Business Law Chapter 1

1. Business LawChapter 1 Contract and its kinds By: Fazal-e-Malik

2. Definition of contract Some definitions are as follows: Pollack: “Every agreement and promise enforceable at law is a contract”. Salmond: “A contract is an agreement creating and defining obligation (duty, responsibility) between the parties”. Sir William Anson: “An agreement enforceable by law made between two or more persons, by which rights are acquired by one or more to acts or forbearance (with patience)on the part of other or others By: Fazal-e-Malik

3. Conti… Sec. 2(h) of contract act provides “An agreement enforceable by law is a contract.” Thus a contract consists of two elements: • Agreement • Enforceability by law By: Fazal-e-Malik

4. 1. Agreement Section 2(e) defines agreement as, “Every promise and set of promises, forming the consideration for each other, is an agreement.” Section 2(b) defines promise as, “ When the person to whom the proposal (offer) is made signifies (show) his assent (agree) upon it, the proposal is said to be accepted. A proposal, when accepted, becomes a promise.” A promise comes into existence when one party makes a proposal to the other party, gives consent (permission). Therefore, a contract is an agreement, an agreement is a promise and a promise is an accepted proposal. By: Fazal-e-Malik

5. EXAMPLE A offers to sell his car to B for 200,000 AFN,B gives acceptance. It is an agreement. By: Fazal-e-Malik

6. 2. Enforceability An agreement is enforceable if it is recognized by court. In order to be enforceable by law, the agreement must create legal obligations between the parties. Thus, the term agreement is wider than a contract. All contracts are agreements but all agreements are not contracts. Agreements are of two types: • Social Agreements: Social agreements 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. By: Fazal-e-Malik

7. Conti… • Legal agreements: legal agreements are enforceable because they create legal obligations between the parties. In such agreements the parties intend to create legal relations. All business agreements are contracts as there is an intention to create legal obligations. By: Fazal-e-Malik

8. Examples A invites B a dinner. B accepts the invitation but does not attend. A cannot sue B for damages. It is a social agreement. A promises to sell his car to B for 200,000 AFN. It is a legal agreement because it creates legal obligations. This agreement is a contract. By: Fazal-e-Malik

9. Essential of a valid Contract: A valid contract is binding (compulsory) and enforceable. In a valid contract, all the parties are legally bound to perform the contract. Thus, a contract can be enforced by either of the parties. If one party refuse to perform the contract , the other can enforce it through court. To be enforceable, an agreement must own the essentials of a valid contract. By: Fazal-e-Malik

10. Conti… According to section 10, “All agreements are contracts if they are made by the free consent (permission) of parties, competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void (invalid). Where necessary, the agreements must satisfy the requirements of law regarding writing, attestation.” The essentials of valid contracts are as follow: By: Fazal-e-Malik

11. Conti… 1. Offer and Acceptance: For an agreement, there must be a lawful offer by one party and lawful acceptance of that offer by the other party. The term lawful means that the offer and acceptance must satisfy the requirements of the Contract Act. Example: A offers to sell his cycle to B for 2,000 AFN, this is an offer. If B accepts this offer, there is an acceptance. 2.Legal Obligation: The parties to an agreement must create legal obligations. It means that if one party does not fulfill his/her promise, he/she shall be liable for breach of contract. It is presumed (supposed) in commercial agreements that parties intend (aim) to create legal relations. By: Fazal-e-Malik

12. Examples • A offers to sell his watch to B For 200 AFN. B agrees to buy. It is a contract as it creates legal obligation. • A husband promised to pay his wife an allowance of $30 every month. Later the parties separated and the husband refused to pay. The wife sued. Held, that the wife was not entitled, as agreement did not create legal obligations. (Belfour vs. Belfour 1919) By: Fazal-e-Malik

13. Conti… • Lawful Consideration For a valid contract, consideration should be lawful. Consideration is the price paid by one party for the promise of the other party. An agreement is enforceable only when both the parties give and take something. That something given or taken is called consideration. • A agrees to sell his house to B for 1,000,000 AFN, For A one million AFN is the consideration and for B house is the consideration. By: Fazal-e-Malik

14. Conti… • A promises B to get him a government job and B promises to pay 100,000 AFN. The agreement is (void, invalid,) as the consideration is unlawful. • Capacity of parties An agreement is enforceable if it is made by parties who are competent to contract. To be competent to contract, it is essential that the parties are of the age of maturity, have sound mind and are not disqualified from contracting by law. Contract by a person of unsound mind is void ab-initio (from the beginning). By: Fazal-e-Malik

15. Examples • M, a person of unsound mind agrees to sell his house to S for 200,000 AFN. It is not valid contract because M is not competent to contract. • A, aged 20 promises to sell his car to B for 300,000 AFN. It is a valid contract because A is competent to contract. • Free Consent For valid contract, it is essential that the consent (permission) of parties must be free. Consent is free when it is not obtained by coercion (force), undue (unwanted) influence, fraud, misrepresentation or mistake. If the consent of either the parties is not free, the agreement cannot become a contract (Sec. 14). By: Fazal-e-Malik

16. Example A compels (force) B to enter into a contract at gunpoint. It is not valid contract as the consent of B is not free. • Lawful Object It is necessary that agreement is made for a lawful object. The object of agreement must not be fraudulent, illegal, immoral, imply injury to the person or property of another. Every agreement with unlawful object or consideration is illegal and therefore void. (Sec. 23) By: Fazal-e-Malik

17. Examples A promises to pay 5,000 AFNif B Beats C. the agreement is illegal as its object is unlawful. A hires a house to use for gambling. The object of the agreement is unlawful, so the agreement is illegal and void. • Writing and registration: A contract may be oral or in writing. It is preferable that the contract be in writing because it is easy to prove in court. If required by law, a particular contract must be in writing, signed, attested by witnesses and registered; e.g. sale and mortgage of land. By: Fazal-e-Malik

18. Examples • X verbally promises to sell his book to Y for 200 AFN it is a valid contract because the law does not require it to be in writing. • A verbally promises to sell his house to B. it is not a valid contract because the law requires it to be writing. • Certainty (sureness) of terms: According to section 29, “Agreements, the meaning of which is not certain or capable of being made certain, are void.” The terms of an agreement, must be clear, complete and certain. If the terms are uncertain, the agreement is void. By: Fazal-e-Malik

19. Examples • A promises to sell 20 books to B without specifying their titles. The agreement is void because the terms are not clear. • O agreed to purchase a Car from S. the price was to be paid over two years. Held, there was no contract as the terms were not certain about rate of interest and mode of payment (Scammel Vs. Ouston 1941) • Possibility of Performance: A valid contract must be capable of being performed. An agreement to do an impossible act is void. If the act is legally or physically impossible to perform, the agreement cannot be enforced by law (Sec. 56) By: Fazal-e-Malik

20. Examples • A agrees with B to discover a treasure by magic, the agreement is not enforceable. • A agrees with B to put life into B’s dead brother. The agreement is void as it is impossible to perform. • Not Expressly Declared Void: The agreement must not be one of those agreements which have been expressly declared to be void by the law. Section 24-30 explain certain agreements which have been expressly declared to be void, e.g. agreement in restraint (command) of trade and wager (gamble) etc. are expressly declared void. By: Fazal-e-Malik

21. Examples A promises to close his business on the promise of B to pay him 200,000 AFN is a void agreement because it is in restraint of trade. A promises to pay 2,000 AFN to B if France wins the football final. The agreement is void being a wagering agreement. By: Fazal-e-Malik

22. Kinds of Contract The contracts can be classified into the following four categories. 1. According to enforceability According to enforceability, a contract can be divided as under: a. Valid Contract A valid contract is enforceable by law. An agreement becomes enforceable by law when all the essentials of a valid contract are present. By: Fazal-e-Malik

23. Conti… Obligation of parties In valid contract, all parties are legally responsible for the performance of the contract. If one of the parties breaches the contract, the other party can enforce it through the court of law. By: Fazal-e-Malik

24. Example A agrees to sell a car to B. if it fulfills all the essential of a contract, it is a valid contract. If A fails to deliver the car. B can sue him and if B fails to pay, A can sue him. b. Void contract The word void contract means not binding in law. Section 2(j) defines “ A contract which ceases (stop, finish) to be enforceable by law becomes void, when it ceases to be enforceable.” It means that a void contract is not void from the beginning. It is valid contract when it is made subsequently (After, later) it becomes void due to certain reasons. By: Fazal-e-Malik

25. Conti… Obligation of Parties In void contract both the parties are not legally responsible to fulfill the contract. Under this contract the party who has received any benefit is bound to return it to the other party. A contract becomes void under the following circumstances: By: Fazal-e-Malik

26. Impossibility of Performance A contract becomes void due to impossibility of performance. A contract becomes void before performance when it becomes impossible to be performed by any party due to any reason. (Sec. 56) Example: A agrees to sell his house to B after two days. The house is burnt next day. The contract becomes void. By: Fazal-e-Malik

27. Subsequent illegality A contract becomes void by subsequent illegality. A contract may become illegal before performance due to certain reasons. (Sec. 56) Example: A agrees to sell 100 bags of wheat to B. Before delivery the government bans private trade in wheat. The contract becomes void. By: Fazal-e-Malik

28. Rejection of a voidable Contract A voidable contract becomes void when the party whose consent is not free rejects the contract. (Sec. 19) Example: A forcibly buys B’s car for 20,000 AFN. The contract is avoidable at the option of B. B may accept or reject. If B rejects the contract it becomes void. By: Fazal-e-Malik

29. Impossibility of depending event The performance of a contingent (condition) contract depends upon the happening or non-happening of a certain event. It becomes void when that event does not happen. (Sec 32) Example: A contract to give 100,000 AFN to B, if B gets admission in Oxford University. B fails to get admission. The contract becomes void. By: Fazal-e-Malik

30. Conti… c. Void Agreement An agreement not enforceable by law is said to be void. The void agreement does not create legal obligations among the parties. An agreement which is void from the beginning is void ab-initio. In void agreement, there is absence of one or more essentials of valid contract except free consent. An agreement with minor and an agreement without consideration is void from the beginning. (Sec.2(g)) By: Fazal-e-Malik

31. Conti… Obligation of parties In void agreement, the party who has received any advantage is bound to restore (return) it to the party from which he/she received it. Both the parties are not responsible for the performance of the agreement. Example: A promises B to buy a Horse from B for 80,000 AFN. The Horse was dead before the contract. The parties were unaware. The agreement is void. By: Fazal-e-Malik

32. Voidable Contract “An agreement which is enforceable by law at the option of one or more of the parties thereto but not the option of the other or others, is a voidable contract.” (Sec. 2 (i)) A contract is voidable when consent of one of the parties is not free. It is a valid contract until it is avoided by the party having the right to avoid it. If one party decides to confirm it, it remains valid. A contract becomes voidable under the following circumstances: By: Fazal-e-Malik

33. Conti… A. A contract becomes voidable when the consent of one or more of the parties to a contract is obtained by coercion, undue influence, misrepresentation or fraud. (Sec. 15-18) Examples: a. A compels B to sell his car at gunpoint. The contract is made by coercion and is voidable at the option of B. b. A deceives B by stating that his factory produces 1,000 kg of sugar daily and induces (encourage) B to buy it. The contract is voidable at the option of B. By: Fazal-e-Malik

34. Conti… B. When one party promises to do something for the other party but the other party prevents him from performing his promise, the contract becomes voidable at his option. (Sec. 53) Example: A contracts to paint B’s house. A is ready to paint but B prevents him from doing so. This contract is voidable at the option of A. By: Fazal-e-Malik

35. Conti… C. When a party to the contract promises to do a certain thing within a specified time, but fails to do it, then the contract becomes voidable at the option of the promisee, if time is essence (very necessary) of the contract. (Sec.55) Example: A contracts to paint B’s house within one weak. A, does not come within the specified time. The contract is voidable at the option of B. By: Fazal-e-Malik

36. Conti… Obligation of Parties The following are obligation of the parties: a. It is a valid contract for both the parties if it is not rejected by party having the right to reject. b. The law gives an option to one of the parties to avoid it. c. The party entitled to cancel the contract is not bound to cancel. If he confirms it, the other party remains bound to perform. By: Fazal-e-Malik

37. Conti… d. The aggrieved (sad, upset) party can get damages from the other party. e. If one party has received some benefit, he must return it to other. Burden Proof The burden proof lies on plaintiff i.e. the aggrieved party. It means that the party, who claims that his consent is not free, has to prove in the court of law. If he fails to prove, the contract remains valid. By: Fazal-e-Malik

38. e. Unenforceable Contract An unenforceable contract is that contract which cannot be enforced in a court of law because of some technical defects such as absence of writing, registration, requisite stamp etc. When these defects are removed, the contract can be enforced. Example: A borrows One billion AFN from B and makes a pronote on a 10 AFN stamp paper. It is unenforceable because pronote is undervalued. By: Fazal-e-Malik

39. Conti… Obligation of Parties: In an unenforceable contract, the parties may perform the contract. But in case of breach of such contract, the aggrieved party is not entitled to legal remedies. By: Fazal-e-Malik

40. f. Illegal agreement An agreement is illegal when its performance is forbidden (not allowed) by any law. Such an agreement can never become a contract. An agreement is illegal and void if it is forbidden by law or is such of a nature that is not permitted, it would defeat the provisions of any law or is fraudulent or involves injury to the person or property of another or the Court regards it as immoral or opposed to public policy. (Sec. 23) By: Fazal-e-Malik

41. Example A gives money to B, a smuggler to buy smuggled goods. The agreement is illegal and the money cannot be recovered. Obligation of parties The parties to the illegal agreement are not responsible to perform their promises. There is punishment for the parties according to law. By: Fazal-e-Malik

42. Conti… 2. According to Formation According to formation, a contract has the following three kinds: a.Express Contract: Express contract is one which is expressed in words spoken or written. When such a contract is formed, there is no difficulty in understanding the rights and obligations of the parties. In express contract, the parties directly state the terms of the contract. (Sec.9) By: Fazal-e-Malik

43. Conti… Example: A tells on telephone to B that he wants to sell his car and B informs A that he agrees to buy the car, it is an express contract. b.Implied Contract: An implied contract is made otherwise than by words spoken or written. It arises from acts, conduct of parties, course of dealings or circumstances. It arises when one person, without being requested to do so, renders services under circumstances indicating that he expects to be paid for them and the other person knowing such circumstances accepts the benefit of those services. (Sec. 9) By: Fazal-e-Malik

44. Examples i. A went into a restaurant and had a cup of tea. It is an implied contract and A will pay for the cup of tea. ii. M, a shoe shiner state polishing the shoes of W in his presence, and W allows him to do so. It is an implied contract. c.Quasi Contract: In a quasi contract, the law imposes certain obligations under some specific circumstances. It is based upon the principle of equity that a person shall not be allowed to get benefit at cost of another. In fact, it is not a contract but creates relations similar to contract. It is also called constructive contract. By: Fazal-e-Malik

45. Examples A, finds lost goods of B. A is bound to return the goods to B. A leaves his goods at B’s house by mistake, B treats them as his own and uses them. It is quasi contract. B is bound to pay for the goods. 3. According to Performance According to performance a contract is of the following two kinds. a. Executed Contract b. Executory Contract By: Fazal-e-Malik

46. a. Executed Contract A contract is said to be executed when both the parties have completely performed their obligations. It means that nothing remains to be done by either party under the contract. Examples: a. A buys a book from B. A delivers the books and B pays the price. It is an executed contract. b. A agrees to paint a picture for B for 2,000 AFN. When A paints the picture and B pays the price, the contract is said to be executed. By: Fazal-e-Malik

47. b. Executory Contract In an executory contract something remains to be done. In other words a, contract is said to be executory when both the parties to a contract have yet to perform their obligations. Examples a. M sells his car to N for 200,000 AFN. N is not yet paid the price and M has not delivered the car. The contract between M and N is Executory. b. A agrees to teach B, in May and B promises to Pay 5,000 AFN to A. it is an executory contract because the promises are yet to be performed. By: Fazal-e-Malik

48. Conti… 4. According to Parties According to parties a contract may be of the following two kinds: a. Unilateral Contract b. Bilateral Contract By: Fazal-e-Malik

49. a. Unilateral Contract In a unilateral contract only one party makes a commitment. In other words, it is a contract where only one party is bound but the other party chooses to be bound by it. Example: A promises to pay 1,000 AFN to any one who finds his lost bag. B finds the bag and returns. A. it is a unilateral contract which comes into existence when the bag is found. By: Fazal-e-Malik

50. b. Bilateral Contract It is a contract where both parties are bound by it, as soon as the contract is made. In other words it is a contract in which both the parties have yet to perform their obligations. Example: A promises to paint a picture for B and B promises to pay 5,000 AFN to A. By: Fazal-e-Malik