Introduction to Business

Law
CH # 1
CONTRACT AND ITS KINDS

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 Introduction to Law
Law means a set of rules or a system of rules of conduct designed and
enforced by the state to control and regulate the conduct of people.
Law is not stagnant. As circumstances and conditions in a society change,
laws are also changed as per the requirements of the society.
The word law may have different meaning for different situations. It is often
preceded by an adjective to give it a clearer meaning e.g. Civil Law, Criminal
Law, Business Law etc.
There is no uniform definition of law, different jurists have defined it.
“Law denotes rules and principles enforced by an authority.”
“Law is a command of sovereign backed by sanction”
 Definition of Mercantile Law
A business is defined as an organization or enterprising entity engaged in
commercial, industrial, or professional activities. Businesses can be for-profit
entities or non-profit organizations. Business types range from limited liability
companies to sole proprietorships, corporations, and partnerships.
Business Law is the part of civil law which deals with the rights and obligations of
persons dealing with each other. It includes laws relating to contracts,
partnership, sale of goods, negotiable instruments etc.
Commercial law or business law is the body of law which governs business and
commerce and is often considered to be a branch of civil law.
 The Contract Act, 1872

• The Contract Act, 1872 came into force on 1st September, 1872.
• Law of Contract is concerned with enforceability of rights and obligations
arising out of contracts.
• Initially laws relating to Sale of Goods and Partnership were part of the Contract
Act, 1872.
 Introduction to Contract

• What is Contract?
“A business contract is a legally binding agreement between two or more persons
or entities”.
“An agreement that creates legal rights and duties between the parties”.
For instance: when you buy an internet connection or when you deposit your
college fee or a railway ticket or place an order for meal in a restaurant or you
make a business deal.
 Definition of Contract
Section 2(b) of The Contract Act, 1872:
“An agreement enforceable by law is a contract.”
Agreement + Enforceability = Contract
Section 2(e) of The Contract Act, 1872:
“Every promise and every set of promises forming consideration for each other is an
agreement.”
Promise + Consideration = Agreement
Example: Aftab offers to sell his car to Zahid for Rs. 1 million. Zahid accepts the offer. This
promise is an agreement because there is consideration for each of the parties to it.
Section 2(b) of The Contract Act, 1872:
“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.”

Proposal + Acceptance = Promise

Enforceability:
An agreement creating a legal obligation is said to be enforceable by law if one of
the parties fails to perform his promise and the other is entitled to file a suit for
breach of contract. The parties to an agreement must be bound to perform their
promises and in case of default by either of them, must intend to sue.
In case of social or domestic agreements, the usual presumption is that the
parties do not intend to create legal relationship.
 Essentials of a Valid Contract:
“Every contract is an agreement, but every agreement is not always a contract”.
A valid contract is binding and enforceable. Essentials conditions for validity of a
contract are stated in Section 10 of the Contract Act, 1872:
1. Offer and Acceptance:
An offer is a starting point for a contract. In order to form an agreement, there
must be a lawful offer by one party and a lawful acceptance of that offer by the
other party.
2. Legal Obligations:
The parties to an agreement must create legal obligations. If one party does
not fulfill his promise, he shall be liable for breach of contract.
3. Lawful Consideration:
Lawful consideration means something in return. An agreement is enforceable only
when both the parties give and take something.
4. Capacity of Parties:
An agreement is enforceable if it is made by parties who are competent to contract. It
is essential that the parties are of the age of majority, have sound mind and are not
disqualified from contracting by law. A contract by a person of unsound mind or
minor is void ab-initio (void from the beginning).
5. Free Consent:
It is essential that the consent of parties must be free. Consent is free when it is not
obtained by Coercion, Undue Influence, Fraud, Misrepresentation or Mistake.
6. Lawful Object:
The agreement must be made for a lawful object. The object of agreement must not
be fraudulent, illegal, immoral, opposed to public policy, imply injury to the person or
property of another.
7. Legal Formalities:
A contract may be oral or in writing. It is better that the contract is in writing because
it is easy to prove in court. A particular contract must be in writing, signed, stamped,
attested by witnesses and registered.
8. Certainty:
The terms of an agreement must be clear, complete and certain. If the terms are
uncertain, the agreement is void.
9. Possibility of Performance:
An agreement to perform an impossible act is void. If the act is legally or physically
impossible to perform, the agreement cannot be enforced by law.

10. Not Expressly Declared Void:

The agreement must not be one of those agreements which have been expressly
declared to be void by the law. For instance, agreement in restraint of marriage,
agreement in restraint of trade, agreement by way of wager.
 Contract and its Kinds
On the basis of validity or enforceability contracts are classified into four kinds.

1. Valid Contract
2. Voidable Contract
3. Void Contract
4. Unenforceable Contract
 Valid Contract:
“A contract that is enforceable at the option of each of the parties to it, is called a
valid contract.”
• A contract is valid if it satisfies all the essential elements of a valid contract.
• Each party to a valid contract is liable to perform his promise. If any one of the
parties to a valid contract fails to perform his promise, the other party can sue
him for the breach.
• Example:
A agrees to sell his house to B, if all the essentials of contract are fulfilled, it is a
valid contract. If A fails to give the possession of his house to B, B can sue him and
if B fails to pay A, A can sue him.
 Voidable Contract:
“ An agreement which is enforceable by law at the option of one or more parties
thereto, but not at the option of other or others, is a voidable contract.”
• It is a contract that can be rescinded (revoked) by one of the parties to it.
• When it is revoked, a voidable contract becomes void, none of the parties
remains liable to perform his obligations.
• A contract becomes voidable due to the following reasons:
I. Consent Not Free
II. Promisor Prevented from Performance
III. Failure to Perform at Specified Time
• Example:
A at pistol point compels B to sign a contract. As consent of B is obtained by
coercion, B can revoke the contract.

• Example:
A contracts with B to whitewash his house on a certain day. A is ready to execute
the work as promised, but B forbids him. The contract is voidable at the option of
A; and, if A elects to revoke it, he is entitled to recover from B compensation for
any loss which A sustains due to non performance of contract.
• Example:
A makes a contract to deliver certain goods to B on a certain date. A fails to deliver
the goods at the specified date. The contract becomes voidable at the option of B.
 Void Contract:
“ A contract which ceases to be enforceable by law becomes void when it ceases
to be enforceable.”
• A void contract was valid at the time when it was made. But subsequently due to
some change in circumstances it becomes void.
• A contract that becomes void cannot be enforced by any of the parties to it.
• A contract becomes void due to following reasons:
1. Subsequent Impossibility of Performance
2. Impossibility of Depending Event
3. Recession of a Voidable Contract
• Example:
A contracts to deliver certain goods to B on a stated day. Before that day a fire breaks
out and the goods are destroyed. The contract becomes void due to subsequent
impossibility of performance.
• Example:
A contracts to give Rs. 500,000 to B, if B gets first position in the final exams. B fails
to get first position in the exams. The contract becomes void on the basis of
impossibility of depending event.
• Example:
Aslam threatens to kill Babar if Babar does not sell his house to Aslam. The contract
is voidable at the option of Babar. Babar may accept or reject the contract. If Babar
rejects the contract, it becomes void as a recession of voidable contract.
 Unenforceable Contract:
“ It is a contract, which cannot be enforced in a court of law due to some
technical defects.”
• Technical defects that make a contract unenforceable include absence of:
• Writing, Witness, Stamp, Attestation, Registration, etc.

• Example:
A contract for sale of immovable property is not enforceable unless it is written on
stamp paper in the presence of witnesses and registered.