Introduction

 Mercantile Law/Business Law- The body of law that governs the rights,
relations, and conduct of person and businesses engaged in commerce,
merchandising, trade and selling.
 Law-A ‘set of rules’ which governs our behaviors and relating in a
civilized society. No need of law in an uncivilized society.
 Ignorance of Law is no excuse!
 Sources of Mercantile Laws in India:
1. English Mercantile
2. Indian Status Law
3. Judicial Decisions
4. Customs & Usage
 Indian Contract Act, 1872 was passed by British India, based on the
principles of English Common Law.
 The preamble to the Act says that it is an Act “to define and amend
certain parts of the law relating to contract”.
 It came into effect from 1st September 1872.
 Prior to this English law of contract was followed in India.
 Law of contract creates jus in personem and not in jus in rem.
 Law of Contract creates personal rights and obligations between
the parties to a contract (jus in personem) and does not create
rights that are enforceable against 3rd parties or the general public
(jus in rem).
 The Indian Contract Act consists of the following two parts:
(a) General principals of the Law of Contract- Section 1-75: apply to all
kinds of contracts irrespective of their nature.
(b) Special kinds of contracts- Section 124-238: Indemnity, Guarantee,
Bailment, pledge and Agency.
 Definitions
1. Section 2(a)- Offer (i.e., Proposal) - 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 person either to such act or
abstinence, he is said to make a proposal.

 Person making the offer- Proposer/Offeror

Person to whom the proposal is made- Offeree

 Rules governing Offers:

(a) An offer must be clear, definite, complete. It must not be vague.

For example, a promise to pay an increased price for a horse if it
proves lucky to promisor, is vague and is not binding.
(b) An offer must be communicated to the offeree.
(c) The communication of an offer may be made by express words-oral
or written-or it may be implied by conduct. A offers his car to B for
Rs 10,000. It is an express offer. A bus plying on a definite route
goes along the street. This is an implied offer on the part of the
owners of the bus to carry passengers at the scheduled fares for
the various stages.
(d) The communication of the offer may be general or specific. Where
an offer is made to a particular person or a particular group of
persons it is called specific offer and it can be accepted only by that
particular person. But when an offer is addressed to an uncertain
body of individuals i.e., the world at large, it is a general offer and
can be accepted by any member of the general public by fulfilling
the condition laid down in the offer.

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 Carlill v. Carbolic Smoke Ball Co Case
(i) A co. advertised that it would give a reward of £ 100 to anyone who
contracted influenza after using its smoke balls for a certain period
according to printed directions.
(ii) Mrs. Carlill purchased and used smoke balls as per the printed
instructions, even then contracted influenza.
(iii) She claimed the reward of £100.
(iv) Co. resisted the claim on the ground that offer was not made to her
and she had also not communicated her acceptance to the offer.

Decision:
She could recover the reward as she had accepted the Co’s offer by
complying with terms.

Example:
 A advertises in the newspapers that he will pay rupees one thousand to
anyone who restores to him his lost son. B without knowing of this
reward finds A’s lost son and restore him to A. In this case since B did not
know of the reward, he cannot claim it from A, even though he finds A’s
lost son and restores him to A.
 In India also, in the case of Harbhajan Lal v. Har Charan Lal (Lalman
Shukla v. Gauri Dutt case), the same rule was applied. In this case, a
young boy ran away from his father’s home. The father issued a
pamphlet offering a reward of Rs 500 to anybody who would bring the
boy home. The plaintiff saw the boy at a railway station and sent a
telegram to the boy’s father. It was held that the handbill was an offer
open to the world at large and was capable to acceptance by any person
who fulfilled the conditions contained in the offer. The plaintiff

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 substantially performed the conditions and was entitled to the reward
offered.
Cross offer-it occurs when 2 persons make identical offers to each other
in ignorance of each other’s offer. It leads to termination of the original
offer.
Counter offer- upon receipt of an offer from an offeror, if the offeree
instead of accepting it, straightaway modifies or varies the offer, he is
said to make a counter offer. It leads to rejection of original offer.
Standing/Continuing/ Open Offer- offer which made to public at large
and kept open for public acceptance for a certain time period. It refers to
a tender to supply goods as and when required. Each successive order
given creates a separate contract. It does not bind either party unless
and until such orders are given.
2. Section 2(b)- Acceptance-When the person to whom the proposal is
made, signifies his assent there to, the proposal is said to be accepted.
3. Section 2(b)- Promise-A Proposal when accepted becomes a promise.
In simple words, when an offer is accepted it becomes promise.
4. Section 2(c)- Promisor and Promisee- When the proposal is accepted,
the person making the proposal is called as promisor and the person
accepting the proposal is called as promisee.
5. Section 2(d)- Consideration-When at the desire of the promisor, the
promisee or any other person has done or abstained from doing
something or does or abstains from doing something or promises to
do or abstain from doing something, such act or abstinence or promise
is called a consideration for the promise.
6. Section 2(e)- Agreement- Every promise and set of promises forming
the consideration for each other. In short, agreement = offer +
acceptance.

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 7. Section 2(g)- Void Agreement- An agreement not enforceable by law is
void.
8. Section 2(h)- Contract- An agreement enforceable by Law is a contract.
9. Section 2(i)-Voidable Contract- An agreement is a voidable contract if
it is enforceable by Law at the option of one or more of the parties
there to (i.e., the aggrieved party), and it is not enforceable by Law at
the option of the other or others.
Void Contract- A contract which ceases to be enforceable by Law
becomes void when it ceases to be enforceable.

Essentials of a Valid Contract

“All agreements are contracts, if they are made –

 by free consent of the parties, competent to contract,
 for a lawful consideration and
 with a lawful object, and
 not hereby expressly declared to be void.” – Section 10

Offer+ Acceptance=Promise
Promise+ Consideration=Agreement
Agreement+ Enforceability by Law= Contract

“All Contracts are Agreements, but all Agreements are not Contracts.”

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 Basis Contract Agreement
1. Section Section 2(h) Section 2(e)
2. Definition Agreement enforceable by law. Every set of promise(s) forming
consideration.
3. Enforceability Every contract is enforceable. Every promise is not enforceable.
4. Interrelationshi A contract includes an agreement An agreement does not include a
p contract.
5. Scope Limited-only commercial agreements Scope is wider-both social & commercial
6. Validity Only legal agreements are called contracts. An agreement may be both legal/illegal.
7. Legal Obligation Every contract contains a legal obligation. Not necessary to have legal obligation.

Section 2(a)- Offer (i.e., Proposal) - 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 person either to such act or abstinence, he is said to
make a proposal.
1. Proper offer and proper acceptance with intention to create legal
relationship.

2. Lawful consideration- consideration must not be unlawful, immoral or

opposed to the public policy.
3. Capacity- The parties to a contract must have capacity (legal ability) to
make a valid contract.
Section 11- Who are competent to contract? 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.

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 Section 12- What is a sound mind for the purposes of contracting?
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 judgment as to its effect
upon his interests.
An alien enemy, foreign sovereigns and accredited representative
of a foreign state. Insolvents and convicts are not competent to
contract.
4. Free Consent (Section 13 & 14)- Two or more persons are said to
consent when they agree upon the same thing in the same sense
consensus – ad – idem. Consent is said to be free when it is not caused
by -
I. coercion, as defined in section 15, or
is the committing, or threatening to commit, any act forbidden by
the Indian Penal Code (45 of 1860) or the 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.
II. undue influence, as defined in section 16, or
 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 the other and uses
that position to obtain an unfair advantage over the other.
 In particular and without prejudice to the generality of the
foregoing principle, a person is deemed to be in a position to
dominate the will of another—
(a) where he holds a real or apparent authority over the other, or
where he stands in a fiduciary relation to the other; or
(b) where he makes a contract with a person whose mental
capacity is temporarily or permanently affected by reason of age,
illness, or mental or bodily distress.

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  Where a person who is in a position to dominate the will of
another, enters into a contract with him, and the transaction
appears, on the face of it or on the evidence adduced, to be
unconscionable, the burden of proving that such contract was not
induced by undue influence shall lie upon the person in a position
to dominate the will of the other.
III. fraud, as defined in section 17, or
“Fraud” means and includes any of the following acts committed by
a party to a contract, or with his connivance, or by his agent2, with
intent to deceive another party thereto of his agent, or to induce
him to enter into the contract: —
i) the suggestion, as a fact, of that which is not true, by one who
does not believe it to be true;
ii) the active concealment of a fact by one having knowledge or
belief of the fact;
iii) a promise made without any intention of performing it;
iv) any other act fitted to deceive;
v) any such act or omission as the law specially declares to be
fraudulent.
IV. misrepresentation, as defined in section 18, or
Misrepresentation” means and includes—
(1) the positive assertion, in a manner not warranted by the
information of the person making it, of that which is not true,
though he believes it to be true;
(2) any breach of duty which, without an intent to deceive, gains an
advantage to the person committing it, or any one claiming under
him; by misleading another to his prejudice, or to the prejudice of
any one claiming under him;

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 (3) causing, however innocently, a party to an agreement, to make
a mistake as to the substance of the thing which is the subject of
the agreement.
V. mistake, subject to the provisions of sections 20, 21 and 22.
Section 20 - Agreement void where both parties are under mistake
as to matter of fact. —Where both the parties to an agreement are
under a mistake as to a matter of fact essential to the agreement,
the agreement is void.
Section 21- Effect of mistakes as to law — A contract is not
voidable because it was caused by a mistake as to any law in force
in 1[India]; but a mistake as to a law not in force in 1[India] has the
same effect as a mistake of fact.
Section 22- Contract caused by mistake of one party as to matter
of fact — A contract is not voidable merely because it was caused
by one of the parties to it being under a mistake as to a matter of
fact.
Section 19- Voidability of agreements without free consent. —
When consent to an agreement is caused by coercion, fraud or
misrepresentation, the agreement is a contract voidable at the
option of the party whose consent was so caused.

5. Lawful object
 The object of agreement should be lawful and legal.
 Two persons cannot enter into an agreement to do a criminal
act.
 Consideration or object of an agreement is unlawful if it
 is forbidden by law; or
 is of such nature that, if permitted, would defeat the
provisions of any law; or

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  is fraudulent; or
 Involves or implies, injury to person or property of
another; or
 Court regards it as immoral, or opposed to public policy.
6. Possibility of Performance
 The terms of the agreement should be capable of performance.
 An agreement to do act, impossible in itself cannot be enforced.
7. The terms of the agreements are certain or are capable of being made
certain.
8. Not declared Void
 The agreement should be such that it should be capable or being
enforced by law.
 Certain agreements have been expressly declared illegal or void
by the law
9. Necessary legal formalities
 A contract may be oral or in writing.
 Where a particular type of contract is required by law to be in
writing and registered, it must comply with necessary formalities as
to writing, registration and attestation.
 If legal formalities are not carried out then the contract is not
enforceable by law.
Example: A promise to pay a time. Barred debt must be in writing

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 Types of Contracts

On the basis On the basis On the basis On the basis

of Creation of Validity of Execution of Liabiltity

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