CONTRACT

Law of Contract

The law relating to contracts in Pakistan is contained in the Contract Act,1872. It extends to the whole of
Pakistan and came into force on the 1st day ofSeptember, 1872. It deals with:

1. General principles governing all types of contracts (Sec. 1-75).

2. Contracts of Indemnity, Guarantee, Bailment, Pledge and Agency (Sec. 124-

238)

Initially, sections 76-123 and sections 239-266 relating to sale of goods and partnership were contained
in the Contract Act but were subsequently repealed and a separate Sale of Goods Act, 1930 and a
Partnership Act, 1932came into force.

Definition of Contract

Some definitions are as follows:

Pollack: "Every agreement and promise enforceable at law is a contract."Salmond: "A contract is an
agreement creating and defining obligations between the parties".

Sir William Anson: "An agreement enforceable by law made between two or more persons, by which
rights are acquired by one or more to acts or forbearance on the part of other or others."

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

(a) Agreement (b) Enforceability by law

1. Agreement

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

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

A promise comes into existence when one party makes a proposal to the other party and that other
party gives consent. Therefore, a contract is an agreement, an agreement is a promise and a promise is
an accepted proposal.

EXAMPLE
A offers to sell his car to B for Rs. 8 Lac. B gives acceptance. It is anagreement.

2. Enforceability

An agreement is enforceable by law if it is recognized by the court. In order to be enforceable by law,

the agreement must create legal obligations between the parties. Thus, the term agreement is wider
than a contract. All contracts are agreements but all agreements are not contracts. Agreements are of
two types:

a. Social agreements

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

b. Legal agreements

Legal agreements are enforceable by law because they create legal obligations between the parties. In
legal agreements, the parties intend to create legal relations. All business agreements are contracts as
there is an intention to create legal obligations.

EXAMPLES

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

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

Essentials of a Valid Contract

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

According to section 10, "All agreements are contracts if they are made by the free consent of parties,
competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly
declared to be void. Where necessary, the agreements must satisfy the requirements of law regarding
writing, attestation or registration."

The essentials of a valid contract are as follows:

1. Offer and Acceptance

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

EXAMPLE

A offers to sell his cycle to B for Rs. 2000. This is an offer. If B accepts this offer, there is an acceptance.

2. Legal Obligation

The parties to an agreement must create legal obligations. It means that it one party does not fulfill his
promise; he shall be liable for breach of contract. It is presumed in commercial agreements that parties
intend to create legal relations.

EXAMPLES

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

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

3. Lawful Consideration

For a valid contract, the consideration should be lawful. Consideration is the price paid by one party for
the promise of the other party. An agreement is enforceable only when both the parties give and take
something. That something given or taken is called consideration,

EXAMPLES

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

b. A promises B to get him a government job and B promises to pay Rs.1 Lac.The agreement is void as
the consideration is unlawful.

4. Capacity of Parties

An agreement is enforceable if it is made by parties who are competent to contract. In order to be

competent to contract, it is essential that the parties are of the age of majority, have sound mind and
are not disqualified from contracting by law. Contract by a person of unsound mind void ab-initio (from
the beginning).

EXAMPLES

a. M, a person of unsound mind agrees to sell his house to Sfor Rs. 2 Lac. It is not a valid contract
because M is not competent to contract.
b. A, aged 20 promises to sell his car to B for Rs. 3 Lac. It is a valid contract because A is competent to
contract.

5. Free Consent

For a valid contract, it is essential that the consent of parties must be free. Consent is free when it is not
obtained by coercion, undue influence, fraud, misrepresentation or mistake. If the consent of either of
the parties is not free, the agreement cannot become a contract. (Sec. 14)

EXAMPLE

A compels B to enter into a contract at gunpoint. It is not a valid contract as the consent of B is not free.

6. Lawful Object

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

EXAMPLES

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

b. A hires a house to use for gambling. The object of the agreement is unlawful, SO the agreement is
illegal and void.

7. Writing and Registration

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

EXAMPLES

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

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

8. Certainty of Terms

According to section 29, "Agreements, the meaning of which is not certain or capable of being made
certain, are void." The terms of an agreement must be clear, complete and certain. If the terms are
uncertain, the agreement is void.

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

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

9. Possibility of Performance

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

EXAMPLES

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

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

10. Not Expressly Declared Void

The agreement must not be one of those agreements which have been expressly declared to be void by
the law. Sections 24-30 explain certain agreements which have been expressly declared to be void, e.g.
agreement in restraint of trade and wager etc. are expressly declared void.

EXAMPLES

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

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

KINDS OF CONTRACT

The contracts can be classified into the following four categories:

1. According to Enforceability

According to enforceability, a contract can be divided as under:

a. Valid Contract

A valid contract is enforceable by law. An agreement becomes enforceable by law when all the
essentials of a valid contract are present.
Obligation of Parties

In valid contract, all parties are legally responsible for the performance of the contract. If one of the
parties breaches the contract, the other party can enforce it through the court of law.

EXAMPLE

A agrees to sell a car to B. If it fulfills all the essentials of a contract, it is a valid contract. If A fails to
deliver the car, B can sue him and if B fails to pay, A can sue him.

b. Void Contract

The word void means not binding in law. Section 20) defines "A contract which ceases to be enforceable
by law becomes void, when it ceases to be enforceable. It means that a void contract is not void from
the beginning. It is valid contract when it is made but subsequently it becomes void due to certain
reasons.

Obligation of Parties

In void contract both the parties are not legally responsible to fulfill the contract. Under this contract the
party who has received any benefit is bound to return it to the other party.

A contract becomes void under the following circumstances:

I. Impossibility of Performance

A contract becomes void due to impossibility of performance. A contract becomes void before
performance when it becomes impossible to be performed by any party due to any reason. (Sec. 56)

EXAMPLE

A agrees to sell his house to B after two days. The house is burnt next day. The contract becomes void.

ii. Subsequent Illegality

A contract becomes void by subsequent illegality. A contract may become illegal before performance
due to certain reasons. (Sec. 56)

EXAMPLE

A agrees to sell 100 bags of wheat to B. Before delivery the government bans private trade in wheat. The
contract becomes void.

ill. Rejection of a Voidable Contract

A voidable contract becomes void when the party whose consent is free rejects the contract. (Sec. 19)
EXAMPLE

A forcibly buys B's car for Rs. 20,000. The contract is voidable at the option of B. B may accept or reject
it. If B rejects the contract it becomes void.

iv. Impossibility of depending Event

The performance of a contingent contract depends upon the happening or non-happening of a certain
event. It becomes void when that event does not happen. (Sec 32)

EXAMPLE

A contracts to give Rs. 1 Lac to B, if B gets admission in Hailey College. B fails to get admission. The
contract becomes void.

c. Void Agreement

An agreement not enforceable by law is said to be void. The void agreement does not create legal
obligations among the parties. An agreement which is void from the beginning is void ab-initio. In void
agreement, there is absence of one or more essentials of valid contract except free consent. Agreement
with minor and agreement without consideration are void from the beginning. (Sec. 2 (9))

Obligation of Parties

In void agreement, the party who has received any advantage is bound to restore it to the party from
which he received it. Both the parties are not responsible for the performance of the agreement.

EXAMPLE

A promises to buy a dog from B for Rs. 10,000. The dog was dead before the contract. The parties were
unaware. The agreement is void.

d. Voidable Contract

"An agreement which is enforceable by law at the option of one or more of the parties thereto but not
at the option of the other or others is a voidable contract." (Sec. 2 ()

A contract is voidable when 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. If the party decides to confirm it, it remains valid. A
contract becomes voidable under the following circumstances: A contract becomes voidable when the
consent of one or more of the parties to a contract is obtained by coercion, undue influence,
misrepresentation or fraud. (Sec. 15-18).

EXAMPLES

a. A compels B to sell his car at gunpoint. The contract is made by coercion and is voidable at the option
of B.
b. A deceives B by stating that his factory produces 90 kg of sugar daily and induces B to buy it. The
contract is voidable at the option of B.

B. When one party promises to do something for the other party but the other party prevents him from
performing his promise, the contract becomes voidable at his option. (Sec. 53)

EXAMPLE

A contracts to paint B's house. A is ready to paint but B prevents him from doing so. This contract is
voidable at the option of A.

C. When a party to the contract promises to do a certain thing within a specified time, but fails to do it,
then the contract becomes voidable at the option of the promisee, if time essence of the contract. (Sec.
55)

EXAMPLE

A contracts to paint B's house within one week. A, does not come within the specified time. The contract
is voidable at the option of B.

Obligation of Parties

The following are obligations of the parties:

1. It is a valid contract for both the parties if it is not rejected by the party having the right to reject

2. The law gives an option to one of the parties to avoid it.

3. The party entitled to cancel the contract is not bound to cancel. If he confirms

it, the other party remains bound to perform.

4. The aggrieved party can get damages from the other party.

5. If one party has received some benefit, he must return it to the other.

Burden of Proof

The burden of proof lies on plaintiff i.e. the aggrieved party. It means that the party, who claims that his
consent is unfree, has to prove in the court of law. If he fails to prove the contract remains valid.

e. Unenforceable Contract

An unenforceable contract is that contract which cannot be enforced in a court of law because of some
technical defects such as absence of writing, registration, requisite stamp etc. When these defects are
removed, the contract can be enforced.

EXAMPLE
A borrows Rs. 1 billion from B and makes a pronote on a Rs. 10 stamp paper. It is unenforceable because
pronote is undervalued.

Obligation of Parties

In an unenforceable contract, the parties may perform the contract. But in case of breach of such
contract, the aggrieved party is not entitled to legal remedies.

f. Illegal Agreement

An agreement is illegal when its performance is forbidden by any law. Such an agreement can never
become a contract. An agreement is illegal and if it is forbidden by law or is of such a nature that if
permitted, it would defeat the provisions of any law or is fraudulent or involves injury to the person or
property of another or the Court regards it as immoral or opposed to public policy, (Sec. 23)

EXAMPLE

A gives money to B, a smuggler, to buy smuggled goods. The agreement is illegal and the money cannot
be recovered.

Obligation of Parties

The parties to the agreement are not responsible to perform their promises. There is punishment for the
parties according to law.

2. According to Formation

According to formation, a contract has the following three kinds:

a. Express Contract

Express contract is one which is expressed in words spoken or written. When such a contract is formed,
there is no difficulty in understanding the rights and obligations of the parties. In express contract, the
parties directly state the terms of the contract. (Sec. 9)

EXAMPLE

A tells on telephone to B that he wants to sell his car and B informs A that he agrees to buy the car, it is
an express contract.

b. Implied Contract

An implied contract is made otherwise than by words spoken or written. It arises from acts, conduct of
parties, and course of dealings or circumstances. 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 knowing such circumstances accepts the benefit of those services. (Sec.9).
EXAMPLES

a. A went into a restaurant and had a cup of tea. It is an implied contract and A will pay for the cup of
tea.

b. M, a shoe shiner starts polishing the shoes of W in his presence, and W allows him to do so. It is an
implied contract.

c. Quasi Contract

In a quasi contract, the law imposes certain obligations under some special circumstances. It is based
upon the principle of equity that a person shall not be allowed to get benefit at the cost of another. In
fact, it is not a contract but creates relations similar to contract. It is also called constructive contract.

EXAMPLES

a. A, finds lost goods of B. A is bound to return the goods to B.

b. A leaves his goods at B's house by mistake. B treats them as his own and uses them. It is a quasi
contract. B is bound to pay for the goods.

3. According to Performance

According to performance a contract is of the following two kinds:

a. Executed Contract

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.

EXAMPLES

a. A buys a book from B. A delivers the books and pays the price. It is an executed contract.

b. A agrees to paint a picture for B for Rs. 2,000. When A paints the picture and B pays the price, the
contract is said to be executed.

b. 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.

EXAMPLES

a. M sells his car to N for Rs. 2 lac. N has not yet paid the price and M has not delivered the car. The
contract between Mand N is executor.
b. A agrees to teach B, in May and B promises to pay Rs. 800 to A. It is an executory contract because the
promises are yet to be performed.

4. According to parties

According to parties a contract may be of the following two kinds:

a. Unilateral contract

In a unilateral contract only one party makes a commitment. In other words, it is a contract where only
one party is bound but the other party chooses to be bound by it.

EXAMPLE

A promises to pay Rs. 1,000 to any one who finds his lost bag. B finds the bag and returns it to A. It is a
unilateral contract which comes into existence when the bag is found.

b. Bilateral contract

It is a contract where both parties are bound by it, as soon as is made. In other words, it is a contract in
which both the parties have yet to perform their obligations.

EXAMPLE

A promises to paint a picture for B and B promises to pay Rs. 5,000 to A.

DIFFERENCE BETWEEN VOID AGREEMENT & VOID CONTRACT

The differences between void agreement and void contract are as under:

Void Agreement Void Contract

Enforceability
A void agreement is unenforceable from the A void contract is enforceable when it is made. It
beginning becomes unenforceable later on.
2. Enforced
A void agreement can never be enforced. A void contract can be enforced before it becomes
3. Restoration of Benefit unenforceable.

In a void agreement, the, parties are not entitled In a void contract, the parties are entitled for
for restoration of benefits which they have restoration of benefits which they have exchange
exchange during the contract. during the contract.
 DIFFERENCE BETWEEN ILLEGAL & VOID AGREEMENT

The following are points of difference between the two:

illegal Agreement Void Agreement

1. Prohibited
An illegal agreement is prohibited by law. A void agreement is not prohibited by law.
2. Punishable
An illegal agreement is punishable A void agreement is not punishable.
3. Nature
An illegal agreement is also void agreement. A void agreement is not illegal agreement.
4. Object
The object of illegal agreement is illegal. The object of void agreement is not illegal.
5. Collateral Agreement
A collateral agreement to an illegal agreement is A collateral agreement to a void agreement is
not enforceable. enforceable.
6. Restoration of benefit
In illegal agreement the money paid cannot be In void agreement received must be returned to
claimed back. the other party

Collateral Agreement

When an agreement is illegal, other agreement which is collateral to it is also illegal and so not
enforceable by law.

EXAMPLE

A borrows Rs. 2 lac from B to buy a car from X for bomb blast. B knows the purpose of the loan. An
agreement between A and B is collateral to the agreement with X so it is also illegal and void agreement.

DIFFERENCE BETWEEN VOID AGREEMENT AND VOIDABLE CONTRACT

The following are points of difference between the two:

Void Agreement Voidable Contract

1. Enforceability
A void agreement is not enforceable by law. A voidable contract is enforceable by law till it is
2. Defects rejected.
A void agreement is void ab-initio and its defects A voidable contract is not void ab- initio and its
cannot be removed. defects can be removed.
3. Rights of Third Party
In a void agreement, a third party who buys goods In a voidable contract, a third party who buys
in good faith and for consideration does not goods in good faith and for consideration acquires
acquire any rights. rights before the contract is rejected.
 OFFER AND ACCEPTANCE

The first essential of a valid contract is an agreement i.e. offer and acceptance. An agreement arises
when one party makes an offer and the other party accepts that offer.

OFFER

Definition

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.

It means that when a person shows his willingness to do or not to do something to obtain the consent of
other person, it is considered a proposal.

The person making the offer is called the offeror or promisor. The person to whom the offer is made is
called the offeree. The person accepting the offer is called the promisee or acceptor. The word 'offer' in
English Law is similar to the word proposal' in Pakistani law but the word offer is usually used in our
practical life.

EXAMPLES

a. A offers to sell his watch to B for Rs. 100. A makes an offer to B.

b. A promises to sell his car to B for Rs. 3 Lac. A makes an offer to B.

Essentials of a Valid Offer

The following are legal rules or essentials of a valid offer:

1. Express or Implied

An offer may be expressed or implied. An offer which is made by words spoken or written is called an
express offer. An implied offer appears from the actions, conduct of parties, course of dealings or
circumstances of the case.

EXAMPLES

a. M says to N that he will sell his motoroycle to him for Rs. 40,000. It is an express offer.

b. A railway coolie carries the luggage of B without asking to do so. B allows him to do so. It is an implied
offer.

C. New Khan Company runs buses to carry passengers at scheduled fares. This is an implied offer by the
company.
2. Legal Relations

The offer must be made in order to create legal is no agreement. If an offer does not give rise to legal
obligations between the parties, it is not a valid offer. In business transactions, it is presumed that the
parties intend to create legal relations.

EXAMPLES

a. A invites B to dinner and B accepts the invitation. It does not create legal relations, so there is no
agreement.

b. A offers to sell his watch to B for Rs. 200 and B agrees. There is an agreement because the parties
intend to create legal relations.

C. Three friends agreed to enter a newspaper competition and share any winnings. It was held that they
intended to create legal relations so there was a contract. (Simpkins vs. Pays)

3. 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. An agreement to agree in
future is not a contract because the terms of agreement are not clear.

EXAMPLES

a. 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 which motor cycle A wants to sell.

b. X purchased a horse from Y and promised to buy another, if the first one proved lucky. X refused to
buy the second horse. Y could not enforce the agreement, as it is unclear. (Taylor vs. Portington)

4. Different from Invitation to Offer

An offer is different from an invitation to offer. In an invitation to offer, the person making the invitation
does not make an offer but only invites the other party to make an offer. His object is to inform that he
is willing to deal with anybody who is willing to deal with him.

EXAMPLES

a. X displays goods for an auction sale. It is not an offer. The offer will come from the buyer in the form
of bid.

b. N advertised to sell his furniture at Bury on specified day. H came from London to attend the auction
but all furniture was withdrawn from sale. H Sued N for loss of time and expenses. Held, H could not
recover expenses because the advertisement was an invitation to offer. (Haris vs. Nickerson)

5. Specific or General
When an offer is made to a specific person or group of persons, it is called specific offer. Specific offer
can be accepted only by the person or persons to whom it is made. A general offer is made to public in
general and it may be accepted by any person who fulfils the conditions mentioned in it.

EXAMPLES

a. 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.

b. A announces in a newspaper a reward of Rs. 1,000 for anyone who will return his lost radio. It is a
general offer.

C. The CSB Co. advertised to pay $ 100 to any person who contracts flue after using their medicine. Mrs.
Carlill used the medicine but suffered from flue. She sued for the reward. The company was held liable.
(Carlill vs. Carbolic Smoke Balls Co.)

6. Communication with Offeree

An offer is valid only when it is communicated to the offeree. If an offer is not communicated to the
offeree, it cannot be accepted. An acceptance of 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.

EXAMPLE

G's nephew was missing from home. He sent his servant Lalman in search of the boy. When the servant
left, G announced a reward of Rs.501 for anyone who gives information about the boy. The servant
before the announcement found the boy and informed G. Later, he claimed for the reward. He failed on
the grounds that he could not accept the offer unless he had the knowledge of it. (Lalman vs. Gauri Datt)

7. Negative Condition

An offer cannot contain a condition that the offer would be considered as accepted if acceptance is not
communicated up to a certain date. If the offeree does not reply, there is no contract because an
obligation to reply cannot be imposed on the grounds of justice

EXAMPLE

A wrote to B to sell his book adding that if he did not reply within 5 days, the offer would be considered
as accepted. There is no contract.

8. Conditions in Offer

An offeror may include any condition in his offer. There is no contract unless all the conditions of the
offer are accepted. If the offeror prescribes a specific mode of acceptance, the offeree must adopt the
same mode of acceptance. If the offeree does not follow the prescribed mode, the offeror must inform
the offeree regarding its rejection otherwise he is considered to have accepted the acceptance.
EXAMPLE

A asks B to send the reply of his offer by telegram but B sends reply by letter. A may reject such
acceptance.

9. Cross Offers

When two parties make similar offers to each other without having knowledge of other's offer, it is
called cross-offers. The acceptance of cross offers does not result in formation of a contract.

EXAMPLE

A wrote to B to sell him 1 ton of iron for Rs. 1 Lac. On the same day Bwrote to A to buy 1 ton of iron for
Rs. 1 Lac. There is no contract.

Revocation of Offer

An offer may revoke in any of the following ways: (Sec.6)

1. Notice of Revocation

An offer can be revoked by sending a notice of revocation to the other party. It means that the offeror
may revoke his offer at any time before acceptance, even though the period of acceptance of offer has
not yet expired. The offeree cannot create a contract by accepting the revoked offer.

EXAMPLE

A, at an auction gives the highest bid to buy B's goods. He withdraws the bid before the fall of hammer.
The offer is revoked.

2. Lapse of Time

When the offer is kept open for a specified time period, it terminates if it is not accepted within that
time period. If the offer does not specify any time period,it terminates after lapse of a reasonable time.
The reasonable time depends upon the circumstances of each case. If the commodity is perishable, the
reasonable time will be relatively shorter.

EXAMPLE

M offered to buy shares of a company R, on 8" June. R allotted shares to M on 23 November. M refused
to accept them. Held that the offer had lapsed by delay in acceptance. (R.V. Hotel Co. vs. Montefiore)

3. Failure to Fulfill Condition

If an offer contains some conditions and the offeree fails to fulfil these conditions, the offer terminates.

EXAMPLE
A offers to sell his scooter to B for Rs. 50,000 if B gets admission in medical college. B fails to get
admission, the offer is revoked.

4. Death or Insanity of Offeror

An offer terminates on death or insanity of the offeror, if the offeree comes to know about the death or
insanity of offeror before his acceptance. If the offeree does not know about the death or insanity of
offeror and gives his acceptance, it is valid acceptance. It results in a valid contract and legal
representatives of the deceased offeror will be bound by the contract.

EXAMPLE

X requested D, to give credit to Y and guaranteed payment up to Rs. 1 Lac. X died and D in ignorance of
this fact continued to give credit to Y. D sued X's legal representatives on the guarantee. Held, that the
legal representatives were liable

5. Revocation of Offer by Offeree

If the offeree rejects the offer and communicates the rejection to the offeror, the offer terminates even
though. the period for acceptance of offer has not yet expired.

EXAMPLE

A offers to sell his cycle to B and keeps the offer open for ten days. B refuses after three days. It
terminates although the period has not yet expired.

6. Counter Offer by Offeree

When an offer is accepted with some change in the terms of the offer, such acceptance is called counter
offer. An offer terminates when a counter offer is made. The party making a counter offer cannot accept
the original offer

EXAMPLES

a. A offers to sell his house to B for Rs. 1 Lac. B counter offers Rs. 80,000. Later, even if B is ready
to pay Rs. 1 Lac, the original offer is terminated.

b. W offered to sell a farm to H for £1,000. H offered £950. W refused the offer. Subsequently H
offered 1,000 . Held, there was no contract as H by offering 950 £ had rejected the original offer.
(Hyde vs. Wrence

7. Death or Insanity of Offeree

An offer can be accepted only by the offeree. It cannot be accepted by his legal representatives upon his
death. If the offeree dies or becomes insane before acceptance, the offer terminates.
EXAMPLE

X offers to sell his camera to Y. Y dies before acceptance terminates.

8. Subsequent llegality

An offer lapses if it.becomes illegal before its acceptance. An offer may also terminate if it becomes
illegal due to change in law before its acceptance by the offeree.

EXAMPLE

A offers to sell 10 bags of rice to B for Rs. 2000. Before its acceptance, a law bans the sale of rice. The
offer terminates.

9. Destruction of Subject Matter

An offer lapses if the subject matter of the offer is destroyed before its acceptance by the offeree.

EXAMPLE

A offers to sell his horse to B. The horse dies before the acceptance ofoffer by B. The offer terminates.

10. Prescribed Manner

if the offeror prescribes the manner of acceptance, the offer terminates if the offeree does not accept
according to the prescribed manner. If the offeror wants to reject the offer, he must inform the offeree
within a reasonable time. If offeror does not inform, he will be bound by such acceptance.

EXAMPLE

A offers to sell his car to B. A requests B to give acceptance by telephone. B sends acceptance by letter.
The offer terminates.

ACCEPTANCE

Definition

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

EXAMPLE

A offers to sell his house to B for Rs. 5 Lac. B accepts the offer. This is an acceptance.

Essentials of Valid Acceptance

The following are legal rules or essentials of a valid acoeptance:

1. Acceptance by Offeree

An offer can be accepted only by the person to whom it is made. It cannot be accepted by another
person without the consent of offeror. When an offer is made to a particular group, it can be accepted
by any member of that group. If the offer is made to general public, it can be accepted by any person
who has knowledge of that offer.

EXAMPLES

a. X offered to sell his house to Y. Z who was aware of şuch offer said that he is ready to buy X's house.
There is no contract with Z.

b. A sold his business to B without informing his customers. J sent an order for the supply of goods to A
by name. B received the order and supplied the goods. It was held that there was no contract because J
never made any offer to B. (Boulton vs. Jones)

2. Absolute & Unconditional

In order to form a valid 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. There is no
contract until the counter offer is accepted by the original offeror.

EXAMPLES

a. A offers to sell his watch to B.for Rs. 500. B replies that he can buy it for Rs.300. There is no
acceptance on the part of B.

b. M offered to sell land to N for £280. N accepted and enclosed 280 with apromise to pay the balance
by monthly installments of £50 each. Held, there was no contract as the acceptance was conditional.
(Neale vs. Merret)

3. Prescribed Manner

If the offeror prescribes a particular manner of acceptance, the offeree must accept according to that
particular manner. If acceptance is not made according to the prescribed manner, the offeror may reject
it. If no particular manner is prescribed in the offer then acceptance should be made in a reasonable
manner.

EXAMPLES

a. A makes an offer to B and asks him to accept the offer by telegram. B sends his acceptance by post. It
is not a valid acceptance.
b. A offered to buy flour from B and requested him to send acceptance by messenger who had brought
the order. B sent his acceptance by post thinking that it would reach A earlier than the messenger. Held,
A was not bound by the acceptance. (Eliason vs. Henshaw)

4. Communication with Offeror

The offeree or his agent must communicate the acceptance to the offeror in a clear manner. Showing
the intention to accept an offer is not a valid acceptance. If the offeree does not accept the offer, no
contract is formed. When offeree accepts an offer but fails to clearly communicate, it is not considered
an acceptance

EXAMPLES

a. A offers by letter to purchase B's house. B expresses his intention to sell it but does not reply. B sells
to C. A has no legal remedy against B.

b. The manager of a railway company received a draft agreement relating to supply of coal. The
manager approved and put the agreement in the drawer and forgot all about it. Held, there was no
contract, as the other party was not informed. (Brodgen vs. Metropolitan Railway Co.)

5. Express or Implied

When an acceptance is given by words spoken or written, it is called express acceptance. When
acceptance is given by conduct or action it is called implied acceptance. If the offer is made to the
public, the contract arises when any person accepts it by words or conduct.

EXAMPLEs

a. A offered by letter to sell his cycle to B for Rs. 2,000. B accepted his offer and sent a letter of
acceptance. It is an express acceptance.

b. A widow promised to give some property to her niece if she stayed with her. The niece stayed in her
residence till her death. Held, the niece was entitled to the property. (V. Rao vs. A. Rao).

6. Acceptance after Offer

Acceptance must be given after receiving an offer. It cannot precede the offer. If acceptance is made
without having knowiedge of the offer, there is no contract because no acceptance can be made
without an offer.

EXAMPLEs

a. A offered a reward for anyone who finds his lost dog. B, in ignorance of the offer, finds and retuns the
dog. B cannot claim the reward.

b. A company allotted shares to a person who had not applied for them. Later, he applied for the shares.
Held, that the previous allotment was invalid.
7. Reasonable time

if offeror specifies a time period for acceptance in his offer, the offeree must give acceptance within that
specified time. If no time is specified, the acceptance must be given within a reasonable time. The
reasonable time depends upon the circumstances of each case

EXAMPLE

M applied for shares of a company in June but allotment was made in November. M refused to accept
the shares. It was held that M could refuse to take shares because the offer had lapsed after the expiry
of a reasonable time (Ramsgate Victoria Hotel Co. vs. Montefiore)

Communication of Offer, Acceptance and Revocation

When the contracting parties are face to face with each other, there is immediate communication of
offer and acceptance. The moment the offeree gives his acceptance, there is a valid agreement. When
the parties are at a distance from each other, the services of post office are utilized to enter into a
contract. In this case the following rules apply:

1. Communication of Offer

Section 4 explains, "The communication of a proposal is complete when it comes to the knowledge of
the person to whom it is made”. It means that communication of an offer completes when the letter
Containing an offer comes to the knowledge of the offeree.

EXAMPLES

a. A offers, by letter, to sell a van to B for Rs. 1 Lac. The letter reaches B on 8th March. Communication of
the offer is complete on 8th march.

b. X sends a letter to Y offering to sell his motorcycle for Rs. 4,000. The letter never reaches Y, The offer
is 2.

Communication of Acceptance

The communication of an acceptance is complete:

a. As against the proposer, when it is put in course of transmission to him, so as to be out of power of
the acceptor.

b. As against the acceptor, when it comes to the knowledge of the proposer.(Sec.4) It means that the
communication of an acceptance completes, as against the offeror, when the letter of acceptance is
posted to the offeror, i.e. when letter of acceptance is out of control of the acceptor. The
communication of an acceptance completes, as against the acceptor, when the letter of acceptance
comes to the knowledge of offeror.

EXAMPLES
a. A offers, by letter, to sell a van to B for Rs. 50,000. The letter reaches B on 8 March. B accepts by a
letter sent by post on 9th March. The letter reaches A on 11th March. The communication of the
acceptance is complete:

i. As against A, when the letter is posted, i.e. on 9th March.

ii. As against B, when the letter is received by A, i.e. on 11th March.

b. G offered by post to purchase share of the company. The letter of allotment posted by the company
never reached G. Held, the acceptance was complete as soon as the letter of acceptance was posted. (H.
F. Insurance Co. vs. Grant)

3. Communication of Revocation

Revocation means cancellation. There may be a revocation of offer and acceptance. The communication
of a revocation is complete

a. As against the person who makes it, when it is put in course of transmission to the person to whom it
is made, so as to be out of the power of person who makes it.

b. As against the person to whom it is made, when it comes to his knowledge. (Sec. 4) It means that
communication of revocation completes as against the person who makes it, when the letter of
revocation is posted. The communication of revocation completes as against the person to whom it is
made, when the letter of revocation comes to his knowledge.

EXAMPLES

a. A revokes his offer by letter on 8th March. The letter reaches B on 10th March. The revocation is
complete as against A on 8th, when the letter of revocation is posted. It is complete as against B on 1

b. T offered by a letter on October 1st, to sell goods to B in New York.B received the offer on 11th and
gave his acceptance. On 18th T wrote a letter revoking his offer. The letter was received by B on 20th.
Held, the revocation was of no effect until it reached B. A contract made on 11th when B accepted the
offer. (Byme vs. Van Timehoven)

Time of Revocation of Offer and Acceptance

An offer may be revoked any time before communication of its acceptance is complete as against the
offeror, but not afterwards. An acceptance may be revoked any time before communication of the
acceptance is complete as against the acceptor, but not afterwards. (Sec.5)

EXAMPLE

A offers by letter to sell his house to B. B accepts the offer by a letter posted on 4 May. The letter
reaches A on 6 May. A may revoke his offer before B posts his letter of acceptance, i.e. 4th but not
afterwards. B may revoke his acceptance before the letter of acceptance reaches A, i.e. 6th but not
afterwards.
Loss of Letter of Acceptance

If the letter of acceptance is delayed or lost, following is the eftect:

1. Position of Offeror

When the letter of acceptance is posted, the offeror is bound by that acceptance. The contract is valid
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. If wrong address is given by the offeror himseif, he
will be bound by the acceptance.

2. Position of Acceptor

The acceptor is not bound by the letter of acceptance till it reaches the offeror. Until the letters of
acceptance reaches the offeror, the contract remains voidable at the option of acceptor. He may
enforce the contract or revoke his acceptance before the letter reaches the offeror.

3. Accidental 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 first reads the
letters of acceptance, a contract will arise. But if offeror first reads the letter of revocation, there will be
no contract.

4. Contracts over Telephone

In case of contract over telephone, there is immediate communication of offer, acceptance and
revocation. The rules which apply to contracts made when parties are face to face with each other, also
apply to contracts made over telephone. If acceptance is not communicated to the offeror due to a fault
in the telephone, there will be no contract. The offeree must make sure that his acceptance is received,
heard and understood by the offeror; otherwise there is no contract. In case of a contract over
telephone the question of revocation does not arise because an offer is made and accepted at the same
time.
 CONSIDERATION AND OBJECT

Meaning and Definition

Consideration is one of the essentials of valid contract. An agreementwithout consideration is void. A

consideration is what a promisor demands for his promise. An agreement is enforceable when both the
parties take something and give something. The something given or taken is called consideration.

Pollock says, "The consideration is the price for which the promise of theother is bought and the
promise thus given for value is enforceable."

Lush J defines, "A valuable consideration may consist of some right,interest, profit or benefit accruing to
one party and some forbearance, detriment,loss or responsibility given, suffered or undertaken by
other"

Justice Patterson defines, "The consideration means something which isof some value in the eye of law.
It may be some benefit to the plaintiff or some detriment to the defendant."

Section 2(d) defines, "When at the desire of the promisor, the promise 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 a consideration for the promise."

EXAMPLES

a. A agrees to sell his house for Rs. 10 Lac to B. For A the consideration is Rs.10 Lac. For B consideration
is house.

b. A promises to repair B's car and B promises to pay Rs. 1 Lac. The promise of one party is the
consideration for the other party.

c. A promises not to sue his debtor B and B promises to pay additional 1 Lac.The abstinence of A is the
consideration for B's promise to pay.

d. A promises to paint a picture for B and B promises to teach him for a month. The promise of one party
is the consideration for the other.

Essentials of Valid Consideration

The essentials or legal rules of a valid consideration are as under:

1. Desire of Promisor

For a valid consideration, the act or abstinence which forms the consideration must be done at the
desire of the promisor. It means that any act performed at the desire of third party or without the desire
of the promisor cannot be a consideration. Similarly, the act done voluntarily does not create a valid
Consideration. The promisor need not necessarily get any benefit; the third partymay also get benefit
from the contract.

EXAMPLEs

a. A saved. B's house from fire. B did not ask for help. A cannot demand payment for his services
because he acted voluntarily.

b. B promised to pay a commission on goods sold in his market if D constructed a market in that area.
Later, the collector requested D to construct the market and D constructed the market on his request. D
demanded commission from B. Held, the promise was not enforceable because the market was not
constructed at the desire of B. (Durga Prasad vs. Baldeo)

2. Promisee or other Person

A consideration may move from the promisee or any other person. It means a person can sue on a
contract; even if the consideration for the promise moved from a third party.

EXAMPLE

A gifted property to her daughter R on the condition that she would pay certain amount annually to A's
brother C. R promised to pay the amout to her uncle C. Later, R refused to pay. C sued. Held, C could
recover the amount as the consideration had moved from A to C. (Chinnaya vs. Ramayya)

3. Act, Abstinence or Promise

The consideration may be a positive or a negative act. Sometimes a return promise also forms
consideration.

a. Act

A consideration may be an act, i.e. doing of something. In this sense, consideration is in positive form.

EXAMPLE

P agrees to construct A's house for Rs. 10 Lac. A's promise to pay Rs. 10 Lac is the consideration for P's
promise of constructing the house.

b. Abstinence

Abstinence means refraining from doing something. In this sense consideration is in negative form.

EXAMPLE

A promises not to sue B if B pays him additional Rs. 5,000. The abstinence of A is the consideration for
B's payment.
c. Promise

For a valid consideration, there must be a promise from both sides. It means that there must be a
promise by one party agaiņst the promise of other party.

EXAMPLE

A agree to sell his horse to B for Rs. 30,000. B's promise to pay Rs. 30,000 is the consideration for A's
promise. A's promise to sell the horse is the consideration for B's promise.

4. Past, Present or Future

The consideration may be past, present or future. It means that consideration is an act which has been
done or is in progress or is promised to be done in future.

a. Past Consideration

When the consideration is given before the formation of agreement, it is called a past consideration. It is
not a valid consideration. When an act is done voluntarily without any promise for compensation, it is a
past consideration and the person doing the act gets no compensation. But if promise is made to
compensate a person who has rendered some services, then past consideration is a valid consideration.

EXAMPLES

a. B found A's lost purse and gave it to him. B cannot demand payment for his services due to past
consideration.

b. A teaches B at his request in January, and in February B promises to pay A Rs. 2,000 for his services.
The service of A is past consideration.

C. A lawyer gave up his practice and served as manager at the request of landlord. The landlord
promised to pay pension. It was held that there was valid past consideration. (Shiv Saran vs. Kesho
Prasad)

b. Present Consideration

When consideration is given immediately by one party to another at the time of contract, it is called
present consideration. The act creating the consideration is completely performed.

EXAMPLE

A sells a book to B and B pays price immediately. It is a case of present consideration.

C. Future Consideration

When the consideration on both sides is to move at a future date, it is called future consideration. It
consists of promises and each promise is a consideration for the other party. In future consideration, the
liability is outstanding on both sides
EXAMPLE

X promises to deliver a car to Y after a week, and Y promises to pay the price at the time of delivery. The
consideration is future.

5. Not necessarily Adequate

It is not necessary that the consideration is equal in value to the promise. The law insists on the
presence of consideration and not on its adequacy. The parties are free to decide the value of
consideration. However, inadequate consideration may create a doubt about the free consent of the
parties. But if the consent is proved to be free, inadequate consideration is valid.

EXAMPLE

A agrees to sell his car worth Rs. 2 lac for Rs. 50,000 and his consent is free. The contract is valid.

6. Real and Competent

It is necessary that the consideration is real and competent. A consideration is not considered valid if it
is physically impossible, illegal, uncertain or unreal.

a. Physically Impossible

A promise to do something which is physically impossible.

EXAMPLE

A promises to put life in B's dead brother and B promises to pay him Rs. 1 Lac.

b. Legally Impossible

A promise to do something which is illegal.

EXAMPLE

A promise to pay Rs. 1 Lac to B on his promise to beat C.

c. Uncertain Consideration

A promise to do something which is uncertain.

EXAMPLE

A employs B for a certain work and promises to pay a reasonable amount.

d. Unreal Consideration

Consideration is unreal if it consists of a promise to perform a duty which a person is already responsible
to perform under a law.
EXAMPLE

C was summoned to give evidence in court for G. G promised to pay some amount. G refused to pay. C
sued. Held, that consideration was unreal as it was C's duty to give evidence. (Collins vs. Godefroy).

Exceptions to Consideration

According to law, agreement without consideration is void. Following are the agreements which are
valid even without consideration:

1. Natural Love and Affection

The agreement which is expressed in writing and registered under the law and is made on account of
natural love and affection between the parties standing in a near relation to each other is enforceable
even if there is no consideration. The contract without consideration shall be valid if following
conditions are satisfied: (Sec. 25)

a. The contract is in writing.

b. The contract is registered.

C. The contract is made on account of natural love and affection.

d. There must be near relation between the parties to the contract

EXAMPLES

a. A promises to give Rs. 1000 to B for no consideration. It is a void agreement.

b. F, on account of natural love and affection, promises to give Rs. 1 Lac to his son S. F puts it in writing
and gets it registered. S can enforce it.

C. B, due to dispute with his wife R, promised on a registered document to pay some amount. Later, B
refused to pay. R sued for recovery. It was held that agreement was void because it was not based on
natural love and affection. (Rajlakhi Devi vs. Bhootnath)

2. Voluntary Compensation

If a promise is made to compensate, wholly or in part, a person who has voluntarily done something for
the promisor, is enforceable even though without consideration. In other words, a promise to pay for a
past voluntarily service is binding. This is an exception to the principle that past consideration is no
consideration. For this exception, the following points should be noted: (Sec.25(2))

a. The services were rendered voluntarily for the promisor.

b. The promisor must be in existence at the time the services were rendered.

C. The intention of the promisor should be to compensate the promisee.

d. The services rendered must be legal.

EXAMPLES

a. A finds B's purse and returns it to him. B promises to give A Rs. 500. This is a contract.

b. A saves B from drowning in the river and B promises to pay Rs. 10,000 to A This is a valid contract.

3. Time-Barred Debt

A debt becomes time-barred if it is not claimed for a period of three year from the date it becomes due.
Where there is an agreement, made in writing and signed by the debtor to pay wholly or in part a time-
barred debt, the agreement is valid even though it is not supported by any consideration. Such an
agreement is valid if the following conditions are fulfilled. (Sec. 25(3))

a. The debt must be time-barred.

b. The promisor himself must be liable for the debt.

C. There must be an express promise to pay a time-barred debt.

d. The promise must be in writing and signed by the debtor or his agent.

EXAMPLE

A Owes B Rs. 1000, but the debt becomes barred. A signs a written promise to pay B Rs. 500 on account
of the debt. It is a contract.

4. Completed Gift

A gift does not require consideration in order to be valid. Any gift given will be valid between the donor
and donee even though without consideration. There need not be natural love and affection or nearness
of relationship between the donor and donee. The gift must be complete, and it is said to be completed
when possession is given to the donee by the donor. (Sec. 25 Explanation 1)

EXAMPLE

A gifted a watch to B on his birthday. Later, A cannot get his watch back on the ground that there was no
consideration for him.

5. Contract of Agency

Consideration is not necessary to create an agency. Generally, an agent 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. (Sec. 185)

EXAMPLE
A promises to sell B's house on his behalf. An agreement between A and B is valid even without
consideration.

6. Remission by Promisee

When a person agrees to receive less than what is due, it is known as remission. If a creditor agrees to
give up a part of his claim, there is no need of consideration for such an agreement. Similarly, an
agreement to extend time for performance of a contract need not be supported by consideration. (Sec.
63)

EXAMPLE

A owes B 5,000 rupees. A pays Rs. 2,000 to B and B accepts it in full satisfaction of the whole debt. The
whole debt is discharged

Doctrine of Privity of Contract

Privity of contract means relationship existing between the parties who have entered into agreement.
There are two consequences of the doctrine of privity of contract.

1. A person who is not a party to a contract cannot sue upon it even though the contract is for his
benefit and he provided consideration.

EXAMPLE

X owes Rs. 1 Lac to Y. X sells his house to B for Rs. 1 Lac and asks B to pay to Y. B fails to pay. Y cannot
sue B because he is not a party to the contract.

2. A contract cannot confer rights or impose obligations arising under it on any person other than the
parties to it.

EXAMPLE

Dunlop sold tyres to D, on the condition that he will not sell the tyres to the public below Dunlop's list
price. D sold tyres to S on this condition. S sold them below the list price. It was held that the Dunlops
could not sue S as he was a stranger to the contract. (Dunlop Tyres Co. vs. Selfridges Ltd.)

Stranger to Contract

A person who is not a party to the contract is called stranger to the contract. A stranger to the contract
cannot sue because he has no privity of contract. The above rule is subject to the following exceptions:

1. Trust

In case of trust, the beneficiary can sue to enforce his rights under the trust although he is not a party to
the contract.

EXAMPLES
a. A transfers some property to B under trust for the benefit of M. M. can enforce the agreement. (M. K.
Ropai vs John)

b. An addressee of an insured article can sue the Post Office in case of loss because on receipt of article,
the Post Office becomes trustee for the addressee. (Amir Ullah vs. Central Government)

2. Agreements relating to Immovable Property

Owner of a property may be entitled to certain rights and obligations created by an agreement affecting
the property. When a person purchases such property with the notice of rights and obligations of the
owner, he is bound by those rights and obligations although he is not a party to the original agreement.

EXAMPLE

A buys a house through HBFC loan. A sells the house to X without returning the loan to HBFC. HBFC can
sue X.

3. Family Settlements

Where provision is made for the marriage, partition or other family arrangements for the benefit of any
member of a family, such member though hot party to the agreements, can enforce the agreements.

EXAMPLE

On a partition of joint property, two brothers agreed to pay Rs. 300 to their mother for her
maintenance. Held, she was entitled to recover (Shuppu vs. Ammal)

4. Agent

Where a person acts as agent for his principal, the principal can sue on a contract a though he is not a
party to a contract.

EXAMPLE

A appoints B as his agent to sell goods. B sells goods to X. X can sue A for defective goods though there is
no direct contract between A and X.

5. Assignment

In assignment of rights under a contract in favour of a third party voluntarily or by operation of law, the
assignee can enforce the contract.

EXAMPLE

A assigned his insurance policy in favour of his wife. The wife can enforce it although she is not a party
to the contract
Unlawful Considerations and Objects

For the valid agreement, the object and consideration of an agreement must be lawful. If the
consideration or object of a contract is unlawful the agreement is illegal and therefore void.

The words 'object' and 'consideration' are different from each other. The word object means purpose.
While the consideration means the price for which the promise of the other is taken. Sometimes the
object of a contract may be illegal though its consideration is lawful

EXAMPLE

A takes a house from B on rent. It is lawful. If A wants to store illegal arms in the house, the agreement is
unlawful due to unlawful object.

According to section 23 the consideration or 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 law, the agreement is unlawful and void.
An act is forbidden by law

a. When it is punishable by the Criminal Law of the country, or

b. When it is prohibited by special act of legislature.

EXAMPLES

a. B and C agree to divide the goods obtained by theft. The agreement is unlawful.

b. The sale of liquor without license is illegal and so void.

C. Agreement to sell above the price fixed by the law is illegal and void. (Sita Ram vs. Kunj Lal

2. Defeats Provisions of Law

If the object or consideration of an agreement is of such a nature that if permitted it would defeat the
provisions of any law, then it is considered illegal. Such objects or considerations may not be directly
forbidden by law but they will indirectly violate law.

EXAMPLE

A fails to pay his loan to HBFC. A's house is sold for recovery of debt. According to law, A is prohibited
from purchasing his house. A asks B to purchase the house and transfer it back to him. The agreement is
void.

3. Fraudulent
If the object or consideration of an agreement is to defraud others, then it is considered unlawful and
void. Where the parties agree to commit a fraud on a third person, the agreement is illegal.

EXAMPLES

a. Apromises to pay Rs. 20,000 to B, on Bs' promise to commit fraud on C. The agreement is illegal and
void.

b. A is the agent of X. A agrees to sell the land to his friend B, at a lesser price without knowledge of his
principal. The agreement between A and B is void as it is fraud by A against X.

4. Involves Injury to Person or Property

If the object or consideration of agreement is to cause an injury to a person or property of another, then
it is illegal and also void. Injury means criminal or wrongful harm.

EXAMPLES

a. An agreement to put certain property on fire is unlawful and void

b. An agreement to commit an assault or to beat a man is held unlawful and void. (Allen vs. Rescous)

5. Court regards as Immoral

If the consideration or object of an agreement is such that the court regards it as immoral, the
consideration is void. Immoral means acts which are against the moral values and also prohibited by
law.

EXAMPLE

A married woman was given money to obtain divorce from her husband and then marry the lender.
Woman refused to take divorce. Held, the agreement was immoral and the lender could not recover
the money. (Bai vijli vs. Hamda Nagar)

6. Court considers it against Public Policy

An agreement which is harmful for the welfare of the society or the state is against the public policy. If
the court considers the object or consideration of an agreement as opposed to public policy, then the
agreement is unlawful. An agreement which leads to corruption, injustice or immorality is considered to
be against the public policy. The following agreements are held to be against public policy:

EXAMPLES

a. The agreements to give money to induce a person to give false evidence.

b. The agreements to influence judges.

C. The agreements with an alien enemy.

d. The agreements which disturb the friendly relations of the state.

e. The agreements the purpose of which is to influence over the officers of justice
 CAPACITY OF PARTIES

The contracting parties must be competent to contract. Every person is competent to contract who is of
the age of majority, has sound mind, and is not disqualified from contracting by any law. A minor,
person of unsound mind and person disqualified by law are incompetent to contract. (Sec.11)

MINOR

Minor is a person who has not attained 18 years of age. According to Majority Act, 1875, where a
guardian of minor's person or property is appointed or court of wards take charge of minor's property, a
minor will attain the age of majority after 21 years.

Nature of Minor's Agreements

The law regarding minor's agreements is explained as under:

1. Void Agreement

An agreement with minor is void. A minor is not liable to perform any act which he has promised
because he does not possess the capacity to judge what is good or bad for him. A minor cannot be
compelled to pay back the money received by him under the agreement. An agreement with a minor
does not create legal rights and duties.

EXAMPLES

a. A, a minor sold his shop to B. The amount was paid to A but the sale deed could not be registered as A
was minor. On a suit by B, it was held that as A was minor, so agreement was void ab-initio and the
amount was not recoverable. (Shiam Lal vs. Ram Piary).

b. D, a minor mortgaged his house in favour of M to secure a loan of Rs. 20000. D received Rs. 8000. M
filed a suit for recovery of money and sale of mortgaged property in case of default. Held that the
agreement with minor was void so M cannot recover the money or sell the minor's mortgaged property.
(Mohori Bibi vs. Dharmo Das Gosh)

2. Minor and Ratification

Ratification means act of confirming or approving. An agreement made by a minor cannot be confirmed
by him on attaining the age of majority because an agreement which is void from the beginning cannot
be made valid by subsequent confirmation.

EXAMPLE
M, a minor borrowed some money and wrote a pronote for it. On attaining majority, M wrote a second
pronote to settle the first note. It was held that the second pronote was void for want of consideration.
(Suraj Narain vs. SukhuAhir)

3. Minor and Estoppel

The rule of estoppel does not apply to a minor. It means that a minor is not estopped from pleading his
infancy in order to avoid a contract, even if he has entered into an agreement by falsely representing
that he was of full age. In other words, where a minor represents fraudulently that he is of full age and
induces another to enter into a contract with him, he is not bound by the contract.

EXAMPLE

M, a minor fraudulently shows that he is of full age and contracts with N to sell his house. M refuses to
perform the contract on the ground that he is a minor. N cannot sue M. (Sadiq Ali Khan vs. Jai Kishore)

4. Minor and Repayment

A minor can hot be compelled to repay the money received by him under an agreement. If anything is
recoverable from minor out of the proceeds of the contract made by fraudulently showing that he was
of full age, the court may compel the minor to return the amount to the other party when the minor
himself brings a suit against the other party. But, if the minor loses the property or money, he cannot be
made responsible to restore.

EXAMPLES

a. M, a minor got Rs. 17,500 as advance and promised to sell the land. Later, M refused to perform the
contract. The court ordered the minor to refund the amount. (Khan Gull vs. Labha Singh)

b. A minor sold a house for Rs. 50,000 showing that he is an adult. Later, he Sued to cancel the sale on
the ground of minority. The court ordered the minor to return the money received by him. (Jager Nath
Singh vs. Lalta Prasad)

5. Minor and Necessaries

A person who supplies necessaries to a minor or anyone whom the minor is bound to support, can
recover reasonable value of such goods from the property of a minor. If a minor owns no property, the
supplier cannot recover the price of necessaries.

The necessary article depends upon the status and circumstances of the minor. If the minor already
possesses a necessary at the time when necessary is supplied to him, the supplier cannot recover value
of that necessary. (Sec. 68)

EXAMPLES
a. C supplied necessaries of life to B, a minor. C can recover value from B’s property.

b. C supplies necessaries to the wife and children of B, a minor. C can recover expenses from B's
property.

C. C supplied a coat with diamond buttons to a minor. C cannot recover the price of coat.

d. A minor purchased 11 coats. He had sufficient clothes at that time. It was held that the coats were not
necessaries of life and minor was not liable to pay for them. (Nash vs. Inman)

6. Agreement on behalf of Minor

A contract made on behalf of a minor by his guardian is binding on the minor. It can be enforced against
the minor provided the contract is within the authority of the guardian and for benefit of the minor.

EXAMPLE

A contract of sale of immovable property by the guardian of minor for the minors benefit may be
enforced by either party to the contract.(Gujoba Tulsiram vs. Nilkanth)

7. Minor as Beneficiary

A minor is capable of accepting benefit. Any contract is valid which is for the benefit of a minor ánd
under which the minor is not required to bear an obligation. The minority of one party to a contract
does not affect the other party's liability.

EXAMPLE

a. A, a minor advanced some amount to B. B mortgaged his property in favour of A. A can enforce the
mortgage if B does not repay the money. (Raghva Chariar vs. Srinivasa)"

b. A, a minor delivered some goods under an agreement to P. P refused to make the payment. The court
held that minor could recover the price. (Abdul Gafar vs. Piare Lal)

8. Minor as Agent

A minor can act as 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.

9. Minor as Partner

A minor cannot become a partner of a firm. He can be admitted only in the benefits of the firm through
his guardian with the consent of all the partners. Minor can only inspect the accounts of a firm but not
the books. He cannot participate in the management of the firm. The minor's liability is limited to his
investment in the business.

EXAMPLE

A, B, and Care partners in a firm. In order to make M, a minor a partner, they make a contract with X
who is the guardian of M. M can be admitted to the benefits of firm.

10. 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. The adult is responsible because there is direct contract between adult
and the third party.

EXAMPLE

M, a minor makes a contract with X. S stands surety for M. The contract is valid.

11. Minor as Member of Company

A minor cannot directly buy shares of a company because he is not competent to contract. If parents of
a minor are shareholders in a company, the company can transfer shares in favor of a minor upon the
death of parents.

EXAMPLE

D holds shares in a company. D dies and leaves M, a minor as his legal representative. The company is
bound to transfer the shares to M.

12. Minor and Insolvency

A minor cannot be declared insolvent. A minor is not personally liable even for necessaries supplied to
him. Only the minor's property is liable. The payment cannot be recovered if he has no property. (Sec.
68)

EXAMPLE

M, a minor buys medicines from X. M has no property. M cannot be held liable for payment. He cannot
be declared insolvent.

13. Contract by Minor and Adult

Where a minor and an adult jointly enter into a contract with another person, the minor has no liability.
But the contract as a whole can be enforced against the adult.

EXAMPLES

a. M, a minor and A jointly make an agreement with X to purchase a car. The agreement is valid.
b. A minor and adult jointly agreed to pay some amount and executed a bond. The court held that adult
was liable but minor was not liable. (Jamna Bai vs. Vasanta Rao)

14. Liability of Minor's Parents

The parents of a minor are not liable for agreements made by the minor even if the agreement is for the
purchase of necessaries. The parents are liable if the minor acts as an agent of the parents.

EXAMPLE

F sends his son M, a minor to buy goods from S. M buys goods from S. F is liable for payment.

15. Minor and Negotiable Instruments

A. minor can make, draw, endorse and deliver bill of exchange, promissory note and cheque to bind
other parties except himself. He himself is not liable but all other parties to the instrument are liable in
their respective capacities.

EXAMPLES

a. M, a minor draws a bill of exchange on A. A accepts the bill. M endorses it to C. The bill is valid.

b. X draws a bill on Y, a minor. Y accepts the bill. The bll is invalid.

PERSON OF UNSOUND MIND

For a valid contract, it is necessary that each party to the contract must have a 'sound mind'. (Sec. 11)

Sound Mind

Section 12 states that: "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 of forming a rational judgment as to its
effect upon his interests. 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."

It means that a person must be able to understand the nature of contract. He should be able to make a
rational judgment that whether the contract is profitable or not. A person who is temporarily of
unsound mind cannot make a contract during such period. However, he can make a contract when he
becomes of sound mind. A person may become of unsound mind due to idiocy, insanity, drunkenness,
hypnotism, old age, etc.

EXAMPLES

a. A, a sane man who becomes temporary insane due to drug overdose, sells his scooter to B. The
agreement is void.
b. S agreed to sell property worth Rs. 25,000 for Rs. 7,000. His mother proved that he was an idiot by
birth. The agreement was held to be void. (Inder Singh vs. Parmeshwardhari Singh)

Effect on Agreement

An agreement by a person of unsound mind is void but he can get benefit under it. However, the person
who supplies necessaries to a person of unsound mind or anyone whom he is legaly bound to support,
can recover reasonable value of those necessaries from the property of such person. If the person of
unsound mind owns no property, then the supplier cannot recover. (Sec 68)

Burden of Proof

If a person is usually of sound mind, the burden of proving that he was of unsound mind at the time of
contract lies on the person who challenges the validity of contract.

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.

DISQUALIFIED PERSON

The following persons are disqualified from contracting: (Sec. 11)

1. Joint Stock Company

Joint Stock Company cannot enter into a contract outside the powers given to the company by its
EXAMPLE

XYZ Co. makes an agreement with A to sell some property which the company is not authorized by its
Memorandum of Association, the agreement is void.

2. Diplomatic Agent

The diplomatic agent means the staff of the diplomatic mission of a foreign country in Pakistan. No
proceeding in any Court shall lie against a diplomatic agent except in the following case:

a. Any private immovable property situated in Pakistan.

b. If he acts as an executor, administrator and heir as a private person.

C. Any professional or commercial activity that he exercised outside his official functions.

EXAMPLE

E, a diplomat got a house on rent from M on behalf of the country to which he belongs. M sued for
recovery of arrears of rent. It was held that no action can be brought against him. (Engelke vs. musman)

3. 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 an alien friend is valid. An peace with alien whose country is at war with
Pakistan is an alien enemy. A contract with an alien enemy is ilegal.

EXAMPLE

Y contracts to buy goods from X, a citizen of India without the permission of Pakistan Government. The
contract is illegal and void.

4. Insolvent

An. insolvent person cannot enter into a contract with anyone regarding his property which is in the
control of official receiver. After the order of discharge, he can enter into a contract.

EXAMPLEE

C, an insolvent, promises to sell his car to B. The agreement is void.

5. Convict

A convict is a person who has been imprisoned by a court of law. During the period of sentence, he is
incapable of entering into a contract. However, he can enter into a contract while on parole or through
Commission. He becomes capable of making a contract when the sentence of imprisonment expires.

EXAMPLE

W, during imprisonment, enters into an agreement with S to sell his land. The agreement is void.
 FREE CONSENT

Consent

An agreement is valid when it is made with free consent of the parties. According to Section 13, two or
more persons are said to consent when they agree upon the same thing in the same sense.

Definition of Free Consent

According to Section 14, consent is said to be free when it is not caused by coercion, undue influence,
fraud, misrepresentation, or mistake.

In other words, when the consent is obtained by coercion, undue influence, misrepresentation or fraud,
the contract is voidable at the option of the aggrieved party. Consent is not free when it is obtained by
the following means:

COERCION

Definition

Section 15 defines coercion as, "Coercion is the committing or threatening to commit any act forbidden
by the Pakistan Penal Code, or the unlawful detaining or threatening to detain any property, to the
prejudice of any person whatever, with the intention of causing any person to enter_ into an
agreement."

The Explanation to the Section states that, "It is immaterial whether the Pakistan Penal Code is or is not
in force in the place where the coercion is employed." The above definition can be analyzed as follows:

1. Commit or threat to commit

If a person commits or threatens to commit any act which is forbidden by the Pakistan penal code to
compel the other party to enter into a contract, is a contract made under coercion.

EXAMPLES

a. W threatens to shoot M, if he does not give his house on rent. M agrees. The consent of M is obtained
by coercion.

b.A widow was threatened to adopt a boy otherwise her husband's dead body would not be allowed to
be removed for cremation. The widow adopted the boy and later applied for cancellation of adoption.
Held, that agreement was not binding. (Ranganayakamma vs. Alwarsetti)

2. Detain or threat to detain Property

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 voidable at the option of aggrieved party.

EXAMPLES
a. An agent refused to hand over the account books to the new agent unless the

principal released him from all liabilities. The principal gave a release deed. It was held that the release
deed was given under coercion. (Muthia vs.Karuppan)

b. The government threatened to seize the property of A to recover the fine due from B, the son of A. A
paid the fine. It was held that fine was recovered by coercion. (Bansraj vs. Secy. of State

3. Threat to Third Party

The threats may be directed against third persons who are near relatives of the person making the
contract. Thus, a threat to injure one's parents, child, husband, wife, brother, etc. is considered as
coercion. Coercion need not be exercised only by the contracting party; it can be exercised by any
person related to that party.

EXAMPLES

a. C threatens to kidnap B's son if he does not give him Rs. 2 Lac. B agrees. The agreement is made by
coercion.

b. D threatens to shoot B if he does not lend his house to C. B agrees. B's consent is obtained by
coercion.

Enforcement of Pakistan Penal Code

It does not matter whether Pakistan Penal Code, 1860 is or is not in force in the place where the
coercion is employed. If the suit is filed in Pakistan, the provisions of PPC will apply.

EXAMPLE

C forced B to enter into an agreement on a ship near Jeddah. Afterwards, B sued C for breach of
contract at Karachi High Court. C has employed coercion although Pakistan Penal Code was not in force
at Jeddah.

Effects of Coercion

The effect of coercion is as under: (Sec. 19& 72)

1. The contract is voidable at the option of the party whose consent is obtained by coercion.

2. When the aggrieved party decides to cancel the contract, he must return the benefit received from
the other party.

3. The other party to. whom money was paid or anything delivered under coercion must repay or return
it.

4 If the aggrieved party does not decide to cancel the contract, it remains a valid contract.
Burden of Proof

The burden of proof that coercion was used lies on the party who wants to cancel the contract. He has
to prove that he would not have entered into a contract, if the coercion had not been used.

UNDUE INFLUENCE

Definition

The term undue influence means the unfair use of one's superior power in order to obtain the consent
of person who is in a weaker position. It is described under section 16 (1 & 2) as follows:

1. Section. 16(1)

It defines undue influence as, "A contract is said to be induced by undue influence where the relations
subsisting between the parties are 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." It is further explained as
follows:

a. Position to Dominate

In order to prove undue influence the relations existing between the parties should be such that one of
them must be in a position to dominate the will of the other party. The person in a superior position
may obtain the consent of other party.

EXAMPLE

U, a spiritual adviser induced his follower M, to gift him his property to secure benefits in the next
world. It was held that gift was obtained by undue influence as U was in a position to dominate. (Mannu
Singh vs. Umadat Pandey)

b. 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.

EXAMPLE

A, having advanced money to his son B, obtains a bond for an amount greater than the sum advanced by
misuse of parental influence. A obtains unfair advantage.

2. Section 16(2)

A person is deemed to be in a position to dominate the will of another as follows:

1. Where he holds a real or apparent authority over the other.

2. Where he stands in a fiduciary relation to the other.3. Where he makes a contract with a person
whose mental capacity is temporarily or permanently affected by reason of age, illness, mental orbodily
distress, etc.

It is further explained as under

a. Real or Apparent Authority

A person in authority can dominate the will of the person over whom the authority is held. The authority
may be real or apparent. For example, authority of income tax officer over an assessee, authority of
police officer over an accused person.

EXAMPLE

A, a police officer bought a property worth Rs. 1 Lac for Rs. 5,000 from B, an accused under his custody.
Later, B sued to cancel the contract. A is in a position to dominate the will of B.

b. Fiduciary Relation

Fiduciary relation is a relationship of mutual trust and confidence. It exists in case of father and son,
guardian and minor, advocate and client, doctor and patient, religious adviser and follower, etc.

EXAMPLE

An illiterate elderly woman made a deed of gift of her whole property to her nephew who managed her
estate. The deed was cancelled on the ground of undue influence. (1 Gariah vs. Shaikh Allie Bin Omar)

c. Mental Distress

A person is said to be in distress when his mental capacity is temporarily or permanently affected. It may
be due to old age, mental or physical illness, etc. Such a person is easily persuaded to give consent to a
contract which may be unfavorable to him.

EXAMPLE

A moneylender gave a loan at 100% interest to a needy widow. It was held that undue influence was
used and the court reduced the interest to 24%. (Rannee Annapurni vs. Swaminatha)

Presumption of Undue Influence

it is presumed that the dominating person has exercised undue influence in these cases: father and son,
guardian and minor, doctor and patient, advocate and client, trustee and beneficiary, spiritual adviser
and follower, teacher and student, master and servant.

Burden of Proof

In these cases, the burden of proof lies on the dominating person. He can disprove the presumption by
arguing that;
1. The facts were fully disclosed.

2. The price was enough.

3. The dominated party was in a position to receive independent advice.

4. The dominated party gave his.free consent.

No Presumption of Undue Influence

It is not presumed that the dominating person has used undue influence in these cases:. husband and
wife, landlord and tenant, creditor and debtor, principal and agent, mother and daughter

Burden of Proof

In these cases, the weaker party will prove that undue influence has been exercised over him.

Effect of Undue Influence

The effects of under influence are as follows: (Sec. 19A)

1. The agreement is voidable at the option of the party whose consent was taken by under influence.

2. The court may direct the aggrieved party to refund the benefit or cancel the contract

3. If the aggrieved party does not cancel the contract, it remains a valid contract.

Contract with Pardahnashin Lady

A Pardahnashin lady is one who is illiterate, ignorant and observes complete seclusion (pardah)
according to the custom of her family. If a lady keeps her face covered but transacts her own business,
collects rents from her tenants and deals with persons who are not members of her family, then she
cannot be regarded as pardahnashin. There is a presumption of undue influence in a contract with a
pardahnashin lady. Such lady can avoid contract on the plea of undue influence.

EXAMPLE

A lady appeared before the Registrar for registration of certain documents and gave evidence in a suit.
The court held that she could not be treated as a pardahnashin lady. (Shaik Ismail vs. Amir Bibi)

Burden of Proof

In case of contract with pardahnashin lady, it is the duty of other party to prove that no undue influence
was applied by him. In order to disprove the undue influence, the other party must satisfy the court
that:

1. The terms and conditions of the contract were fully explained to her.

2. She was aware of the results of the contract.

3. She was free to get independent advice regarding the contract.

4. She gave her free consent to execute the contract.

DIFFERENCE BETWEEN COERCION AND UNDUE INFLUENCE

The following are points of difference between the two

Coercion Undue Influence

1. Nature
Coercion is a physical threat to property or person Undue influence is a mental or moral property or
person threat
2. Illegal & Unfair
Coercion involves doing or threatening be to do an In undue influence the act may not be illegal, it
illegal act. may be unfair.
3. Penal Action
In coercion, penal action is also taken against In undue influence, no penal action is taken
guilty party. against guilty party.
4. Parties
Coercion may be exercised by or against the party In Undue influence must be exercised by or against
to the agreement. It may also be exercised by or the party to the agreement
against some third party
5. Relationship
For coercion no specific relationship between the For undue influence there must be a specific
parties is necessary relationship between the parties.

6. Refund of Benefit
In coercion the aggrieved party has to refund the In undue influence, the court may direct the
benefit received from the other party. aggrieved party to refund the benefit received
from the other party.
7. Effect
In coercion, the contract is voidable at the option at In undue influence, the contract is voidable or
of aggrieved party. the court may cancel or enforce it in a modified
form.
8. Punishment
It involves criminal liability. It does not involve criminal liability.

FRAUD

The term fraud includes all acts committed by a party to induce the other party to enter into a contract
with an intention to deceive.
Definition

Section 17 states, "Fraud means and includes any of the following acts committed by a party to a
contract, or with his connivance, or by his agent, with intent to deceive another party thereto or his
agent or to induce him to enter into the contract:

1. The suggestion, as a fact, of that which is not true, by one who does not believe it to be true.

2. The active concealment of a fact by one having knowledge of the fact.

3. A promise made without any intention of performing it.

4. Any other act fitted to deceive.

5. Any such act or omission as the law specially declares to be fraudulent."

As per section 17, there is fraud in the following cases:

1. False Statement

When a party to the contract makes a false statement intentionally, he can be held liable for fraud. If a
person honestly believes his statement to be true, he cannot be held liable for fraud.

EXAMPLES

a. A tells B, knowing to be false, that his factory produces 500 pounds of butter per day. B agrees to buy.
A is guilty of fraud. A knows that his watch has been made in Pakistan but tells B that it has been made
in Japan. B buys the watch. A is guilty of fraud.

2. Active Concealment

When the party to the contract conceals material facts essential to the contract, which he is under an
obligation to disclose to the other party before entering into a contract, he is guilty of fraud. The seller is
bound to disclose to the buyer about the faults in the goods he is selling

EXAMPLE

A sells his house to B. The house has cracked walls. A fills it up to conceal the defect. B cannot find the
defect. A is guilty of fraud.

3. Intentional Non-performance

When a person enters into a contract with no intention to perform his part of promise, it is considered
an act of fraud.

EXAMPLEs
a. X purchases goods from Y on credit without any intention of paying as he is about to be declared
insolvent. X is guilty of fraud.

b. B, knowing that he has no money, takes a meal in a hotel with an intention of slipping away. B is guilty
of fraud.

4. Intention to Deceive

Act fitted to deceive means any act which is done with the intention of committing fraud. It includes all
cases which are not covered by other clauses. A person can adopt different methods to deceive the
other party. Therefore, it is difficult to explain all the methods under the definition of fraud.

EXAMPLE

A company issued prospectus containing a statement that company paid dividend between 2001 and
2007. In fact, the company suffered losses in those years and paid dividend out of secret reserves. The
company is guilty of fraud,

5. Act or Omission

In certain cases, it is obligatory to disclose relevant facts to the other party. Under section 55 of the
Transfer of Property Act, the seller is bound to disclose to the buyer all material defects about the
property. If a person does not disclose the relevant facts, he is guity of fraud.

EXAMPLE

A sold his house to B for Rs. 1 Lac. The house was mortgaged with C for Rs. 10,000. A did not inform B
about it. Later, C claimed Rs. 10,000 from B. B can avoid the contract as A is guilty of fraud by silence.

Essentials of Fraud

The following are essentials of fraud:

1. The representation must be false.

2 The representation must relate to a fact.

3. The representation was made to induce the other party to contract.

4. The representation was made with the knowledge of its being false.

5. The representation was made before formation of the contract.

6: The other party must have relied upon the representation.

7. The other party was deceived by the fraud.

8. The other party must have suffered a loss.

Effect of Fraud

The following remedies are available to the aggrieved party:

1. He can avoid the contract

2. He can sue for damages.

3. He can ask for specific performance and restoration

Burden of Proof

The burden of proof that fraud was committed lies on the party who wants to set aside the contract on
basis of fraud.

Silence as Fraud

Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud,
unless the circumstances of the case are such that, regard being had to them, it is the duty of the person
keeping silence to speak, or unless his silence is in itself equivalent to speech. (Sec. 17 Explanation)

Exception

The following are exceptions to the above mentioned rule:

1. Duty to Speak

When there is duty to speak and the person does not say the thing he is bound to say, it is an act of
fraud. But there is no obligation to disclose the thing which is already known to the other party.

EXAMPLE

A sells his horse to his son S. The horse is sick. A does not tell S about the health of horse. S can avoid
the contract because A was bound to tell S about the health of horse.

2. Silence is equivalent to Speech

When the circumstances are such that silence is in itself equivalent to speech, there is no fraud.

EXAMPLE

B says to A, "if you do not deny it, I shall assume that horse is healthy." A says nothing. Here A's silence
is equivalent to speech. If the horse is unhealthy, A's silence amounts to fraud.

MISREPRESENTATION

Misrepresentation means an innocent misstatement of fact about the contract, made by one party to
induce the other party to enter into a contract
Definition

According to Section 18, misrepresentation includes:

1. The positive assertion in a manner not warranted by the information of the 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 any one claiming 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.

There is misrepresentation in the following cases:

1. Unwarranted Positive Assertion

The positive assertion means an absolute, full and clear statement of a fact. There is misrepresentation
when a person makes a clear statement of facts about the contract without any reasonable justification,
believing it to be true though it is not true.

EXAMPLES

a. A tells B that my land produces 4000 kg of wheat per acre. A believes it to be true. B buys it. Later, it
appears that the land produces 1000 kg of wheat per acre. This is a misrepresentation.

b. A sold a mine to M and told certain facts about the mine which were incorrect. A believed them to be
true. Later, M discovered the real facts. This is a misrepresentation (Sheffield Nickel Co. vs. Unvin

2. Breach of Duty

A person commits breach of duty when it brings advantage to him and loss to the other party. Breach of
duty will be considered misreprestation if it is done without any intention to deceive the other party. It
includes all those cases where one party is under legal obligation to disclose all material facts to the
other party.

EXAMPLE

A told B that the monthly sale of his business was Rs. 50,000 before the contract was signed. The' sales
decreased to Rs.25000. A did not inform B about the decrease in sales. Held, that there was
misrepresentation. (With vs. O'Flanagan)

3. Induce Mistake

If a party to an agreement induces the other party, although innocently, to commit a mistake as to the
nature or quality of subject matter of the agreement, he becomes guilty of misrepresentation.
EXAMPLE

The seller told the buyer that the motorcycle was free from defects. But there was an inbuilt defect in it.
The buyer purchased the motorcycle. There is a misrepresentation.

Essentials of Misrepresentation

The following conditions are necessary to prove misrepresentation:

1. It must be made innocently and the person making it honestly believes it to be true.

2. It must relate to the fact essential to the contract. Mere expression of opinion is not
misrepresentation.

3. The statement made must be untrue.

4. It must induce the other party to enter into a contract.

5. It must be made without any desire to deceive the other party.

6. The other party must suffer a loss.

7. The other party cannot discover the truth by ordinary diligence.

Effects of Misrepresentation

The following remedies are available to aggrieved party:

1. He can rescind the contract.

2. He can accept the contract and ask the other party for restoration

The aggrieved party loses the rights in the following cases:

1. If consent was given with the knowledge of misrepresentation.

2. If third party has acquired rights in the subject matter of contract in good faith and for value.

3. If the aggrieved party could discover the truth with ordinary diligence.

Burden of Proof

The burden of proof that misrepresentation was used lies on the party who wants to set aside the
contract on ground of misrepresentation.

Contracts of Utmost Good Faith

The following contracts are the contracts of utmost good faith:

1. Fiduciary Relationship

Fiduciary relationship means a relationship of trust and confidence. Such a relationship is supposed to
exist in these cases i.e. father and son, guardian and minor, doctor and patient, etc. In such cases, the
person having the dominating position must make full disclosure of facts essential to the contract.

2. Contract of Insurance

Contract of Insurance is a contract in which the insured knows more about the subject matter of the
contract than the insurer. Thus, it is the duty of the insured to disclose all material facts which might
influence the insurance company to enter into the contract or in fixing the amount of premium. The
concealment or misstatement of a material fact will render the contract voidable.

3. Contract of Purchase of Shares

The promoters and directors, who issue the prospectus of a company to invite the public to buy shares
and debentures, possess information which is not available to the general public. They must disclose all
facts regarding the company so that the investors have complete information while making an
investment.

4. Contract of Sale of Land

In case of contract for sale of land, the seller is bound to disclose all material defects in the property
which are within his knowledge. These are the defects about which the buyer is not aware of and which
the buyer cannot discover with ordinary diligence

5. Contract of Partnership

In case of Partnership, it is the duty of a partner to provide true accounts and full information of all
matters regarding the partnership firm to rest of the partners.

6. Contract of Guarantee

According to Section 143, any guarantee which the creditor obtains by remaining silent as to material
circumstances is invalid. A creditor must disclose all material facts to the surety.

7. Contract of Marriage Engagement

Every material fact must be disclosed by both parties to a contract of marriage otherwise the aggrieved
party is justified in breaking off the marriage engagement.

8. Contract of Family Settlements

When members of a family make arrangements for the settlement of the family property, each member
of the family must make full disclosure of every material fact within his knowledge.
 DIFFERENCE BETWEEN FRAUD AND MISREPRESENTATION

The following are points of difference between the two:

Fraud Misrepresentation

1. Intention
In case of fraud, the party makes a false statement In case of misrepresentation, there is no intention
with an intention to deceive the other party. to deceive the other party
2. Belief
In case of fraud, the person making the suggestion In case of misrepresentation, the person making
does not believe it to be true. the suggestion believes it to be true.
3. Damages
In fraud, the aggrieved party can avoid contract In misrepresentation the aggrieved the avoid
and claim damages. contract and cannot claim damages.
4. Offence
Fraud may amount to an offence of cheating. It is a Misrepresentation does not amount to a offence
criminal act. of cheating. It is not a criminal act.
5.Truth
In case of fraud, the aggrieved party can avoid In case of misrepresentation, the aggrieved party
contract even if it had the means to discover the cannot avoid contract if with it had means to
truth with ordinary diligence. discover the truth with ordinary diligence.

Loss of Right of Cancellation

Right of cancellation or rescission is lost in the following cases:

1. Affirmation

After becoming aware of his right to rescind, if the aggrieved party confirms the transaction either by
express words or by an act, the right of rescission is lost.

EXAMPLE

B purchases shares on the faith of a misleading prospectus of S Company. B becomes aware of its falsity
but accepts the dividends paid by company. B cannot avoid the contract.

2. Restitution not Possible

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. the subject matter of the contract has been consumed or destroyed.
EXAMPLE

B buys apples 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 contact within reasonable time on discovering the false
representation or on becoming aware of the fraud, the right of rescission is lost.

EXAMPLE

X buys a T.V. from Y by fraud. Despite knowledge of the fraud, Y does not reject the contract. Y loses his
right to avoid the contract after a reasonable time.

4. Rights of Third Party

The right of rescission is lost, if the third party acting in good faith has acquired the rights in the subject
matter of the contract.

EXAMPLE

A buys a watch from B by fraud, and sells it to C. C buys the watch in good faith. B's right to cancel the
contract is lost since C gets rights in the subject matter of the contract.

MISTAKE

When the parties give their consent under any mistake, there is no agreement. t means that there
should be consensus ad-idem. Mistake can be divided into two types: (1) mistake of fact and (2) mistake
of law

MISTAKE OF FACT

Mistake of fact may be (1) bilateral mistake (2) unilateral mistake.

1. Bilateral Mistake

According to Section 20, where both the parties to an agreement are under a mistake as to the matter
of fact essential to the agreement, there is a bilateral mistake and the agreement is void. Explanation of
section 20 states that an erroneous opinion as to the value of the thing which forms the subject matter
of the agreement is not to be deemed a mistake of fact." The following conditions must be fulfilled to
avoid a contract:

a. There must be a mistake as to the formation of contract.

b. The mistake must made by both the parties.

C. It must be a mistake of fact and not a judgment or opinion.

d. It must be about a fact essential to the agreement.

EXAMPLES

a.. A contracts B to sell his car. Both the parties think it is in A's garage. The car was stolen before the
agreement. The agreement is void.

b. A buys a car from B for Rs. 4 Lac. Later, A discovers that the actual value is Rs. 2 Lac. A cannot avoid
the contract.

A bilateral mistake may be of the following types:

a. Existence of Subject matter

The parties may be mistaken as to the existence of subject matter. If both the parties believe the subject
matter of cotract to be in existence at the time of contract, but in fact it is not in existence, there is no
contract.

EXAMPLES

a. A agrees to buy a horse from B. It turns out that the horse was dead at the time of bargain but neither
party was aware of this fact. The agreement is void.

b. H was employed to sell C's cargo which was being transported by sea. H sold the cargo. Later, it was
discovered that the cargo had been damaged and sold at the nearest port. The buyer rejected the
contract and sued for damages.H was held not liable. (Couturier vs. Hastie

b. Identity of Subject matter

When there is a mutual mistake as to the identity of the subject matter, the agreement is void. When
one party has one thing in mind while the other has another thing, there is no consensus ad idem and
no contract.

EXAMPLES

a. A agrees to buy a transformer from B. A thinks he is buying a 1-phase transformer while B thinks he is
selling a 3-phase transformer. There is no contract.

b. W agreed to buy cotton from R. The cotton was to arrive on ship named P. Two ships of that name
were sailing, one in October and other in December. W meant the former ship but R meant the latter. It
was held that there was no contract. (Raffles vs. Wichelhaus)

c. Ownership of Subject matter

Parties to a contract are under a mistake as to the ownership of subject matter, if unknown to both the
parties, the buyer is already the owner of the subject matter of contract.
EXAMPLE

A agreed to take a fishery from B on lease. Both parties believed that B was the owner. Later, it was
discovered that the fishery belonged to A. Held, that the agreement was void. (Cooper vs Pahibbs)

d. Quantity of Subject matter

There is no contract if there is difference between the quantity sold or purchased. If both the parties are
under a mistake as to the quantity of the subject matter, the agreement is void.

EXAMPLE

P examined 50 rifles in a shop. Later, P sent an order by telegraph, "Send three rifles". H, the clerk, by
mistake read the message as "Send the rifles". H sent 50 rifles. P accepted 3 and returned 47 rifles. H
filed a suit for damages. It was held that there was no contract. (Henkel vs. Pope)

e. Quality of Subject matter

When both the parties are under a mistake regarding 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.

f. Possibility of Performance

The agreement is void where there is a bilateral mistake as to the possibility of performance. In other
words, where the parties to an agreement believe that the agreement is capable of performance but in
fact it is not, the agreement is void.

EXAMPLE

A and B, believing themselves to be married, made a separation agreement in which A agreed to pay B
£1 every week. Later, it was discovered that they were not validly married. B claimed the promised
payment. It was held that the agreement was void. (Galloway vs. Galloway)14

2. Unilateral Mistake

When only one party is at a mistaké regarding the terms of the agreement, it is called a unilateral
mistake. Section 22 states that "a contract is not voidable merely because it was caused by one of the
parties to it being under a mistake as to a matter of fact." The effect of unilateral mistake on contracts is
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 avoid the contract. A unilateral mistake has no effect on the contract and the contract
remains valid.

EXAMPLES

a. X buys rice from Y, thinking that the rice is old. However, the rice is new. X cannot avoid the contract.

b. The government auctioned the right of fishery. A offered the highest bid thinking that the right was
being sold for 3 years but in fact it was for only 1 year. A cannot avoid the contract. (A. A. Singh vs.
Union of India)

b. Voidable Contract

If the unilateral mistake is caused by fraud or misrepresentation etc, on the part of the other party, the
contract is voidable and can be avoided by the aggrieved party.

EXAMPLE

A sold a house to B. The house had cracked walls. A tried to conceal the defect but B discovered it. A is
guilty of fraud. B can avoid the contract.

c. Void Agreement

A void agreement is not enforceable by law. In the following cases, no contract will arise under a
unilateral mistake:

i. Identity of Party

When the intention of the party is to enter into a contract with a particular person, but by mistake the
party enters into a contract with another person, the agreement is void. When the intention of the party
is not to enter into a contract with a particular person, but by mistake the party enters into a contract
with that particular person, the agreement is void

EXAMPLES

a. A wants to contract with B but makes a contract with C, believing him to be B. The contract is void.

b. B, the director of a theater, gave instructions that no ticket should be sold to S who was critic of the
plays. S got a ticket through his friend. S went to the theater but was refused admission. S filed a suit for
damages. It was held that there was no contract because the theater company never wanted to contract
with S. (Said vs. Butt)'

ii. Nature of Contract

When one of the paties to a contract without any fault of his own, is made to commit a mistake as to the
nature of contract, the agreement is void.

EXAMPLE

M, an old iliterate man of poor sight, was induced to sign a bill of exchange falsely representing that it
was a guarantee. It was held that M was not liable. (Foster vs. Mackinnon)

MISTAKE OF LAW

Mistake of law may be (1) mistake of Pakistani law or (2) mistake of foreign law

1.. Pakistani Law

If there is a mistake of law of the country, the contract is binding because everyone is supposed to know
the law of his country. Therefore, the mistake of Pakistani Law does not affect the validity of the
contract. A contract is not voidable because it was caused by a mistake as to any law in force in Pakistan
Sec (21)

EXAMPLES

a. A and B make a contract which is based on erroneous belief that a particular debt is barred by
Pakistani Law of limitation. The contract is valid.

b. If someone is caught traveling without ticket in a bus, he cannot be excused on the ground that he
was not aware that the ticket is necessary for the journey.

2. Foreign Law

A mistake as to a law not in force in Pakistan (a foreign law) has the same effect as a mistake of fact. The
law of foreign country requires to be proved in Pakistani courts as ordinary facts and such mistake
makes the contract void. (Sec. 21)

EXAMPLE

A, a Pakistani, agrees to sell a particular medicine to B, a foreign national. The law of that country has
banned the sale and purchase of that particular medicine. This is a mistake and the agreement is void.