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Published by Enhelion, 2019-11-22 00:50:08

Module 1

Module 1

COMMERCIAL
CONTRACTS

CERTIFICATE COURSE

DEVELOPED BY
Corp Comm Legal

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MODULE - 1

UNDERSTANDING COMMERCIAL
CONTRACTS

1.1. Introduction to Commercial Contracts agreement outlined within. It's important to have a
Commercial contracts are documents that cover a contract created by a lawyer to avoid loopholes and
combination of legal and commercial factors weaknesses prior to everyone's signing.
Commercial contracts are documents that cover a
combination of legal and commercial factors. The Types of Commercial Contracts
term encapsulates a large body of laws that regulate Commercial contracts can be verbal or written, but
business transactions.. it's preferable to have a written contract as it's more
difficult to enforce a verbal contract in court due to
What Are Commercial Contracts? lack of documentation. Contracts can be formal or
A commercial contract is a legally binding document informal and relate to any kind of business activity
that puts one party into a binding position either to do such as wages, hiring, and safety. It's possible to
something or not to engage in the stated activity. It's execute a contract to establish terms regarding any
used for businesses and organizations and its key business activity as long as the components listed
requirement is to ensure that legal arrangements below are in the contract:
allow full benefits of the contract to be realized. Also
stated in the contract are the terms of the Sales of goods, either retail or parts
arrangement that cover all important factors. In the Provision of services such as vendor services
event one party fails to meet their side of the and employment
agreement, a breach of contract Use of intellectual property
happens. Commercial contracts that aren't drawn up including patents,trademarks,copyrights,
correctlyandhaveweakareascanundermine the and trade secrets.

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The right of any given party to disclose The item being bought, sold, or delivered
confidential information or engage in The amount being paid
competition When the services and/or goods are to be
Lease or purchase of real property delivered
Both parties have to exchange something with one
Process of a Commercial Contract another. This is the part that separates the contract
from being thought of as a gift and is known as
A commercial contract has two parties with one consideration. It means that both parties have to
party requesting the other party to perform a give up something they had the right to keep (money,
specified job or activity. They are also used when one goods, services) or not do something they had the
party is agreeing not to engage in a specified activity right to do. Each party also needs to be legally eligible
such as a non-compete agreement. to create a contract agreement. There are legal
What Is a Commercial Contract Format? guidelines indicating that individuals below a specific
Acommercial contract formatis a template for age are ineligible to enter in a contract. Individuals
contracts that deal with: who sign contracts cannot be:

Bulk salesor purchases of products Under 18 years of age
Buying or selling a company Under the influence of drugs
Licensing technicalknowledge Intoxicated
Copyrights Incapacitated by a handicap or an illness
These are some of the things a commercial contract Parties have to enter into a contract willingly. In the
format covers. event when one party entered into a contract against
Elements Needed for a Valid and Enforceable their will or was misled to agree or sign a contract,
Contract that party may have the ability to void the
The ICA states that there needs to be an agreement settlement. A party may also be able to cancel the
in which an offer must be made, followed by an contract if there's an error about the items being
acceptance. The core of this requirement is that both sold, offered, or purchased. The subject material of
parties are in agreement over each and every aspect thecontracthasto belegaland authorized. Parties
of the material, services, and financial elements of cannot enter into a contract to carry out unlawful
the agreement. Those elements include: acts of any kind.

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Contracts vis-a-vis Commercial Agreements products sold, business contracts can range from
Agreements which are legally enforceable are called simple actions executed by a downloadable form, to
contracts. Valid contracts create legal obligation on highly complex contracts that require teams of
allparties tothecontractandthepartiesarebound advocates.
to fulfill their obligations under the contract. A
Commercial Contract refers to a legal agreement A business contract can serve both individuals
between parties in which they are obligated to do or (employees and customers) as well as be a
restrain from doing particular things. They can be commercial agreement between two companies for
written, verbal, or implied in a formal or an informal products or supplies. For example, a company enters
manner. Commercialcontractcanincludeallaspects into a contract with customers and offers a bill of sale.
of a business, such as hiring, wages, leases, loans and They hold promissory notes for leases or mortgages.
employee safety. A breach of commercial contract Both of these are types of commercial contracts.
takesplace whena contracting party fails to live up
to the agreements. A commercial contract is However, businesses also enter into
generally executed for business activities. Some commercial contracts with their employees
examples of commercial contracts that may be and freelance employees. Standard hiring
executed are: forms such as employment and nondisclosure
a. Thesaleofgoodsandprovisionofservices; agreements, as well as safety and human
b. The right to use intellectual property, such as resource activities, are considered
commercial agreements.
patents, copyrights, trademarks and trade Most commercial contracts include certain
secrets; boilerplate clauses. These include assignment
c. A party’s right to disclose confidential clauses, which indicate the terms, integration
information, or to engage in competition; and force majeure (act of God) clauses,
d. The purchase or lease of a property.
confidentiality agreements for contracts that
Scope of a commercial contract involve trade secrets, amendment clauses, and
any severance agreements that need to be
Different types of commercial contracts or included.
agreements are a part of every company's daily
business. From purchase orders to simple receiptsfor

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What types of commercial contracts exist? Fixed-price contracts, however, include a
clause for an adjustable price. These
The types of commercial contracts are as numerous adjustable prices include both a "ceiling" and
as the number of businesses that operate in the a "target" price that gives a range of potential
world. However, despite the many possible needs for costs and expenditures for both sides of the
contracts and contractual relationships, there are agreement. These contracts include language
several typical commercial contracts that are that protects both sides of the deal and
standard across different industries. require any price changes to remain equitable
and in the spirit of the original contracted
Definite-quantity contracts are related to the price.
purchase of goods and fall under the umbrella Time and materials contracts are risky but
of Indefinite Delivery Contracts, or IDC. sometimes necessary contracts that do not
These contracts provide for the delivery of a have a predetermined schedule or budget
specific and defined quantity of supplies or included. Many times, this is done out of
services that is scheduled at the time of the necessity and is the norm on construction
contract. They are also contracted to deliver contracts where building materials and
these goods on a regular schedule. These are calendars often require revision throughout
standard when supply numbers are known in the project.
advance of a product.
Firm-fixed-price contracts are agreements When are commercial contracts needed?
where the contractor gets a fixed amount of
money from a client but provides all goods Commercial agreements examples are helpful in
and services up front. This agreement is risky learning what sorts of services require the protection
for the contractor, as it forces them to take on and safety of a contractual relationship. Like most
all the responsibility of pricing out materials other contracts, they are useful in almost all business
and service at the beginning of the situations where there is a risk, any transaction, or
relationship. However, these sorts of obvious safety needs. These can include:
contracts encourage pre-planning and come
with low amounts of administrative and Production and logistics agreements help
financial oversight once they're enacted. give businesses peace of mind when entering

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into business contracts with third-party Transportation of goods and services
vendors. These sorts of arrangements detail requires an intense amount of logistical
how andwhenproductsarehandledonboth juggling that requires the security of a
sides of the agreement. contract in almost all circumstances. The
Distribution contracts are regularly created ability to detail the terms of the agreement, as
to facilitate relationships between suppliers well as structuring the contract in a way that
of goods and distributors of products. These is beneficial and cost-effective for all parties
contracts are complex and often require involved, lowers the risk of this necessary
language to determine whether the business need.
distribution agreement will be exclusive or Construction contracts can either be capped
non-exclusive, among other questions and or open-ended when it comes to cost and
arrangements. timeline of the project. As a result,
Purchasing or leasing equipment may not commercial construction contracts are
require a contract but usually involves one as usually one of the first steps before a building
a part of the financing process. As companies project begins.
grow and expand, accessing reliable Confidentiality agreements range from non-
equipment is critical. Similarly, purchasing or disclosure agreements for contract
leasing property and buildings require the employees to necessary forms that are
same sort of oversight and care. standard with any hiring process.
For businesses that do not have in-house Confidentiality contracts protect employers
marketing and public relations departments, and other businesses from losing trade
contracting those services is often necessary. secrets or other intellectual property.
However, negotiating terms and deliverable Any sale of products or services should
assets, as well as costs and timelines, requires include a contractual relationship between
contractual support. This negotiation is the seller and the buyer. This allows for a
especially critical for both the customer and commercial relationship that protects both
the vendor, as it clarifies expectations at the parties and makes the exchange fair and
start of the relationship. equitable.

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1.1.1 The Need for Commercial Contracts and its do not contemplate a legal relationship, are not
essential ingredients. contracts.
Commercial contracts are needed as they legally
c. Lawful consideration- It is described as
determine and create liability over parties who enter something in return. It is also vital for the validity
into agreements for transacting a business, sealing a of the contract. A promise to do something or to
deal, selling and buying of movable and immovable provide something without anything in return
goods, renting and leasing of properties etc. In each will not be enforceable at law and, therefore, will
and every aspect of a commercial transaction the not be valid. Consideration need not be in kind or
formation of contract and agreements is cash. A contract without consideration is a
indispensable. The requirements of a commercial wagering contract or betting. Besides, the
contract are:- consideration must also be lawful.

a. Offer and Acceptance- All offers must be valid d. Competency of parties- The parties to an
and once accepted, it binds both the parties into agreement should be capable of contracting. In
a valid agreement. The offree is now an acceptor, other words, they should be capable of entering
and thus the agreement is made between an into the contract. According to the Contract act,
offeror and an acceptor. The adjective lawful every person is competent to contract who is the
suggests that the offer and acceptance must age of majority to which he/she is subject to and
satisfy the recruitments of the contract act in who is of the sound mind and is not disqualified
relation. from the contracting by any law to which he/she
is subject.
b. Legal relationship - Parties to a contract must
desire to constitute a legal relationship. It results Thus, according to the Contract Act, every
when the parties know that if any one of them person with the exception of the following is
fails to fulfill his/her part of the promise, he/she competent to enter into a contract:
would be liable for the failure of the contract. If
there is no desire to create a legal relationship, A minor - A minor is one who has not attained the
there is no contract between the parties. age of 18, and for every contract, the majority is
Agreements of social or domestic natures, which a condition precedent. By looking at the Indian

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law, minor’s agreement is a void one, meaning agreement is a contract.
thereby that it has no value in the eye of the law,
and it is null and void as it cannot be enforced by Exception to general rule
either party to the contract. And even after he
attains majority, the same agreement could not For providing protection to a minor, his
be ratified by him. Here, the difference is that agreement is void. But there are certain
minor’s contract is void/null, but is not illegal as exceptions as well.
there is no statutory provision upon this.
When minor has performed his obligation: In a
Mohiri Bibi v. Dharmodas Ghoshi contract, a minor can be a promise but not a
The case goes back to the year 1903 in which, for promisor. So if the minor has performed his part
the first time, the Privy Council held that a of the promise, but the other party hasn’t the
minor’s contract is void-ab-initio that it is void minor being in the position of a promise he can
from the beginning. enforce the contract.
A contract entered into by guardian of minor for
Facts of the case – The plaintiff Dharmodas his benefit: In that case, a minor can sue the
Ghosh, when he was a minor, mortgaged his other party when it does not perform its promise.
property to the defendant, a moneylender. At In the case of Great American Insurance v.
that time, defendant’s attorney had the Madan Lalii the guardian on the behalf of her son
knowledge about plaintiff’s age. The plaintiff entered into an insurance contract in respect of
later paid only Rs 8000 but refused to pay rest of fire for the minor’s property. When the property
the money. The plaintiff’s mother was his next was damaged and minor asked for the
friend (legal guardian) at that time, so he compensation, the insurer denied it by saying
commenced an action against the defendant that a contract with a minor is a void one. But
saying that at the time of making of a contract, he later the court held that this contract was
was a minor, so the contract being a void one, he enforceable, and he is liable to pay
is not bound by the same. compensation.
The court held that unless the parties have Contract of apprenticeship: Under the Indian
competence under Section 11 of the Act, no Apprentices Act, 1850, a contract of apprentice
entered by guardian on his behalf is binding on

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the minor. minor can become an agent as per the provisions of
section 184 but the principal shall be bound by the
Minor as a partner acts of the minor and he would not be personally
liable in that case.
The way of a contract creates a partnership, and the
essential of a contract is that the both the parties · A person of unsound mind - According to section
should be of the age of majority. However, as an 12 of The Indian Contract Act,1872, A person is
exception as per Section 30 of the Partnership Act is said to be of sound mind for the purposes of
that with the due consent of all the partners, the making a contract, if, at the time when he makes
minor can be admitted to the benefit of partnership it, he is capable of understanding it and of
for the time being. But he will not be liable for any of forming a rational judgment as to its effect upon
his acts. his interests.

Liability of a minor under the Negotiable In Kanhaiyalal v. Harsing Laxman Wanjariiii, it
Instrument Act was held that mere weakness of mind is not
As per Section 26 of the Act, a minor can draw, unsoundness of mind. Mental incapacity, arising
endorse, and negotiate and he can bind everybody out of any reason, deprives a person not only of a
except himself. Every person who is capable of full understanding of transaction but also of the
contracting according to the law to which he is awareness that he does not understand it. A
subject may bind himself and be bound by the making, person of unsound mind is thus not necessarily a
drawing, accepting, delivery and negotiation of a lunatic. It is sufficient if the person is incapable of
promissory note, cheque or a bill of exchange. judging the consequences of his acts.

Can a minor be an agent or principal? In Inder Singh v. Parmeshwardhari Singhiv,
justice Sinha explained the effect of section 12 in
A minor can never be a principal because Section 183 following passage:
of the Indian Contract Act for anybody to become a
principal he should be of the age of majority and be of “According to this section, therefore the person
sound mind and since a minor is not competent to entering into the contract must be a person who
contract, he also cannot employ an agent. But, a understands what he is doing and is able to form
a rational judgement as to whether what he is

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about to do is to his interest or not. The crucial 2. Convicts: Aconvictisaperson,whoissentenced
point, therefore, is to find out whether he is by a competent court to the death sentence or
entering into the contract after he has imprisonment. A convicted person cannot enter
understood it and has decided to enter into that into a contract while undergoing sentence.
contract after forming a rational judgement in When the period of his sentence is over or he is
regard to his interest. It does not mean that the pardoned, then his incompetency is also over.
man must be suffering from lunacy to disable him
from entering into a contract. A person may to all 3. Insolvent: There is no prohibition against a
appearances behave in a normal fashion, but, at contract by an insolvent after the insolvency
the same time, he may be incapable of forming a proceedings have commenced but before
judgement of his own, as to whether the act he is adjudication. In simple words, the insolvent is
about to do is to his interest or not.” disqualified from entering into a contract until he
is discharged by the court of law.
This distinguishes it from lack of ability arising
due to illiteracy and unfamiliarity with the For example, A executed a sale-deed, but before
language. he could get it registered of the deed took place
during the pendency of the insolvency
· A person expressly declared disqualified to get proceedings. Under these circumstances, the
into a contract under any Law - sale-deed valid and binding on the parties.

1. Alien enemy:Apersonwho isanIndiancitizenis 4. Foreign sovereigns and diplomats: Foreign
called an alien or non-citizen of the Republic of sovereigns have some special privileges.
India. An alien enemy is a person whose country Generally, they cannot be sued unless they,
is at war with India. In India, a contract with an themselves surrender under the jurisdiction of
alien enemy is void but a contract with an alien the Indian court of law. They cannot enter into a
friend is valid under the Indian Contract Act. No contract unless an Indian citizen obtained a prior
contract can be made with an alien enemy during sanction of the Government of India, in order to
the subsistence of war, except with the prior sue them in the Indian court of law.
approval of the Indian Government.
5. Corporations: The power of a corporation to
make a contract vary according to the character

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of the corporation. A company is an artificial intention of causing any person to enter into an
person created by law and is competent to agreement. It is immaterial whether the Indian
contract. But its power of contract is subject to Penal Code (45 of 1860) is or is not in force in the
the limitation which may be either necessary or place where the coercion is employed. Thus, if a
express. party signs a contract due to coercion, the
contract generally will not be considered legally
It is very clear that only those people are enforceable.
competent to contract who is major, sound mind
and not disqualified by law. A person, who is The rule regarding coercion applies both to the
diagnosed as being mentally ill, that prevents entire contract as well as individual terms in the
them from managing his own affairs may contract. That is, the parties must willingly agree
bedeclared mentally incompetentby a court of to the contract as a whole, as well as the various
law. When a person is judged to be incompetent, terms, definitions, and requirements laid out
a guardian is appointed to handle the person’s individually in the agreement.
property and personal affairs.
If conditions of coercion are found, the effect on
e. Free consent- Another essential of the valid the contract is usually that the entire contract is
contract is the consent of parties, which should rescinded or cancelled. Contract rescission has
be free. As per the Contract Act, two or more the effect of canceling the agreement in its
parties are said to consent when they agree upon entirety. This will release both parties from their
the same things in the same sense. The consentis obligation to perform any contract duties as
considered free when any of the following things contained in the agreement.
do not induce it:
Coercion and Duress are two commonly
Coercion – It is defined under Section 15 of The confused terms under the Law of Contract.The
Indian Contract Act, 1872 as committing, or term Duress corresponds to Coercion in English
threatening to commit, any act forbidden by the law. However Coercion under the Indian
Indian Penal Code (45 of 1860) or the unlawful Contract Law has wider amplitude than Duress
detaining, or threatening to detain, any property, under the English Law
to the prejudice of any person whatever, with the

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Coercion Duress

Coercion can be employed against any person Duress can be employed only against the life or
including a stranger. liability of other party to the contract or
members of his family.

Immediate violence subsequent to coercion is Duress must be such that it causes immediate

not an essential element. violence.

Coercion may be employed against any Duress may be employed only by the party to the
person. contract or his agent.

Unlawful detention of goods is a kind of Unlawful detention is not duress under the
coercion. English Law.

· Misrepresentation - Section 18 of the Indian misleading another to his prejudice or to do the
Contract Act, 1872 defines misrepresentation as prejudice of another claiming under him.
under:
c. Causing, however innocently, a party to an
Misrepresentation means and includes- agreement, to make a mistake as to the
substance of the thing which is the subject of the
a. The positive assertion, in a manner not agreement.
warranted by the information of a person making
it, of that which is not true, though he believes it Positive assertion, i.e. an explicit statement of
to be true. fact by a person of that which is not true, though
he believes it to be true amounts to
b. Any breach of duty which, without any intent to misrepresentation. There should be a false
deceive, gains an advantage to the person statement made innocently, without any
committing it, or anyone claiming under him, by intention to deceive.

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Noorudeen vs. Umairathu beeviv is an recoverable for negligent misrepresentation
illustration where the transaction was set aside under 2(1) of the Misrepresentation Act, 1967.
on the ground of fraud and misrepresentation. Under this act, such compensation can be
The defendant, who was plaintiff’s son got a awarded in lieu of performance under section 19
document executed from the plaintiff describing as would place the representee in a position as if
it as hypothecation deed of the plaintiff’s the contract were performed. The court granting
property. In fact, by fraud and rescission has also the power to order
misrepresentation, the document executed was compensation under section 30 of the Special
a sale deed of the plaintiff’s property. The Relief Act, 1963. The person rescinding the
plaintiff was a blind man and the sale was for an contract would also be entitled to restitution to
inadequate consideration. It was held that such a the extent provided in section 65.
deed which was got executed by fraud and Fraud - According to section 17 of the Indian
misrepresentation, was rightly set aside. Contract Act, 1872 “fraud” means and includes
any of the following acts committed by a party to
Negligent Misrepresentation - Negligent a contract, or by his agent, with intent to deceive
misrepresentation is one made carelessly or another party thereto or his agent, or to induce
without reasonable grounds for believing it to be him to enter into the contract:
true. But it cannot be regarded unless the
representor owed a duty to the represented to a. The suggestion,as a fact,ofthatwhich is not true,
be careful. by one who does not believe it to be true;

Innocent Misrepresentation - The term innocent b. The active concealment of a fact by one having
misrepresentation is used for the knowledge or belief of the fact;
misrepresentation in which no element of fraud
or negligence is found or one for which the c. A promise made without any intention of
representee has good grounds of belief. performing it;

Damages for misrepresentation - Damages have d. Any other act fitted to deceive;
always been recoverable under the English law e. Any such act or omission as the law specially
for fraudulent misrepresentation and are
declares to be fraudulent.

Explanation – Mere silence as to facts likely to
affect the willingness of a person to enter into a

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contract is not fraud, unless the circumstances of are such that, regard being had to them, it is the
the case are such that, regard being had to them, duty of the person keeping silence to speak, or
it is the duty of the person keeping silence to unless his silence is, in itself, equivalent to
speak, or unless his silence is, in itself, equivalent speech”.
to speech.
In Shri Krishan vs. Kurukshetra University, Shri
Essentials of fraud - According to Section 17, Krishan, a candidate for the L.L.B. part1 exam,
following are the essentials of Fraud:- who was short of attendance, did not mention
a. There should be a false statement of fact by a that fact himself in the admission form for the
person who himself does not believe the examination. Neither the head of the law
statement to be true. department nor the university authorities made
b. The statement should be made with a wrongful proper scrutiny to discover the truth. It was held
intention of deceiving another party thereto and by SC that there was no fraud by the candidate
inducing him to enter into the contract on that and the university had no power to withdraw the
basis. candidate on that account.

Mere silence is no fraud - It has been noted Undue influence - Section 16 of the Indian
above that to constitute fraud; there should be a Contract Act, 1872 defines ‘Undue influence' as:
representation as to be certain untrue facts.
Active concealment has also been considered to (1) A Contract is said to be induced by `undue
be equivalent to a statement because in that influence' where the relations subsisting
case, there is a positive effort to conceal the between the parties are such that one of the
truth and create an untrue impression on the parties is in a position to dominate the will of the
mind of the other. Mere silence, however, as to other and uses that position to obtain an unfair
facts in no fraud. Explanation to “section 17”, in advantage over the other.
this connection, incorporates the following
provision: (2) In particular and without prejudice to the
generality of the foregoing principle, a person is
“Mere silence as to facts likely to affect the deemed to be in a position to dominate the will of
willingness of a person to enter into a contract is another-
not fraud, unless the circumstances of the case

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(a) Whereheholdsarealorapparentauthority which confined him to a nursing home. There he
over the other, or where he stands in a fiduciary madea deed giftingallhisproperties to oneof
relation to the other; or his sons to the exclusionof others. Court held
that the gift was caused by undue influence
(b) Where he makes a contract with a person voidable.
whose mental capacity is temporarily or
permanentlyaffected byreason ofage,illness, or · Mistake - According to section 20, Mistake may
mental or bodily distress. work in two ways:

(3) Where a person who is in a position to 1. A mistake in the minds of parties is such that
dominate the will of another, enters into a there is no genuine agreement at all. There may
contract with him, and the transaction appears, be no consensus and idem i.e. the meeting of two
on the face of it or on the evidence adduced, to minds, i.e. there may be absent of consent. The
be unconscionable, the burden of proving that offer and acceptance do not coincide and thus no
such contract was not induced by undue genuine agreement is constituted between the
influence shall be upon the person in a position to parties.
dominate the will of the other.
2. There may be a genuine agreement, but there
(4) Nothing in this sub-section shall affect the may be a mistake as to a matter of fact relating to
provisions of section 111 of the Indian Evidence that agreement.
Act, 1872 (1 of 1872).
Mistake, when there is no consensus ad idem or
Essential elements of Undue Influence- there is an absence of consent -“Two or more
persons do not agree to the same thing in the
a. One of the Contracting Parties dominates the same sense, there is deemed to be no consent on
will and mind of another; their part. In other words, there may be an
absence of the meeting of minds of the parties, or
b. The Dominating Party has taken an unfair there may be no consensus ad idem. In such
advantage over the weaker party or the cases, there arises no contract which can be
transaction is unconscionable. enforced.”
Lakshmi Amma v. T. Narayanavi, in this case, a
person was suffering from a number of ailments

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In Raffles vs. Wichelhaus, the buyer and the contract is not voidable. Everyone is supposed to
seller entered into an agreement under which know the law of the land. Ignorance of law is no
the seller was to supply a cargo of cotton to excuse. If a person wants to avoid the contract on
arrive “ex Peerless from Bombay”. There were the ground that there was a mistaken impression
two ships of the same name i.e. Peerless and both in his mind as to the existence of some law while
were to sail from Bombay, one in October and he entered into the contract, he will get no relief.
other in December. The buyer had in mind For instance, A owes B Rs 1000, both A and B
peerless sailing in October while the seller mistakenly thinks that the debt is time-barred
thought of the ship sailing in December. The and agrees that A may pay only Rs 500 to clear
seller dispatched the cotton by December ship the debt. It is a mistake of law and the contract to
but the buyer refused to accept the same. In this pay Rs 500 is valid.
case, the offer and the acceptance didn’t coincide
and there was no contract. Therefore, it was held MISTAKE ESSENTIAL TO AGREEMENT
that the buyer was entitled to refuse to take
delivery. a. Mistake as to the existence of the subject
matter:-
Requirements under Section 20
· Both the parties to the contract should be under If both the parties to contract believe in the
existence of the subject matter, which in fact
a mistake. does not exist, the agreement would be void. The
reason is that if the subject matter of the
· Mistake should be as regards a matter of fact. contract has already perished, there is nothing
regarding which the contract is being made.
· The fact regarding which the mistake is made
should be essential to the agreement. In Galloway vs. Gallowayvii, a man and a woman
executed a separation deed, both of them
Mistakeoffact- There should be a mistake of fact working under a common mistaken impression
and notof law. The validity of the contractis not that they were married to each other.Since the
affected by mistake of law. fact of marriage was non-existent, the deed was
held void.
Illustration -A and B make a contract grounded
on the erroneous belief that a particular debt is
barred by the Indian law of limitation, the

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b. Mistake regarding quality of the subject matter perform this contract. The agreement has been
only:- covered under mistake, is void.

If the parties to contract are not mistaken as to d. Mistake as to title:-
the subjectmatter,but only regardingits quality,
i.e. when the subject matter has been clearly Sometimes the parties may be laboring under a
identified although its quality has not been, the mutual mistake as to the title to the goods sold.
agreement would be valid. The buyer may already be the owner of what the
seller purports to sell. In fact, there is nothing
In Smith vs. Hughesviii, there was a sale of a parcel which the seller has to transfer. The transfer of
of oats by sample by A to B. B refused to accept ownership is intended but the same is impossible
the oats on the ground that he thought that the as the buyer is already the owner. Such an
oats were old when in fact they were new. A agreement is void because of mutual mistake.
claimed for damages from B. It was held that
there was no mistake as to the identity of subject In Cooper vs. Phibbsix, A agreed to take a lease of
matter, but merely as to the age of oats. The the fishery from B. Unknown to both the parties,
contract, in this case, was not for the sale of old A was already tenant for life of the fishery rights
oats, but of a specific parcel, by a sample. The and B had no title to the same. The agreement
contract was, therefore, valid and B was liable for was set aside on the ground of common mistake.
not accepting the goods.
e. Mistake as to promise:-
c. Mistake as to the possibility of performance of
the contract:- If there is a mistake because of which the
promise does not reflect the real intention which
It is the position when the performance of the was there in the proposed agreement, such an
contract is not legally possible. For instance, A agreement would be void.
agrees to take a lease of a fishery from B. If it In Hartog vs. Colins & Shieldsx, there was a
turns out that A is himself already the tenant for contract for the sale of 30,000 pieces of
life, and B has no interest which could be Argentine hare-skins. Negotiations as to price
transferredtoA,itisnotlegallypossibleforB to were on ‘per piece’ basis and that was in

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accordance with the usual trade practice. The get a good title to the goods and therefore, the
sellers by mistake in the offer stipulated to defendants also didn’t get any title and they were
supply at a certain rate “per pound” instead of bound to return the goods to the plaintiffs. It was
“per piece”. A pound on an average contained held that because of mistake Blenkarn did not
three pieces of such skins. The buyer sued the get any title to the goods and the transferee from
sellers for the non-delivery of goods. It was held Blenkarn, i.e. the defendants also did not get any
that there had arisen no contract in this case, title and they were bound to return the goods to
because the buyer could have noticed the the plaintiff.
mistake by the sellers contained in their offer,
and because of their mistake, the seller’s g. Mistake as to the existence of a material fact:-
intention was not properly reflected in the offer.
If the mistake is regarding a fact essential to the
f. Mistake as to the identity of the parties:- agreement, the agreement is void. But if the
mistake does not relate to the existence of a
This can be cleared through the case of Cundy vs. material fact concerning the subject matter of
Lindsay; one Blenkarn placed an order for supply the contract, the validity of the contract may not
of goods to the plaintiffs, fraudulently imitating be affected thereby.
signatures of other goods at an address which
happened to be in the same street in which f. Lawful object- According to Contract act, an
Blenkiron and co. was located. The plaintiff agreement may become a valid-contract only, if
believed that this was an order from the reputed it is for a lawful consideration and lawful object.
firm Blenkiron and co. and supplied the goods to The below-mentioned considerations and
Blenkarn. After receiving the goods, Blenkarn objects are not lawful as per the Contract Act :-
sold the goods to the defendants, who were
acting innocently in good faith. The plaintiffs If it is forbidden by law
brought an action against the defendants to If it is against the provision of any other
recover the goods contending that since there laws
was a mistake as to the identity of the party when If it is fraudulent
the plaintiff accepted the offer, there was no If it damages somebody’s person or
contract. Therefore, the defendants also did not property

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If it is in the opinion of courts, immoral or Example: Withdrawing cash from an ATM
against the public policies machine
2. Based On Execution
1.2 Classification Of Contracts · Executed Contract: This is a contract signed
Broadly, the contracts in India can be classified between two parties who have performed their
into four different kinds, which can further be legal obligations under the contract.
listed as different types of contracts.
Example- A person selling his car to another
1. Based On Creation person saying the car is for sale for a sum of 5
lakh rupees and the same being obligated.
· Express Contract: An express contract deals
with a contract which is either made by spoken · Executory Contract: This is a contract signed
words or a written document. Example- A between two parties who are yet to perform
customer buying a flat from a broker with a their legal obligations under the contract.
written document.
Example- A person offers his bike for 1 lakh
Implied Contract: An implied contract deals with rupees and another person accepts the offer, but
a contract which is made in any way other than a the bike is yet to be delivered and the amount for
verbal agreement or a written record. In this it is also yet to be paid.
particular case, it is inferred from the conduct of
a person or from that of any given circumstance. · Partly Executed Contract: This is a contract
Example- A bus shuttle service from the state signed between two parties where one of the
government plies in a city, to use its service you mentioned parties is yet to perform a legal
have to buy a ticket and the shuttle service isn’t commitment whereas the other party has
exclusively operating for you. satisfactorily completed the legal obligation as
per the contract.
· Tacit Contract: A tacit contract deals with a
contract which implies that it is made in silence Example- A salesperson sells a flat to a customer
because there is an understanding that there is
no contradiction or objection from the
circumstances.

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but handing over of the keys to the new flat takes considered to be void.
a month’s time. Voidable Contract: An agreement which is
enforceable by one or more of the legally bound
3. Based On Enforceability parties but not at the option of the other party. If
· Valid Contract: A contract which duly follows the contract isn’t forsworn by the disgruntled
party or set aside, the contract cannot be a valid
the laws prescribed by any Court of law is said to one.
be a Valid contract. Example- A land shark threatens to kill a person
if he doesn’t sell his property for 1 lakh rupees.
Example- A man offers to marry a woman, the The payment is received because of forced
woman agrees to this offer. coercion. The person has to make this voidable
contract because his consent to the sell the
· Void Contract: At the time of contracting, the property in contention was never given and this
must be done quickly before the hooligans or the
contract was valid but in due course of time, the land shark sells it to another party who isn’t
aware of its pre-existing conditions. If that’s
contract becomes void due to several reasons done, then it becomes a non-repudiated
contract.
like a change of law or a subsequent amendment
· Illegal Agreement: Illegal agreements are void
to it, performance degradation and other from the very beginning because the agreement
made cannot be enforced by any law.
unforeseeable circumstances.
Example- Contract killing or supari killing is void
Example- A man marries a woman with her from the very beginning.

consent but later on the woman dies due to Unenforceable Contract: This is a valid contract
but still it can’t be enforceable because of a
illness. So initially the contract was valid and the technical lag.

same becomes void due to the death of the

spouse.

Void Agreement: If an agreement isn’t
enforceable by law, then such type of an
agreement is said to be void.

Example- An agreement made with a minor or a
person of unsound mind or a drunkard is

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Example- All arbitration agreements must be Zero Hour Contracts: This type of contract deals
made in writing, any oral agreement can’t be with workers who can be contacted for
taken into account and made enforceable. professional service but they are already
working for some other employer. It’s not
4. Based On Duration necessary that they should right away work on
· Full-time and Part-time Contracts: A full-time the assigned work, unlike full-time employees.
Example- Freelancers providing content.
contract usually involves 40 hours of work per
week and it may go up to a maximum of 60 hours 1.3 Types of Commercial Contracts
per week. A part-time contract generally hovers There can be many different kinds of commercial
around the 30-hour mark per week. contracts and it is not possible to make a list of all
such commercial contracts. These can be broadly
Example- Salaried professionals like engineers categorized as:
are full-time employees and delivery boys can be
employed on a part-time basis. “Contracts of Performance” such as “Sale of
goods/Service Contract, “Vendor Contracts”,
· Fixed-term Contracts: A fixed-term contract is Distribution Contracts”, Joint Venture
set for a stipulated period within which the set Contracts”;
task must be accomplished. “Personal Contract” such as Employment
Contract, Consultancy Agreements etc;
Example- Construction workers were given a “Financial Contracts” such as Loan Contracts,
task to finish a building project within 6 months. Collateral/Security Contracts, Equity
Investment Contracts etc.;
· Agency Staff Contracts: This contract deals with “Intellectual Property Agreements; and,
hiring employees on a temporary basis from · Real Estate Agreements, etc.
agencies which provide services for larger
corporations. What types of commercial contractsexist?
The types of commercial contracts are as
Example- Agencies providing skilled labour for numerous as the number of businesses that
corporations like IBM, Yahoo, Infosys etc.

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operate in the world. However, despite the many a "target" price that gives a range of potential
possible needs for contracts and contractual costs and expenditures for both sides of the
relationships, there are several typical agreement. These contracts include language
commercial contracts that are standard across that protects both sides of the deal and
different industries. require any price changes to remain equitable
· Definite-quantity contracts are related to the and in the spirit of the original contracted
price.
purchase of goods and fall under the umbrella · Time and materials contracts are risky but
of Indefinite Delivery Contracts, or IDC. sometimes necessary contracts that do not
These contracts provide for the delivery of a have a predetermined schedule or budget
specific and defined quantity of supplies or included. Many times, this is done out of
services that is scheduled at the time of the necessity and is the norm on construction
contract. They are also contracted to deliver contracts where building materials and
these goods on a regular schedule. These are calendars often require revision throughout
standard when supply numbers are known in the project.
advance of a product. When are commercial contracts needed?
· Firm-fixed-price contracts are agreements Commercial agreements examples are helpful
where the contractor gets a fixed amount of in learning what sorts of services require the
money from a client but provides all goods protection and safety of a contractual
and services up front. This agreement is risky relationship. Like most other contracts, they
for the contractor, as it forces them to take on are useful in almost all business situations
all the responsibility of pricing out materials where there is a risk, any transaction, or
and service at the beginning of the obvious safety needs. These can include:
relationship. However, these sorts of · Production and logistics agreements help
contracts encourage pre-planning and come give businesses peace of mind when entering
with low amounts of administrative and into business contracts with third-party
financial oversight once they're enacted. vendors. These sorts of arrangements detail
· Fixed-price contracts, however, include a how and when products are handled on both
clause for an adjustable price. These sides of the agreement.
adjustable prices include both a "ceiling" and

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· Distribution contracts are regularly created juggling that requires the security of a
to facilitate relationships between suppliers contract in almost all circumstances. The
of goods and distributors of products. These ability to detail the terms of the agreement, as
contracts are complex and often require well as structuring the contract in away that
language to determine whether the is beneficial and cost-effective for all parties
distribution agreement will be exclusive or involved, lowers the risk of this necessary
non-exclusive, among other questions and business need.
arrangements. · Construction contracts can either be capped
or open-ended when it comes to cost and
· Purchasing or leasing equipment may not timeline of the project. As a result,
require a contract but usually involves one as commercial construction contracts are
a part of the financing process. As companies usually one of the first steps before a building
grow and expand, accessing reliable project begins.
equipment is critical. Similarly, purchasing or · Confidentiality agreements range from non-
leasing property and buildings require the disclosure agreements for contract
same sort of oversight and care. employees to necessary forms that are
standard with any hiring process.
· For businesses that do not have in-house Confidentiality contracts protect employers
marketing and public relations departments, and other businesses from losing trade
contracting those services is often necessary. secrets or other intellectual property.
However, negotiating terms and deliverable · Any sale of products or services should
assets, as well as costs and timelines, requires include a contractual relationship between
contractual support. This negotiation is the seller and the buyer. This allows for a
especially critical for both the customer and commercial relationship that protects both
the vendor, as it clarifies expectations at the parties and makes the exchange fair and
start of the relationship. equitable.

· Transportation of goods and services
requires an intense amount of logistical

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1.3. The commercial contracts most commonly used they are industrial supplies) or to retailers (if
by foreign companies which do business in India they are consumer products).
are: Agency Agreement: The foreign company
appoints a natural person or a legal entity to seek
Purchase of Goods Contract: For companies clients and carry out transactions, normally in a
(especially SMEs) which purchase and import certain State of India or for the whole country.
products from India. The contract is written from The agent receives its fees through commissions
the perspective of the foreign company that buys on the sales it achieves.
products in India. Sales Representative Agreement: Similar to the
Sale of Goods Contract: For the exportation of Agency Contract, although the representative
goods engaged in by foreign companies with can negotiate the sale conditions of the products
India, usually industrial supplies, machinery or with the Indian company, always in accordance
consumer products. The model contract is with the instructions and clauses indicated by
written from the perspective of the foreign the foreign company.
company that sells products in India. Joint Venture Agreement: For the
Manufacturing Contract: For foreign companies establishment of a new company between two
subcontracting their manufacturing in India and partners (a foreign company and an Indian
need that the manufactured products comply company) who have agreed to share the profits
with certain technical and commercial and risks of a business carried on by both of
requirements, and also that the Indian them.
manufacturer complies with the confidentiality Confidentiality (or Non-Disclosure)
and intellectual property rights of the foreign Agreement: is used in preliminary negotiations
company. before distribution, licensing, or joint venture
Distribution Contract: When the foreign agreements between foreign companies and
company appoints an Indian company to Indian companies to safeguard the sensitive
distribute its products in all or part of the information (commercial or technical) which is
territory of India. The Indian distributor resells supplied to the other party during negotiations.
the products to manufacturing companies (if

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i Ilr (1903) 30 Cal 539 (Pc) vi AIR 1967 SC 878
ii 1935 37 BOMLR 461 vii 1914 30 T.L.R. 531
iii AIR 1944 Nag 232 viii1871 L.R. 6 Q.B. 597
iv AIR 1957 Pat 491 ix 1867 L.R. 2 H.L. 149
vAIR 1998 Ker 171 x 1939 3 All E.R. 556

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