Introduction.

Law is one of the main and ost important aspects a business should consider and follow. It is
really important for a business to know and have knowledge about legality and have an idea
about contracts.

Task 1: Understand the essential elements of a valid contract.

1.1

Explain the essential elements of a valid contract.

A contract is basically a voluntary, deliberate, and legally binding agreement between two or
more competent parties. The purpose of a contract is to establish the agreement that the parties
have made and to fix their rights and duties in accordance with that agreement. The courts must
enforce a valid contract as it is made, unless there are grounds that bar its enforcement.
A contract to be valid must have the following essential elements:
1. Proper Offer and Acceptance There must be at least two parties- one making the offer and
the other accepting it. Such offer any acceptance must be valid. An offer to be valid must
fulfil certain conditions, such as it must intend to create legal relations, its term, must be
certain and unambiguous, it must be communicated to the person to whom it is made, etc.
An acceptance to be valid must folds certain conditions, such as it must be absolute and
unqualified, it must be made in the prescribed manner, it must be communicated by an
authorised person before the offer lapses.
2. Consensus ad idem Latin term meaning an agreement, a meeting of the minds between
the parties where all understand and have accepted the contractual commitments made by
each other, respectively. For a contract to be useful the parties must be in agreement about
its provisions. When people develop a contract, an offer is extended and accepted, and the
terms of the offer are worked out. This is the stage where the consensus ad idem comes in,
as the parties to the contract discuss the specifics and the details, and focus on developing
a contract all are satisfied with.
3. Intention to Create Legal Relationship There must be an intention among the parties to
create a legal relationship. In case of social or domestic agreements, the usual presumption
is that the parties do not intend to create legal relationship but in commercial or business
agreements, the usual presumption is that the parties intend to create legal relationship
unless otherwise agreed upon.
But even a business agreement may not be enforceable by law where the agreement so
provides e.g. in Rose & Frank Co. v. Crompton Bros. (1925) A.C. 445, the agreement
entered into stated that it will not be subject to legal jurisdiction in the law courts, the
agreement was not enforceable by law as the parties never agreed to create legal
obligations despite being a business agreement.
4. Legal enforceability Although a contract may have all of the essential elements, it may not
be enforceable because of some other issue, such as:

Lack of capacity of one of the parties (eg one of the parties is a child).

Where a mistake is made about the nature of the contract. Relief may be granted under
the Contractual Mistakes Act 1977 where the mistake results in a substantially unequal
exchange of values.

Where there has been misrepresentation of a particular fact or facts inducing a person to
enter into the contract. Under the common law and the Contractual Remedies Act 1979
there may be a right to cancel the contract and/or claim damages.

Where a contract is illegal or immoral or is effected by duress or undue influence of one

party over another.

Where a contract unduly restrains a person in their trade.

5. Lawful Consideration The agreement must be supported by consideration. Consideration

means something in return i.e, both the parties must get something in return for the promise.
If the promise is not supported by consideration, it will be a bare promise and hence not
enforcible by law. It must be lawful, real and not illusionary.
6. Capacity of Parties The parties to an agreement must be competent to contract. In other
words, they must be capable of entering into a contract. In other words. the person must be
major, must be of sound mind and must not be declared disqualified from contracting by any
law to which he is subject. If the parties to agreement are not competent to contract, then no
valid contract comes into existence.
Example: X a minor borrowed Rs 8,000 from Y and executed mortgage of his property in
favour of the lender. This was not a valid contract because X is not competent to contract.
Therefore, the mortgage was not valid and the money advanced to minor could not be
recovered.
7. Free Consent There must be free consent of the parties to the contact. According to
Section 14, Consent is said to be free when it is not caused by (i) coercion, (ii) undue
influence, (iii) fraud, (iv) misrepresentation, or (v) mistake. If the consent of the parties is not
free, then no valid contract comes into existence.
Example: X threatens to kill Y if he does not sell his house to X. Y agrees to sell his house to
X. In this case, Ys consent has been obtained by coercion and therefore, it cannot be
regarded as free.
8. Lawful Object The object of an agreement must ne lawful. It must not be fraudulent,
unlawful, immoral or opposed to public policy. If an agreement suffers any legal flaw, it shall
not be enforeable by law.

9. Agreement not Expressly Declared Void There are certain agreements which have been
declared to be void by the law of a country, and then such agreement, if entered into, shall
not be enforceable by the court even if the agreement possesses all other elements. There
are agreements which have expressely been declared void as these agreements are not in
public interest such as agreement in restraint of trade, marriage, legal proceedings etc.
10. Certainity and possibility of performance The meaning of an agreement must be certain
or should be capable of being made certain and it should also be capable of being
performed. If the parties have agreed on a contract that contians any promise, not possible
to be performed in real life, then the agreement will not be considered as valid.
11. Legal formalities A contract may be by word, spoken or written, but if there is a satutory
requirement that the contract should be in writing, registered or attested and such
agreement must be so, otherwise it shall not be enforceable.
Example: An oral agreement of sale of immovable property is unenforceable because the
law requires such agreements to be in writing and registered.

1.2

Explain different types of contracts and their impact.

There are different types of contracts and can be classified as follows:

On the basis of
formation.

On the basis of
performance.

On the basis of
validity.

Express
contract.

Executed
contract.

Voidable
contract.

Implied
contract.

Executory
contract.

Void
agreement.

Quasi
contract.

Void contract.

Valid contract.
Illegal
agreements.
Unenforceable
contract.

Figure 1: Classification of types of contracts.

On the basis of formation

a) Express contract: Where the terms of agreement are expressly agreed upon by the parties
in words either written or spoken, at the time of formation, the contract is said to be an
express contract.
Example: Amar said to Bell: Will you buy my watch for Qr.150? Bell replies: I am ready to
buy.
b) Implied contract: Where a proposal or acceptance is made otherwise than in word spoken or
written, promise is said to be implied. It is inferred from the conduct of a person or the
circumstances of the particular case.
Example: A transport company runs buses on different routes to carry passengers. This is
an implied offer by transport company. X hoards u bus. This is an implied acceptance by X.
Now, there is an implied contract and X is bound to pay the prescribed fare.

c) Quasi contract: these contracts are created neither by words spoken or written nor by the
conduct of parties, but created by the law. It is based on the principlethat a person shall not
be allowed to enrich himself at the expense of another.
Example: X is a trader and leaves his goods at Zs place. Z treats the goods as his own and
uses it. Z is bound to pay for the goods to X as Z has used the goods to his benefit.
On the basis of performance
a) Executed contract: It is the one in which both parties have performed their respective
obligations. It is a contract where, in the terms of contract, nothing remains to be fulfilled by
both parties.
Example: Husam rents a car from Anas for Qr. 2500 for a month. After a month Husam pays
the amount. This is said to be an executed contract since both parties have performed their
obligations.
b) Executory contract: It is one wherein both parties or one of the parties to the contract, are
yet to perform their obligations.
Example: Hussain agrees to paint a picture for Abishek for Qr.5000 and deliver it to him. But
after painting Abishek says he will pay after it has been delivered to his house. In this case,
Hussain has did his part and Abishek is yet to perform his obligation.

On the basis of validity

a) Valid contract: An agreement which has all the essential elements of a contract is known as
a valid contract. It is one which can be enforces by any of the parties to the contract and the
party not at fault can also file a suit in the court of law.
Example: Akbar offers to sell his T.V for Qr. 1800 to Micheal. He accepts the offer. It is a
valid contract. Here either of the parties to contract can enforce the contract.
b) Voidable contract: It is a contract which can be set aside, repudiated or avoided at the option
of the aggrieved party. Until the contract is set-aside or repudiated by the aggrieved party, it
remains a valid contract.

Example: Cristin promises to sell her house to Adam for Qr. 500 and Cristins consent was
obtained forcefully. This contract is voidable at the option of Cristin. If she fails to avoid, the
contract remains valid.
c) Void contract: It is a contract which was enforceable by la when originally created, but due to
some events, it ceases to be enforceable by law. The circumstances under which a contract
subsequently becomes void are:

Destruction of subject matter

Contract becoming unlawful

Death of parties

Parties becoming unsound mind

Party becoming alien enemy

Example: David offers to marry Ashley and she accpets. Later she dies. The contract was
valid at the time of formation but subsequently becomes void on the death of Ashley.
d) Void agreement: Sec 2(g) says An agreement not enforceable by law is said to be void. A
void agreement is in nullity of substance and destitute of any legal efects in the eyes of law.
It is void-ab-initio i.e, void from the very beginning. Such an agreement does not result in a
contract at all.
Example: Blake a major extends a loan of Qr.15,000 to Max a minor. Max fails to pay the
loan amount. But Blake cannot recover the same as an agreement with minor is void-abinitio.
e) Unenforceable contract: A contract which is good in substance, but due to technical defects
cannot be enforced by law is known as unenforceable contract. If the defect is removed, the
contract can be enforced.
Example: When the law requires that a contract should be in writing, stamped or regitered,
the contract cannot be enforced by law if such formalities are not properly observed.
f)

Illegal agreement: the term illegal refers to an act which is contradictory to the law. In other
words agreements which are forbidden and punishable by law are called illegal agreements.
Making of such agreements is unacceptable and law does not recognise such agreements
and they are declared void-ab-initio. Moreover any collateral agreement to an illegal
agreement is also tainted with illegality and hence void.

Example: Jack agrees to pay Qr 50,000 to Mike if he kills Mary. Such agreements are
criminal in nature and therefore cannot be enforced in the court of law.

1.3
I.

Analyze the following terms with relevant case laws.

Doctrine of Privity.
The doctrine of privity of contract dictates that only persons who are parties to a contract are
entitled to take action to enforce it. A person who stands to gain a benefit from the contract (a
third party beneficiary) is not entitled to take any enforcement action if he or she is denied the
promised benefit. It means that a contract cannot confer right to impose obligations arising
under it on any person who is not a party to contract/ stranger to contract.
Exceptions to General Rule of Privity:
Collateral Contracts: A collateral contract is one that accompanies the main contract between
two parties. It is one involving either of them and a third party.
A classic example of this happened in England in 1953 in the case of Shanklin Pier v. Detel
Products Ltd. In this case Shanklin Pier (plaintiff) employed contractors to paint a pier. The
contractors then instructed Detel Products to supply them paint. This instruction was given
based on a statement made by the defendants to the plaintiffs that the paint would last for seven
years. When after just three months the paint work fell apart, the plaintiff sued and was given the
go ahead by the courts to proceed with the suit against the defendant because even though the
main contract had been between the contractor and the defendant there was in existence a
collateral contract between the plaintiff and the defendant guaranteeing seven years protection.
Multilateral Contracts: When a person joins an unincorporated association such as a club, it
could be said that he has gone into a contractual relationship with other members even if he may
not be aware of their identity and if the person only liaises with the secretary of the organization.
Example, in one case the courts decided that a competitor in a race contracted not only with the
organizers but with other competitors.

Agency: The status and vicarious liability issues of an agent also create exceptions to the rule of
privity. When an agent negotiates a contract between his principal and a third party, it is
generally regarded as being between the principal and the third party. However there are
situations where it is subject to question as to whether or not an agent acted on his own behalf
or not. It may even reach new heights of complexity when an agent makes use of a sub-agent,
spawning twin questions of whether or not the contract will now be between the principal and the
sub-agent or the agent and the sub-agent.
Case Law:

II.

Quid Pro Quo.

III.

Doctrine of Frustration.

IV.

Ex nudo pacto oritur actio.

Task 2: Be able to apply the elements of a contract in business

situation.

2.1 Apply the elements of contract for the given scenario.