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Business Law
Assignment 2 Submitted by: Humaira Shafiq ID: 2012-3-49-14004 Submitted to: Mr. Muhammad Ali

Lenovo [Type the company name] 1/1/2012

Kinds of Contracts
Contracts can be classified into three groups:

According to Enforceability
According to enforceability contracts can be divided as given below. a) Valid Contract A valid contract is one which is enforceable by law. It satisfies all the conditions prescribed by law. E.g. X offers to marry Y. Y agrees so it is a valid contract. b) Void Contract A void contract is not void from the beginning. It is a valid contract when it is made but subsequently it becomes void due to certain reasons. E.g. X offers to marry Y. Y accepts Xs offer. Later on Y dies. This contract was valid at the time of formation but became void when Y died. c) Voidable Contract An agreement which is enforceable by law at the option of one or more of the parties thereto but not at the option of the other or others is a voidable contract. (Sec 2(i)). E.g. A deceives B by stating that his factory produces 90 kg of sugar daily and induces B to by it. The contract is voidable at the option of B. d) Unenforceable Contract This has all the elements of a valid contract but has some sort of fault that bans it from being legally enforced. E.g. A contract for the sale of land must be in writing else it is unenforceable. e) Illegal Agreement This is one of the object of which is unlawful. It can not be enforced by law. They are always void ab-inito. E.g. A gives money to B, a smuggler, to buy smuggled goods. This agreement is illegal and the money cannot be recovered. 1. According to Formation These kind of contracts can be divided into three kinds: a) Express Contract This contract is one which is expressed in words which are spoken or written. When such a contract is formed, there is no difficulty in understanding the rights and obligations of the parties. The parties directly state the terms of the contract. E.g. A tells B on telephone that he wants to sell his car and B informs that he agrees to buy the car. This is an express contract. b) Implied Contract This contract is made other than words spoken or written. E.g. A went into a restaurant and had a cup of tea. It is an implied contract and A Will pay for the cup of tea.

C) Constructive or Quasi Contract The law imposes certain obligations under some special circumstances. In fact it is Not a contract but creates relations similar to a contract. E.g. A finds lost goods of B. A is bound to return the goods to B. 2. According to Performance a) Executed Contract It is simply a contract that has been agreed to by all the parties to the contract. E.g. A makes an offer on a house (which A signs) and then B signs it without changes the contract is executed. b) Executory Contract
An executory contract is a contract to do some future act, - as where an agreement is made to build a house in six months, or to do an act on or before some future day, or to lend money upon a certain interest payable at a future time.

Discharge of Contract
This is the termination of the contractual relationship between the parties. A contract is said to be discharged when the operation ceases. A contract may be discharged by: Performance Agreement Subsequent Imposibility Lapse of time Operation of Law Breach of Contract

Discharge by performance
a) Actual Performance This is when the parties to the contract have duly performed their respective promises which had been undertaken by them then the contract ends. E.g. A agrees to sell his watch to B for Rs. 500. A delivers the watch to B and B does the payment. This is known as actual performance of contract. b) Tender

This is also known as offer of performance or attempted performance. When one of the parties to the contract offers to perform the contract and the other does not accept it then it is known as tender. E.g. A agrees to sell his book to B for Rs. 400. A offers to deliver the book but B does not accept it. This is offer of performance. Essentials of a valid offer of performance or tender 1) 2) 3) 4) 5) 6) 7) It must be unconditional. It must be in accordance with the contract Must be made at proper time and place Must be of whole obligation The person making it must be able to perform the promise Must be made to the promise of the agent In case of joint promises tender to any one of them is valid Where money is involved then actual amount must be tendered

2) Discharge by Agreement
A contract is discharged by agreement in the following ways: a) Novation Replacing an existing Contract by a new contract. The new contract must be formed by the same parties or by new parties. E.g. A owed to B and B to C. As debt is cancelled and C accepts as his debtor. This is novation. b) Alteration When one or more terms or conditions of the contract are changed then this is known as alteration. E.g. A agrees to supply salt to B on 1 Feb. Later A and B agree to change the date of delivery to 1 March this is alteration in the terms of the contract. c) Recission This is cancellation of contract by mutual agreement. This releases the parties from their obligations. E.g. A promises to deliver goods to B on a certain date. Before the end of performance, A and B agree that the contract will not be performed. Thus the contract rescinded. d) Remission This is acceptance of lesser fulfillment of a promise that was made. E.g. A owes B Rs. 500. B agrees to accept Rs. 200 in full satisfaction of his claim. The whole debt is discharged.
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Waiver The parties may abandon their respective rights by mutual consent. E.g. A promises to make a shirt for B and B afterwards forbids him from doing so. This contract is terminated by waiver.

3) Discharge by Subsequent Impossibility

a) Initial Impossibility An agreement to to discover treasure by magic is void agreement. b) Subsequent Impossibility Subsequent impossibility or illegality will make the contract void and the contract will be discharged. This is known as Doctrine of Frustration. The following factors can make the contract void: i. Distruction of subject matter When the subject matter of a contract after the formation of the contract is destroyed without the fault of the promisor of promise then the contract is discharged. E.g. A lent his hall to B for concerts. The hall was destroyed by fire before the first contract. The contract became void. ii. Failure of Purpose Where the formation of a contract depends upon happening of a certain event and if that event does not happen , the contract is discharged. E.g A contracts to hire a room at a hotel to attend a seminar on a particular date. The seminar is postponed and the contract is discharged. iii. Death of Personal Incapacity A and B contract to marry one another. A dies before the time fixed for the marriage. The contract becomes void. iv. Change of Law A change in law may tender the contract illegal and the contract is deemed to be discharged. E.g. A promised to sell wheat to B. Before delivery of wheat, the Government banned the sale of wheat by private traders. Thus the contract was discharged. v. Declaration of War A contract which was entered into before the war took place is suspended when the war took place and can be continued after the war.

E.g. A contracts to carry Cargo for B from port X to port Y. Later War is declared at Port X. The contract becomes void.

4) Discharge by Lapse of Time

Lapse of time terminates a contract. The period of time of a contract is usually 3 years. If 3 years expire and Creditors fail to file a suit to recover the amount, the debtor is discharged form his liabilities. E.g. A owed B Rs. 10,000/-. The last date expired but B did not sue A until 3 years. B lost the right to recover.

5) Discharge by Operation of Law

a) Insolvency When a person is declared insolvent by the court his rights and duties are transferred to the actual receiver. b) Merger This is when two or more entities become one. E.g. When a part time lecturer becomes a full time lecturer the contract of part time lectureship is discharged by merger. c) Material Alteration This is a change which affects the rights, liabilitiesand legal position of the parties to contract. E.g. A executes a pro note in favour of B for Rs. 500. B exceeds the amount form Rs. 500 to Rs. 5000 by alteration. A may refuse to pay Rs. 500.

6) Discharge by Breach of Contract

Breach of Contract is when the failure of a party to perform his obligations. This may be: i. ii. Actual Breach Failure to perform when the contract is due. Anticipatory Breach A party to the contract communicates to the other party his inability to perform the contract before the due date of performance.

Remedies for Breach of Contract.

When one of the parties breaks the contract then it is known as Breach of Contract. There are following remedies: 1) Suit for Recission Recission means cancellation of contract. E.g. A pledges ornaments to B and gets a Loan. A does not return the loan to B. B may rescind the contract and refuse to return the ornaments to B.

2) Suit for Damages Damages may be of the following 5 kinds: a) Ordinary Damages These are also known as general damages. These are assessed on the basis of actual loss. E.g. A contracts to pay B Rs. 5,000 on 1 January. A could not pay up due to which B is totally ruined. A is liable to pay only principle sum and damages. b) Special Damages These arise under special circumstances. These include loss which may occur due to breach of contract. E.g. A contracts C to buy one ton of iron for Rs. 50,000. A also contracts to sell B, one ton of iron for Rs. 80,000. A informs C of the purpose of contract. C fails to supply. As a result, A cannot supply to B. C is liable for the loss of profit which A would have earned form B. c) Exemplary Damages These are awarded to pay the guilty party for the breach of contract. E.g. BK Bank promised to give Mr. A a loan for a trip to Lahore by crediting his account. The Bank failed to do so and As cheque was dishonoured. The court allowed exemplary damages for the emotional distress. d) Liquidated Damages A contracts to pay Rs. 20,000 to B as damages if he fails to pay Rs. 5 laks on a given day. A fails to pay on that day. B can recover damages not exceeding Rs. 20,000. e) Nominal Damages A and B enter into a contract where A is to provide insurance for B. Now A fails to provide insurance, but afterwards B takes steps to insure themselves. A court will probably not award losses to B since they have already insured themselves. Since there are no losses, the court may award nominal damages to acknowledge that A failed to perform their contractual duty

Indemnity and Guarantee

Indemnity means an exemption from liability of damages.

Indemnifier: One who secures against future loss, injury or expense Indemnity holder: A person whose loss is made good

Rights of Indemnity Holder

a) Damages b) Costs/ Expenses c) Sums

Rights of Indemnifier
The rights of the indemnifier are the same as the rights of the guarantor.

A formal promise or assurance (typically in writing) that certain conditions will be fulfilled, esp. that a product will be repaired or replaced if not of a specified quality and durability. E.g. A requests B to lend Rs. 5 Lakh to C. A guarantees that if C fails to return the loan, A will pay to B. This is Contract of Guarantee.

There are three parties to a guarantee. Surety: This is the person who gives the guarantee Creditor: The person getting the guarantee Debtor: The person for whom guarantee is given

Essential Features of a Guarantee

i. Secondary Contract It is also known as a tripartite contract. It is an agreement between principal debtor, creditor and surety. Misrepresentation This is a false statement made by one party to another party. Writing not necessary



The guarantee may either be oral or written. It may be implied or express from the conduct of the parties. It is not necessary for it to be written.

Kinds of guarantees
i. Specific The guarantor's liability to a particular transaction between the debtor and the bank is limited to a specific sum. Continuing Guarantee A continuing guarantee is a guarantee where the guarantor assumes liability for any past, present and future obligations owed by a debtor to a lender or creditor.


Rights of surety
i. Against the Creditor a) Right to Securities C gives a loan of Rs. 2 Lakhs to B on the guarantee of X. C also pledges Xs car. B fails to pay the loan and X pays Rs. 2 Lakhs to C. X can get the car from C. b) Right to Claim Setoff A supplies furniture worth Rs. 2 Lakhs to B on the guarantee of C. B claims that some furniture is defective and refuses to pay Rs.20,000. C and ask for adjustment of Rs. 20,000. Against Principle Debtor a) Right to indemnity In every contract of guarantee there is an implied promise by principal debtor to indemnify the surety. Right of subrogation Primary contract starts here between debtor and creditor.



Discharge of surety against Liability

A surety comes to an end in the following ways:

a) b) c) d) e) f) g) h)

Notice of revocation Death of surety Change in terms of contract Release or discharge of principle debtor Arrangement without suretys consent Creditors act or omission Loss of security Invalidation of the contract of guarantee

Indemnity There are two parties; Indemnifier and Indemnity holder There is one contract between indemnifier and indemnity holder

Guarantee There are three parties; Creditor, Principle Debtor and Surety There are three contracts; between creditor and principle debtor, creditor and surety and surety and principle debtor The liability of surety is secondary. Surety is liable The liability of indemnifier is primary and independent only if principle debtor fails to perform his promise. The indemnifier promises without the request of The debtor The liability exists and its performance is The liability of indemnifier arises on happening of event guaranteed by surety A contract of indemnity is for reimbursement of A contract of guarantee is for security of a debt or loss performance or promise

Bailment and Pledge

Contract of Bailment
Bailment means to deliver. It is change of possession of goods from one person to another and not transfer of ownership. Bailor: This is the person who delivers the goods Bailee: The person to whom the goods are delivered Essential Features


Contract The contract is between bailor and bailee. E.g. A gives a piece of cloth to T, a tailor, to make a suit. This is a contract of bailment between B and T. Specific Purpose Bailment of goods should be for a specific purpose. E.g. a gives his watch to B for repair. This is a bailement. Delivery of goods The bailment is the deliveryof moveable goods from one person to another. E.g. A buys a TV from Band asks B to keep the TV for an hour, so that A may buy other goods from the market B is now holding the TV as a bailee. No change of ownership Under bailment only the possession of goods passes from the owner to another person and not the ownership. E.g. A delivers his car to B for repair. The possession of car transfers from A to B but the ownership remains with A. Return of same goods When the purpose is accomplished then the goods must be returned in the same form in which they were received or in changed form or disposed off according to the directions of the bailor. E.g. A lends his cycle to B for a week. B is liable to return the same cycle.





Kinds of bailment Bailment is classified according to benefit and reward as under: Benefit According to benefit bailment can be grouped into three classes: i. ii. iii. Rewards i. ii. Bailement without reward Bailment for reward For benefit of bailor For benefit of bailee For benefit of bailor and bailee

Duties of Bailor i. ii. iii. Duty to disclose faults Duty to repay necessary expenses Duty to repay extra ordinary expenses

iv. v. vi.

Duty to indemnify for demanding back Duty to indemnify for defective title Duty to receive back goods

Rights of bailee Rights of bailee are as under i. ii. iii. iv. v. vi. Right to claim damages Right to deliver goods Rights to compensation Rights to stop delivery Right to sue Right of lien

Duties of Bailee i. ii. iii. iv. v. To take reasonable care Not to make unauthorized use Not to mix the goods To return the goods Duty to return increase

Rights of Bailor i. ii. iii. iv. v. Right to claim damages Right to demand return of goods Right to claim increase Right to terminate bailment Right to sue

Termination of bailment i. ii. iii. iv. v. vi. Expiry of time Accomplishment of purpose Unauthorised use On death Termination by bailor Destruction of subject matter

Finder of lost goods A person who finds goods belonging to someone else and keeps them in his own custody has same duties as a bailee. Duties of Finder i. Duty to find owner

ii. iii. iv.

Duty to take reasonable care Duty not to use goods Duty not to mix goods

Rights of Finder i. ii. iii. iv. v. Right to retain Right of lien Right to sue third person Right to sue for reward Right of sale

Pledge or Pawn
A bailment of a chattel as security for a debt or other obligation without involving transfer of title. E.g. A borrows Rs. 1,000 from B and gives his watch as security for payment of debt. The bailment of debt is called a pledge. Essentials of a pledge i. Moveable Property A gives his car to B as a security and borrows Rs. 1 Lakh as loan. This is a pledge between A and B. Limited Interest A gives his TV to B for repair. A does not pay Rs. 500 as repair charges. B pledges the TV with X to borrow Rs. 900. A pledge with X is valid upto Rs. 500. Transfer of Possession C pledges ornaments with B and gets a loan of 1 lac. The possession of ornaments transfers form C to B. No transfer of ownership M pledges his car with N and gets a loan of Rs. 10 laks. The ownership of car remains with M. Not mere custody T puts some goods in the custody of his servant, S. S pledges the goods with B. It is not a valid pledge.





Rights of Pledgee
Right to retain Right to retain for other debts Right to extra ordinary expenses Right to sue and sell

Duties of pledgee
To take reasonable care of goods pledged Not to mix goods Not to make unauthorized use To return the goods pledged on receipt of full dues To deliever any accretion to the goods pledged

Rights of Pledgor
Right to redeem Right to claim damages Right to claim increase Right to redeam the debt

Duties of Pledgor
Duty to compensate Duty to complete

Pledge The goods are delivered as a security for loan or for the performance of promise The pledge has right of sale of the pledged goods on default after giving a notice to the pledger The pledge has no right to use the goods Not bound to return the goods Lien can be exercised even for non payment of interest

Bailment The goods are delivered for repairs and safe custody etc. The bailee has no right of sale. He can retain the goods or sue for dues There is no restriction to use the goods if the nature of transaction requires Bound to return the goods Lien can be exercisedonly for labour and skill spent