THE CONTRACT ACT 1872 Contract and Agreement: Section 2(e) defines as every promises and every set

of promises forming the consideration for each other is an agreement. Section 2h defines contract as an agreement enforceable by law is a contract. Section 2a 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. Section 2b when the person to whom the proposal is made signifies his assent thereto; the proposal is said to bi accepted. A proposal, when accepted, becomes a promise. Consensus ad idem: A contract shall be validly formed only when there is consensus of parties of the same thing i.e. their minds are meeting in the same sense that they understand the same thing in the same sense. Difference between Contract and agreement: A contract is an agreement between parties that will be legally enforceable. A simple agreement is an arrangement between the parties which may or may not contain the necessary elements to be enforceable before a court of law. A valid contract must contain the seven valid elements which are: 1. Offer 2. Acceptance 3. consideration 4. Intention 5. Form 6. Genuine Consent 7. Legality OR An agreement is essentially an exchange of promises between two or more parties. A contract is a written agreement that demonstrates that all parties bound to the agreement have consented to their respective responsibilities as to the agreement. In other words, an agreement is an arrangement between parties regarding a course of action. And a contract is a written expression of that agreement which, when executed by signature or expressed in other forms of acknowledgement and legally binds the parties to that agreement. Or A contract is an exchange of promises between two or more parties to do, or refrain from doing, an act which is enforceable in a court of law. It is binding legal agreement. It is where an unqualified offer meets a qualified acceptance and the parties reach consensus ad idem.

The parties must have the necessary capacity to contract and the contract must no be trifling, indeterminate, impossible or illegal. CLASSIFICATION OF CONTRACTS 1. According to Validity or Enforceability: a. Valid b. Voidable c. Void d. Illegal e. Unenforceable 2. According to Formation or Creation: a. Express b. Implied c. Quasi 3. According to Performance: a. Executed b. Executory c. Unilateral d. Bilateral Valid Contract: Valid contract is one which if fully operative in accordance with the intention of parties and the law. A valid contract is one which is fully enforceable by law. It must have all the essential elements required by law. If one or more of these elements are missing then contract is either Voidable or illegal or unenforceable. A valid contract may become unenforceable if some rule of law renders it incapable of proof e.g. promissory note not stamped at all or insufficiently stamped shall not be enforceable. Voidable Contract: Section 2i defines Voidable Contract is an agreement which is unenforceable by law at the option of the one (or more) of the parties thereto but not at the option of the other parties. It means that the contract is binding one the parties unless set aside on the ground that the transaction was vitiated by: 1. Absence of free consent & undue influence (see section 19 & 19a) fraud (section 17) or misrepresentation (section 18), or any other circumstances entitling a party to a contract to void it. 2. prevention of performance (section 53) 3. failure to perform in time (section 55)

For example a contract falling under section 236 is a Voidable contract i.e. a person representing as an agent while he actually was no an agent. Void agreements: 2g an agreement not enforceable by law is said to be void; For example an agreement with a minor is void. Void contracts; 2j a contract which ceases to be enforceable by law becomes void when it ceases to be enforceable. A void contract, also known as a void agreement, is not actually a contract and does not create rights. A void contract cannot be enforceable by law. Void contracts are different from Voidable contracts, which are contracts that may be (but not necessarily will be) nullified. So a contract that: 1. Is illegal (inherently void) from the moment it is made. 2. Is legal but declared null (having no legal effect) by the courts because it violates a fundamental principle such as fairness, or is contrary to public policy? 3. Becomes void due to change in law or in government policy, or 4. Has been fully performed. Lack of capacity to contract (being an infant or minor, intoxicated, or insane) automatically makes a contract void. An agreement to carry out an illegal act is an example of a void contract or void agreement. For example, a contract between drug dealers and buyers is a void contract simply because the terms of the contract are illegal. Another example of this can given if a man goes through the form of making a contract with A through B as As agent, and B is not in fact the agent of A, there is no contract because there is only one party. The promise offered to A has not been accepted by him, and no consideration has moved from him. Effect of Void contract: In such a case, neither party can go to court to enforce the contract. A void contract is void ab intito i.e. from the beginning while a Voidable contract can be Voidable by any of the parties to it. Section 36 of the contract act 1872 provides that agreements contingent on impossible events are voidcontingent agreements to do or not to do anything, if an impossible event happens, are void, whether the impossibility of the event is known or not to the parties to the agreement at the time when it is made. Illustrations: a. A agrees to pay B 1,000 rupees if two straight lines should enclose a space. This agreement is void. b. A agrees to pay B 1,000 rupees if B will marry As daughter C. C was dead at the time of the agreement. The agreement is void.

Void Voidable and enforceable agreements: There can be three different ways in which contracts can be set aside. A contract may be deemed Void, Voidable or unenforceable. Voidness implies that a contract never came into existence. Voidability implies that one both parties may declare a contract ineffective at their wish. Unenforceability implies that neither party may have recourse to a court for a remedy. Rescission is a term which means to take a contract back. The conditions required for an agreement being enforceable by law are contained in section 10, below where it will also be seen that absence of any such condition makes an agreement void, and certain defects will make a contract Voidable. The duties of parties to a contract are set forth in chap. IV of the act. The manner in which contract are, it necessary, enforced belongs to Civil procedure. Sec. 10 of the Contract Act, 1872 defines what agreements are contracts? 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. Illegal Agreement: An illegal agreement is that the object of which are not permissible by law or are prohibited by law. Unenforceable Contract: Unenforceable contract is one which can not be enforced in the court because of some technical defect or lace of evidence such as absence of writing, non registration of document or being time barred. Express Contracts: See section 9 an express contract is one in which the parties have made oral or written declaration of their intention to agree on terms and conditions of the transaction. Implied Contracts: Again see section 9 an implied contract is that the terms of which are inferred from the conduct of the parties or from the circumstances of the case or course of dealings between the parties. Quasi Contract: A contract which is implied in law or created by law is also called a quasi contract, because it is not in fact a contract rather, it is a means for the courts to remedy situations in which one party would be unjustly enriched were he or she not required to compensate the other. For example, a plumber accidentally installs a sprinkler system in the lawn of the wrong house. The owner of the house had learned the previous day that his neighbor was getting new sprinklers. That morning, he sees the plumber installing them in his lawn. Pleased at the mistake, he says nothing, and then refuses to pay when the plumber delivers the bill. Will the man be held liable for payment? Executed Contract: Is one which has been completely performed by both the parties?

Executory Contract: Is one which is composed of undertaking in which both the parties are under an obligation to do or not to do certain things. Unilateral Contract: In one in which only one party has to perform his part of the obligation at the time of the formation of the contract. It is also called a one sided contract. In this consideration is executed. Bilateral contract: Is one in which the obligation on the part of both the parties to the contract are outstanding at the time of formation of the contract. Elements / ingredients / essentials of valid contract: In common law systems, the five key requirements for the creation of a contract are: 1. offer and acceptance (agreement). 2. Consideration. 3. An intention to create legal relations. 4. Legal capacity. 5. Formalities. Proposal: acceptance and revocation: Offer / Proposal- section 2 a when one person signifies to another his willingness to do or abstain from doing anything, with a view to obtaining the assent of that to such act or abstinence, he is said to make a proposal. An offer can be made by express words, spoken or written. An offer can also be made by conduct of parties. As an offer can be made to a specific person or group of persons or to the public at large. Example: A says to B will you buy my house for Rs. 20,000,000? Here A is making an offer to B by signifying his willingness to sell his house to B Rs. 20,000,000 with a view to obtaining assent of B. Acceptance: Section 2b 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: if b above agrees to buy As house for Rs. 20,000,000, he can be said to have accepted As offer. Types of offer: Express Offer: Face to face offer.written offer Implied Offer: Through conduct of the offeror i.e. bus company, rail service etc. Specific Offer: Offer to a particular person General Offer: Offer made to public at large. Standing Offer: Continuous offer. E.g. mobile phone packages Cross Offer: Offer made by two different persons to each other. Counter Offer: Acceptance of offer but subject to some terms and conditions.

Essentials of an Offer: Offer must be: i. ii. Made with a view to obtain acceptance. (section 2a) With the intention of creating legal relations. A social invitation even if accepted does not create legal relations as the offeror does not intend to create legal relations. Example: an agreement to go together to picture or for a walk is not an offer, agreements between husband and wife living together are of social nature. iii. iv. Clear, unambiguous, definite and certain and must not be loose, vague or ambiguous (section 29). Distinguished from (a) mere declaration of intention (b) an invitation to offer or to treat. Invitation to offer is merely a circulation of information by a person of his willingness to treat with any person who on such information is willing to open negotiation with him and is not an offer. E.g. Prospectus for admission, display of goods in shelf with price tags, catalogue, quotation, price list, advertisement, invitation to tenders etc. v. vi. vii. viii. ix. x. Free from stress as offer under stress is no offer. Announcement on speaker Shelf prices are not offer. Communicated to the offeree. Made with terms and conditions on which the offer is being made. In the nature of request.

Acceptance: Contract is formed when one party makes an offer for an arrangement and another accepts. This can be called concurrence of wills or ad idem (meeting of the minds) of two or more parties. Acceptance is the expression by the offeree of his willingness to be bound by terms of the offer. Section 2b states: when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal when accepted, become a promise. Consensus ad idem: A contract shall be validly formed only when there is consensus of parties on the same thing i.e. their minds are meeting in the same sense that they understand the same thing in the same sense. Acceptance how made: Offer and acceptance does not always need to be expressed orally or in writing. Any mode which can express an intention to agree would be sufficient e.g. by saying yes, ok, node of head, by performing the act called for etc. Acceptance Express or Implied:

Acceptance is express when it is communicated by words spoken or written and is implied when gathered from conduct. Example: a. Acceptance by conduct: A trader receives an order from a customer and executes the order by sending the goods. This is acceptance through conduct. This can take two forms. A contract which is implied in facts is one in which the circumstances imply that parties have reached an agreement even though they have not done so expressly. For example, by going to a doctor for a checkup, a patient agrees that he will pay a fair price for the service. If one refuses to pay after being examined, the patient has breached a contract implied in fact. b. Implied Acceptance: A enters a bus for traveling to his destination and takes a seat. This is implied acceptance on the part of A. c. Surrounding circumstances: As car goes out of order, B starts repairing the car and A lets him do that. Who can accept offer? a. only specific person to whom offer is made. b. When offer is not made to a specific person rather to general public then any member of public may accept the offer. c. Where a product in large quantities is advertised in a newspaper or on a poster, it is as an offer, however, if the person who is to buy the advertised product is of importance, for instance because of his personality, etc., when buying land, it is regarded merely as an invitation to treat. Essentials of valid Acceptance: 1. Acceptance must be absolute and qualified. Section 7, 1 and without any variation. Possession date varied. 2. Acceptance must be communicated to offeror. 3. acceptance must be in prescribed manner. Section 7, 2. 4. As per the mode prescribed or stated in the offer. 5. Acceptance should be within the time prescribed. 6. Acceptance can not precede offer i.e. acceptance must be in response to offer. 7. Acceptance must show intention to fulfill promise. 8. Acceptance can not be implied from silence. E.g. sale of car if do not hear you in seven days, acceptance shall be presumed. Communication, Acceptance and Revocation: Section 3. Communication, acceptance and revocation of proposals. The communication of proposals, the acceptance of proposals, and the revocation of proposals and acceptances, respectively, are deemed to be made by any act or omission of the party proposing, accepting or

revoking, by which he intends to communicate such proposal, acceptance or revocation, or which has the effect of communicating it. For a Valid Offer, Acceptance and Revocation It is a must that: a) Offer is communicated to offeree b) Acceptance is communicated to offeror c) Revocation of offer must be communicated by the offeror to offeree. d) Revocation of acceptance must be communicated by the offeree. Communication of offer- section 4. Communication when complete. The communication of a proposal is complete when it comes to the knowledge of a person to whom it is made. Communication of Acceptance The communication of an acceptance is complete, as against the proposer, when it is put in a course of transmission to him, so as to be out of the power of the acceptor, as against the acceptor, when it comes to the knowledge of the proposer. The communication of a revocation is complete, as against the person who makes it, when it is put into a course of transmission to the person to whom it is made, so as to be out of the power of the person who makes it, as against the person to whom it is made, when it comes to his knowledge. Illustration: a) A, proposes, by letter, to sell a house to B. at a certain price. The communication of the proposal is complete when B receives the letter. b) B accepts As proposals by a letter sent by post. The communication of the acceptance is complete, as against A, when the letter is posted, as against B, when the letter is received by A. c) A revokes his proposal by telegram. The revocation is complete as against A, when the telegram is dispatched. d) It is complete as against B, when B receives it. e) B, revokes his acceptance by telegram. Bs revocation is complete as against B, when the telegram is dispatched and as against A, when it reaches him. Revocation of Offer & Acceptance Section 5 stipulate that a proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards. An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not afterwards. Revocation how made: Pursuant to section 6, a proposal is revoked:1. by the communication of notice of revocation by the proposer to the other party. 2. by the lapse of time prescribed in such proposal for its acceptance or if no time is so prescribed, by the lapse of a reasonable time without communication of the acceptance.

3. by the failure of the acceptor to fulfill a condition precedent to the acceptance. 4. by the death or insanity of the proposer if the fact of his death or insanity comes to knowledge of the acceptor before acceptance. Revocation in contracts made over telephones does not arise. Consideration Contract is made with intention to derive or confer some benefit OR promises are exchanged in return of something in return. That something can be a benefit, right, interest, profit or it may also be some forbearance, detriment, loss or responsibility upon other party. Pollock defines Consideration as consideration is the price for which promise is given and promise for value is enforceable. Example: A lends his book to B, who promises to return it after examinations, this results in a benefit to B and a detriment to A, which is consideration in return of Bs promise to return the book. Example: Abdul Aziz v. Masum Ali (1914) A promised to subscribe Rs. 500 for rebuilding of a mosque but later refused. Secretary of mosque sues A for recovery of Rs. 500. Held the promise to pay was not backed by any consideration on the part of mosque. So not enforceable. Section 2 (d) defines Consideration When, at the desire of the promisor, the promisee or any other person (i) has done or abstained from doing or (ii) does or abstains from doing, or (iii) promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise. Consideration is known as 'the price of a promise' and is a controversial requirement for contracts under common law. It is not necessary in all common law or civil law systems, and is considered by some to be unnecessary as the requirement of intention to create legal relations by both parties meets the same requirement under contract. The idea is that both parties to a contract must bring something to the bargain, that both parties must confer some benefit or detriment (for example, money, however in some cases money will not suffice as consideration - eg when one party agrees to make part payment of a debt in exchange for being released from the full amount). This can be either conferring an advantage on the other party, or incurring some kind of detriment or inconvenience towards oneself. Three rules govern consideration:

Consideration must be real, but need not be adequate but must be lawful. For instance, agreeing to buy a car for a penny may constitute a binding contract. Consideration must not be from the past. For instance, in Eastwood v. Kenyon, the guardian of a young girl obtained a loan to educate the girl and to improve her marriage prospects. After her marriage, her husband promised to pay off the loan. It was held that the guardian could not enforce the promise because taking out the loan to raise and educate the girl was past consideration. Consideration must move from the promisee at the desire of promisor. For instance, it is good consideration for person A to pay person C in return for services rendered by person B. If there are joint promisees, then consideration need only to move from one of the promisees.

CAPACITY TO CONTRACT Generally, every person is competent to contract and if any one claims to be incompetent to enter into contract, he must prove such incapacity. Who is competent to contract? The conditions required for an agreement being enforceable by law are contained in Section 10, below, where it will also be seen that the absence of any such condition makes an agreement void, and certain defects will make a contract voidable. Sec 10 of the Contract Act, 1872 defines what agreements are contracts ? 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. Sec 11 declares following persons as incompetent to enter into Contracts: (a) Minor Section 3 of the Majority Act, 1875 defines minor as a person who has not completed 18 years of age. Contracts entered into by minors are void. Any such document can not be ratified by minor even after attaining age of majority i.e. 21 years because the original agreement is void ab initio. Minor is not liable to return benefit. A Minor can always plead minority. No specific performance can be enforced against minor. Minor can not be a partner. Minor can not be insolvent. Person of unsound mind Section 12 provides the tests to determine a sound mind. A person is said to be of unsound mind for the purpose of making a contract, if at the time when he makes it, he is incapable of understanding it, and of forming a rational judgment as to its effect upon his interest. Persons disqualified by any law to which they are subject

(b)

(c)

Flaws in capacity Sometimes the capacity of either natural or artificial persons to either enforce contracts, or have contracts enforced against them is restricted. For instance, very small children may not be held to bargains they have made, or delinquent employees or directors may be prevented from contracting for their company, because they have acted ultra vires (beyond their power). Another example might be people who are mentally incapacitated, either by disability or drunkenness. When the law limits or bars a person from engaging in specified activities, any agreements or contracts to do so are either voidable or void for incapacity. The law on capacity can serve either a protective function or can be a way of restraining people who act as agents for others.

Consent Section 13 defines Consent as Consent means that two or more persons agree upon the same thing in the same sense. Meaning thereby Consensus ad idem is present i.e. meeting of minds is there. Absence of Consent Absence of meeting of minds i.e. absence of ad item means there is no agreement because Consent is absent. Example: A agrees to sell House No. 1 to B, whereas B thinks that A is proposing to sell House No. 2. So there is no meeting of mind as consent on same item is missing. In the case of Bala Devi v. S. Majumdar (1956) an illiterate woman signed a document to manage assets whereas it was originally a deed of gift which was never read or explained to her. Held: the deed was void and inoperative as there was no consent hence no contract. Free Consent Pursuant to Section 14, Consent is free when it is not caused by: (a) (b) (c) (d) (e) Coercion Undue Influence Fraud Misrepresentation Mistake subject to provisions of Section 20, 21, 22

Consent will not be free if it is given or procured because of above items. Coercion / Duress Section 15 Defines Coercion as 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. Coercion / Duress has been defined as a "threat of harm made to compel a person to do something against his or her will or judgment; especially, a wrongful threat made by one person to compel an appearance of seeming assent by another person to a transaction without real volition." An example is in Barton v. Armstrong, a decision of the Privy Council. Armstrong threatened to kill Barton if he did not sign a contract, so the court set the contract aside. Burden of Proof An innocent party wishing to set aside a contract for duress to the person need only to prove that the threat was made and that it was a reason for entry into the contract; the burden of proof then shifts to the other party to prove that the threat had no effect in causing the party to enter into the contract. There can also be duress to goods and sometimes, the concept of 'economic duress' is used to vitiate contracts.

Undue Influence Section 16 defines Undue Influence. Undue Influence means, It exists 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 unfair advantage over the other. Undue influence is an equitable doctrine that involves one person taking advantage of a position of power over another person. Whenever consent to an agreement is caused due to Undue influence, the agreement is voidable at the option of the party whose consent is caused due to Undue influence (Section 19-A). The law presumes that in certain classes of special relationship, such as between parent and child, or lawyer and client etc., there will be a special risk of one party unduly influencing their conduct and motives for contracting. As an equitable doctrine, the court has the discretion to vitiate such a contract. When no special relationship exists, the general rule is whether there was a relationship of such trust and confidence that it should give rise to such a presumption. See Odorizzi v. Bloomfield School District. Presumptions of Undue Influence when arises

Position to dominate: where one is in a position to dominate will of the other party. Mannu Singh v. Umadat Pandey (1890) where spiritual guru forced his follower to gift his property to Guru. Unfair advantage: Dominating party actually uses position to obtain unfair advantage. Real and apparent authority: Master-Servant, Doctor-Patient, Income Tax Officer-Assessee etc. Fiduciary relationship: A relationship of trust and confidence. E.g Father-Son, Guardian-Ward, Lawyer-Client, Trustee-Beneficiary, Promoter-Company Mental distress: Incapacity due to age, illness, mental or bodily distress.

Distinguish Coercion and Undue Influence? (DO NOT BE SURPRISED, ITS YOU WHO NEED TO MAKE YOUR OWN NOTES ON THIS). I shall check your knowledge on this during lectures. Fraud Section 17 defines Fraud 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) (2) (3) (4) (5) The suggestion, as to a fact, of that which is not true, by one who does not believe it to be true The active concealment of a fact by one having knowledge or belief of the fact A promise made without any intention of performing it Any other act fitted to deceive Any such act or omission which the law specifically declares to be fraudulent

Fraud is an untrue statement made knowingly, or without belief in its truth, or recklessly, carelessly whether it be true or false, with intent to deceive. Derry v. Peek (1889) Essentials of Fraud

(1) False misrepresentation; (2) Representation must be of fact; (3) Representation before contract; (4) Representation with knowledge of falsehood; (5) Representation must induce other; (6) Representation must in fact deceive; (7) Fraud must damage party misled. There are two types of misrepresentation in contract law, fraud in the factum and fraud in inducement. Fraud in the factum focuses on whether the party in question knew they were creating a contract. If the party did not know that they were entering into a contract, there is no meeting of the minds, and the contract is void. Fraud in inducement focuses on misrepresentation attempting to get the party to enter into the contract. Misrepresentation of a material fact (if the party knew the truth that party would not have entered into the contract) makes a contract voidable. According to Gordon v. Selico it is possible to make a misrepresentation either by words or by conduct, although not everything said or done is capable of constituting a misrepresentation. Generally, statements of opinion or intention are not statements of fact in the context of misrepresentation. If one party claims specialist knowledge on the topic discussed, then it is more likely for the courts to hold a statement of opinion by that party as a statement of fact. Misrepresentation Misrepresentation means a false statement of fact made by one party to another party and has the effect of inducing that party into the contract (Section 18). In dealing with it the first question which arises is whether the representation is, or is not, part of the contract. If the contract is in writing and the representation is set out on the face of the paper, it may be material or immaterial, but the effect of its untruth will be determined on much the same principles as govern the failure to perform a promise on the same side. For example, under certain circumstances, false statements or promises made by a seller of goods regarding the quality or nature of the product that the seller has may constitute misrepresentation. A finding of misrepresentation allows for a remedy of rescission and sometimes damages depending on the type of misrepresentation. 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 under him by misleading another to his prejudice or to the prejudice of any one claiming under him (3) Causing, however, innocently, a party to any agreement to make a mistake as to substance of the thing which is the subject of the agreement. Mistake A mistake is an incorrect understanding by one or more parties to a contract and may be used as grounds to invalidate the agreement. Common law has identified three different types of mistake in contract: unilateral mistake, mutual mistake, and common mistake. A common mistake is where both parties hold the same mistaken belief of the facts essential to the agreement; the agreement is void (Section 20). Illustration: A agrees to buy from B a horse. It turns out the horse was dead at the time of making of the bargain, but both the parties were unaware of this fact. The agreement is void as both the parties are on mistake of fact essential to the agreement. This was demonstrated in the case of Bell v. Lever Brothers Ltd., which established that common mistake can only void a contract if the mistake of the subject-matter was sufficiently fundamental to render its identity different from what was contracted, making the performance of the contract impossible.

A mutual mistake is when both parties of a contract are mistaken as to the terms. Each believes they are contracting to something different. The court usually tries to uphold such a mistake if a reasonable interpretation of the terms can be found. However, a contract based on a mutual mistake in judgment does not cause the contract to be voidable by the party that is adversely affected. See Raffles v. Wichelhaus. A unilateral mistake is where only one party to a contract is mistaken as to the terms or subjectmatter and the contract will not be voidable because of mistake of one party to a matter of fact (Section 22). The courts will uphold such a contract unless it was determined that the non-mistaken party was aware of the mistake and tried to take advantage of the mistake. It is also possible for a contract to be void if there was a mistake in the identity of the contracting party. An example is in Lewis v. Avery where Lord Denning MR held that the contract can only be avoided if the plaintiff can show that, at the time of agreement, the plaintiff believed the other party's identity was of vital importance. A mere mistaken belief as to the credibility of the other party is not sufficient.

Contingent contracts Section 31. of the Contract Act, 1872 defines "Contingent contract" as A "contingent contract" is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen. Illustration-1

A contracts to pay B Rs. 10,000 if B's house is burnt. This is a contingent contract. Illustration-2 if I offer a reward for the recovery of lost goods, there is not a contingent contract; there is no contract at all unless and until some one, acting on the offer, finds the goods and brings them to me. Explanation: A promise is said to be absolute or unconditional when the promisor binds himself to performance in any event, conditional when performance is due only on the happening of some uncertain event. All contracts of insurance and indemnity are obviously contingent. Contingent contracts are enforced on happening of an event (Section 32). Contingent contracts are not enforced on an event not happening (Section 33). Contingency basically is dependent on act of party.

PERFORMANCE OF CONTRACTS Contracts which must be performed Most contracts only need to contain two elements to be legally valid:

All parties must be in agreement (after an offer has been made by one party and accepted by the other). Something of value must be exchanged -- such as cash, services, or goods (or a promise to exchange such an item) -- for something else of value.

Section 37 provides for Obligation of parties to contracts.---The parties to a contract must either perform or offer to perform, their respective promise, unless such performance is dispensed with or excused under the provisions of this Act, or of any other law. Promises bind the representatives of the promisors in case of the death of such promises before performances unless a contrary intention appears from the contract. Illustrations (a) A promises to deliver goods to B, on a certain day on payment of Rs. 1,000. A dies before that day. A's representatives are bound to deliver the goods to B, and B is bound to pay the Rs. 1,000 to A's representatives. (b) A promises to paint a picture for B by a certain day, at a certain price. A dies before the day. The contract cannot be enforced either by A's representatives or by B. A contract, being an agreement enforceable by law (Section 2,) creates a legal obligation, which subsists until discharged.

Sections (62-67) explain "Contracts which need not be performed." Time and place for performance Section 46 provides for Time for performance of promise where no application is to be made and no time is specified.--- Where, by the contract, a promisor is to perform his promise without application by the promisee, and no time for performance is specified, the engagement must be performed within a reasonable time. Explanation :---The question "what is a reasonable time" is, in each particular case, a question of fact. "Engagement."---The word "engagement" is constantly used instead of "agreement" or "promise." Here it is synonymous with "promise". Reasonable time.---It is always a question of fact. Where the defendants agreed to supply coal to the plaintiffs from time to time, as required by the plaintiffs, on reasonable notice given to them, a notice given by the plaintiffs on the 22nd July, 1898, for the supply of 2,648 tons of coal on or before 31st August, 1898, was held not to be reasonable. Section 47 lays down Time and place for performance of promise where time is specified and no application to be made.---When a promise is to be performed on a certain day, and the promisor has under-taken to perform it without application by the promisee, the promisor may perform it at any time during the usual hours of business on such day and at the place at which the promise ought to be performed. Illustration A promises to deliver goods at B's warehouse on the 1st January. On that day A brings the goods to B's warehouse but after the usual hour for closing it, and they are not received. A has not performed his promise. Common Law rule.---This section, with the illustration, simplifies the rule. "B, is not bound to be at the warehouse to receive the goods after the usual hours of business, and if he is not there A has not performed his promise. If B is there and could receive the goods before midnight, but' refuses to do so, A has performed his promise." Question of fact---Question whether there was a concluded contract, is a question of fact and has to be inferred from evidence led and documents produced by parties. Absence of time---Mere absence of time in fulfillment of contract, does not rob contract of its basic characteristics. Time cannot be made essence of contract by unilateral action---Whenever time is made essence of contract, court, looks into circumstances of time proposed by one or other party reasonable one and particularly higher duty devolves where subject-matter is substantial and very valuable. Time essence of contract--In cases of sale of land, a party can make time essence of contract but only by giving a notice of it) other side, in case that other side is guilty of undue delay in performance of contract in a reasonable time. 48. Application for performance on certain day to be at proper time and place .----When a promise is to be performed on a certain day, and the promisor has not undertaken to perform it without application by

the promisee, it is the duty of the promisee to apply for performance at a proper place and within the usual hours of business. Explanation.---The question "what is a proper time and place" is, in each particular case, a question of fact. COMMENTS The proper place will, of course, be the place named in the contract, if any. Where more than one place is named, "it is for the person to whom payment is to be made to fix the place at which he will be paid; until he has selected the place at which he will be paid there can be no default." The English decision from which we quote would presumably be followed here. Agreement to sell immovable property within stipulated time---In case of non-execution of sale deed within stipulated time, option is given to promisee (purchaser) to rescind contract---Promisor (vendor) does not have choice of rescinding contract in such case. 49. Place for performance of promise where no application to be made and no place fixed for performance.---When a promise is to be performed without application by the promisee, and no place is fixed for the performance of it, it is the duty of the promisor to apply to the promisee to appoint a reasonable place for the performance of the promise, and to perform it at such place. Illustration A undertakes to deliver a thousand maunds of jute to B on a fixed day. A must apply to B to appoint a reasonable place for the purpose of receiving it, and must deliver it to him at such place. 50. Performance in manner or at time prescribed or sanctioned by promisee.--- The performance of any promise may be made in any manner, or at any time which the promisee prescribes or sanctions. Illustrations (a) B owes A, 2,000 rupees. A desires B to pay the amount to A's account with C, a banker. B, who also banks with C, orders the amount to be transferred from his account to A's credit, and this is done by C Afterwards, and before A knows of the transfer, C fails. There has been a good payment by B. (b) A and B are mutually indebted, A and B settle an account by setting off one item against another, and B pays A to balance found to be due from him upon such settlement. This amounts to a payment by A and B, respectively, of the sums which they owed to each other. (c) A, owes B 2,000 rupees. B accepts some of A's goods in deduction of the debt. The delivery of the goods operates as a part payment. (d) A desires B, who owes him Rs. 100, to send him a note for Rs: 100 by post. The debt is discharged as soon as B puts into the post a letter containing the note duly addressed to A. Performance of reciprocal promises Section 2 (f) provides for Promises which form the consideration or part of the consideration for each other are called reciprocal promises:

Section 51 provides that promisor is not bound to perform unless reciprocal promisee ready and willing to perform.---When a contract consists of reciprocal promises to be simultaneously performed no promisor need perform his promise unless the promisee is ready and willing to perform his reciprocal promise. Illustrations (a) A and B contract that A shall deliver goods to B to be paid for by B on delivery. A need not deliver the goods unless B is ready and willing to pay for the goods on delivery. B need not pay for the goods unless A is ready and willing to deliver them on payment. (b) A and B contract that A shall deliver goods to B at a price to be paid by installments, the first installment to be paid on delivery. A need not deliver unless B, is ready and willing to pay the first installment on delivery. B need not pay the first installment unless A is ready and willing to deliver the goods on payment of the first installment. In a contract by mutual promises the promises on either side are the consideration and the only consideration for one another. But the terms of a promise may express or imply conditions of many kinds and the other party's performance of the reciprocal promise or at least readiness and willingness to perform it may be a condition. It is obviously immaterial whether it is called a condition or not, if in substance it has that effect. Readiness and willingness.---In the case of a contract for the sale of shares in a company it is not necessary, in order to prove that a vendor was ready and willing to perform his part of the agreement, that he should be the beneficial owner of the shares, or that he should tender to the purchaser the final documents of title to the shares. It is enough that he should be able and willing to constitute the purchaser the legal owner of the shares agreed to be sold. Thus, where the vendor tendered to the purchaser share allotment and receipt papers, and together with each a transfer paper and an application paper, both signed in blank by the original allottee, it was held that the vendor was ready and willing to perform his promise. Section 52 deals with the order of performance of reciprocal promises .---Where the order in which reciprocal promises are to be performed is expressly fixed by the contract, they shall be performed in that order; and, where the order is not expressly fixed by the contract, they shall be performed in that order which that nature of the transaction requires. Illustrations (a) A and B contract that A should build a house for B at a fixed price. As promise to build the house must be performed before B's promise to pay for it. (b) A, and B, contract that A shall make over his stock in trade to B at a fixed price; and B. promises to

give security for the payment of money. A's promise need not be performed until the security is given, for the nature of the transaction requires that A should have security before he delivers up his stock. Appropriation of payments Sections 59 to 61 deals with appropriation of payments. Where debtor intimates appropriation, then Section 59 provides for application of payment, where debt to be discharged is indicated then payment should be applied towards the discharge of that particular debt (Croft v. Lumley 1858). If there is no express intention on this, then surrounding circumstances will be looked upon by court. Example: If A pays to B Rs. 10000 to settle a debt against a promissory note then Rs. 10000 must be applied to settle the debt against the promissory note and not otherwise. Where debt to be discharged is not indicated then Section 60 provides that In that case the creditor may apply the payment at his discretion to any lawful debt actually due and payable to him from the debtor. Law of limitation is not applicable. Where neither party indicates or appropriates then Section 61 provides that the payment shall be applied in discharge of the earlier debt in order of time. Where it is not stated that payment is to be applied for settlement of debt due or interest thereon, then the lender may apply the payment first towards the interest. Contracts which need not be performed Performance of a contract may be avoided under the following circumstances:1. When performance of contract becomes impossible. Example: an agreement to double the currency through magic is void and impossibility. 2. Section 62 deals with effect of novation, rescission and alteration of contract. If the parties to a contract agree to substitute a contract with a new one then the old contract need not be performed. 3. Section 63 provides that a Promisee may dispense with or remit performance of promise made to him or may extend the time for such performance. Example: A engages B to paint a picture for A, Afterwards A forbids B to paint the picture; B need not perform the contract. 4. Section 64 allows for non performance of voidable contract which are rescinded at option of a party then the other party need not perform the contract. 5. Section 65 provides that when an agreement is discovered to be void any person who has received advantage under void agreement or contract that becomes void is bound to restore the same to the person from whom he received it. If the terms of the contract are uncertain or incomplete, the parties cannot have reached an agreement in the eyes of the law. An agreement to agree does not constitute a contract, and an inability to agree on key issues, which may include such things as price or safety, may cause the entire contract to fail. A contract is void if it is based on an illegal purpose or contrary to public policy.

One example, from Canada, is Royal Bank of Canada v. Newell. A woman forged her husband's signature on 40 checks, totalling over $58,000. To protect her from prosecution, her husband signed a letter of intent prepared by the bank in which he agreed to assume "all liability and responsibility" for the forged checks. However, the agreement was unenforceable, and struck down by the courts because of its essential goal, which was to "stifle a criminal prosecution." Because of the contract's illegality, and as a result voided status, the bank was forced to return the payments made by the husband. In the U.S., one unusual type of unenforceable contract is a personal employment contract to work as a spy or secret agent. This is because the very secrecy of the contract is a condition of the contract (in order to maintain plausible deniability). If the spy subsequently sues the government on the contract over issues like salary or benefits, then the spy has breached the contract by revealing its existence. It is thus unenforceable on that ground, as well as the public policy of maintaining national security (since a disgruntled agent might try to reveal all the government's secrets during his/her lawsuit). Other types of unenforceable employment contracts include contracts agreeing to work for less than minimum wage and forfeiting the right to workman's compensation in cases where workman's compensation is due. Anticipatory breach of contract It occurs when a party to a contract repudiates the contract before the stipulated time for performance Or when a party disables himself from performing the contract by doing some act. Whenever you have a contract that requires completing something, and a person informs you before they begin your project that it will not be completed, this is referred to as anticipatory breach. Examples: A promised to marry B as soon as As father dies. However, A refused to marry B during the life time of As father. (Frost v. Knight LR Ex 111) A promised to assign to B, within seven years from the date of promise, all his interest in a lease for GBP 140. However, he changed his mind and assigned the lease to C. (Lovelock v. Franklyn 1846). Actual breach of contract Actual breach can take place: (a) At the time when performance is due Where a party to a contract fails or refuses to perform his part of the obligation under the contract when the performance is due. Example: A fails to deliver to B 1000 bales of cotton on 30 March 2008. This is actual breach of contract. (b) During the performance of the contract When during the performance one party either expressly or impliedly repudiates the contract. The party not in breach can treat the contract as no longer binding on him and sue for damages. Such breach can be either express or implied. Express breach occurs when one party communicates to the other about his intention either not to perform the contract or after accepting partly performance from the other party refuses to accept the remaining performance. (Ambergate etc. Rly. Co 1851) wherein, Ambergate was required to supply 3000 tons of railway chairs on installments to the Railway Company. B after receiving

1787 asked Ambergate not to supply remaining chairs. Held, Ambergate could bring an action for breach of contract. Implied breach occurs when completion of performance of contractual obligation is made impossible because of act of a party. In that case the other party is discharged from its obligations. (ONeil v. Armstrong 1895) wherein a British national was employed in a Japanese ship. When the Japan declared war with China, he was asked to leave the ship. It was held, he was entitled to recover the agreed wages. Remedies of breach of contract A breach of contract is failure to perform as stated in the contract. Where a contract is breached, the injured party becomes entitled to remedies. There are many ways to remedy a breached contract assuming it has not been waived. Rescission of the contract. Typically, the remedy for breach of contract is a suit and consequential award of money damages. When dealing with unique subject matter, specific performance may be ordered. Suit for injunction can also be filed.

Followings are the Sections of Contract law that provides for remedies for breach of Contract. Section 75 provides that a party rightfully rescinding contract is entitled to compensation. Example: A, a singer, contracts with B to sing at Bs theatre for two nights during a week for two months for a price of Rs. 1000. A performs for five nights but fails to turn up on sixth night. B rescinds the contract and is entitled to compensation. Rescission can be refused where plaintiff expressly or impliedly ratifies the breach and contract, third party acquires rights for value and in good faith, Section 73 provides for compensation for loss or damage caused by breach of contract. When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it. Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach. Compensation for failure to discharge obligation resembling those created by contract .---When an obligation resembling those created by contract has been incurred and has not been discharged, any person injured by the failure to discharge is entitled to receive the same compensation from the party in default as if such person had contracted to discharge it and had broken his contract.

Explanation.---In estimating the loss or damage arising from a breach of contract, the means which existed of remedying the inconvenience caused by the non-performance of tile contract must be taken into account. Illustrations (a) A contracts to sell and deliver 50 maunds of saltpetre to B at a certain price, to be paid on delivery. A, breaks his promise B is entitled to receive from A by way of compensation, the sum, if any, by which the contract price falls short of the price for which B might have obtained 50 maunds of saltpetre like quality at the time when the saltpetre ought to have been delivered. There are four different types of damages.

General Damages General damages are those damages which naturally flow from a breach of contract. Hadley v. Baxendale establishes general and consequential damages.

Compensatory damages which are given to the party which was damaged by the breach of contract. With compensatory damages, there are two kinds of damages, consequential damages and direct damages. Compensatory damages are awarded to put the party in as good of a position as the party would have been in had the contract been performed as promised. There must be certainty, not estimates, of what the party could have benefited if the contract had been performed. Consequential damages are those damages which, although not naturally flowing from a breach, are naturally supposed by both parties at the time of contract formation. An example would be when someone rents a car to get to a business meeting, but when that person arrives to pick up the car, it is not there. General damages would be the cost of renting a different car. Consequential damages would be the lost business if that person was unable to get to the meeting, if both parties knew the reason the party was renting the car.

Exemplary damages which are used to make an example of the party at fault to discourage similar crimes. Fines can be multiplied by factors of up to 50 for such damages. Liquidated Damages which are damages paid for permission to breach the contract with no further obligations. Liquidation damages must be expressly stated in the contract, and must be reasonable (as determined by the courts), depending on the nature of the contract. Nominal damages which include minimal dollar amounts (often sought to obtain a legal record of who was at fault).

Punitive damages which are used to punish the party at fault. These are not usually given regarding contracts but possible in a fraudulent situation. Section 73a provides for compensation for failure to discharge obligation resembling those created by contract.

Section 74 provides for compensation for breach of contract where penalty is stipulated for within the terms of a contract. Specific Performance: There may be circumstances in which it would be unjust to permit the defaulting party simply to compensate the injured party with damages. The court may make an order of what is called "specific performance", requiring that the contract be performed (Section 19 of Specific Relief Act, 1877). For example where an art collector purchases a rare painting and the vendor refuses to deliver, the collector's damages would be equal to the sum paid. A specific performance is obtainable for the breach of a contract to sell land or real estate on such grounds that the property has a unique value. A contract for the sale of real property is a notable exception. In most jurisdictions, the sale of real property is enforceable by specific performance. Even in this case the defenses to an action in equity (such as laches, the bona fide purchaser rule, or unclean hands) may act as a bar to specific performance. Injunction: In some circumstances a court will order a party to perform his or her promise (an order of "specific performance") or issue an order, known as an "injunction," that a party refrain from doing something that would breach the contract. Both an order for specific performance and an injunction are discretionary remedies, originating for the most part in equity. Neither is available as of right and in most circumstances a court will not normally order specific performance. Related to orders for specific performance, an injunction may be requested when the contract prohibits a certain action. Action for injunction would prohibit the person from performing the act specified in the contract. Restitution: When it is neither possible nor desirable to award damages measured in that way, a court may award money damages designed to restore the injured party to the economic position that he or she had occupied at the time the contract was entered (known as the "reliance measure"), or designed to prevent the breaching party from being unjustly enriched ("restitution"). Doctrine of frustration Where uncontemplated turn of events has occurred which makes further performance of a contract impossible or unlawful, the contract becomes frustrated at that point and parties are discharged from their obligations (Section 56).

Doctrine of frustration makes it impossible to execute a contract without the action of any party ( PLD 1980 SC 122). Frustration applies only to executory contracts and not to executed contracts. Frustration of contract---How determined. The question whether frustration of contract occurs or not depends on the nature of the contract and on the events which have occurred. The question for consideration is, "what was the common intention and a common purpose for entering into a contract and whether that purpose and intention has been frustrated by supervening circumstances". It is not permissible for a Court of law to imply a term which is not consistent with the express terms of the contract merely on the ground that parties being reasonable men must be deemed to have provided for a particular event. Various discharges of contracts Parties to a contract may be discharged from their obligations under the contract in following circumstances: 1. By Agreement (a) Waiver Contracts may be discharged by mutual agreement. A party may agree to waive his rights and the other party is discharged from contract. (b) Novation or Substitute Agreement Section 62 provides that parties to a contract may agree to substitute a new contract in place of an existing contract, or to rescind it or to alter the original contract, which then need not be performed. An existing contract is substituted with a new one between same parties or different parties against the consideration of mutually discharging of the old contract. Effect of Novation is that the original contract need not be performed. Rules of Novation include that parties to a contract may be same and substitute the old terms with new ones. Terms may require a new party may be added or substituted. Substituted contract or the old contract must be valid and enforceable. 2. By Performance A contract may be performed, thus resulting in fulfilling the obligations under a contract. 3. By Breach Breach of contractual terms discharges either party from performance of contractual terms, which may still be due from him. Discharge by breach can be in the form of: discharge by renunciation before performance; Impossibility created by one party before performance becomes due; by reununciation in the course of performance for example refusing to accept balance quantity of goods after receiving half of the delivery; by impossibility created by one party during the course of performance 4. Impossibility

Contract may become impossible to perform by reason of circumstances which discharge the parties from their respective obligations (Section 56). This includes agreements to do impossible acts. Examples: Change of law, destruction of thing contracted for, death of promisor in contract for services etc. 5. Frustration If performance of contract becomes impossible by reason of some event which promisor could not prevent. Example: A promises to marry B, and before marriage A goes mad. Force Majeure (French for "superior force") is a common clause in contracts which essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, such as a war, strike, riot, crime, or act of God (e.g., flooding, earthquake, volcano), prevents one or both parties from fulfilling their obligations under the contract. 6. By Operation of law This means, some set of circumstances which brings about a discharge of contract. Example: A company goes bankrupt Bailment Bailment is the delivery of goods by one person to another for some purpose, which goods shall be returned upon completion of such purpose or disposed off according to the direction of person delivering such goods according to a contract between parties thereto. The person delivering the goods is called bailor and the person to whom goods are delivered is called bailee (Section 148). Main characteristics of Bailment: 1. Delivery of goods and delivery of possession is important ( Section 149). If there is a transfer of ownership, then it will be sale or exchange but not bailment. 2. Bailor must disclose faults in goods to Bailee (Section 150). 3. Delivery of possession is temporary but it is for some purpose. Bailor has the right to reclaim the goods so delivered. 4. Goods are handled, returned or disposed off according to instructions of Bailor. 5. Only the movable property can be bailed. Duties of Bailee 1. 2. 3. 4. 5. It is the duty of Bailee to take care of the goods entrusted to him (Section 151). Not to make unauthorized use of goods (Section 154). Not to mix the goods with his own goods (Section 155-157). Not to set up a title in goods adverse to the title of the Bailor. To return the goods upon completion of the purpose or time for which the goods are bailed to him.

Duties of Bailor 1. Disclose faults in goods to the Bailee 2. Bear any extraordinary expenses (Section 158). 3. Compensate or indemnify the Bailee for any loss which Bailee may suffer by reason that Bailor was not entitled to make Bailment (Section 164). Contract of indemnity A contract of indemnity is a contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person (Section 124). Illustration: A contracts to indemnify B against the consequences of any proceedings which C may initiate against B in respect of a sum of Rs. 200. This is a contract of indemnity. Another example is the case of Goulston Discount Co Ltd. V. Clark (1967) . Facts of the case are that A and B go into a shop. B says to shopkeeper, Let A have the goods, I will see you paid. Held The contract is of indemnity. Contracts of insurance are common examples of Contracts of indemnity. A contract of indemnity is a class of general contract and is subject to all the rules of contract e.g. consent, lawful object etc. Contract of indemnity can be express or implied. Parties in a contract of indemnity: There are two parties. One is indemnifier, who promises to make good the loss, and the other is indemnified or indemnity holder, the one whose loss is made good (Section 124). Rights of Indemnity Holder: 1. Damages are paid all damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies. 2. Cost of suit All costs which he may be compelled to pay brining or defending such suit. 3. Compromise payment An indemnity holder can compromise a claim on the best term he can and then bring an action on the contract of indemnity (Section 125). Rights of indemnifier: 1. Rights of the indemnifier are analogous to the rights of a surety under Section 141. 2. Indemnifier, on making good the indemnity, be entitled to succeed to all the ways and means by which the person indemnified might have protected himself against or reimbursed himself for the loss. Contract of guarantee A contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default. Example: A requests B to lend Rs. 1000 to C and guarantees if C does not pay the amount, he will pay. This is contract of guarantee.

A and B go into a shop. A says to shopkeeper C, let B have the goods, if B does not pay, I will pay. (Birkmyr v. Darnell 1704) Held This is a contract of guarantee. Parties to a contract of guarantee 1. Surety The person who gives guarantee 2. Creditor The person to whom guarantee is given 3. Principal Debtor The person in respect of whose default the guarantee is given. Agreements within Contract of Guarantee Contract of guarantee comprises of three collateral contracts: 1. Between creditor and principal debtor, there is a contract out of which the guaranteed debt arises. 2. Between surety and creditor, there is a contract by which surety guaranteed to pay to creditor, principal debtors debt in case of default. 3. Between surety and principal debtor, there is a contract that principal debtor shall indemnify surety in case surety pays in the event of default by principal debtor. Essentials of Contract of Guarantee 1. Concurrence of all three parties is necessary and in the absence of consent of any of them no contract is made. 2. Liability must be legally enforceable. If the liability does not exist, there cannot be a contract of guarantee. Thus a surety is not liable on a guarantee for the payment of a debt which is barred by the law of limitation. 3. A contract of guarantee must meet all the requirements of a valid contract. But if a principal debtor goes mad in that case surety is regarded as the principal debtor and is liable personally (Kashiba v. Shripat 1895) and consideration must be received by the principal debtor which need not be of any benefit to the surety himself (Section 127). 4. Writing is not necessary and it can be oral or written. YOURSELF PREPARE NOTES ON DISTINGUISH INDEMNITY AND GUARANTEE Principal and agent Section 182 defines "Agent" and "principal" in following words--- An "agent" is a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done, or who is so represented, is called the "principal". The essential point about an agents position is his power of making the principal answerable to third persons. No consideration is necessary to create an agency (Section 185). Illustration A owns a shop in Quetta, living himself in Karachi and visiting the shop occasionally. The shop is managed by B, and he is in the habit of ordering goods from C in the name of A for the purposes of the shop, and of paying for them out of As funds with As knowledge. B has an implied authority from A to order goods from C in the name of A for the purposes of the shop. In order to determine whether a party stands in the relation of agent or principal in reference to the other contracting party, the nature of the agreement and the course of business have to be taken into account.

The legal relation between a merchant in one country and a commission agent in other is that of principal and agent, and not seller and buyer. An agent may have, and often has, in fact, a large discretion, but he is bound in law to follow the principal's instructions provided they do not involve anything unlawful. Two or more persons may be employed to act as agents jointly or severally, or jointly and severally. An agent who negligently omits to comply with the clear instructions of his principal must be regarded as guilty or gross negligence. Who may be an agent? Section 184 provides for as to who can be an agent. As between the principal and third persons any person may become an agent, but no person who is not of the age of majority and of sound mind can become an agent, so as to be responsible to his principal according to the provisions in that behalf herein contained. Appointment of a "sole agent" does not preclude the principal from acting himself in the business of the agency without being accountable to the agent. Only an express prohibition would have that effect. Creation of agency Express Agency The authority of an agent may be expressed or implied (186). Principal impliedly ratifying acts of agent cannot disown liability arising there from. Sometimes an agency is created to represent a person in a particular formal deed of appointment drawn which is drawn up and signed by the principal. Implied Agency An authority is said to be express when it is given by words spoken or written. An authority is said to be implied when it is to be inferred from the circumstances of the case; and things spoken or written, or the ordinary course of dealing, may be accounted circumstances of the case (Section 187). Implied agency arises from the conduct, situation of parties, necessities or circumstances of a case. Example: A & B are brothers. A resides at Karachi and B resides in Hyderabad. B with the knowledge of A, leases As agricultural land at Hyderabad. B realizez the rent and remits the same to A. B is agent of A, though not expressly appointed as such. Smith v. Moss (1940), wherein a woman allowed her son to drive a car for her, she paying all expenses of maintenance and operation. The son met an accident injuring his wife. Held Wife can not sue Mother as the son was implied agent of the mother. Agency by Estoppel It is created where a person by his conduct or by words spoken or written, leads willfully another person to believe that a certain state of affairs exists and induces him to act on that behalf so as to alter his previous position, such person is then precluded from denying subsequently the fact that state of affairs (Section 237).

Example: B is As agent and A instruct him to not to sell goods at a price lower that what A has fixed. C ignorant of As instructions buys goods from B at a price lower than what A has fixed. A is bound by the contract. Agency by holding out Agency by holding out is created by some positive or affirmative act on the part of the principal. Example: If A habitually allows his servant B to purchase goods for him from C and paid C for the goods later on. On one occasion A sent B with cash but B purchased goods on credit. Held C can recover from A as he has held out his servant as his agent on prior occasions. Agency by necessity It is created by law, under circumstances, where there is no opportunity of communicating to one person with the other. Example: Husband-Wife, wife forced to live separately can pledge her husbands credit to buy all necessities of life according to position of her husband even against his wishes. Agency by ratification It arises where a person acts on behalf of another without his knowledge or consent and who afterwards accepts such act. Example: A insures Bs goods and B without his authority and B later on ratifies As act. Ratification can be express or implied.

Effects of ratification effect of ratification is to render the acts of agent as binding on principal (Section 196). Requisites of ratification 1. 2. 3. 4. 5. 6. 7. 8. 9. Agent must expressly act as agent for a principal who in contemplation and is identifiable at the time of contract. Principal must exist at the time of contract. Principal must have contractual capacity both at the time of contract and at the time of ratification. Ratification must be with full knowledge of facts (Section 198). Ratification must be within reasonable time. Ratification must be for a lawful act. Whole transaction must be ratified (Section 199). Ratification must be communicated to the party who is liable by the act done by the agent. Ratification must be of the acts which the principal had power to do.

Classification of Agents

Special agents

Special agent is one who is appointed to perform a particular act or to represent the principal in a particular transaction.

General Agents

General agent is one who has authority to do all acts connected with a particular business. Universal agents Universal agent is one whose authority to act for the principal is unlimited. Such agent has authority to bind his principal by any act which he does. Kinds of agents Factor A factor is an agent who is entrusted with the possession of goods by his principal with authority to sell the same. Such agent is entitled to sell the goods of his principal in his own name without disclosing that of his principal. A factor is considered as Mercantile agent. Auctioneer An auctioneer is an agent both for seller as well as purchaser. He advertises and conducts the sale as agent of the seller. On final call of the hammer he becomes the agent of the highest bidder i.e. the buyer. He is entitled to recover the price from such buyer by filing a suit in his own name. He has a particular lien on the goods in his possession. Broker A broker is an agent who buys and sells goods on behalf of another and receives commission for doing so. He procures contractual relations between the principal and a third party. He is not entrusted with possession of the goods in which he deals. Commission Agent A commission agent is one who buys or sells in the market on behalf of his principal as per his instructions. He is liable for the failure of the other party to the agreement to carry out his part. He cannot charge a price higher to his principal than that which is charged to or by him. Del Credere Agent Is one who in consideration of an extra commission, guarantees his principal that the person with whom he makes contracts on behalf of the principal shall perform their obligation. Duties and rights of an agent 1. Carry out work according to instructions & where no instructions then as per Custom An agent is bound to conduct the business of his principal according to the directions given by the principal, or, in the absence of any such directions, according to the custom which prevails in doing business of the same kind at the place where the agent conducts such business. When the agent acts otherwise, if any loss be sustained, he must make it good to his principal, and, if any profit accrues, he must account for it (Section 211). Illustrations (a) An agent, instructed to warehouse goods at a particular place, warehouse a portion of them at another place, where they are destroyed, without negligence. He is liable to the principal for the value of the goods destroyed. (b) A, an agent engaged in carrying on for B, a business, in which it is the custom to invest from time to time, at interest, the moneys which may be in hand, omits to make such investments. A must make good to B the interest usually obtained by such investments.

(c) B, a broker, in whose business it is not the custom to sell on credit, sells goods of A, on credit to C, whose credit at the time was very high. C before payment, becomes insolvent. B must make good the loss to A. 2. Skill and diligence required from agent. An agent is bound to conduct the business of the agency with as much skill as is generally possessed by persons engaged in similar business, unless the principal has notice of his want of skill. The agent is always bound to act with reasonable diligence, and to use such skill as he possesses; and to make compensation to his principal in respect of the direct consequence of his own neglect, want of skill or misconduct, but not in respect of loss or damage which are indirectly or remotely caused by such neglect, want of skill or misconduct (Section 212). Illustrations (a) A, a merchant in Islamabad, has an agent, B, in London to whom a sum of money is paid on A's account, with orders to remit. B retains the money for a considerable time. A, in consequence of not receiving the money, becomes insolvent. B is liable for the money and interest from the day on which it ought to have been paid, according to the usual rate, and for any further direct loss---as e.g., by variation of rate of exchange--but not further. (b) A, an agent for the sale of goods, having authority to sell on credit, sells to B on credit, without making the proper and usual inquiries as to the solvency of B. B, at the time of such sale, is insolvent. A must make compensation to his principal in respect of any loss thereby sustained. (c) A, an insurance broker, employed by B to effect an insurance on a ship, omits to see that the usual clauses are inserted in the policy. The ship is afterwards lost. In consequence of the omission of the clauses nothing can be recovered from the underwriters. A is bound to make good the loss to B. (d) A, a merchant in England, directs B, his agent at Karachi who accepts the agency, to send him 100 bales of cotton by a certain ship. B, having it in his power to send the cotton, omits to do so. The ship arrives safely in England. Soon after her arrival, the price of cotton rises. B is bound to make good to A, the profit which he might have made by the 100 bales of cotton at the time the ship arrived, but not any profit he might have made by the subsequent rise. 3. Render proper agent's accounts An agent is bound to render proper accounts to his principal on demand (Section 213). 4. Agent's duty to communicate with principal It is the duty of an agent, in cases of difficulty, to use all reasonable diligence in communicating with his principal, and in seeking to obtain his instructions (Section 214). 5. Right of principal when agent deals, on his own account, in business of agency without principal's consent If an agent deals on his own account in the business of the agency, without first obtaining the consent of his principal, if agent does so, the principal may repudiate the transaction, if the case shows either that any material fact has been dishonestly concealed from principal (Section 215).

Illustrations (a) A directs B to sell A's estate. B buys the estate for himself in the name of C. A, on discovering that B has bought the estate for himself, may repudiate the sale, if he can show that B has dishonestly concealed any material fact, or that the sale has been disadvantageous to him. 6. Principal's right to benefit gained by agent dealing on his own account in business of agency It is the duty of an agent to remit any benefit which may have resulted to him from the transaction to his principal, provided an agent, without the knowledge of his principal, deals in the business of the agency on his own account instead of on account of his principal (Section 216). 6. Pay sums received for principal (Sections 217 & 218) 7. Protect and preserve principals interest in case of death or insanity 8. Not to use information obtained in the course of agency against the principal 9. Not to make secret profits from Agency. 10. Not to set up adverse title 11. Not to conflict interest and duty. 12. Not to delegate authority Rights of Agent 1. Agent's right of retainer out of sums received on principal's account - An agent may retain, out of any sums received on account of the principal in the business of the agency, all moneys due to himself in respect of advances made or expenses properly incurred by him in conducting such business, and also such remuneration as may be payable to him for acting as agent. 2. Right to receive remuneration - In the absence of any special contract, payment for the performance of any act is not due to the agent until the completion of such act; but an agent may detain moneys received by him on account of goods sold, although the whole of the goods consigned to him for sale may not have been sold, or although the sale may not be actually complete (Section 219). 3. Agent's Right of lien on principal's property.--- In the absence of any contract to the contrary an. agent is entitled to retain goods, papers and other property, whether moveable or immoveable, of the principal received by him, until the amount due to himself for commission, disbursements and services in respect of the same has been paid or accounted for to him (Section 221). 4. Agents right to be indemnified against consequences of lawful acts - The employer of an agent is bound to indemnify him against the consequences of all lawful acts done by such agent in exercise of the authority conferred upon him (Section 222). Illustrations (a) B, at Singapore, under instructions from A, of Quetta, contracts with C to deliver certain goods to him. A does not send the goods to B and C sues B for breach of contract. B informs A of the suit, and A authorizes him to defend the suit. B defends the suit, and is compelled to pay damages and costs and incurs expenses. A is liable to B for such damages, costs, and expenses. (b) B, a broker at Quetta by the orders of A, a merchant there, contracts with C for the purchase of 10 casks of oil for A. Afterwards A refuses to receive the oil, and C sues B. B informs A, who repudiates the contracts altogether. B defends, but unsuccessfully and has to pay damages and costs, and incurs expenses. A is liable to B for such damages, costs, and expenses.

Agent has a right to be indemnified for acts done in good faith ( Section 223). However, right to indemnification do not extend to acts which are criminal in nature (Section 224). 5. Right of Compensation to agent for injury caused by principal's neglect - The principal must make compensation to his agent in respect of injury caused to such agent by the principal's neglect or want of skill. Illustration A employees B as a bricklayer in building a house, and puts up the scaffolding himself. The scaffolding is unskillfully put up, and B is in consequence hurt. A must make compensation to B. Duties and rights of principal scope Duties 1. Indemnify Agent - The employer of an agent is bound to indemnify him against the consequences of all lawful acts done by such agent in exercise of the authority conferred upon him (Section 222). Illustrations (a) B, at Singapore, under instructions from A, of Quetta, contracts with C to deliver certain goods to him. A does not send the goods to B and C sues B for breach of contract. B informs A of the suit, and A authorises him to defend the suit. B defends the suit, and is compelled to pay damages and costs and incurs expenses. A is liable to B for such damages, costs, and expenses. (b) B, a broker at Quetta by the orders of A, a merchant there, contracts with C for the purchase of 10 casks of oil for A. Afterwards A refuses to receive the oil, and C sues B. B informs A, who repudiates the contracts altogether. B defends, but unsuccessfully and has to pay damages and costs, and incurs expenses. A is liable to B for such damages, costs, and expenses. 2. Agent has a right to be indemnified for acts done in good faith (Section 223). 3. Indemnify agent for injury caused by principals neglect - The principal must make compensation to his agent in respect of injury caused to such agent by the principal's neglect or want of skill ( Section 225). 4. Pay any commission due to or agreed with agent. Rights of Principal 1. To recover damages from agent if agent disregards the directions of principal or suffers loss due to lack of requisite skill, care or diligence on the part of his agent. 2. To recover secret profits made by agent and resist claim of agent for remuneration. 3. Resist claim against indemnity where in any transaction the agent has acted as principal and not as agent. 4. Principal's right to benefit gained by agent dealing on his own account in business of agency.

5. Right of principal when agent deals, on his own account, in business of agency without principal's consent If an agent deals on his own account in the business of the agency, without first obtaining the consent of his principal, if agent does so, the principal may repudiate the transaction, if the case shows either that any material fact has been dishonestly concealed from principal (Section 215). Extent and kinds of agents authority Section 226 lays down the acts of an agent which fall within the scope of his authority which bind his principal. Contracts entered into through an agent, and obligations arising from acts done by an agent, may be enforced in the same manner, and will have the same legal consequences as if the contracts had been entered into and the acts done by the principal in person. Illustrations (a) A buys goods from B knowing that he is an agent for their sale, but not knowing who the principal is. B's principal is the person entitled to claim from A the price of the goods, and A cannot, in a suit by the principal, set off against that claim a debt due to himself from B. (b) A being B's agent, with authority to receive money on his behalf, receives from C a sum of money due to B. C is discharged of his obligation to pay the sum in question to B. Authority of agent to bind his principal may be: a. Actual or real authority b. Apparent or ostensible authority Actual Authority (Section 186). Actual authority of an agent is the authority conferred on him by the principal. It may be express, incidental or implied. a. Express authority is that which is given by the principal by words spoken or written ( Section 187). b. Implied authority is inferred from the relevant circumstances i.e. from an act done which was necessary for execution of express authority (Section 188). Apparent or Ostensible Authority Apparent authority is that which is not real but the principal by his words or conduct reasonably leads a third party to believe that agent possesses such authority. Ryan v Pilkington (1959) where an estate agent was instructed by owners to find a purchaser for a property and accepted deposit as agent. Held: although agent was not given authority to accept deposit yet, he acted within the scope of his ostensible authority. Liabilities of principal to third party Liability when principal is named

1. Acts of agents are acts of Principal - Contracts entered into through an agent, and obligations arising from acts done by an agent, may be enforced in the same manner, and will have the same legal consequences as if the contracts had been entered into and the acts done by the principal in person (Section 226). Example: A being B's agent, with authority to receive money on his behalf, receives from C a sum of money due to B. C is discharged of his obligation to pay the sum in question to B. 2. When Agent exceeds authority - When an agent does more than he is authorized to do, and when the part of what he does, which is within his authority, can be separated from the part which is beyond his authority, so much only of what he does as is within his authority is binding as between him and his principal. Illustration A being owner of a ship and cargo, authorizes B to procure an insurance for 4,000 rupees on the ship. B procures a policy for 4,000 rupees on the ship, and another for the like sum on the cargo. A is bound to pay the premium for the policy on the ship, but not the premium for the policy on the cargo. 3. Notice given to Agent is notice given to Principal - Any notice given to or information obtained by the agent, provided it be given or obtained in the course of the business transacted by him for the principal, shall, as between the principal and third parties, have the same legal consequences as if it had been given to or obtained by the principal. Illustrations (a) A is employed by B to buy from C certain goods of which C is the apparent owner, and buys them accordingly. In the course of the treaty for the sale, A learns that the goods really belonged to B, but B is ignorant of that fact. B is not entitled to set off a debt owing to him from C against the price of the goods. (b) A is employed by B to buy from C goods of which C is the apparent owner. A was, before he was so employed, a servant of C, and then learnt that the goods really belonged to D, but B is ignorant of that fact. In spite of the knowledge of his agent, B may set off against the price of the goods a debt owing to him from C. 4. Misrepresentation or Fraud of Agent - Misrepresentation made, or frauds committed, by agents acting in the course of their business for their principals, have the same effect on agreements made by such agents as if such misrepresentations or fraud had been made or committed by the principals; but misrepresentations made, or frauds committed, by agents, in matter which do not fall within their authority, do not affect their principals. Illustrations (a) A, being B's agent for the sale of goods, iduces C to buy them by a misrepresentation, which he was not authorised by B to make. The contract is voidable as between B and C at the option of C.

(b) A, the captain of B's ship, signs bills of lading without having received on board the goods mentioned therein. The bills of lading are void as between B and the pretended consignor. Liability when principal is unnamed If agent contracts but does not discloses name of his principal, such principal is liable. If the third party is aware about existence of principal, such third party cannot sue the principal. If Agent refuses to disclose the identity of principal then he becomes personally liable. Liability when Principal is undisclosed (a) Rights of parties to a contract made by agent not disclosed (Section 231) - If an agent makes a contract with a person who neither knows, nor has reason to suspect, that he is an agent, his principal may require the performance of the contract; but the other contracting party has, as against the principal, the same rights as he would have had as against the agent if the agent had been principal. If the principal discloses himself before the contract is completed, the other contracting, party may refuse to fulfill the contract, if he can show that, if he had known who was the principal in the contract, or if he had known that the agent was not a principal, he would not have entered into the contract. (b) Position of agent As between the principal and agent, an agent has all the rights of an agent as against the principal. But as regards the third party, he is personally liable on the contract. The third party may sue the agent on the contract, and the agent has a right to sue the third party. (c) Position of third parties The third party on making a contract with an agent for an undisclosed principal may elect to sue either the principal or the agent or both of them. Example: A makes a contract with B for the sale of 100 bales of cotton yarn, where after A discovers that B is acting as agent for C. A may sue either C or B or both C & B, for the price of goods. Personal liability of agent to third party An agent is personally liable to third parties in the following cases: 1. When contract expressly provides - that a party while contracting with an agent may expressly stipulate that in case of breach of contract, he would hold the agent personally liable in case of breach of contract and if the agent agrees to it, he is personally liable. 2. When agent act for a foreign principal - Where the contract is made by an agent for the sale or purchase of goods for a merchant resident abroad, agent is held personally liable (Section 230). 3. When agent acts for undisclosed principal - Where the agent does not disclose the name of his principal, agent is held personally liable (Section 230). 4. When agent signs contract in his own name when an agent signs a contract in his own name without disclosing that he is acting as an agent, though known to be an agent is understood to have contracted personally. 5. When agent acts for a non-existent principal When the promoters act for a company yet to be registered, they are personally liable for all such acts.

6. When agent is liable for breach of warranty of authority when a person acts as an agent but has no authority from the alleged principal, or exceeds the authority, he is personally liable. 7. When agent pays or receives money by mistake or fraud he is personally liable to the third party. 8. When authority is coupled with interest When an agent has an interest in the subject matter of the contract made by him with a third party, his authority is coupled with interest. He can sue and be sued to extent of his interest. 9. When agent is personally liable under trade usage or customs. Example: A contracts with B to sell 100 Air conditioners. Later on A discovers that B was acting as agent for C. A may sue B or C or both for the price of Air Conditioners. Termination of agency An Agency can be terminated by: 1. 2. Act of parties Operation of law

1. Termination of Agency by Act of Parties: Termination of Agency by Act of Parties can be through: a. b. c. Agreement Revocation by the principal Revocation by the Agent

2. Termination of Agency by Operation of Law Termination of Agency by Operation of Law can be through: a. Performance of contract:

Where an agreement is for a particular purpose and when the purpose is accomplished the agreement automatically terminated or when the object of contract becomes impossible. Section 201 provides that an agency is terminated by the principal revoking his authority; or by the agent renouncing the business of the agency; or by the business of the agency being completed; or by either the principal or agent dying or becoming of unsound mind; or by the principal being adjudicated an insolvent under the provisions of any Act for the time being in force for the relief of insolvent debtors. b. Expiry of time

Where an agent has been appointed for a fixed term, the expiration of the term puts an end to the agency, whether the purpose of the agency has been accomplished or not; consequently where an agency for sale has expired by express limitation, a subsequent execution thereof is invalid, unless the term has been extended. c. Death of either of the parties

An agency comes to an end by the death of either Principal or Agent (Section 201). Where the Principal dies, the agent must take on behalf of the representatives of his late principal all reasonable steps for the protection of the interest entrusted to him (Section 209). A power of attorney to an agent to present a document for registration is revoked by the death of the principal. d. Insanity of either of the parties

Pursuant to Section 201, either the principal or agent dying or becoming of unsound mind, agency shall come to an end. e. Insolvency of either of the parties / Dissolution of a Company

Insolvency of Principal or Agent results in termination of Agency. For example, a power of attorney, executed by a firm, to sell immovable property stands terminated by the dissolution of the firm. f. Destruction of the subject matter

When subject matter of an agency agreement is destructed and agreement becomes impossibility then agency agreement stands terminated. Example: A is appointed an agent of B for a particular sale of a horse of B. A enters into an agreement with C to sell Bs horse. Bs horse dies so performance of the contract becomes impossible and Agency agreement comes to an end. g. Principal becoming an alien enemy

If contract of agency is between principal and agent belonging to two different countries, it is valid as long as their countries are at peace otherwise the agreement stands terminated. h. Termination of sub agents authority

The termination of the authority of an agent causes the termination (subject to the rules herein contained regarding the termination of an agents authority) of the authority of all subagents appointed by him (Section 210). i. Principal revokes Agents authority

Agency agreement stands terminated if a principal revokes the authority given to his agent at any time before the authority has been exercised so as to bind the principal (Section 203). In case of revocation of agency by Principal or Renunciation of Agency by Agent, reasonable notice must be given of such revocation or renunciation; otherwise the damage thereby resulting to the principal or the agent, as the case may be, must be made good to the one by the other. Time from which revocation operates Revocation by the act of the principal takes effect as to the agent from the time when the revocation is made known to him; and as to third persons when it is made known to them, and not before.

Questions to Prepare for Contract Act Q: Identify and explain various aspects of contracts such as; Q: Q: Q: communication, acceptance and revocation of proposals essentials of valid contract performance, discharge, breach of contract and damages for breach of contract contract of bailment

describe how an agency is created differentiate between contract of Indemnity and Guarantee explain the classes of agent and describe: the agents duty to the principal and principals duty to agent

Q: Q:

identify and explain the rights and liabilities of parties to a contract, when principal is disclosed or undisclosed describe the ways when an agency is terminated