BUSINESS LAW

CONTRACT AND ITS KINDS ::

Law Of Contract ::

Initially, sections 76-123 and sections 230-266 relating to sale of goods and partnership were contained in the Contract Act, 1930 and a Partnership Act, 1932 came into force.

Definition Of Contract ::

Sec.2 (h) Of Contract Act provides " An agreement enforceable by law is a contract." Thus a contract consists of two elements:

(a) Agreement (b) The agreement must be enforceable by law.

1. Agreement ::

Section 2(e) defines agreement as, " Every promise and every set of promises, forming the consideration of each other, is an agreement.

A promise comes into existence when one party makes a proposal to the other party and that other party signifies his assent. These definitions shows that a contract is an agreement; an agreement is a promise and a promise is an accepted proposal. Following are the characteristics of agreement:

(a) Plurality of Persons :

There must be two or more persons to make an agreement because one person cannot enter into an agreement with himself.

(b) Consensus ad idem ::

It means that both the parties to an agreement must agree about the subject matter of the agreement in the same sense and at the same time. The term consensus means identity of minds.

EXAMPLES ::

(a) A has two cycles X and Y. A sells X cycle. B thinks he is buying Y cycle. There is no consensus ad idem so no agreement.

2. ENFORCEABILITY ::

An agreement is enforceable if it is recognized by courts. In order to be enforceable by law, the agreement must create legal obligations between the parties. Thus, the term agreement is wider than a contract. All contracts are agreements but all agreements are not contracts. Agreements are of two types:

(a) Social Agreements ::

Social agreements are not enforceable because they do not create legal obligations between the parties. In such agreements the parties do not intend to create legal relations.

(b) Legal agreements ::

Legal agreements are enforceable because they create legal obligations between the parties. In such agreements the parties intend to create legal relations.

EXAMPLES ::

(a) A invites b to a dinner. B accepts the invitation but does not attend. A cannot sue B for damages. It is a social agreement.

(b) A promises to sell his car to B for Rs. 2 lac. It is a legal agreement because it creates legal obligations. This agreement is a contract.

Essentials Of A Valid Contract ::

A valid contract is binding and enforceable. In valid contract all the parties are legally bound to perform the contract. It is a contract which can be enforced by either of the parties. If either party refuses to perform the contract, the other can enforce it by a court. To be enforceable, an agreement must possess essentials of a valid contracts.

According to section 10, " All agreements are contracts if they are made by 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 a law regarding writing, attestation of registration."

The essentials of a valid contract are as follow:

1. Offer And Acceptance ::

For an agreement, there must be a lawful offer by one party and a lawful acceptance of that offer from the other party. The term lawful means that the offer and acceptance must satisfy the requirements of Contract Act.

2. Legal Obligations ::

The parties to an agreement must create legal obligations. It means that if one of them does not fulfill his part of promise, he shall be liable for beach of contract. It is presumed in commercial agreements that parties intend to create legal relations.

EXAMPLES ::

(a) A father promises to pay his son Rs. 500 as pocket money. Later, he refuses to pay . The son cannot recover as it is a social agreement.

(b) A offers to sell his watch to B for Rs. 200. B agrees to buy. It is a contract as it creates legal relationship.

(c) A husband promised to pay his wife an allowance of 30 pounds every month. Later, the parties separated and the husband failed to pay. The wife sued. Held, that the wife was not entitled as agreement did not create legal obligations. ( Belfour vs. Belfour )

3. Lawful consideration ::

Consideration may be some benefit to the other party. It is the price paid by one party for the promise of the other party. An agreement is enforceable only when both the parties get and give something. The something given or obtained is called consideration. Consideration must be lawful as well.

EXAMPLES ::

(a) A agrees to sell his house to B for Rs. 10 lac. For A Rs. 10 lac is consideration and for B house is the consideration.

(b) A promises B a job in public service and B promises to pay Rs. 1 lac to A. The agreement is void as the consideration is unlawful.

4. Capacity Of Parties ::

An agreement is enforceable only if it is made by parties who are competent to contract. To be competent to contract, the parties must be the age of majority and of sound mind and must not be disqualified from contracting by law. A contract by a person of unsound mind is void ab-initio ( from the beginning )

EXAMPLES ::

(a) M, a person of unsound mind agrees to sell his house to S for Rs. 2 lac. It is not a valid contract because M is not competent to contract.

(b) A, aged 20 promises to sell his car to B for Rs. 3 lac. It is a valid contract because A is competent to the contract.

5. Free Consent ::

Consent means that the parties must agree upon the same thing in the same sense. For a valid contract, it is necessary that the consent of parties must be free.

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. ( Sec. 14)

EXAMPLES ::

A compels B to enter into a contract on the point of pistol. It is not a valid contract as the consent of B is not free.

6. Lawful Object ::

It is also necessary that agreement should be made for a lawful object. The object of agreement must not be fraudulent, illegal, immoral opposed to public policy, imply injury to the person or property of another. Every agreement, with unlawful object or consideration is illegal and therefore void. ( Sec. 23)

EXAMPLES ::

(a) A, promises to pay B Rs. 5000 if B beats C. The agreement is illegal as its object if unlawful.

(b) A hires a house to use for gambling. The object of the agreement is unlawful, so it is illegal.

7. Writing and registration

A contract may be oral or in writing. It is preferable that the contract should be in writing because it is easy to prove in court. If required by law, a particular contract must be in writing, signed, attested by witnesses and registered: e.g. sale and mortgage of land.

EXAMPLES :

(a) X verbally promises to sell his book to Y for Rs. 200. It is a valid contract because the law does not require it to be in writing.

(b) A verbally promises to sell his house to B. It is not a valid contract because the law requires it to be in writing.

8. Certainty Of Terms :

According to section 29. " Agreement, 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.

EXAMPLES :

(a) A promises to sell 20 books to B without specifying their titles. The agreement is void because the terms are not clear.

(b) A agrees to sell B a 100 kg of oil without informing the kind of oil. The agreement is void because of its uncertainty.

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

9.Possibility Of Performance :

The valid contract must be capable of being performed. An agreement to do an impossible act is void. If the act is legally or physically impossible to be performed, the agreement cannot be enforced by law. ( Sec.56)

EXAMPLES :

(a) A agrees with B to discover a treasure by magic, the agreement is not enforceable.

(b) A agrees with B to put life into B's dead brother. The agreement is void as it is impossible to perform.

10. Not Expressly Declared Void :

For a valid contract, the agreement must not be one of those, which have been expressly declared to be void by the law. Section 24-30 explain certain agreements which have been expressly declared to be void. An agreement, in restraint of trade and of wager has been expressly declared void.

EXAMPLES :

(a) A promises to close his business on the promise of B to pay him Rs. 2 lac is a void agreement because it is in restraint of trade.

(b) A promises to pay Rs. 2000 to B if Pakistan wins the world cup final. The agreement is void being a wagering agreement.