University of Management &

Technology
School of Commerce and Accountancy

SEMESTER FALL– 20
INTRODUCTION TO BUSINESS LAW
Open Book Examination
Course Instructor: Mr. Muhammad Farooq Awan

Time 8:00 AM to 12:00 AM

Section: QCA Program: BSACT/BS(BMA)/BAC/BCOM(H) Date:17 FEB 2021

Time Allowed: 4 Hours Maximum Marks:40

TO BE FILLED IN BY THE STUDENT

Student Name: Mustafa Saeed Registration No: F2019383008

Instructions: Briefly answer the following questions. Provide a justification of your point of
view by using examples where needed to support your argument.

Question No. 1
Define the term sale, what are the essentials of valid sale, also distinguish between sale and
agreement to sell.
Sale
Term of Sales refers to the agreement between the buyer and seller of goods and services. The
term of sales includes the conditions the parties agree on price, quality, quantity, delivery,
warranty, payment terms and other special conditions. In a legal sense, terms of sale refers to the
point where the sellers have fulfilled their obligations so that the goods can be delivered to the
buyer. The special conditions include the limitation of liability, refunds policy, Intellectual
property rights, assignment and sub-contracting.
The term ‘sale’ in a general business context involves an exchange of money or value for either a
transfer of the ownership of a good or property or the entitlement to a service.

Essentials of valid sale

Elements that must be present in order to make a sale valid are:

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1. The competence of both the seller and the buyer to enter into a contract
2. Mutual agreement on the terms of exchange
3. Something that is capable of being transferred (a good, an ownership title, entitlement to
a certain service, etc)
4. A consideration in money (or its equivalent in value) paid or promised

Terms of Sale Example

Sophia imports and exports goods to China. She has a hard job; making sure deals are
succinct, products are delivered, governments are appeased, and customers are satisfied. She
deals closely with terms of sale; 2 10 net 30, delivery paid for by the seller, and she covers the
duties.

On a recent shipment of consumer products she is reviewing the terms of sale agreement. This
tells her all of the important information regarding the purchase. She makes sure to read the fine
print.

In this document she finds a typo which makes the terms unclear. Rather than accepting this she
contacts the seller. Sophia knows better than to let this problem go without fixing. Sophia finds,
through this, that she and the delivering company have different expectations. Luckily she found
this now, so she begins renegotiation. She is able to recover a better deal than she was originally
presented with. All of this because she checked the terms of sale.

Main Differences between Sale and Agreement to Sell 

No                           Sale Agreement to Sell  

1
Meaning: where the Property Meaning:  where the transfer of
immediately transferred from seller property in goods is to take place in
to buyer, it is called ‘Sale’.    future, from seller to buyer is called
‘Agreement to Sell’.  

2 Definition: Sale can be defined as Definition: in case where the seller

“transfer of ownership in the goods agrees with the buyer to transfer the
by the seller to buyer in exchange of title of ownership on a future date
price paid or promised or partly paid upon satisfying certain condition is
and partly promised.   called as ‘Agreement to Sale’.   

3 Example: ‘X’ sold 10 bags of Wheat Example:  ‘X’ agrees to sell 10 bags of
to ‘Y’ against payment of Rs. 3,000.  wheat to ‘Y’ for Rs.3,000  after
getting  the stock.

4 In contract of sale property in goods In agreement to sell, property in goods

transfers from seller to buyer does not transfer immediately
immediately

  

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 5 Contract of sale is an executed Agreement to Sell is an executory
contract contract

6 It creates right in rem  It creates rights in personam

7 The seller can sue the buyer for case The seller can sue the buyer only for
of breach of contract. damages but not for the price.

8 Sale is liable for the Sale Tax. Agreement to sale is not liable for the
Sale Tax.

9 Seller has no right of resale. Seller has right of resale.

 

10 If the goods are destroyed, the loss The loss fall on the seller even though
is borne by the buyer even though the goods are in the possession of the
the goods are in the possession of buyer.  
the seller.
(10)
Questio
n No. 2
What are the different Modes by which a contract may be discharged and what remedies
are available to an aggrieved party against guilty party for breach of contract? Explain by
adding examples.

The modes by which a contract may be discharged

Discharge by Performance:
 Performance is the natural modes of discharge. When the parties to a contract perform their
shares of the promises, the contract is discharged. If only one of the several parties performs the
promise, he alone is discharged. Performance of contract is the most usual mode of its discharge.
Performance may be,
a. Actual performance
b .Offer of performance or tender
2. Discharge by Agreement or consent:
 A contract can also be discharged by the fresh agreement between the same parties. A contract
may be terminated by agreement in any of the following ways:
a. Novation- Novation of contract means replacement of an existing contract by another
contract. In novation the parties may change. If the parties are a not changed then the material
terms of the contract must be altered the new contract because a mere variation of some of the
terms of a contract is not novation but alteration.
b. Alteration- Alteration of a contract takes place when one or more of the terms of the
contract are changed. If a material alteration in a written contract is made with the consent of all
the parties the original contract is discharged by alteration and a new contract takes its place. An
alteration may be a change in the amount of money, the rate of interest, or the names of the
parties. In such cases, the old contract may be discharged.

3. Discharge by Subsequent Impossibility:

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Initial Impossibility: According to section 56, “An agreement to do impossible act is void
ab-initio. “ It means agreement which is obliviously impossible cannot be binding, e.g. an
agreement to discover treasure by magic is void agreement.
Subsequent Impossibility: Sometimes, a contract capable to be performed after formation
becomes impossible or unlawful and as a result void.
4. Discharge by laps of time
 A contract is discharged by lapse of time. The Limitation Act, 1908 laws down that a contract
should be performed within a specified period. If the contract is not performed and no legal
action is taken by the promise within the period of limitation, he is deprived of his remedy at
law; the contract is termination in such a case.
5. Discharge by Operation of Law
 A contract terminates by operation of law in the following cases:
a. Insolvency: The insolvency Act for discharge of contract under particular circumstances.
Where the court declares a person as insolvent, the rights and duties of such person are
transferred to the officer of court, known as Official Receiver, after the order of the court such
person is discharge from his liabilities incurred before his insolvency.
b. Merger: Merger takes place when an inferior right available to a party mergers into a
superior right available to the same party under, some other contract. As a result of merger the
former contract stands discharged automatically.
6. Discharge by Breach of Contract
 A contract must be performed according to its terms. But where the Promisor fails to perform
the contract according to the terms of the contract, there is breach of contract by him.

What remedies are available to an aggrieved party against guilty party for
breach of contract?
There are several remedies for breach of contract, such as award of damages, specific
performance, rescission, and restitution. In courts of limited jurisdiction, the main remedy is an
award of damages. Because specific performance and rescission are equitable remedies that do
not fall within the jurisdiction of the magistrate courts, they are not covered in this tutorial.
There are two general categories of damages that may be awarded if a breach of contract claim is
proved. They are:

1. Compensatory Damages. Compensatory damages (also called “actual damages”) cover the

loss the nonbreaching party incurred as a result of the breach of contract. The amount awarded is
intended to make good or replace the loss caused by the breach.

There are two kinds of compensatory damages that the nonbreaching party may be entitled to
recover:

A. General Damages. General damages cover the loss directly and necessarily incurred by the
breach of contract. General damages are the most common type of damages awarded for
breaches of contract.

Example: Company A delivered the wrong kind of furniture to Company B. After discovering

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the mistake later in the day, Company B insisted that Company A pick up the wrong furniture
and deliver the right furniture. Company A refused to pick up the furniture and said that it could
not supply the right furniture because it was not in stock. Company B successfully sued for
breach of contract. The general damages for this breach could include:

• refund of any amount Company B had prepaid for the furniture; plus 
• reimbursement of any expense Company B incurred in sending the furniture back to Company
A; plus
• payment for any increase in the cost Company B incurred in buying the right furniture, or its
nearest equivalent, from another seller.

B. Special Damages. Special damages (also called “consequential damages”) cover any loss
incurred by the breach of contract because of special circumstances or conditions that are not
ordinarily predictable. These are actual losses caused by the breach, but not in a direct and
immediate way. To obtain damages for this type of loss, the nonbreaching party must prove that
the breaching party knew of the special circumstances or requirements at the time the contract
was made
.
Example: In the scenario above, if Company A knew that Company B needed the new furniture
on a particular day because its old furniture was going to be carted away the night before, the
damages for breach of contract could include all of the damages awarded in the scenario above,
plus:

(10)
Question No. 3
Define negotiable instruments, What instrument are negotiable and what instrument are
not negotiable, also distinguish between promissory note, bills of exchange and cheque.
(10)

Negotiable instruments
A negotiable instrument is a signed document that promises a sum of payment to a specified
person or the assignee. In other words, it is a formalized type of IOU: A transferable, signed
document that promises to pay the bearer a sum of money at a future date or on-demand. The
payee, who is the person receiving the payment, must be named or otherwise indicated on the
instrument.

 A negotiable instrument is a signed document that promises a sum of payment to a

specified person or the assignee.
 Negotiable instruments are transferable in nature, allowing the holder to take the funds as
cash or use them in a manner appropriate for the transaction or according to their
preference.
 Common examples of negotiable instruments include checks, money orders, and
promissory notes.

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Examples of Negotiable Instruments
One of the more common negotiable instruments is the personal check. It serves as a draft,
payable by the payer’s financial institution upon receipt in the exact amount specified. Similarly,
a cashier’s check provides the same function; however, it requires the funds to be allocated, or
set aside, for the payee prior to the check being issued

What instrument are negotiable and what instrument are not negotiable

Negotiable instruments

 Promissory notes.
 Bill of exchange.
 Check.
 Government promissory notes.
 Delivery orders.
 Customs Receipts

Non-negotiable instruments

 Money orders

 Postal orders

 Fixed deposit receipts

 Share certificates

 Letters of credit

Distinguish between promissory note, bills of exchange and cheque

Bill of Exchange Promissory Note

Definition

A negotiable instrument issued to order the A negotiable instrument issued by the debtor with
debtor to pay the creditor a certain sum of a written promise to pay the creditor a certain
money within a specific date or on demand. amount within a specific date or on demand.

Section

Mentioned in Section 5 of the Negotiable Mentioned in Section 4 of the Negotiable

Instruments Act, 1881 Instruments Act, 1881

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 Issued By

Creditor Debtor

Parties Involved

Three parties involved i.e a drawer, the drawee Two parties involved i.e a drawer/maker and the
and a payee. payee

Acceptance

Drawee needs to accept the bill of exchange No acceptance required from the drawee.
before payment.

Liability

Liability of drawer is secondary and Liability of drawer is primary and absolute.

conditional.

Dishonouring of instrument

Notice served to all the concerned parties No notice served to the drawer in case of
involved in the transaction on dishonouring the dishonouring the instrument.
instrument.

Copies

Bill of exchange can have copies. The promissory note allows no copies.

Is it Payable to drawer/maker

Yes, the same person can be drawer and The same person cannot be drawer and payee.
payee.

Question No. 4

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All contracts are agreements but all agreements are not contracts, discuss the statement

explaining the each essential of valid contract in detail with illustrations or examples to

support your answer.

How is an agreement formed?

To form an agreement, the following ingredients are required:

 Parties: There need to be two or more parties to form an agreement

 Offer/ Proposal: When a person signifies to another his willingness of doing or
omitting to do something with a view to obtain other’s assent. [Section 2(a)]
 Acceptance: When the person to whom the proposal is made signifies his assent for
the same thing in the same sense as proposed by the offeror. [Section 2(b)]
 Promise: When a proposal is accepted, it becomes a promise. [Section 2(b)]
 Consideration: It is the price for the promise. It is the return one gets for his act or
omission. [Section 2(d)]

An agreement is, therefore, a promise or set of promises forming consideration for all the
parties. [Section 2(e)]

Agreement = Promise or set of promises (offer + acceptance) + Consideration (for all the
parties)

If a 7-year-old boy is buying an ice-cream from an ice-cream vendor and giving Rs. 10 in return,
it becomes an agreement. This is because the boy offers to buy ice-cream and the vendor accepts
the offer which makes it a promise. The consideration for both was ice-cream and money
respectively.

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How is a contract formed?

A contract is a lawful agreement. In other words, an agreement enforceable by law is a contract.

Contract = Agreement + Legal enforceability

                            Or

Contract = Legally enforceable Agreement

Now, the law says that any contract entered with a person below the age of 18 years is not
enforceable. In the above case, the deal between the boy and ice-cream vendor was an agreement
but it cannot be termed as a contract because it is not legally enforceable.

Agreement and Contract: The difference

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‘All contracts are agreements but all agreements are not contracts.’ This statement can be
understood from the above Venn diagram. The agreements which are enforceable under the law
of the land become contracts, which are denoted by the inner circle. The outer circle denotes the
agreements which are not contracts. The shaded part includes agreements which are not
enforceable by law and are known as void agreements.

The concept of Voidable contracts: There exist some agreements which are enforceable on the
part of one party but not on the option of other parties. It is on the discretion of that party if it is
willing to enforce the contract or make it non-enforceable i.e. void. The voidable agreements are
therefore both valid and void agreements. The dotted circle of voidable agreements denotes that
they can be termed as void or valid on the discretion of one party thus covers the area of both
valid and void agreements.

For example, if a person is buying a car which is just 3-4 years old and the owner lied about the
year of manufacturing of the car thereby committing fraud. Now, according to the Indian
Contract Act, 1872 fraud makes a contract voidable. Therefore, the buyer is on the discretion that
he can either buy the car or not, whereas the seller is bound by the promise he made.

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How does an agreement become a contract?

To make an agreement, a contract, we need to ensure that the following conditions are fulfilled:

The parties must be competent to contract

The parties entering into the contract are competent to contract when they:

 Have attained the age of majority i.e. 18 years of age,

 Are of Sound mind, and
 Are not expressly disqualified from contracting by the law

At the time of entering into an agreement, if a person is of unsound mind or is disqualified by

law; the agreement is considered to be void. On the other hand, an agreement entered with a
minor is void-ab-initio i.e. void from the very beginning and thus cannot be enforced. For
example, if a seven-year-old boy is buying an ice-cream; although he is entering into an

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agreement with the ice-cream vendor, it is not considered as a contract because being a minor;
the party is not competent to contract. (Minor)

Similarly, if an unsound mind person is entering into an agreement at the time when he is
considered unsound mind, the agreement becomes void because of her unsoundness of mind at
the time of entering into the agreement. (Unsound mind)

For example; Mr A is declared as insolvent by the court and the court ordered that he is
disqualified from contracting. Now Mr A buys a flat on instalments and failed to pay any. The
owner of the flat cannot sue him because the contract was void. (disqualified from contracting)

The consent must be free

The consent can be given expressly by words- oral or written or impliedly by gestures or
surrounding circumstances. (Section 13) For example, A offered B to sell his car for Rs. 50,000.
A asked him to come to the house in the evening with cash if he is willing to buy the car. When
B came to the house with cash in the evening, it shows his implied consent to buy the car.

The consideration and the object needs to be lawful

The consideration and object of an agreement are unlawful if it is:

 Forbidden by law
 Of such a nature that if permitted, would defeat the provisions of any law
 Fraudulent
 Involves or implies injury to person or property
 Regarded as immoral or opposed to public policy by the law

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