DEFINITION OF CONTRACT according to section 2(H) of the contract act “an agreement enforceable by law is a contract.” From the definition it is clear that in order to make a contract there must be 1. an agreemnt, 2. The agreement should be enforceable by law. In order to be enforceable ;by law the agreement must create legal obligations between the parties. Contract = agreement + legal obligationsESSENTIALS OF A VALID CONTRACT According to section 2(h) “an agreement enforceable by law” is a contract”. It means an agreement is regarded as a contract when it is enforceable by law. In other words, an agreement that the law will enforce is a contract. The conditions of enforceability are states in section 10. According to section 10, 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.” Where necessary, the agreements must satisfy the requirements of law regarding writing, attestation or registration. An agreement becomes enforceable by law when it fulfills essential conditions. These conditions may be called essentials of a valid contract which are briefly discussed hereunder. Agreement: For an agreement, there must be a lawful offer, by one party and lawful acceptance of that offer from the other party. The term lawful means that the offer and acceptance must satisfy the requirements of contract act. Legal relationship: the parties to an agreement must create legal relationship. It arises when parties know that if one of them does not fulfill his part of promise. He shall be liable for the failure of a contract, agreements of a social or domestic nature do not create legal relations. Lawful consideration: Consideration is “ something in return’ it means something which is of some value in the eye of law. It may be some benefit to the other party. Consideration has been defined as the price paid by one party for the promise of the other. Capacity of Parties: The parties to an agreement must be competent to contract, otherwise it cannot be enforce by law. If one of the a parties to the agreement suffers from minority, lunacy, idiocy, drunkenness etc. the agreement is not enforceable at law, except, in some cases, in case of necessaries supplied to a minor or lunatic, the supplier of goods is entitled to be reimbursed from their estate. Free consent means the consent of the party should be obtained without fear undue influence, misrepresentation, fraud, etc. Lawful object: It is also necessary that agreement should be made for a lawful object. Writing and registration: a contract may be oral or in writing, it is essential for the validity of a contract that it must be in writing, signed and attested by witness and registered with the registrar appointed by the government for this purpose. Certainty: According to section 29 of the contract act, agreements that meaning of which is not certain or capable of being made certain are void. For a valid contract, the terms and conditions of an agreement must be clear and certain. Possibility of performance: The valid contract must be capable of performance, section 56 says “ an agreement to do an act impossible in itself is void” Not expressly declared void: an agreement must not be one of those which have been expressly declared to be void by the act. E.g an agreement in restraint of trade and an agreement by way of wager have been expressly declared void under section 27 & 30 respectively.KINDS OF CONTRACTS: There are 3 main groups of contracts: 1 VALID CONTRACT: 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. “where necessary, the agreements must satisfy the requirements of law regarding writing, attestation or registration. A valid contract is one that meets all the legal requirements for binding contract. A valid contract is an agreement that is binding and enforceable, in order to be binding and enforceable an agreement must posses the essential elements of a valid contract which are as under: agreement – offer & acceptance Legal relationship Lawful consideration capacity of the parties Free consent of the parties Lawful object writing and registration certainty possibility of performance Not expressly declared void. Obligation of parties IN valid contract all the parties to the contract are legal responsible for the performance of a contract. If one of the parties breaks the contract, the other party has a right to take action against the guilty part, the contract can be enforced through the court also. 2. 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. A voitable contact is one in which one or more of the parties have legal rights to cancel their obligations under the contract. they are enforceable against both the parties unless a party with the power to break the contract has exercised that power. A voibalbe contract I san agreement which may be binding and enforceable but due to some reasons regarding its execution it may be rejected by the party entitled to do so. Circumstances under which a contract becomes voidable: The following are the circumstances under which a contract becomes voidable: 1. a contract becomes voidable when the consent of one of the parties to the contract is obtained by coercion, undue influence, misrepresentation or fraud. 2. when a contract contains reciprocal promises, and one party to the contract prevents the other from performing his promise, then the contract becomes voidable at the option of the party so prevented. 3. when a party to the contract promises to do a certain thing at and before specified time, but fails to do it, then the contract becomes voidable at the option of the promise, if the intention of the parties was that time should be of the essence of the contract. it may however be explained that the question as to whether time was the essence of the contract is a question of fact. Obligations of the parties: It ia a valid contract until it is avoided by the party having the right to avoide it. Such a contract can be rescinded by the aggrieved party, i.e. a party whose consent was so obtained. If the aggrieved party wants its performance it can compel the other party for performance. The aggrieved party can reject such contract (i) within a reasonable time and (ii) before the rights of third parties intervene otherwise, the contract would be binding. When an aggrieved party avoides the contract, the other party need out performance any promise contained in the contract, if the party rescinding a voidable contract ahs received any benefit from another party, he must restore such benefit, to the person from whom it was received. Burdon of Proof: The burdon of proof lies on plaintiff, i.e. an aggrieved party. It means that the party who claims that his consent has been obtained by coercion, undue influence, misrepresentation or fraud has to proof in the court of law, if he cannot prove, than the contract will remain valid. VOID CONTRACT: void contract is that which has no legal effect at all. “ a contract which ceases to be enforceable by law becomes void, when it ceases to be enforceable. Circumstances under which a contract becomes void: Impossibility of performance, subsequent illegality, rejection of a voidable

contract, contingent contract when depending event becomes impossible, obligation of parties: in case of a void contract, both the parties are not legally responsible to fulfill the contract, under this contract any party who has received any benefit is bound to return it, to the person from whom he received it. UNENFORCEABLE CONTRACT: An agreement is illegal and void if it; is forbidden by law or is of such a nature that if permitted, it would defeat the provisions of any law or is fraudulent or it involves or implies injury to the person or property of another or the court regards it as immoral, or opposed to public policy. RIGHTS OF PARTNERS Every partner has a right to share equally in the profits earned by the fir, irrespective of his amount of capital contribution. a partner is not entitled to receive interest on the capital contributed by him. a partner is entitled to received 6% interest on any loans made by him to the partnership, unless it is agreed that no such interest would be allowed. Such interest shall be paid from the date of the payment of advance. a partner is not allowed to demand pay or remuneration for taking part in the conduct of business. every partner has a right to take part in the conduct of the business. a partner shall indemnify the firm for any loss caused to it by his willful neglect in the conduct of the business. if a partner pays more than his proportionate share of the firm’s debts, he may compel his copartners to contribute their relative shares. the partnership must indemnify every partner in respect of (a) payment made by him (b) personal liabilities incurred by him in the conduct of the business. every partner has a right to check the books of accounts of the firm and to get the copies. a new partner cannot be admitted in the firm and an old partner cannot be expelled from the firm without the prior consent of all the parties. Nature of the partnership business cannot be altered without the prior approval of all the partners. a partner has an implied right to collect partnership debts and to give receipts for payments. a partner can lease both real personal property on behalf of the partnership, provided the lease is reasonably necessary to carry on the partnership business in the ordinary course of its affairs. every partner can act as an agent on behalf of the remaining partners and bind the other partners to his act. every partner has a right to be consulted and heard before any matter is decided. DUTIES OF PARTNERS every partner is bound to work in the business of the firm to the greatest common advantage. It means that every partner must use his knowledge and skill for the benefit of the firm and not for hi personal gain. He must conduct the business with the best of his ability and secure maximum benefits for the firm. every partner must be just and faithful to his copartners. He must observe utmost good fait and fairness towards other partners of the firm. every partner must render true and proper accounts to his copartners, it means that each partner must be ready to explain the accounts of the firm and produce vouchers in support of the entries. No partner should try to earn secured profit at the expense of the firm. every partner must give full information about the firm to his co partners. A partner being an agent of other partners must not conceal any information concerning the firm from other partners. if the firm suffers any loss due to willful negligence or fraud by any partner, the partner concerned must compensate the firm and other partner. Where a partner acts bonafide the loss caused by his neglect or want of skill or omission is borne by the firm. in day to day business the decision is taken by the majority partners. a partner must not employ the firm’s property for his personal use or benefits. if a partner earns profit from any

transaction of the fir, the profit will be paid to the firm. a partner may not without the consent of his copartners engage in any business, either openly or secretly, which competes the partnership business. LIABILITIES every partner is jointly and severally liable for business debts. a new partner cannot be held responsible for any debts or transactions before his date of admission. all the partners are responsible for injuries done to outsiders by one of the partners provided the partner has caused this injury during the proper conduct of the partnership affairs. every partner is to bear the loss of the firm in the agreed proportion nd in the absence of an agreement loss must be borne by all the partners equally. the property of the deceased partner cannot be held responsible for any liabilities incurred or transactions happened after his death. a retiring partner is liable for the debts incurred before the date of his retirement.PARTNERSHIP the document in which the respective rights and obligations of the members of the partnership are written is called “partnership deed” it should be drafted with care and be signed by all the partners. Each partner should have a copy of the deed. At the time of the registration of the fir, a copy of deed should be filed with the respective registrar of firm appointed by government. Such deed is also called articles of partnership. Need & Importance the successful running of partnership business depends uon the mutual trust and cooperation of partners. It is generally observed that such trust and cooperation starts disappearing after the firm has worked for some time. Partners start quarreling on petty matters. As a result the firm comes to an end. Such possibilities can be minimized and even avoided if there is written agreement between the partners on such matters which may create differences in course of time. The need and importance can be described as under. it forms the basis of the formation of the partnership, a well though out partnership deed can guarantee the existence of firm for a long time. it is important in the sense that it defines the mutual rights duties and liabilities of partners. it describes the name, nature of business, names and addresses of partners, and their capital contribution. it contains the relevant rules and regulations governing the business. OFFER OR PROPOSAL: defination of an offer reveals three essentials of a proposal. 1. it must be an expression of the willingness to do or to to abstain from doing something. 2. The expression of willingness to do or to abstain from doing something must be to an other person. There can be no proposal by a person to himself. 3. the expression of willingness to do or to abstain from doing something must be made with a view to obtaining the assent of the other person to such act or abstienence. Essentials: an offer may be express or implied. an offer must create legal relations the terms of the offer must be certain and not vague an invitation to offer is not an offer. an offer may be specific or general an offer must be communicated to the offeree noncompliance of a term an offer can be subject to any terms and conditions two identical cross offers do not make a contract. TERMINATION OF OFFER: by the communication of notice of revocation by the proposer to the other party. 2 by the lapse of the time prescribed in such proposal for its acceptance, or if no time is so prescribed, by the lapse of reasonable time, without communication of the acceptances, 3 by the failure of the acceptor to fulfil a condition precedent to acceptance or by the death or insanity of the proposer if the fact of his death or insanity comes to the knowledge of the acceptor before acceptance. ACCEPTANCE: 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. Thus acceptance is the assent given to a proposal and it has the effect of covering the proposal into promise. ESSENTIALS: acceptance must be given by the offeree, acceptance must be absolute and unqualified., refusal and renewal of proposal, acceptance must be in a prescribed way., acceptance must be communicated by the acceptor, acceptance may be express or implied, acceptance of a proposal is an acceptance of all the terms, acceptance must succeed the offer, acceptance must be given before revocation of offer. TERMINATION OF ACCEPTANCE an acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not afterwards. DEFINITION OF FREE CONSENT: Section 14 says the consent is said to be free when it is not caused by 1 coercion, as defined in section 15 or, 2 undue influence as defined in section 16 or 2. fraud, as defined in section 17 or, 4 misrepresentation , as defined in section 18, or mistake, subject to the provision of section 20, 21 and 22.CAPACITY OF PARTIES: Minors, according to section 3 of majority act 1875 a person domiciled in Pakistan who is under 18 years of age is a minor. Accordingly every person who has completed the age of 18 years becomes a major, but a minor attains majority after 21 years of age in the following 2 cases. 1. where a guardian of minors person or property has been appointed by the court under guardian and wards act 1890, 2. where a minor is under the guardianship of court of words.

persons of unsound mind, Section 12 of the contract act defines the term sound mind as follows, a person is said to be sound mind for the purpose of making a contract if at the time when he makes it, he is capable of understanding it and of forming a rational jud to its effect upon his interests, a person which is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind, a person who is usually of sound mind but occasionally of unsound mind, many not make a contact when he is of unsound mind.disqualified persons: according to section 11 the third category of incompetent person is that who are disqualified from contracting due to political professional or legal status such as; joint stock company, independent sovereigns and ambassadors, aliens, insolvent person.

DIFFERENCE BETWEEN PRIVATE & PUBLIC LIMITED COMPANY: Private Company Public Company# of membersthere can be min 2 & max. 50Area of ownershipvery limited, it is generally confined to one family.Sale of shareCan not invite general public for purchase of sharesCommencement of businessPrivate company can start its business as son as it gets the certificate of incorporationAllotment of shares

Min 7 & max no limit

On the contrary a public company has ownership scattered over a wide area.

Can invite the general public for purchase of shares.

A public company cannot start its business until it has received the certificate of commencement of business.

Can allot its shares immediately after its incorporationStatutory meetingFor this calling of statutory meeting is not essential.Issue of prospectusThis company cannot issue either prospectus or statement in lieu of prospectus.Framing of articles of associationA private company has to frame its own articles of associationTransfer of sharesThere is restriction on the transfer of shares in this company.Minimum number of directorsA private company must have minimum 2 directors.BorrowingA private company can borrow money soon after incorporation.QuorumA quorum for a private company’s meeting is two members who represent not less than 25% of the total voting power unless the articles provide for larger member.Sending of accountsA private company is not required to send copies of profit and loss account and balance sheet to the authority, stock exchange and the registrar.Use of the word LimitedA private company must use the words pvt ltd. At the end of its name.Signatories to memorandumIn order to form a private company only two signatories to the memorandum are required.First directorsA private company is not required to appoint first directors.Loans to directorsA private company can give loans to directors or give guarantee for getting loans.Rights of directorsThe directors of a private company can give his vote on

This company cannot allot its shares till it has received a min. amount of money as subscription.Calling of statutory meeting and submission of the statutory report is essential.Issue of prospectus or a statement in lieu of prospectus is a must.Can choose not to have its own articles and allow itself to be governed by the provisions of Table A of schedule 1 of the companies ordinance.

Shares of this company can be transferred freely.A public company must have at least seven directors.

can do so after getting the certificate of commencement of business.

A quorum of PC meeting is 3 who represent not less than 25% of the total voting power unless the articles provide for larger number.

Company is required to send copies of profit and loss account and balance sheet to the authority, stock exchange and registrar.

Must use the word limited only at the end of its name.

Atleast seven signatories to memorandum are required.

Company is required to appoint first directors.

Cannot give loans to directors or give guarantee for getting loans.

Cannot give his vote on such agreements in which his interests are involved.

such agreements in which his interests are involved.

NEGOTIABLE INSTRUMENTS: The work negotiable means transferable by delivery, and the word instrument means a written document which creates a right in favor of some person. Thus the term negotiable instrument means a written document transferable by delivery. According to section 13 of the negotiable instruments act, a negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or bearer. A negotiable instrument may be made payable to two or more persons jointly, or it may be made payable in the alternative to one of two, or one or some of several payees. (Sec 12(2). CHARACTERISTICS OF A NEGOTIABLE INSTRUMENT: Easy Transferability: They are transferable from one person to another. The right of ownership in these instruments passes either by endorsement or merely delivery. Transferee can sue in his own name: a note bill of exchange or a cheque gives the right to the creditor to recover something from debtor. The creditor can recover this amount himself or can transfer his right to another person. When he transfers his right, the transferee of the negotiable instrument can sue the debtor in his own name in case of dishonor, without giving notice to the debtor of the fact that he has become holder. Better title to a bonafide transferee for value: A bonafide transferee of a negotiable instrument for value (called holder in due course) gets the instrument free from all defects. He is not affected by any defect of title of the transferor or any prior party. Thus, the general concept of law that in case of transfer of property “nobody can transfer a better title than that of his own does not apply to negotiable instruments. For example, where a person sells a stolen radio to another, the true owner can get his radio back from the buyer even though the buyer may have got it in good faith for consideration. But when somebody gets a negotiable instrument, for value in good faith even from a thief, he gets better title and transferor becomes a holder in due course. The following are some examples of negotiable instruments. Bills of exchange, promissory notes, cheques, dividend warrants, shares warrants, bearer debentures, government promissory notes etc. Promissory Note: according to sec6tion 4 a promissory note is an instrument in writing (not being a bank note or a currency note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or to the order of a certain person, or to the bearer of the instrument. Parties to the promissory note: There are two parties to a promissory note namely; 1) maker: The person who makes the promise to pay is called the maker. He is the debtor and must sign the document. 2) payee: the person to whom payment is to be made is called payee i.e. creditor. Essentials of Promissory Note: The following are the essentials of promissory note. 1) it must be in writing: a promissory note must be in writing. A verbal promise to pay does not become a promissory note. The writing may be on any paper or book, it can be written with pen or pencil. It may be printed or typed. 2) it must contain a promise to pay: There must be a promise or an undertaking to pay. A mere acknowledgement of debt is not a promissory note. 3) the promise to pay must be unconditional: it must contain an unconditional promise to pay. The promise to pay must not depend upon the happening of some uncertain event or fulfillment of condition. It must be absolute. If it contains a conditional promise, it is not a valid promissory note. 4) it must be signed by the maker: It is necessary that the

maker must sign the promissory note. The signature may be in any part of the instrument and not necessarily be at the bottom, when the maker is illiterate, his thumb mark is sufficient. 5) the maker must be a certain person: The instrument must indicate who is the person taking responsibility to pay. Where there are two or more makers, they may be liable jointly or jointly and individually. But alternative promisor are not allowed. 6) The payee must be certain: the payee of a promissory note must also be a certain person. The payee’s name can be indicated by his official designation only. It may be made payable to two or more payees jointly. It can also be made payable in the alternative to one of two, or one or some of several payees. The alternative payees are allowed in law (sec 13 (2)) 7) the sum payable must be certain: It is also necessary that the sum of money promised to be payable must be certain and definite. A note is the form “I promise to pay B Rs 500 and all fines according to rules” is not a valid promissory note. 8) The sum payable must be in Legal tender money of Pakistan: A promissory note containing a promise to pay a ceratin amount in foreign currency or to deliver a certain goods is not a valid promissory note. A promise to pay B Rs 1000 and a horse is not a valid promissory note. For a valid note, it must contain a promise to pay a certain amount in Pakistani Currency. Thus a note signed by A saying “I promise to pay B Rs 500 and to deliver to him my horse on 1st January next” is not a valid note. 9) Other Formalities: Apart from the above essentials, some other things are also necessary, a) it is proper to state the place in a note where it is made. B) the date should also be mentioned on which it is made. C) The promise to pay in the note must be for lawful consideration. D) it must be properly stamped under the stamp act. E) it is also necessary to cancel all the stamps affixed on the note. Important Points: the following points regarding promissory note are worth noting; 1. a note payable only to a particular person is valid even though it is not a negotiable instrument or it restricts its transferability. 2) a promissory note cannot be originally made payable to bearer, because only the government have a right to issue such instruments. 3) it can be drawn ”payable to order” originally 4) on endorsement in blank it can become “payable to bearer” or payable to bearer on demand” subsequently. 5) it may not be a bank note or a currency note.BILL OF EXCHANGE: Section 5 of the act defines bill of exchange as follows; “a bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to , or to the order of , a certain person or to the bearer of the instrument. Parties to a bill of exchange: There are three parties to a bill of exchange: 1) drawer: the person who makes the bill is called the drawer 2) Drawee: The person who is directed to pay is called the drawee. 3) payee: The person to whom the payment is to be made is called the payee. The drawer or the payee in case of endorsement is called the holder. The holder must present the bill to the drawee for his acceptance. When the drawee accepts the bill, by writing the words “accepted and signs it, he is called acceptor. But when the bill is drawn “pay to me or my order. The drawer becomes the payee also. A drawee may also become the payee when bill is subsequently endorsed in favour of the drawee. Similarly, when one draws a bill upon himself, the drawer will become the drawee also. But in this case the holder may treat it as a bill or as note. Essentials of a Bill of Exchange: The following are the essentials of a bill of exchange. 1) it must be in writing 2) it must contain an order to

pay 3) the order to pay must be unconditional 4) it must be signed by the drawer 5) the drawee must be certain person. 6) the payee must be a certain person. 7) the amount payable must be certain. 8) the order must be to pay money only. 9) it must also comply with the formalities as regards date, place, consideration, stamps etc. Distinction between promissory note and a Bill of exchange: 1) number of parties: there are two parties in a pro-note, namely the maker and the payee. In a bill there may be three parties, the drawer, the drawee and the payee. 2) maker and payee: In a pro-note the maker cannot be the payee because the same person cannot be both the promisor and the promise. But in a bill the drawer and payee may be the same person when bill is drawn “pay to me or my order”. 3) promise and order: In a promissory note there is a promise to make the payment. whereas in a bill of exchange there is an order for making the payment. 4) Nature of Liability: The liability of maker of a pro-note is primary. But the liability of a drawer of a bill is secondary and condition. The drawer is liable only when the acceptor does not honour the bill. 5) maker’s Position: The maker of a promissory note stands in immediate relation with the payee. but the drawer of a accepted bill stands in an immediate relation with the acceptor and not the payee. 6) Payable to Bearer: A pro-note cannot be drawn payable to bearer. But a bill can be so drawn provided it is not drawn “payable to bearer on demand. 7) acceptance: A note requires no acceptance as it is signed by the person who is liable to pay. The bill must be accepted by the drawee before it is presented for payment. 8) Notice of Dishonour: In case of promissory note, no notice is necessary to the maker in case of dishonour. But in bill of exchange, notice of dishonour must be given by the holder to all prior parties who are liable to pay. 9) Payable to maker: A note cannot be made payable to the maker himself. While a bill can be made payable to the maker himself as one person may become both the drawer and payee or drawee and payee. 10) copies: a note cannot be drawn in sets, while a foreign bill can be drawn in sets 11) Protest: A note need not be protested. But a foreign bill must be protested for dishonour when it is required by law. 12) certain provisions: the provisions relating to presentment for acceptance or acceptance for honour are applicable only to a bill of exchange. These provisions are not applicable to a promissory note.CHEQUE: section 6 defines a cheques as follows; “ A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise, than on demand. Parties to a cheque: there are three parties to a cheque. Drawer: the person who draws the cheque is known as the drawer. Drawee: The bank on which the cheque is drawn is known as the drawee. Payee: The person to whom the cheque is made payable is known as the payee. Features of Cheque: 1) it is always drawn on a bank. 2) It is always payable on demand. Distinction between cheque and bill of exchange: 1) Drawee: a cheque is always drawn on a bank, while a bill can be drawn on any person, including a bank 2) payable on Demand: a cheque can only be drawn payable on demand while a bill may be drawn payable on demand or on the expiry of a certain period after date or sight. 3) Payable to bearer on demand: A cheque drawn “payable to bearer on demand” is valid but a bill drawn “payable to bearer on demand is void. 4) Acceptance: A cheque does not requires any acceptance by the drawee before payment can be demanded. But a bill requires acceptance by the drawee before it is presented for payment. 5) Grace Days: Three grace days are allowed while calculating the maturity date in the case of bill

drawn payable after the expiry of a certain period. Cheque is always payable on demand there is no question of allowing grace days. 6) Stamp: A cheque does not require any stamp. But a bill must be stamped. 7) Crossing: Cneque can be crossed for the purpose of safety. But a bill cannot be crossed. 8) Noting or protest: there is no system of noting or protest in case of a cheque. But in case of dishonour of a bill, the holder can cause such dishonour to be noted by a notary public. 9) Stopping the payment: the payment of a cheque can be stopped by the drawer. But in case of bill the drawer cannot stop the payment. 10) Notice of dishonour: notice of dishonour is not required in cheque. But notice of dishonour is required in bill.CONTRACT OF SALE OF GOODS: section 4(1) of the sale of goods act defines a contract of sale of goods as a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. Essentials of a contract of sale: The above definition provides the following essentials or characteristics of a contract of sale of goods. 1) Two parties: The first essential is that there must be two parties to a contract of sale i.e a buyer and a seller because a person cannot buy his own goods. According to section 4(1) there may be a contract of sale between one part owner and another, for example, if A and B jointly own a typewriter. A may sell his share to B. In this way B may become sole owner of the typewriter. Similarly, a partner may buy the goods from the firm in which he is a partner and vice versa. 2) Transfer of Property: Transfer of property is the second essential of sale. “property” here means ownership. A mere transfer of possession of the goods cannot be termed as sale. To constitute a contract of sale the seller must either transfer or agree to transfer the property (ownership) in the goods to the buyer. 3) Goods: The subject matter of the contract of sale must be goods. According to section 2(7), goods means every kind of movable property other than actionable claims and money. And include electricity, water, gas, stock and shares, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale. Thus every kind of movable property except actionable claim and money is regarded as goods. Goodwill trademarks, copyrights, water, gas electricity, decree of a court of law all are regarded as goods. With regard to growing crops, grass and things attached to or forming part of the land such as trees, fruits, etc are regarded as goods because they can be separated from land and taken away by buyer. But the goods which cannot be separated from land are not regarded as goods. Actionable claims, means claims which can be enforced by a legal action, e.g. a debt. Money is also not regarded goods because it is the medium of exchange through which goods can be bought. However old and rare coins may be treated as goods. 4) Price: According to section 2(10) the consideration for a contract of sale must be money called the price. When goods are sold or exchanged for other goods, the transaction is barter, and not a contract of sale of goods. If goods are sold partly for goods and partly for money, the contract is sale. 5) sale and agreement to sell: the term contract of sale includes, both sale and an agreement to sell. Where under a contract of sale the property (ownership) in the goods is immediately transferred at the time of making the contract from the seller to the buyer, the contract is called a sale. where under a contract of sale the transfer of ownership in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell. 6) Other Formalities: According to section 5, there is no specific procedure to make a

contract. It is only the result of offer an acceptance. Neither payment nor delivery of goods is necessary at the time of contract. It may be oral or in writing. Distinction between sale and agreement to sell: the following are the points of distinction between sale and an agreement to sell. 1) transfer of property (ownership): in a sale the ownership in goods passes to the buyer immediately at the time of making the contract. In other words, the seller ceases to be the owner of the goods and the buyer becomes the owner immediately. in an agreement to sell, there is no transfer of ownership to the buyer at the time of the contract. The ownership transfers at a certain date or subject to fulfillment of some condition. 2) Risk of Loss: The general rule is that unless otherwise agreed, the risk of loss prima facie passes with ownership. (Sec 26) in case of sale, if the goods are destroyed the loss falls on the buyer even though the goods are in the possession of seller, because the ownership has already passed to the buyer. in an agreement to sell, where the ownership in the goods is yet to pass from seller to the buyer, such loss has to be borne by the seller even though the goods are in the possession of the buyer. 3) consequences of breach: In case of sale, if the buyer wrongfully neglects or refuses to pay the price of goods, the seller can sue for the price, even though the goods are still in his possession. In an agreement to sell, if the buyer fails to accept and pay for the goods, the seller can only sue for damages and not for the price, even though the goods are in the possession of buyer. 4) right of resale: in a sale, the ownership is with the buyer and so the seller cannot resell the goods, even though the goods are in the possession of seller. If the seller sells the goods, the new buyer having knowledge of the previous sale does not acquire a title to the goods. The original buyer can sue and recover the goods from the thirds person as owner. The buyer can also sue the seller for breach of contract. The right to recover the goods from the third party is, however lost if the subsequent buyer had bought them bonafide without notice of the previous sale. (sec. 30) in an agreement to sell, the ownership in good remains with the seller and so he can resell those goods to the new buyer. The original buyer can sue for breach of contract only. The subsequent buyer gets a good title to the goods, irrespective of his knowledge of previous sale. 5) insolvency of buyer: In a sale, if the buyer is adjudged insolvent before he pays for the goods, the seller, in the absence of lien over the goods, must deliver the goods to the official receiver. The seller is entitled only to rateable dividend for the price of the goods. but in an agreement to sell, in these circumstances, the seller may refuse to deliver the goods to official receiver unless paid for, as ownership is still with the seller. 6) insolvency of seller: in a sale, if the seller is adjudged insolvent, the buyer is entitled to recover the goods from official receiver because the ownership in goods is with the buyer. in an agreement to sell, if the buyer has already paid the price, and the seller is adjudged insolvent, the buyer can only claim a rateable dividend as a creditor and not the goods because the ownership pin them still rests with the seller.CONTRACT OF GUARANTEE: “a contract of guarantee is a contract to perform the promise or discharge the liability of a third party in case of his default. (sec. 126). Parties: there are three parties to a contract of guarantee: 1) surety: the person who gives the guarantee is called the surety or guarantor 2) creditor: the person to whom the guarantee is given is called the creditor. Principal debtor: The person in respect of whose default the guarantee is given is called the principal debtor or the

person for whom guarantee is given is called principal debtor. a contract of guarantee is made with the object of enabling a person to get a loan or goods on credit or an employment etc. it may be either oral or written. Some person comes forward and tells the lender, or the supplier or the employer that he may be trusted and in case of any default. “I undertake to be responsible.” Essential Features: the following are the essential features of contract of guarantee. Principal debt: The purpose of a guarantee is to secure a debt. The existence of a recoverable debt is necessary. A contract of guarantee is an agreement between the principal debtor, the creditor and the surety. The three separate contracts exist between them. One between the principal debtor and the creditor, creating the debt, the second between the creditor and the surety creating liability and the third between the principal debtor and surety where the principal debtor requests the surety to act as surety and impliedly promises to indemnify the surety in case the surety incurs a liability. in a contact of guarantee there should be some one liable as a principal debtor and the surety should be liable on principal debtor’s default. It is a principal contract and not a collateral. Consideration: a contract of guarantee, like every other contract must have essential elements of a valid contract, e.g. free consent, legality of object, competency of parties etc. it must also be supported by some consideration. But there need not be direct consideration between the surety and the creditor and consideration received by the principal debtor is sufficient for the surety. According to section 127 of the act “anything done, or any promise made for the benefit of the principal debtor may be a sufficient consideration to the surety for giving the guarantee. No Misrepresentation: According to section 142, a guarantee obtained by means of misrepresentation made by the creditor or with his knowledge and assent, concerning a material part of the transaction, is in valid. in a contract of guarantee, surety is entitled to know material facts of the contact of guarantee. It is the duty of the creditor to disclose the material facts about the contract and principal debtor to the surety. If the consent of surety will be obtained by misrepresentation, the surety will be discharged from his liability. Writing not necessary: According to section 126, it is not necessary that contract of guarantee must be in writing. It may be either oral or written.KIND OF GUARANTEE: a guarantee may be an ordinary guarantee or a continuing guarantee. An ordinary guarantee, has to be distinguished from a continuing guarantee as explained below; Ordinary Guarantee: The guarantee which is given fro a single specific debt or transaction, is called an ordinary or specific guarantee. It comes to an end as soon as the liability under the transaction ends. Continuing Guarantee: according to section 129 A guarantee, which extends to a series of transactions. Is called continuing guarantee. In other words a guarantee which covers a number of transactions over a period of time is called continuing guarantee. It is just like a standing offer which is accepted by the creditor every time a subsequent transaction takes place. Being a standing offer it may be revoked at any time by the surety as to further transactions.DISTINCTION BETWEEN A CONTRACT OF INDEMNITY AND A CONTRACT OF GUARANTEEIndemnity GuaranteeThere are two parties the indemnifier and the indemnity holder.The liability of indemnifier is

There are three parties, the creditor, the principal debtor, and the surety.The liability of surety is

primary and independent.The indemnifier acts without the request of the debtor.The liability of the indemnifier arises only on the happening of a contingency.The indemnifier cannot sue the third party for loss in his own name. he can do so only if there is an assignment of claim in his favour.A contract of indemnity is for the reimbursement of loss.There is only one contract between the indemnifier and the indemnified.

secondary. It means that surety is liable only if the principal debtor falls to perform his obligations.It is necessary that the surety should give the guarantee at the request of the debtor.There is an existing legal debt or duty the performance of which is guaranteed by the surety.The surety after he discharges the debt owing to the creditor can, proceed against the principal debtor in his own right.A contract of guarantee is for the security of a debt or good conduct of an employee.There are three contracts on between creditor, and the principal debtor, the second between the creditor and the surety, and the third between the surety and the principal debtor.

CONTRACT OF INDEMNITY: 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, is called a contract of indemnity. (Sec 124). in other words a contract where one person promises to compensate the other form the loss which may arise due to the conduct of the promisor himself or any other person. Is called a contract of indemnity. a contract of indemnity is made in order to protect the promise against anticipated loss. The contingency upon which the whole contract of indemnity depends is the happening of loss. A contract of indemnity is part of a general class of contingent contracts. Contracts of insurance are common examples of indemnity. It must also fulfill all the essential of a valid contract. Parties: there are two parties to a contract of indemnity. 1) indemnifier: The person who promises to make good the loss is called the indemnifier (promisor). 2) indemnity holder: the person whose loss is to be made good is called the indemnity holder or indemnified (promisee). Rights of Indemnity Holder: the indemnity holder has the following rights against the indemnifier as explained in section 125 of the contract act 1872. 1) he is entitled to claim all damages which he may be compelled to pay in respect of any suit filed against him. 2) he can recover all costs reasonably incurred, in bringing or defending such suit, provided he acted prudently or with authority of the indemnifier. 3) he can recover all sums which he may have paid under the terms of any compromise of any such suit, provided the compromise was not against the orders of the indemnifier and was prudent or was authorized by the indemnifier. Rights of indemnifier: It is well known principle of the law that where one person has agreed to indemnify another, he will on making good the loss, be entitled to all the ways and means by which the person indemnified might have protected himself against or reimbursed himself for the loss.AGENT AND PRINCIPAL: section 182 of the contract act defines the terms agent and principal as follows; “ An agent is a person employed to do any act for another or to represent

another in dealings with third person. The person for whom such act is done or who is so represented, is called the principal. the contract which creates the relationship “Principal and agent is called an agency. Under a contract of agency the agent is authorized to create a contract between his principal and a third party. An agent is merely a connecting link, after entering into a contract of behalf of the principal with a third part, the agent drops out and ceases to be a party to the contract and the contract binds the principal and the third party as if they have made it themselves. the person who gives only an advise to another, cannot be called an agent. Similarly a person rendering personal service to his master or working in his factory cannot be called an agent. Agency arises only when one person acts as representative to the other in business dealings in order to create contractual relations between that other and third person. Essentials of Agency: 1) agreement: the relationship agency is the result of an agreement between the principal and agent. The agreement may be express or implied from the conduct of the parties. 2) Principal should be competent to contract: according to section 183, any person who is of the age of majority according to the law to which he is subject, and who is of sound mind may employ an agent, it follows only a person competent to contract can employ an agent, minor, lunatic or a drunken person cannot employ an agent. 3) agent need not be competent: according to section 184, the agent need not be competent to contract. Every person can become an agent. Even a minor or a person of unsound mind can be appointed as agent because it is the principal who is liable to the third parties for the act of his agent. In appointing a person of unsound mind or minor as an agent, the principal takes a great risk because he cannot hold such an agent liable for his misconduct or negligence. 4) consideration not necessary: in order to create an agency the consideration is not necessary. The fact that principal has agreed, to be represented by the agent is sufficient detriment to the principal to support the contract (sec 185) 5) Intention: the agent must have intention to act on behalf of the principal. When the agent enters into a contract for himself, then the principal will not be liable. The principal shall be liable only when agent contracts with the intention to act on behalf of principal. TEST OF AGENCY: agency exists whenever a person has the authority to act on behalf of the other and to create contractual relations between that and other persons. When this kind of power is not enjoyed. The relationship is not one of agency. Thus a person is not an agent merely because he gives another advise in matter s of business. Similarly, a person rendering personal service to his mater cannot be called an agent. PURPOSE OF AGENCY: usually an agency may be created to perform any act which the principal himself could lawfully do. The object of agency should not be criminal and contrary to public policy. They courts will not enforce an agency contract which is against the interest s of the society. There are some acts which must be performed by a person himself and cannot be delegated to an agent. Voting, swearing to the truth of documents are the instances where personal action is required. GENERAL RULES OF AGENCY: the following are the two rules regarding agency: 1) whatever a person competent to contract can do himself he can do through an agent, except for acts involving personal skill and qualifications. For example, a person cannot marry through an agent. He cannot paint a picture through an agent etc. as so doing involves his own skills. 2) The acts of the agent are the acts of the principal. It means he who acts through an agent is himself acting.

DISTINCTION BETWEEN AGENT AND SERVANT: the distinction between agent and servant is as under; 1) a servant acts under the direct control and supervision of his employer. An agent does not act under the direct control and supervision of his principal. 2) a servant has to act according to the orders of the mater in every particular case. An agent has a wide discretion to act within the scope of his authority. 3) A servant does not create relations between his employer and third persons and cannot bind the master to third parties. An agent creates relations between his principal and third persons and can bind his principal to third parties. DISTINCTION BETWEEN AGENT AND INDEPENDENT CONTRACTOR: the distinction between an agent and independent cont5ractor is as under: 1) an independent contractor is employed to perform certain specified work but he performs the work according to his discretion. An agent is also employed to do work but he acts within the scope of the authority entrusted to him by his principal. 2) the contractor does not represent his employer. An agent always represents his principal. 3) the contractor cannot bind his employer to third persons. An agent can bind his principal to third persons.