SEMESTER – III Skill Based Subject-1
COMMERCIAL LAW
Subject Description : This course aims the students to understand the Fundamentals of
Laws relating to Commercial Activities
Goals : To enlighten the students’ knowledge on the basic Business Law
Objectives : After the successful completion of the course the student should
have a through knowledge on Law of Contract and relevant laws.
Unit – I
Law – Meaning – Law of Contract – Essential Elements of Valid Contract – Types of
Contracts - Offer – Legal Rules relating to Offer – Acceptance – Essentials of Valid
Acceptance – Revocation of Offer and Acceptance.
Unit – II
Consideration – Essentials of Valid Consideration – Capacity to Contract – Law
relating to
Minor, Unsound Mind – Persons Disqualified by Law.
Unit – III
Performance of Contract – Modes of Performance – Quasi-Contract – Discharge of
Contract –
Modes of Discharge - Remedies for Breach of Contract.
Unit – IV
Contract of Indemnity and Guarantee – Rights of Indemnity Holder – Rights and
Liabilities of
Surety.- Bailment and Pledge.
Unit – V
Sale of Goods Act – Sale and Agreement to Sell – Conditions and Warranties - Law
of Carriage of Goods
COMMERCIAL LAW
UNIT-1
SECTION A
1. DEFINITION OF COMMERCIAL LAW.
Commercial law (also known as business law, which covers also corporate law) is the body of
law that governs business and commercial transactions. It is often considered to be a branch of
civil law and deals with issues of both private law and public law.
Commercial law includes within its compass such titles as principal and agent; carriage by land
and sea; merchant shipping; guarantee; marine, fire, life, and accident insurance; bills of
exchange and partnership. It can also be understood to regulate corporate contracts, hiring
practices, and the manufacture and sales of consumer goods. Many countries have adopted civil
codes that contain comprehensive statements of their commercial law. In the United States,
commercial law is the province of both the United States Congress, under its power to regulate
interstate commerce, and the states, under their police power
2. WHAT DO YOU MEAN BY CONTRACT
In law, a contract is any legally binding agreement voluntarily entered into by two or more parties that
places an obligation on each party to do or not do something for one or more of the other...
3. . WHAT DO YOU MEAN BY VALID CONTRACT
The remedy of specific performance presupposes the existence of a valid contract between the parties to
the controversy. The terms of the contract must be definite and certain. This is significant because equity
cannot be expected to enforce either an invalid contract or one that is so vague in its terms that equity
cannot determine exactly what it must order each party to perform. It would be unjust for a court to
compel the performance of a contract according to ambiguous terms interpreted by the court, since the
court might erroneously order what the parties never intended or contemplated.
4. WHAT DO YOU MEAN BY OFFER.
An offer is a proposal to take some action, or to refrain from taking some action. If accepted according
to its terms, and accompanied by something of value (which can be a tangible thing, money, or a
correlative promise to do or refrain from doing an act--in all cases called "consideration"), a contract is
formed. However, even if accepted and supported by consideration, the offer of an illegal act cannot
be the basis of a contract.
5. WHAT DO YOU MEAN BY REVOCATION.
Revocation is the act of recall or annulment. It is the reversal of an act, the recalling of a grant, or the
making void of some deed previously existing.
6.WHAT ARE THE TYPES OF OFFER.
There are three key types of offer to use in marketing. And all
your marketing should carry some kind of offer. That means you
should be including offers in your person selling, in sales letters, on
your website, in radio or newspaper advertising, on signs, on your
vehicles, in your flyers, and so on. Many people make the mistake of
avoiding using offers because when they think offer they
immediately think “discount” and they do not want to use discounts
for obvious reasons.
You will be relieved to know that discount is generally the least
effective of all three types of offer.
However you need to test all three to ensure that you know
which is most effective for you. The three types of offer are:
1.
FREE Information
Free information is generally the most effective of all offers. Right
now you’re reading my free information. Because it’s helpful and
informative you’ll probably be back for more. Each time you come
back it confirms for you once again that you can trust Holloways to
give you worthwhile help. That means if you’re ever wanting to pay
someone for marketing help you’ll almost certainly enquire about
the services and products that we provide. With free information
you earn the right to then make offers to your prospect which they
can then consider.
2.
Value-Add or ‘Soft Cost’
This is where you give exceptional value to your prospect or
customer but the cost to you is much less than the value to them.
Your supplier might provide you with product for free or a low price
that is of high perceived value to your customer. Or you may
provide your customer with a service which costs you very little but
is of high value to them. For signwriter might offer to clean the sign
within the first 30 days because he always has staff driving around
town from one job to another so getting them to stop off and give a
sign a quick rub down costs very little, but seems exceptionally
good service to the customer.
3.
Discount
This one is obvious. Make sure when you offer a discount that you
state the original price, the new price and the amount they save.
Also make sure you take note of the Fair Trade laws and do not
state a discount if the price is actually the price you’re selling at
anyway.
7.WHAT ARE THE TYPES OF ACCEPTANCE.
Types of Acceptance
An acceptance may be conditional, express, or implied.
Conditional Acceptance A conditional acceptance, sometimes called a qualified acceptance, occurs
when a person to whom an offer has been made tells the offeror that he or she is willing to agree to the
offer provided that some changes are made in its terms or that some condition or event occurs. This type
of acceptance operates as a counteroffer. A counteroffer must be accepted by the original offeror before
a contract can be established between the parties.
Another type of conditional acceptance occurs when a drawee promises to pay a draft upon the fulfillment
of a condition, such as a shipment of goods reaching its destination on the date specified in the contract.
Express Acceptance An express acceptance occurs when a person clearly and explicitly agrees to an
offer or agrees to pay a draft that is presented for payment.
Implied Acceptance An implied acceptance is one that is not directly stated but is demonstrated by any
acts indicating a person's assent to the proposed bargain. An implied acceptance occurs when a shopper
selects an item in a supermarket and pays the cashier for it. The shopper's conduct indicates that he or
she has agreed to the supermarket owner's offer to sell the item for the price stated on it.
SECTION-C
ESSENTIALS OF VALID CONTRACT.
Essentials of a valid contract.
What is a contract?
A contract is an agreement that can be enforceable by law. An agreement is an offer and its
acceptance. An agreement which can be enforceable by law must have some essential elements.
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 are not hereby
expressly declared to be void" As per the above section, a contract must have the following
elements.
1. Intention to create legal relationship.
2. Lawful object
3. Agreement not expressly declared void
4. Proper offer and it s acceptance
5. Free Consent
6. Capacity of parties to contract
7. Certainty of meaning.
8. Possibility of performance.
9. Lawful consideration
10. Legal formalities
Intention to create legal relationship: The parties entering into a contract must have an intention
to create a legal relationship. If there is no intention to create a legal relationship, that agreement
cannot be treated as a valid contract. Generally there is no intention to create a legal relationship in
social and domestic agreements. Invitation for lunch does not create a legal relationship. Certain
agreements and obligation between father and daughter, mother and son and husband and wife
does not create a legal relationship. An agreement wherein it is clearly mentioned that "This
agreement is not intended to create formal or legal agreement and shall not be subject to legal
jurisdiction in the law of courts." cannot be treated as a contract and not valid.
Lawful Object: The objective of the agreement must be lawful. Any act prohibited by law will not be
valid and such agreements cannot be treated as a valid contract. A rents out his house for the
business of prostitution or for making bomb, the acts performing there are unlawful. Hence such
agreement cannot be treated as a valid contract. Therefore the consideration as well as the object of
the agreement should be lawful.
Agreement not expressly declared void: Section 24 to 30 specify certain types of agreement
which have been expressly declared void. For example Restraint of marriage which has been
expressly declared void under Section 26. If John promises to pay $50 to Mary if she does not marry
throughout her life and Mary promise not to marry at all. But this agreement cannot be treated as a
valid contract owing to the fact that, under section 26 restraint of marriage expressly declared void.
Some of the agreement which have been expressly declared void are agreement in restraint of legal
proceedings, agreement in restraint of trade, agreement in restraint of marriage and agreement by
way of wager.
Proper offer and it s acceptance: To create a valid contract, there must be two or more parties.
One who makes the offer and the other who accepts the offer. One person cannot make an offer and
accept it. There must be at least two persons. Also the offer must be clear and properly
communicated to the other party. Similarly acceptance must be communicated to the other party and
the proper and unconditional acceptance must be communicated to the offerer. Proper offer and
proper acceptance should be there to treat the agreement as a contract which is enforceable by law.
Free Consent: According to section 14, consent is said to be free when it is not caused by (i)
coercion, (ii) undue influence (iii) fraud, (iv) misrepresentation, or (v) mistake. If the contract made by
any of the above four reason, at the option of the aggrieved party it could be treated as a void
contract. If the agreement induced by mutual mistake the agreement would stand void or canceled.
An agreement can be treated as a valid contract when the consent of the parties are free and not
under any undue influence, fear or pressure etc. The consent of the parties must be genuine and
free consent.
Capacity of parties to contract: Parties entering into an agreement must be competent and
capable of entering into a contract. If "A" agrees to sell a Government property to B and B agrees to
buy that property, it could not treated as a valid agreement as A is not authorized or owner of the
property. If any of the party is not competent or capable of entering into the agreement, that
agreement cannot be treated as a valid contract. According to Section 11 of the Act which says that
every person is competent to contract who is of the age of majority according to the law to which he
is subject and who is of sound mind, and is not disqualified from contracting by any law to which he
is subject. So it is clear that the party must be of sound mind and of age to enter into a valid
agreement which can be treated as a valid contract.
Certainty of meaning: Wording of the agreement must be clear and not uncertain or vague.
Suppose John agrees to sell 500 tones of oil to Mathew. But, what kind of oil is not mentioned
clearly. So on the ground of uncertainty, this agreement stands void. If the meaning of the
agreement can be made certain by the circumstances, it could be treated as a valid contract. For
example, if John and Mathew are sole trader of coconut oil, the meaning of the agreement can be
made certain by the circumstance and in that case, the agreement can be treated as a valid
contract. According to Section 29 of the Contract Act says that Agreements, the meaning of which is
not certain or capable of being made certain, are void.
Possibility of performance: As per section 56, if the act is impossible of performance, physically or
legally, the agreement cannot be enforced by law. There must be possibility of performance of the
agreement. Impossible agreements like one claims to run at a speed of 1000km/hour or Jump to a
height of 100feet etc. would not create a valid agreement. All such acts which are impossible of
performance would not create a valid contract and cannot treated as a valid contract. In essence,
there must be possibility of performance must be there to create a valid contract.
Lawful consideration: An agreement must be supported by a consideration of something in return.
That is, the agreement must be supported by some type of service or goods in return of money or
goods. However, it is not necessary the price should be always in terms of money. It could be a
service or another goods. Suppose X agrees to buy books from Y for $50. Here the consideration of
X is books and the consideration of Y is $50. It can be a promise to act (doing something) or
forbearance (not doing something). The consideration may be present, future or can be past. But the
consideration must be real. For example If John agrees to sell his car of $ 50000 to Peter for
$20000. This is a valid contract if John agrees to sell his car not under any influence or force. It can
be valid only if the consideration of John is free. An agreement is valid only when the acts are legal.
Illegal works like killing another for money, or immoral works or illegal acts are cannot be treated as
a valid agreement. So, illegal works will not come under the contract act.
Legal formalities: The contract act does not insist that the agreement must be in writing, it could be
oral. But, in some cases the law strictly insist that the agreement must be in writing like agreement to
sell immovable property must be in writing and should be registered under the Transfer of Property
Act, 1882. These agreement are valid only when they fulfill the formalities like writing, registration,
signing by the both the parties are completed. If these legal formalities are not completed, it cannot
be treated as a valid contract.
Most important essentials of a valid contract are mentioned above. These elements should be
present in a contract to make it a valid contract. If any one of them is missing we cannot treat that
agreement as a valid contract.
WHAT ARE THE TYPES OF CONTRACT.
Contracts under Seal Traditionally, a contract was an enforceable legal document
only if it was stamped with a seal. The seal represented that the parties intended the
agreement to entail legal consequences. No legal benefit or detriment to any party was
required, as the seal was a symbol of the solemn acceptance of the legal effect and
consequences of the agreement. In the past, all contracts were required to be under seal
in order to be valid, but the seal has lost some or all of its effect by statute in many
jurisdictions. Recognition by the courts of informal contracts, such as implied contracts,
has also diminished the importance and employment of formal contracts under seal.
Express Contracts In an express contract, the parties state the terms, either orally or
in writing, at the time of its formation. There is a definite written or oral offer that is
accepted by the offeree (i.e., the person to whom the offer is made) in a manner that
explicitly demonstrates consent to its terms.
Implied Contracts Although contracts that are implied in fact and contracts implied
in law are both called implied contracts, a true implied contract consists of obligations
arising from a mutual agreement and intent to promise, which have not been expressed
in words. It is misleading to label as an implied contract one that is implied in law
because a contract implied in law lacks the requisites of a true contract. The term quasicontract is a more accurate designation of contracts implied in law. Implied contracts
are as binding as express contracts. An implied contract depends on substance for its
existence; therefore, for an implied contract to arise, there must be some act or conduct
of a party, in order for them to be bound.
A contract implied in fact is not expressed by the parties but, rather, suggested from
facts and circumstances that indicate a mutual intention to contract. Circumstances
exist that, according to the ordinary course of dealing and common understanding,
demonstrate such an intent that is sufficient to support a finding of an implied contract.
Contracts implied in fact do not arise contrary to either the law or the express
declaration of the parties. Contracts implied in law (quasi-contracts) are distinguishable
in that they are not predicated on the assent of the parties, but, rather, exist regardless
of assent.
The implication of a mutual agreement must be a reasonable deduction from all of the
circumstances and relations that contemplate parties when they enter into the contract
or which are necessary to effectuate their intention. No implied promise will exist where
the relations between the parties prevent the inference of a contract.
A contract will not be implied where it would result in inequity or harm. Where doubt
and divergence exist in the minds of the parties, the court may not infer a contractual
relation-ship. If, after an agreement expires, the parties continue to perform according
to its terms, an implication arises that they have mutually assented to a new contract
that contains the same provisions as the old agreement.
A contract implied in fact, which is inferred from the circumstances, is a true contract,
whereas a contract implied in law is actually an obligation imposed by law and treated
as a contract only for the purposes of a remedy. With respect to contracts implied in
fact, the contract defines the duty; in the case of quasi-contracts, the duty defines and
imposes the agreement upon the parties.
Executed and Executory Contracts An executed contract is one in which nothing
remains to be done by either party. The phrase is, to a certain extent, a misnomer
because the completion of performances by the parties signifies that a contract no longer
exists. An executory contract is one in which some future act or obligation remains to be
performed according to its terms.
Bilateral and Unilateral Contracts The exchange of mutual, reciprocal promises
between entities that entails the performance of an act, or forbearance from the
performance of an act, with respect to each party, is a BILATERAL CONTRACT. A
bilateral contract is sometimes called a two-sided contract because of the two promises
that constitute it. The promise that one party makes constitutes sufficient consideration
(see discussion below) for the promise made by the other.
A unilateral contract involves a promise that is made by only one party. The offeror (i.e.,
a person who makes a proposal) promises to do a certain thing if the offeree performs a
requested act that he or she knows is the basis of a legally enforceable contract. The
performance constitutes an acceptance of the offer, and the contract then becomes
executed. Acceptance of the offer may be revoked, however, until the performance has
been completed. This is a one-sided type of contract because only the offeror, who
makes the promise, will be legally bound. The offeree may act as requested, or may
refrain from acting, but may not be sued for failing to perform, or even for abandoning
performance once it has begun, because he or she did not make any promises.
Unconscionable Contracts An UNCONSCIONABLE contract is one that is unjust or
unduly one-sided in favor of the party who has the superior bargaining power. The
adjective unconscionable implies an affront to fairness and decency. An unconscionable
contract is one that no mentally competent person would accept and that no fair and
honest person would enter into. Courts find that unconscionable contracts usually result
from the exploitation of consumers who are poorly educated, impoverished, and unable
to shop around for the best price available in the competitive marketplace.
The majority of unconscionable contracts occur in consumer transactions. Contractual
provisions that indicate gross one-sidedness in favor of the seller include limiting
damages or the rights of the purchaser to seek court relief against the seller, or
disclaiming a WARRANTY (i.e., a statement of fact concerning the nature or caliber of
goods sold the seller, given in order to induce the sale, and relied upon by the
purchaser).
Unconscionability is ascertained by examining the circumstances of the parties when
the contract was made. This doctrine is applied only where it would be an affront to the
integrity of the judicial system to enforce such a contract.
Adhesion Contracts Adhesion contracts are those that are drafted by the party who
has the greater bargaining advantage, providing the weaker party with only the
opportunity to adhere to (i.e., to accept) the contract or to reject it. (These types of
contract are often described by the saying "Take it or leave it.") They are frequently
employed because most businesses could not transact business if it were necessary to
negotiate all of the terms of every contract. Not all adhesion contracts are
unconscionable, as the terms of such contracts do not necessarily exploit the party who
assents to the contract. Courts, however, often refuse to enforce contracts of adhesion
on the grounds that a true meeting of the minds never existed, or that there was no
acceptance of the offer because the purchaser actually had no choice in the bargain.
Aleatory Contracts An aleatory contract is a mutual agreement the effects of which
are triggered by the occurrence of an uncertain event. In this type of contract, one or
both parties assume risk. A fire insurance policy is a form of aleatory contract, as an
insured will not receive the proceeds of the policy unless a fire occurs, an event that is
uncertain to occur.
Void and Voidable Contracts Contracts can be either void or VOIDABLE. A void
contract imposes no legal rights or obligations upon the parties and is not enforceable
by a court. It is, in effect, no contract at all.
A voidable contract is a legally enforceable agreement, but it may be treated as never
having been binding on a party who was suffering from some legal disability or who was
a victim of fraud at the time of its execution. The contract is not void unless or until the
party chooses to treat it as such by opposing its enforcement. A voidable contract may be
ratified either expressly or impliedly by the party who has the right to avoid it. An
express ratification occurs when that party who has become legally competent to act
declares that he or she accepts the terms and obligations of the contract. An implied
ratification occurs when the party, by his or her conduct, manifests an intent to ratify a
contract, such as by performing according to its terms. Ratification of a contract entails
the same elements as formation of a new contract. There must be intent and complete
knowledge of all material facts and circumstances. Oral ACKNOWLEDGMENT of a
contract and a promise to perform constitute sufficient ratification. The party who was
legally competent at the time that a voidable contract was signed may not, however,
assert its voidable nature to escape the enforcement of its terms.