IAI Actuarial Core Principles · Business Management

Sources of Indian law and valid contracts: formula sheet

Full chapter guide

Key formulas

Hierarchy of sources: Constitution > Statute > Delegated legislation; A lower source is invalid if it conflicts with a higher one. Delegated legislation must stay within the parent Act.
Binding precedent: Supreme Court binds all courts; High Court binds subordinate courts in its State; A High Court decision from another State is only persuasive.
Ratio vs obiter: Ratio decidendi = binding; obiter dicta = persuasive; Only the reasoning essential to the decision is binding.
Test for delegated legislation: Valid if intra vires the enabling Act and the Constitution; If it exceeds the power given, courts can declare it void (ultra vires).
Test for a valid custom: Ancient + certain + reasonable + continuous + not against statute or public policy; Custom must be proved by the person relying on it.
Court hierarchy (top to bottom): Supreme Court → High Court → District / subordinate courts; Appeals normally move upward. The exact route depends on the type and value of the case and on the statute.
Civil standard of proof: Balance of probabilities; The claimant must show the claim is more likely true than not.
Criminal standard of proof: Beyond reasonable doubt; The prosecution carries the burden. This is a higher standard than the civil one.
Purpose of each branch: Civil = remedy between parties; Criminal = punishment for offence against society; Use this to classify any scenario quickly.
Regulator map: Insurance → IRDAI; Securities → SEBI; Banking → RBI; Pensions → PFRDA; Actuarial profession → IAI; Match the activity to the body that supervises it.
Definition of a contract: Contract = Agreement + Enforceable by law; Every contract is an agreement, but not every agreement is a contract.
Definition of an agreement: Agreement = Offer (proposal) + Acceptance; Acceptance of a proposal makes it a promise. Every promise and set of promises forming the consideration for each other is an agreement.
Essentials checklist: Offer and acceptance + Intention to create legal relations + Consideration + Capacity + Free consent + Lawful object + Certainty + Possibility of performance + Legal formalities (where required); All must be present for a valid contract. Name the missing one in your answer.
Rules for a valid offer: Offer must be: communicated, capable of creating legal relations, certain, and made with a view to obtaining assent; An invitation to treat is not an offer. A general offer to the public can be accepted by anyone who performs the stated conditions.
Rules for valid acceptance: Acceptance must be: absolute, unqualified, communicated, in the prescribed or a reasonable mode, and given before the offer lapses or is revoked; A counter-offer rejects the original offer. Silence is not acceptance.
Status of agreements: Valid: all essentials present. Voidable: enforceable at the option of one party. Void: not enforceable by law.; Use these terms precisely in written answers.
Consideration, section 2(d): Consideration = act, abstinence or promise, at the promisor's desire, by the promisee or any other person; past, present or future; Apply the three tests: at desire of promisor, from promisee or anyone else, and may be past, present or future.
No consideration, no contract: Agreement without consideration = void (section 25); Exceptions: natural love and affection (written and registered, near relatives), compensation for voluntary past service, and a written promise to pay a time-barred debt. Only the love and affection exception and the time-barred debt exception require writing. The compensation exception under section 25(2) does not.
Adequacy of consideration: Consideration must be real and lawful, but need not be adequate; Courts do not check fairness of price. Inadequacy may still suggest fraud or lack of free consent.
Privity: Only parties to a contract can sue or be sued on it; Recognised exceptions include trusts, family arrangements, assignment, charge on property and estoppel.
Competence to contract, section 11: Competent = age of majority AND sound mind AND not disqualified by law; All three conditions must hold. Majority is 18, or 21 if a court-appointed guardian or a court of wards applies.
Minor's agreement: Minor's agreement = void ab initio; No ratification on reaching majority. A minor can be a beneficiary, and necessaries can be recovered from the minor's property.
Void and voidable: Void = no legal effect; Voidable = valid until avoided by the aggrieved party; Voidable arises from lack of free consent, not from minority.
Modes of discharge: Performance | Agreement | Impossibility (frustration) | Breach; Use these four headings to organise any answer on discharge. Breach ends the contract only if the innocent party chooses to treat it as ended.
Initial impossibility: Act impossible in itself when the contract is made → agreement is void (section 56, first paragraph); This is not frustration. A promisor who knew, or could have known, of the impossibility must compensate a promisee who did not know (section 56, third paragraph).
Frustration (impossibility after contract): Act becomes impossible or unlawful after the contract + not caused by the promisor → contract becomes void (section 56, second paragraph); Higher cost, delay or inconvenience alone is not enough.
Anticipatory breach: Refusal before due date → innocent party may put an end to the contract and sue now, or keep it alive and wait until the due date (section 39 covers a party refusing wholly to perform; the wider rule on anticipatory breach is developed by case law). Damages are governed by section 73; If you keep the contract alive, you keep your own obligations and risk a later event, such as frustration, ending the contract. Damages are generally assessed by reference to the time of breach, and you cannot recover loss you could reasonably have avoided.
Damages (general rule): Compensation for loss that arises naturally from the breach, or that both parties knew was likely when contracting; Remote loss is not recoverable. This is the rule in section 73.
Mitigation: Recoverable damages = loss caused by breach − loss that reasonable steps could have avoided; The innocent party must take reasonable steps to reduce loss.
Specific performance: Available when damages are not an adequate remedy; discretionary; Typical for unique goods or land. Rarely for personal service or contracts needing constant supervision.
Injunction: Prohibitory injunction: court order restraining a breach, typically of a negative promise. Mandatory injunction: court order to undo a wrongful act; Temporary or perpetual. Granted at the court's discretion.

Quick revision

Sources of Indian law include the Constitution, statutes, delegated legislation, case law and custom.
Courts apply the law, and higher court decisions guide lower courts through precedent.
A valid contract needs offer, acceptance, lawful consideration, capacity, free consent, lawful object and intention to create legal relations.
An agreement enforceable by law is a contract.
Consideration must be lawful, and it may be past, present or future.
A minor's agreement is treated as void from the start under Indian law.
Consent is free when it is not caused by coercion, undue influence, fraud, misrepresentation or mistake.
A contract with consent that is not free is generally voidable at the option of the affected party.
An agreement with an unlawful object or consideration is void.
Discharge can occur by performance, agreement, impossibility or breach.
Remedies for breach include damages, specific performance and injunction, depending on facts.
In a case study, name the rule, apply it to the facts, then conclude.

Common mistakes

Treating delegated legislation as a separate, equal source to statute. Fix: Remember it derives its power from an Act. It can be struck down if it goes beyond that Act.
Saying every court judgment binds all courts. Fix: State which court decided it. Supreme Court binds all courts; High Court binds only courts below it in its State.
Saying a High Court is below the district court, or mixing up the order of appeal. Fix: Draw the ladder: Supreme Court, High Court, district courts. Appeals go up, not down.
Treating civil and criminal cases as exclusive. Fix: Say that one act, such as fraud, can lead to both a criminal prosecution and a civil claim, each with its own standard of proof.
Treating every agreement as a contract. Fix: Write the definition: a contract is an agreement enforceable by law. Then test for enforceability using the checklist.
Calling a shop display, catalogue or price list an offer. Fix: Treat such displays as invitations to treat. The customer makes the offer and the seller accepts it, for example at the billing counter.
Calling a minor's agreement voidable Fix: Remember that a minor's agreement is void ab initio. Voidable arises only from defective consent.
Saying consideration must be adequate Fix: Say consideration must be real and lawful but need not be adequate. The court does not weigh the price.
Treating a contract that has become more expensive or difficult as frustrated. Fix: Frustration needs the act to become impossible or unlawful, or the basis of the contract to vanish. Extra cost alone is not enough.
Saying the contract is automatically ended by any breach. Fix: Breach gives the innocent party a right to treat the contract as ended (section 39 where a party refuses wholly to perform) and to claim damages. The innocent party may instead choose to keep the contract alive. The contract is not discharged unless that choice is made.

Exam tips

Learn the hierarchy as a short chain and write it at the start of a longer answer.
Use the exact terms: intra vires, ultra vires, ratio decidendi, obiter dicta. Examiners look for them.
In scenario questions, name the source first, then apply it. Do not just list all sources.
For multiple-choice questions, watch for options that call persuasive sources binding.
Do not cite section numbers or case names unless you are certain of them.
Draw a quick ladder of courts in the margin before you write. It prevents ordering errors and shows structure.
In scenario questions, state civil or criminal first, then the standard of proof. Those two points earn marks quickly.
Always link the legal point to an actuary's role, such as advice, duty or regulatory compliance. Pure recall answers score lower.