Module 1

Module Name
Legal aspects of business and contracts

Notes

Legal and Business environment

MBA Semester 1
Course –
The Indian contract act 1872
Legal aspects of business and contracts: Concept of law. Types of Law.
Definition, Nature and types of contracts.
Essentials of valid contract.
Consideration and essentials of consideration.
Free Consent. Legality and Validity of Contracts.
Discharge of contracts.
Arbitration: Meaning, Essential and Effects.
Conciliation: Meaning, Procedure and Effect.

In the constitution of India, every citizen has been given several rights and since the rights are
provided, there will infringement of those rights as well. Our legislature has introduced various
laws to enforce and protect such rights, in order to civilize the society and maintain peace and
harmony among the individuals.
Law is basically a set of rules that are created and enforced by a particular country or
community through social or governmental institutions to regulate the actions of its members.

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Federal judicial system which primarily based mixed i.e. based on parliamentary legislature,
court customary religious laws well. Indian and judgments.

Types of legal system civil law; common law, customary law, religious law and mixed law,

Types of Indian Judicial System there are four types of law.

1. Criminal law:The Criminal law is enforced by the police. Cases like murder, rape, assault,
robbery are dealt under Criminal Law. Offenses which are committed against any individual but
are seen as being against everybody, even though it does not, come under the Criminal law.

For example, if house is burgled then the theft is against the individual, but it threatens all house
owners because they might have burgled their houses. 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.

2. Civil law: The Civil law is law that looks at actions that are not the crime. It is a section of law.
The Civil law is law that looks at actions that are not the crime. It is a section of law dealing with
disputes between organizations and individuals. It covers different areas such as defamation,
custody of children, right to education, divorce, trade union membership, property disputes,
ownership issues, Copy Right, insurance claims etc.

For example, a person by force took over someone else property without his/her permission
and not vacating it or one company sue another over a trade dispute or car crash victims claims
from the driver for loss or injury sustained in an accident.

3. Common law: The Common Law also known as case law or Judicial precedent judge-made law
is a section of law which is derived from the judicial decision of courts and similar tribunals. As
the name suggests it is common to all. The example set by higher courts is binding on cases tried
in lower courts. Lower courts can also choose to overturn the precedent, but this rarely occurs.

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.

4. Statutory law: Statute or Statutory Law is a law established by an act of the legislature that is
signed by the executive or legislative body. For state law, the acts are passed by the state
legislature and signed by the state governor. In rare circumstances, the executive (President or
governor) may refuse to sign the bill or reject it, which is known as a "veto."

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.

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LAW TERMOLOGY
 Proposal (offer) = when one person signifies to another his willingness to do or to
abstain from doing anything with the view to obtaining the assent of that other to such
act or abstinence he is said to make a proposal.

 Promise = when the person to whom the proposal is made signifies his assents there
to the proposal is said to be accepted. When proposal accepted become promise.

 Promisor and promisee = The person making proposal is said promisor. The person
accepting the promise is said promisee.

 Consideration = When at the desire of the promisor the promise or any other person
has done or abstain from doing or promise to do or abstain from doing something such
act abstained or promise is called consideration for the promise

 Agreement = Every promise or set of promises forming the consideration for each other
is an agreement.

 Contract Sec 2h = “ An agreement enforceable by law is contract”

According to Salmond a contract is an agreement creating and defining obligation

between the parties

Thus the contract can be divided into two folds firstly there should be agreement
and secondly it should be enforceable by law.so that it should create legal
obligation on both the parties .in absence of enforceability it would be mere
agreement and not the contract.

Essentials of valid contract

An agreement becomes a valid contract when it fulfil all the following condition
The following are essential of valid contract

1) Offer and acceptance: There must be minimum two parties in contract. There must be
lawful offer and lawful acceptance. both the parties must have agreed about the subject
matter of the contract at the same time in the same sence , in other words identity of
minds ,example :A owns two house one at Delhi and other at Bombay he offers B to sell
one house intending it as the house of Bombay and B accepts the offer thinking the
house of Delhi there is no consensus or identity of minds hence there is no contract

2) Intention to create legal relation: Agreement must be legal, that it should be entered
to create legal relationship. Agreement should not be social otherwise it will not create
legal binding and will not be contract.
Example……..A invites B for a dinner, if B do not co me for dinner. A cannot go to court to
recover his losses and damages. But if A agrees to sell his scooter in 5000 to B and B agrees to
buy scooter in 5000.but don’t buy later on.. Then A can sue B for the breach of contract and
compel him to pay damages because it’s legal agreement.

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 3) Lawful consideration: An agreement must be supported by
consideration .consideration means something in return .Both the parties must get
something in return.
Example: If A sell his house for rs 70 lakhs to B, for A the consideration is amount 70 lakhs,
whereas for B the consideration is the house. Both are getting something, but it must be lawful.
i.e it should not be fraudulent , unlawful ,oppose to public policy . Example A promises to pay
10000 B in consideration of murdering C .the consideration is unlawful and hence the
agreement is illegal.

4) Capacity of parties: Every person is competent to contract who is a) of a major b)

sound mind c) not disqualified by law to enter into contract. Therefore contract made
by minor or unsound person is not a contract

5) Free consent; for a valid contract the parties must give their consent freely. Consent
must be not obtained by force, fraud, misrepresentation, coercion or undue influence.
Example …If on gunpoint a person ask to sell his property for half the price, then here
the consent is not free consent and hence the agreement will be void.

6) Lawful object: An agreement must be made for a lawful purpose.it should be

fraudulent, unlawful, immortal, or oppose to public policy. All this type of agreement are
not enforceable by law. A promise to pay 5000 to B for letting him to run a brothel, its
illegal because object is illegal and immoral.

7) Not expressly declared void: there are so many such agreement which are expressly
declared void because there are not in public interest, example A promise to pay 600 to
B if its rain on Tuesday.

8) Possibility of performance: There should be possibility of performance in contract.

The contract of doing impossible things are not enforceable by law .example A promise
B to pay 500 rs if runs at the speed of 500km per hour. Which is impossible so the
agreement is void .

Definition of Agreement
Definition: In legal parlance, the word ‘agreement’ is used to mean a promise/commitment or a
series of reciprocal promises which constitutes consideration for the parties to contract.

In an agreement, one person offers or proposes something to another person, who in turn
accepts the same. In other words, offer plus acceptance amounts to the agreement, or we can
say that an accepted proposal is an agreement.

What is a Promise?

The party to the agreement, to whom the offer is given or proposal is made, gives his/her assent
in this regard for mutual consideration, the offer is considered as accepted, which results in a
promise.

What are Reciprocal Promises?

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 In the Contract Act, the word ‘reciprocal’ refers to ‘mutual or give-and-take’. Hence, ‘reciprocal
promise’ is the promise which results in consideration or part thereof, for the parties to the
agreement.

Characteristics of Agreement

The main characteristics of the agreement are discussed below:

1. Plurality of Persons: To constitute an agreement, at least two persons should be there, as one
person cannot make an agreement with himself/herself.
2. Consensus ad idem: It is a Latin term, which implies “Concurrence of Minds”, i.e. when in an
agreement there is a common understanding between the parties with respect to the terms and
conditions of the agreement.
This means that the parties to the agreement must agree upon the same thing in the same sense,
as it was intended, with respect to their corresponding rights and duties, concerning the
performance of promises in the past or future.

Elements of Agreement

Basically there are two key elements of the agreement, which are discussed as under:

 Offer/Proposal: A person makes an offer, when he/she expresses to another person his/her
willingness to undertake an obligation, in exchange for a promise, act or abstinence. The person
who expresses his/her willingness or the one who makes the offer is known
as offeror or proposer, whereas the person to whom the offer is made, is regarded as
the offeree.
Offer made by the offeror must be clear, i.e. the terms concerning the offer must be certain. In
addition to this, the offer should be communicated to the offeree, which is considered as
complete when the offeree comes to know about it.

 Acceptance: As the name signifies, when the offeree gives his/her assent to the offeror, either
expressly or impliedly to receive or undertake something which is proposed to him/her, it is
considered as acceptance. It is required to be communicated to the person who makes the offer,
in the prescribed mode, within a reasonable time. It must be unqualified and absolute.
Further, when the offer is made to a particular person, it is required to be accepted by that
specific person only. However, in case of a general offer, it is open to all and anyone can accept
it.

Examples

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1. Alex offers to sell his Royal Enfield to Ben for Rs. 80,000. So, when Ben accepts the offer, it
becomes an agreement.
2. John orders pizza from Domino’s, which is executed by Domino’s by sending pizza at the given
address. In this case, John’s order for pizza results in an offer, which was accepted by Domino’s
by sending Pizza, which constitutes an agreement.
3. Alpha Ltd. sends an offer letter with respect to a job opening to Peter when the offer letter is
accepted and signed by Peter, it amounts to an agreement.
The term ‘agreement’ is broader in comparison to ‘contract‘, as in “Every contract is an
agreement, but vice versa is not possible”. This is because, all the contracts, contains the
elements of the agreement, i.e. offer and acceptance, however, not all the agreement contains
the main element which constitutes a contract, i.e. Legal enforceability. So, we can say that every
agreement is not a contract

DIFFERENT TYPES OF CONTRACT

 Classification of the contract according to validity.

 Classification according to formation.
 Classification according to the performance.

Classification of the contract according to validity

1) Valid contract:
A contract which fulfil all the essential element of valid contract such as
1) Offer an acceptance 2) legal relationship
3) Lawful object 4) lawful consideration
5) Capacity 6) free consent
7) Registration and writing 8) certainty
9) Possibility of performance
as said to be a valid contract which are enforceable by law by both the parties .such
contract are called valid contract.
2) Void contract or invalid contract:
It is an agreement without any legal effect. A contract may be void from very beginning or it
may become void subsequently. A void contract cannot be enforced by either party .It is wrong

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 to say void contract because when the contract is void it is not a contract at all .the right term is
void agreement. Example an agreement with a particular country is valid until there is peace
treaty with that country if war breaks out between the two countries then agreement will
become void.
3) Voidable contract: An agreement which is enforceable by law at the option of one or
more parties .thereto its voidable contract but not at the option of the other or others is
voidable contract. A contract is voidable when one of the parties to the contract has not
exercise his free consent examples of voidable contract are those which are induced by
coercion undue influence fraud or misrepresentation .The person whose consent
was not freely given may avoid the contract .It follows that such contract is good and
valid until it is avoided. Once it is avoided it becomes void. But if the party choose to
accept it the contract continues to be valid.
Example Mr A promises to sell his bungalow to Mr B for rs 50,000 the consent of Mr A ids
obtain by coercion. The contract is voidable at the option of me A as his consent to the
contract was not free. Mr A may cancel the contract or elect to be bound by it. If he chooses
to cancel it, it becomes a void contract. But if he elects to confirm it, it becomes a valid
contract.
Difference between Void and Voidable Contract

Basis Void Contract Voidable Contract

Definition It means contract which ceases to be It means an agreement enforceable by law, by one
enforceable. or more parties.

Nature Valid when made but subsequently It remains as voidable until cancelled by the party
becomes unenforceable.

Right or No legal remedy is available for the Aggrieved party has a remedy to cancel the
Remedy void contract. contract.

Performance Party cannot demand the If aggrieved party does not cancel it within a
performance of contract. reason-able time, performance can be demanded.

Reason Contract becomes void due to If consent is not obtained freely then it is regarded
change in law or circumstances. as a voidable contract.

Damages Party cannot claim damages. Party can demand damages in certain cases.

4) Unenforceable contract: An unenforceable contract is the contract which is otherwise

valid, but cannot be enforced due to some technical defect. Example if a contract
requiring registration is not registrated it would be unenforceable. Such a contract may
become enforceable in future its technical defect is rectified.
For example a contract is under stamped, the contract is unenforceable but if the necessary
stamp is permitted to be affixed, and it is actually affixed also the contract becomes
enforceable.

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Classification according to the formation.

When it comes to business contracts, there are generally three different types: express, implied,
and quasi-contracts.

A contract is a legally enforceable agreement between two or more parties. In many cases, a
contract is an actual written document, signed by both parties. But this is not always necessarily
the case.

Express contract = Express contracts are made by either written or oral agreement of the two
parties. Written contracts are preferred in many types of business agreements because they
offer both parties the most legal protection. In some cases, business contracts must be in
writing, such as certain sales agreements or lease agreements. Express contracts can also be
formed by oral agreement when a written agreement is not required by the statute of frauds
Implied contract= an implied contract is an agreement created by action of the party involved,
but it is not written or spoken. This is the contract assumed to have been drawn.in this case
there is neither written record nor any actual verbal agreement .A form of a implied contract is
an implied warranty provided automatically by law. Any implied warranty means that when a
product is purchased, it is guaranteed to work for its ordinary purpose.
For example a refrigerator is fit to keep food cool, if refrigerator does not work properly then
responsibility will implied over the manufacturer to replace it.

Quasi contract= Although a quasi-contract is considered a type of contract and functions to

achieve the same result as a contract would in many instances, it is not actually a contract in the
traditional sense. Rather, a quasi-contract is created by a court in order to avoid unjust
enrichment.

Quasi-contracts are typically used in situations where the absence of an express or implied
contract will create an unjust result. A quasi-contract is a form of equitable relief, allowing a
plaintiff to recover the value of a benefit conferred upon a defendant who would not otherwise
be obligated to pay.

Learn more about drafting, enforcing, and understanding business contracts at FindLaw's
section on Business Contracts and Forms.

Under certain circumstances a person may receive a benefit to which the law regards another
person as better entitled or for which the law consider he should pay to the other person even
though there is no contract between the parties. Such relationship are called as quasi contract.
Quasi is a Latin word which means to recover the expenses made on behalf of others.
Example= if A finds B cows and feed it till he finds the owner. A is legally entitled
to recover the cost of feed in the cow though there is no contract between A and
B.

Classification according to the performance

There are various types of contract, one such type are contacts based on their performance. The
basis for this type is whether the contract is performed or still to be performed. Accordingly, the
two types are known as executed contracts and executory contracts. Let us learn more.

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Executed Contracts: A contract between two or more parties is said to be executed when the act
or forbearance promised in the contract has been performed by one, both or all parties. Basically,
it means that whatever the contract stipulated, has been carried out. Thus the contract has been
executed.

Executed contract= this is also called as unilateral contract in which one party to the contract
has performs his part at the time the contract and an obligation is outstanding only against the
other.
Example= A has paid rs 500 to B in consideration of which , B promised to deliver the book to A.
B’s part to deliver the book is outstanding while A has performance his part. This is an executed
contract

Let us see an example of an executed contract. Alex goes to the local coffee shop and buys a cup of
coffee. The barista sells her the coffee in exchange for the cash payment. So it can be said that this is
an executed contract. Both parties have done their part of what the contract stipulates.

In most executed contracts the promises are made and then immediately completed. The buying of
goods and/or services usually falls under this category. There is no confusion about the date of
execution of the contract since in most cases it is instantaneous.

Executory Contract

In an executory contract, the consideration is either the promise of performance or an obligation.

In such contracts, the consideration can only be performed sometime in the future, hence the name
executory contract. Here the promises of consideration simply cannot be performed immediately.
Executory contract = This is also called as bilateral contact, in which both the obligation are
outstanding. A promises to B to pay rs500 in consideration of B’s promise to deliver a book.
Both the promises are outstanding this is called executory contract.
The best example of an executory contract is that of a lease. All the conditions of a lease cannot be
fulfilled immediately. They are performed over time. Similarly, say Alex decides to tutor some
students in Physics. They pay her Rs 2500/- at the start of the month. But here the contract isn’t
executed since Alex has to still carry out her promise. So such a contract is an executory contract.

Now even in executory contracts, there are two types, namely unilateral and bilateral contracts. Let
us take a look at both times.

Unilateral Contracts

As the name suggests these are one-sided contracts. It usually comes into existence when only one
party makes a promise, which is open and available to anyone who wishes to or can fulfil the said
promise. The contract will only be fulfilled once someone fulfils the promise.

A unilateral contract is a contract created by an offer than can only be accepted by performance.

Overview

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 In a unilateral contract, there is an express offer that payment is made only by a party's
performance. Another example of a unilateral contract is a reward or a contest.
In a unilateral contract, the offer or may revoke the offer before the offeree's performance
begins. Typically the revocation needs to be express.
Similar to contract law in general, specific guidelines on unilateral contracts are governed by
state laws, rather than federal laws.

Bilateral Contracts: By contrast, a bilateral contract is one that has two parties. It is a traditional
type of contract most commonly known and occurring. Here both parties agree to the terms of the
agreement and thus enter into a contract. Hence it is also known as a reciprocal contract

In bilateral contracts, both parties have usually agreed to a time frame to carry out the said
contract. For example the contract of sale of a house. The buyer pays a down payment and agrees
to pay the balance at a future date. The seller gives possession of the house to the buyer and agrees
to deliver the title against the specified sale price. This is a bilateral contract

Consideration and essential Consideration

 CONSIDERATION plays a very significant role in the contract.

 Section 10 of the Indian Contract Act enumerates (mentions) it as one of the essentials
to a valid contract.
 There can be no agreement without consideration. According to section 25 of the
Indian Contract Act, an agreement without consideration is void.
According to section 2(d) of the Indian Contract Act, when at the desire of the promisor, if the
promisee or any other person:

o has done or abstained from doing (past),

o does or abstains from doing (present),
o promises to do or abstains from doing (future),

Such an act or abstinence is known as consideration.

Essentials of a Valid Consideration

The essentials of a valid consideration are derived from the definition of ‘consideration’ given
under section 2(d) of the Indian Contract Act, 1872. They are:-

1. Give at the desire of the promisor.

2. Given by the promisee or any other person.
3. It may be in the past, present or future.
4. It must be real, certain and lawful.
5. It may be positive or negative.
6. It need not be adequate.
The six essentials of a valid consideration are explained below in detail.

1. Given at the Desire of the Promisor.

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The consideration should be given at the desire of the promisor, not that of the third person.
The act done at the plaintiff’s desire may be of no significance or personal benefit to the plaintiff
– it will be considered a good consideration.

In Durga Prasad vs Baldeo 1880, the defendant spent some money on construction at the desire
of the district’s collector. Plaintiff promised to pay commission to the defendant on articles sold
by him in the market in which he occupied a shop.

In a suit by the defendant, it was held that there was no consideration for the promise made by
the plaintiff and hence no contract as he had not constructed that market at the plaintiff’s
instance.

1. Given by the Promisee or Any Other Person.

In order to constitute legal consideration, the act or abstinence forming the consideration for
the promise must be done at the desire or request of the promisor. Thus acts done or services
rendered voluntarily, or at the desire of third party, will not amount to valid consideration so as
to support a contract.

The consideration doesn’t need to be given by the promisee. It may come from any other person
also. It is immaterial as to who furnished it.

In Chinnaya vs Ramayya, an old lady gifted her entire property to her daughter under the
condition that she would give annuity to her uncle. Annuity means paying someone a fixed sum
of money each year, typically for the rest of their life. She agreed to pay annuity but stopped
after some time and filed a plea that no consideration was moved by her uncle. The court
rejected the plea and held that indirect consideration was already moved by her aunt.

3. Consideration May Be Past, Present or Future.

The past, present, and future nature of the consideration can be inferred from the definition of
‘consideration’ as given under section 2(d) of the Indian Contract Act.A consideration is
called past consideration when the act is done before any promise is made.

Example: A renders his service to B, and B promises to pay a sum of ₹500 for the service after a
month. This is past consideration.

When consideration is given simultaneously with the promise is called present consideration.
It is also known as executed consideration. Example: Sale of an article in cash.

When a promise is made to do or abstain from doing something in future, it is called future
consideration. It is also known as executory consideration. It is a promise for a promise.

Example: A agrees to sell B 10 quintals of wheat at ₹10000 when they will be harvested.

4. It Must Be Real, Certain and Lawful:In a contract where consideration is unreal, uncertain
or unlawful, such contract is void.

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If A agrees to sell his car to B at whatever price he wants to pay is an uncertain consideration.

If B promises to pay ₹10000 to A to beat up C, it is an illegal consideration.

5. Consideration May Be Positive or Negative: There should be some act or abstinence.

Consideration may be positive when the promisee does something at the express wish of the
promisor. Consideration may be negative when the promisee is abstained from doing something
at the wish of the promisor.

6. It Need Not Be Adequate: Consideration need not necessarily be adequate. The law provides
that there should be a consideration for a valid contract. It may or may not be adequate. The
adequacy of consideration is for the parties to consider at the time of agreement. A contract
cannot be held invalid on the grounds of the inadequacy of consideration. For
instance, A decides to sell his wheat produce valued at ₹10000 for ₹2000 to B. Such agreement
will be deemed to be a contract if A has free consent.

Free Consent. Legality and Validity of Contracts.

There have to be two parties to a contract, who willingly and knowingly enter into an agreement.
But how does the law determine if the parties are both these things? This is where the concept of
free consent comes in. Let us learn more about free consent and the elements vitiating free consent.

Free Consent

In the Indian Contract Act, the definition of Consent is given in Section 13, which states that “it is
when two or more persons agree upon the same thing and in the same sense”. So the two people
must agree to something in the same sense as well. Let’s say for example A agrees to sell his car to
B. A owns three cars and wants to sell the Maruti. B thinks he is buying his Honda. Here A and B
have not agreed upon the same thing in the same sense. Hence there is no consent and
subsequently no contract.

Now Free Consent has been defined in Section 14 of the Act. The section says that consent is
considered free consent when it is not caused or affected by the following,

1. Coercion

2. Undue Influence

3. Fraud

4. Misrepresentation

5. Mistake

Elements of Free Consent

1] Coercion (Section 15)

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Coercion means using force to compel a person to enter into a contract. So force or threats are used
to obtain the consent of the party under coercion, i.e it is not free consent. Section 15 of the Act
describes coercion as

 committing or threatening to commit any act forbidden by the law in the IPC

 unlawfully detaining or threatening to detain any property with the intention of causing any
person to enter into a contract
For example, A threatens to hurt B if he does not sell his house to A for 5 lakh rupees. Here even if B
sells the house to A, it will not be a valid contract since B’s consent was obtained by coercion.

Now the effect of coercion is that it makes the contract voidable. This means the contract is
voidable at the option of the party whose consent was not free. So the aggravated party will decide
whether to perform the contract or to void the contract. So in the above example, if B still wishes,
the contract can go ahead.

Also, if any money have been paid or goods delivered under coercion must be repaid or returned
once the contract is void. And the burden of proof proving coercion will be on the party who wants
to avoid the contract. So the aggravated party will have to prove the coercion, i.e. prove that his
consent was not freely given.

2] Undue Influence (Section 16)

Section 16 of the Act contains the definition of undue influence. It states that when the relations
between the two parties are such that one party is in a position to dominate the other party, and
uses such influence to obtain an unfair advantage of the other party it will be undue influence.

The section also further describes how the person can abuse his authority in the following two
ways,

 When a person holds real or even apparent authority over the other person. Or if he is in a
fiduciary relationship with the other person

 He makes a contract with a person whose mental capacity is affected by age, illness or
distress. The unsoundness of mind can be temporary or permanent
Say for example A sold his gold watch for only Rs 500/- to his teacher B after his teacher promised
him good grades. Here the consent of A (adult) is not freely given, he was under the influence of his
teacher.

Now undue influence to be evident the dominant party must have the objective to take advantage
of the other party. If influence is wielded to benefit the other party it will not be undue influence.
But if consent is not free due to undue influence, the contract becomes voidable at the option of
the aggravated party. And the burden of proof will be on the dominant party to prove the absence
of influence.

3] Fraud (Section 17)

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Fraud means deceit by one of the parties, i.e. when one of the parties deliberately makes false
statements. So the misrepresentation is done with full knowledge that it is not true, or recklessly
without checking for the trueness, this is said to be fraudulent. It absolutely impairs free consent.

So according to Section 17, a fraud is when a party convinces another to enter into an agreement by
making statements that are

 suggesting a fact that is not true, and he does not believe it to be true

 the active concealment of facts

 a promise made without any intention of performing it

 any other such act fitted to deceive

Let us take a look at an example. A bought a horse from B. B claims the horse can be used on the
farm. Turns out the horse is lame and A cannot use him on his farm. Here B knowingly deceived A
and this will amount to fraud.

One factor to consider is that the aggravated party should suffer from some actual loss due to the
fraud. There is no fraud without damages. Also, the false statement must be a fact, not an opinion.
In the above example if B had said his horse is better than C’s this would be an opinion, not a fact.
And it would not amount to fraud.

4] Misrepresentation (Section 18)

Misrepresentation is also when a party makes a representation that is false, inaccurate, incorrect,
etc. The difference here is the misrepresentation is innocent, i.e. not intentional. The party making
the statement believes it to be true. Misrepresentation can be of three types

 A person makes a positive assertion believing it to be true

 Any breach of duty gives the person committing it an advantage by misleading another. But
the breach of duty is without any intent to deceive

 when one party causes the other party to make a mistake as to the subject matter of the
contract. But this is done innocently and not intentionally.
The last factor of mistake will be covered by the next article.

Q: What are the effects of fraud on a contract?

Ans: When a contract is entered into via fraud, the defrauded party can

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 i. Rescind the contract within a reasonable time

ii. Sue for damages

iii. Can insist the other party to perform the contract on the condition that he shall be put in the
position in which he would have been if the false statement had been made true.

Discharge of contracts.
Discharge of contract refers to the way in which it comes to an end. A contract is discharged
when the obligation created by it comes to an end.
 Discharge of the contract means termination of the contractual relationship between the
parties.
 A contract is said to be discharged when it fails to operate.

Contract may be discharged or terminated in any of the following ways.

1) By performance: performance means fulfilling the obligation of the contract. A
party who performs contract can get discharged from it.
2) By agreement or consent: the parties may agree to terminate the existence of the
contract by any of the following ways
a) By novation: novation means substitution of the new contract in place of old
existing contract. New contract may be either between the same parties or
between different parties, the consideration being mutually the discharge of the
old contract.
Substitution of the contract with the new terms on the old contract between the same parties
Substitution of the new party for an old one the contract remains the same. Promise will be on
the third party for the performance of the contract. Original promisor is released of the
obligation under the old contract.
A owes money to B under a contract it is agreed between A B and C that B shall henceforth
accept C as his debtors instead of A. the old debt of A to B is as end and a new debt from C to B
has been contracted.
Novation can take place only with consent of all the parties.it is not compulsory, as a result of
novation old contract will be completely discharge and law will not entertain any action based
upon on the terms of old contract.
Rescission: rescission means cancellation of the contract. A contract can be rescinded by
mutual consent or by aggrieved party, party whose consent is not free.
ALTERATION: Alteration means changes in term of original contract by mutual consent when it
is done by the consent of both the parties
 The parties are lawfully bound in the performance of the altered contract
and original contract get discharge.
 Alteration can be regarding time, place, quantity or price etc.
d) remission: acceptance of a lesser or delayed fulfilment of a promise by the promisee is called
a remission or waiver.
 A owes B rs 5, 00,000 to B. B is in urgent need of money and agree on term with A to pay
the amount 4,00,000 before the decided time .in discharged of the contract with whole
amount.

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3) By impossibility of performance
a) Non-occurrence of an event: if a contract is based on occurrence of the event the non-
occurrence of the event will make the contract void.
b) Outbreak of war: All contract made with an alien enemy during war will be void.
Even when the parties make the contract when the relations between the counties are friendly,
the outbreak of war makes the performance of the contract impossible and hence it will can
discharged.
d) Discharge by lapse of the time: If the contract is to be performed in a specific time, each
party to it must have to perform his promise within that stipulated time .otherwise the contract
get discharged.
If a debtor does not pay his debt by the agreed date, the creditor may file the suit
within 3 yrs. of time if hi dose not sue within that period he losses the legal right
to claim the debt under the limitation act .the debtor is not lawfully bound to pay
e) By the sudden death or the disablement of the parties to the contract.

3) By operation of law:
A Contract gets discharged or gets terminated by operation of other laws.
a) Merger: merger implies to the inferior rights accruing to the party under a contract merges
into superior rights accruing to the same party under the same or some other contract of the
merger is said to take place. When the lesser of an immovable property becomes the legal
owner of the property the lease deed gets terminated
 In merger the parties to the contact must be same.
 There must be no change in subject matter of the contract.

b) By unauthorised alteration
e) By insolvency: an insolvent is released from performing his part of the contract by
law. Order of discharged, however gives a new lease of life to the insolvent and he is
discharged from all obligation arising from all his earlier contracts.
Discharged by breach of contract: A breach of contract occurs when one party refuses or fails
to perform his or her part of the contract or by his or her act makes it impossible to perform his
obligation under contract. In breach of contract the aggrieved party gets rights to proceed
against the part at fault.
 The parties to the contract must either perform or offer to perform their respective
promises unless such performance is dispensed or excused under the provision of the
act or any other law

 In the contract the agreement being enforceable by law each party to the contract is
legally bound to perform his part of the obligation non-performance of the duty
undertaken by the party in a contract amounts to the breach of contract.

a) Actual breach: a party to the contract refuses or fails to perform his part of the
contract at the time stipulated for the performance

pg. 16
  Assume that A agrees to deliver 1000 gloves in two instalment on 1st may
and 3rd may. but he refuses to deliver on same date of delivery is said to be
actual breach of contact
 During the course of the performance a party has performed a part of the
contact and refuses or fails to perform the remaining part of the contract.
 500gloves delivered on 1st may and remaining 500 gloves refuse to deliver.
b) Anticipatory or constructive breach: anticipatory breach of contract occurs when the
party declares his intention of not performing the contract before his performance is
due. Therefor when a party refuses to perform a contract even before it is due date:
or performance it is called anticipatory breach….
Arbitration: Meaning, Essential and Effects.
ARBITRATION. Meaning of Arbitration

Arbitration is the process in which a neutral third party listens to the disputing parties, gathers
information about the dispute, and makes a decision to be binding on both the parties. It differs
from conciliation in the sense that in arbitration, the arbitrator gives a decision on a dispute
while in conciliation; the conciliator merely facilitates the disputing parties to arrive at a
decision.

Qualities of an arbitrator concern the individual's attributes. There are a number of generic
attributes relevant to most good arbitrators, such as language abilities and experience,
reputation for professionalism, integrity, impartiality and decisiveness.

Essential Elements of Arbitration

1) Validity: An arbitration agreement, including an arbitration clause in an agreement, is a

contract. It must be legally valid under the Indian Contract Act, 1872. A contract, to be
legally valid under said act, must have following

i)Parties must be legally competent to enter into contract

ii) Consent of parties must not be influenced by fraud.

iii) The object of the contract must be lawful

iv) The contract must be capable of being carried into effect. Therefore, it should not be
uncertain

2 Writing & Intent: An arbitration agreement is only valid if it is in writing. Both parties should
be completely intent on referring the matter to arbitration.

3) Dispute: The arbitration agreement can be in respect of present or future dispute. Such
dispute must arise out of the defined legal relationship. A dispute not arising from the legal

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 relationship is beyond the scope of arbitration. The legal relationship can be contractual or non-
contractual, arising out of a breach of statutory

Types of Arbitration in India, there are two types of arbitration

1) Voluntary Arbitration: In voluntary arbitration, the arbitrator is appointed by both the

parties through mutual consent. The arbitrator acts when the dispute is referred to him. In
order to promote voluntary arbitration, Government of India constituted National Arbitration
Promotion Board in 1967. The Board promotes the concept of voluntary arbitration by
providing updated list of arbitrators, booklets containing procedures and positive sides of
voluntary arbitration.

2) Compulsory Arbitration: When the disputing parties exhaust other means of settling their
disputes, the Government can force the parties for compulsory arbitration, or the Government
may refer the dispute for arbitration on the written request of both the parties. The award of the
compulsory arbitration is binding on both the parties where the dispute has been referred to
arbitration, the Government may prohibit any unilateral action by any of the competing parties.

The award

After the hearing, the tribunal will produce its award. This will set out the decisions it has
reached on the issues between the parties. Unless the award is challenged, it determines the
rights and obligations of the parties.

Challenging/appealing the award

The grounds on which an award can be challenged or appealed vary depending on factors such
as the terms of the arbitration agreement, the arbitral ‘seat’ and the institutional rules. A
tribunal’s findings of fact can rarely be challenged. However, if the tribunal has not conducted
itself properly, has answered questions it should not have answered or, in some cases, made an
error of law, a party can go to court to ask for the award to be set aside or sent back to the
tribunal to make its decision properly.
Enforcement
One of the main attractions of arbitration is that awards can typically be enforced in most
countries worldwide without a rehearing of the issues and after following a relatively short
process. The realities of enforcement vary depending on such factors as:
 The jurisdiction in which enforcement is likely to be sought
 The status of the party against whom enforcement is sought eg certain assets may be immune
from execution if the award is against a State
 Whether it is possible to take steps to ensure the other side does not get rid of its assets to
frustrate enforcement.
If cash in the bank is important, the prospects of enforcement should be considered at the outset
of any dispute.
LIL

Meaning and Definition of Conciliation

Conciliation is a process by which representatives of workers and employers are brought
together before a third person or a group of persons with a view to persuade them to come to a

pg. 18
mutually satisfying agreement. According to The International Labour Organisation,
"Conciliation is the practice by which the services of and party a used in a dispute as a means of
helping the disputing parties to reduce the extent of their amicable settlement or agreed
solution.
The objective of this method is to settle disputes quickly and prevent prolonged work
stoppages if they have already occurred. The essential hallmarks of this approach are
1) The conciliator tries to bridge the gulf between the parties, possible.
2) If he does succeed, he tries to reduce the differences to the extent possible
3) He persuades parties to take a fresh look at the whole issue
4) He oily advances possible lines of solution for consideration by the disputants.
5) The conciliator need not follow the same path in each case

Procedure of Conciliation
1) Commencement of the conciliation proceedings [Section 62]: The conciliation proceeding are
initiated

by one party sending a written invitation to the other party to conciliate. The invitation should
identify the subject of the dispute. Conciliation proceedings are commenced when the other
party accepts the invitation to conciliate in writing. If the other party rejects the invitation, there
will be no conciliation proceedings. If the party inviting conciliation does not receive a reply
within thirty days of the date he sends the invitation or within such period of time as is specified
in the invitation, he may elect to treat this as rejection of the invitation to conciliate. If he so
elects he should inform the other party in writing accordingly.

2) Submission of Statement to Conciliator [Section 65]: The conciliator may request each
party to submit to him a brief written statement. The statement should describe the general
nature of the dispute and the points at issue. Each party should send a copy of such statement to
the other party. The conciliator may require each party to submit to him a further written
statement of his position and the facts and grounds in its support. It may be supplemented by
appropriate documents and evidence. The party should send the copy of such statements,
documents and evidence to the other party. At any stage of the conciliation proceedings. the
conciliator may request a party to submit to him any additional information which he may deem
appropriate

3) Conduct of Conciliation Proceedings [Section 69(1), 67(3)]: The conciliator may invite the
parties to meet him. He may communicate with the parties orally or in writing. He may meet or
communicate with the parties together or separately. In the conduct of the conciliation
proceedings, the conciliator has some freedom. He may conduct them in such manner as he may
consider appropriate. But he should take in account the circumstances of the case, the express
wishes of the parties, a party's request to be heard orally and the need of speedy settlement of
the dispute.

pg. 19
4) Administrative assistance [Section 68]: Section 68 facilitates administrative assistance for
the conduct of conciliation proceedings. Accordingly, the parties and the conciliator may seek
administrative assistance by a suitable institution or the person with the consent of the parties.

Legal Effect of Conciliation

The legal effect of conciliation is as under,

1. The settlement agreement signed by the parties shall be final and binding on the parties.
[Section 73(1)]
2. The agreement is to be authenticated by the conciliator. [Section 73(4)]
3. The settlement agreement has the same status and effect as if it were an arbitral award
rendered by the arbitral tribunal on agreed terms. The net result is that the settlement can be
enforced as a decree of court virtue of Section 36 of the Act (Section 74 read with section. 30].

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