Legal Aspects of Business

Unit 2

Unit 2
Structure: 2.1 Introduction Objectives 2.2 Definition of a Valid Contract Contract Agreement Essentials of a contract Classification of contracts 2.3 Offer and Acceptance Modes of making an offer Acceptance of an offer Communication of offer and acceptance 2.4 Capacity to Contract Competency to contract Minors contracts Soundness of mind 2.5 Consent Definition Free consent 2.6 Consideration Definition No consideration, no contract 2.7 Performance of Contracts Definition Offer of performance Onus of performance 2.8 Discharge of Contracts Performance or tender Mutual consent Impossibility of performance Operation of law 2.9 Breach of Contract and Void Agreements Discharge of contract by breach Remedies for breach of contract

Law of Contracts

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2.10 Quasi Contracts Definitions Types 2.11 Freedom to Contract Myth or illusion Standard form contract 2.12 Summary 2.13 Glossary 2.14 Terminal Questions 2.15 Answers 2.16 Case Study

2.1 Introduction
In the previous unit, we have understood the definition and basic concepts of law. This unit discusses the law of contracts in detail and the salient features of a contract as provided under the Indian Contracts Act, 1872. We will first study how contracts are created as it is important to understand that we enter into contracts voluntarily, for example, purchase or sale of shares of a company or a plot of land. There are other types of contracts entered into without our volition, for example, hiring a taxi, buying a book, etc. Contracts, irrespective of the method of formation, confer legal rights on one party and subject the other party to some form of legal obligation. Contracts are the life blood of a business as every business transaction is built on the usage of contracts. Thus, business executives, corporate counsels, entrepreneurs and professionals in different fields frequently deal with contracts. Objectives: After studying this unit, you should be able to: describe the essentials of a valid contract define terms related to contracts recognise the various types of contracts identify the standard form of a contract

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2.2 Definition of a Valid Contract

Let us look at the definition of a valid contract in this section. 2.2.1 Contract According to Section 2 (h) of the Indian Contracts Act, 1872, a contract is an agreement enforceable by law made between at least two parties as per which rights and obligations are mutually created for both parties. If the party who had agreed to do something fails to do that, then the other party has a remedy in law. Example: D Airlines sells a ticket on 1 January to X for the journey from Mumbai to Bangalore on 10 January. The airline is under an obligation or duty to take X from Mumbai to Bangalore on 10 January. In case the airline fails to fulfill its promise, X has the right to sue the airlines for breach of contract. 2.2.2 Agreement Section 2 (e) of the Contracts Act defines an agreement as every promise and every set of promises forming a consideration for each other. For an agreement, a promise becomes essential. The word promise is defined by Section 2 (b) of the Contracts Act. In a contract, there are at least two parties. One of them makes a proposal (or offer) to the other to do something with a view of getting approval of the other to such an act. When the person to whom the proposal is made provides his/her assent, the proposal is said to be accepted. A proposal, when accepted, becomes a promise according to Section 2 (b). Enforceability by law: The agreement must be enforceable by law to become a contract. Thus, there are certain agreements that do not become contracts as the element of enforceability by law is absent. 2.2.3 Essentials of a contract Section 10 of the Contracts Act provides that all agreements are contracts if they are made by free consent of parties competent to contract for a lawful consideration with a lawful object and are not expressly declared by law to be void. To constitute a contract, there must be an agreement between two or more parties. One cannot enter into a contract with oneself. An agreement is composed of two elements offer or proposal by one party and acceptance thereof by the other party.
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Effect of absence of one or more essential elements of a valid contract: If one or more essentials of a valid contract are missing, then the contract may be voidable, void, illegal or non-enforceable. 2.2.4 Classification of contracts Contracts may be classified as follows: Classification according to formation: A contract may be made: In writing (express) By spoken words (implied) Inferred from the conduct of parties or circumstances of the case. Contracts are also classified as formal or informal on the basis of their formation. A formal contract is one in which the law gives special effect because of formalities or special language used in creating it. The best example of formal contracts is negotiable instruments such as cheques. Informal contracts are those in which the law does not require formalities or special language. Classification according to validity: Contracts may be classified according to their validity as follows: Valid Voidable Void Non-enforceable Valid means that the contract possesses all the elements of a contract as mentioned in Section 10 of the Contracts Act. If one or more of the essential elements are missing, the contract is voidable, void, illegal or nonenforceable. As per Section 2 (i), a voidable contract is one which may be repudiated (i.e., avoided) at the will of one or more parties, but not by others. In the next section, we will discuss offer and acceptance. Self Assessment Questions 1. A promise for a promise is a good consideration. (True/False) 2. A stranger to consideration cannot maintain a suit. (True/False) 3. An agreement, the meaning of which is not certain or capable of being made certain, is valid. (True/False)
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2.3 Offer and Acceptance

So far, we have seen the definition of a contract. Now, we will discuss offer and acceptance. Offer is the basic building block on which a contract rests. An offer is synonymous with a proposal. As per Section 2 (a) of the Contract Act, the offeror or proposer expresses his/her willingness to do or not to do something (i.e., act or abstain from doing something) with a view to obtain consent of the other party to such act or abstinence. The person making the offer is called the Offeror / Promisor / Proposer and the person to whom the offer is made is called the Offeree / Proposee. When the Offeree accepts the offer, he/she is called the Acceptor or Promisee as per Section 2 (c). 2.3.1 Modes of making an offer An offer can be made if a person commits an act or omission by which the person intends to communicate a proposal or which has the effect of communicating it to the other party according to Section 3 of the Contract Act. An offer can be either express or implied or specific or general. Express offer It is an offer made by words (whether written or oral). The written offer can be made by letters, telegrams, telex messages, advertisements, etc. The oral offer can be made either in person or over the telephone. Implied offer It is an offer made by conduct such as positive acts or signs, so that the person acting or making signs conveys something. However, silence of a party can, in no case, amount to an offer by conduct. Offer by abstinence An offer can also be made by a party by omission to do something. This includes such conduct by a party that the other person takes it as his/her willingness or assent. Case study: Harvey vs. Facey Harvey and Facey exchanged three telegrams as follows: (i) Will you sell us your Bumper Hall Pen? Telegraph lowest cash price answer paid (Harvey to Facey) (ii) Lowest price for Bumper Hall Pen 900 (Facey to Harvey) (iii) We agree to buy Bumper Hall Pen for 900 asked by you (Harvey to Facey) Here, there was no concluded contract between Harvey and Facey. The first telegram asked about the willingness to sell as well as the lowest price.
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While Facey replied only to the second question, he did not make any offer to sell. If Facey had replied in the affirmative to the last telegram, a contract could have been created between the two parties. As he did not make an offer to sell, there was no contract. 2.3.2 Acceptance of an offer According to Section 2 (b), when the person to whom the offer is made agrees and conveys his/her assent thereto, the offer is said to be accepted. Thus, acceptance is the act of giving consent to the proposal. The offeree is deemed to have accepted when he/she gives assent to the proposal. The acceptance of an offer may be express or implied. It is expressed when the acceptance has been signified in writing, by words of mouth or by the offeree performing some act. Acceptance is implied when it can be gathered from the surrounding circumstances or the conduct of the parties. 2.3.3 Communication of offer and acceptance It is necessary for the offeror to communicate an offer to the offeree. It is also necessary for the offeree to communicate his/her acceptance to the offeror. Section 4 of the Indian Contract Act states that the communication of an offer is complete when it comes to the knowledge of the person to whom it is made. For example, when A proposes by a letter to sell his/her car to B at a certain price, the communication of the offer is complete when B receives the letter. The completion of communication of acceptance has two aspects namely: As against the offeror, when it is put into a course of transmission to him/her As against the acceptor, when it comes to the knowledge of the proposer Section 4 of the Act states that revocation or recall of an offer or acceptance is permitted. Both offer and acceptance may be revoked at any time before communication of the same is complete as against the other person, but not afterwards. Section 5 states that if communicated by post, the acceptance is complete as against the offeror as soon as the letter is correctly addressed, sufficiently stamped and posted. The contract is complete even if the letter of acceptance is lost in postal transit or through some accident. Contracts over telephone / telex have the same effect of face-to-face oral agreements. In the next section, we will discuss capacity to contract.
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Self Assessment Questions 4. Communication of offer is complete when the letter of offer is posted. (True/False) 5. A proposal when accepted becomes a valid contract even though acceptance is not in the prescribed mode. (True/False) 6. The communication of acceptance is complete, as against the person to whom it is made, when it comes to his/her knowledge. (True/False)

2.4 Capacity to Contract

We learnt about offer and acceptance in the previous section. In this section, we will discuss the capacity to contract. 2.4.1 Competency to contract A person must be competent to enter into a contract according to the law. According to Section 11 of the Act, a person is competent to enter into a contract if: That person is a major as per age That person is of sound mind That person is not disqualified from contracting by any law to which he/she is subject 2.4.2 Minors contracts The law protects minors against their own inexperience and the possible improper designs of those who are experienced. The Contract Act states that only a person who is a major can enter into a contract. Section 3 of the Indian Majority Act, 1875, states that a minor is a person who has not completed 18 years of age. An agreement with a minor is void and cannot be ratified by him/her until he/she attains majority. However, a minor can be a promisee or beneficiary under a contract and can enter into special types of contracts for necessaries (articles that are reasonably required for a minor to maintain his/her status and position) of life. Case study: Mohiri Bibi vs. Dharamadas Ghose A minor mortgaged his house in favour of a money lender to secure a loan of Rs. 20,000 of which the minor was paid Rs. 8,000. Later, the minor sued the money lender for setting aside the mortgage on the pretext that he was under age. The mortgage was deemed to be void and cancelled. The
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moneylenders contention that the minor should repay the amount was not accepted. 2.4.3 Soundness of mind Section 12 of the Contract Act states that a person is of sound mind to make a contract if that person is capable of understanding the terms of the contract at the time of its creation and is capable of making rational judgments in his/her interests. According to the Act, lunatics (deranged due to personal trauma), idiots (completely lost mental capacity) and drunken persons (intoxicated and under the influence of substances) do not have the mental capacity to enter into a contract. While a lunatic or drunken person may have lucid intervals, an idiot is a person who does not possess any soundness of mind and all contracts with such persons are void. Lunatics and drunks can enter into valid contracts during periods of lucidity but not otherwise. In the next section, we will discuss about consent. Activity 1: G, a minor, entered into a contract with R, a noted billiards player, to pay him a fee to learn the game and play matches with him around the world. R spent time and effort arranging matches. G subsequently refused to pay the fee claiming that he was not interested. Can R sue G for breach of contract? (Hint: Minor is liable to pay for necessaries supplied to him) Self Assessment Questions 7. A married woman cannot enter into a contract. (True/False) 8. When a promisee does not accept the offer of performance, the promisor is not responsible for non-performance. (True/False)

2.5 Consent
In the last section, we learned about the capacity to contract. In this section, we will look into the idea of consent. 2.5.1 Definition It is essential that both parties to a contract agree to the same thing in the same sense for the creation of the contract. This is known as Consensus ad idem. Section 13 of the Contracts Act claims that consent is the act of
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assenting for the offer and is present when two or more persons agree to the same thing in the same sense. 2.5.2 Free consent For a contract to be valid, it is necessary that the parties provide free consent to its terms. If there is no free consent, the contract is voidable at the option of the party whose consent was not free. Consent is said to be free when it is not caused by: Coercion Undue influence Fraud Misrepresentation Mistake Coercion (Sections 15 and 72) Coercion refers to any of the following: 1. committing or threatening to commit any act forbidden by the Indian Penal Code 2. unlawful detaining or threatening to detain any property, with the intention of forcing a person to enter into an agreement. Case study: Ranganayakamma vs. Alwar Setty A girl aged 13 lost her husband and was forced to adopt a boy by her husbands relatives, who prevented the corpse from being removed for cremation until she consented. The adoption was set aside by the court as the consent was obtained by coercion. Undue influence (Section 16) When a special relationship exists between two parties in such a way that one person has the ability to influence the other by persuasion and is able to dominate his/her will so as to get undue advantage, then he/she is said to have exercised undue influence. Normally, undue influence is exercised when a person has authority over another, is in a fiduciary relationship or is a caregiver for a person who is physically or mentally disabled. Undue influence is also called moral coercion. Fraud (Sections 17 and 19) Fraud is an intentional misrepresentation to deceive a person and make him/her enter into a contract. It could be:
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A false suggestion made as a fact by one who does not believe it to be true Concealment of a fact by one having knowledge of that fact Promise made without any intention of keeping it Any other act to deceive Any act or omission specifically declared to be fraudulent by law

As there is active concealment of facts, the contract is voidable even though the aggrieved party has the means to discover the truth with ordinary diligence. Case study: Peek vs. Gurney The prospectus of a company did not refer to the existence of a document disclosing liabilities. This resulted in the company appearing to be doing well. If the document was disclosed, it would have changed the impression about the company. The court ruled that the non-disclosure amounted to fraud and anyone who purchased shares on the faith of this prospectus could avoid the contract. Misrepresentation (Sections 18-19) Misrepresentation is also known as simple misrepresentation while fraud is known as fraudulent misrepresentation. Like fraud, misrepresentation is an incorrect or false statement; however, the falsity or inaccuracy is not due to any desire to deceive or defraud the other party. Such a statement is made innocently. The party making the statement believes it to be true. It can be avoided by the party subject to such misrepresentation. Meaning of mistake (Sections 20-21) Mistake may be defined as an erroneous belief on the part of the parties to the contract concerning something pertaining to the contract. A mistake of fact is excused but a mistake of law is inexcusable. In the next section, we will discuss consideration. Self Assessment Questions 9. Consent obtained by fraud makes the agreement void. (True/False) 10. Undue influence is also called moral coercion. (True/False) 11. Coercion refers to committing or threatening to commit any act for bidden by the Indian Penal Code. (True/False)
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2.6 Consideration
In the previous section, we discussed consent. In this section, we will discuss consideration. 2.6.1 Definition Sections 2 (d), 23-25 and 185 of the Indian Contracts Act deal with consideration. One of the essential elements of a valid contract is that it must be supported by consideration. In simple terms, consideration is what a promisor demands as the price for his/her promise. The term consideration is used in the sense of quid pro quo, i.e., something in return. The consideration need not be in terms of money; it may even be some benefit, right, interest or profit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other party. Additionally, a promise by one party may be a consideration for the promise of the other party. 2.6.2 No consideration, no contract Sections 10 and 25 of the Contracts Act deal with the maxim no consideration, no contract. A promise without consideration cannot create a legal obligation. A person who makes a promise to do or abstain from doing something usually does so as a return of some loss, damage or inconvenience that may have or may have been occasioned to the other party with respect to the promise. A consideration must move at the desire of the promisor; it can be from the promisee or any other person. The consideration must be real and, need not be adequate; it can be given in the past, present or future. In the next section, we will deal with performance of contracts. Self Assessment Questions 12. Consideration can be given in the past, present or future. (True/False) 13. Consideration is based on the principle of Quid Pro Quo or something in return. (True/False)

2.7 Performance of Contracts

In the previous section, we dealt with consideration. In this section, we will learn about the performance of contracts.
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2.7.1 Definition Sections 37-67 of the Contracts Act deal with the performance of a contract. A contract creates obligations. Performance of a contract takes effect when the parties to the contract fulfill their obligations within the time and manner specified under the contract. The parties to a contract must either perform or offer to perform their respective promises unless such performance is dispensed with or excused under the provisions of law (Section 37). 2.7.2 Offer of performance It may happen that the promisor offers performance of his/her obligation under the contract at the proper time and place, but the promisee refuses to accept the performance. This is called tender or attempted performance. If a valid tender is made and is not accepted by the promisee, the promisor shall not be responsible for non-performance nor shall he/she lose his/her rights under the contract (Section 38). 2.7.3 Onus of performance The promise may be performed by the promisor himself/herelf, his/her agent or his/her legal representative. In case there was an intention of the parties that the promise must be performed by the promisor himself/herself, such a promise is to be performed by him/her only. Thus, where A promises to paint a picture for B, then A must perform this promise personally. If there is no such intention of the parties, then the promisor may employ a competent person to perform the promise. If A had promised to deliver some items of grocery to B, A may perform this promise either personally or have it delivered to B through someone. In case of death of the promisor, the legal representative must perform the promise unless a contrary intention is mentioned in the contract. In the next section, we will see the discharge of contracts. Self Assessment Questions 14. If the promisor attempts to perform the contract, but the promisee does not accept the same, then the contract is not performed. (True/False) 15. If there is intention of personal performance of promisor, then the promisor may employ a competent person to perform the promise. (True/False)

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2.8 Discharge of Contracts

In the previous section, we dealt with performance of contracts. In this section, we will learn about the discharge of contracts. Discharge refers to the termination of contractual relationship between the parties. The contract ceases to operate, i.e., when the rights and obligations under the contract ends. According to Sections 73-75 of the Contracts Act, a contract may be discharged in several modes. 2.8.1 Performance or tender The obvious mode of discharge of a contract is by performance, where the parties have done whatever was contemplated under the contract. Thus, where A contracts to sell his/her car to B for Rs. 1,85,000, as soon as the car is delivered to B and B pays the agreed price for it, the contract comes to an end by performance. The tender or offer of performance has the same effect as performance. If a promisor tenders performance of his/her promise but the other party refuses to accept it, the promisor stands discharged of his/her obligations. 2.8.2 Mutual consent Section 62 of the Act states that if the parties to a contract agree to substitute a new contract for the old or rescind or alter the terms, the original contract is discharged. A contract may be terminated by mutual consent in any of the six ways, viz., novation, rescission, alteration and remission, waiver and merger. Novation means substitution of a new contract for the original one. 2.8.3 Impossibility of performance A contract may be discharged because of impossibility of performance. There are two types of impossibility: One that is inherent in the transaction (i.e., the contract) One that may emerge later by the change of certain circumstances material to the contract. 2.8.4 Operation of law Discharge by operation of law may take place in three ways: (i) By death of the promisor in cases involving personal skill or ability

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(ii) By insolvency, where an order of discharge is passed by an insolvency court and the insolvent stands discharged of all debts incurred previous to his adjudication. (iii) By merger In the next section, we will deal with breach of contract. Self Assessment Questions 16. ____________ means substitution of a new contract for the original one. 17. A contract terminates by breach of contract. (True/False)

2.9 Breach of Contract and Void agreements

In the previous section, we discussed the performance of contracts. In this section, we will read about breach of contracts. 2.9.1 Discharge of contract by breach A breach of contract is one partys failure to live up to the promises under a contract without a legal excuse. If the promisor has not performed his/her promise in accordance with the terms of the contract or where the performance is not excused by tender, mutual consent or impossibility or operation of law, then this amounts to a breach of contract on the part of the promisor. The consequence is that the promisee becomes entitled to certain remedies. The breach of contract may arise in two ways anticipatory and actual. Anticipatory breach of contracts: This occurs when a party repudiates the contract before the time fixed for performance or when a party by their own act disables themselves from performing the contract. Actual breach of contracts: This occurs by failure to perform as promised or by making it impossible for the other party to perform. The actual breach by failure to perform may take place at the time when performance is due or during the performance of the contract. Thus, if a person does not perform his/her part of the contract at the stipulated time, he/she will be liable for its breach. When someone breaches a contract, the other party is no longer obligated to keep his/her end of the bargain. The other party may urge the breaching party to reconsider the breach; for a business contract, the
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aggrieved party may get help from consumers associations, sue for damages or consider other remedies. Rescission of the contract: When a breach of contract is committed by one party, the other party may treat the contract as rescinded. In such a case, the aggrieved party is freed from all his/her obligations under the contract. Damages (Section 75): Another relief or remedy available to the promisee in the event of a breach of promise by the promisor is to claim for damages or losses arising to him/her. Damages are awarded according to certain rules as laid down in Sections 73-74 as follows: Compensation as general damages will be awarded only for those losses that directly and naturally result from the breach of contract. Compensation for losses indirectly caused by breach may be paid as special damages if the party in breach had knowledge. The aggrieved party is required to take reasonable steps to keep his/her losses to a minimum.

2.9.2 Remedies for breach of contract The usual remedy for breach of contracts is to sue for damages. The main type of damages awarded is ordinary damages. This is the amount of money that would take to put the aggrieved party in a position as if there had not been a breach of contract. The idea is to compensate the aggrieved party for the losses suffered as a result of the breach of contract. Sections 26-30 of the Act declare certain agreements to be void. Some of them that have already been explained are agreements entered into through a mutual mistake of fact between the parties (Section 20); agreements, the object or consideration of which is unlawful (Section 23); agreements, part of consideration of which is unlawful (Section 24); agreements made without consideration (Section 25). Agreements, the meaning of which is uncertain or capable of being made certain, are void. Uncertainty may be regarding the existence, quantity, quality or price or title of subject matter. Self Assessment Questions 18. The two types of breach of contract are anticipatory and antagonistic breaches. (True/False)
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19. Damages under Section 75 are awarded according to certain rules as laid down in Sections 73-74. (True/False) 20. An agreement to agree is a valid contract. (True/False) 21. Social agreements are enforceable in courts. (True/False)

2.10 Quasi-Contracts
In the previous section, we learned what void agreements are. In this section we will discuss quasi-contracts. 2.10.1 Definition A person may receive a benefit under certain circumstances for which the law regards another person to be better entitled, or for which the law considers that the other person should be paid even in the absence of a contract between them. Such relationships are quasi-contracts as the law considers as if a contract exists between the parties, in spite of there not being a contract between the parties. Quasi-contracts are so called because the obligations associated with such transactions could neither be referred to as tortious nor as contractual, but are still recognised as enforceable, like contracts in courts. It is based on the principle of equity that one person should not be allowed to enrich oneself unjustly at the expense of another. 2.10.2 Types The following are the cases that are to be deemed as quasi-contracts: 1. Claim for necessaries supplied to a person incapable of contracting or on his/her account. If a person incapable of entering into a contract or his/her dependent is supplied with necessaries suited to his/her condition in life, the person who has furnished such necessities can be reimbursed from the property of such an incapable person. Such necessaries must be suitable to the persons stature in life (Section 68). 2. Reimbursement to a person paying money due by another in payment of which he/she is interested. A person who is interested in the payment of money that another is bound by law to pay, and who pays it is entitled to be reimbursed by the other (Section 69). In the next section, we will deal with freedom to contract.

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Self Assessment Questions 22. Quasi-contracts are based on the principle of equity that one person should not be allowed to enrich himself unjustly at the expense of another. (True/False) 23. If a person pays the money that is due from another by law, he is entitled to reimbursement. (True/False)

2.11 Freedom to Contract

In the previous section, we learned what are quasi-contracts. In this section we will discuss freedom to contract. 2.11.1 Myth or illusion The freedom of parties is limited by two factors. There are certain laws for the protection of employees, and an employer cannot, therefore, induce his employees to enter into any contract favourable to the employer. 2.11.2 Standard form contract A standard form contract is a document that is generally printed, containing terms and conditions, with certain blanks to be filled in. It is prepared by business people. The customer has to only sign it. Therefore, from his standpoint, the freedom to contract is restricted. Many of the contracts now being entered into by consumers are not the result of individual negotiations; rather, they are one-sided contracts. Self Assessment Questions 24. A contract is imposed by a party having strong bargaining power over a party having weak bargaining power. (True/False) 25. The freedom of the parties is limited by four factors. (True/False)

Activity 2: Discuss the statement 'Freedom to contract is a myth or an illusion' in the light of day-to-day transactions in the market and the essentials of law. Hint: Refer Sec.2.11

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2.12 Summary
Let us recapitulate the important concepts discussed in this unit: Essential features of a contract are offer and acceptance, capacity, consideration and consent Contracts can be normally performed or discharged. Non-performance leads to breach of contract Quasi-contracts are types of agreements which resemble a contract Freedom to contract is a legal myth as parties are constrained by the terms of the contract and contract law

2.13 Glossary
Agreement Every promise and set of promises forming the consideration for each other. Contract An agreement enforceable by law. Valid Contract A contract that satisfy all the essential elements of a valid contract are enforceable in a court of law. Void Contract A contract that ceases to be enforceable by law becomes void when it ceases to be enforceable.

2.14 Terminal Questions

1. What is a contract? What test would you apply to ascertain whether an agreement is a contract? 2. All agreements are not contracts but all contacts are agreements. Comment. 3. Enumerate contracts that are expressly declared to be void by the Indian Contract Act, 1872. 4. When is an offer to be accepted? 5. Describe the rules regarding communication of offer and acceptance.

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2.15 Answers
Self Assessment Questions 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. True False False False False False False False False True True True True False True Novation True False True False False True True False False

Terminal Questions 1. A contract is an agreement enforceable by law, made between at least two parties. According to Section 2 (h) of the Indian Contracts Act, 1872, a contract is an agreement enforceable by law made between at least two parties as per which rights and obligations are mutually created for both parties. For more details, refer to section 2.2.
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2. The agreement must be such that it is enforceable by law so as to become a contract. To constitute a contract, there must be an agreement between two or more parties. One cannot enter into a contract with oneself. An agreement is composed of two elements offer or proposal by one party and acceptance thereof by the other party. For more details, refer to section 2.2. 3. Voidable contract is one that may be repudiated at the will of one or both parties. Valid means that the contract possesses all the elements of a contract as mentioned in Section 10 of the Contracts Act. If one or more of the essential elements are missing, the contract is voidable, void, illegal or non-enforceable. As per Section 2 (i), a voidable contract is one which may be repudiated (i.e., avoided) at the will of one or more parties, but not by others. For more details, refer to section 2.2. 4. Offer is not only one of the essential elements of a contract, but also the basic building block. Section 4 of the Indian Contract Act states that the communication of an offer is complete when it comes to the knowledge of the person to whom it is made. For more details, refer to section 2.3. 5. It is necessary to communicate an offer to the offeree and the acceptance to the offeror. It is necessary for the offeror to communicate an offer to the offeree. It is also necessary for the offeree to communicate his/her acceptance to the offeror. For more details, refer to section 2.3.

2.16 Case Study

The Carbolic Smoke Ball Company (CSBC) made a product called the smoke ball. It claimed to be a cure for influenza and a number of other diseases. The smoke ball was a rubber ball with a tube attached. It was filled with carbolic acid (phenol). The tube was then inserted into the user's nose. It was squeezed at the bottom to release vapors into the nose of the user. This would cause the nose to run, and hopefully flush out the cold. CSBC published advertisements in the Pall Mall Gazette and other newspapers on November 13, 1891, claiming that it would pay 100 to anyone who got sick with influenza after using its product, according to the instructions set out in the advertisement. CSBC would pay a reward to any person who contracts influenza colds, or any disease, after having used the
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ball three times daily for two weeks, according to the printed directions supplied with each ball. An amount of 1,000 was deposited with Alliance Bank, Regent Street, showing the companys sincerity in the matter. Mrs. Louisa Elizabeth Carlill saw the advertisement, bought one of the balls and used three times daily for nearly two months, until she contracted the flu on January 17, 1892. She claimed 100 from CSBC. CSBC ignored two letters from her husband, who had trained as a solicitor. On a third request for her reward, they replied with an anonymous letter that if the ball is used properly, the company had complete confidence in the smoke ball's efficacy. However, to protect themselves against all fraudulent claims, they would need her to come to their office to use the ball each day and have it checked by the secretary. Mrs. Carlill brought the claim to court. The barristers representing her argued that the advertisement and her reliance on it was a contract between her and the company, and so CSBC ought to pay. The company argued it was not a contract, as there was no offer made to Mrs. Carlill. Discussion Question: Do you agree to what the company says? Justify. (Hint: The case refers to the concept of general offer.) References: Aggarwal, Rohini (2003). Students Guide to Mercantile and Commercial Laws, Taxmanns, New Delhi Kapoor, N.D. (2003). Elements of Mercantile Law, Sultan Chand and Sons, New Delhi. Kucchal M.C. (2002). Business Law, Vikas Publishing House Pvt. Ltd., New Delhi. Tulsian P.C. (2002). Business Law, Tata McGraw-Hill Pvt. Ltd., New Delhi. Gulshan S.S. (2006). Business Law, Excel Books, New Delhi.

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