Commercial Laws (Study Text) PDF

Commercial Laws (Study Text) i|Page  ALL RIGHTS RESERVED This book and material including write-up, tables, graphs, figures, etc., therein are copyright material and are protected under Copyright Laws of Pakistan. No part of this publication can be reproduced, stored in...

Commercial Laws (Study Text) i|Page  ALL RIGHTS RESERVED This book and material including write-up, tables, graphs, figures, etc., therein are copyright material and are protected under Copyright Laws of Pakistan. No part of this publication can be reproduced, stored in a retrieval system or transmitted in any physical photocopying, recording or otherwise without prior written permission or the ICMA’s Head Office. Institute of Cost and Management Accountants of Pakistan Email : [email protected] Website : www.icmainternational.com Phone : + 92-21-99243900 Fax : + 92-21-99243342 First Edition 2014 Contents developed by a consortium lead by KAPLAN. Second Edition 2020 Contents updated by the ICMA International. Third Edition 2024 Contents updated by the ICMA International. Commercial Laws (Study Text) ii | P a g e Disclaimer This document has been developed to serve as a comprehensive study and reference guide to the faculty members, examiners and students. It is neither intended to be exhaustive nor does it purport to be a legal document. In case of any variance between what has been stated and that contained in the relevant act, rules, regulations, policy statements etc., the latter shall prevail. While utmost care has been taken in the preparation / updating of this publication, it should not be relied upon as a substitute of legal advice. Any deficiency found in the contents of study text can be reported to the Education Department at [email protected] Commercial Laws (Study Text) iii | P a g e  CONTENT S.no Chapters Page No 1 Introduction to Legal System of Pakistan 01 2 The Contract Act, 1872 19 3 Sale of Goods Act 110 4 Partnership Act, 1932 137 5 Negotiable Instruments Act, 1881 167 6 Business Ethics and threats 234 Commercial Laws (Study Text) iv | P a g e  HOW TO USE THE MATERIAL The main body of the text is divided into a number of chapters, each of which is organized on the following pattern:  Detailed learning outcomes. You should assimilate these before beginning detailed work on the chapter, so that you can appreciate where your studies are leading.  Step-by-step topic coverage. This is the heart of each chapter, containing detailed explanatory text supported where appropriate by worked examples and exercises. You should work carefully through this section, ensuring that you understand the material being explained and can tackle the examples and exercises successfully. Remember that in many cases knowledge is cumulative; if you fail to digest earlier material thoroughly; you may struggle to understand later chapters.  Examples. Most chapters are illustrated by more practical elements, such as relevant practical examples together with comments and questions designed to stimulate discussion.  Self-Test question. The test of how well you have learned the material is your ability to tackle standard questions. Make a serious attempt at producing your own answers, but at this stage don’t be too concerned about attempting the questions in exam conditions. In particular, it is more important to absorb the material thoroughly by completing a full solution than to observe the time limits that would apply in the actual exam. Solutions. Avoid the temptation merely to ‘audit’ the solutions provided. It is an illusion to think that this provides the same benefits as you would gain from a serious attempt of your own. However, if you are struggling to get started on a question you should read the introductory guidance provided at the beginning of the solution, and then make your own attempt before referring back to the full solution. Commercial Laws (Study Text) v|Pag e  STUDY SKILLS AND REVISION GUIDANCE Planning To begin with, formal planning is essential to get the best return from the time you spend studying. Estimate how much time in total you are going to need for each subject you are studying for the Operational Level. Remember that you need to allow time for revision as well as for initial study of the material. This book will provide you with proven study techniques. Chapter by chapter it covers the building blocks of successful learning and examination techniques. This is the ultimate guide to passing your ICMA Pakistan written by a team of developers and shows you how to earn all the marks you deserve, and explains how to avoid the most common pitfalls. With your study material before you, decide which chapters you are going to study in each week, and which weeks you will devote revision and final question practice. Prepare a written schedule summarizing the above and stick to it. It is essential to know your syllabus. As your studies progress you will become more familiar with how long it takes to cover topics in sufficient depth. Your timetable may need to be adapted to allocate enough time for the whole syllabus. Tips for effective studying (1) Aim to find a quiet and undisturbed location for your study, and plan as far as possible to use the same period of time each day. Getting into a routine helps to avoid wasting time. Make sure that you have all the materials you need before you begin so as to minimize interruptions. (2) Store all your materials in one place, so that you do not waste time searching for items around your accommodation. If you have to pack everything away after each study period, keep them in a box or even a suitcase, which will not be disturbed until the next time. (3) Limit distractions. To make the most effective use of your study periods you should be able to apply total concentration, so turn off all entertainment Commercial Laws (Study Text) vi | P a g e  equipment, set your phones to message mode and put up your ‘do not disturb’ sign. (4) Your timetable will tell you which topic to study. However, before dividing in and becoming engrossed in the finer points, make sure you have an overall picture of all the areas that need to be covered by the end of that session. After an hour, allow yourself a short break and move away from your study text. With experience, you will learn to assess the pace you need to work at. (5) Work carefully through a chapter, note important points as you go. When you have covered a suitable amount of material, vary the pattern by attempting a practice question. When you have finished your attempt, make notes of any mistakes you make, or any areas that you failed to cover or covered more briefly. Commercial Laws (Study Text) vii | P a g e 1  Chapter learning objectives When you have completed this chapter, you should be able to:  Understand the need to study law  Explain Pakistan’s law making authority  Understand system of courts  Explain different sources of law  Explain doctrine of precedent Commercial Laws (Study Text) 2|P a ge 1) Need of laws Why do we need Laws? Man is a social animal and for the survival of man in a society, rules are required, so that one could enjoy limited resources of life with others. Rules or Laws are made to regulate human behaviors in a society. But laws can be distinguished from general body of rules, as the laws (legal rules) are made by the Government for people and moralities (moral rules) are evolved in a society. ‘Laws’ in its legal sense, as distinguished from other uses of the term, mean those rules and principles that govern and regulate social conduct and the observance of which can be enforced in courts. Countless schools of law have defined from distinctive perspectives. Some have outline it on the basis of its nature, some focus primarily on its sources and some define in tends of its effect on civilization. Law is a social science which grows and develops alongside the growth and development of the community. Modern developments in the community create new problems and law is required to enforce with such problems. Law is the most general and comprehensive sense signifies a rule of action and is applied indiscriminately to all kinds of actions, whether animated or inanimate, rational or irrational. Thus, we say the laws of gravitations, or optics or mechanics, as well as laws of nature and of nations- William Blackstone Law is the aggregate of rules set by men as politically superior, or sovereign, to men as politically subject- John Austin. The concept of law fulfils as a central role within the sphere of jurisprudence, no simple definition will however, satisfy us in the absence of a clear grasp of the upshots of the concept throughout its domain alongside an acceptable norm of adequacy. Law seems to require a certain minimum degree of regularity and certainty, for without this it would be impossible to assert that what was operating in a given territory amounted to a legal system. Clearly, however, no exact criterion can be applied for determining what degree of regularity or certainty is necessary to achieve this aim, and states may vary from arbitrary tyrannies where all are subject to the momentary caprices of a tyrant, to the elaborate and orderly governed states associated with Western democracies. Lord Dennis Lloyd of Hampstead, introduction to Jurisprudence (1979). In order to keep step with the society, the definition and scope of law must continue to change/upgrade. The outcome is that a definition of law presented at a specific timeline can’t remain effective for all times to come. A definition which is reflected adequate today may be found constricted tomorrow. Commercial Laws (Study Text) 3|P a ge Sources of Law Sources of Law means the origins of law, i.e. the binding principles/rules governing the human conduct. Such Sources may be international, national, religious. It also refers to the sovereign or the state from which the law descends its enforcement or authority. In Civil law systems, one has only to look at the appropriate code or status; but in common law systems one needs to look at legislation (primary and secondary) and at the judicial precedents. There are divergent views about sources of law. Austin says that law originates from sovereign. According to theologians, law originates from God. The Vedas are the primary sources of Hindu law which are considered to be words of God. Similarly, in Islam, Quran is main source of Muslim Law which is also considered to be resolved by God. Salmond has divided the sources of law into two classes: (a) The sources from which the law derives its forces and validity. Such courses are called formal sources. (b) The sources from which Law derives the matter of which it is composed. Such sources are called material sources. The material sources of law are those from which is derived the matter, though not the validity of the law. The matter of law may be drawn from all classes of material sources. Material sources of law are of are divided in two: (i) Historical Sources: Historical sources are sources where rules, subsequently turned into legal principles, were first to be found in an unauthoritative form. These are not allowed by the law courts as of right. These operate only mediately and indirectly. (ii) Legal Sources: Legal sources are those sources which are the instruments or organs of the State by which legal rules are created, e.g. legislation and custom. These are authoritative and are followed by law courts as of right. These are the gateway through which new principles find access into the realm of law. (iii) By reference to their legal sources, there are six kinds of law: (i) Enacted law having its source in legislation; (ii) Case law having its source in precedent; (iii) Customary law having its source in custom; (iv) Conventional law having its source in agreement; (v) Equity having its source concurrently in common law and (vi) Professional opinions of eminent jurists, appearing as juristic law. Commercial Laws (Study Text) 4|P a ge 2. Pakistan’s law-making authority Pakistan is a parliamentary form of government. Every State has three main functions which are also known as three pillars of the state. These branches are Legislature, Executive and Judiciary. 2.1 Legislative function of the state is to make laws for the people of the country. In Pakistan, parliaments are responsible to make laws for the country. ‘Women Protect Act 2006’ and ‘Companies Ordinance 1984’ are examples of legislation. Parliament is the responsible institution for making laws in Pakistan and the laws made by parliament are called Statute Laws. 2.2 Executive function of state is the implementation of laws and management of the government for the people of country. In Pakistan, cabinet ministers are chief managers and law enforcement heads of their respective fields. 2.3 Judicial function of the state means to decide between right and wrong. In implementation of laws there are always issues which need a decision between ‘the parties in conflict’. As the laws carry varied interpretations, therefore courts tell people the correct interpretation of law. In Pakistan, Supreme Court of Pakistan is the responsible institution for performance of judicial function of the State. In judicial interpretation principle of ‘jus necessitates’ is developed through Apex Courts in Pakistan, which has its strong roots in Pakistan’s Constitutional History. Decisions of the courts also have the status of law and are more commonly known as Case Laws. 3) Legislation Process under the Constitution of Islamic Republic of Pakistan. 3.1 As per Constitution 1973, the two houses of parliament, i.e. National Assembly and Senate are the supreme law-making authority in Pakistan. The National Assembly (lower house) is elected house of the parliament constituted through the votes of general public. Senate is the upper house of parliament, where equal number of Senators from all the provinces is elected by the Members of Provincial Assemblies (MPAs). Fourth Schedule in the Constitution provides Federal Legislative List, containing the subjects for which the two houses of parliament have power to make laws. Commercial Laws (Study Text) 5|P a ge 3.2 Steps involved in process of legislation through parliament are as follows: (i) A bill (proposal of law) may originate from either house or when passed from one house is transmitted to the other house. In the other house if the bill is passed without any amendments, then it is presented to President for an assent. (ii) If the bill is passed from one house and is (i) rejected or (ii) not passed within 90 days or (iii) is passed with amendments by the other house, then the bill is considered in joint sitting of both the houses of parliament, where if passed with a majority vote, is presented to the president for assent. (iii) According to Article 75 of 1973 Constitution, President has following options when the bill is presented by Parliament for an assent: a. President assents the bill and it becomes an ‘Act’ of parliament. b. President sends the bill back to the joint sitting of both the houses of parliament. (iv) After reconsideration if the parliament in joint setting again passes the bill with or without amendments it is again presented to the President for assent. (v) If bill is presented again to the president after reconsideration then president cannot refuse to assent the bill. However, if President does not assent the bill within ten days of this 2 nd presentment, it automatically becomes an ‘Act’ of the parliament after the expiry of ten days. (vi) Under the Constitution in dissolution of Assemblies, Senate being the upper house of parliament is not dissolved. If a bill is pending in National Assembly or a bill passed by National Assembly is pending in Senate, at the time of dissolution of National Assembly, the bill is considered as lapsed. But at the time of dissolution of the National Assembly, if the bill was pending in Senate and not passed by National Assembly it shall not be considered as lapsed. (vii) Money Bill (Budget) unlike other bills only originates in National Assembly and simultaneously a copy of Money Bill is sent to Senate for any recommendations. The National Assembly is not bound to follow the recommendations given by Senate. When a Money bill is passed by National Assembly it is not sent to Senate and directly presented to the President for an assent. Commercial Laws (Study Text) 6|P a ge  Procedure of Legislation under the Constitution of Pakistan When National Assembly is in session When National Assembly is not in session Money Bill Other Bill President National Assembly Senate National Assembly Ordinance President Assent Send for reconsideration in joint session of National Assembly & Senate Act 3.3 Presidential power to issue Ordinance According to article 89 of 1973 Constitution of Pakistan, President has the power to promulgate Ordinance, when National Assembly is not in session and President is satisfied that circumstances exit which render it necessary to take immediate action. An ordinance promulgated by the President has the same effect as of an Act passed by the parliament. But every such Ordinance must be laid before parliament for approval within one hundred and twenty days of its promulgation. The Ordinance stands repealed on expiry of one hundred and twenty days if not repealed earlier by the parliament. In the constitutional history of Pakistan, ordinances which were promulgated after abrogation of the constitution, when accepted by the parliament through constitutional amendments are still called ‘Ordinance’ even after the expiry of one hundred and twenty days. For example, Companies Ordinance 1984, National Accountability Bureau Ordinance 1999, Electronic Transaction Ordinance 2002. Commercial Laws (Study Text) 7|P a ge 4 Court Structure in Pakistan 4.1 The Constitution of Pakistan deals with the superior judiciary in a fairly comprehensive manner and contains elaborate provisions on the composition, jurisdiction, powers and functions of these courts. The Constitution provides for the “separation of judiciary from the executive” and the 13 “independence of judiciary” It entrusts the superior courts with an obligation to “preserve, protect 14 15 and defend “the Constitution. The qualifications of judges, their mode of appointment, service 16 conditions, salary, pension, etc. are also laid down in the Constitution. The remuneration of judges and other administrative expenditures of the superior courts are charged on the Federal/Provincial 17 Consolidated Fund, which means it may be discussed but cannot be voted upon in the legislature. 4.2 Presently the Judicial system of the country according to this Constitution is being regulated under Article 175 which provides for the establishment of a Supreme Court and High Courts in each of the four provinces, i.e. Punjab, Sindh, Balochistan and Khyber Pakhtunkhwa. Recently through an amendment, a High Court for Islamabad capital territory has also been established. This Article also provides for the establishment of other courts through law and accordingly Civil Courts and Criminal Courts stood established respectively under Civil Courts Ordinance 1962 and Code of Criminal Procedure 1898. Article 227 of the constitution has also established Federal Shariah Court. 4.3 Supreme Court the Supreme Court is the apex Court of the land, exercising original, appellate and advisory jurisdiction. It is the Court of ultimate appeal and final arbiter of law and the Constitution. Its decisions are binding on all other courts. The Court consists of a Chief Justice and other judges, appointed by the President as per procedure laid down in the Constitution. An Act of Parliament has fixed the number of Judges at 17 i.e. Chief Justice and 16 judges. There is also a provision for appointment of acting judges as well as ad hoc judges in the court. A person with 5 years’ experience as a Judge of a High Court or 15 years standing as an advocate of a High Court, is eligible to be appointed as judge of the Supreme Court. The Court exercises original jurisdiction in settling inter- governmental disputes, be that dispute between the Federal Government and a provincial government or among provincial governments. The Court also exercises original jurisdiction concurrently with High Courts for the enforcement of Fundamental Rights, where a question of 'public importance' is involved. The Court has appellate jurisdiction in civil and criminal matters. Furthermore, the Court has advisory jurisdiction in giving opinion to the Government on a question of law. 4.4 High Courts There is a High Court in each province and yet another High Court for the Islamabad Capital Territory. Each High Court consists of a Chief Justice Commercial Laws (Study Text) 8|P a ge  and other puisne judges. The strength of Lahore High Court is fixed at 60, High Court of Sindh at 40, Peshawar High Court at 20, High Court of Balochistan at 11 and Islamabad High Court at 7. Qualifications mentioned for the post of a judge are, 10 years’ experience as an advocate of a High Court or 10 years’ service as a civil servant, including 3 years’ experience as a District Judge or 10 years’ experience in a judicial office. 4.5 The High Court supervises and controls all the courts subordinate to it. It appoints its own staff and frames rules of procedure for itself as well as courts subordinate to it. 4.6 Federal Shariat the Court consists of 8 Muslim judges including the Chief Justice. Procedure for appointment of judges of Federal Shariat Court has been changed after 18th and 19th amendments as previously such judges were appointed by the President from amongst the serving or retired judges of the Supreme Court or a High Court or from amongst persons possessing the qualifications of a judge of the High Court. At present, the judges of Federal Shariat Court are also appointed through the Judicial Commission, which comprises the Chief Justice of Pakistan, as Chairman with four senior most Judges of the Supreme Court, one former Chief Justice or a retired judge of the Supreme Court, appointed by the Chairman, in consultation with the four member judges of the Supreme Court, Attorney General for Pakistan, the Federal Minister for Law and Justice, Chief Justice of Federal Shariat Court and most senior judge of the Federal Shariat Court, as members. For appointment of Chief Justice, however, the most senior judge of the Federal Shariat Court is excluded from the composition of the Commission. Once the Judicial Commission approves a new name for appointment as a judge of the Federal Shariat Court, it goes to an 8- member Parliamentary Committee that has equal representation of the Government and the Opposition as well as of two houses i.e., National Assembly and Senate. This Committee has two weeks to review the recommendation. If the recommendation is approved, it goes to the Prime Minister who forwards the same to the President for appointment. The Parliamentary Committee, for reasons to be recorded, may not confirm the recommendation by three-fourth majority, in which instance, the decision is forwarded to the Commission through the Prime Minister, and the Commission is required to send another nomination. 4.7Subordinate Courts the Subordinate Judiciary may be broadly divided into two classes; one, civil courts, established under the Civil Courts Ordinance 1962, and two, criminal courts, created under the Code of Criminal Procedure 1898. In addition, there also exist other courts and tribunals of civil and criminal nature, created under special laws. Their jurisdiction, powers and functions are specified in the statutes, creating them. The decisions and judgments of such special courts are assailable before the superior judiciary (High Court and/or Supreme Court) through revision or appeal. The provincial governments fund the justice Commercial Laws (Study Text) 9|P a ge  sector. The civil and criminal courts judges and their terms and conditions are regulated under the provincial rules. The High Court, however, exercises administrative control over such courts. The civil courts consist of District Judge, Additional District Judge, Senior Civil Judge and Civil Judge Class I, II & III. Similarly, the criminal courts comprise of Sessions Judge, Additional Sessions Judge and Judicial Magistrate Class I, II & III. Law fixes their pecuniary and territorial jurisdictions. Appeal against the decision of civil courts lies to the District Judge and to the High Court, if the value of the suit exceeds specified amount. Similarly, in keeping with the quantum of penalty, appeals against criminal courts lie to Sessions Judge or High Court. 4.8 Special Courts and Administrative Tribunals the Constitution authorizes the Federal Legislature to establish special courts as well as 58 administrative courts and tribunals for dealing with federal subjects. Consequently, several special courts/tribunals have been created which operate under the administrative control of the Federal Government. Most of these courts function under the Ministry of Law & Justice, however, certain courts also operate under other ministries/departments. Such courts/tribunals include Special Courts (Control of Narcotics Substances), Banking Courts (Recovery of Loans), Special Courts (Offences in Banks), Special Courts (Customs, Taxation & Anti-smuggling), Income Tax Appellate Tribunal, Environmental Tribunal, Insurance Appellate Tribunal, Customs, Excise & Sales Tax Appellate Tribunal, Special Judges (Central), Drugs Courts, Anti-terrorism Courts, Accountability Courts. Similarly, the provincial governments have their own special courts/tribunals, established under statutes. Such provincial courts/tribunals include Labour Courts, Consumer Protection Courts, Anti–terrorism Courts and Anti-corruption Courts. The judicial officers presiding over these courts are mostly appointed on deputation from the provincial judicial cadre. Besides, there exist revenue courts, operating under the WP Land Revenue Act 1967. The revenue courts may be classified as the Board of Revenue, Commissioner, Collector, Assistant Collector of the First Grade and Second Grade. The provincial government that exercises administrative control over them, appoints such officers. The WP Land Revenue Act 1967 prescribes their powers and functions. 4.9 Service Tribunals Under Article 212 of the Constitution, the government is authorized to set up administrative courts and tribunals for exercising exclusive jurisdiction in matters, relating to the terms and conditions of 59 service of civil servants. Accordingly, service tribunal has been established at the Federal level. The provincial governments have established their own service tribunals. The members of these tribunals were previously appointed by the respective government. However, as the service tribunals, both Federal and provincial, perform judicial functions, the Supreme Court has directed the government to make appropriate legislation to ensure the independence and impartiality of 60 Commercial Laws (Study Text) 10 | P a g e  such bodies and ensure their financial autonomy. Appeals against the decision of the Federal/provincial service tribunals lie to the Supreme Court. Supreme Court of Pakistan Division Bench of High Court High court: Company bench| Banking Court| Writ Jurisdiction Suit valued more District Courts than 2,500,000/- Civil Courts Supreme Court of Pakistan Division Bench of High Court High Court Sessions Court Assistant Sessions Court Conviction for sedition Magistrates Courts Commercial Laws (Study Text) 11 | P a g e  5. Sources of Law Sources of law can be classified as either Legal or Historical. The Legal sources of law produce a final product which everyone is bound to follow it, whereas Historical sources are like raw material, lacking recognition and importance as law. 5.1 Historical Sources Pakistan with its basic ideology of Islam has inherited its legal system from British Colonial Structure. The principles of English law are embodied in our statutory framework of laws. Most of the laws applicable in Pakistan were made before the formation of Pakistan in 1947. In this mixture of Islamic and British heritage following are the historical sources of law in Pakistan 5.1.1 Common Law: The Common Law consists of principles based on immemorial custom enforced by the courts after the Norman Conquest in 1066. The decisions of English courts during the period beginning with the thirteenth century and extending into the eighteenth century were brought to this country by the British rulers. These are to be found in some thousands of volumes of reported cases. 5.1.2 Equity: Equity in its popular sense is equivalent to morality. Where common law failed to provide justice, it was the equity which provided relief to people. Equity developed new remedies. The common law courts only awarded damages, and were without the remedy of injunction to prevent the commission of a tort and had no machinery to compel the specific performance of a contract. 5.1.3 Quran & Sunnah: The Quran which is not only of divine origin but has existed from eternity, was revealed in parts to the prophet of Arabia during the space of twenty or twenty- five years. It is divided into suras or chapters, each having a separate designation, and is composed of ayats or verses. The arrangement of the verses is not in the order in which they were revealed, but is believed to be in accordance with a plan sanctioned by the Prophet himself. Most of the versus, which embody rules of law, were revealed to settle questions that actually arose for decision; some in order to repeal objectionable customs like infanticide, gambling, usury and unlimited polygamy; some for effecting social reforms such as by raising the legal status of women, settling the question of succession and inheritance on an equitable basis, providing protection for the rights of minors and other persons under disability; and some lay down the principles of punishment for the purpose of securing peace and order.1 1 The Principles of Muhammadan Jurisprudence by Abdur Rahim Commercial Laws (Study Text) 12 | P a g e  The difference between the Quran and the precepts (rule of personal conduct) lies in the fact that the former contains the very words of Allah, while the precepts were delivered in the Prophet’s own language. One result of this difference is that the words of the Quran have a spiritual value and significance apart from what they lay down. When clear guidance is not available from Quran then Sunnah (traditions) are consulted to see how the Quran was interpreted by the Prophet Muhammad (S. A.W.). After the death of Prophet Muhammad (S.A.W) Sunnah (traditions) was not collected by the authority of the State, therefore there are traditions, which have the possibility of concoction and error. Traditions are grouped into three classes according to the nature of their proof. Such of them as, have received universal publicity and acceptance, having been related by an indefinite number of men in each one of the three ages and of different places, are called ‘continuous’. Traditions of this class like a verse of the Quran ensure absolute certainty as to their authenticity and demand implicit belief. The next class of traditions is regarded in law as carrying conviction of their genuineness into a man’s mind, though not absolute certainly like the first. These were reported by a limited number of companions in the first instance, and thereafter, i.e., in the two successive periods, fulfilled the conditions of a continuous traditions. They are called ‘well-known traditions. The third class is designated ‘isolated’ traditions. These latter neither ensure certainty of belief like the continuous, nor carry conviction like the ‘well-known traditions’, but their genuineness in the opinion of generality of jurists is so far guaranteed, that it would be justifiable to base a rule of law thereupon.2 5.1.4 Ijma: Ijma or Consensus of juristic opinion is defined as agreement of the jurists among the followers of Muhammad in particular age on a question of law. Its authority as a source of laws is founded on certain Quranic and traditional texts. The principle underlying these texts is expressed in especially apt statements and one of them says: ‘whatever the Muslims hold to be good is good before Allah’. 5.1.5 Qiyas: Most of the Schools of Jurisprudence agree that in matters which have not been provided for by Quranic or Traditionary text nor determined by Ijma (Consensus of Opinion), the law may be deduced from what has been laid down by any of these three authorities, by the use of Qiyas, which is generally translated as analogy. The root meaning of the word Qiyas is ‘measuring’, ‘accord’, ‘equality’. In plain language Qiyas is a process of deduction by which the law of a text is applied to 2 The Principles of Muhammadan Jurisprudence by Abdur Rahim Commercial Laws (Study Text) 13 | P a g e  cases which though not covered by the language but governed by the reason of the text. Many statements are made during the course of judge’s judgment that have no bearing on the reason for the final decision but provides a valuable indication of the judge’s opinion on certain matters. These comments are described as obiter dicta. The literal definition of the term obiter dicta is ‘a saying by the way’. They may be statements concerning the law, but they do not form the basis of the judge’s decision. A distinction is drawn between a binding precedent and a persuasive precedent. A binding precedent is one that a court must follow. A persuasive precedent is one that a court is not bound to follow but may regard as very influential. Two factors determine if a precedent is binding or merely persuasive. First, the origin of the case and second the ratio decidendi (ratio) of the case. 3 5.1.5.1 Binding Precedent In order to be binding, a precedent must come from a court in the same hierarchy of courts. For example, decisions of American courts are not binding precedents for Pakistani Courts because they are part of a different court hierarchy, although these decisions may be persuasive. The decision must come from a higher court in the same hierarchy, or it could be the same court if that court is obliged to follow its own previous decision. Courts are ranked in order of importance. Courts dealing with more complex matters are at the top of the hierarchy. Courts dealing with less complex matters are at the bottom of the hierarchy. A court is obliged to follow only the ratio decidendi of another case, i.e., the underlying principle of a case. It will be necessary for a judge to ascertain the ratio of a binding precedent. The judge must then apply the precedent to the facts of the case. This is so even if the precedent is very old. 5.1.5.2 Persuasive Precedent If a precedent is not binding it may be regarded as persuasive. A precedent will be persuasive if it is decision of a court in a different court hierarchy. If the decision comes from a court lower in the same hierarchy, it can also be persuasive. It is for a court to decide whether to follow a persuasive precedent, but it is not obliged to. Cases from other jurisdictions may be cited by judges if a matter has been dealt with before by a court. The court may decide to follow the precedent, particularly if it is the only case law on the subject. 3 Fundamentals of Business Law [4th Edition] by M. L. Barron & R. J. A. Fletcher Commercial Laws (Study Text) 14 | P a g e  Another type of persuasive precedent is material that comes from the decision of a court of binding status in the same hierarchy, where it is not the ratio but is obiter dicta. Such statements may be followed by a judge in a future case, but there is no compulsion to do so. 5.1.5.3 General Rules regarding precedents It is possible to identify a number of rules regarding the operation of the doctrine of precedent. They are summarized as follows: i) A court is only bound to follow the ratio decidendi of a case and not comments made obiter dicta. ii) Decisions of a court outside the same court hierarchy will not be binding precedents. iii) Decisions of courts lower in the same hierarchy will not be binding precedents. iv) Decisions of the Supreme Court of Pakistan are binding precedents for every court in Pakistan. v) Decisions of the High Court of one province are not binding precedents for courts of other provincial High Courts. However, they are highly persuasive. Following table helps to explain the operation of the doctrine of precedent between different courts: Decision made by Binding for Persuasive for Supreme Court of Pakistan All the courts in Supreme Court of Pakistan Pakistan High Court All the  Supreme Court of Pakistan subordinate  High courts courts in the Province Federal Shariat Court All the High Supreme Court of Pakistan Courts and subordinate court 5.1.5.4 Consequences of not complying with a binding precedent A judge will be legally wrong if he or she does not follow a binding precedent. The case can be taken on appeal and the decision of the judge can be reversed. This is because the judge has made a mistake of law. If no appeal is taken, it is possible for the decision to be overruled by a subsequent court with appropriate status in the court hierarchy. It is not possible for a court lower in the hierarchy to overrule the decision. Commercial Laws (Study Text) 15 | P a g e  If it is shown that the facts of the case before the court are different from the facts in the precedent case, it will not be appropriate to apply the precedent. The term used for such an argument is to distinguish a precedent. If a precedent is distinguished, there will be the beginning of new rule, which in turn may be modified by the courts. In rare eventuality, if a case comes before a court, which has never been decided before, the judge would have opportunity to make laws. Conservative judges may decline to do so. Other judges will create new legal principles. 5.1.5.5 Some advantages and disadvantages of precedent are given below: Advantages Disadvantages Efficiency Precedents may be outdated but must be followed Certainty Development of laws restricted Systematic reform Require an Act of parliament to change Legal equality 5.1.6 Customs: The first source of the law is the customary conduct of community life. Group life creates customs, and when these customs become stabilized to the extent that each member of the society is justified in assuming that every other member of society will respect them and will act in conformity with them, it can be said that rules of conduct have been formulated. When these rules of conduct have received the recognition of the community in general and have become formally expressed in judicial decisions, the `Law' is made. The court, by its decision, lays down a principle, based upon a custom or convenience, and thus creates a precedent which will be controlling in similar future controversies. With the growth of legal systems importance of customs as a source of law has diminished. But still for the new avenues of human conduct and civilization, customs or trade practices are considered as law. For example, Internet and E- Commerce has reduced world into a global village and in the absence of laws to regulate this new avenue of social life customs are the only laws to follow. The basic reason for attributing custom to the force of law is that custom carry those principles which has received the approval of society as principles of justice and public utility. The existence of an established custom is the basis of a rational expectation of its continuance in the future. Moreover ‘custom is to society what law is to the state’4. 4 Salmond on Jurisprudence [12th Edition] by P. J. Fitzgerald Commercial Laws (Study Text) 16 | P a g e  Self-Test Questions State with reasons whether the following statements are True or False: 1. Law cannot be made against Quran and Sunnah. 2. Pakistan has a presidential form of Govt. 3. President is a symbol of federation. 4. National Assembly is upper house of parliament. 5. Money bills are only presented in Senate. 6. Budget is only passed by National assembly. 7. Crime is an act prohibited by law. 8. Civil suits are initiated by an individual. 9. Civil proceedings can be stopped at the will of plaintiff. 10. A crime is a private and public wrong. 11. An accused is presumed innocent until proved guilty. 12. Civil wrong is a public wrong. 13. Court of 1st instance is also called a court of original jurisdiction. 14. Writ is issued against private persons. 15. Rules of precedents are authoritative 16. Legal sources are the statues and case laws. 17. Historical sources are appreciated by courts as matter of right. 18. Equity is equal to morality. 19. Parliament cannot repeal earlier statue. 20. Supremacy of parliament in Pakistan is same as doctrine of parliamentary supremacy in England law. 21. American courts decisions are binding precedents for Pakistani courts. 22. Decisions of courts lower in the same hierarchy will be binding precedent. 23. Decisions of the Supreme Court of Pakistan are binding precedent for every court in Pakistan. Short Questions 1. Which parliament is considered to be the mother of parliament? 2. Write a short note on the following main functions of the state. a. legislation b. executive c. judiciary 3. What are the legal sources of law? 4. What is the Judicial system of Pakistan? 5. What is doctrine of precedent? Commercial Laws (Study Text) 17 | P a g e Answers Self-Test Questions Question no. Answer Question no. Answer 1 True 13 True 2 False 14 False 3 True 15 False 4 False 16 True 5 False 17 False 6 True 18 True 7 True 19 False 8 True 20 False 9 True 21 True 10 False 22 False 11 True 23 True 12 False Commercial Laws (Study Text) 18 | P a g e Commercial Laws (Study Text) 19 | P a g e Chapter learning objectives When you have completed this chapter, you should be able to:  Understand and explain the provisions of Contract Act regarding:  Consideration and object  Free Consent  Capacity of parties  Offer and Acceptance  Void agreements  Contingent and Quasi contracts  Discharge of contract  Performance of contract  Remedies for breach of contract  Indemnity and guarantee  Bailment and pledge  Contract of agency Commercial Laws (Study Text) 20 | P a g e 1 Introduction 1.1 An understanding of the law of contract is of fundamental importance in the context of business practices. Contracts are part of our daily life, which give rise to hundreds and thousands of rights and obligations, which bind the society together. It is for these rights and obligations that people need enforceability or sanction, so that nobody could deny what he has committed to do. Common practices of trade and commerce between people in daily wakes of life are some of the very basic principles of the law of contract and people don’t even know it to be so. That is why law is said to be nothing but common sense. In business transactions, where promises are made at one time and the performance is to follow later, the parties have two alternatives open to them. They may either rely upon one another's honour to ensure performance, or else there should be a legally enforceable obligation to perform the agreement. Reliance upon honour alone is insufficient protection. Legal means of enforcing promises has, therefore, been developed in civilized societies. Legally enforceable promises are termed contracts. The object and function of the law of contract is to see that, as far as it is possible, expectations created by promises of the parties are fulfilled and obligations prescribed by the agreement of the parties are enforced. The contract is, indeed, cement that holds an economic system together. For this reason, the sanctity of contract has always been made an objective of social control and individual liberty. Contract Act 1872 is inherited by Pakistan from its British Colonial era, which carries English Common Law. This Act explains the principles of law of contract and explains the basis of formation of legal obligation through social interaction. It can rightly be taken as the mother of all the other mercantile laws relating to special types of contractual obligations, e.g. Sales of Goods Act, Partnership Act, Negotiable Instruments Act, Carriage of Goods by Sea Act and Trust Act. 1.2 Meaning of Contract For a contract essentially at least two parties are required and according to the definitions provided in section 2 of the Contract Act 1872, a proposal by one person when accepted by the other becomes a promise; and a promise or set of promises forming consideration between the persons is called an agreement; finally, an agreement if enforceable by law is called a Contract. Commercial Laws (Study Text) 21 | P a g e  Contract An Agreement enforceable by law Every promise forming consideration for each other A when proposal accepted Basically, in the form of equations of contract: Contract = An agreement + enforceable by law Agreement (promise) = A Proposal (offer) + when accepted The fundamental question which arises is that what is meant with ‘enforceable by law’? And answer to this question is that the agreement which a person if tries to avoid; other person can resort to court to compel the avoiding person to follow the agreement. In the above diagram it is highlighted that all contracts are agreements, but all agreements are not contracts. It is only those agreements, which are enforceable by law, are contracts. There can be an agreement which is not enforceable by law, like an agreement to murder someone or an agreement to supply illegal drugs. A famous Jurist Mr. Salmond observes: "The Law of Contracts is not the whole law of agreements, nor is it the whole law of obligations. It is the law of those agreements which create obligations, and those obligations which have Commercial Laws (Study Text) 22 | P a g e  their source in agreements." Also, agreement is the genus of which contract is the species; and, therefore, all contracts are agreements, but all agreements are not contracts. Example Mr. X promises to donate Rs 500,000 towards the repair of a charitable institution. Mr. X did not pay. Can the trustee recover the promised amount for Mr. X (a) if they have incurred any liability on the faith of the X’s promise (b) if they incurred any liability on the faith of this promise? Yes, the agreement is valid because it was supported by consideration in the form of a detriment to the trustees who had incurred liability on the faith of the promise made by Mr. X. Example Mr. X wanted to sell his black car in Rs. 100,000/- to Miss Y but she thought that the car’s color was red. In the course of dealing the color of car never came under discussion. Miss Y agreed to purchase the car. In this agreement both the parties were thinking differently about the subject matter therefore no contract is formed between the parties. 1.3 Essentials of a valid contract Section 10 of Contract Act 1872 states that “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.” The section further states that those agreements, which under their relevant laws are required to be in writing and those agreement, which are required to be registered shall continue to be so. Bare perusal of the above provision illuminates the fact that there are five essentials of a valid contract, that are: i) Free Consent ii) Competency to contract iii) Lawful consideration iv) Lawful Object & v) Not expressly declared to be void. i) Free Consent Consent means that the parties must have agreed upon the same things in the same manner. According to Contract Act 1872 consent is not free if it is caused by [i] Coercion (section 15) [ii] Undue Influence (section 16) [iii] Fraud (section Commercial Laws (Study Text) 23 | P a g e  17) [iv] Misrepresentation (section 18) [v] Mistake (section 20). Where a contract is caused by any of the first four elements, the contract is not valid and it is voidable at the option of the party whose consent was so caused. But in case of fifth element, i.e., mistake the agreement between the parties is void. Example Mr. X under the undue Influence of his boss Miss Y agrees to sell her his car in Rs. 10,000/- only. This agreement is not valid and voidable at the option of Mr. X. ii) Competency to contract Section 11 of Contract Act 1872 declares the qualification of the persons who are generally competent to contract, that ‘every person is competent to contract who is of the age of majority according to the 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’. According to this qualification following table can be drawn: Mental Deficiency Status Which may be due to Which may be 1) Minority 1) Political or Foreign Civic Sovereign Alien Enemy Felons 2) Idiocy 2) Professional 3) Lunacy 3) Artificial or Corporate 4) Drunkenness 4) Married The table is explained in preceding contents under a separate heading. Example Mr. X is a minor who agrees to sell his car to Miss Y for Rs. 100,000/-. This agreement is void and Mr. X cannot be compelled to deliver the car to Miss Y. iii) Lawful Consideration Consideration in simplest terms can be defined as the exchange between parties to a contract. Consideration is also defined as price paid for the promise of other. Commercial Laws (Study Text) 24 | P a g e  Example X, a client promises to pay y, his advocate Rs 10,000 in addition to his fees if he succeeds. X succeeds but refuses to pay Rs 10,000. Can Y recover from X? No because X’s promise to pay the additional sum was without consideration. The consideration must be something which the promise is not already bound to do. Here, Y was bound to render the best of his services under the original contact [Leading case: Ram Chandra Chitaman v. Kalu Raja] iv) Lawful Object Section 23 of Contract Act 1872 defines same rules for consideration and object and if the consideration or object falls into any of the following categories it is said to be unlawful: a) it is forbidden by law, whether express or implied b) it is of such a nature that if permitted, it would defeat the provision of any law c) it is fraudulent d) it involves an injury to the person or property of another e) The court regards it as immoral or opposed to public policy v) Not expressly declared as void Other than above mentioned essentials of section 10 in Contract Act 1872, if an agreement is required to be qualified as contract, it must not be from the ones that are expressly declared as void by the Contract Act 1872 itself. Amongst others following are the few, which the Contract Act has declared as void: (a) Agreement without consideration is void (b) Agreement in restraint of trade is void (c) Agreement in restraint of marriage is void (d) Agreement in restraint of legal proceedings is void (e) Agreement by way of wager is void Example Mr. X agrees with Mrs. Y that he will never marry anyone. This agreement between Mr. X and Mrs. Y is an agreement in restraint of marriage, therefore void. Commercial Laws (Study Text) 25 | P a g e  2 Kinds of Agreement Agreements can be classified into different categories. The classification can be based either on creation, execution or enforceability. Whatever the basis of classification of agreements are, they are of following kinds: i) Valid Contract ii) Voidable Contract iii) Void agreements iv) Unenforceable agreements v) Illegal agreements vi) Contingent Contract vii) Quasi Contract 2.1 Valid Contract As discussed above an agreement enforceable by law is Contract. Section 10 of Contract Act 1872 describes the essentials briefs discussed above, which fulfilled would make the agreement a valid contract. 2.2 Voidable Contracts Section 2(i) of Contract Act 1872 defines the meaning of ‘voidable’. It states that a contract is voidable when it is at the option of one party, who may hold it as valid or void, but it is not so at the option of the other. The contracts in which consent of a party is caused by coercion, undue Influence, fraud or misrepresentation, the contract is said to be voidable at the option of the party whose consent was so caused. Example Mr. X under the undue Influence of his boss Miss Y entered into a contract to sell his car for Rs. 10,000/- only. Later on, it is at the option of Mr. X whether he wants to keep the contract valid or to hold it void with Miss Y. In this situation Miss Y do not have the option to hold the contract as void or valid, because her undue influence has made the contract voidable. Section 64 of Contract Act 1872 explains the rights and obligations of the parties in a voidable contract after the contract is rescinded. The section states that when a person at whose option a contract is voidable rescinds it, the other party of the contract need not perform his/her part of the contract and if the party rescinding avoidable contract has received any benefit from the other party, he must restore such benefit. Thus, in our above example if Mr. X has received Rs. 10,000/- from Miss Y, then on rescinding the contract Mr. X also have to return Rs. 10,000/- to Miss Y. Commercial Laws (Study Text) 26 | P a g e 2.3 Void Agreement Section 2(g) of Contract Act 1872 defines that an agreement not enforceable by law is called a void agreement. Such an agreement is void-ab-initio, i.e., from the very beginning. Certain agreements have been expressly declared void in the Contract Act, which means that if such a void agreement is made by the parties, assistance of court cannot be taken to enforce it against the party, who refuses to fulfill the void agreement. A void agreement is different from a void contract, as void agreement is the one which was void from the beginning, whereas a void contract is the one, which has subsequently become void. A void contract initially was a valid contract but subsequently something happened, which rendered it void. A void contract is also written as a ‘contract which becomes void’. Section 65 of Contract Act 1872 lays down that when an agreement is discovered to be void or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it, or make compensation for it, to the person from whom he received it. 2.4 Unenforceable Agreements Sometimes a contract is valid according to the Contract Act 1872 but is still unenforceable. As stated earlier, that Contract Act 1872 carries basic conceptual principles of the law of contract, whereas there are other laws as well specifically designed for particular contracts. For example, an oral arbitration agreement is unenforceable, or a promissory note has to be in writing. 2.5 Illegal Agreements These are the agreements which are forbidden by law and are not just void. Thus if Mr. X agrees with Miss Y to murder Asif for Rs. 100,000/- this agreement is illegal and also void. For such an agreement Mr. X & Miss Y can be apprehended by police and sentenced, whereas only void agreement does not attract any penal provisions. It’s just that the courts don’t enforce it, e.g. Mr. X agreed for a sum of 100,000/- with Mrs. Y not to marry throughout his life. Later Mrs. Y refused to pay, now Mr. X just cannot recover Rs. 100,000/- from Mrs. Y for not marrying according to the agreement, Mr. X and Mrs. Y cannot be apprehended by police and sentenced for a void agreement. All illegal agreements are also void but all void agreements are not illegal. Commercial Laws (Study Text) 27 | P a g e 2.6 Contingent Contracts Where a contract is based on the happening or not happening of an uncertain event, such a contract is called a contingent contract. Section 31 of Contract Act 1872 defines it as contract to do or not to do something, if some event collateral to such contract, does or does not happen. Insurance Contracts are examples of contingent Contracts. Based on the event of an accident, which may or may not happen, Insurance Company undertakes to make compensation for the accidental loss to a Car Owner. 2.7 Quasi Contracts Normally in a contract an offer is made by one person and accepted by another. But this is not always the case; there can be a situation where without any offer and acceptance between the parties a contract can be made. ‘Quasi Contracts’ or constructive contracts rest upon the equitable principle that a person shall not be allowed to enrich himself unjustly at the expense of another. In truth, Quasi Contracts are not contracts but an obligation which law creates in the absence of any agreement. Section 68 to 72 in Contract Act 1872, quasi contracts or ‘certain relations resembling those of contracts’ are discussed and are numbered as: (i) Necessities supplied to a person incapable of contacting on his behalf. (ii) Payments made under compulsion on behalf of another. (iii) Obligations of finder of lost goods (iv) Obligations of a person, who enjoys benefits of a non-gratuitous act. 3. Offer and Acceptance 3.1 Offer/Proposal The word ‘proposal’ is used in Contract Act 1872, which is a synonym of ‘offer’. Section 2(a) of the Act defines that, ‘a person is said to have made the proposal when he signifies to another his willingness to do or to abstain from doing Commercial Laws (Study Text) 28 | P a g e  anything with a view to obtaining the assent of that offer to such act or abstinence’. The person making the proposal is called offeror and the person to whom offer is made is called the offeree. An offer is a definite and unequivocal statement of willingness to be bound on specified terms without further negotiations. An offer can be in any form – oral, written or by conduct. However, it is not effective until it has been communicated to the offeree. For example, if a reward is offered for the return of a lost item, it cannot be claimed by someone who did not know of the reward before they returned the item. An offer can be made to a particular person, to a class of persons or even to the whole world. In Carlill v Carbolic Smoke Ball Co (1893) the manufacturers of a medicinal ‘smoke ball’ advertised in a newspaper that anyone who bought and used the ball properly and nevertheless contracted influenza would be paid a 100 reward. Mrs. Carlill used the ball as directed and did catch influenza. The defendant claimed that there was no enforceable contract because Mrs. Carlill had never notified the company that she accepted its offer. The court rejected the defendant’s argument on the basis that the wording of the advert was such that Mrs. Carlill needed only to comply with the terms of the offer and there were no further negotiations intended. Once Mrs. Carlill had satisfied the conditions she was entitled to enforcement of the contract. Furthermore, weight was placed on the 1000 bank deposit that claimed to 'show their sincerity in the matter' in showing that the advertisement was not just a mere 'puff'. 3.2 What is not an offer? An invitation to treat is not an offer. An invitation to treat means an invitation to the other party to make an offer; e.g. ‘we may be prepared to sell’ – Gibson v Manchester City Council (1979). An invitation to treat cannot be accepted to form a valid contract. Examples of invitations to treat are product advertisements shown in newspapers and media. In Partridge v Crittenden (1968) the defendant put the following advertisement in a magazine ‘Bramble finch cocks and hens, 25s each’. The court held that it was an invitation to treat and not an offer. The advertisement stated that the birds were for sale, not that the seller would sell to all comers. Note, however, that it would be an offer if no further negotiations were intended or expected. The advertisements suggesting a work to be done for reward would be considered an offer. As held in Carlill v Carbolic Smoke Ball Co (1893). Shop window displays are invitation to an offer. In Fisher v Bell (1961) the Restriction of Offensive Weapons Act 1959 creates a criminal offence of ‘offering for sale’ certain offensive weapons. A shopkeeper was prosecuted under this statute for displaying a flick knife in his shop window, and thus 'offering it for sale'. It was held by the court that a window display was not an offer of sale, but only an invitation to treat. So, the display did not infringe the law. Commercial Laws (Study Text) 29 | P a g e  Goods on shop shelves are also an invitation to an offer. In Pharmaceutical Society of Great Britain v Boots Cash Chemists (1953) the facts were that a Statute required the sale of certain pharmaceuticals under the supervision of a qualified pharmacist. Boots (defendant) operated a store where the drugs were displayed on a self-service basis and the customers paid at a cash desk for the goods they had selected. A pharmacist was present at the cash desk but not at the shelves where the goods were displayed with a price tag. The Pharmaceutical Society (plaintiff) claimed that the statute was being contravened. The court held that the display of goods in a shop was not an offer, but an invitation to treat. It was the customer who made the offer and Boots could either accept or reject this offer at the cash desk (in the presence of the qualified pharmacist). The act constituting the acceptance is the ringing up of the price on the till by the cashier and at that moment a binding contract of sale is made. Tenders notice published in media are not an offer. A tender arises where one party issues a statement asking interested parties to submit the terms on which they are willing to carry out work or supply goods. The person inviting the tender is simply making an invitation to treat. The person submitting a tender is the offeror and the other party is free to accept or reject the offer as they please. A mere statement of selling price in response to a request for information is not an offer. In Harvey v Facey (1893) the defendant (F) was in negotiations with them regarding the sale of his store. The claimant (H) sent the defendant a telegram stating: “Will you sell us Bumper Hall Pen? Telegraph lowest cash price answer paid.” On the same day, F sent H a reply by telegram stating: “Lowest price for Bumper Hall Pen was 900.” H sent F another telegram agreeing to purchase the property at the asking price. F refused to sell, and H sued for specific performance and an injunction to prevent the new buyer from taking the property. The court held that by replying to H's question regarding the lowest price of the property, F did not make an affirmative answer to the first question regarding his willingness to sell. The defendant’s response to the query was simply a statement of information. It was not an offer capable of being accepted by the claimant. A mere statement of intention to sell is not an offer. In Harris v Nickerson (1873) the defendant placed an advertisement in London papers that certain items, including some office furniture would be placed up for auction over three days. The claimant obtained a commission to buy the office furniture and expended time and expense to travel to bid for the office furniture. On the third day, the lots for the office furniture were withdrawn. The claimant sued for loss of time and expense. It was held by court that an advertisement that goods will be put up for auction does not constitute an offer to any person that the goods will actually be put up, and that the advertiser is therefore free to withdraw the goods from the auction at any time prior to the auction. Commercial Laws (Study Text) 30 | P a g e 3.3 Termination of an Offer Once an offer has been terminated, it cannot be accepted. An offer can be terminated by: Revocation Rejection Lapse. Revocation: Revocation by the offeror can be made at any time before acceptance, even if the offeror has agreed to keep the offer open. In Routledge v Grant (1828) the defendant (G) offered to buy plaintiff (R’s) horse and stated that the offer would remain open for six weeks. However, before the six week period had elapsed, G withdrew the offer. It was held that defendant (G) was entitled to withdraw the offer at any time before acceptance. The revocation must be communicated to the offeree, i.e. it must be brought to his actual notice. In Byrne v Leon Van Tienhoven (1880) an offer was posted on 1 October. It reached the plaintiff on 11 October. The plaintiff immediately cabled his acceptance. In the meantime, the defendant had changed his mind and posted a letter of revocation on 8 October. The revocation was received by the plaintiff after he had cabled his acceptance. The court held that the revocation did not take effect as it was not communicated to the plaintiff prior to his acceptance. The contract was therefore binding. The revocation can be communicated by the offeror or a reliable third party. In Dickinson v Dodds (1876) the defendant agreed to keep an offer open for two days. However, in the meantime the defendant sold the property to a third party. The offeree was told of the sale by a third party, but then attempted to accept the original offer. Held: This was a reasonable way of communicating revocation. The offer was therefore properly revoked and could not be accepted. There are two exceptions to the above rules on revocation: i) If the offeree pays the offeror to keep the offer open, any revocation will amount to a breach of that collateral contract. The offeree could claim damages for the loss of the opportunity to accept the offer, although he could not accept the offer itself. ii) In the case of a unilateral/optional contract, the offeror cannot revoke his offer once the offeree has begun to perform the acts which would amount to acceptance. In Errington v Errington (1952) a father offered to transfer his house to his son if the son paid the mortgage. The son began to pay the mortgage but, when the father died, his personal representatives wanted to withdraw the offer. Held: The offer could not be withdrawn because the son, by paying some of the installments, had started acceptance. Commercial Laws (Study Text) 31 | P a g e  Rejection: Rejection by the offeree may be outright or by means of a counteroffer. A counteroffer is an offer made in response to an offer. In Hyde v Wrench (1840) Wrench (defendant) offered to sell Hyde (plaintiff) a farm for 1,000. Hyde (Plaintiff) made a counteroffer, by offering 950. Wrench (defendant) rejected this. Later Hyde (plaintiff) came back and said that he now accepted the original offer of 1,000. Wrench (defendant) rejected it. Held: Hyde could no longer accept the original offer. It had been terminated by the counteroffer and was no longer capable of acceptance. His ‘acceptance’ was merely a fresh offer which Wrench was free to turn down. Note that a mere request for further details does not constitute a counter offer. In Stevenson v McLean (1880) M (defendant) offered, in writing, to sell a quantity of iron to S (Plaintiff) at a given price. Plaintiff replied to querying delivery times, but before receiving a reply sent a further letter accepting the offer. This acceptance crossed in the post with a letter of revocation from defendant to plaintiff. Defendant refused to supply the iron to plaintiff, arguing that plaintiff’s query was a counteroffer. Held: Defendant could not treat the query as a counteroffer. Plaintiff had not intended to prejudice Defendant’s position, just to establish the boundaries of the deal. Therefore, Defendant’s offer was still open when Plaintiff wrote accepting it. Lapse: An offer will lapse on: i) The death of the offeror (unless the offeree accepts in ignorance of the death) ii) The death of the offeree iii) After the expiry of a fixed time (if any) or after a reasonable time. What is a reasonable time may depend on the subject matter of the contract. In Ramsgate Victoria Hotel Co v Montefiore (1866) the defendant applied to the company to buy some shares in June and paid a deposit. He didn't hear anything until November when the company sent him a letter of allotment as acceptance and a request for the balance. By this time the defendant had changed his mind and no longer wanted the shares. Held: The offer was for a reasonable time only and since five months had passed since the offer had been made the offer was deemed to have lapsed. The defendant was not bound to buy the shares. Their value could have changed dramatically in such a long period. If the goods are perishable the time for lapse will be very short. 3.4 Acceptance Section 2 of Contract Act 1872 states that ‘when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be Commercial Laws (Study Text) 32 | P a g e  accepted’. Acceptance is the manifestation by the offeree of his assent to the terms of the offer. The acceptance must be absolute and unconditional. Offeree can only accept what is offered. No particular form of words or mode of expression is required for an acceptance. Any expression of an intention to agree is sufficient. Acceptance can be oral as well as in writing. Acceptance can also be implied by conduct of the parties. In Brogden vs. Metropolitan Rly Co.5, for many years Mr. B supplied coal to M Railway Co. He suggested that they should enter into a written agreement and M Railway Co.’s agent sent a draft to him for consideration. Mr. B added the name of an arbitrator in a space left for the purpose and having marked it approved, returned the amended draft to M Railway Co.’s agent. The agent took no further action on it. Mr. B continued to supply coal and the parties applied to their dealings the terms of the draft agreement, but they never signed a final version of it. Mr. B later denied that there was any agreement between him and M Railway Co. It was held that the return of the draft was not an acceptance of the M Railway Co.’s offer, since Mr. B had added a new term which M Railway Co.’s had not accepted or rejected. However, the subsequent conduct of the parties was only explicable on the assumption that they both agreed to the terms of the draft. The draft agreement became a binding contract as soon as M Railway Co. ordered and Mr. B supplied coal after the return of the draft to the agent. The offeror can stipulate a particular mode of acceptance. However, if he merely requests a mode, the offeree is not limited to that mode. Communication of acceptance is essential and silence cannot be a suggested mode of acceptance. In Felthouse v Bindley (1863) the plaintiff was interested in buying a horse and had discussed with his nephew the purchase of a horse belonging to him. The plaintiff wrote to his nephew and stated in this letter that he assumed the horse was his for a stated sum of money if he did not receive a response from his nephew. The nephew did not reply, and instructed the defendant, an auctioneer he had engaged to conduct a sale of his farming stock, to withhold the horse from the auction. By mistake, the defendant allowed the horse to be put up and sold. The plaintiff sued the defendant for damages. Held: An acceptance of an offer will not give rise to a binding agreement unless it is expressly communicated to the individual who makes the offer. Although the nephew had the intent to sell his horse to the plaintiff at the offered price, he did not communicate this intention to his uncle, or do anything to bind himself. Since property was not vested in the plaintiff, he had no right to bring action against the defendant. 3.5 Communication of Offer, Acceptance and Revocation 5 (1877) A.C. 666 Commercial Laws (Study Text) 33 | P a g e  Section 3, 4 & 5 of Contract Act 1872 explains the law relating to the communication of offer; communication of acceptance; and revocation of offer or acceptance. Communication of offer is essential before its acceptance and section 3 states that ‘the communication of proposals, the acceptance of proposals, and the revocation of proposal and acceptances, respectively, are deemed to be made by any act or omission of the party proposing, accepting or revoking by which he intends to communicate such proposal, acceptance or revocation, or which has the effect of communicating it’. 3.6 Postal Rule What has been stated in section 4 of Contract Act 1872, can verily be called a postal rule. It explains that completion point of the communication of offer, acceptance and revocation. Following drawing further explains the contents of section 4:     Legend Communication = Time of Revocation = Offer =  Acceptance =  Figure 1 In Figure 1 communication of an offer from Mr. X to Miss Y is complete, when it comes into the knowledge of Miss Y. Shown in a bold arrow from Mr. X to Miss Y. Communication of acceptance however is divided into two parts. First part is, when Miss Y post letter of acceptance so that it is out of the reach of Miss Y, it is Commercial Laws (Study Text) 34 | P a g e  then the communication of acceptance is complete to the extent of Mr. X and now he is bound into the contract. In Figure 1, it is shown as bold arrow from Miss Y to the letter box. Whereas Miss Y is still not bound into the contract, as she would be, when the letter of acceptance reaches Mr. X. In Figure 1, it is shown as bold arrow from letter-box to Mr. X. Section 5 of Contract Act 1872 explains the process of revocation for offer and acceptance. According to our above stated illustration revocation of offer can be made by Mr. X before the acceptance of offer by Miss Y and the time frame which Mr. X has is shown in Figure 1 as a dotted line from Mr. X to the letter-box, indicating that Mr. X can revoke his offer before Miss Y post her letter of acceptance. A fast and efficient mode of communication for revocation has to be adopted by Mr. X because the revocation is only effective when it comes into the knowledge of Miss Y before her acceptance. An acceptance can also be revoked before it comes into the knowledge of the offeror. In Figure 1 it is shown as the dotted line from Miss Y to Mr. X. Just like revocation of offer, Miss Y is responsible to adopt faster means of communication of revocation, as the ‘revocation of acceptance’ is only effective when it comes to the knowledge of Mr. X before the knowledge of ‘acceptance’. 3.7 Effect of loss of acceptance letter in post It is according to this postal rule that when the letter of acceptance is posted the offeror gets bound into the contract, no matter if the acceptance letter is lost in the post and it never arrive to the offeror. But due to the mere fact that the acceptance letter was posted, the offeror is bound into the contract. In Household Fire and Carriage Accident Insurance Co. V. Grant6, Mr. G sent an offer application for the allotment of shares in the company. In acceptance of Mr. G’s offer the company sent its acceptance letter (allotment of shares), which was lost in the post and never arrived to Mr. G. Later the company claimed money for the allotted shares. Mr. G refused to make the payment. It was held that Mr. G had to pay. The contract between the company and Mr. G had been formed when the letter of allotment was posted, regardless of the fact that it was lost in the post. Section 2(c) states that the person making the proposal is called ‘Promisor’ and person accepting the proposal is called ‘Promisee’. In negotiation between the parties, where offer and counter-offers are exchanged, one cannot judge the characters of Promisor and Promisee. Only after the acceptance of an offer it transpires that the person who made the offer is ‘Promisor’ and the person who accepted the offer is ‘Promisee’. 6 (1879) LR 4 Ex D 216 Commercial Laws (Study Text) 35 | P a g e  4. Consideration Sir Frederick Pollock has defined consideration as "the price for which a promise is bought." In Currie v. Misa 7, Lush J., defined consideration as "some right, interest, profit, or benefit accruing to one party for some forbearance, detriment, loss or responsibility given, suffered, or undertaken by the other." Section 2(d) of Contract Act, 1872, defines consideration: "When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing or promises to do or to abstain from doing something, such act or abstinence or promise is called a consideration for the promise". ‘Consideration is an act or forbearance (or the promise of it) on the part of one party to a contract as the price of the promise made to him by the other party to the contract’8. 4.1 Classification of consideration If the definition of consideration given in section 2 (h) is minutely observed in different parts it can be seen as follows: (i) When at the desire of the promisor (ii) the promisee or any other person has… done or abstained from doing does or Abstains from doing Promises to do abstain from doing or something (iv) such act or abstinence or promise is called a consideration From the definition it can be vividly observed that consideration can be classified as past, present or future. In the following it can be further explained as: (a) Executory (Future) (b) Executed (Present) (c) Past Executory or future consideration— means that it takes the form of a promise to be performed in the future. It is the price promised by one party in return for the other party's promise, e.g. an engagement to marry someone, or a promise to deliver goods or to render services at a future date. 7 (1875) 10 Ex. 153 8 Dunlop Pneumatic Tyre Co v Selfridge & Co Ltd (1915) Commercial Laws (Study Text) 36 | P a g e  Executed or present consideration means consideration which takes place simultaneously with the promise. The act constituting the consideration is wholly or completely performed. If A buys a book from a book-seller and pays the price and the book-seller delivers the book to A there and then, the consideration in this case is executed or present, since it is performed simultaneously by both the parties. Past consideration means a past act or forbearance, that is, one which took place and is complete before the promise is made. If Mr. X gives his car to Miss Y at the desire of Miss Y in January 2009 and after delivering the car in March 2009 Miss Y makes a promise to Mr. X to pay for the car, Mr. X will be able to enforce Miss Y’s promise. 4.2 Rules relating consideration and object An agreement without consideration is void and is not enforceable by law, in the words of Salmond, "a promise without consideration is a gift; one made for consideration is a bargain". Hence, "bargain without consideration is a contradiction in terms and cannot exist." Consideration must be of a value— in the formation of contract consideration must carry certain value but it need not be adequate. A person may sell his watch worth of Rs. 100,000/- in just Rs. 100/-, law has no objections over it. But if a person requires money in return of prayer for success, such an agreement is not valid, as in material world prayers cannot be valued. In Chappell & Co. v. Nestle Co.9 as a sales promotion scheme, Nestle & Co. offered to supply a music record to anyone who sent in a postal order of certain sum of money and three wrappers from bars of chocolate made by the company. Chappell & Co. owned the copyright of the music record and they sued Nestle & Co. for its violation. Nestle & Co. offered to pay cash money to Chappell & Co. collected from the sale of music record but Chappell & Co. rejected the offer and said wrappers from bars of chocolate were also part of the consideration collected by Nestle & Co. In the case it was argued that whether the wrappers from chocolate bars were part of the consideration. It was held the Nestle & Co. had required the wrappers to be sent (for obvious commercial reasons). It was immaterial that the wrappers when received were of no economic value to him. The wrappers were part of the consideration as they had commercial value. A) Consideration must move at the desire of the promisor— The promisor must desire the act or forbearance from the promisee. The act performed at the desire of third party cannot be consideration. But the promisor need not necessarily derive any benefit from the contract. The benefit may be intended for a third party. Again, for consideration to be present, it is essential that what 9 (1960) AC 87 Commercial Laws (Study Text) 37 | P a g e  is done must have been done at the desire of the promisor, and not voluntarily. If Mr. X notices that Miss Y's house is on fire and rushes voluntarily to help Miss Y, there is no consideration. If, however, Mr. X goes to help at the desire of Miss Y, there is good consideration. B) Consideration may move from the promisee or any other person. A stranger to consideration is the person who is a party to the contract but he has not given the consideration for the contract. On breach of such contract this person can file the suit to enforce it. In Chinnaya Rau v. Ramayya10, A, an old lady, by a deed of gift, made over certain property to her daughter with a direction that the daughter should pay an annuity to A's brother as had been done by A. By an agreement of even date between the daughter of A and the brother of A, the daughter promised to pay the annuity. The daughter, however, did not pay the annuity as promised. A's brother sued the daughter. It was held that the consideration moved from A, the donor of the estate, that was sufficient consideration for the daughter's promise to A's brother, because the consideration need not move from the promisee, but can move from any other person. C) Privity of Contract— a stranger to a contract is the person who never entered into the contract and such person do not have right to get the contract enforced, even if the contract was made for the benefit of this person. The basis of this rule is that a contract is a private relationship between the parties who make it, and no other person can acquire rights or incur liabilities under it. This rule is usually designated as the doctrine of Privity of Contract. Thus, where Mr. X mortgages his property to Miss Y in consideration of Miss Y’s promise to Mr. X to pay Mr.’s debts to Mrs. Z. Now Mrs. Z cannot file a suit against Miss Y to enforce the promise. Mrs. Z being no party to the contract between Mr. X and Miss Y. There are however exceptions to the doctrine of Privity of Contract, which means that though a party is stranger to the contract but still can go to the court to enforce it. These exceptions are as follows: (i) If the transaction between the parties is trust for a beneficiary, such beneficiary can file a suit to enforce the trust created for his benefit. (ii) In implied trusts, persons not parties to transactions like partition or family arrangements conferring benefits on them become beneficiaries. Such transactions are in the nature of trusts. (iii) In a contract of agency, a principal, even if concealed, may sue on a contract made by the agent. Thus, where A is secretly acting as agent for P, P can intervene to enforce the contract between T and A. 10 (1881) 4 Mad. 137 Commercial Laws (Study Text) 38 | P a g e  (iv) In assignment of rights in a contract the assignee of a debt or an actionable claim may sue the original debtor. D) Consideration or object must be lawful. Contract Act 1872 states that same rules for consideration and object are applicable and though the consideration need not be adequate to the promise, it must be competent, real; and not illusory, impossible, uncertain, vague or ambiguous. Consideration must be real, though it may be nominal. Further a consideration must be lawful, e.g.; not some illegal act, such as paying someone to commit a crime. If the consideration is unlawful, the contract is void and unenforceable. Section 23 of Contract Act 1872 prescribes the rules to hold a consideration and object as unlawful. It states that for any of the following reasons a consideration or object would be considered as unlawful: a) it is forbidden by law, whether express or implied b) it is of such a nature that if permitted, it would defeat the provision of any law c) it is fraudulent d) it involves an injury to the person or property of another e) the court regards it as immoral or opposed to public policy Examples: i) N agrees to pay S for the murder of A. The agreement is illegal and void because the consideration is forbidden by law. ii) Mr. X borrowed Rs. 100,000/- from Miss Y and agreed not to raise any objection as to the limitation and that Miss Y may recover the amount even after the expiry of limitation period. This agreement is void as it defeats the provisions of the Limitation Act. iii) Mr. A, being agent of a landed proprietor, agrees for money, without the knowledge of his principal, to obtain for B a lease of land belonging to his principal.