CA FOUNDATION – PAPER 2 – BUSINESS LAWS

Test No.: 01 Marks: 24 Marks;

Topics: ICA, 1872 – First 2 Chapters Time: 1 Hour

ANSWERS
Q.1.
(a) Essential Elements of a Valid Offer:
In order to be valid, an offer must have the following essential elements or legal rules:
1. The Offer must be clear and definite: The terms of the offer must be very clear, certain and definite.
It should not contain any unclear, vague(not clear) or ambiguous(confusing) terms.
For Example: Mr. A. offers to sell Mr. B, one of his cars. Here the subject matter, i.e., which car is not
clear. This can lead to confusion, so it is not a valid offer.
2. The Offer must be capable of creating legal relationship: It is a general presumption(legal assumption) that
social/domestic offers do not intend to create legal relations, whereas business/ commercial
transactions intend to create legal relations. However, there can be exceptions to both.
For Example: Mr. A offers to gives his house on rent to Mr. B at a monthly rental of
` 10,000/- This is a commercial transaction and the intention of both the parties is to create a legal
relation, so the offer is a valid one.
3. The Offer must be made with a intention of obtaining the consent of the Offeree: An offer should be
made with the intention of obtaining the consent/ assent(agreement) of the Offeree, and not merely
disclosing the intention of making an offer.
4. The Offer may be express or implied: An offer may be expressed in words or it can also be implied
through the behavior, actions, conduct of the Offeror.
5. The Offer must be communicated: It is not enough that an offer has to exist, but in order to be
complete and valid, it also needs to be communicated to the Offeree, i.e., it should come to the
knowledge of Offeree. Only after coming to his knowledge can the Offeree give his acceptance, not
before that.
For Example: (Lalman Shukla V. Gauri Datt)
Facts of the case: Mr. A’s nephew went missing, so he told his servant, Mr. B to go in search of the
missing nephew. Following his master’s orders, Mr. B set out. Meanwhile, Mr. A gave an advertisement
in the newspapers, offering a reward to the finder of the nephew. Mr. B, unaware of this offer found
the missing nephew and returned. Later on knowing about the offer, he went to claim his reward from
his master, Mr. A.
Issue: Mr. B, the servant demanded the reward offered by Mr. A, since he has already fulfilled the
condition given in the offer. Mr. A. refused to give Mr. B the reward, claiming that Mr. B had done the
act of finding the nephew in ignorance of the offer, and so there was no acceptance of the same.
Decision: The Court held that since Mr. B had done the act, without knowing of the offer of reward, he
was not entitled to it as there was not communication of offer to him, nor was there any acceptance.
 6. The Offer may be Conditional: An Offer may contain certain terms and conditions, which will be
binding on the Offeree, when he accepts the offer, provided, the terms and conditions are
communicated before the acceptance is given by the Offeree.
For Example: Mr. A offers to sell his two-wheeler to Mr. B for ` 25,000/-, on the condition that Mr. B.
pay an advance of ` 10,000/- immediately. Here the offer with the condition is valid provided the
condition is communicated to Mr. B at the time of the offer or before his acceptance is given.
7. Communication of special Terms and Conditions: If the offer contains special terms and conditions it
is important that the same are communicated to the Offeree at the time of the offer itself. Offeree is
not bound by terms communicated after his acceptance has been given.
Big companies in the field of – Insurance, Banking, transport, Hotel, Dry Cleaning etc. generally use
standard form of contracts to communicate special terms.
For Example: (Henderson V. Stevenson)
Mr. A. purchased a steamer ticket, on the back of which were mentioned the conditions. One of the
condition excluded the liability of the company for loss, injury or delay to the passengers or their
luggage. However, there was nothing on the face of the ticket to draw Mr. A’s attention to the
conditions printed at the back. Mr. A never looked at the back and so was not aware of the conditions.
His luggage was lost. It was held that Mr. A was entitled to claim compensation in-spite of the
exemption clause because there was no indication on the face of the ticket about the conditions
mentioned at the back.
Hence, the offeror has to take appropriate efforts to bring the special terms and conditions to the
knowledge of offeree before acceptance in given.
8. The Offer should not contain a term, the non-compliance(failure or refusal to comply) of which may be assumed
as acceptance: The Offeror while making the offer cannot tell the Offeree that if the Offeree does not
communicate his acceptance within specific days, the offeror will assume that the offeree has accepted
it. This is like pressurizing the offeree to accept, so any such term, in the offer, the non-compliance of
which is assumed as acceptance, is not a valid offer.
For Example: Mr. A writes a letter to Mr. B offering to sell his car for ` 3 lakhs and also states that if
Mr. B does not replay within 3 days. Mr. A shall assume that his offer is accepted by Mr. B.
This is not a valid offer.
9. Statement of price is not an offer:
For Example: Harvey Vs Facey.

(b) (a) The communication of offer is complete on 7th January because the letter containing the offer reaches
the offeree on 7th January.
(b) The communication of acceptance is complete as against the offerer on 10th Jan. because the letter
of acceptance is posted on 10th January.
(c) The communication of acceptance is complete as against the acceptor, on 15th Jan. because the letter
of acceptance is received by the offerer on 15th January.
(d) X's revocation is valid because X can revoke his offer at any time before the letter of acceptance is
posted by the offeree.
(e) Y's revocation is valid because Y can revoke his acceptance at any time before the letter of acceptance
is received by the offerer.
Q.2.
(a) Agreement & Contract:
Similarities
Sr.
Subject Agreement Contract
No.
1. Meaning Is a promise or set of promises Is essentially an agreement, i.e., a
promise or set of promises
Differences
1. Enforceability May or may not be enforceable by law. E.g.- Is an agreement enforceable by law
social, moral, domestic are generally not-
enforceable while business agreements are.
2. Effect Not always binding on concerned parties Always concluded and is binding on
concerned parties
3. Scope All agreements are not contracts All contracts are agreements

(b) Voidable Contracts: According to Sec 2(i) of The Indian Contract Act, 1872, it is ‘an agreement which is
enforceable by law at the option of one or more parties, thereto, but not at the option of the other or others’.
Here a contract does come into existence, but can be avoided, repudiated/ rescinded(cancelled), at the option
of an aggrieved party(party who has suffered a legal grievance). This may happen in the following cases:
▪ The consent of one of the parties to the contract has not been freely given, i.e., consent has been got
by coercion(use of physical force or pressure), undue influence(unfair persuasion), fraud(cheating/ deception) or
misrepresentation(statement or conduct which conveys a false or wrong impression).
For Example: Mr. A threatens to kidnap Mr. B’s son if Mr. B does not sell his house to Mr. A. Here
contract has been entered into, but it is a Voidable one, i.e., can be avoided by Mr. B, the aggrieved
party.
▪ When in a contract containing reciprocal promises(promises forming the consideration or part of the consideration for each other)
one of the parties to the contract prevents the other from performing his set of promises, the contract
is voidable at the option of the party so prevented from performing.
For Example: Mr. A contracts to paint Mr. B’s house for ` 50,000/- , but Mr. B. keeps the house locked,
thereby preventing Mr. A from performing his promise, so the contract is voidable at the option of Mr.
A, the aggrieved party.
▪ When a party to the contract promises to do a certain thing at a specified time, but fails to complete
it within the stipulated(arranged or settled definitely) time, then the contract becomes voidable at the option of
the aggrieved party.
For Example: Mr. A promises to deliver 500 kgs of rice to Mr. B within a week, but fails to perform his
promise, so the contract becomes avoidable at the option of Mr. B, the aggrieved party.
Thus, a voidable contract becomes:
▪ unenforceable at the option of the aggrieved party;
▪ both the parties are relieved from performance of the contract;
▪ if the aggrieved party has suffered any loss or damage, he will have to be compensated for, by the
other party;
▪ if any of the parties has received any benefit, then it will have to be restituted(returned) once the contract
is cancelled.
(c) (a) Y is not entitled to receive the amount of reward because there can be no valid acceptance without
the knowledge of the offer. [Leading case: Lalman Shukla v. Gauri Dutt]
(b) Y is entitled to receive the amount of reward because Y has accepted the general offer by tracing the
missing son. [Leading case: Har Bhajan Lal v. Harcharan Lal]

(d) Case:
(a) X was entitled to claim compensation for the loss of his coat because there was no indication on the
face of the ticket to draw his attention to the special terms printed on the back of the ticket.
[Handerson v. Stevenson]
(b) X was entitled to claim only 50% of the cost of the coat because there was sufficient notice on the face
of the ticket as to the existence of the conditions.

Q.3.
(a) Illegal Agreement: are those which are unlawful and illegal. They are void ab-initio (void since the beginning) so they
are actually illegal agreements. Contracts to commit crimes or do things which are immoral, unlawful,
fraudulent or opposed to public policy, are considered to be illegal. All illegal agreements are void, but all
void agreements are not necessarily illegal.
For Example: Mr. A offers Mr. B ` 10,000/- for beating up Mr. C. This is an illegal agreement and so void.
It is important to note that the collateral transactions of an illegal agreement are also void, but the collateral
transaction(agreement related to the main transaction) of a void agreement which is not illegal are not necessarily void in
nature.
For Example: Mr. A and Mr. B started a smuggling business in partnership. Mr. A took a loan for the business
from Mr. C, who knew the nature of Mr. A’s business. The agreement between Mr. A and Mr. C is collateral
to the main agreement between Mr. A and Mr. B. However, the main agreement itself is illegal, so the
collateral agreement is also illegal and void.

(b) End of Offer:

An offer can come to an end in the following ways:
1. Revocation (withdrawal): According to Sec 5 of The Indian Contract Act, 1872, a proposal may be
revoked at any time before the communication of acceptance is complete as against the proposer, but
not afterwards. Thus, a proposal/offer can end if the offeror revokes/ withdraws the offer before it is
accepted by the offeree.
2. Lapse of Time: An offer is considered to have lapsed where no acceptance has been made within a
specified time (if time is specified) or within reasonable time (if no time is specified). For Example: Mr.
A applied(offered) for the shares of a Company in early June. The allotment (acceptance) by the
Company was made in late November. Now, Mr. A refused to take the shares, as he was entitled to do
so as the reasonable time for the acceptance of the shares has lapsed(come to an end) (Ramsgate
Victoria Hotel Co. V. Montefiore)
3. By Failure to fulfill conditions mentioned in offer: In the offeree accepts the offer and then fails to
fulfill the conditions mentioned in the offer, then the offer can end.
For Example: Mr. A. offers to sell his two wheeler to Mr. B, provided Mr. B pays an advance of `
15,000/- within 2 days. Failure on the part of Mr. B to fulfill the condition, will lead to revocation of
offer by Mr. A.
4. By Death or Insanity (unsoundness of mind) of the Offeror. In case of offers involving personal skill and
talent (painting, singing, dancing, etc,) the offer stands revoked on the death or insanity of the offeror.
An offer can also end if the offeree dies or becomes insane before he has given his acceptance.
However, if the offer is accepted in ignorance of the death or insanity of the offeror, then it will become
a valid contract.
 5. By a Counter Offer: A counter offer by the offeree leads to a new offer and the automatic revocation
of original offer made by the offeror.
6. By Impossibility of Performance: In case the offer becomes impossible to perform, like, due to change
in the law, destruction of the subject matter, the offer stands revoked.
7. Acceptance not according to the prescribed mode or manner: If the offeror has prescribed a specific
mode and manner of giving acceptance, then the offeree has to do so accordingly. If he fails to do so,
the offeror can take back his offer.
8. Rejection of Offer: If the offeree rejects the offer expressly or gives conditional acceptance to the
offer, the offer comes to an end. Once an offer has been rejected, it can not be subsequently revived.

(c) Y's first reply is a counter offer and not an acceptance of X's offer and has put an end to the original offer.
After having made the counter offer, Y cannot accept the original offer which has already come to an end.
Hence, X is not bound to sell his car to Y. [Leading case: Nihal Chand v. Amar Nath]

(d) She will not succeed because it was a social agreement and the parties never intended to create any legal
relations. [Leading case: Balfour v. Balfour]

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