Lecture Notes The Law of Contract F-15 QAU Fall 2017 A PDF

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The Islamabad Center for Legal Studies Islamabad - Pakistan Lecture Notes on the Law of Contract 2 Contents Lesson-1: An Introduction to the Law of Contract …………………………….. 3 Lesson-2: Proposal: It’s Communication, Acceptance and Revocation …… 8 Lesson-3: Acceptance of a Proposal and its Communication...

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The Islamabad Center for Legal Studies Islamabad - Pakistan

Lecture Notes on the Law of Contract

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Contents Lesson-1: An Introduction to the Law of Contract …………………………….. 3 Lesson-2: Proposal: It’s Communication, Acceptance and Revocation …… 8 Lesson-3: Acceptance of a Proposal and its Communication ………...…... 22 Lesson-4: Formation of Contract ………………………………………………... 29 Lesson-5: Void Agreement …………………………………………………..…….. 41 Lesson-6: Performance of Contract ……………………………………...……… 57 Lesson-7: Time and Place for the Performance of Contract ………..……... 66 Lesson-8: Contracts which need not be Performed ………………….………. 74 Lesson-9: Quasi Contracts ………………………………………………….…….. 78 Lesson-10: Breach of Contract ………………………………………..…………… 82 Lesson-11: E-Contracts and E-Commerce ……………………………………… 90

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Lesson-1 An Introduction to the Law of Contract Introduction: All of us conclude and executed dozens of contracts every day without realizing that we are doing so, for instance. The act of buying a ticket for travelling by metro amounts to a contract with metro administration. Similarly, getting into a restaurant for having breakfast is a contract which many people conclude every day. Buying a newspaper is also the result of a contract although we do not realize that we have made and executed a contract by putting the price on the till and picking our newspaper. In all the above-mentioned situations, people concluded and execute many contracts every day, however, they do not realize or bother that they are making binding and enforceable contracts. The fact of existence or non-existence of a binding and enforceable contract is realized when a dispute concerning a contract is brought to a court of law. In our country the law which regulates contracts is The Contract Act 1872. The Importance of the Law of Contract: In a society where people live together there has to be a sound system of law of contract as without it no society can be imagined to work properly. The law of contract is the foundation of all the civil dealings between the members of a society. It is the law of contract that governs the agreements and obligations of the members of a society. If there is no law of contract in a society, no value would be attributed to a promise made by a person to another. The result would be that people would not have trade dealing with each other and the society might go back to the Stone Age. What is a Contract? Section-2(h) of the Contract Act, 1872 defines a contract as “an agreement enforceable by law.” Section-2(e) defines contract as “every promise and every set of promises forming Copy Right © Shaukat Hayat 2017

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consideration for each other.” Similarly, Section-2(b) defines promise as “When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal when accepted becomes a promise.” From the above definition of promise, it reveals that a contract is an accepted proposal. In short a contract is the existence of the following two elements: a). a proposal; and b). an acceptance of that proposal. Definitions of Legal Terms: a). Proposal: When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal (Section-2[a]). b). Promise: When the person to whom the proposal is made, signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise (Section-2[b]). c). Promisor and Promisee: The person making the proposal is called the “promisor”, and the person accepting the proposal is called “promisee” (Section-2[c]). d). Consideration: 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 to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise (Section-2[d]). e). Agreement: Every promise and every set of promises, forming the consideration for each other, is an agreement (Section-2[e]).

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f). Reciprocal Promises: Promises which form the consideration or part of the consideration for each other are called reciprocal promises (Section-2[f]). g). Void Agreement: An agreement not enforceable by law is said to be void (Section-2[g]). h). Contract: An agreement enforceable by law is a contract (Section-2[h]). i). Voidable Contract: An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract (Section-2[i]). Kinds of Contracts:

(1) Express Contract: The contracts which are concluded by spoken or written words are called Express Contracts. For instance A has made a proposal, either by spoken or written words to sell his house to B. B has accepted A’s proposal either by spoken or written words (Section-9).

(2) Implied Contract: The contracts which are concluded by way of actions instead of spoken or written words are called implied contracts. For instance sitting in a bus can be taken as example of implied contract between passenger and owner of the bus or buying a newspaper by placing a currency note on the till of a shop and picking the newspaper (Section-9).

(3) Bilateral Contract: Every contract involves at least two parties, a proposer and a proposee. The proposer promises to do or not to do something. Most contracts are bilateral contracts in that the contracting parties each exchange “a promise for a promise.” Copy Right © Shaukat Hayat 2017

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Whether a contract is unilateral or bilateral depends on what the proposee must do to accept. A bilateral contract is a promise for a promise, if the proposee need only promise to perform, the contract is bilateral.

(4) Unilateral Contract: As a general principle the only requirement for the conclusion of a contract is an acceptance i.e. a contract is concluded when the proposal is accepted by the proposee. Unlike this when in a contract acceptance plays no role in the conclusion of a contract and the contract is concluded only by the performance of the promise of the promisee the contract is called a unilateral contract Most contracts are bilateral contracts in that the contracting parties each exchange “a promise for a promise.” In a unilateral contract one party offers a promise to anyone who accepts the contract by doing something specified in the contract i.e. “acceptance by performance.” Rewards are perhaps a classic example of a unilateral contract (Section-168). Illustrative Case on Unilateral Contract, Carlill v. Carbolic Smoke Ball (1893): It was advertised by the Carbolic Smoke Ball company in an advertisements that a £. 100 reward will be paid to any person who is caught by influenza colds after having used the ball three times daily for two weeks, according to the printed directions supplied with each ball. When Mrs. Louisa Elizabeth Carlill contracted influenza after using the balls as stated she made her claim to which the company tried to contend that the offer wasn’t serious. The matter was taken to court and it ruled that the Carbolic Smoke Ball company was bound in contract to pay Mrs. Louisa Elizabeth Carlill £. 100 as the company had made a unilateral offer through the advertisement.

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(5) Valid Contract: The contracts which are enforceable in a court of law are called Valid Contracts. A contract is valid if it has the following features: a). Legal capacity of the parties; b). Free consent; c). Consideration; d). Legality of Object and consideration; e). Possibility of performance, etc. (6) Void Contract: A Contract which is not enforceable in a court of law is called Void Contract. If a Contract is deficient in any one or more of the afore-mentioned features (Except free consent and legal formalities) it is called Void Contract (Section-2[h]).

(7) Voidable Contract: A Contract which is deficient in only free consent is called voidable Contract. That means it is a contract which is made under certain pressure either physical or mental. At the option of aggrieved party, a voidable contract may become either valid or void in future. For instance if there is a contract between A and B where B has forcibly made A to consent, the contract would be voidable at the option of A (Section-2[i]).

(8) Illegal Contract If the contract has some unlawful object or consideration it is called Illegal Contract. For instance if there is a contract between Mr. Brown and Mr. Black according to which Mr. Black has to murder Mr. White for a consideration of Rs. 10000/- from Mr. Brown. It is an illegal contract.

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Lesson-2 Proposal: It’s Communication, Acceptance and Revocation Proposal: Section-2 (a) of The Contract Act 1872 defines the term, “Proposal” in the following words: “When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal.” A proposal is an expression of willingness to contract made with the intention that it shall become binding on the proposer as soon as it is accepted by the proposee. When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal. In other words a proposal is the definite undertaking or promise made by one party with the intention that it shall become binding on the party making it as soon as it is accepted by the party to whom it is addressed. Invitation to Treat: A proposal is different from what is known as an “invitation to treat”, i.e. where a party is merely inviting proposals, which he is then free to accept or reject. The examples of “invitation to treat” are: a). b). c). d). e).

Auction Sale; Display of Goods in Shop Windows; Advertisements; Price Lists; and Tenders;

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1- Auction Sale In an auction sale, the auctioneer’s call for bids is an invitation to treat, a request for proposals. The bids made by persons at the auction are proposals, which the auctioneer can accept or reject as he chooses. Similarly, the bidder may retract his bid before it is accepted. Illustrative Case, Payne v Cave (1789): The defendant made the highest bid for the plaintiff's goods at an auction sale, but he withdrew his bid before the fall of the auctioneer's hammer. It was held that the defendant was not bound to purchase the goods. His bid amounted to a proposal which he was entitled to withdraw at any time before the auctioneer signified acceptance by knocking down the hammer. 2- Display of Goods in Shop Windows It is a well settled rule of the English law of contract that the display of goods with a price tag attached in a shop window or on a supermarket shelf is not a proposal to sell such item. Instead it is an “invitation to treat” i.e. an invitation for customers to make a proposal to buy. Consequently, a personal attracted by the cheap price of an item displayed in a shop window legally cannot insist to buy it considering himself to be an acceptor of the proposal by the shop by display in the shop window. In fact such person is the one who gets into the shop with a proposal to buy such item. The shop keeper is at liberty either to accept or to reject his proposal as the shop window display wan not a proposal. Illustrative Case, Fisher v Bell (1960): The defendant shopkeeper had displayed a flick knife marked with a price in his shop window but he had not actually sold any. The defendant was charged under Section-1(1) of the Restriction of Offensive Weapons Act of 1959. The section says that ‘any person who sells or hires or offers for sale or hire a flick-knife guilty of an offence’. The court found him guilty of offering the knife for sale.

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However, the Court of Appeal held that the conviction should be set aside for the reason that the technical meaning in contract law of ‘offer’ was not equal to the display of an item in a shop window. This was not an offer, it was only an invitation to treat. Under the literal legal meaning of ‘offer’, the shop-keeper had not made an offer to sell. 3- Advertisements: Advertisements of goods for sale are not proposals being basis for an enforceable contract. Advertisements for sale of goods are considered as invitations to treat. Consider if advertisements were offers, someone who saw an advertisement for “Delicious Apples” could say, “I accept your offer to purchase delicious apples, and if they are not delicious, I will sue you.” No one would be able to conduct business or advertise products. Illustrative Case, Partridge v Crittenden (1968) 1 WLR 1204: Partridge published a classified where he indicated he had Bramblefinch cocks and Branmblefinch hens but the advertisement itself did not make any offer for the sale of the birds. A person sent a cheque to Partride and asked for a hen, which Patridge provided in a box. However, in terms of the Protection of Birds Act, 1954, offering for sale this particular species of wild birds was an offence and Partidge was convicted by the Magistrate. Partridge appealed against conviction. On appeal, the high court decided that the advertisement was not an offer but an invitation to treat. 4- Price Lists: A statement of the minimum price at which a party may be willing to sell will not amount to a proposal and, consequently, will not be basis for the conclusion of a contract. Illustrative Case, Harvey v Facey (1893): The plaintiffs sent a telegram to the defendant, “Will you sell Bumper Hall Pen? Telegraph lowest cash price.” The defendants reply was "Lowest price £. 900.” The plaintiffs telegraphed “We agree to buy for £900 asked by you.” It was held by the Privy Council that the defendant’s telegram was not an Copy Right © Shaukat Hayat 2017

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offer but simply an indication of the minimum price the defendants would want, if they decided to sell. The plaintiff’s second telegram could not be an acceptance. 5- Tenders: A tender is a statement which indicates that the one who invites tenders intends to invite proposals from the public which can be accepted or rejected by the inviting party. Where goods are advertised for sale by tender, the statement is not a proposal, but an invitation to treat. A tender is a request by the owner of the goods for proposals to purchase them. The inviting party is not bound to the highest bidder, however, if the bid uses any specific wording such as “and we undertake to sell to the highest bidder” then the inviting party is bound under contract to the one whose bid is highest. Illustrative Case, Spencer v Harding (1870) LR 5 CP 561: The Defendants sent out a circular containing the following wording: “28, King Street, Cheapside, May 17th, 1869. We are instructed to offer to the wholesale trade for sale by tender the stock in trade of Messrs. G. Eilbeck & Co., of No. 1, Milk Street, amounting as per stock-book to 2503l. 13s. 1d., and which will be sold at a discount in one lot. Payment to be made in cash. The stock may be viewed on the premises, No. 1, Milk Street, up to Thursday, the 20th instant, on which day, at 12 o'clock at noon precisely, the tenders will be received and opened at our offices. Should you tender and not attend the sale, please address to us sealed and inclosed, 'Tender for Eilbeck's stock.' Stock-books may be had at our offices on Tuesday morning. Honey, Humphreys, & Co.” The defendants did not promise to sell the stock to the highest bidder for cash. The plaintiffs sent a tender to the defendants which, following the submission of all tenders, was the highest tender. The defendants refused to sell the stock to the plaintiffs.

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The defendants submitted that the circular was not intended to be a binding offer capable of acceptance. Rather, it was merely a circular inviting others to make offers. The Defendants submitted that the circular did constitute a valid offer and that the Defendant had, by submitting the highest tender and attending all the necessary meetings, accepted that offer. It was held by the court that the circular was not an offer, but merely an invitation to gather tenders, upon which the Defendants were entitled to act. Willes, J. held that the absence of any specific wording such as “and we undertake to sell to the highest bidder” rebutted any presumption that the Defendants had intended to be bound by a contract and distinguished the present circumstances from instances of reward contract offers or an offer to the world. Essential Requirements of a Valid Proposal: An offer must have certain essentials in order to constitute it a valid offer. These are: 1)- A Proposal must be made with a view to obtain Acceptance: Section-2 (a) of the Contract Act 1872 while defining the term, “proposal” says: “When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal.” It is clear from the language of the above section that a proposal must be addressed to someone with the intention of seeking his acceptance. Any non-serious statement in this regard would not amount to a proposal. Illustration: Badam Gul and Kala Khan, two students of the School of Law, Quaid-i-Azam University, were having tea in the University Cafeteria. Badam Gul said to Kala Khan, “Kala Khan! I am thinking to sell you my laptop for 10,000 rupees.” Copy Right © Shaukat Hayat 2017

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The statement of Badam Gul cannot be termed as a proposal because it lacks seriousness as well as an intention to obtain acceptance of Kala Khan. The statement is just an intention on the part of Badam Gul. 2)- A Proposal must be made with the Intention of Creating Legal Relations: The requirement of intention to create legal relations in contract law is essential for removing confusion about the existence of contract between the parties. For example one may have an agreement to meet a friend at a park. This is not a binding contract because in general the parties to such agreements do not intend to be legally bound. In order to determine which agreements are legally binding and subject to an intention to create legal relations or not, the law draws a distinction between domestic agreements and agreements made in a commercial context. Illustrative Case, Balfour v. Balfour (1919) 2 K.B. 571: A husband worked overseas and agreed to send maintenance payments to his wife. At the time of the agreement the couple was happily married. The relationship later soured and the husband stopped making the payments. The wife sought to enforce the agreement. The Court held that the agreement was a purely social and domestic agreement and therefore it was presumed that the parties did not intend to be legally bound. 3. The Terms of the Proposal must not be Vague or Ambiguous. It is an essential requirement for the validity of a proposal that the terms of proposal must be definite, unambiguous and certain or capable of being made certain. For the enforceability of an agreement it is essential that the terms of proposal ar...