Business Laws PDF - University of Delhi

Department of Distance and Continuing Education University of Delhi nwjLFk ,oa lrr~ f'k{kk foHkkx fnYyh fo'ofo|ky; B.Com. (Programme) / B.Com. (Hons.) Semester-I Course Credit - 4...

Department of Distance and Continuing Education University of Delhi nwjLFk ,oa lrr~ f'k{kk foHkkx fnYyh fo'ofo|ky; B.Com. (Programme) / B.Com. (Hons.) Semester-I Course Credit - 4 DSC-2 BUSINESS LAWS (Department of Commerce) As per the UGCF - 2022 and National Education Policy 2020 Business Laws Editorial Board Sh. K.B.Gupta, Dr. Sneh Chawla, Ms. Ritika Sharma Content Writers Ms. Sumita Jain (Unit V) Academic Coordinator Deekshant Awasthi © Department of Distance and Continuing Education ISBN : 978-93-95774-43-7 Ist edition: 2022 E-mail: [email protected] [email protected] Published by: Department of Distance and Continuing Education under the aegis of Campus of Open Learning/School of Open Learning, University of Delhi, Delhi-110 007 Printed by: School of Open Learning, University of Delhi © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi  Business Laws Unit I-V are edited versions of study material prepared for the courses under Annual & CBCS Mode. Corrections/Modifications/Suggestions proposed by Statutory Body, DU/Stakeholder/s in the Self Learning Material (SLM) will be incorporated in the next edition. However, these corrections/modifications/suggestions will be uploaded on the website https://sol.du.ac.in. Any feedback or suggestions can be sent to the email- [email protected] © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi Business Laws TABLE OF CONTENTS UNIT I : Indian Contract Act, 1972 1. Indian Contract Act, 1972 UNIT II : Discharge of Contract and Remedies for Breach 2. Discharge of Contracts 3. Contingent Contract and Quasi Contract UNIT III : Introduction to Special Contract 4. Contracts of Indemnity and Guarantee, Bailment and Pledge & Agency UNIT IV : The Sale of Goods Act, 1930 5. The Sales of Goods Act, 1930 6. Transfer of Property in Contract of Sale of goods UNIT V : The Limited Liability Partnership Act 2008 Ms. Sumita Jain 7. Meaning of Limited Liability Partnership 8. Partners, their relations and Liabilities in a LLP 9. Financial Disclosure and winding up of LLP © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi Business Laws UNIT 1 LESSON 1 INDIAN CONTRACT ACT, 1972 STRUCTURE 1.1 Learning Objectives 1.2 Introduction 1.3 Application of The English Law 1.4 Meaning and Nature of Contract 1.4.1 What a contract requires 1.4.2 Essential Elements of a valid Contract 1.4.3 Kinds of Contracts 1.5 Offer and Acceptance 1.5.1 Determination of an Offer (Test of an offer) 1.5.2 Essentials of a Valid Offer 1.5.3 Tender 1.5.4 Cross Offers 1.5.5 Acceptance 1.5.6 Communication of offer: Acceptance and Revocation 1.5.7 Modes of Revocation or lapse of offer 1.6 Capacity of Parties 1.6.1 Disqualification by Infancy 1.6.2 Law Relating to Minor's Agreement 1.6.3 Disqualification by insanity 1|Page © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi  B.Com. (Programme)/ B.Com. (Hons.) 1.7 Consideration 1.7.1 Definition of Consideration 1.7.2 Essential Elements of Consideration 1.7.3 When no consideration is necessary 1.7.4 Stranger to Contract 1.8 Lawful Consideration or Objects 1.9 Free Consent 1.9.1 Coercion 1.9.2 Undue Influence 1.9.3 Distinction between Coercion and Undue Influence 1.10 Fraud and Misrepresentation 1.10.1 Fraud 1.10.2 Misrepresentation 1.10.3 Distinction between Fraud and Misrepresentation 1.11 Void Agreement 1.11.1 Difference between a Void Agreement and a Void Contract 1.11.2 Difference between Illegal and opposed to Public Policy Agreements 1.11.3 Agreements under Mistake of Law 1.11.4 Agreements by Way of Wager 1.11.5 Distinction of wager with a conditional promise and a guarantee 1.11.6 Wager and collateral Transaction 1.11.7 Wager and a Contingent Contract 1.11.8 Distinction between a Wagering and a Contingent Contract 1.12 Summary 1.13 Answers to In-text Questions 1.14 Self-Assessment Questions 2|Page © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi Business Laws 1.15 Suggested Readings 1.16 Additional Readings 1.1 LEARNING OBJECTIVES To help the students to understand the basic rules of agreements and contracts. To help the students to understand basic rules of Offer, Acceptance, Consideration, Capacity/Competency to contract & rules governing Consideration in The Indian Contract Act, 1872. To let students, know about void agreements and how they are different from void contracts. To create an ability to apply basic concepts and rules relating to the field of business law in the students. 1.2 INTRODUCTION The Indian Contract Act came into force on 1st September 1972. It was enacted mainly with a view to ensure reasonable fulfilment of expectations created by the promise of the parties and also enforcement of obligations prescribed by an agreement between the parties. The object of the Act is also to determine the circumstances in which promises made by the parties to a contract should be legally binding. The Acts is neither retrospective nor exhaustive. It deals mostly with the general principles embodying contracts. The Act does not cover the whole field of contract law. Besides the Contract Act, there are various other laws regulating different types of agreements, e.g., the Transfer of Property Act deals with agreements relating to transfer of immovable property; the Sale of Goods Act deals with contracts of sale of goods; the partnership Act deals with partnership agreements, the Information Technology Act deals with contracts made through electronic medium, etc. The present Contract Act also does not affect particular customs and usages of trade, which are not inconsistent with any of the provisions of law, for example, usages relating to Hundies as negotiable instruments. The Law of Contract is different from other branches of law in as much as that the contracting parties are at liberty to make rules and regulations about the enforcement of their rights and fulfilment of their duties. 3|Page © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi  B.Com. (Programme)/ B.Com. (Hons.) 1.3 APPLICATION OF THE ENGLISH LAW In case, a particular matter is not covered by any section of the Contact Act or by any other law in force in India, the courts may follow the principles of English Common Law, provided they are not inconsistent with Indian conditions and circumstances. Indian Contract Act applies only to those agreements which are valid and enforceable by law. Further, the law of Contract is not the whole law of agreements nor is it the whole law of obligations. An agreement which does not give rise to any legal obligations e.g., marriage, conveyance of gifts, etc., which are not enforceable by law as contracts. Obligation to maintain one's wife and children does not arise out of contract. Agreements which result in the transfer or the destruction of rights are not covered by the, Contract Act. 1.4 MEANING AND NATURE OF CONTRACT A contract has been defined as follows: Salmond defines a contract as "an agreement creating and defining obligations between the parties". Agreement = Offer +Acceptance Sir William Anson observes, "A contract is an agreement enforceable at law made between two or more persons, by which rights are acquired by one or more to acts or forbearances on the part of other or others". According to Sir Fedrick Pollack, "Every agreement and promise enforceable at law is a contract". Sec 2(h) of the Indian Contract Act defines a contract as "An agreement enforceable at law". Contract = Agreement +Legal Enforceability These definitions resolve themselves into two distinct parts: First, there must be an agreement. Secondly, such an agreement must be enforceable by law and an agreement to be enforceable by law and an agreement to be enforceable must be coupled with obligation. 1.4.1 Contract requires: i) Two Parties: There must be two parties to constitute a contract. A contract can only be bilateral and the same party cannot be a party from both the 4|Page © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi Business Laws sides. Hence, there cannot be a contract between A on one side and A on the other. Nor can a partner be a servant of his own firm as a man cannot be his own employer. A person cannot enter into a contract with himself. The person who makes the promise is known as the "promisor" and the person to whom the promise is made is known as the "promisee". As a matter of fact, in a contract each party is a promisor as well as promisee. For example, when a promises to sell his car for a sum of Rs. 20,000 to B, A is a promisor because he has promised to sell his car while he is also a promisee because there is a promise from B to pay a sum of Rs. 20,000 to him. The same is the position of B. ii) An agreement: A proposal from the side of one party to do or abstain from doing a particular act and its acceptance by the other party are the two essential elements of an agreement. An agreement occurs when two minds meet for a common purpose; they mean the same thing in the same sense at the same time. The meeting of the mind is called consensus ad idem, i.e., consent to the matter. For example, if A says to B that he is willing to sell his car for Rs. 20,000 and B gives his assent to this offer, the agreement will come into being. An agreement means every promise and every set of promises, which forms consideration for each other. And as per Sec. 2(b), a promise means "when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise". It simply means that an agreement is an accepted proposal. Therefore, to form an agreement, there must be a proposal or offer by one party and its acceptance by the other. iii) An Obligation: An obligation is the legal duty to do or abstain from doing something. An agreement to a contract should give rise to some legal obligation i.e., which is enforceable at law. Agreements which give rise only to social or domestic obligations cannot be termed as contracts. Thus, an agreement to go to a picture or attend a dinner is not a contract as it was not intended to give rise to any legal obligation. Similarly, an agreement to agree in future is not a contract because unless all important terms of the contract are settled, there cannot be any binding obligation. Such agreements are void for want of 5|Page © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi  B.Com. (Programme)/ B.Com. (Hons.) certainty. For example, if A agrees to sell I00 bales of cotton to B at a price to be settled in future. All Agreement are not Contracts Agreement is a much wider concept than a contract. Agreements in which the intention to create legal obligation is absent are not contracts. Therefore, agreements relating social matters are not contracts. For example, an agreement between two persons together for a walk, or a cinema show does not create any legal obligation on their part to abide by it. Also, agreements which the parties declare not to be binding do not constitute a contract. They may be just "honored pledges" and expressly stated to "outside the jurisdiction of any court". (Rose Frank Co. v. Cromption Brs. (1925). All Obligations also do not constitute contracts Any obligation, which arises independently of an agreement, cannot be the basis of a valid contract, A domestic arrangement with no intention to create legally binding relations will not constitute a contract, such as a promise by a father to pay pocket money to his son. In the words of Lord Atkin, "The most usual form of agreements, which do not constitute a contract, are the agreements made between husband and wife". They are not contracts because the parties do not intend that they should be attended by legal consequences. Leading Case- Balfour v, Balfour (1919) Mr. Balfour left his wife in England on medical grounds and left for Ceylon, the place of his appointment. He had promised to pay £30 P.M. to his wife until she returns. Subsequently, he stopped sending money to her and decided to live apart. The wife sued the husband for the recovery of the amount promised for, on the ground that her consent to the agreement was enough to constitute valid consideration for the contract. The court did not agree with the views of the wife and dismissed her claim. It was held that it was only a domestic arrangement and not a legal contract because domestic arrangements are outside the realm of contract altogether. However, parties standing in domestic or social relationship may enter into an enforceable contract if they intend their agreements to have legal consequences. Merrit V Merrit (1970). Therefore, to sum up, a contract results from a combination of agreement and obligation between the parties to the agreements. An agreement may exist without any legal obligation, but a contract cannot. Agreements giving rise to social obligations will not constitute binding 6|Page © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi  Business Laws contracts. Obligations arising from a trust or a decree or from statutes do not fall within the scope of the Contract Act. Thus, an agreement is the genus of which contract is the species, and therefore, all contracts are agreements, but all agreements are not contracts. Hence, "the law of contract is not the whole law of agreements nor is the whole law of obligations. It is law of those agreements which create obligations, and those obligations which have their sources in agreements." -Sir John Salmond. 1.4.2 Essential Elements of a valid Contract- Defined An agreement to be enforceable at law must satisfy the essentials of a valid contract, According to Section 10 of the Act. "All agreements are contracts, if they are made by the free consent of parties, competent to contract, for a lawful consideration and with a lawful object, and not hereby expressly declared to be void." Thus, the following are the essential elements of a valid contract: (i) Agreement, i.e., Proposal and Acceptance. (ii) Intention to Create Legal Relationship. (iii) Free Consent (iv) Competent Parties (v) Lawful Consideration (vi) Legal Object (vii) Not Expressly Declared Void by Law (viii) Possibility of Performance (ix) Compliance with Legal Formalities a) Agreement: An offer or proposal by one party and an acceptance of that offer by another party is called an agreement. An agreement has been defined by the Act as "every promise or every set of promises forming considerations for each other." The acceptance of the offer must be according to the mode prescribed and must be communicated to the proposer. Further, the intention of the agreement must be to create legal relationship between the parties. Agreement must be capable of performance with term which are clear and certain. It should not be suffering from either a fundamental mistake or impossibility of performance. 7|Page © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi  B.Com. (Programme)/ B.Com. (Hons.) b) Intention to create legal relationship when an agreement is made between the parties, their intention should be to create legal relationship. Absence of such an intention creates no contract between the parties. Social or domestic agreements do not involve creation of legal relationship so, they are not contracts. Example: A husband made a promise to pay his wife £ 30 every month as domestic expense. Sometime later, husband and wife separated and the husband stopped paying monthly expense. Subsequently, wife filed a suit for the allowance for expenses. It was held that it was a domestic agreement and this was outside the contract. This was decided in the case of Balfour V Balfour. c) Free consent: Two or more persons are said to have consented when they agree upon the same thing in the same sense. Thus, if two persons enter into apparent contract concerning a particular person or thing and it turns out that each of them was misled by a similarity of name and actually each had a different person or thing in mind, no contract would exist between them. For example, A has two cars, one blue and the other red. He wants to sell his blue car, B, who knows of only A's red car, offers to purchase A's car for Rs. 20,000. A accepts the offer thinking that it is for his blue car. There is no consent because both the parties are not understanding the same thing in the same sense. Besides, to make a contract valid not only consent is necessary but the consent must also be free. According to Sec. 14, consent is said to be free when it is not caused by coercion, undue influence, fraud, misrepresentation or mistake. A clear distinction must be made between 'no consent' and 'no free consent'. In the case of 'no consent' there is no identity of mind and therefore, in the absence of consent the agreement is void abinitio--from the very beginning. In the latter case of 'no free consent' consent is there but it not free, the agreement is voidable at the option of the party whose consent is not free. A thief who deprives a person of his goods without his consent cannot claim any title whatsoever in the goods. But a dacoit who goods obtains from the other person by obtaining his consent at the point of pistol (coercion) can retain the goods until the real owner claims them back. The possession of the thief is void for want of consent but the possession of the dacoit is voidable at the option of the real owner, i.e., valid unless challenged by the real owner because it has been obtained with the consent of the real owner though the consent had not been free. d) Competent Parties: At least two parties are essential for every valid contract. A person cannot enter into a contract with oneself except in a different capacity, e.g., a partner 8|Page © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi  Business Laws may purchase goods from his own firm. In order that an agreement may be a binding contract, the parties must have the legal capacity of entering into the contract. According to Sec. 11 of the Act "Every person is competent to contract who is of the age of majority according to the law to which he is subject and who is of sound mind and is not disqualified from contracting by any law to which he is subject". Thus, a contract entered into by a minor or by a lunatic is void, In India, a person who has not completed his 18th year of age is considered to be a minor. However, a lunatic can enter into binding contracts during his lucid intervals. The legal presumption is that every party to a contract has the capacity to contract unless contrary is proved and the presumption is rebutted. e) Lawful Consideration: Consideration is an essential element of valid contract. An agreement without consideration is a bare promise and is not binding on the parties. Contracts result only when a promise is made for something in return. This something in return is termed as consideration. "Consideration is the price paid by the promisee for the obligation of the promisor. Consideration need not be a benefit to the promisor. If the promisee has suffered some loss of detriment, it will be taken as sufficient consideration for the promisor to fulfil his promise. Example: A agrees to sell his car to B for a sum of Rs. 10,000. For A's promise, the consideration is a sum of Rs. 10,000 while for B's promise' consideration is the car. Consideration is also the necessary evidence required by law about the intention of the parties to establish legal relationship. Consideration must be real, and not illusory or illegal. Consideration may be past, present or future. It may move from the promise or any other person but it should always be furnished at the desire of the promisor. Consideration must be valid in the eyes of law, i.e., it must result in some gain to one party and detriment to the other. f) Legal object: The agreement must not relate to a thing which is contrary to the provisions of any law or has expressly been forbidden by any law or which is opposed to policy or is immoral. All agreements which are not lawful cannot be enforced by law. This is because courts will not allow polluted hands to touch the pure fountains of justice. No agreement can be allowed to defeat the provisions of any law or to cause injury to the person or property of any person or to achieve fraudulent objects. Example: A agrees to sell certain goods to B. A knows that the goods are to be smuggled out of the country. The contract is unlawful and not enforceable. 9|Page © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi  B.Com. (Programme)/ B.Com. (Hons.) g) Not expressly declared void: The agreement must have not been expressly declared void by any law in force in the country. In India agreements in restraint of trade, in restraint of marriage, or to do things which are impossible or are in the nature of marriage agreements, etc., are expressly declared void by the Indian Contract Act. Example: A and Bare competitions in a business. B agreed to pay A a sum of money if he would close his business. A did so but B refused to pay him the money. Here, the agreement was void because it was in the nature of restraint of trade and therefore, money could not be recovered. h) Certainty and possibility of performance. The agreement entered into by the parties must be certain and not indefinite. If the agreement is vogue or indefinite and the ascertainment of the meaning of the agreement is not possible, such an agreement cannot be enforced. Example: A agrees to sell to B one thousand meters of cloth. This does not indicate what kind of cloth is intended to be sold. This agreement is void and unenforceable because of uncertainty. i) Compliance with Legal Formalities: If any legal formalities of writings, registration, etc., are necessary by law, these must be satisfied. In the absence of these legal formalities, agreements will not be enforceable in courts of law. Contracts which must be registered (i) A promise made without consideration on account of natural love and affection between parties standing in near relation to each other. (ii) Documents of which registration is compulsory under Sec. 17 of the Registration Act, 1908. (iii) Contracts relating to the transfer of immovable properties under the transfer of Property Act 1882. (iv) Memorandum and Article of Association, debentures, mortgage and charges under the companies Act, 1956. 10 | P a g e © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi  Business Laws IN-TEXT QUESTIONS 1. The Indian Contract Act came into force on _______________. 2. One party can enter into a contract with itself. True / False 3. Which of the following is not an essential element of a valid Contract: a) Agreement b) Lawful consideration c) Illegal objective d) Free Consent 4. A contract is an agreement enforceable at law made between two or more persons. True/ False 1.4.3 Kinds of Contracts: 1. On the basis of enforceability: (a) Valid Contracts (b) Void Contracts (c) Voidable Contracts (d) Illegal Contracts (e) Unenforceable Contracts 2. On the basis of mode of creation: (a) Express Contracts. (b) Implied Contracts. 3. On the basis of extent of execution. (a) Executed Contracts (b) Executory Contracts. 4. On the basis of the form of the Contract: (a) Formal Contracts. (b) Simple Contracts. 1. Classification on the basis of enforceability: (a) Valid Contracts: Contracts which satisfy at the essentials of a valid contracts. Only valid contracts are enforceable in a court of law. (b) Void Contracts: An agreement may be enforceable at the time when it was entered 11 | P a g e © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi  B.Com. (Programme)/ B.Com. (Hons.) into but later on due to certain reasons, for example impossibility or illegality of the contract, it may become void and unenforceable. Such contracts are called void contracts. Technically the words "void contracts" are a contradiction in terms. Such contracts can appropriately be termed as "contracts which have become void" in place of "void contracts". Example: X, by exercising coercion over Y, makes him agree to sell his house worth Rs. 50,000 for a mere sum of Rs. 1,000. The agreement is voidable at the option of Y In case Y decides to rescind the contract, it becomes void between X and Y Void Agreement: A void agreement is one which is deficient in essentials and is therefore, destitute of legal effect. Sec. 2(g) defines it as an “agreement not enforceable by law is said to be void". A void agreement is non-existent in the eyes of law. So, it cannot be enforced and confers no rights on either party. All illegal or immoral agreements are void. An agreement with a minor is void. Example: A agrees with B to draw two parallel lines in such a way so that they cross each other for consideration of Rs. 500. The agreement is impossible to perform and hence void. Void Agreement and Void Contract Thus, void agreement is void from the very beginning i.e., void abinito, while a void contract was a valid at the time when it was made but becomes void later on because of certain reasons. An agreement void ab initio or which becomes void subsequently will have these effects:- (i) The agreement shall be unenforceable. (ii) Money paid or property transferred is recoverable subject of the condition that both the parties were ignorant about the illegal or void nature of the agreement when it was made. (iii) Collateral transaction shall not become void unless the agreement has also been illegal. (iv) All lawful promises shall remain valid in case they are severable and can be enforced. (c) Voidable Contract: As per Sec. 2(i) "An agreement, which is enforceable by law at the option of one or more of the parties thereto, but not at the option of other or others, is a 12 | P a g e © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi  Business Laws voidable contract". Agreement induced by coercion, undue influence, fraud or misrepresentation are voidable at the option of the party whose consent has been so obtained. The contract shall remain valid so long as it is not repudiated by the aggrieved party entitled to do so. The aggrieved party is entitled to get damages for any loss suffered by him. Similarly; if he has received some benefit under the contract, he must restore such benefits to the persons from whom it was received. (d) Illegal Agreements: An agreement is illegal when it is contravention of statutory provision. An illegal agreement is destitute of legal effects ab initio-from the very beginning. All the transactions collateral to illegal agreements become tainted with illegality and are, therefore, not enforceable. For example, if A promises to pay a sum of Rs. 100 to B if he (B)gives a good beating to C.B gives a good beating to C and A, in order to pay B borrows from D a sum of Rs. 100. D knows the purpose of borrowing. The agreement between A and B being illegal, the collateral transaction between A and D will be void, D cannot recover his debt of Rs. 100 from A. Parties to an unlawful agreement cannot get any help from a Court of law, for courts expect a person to come to them with clean hands. Law does not permit a guilty man to take advantages of his guilt. (e) Unenforceable contracts: Certain contracts become void because they cannot be enforced due to certain technical defects i.e., non-observance of legal formalities of writings, registration, etc. These contracts are valid in the eyes of law but since they are incapable of proof, law courts will not enforce them. Many of the contracts, in the absence of writings, are quite good but cannot be enforced in a court of law until the written evidence is furnished. Some of them can be enforced if the technical defect is removed. Difference between void agreements and voidable contracts 1. The term "illegal agreement has wider conception than void agreement. All illegal agreements are void but all void agreements are not necessary illegal, e.g., wagering agreements is void but not illegal or an agreement with a minor is void but not illegal. Illegal agreements are prohibited by law. Void agreements are declared non-enforceable in a court of law. If the parties wish to perform, they can perform void agreements. 2. Though the legal effects of both are the same, i.e., void abinitio. But a void agreement does not affect the performance of collateral transaction, but illegality of the original contract will make even the collateral transaction tainted with illegality. 13 | P a g e © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi  B.Com. (Programme)/ B.Com. (Hons.) 3. For entering into a void agreement, there is no penalty on the parties. But for an illegal agreement the parties may be punished. 2. Classification of contracts on the basis of mode of creation (a) Express Contracts: Contracts entered into between the parties by words spoken or written, are termed as express contracts. In such contracts, parties make oral or written declaration of their intentions and of the terms of the transactions. (b) Implied Contracts: Contracts which come into existence on account of the conduct and acts of the parties are termed as implied contracts. For example, if a person takes a seat in a bus, he has entered into an implied contract that he will pay the specified fare to the bus owner for taking him to his destination. 3. Classification of contracts on the basis of the extent of execution (a) Executed Contracts: When both the parties to the contract have fulfilled their respective obligations, contract is said to be executed. (b) Executory contracts: When one of both the parties to the contract has still to do certain things in future, the contract is termed as an executory contract. For example: A agrees to sell a radio set to B for Rs. 200, B pays the price in advance. The contract is executed as regards B, but executory as regards A, for he is yet to deliver the radio set to B: On the basis of execution, contracts may also be divided as: (a) Unilateral contracts (b) Bilateral contracts (a) Unilateral contracts: A contracts is said to be unilateral where one party has performed his obligation either before or at the time when the contract comes into existence, whereas the other party is yet to perform his obligation. Example: A, coolie, puts B's luggage in the carriage. A has performed his obligation. It is now for B to perform his obligation by paying the charges to the coolie. (b) Bilateral contracts: a contract is bilateral if the obligations of both the parties are outstanding at the time of the formation of the contract. They are executory or bilateral contracts. Example: A agrees to sell his car to B after a month, B promises to pay the price on the delivery of the car. The contract is bilateral. 14 | P a g e © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi  Business Laws It is to be noted that the contract comes into existence on the date on which it is entered into between the parties and not from the time its performance is due. 4. Classification of contracts on the basis of form (a) Formal Contracts: (i) Contracts under seal and (ii) contracts of record have been recognized as formal contracts under English law. Their validity depends upon their form alone. Consideration is not necessary for such contracts. They are required to satisfy certain legal formalities in order to be valid and binding. (b) Simple contracts: All contracts other than formal contracts are known as simple contracts. They will be valid only when they are supported by consideration. The Indian Law does not recognise formal contracts. If recognises only simple contracts which must be supported by consideration except in circumstances specifically laid down in the Act. 1.5 OFFER AND ACCEPTANCE Offer or Proposal Essential Elements of a Valid Contract discussed in detail Section 2(a) defines an offer as, "a proposal made by one person to another to do an act or abstain from doing it." The person who makes the offer is known as the promisor or offer or and the person to whom an offer is made is known as the promisee or the offeree. An offer may require a unilateral act or an act by two or more parties. Thus, if X gifts Y his horse, it is an offer of unilateral acts as Y has to do nothing or pay nothing to X in return of the gifts of X. But in case of offers of bilateral acts or requiring actions by two or more persons, then the offeree is supposed to act or respond in a specified manner. Now suppose X offers to sell his horse for Rs. 1000 to Y then here Y also is expected to pay Rs. 1000 to X. It is only the second type of offers about which we are concerned in the Indian Contract Act. Thus, an offer can be analysed into two parts comprising of: - (a) a promise by the offeror, and (b) a request to the offeree for something in return of the offer. When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise. 15 | P a g e © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi  B.Com. (Programme)/ B.Com. (Hons.) 1.5.1 Determination of an Offer (Test of an offer) Every proposal made by an offeror is not legally regarded as an offer. Three tests are applied to determine whether or not an offer has actually been made: 1. Does the offer show a clear intention on the part of the offeror to be bound by it. 2. Whether the proposal is definite? 3. Whether the offer is communicated to the offeror? Offer must be distinguished from (i) Mere invitation to an offer. Offer should be distinguished from a mere invitation to an offer. Catalogue of goods, an advertisement inviting tenders or application for a job, a prospectus of a company; an auctioneer's request for bids or display of goods in showcase with prices marked upon them etc., are mere invitations to offers and not actual offers. A statement of the lowest price at which a landowner is prepared to sell has been held not to be an offer thus, when an owner of property says he will not accept less than Rs. 5,000 he does not make an offer, but merely invites offer. Similarly, a term in a partnership deed that any of the parties wishing to sell his share will sell to the others at the market value is not an offer but an undertaking to make an offer. Thus, in such cases the person who responds to an invitation to an offer, makes the actual offer. The party issuing an invitation for the offers has a right to accept or not to accept the offers received. As such in a case where brokers in Bombay wrote to merchants in Delhi stating their terms of business and the merchants afterwards placed orders with the brokers; no contract was made until the orders given by the brokers were accepted by the merchants. A bank's letter with quotation as to particulars of interest on deposits, in answer to an enquiry, is not an offer but only a quotation of business terms. Example: A shopkeeper displays goods for sale in a shop with price tags attached to each article. This is only an invitation to an offer. The shopkeeper cannot be compelled to sell the goods at the price mentioned. (ii) Mere statement of Intention: A declaration by a person that he has the intentions to do something does not amount to an offer. The person making the declaration will not be liable to the person who has suffered some loss because of reliance on the declared intention. Seller cannot be held liable for any loss caused to a prospective buyer by not adhering to the advertisement for sale of goods by auction at a particular time and place because 16 | P a g e © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi  Business Laws the advertisement was a mere statement of intention (Hari V. Naickersor (1873). Similarly, the announcement made on loudspeakers do not result into any binding offers. Examples: (a) T said in conversation to W that he would give Rs. 1000 to anyone, who married his daughter with his consent. W married T's daughter with his consent. Thereafter, T refused to pay Rs. 1000/- W filed a case against T for the alleged promise. It was held that words used by T were mere statement of intention and do not constitute an offer, therefore, W could not succeed in his claim (Weeks V. Tybald 1605). (b) A father wrote to his would-be son-in-law that his daughter would have a share in all the assets that he would leave. It was merely a statement of intention and, therefore, neither the daughter nor the son-in-law can hold the promisor liable for anything if he does not leave any assets. (Farina V. Fickus) (1900). 1.5.2 Essentials of a Valid Offer 1. The offer must disclose an intention to create legal relations: If the offer does not contemplate to give rise to legal relationship, it is no offer in the eyes of law, e.g., invitation to a dinner which has no intention to create relationship. An offer must impose some legal duty on the party making it. 2. The terms of offer must be clear and certain and not indefinite, lose or ambiguous: The terms of the offer must be definite, unambiguous, clear and certain and not lose and vague. The offer must not be based on a condition which is uncertain or incapable of performance. Though the proposer is free to lay down any terms and conditions in his offer, but they should be certain and legal, otherwise its acceptance will amount to a vague agreement which the courts will not enforce. But, where an agreement contains its own machinery for clarifying vague term, the agreement will not be vague in Law. (Foley V Classque Coaches Ltd.) (1934). In some circumstances, the courts might imply a term based upon the presumed, intention to the parties. Examples:-(a) A says to B "I will sell you, my car. A owns four different cars. The offers are not valid because it is not definite. (b)A made a contact with B and promised that if he was satisfied with him as a customer, he would favorably consider his application for the renewal of the contract. The promise is too vague to create any legal relationship. 3. Offer may be general or specific: An offer may be made to definite person or persons 17 | P a g e © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi  B.Com. (Programme)/ B.Com. (Hons.) or to the world at large. When it is made to some specific person or persons it is called a specific offer. When it is made to the world at large it is called a general offer. A specific offer can be accepted only by the person to whom the offer has been made and, in the manner, if any specified in the terms of the offer. But a general offer can be accepted by any persons having notice of the offer by doing what is required under the offer. The most obvious example of such an offer is where a reward is publicity offered to any about that object, who will recover a lost object or will give some information, there the party claiming the reward has not to prove anything more than that he has performed the conditions on which the reward was offered. The time table of railways is a general proposal to run trains according to the table, which is accepted by an intending passenger tendering the price of the ticket. Carlill V Carbolic Smoke Ball Co. (1983). In this case, the Company advertised that a reward of £ 100 would be given to any person who contracted influenza after having used the smokeballs of the Company as directed. Mrs. Carlill used the smoke-balls according to the directions of the company. but contracted influenza. It was held, that the offer was a general one, and Mrs. Carlill had accepted it by acting in accordance with the advertisement, and therefore, the company could not get away from its responsibility by saying that they had not meant it seriously. She was entitled to the reward. In India, the principle was applied in the case of Har Bhajan Lal Vs. Har Charan Lal. In this case offer of reward was made to any one tracing a lost boy and bringing him home. Harbhajan Lal who knew of the reward. found out the boy and took him to the Police Station. It was held that he was entitled to the reward. 4. Offer may be express or implied: An offer made by words, spoken or written is termed as an 'express offer'. Example: If A says to B that he is willing to sell him his car for a sum of Rs. 10,000 it is an express offer. 'Implied offer' means an offer made by conduct, an offer may also be implied from the conduct of the parties or the circumstances of the case. This is known as an implied offer. When one person allows the other to perform certain acts under such circumstances that nobody would accept them without consideration it will amount to an offer by conduct and the permission of the party, who is benefitted by such performances, will amount to his acceptance. 18 | P a g e © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi  Business Laws Example: A bus company runs a bus on a particular route. This is an implied offer by the bus company to take any person on the route who is prepared to pay the prescribed fare. The acceptance of the offer is complete as soon as a passenger gets into the bus. 5. Offer must be communicated: The offer, to be valid must be communicated to the offeree. An offer becomes effective only when it has been communicated to the offeree so as to give him an opportunity to accept or reject. An acceptance of the offer, in ignorance of the offer, is no acceptance and, therefore, no valid contract can arise. 6. Statement of Price: If a party makes a statement of price, it cannot be taken as an offer to sell at that price. The decision made in case of Harvey and Facey, is important to note in this connection. Example: A asks B, "Will you sell us Bumper Ball Pen? Telegraph lowest cash price- answer paid". B replies telegraphically "lowest price for Bumper Ball Pen £ 900". A respond by telegram "We agree to buy Bumper Ball Pen for the sum of£ 900 asked by you". It was held that no contract was concluded between A and B. Leading case: Lalman Shukla V. Gauri Dut (1913): In this case, Gauri Dut's nephew has absconded. He sent his munim Lalman Shukla in search of the missing boy. In his absence, Gauri Dut issued hand bills offering a reward of Rs, 501/- to anyone who might find out the boy, Lalman found out the boy before seeing the hand bills. Later on, he came to know of the reward and sued Gauri Dut for the reward. Here he could not claim the reward as he did not know about the offer. 7. Offer must be made with a view to obtain the consent: The offer must be made with a view to obtain the consent of the other party and not merely with a view to disclosing the intention of making an offer. A proposer cannot also dictate terms under which the offer can be refused. At best, he can lay down the mode of acceptance. 8. Offer should not contain a term the non-compliance of which would amount to acceptance: The offer should not contain a term the non-compliance of which would amount to acceptance for example a person cannot make such an offer that if the acceptance of the offer is not received upto Monday, the offer would be presumed to have been accepted. 9. Special conditions attached to an offer must also be communicated: Though an 19 | P a g e © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi  B.Com. (Programme)/ B.Com. (Hons.) offeror is free to lay down any terms and conditions in his offer, but it is the responsibility of the offeror to bring all the terms of the offer to the notice of the other party, the acceptor is bound only for those conditions which (i) have expressly communicated to him or (ii) have so clearly been written that he ought to have known them or (iii) have reasonable notice of the existence of those terms. He will also be bound by the conditions if he knew of their existence, though they are in a language unknown to him. It is his duty to get them explained. Examples: (a)A passenger had purchased a ticket for a journey. On the back of the ticket, there were certain terms and conditions. One of the terms was that the carrying company was not liable for losses of any kind. But there was nothing on the face of the ticket to draw the attention of the passenger to the terms and conditions on the back of ticket. Held, the passenger was not bound by the terms and conditions on the back side of the ticket. (Henderson V. Stevenson) (1875). (b)T, an illiterate, purchased a railway ticket on the front of which was printed "for conditions seek back". One of the conditions was that the railway company would not be liable for personal injuries to the passenger. An accident caused some injuries to T. Suit for damages brought by T was dismissed as he was bound by the conditions printed on the reverse of the ticket. (Thompson V. L. M. & S. Rly.) (1930). Now it is the established law that wherever on the face of a ticket words to the effect "for conditions see back" are printed, the passenger concerned is bound by the conditions, it is immaterial whether he actually reads them or not. If conditions are printed on the back of the ticket, but there is nothing on the face of it to draw attention of the person to these conditions, he is not bound by the conditions. Thus, it is to be noted that a person, who accepted without objection a document containing terms of the offer, which he knows or ought to have known, will be bound by those terms even if he had not read them. However, this rule will not be applicable if the conditions are so irrelevant for unreasonable that an assent to them cannot reasonably be presumed. Similarly, where a condition to an offer is against public policy, it will not be enforced merely because it has been accepted by the acceptor. Example: A garment of B was lost due to the negligence of laundry owner. On the back of the laundry receipt, it was mentioned that in the event of loss only 15% of the market price or value of the article would be recovered by the customer. In a suit by R, it was held that the term being prima facie opposed to public policy it could not be enforced even though there 20 | P a g e © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi  Business Laws was tacit acceptance by the customer of the terms (Lily White V. Munnuswami) 1966. The acceptor would be bound by the terms and conditions only when all the following conditions are satisfied: 1. The acceptor knows about the writing or printing on the ticket. 2. He also knew the writing or printing on the ticket contained conditions regarding terms of the contract. 3. The conditions must not be against public policy or the fundamental principles of contracts. 4. The offeror had done all that was reasonably sufficient to give the acceptor notice of the conditions. For example, if printing of the ticket is not clearly visible due to the smallness of the type it could not be taken that the carrying company had made sufficient arrangement for the communication of the conditions. (Richardson V. Rowntree) (1894). 5. The notice of the conditions should be given before or at the time of the contract but not afterwards. A subsequent notice about the conditions will not bind the other party. Example: A hotel put up a notice in a bed room. "The proprietors will not hold themselves responsible for articles lost or stolen unless handed to the manager for safe custody". Held, the notice was not effective as it came to the knowledge of the customer only after the contract had been made and the customer had already paid the rent. 6. Conditions must not be contained in a voucher or receipt for payment of money because they will not bind the person receiving the voucher or receipt (chapleton V. Barry U.D.C.) 1940. 1.5.3 Tender A person may invite tenders for the supply of specific goods or services. Thus, a tender, in response to an invitation, is an offer. A tender may be either: (i) A definite or single offer, or (ii) A standing or an open offer. Tender as a definite offer: If a tender has been submitted for goods or services in specified quantities it is termed as a definite offer, A binding contract comes into existence as soon as the tender is accepted. Example: A invites tenders for the supply of 100 tons of local X, Y and Z submit the tenders. 21 | P a g e © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi  B.Com. (Programme)/ B.Com. (Hons.) A accepts Y's tender. There is binding contract between A and Y. Tender as a standing offer. Standing offer or tender may be of the nature of a continuing offer. Thus, a tender to supply goods as and when required over a certain period amount to a standing offer. Here, the tenderer must supply whenever an order is placed. But he cannot insist on any order being made at all. Example: (a) A tendered to supply goods upto a certain amount to B over a certain period. B's order did not come upto the amount expected and A sued for breach of contract. Held, each order made was a separate contract and A was bound to execute the orders made. B was under no obligation to make any order at all. (Percival Ltd. VL.C.C.) (1918). (b) A railway company invited tenders for the supply of certain iron articles over a period of 12 months. W's tender was accepted. After supplying for sometime, W refused to execute on order placed during the currency of the tender. Held, W could not refuse within the terms of the tender. (Great Northern Railway V Witam). 1.5.4 Cross Offers: Identical offers made by two parties in ignorance of each other's offer, are termed as cross offers. They will not constitute acceptance of one's offer by the other. (Tinn V Hoffinan) 1873. Example: A, by a letter offers to sell his car to B for Rs. 10,000 B, by a letter which crosses A's letter in the post, offers to buy it for Rs. 10,000. The offers are cross- offers and no binding contract will arise. Both A and bare ignorant of each other's offer. There can be no automatic acceptance of each other's offer, rather a new acceptance from either of the two parties would be required. 1.5.5 Acceptance A contract comes into being from the acceptance of an offer. When the person to whom the offer is made signifies his assent thereto, the proposal is said to be accepted (Sec. 2(b). Thus, acceptance of the offer must be absolute and unqualified. It cannot be conditional. Who can give acceptance? When an offer is made to particular person or to a group of persons, it can be accepted only by that person or member of the group. If it is accepted by any other persons, there is no valid acceptance. Example: B sold his business to P without disclosing the fact to his customers. J, who had a 22 | P a g e © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi Business Laws running account with B, placed an order with B for supply of certain goods. The new owner without disclosing the fact of himself having purchased the business, executed the order. J refused to pay P for the goods because he, by entering into contract with B intended to set off his debt against B. Held, the new owner of could not recover the price. "The rule of law is that if you promise to make a contract with A, then B cannot substitute himself for A without your consent and to your disadvantage, securing to himself all the benefits of the contract". When an offer is made generally to the public at large, any person or persons who have the notice of the offer, may come forward and accept the offer. By doing what is required to be done under the offer, offer is said to be as accepted and there will be valid contract, (Carlill V. Carbolic Smoke Ball Co. 1893). Essentials of a valid acceptance 1. Acceptance must be absolute and unqualified: Section 7 of the Contract Act requires that the acceptance must be absolute and unqualified. It must correspond with all the terms of the offer. Conditional acceptance is no acceptance. If there is a variation in the terms of the acceptance, it is not an acceptance, but a counteroffer, which the proposer may or may not accept. A counter-offer destroys the original offer. Thereafter the offeree cannot revert to the original offer and purport to accept it. (Erollope & Colls Ltd. V. Atomic Power Construction Ltd. (1963) Example: A offers to sell his house for a sum of Rs. 20,000 B sends his acceptance to purchase it for a sum of Rs. 19,000. There is no acceptance. It will be taken as a new offer from B, which may not be accepted by A. 2. Acceptance must be in the mode prescribed: A proposal must be accepted according to its terms. If the proposal lays down a mode of acceptance, the acceptance must be according to the mode prescribed. Therefore, if the proposer choses to require that the goods shall be delivered at a particular place, he is not bound to accept delivery at any other place. It is not for the acceptor to say that some other mode of acceptance which is not according to the terms of the proposal will do as well. If the acceptance is not given in the made prescribed, the proposer may reject the acceptance and intimate the offeree within a reasonable time. But if he does not inform the offeree, he is deemed to have accepted the acceptance. If the proposer has not prescribed any mode of acceptance, it must be given and communicated in some usual and reasonable manner. 23 | P a g e © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi  B.Com. (Programme)/ B.Com. (Hons.) Example: An offer is made to take shares indicating that the acceptance is to come by a telegram. If the acceptance is sent by ordinary post, then it is not an acceptance according to the mode prescribed and the offer will be deemed to be not accepted. The offeror need not inform the offeree that the acceptance is not according to the mode prescribed. 3. Acceptance must be communicated to the offeror: Acceptance must be communicated to the offeror to create a binding contract. Mental acceptance is no acceptance in the eyes of law. But where the offer is to be accepted by being acted upon, no communication to the offer will be necessary. Example: The manager of a railway company received a draft agreement. The manager wrote the word "approved" and put the draft in the drawer of his table. By some oversight the document remained in the drawer and was never communicated. It was held that there was no contract as the acceptance had not been communicated. (Brogden V. Metropolition Rly. Co.) (1877). 4. Silence cannot be prescribed as mode of acceptance: The offer cannot frame his offer in such a way as to make the silence or inaction of the offeree to operate as an acceptance. In other words, the offeror can prescribe the mode of acceptance but not the mode of rejection. Leading case: Felthouse V. Bindley (1863). F offered by letter to buy his nephew's horse for £30 adding, "If l hears no more about it, I shall consider the horse as mine for £30. Nephew did not give any reply, but he told an auctioneer who was selling his horses not to sell that particular horse because it was sold to his uncle. By mistake auctioneer sold the horse. Held: F had no claim against the auctioneer because the horse had not been sold to him and the horse did not belong to F. Silence cannot be prescribed as a mode of acceptance because if that was so the offeree will be put to a great deal of inconvenience because he shall have to unnecessary write in clear terms that he is not accepting the offer. 5. Acceptance must be given within the time stipulated or within a reasonable time if time is not mentioned. Further, acceptance must be given before the offer lapses or before the withdrawn. 6. There can be no acceptance before the communication of the offer. There can be no acceptance of an uncommunicated offer. Acceptance cannot precede an offer. A person who has no knowledge of an offer cannot be said to have accepted it merely because he 24 | P a g e © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi Business Laws happened to act just by chance in the manner prescribed by the offer. (Lalman V. Gauri Dutt). 7. Acceptor must in indicate intention to fulfil the promise. Acceptance, in order to be valid, must be made under circumstances which would show that the acceptor is able and willing to fulfil the promise. Acceptance must show an intention on the part of the acceptor to fulfil the promise. If no such intention is present, the acceptances is not valid. 8. If the proposal is made through an agent, it is sufficient if the acceptance is communicated to him: If A sends the offer to B by an agent C, and B give his acceptance to C, the acceptance is complete resulting into a valid contract. It is immaterial whether C communications the acceptance of B to his principal A or not. 9. Acceptance of the proposal will mean acceptance of all the terms of the offer. Acceptance subject to contract, when an offer is accepted by an offeror "subject to contract" or subject to formal contract" or "subject to contract to be approved by solicitors," the matter is known to be at the negotiation stage and the parties do not intend to be bound until a formal contract is made and signed by them. Agreement to agree in future. If the parties have failed to agree upon the terms of the contract but have made an agreement to agree in future, there is no contract, example: An actress was engaged by a theatrical company for a certain period. One of the terms of the agreement was that if the party was, shown in London, she would be engaged at a salary to be mutually agreed upon. Held, there was no contract. (Luftus V. Roberts, (1902) 18 T.L.R. 532). 1.5.6 Communication of offer: Acceptance and Revocation An offer and its acceptance, to be valid must be communicated to the other party. Communication of offer: (Se.4) The communication of an offer is complete when it comes to the knowledge of the person to whom it is made. When an offer is made by post, its communication will be complete when the offeree receives the letter. Example: A proposes, by letter, to sell a house to B at a certain price. The communication of the proposal is complete when B receives the letter. Communication of Acceptance (Sec.4) The communication of an acceptance is complete: - 25 | P a g e © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi  B.Com. (Programme)/ B.Com. (Hons.) (i) as against the proposer, when it is put in the course of transmission to him, so as to be out of the power of the acceptor to withdraw, and (ii) as against the acceptor, when it comes to the knowledge of the offeror. Example: B accepts A's proposal by a letter sent by post. The communication of the acceptance is complete as against A, when the letter is posted; as against B when the letter is received by A. Communication of Revocation: (Sec.4) The word 'revocation' means "taking back". Both an offer as well as an acceptance may be revoked. The communication of Revocation is complete: (i) as against the person who makes it, when it is put into the course of transmission to the person to whom it is made, so as to be out of the power of the person who makes it; (ii) as against the person to whom it is made, when it comes to his knowledge. Example: Thus, in the above example: A revoke his proposal by telegram. The revocation is complete as against A, when the telegram is dispatched. It is complete as against B when B received it. B revokes his acceptance by telegram. B's revocation is complete as against B when the telegram is dispatched, and as against A when is reaches him. The time during which an offer or acceptance may be revoked is dealt with in Sec.5 as follows: Revocation of a proposal According to Sec.5 "proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards". Example: A proposes, by a letter sent by post, to sell his house to B. B accepts the proposal by a letter sent by post. A may revoke his proposal at any time before or at the moment when B posts his letter of acceptance, but not afterwards. In an auction sale, a bidder may withdraw his bid at any time before the any time before or at the moment when B posts his letter of acceptance, but not afterwards. In an auction sale, a bidder may withdraw his bid at any time before the fall of the hammer (acceptance). 26 | P a g e © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi  Business Laws Revocation of an Acceptance An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor but not afterwards. Example: In the above example, B may revoke his acceptance at any time before or at the moment when the letter communicating it (acceptance) reaches A but not afterwards. In case, the letter of acceptance and the letter of revocation of acceptance reach simultaneously, which of the two is opened first will decide the issue. When the letter of revocation reaches prior to the letter of acceptance, the acceptance will be treated as revoked. 1.5.7 Modes of Revocation or lapse of offer Sec.6 deals with various modes of revocation of offer, these cases are as follows: 1. By communication of the notice of revocation: An offer may be revoked by the communication of the notice of revocation. It may be revoked only before its acceptance is complete as against the offeror. The acceptance is complete as against the offeror when the letter of acceptance is put in transmission to him. Notice of revocation will take effect only when it comes to the knowledge of the offeree. 2. By lapse of specified time: If time is mentioned in the offer for its acceptance, it is revoked by the lapse of time. If no time is mentioned then it lapses on the expiry of reasonable time. Example: M applied for shares of a company in June. Allotment was made in November held, the offer had lapsed, because period of five months was not a reasonable time. So, M could not be treated as shareholder of the company. 3. By the failure of the acceptor to fulfil a condition precedent to the acceptance: An offer lapses if the offeree fails to fulfil a condition precedent to the acceptance. Example: A offers to sell his car to B for a sum of Rs. 10,000 provided B sends an advance of Rs. 500 with his acceptance. B accepts the offer but does not send the advance. The offer may be taken as revoked. 4. By the death or insanity of the proposer. The death of the proposer puts an end to the offer, provided the fact of death or instantly comes to the knowledge of the acceptor before acceptance. If the proposer dies after the acceptance of the offer, the legal representatives of the proposer shall be bound by the contract. The acceptance of an offer in ignorance of the death or insanity of the proposer is valid. But according to 27 | P a g e © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi  B.Com. (Programme)/ B.Com. (Hons.) English Contract Law, no notice of death is required to the offeree. An offer shall automatically stand revoked in the case of death or insanity of the proposer. No provision has been made in the Act for a case where the person to whom the proposal is made dies before the acceptance for the obvious reason that the proposal can never be meant to be made to a dead or his executors. In addition to the above-mentioned cases dealt with in Sec.6 following two more cases should also be added. 5. A counter offer also amounts to a revocation of the original offer 6. If an offer is not accepted according to the mode prescribed it will lapse provided the offeror gives notice for the offeree that the acceptance is not according to the prescribed mode. It is to be noted here that the rejection of a proposal by the person to whom it is made is wholly distinct from revocation. Contract through Post: When the contracting parties make contracts through post, i.e., by letter or telegram, it is observed that "The Post Office is the servant employed by the party making the offer to deliver the offer and receive the acceptance." The rules of contract by post may be summarized as follows: - (a) An offer is made only when it reaches to the offeree and not before. (b) An acceptance is complete when the letter of acceptance is put in the course of transmission, so as to be out of the control of acceptor. If the letter of acceptance is properly addressed, stamped and posted, it is immaterial whether it reaches the offeror or not. Loss of letter in the post, late delivery or miscarriage etc. will not affect the validity of the contract. It was observed in Dunlop V. Higgins (1866)". If the party accepting the offer puts his letter into the post on the correct day, has he not done everything that he was bound to do? How can be responsible for that over which he has no control? (c) An offer may be revoked before the letter containing the acceptance is posted and not thereafter. (d) An acceptance may be revoked before, it reaches the offeror. But the acceptor will be bound by his acceptance only when the letter of acceptance has reached the proposer. 28 | P a g e © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi Business Laws In English law an acceptance cannot be revoked, once the letter of acceptance is properly posted, the contract is concluded for both the parties. Contracts over telephone: Contracts over telephone or telex are treated on the same principles as those when the parties are facing each other. In both cases offer is made and oral acceptance is expected. The Supreme Court, in the case of Bhagwandas Goverdhandas Kedia V. Girdharilal Purshottam Dass & Co. (1966) ruled by a majority judgement that post office rules of communication are not applicable to contracts over telephone or telex. In case of such contracts, the contract will be complete only when the acceptance has been communicated to the offeror and not when it is put in the transmission as in the case of post. In case a person makes an offer to another person and in the course of his reply the line goes dead, on account of which the offeror does not hear the offeree's words of acceptance there is no contract at that time. If the whole conversation is repeated and the offeror hears the words of acceptance, the contract is complete (Kanhaiyalal V. Dineshwar Chand's (1959). Contract will come into existence at the place where the acceptance has been recieved. Ananson has beautifully compared an offer with a train of gunpowder and acceptance with a lighted match in the following words"-Acceptance is to an offer what a lighted match is to a train of gunpowder. It produces something which cannot be recalled or undone. But the powder may have laid until it has become damp, or the men who has laid the train may remove it before the match is applied. So, an offer may lapse for want of acceptance or be revoked before acceptance. Acceptance converts the offer into a promise and then it is too late to remove it." Just as when the lighted match is brought near the gunpowder, it explodes. Similarly, an offer when accepted becomes a contract and will give rise to legal obligations. Further, explosion can be prevented if the gunpowder becomes damp or is removed before the lighted match is brought near it. Similarly, no contract arises if the offer has already lapsed on account of no acceptance, or acceptance not being given within a reasonable or fixed time or it has been withdrawn by the offeror before its acceptance. 1.6 CAPACITY OF PARTIES Section 10 of the Contract Act requires that an agreement to be enforceable by law must be made by the parties competent to contract. 29 | P a g e © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi  B.Com. (Programme)/ B.Com. (Hons.) Section 11 of the contract Act provides that "every person is competent to contract, who is of the age of majority according to the law to which he is subject, and who is of sound mind and is disqualified from contracting by any law to which he is subject." This Section deals with personal capacity in three distinct branches: (a) Disqualification by infancy, i.e., minors. (b) Disqualification by insanity, i.e., lunaties. (c) Other special disqualifications by personal laws, such as insolvency, conviction etc. 1.6.1 Disqualification by Infancy Age of Majority: A valid agreement requires that both the parties to the contract should understand the legal implications of their conduct. They must have mature mind. They should be major in age. According to Indian Majority Act, 1875, every person domiciled in India shall be deemed to have attained his majority when he shall have completed his age of eighteen years and not before. In case, guardian has been appointed to the minor or where the minor is under the guardianship of the court of wards, the person shall become major on the completion of the age of 21 years. 1.6.2 Law Relating to Minor's Agreement The Act makes it essential that all contracting parties should be competent to contract, and if a person is incompetent to contract by reason of infancy, he cannot make a contract within the meaning of the Act. Therefore, an agreement with a minor is void and a minor can neither sue nor be sued upon it. The Contract is also not capable of ratification in any manner. The parents of a minor are not legally responsible for his contracts unless he acts as their agent. Following important provisions govern agreements made with a minor. 1. Agreement is absolutely void: An agreement by or with a minor is void-ab-initio. It is considered to be a nullity and non-existing from the very beginning. Thus, if a party who has parted with goods, can trace them with the minor then he can recover damages for the breach of contract or recover their price. Nor can money lent to such a minor be recovered because if that were to be allowed it would tantamount of enforcing the contract. Leading case: Mohiri Bibi V. Dharmodus Ghosh. In this case a minor executed a mortgage for Rs. 20,000 and received Rs.8,000 from the 30 | P a g e © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi  Business Laws mortgagee. The minor sued for setting aside the mortgage. The mortgage claimed the sum which he had actually paid, i.e., Rs. 8,000. The Privy Council held that as the minor's contract was absolutely void, and no question of money could arise in these circumstances. However, if the minor has carried out his obligations, he can bring a suit against the other party for the enforcement of the other party's obligations. Example: A, a minor, advanced money to B against a mortgage. It was held that the mortgage was enforceable by him or by the other person on his behalf, (Satyadev V. Tribeni) (1936). But the contract is enforceable only when the minor has performed his part, the agreement is unenforceable. Example: M entered into a contract on behalf of a minor with S to purchase some immovable property. On S's non-fulfilment of his promise, the minor filled a suit against S. It was held that the agreement was void because the contract is still executory. Therefore, his plea could not be accepted. (Mir Sawargan V. Fakhrudin Md. Chowdhry) (1912). 2. No ratification: Since the contract is void ab initio it cannot be ratified by the minor on attaining the age of majority. However, a minor who, on attaining majority, takes up and carries on transaction commenced while he was under disability, will bind himself for the whole transaction. Example :(A) F, an infant speculated on the stock exchange and became liable to the stockbrokers for £547. After attaining the age of majority, he gave two bills for £50 each in satisfaction of the original debt. Held F was not liable on the bills (Smith V. King, (1892) 2 R.B. 543). Example :(B) A, a minor, takes a loan of Rs. 1,000 from B during his minority. After attaining age of majority, A applies for a fresh loan of Rs. 1,000 B gives the loan and obtain from A, a combined promissory note of Rs.2,000. This will be taken as a new contract and will therefore, be 31 | P a g e © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi  B.Com. (Programme)/ B.Com. (Hons.) enforceable. 3. No restitution: When a contract becomes void, it is not to be performed by either party. But if any party has received any benefit under such a contract from the other party, he must restore it or make compensation for it to the other party. This is called restitution. A minor is not liable to repay any money or compensation for any benefit that he might have received under a void contract. Court, may however, in certain cases, while ordering for the cancellation of an instrument at the instance of the minor, require him to pay compensation to the other party to the instrument under Sec. 33 of the Specific Relief Act. 4. No Estoppel: A minor is not bound by his mis-representations. If a minor procures a loan or enters into any other agreement by representing that he is of full age. He cannot be prevented from pleading his minority in his defence. He will not be held liable under the contract. It was held in Sadiq Ali Khan V. Jai Kishore (1928) that a deed executed by a minor is a nullity there can be no estoppel against a statue, Thus the rule of estoppel as per Sec.115 of the Evidence Act, 1872 is not applied against a minor. 5. But this does not mean that the minors are allowed to cheat and to enjoy the fruits of their fraud. According to Sec.33 of the Specific Relief Act, 1963 Court will order, on equitable considerations for restitution if the minor is still in possession of the money or things purchased out of it. The minor shall have no liability if the money or things cannot be traced out in his hands. Examples: (a) A minor borrowed Rs. 1000 on a fraudulent representation that he was a major, and he spent the whole of the money in a picnic tour of Kashmir. In this case the creditor cannot sue for the realisation of the money so advanced by him. A minor fraudulently over states his age and takes delivery of a motor car after executing a promissory note in favour of the trader for its price, though the minor cannot be compelled to pay on the promissory note; but the court on equitable grounds may order the minor to return the car to the trader, if it is still with the minor. Minos liability for necessities: All contracts relating to the necessities supplied to a minor according to this status in life are valid. But only the minor's property is liable for necessities, and no personal liability is incurred by him. Necessities must be things which the minor actually needs; therefore, it is not enough that 32 | P a g e © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi  Business Laws they be of a kind which a person of his condition may reasonably want for ordinary use, they will not be necessities if he is already sufficiently supplied with things of that kind, and it is immaterial whether the other party knows this or not. Objects of mere luxury cannot be necessities nor can objects which, though of real use, are excessively costly. The fact that buttons are normal part of any kinds of clothing, but it will not make pearl or diamond buttons necessities. Example: A grocer supplies monthly rations for 6 months to B who is aged 17 years. On B' failure to pay, he sues him for the realisation of his dues. In this case B's property is liable for the payment of credit rations consumed by B during the period of his minority. Costs incurred in successfully defending a suit on behalf of a minor in which his property was in jeopardy are "necessities". 6. Minor as a beneficiary: All such contracts under which the minor is to receive some benefit, or which are beneficial to him are valid. These contracts include agreements which provide for the teaching, instruction or employment of a minor. It is to be noted that only his property is liable for liabilities arising out of such contracts. In no case he will be personally liable. English law has expressly made a contract for the minor's benefit enforceable. But in India all contracts made by minors are void. Still majority of the contracts for the benefit of minor have been held to be enforceable on the ground that it will be unjust in the circumstances to deprive a minor of a benefit which he may be entitled to get under a contract. 7. Minor as Agent: A minor can be appointed as an agent. He can represent his principal in dealings with other parties. Since minor does not incur any personal liability, he cannot be held responsible for his any act of negligence or fault. Therefore, the principal will be responsible to the third parties for the acts of his minor agent. He cannot hold the minor agent personally liable for any wrongful acts. Thus, the principal runs a great risk. 8. Minor as a partner: A minor cannot be a partner of a firm. An agreement of partnership making a minor a full-fledged partner is invalid between all partners. However, he may be admitted to the benefits of an already existing partnership firm with the unanimous express consent of all the existing partners. Such an agreement may be entered into by his guardian on his behalf with the partners. 33 | P a g e © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi  B.Com. (Programme)/ B.Com. (Hons.) A minor admitted to the benefits of partnership, has a right to share the property and profits of the firm in the proportion agreed upon by him with the other partners. Further, he has a right to have access to and inspect and copy any of the accounts of the firm but not the books of accounts of the firm. Her liability is limited to the extent of his share in the firm. 9. Minor as a member of a company: A minor cannot be a member of a company since he is incompetent to enter into a contract. A minor may be allotted shares. His name may remain on a company's register of members, but during minority he incurs no liability. On attaining majority and becoming aware of the presence of his name in the register of members, the major has the option to repudiate his shares within a reasonable time. Where he does not do so he may safely be taken to have accepted his position. His liability as a shareholder then commences. However, it a minor has been allotted shares through ignorance and his name has been entered in the Register of members both the company and the minor, can repudiate the allotment of shares during his minority. 10. Surety for a minor: A person who stands as a surety for a loan taken by the minor will be liable to the creditor for payment of the loan, even though minor was not liable. 11. Mortgages and sales in favour of minors: A sale or mortgages of his property by a minor is void. But a duly executed transfer by way of sale or mortgage in favour of a minor who has paid the consideration money is not void and it is enforceable by him or any other person on his behalf. A minor, therefore, in whose favour a deed of sale is executed is competent to sue for the possession of the property conveyed thereby. 12. A minor cannot be declared as an insolvent even for his necessities of life. Only his property is liable even for necessities of life and he, personally, is not liable for the same. Thus, the contract made with the minors can be under three heads. (i) Valid Contracts: They include (a) contracts for necessities which include goods as well as services. (b) Contracts for loans taken to purchase "necessities". (ii) Voidable Contracts: This category of voidable contracts is not recognised our country. This category includes those contracts in which minor is a beneficiary. Only minor is entitled to enforce but not the other party. They can be reasonably called as contract 34 | P a g e © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi  Business Laws voidable at the option of the minor. (iii) Void Contracts: All contracts by a minor other than those referred to above shall be void. Salmond has defined the position of a minor in the following words: "The law protects their persons, preserves their rights and estates, excuses their laches and assists them in their pleadings, the judges are their counsellors, the jury are their servants and law is their guardian." 1.6.3 Disqualification by insanity According to Sec.12, "A person is said to be of sound mind for the purpose of making a contract if, at the time when he makes it, he is capable of understanding it and 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. Example: (a) A patient in a lunatic asylum, who is at intervals of sound mind, may contract during those intervals. (b) A sane man, who is delirious from fever, or who is so drunk that he can not understand the terms of a contract or form a rational judgement as to its effect on his interests, can not contract during such delirium or drunkenness. Thus, idiots, lunatics and drunkard are not considered to be persons of sound mind. (i) Idiot: A person who is devoid of any faculties of thinking or rational judgement. All agreements, other than those for necessaries of life, with idiots are absolutely void. (ii) Lunatic: A person whose mental powers are derange is called a lunatic. Lunatic is not a person who is continuously in state of unsoundness of mind but he may have lucid intervals. period in which he is to his senses. Agreement with lunatics are void except those made during lucid intervals and made for necessities of life. However, for necessities of life, the property of such persons is liable. He does not have personal liabilities. (iii) Drunkards: A person under the influence of drink or drugs, stands on the same footing 35 | P a g e © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi  B.Com. (Programme)/ B.Com. (Hons.) as lunatic. Mere drunkenness affords no ground for resisting a suit to enforce a contract. But where the judgement of one party was, to the knowledge of the other part, seriously affected by drink, equity will generally refuse specific performance at the suit of the other. And, where the court is satisfied that a contract disadvantageous to the party affected has been obtained by "drawing him into drink" or that three has been real unfairness in taking advantage of his position, the contract may be set aside. Persons disqualified by any other laws: Certain types of people are specifically disqualified by special statues from entering into valid contracts. (I) Alien Enemies: A person who is not an Indian citizen is an alien. An alien may be either an alien friend or an alien enemy. An alien friend is one, whose state or Sovereign is at peace with India. He has full contractual capacity like an Indian Citizen subject to certain restrictions put by the Government of India, e.g., and alien can not acquire any ownership interests in any Indian ship. On the declaration of war between India and alien's country he becomes an alien enemy. A contract with an enemy becomes unenforceable on the outbreak of war. With regard to a contract with an alien enemy following rules will apply: (i) Since trading with an alien enemy is considered illegal, no contract can be made with an alien enemy during the subsistence of war except with the prior approval from the Central Government. (ii) Contracts entered into before the outbreak of war will be suspended during the course of war. They will be performed after the war is over. (II) Foreign Sovereigns and Ambassadors: Foreign sovereigns and accredited representatives of foreign states, i.e., Ambassadors. High Commissioners. enjoy a special privilege in that they can not be used in Indian courts, unless they voluntarily submit to the jurisdiction of Indian courts. Though they can enter into contracts through agents residing in India. In such cases the agent becomes personally liable for the due performance of the contracts. Corporations: A corporations is only an artificial person created by law, e.g., a company registered under the Companies Act, public bodies created by statue such as Industrial Finance Corporation of India, A corporation exists only in contemplation of law, it has no physical body or form. It can hold property, can sell or purchase goods and can sue or be sued in relation to any of the contracts entered into by it. Being a mere creature of law, it cannot go beyond those objectives which have been laid down in the charter of its creation, i.e., 36 | P a g e © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi  Business Laws Memorandum of Association. Further, its capacity and powers to contract are also limited by its charter. Any contract beyond such powers is ultra vires and void. Such ultra vires contracts can not be ratified even by the unanimous vote of all its members. Besides that, a Company etc. can not make certain contracts at all e.g., a contract to marry. (III) Convicts: While undergoing sentence a convict is incapable of entering into a contract. This inability comes to an end on the expiration of the sentence or if he has been "pardoned". (IV) Profession/a persons: In England barristers-at law, are prohibited by the etiquette of their profession from suing for their fees. So also, are the Fellow Members of the Royal College of Physicians. In our country no such professional disqualification exists. 1.7 CONSIDERATION Consideration is an essential element of a valid contract. A promise without consideration cannot be enforced by law except under certain circumstances. Consideration is the necessary evidence by law of the intention of the parties to affect their legal relations. Consideration, broadly speaking, is the price paid by the promisee for the obligation of the promisor. The term 'consideration' is used in the sense of "something in return", i.e., quid pro quo. An agreement without consideration is a bare promise and exnudo pacto non aritio actio, i.e., cannot be held to binding on the parties. 1.7.1 Definition of Consideration Sir Frederick Pollock has defined consideration, "It is the price for which the promise of the other is bought, and the promise thus given for value is enforceable." In the case, Curie v. Misa the term was defined, "A valuable consideration in the sense of the law may consist either in some right, interest, forbearance, detriment, loss or responsibility, given, suffered or undertaken by the other." Section 2(d) of the Indian Contact Act defines consideration thus: "when at the desire of the promisor, 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." Example: A offers to sell his house to B for a sum of Rs.50,000. B accepts the offer. In this contract, for A's promise, the consideration is a sum ofRs.50,000 while for B's promise 37 | P a g e © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi  B.Com. (Programme)/ B.Com. (Hons.) consideration is the house. 1.7.2 Essential Elements of Consideration 1. Consideration must proceed at the desire of the Promisor. The act constituting the consideration must have been at the desire or request of the promisor. An act done at the desire of a third party is not a consideration. Voluntary acts also would not constitute good consideration in the eyes of law. If A rushes to B's help whose house is on fire, there is no consideration here. It is a voluntary act of A. But if