BUSINESS LAW

Shahid Hussain - LLB, LLM (UK), MBA (UK)

 CONTRACT LAW
 1- Section 1-75 of Contract Act 1872 deals with the general
principles for all contracts (sections 1-75)

 2- From section 76-123 relating to sale of goods used to be part of

contract Act 1872 as a chapter 7 but subsequently excluded and
introduced separate sales of goods Act 1930

 3- Section 124-238 deals with contacts of indemnity, guarantee,

bailment, pledge and agency (Section 124-238)

 4- From section 239-266 relating to partnership also were part of

contract Act 1872 but subsequently excluded and introduced
separate Partnership Act, 1932.
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 CONTRACT

Contract

Enforceable
Agreement
by law

Plurality of Social Legal

Consensus
persons Agreement s Agreements

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 DEFINITION OF CONTRACT
1- Contract is an agreement between two or more persons creating rights and duties
between them and which is enforceable by law.
 
2- Pollack defines contract as, “every agreement and promise enforceable at law is a
contract.”
 
3-  According to Section 2(h) of the Contract Act, “an agreement enforceable by law
is a contract.”

4- According to Salmond:- “Contract is an agreement creating and defining

obligations for parties”

  From the above definitions it is clear that a contract consists of two elements:
 
     (1)        An agreement.
     (2)        The agreement should be enforceable by law.
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 AGREEMENT
 According to Section 2(e) “Every promise and every set of promises
forming the consideration for each other, is an agreement.”
 
 An agreement, therefore, comes into existence only when one party make a
proposal or offer to the other and that other signifies his assent (i.e. gives his
acceptance).
 
 From the above definitions it is clear that for an agreement there must be:
 
(a) Plurality of Persons
 
 There must be two or more persons to make an agreement because one
person cannot enter into an agreement with himself.
 

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 AGREEMENT
(b) Consensus ad idem
 
It means that both the parties to an agreement must agree about
the subject matter of the agreement in the same sense and the
same time. The term consensus means identity of minds.
 
EXAMPLE:
 
A own two cycles Sohrab and Eagle. A is selling Sohrab cycle
to B. B. thinks he is buying Eagle cycle. There is no consensus
ad idem and consequently no contract.

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 Enforceability
 Enforceability is the second requirement of contract. An agreement is said to be
enforceable if it is recognized by courts. In order to be enforceable by law, the
agreement must create legal obligations between the parties. If an agreement does
not create legal obligations, it is not contract. ‘All contracts are agreements but
all agreements are not contracts. Agreements are of two types:
 
(a)                Social agreements
(b)               Legal agreements
 
 Social agreements are social in nature and do no enjoy the benefits of law. In such
agreements the parties do not intend to create legal relations.
  
 Legal agreements are contracts because they create legal obligations between the
parties. In business agreements it is presumed that the parties intend to create legal
relations so all business agreements are in other words contracts.

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 Enforceability
EXAMPLE:
 
(a)   A invites B to a dinner. B accepts the invitation but does
not attend it A cannot sue B for damages. It is a social
agreement because it does not create legal obligation. It is
not a contract.

(b)    A promise to sell his car to B for Rs.2 lac. It is a legal

agreement because it creates legal obligations between the
parties. This agreement is also a contract.

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FORMATION OF CONTRACT
i- Offer & Its
Communication

ii- Accepted and

Communicated

iii- Promise—
(not enforceable
at law unless)

iv-
Consideration---
(need not to be
adequate)

v- Agreement

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 FORMATION OF CONTRACT
1- Major

i- Legal capacity 2- Sound Mind

3- Not
disqualified at
law

1- Coercion

2- Undue
Influence
ii- Free consent
Active
3- Fraud concealment of
facts
iii- Lawful
ENFORECEAB Consideration 4-
LE AT LAW Innocent
Misrepresentatio
Mistake
n
iv- Lawful
Object

V- Possible to be
performed

vi- Certain

vii- Intention to
create legal
obligations
AGREEMENT
Viii- Not
expressly
declared void

i- Unlawful
Consideration

ii-Agreement
without
consideration

iii- Restraint of
Marriage

NOT
iv- Restraint
ENFORCEABL
from trade
E AT LAW

v- Restraint
from legal
proceedings

vi- Uncertainty

Vii- Wagering

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ESSENTIALS OF A VALID CONTRACT
WHAT AGREEMENTS ARE CONTRACT? SECTION 10

A valid contract is an agreement, which is binding and enforceable. In valid contract all the parties
are legally bound to perform the contract.
 
 According to Section 2 (h) of the Contract Act, “an agreement enforceable by law is a contract.”
 It means an agreement is regarded as a control when it is enforceable by law. It is a contract,
which can be enforced by either of the parties to the contract. If one of the parties refuses to
perform the contract, the other party can take an action in a court of law against such party. To be
enforceable by law, an agreement must possess some essentials of a valid contract, which are
stated in section 10.
 
 According to Section 10, “all agreements are contracts if they are made by the free consent of
parties, competent to contract, for a lawful consideration and with a lawful object and are not
hereby expressly declared to be void.”
 
 When necessary the agreement must satisfy the requirements of law regarding writing attestation
or registration.

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ESSENTIALS OF A VALID CONTRACT
Offer and
Acceptance

Not Expressly Legal

Declared Void Relationship

Possibility of Lawful
Performance consideration

Essentials
of a Valid
Contract
Capacity of the
Certainty
Parties

Writing and
Free Consent
Registration

Lawful Object

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ESSENTIALS OF A VALID CONTRACT
An agreement becomes enforceable by law when it fulfills essential conditions.
These conditions may be called the essentials of a valid contract, which are as
follows:
 
(1) OFFERS AND ACCEPTANCE
 
 For an agreement there must be a lawful offer by one and lawful acceptance of
that offer from the other party. The term lawful means that the offer and
acceptance must satisfy the requirements of Contract Act. The offer must be made
with the intention of creating legal relations otherwise, there will be no agreement.
 
EXAMPLE:
 
 A says to B that he will sell his cycle to him for Rs.2000. This is an offer. If B
accepts this offer, there is an acceptance.

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ESSENTIALS OF A VALID CONTRACT
2)  LEGAL RELATIONSHIP
 
 The parties to an agreement must create legal relationship. It arises when parties know
that if one for the failure of a contract. Agreements of a social or domestic nature do not
create legal relations and as such cannot give rise to a contract. It is presumed in
commercial agreements that parties intend to create legal relations.
 
EXAMPLE:
(i)  A father promises to pay his son Rs.500 every month as pocket money. Later, he refuses
to pay. The son cannot recover as it is a social agreement and does not create legal
relations.
(ii)  A offers to sell his watch to B for Rs.200 and B agrees to buy it at the same price, there
is a contract as it creates legal-relationship between them.
(iii) A husband promised to pay his wife a household allowance of 30 pounds every month.
Later, the parties separated and the husband failed to pay. The wife used for allowance.
Held that the wife was not entitled for the allowance as the agreement was social and did
not create any legal obligations.

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ESSENTIALS OF A VALID CONTRACT
3.  LAWFUL CONSIDERATION
 
 The third essential of a valid contract is the presence of lawful consideration.
Consideration is “something in return.” It may be some benefit to the party. Consideration
has been defined as the price paid by one party for the promise of the other. An agreement
is enforceable only when both the parties get something and give something. The
something given or obtained is the price of the promise and is called consideration.
 
EXAMPLE:
 
(i)   A agrees to sell his house to B for Rs.10 Lac is the consideration for A’s promise to sell
the house, and A’s promise to sell the house is the consideration for B’s promise to pay
Rs.10 Lac. These are lawful considerations.

(ii)   A promise to obtain for B employment in the public service, and B promise to pay
10,000 rupees to A. the agreement is void, as the consideration for it is unlawful.

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ESSENTIALS OF A VALID CONTRACT
4.  CAPACITY/COMPETENCY OF PARTIES
 
 An agreement is enforceable only if it is entered into by parties who possess
contractual capacity. It means that the parities to an agreement must be competent
to contract. According to Section 11, in order to be competent to contract the
parties must be of the age of majority and of sound mind and must not be
disqualified from contracting by any law to which they are subject. A contract by a
person of unsound mind is void ab-initio (from the beginning). 
 If one of the parties to the agreement suffers from minority, madness, drunkenness
etc., the agreement is not enforceable at law, except in some cases.
 
EXAMPLE:
 (i)  M, a person of unsound mind, enters into an agreement with S to sell his house
for Rs.2 lac. It is not a valid contract because M is not competent to contract.
 (ii)  A, aged 20 promises to sell his car to B for Rs.3 Lac. It is a valid contract
because A is competent to contract.

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ESSENTIALS OF A VALID CONTRACT
(5) FREE CONSENT
 
 It is another essential of a valid contract. Consent means
that the parties must have agreed upon the same thing in
the same sense. For a valid contract it is necessary that the
consent of parties to the contact must be free.

EXAMPLE:-
 
 A compels B to enter into a contract on the point of pistol.
It is not a valid contract as the consent of B is not free.
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ESSENTIALS OF A VALID CONTRACT
(6) LAWFULL OBJECT
 
 It is also necessary that agreement should be made for a lawful
object. The object for which the agreement has been entered into
must not be fraudulent, illegal, immoral, or opposed to public
policy or must not imply injury to the person or property of
another. Every agreement of which the object or consideration is
unlawful is illegal and the therefore void.
 
EXAMPLE:-
 
 A promise to pay B Rs.5 thousand if B beats C. The agreement is
illegal as its object is unlawful.

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ESSENTIALS OF A VALID CONTRACT
(7) WRITING AND REGISTRATION
 
 According to Contract Act, a contract may be oral or in writing. Although in
practice, it is always in the interest of the parties that the contract should be made in
writing so that it may be convenient to prove in the court. However, a verbal contract
if proved in the court will not be considered invalid merely on the ground that it not
in writing. It is essential for the validity of a contact that it must be in writing signed
and attested by witness and registered if so required by the law.
 
EXAMPLE:
 
(i)  A Verbally promises to sell his book to y for Rs.200 it is a valid contract because
the law does not require it to be in writing.
 
(ii)  A verbally promises to sell his house to B it is not a valid contract because the law
requires that the contract of immovable property must be in writing.

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ESSENTIALS OF A VALID CONTRACT
(8) CERTAINITY
 
 According to Section 29 of the Contract Act, “Agreements the meaning of which are not
certain or capable of being made certain are void.” In order to give rise to a valid contract
the terms of the agreement, must not be vague or uncertain. For a valid contract, the terms
and conditions of an agreement must be clear and certain.
EXAMPLE:
 
(i)  A promised to sell 20 books to B. It is not clear which books A has promised to sell. The
agreement is void because the terms are not clear.

(ii)  A agrees to sell B a hundred tons of oil. It is not clear what is the kind of oil. The
agreement is void because of it uncertainty.

(iii)  O agreed to purchase a van from S on hire-purchase terms. The price was to be paid
over two years. Held there was no contract as the terms were not certain about rate of
interest and mode of payment.

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ESSENTIALS OF A VALID CONTRACT
(9) POSSIBILITY OF PERFORMANCE
 
 The valid contract must be capable of performance section 56 lays down
that. “An agreement to do an act impossible in itself is void.” If the act is
legally or physically impossible to perform, the agreement cannot be
enforced at law.
 
EXAMPLE:-
 
(i)  A agrees with B to discover treasure by magic, the agreement is not
enforceable.
 
(ii)  A agrees with B to put life into B’s dead brother. The agreement is void
as it is impossible of performance.

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ESSENTIALS OF A VALID CONTRACT
(10) NOT EXPRESSLY DECLARED VOID
 
 An agreement must not be one of those, which have been expressly declared
to be void by the Act. Section 24-30 explains certain types of agreement,
which have been expressly declared to be void. An agreement in restraint of
trade and an agreement by way of wager have been expressly declared void.
 
EXAMPLE:-
 
 A promise to close his business against the promise of B to pay him Rs.2 lac
is a void agreement because it is restraint of trade.

 A promises to pay Rs 2Lac to B if Pakistan wins the final of World cup. The
agreement is void because it is a wagering agreement.

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 CLASSIFICATION OF CONTRACTS
Classification
of Contract

According to
According to According to
Enforceabilit
Formation Performance
y

Valid Express Executed

Contracts Contracts Contracts

Void Implied Executory

Contracts Contracts Contracts

Voidable Quasi Unilateral

Contracts Contracts Contracts

Unenforceabl Bilateral
e Contracts Contracts

Illegal
Contracts

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CLASSIFICATION OF CONTRACTS
 The contracts can be divided in the following three main
groups.
 
1.       According to Enforceability.
2.       According to Formation.
3.       According to Performance.

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 CLASSIFICATION OF CONTRACTS
ENFORCEABILITY:
 
 According to enforceability, a contract can be divided into
the following five kinds:

 a- Valid Contracts

b- Void Contracts- Void Agreement
c- Voidable contracts
d- Unenforceable Contracts
e- Illegal Contracts

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 CLASSIFICATION OF CONTRACTS
1.  VALID CONTRACT:
 
DEFINITION:
 
 A valid contract, is an agreement enforceable by law. An agreement becomes
enforceable by law when all the essentials of a valid contract as explained by
Section 10 are present. If even one is missing, there, is no valid contract.
 
OBLIGATION OF PARTIES
 
 In valid contract all the parties to the contract are legally responsible for the
performance of a contract, if one of the parties breaks the contract, the other
party has a right to take action against the guilty party. The contract can be
enforced through the court also.
 

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CLASSIFICATION OF CONTRACTS
EXAMPLE:
 
 A Proposes to sell his car to B for Rs.20 lac and B accepts the
proposal. If A and B both possess contractual capacity and the
consent of both is free, there is a valid contract between A and B.
 
 If A fails to deliver the car, B can sue him in the court for
delivery and if B fails to make the payment, A can sue him for
recovery of price.
 

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CLASSIFICATION OF CONTRACTS
2.  VOID CONTRACT
 
DEFINITION:
 
 The word void means not binding in law. A contract, -which cannot be enforced by either
party, is called a void contract Section 2(j) defines “A contract which ceases to be enforceable
by law becomes void, when it ceases to be enforceable.”
 
 From this definition, it is clear that a void contract is not void from the very beginning. It is
valid contract and binding on the parties when it is originally made but after its formation it
become void due to certain reasons.

 a- Impossibility of performance
 A contract becomes void due to impossibility of performance.

 Exp. C agrees to sell his house to B after one month. The house is burnt next day. The
contract becomes void due to impossibility of performance.

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CLASSIFICATION OF CONTRACTS
 b- Subsequent Illegality
 A contract becomes void by subsequent illegality.

 Exp C agrees to sell 1000 bags of wheat to B. before the

delivery of wheat, the Govt. put bans on private trade of wheat.

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CLASSIFICATION OF CONTRACTS
VOID AGREEMENT:-
An agreement which is not enforceable by law is a void
agreement. It does not create legal obligations among parties.
It is void ab-initio. In these agreement there is an absence of
any essentials of a valid contract except free consent.
For Example:- Agreement with minor or agreement without
consideration are void.

Example:- A promised to sell horse to B for Rs 1Lac but the

horse was dead before the agreement was made but the parties
were unaware. The agreement is void.

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 CLASSIFICATION OF CONTRACTS
3.  VOIDABLE CONTRACT
DEFINITION:
 
 According to Section 2(i) “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 avoidable.
 
 Generally, avoidable contract takes place when the consent of
one of the parties is not free. It is a valid contract until it is
avoided by the party having the right to avoid it. Once it is
avoided it becomes void. But if the party chooses to affirm it,
the contract continuous to be valid.
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 CIRCUMSTANCES UNDER WHICH
A CONTRACT BECOMES VOIDABLE
The following are the circumstances under which a contract becomes voidable.

1.  A contract becomes voidable when the consent of one of the parties to the
contract is obtained by coercion influence, misrepresentation or fraud. (Sec 19).
 
EXAMPLE:
 
(a)   A, threatens to shoot B to purchase his Honda 110 for Rs.20,000. B agrees.
This contract was made by coercion and is voidable at the option of B.

(b)  A, in order to deceive B, falsely states that 500 pounds of sugar is produced
annually at A’s factory and in this way induces B to buy the factory. The
contract is voidable at the option of B.

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 CIRCUMSTANCES UNDER WHICH
A CONTRACT BECOMES VOIDABLE
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 5).
 
EXAMPLE:
 
 A contracts with B that A shall whitewash. B’s House for Rs.10,000. A, is ready to
whitewash but B prevents him from doing so. This contract is voidable at the option of A.
 
3.  When a party to the contract promises to do a certain thing within a specified time, but
fails to do it, then the contract becomes voidable at the option of the promise, if the time is
essence of the contract, (Sec 55)
 
EXAMPLE
 
 A, contracts with B that A shall white-wash B’s House for Rs.10,000 within one week. But
A does not turn up within the specified time. The contract is voidable at the option of B.

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CLASSIFICATION OF CONTRACTS
 4- Unenforceable Contracts

 Definitions;
 Any contract which cannot be enforced by the
law due to some technical defects.

 Example; C borrows Rs I0 million from B and makes a

pronote on Rs 10 stamp paper. It is unenforceable by law
because pronote is undervalued.

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CLASSIFICATION OF CONTRACTS
 5- Illegal Contracts

 Definition
 An agreement is illegal if it is forbidden by any
law. The object of illegal agreement is unlawful. It is void
ab-initio. It cannot be enforceable by law. There is
punishment for the parties who make such agreements.

 Example: C gives money to B, a smuggler, to buy

smuggled goods. The agreement is illegal.

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 CLASSIFICATION OF CONTRACTS
FORMATION:
 
 According to formation, a contract can be divided into the following three kinds:

1.  EXPRESS CONTRACT
 
 Where the offer or acceptance is made in words spoken or written, it is an express contract.

 
 It can also be defined in this way that an express contract is one in which the parties to the
contract directly state the terms of the contract orally or in writing at the time the contract
is made.
 
EXAMPLE:
 
 A tells on telephone to B that he wants to sell his car for Rs.3 lac and B informs A that he
agrees to purchase the car, there is an express contract.

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 CLASSIFICATION OF CONTRACTS
2.  IMPLIED CONTRACT

 Where the offer or acceptance is made, otherwise than in words, it is an implied contract.  
 Implied contract is one, which is not made by words, written or spoken, but by the acts and
conduct of the parties thereto. It arises when one person, without being requested to do so,
renders services under circumstances indicating that he expects to be paid for them, and the
other person, known such circumstances, accepts the benefit of those services.

 EXAMPLE
 (a)  A, a Railway Coolie carries the luggage of B in order to carry it out of the railway station
without being asked by B, and B allows him to do so. The conduct of B shows that he is a
ready to pay to A for the services. It is an implied contract.

(b)  M, a professional shoes shiner starts polishing the shoes of W without being asked to do so,
and W allows him to do so. It is an implied contract and W is under obligation to pay to M.

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 CLASSIFICATION OF CONTRACTS
3.  CONSTRUCTIVE OR QUASI CONTRACT
     Such a contract does not arise due to express or implied agreement between the parties but the
law imposes a contract under certain special circumstance. A quasi Contract is based upon the
principle of equity and justice that a person shall not be allowed to get benefit at the expense of
another.

EXAMPLE
1- FINDER OF LOST GOODS:-
a) A, finder of lost goods is under a obligation to find out the true owner and return the goods.
This responsibility is similar as a bailee [Sec. 71]

(b)   A, a trader, leaves goods at B’s house by mistake, B treats the goods as his own and starts
using them. There is a quasi contract between A and B. B is bound to pay for the goods.

2- LIABILITY FOR NECESSARIES:- If a person supplies necessaries to a person who is

incompetent to contract the supplier can recover a reasonable price of such necessaries from
the property of such person. If such person owns no property, the supplier cannot recover the
price of such necessaries. [Sec. 68]
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 CLASSIFICATION OF CONTRACTS
3- PAYMENT BY THE INTERESTED PERSON:- A person who is interested in the payment
of money which another is bound to pay by law, and who therefore pays it, is entitled to be
reimbursed by the other. [Sec. 69]
It means if a person makes a payment on behalf of another person who is bound to pay, he can
recover from that person .
EXAMPLE:-
a- contract of agency
b- A rented a property to B. A paid the outstanding electricity bills of B to avoid disconnection of
electricity. A can recover the payment from B.

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 PERFORMANCE
1.  EXECUTED CONTRACT
 
 Executed means that which is done. 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)  A, purchased a book from B for Rs.200 and paid the price on the spot. It is an executed
contract because both the parties have performed their duties.

(b) A agrees to paint a picture for B for Rs.2,000. When A paints the picture and B pay the price,
the contract is said to be executed.

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 PERFORMANCE
2.  EXECUTORY CONTRACT
 
    Executory means that which remains to be done. 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
 
(a) M promise to sell his car to N for Rs.2 lac and N pays only Rs.50,000 as advance money and
promise to pay the balance later. M gives the possession of car to N and promises to transfer
ownership on receipt of full amount. The contract between M and N is executory because there
remains something to be done on both sides.

(b)  A agrees to teach B, from the next month and B promises to pay Rs.800 to A. It is an
executory contract because the promises are yet to be performed.

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 PERFORMANCE
3.  UNILATERAL CONTRACT
 
 Unilateral contract is one in which only one party has to fulfill his obligations at the time of
formation of the contract, the other party has already fulfilled his obligations by doing some
acts at the time of the contract or before the contract comes into existence. Such contract is also
known as contract with executed consideration.
 
EXAMPLE
 
 A promised to pay Rs.1,000 to any one who found his lost bag. B found the bag and returned it
to A. It is an unilateral contract which comes into existence when the bag is found. Now A has
to pay as B as already performed his obligation by finding the bag.

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 PERFORMANCE
4.  BILATERAL CONTRACT
 
 A bilateral contract is one in which die obligations of both the parties to the contract are
outstanding at the time of the formation of the contract. In other words it is a contact in which
both the parties have yet to perform their obligations.
 
 It is similar to executory contract and is also known as contract with executory consideration.
 
EXAMPLE
 
 A Promises to paint the picture for B and B promises to pay Rs.5,000 to A.

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