Page 9 - DMGT407Corporate and Business Laws

Corporate and Business Laws

Notes Explain the consideration of a contract;
Discuss the issue of capacity of the parties to contract.

Introduction

‘Law’ means any rule of conduct, standard or pattern, to which actions are required to conform;
if not conformed, sanctions are imposed. When we speak of the law of a State, we use the term
‘law’ in a special and strict sense. In this sense, the term ‘law’ is defined in Oxford English
Dictionary as “the body of rules whether proceeding from formal enactment or from custom,
which a particular State or community recognises as binding on its subjects or members”. These
are rules which are recognised and acted on by courts of justice. Law may also be defined as rule
of conduct of persons (both natural and artificial), imposed upon and enforced among the
members of a given State.
We enter into contracts everyday. Some of these are made consciously, for example, purchase or
sale of a share of a company or a plot of land. Contracts confer legal rights on one party and
subject the other party to some legal obligation. In the case of people engaged in business, they
carry on business by entering into contracts. Thus, the business executives, corporate counsels,
entrepreneurs, and professionals in different fields deal frequently with contracts. At times,
they have to draft one such contract or scrutinize it or provide inputs to its making or even
interpret it. Therefore, it is necessary for them to know what constitutes a contract. The law
relating to contracts is contained in the Indian Contract Act, 1872.
1.1 Meaning of the Contract

1. Contract: A contract is an agreement, enforceable by law, made between at least two
parties by which rights are acquired by one and obligations are created on the part of
another. If the party, which had agreed to do something, fails to do that, then the other
party has a remedy.

Example: D Airlines sells a ticket on 1 January to X for the journey from Mumbai to
Bangalore on 10 January. The Airlines is under an obligation to take X from Mumbai to Bangalore
on 10 January. In case the Airlines fails to fulfil its promise, X has a remedy against it.
Thus, X has a right against the Airlines to be taken from Mumbai to Bangalore on 10
January. A corresponding duty is imposed on the Airlines. As there is a breach of promise
by the promisor (the Airlines), the other party to the contract (i.e., X) has a legal remedy.
Section 2(h) defines a contract as “an agreement enforceable by law”. Thus, a contract
essentially consists of two elements: (i) an agreement and (ii) its enforceability by law.
2. Agreement: Section 2(e) defines an agreement as “every promise and every set of promises
forming consideration for each other”. In a contract there are at least two parties. One of
them makes a proposal (or an offer) to the other, to do something, with a view to obtaining
the assent of that other to such act. 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 [s.2(b)]. The person making the proposal is called ‘promisor’ and the
person accepting the proposal is called the ‘promisee’ [s.2(c)].

3. Enforceability by law: The agreement must be such which is enforceable by law so as to
become a contract. Thus, there are certain agreements which do not become contracts as
this element of enforceability by law is absent. For example, an agreement to go for a
stroll together or for a picnic does not become a contract, and therefore, neither rights nor

2 LOVELY PROFESSIONAL UNIVERSITY