Legal Environment for Business

MBA 202-18 Unit 1 Notes

Introduction to Business Law:
The law affects every aspect of our lives; it governs our conduct from the
cradle to the grave and its influence even extends from before our birth to
after our death. Law is essential to any society in that it provides the rules by
which people and businesses interact. Law affects almost every function and
area of business.
What is Law?
The law is a set of rules, enforceable by the courts, which regulate the
government of the state and govern the relationship between the state and its
citizens and between one citizen and another.
OR
Rules made by authority for the proper regulation of a community or society,
or for correct conduct in life.
Nature of Law:
Law is, at one and the same time, essentially authoritative and
essentially ideal.
Law necessarily comprises both a real or factual and an ideal or critical
dimension.
A central element of its ideal dimension is a claim to correctness, which
includes a claim to moral correctness.
A central element of the real dimension of law is coercion or force.
"Ignorance of law excuses no one", this is a legal principle holding that a
person who is unaware of a law may not escape liability for violating that law
merely because one was unaware of its content.
The Constitution of India is the supreme law of India. It is the longest written
constitution of any sovereign country in the world. It came into effect on 26
January 1950.
Business law encompasses all of the laws that dictate how to form and run a
business. This includes all of the laws that govern how to start, buy, manage
and close or sell any type of business. Business laws establish the rules that all
businesses should follow.
Characteristics of Business law:
• Defining general rules of commerce;
• Protecting business ideas and business assets;
• Providing mechanisms that allow business people to determine how they will
participate in business ventures and how much risk they will bear;
• Ensuring that losses are borne by those responsible for causing them; and
• Facilitating planning by ensuring that commitments are honoured.
Sources of Business law:
Customs of History (Trade)
Mercantile Law
Principles of Equity
Law of Merchants
British Statutory law
Indian Statutory laws
The main sources of business law in India are:
Statutory Law:
Legislation or statutory is the most important source of law. Legislation is the
making of law. But when we use the term legislation as a source of law, we
mean law making by statutory authority. Both parliament and State assemblies
have enacted a number of legislations that cover various aspect of business.
In England, a distinction is made between statute law or written law and the
common law. Only the former is called legislation. In India, there is no common
law. Here legislation or enacted law is different from customary or personal
law.
English Mercantile Law:
The English mercantile law constitutes the foundation on which the super
structure of the Indian mercantile law has been built. Our sales of goods Act,
for instance has been taken from the English sales of goods of Act. Even now,
despite the enactment of various statutes relating to matter falling with the
purview of the mercantile law, our courts generally take recourse to the
English law where some principles are not expressly dealt within the Act, or
where there is ambiguity.
Case Law:
The past judicial decisions of courts are important source of law. Sometimes
there is no statutory provisions which can answer a legal question raised in a
law suit. In such cases, the court will look into previous court decision on
similar matters to find the relevant law.
Precedents (past judicial decisions):
In common law legal systems, a precedent or authority is a legal case that
establishes a principle or rule. This principle or rule is then used by the court or
other judicial bodies use when deciding later cases with similar issues or facts.
Indian statue law:
Statutory law or statute law is written law set down by a body of legislature or
by a singular legislator (in the case of absolute monarchy). This is as opposed
to oral or customary law; or regulatory law promulgated by the executive or
common law of the judiciary. Statutes may originate with national, state
legislatures or local municipalities.
Mercantile law is also known as “Lex Mercatorian”, it is the Latin expression
for a body of trading principles used by merchants throughout Europe in the
medieval. Literally, it means “merchant law". It evolved as a system of custom
and practice, which was enforced through a system of merchant courts along
the main trade routes.
Nature of Business Law:
It is a conduct, culture tradition and religion developed by humans.
It creates rights and duties
It ensures all the people have specific power and responsibility
it maintains peace and security
It provides justice and administers punishment
It always aims to give justice to the victim and punishment to the law
breakers
It regulates day to day activities
Regulates internal activities
Defined by the (Supreme) Court
Scope of Business law:
Constitutional Law
Criminal Law
Civil Law
Industrial Law
Labour Law
Commercial Law
[Extend scope]
MRTP act,1969
Environmental Protection Act, 1986
Patent Act, 1976
SICA Act, 1985
Consumer protection Act, 1986
BASIC DEFINITIONS TO BE COVERED UNDER THE SUBJECT:
CONTRACT:
Meaning: Sec.2 (h) “An agreement enforceable by law is a contract.”
Therefore, a contract has two important elements, one is the agreement, and
the other is the obligation which is enforceable by law.
AGREEMENT:
Agreement is the outcome of the consensus between the parties who enter
into a contract, i.e., the promise made between them, represents concurrence
of their minds.
(Sec.13). these would not be an agreement if the parties do agree but not on
the same thing in the same sense, i.e., consensus is not sufficient. There has to
be consensus ad idem.
Sec.2 (e) defines an agreement as “Every promise or every set of promises
forming consideration for each other”. A proposal when accepted becomes a
promise.
Example: A received Rs.10, 000 from B and promises to supply him 10 bags of
rice after 10 days. It is a promise. It shall be a set of promises if a promises to
supply 10 bags of rice after 10 days and B promises to pay him Rs.10, 000 after
the rice is supplied. Thus,
Agreement = Offer + Acceptance
OFFER (PROPOSAL):
Offer [(proposal) (Sec.2 (a)] “When one person signifies to another his
willingness to do or to abstain from doing anything with a view to obtaining
the assent of the other to such act or abstinence, he is said to make a
proposal”.
In order to create a valid contract, one party must make an offer, another
party must accept the offer, and consideration must be exchanged. The one
who makes the offer is known as the “offerer,” while the person who receives
the offer is called the “offeree.” An offer refers to a promise that one party
makes in exchange for another party's performance. In other words, it is an
invitation to enter into a contract on certain terms. 
ACCEPTANCE:
Acceptance has been defined u/s (Sec.2 (b)) as “When the person to Whom
the proposal is made, signifies his assent thereto, the proposal is said to be
accepted. A proposal when accepted becomes a promise”.
Example: A lost his Cell Phone and announced that anybody who brought his
cell phone back home would receive Rs.500 as reward. B heard the
announcement and brought the Cell Phone back home. He is said to have
accepted the proposal by doing the act required by A and hence he can
recover the reward.
PROMISSORY:
A person who makes the promise is called the, “Promissory or Offerer”. And
the person to whom the proposal is made is known as „Promisee‟ or „Offeree.
‟In case an agreement is a set of promises, then a person becomes a
promissory and promisee. Thus, if there is an offer, acceptance and consensus
ad idem between the parties, there is an agreement. However, this
agreement does not become a contract unless there is a corresponding
obligation, i.e., enforceability at law.
OBLIGATION:
(Sec.10): It is the legal duty of a person to carry out what he has promised to
do or not to do. All agreements are contracts if they are made by the free
consent of the parties competent to enter into contract, for a lawful
consideration and with a lawful object and not hereby expressly declared to be
void.
ESSENTIAL ELEMENTS OF A CONTRACT:
Capacity of the Parties:
Only those persons who are competent to enter into a contract can create
valid obligations. A minor, a lunatic, a drunkard etc., suffer from flaw in
capacity to Contract and therefore the contract made with them can’t be
enforced against them.
Free Consent:
Absence of consent does not create a legal obligation. For an agreement to
become a contract the parties to an agreement should give their consent to
the agreement out of their own free will. It should not be induced by coercion,
undue influence, fraud, misrepresentation, etc.
Lawful Consideration and Object:
Consideration means something in return, i.e., „quid pro quo. E.g., A promises
to give his bike to B for no money, here, there is no consideration, hence no
obligation. Without consideration a promise can’t be enforceable by law.
However, consideration need not be in money or in kind. It may be of an act,
abstinence, a promise to do, or not to do something. But consideration should
be lawful.
Example: A promises to pay a sum of money to B if B smuggles the object
proposed by A. In this case, there is no lawful object.
Intention to create Legal Relationship:
Social obligation can’t bring legal relationship. For example: Father promised
his son to pay Rs.100 per day for pocket expenses, however, later on, did not
pay the said amount. Therefore, if the parties do not intend to be bound by
law at the time they make promises, nothing can bind them to their promises,
later on.
Possibility of Performance:
Example: A promised B that he would make The Sun rises in the West if B pays
him Rs.1 lakh. And B agreed to it, this agreement does not create any legal
obligation as it would not be enforceable by law.
Meaning should be certain:
Example: A agrees to sell B‟s horse. There is nothing whatever to show which
horse is intended. The agreement is void for uncertainty.
Legal Formalities (If required):
An agreement to make a gift for natural love and affection should not only be
in writing but registered also (Sec. 25). In the absence of any such specific
requirement an oral agreement is as enforceable as a written agreement.
Agreements not declared Void:
Indian Contract Act has specifically declared some agreements to be not
enforceable at law e.g., Agreements in restraint of trade, Agreements in
restraint of marriage, wagering agreements etc. Thus, the law of Contract is
not the whole law of Agreements. It is the law of those agreements which
create obligations.
KINDS OF CONTRACT:
1. Valid Contract:
It is an agreement which fulfils all the essentials of enforceability and can
be enforced by either of the parties at the courts of law.
2. Voidable contract:
Sec 2(I) lays down that “An agreement which is enforceable by law at
the option of one or more of the parties thereto, but not at the option of
the other or others, is a Voidable Contract.” This arises where the
consent of one of the parties to the contract is not free. Ex., A, at the
 point of pistol makes B agree to sell his bicycle forRs.500. Here B‟s
consent is not free.
3. Void Contract:
[Sec 2(j)] “A contract which ceases to be enforceable by law becomes
void when it ceases to be enforceable. A agrees to sell his car to B for
Rs.10, 000. All essentials of a contract are fulfilled. If A refuses to sell his
car, B can go to the court and the court would enforce A‟s promise. But
if, before the delivery the car is destroyed by Tsunami, the court cannot
enforce anything and hence this contract becomes unenforceable i.e.,
void. Thus, void contract is one which was a valid contract when it was
made but becomes void later on.

Those Agreements which are void abs initio (from the very beginning)
are called Void Agreements and those which become void later on are
called Void Contracts.

INDIAN CONTRACT ACT

Meaning: “A contract is an agreement made between two (or) more parties
which the law will enforce.”
Definition: According to section 2(h) of the Indian contract act, 1872. “An
agreement enforceable by law is a contract.
According to SALMOND, a contract is “An agreement creating and defining
obligations between the parties”.
Essential elements of a valid contract:
According to section 10, “All agreements are contracts if they are made by the
free consent of the parties competent to contract, for a lawful consideration
and with a lawful object and not here by expressly declared to be void”. In
order to become a contract an agreement must have the following essential
elements, they are follows: -
Offer and acceptance: To constitute a contract there must be an offer
and an acceptance of that offer. The offer and acceptance should relate
to same thing in the same sense. There must be two (or) more persons
to an agreement because one person cannot enter into an agreement
with himself.
Intention to create legal relationship: The parties must have intention
to create legal relationship among them. Generally, the agreements of
social, domestic and political nature are not a contract. If there is no
such intention to create a legal relationship among the parties, there is
no contract between them.
Example: BALFOUR (vs) BALFOUR (1919) Facts: A husband promised to
pay his wife a household allowance of Rs 30 (pounds) every month. Later
the parties separated and the husband failed to pay the amount. The
wife sued for allowance.
Judgment: Agreements such as there were outside the realm of contract
altogether. Because there is no intention to create legal relationship
among the parties.

Free and Genuine consent: The consent of the parties to the agreement
must be free and genuine. Free consent is said to be absent, if the
agreement is induced by a) coercion, b) undue influence, c) fraud, d)
Mis-representation, e) mistake.
Lawful Object: The object of the agreement must be lawful. In other
words, it means the object must not be Illegal, (b) immoral, (c) opposed
to public policy. If an agreement suffers from any legal flaw, it would not
be enforceable by law.
Lawful Consideration: An agreement to be enforceable by law must be
supported by consideration. Consideration means “an advantage or
benefit” moving from one party to other. In other words, “something in
return”. The agreement is enforceable only when both the parties give
something and get something in return. The consideration must be real
and lawful.
Capacity of parties: (Competency) The parties to a contract should be
capable of entering into a valid contract. Every person is competent to
contract if. He is the age of majority. He is of sound mind and. He is not
dis-qualified from contracting by any law. The flaw in capacity to
contract may arise from minority, lunacy, idiocy, drunkenness, etc.,
Agreement not to be declared void: The agreements must not have
been expressly declared to be void u/s 24 to 30 of the act. Example:
Agreements in restraint of trade, marriages, legal proceedings, etc.,
Certainty: The meaning of the agreement must be certain and not be
vague (or) indefinite. If it is vague (or) indefinite it is not possible to
 ascertain its meaning. Example: „A‟ agrees to sell to „B‟ a hundred tons
of oil. There is nothing whatever to show what kind of an oil intended.
The agreement is void for uncertainty.
Possibility of performance: The terms of an agreement should be
capable of performance. The agreement to do an act impossible in itself
is void and cannot be enforceable. Example: „A‟ agrees with „B‟, to put
life into B‟s dead wife, the agreement is void it is impossible of
performance.

Necessary legal formalities: According to Indian contract Act, oral (or)

written are perfectly valid. There is no provision for contracting being
written, registered and stamped. But if is required by law, that it should
comply with legal formalities and then it should be complied with all
legal (or) necessary formalities for its enforceability.
OFFER OR PROPOSAL:
According to section 2(a) of Indian contract act, 1872, defines offer as “when
one person signifies to another his willingness to do (or) to abstain from doing
anything with a view to obtaining the assent of that other to, such act (or)
abstinence, he has said to make a proposal”.
Legal rules (OR) Essential elements of a valid offer / proposal: -
Offer must be capable of creating legal relations: A social invitation,
even if it is accepted does not create legal relationship because it is not
so intended to create legal relationship. Therefore, an offer must be
such as would result in a valid contract when it is accepted.
Offer must be certain, definite and not vague: If the terms of the offer
are vague, indefinite, and uncertain, it does not amount to a lawful offer
and its acceptance cannot create any contractual relationship.
Offer must be communicated: An offer is effective only when it is
communicated to the person whom it is made unless an offer is
communicated; there is no acceptance and no contract. An acceptance
of an offer, in ignorance of the offer can never treated as acceptance
and does not create any right on the acceptor.
Example: LALMAN SHUKLA (VS) GAURI DATT. (1913)
 Facts: „S‟ sent his servant, „L‟ to trace his missing nephew. He then
announced that anybody would be entitled to a certain reward. „L‟
traced the boy in ignorance of his announcement. Subsequently, when
he came to know of his reward, he claimed it.
Judgment: He was not entitled for the reward.
Offer must be distinguished from an invitation to offer: A
proposer/offer must be distinguished from an invitation to offer. In the
case of invitation to offer, the person sending out the invitation does not
make any offer, but only invites the party to make an offer. Such
invitations for offers are not offers in the eyes of law and do not become
agreement by the acceptance of such offers.
Example: Pharmaceutical society of Great Britain (vs) Boots cash chemists
(1953).
Facts: Goods are sold in a shop under the „self-service‟ system. Customers
select goods in the shop and take them to the cashier for payment of price.
Judgment: The contract, in this case, is made, not when a customer selects
the goods, but when the cashier accepts the offer to buy and receives the
price.
Offer may be expressed (or) implied: An offer may be made either by
words (or) by conduct. An offer which is expressed by words (i.e..,
spoken or written) is called an „express offer‟ and offer which is inferred
from the conduct of a person (or) the circumstances of the case is called
an „implied offer‟.
Offer must be made between the two parties: There must be two (or)
more parties to create a valid offer because one person cannot make a
proposal/offer to himself.
Offer may be specific (or) general: An offer is said to be specific when it
is made to a definite person, such an offer is accepted only by the
person to whom it is made. On the other hand, general offer is one
which is made to a public at large and maybe accepted by anyone who
fulfils the requisite conditions.
Example: Carlill (vs) Carbolic Ball company (1893).
Facts: A company advertised in several newspapers is that a reward of L
100 (pounds) would be given to any person contracted influenza after using
the smoke ball according to the printed directions. Once Mr. Carlill used the
smoke balls according to the directions of the company but contracted
influenza.
Judgment: she could recover the amount as by using the smoke balls she
accepted the offer.
Offer must be made with a view to obtaining the assent: A offer to do
(or) not to do something must be made with a view to obtaining the
assent of the other party addressed and it should not made merely with
a view to disclosing the intention of making an offer.
Offer must not be statement of price: A mere statement of price is not
treated as an offer to sell. Therefore, an offer must not be a statement
of price.
Example: HARVEY (VS) FACEY (1893):
Facts: Three telegrams were exchanged between Harvey and Facey. “Will
you sell us your Bumper Hall pen? Telegram lowest cash price- answer paid”.
[Harvey to Facey]. “Lowest price for bumper hall pen L 900 (pounds)”. [ Facey
to Harvey] “We agree to buy Bumper Hall pen for the sum of L 900 (pounds)
asked by you”. [Facey to Harvey]
Judgment: There was no concluded contract between Harvey and Facey.
Because, a mere statement of price is not considered as an offer to sell.
Offer should not contain a term “the non-compliance” of which may be
assumed to amount to acceptance.
WHAT IS AN ACCEPTANCE?
According to section 2(b) of the Indian contract Act, 1872, defines an
acceptance is “when the person to whom the proposal is made signifies
is assent thereto, the proposal is said to be accepted becomes a
promise”.
On the acceptance of the proposal, the proposer is called the
promisor/offeror and the acceptor is called the promise/offeree. Legal
rules as to acceptance: A valid acceptance must satisfy the following
rules: -
Acceptance must be absolute and unqualified: An acceptance to be
valid it must be absolute and unqualified and in accordance with the
exact terms of the offer. An acceptance with a variation, slight, is no
 acceptance, and may amount to a mere counter-offer (i.e.., original may
or may not accept).
Acceptance must be according to the mode prescribed (or) usual and
reasonable manner:
o If the offeror prescribed a mode of acceptance, acceptance must give
according to the mode prescribed.
o If the offeror prescribed no mode of acceptance, acceptance must give
according to some usual and reasonable mode.
o If an offer is not accepted according to the prescribed (or) usual mode.
The proposer may within a reasonable time give notice to the offeree
that the acceptance is not according to the mode prescribed.
o If the offeror keeps quiet, he is deemed to have accepted the
acceptance.
Acceptance must be given within a reasonable time:
o If any time limit is specified, the acceptance must be given with in that
time.
o If no time limit is specified, the acceptance must be given within a
reasonable time.
Example: Ramsgate Victoria Hotel Company (vs) Montefiore (1886)
Facts: On June 8th „M‟ offered to take shares in „R‟ Company. He
received a letter of acceptance on November 23rd. he refused to take shares.
Judgment: „M‟ was entitled to refuse his offer has lapsed as the
reasonable period which it could be accepted and elapsed.
It cannot precede an offer:
If the acceptance precedes an offer, it is not a valid acceptance and does not
result in a contract. In other words, “acceptance subject to contract” is no
acceptance.
Acceptance must be given by the parties (or) party to whom it is
made: An offer can be accepted only by the person (or) persons to
whom it is made. It cannot be accepted by another person without
the consent of the offeror.
It cannot be implied from silence:
Silence does not amount to acceptance. If the offeree does not respond to
offer (or) keeps quiet, the offer will lapse after reasonable time. The offeror
cannot compel the offeree to respond offer (or) to suggest that silence will be
equivalent to acceptance.
Acceptance must be expressed (or) implied: An acceptance may be
given either by words (or) by conduct. An acceptance which is expressed
by words (i.e.., spoken or written) is called „expressed acceptance‟. An
acceptance which is inferred by conduct of the person (or) by
circumstances of the case is called an „implied or tacit acceptance‟.

What Is Consideration?
Section 2(d) of the Indian Contract Act defines consideration as: ‘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 to abstain from doing something, such act or abstinence or promise
is called a consideration for the promise.’
As per this definition, consideration is something in return of a promise
which consists of:
1. an act, abstinence or forbearance,
2. done at the desire of the promisor,
3. by the promisee or any other person,
4. which can be either already executed or is in the process of
execution or may still be executory.
Thus, if at the desire of A, B agrees to paint a picture for him at an
agreed remuneration, the painting of the picture would be regarded as
consideration moving from B and the remuneration as consideration
moving from A.
Essential elements of consideration
The above elements of consideration can be elaborated as follows:
Consideration must move at the desire of the promisor   – An act or
abstinence without any request from the promisor is a voluntary
act and does not come within the definition of consideration.
 Similarly, an act or abstinence done at the request of any person
other than the promisor does not constitute consideration. In other
words, an act shall not be a good consideration unless it is done at
the desire of the promisor.
Examples:
A sees B drowning and saves his life. A cannot demand payment for his
services as it is a voluntary act on his part and B never asked him to do
so.
Consideration may move from the promisee or any other person   –
It means that so long as there is consideration for promise, it is
immaterial who has furnished it. It may move from the promisee,
or from any other person if the promisor has no objection.
Examples:
In marine insurance, broker’s undertaking to pay premium is
consideration though it moves from a third person – AIR 1926 Bom. 82
(85)
Note: A consideration moving from third party who is a minor is no consideration

Consideration is an act, abstinence, forbearance or detriment   – At

times consideration is taken as misnomer of money form of
exchange. The legal term consideration does not mean payment of
money only. The Contract Act says that the consideration can be in
the form of an act, abstinence, forbearance or detriment.
(a) Consideration as an act  – An act done by a person can constitute
consideration. Where a person executes an undertaking in favour of a
bank on the basis of which he receives a substantial benefit of having a
current overdraft account with a bank, the facility of overdraft account
cannot be said to be without consideration – AIR 1953 Tripura 10 (10).
(b)  Consideration as an abstinence – To constitute abstinence as
consideration, one must refrain or promise to refrain from doing
something that he or she is privileged to do.
Example – X promised to pay his nephew Y, a sum of Rs. 50,000 if he
would refrain from drinking, using tobacco, swearing and playing cards
for money until he becomes 21 years of age. The nephew refrained from
all the specified activities as he was requested to do but his uncle died
without making the payment. He claimed the money out of the uncle’s
estate as his legal right. Held that, he abandoned his legal right and
restricted his lawful freedom of action upon the faith of his uncle’s
agreement although it may seem that such performance actually did not
prove to be a benefit to the promisor. Such detriment however
amounted to consideration and he was granted the promised sum of Rs.
50,000.
(c) Consideration as forbearance  – Forbearance means foregoing one’s
legal right or claim. Creditor forbearing to enforce execution and
allowing time to pay at the request of the debtor is a good consideration
Example:
A promise to pay C, his law partner, Rs. 750 if C will give up his part-time
job in a dance band for the next nine months. C lives up to the terms of
the offer, but A refuses to pay. If C brings suit to recover Rs.750, A is
liable. Here again we have a unilateral contract, promise in exchange for
a negative act (or a forbearance) – the act of not playing in the band. C’s
refraining constituted both an acceptance of the offer and a legal
detriment to him; thus, we can see that A’s promise was supported by
consideration.
 (d) Consideration as detriment  – A detriment suffered by the promisee
or any other person, whether actual or prospective, can constitute a
good consideration. The ordinary contract of guarantee is good example
of detriment form of consideration. In consideration of A’s lending B
Rs.1000, C promises to repay the loan if B does not. Here C derives no
benefit, but A suffers detriment by parting with his money, and this is
enough consideration to support C’s promise provided A lends the money
at C’s request.
Example:  X, a publisher, promises Y: “If you will loan Rs. 5,000 to my
nephew for one year, I will run all your advertisements during that time
at half the regular rate.” Y makes the loan, but X refuses to provide
advertising space at the reduced rate. If Y sues X to recover damages for
breach of contract – that is, Y seeks to enforce X’s promise – X is liable.
Y’s act of making the loan to the nephew constituted not only an
acceptance of X’s offer but a detriment to Y – the parting with something
of value where he was not otherwise legally obligated to do so. Thus, X’s
promise, supported by consideration, is enforceable against him.
Note: That it is not necessary for the promisor to receive any benefit as
long as the promisee or someone else suffers a detriment.
Consideration can be past, present or future
(a) Past consideration – A past consideration consists in an act already
done by one as consideration for a promise of the other. Thus, when a
person promises to compensate another in return for what the latter had
done for the promisor in the past or before making of the promise, such
promise is said to be for past consideration, i.e. consideration which took
place in the past. Past consideration is as good as present or future
consideration. For example, A does some work for B in the month of
April without expecting any return from B. Later on, in June, B promises
to pay him some money for the work done in April. This constitutes a
valid contract as the work done by A is of the nature of past
consideration.
Example  –  “A” provided extra services to B (his master), after which B
promised him a bonus for the same. Later on, B refused to pay the bonus.
Held that, if the servants put forth extra work in consideration whereof a
bonus is subsequently promised to them by the masters, it is in law a
promise for past services which is good under Indian Law
Note: Under the English law, past consideration is no consideration. But
under the Indian Law past consideration is good consideration because of
the use of the words “has done or abstained from doing” in the definition
of “consideration”.
(b) Present (Executed) Consideration  – The consideration which moves
simultaneously with the promise is present consideration. It consists in
“doing” or “abstaining from doing something”. The best example of
present consideration is cash sale where performance by both the parties
(seller and buyer) is simultaneous. Another example is a contract of
marriage where there is simultaneous performance by both the parties.
The present consideration is also known as executed consideration
because it emphasizes on the execution part of performance. A may offer
B $10 if B runs from London to Bath. Even though B says that he will
accept A’s offer, yet until he has run from London to Bath, (i.e., B has
performed his part of contract), there is no consideration for A’s
promise. B accepts the offer and by running from London to Bath
simultaneously executes the consideration which makes A’s promise a
binding contract.
Note: Past consideration must be distinguished from the executed
consideration. The consideration (running from London to Bath) in the
above case is executed after the offer or request and simultaneously with
the acceptance. But, if A promises B $10 in consideration of having run
from London to Bath last week, the consideration is past. It is something
wholly done before the offer or request and before acceptance of the
offer.
(c) Future (Executory) Consideration – A promise to do something in
future is legal consideration. When the consideration from one party to
another is to move at some future date, it is called future consideration.
The consideration for A’s promise to B may be a promise by B to A. The
consideration is then said to be executory. If A promises to marry B in
consideration of B promising to marry A, the promise made by each is the
consideration for the promise made by the other.
Examples:
M and B enter into a contract in April under the terms of which M agrees
to build a swimming pool for B in June, B promising to pay Rs. 2,500 in
return. M later refuses to perform, and B sues him to recover damages
for breach of contract. M is liable; that is, his promise is enforceable.
1. When the promise was given by one of the partner’s for
investing certain amount in the partnership firm, it was itself
consideration for agreement. Similarly, when such partner
had also undertaken liability to bear losses, that was also
consideration for other partners on the point of bearing loss
and as such it could not be said that the agreement of
partnership was without consideration.
General Rules Regarding Consideration:
In addition to the elements of consideration, the other general rules
regarding consideration are as follows:
(1) Adequacy of consideration   – Consideration, means “something in
return”. This “something in return” need not necessarily be equal in
value to “something given”. The law simply provides that a contract
should be supported by consideration. So long as consideration exists,
the Courts are not concerned as to its adequacy, provided it is of some
value. 
(2) It must have some value in the eyes of law   – A valuable
consideration may consist either in some right, interest or property
accruing to one party or some loss or responsibility suffered or
undertaken by the other. Moreover, consideration must be certain. A
promise to give a reasonable sum in return for a service cannot be
enforced on the grounds of uncertainty.
Example – In the case of White v. Bluett 1853, the promise by a father to
release his son from an outstanding loan, if the latter refrained from
boring the father with complaints, was refused to be enforced, since the
essential elements of a bargain was lacking. The court observed that
Note: A consideration to be valid must be ‘good’ or ‘valuable’ in the
sense in which these words appear in the English law though these words
do not appear in the Indian Contract Act which speaks only of lawful and
unlawful consideration.
(3)  It must be real not illusory   – The consideration should be real, i.e. it
must not consist of impossible act or promise. It must not be illusory or
sham, e.g., to discover a treasure by magic. The impossibilities can be
categorized as:
o Physical impossibility – A promises to pay B Rs. 1,00,000 in
consideration of B bringing a star from the sky to the earth. This is
unreal because B’s promise is absurd and physically impossible.
o Legal impossibility – A owes Rs. 1,000 to B. He promises to pay Rs.
200 to C, the servant of B who in return promises to discharge A
from the debt. This is legally impossible because C cannot give
discharge for a debt due to B, his master
– Harvey v. Gibbons [1675] 2 Lev. 161.
o Illusory consideration – Illusory consideration gives impression of
consideration which is not actually there. These agreements lack
mutuality.
Example:
o S and D enter into a contract under the terms of which B promises
to buy from S all the coal he “might wish” over the next 6 months,
with S promising to sell such quantity at a specified price per ton.
 Because of the language used, intentionally or accidentally, B has
not bound himself to buy any quantity of coal at all; thus he has
incurred no detriment at all. This being true, neither promiser is
liable to the other. The result is that if B later desires some coal, he
is free to buy from whomever he wishes. Conversely, if B orders
coal from S, S ordinarily has no duty to supply it.
(4) It must be something which a promisor is not already bound to do   –
Where one is doing, or promising to do something which one is already
under an obligation to do will not form a good consideration. One can
already be bound:
(i) under a duty imposed by law: Where a person is responsible to
perform certain duty under laws of land, performance of such duties
cannot form a consideration to constitute a valid contract. Thus, where A
promise to pay B, who had received summons to appear at a trial in a
civil suit, a certain sum being a compensation for the loss of time during
his attendance. It was held, the promise was without consideration as B
was already under a duty imposed by law to appear and give evidence
– Collins v. Godfrey [1831] 1B & AD 956.
(ii) under a duty emanating from an existing contract: If a person is
bound to perform certain act under an existing contract, the same
performance cannot form a good consideration for any other contract.
There was a promise to pay the advocate an additional sum if the suit
was successful. Held, the promise was void for want of consideration.
The advocate was under a pre-existing contractual obligation to render
the best of his services under the original contract – Ramachandra
Chintaman v. Kaluraju [1877] 2 Bom. 302.
o However, where a person being already under a legal contractual
duty to do something undertakes to do something more than what
he is bound to do under the original contract, this will be a good
consideration for the promise, e.g., where a police constable who
sued for reward offered for the supply of the information, leading
to a conviction, had rendered services outside the scope of his
ordinary duties, he may be held entitled to recover
– England v. Davidson [1840] 19 L.J.Q.B 287.
(5) Consideration must be lawful   – According to section 10 of the Act,
 “All agreements are contracts if they are made for a lawful
consideration”.
So, a consideration must be lawful without which an agreement is
void. Section 23 states that consideration is unlawful if
(a) it is forbidden by law;
(b) or, is of such a nature that if allowed it would defeat some law
of the country;
(c) it is fraudulent;
(d) it involves injury to the property or person of the other;
(e) court regards it as immoral or opposed to the public policy.
There may be cases where one part of consideration is unlawful but the
other is not. In such cases the whole agreement is void if the unlawful
part cannot be separated from the lawful part.
Example – A promises to work for B who runs both illegal and legal
business for a sum of Rs. 4,000 per month and B agrees to pay this
amount to A. The legal business can be separated from illegal business,
the part of salary pertaining to legal business is lawful consideration.
o In the above case, if legal and illegal businesses cannot be
separated, whole salary of A will constitute unlawful consideration.
o Lawfulness of consideration is discussed in detail in this Chapter
under the heading ‘Legality of Object and Consideration’.

Exceptions to the doctrine of consideration

So far, we have seen that an agreement has to be supported by
consideration to be enforceable at law. But there may be certain
circumstances where it will not be reasonable to apply the doctrine of
consideration to meet the basic motives of the law. Section 25 of the
Indian Contract Act, 1872 takes care of such circumstances. It says that,
“An agreement without consideration is void unless it is in writing and
registered or is a promise to compensate for something done, or is a
promise to pay a debt barred by limitation law.”
Such circumstances are elaborated below:
(1) Love and affection [Sec. 25(1)]   – An agreement is enforceable even if
there is no consideration, if it is
(i) expressed in writing,
(ii) registered under the law for the time being in force for the
registration of documents,
(iii) is made on account of natural love and affection, and
(iv) between parties standing in a near relation to each other.
In simple words, a written and registered agreement based on natural
love and affection between near relatives is enforceable even if it is
without consideration –Ram Dass v. Krishan Dev AIR 1986 H.P. 9.
Examples:
F, for natural love and affection, promises to give his son, S, Rs. 1,000. F
puts his promise to S in writing and registers it. This is a contract.
(2) Compensation for past voluntary services [Sec. 25 (2)]  – A promise to
compensate, wholly or in part, a person who has already voluntarily done
something for the promisor, is enforceable, even though without
consideration. In simple words, a promise to pay for a past voluntary
service is binding.
Examples:
1. A finds B’s purse and gives it to him. B promises to give A Rs. 50.
This is a contract.
2. A supports B’s infant son. B promises to pay A’s expenses in so
doing. This is a contract.
3. A says to B, “At the risk of your life you saved me from a serious
accident. I promise to pay you Rs. 1,000.” There is a contract
between A and B.
(3) Promise to pay a time-barred debt [Sec. 25(3)]  – A time barred
debt is a debt which is not recoverable because of lapse of specified
time (presently 3 years) under the Limitation Act. In the normal
course, once a debt becomes time barred, the lender is left with no
remedy to get his money back. Therefore, a debtor is not legally
bound to pay the debt if it becomes time-barred.
In such a case, if the debtor subsequently promises to pay the time
barred debt, apparently there is no consideration moving from the other
party but the contract is still enforceable. This is because, under section
25(3) of the Act, a promise by a debtor to pay a time-barred debt is
enforceable provided:
(i) it is made in writing,
(ii) is signed by the debtor or by his agent generally or specially
authorized in that behalf, and
(iii) the debt must be such “of which the creditor might have
enforced payment but for the Law of the limitation of suits.”
The promise may be to pay the whole or any part of the debt.
Example –  D owes C Rs. 1,000 but the debt is barred by the Limitation
Act. D signs a written promise to pay C Rs. 1,000 on account of the debt.
This is a contract.
(4) Completed gift [Explanation 1 to Sec. 25]  – The rule “No
consideration, no contract” does not apply to completed gifts. According
to Explanation 1 section 25, nothing in section 25 shall affect the validity,
as between the donor and the donee, of any gift actually made.
Thus, transfer of properties by one person to the other as a gift according
to the provisions of the Transfer of Property Act ( i.e., by a written and
registered document) is valid and a person transferring the property
cannot subsequently demand the property back on the ground that there
was no consideration .
(5) Agency [Sec. 185]   – Under section 185 of the Indian Contract Act, no
consideration is necessary to create an agency, i.e., a transaction of
agency. For giving a person authority to act as agent, consideration is not
necessary. Thus, if A authorises B to act on his behalf (act as an agent)
before C, and B agrees to do so, the contract is enforceable at the court
of law although no consideration is moving from A to B. A will be bound
by the acts done by B on his behalf as against C. Even a gratuitous agent
can be held liable for negligence. The principle of Promissory Estoppel
emanates from this provision.
(6) Remission   – Under section 63 of the Act, no consideration is
necessary for an agreement to receive less than what is due, known as
remission in the law.
Example – Creditor A agrees to accept Rs. 500 from B in full satisfaction
of the debt of Rs. 1000. A subsequently cannot claim the amount of Rs.
500 which he has rescind.
(7) Guarantee [Sec. 127]   – A contract of guarantee is made without
consideration.

Exceptions to the Doctrine of privity to contract

Following are the exceptions to the rule that a stranger to a contract
cannot sue:
(1) Beneficiary under trust or a charge   – When a trust is created, the
beneficiary can enforce the rights given to him under the trust, even
though he was not a party to the contract between the settler and the
trustees.
Examples:
1. A transfer some property in favour of B to be held by him in trust
for the benefit of X. X can enforce the agreement even though he is
a stranger to the contract.
2. In the case of Khwaja Khan  v.Hussaini Begam[1910, 32 All 410
(PC)], it was held that where a Mohamaden lady sued her own
father in law to recover arrears of allowance payable to her by her
father-in-law under an agreement between him and her own father
in consideration of her marriage, she could enforce the promise in
her favour in so far as she was a beneficiary under the agreement
to make a settlement in her favour, and she was claiming as a
beneficiary under such settlement.
(2) Doctrine of promissory estoppel   – Courts have at times been
confronted by the cases involving gratuitous promises and unaccepted
offers, which are without consideration and hence not enforceable at
law. Under certain circumstances, the courts will enforce gratuitous
promises and unaccepted offers.
If a person makes a promise to the other, and that other person incurs a
detriment relying upon the promise, in such a case, the promiser is
estopped from going back from his promise to the extent the promisee
has incurred a detriment on the basis of such promise. This is known as
the doctrine of promissory estoppel.
For example, A promises to make a gift of Rs. 3,000 towards the repairs
of temple. The trustee of the temple on the faith of his promise incurs
liability worth Rs. 2,500. A does not pay. Can the trustee recover the
promised amount from A? Yes, because the trustee has taken action
(i.e., spent amount on repair of the temple) on the basis of the promise
made by B to the extent of amount spent by him, i.e. Rs. 2,500.
The basic idea underlying this doctrine is that if the promisor makes a
promise under circumstances in which he or she should realise that the
promisee is almost certainly going to react to the promise in a particular
way, and if the promisee does so react, thereby causing a substantial
change in his or her position, the promisor is bound by the promise even
though the consideration is lacking.
Examples:
1. In the case of Kedar Nath  v.Gauri Mohammed  1886 I.L.R. 14 Cal.
64, where the secretary of townhall had acted on the faith, that the
promisee will pay Rs. 100 for construction of townhall, and
incurred a liability, the court enforced the claim for the recovery of
the amount to the extent of the liability incurred by the promisee.
Note: Where the promisee has not acted, i.e., not suffered any detriment
based on the promise made by the promisor, then such a promise is not
tenable at the court of law.
2. X promised to pay Rs. 500 for rebuilding of a mosque which he
refused later on. The secretary of the Mosque Committee filed a suit
to enforce the promise to subscribe Rs. 500 for rebuilding of the
mosque. By that time no initiative was taken for the rebuilding. Court
 dismissed the suit on the ground that the Mosque committee did not
suffer any detriment or liability on the faith of such promise.
(3) Family Settlements  – Family arrangements or compromises made
among male members for the benefit of female members of the family
can be enforced by the female members, although the female members
are not a party to those arrangements. Thus, where an agreement is
made in connection with marriage, partition or other family arrangement
and a provision is made for the benefit of a person, that person may take
advantage of that agreement although he is not a party to it.
Examples:
1. On the partition of a joint Hindu family property, an agreement was
entered among its male members to make provision for the
marriage expenses of a female member. Held, the female member
was entitled to sue the parties to the partition deed to enforce the
provision in her favour – Sunder Raja Aiyengar  v.Laxmi Ammal1915
38 Mad. 788.
2. Two brothers on a partition of the family property agreed to pay
Rs. 300 in equal share to their mother for maintenance. It was held
that the mother, though a stranger could enforce the provision in
her favour – Shuppu Ammal  v.Subramanian1910 33 Mad. 238 41
C1083.
(4) Marriage Settlement of Minor  – In case of provisions of marriage
settlement of minors, the minor is entitled to sue to enforce his claim.
This is because in India, marriages are contracted for minors by their
parents and guardians and therefore the Doctrine of Privity of
Contract does not apply in this case.
Example – R’s father entered into an agreement for her marriage with J.
Subsequently, J refused to marry. It was held that R after attaining
majority could sue J for damages of breach of the promise and J could
not take the plea that R was not a party to the agreement –  Rose
Fernandis  v.  Joseph Gonsalvis AIR 1925 Bom. 97.
(5) Agency  – Contracts entered into by an agent can be enforced by the
principal.
Example –  A appoints B as his agent for selling the goods. B sold the
goods to a buyer C. C sued A for defective goods. In this, though there is
no direct contract between A and C, yet A is liable because B has sold the
goods to C as A’s agent.
When an agent sent the goods to a foreign buyer not as his own, but as
agent of principal, there is privity of contract between the principal and
the foreign buyer, even in cases when the agent has not disclosed the
name of the principal – [1981 47 STC 62(66) Mad.]
(6) Covenants running with the land  – In cases of transfer of immovable
property, the purchaser of land is bound by certain conditions or
covenants created by an agreement between the original buyer and the
concerned authority effecting the land although he was not a party to the
original agreement which contained those conditions or covenants
– Tulk  v.  Moxhay (1919) 88 LJ KB 861.
sLegality of object and consideration
According to section 10 of the Indian Contract Act, 1872, lawful
consideration and object is one of the essential ingredients to constitute
a valid contract. Section 23 lays down the cases where the consideration
and object (purpose or design) of an agreement can be deemed to be
unlawful.
Anything which is not lawful within section 23 is unlawful for the purpose
of an agreement or compromise, and a decree incorporating such an
agreement or compromise is a nullity. The section declares  following
agreements to be void for unlawfulness :
(1) Where the consideration or object is forbidden by law  – A contract
which is expressly forbidden and made criminal by statute can give no
cause of action to a party who seeks to enforce it.
Examples:
1. A promises to obtain for B an employment in the public service,
and B promises to pay Rs. 1,000 to A. The agreement is void as the
consideration for it is unlawful.
2. Oral sale of any immovable property under the J&K Transfer of
Property Act is forbidden and thus such oral contract would be void
under section 23 of the Contract Act – [1989 3 Cur CC 56(57) J&K].
 3. An agreement to sell paddy above the maximum price fixed under
Maximum Price Control Order – it is unlawful or void – [AIR 1972
Andhra 367 (368)].
(2) Where the consideration or object defeats the provisions of any law –
Where a contract is to do a thing which cannot be performed without an
infringement of law, it is void whether parties knew the law or not.
Examples:
1. A promises B to drop a prosecution which he has instituted against
B for robbery, and B promises to restore the value of the things
taken. The agreement is void as its purpose is to defeat provisions
of law.
2. A’s estate is sold for arrears of revenue under the provisions of an
Act of the Legislature, by which the defaulter is prohibited from
purchasing the estate. B, upon an understanding with A, becomes
the purchaser, and agrees to convey the estate to A upon receiving
from him the price which B has paid. The agreement is void as it
renders the transaction, in effect, a purchase by the defaulter, and
would so defeat the object of the law.
(3) Where the consideration or object is of such nature that it is
fraudulent – Where agreement involve the commission of a wrong, or
commission of a fraud against a third person or the commission of fraud
against the public, they are unlawful and unenforceable.
Examples:
1. A, B and C enter into an agreement for the division among them, of
gains acquired, or to be acquired, by them by fraud. The agreement
is void.
2. A, being agent for a landed proprietor, agrees for money, without
the knowledge of his principal, to obtain for B a lease of land
belonging to his principal. The agreement between A and B is void,
as it implies a fraud by concealment by A on his principal.