Legal Environment of

Business

V.SUGUMARAN MBA., MCS., M.PHIL., PGDCA., SLET

ASSISTANT PROFESSOR
KARUNYA SCHOOL OF MANAGEMENT
KARUNYA UNIVERSITY, COIMBATORE.
 UNIT-I
 Introduction: Meaning and Scope of
business law. Indian Contract Act of
1872 : Definition – Types of contract
– Essentials of valid contract– Legal
rules as to offer, acceptance,
consideration -Free consent -Void
agreements –Remedies for breach
of contract.
 Business Law or Mercantile
Law or Business Legislation
 The commercial law means that branch of Law which is
concerned with trade and commerce. The trade or
commercial transactions may relate to movable or
immovable properties or services. The transactions
relating to movable properties are classified into the
following:
 Chose in Possession: It has a material form. Its
possession can be maintained by the person entitled to
by means of force or suit. Example: Glod ring.
 Chose in Action: It has no material form. But it is a claim
enforceable in a court of law. Example: Promissory notes,
bill of exchange, etc.
THE INDIAN CONTRACT
ACT (ICA), 1872

The Indian Contract Act come into force on 1st

September 1872. This act extends to the whole of
India except the state of Jammu and Kashmir.
Special Terms in a Contract
Examples: Dry cleaner’s receipt, courier’s
receipt, shipment receipt, insurance policy,
etc.
 Binding if communicated or attention drawn to
the fact that there are certain special terms
and conditions.
 Not binding if attention is not drawn and the
other party not aware of.
Agreement?
 Section 2(e)

Promise/(s) Promise/(s)
= Agreement
(in exchange for)
Promise?
Section 2(b)
Promise = Proposal/Offer + Acceptance

Proposal?
Section 2(a)
Expression of willingness
With a view to seek the assent of the other
Thus, mere expression of willingness doesn’t
constitute offer/proposal.
Acceptance
Section 2(b)
Giving of assent to the proposal.
Enforceability by Law
Agreements which are not enforceable
Illegal/unlawful agreements, e.g., to
smuggle/to kill
Social Agreements (Balfour vs. Balfour)
Agreements Declared Void
under ICA
e.g.
 Agreement with or by a minor
 Agreement in restraint of trade
 Marriage brokerage contract
 Wagering/Betting Agreements
 CLASSIFICATION OF
CONTRACTS
 1. Classification according to validity or
enforceability.
 Valid
 Voidable
 Void contracts or agreements
 Illegal.
 Unenforce­able
CLASSIFICATION OF CONTRACTS (con…)

2. Classification according to Mode of

formation
 Express contract
 Implied contract
3. Classification according to Performance
 Executed contract
 Executory contract.
 Unilateral Contract
 Bilateral Contract
1.Valid Contract
Section 10
“An Agreement entered into and enforceable under
the Indian contract act”
To be a valid contract, it must satisfy the following:
1. Offer and Acceptance:(Example: A offers to sell a car for
Rs.12,000/. If B ready to accept the contract is over)
2. Consensus-ad-idem (Meeting of minds) i.e.,
persons must agree to the same thing in the same
sense and at the same time.
3. Intention to create legal relationship as against
social relationship or illegal/unlawful relationship.
(Example: BALFOUR Vs. BALFOUR(1919): It was held that a
promise made by a husband to pay $ 30 to his wife was never
intended to be enforced by law.
4. Free and Genuine Consent, i.e., free from
 coercion
 undue influence
 fraud
 misrepresentation
 mistake

5. Parties competent to contract

6. Lawful consideration and object, i.e.,
something in return and that must be
lawful.
Valid Contract
(‘Object’ and ‘Consideration’ usually overlap.
However, there may be difference at times
e.g., object may be to kill competition and for
that purpose in view, a senior manager of the
competitor may be paid a certain amount to
give unrealistically high quotation.)
Here: Object is to kill competition.
Consideration is :
(i) payment of money
(ii) giving high quotations
Valid Contract
7. Agreement not declared void.
8. Certainty of Meaning: e.g. sale and
purchase of 100 tonnes of oil. But which
oil? Thus, agreement being uncertain –
not valid.
But, if the seller deals only in one kind of
oil and one variety, then it shall be valid
since it is capable of being made certain.
Valid Contract
9. Possibility of performance:
Impossibility whether known to the
parties or not, renders a contract
invalid.
10. Necessary legal formalities: e.g.
sale-deed of immovable property.
11.Must be in writing. (Generally, oral contract is
not enforceable)
Void Agreement and Voidable
Agreement
 Void Agreement
i.e., void­ab­initio i.e. unenforceable from the
very beginning
Becomes void (Void Contract)
 Voidable
i.e., void + able
i.e., capable of being declared void
(unenforceable) at the option of one of the
parties to the contract but not at the option of
the other.
Void vs. Illegal Agreements

Void Agreement Illegal Agreement

1. Unenforceable 1. Unenforceable
2. Not Punishable 2. Punishable (fine or
3. Collateral imprisonment or
transactions both)
unaffected. 3. Collateral
transactions are
also void.
Offer
 An offer is a proposal by one party to enter
into an agreement with another.
 According Sec.2(a) of the Act defines, “When
one person signifies to another, his
willingness to do or to abstain from doing
anything with a view to obtaining the assent
of that other to such act or abstinence, he is
said to make a proposal”
 The person making the offer is called offeror
and the person to whom it is made is called
offeree.
Specific and General Offer
 Specific Offer:
 made to a specified person or a group of
persons.
 can be accepted only by the person to
whom made.
Thus, if offer is addressed to ‘A’, ‘B’
cannot accept it.
 Case Law: Boulton vs. Jones
Specific and General Offer
 General Offer:
 which is not a specific offer.
 made to the world at large.
 can be accepted by anyone by
complying with the terms of the offer.
 Case Law: Carlill vs. Carbolic Smoke
Ball Co.
Offer vs. Invitation to offer
 Illustrations of Invitation to Offer:
 Prospectus issued by a college.
 Prospectus issued by a company.
 Invitation of bids in an auction.
 Price-catalogues, price lists, quotations
 Display of goods with a price-tag in a
shop window.
Cross Offers & Counter Offers
 Cross Offers
Identical offers cross each other and none of
the parties is aware of the same. Doesn’t
result in a contract unless one of them is
accepted.
 Counter Offer
Instead of accepting an offer, the offeree
makes a counter offer, i.e., accepts the same
subject to certain conditions or qualification.
Contracts through Post
 Communication of Offer
is complete when the offeree has the
knowledge of the same.
 Communication of Acceptance
 It has two aspects, viz.,
 As against the proposer

 As against the acceptor

As against the proposer
 Communication is complete as soon as a duly
addressed letter of acceptance is put into the
course of transmission.
 Whether the same reaches the proposer or
not.
As against the acceptor
 Communication is complete only when the
proposer has received the letter and learnt
the contents thereof.
Communication of Revocation
 Communication of revocation (of offer
or acceptance) is complete:
 As against the person who makes it
when it is put into the course of
transmission.
 As against the person to whom it is
made, when it comes to his knowledge.
Essentials of a Valid offer
 It must be certain
 It must be intended to create Legal relations
 It must be distinguished from a quotation or
an Invitation to offer
 An offer must ne communicated to the offeree
ACCEPTANCE
Definition
 Acceptance has been defined as "When the person to whom
the proposal is made signifies his assent thereto, the proposal is
said to be accepted”.
 Acceptance how made:
 The offeree is deemed to have given his acceptance when he
gives his assent to the proposal. The assent may be express or
implied. It is express when the acceptance has been signified
either in writing, or by word of mouth, or by performance of
some required act.
 Ex- A enters into a bus for going to his destination and takes a seat. From
the very nature, of the circumstance, the law will imply acceptance on the
part of A.]
 In the case of a general offer, it can be accepted by anyone by
complying with the terms of the offer.
 ESSENTIALS OF A VALID
ACCEPTANCE
 Acceptance must be absolute and unqualified.
 Acceptance must be communicated to the offeror.
 Brogden Vs Metropolitan Railway co.
 Acceptance must be according to the mode prescribed.
Ex- A sends an offer to B through post in the usual course. B should make the
acceptance in the "usual and reasonable manner" as no mode of acceptance is
prescribed. He may ac-cept the offer by sending a letter, through post, in the ordinary
course, within a reasonable time.
 Time of Acceptance
 Acceptance before Offer lapses or Revoked
 Acceptance after Offer
 COMMUNICATION OF OFFER,
ACCEPTANCE AND REVOCATION
 In order to be a valid offer and acceptance.
 (i) the offer must be communicated to the offeree, and
 (ii) the acceptance must be communicated to the offeror.

The communication of acceptance is complete:

(i) as against the proposer, when it is put into a course of transmission

to him, so as to be out of the power of the acceptor;
(ii) as against the acceptor, when it comes to the knowledge of the
proposer.
Ex- A proposes, by letter, to sell a house to B at a certain price.
B accepts A's proposal by a letter sent by post. The communication of
acceptance is complete: (i) as against A, when the letter is posted by
B; (ii) as against B, when the letter is received by A.
Revocation of Proposal and Acceptance
 A proposal may be revoked at any time
before the communication of its acceptance is
complete as against the proposer, but not
afterwards.

 Ex- 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 ac-ceptance, but not afterwards. B may revoke his
acceptance at any time before or at the moment when the letter
communi-cating it reaches A, but not afterwards.
CONSIDERATION
[Sections 2(d), 10,23-25, 148, 185]
 According to Indian Law, a contract made
without consideration is void subject to the
exceptions. The term consideration means
something in return.
 X agrees to sell a house to Y for Rs.5,00,000.
For X’s promise, the consideration is
Rs.5,00,000. For Y’s promise, the
consideration is the house
 Definition
 Consideration is what a promisor demands as
the price for his promise. In simple words, it
means 'something in return.'
 Consideration has been defined as "When at
the desire of the promisor, the promisee or
any other person has done or abstained from
doing, or promises to do or promises to
abstain from doing some-thing, such act or
abstinence or promise is called a
consideration for the promise."
IMPORTANCE OF
CONSIDERATION
 A person who makes a prom-ise to do or
abstain from doing something usually does so
as a return or equivalent of some loss,
damage, or inconvenience that may have
been occasioned to the other party in respect
of the promise. The benefit so received and
the loss, damage or inconvenience so caused
is regarded in law as the consideration for the
promise.
Rules Governing Consideration
 Every Agreement must be supported by consideration.
(A contract without consideration is void)
 the Consideration must be at the desire of the promisor
 Consideration must proceed from the promisee or any
other person
 Consideration may be past, present or future.
 Consideration need not be adequate
 Consideration must be real and lawful
These are few lawful considerations.
(a) A agrees to sell his house to B for 10,000 rupees. Here, B's
promise to pay the sum of 10,000 rupees is the consideration for
A's promise to sell the house and A's promises to sell the house is
the consideration for B's promise to pay the 10,000 rupees.
(b) A promises to pay 10,000 rupees at the end of six months, if
C, who owes that sum to B, fails to pay it, B promises to grant
time to C accordingly. Here, the promises of each party is the
consideration for the promises of the other party.
(c) A promises, for a certain sum paid to him by B, to make
goods to B the value of his ship of it is wrecked on a certain
voyage. Here, A's promises is the consideration for B's payment
and B's payment is the consideration for A's promise.
(d) A promises to maintain B's child, and B promises to pay A
1,000 rupees yearly for the purpose. Here, the promise of each
party is the consideration for the promise of the other party.
 Unlawful objects & considerations
 A, B and C enter into an agreement for the division among
them of gains acquired or to be acquired, by them by fraud.
(UO)
 A promises B to drop a prosecution which he has instituted
against B for robbery, and B promises to restore the value of
the things taken. (UO)
 A promises to obtain for B an employment in the public service
and B promises to pay 1,000 rupees to A. (UC)
 A, being agent for a landed proprietor, agrees for money,
without the knowledge of his principal, to obtain for B a lease of
land belonging to his principal. The agreement between A and
B is void, as it implies a fraud by concealment, by A, on his
principal. (UO &UC)
Free consent
(Sections 10; 13-22)
What is the meaning of `CONSENT`
 When two or more persons agree upon the
same thing in the same sense, they are said
to consent.
 Ex- A agrees to sell his Fiat Car 1983 model
for Rs. 80,000. B agrees to buy the same.
There is a valid contract since A and B have
consented to the same subject matter.
What is meant by `Free Consent`
 Consent is said to be free when it is not caused by

Causes affecting contract Consequences

1. Coercionn (compulsion) Contract voidable
2. Undue (unjustified) influence Contract voidable
3. Fraud Contract voidable
4. Misrepresentation Contract voidable
5. Mistake –
(i) of fact
(a) Bilateral Void
(b) Unilateral Generally not invalid
(ii) of Fact Void
Void Agreement
 Void Agreement 2(g)
i.e., void­ab­initio i.e. unenforceable from the
very beginning
Becomes void (Void Contract)
 According to act “ a void agreement is an
agreement which is not enforceable by law”
 Void Agreement
 Agreements by person who are not competent to contract.
 Agreements under a mutual mistake of fact material to the
agreement.
 Agreement with unlawful consideration.
 Agreement without consideration. (Exception – if such an agreement
is in writing and registered or for a past consideration)
 Agreement in restraint of marriage.
 Agreement in restraint of trade
 Agreements in restrain of legal proceedings,
 Agreements void for uncertainty (Agreements, the meaning of which
is not certain, or capable of being made certain)
 Agreements by way of wager (a promise to give money or money's
worth upon the determination or ascertainment of an uncertain event)
 Agreements against Public Policy
 Agreements to do impossible act.
REMEDIES FOR BREACH OF CONTRACT

(SECTIONS 73-75)
 As soon as either party commits a breach of the contract, the
other party becomes entitled to any of the following reliefs: -
 Recession of the contract
 b) Damages (monetary compensation)
 c) Specific performance
 d) Injunction

 Ex –A, a singer contracts with B, the manager of a theatre, to

sing at his theatre for two nights in every week during the next
two months, and B engages to pay her Rs. 100 for each night’s
performance. On the sixth night, A wilfully absents herself from
the theatre and B in consequence, rescinds the contract. B is
entitled to claim compensation for the damages for which he
has sustained through the non-fulfilment of the contract.