LLB Examination Law of Contract and Mercantile Law Syllabus

Is a minor liable for 'necessaries' supplied to him? On what basis?

A minor's estate (not the minor personally) is liable to pay a reasonable price for necessaries supplied to him or to those he is legally bound to support (Sec 68). This is a quasi-contractual liability, not contractual, since the minor's contract itself is void.

Under Section 12, when is a person said to be of sound mind for contracting?

A person is of sound mind for contracting if, at the time of making the contract, he is capable of understanding it and of forming a rational judgment as to its effect upon his interests. A usually-sane person may contract when sane; a usually-insane person may contract when of sound mind.

What is the difference between 'consent' (Sec 13) and 'free consent' (Sec 14)?

Consent (Sec 13) means two or more persons agreeing upon the same thing in the same sense (consensus ad idem). Free consent (Sec 14) is consent not caused by coercion, undue influence, fraud, misrepresentation, or mistake.

List the five factors that vitiate free consent under Section 14, and the effect of each on the contract.

(1) Coercion, (2) Undue influence, (3) Fraud, (4) Misrepresentation — each makes the contract VOIDABLE at the option of the aggrieved party. (5) Mistake — a bilateral mistake of essential fact makes the contract VOID (Sec 20).

Define coercion under Section 15.

Coercion is committing or threatening to commit any act forbidden by the Pakistan Penal Code, or unlawfully detaining or threatening to detain any property, to the prejudice of any person, with the intention of causing that person to enter into an agreement. The PPC need not be in force where coercion is employed.

Define undue influence under Section 16 and state when a relationship is presumed dominant.

Undue influence exists where the parties' relations are such that one is in a position to dominate the will of the other and uses that position to obtain an unfair advantage. Dominance is presumed where one holds real or apparent authority, stands in a fiduciary relation, or contracts with a person whose mental capacity is temporarily/permanently affected (e.g., parent-child, doctor-patient, solicitor-client, trustee-beneficiary).

Distinguish coercion from undue influence.

Coercion involves physical force or threats (illegal acts/PPC offences or detention of property) and may come from anyone; undue influence is moral/mental pressure arising from a dominant relationship. Coercion is criminal in nature; undue influence is not. Both make the contract voidable, but in undue influence the burden of proving fairness shifts to the dominant party.

Define fraud under Section 17 and list its constituent acts.

Fraud means any act done by a party (or with his connivance/agent) with intent to deceive or induce another to enter a contract: (1) suggestion of a fact untrue, known to be untrue; (2) active concealment of a fact; (3) a promise made without intention to perform; (4) any other act fitted to deceive; (5) any act/omission specially declared fraudulent by law.

What is the general rule on silence as fraud under Section 17, and its exceptions?

Mere silence as to facts likely to affect willingness to contract is not fraud. Exceptions: (1) where there is a duty to speak (fiduciary/uberrimae fidei relationships); (2) where silence is itself equivalent to speech.

Define misrepresentation under Section 18.

Misrepresentation is an innocent false statement of fact made without intent to deceive: (1) a positive assertion of an untrue fact believed true; (2) a breach of duty gaining advantage to the misleading party; (3) causing a party, however innocently, to make a mistake about the subject-matter's substance.

Distinguish fraud from misrepresentation.

Fraud involves intent to deceive and knowledge of falsity; misrepresentation is innocent with belief in truth and no intent to deceive. In fraud, the aggrieved party may both rescind AND claim damages; in misrepresentation, he may rescind but generally cannot claim damages. In misrepresentation, the defence that the aggrieved party had means to discover the truth is available; in fraud (other than by silence) it is not.

What are the remedies available to a party whose consent was caused by fraud or misrepresentation (Sec 19)?

The contract is voidable at his option. He may: (1) rescind the contract; (2) insist the contract be performed and that he be put in the position he would have been if the representations were true; and in fraud, additionally claim damages.

State the effect of mistake of fact and mistake of law under Sections 20, 21 and 22.

Sec 20: a bilateral mistake of both parties on an essential matter of fact makes the agreement VOID. Sec 21: a mistake as to a law in force in Pakistan does NOT make a contract voidable (ignorantia juris non excusat), but mistake of foreign law is treated as mistake of fact. Sec 22: a unilateral mistake of fact does not make the contract voidable.

Under Section 23, what considerations and objects are unlawful?

The consideration or object is unlawful if it: is forbidden by law; would defeat the provisions of any law; is fraudulent; involves or implies injury to the person or property of another; or the court regards it as immoral or opposed to public policy. Such agreements are void.

What is the effect under Section 24 when part of a single consideration for one or more objects is unlawful?

If any part of a single consideration for one or more objects, or any one or any part of several considerations for a single object, is unlawful, the whole agreement is void.

List the main heads of agreements opposed to public policy.

Trading with an enemy; agreements to commit a crime/tort; agreements interfering with the administration of justice (e.g., stifling prosecution, maintenance and champerty); agreements in restraint of legal proceedings; sale of public offices and titles; agreements tending to create monopolies; marriage brokerage agreements; and agreements in restraint of marriage, trade, or parental rights.

State the general rule of Section 27 on agreements in restraint of trade.

Every agreement by which any person is restrained from exercising a lawful profession, trade, or business of any kind is, to that extent, void. The restraint need not be unreasonable to be void — the rule is stricter than English law.

What is the statutory exception to Section 27 regarding restraint of trade?

The sole exception in the Act: one who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business within specified local limits, so long as the limits appear reasonable to the court, while the buyer or his successor carries on a like business there.

What restraints are permitted as exceptions to Section 27 outside the statutory goodwill exception?

Restraints recognised under the Partnership Act: (a) a partner may be restrained from carrying on a competing business during the partnership; (b) outgoing partners and (c) partners on dissolution may agree to reasonable restraints; and (d) restraints in anticipation of dissolution. Reasonable restraints on employees DURING employment are valid, but post-employment restraints are generally void under Sec 27.

State Section 26 — agreements in restraint of marriage.

Every agreement in restraint of the marriage of any person, other than a minor, is void. Both partial and total restraints on the marriage of a major person are void.

State Section 28 — agreements in restraint of legal proceedings.

Every agreement that absolutely restricts a party from enforcing his rights through ordinary legal proceedings, or that limits the time within which he may enforce them, is void to that extent. Exceptions: agreements to refer present or future disputes to arbitration are valid and not void under this section.

Define a wagering agreement and state the effect under Section 30.

A wager is an agreement between two parties on the determination of an uncertain future event, where each stands to win or lose depending on the outcome, with no other interest except the stake. Agreements by way of wager are VOID; no suit can be brought to recover anything won or for failure to abide by the result.

What are the essential features of a wagering agreement?

(1) Mutual chances of gain or loss to both parties; (2) uncertainty of the event; (3) each party stands to win OR lose; (4) neither party has any interest in the event other than the stake (no insurable interest); (5) the parties have no control over the event.

Distinguish a wagering agreement from a contract of insurance.

Insurance requires an insurable interest in the subject-matter and aims at indemnity/protection against loss; it is a valid, enforceable contract of indemnity. A wager has no insurable interest, is purely speculative for gain, and is void. Insurance is based on scientific calculation of risk; a wager is a pure gamble.

Are collateral transactions to a wagering agreement enforceable in Pakistan?

Yes. Although a wagering agreement is void, it is not unlawful (illegal) under Sec 23. Therefore collateral transactions (e.g., a loan given to pay a wagering debt) are generally enforceable, unless the wager amounts to a lottery or gaming declared illegal by special statute.

Define a contingent contract under Section 31.

A contingent contract is a contract to do or not to do something if some event, collateral to such contract, does or does not happen. (E.g., a contract of insurance or indemnity.) The event must be uncertain and collateral to the contract.

State the rules for enforcement of contingent contracts (Sections 32-36).

Sec 32: contingent on a future uncertain event happening — enforceable only when that event happens; void if the event becomes impossible. Sec 33: contingent on an event NOT happening — enforceable when happening becomes impossible. Sec 34: future conduct of a living person treated as impossible if he does anything rendering it impossible within a definite time. Sec 35: time-limited contingencies. Sec 36: agreements contingent on an impossible event are void, whether or not the impossibility was known.

Distinguish a contingent contract from a wagering agreement.

In a contingent contract the uncertain event is COLLATERAL to the contract and the parties may have a real interest; the contract is valid. In a wager the uncertain event is the SOLE determining factor, parties have no interest beyond the stake, and the agreement is void. Every wager is contingent, but not every contingent contract is a wager.

What is the obligation of parties to perform under Section 37?

The parties to a contract must either perform, or offer to perform, their respective promises, unless such performance is dispensed with or excused under the Act or any other law. Promises bind the representatives of the promisor in case of his death before performance, unless a contrary intention appears.

What is a valid 'tender' (attempted performance) and the effect of its refusal under Section 38?

A tender is an offer to perform that is unconditional, made at a proper time and place, and gives the other party a reasonable opportunity to ascertain the offerer is able and willing to perform. If a valid tender is refused by the promisee, the promisor is not responsible for non-performance nor loses his rights under the contract — the obligation is discharged as to that performance.

Who must perform a contract, and can performance be by a third person (Sections 40 & 41)?

Where the contract shows the parties intended performance by the promisor personally (contracts of personal skill), it must be performed by him. Otherwise the promisor or his representatives may employ a competent person. Under Sec 41, if the promisee accepts performance from a third person, he cannot afterwards enforce it against the promisor.

List the various modes by which a contract may be discharged.

(1) By performance (actual or attempted/tender); (2) by agreement or consent (novation, rescission, alteration, remission, waiver); (3) by impossibility/frustration; (4) by lapse of time (limitation); (5) by operation of law (death, insolvency, merger); and (6) by breach (actual or anticipatory).

Explain discharge by agreement under Section 62 (novation, rescission and alteration).

If the parties agree to substitute a new contract, or to rescind or alter the existing one, the original contract need not be performed. Novation = substituting a new contract or new party; Rescission = cancelling the contract; Alteration = changing one or more terms with mutual consent. The original obligation is thereby discharged.

Explain remission and waiver under Section 63.

Remission: every promisee may dispense with or remit, wholly or in part, the performance of the promise made to him, extend the time for performance, or accept any satisfaction he thinks fit. No consideration is needed for remission, and a promise to accept less than what is due is binding under Pakistani law (unlike the English rule in Pinnel's Case).

State the doctrine of frustration / supervening impossibility under Section 56.

An agreement to do an impossible act is void ab initio. A contract to do an act which, after the contract is made, becomes impossible or unlawful by reason of some event the promisor could not prevent, becomes void when the act becomes impossible or unlawful. This is the doctrine of frustration (subsequent impossibility).

List the grounds on which a contract is discharged by frustration.

Destruction of the subject-matter (Taylor v Caldwell); non-occurrence of a contemplated event (Krell v Henry); death or incapacity in personal-service contracts; supervening illegality/change of law; declaration of war; and frustration of the commercial purpose of the contract. Mere difficulty, increased cost, or commercial hardship does NOT frustrate a contract.

What is the effect of frustration, including restitution of advantages received (Sec 65)?

On frustration the contract becomes void and both parties are discharged from further performance. Under Sec 65, when an agreement is discovered to be void, or a contract becomes void, any person who has received an advantage under it must restore it or make compensation to the person from whom he received it.

Define breach of contract and distinguish actual breach from anticipatory breach.

Breach is the failure of a party to perform his contractual obligation without lawful excuse. Actual breach occurs at or during the time fixed for performance. Anticipatory breach occurs when, before performance is due, a party repudiates the contract or disables himself from performing (Hochster v De La Tour).

What options does the aggrieved party have on an anticipatory breach?

He may either (1) accept the repudiation, treat the contract as discharged immediately, and sue for damages at once; or (2) keep the contract alive, wait for the date of performance, and hold the other party bound — but then he risks the contract being discharged by a supervening event, and the wrongdoer may still perform.

List the remedies available to an injured party for breach of contract.

(1) Rescission of the contract (Sec 39); (2) suit for damages (Sec 73); (3) suit for specific performance; (4) suit for injunction; (5) suit upon quantum meruit; and (6) restitution. These are governed by the Contract Act and the Specific Relief Act 1877.

State the rule of damages laid down in Hadley v Baxendale and Section 73.

Damages for breach are recoverable for loss that (1) arose naturally in the usual course of things from the breach (ordinary/general damages), or (2) which the parties knew, when making the contract, to be likely to result from its breach (special damages, recoverable only if the special circumstances were communicated). Remote and indirect losses are not recoverable.

What is the duty to mitigate damages, and how is it reflected in Section 73?

The injured party must take all reasonable steps to minimise the loss resulting from the breach; he cannot recover for any loss he could have avoided by reasonable effort. The Explanation to Sec 73 states that in estimating loss, the means available for remedying the inconvenience caused by non-performance must be taken into account.

Distinguish liquidated damages from a penalty, and state the Pakistani rule under Section 74.

Liquidated damages are a genuine pre-estimate of loss agreed in the contract; a penalty is a sum stipulated in terrorem (to frighten) and is disproportionate to actual loss. Under Sec 74, whether the sum named is a penalty or liquidated damages, the court awards only REASONABLE COMPENSATION not exceeding the amount named — the English distinction is not strictly followed.

What are nominal damages, and what are exemplary (vindictive) damages?

Nominal damages are a token sum awarded where a legal right is infringed but no actual loss is suffered, merely recognising the breach. Exemplary/vindictive damages are awarded to punish the wrongdoer and are exceptional in contract — generally allowed only for breach of promise to marry and wrongful dishonour of a customer's cheque by a banker.

What is a quasi-contract, and list the situations covered by Sections 68-72.

A quasi-contract is an obligation imposed by law (not by agreement) to prevent unjust enrichment ('certain relations resembling those created by contract'). Sec 68: necessaries supplied to a person incapable of contracting; Sec 69: payment by an interested person of money another is bound to pay; Sec 70: liability to pay for non-gratuitous acts/benefits enjoyed; Sec 71: responsibility of a finder of goods; Sec 72: money paid or thing delivered by mistake or under coercion must be repaid/returned.