Business Law Contract Act 1872- 3

8/2/2019 Business Law Contract Act 1872- 3

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Ghulam Murtaza Korai IoBM


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Intention to create legal relationship: Themaker of the proposal must intent to enter

into contractual relationship.The terms of offer must be certain(clear) notloose or vague: The terms of an offer must bedefinite and certain.Communication of Proposal: It means thatproposal must be communicated to the otherparty.


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Express Proposal: A proposal made by words of mouth or by writing is an express proposal.Implied Proposal: A proposal made neither verballynor in writing is an implied proposal. It is made by theconduct of the party. A common example is takinggoods to the cash counter in a super-market. That isan implied proposal.Specific Proposal: An offer made to an individual or to

a specific group of persons. It can only be accepted bythe person to whom it is made.General Proposal: An offer may be made to the publicat large. It may be accepted by anyone who complieswith the terms of the offer


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Counter Proposal: A statement (by the offeree) whichdoes not accept all the terms and conditions proposedby the offerer, but which in fact introduces a newterms is a new proposal and it is called a counterproposal. A counter proposal is capable of beingaccepted or rejected. The legal effect of a counterproposal is that terminates the original proposal.Cross Proposal: Two manifestations of willingness to

make the same bargain are said to be cross proposalsif the following conditions are fulfilled. I) subjectmatter of both the offers must be same; ii) terms of both the offers must be same; and iii) they must bemade simultaneously.


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Definition: When the person to whom the proposal is madesignifies assent to it, the proposal is said to be accepted. Theacceptance should be absolute and unconditional. It is calledMirror Image Rule. Promise, Promiser and Promisee Proposal+ Acceptance= Promise. A proposal when acceptedbecomes a promise. Promise is an accepted proposal. Promiser: The person making the proposal is called the promise orthe one whose proposal is accepted and he becomes bound by hispromise.Promisee: The person accepting the proposal is called thepromise.


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A proposal may be revoked at any time beforethe communication of the acceptance.Revocation of Acceptance

An acceptance may be revoked at any timebefore the communication of the acceptanceThe Postal RuleWhere the postal service is used as the means of communication, an acceptance is deemed to becomplete as soon as the properly addressed andstamped letter is posted. The contract isconcluded on posting the letter even if the lettersubsequently fails to reach the proposer.


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OFFER An offer is a promise to be bound on particular terms. Itmay (If it is accepted by an offeree) result in a legallyenforceable contract. Acceptance is necessary for theformation of a contract but once the offeree has assentedto the terms offered, a contract comes into effect andboth parties are bound. The proposer can no longerwithdraw his offer nor can the offeree withdraw hisacceptance.

INVITATION TO TREATAn invitation to treat is simply an expression of willingness to enter into negotiations which it is hoped willlead to the conclusion of a contract at a later date.


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Display of goods for sale The display of goods constitutes an invitation to treat andthat the offer is made by the customer when he presentsthe goods at the cash counter where the offer may beaccepted by the shopkeeper.Tenders Tenders an other example of invitation to treat. They occurwhere someone wishes particular work to be done andissues a statement asking interested parties to submit the

terms on which they are willing to carry out the work. Theperson who invites the tender makes an invitation to treat.The person who submits the tender is the offerer and theother party is at liberty to accept or reject the offer.


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Auction Sales The general rule is that an auctioneer (byinviting bids to be made) makes an invitation to

treat. The offer is made by the bidder which inturn is accepted when the auctioneer strikes thetable with his hammer. The advertisement of anauction-sale is generally an invitation to treat. Certain Statements Which Do Not Amount toProposalSupply of informationA statement of wish


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Consideration is the price by which thepromise of the other party is bought. When at

the desire of the promise, the promisee whodoes or abstains from doing something suchact or abstinence or promise is called aconsideration for the promise (by thepromisee to the promisor).


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Coercion : Coercion is the committing or threatening tocommit any act forbidden by the Pakistan Penal Code(PPC 1860) or the unlawful detaining or threatening todetain any property to the prejudice of any person withthe intention of causing any person enter into anagreement.Effect of Coercion When consent to agreement is causedby coercion, the agreement is a contract voidable at theoption of the party whose consent was so caused.

Burden or Onus of Proof Burden of proof that the consentfor the agreement was obtained by coercion lies on theparty intending to avoid the contract.


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Undue influence: A contract is said to be induced by undueinfluence when the relation between the parties are such that oneof them is in a position to dominate the will of the other and usesthat position to obtain an unfair advantage over the other.When a person is deemed to be in a position to dominate thewill of another? Real authority: Where he holds real or apparent authority over theother. a) officer and his subordinate b) a police officer and anaccused c) master and servantFiduciary Relation: Where he stands in a fiduciary relation to theother. a) spiritual guide and his disciple b) solicitor and client

Affected mental capacity: Where he makes a contract with aperson whose mental capacity is temporarily or permanentlyaffected by reason of age, illness or mental or bodily distress.Medical attendant and patient.


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Effect of Undue Influence When consent toagreement is caused by undue influence, theagreement is a contract voidable at theoption of the party whose consent was socaused.

Burden or Onus of Proof Burden of proof that the consent for the agreement wasobtained by undue influence lies on the partyintending to avoid the contrac t.


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Fraud: Fraud is intentional. It is an intention todeceive the party on whom it is employed or induced.The induced also enters into a contract. It includes:False Assertion: A false representation of a fact madeknowingly or without belief in its truth constitutesfraud. Active Concealment: Active concealment of afact by one having knowledge or belief of fact is fraud.For example, where a seller sells goods already sold byhim to third person. His conduct amounts to activeconcealment and fraud. Empty Promise: Making apromise without the intention of performing it is afraud. For example, buying goods under a contract of sale with the intention of not paying the price is fraud.


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Misrepresentation: It is misstatement butinnocent. There is no intention to deceive. When

a person makes a positive statement that a factis true when his information does not warrant itto be so, though he believes it to be true thisamounts to misrepresentation. If a party to anagreement induces (however innocently) theother party to make a mistake as to the natureor quality of the subject matter of theagreement, this act also amounts tomisrepresentation.


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Effects: if there is no free consent Voidability of agreement without free consent

A contract is voidable at the option of a partywhose consent to the contract is obtained bymeans of:Coercion; orUndue influence; orFraud; orMisrepresentation.


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Incompetency of Party A minor A person of unsound mind A disqualified personMistake of FactUnlawful agreement Forbidden by law Fraudulent Injury to person Immoral or opposed to public policy


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Agreements without considerationRestraint of marriage

Restraint of tradeRestraint of legal proceedingsUncertain agreementWagering agreementImpossible act


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Incompetency of Parties : An agreement inwhich one of the contracting parties is an

incompetent person is a void agreement.Following Persons are incompetent to enterinto a contract:

o A minor i) Age of Majority 18 years ii) 21 yearsguardian

o A person of unsound mindo A person disqualified by law


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Test of soundness of mind : A person is saidto be sound mind for the purpose of making acontract if at the time when he makes it, he iscapable of understanding it and of formingrational judgment as to its effect upon hisinterest.

Contract in lucid interval : A person who isusually of unsound mind but occasionally of sound mind may make a contract when he isof sound mind.


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Mistake of fact : where both the parties tothe agreement are under a mistake as to a

fact essential to the agreement, theagreement is void.Consideration &/ or Object unlawful : Everyagreement of which the object orconsideration is unlawful is void. Theconsideration or object of an agreement isunlawful in the following cases:


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When it is forbidden by law : A promises to Bto drop a prosecution which he has institutedagainst B for robbery, and B promises torestore the value of things taken. Theagreement is void, as its object is unlawful.If it is Fraudulent : A,B and C enter into

agreement for the division among them of gains acquired, or to be acquired, by them byfraud. The agreement is void, as its object isunlawful


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Injury to person : X promises to pay Rs 10,000to Y to publish a libel (i.e. defamatory article

against someone).Agreements opposed to public policy : Anagreement to sale public property


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Agreements without consideration : Anagreement without consideration is a void

agreement.Restraint of Marriage : Every agreement inrestraint of marriage of any person is void.Restraint of trade : An agreement restraininga person from carrying on a lawful profession,or trade, or business is void to that extent.


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Restraint of legal proceedings : Anagreement by which a party is restricted from

enforcing his contractual (legal) rights by theusual legal proceedings in the ordinarytribunals is void.Uncertain Agreements : the agreement, theterms of which are not certain is void.


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Performance of Contract means fulfilling of their respective legal obligations created

under the contract by both the promisor andthe promisee. A contract is said to have beenperformed when the parties to a contracteither perform or offer to perform theirrespective promises. Section 37 of ContractAct lays down the obligation of the partiesregarding performance.


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There may be two types of performance asfollows :

Actual performance: where a promisor has made anoffer of performance to the promisee and the offer hasbeen accepted by the promisee, it is called an actualperformance.Example A contracted to deliver B at his warehouse on1st December 100 bales of cotton of a particular quality.A brought the cotton of required quality to the decidedplace on the agreed day during the business hours and Btook the delivery of goods. This is an actualperformance.


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Attempted Performance : where a promisor has madean offer of performance to the promisee, and the offerhas not been accepted by the promisee. It is called an

attempted performance (section 38).Example if in the aforesaid example, B refused to take the

delivery of goods, it is a case of attempted performancebecause A has done what he was required to do underthe contract.


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If any party to the contract refuses or fails toperform his part of the contract is called

breach of contract. Or even by his act makesit impossible to perform his obligation underthe contract. A breach may of contract mayoccur in the following ways.


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Anticipatory Breach of Contract : Anticipatory breachof contract occurs when the party declares hisintention of not performing the contract before theperformance is due.Actual Breach of Contract : Actual breach of contractoccurs in the following two ways:

1. On due date of performance : if any party to thecontract refuses or fails to perform his part of thecontract at the fixed time of performance, it is calledan actual breach of contract on due date of performance

2. During the course of performance: if any party hasperformed a part of the contract and refuses or fails


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to perform the remaining part of the contract, it iscalled an actual breach of contract during thecourse of performance.

Consequences of Breach of Contract : Theaggrieved party (i.e. the party not at fault) isdischarged from his obligation and gets rights to

proceed against the party at fault. The variousremedies available to an aggrieved party.


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Meaning of Remedy: a remedy is the course of action available to an aggrieved party (i.e. theparty not at fault) for the enforcement of a rightunder a contract.Remedies for Breach of Contract : The variousremedies available to an aggrieved party are.Rescission of ContractSuit for DamagesSuit for Specific PerformanceSuit for Injunction


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Rescission means a right not to perform obligation. Incase of breach of contract, the promisee may put anend to the contract. In such a case, the aggrievedparty is discharged from all the obligations under thecontract and is entitled to claim compensation for thedamage which he has sustained because of the non-performance of the contract. For example X agrees tosupply 10 tons of wheat to Y on 20 December. Ypromises to pay for goods on delivery. X does notsupply the goods on due date. Here Y is dischargedfrom the liability of paying the price. Y is entitled torescind the contract and to claim compensation forthe damage because of non supply of goods.


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Damages are monetary compensation allowedfor the loss suffered by the aggrieved party dueto breach of contract. The object of rewarding

damages is not to punish the party at fault but tomake good the financial loss suffered by theaggrieved party due to the breach of contra ct.Types of Damages:Ordinary DamagesSpecial DamagesExemplary or Punitive DamagesNominal Damages


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Ordinary damages are those which naturallyarise in the usual course of things from such

breach. These damages can be recovered if the following two conditions are fulfilled:The aggrieved party must suffer by breach of contract, andThe damages must be proximateconsequences of the breach of contract andnot the indirect consequences.


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Measure of Ordinary Damages: In a contract forthe sale of goods, the measure of ordinarydamages is the difference between the contract

price and the market price of such goods on thedate of breach. For example on 1 st December Acontracted to sell and deliver 50 tons of wheat@ Rs. 8,000 per ton to B. On 20 December. Afailed to deliver goods on 1 st January when theprice of the wheat was Rs.9,500 per ton. Y isentitled to recover Rs 75,00 [(i.e. Rs 9,500-8,000)*50]


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Special damages are those which mayreasonably be supposed to have been in thecontemplation of both parties as the probable

result of the breach of a contract. Thesedamages can be recovered if the specialcircumstances which would result in a specialloss in case of breach of a contract arecommunicated to the promisor, e.g. loss of profits on account of default by the other partyto the contract can be claimed only when anadvance notice of such damages has been givenbefore.


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Example A, a builder, contracts to construct and finish ahouse by the 1 st January, in order that B may givepossession of it at that time to C, to whom B has

contracted to let it. A is informed of the contractbetween B and C. A builds the house so badly that,before the first of January it falls down, and has to berebuilt by B, who, in consequences, loses the rentwhich he was to have received from C, and is obligedto make compensation to C for the breach of hiscontract. A must make compensation to B for the costof rebuilding the house, for the rent lost and for thecompensation made to C.


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Nominal damages are those which areawarded where there is only a technical

violation of a legal right but the aggrievedparty has not in fact suffered any lossbecause of breach of contract. Thesedamages are called nominal because they arevery small, say, one rupee. The court may ornot award these nominal damages.


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Suit for specific performance meansdemanding courts direction to the defaulting

party to carry out the promise according tothe terms of the contract. Example A agreedto sell his house to B for Rs. I million.Subsequently, A refused to sell the house.Here, B may file a suit against B for thespecific performance of the contract.


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Suit for injunction means demanding courts stay order. Injunction means an order of thecourt prohibits a person to do a particular act.

Where a party to a contract does somethingwhich he promised not to so, the court may issuean order prohibiting him from doing so. ExampleA agreed to play for Karachi Dolphins onlyduring the contract period. During the contractperiod, A made contract with IPL to play outsidePakistan and refused to play for KarachiDolphins, it was held that A could be restrainedby injunction from playing for IPL.


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A Quasi-contract is not a contract a t allbecause one or the other essentials for theformation of a contract are absent. It is anobligation imposed by law upon a person forthe benefit of another even in the absence of a contract

.FEATURES OF A QUASI-CONTRACTS:Thesalient features of a quasi-contract are asunder:


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It is imposed by law and does not arise fromany agreement.

The right under it is always a right to money.A suit for its breach may be filed in the sameway as in case of a complete contract.


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(a) Right to Recover the Price of NecessariesSupplied: The person who has supplied thenecessaries to a person who is incapable of

contracting or anyone whom such incapable person islegally bound to support, is entitled, is entitled toclaim their price from the property of such incapableperson. Example 1. A supplies B, a lunatic, withnecessaries suitable to his condition in life. A isentitled to be reimbursed from Bs property. Example2. A supplies the wife and children of B, a lunatic, withnecessaries suitable to their condition of life. A isentitled to be reimbursed from Bs property.


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(b) Right to Recover Money Paid for AnotherPerson: A person who is interested in the payment of money which another is bound by law to pay, andtherefore pays it, is entitled to be reimbursed by theother. Example B holds land in Sindh, on lease grantedby A, a Zamindar. The revenue payable by A to theGovernment being in arrears, his land is advertised forsale by the Government, under the Revenue Law, theconsequences of such sale will be the annulment of Bs lease. To prevent the sale and the consequentannulment of his own lease, pays the government thesum due from A. A is bound to make good to B theamount so paid.

Business Law Contract Act 1872- 3

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Transcript of Business Law Contract Act 1872- 3