The Contract Act, 1872

One of the types of Law is ‘Business Law’ or ‘Mercantile Law’

Introduction to Contract Act, 1872

 Passed in 1872
 Came into force on 1st September, 1872.
 Passed by the then British India in the Indian Parliament.
 It extends to the whole of Pakistan.

Contract Coverage

 Nature of Contract
 Consideration
 Other essential elements of a valid contract
 Performance of Contract
 Breach of Contract
 Contingent and Quasi Contracts

Overview of ‘Nature of Contract’

 What is contract? (nature, definition)

 Types of Contract
 Offer (definition, rules to a proper offer, how it gets lapsed)
 Acceptance (definition, proper rules to acceptance)
 Communication (how an offer and acceptance need to be
communicated and when is communication is complete)
 Essential elements of a Contract

What is a Contract?
2(h): Contract is an agreement enforceable by law.

2(e) Every promise or set of promises forming consideration for each

other is an agreement.

Eg if someone says something and we agree then that is an agreement

eg if someone says will you buy my bike, then if I say yes I will, then it is
an agreement between two parties. First person is promising that he
will transfer his ownership of bike and the other says he will give him
20K in return. Hence two promises are being made; i.e. we have a set
of promises.

One person’s promise is return or consideration for the other person

and vice-versa.

What is meant by promise:

A proposal when accepted becomes a promise. (the word promise is

not defined in Contract Act, 1872)

1. Offer/proposal made…acceptance….leads to promise

2. A promise or set of promises forming consideration for each other is
an agreement
3. When this agreement becomes enforceable by law, it becomes a
contract

2(a) 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.

Signifies means to express or communicate… communicate what?

Communicate his willingness to do or not do sth… why did he
communicate? To obtain assent for acceptance or agreement of the
other party.

2(b) Acceptance: when the person to whom the proposal is made

signifies his assent thereto, he is said to have accepted the proposal.

Steps:

1. the initiation of all contracts starts with offer/proposal.

2. When offer is accepted, it becomes a promise.
3. Promise/set of promises forming consideration for each other leads
to agreement.
4. Agreement becomes contract when it is enforceable by law. (if one
person does not honour his promise now, the other can take legal
recourse, he can file a suit/case.)

What things are required in an agreement to make it enforceable by

law:
1. Intention to create legal relationship (when both parties think
that if the other party does not honour his promise, he will take
legal recourse; this is called intention to create legal relationship)
2. Lawful consideration (consideration is something in return; but
consideration has to be lawful; eg supply of contraband is not
lawful consideration and hence no enforceability of law to the
contract will be available)
3. Lawful object (if the motive of the contract is not lawful then
agreement not enforceable y law. Eg payment for smuggling in
gold; now here consideration is lawful but object is not and hence
not enforceable by law)
4. Capacity to contract
5. Free Consent (the agreement should be free of any force; both
offer and acceptance should be of free consent)
6. Agreement not expressly declared void or illegal ( eg murdering,
rape is illegal. These have been expressly stated in PPC. Hence no
contract to murder someone will be enforceable by law)
7. Certainty of meaning (the terms and conditions of the contract
should be certain. Eg A says to B will you buy my bike; now this is
not a valid offer because it doesn’t state at how much price he
will sell his bike; it is only a statement and not an offer. It will be
an offer if he says will you purchase my bike for 20K. so if
meaning, subject matter, and consideration is certain, only then
contract is valid)
8. Possibility of performance of an agreement ( every promise
should be humanly possible to perform; eg a human can’t bring
back to life a dead person; similarly it is humanely impossible to
build five floors of a building in two days)
 9. Necessary legal formalities (eg if I buy a property, it will have to
have certain formalities eg agreement should be in writing, signed
by both parties, registered by registrar, it will only registered if
stamp duty is paid; another example is a gift deed)

Example

In this example B has legal remedy available in this case because proper
offer and acceptance done. Consideration was there. Agreement
signed. This agreement is enforceable by law because it meets all the 9
prerequisites of essential elements. Eg lawful consideration, lawful
object, not expressly prohibited by law etc etc.

Court will ask A to hand over the TV to B and take payment in this case
as it is a valid contract will all the essential elements to it.
Types of Contracts of the Basis of Validity:

1. Valid contract: an agreement with all the essential elements of a

contract.
2. Void/Null/Invalid Contract: an agreement which does not contain all
the essential elements of a contract.

Void contract has been defined in Contract Act 1872 as ‘A contract

which ceases to be enforceable by law’.

Ceases means that the contract started as a valid contract but after a
point it ceased to be a valid contract. I.e. later on some essential
element goes missing. Eg A deals in liquor. B purchases liquor. The
condition was that the delivery will happen after a month. Before
month end, a law was passed and trading in liquor was banned by law.
Now A cant supply liquor because it would be a crime. Now the object
of the contract becomes illegal hence an essential element goes missing
and hence contract becomes void.

3. Voidable Contract: it is cancelable at the option of one party. Law

never allows it but only in special situations/circumstances.

Contract Act, 1872 defines Voidable contract as ‘a contract which is

enforceable by law at the option of one party but not at the option
of the other party’

Ie only one party has the right to enforce it or stop it from being
enforceable.

But should only one party have this option?

Q: when does contract become voidable?

A: when free consent is absent in the contract ie when acceptance is

given under force or the party was defrauded, then the consent is not
free. In this scenario the contract is voidable.

Q: When is free consent said to be absent?

A: when following are present:

a. Coercion (applying physical pressure eg telling somebody at

gunpoint to transfer the ownership of the flat to his name… but
this contract didn’t have a valid acceptance… acceptance was
made under pressure. The contract will become voidable at the
option of the aggrieved party, he has this option)
b. Undue influence (unnecessary/unwarranted power to change
the will or convince. Eg if a spiritual guru asks his disciple to
 donate 10M, the disciple will donate because he is under
undue influence… law says this is not correct. This dominance
is not physical… its mental or psychological….consent is under
emotional or mental pressure… the disciple is not applying his
mind rationally….disciple has the option.. he is aggrieved party)
c. Fraud (if I tell someone that the pen I am selling is imported
but it’s not. I charge exorbitant price for a locally made pen by
presenting it as an important… I am cheating you deliberately.
This is a case of fraud and law says free consent is absent
because agreement is induced by deception)
d. Misrepresentation (also sometimes called innocent fraud.
similar to fraud but here I also believe that the pen is made in
USAA… that is it’s imported. Yet the law says free consent is
absent in this case also and hence contract is voidable)
e. Mistake (even though free consent is absent, contract dosnt
become voidable if it made on account of mistake)

Illegal Conract: Forbidden by Law

These contracts are expressly forbidden by law. Eg A tells B to kill C for
him. B will kill C for A and A will pay him money. Now this is an example
of an illegal contract because law prohibits you from murdering
someone. Same is the case for smuggling contract, rob someone for
you. This is because Pakistani law has designated these acts as crimes.
Hence law will not afford enforceability to such contracts. These
contract don’t have any standing in the court. If A refuses to pay B, B
cant go to court because instead of recovery he will be punished under
relevant law. Neighter can A go to court if B does not kill C at A’s behest
despite taking payment.

Note: Illegal contracts are essentially illegal agreements: beause for

any agreement to become contract it has to have enforceability of law
and such agreements never get enforceability of law and hence never
becaome contracts.

So all illegal agreements are void. In illegal agreements no rights and

liabilities exist/arise.

All illegal contracts are void but not all void contracts are illegal.

Venn Diagrram to depict this scenario:

What is collateral agreement: collateral means sth which is linked,
something which is running along the primary thing.

Collatratal agreement means an agreement which is linked with the

main agreement. For eg A contracted with B that he will sell godown
to him for PKR 10K. B will give him 10K. this is the main contract. Now
there is another person C who will give loan to B because B doesn’t
have money on him right now at interest at 10%. This is a second
contract between B and C. First contract was main contract between
A and B. Second contract is linked with the primary contract.

Now lets assume C advances the loan to B and before B making the
payment to A, godown gets destroyed by lightening. Now first
contract becomes viod. But second contract (collateral contract) stays
valid.

Note: Collateral contract of a void contract is valid but collateral

contract of an illegal contract is always void.
X contracts with Y to smuggle gold. X will give 50% to Y of the
proceeds. This is an illegal contract. Y tells Z to help him in smuggling
and will give 25% to Z. now there are two contracts. Main contract is
between X and Y; collateral/secondary contract is between Y and Z.
Here, both contracts are illegal because main contract is illegal and
hence void.

Void-ab-initio means void since the initiation or start.