BUISNESS LAWW AND POLICY

MODULE-1

Indian Contract Act 1872:-

Introduction
All contracts are based on agreements which are either express or implied.

Everyone of us enter into a number of contracts almost everyday.

The law of contract was made lying down rules for performance and discharge of
contract and the remedies available to the aggrieved party in case of breach of contract.

Contract:
The word contract is derived from the Latin Contractum meaning drawing together.
According to the Act, An agreement enforceable by law is a contract - Sec.2(h)
An Agreement creating and defining obligations between the parties
-
Salmond
An analysis of the definitions would show that a contract must have the following two elements:
a) An Agreement
b) Its enforceability (legal obligation)
In the form of an equation, it can be shown as under:
Contract = An agreement + its enforceability

What is an agreement?
According to the Act, Every promise & every set of promise forming the consideration for each
other is an agreement.

What is Promise?
According to the Act, A proposal when accepted becomes a promise.
Ex: Ram offers to sell his car to Shyam for Rs.2,00,000. Shyam accepts the offer.
This offer after acceptance becomes promise & this promise is treated as an agreement
between Ram & Shyam.

What is enforceability of an agreement?

An agreement is enforceable by law if it creates some legal obligation. In other words, the parties
to an agreement must be bound to perform their promises. In case of social or domestic
agreements, the parties do not intend to create legal relations.
Ex: Manoj invites his friend Sachin to a dinner and Sachin accepts the invitation. If Sachin fails
to turn up for dinner, Manoj cannot go to the court to claim his loss.
In commercial or business agreements the parties intend to create legal relations.
Ex: Vikram offers to sell his car to kiran for Rs. 1 lakh. Kiran accepts the offer. Such an
agreement is a contract because it creates legal obligation.

Essential Elements of a valid Contract

Proposal (offer) and Acceptance.

Intention to create a legal relation.

Lawful considerations.

Capacity of parties.
Free consent.

Lawful object.
Writing & Registration.

Certainity.
Possibility of performance.

Agreement not expressly declared void.

1) Proposal and Acceptance:-
The first step towards creating a contract is that one person shall signify or
make a proposal or offer to the other, with a view to obtaining the
acceptance of that another person to whom the offer is made.[Sec.2(a)].
A proposal when accepted becomes a promise. [Sec.2(b)]
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 [Sec.2(b)]
2) Intention to create Legal Relations:-
a. Agreements which create legal relations or are capable of creating legal relations
are contracts.
b. Existence of legal relationship is determined by the intention of parties.
 c. There must be common intention of the parties to create a legal relations in order
to constitute a contract like buying, selling, marriage etc.

3) Consideration lawful consideration[Sec.2(d), 23 &25]

i. The agreement is legally enforceable only when both the parties give
something and get something in return.
ii. Consideration need not be in cash or in kind. It may be an act or
abstinence (abstaining from doing something) or promise to do or not to
do something.
iii. It may be past, present or future. But it must be real and lawful.
4) Capacity of parties to contract competent parties. [Sec.11&12]:
a. The parties to the agreement must be capable of entering into a valid contract.
b. Every person is competent to contract if he :
i. Is of the age of majority
ii. Is of sound mind
iii. Is not disqualified from contracting by any law to which he is subject
c. Flaw in capacity to contract may arise from minority, lunacy, idiocy, drunkenness,
etc. and status. If a party suffers from any flaw in capacity, the agreement is not
enforceable except in some special cases.
5) Free Consent [Sec. 13 &14]:
i. The parties must be ad-idem parties must agree upon the same thing in
the same sense
ii. Mere consent is not enough. Consent of parties must be free, for example,
it must not have been obtained by:
i. Coercion
ii. Undue influence
iii. Fraud
iv. Misrepresentation
v. Mistake
6) Lawful object:
The object of the agreement must be lawful. It means that the object must not be illegal,
immoral, or opposed to public policy.
 7) Writing and Registration, if so required by law:-
a. A contract may be made by words spoken or written.
b. It is, however, in the interest of the parties that the contract should be in writing.
c. There are some other formalities also which has to be complied with in order to
make an agreement legally enforceable. In some cases, the document in which the
contract is incorporated is to be stamped. In some other cases, a contract, besides
being a written one, has to be registered.
d. Certain documents also require attestation, for example, they are to be signed or
executed in the presence of at least two witnesses, like court marriage, mortgage,
leases etc.
8) Certainty:-
i. The terms of contract should be clear. In other words, the contract must
not be vague.
9) Possibility of Performance:-
i. Contracts based on impossibility of performance are not valid. The
contracts must be capable of being performed.
10) An agreement must not be expressly declared to be void
a. A void agreement (opposed to public policy like agreements in restraint of trade,
or in restraint of marriage or in restraint of legal proceedings) is not enforceable
by law. [Sec.2(g)]
b. It does not give rise to any rights and obligations
c. An agreement should not be void in order to constitute a valid contract.

Classification of Contracts
1. Classification according to Validity
i] Voidable contract: An agreement which is enforceable by law at the option of one party but
not at the option of the other or others is a voidable contract [Sec. 2(i)].
The party whose consent is not free may either rescind (avoid or repudiate) the contract,
if he so desires, or elect to be bound by it.
A voidable contract continues to be valid till it is avoided by the party entitled to do so.
 Example of Voidable Contract: A promises to sell his car to B for Rs 2000. His consent is
obtained by use of force.The contract is voidable at the option of A.
He may avoid the contract or elect to be bound by it.
ii] Void Agreement: An agreement not enforceable by law is said to be void [Sec.2(g)].
E.g., An agreement with a minor or an agreement without consideration.
iii] Void Contract: A contract which ceases to be enforceable by law is a void contract. [2 (j)].
E.g., A contract to import goods becomes void, when war breaks out between the countries.
iv] Illegal Agreement: An illegal agreement is one which transgresses the public policy or which
is criminal in nature or which is immoral.
E g.,An agreement to import prohibited goods.
All illegal agreements are void but all void agreements are not necessarily illegal.
v] Unenforceable Contract:
An unenforceable Contract is one which cannot be enforced in a Court of law because of some
technical defect such as absence of writing or where the remedy has been barred by lapse of
time.
The contract may be carried out by the parties concerned; but in the event of breach or
repudiation of such a contract, the aggrieved party will not be entitled to the legal remedies.
2. Classification according to Formation
A contract may be (a) made in writing or by word of mouth, or (b) inferred from the conduct of
the parties or circumstances of the cases.These are the modes of formation of contract.
On the basis of Formation Contract can be classified as,
(i) Express Contract, (ii) Implied Contract, &
(iii) Quasi Contract.

(i) EXPRESS CONTRACT: If the terms and conditions of contracts are expressly agreed upon
(whether words spoken or written) at the time of formation of contract, the contract is said to be
Express Contract .
(ii) IMPLIED CONTRACT: One which is inferred from the acts or conduct of the parties or
course of dealings between them.
An implied contract is one which is not an express contract.
(iii)QUASI CONTRACT: Strictly speaking Quasi Contract is not a contract at all.
A contract is intentionally entered in to by the parties.
A quasi contract, on the other hand is created by law. It rests on the ground of equity that, a
person shall not be allowed to enrich himself unjustly at the expense of another .
For example:
P agrees to work for D for one year, payment of the $30,000 salary to be made at the end. P
works for six months, then unjustifiably quits. P cannot recover "on the contract," because he has
not substantially performed. But he will probably be allowed to recover in quasi-contract, for the
fair value of the benefits he has conferred on D. The court will estimate these benefits (which
will probably be one-half of the $30,000 annual salary), and will subtract the damage to D of P's
not performing the second six months.
III. Classification according to Performance
(i) Executed Contract
(ii) Executory Contract
-Unilateral or One-sided Contract
-Bilateral Contract

(I) EXECUTED CONTRACT:

Executed means that which is done.
An executed contract is one in which both the parties have performed their respective
obligations.
(ii) EXECUTORY CONTRACT:
Executory means that which remains to be carried in to effect. A contract may be partly
executed and partly executory.
ONE-SIDED OR UNILATERAL CONTRACT
Performance of only one party is outstanding.
BILATERAL CONTRACT.
Performance of both the parties remains outstanding.
Contract of Indemnity:-
A contract by which one party promises to save the other from loss caused to him by the
conduct of the promisor himself, or by the conduct of any person, is called a contract of
indemnity (Sec. 124). The person who promises to make good the loss is called the indemnifier
(promisor) and the person whose loss is to be made good is called the indemnified or indemnity-
holder.
Contract of Guarantee:-
It is a contract to perform the promise, or discharge the liability, of a third person in case
of his default. The person who gives the guarantee is called the surety , the person in respect of
whose default the guarantee is given is called the principal debtor and the person to whom the
guarantee is given is called the creditor.
A guarantee may be either oral or written (sec126).
It may be express or implied and may even be inferred from the course of conduct of the
parties concerned.

Contract of Agency
AGENT:- Person employed to do any act for another or to represent another in dealings with
third person.
In other words, an agent is a person who acts in place of another.
The person for whom or on whose behalf he acts is called the PRINCIPAL.

Duties of an Agent
To conduct the business of agency according to the principals directions and not to
deviate even for the benefit of the principal.
To conduct the business with the skill and diligence generally possessed by persons
engaged in similar business.
To render proper accounts.
Not to make any secret profits.

Not to deal on his own account.

Not entitled to remuneration for business mis-conducted.

Rights of an Agent
Right to receive agreed or reasonable remuneration.
Right to retain money of the principal towards advance made or expenses properly
incurred by him.
Right of lien.
Right of stoppage of transit.

Right to be indemnified against consequences of all lawful acts done within the authority.
Creation of Agency
An agency may be created in any of the following ways:
1) Agency by express agreement: An agency by express agreement is created when by spoken
or written words an express authority is given to an agent.
Ex: X who owns a shop, appoints Y to manage his shop by executing a power of attorney in Ys
favor.
2) Agency by implied agreement: Implied agency arises when agency is inferred from the
circumstances of the case, or from the conduct of the parties on a particular occasion, or from the
relationship between parties.
Implied agency includes the following:
i) Agency by estoppel: Agency by estoppel arises where a person by his words or conduct
induces third persons to believe that a certain person is his agent. The person who induces
as such is estopped or prevented from denying the truth of agency.
Ex: Suppose you want to sell your house. So, you consciously allow a real estate agent
(lets call him agent X) to purport that he is your agent. Now, the agent goes out and finds
you a buyer. The buyer is relying on the word of the agent X, who says that he represents
the owner. And now suppose that the buyer goes out and borrows money so that he can
purchase your house.
If you refuse to sell to the potential buyer by saying that the agent X is not actually your agent,
you could be found at fault in a court of law. This is because you consciously allowed the agent
to purport to be your agent, even though no formal agency contract or agreement was ever made
between you and Agent X. So, agency was assumed, although there was no formal contract.
ii) Agency by holding out: This is a type of agency by estoppel. Such agency arises when a
person by his past affirmative and positive conduct leads third person to believe that person
doing some act on his behalf is doing with authority.
Ex: X allows Y, his servant to purchase goods for him on credit from Z, and later on pays for
them, one day X pays cash to Y to purchase goods. Y misappropriates the money and purchases
goods on credit from Z. Z can recover the price of goods from X because X had held out before
Z that Y is agent.
iii) Agency by necessity: Agency by necessity arises under the following two conditions:
a) There is an actual and definite necessity for acting on behalf of the Principal, and
b) It is impossible to obtain the consent of the principal. Ex: X consigned some vegetables
from Delhi to Mumbai by a truck. The truck met with an accident. The vegetables being
perishable were sold by the transporter. This sale is binding on X. In this case the
transporter became an agent by necessity.
 c) 3) Agency by ratification: where acts are done by one person on behalf of another, but
without his knowledge or authority, the latter may elect to ratify (adopt and accept) or to
disown such acts. If he ratifies them, the same effect will follow as if they had been
performed by his authority.
d) Ratification may be express or implied in the conduct of person on whose behalf the acts
are done.
e) Ex: A, without authority, buys goods for B. Afterwards B sells them to C on his own
account. Bs conduct implies a ratification of the purchases made for him by A.
f) 4) Agency by operation of law: Agency by operation of law is said to arise where the
law treats one person as an agent of another.
Ex: On formation of partnership, every partner becomes the agent of other partners. Such
agency is said to arise by operation of law.

Termination of Agency
By act of parties
Agreement.

Revocation by the principal.

Renunciation by the Agent.

By operation of law
Completion of business of Agency.
Death of Principal or Agent.

Insanity of Principal or Agent.

Insolvency of the Principal.

Destruction of the subject matter.

Principal or Agent becoming alien enemy.

Dissolution of the company.

BAILMENT AND PLEDGE
Meaning of a bailment
The word Bailment is derived from the French word Bailer, which means to
deliver.
The word Bailment means to change a possession of the goods i.e to delivery of goods
from one person to another for some specific purpose.
 According to section 148,
Bailment means the delivery of goods by one person to another for some purpose,
upon a contract, that they shall when the purpose is accomplished, be returned or
otherwise disposed off according to the direction of the person delivering them.
It means that, under the contract of bailment
One person delivers goods to the other person for a specific purpose.
When the purpose is over, the goods are to be returned to the owner.

The goods may be disposed off according to the direction of the owner of the goods.
In the contract of Bailment there are two parties involved.
i) Bailor: The person who deliver goods.
ii) Bailee: The person to whom the goods are delivered.
Examples
1. A delivers a piece of cloth to B, a tailor, to be stitched into a suit. There is a contract of
bailment between A and B.
2. A sells certain goods to B who leaves them in the possession of A. The relationship
between B and A is that of Bailor and Bailee.
3. A lends a book to B to be returned after the examination. There is a contract of bailment
between A and B.
Essential features of bailment
A bailment has the following characteristic features:
a) It is the delivery of movable goods.
b) The goods are delivered for some purpose.
c) Return of specific goods-The goods which form the subject matter of a bailment must be
returned to the bailor, after the accomplishment of purpose or after the expiry of period of
bailment.

Classification or types of Bailment

Bailment may be classified from the point of view of benefit or reward. The benefit may
be exclusive to the bailor or bailee or mutual. Bailment on the basis of reward may be:
1. Gratuitous bailment: Neither the bailor nor the bailee is entitled to any remuneration,
I,e loan of book to a friend, depositing of goods for safe custody.
2. Non Gratuitous bailment: Here the goods are given for reward, remuneration or for
some consideration e.g. car let out on hire, goods given for repairs, etc.
3. Pawn or pledge: Goods delivered to another as a security for money borrowed is called
pledge.

DUTIES OF BAILOR
1. To disclose known faults
Example: A hires a carriage of B. The carriage is unsafe, though B is not aware of it, and
is injured. B is responsible to A for the injury.
2. To bear extraordinary expense of bailment.
Example: A leaves his car with B, a friend, for safe custody for 2 months, B has to pay Rs
100 per month to the night watchman for keeping a watch over the car. It is the duty of A
to pay B the necessary expenses incurred by B.
3. To indemnify bailee for the loss in case of premature termination of gratuitous
bailment.
Example: A lends an old discarted bicycle to B gratuitously for three months. B incurs
Rs. 120 on its repairs. If A asks for the return of the bicycle after one month, he will have
to compensate B for expenses incurred by A in excess of the benefit derived by him.
4. To receive back the goods .
5. To indemnify the bailee.

DUTIES OF BAILEE
1. To take reasonable care of the goods bailed.
Example: A entered a restaurant for dining. His coat was taken by a waiter who hung it on
a hook behind A. when A rose to leave, the coat was gone the proprietor of the restaurant
was liable for the loss.
2. Not to make any unauthorized use of goods.
3. Not to mix the goods bailed with his own goods.
Example: A bails 100 bales of cotton marked with a particular mark to B. B, without As
consent, mixes the 100 bales with other bales of his own, bearing a different mark. A is
entitled to have his 100 bales returned and B is bound to bear all the expenses incurred in
the separation of the bales.
4. Not to set up an adverse title.
5. To return any accretion to the goods.
6. To return the goods.
 RIGHTS OF BAILOR
1. Enforcement of bailees duties.
2. To terminate bailment if the bailee uses the goods wrongfully.
3. To demand return of goods at any time in case of gratuitous bailment.

RIGHTS OF BAILEE
Enforcement of bailors duties.
Delivery of goods to bailor in good faith without title.

Right to apply to court to stop delivery.

Right to action against trespassers.

Pledge
The bailment of goods as security for payment of a debt or performance of a promise is
called Pledge.
The bailor is, in this case, called the Pledger or Pawner and the bailee is called the
Pledgee, or Pawnee. (sec 172).
A Pledge is a bailment for security.
It is a special kind of bailment.

Ex: If A borrows Rs 200 from B and keeps his watch as security for payment of the debt,
the bailment of watch is a pledge.

Difference between bailment and pledge

Pledge Bailment

1. Pledge is the bailment of goods as a 1. Bailment is for a purpose of any kind.

security for the performance of a
specific promise, i.e. the payment of a
debt or performance of a promise.

2. By the default by the pawner to repay 2. The bailee may either retain the goods or
the debt, the pawnee may, after giving sue for his charges.
notice to the pawner, sell the goods
pledged with him.
 3. The pawnee has no right to use the 3. The bailee may do so if the terms of
goods pledged with him. bailment so provide.

Rights of Pawner and Pawnee

Rights of pawnee:
1. Right of retainer.
2. Right to extraordinary expenses.
3. Right against true owner, when the pawners title is defective.
i. He may file a suit against the pawner upon the debt or promise.
ii. He may sell the goods pledged after giving the pawner a reasonable notice of sale.
iii. He can recover from pawner any deficiency arising on the sale of goods by him.

Rights of pawner:
1. Right to get back goods.
2. Right to redeem debt.
3. Preservation and maintenance of the goods.
4. Rights of an ordinary debtor.