CORPORATE LAW

Week 2-5
Law of Contract
By
Muhammad Naveed Chohan

Thursday, August 4, 2022 1

 Outline
Week 2 & 3
Formation and Discharge of Contract
 Formation of Contract
 Essentials of a Valid Contract
 Classification of Contract on the basis of Formation, Performance and
Enforceability
 Discharge of Contract
 Rules of Discharge of Contract
 Remedies for Breach of Contract
Week 4 & 5 & Secondary Contracts
Circumstantial
 Contingent Contract
 Quasi Contract
 Types of Quasi Contracts
 Contract of Indemnity
 Contract of Guarantee
 Nature and Discharge of Surety’s Liability

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 Formation of Contract
What is Contract?
‘‘An agreement enforceable by law is a contract’’
[Sec. 2 (h) of contract Act 1872]
Contract= Agreement + Enforceable

‘‘Every agreement and promise enforceable at law is a

contract’’
[Pollack]

‘‘A contract is an agreement creating and defining obligations

between the parties’’
[Salmond]
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 Formation of Contract
Concluded Points :
 Agreement:

‘‘Every promise and every set of promises, forming the consideration

for each other is an agreement’’
[Section 2(c)]
Agreement = Promise + Consideration

‘‘A proposal when accepted becomes a promise’’

[Section 2(b)]
Promise = Proposal + Acceptance

 Enforceability:
• Social Agreements
• Legal Agreements
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 Formation of Contract

Contract

STEP 1 Promise = Proposal + Acceptance

STEP 2 Agreement = Promise + Consideration

STEP 3 Contract= Agreement + Enforceable

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 Formation of Contract

Essentials of a Valid Contract:

‘‘All agreements are contracts if they are made by the free consent of
the parties competent to contract, for a lawful consideration and
with a lawful object, and are not hereby expressly
declared void’’
[Section 10]

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 Formation of Contract

Essentials of a Valid Contract:

‘‘All agreements are contracts if they are made by the free consent of
the parties competent to contract, for a lawful consideration and
with a lawful object, and are not hereby expressly
declared void’’
[Section 10]

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 Formation of Contract
Essentials of a Valid Contract :
 Agreement
 Free Consent
 Capacity of Parties
 Lawful Consideration
 Lawful Object
 Not Expressly Declared Void
 Legal Relationship
 Legal Formalities
 Certainty
 Possibility of Performance

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 Formation of Contract
Essentials of a Valid Contract :
1. Agreement:
• There must be two parties
• Existence of offer and acceptance
• Legal offer and unconditional acceptance

2. Free Consent:

‘‘Two or more persons are said to consent when they agree upon the
same thing in the same sense’’
[Section 13]

‘‘Consent is said to be free when it is not caused by: (i) coercion, (ii)
undue influence, (iii) fraud, (iv) misrepresentation, or (v)
mistake’’
Thursday, August 4, 2022 [Section 14] 9
 Formation of Contract
Essentials of a Valid Contract :
3. Capacity of Parties:

‘‘Every person is competent to contract who (i) is of age of majority,

(ii) is of sound mind and (iii) is not disqualified from contracting
by any law’’
[Section 11]
4. Lawful Consideration:
• Consideration - Price for which promise of another is bought [Pollock]
• A contract without consideration is void
‘‘Consideration of an agreement is lawful unless (i) forbidden by law,
(ii) it defeats the provision of law, (iii) fraudulent, (iv) involves
injury to a person or property, (v) immoral or (vi) opposed to
public policy’’
Thursday, August 4, 2022
[Section 23] 10
 Formation of Contract
Essentials of a Valid Contract :
5. Lawful Object:

‘‘Object of an agreement is lawful unless (i) forbidden by law, (ii) it

defeats the provision of law, (iii) fraudulent, (iv) involves injury to
a person or property, (v) immoral or (vi) opposed to public
policy’’
[Section 23]

6. Not Expressly Declared Void:

• Agreements in restrain of marriage [Section 26]
• Agreement in restrain of trade [Section 27]
• Agreement in restrain of legal proceedings [Section 28]
• Wagering agreements [Section 30]

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 Formation of Contract
Essentials of a Valid Contract :
7. Legal Relationship:
• Intention to create a legal relationship
• Filing of suit under legal relationship
• In Commercial transactions parties intend to create legal relationship
8. Legal Formalities:
• Writing
• Attestation
• Witness
• Registration
9. Certainty:
‘‘Agreement not certain or being made certain is void’’ [Section 29]
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 Formation of Contract
Essentials of a Valid Contract :
10. Possibility of Performance:
• Agreement to do an impossible act is void [Section 56]
• Contract to do an act that after formation becomes impossible
becomes void [Section 56]

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 Classification of Contracts
Contract

According to According to According to

Validity or Formation Performance
Enforceability

• Express • Executed
• Valid • Implied • Executory
• Voidable • Quasi • Unilateral
• Void • Bilateral
• Unenforceable

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 Classification of Contracts
Types According to Validity :
 Valid Contract:
• Can be enforced by each of the parties
• Who fails can be sue by other

 Void Contract:
A contract which ceases to be enforceable by law becomes void, when it
ceases to be enforceable’’
[Section 2(j)]
 Unenforceable Contract:
• Due to technical effects
• Illegal contracts

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 Classification of Contracts
Types According to Formation :
 Express Contract:
• Offer or acceptance in words
• Words in written or spoken form

 Implied Contract:
• Offer or acceptance
• Inferred from the acts or conduct of the partitas

 Quasi Contracts:
• No express or implied contract
• Under certain circumstances the law recognizes the existence of
contract

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 Classification of Contracts
Types According to Performance :
 Executed Contract:
• Two or more parties
• All have performed their obligations

 Executory Contract:
• Two or more parties
• Have yet to perform their obligations arising under contract

 Unilateral Contracts:
• Two or more parties
• One of the parties to a contract has performed his obligation but other
party is yet to perform

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 Discharge of Contract
When a Contract is Discharged?

A contract is said be discharged or terminated

when the rights and obligations created by it
come to an end.

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 Modes of Discharge of Contract
Discharge of
Contract

Discharge by Discharge by Discharge by Discharge by Discharge by

Performance Agreement Subsequent Lapse of Time Operation of
Impossibility Law

Discharge by
• Actual • Novation
Breach
Performance • Alteration • Insolvency
• Attempted • Recession • Initial
• Merger
Performance • Remission Impossibility
• Material Alteration
• Waiver • Subsequent
• Death
Impossibility • Actual
• Anticipatory

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 Modes of Discharge of Contract
 Discharge by Performance :
1. Actual Performance: (Sec. 37)
• Each party to a contract perform obligations under contract
• According to terms and condition

2. Attempted Performance/Tender:
• Tender – Promisor offer of performance and promisee does not accept

• Promisor can file a suit against promisee in case of breach (Sec. 38)
 Essentials of a Valid Tender:
• Unconditional
• Proper time and Proper Place
• Opportunity to promisee to check goods
• Made to an able person
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 Modes of Discharge of Contract
 Essentials of a Valid Tender:
• Made to promisee or his agent
• Joint promisees, a tender to any one of them
• Money tender, exact amount should be tender

 Discharge by Agreement:
1. Novation:
• Parties to a contract agree to substitute a new contract
• Change in terms of contract
• Change of Parties
• Both
2. Alteration :
• Change in only terms of a contract

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 Modes of Discharge of Contract
 Discharge by Agreement:
3. Recession:
• Recession means cancelation
• Consent not free
• One party fails to perform
4. Remission:
• Remission means forgive the claim
• Whole or in part remission
• Extend the time of performance
• Accept any other satisfaction
5. Waiver:
• Intentional abandonment of rights
• Forgoing of right
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 Modes of Discharge of Contract
 Discharge by Subsequent Impossibility :
1. Initial Impossibility: (Sec.56)
• Void or Void ab-initio
2. Subsequent Impossibility: (Sec.56)
• After formation becomes impossible
 Factors Causing Impossibility of Performance:
• Destruction of subject matter
• Failure of purpose
• Death or personal incapacity
• Change of law
• Declaration of war

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 Modes of Discharge of Contract
 Discharge by Lapse of Time:
• Lapse of time terminates the contract
• No legal action after the limitation period
• Limitation Act, 1908 lay down limitation period
• Limitation for simple contract is 3 years

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 Modes of Discharge of Contract
 Discharge by Operation of Law :
1. Insolvency:
• Court declares a person insolvent
• Rights and duties of such person are transferred to officer of court
• officer of court is known as Official Receiver
2. Merger :
• Inferior right merges into a superior right
• Formation of new contract
• Discharge of former contract
3. Material Alteration:
• Alteration without consent
• Contract is discharged

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 Modes of Discharge of Contract
 Discharge by Operation of Law :
4. Death:
• Performance depend on personal skill
• Death discharge a person from contract

 Discharge by Breach of Contract :

1. Actual Breach:
• Intentional Breach
• Discharge other person from contract
2. Anticipatory Breach:
• Express Breach
• Implied Breach

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 Remedies for Breach of Contract
Remedies

Suit for Suit for Suit upon Suit for

Suit for Specific
Recession Damages Quantum Injunction Performance
Meruit

Kinds of Damages

• Ordinary
• Special
• Exemplary
• Liquidated
• Nominal

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 Remedies for Breach of Contract
 Suit for Recession: (Sec. 75)
• Recession - Right to cancel
• One party breaks the contract
• Other party - Aggrieved party file suit for recession of the contract
• Other party can ask for damages - Court can grant

 Suit for Damages: (Sec. 73)

• Damages - monetary compensation allowed to aggrieved/injured party
• Aggrieved party file suit for damages due to breach of contract
 Kinds of Damages:
1. Ordinary Damages:
• Direct loss
• Naturally arises as a result of breach of contract
• Ordinary damages = Difference in contract price and market price
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 Remedies for Breach of Contract
 Kinds of Damages:
2. Special Damages:
• Indirect loss
• Notice to parties
• Special circumstances
3. Exemplary Damages:
• Awarded to punish for guilt
• Monetary loss and disappointment to aggrieved party
• Examples; Contract to marry, Dishonor of cheque
4. Liquidated Damages:
• Fixed at the time of formation of contract
• Should be fair and reasonable

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 Remedies for Breach of Contract
 Kinds of Damages:
5. Nominal Damages:
• Not for punishment and not for compensation
• No loss to claiming party

 Suit upon Quantum Meruit:

• Quantum Meruit – As much as done
• A party performed a part of the contract
• Remaining part was rescinded or become unlawful
• Party who performed a part can claim remuneration on performed part
 Suit for Injunction:
• Injunction is granted when damages are not adequate relief
• Restrain the guilt party from doing

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 Remedies for Breach of Contract
 Suit for Specific Performance:
• when damages are not adequate relief
• Loss caused by breach of contract
 Cases - Granting Specific Performance:
• Compensation in money is not adequate relief
• Damages can not be calculated
• Compensation in money can not be recovered
 Cases - Not Granting Specific Performance:
• Damages are adequate relief
• Performance involves personal skill
• Where court can not supervise execution
• Contract is uncertain
• Contract is inequitable to either party

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 Contingent Contract
What is Contingent Contract?
‘‘A contingent contract is a contract to do or not to do
something, if some event, collateral to such contract, does
or does not happen ’’
[Sec. 31 of Contract Act 1872]

Essentials of a Contingent Contract:

 Conditional performance
 Uncertain event
 Event must be collateral

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 Contingent Contract
Rules of Performance of Contingent Contract: (Sec.32-35)
 Happening of uncertain event (Enforcement on happening)
 Not happening of uncertain event (Enforcement on not happening, Example of Ship)
 Act of a person at unspecified time
 Happening of event within fixed time
 Not Happening of event within fixed time
 Agreement contingent on impossible events (Void Contract)

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 Quasi Contract
What is Quasi Contract: (Sec. 68-72)
‘‘Quasi contract or constructive contract is the term used to denote certain
relations resembling those created by contract’’

Principle of Equity: No person is allowed to get benefit unjustly at the expense

of another.
Quasi Contracts:
 Supply of Necessaries
 Payment by Interested Person
 Liability to pay for non-gratuitous acts
 Responsibility of finder of goods
 Liability under mistake or coercion

Thursday, August 4, 2022 34

 Contract of Indemnity
What is Contract of Indemnity: (Sec. 124)
‘‘A contract by which one party promises to save the other from loss
caused to it by the conduct of promisor himself or by the conduct of
any other person, is called a contract of indemnity’’

Parties:
 Indemnifier:
‘‘A person who promises to compensate the loss is called indemnifier’’

 Indemnified or indemnity holder:

‘‘The person whose loss is to be compensated is called indemnified or indemnity
holder’’

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 Contract of Indemnity
Rights of Indemnity Holder: (Sec. 125)
 Recover all Damages – Compelled to Pay in Respect of suit Filed
 Recover Expenses – Suit Filed by him with the Authority of
Indemnifier
 Recover all Expenses under the terms of such suit – Compromise with
the Consent of Indemnifier
Rights of Indemnifier:
 No provision in the law
 Same Rights of Guarantor

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 Contract of Guarantee
What is Contract of Guarantee: (Sec. 126)
‘‘A contract of guarantee is a contract to perform the promise or discharge
the liability of a third person in case of his default’’
Parties:
 Surety:
‘‘A person who gives guarantee is called a surety’’

 Creditor:
‘‘The person to whom the guarantee is given is called creditor’’

 Principle Debtor:
‘‘The person in respect of whose default the guarantee is given is called principle
debtor’’

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 Contract of Guarantee
Essentials of a Contract of Guarantee:
 Secondary Contract
 Consideration (Section 127)
 No Misrepresentation (Section 142 & !43)
 Writing not Necessary (Section 126)

Kinds of Contract of Guarantee:

 Specific Guarantee
 Continuing Guarantee (Section 129)

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 Contract of Guarantee

GUARANTEE

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 Contract of Guarantee
Nature of Surety’s Liability:
 Secondary
 On default of Debtor
 Securities from Creditor than no Need to get Securities from Surety
 Surety is not Liable when Creditor has obtained Guarantee by
Misrepresentation
 Principle Debtor and Surety are not one Person
 Discharge of Debtor by Operation of law no Discharge of Surety
 Liability Of Surety does not come to an end on death of Debtor

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 Contract of Guarantee
Discharge of Surety’s Liability:
 Notice of Revocation
 Death of Surety
 Change in Terms of Contract
 Release or Discharge of Principle Debtor
 Arrangement without Surety’s Consent
 Creditor’s Act or Omission
 Loss of Security
 Invalidation of the Contract of Guarantee

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 Contract of Guarantee
Rights of Surety:
 Rights of Surety
• Right to Securities
• Right to Claim Set Off

 Rights Against Principle Debtor

• Right of Subrogation
• Right of Indemnity
 Rights Against Co Sureties
• Similar Amount
• Different Amount

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 End of Weeks # 2-5 Lecture Presentation
Thanks for Patience

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