Contract & Its Kind Chapter 1

Contract Mercantile law is that branch of law which deals with the right and obligations of mercantile person arising out of mercantile transactions in respect of mercantile property. An agreement creating an obligation is called contract An agreement enforceable by law is called a contract. Thus a contract has two elements; An agreement Enforceable by Law

1. Agreement Every promise or set of promises, forming the consideration for each other is called an agreement. Proposal: A promise comes into existence when one party makes a proposal to the other party and the other party signifies his assent.

Characteristics of Agreement Plurality of Persons: There must be at least two or more persons to make an agreement because one person cannot enter into a agreement with himself. Consensus ad Idem OR meeting of minds: It means that both parties to an agreement must agree about the subject matter of the agreement in the same sense and at the same time. e.g. A has two cycles X and Y. A sells X cycle. B thinks he is buying Y cycle. There is no consensus ad idem and so no agreement.

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

Types of Agreement There are two types of an agreement. Social Agreement Legal Agreement

1. Social Agreement Social agreements are not enforceable by law because they do not create legal obligations between the parties. Example A invite B to a dinner. B accept the invitation but does not attend. A cannot sue B for damages. It is a social agreement.

2. Legal Agreement Legal Agreements are enforceable by law because they create legal obligation between the parties. In such agreement the parties intend to create legal relations. All the business agreements are contract as there is intention to create legal relations. E.g. A promise to sell his car to B for AFN 200,000. It is a legal agreement because it create legal obligations. This agreement is a contract.

Kinds of Contract The contract can be classified in to three categories According to Enforceability According to Formation According to Performance

According to Enforceability Valid Contract Void Contract Voidable Contract

1. Valid Contract A valid contract is binding and enforceable. In valid contract all the parties are legally bound to perform the contract. If either party refuse to perform the contract, the other can enforce it by a court. To be enforceable, an agreement must possess essentials of a valid contract which are as followings

Essentials of Valid Contract 1. Offer and Acceptance: For a valid contract, there must be a lawful offer by one party and lawful acceptance of that offer from the other party. Example: A says to B that he will sell his cycle for AFN 2,000. This is an offer. If B accept this offer, there is an acceptance.

Essentials of Valid Contract 2. Legal Obligations: Gives right to one person and cast corresponding duty on another person. The parties to a contact must create legal obligations. It means that if one of them does not fulfill his part of promise, he shall be liable for the breach of contract. Example: A father promise to pay his son AFN 500 as pocket money. Later he refuses to pay. The son cannot recover as it is a social agreement.

Essentials of Valid Contract 3. Lawful Consideration: Something in return is known as consideration. Consideration may be some benefit to the other party. It is the price paid by one party for the promise of the other party. In simple term consideration means the element of exchange in a bargain. An agreement is enforceable by law only when both parties get and give something. Example. A agreed to sell his house for AFN 1M to B. For A 1M is the consideration and for B house is the consideration.

Essentials of Valid Contract 4. Capacities of the Parties: To be competent to contract, the parties must be, Of age of majority Of sound mind And must not be disqualified by law Example: M, a person of unsound mind agrees to sell his house for 1m to S. It is not a valid contract because M is not competent to contract.

Essentials of Valid Contract 5. Free Consent: Consent means that the parties must agree upon the thing in the same sense. For a valid contract it is necessary that the consent of the parties must be free. Consent is not free when it is obtained by coercion, undue influence, fraud, misrepresentation or mistake. 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.

Essentials of Valid Contract 6. Lawful Object: It is also necessary that contract should be made for a lawful object. The object of contract must not be fraudulent, illegal, immoral, opposed to public policy, imply injury to the person or property of another. Example: A, promised to pay B 5000, if B beats C. The agreement is void.

Essentials of Valid Contract 7. Writing and Registration: A contract my be oral or in writing. It is preferable that the contract should be in writing because it is easy to prove it in court. If it required by law, a particular contract must be in writing, signed, attested by witnesses and registered. Example: X verbally promised to sell his book to Y for 300, it is a valid contract because the law does not require it to be in writing.

Essentials of Valid Contract 8. Certainty of Term: The terms of contract must be clear, complete and certain. Example: A agrees to sell B a 100 liters of oil without specifying their kind, the contract is void because of its uncertainty

Essentials of Valid Contract 9. Possibility of Performance: The valid contract must be capable of being performed. If the act is physically or legally impossible to be performed, the contract cannot be enforced by law. Example: A agree to pay B if B discovers treasure by magic, the contract cannot be enforced by law.

Essentials of Valid Contract 10. Expressly Declared Void: For a valid contract, the agreement must not be of those which are expressly declared to be void by law. An agreement in restraint of trade or of wager has been expressly declared void. Example: A promised to pay AFN 2000 to B if Pakistan wins the world cup final. The agreement is void being a wagering agreement.

2. Void Contract The word void means not binding in law. A contract which ceases to be enforceable by law become void. It means that a void contract is not void from beginning. It is valid contract when it is made but subsequently it become void due to certain reasons. A contract become void under the following circumstances;

2. Void Contract Impossibility of performance: A contract become void due to impossibility of performance. Example: A agree to sell his house to B after two days. His house is burnt next day. The contract become void.

2. Void Contract 2. Subsequently Illegality. A contract become void by subsequent illegality. A contract become illegal before performance, due to uncertain reason. Example: A agree to sell 100 bags of wheat to B. Before delivery the government bans private trade in wheat. The contract becomes void.

2. Void Contract 3. Rejection of a voidable Contract: A voidable contract become void when the party whose consent is not free reject the contract. Example: A forcibly buys B’s car for AFN 50,000 only. The contract is voidable at the option of B. B may accept or reject it. If B reject the contract it becomes void.

2. Void Contract 4. Impossibility of Depending Event: A contingent contract is that , the performance of which depends upon the happening or non-happening of a certain event. It becomes void when that event does not happen. Example: A contracts to give AFN 50,000 to B, if B get admission to London Business School,. B failed to get admission. The contract becomes void.

Voidable Contract A contract is voidable 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. When is avoided it becomes void. Example: A threatens B to Purchase his car for 200,000 and B had to agree. The contract is made by coercion and is voidable at the option of B.

According to Formation According to formation contract has the following three kinds; Express Contract Implied Contract

Express contract Express contract is one which is expressed in words spoken or written. In Express contract the parties directly state the terms and condition of contract. Example: A tells on telephone to B that he want to sell his car and B inform A that he agrees to buy the car, there is express contract.

Implied contract An implied contract is made other then words spoken or written. It arises from act, conduct of the parties or circumstances. Example: A went to restaurant and took a cup of tea. It is an implied contract and A will pay for the cup of tea.

According to Performance According to performance a contract is of the following two kinds; Executed Contract Executory Contract

Executed Contract A contract is said to be executed when both parties have completely performed their obligations. It means that nothing remaining to be done by either parties under the contract. Example: A buys a book from B. A deliver the book and B pay the price. It is an executed contract.

Executory Contract In an executory contract something 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: A agrees to teach M, in June and M promise to pay 1000 to A. it is an executory contract because the promises are yet to be performed.

End of Chapter 1