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Mercantile and industrial laws

Chapter 1

Law of contracts

The law governing the contracts in Pakistan is contained in the contract Act1872.
The first75 sections of this Act contain a discussion of general principles
governing all types of contracts. However, the remaining sections deal with the
following three types of contracts

1. Indemnity and guarantee


2. Bailment
3. Agency
The origin of the contract

A contract may be defined as an agreement which is enforceable at law. It


originates when a person named as proposer makes a proposal or offer and the
other party to whom the proposal or offer is made called the propose of offeree,
accepts it. Offer and acceptance make an agreement and if it is enforceable at law,
it is called a contract.

Definitions
Proposal
A person is said to make proposal, when he signifies to another his willingness to
do or to abstain from doing anything with a view to obtaining the assent of the
other to such act or abstinence. A proposal is known as an offer.
Invitation of offer
An invitation to offer is a mere statement of the person’s intentions or his
willingness to enter into negotiations. It is just like an advertisement through
which people are invited to make an offer. The examples of invitation for an offer
are an advertisement for an auction, for tender, catalogue of goods.
Standing offer
When an offer takes a form of continuing offer, it is called standing offer, e.g., a
party may make an offer to supply certain goods at a particular price and have a
fixed period. This would constitute an example of a standing offer.
Acceptance
The proposal is said to be accepted, when the person to whom the proposal is
made signifies his assent thereto.
Promise
When a proposal is accepted, it becomes a promise.
Promisor
The person who makes the proposal or an offer is known as promisor.
Promisee
The person who accepts the proposal is called promise.
Agreement
Every promise constituting an offer and its acceptance is known as agreement.
agreement which is not enforceable at law is known as void agreement. For
example a gambling agreement is not enforceable at law because its object is
unlawful. Therefore, it is a void agreement.
Consent
The consent has been defined in law as “two or more persons are said to consent
when they agree upon the same thing in the same sense”.

Contract
An agreement which is enforceable at law is known as a contract. In order to be a
contract, an agreement must meet the following essentials

1. there must be an agreement


2. the parties must be competent to contract
3. the parties must give their free consent
4. the consideration and the object must be lawful
5. The agreement must be in writing, attested and registered in cases which it
is so required to be done by any law in Pakistan.
6. The agreement must not come within the clauses of agreement which have
been declared as void by contract Act, 1872.

Kinds of contract

1. valid contract
The agreement which can be enforced at law by either party
to the agreement is known as valid contract.

2. void able contract


The agreements which are enforceable at law at the option of
one or more parties but not at the option of the other or others
are known as “void able contacts”.

3. void contract
A contract which is ordinarily enforceable at law but cannot
be so enforced due to the happening of certain event.

4. Illegal contract
It is a contract which contravenes another law. For example
some contracts are illegal at common law i.e., contracts of
immoral nature.
Communication, Acceptance and Revocation of proposal

Communication of proposal
The communication of proposal is complete when it comes to knowledge of
the person to whom it is made. An illustration in this respect is:
Mr. John proposes by a law to sell a house to Mr. Clarke at a certain price.
The communication of the proposal is complete when Mr. Clarke receives the
letter.
Communication of Acceptance
The communication of an acceptance is complete:
1. As against the proposer, when it is put in a course of transmission to
him, so as to be out of power of the acceptor;
2. As against the acceptor, when it comes to the knowledge of the
proposer. An illustration in this respect is:
Mr. Johan accepts Mr. Smith proposal by a letter sent by post. The
Communication of the acceptance is complete on the part of Mr. Smith when
the letter is posted and on the part of Mr. Johan when the letter is received by
Mr. Smith.

Revocation

When the proposer or the acceptor wants to withdraw his proposal or


acceptance, this is known as Revocation. The communication of revocation is
complete.
1. 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;'

2. as against the person to whom it is made, when it comes to his knowledge.


An illustration in this respect is:
Let us suppose that Mr. Afzal revokes his proposal by a telegram. The
revocation
is complete as against Mr. Afzal when the telegram is dispatched and it is
complete as against Mr. Anwar when he receives it.
Now let us suppose that Mr. Anwar revokes his acceptance by telegram, his.
Revocation is complete as against him when the telegram is dispatched and
as against Mr. Anwar when it reaches him. A proposal may be revoked at any
time before the communication of its acceptance is complete as against the
proposer but not afterwards. It, therefore, follows that the proposal cannot be
revoked if its acceptance has been put in a course of transmission to the
proposer so as to be out of power of the acceptor. An illustration in this
respect is:
Mr. Shaheen proposes by a letter sent by post to sell his house to Mr. Munir
on January 1, 2005. Mr. Munir accepts the proposal by a letter sent by post at
3.00 p.m. on January 5, 2005. If Mr. Munir revokes his offer before 3.00 p.m.
on January 5, 2005, the revocation will be bad. A proposal may be revoked in
either of the following ways:
1. By the communication of notice of revocation by the proposer to the
other party.
2. By the lapse of the 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 proposal.
3. By the failure of the acceptor to fulfill a condition precedent to
acceptance.
4. By the death or insanity of the proposer, if the fact of his death or
insanity comes to the knowledge of the acceptor before acceptance.
An acceptance may be revoked at any time before the communication of the
acceptance is complete as against the acceptor, but not afterwards. It means
that an acceptance cannot be revoked if it has come to the knowledge of the
proposer. We illustrate this as under:
Mr. Asad offers to sell his house to Mr. Hamayun for Rs. 550,000 by a letter
posted on December, 1, 2004. It is accepted by Mr. Hamayun through a letter
posted on December 5, 2004. It reaches Mr. Asad on December 7, 2004 at
11.00 p.m. Mr. Hamayun may revoke his acceptance at any time before 11.00
a.m. on December 7, 2004, but not after-ward.

Essentials of a valid contract

1. Offer and Acceptance

Every contract is an agreement. In order to constitute an agreement there


must be an offer and it must then be accepted.
An offer must possess the following characteristics:
(a) It should not impose any condition ;
(b) It must be made with a view to creating some legal relationship. The
offer must be accepted "by the other party. A valid acceptance must possess
the following characteristics:
(I)It should be absolute and unqualified, and
(ii) It must be made in the manner prescribed by the offer. The
acceptance may be made either by words or by conduct. Counter
proposal does not constitute any valid acceptance.
(iii) It must be an expression of willingness to do or to abstain from
doing something.
(iv) It must be made with a view to obtaining the assent of the other
person.
(v) It must be made to another person.

2. Contractual Capacity
Every person is competent to contract if he specifies the following three
conditions:
(a) Age of Majority
A major is competent to contract if he suffers from no other disqualification.
A minor is incompetent to contract. A person is deemed to have attained
majority when he completes 18 years and not before. In case of a minor who
has a guardian appointed by a court or the superintendence of whose property
is assumed by Court of Wards, the age of majority is deemed to have been
attained on the completion of 21 years. Ordinarily an agreement with minor
is void. However, an agreement regarding the necessaries supplied to minor
shall be binding on the minor and his estate shall be liable for payment, if the
price is reasonable. Whether a thing is or is not a necessity of life to a minor
shall be decided by the judge.
(b) Sound Mind
An insane is incompetent to contract and, therefore, any agreement entered
into by him will be void.-A person is said to be of sound mind for the
purpose of making a contract if, at the time when he makes it, he is capable
of understanding it, and of forming a rational Judgment as to its effect upon
his interest. A person who is usually of unsound mind, but occasionally of
sound mind may make a contract when .he is of sound mind. Similarly, a
person who is usually of sound mind, but occasionally of unsound mind, may
not make a contract when he is of unsound mind.
(c) No other Disqualification
In order to be competent to contract, a person must not be disqualified from
contracting by any law to which he is. Subject:
(I) The Court of Wards Act imposes contractual incapacity. Ward of any
Court
of Wards cannot enter into a valid contract as regards property situated
anywhere.
(ii) Certain persons are not capable of contracting owing to their political
status, e.g., foreign enemies or due to their professional status, e.g., a
barrister cannot sue for fees for his professional services ; or due to legal
status, e.g., a company which being an artificial person cannot contract
except through its agent and according to its constitution.

3. Free consent of parties

The consent of the parties to a contract must be free. It is said to be free when
it is not caused by:

(a) Coercion
Coercion is the committing, or threatening to commit, any act forbidden by
the Pakistan Penal Code, or the unlawful detaining, or threatening to detain,
any property to the prejudice of any person whatever with the intention of
causing any person to enter into an agreement. Coercion renders the contract
void able at the option of the party who has been coerced. In order that
coercion be effective in law, the following things are necessary:
(I) It must have been exercised.
(ii) The object of coercion must be to cause any person to enter into an
agreement. Coercion without this intention will not be legally effective. It is
however, immaterial whether the Pakistan Penal Code is or is not enforce
in the place where the coercion is employed.

Undue influence
A contract is said to be induced by undue influence where the relations
subsisting between the parties are such that one of the parties is in a position
to dominate the will of the other, and uses that position to obtain an unfair
advantage over the other. Undue influence may be induced:
(I) By a teacher on his taught.
(ii) By a medical doctor on his patient.
(iii) By a lawyer on his client.
(iv) By a guardian on his ward.
Undue influence makes the contract void able at the option of the party
whose consent has been obtained by undue influence. The following
elements constitute undue influence:
(I) Holding of a dominant position.
(ii) Its use to obtain an unfair advantage.
(c)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 the intention to deceive
another party thereto or his agent, or induced him to enter into contract;
(I) the suggestion as to a fact, of that which is not true, by one who does not
believe it to be true.
(ii) The active concealment of a fact by one having knowledge or belief of
the
fact.
(iii) A promise made without any intention of performing it.

(d)Misrepresentation
Misrepresentation means and includes:
(I) 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;
(ii) Any breach of duty which, without any 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.
(iii) Causing, however, innocently, a party to an agreement e.g.,
erroneous
statement of the tonnage of the ship.
.

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