Nature of Contracts (Part - 7) CA Foundation Notes | EduRev

Business Laws for CA Foundation

Created by: Sushil Kumar

CA Foundation : Nature of Contracts (Part - 7) CA Foundation Notes | EduRev

The document Nature of Contracts (Part - 7) CA Foundation Notes | EduRev is a part of the CA Foundation Course Business Laws for CA Foundation.
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TEST YOUR KNOWLEDGE:

Multiple Choice Questions
1. An agreement enforceable by law is a
(a) Promise
(b) Contract
(c) Obligation
(d) Lawful promise
2. A void agreement is one which is -
(a) Valid but not enforceable
(b) Enforceable at the option of both the parties
(c) Enforceable at the option of one party
(d) Not enforceable in a court of law.
3. An agreement which is enforceable by law at the option of one or more of the parties thereon but not at the option of the other or others is a
(a) Valid Contract
(b) Void contract
(c) Voidable contract
(d) Illegal contract
4. When the consent of a party is not free, the contract is
(a) Void
(b) Voidable
(c) Valid
(d) Illegal
5. In case of illegal agreements, the collateral agreements are:
(a) Valid
(b) Void
(c) Voidable
(d) None of these
6. An offer may lapse by:
(a) Revocation
(b) Counter Offer
(c) Rejection of offer by offeree
(d) All of these
7. A proposal when accepted becomes a
(a) Promise
(b) Contract
(c) Offer
(d) Acceptance
ANSWERS TO MCQS:
1 (b)
2 (d)
3 (c)
4 (b)
5 (b)
6 (d)
7 (a)


Theoretical Questions:
Question 1 
“All contracts are agreements, but all agreements are not contracts”. Comment.
Question 2 Define the term “Acceptance’. Discuss the legal provisions relating to communication of acceptance.
Question 3 Distinction between Void and Illegal Agreements.

Answer to the Theoretical Question
1. An agreement comes into existence when one party makes a proposal or offer to the other party and that other party gives his acceptance to it. A contract is an agreement enforceable by law. It means that to become a contract an agreement must give rise to a legal obligation i.e. duty enforceable by law. If an agreement is incapable of creating a duty enforceable by law, it is not a contract. There can be agreements which are not enforceable by law, such as social, moral or religious agreements. The agreement is a wider term than the contract. All agreements need not necessarily become contracts but all contracts shall always be agreements.
All agreements are not contracts: When there is an agreement between the parties and they do not intend to create a legal relationship, it is not a contract.

For example, A invites B to see a football match and B agrees. But A could not manage to get the tickets for the match, now B cannot enforce this promise against A i.e., no compensation can be claimed because this was a social agreement where there was no intention to create a legal relationship.
All contracts are agreements: For a contract there must be two things

(a) an agreement and

(b) enforceability by law.

Thus, existence of an agreement is a pre-requisite existence of a contract. Therefore, it is true to say that all contracts are agreements. Thus, we can say that there can be an agreement without it becoming a contract, but we can’t have a contract without an agreement.
2. According to Section 2(b), the term ‘acceptance’ is defined as follows: “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.
“An acceptance in order to be valid must be absolute, unqualified, accepted according to the mode if any prescribed within reasonable time and communicated to offeror. Acceptance can also be made by way of conduct."
The legal provisions relating to communication of acceptance are contained in Section 4.
The communication of an acceptance is complete:
(a) as against the proposer, when it is put in a course of transmission to him, so as to be out of power of the acceptor;
(b) as against the acceptor, when it comes to the knowledge of the proposer.
Example: A proposes, by letter, to sell a house to B at a certain price:
(1)  The communication is complete when B receives the letter.
(2)  B accepts the proposal by a letter sent by post. The communication is complete: as against A, when letter is posted. as against B when the letter is received by A. Section 3 of the Act prescribes, in general terms, two modes of communication, namely:
(1) by any act or
(2) by omission intending thereby communicate to the other or which has the effect of communicating it to the other.
The first method would include any conduct and words whether written or oral. Written words would include letters, telegrams, talex messages, advertisements, etc. Oral words would include telephone messages. Any conduct would include positive acts or signs so that the other person understands what the person acting or making signs means to say or convey. Omission would exclude silence but include such conduct or forbearance on one’s part that the other person takes it as his willingness or assent. These are not the only modes of communication of the intention of the parties. There are other means as well, e.g., if you as the owner, deliver the goods to me as the buyer thereof at a certain price, this transaction will be understood by everyone, as acceptance by act or conduct, unless there is an indication to the contrary. The phrase appearing in Section 3 “which has the effect of communicating it”, clearly refers to an act or omission or conduct which may be indirect but which results in communicating an acceptance or non-acceptance. However, a mere mental but unilateral act of assent in one’s own mind does not tantamount to communication, since it cannot have the effect of communicating it to the other.
3. Void and Illegal Agreements: According to Section 2(g) of the Indian Contract Act, an agreement not enforceable by law is void. The Act has specified various factors due to which an agreement may be considered as void agreement. One of these factors is unlawfulness of object and consideration of the contract i.e. illegality of the contract which makes it void. Despite the similarity between an illegal and a void agreement that in either case the agreement is void and cannot be enforced by law, the two differ from each other in the following respects:
(i) Scope: An illegal agreement is always void while a void agreement may not be illegal being void due to some other factors e.g. an agreement the terms of which are uncertain is void but not illegal.
(ii) Effect on collateral transaction: If an agreement is merely void and not illegal, the collateral transactions to the agreement may be enforced for execution but collateral transaction to an illegal agreement also becomes illegal and hence cannot be enforced.
(iii) Punishment: Unlike illegal agreements, there is no punishment to the parties to a void agreement.
(iv) Void ab-initio: Illegal agreements are void from the very beginning but sometimes valid contracts may subsequently become void.

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