Contract Act

What is a contract:
An agreement enforceable by law is a contract.
Consists of:
Agreement (offer and acceptance) and enforceable (legal obligation)

Proposal:
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.

Promise (acceptance)
When to person to whom proposal is made signifies his assent to is, the proposal is said to
be accepted. A proposal when accepted, becomes a promise.

Agreement:
Every promise and set of promises forming the consideration for each other is an
agreement.

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.

Essentials of a valid contract:

1. Offer and acceptance
2. Legal relationship
3. Competency of parties
4. Consideration
5. Free consent
6. Lawful object
7. Not declared as void
8. Certainty
9. Possibility of performance
10. Legal formalities

Classification of contracts:
Formation – Enforceability – Performance.

Formation:
Express contract
A contract created by words i.e. verbally or written.
Implied contract:
A contract created by conduct of a person or the circumstances of a particular case.
quasi contract (by legal obligation‫)۔‬
An obligation enforced by law
Enforceability:
Valid contract
An agreement which is enforceable by law
Void agreement (void ab-initio (from the start)) – Section 2(g)
An agreement which is not enforceable by law
Void contract – Section 2(j)
A contract which ceases to be enforceable by law becomes void when it ceases to be
enforceable.
Voidable contract – Section 2(i)
An agreement which is enforceable by law at the option of the aggrieved party.
Illegal agreement
An agreement the object of which is illegal.
Unenforceable agreement:
An agreement which is otherwise enforceable but due to some technical lacking i.e. lack of
writing remains unenforceable.
Performance:
Executed contract
A contract where both parties have performed their respective promises
Executory contract
A contract in which something is yet to be done.
Unilateral contract:
A contract in 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 party.
Bilateral contract:
A contract in which a promise on one side is exchanged for a promise on the other.

Offer and acceptance:

Offer: When one person signifies his willingness to do or abstain from anything, with a view
to obtaining the assent of that other to such act or abstinence, he is said to make a
proposal.

Essentials of a valid proposal:

1. Two persons
2. Certain and definite
3. Contractual intention
4. Communication
5. Objective of consent
6. Conditional
These make a proposal invalid:
1. Negative confirmation
2. Invitation of an offer

Acceptance:
When the person to whom a proposal is made signifies his assent to it, the proposal is said
to be accepted.

Essentials of a valid acceptance:

 1. Absolute and unconditional
2. Communication
3. Reasonable time
4. Reasonable mode
5. Awareness of proposal
6. Before lapse of an offer
These make an acceptance invalid:
1. Negative confirmation
2. Invitation of an offer

Capacity of Parties:
Every person is competent to contract:
- Who is of the age of majority
- Who is of sound mind
- Is not disqualified from contracting by an law to which he is subject.

A minor is a person who has not attainted majority which is:

- 21 years where a guardian of a minor’s person or property is appointed by the court
of law, or;
- 18 years in other cases.

Void agreement (if one party is minor)

No liability of minor in case he fraudulently represented himself as an adult
Agreement cannot be ratified on attaining majority
In Joint agreement with a major, only major will be responsible
Cannot become a partner in a firm, but can be admitted to its benefit.
Can become an agent.
Cannot be declared insolvent
Cannot be sued.

Consideration:
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 of promise.

Elements of consideration:
1. Desire of the promisor
2. From promisee or any other person
3. Consideration may be past, present or future
4. Consideration to have some value
5. Consideration must be real
6. Something which the promisor is not already bound to do
7. Lawful
Stranger to consent
Generally, a stranger to a contract cannot sue, while a stranger to consideration can sue.
This rule is known as doctrine of privity of contract.

Exception:
The following exceptions to the rule that a stranger to a contract cannot sue:

1. When an arrangement is made in connection with marriage, partition or other family

arrangement and a provision is made for the benefit of a person he may sue
although he is not a party to the contract.
2. The person who becomes an agent of third party by acknowledgement or estoppel,
may be sued by such third party.
3. Where the benefit under a contract has been assigned the assignee can enforce the
contract
4. Where a charge in favor of a person has been created on specific immovable
property, such charge is enforceable at the instance of the person beneficially
intererested, though he may not be a party to the document creating the charge.

Agreements without consideration:

It is void but there are certain cases where it is not void:

1. Natural love and effection
2. Promise to compensate past voluntary service
3. Time barred debt
4. Gifts
5. Contract of agency
6. Contract of bailment
7. Charitable subscription
8. Contract of guarantee

Free Consent:

Consent: two persons are said to consent when they agree upon the same thing in the same
sense.

Free Consent:
The consent is said to be free when it is not caused by:
1. Coercion
2. Undue influence
3. Fraud
4. Misrepresentation
5. Mistake

Effect of absence of free consent

The contract becomes voidable if the consent is obtained with 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 (contract cannot
be voided) depending upon the nature of the mistake.

Coercion is the:
- Committing
- Threating or commiting
o Any act which is forbidden by Pakistan Penal code or
- Unlawful detaining
- Threating to detain
Any property with an intention of causing any person to enter into an agreement.

Undue Influence:
A contract is said to be induced by undue influence where the relationships subsisting
between the parties are such that the position of one party is dominant and can dominate
the other party’s will and hence uses its position to obtain an unfair advantage over the
time.

Nature of relationship:
A person can dominate the will of another where he:
- Holds the real or apparent authority over the other e.g parent and son.
- Stands in a fiduciary relation to the other e.g already debted.
- Makes a contract with a person whose mental capacity is temporarily or
permanently effected.

Effects 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 the position to dominate the will of other party
not all cases.

Following relationships, it is presumed that a person is able to dominate the will of another
person:
Father and son, guardian and ward, employer and employee, trustee and beneficiary,
teacher and student, doctor and patient, fiancé and fiancée, Pardanasheen lady (completely
secluded).

Fraud:
It 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 a contract

Essentials of Fraud:
Party to a contract, False representation, Representation as a fact, deceived, Suffered loss.
Misrepresentation:
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.

Essentials of misrepresentation:
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.
False representation: There must be a false representation and that too must be made
without the knowledge of falsehood
Representation as a fact: A opinion does not amount to misrepresentation; A representation
must be related to a fact.
Object: The objective is to induce the other party to enter a contract without the intention
of deceiving the other party.
Did act: The other party must have acted on the faith of the representation

Mistake:
Where both the parties to an agreement are under a mistake as to matters of fact essential
to the agreement, the agreement is void.

Types of mistakes:
Mistake of law
Pakistan or foreign law
Mistake of fact.
- Can be bilateral
o Subject matter
o Possibility of performance
- Unilateral
o Identity of the person
o Nature of the contract

Legality of object, consideration and agreements opposed to public policy:

The consideration of object or consideration of an agreement is lawful unless:
- It is forbidden by the law
- Is of such a nature that if permitted would defeat the provision of any law
- It is fraudulent
- It involves an injury to the person or property of another person
- The court regards It as immoral, or opposed to public policy

Void agreement:
1. Agreements by or with persons incompetent to contract
2. Agreements made under mutual mistake of fact
3. Agreement mades under mutual mistake of foreign law
4. Agreement, the object of consideration of which is unlawful
5. Agreement, the consideration or object of which is partly unlawful.
6. Agreement made without consideration
 7. Agreements in restraint of trade
8. Wagering agreement
9. Agreements in restraint of legal proceedings
10. Agreement in restraint of marriage
11. Uncertain agreements
12. Agreements contingent on impossible events
13. Agreements to do impossible act.

Contingent Contract:
A contract
- To do or
- Not to do
In some events, collateral to such contact
- Does or
- Does not happen
The following are characteristic of contingent contracts:
- The performance of 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

Quasi contract:
A quasi contract is an obligation imposed by law in absence of agreement between the
parties. A quasi contract is not an actual contract, but a legal substitute formed to impose
equity between two parties.

The types of quasi contracts are listed below:

- Supply of necessaries
- Payment by interested persons
- Persons enjoying benefit of non-gratuitous acts/goods
- Finder of goods
- Payments by mistake or under coercion.

Performance of a contract:
A contract creates an obligation, which continues till the contract has been discharged by
actual performance. A contract is said to have been performed when the parties to a
contract either perform or offer to perform their respective promises.

There are two types of performance as follows:

- Actual performance
- Attempted performance (tender)

Types of tenders:
Tenders of goods & services or tenders of money
Tender of goods and services:
Where the promisor offers to deliver the goods or services but the promisee refuses to
accept.

Effects:
- Goods or services need to be offered again.
- Promisor must sue the promisee for non-performance and claim damages
- Promisor is discharged from his liability i.e he is not liable for non-performance.

Tender of money:
When the promisor offers to pay the amount but the promisee refuses to accept the same.

Effects:
- The 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.

Essentials of a valid tender:

- Unconditional
- Proper Time
- Proper place
- Proper person
- Reasonable opportunity
- Whole obligation
- Fixed amount and legal tender

Discharge of a contract:
When contractual relations between the parties to a contract are terminated or comes to an
end.

Modes of discharge:

Performance:
- Performance
- Attempted Performance

Agreement:
- Innovation
- Rescission
- Alteration
- Remission
- Waiver
Operation of law:
- Death
- Insolvency
- Material Alteration
- Same identity
Impossibility of performance:
 - Supervening Impossibility
- Supervening illegality
Lack of time
Breach
- Actual
- Anticipatory

Contracts which need not be peformed:

1. If parties agree to ‘innovation’, ‘rescission’ or ‘Alteration’; the original contract need
not be performed.
2. If parties to a contract agree to dispense with or remit performances of promise
either wholly or in part, the original contract stands discharged.
3. When a person, at whose option a contract is voidable, rescinds it, the other party
there to need not perform his promise.
4. If any promisee neglects or refuses to afford the promisor reasonable facilities for
the performance of his promise, the promisor is excused for the non-performance of
the contract.
5. When its performance becomes impossible.

Indemnity
A contract by which one party promises to save the other from loss caused to him by the
conduct of the promisor himself, or by the conduct of any other person.
- All damages which he may be compelled to pay in any suit in respect of any matter
to which the promise to indemnify applies;
- All costs which he may be compelled to pay in bringing or defending such suits.

Guarantee
A contract of guarantee is a contract to perform the promise or discharge the liability of a
third person in case of his default.

Parties in a contract of guarantee:

1. Principle debtor
- The person in respect of whose default the guarantee is given.
2. Creditor
- The person to whom guarantee is given
3. Surety
- The person who gives guarantee.
Essentials of a contract of guarantee:
1. Tripartite agreement
2. Consent of parties
3. Existence of a debt
4. Essentials of a contract
5. Misrepresentation should not be there
6. No Fraud
Bailment and Pledge
Bailment: The bailment is the delivery of goods by one person to another for some purpose,
upon a contract that they shall, when the purpose is accomplished, be returned or
otherwise disposed of according to the directions of the person delivering them.

A bailment involves delivery of goods by bailor to bailee.

Pledge: The bailment of goods as a security for payment of a debt or performance of a

promise is called pledge or pawn.
The bailor In this case is called the pawnor/pedgor
The bailee in this case is called pawnee/pledgee.

Duties of Bailor:
1. Duties to disclose facts.
2. Duty to bear expenses
3. Duty to indemnify bailee for loss in case of early termination of gratuitous bailment
4. Duty to receive back the goods
5. Duty to indemnify the bailee
6. Duty to bear the risk of loss.

Duties of bailee:
1. Duty to take care of goods bailed
2. Duty not to make any unauthorized use of goods.
3. Duty not to mix goods bailed with his own goods
4. Duty not to set up an adverse title
5. Duty to return the goods
6. Duty to return increase.

Rights of bailor:
1. Right to claim in case of damages.
2. Right to claim terminate the contract in case of unauthorized use.
3. Right to claim compensation in case of unauthorized use.
4. Right to claim separation of goods in case of unauthorized mixture
5. Right to claim compensation in case of unauthorized mixture of goods
6. Right to demand returns of goods
7. Right to earn compensation in case of unauthorized retention of goods
8. Right to demand increase.

Rights of bailee
1. Right to claim damages
2. Right to claim reimbursement of damages.
3. Right to be indemnified in case of early termination of gratuitous bailment.
4. Right to recover loss in case of bailor’s defective title.
5. Right to recover loss in case of bailor’s refusal to take the goods back.
6. Right to deliver goods in case of several joint owners.
7. Bailee not responsible on re-delivery to bailor without title.
8. Rights of bailor and bailee against wrong doer
 9. Right of lien.

Pledge:

Rights of PAWNEE
1. Right of retainer:
The pawnee may retain the goods pledged for:
- Payment of the debt or the performance of the promise
- For the interest of the debt
- All necessary expenses incurred by him in respect of the possession or for the
preservation of the goods pledged.
2. Right of retainer for other advances.
It is the presumption that when the pownee leads money to the same pawnor after the date
of the pledge the right of the retainer over the pledged goods extends to subsequent
advances also unless otherwise agreed upon.

3. Right to extraordinary expenses:

The pawnee is entitled to receive from the pawnor extraordinary expenses incurred by him
for the preservation of the goods pledged.
4. Right where pawnor makes default
- Right to sue
- Right to sell

RIGHTS OF PAWNOR
1. Right to get back goods
On the performance of promise, or repayment of loan and interest, if any, the pawnor is
entitled to get back the goods pledged.

2. Right to redeem debt

If the pawnor makes default in payment of the debt or performance of the promise at
the stipulated time, he may still redeem the goods pledged at any subsequent time before
the actual sale of them.

3. Right to see
The pawnee is entitled to receive from the pawnor extraordinary expenses incurred by him
for the preservation of the goods pledged.

AGENCY

An agent is a person employed to do any (lawful) act for another or to represent another in
dealing with a third person. An agent is a person who acts on behalf of someone else (a
‘principal’) to arrange a transaction with a third party.

Legal effects of agency relationships:

1. The agency acts on behalf of the principal, by negotiating with a third party.
2. When the contract is made , it is between the principal and the third party.
 3. Any person who is of the age of majority and who is of sound mind may employ an
agent.
4. Even a minor or a person of unsound mind can be appointed as an agent.
5. No considerations is necessary to create an agency.

Creation of agency:
There are four ways in which an agency relationship, recognized in law, can be established.
1. By express appointment (by agreement)
2. By ratification
3. By estoppel
4. By necessity

Duties of agent:
1. Duty to carry out mandate
2. Duty to follow instruction
3. Duty to reasonable carefulness
4. Duty to maintain and render accounts
5. Duty to communicate
6. Duty not to deal personally
7. Duty to pay sums received.
8. Duty not to use critical information

Rights of agent:
1. Right to receive remunerations
2. Right of lien
3. Right of retainer
4. Right of indemnify for lawful acts
5. Rights to compensation
6. Right of stoppage in transit.