, on reading the notice of reward, the servant claimed it. His suit was dismissed on the ground that he could not accept the offer, unless he had knowledge of it. The above case also established a rule that acceptance can not precede an offer or acceptance must succeed an offer. 4. An offer cannot prescribe silence on the part of other party as acceptance. An offeror cannot say that if acceptance is not communicated up to a certain date, the offer would be considered to have been accepted. Because of the simple reason that obligation to respond cannot be imposed. Offeror cannot exploit offeree’s inertia (refer to point 4, page 2.10). 5. Offer may be conditional. It means that an offer can be made subject to any terms and conditions e.g. offerer may ask for payment by RTGS Offer and Acceptance 2.7 or NEFT. Even the mode of acceptance (e.g. by e-mail, telephone etc.) can also be prescribed by offerer. 6. Communication of special terms. Special terms of the contract are usually contained in a receipt, ticket or standard form documents*. Rules regarding communication of special terms are: (a) These must be communicated before or at the time of formation of contract and not later otherwise these are not binding upon the acceptor. Case Laws: Olley v. Marlborough Ltd. A husband and his wife hired a room in a hotel and paid a week's rent in advance. When they went up to occupy the room there was a notice on one of the walls to the effect that: "The proprietors will not hold themselves responsible for articles lost or stolen. Their property having been stolen owing to the negligence of the hotel staff, the hotel was held liable as the court said that the notice was not a part of the agreement. Notice was ineffective as the contract had already been made. Handerson v. Stevenson ‘A’ bought a steamer ticket. Conditions were printed on the back side where it was written that the company shall not be responsible for loss of luggage. ‘A’ never looked at the back of the ticket. His luggage was lost. He claimed damages for its loss. It was held that ‘A’ was entitled to recover his loss from the company as there was not sufficient communication of the terms and conditions. The front of the ticket bore no reference to the back. If on the face of ticket it is written that for ‘conditions see back’ or ‘please turn over’ then situation would be different and company would not be liable for damages whether A has read the conditions or not. Example: DMRC puts its instruction boards at the entry point, such instructions are binding on the passengers as it is done before the formation of contract and reasonable effort has been made to bring attention of the passengers to such conditions by placing it at the conspicuous place. (b) The acceptor cannot plead that he was illiterate or blind or did not know the language or did not read if there is reasonable and adequate notice {as specified in point (a) above} of special terms. *Standard Form Documents or Contracts : Sometimes certain organisations, like Railways, Insurance Companies, Banks, electricity, courier companies etc. may have to enter into contracts with thousands of persons. They cannot possibly negotiate with each individual for making a contract. Contracts with pre-drafted terms (in Standard Form) are prepared by such organisations. 2.8 Business Laws (c) Extremely unreasonable conditions have not been held to be binding. Thus, a drycleaner’s terms that he will pay only eight times the amount of drycleaning charges for loss of garments has been held to be unreasonable. Most of the cases where the Indian courts declared the conditional clause as unreasonable are related to garment and laundry industries. The Supreme Court has also held that standard form contracts drawn up even by the Government must be fair and that these contracts are open to judicial review on grounds of unreasonableness and unfairness (LIC of India v. Central Electricity Regulatory Commission). Essentials of Valid Offer (Check list) 1. Intention: intention must be to create legal relations. 2. Terms and conditions: Offer may be subjected to any terms and conditions but these must be certain. 3. Communication of offer: Offer cannot be accepted in its ignorance (Lalman Shukla v. Gauri Dutt). 4. Silence cannot be the mode of acceptance: External manifestation of acceptance is required. Mental acceptance shall not be sufficient. 5. Special terms: Special terms must be communicated either before or at the time of formation of contract. Adequate effort to bring terms to the notice of party and reasonability of the terms are essential to be binding. LAPSE AND REVOCATION OF OFFER An offer lapses in the following circumstances: 1. An offer lapses after stipulated or reasonable time. An offer lapses if acceptance is not communicated within the time prescribed in the offer, or if no time is prescribed, within a reasonable time. Reasonability of time is decided by circumstances of particular case. 2. An offer lapses by not being accepted in the mode prescribed, or if no mode is prescribed, in some usual and reasonable manner. 3. An offer lapses by rejection. It may be express rejection or implied through conditional acceptance. 4. An offer lapses by the death or insanity of the proposer, if such fact comes to the knowledge of the acceptor before acceptance. 5. An offer lapses by the death or insanity of the offeree before acceptance as his heirs cannot accept for him. Offer and Acceptance 2.9 6. An offer lapses by revocation. A revocation of an offer must be communicated or made known to the offeree, otherwise the revocation does not prevent acceptance. 7. An offer stands revoked if the offeree fails to fulfill a condition precedent to acceptance [Sec. 6(3)]. 8. An offer lapses by subsequent illegality or destruction of subject matter. THE ACCEPTANCE Sec. 2(b) states that “A proposal when accepted becomes a promise” and defines ‘acceptance’ as “when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted.” In simple words acceptance means assent of offeree to a proposal. Legal Rules Regarding a Valid Acceptance are: 1. In case of specific offer acceptance must be given only by the person to whom the offer is made. An offer made to a particular person can be validly accepted by him alone. Case Law : Boulton v. Jones A sold his business to his manager B without disclosing the fact to his customers. C, a customer, who had a running account with A, sent an order for the supply of goods to A by name. B received the order and executed the same. C refused to pay the price. It was held that there was no contract between B and C because C never made any offer to B and as such C was not liable to pay the price to B. 2. Acceptance must be absolute and unqualified. In order to be legally binding it must be an absolute and unqualified acceptance of all the terms of the offer. The acceptance must be exactly the same as the original offer made (popularly known as the mirror image approach to contract formation). In effect conditional acceptance is regarded as a counter offer in law. A counter offer would terminate the original offer and introduce a new offer to the original offeror. Once the original offer is destroyed by counter offer, it is a dead offer. Example: A offered to B his bike for ` 20,000. B accepted the offer and tendered ` 15,000 cash down, promising to pay the balance of ` 5,000 by next week. There is no contract, as the acceptance was not absolute and unqualified. Rather it is a counter offer which may or may not be accepted by A. An acceptance with a variation is no acceptance. 2.10 Business Laws 3. Acceptance must be through the means of communication specified in the offer. If the offeror prescribes mode of acceptance, i.e. means of communication such as e-mail, telephone etc., the acceptance must be communicated through that mode only. Otherwise it will be termed as deviated acceptance. And if no mode is prescribed then acceptance must be communicated according to some usual and reasonable mode. The usual modes of communication are by word of mouth, by e-mail, by post and by conduct. In case of deviated acceptance ‘the proposer may, within a reasonable time after the acceptance is communicated to him, insist that his proposal shall be accepted in the prescribed manner, and not otherwise; but, if he fails to do so, he accepts the (deviated) acceptance.’ 4. Under law ‘silence’ cannot be prescribed as the mode of acceptance. Thus, a person cannot say that if within a certain time acceptance is not communicated the offer would be considered as accepted. As per rule, “It is not open to an offeror to stipulate against an unwilling offeree that the latter’s silence will be regarded as equivalent to acceptance”. The rule prevents an offeror from exploiting an offeree’s inertia. Case Law : Felthouse v. Bindley Felthouse offered by letter to buy his nephew’s horse adding “If I hear no more about him I shall consider the horse mine.” The nephew sent no reply to this letter but told Bindely, an auctioneer, to keep the horse out of a sale of his farm stock, as he intended to reserve it for his uncle Felthouse. Bindley sold the horse by mistake and Felthouse sued him for conversion of his property. The Court held that there was no contract as there was no communication of acceptance to Felthouse before the auction sale took place. Therefore Felthouse had no right to complain of the sale. Mental acceptance is ineffectual. Acceptance to be valid must be evidenced by words (spoken or written) or conduct as was observed by Lord Blackburn in Brogden v. Metropolitan Rly. Co. Sec. 2(b) of the Act requires offeree to signify his assent (either express or implied and not merely in mind) thereto. 5. Acceptance must be communicated by the acceptor only. Communication of acceptance must be either by the offeree or by his authorized agent. Communication of acceptance by any other person will not be valid. Offer and Acceptance 2.11 Case Law: Powell v. Lee P was a candidate for the post of headmaster in a school. The managing committee of the school passed a resolution selecting him for the post. A member of the managing committee, acting in his individual capacity, informed P that he had been selected, but P received no other intimation. Subsequently, the resolution was cancelled, and P was not appointed to the post. P filed a suit against the committee for breach of contract. The Court held that in the absence of an authorised communication from the committee there was no binding contract. 6. Acceptance must be given within time fixed in the offer or reasonable time. Acceptance must be given within the specified time limit and if no time limit is stipulated, acceptance must be given within a reasonable time because an offer cannot be kept open forever. Essentials of Valid Acceptance (Check list) 1. Specific offer: Acceptance only by the person to whom offer was made. Acceptance must be evidenced by words or conduct. General offer: Acceptance by anyone who has knowledge of offer. Communication of acceptance not required. Acceptance simply by acting as per terms of offer (Carlil v. Carbollic Smokeball Co. Ltd.). 2. Absolute acceptance: Acceptance must be unqualified. Conditional acceptance gives rise to counter offer. 3. Mode of acceptance: As prescribed in offer otherwise may not be accepted after intimation. If not prescribed in offer then by some usual means. 4. Can silence be prescribed as mode of acceptance? No, (Felthouse v. Bindley). 5. Communication of acceptance (By whom): Only by the acceptor or with his authority (Powell v. lee). 6. Time of acceptance: As stipulated in offer. If not stipulated then within reasonable time. COMMUNICATION OF OFFER, ACCEPTANCE AND REVOCATION 1. Where parties to the contract negotiate face to face, there is instantaneous communication of offer and acceptance and a valid contract comes into existence the moment the offeree gives his absolute 2.12 Business Laws acceptance to the proposal made by the offeror. Here, there is no question of revocation of either offer or acceptance, in such cases a definite offer is made and accepted instantly at the same time. 2. Where the parties to the contract are at a distance from one another and communication is to be done through post*, it is not always easy to ascertain time at which an offer or/and an acceptance is made or revoked. In these cases the following rules, as laid down in Secs. 4 and 5, will be applicable: (a) Communication of offer. According to Sec. 4 of the Act, “the communication of an offer is complete when it comes to the knowledge of the person to whom it is made i.e. when the letter of offer reaches the offeree. For example, A of Delhi sends a letter of offer to sell his car to B of Hyderabad on 16th August, 2015. The letter reaches B on 20th August, 2015. The communication of offer is complete when the letter of offer reaches B i.e. 20th August, 2015. If in the above case, the letter never reaches B, the offer would remain incomplete. (b) Communication of an acceptance. Sec. 4 of the Act states that “the communication of an acceptance is complete: (a) as against the proposer, when it is put in a course of transmission to him, so as to be out of the power of the acceptor, and (b) as against the acceptor, when it comes to the knowledge of the proposer.” Examples: (i) X proposed to sell a car to Y at a certain price through a letter which was posted on 10th March. It reached Y on 12th March. The communication of offer was complete when Y received the letter i.e., on 12th March. (ii) Y sent his acceptance through post on 13th March which was received by X on 15th March. The communication of the acceptance is complete against the offeror on 13th March when the letter was posted and as against the offeree (i.e., Y) on 15th March when the letter is received by X. (c) Communication of Revocation (Sec. 4). Revocation means cancellation (or taking back). It may be a revocation of offer or acceptance. The communication of revocation is complete (a) as against the person who makes it, when it is put in the course of transmission to the person to whom it is made; so *With the advent of technology postal mode is not much in use these days. Offer and Acceptance 2.13 as to be out of the power of the person who makes it; and (b) as against the person to whom it is made, when it comes to his knowledge. Examples: (i) In the above example (i), X revokes his offer by letter on 12th instant. The letter reaches Y on 14th instant. The revocation is complete as against X on 12th, when the letter of revocation is posted. It is complete as against Y on 14th, when the letter of revocation is received by him. (ii) In the above example (ii), Y revokes his acceptance by letter on 13th instant. The letter reaches X on 15th instant. The revocation is complete as against Y on 13th, the date on which the letter of revocation is posted and as against X on 15th, the date on which the letter reaches hi