INDIAN BUSINESS

ENVIRONMENT (LEGAL,
ECONOMY, AND POLICY)
Prepared By-
Ms. Chandrika Krishnan
Assistant Professor
Department of HR & General Management
ISBR Business School
Course Description

• The course is designed to provide students with a comprehensive understanding of

the legal framework governing various business activities.

• It explores the intersection of law and business, focusing on the laws and
regulations that shape the business environment, economy, and policies that impact
organizational decision-making.

• It explores organizations’ dynamic interactions and broader economic, social,

political, and technological contexts.
Course Outcome
• To analyze the need for the law in modern society of India, various
essential elements of the Indian Contract Act, of 1872 and various
essential elements of law relating to the Indian Sale of Goods Act, of
1930

• To apply various concepts of the Information Technology

(Amendment) Act, 2008 in the business environment

• To apply various concepts of Intellectual Property Rights (IPR) and

follow Ethics related to IPR

• To evaluate the macro environment of business along with various

monetary and fiscal policies of the country and the state of the Indian
economy with the help of different case studies.
REFERENCE BOOKS
• Business Law, N D Kapoor, Sultan Chand & Sons
Publication, 36th Edition
• Legal & Business Environment, Ravindra Kumar &
Renukamurthy, Cengage learning, 2018.
• Business Law, M C Kuchhal & Vivek Kuchhal, Vikas
Publishing House Pvt Ltd, 6th Edition.
What is Law?
• A person is a social human being living in the group, called society.

• He has to do various activities for his livelihood. Some activities are

good or some are bad. In other words, some are beneficial for the
society and some are harmful to the society.

• “To regulate the activities of human behaviour a group of set

activities is introduced by regulatory authorities so that no one
could harm the other one, this set of rules is called Law.”

• Let us take a look at the meaning of the law and a brief introduction to
Indian Law.
What is Law?
• The State regulates the conduct of its people by a set of
rules.

• It ordains, directly or indirectly, implicitly or explicitly,

a general course of conduct to be followed by the
people.

• Such rules of conduct, if recognized by the State and

enforced by it on people, are termed as “law”.
Meaning of Law

• Holland, a jurist, defines “law” as rules of external human

action enforced by the sovereign political authority, i.e., the
State.
• In the words of Salmond, “Law is the body of principles
recognized and applied by the State in the administration of
justice”
• Woodrow Wilson has defined law as “that portion of the
established habit and thought of mankind which has gained
distinct and formal recognition in the shape of uniform rules
backed by the authority and power of the government”
Meaning of Law

• In the real world, the law is an amorphous set of rules

govern individuals and group behaviour.
• We don’t even know about many of these rules or we
understand them only generally.
• For example, you don’t need to see a written law to know
that it’s a crime to steal or destroy someone else property.
• In other words, “the law is a system of rules that are
created and enforced through the social or
government institutions to regulate behaviour”.
TYPES OF LAW
There are four types of law that we have in our legislative
system.
1. Criminal law
• Murder, assault, robbery, and rape are examples of it.

• For example, if a car is stolen then the theft is against the

individual, but it threatens all car owners because they
might have stolen their car. Because the view is taken
that everybody is threatened by the crime this law is dealt
with the public services and not by private investigators.
TYPES OF LAW
2. Civil law
• Different areas such as a right to an education or to A
trade union membership and divorce problems between
the couple and who receives custody of the children.

• The best way to describe civil law is that it looks at

actions that are not the crime.

• But the individuals to sort their own problems by going

to court themselves or with a lawyer.
TYPES OF LAW
• It is a section of law dealing with disputes between
individuals and organizations.

• For example, a car crash victims claims from the

driver for loss or injury sustained in an accident or
one company sue another over a trade dispute.
TYPES OF LAW
2. Civil law
• Different areas such as a right to an education or to A
trade union membership and divorce problems between
the couple and who receives custody of the children.

• The best way to describe civil law is that it looks at

actions that are not the crime.

• But the individuals to sort their own problems by going

to court themselves or with a lawyer.
TYPES OF LAW
• It is a section of law dealing with disputes between
individuals and organizations.

• For example, a car crash victims claims from the

driver for loss or injury sustained in an accident or
one company sue another over a trade dispute.
TYPES OF LAW
3. Common law
• It is also known as Judicial precedent or judge-made law or case law.

• It is a body of law derived from the judicial decision of courts and

similar tribunals.

• As the names describe it is common to all. Today one-third of world’s

population lives in common law jurisdictions or in the systems.

• “It is defined as a body of legal rules that have been made by

judges at the issue rolling on cases as opposed to rules and laws
made by the legislature or in official statues.”
TYPES OF LAW
• An example of common law is a rule that a judge
made the people have a duty to read contracts.

• Example of a common law marriage is when two

people have lived together for 10 or more years.
They have thus and legal rights to share their assets
because of it.
TYPES OF LAW
4. Statutory law
• It is term used to define return loss usually enacted by a
legislative body.

• It varies from regulatory or administrative laws common law or

the law created by prior Court decisions.

• A bill is proposed in the legislature and voted upon.

• For example, you are given a citation for violating the speed
limit, you have broken a vehicle and traffic law.
MEANING OF AN ACT
• Acts of parliament, also called primary legislation, are statutes passed by a
parliament (legislature).

• In the Parliament of India, every bill passes through following stages before
it becomes an Act of Parliament of India:
• First reading - introduction stage: Any member, or member-in-charge of the
bill seeks the leave of the house to introduce a bill. If the bill is an
important one, the minister may make a brief speech, stating its main
features.

• Second reading - discussion stage: This stage consists of detailed

consideration of the bill and proposed amendments.
MEANING OF AN ACT
• Third reading - voting stage: This stage is confined only to arguments either
in support of the bill or for its rejection as a whole, without referring to its
details.

• After the bill is passed, it is sent to the other house.

• Bill in the other house (Rajya Sabha): After a bill, other than a money bill,
is transmitted to the other house, it goes through all the stages in that house
as that in the first house.

• But if the bill passed by one house is amended by the other house, it goes
back to the originating house.
MEANING OF AN ACT
• President's approval: When a bill is passed by both the houses, it is sent to
the President for his approval.

• The President can assent or withhold his assent to a bill or he can return a
bill, other than a money bill.

• If the President gives his assent, the bill is published in The Gazette of
India and becomes an Act from the date of his assent.

• If he withholds his assent, the bill is dropped, which is known as power of

veto.
JUDICIAL SYSTEM IN INDIA
OTHER SPECIAL COURTS IN INDIA
• Family Court
• Fastrack Court
• Court of Small Causes
Public Interest Litigation- PIL
• LITIGATION: The meaning of litigation in law refers to the actions
between two opposing parties working in the interest of enforcing or
defending a legal right. In most cases, the parties settle litigation by
working out an agreement, but they may also go to court and have the
jury or judge determine the final resolution.
• Public Interest Litigation (PIL) refers to such legal action which is
initiated in a court of law in order to enforce the public interest or
general interest in which the common people have some interest by
which their legal right or liability is affected.
• PIL is not defined in any statute or in any act. It has been interpreted by
judges to consider the intent of the public at large. It is the power given
to the public by courts through judicial activism.
PIL Case example
M.C. Mehta vs. Union of India
• The judgment delivered on January 12, 1988, criticized the local government for permitting
untreated sewage from Kanpur’s tanneries to enter the Ganges. Over the course of time,
over 50,000 polluting companies in the Ganga basin have been subject to many Orders and
three historic decisions.

• More than 250 towns and localities have been told to build sewage treatment plants in this
case, in addition to the industries.

• A planned leather complex in the state of West Bengal has received 600 tanneries. It was
originally situated in congested residential areas of Kolkata.

• Six hundred tanneries that were formerly located in Kolkata’s most crowded residential
districts have been transferred to the State of West Bengal’s proposed Leather Complex.
The Court then forced the closure of many factories. These businesses could only return
after installing effluent treatment facilities and implementing pollution control measures.

• These directions have prevented the consequences of air and water pollution on millions of
people in the Ganga basin.
INDIAN CONTRACT ACT – 1872
• 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.

• This definition has two major elements in it visa viz – “agreement” and
“enforceable by law”.

• So in order to understand a contract in the light of The Indian Contract Act,

1872 we need to define and explain these two pivots in the definition of a
contract.
AGREEMENT
• The Indian Contract Act, 1872 defines what we mean by
“Agreement”.

• In its section 2 (e), the Act defines the term agreement as

“every promise and every set of promises, forming
the consideration for each other”.

• Now that we know how the Act defines the term

“agreement”, there may be some ambiguity in the definition
of the term promise.
PROMISE

• This ambiguity is removed by the Act itself in its section

2(b) which defines the term “promise” here as: “when
the person to whom the proposal is made signifies his
assent thereto, the proposal is said to be accepted.
Proposal when accepted becomes a promise”.

• In other words, an agreement is an accepted promise,

accepted by all the parties involved in the agreement or
affected by it.
PROMISE
The steps may be described as under:

• The definition requires a person to whom a certain proposal is made.

• The person (parties) in step one have to be in a position to fully understand all the aspects of a
proposal.
• “signifies his assent thereto” – means that the person in point one accepts or agrees with the
proposal after having fully understood it.
• Once the “person” accepts the proposal, the status of the proposal changes to “accepted proposal”.
• “accepted proposal” becomes a promise. Note that the proposal is not a promise. For the proposal
to become a promise, it has to be accepted first.
• Thus, in other words, an agreement is obtained from a proposal once the proposal, made by one or
more of the participants, is accepted by all the parties becomes the agreement. To sum up, we can
represent the above information below:

Agreement = Offer + Acceptance.

 Enforceable By Law:
• Now let us try to understand this aspect of the definition as is present in the Act.

• Suppose you agree to sell a unicorn for ten magic beans with a friend. Can you have a contract for this?

• Well if you follow the steps in the previous section, you will argue that once you and your friend agree on the
promise, it becomes an agreement.

• But in order to be a contract as per the definition of the Act, the agreement has to be legally enforceable.

• Thus we can say that for an agreement to change into a Contract as per the Act, it must give rise to or lead to
legal obligations or in other words must be within the scope of the law.
• Thus we can summarize it as:
Contract = Accepted Proposal (Agreement) + Enforceable by law (defined within the law)
Enforceable By Law:
Difference Between Agreement And Contract

• Let us see how a contract and agreement are different from each other. This
will help you summarize and make a map of all the important concepts that
you have understood.
Difference Between Agreement And Contract

Contract Agreement

A promise or a number of promises that are not

A contract is an agreement that is enforceable by law. contradicting and are accepted by the parties
involved is an agreement.

An agreement must be socially acceptable. It may or

A contract is only legally enforceable.
may not be enforceable by the law.

A contract has to create some legal obligation. An agreement doesn’t create any legal obligations.

All contracts are also agreements. An agreement may or may not be a contract.
TEST YOUR UNDERSTANDING

Q1: “A person A agrees to sell his house to a person B for 50 lakh.” This is an
example of:
A. A contract
B. An agreement
C. Neither a Contract nor an Agreement
D. It is a contract as soon as A gets the money.
TEST YOUR UNDERSTANDING

Answer: Let us see what we need for the above to be a contract. We

need Accepted Proposal (Agreement) + Enforceable by law (defined within the
law). We have an “accepted proposal” by A as inferred from the phrase “A agrees
to sell...”, but we don’t know whether B has been made a party to the agreement
or not. So this is neither a contract nor an agreement and the answer is C) Neither
a Contract nor an Agreement.
Essentials of a Contract-
What makes a valid contract?
• A valid contract is enforceable by law and if a contract is not valid it may lead
to obstruction of businesses and unlawful and insincere dealings.
• Let us learn about the essential features of a valid contract.
Essentials of a Valid Contract:
• A contract that is not a valid contract will have many problems for the parties
involved. For this reason, we must be fully aware of the various elements of a
valid contract.
• In other words, here we shall ponder on all the ramifications of the definition
of the contract as provided by The Indian Contract Act, 1872.
Essentials of a Contract-
What makes a valid contract?
• The Indian Contract Act, 1872 itself defines and lists the Essentials of a
Contract either directly or through interpretation through various judgments of
the Indian judiciary.
• Section 10 of the contract act enumerates certain points that are essential for
valid contracts like Free consent, Competency Of the parties, Lawful
consideration, etc.
• Other than these there are some we can interpret from the context of the
contract which is also essential. Let us see.
Essentials of a Contract-
What makes a valid contract?
1] Two Parties
• So you decide to sell your car to yourself! Let us say to avoid tax or some other
sinister purpose.
• Will that be possible? Can you have a contract with yourself? The answer is no,
unfortunately. You can’t get into a contract with yourself.
• A Valid Contract must involve at least two parties identified by the contact.
• One of these parties will make the proposal and the other is the party that
shall eventually accept it.
• Both the parties must have either what is known as a legal existence e.g.
companies, schools, organizations, etc. or must be natural persons.
Essentials of a Contract-
What makes a valid contract?
• For Example: In the case State of Gujarat vs Ramanlal S & Co. –
A business partnership was dissolved and assets were distributed among the
partners as per the settlement. However, all transactions that fall under a
contract are liable for taxation by the office of the State Sales Tax Officer.
However, the court held that this transaction was not a sale because the
parties involved were business partners and thus joint owners. For a sale, we
need a buyer (party one) and a seller (party two) which must be different
people.
Essentials of a Contract-
What makes a valid contract?
2] Intent Of Legal Obligations
• The parties that are subject to a contract must have clear intentions of creating
a legal relationship between them.
• What this means is those agreements that are not enforceable by the law e.g.
social or domestic agreements between relatives or neighbours are not
enforceable in a court of law and thus any such agreement can’t become a
valid contract.
Essentials of a Contract-
What makes a valid contract?
3] Case Specific Contracts
• Some contracts have special conditions that if not observed would render
them invalid or void.
• For example, the Contract of Insurance is not a valid contract unless it is in the
written form.
• Similarly, in the case of contracts like contracts for immovable properties,
registration of contract is necessary under the law for these to be valid.
Essentials of a Contract-
What makes a valid contract?
4] Certainty of Meaning
• Consider this statement “I agree to pay Mr X a desirable amount for his house
at so and so location”.
• Is this a valid contract even if all the parties agree to this term?
• Of course, it can’t be as “desirable amount” is not well defined and has no
certainty of meaning.
• Thus we say that a valid contract must have certainty of Meaning.
Essentials of a Contract-
What makes a valid contract?
5] Possibility Of Performance Of an Agreement
• Suppose two people decide to get into an agreement where person A agrees to
bring back the person B’s dead relative back to life.
• Even when all the parties agree and all other conditions of a contract are
satisfied, this is not valid because bringing someone back from death is an
impossible task.
• Thus the agreement is not possible to be enforced and the contract is not valid.
Essentials of a Contract-
What makes a valid contract?
6] Free Consent (Section 13)
• Consent is crucial for an agreement and thus for a valid contract.
• If two people reach a similar agreement in the same sense, they are said to
consent to the promise.
• However, for a valid contract, we must have free consent which means that the
two parties must have reached consent without either of them being
influenced, coerced, misrepresented or tricked into it.
• In other words, we say that if the consent of either of the parties is impaired
knowingly or by mistake, the contract between the parties is no longer valid.
Essentials of a Contract-
What makes a valid contract?
• Example: Where the persons refer to a ship of a name in the contract but each of
them had a different ship in mind though of same name, there is no identity of
reasons and hence there is no consent.
• Consent is free when it is not caused by coercion, undue influence, fraud,
misrepresentation, or mistake (Section 14). When the consent is caused by
mistake, the agreement is void, but when caused by other factors it is voidable.
• Coercion(Section 15): “Coercion” is the committing, or threatening to commit
any act forbidden by the Indian Penal Code 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.
Essentials of a Contract-
What makes a valid contract?
For example, X says to Y ‘I shall not return the documents of title relating to
your wife’s property unless you agree to sell your house to me for
‘5000’. ‘Y’ says, “All right, I shall sell my house to you for 5000; do not
detain my wife’s documents of title”, X has employed coercion; he cannot
therefore enforce the contract. But Y can enforce the contract if he finds the
contract to his benefit. An agreement induced by coercion is voidable and
not void. That means it can be enforced by the party coerced, but not by
the party using coercion.
Essentials of a Contract-
What makes a valid contract?
• Undue influence (Section 16): 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 of the other. A person is deemed to be
in a position to dominate the will of the other, when he holds authority, real or
apparent over the other, or when he stands in a fiduciary relation to other.
• The essential ingredients of undue influence are: One of
the parties dominates the will of the other and
(i) he has real or apparent authority over the other;
(ii) he is in a position to dominate the will of the other and
(iii) The dominating party takes advantage of the relation.
Essentials of a Contract-
What makes a valid contract?
• Following are the instances where one person can be treated as in a position
to dominate the will of the other.
(i) A solicitor can dominate the will of the client.
(ii) A doctor can dominate the will of his patient having protracted illness, and
A trustee can dominate the will of the beneficiary.
(iii)

• The burden of proof (in situations like the above) that there is no undue
influence in an agreement would be on the person who is in a position to
dominate the will of the other. For instance the ‘father’ should prove that he had
not unduly influenced his son in the case of any given agreement. The stronger
party must act in good faith and see that the weaker party gets independent
advice.
Essentials of a Contract-
What makes a valid contract?
Difference between Coercion and Undue Influence: Having discussed in
detail the concepts of coercion and undue influence, let us understand the
difference between the two:-
• Nature of action: Coercion involves physical force and sometimes only threat.
Undue influence involves only moral pressure.
• Involvement of criminal action: Coercion involves committing or threatening
to commit any act prohibited or forbidden by law, or detention or threatening to
detain a person or property. In undue influence, there is no such illegal act
involved.
Essentials of a Contract-
What makes a valid contract?
• Relationship between parties: In coercion, there need not be any relationship between
parties; whereas in undue influence, there must be some kind of relationship between
parties, which enables one to exercise undue influence over the other.
• Exercise by whom: Coercion need not proceed from the promisor. It also need not be
directed against the promisee. Undue influence is always exercised by one on the
other, both parties to a contract.
• Enforceability: Where there is coercion, the contract is voidable. Where there is undue
influence the contract is voidable or the court may set aside or enforce it in a modified
form.
• Position of benefits received: In case of coercion, where the aggrieved party rescues
the contract, any benefit received has to be restored. In the case of undue influence, the
court has the discretion to pass orders for the return of any such benefit or not to give
any such directions.
Essentials of a Contract-
What makes a valid contract?
Fraud(Section 17): Fraud means and includes any of the following acts
committed by a party to a contract or secretly involved in an immoral or illegal act
or by his agent with intent to deceive another party thereto or his agent or to
induce him to enter into the contract.
(i) the suggestion, as to a fact, of that which is not true by one who does not
believe it is true;
(ii) the active concealment of a fact by one, having knowledge or belief of the fact;
(iii) any promise made without any intention of performing it;
(iv) any other act fitted to deceive; and
(v) Any such act or omission as to law specially declared to be fraudulent
Essentials of a Contract-
What makes a valid contract?
• It is important to note that ‘fraud’ that results in a contract alone is covered by section 17
of the Act. If there is a ‘fraud’ but it does not result in a contract, it would not fall within
the purview of the Act.
• The following can be taken as a n illustration of fraud:
 A director of a company issues a prospectus containing misstatement knowing fully
well about such misstatement. It was held any person who had purchased shares on the
faith of such misstatement could reject the contract on the ground of fraud.
 B discovered an ore mine in the Estate of ‘A’ He conceals the mine and the information
about the mine. ‘A’ in ignorance agrees to sell the estate to ‘B’ at a price that is grossly
undervalued. The contract would be voidable of the option of ‘A’ on the grounds of fraud.
 Buying goods with the intention of not paying the price is an act of fraud.

NOTE: Mere silence would amount to fraud under certain circumstances.

Essentials of a Contract-
What makes a valid contract?
(a) Misrepresentation [Section 18]: “Misrepresentation’ does not involve
deception but is only an assertion of something by a person that is not true,
though he believes it to be true. misrepresentation could arise because of the
innocence of the person making it or because he lacks sufficient or
reasonable ground to make it. A contract hit by misrepresentation can be
avoided by the person who has been misled.
• For example, A while selling his horse to B, tells him that the horse is thoroughly
sound. A genuinely believes that the horse is sound although he has no sufficient
ground for the belief. Later on, B finds the horse to be unsound. The
representation made by A is a misrepresentation
Essentials of a Contract-
What makes a valid contract?
7] Competency Of the Parties
• Section 11 of the Indian Contract Act, 1872 is: “Who are competent to contract
— Every person is competent to contract who is
(1) of the age of majority according to the law to which he is subject,
and who is (2) of sound mind and is
(3) not disqualified from contracting by any law to which he is subject.”
Let us see these qualifications in detail:
• refers to the fact that the person must be at least 18 years old or more.
Essentials of a Contract-
What makes a valid contract?
• means that the party or the person should be able to fully understand the
terms or promises of the contract at the time of the formulation of the
contract.
• states that the party should not be disqualified by any other legal
consequences.
• For example, if the person is a convict, a foreign sovereign, or an alien enemy,
etc., they may not enter into a contract.
Essentials of a Contract-
What makes a valid contract?
8] Consideration
• Quid Pro Quo means ‘something in return’ which means that the parties must
accrue in the form of some profit, rights, interest, etc. or seem to have some
form of valuable “consideration”.
• For example, if you decide to sell your watch for Rs. 500 to your friend, then
your promise to give the rights to the watch to your friend is a consideration
for your friend.
• Also, your friend’s promise to pay Rs. 500 is a consideration for you.
Essentials of a Contract-
What makes a valid contract?
9] Lawful Consideration
In Section 23 of the Act, the unlawful considerations are defined as all those
which:
• it is forbidden by law.
• is of such a nature that, if permitted, it would defeat the provisions of any law,
or is fraudulent.
• involves or implies, injury to the person or property of another
• the Court regards it as immoral or opposed to public policy
• These conditions will render the agreement illegal.
Legal Rules Regarding Consideration

• Enforcing any legal contract requires it to have an element of consideration included in

it.
• Simply put, it is nothing but a price that the promisee agrees to pay the promisor.
• Now, this price can be paid as a benefit to the promisor and/or a loss or detriment to
the promisee.
• According to Section 2(d) of the Indian Contract Act, 1872, consideration is defined as
follows:
• “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 abstain
from doing something, such act or abstinence is called a consideration for the
promisee.”
Legal Rules Regarding Consideration

At the desire of the promisor if the promisee either

• Does something (in the past, present or future) OR

• Abstains from doing something (in the past, present or future)
• Then, this act of doing or abstinence is called Consideration. Now,
it has two aspects, either doing some act or abstaining from doing
something.
Legal Rules Regarding Consideration

Example 1 – Doing something

Peter and John enter into a contract where Peter promises to deliver 15 curtains to John in
one month’s time. Also, John promises to pay Peter an amount of Rs 3,000 on delivery. In
this contract, John’s promise to pay Rs 3,000, on delivery, is the consideration for Peter’s
promise. Also, Peter’s promise of delivering 15 curtains is the consideration of John’s
promise to pay.

Example 2 – Not doing something

Peter has taken a loan from his friend John. However, he has not repaid the loan yet. John
promises not to file a suit against Peter if he promises to repay the loan within a week. In
this case, abstinence on the part of John is due to the consideration of Peter’s promise of
repayment of the loan.
Rules Regarding Consideration

According to Section 2(d) of the Indian Contract Act, 1872, the follows features are
essential for a valid consideration:

(i) Consideration must move at the desire of the promisor

Consideration can be offered by the promisee or a third-party only at the request or desire
of the promisor. If an action is initiated at the desire of the third-party, it is not a
consideration.

Peter is going back home from work. On his way, he sees that his neighbor John’s house is
on fire. He immediately arranges for a water hose and manages to douse the fire. Peter
cannot claim any reward for his effort because it was a voluntary act and was not done at
the desire of John (promisor).
Rules Regarding Consideration

(ii) Consideration may move from the promisee to any other person
If you look at the definition of consideration according to section 2 (d) of the Indian Contract Act.
1872, it explicitly states the phrase ‘promisee or any other person…’ This essentially means that
in India, consideration may move from the promise to any other person. However, it is important
to note that there can be a stranger to consideration but not a stranger to the contract.

Peter gifted his son, Oliver an apartment in the city with a condition that he pays a fixed
amount of money to his uncle, John, every year. On the same day, Oliver executed a deed to
pay a fixed amount of money to John every year. However, Oliver failed to pay and John filed a
suit for recovery. Oliver pleaded that he was not liable since no consideration had moved from
John. However, the court held the words ‘promisee or any other person…’ and allowed John to
maintain his suit for recovery.
Rules Regarding Consideration

(iii) It can be in the past, present or future

a. Past
Since consideration is the price of a promise, it is normally given to induce the promise. However,
it can be given before the promise is made by the promisor. This is past consideration. It is
important to note that past consideration is not considered for a new promise since it is not been
given in lieu of the promise. According to Indian law, ‘past considerations’ is ‘good consideration’
if it was given at the desire of the promisor.

Peter employs John to work in his field during the months of agricultural harvesting. He
promises to pay John an amount of Rs 5,000 for his services when he sows the new crop in the
fields. The services of John in the past constitute a valid consideration.
Rules Regarding Consideration

a.1. Past Voluntary services

At times, a person might render voluntary services without any request or promise from
another. If the person receiving the services makes a subsequent promise to pay for the
services, then such a promise is enforceable in India under Section 25(2) of the Indian
Contract Act, 1872 which states:
‘An agreement made without consideration is void, unless it’s a promise to compensate,
wholly or in part, a person who has already voluntarily done something for the promisor, or
something which the promisor was legally compellable to do; or unless.’

Peter finds John’s wallet on the road. He returns it to him and John promises to pay Peter
Rs 500 for his services. This is a valid contract.
Rules Regarding Consideration

b. Present
If the promise and consideration take place simultaneously then it is present or
executed consideration. An example is Peter goes to a shop, buys a bag of chips
and pays for the same on-spot.
c. Future
When the consideration for a promise moves after the contract is formed, it is a
future or executor. It is also valid if it depends on the condition.
Peter promises to create architectural plans for John’s new house. John promises
to pay Peter an amount of Rs 50,000 provided the plans are approved by his
wife.
Rules Regarding Consideration

(iv) It must have value in the eyes of the law

While the law allows the parties to decide an ‘adequate’ consideration for them, it
must be real and have value in the eyes of law. While the Court will not consider
inadequacy, it will look at it to determine if the consent was given by the party
with free-will or not.

Peter’s wife agrees to withdraw the suit she has filed against him in return for
his promise to pay her a monthly maintenance amount. This is a good
consideration and holds value in the eyes of law.
Rules Regarding Consideration

(v) It should be over and above the Promisors’ existing obligations

If the promisor is already obligated either by his promise or law to perform or
abstain from a certain act, then it is not a good consideration for a promise.

Peter receives a summons from the Court to appear before it as a witness for
John. John promises to pay him Rs 10,000 to appear in the Court. This contract is
not valid because Peter is obligated by law to appear in the Court on receiving a
summons.
Rules Regarding Consideration

(vi) It cannot be Unlawful

A consideration that is against the law or public policies is not valid.

Peter offers Rs 10,000 to John to beat up his business rival. John beats him up
but Peter refuses to pay him. John cannot file a suit for recovery since the
consideration is against the law.
Practical Questions

Which of these contracts are valid?

1. Peter promises to pay John an amount of Rs 500,000 if his car meets with an
accident and gets damaged more than 50% provided John pays him Rs 25,000
per year for the next 10 years.
2. Arjun promises to take care of Ravi’s house while Ravi is away for work for six
months provided he pays him Rs 5,000 upon his return.
3. Rita promises to get Amita a job with the Indian Government if Amita
promises to pay her Rs 20,000 when she gets the job.
Solutions

1. Peter’s promise is the consideration for John’s payment and vice versa.
Further, these are lawful considerations and have value in the eyes of law.
Hence, it is a valid contract.
2. Arjun’s promise is the consideration for Ravi’s payment and Ravi’s payment is
for Arjun’s promise. Further, these are lawful considerations and have value in
the eyes of law. Hence, it is a valid contract.
3. This is not a valid contract because the consideration is against the law.
Doctrine of Privity of Contract

The Indian Contract Act clearly states that there cannot be a stranger to a
contract. What does this exactly mean? And are there any exceptions? This is
explained through the Doctrine of Privity of a Contract.
The Indian Contract Act. 1872, allows the ‘Consideration‘ for an agreement to
proceed from a third party. However, a stranger (third party) to consideration is
different from a stranger to a contract. The law does not allow a stranger to file a
suit on the contract. This right is available only to a person who is a party to the
contract and is called the Doctrine of Privity of Contract.
Doctrine of Privity of Contract

Let’s understand this with the help of an example:

• Peter has borrowed some money from John.

• Peter owns a property and decides to sell it to Arjun.
• Arjun promises to pay John on behalf of Peter.
However, if Arjun fails to pay, then John cannot sue since Arjun is a stranger to the
contract. It is important to note that the Doctrine of Privity has exceptions that
allow a stranger to enforce a claim as given below.
Exceptions to the Doctrine of Privity of Contract

A stranger or a person who is not a party to a contract can sue on a contract in the
following cases:

1. Trust
2. Family Settlement
3. Assignment of a Contract
4. Acknowledgement or Estoppel
5. A covenant running with the land
6. Contract through an agent
Exceptions to the Doctrine of Privity of Contract

Trust
If a contract is made between the trustee of a trust and another party, then the beneficiary of the trust
can sue by enforcing his right under the trust, even if he is a stranger to the contract.

Arjun’s father had an illegitimate son, Ravi. Before he died, he put Arjun in possession of his estate
with a condition that Arjun would pay Ravi an amount of Rs 500,000 and transfer half of the estate in
Ravi’s name, once he becomes 21 years old.

After attaining that age when Ravi didn’t receive the money and asked Arjun about it, he denied
giving him his share. Ravi filed a suit for recovery. The Court held that a trust was formed with Ravi
as the beneficiary for a certain amount and share of the estate. Hence, Ravi had the right to sue
upon the contract between Arjun and his father, even though he was not a party to it.
Exceptions to the Doctrine of Privity of Contract

Family Settlement
If a contract is made under a family arrangement to benefit a stranger (person not a party to the
contract), then the stranger can sue in his own right as a beneficiary of the contract.

1. Peter promised Nancy’s father that he would marry Nancy else would pay Rs 50,000 as damages.
Eventually, he married someone else, thereby breaching the contract. Nancy filed a case against
Peter which was held by the Court since the contract was a family arrangement with Nancy as
the beneficiary.
Exceptions to the Doctrine of Privity of Contract

Assignment of a Contract
If a contract is made for the benefit of a person, then he can sue upon the contract even though he is
not a party to the agreement. It is important to note here that nominees of a life insurance policy do
not have this right.

Acknowledgment or Estoppel
If a contract requires that a party pays a certain amount to a third party and he/she acknowledges it,
then it becomes a binding obligation for the party to pay the third party. The acknowledgment can also
be implied.

Peter gives Rs 1,000 to John to pay Arjun. John acknowledges the receipt of funds to be paid to
Arjun. However, he fails to pay him. Arjun can sue John for recovery of the amount.
Exceptions to the Doctrine of Privity of Contract

Rita sold her house to Seema. A real estate broker, Pankaj, facilitated the deal.
Out of the sale price, Pankaj was to be paid Rs 25,000 as his professional
charges. Seema promised to pay Pankaj the amount before taking possession of
the property. She made three payments of Rs 5,000 each and then stopped
paying him. Pankaj filed a suit against Seema which was held by the Court
because Seema had acknowledged her liability by conduct.
Exceptions to the Doctrine of Privity of Contract

A Covenant Running with the Land

When a person purchases a piece of land with the notice that the owner of the land will be
bound by all duties and liabilities affecting the land, then he can sue upon a contract
between the previous land-owner and a settler even if he was not a party to the contract.

Peter owned a piece of land which he sold to John under a covenant that a certain part of
the land will be maintained as a public park. John abided by the covenant and eventually
sold the land to Arjun. Though Arjun was aware of the covenant, he built a house in the
specific plot. When Peter came to know of it, he filed a suit against Arjun. Although Arjun
denied liability since he was not a party to the contract, the Court held him responsible for
violating the covenant.
Exceptions to the Doctrine of Privity of Contract

Contract through an Agent

If a person enters into a contract through an agent, where the agent acts within
the scope of his authority and in the name of the person (principal).
Practical Question

1. Vidya purchases a property from Krishna. Rajiv is already living in the

property on a three-year lease. As a part of the purchase agreement, Vidya
takes over the lease. There are some leakages in the house that Krishna
promises to fix, as a part of the contract. A few months go by and the
leakages are still not fixed. Rajiv calls Vidya, the new owner, and she says
that it is Krishna’s responsibility. Can Rajiv file a suit for repairs against
Krishna?
Solution

Since there is no contract between Rajiv and Krishna about repairing the leakage,
if he files a suit, it will probably be dismissed by the Court. Krishna had agreed to
carry out the repairs in his purchase contract with Vidya. Hence, she can file a suit
against Krishna to get the work done.

Rajiv, on the other hand, can sue Vidya for not performing her obligations
according to the lease contract.
Agreements without Consideration

• Consideration is an integral part of a contract. The rules of consideration state

that it is essential to have consideration for a contract. But there are some
specific exceptions to the “No consideration no contract” rule.
• Can you make a legal agreement without consideration? No. As per Section 10
and Section 25 of the Indian Contract Act, 1872, consideration is essential in a
valid contract. In simple words, no consideration no contract. Hence, you can
enforce a contract only if there is a consideration.
• While considerations are integral to a contract, the Indian Contract Act, 1872
has listed some exceptions whereby an agreement made without
consideration will not be void.
Exceptions to the ‘No Consideration No Contract’ Rule

• Section 25 also lists the exceptions under which the rule of no consideration no
contract does not hold, as follows:
Natural Love and Affection
• If an agreement is in writing and registered between two parties in close
relation (like blood relatives or spouse), based on natural love and affection,
then such an agreement is enforceable even without consideration.
Exceptions to the ‘No Consideration No Contract’ Rule

• Example:
Peter and John are brothers. In his will, their father nominates Peter as the sole
owner of his entire property after his death. John files a case against Peter to
claim his right to the property but loses the case. Peter and John come to a
mutual decision where Peter agrees to give half of the property to his brother
and register a document regarding the same.
Eventually, Peter didn’t fulfil his promise and John filed a suit for recovery of his
share in the property. The Court held that since the agreement was made based
on natural love and affection, the no consideration no contract rule didn’t apply
and John had the right to recover his share.
Exceptions to the ‘No Consideration No Contract’ Rule

Past Voluntary Services

• If a person has done a voluntary service in the past and the beneficiary
promises to pay at a later date, then the contract is binding provided:
• The service was rendered voluntarily in the past
• It was rendered to the promisor
• The promisor was in existence when the voluntary service was done (especially
important when the promisor is an organization)
• The promisor showed his willingness to compensate the voluntary service
Exceptions to the ‘No Consideration No Contract’ Rule

• Example, Peter finds Johns wallet on the road and returns it to him. John is
happy to find his lost wallet and promises to pay Peter Rs 2,000. In this case,
too, the no consideration no contract rule does not apply. This contract is a
valid contract.
Exceptions to the ‘No Consideration No Contract’ Rule

Promise to pay a Time-Barred Debt

• If a person makes a promise in writing signed by him or his authorized agent
about paying a time-barred debt, then it is valid despite there being no
consideration. The promise can be made to pay the debt wholly or in part.

• Example, Peter owes Rs 100,000 to John. He had borrowed the money 5 years
ago. However, he never paid a single rupee back. He signs a written promise
to pay Rs 50,000 to John as a final settlement of the loan. In this case, ‘the no
consideration no contract’ rule does not apply either. This is a valid contract.
Exceptions to the ‘No Consideration No Contract’ Rule

Creation of an Agency
According to section 185 of the Indian Contract Act, 1872, no consideration is
necessary to create an agency.

Gifts
The rule of no consideration no contract does not apply to gifts. Explanation (1) to
Section 25 of the Indian Contract Act, 1872 states that the rule of an agreement
without consideration being void does not apply to gifts made by a donor and
accepted by a donee.
Exceptions to the ‘No Consideration No Contract’ Rule

Charity
If a person undertakes a liability on the promise of another to contribute to
charity, then the contract is valid. In this case, the no consideration no contract
rule does not apply.
Exceptions to the ‘No Consideration No Contract’ Rule

Example, Peter is the trustee of his town’s charity organization. He wants to build a small
pond in the town to enhance greenery and offer the residents a good place to walk
around in the evenings. He raises a charity fund where he appeals to people to come
ahead and contribute to the cause. Many people come forward as subscribers the fund
and agree to pay Peter their share of the amount once he enters into a contract for
constructing the pond.

After raising half the amount, Peter hires contractors for building the pond. However, 10
people back out at the last moment. Peter files a suit against them for recovery. The Court
ordered the 10 people to pay the amount to Peter since he had undertaken a liability
based on their promise to pay. Even though there was no consideration, the contract was
valid and enforceable by law.
Practical Question

On the eve of his marriage Rahul’s father gifted him a house. They
went to register the documents, but such agreement was rejected
as there was no consideration. Is this correct? Or can Rahul take
legal action?
Practical Question

The rule of no consideration no contract does not apply to gifts.

Also. Rahul’s father was gifting him the house of his natural love
and affection. So this is an exception and the agreement can be
registered even without consideration.
Types of Offer

• The whole process of entering into a contract starts with a

proposal or an offer made by one party to another.
• To enter into an agreement such a proposal must be accepted.
• Let us look at the classification of an offer and the essentials of a
valid offer.
• There can be many types of offers based on their nature, timing,
intention, etc. Let us take a look at the classifications of offers.
Types of Offer

• General Offer
➢ A general offer is one that is made to the public at large. It is not
made by any specified parties.
➢ So any member of the public can accept the offer and be entitled
to the rewards/consideration.
➢ Say for example you put out a reward for solving a puzzle.
➢ So any member of the public can accept the offer and be entitled
to the reward if he finishes the act (solves the puzzle.)
Types of Offer

• Specific Offer
➢ A specific offer, on the other hand, is only made to specific
parties, and so only they can accept the said offer or proposal.
They are also sometimes known as special offers. Like for
example, A offers to sell his horse to B for Rs 5000/-. Then only B
can accept such an offer because it is specific to him.
Types of Offer

• Cross Offer
➢ In certain circumstances, two parties can make a cross-offer. This
means both make an identical offer to each other at the exact
same time. However, such a cross-offer will not amount to
acceptance of the offer in either case.
➢ For example, both A and B send letters to each other offering to
sell and buy A’s horse for Rs 5000/-. This is a cross-offer, but it
will be considered acceptable for either of them.
Types of Offer

• Counter Offer
➢ There may be times when a promise will only accept parts of an
offer, and change certain terms of the offer. This will be a
qualified acceptance. He will want changes or modifications in the
terms of the original offer. This is known as a counteroffer. A
counteroffer amounts to a rejection of the original offer.
Essentials of a Valid Offer

• Offer must create Legal Relations

➢ The offer must lead to a contract that creates legal relations and legal consequences in
case of non-performance. So a social contract that does not create legal relations will
not be a valid offer. Say for example a dinner invitation extended by A to B is not a valid
offer.

• Offer must be Clear, not Vague

➢ The terms of the offer or proposal should be very clear and definite. If the terms are
vague or unclear, it will not amount to a valid offer. Take for example the following offer
– A offers to sell B fruits worth Rs 5000/-. This is not a valid offer since what kinds of
fruits or their specific quantities are not mentioned.
Essentials of a Valid Offer

• Offer must be Communicated to the Offeree

➢ For a proposal to be completed it must be clearly communicated to the offeree. No
offeree can accept the proposal without knowledge of the offer. The famous case study
regarding this is Lalman Shukla v. Gauri Dutt. It makes clear that acceptance in
ignorance of the proposal does not amount to acceptance.

• Offer may be Conditional

➢ While acceptance cannot be conditional, an offer might be conditional. The offeror can
make the offer subject to any terms or conditions he deems necessary. So A can offer to
sell goods to B if he makes half the payment in advance. Now B can accept these
conditions or make a counteroffer.
Essentials of a Valid Offer

• Offer cannot contain a Negative Condition

➢ The non-compliance of any terms of the offer cannot lead to automatic acceptance of the offer. Hence it
cannot be said that if acceptance is not communicated by a certain time it will be considered as accepted.
Example: A offers to sell his cow to B for 5000/-. If the offer is not rejected by Monday it will be
considered as accepted. This is not a valid offer.

• Offer can be Specific or General

➢ As we saw earlier the offer can be to one or more specific parties. Or the offer could be to the public in
general.

• Offer may be Expressed or Implied

➢ The offeror can make an offer through words or even by his conduct. An offer that is made via words,
whether such words are written or spoken (oral contract) we call it an express contract. And when an
offer is made through the conduct and the actions of the offeror it is an implied contract.
Practical Question

• A agrees to sell to B 300 liters of oil in exchange for 500 kg of

grains. Is this a valid offer?
Solution

• No, this is not a valid offer. The terms of the offer are very vague. There is no
mention of what oil A will be selling to B. Is it crude oil, cooking oil? There is
no mention. Also in exchange, he will get 500 kg of grains but the specific
grain has not been mentioned. Since the specific terms are not mentioned,
this is not a valid offer.
Invitation to offer

• An offer and invitation to offer are not one and the same. The difference
between the two must be appreciated. An offer is definite. It is an intention
towards a contract.
• An invitation to offer is an act precedent to making an offer. It is done with the
intent to generally induce and negotiate.
• An invitation to offer gives rise to an offer after due negotiation and it cannot be
per se accepted.
• In an invitation to offer there is no expression of willingness by the offeror to be
bound by his offer.
• It is only a proposal of certain terms on which he is willing to negotiate. It is
not capable of being accepted as it is.
Invitation to offer

• When there is an advertisement by a person who has a stock of books for sale,
it is an invitation to offer and not an offer.
• This advertisement is made to receive offers and to further negotiate.
• In terms of Section 2[a] of the Act, it is very clear that an offer is the final
expression of willingness by the offeror to be bound by the offer if it is
accepted by the other party.
• Hence the only thing that is required is the willingness of the offeree to abide
by the terms of offer.
Invitation to offer

•The test to decide whether a statement is an ‘offer’ or ‘invitation to offer’ is to

see the ‘intention’.
•If a person who makes the statement has the intention to be bound by it as
soon as the other accepts, he is making an offer.
•If he however intends to do some other act, he is making only an invitation to
offer. Thus the intention to be bound is the important thing, which is to be
seen.
•Eg: Harvey vs. Facie [1893] AC 55
Invitation to offer

•Similarly, when goods are sold through auction, the auctioneer does not
contract with anyone who attends the sale.
•The auction is only an advertisement to sell but the items are not put for sale
though persons who have come to the auction may have the intention to
purchase.
•Following are instances of invitations to offer to buy or sell:
(i) An invitation by a company to the public to subscribe for its shares.
(ii) Display of goods for sale in shop windows.
(iii) Advertising auction sales and
(iv) Quotation of prices sent in reply to a query regarding price