Essentials of a contract

The general law of contract in Pakistan is contained in the Contract Act 1872. English decision's (where relevant) are also cited in the courts. The Act defines "contract" as an agreement enforceable by law. The essentials of a (valid) contract are: 

(a) intention to create a contract; 

(b) offer and acceptance; 

(c) consideration; 

(d) capacity to enter into a contract; 

(e) free consent of the parties; 

(f) lawful object of the agreement; 

Writing is not essential for the validity of a contract, except where a specific statutory provision requires writing. An arbitration clause must be in writing. 

Offer and acceptance 

It is a essential ingredient of a contract, that there must be a offer and its acceptnce. If there is no offer, there is no contact, because there is no meeting of minds. Again, if there is an offer by one party, but it is not accepted by the other party or if the ostensible acceptance of the offer is defective, then also, there is no agreement and therefore no "contract". 

These propositions may appear to be elementary. A large bulk of commercial litigation, however, requires the parties to deal with the basic questions, which are :  

(a) Whether there has there been an offer at all in the particular case, or whether there is something less than an offer; 

(b) If there is an acceptance; whether it is in the proper form;  

(c) Whether there has been an acceptance of the offer; 

(d) Whether the acceptance has been communicated to the offeror. 

Concept of offer 

An offer (or a "proposal") is not defined by statute. It is generally understood as denoting the expression, by words or conduct, of a willingness to enter into a legally binding contract as soon as it has been accepted, usually, by a return promise or an act on the part of the person (the offeree), to whom it is so addressed.  

An acceptance, in relation to an offer, is a final and unqualified expression of assent to the terms of the offer.  

Offer, followed by acceptance, is an "agreement", if an agreement is enforceable by law, it is a "contract".  

Offer by and to whom 

An offer must be made by a person legally competent to contract or on his behalf, by someone authorised by him to make the offer. It is usually made to a person (or to a number of persons), but it can be made to the entire world, as happened in Carlill v. Carbolic-Smoke Ball. Co., [(1893) 1 QB 256: (1881-94) All ER 127]. In that case, the defendants (manufacturers of medicinal smoke balls) promised to pay £100 to anyone who, after having bought and used their smoke balls, caught influenza. Plaintiff did so and caught influenza. Plaintiff was held entitled to recover. It was no defence that there was no particular individual to whom the announcement was addressed. Such contracts are sometimes called "unilateral contracts" – not a very happy term, because a contract can never be "unilateral". There must be two parties. It is really a case of innumerable offers, made to all potential readers of the announcement.  

Statements which are not offers 

Every statement of intention is not an offer. A statement must be made with the intention that it will be accepted and will constitute a binding contract. Following are not offers:– 

(a) Statement made during negotiation, without indicating that the maker intends to be bound without further negotiation.  

(b) A statement which invites the other party to make an offer (e.g., a notice inviting tenders).  

(c) Statement of lowest price. [Harvey v. Facey, (1893) A.C. 552]. It is regarded as an invitation to make offers. [Re Webster (1975) 132 CLR 270 (Australia)].  

(d) Display of goods in a ship with price tags. (It is merely an invitation to make an offer, so that the trader may not accept the offer, if the price is incorrectly marked. [Fisher v. Bell, (1960) 3 All ER 731].  

Intention to be bound 

A definite intention to be bound is highlighted in Gibson v. Manchester City Council, [(1979) 1 All ER 192]. In 1970, M adopted a policy of selling council houses to tenants. In February, 1971, the City Treasurer wrote to G, stating that council "may be prepared to sell the house to you at £2,180 (freehold)". The letter asked G to make a formal application. This he did, and the council took the house off the list of council-maintained properties. Before the completion of the normal process of preparation and exchange of contracts when property is sold, control of the council changed hands and the policy of selling council houses was reversed. The new council decided only to complete those transactions where exchange of contracts had already taken place. In the UK Court of Appeal, it was held (by a majority) that a contract had been made between G and M. Lord Denning suggested that "there is no need to look for strict offer and acceptance" in every case; a price had been agreed and the parties intended to carry through the sale. However, the house of Lords held that the February letter was (at the most) an "invitation" of treat. G's application was an offer and not an acceptance. (Informal agreements for the sale of houses are not likely to be held as binding contracts, because, otherwise, buyers may find themselves committed before securing mortgage finance).  

Termination of offer 

Some parties clearly indicate that their statements or documents do not constitute offers, e.g., estate agents."These particulars do not form, nor constitute any part of an offer, or a contract, for sale". Until an offer is accepted, it creates no legal rights and it may be terminated at any time in a variety of ways. Principal modes of termination of an offer are: 

(a) by the offeror revoking (or withdrawing) it before acceptance;  

(b) by the offeree rejecting the offer outright or by making a counter-offer; 

(c) by lapse of time, if the offer is stated to be open only for a fixed time; 

In Great Northern Rly. Co. Ltd. v. Witham, [(1873) LR 9 CP 16]. Great Northern Railway advertised for tenders for the supply of such stores as they might require for one year. W submitted a tender to supply the stores in such quantities as Great Northern Railway might order from time to time and his tender was accepted. Orders were given for some time, but eventually was given an order which he refused to carry out. It was held that W was in breach. A tender of this kind was a standing offer which was converted into a series of contracts as Great Northern Railway made their orders. W might revoke his offer for the remainder of the period covered, but must supply the goods already ordered. Revocation of an offer is effective, only when communicated to the offeree.  

Quality of acceptance 

Acceptance of an offer must be absolute and must correspond with the terms of the offer. This rule a key constituent of the basic premise, does not always accord with the realities of complex business contract negotiations today. Such negotiations may indeed proceed through a series of proposals, counter-proposals, withdrawals, variations and qualifications, before agreement (or otherwise) is reached. When parties carry on lengthy negotiations, it may be hard to say exactly when an offer has been made and acceptance. Butler Machine Tool Co. Ltd. v. The Ex Cello Corp. (Eng) Ltd. (1979) 1 WLR 401]. the court must look at the entire correspondance to decide whether an apparently unqualified acceptance did, in fact, conclude the agreement. 

A conditional offer, if accepted, must be accepted along with all the conditions. 

However, in regard to international agreements governed by the U.N. Convention on contracts for international sale of goods, there is a slight qualifications, in as much as, article 19 of the Vienna Convention provides that non material variations between offer and acceptance do not make a difference. 

Consideration 

As a rule, An agreement without "consideration" is void. The Act contract defines "consideration" as follows: 

"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 abstains from doing, something, such act, abstinence, or promise is called a consideration for the promise."  

A mere promise to give a donation, either orally or in writing, is not enforceable. Settlement of bona fide but doubtful claims involves a bargain between the contracting parties and is, therefore, based on consideration. Money is not the only form of consideration. A consideration may consist sometimes in the doing of a requested act, and sometimes in the making of a promise by the offeree. Forbearance to sue at the promisor's desire constitutes good consideration.  

Consideration is not required for a promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor or something which the promisor was legally compellable to do. It is also not required for a written and signed promise by the debtor (or his duly authorised agent) to pay a time-barred debt to the creditor. 

Capacity of the parties 

A person is competent to contract if, at the time of making it, he is of sound mind, major and not disqualified from contracting under law.  

Where he has not attained the age of 18 years (or being under a court of wards, has not attained the age of 21 years), he cannot contract. Agreements made by minors are void. Minors cannot, on attaining majority, ratify agreements entered into during their minority. But if a minor makes a fraudulent misrepresentation about his age and obtains a loan, he can be required (at the discretion of the court) to refund it or to make compensation for it.  

An unadjudged lunatic can enter into a valid contract during lucid intervals.  

A corporation can contract subject to limits imposed by its documents of incorporation.  

Consent 

When consent of a party to a transaction is procured by coercion, undue influence, fraud or misrepresentation, the agreement is voidable at the option of the party whose consent was so procured. Cases of undue influence arise where the transaction is ex facie unconscionable and one party was in a position to dominate the will of the other. Where parties are bound by a fiduciary relationship, (as in the case of father and son, doctor and patient, master and servant, advocate and client), the law protects the weaker party, throwing on the other party the burden of proving that no undue influence was exercised.  

Mutual mistake in respect of material facts in the formation of a contract renders the agreement void. A unilateral mistake, however, does not render an agreement void. Nor does a mistake of law affect its validity.  

Unlawful agreements 

An agreement whose consideration or object is unlawful, is void. The consideration or object of an agreement is unlawful, if it is forbidden by law or it would defeat the provisions of any law or is fraudulent, or involves or implies injury to the person or property of another or the court regards it as immoral or opposed to public policy.  

A party to an illegal agreement who has advanced money under it to the other party is entitled to recover it, if the illegal purpose has not been partly or wholly carried out.  

Agreements in restraint of marriage, trade and legal proceedings are void. The seller of the good-will of a business may, however, validly agree with the buyer to restrain from carrying on a similar business within specified local limits, provided the limits are reasonable. 

Persons bound by the contract 

Promises bind the promisors and in case of death of promisor (before performance) their legal representatives, unless there is contract to the contrary, or the nature of the contract is such that it depends upon the personal qualifications of any party. 

Performance and frustration 

There are special provisions dealing with the case where time is the essence of contract. In commercial contracts, it is better to provide specifically that time is of the essence. A contract is validly discharged by faithful performance, by release or remission by the promisee, by "frustration" (under law) or by "Novation" (by agreement).  

Frustration occurs when unexpected developments subsequent to the making of the contracts render performance impossible. Novation occurs when the old agreement is replaced by a new agreement.  

Subsequent events and frustration 

If, subsequent to the making of the contract, some event happens, which the parties could not control so that the agreement cannot be performed, the contract is said to be "frustrated"because the contract then becomes impossible of performance. Frustration may occur by a change in the law, destruction of the subject-matter, supervening incapacity of the contracting party to perform the contract or fundamental change in circumstances after the contract is made. Mere strike, lock-out in the factory, rise in price of the contracted goods or other commercial difficulties do not, as such, render the contract "impossible" of performance.  

Introduction of the permit system by statute does not absolve the promisor from supplying the goods. He must make reasonable efforts to procure the permit to fulfill his agreement. Change in market conditions also does not justify a supplier in demanding a price higher than that stipulated, unless there is an "escalation" clause.  

Frustration leads to automatic termination of the contract, and exempts the parties from performance or further performance of the contract without rendering any of them liable for damages. Where, however, any party has received any benefit under the agreement, he must restore it or make compensation for it to the other party.  

Remedies for breach of contract 

The principal remedies for breach of contract are: 

(a) damages; 

(b) specific performance of the contract; and 

(c) injunction.  

When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, being loss or damages which naturally arose in the usual course of things from such breach or which the parties knew, when they made the contract, to be likely to result from the breach of it.  

Such compensation is not to be given for any remote and indirect loss of damage sustained by reason of the breach.  

The same principle applies for determining damages for breach of an obligation arising from quasi-contract.  

In estimating the loss or damage arising from a breach of contract, the means which existed of remedying the inconvenience caused by the non-performance of the contract must be taken into account. This is referred to, as the duty to mitigate. 

Illustration 

A stipulation for increased interest from the date of default may be regarded as a stipulation by "way of penalty", if the amount is excessive. The court is empowered to reduce it to an amount reasonable in the circumstances. 

Specific performance and injunctions 

In certain special cases dealt with in the Specific Relief Act, the court may direct against the party in default "specific performance" of the contract, that is to say, the party may be directed to perform the very obligation which he has undertaken, by the contract. This relief is awarded only in exceptional cases.  

That Act also deals with permanent injunctions. Temporary injunctions are governed by the provisions of order of the Code of Civil Procedure, 1908.