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Contract:
Pollack: “Every agreement and promise enforceable at Law is a contract”

Salmond: “A contract is an agreement creating and defining obligations between the parties.

Section 2(h) provides “An agreement enforceable by Law is a Contract”.

Essentials of a Valid Contract:

1- Offer: it’s a type of invitation for other parties to enter a contract.
Example: “A” offers to sell his bicycle “B” for Rs. 2,000. This is an offer from “A” to “B”.

2- Acceptance: The person to whom the offer is made if he accepts it unconditionally

becomes acceptance.
Example: “A” offers to sell his bicycle “B” for Rs. 2,000. This is an offer from “A” to “B”.
if “B” accepts this offer there is an acceptance.

3- Consideration: Consideration is something in return. When one person offers and

another person accepts, the amount settled between the parties or the reason for
which the contact is made is known as consideration.

Example: “A” offers to sell his house to “B” for Rs. 1,000,000. For “A” Rs. 1,000,000 id
consideration while for “B” the house is consideration.

4- Legal Formalities: A contract must fulfill the formalities imposed by Law.

Example: “A” offers to sell his watch to “B” for Rs. 200. “B” agrees to buy. It is a contract as it
creates legal obligation.

5- Free Consent: The parties to the contact must enter Into it with their own free wish
and will.
Example: “A” compels “B” at Gunpoint to enter into an agreement. It is not a valid contract
as consent of “B” is not Free.

6- Lawful Object: The Object is the purpose of the contract which needs to be Lawful. A
contract with unlawful object us Void.
Example: “A” promises to pay Rs. 5,000 to “B” if “B” beats “C”. The agreement is illegal as its
object is unlawful.
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7- Not Expressly declared Void: A contract which is forbidden by law is not a valid contract.

Example: “A” promises to pay “B” Rs. 2 Million if “B” closes its business. It is not a valid
agreement as it is in restraint of trade.

8- Competent parties / Capacity of parties: Parties to the contract must be competent to

the contract such as majority of age, sanity of mind.
Example: “A” a person of unsound mind agrees to sell his house to “B” for Rs. 10 Lac. It is not
a valid contract as “A” is not competent to contract.

9- An Agreement enforceable by Law: Only those agreements are contracts which are
enforceable by Law.
10- Possibility of Performance: A valid contract must be capable of being performed. An
agreement to do an impossible act is not valid. If the agreement is legally impossible to
perform, the agreement is not enforceable by law.

Example: “A” agrees with “B” to find treasure by magic is not enforceable by law.

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OFFER:
Offer is the first step towards the making of the contract it is a kind of invitation from one
person to another person inviting him to enter a contract. There is no contract without an
offer.

Definition:
According to Section 2 (a) of the contract Act, “when one person signifies to another person
his willingness to do or abstain from doing anything with a view to obtain assent of another
person to such act or abstinence is called an Offer.

Or
The offer is an invitation to another to accept his proposal.
Example: Mr. A offers to Mr. B to sell his car for Rs. 1,000,000. This is an offer from Mr. A to
Mr. B.

Parties to Proposal:
There must be two parties to make an offer.

1- Offeror: The person who makes an offer is called the offeror or Promisor.
2- Offeree: The person to whom the offer is made is called the offeree or Promisee.
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Classification / Kinds of Offer:

1- Express Offer:

The offer which is made by words spoken or written is called an expressed offer.
Example: “A” said to “B” that he will sell his motorcycle to him for Rs. 40,000. It is an
expressed offer.

2- Implied Offer:
An offer results from the action, conduct of the parties or circumstances of the case.
Example: “New Khan Company / Skyways” runs buses to carry passengers at
scheduled fares. This is an implied offer by the company.
3- Specific Offer:
An offer which is made to a specific person, or groups of persons is called specific
offer.it can be accepted by a person or group of persons to whom the offer is made.
Example: “A” makes an offer to “B” to sell his cycle for Rs. 1,000. It is a specific offer
and only “B” can accept or reject it.
4- General Offer:
An offer made to the General public at large and can be accepted by any person who
fulfills the conditions mentioned in it. Example: “A” announces in Newspaper a
reward of Rs. 1,000 for anyone who will find and return his lost Radio. It is a general
offer.

Essentials to Valid Offer:

Following are the essentials of a valid offer:

1- Legal Relationship: The offer must be made in order to establish a legal relationship
otherwise there would be no agreement. Example: “A” invites “B” to dinner and “B”
accepts the invitation. It does not create a legal relationship so there is no
agreement.

2- Communication with offeree: An offer is valid only when it is communicated to the

offeree. An acceptance of an offer without having knowledge of such offer is not
valid and does not create a legal relationship. The offer which is not communicated is
not a valid offer.

Example: G’s nephew was missing from home. He sent his servant “Lalman” to
search the boy. When the servant left the house to search the boy “G” announces a
reward of Rs. 50,000. The servant before having the knowledge found the boy and
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informed “G”. Later he claimed the reward but failed because he could not accept
the offer without having knowledge of it.

3- Definite and certain: An offer must be definite and certain. If the terms of the offer
are not clear or definite it cannot be called a valid offer. If such an offer is accepted, it
cannot create a binding contract.
Example: “A” has 02 motorcycles. “A” offers “B” to sell one of his motorcycles for Rs. 27,000.
It is not a valid offer because it is not clear which motorcycle “A” wants to sell.

4- Condition: An offeror may or may not include any condition in his offer. There is no
contract unless all the conditions mentioned in the offer are accepted. If any mode is
prescribed for acceptance by the Offeror the offeree must give his acceptance as per
the prescribed mode.
Example: “A” asks “B” to send the reply regarding acceptance of offer through
Telegram, but “B” sends the reply by letter. “A” may reject the offer.

5- Express or Implied:
a- An offer may be expressed or implied. The offer which is made by words spoken
or written is called an expressed offer.
Example: “A” said to “B” that he will sell his motorcycle to him for Rs. 40,000. It is
an expressed offer.

b- An offer results from the action, conduct of the parties or circumstances of the
case is called Implied offer.
Example: “New Khan Company / Skyways” runs buses to carry passengers at
scheduled fares. This is an implied offer by the company.

6- Specific or General: An offer may be specific or General. An offer may be expressed

or Implied.
a- An offer which is made to a specific person, or groups of persons is called
specific offer.it can be accepted by a person or group of persons to whom the
offer is made.
Example: “A” makes an offer to “B” to sell his cycle for Rs. 1,000. It is a
specific offer and only “B” can accept or reject it.
b- An offer made to the General public at large and can be accepted by any
person who fulfills the conditions mentioned in it.
Example: “A” announces in Newspaper a reward of Rs. 1,000 for anyone who
will find and return his lost Radio. It is a general offer.

Question: When the communication of offer is complete.

Answer: When the person to whom the offer is made becomes aware of it the
communication of offer is completed and an offer may be revoked before its
communication is completed and not afterward.
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Note: An invitation to offer cannot be treated as Offer.

Example: Shoes for sale with price tag is an Offer,
Shoes for sale without price tag is an invitation to offer.
Acceptance:
Section 2(b) defines acceptance as “When the person to whom the offer is made signifies his
assent thereto, the proposal is said to be Accepted.
A proposal, when accepted, becomes a promise.
Example: “A” offers to sell his house to “B” for Rs. 5 Lac. “B” accepts the offer. This is an
Acceptance.

Essentials of Valid Acceptance:

1- Acceptance by Offeree: Acceptance must be given by Offeree to whom the offer is
made. It cannot be accepted by any other person without the consent of the offeror.
Example: “A” offered to sell his house to “B”. “C” who was aware of the offer said that he
is ready to buy “A”’s house. There is no contract with “C” and only “B” can accept or
reject the offer to whom it is made.

2- Absolute and Unconditional: Acceptance must be absolute and unconditional, if the

offeree imposes any condition in his acceptance, it is not a valid offer rather it is a
counteroffer.
Example: “A” offers to sell his watch to “B” for Rs. 500, “B” replies that he can buy the
watch for Rs. 300, there is no acceptance.

3- Prescribed Manner: Acceptance must be given in a manner as prescribed by the offeror.

If the offer is not made as prescribed by the offeror the offeror may reject the offer.
Example: “A” asks “B” to send the reply regarding acceptance of offer through Telegram,
but “B” sends the reply by letter. “A” may reject the offer.

4- Communication with Offeror: The offeree must communicate the acceptance to the
offeror in a clear manner and in a manner as prescribed by the offeror.
Example: “A” offers by letter to purchase “B” ‘s house. “B” expresses his intention to sell
it but does not reply. “B” sells his house to “C”. “A” has no legal claim against “B”.

5- Reasonable time: If the offeror specifies any time period for acceptance in his offer the
offeree must give his acceptance within that specified time period. If no time is specified,
then the acceptance must be given within a reasonable time period.
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Example: “A” applied for the shares of a company in June, but the allotment was made in
December. “A” can refuse to take the shares on ground on laps of reasonable time
period.
Types of Acceptance:
1- Expressed Acceptance:
An acceptance given by words spoken or written is called expressed acceptance.
Example: “A” offered to sell his cycle to “B” for Rs. 2,000. “B” accepted his offer. It is
an expressed offer.

2- Implied Acceptance:
If the acceptance is conveyed by the conduct of the offeree, it is called implied
acceptance.
Example:
“A” offers “B” to purchase his car and if he accepts, he must transfer the amount to
A’s account. If “B” transfers the amount into A's account, it will be considered as
implied acceptance by “B.”
3- Conditional Acceptance / Qualified Acceptance:
The offeree agrees to give his acceptance only if certain changes are made to the
terms of the offer. This becomes a counteroffer which may or may not be accepted
by the offeror.
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Consideration:
Consideration is something in return, generally a contract without consideration is void but
there are some exceptions to this also.

Definition:
Section 2(d) of the contract Act define it as “When at the desire of the promisor (offeror) the
promisee or any other person has done or abstained from doing something or does or
abstain from doing something or promise to do or abstain from doing something. Such act,
abstainers of the promise is called Consideration.
OR

Pollack Definition: The price for which the promise of other is bought.

Example:

1- “A” offers to sell his house to “B” for Rs. 1,000,000. For “A” Rs. 1,000,000 is
consideration while for “B” the house is consideration.
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2- “A” promised to paint a picture for “B” and “B” promised to teach him for one
month. The promise of one party is the consideration for other.

Essential elements of Consideration:

1- Consideration must be proceeded by the promisor.
Example: “A” saved “B” house from fire. “B” did not ask for help. “A” cannot demand
payment for his services because he acted voluntarily.

2- Consideration may be proceeded by the promisee.

Example: “A” gifted property to her daughter “B” on a condition that she would pay a
certain amount to his Uncle “C” annually. “B” promised to pay the amount to her uncle
“C” but later refused to pay. “C” sued her and could recover the amount as consideration
had moved from “A” to “C”.

3- Consideration may be past, present, or future.

Example:
a. “A” teaches “B” at his request in January and in February “B” promised to pay “A” Rs.
2,000 for his services. The services of “A” is past Consideration.
b. “A” sells a book to “B” and “B” pays the price immediately. It is a case of Present
Consideration.
c. “A” promised to deliver a car to “B” after a week and “B” promised to pay the price
on delivery. This is a case of Future consideration.

4- Consideration may or may not be adequate. The law insists on presence of consideration
and not its adequacy. The parties are free to decide the value of consideration.
Example: “A” agrees to sell his house worth Rs. 5 million to “B” for Rs. 2 million and his
consent is free. The contract is valid.

5- Consideration must be of some value.

6- Consideration must be real, means consideration must not be:

a- Physically impossible
b- It must not be legally impossible.
c- It must not be uncertain.
Example: “A” promised to “B” he would bring the moon to Earth if she agreed to marry him
it is physically impossible.

Kinds / Elements of Consideration (Past, Present and Future Consideration):

1- Past Consideration:
A promise for an Act performed in the past that enables the party making the promise to
pay later is called Past Consideration.
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Example: “A” paints the house of “B” without any expectation of anything in return, but “B”
pays Rs. 50,000 to “A” for the act after some time.

2- Present Consideration:
This consideration moves simultaneously with the act is called present consideration.
Example: “A” offers reward for finding lost goods the finder of the goods can claim
consideration / reward at the time of handing over the lost goods to “A”.

3- Future Consideration:
A consideration which is known as executory consideration which is yet to be executed
that will be carried out at later time.
Example: “A” promised to sell his car to “B” for a certain price. “B” promises to make
payment in Future.

Exception to Considerations:
Generally, a contract without consideration is void but there are some exceptions to this rule
which make the contract valid though without consideration.

1- Natural Love and affection:

A written and registered agreement based on natural love and affection between the
near relatives is enforceable without consideration.

2- Past Voluntary Services:

A promise to compensate a person who has already voluntarily done something for the
promisor, such services may be rewarded.

3- Time Barred Debt:

A promise to pay a time barred debt is enforceable. A debt becomes time barred if it is
not paid or claimed for a period of three years from the date it becomes due. Time
barred debt is not recoverable.
Example: “A” owes Rs. 10,000 to “B” but debt becomes time barred. A sign a written
promise to “B” to pay him Rs. 5,000 on account of the debt. It is a valid contract.

4- Act or Abstinence:
A consideration may be formed by an Act that is doing something. In this case it is called
positive consideration.
A consideration may also be formed by abstinence that is not doing something. In this
case it is called negative consideration.
Example:
“P” agrees to construct “A’s house for Rs. 10 Lac. A’s promise to pay Rs. 10 Lac is the
consideration for “P’s promise to construct the house.
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Misrepresentation:
“An innocent or false statement by one party to another party to make a contract without
any intention to deceive the other party.”
Section 18 of the contract Act 1872 defines Misrepresentation as
“Misrepresentation means and includes:
1- The positive assertion in a manner not warranted by the information of the person
making it, of that which is not true though he believes it to be true.
2- Any breach of duty which without an intent to deceive, gains an advantage to the
person committing it, or anyone claiming under him, by misleading another to his
prejudice or to the prejudice of anyone claiming under him.
3- Causing, however, innocently to make party to an agreement to make a mistake as to
the substance of the thing which is the subject of the agreement.
Example:“A” tells “B” that his land produces 4,000 kg of wheat per Acre. A believes it to be
true “B” buys it. Later, it appears that the land produces 1,000 kg of wheat per Acre. It is
Misrepresentation.

Types / Kinds of Misrepresentation:

The Following are the types / kinds of misrepresentation:
1- Innocent Misrepresentation:
a- False Statement of material Facts.
b- The party making representation was unaware of it.
Remedies:

a- Recission of the contract

b- Cancellation of the contract.

2- Negligent Misrepresentation:
It is a statement that the party to the contract did not attempt to verify the truth.
Remedies:

a- Recission of the contract

b- Recovery of the damages

3- Fraudulent Misrepresentation:
A party to the contract makes a statement knowing it as False.
Remedies:

a- To make a contract void.

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b- Claim damages.

Example:

“X” buys a car from “Y” by fraud. Despite knowledge of the fraud “Y” does not reject
the contract. “Y” loses his right to avoid the contract after reasonable time.

Essentials of Misrepresentation / How to prove Misrepresentation:

1- It must be made innocently and the person making it honestly believes it to be
true.
2- It must relate to the facts essential to the contract.
3- The statement made must be untrue.
4- It must induce the other party to enter into a contract.
5- It must be made without any desire to deceive the other party.
6- The other party must suffer a loss.
7- The other party cannot discover the truth by ordinary diligence.
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Discharge of Contract:
When the rights and obligations arising out of a contract comes to an end the contract is
said to be discharged or terminated.

Consequences of Discharge of Contract:

1- It is the termination of the contractual relationship between the parties.
2- Discharge means the contract has ceased to operate.
3- Rights and obligations come to an end.

Modes of discharge of Contract:

1- By performance
2- By Agreement / consent
3- By impossibility of performance
4- By laps of time
5- By breach of contract
6- By operation of Law.

1- Discharges of contract by Performance:

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Performance means fulfillment of the obligation by the parties to the contract. When
the parties to the contract fulfill their promises, the contract is said to be discharged
by performance.
Modes of Performance:
a. Actual performance:
When both the parties actually fulfill the obligations according to the terms and
conditions of the contract it is called actual performance.
Example: “A” agrees to sell his watch to “B” for Rs. 400, “A” delivers the watch to
“B” and “B” make the payment. This is the actual performance of the contract.

b. Tender / Attempted performance:

It is not actual performance, when one party to the contract offers to perform the
contract but the other party does not accept it, there is a tender.
Example: “A” agrees to sell his book to “B” for Rs. 500. “A” offers to deliver the
book, but “B” does not accept it. This is an offer of performance.

2. Discharge of contract by Agreement / Consent:

As the agreement binds the parties, so by the agreement or consent of the parties to
the contract may be terminated / discharged. A contract is discharged by agreement
in the following ways:
Types of discharge by Agreement:
a. Novation: Novation means replacement of existing contract by a new contract.
Example: “A” owed to “B” and “B” owed to “C”. “A”’s debt to “B” is cancelled
and “C” accepts “A” as his debtor. It is novation.

b. Alteration: Alteration is the change in terms and conditions of the contract. If

the alteration in the contract is made with the consent of the all the parties to
the contract, then the original contract is discharged and the new contract
takes its place.
Example: “A” agrees to supply bags of salt to “B” on 1st February, but later A
and B agrees to change the date of supply to 1st March. It is an alteration of
the contract.

c. Rescission: The rescission means cancellation of the contract by mutual

consent. A contract can be cancelled with mutual consent at any time before it
is discharged by performance.
Example: “A” promises to deliver the goods to “B” on a certain date but before
the date of performance both the parties to the contract by mutual consent
cancelled the contract. It is rescission of contract.
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d. Remission: Remission means acceptance of lesser fulfillment of promise that

was actually made.
Example: “A” owes “B” Rs. 5,000. “B” agrees to accept Rs. 2,000 in full
satisfaction of his claim. The whole debt is discharged.

e. Waiver: Waiver means the intentional abandonment of a right which a person

is entitled to under a contract.
Example: “A” promised to stitch a shirt for “B” but later “B” forbids him to do
so. The contract is terminated by Waiver.

f. Merger: Merger refers to the consolidation of one or more contracts into a

single unified contract. As a result, the former contracts stand discharged.
Example: Where a part time lecturer is made full time lecturer, the contract of
part time lecturer is discharged by merger.

3. Discharge of Contract by Impossibility of Performance:

An agreement to do an act which is impossible is void. An impossibility which arises
subsequent to the formation of contract discharge the parties.
Example: “A” rented out his hall to “B” for a concert, but the hall was destroyed by
fire before the date of concert. The contract becomes Void.
Other Examples:
i- Destruction of subject matter.
ii- Non-Existence of state of thing.
iii- Death or incapacity of parties
iv- Change of law
v- Outbreak of War.

4. Discharge by Laps of time:

According to the law, a contract should be performed within a specific period if not
performed and no action is taken within the period of limitation the party of
deprived of his rights.
Example: “A” owed Rs. 5,000 to “B”. The last date for repayment of loan was expired
but “B” did not sue “A” until 3 years. “B” lost the right to recover the loan.

5. Discharge of Contract by Operation of Law:

A contract may be discharged by operation of law under the following circumstances:
I. By the Death
II. By insolvency
III. By unauthorized alteration in the terms of agreement.
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Example: “A” promised to sell his car to “B” for Rs. 5 Lac. Before the performance of
the contract, “A” is declared as insolvent by the Court. The contract is discharged.

6. Discharge of Contract by Breach:

A breach of contract means the failure of a party to the contract to perform his
obligation. When a party fails to perform the contract, there is a breach of contract.
Kinds of Brach:
a. Actual breach
When the performance is due, and one party to the contract fails or refuses to
perform his contractual obligation is called an actual breach.
Example: “A” agrees to deliver 5 bags of wheat on 1 st March. He does not deliver
the bags on that day. There is an actual breach of contract.

b. Anticipatory breach
When a party to the contract declares his intention of not to perform the
contract before the due date is called anticipatory breach.
 it may be by renouncing his obligations.
 By doing an act which makes the performance impossible.
Example: “A” promised to sell his horse to “B” on 1st June. Before that date “B”
sells the same horse to “C”. There is an anticipatory breach of contract.
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Breach of Contract:
Violation of the terms of contract by any party of contract is called breach of
contract.
Definition:
Where any party or parties to the contract breaks or fails to fulfill the terms of a
binding contract is called breach of contract.
Types of breach of Contract:
1- Minor breach:
It is a partial breach of contract in which the main purpose of the contract has
been achieved.

2- Material Brach:
It occurs when the breach results in substantially different results originally
specified in the contract which may also cause loss to the other party.
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3- Anticipatory Breach:
It occurs when a party notifies the other party by his conduct that he is not going
to fulfill the obligations.

4- Actual Breach:
It happens when a party fails to perform its part of the contract when it was due.

Consequences / Remedies for Breach of Contract:

1- Recission of contract
2- Specific performance
3- Injunction
4- Recovery of Damages
5- Quantum Maruit.

1- Recission of Contract:
Recission means cancellation of contract. Where a party breaks the contract, the
other party is released from the obligation under the contract.
Example: “A” contract to supply 50 bags of cement to “B” on 1 st April and “B” agrees
to pay the price on delivery of goods. “A” does not supply the goods on due date “B”
is discharged from his liability to pay. “B” can rescind the contract and claim
damages.

2- Specific performance:
Specific performance means the party in breach of contract have to carry out his
duties under the contract on direction of the court.
Example: “A” agrees to sell his plot to “B” who wants to erect a mill. “A” commits
breach, “B” filed a suit. “A” is directed by the court to perform the contract.

3- Injunction:
It is an order of the court restraining a person from doing something which he
promised not to do.
Example: “A” agrees to sing at “B” theatre only late “A” contracted with “C” to sing at
another theatre and refused to sing for “B”. “A” could be restrained by injunction
from singing for “C”.

4- Recovery of Damages:
The party against whom the contract is broken can claim damages for the loss
suffered due to breach of contract.
a- Liquidated Damages:
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When parties to the contract fix the amount of damages for the breach of
contract at the time of formation of contract such damages are called liquidated
damages.
Example: “A” contracts to pay Rs. 20,000 as damages to “B” if he fails to pay Rs. 5
Lac on due date, “A” fails to pay on due date. “B” can claim damages not
exceeding Rs. 20,000.

b- Un-liquidated / Nominal Damages:

Where in case of breach of contract the aggrieved party suffers no loss, the court
may award nominal damages in recognition of his right.
Example: “A” agrees to supply 50 bags of cement to “B” for Rs. 200 each. “A”
does not supply the bags. At the time of breach, the rate per bag was same. “B” is
entitled to nominal damages.

5- Quantum Maruit:
It is a rule according to which a person is allowed to perform the contract as much as
possible and he will pay the damages for the remaining part of the contract. Or it
means the payment in proportion to the value of work done or reasonable value of
work done.
Example: “A” contracts to build a three-story building for “B”. When one story is
completed “B” stops “A” from work. “A” can get compensation for the work done.

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Contract of Indemnity:
It is a contract in which one party promises the other party to make good its losses.
Definition:
Section 124 of the contract act define it as “A contract by which one party promises to save
the other from loss caused to him by the conduct of the promisor himself or by the conduct
of any other person in called Contract of indemnity.
Example:
“A” promises to deliver certain goods to “B” for Rs. 20,000 every month, “C” promises to
identify “B’s loss if “A” fails to deliver the goods. The contract between “B” and “C” is the
contract of indemnity.

Parties to Contract of Indemnity:

There are two parties to the contract of indemnity.
1- Indemnifier
2- Indemnified
Indemnifier:
A person who promises to indemnify or pay for the Loss.
Indemnified:
The person for whom such promise is made is called Indemnified or indemnity holder.

Essentials to the contract of Indemnity:

1- There must be two parties.
2- One of the parties promises to pay for the Loss.
3- Contract may be expressed (Written) or Implied (by conduct)
4- It must satisfy the essentials of a valid contract.
Rights of Indemnity Holder:
1- The indemnifier will have to pay the damages.
2- Indemnity holder can compel indemnifier to pay the cost of suit also.
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3- The indemnifier has to pay the compromise amount if the compromise has been
made between the parties.

Contract of Guarantee:
A contract which is made to discharge the liability of the person if he fails so.
Ordinarily, there are two parties to a contract but in contract of Guarantee there are Three
parties involved in it. It is also called Tripartite Contract.
Definition of Contract of Guarantee:
Section 126 of the contract Act 1872, define contract of Guarantee as:
“A contract to perform the promise or discharge the liability of a 3rd person in case of his
default.”
Example: “A” requests “B” to give a loan of Rs. 5Lac to “C”. “A” guarantees that if “C” fails to
return the loan “A” will pay to “B”. This is contract of Guarantee.
Parties to Contract of Guarantee:
There are Three parties in a contract of Guarantee.
1- Surety: A person who gives a guarantee to perform the liability.
2- Principal Debtor: A person for whom the guarantee is given.
3- Creditor: A person to whom the guarantee is given.
Types of Guarantees:
There are two types of Guarantees.
1- Specific / Simple / Ordinary Guarantee: A guarantee which extends to a single det or
transaction in called Specific / Simple / Ordinary Guarantee. It comes to an end as soon
as the liability under the transaction ends.
Example: “A” guarantees “B” to make payments against 5 bags of wheat purchased by
“C”. “C” makes the payment. Later “C” again purchased 5 Bags of wheat but did not pay.
“B” sued “A”. Held, A’s guarantee is specific guarantee and “A” is not liable.

2- Continuing Guarantee: A guarantee that covers a series of transactions until the surety
revoke it is called Continuing Guarantee.
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Example: “A” guarantees “B” for purchases of Goods by “C” from “B” up to Rs. 50,000 for
the next One year. This is a continuing guarantee.
Features of Contract of Guarantee:
1- A contract of guarantee may be oral or in written.
2- It is a tripartite contract having 3 parties involved in it.
3- Responsibility of surety is dependent on default of Debtor.
4- The consent of surety cannot be obtained by misrepresentation or concealment of
facts.

Revocation of continuing Guarantee:

There are two ways to revoke the continuing guarantee:
1- It may be revoked by giving notice to the creditor.
2- By surety’s death.

Discharge of a Surety:

1- Notice of revocation: A specific guarantee can be revoked by notice if the liability has
not arisen while a continuing guarantee can be revoked at anytime by giving a notice
to the creditor.
Example: “A” gives loan to “B” on the guarantee of “C”. C cannot revoke the
guarantee but if “A” has yet not given the loan to “B” then “C” can revoke the
guarantee by giving a notice.

2- Death of Surety: In specific guarantee the surety is not discharged from his liability
on his death if the liability has already been occurred but in continuing guarantee the
death of surety will discharge him from any liability against any transaction that takes
place after his death.
Example: “A” sells goods to “B” worth 1 Lac on the guarantee of “C”. “A” supplies the
goods worth 50,000. Later “C” dies. The property of “C” is liable up to Rs. 50,000.

3- Change if terms of Contract: When any change is made in the contract by Principal
debtor and creditor without the consent of surety. The surety stands discharged with
respect to transactions subsequent to change.
Example: “A” contracts to give loan of Rs. 5 Lac to “B” on 1 st March. “C” guarantees
the payment. “A” gives loan to “B” on 1st January. “C” is discharged from his liability.

4- Performance of Contract: When the principal debtor and creditors have performed
their part of obligation under the contract and principal debtor is released this will
discharge the Surety from his liability.
 19

Example: “A” contracts to build a house for “B” in 12 months. “C” guarantees the
performance. “A” constructed the house in 12 months. “C” stands discharged from
his liability.
5- Arrangement without Surety’s consent: When creditor makes an arrangement with
principal debtor to not to sue in case of debtor’s default. The surety will be
discharged.
Example: “A” purchased a car from “B” on the guarantee of “D”. “B” gives more time
to “A” for payment against the agreed time period. Giving extra time by “B” to “A”
will discharge “D” from his liability.

6- Creditor’s Act or Omission: If the creditor does any Act which is inconsistent with the
rights of the surety the surety is discharged from his liability.
Example: “A” employs “B” as a cashier on the Guarantee of “Z”. “A” promised to count the
cash once a month. “A” does not count the cash. “B” commits fraud. “Z” is not liable to “A”.

Difference between Contract of Indemnity and Guarantee:

Sr # Contract of Indemnity Contract of Guarantee

1 Number of Parties:
There are Two parties to the contract. There are Three parties to the contract.

2 Number of Contracts:
There is only One contract. There are Three contracts
a- Principal Debtors & Creditors
b- Surety & Creditor
c- Surety and principal debtor

3 Nature of Liability:
The liability of indemnifier is Primary. The liability of surety is Secondary one, it only
arises when debtor default.

4 Default of Third person:

The liability of indemnifier is not on The liability of Surety is dependent on default
default of some person. of Debtor.

5 Nature of Contract:
It can be oral or written. It can be oral or written.

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Contract of Bailment:
Introduction:
Bailment is a contract which creates a legal relationship between two parties, where goods
Or property are transferred for some purpose with agreement to return it.
Definition:
As per Section 148 of Contract Act, Bailment is a contract in which goods are delivered by
one person to another person for some purpose, under a contact that goods are to be
returned when the purpose is completed.
Example: “A” delivers his car for service at a service station center of “B” under a contract
that when the service is complete car will be returned to “A”.
Parties to the contract of Bailment:
There are two parties to the contract.
1- Bailor: The person who delivers the goods is called Bailor.
2- Bailee: The person to whom the goods are delivered is called Bailee.

Essentials of the Contract of Bailment:

1- Valid contract: There should be a valid contract of bailment between the Bailer and
the Bailee. The goods must be delivered for some purpose and when the purpose is
accomplished the goods shall be returned. There is no bailment if the goods are
delivered without any contract.
Example: “A” gives a piece of cloth to “B” for stitching suit. This is a contract of
bailment between “A” and “B”

2- Specific Purpose: The delivery of goods should be made for specific purposes and
when the purpose is accomplished the goods should be returned. When the goods
are delivered without any purpose there is no contract of Bailment.
Example: “A” gives his watch to “B” for repair. This is bailment.
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3- Delivery of goods: The bailment is of delivery of moveable goods from one person to
another person. Only the custody or possession of goods does not create a
relationship between Bailor and Bailee.
Example: “A” purchased a Radio from “B” and asks him to keep the Radio with him
for an hour so that he may purchase some other items from market. “B” is holding
the Radio as Bailee.

4- Return of same Goods: When the purpose of delivery of goods is accomplished the
goods must be returned in its original form. If the bailee has the option to return
some different goods, there is no Bailment.
Example: “A” gives his cycle to “B” for repair. “B” is liable to return the same cycle.

5- No change in Ownership: in bailment only the possession of goods is transferred

from Bailor to Bailee while the ownership will remain with the Bailor.
Example: “A” gives his cycle to “B” for repair. The possession of the cycle is
transferred from “A” to “B”, but the ownership will remain with “A”.

6- The contract of bailment may be expressed or Implied.

7- Bailment is only for moveable goods / Property.

Types of Bailments:
1- Deposit: Simple bailment of goods for particular use.
2- Hire: Delivery of goods for hire such as Rent.
3- Pledge: Goods delivered by way of security for Loan.

Kinds of Bailment:
1- Gratuitous Bailment:
Bailment of goods without any charges or reward.
2- Non-Gratuitous Bailment:
Bailment of goods for some reward or charges.

Termination of Bailment:

1- Fulfillment of the purpose: If the contract of bailment is made for a specific purpose,
the bailment terminates as soon as the purpose is accomplished.
Example: “A” gives his cycle to “B” for repair. “B” repairs the cycle and returned to
“A” the bailment is over.

2- Expiry of Time: When the bailment is made for a specific time period, the bailment
terminates after the expiry of specified time period.
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Example: “A” stored “B”’s mangos in cold storage for 1 month. After a month the
bailment terminates.

3- Inconsistent use of Goods: Where the Bailee use the goods for a purpose other than
as specified in contract of bailment. The bailor has the right to terminate the
bailment even if the purpose of bailment is not accomplished.
Example: “A” delivers the car to “B” for general service and wash, but “B” uses the
car for his personal matters. “A” has the right to terminate the bailment.

4- Destruction of subject matter: A bailment is terminated when the subject matter is

destroyed or becomes incapable of using for the purpose of bailment.
Example: “A” delivers a horse to “B” for safe custody for 2 months. After 1 month the
horse died. The bailment is terminated.

5- Death of any party: A bailment is terminated by the death of either Bailor or bailee.
Example: “A” borrows a book from “B” for 10 days. “A” dies the bailment terminated.

6- Termination by Bailor: A gratuitous bailment can be terminated by the bailor at any

time even before the specified time period.
Example: “A” lends a book to “B” for one month. “A” can demand the return of book
before the expiry of the bailment period.

Rights and Duties of Bailor & Bailee:

Duties of Bailor:
1- Duty to disclose Faults:
The bailor is bound to disclose to the bailee all those faults in goods bailed which are
known to him.
Example: “A” hires a car from “B” the car was damaged, and “B” is not aware of it.
“A” get injured. “B” is responsible for to “A” for the injury.

2- Duty to Compensate for Premature Termination:

Where a bailor sent goods to bailee for a specified period and ask the bailee to
return the goods before the expiry of specified period he must indemnify the bailee
for the loss caused to him due to this termination.
Example: “A” gives his cycle to “B” for 3 months. “B” spent Rs. 500 on its repair. “A”
demands the return of Cycle after one month. “A” is liable to compensate “B” for the
expenses incurred by him.

3- Duty to indemnify for Defective title:

Where the title of the bailor to the goods is defective and as a result the bailee
suffers a loss, the bailor is responsible to indemnify the bailee for such loss.
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Example: “A” gives the scooter of “B” to “C” for use without the permission of “B”.
“B” sues “C” and receive compensation. “A” is bound to indemnify “C” for the losses.

4- Duty to receive back the Goods:

It is the duty of the bailor to receive back the goods when the bailee return them
after the accomplishment of the purpose of bailment. If the bailor refuses to receive
the goods, the bailee can claim the expenses by him for the safe custody of the
Goods.
Example: “A” bails his horse to “B” for 2 months. After 2 months “A” refuses to
receive back the horse. “A” is liable to compensate “B” for the expenses incurred by
him for taking care of the horse after expiry of 2-month period.

5- Duty to Allow Inspection: The bailor has a duty to allow the bailee to inspect the
goods before accepting the bailment. This includes a duty to disclose any defects or
damage in the goods that may not be apparent upon inspection. Failure to allow
inspection or disclose defects may render the bailment voidable at the option of the
bailee.

Rights of the Bailor:

1- Right to claim damages: The bailor has the right to claim compensation for any
damages or loss suffered to the goods during the bailment period. If the bailee fails
to take proper care of the goods or breaches the terms of the bailment, the bailor
can seek compensation for the resulting damages.

2- Right to terminate the contract: The bailor has a right to terminate the bailment if
bailee does any act inconsistent with the terms of the bailment even before the
expiry of the bailment contract.

3- Right to demand return of Goods: The bailor has the right to demand the return of
the goods from the bailee once the purpose of the bailment is accomplished or when
the agreed-upon time period for the bailment expires.

4- Right to Sue for Breach of Bailment Contract: If the bailee fails to fulfil the terms of
the bailment contract, the bailor has the right to sue for breach of contract and seek
appropriate legal remedies, including damages for any loss suffered.

5- Right to claim increase to the goods: The bailor is entitled to claim any increase or
profit which may accrued from the goods bailed.

6- Right to claim compensation: The bailor has a right to claim compensation in case of
an unauthorized mixture of goods which cannot be separated.
 24

7- Right to claim separation of Goods.

Duties of Bailee:
1- Duty to Take Reasonable Care: The bailee is bound to take reasonable care of the
Goods bailed to him. The bailee must take necessary precautions to prevent any
damage or loss to the goods and must use them only for the specific purpose for
which they were entrusted.

2- Duty to Return the Goods: The bailee has a duty to return the goods to the bailor
once the purpose of the bailment is accomplished. The bailee must not use them for
any other purpose without the consent of the bailor.

3- Duty not to Mix Goods: where the bailment is for specific goods that needs to be
kept separate from the bailee’s own goods, the bailee has a duty not to mix those
goods with his/her own goods.
4- Duty not to make unauthorized use: The bailee must use the goods according to the
terms of bailment. If bailee makes an unauthorized use of goods, he is liable to
compensate the bailor for any loss arises for such unauthorized use.

5- Duty to return the increase: In contract of bailment the bailee is bound to return the
any natural increase or any profit accrued from the bailed goods.

Rights of Bailee:
1- Right to claim damages: If the goods are damaged due to any fault of the bailor or a
third party, the bailee has the right to claim compensation for such damages.

2- Reimbursement of expenses: The bailee is entitled to be reimbursed for any

expenses incurred in the ordinary course of bailment. For example, if the bailee
incurs expenses for the preservation or maintenance of the goods, the bailor is
obligated to compensate the bailee for such expenses.

3- Right to deliver goods: Where the goods are bailed by several joint owners the
bailee has a right to deliver the goods to any of the owners unless there is an
agreement to the contrary.

4- Right to recover damages for defective title of Bailor: In case of defective title of the
goods bailed from bailor, Baliee has a right to recover damages caused to him due to
this defect in title of Goods.

5- Right to recover damages for the loss in case bailor refuses to take the delivery.
 25

6- Right to Sue: if a third party forcefully takes the possession of Goods from bailee or
cause injury to the goods bailee is entitled to sue such third person.

7- Right to Lien: The bailee has the right of lien, which means that the bailee can retain
possession of the goods until the bailor pays the charges or remunerations to the
bailee for the services rendered in respect of the goods.

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Creation of Agency:
Introduction:
Agency is a relationship between principal and agent.
1- It is a special kind of contract.
2- It means an agreement by which one person acts for the Other.

What is Agency / Meaning of Agency:

A contract by which a relationship between principal and agent is created, under this
contract agent represents the principal in dealing with third person.
Example: “A” appoints “B” to buy 10 bags of sugar on his behalf. “A” is the principal and “B”
is the agent.

Modes of Creation of Agency:

Agency can be created by following means:
1- Agency by expressed agreement:
An agreement in which the authority is given to the agent by the principal by words
spoken or written.
Example: A job appointment letter issued by the owner to employee.

2- Agency by Implied Agreement:

An implied agency arises from the conduct, situation, or relationship of the parties.
An agreement. where authority by principal is assumed from the circumstances and
not by expressed words.
Example: “A” and “B” are brothers. “A” lives in Lahore while the “B” lives in Multan.
“B” with the knowledge of “A” gives his land on lease. He collects the rent and remit
to “A”. Here “B” is the implied agent of “A”.

Kinds of Agency by Implied Agreement:

a- Agency by Estoppel:
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Estopple means to prevent a person from denying a fact. Where agent do not
have authority from the principal but the principal through his conduct creates an
impression on mind of the third person that the agent is authorized is called
agency by Estopple.
Example: “A” tells “B” in the presence of “Z” that he is an agent of “Z”. “Z” does
not object to the statement and keep quite. Later, “B” assuming that “A” is Z’s
agent entered into an agreement with him. “Z” is bound by this agreement.

b- Agency by Holding out:

When the positive conduct of the principal makes the third person believe that
the agent is authorized though he is not actually.
Example: “A” is the servant of “B”. A” buys goods from “C” and “B” make the
payment on regular basis. “A” purchased the goods on credit from “C” for his
personal use. “B” is liable to “C” for the payment.

c- Agency by Necessity:
It arises in case of emergency; the agent is empowered to take necessary steps to
protect the principal from loss.
Example: “A” asks “B” to deliver fruit in Karachi. “B” finds that fruit is perishing
and sells them Multan. The sale is binding on the principal “A”.

d- Agency by Ratification:
Agency by ratification arises where a person acts on behalf of another without his
authority and his act is accepted by the person later is called agency by
ratification.
Example: “A” buys 5 bags of wheat without the authority of “B”. Later “B” ratifies
the act of “A”. “A” becomes his agent by this ratification.

3- Agency by Operations:
An agency arises by the operation law. Under the Partnership Act every partner is the
agent of the partnership firm. Similarly, under the Companies Act, the directors are
the agents of the company.
Example: “A” the director of a company contracts with “B” to buy machinery for the
company. “A” act as agent of the company.

4- Agency in Husband & Wife relationship:

Husband and Wife both are considered as agent of each other in dealing with third
person.

Agency Relationship:
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Parties to the Contract:

There are two parties to the contract of the agency.

1- Principal: The person for whom an act is done Or who is represented by agent is
called Principal Or The person who delegates his authority to agent is called
principal.
Example: “A” a businessman delegates “B” his authority to buy goods on his behalf,
the role of Mr. A is called principal while Mr. “B” will act as an Agent.

2- Agent: An agent is a person employed to do an act for another Or to represent

another in dealing with third person.
Example: “A” a businessman delegates “B” his authority to buy goods on his behalf,
the role of Mr. A is called principal while Mr. “B” will act as an Agent.

Note:
Agency by Necessity = Agency by Ratification + Agency by operation of Law +
Agency between husband and wife.

Short Questions:

Question: Is the consideration necessary in contract of agency?

Answer: In contract of agency “Consideration” is not necessary.

Question: Who can appoint an Agent?

Answer:
1- The person who has attained the age of majority.
2- The person with a sound mind.
3- A person capable of contacting.

Question: Who can be an agent?

Answer:
1- The person who has attained the age of majority.
2- The person with a sound mind.
3- A person capable of contacting.

Question: Define Agency by Ratification?

Answer:
1- There is No express agreement of agency between the Principal & Agent.
2- A person may act as agent of Principal without his permission.
3- The Principal may subsequently ratify that Act.
4- If the act is ratified the relationship of agency is created.
This agency is called agency by ratification.
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Question: Who is sub agent:

Answer:
1- An agent may delegate his powers to someone else.
2- Those powers must be delegated by the consent of the principal.
3- The person who is so appointed by the agent is called Sub Agent.
4- A sub agent may be appointed in case of necessity otherwise the agent cannot
delegate his duty.

Question: What is difference between Sub-Agent and Substituted Agent:

Answer:
When a person is asked to perform the task of an agent to fill the temporary vacancy
by the agent is called substituted agent though he may be appointed by the agent.

Types of Agents:
1- Special Agent: An agent to be appointed for a single specific contract.
2- General Agent: The person appointed to do all acts relating to a specific job.
3- Sub Agent: An agent appointed by an Agent.
4- Co – Agent: Agents appointed together to do an act jointly.
5- Factor Agent: An agent who is remunerated by a commission, the person who
looks like the apparent owner.
6- Broker: An agent whose job is to create a contractual relationship between two
parties.
7- Commission Agent: A person appointed to buy and sell goods for his principal.
8- Dell Credere: An agent who acts as salesperson, broker, and guarantor for the
principal. He guarantees the creditor extended to the buyers.

Revocation of Agent’s Authority:

1- It can be revoked at any time before the authority has been exercised.
2- Termination does not take effect if it is not communicated to the agent.
3- Termination of authority of agent terminates the authority of subagent also.

Termination of Agency:

1- Termination by Revocation: When the agent’s authority is revoked by the Principal.

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2- Renouncement by Agent: When the agent renounces the business of agency.

3- By Completion of Business: When the business of the agency is completed.
4- Death or Insanity of Parties: When either of the parties dies or becomes insane.
5- Insolvency of Principal: When the principal is declared insolvent.

Rights and Duties of Agent & Principal:

Duties of Agent:
1- He must conduct the business as per the directions of the Principal.
2- An agent is to conduct the business by using his skills and knowledge.
3- The agent is to present the accounts to the principal as and when demanded.
4- The agent is to use diligence to communicate any difficulty to the Principal.
5- Nothing should be concealed from the principal regarding the business.

Principal’s Duties to the Agent:

1- The principal is to indemnify the agent in case of loss suffered by agent.
2- The principal must compensate the agent in case of injury due to lack of skills.
3- The principal is liable to agent if the agent suffers loss in case of Illegal act of
Principal.

Rights of Agent:
1- Right to retain any expense incurred by him.
2- Right to remuneration.
3- Right to lien on principal’s property until his remuneration is paid.
4- Right to be indemnified for the loss incurred during business.
5- Right to compensation for any kind of injury suffered during business.

Rights of Principal:
1- Right to get business be conducted from the agent.
2- Right to the business be conducted by use of agent’s skills.
3- Right to inspect the accounts of the business.
4- Right to be indemnified against illegal acts of agents.
5- Right to get compensation in case of Loss to non-use of skills by agent.
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What is Contract Act 1872?

- Contract Act 1872 was taken from English Common Law. It is implemented in
Pakistan to regulate the Laws regarding contracts in Pakistan.
- This law defines where the promises become binding to the contracting parties.
- Each party in Contract has some rights and duties defined in this Act.
- Government of Pakistan adopted it with certain amendments.

Mid Term Syllabus:

Sr # Topic
1 Introduction to Law of Contract
2 Offer and Acceptance
3 Consideration
4 Misrepresentation
5 Discharge of Contract
6 Brach of Contract.

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