ContractAct A B PDF

Business Law
INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to give students an understanding of the legal system
and commercial laws; and build a knowledge base of corporate laws.
Introduction to the law of contract
LO 2
On the successful completion of this paper, candidates will be able to

demonstrate knowledge of laws relating to Contract Act.
LO 2.1.1
Discuss the provisions of Act with respect to validity of a contract
LO 2.1.1
Demonstrate comprehension in simple scenario based problems
The learning outcome 2.1.1 is covered from chapter 2 to 16.
Exam context
By the end of this chapter students will be able to:
Understand the meaning of a contract
Discuss the essentials of a valid contract
Explain the different classifications of contract
References to Legal Acts

Section number references embedded in the learning materials refer to the following legal
acts unless otherwise stated:
Act
Contract Act 1872
Chapters
3-16
Partnership Act 1932
17
Negotiable Instrument Act 1881
18
Companies Ordinance 1984
Emile Woolf International
19-27
26
The Institute of Chartered Accountants of Pakistan
Section A: Mercantile Law - Chapter 2: Introduction to the law of contract
INTRODUCTION TO THE LAW OF CONTRACT

Section overview
Definition of a contract
Essentials of a valid contract
Classifications of contract
1.1 Definition of a contract

Definition: Contract [Section 2(h)]
An agreement enforceable by law is a contract.
A contract is an agreement which legally binds the parties. The analysis of the
above definition reveals that a contract has following two elements:
Contract
Agreement
Offer
Enforceability
Acceptance
Legal
obligation
These two essentials are discussed below:

Definition: Agreement [Section 2(e)]
Every promise and every set of promises forming the consideration for each other
is an agreement.
The analysis of the above definition reveals that an agreement comes into
existence only when one party makes a proposal or offer to the other party and
the other party signifies his acceptance thereto. Thus an agreement can be an
accepted proposal.
Definition: Promise [Section 2(b)]
When the person to whom the proposal is made signifies his assent to it, the
proposal is said to be accepted. A proposal, when accepted becomes a promise.
The person making the proposal is called the promisor and the person accepting
the proposal is called the promisee.
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Business Law
Definition: Proposal [Section 2(a)]

When one person signifies to another his willingness to do or to abstain from doing
anything, with a view to obtaining the assent of that other to such act or
abstinence, he is said to make a proposal.
Enforceability
Every contract is an agreement, but every agreement is not always a contract. An
agreement creating a legal obligation is said to be enforceable by law. The
parties to an agreement must be bound to perform their promises and in case of
default by either of them, must intend to sue. For an agreement to be enforceable
by law there should be legal obligation instead of social, moral or religious
obligation.
Example: Enforceability
A, offers to sell his furniture to B or Rs. 50,000. B accepts this offer. In this
agreement if there is default by either party, an action for breach of contract
can be enforced through a court of law provided all the essential elements of
a valid contract are present in this agreement.
A invites B to dinner. B accepts the invitation but fails to turn up. Here, A
cannot sue B for damages because the parties to this agreement do not
intend to create legal obligations.
Thus, the law of contract covers such agreements where the parties intend to
create legal obligations. In social, domestic, moral and religious obligation the
usual presumption is that the parties do not intend to create legal obligations.
28
1.2 Essentials of a valid contract

The essentials of a valid contract are shown below [Section 10]:
These essentials are discussed below:

Offer and acceptance
There must be an agreement between parties to create a valid contract. An
agreement involves a valid offer and its acceptance.
Example: Offer and acceptance
A offers to buy bike from B for Rs.50,000 to which B responds positively.
Here A has made an offer and B has accepted it
Offer and acceptance is discussed in detail in Chapter 3.

Legal relationship
A contract to become valid must have 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.
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Business Law
Example: Legal relationship

A invited B on a dinner at his home. B accepted the invitation. It is a social
agreement. If A fails to serve dinner to B than B cannot go to court for enforcing
the agreement and similarly if B did not turn up than A cannot go to court for
enforcing the agreement.
Competency of parties
As per section 11 the parties to an agreement must be competent to contract. In
other words, the person must be of
The age of majority
Person of sound mind and
Not declared as disqualified from contracting by any law to which he is

subject.
Example: Competency of parties

A (Minor) borrowed Rs. 100,000 from B and executed mortgage of his property in
favour of the lender. This is not a valid contract because A is not competent to
contract.
Competency of parties is discussed in detail in Chapter 4.
Consideration
As per section 23 an agreement must be supported by lawful consideration.
Gratuitous (without consideration) promises are not enforceable at law.
Consideration requires not only presence of consideration but also lawfulness of
consideration.
Example: Consideration
A offers to buy IPAD from B for Rs. 50,000 to which B responds positively.
Here As promise to pay Rs. 50,000 is the consideration for Bs promise and Bs
promise to sell the IPAD is the consideration for As promise.
Consideration is discussed in detail in Chapter 5.
Free Consent
As per section 14 an agreement must be made between parties by free consent.
In other words, the consent must not be obtained from following:
Coercion
Undue influence
Fraud
Misrepresentation
Mistake
30
Example: Free consent
A beats B and compels him to sell his bike for Rs. 20,000. Here, Bs consent
has been obtained by coercion because beating someone is an offence under
the Pakistan Penal Code.
A having advanced money to his son, B during his minority, upon Bs coming
of age obtains, by misuse of parental influence, a bond from B for a greater
amount than the sum due in respect of the advances. A employs undue
influence.
Free consent is discussed in detail in Chapter 6.

Lawful Object
As per section 23 the object of an agreement must be lawful. An object is said to
be unlawful when:
It is forbidden by law
Is of such a nature that if permitted would defeat the provisions of any law
It is fraudulent
It involves an injury to the person or property of another
The court regards it as immoral, or opposed to public policy
Example: Lawful object
A, B and C enter into an agreement of the division among them of gains

acquired, or be acquired, by them by fraud. The agreement is void, as its
object is unlawful.
A promises to obtain for B an employment in the public service, and B

promises to pay Rs.10,000,000/-to A. The agreement is void as the
consideration for it is unlawful.
A, who knows that B has stolen goods amounting to Rs.500,000, receives

Rs.100,000 from B in consideration of not exposing A. This agreement is
illegal.
Lawful object is discussed in detail in Chapter 7.

Not declared as void
As per section 24 to 30 an agreement which is not enforceable by law is called
void agreement. There are certain agreements which have been expressly
declared as void such as:
Agreement, the consideration or object of which is partly unlawful
Agreement made without consideration
Agreement in restraint of marriage
Agreement in restraint of legal proceedings
Agreement in restraint of trade
Uncertain agreements
Wagering agreement
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Business Law
Example: Not declared as void
A and B carried on business in a certain locality in Karachi. A promised to

stop business in that locality if B paid him Rs 1,000 per day. A stopped his
business but B did not pay him the promised money. It was held that A could
not recover anything from B because the agreement was in restraint of trade
and was thus void (restraint of trade).
A promises to pay Rs 10,000 to B if it rained today, and B promises to pay Rs

1,000 to A if it did not. The agreement is void because the happening and
non-happening is dependent on future uncertain event (wager).
Void agreements are discussed in detail in Chapter 8.

Certainty
As per section 29 an agreement may be void on the grounds of uncertainty. The
meaning of the agreement must be certain or capable of being certain.
Example: Certainty
A agrees to sell to B "a hundred ton of oil." There is nothing whatever to show
what kind of oil was intended. The agreement is void for uncertainty.
A, who is a dealer in coconut oil, agrees to sell to B "one hundred ton of oil."
The nature of A's trade affords an indication of the meaning of the words,
and has entered into a contract for the sale of one hundred tons of coconut
oil.
A agrees to sell to B "all the grain in my granary at Peshawar." There is no

uncertainty here to make the agreement void.
A agrees to sell to B "one thousand mounds of rice at a price to be fixed by

c." As the price is capable of being made certain, there is no uncertainty here
to make the agreement void.
A agrees to sell to B "my white horse for Rupees five hundred or Rupees one
thousand." There is nothing to show which of the two prices are to be given.
The agreement is void.
Possibility of performance
As per section 56 the terms of the agreement must be capable of being
performed. An agreement to do an act impossible in itself is void.
Example: Possibility of performance
A agrees with B to discover treasure by magic. The agreement is void.
Legal formalities
As per section 25 an oral contract is a perfectly valid contract, except in certain
cases where a contract must comply with the necessary formalities as to writing,
registration etc.
Example: Legal formalities
An oral agreement for arbitration about present disputes is unenforceable because
the law requires that such arbitration agreement must be in writing.
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1.3 Classifications of contract
Valid contracts
Void
agreement
Void contract
Voidable
contract
Illegal
agreement
Unenforceable
agreement
Performance
Express
contracts
Implied
contracts
Quasi contracts
Enforceability
Formaon
The differenWFODVVLFations of contract are shown below:
Executed
contract
Executory
contract
The above classications of contract are briey discussed below:

Express contracts
A contract created by words i.e. verbally or in writing
Implied contracts
A contract created by conduct of a person or the

circumstances of a particular case.
Quasi contracts
An obligation imposed by law.
Valid contract
An agreement which is enforceable by law.
Void agreement
An agreement which is not enforecable by law.
Section 2(g)
Void contract
Section 2(j)
Voidable contract
A contract which ceases to be enforceable by law

becomes void when it ceases to be enforceable.
Section 2(i)
An agreement which is enforceable by law at the

option of the aggrieved party.
Illegal agreements
An agreement the object of which is illegal.
Unenforceable
agreement
An agreement which is otherwise valid but due to

some technical lacking, such as writing etc. remains
unenforceable.
Executed contract
A contract where both the parties have performed

their respective promises.
Executory contract
A contract in which something remains to be done.
Emi l e Wo o lf I nt er nat i on a l
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T h e I n st it ut e of C hart er e d Account a nts of Pak ist an
Business Law
Unilateral contract
A contract is which a promise on one side is

exchanged for an act on the other side. In such
contract one party to a contract has performed his
part and performance is outstanding against the other
party.
Bilateral contract
A contract in which a promise on one side is

exchanged for a promise on the other.
Example: Void contract

A music hall was rented out for a series of concerts. The hall caught fire before the
date of first concert. The contract was valid at the time of its formation but became
void when hall caught fire.
Example: Void agreement
A (Minor) borrowed Rs. 100,000 from B and executed mortgage of his property in
favour of the lender. This is a void agreement because A is not competent to
contract and B cannot legally enforce against A.
Example: Voidable contract
A threatens to kill B if he does not sell his BMW for Rs 1 million to A. B contracted
to sell his BMW to A and receives the payments. Here, Bs consent has been
obtained by coercion. Hence, this contract is voidable at the option of B but B has
no right to insist that contract shall be performed.
Example: Illegal agreement
Rs.100,000 from B in consideration of not exposing A. This agreement is illegal.
Example: Unenforceable agreement
An oral agreement for arbitration about present disputes is unenforceable because
the law requires that such arbitration agreement must be in writing.
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CHAPTER REVIEW
Chapter review
Before moving on to the next chapter check that you now know how to:
Understand the meaning of a contract
Discuss the essentials of a valid contract
Explain the different classifications of contract
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Business Law
36
CHAPTER
Certificate in Accounting and Finance

Business Law

Contents
1 Offer
2 Acceptance
3 Revocation of offer and acceptance
4 Chapter review
37
Business Law
INTRODUCTION
Learning outcomes
LO 2

demonstrate knowledge of laws relating to offer and acceptance of a
contract.
LO 2.1.1
Discuss the provisions of Act with respect to offer and acceptance of a

contract
LO 2.1.1
Exam context
Define the offer and acceptance along with their essentials
Discuss briefly the law relating to the communication of offer, acceptance and revocation
Discuss the circumstances in which an offer lapses

Act
Contract Act 1872
Chapters
3-16
17
18
19-27
38
Section A: Mercantile Law - Chapter 3: Offer and acceptance
OFFER
Section overview
Denition of proposal / offer
Essentials of an offer
Types of offer
1.1 Definition of proposal / offer [Section 2(a)]

Definition:
When one person signies to another his willingness to do or to abstain from doing
anything, with a view to obtaining the assent of that other to such act or
abstinence, he is said to make a proposal.
Thus, an offer is a proposal by one person to another for entering into a legally
binding agreement with him.
1.2 Essentials of an offer

The essentials of an offer are shown below:
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Business Law

Two persons
For a valid offer there needs to be two persons. A person cannot make an offer to
himself. The person making the proposal is called offeror and the person to
whom offer is made is called offeree.
Certain and definite
A valid offer is one which is certain and definite. Thus, no contract can come into
existence if offer is uncertain.
Contractual intention
An offer must be made with an intention to create a contract.
Communication
The offer must be communicated to the offeree. The communication is complete
when it comes to the knowledge of the person to whom it is made. In case an
offer is made by post, its communication will complete when the letter reaches
the offeree. An offer can be made by words spoken or written or through conduct
of the person. [Section 4]
Objective of consent
An offer must be made with a view to obtain the consent of the other person to
proposed act or abstinence.
Conditional
An offer may be subject to some condition. It is on the sole discretion of the
person to whom such offer is made to either accept or reject it. A conditional offer
lapses when condition is not accepted.
Negative confirmation
An offer cannot be in the form of negative confirmation i.e. if it is not accepted
within a specific time then it will be presumed to have been accepted.
Invitation of an offer
An offer is different from an invitation of an offer. The intention in invitation of an
offer is to circulate information of his readiness to do the transaction. Such
intentions are not offers and do not tantamount to promise on acceptance.
In other words, an invitation of an offer means an intention of a person to invite
others with a view to enter into an agreement.
Example: Invitation of an offer
Goods were displayed in a departmental store for sale and self-service system was
there. One customer selected an item. Here the display of goods is an invitation to
offer and selection by the customer is an offer to buy.
Communication of special conditions
When there are special terms and conditions in an offer they must be specifically
communicated to the other party.
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1.3 Types of offer

Following are the different types of offer:
Specific Offer
If an offer is made to definite or a particular person or

specific group of persons it is said to be specific offer.
Such offer can be accepted only by that definite person
or that specific group of persons.
General offer
If an offer is made to the world or public than it is said to

be general offer. Such offer can be accepted by any
person. The contract is made with person who having
the knowledge of the offer comes forward and acts
according to the conditions of the offer.
Cross offers
If two parties ignorant of each others offer made similar

offers to each other they are called cross offers. Cross
offers are not equal to acceptance.
Standing / Open /
Continuing offer /
Tender
If an offer is of on-going nature it is said to be a standing

offer. A contract is entered only when the person
signifies his acceptance on the basis of the tender.
.
Example: Specific Offer
A offers to buy bike from B for Rs.50,000.
Example: General Offer

A advertised in the newspaper that he would pay Rs.50,000 to anyone who traces
his d o g . B , who knew about the reward traced that dog and sent a message to A
that he had found his dog. It was held that A was entitled to receive the amount of
reward.
Example: Cross offers

A of Karachi sends by post to B of Lahore offering to sell his bike for Rs.50,000.
The letter is posted on 1st December and on same day, B of Lahore sends a letter
by post to A of Karachi offering to buy As bike for Rs.50,000.
Example: Standing / Open / Continuing offer / Tender

A required a large quantity of certain goods during a year and offered this by an
advertisement. B supplied those goods at a specific rate. Every supply of B is an
acceptance of the standing offer of A.
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Business Law
ACCEPTANCE
Section overview
Meaning of acceptance
Essentials of acceptance
2.1 Meaning of acceptance

When the person to whom the proposal is made signifies his assent to it, the
proposal is said to be accepted. [Section 2(b)]
Thus, an acceptance means assenting to an offer made. An offer when accepted
becomes a promise.
2.2 Essentials of acceptance

The essentials of acceptance are shown below:

Absolute and unconditional
An offer should be accepted without any condition. If any condition is imposed on
an offer then it turns out to be counter offer instead of acceptance. [Section 7]
Communication
The acceptance may be complete when it is communicated to the offeror. An
offer can be accepted by words spoken or written or through conduct of the
person. Further, a valid acceptance is communicated either by the offeree
himself or any person authorized by him to communicate to the offeror.
42
Postal rule
The communication of acceptance by post is complete as against the proposer
when it is put in a course of transmission. In case of acceptance made by post,
the proposer becomes bound as soon as the letter of acceptance is posted even
if such letter is lost or delay.
The communication is complete as against the acceptor when it comes to the
knowledge of the proposer. In case of acceptance by post, the acceptor becomes
bound when the letter of acceptance is actually received, before that acceptor
may revoke his acceptance.
Contracts over telephone / telex / fax
A contract by telephone / telex / fax is treated on the same principle as an oral
agreement made between two parties when they are face to face with each
other. In such cases, the contract will complete only when the acceptance is
received by the proposer and not when it is transmitted by the acceptor.
Reasonable time
A valid acceptance is when it is accepted within the time specified or within a
reasonable time where no time is specified.
Reasonable mode
Acceptance should be made in the manner specified or in a usual manner where
no mode is specified.
If the proposal prescribes a manner in which offer is to be accepted and the
acceptance is not made in that manner. The offeror shall, in this case, when the
acceptance is communicated to him, insist that his proposal shall be accepted in
the prescribed manner and not otherwise. If the offeror fails to insist within a
reasonable time it is deemed that he has accepted the performance.
Awareness of proposal
The acceptor must be aware of the proposal at the time of acceptance of the
proposal.
Before lapse of an offer
The acceptance must be given before the offer lapses or is withdrawn.
Negative confirmation
A proposal is not accepted if the offeree remains silent. In cannot be in the form
of negative confirmation i.e. if it is not accepted within a specific time than it will
be presumed to have been accepted.
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Business Law
REVOCATION OF OFFER AND ACCEPTANCE

Section overview
Timing of revocation
Communication of revocation
Lapse of an offer
3.1 Timing of revocation

According to Section 5 of the Contract Act:
Timing of revocation of an offer
A proposal may be revoked at any time

before acceptance or the communication
of its acceptance is complete as against
the proposer, but not afterwards.
Timing of revocation of an
acceptance
An acceptance can be revoked at any time

before the communication of the
acceptance is complete as against the
acceptor i.e. when acceptance comes to
the knowledge of the offeror, but not
afterwards.
3.2 Communication of revocation

The rules regarding the communication of revocation are as under [Section4]:
As against the person who
makes it
When it is put in a course of transmission

so as to be out of the power of the revoker.
As against the person to whom

it is made
When it comes to the knowledge of the

revokee.
3.3 Lapse of an offer

An offer is lapsed in the following ways:
Revocation
An offer may be revoked before its acceptance by the offeree. [Section 5]
Lapse of time
An offer will come to an end if it is not accepted within the time specified or within
a reasonable time where no time is specified. What is the reasonable time is a
question of fact depending upon the subject matter and circumstances. [Section
6(2)]
Death or insanity
An offer comes to an end by the death or insanity of the offeror if the fact of his
death or insanity comes to the knowledge of the acceptor before acceptance.
[Section 6(4)]
44
Non-fulfilment of condition precedent

An offer comes to an end when the acceptor fails to fulfil the conditions precedent
to the offer. [Section 6(3)]
Counter offer
An offer comes to an end if the counter offer is made.
Non-acceptance according to requirement
An offer comes to an end if it is not accepted according to the requirement (if
any) of the offeror.
Non-acceptance / Rejection
An offer comes to an end if it is not accepted by the offeree. An offer is said to be
rejected if the offeree expressly rejects.
Subsequent illegality or destruction
An offer comes to an end if it becomes illegal or the subject matter is destroyed
before its acceptance.
45
Business Law
CHAPTER REVIEW
Chapter review
Define the offer and acceptance along with their essentials
Discuss briefly the law relating to the communication of offer, acceptance and
revocation
Discuss the circumstances in which an offer lapses
46
CHAPTER

Business Law
Capacity of parties
Contents
1 Competent to contract
2 Chapter review
47
Business Law
INTRODUCTION
Learning outcomes
Capacity of parties
LO 2

demonstrate knowledge of laws relating to competency / capacity of
parties.
LO 2.1.1
Discuss the provisions of Act with respect to competency / capacity of parties
LO 2.1.1
Exam context
Explain the capacity to contract and persons who are incompetent to contract
Discuss the position of agreements entered by person incompetent to contract

Act
Contract Act 1872
Chapters
3-16
17
18
19-27
48
Section A: Mercantile Law - Chapter 4: Capacity of parties
COMPETENT TO CONTRACT
Section overview
Who are competent to contract
Agreements with a minor
Agreements by persons of unsound mind
Agreements with persons disqualified by law
1.1 Who are competent to contract?

According to Section 11 of the Contract Act every person is competent to
contract:
who is of the age of majority according to the law to which he is subject,

and
who is of sound mind, and
is not disqualified from contracting
by any law to which he is subject.

The below chart shows the persons who are incompetent to contract:
Incompetent to contract
Disqualified by
law
Minor
Unsound mind
Alien enemies
Foreign sovereigns
and ambassadors
Convicts
Inslovent
1.2 Agreements with a minor

In Pakistan a minor is a person who has not attained majority which is:
21 years where a guardian of a minors person or property is appointed by

the court of law under the Guardians and Wards Act, 1890; or
18 years in other cases.
Position of agreements by a minor

The law pertaining to agreements with a minor is given below:
An agreement with a minor is void.
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Business Law
Where an infant / minor represents fraudulently or otherwise that he is of

the age of majority and induces another to enter into a contract with him, he
will not be liable
Since ratification has a retrospective application it is necessary that the

minor must be competent to contract at the time when the contract is
entered into. Therefore, an agreement with a minor cannot be ratified
subsequently after he attains majority.
If a minor enters into an agreement jointly with a major person then such
agreement can be enforced against the major person who has jointly
promised to perform.
A minor can be admitted for the benefits of partnership with the consent of
all the partners. He cannot be a partner until he attains majority. [Section 30
of the Partnership Act]
A minor can be agent but cannot be a principal but if anyone acts on behalf
of minor principal, he will be personally liable. [Section 184]
A minor cannot be declared insolvent because he is incompetent to

contract.
A minor can file a suit but cannot be sued.
If the parent of a minor entered into on behalf of a minor being within the
scope of the authority and for the benefit of the minor then such
agreements can be enforced by or against the minor.
A person who supplied necessaries to a minor is entitled to be reimbursed

from the property of such minor. Such claim is against the property of the
minor and not against the minor personally. [Section 68]
1.3 Agreements by persons of unsound mind

Meaning of sound mind
According to Section 12 of the Contract Act, a person is said to be of sound mind
for the purpose of making a contract
if at the time when he makes it,
he is capable to understand the terms of the contract,
to form a rational judgment as to its effect upon his interests.
Thus, if a person is not capable of both, he is said to have suffered from

unsoundness of mind.
Example: Meaning of sound mind
The examples of persons having an unsound mind include:
specific persons/idiots
lunatics and
drunken persons.
Specific persons/idiots
A person who is so mentally deficient by birth as to be incapable of ordinary
reasoning or rational conduct is said to be a specific person.
50
Lunatic
A person affected by lunacy is said to be 'lunatic'. A person can become lunatic at
any stage of his life.
Position of agreements with a person of unsound mind
The positions of such agreements are given below:
If a lunatic enters into a contract while he is of unsound mind, an

agreement during this period is void.
If a lunatic enters into a contract while he is of sound mind, an agreement

during this period is valid.
An agreement with a specific person is void.
A person delirious from fever or drunken person cannot enter into a

contract while such delirium or drunkenness lasts and he is not able to
understand the terms of the contract or form a rational judgment.
A person of unsound mind can enforce a contract for his benefits
A person who supplied necessaries to a person of unsound mind or his

defendant entitled to be reimbursed from the property of such person of
unsound mind. Such claim is against the property of the person of unsound
mind not against the person personally.
Position of a person who is usually of unsound mind but occasionally of sound mind
A person who is
usually of unsound mind but
occasionally of sound mind
may make a contract when he is of sound mind

Example: Position of a person who is usually of unsound mind but occasionally of
sound mind
A patient in a lunatic asylum who is at intervals of sound mind may contract during
those intervals.
Position of a person who is usually of sound mind but occasionally of unsound mind
A person who is
usually of sound mind but
occasionally of unsound mind
may not make a contract when he is of unsound mind

Example: Position of a person who is usually of sound mind but occasionally of
unsound mind
A sane man who is so delirious from fever or who is so drunk that he cannot
understand the terms of a contract or form a rational judgment as to its effect on
his interest cannot enter into contract while such delirium or drunkenness lasts.
Burden of proof
The rules regarding the burden of proof are following:
If a person is usually of sound mind or in drunkenness or in delirium from

fever then the burden of proof that he was of unsound mind lies on the
person who questions the validity of contract.
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Business Law
If a person is usually of unsound mind then the burden of proof that he was
of sound mind lies on the person who confirms it.
1.4 Agreements with persons disqualified by law

There are some disqualifications imposed on certain persons in respect of their
capacity to contract which are discussed below:
Alien enemies
Foreign
sovereigns and
ambassadors
Convicts
Insolvent
An alien is a person who is the citizen of a foreign

country. He can enter into a contract and be sued during
peace time but if a war is declared than an alien enemy
can neither enter into a contract or be sued during the
period of war. Contracts entered before the declaration of
war are either suspended or terminated during the period
of war.
Such persons have immunity unless they choose to
submit themselves to the jurisdictions of our courts. They
have a right to enter into a contract but can claim the
privilege of not being sued.
A convict while under imprisonment is incapable of
contracting but this disability comes to an end after the
expiry of the sentence or when he is on parole.
A person declared as insolvent cannot enter into a
contract as his property is dealt with by official assignee
or official receiver.
Note
Companies
A company is an artificial person and a contract entered

into by a company will be valid only if it is within the
powers granted by the Memorandum of Association.
52
CHAPTER REVIEW
Chapter review
Explain the capacity to contract and persons who are incompetent to contract
Discuss the position of agreements entered by person incompetent to contract
53
Business Law
54
CHAPTER

Business Law
Consideration
Contents
1 Consideration
2 Chapter review
55
Business Law
INTRODUCTION
Learning outcomes
Consideration
LO 2

demonstrate knowledge of laws relating to consideration of a contract.
LO 2.1.1
Discuss the provisions of Act with respect to consideration of a contract
LO 2.1.1
Exam context
Define consideration and essentials of a valid consideration
Discuss the contracts where there is no consideration

Act
Contract Act 1872
Chapters
3-16
17
18
19-27
56
Section A: Mercantile Law - Chapter 5: Consideration
CONSIDERATION
Section overview
Definition of consideration
Essential elements of consideration
Stranger to contract
Agreements without consideration
1.1 Definition of consideration

Definition: Consideration [Section 2(d)]
When at the desire of the promisor, the promisee or any other person who has
done or abstained from doing, or does or abstains from doing, or promises to do or
to abstain from doing something, such act or abstinence or promise is called a
consideration for the promise.
When a party to an agreement promises to do something, he must get something

in return. This something is in return of consideration. The analysis of the above
definition reveals that a consideration may be the value by which promise is
bought. Consideration may be following:
An act i.e. doing of something
An abstinence or forbearance i.e. abstaining or refraining from doing

something.
A return promise
Example: Consideration
A promises B to guarantee payment of price of the goods which B sells on

credit to C.
Here selling of goods by B to C on credit is consideration for As promise.
A asks B not to sue C for a year for his debts and promises in case of default
of C, A would be liable.
Here B not filing a suit for a year is abstinence, which is a sufficient
consideration for A.
A promises to deliver iPhone to B and B promises to pay Rs. 85,000 on

delivery.
Here the consideration for A will be Rs. 85,000 on delivery and consideration
for B will be delivery of goods
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1.2 Essentials elements of consideration

The essentials of consideration are shown below:
These are discussed below.

Desire of the promisor
An act or abstinence of promise constituting consideration must have been done
or made at the desire or request of the promisor. Thus, an act done at the desire
of a third party or without the desire of the promisor cannot constitute a valid
consideration.
Example: Desire of the promisor
A saves Bs goods from fire without being asked to do so. A cannot demand
payment for his services.
Move / from promisee or any other person
In return consideration may be from the promisee himself or by any other person
even by stranger.
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Example: Move / from promisee or any other person

X transferred certain property to her daughter Y with a direction that Y should
pay Z annuity. On the same day Y executed a deed in writing in favour of Z and
agreed thereby to pay the annuity. Later, Y refused to pay the annuity on the
plea that no consideration had moved from Z.
Here Z is entitled to maintain suit because a consideration not necessarily move
from the promisee, it may move from any other person (by X in this case).
Consideration may be past, present or future
The consideration may be past (done or abstained from doing), present (does or
abstains from doing) or future (promises to do or to abstain from doing).
The consideration which has moved before the formation of agreement is said to
be past consideration.
The consideration which moves simultaneously with the promise is called
present consideration.
The consideration which moves after the formation of agreement is called future
consideration.
Example: Consideration may be past, present or future
A renders some service to B in the month of August. In September B

promises to compensate A an amount of Rs. 10,000 for the services he
rendered to him. Past services amount to past consideration. A can recover
Rs. 10,000 from Y.
A sells his car for Rs. 1 million and delivers the car at the time of payment.
Here the consideration is moving simultaneously with the promise and is
called present consideration.
A promises to deliver certain goods to B after 5 days and B promises to pay

after 5 days from the date of delivery. Consideration in this case is future.
Consideration to have some value

There is no requirement for the adequacy of consideration but it should have
some value. There should be something in return and this something in return
need not necessarily be equal in value to something given.
Consideration must be real
The consideration must be real and not illusory.
Example: Consideration must be real
A engages B to work as an accountant in his office and promises to make

him happy. This promise is not enforceable because the consideration is not
real but illusory.
A promises to put life into Bs dead wife and B promises to pay Rs. 1 million.
This agreement is void because consideration is impossible to perform and
not real.
A engages B to work as an accountant in his office and promises to pay him

Rs. 75,000 per month. This is a real consideration for both the parties.
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Business Law
Something which the promisor is not already bound to do

It may be an act, abstinence, forbearance or a return promise e.g. compromise of
a disputed claim, composition with creditors.
The consideration must be something which the promisor is not already bound to
do because a promise to do what a promisor is already bound to do adds nothing
to the existing obligation.
Lawful
The consideration must neither be unlawful nor opposed to public policy.
Example: Lawful
A promises B to pay Rs. 100,000 to beat C. B beats C and claims Rs.

100,000 from B. A refuses to pay. B cannot recover because the agreement
is void on the ground of unlawful consideration.
A promises B to obtain an employment in the public service and B promises

to pay Rs. 100,000 to A. The agreement is void on the ground of unlawful
consideration.
1.3 Agreement, the consideration or object of which is partly unlawful

If a party of a single consideration for one or more objects, or any one or any part
of any one of several conditions for a single object, is unlawful, the agreement is
void. [Section 24]
Example: Agreement, the consideration or object of which is partly unlawful
A promises to superintends, on behalf of B, a legal manufacture of indigo, and an
illegal traffic in other articles. B promises to pay salary to A of Rs. 10,000 per
month. The agreement is void as the object of As promise and the consideration
for Bs promise being in party unlawful.
1.4 Stranger to contract

Generally a stranger to a contract cannot sue, while a stranger to consideration
can sue. This rule is known as the doctrine of privity of contract. Privity of contract
means the relationship subsisting between the parties who have entered into
contractual obligations. It implied a mutuality of will and creates a legal bond
between the parties to a contract.
Exceptions
The following are the exceptions to the rule that a stranger to a contract cannot
sue:
When an arrangement is made in connection with marriage, partition or

other family arrangements and a provision is made for the benefit of a
person, he may sue although he is not a party to the contract.
The person who becomes an agent of third party by acknowledgement or

estoppel, may be sued by such third party.
Where a benefit under a contract has been assigned (other than one
involving personal skill), the assignee can enforce the contract subject to all
equities between the original parties to the contract.
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Where a charge in favour of a person has been created on specific

immovable property, such charge is enforceable at the instance of the
person beneficially interested, though he may not be a party to the
document creating the charge.
1.5 Agreements without consideration

According to Section 25 of the Contract Act, an agreement without consideration
is void except under the following cases:
Natural love and affection [Section 25(1)]
Agreements made on account of natural love and affection without consideration
will be valid if it is:
expressed in writing,
registered under the law,
made on account of natural love and affection, and
between parties standing in a near relation to each other.
Example: Natural love and affection

A, for natural love and affection; promises to give his son, B, Rs. 10,000. A puts his
promise to B into writing and registers it. This is a contract.
Promise to compensate past voluntary services [Section 25(2)]
Such promise made without consideration is valid if:
it is a promise to compensate and
the person who is to be compensated has already done something

voluntarily or has done something which the promisor was legally bound to
do.
Example: Promise to compensate
A finds B's purse and gives it to him. B promises to give A Rs.5,000. Now this
promise of B is a contract.
A supports Bs infant son. B promises to pay As expenses in so doing. This is

a contract.
Time barred debt [Section 25(3)]

A promise to pay time barred debt is enforceable if:
it is made in writing,
it is signed by the debtor or his agent, and
it relates to a debt which could not be enforced by a creditor because of law

of limitation.
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Business Law
Gifts
The gifts which are accepted by the donee are called completed gifts and are
valid.
Example: Gift
X transferred some property to Y by a duly written and registered deed as a gift.
This is a valid contract even though no consideration given by Y.
Contract of agency
A consideration is not necessary for a contract of agency. [Section 185]
Contract of bailment
A consideration is not necessary for a contract of bailment i.e. gratuitous contract
of bailment.
Example: Gratuitous bailment
Zaheer lends an IPAD to Imran for his work without any charge.
Charitable subscription
Where the promise on the strength of the promise makes commitments i.e.
changes his position to the detriment.
Contract of guarantee
Consideration received by the principal debtor is sufficient for the surety and it is
not necessary to result in some benefit to the surety himself. [Section 127]
Example: Contract of guarantee

B requests A to sell and deliver to him goods on credit. A agrees to do so, provided
C will guarantee the payment of the price of the goods. C promises to guarantee
the payment in consideration of As promise to deliver the goods. This is sufficient
consideration for Cs promise.
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CHAPTER REVIEW
Chapter review
Define consideration and essentials of a valid consideration
Discuss the contracts where there is no consideration
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Business Law
64
CHAPTER

Business Law
Free consent
Contents
1 Consent Consensus-ad-idem
2 Coercion
3 Undue influence
4 Fraud
5 Misrepresentation
6 Mistake
7 Chapter review
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Business Law
INTRODUCTION
Learning outcomes
Free consent
LO 2

demonstrate knowledge of laws relating to free consent of a contract.
LO 2.1.1
Discuss the provisions of Act with respect to free consent of a contract
LO 2.1.1
Exam context
Discuss the meaning of consent
Explain when a consent is said to be free
Understand the effects and meaning of coercion, undue influence, fraud and
misrepresentation
Discuss the laws relating to the effect of mistake on contracts

Act
Contract Act 1872
Chapters
3-16
17
18
19-27
66
Section A: Mercantile Law - Chapter 6: Free consent
CONSENT Consensus-ad-idem
Section overview
Definition of consent
Effect of absence of consent
Definition of free consent
Effect of absence of free consent
1.1 Definition of consent

Definition: Consent [Section 13]
Two persons are said to consent when they agree upon the same thing in the same
sense.
Thus, the analysis of the above definition reveals that both the parties must be at
the same frequency of mind at the time of entering into a contract. I.e.
Consensus ad ideur.
1.2 Effect of absence of consent

The effect of absence of consent is that the agreement is not valid and is not
enforceable by law. [Section 19]
Example: Effect of absence of consent
X has one Alto and one Coure. He wants to sell Coure. Y does not know that X has
two cars. Y offers to buy Xs Alto for Rs. 400,000. X accepts the offer thinking it to
be an offer for his Coure. Here, there is no identity of minds in respect of the
subject matter. Hence, there is no consent at all and hence there is no agreement.
1.3 Definition of free consent

Definition: Free consent [Section 14]
The consent is said to be free when it is not caused by:
Coercion or
Undue influence or
Fraud or
Misrepresentation or
Mistake
1.4 Effect of absence of free consent

The effect of absence of free consent is that the contract becomes voidable if the
consent is obtained by coercion or undue influence or fraud or misrepresentation
at the option of the party whose consent was so caused but if the consent is
obtained by mistake then agreement may be void-ab-initio or contract is not
voidable depending upon the nature of the mistake. [Section 19A]
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Business Law
COERCION
Section overview
Definition of coercion
Effects of coercion
2.1 Definition of coercion

Definition: Coercion [Section 15]
Coercion is the:
committing or
threatening to commit any act

x
which is forbidden by Pakistan Penal Code or
unlawful detaining or
threatening to detain,
Any property with an intention of causing any person to enter into an agreement.
The analysis of the above definition reveals that coercion may be compelling a
person to enter into a contract under pressure or a threat.
Example: Coercion
A beats B and compels him to sell his bike for Rs. 20,000. Here, Bs consent
has been obtained by coercion because beating someone is an offence under
A, on board an English ship causes B to enter into an agreement by an act

amounting to criminal intimidation under the Pakistan Penal Code. A
afterwards sues B for breach of contract at Karachi. A has employed
coercion, although his act is not offence by the law of England and PPC was
not in force at the time when or place where the act was done.
Coercion may be exercised from any person, and may be directed against any
person, even a stranger.
Example: Coercion
A threatens to kill C, Bs daughter, if B refuses to sell his house to him. B

agrees to sell his house. Here, Bs consent has been obtained by coercion
though C is not a party to the contract.
A threatens to kill B if B refuses to sell his house to C. B agrees to sell his

house. Here, Bs consent has been obtained by coercion though A is not a
party to the contract.
2.2 Effects of coercion

The effects of coercion are given below: [Section 19, 64 and 72]
the contract becomes voidable at the option of the party whose consent
was so caused. The burden of proof lies on the party who rescinds the
contract.
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The party rescinding a voidable contract shall, if he has received any

benefit from another party, restore such benefit i.e. restitution.
A person to whom money has been paid or anything delivered by coercion

must repay or return it.
Example: Effects of coercion

A threatens to kill B if he does not sell his BMW for Rs 1 million to A. B contracted
to sell his BMW to A and receives the payments. Here, Bs consent has been
obtained by coercion. Hence, this contract is voidable at the option of B but B has
no right to insist that contract shall be performed.
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Business Law
UNDUE INFLUENCE
Section overview
Definition of undue influence
Nature of relationship
Effect of undue influence
Difference between coercion and undue influence
3.1 Definition of undue influence

Definition: Undue influence [Section 16]
A contract is said to be induced by undue influence where the relations subsisting
between the parties are such that one of the parties is in a position to dominate
the will of the other and uses that position to obtain unfair advantage over the
other.
Thus the analysis of the above definition reveals that an undue influence means
dominating in a relationship the will of the other person to obtain an unfair
advantage. A contract is said to be induced by undue influence:
Where the relations between the parties are such that
one of them in a position to dominate the will of the other and
uses that position to obtain an unfair advantage over the other.
3.2 Nature of relationship

A person is in a position to dominate the will of another where he:
holds the real or apparent authority over the other e.g. parent and child
stands in a fiduciary relation to the other e.g. already indebted
makes a contract with a person whose mental capacity is temporarily or

permanently affected by reason of age, illness or mental or bodily distress
e.g. medical attendant and patient.
Example: Undue influence
A having advanced money to his son, B during his minority, upon Bs coming
of age obtains, by misuse of parental influence, a bond from B for a greater
amount than the sum due in respect of the advances. A employs undue
influence.
A, a man enfeebled by disease or age, is induced, by Bs influence over him
as his medical attendant, to agree to pay B an unreasonable sum for his
professional services. B employs undue influence.
A being in debt to B, the money lender of his village, contracts a fresh loan on
terms which appear to be unconscionable. It lies on B to prove that the
contract was not induced by undue influence.
A applies to a banker for a loan at a time when there is stringency in the
money market. The banker declines to make the loan except at a unusually
high rate of interest. A accepts the loan on these terms. This is a transaction
in the ordinary course of business, and the contract is not induced by undue
influence.
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3.3 Effect of undue influence

The contract becomes voidable at the option of the party whose consent was so
caused. The burden of proof is on the party who was in a position to dominate
the will of the other party not all cases [Section 19].
In the following relationships it is presumed that a person is in a position to
dominate the will of another person:
Father and son
Guardian and ward
Employer and Employee
Trustee andEHQHFLDUy
Teacher and student
Doctor and patient
Solicitor and client
Fianc and ance
Pardanasheen lady (Completely secluded)
In the following relationship there is no presumption that a person is in a position
to dominate the will of another person:
Landlord and tenant
Creditor and debtor
Husband and wife (non parda observing)
Rebutting presumption
The presumption of undue inuence can be rebutted by showing that the:
dominant party has made a full disclosure of all the facts to the weaker
party before making the contract
price was adequate
weaker party was in receipt of competent independence advice before
entering into the contract.
The contract may be set aside either absolutely or if the party who was entitled to
avoid it has received any benet, upon such terms and conditions as to the Court
may seem just. [Section 19A]
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Business Law
3.4 Difference between coercion and undue influence

S.no
Coercion
Undue influence
Definition
A contract is said to be caused A contract is said to be induced by
by coercion when it is obtained undue influence:
Where the relations between

by:
committing or threatening to
the parties are such that
commit any act
x
one of them in a position
x
which is forbidden by
to dominate the will of
Pakistan Penal Code
the other and
or
x
uses that position to
unlawful detaining or
obtain an unfair
threatening to detain.
advantage over the
other.
Consent
Consent is obtained by giving a
threat of an offence or
committing an offence.
Nature of pressure
It involves physical pressure.
It can only be exercised by a party

to the contract and not by a
stranger.
Onus of proof
The onus of proof is on the party
who wants to relieve himself of
the consequences of coercion.
10
Undue influence may only be

employed on the party whose
consent is desired.
By whom
It can be excercised by a
stranger to the contract.
Criminal liability is not incurred.
On whom
Coercion may be employed on a
person other than a party whose
consent is desired, for instance
his son.
The objective is to obtain an unfair

advantage.
Criminal liability
Criminal liability is incurred,
therefore it is illegal.
Parties to a contract are related to

each other under some sort of
relationship.
Reason
The objective is to compel a
person to enter into a contract.
It involves moral pressure.
Relationship
Parties to a contract may or may
not be related to each other.
Consent is obtained by dominating

the will.
The onus of proof is on the party in

a position to dominate the will of the
other party.
Restoration of benefit
The aggrieved party has to
restore the benefit received.
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The party avoiding the contract may

or may not restore benefit.
FRAUD
Section overview
Definition of fraud
Essentials of fraud
Effects of fraud
Silence as to fraud
4.1 Definition of fraud

Definition: Fraud [Section 17]
Fraud means and includes any of the following acts committed.
by a party to a contract, or
with his connivance, or
by his agent
with intent
to deceive another party to it or his agent, or
to induce to enter into a contract
By false assertion
A false representation of a fact made
Knowingly or
Without belief in its truth
Example: False assertion

A sells to B locally manufactured goods representing them to be imported goods
charging a higher price, it amounts to fraud.
Active concealment
The active concealment of a fact by one having knowledge or belief of the fact
such as, where steps are taken by a seller concealing some material facts so that
the buyer even after a reasonable examination cannot trace the defects, it will
amount to fraud,
Example: Active concealment
Z a furniture dealer conceals the cracks in furniture sold by him by using some
packing material and polishing it in such a way that the buyer even after
reasonable examination cannot trace the defect, it would amounts to fraud
through active concealment.
Empty promise
A promise made without any intention of performing it constitutes to fraud.
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Business Law
Example: Empty promise

Buying goods under a contract of sale with an intention of not paying the price is
fraud.
Declared act
Any such act or omission as the law specially declares to be fraudulent
Fitted act
Any other act fitted to deceive.
4.2 Essentials of fraud

The essentials of fraud are shown below:

Party to a contract
The fraud must be committed by a party to a contract or by anyone with his
connivance or by his agent. Thus, the fraud by a stranger to the contract does not
affect its validity.
74
False representation
It means that a false representation is made with the knowledge of its falsehood.
It will equal to fraud if a true representation is made but becomes untrue at the
time of formation of contract the fact is known to the party who made the
representation.
Representation as to fact
A mere opinion does not amount to fraud. A representation must relate to a fact
than it amount to fraud.
Actually deceived
A deceit, which does not deceive is not fraud. The fraud must have actually
deceived the other party who has acted on the basis of such representation.
Suffered loss
Loss has been suffered by the party who acted on the representation.
4.3 Effects of fraud

The effects of fraud are as follows [Section 19]:
The contract becomes voidable at the option of the party whose consent
was so caused.
The party whose consent was so caused may insist on performance of the
contract.
The party whose consent was so caused is entitled to claim damages.
Exceptions to rescind the contract
A party cannot rescind the contract where:
silence amounts to fraud and the aggrieved party had the means of
discovering the truth with ordinary diligence
the party gave the consent in ignorance of fraud
the party after becoming aware of the fraud takes a benet under the
contract
an innocent third party before the contract is rescinded acquires for
consideration and in good faith some interest in the property passing under
the contract,
the parties cannot be restored to their original position.
4.4 Silence as to fraud

Mere silence as to facts likely to affect the willingness of a person to enter into a
contract is not fraud, unless the circumstances of the case are such that parties
stands in GXFLDU\ relationship or where silence itself is equivalent to speech.
[Section 17]
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Example: Silence as to fraud

A sells by auction to B a horse which A knows to be unsound. A says nothing to B
about the horse's unsoundness. This is not fraud by A.
B is A's daughter and has just come of age. Here, the relation between the
parties would make it A's duty to tell B if the horse is unsound.
B says to A, "If you do not deny it, I shall assume that the horse is sound." A says
nothing. Here A's silence is equivalent to speech. If the horse turns out to be
vicious. A can be held liable for fraud.
Note
In the early 80s the Federal Shariat Court decided that provision regarding position of
silence in Contract Act is not in conformity with the teachings of Islam.
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MISREPRESENTATION
Section overview
Definition of misrepresentation
Essentials of misrepresentation
Effects of misrepresentation
5.1 Definition of misrepresentation

Definition: Misrepresentation [Section 18]
Misrepresentation means and includesUnwarranted statement
When a person makes a positive statement that a fact is true when his information
does not warrant it to be so, though he believes it to be true this amounts to
misrepresentation.
Breach of duty
Any breach of duty which
without an intent to deceive,
gains an advantage to the person committing it, or
anyone claiming under him,
by misleading another
to his prejudice or
to the prejudice of anyone claiming under him.
Inducing mistake about subject matter (Innocent misrepresentation)

A party to an agreement induces (however innocently) the other party to make a
mistake as to the nature or quality of the subject of the agreement.
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5.2 Essentials of misrepresentation

The essentials of misrepresentation are shown below:

Party to a contract
The representation must be made by a party to a contract or by anyone with his
connivance or by his agent. Thus, the representation by a stranger to the contract
does not affect the validity of the contract.
False representation
There must be a false representation and it must be made without the knowledge
of its falsehood i.e. the person making it must honestly believe it to be true.
Representation as to fact
A mere opinion does not amount to misrepresentation. A representation must
relate to a fact if it amounts to misrepresentation.
Object
The objective is to induce the other party to enter into contract without the
intention of deceiving the other party.
Actually acted
The other party must have acted on the faith of the representation.
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5.3 Effects of misrepresentation

The effects of representation are following [Section 19]:
the contract becomes voidable at the option of the party whose consent
was so caused.
The party whose consent was so caused may insist on performance of the
contract.
Exceptions to rescind the contract

A party cannot rescind the contract where:
the party whose consent was caused by misrepresentation had the means
of discovering the truth with ordinary diligence;
the party gave the consent in ignorance of misrepresentation
the party after becoming aware of the misrepresentation takes a benefit

under the contract
an innocent third party before the contract is rescinded acquires for

consideration and in good faith some interest in the property passing under
the contract,
the parties cannot be restored to their original position.
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MISTAKE
Section overview
Mistake
Types of mistakes
6.1 Mistake
Where both the parties to an agreement are under a mistake as to matters of
facts essential to the agreement, the agreement is void [Section 20].
6.2 Types of mistakes

The types of mistakes are shown below:
Types of mistakes
Mistake of
law
Pakistan
law
Mistake of fact
Foreign
law
Bilateral
Subject
matter
Possibility of
performance
Unilateral
Identity of
person
Nature of
contract
Mistake of Pakistan law

A contract is not voidable because it was caused by a mistake as to any law in
force in Pakistan. [Section 21]
Mistake of foreign law
A mistake as to the law not in force in Pakistan has the same effect as a mistake
of fact i.e. void. [Section 21]
Bilateral mistake
Where both the parties to an agreement are under a mistake as to a matter of
facts essential to the agreement, the agreement is void.
An erroneous opinion as to the value of the thing which forms the subject matter
of the agreement is not to be deemed a mistake as to a matter of facts. [Section
20]
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Example: Bilateral mistake
A buys' a painting believing it to be worth Rs 100,000 while in fact it is worth

only Rs 10,000. The contract is not void.
A agrees to sell to B a specific cargo of goods supposed to be on its way from

England to Karachi. It turns out that, before the date of the bargain, the ship
conveying the cargo had been cast away and the goods lost. Neither party
was aware of facts. The agreement is void.
Bilateral mistake as to the subject matter

A bilateral mistake as to the subject matter includes the following mistakes
as to the:
x
existence of subject matter
quantity of subject matter
quality of subject matter
price of subject matter
identity of subject matter
title of subject matter
Example: Bilateral mistake as to the subject matter
A agrees to buy from B a certain horse. It turns out that the horse was dead
at the time of bargain though neither party was aware of the fact. The
agreement is void because there is bilateral mistake as to the existence of
subject matter.
A agrees to buy from B all his horses believing that B has two horses but B
actually has three horses. The agreement is void because there is bilateral
mistake as to the quantity of subject matter
A agrees to buy a particular horse from B. Both believe it to be a race horse

but it turns to be a cart horse. The agreement is void because there is
bilateral mistake as to the quality of the subject matter.
A agrees to buy a particular horse from B who mentioned in his letter the
price as Rs 1,150 instead of 5,150. The agreement is void because there is
bilateral mistake as to the price of the subject matter.
A agrees to buy from B a certain horse. B has one race horse and one cart
horse. A thinks that he is buying race horse but B thinks that he is selling cart
horse. The agreement is void because there is bilateral mistake as to the
identity of subject matter.
A agrees to buy a particular horse from B. That horse is already owned by A.

The agreement is void because there is bilateral mistake as to the title of the
subject matter.
Bilateral mistake as to the possibility of performance

Where the parties believe that an agreement is capable of performance and
actually it is not then it is said to be a bilateral mistake as to the possibility
of performance due to which agreement is void.
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Unilateral mistake
A contract is not voidable merely because it was caused by one of the parties to
it being under a mistake as to matter of facts. [Section 22]
Example: Unilateral mistake
A buys' a painting believing it to be worth Rs 100,000 while in fact it is worth only
Rs 10,000.
Exceptions
Following are the exceptions where agreement is void on the basis of unilateral
mistake:
Mistake relating to the identity of the person
Mistake relating to the nature of the contract
Example: Mistake relating to the identity of the person

A knew that on "account of his criticism of the plays in the past, he would not be
allowed entry to the performance of a play at the theatre. The managing director of
the theatre gave instructions that ticket should not be sold to A. A, however,
obtained a ticket through one of his friends. On being refused admission to the
theatre, he sued for damages for breach of contract. It was held that there was no
contract between the theatre company and A as the theatre company never
intended to contract with A.
Example: Mistake relating to the nature of contract

An old illiterate man was induced to sign a bill of exchange by means of a false
representation that it was a mere guarantee. It was held that he was not liable for
the bill of exchange because he never intended to sign a bill of exchange.
82
CHAPTER REVIEW
Chapter review
Discuss the meaning of consent
Explain when a consent is said to be free
Understand the effects and meaning of coercion, undue influence, fraud and
misrepresentation
Discuss the laws relating to the effect of mistake on contracts
83
Business Law
84
CHAPTER

Business Law
Legality of object and consideration

and agreements opposed
to public policy
Contents
1 Legality of object, consideration and agreements
opposed to public policy
2 Chapter review
85
Business Law
INTRODUCTION
Learning outcomes
Legality of object, consideration and agreements opposed to public policy
LO 2

demonstrate knowledge of laws relating to legality of object and
agreements opposed to public policy.
LO 2.1.1
Discuss the provisions of Act with respect to legality of object and agreements
opposed to public policy
LO 2.1.1
Exam context
Explain the cases where the object or consideration of an agreement are said to be
unlawful
Name various types of agreements which are considered to be opposed to public

policy

Act
Contract Act 1872
Chapters
3-16
17
18
19-27
86
Section A: Mercantile Law - Chapter 7: Legality of object and consideration and agreements opposed to public policy
LEGALITY OF OBJECT, CONSIDERATION AND AGREEMENTS OPPOSED

TO PUBLIC POLICY
Section overview
Circumstances where object or consideration is unlawful
Agreements opposed to public policy
1.1 Circumstances where object or consideration is unlawful

Definition: Legality of object and consideration [Section 23]
The consideration or object of an agreement is lawful unless:
It is forbidden by law
Is of such a nature that if permitted would defeat the provisions of any law
It is fraudulent
It involves an in injury to the person or property of another
The court regards it as immoral, or opposed to public policy

The analysis of above definition is given below:
Forbidden by law
If the law of the state prohibits an object or the consideration of an agreement
then such agreements are void. An act is forbidden by law when it is punishable
by the law of the country.
Example: Forbidden by law
A promises B to drop a prosecution which he has instituted against B for

robbery, and B promises to restore the value of the things taken. The
agreement is void, as its object is unlawful.
A promises to obtain for B an employment in the public service, and B

promises to pay Rs.1,000/-to A. The agreement is void as the consideration
for it is unlawful.
The effects of such agreements are following:
The collateral transactions to such an agreement also become tainted and

hence cannot be enforced.
No action can be taken for the recovery of money paid or property

transferred under such an agreement and for the breach of any such
agreement.
In case of an agreement containing the promise, some part of which is legal

and other part illegal, the legal position is as under: [Section 57 & 58]
x
If the illegal part cannot be separated than the whole agreement is

illegal.
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Business Law
If the illegal part can be separated than court will enforce the legal
part and will reject illegal party.
Defeats the provisions of any law

If the object or the consideration of an agreement is of such nature that, if
permitted, it would defeat the provisions of any law, the agreement is void.
Example: Defeats the provisions of any law
A's estate is sold for arrears of revenue under the provisions of an Act of the
Legislature, by which a defaulter is prohibited from purchasing the estate. B,
upon an understanding with A, becomes the purchaser, and agrees to convey
the estate to A, upon receiving from him the price which B has paid. The
agreement is void as the transaction, in fact, a purchase by the defaulter, and
would so defeat the object of the law.
Fraudulent
Where the object of an agreement is fraudulent the agreement is void.
Example: Fraudulent
A, B and C enter into an agreement of the division among them of gains

acquired, or be acquired, by them by fraud. The agreement is void, as its
object is unlawful.
A, being agent for a landed proprietor, agrees for money, without the
knowledge of his principal, to obtain for B a lease of land belonging to his
principal. The agreement between A and B is void, as it implies a fraud by
concealment by A, on his principal.
Involves or implies injury

The object of an agreement will be unlawful if it tends to injure a person or the
property of another. Property can either be movable or immovable.
Example: Involves or implies injury
A promised to pay Rs.100,000 to B on agr eeing to publish a defamatory
article against C. It was held that B could not recover the amount because the
agreement was void as it involves injury to C.
Court regards it as immoral or opposed to public policy
Where the object or consideration of an agreement is such that the court regards
it as immoral or opposed to the public policy then the agreement is void.
Example: Court regards it as immoral or opposed to public policy
A, who is B's mukhtar, promises to exercise his influence, as such, with B in

favour of C, and C promises to pay Rs 1,000 to A. The agreement is void,
b ec au se it is immoral.
A agrees to let her daughter to hire to B for concubinage. The agreement is

void because it is immoral, though the letting may not be punishable under
88
1.2 Agreement, the consideration or object of which is partly unlawful

A contract may contain several distinct promises or a promise to do several
distinct acts of which some are legal and others illegal, or a part of which is legal
and a part of which is illegal. In case of an agreement containing the promise,
some part of which is legal and other part(s) illegal, the legal position is as follows
[Section 24]:
If the illegal part cannot be separated than the whole agreement is illegal.
If the illegal part can be separated than court will enforce the legal part and
will reject illegal party.
Promise to do legal and illegal things

Where persons reciprocally promise, firstly, to do certain things which are legal,
and secondly, under specified circumstances, to do certain other things which
are illegal, the first set of promises is a contract, but the second is a void
agreement. [Section 57]
Example: Promise to do legal and illegal things
A and B agree that A shall sell B a house for Rs.10,000,000 but that, if B
uses it as a gambling house, he shall pay Rs.50,000,000 for it.
The first set for reciprocal promises, namely to sell the house and to pay
Rs.10,000,000 for it, is a contract. The second set is for an unlawful object,
namely, that B may use the house as a gambling house and is a void agreement.
Alternative promise being illegal
In the case of an alternative promise, one branch of which is legal and the other
illegal, the legal branch alone can be enforced. [Section 58]
Example: Alternative promise being illegal
A and B agree that A shall pay B Rs.1,000 for which B shall afterwards
deliver to A either rice or smuggled opium.
This is a valid contract to deliver rice, and a void agreement as to the opium.
1.3 Agreements opposed to public policy

An agreement is said to be unlawful if the court regards it as opposed to public
policy. Following are the agreements which are held to be opposed to public
policy:
Trading with enemy
A person cannot enter into an agreement with an alien enemy during the period
of war on the ground of public policy. This is because the further performance of
the agreement involves commercial interaction with the enemy and the continued
existence of agreement would confer upon the enemy an immediate or future
benefit. Contracts entered before the declaration of war are either suspended or
terminated during the period of war.
Stifling prosecution
Criminals should be prosecuted and punished; hence an agreement for stifling
prosecution is illegal. It is in public interest that if a person has committed crime
he must be prosecuted and punished.
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Business Law
Example: Stifling prosecution

Rs.100,000 from B in consideration of not exposing A This agreement is illegal.
Maintenance and champerty
Maintenance is an agreement where a person promises to maintain a suit in
which he has no interest.
Example: Maintenance and champerty
A promises to pay B Rs.100,000 if B files a suit against C.
Champerty is an agreement whereby one party agrees to assist another in

recovering property and in turn is to share in the proceeds of the action.
In Pakistan, Maintenance and champerty are not absolutely void. They may be
treated valid if they fulfil certain conditions if:
(i)
It is reasonable
(ii)
With bona fide intention
x If funds are supplied then maintenance and champerty both may be
valid
x But if professional services have been provided then only
maintenance may be valid and not champerty.
Sale of public offices
The agreements of sale of public offices are illegal as such agreements, if
enforced, would led to inefficiency and corruption on public life. Similarly, an
agreement to pay money to a public servant to induce him to act corruptly or to
retire and thus make way for the appointment of promisor are void on the ground
of public policy.
Restraint of parental rights
An agreement which prevents a parent to exercise his right of guardianship is
void. A father is entitled by law to the custody of his child. He cannot enter into an
agreement which is inconsistent with his duties arising out of such custody.
Restraint of personal liberty
An agreement which unduly restricts the personal liberty of a person is void as
law generally allows all persons freedom to enter into any contract they please.
Agreement to create monopoly
An agreement to create monopoly is void as this will impair consumer sovereignty
and result in high prices for law quality of goods and services.
Marriage brokerage agreement
An agreement in which a person promises for reward to procure marriage for
another is void being opposed to public policy.
90
CHAPTER REVIEW
Chapter review
Explain the cases where the object or consideration of an agreement are said to
be unlawful
Name various types of agreements which are considered to be opposed to public

policy
91
Business Law
92
CHAPTER

Business Law
Void agreements
Contents
1 Void agreements
2 Agreements in restraint of trade
3 Wagering agreements
4 Other void agreements
5 Chapter review
93
Business Law
INTRODUCTION
Learning outcomes
Void agreements
LO 2

demonstrate knowledge of laws relating to void agreements.
LO 2.1.1
Discuss the provisions of Act with respect to void agreements
LO 2.1.1
Exam context
Discuss briefly expressly declared void agreements
Discuss the exceptions to such void agreements
Explain wagering agreement

Act
Contract Act 1872
Chapters
3-16
17
18
19-27
94
Section A: Mercantile Law - Chapter 8: Void agreement
VOID AGREEMENTS
Section overview
Meaning of void agreements
Void agreements
1.1 Meaning of void agreement

An agreement not enforceable by law is said to be void. All agreements may not
be enforceable by law. The agreements which are not enforceable by law right
from the time when they are made are called void-ab-initio. [Section 2(g)]
Effect on agreement collateral to void agreement
When an agreement is void, other agreement which is collateral to it is also void
and is not enforceable by law if the other party has knowledge about it
1.2 Void agreements

Contract Act declares certain agreements to be void. Such agreements are listed
below:
1.
Agreements by or with persons incompetent to contract [Section 11]
2.
Agreements made under mutual mistake of fact [Section 20]
3.
Agreements made under mutual mistake of foreign law [Section 21]
4.
Agreement, the object or consideration of which is unlawful [Section 23]
5.
Agreement, the consideration or object of which is partly unlawful [Section

24]
6.
Agreement made without consideration [Section 25]
7.
Agreements in restraint of trade [Section 27]
8.
Wagering agreement [Section 30]
9.
Agreements in restraint of legal proceedings [Section 28]
10.
Agreements in restraint of marriage [Section 26]
11.
Uncertain agreements [Section 29]
12.
Agreements contingent on impossible events [Section 32]
13.
Agreements to do impossible acts [Section 56]
14.
Agreement to enter into an agreement in future
Note
Agreements from 1 to 6 have been discussed in earlier chapters.
From 5 to 11 are those agreements which are specifically or expressly declared

as void under the Contract Act.
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Business Law
AGREEMENTS IN RESTRAINT OF TRADE

Section overview
Meaning of agreements in restraint of trade
Exceptions of agreements in restraint of trade
2.1 Meaning of agreements in restraint of trade

Every agreement by which anyone is restricted from exercising a lawful
profession, trade or business of any kind, is to that extent void. [Section 27]
Example: Agreements in restraint of trade
A and B carried on business in a certain locality in Karachi. A promised to stop
business in that locality if B paid him Rs 1,000. A stopped his business but B did
not pay him the promised money. It was held that A could not recover anything
from B because the agreement was in restraint of trade and was thus void.
2.2
Exceptions of agreements in restraint of trade

Following are the exceptions where agreements in restraint of trade are not
considered as void:
Sale of goodwill
One who sells the goodwill of a business may agree with the buyer to refrain from
carrying on a similar business within specified local limits, so long as the buyer,
or any person deriving title to the goodwill from him, carries on a like business
therein, provided that such limits are reasonable. [Section 27]
Partners agreements
The Partnership Act allows following agreements as an exception to the
agreement in restraint of trade:
Existing partner
Subject to contract between partners, a partner may not carry on any
business competing with that of the firm while he is a partner. [Section 1]
Outgoing partner
An outgoing partner may agree with his partners that he will not carry on
any business similar to that of the firm for a specified period and for
specified local limits. [Section 36]
Dissolution of the firm

Partners may, upon or in anticipation of the dissolution of the firm, make an
agreement that some or all of them will not carry on a business similar to
that of the firm for a specified period and for specified local limits. [Section
54]
Sale of goodwill
Partner(s) may upon the sale of the goodwill of a firm, make an agreement
that partner(s) will not carry on any business similar to that of the firm for a
specified period and for specified local limits. [Section 55]
96
Trade combinations
An agreement between different firms in the nature of a trade combination in
order to maintain a price level and avoid under selling is not void.
Example: Trade Combinations
An agreement by two persons to avoid competition is void because it tends to

create monopoly.
An agreement among some manufacturing companies not to sell goods

below a minimum price and to divide the profits in a certain proportion is not
void because such agreement was made to regulate the business and not to
restrain it.
Service Agreements
During the employment, agreement of services often contains a clause by which
an employee is prohibited from working anywhere else. Such a clause in service
agreement by which an employer restricts the employee not to compete with the
employer or accepting any other employment is not restraint of trade. Further,
where legitimate interest or goodwill or trade secret of employer is involved an
employer may restrict his employee even after the end of employment but such
restriction should be just and reasonable.
Example: Service Agreements
An employee who possesses certain trade secrets, agreed not to carry on the
similar business during 5 years after the termination of service.
It is a valid agreement because restraint is intended to protect an employer
against an employee making use of trade secrets learned by him in the
course of his employment.
An agreement to restrain a servant from competing for 5 years after the

period of service.
It is void because restraint is intended to avoid competition.
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Business Law
WAGERING AGREEMENT
Section overview
Meaning of wagering agreement
Effects of wagering agreement
3.1 Meaning of wagering agreement

An agreement between two persons under which money or moneys worth is
payable, by one person to another on the happening or non-happening of a
future uncertain event is called a wagering event. An agreement by way of wager
is void. [Section 30]
Example: Wagering agreement
A promises to pay Rs 10,000 to B if it rained today, and B promises to pay Rs
1,000 to A if it did not.
Example: Transactions which are not held wagers:
3.2
Prize competitions which are games of skill, e.g. picture puzzles, athletic
competitions. For example, an agreement to enter into a wrestling event in
which winner was to be rewarded by the entire sale proceeds of tickets is not
a wagering contract.
An agreement to contribute to a plate or prize of the value of Rs 500 and

above to be awarded to the winner of a horse race.
Stock market transaction in which the delivery of shares is intended to be

given.
Contracts of insurance.
Effects of Wagering Agreement

The effects of wagering agreements are following:
Such agreements are void
No suit can be filed to recover the amount won on any wager.
Transactions which are collateral to wagering agreements may also be

void.
98
OTHER VOID AGREEMENTS

Section overview
Agreements in restraint of legal proceedings
Agreements in restraint of marriage
Uncertain agreements
Agreements contingent on impossible events
Agreements to do impossible acts
Agreements to enter into an agreement in future
4.1 Agreements in restraint of legal proceedings

Every agreement by which any party is restricted from enforcing his right under a
contract by the usual legal proceedings or which limits the time within which he
may enforce his right is void. [Section 28]
Exceptions
An agreement between two or more persons who agree that any dispute
which may arise between them shall be referred to arbitration, is valid.
An agreement whereby parties agree not to file an appeal in upper court lf

law, is valid.
Parties making extract to select one court of law between two courts
equally competent.
Exception
An agreement restraining the marriage/to hear case, is valid of a minor is valid.
4.2 Agreements in restraint of marriage

Every agreement in restraint of the marriage of any person other than a minor is
void. This is because the law regards marriage and married status as the right of
every individual. [Section 26]
Example: Agreements in restraint of marriage
A promises with B for good consideration that she will not marry C. It is a void
agreement..
4.3 Uncertain agreements

An agreement the meaning of which is not certain or capable of being made
certain are void. [Section 29]
Example: Uncertain agreements
A agrees to sell to B "a hundred ton of oil." There is nothing whatever to show
what kind of oil was intended. The agreement is void for uncertainty.
A, who is a dealer in coconut oil, agrees to sell to B "one hundred ton of oil."
The nature of A's trade affords an indication of the meaning of the words,
and has entered into a contract for the sale of one hundred tons of coconut
oil.
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Business Law
A agrees to sell to B "all the grain in my granary at Peshawar." There is no

uncertainty here to make the agreement void.
A agrees to sell to B "one thousand mounds of rice at a price to be xed by
C." As the price is capable of being made certain, there is no uncertainty here
to make the agreement void.
A agrees to sell to B "my white horse for Rupees YH hundred or Rupees one
thousand." There is nothing to show which of the two prices are to be given.
4.4 Agreements contingent on impossible events

Contingent agreements to do or not to do anything, if an impossible event
happens are void whether the impossibility of the event is known or not to the
parties to the agreement at the time when it is made. [Section 32]
Example: Agreements contingent on impossible events
A agrees to pay Rs. 1,000 if B marries C (a Hindu) who is already married to D. This
agreement is void.
4.5 Agreements to do impossible acts

An agreement to do an impossible act is void. [Section 56]
Example: Agreements to do impossible acts
A agrees with B to discover treasure by magic. The agreement is void.
4.6 Agreements to enter into an agreement in the future

An agreement to enter into an agreement in the future is void.
Emi le Woo lf I nt er nat i ona l
100
Th e I n st it ut e of C ha rt er e d Account a nts of Pak ist an
CHAPTER REVIEW
Chapter review
Discuss briefly expressly declared void agreements
Discuss the exceptions to such void agreements
Explain wagering agreement
101
Business Law
102
CHAPTER

Business Law
Contingent contracts
Contents
1 Contingent contracts
2 Chapter review
103
Business Law
INTRODUCTION
Learning outcomes
Contingent contracts
LO 2

demonstrate knowledge of laws relating to contingent contracts.
LO 2.1.1
Discuss the provisions of Act with respect to contingent contracts
LO 2.1.1
Exam context
Define the term contingent contracts
Discuss the rules relating to the performance of contingent contracts
Explain the extent of impossibility of the contingency affects the performance of the
contract
Differentiate between contingent contract and wagering agreement

Act
Contract Act 1872
Chapters
3-16
17
18
19-27
104
Section A: Mercantile Law - Chapter 9: Contingent contracts
CONTINGENT CONTRACTS
Section overview
Denition of contingent contract
Characteristics of contingent contracts
Rules regarding contingent contract
Difference between contingent contract and wagering agreement
1.1 Definition of contingent contract

Definition: Contingent contract [Section 31]
A contingent contract is a contract.
to do or
not to do something
if some event, collateral to such contract
does or
does not happen.
Insurance contracts and contracts of indemnity and guarantee provide the best
example of contingent contracts.
Example: Definition of contingent contract
A contracts to pay B Rs.10,000 if Bs house is burnt. This is a contingent contract.
1.2 Characteristics of contingent contracts

The following are the characteristics of contingent contracts:
the performance of a contingent contract depends upon the happening or
non-happening of some future event.
the event must be collateral to the contract
the event must be uncertain
1.3 Rules regarding contingent contracts

The rules regarding the enforcement of contingent contract are given below:
Contracts contingent upon the happening of an uncertain future event
A contract, the performance of which is contingent on the happening of an
uncertain future event, cannot be enforced by law unless and until that event has
happened. If the event becomes impossible, such contracts become void.
[Section 32]
Emi le Woo lf I nt er nat i ona l
105
Th e I n st it ut e of C ha rt er e d Account a nts of Pak ist an
Business Law
Example: Contracts contingent upon the happening of an uncertain future event
A makes a contract with B to buy B's horse if A survives C. This contract

cannot be enforced by law unless and until C dies in A's life time.
A makes a contract with B to sell a horse to B at a specified price if C to

whom the horse has been offered, refuses to buy him. The contract cannot be
enforced by law unless and until C refuses to buy the horse.
A contract to pay B a sum of money when B marries C. C dies without being

married to B. The contract becomes void.
Contracts contingent upon the non-happening of a certain future event

A contract the performance of which is contingent on the non-happening of a
certain future event can be enforced when the happening of that event becomes
impossible and not before. [Section 33]
Example: Contracts contingent upon the happening of a certain future event
A agrees to pay B a sum of money ifa certain ship does not return. This ship is
sunk. The contract can be enforced when the ship sink.
Contracts contingent upon the future conduct of a living person
If the future event on which a contract is contingent is the way in which a person
will act at an unspecified time, the event shall be considered to become
impossible when such person does anything which renders it impossible that he
should so act within any definite time or otherwise than under further
contingencies. [Section 34]
Example: Contracts contingent upon the future conduct of a living person
A agrees to pay B a sum of money if B marries C. C marries D. the marriage of B to
C must now be considered impossible, although it is possible that D may die, and
that C may afterwards marry B.
Contracts contingent upon the happening of an uncertain specified event within a
fixed time
Contingent contracts to do or not to do anything if a specified uncertain event
happens within a fixed time become void if at the expiration of the time fixed such
event has not happened or if before the time fixed such event becomes
impossible. [Section 35]
Example: Contracts contingent upon the happening of an uncertain specified event
within a fixed time
A promises to pay B a sum of money if a certain ship returns within a year. The
contract may be enforced if the ship returns within the year, and becomes void if
the ship is burnt within the year.
Contracts contingent upon the non-happening, of an uncertain specified event
within a fixed time
A contract of performance of which is contingent on the non-happening of a
specified uncertain event within a fixed time may be enforced by law:
When the time fixed has expired and such event has not happened or
If (before the expiry of the time fixed) it becomes certain that such event will
not happen. [Section 35]
106
Section A: Mercantile Law - Chapter 9: Contingent contracts
Example: Contracts contingent upon the non-happening of an uncertain specified

event within a fixed time
A promises to pay B a sum of money if a certain ship does not return within a
year. The contract may be enforced if the ship does not return within the year, or
is burnt within the year.
Agreements contingent upon impossible events
Contingent agreements to do or not to do anything, if an impossible event
happens, are void, whether the impossibility of the event is known or not to the
parties to the agreement at the time when it is made. [Section 36]
Example: Agreements contingent upon impossible events
A agrees to pay B Rs. 1,000 if two straight lines should enclose a space.
A agrees to pay B, Rs. 1,000 if B will marry A's daughter C. C was 'dead at
the time of the agreement. The agreement is void.
1.4 Difference between contingent contract and wagering agreement

Following are the few differences between contingent and wagering agreement:
Contingent contract
Wagering agreement
Validity
It is a valid contract.
It is void and illegal.
Interest of parties
In a contingent contract parties have
real interest in the occurrence or nonoccurrence of the event e.g. insurable
interest in the property insured.
Parties are not interested in the

occurrence or non-occurrence of the
event except for the winning or losing
the amount.
Uncertain event
The future uncertain event is merely The uncertain event is the sole
collateral.
determining factor of the agreement.
Reciprocal promises
It consists of reciprocal promises.
107
It may or may not consist of reciprocal

promises.
Business Law
CHAPTER REVIEW
Chapter review
Define the term contingent contracts
Discuss the rules relating to the performance of contingent contracts
Explain the extent of impossibility of the contingency affects the performance of

the contract
Differentiate between contingent contract and wagering agreement
108
CHAPTER

Business Law
10
Quasi contracts
Contents
1 Quasi contracts
2 Chapter review
109
Business Law
INTRODUCTION
Learning outcomes
Quasi contracts
LO 2

demonstrate knowledge of laws relating to Quasi contracts.
LO 2.1.1
Discuss the provisions of Act with respect to Quasi contracts
LO 2.1.1
Exam context
Explain Quasi contracts
Discuss the kinds of Quasi contracts

Act
Contract Act 1872
Chapters
3-16
17
18
19-27
110
Section A: Mercantile Law - Chapter 10: Quasi contracts
QUASI CONTRACTS
Section overview
Meaning of Quasi contract
Kinds of Quasi contracts
Application of Quantum Meruit
1.1 Meaning of Quasi contract

A Quasi contract is an obligation imposed by law in absence of any agreement
between the parties. A quasi-contract is not an actual contract, but is a legal
substitute formed to impose equity between two parties. The concept of a quasicontract is that of a contract that should have been formed, even though in
actuality it was not. The other name for Quasi contracts is constructive contracts.
1.2 Kinds of Quasi contracts

The kinds of Quasi contracts are listed below:
Supply of necessaries
Payment by interested person
Person enjoying benefit of non-gratuitous act / goods
Finder of goods
Payment by mistake or under coercion
These Quasi contracts are discussed below:

Supply of necessaries
If a person incapable to enter into contract or his dependent is supplied by
another person necessaries suited to his conditions in life the person supplying
such necessaries is entitled to be reimbursed his price from the property of such
incompetent person. [Section 68]
This has been discussed in detail in chapter 4.
Example: Supply of necessaries
A supplies B, a lunatic, with necessaries suitable to his condition in life. A is

entitled to be reimbursed from B's property.
A supplies the wife and children of B, a lunatic, with necessaries suitable to

their condition in life. A is entitled to be reimbursed from B's property.
Payment by interested person

A person, who is interested in the payment of money which another is bound by
law to pay, and who therefore pays it, is entitled to be reimbursed by the other.
[Section 69].
Thus the essential requirement of this section is:
The payment made should be bona fide for the protection of ones interest
The payment should not be a voluntary one
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Business Law
The payment must be such as the other party was bound by law to pay
Example: Payment by interested person

B holds land in Sindh, on a lease granted by A, a Zamindar. The revenue payable by
A to the Government being in arrears, his land is advertised for sale by the
Government. Under the revenue law, the consequence of such sale will be the
annulment of B's lease. B, to prevent the sale and the consequent annulment of his
own lease, pays the Government the sum due from A. A is bound to make good to
B the amount so paid.
Where a person lawfully does anything for another person, or delivers anything to
him, not intending to do so gratuitously and such other person enjoys the benefit
thereof, the latter is bound to make compensation to the former in respect of, or
to restore, the thing so done or delivered. [Section 70]
Following conditions must be satisfied before any right of action arises under this
section:
The thing must have been done lawfully
The person doing the act should not have intended to do it gratuitously
The person for whom the act is done must have enjoyed the benefit of the
act.
Example: Person enjoying benefit of non-gratuitous act / goods
A, a tradesman, leaves goods at B's house by mistake. B treats the goods as

his own. He is bound to pay A for them.
A saves B's property from fire. A is not entitled to compensation from B, if the
circumstances show that he intended to act gratuitously.
Finder of goods
A person who finds goods belonging to another, and takes them into his custody,
is subject to the same responsibility as a bailee. He is bound to take as much
care of the goods as a man of ordinary prudence would, under similar
circumstances, take of his own goods. He must also take reasonable steps to
trace its owner - if he does not, he will be guilty of wrongful conversion of the
property. [Section 71]
This has been discussed in detail in chapter 15.
Example: Finder of goods
A found a diamond ring at a wedding reception of B. A told B and other guests
about it with an intention to find the true owner. If he is not able to find the owner
he can retain the ring as bailee.
Payment by mistake or under coercion
A person to whom money has been paid, or anything delivered by mistake or
under coercion, must repay or return it. [Section 72]
Example: Payment by mistake or under coercion
A and B jointly owe Rs 100 to C. A alone pays the amount to C, and B, not
knowing this fact, pays Rs 100 over again to C. C is bound to repay the
amount to B.
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A railway company refuses to deliver up certain goods to the consignee,

except upon the payment of an undue charge for carriage. The consignee
pays the sum charged in order to obtain the goods. He is entitled to recover
so much of the charge as was excessive.
Quantum meruit
The term Quantum Meruit means as much as earned or deserved. In case of
breach of contract the application or non-application of the term quantum meruit
varies depending upon the terms of the contract. Further, the divisibility or
indivisibility of performance of the contract may also be taken into account.
The aim of such an award is based on an implied agreement to pay for what has
been done. Quantum Meruit is likely to be sought where one party has already
performed part of his obligations and the other party then repudiates the contract.
Provided the injured elects to treat the contract as terminated, he may claim a
reasonable amount for the work done.
1.3 Application of Quantum Meruit

Quantum meruit applies in the following cases:
Void agreement or a contract that becomes void
Act preventing the completion of contract
Divisible contract
Indivisible contract performed completely but badly
Express or implied contract to render services but no remuneration is presettled
Void agreement or contract that becomes void

When an agreement is discovered to be void, or when a contract becomes void,
any person who has received any advantage under such agreement or contract
is bound to restore it, or to make compensation for it to the person from whom he
received it. [Section 65]
Example: Void agreement or contract that becomes void
A, pays B Rs. 1,000 in consideration of Bs promising to marry C, As

daughter. C is dead at the time of the promise. The agreement is void, but B
must repay A Rs. 1,000.
A contracts with B to deliver to him 250 kg of rice before May. A delivers 130
kg only before the agreed time, and none after. B retains the 130 kg. He is
bound to pay A for them.
A, a singer contracts with B, the manager of a theatre, to sing at his theatre

for two nights in every week during the next two months, and B engages to
pay her Rs 50,000 for each night's performance. On the sixth night, A wilfully
absents herself from the theatre, and B, in consequence rescinds the
contract. B must pay A for the five nights on which she has sung.
A contracts to sing for B for Rs 100,000 which are paid in advance. A is too ill
to sing. A is not bound to make compensation to B for the loss of the profits
which B would have made if A had been able to sing, but must refund to B Rs
100,000 paid in advance.
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Where a person lawfully does anything for another person, or delivers anything to
him, not intending to do so gratuitously and such other person enjoys the benefit
thereof, the latter is bound to make compensation to the former in respect of, or
to restore, the thing so done or delivered. [Section 70]
Example: Person enjoying benefit of non-gratuitous act / goods
A, a tradesman, leaves goods at B's house by mistake. B treats the goods as

his own. He is bound to pay A for them.
A saves B's property from fire. A is not entitled to compensation from B, if the
circumstances show that he intended to act gratuitously.
Act preventing completion of performance

If a party does not complete the contract or prevents the other party from
completing it, the aggrieved party can sue on quantum meruit.
Example: Act preventing completion of performance
C, an owner of a magazine engaged P to write a book to be published by
instalments in his magazine. After a few instalments were published, the
publication of the magazine was stopped. It was held that P could claim payment
for the part already published.
Divisible contract
The party at default may sue on a quantum meruit if the contract is divisible and
the party not at default has enjoyed benefits of the part performance.
Example: Divisible contract
A hired B to construct a house for Rs. 1 million but B abandoned this contract
after having done the work worth Rs. 0.5 million. Afterwards, A got the work
completed. B could not recover anything for the work done because he was
entitled to the payment only on the completion of the work.
Indivisible contract performed completely but badly
If it is an indivisible contract which has been completely performed but with faults
than the party at default may claim the amount agreed after deducting any
amount which the other party has paid to remove faults.
Example: Indivisible contract performed completely but badly
A agreed to decorate B's flat for a lump sum of Rs 200,000. A did the complete
work but B complained of faulty workmanship. It costs B another Rs 30,000 to
remedy the defect. It was held that A could recover only Rs 170,000 from B.
Express or implied contract to render services but no remuneration is pre-settled
When there is an express or implied contract to render services but no
remuneration is pre-settled in such a case reasonable remuneration is payable.
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CHAPTER REVIEW
Chapter review
Explain Quasi contracts
Discuss the kinds of Quasi contracts
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116
CHAPTER

Business Law
11
Performance of a contract
Contents
1 Performance of a contract
2 Reciprocal promises
3 Appropriation of payment
4 Assignment of contracts
5 Chapter review
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INTRODUCTION
Learning outcomes
Performance of a contract
LO 2

demonstrate knowledge of laws relating to performance of a contract.
LO 2.1.1
Discuss the provisions of Act with respect to performance of a contract
LO 2.1.1
Exam context
Understand the meaning of performance of a contract
Explain the term tender and effect of refusal to accept a tender
State who can perform and demand performance
State briefly provisions of Act relating to the time and place of performance
Explain reciprocal promises and rules regarding their performance
Summarize the rules laid down in the Act as to the appropriation of payments
Understand the meaning and modes of assignment of contract

Act
Contract Act 1872
Chapters
3-16
17
18
19-27
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Section A: Mercantile Law - Chapter 11: Performance of a contract
PERFORMANCE OF A CONTRACT
Section overview
Meaning of performance
Types of performance
Types of tender
Essentials of a valid tender
Effect of refusal to perform
Persons who can perform and demand performance
Rules regarding the performance of joint promise
Time and place of performance
Time as essence of contract
1.1 Meaning of performance

A contract creates an obligation, which continues till the contract has been
discharged by actual performance. Performance of the contract is one of the vital
modes of discharge of the contract. A contract is said to have been performed
when the parties to a contract either perform or offer to perform their respective
promises.
Obligations of parties to contracts
The parties to a contract must either perform, or offer to perform their respective
promises, unless such performance is dispensed with or excused under the
provisions of this Act, or of any other law.
1.2 Types of performance

There are two types of performance as follows:
Actual performance
When the promisor has made the performance in accordance with the terms of
the contract and is accepted by the promisee it is called an actual performance.
[Section 37]
Example: Actual performance
A contracted to deliver to B at his warehouse on 1st November, 500 bales of cotton
of a particular quality. A brought the cotton of requisite quality to the appointed
place on the appointed day during the business hours, and B took the delivery of
goods. This is an actual performance.
Attempted performance
Although, the promisor has made an offer of performance but the offer of
performance of promisor is not accepted by the promisee it is called an
attempted performance. Attempted performance is also known as tender.
[Section 38]
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Example: Attempted performance

A contracted to deliver to B at his warehouse on 1st November, 500 bales of
cotton of a particular quality. B refused to take the delivery of goods; it is a
case of attempted performance because A has done what he was required to
do under the contract.
1.3
Types of tender
There can be two types of tender as follows:
Tender of goods or services
Where the promisor offers to deliver the goods or services but the promisee
refuses to accept.
Effects
Goods or services need not be offered again.
Promisor may sue the promisee for non-performance and claim damages.
Promisor is discharged from his liability i.e. he is not liable for nonperformance.
Tender of money
Where the promisor offers to pay the amount but the promisee refuses to accept
the same.
Effects
Promisor is not discharged from his liability to pay the amount
Promisor will not be liable for interest from the date of a valid tender
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1.4
Essentials of a valid tender

The essentials of a valid tender are shown below:
Unconditional
Tender is said to be unconditional when it is made in accordance with the
terms of the contract.
Proper Time
Tender must be made at the stipulated time or during business hours.
Tender of goods or money before the due date is also not a valid tender.
Proper Place
Tender must be made at the stipulated place or at business place.
Proper Person
It must be made to the promisee or his duly authorized agent. In case of
several joint promisees, a tender made to one of them has the same legal
consequences as tender to all of them.
Reasonable Opportunity
Promisee must have reasonable opportunity for examining that the goods
offered are the same as per the terms of the contract.
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Whole Obligation
A valid tender is for the whole obligation. However, a minor deviation from
the terms of the contract may not render the tender invalid.
Fixed amount and legal tender

In case of tender of money the amount must be fixed and in legal tender.
1.5
Effect of refusal to perform

When a party to a contract has refused to perform or disabled himself from
performing his promise in its entirety, the promisee may put an end to the
contract, unless he has signified, by words or conduct, his willingness in its
continuance. [Section 39]
Example: Effect of refusal to perform
1.6
A, a singer enters into a contract with B, the manager of a theatre, to

sing at his theatre two nights in every week during the next two
months, and B engages to pay her Rs.100 for each night's
performance. On the sixth night, A wilfully absents herself from the
theatre. B is at liberty to put an end to the contract.
A, a singer enters into a contract with B, the manager of a theatre, to

sing at his theatre two nights every week during the next two months
and B engages to pay her at the rate of Rs.100 for each night. On the
sixth night, A wilfully absents herself. With the assent of B, A sings on
the seventh night. B has signified his acquiescence in the continuance
of the contract, and cannot now put an end to it, but is entitled to
compensation for damage sustained by him through A's failure to sing
on the sixth night.
Persons who can perform and demand performance

Persons who can perform and demand performance are shown below [Section
40 to 42]:
Persons who
can perform
Promisor
Promisor's agent
Legal representative
Third party
Joint promisor
Persons who
can demand
performance
Promisee
Promisee's agent
Third party
Joint promisees
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Persons who can perform
Promisor
If a contract is of personal nature or it was agreed that promise will be
performed by the promisor himself than such promise must be performed
by the promisor.
Example: Promisor
A promises to marry B, A must perform this promise personally.
A promises to paint a picture for B, A must perform the promise

personally.
Promisors agent
If the intention of parties is that the promise can either be performed by the
promisor himself or any person employed by him than such contracts can
be performed by the promisor himself or an agent employed by him.
Example: Promisors agent

A promises to pay B a sum of money. A may perform this promise either by
personally paying the money to B, or by causing it to be paid B by another,
and if A dies before the time appointed for payment, his representatives
must perform the promise, or employ some proper person to do so.
Legal representatives
Unless a contrary intention appears or the contract is of personal nature on
death of promisor, his legal representative can perform the contract.
Example: Legal representatives

A promises to marry B, A dies. As legal representatives cannot perform
this promises.
Third party
With the consent of the promisee a contract can be performed by a third
party. When a promisee accepts performance of the promise from a third
person, he cannot afterwards enforce it against the promisor.
Joint promisor
Unless a contrary intention appears, in case of several promisor the
following persons must perform the promise:
x
All the promisors jointly in case of all the promisors are alive
Representatives of the deceased promisor jointly with the surviving

promisor(s) in case of death of any of the joint promisors
Representatives of all of them jointly in case of death of all joint

promisors
Example: Joint promisor

A and B jointly promise to repay a loan of Rs.10,000 on a specified day. A
dies before that specified day. A's representative jointly with B must
perform the promise on the specified day.
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Persons who can demand performance
Promisee
Under a contract only a promisee can demand the performance of the
promise.
Example: Promisee
A promises B to pay Rs.10,000 to C. It is only B who can demand performance and
not C.
Promisees agent:
If the intention of parties is that performance can be demanded from any
person authorised by the promisee then performance can be demanded by
promisees agent.
Unless a contrary intention appears from the contract or the contract is of a
personal nature on death of the promisee, his legal representative can
demand performance.
Example: Legal representative

A promise to marry to B on the specified day. B dies before the specified day. The
legal representatives of B cannot demand performance of the promise from A
because the contract is of personal nature.
Third party
A third party can also demand the performance of the contract in some
exceptional cases like beneficiary in case of trust or the person for whose
benefit the provision is made in family arrangements.
Joint promisees
In case of several promisees, unless a contrary intention appears, the
performance can be demanded by the following persons:
x
All the promises jointly in case all the promisees are alive
Representatives of deceased promisee jointly with the surviving

promisees in case of death of any of joint promisees
Representatives of all of them jointly in case of death of all joint

promisees
Example: Joint promisees

A promises B and C jointly to repay loan of Rs.10,000 on a specified day. B
dies before that specified day. B's representative jointly with C can demand
the performance from Aon specified day. If B and C die before that
specified day, the representatives of B and C jointly can demand the
performance from A on the specified day.
1.7
Rules regarding the performance of joint promise

The rules regarding the performance of joint promises are as follows
[Section 43 to 44]:
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Joint and several liability of joint promisors

When two or more persons make a joint promise, the promisee may, in the
absence of express agreement to the contrary, compel anyone or more of
such joint promisors to perform the whole of the promise.
Example: Joint and several liability of joint promisors
A, B and C jointly promise to pay DRs.3,000. D may compel either A or B or
C to pay him Rs.3,000.
Right to claim contribution
Each of two or more joint promisors may compel every other joint
promisor to contribute equally with himself to the performance of the
promise, unless a contrary intention appears from the contract.
Example: Right to claim contribution
A, B and C jointly promise to pay D a sum of Rs.3,000. C is compelled to pay
the whole. A is insolvent, but his assets are sufficient to pay one-half of his
debts. C is entitled to receive Rs.500 from A's estate and Rs.1,250 from B.
Sharing of loss in contribution
If anyone of two or more joint promisors makes default in such
contribution, the remaining joint promisors must bear the loss arising from
such default in equal shares.
Example: Sharing of loss in contribution
A, B and C are under a joint promise to pay D Rs.3,000. C is unable to pay
anything and A is compelled to pay the whole. A is entitled to receive
Rs.1,500 from B.
Release of one joint promisor
Where two or more persons have made a joint promise, a release of one
of such joint promisors by the promisee, does not discharge the other joint
promisor or joint promisors; neither does it free the joint promisor so
released from responsibility to the other joint promisor or joint promisors.
Example: Release of one joint promisor
A, B and C jointly promise to pay D Rs.3,000. D releases A from his liability
and sues B and C for payment, Here, neither B and C are released from their
liability to D nor is A released from his liability to B and C for contribution.
Devolution of joint rights
When a person has made a promise to two or more persons jointly, then,
unless a contrary intention appears from the contract, the right to claim
performance rests, as between him and them, with them during their joint
lives, and, after the death of any of them, with the representative of such
deceased person jointly, with the survivor or survivors and after the death
of the last survivor, with the representatives of all jointly. [Section 45]
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Example: Devolution of joint rights

A, in consideration of Rs.5,000 lent to him by B and C, promises B and C
jointly to repay them that sum with interest on a day specified. B dies. The
right to claim performance rests with B's representative jointly with C during
C's life, and, after the death of C, with the representatives of B and C jointly.
1.8
Time and place of performance

The various rules regarding the time and place of performance are given
below:
Time for performance is not specified
Where the time for performance is not specified in a contract and the
promisor has undertaken to perform without application by the promisee
then the contract must be performed within a reasonable time. The
question 'What is reasonable time' is a question of fact. [Section 46]
Time for performance is specified
Where the time for performance is specified in a contract and the promisor
has undertaken to perform it without application by the promisee then the
promisor must perform his promise on that particular day during the usual
hours of business and at a place where the promise ought to be performed.
[Section 47]
Place for performance is specified
Where the time for performance is specified in a contract and the promisor
has not undertaken to perform it without application by the promisee than
the promisee must apply for performance at a proper place and within
usual hours of business. [Section 48]
Place for performance is not specified
Where the place for performance is not specified in a contract and the
promise is to be performed without application by the promisee than the
promisor must apply to the promisee to appoint a reasonable place for the
performance and to perform the promise at such place. [Section 49]
Promisee prescribes the manner or time
Where the promisee prescribes the manner or time for performance then
the promise must be performed in the manner and at the time prescribed
by the promise. [Section 50]
Example: Time and place of performance
B owes A Rs.2,000. A desires B to pay the amount to A's account with

C, a banker. B who also banks with C, orders the amount to be
transferred from his account to A's credit, and this is done by C.
Afterwards, and before A knows of the transfer, C fails. There has
been a good payment by B.
A and B are mutually indebted. A and B settle an account by setting

off one item against another, and B pays A the balance found to be
due from him upon such settlement. This amounts to payment by A
and B, respectively, of the sums which they owed to each other.
A owes B Rs.2,000. B accepts some of A's goods in reduction of the

debt. The delivery of the goods operates as a part payment.
A desires B, who owes him Rs.100, to send him a note for Rs.100 by
post. The debt is discharged as soon as B posts a letter containing the
note duly addressed to A.
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1.9
Time as essence of contract

Time is essence of a contract means that it is necessary for the parties to a
contract to perform their respective promises within the specified time. But
if the promisor fails to do so, can the promisee rescind the contract? This
question can be answered by deciding whether in such a case time was or
was not the essence of the contract. [Section 55]
Cases where time is essence
In the following cases, time is usually considered to be the essence of
contract:
Where the parties have expressly agreed to treat the time as the essence
of the contract.
Where the non-performance at the specified time operates as an injury to

the party.
Where the nature and necessity of the contract requires the performance of
the contract within the specified time.
Consequences where time is essence

In case the performance is not made where time is essence the breach will have
following consequences:
Voidable at the option of promisee.
Promisee is entitled to claim compensation for any loss arising to him due
to non-performance of the promise at agreed time where performance
beyond the stipulated time is not accepted.
Promisee is not entitled to claim compensation for any loss arising to him
due to non-performance of the promise at agreed time where performance
beyond the stipulated time is accepted, unless the promisee gives notice to
the promisor of his intention to claim compensation.
Consequences where time is not essence

In case the performance is not made where time is not essence the breach will
have the following consequences:
Not voidable at the option of promisee.
Promisee is entitled to claim compensation for any loss arising to him due
to non-performance of the promise at agreed time where performance
beyond the stipulated time is not accepted.
Promisee is not entitled to claim compensation for any loss arising to him
due to non-performance of the promise at agreed time where performance
beyond the stipulated time is accepted, unless the promisee gives notice to
the promisor of his intention to do so.
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Example: Consequences where time is not essence

A, a singer, enters into a contract with B, the manager of a theatre, to sing at his
theatre two nights in every week for the next two months. B agrees to pay her Rs
100 for each performance. On the sixth night, A willfully absents herself from the
Theatre.
In this case, B has the following two options:
B may rescind the contract and claim compensation for the loss occasioned
to him by A's failure to sing on the sixth night.
B may permit A to sing on the seventh night and claim compensation

for loss from A by giving a notice to A of his intention to do so.
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RECIPROCAL PROMISES
Section overview
Meaning of reciprocal promises
Types of reciprocal promises
Rules regarding performance of reciprocal promises
2.1 Meaning of reciprocal promises

Promises which form the consideration or part of the consideration for each other
are called 'reciprocal promises'. [Section 2(f)]
Example: Meaning of reciprocal promises
In a contract for sale, A promises to deliver the goods to B at a fixed price and B
promises to give promise for the payment of the price. Such promises are called
reciprocal promises.
2.2 Types of reciprocal promises

The reciprocal promises have following types:
Mutual and independent
When the promises are to be performed by each party independently, without
waiting for the other party to perform is called Mutual and independent.
Mutual and dependent
When the performance of one party depends on the prior performance of the
other party it is called Mutual and dependent.
Mutual and concurrent
When the promises are to be performed simultaneously i.e. at the same time it is
called Mutual and concurrent.
2.3 Rules regarding performance of reciprocal promises

The rules regarding the performance of reciprocal promises are as follows:
Simultaneous performance
When a contract consists of reciprocal promises to be simultaneously
performed, the promisor need not perform his promise unless the promisee
is ready and willing to perform his reciprocal promise. [Section 51]
Example: Simultaneous performance
A and B contract that A shall deliver goods to B to be paid for by B on

delivery A need not deliver the goods unless B is ready and willing to
pay for the goods on delivery B need not pay for the goods, unless A is
ready and willing to deliver them on payment.
A and B contract that A shall deliver goods to B at a price to be paid in
instalments, the first instalment to be paid on delivery. A need not
deliver unless B is ready and willing to pay the first instalment on
delivery. B need not pay the first instalment, unless A is ready and
willing to deliver the goods on payment of the first instalment.
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Order of performance
Where the order in which reciprocal promises are to be performed is
expressly fixed by the contract, they must be performed in that order, and
where the order is not expressly fixed by the contract, they must be
performed in the order which the nature of the transaction requires. [Section
52]
Example: Order of performance
A and B contract that A shall build a house for B at a fixed price. A's
promise to build the house must be performed before B's promise to
pay for it.
A and B contract that A shall make delivery of his stock-in-trade to B at a
fixed price, and B promises to give security for the payment of the
money. A's promise need not be performed until the security is given,
because the nature of the transaction requires that A should have
security before he delivers up his stock.
Preventing the performance

When a contract contains reciprocal promises, and one party to the contract
prevents the other from performing his promise, the contract becomes
voidable at the option of the party so prevented; and he is entitled to
compensation from the other party for any loss which he may sustain in
consequence of the non-performance of the contract. [Section 53]
Example: Preventing the performance
A and B contract that B shall execute certain work for A, for Rs.1,000. B is
ready and willing to execute the work accordingly, but A prevents him from
doing so. The contract is voidable at the option of B; and, if he elects to
rescind it, he is entitled to recover from A compensation for any loss which he
has incurred by its non-performance.
Non-performance in case of mutual and dependent reciprocal promises
Where the performance of one party depends on the prior performance of
the other party and the party who is liable to perform first, fails to perform it,
then such party cannot claim the performance from the other party and must
make compensation to the other party for any loss which the other party
may sustain by the non-performance of the contract. [Section 54]
Example: Non-performance in case of mutual and dependent reciprocal promises
A contracts with B to execute certain builder's work for a fixed price, B

supplying the timber necessary for the work. B refuses to furnish any
timber. A need not execute the work, and B is bound to make
compensation to A for any loss caused to him by the non-performance
of the contract.
A contracts with B to deliver to him, at a specified price, certain

merchandise on board of a ship which cannot arrive for a month, and B
engages to pay for the merchandise within a week from the date of the
contract. B does not pay within the week. A's promise to deliver need not
be performed, and B must make compensation.
A promises B to sell him 1000 bales of merchandise to be delivered

next day, and B promises A to pay them within a month. A does not
deliver according to his promise. B's promise to pay need not be
performed, and A must make compensation.
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Promise to do legal and illegal things

Where persons reciprocally promise, firstly, to do certain things which are legal,
and secondly, under specified circumstances, to do certain other things which
are illegal, the first set of promises is a contract, but the second is a void
agreement. [Section 57]
Example: Promise to do legal and illegal things
A and B agree that A shall sell B a house for Rs.10,000 but that, if B uses it
as a gambling house, he shall pay Rs.50,000 for it.
The first set for reciprocal promises, namely to sell the house and to pay
Rs.10,000 for it, is a contract. The second set is for an unlawful object, namely,
that B may use the house as a gambling house and is a void agreement.
Alternative promise being illegal
In the case of an alternative promise, one branch of which is legal and the other
illegal, the legal branch alone can be enforced. [Section 58]
Example: Alternative promise being illegal
A and B agree that A shall pay B Rs.1,000 for which B shall afterwards
deliver to A either rice or smuggled opium.
This is a valid contract to deliver rice, and a void agreement as to the opium.
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APPROPRIATION OF PAYMENT
Section overview
Meaning of appropriation of payment
Rules regarding appropriation of payment
3.1 Meaning of appropriation of payment

Appropriation of payment means allocation of payment to a particular debt.
3.2 Rules regarding appropriation of payment

The various rules regarding appropriation of payments are given below:
Debt to be discharged is indicated
The payment, if accepted must be applied accordingly. [Section 59]
Example: Debt to be discharged is indicated
A owes B, among other debts, Rs.1,000 upon a promissory note, which falls
due on the first June. He owes B one other debt of that amount. On the first
June, A pays to B Rs.1,000. The payment is to be applied to the discharge of
the promissory note.
A owes to B, among other debts; the sum of Rs.567. B writes to A and

demands payment of this sum. A sends to BRs.567. This payment is to be
applied to the discharge of the debt of which B had demanded payment.
Debt to be discharged is not indicated

The creditor has option to apply the payment to any lawful debt due from the
debtor even if it is a time barred debt but he cannot apply to a disputed debt.
[Section 60]
Neither party makes an appropriation
The payment shall be applied in discharge of the debts in order of time whether
or not they are time barred. In other words, all payments shall be applied towards
the payment of first debt till it gets extinguished. Similarly, all subsequent
payments applied towards second debt till it gets fully paid and so on and so
forth. If the debts are of equal standing, the payment shall be applied in
discharge of each, proportionately. [Section 61]
If principal amount and markup both are due, then mark-up is settled first and
then principal amount is settled.
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ASSIGNMENT OF CONTRACTS
Section overview
Meaning of assignment of contracts
Modes of assignment of contract
4.1 Meaning of assignment of contracts

Assignment of a contract means transfer of contractual rights and liabilities to a
third party.
4.2 Modes of assignment of contracts

Assignment of a contract may take place in the following ways:
Assignment by act of parties
Assignment by operation of law
Assignment by act of parties

Assignment by act of parties takes place when the parties to a contract
themselves make the assignment. Such an assignment is subject to the following
rules:
If it is a contractual obligation/right involving personal skill or ability than it

cannot be assigned.
If the contract expressly or impliedly provides that the contract shall be

performed by the promisor only then such obligation cannot be assigned
If the contract does not expressly or impliedly provides that the contract
shall be performed by the promisor only then the promisor or his
representative my employ a competent person to perform such obligation
but even than the promisor remains liable to the promisee for proper
performance.
By Novation the promisor may transfer his liability to a third party with the
consent of the promisee and the transferee.
Actionable claims i.e. claim to any debt or to any beneficial interest in

movable property can always be assigned by an instrument in writing.
Notice of such assignment is also required to be given by the debtor.
Assignment by operation of law

Assignment by operation of law takes place when the law intervenes. Such
assignment takes place in the following cases:
In case of death of any party the rights and obligation (other than those of
personal nature) of the deceased party pass on to his legal representatives.
In case of insolvency of any party the rights and obligations (other than
those of personal nature) of the insolvent party pass on to the Official
Receiver or Assignee.
133
Business Law
Example: Assignment
A promises to marry B. Here, neither A can assign their obligation nor B can
assign their right because the contract is of personal nature.
A owes B Rs.100,000 and C owes A Rs.100,000. Here A cannot compel B to

recover the amount from C. However, he can transfer his liability to C with the
consent of B and C. B can also transfer his right to a third party to recover the
amount from A.
134

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Business Law

On the successful completion of this paper, candidates will be able to

Discuss the provisions of Act with respect to validity of a contract

Demonstrate comprehension in simple scenario based problems

The learning outcome 2.1.1 is covered from chapter 2 to 16.

Understand the meaning of a contract

Discuss the essentials of a valid contract

Explain the different classifications of contract

References to Legal Acts

Partnership Act 1932

Negotiable Instrument Act 1881

Companies Ordinance 1984

Emile Woolf International

The Institute of Chartered Accountants of Pakistan

Section A: Mercantile Law - Chapter 2: Introduction to the law of contract

INTRODUCTION TO THE LAW OF CONTRACT

Essentials of a valid contract

1.1 Definition of a contract

These two essentials are discussed below:

Emile Woolf International

The Institute of Chartered Accountants of Pakistan

Definition: Proposal [Section 2(a)]

Emile Woolf International

The Institute of Chartered Accountants of Pakistan

Section A: Mercantile Law - Chapter 2: Introduction to the law of contract

1.2 Essentials of a valid contract

These essentials are discussed below:

Offer and acceptance is discussed in detail in Chapter 3.

Emile Woolf International

The Institute of Chartered Accountants of Pakistan

Example: Legal relationship

The age of majority

Person of sound mind and

Not declared as disqualified from contracting by any law to which he is

Example: Competency of parties

Emile Woolf International

The Institute of Chartered Accountants of Pakistan

Section A: Mercantile Law - Chapter 2: Introduction to the law of contract

Example: Free consent

Free consent is discussed in detail in Chapter 6.

It involves an injury to the person or property of another

The court regards it as immoral, or opposed to public policy

Example: Lawful object

A, B and C enter into an agreement of the division among them of gains

A promises to obtain for B an employment in the public service, and B

A, who knows that B has stolen goods amounting to Rs.500,000, receives

Lawful object is discussed in detail in Chapter 7.

Agreement, the consideration or object of which is partly unlawful

Agreement made without consideration

Agreement in restraint of marriage

Agreement in restraint of legal proceedings

Agreement in restraint of trade

Emile Woolf International

The Institute of Chartered Accountants of Pakistan

Example: Not declared as void

A and B carried on business in a certain locality in Karachi. A promised to

A promises to pay Rs 10,000 to B if it rained today, and B promises to pay Rs