Unit – 1

Law
Law, the discipline and profession concerned with the customs, practices, and rules of
conduct of a community that are recognized as binding by the community.
Enforcement of the body of rules is through a controlling authority. In old English
“Lagu” i.e. law, ordinance, rule, regulation from old norse “lagu” law collective Plural
of “Lag” is layer, measure, stroke ‘Literally’ something laid down of fixed. The term
“Law’ denotes different kinds of rules and Principles. Law is an instrument which
regulates human conduct/behavior. Law means Justice, Morality, Reason, Order, and
Righteous from the view point of the society. Law means Statutes, Acts, Rules,
Regulations, Orders, and Ordinances from point of view of legislature. Law means
Rules of court, Decrees, Judgment, Orders of courts, and Injunctions from the point of
view of Judges. Therefore, Law is a broader term which includes Acts, Statutes, Rules,
Regulations, Orders, Ordinances, Justice, Morality, Reason, Righteous, Rules of court,
Decrees, Judgment, Orders of courts, Injunctions, Tort, Jurisprudence, Legal theory,
etc.
Contract law
The law of contract is the most important branch of Mercantile Law. Without such a
law it would be difficult, if not impossible, to carry on any trade or business in a
smooth manner. The law of contract is applicable not only to business but also to all
day-to-day personal dealings. In fact, each one of us enters into a number of contracts
from sunrise to sunset. When a person buys a newspaper or rides a bus or purchases
goods or gives his radio for repairs or borrows a book from library, he is actually
entering into a contract. All these transactions are subject to the provisions of the law
of contract. The term business law refers to those rules which govern and regulate
business transactions. These rules, regulations etc bring a sense of seriousness and
definiteness in business dealings. They provide for rules regarding the validity of
making contracts and their performances.
Contract act 1872
Broadly speaking, a contract is an agreement made between two or more persons to do
or to abstain from doing a particular act. A contract invariably creates a legal
obligation between the parties by which certain rights are given to one party and a
corresponding duty is imposed on the other party. The law of contract is the most
important part of mercantile law in India. It determines the circumstances in which the
promise made by the parties to a contract shall be binding on them and provides for
the remedies available against a person who fails to perform his promise. The law of
contract is contained in the Indian Contract Act, 1872, which deals with the general
principles of law governing all contracts 'and covers the special provisions relating to
contracts like bailment, pledge, indemnity, guarantee and agency. Section 2(h) of the
Act states that an agreement enforceable by law is a contract. Let us discuss these two
elements in detail. Every contract thus combines two essential elements
(i) Agreement
(ii) Obligation.
It creates rights and obligations between the parties to the contract which are
correlative, in case a party refuses to honor a contacted obligation it will give right of
action to other party. According to the terms of Section 10 of the Act, an agreement is
a valid contract if it is made by the free consent of the parties competent to contract,
for a lawful consideration and with a lawful object and are not expressly declared to
be void. On analysing this definition of contract, you will notice that a contract
essentially consists of two elements:
(i) An agreement, and
(ii) Its enforceability by law
Agreement
Section 2(e) of the Contract Act defines agreement as every promise 'and every set of
promises forming the consideration for each other. In this context a promise refers to a
proposal (offer) which has been accepted. For example, Ramesh offers to sell his T.V.
for Rs. 8,000 to Shyam. Shyam accepts this offer. It becomes a promise and treated as
an agreement between Ramesh and Shyam. In other words, an agreement consists of
an offer by one party and its acceptance by the other. Thus, Agreement = Offer +
Acceptance. From the above analysis it is clear that there must be at least two parties
to an agreement, one making an offer and the other accepting it. No person can enter
into agreement with himself. There is another important aspect relating to an
agreement i.e., the parties to an agreement must have an identity of minds in respect of
the subject matter. They must agree on the same thing in the same sense. This is also
called consensus-ad-idem. Suppose A has two houses, one situated in South Delhi and
the other in North Delhi. He offers to sell his North Delhi house to B while B is under
the impression that he is buying the South Delhi house. Here, there is no identity of
minds. Both the parties are thinking about different houses. Hence there is no
agreement.
Legal Obligation
In order that an agreement may be regarded as a contract, it must give rise to a legal
obligation i;e., it must be enforceable by law. Any obligation (duty) which is not
enforceable by law is not regarded as a contract. Social, moral or religious agreements
do not create any legal obligation. For example, an agreement to take lunch together
or to go to a picnic is not a contract because it does not create a duty enforceable by
law. Such agreements are purely of a social nature where there is no intention to create
legal relationship. Hence, they do not result in contracts. In case of business
agreements, however, the usual presumption is that the parties intend to create a legal
relationship. For example, an agreement to sell a scooter for Rs. 8,000 is a contract
because it gives rise to an obligation enforceable by law. In this agreement if there is
default by either party, an action for breach of contract can be enforced through a
court of law provided all the essentials of a valid contract are present in the agreement.
Distinction between an agreement and a contract
Agreement Contract
Offer and its acceptance constitute Agreement and its enforceability, an
an agreement. agreement. constitute a contract
An agreement may not create a legal A contract necessarily creates a legal
obligation. obligation.
Every agreement may not be a All contracts are agreements.
contract
Agreement is not a concluded or a Contract is concluded and binding on the
Binding contract. concerned parties

Classification of contracts
Contracts can be classified on a number of basis. They are:
1) On the basis of creation.
2) On the basis of execution.
3) On the basis of enforceability.
1) On the Basis of Creation
A contract may be
(i) Made in writing or by word of mouth or
(ii) Inferred from the conduct of the parties or circumstances of the case. The
first category of contract is termed as 'express contract' and the second as
'implied contract'
2. On the Basis of Execution
On the basis of the extent to which the contracts have been performed, we may
classify them as
(i) Executed contracts
(ii) Executory contracts
3. On the Basis of Enforceability
From the point of view of enforceability, a contract may be
(i) Valid
(ii) Void
 (iii) Voidable
(iv) Illegal
(v) Unenforceable

Business Law
All the laws which pertain to how, what and why of how businesses are legally
allowed to and supposed to function are encompassed by what is business law.
Business law meaning includes contract laws, manufacturing and sales laws, and also
hiring practices and ethics. In simple words, it refers to and pertains to the legal laws
of business and commerce in the public as well as the private sector. Note that it is
also known as commercial law and corporate law, due to its nature of regulating these
worlds of business.
Significance of Business Law
Business law is an important aspect of law in general because, without the same, the
corporate sector, manufacturing sector, and retail sector would be in tyranny. The aim
of putting business and law together is to maintain safe and functional working spaces
for all individuals involved in the business, whether they’re running it or working for
the people running it.

Types of Business Law

There are several types of business law that are recognised and followed by countries
the world over. Some of these include the types of business law sections that follow.
1. Contract Law
A contract is any document that creates a sort of legal obligation between the parties
that sign it. Contracts refer to those employee contracts, sale of goods contracts, lease
contracts, etc.
2. Employment Law
Employment law is where it is imperative for business and law to meet. These laws
enforce the rules and regulations that govern employee-employer relationships. These
cover when, how and for how much and how long employees should work.
3. Labour Law
Labour law also indicates the appropriate relationship between employee and
employer, and also pay grades and the like. However, an additional element to labour
laws is the relationship of the union with the employer and employee.
4. Intellectual Property Law
Intellectual property refers to the intangible products of the working of the human
mind or intellect, which are under the sole ownership of a single entity, such as an
individual or company. The validation of this ownership is provided by intellectual
property law, which incorporates trademarks, patents, trade secrets, and copyrights.
5. Securities Law
Securities refer to assets like shares in the stock market and other sources of capital
growth and accumulation. Securities law prohibits business persons from conducting
fraudulent activities taking place in the securities market. This is the business law
section that penalizes securities fraud, such as insider trading. It is, thus, also called
Capital Markets Law.
6. Tax Law
In terms of business law, taxation refers to taxes charged upon companies in the
commercial sector. It is the obligation of all companies (except a few tax-exempt
small-time companies) to pay their taxes on time, failure to follow through which will
be a violation of corporate tax laws.
Indian Contract Act of 1872
In the year 1861, the third law commission of British India under the chairmanship of
Sir John Romily presented the report on contract law for India. The law commission
submitted a draft on 28th July 1866.The draft contract law after several amendments
was enacted as The Act 9 of 1872 on 25th April 1872 and the INDIAN CONTRACT
ACT 1872 came into force w.e.f 1st September 1872.The Indian Contract Act, 1872 is
one of the oldest in the Indian law regime, passed by the legislature of pre-
independence India; it received its assent on 25th April 1872. The statute contains
essential principles for formation of contract along with law relating to indemnity,
guarantee, bailment, pledge and agency,
Indian Contract Act frames and validates the contracts or agreements between various
parties. Contract Act is one of the central laws that regulate and oversee all the
business wherever there is a case of a deal or an agreement. The Indian Contract Act,
1872 defines the term “Contract” under its section 2 (h) as “An agreement enforceable
by law”. In other words, we can say that a contract is anything that is an agreement
and enforceable by the law of the land.
The Indian Contract Act governs the working of contract laws in our country. Some of
its requirements for contract laws are:
• Absolute acceptance of the contract by both parties.
• Lawful consideration from both parties.
• Competent to contract:
• Neither party should be a minor.
• Neither party should be of unsound mind.
• Free consent: neither party should have been coerced into signing.
• Agency: when one party engages another party to act in place of it.
• Final enforcement of contracts

Business Laws in India

Sale of Goods Act 1930
The transfer of ownership of a tangible, immovable commodity between a buyer and a
seller for a decided amount of money warrants a sale of goods contract, whose
specifics are governed by the Sale of Goods Act of 1930.
Indian Partnership Act 1932
A partnership in business refers to when two or more business entities come together
to create a new venture together. The investment and profits are split evenly between
the involved parties. The Indian Partnership Act provides the laws under which
partnerships in India can function.
Limited Liability Partnership Act 2008
This Act is differentiated from the IAP of 1932. A Limited Liability Partnership is a
separate legal entity, which continues with its business as is, even if a partnership
dissolves, only suffering the liability as mentioned in the contract.
Companies Act 2013
This is the ultimate business law, which oversees and provides the rules pertaining to
each aspect of creation as well as dissolution of companies established in India.
Offer
For making a valid contract there must be a lawful offer and a lawful acceptance of
that offer. An offer is also called ‘proposal'. The words 'proposal' and 'offer' are
synonymous and are used interchangeably. Section 2(a) defines the term 'proposal' as
follows: "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. "
offer involves the following elements
i) It must be an expression of readiness or willingness to do or to abstain from doing
something. Thus, it may involve a 'positive' or a 'negative' act. For example, A offers
to sell his book to B for Rs. 30. A is making a proposal to do something i.e., to sell his
book. It is a positive act on the part of the proposer A. On the other hand, when A
offers not to file a suit against B if the latter
pays A the outstanding amount of Rs. 1,000, the act of A is a negative one i.e., he is
offering to abstain from filing a suit.
ii) It must be made to another person. There can be no 'proposal' by a person to
himself
iii) It must be made with a view to obtain the assent of that other person to such act or
abstinence. Thus, a mere statement of intention- "I may sell my furniture if I get a
good price" is not a proposal.
The person making the offer is called the 'offerer' or the 'promisor' and the person to
whom it is made is called the 'offeree'. When the offeree accepts the offer, he is called
the 'acceptor' or the 'promisee'. For example, Ram offers to sell his scooter to Prem for
Rs. 10,000 This is an offer by Ram. He is the offerer or the promisor. Prem to whom
the offer has been made is the offeree and if he agrees to buy the scooter for Rs.
10,000 he becomes the acceptor or the promisee.
Legal Rules for a Valid Offer
An offer or proposal made by a person cannot legally be regarded as an offer unless it
satisfies the following conditions.
1) Offer must intend to create legal relations: An offer will not become a promise
even after it has been accepted unless it is made with a view to create legal
obligations. It is so because the very purpose of entering into an agreement is to make
it enforceable in a court of law. A mere social invitation cannot be regarded as an offer
because if such an invitation is accepted it will not give rise to any legal relationship.
For example, A invites his friend B to a dinner and B accepts the invitation. If B fails
to turn up for dinner, A cannot go to the court to claim his loss. In social agreements
the presumption is that the parties do not intend to create legal relationship.
2)Terms of offer must be certain, definite and not vague: No contract can be
formed if the terms of the offer are vague, loose and indefinite. The reason is quite
simple. When the offer itself is vague or loose or uncertain, it will not be clear as to
what exactly the parties intended to do. A vague offer does not convey what it exactly
means. For example, A promises to buy one more horse from B if the horse purchased
earlier proves lucky. This promise cannot be enforced because it is loose and vague. If,
however, the terms of the offer are capable of being made certain, the offer is not
regarded as vague. For example, A offers to sell to B "a hundred 4 quintals of oil". The
offer is uncertain as there is nothing to show what kind of oil is intended to be sold.
But, if A is a dealer in coconut oil only, it is quite clear that he wants to sell coconut
oil. Hence, his offer is not vague. It is a valid offer.
3) The offer must be distinguished from a mere declaration of intention:
Sometimes a person may make a statement without any intention of creating a binding
obligation. Such statement or declaration only indicate that he is willing to negotiate
and an offer will be made or invited in future. For example, an auctioneer advertised
in a newspaper that a sale of office furniture will be held on a certain date. A person
with the intention to buy furniture came from a distant place for the auction, but the
auction was cancelled. He cannot file a suit against the auctioneer for his loss of time
and expenses because the advertisement was merely a declaration of intention to hold
auction
4) Offer must be distinguished from an invitation to offer: An offer must be
distinguished from an invitation to receive an offer or to make an offer or to negotiate.
In the case of invitation to offer there is no intention on the part of the person sending
out the invitation to obtain the assent of the other party to such invitation. On the other
hand, offer is a final expression of willingness by the offerer to be bound by his
promise, should the other party choose to accept it. In case of an invitation to offer, his
aim is to merely circulate information of his readiness to negotiate business with
anybody who on such information comes to him. An invitation to offer is not an offer
in the eyes of law and does not become a promise on acceptance. You must have
noticed that shopkeepers generally display their goods in showcases with pride tags
attached. The shopkeeper in such cases is not making an offer so that you can accept
it. He is in fact inviting you to make an offer which he may or may not accept. You
cannot compel the shopkeeper to sell the goods displayed in the showcase at the
market price. Similarly, quotations, catalogues, price list, advertisements in a
newspaper for sale or a circular sent to prospective buyers do not constitute an offer.
Similarly, a prospectus issued by a company for subscription to its shares by the
members of the public is only an invitation to offer.
5) The offer must be communicated: An offer must be communicated to the person
to whom it is made. It means that an offer is complete only when it is communicated
to the offeree. You should note that a person can accept the offer only when he knows
about it. In the case of Fitch v. Snedakar, S offered a reward to anyone who returns his
lost dog. F brought the dog without any knowledge of the offer of reward. It was held
that F was not entitled to the reward because F
cannot be said to have accepted the offer which he was not aware of.
6) Offer should not contain a term the non-compliance of which would amount to
acceptance: The offer should not impose on the offeree an obligation to reply. While
making the offer the offerer cannot say that if the offer is not accepted before a certain
date, it will be presumed to have been accepted. Unless the offeree sends his reply, no
contract will arise. For example, A. writes to B "I offer to sell my scooter to you for
Rs. 7,000. If I do not receive a reply by Wednesday next, I shall assume that you have
accepted the offer." If B does not reply, it shall not imply that he has accepted the
offer. Hence, there will be no contract.
Acceptance
When an offer is accepted, it results in an agreement. Acceptance is an expression by
the offeree of his willingness to be bound by the terms of the offer. This results in the
establishment of legal relations between the offerer and offeree. Section 2(b) of the
Indian Contract Act defines the term 'acceptance' as "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. " For example, A offers to sell his book
to B for Rs. 20. B agrees to buy the book for Rs. 20. This is an acceptance of A's offer
by B.
Legal Rules for a Valid Acceptance: The acceptance of an offer to be effective must
fulfil certain conditions. These are:
1) Acceptance must be absolute and unqualified: Section 7 (1) of the Indian
Contract Act provides that 'In order to convert a proposal into a promise, the
acceptance must be absolute and unqualified. This is so because a qualified and
conditional acceptance amounts to a counter offer leading to the rejection of the
original offer. No variation should be made by the offeree in the terms of offer. If
while giving acceptance, any variation is made in the terms of the offer the acceptance
will not be valid and there will be no contract. For example, A offers to sell his scooter
to B for Rs. 8,000 and B agrees to buy it for Rs. 7,500. It is a counter offer and not an
acceptance. If, later on, B is ready to pay Rs. 8,000 A is not bound to sell his scooter,
because E's counter offer has put an end to the original offer. Further an offer must be
accepted in toto. If only a part of the offer is accepted the acceptance will not be valid.
For example, G offers to sell 10 quintals of wheat to B at a certain price. B accepts to
buy 70 quintals only. It is not a valid acceptance since it is not for the whole of the
offer. Thus, an offer should be accepted as it is, without any reservations, variations or
conditions. Any variation, howsoever unimportant it may be, makes the acceptance
invalid.
2) Acceptance must be in the prescribed manner: Where the offerer has prescribed
a mode of acceptance, it must be accepted in that very manner. If the offer is not
accepted in the prescribed manner, it is up to the offerer to accept or reject such
acceptance. But when the acceptance is not in the prescribed manner and the offerer
wants to reject it, he must inform the acceptor within a reasonable time that he is not
bound by acceptance since it is not in the prescribed manner. If he does not do so
within a reasonable time, he will be bound by the acceptance. For example, A makes
an offer to B and says "send your acceptance by telegram". B sends his acceptance by
a letter. A can refuse this acceptance on the ground that it was not accepted in the
prescribed manner. But, if A fails to inform B within a reasonable time, he will be
deemed to have accepted the acceptance by ordinary letter and it will result in the
formation of a valid contract: If, however, no mode has been prescribed, it should be
accepted in some usual and reasonable manner.
3) Acceptance must be communicated: Acceptance should be signified. In other
words, the acceptance is complete only when it has been communicated to the offerer.
A mere mental acceptance, not evidenced by words or conduct, is no acceptance. In
Brogen v. Metropolitan Railway Co.'s case an offer to supply coal to the railway Co.
was made. The manager wrote on the letter 'accepted', put it in his drawer and forgot
all about it. It was held that no contract was made because acceptance was not
communicated. Communication of acceptance does not mean that the offerer must
come to know about the acceptance. Even if the letter of acceptance is lost in transit or
delayed, the offerer is bound by the acceptance because the acceptor has done all that
is required of him.
4) Acceptance must be communicated by a person who has the authority to
accept: For an acceptance to be valid it should be communicated by the offeree
himself or by a person who has the authority to accept. Thus, if acceptance is
communicated by an unauthorised person, it will not give rise to legal relations. The
case of Powell v. Lee can be mentioned in support of this point. In this case P applied
for the post of a headmaster in a school. The managing committee passed a resolution
appointing P to the post but this decision was not communicated to P. However, a
member of the managing committee, in his individual capacity and without any
authority, informed P about the decision. Subsequently, the managing committee
cancelled its resolution and appointed someone else. P filed a suit for breach of
contract. It was held that he was not informed about his appointment by some
authorised person, hence there was no communication of acceptance.
5) Acceptance must be made within the time prescribed or within a reasonable
time: Sometimes the offerer while making the offer fixes the period within which the
offer should be accepted. In such a situation, the acceptance must be given within the
prescribed time and if no time is prescribed, it should be . accepted within a
reasonable time. What is the reasonable time depends upon the facts of the case.
Where an offer to buy shares of a company was made in June but the acceptance was
communicated in November, it was held that because acceptance was not give within
a reasonable time the offer had elapsed.
6) Acceptance must be given before the offer lapses or is withdrawn: The
acceptance must be given while the offer is in force. Once an offer has been
withdrawn or stands lapsed, it cannot be accepted. For example, A offered, by a letter,
to sell his car to B for Rs. 40,000. Subsequently, A withdraws his offer by a telegram,
which was duly received by B: After the receipt of the telegram, B sends his
acceptance to A. This acceptance is not valid.
Free consent
sec 13 of the contract act defines consent “Two or more persons are said to
consent when they agree upon the same thing in the same sense at the same
time.”
Section 14 of the Act states that Consent is said to be free when it is not caused by
(i) Coercion
(ii) Undue influence
(iii) Fraud
(iv) Misrepresentation
(v) Mistake
Thus, the consent of the parties to a contract is regarded as free if. it has not been
induced by any of the five factors stated under Section 14. In other words, the consent
is not free if it can be proved that it has been caused by coercion, undue influence,
fraud, misrepresentation, or mistake, for example, X, at a gun point, makes Y agree to
sell his house to X for Rs. 500,000. Here, Y's consent has been obtained by coercion
and therefore, it shall not regard as free. When the consent of any party is not free, the
contract is usually treated as voidable at the option of the party whose consent was not
free. If, however, the consent has been caused by mistake on the part of both the
parties, the contract is considered void.
1) COERCION
Coercion simply means forcing a person to enter in to a contract. Sec. 15 defines
coercion as, “Committing or threatening to commit, any act forbidden by the Indian
Penal Code, or unlawful detaining or threatening to detain, any property, to the
prejudice of any person whatever with the intention of causing any person to enter into
an agreement”.
The essential elements of coercion are
(1) Committing or threatening to commit any act forbidden by Indian Penal Code.
(2) Unlawful detaining or threatening to detain any property.
(3) The act of coercion may be directed at any person and not necessarily at the other
party to the agreement.
(4) The act of coercion must be done with the object of inducing or compelling any
person to enter into an agreement.
2) UNDUE INFLUENCE :
It is kind of moral coercion. Sec. 16(1) defines undue influence as, “A contract is said
to be induced by undue influence where the relations subsisting between the parties
are such that one of the parties is in a position to dominate the will of other and uses
that position to obtain an unfair advantage over the other”.
(a) Where he holds a real or apparent authority over the other e.g., in the relationship
between master and servant.
(b) Where he stands in fiduciary relation to the other. It implies a relationship of
mutual trust and confidence.
(c) Where a contract is made with a person whose mental capacity is affected by
reason of age, illness, or mental or bodily distress. Any innocent or unintentional false
statement or assertion of fact made by one party to the other during the course of
negotiation of a contract is called a misrepresentation.
3) MISREPRESENTATION
As per Sec. 18, misrepresentation is a wrong statement of fact made innocently, i.e.,
without any intention to deceive the other party. It may be caused.
By positive statement
By breach of duty
By mistake regarding the subject matter of the agreement.
Essential of misrepresentation
 There must be a representation or omission of a material fact.
 The representation or omission of duty must be made with a view to inducing
the other party to enter into contract.
 The representation or omission of duty must have induced the party to enter
into contract.
 The representation must be wrong but the party making the representation
should not know that it is wrong.

4) FRAUD
Fraud is the intentional misrepresentation or concealment of material facts of an
agreement by a party to or by his agent with an intention to deceive and induce the
other party to enter into an agreement. Sec. 17 defines fraud as, any of the following
acts committed by a party to a contract (or with his convenience or by his agent) with
intention to deceive another party thereto (or his agent) or to induce him to enter into
the contract.
 The suggestion that a fact is true when it is not true by a person who does not
believe it be true.
 The active concealment of the fact by a person having knowledge or belief of
the fact.
 A promise made with out any intention to perform it.
 Any other act fitted to deceive.
 Any such act or omission as the law specifically declares to be fraudulent.
5) MISTAKE
Acc. To Sec. 20 mistake means erroneous belief concerning some fact. The parties are
said to consent when they agree upon the same thing in the same sense. If they do not
agree upon the agreement in the same sense, there will be no contract. When the
consent of one or both the parties to a contract is caused by misconception or
erroneous belief, the contract is said to be induced by mistake
Mistake may be of following types:
1) Mistake of law,
Mistake of law of the country
Mistake of foreign law.
2) Mistake of Fact
Bilateral mistake:-
 mistake as to the existence of the subject matter
 mistake as to the identity of the subject matter
 mistake as to the title of the subject matter
 mistake as to the quantity of the subject matter
 mistake as to the quality of the subject matter
Unilateral mistake:-
 Mistake as to the identity of the person contacted with
 Mistake as to the nature of the contract

Consideration
Consideration, in contract law, an inducement given to enter into a contract that is
sufficient to render the promise enforceable in the courts. The technical requirement is
either a detriment incurred by the person making the promise or a benefit received by
the other person. Thus, the person seeking to enforce the promise must have paid, or
bound himself to pay, money, parted with goods, spent time in labour, or foregone
some profit or legal right. In a contract for the sale of goods, the money paid is the
consideration for the vendor, and the property sold is the consideration for the
purchaser.
The doctrine that a consideration is necessary if a contract is to be enforceable has a
number of functions in the law of contracts. In addition to providing evidence that a
contract exists, consideration also has the cautionary function of guarding the
promisor against ill-considered action; the deterrent function of discouraging
transactions of questionable utility; and a channelling function of enabling interested
persons to distinguish particular types of transactions.
Consideration means something in exchange. It is an essential element ordinarily
required in a contract. One of the basic ideas underlying the present-day requirement
of consideration is that one party to an agreement should not be bound by it if the
other party is not similarly bound. Generally, if an agreement lacks consideration,
neither party can enforce it, even if it is in writing. Stating it positively, the concept of
consideration requires that both parties to a contract shall have given and have
received something as the “price” of their respective promises. For example: X
promise to install a home-air conditioning unit for Y, and Y promises to pay X Rs.
1,100 for the job. Here the price X has received (in return for his obligation to install
the unit) is the right to a payment of Rs. 1,100 from Y when the job is done; similarly,
the price Y has received (for her promise to pay the Rs. 1,100) is her right to have the
unit installed.
The second part of this judicial description is the more important one as it emphasizes
that the consideration is reflected not so much in profit for one party but abandonment
of some legal right by the other party. It does not matter whether the party accepting
the consideration has any apparent benefit thereby or not; it is enough that he accepts
it, and that the party giving it thus thereby undertakes some burden, or lose something
which in contemplation of law may be of value.
Section 2(d) of the Indian Contract Act defines consideration as: ‘When, at the
desire of the promisor, the promisee or any other person has done or abstained, from
doing or does or abstains from doing, or promises to do or to abstain from doing
something, such act or abstinence or promise is called a consideration for the
promise.’
As per this definition, consideration is something in return of a promise which consists
of:
 An act, abstinence or forbearance,
 Done at the desire of the promisor,
 By the promisee or any other person,
 Which can be either already executed or is in the process of execution or may
still be executory.

Exceptions to the doctrine of consideration

So far, we have seen that an agreement has to be supported by consideration to

be enforceable at law. But there may be certain circumstances where it will not
be reasonable to apply the doctrine of consideration to meet the basic motives
of the law. Section 25 of the Indian Contract Act, 1872 takes care of such
circumstances. It says that,
(1) Love and affection [Sec. 25(1)] – An agreement is enforceable even if
there is no consideration, if it is
(i) Expressed in writing,
(ii) Registered under the law for the time being in force for the registration of
documents,
(iii) Is made on account of natural love and affection, and
(iv) Between parties standing in a near relation to each other.
In simple words, a written and registered agreement based on natural love and
affection between near relatives is enforceable even if it is without
consideration
(2) Compensation for past voluntary services [Sec. 25 (2 )] – A promise to
compensate, wholly or in part, a person who has already voluntarily done
something for the promisor, is enforceable, even though without consideration.
In simple words, a promise to pay for a past voluntary service is binding.
(3) Promise to pay a time-barred debt [Sec. 25(3)] – A time barred debt is a
debt which is not recoverable because of lapse of specified time (presently 3
years) under the Limitation Act. In the normal course, once a debt becomes
time barred, the lender is left with no remedy to get his money back. Therefore
a debtor is not legally bound to pay the debt if it becomes time-barred.

In such a case, if the debtor subsequently promises to pay the time barred debt,
apparently there is no consideration moving from the other party but the
contract is still enforceable. This is because, under section 25(3) of the Act, a
promise by a debtor to pay a time-barred debt is enforceable provided:
(i) it is made in writing,
(ii) is signed by the debtor or by his agent generally or specially authorized in
that behalf, and
(iii) the debt must be such “of which the creditor might have enforced payment
but for the Law of the limitation of suits.”
The promise may be to pay the whole or any part of the debt.
(4) Completed gift [Explanation 1 to Sec. 25] – The rule “No consideration,
no contract” does not apply to completed gifts. According to Explanation 1
section 25, nothing in section 25 shall affect the validity, as between the donor
and the donee, of any gift actually made. Thus transfer of properties by one
person to the other as a gift according to the provisions of the Transfer of
Property Act (i.e. by a written and registered document) is valid and a person
transferring the property cannot subsequently demand the property back on the
ground that there was no consideration.
(5) Agency [Sec. 185] – Under section 185 of the Indian Contract Act, no
consideration is necessary to create an agency, i.e. a transaction of agency. For
giving a person authority to act as agent, consideration is not necessary. Thus if
A authorises B to act on his behalf (act as an agent) before C, and B agrees to
do so, the contract is enforceable at the court of law although no consideration
is moving from A to B. A will be bound by the acts done by B on his behalf as
against C. Even a gratuitous agent can be held liable for negligence. The
principle of Promissory Estoppel emanates from this provision.
(6) Remission – Under section 63 of the Act, no consideration is necessary for
an agreement to receive less than what is due, known as remission in the law.
Example – Creditor A agrees to accept Rs. 500 from B in full satisfaction of the
debt of Rs. 1000. A subsequently cannot claim the amount of Rs. 500 which he
has rescind.
(7) Guarantee [Sec. 127] – A contract of guarantee is made without
consideration.
Capacity of parties
As per Section 10, all agreements are contracts, if they are made by the parties
competent to contract. The competency of parties is one of the essential
elements of the valid contract. The capacity of parties to the contract means the
legal ability of the parties to enter into a contract.
Capacities of Parties
Capacity or competence to contract means legal capacity of parties to enter into
a contract. In other words, it is the capacity of parties to enter into a legally
binding contract. As per Section 10, all agreements are contracts, if they are
made by the parties competent to contract. The competency of parties is one of
the essential elements of the valid contract. The capacity of parties to the
contract means the legal ability of the parties to enter into a contract.
According to section 11 of the contract act, everyone is competent to contract
 Who has achieved the age of majority.
 Who is of sound mind.
 Not prohibited by the law to enter into a contract.
 Incompetent to contract.
There are certain guidelines for persons who are not eligible to enter into a
contract. Following are some of the points which are described under the Indian
contract act -
 A person with an unsound mind.
 Minors who have not attended the majority.
 The persons who are prohibited or disqualified by the law.
 The aspects of the capacity of contract.
1) MINORS
Any person, who has not attained the age of majority prescribed by law, is known as
minor. Section 3 of the Indian Majority Act prescribes the age limit for majority and
says a minor is a person who has not completed eighteen years of age. But the same
Act also mentions that in the following two cases a person attains majority only after
he completes his age of twenty one years :
(i) Where a Court has appointed guardian of a minor’s person or property or both
(under the Guardians and Wards Act, 1890) or
(ii) Where the minor’s property has been placed under the superintendence of a Court
of Wards.
2) PERSONS OF UNSOUND MIND
A person is said to be of sound mind for the purpose of making a contract (a) if he is
capable of understanding the contract at the time of making it, and (b) if he is capable
of making a rational judgment as to the effect upon his interests.
Types of Persons of Unsound Mind and their Contracts:
a. Idiot
b. Lunatic
c. Delirious persons
d. Drunken or intoxicated persons
e. Hypnotized persons
f. Mental decay

3) PERSONS DISQUALIFIED BY OTHER LAWS

There are certain persons who are disqualified from contracting by the other laws of
our country. They
are as under:
a. Alien enemy
b. Foreign sovereigns, diplomatic staff etc.
c. Corporations and companies
d. Insolvents
e. Convicts
Rules /effects as to or Nature of Minor’s Agreements:
1. Void ab-initio: - Minor’s agreement is absolutely void from very beginning, i.e.
void ab- initio. It is nullity in the eye of law. An agreement with minor, therefore, can
never be enforced by law.
2. Minor can be a promise or beneficiary: - A minor can enforce such agreements in
which he is a beneficiary or promise and does not create any obligation on his part.
3. No ratification:- A minor cannot be ratify even after attaining the age majority
because void agreement cannot be ratified.
4. Restitution/ Compensation possible: - If a minor has received benefits under an
agreement from the other party, the Court may require the minor to restore the benefit
(so far as may be), to the other party at the time of rescission of the agreement. The
minor may be asked to restore the benefit to the extent he or his estate has been
benefited.
5. Contract by parent/ guardian/ manager: - A minor’s parent/ guardian/ manager can
enter into contract on behalf of the minor provided:
i) The parent/ guardian/ manager acts within the scope of his uthority
ii) The contract is for the benefit of the minor.
6. No liability of parents: - The parents (guardian) of a minor are not liable for
agreements made by their minor ward. However, they can be held liable if the minor
makes agreement as their authorized.
7. Minor as an agent: - A minor is not entitled to employ an agent; he can be an agent
himself for someone else. As an agent he ca represent the principal, and bind him for
his acts done in the course of agency. But the minor is not responsible to the principal
for his acts.
8. Minor and insolvency: - A minor cannot be declared insolvent because he is not
competent to contract.
9. Minor as joint Promisor: - A minor can be a joint promisor with a major, but the
minor cannot be held liable under the promise to the promises as well as to his co-
promisor. But the major promise cannot escape liability. The major joint promisor can
be forced to perform the promise.
10. Minor shareholder: - A minor can become a shareholder or member of a company
if (a) the shares are fully paid up and (b) the articles of association do not prohibit so.
11. Liability for necessaries of life: - A minor is incompetent to contract. A minor,
therefore, is not personally liable for the payment of price of necessaries of life
supplied to him or to his legal dependents. However, the person who has furnished
such supplies is entitled to be reimbursed from the property of the minor.
12. Minor Partner: - According to the Partnership Act, 1932, a minor cannot make a
contract of partnership though he may be admitted to its benefits with the consent of
all the partners. A minor partner cannot be made personally liable for any obligation of
the firm, but his share in the firm’s property can be made liable.
13. No estoppels against minor: - The term ‘estoppels’ means prevention of a claim.
When a minor enter into contract, representing that he is a major, but in reality he is
not, then later on he can plead his minority as a defence and cannot be estopped
(prevent) from doing so.