Business Law: Contract and Its Kinds

BUSINESS LAW
CONTRACT AND ITS KINDS

Contract
Meaning of Law
The law is a set of official rules and regulations used to govern a
society. It is enforced by the state to regulate the business, protect the
rights of people and ensure justice in the society. It explains the rights
and obligations which can be enforced in a court. The law is necessary
to maintain peace and order in the society. In the absence of law, no
person will recognize the rights of others
Business & Corporate Law: Offer and Acceptance,

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Competency, Consideration
Contract
Business Law
Business law is also known as commercial law or mercantile law. It is a
branch of law which governs and regulates the trade and commerce. It
deals with the rights and obligations arising out of business
transactions.

3
Contract
Pakistan inherited its legal system from the British. The pre-partition
laws and legal decisions are still followed. Pakistan adopted the
Contract Act, 1872, Sale of Goods Act, 1930, Partnership Act, 1932 and
Negotiable instruments Act, 1881. Some laws were amended according
to the needs.

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Law of Contract
The law relating to contracts in Pakistan is contained in the Contract

Act, 1872. It applies to the whole of Pakistan. It came into force on 01st
September 1872. It deals with the general principles for all types of
contracts [Section 1-75].
The contract of indemnity, guarantee, bailment, pledge and agency

[Section 124-238].

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Law of Contract
Initially, Section 76-123 relating to Sales of goods and Sections 239-266

relating to Partnership were part of Contract Act, 1872. But were
subsequently excluded and a separate Sale of Goods Act, 1930 and
Partnership Act, 1932 came into force.

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Definition of Contract
Some definitions of contract are as follows:-
Pollack: Any agreement or promise enforceable at law is a contract.

Salmond: A contract is an agreement creating and defining obligations
between the parties.
Section 2(h) An agreement enforceable by law is a contract.

The definition shows that for a contract, there must be an agreement
between the parties and the agreement must be enforceable by law.
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Agreement
Section 2(e) defines agreement as, “Every promise and every set of
promises forming the consideration for each other is an agreement”.
It means that every promise is an agreement if it forms a consideration

for both parties. If a promise forms no consideration for both parties, it
cannot become an agreement.

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Agreement
a. Promise
Section 2(b) defines promise as, “ When the person to whom the
proposal is made signifies his assent thereto, the proposal is said to be
accepted. A proposal, when accepted becomes a promise”.

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Agreement
b. Proposal
Section 2(a) defines proposal as, “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”.
It means that when one person shows his willingness to do or not to do

anything in order to get the consent of other person, it is called a
proposal. A proposal is also called an offer.

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Agreement
b. Proposal
Example: C offers to sell his car to B for Rs. 8mn. B accepts the offer. It
becomes a promise.

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Enforceable by Law
An agreement is enforceable by law if it creates legal obligations

between the parties. All contracts are agreements but all agreements
are not contracts. There are two types of agreements.
1. Social Agreements
2. Legal Agreements

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Enforceable by Law
A social agreement us not enforceable by law because it does not
create legal obligations between the parties. In a social agreement, the
parties do not want to create legal relations.

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Enforceable by Law
Example:
C invites B to a dinner. B accepts the invitation but does not attend. C
cannot sue B for damages. It is a social agreement.

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Enforceable by Law
2. Legal Agreements
A legal agreement is enforceable by law because it creates legal
obligations between the parties. In a legal agreement, the parties want
to create legal relations. In Business agreements, it is presumed that
the parties want to create legal obligations.

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Enforceable by Law
2. Legal Agreements
Example:
C promises to sell his car to B for Rs. 2mn. It is a legal agreement
because it creates legal obligations. This agreement is a contract.

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Essentials of Valid Contract
A valid contract is enforceable by law. In a valid contract, all the parties

are legally bound to perform the contract. In order to be enforceable,
an agreement must possess the essentials of a valid contract given in
Section 10.
Section 10 states “All agreements are contracts if they are made by the
free consent of parties, competent to contract, for a lawful
consideration and with a lawful object, and are not hereby expressly
declared to be void. Where necessary, the agreements must satisfy the
requirements of law regarding writing, attestation or registration”.
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The essentials of a valid contract are as follows:-

1. Offer and Acceptance
2. Legal obligations
3. Lawful consideration
4. Capacity of Parties
5. Free consent
6. Lawful object
7. Certainty of terms
8. Possibility of performance
9. Not / expressly declared void
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An offer is a starting point of a contract. In order to form an agreement,
there must be an offer by one party and an acceptance of that offer by
the other party.

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Example
C offers to sell his cycle to B for Rs. 4k. It is an offer. If B accepts the
offer as it is, there is an acceptance.

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2. Legal Obligations
The parties to an agreement must create legal obligations. It means
that if one party does not fulfil his promise, he shall be liable for breach
of contract. It is presumed in business agreements that the parties
want to create legal obligations.

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2. Legal Obligations
Example
C offers to sell his watch to B for Rs. 8000. B agrees to buy. It is a
contract as it creates legal obligations.

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The consideration means something in return. The agreement must be
supported by lawful consideration on both sides. The consideration is
the price paid by one party for the promise of the other party. An
agreement is enforceable only when both the parties give and receive
something. The something given or received is called consideration.

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Example
C agrees to sell his house to B for Rs. 80mn. 80mn is the consideration
for C and house is the consideration for B.

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An agreement is enforceable if its made by parties who are competent
to contract. In order to be competent to contract, it is essential that the
parties must be of the age of majority, of sound mind and not
disqualified from contracting by law. An agreement with an
incompetent person is not a valid agreement.

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Example
M, a person of unsound mind, agrees to sell his house to N for Rs. 20
lac. It is not a valid contract because M is not a competent to contract.

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4. Free Consent
For a valid contract, it is essential that the consent of parties must be
free. The consent is free when it is not obtained by coercion, undue
influence, fraud, misrepresentation or mistake. If the consent of either
of the parties is not free, the agreement cannot become a contract.

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4. Free Consent
Example
C compels B to enter into a contract at gunpoint. It is not a valid
contract as the consent of B is not free.

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6. Lawful Object
The agreement must be made for a lawful object. The object of an
agreement is lawful if it is not fraudulent, illegal, immoral, opposed to
public policy or involves injury to the person or property of another.
Every agreement with unlawful object or consideration is illegal and
void.

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6. Lawful Object
Example
C promises to pay Rs. 5,000 to B, if B beats D. The agreement is illegal
as its object is unlawful.

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Section 29 states, “Agreements, the meaning of which is not certain or
capable of being made certain, are void”. The terms of an agreement
must be clear, complete and certain. If the terms are uncertain, the
agreement is void.

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Example
O agreed to purchase a van from S. The price was to be paid within 2
years. The terms of agreement were not certain, about the rate of
interest, payment mode etc.

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A valid contract must be capable of being performed. An agreement to
perform an impossible act is void. If the act is legally or physically
impossible to perform, the agreement cannot be enforced by law.
[Section 56].

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Example
C agrees with B to discover a treasure by magic. The agreement s not
enforceable by law.

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7. Expressly declared void

The agreement must not be one of those agreements which have been
expressly declared void by the law. Section 24-30 explain certain
agreements which have been expressly declared void e.g. agreement in
restraint of trade, wagering agreement.

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7. Expressly declared void

Example
C promises to close his business if B pays him Rs. 2mn. It is a void
agreement because it is in a restraint of trade.

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Kinds of Contract
There are different types of contracts which can be classified as follows:-

a. Valid Contract
b. Void Contract
(i) Impossibility of performance
(ii) Subsequent illegality
(iii) Impossibility of depending event
c. Void Agreement
d. Voidable Contract
e. Unenforceable Contract
f. Illegal Agreement
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Kinds of Contract
a. Valid Contract
An agreement enforceable by law is a valid contract. An agreement
becomes a contract when it fulfils all the essentials of valid contract. In
a valid contract, all parties are legally responsible for the performance
of the contract. If one of the parties breaches the contract, the other
party can enforce it through the court of law.

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Kinds of Contract
b. Void Contract
The term void means something without legal effect. Section 2(j)
states, “A contract which ceases to be enforceable by law becomes void
when it ceases to be enforceable”. It means that a void contract is a
valid contract when it is made but subsequently it becomes void due to
certain reasons. In a void contract, both the parties are not legally
responsible to fulfill the contract.

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Kinds of Contract
A contract becomes void under the following circumstances.

A contract becomes void due to impossibility of performance. A
contract becomes void when it becomes impossible to be performed by
any party due to any reasons [Section 56].

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Kinds of Contract

Example
C agrees to sell his house to B after two days. The house is burnt the
next day. The contract becomes void due to impossibility of
performance.

41
Kinds of Contract

A contract becomes void by subsequent illegality. If a contract is made
between two parties but before the performance of contract, a new
law makes the implementation of the contract illegal, the contract
becomes void. [Section 56].

42
Kinds of Contract

Example
C agrees to sell 1000 bags of wheat to B. Before delivery of wheat, the
government put a bans on private trade of wheat. The contract
becomes void.

43
Kinds of Contract

The performance of a contingent contract depends upon the
occurrence or non-occurrence of a certain event. It becomes void when
that event does not occur. [Sec 32]

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Kinds of Contract

Example
Marriage halls in COVID-19 situation.
Singer

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Kinds of Contract
C. Void Agreement
An agreement which is not enforceable by law is a void agreement. It
doesn’t not create legal obligations among the parties. It is void ab-
initio i.e. from the beginning. In a void agreement, there is absence of
any essential of a valid contract except free consent. An agreement
with a minor and agreement without consideration are void agreement
[Sec 2(g)].

46
Kinds of Contract
D. Voidable Contract
The term voidable means which can be avoided or confirmed. It is not
absolutely void. When a contract is made without free consent, it is a
voidable contract. It is considered valid if it is not cancelled by the
aggrieved party within reasonable time.

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Kinds of Contract
D. Voidable Contract
Example
C compelled B to sell his car at gunpoint. The contract is made by
coercion and is voidable at the option of B.

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Kinds of Contract
E. Unenforceable Contract
It is a contract which cannot be enforced by the court due to some
technical defects. The technical defects may be absence of writing,
registration, stamp etc. When the technical defects are removed, the
contract becomes enforceable.

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Kinds of Contract
E. Unenforceable Contract
Example
C borrows Rs. 1Bn from B and makes a pronote on Rs.10 stamp paper. It
is unenforceable because the pronote is undervalued.

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Kinds of Contract
F. Illegal agreement
An agreement is illegal if it’s forbidden by any law. The object of illegal
agreement is unlawful. It is void ab initio. It cannot be enforced by the
court. The parties to an illegal agreement are not responsible to
perform their promises. There is punishment for the parties who make
such agreement. [Section 23].

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Kinds of Contract
F. Illegal agreement
Example
Agreement of smuggling

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Kinds of Contract
a. Express contract
An express contract is a contract where the parties state the terms by
words spoken or written at the time of its formation. When such a
contract is formed, there is no difficulty in understanding the rights and
obligations of the parties. [Sec 9].

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Kinds of Contract
a. Express contract
Example
C tells B through a telephone call that he wants to sell his car and B
informs C that he agrees to buy the car.

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Kinds of Contract
b. Implied contract
An implied contract is made otherwise than by words spoken or
written. It arises from the acts or conduct of parties or circumstances of
the particular case. It arises when one person, without request,
provides services and expects to be paid for them and the other person
accepts those services [Sec 9].

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Kinds of Contract
b. Implied contract
Restaurant is the best example.

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Kinds of Contract
c. Executed contract
In an executed contract, both the parties completely fulfill their
obligations. It means that nothing remains to be done by either party
under the contract.

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Kinds of Contract
c. Executed contract
Example
B buys a book from C. C delivers the book and B pays the price. It is an
executed contract.

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Kinds of Contract
d. Executory contract
In an executory contract, some obligation remains to be fulfilled. In
other words, a contract is said to be executory when both parties to a
contract have not performed their obligations.

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Kinds of Contract
d. Executory contract
Example
M sells his car to N for Rs. 2mn. N has not yet paid the price and M has
not delivered the car. The contract between M and N is executory.

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Kinds of Contract
Difference Between Agreement and Contract
Agreement Contract
1. Formation
An agreement and its enforceability
An offer and its acceptance make an agreement make a contract
2. Legal Obligation
It necessarily creates legal
It may or may not create legal obligations Obligations
3. Scope
All contracts are
All agreements are notcontracts. agreements.
4. Binding
All contracts are binding on the
All agreements are not binding on te concerned parties. concerned parties

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Kinds of Contract
Difference Between Void Agreement and Void Contract

Void Agreement Void Contract
1. Enforceability
It is unenforceable from the It is enforceable when it is made. It becomes
beginning unforceable later on
2. Enforced It can be enforced before it becomes
unenforceable
It can never be enforced
3. Return of benefits The parties have the right to return the
benefits which they have exchanged during the
contract
The parties may or may not have the right to
return the benefits which they have exchanged
during the agreement
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Kinds of Contract
Difference Between illlegal and void agreement

Illegal Agreement Void Agreement
1. Prohibited
It is prohibited by law It is not prohibited by law
2. Punishable
The parties are punishable The parties are not punishable
3. Nature
An illegal agreement is illegal A void agreement is not an illegal agreement
4. Object
The object of illegal agreement is illegal The object of void agreement is not illegal
5. Collateral Agreement
An agreement which is collateral to an illegal An agreement which is collateral to a void agreement
agreement is not enforceable is enforceable
6. Return of benefits
The benefit cannot be claimed back. The benefit may or may not be claimed back.

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Difference Between Void Agreement and Voidable Contract
Void Agreement Voidable Contract
1. Enforceability
It is enforceable by law till it is
It is not enforceable by law. rejected.
2. Defects
It is not void ab-initio and its defects can be
It is void ab-initio and its defects cannot be removed. removed.
3. Rights of third party
A third party who buys goods in good faith
acquires rights before the contract is
A third party who buys goods does not acquire any rights rejected
4. Compensation
The aggrived party can claim compensation
The aggrived party cannot claim compensation for loss arising due to for loss arising due to non perfomance of the
non perfomance of the agreement Contract.
5. Lapse of time
It may become a valid contract if the
aggrieved party does not reject it within a
It can never become a valid contract onBusiness
the expiry of reasonable
& Corporate time
Law: Offer and reasonable time
Acceptance, Competency,
64
6. Free consent Consideration

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BUSINESS LAW

CONTRACT AND ITS KINDS

Business & Corporate Law: Offer and Acceptance,

Business & Corporate Law: Offer and Acceptance,

Business & Corporate Law: Offer and Acceptance,

The law relating to contracts in Pakistan is contained in the Contract

The contract of indemnity, guarantee, bailment, pledge and agency

Business & Corporate Law: Offer and Acceptance,

Initially, Section 76-123 relating to Sales of goods and Sections 239-266

Business & Corporate Law: Offer and Acceptance,

Some definitions of contract are as follows:-

Pollack: Any agreement or promise enforceable at law is a contract.

Section 2(h) An agreement enforceable by law is a contract.

It means that every promise is an agreement if it forms a consideration

Business & Corporate Law: Offer and Acceptance,

Business & Corporate Law: Offer and Acceptance,

It means that when one person shows his willingness to do or not to do

Business & Corporate Law: Offer and Acceptance,

Business & Corporate Law: Offer and Acceptance,

An agreement is enforceable by law if it creates legal obligations

Business & Corporate Law: Offer and Acceptance,

Business & Corporate Law: Offer and Acceptance,

Business & Corporate Law: Offer and Acceptance,

Business & Corporate Law: Offer and Acceptance,

Business & Corporate Law: Offer and Acceptance,

A valid contract is enforceable by law. In a valid contract, all the parties

The essentials of a valid contract are as follows:-

1. Offer and Acceptance

Business & Corporate Law: Offer and Acceptance,

1. Offer and Acceptance

Business & Corporate Law: Offer and Acceptance,

Business & Corporate Law: Offer and Acceptance,

Business & Corporate Law: Offer and Acceptance,

Business & Corporate Law: Offer and Acceptance,

Business & Corporate Law: Offer and Acceptance,

Business & Corporate Law: Offer and Acceptance,

Business & Corporate Law: Offer and Acceptance,

Business & Corporate Law: Offer and Acceptance,

Business & Corporate Law: Offer and Acceptance,

Business & Corporate Law: Offer and Acceptance,

Business & Corporate Law: Offer and Acceptance,

Business & Corporate Law: Offer and Acceptance,

Business & Corporate Law: Offer and Acceptance,

Business & Corporate Law: Offer and Acceptance,

Business & Corporate Law: Offer and Acceptance,

7. Expressly declared void

Business & Corporate Law: Offer and Acceptance,

7. Expressly declared void

Business & Corporate Law: Offer and Acceptance,

There are different types of contracts which can be classified as follows:-

Business & Corporate Law: Offer and Acceptance,

Business & Corporate Law: Offer and Acceptance,

A contract becomes void under the following circumstances.

(i) Impossibility of performance

Business & Corporate Law: Offer and Acceptance,

(i) Impossibility of performance

Business & Corporate Law: Offer and Acceptance,

(ii) Subsequent illegality

Business & Corporate Law: Offer and Acceptance,

(ii) Subsequent illegality

Business & Corporate Law: Offer and Acceptance,

(iii) Impossibility of depending event