Types of contracts in business law/what is contract in business

 

Types of contracts in business law

Types of contracts in business law?

Introduction

Pakistani contract Act, 1872 contains the law relating to contracts. It

provides the rules relating to commercial transactions. It determines the

circumstances in which promises made by the parties to a contract shall be

legally binding on them. It honors all the customs or usage of trade, which an

inconsistent with the Act. However, where the Act is silent and there is no use

or custom relevant to the case, decisions are made on the basis of equality s

justice. It is the most important branch of law. It affects all of us in our daily life.

The Contract Act  types of contracts in business law

The law relating to contracts in Pakistan is contained in the Contract

1872. It extends to the whole of Pakistan and came into force on the 1st day

September 1872. It consists of 238 sections divided into the following parts.

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

2. Sections 76 to 123 stand repealed.

Contracts of Indemnity and Guarantee (Sections 124-147).

Contracts of Bailment and Pledge (Sections 148-181).

Contracts of Agency (Sections 182-238).

Initially, the provisions relating to the sale of goods and partnerships were

contained in the Contract Act. But subsequently Sections 76-123 relating to $

of Goods were repealed and a separate Act called the Sale of Goods Act, 19°

came into force. Similarly, Sections 239-266 relating to the partnership were rep, and the separate Partnership Act, 1932 came into force.

Definition of Contract types of contract in business law

A contract is an agreement between two or more persons creating rights

and duties and which are enforceable by law.

- Pollack defines contracts, "every agreement and promise enforceable at

law is a contract."

According to Salmond, "a contract is an agreement creating and defining

obligations between the parties"

Sir William Anson defines a contract as " a legally binding agreement

between two or more persons by which rights are acquired by one or more to.

acts or forbearance on the part of others."

Section 2(h) of the Contract Act, defines a contract as, "An agreement

enforceable by law is a contract."

From the definitions it is clear that a contract consists of two elements:

1. An agreement 2 The agreement should be enforceable by law.

mentioned elements in detail.

In order to understand the definition of contract, we examine the above-

1. Business Agreement

"Section 2(e) defines the term agreement as, "Every promise and every set

promises, forming the consideration for each other, is an agreement."

It is clear from the above definition that a promise is an agreement. What is

a promise? The term promise has been defined as under:

Section 2(b) defines the term promise as, “When the person to whom the

proposal is made signifies his assent thereto, the proposal is said to be accepted.

the proposal, when accepted, becomes a promise."

Thus an agreement is a promise or set of promises. A promise comes to existence when one party makes a proposal or offers to the other party and

it another party signifies his assent (i.e: gives his acceptance) thereto. These

change promises must form consideration (i.e; something in return) to each

jar. The process of definition shows that a contract is an agreement; a

nement is a promise and a promise is an accepted proposal.

An agreement, therefore, comes into existence only when one party makes

s his acceptance) thereto.

proposal or offer to the other party and that other party signifies his assent (i.e.

The following are the characteristics of the agreement.

unreality of Persons

There must be two or more persons to make an agreement because one

erson cannot enter into an agreement with himself.

b) Consensus ad idem

It means that both the parties to an agreement must agree on the

subject matter of the agreement in the same sense and at the same time. The term

consensus means the identity of minds. Unless there is consensus ad idem, there can

e no contract.

EXAMPLES types of contracts in business law

A owns two cycles Sohrab and Eagle. A is selling Sohrab cycle to B. B

consequently no contract.

thinks he is buying Eagle cycle. There is no consensus ad idem and

(b) A says to B, "Will you purchase my Honda Car for Rs. 8 Lac?" and B says

yes to it, there is consensus ad idem and so an agreement between A and B.

2. Enforceability

Enforceability is the second requirement of a contract. An agreement is said

to be enforceable if it is recognized by courts. In order to be enforceable by law,

the agreement must create legal obligations between the parties. If an agreement

does not create legal obligations, it is not a contract. Thus the term agreement is a

wider than a contract. All contracts are agreements but all agreements are not

contracts.' Agreements are of two types:

(a)  Social agreements (b) Legal agreements

Social agreements are social in nature and do not enjoy the benefits of the law.

They are not enforceable because they do not create legal obligations between the

parties. In such agreements, the parties do not intend to create legal relations.

On the other hand, Legal agreements are contracts because they create

legal obligations between the parties. In these agreements, the parties intend to

create legal relations. In business agreements, it is presumed that the parties

intend to create legal relations so all business agreements are in other words

contracts.

EXAMPLES

(a)   A invites B to dinner. B accepts the invitation. but does not attend it A

cannot sue B for damages It is a social agreement because it does not create

legal obligations. It is not a contract.

(b)  A promises to sell his car to B for Rs. 2 lac. It is a legal agreement because it

creates legal obligations between the parties. This agreement is a contract.

Essentials of a Valid business Contract

A valid contract is an agreement, which is binding and enforceable. Invalid contract, all the parties are legally bound to perform the contract:)

According to Section 2(h) "An agreement enforceable by law is a contract.

It means an agreement is regarded as a contract when it is enforceable b-

law. It is a contract that can be enforced by either of the parties to the contract

If one of the parties refuses to perform the contract, the other party can take an

action in a court of law against such party. To be enforceable by law, ar

agreement must possess some essentials of a valid contract, which are stated in

section 10

According to Section 10,"All agreements are contracts if they are made bu

the free consent of parties, competent to contract, for a lawful consideration and

with a lawful object, and are not hereby expressly declared to be void."

Where necessary, the agreements must satisfy the requirements of law

regarding writing, attestation or registration.

An agreement becomes enforceable by law when it fulfils essenti

conditions. These conditions may be called the essentials of a valid contract

which are as follows:

1. Offer and Acceptance business agreement

For an agreement, there must be a lawful offer by one party and lawe

acceptance of that offer from the other party. The term lawful means that E

offer and acceptance must satisfy the requirements of Contract Act. The of

must be made with the intention of creating legal relations, otherwise, there

be no agreement.

EXAMPLE

A says to B that he will sell his cycle to him for Rs. 2000. This is an offer

Accepts this offer, there is an acceptance.)

2. Legal Relationship of business agreement

The parties to an agreement must create a legal relationship. It arises wa

the parties know that if one of them does not fulfill his part of the promise, he shall

liable for the failure of a contract. Agreements of a social or domestic nature

did not create legal relations and as such cannot give rise to a contract. It is pressure

in commercial agreements that parties intend to create legal relations.

EXAMPLES

A father promises to pay his son Rs. 500 as pocket money. Later, he ref

to pay. The son cannot recover as it is a social agreement and does

create legal relations.

b) A offers to sell his watch to B for Rs. 200 and B agrees to buy it at the

(c)

price, there is a contract as it creates legal relationship between them.

A husband promised to pay his wife an allowance of 30 pounds

a month. Later, the parties separated and the husband failed to pay. The

sued for allowance. Held, that the wife was not entitled as the agree

was social and did not create any legal obligations.(Belfour vs Belfour

3. Lawful Consideration

The third essential of a valid contract is a consideration. Consid

means something in return. It may be of some benefit to the other party.

the price paid by one party for the promise of the other. An agreement is enforceable

only when both the parties get something and give something. The something

which is lawful.)

given or obtained is called consideration. Only those considerations are valid

According to Section 23, the consideration of an agreement is lawful, if it is

not forbidden by lawl fraudulent, involves injury to the person or property of

another, is immoral or opposed to public policy.

EXAMPLES

-

(a) A agrees to sell his house to B for Rs.10 lac. Here B's promise to pay a sum

of Rs.10 lac is the consideration for A's promise to sell the house, and A's

promise to sell the house is the consideration for B's promise to pay Rs.

10 lac. These are lawful considerations.

(b) A promises to obtain for B employment in the public service and B

promises to pay 10,000 rupees to A. The agreement is void as the

consideration for it is unlawful.

Capacity of Parties

An agreement is enforceable only if it is made by parties who possess

the contractual capacity. It means that the parties to an agreement must be

competent to contract. According to Section 11, in order to be competent to

contract the parties must be of the age of majority and of sound mind and must

not be disqualified from contracting by any law to which they are subject. A

contract by a person of unsound mind is void ab-initio (from the beginning).

If one of the parties to the agreement suffers from minority, madness,

drunkenness, etc., the agreement is not enforceable at law, except, in some cases

(Sec 68).

EXAMPLES

(a) M, a person of unsound mind enters into an agreement with S to sell his

house for Rs. 2 lac. It is not a valid contract because M is not competent in the

contract.

(b) A, aged 20 promises to sell his car to B for Rs. 3 Lac. It is a valid contract

because A is competent to contract.

5. Free Consent

It is another essential of a valid contract. Consent means that the parties

must have agreed upon the same thing in the same sense. For a valid contract, I

s necessary that the consent of parties to the contract must be free.

EXAMPLES

A promised to sell 20 books to B. It is not clear which books A promised to

sell. The agreement is void because the terms are not clear.

(b) A agrees to sell B a hundred tons of oil. It is not clear what is the kind of oil.

The agreement is void because of its uncertainty.

( ) O agreed to purchase a van from Son hire-purchase ferms. The price was to

be paid over two years. Held, there was no contract as the terms were not

certain about the rate of interest and mode of payment (Scammel vs Ouston) 2

9. Possibility of Performance in business agreement

The valid contract must be capable of being performed Section 56 lays

down that "An agreement to do an act impossible in itself is void." If the act is

legally or physically impossible to perform, the agreement cannot be enforced at

law. Thus where the goods being the subject matter of the contract are damaged

through the fault of nobody the contract cannot be enforced.

EXAMPLES

(a) agrees with B to discover treasure by magic, the agreement is not

enforceable.

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

is impossible of performance.

10. Not Expressly Declared Void

An agreement must not be one of those, which have been expressly

declared to be void by the Act. Sections 24-30_explain certain types of

agreements, which have been expressly declared to be void. An agreement in

restraint of trade and an agreement by way of wager has been expressly

declared void

EXAMPLES

(a) A promises to close his business against the promise of B to pay him Rs. 2

lakh is a void agreement because it is in restraint of trade,

(b) A promises to pay Rs. 20,000 to B if Pakistan wins the cricket match with

England on a particular day. The agreement is void being a wagering

agreement.

(1941) AC 251

KINDS OF Business CONTRACTS

The contracts can be divided according to enforceability, formation and

Performance

1. Enforceability

According to enforceability, a contract can be divided into the following

five kinds:

a) Valid business Contract

Definition

A valid contract is an agreement enforceable by law An agreement

becomes enforceable by law when all the essentials of a valid contract as

explained by section-10 are present. If even one is missing, there is no valid

contract.

Obligation of Parties

In a valid contract, all the parties to the contract are legally responsible for

the performance of a contract. If one of the parties breaks the contract, the other

party has a right to take action against the guilty party. The contract can be

enforced through the court also.

EXAMPLE

A offers to sell his car to B for Rs. 2 lac and B accepts the offer if this

agreement fulfills all the essentials of a contract, it is a valid contract. If A fails to

deliver the car, B can sue him in court for delivery and if B fails to make the

payment, A can sue him for recovery of the price.

b) Voidable Contract

Definition

According to Section 2(1) "An agreement which is enforceable by law a

the option of one or more of the parties thereto, but not at the option of the otha

or others is a voidable contract."

Generally, a contract is said to be voidable when the consent of one of

the parties is not free. It is a valid contract until it is avoided by the party having

a right to avoid it/Once it is avoided it becomes void. But if the party chooses to

affirm it, the contract continues to be valid.

Circumstances under which a Contract Becomes Voidable

voidable:

The following are the circumstances under which a contract becomes voidable when the consent of one or more of the parties

to a contract is obtained by coercion, undue influence, misrepresentation, or

fraud. (Secs 15-18).

EXAMPLES

A threatens to shoot B to purchase his Honda 110 for Rs 20,000. B agrees.

This contract was made by coercion and is voidable at the option of B.

b) A to deceive B, states that 500 maunds of sugar is produced annually at A's

factory and thus induces B to buy the factory. The contract is voidable at

the option of B.

When a person promises to do something for another person but the other

person prevents him from performing his promise, the contract becomes

voidable at his option. (Sec 53)

EXAMPLE

A contract to whitewash B's house. A is ready to whitewash but B

prevents him from doing so. This contract is voidable at the option of A.

3. When a party to the contract promises to do a certain thing within a

specified time but fails to do it, then the contract becomes voidable at the

option of the promisee if the time is the essence of the contract. (Sec 55.)

EXAMPLE

A contract to white-wash B's house within one week. A does not come

within the specified time. The contract is voidable at the option of B.

Obligation of Parties

The following are the obligations of the parties.

1. It is valid and binding on both parties so long as it continues.

2.

The law gives an option to one of the parties to avoid it if he so chooses.

3. The party entitled to cancel the contract is not bound to cancel it. He may

affirm it. If he affirms it, the other party remains bound to perform it.

The aggrieved party can get damages from the other party.

5.

If the party has received some benefit under the contract he must return

such benefit to the other party.

Burden of Proof

The burden of proof lies on the plaintiff, i.e., an aggrieved party. It means that

influence, misrepresentation, or fraud has to proven in a court of law. If 

the party who claims that his consent has been obtained by coercion, undue

cannot prove, then the contract will remain valid.

c) Void Contract

Definition

The word void means not binding in law, A contract, which cannot be

enforced by either party, is called a void contract (Section 20) defines "A contract

which ceases to be enforceable by law becomes void, when it ceases to be

enforceable.'

From this definition, it is clear that a void contract is not void from the

very beginning. It is a valid contract and binding on the parties when it is

originally made but after its formation, it becomes void due to certain reasons.

Circumstances under which a Contract Becomes Void

The following are the circumstance under which a contract becomes void:

Impossibility of Performance

A contract may become void due to the impossibility of performance,

a contract may, after formation but before the performance, become void when

becomes impossible to be performed by any party due to any reason (Sec 56)

EXAMPLE

A agrees to sell his house to B after two days. His house is burnt the next day.

The contract becomes void.

2 Subsequent Illegalities

A contract becomes void by subsequent illegality. A legal contract may,

after formation but before the performance, become illegal and as a result void due

to certain reasons. (Sec 56)

EXAMPLE

A agrees with B to sell 100 bags of wheat at Rs. 150 per bag. However,

before delivery, government bans private trade in wheat. It is a contract that

afterward becomes void.

3 Rejection of a Voidable Contract

Avoidable contract becomes void when the party whose consent is

free rejects the contract. (Sec 19)

EXAMPLE

A, by threatening to injure B, compelled him to sell his new car for Rs. 20,0

only. This contract is the result of coercion and is voidable at the option of B

may affirm or reject the contract. In case B rejects the contract, it becomes void

Contingent Contract When Depending Event Becomes Impossible

     A contingent contract to do or not to do something on the happening of an

uncertain event becomes void, when the event becomes impossible. (Sec 32)

EXAMPLE

A contract to give Rs. 1,00,000 as a loan to B, if B marries C. C dies without

being married to B. The contract becomes void.

Obligation of Parties

In case of a void contract, both the parties are not legally responsible to

fulfill the contract. Under this contract, any party who has received any benefit is

bound to return it, to the person from whom he received it.

d) Unenforceable Contract

An unenforceable contract is one that is valid but cannot be enforced is

a court of law because of some technical defects such as the absence of writing

Registration, requisite stamp, etc. When these defects are removed, the contract

can be enforced

EXAMPLE

A borrows Rs. one Lac from B and makes a promissory note and the Orig

rupee stamp is pasted on the promoting. The agreement through complete

Obligation of Parties

In case of an unenforceable contract, the parties may perform the contract.

But in case of breach of such contract, the aggrieved party will not be entitled to

the legal remedies.

e) Illegal Agreement

The word illegal means against the law. An agreement is illegal when its

Performance is forbidden by any law of the country. Such an agreement can

Never become a contract. It is also void. Section 23 states that an agreement is

Illegal and void if it is forbidden by law or is of such a nature that, if permitted, it

would defeat the provisions of any law or is fraudulent or involves injury to

the person or property of another or the Court regards it as immoral or opposed

to public policy.

EXAMPLE

Gives money to B, a smuggler to buy smuggled goods. Such agreement

is illegal and the money cannot be recovered.

Obligation of Parties

Parties to this agreement are not responsible to perform their promises.

There is a punishment for the parties to the agreement according to the law also.

2. Formation

According to the formation, a contract can be divided into the following three kinds:

a) Express Contract

Acceptance of any promise is made in words, the promise is said to be expressed."

Section of the Contract Act provides that," in so far as the proposal or

en other words, a promise made in words is called an express promise. The

Express promises to result in express contracts.

It can also be defined in this way that an express contract is one in which

the parties directly state the terms of the contract orally or in writing at the time

the contract is made.

EXAMPLE

A tells on the telephone to B that he wants to sell his car for Rs. 3 lac and B

Informs A that he agrees to purchase the car, there is an express contract.

b) Implied Contract

Section 9 of the Contract Act provides that," in so for as such proposal or

Wise than in words, the promise is said to be implied."

Acceptance is made oth

An implied promise results in an implied contract.

It arises from the acts or conduct of the parties or course of dealings

Between them or from the circumstances.

An implied contract is one that is not made by words, written or spoken. It

arises when one person, without being requested to do so, renders services under

Circumstances indicating that he expects to be paid for them, and the other

person, knowing such circumstances, accepts the benefit of those services.

EXAMPLES

(a) A went into a restaurant and took a cup of tea. In this case, there is an

implied contract that he will pay for the cup of tea.

(b) M, a shoe shiner starts polishing their shoes of W in his presence, and W

allows him to do so. It is an implied contract and W is liable to pay.

c). Quasi Contract

In a quasi-contract, the rights and obligations do not arise as a result of an

agreement between the parties but the law imposes certain obligations under

Some special circumstances. It is based upon the principle of equity that a person

shall not be allowed to get benefits at the expense of another. In fact, it is not a

Contract but creates relations similar to a contract. The law recognizes such

Relations as contracts. It is also called a constructive contract.

EXAMPLES

(a) A finder of lost goods is under an obligation to find out the true owner and

return the goods.

(b) A, a trader, leaves goods at B's house by mistake, B treats the goods as his

own and uses them. It is a quasi-contract between A and B. B is bound to

pay for the goods.

3. Performance

According to performance, a contract can be divided into the following

four kinds:

a). Executed Contract

Executed means that which is done. A contract is said to be executed when

Both the parties have completely performed their obligations. It means that

Nothing remains to be done by either party under the contract.

EXAMPLES

(a) A. purchased a book from B for Rs. 200 and paid the price on the spot. It is

an executed contract because both parties have performed their duties.

(b) A agrees to paint a picture for B for Rs. 2,000. When A paints the picture

and B pays the price, the contract is said to be executed.

b). Executory Contract

Executory means that which remains to be done. In an executory contract

Something remains to be done. In other words a, contract is said to be executory

when both the parties to a contract have yet to perform their obligations.

EXAMPLES

(a) M sells his car to N for Rs. 2 lac and N pays Rs. 50,000 as advance and

promises to pay the balance later. M gives the possession of the car to N and

promises to transfer ownership on receipt of the full amount. The contract

between Mand N is executory,

(b) A agrees to teach B, from the next month and B promises to pay Rs. 800 to

A. It is an executory contract because the promises are yet to be performed.

c). Unilateral contract

A unilateral contract is one in which only one party has to fulfill his

obligations at the time of formation of the contract, the other party has already

fulfilled his obligations by doing some acts at the time of the contract or before

the contract comes into existence. Such a contract is also known as a contract with

executed consideration.

EXAMPLE

A promises to pay Rs. 1,000 to anyone who finds his lost bag. B finds the

bag and returns it to A It is a unilateral contract that comes into existence

when the bag is found. Now A has to pay. B has already performed his

obligation by finding the bag.

d). Bilateral contract.

A bilateral contract is one in which the obligations of both the parties to

the contract is outstanding at the time of its formation of the contract. In other

words it is a contract in which both the parties have yet to perform their

It is similar to an executory contract and is also known as a contract with executory

consideration

EXAMPLE

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

Void Agreement

According to Section 2(g) of the Act, "An agreement not enforceable by

aw is said to be void."

The void agreement does not create legal relations among the parties and

is void ab initio (from the beginning). It is not recognized by law. In the case of a void

agreement, there is the absence of one or more essentials of a valid contract except for Free

consent. Thus, an agreement with a minor is void ab-initio because a minor lacks

the capacity to contract. Similarly, an agreement without consideration is void

ab-initio except with the certain exceptions given in section 25.

Obligation of Parties

Section 65 provides that when an agreement is discovered to be void, any

person who has received any advantage under such agreement is bound to

restore it to the person from whom he received it. According to this section both

the parties will not be responsible for the performance of the agreement.

EXAMPLE

A promises to purchase the horse of B for Rs. 4,000. The horse was dead at

the time of the bargain, though neither party was aware of the fact. The agreement is

void and B must repay Rs. 4,000 to A.

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