Business and Labour Laws - MGT 611 VU

Lesson 8

KINDS & LEGAL CAPACITY OF PARTIES TO A CONTRACT

Kinds of Contract:
We have discussed different kinds of contracts; same are reproduced here under for ready reference.

(a) Valid contract

(b) Voidable contract
(c) Void contract
(d) Unenforceable contract
(e) Express contract
(f) Implied contract
(g) Executed contract
(h) Executory contract

We have already discussed valid and voidable contract have already been discussed, rest of the kinds of
contract are discussed hereunder.

Void Agreements

This is a very wide topic and we shall explain the scope of respective sections in later discussion.
Agreements void, if considerations and objects unlawful in part. If any part of a single consideration for one
or more objects, or any one or any part of any one of several considerations for a single object, is unlawful,
the agreement is void.

Illustration

A promises to superintend, on behalf of B, a legal manufacture of indigo, and an illegal traffic in other
articles. B promises to pay to A, a salary of 10,000 rupees a year. The agreement is void, the object of A's
promise and the consideration for B's promise being in part unlawful.

Transfer of property: ---When a document transferring immovable property has been once executed and
registered, the transaction "passes out of the domain of a mere contract into one of conveyance". It then
becomes governed by the Transfer of Property Act, and S. 24 of the Contract Act has no application.

Trusts Act, 1882: ---S. 4 of the Act provides that where a trust is created for two purposes of which one is
lawful, and the other unlawful, and the two purposes cannot be separated, the whole trust is void.

Agreement without consideration is void, unless it is in writing and registered:

An agreement made without consideration is void, unless: ---

(1) It is expressed in writing and registered under the law for the time being in force for the registration
of documents, and is made on account of natural love and affection between parties standing in a
near relation to each other; or unless;
(2) or is a promise to compensate for something done; it is 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, or unless.
(3) or is a promise to pay a debt barred by limitation law; it is a promise, made in writing and signed by
the person to be charged therewith, or by his agent generally or specially authorised in that behalf,
to pay wholly or in part a debt of which the creditor might have enforced payment but for the law
for the limitation of suits.

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In any of these cases, such an agreement is a contract.

Explanation 1: ---Nothing in this section shall affect the validity, as between the donor and donee, of
any gift actually made.

Explanation 2: --- An agreement to which the consent of the promisor is freely even is not void
merely because the consideration is inadequate; but the inadequacy of the consideration may be taken
into account by the Court in determining the question whether the consent of the promisor was freely
given.

Illustrations

(a) A promises for no consideration, to give to B Rs. 1,000. This is a void agreement.
(b) A, for natural love and affection, promises to give his son, B, Rs. 1,000. A puts his promise
to B into writing and registers it. This is a contract.
(c) A find B's purse and gives it to him. B promise to give A Rs. 50. This is a contract.
(d) A supports B's infant son. B promises to pay A's expenses in so doing. This is a contract.
(e) A ownes B Rs. 1,000 but the debt is barred by the Limitation Act. A signs a written
promise to pay B Rs. 500 on account of the debt. This is a contract.
(f) A agrees to sell a horse worth Rs. 1,000 for Rs. 10. A's consent to the agreement was freely
given. The agreement is a contract notwithstanding the inadequacy of the consideration.
(g) A agrees to sell a horse worth Rs. 1,000 for Rs. 10. A denies that his consent to the
agreement was freely given.
(h) The inadequacy of the consideration is a fact which the Court should take into account in
considering whether or not A's consent was freely given.

Consideration: --- It is necessary element of a binding contract. This has already been assumed in S. 10.
The present section goes on to state the exceptional cases in which consideration may be dispensed with. It
is curious that the Act nowhere explicitly states that mutual promises are sufficient consideration for one
another, though it is assumed throughout the, Act, and seems to be involved in the definitions of
"agreement" and "reciprocal promises" in S. 2, sub-sections (e) and (f)

Forbearance and compromise as consideration: ---Compromise is a very common transaction, and so is

agreement to forbear prosecuting a claim, or actual forbearance at the other party's request, for a definite or
for a reasonable time. It may seem at first sight that in all these cases the validity of the promise is doubtful.
For the giving up, or forbearing to exercise, an actually existing and enforceable right is certainly a good
consideration; but what if the claim is not well founded? Can a cause of action to which there is a complete
defence be of any value in the eye of the law? If a man bargains for reward in consideration of his
abandonment of such a cause of action, does he not really get something for nothing, even if he believes he
has a good case? The answer is that abstaining or promising to abstain from doing anything which one
would otherwise be lawfully free to do or not to do is a good consideration, and every man who honestly
thinks he has a claim deserving to be examined is free to bring it before the proper Court, and have the
judgement of the Court on its merits, without which judgment it cannot be certainly known whether the
claim is well founded or not.

In the case of family arrangements, the Court will not look too closely into the quantum of consideration,
and an arrangement designed to promote peace and good will among members of a family has been held to
be based on good consideration, even in the absence of a dispute or of a claim to property.

A compromise relating to title to land, at a time when it was doubtful, is valid, although subsequently it may
be found by judicial decision in another case, that one of the parties to the corn. promise had a wholly valid
title, and the other had not title at all. An agreement by client to pay to his vakil after the latter had accepted
the vakalatnama certain sum in addition to his fee if the suit was successful is without consideration.

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But if a man, being already under a legal duty to do something, undertakes to do something more than is
contained therein, or to perform the duty in some one of several admissible ways, in other words, to forgo
the choice Which the law allows him, this is a good consideration for a promise of special reward.

Negotiable Instruments: ---The law merchant has almost---but, as it is held by something very near a
fiction, not quite---made an exception to the rule of consideration in the case of negotiable instruments, or
rather established another and independent rule. The Negotiable Instruments Act, 1881, S. 118, affirming
the well-settled general law, enacts that until the contrary is proved the presumption shall be made that
every negotiable instrument was made or drawn for consideration; and that every such instrument, when it
has been accepted, endorsed, negotiated, or transferred, was accepted, endorsed, negotiated, or transferred
for consideration.

The distinction between an acknowledgment under S. 19 of the Limitation Act and a "promise"
within the meaning of this section is of great importance. Both an acknowledgment and a promise are
required to be in writing signed by the party or his agent authorised in that behalf; and both have the effect
of creating a fresh starting point of limitation. But while an acknowledgment under the Limitation Act is
required to be made before the expiration of the period of limitation, a promise under this section to pay a
debt may be made after the limitation period. After the period of limitation expires, nothing short of an
express promise will provide a fresh period of limitation; an implied promise is not sufficient.

An agreement between a creditor and a debtor entered into before the expiry of the period of limitation,
whereby the date of payment is extended beyond the period of limitation, is valid, though verbal, if there is
a consideration for the agreement, e.g. payment of interest up to the extended date. Such an agreement is
not an acknowledgment within the meaning of S. 19 of the Limitation Act, nor is it a promise to pay a
barred debt; it may be enforced at any time within three years from the date on which it was made. "A
promise to pay may be absolute or conditional. If it is absolute, if there is no 'but' or 'if', it will support a suit
without anything else; if it is conditional, the condition must be performed before a suit upon it can be
decreed.

Similarly, if the promise be to pay a barred debt "within a month," the promisee must wait for a month
before he can sue on the promise. If the debtor promises to pay a barred debt out of his share of the profits
of the business started by him in partnership with his creditor, the latter cannot recover the debt except in
the manner provided in the agreement.

Agent generally or specially authorised in that behalf. A Collector, as agent to the Court of Wards, is not an
agent "generally or specially authorised in that behalf" so as to bind a ward of the Court of Wards by a
promise to pay a barred debt. A pleader cannot bind his client unless he is specially authorised in that
behalf; nor a minor's guardian the minor.

Debt: ---The expression "debt" here means an ascertained sum of money. A promise, therefore, to pay the
amount that may be found due by an arbitrator on taking accounts between the parties is not a promise to
pay a "debt" within this section. The expression "debt" in this clause includes a judgment debt. A promise,
therefore, to pay the amount of a decree barred by limitation does not require any consideration to support
it.

It is not necessary to the operation of this clause that the promise should in terms refer to the barred debt.
Thus where A passed a promissory note for Rs. 50,000 to B, and after the debt was time-barred, passed
another note promising "to pay Rs. 50,000 for value received in cash," it was held that it was open to B to
show that the amount, though not paid in cash, referred to the debt due under the first note.

An insolvent who has obtained his final discharge is under no legal obligation to pay any debt included
therein, and any promise to pay it is accordingly without consideration. Such a debt is said to be barred by
insolvency, and the Contract Act contains no exception in favor of a promise to pay it.

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Agreement to pay time-barred debt cannot be avoided u/s. 25.

Inadequacy of Consideration: Agreement to which consent of Promisor freely given to be not void
merely because of consideration being inadequate---Inadequacy of consideration, however, to be
competently taken into account in determining question whether consent of Promisor was freely given.

Transaction to pay a time-barred debt: Gives rise to inference that it was without consideration---Such
transaction would be void under section 25 (3).

Inadequacy of consideration---Effect on agreement---Agreement to which consent of promiser was

freely given, held, would not be void merely because of inadequacy of consideration---Such inadequacy of
consideration, could be taken into account by the Court in determining question whether consent of
promiser was freely given---Circumstances in which sale-deed was executed and fact that same was not
given effect in revenue record in the life-time of vendor and till a further period of four years after death of
vendor, held, would lead to irresistible conclusion that sale-deed was not a genuine transaction and consent
of seller was not freely given.

Time barred debt---Promise to pay under duress---Promise invalid. Promise in writing to pay a debt
which was already time barred was extracted from the defendant under policy pressure.

Promise to pay should not be conditional but absolute.

An agreement for payment of a debt should be an absolute promise. If it is a conditional promise

dependent on the happening or the success of certain events. It is the duly of the plaintiff to prove that
these events have happened and the defendant was to perform the promise. Failure to prove it is fatal to the
success of a suit based on such a document.

Agreement without consideration---Void: An agreement without consideration is void unless it comes

under any of the exceptions set out in Sub-clauses (1) to (3) of section 25 of the Contract Act.

Gift made without consideration---Void---Conditions for such a gift: When a gift was made for
services rendered although they could not be measured in money:

Explanation I to section 25 of the Contract Act is fully applicable and the gift is perfectly valid even if
there was no consideration for it. For such a gift to be valid the three essential conditions are;

(1) clear and unambiguous declaration of the intention of the donor to give immediately a property to
the donee;
(2) acceptance of the gift by the donee and;
(3) delivery of possession of the subject of gift to the donee

If these three conditions are fulfilled, the gift is complete and valid.

Agreement in restraint of legal proceedings.---"This section applies to agreements which wholly or

partially prohibit the parties from having recourse to a court of law. If, for instance, a contract were to
contain a stipulation that no action should be brought upon it, that stipulation would, under the first part of
S. 28, be void, because it would restrict both parties from enforcing their rights under the contract in the
ordinary legal tribunals, and so if a contract were to contain a double stipulation that any dispute between
the parties should be settled by arbitration, and that neither party should enforce his rights under it in a
court of law; that would be a valid stipulation so far as regards its first branch, viz., that all disputes between
the parties should be referred to arbitration, because that of itself would not have the effect of ousting the
jurisdiction of the Courts, but the latter branch of the stipulation would be void because by that the
jurisdiction of the Court would be necessarily excluded."
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Agreements void for uncertainty. Agreements, the meaning of which is not certain, or capable of being
made certain, are void.

Illustration

(a) A agrees to sell to B "a hundred tons of oil." There is nothing whatever to show what kind of oil
was intended. The agreement is void for uncertainty.
(b) (b) A agrees to sell to B one hundred tons of oil of a specified description, known as an article of
commerce. There is no uncertainty here to make the agreement void.
(c) (c) A, who is a dealer in coconut-oil only, agrees to sell to B "one hundred tons of oil." The nature
of A's trade affords an indication of the meaning of the words, and A has entered into a contract
for the sale of one hundred tons of coconut-oil
(d) (d) A agrees to sell to B "all the grain at Rahimyar Khan. "There is no uncertainty here to make the
agreement void.
(e) (e) A agrees to sell to B "one thousand maunds of rice at a price to be fixed by C." As the price is
capable of being made certain, there is no uncertainty here to make the agreement void.
(f) (f) A agrees to sell to B "my white horse for rupees five hundred or rupees one thousand." There is
nothing to show which of the two prices was to be given. The agreement is void.

Agreement is void only when it is uncertain and unascertainable---Agreement capable of being

ascertained---Not void. Under section 29 of the Contract Act, it is only when the meaning of an
agreement is not certain or capable of being made certain that the agreement becomes void.

When, therefore, the sellers told the buyers that each shipment shall be treated as if separate contracts were
made for it and they shall be bound to accept it even if this shipment was only in respect of a part of the
goods and the buyers agreed to this condition, the agreement is not void as it is capable of being
ascertained.

Agreement by way of wager void: Agreements by way of wager are void; and no suit shall be brought for
recovering anything alleged to be won on any Wager, or entrusted to any person to abide the result of any
game or other uncertain event on which any wager is made.

Section 294-A of the Pakistan Penal Code not affected: Nothing in this section shall be deemed to
legalise any transaction connected with horse racing, to which the provisions of section 294-A of the
Pakistan Penal Code apply.

Wagering contract: ---This section represents the whole law of wagering entracts now in force.---There is
no technical objection to the validity of a wagering contract. It is an agreement by mutual promises, each of
them conditional on the happening or not happening of an unknown event. So far as that goes, promises of
this form will support each other as well as any other reciprocal promises. It would have been better if the
Courts in England had refused, on broad grounds of public policy, to admit actions on wagers; but this did
not occur to the Judges until such actions had become common; and, until a remedy was provided by
statute, they could only find reasons of special public policy in special cases, which they did with almost
ludicrous ingenuity.

What is a wager? A wager has been defined as a contract by A to pay money to B, on the happening of a
given event, in consideration of B paying [this should be "promising to pay" to him money on the event not
happening.

"By way of wager"---There is no distinction between the expression "gaming and wagering," and the
expression "by way of wager," used in this section. The cases therefore bearing on the expression used are
still useful in construing the expression "by way of wager.’

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Void Contract:
A void contract is the one which is not enforceable by law. It has been provided in section (j) of the
Contract Act.

“A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable”. A
voidable contract is a good contract as long as it is not avoided by the person who has the option to avoid
whereas a void contract is not a contract at all from the very beginning in the eye of law.

Example:
Mr. Aslam resident of Lahore entered into an agreement with Mr. Kamal, a rice dealer at Gujranwala for the
purchase of 100 tons of rice. District Coordination Officer (DCO) Lahore had imposed restriction on entry
of rice in the territorial jurisdiction of District Lahore well before the date of the above agreement. The said
agreement is not enforceable at law, hence void.

Situations of void contract;

¾ Impossibility of performance: It has been discussed in section 56
¾ Legal contract may become void due to some illegality afterwards.
¾ Revocation of a voidable contract by the party at whose option, the contract is avoidable
becomes void contract

Unenforceable Contract
Such contracts are unenforceable before a court of law due to some technical defects such as non-deposit
of court fee, submission of unsigned documents, absence of writing, wherever writing required, absence of
registration, wherever required under law. On removal of these discrepancies, the contract becomes
enforceable.

Express contract
An express promise shall lead to an express contract. Such a contract may be expressed by words spoken or
written. Express contracts are contained in the provisions of section 9 of the Act.

Implied contract
Such contracts are inferred from the acts and conduct of the contracting parties.
Example:
Mr. Aslam was engaged by a business man as a helper at his shop. He has been performing the job assigned
to him, however no appointment letter was issued by the shopkeeper. Although there is no express
agreement as to the employment of Mr. Aslam but the acts and the conducts of the respective parties shall
lead to a conclusion regarding the nature of contract between them. Since the conclusions shall be inferred
from the acts and conduct of the respective parties, such contract would be called an implied contract.
The provisions regarding express and implied contract as contained in section 9 are given below:

“In so far as the proposal or acceptance of any promise is made in words, the promises is said to be
express. In so far as such proposal or acceptance is made otherwise than in words, the promise is said to
be implied.”

Promises express and implied—Explanation:

In so far as the proposal or acceptance of any promise is made in words, the promise is said to be express.
In so far as such proposal or acceptance is made otherwise than in words, the promise is said to be implied.

Express and Implied promises: --- An implied promise, in the sense of the Act, is a real promise, though
not conveyed in words. A tacit promise may be implied from a continuing course of conduct as well as
from particular acts. Thus an agreement between partners to vary the terms of the partnership contract may
"either be express or be implied from a uniform course of dealing" (section 11 (1) of the Partnership Act,

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1932. Where parties have acted on the terms of an informal document which has passed between them, but
has never been executed as a written agreement or expressly assented to by both, it is a question of fact
whether their conduct establishes an implied agreement to be bound by those terms. Questions may arise
whether all the terms of another document are incorporated in a contract, when the contract refers to that
document. The terms of a document can be incorporated by reference, when they are not inconsistent with
the express terms of the incorporating document, and are not repugnant to the transaction which that
document represents.

Sale of immovable property---No price specified---Not enforceable contract. As a general rule, in the
case of immovable properties price is of the essence of a contract of sale and unless the price is fixed there
is no enforceable contract, because if no price is named the law does not imply, as in case of a sale of goods,
a contract at a reasonable price.

Executed contract
Such contracts are those where interactive parties have completely performed their respective obligations
under the contract.
Example:
Mr. Ali entered into an agreement with Mr. Aslam to sell his car for Rs 800,000. Mr. Ali delivers the car to
Mr. Aslam and he paid the promised amount i.e. Rs 800,000 to Mr. Ali. Such a contract is called an
executed contract since both parties have performed their part of promises.

Executory contract:
In such contracts both parties are yet to perform their obligations under the contract.
Example:
We take the same example as quoted above but with some difference.
Mr. Ali entered into an agreement with Mr. Aslam to sell his car for Rs 800,000. Mr. Ali has not yet
delivered the car to Mr. Aslam and Mr. Aslam has not yet paid the promised price that is Rs 800,000 to Mr.
Ali. Such a contract is executory contract since both parties are yet to perform their part of promises.

Legal capacity of parties to a contract

We have already discussed that contracting parties must be competent under law to enter into a contract.
The scope of the legal capacity is provided in section11 which we have already discussed and same is
reproduced here under for ready reference.

“Every person is competent to contract who is of the age of majority according to law to which he is
subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is
subject.”

Scope of definition:
According to above definition, the question of legal capacity of contracting party shall be determined on the
following parameters:

1. Contracting parties should have attained the age of majority.

2. Contracting parties should be of sound mind
3. Contracting parties not disqualified from contracting by any law.

Concept of age of majority:

For the purpose of entering into contract, a person must have attained age of 18 years. Contract by a minor
is void ab-initio. In a transaction where minor is only a beneficiary and not a contracting party, the
transaction shall be treated as valid transaction. Under Majority Act 1875, age of 18 years or more is the age
of majority. If guardian is appointed by court then minority continues till the age of 21 years.

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A mortgage executed by a minor is void.

A contract for personal service by a minor is void, in case of breach of such an agreement on the part of a
minor, he can not be sued.

A minor entering into a service contract can leave the job at any time and by doing so that person (minor)
shall not be committing any actionable wrong. It means that minor if under a service agreement cannot be
sued.

However there are some exceptions with respect to agreement with the minor or on account of
minor which have been provided in section 68:
“Claim for necessaries supplied to a person incapable of contracting, or on his account: --- If a person
incapable of entering into a contract or any one whom he is legally bound to support, is supplied by another
person with necessaries suited to his condition in life, the person who has furnished such supplies is entitled
to be reimbursed from the property of such incapable person”. Necessaries shall include goods, food,
education, health care etc.

"Law to which he is subject": ---The age of majority as well as the disqualification from contracting is to
be determined by the law to which the contracting party is subject.

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