Business Law

Contract Law

UOG COLLEGE FOR BOYS

5/11/2011
Authored by: Shoaib Waqas
 Business Law

Contract Law

Definitions
Business: - Any profitable activity, such as trade, commerce and industry.

Law:-Rules and principles made by competent authority for proper regulation

of a community.

Business law is that branch of law which comprises

laws concerning trade, industry and commerce.
Contract Act 1872
Law, governing the Contract in Pakistan is contained
in the Contract Act 1872.
Passed in 1871and came into force on 1 st Sep, 1872.
Based mainly on English Common Law which is to a
large extent made up of judicial precedents.
Scheme of the Act
The scheme of the Act may be divided into two main groups,
a. General principles of the law of Contract; (sec 1-75)
b. Specific kinds of Contract;
1. sale of goods; (76-123, repealed)
2. Indemnity and Guarantee; (Sec 124-147)
3. Bailment and Pledge; (Sec 148-181)
4. Agency; (sec 182-238)
5. Partnership; (sec 239-266)
What is Contract
Sec 2 (h) of CA defines, an agreement enforceable by law is Contract.
Explanation: A Contract is an agreement the object of which is to create a
legal obligation, i-e a duty enforceable by law.
What is agreement (Sec 2 (e)
Every promise and every set of promise, forming the consideration for each
other, is an agreement.
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Promise: - When the person to whom the proposal is made signifies his
assent thereto, the proposal is said to be accepted and a proposal, when
accepted becomes promise. Sec 2(b)
(ii) Legal Obligation
1. Duty enforceable by law.

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 2. An agreement incapable to create a duty enforceable by law is no Contract at
all.
3. All Contracts are agreements but all agreements are not Contracts.
Conclusion
The law of Contract is not the whole law of agreements, nor is it the whole law of
obligations. It is the law of those agreements which create obligations, and those
obligations, which have their source in agreements. (Salmond)

Essentials of a Valid Contract

According to Sec 10, all agreements are Contract if they are made by the free
consent of parties, competent to Contract, for lawful consideration with lawful
object and or not hereby expressly declared to be Void.
Where necessary the agreement must satisfy the requirements of Law regarding
writing, attestation or registration.
1. Offer and Acceptance
For nay agreement there must be lawful offer by one party and lawful
acceptance of that offer from other party. The term lawful means that the
offer and acceptance must satisfy the requirements of Contract.
2. Legal Obligation
The parties to an agreement must create a legal obligation. It means that if
one party does not fulfill his part of promise he shall be liable for breach of
Contract.
Example:
a. A offers to sell his watch to B for rupees 200. B agrees to buy. It is a
Contract as it creates legal obligation.
b. A husband promise to pay his wife an allowance of $30 every month.
Later the parties separated and the husband refused to pay. The wife
sued. Held that wife was not entitled as agreement did not create legal
obligation. (Belfour vs. Belfour)
3. Lawful Consideration
An agreement is enforceable only when parties get and give something. The
something given or obtained is called consideration. Consideration must be
lawful as well.
Example:
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A promise to give him a government job and B promises to pay Rs. 1 Lac.
The agreement is void because consideration is unlawful.
4. Capacity of Parties
An agreement is enforceable only if it is made by parties who are competent
to Contract. To be competent to Contract, the parties must be of the age of
majority, of sound mind and not disqualified from Contracting by law.

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 Example
M a person of unsound mind agrees to sell his house to S for Rs. 2 Lac. It is
not a valid Contract because M is not competent to Contract

5. Free Consent
Consent means that parties must agree upon the same thing in same sense.
For a valid Contract the consent of parties must be free.
(According to Sec. 14) consent is free when it is not obtained by coercion, undue
influence, fraud, misrepresentation or mistake. If the consent of either of the parties
is not free, the agreement cannot become a Contract.
Example
A compels B to enter into a Contract at gunpoint. It is not a valid Contract as
the consent of B is not free.
6. Lawful Object
(According to Sec. 23) it is necessary that agreement should be made for a
lawful object. The object of agreement must not be fraudulent, illegal, immoral
opposed to public policy, imply injury to the person or property of another. Every
agreement with unlawful object is void.
Example
A hires a house to use for gambling, the object of agreement is unlawful, so
the agreement is illegal and void.
7. Writing and registration
A Contract may be oral or in writing. If required by law, a particular Contract
must be in writing, signed, attested by witnesses and registered; e.g. sales and
mortgage of land
Example
A verbally promise to sell his house to B. it is not a valid Contract because
the law requires it to be in writing.
8. Certainty of terms
According to section 29, agreements the meaning of which is not certain or capable
of being made certain, are void.
The terms of agreement must be clear, complete and certain. If the terms are
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uncertain the agreement is void.

Example
A promise to sell 20 books to B without specifying their titles. The agreement
is void because the terms are not clear.
9. Possibility of performance

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 (According to Sec. 56) The valid Contract must be capable of being
performance. An agreement to do an impossible act is void. If the act is legally or
physically impossible to be performed, the agreement cannot be enforced by law.
Example
A agrees with B to discover a treasure by magic, the agreement is not enforceable.

10. Not expressly declared void

For a valid Contract, the agreement must not be one of those, which have been
declared to be void by the law. Sec (24-30) explains certain agreements which have
been expressly declared to be void e.g. agreements in restraint of trade and of wager
etc. are expressly declared void.
Example
A promise to pay Rs. 2000 to B if Pakistan wins the world cup final, the agreement
is void being a wagering agreement.

Kinds of Contract
The Contracts can be classified into four categories as follows
1. According to enforceability
According to enforceability, a Contract can be divided as under
a. Valid Contract
A valid Contract is enforceable by law. An agreement becomes enforceable
by law when all the essentials of a valid Contract are present.
Obligations of parties
In a valid Contract all the parties are legally responsible for the performance
of Contract. If one of the party breaches the Contract, the other party can
enforce through the court of law.

b. Void Contract
The word void means not binding in law. Section 2 (j) A Contract which ceases to
be enforceable by law becomes void, when it ceases to be enforceable. It means that
a void Contract is not void from the beginning. It is valid Contract when it is made
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but subsequently it becomes void due to certain reasons.

Obligation of parties
In void Contract both parties are not legally responsible to fulfill the
Contract. Under this Contract the party who has received any benefit is bound to
return it to other party.
A Contract becomes void under the following circumstances:

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 i. Impossibility of performance
A Contract becomes void due to impossibility of performance. A Contract
becomes void before performance, when it becomes impossible to be performed
by any party due to any reason (Sec 56)
Example
A agrees to sell his house to B after two days. The house is burnt next day. The
Contract becomes void.
ii. Subsequent illegality
A Contract becomes void subsequent illegality. A Contract may become illegal
before performance due to certain reason. (Sec 56)
Example
A agrees to sell 100 bags of wheat to B. before delivery the government bans
private trade in wheat. The agreement becomes void.

iii. Rejection of voidable Contract

A voidable Contract becomes void when the party whose consent is not free
rejects the Contract (Sec 19)
Example
A forcibly buys Bs car for Rs. 20,000 the Contract is voidable at the option of B.
B may accept or reject it. If B rejects the Contract it becomes void.
iv. Impossibility of depending event
A contingent Contract is that, the performance of which depends upon the
happening or non-happening of a certain event. It becomes void when that event
does not happen. (Sec 32)
Example
A Contract to give Rs. 1 Lac to B if B gets admission in Hailey College, B
fails to get admission. The Contract becomes void.

c. Void agreement
An agreement not enforceable by law is said to be void. The void agreement
does not create legal obligation among the parties and is void ab-initio. In void
agreement there is absence of one or more essentials of valid Contract except
free consent. An agreement with minor and an agreement without consideration
are void from the beginning. (Sec 2 (g))
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Obligation of parties
In void agreement, any party who has received any advantage is bound to restore
it to the party which he received it. Both the parties are not responsible for the
performance of the agreement.
Example

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 A promise to buy a dog from B for Rs. 10,000 the dog was dead before
the Contract. The parties were unaware. The agreement is void.

d. Voidable Contract
An agreement which is enforceable by law at the option one or more of the parties
thereto, but not at the option of the other or others is a voidable Contract (Sec 2 (i))
1) A Contract becomes voidable when the consent of one or more of the
parties to a Contract is obtained by coercion, undue influence,
misrepresentation or fraud. (Sec 15-18)
Example
A compels B to sell his car at gunpoint. The Contract is made by
coercion and is voidable at the option of B.
2) When a person promises to do something for another person but the
other person prevents him from performing his promise, the Contract
becomes voidable at his option. (Sec 53)
Example
A Contract to paint Bs house A is ready to paint but B prevents him from
doing so. This Contract is voidable at the option of B.

3) When party to the Contract promises to do a certain thing within a

specified time, but fails to do it, then the Contracts becomes voidable at
the option of the promisee, if time is essence of the Contract. (Sec 55)
Example
A Contract to paint Bs house within week A does not come within
specified time. The Contract is voidable at the option of B.
Obligations of parties
It is a valid Contract for both the parties if it is not rejected by the party
having the right to reject
The law gives an option to one of the parties to avoid it
The party entitled to cancel the Contract is not bound to cancel. If he
confirms it, the other party remains bound to perform.
The aggrieved party can get damages from the other party
If one party has received some benefit, he must return it to other
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Burden of proof
The burden of proof lies on plaintiff i.e. an aggrieved party. It means that the
party who claims that his consent is not free has to prove in the court of law. If
he fails to prove the Contract remains valid.
e. Unenforceable Contract

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 An unenforceable Contract is that Contract which cannot be enforced in a court
of law because of some technical defects such as absence of writing, registration,
requisite stamp, etc. when these defects are removed, the Contract can be
enforced.
Example
A borrows Rs. 1 billion from B and makes a pronote on Rs. 10 stamp paper.
It is unenforceable because pronote is undervalued.
Obligation of parties
In unenforceable Contract, the parties may perform the Contract but in breach
of such Contract, the aggrieved party is not entitled to the legal remedies.
f. Illegal agreement
An agreement is illegal when its performance is forbidden by law; such an
agreement can never become a Contract. An agreement is illegal and void if it is
forbidden by law or is of such a nature that, if permitted, it would defeat the
provision of any law or is fraudulent or it involves injury to the person or
property of another or the court regards it as immoral, or opposed to public
policy.(Sec 23)
Example
A gives money to B, a smuggler to buy smuggled goods. The agreement is
illegal and the money cannot be recovered.

Obligation of parties
The parties to this agreement are not responsible to perform their promises.
There is a punishment for the parties according to law also.

2. According to formulation
According to formulation, a Contract has the following three kinds
a. Express Contract
Express Contract is one which is express in words spoken or written. When such
Contract is formed, there is no difficulty in understanding the rights and
obligations of the parties. In express Contract, the parties directly state the terms
of the Contract. (Sec 9)
Example
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A tells on telephone to B that he wants to sell his car and b informs

that he agrees to buy the car, it is an express Contract.

b. Implied Contract
An implied Contract is made otherwise than by words spoken or written. It
arises from the acts, conduct of the parties, course of dealings or circumstances.

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 It arises when one person without being requested to do so, renders service
under circumstances indicating that he expects to be paid for them, and the
other person, knowing such circumstances, accept the benefit of those services.
(Sec 9)
Example
A went into restaurant and had a cup of tea. It is an implied Contract
and A will pay for the cup of tea.

c. Quasi Contract
In a quasi Contract law imposes certain obligations under some
circumstances. It is based upon the principle of equity that a person shall not
be allowed to get benefit at the cost of another. In fact it is not a Contract but
creates relations similar to Contract. It is also called constructive Contract.
Example
A finds lost goods of B. A is bound to return the goods to B.

3. According to performance
According to performance a Contract is of the following two kinds:

a. Executed Contract
A Contract is said to be executed when both the parties have completely
performed their obligations. It means that nothing remains to be done by
either party under the Contract.

Example
A buys a book from B. a delivers the book and B pay the price. It is an
executed Contract.

b. Executory Contract
In an executory Contract something remains to be done. In other words a
Contract is said to be executory when both the parties to a Contract have yet to
perform their obligations.
Example
M sells his car to N for Rs. 2 Lac N has not yet paid the price and M has not
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delivered the car. The Contract between M and N is executory.

4. According to party

a. Unilateral contract

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 In a unilateral contract only one party makes a commitment. In other words, it is
a contract where only one party is bound to but the other party chooses to be
bound by it.
Example
A promises to pay Rs. 1000 to anyone who finds his lost bag. B finds
the bag and returns A. it is a unilateral contract which comes into existence when
the bag is found.

b. Bilateral contract
It is a contract where as soon as the contract is made, both parties are bound
by it. In other words it is a contract in which both parties have yet to perform
their obligations.
Example
A promises to paint the picture for B and b promises to pay Rs.
5000 to A.

Performance of Contracts
Performance of Contract means fulfilling of their respective legal obligations
created under the Contract by both the promisor and the promisee.
Performance by all the parties of the respective obligations is the normal and
natural mode of discharging or terminating a Contract.

VARIOUS RULES REGARDING PERFORMANCE OF CONTRACTS

1. Who can demand performance?
It is only the promisee who can demand performance of the promise under a
Contract, for, the general rule is that a person cannot acquire rights under a
Contract to which he is not a party.
In case of the death of the promisee, his legal representatives are entitled to
enforce the performance of the Contract, against the promisor.
By whom Contracts must be performed?
1. By the promisor himself. (Sec 40)
2. By the promisor or his agent. (sec 40-Clause-2)
3. By the legal representative. (Sec 37-Clause-2)
4. Performance by a third party. (sec 41
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Performance of joint promises

Joint Promise: - (i) where several joint promisors make a promise with a
single promisee, A, B and C jointly promise to pay Rs, 50,000 to D.
(ii) Where a single promisor makes a promise with several joint promisees, P
promises to pay Rs, 30,000 to Q and R jointly.

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 (iii) Where several joint promisors make a promise with several joint
promisees, A, B and C jointly promise to pay Rs, 5,000 to P, Q and R jointly.
Rules regarding performance of joint promises
Who can demand performance of joint promises?
(Sec 45) provides that when a promise is made to several persons jointly, the
right to claim the performance rests with all the promisees jointly (unless
otherwise) and a single promisee cannot demand performance.
By whom joint promises must be performed? (Sec 42-44)
1. All promisors must jointly fulfill the promise.
2. Anyone or more of joint promisors may be compelled to perform.(sec-43)
Example: - A, B and C jointly promises to pay Rs, 3,000 to D. D may compel either
A or B or C or all or any two of them to pay him Rs, 3,000.

3. Right of contribution inter-se between joint promisors.(sec-43, Para 2)

Example:
If A is compelled to pay the entire amount of Rs, 3,000, he can realize
from B and C Rs, 1,000 each.
4. Sharing of loss by default in contribution. (sec 43)
If A is compelled to pay the whole amount of 3,000 and C is unable to pay
anything, A is entitled to receive Rs. 1500 from B. if Cs estate is able to pay
one-half of his share, Rs 500, then Rs, 1250 will be received from B.
5. Effect of release of one joint promisor.
If one of the joint promisors is released from his liability by the
promisee, his liability to the promisee ceases but this does not
discharge the other joint promisor from liability. (Sec 44)

Time and Place for Performance

Sec 46 to 50 & 55.
1. Where prescribed by the promisee; the performance of the Contract must
be at the specified time and place.
2. Where not prescribed by the promisee;
a. Within a reasonable time, on a working day) and within the usual hours
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of business.
b. At proper place, (a shop or working place and not at public meeting or a
fair).

Effects of failure to perform a Contract within a stipulated time

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 1. Where time is of the essence of the Contract: failure to perform within the
fixed time makes the Contract void able at the option of promisee.
2. Where time is not of the essence of the Contract: failure to perform within
the specified time does not make the Contract voidable.
3. In case of Contract void able due to failure to perform within agreed
time/reasonable time, if promisee accepts the delayed performance, cant
claim compensation afterwards for the loss caused by delay, unless giving
notice (promisor) at the time of accepting performance.

Contracts which need not be performed

4. In case of innovation, alteration, or rescission, original Contract need not be
performed.62
5. In case of remission, original Contract stands discharged.63
6. when aggrieved party cancels the Contract, need not perform the promise.64
7. If any promisee neglects or refuses to afford the promisor reasonable facilities
for the performance of his performance, the promisor is excused for the non-
performance of the Contract.67
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