Essentials of a contract
The general law of contract in Pakistan
(a) intention to create a contract;
(b) offer and acceptance;
(c) consideration;
(d) capacity to enter into a contract;
(e) free consent of the parties;
(f) lawful object of the agreement;
Writing is not essential for the validity of a contract, except
where a specific statutory provision requires writing. An arbitration clause
must be in writing.
Offer and acceptance It is a
essential ingredient of a contract, that there must be a offer and its
acceptnce. If there is no offer, there is no contact, because there is no
meeting of minds. Again, if there is an offer by one party, but it is not
accepted by the other party or if the ostensible acceptance of the offer is
defective, then also, there is no agreement and therefore no "contract".
These propositions may appear to be elementary. A large bulk of
commercial litigation, however, requires the parties to deal with the basic
questions, which are :
(a) Whether there has there been an offer at all in the particular
case, or whether there is something less than an offer;
(b) If there is an acceptance; whether it is in the proper
form;
(c) Whether there has been an acceptance of the offer;
(d) Whether the acceptance has been communicated to the
offeror.
Concept of offer An
offer (or a "proposal") is not defined by statute. It is generally
understood as denoting the expression, by words or conduct, of a willingness to
enter into a legally binding contract as soon as it has been accepted, usually,
by a return promise or an act on the part of the person (the offeree), to whom
it is so addressed.
An acceptance, in relation to an offer, is a final and unqualified
expression of assent to the terms of the offer.
Offer, followed by acceptance, is an "agreement", if an
agreement is enforceable by law, it is a "contract".
Offer by and to whom An
offer must be made by a person legally competent to contract or on his behalf,
by someone authorised by him to make the offer. It is usually made to a person
(or to a number of persons), but it can be made to the entire world, as
happened in Carlill v. Carbolic-Smoke Ball. Co. ,
[(1893) 1 QB 256: (1881-94) All ER 127]. In that case, the defendants
(manufacturers of medicinal smoke balls) promised to pay £100 to anyone who,
after having bought and used their smoke balls, caught influenza. Plaintiff did
so and caught influenza. Plaintiff was held entitled to recover. It was no
defence that there was no particular individual to whom the announcement was
addressed. Such contracts are sometimes called "unilateral contracts"
– not a very happy term, because a contract can never be
"unilateral". There must be two parties. It is really a case of
innumerable offers, made to all potential readers of the
announcement.
Statements which are not offers Every
statement of intention is not an offer. A statement must be made with the
intention that it will be accepted and will constitute a binding contract.
Following are not offers:–
(a) Statement made during negotiation, without indicating that the
maker intends to be bound without further negotiation.
(b) A statement which invites the other party to make an offer
(e.g., a notice inviting tenders).
(c) Statement of lowest price. [Harvey Australia
(d) Display of goods in a ship with price tags. (It is merely an
invitation to make an offer, so that the trader may not accept the offer, if
the price is incorrectly marked. [Fisher v. Bell
Intention to be bound A
definite intention to be bound is highlighted in Gibson v. Manchester City
Council, [(1979) 1 All ER 192]. In 1970, M adopted a policy of selling council
houses to tenants. In February, 1971, the City Treasurer wrote to G, stating
that council "may be prepared to sell the house to you at £2,180
(freehold)". The letter asked G to make a formal application. This he did,
and the council took the house off the list of council-maintained properties.
Before the completion of the normal process of preparation and exchange of
contracts when property is sold, control of the council changed hands and the
policy of selling council houses was reversed. The new council decided only to
complete those transactions where exchange of contracts had already taken
place. In the UK Court of Appeal, it was held (by a majority) that a contract
had been made between G and M. Lord Denning suggested that "there is no
need to look for strict offer and acceptance" in every case; a price had
been agreed and the parties intended to carry through the sale. However, the
house of Lords held that the February letter was (at the most) an
"invitation" of treat. G's application was an offer and not an
acceptance. (Informal agreements for the sale of houses are not likely to be
held as binding contracts, because, otherwise, buyers may find themselves
committed before securing mortgage finance).
Termination of offer Some
parties clearly indicate that their statements or documents do not constitute
offers, e.g., estate agents."These particulars do not form, nor constitute
any part of an offer, or a contract, for sale". Until an offer is
accepted, it creates no legal rights and it may be terminated at any time in a
variety of ways. Principal modes of termination of an offer are:
(a) by the offeror revoking (or withdrawing) it before
acceptance;
(b) by the offeree rejecting the offer outright or by making a
counter-offer;
(c) by lapse of time, if the offer is stated to be open only for a
fixed time;
In Great Northern Rly . Co. Ltd.
v. Witham, [(1873) LR 9 CP 16]. Great Northern Railway advertised for tenders
for the supply of such stores as they might require for one year. W submitted a
tender to supply the stores in such quantities as Great Northern Railway might
order from time to time and his tender was accepted. Orders were given for some
time, but eventually was given an order which he refused to carry out. It was
held that W was in breach. A tender of this kind was a standing offer which was
converted into a series of contracts as Great Northern Railway made their
orders. W might revoke his offer for the remainder of the period covered, but
must supply the goods already ordered. Revocation of an offer is effective,
only when communicated to the offeree.
Quality of acceptance Acceptance
of an offer must be absolute and must correspond with the terms of the offer.
This rule a key constituent of the basic premise, does not always accord with
the realities of complex business contract negotiations today. Such negotiations
may indeed proceed through a series of proposals, counter-proposals,
withdrawals, variations and qualifications, before agreement (or otherwise) is
reached. When parties carry on lengthy negotiations, it may be hard to say
exactly when an offer has been made and acceptance. Butler Machine Tool Co.
Ltd. v. The Ex Cello Corp. (Eng) Ltd. (1979) 1 WLR 401]. the court must look at
the entire correspondance to decide whether an apparently unqualified
acceptance did, in fact, conclude the agreement.
A conditional offer, if accepted, must be accepted along with all
the conditions.
However, in regard to international agreements governed by the
U.N. Convention on contracts for international sale of goods, there is a slight
qualifications, in as much as, article 19 of the Vienna Convention provides
that non material variations between offer and acceptance do not make a
difference.
Consideration As a rule, An agreement without
"consideration" is void. The Act contract defines
"consideration" as follows:
"When, at the desire of the promisor, the promisee or any
other person has done or abstained from doing, or does or abstains from doing,
or promises to do or abstains from doing, something, such act, abstinence, or
promise is called a consideration for the promise."
A mere promise to give a donation, either orally or in writing, is
not enforceable. Settlement of bona fide but doubtful claims involves a bargain
between the contracting parties and is, therefore, based on consideration.
Money is not the only form of consideration. A consideration may consist
sometimes in the doing of a requested act, and sometimes in the making of a
promise by the offeree. Forbearance to sue at the promisor's desire constitutes
good consideration.
Consideration is not required for a promise to compensate, wholly
or in part, a person who has already voluntarily done something for the
promisor or something which the promisor was legally compellable to do. It is
also not required for a written and signed promise by the debtor (or his duly
authorised agent) to pay a time-barred debt to the creditor.
Capacity of the parties A
person is competent to contract if, at the time of making it, he is of sound
mind, major and not disqualified from contracting under law.
Where he has not attained the age of 18 years (or being under a
court of wards, has not attained the age of 21 years), he cannot contract.
Agreements made by minors are void. Minors cannot, on attaining majority,
ratify agreements entered into during their minority. But if a minor makes a
fraudulent misrepresentation about his age and obtains a loan, he can be
required (at the discretion of the court) to refund it or to make compensation
for it.
An unadjudged lunatic can enter into a valid contract during lucid
intervals.
A corporation can contract subject to limits imposed by its
documents of incorporation.
Consent When consent of a party to a transaction is procured by
coercion, undue influence, fraud or misrepresentation, the agreement is
voidable at the option of the party whose consent was so procured. Cases of
undue influence arise where the transaction is ex facie unconscionable and one
party was in a position to dominate the will of the other. Where parties are
bound by a fiduciary relationship, (as in the case of father and son, doctor
and patient, master and servant, advocate and client), the law protects the
weaker party, throwing on the other party the burden of proving that no undue
influence was exercised.
Mutual mistake in respect of material facts in the formation of a
contract renders the agreement void. A unilateral mistake, however, does not
render an agreement void. Nor does a mistake of law affect its
validity.
Unlawful agreements An agreement whose
consideration or object is unlawful, is void. The consideration or object of an
agreement is unlawful, if it is forbidden by law or it would defeat the
provisions of any law or is fraudulent, or involves or implies injury to the
person or property of another or the court regards it as immoral or opposed to public
policy.
A party to an illegal agreement who has advanced money under it to
the other party is entitled to recover it, if the illegal purpose has not been
partly or wholly carried out.
Agreements in restraint of marriage, trade and legal proceedings
are void. The seller of the good-will of a business may, however, validly agree
with the buyer to restrain from carrying on a similar business within specified
local limits, provided the limits are reasonable.
Persons bound by the contract Promises bind the
promisors and in case of death of promisor (before performance) their legal
representatives, unless there is contract to the contrary, or the nature of the
contract is such that it depends upon the personal qualifications of any
party.
Performance and frustration There are special
provisions dealing with the case where time is the essence of contract. In
commercial contracts, it is better to provide specifically that time is of the
essence. A contract is validly discharged by faithful performance, by release
or remission by the promisee, by "frustration" (under law) or by
"Novation" (by agreement).
Frustration occurs when unexpected developments subsequent to the
making of the contracts render performance impossible. Novation occurs when the
old agreement is replaced by a new agreement.
Subsequent events and frustration If,
subsequent to the making of the contract, some event happens, which the parties
could not control so that the agreement cannot be performed, the contract is
said to be "frustrated"because the contract then becomes impossible
of performance. Frustration may occur by a change in the law, destruction of
the subject-matter, supervening incapacity of the contracting party to perform
the contract or fundamental change in circumstances after the contract is made.
Mere strike, lock-out in the factory, rise in price of the contracted goods or
other commercial difficulties do not, as such, render the contract
"impossible" of performance. Introduction of the permit
system by statute does not absolve the promisor from supplying the goods. He
must make reasonable efforts to procure the permit to fulfill his agreement.
Change in market conditions also does not justify a supplier in demanding a
price higher than that stipulated, unless there is an "escalation"
clause.
Frustration leads to automatic termination of the contract, and
exempts the parties from performance or further performance of the contract
without rendering any of them liable for damages. Where, however, any party has
received any benefit under the agreement, he must restore it or make
compensation for it to the other party.
Remedies for breach of contract
The principal remedies for breach of contract are:
(a) damages;
(b) specific performance
of the contract; and
(c) injunction.
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, being loss or
damages 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 of damage sustained by reason of the breach.
The same principle applies for determining damages for breach of
an obligation arising from quasi-contract.
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 the contract must be taken into account. This is referred
to, as the duty to mitigate.
Illustration A stipulation for increased interest from
the date of default may be regarded as a stipulation by "way of
penalty", if the amount is excessive. The court is empowered to reduce it
to an amount reasonable in the circumstances.
Specific performance and injunctions In
certain special cases dealt with in the Specific Relief Act, the court may
direct against the party in default "specific performance" of the
contract, that is to say, the party may be directed to perform the very
obligation which he has undertaken, by the contract. This relief is awarded
only in exceptional cases. That Act also deals with permanent
injunctions. Temporary injunctions are governed by the provisions of order of
the Code of Civil Procedure, 1908.
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