SHAHEED BANAZIR BHUTTO

UNIVERSITY
SHAHEED BENAZIRABAD
SHAHEED BENAZIR BHUTTO UNIVERSITY (SANGHAR CAMPUS)

TOPIC CONTRACT

SUBJECT BUSINESS LAW

Submitted By SHIZA ABDUL GHANI

Submitted To SIR MUHIB NAHRIO

CLASS SCHOOL OF BUSINESS ADMINISTRATION

Roll No 16-BBA-020

DATE 17/09/2018
CONTRACT
DEFINITIONS
A written or spoken agreement, especially one concerning employment, sales, or tenancy, that is
intended to be enforceable by law.

A contract is an agreement that is enforceable by a court of law.

A contract is a promise or a set of promises for the breach of which the law gives a remedy or the
performance of which the law in some way recognizes a duty.

The Restatement (Second) of Contracts

Parties to a Contract
Every contract involves at least two parties. The offeror is the party who makes an offer to enter into a
contract. The offeree is the party to whom the offer is made. In making an offer, the offeror promises to do—
or to refrain from doing—something if the offeree promises to do something specified. The offeree then has
the power to create a contract by accepting the offeror’s offer. 
Types of Contracts
In connection with contracts, there are four types of classifications. Types of contracts in contract law
are as follows;

1. On the basis of Formation,

2. On the basis of Nature of Consideration,

3. On the basis of Execution and

4. On the basis of Validity.

Types of Contracts on the basis of Formation

On this base Contracts can be classified into three groups, namely Express, Implied, Quasi Contracts.
Express Contracts: 
The Contracts where there is expression or conversation are called Express Contracts. For example: A
has offered to sell his house and B has given acceptance. It is Express Contract.

Implied Contract: 
The Contracts where there is no expression are called implied contracts. Sitting in a Bus can be
taken as example to implied contract between passenger and owner of the bus.

Quasi Contract
: In case of Quasi Contract there will be no offer and acceptance so, Actually there will be no
Contractual relations between the partners. Such a Contract which is created by Virtue of law is
called Quasi Contract. Sections 68 to 72 of Contract Act read about the situations where court
can create Quasi Contract.

 Sec. 68: When necessaries are supplied

 Sec. 69: When expenses of one person are paid by another person.

 Sec. 70: When one party is benefited by the activity of another party.

 Sec. 71: In case of finder of lost tools.

 Sec. 72: When payment is made by mistake or goods are delivered by mistake.

Example: A case on this occasion is Chowal Vs Cooper. In this case A`s husband becomes no
more. She is very poor and therefore not capable of meeting even cost of cremation. B, one of
her relatives, understand`s her position and spends his own money for cremation. It is done so
without A`s request. Afterwards B claims his amount from A where A refuses to pay. Here court
applies Sec. 68 and creates a Quasi Contract between them.

Types of Contracts on the basis of Nature of Consideration

On this base, Contracts are of two types. Namely Bilateral Contracts and Unilateral Contracts.
Bilateral Contracts: 
If considerations in both directions are to be moved after the contract, it is called Bilateral
Contract.

Example: A Contract has got formed between X and Y on 1st Jan, According to which X has to
deliver goods to Y on 3rd Jan and Y has to pay amount on 3rd Jan. It is bilateral contract.

Unilateral Contract: 
If considerations is to be moved in one direction only after the Contract, it is called Unilateral
Contract.

Example: A has lost his purse and B is its finder. There after B searches for A and hands it over
to A. Then A offers to pay Rs. 1000/- to B to which B gives his acceptance. Here, after the
Contract consideration moves from A to B only. It is Unilateral Contract.

Types of Contracts on the basis of Execution

On this base Contracts can be classified into two groups. namely, Executed and Executory
Contracts. If performance is completed, it is called executed contract. In case where contractual
obligations are to be performed in future, it is called executor contract.

Types of Contracts On the basis of Validity

On this base Contracts can be classified into 5 groups. namely Valid, Void, Voidable, Illegal and
Unenforceable Contracts.

Valid: 
The Contracts which are enforceable in a court of law are called Valid Contracts. To attain
Validity the Contract should have certain features like consensus ad idem, Certainty, free
consent, two directional consideration, fulfillment of legal formalities, legal obligations, lawful
object, capacity of parties, possibility of performance, etc.
Example: there is a Contract between X and Y and let us assume that their contract has all
those above said features. It is Valid Contract.

Void:
 A Contract which is not enforceable in a court of law is called Void Contract. If a Contract is
deficient in any one or more of the above features (Except free consent and legal formalities). It
is called Void Contract.

Example: there is a Contract between X and Y where Y is a minor who has no capacity to

contract. It is Void Contract.

Voidable: 
A Contract which is deficient in only free consent, is called Voidable Contract. That means it is a
Contract which is made under certain pressure either physical or mental. At the option of
suffering party, a voidable contract may become either Valid or Void in future. For example:
there is a Contract between A and B where B has forcibly made A involved in the Contract. It is
voidable at the option of A.

Illegal:
If the contract has unlawful object it is called Illegal Contract.

Example:  There is a contract between X and Z according to which Z has to murder Y for a
consideration of Rs. 10000/- from X. It is illegal contract.

Unenforceable: 
A contract which has not properly fulfilled legal formalities is called unenforceable contract.
That means unenforceable contract suffers from some technical defect like insufficient stamp
etc. After rectification of that technical defect, it becomes enforceable or valid contract.
Example:  A and B have drafted their agreement on Rs. 10/- stamp where it is to be written
actually on Rs. 100/- stamp. It is unenforceable contract.

Termination of Contract
Contract creates relation between the parties and binds them over. Termination of such
contractual relations is called discharge of contract. The following are different modes of
discharge or termination of contract.
1. Discharge by Performance.
2. Discharge by Breach of Contract.
3. Discharge by Impossibility.
4. Discharge by Operation of Law.
5. Discharge by Lapse of Time.
6. Discharge by Mutual understanding or by Agreement.

Discharge of contract by Performance

As said by Salmond, contract creates obligations to parties. If both parties perform their
contractual obligations promptly, the contract is said to be discharged by performance. It is the
ideal method that number of contracts gets terminated in this way.

Discharge of contract by Breach

Failure in performance of contractual obligation is called breach of contract. Discharge of

contract takes place by breach of contract also. Breach of contract is of two types. Namely;

 Actual breach and

 Anticipatory breach.
In case where contract is breached by party on the date of performance, it is called actual
breach. If breach of Contract takes place before data of performance, it is called anticipatory
breach.

Discharge of contract by Impossibility

The element of impossibility terminate contractual relations. impossibility is of two types.

Namely;

 Pre Contractual impossibility and

 Post Contractual impossibility.

If impossibility has already come into force before the contract itself, it is called Pre-Contractual
impossibility. Here discharge of Contract takes place soon after formation of Contract. The
impossibility which comes into force after the contract is called Post-Contractual Impossibility.
Here contractual relations will exists only up to occurrence of impossibility.

Discharge of contract by lapse of time

Limitation act has specified duration to perform different contracts. The duration thus specified
is called limitation period. Soon after expiry of limitation period, the contract gets discharged.

Example: There is a contract of loan between A and B. Her limitation period is 3 years. After
completion of 3rd year discharge of contract takes place and debtor – creditor relationship
comes an end. Thus it becomes time bared debt which cannot be recovered by means of legal
proceedings.

Discharge of contract by Operation of law

This can be as following;
By Death: Whenever one of the parties comes across death, contractual relations will come to
an end.
By Insolvency: When one of the parties to the contract becomes insolvent, he forgoes capacity
to contract and those contracts which were made by that person will get discharge.

By lunacy: When one of the parties gets attached by lunacy discharge of contract takes place.

Right and liability going into the hands of same party: Contract creates right to one party and
liability to the other when right and liability reach the same person, the result is discharge of
contract.
Example: X has drawn a bill on Y. Here X has right to collect amount on the bill and Y has
liability to pay. There after X has endorsed the bill to Z. Where Z has got the right and liability is
with Y. Assume that Z has endorsed the bill to Y. Now right as well as liability are with Y. This
situation discharges the contract.

Discharge of contract by Agreement

This can be as following;
By Alterations: Whenever Material alterations in contract are made, then it is said that old
contract has got discharged and a new contract has come into force.

By Renewal: At times parties to the contracts may substitute completely new contract in the
place of old contract. Now the old contract has got discharged.

By Recession: In case of recession old contract gets discharged and there will be no formation
of new contract.
Example: There is a contract between A and B according to which A has to supply 100 pairs of
ready made dresses to B on 10th January. Where date of formation of contractee`s 1st January.
On 2nd January A says to B that those dresses have become out of fashion and hence not
possible to assemble 100 pairs. Still B says that though he (B) supplies 100 pairs by taking a lot
of risk, B cannot sell them because they are outdated. Thus by mutual understanding, they have
terminated their contract.
Legal essentials / basis of a valid contract

Essential elements of a valid contract in business law are explained below:

According to Sec. 10, “All agreements are contract 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
expressly declared to be void.”

Thus, Sections 2(h) and 10 of the Act state that there are some essential elements of a valid
contract. If any of these elements is not satisfied by an agreement, it will affect the validity and
will not form a valid contract.

On analysing the contents of Sec. 10. It is revealed that the following are the essentials of a
valid contract:-

1. Offer and acceptance.

2. Legal relationship.

3. Consensus-ad-idem.

4. Competency of parties.

5. Free consent.

6. Lawful consideration.

7. Lawful object.

8. Not declared to be void.

9. Certainty and possibility of performance.

10. Legal formalities.

1. Offer and acceptance:
In a contract there must be at least two parties one of them making the offer and the other
accepting it. There must thus be an offer by one party and its acceptance by the other. The
offer when accepted becomes agreement.

2. Legal relationship:
Parties to a contract must intend to constitute legal relationship. It arises when the parties
know that if any one of them fails to fulfil his part of the promise, he would be liable for the
failure of the contract.

If there is no intention to create legal relationship, there is no contract between parties.

Agreements of a social or domestic nature which do not contemplate a legal relationship are
not contracts.

3. Consensus-ad-idem:
The parties to an agreement must have the mutual consent i.e. they must agree upon the same
thing and in the same sense. This means that there must be consensus ad idem (i.e. meeting of
minds).

4. Competency of parties:
The parties to an agreement must be competent to contract. In other words, they must be
capable of entering into a contract.

According to Sec 11 of the Act, “Every person is competent to contract who is of the age of
majority according to the law to which he is subject to and who is of sound mind and is not
disqualified from contracting by any law to which he is subject.”

Thus, according to Section 11, every person with the exception of the following is competent to
enter into a contract:-

(i) A minor,

(ii) A person of unsound mind, and

(iii) A person expressly declared disqualified to enter into a contract under any Law.
5. Free consent:
Another essential of a valid contract is the consent of parties, which should be free. Under Sec.
13, “Two or more parties are said to consent, when they agree upon the same thing in the same
sense.” Under Sec. 14, the consent is said to be free, when it is not induced by any of the
following:- (i) coercion, (ii) misrepresentation, (iii) fraud, (iv) undue influence, or (v) mistake.

6. Lawful consideration:
Consideration is known as ‘something in return’. It is also essential for the validity of a contract.
A promise to do something or to give something without anything in return would not be
enforceable at law and, therefore, would not be valid.

Consideration need not be in cash or in kind. A contract without consideration is a ‘wagering

contract’ or ‘betting’. Besides, the consideration must also be lawful.

7. Lawful objects:
According to Sec. 10, an agreement may become a valid-contract only, if it is for a lawful
consideration and lawful object. According to Sec. 23, the following considerations and objects
are not lawful:-

(i) If it is forbidden by law;

(ii) If it is against the provisions of any other law;

(iii) If it is fraudulent;

(iv) If it damages somebody’s person or property; or

(v) If it is in the opinion of court, immoral or against the public policy.

Thus, any agreement, if it is illegal, immoral, or against the public policy, cannot become a valid
contract.

8. Agreement not expressly declared void:

An agreement to become a contract should not be an agreement which has been expressly
declared void by any law in the country, as it would not be enforceable at law.
Under different sections of the Contract Act, 1872, the following agreements have been said to
be expressly void, viz :-

(i) Agreements made with the parties having no contractual capacity, e.g. minor and person of
unsound mind (Sec. 11).

(ii) Agreements made under a mutual mistake of fact (Sec. 20).

(iii) Agreements with unlawful consideration or object (Sec. 23).

(iv) Agreements, whose consideration or object is unlawful in part (Sec. 24).

(v) Agreements having no consideration (Sec 25).

(vi) Agreements in restraint of marriage (Sec. 26).

(vii) Agreements in restraint of trade (Sec. 27).

(viii) Agreements in restraint of legal proceedings (Sec. 28).

(ix) Agreements, the meaning of which is uncertain (Sec. 29).

(x) Agreements by way of wager (Sec. 30). and

(xi) Agreements to do impossible acts (Sec. 56).

9. Certainty and possibility of performance:

Agreements to form valid contracts must be certain, possible and they should not be uncertain,
vague or impossible. An agreement to do something impossible is void under Sec. 56.

10. Legal formalities:

The agreement may be oral or in writing. When the agreement is in writing it must comply with
all legal formalities as to attestation, registration. If the agreement does not comply with the
necessary legal formalities, it cannot be enforced by law.