Business Law Week 4 (Essential of A Valid Contract)

LAW OF CONTRACT
CONTRACT ACT—DEFINITION &

SCOPE
Law of contract is one of the
important law relating to business
transactions. Law regarding contracts
is governed by the Contract Act 1872.
Some Definitions of Contract
1. Pollock : Every agreement and promise enforceable at
law is a contract.
2. Salmond : A contract is an agreement, creating and

defining the obligation between parties.
3. Halsbury: An agreement between two or more persons

which is intended to be enforceable at law and is
constituted by the acceptance of one party to an offer
made to him by the other party to do or abstain from doing
some act.
Contract as defined in Sec. 2(h):
“An agreement enforceable by law is a contract”
Thus, a contract consists of two elements:
a) Agreement
b) Enforceability by Law
Contract = Agreement + Enforceable by Law
a) Agreement
To understand a contract, we need to know what an
agreement is.
The agreement has been defined in section 2 (e) of the Act
which is given below:
“Every promise or every set of promises, forming the
consideration for each other is an agreement.”
Agreement = Promise + Consideration
Promise
To understand an Agreement, we must know what a
promise is. The promise has been defined in section 2(b)
of the Act which is reproduced below:
“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”.
Promise = Proposal + Acceptance
Consideration
It is the price paid by one party for the promise of the
other party.
Therefore, a contract is an agreement, an agreement is a
promise and a promise is an accepted proposal.
Example:
C offers (proposal) to sell his car to B for Rs. 8 lac
(Consideration). B gives acceptance to the offer/proposal
(promise).
b) Enforceability
An agreement is enforceable by law if it is recognized by
the courts.
In order to be enforceable by law, the agreement must
create legal obligations between the parties.
All the contracts are agreements but all agreements are
not contracts.
Two types of Agreements
a) Social Agreements
b) Legal Agreements
Examples
a) Husband promised his wife to give her a diamond ring
on her birthday. Wife cannot sue her husband in this
respect. It is a social agreement.
b) C promises to sell his car to B for Rs. 8 lac. It is a legal
agreement. Because it creates legal obligations. This
agreement is a contract.
Contract = Agreement + Enforceable by Law
Agreement = Promise + Consideration
Promise = Proposal + Acceptance

Essential of Valid Contract
A valid contract is binding and enforceable by law.
In a valid contract all the parties are bound to perform the
contract.
If one party refuses to perform the contract, the other
party can enforce it through court.
In order to be enforceable, an agreement must possess
essentials of a valid contract.
According to Section 10:
“What agreements are contracts. All agreements are
contracts if they are made by the free consent of parties
competent to contract, for a lawful consideration and with
a lawful object, and are not hereby expressly declared to
be void.
Essential of a Valid Contract
1. Offer and Acceptance
2. Legal Obligations (not social agreement)
3. Lawful Consideration
4. Capacity of Parties
5. Free Consent
6. Lawful Object
7. Writing and Registration
8. Certainty of Terms
9. Possibility of Performance
10. Not expressly declared void
1. Offer and Acceptance
An offer is the starting point of a contract. In order to form an
agreement, there must be an offer by one party and an acceptance
of that offer by the other party.
Example:
C offers to sell his cycle to B for Rs.4000. It is an offer. If B

accepts the offer, there is an acceptance.
2. Legal Obligations (not social
agreement)
The parties to an agreement must create legal obligations. It
means that if one party does not fulfil his promise, he shall be
liable for breach of contract. It is presumed in commercial
agreements that the parties intend to create legal obligations.
Examples:
a. C offers to sell his watch to B for Rs.800. B agrees to buy. It is a
contract as it creates legal obligation.
b. A husband promised to pay his wife an allowance of £30 every month.
Later, the parties separated and the husband refused to pay. The wife
sued. Held, that the wife could not recover the amount as the parties did
not want to create legal obligations. (Belfour vs. Belfour)
3. Lawful Consideration
Consideration means something in return. The contract must be
supported by lawful consideration on both sides. Consideration is
the price paid by one party for the promise of the other party. An
agreement is enforceable only when both the parties give and
receive something; the something given or received is called
consideration.
Examples:
C agrees to sell his house to B for Rs.10 Lac. Rs.10 Lac is the
consideration for C, and house is the consideration for B.
C promises B to get him a government job and B promises to
pay bribe of Rs.1 Lac. The agreement is void as the consideration
is unlawful.
4. Capacity of Parties
An agreement is enforceable if it is made by parties who are
competent to contract. In order to be competent to contract, it is
essential that the parties must be of the age of majority, of sound
mind and not disqualified from contracting by law. An agreement
with incompetent person is not a valid contract.
Examples:
a. M, a person of unsound mind, agrees to sell his house to S
for Rs.20 Lac. It is not a valid contract because M is not
competent to contract.
b. C, aged 20, promises to sell his car to B for Rs.3 Lac. It is a
valid contract because C is competent to contract.
5. Free Consent
For a valid contract, it is essential that the consent of parties must
be free. Consent is free when it is not obtained by coercion, undue
influence, fraud, misrepresentation or mistake. If the consent of
either of the parties is not free, the agreement cannot become a
contract.
Examples:
a. C compels B to enter into a contract at gunpoint, It is not a
valid contact as the consent of B is not free.
b. M, with free consent, promises to sell his motor cycle to N
for Rs.50,000/-. It is a valid contract.
6. Lawful Object
The contract must be made for a lawful object. The object of
contract is lawful if it is not fraudulent, illegal, immoral, opposed
to public policy or involves injury to the person or property of
another.
Every contract with unlawful object or consideration is illegal
and void.
Examples:
a. C promises to pay Rs.5000 to B, if B beats D. The contract is
illegal as its object is unlawful.
b. B hires a house to use for gambling. The object of the
contract is unlawful so agreement is illegal and void.
7. Writing and Registration
A contract may be oral or in writing. However, if the contract is
in writing, it is easier to prove in court. Therefore it is necessary
that a particular contract must be in writing, signed by parties to
the contract and should be witnessed by two witnesses and it
must fulfil all the requirements of a valid contract..
Examples:
A written agreement was made for sale of immovable

property but it was not signed by the two parties. The court
held that no contract existed. (Farzand Ali vs. Khuda
Bakhsh)
8. Certainty of Terms
According to Section 29,
“Agreements, the meaning of which is not certain or
capable of being made certain, are void.”
The terms of an agreement must be clear, complete and

certain. If the terms are uncertain, the agreement is void.
9. Possibility of Performance
A valid contract must be capable of being performed. An agreement
to perform an impossible act is void. If the act is legally or
physically impossible to perform, the agreement cannot be enforced
by law.
Examples:
a. C agrees with B to discover a treasure by magic. The
agreement is not enforceable by law.
b. C agrees with B to put life in B’s dead dog. The agreement is
void as it is impossible to perform.
10. Expressly Declared Void
The agreement must not be one of those agreements which have
been expressly declared void by the law. Sections 24-30 explain
certain agreements which have been expressly declared void, e.g.
agreement in restraint of trade, wagering agreement.
Examples:
a. C promises to close his business if B pays him Rs.2 Lac It is
a void agreement because it is in restraint of trade.
b. C promises to pay Rs.2000 to B if Pakistan wins the final of
cricket world cup. The agreement is void because it is a
wagering agreement.
Wagering Agreement:
Agreements entered into between parties under the

condition that money is payable by the first party to
the second party on the happening of a future
uncertain event, and the second party to the first party
when the event does not happen, are called Wagering
Agreements.
Case Study
Belfour vs. Belfour

Business Law Week 4 (Essential of A Valid Contract)

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LAW OF CONTRACT

CONTRACT ACT—DEFINITION &

2. Salmond : A contract is an agreement, creating and

3. Halsbury: An agreement between two or more persons

Agreement = Promise + Consideration

Promise = Proposal + Acceptance

C offers to sell his cycle to B for Rs.4000. It is an offer. If B

A written agreement was made for sale of immovable

The terms of an agreement must be clear, complete and

Agreements entered into between parties under the

Belfour vs. Belfour

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