Business law

Contract: every argument and promise enforceable at law between the two persons or
parties that specifies the terms and conditions of the agreement. Similarly there are two
type of contract i.e . . . . Social agreement and the other is legal contract

Contract act: contract act of 1872 are prevailing in Pakistan for commercial contracts
and it come into force on the September 1st. 1872 in the sub content
It consist 238 sections details are as follows (5 parts)
1) Sections 1-75. general principles governing all types of contracts
2) Section 76-123. stands repealed(to withdraw a law or show flexibility)
3) Section 124-147 contract of indemnity and guarantee
4) Sections148-181 contracts of bailment and pledge.
5) Section 182-238 contracts of agency

Agreement: every promise forming the considerations foe one another is called as
agreement
(Contracts based on agreements)
Enforceability: an agreement that is recognized by the law or court of law is known as
enforceability

Essentials of a valid contract:

➢ Offers and acceptance: for a valid contract their must b an offer from one party
and acceptance of that offer from the other party.
➢ Legal Relationship: the parties of an agreement must creates legal relationship
which means a consideration to each other according to law.
➢ Capacity of parties: the parties to a contract must be of sound mind. Lawful age
and must not disqualified by each courts.
➢ Free consent: there will be no impossession of facts and figures but the contract
must base on the free wall of the parties.
➢ Lawful objects: the objects for which a contract has been entered into must not be
fraudulent or illegal or immoral.
➢ Writing and registration: according to contract act a contract may be oral or in
written form because it is in the interest of parties.
➢ Certainty: for a valid contract the terms and conditions must be clear and certain.

Kinds of a valid contact according to enforceability

• Valid contract: A valid contract is on agreements enforceable at law. in a valid
contract all the parties to the contract are legally responsible for the performance
of the contract
• If one of the parties breaks the contract the other party has the right to take
necessary action against the guilty party.
• Voidable contract: Generally a voidable contract takes place when the consent of
the parties is not free. In voidable contract threats are involved.
• Void contract: A contract which leases to be enforceable by law becomes void. it
is clear that a void contract is not from the beginning.
• Enforceable contract: This is valid but cannot be enforced in a court of law
become of some technical reasons .such as absence of writing and registration etc.
• Illegal contract: This is forbidden by any court of the country.

Kinds of contract according to formation:

a. Express contract: it is that type of contract which the parties directly state the
terms of the contract either orally or in writing.
b. Implied contract: that type of contract which is made by words. Written or
spoken but by the acts or conduct of the party e.g. shoe shiner.
c. Constructive or Quasi contract: such a contract does not arise due to express or
implied agreement between the parties but it is based upon the principle of
equality that a person shall not allowed to get benefits to the expense of other.

Kinds of a valid contract according to performance:

a. Executed contract: when both the parties have completely performed their
obligations is said to be an executed contract. It means that nothing remains to be
done.e.g. On the spot transaction.
b. Executory contract: when both the parties to a contract have yet to perform their
obligation (future transaction).
c. Unilateral contract: (one way) when one party has to fulfill his obligations at the
time of the formation of the contract. The other party has already fulfilled their
obligations.
d. Bilateral contract (Two ways): the type of contract in which both the parties
have yet to fulfill their obligations .it is also known as contract with executory
consideration.
Note: bilateral and executory are the same.

Offer or proposal
When one person signifies his willingness to another person to do or to abstain from
doing any thing with a view to obtain the assent of other, is known as offer or
proposal. The person making the offer is known as offeror. While the person to whom
the offer is made is called as the offeree.
 Essentials of a valid offer:
1. it may be express or implied : an offer may be made by spoken or written words
or by the conduct of the parties .
2. it must create legal relations: if an offer does not create legal
relations/obligations between the parties . It is not a valid offer according to law.
3. Must be definite and clean: the terms and conditions of on offer must be clear
and definite to both the parties.
4. It may be specific or general: an offer may be made to a particular person and
the offeree (specified) will accept it while it may be made open to the general
public through newspaper etc.
5. it must be communicated to the offeree : an effective offer should be
communicated to the offeree for an acceptance or rejection. If the offeree does not
perform his role according to law.
6. It should not contain negative condition: an offeror cannot say that if the
acceptance is not made to certain date/time the offer would be presumed to be
accepted.
7. It must be subject to any terms and condition by the offeror.
8. It must not contain cross offer: when two parties make similar offer to each
other, in ignorance of each other offer such offer is not acceptable.

Ways of revocation or termination of offer:

1. Notice of revocation: the offeror can terminate his offer at any time by sending a
notice of termination, before its acceptance. Even though the period for which it
was kept open has not yet expired.
2. Lapse of time: when the offer states that it is open until a particular date. The
offer terminates on that date. If it is not accepted by that time.
3. Failure to fulfill conditions: an offer stands revoked if the offerer is failed to
fulfill the terms and conditions given their in.
4. Revocation of offer by offeree: if the offeree reject the offer and communicate
the rejection to the offeror before the acceptance .the offer shall terminate. Even
though the period has not yet expired.
5. Counter offer by the offeree: when an offer is accepted with some modification
in terms the offer. Such as acceptance is called counter offer. An offer comes to
an end. When the offeree makes a counter offer.
6. Death or insanity of the offeror or offeree: if the offeror dies or becomes insane
before the acceptance. The offer lapse provided that the fact of his death or
insanity comes to the knowledge of the accepter before acceptance. If the offeree
does before the acceptance of proposal, the proposal will come to an end but if he
dies after the proposal has accepted, then his legal representative will be
responsible for the contract.
7. Subsequent illegality: an offer lapses if it becomes illegal after it is made and
before it is accepted e.g.
8. An offer is made to sell 10 bags of rice for Rs 20000 and before it is accepted. a
law prohibiting the sale of rice by private individuals . So the offer comes to and
end.
9. Destruction of subject matter: an offer lapses if the thing. Which is subject
matter pf the offer destroys before its acceptance by the other party
 Acceptance
When the person to whom the proposal is made, signifies his aggent, the proposal is said
to be accepted, a proposal when accepted becomes a promise.
Essentials of valid acceptance:
• It must be given by the offeree: an offer can be accepted only by the person to
whom it is made and it cannot be accepted by another person without the consent
of offeror.
• It must be absolute and unconditional: it the offeree imposes any condition in
his acceptance. it is not a valid acceptance but a counter offer . in order to convert
the offer into and agreement. The acceptance must be absolute and unconditional.
• It must be in a prescribed manner: it the acceptance is not made according to
the prescribed manner (term given by the offeror) the offeror may reject it with in
a reasonable time.
• It must be communicated to the offeror: in order to corm a contract the
acceptance must be communicated to the offeror in a clear manner by the offeror
or his authorized agent.
• It may be express or implied: the acceptance of proposal may be in written
words or spoken words and also by the conduct of the parties.
• It must follow the offer: acceptance must be given after receiving the offer; it
should not precede the offer.
• It must be given within reasonable time: a valid acceptance must be given
within a specified time allowed by the offeror.

 Communication of offer: if offer is specified then the offeror must

communicate the offer to offeree within a specified time period.
 Communication of acceptance: the offeree must communicate the
acceptance to the offeror in a specified time period
 Communication of revocation: And this sort of communication occurs
from both the side depending upon the condition or situation.

Performance of a contract
Performance: of a contract means the fulfillment of legal obligation created under the
contract by both the promiser and promisee.

Performance of single promise:

It is only the promisee who can demand the performance of a contract, a third party can
not demand performance of a contract even though it was made for his benefit. In case of
death of the promisee his legal representatives can demand the performance.

Who may perform (in single promise):

I. The promisor himself: a contract may be performed by the promisor either
personally (involving personal skills) or through any other competent person (no
involvement of personal skills). E.g. an artist.
Note: (when personal skill is involved then u can’t sue against him if he is deceased
promisor while in case of impersonal skills u can sue against him in court)
II.The legal representatives: in case of a contract involving personal skills, the
legal representatives of a deceased promisor or not bound to perform the contract
 but In case of contract of impersonal nature, the legal representatives are bound to
perform the contract.
III.The third party: once the third party performs the contract, and that is accepted
by the promisee there is end of the matter and the promisor is then discharged.

Performance of a joint promise:

When a promise is made with several persons jointly, then all the promises jointly
have a right to claim compensation and a single promisee cannot demand
performance.
In case of death any one promisee, the legal representatives of deceased persons
jointly can demand performance with surviving promises. When all the promises are
dead, the legal representatives all jointly can demand performance.

Who may perform (joint promise):

a) All promisors must jointly fulfill the promise: when two are more person make
a joint promise, all such persons must jointly fulfill the promise, when any one of
the joint promisors dies, his legal representative must fulfill the promise jointly
with the surviving promisors.
b) Anyone of joint promisors may be compelled to perform: the promisee may be
compelled any one of the joint promisors to perform the promise. In case of debt
of the original debtor, the promisee must sue against all the heirs of the debtor
collectively.
c) Each promisor may compel for contribution: if any one of the joint promises is
compelled to perform the whole contracts, he can ask the equal contribution to the
others.
d) Sharing of loss by default in contribution: if any one of the joint promisors
makes a default (become unable to pay/perform) in making contribution. The
remaining joint promisors must bear the loss arising out of such default in equal
share.
e) Effect of release of one joint promisor: in one of the joint promisors is released
from his liability by the promises ,his liability to the promisee ceases, but his
liability to the other promisors to contribute does not cease.

Order of performance of reciprocal promises:

Promises which form the consideration for each other are called reciprocal promises. It
has three classes:
a. Mutual and independent: where each party must perform his promise
independently without the waiting for the performance of other, the promises are
mutual and independent.
b. Mutual and dependent: where the performance of the promise one party
depends on the prior performance of the promise by the other party, the promises
are mutual and dependent. If the promisor, who is required to perform his promise
in the first place, fails to perform it, such promisor can not claim the performance
of the reciprocal promise, and must make compensation to the other party for any
loss.
c. Mutual and concurrent (simultaneously): when the two promises are to be
performed simultaneously, they are mutual and concurrent. In such a case, the
 promisor needs not to perform his promise unless the promise is ready and willing
to perform his reciprocal promise. Note: simultaneous here means physically.

Mode of performance:
According to section 5o, the performance of any promise may be made
in the manner which the promise prescribes or sanctions (permission). The promisor must
perform the promise according to the terms of the contract and the instructions of the
promisee. He has no right to adopt the other method for performance but should follow
the instruction of the promise.
Note: strongest party in a promise is always promise.

Breach of a contract:
When a party breaks the contract by refusing to perform his promise, the breach of
contract take place. The following remedies are available to the aggrieved party against
the guilty party

Remedies available to the aggrieved party:

i. Sue for recession of the contract: when one of the party breaches the contract,
the other party is released from his obligation under the contract, the aggrieved
party may sit home. If he does mot want to take any legal action against the guilty
party. If the aggrieved party wants to sue the guilty party for damages, he has to
file a sue for recession of the contract. When the court grants recession, the
aggrieved party is free from all his obligations and become entitled to
compensation.
ii. Sue for damages: In case of breach of contract the aggrieved party may sue for
damages are monitory compensation allowed to the injured party for the loss
suffered by him as a result of the breach of the contract.
iii. Sue upon Quantum merit: it means where a person has done some wok under a
contract and the other party cancels the contract or some event happens which
makes the further performance of the contract impossible, the other party who has
performed the work can claim remuneration for the work he has already done.
iv. Sue for specific performance: in come cases where the damages are not
sufficient remedy. The court may direct the guilty party to fulfill the contract. The
aggrieved party may file or sue for specific performance in addition to sue for
damages.
v. Sue for injunction: injunction is an order of a court restraining a person from
doing a particular act, it is a mode of securing specific performance in the
negative form the court by issuing injunction, and restrains (prevent) the guilty
party from doing what he promised not to do. I.e. stay order from the court.
 Note: monitory compensation: Means just to compensate for the damages and not to
punish the guilty party.
Special performance: it is in the following cases i.e. 1. Where there is no monitory
compensation. 2. difficult to compute the damages.
Rescission means withdraw/cancellation from the contract.
File a case means sue in court.

Contract of indemnity
Definition: A contract where one person promises to compensate the other from the
loss, which may arise due to the conduct of the promisor himself.
A contract of indemnity is made in order to protect the promisee against the
anticipated (expected) loss. E.g. the contract of insurance. Here we have two parties’
i.e.
A. Indemnifier: the person who promises to make good the loss, also called
promisor.
B. Indemnity-holder: the person whose loss is to be made good also called
promisee.

Contract of Guarantee
A contract to perform the promise or discharge the liability of a third person in case of his
default. It is made with the purpose of enabling a person to get loan or goods on credit
etc. it may either oral or written. Here we have three parties.
a) Surety: the person who gives the guarantee, also called the guarantor.
b) Creditor: the person to whom the guarantee is given also called lender.
c) Principal debtor: The person, for whom the guarantee is given, also called
borrower.

Essential features of a contract of guarantee:

1. Secondary contract: a contract of guarantee is an agreement between the
principal debtor, the creditor and the surety. The principle (primary) contract
exists between the principal debtor and creditor while the contract between the
creditor and surety is a secondary contract.
2. Consideration: a contract of guarantee, like other contracts must have essential
elements of a valid contract e.g. free consent , legality of objects, competency of
parties etc.
Note: indemnity: means to compensate the loss expected to occur.
Competency means capability for signing a contract.
Anticipated means expected.
3. Misrepresentation: it is the duty of creditor to disclose the material facts (terms
and conditions) about the contract and the principle debtor, to the surety. If the
consent of surety is obtained by misrepresentations the surety will be discharged
from his liability.
4. Writing not necessary: according to section125 it is not necessary that contract
of guarantee must be inwritting. It may be wither express or implied.
 Distinction between indemnity and guarantee:
1. In a contract of indemnity: there are two parties (indemnity and indemnity
holder), while the number of parties are three in contract of guarantee (creditor,
principle debtor and surety).
2. In indemnity: there is only one contract between the indemnifier and indemnified
(indemnity holder) while in guarantee, there are three contracts, one between the
creditor and principle debtor, the second b/w the creditor and surety and the third
b/w the surety and principle debtor.
3. The liability: of indemnifier is primary and independent while the liability of
surety is secondary and dependent on the principle debtor if he fails to perform his
obligation.
4. In indemnity: the indemnifier acts without any request while in a guarantee, the
surety should give the guarantee at the request of the debtor.
5. In indemnity: the liability of the indemnifier arises only on the happening of a
contingency (something may happen). While in guarantee, the liability already
exists and its performance is guaranteed by the surety.
6. A contract: of the indemnity is for the reimbursement of loss while the contract
of guarantee is for the security of a debt.

Contract of bailment:
According to section148 a bailment is the delivery of goods by one person to another, for
some purpose, upon a contract that they shall when the purpose is accomplished be
returned, or otherwise disposed off, according to the directions of the person delivering
them, the person delivering the goods is known as the bailer. The person to whom the
goods are delivered is known as the bailee.
Note: here only possession is transferred not the ownership.

Essentials features of a contract of bailment:

a. Contract: A contract of bailment should also pass all the essentials of a valid
contract this contract may be expressed or implied.
b. Specific purpose: This contract is always made for some purpose and is subject
to the condition that when the purpose is accomplished, the goods will be returned
to the bailer or disposed off, According to the directions of the bailer.
c. Delivery of goods: the most important feature of bailment is the deliveries of
moveable goods from one person to another (mere custody) do not create
relationship of bailer and bailee.
d. No change of ownership: under bailment, it is only the possession that passes
from the owner to the other person and not the ownership.
e. Return of some goods: when the purpose is accomplished, the goods must be
returned in original form or in changed form or disposed off according to the
directions of the bailer.

Note: mere custody means short time custody …. This is not including in contract of
bailment.
Sale out of goods by bailee according to direction of bailee is called as disposed off.

Duties of Bailer
 • Duty to disclose faults: a bailer is bound to disclose to the bailee all those faults
in the goods bailed which are known to him and if he fails to do so he will be
liable to pay such damages to the bailee arising from such faults.
• Duty to repay necessary expanses: where the goods are to be kept by the bailee
for the bailer, it is the duty of the bailer to repay all necessary expanses incurred
by the bailee for the purpose of bailment.
• Duty to repay extra ordinary expanses: it is the duty of the bailer to repay all
necessary expanses as well as extra ordinary expanses, if any incurred by the
bailee regarding the goods bailed.
• Duty to indemnify for demanding back: if the bailee who has sent goods foe
specified time, asks the bailee to return the goods before the specified time, he
must indemnify bailee for the loss caused to him in excess of the benefit already
enjoyed by the bailee from such goods
• Duty to indemnify for defective title: when the title of the bailer to the goods is
defective and as a result the bailee suffers a loss .the bailer is responsible to
indemnify the bailee.
• Duty to receive back the goods: if the bailer refuses the take delivery of goods
at proper time the bailee can claim compensation for all necessary expanses
incurred in connection of safe custody.
Notes: extraordinary expanses …accidental expanses
Necessary expanses …. Routine expanses.

Duties of Bailee:

➢ Duty to take reasonable case: in all cases of bailment the bailee is bound to take
as much care of the goods bailed to him as a man or ordinary prudence would take
of his own goods of the same nature in quality.
➢ Duty not to make unauthorized use: if the bailee makes unauthorized ude of the
goods bailed, he is liable to make compensation to the bailer for any damage
arising to such use.
➢ Duty not to mix the goods: the bailee should not mix his own goods with those
of the bailee without the bailer’s consent.
➢ Duty to return the goods: it is the duty of the bailee to return the goods
according to the bailee to return the gods according to the bailer direction as soon
as the time for which they were bailed has expired or the purpose has been
accomplished.
➢ Duty to return increase: the bailee is bound t o deliver to the bailer any natural
increase or profit which may have accrued from the goods bailed.

Termination of bailment:

i. Expiry of time: the bailment terminates after the expiry of specified time.
ii. Accomplishment of purpose: the bailment terminated as soon as the specified
purpose is accomplished.
iii. Unauthorized use: if the bailee does any act that is unauthorized by the bailer the
bailment may be terminated by the bailer even though the term of the bailment
does not expire or purpose has not been accomplished.
 iv. On death: a bailment is terminated by the d4eath of either bailer or the bailee.
v. Termination by bailer: a bailment can be terminated by the bailer at any time,
ever before the stated time. If the termination causes no loss to the bailee.
vi. Destruction of subject matter: a bailment is terminated when the subject matter
of the bailment is destroyed.

Contract of Agency
An agent is a person employed to do any act for another or to represent another in dealing
with third persons. The person for whom such act is done, or who is so represented is
called the principal. While the person who acts on behalf of another or who has been
delegated the authority is called agent. Agency creates only when one person acts as
representative to the other in business dealing in order to create contractual relations
between the other and the third person.

Essentials of agency
a. Agreement: the creation of agency is the result of an agreement between the
principal and the agent/employee. It may be expressed or implied.
b. Contractual capacity: the principal as well as the agent must be competent to
contract. It means a minor (below legal age) or a person of unsound mind cannot
be as agent or principal/manager/original owner.
c. Consideration not necessary: the fact that principal is agreed; to be represented
by the agent is sufficient detriment (means enough loss) to the principal to support
the contract.
d. Intention: the agent must have intention to act on behalf of the principal when the
agent enters into a contract on behalf of himself then the principal will not be
liable.

Creation of agency

a) Agency by express agreement: The agency may be created by words of mouth

or by an agreement in writing. The usual form of a writhen contract of agency is
the power of attorney to agent to act on behalf of the principal.
b) Agency by implied agreement: An implied arises by conduct, situation or
relationship of parties.
c) Agency of necessity: In certain circumstances the law gives an authority to a
person to act as an agent for another without any consent of the principal, is called
an agency of necessity.
d) Agency of ratification (subsequent acceptance): ratification means the
subsequent acceptance of an unauthorized act. It arises when a person acts on
behalf of another with knowledge or assent and afterwards his act is accepted or
ratified. If the act is not accepted, there is no agency.
e) Agency by operation of law: in partnership every partner is an agent of the firm
for the purpose of business and the act of partner which is done in the usual
business of the firms binds the firms. Similarly in case of company the directors
are agent through whom the company acts.

Duties of agent:
• Duty to follow principal’s directions: the agent must act with in the scope of the
authority given to him. If he does not act according to the directions given by the
principal he will be liable for any loss sustained by the principal.
• Duty to work with reasonable skill and diligence: if the agent does not work
with reasonable skills and diligence he must compensate his principal in respect
of loss arising there from.
• Duty to render accounts: it is the duty of an agent to keep true accounts
regarding all the property or money, belonging to his principal. He should also
produce then to his principal on demand.
• Duty to communicate in difficulty: it is the duty of an agent, to use reasonable
diligence in communicating with his principal and in seeking to obtain his
instructions.
• Duty on termination of agency: when an agency terminates due to the death or
insanity of principal the agent must take reasonable steps for the protection of
interests for the representative of late principal.
• Duty not to deal on his own account: in case an agent deals on his own account
in the business of agency, without obtaining proper permission of his principal,
the principal may reject the transaction.
• Duty not to make any secret profits: an agent should not make any secret profits
out of his agency, he must pay to his principal all amounts received by him on
behalf of his principal.
• Duty not to delegate authority: an agent must not delegate his authority to
another person but perform the work of agency himself provided that where the
principal has permitted, or where by the ordinary custom of trade a sub-agent can
be appointed (I.e. in stock exchange a head broker can hire other sub-agent).

Duties of principal

○ Duty to indemnify the lawful acts: the principal is bound to indemnify the agent
against the consequences of lawful acts done by such agent in exercise of
authority.
○ Duty to indemnify for acts done in good faith: if the agent does the acts in good
faith the principal is liable to indemnify the agent against the consequences of
acts, though it causes an injury to the right of the third person.
○ Duty to indemnify for injury caused by principal neglect: the principal must
make compensation to his agent in respect of injury caused to such agent by the
principal’s neglect.

Termination of agency

 Agreement: an agency can be terminated any time by the mutual agreement

between the principal and the agent (sec 201).
 Revocation of principal: the principal can revoke the authority of the agent at
any time before the agent has exercised his authority. In order to revoke the
authority for future, reasonable notice is not given, this principal will be liable
to compensate the losses.
  Revocation of agent: the agent can be terminated by the agent because a
person cannot be compelled to work as agent but the agent must give a
reasonable notice of revocation to the principal, otherwise he will be liable to
compensate to principal for any loss.
 Completion of the business of agency: an agency comes to an end
automatically when the business of agency is compelled. When an agency is
for sale of particular property, agency terminates on the completion of sale
and does not continue until payment of price.
 Expiry of time: if the agent is appointed for a fixed period, even though the
business of agency may not have been completed.
 Death of the principal or agent: an agency terminates on the death of
principal or the agent.
 Insanity of the principal or agent: an agency terminates automatically, when
the principal or the agent becomes of an unsound mind. When the principal
becomes insane, the agent cannot act for a person of unsound mind.
 Insolvency of the principal: an agency is also terminated by the insolvency
of the principal but since an agent is merely (temporary) connecting link with
the third parties.
 Destruction of subject matter: an agency terminated on the destruction of
the subject matter of the contract of agency.
 Principal or agent become alien enemy: if the principal and agent are
nationals of two different countries and a war breaks between the two
countries, the contract of agency terminated.

Note: a technical difference between insolvency and bankruptcy

Insolvency: if business/person’s short term asset becomes unable to pay its short
term liability.
Bankruptcy: if court or law officially declares that the business in such a
condition that its short term asset cannot pay its short term liability.
Both the terminologies are used interchangeably.

Contract of sales of goods:

The law relating to sales of goods is contained in the sale of goods act 1930. The
act contains 66 sections; it is implemented on 1st July 1930.
A contract whereby the seller transfer or agrees to transfer the property in goods
(ownership) from the seller to the buyer is known as contract of sale.

Essentials of a contract of sale

a) Buyers and sellers: there should be two parties to a contract of sale i.e. the buyer
and seller; similarly a partner may buy the goods from the firm in which he is a
partner and vice versa.
b) Transfer of property: property here means the ownership. A mare transfer of
permission of the goods cannot be termed as agree to transfer the property
(ownership) in goods to the buyer.
 c) Goods: the subject matter of the contract of sale must be moveable property. Thus
every kind of moveable property except actionable claim (a debt due from one
person to another) and money comes under contract of sale.
d) Price: the consideration in contract of sale must be the price when goods are sold
or exchanged to other goods; the transaction is barter, and not a contract of sale of
goods.
Note: also called as agreed price, consensus price or equilibrium price.
e) Sale and agreement to sell: contract of sales includes both sale and agreement to
sell where the property in the goods is transferred from the seller to the buyer, at
the time of making the contract (on the spot), is called contract of sale while
where the transfer of ownership in goods is to take place in future time or subject
to some condition, therefore to be fulfilled (future contract), is called an
agreement.
f) Other formalities: all other essentials of a valid contract like capacity of the
parties, free consent, and legality of the object that should be there in a contract of
sale. If may be oral or in writing.

Distinction between sale and agreement to sell

Sale dividend (some portion of price) for

1. the ownership in goods passes to the
buyer immediately at the time of
Contract.
2. A sale can only be in case of existing
and specific goods.
3. The buyer becomes the owner of the
goods and to get the rights against
the goods. If the seller refuses to
deliver the goods, the buyer may sue
for recovery of goods.
4. If the goods 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.
5. If the buyer refuses to price, the
seller can sue for the price, even
though the goods are still in his
possession.
6. The ownership is with the buyer and
so the seller cannot resell the goods.
7. If the buyer becomes insolvent
before he pays for the goods, the
seller, in the absence of lien over the
goods must deliver the goods to the
buyer; the seller is entitled to ratable
the price of goods.
8. If the seller becomes insolvent, the
buyer is entitled to recover the goods
from the seller, because the buyer
has the ownership.
9. It is an executed contract (on the
spot).
Agreement to sell
1. The ownership transfer at certain
future date or subject to the
fulfillment of some condition.
2. An agreement to sell is mostly in
case of future and contingent goods.
3. The buyer can not set the right
against the seller, so he can sue for
damages for breach of agreement
and not for recovery of goods.
4. Here, such loss has to be borne by
the seller even though the goods are
in the possession of the buyer
because the ownership of the goods
is yet to pass.
5. If the buyer fails to accept and pay
for the goods, the seller can only sue
for damages and not for the price.
 6. As the ownership remains with the
seller and he can resell those goods
to the new buyer, the original buyer
can sue for the breach of contract
only.
7. If the buyer becomes insolvent and
has not yet paid the price, the seller
may refuse the goods to the buyer
unless he is paid for.
8. If the buyer has paid the price
already, and the seller becomes
insolvent the buyer can claim only a
ratable dividend as a creditor and
not the goods because the ownership
is with the seller.
9. It is an executory contract (future
contract/ transaction).

Kinds of goods
• Existing goods: the goods which are physically in existence and in seller
ownership or possession, at the time of entering a contract of sale is known as
existing goods. It can be divided into following kinds.
a. Specific goods: the goods which are identified and agreed upon at the time
of contract of sale are called specific goods.
b. Ascertained goods: those goods which are identified only after the
formation of contract of sale, called as ascertained goods.
c. Unascertained goods: those goods which are identified and agreed upon by
the parties, the goods are called as unascertained goods.
• Future goods: the goods which a seller does not possess at the time of contract but
which will be manufactured produced or acquired by the seller after making the
contract of sale.
• Contingent goods: these are like future goods in this case; the acquisition by the
seller depends upon an uncertain contingency (may or may not). The ownership
does not pass to buyer at the time of contract, like future goods.

Condition
A condition is a stipulation essential to the main purpose of the contract, the breach of
which gives the aggrieved party a right to repudiate (cancel) the contract itself.

Warranty
A warranty is a stipulation collateral (minor) to the main purpose of the contract, the
breach of which gives the aggrieved party a right to sue for damages only and not to
avoid the contract itself. It is of secondary importance.

Difference between condition and warranty

 Condition
○ Essential to the main purpose of the contract.
○ It forms the basis of a contract.
○ The breach of a condition gives the aggrieved party the right to reject the contract.
○ A breach of contract may be treated as a breach of warranty.
○ In breach of condition the aggrieved party has the option to claim damages, instead
of rejecting the contract.

Warranty

○ Not essential to the main purpose.

○ It does not form the basis of a contract.
○ Does not give the aggrieved party the right to reject the contract.
○ Cannot be treated as a breach of condition.
○ Here, the aggrieved party has no option to reject the contract, he can only claim
damages.

Transfer of property in specific and ascertained goods.

In case of contract of specific goods, the transfer of property takes place when the parties
intend to pass it. The parties may intend to pass the ownership at once at the time of
making of the contract or when the goods are delivered or when the payment is made.

Transfer of property in unascertained and future goods.

In case of a contract of unascertained or future goods by description (terms and
conditions) and goods of that description and in a deliverable state are unconditionally
appropriated to the contract, either by the seller with the assent of the buyer or by the
buyer with the assent of the seller, the property in the goods there upon passes to the
buyer. Appropriation means setting apart goods as subject matter of the contract. It
includes separating, weighting, and measuring, counting or similar acts in relation to
goods, with an intention to identify and determine the specific goods to be delivered
under the contract.
Note: here both unconditional (ascertained goods) and conditional (future and contingent
goods) appropriation of goods occur.

Unpaid seller
The seller of goods is deemed (consider) to be an unpaid seller if we have the following
two condition i.e.
When the whole of the price is not been paid or tendered (payable in future)
When a bill of exchange or other negotiable instrument (transferable instruments) has
been received as a conditional payment and the same has been dishonored.

Feather of unpaid seller:

a. He must sell goods either on cash basis or on credit basis, and he must be unpaid.
b. He is unpaid seller if the term of the credit has expired and price has not been
paid.
c. He must be unpaid either wholly or partly, if only a part of price remains unpaid,
he is deemed to be an unpaid seller.
d. Where the price is paid through a bill of exchange or other negotiable instruments,
and if dishonored, the seller is deemed to be an unpaid seller.
e. The seller must not refuse to accept payment when tendered, if the price has been
tendered by the buyer but the seller refuses, he ceases to be an unpaid seller.

Right of an unpaid seller against the goods:

i. Right of lien: A lien is the right to retain possession of goods and refuse to
deliver them to the buyer until the price due in respect of them is paid or
tendered. A right of lien can be exercised by an unpaid seller if; where the
goods have been sold on credit, but the term of credit has expired or where
the buyer becomes insolvent even though the period of credit may not
have yet expired.
ii. Right of stoppage of goods in transit: it means that the goods must be
neither with the seller, nor with the buyer, nor with their agent. They
should be in the custody of carrier so; the seller can retain them until
payment or tender of price.
iii. Right of resale: an unpaid seller can resell the goods in the following
cases:
➢ Where the goods are of perishable nature.
➢ Where there is express provision regarding such right in the
contract.
➢ Where the seller gives a notice to the buyer of his intention to
resell and the buyer does not pay or tender the price with in a
reasonable time.

Note: tendering also based on some condition.

Express provision: mutually agreed to resell.

Right of unpaid seller against the buyer:

• Sue for price: where the buyer has the ownership in goods and he refuses to
pay the price according to the terms of the contract, the seller can sue the
buyer for price.
• Sue for damages for non-acceptance: where the buyer refuses to accept and
pay for goods, the seller may sue him for damages for non-acceptance; the
seller can recover damages only.
• Sue for specific damages and interest: where the parties are aware of such loss
at the time of contract the unpaid seller can recover interest at a reasonable
rate on the total unpaid price of goods sold, from the time it was due until it is
actually paid.

Negotiable instruments:
 Negotiable instruments mean a written document transferable by delivery
to other person. A negotiable instrument is a promissory note, bill of
exchange OR check payable either to order or bearer.
Negotiable instruments Act of 1881 comes into force on 1st of March
1882.

Characteristics of negotiable instruments:

✔ Easy transferable: the right of ownership in those instruments can be
transferred from one person to another easily.
✔ Right of the holder: these instruments give the right to the creditor to recover
something from debtor. The creditor can recover this amount by him (bearer)
or can transfer this right to another person (order). a negotiable instrument
can be transferred any number of times before its maturity.
✔ Unconditional promise or order: a negotiable instrument contains an
unconditional promise or order to pay. In case of promissory note the debtor
promises to pay a certain amount of money to the holder of the instrument.
✔ Certain amount: in these instruments, the promise or order is made for a
payment of certain amount of money and not anything else like goods, shares
etc.
✔ Prescriptions: the prescriptions are regarding consideration, date, time of
acceptance, stamp, holder etc.
Note: bearer: transact on his own account,
Order: sent other to collect his cheque.
Presumptions: before signing a contract you must be agreed on certain
assumption.
Promissory note:
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
(debtor), to pay on demand or at a fixed or determinable future time a certain sum
of money only to the order of a certain person or to the bearer of the investment.
The person who makes the promissory note and promises to pay is called
maker (debtor), while the person to whom the payment is to be made is called
payee (creditor).

Essentials of a promissory note:

• It must be in writing: a verbal promise to pay does not become a
promissory note. It must be in writing with pen or may be printed or typed.
• It must contain a promise to pay: there must be a promise or
undertaking to pay a mere acknowledgment of debt without a clear
promise to pay is not a promissory note.
• The promise to pay must be unconditional and absolute: the promise to
pay must mot depends upon the happening of some uncertain event or
fulfillment of a condition.
• It must be signed by the maker: the maker must sign the promissory
note in any part of the instrument and not necessarily at the bottom. When
the maker is illiterates is thumb impression is sufficient.
• The maker must be certain person: the instrument must indicate who is
the person taking the responsibility where there are two or more makers,
 they may be liable jointly and individually but alternate promisors are not
allowed.
• The payee must be certain: the payee’s name can be indicated by his
official designation only. It may be made payable to two or more payee
jointly.
• The sum payable must be certain and must be in Pakistani currency:
if the amount is to be paid is uncertain, the instrument will not be a valid
promissory note.
• Other formalities: it includes the place in a note where it is made, the
date, properly stamped under stamp Act etc.

Bill of exchange
It is an instrument in writings containing an unconditional order,
signed by the maker (creditor), directing a certain person to pay on
deemed or at a fixed
 These notes are just covering 13 weeks.

Written by: Amir Sajjad Khan

BBA (Hons) 5th semester
Email address: amirsajjadkhan_ibms@yahoo.com
amirsajjadkhan_ibms@live.com