CONTRACT

By Taha Abid
 CONTRACT
• DEFINITION
According to Section 2(h) of the Contract Act,
“An agreement enforceable by law is a contract.”
• From the above definitions it is clear that a contract consists of two
elements:
(1) An agreement.
(2) The agreement should be enforceable
• (1) AGREEMENT
According to Section 2(e)
“Every promise and every set of promise forming the consideration for each
other, is an agreement.”
• Promise
• Proposal/Offer
• Consideration
• Proposal
“when one person signifies to another his willingness to do or to abstain from
doing any thing, with a view to obtaining the assent of that other to such act or
abstinence he is said to make a proposal.”
Promise
A proposal when accepted becomes a promise.
All contracts are agreements but all agreements
are not contracts.
• 2) Enforceability
Enforceability is the second requirement of contract. An agreement is said to
be enforceable if it is recognized by courts. In order to be enforceable by law,
the agreement must create legal obligations between the parties
• (a)Social agreements
• (b)Legal agreements
All contracts are agreements but all agreements
are not contracts.
• Social agreements are social in nature and do no enjoy the benefits of law. In
such agreements the parties do not intend to create legal relations.
• Legal agreements are contracts because they create legal obligations between
the parties. In business agreements it is presumed that the parties intend to
create legal relations so all business agreements are in other words contracts.
All contracts are agreements but all agreements
are not contracts.
Example :

• (a) A invites B to a dinner. B accepts the invitation but does not attend it A
cannot sue B for damages. It is a social agreement because it does not create legal
obligation. It is not a contract.

• (b) A promise to sell his car to B for Rs.2 lac. It is a legal agreement because it
creates legal obligations between the parties. This agreement is also a contract.
 CLASSIFICATION OF CONTRACTS
• The contracts can be divided in the following three main groups.

1. According to enforceability.
2. According to formation.
3. According to performance.
 ENFORCEABILITY:
According to enforceability, a contract can be divided into the following kinds:
1. VALID CONTRACT
2. VOID AGREEMENT
3. VOID CONTRACT
• IMPOSSIBILITY OF PERFORMANCE
• SUBSEQUENT ILLEGALITY
• REJECTION OF VOIDABLE CONTRACT
4. VOIDABLE CONTRACT
5. UNINFORCEABALE CONTRACT
6. ILLEGAL AGREEMENT
 VALID CONTRACT
• A valid contract, is an agreement enforceable by law. An agreement becomes enforceable by law when all the essentials of a valid contract as
explained by section 10 are present. If even one is missing, there, is no valid contract.
• Sec 10 states “All agreements are contracts if they made by free consent of parties, competent to contract, for lawful consideration and
with lawful object, and are not hereby expressly declared to be void. Where necessary, the agreement must satisfy the requirements of law
regarding writing, attestation or registration.

EXAMPLE:

A Proposes to sell his car to B for Rs.2 lac and B accepts the proposal. If A and B both possess contractual capacity and B is consent is
free, thee is a valid contract between A and B.
 ESSENTIALS OF A VALID CONTRACT:

• OFFERS AND ACCEPTANCE

An offer is the starting point of a contract. In order to form an agreement,
there must be an offer by one party and acceptance of that offer by the other
party.
Example : C offers to sell his cycle to B for Rs.4000. It is an offer. If B accepts
the offer, there is an acceptance.
• Legal obligations
The parties to an agreement must create legal obligations. It means that if one party does not
fulfill his promise, he shall be liable for breach of contract.
Example :
• A offers to sell his watch to B for Rs.200 and B agrees to buy it at the same price, there is a
contract as it creates legal-relationship between them.
• A father promises to pay his son Rs.5000 every month as pocket money. Later, he refuses to
pay. The son cannot recover as it is a social agreement and does not create legal relations.
• LAWFUL CONSIDERATION
The third essential of a valid contract is the presence of consideration.
Consideration is “something in return.” It may be some benefit to the party.
Consideration has been defined as the price paid by one party for the promise of the
other. An agreement is enforceable only when both the parties get something and give
something.
• Example :
C agrees to sell his house to B for Rs.80Lac .80Lac is consideration for C and
house is the consideration for B.
• CAPACITY OF PARTIES
An agreement is enforceable only if it is entered into by parties who possess contractual
capacity. It means that the parities to an agreement must be competent to contract. According to
Section 11, in order to be competent to contract the parties must be of the age of majority and of
sound mind and must not be disqualified from contracting by any law to which they are subject.
A contract by a person of unsound mind is void ab-initio (from the beginning).
• Example :
M, a person of unsound mind, enters into an agreement with S to sell his house for Rs.2
lac. It is not a valid contract because M is not competent to contract.
• A, aged 20 promises to sell his car to B for Rs.3 Lac. It is a valid contract because A is competent
to contract.
• FREE CONSENT
For a valid contract it is necessary that the consent of parties to the contact must be
free.
• Example :
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.
• LAWFULL OBJECT
• It is also necessary that agreement should be made for a lawful object. The object
for which the agreement has been entered into must not be fraudulent, illegal,
immoral, or opposed to public policy or must not imply injury to the person or
property of another. Every agreement of which the object or consideration is
unlawful is illegal and the therefore void.
• Example :
B rents a house to use it for gambling. The object of the agreement is unlawful so
agreement is illegal and void.
• WRITING AND REGISTRATION
According to Contract Act, a contract may be oral or in writing.
Although in practice, it is always in the interest of the parties that the contract
should be made in writing so that it may be convenient to prove in the court.
However, a verbal contract if proved in the court will not be considered invalid
merely on the ground that it not in writing. It is essential for the validity of a
contact that it must be in writing signed and attested by witness and registered.
• CERTAINITY OF TERMS
According to Section 29 of the Contract Act, “Agreements the meaning
of which are not certain or capable of being made certain are void.” The terms
and conditions of an agreement must be clear and certain.
Example : C agrees to sell 20books to B without specifying their titles. The
agreement is void because the terms are not clear.
• POSSIBILITY OF PERFORMANCE
Section 56 states that. “An agreement to do an act impossible in itself is void.” If the act is
legally or physically impossible to perform, the agreement cannot be enforced at law.
Example :
• A agrees with B to discover treasure by magic, the agreement is not enforceable.
• A agrees with B to put life into B’s dead brother. The agreement is void as it is impossible of
performance.
• NOT EXPRESSLY DECLARED VOID
• An agreement must not be one of those, which have been expressly declared
to be void by the Act. Section 24-30 explains certain types of agreement,
which have been expressly declared to be void.
 VOID AGREEMENT

• An agreement which is not enforceable by law is void agreement. It does not create legal
obligations among the parties. It is void ab-initio(from the beginning). In void agreement
there is absence of any essential of a valid contract except free consent. An agreement with
minor and agreement without consideration are void agreements.[sec2(g)]
• In void agreement, the party who has received any benefit is bound to return it to the party
from whom he received it . Both parties are not responsible for the performance of
agreement.
• Example :
C promises to buy dog from B for Rs.10000. The dog was dead before the agreement was
made but the parties were unaware. The agreement is void.
 VOID CONTRACT
• Section 2(j) states,
• “A contract which ceases to be enforceable by law becomes void when it
ceases to be enforceable.”
It means a void contract is valid contract when it is made but later on it
becomes void due to certain reasons.
 VOID CONTRACT
A contract becomes void under following circumstances.
• Impossibility of performance
• Subsequent illegality
• Rejection of Voidable Contract
• Impossibility of Depending Event
 IMPOSSIBILITY OF PERFORMANCE
• A contract becomes void when it becomes impossible to be performed by
any party due to any reason.[Sec.56]
• Example:
I )Death of either party
II) C agrees to sell his house to B after two days. The house burnt the next day
. The contract becomes void due to impossibility of performance.
 SUBSEQUENT ILLEGALITY
• 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 contract illegal, the contract becomes void.
[Sec.56]
• 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.
 REJECTION OF VOIDABLE CONTRACT

• If the consent of one party is not free the contract is voidable. The party
whose consent is not free has the right to reject or accept the contract. A
voidable contract becomes void when the party whose consent is not free
rejects the contract. [Sec.19]
• Example:
C forcibly buys B’s car for Rs80000. The contract is voidable at the option of
B. B may accept or reject the contract . If B rejects the contract it becomes
void.
 IMPOSSIBILITY OF DEPENDING
EVENTS
• The performance of a contingent(if-then agreement) contract depends upon the
occurrence or non-occurrence of a certain event. It becomes void when that even
does not occur. [Sec.32]
• Example :
• C contracts to give Rs.1 Lac to B, if B gets admission in Hailey College .B fails to
get admission. The contract becomes void.
• A contracts to pay B, a sum of 10,000 if B's house is burnt, it is a valid
contingent contract
• Contract of insurance is another example of contingent contract.
 VOIDABLE CONTRACT
• A voidable contract takes place when the consent of one of the parties is not free.
It is a valid contract until it is avoided by the party having the right to avoid it. Once
it is avoided it becomes void. But if the party chooses to affirm it, the contract
continuous to be valid.
• A contract becomes voidable when the consent of one of the parties to the
contract is obtained by coercion undue influence, misrepresentation or fraud.
• Example :
A agrees to buy B’s factory for Rs.10 Lac . A consent to this agreement is obtained by
fraud. The contract is voidable at the option of A.
 UNENFORECEABLE CONTRACT
• It is contract which can not be enforced by the court due to some technical
defects. The technical defects maybe absence of writing , registration, stamp
etc. when the technical defects are removed the contract becomes
enforceable.
 ILLEGAL AGREEMENT
• An agreement is illegal if it is forbidden by law. The object of illegal
agreement is unlawful. There is punishment for the parties who make illegal
agreement.
• Example :
• A gives money to B, to buy smuggled goods. The agreement is illegal and the
money can not be recovered.
 ACCORDING TO FORMATION
• According to formation, a contract can be divided into the following three kinds:
• 1. EXPRESS CONTRACT
• 2. IMPLIED CONTRACT
• 3. CONSTRUCTIVE OR QUASI CONTRACT
 EXPRESS CONTRACT
• Where the offer or acceptance is made in words spoken or written, it is an express contract.
It can also be defined in this way that an express contract is one in which the parties
directly state the terms of the contract orally or in writing at the time the contract is made.
• EXAMPLE:
A tells on telephone to B that he wants to sell his car for Rs.3 lac and B informs A that
he agrees to purchase the car, there is an express contract.
 IMPLIED CONTRACT
• Where the offer or acceptance is made, otherwise than in words, it is an implied contract.
Implied contract is one, which is not made by words, written or spoken, but by the acts
and conduct of the parties thereto. It arises when one person, without being requested to do so,
renders services under circumstances indicating that he expects to be paid for them, and the other
person, known such circumstances, accepts the benefit of those services.
Example :
A, a Railway Coolie carries the luggage of B in order to carry it out of the railway station without
being asked by B, and B allows him to do so. The conduct of B shows that he is a ready to pay to A
for the services. It is an implied contract.
B went to a restaurant and had a cup of tea. It is an implied contract and B must pay for the cup of
tea.
 CONSTRUCTIVE OR QUASI CONTRACT

• A quasi contract is not a contract. It is an obligation created by law in the absence

of a contract. It is based on principle of equity that a person shall not be allowed to
get benefit at the cost of another. It is also called constructive contract.
• Example :
• A, finder of lost goods is under a obligation find out the true owner and return the
goods.
 ACCORDING TO PERFORMANCE
1. EXECUTED CONTRACT
• Executed means that which is done. A contract is said to be executed when both the
parties have completely performed their obligations. It means that nothing remains
to be done by either party under the contract.
• Example : A, purchased a book from B for Rs.200 and paid the price on the spot. It
is an executed contract because both the parties have performed their duties.
• 2. EXECUTORY CONTRACT
• Executory means that which remains to be done. In other words a, contract is said to be
executory when both the parties to a contract have yet to perform their obligations.
• Example :M promise to sell his car to N for Rs.2 lac and N pays only Rs.50,000 as advance
money and promise to pay the balance later. M gives the possession of car to N and
promises to transfer ownership on receipt of full amount. The contract between M and N is
executory because there remains something to be done on both sides.
• A agrees to teach B, from the next month and B promises to pay Rs.800 to A. It is an
executory contract because the promises are yet to be performed.
 ACCORDING TO PARTIES
• UNILATERAL CONTRACT
It is a one sided contract. It is a contract where one party makes a promise in
exchange for performance of a particular act by any party.
Example : A promised to pay Rs.1,000 to any one who found his lost bag. B
found the bag and returned it to A. It is an unilateral contract which comes into
existence when the bag is found.
• BILATERAL CONTRACT
It is a two sided contract. In this contract both the parties exchange mutual promises.
It is similar to executory contract and is also known as contract with executory
consideration.
Example :
C promises to paint a picture for B and B promises to pay Rs.5000 to C. It is a bilateral
contract
OFFER AND
ACCEPTANCE
BY TAHA ABID
OFFER

DEFINITION
 The words proposal and offer are synonymous and are used
interchangeably. Section 2(a) defines a proposal as “when one
person signifies to another his willingness to do or to abstain from
doing any thing, with a view to obtaining the assent of that other to
such act or abstinence he is said to make a proposal.”
 This definition of an offer consists of two parts.

 (1) There must be an expression of the willingness by one to

another to do or to abstain from doing something.

 (2) The expression of willingness must be made to obtain the

assent of the other person to such act or abstinence.
 The offer must be made with the intention of creating legal relations; otherwise,
there will be no agreement.

 EXAMPLE:-

 (i) A offer to sell his watch to B for Rs.100 A is making an offer to B.

 (ii) A says to B I am willing to sell my car for Rs.3 Lac Are you interested to
buy it. A makes an offer to B.

 (iii) A to B I will not sue you if you pay me a compensation of Rs50000. A makes
an offer.
 OFFEROR: The person making the offer is called the offeror or
promisor.

 OFFEREE: The person to whom the offer is made is called the

offeree or promisee .
 PROMISEE: The person who accepts the offer is called promisee or
acceptor.
ESSENTIALS OF A VALID OFFER

 (1) IT MAY BE EXPRESS OR IMPLIED

 Express Offer
An offer may be made either by words or by conduct. An offer, which
is made by words spoken or written, is called an express offer.

 Implied Offer
The offer, which is made by the conduct of a person, is called an
implied offer.
Implied offer example

 When we are waiting for a bus to go to a certain place, the bus

which can take us to the place where we desire to go arrives and
halts at the bus stop.
 You go to the hotel and have a dinner waiter expects you to pay
the bill.
 A railway coolie carries the luggage of B without asking. B allows
him to do it is an implied offer.
(2) IT MUST CREATE LEGAL
RELATIONS
 The offer must be made in order to create legal relations otherwise,
there will be no agreement. If an offer does not create legal
relations between parties, it is not a valid offer
 Example:
 A invites B to dinner B accept the invitation. It does not create any
legal relations. It is a social agreement.
 A offers to sell his watch to B for Rs.200 and B agrees. There is an
agreement because here the parties intend to create legal
relations.
 Three friends joined to enter a newspaper competition and agreed
to share any winnings. It was held the intended to create legal
relations and their agreement was therefore a contract
(3) IT MUST BE DEFINITE & CLEAR

 An offer must be definite and clear, if the terms of an offer are not
definite and clear, it cannot be called a valid offer. If such offer is
accepted it cannot create a binding contract.
 Example
A has two motorcycles. He offers B to sell one motorcycle for Rs.27,000.
It is not a valid offer because it is not clear that which motor cycle A
wanted to sell.
(4) IT IS DIFFEENT FROM INVITATION
TO OFFER
 An invitation to offer is not an offer. In an invitation to offer, the
person does not make an offer but only invites the other party to
make an offer.
 Example:
 Display of goods in an auction sale is not an offer rather it is an
invitation to offer. The offer will come from the buyer in the form of
bids.
 Quotations, Catalogues of prices, display of goods with prices issue
of prospectus by companies are examples of invitation to offer
(5) IT MAY BE SPECIFIC OR GENERAL

 Specific offer
 When an offer is made to a specified person or group of persons, it is
called specific offer. Such an offer can be accepted only by the
person or persons to whom it is made.
 Example :
 M makes an offer to N to sell his bicycle for Rs.800, it is a specific
offer. In this case, only N can accept it.
 CSB Co. advertised to pay $100 to any person who suffered from
flue after using their medicine. C used the medicine and caught
flue. C sued for the reward . The company was held liable.(Carlill vs
carbolic Smoke Balls Co)
 General offer
 A general offer, on the other hand, is one, which is made to public
in general and it may be accepted by any person who fulfils the
conditions mentioned in it.
 Example :
 A announces in a newspaper a reward of Rs.1,000 for any one who
will return his lost radio. It is general offer.
(6) IT MUST BE COMMUNICATED TO
THE OFFEREE
 An offer is effective only when it is communicated to the offeree. If
an offer is not communicated to the offeree it cannot be
accepted.
 An acceptance of the offer without having knowledge of such offer
is not a valid acceptance and does not create any legal
obligations. Thus an offer, which is not communicated, is not a valid
offer. It applies to both specific and general offers.
 Example
A without knowing that a reward has been offered for the arrest of a
particular criminal, catches the criminal and informs the police. A
cannot recover the reward as he was not aware of it.
(7) IT SHOULD NOT CONTAIN
NEGATIVE CONDITION
 An offer must not contain negative condition. An offeror cannot say
that if acceptance is not communicated up to a certain date, the
offer would be presumed to have been accepted. If the offeree
does not reply, there is no contract, because no obligation to reply
can be imposed on him, on the ground of justice no agreement
because such condition cannot be imposed on the offeree.
 Example
 A wrote to B offering to sell his book for Rs.500 adding that if he
didn’t reply with in 5 days, the offeree would be presumed to have
been accepted. There is no agreement b/c such condition can’t
be imposed on the offeree. It is only a one sided offer.
(8) IT MAY BE SUBJECT TO ANY
TERMS & CONDITIONS
 An offeror may attach any terms and conditions to the offer he
makes. He may even prescribe the mode of acceptance. There is
no contract, unless all the terms of the offer are accepted in the
mode prescribed by the offeror.
 Example:
A asks B to send the reply of his offer by telegram but B sends reply by
letter, A may reject such acceptance because it is opposed to the
prescribed mode of communication.
(9) IT MUST NOT CONTAIN CROSS
OFFERS
 When two parties make similar offers to each other, in ignorance of
each other’s such offers are called cross-offers. The acceptance of
cross-offers does not result in complete agreement.
 A writes to B to sell him 1 ton of iron for Rs.1Lac. On the same day, B
writes to A to buy 1 ton of iron for Rs.1 Lac. It is a cross offer.
REVOCATION OR TERMINATION OF
OFFER
 According to Section 6, an offer may come to an end in any of the
following ways:
 Notice of revocation
 Lapse of time
 Failure to fulfill condition
 Revocation of offer by offeree
 Counter offer by the offeree
 Death or insanity of the offerer or offeree
 Subsequent illegality
 Destruction of subject matter
 Prescribed manner
(1)NOTICE OF REVOCATION

 The offer can be revoked at any time by sending a notice of

revocation to the party, before its acceptance.
 Example
A, the offeror at an auction sale makes the highest bid. But he has the
right to withdraw (revoke) the bid (offer) is revoked before the fall of
hammer.
(2) LAPSE OF TIME

 When the offer states that, the it is open until a particular date the
offer terminates on that date if it is not accepted by that time.
 Example
A offers to sell his car to B and asks him to reply within 5days. If B does
not reply within 5days, the offer terminates.
(3) FAILURE TO FULFILL CONDITION

 If an offer contains some conditions and the offeree has taken

responsibility to fulfill such conditions and if the offeree fails to fulfill
such conditions the offer terminates.
 Example :
A offer to sell his scooter to B for Rs.48,000 if B gets admission in medical
college. If B fails to get admission the offer will stand revoked as he fails
to fulfill the conditions.
(4) REVOCATION OF OFFER BY
OFFEREE
 If the offeree rejects the offer and communicates the rejection to
the offeror, the offer shall terminate even though the period for
which the offer was kept open may not have yet expired. The
rejection may be by words spoken or written.
 Example :
C offers to sell his car to B and keeps the offer open for 10days. B
refuses after 3days. The offer terminates.
(5) COUNTER OFFER BY THE OFFEREE

 When an offeree instead of accepting the original offer makes a

fresh offer to the offeror, it is called a counter offer. The original offer
terminates when a counter offer is made.
 Example :
 W offered to sell a farm to H for 80Lac. H offered 75Lac . W refused
the offer. Later, H offered 80lac . There was no contract as H by
offering 75Lac had rejected the original offer. ( Hyde vs Wrence)
(6) DEATH OR INSANITY OF THE OFFEROR OR
OFFEREE
 An offer terminates on death or insanity of the offeror, if the offeree
comes to know about his death or insanity before acceptance.

 An offer terminates on death or insanity of the offeree, if the offeror

comes to know about his death or insanity before acceptance.

 But in both cases if the offeror or offeree does not know about the
death or insanity of the offeror/offeree and gives acceptance it is a
valid acceptance. In such case legal representatives of the
deceased will be bound by the contract.
(7) SUBSEQUENT ILLEGALITY

 An offer terminates if it becomes illegal before its acceptance . An

offer may also terminate, when it becomes illegal due to change in
law, before its acceptance by the offeree.
 a offers to sell 100bags of rice to B for Rs.20,000. Before its
acceptance, the government puts a ban on the sale of rice. The
offer terminates.
(8) DESTRUCTION OF SUBJECT
MATTER
 An offer terminates automatically if the subject matter of the offer is
destroyed before its acceptance by the offeree.
 Example :
A offer to sell his horse to B the horse dies before the acceptance of
offer by B the offer terminates.
(9) Prescribed Manner

 If the offeror prescribes a specific manner of acceptance, the offer

terminates if the offeree does not accept according to the same
manner. If the offeror wants to reject the acceptance, he must
inform the offeree within a reasonable time, otherwise it’s
considered as accepted.
 Example :
 A offers to sell his Car to B. A asks to give acceptance by telephone
by noon . B sends acceptance through a letter. The offer terminates.
But A should inform B that it is rejected because it not in the
prescribed manner.
ACCEPTANCE

 Sec2 (b) When the person to whom proposal is made signifies his
assent thereto, the proposal is said to be accepted.
 Example :
A offer to sell his house to B for Rs.5 Lac B accepts the offer to purchase
the house for Rs.5 Lac. This is an acceptance.
ESSENTIALS OF A VALD
ACCEPTANCE
(1) IT MUST BE GIVEN BY THE OFFEREE
(2) IT MUST BE ABSOLUTE & UNCONDITIONAL
(3) IT MUST BE IN A PRESCRIBED MANNER
(4) IT MSUT BE COMMUNICATED TO THE OFFEROR
(5) IT MAY BE EXPRESS OR IMPLIED
(6) REASONABLE TIME
(7) ACCEPTANCE MUST BE OF WHOLE OFFER
(8) ACCEPTANCE BEFORE THE REVOCATION OF OFFER
(1) IT MUST BE GIVEN BY THE
OFFEREE
 An offer can be accepted only by the person to whom it is made. It
cannot be accepted by an other person without the consent of
offeror. If anyone attempted to accept it no contract with that
person arises.
 Example: A sold his business to B without disclosing the fact to his
customers. J sent an order for the supply of goods to A by name. B
received the order and executed the same. It was held that there
was no contract between B and J because J never made any offer
to B.( Boulton vs jones)
 2) X offered to sell his house to Y . Y or his agent can accept the
offer.
(2) IT MUST BE ABSOLUTE &
UNCONDITIONAL
 In order to convert the offer into an agreement the acceptance
must be absolute and unconditional. If the offeree imposes any
condition in his acceptance it is not a valid acceptance but a
counter offer.
 Example:
 C offers to sell his watch to B for Rs.500. B replies that he can buy it
for Rs. 450. It is not a valid acceptance.
 M offered to sell land to N for $280. N accepted and sent $80 with a
promise to pay the balance by monthly installments of $50 each.
There was no contract as the acceptance was conditional.( Neale
vs Merret).
(3) IT MUST BE IN A PRESCRIBED
MANNER
 If the offeror in his offer has prescribed any particular manner of
acceptance it must be given according to all that particular
manner. If no particular manner is prescribed in the offer then
acceptance should be made in a reasonable manner.
Example:
 A makes an offer to B and writes “if you accept the offer send your
acceptance by telegram.” B sends his acceptance by registered
post. It is not a valid acceptance. But a should inform B that it is
rejected because it not in the prescribed manner.
(4) IT MUST BE COMMUNICATED TO
THE OFFEROR
 In order to form a contract, the acceptance must be
communicated to the offeror in a clear manner by the offeree or his
authorized agent. Mere expression of intention to accept an offer is
not a valid acceptance.
 Example:
 A proposes by letter to purchase B’s house. B expresses his intention
to sell it to A but does not send a reply to him. The house is sold to C
despite B’s intention. A has no legal remedy against B.
(5) IT MAY BE EXPRESS OR IMPLIED

 When an acceptance is given by words spoken or written, it is

called express acceptance. When it is given by conduct, it is called
implied acceptance. Sometimes the proposal instead of being
made to a definite person is made to the public.
 Example:
 A wrote a letter to B to sell his cycle for Rs.2,000. B accepted his offer
and sent a letter of acceptance to A. It is an express acceptance.
 In an auction sale, when the bidder strikes a hammer on the table,
there is an implied acceptance.
(6) REASONABLE TIME

 If the offeror specifies a time period for the acceptance in his offer,
the offeree must give the acceptance within that time period. If no
time period is specified, the acceptance must be given writing
reasonable time . The reasonable time depends upon the
circumstances of each case.
(7) ACCEPTANCE MUST BE OF
WHOLE OFFER
 Offeree must accept whole of the offer. If offeree accepts some of
the terms of offer and does not accept other terms, such
acceptance is not valid.
 Example :
 A proposes B to sell him 100 bags of sugar at Rs.1000 per bag . B
accepts the proposal but promises to buy 50 bags only. The
acceptance is not valid because it is acceptance of price only and
not of the quantity.
(8) ACCEPTANCE BEFORE THE
REVOCATION OF OFFER
 Acceptance must be given before the offer is revoked. An offer
stands revoked in the following cases.
i. Communication of revocation by the offeror. Sec 6(1)
ii. Lapse of time :Sec 6(2)
iii. Failure to fulfill the condition Sec6(3)
iv. Death or insanity of parties. Sec 6(4)
v. Rejection of proposal by the proposee.
vi. Counter proposal by the proposee
vii. Destruction of subject matter
viii. Subsequent illegality
COMMUNICATION OF OFFER
ACCEPTANCE AND REVOCATION
1) Communication of offer
Communication of offer is complete when it comes to the knowledge
of the person to whom it is made.
It means when the offeree reads the letter containing offer, the offer
becomes effective.
Example:
A proposes, by letter, to sell a house to B. Communication of offer is
complete when B reads the letter.
2) COMMUNICATION OF ACCEPTANCE
It means that communication of acceptance is complete against the
offeror, when the letter of acceptance is posted to the offeror.
The communication of an acceptance is complete against the acceptor
when the letter of acceptance comes to the knowledge of offeror.
Example :
A offers, by letter, to sell a van to B for Rs.5Lac. The letter reaches to B on
8th March. B accepts the offer and posts a letter on 9th March. The letter
reaches A on 11th March . The communication of acceptance if complete
.
i) Against A : when letter is posted on 9th March.
ii) Against B: when letter is received by A on 11th March.
3) COMMUNICATION OF REVOCATION
Communication of revocation is complete, against the person who makes
it, when letter of revocation is posted. The communication of revocation is
complete, against the person to whom it is made, when letter of
revocation comes to his knowledge.
Example :
a) A revoked his offer by letter on 8th May. The letter reached B on 10th
May. The revocation is complete against A on 8th May , when letter is
posted. The revocation is complete against B on 10th, when letter
reaches him.
b) On October 1st , T offered by letter to sell goods to B. B received the
offer on 11th and gave his acceptance. On 18th , T wrote a letter
revoking his offer . B received the letter on 20th . A contract made on
11th and the revocation had no effect. (Byrne vs Van Timehoven)
4) Time of revocation
An offer maybe revoked any time before the communication of its
acceptance is complete against the offeror, but not afterwards. An
acceptance maybe revoked anytime before the communication of
acceptance is complete against the acceptor, but not
afterwards.(sec.5)
Example :
i)C offers to sell his book to B. C can revoke his offer before the letter of
acceptance is posted by B.
ii) P made the highest bid to purchase steel pipes from ISP Ltd. But
withdraw its bid before acceptance. P sued to recover advance
money. P was entitled to withdraw its offer and recover advance
money. (Pak Steel Products vs Indus Steel Pipes Ltd)
LOSS OF LETTER OF ACCEPTANCE

 If the letter of acceptance is delayed or lost, the following is the

effect.
 Position of Offeror
When the letter of acceptance is posted, the offeror is bound by the
acceptance even if the letter of acceptance is delayed or lost . In
order to bind the offeror, the letter must be stamped, correctly
addressed and properly posted.
 Position of Acceptor
The acceptor is not bound by the letter of acceptance till it reaches
the offeror .Until the letter of acceptance reaches the offeror, the
contract remains voidable at the option of acceptor.
FORMATION OF CONTRACT

 When both the letter of acceptance and letter of revocation of

acceptance are received at the same time by the offeror, the
formation of a contract depends upon chance. If the offeror reads
the letter of acceptance, a contract will arise. But if the offeror first
reads the letter of revocation, there will be no contract.
CONTRACT OVER TELEPHONE

 The rules which apply to contracts made when parties are face to
face with each other, also apply to contracts made over
telephone. If the acceptance is no communicated properly there
will be no contract.
 The offeree must make sure that his acceptance is received ,
heared and understood by offeror otherwise there will be no
contract.
THANK YOU AND HAPPY WOMEN’S
DAY
CONSIDERATION &
OBJECT
By taha abid
CONSIDERATION

 Something in return.
 Quid pro quo : “this for that”
 “No consideration no contract”
 In order to make a valid contract it is necessary that there must be lawful
consideration.
 Term consideration refers to something of value given to someone in return
for goods, services, or some other promise.
CONSIDERATION

 Definition
Sec 2(d) “When at the desire of the promisor, the promisee or any
other person has done or abstained from doing, or does or abstains from doing
or promises to do or abstain from doing something, such act or abstinence or
promise is called Consideration”
Example :
C agrees to sell his house to B for Rs.50Lac. For C consideration is 50Lac for B
the consideration is the house.
 ESSENTIALS OF A VALID CONSIDERATION

 1)IT MUST MOVE AT THE DESIRE OF THE PROMISOR

For a valid consideration, the act or abstinence that creates a consideration must be done
at the desire of promisor. It means any act performed at the desire of third party or an act
done voluntarily does not create a valid consideration.
Example :
C gives lift to B it is a voluntarily act done by C, so can not ask for the consideration.
2)IT MAY MOVE PROMISEE OR OTHER
PERSON
 The second essential of a valid consideration is that consideration may
move from the promisee or from a third person on his behalf. In other words
the act which is to constitute consideration may be done by the promisee
or any other person.
 Example :
A contracts to pay Rs.500 to B if B repairs C’s car. B contracts to repair C’s car.
Later B refuses due to lack of consideration from C. C can sue B to enforce the
contract.
3)ACT OR ABSTINENCE

A consideration maybe an act or abstinence. An act means doing something.

When consideration is an act, it is called positive consideration. Abstinence
means not doing something . When consideration is abstinence, it is called
negative consideration.
Example :
C promises not to sue his B if B pays Rs.5000 for the damages. B promise to
pay for damages is in consideration of an abstinence.
4)IT MAY BE PAST, PRESENT OR FUTURE

It is clear from the definition of consideration that it may be past

present or future. It means that the consideration is an act, which has already
been done at the desire of the promisor, or in progress or is promised to be
done in future.
 Past Consideration:
When the act and abstinence has already been done and
subsequently a promise is made to pay remuneration for that.
Example :
A an architect, provide some professional services to B. B promises to pay
Rs.50000 for the services. The consideration is past.
 Present Consideration
When consideration is given immediately by one party to another at the time
of contract, it is called Present Consideration.
Example :
A sells a book to B and B pay its price immediately it is a case of
present consideration.
 Future Consideration
When the consideration on both sides is to be given at a future date, it
s called future consideration or executory consideration. It consists of promises
and each promise is a consideration for the other.
Example :
X promises to deliver certain goods to Y for Rs.1500 after a week upon
Y’s promise to pay the agreed price at the time of delivery.
5)ADEQUACY OF CONSIDERATION

 It is not necessary that consideration should be adequate. The law only

insists on the presence of consideration and not on its adequacy. It is for
the parties to the contract to consider the adequacy of consideration and
the courts are not concerned about it
 Example :
A agrees to sell his car worth Rs.200,000 for Rs.50,000 only and his
consent is free. The agreement is valid contract.
6)LEGAL AND CERTAIN

The consideration must be legal and certain. Where consideration is

physically impossible, illegal, uncertain or unreal there shall not be a
valid consideration. The consideration is not valid in following
circumstances.
 A promise to do something which is physically impossible.
E.g. A, promise to put life in B’s dead brother on B’s promise to pay him
Rs.1 Lac.
 A promise to do something which is illegal.
E.g. A promise to pay Rs.1 Lac to B on his promise to beat C.
 A promise to do something, which is too unclear and uncertain.
E.g. A employs B for a certain work and promises to pay a reasonable
remuneration.
EXCEPTION TO CONSIDERATION

 An agreement without consideration is void. However, the following

agreements are valid even without consideration.
 1)Natural love and Affection
The agreement made on account of natural love and affection between the
parties is valid even without consideration. If the following conditions are satisfied.
 The contract must be in writing.
 The contract must be registered according to law.
 The contract must be based on natural love and affection
 There must be near relation between the parties to the contract.
Example :
Father out of natural love and affection, promises to give 1Lac to his son. Father
puts agreement in writing and gets registered.
2)VOLUNTARY COMPENSATION

If the promise is made to compensate a person who has voluntarily done

something for the promisor. It is enforceable even without consideration.
 The services must be rendered voluntarily .
 The intention of the promisor must be to compensate the promisee.
 The services rendered must be legal.
Example :
C saves B from drowning in the river and B promises to pay Rs.10,000 to C. It is a
valid contract.
3)TIME BARRED DEBT

 A debt becomes time-barred if it is not paid or claimed for a period of

3years after the cause of action. A time barred debt is not recoverable by
the law. An agreement to pay a time barred debt is valid even without
consideration.
 Example :
C owes Rs.10000 to B but debt becomes time barred. C signs a written promise
to pay Rs.10,000 to B on the account of the debt. It is a valid contract.
4)CONTRACT OF AGENCY

 In contract of agency there are three parties

 Principal
 Agent
 Third party
Agent – deals on the behalf of principal with the third party.
 Relation between principal and agent is called contract of agency.
 The consideration is not necessary to create an agency. Generally, an agents
gets commission for his services. If the agent promises to perform any act for his
principal without charging any commission, the agreement is valid even without
consideration.
Example :
C promises to sell B’s house on his behalf without consideration it is valid contract.
5)COMPLETED GIFTS

 If a donor offers gift to donee and donee accepted the gift after
acceptance gift becomes completed gift. After its completion the donor
cant revoke its gift.
 Example :
 C transferred property to B by registered deed as a gift . It is a valid
contract even without consideration.
UNLAWFUL CONSIDERATION AND
OBJECT
 The object and consideration of an agreement must be lawful. If the
consideration or object of an agreement is unlawful, the agreement is
illegal.
 The consideration and object of an agreement is unlawful in the following
cases.
1)Forbidden by law
If the consideration or object of an agreement is forbidden by the law, the
agreement is unlawful.
Example : The sale of alcohol without license is illegal in Pakistan.
 Defeats Provisions of Law
This clause refers to those considerations and objects that are not directly
forbidden by the law but they indirectly violate law.
Evasion of sale tax and income tax income tax is defeating the provisions of
tax laws.
Example :
C fails to pay a loan he borrowed from a bank. C’s house is out in sale for
recovery of loan, according to law C can not purchase his house . C asks B to
to purchase his house and transfer it to him. The agreement is void.
FRADULENT

 If the object or consideration of an agreement is to defraud others, it is

unlawful and void.
 Example :
A is the agent of B. A agrees to sell land to X at a lesser price without telling to
B. The agreement is void.
INJURY TO THE PERSON OR PROPERTY

 If the object or consideration of the agreement is to cause injury to a

person or damage his property, it is illegal.
 Example :
An agreement to beat a man is unlawful
Y agrees with x to put a certain house on fire. The agreement is unlawful.
Immoral

 Means an act which is against the moral values of the society. If the
consideration or object of an agreement is such that the court regards it as
immoral the consideration is void.
 Example :
A woman was given money to obtain divorce from her husband and marry
the lender. The woman refused to take divorce, the agreement was immoral
and lender could not recover the money ( Bai Vilji vs Hamda Nagar)
 AGAINST PUBLIC POLICY
If the consideration or object is against welfare of society or state, it is said to
be against public policy and is unlawful.
Example : B promises to provide a government job to C. C promises to
pay him Rs.10,000. the agreement is against public policy.

 An agreement to create monopoly.

 An agreement not to bid.
Thank you !!!
CAPACITY OF PARTIES By Taha Abid
CAPACITY OF PARTIES
COMPETENT TO CONTRACT
All parties to a contract must be competent to contract. Every person is competent to
contract who is of the age of majority, of sound mind and not disqualified form
contracting by the law.
According to section 11 the following persons are incompetent to contract.
1. Minors.
2. Persons of unsound mind.
3. Persons disqualified by law.
1)MINOR
AGE OF MAJORITY
In general
According to Majority Act 1875, a minor is a person who has not attained 18 years of
age . A person is competent to contract after attaining 18 years of age.
Special cases
However, when a court appoints a guardian for a minor, the minor attains the age of
majority after 21years.
MINOR’S AGREEMENT
1)VOID AGREEMENT
An agreement with minor is void from the beginning(void-ab-initio). A minor is not
liable to perform any promise because he cannot understand the nature of a contract.
A minor cannot be compelled to return the benefit received by him under the
agreement.
Example :
A minor hires a car under an agreement that he will be liable for any damage to the
car. The agreement is not enforceable.
2)Minor and Ratification
Ratification means the acceptance of an agreement already made. The ratification by
minor is not valid . An agreement made by minor cannot be approved by him on
attaining the age of majority because an agreement which is void can not become
valid by subsequent approval.
Example :
B, a minor, makes an agreement to buy a house. The agreement is void. B can not
ratify the agreement after attaining the age of majority.
3) PROVING MINORITY
If a minor fraudulently enters into a contract showing that he has attained 18years to
age , he cannot be prevented from proving his minority in a court.
Example :
B, a minor, representing himself as 20years of age obtained a loan from C. B spend
the money. C filed a suit against B. B can apply the plea of minority .
4)Minor and Reimbursement
Generally, a minor cannot be compelled to return the money received by him under an
agreement. But where a minor enters into an agreement by fraudulently showing that
he has attained 18 years of age, the court may order to return the amount. The court
decision depends upon the circumstances of the case.
Example :
Sheill, a minor, obtained a loan from leslie by misrepresenting his age. Leslie sued for
recovery of loan. The court ordered sheill to return the loan
5)MINOR AND NECESSARIES
If a person supplies necessaries of life to minor, the supplier is entitled to recover
reasonable value of such goods from property of minor. If the minor owns no
property, the supplier can not recover anything.
Example :
A supplies necessaries to B, a minor for his life. A is entitled to recover value from B’s
property.
A supplied minor a coat with diamond buttons. A cannot recover the price of the coat.
6) GUARDIAN OF MINOR
A contract made, on behalf of minor, by his guardian is binding on the minor. It can be enforce
against the minor if the guardian is authorized to enter in to a contract and the contract is for
the benefit of the minor. The sole aim should be the benefit and welfare of the minor.
Example :
A contract of sale of immovable property by the guardian of minor, for the minor’s benefit,
may be specifically enforced by either party to the contract.
7)MINOR AS AN AGENT

(Sec. 184) A minor can be an agent. If a minor works as an agent he can make
his principal responsible to third parties for his acts. But he cannot be held personally
liable for negligence or breach of duty.
Example :
A appoints M, a minor as his agent to sell his house. M makes an agreement with B to
sell A’s house. The agreement is valid.
8)MINOR AS BENEFICIARY
A minor is not bound to perform the contract. But if minor performs his part of the
contract and fulfill his promise under a contract, he can enforce the contract against
the other party.
Example :
B, a minor, sells and delivers books to C, C refuses to pay. B can sue C for recovery of
payment`
9) SURETY FOR MINOR
When an adult stands surety for a minor in a contract of guarantee, the adult is liable
under the contract but the minor is not answerable.
10) Member of Company
A minor cannot directly buy shares of company because he is not competent to
contract. If the parents of a minor are shareholders in a company, the company shall
transfer the shares in favor of the minor upon death of the parents. A minor is not
responsible for any unpaid amount on those shares.
11) MINOR AND INSOLVENCY
A minor cannot be declared insolvent because he is not liable to pay debts. The
amount can be recovered from the minor’s property only. If he owns no property,
nothing can be recovered. Sec.(68)
12)PARENTS OF MINOR
Parents of minor are not liable to pay for an agreement made even for purchase of
necessaries. The parents are liable only if the minor acts as an agent of the parents.
Example :
N sends his son M, a minor , to buy goods from P . M buys the goods. N is liable for
payment.
2)UNSOUND MIND
According to section 12 of 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 of understanding it and forming a rational
judgment as to its effect upon his interest.
A person who is usually of unsound mind, but occasionally of sound mind, may make a
contract when he is of sound 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 :
B, a sane man, became temporary insane due to drug overdose and sold his car to C.
The agreement is void.
EFFECT ON AGREEMNET
i)Agreement Imposing Obligation is Void
An agreement that imposes an obligation on a person of unsound mind is void-ab-
initio. But an agreement that is made for the benefit of a person of unsound mind is
valid contract.
ii) Unsound Mind and Necessaries
If a person supplies necessaries to a person of unsound mind, or anyone whom he is
legally bound to support, the supplier is entitled to recover reasonable value of the
necessaries from the property of the person of unsound mind.
BURDEN OF PROOF
If a person is usually of unsound mind, the burden of proving that he was of sound
mind at the time of contract lies on the person who affirms it.
3)PERSONS DISQUALIFIED BY LAW
Some persons are declared disqualified by the law to enter into a contract by
Contract Act or any other law.
Following are the persons disqualified from contracting (Sec.11)
i. Company
ii. Alien enemy
iii. Insolvent
iv. Convict
i)Company
A company which is declared as insolvent.
A company cannot enter into a contract outside the powers given by its memorandum
of association or by the provisions of Companies Act.
Example :
X co makes an agreement with Y to sell property which is not authorized by its
memorandum of association. The agreement is void.
ii) ALIEN ENEMY
An alien means a citizen of a foreign country. An alien whose country is at peace with
Pakistan is an alien friend. A contract with alien friend is valid. An alien whose country
is at war with Pakistan is an alien enemy . A contract with alien enemy is illegal.
Example :
Y contracts to buy good from X, a citizen of India, without the permission of Pakistani
Government. The contract is illegal and void.
iii) INSOLVENT
The person who has been declared as insolvent can not enter into a contract.
Example :
A, after being declared insolvent, agrees to sell some of his property to B. The
agreement is void.
iv)CONVICT
A convict while undergoing imprisonment cannot make a valid contract, except under a
special permission called “ Ticket of Leave”.
THANKS !!!
FREE CONSENT
 FREE CONSENT
DEFINITION
According to section 10 free Consent of all the parties to an agreement
is one of the essential elements of a valid contract. Contract Act, defines
the term Consent as “Two or more persons are said to consent when
they agree upon the same thing in the same sense.”
• In other words when the consent is obtained by coercion, undue
influence misrepresentation or fraud thee is no free consent, and the
contract is voidable at the option of the party whose consent was not
free.
 COERSION
“Coercion is the committing or threatening to commit, any act, forbidden
by the Pakistan Code, or the unlawful detaining to detain, any property, to the
prejudice of any person whatever, with the intention of causing any person to
enter into an agreement.
ESSENTIALS OF COERCION
• 1)COMMIT OR THREAT TO COMMIT
If a person commits or threatens to commit an act which is forbidden
by the Pakistan Penal Code to compel another person to enter into a
contract, it is an agreement made under coercion.
Example :
N threatens to shoot M, if he does not give his house on rent. M
agrees. The consent is obtained by coercion.
• 2)DETAIN OR THREAT TO DETAIN
• If a person unlawfully detains or threatens to detain the property of
another person to compel him to enter into an agreement, the
agreement is made under coercion and it is voidable.
• Example :
• A says to B I shall not return the documents of your wife’s property
unless you sell your house to me. B agrees. A employs coercion.
• 3) THREAT TO THIRD PARTY
• An act of coercion is also used against third party it can also be used
on friends and relatives. Similarly it can also be used directly by the
party of contract or indirectly through any person related to him.
• 4) PAKISTAN PENAL CODE
• It does not matter if a Pakistan Penal Code , is in force or not at the
place where coercion is employed. If a suit is filed in Pakistan the
provisions of Pakistan Penal Code will apply.
• Example :
• C forced B to enter into an agreement on a ship near Jeddah. Later B
sued C for breach of contract at Karachi High Court. C employed
coercion although Pakistan Penal Code was not in force at Jeddah.
EFFECT OF COERCION
• The effect of coercion is as under : (Sec 19,64 72 )
i. The contract is voidable at the option of the party whose consent is
obtained by coercion.
ii. The aggrieved party need not perform his part of contract.
iii. If the aggrieved party decides to cancel the contract, he must
return the benefit received from other party.
iv. If aggrieved party does not decide to cancel the contract, it remains
valid contract.
BURDEN OF PROOF
• The burden of proof that consent was obtained by coercion lies on
the aggrieved party. He must prove that he would not have entered
into a contract if the coercion had not been used.
• UNDUE INFLUENCE
• Section 16(1) “A contract is said to be induced by undue influence where
the relations subsisting between the parties such that one of the parties is
in a position to dominate the will of the other and uses that position to
obtain an unfair advantage over the other.”
• A person is deemed to be in a position to dominate the will of another:
i. Where he holds a real or apparent authority over the other.
ii. Where he stands on a fiduciary relation to the other.
iii. Where he makes a contract with a person whose mental capacity is
temporarily or permanently affected by reason of age illness, mental or
bodily distress etc.
ESSENTIAL OF UNDUE INFLUENCE
1) POSITION TO DOMINATE
• In order to prove undue influence it is necessary that relations existing
between the parties should be such that one of them must be in a position
to dominate the will of the other. The person who occupies the superior
position may be in a position to obtain the consent of another party.
• Example :
• U, a spiritual adviser induced his follower M to gift to him the whole of his
property to secure benefits to his soul in the next world. Such consent is
said to be obtained by undue influence. U is in a position to dominate the
will of another.
a) REAL OR APPARENT
b) FIDUCIARY RELATION
c) MENTAL CAPACITY
• a) REAL OR APPARENT AUTHORITY
• A person who has authority over other can dominate the will of that
person. The authority may be real or apparent . For example income,
police officer over an accused person, master over servant etc.
• Example :
• A, a police officer, buys a property worth Rs.50Lac for Rs.15Lac from
B, an accused under his custody. B may sue for cancellation of
contract.
• b)FIDUCIARY RELATION
A fiduciary relation is a relationship of mutual trust and confidence. In
a fiduciary relation, one person is in a dominant position because the
other person keeps faith in him. i.e guardian and minor, advocate and
client, doctor patient, religious advisor and follower etc.
• C) MENTAL CAPACITY
• A person may lack mental capacity temporarily or permanently due to
old age, mental or physical illness etc. a person lacking mental
capacity can be easily persuaded to give consent to a contract which
maybe unfavorable to him.
• Example :
• An old women admitted in a hospital signed an agreement before her
death to transfer her property to a nurse. The agreement was
obtained by undue influence.
2) UNFAIR ADVANTAGE
In order to prove undue influence. It is necessary that the party who is
in a dominating position must have used his position to obtain an
unfair advantage from the other party.
BURDENT OF PROOF
• In case of presumption of undue influence, the burden of proof lies
on the dominating person. He can disprove the presumption by
arguing that:
• The terms of the contract were fully disclosed to the weaker party.
• The price of contract was adequate.
• The weaker party was in a position to receive independent advice.
• The weaker party understood the terms of contract and gave his
consent freely.
 COERCION UNDUE INFLUENCE
Nature
Coercion is a physical threat either to property or
person. Undue influence is a mental or moral threat.
Illegal & Unfair
Threatening to do an illegal act.
In undue influence the act may not be illegal, it may
only be unfair.
Parties
Coercion may be exercised by Or Against the party to
the agreement it may also be exercised by or Against Undue influence must be exercised by or against the
some third party. party t the agreement.
Relationship
For concern no specific relationship between the
parties is necessary. For undue influence there must be a specific
relationship between the parties.
Effect
In coercion the contract is voidable at the option of
aggrieved party. In undue influence the contract is either voidable or
the court may set aside it or enforce it in a modified
form.
 FRAUD
Fraud means intentional misstatement of the facts which are necessary
for formation of a contract ,or one person to deceive another person. It
occurs when someone deliberately misleads a party about material
facts in order to gain advantage
ESSENTIAL OF FRAUD
1)FALSE STATEMENT
When a party to the contract makes a false statement intentionally in
order to deceive another arty and induce him to enter into a contract,
He is guilty of fraud.
• 2 CONCEALMENT OF FACTS
• When a party to the contact conceals the material facts essential to
the contract, which he must disclose to the other party.
3) NON-PERFORMANCE
When a person enters into a contract with the intention of not
performing his promise, he is guilty of fraud.
Example :
X purchases goods from Y on credit without any intention of paying for
them .
4) FITTED TO DECEIVE
An act fitted to deceive means any act which is done with the intention
of committing fraud.
5) ACT OR OMISSION
There are provisions of different Acts under which a person must
disclose relevant facts to the other person. According to Transfer of
Property Act, 1882 a seller of unmovable property must disclose to the
buyer all material defects. If fails to disclose, he is guilty.
SILENCE AS FRAUD
• According to Section 17, mere silence as to facts likely to affect the
willingness of a person to enter into a contract is not fraud.
It means that if a buyer does not inquire about the facts of a contract
and the seller remains silent, the silence of seller shall not be
considered as fraud.
Example :
A and b makes contract. A has private information about a change in
price which can affect B’s willingness to enter into contract. A is not
bound to inform.
• Exceptions
A silence is considered as fraud in the following cases:
• i) Duty to speak
A silence is considered as fraud when the person who remains silent is
under a duty to speak. The duty to speak arises when there is a
fiduciary relationship between the parties to the contract.
Example :
P sell a horse to his son S. The horse is sick. P does not inform S that
the horse is sick. S can avoid the contract because O was bound to
inform S.
• ii)Silence Equivalent to Speech
Sometimes the silence is equivalent to speech. A silence is considered
as fraud if a person remains silent at the time of contract, knowing that
his silence is going to be deceptive.
Example :
B says to A , If you do not say it . I shall assume that the horse is
healthy”. A knows that the horse is unhealthy but remains silent. The
silence of A amounts to fraud.
EFFECT OF FRAUD
The effects of fraud for the aggrieved party are as follows: Sec(19)
i. He can cancel the contract.
ii. He can accept the contract and ask for its performance.
iii. He can avoid the performance of contract.
iv. He can sue for damages.
v. Where silence is considered as fraud was committed lies on the
cancel the contract if he can discover the truth with ordinary
diligence.
 MISREPRESENTATION
• Meaning and Definition
Misrepresentation means false statement about the material facts of a contract
made without any intention to deceive the other party which induces him to enter
into the contract.
Definition
Section 18 states “Misrepresentation means and includes”
1) The positive assertion, in a manner not warranted by the information of person
making it, of that which is not true, though he believes it to be true.
2) 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,
3) Causing, however, innocently a party to an agreement , to make a mistake as to
the substance of the thing which is the subject of the agreement.
ESSENTIALS OF MISREPRESENTATION
• 1) POSITIVE ASSERTION
The positive assertion means an absolute and clear statement of fact.
When a person makes a positive statement of facts about the contract
without any proper source of information, believing it to be true
though it is not, there is misrepresentation.
Example :
A tells B that his land produces 4000kg wheat per acre. A believes it to
be true. B buys it. Later B finds out that the land produces 1000kg of
wheat per acre. It is misrepresentation
• 2) BREACH OF DUTY
When a person commits breach of duty and, as a result, gains
advantage and the other party is misled and suffers a loss, there is
misrepresentation. A breach of duty is considered as
misrepresentation if it is committed without intention to deceive the
other party.
Example :
A told B that monthly sale of his business was Rs.50000 before the
contract was made. The sales decreased to Rs.25000. A did not inform
B about the decrease in sales. Held, that it was misrepresentation.
(With vs O’flang)
• 3) INDUCING MISTAKE
All the parties must clearly understand all the facts of a contract. If one
party induces the other party, though innocently, to commit a mistake
regarding the nature of facts of a contract there is misrepresentation.

Example :
Z agreed to purchase shares of company. The company showed
liabilities of 16million due to mistake . Its actual liabilities were
32million. Z sued to cancel the agreement. Held , that agreement was
voidable.( zafar ahmad vs Government of Pakistan)
LOSS OF RIGHT OF CANCELLATION
1) AFFERMATION
After becoming aware of his right to rescind. If the aggrieved party confirms
the transaction either by express words or an act, the right of rescission is
lost.
2) NO RESTORATION
The right to rescission is lost if the aggrieved party is not in a position to
restore the benefits obtained by him under the contract, i.e subject matter
of the contract is consumed.
Example :
B buys apple from C by fraud. B eats all the apples . C cannot avoid the
contract.
• 3) LAPSE OF TIME
If the aggrieved party fails to reject the contract within reasonable time on
discovering the false representation or becoming aware of the fraud the
right of rescission is lost.
4) RIGHTS OF THIRD PARTY
The right of rescission is lost if the third party has acquired the rights in the
subject matter of the contract in good faith for consideration and without
knowledge of the misrepresentation between the other two parties.
Example :
A buys the watch from B by misrepresentation and sells it to C. C buys the
watch in a good faith. B loses the right to cancel the contract.
 FRAUD MISREPRESENTATION
Intention
In case of fraud, the party makes a False statement
with an intention to deceive the other party. In case of misrepresentation there is no intention to
deceive the other party.
Belief
In case of fraud, the person making the suggestion
does not believe it to be true. In case of misrepresentation the person making the
suggestion believes it to be true.
Damages
In fraud, the aggrieved part can Claim damages in
addition to the right of avoiding the contract In misrepresentation entitles the party to avoid
contract and there can be no suit for damages
Offence
Fraud may amount to an offence of cheating. It is a
criminal act. Misrepresentation does not amount to a Offence of
cheating. It is not a criminal act.
Truth
In case of fraud, the aggrieved party can avoid contract
even if it had the means of discover the truth with In case of misrepresentation aggrieved party cannot
Ordinary diligence. avoid the count if it had means to discover the truth
ordinary diligence.
 Mistake
• MEANING AND DEFINITION
The term mistake means an incorrect belief about something. Mistake
leads a party to misunderstand the terms of contract. When the parties
give their consent under any mistake, there is no agreement.

Mistakes are of two types:

1) Mistake of Facts
2) Mistake of law
 MISTAKE TO FACT
• Mistake of fact maybe are of
• i) bilateral mistake or
• ii)) unilateral mistake (Sec 20-22)
• 1) BILATERAL MISTAKE
Where both the parties to an agreement are under a mistake about he
facts essential to the agreement, there is a bilateral mistake and the
agreement is void. However, a wrong opinion about the value of
subject matter of the agreement is not considered a mistake of fact.
• Bilateral mistakes are of following types.
• 1)EXITENCE OF SUBJECT MATTER
When the parties make a mistake about he existence of subject matter
of the agreement, the agreement is void. If both the parties believe
that the subject matter of contract is in existence at the time of
contract, but in fact it is not in existence the agreement is void.
Example :
A agreed to buy a horse from B . Later, the parties found out that horse
was dead at the time of contract but neither party was aware of the
fact, the agreement is void.
• 2) IDENTITY OF SUBJECT MATTER
When both the parties are under a mistake about the identity of the
subject matter the agreement is void. When one party has one thing in
mind and the other party has another thing, there is no agreement.
Example :
A agrees to buy transformer from B . If thinks he is buying 1-phase
transformer while B thinks he is selling 3-phase transformer. There is no
agreement.
• 3)QUANTITY OF SUBJECT MATTER
There is no contract if there is difference between the quantity sold or
purchased. If both parties are under a mistake about the quantity of
the subject matter, the agreement is void.
Example :
A agrees to buy 100ton of iron from B . B send 2 trucks full of iron and
thought that each truck carries 50ton of iron but they weigh 45ton
each. The agreement is void.
• 4) QUALITY OF SUBJECT MATTER
When both the parties are under a mistake about the quality of subject
matter, the agreement is void.
Example :
C contracts to sell B a horse which both parties believe to be a race
horse. Later, it turns out to be a cart horse. The agreement is void.
• 5) POSSIBILITY OF PERFORMANCE
When both parties believe that the agreement is capable of
performance but in fact it is not, the agreement is void.
Example :
C agreed to sell a particular medicine to B. Later, it was discovered that
there was a ban on sale of that medicine . The agreement is void.
• 6)MISTAKE OF PRICE
If both the parties to the agreement make a mistake about the price of
the goods, the agreement is void.
Example :
A agreed with B to give his house on monthly rent of Rs.520. however,
in the lease deed it was written as Rs.250. the agreement was void.
UNILATERAL MISTAKE
• When one party commits a mistake regarding the terms of the agreement, it is
called a unilateral mistake. A contract is not voidable because one party has
committed a mistake about the matter of fact essential for the agreement.
The effect of unilateral mistake are as follows
a) Valid Contract
If a person makes a wrong contract due to his own negligence or carelessness, he
himself is responsible and cannot avid the contract. A unilateral mistake has no
effect on the contract and the contract remains valid.
Example :
The government auctioned the right of fishery. A offered the highest bid thinking
that the right was being sold for 3years but in fact it was only for 1 year. A could
not avoid the contract.
• b) VOIDABLE CONTRACT
If a unilateral mistake is caused by fraud or misrepresentation on the
part of the other party, the contract is voidable and can be avoided by
the aggrieved party.
Example :
A sells a house to B. The house has cracked walls. A tries to conceal the
defect but B discovers it . A is guilty of fraud . B can avoid the contract.
MISTAKE OF LAW
• 1) PAKISTANI LAW
The mistake of Pakistani law does not affect the validity of a contract. A
party cannot avoid the contract on the grounds that he was not aware
of the law of his own country
Example :
A and B make a contract based on wrong belief that a particular debt is
barred by Pakistani Law of Limitation. The contract is valid.
• 2) FOREIGN LAW
A mistake as to a foreign law is treated as a mistake of fact. A person
cannot be expected to know the law of foreign country.
Thank you !!!
VOID AGREEMENT
 VOID AGREEMENT

 An agreement not enforceable by law is void agreement. For a valid

contract it is necessary that an agreement must not be one of those
which is expressly declared void by the law.
EXPRESSLY DECLARED VOID

 Following agreements have been expressly declared void.

1]Agreement in Restraint of Marriage
Every person has the right to marry according to his own choice. Therefore,
any agreement which prevents a major person from marriage is void. But
agreement in restraint of marriage of minor is valid. An agreement not to
marry any person is also void. (sec.26)
Example :
A agrees to B that he will not marry C. It is a void agreement.
 2] Agreement in Restraint of Trade
Every person has the right to carry on any lawful trade, business or profession.
An agreement that prevents a person from doing any lawful trade, business
or profession is an agreement in restraint of trade is void. (sec 27)
Example :
a) M promised to close his business against the promise of N to pay some
amount, it is an agreement in restraint of trade.
b) Two electronic companies agreed not to employ the other company’s
staff for 5years . The court held that it was an agreement in restraint of
trade.
 Exceptions in Restraint of Trade.
Following are the exceptions in restraint of trade.
a)Sale of Goodwill
Where a seller sells his business along with the goodwill and agrees not to
carry on a similar business within reasonable local limits such an agreement is
valid.
Example :
A sells his bakery to B with goodwill of Rs.10Lac and agrees not to open a
bakery anywhere in city . This is valid agreement.
b) Partner’s Agreement
An agreement among partners in a partnership containing the following
conditions is valid.
i. A partner may agree not to carry on a business similar to that of a
partnership while he is a partner.
ii. A retiring partner may agree that he will not carry on a similar business
within a specified period or specified limits.
iii. A partner, on the sale of goodwill, may agree with the buyer not to
carry on similar business within a specified period or specified limits.
c) Trade Combination
An agreement among various businessmen to regulate prices, output, etc. is
valid agreement. But a trade combination which creates monopoly and is
against public interest is void.
d) Service Agreement
An agreement of service may contain a condition that the employee shall
not work anywhere else during the period of employment, it is valid
agreement.
Example :
A doctor joins the army on the condition that during service he will not do
private practice. The agreement is valid
3) AGREEMENT IN RESTRAINT OF LEGAL PROCEEDINGS
An agreement which prevents a person from taking legal action to enforce
this rights arising from a contract is void.
4) UNCERTAIN AGREEMENT
The meaning of which is not certain or capable of being made certain. Such
an agreement is void. In other words, the terms of an agreement must be
clear, complete and certain (sec-29)
Example :
A agrees to sell his car to B for 1Lac to 3Lac. Sale price is not clear.
5) WAGERING AGREEMENT
A wager means a bet. A wager is an agreement to pay money or money’s worth
on the happening or non-happening of future event. It is void agreement.
Effect of Wagering Agreement
 A wagering agreement is void.
 An agreement which is made to help the performance of any wagering
agreement is also void.
 No suit can be filed in the court to recover the money, commission, brokerage,
fee or reward relating to wagering agreement.
 An agreement to contribute for the payment of a prize to the winner is valid.
6) AGREEMENT CONTINGENT ON IMPOSSIBLE EVENTS
An agreement contingent on impossible events is an agreement the
performance of which depends upon the happening of an impossible event.
It is a void agreement.
This agreement cannot be enforced because an impossible event will never
happen.(sec-36)
Example :
C agrees to pay 1Lac to B if sun rises from the west next morning .
 7) AGREEMENT TO DO IMPOSSIBLE ACT
An agreement to do an impossible act is void. It means that a person cannot
perform an act which is impossible for him to perform.(Sec.56)
Example :
C agrees to bring back B’s dead brother.
SPECIAL CASES
 The following agreements are valid.
a)Commercial Transaction
An agreement where the parties deliver the goods at a future date is a
valid contract.
b)Insurance Contract
Insurance contract is valid. The payment of money depends on the
happening of a future uncertain event. It differs from a wagering
agreement because it has an insurable interest and is beneficial to the
public.
c)Lottery
A lottery is a game of chance. The lottery is wagering agreement and
illegal. However, if the lottery is authorized by the Government, it
becomes valid.
CONTINGENT AND QUASI
CONTRACTS
Meaning and Definition
Section 31 states. “An contingent contract is a contract to do or not to do
something, if some event, collateral to such contract, does or does not happen.”
It means it is contract whose performance depends upon the happening or non-
happening of an uncertain event.
Example :
B promises to give a loan of Rs.1lac to C, if he is elected as president of an
association.
PERFORMANCE OF CONTINGENT
CONTRACT
 1)HAPPENING OF EVENT
It means that the performance of a contingent contract depends upon the
happening of an uncertain event. If that uncertain event takes place , the
contract becomes valid. But if that uncertain event does not take place , the
contract becomes void.
Example :
A makes a contract to sell a horse to B, if C refuses to buy it. The contract
becomes enforceable if C refuses to buy the horse.
2) NON-HAPPENING OF EVENT
It means where the performance of a contingent contract depends upon the non-
happening of a certain event and If that event does not happen, it is a valid
contract. But if that event happens, the contract becomes void.
Example:
A agrees to pay a sum of money to B if a certain ship does not return. The ship is
sunk . The contract becomes enforceable when the ship is sunk.
3) DEPENDENT ON FUTURE CONDUCT
It means the performance of a contingent contract depends upon the conduct of
a person. The person may make the contract valid or void.

Example :
Father agrees to pay some of money to his son B, if he marries A . Later, B
marries D . The marriage of B to C becomes impossible.
 4) HAPPENING OF EVENT WITHIN FIXED TIME
It means the performance of a contingent contract depends upon the happening
of an uncertain event within a fixed time. If such event happens within the fixed
time , it becomes valid contract.
Example :
A buyer promises to pay money to seller, if the ship with goods returns within 1
year. The contract becomes enforceable if the ship returns within 1 year and
becomes void if the ship sinks within 1 year.
 5) NON-HAPPENING OF EVENT WITHIN FIXED TIME
It means the performance of a contingent contract depends upon the non-
happening of an event within a fixed time . If such event takes place within fixed
time it is a void contract, if such event does not take place with a fixed time, it
is a valid contract.
Example :
Seller promises to pay 1Lac to B if a certain ship does not return within 1 year.
The contract maybe enforced if the ship does not return within 1 year.
6) HAPPENING OF IMPOSSIBLE EVENT
Contingent agreements to do or not to do anything if an impossible event
happens, are void. When the performance of contract depends upon the
happening of an impossible event, such agreement is void from beginning.
 QUASI CONTRACT

MEANING AND DEFINITION

A quasi contract is a contract that is created by the court when no such official
contract exists between the parties, and there is a dispute with regard to
payment for goods or services provided. Courts create quasi contracts to prevent
a party from being unjustly enriched, or from benefitting from the situation
when he does not deserve to do so.

DEFINITON
A contract created by the court in the absence of an official agreement between
the parties.
CIRCUMSTANCES OF QUASI CONTRACT

 LIABILITY FOR NECESSARIES

If a person supplies necessaries to a person who is incompetent to contract or to
any person whom he is bound to support the supplier can recover a reasonable
price of such necessaries from the property of such person, if such person owns
no property, the supplier cannot recover the price of such necessaries.
 2) PAYMENT BY INTERESTED PERSON
A person who is interested in payment of money which another is bound to pay
and who therefore pays it on his behalf , he can recover from that person.
Example :
A rented his house to B. a paid the outstanding electricity bills of B to void
disconnection of electricity. A can recover the payment from B.
 3) FINDER OF GOODS
A person who finds goods belonging to another and takes them into the custody is
subject the return them to its original owner. He must take good care of goods.
Example :
X, a guest, found a diamond ring at the birthday party of Y. X told Y and other
guests about it . X could not find the owner X can retain the ring.
4) Mistake or Coercion
A person to whom money is paid or anything delivered by mistake or under
coercion, must repay or return it. (Sec.72)
Example :
PIA demands extra charges from B, a passenger. B pays the extra charges B can
recover the amount.
 CHAP#8
Performance of Contract
 Performance of Contract

Performance of Contract means the fulfillment of legal obligations created

under the contract by both the promisor and the promisee. When a Contract is
duly performed by both the parties, the contract comes to an end.
1)Actual Performance
2) Attempted Performacne
 Actual Performance

• Where the party to a contract has done what he had undertaken to do or

either of the parties have fulfilled their obligations under the contract within
the time and specified manner.
• Example :
X borrows 5lac from Y with a promise to be paid after 1month. X repays the
amount on due date. This is actual performance.
 Attempted Performacne / Offer to Perform

• It may happens some times , when the performance becomes due, the
promisor offers to perform his obligations but the promisee refuses to
accept the performance.
• Example :
P promises to deliver certain goods to R. P takes the goods to the appointed
place during business hours but R refuses to take the delivery of goods. This is
an attempted performance as P the promisor has done what he was required
to do under the contract.
 Essentials of Valid Offer/ Performance
Unconditional When it is made in accordance with terms of contract.
Proper time Offer must be made during business hours.
Proper place Offer must take place at business area.
Proper person It must be made to the promisee or his duly authorized agent.
Reasonable Promisee must have reasonable opportunity for examining that the goods offered are
opportunity the same as per term of contract
Whole obligation A valid offer is for whole obligation. However minor deviation from contract terms
may not make it invalid.
Fixed amount Definite amount and must be of same currency.
 Who Can Perform & Who Can Demand
PERSON WHO CAN PERFORM
Promisor Performance
If a contract is of personal nature or it was agreed that promise will be performed by
promisor himself
Promisor’s Agent Of the intention of parties is that promise can wither be performed by promisor himself or
any person employed by him.
Legal On death of promisor. (unless the contract is of personal nature).
Representative
Third party With a consent of promisee a contract can be performed by a third party .
E.g
1)(Contract of Educational institutions )
2) A is liable to pay 1lac to B but unable to pay. C agrees and pay 1lac to b on behalf of A
Performance of contract is completed by third person.
Joint Promisor Example : A B & C took joint loan and decided to repay equally.
• All the promisors jointly are liable. (if all are alive)
• Any one of joint promisor is liable to complete the performance
• Representative of deceased promisor jointly with surviving promisor.
• Representative of all of them jointly( death of all joint promisors)
 Who can demand performance

• Promisee
• Promisee’s Agent
• Legal Representative
• Third Party
• Joint Promisees
(same rules as provided for promisor)
 Rules Regarding Performance of Joint
Promise
• Joint & Several Liability of Joint Promisors
Promisee may compel anyone or more of such joint promisors to perform the whole promise.
• Right To Claim Contribution
Each of two or more joint promisors may compel every other joint promisor to contribute equally with himself to
performance of promise.
• Sharing of loss in Contribution
If any one 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.
• Release of One Joint Promisor by the Promisee
If promisee release one of joint promisors , it dosent mean that he is released from responsibility to the other joint promisors.
 JOINT PROMISOR IN CASE OF MUTUAL
AGREEMENT

Internal contract
In case of mutual agreement C got bankrupt and A and B paid off the loan. A and B
has the right to recover the loan from C.
External Contract
All three A B & C are representing jointly and, equally liable to pay complete amount
of loan..

-Separate rights and obligations for internal and external contract.

 Time and Place of Performance
Time for performance is not specified
Time for performance is specified
Place for performance is specified
Place of performance is not specified
Promisee prescribes manner or time
Contract must be performed in reasonable time
Contract must be performed on that day during usual hours of
business.
Promisee must apply for performance at a proper place and
within usual hours of business where promise is ought to be
performed.
Promisor must apply to the promisee to appoint a reasonable
place
Promise must be performed in the manner and at time
prescribed.
 1)Time as Essence of Contract

In following cases, time is usually considered to be essence of contract

• Where parties have expressly agreed to treat time as the essence of contract.
• Where the non-performance at the specified time operates as an injury to the
party.( singing concert)
• Where nature and necessity of the contract requires the performance of the
contract within specified time . Even when time period is not specified.( admission
in college universities).
2)When Time Is Not The Essence Of Contract
Where time is not of the essence of the contract and promisor fails to
perform within the fixed time, the contract remains valid and the promisee
will have to accept the delayed performance. But he can claim compensation
for any loss due to delay. The delay should be reasonable other wise it will
become Voidable of the option of promisee.
• EXAMPLES: A promises to deliver a car to B on 1st May. A delivers it on 9th
May. B will have to accept the delivery. B can claim damages only.
3) Acceptance Of Delayed Performance
When the promisee accepts the delayed performance instead at avoiding the
contract, he cannot afterwards claim compensation for any loss caused by the delay
unless at the time of accepting the delayed performance he gives notice to the
promisor of his intention to do so.
• EXAMPLE: A promise to supply bricks to B on 4th May. A delivers on 8th May B
accepts the delayed delivery. Later, he cannot claim damages.
 Reciprocal Promises

• Promises which form the consideration for each other are called reciprocal
promises. In other words, a contract consists of reciprocal promises when
one party makes a promise in consideration of a similar promise made by
the ether party. (Sec. 2 (f)).
 Types and Rules of Reciprocal Promises

• Rules of performance of reciprocal promises are

1)Mutual & Independent
Where each party has to perform his promise independently without waiting for the
performance by other party they are called mutual and independent. Such promises must be
performed in the order fixed by the contract and where the order is not expressly fixed they
must be performed in that order which the nature of the transaction requires.
• EXAMPLE: A agreed to 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.
Order Of Performance
Where the order of performance is expressly fixed by the contract, the
promises must be performed in that order. Where the order of performance is
not expressly fixed by contract, the promises must be performed in the order
which the nature of transaction requires.
Example : A agrees to build a house for B at fixed price. A’s promise if to build
the house must be performed before B’s promise to pay it
2)Mutual/Conditional And Dependent
Where the performance of the promise by one party depends on the prior performance of
the promise by the other party, the promises are conditional and dependent.
If the promisor who is required to perform his promise in the first place, fails to perform it,
such promisor cannot claim the performance of the reciprocal promise, and must make
compensation to the other party to the contract for any loss which such other party may
sustain by the non-performance of the contract.
• EXAMPLE A promises to sell 100 bales of cotton to B, to be delivered next day. B
promises A to pay within a month. A does hot deliver B's promise to pay need not be
performed and A must make compensation.
3)Mutual And Concurrent
Where the two promises are to be performed simultaneously(at the same
time), they are called mutual and concurrent. In case of such promise the
promisor need not perform his promise unless the promisee is ready to
perform his reciprocal promise.
• EXAMPLE: A agreed to deliver goods to B at a price to be paid by B on
delivery. A need not deliver the goods unless B is ready to pay on delivery
and B need not Pay unless A is ready to deliver them on payment.
4)Preventing The Performance
When one party to contract prevents the other from performing his promise ,
the contract becomes voidable at the option of the aggrieved party and he can
recover compensation from the other party for the loss he suffers.
Example : B agrees to do work for A for Rs.50000. B is ready to do the work.
But A prevents him from doing so. The contract becomes voidable at the
option of B, he can claim for damages.
5)Legal and Illegal Promise
When the persons reciprocally promise, firstly to do a certain act which is legal and
secondly to do certain other act which is illegal, the first promise is a contract and
second promise is illegal agreement.
Example :
A agrees to sell his house to B for 10lac, if B will use the house for gambling he shall
pay 50lac to A.
The first promise is contract and the second promise is illegal agreement.
6)Alternate Promise
In case of alternate promise one part of which is legal and other illegal, the
legal part alone can be enforced.
Example :
A agrees to pay Rs.1lac to B for which B shall deliver either rice or wine . It is
valid contract to rice and illegal agreement as to wine.
 Allocation of Payments

• Allocation of payment to particular debt

1)Allocation by Debtor
When the debtor owing several debt states that the payment made by him shall apply to discharge
a particular debt.
Debtor shall inform that of which transaction the payment has made.
The creditor must discharge the particular debt.
Example :
A owes to B, among other debts, a sum of Rs.500. B writes to A and demands payment of this sum.
A sends 500. The payment will discharge the debt for which B has demanded payment.
2)Allocation by Creditors
If the debtor does not specify the debt to which payment shall apply, the creditor has
the option to apply the payment to any lawful debt due from the debtor

Law also gives the Creditor to avail the option to clear the “time barred debt” of that
debtor.
3)Neither Party Makes allocation/ Allocation by Law
When neither the debtor nor creditor makes any allocation. The payment shall apply
to discharge the earlier debt in order of time .
“Allocation according to sequence.”
Example :
A owes B two debts of rs 2Lac each which are time barred and another debt of Rs
4Lac . A sends Rs 2.Lac to B without mentioning. It will be allocated against the two
debts of Rs.2Lac each.
THANK YOU
DISCHARGE OF
CONTRACT
MODES OF The discharge of contract means termination of contractual
agreements between the parties to contract. A contract
DISCHARGE terminates when the rights and obligations of parties come to an

OF end.
A contract me be discharged in any of the following modes
CONTRACT
1. Discharge by Agreement
2. Discharge by Operation of Law
3. Discharge by Lapse of time
4. Discharge by Performance
5. Discharge by Impossibility Of Performance
6. Discharge by Breach Of Contract
 • A contract is discharged by the agreement in following
ways.
a) Novation

1)DISCHARGE b) Alteration

BY AGREEMENT c) Rescission
d) Remission
e) Waiver
a)Novation
Novation of contract means replacement of an existing contract by a new
contract. The new contract may be between same parties or between new parties. Thus, an
old contract is discharged, and a new contract comes into existence.
• Example : A owes Rs.10000 to B. A mortgaged his estate to B for a debt of Rs.10000. It is
a new contract that terminates the old one.
• A owed to B and B owed to C all parties agreed that A would pay to C it is novation.
b)Alteration
Alteration of contract means a change in one or more terms of the contract with mutual
consent of parties. An alteration in contract discharges the original contract and creates a
new contract. In case of alteration the parties remain the same and only the terms of
contract are changed.(sec.62)
Example : A agrees to supply B salt on 1st Feb. later, A and B agree to change the date of
delivery to 1st March. It is alteration of contract.
c)Rescission
The rescission means cancellation of contract by mutual consent. A contract may
be cancelled by an agreement between the parties at any time before its performance. The
cancellation of agreement releases the parties form their obligations. (Sec 62)
Example : A promises to deliver goods to B on a certain date. Before the date of
performance, A and B agree that the contract will not be performed. The contract is
rescinded.
D ) R E MI S S I O N
Remission means the
acceptance of lesser
consideration than what was
mentioned in the contract.
Contract may be discharged by
remission of
performance(discount) or
extension of time, (Sec. 63)
Example :
A owes B Rs. 5,000. B agrees to
accept Rs.2,000 in full
satisfaction of his claim, The
whole debt is discharged.
E ) WA I V E R
Waiver means the intentional
giving up of a right which a
person is entitled to under a
contract. When a party waives
his right under the contract,
the other party is released
form his obligations
Example :
A promises to supply rice to B.
later, B releases A from fulfilling
the contract. The contract is
terminated by waiver.
DISCHARGE BY OPERATION OF LAW

a. Death or Personal Incapacity

b. Insolvency
c. Material Alteration
DISCHARGE BY OPERATION OF LAW

• Death or Personal Incapacity

Where the performance of a contract depends upon the personal skill, or
qualification or the existence of a particular person, the contract is discharged on the
illness, incapacity or the death of that person.
Example : An artist agreed to sing on particular date but fell ill and could not sing. Held, that
the contract was discharged
• Insolvency
Where the court declares a person as insolvent, the rights and duties of such person are
transferred to the official receiver. After the order of the court such person is discharged
form his liabilities.
• Example : A person may own a large house and a valuable car, but not have enough
liquid assets to pay a debt when it falls due.
• Material Alteration
Material alteration means a change which affects the rights and liabilities of the parties. If
the document containing the terms of contract is altered by a party to the contract,
without the consent of the other party, the contract is discharged.
 DISCHARGE BY LAPSE OF TIME

• Contract has been made for a specific period of time time ,after the time expires the contract
comes to an end.
• The limitation Act, 1908 states that in case of a breach of contract, legal action must be taken
within a specified period. If the contract is not performed and no legal action is taken by the
promisee within the period of limitation, he is debarred from enforcing the contract. The period of
limitation to recover debt is 3 years. If 4 years expire and creditor fails to file a suit to recover his
amount, the debtor is discharged from his liabilities.
Example : A owed Rs.5000 to B . The last date for repayment of the loan expired but B did not sue A
until 3 years . B lost the rights to recover.
DISCHARGE BY PERFORMANCE

• A contract can be discharge by any of the following way.

1) Actual performance
When both parties to a contract fulfil the obligations according to the terms and
conditions of the contract, it is called actual performance of the contract and the contract
comes to an end (Sec-37).
Example. A agrees to sell his watch to B for Rs. 400. A delivers the watch and B makes
the payments. There is a actual performance.
• 2) Offer to Perform/ Attempted Performance
It is also called offer of performance or attempted performance. When one of the parties to the
contract offers to perform the contract but the other party does not accept it. It is not an
actual performance but is equivalent to actual performance. In offer of performance
the promisor/promisee is excused from performance and is entitled to sue the
promisor/promisee for damages. (Sec.38)
• EXAMPLE
A agrees to sell his book to B for Rs. 500. on the day of execution A offers to deliver
the book but B does not accept it, there is offer of performance. A can sue for damages in
court.
• Attempted Performance
If the promisor has made an offer of performance as per the terms of the contract
and the promisee refuses to accept the offer of performance.
• It is equal to actual performance.
• Contract is deemed to be performed.
DISCHARGE BY IMPOSSIBILITY OF
PERFORMANCE
• When the performance of contract becomes impossible due to subsequent reasons which are
beyond the control of parties, the contract becomes void. It is also called doctrine of
frustration or doctrine of supervening impossibility.
1)Supervening Impossibility
When the contract is valid at the time of formation and becomes impossible to perform
subsequently.
• Contract becomes void when an act becomes impossible after to formation of the contract.
• Every person is bound to restore any benefit received or compensated earlier
Grounds of supervening impossibility
I. If subject matter is destroyed after the formation of contract without fault of either party.
II. Death or personal incapacity(doctrine of frustration) in contract of personal nature.
III. On declaration of war contract with alien enemies are either suspended or declare void.
• A contract entered into with an alien enemy during war is void ab-initio. A contract entered into before the commencement of
war remains suspended during the war. However, such contract may be revived after the war is over if the nature of the
contract so permits.
EXAMPLE
A contracts to carry cargo for B at a foreign port. A’s government afterwards declares war against the country where the port is
situated. The contract becomes void.
2) Supervening Illegality
If the performance of the contract becomes unlawful due to a change in the law after the
formation of the contract, then the contract is said to be discharged.
DISCHARGE BY BREACH OF CONTRACT

• The breach of contract means the failure of party to perform his obligations. When a
party fails to perform the contract, there is a breach of contract. It discharges the
aggrieved party form performing his obligations. It may be
(1) Actual breach
(2) Anticipatory breach
• Actual Breach
When a party to contract refuses or fails to perform his part of the contract at the time fixed for
performance. Actual breach of contract can occur :
• On due date of performance or
• During the course of performance
• EXAMPLE
A agrees to deliver 5 bags of wheat on 1 March. He does not deliver the wheat on that day.
There is a actual breach of contract.
 ACTUAL BREACH
Time is Essence
Voidable at the option of the promisee.
Promisee is entitled to claim compensation
to any loss due to non-performance at agreed
time where performance beyond the time is
not accepted.
Time is not Essence
Not voidable at the option of promise
Promisee is not entitled to claim the
compensation for any loss due to non-
performance at the agreed time where
performance beyond the time is accepted unless
the promisee gives notice to promisor of his
intention to claim damages.
• Anticipatory Breach
Anticipatory breach of contract occurs when a party declares his intention not to perform
the contract before the due date of performance.
i)Express Breach
In this case a party to the contract communicates to the other party, his intention not to
perform the contract, before the due date of performance has arrived.
• EXAMPLE: A agrees to supply wheat to B on 1st July. On 15th June, A informs B that he
will not supply the wheat. This is express breach of contract.
(ii) Implied Breach
In this case a party to the contract does an act, which makes the performance of the
contract impossible. It is an implied breach
• EXAMPLE
• A promises to sell his horse to B on 1st June and before that date he sells the same
horse to C.
• Effect of an Anticipatory Breach
In anticipatory breach, the promisee gets the following rights:
(i) The promisee is released from performance.
(ii) He may treat the contract as rescinded and sue the other party
for damages immediately.
(iii) He may ignore the conduct of promisor and wait for the time of
performance and then sue the promisor.
REMEDIES FOR BREACH OF
CONTRACT
 BREACH OF CONTRACT

• When a party breaks the contract by refusing to perform his promise the
breach of contract takes place.
 MO D ES O F REMED I ES FOR BREACH OF
CONTRACT

Following remedies are

available to the
aggrieved party against
the guilty party.

Suit upon Quantum

Meruit- ( payment in
Suit for Specific
Suit for Rescission Suit for Damages proportion to the work Suit for Injunction
Performance
done or reasonable
value of work done)
(1) Suit for Rescission
Rescission means cancellation of a contract. When one
of the parties breaks the contract, the other party is
released from his obligation under the contract. If the
aggrieved party wants to sue the guilty party for
damages for breach of the contract, he must sue for
rescission of the contract. When the court grants
rescission, the aggrieved party is free from his
obligations and becomes entitled to compensation.
(Sec. 75)
Example : A contracts to supply cement to B
on 15 April. B agrees to pay the price on receipt of
goods. A does not supply on due date. B is discharge
from liability to pay. B can rescind and claim damages.
 REMEDIES FOR BREACH

• 1) Restitution
• Return of benefits received by one party from the other under void contract.
• When the contract becomes void it needs not to be performed by either
party.
• 2) Damages
• Monetary compensation is allowed for loss suffered by aggrieved party .
• Object is not punishing the party at fault but to compensate the aggrieved
party.
• (2) Suit for damages
The aggrieved party may sue for damages. Damages
are a monetary compensation allowed to the injured
party for the loss suffered by him as a result of the
breach of contract. In case of breach of contract, the
aggrieved party can claim the following damages.
• (Sec. 19)
(a) Ordinary Damages

These are also called general damages.When a contract is broken,

the aggrieved party can recover ordinary damages from the guilty
party. Ordinary damages are usually assessed on the basis of actual KINDS OF
loss. In a contract of sale of goods, the damages payable are DAMAGES
the difference between the contract price and the market
price at the date of breach. (Sec. 73)

Example :A contracts to pay 1 lac to B on 1st Jan. A does not pay

on that day. B, as a result is totally ruined. A is liable to pay B only
principal sum and interest on it.
• (b) Special Damages
These damages arise under some special circumstances.These damages include
indirect loss which may arise due to breech of contract. The parties must be
aware of the loss which may arise from the breach of contract. The notice to this
effect must have been given to the other party: otherwise he is not
responsible for special damages. Subsequent knowledge of special
circumstances will not create special liability on guilty party. (Sec. 21)
Example : A contracts C to buy 1 ton of iron for Rs. 80,000. A also contracts to
sell B, 1 ton iron for Rs. 1 lac. A informs C about the purpose of contract. C fails
to supply, As a result, A cannot supply to B. C is liable for loss of profit which A
would have earned form B.
(c) Exemplary Damages
These damages are awarded to punish the guilty party for the breach of contract.
The breach of contract results in monetary loss to the aggrieved party and
causes disappointment. Exemplary damages have no place in law of contract and
are not recoverable. These are awarded in the following cases
Exemplary Damages
• A) In case of breach of a contract to marry, the amount of damages will
depend upon the extent of injury to the feelings of the party.
• B) In case of dishonor of a cheque by a banker when there are sufficient funds
to the credit of the customer. The rule is, the smaller the cheque dishonored,
the greater the damage.
• (d) Liquidated Damages
• When parties to a contract fix the amount of damages for the breach of
contract at the time of formation of contract, such damages are called
liquidated damages. Where a sum is agreed in the contract to be paid by the
defaulting party, in case of breach of contract, the court will allow the
reasonable damages, not exceeding the amount already agreed. If the actual
loss is more than the agreed amount, damages will be payable to the agreed
amount. (Sec. 74)
• Example :A contracts to pay Rs. 20,000 as damages to B. if he fails to pay
him Rs. 5 lac on a given day. A fails to pay on that day, B cant recover damages
not exceeding Rs. 20,000.
• (e) Nominal Damages
• These are neither awarded to compensate the aggrieved party nor to punish
the guilty party.When the aggrieved party suffers no loss, the court may award
nominal damages in recognition of his right. The court has discretion in this
case. The court may refuse to award damages.
• Example : A promises to sell cement to B for Rs. 200 per bag. A does
not supply. At the time of breach, the market rate of cement is the
same. B is entitled to nominal damages.
 (3) SUIT UPON QUANTUM MERUIT

• The term quantum meruit means payment in proportion to the work done or
reasonable value of work done. Where a person has done some work under a
contract and the other party cancels the contract or an event happens, which
makes the performance of the contract impossible; such party can claim
remuneration for the work already done. The right to claim for quantum
meruit arises when the original contract is discharged. If the original contract
exists, the party may sue for quantum meruit. The aggrieved party may sue in
the following cases:
 SUIT UPON QUANTUM MERUIT

(a) When an agreement becomes subsequently void.

(b) When there is a promise to render services but no agreement about
remuneration.
(c) Where something is done without any intention to do so gratuitously.
(d) When the contract is divisible.
(e) When the completion of the contract is prevented by the other party.
 EXAMPLE :

• (a) B contracts to build a 3-story house for A. When one story is

complete, A stops B’s work. B can get compensation for work done.

• (b) C was employed MD in a company. After 3 months it was found

that the directors were not authorized to appoint him. C sued for
remuneration. Held, C could recover for the work done. (Craven Ellis vs.
Canon Ltd.)
 (4) SUIT FOR SPECIFIC
PERFORMANCE

• Specific performance means the actual carrying out of the contract by a party.
In some cases where the damages are not an adequate remedy the court may
direct the guilty party to fulfil the contract. The aggrieved party can sue for
specific performance in the following cases:
• Suit for Specific Performance
• (a) Where compensation in money is not an adequate remedy.
• (b) Where it is difficult to calculate the actual damages.
• (c) Where compensation in money cannot be obtained.
• Specific performance is not granted in the following cases:
• (a) Where damages are an adequate remedy.
• (b) Where the court cannot supervise the execution of the contract, e.g, a
construction contract.
• (c) Where one of the parties is a minor
• d) Where contract is of personal nature
• Example :
• (a) A agrees to sell his plot to C, who agrees to buy to erect a mill. A
commits breach. On the suit of C, A is directed by the court to perform the
contract.
• (b) A agrees to sell B his painting, but commits breach, B cannot sue for
damages. A shall be ordered to make specific performance to B.
 (5) SUIT FOR INJUNCTION

• Injunction is an order of a court restraining a person from doing something which

he promised not to do. It is a preventive relief. If is a discretionary remedy of the
court. It is appropriate in cases of anticipatory breach of contract.
• Example :
• (a) W agreed to sing at Lu’s theatre and for no one else. Afterwards W
contracted Z to sing at another theatre and refused to sing for Lu. Held, W could
be restrained by injunction from singing for Z. (Lumly vs. Wagner)
• (b) G agreed to take the supply of electricity only from M company. G
was, restrained by an injunction from buying electricity from any other company.
(Metropolitan Electric Supply Co. vs Ginder).
 CHAPTER 11
INDEMNITY AND
GUARANTEE
INDEMNITY

 Definition and Nature

 The term indemnity means to compensate the loss. Section 124 provides
that.
 “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 is called a contract of indemnity.”
 A contract of indemnity is made to protect the promisee against
anticipated loss. It depends upon happening of loss. Contract of insurance
is example of indemnity.
  INDEMNIFIER
 The person who promises to
compensate the loss is called the
indemnifier (promisor).
 INDEMNIFIED
 The person whose loss is to be
compensated is called the indemnity
holder or indemnified (promisee).
PARTIES IN  Examples: A parked his cycle at cycle
CONTRACT OF stand. He lost his token given by B. B
refuses to return the cycle. To get the
INDEMNITY cycle A promises to compensate B
against the loss he may suffer if any
other person claims the cycle from B.
 A(Principal) contracts to indemnify
B(Agent) against the result of any
proceedings which C may take against
B for certain sum of Rs. 2 lac. It is a
contract of indemnity.
Essentials of Contract of Indemnity

 Following are the essentials of a valid contract of indemnity.

Special Contract
It is a special type of contract. All the essentials of valid contract are also required for a contract of
indemnity. It maybe express or implied.
It is kind of contingent contract.
Example : A asks B, a journalist, to publish a false statement against C and promise to compensate B for
any loss which he may suffer . It is not a valid contract.
2) Indemnity by Promisor
The purpose of the contract of indemnity is to protect the indemnity holder from loss which may occur in
future by the promisor . A contract of indemnity will be performed when the indemnity holder suffers a loss.
3) Reason of loss
Indemnity holder shall be protected from loss caused be he action of indemnifier or any other person.
Rights of Indemnity Holder

 The following are the rights of indemnity holder. (Sec 125).

a) Recovery of Damages
He can recover all damages which he may be compelled to pay in respect of
any suit filed against him.
a) Recovery of Expenses
He can recover expenses in respect of any suit filed by him with the authority of
indemnifier.
a) Recovery of Amount
He can recover all the amount which he might have paid as a result of any
compromise.
CONTRACT OF GUARANTEE

 Definition
 Section 126 provides that, “A contract of guarantee is a contract to
perform the promise or discharge the liability of a third person in case of his
default,”
 A contract of guarantee is made to enable a person to get a loan or
goods on credit or an employment etc. it may be oral or written. It is an
act to perform the promise of the other, on his failure to do so.
 Example : A requests B to lend Rs. 5 lac to C and guarantees that if C fails
to pay, he will pay to B, this is a contract of guarantee.

 Parties in Contract of Guarantee

 Surety/Guarantor
The person who gives the guarantee is called the surety or guarantor.
 Creditor
The person to whom the guarantee is given is called the creditor.
 Principal Debtor
The person in respect of whose default the guarantee is given is called the
principal debtor.
Example : A and B enter in D’s shop. A says to D. “Supply B, the goods and if B
does not pay you, I will pay.”
A, on request of B, promises with the employer of B that if B commits a fraud, A
shall be liable . It a contract of guarantee.
Parties in
Contract
of
Guarantee
ESSENTIAL OF CONTRACT OF
GUARANTEE

 Tripartite Contract
 Consideration
 Misrepresentation-INVALIDATES
 Concealment-INVALIDATES
 Writing not Necessary
 1) Tripartite Contract
 It is an agreement between the principal debtor, creditor and surety. The three
separate contracts exist between them. If the promise by principal debtor is
not fulfilled, the liability of the surety arises.
 In a contract of guarantee the principal debtor is liable and the surety will be
liable on principal debtor’s default. The primary/principal contract exists
between the principal debtor and the creditor and the contract between
creditor and surety is a secondary contract
 Example : X takes a loan of Rs. 5000 from Y on the guarantee of Z. the
agreement between X and Y is the principal contract and the contract
between Y and Z is a contract of a guarantee. The liability of Z will arise only
when X fails to repay the loan.
 2) Consideration
 A contract of guarantee like other contracts must fulfill essentials of a valid
contract. It must be supported by some consideration. It is not necessary
that there must be direct consideration between the surety and the
creditor. The consideration received by the principal debtor is sufficient for
the surety. (Sec. 127)
 Example :
 A sells goods on credit to B on C’s guarantee. C’s promise to guarantee is
the consideration for A’s promise to sell the goods.
 3) Misrepresentation
A guarantee obtained by means of misrepresentation made by the
creditor regarding the facts of a contract is invalid. If the consent of the
surety is obtained by misrepresentation, the surety will be discharged from
the liability. (Sec.142)
 4) Concealment
The creditor must disclose all the material facts about the contract to the
surety before entering into a contract. If the creditor conceals material facts
from the surety and obtained his consent, the contract is invalid. (Sec.143)
 (5) Writing not Necessary
It is not necessary that the contract of guarantee must be in writing. It may be
either oral or written. It may be express or implied from the conduct of parties,
(Sec. 126)
Difference between Indemnity Guarantee
Indemnity & 1. Number of Parties In a contract of guarantee, there are three
Guarantee In a contract of Indemnity, there are two
parties indemnifier and indemnity holder.
parties creditor, principal debtor and
surety.

2. Number of contract In guarantee there are three contracts i.e.

In indemnity there is one contract between between creditor and principal debtor,
indemnifier and indemnified. creditor and surety , and surety and
principal debtor.

3. Nature of Liability
The liability of indemnifier is primary and The liability of surety is secondary. Surety
independent. is liable if principal debtor fails to perform
his promise.
4. Request
In a contract of Indemnity, the indemnifier In a contract of guarantee, the surety gives
promises without the request of the debtor. the guarantee on the request of debtor.

5. Existence of Liability
In a contract of indemnity, the liability of In a contract of guarantee, the liability
the indemnifier arises on the happening of already exists and its performance is
event. guaranteed by surety.

6. Filing of Suit
In a contract of indemnity, the indemnifier
cannot sue the third party for loss in his
own name. He can sue if the claim is
assigned in his favour.
In a contract of guarantee, the surety after
paying to creditor can sue principal debtor
in his own name.

7. Purpose
A contract of indemnity is for A contract of guarantee is for security of a
reimbursement of loss. debt or performance of promise.
Kinds of Guarantee

 1. Simple guarantee
 A guarantee which extends to a single debt or transaction is called
ordinary, simple or specific guarantee. It comes to an end as soon as the
liability under the transaction ends.
Example : G guarantees K for the payment of 5 bags of wheat purchased by
C. C makes payment. Later on C again purchases 5 bags of wheat. C did not
pay. K sued G. Held, G’s guarantee is specific guarantee and G is not liable.
(Kyk vs. Groves)
 2. Continuing guarantee
A guarantee, which extends to a series of transactions is called continuing
guarantee. In other words a guarantee which covers a number of
transactions over a period of time is called continuing guarantee. It is like a
standing offer which is accepted by the creditor every time a subsequent
transaction takes place
Example
 A guarantees to C for B’s credit purchases with a running balance of
account not exceeding Rs. 5,000. This is a continuing guarantee
 A guarantees to C for B’s purchases from C for six months to the extent of
Rs. 5,000. This is a continuing guarantee
Revocation of Continuing Guarantee

 May be revoked by the surety as to future transactions, by notice to the

creditor
 In case of death of surety(personal nature contract)
 Novation
 Alteration
 Release of discharge of the principal debtor by creditor
 Compounding of creditor with the principal debtor
 Loss of security
Nature of Surety’s Liability

 Extent of Surety’s Liability

 The liability of the surety is co-extensive with that of the principal debtor
unless it is otherwise provided by the contract. The phrase co-extensive
with that of principal debtor shows the quantum of the surety’s liability. It
means that the liability of a surety is the same as that of a principal debtor
unless there is a contract to the contrary.. (Sec. 128)
 Example :
 A guarantees to B for the payment of a bill accepted by C. The bill is
dishonored. A is liable for the payment.
 Limitations of Surety Liability
By an express contract, the surety’s liability can be made less than that of the
principal debtor but never greater
 Initiation of Surety’s Liability
The liability of surety arises immediately at the time of default by the principal
debtor.
Rights of Surety

 Rights against principal debtor

The surety enjoys the following rights against principal debtor
(a) Right to Subrogation
After making the payment on the behalf of principal debtor, surety is clothed
with all the rights of the creditor, which he can himself exercise against
principal debtor.
Example :
X borrowed money from Y on the guarantee of W and mortgaged his house
to Y.X failed to pay, and W paid. Now W can enforce the mortgage of the
house against X.
Rights of Surety

 (b) Right of indemnity

 In every contract of guarantee there is an implied promise by principal
debtor to indemnify surety. The surety is entitled to recover from principal
debtor whatever sum he has rightfully paid under the guarantee. (Sec 145)
 3. Rights against co-sureties
 Where a debt is guaranteed by more than one surety, they are called co-
sureties. In such a case all the sureties are liable to make the payment to
creditor according to the agreement among them. If there is no
agreement and one of the co-sureties is compelled to pay the entire debt,
he has a right to contribution from the co-sureties. The rules in this
connection are as follows: (Sec. 146-147).
Rights against co-sureties

 (a) Similar Amount

 Where there are sureties for the same debt and the principal debtor has
committed a default, each party is liable to contribute equally to the
extent of the default.
 Example : A, B and C are sureties to D for the sum of Rs. 3000 let to E. E
makes default in payment. A, B and C are liable to pay Rs. 1000 each. If C
is insolvent and could only pay Rs. 500, then A and B will contribute
equally.
Rights against co-sureties

 (b) Different Amount

 Where there are sureties for the same debt for different sums, they are bound
to contribute equally subject to the limit fixed by their guarantee. They will not
contribute proportionately.
 Example : A B & C guarantee to D for sum of Rs.2Lac, 3Lac, and 4Lac,
respectively. In case of default, they will contribute equally subject to the
maximum limit fixed by their guarantee.
 If loss =8 lac 50thousand
 A will pay 2 lac
 B will pay 3 lac
 C will pay 3lac 50thousand
CO-SURITIES MAX GUARANTEE DEFAULT LOSS=90Rs
A 100 30
B 50 30
C 30 30

CO-SURITIES MAX GUARANTEE DEFAULT LOSS=100Rs

A 100 30+5=35
B 50 30+5=35
C 30 30

As the maximum guarantee limit for C is 30 so he is only liable

to pay 30Rs.
Rights against the creditor

 The surety enjoys the following rights against the creditor

 (a) Right to Securities
The surety at the time of payment can demand the securities which creditor
has received from principal debtor at the time of creation of contract,
whether surety is aware of such securities or not. If creditor by negligence
loses any security held by him, the surety is discharged to that extent from the
payment of guaranteed sum
Example : C gives loan of Rs. 2 lac to B on the guarantee of X. C also pledges
B’s car. B fails to pay, and X pays Rs. 2 lac to C. X can get the car from C.
 (b) Right to Claim Set-off/Counter Claim
If the principal debtor has some claims against the creditor, the debtor can
ask for adjustment of his debts to the extent of his claims. If creditor sues surety
for repayment, the surety can claim set off, if any which principal debtors had
against creditor.
Example :
A supply furniture of worth 2Lac to B on the guarantee of C. B claims that
some furniture is defective, and he will pay only Rs.180000. C can ask A for
adjustment of B’s claim.
CHAPTER 11
BAILMENT AND PLEDGE
CONTRACT OF BAILMENT
Meaning and Definition
The word bailment is derived from French word ‘baillier’ which means to deliver. According to
Section 148, “A 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 is the voluntary transfer of the possession
of goods by the owner to another person, under a
contract that such other person shall do hold them or
return them to the owner or deliver them according
to his order.
• A bailment arises when one person transfers possession of goods
CONTRACT OF to another person on condition that he will return them after the
accomplishment of purpose. If a person already in possession of
BAILMENT the goods of another person contracts to hold them, he becomes
the bailee and the owner becomes the bailor

The person delivering the goods is called the bailor.

The person to whom they are delivered is called the
bailee.
EXAMPLES:
A delivers a piece of cloth to B to make a suit. There is a contract of bailment between A and B.
b. A lends book to B for examination. There is a contract of bailment between A and B.
c. A delivers a watch to B for repair. There is a contract of bailment.
Essentials of Bailment
1.Contract
A bailment is based on a contract between bailor and bailee. The delivery of goods should be
made for some purpose and when the purpose is accomplished, the goods shall be returned to
the bailor
Example : A gives a piece of cloth to B, a tailor for making a suit. There is a contract of bailment
between A and B
2)Delivery of Goods
Bailment is the delivery of moveable goods from one person to another. Mere custody does not
create relationship of bailor and bailee. A servant who receives goods from his master to take to
a third person has only custody. The possession remains with master, so the servant cannot be
called bailee.
Example : A gives his watch to B who is shop owner for repair. There is a bailment.
3. Change of Possession
In case of bailment, the possession of moveable goods transfers from the owner to other person
for a temporary purpose. The ownership of the goods remains with the owner.
Example :
A delivers his car for repair. The possession of car transfers from A to B but ownership remains
with A.
4) Return of Goods
A bailment is made for some purpose. When the purpose is accomplished, the goods must be
return to the bailor in original form or altered form.
Example : A lends his cycle to B for a week. B is liable to return the same cycle .
A delivers a piece of cloth to B to make a suit. This is contract of bailment.
 1 By Benefit
2 By Reward
According to benefit, bailment can be grouped into three
Kinds of classes:

Bailment (a) For the Benefit of the Bailor

(b) For the Benefit of the Bailee
(c) For the Benefit of the Bailor and Bailee
(a) For the Benefit of the Bailor
Where the goods are delivered by the bailor to the bailee for benefit of the bailor, it is bailmet
for benefit of bailor only.
Example : B leaves his car with his neighbor without any charges.
(b) For the Benefit of the Bailee
Where goods are delivered to the bailee to be used without any compensation. It a bailment for
the benefit of the bailee only.
Example : A borrows B’s pen to use in examination hall.
A lend his books to B for study.
(c) For the Benefit of the Bailor and Bailee
Where the goods are delivered for the mutual benefit of both bailor and bailee. It is a
bailment for the benefit of bailor and bailee.
Example :A delivers his car to B, a mechanic for repair. It is for the benefit of bailor and bailee.
2) By Reward
According to reward, a bailment has two kinds.
a) Gratuitous Bailment
b) Non-Gratuitous Bailment
a) Gratuitous Bailment
It is bailment in which neither the bailor nor the bailee is entitled to any remuneration. It is also
called gratuitous bailment.
Example : Lending of a book to a friend.
b) Non- Gratuitous Bailment
It is a bailment where the bailor or the bailee is entitled to remuneration. It is also called non-
gratuitous bailment.
Example: Motorcar let out on rent.
Cloth given for tailoring on charges.
PLEDGE OR PAWN
Definition
The bailment of goods as security for payment of a debt or performance of a promise is called
pledge. (Sec 172)
The bailor in this case is called pledger. The bailee is called pledgee. A pledge is a special kind of
bailment. Under pledge on person transfers possession of some goods to another to secure the
payment of debt or the performance of a promise. In case of pledge the goods are deposited as
security to get a loan.
Example : A borrows Rs. 1000 from B and keeps his watch as security for payment of the debt.
The bailment of watch is called a pledge
Rights of Pledgee
1. Rights to Retain
The Pledgee can retain the goods pledged until his dues are paid. He can retain them for
payment of debt or performance of promise for interest due on the debt and all necessary
expenses incurred by him for the preservation of goods. (Sec. 173)
Example: A borrows Rs. 2 lac from B and pledges his diamond ring. If A does not return the loan
B can retain the ring.
2. Right to Retain for Other Debts
When the pledgee lends advances to the same pledgor after the date of the pledge, it shall be
presumed that the right to retain over the pledged goods extends even to subsequent advances.
(Sec. 174)
Example : M borrows Rs. 4 lac from N on 1 March and pledges his car. On 1 June M borrows
another sum of Rs.3 lac from N. M repays the first debt in full. N can retain the car against his
claim for second loan.
3. Right to extraordinary Expenses
The pledgee has the right to recover from the pledgor extra-ordinary expenses incurred by him
for the preservation of the goods pledged. But he cannot retain the goods, if such expenses are
not paid. He has only a right to sue the pledgor for recovery of such extra-ordinary expenses.
(Sec. 175)
Example
S pledges his horse with T. The horse falls sick and T spends some expenses on his treatment. T
can sue S to recover expenses.
4. Right to Sue and Sell
If the pledgor makes default in the payment of the debt or performance of the promise, the
pledgee may sell the thing pledged, after giving to the pledgor, a reasonable notice of his
intention to sell. The following points must be noted.

a. The reasonable notice is necessary. A sale without notice is void.

b. The pledgee cannot sell the goods to himself. If he does so such sale is void.
The Pledgor can recover the goods on payment.
(Sec. 176)
Duties of Pledgee
The duties of Pledgee are as follows:

1. To take reasonable care of the goods pledged.

2. Not to make any unauthorized use of the goods pledged.
3. Not to mix the goods pledged with his own goods.
4. Not to do any act inconsistent with the terms of the contract.
5. To return the goods pledged on receipt of his full dues.
Rights of Pledgor
The rights of pledgor are as under:
1. Rights to Redeem
If the pledgee makes an unauthorized sale, without giving a reasonable notice, the pledgor can
file a suit for redemption of goods.
2. Right to Claim Damages
To see that the pledgee preserves the goods pledged and properly maintain them.
He can claim damages if the goods were not in their original position.
Duties of Pledgor
The duties of pledgor are as follows:
1. Duty to Compensate
It is the duty of pledgor to compensate the pledgee for an extra-ordinary expenses
incurred by him. (Sec. 175)
2. Duty to Complete
It is the duty of pledgor to meet his obligation on stipulated date and comply with the terms of
contract.
 Difference Between Pledge & Bailment

Pledge Bailment
1. Purpose
In bailment, the goods are delivered for
In pledge, the goods are delivered as a
repairs and safe custody etc.
security for a loan or for the performance of
the promise.

2. Rights
In bailment, the bailee has no such right of
In pledge, the pledgee has a right of sale of
sale. He can retain the goods or sue for
the pledged goods on default after giving a
the dues.
notice to the pledgor.

3. Use of Goods
In pledge, the pledgee has no right of using
In bailment, there is no such restriction if
the goods pledged.
the nature of transaction so requires.
4. Return of goods
In pledge, the pledgee is not bound to
In bailment without reward the bailee is
return the goods delivered unless the debit
bound to return the goods on demand by
is repaid or promise performed
the bailor.
5. Lien
In pledge, lien can be exercised even for
In bailment, lien can be exercised only for
non-payment of interest.
the labour and skill spent.
 CHAP 13
CONTRACT OF
AGENCY
■ Meaning and Definition
A person may perform the business activities himself or through another person. A
person who acts on behalf of another person is called an agent. A person who
authorizes another person to act on his behalf is called principal. A contract which
creates the relationship of principal and agent is called an agency.
Assistance from another person in law will give rise to the creation of an agency law.
Parties to
Contract
■ Agency relationship
creates two contracts
enforceable by law. Firstly,
a contract of agency
between Principal and
Agent and secondly, a
contract of sale between
Principal and Third party.
■ Principal
■ Agent
■ Third party
■ Section 182 states
■ Agent
■ “Agent as person employed to do any lawful act for another or to represent another
in dealings with third persons”
■ Principal
■ “The person for whom such act is done or who is so represented is called the
principal”
■ Example : A appointed B to be his agent to buy goods from C. A will be known as the
Principal, B is the agent while C is the third party.
Essentials of Agency

■ 1) Agreement
■ An agency is the result of an agreement between the principal and an agent. The
contract of agency maybe express or implied. Under the agreement, the principal is
bound by the acts of his agent.
■ Example : B appoints C to buy 10 bags of sugar on his behalf. B is the principal and
C is an agent. It is a contract of agency
■ 2) Competent to Contract
A person who is competent to contract can appoint an agent. A principal must have
attained the age of majority and have a sound mind. A minor cannot appoint an
agent.(Sec.183)
Any person may become an agent. It means a minor or person of unsound mind can be
appointed as an agent.
Example : B appoints C, a minor. It is contract of agency.
■ 3) Consideration
in order to create an agency, the consideration is not necessary. The consideration may
or may not exist in an agency.(Sec.185)
Example : B appoints C as his agent to buy goods. C buys goods without charging any
commission. It is a contract of agency.
Types of Agent

■ General Agent
■ Special Agent
■ Universal Agent
■ Mercantile Agent
■ Commission Agent
■ Del Credere Agent
■ Broker
■ Auctioneer
■ Indenter
■ Banker
■ Advocate
■ General Agent
A general agent has the authority to perform all acts regarding a business, e.g. General
manager he can do any lawful act regarding that business.
■ Special Agent
A special agent has the authority to do a particular transaction.
e.g. person appointed to purchase a particular house . He has the authority to do a
particular act only.
■ Universal agent
A universal agent is the person whose authority is unlimited. He enjoys powers to transact
every kind of business on behalf of his principal. He is authorized to perform all acts given to
him.
■ Mercantile Agent
A mercantile agent is the agent who has authority to sell or buy goods or raise money on
the security of goods. He is generally appointed by a manufacturer or a seller to assist in
the sale of goods.
Commission Agent
A commission agent buys or sells goods in his own name for his principal in the best
possible terms. He receives commission for his services. He may or may not have
possession of goods.
■ Del Credere Agent
A del credere agent is one who gives guarantee to his principal that third party with
whom he enters into contract shall perform their obligations.
■ Broker
A broker is an agent who negotiates and makes contracts for sale and purchase of the
goods on behalf of the principal. He does not have the possession and control of the
goods . He can't act on his on name.
■ Auctioneer
An auctioneer is an agent who is appointed to sell goods to the highest bidder at a
public sale. He gets commission for his services . He acts as an agent of the buyer as
well as of the owner.
■ Indenter
An indenter is an agent who buys or sell goods on behalf of his principal from foreign
countries . He gets commission for services.
■ Banker
■ The banker is an agent of the customer. The banker collects cheques, pay bills etc.
on the behalf of this customer.
■ Company Directors & Managers and Partners
Company’s directors and managers are agents of the company and Partner is an agent
of the firm as they made decisions on the behalf of company / firm.
Sub Agent &
CO/Substitute
Agent
■ Sub Agent

Person employed by the original agent to act

under his control in the business of agency.

■ Co-Agent or Substitute Agent

A person who is named by the agent, on the

authority from the principal, to act for
principal. He is also the agent of principal.

In selecting a co agent for his principal, an

agent is bound to exercise the same amount
of discretion as man of ordinary judgement
or skill care would exercise in his own case.

(if he does this , he is not responsible to

principal for acts or negligence of his co-
agent)
Creation of Agency

■ A contract of agency maybe created in following ways.

1. Agency by Agreement
2. Agency by Estoppel
3. Agency by Necessity
4. Agency by Ratification
5. Agency by Operation of Law
■ 1)Agency by Agreement
It may be express or implied
■ a)Express:
■ When an authority is given by the principal to his agent by words spoken or written.
■ Principal can also give the “Power of attorney” to agent.
■ Power of attorney shall be given in written form.
■ Example : B writes a power of attorney in favor of C and authorizes him to sell his plot . It is a written express agency
■ b) Implied
■ An implied agency arises form the conduct situation or relationship of the parties. It does not arise as result of express
agreement.( sec.187)
■ Example : X and Y are brothers, X lives in Lahore and Y in Multan. Y, with the knowledge of X, gives his land on lease. Y
collects rent and remits to X. Y is an implied agent of X.
■ 2)Agency by Estoppel
The term estoppel means to prevent(estopped) a person from denying the truth of a statement. Agency
by estoppel arises when a person by his words or conduct let third person to believe that a particular
person is his agent, the principal is prevented from denying the existence of his authority.

For 3rd party to rely on existence of an agency by estoppel. Following conditions must apply.
a) The representation must be made by the principal.
b) This representation must have been made to 3rd party .
c) 3rd party must have relied on the existence of agency relationship in reaching a decision.
If these circumstances apply, a third party who suffers losses resulting from the situation can hold the
principal as liable and take legal action against the principal.
■ Example :
■ C tells D, in the presence of B, that he is B’s agent. B does not object to the
statement. Later, D enters into a contract with C thinking that he is B’s agent. B is
bound by the contract
■ L terminated the services of his agent H but did not notify. Later, H purchased goods
form T on the behalf of L held, that L was liable to T .(Truman v Loder)
■ 3)Agency by Ratification
The term ratification means approval of an act which has been performed by the agent
without authority. When a person does some act on behalf of another without his
authority and if his act is approved by that person, there is an agency by ratification. On
ratification, the principal is bound by the acts done by the agent. If his act is not
approved, there is no agency. (Sec.196)
Example : C buys 5 bags of wheat without the authority of B. B ratifies C’s act . C
becomes his agent.
Requisites of Valid Ratification

■ Act should be done on the behalf of the person who wants to ratify it.
■ Ratifier must be in existence at the time when the contract is entered into
■ Ratifier must be competent to the contract at the time of contract as well as at the time
of ratification.
■ Only lawful acts can be ratified.
■ There cannot be ratification of partial transaction( whole transaction must be ratified.)
■ Ratified must have complete knowledge of transaction.
■ No act can be ratified which result in third party to damage.
■ Ratification must be made in reasonable time.
■ 4)Agency by Necessity
Agency by necessity gives an authority to a person to act as an agent for another
without any consent of other person. The person can act as an agent under the
following conditions.
■ There must be real emergency to act on behalf of the principal.
■ There must be a real necessity to act on behalf of the principal.
■ It must not be possible for agent to get the principal’s instructions.
■ The agent has acted honestly in best the interest of the principal.
Example : B askes C to deliver fruits to a store in Karachi. C finds that the fruits are
perishing and sells them at Hyderabad. The sale is binding on B
■ 5) Agency by Operation of Law
An agency arises by the operation of law. Under the Partnership Act, 1932, a partner is
an agent of the firm. The act of a partner for the firm binds the firm. Under companies
Act,2017,a director is an agent of the company.
Authorities of an Agent

■ There are three types of authorities an agent can exercise.

1)Express authority
■ A written agency agreement may give an agent express authority
■ Principal should specify what tasks, power and authority the agent can exercise.
2)Implied Authority
Authority of an agent in excess of his express authority.( according to circumstances)
3)Ostensible Authority
■ where a person makes a representation to third parties that another person has
authority to act as his agent, even though he has not actually been appointed as
agent.
■ Where a person has previously represented to a third party that another person has
the authority to act as an agent and
■ Authority has subsequently taken away but
■ Third parties who previously dealt with agent have not been informed of this fact
Duties of an Agent

■ Carry out mandate( the work for he has been appointed)

■ Follow all lawful instructions of his principal.

■ Agent should conduct the business of agency with reasonable carefulness and proficiency.

■ Maintain accounts
■ Communicate to the principal in cases requiring principal instructions/directions.
■ Not to deal personally
■ Pay sum received

■ In case of death or insanity, agent is bound to take all responsible steps for the protection and preservation of the
interests entrusted to him.
■ Keep the information of principal secret.(even after termination of agency)
■ Not to make secret profit.
■ Exercise same amount of discretion as a man of ordinary skill would exercise in his own case while selecting a sub-agent
■ or substitute agent.
Rights of Agent

■ Right to receive remuneration.(agreed or any reasonable)

■ Lien on goods, paper and other properties of principal until remuneration has been paid.
■ An agent has a right to retain his principal money in his hands for all money due to himself in
respect of
– Remuneration
– Advances made
– Expenses properly incurred by him in conducting the business of agency,
■ Right to be indemnified against the consequences of all lawful acts done by him.
■ An agent has a right to stop the goods in transit to the principal just like an unpaid seller if :
– He has bought good for his principal by incurring personal liability for the price.
– The principal has become insolvent.
Duties of Principal

■ Indemnify agent for his lawful act

■ Indemnify against consequences of acts done in good faith.
■ Compensate agent for injuries sustained by him by neglect on part of principal.
■ Pay the agreed remuneration.(or if no remuneration is agreed, a reasonable
remuneration).
Rights of Principal

■ Principal can revoke the authority.

■ Must be compensated by the agent for any loss sustained due to non following of
the instructions of the principal.
■ To have proper accounts when he demands.
■ Entitled to claim all benefits resulting from transaction where agent secured secret
profit.
■ Principal can refuse to pay remuneration( or a part of it), if an agent has committed
misconduct in the business of agency.
■ To repudiate( cancel) the transaction, if an agent deals on his own account without
first getting prior consent of his principal.
Termination by Law

■ Completion of business
■ Expiry of time for which agent was appointed
■ Death or principal or agent
■ Insanity of principal or agent
■ Insolvent of principal
■ On winding up of company
■ Destruction of subject matter
■ Principal or agent becomes an alien enemy.
Termination by Act of Parties

By Agreement
■ The agency can be terminated at any time by mutual agreement between the principal and his
agent, thus, the authority of an agent terminates when principal and agent agree to terminate it .
■ Example : B employs C as his agent for 5 months. B & C with mutual consent can terminates the
agency before the expiry of 5months.
Revocation by Principal
■ The principal can revoke the authority of his agent at any time before the agent has exercise his
authority. The principal can revoke the authority of his agent for future transactions. In order to
revoke the authority, a reasonable notice must be given to the agent.
■ Example : B employs C as his agent for 1 year. B terminates the agency of C after 2 months
■ by giving his notice.
Revocation by Agent
■ The agency can be terminated by the agent because a person cannot be compelled
to work as an agent. But the agent must give a reasonable notice of revocation to
the principal otherwise he will be liable to compensate the principal for any loss.
■ Example :
■ B is appointed as an agent of C for 1 year. B terminates the agency by giving a
notice to C
PARTNERSHIP
ACT
1932
 The law of partnership is contained in the Partnership Act,1932. It came into
force on 1st October 1932. It extend to the whole of Pakistan.
Meaning and Definition
 Section 4 states “Partnership is the relation between persons who have
agreed to share the profits of a business carried on by all or any one of them
acting for all.”
 A partnership is a voluntary association of two or more persons who
contribute money time and skill to run a business for profit and share the
losses.
 The persons who have entered into a partnership are individually called
partners.
 The persons who have entered into a partnership are collectively called a
firm
 1) Legal Entity
A partnership has no separate legal entity apart from his members. It means that
partnership and partners are not separate from each other.
The rights and liabilities of the partnership firm are considered the rights and
liabilities of the partners.
 2)Agreement
A partnership is the result of an agreement between two or more persons. An
agreement may be written or oral. The persons who are competent to contract can
form a partnership. Upon death of a father who was partner in a firm, the son can
claim share in the firm’s assets but cannot become a partner unless he enters into an
agreement with the other partners.
 3) Mutual Agency
The business may be carried out by all the partners or any of them acting for all the
partners. Each partner acts as an agent of the other partners of the firm. Each partner
acts as a principal because he binds himself to the activities of other partners. It
means that the contract of agency exists among partners.
 4)Business/Purpose of Partnership
In order to form a partnership, the partner must agree to run a certain business. If the
purpose of partnership is to carry on something other than business, it cannot be
called a partnership.
 5) Numbers of Partners

At least 2 persons are required to form a partnership. According to

Companies Act
2017 20 or more persons cannot form a partnership, they have to form
a company if the member are more than 20.
However a partnership of more than 20 persons can be formed to
carry on practice as lawyers, accountants and other professionals. In
case of partnership among family members of a joint family, the
maximum number of member may be more than 20.
 6) Sharing of Profit
The agreement between partners must be to share profits of the business. The profit
is distributed among partners according to the agreement. If there is no agreement
regarding the distribution of profit, it is equally distributed among the partners. The
partners share the loss according to the agreed ratio.
 7) Unlimited Liability
The liability of all the partners is unlimited. All partners are individually and
collectively responsible for the debts of the business. If there is any loss and firm’s
assets are insufficient to pay the claims of the creditors, the private assets of the
partners can be sold to pay the claims.
 8) Transfer of Ownership
The partnership deed includes provisions regarding transfer of ownership of
partners, if there are no such provisions in the partnership deed a partner cannot
transfer his ownership to an outsider without consent of all other partners, thus the
share in a partnership in not freely transferable.
 9) Duration
A partnership continues as long as the partners are willing to run the business. It
comes to an end on death, insanity or insolvency of any of the partners. However if
remaining partners agree to continue the business and make a new agreement the
firm will not dissolve.
 1)Partnership at Will
 Where no provision is made in the agreement regarding the duration of the
partnership, it is called a partnership at will. Any partner can terminate it any time ,
by giving a notice of termination. When such a notice is given the partnership is
dissolved from the date mentioned in the notice.(sec.7)
 2) Particular Partnership
When a partnership is formed to do a particular business or undertaking it is called
a particular partnership. Such partnership is dissolved immediately on the
completion of the particular business, e.g. running coalmine or producing film.
If it is continued after completion of that business for which it was formed, it
becomes partnership at will.
z
TRANSFER OF
PROPERTY
z

 The phrase transfer of property in goods means transfer of ownership of the

goods. The rules regarding transfer of property in goods are as under

 1. UNASCERTAINED GOODS

 Ascertainment is the process by which the goods are identified and

separated. Where there is a contract for the sale of unascertained or future
goods the property in the goods does not pass to the buyer until the goods
are ascertained. (Sec. 18)

 EXAMPLE

 A agrees to sell 100 kg of rice out of rice lying in a godown. B becomes the
owner when 100 kg rice will be separated the rest.
z

 2. INTENTION OF PARTIES

 In contract of sale of specific or ascertained goods the

ownership transfers when the parties intend to transfer it. It
depends on the terms of the contact. It may transfer at the time
of the contract or when the goods are delivered or when the
payment is made. (Sec.19).

 EXAMPLE

 X sells some books to Bon cash basis. B becomes the

owner when he makes the payment.
z

 3. SPECIFIC GOODS IN DELIVERABLE STATE

 The goods in deliverable state means the goods are in such state that the
buyer is bound to take delivery of them.(Sec.2(3))

 Where there is an unconditional contract for the sale of specific goods

in a deliverable state the property in the goods passes to the buyer as soon
as the contract is made and it is immaterial whether the time of payment of
the price or the time of delivery of goods or both is postponed. (Sec 20) .

 EXAMPLE :

 B offers to sell his horse to A on 2 months credit. The horse will be

delivered on stated day and the price will be paid at the time of delivery, A
accepts the offer A becomes the owner when the offer is accepted.
z

 4. GOODS TO BE PUT INTO A DELIVERABLE STATE

 The expression 'put the goods into deliverable state means doing an
act like polishing them packing the goods, or loading them or to give a
finished shape etc. Where there is a contract for the sale of specific goods
and the seller is bound to do something to the goods for the purpose of
putting them into a deliverable state, the property does not pass until such
thing is done and the buyer has notice thereof. (Sec 21).

 EXAMPLES

 a. S sells a scooter to B for Rs. 5000. B pays at the time of contract. But
contract requires S to paint the scooter in gray color. B becomes the owner
when the scooter will be painted, and B will have notice of it.
z

 5. DETERMINATION OF PRICE.

 Where there is a contract for the sale of specific goods in a

deliverable state, but the seller is bound to weigh, measure, test or
do some other things with reference to the goods for the purpose of
ascertaining the price, the property does not pass until such, act is
done and the buyer has notice thereof. (Sec 22).

 EXAMPLE

 Z sold to F. 289 bales of goatskins. Before Z could count them

the bales were destroyed by fire. Held, the loss fell on Z because
the ownership had not Transferred to F. (Zagury. Furnell)2
z

 6. APPROPRIATION

 Where there is contract for the sale of unascertained or future goods

by description, the property in the goods passes to the buyer when goods
of that description in deliverable state are unconditionally appropriated to
the contract, either by the-seller with the assent of the buyer or by the buyer
with the assent of the seller. (Sec. 23(1)).

 EXAMPLE

 T bought 20 bags of sugar from R. R filled 20 bags. T took delivery of

4 and promised to take the rest. T failed to ,collect the remaining and R
sued for price, Held, the ownership had passed to the buyer. (Rhode vs.
Thwaites)3 ,
z

 7. DELIVERY TO A CARRIER

 The seller is deemed to have appropriated the goods when he

delivers the goods to a carrier for transmission to the buyer. The
delivery of goods to a carrier is considered the delivery to the buyer
and the property at once transfers to the buyer. The term
appropriation involves separating, Weighing, measuring counting or
similar acts. (Sec. 23(2)).

 EXAMPLE

 B buys a fridge from A, a shopkeeper. When A handovers the'

fridge to carrier, the ownership transfers to B.
z

 8. GOODS DELIVERED ON APPROVAL

 When goods are delivered to the buyer an approval or on sale return

or other similar terms, the property there in passes to the buyer:-

a). When he gives his acceptance to the seller or does any other act adapting
the transaction.

b). If he does not give his acceptance to the seller but retains the goods
without giving notice of rejection beyond the time fixed for the return of goods
or if no time has been fixed beyond a reasonable time. (Sec. 24)

 EXAMPLES

 a. A sends jeweler to B an sale or return. The jewelley becomes B’

property when B retains them.
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 SALE BY NON-OWNER

 The general rule is that only the owner of the goods can sell
the goods If the seller is not the owner of the goods the buyer
cannot became the true owner of those goods even though he has
paid value far the goods. This protects the owner of the goods. The
“Maxim” “Nemo dat quad non habet” means that no can give
who himself does not have

 EXAMPLE :

 A steals a radio and sells it to B who buys it for value and with
out notice that A is not the owner. The true owner can recover it
from B.
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EXCEPTIONS TO THE RULE
 The following are the cases under which a non-owner of goods can sell the
goods and the buyer became the true owner of those goods

 1. PERSON NOT THE OWNER

 Where the owner of the goods by his words or conduct or act or

omission, causes the buyer to, believe that the seller has the authority to
sell them, he cannot afterwards deny the seller's "authority to. sell. The
buyer in such a case gets a better title than the seller.(Sec27.para1)

 EXAMPLES

 a. A sold his father's car in his presence to. B. His father did not abject.
Later he ,can not deny his son's authority to sell. The sale is valid.
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 2. Mercantile Agent

 Where a mercantile agent is with the consent of the owner, in

possession of goods or documents of title to goods any sale
made by him in the ordinary course of business shall be valid
provided the buyer acts in good faith and without notice that the
seller had no authority to sell.

 EXAMPLE F gave his car to a mercantile agent for sale at a

stated price. The agent sold to S below the stated price. S resold
the car to K. Held, S transferred a good title to K and F was not
entitled to recover the car. (Folks vs. King)6 '
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 3. JOINT OWNER

 When one of the Joint owners, having possession of the

goods by permission of the co-owner sells the goods, a buyer will
get a good title to the goods provided the buyer buys them in good
faith and without notice that the seller's title was defective at the
time of contract. (Sec. 28).

 EXAMPLE

 A,B and C' are three brothers. They own a cow in common. B
and C. leave the cow for look after in A's possession. A sells the
cow to D. D gets a. good title.
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 4. UNPAID SELLER

 Where an unpaid seller who has a right of lien or stoppage in

transit resells the goods, the buyer gets a good title to the goods as
against the original buyer in spite of the fact that no notice of resale
has been given to the original. buyer. [Sec 54(3)]

 EXAMPLE

 A sells a sofa set to B for Rs. 10,000. B pays Rs. 4,000 as

advance and Promises to pay the balance at the time of taking the
delivery. B does not pay the balance for several days. A sells it to
C. C gets a good title
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 5. PERSON IN POSSESSION IN VOIDABLE CONTRACT

 When a person has obtained possession of the goods'

under a voidable contract and sells them before the contract has
been cancelled, the buyer of such goods acquire a good title
provided the buyer acts in good faith and without notice of the
sellers defect of title. (Sec.29).

 EXAMPLE

 A by fraud buys a horse from B. A sells. the horse to C

before cancellation of contract by B. C gets a good title.
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 6. FINDER OF LOST GOODS

 A finder of the lost goods can also sell the goods. under some
circumstances and the buyer will get a good title. (Sec 169)

 EXAMPLE

 A finds a lost horse. The horse fails sick A spends Rs.

1.000 on the treatment. B the owner of the horse refuses to pay
to A. A sells the horse to Z. Z gets a good title.
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 PLEDGEE

 A pledgee can also sell the goods under some

circumstances. The buyer gets a goods title. (Sec176).

 EXAMPLE

 X pledges his tractor to Y and borrows Hs. 5 Lac. X does

not pay the loan. Y sells the tractor to Z. Z gets a good title.
z
RIGHTS OF UNPAID SELLER

 Definition of Unpaid Seller

 The seller of goods is deemed to be an unpaid seller.

 1. When the whole of the price has not been paid or tendered; or

 2. When a bill of exchange or other negotiable instrument has

been received as a conditional payment and it has been
dishonored.

 The term seller includes any person who is in the position of a

seller, e.g. an agent of the seller. (Sec 45).
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Features of Unpaid Seller

 The following are the features of unpaid seller:

 1. He must sell goods on cash basis and must be unpaid.

 2. If he sells the goods on credit, he is not an unpaid seller during the

period of credit.

 3. If the term of credit has expired and the price has not been paid.

 4. He must be unpaid wholly or partly. If a part of the price remains unpaid,

he is an unpaid seller.

 5. Where the price is paid in the from of negotiable instrument and fit is
dishonored.

 6. If the price is offered by the buyer and the seller refuses to accept it, the
seller cannot be called unpaid seller.
z

 (Examples)

 a. A sells goods to B on 5 months credit. A is not an unpaid

seller. But if B becomes insolvent after 2 months A becomes an
unpaid seller.

 b. A sells goods to B for Rs. 5,000. B has paid Rs 3,000 and the
remaining are to be paid. A is an unpaid seller.

 c. A sells 50 books to B. A gets a cheque for payment. The

cheque is dishonored. A is an unpaid seller.

 d. A sells a mixer to B. B offers the payment. A refuses to accept

payment. A is not unpaid seller.
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Rights of an Unpaid Seller

 1)Rights Against the Goods

 Right of Lien

 The right of lien means the right to retain the possession of goods
until the full price is received. An unpaid seller can exercise his right
of lien in the following cases (Sec 47-49)

i) Where the goods have been sold for cash and not on credit.

(ii) Where the goods have been sold on credit but the term of credit
has expired.

(iii) Where the buyer becomes insolvent.

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 Right of Lien

 The others rules regarding lien are as under:

 It can be exercised when the goods are in possession of seller as

agent or bailee of the buyer.

 (ii) It can be exercised even if the documents of title have been

delivered to the buyer.

 (iii) It can be exercised for price and not for other expenses.

 (iv) If seller delivers some goods, it can be exercised on the

remainder
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 Loss the Right of Lien

 The unpaid seller loses his right of lien in the following cases:

 When he delivers the goods to a carrier or other bailee for

transmission to the buyer.

 (ii) When the buyer or his agent lawfully obtains possession of the
goods.

 iii) When the seller waives his right of lien on goods.

 iv) The right of lien, once lost, will not restore.

 (v) Where the buyer further sells the goods and the seller agrees.
z

 (b) Right of Stoppage of Goods in Transit

 The right of stoppage in transit means the right of stopping the goods while
they are in transit to take possession until the price is paid. The unpaid
seller can stop the goods in transit in the following cases. (Sec 50-52)

 When the buyer becomes insolvent;

 (i) When the goods are still in transit.

 (ii) When the seller has the right of stopping the goods.

 (iii) When the property’s ownership has already been passed to the
buyer.
z

 The seller cannot stop the goods in transit in the following cases.

 (i) When the buyer or his agent takes delivery of the goods after the goods
have reached destination.

 (ii) When the buyer or his agent takes delivery of the goods before the
goods have reached at the destination.

 (iii) When the buyer requests the carrier to carry the goods to a new
destination after the goods have reached at original destination.

 (iv) When some of the goods have been delivered to the buyer or his agent
under the circumstances which show that there is an agreement to give up
possession of the whole of the goods.
z

 Right of Stoppage of Goods in Transit (Example)

 A sells 20 bags of cement to B. A delivers the cement to a

carrier to carry to B. Later, A gets a news that B has
become insolvent A can stop delivery only in transit phase.

 If goods delivers to B or B’s agent get the delivery A will loss the
right to stoppage of goods.
z

 (c) Right of Resale

 The unpaid seller can resell the goods in the following cases. (Sec 46(1)54)

 (i) Where the goods are of perishable nature;

 (ii) Where there is provision regarding the right of sale in the contract.

 (iii) Where the seller gives a notice to the buyer of his intention to resell
and the buyer does not pay within a reasonable time, he can:

 a. Recover loss on resale of the goods, if any.

 b. Retain any surplus on resale of goods, if any

z

 Right of Resale

 However, if the seller resells without giving notice to buyer,

he cannot:

 a. Recover loss on resale of the goods, if any.

 b. Retain any surplus on resale of goods, if any

z

2. Rights against the Buyer Personally

 The unpaid seller has the following rights against the buyer:

 (a) Suit for Price

 Where the ownership in goods has passed to the buyer, and

buyer refuses to pay the price according to the terms of the
contract, the seller can sue the buyer for price, irrespective of
delivery of goods. (Sec 55)

 (Example)

 A sells the goods to B. B refuses to pay. A can sue for the

price.
z

 (b) Suit for Damages for Non-acceptance

 Where the buyer refuses to accept and pay for the goods, the
seller may sue him for damages for non-acceptance. The seller
can recover damages only. He cannot recover full price. (Sec
56)

 (Example)

 A sells the goods to B. B refuses to take the goods and pay

the price. A can sue B to compel to take the goods.
z

 (c) Suit for Special Damages and Interest

 The seller can sue the buyer for special damages where the parties
are aware of such damages at the time of contract. The unpaid
seller can recover interest at a reasonable rate on the total unpaid
price of goods, from the time it was due until it is paid. (Sec 56)

 (Example)

 X sells some goods to Y. Y does not pay the price. X can sue
for damages and interest if the parties are aware of such
circumstances.
Conditions
And
Warranties
A contract of sale of goods contains various terms or stipulations regarding the
quality, price mode of payment, delivery of goods, time of performance and
place where the goods are to be sent. The major terms are called conditions
and minor terms are called warranties.
DEFINITION OF CONDITION
 Condition is a stipulation essential to the main purpose of the contract, the
breach of which gives rise to a right to treat the contract as repudiated.
(Sec.12(2)).
 Thus, a condition. is essential for the main purpose of the contract. Its non-
fulfillment causes irreparable loss to the aggrieved party. In case of
violation of condition, the aggrieved party can cancel the contract.
Example :

 ‘X’ wants to purchase a car from ‘Y’, which can have a mileage of 20
km/lt. ‘Y’ pointing at a particular vehicle says “This car will suit you.” Later
‘X’ buys the car but finds out later on that this car only has a top mileage of
15 km/ liter. This amounts to a breach of condition because the seller made
the stipulation which forms the essence of the contract. In this case, the
mileage was a stipulation that was essential to the main purpose of the
contract and hence its breach is a breach of condition.
 C contracts to deliver 100 Royal fans to B. But C delivers Climax fans. It is a
breach in condition. B can accept or reject them and claim damages
DEFINITION OF WARRANTY

 A warranty is a stipulation collateral to the main purpose of the contract,

the breach of which gives rise to a claim for damages but not to right to
reject the goods and treat the contract as repudiated. (Sec. 12(3))
 In other words, a warrantee is not essential for the main purpose of the
contract. The breach of warranty gives the injured party a right to recover
damages only but not to reject the contract.
Example :

1. A man buys a particular car, which is warranted to be quite to drive and

very comfortable. It turns out that after some days the car starts to make
a very unpleasant noise every time it is operated. Also sitting inside it is
also not very comfortable.
 Thus the buyer’s only remedy is to claim damages. This is not a breach of
the condition but rather a breach of warranty, because the stipulation
made by the seller was only a collateral one.
2. A promises to deliver to B 100 fans at his office. But A delivers them at his
home. It is a breach of warranty. B can claim damages only
CONDITION TREATED AS WARRANTY

 A breach of condition is treated as a breach of warranty under the

 following cases:
 1. OPTION OF BUYER
The breach of condition by the seller gives the right to the buyer to reject the
goods. But buyer waives the performance of the condition for his own benefit.
He may treat the breach of condition as a breach of warranty and accept
the goods and claim damages. (Sec. 13(1))
 EXAMPLE
 A agrees to supply B first grade sugar but supplies second grade sugar, B
can reject it B may accept the second grade sugar and claim damages
 2. ACCEPTANCE OF GOODS BY BUYER
 Where the buyer has a accepted the goods, he cannot reject them but can
claim damages. If the buyer has accepted only part of the goods and the
contract is Indivisible, he will have to accept the remaining part also. But in
divisible contract he can reject the remaining goods, if he has accepted only
part thereof. (Sec. 13(2)).
EXAMPLE :
J contracted to sell horns to R. The horns were delivered in 19 boxes by installments.
R accepted 1 box and rejected others being dented. J sued for the price for all
horns, Held, that R could reject (Jackson vs. Rotax Motor Car Co)2.
3) When the condition of contract cannot be fulfilled due to impossibility or any
other reason.
EXPRESS AND IMPLIED CONDITIONS AND
WARRANTIES
 The conditions and warranties which are included in contract are called
express. The conditions and warranties which are not included in the contract
but the law presumes their existence in the contract are called implied.
 IMPLIED CONDITIONS
 1. CONDITION AS TO TITLE
 It is implied condition that in a sale the seller has a right to sell goods and in an
agreement to sell he will have a right to sell the goods at the time when the
ownership is to pass. Thus, if the seller's title proves to be defective the buyer can
reject the goods and recover his price. (Sec. 14(a)).
 EXAMPLE :
 R purchased a car from D. After few months, the police took away the car as it
was stolen. R sued D to recover the price. Held, that R can recover the‘ price.
(Rowland vs. Dival)
 2. SALE BY DESCRIPTION
 In a contract of sale of goods by description; it is an implied condition that
the goods shall correspond with the description. If the goods are not
according to the description, the buyer can reject the goods. If the seller
supplies different goods, the buyer is not bound to accept such goods.
(Sec.15).
 EXAMPLES
 A ) A advertised a car for sale as Corolla, 1990 Model B after buying the
car found it of an earlier model. B could return the car.
 3. SALE BY SAMPLE
 In case of sale by sample, the goods must be. Supplied according to a sample
agreed. It is subjected to the foll9wing are conditions. (Sec. 17).
a) The bulk shall correspond with the sample in quality.
b) The buyer shall have reasonable opportunity to compare the bulk with the
sample.
 c. The goods shall be free from any defect, apparent on reasonable
examination of the sample
 EXAMPLE
There was sale by sample of two parcels of wheat. The seller showed the bulk of
one parcel but not the other. It was held' that the buyer could cancel the contract.
(Lorymer vs. Smith)
 4. Sale by Sample as Well as by Description
 When the goods are sold by sample as well by description, there is an
implied condition that the bulk of the goods shall correspond with the
sample and the description. If the goods supplied correspond only with the
sample and not the with the description. Or vice versa the buyer can reject
the goods. (Sec.15).
 EXAMPLE:
 N agreed to sell G foreign refined grape oil. The oil supplied
corresponded with the sample but was mixed with hemp oil. Held that the
ail was not in accordance with the description, so the buyer could reject.
(Nichol vs. Gadts)
5. CONDITION AS TO WHOLESOMENESS
 Wholesomeness means beneficial for health. This condition applies only in
contract of sale of eatables and provisions. It means that the goods must
be fit for consumption.
 EXAMPLES
 a. F bought milk from A, a dairy owner. The milk contained germs of
typhoid fever. F's wife on taking the milk became infected and died. A,
was held liable in damages (Frost vs. Ayles Bury Dairy Co Ltd)8
 b. C bought a bun containing a stone which broke C's tooth. Held C
could recover damages. (Cheproniere vs. Mason)9 '
 6. Hidden Defects
The seller must inform the buyer of any hidden defects in the goods at the time
of contract which are in his knowledge. But if the defects are obvious, the
seller is not bound to inform the buyer.
Example :
A sold a car to B. A was aware of the defect in the car but did not inform B.
The contract is voidable.
 7. CONDITION BY CUSTOM
 An implied condition as to quality or fitness for a particular purpose may
be annexed by the usage of trade. In some cases the purpose for which
the goods are required may be ascertained from the acts and conduct of
the parties to the sale or from the nature of description of the article
purchased. (Sec.16 (3))
 EXAMPLE
 X sold goods by auction to Y. In a sale by auction there was a custom to
declare any fault in the goods. Goods were sold without declaration.
Goods were found damaged. Held, Y could reject the goods:
IMPLIED WARRANTIES

 1. QUIET POSSESSION
 It is an implied assurance to the buyer that he shall have the possession and
enjoyment of the goods .sold to him without disturbance from the seller or
any other person. lf the buyer is disturbed in the enjoyment of the goods
due to the seller’s defective title, he can claim damages from the seller.
(Sec. 14 (b))
 Example : B bought a cycle from C. The mechanic asked B to pay the
unpaid repair charges . B can recover the amount from C.
 2. FREEDOM FROM ENCUMBRANCES(hurdle)
 It is implied warranty on the part of seller that, the ,goods shall be free from
encumbrance in favor of any third party. the warranty will not apply where
such encumbrances are declared to the buyer when the contract is made.
If the possession of the buyer is disturbed due to such charge in favor of
third party he can claim damage (Sec.14 (c)).
 3. USAGE OF TRADE
 An implied warranty as to quality or fitness for a particular purpose may
be annexed by the usage of trade (Sec. 16(3)).
 EXAMPLE
 Shahalam market offers to pay damage on the fading of color of cloth.
Every seller of cloth of that market is bound by this warranty.
 4. DISCLOSURE OF DANGEROUS GOODS
The implied warranty on the part of the seller is that if the goods are of
dangerous nature he will warn the ignorant buyer about the probable danger.
In case of breach of this warranty the buyer is entitled to claim compensation
for the injury caused to him.
 EXAMPLE
 C purchased a tin of disinfectant Powder from A. A knew that if tin is not
opened with special care it may be dangerous but told nothing to C. C
opened the tin in the normal way and as a result the powder flied into his
eyes and caused injury. A was held liable (Clarke vs. Army &Navy Coop
Lta)11.
DOCTRINE OF CAVEAT EMPTOR

 Caveat Emptor means let the buyer beware According to this principle it is the duty of the
buyer to be careful while purchasing goods of his requirement. The buyer must examine
the goods thoroughly. He should also see that the goods are suitable for his purpose. If the
goods prove to be defective or do not suit his purpose, the buyer cannot hold the seller
liable for the same. If the buyer, at the time of making the purchases, depends upon his
skill and makes a bed choice, he must blame himself for his own folly.

 According to section 16 (a) the seller is under an obligation to inform the buyer of any
defect, in the goods sold at the time of contract, except, in a case where the defect is
obviously known to the buyer. It means that if the defects are in the knowledge of seller he
must inform to the buyer about those defects provided those defects are not obvious. But
it the defects are obvious, the seller is not bound to inform to the buyer.
 EXAMPLE
 A purchases a horse from B.A needs the horse for riding but he does not mention to B. The
horse is not suitable for riding A cannot reject the horse.
EXCEPTIONS

 The doctrine of Caveat Emptor is subject to the following exceptions.

 1. PURCHASE DESCRIPTION
 Where the goods are purchased by description the doctrine of caveat
emptor does not apply if they do not correspond with the description, (Sec
15)
 EXAMPLE
 V sold a reaping machine to W describing that it is 1 year old. W found it to
be 2 years old. W could return it as it does not correspond with description.
 2. PURCHASE BY SAMPLES AND DESCRIPTION
 Where the goods are bought by sample as well as by description and the
bulk of the goods do not correspond both with the sample or with the
description, the buyer is entitled to reject the goods. (Sec. 15)
 A sells Air Filter to B saying that it is genuine and fit for Corolla car. B finds
that it is fit but not genuine. B can reject it.
 3. FITNESS FOR PURPOSE
 Where the buyer informs the seller about particular purpose for which he
needs the goods and relies upon seller's skill and judgment. The seller must
supply the goods which shall be fit for the buyers purpose.[See16(1)].
 EXAMPLE
 A purchased two trousers from B, a manufacturer. On wearing A became
ill. His illness was caused by chemical irritant which B failed to remove in the
process of manufacturing. B was held responsible
 4.CONSENT BY FRAUD
 Where the seller makes a wrong statement intentionally to the buyer and
the buyer relies on it or where the seller actively conceals the defects in the
goods, which could not be discovered on a reasonable examination this
principle does not apply. (Sec.17 of Contract Act).

 EXAMPLE:
 A knows that his watch is made in Pakistan. In order to sell his watch A. tells
B that it is made in Switzerland. B buys the watch. B can reject the contract
 5.CONSENT BY MISREPRESENTATION
 Where the seller makes a misrepresentation arid the buyer relies on it the
doctrine of caveat emptor does not apply. Such a contract is voidable at
the option of the buyer. The buyer can reject the contract. (Sec.18of
contract Act)
 EXAMPLE
 A while selling his horse to B, tells him that the horse is sound. B buys it and
finds the horse to be unsound. B can reject the contract.
 6.PURCHASE BY SAMPLE
 Where the goods are bought by sample the principle of Caveat Emptor
does not apply if the bulk does not correspond with the sample or if the
buyer is not provided an opportunity to compare the goods With sample:
(Sec17)
 EXAMPLE
 X buys Oil Filter from Y by showing a sample. The oil filter does not
correspond with a sample. X can return it.
 7. Dangerous Goods
The doctrine of caveat emptor doe not apply if the goods are of dangerous
nature, and the seller fails to inform the buyer about the particular danger.
Example : A purchased a hot water bottle from B, a retail chemist. B did not
inform A how to open the bottle. When A’s wife opened the bottle, it burst
and injured her. B was liable for damages. (Priest vs Last)
FORMATION AND
DISSOLUTION OF
PARTNERSHIP
FORMATION OF PARTNERSHIP FIRM

 Basic facts of partnership:

 1) Mutual Confidence and Utmost Good Faith .
 2) All Essential elements of Valid Contract is must .
 3) Mutual Rights and Obligations of Partners in form of Partnership Deed .
 4) Partnership firm must be registered, otherwise the firm will not be able
to enforce its legal remedies against outsiders .

 PARTNERSHIP DEED : “ The document in writing containing the important

terms of partnership as agreed by the partners between themselves”.
Drafted, stamped & signed .
 HANDLING OF PARTNERSHIP DEED :
 a) It should be drafted with care and be signed by all the partners .
 b) It must be stamped according with the partnership act .
 c) Each partner should have a copy of deed .
 d) The firm should be registered, and a copy of the deed should be filled at
the time of registration with register of firms .
  THE PARTNERSHIP DEED SHOULD COVER :
 1) Name, name of firm, addresses of partners .
 2) Nature of business, town, place carried it .
 3) Date commencement of partnership .
 4) Duration of partnership (may /may not ) .
The contents  5) Amount of capital by partners and method of raising
of the 
finance in future .
6) Ratio of sharing profits or loss .
partnership  7) Salaries, commission etc. if any payable to partners .

deed 


8) Interest on partners, partners loan and interest .
9) Valuation of assest
 10) Division of tasks and responsibility i.e. the duties,
powers, and obligations .
11) Rules to be followed incase of retirement, death and
admission of partners .
12) Expulsion of partners in case of gross breach of duties
and fraud .
13) Clearly provides that the deed may provide that a
partner shall not carry on any business other than that of
the firm while he is a partner.
14) Dissolution of partnership
CLASSES OR KINDS OF PARTNERS

1. Active, Actual or Ostensible Partners :

2. Sleeping or Dormant
3. Silent partners
4. Partnership in profits only
5. Nominal Partner
6. Sub Partners
7. Partner by Estoppel .
1)Active, Real Ostensible Partner
 An active partner is also known as Ostensible Partner. As the name suggests he
takes active participation in the firm and the running of the business. He
carries on the daily business on behalf of all the partners. This means he acts
as an agent of all the other partners on a day to day basis and with regards to
all ordinary business of the firm.
 Hence when an active partner wishes to retire from the firm, he must give a
public notice about the same. This will absolve him of the acts done by other
partners after his retirement. Unless he gives a public notice, he will be liable
for all acts even after his retirement.
2)Sleeping or Dormant Partner
 This is a partner that does not participate in the daily functioning of the
partnership firm, i.e. he does not take an active part in the daily activities of
the firm. He is however bound by the action of all the other partners.
 He will continue to share the profits and losses of the firm and even bring in
his share of capital like any other partner. If such a dormant partner retires,
he need not give a public notice of the same.
3)Silent Partner
A silent partner is an individual whose involvement in a partnership is limited to
providing capital to the business. A silent partner is seldom involved in the
partnership's daily operations and does not generally participate in management
meetings
4) Nominal Partner
 This is a partner that does not have any real or significant interest in the
partnership. So, in essence, he is only lending his name to the partnership. He
will not make any capital contributions to the firm, and so he will not have a
share in the profits either. But the nominal partner will be liable to outsiders
and third parties for acts done by any other partners.
5)Partner in Profits Only
 This partner will only share the profits of the firm, he will not be liable for any
liabilities. Even when dealing with third parties he will be liable for all acts of
profit only; he will share none of the liabilities.
Example :
 Abdul Rehman, Anushay and Ali are three partners
 Anushay is profit only partner. She will not be liable for the loss of loan payment
of HBL 30million, KESC 2million and salaries 5million.
 Abdul Rehman and Ali are unable to pay
 The partnership firm got losses of 100million will Anushay be liable to pay ?
 Ans : Yes anushay is liable but after payments she has right to recover the
payments as she is just “Partner in Profit Only”
6)Partner by Estoppel
If a person holds out to another that he is a partner of the firm, either by his
words, actions or conduct in front of other partners then such a partner cannot
deny that he is not a partner. This basically means that even though such a
person is not a partner he has represented himself as such, and so he becomes
partner by estoppel or partner by holding out
7) Sub-Partner
Sub partnership is an arrangement between a firm’s partner and a non partner to
share the partner’s profits and losses in the firm business without forming a legal
partnership between the partner and the non-partner.
 Only that partner is liable to pay the sub-partner his share.
 He will be responsible for the any loss incurred by sub partner
 A sub-partner is a person __________.
a) Who is sharing the profit of some partner
b) Who does not invest and shares in profit
c) Who invest but does not work
d) A partner who only gives his name for the partnership
Minors Admitted to Benefits of Partnership

 As we have seen in the Contract Act, minors cannot be a party to a contract.

A contract involving a minor is void-ab-initio. However, the Partnership Act
has its own sets of legal rules regarding minors.
 Section 30 of the Partnership Act 1932 contains legal provisions about a
minor in a partnership. Now we know the Contract Act 1872 clearly states
that no person less than the age of 18, i.e. a minor can be a party to a
contract. And a partnership is a contract between the partners. Hence a
minor cannot be a partner in a partnership firm.
 However, according to the Partnership Act, a minor may be admitted to the
benefits of a partnership. So while the minor will not be a partner, he will
enjoy all the benefits of a partnership. To admit all the minor to the benefits
of the partnership all the partners of the firm must be in agreement.
Position of Minor Before Attaining
Majority
Rights
 Once the minor is given the benefits in a partnership there are certain rights that he enjoys.
 A minor partner will obviously have the right to his share of the profits of the firm. But the
minor partner is not liable for any losses beyond his interests in the firm. So a minor
partner’s personal assets cannot be liquidated to pay the firms liabilities.
 He can also like any other partner inspect the books of accounts of the firm. He can demand
a copy of the books as well.
 If necessary, he can sue any or all of the other partners for his share of the profits or
benefits.
 A minor partner on attaining majority has the right to become a partner of the firm. He has
six months from attaining majority to decide if he will execute this right. Whether he decides
to become a partner or not he must give public notice about the same.
Liabilities of a Minor Partner

 A minor cannot be held personally liable for the losses of the firm. And if the
firm declares insolvency the minor’s share is kept with the Official Receiver
 Limited liability

Disabilities
 No status of partner
 No suit against partners for profit and property except after disconnecting his
relationship with the firm.
 No entitled to have access to books other than books of accounts.
Position After Attaining Majority

 After turning 18 the minor partner can choose to become a partner of the
firm. But he may choose to not become a partner. In this case, the minor
partner has to give a public notice about this decision. And the notice has to
be given within 6 months of gaining a majority. If such a notice is not given
even after 6 months, then the minor partner will become liable for all acts
done by the other partners he shall be considered a major partner till the
date of such notice.
Decision not to Become a Partner
If he decides not to become a partner, his position will be as follows:
 His rights and liabilities continue to be those of minor up to the date of giving
public notice.
 He is not liable for the acts of the firm done after the date of his public
notice.
 He can sue the partners for his share of property and profits in the firm.
Decision to Become a Partner
 If the minor partner choose to become a partner, he will be liable to all the
third parties for the acts done by all partners since he was admitted to the
benefits of the partnership.
 If he becomes a full-time partner, he will be treated as a normal partner and
have all the liabilities of one. His share in the profits and property of the firm
will remain the same as it was when he was a minor partner.
 Q: A minor will automatically become a full-time partner on becoming 18.
True or False?
 Ans: This statement is False. When a minor attains majority it will be his
choice whether to become a full-time partner or retire from the firm. Once
he makes his choice, he must give a public notice declaring the same.
Basic Comparison Partnership Firm Company

Meaning When two or more persons agree to carry on a business and A company is an association of persons who invests money
share the profits & losses mutually, it is known as a towards a common stock, for carrying on a business and shares
Partnership firm. the profits & losses of the business.
Governing Act Partnership Act, 1932 Companies Act, 2013
How it is created? Partnership firm is created by mutual agreement between The company is created by incorporation under the Companies
the partners. Act.
Registration Registration is Optional Registration is compulsory
Number of persons Minimum Two, Maximum 20( other than banking business) Minimum 1 person can carry SMC
Two in case of private company and Seven in case of public
company.
No limits on owners for public company
Management All partners can take part in it. All share holders cannot take part in it

Audit Not Mandatory Mandatory

Management of the Partners itself. Directors
concern
Liability Unlimited Limited
Contractual capacity A partnership firm cannot enter into contracts in its own A company can sue and be sued in its own name.
name
Minimum capital No such requirement 1 lac in case of private company and 5 lac in case of public
company.
Use of word limited No such requirement. Must use the word 'limited' or 'private limited' as the case may
be.
Transfer if interest Partners cannot transfer interest without getting other consent No such restrictions for transfer of shares

Separate legal entity No Yes

Mutual agency A partner is an agent of the firm Shareholders are not agent
Partnership and Co-Ownership
Partnership firm
Formation Created by an agreement alone
Business Carry on business is essential
Number of Persons Minimum 2, Maximum 20
persons(other than banking
business)
Sharing of Profit One of essential elements.
Agency A partner is an agent of firm.
Transfer of Partner cannot transfer his
Interest interest without getting consent
of others.
Co-Ownership
Not necessarily a result of an
agreement alone
Does not necessarily involves
business
No limit on maximum number of the
co-owners
Does not involve sharing of profit
Co-owners are not agents to one
another
Co-owners can transfer his interest
without getting consent from
other(s).
Estoppel and Holding Out

 Estoppel
 Where a person (appears to be a principal) makes a representation to third
parties that another person (appears to be an agent) has authority to act as
his agent, even though has not actually been appointed as an agent.
 Where a person (appears to be principal) has previously represented to a third
party that another person (appears to be agent) has the authority to act as his
agent and
• Authority has subsequently taken away/ended but
• Third parties who previously dealt with the agent have not been informed of this
fact.
 In estoppel, due to any act of (supposed) Principal the 3rd party gets confused
and think someone as (supposed) agent of that principal.
 Holding Out
Where a person (supposed agent) represents himself, he then estopped from
denying the character he has assumed and upon the faith of which creditors may
have acted
In holding out, due to any act of (supposed) Agent the 3rd party gets confused
and think someone as (supposed) Principal of that agent.
RIGHTS , DUTIES AND LIABILITIES

 DUTIES OF PARTNER
 A) ABSOLUTE/GENERAL DUTIES :
 B) QUALIFIED DUTIES:
A) ABSOLUTE/GENERAL DUTIES :

 1)Duty to carry on the business to the greatest common advantage .

 2) Duty to be just & faithful .
 3) Duty to render true accounts .
 4) Duty to provide full information .
 5) Duty to indemnify for loss caused by fraud .
 6) Duty to be liable jointly & severally .
 7) Duty to act within authority
 8) Duty in case of emergency
B)QUALIFIED DUTIES :

1) Duty to attend diligently .

2) Duty to work without remuneration .
3) Duty to contribute losses .
4) Duty to indemnify the willful neglect .
5) Duty to use firm's property exclusively for the firm .
6) Duty not to compete with the business of the firm .
RIGHTS , DUTIES AND LIABILITIES

 RIGHTS OF A PARTNER
 Rights to take part in the conduct of the business .
 Right to be consulted in matters of firm.
 Right to have access to books of the firm.
 Rights to share the profits .
 Right to interest on capital .
 Right to interest on advances .
 Right to indemnified
 Right not to be expel .
 Right to retire .
 Right of out going partner to share in the subsequent profits
 No liability before joining .
Mutual Rights & Liabilities

 Duty to work without remuneration

 Right to share profit and losses equally
 Right to interest on capital
 Right to indemnity
 Duty to indemnify for willful neglect
LIABILITIES OF PARTNERS TO THIRD PARTIES
:

 1)The liabilities of partners of third parties are divided into three categories.

 1) Liability of a partner for acts of firm .

 2) Liability of the firm for wrongful acts of a partner .
 3) Liability of the firm for misapplication by partners .
 4) liability of partner to indemnify for willful neglect.
 5) liability of partner to share losses of firm
 6) Liability of partner to account for personal(secret) profits.
 7) Liability to account for profit of competing business
LIABILITY OF A RETIRING PARTNER

 This can be discussed in two heads :

 A partner is said to retire when the surviving partners continue to carry on the
business. A public notice is given of retirement.

 1) Liability Before Retirement : A retiring partner

continue to be liable for all the acts of the firm done before his retirement or
acts pending at the time of his retirement unless he is discharged from his
liabilities.

 2)Liability After Retirement : A retired partner is not

liable for the act of the firm done after his retirement. But he continues to be
liable till the public notice of retirement is given
B) Dissolution Without The Court
Order:
 Partnership firm may be dissolved in any one of the following :
 1) Dissolution by agreement .
 2) Dissolution by notice.
 3) Dissolution on the happening of certain contingencies :
a) By the expiry of the term fixed .
b) By the completion of the business or undertaking .
c) By the death of a partner . &
d) By the insolvency of a partner .
 4) Compulsory Dissolution : A firm is compulsorily dissolved :
a) Business becomes Unlawful .
b) one or all insolvent
Dissolution by Agreement
 A firm may be dissolved with the consent of the all partners or in the
accordance with the contract between the parties.
Dissolution by Notice
 Partnership at will
 Particular partnership
 Compulsory Dissolution (sec.41) : A firm is compulsorily
dissolved :
Insolvency
 If all the partners become insolvent or
 All the partners becomes insolvent except one
than it will become compulsory dissolution
 Business becomes Unlawful (Sec.41)
By happening of any event which makes it unlawful for the business
of the firm to be carried on or the partners to carry it on in
partnership.
 Provided that
Where more than one separate business or undertaking is carried on by the firm,
the illegality of one or more shall not of itself cause the dissolution of the firm in
respect of its lawful business and undertaking.
B) Dissolution by the Court Sec.44

 Dissolution of a firm by the court is necessitated when there is a

difference of opinion between the partners regarding the matter of
dissolution. The court may order to dissolve the firm in the following
ground.
 i) When a partner become unsound mind.
 ii) Permanent Incapacity of a partner.
 iii) Partner’s misconduct
 iv)Persistent Breach of Agreement.
 v) Continuous loss in the business.
 vi) When the court considers Just and Equitable: e.g. deadlock
in the management.
Public Notice

 The partnership Act require the giving of public notice in each of the
following cases:
a) When a partner retires from a partnership firm.
b) When a partner is expelled from a partnership firm.
c) When a partnership firm is dissolved.
 If public notice is not given the partners shall continue to be liable for any act
done by any of them before the dissolution.
THANK YOU!!!
SALE OF
GOODS ACT
1930
Sale of Goods Act

The law relating to the sale of goods is contained in the

sale of Goods Act, 1930. the Act came into force on 1st July
1930. The Act contains 66 sections and extends to the
whole of Pakistan
Contract of Sale of Goods
A contract of sale of goods is a contract by which the
ownership of movable goods in transferred from seller to
buyer.
Sec.4(1) defines a contract of sale of goods as “a contract
whereby the seller transfers or agrees to transfer the
property in goods to the buyer for a price”
 Contract

Two parties( Buyer & Seller)

Transfer of property
Essentials of a
Goods
Contract of
Price
Sale
Delivery
• Actual Delivery
• Constructive Delivery
• Symbolic Delivery
Sale and Agreement of Sale
 Contract
A contract of sale of goods related to movable goods. All essentials of
a valid contract must be present in a contract of sale of goods like
capacity of parties, fee consent, legality of object, etc. It may be
verbal or in writing . It may be express or implied.
Example : C promises to sell his radio to B. It is a contract of sale if the
parties are competent to contract, consent is free and all essentials of
contract are fulfilled.
Buyer And Seller

Buyer
 As per the sec 2(1) of the Act, a buyer is someone who buys or has
agreed to buy goods. Since a sale constitutes a contract between two
parties, a buyer is one of the parties to the contract.
Seller
 The Act defines seller in sec 2(13). A seller is someone who sells or has
agreed to sell goods. For a sales contract to come into existence, both
the buyers and seller must be defined by the Act. These two terms
represent the two parties of a sales contract.
 Example : A sell his computer to B for Rs.40000. A is the seller and B is the
buyer.
A and b jointly own a property. A sell his share to B. B becomes the sole
owner of the property.
Transfer of Property

 In the Act, property means ‘ownership’ or the general property i.e.

all ownership right of the goods. A sale constitutes the transfer of
ownership of goods by the seller to the buyer or an agreement of
the same.
 Example : A sell his car to B for Rs.4lac. The ownership and possession
of the car transfer from A to B.
Goods

 One of the most crucial terms to define is the goods that are to be
included in the contract for sale. The Act defines the term “Goods”
in its sec 2(7) as all types of movable property.
 Every kind of movable property other than Immoveable property
actionable claims and money; and includes stock and shares,
growing crops, grass, and things attached to or forming part of the
land which are agreed to be severed before sale or under the
contract of sale will be considered goods”
 Example : N sells his car to M for Rs.3lac. It is a contract of sale
because subject matter of the contract i.e. car is a moveable good.
Price

In Sec.2(10) the price is defined as the money consideration for a sale

of goods. When goods are sold of exchanged for other goods, the
transaction is barter and not a contract of sale of goods. If the goods
are sold partly for goods and partly for price. It is contract of sale.
Example :
A sells his horse to B against B’s promise to give 10 ton of wheat. It is not
a contract of sale.
Delivery

 The delivery of goods signifies the voluntary transfer of possession from one
person to another. The objective or the end result of any such process which
results in the goods coming into the possession of the buyer is a delivery process.
The delivery could occur even when the goods are transferred to a person other
than the buyer but who is authorized to hold the goods on behalf of the buyer.
 There are various forms of delivery as follows:
 Actual Delivery: If the goods are physically given into the possession of the
buyer, the delivery is an actual delivery.
 Constructive delivery: The transfer of goods can be done even when the
transfer is effected without a change in the possession or custody of the goods.
For example, a case of the delivery by acknowledgment will be a constructive
delivery. If you pick up a parcel on behalf of your friend and agree to hold on to
it for him, it is a constructive delivery.
 Symbolic delivery: This kind of delivery involves the delivery of a thing in token of
a transfer of some other thing. For example, the key of the godowns with the
goods in it, when handed over to the buyer will constitute a symbolic delivery.
Sale and Agreement of Sale
(Section 4)

Sale
 Here the property in goods is transferred at once to the buyer from
the seller. The Section 4(3) of the Act says that “where under a
contract of sale the property in the goods is transferred from the
seller to the buyer, the contract is then known as a sale.” A sale is
carried out on deliverable goods. Goods are said to be in a
deliverable state when they are in such a condition that the buyer
would, under the contract, be bound to take delivery of them
[Section 2(3)].
Agreement To Sell

 In Section 4(4) of the Act, it is maintained that for an agreement of

sale to become a sale, the time must elapse, or the conditions have
to be fulfilled subject to which the property in the goods is to be is to
be transferred.
 We saw that in a sale the property in the goods is transferred from
the seller to the buyer. However, in an agreement to sell, the
ownership of the property in goods is not transferred immediately.
The objective of the agreement is to transfer the goods at a future
date, once some contingent clauses in the agreement or certain
conditions are satisfied.
Agreement To Sell

 The section 4(3) of the sale of Goods Act defines it as, “where the
transfer of the property in the goods is to take place at a future time
or subject to some condition thereafter to be fulfilled, the contract is
called an agreement to sell.”
 Thus we see that a contract for the sale of goods may be either sale
or agreement to sell. This depends on the condition whether it
postulates an immediate transfer of property from the seller to the
buyer or whether it postulates the transfer to take place at some
future date.

 Example : B buys books from C and pays the whole price. It is a sale.
 A agrees to buy B’s car for Rs.8Lac if his machinic approves. It is an
agreement to sell
 The term contract of sale includes both sale and an agreement to
sell.
 Where under a contract of sale the property in the goods is
transferred from the seller to the buyer, the contract is called a sale,
but where the transfer of the property in the goods is to take place
at a future time or subject to some condition thereafter to be
fulfilled, the contract is called an agreement to sell.
 Difference Between Sale And Agreement To
Sell
Sale Agreement to Sell

1)Transfer of Property The ownership in goods is to be transferred to the buyer at some future date.
The ownership in goods transfers to the buyer at the time of contract

2) Type of Goods An agreement to sell takes place if there are future goods.
A sale takes place if the goods are in existence.

3) Recovery of Goods If seller refuses to deliver the goods, the buyer cannot recover the goods but may sue for
If seller refuses to deliver the goods the buyer may sue for recovery of goods damages.

4) Risk of loss If goods are destroyed, the seller suffers loss.

If goods are destroyed, the buyer suffers loss even though goods are in possession of
seller.

5) Consequences of Breach If buyer fails to pay the price, the seller can sue for damages and not for price
If buyer fails to pay the price of goods, the seller can sue for price.

6) Right of Resale A seller can resell the goods to a new buyer . Although Buyer has the right to sue for
A seller cannot resell the goods even though the goods are in his possession damages.

7) Insolvency of Buyer If buyer becomes insolvent before payment, the official receiver shall have not right over
If buyer becomes insolvent before payment, the official receiver shall have right over the the goods.
goods.

8) In solvency of seller If seller becomes insolvent, the buyer can recover the price from official receiver.
If seller becomes insolvent the buyer can recover the goods from official receiver.

9) Nature of Contract If is an executory contract so the buyer will becomes the owner in future date.
It is an executed contract, so the buyer becomes the owner immediately.
Insolvency of Seller

Sale
 If payment is made but goods are yet to be delivered
Buyer can claim goods from official receiver of seller.
 If goods are delivered and payment is yet to be made
The official receiver of seller will recover the payment from buyer.
 If payment and goods both are not made.
Buyer will take the delivery of goods and pay for that.
Insolvency of Seller

 Agreement to Sell
 If seller becomes insolvent, Buyer cannot claim goods.
 Buyer can only claim the rateable dividend from the official receiver
of seller.
Insolvency of Buyer

 Sale
 If payment is made but goods are yet to be delivered
Official receiver of Buyer can claim delivery of goods.
 If payment is not made but goods are delivered
Seller can only claim rateable dividend from official receiver of buyer
Agreement to Sell
If buyer has made payment in advance, but seller has right to refuse to
deliver goods to buyer, because insolvent person has no contractual
capacity.
Official receiver of buyer can claim the advance payment back from
seller.
Types of Goods

 Every kind of movable property other than actionable claims and

money; and includes stock and shares, growing crops, grass, and
things attached to or forming part of the land which are agreed to
be severed before sale or under the contract of sale will be
considered goods”
 1. Existing Goods
 he goods that are referred to in the contract of sale are termed as
existing goods if they are present (in existence) at the time of the
contract. In sec 6 of the Act, the existing goods are those goods
which are in the legal possession or are owned by the seller at the
time of the formulation of the contract of sale.
 2) Specific Goods
 According to the sec 2(14) of the Act, these are those goods that
are “identified and agreed upon” when the contract of sale is
formed. For example, you want to sell your mobile phone online.
You put an advertisement with its picture and information. A buyer
agrees to the sale and a contract is formed. The mobile, in this case,
is specific good.
 3) Ascertained Goods
 This term is used for specific goods which have been selected from
a larger set of goods. For example, you have 500 apples. Out of
these 500 apples, you decide to sell 200 apples. To sell these 200
apples, you will need to separate them from the 500 (larger set).
Thus you specify 200 apples from a larger group of unspecified
apples. These 200 apples are now the ascertained goods.
 4) Unascertained Goods
 These are the goods that have not been specifically identified but
have rather been left to be selected from a larger group. For
example, from your 500 apples, you decide to sell 200 apples but
you don’t specify which ones you want to sell. A seller will have the
liberty to choose any 200 apples from the lot. These are thus the
unascertained goods.
 Example : A has 100bags of sugar. A promises to sell 10 bags of
sugar out of the . It is contract of unascertained goods.
 5) Future Goods
 In sec 2(6) of the Act, future goods have been defined as the goods
that will either be manufactured or produced or acquired by the seller
at the time the contract of sale is made. The contract for the sale of
future goods will never have the actual sale in it, it will always be an
agreement to sell.
 For example, you have an apple orchard with apples in it. You agree to
sell 1000 apples to a buyer after the apples ripe. This is a sale that has to
occur in the future, but the goods have been identified already and
the agreement made. Such goods are known as future goods.
 Example : X agrees to sell to Y all the mangoes which will be produced
in his farm next year. It is an agreement to sell future goods.
 6) Contingent Goods
Contingent goods are a subtype of future goods in the sense that in
contingent goods the actual sale is to be done in the future. These
goods are part of a sale contract that has some contingency clause in
it. For example, if you sell your apples from your orchard when the trees
are yet to produce apples, the apples are a contingent good. This sale
is dependent on the condition that the trees can produce apples,
which may not happen.
Example : A agrees to sell to B a rare painting if he will be able to
purchase from its present owner . This is agreement to sell contingent
goods.
NEGOTIABLE INSTRUMENTS
NEGOTIABLE INSTRUMENTS
• Law relating to promissory note, bill of exchange, cheque is contained
in the Negotiable Instruments Act 1881. It came into force March 1
1882. It contains 139 Sections . It extend to the whole of Pakistan
NEGOTIABLE INSTRUMENTS
• Transactions are a very important part of businesses. There are many
documents which are required for these transactions. These
documents are used for transactions as well as transferring from one
person to the other. Thus, these documents in business terms are
called the negotiable instrument. Promissory note, cheques, bill of
exchange, etc. are some of the examples of these instruments.
• A negotiable instrument is basically a document which contains some
monetary value and is freely transferable. These instruments include
examples like Promissory note cheques, bills of exchange, etc.
NEGOTIABLE INSTRUMENTS
• The negotiable instruments guarantee the payment of an amount
done on demand or on a set time with the name of the paper usually
on the document. In banking, the banknotes are termed as the
promissory notes. Thus, this note is made by the bank and is payable
to the bearer of this demand.
• This is considered as a legal document between the borrower and the
lender. Through this document, the lender agrees to certain
conditions regarding the money which is borrowed.
• Whenever someone borrows the money from commercial banks then
they have to sign a promissory note. Thus, these notes can also be
bought and sold.
Types of Negotiable Instrument

There are three types of Negotiable Instruments

• Promissory Note
• Bill of Exchange
• Cheque
 Promissory Notes

Lahore 21 July 2020

• Section 4 of the Negotiable
Instruments Act defines promissory
notes. Promissory notes are basically
Mr. A Mr. B
instruments in writing.( neither bank
25000 notes nor currency notes) containing
3 months an unconditional undertaking, signed
by the maker, to pay on demand or at
a fixed or determinable future time a
certain sum of money only to or to the
order of a certain person or to the
bearer of the instrument.
Parties to Promissory Notes

• Every promissory note always comprises of three important parties.

These include the maker, the payee as well as the holder. Even
endorsers and endorsees can be parties in certain cases.
• 1) The maker: This is basically the person who makes or executes a
promissory note and pays the amount therein.
• 2) The payee: The person to whom a note is payable is the payee.
• 3) The holder: A holder is basically the person who holds the notes.
He may be either the payee or some other person.
Essential Elements of a Promissory Note

• In Writing
• A promissory note must always be in writing. It can never be an oral
contractual promise to pay money. It can be written in ink. It maybe
printed or typed.

• Example : A promise to pay B or order Rs.500

• A acknowledge himself to be indebted to B in Rs10000 to be paid on
demand for value received.
• Promise to Pay
• A promissory note must contain a promise to pay. A mere
acknowledgement of deb without clear promise to pay is not a
promissory note.
• Example : A is liable to pay Rs.500 to B
• A have taken Rs.500 from B and he is accountable to pay with
interest.
• Definite and Unconditional promise
• The promise to pay a certain amount of money must be unconditional in all
cases. Hence, a conditional or uncertain promise cannot form the basis of such
notes. For example, one cannot promise to pay money only if he has it, as that
amounts to a condition.
• However, promising to pay on a specific date or upon the happening of an
inevitable event is fine.
• At a particular place
• Specified time
• On happening of an event which must happen
• For example : A can promise to pay B three years from the date of the note’s
execution.
• The following are not valid promissory notes:
• I promise to pay Rs.500 to B seven days ager my marriage with C
• I promise to pay Rs.7000 to B as soon as I can.
• I promise to pay Rs.5000 to B on D’s death if D leaves me some
money
• Specific and Certain Amount
• Every promissory note must mention a specific and certain amount.
There can be neither additions nor subtractions to them. For
example, A cannot make a note promising to pay to B any future
amount that is not specific.
• Signed by Maker
• The maker must sign the promissory note. The signature may be on
any part of the instrument and not necessarily at the bottom. When
the maker is illiterate, his thumb mark is sufficient.
• Example : C writes the instrument but does not sign thereon : ‘I
promise to pay B Rs. 5000’. The note is not valid
• Pakistani Currency / Legal Tender
A Promissory note must contain a promise to pay a certain amount in
Pakistani currency.
Example : A write a promissory note and promise to pay 500 dollars to
B on 1st January next month. This is not a valid note.
 Bills of Exchange

• Bills of exchange are some of the most

• Section 5 of the Negotiable Instruments
Drawer: Who draws bill of
exchange
Drawer : Bashir Drawee :Who is ordered to
Drawee : Amin pay the amount of the bill of
Payee : C exchange.
Payee : To whom the amount
of bill of exchange is payable
common types of negotiable
instruments. Although they are similar to
promissory notes, several differences
exist between them.
Act, 1881 defines bills of exchange.
According to this definition, a bill of
exchange is an instrument in writing
containing an unconditional order.
Furthermore, the bill’s maker(drawer)
directs a certain person(drawee) to pay
some money either to a specific person
(C) or its bearer.
Parties to Bills of Exchange

• The following parties play a role in bills of exchange:

• 1) Drawer: This is basically the person who draws the bill.
• 2) Drawee: In contrast to the drawer, the drawee is the person in
whose favor the bill is drawn.
• 3) Payee: Either the drawee or a stranger may be a payee, which is
the person to whom bills are payable.
Essentials of Bills of Exchange

• A typical bill of exchange contains the following elements:

• In writing
• Order to pay( should not be a request)
• Definite and unconditional
• Signed by Drawer and Drawee
• Certain Parties
• Pakistani Currency/ Legal Tender
• Specific and Certain Amount
Cheque
• A cheque is basically a bill of exchange drawn on a specific banker.
Furthermore, it is not payable otherwise than on demand.
• Parties to a Cheque
• Generally, there are two parties to a cheque. These include the
drawer and the drawee. While the drawer is the person who draws
the cheque, the drawee is the banker on whom it is drawn.
• Drawer : it is the person who draws the cheque.
• Drawee : it a banker who is ordered to pay the amount of the cheque.
• Payee : It is a person to whom the amount of cheque is payable.
Essentials of a Cheque

• In writing
• And express order to pay
• Definite and Unconditional
• Signed by Drawer
• Certain parties(drawer, drawee and payee)
• The order must be to pay a certain sum
• The order must be to pay money only
• Cheques must be drawn on a specified banker
• It must always be payable on demand
Over the Counter Vs Clearing Cheques

Clearing
HBL MCB
Types of Cheque
• A cheque may be classified into the following types:
1) Bearer Cheque
A cheque which is payable to any person who presents it for payment at
bank counter is called a bearer cheque
2) Order Cheque
An order cheque is payable to a particular person. In a cheque, the word
bearer maybe be cancelled, and word order maybe written.
3) Crossed Cheque
A cheque which has two parallel transverse lines on its face is called a
crossed cheque. This cheque is deposited in payee’s account. The collecting
bank credits the proceeds of the crossed cheque to the account of the payee.
Crossing of Cheque
• A cheque is said to be crossed when two parallel transverse lines are drawn
on the left upper corner of the cheque. Its purpose is to direct the bank to
pay the amount of the cheque to a person who presents it through a bank.
• General Crossing – cheque bears across its face an addition of two parallel
transverse lines.
• Special Crossing – cheque bears across its face an addition of the banker’s
name.
• Account Payee Crossing – It directs the collecting banker that he needs to
credit the amount of cheque only to the account of the payee.
• Non-Negotiable Crossing – It is when the words ‘Not Negotiable’ are
written between the two parallel transverse lines.
• General Cheque Crossing
• In general crossing, the cheque bears across its face an addition of
two parallel transverse lines and/or the addition of words ‘and Co.’ or
‘not negotiable’ between them.
• In the case of general crossing on the cheque, the paying banker will
pay money to any banker.
• Special Cheque Crossing
• In special crossing, the cheque bears across its face an addition of the
banker’s name, with or without the words ‘not negotiable’.
• In this case, the paying banker will pay the amount of cheque only to
the banker whose name appears in the crossing or to his collecting
agent.
• Thus, the paying banker will honor the cheque only when it is ordered
through the bank mentioned in the crossing or its agent bank.
• However, in special crossing two parallel transverse lines are not
essential but the name of the banker is most important.
• Account Payee’s Crossing
• This type of crossing restricts
the negotiability of the
cheque. It directs the
collecting banker that he
needs to credit the amount of
cheque only to the account of
the payee, or the party
named or his agent.
• Not Negotiable Cheque Crossing
• It is when the words ‘Not Negotiable’ are written between the two parallel transverse
lines across the face of the cheque in the case of general crossing or in the case of special
crossing along with the name of a banker.
• Negotiable Instruments Act, 1881 a person taking a cheque bearing a general or special
crossing with the words ‘not negotiable’ will not have and is neither capable of giving a
better title than that which the person from whom he took it had.
• One of the important features of a negotiable instrument is that a person who receives
it in good faith, without negligence, for value, before maturity and without knowing
the defect in the title of the transferor, gets a good title to the instrument.
• Thus, he becomes the holder in due course and acquires an indisputable/genuine title
to it. Also, when the instrument passes through a holder in due course, all the
subsequent holders also receive a good/genuine title
•
A B C D E F
• But, Not Negotiable Crossing takes
away this important feature. In this
case, the transferee does not get
the rights of the holder in due
course.
• Only if the title of the transferor is
good, the title of the transferee is
also good. Hence, in case of any
taint in the title of any one of the
endorsers, the title of all the
subsequent transferees also
becomes tainted (corrupt).
Protection to the Collecting Banker
• If a collecting banker has collected a cheque on the behalf of a person
whose title to the cheque was defective, he would be protected and
would not be liable, provided that he proves that :
• He acted in good faith without negligence.
• The cheque was already crossed before reaches his hands and
• He receives the payment on behalf of customer and not on his own
account.
Rights of Holder Against the Banker
• The holder has no right against the banker for refusing to pay the
cheque. But holder is entitled to enforce the payment from the
banker in the following cases :
1st Case
1) Where banker pays a general crossed cheque as over the counter
or
2) b)Pays a special crossed cheque other than the bank whom name
is written on it
2nd case
2) Where the holder does not present the cheque within reasonable
time of its issue and on account of the delay the drawer suffers
actual damage by the failure of the bank and is therefore
discharged to the extent of such damage.
(the holder in this case becomes the creditor of the bank)
Drawer Rs.100000 Payee
Rs.500000

Drawee
(bank)
Circumstance in which Banker Must Dishonor
a Cheque
• Where the customer has stopped the payment of the cheque
• When a garnishee order or any other legal order of court prohibits payment of cheque.
• When the banker receive the notice of the customer’s death.
• When an order of adjudication has been passed against the customer by the insolvency court.
• When the banker receive the notice of customer’s insanity.
• When the customer has given the notice to the banker for the assignment of the credit balance
of his account.
• When the banker has reason to believe that the holder title is defective.
• When the banker receive the notice of loss of cheque from his customer.
• When there has material alteration in the cheque and such alteration has not been
authenticated by his customer by putting his signature.
• When the signature of the drawer does not tally with specimen signature kept by the bank.
• When the banker receive the notice in respect of closure of account.
Circumstances in Which Banker May Dishonor
the Cheque
• Banker may dishonor the cheque in following cases:
• When the balance in the customer’s account is not sufficient.
• When cheque is presented before the date on which it is written
• When funds of the customer are not applicable for the cheque
presented.
• When cheque is presented after banking hours.
• When cheque is presented after 6months from the date of its issue.
• When amount of a cheque is different in words and figures.
• When cheque is mutilated.
Essential Characteristics of Negotiable
Instruments
• 1)In writing
• Negotiable instrument must be in writing and signed by all the parties
according to the rules.
• 2) Easy Transferability
A negotiable instrument can be easily transferred form one person to
another. If the instrument is payable to bearer, the ownership is
transferred to the transferee by delivery. If the instrument is payable
to order, the ownership is transferred by endorsement and delivery
Essential Characteristics of Negotiable
Instruments
3)Payable to Order or Bearer
a) Payable to Order
Which is expressed to be payable or payable to a particular person.
e.g. (Pay A. Pay A or order)
b) Payable to Bearer
Which is expressed to be so payable certain sum of money to the
holder of the instrument.
e.g. pay (A or bearer. or pay bearer)
Essential Characteristics of Negotiable
Instruments
4)Title of Holder in Due Course
Once an instrument is received in the hands of holder in due course it
becomes free from all defects.
 Essential Characteristics of Negotiable
Instruments
• Presumptions
• Every negotiable instrument was made, drawn, accepted, endorsed and
transferred for consideration.
• Every negotiable instrument bearing a date was or drawn on such date.
• Every bill of exchange was accepted by drawee within reasonable time
after its date and before its maturity.
• Every transfer of a negotiable instrument was made before its maturity.
• The endorsement appearing upon a negotiable instrument were made in
the order in which they appear.
• A lost negotiable instrument was duly signend.
Endorsement
• The process of transferring the rights of an instrument is called an
indorsement.
• The person who is making the endorsement is called endorser
• The person to whom the instrument is indorsed is called endorsee.
Essentials
it must be signed by the endorser
It must be made by the holder of the instrument
If the endorser is illiterate, he may endorse by his thumb mark. The thumb
mark must be attested by somebody
It must be made to transfer the ownership of instrument to a third party.
Payment In Due Course
• Means payment in accordance with the apparent tenure of the instrument in
good faith and without negligence to any person in possession of it. Apparent
Tenure means the period of time as expressed in the instrument, after which it is
payable.
• Essentials

1. Payment must be of the apparent tenure of the instrument

a) It should be made at or after majority
b) Payment before majority is not a payment in due course
2. The payment must be paid to a person in possession of the instrument
3. The payment must be made in money only.
4. The payment must be made in good faith and without negligence.
Types of Instrument
• Inland Instrument
Made or drawn in Pakistan and also made payable in Pakistan, or
Made or drawn in Pakistan upon any person resident in Pakistan,
although it maybe payable in foreign country.
• Foreign Instrument
An instrument, which is not an inland instrument, is deemed to be
foreign instrument.
• Holder in due Course
A person becomes holder in due course when he fulfills the following conditions.
• He must be a holder
• There must be lawful and adequate consideration
• A person should receive the instrument before its maturity.
• The instrument must be Complete and regular.
• (it is a duty of every holder in due course to examine the form and contents of
instrument to ensure that it does not contain any unauthorized material
alteration or incompleteness).
• He should take the instrument without any negligence on his part and in good
faith.
•
Dishonor of Negotiable Instrument
• A bill may be dishonored when the drawee refuses to accept or make
payment.
• A note and cheque maybe dishonored by non-payment.
Dishonor by Non-Acceptance
When the drawee does not accept the bill within 48hrs from the time
of presentment for acceptance.
When one or more drawee refuses to accept the bill.
When the drawee is incompetent to the contract.
When the drawee cannot be found after reasonable search
• Dishonor by Non-Payment
• When a note is presented to the maker and he refuses to pay
• When a bill is presented to the acceptor and he refuses to pay
• When a cheque is presented to the bank and it recuses to pay.
Notice of Dishonor
When a negotiable instrument is dishonored by non-acceptance or by
non-payment, the holder of the instrument must give a notice of
dishonor to all the prior parties to make them liable.