Contract Act 1872 – Ejustice

Contract Act 1872 was taken from English Common Law, and it is implemented in Pakistan as Contract Act 1872 Pakistan to regulate contracts in Pakistan. The law defines where the promises become binding to the contracting parties as we enter into many contracts daily. Each party in the contract has some rights and duties, and Contract Act defines these duties and rights.

What is a Contract?

The Contract Act 1872 Pakistan defines a contract as an agreement enforceable by law. However, the following are the essential conditions that make an agreement or promise a contract.

Both the parties have the intention to make a contract.
One party offers the contract, and the other accepts it.
There must be a consideration for the contract.
Both the parties should have the capacity to make the contract.
There should be no pressure, and both parties make the contract with free consent.
The object on which they make the contract should be lawful.

The contract doesn’t need to be done in writing. Yet, specific statutory provisions require the contract to be in writing. However, the arbitration clause should be in writing.

Agreement

A contract is defined as an agreement enforceable by law. In an agreement, one party sends a proposal. The other party who accepts the proposal promises to abide by it. Here, the agreement means any promise that involves consideration of both parties, and both parties are bound to comply with the promise.

Elements of a Valid Contract

Following are the elements that are essential to make a contract valid.

It is essential to have a lawful offer by one party and a lawful acceptance by the other party.
The agreement that forms to be a contract should have the support of real and lawful consideration. It can be cash or any act of past, present, or future.
The parties/persons who make the contract must be competent. The persons are competent to make the contract if they have reached the age of majority, are sound mind, and are not disqualified from making a contract under any law.
Both parties’ consent in the contract must be free and genuine. It does not contain any fraud, undue influence, mistake, or coercion.
The object over which the contract is to be done should not be unlawful or illegal.
Agreements that are illegal or void by law are not enforceable; therefore, they are not valid contracts.
There must be the intention of both parties to create legal relationships.
The contract must include the certainty and possibility of performance.
The contract must also contain all legal formalities.

Validity Based Contract Types

A valid contract has all the essential elements of a contract, and it can be enforced by law.
A void contract is a contract that ceases to be enforced by law at some time. When done, it can be a valid contract and can be binding on the parties but may become void afterward.
A Voidable Contract is a contract that is optionally enforceable by some parties and not by other parties. If any essential element of a valid contract is missing, the law gives the right to the aggrieved party to accept or reject it. However, the contract remains enforceable till the aggrieved party rejects it.
A contract that is forbidden by law as it involves injury to anyone or is opposed to public policy is an Illegal Contract. These contracts are punishable and are void ab-initio.
A contract with all the elements that the law cannot enforce is called an unenforceable contract. It is neither voidable nor void.

Formation Based Contract Types

When parties agree on the terms of the contract expressly, either verbally or written, the contract is said to be an express contract.
A contract inferred from acts and conduct of parties and acceptance is done otherwise than words is known as an implied contract.
Another type of formation-based contract is the tactic contract, an implied contract in itself.
A legal obligation is also a contract that is created by law. It is known as Quasi-contract, and the intention of parties to enter the contract does not matter here.

Performance-Based Contract Types

When both parties in a contract have performed their part, it is known as an executed contract.
When both or one of the parties in a contract has to perform its part in the future, it is known as an executory contract. It also includes partial completed or totally unperformed contracts.
When only one party in the contract has to perform its part when both parties did it, it is a unilateral contract. The other party may have done its part when the contract was made or before it was made.
When both parties had an outstanding obligation to the contract when it was done, it is known as a bilateral contract.

What is Offer?

When a person shows his willingness to do something or abstain from doing anything, he is said to be making an offer. Showing willingness alone is not enough. The offeror must communicate his offer to the offeree. Besides, the offer should not contain terms taken as acceptance if the offeree does not agree.

The offeror must be legally competent to enter any contract. Some other person on behalf of the offeror can also make the offer. In usual cases, the offer is made to a specific person or persons, but it can also be made to the public in general. If the offer is made to the whole world, it will convert to a unilateral contract as the acceptance by the other party is not involved, and the announcement is for everyone, willing or non-willing.

Invitation to Offer

An offer is separate from the invitation to the offer. Invitation to offer is the way to induce the offer in an attempt to proceed towards the offer. If the offeree accepts the invitation to offer, it does not result in any contract, but it is an indication that the offeree is open for negotiation.

Classification of Offer

Different forms of offer are:

A General Offer is an offer made to the public in general.
A Special Offer is made to some specific person.
An offer made in exchange for an identical offer while being ignorant of each other is the Cross Offer.
A proposed modification or variation to the original offer is a Counter Offer.
An offer valid for a specific time is a Standing, Open, or Continuing Offer.

Offer and Acceptance

For a contract, it is a must to have an offer and its acceptance. If there is no offer, there will be no communication. If an offer is not accepted, there will be no contract. Following are some basic questions that the parties in a contract must deal with;

Is there any offer, or is it something less than the offer?
Is there any acceptance of the offer in a proper form?
If there is an acceptance?
Is the acceptance of the offer appropriately communicated to the offeror?

Statements that are not Offer

Following are the scenarios that do not qualify to be an offer.

Any statement proposed during negotiation without indication to make the other party bound to it before further negotiation.
A statement that invites the other party to make an offer.
A statement to lower the prices to invite other parties to make an offer.
Display of goods with price tags on a ship.

Termination of Offer

Some documents or statements are not offers. And until the offer is not accepted, it does not create any legal rights and can be terminated. Following are the principal modes in which the offer can be terminated.

The offeror revokes or withdraws the offer before it gets accepted.
The offeree rejects the offeror makes a counteroffer.
If the offer was only open for a specific time, it terminates automatically after the expiry of that time.

Revocation of Offer

The offeror can revoke the offer any time before the offeree communicates to the offeror about acceptance of the proposal. The offer cannot be revoked once the acceptance is complete. Following are the ways to revoke the offer.

The offeror can communicate the notice of revocation to the other party.
If the time is specified, the offer revokes after that time. If no time is specified, the offer can be revoked after a reasonable time and without acceptance.
The offer is revoked when the acceptor does not fulfill the precedent to acceptance.
When the offeror dies or becomes insane, and the acceptor comes to know of the fact of death or insanity, the offer is revoked.

Acceptance

When the offeree signifies his agreement or approval to the offer, it is said as acceptance. However, the following are the rules of acceptance that must be obeyed.

Acceptance should be complete and final.
The offeree must communicate the acceptance to the offeror.
The offeree must do the acceptance in the prescribed mode.
Acceptance should be made before the offer lapses.
Acceptance should also appear in the behavior of both parties.
The mere silence in response to the offer is not the acceptance.

Acceptance of the offer must be final, and it must also contain all the terms of the offer. However, it is not possible in the case of complex business contracts as it involves a series of proposals, counter-proposals, and agreements. Besides, in lengthy negotiations, it becomes hard to specify whether the offer or the acceptance is made or not.

Lawful Consideration

When the promisee does or abstains from doing anything at the desire of the promisor, such an act is known as consideration of the promise. Both parties must support an agreement with lawful consideration. The consideration is considered lawful until and unless;

It is forbidden by law.
Its nature will defeat the provisions of any other law if permitted.
It’s a fraud or injurious to the person or property of someone else.
It is immoral or against public policy as per the court.
It is in any form; money, services, goods, promise to marry, etc.

Competency To Contract

Section 11 of the Contract Act specifies a person’s competency to make a contract. As per the Act, a person is competent to make a contract if;

The person is not a minor.
He is of sound mind while making a contract.
The person is not personally disqualified by law to enter into a contract.

If a minor does any agreement, it is void. If a minor fraudulently misinterprets his age and obtains a loan, he may be required to refund it or do the compensation at the court’s discretion. A corporation’s competency to enter into a contract is subject to its limits due to its documents of incorporation.

Free Consent

Section 13 of the Contract Act specifies consent as when two or more people agree on the same thing in the same sense. Also, consent is free when it does not involve any coercion, undue influence, mistake, fraud, or misrepresentation.

When a party takes the other party’s consent through coercion, fraud, undue influence, or misinterpretation, it is voidable at the option of the affected party. It happens when one party can dominate the other party. In the case of fiduciary relationships, the law burdens the dominating party to prove no undue influence and protects the weaker party.

Section 15 of the Contract Act explains coercion as doing or threatening to do any act forbidden by law with the intention to make someone enter into the agreement.

Section 16 of the Contract Act explains Undue Influence as when a person is in a position to dominate the will of another, and they both enter into a contract that appears or has evidence to be unconscionable. Here the dominating party has to prove that there is no undue influence.

Section 17 of the Contract Act explains Fraud as a party entering into a contract or its agent deceiving another party or their agent to enter into the contract.

Section 18 of the Contract Act explains Misrepresentation as to a party to an agreement causing a mistake that is subject to the agreement.

In case of a mutual mistake related to material facts of the contract, the agreement becomes void. However, in case of a unilateral mistake, the agreement does not become void. Also, a mistake of law does not affect the contract’s validity.

Performance of Contract

In commercial contracts, it is better to specify the time of performance of the contracts. Here the Contract Act specifies two terms, Frustration and Novation.

Frustration

When some unexpected developments occur after the contract that makes the contract’s performance impossible, these may include destruction of the subject matter, change in the law, fundamental change in the circumstances, rise in the prices, etc. These developments do not cover the introduction of the permit system and changes in market conditions unless there is an escalation clause.

In case Frustration happens, the contract automatically terminates. Also, the parties get an exemption from the performance of the contract further. In case any party has received any benefit, it must restore it or do compensation to the other party.

Novation

When both parties replace the old agreement with a new agreement, it is known as Novation.

Agency

When a person or party (known as the Principal) engages another person (known as the Agent) to act on his behalf or manage his business, it becomes Agency. The Law of Agency regulates the legal relationship with which the agent works on the Principal’s behalf. It also specifies external business relations with the Agent’s power and internal relations between Principal and agent. Check out the more services Pages on Ejustice

An Agency may come to an end;

When the Principal revokes the Agency.
The agent leaves the business of the Agency.
In case the business of job of the Agency completes.
The Principal is declared insolvent.

When the Agency comes to an end, the party that does it must notify the other party. Otherwise, the party which fails to send the notice has to pay the damages. The termination of the Agency does not take effect till the agent gets to know about it

Remedies for Breach of Contract

When a party breaks the contract, it is entitled to compensate the other party who has suffered from such breach. In case of breach of a contract, the remedies include damages, specific performance of the contract, and injunction.

Damages

Damages or losses that both parties knew would occur in case of breach of the contract when they agreed to the contract. It does not include any compensation for any indirect loss.

Specific Performace of the Contract

The Specific Relief Act 1877 deals with such cases. Here, the court directs the defaulted party to perform the very obligation. However, this relief only happens in exceptional cases.

Injunction

The Contract Act also deals with a permanent injunction. However, temporary injunctions are dealt with Code of Civil Procedure 1908.

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Contract Act 1872 – Ejustice

What is a Contract?