TABLE OF CONTENTS I THE LAW OF CONTRACT 51 Ch. 1 The ...TABLE OF CONTENTS PREFACE 49 I THE LAW OF CONTRACT 51 Ch. 1 The Nature of Contract Law and the Contract Act 53 1.1 The Importance

TABLE OF CONTENTS

PREFACE 49

I THE LAW OF CONTRACT 51

Ch. 1 The Nature of Contract Law and the Contract Act 531.1 The Importance of contracts in modern life . . . . . . . . . . . . . . 54

1.1.1 Our daily activities depend on contracts . . . . . . . . . . . . . 541.1.2 The law was developed by judges on the basis of commercial activity 541.1.3 The law of contract provides a framework within which planning for com-

mercial activity is undertaken by business persons . . . . . . . . 541.1.4 For commerce to flourish contracts have to be reliable and should be

enforced by the law . . . . . . . . . . . . . . . . . . . . . . 551.2 Purposes of the Law of Contract . . . . . . . . . . . . . . . . . . . 55

1.2.1 Theories explaining the purposes of the law of Contract . . . . . . 551.2.2 The real force behind contracts is moral obligation . . . . . . . . 56

1.3 The General Principles of Contract Law and the scope of the Contract Act,1872 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 561.3.1 Law of contract or contracts? . . . . . . . . . . . . . . . . . . 561.3.2 The Law of Contract is a Body of General Principles . . . . . . . . 561.3.3 General Principles are Those Principles That are Common to All Types

of Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . 571.3.4 The Scope of the Contract Act 1872 . . . . . . . . . . . . . . . 57

1.3.4.1 Sources of Contract Law in Pakistan . . . . . . . . . . 571.3.4.2 The Contract Act, 1872 Deals Primarily With General Principles,

but it Also Addresses Specific Contracts . . . . . . . . . 581.3.4.3 The Scope of the Act: It is not a complete code and needs to be

supplemented . . . . . . . . . . . . . . . . . . . 591.4 The Diminishing Importance of General Principles of Contract . . . . . 601.5 Relationship Between Contract, Torts and Restitution . . . . . . . . . 61

1.5.1 Principle 1: Expectations engendered by binding promises should befulfilled . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

1.5.2 Principle 2: Compensation must be granted for the wrongful infliction ofharm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

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1.5.3 Principle 3: Unjustified enrichments must be reversed . . . . . . . 611.6 Contract Law, Globalization and International Law . . . . . . . . . . . 611.7 The Meaning of contract and its Essential Elements . . . . . . . . . . 62

1.7.1 Contract: Definition and Meaning . . . . . . . . . . . . . . . . 621.7.1.1 Definition in the Contract Act and by Pollock . . . . . . . 621.7.1.2 Definitions by Treitel and Cheesman . . . . . . . . . . 641.7.1.3 Definition by the American Law Institute . . . . . . . . . 64

1.7.2 Essentials of a Valid Contract . . . . . . . . . . . . . . . . . . 641.7.3 Seven Questions to Understand the Law of Contract . . . . . . . 66

Ch. 2 Formation of Contract 672.1 Classification of Contracts . . . . . . . . . . . . . . . . . . . . . . 69

2.1.1 Bilateral and Unilateral Contracts . . . . . . . . . . . . . . . . 692.1.1.1 Bilateral Contract . . . . . . . . . . . . . . . . . . 702.1.1.2 Unilateral Contract . . . . . . . . . . . . . . . . . . 702.1.1.3 Partial Performance in a Unilateral Contract . . . . . . . 702.1.1.4 Modern Trend in Unilateral Contracts . . . . . . . . . . 71

2.1.2 Express and Implied Contracts . . . . . . . . . . . . . . . . . 712.1.2.1 Express Contracts . . . . . . . . . . . . . . . . . . 712.1.2.2 Implied-in-fact Contracts . . . . . . . . . . . . . . . 712.1.2.3 Quasi-Contracts . . . . . . . . . . . . . . . . . . 72

2.1.3 Formal and Informal Contracts . . . . . . . . . . . . . . . . . 722.1.3.1 Formal Contracts . . . . . . . . . . . . . . . . . . 72

2.1.3.1.1 Contracts under seal. . . . . . . . . . . . . . . 722.1.3.1.2 Recognizances. . . . . . . . . . . . . . . . . 722.1.3.1.3 Negotiable instruments. . . . . . . . . . . . . . 732.1.3.1.4 Letters of credit. . . . . . . . . . . . . . . . . 73

2.1.3.2 Informal (or Simple) Contracts . . . . . . . . . . . . . 732.1.4 Executed and Executory Contracts . . . . . . . . . . . . . . . 732.1.5 Valid, Void, Voidable and Unenforceable Contracts . . . . . . . . 73

2.1.5.1 Valid Contract . . . . . . . . . . . . . . . . . . . 732.1.5.2 Void Contract/Void Agreement . . . . . . . . . . . . . 742.1.5.3 Voidable Contract . . . . . . . . . . . . . . . . . . 742.1.5.4 Unenforceable Contract . . . . . . . . . . . . . . . 74

2.1.6 Option Contracts, First-Refusal Contracts, and Contingent (Conditional)Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . 742.1.6.1 Option Contracts . . . . . . . . . . . . . . . . . . 742.1.6.2 First-Refusal Contracts . . . . . . . . . . . . . . . . 752.1.6.3 Contingent (Conditional) Contracts . . . . . . . . . . . 75

2.2 Formation of Agreement . . . . . . . . . . . . . . . . . . . . . . . 76

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2.2.1 Agreement: Is there an Agreement? . . . . . . . . . . . . . . . 762.2.2 The Four Issues of an Agreement . . . . . . . . . . . . . . . . 76

2.3 Proposal—Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . 772.3.1 Requirements/Elements of a Proposal (Offer) . . . . . . . . . . . 772.3.2 First Element: Determining the Objective Intent . . . . . . . . . . 77

2.3.2.1 Objective Theory of Contracts . . . . . . . . . . . . . 772.3.2.2 Invitation to Treat or Negotiate . . . . . . . . . . . . . 78

2.3.2.2.1 Price lists, circulars and catalogues are not offers. . . . . 782.3.2.2.2 Advertisements, in general, are not offers. . . . . . . . 782.3.2.2.3 Goods displayed in shops are like advertisements. . . . . 792.3.2.2.4 Goods on shelves in supermarkets. . . . . . . . . . 792.3.2.2.5 Auction with a reserve price. . . . . . . . . . . . . 792.3.2.2.6 Company prospectus. . . . . . . . . . . . . . . 802.3.2.2.7 Tenders. . . . . . . . . . . . . . . . . . . . 80

2.3.2.3 Offers and Supply of Information . . . . . . . . . . . . 802.3.2.4 An Offer Can be Made to a Number of People . . . . . . 802.3.2.5 Rewards . . . . . . . . . . . . . . . . . . . . . . 812.3.2.6 Standard or Adhesion Contracts . . . . . . . . . . . . 812.3.2.7 Agreement to Make a Contract at a Future Date . . . . . . 82

2.3.3 Second Element: Terms of Offer Must be Definite . . . . . . . . . 822.3.3.1 Express Terms That Make the Offer Definite . . . . . . . 822.3.3.2 Exceptions to Definiteness . . . . . . . . . . . . . . 822.3.3.3 Implied Terms . . . . . . . . . . . . . . . . . . . 83

2.3.4 Third Element: Offer Must be Communicated by the Offeror to the of-feree . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83

2.4 Revocation or termination of a proposal . . . . . . . . . . . . . . . . 832.4.1 Termination by Action of the Parties . . . . . . . . . . . . . . . 83

2.4.1.1 Revocation of the Offer by the Offeror . . . . . . . . . . 842.4.1.1.1 What Constitutes a Revocation. . . . . . . . . . . 842.4.1.1.2 Communication of Revocation. . . . . . . . . . . . 84

2.4.1.2 Exception to the Rule That the Offer Can be Revoked at Any Timeby the Offeror . . . . . . . . . . . . . . . . . . . . 85

2.4.1.2.1 Option Contracts. . . . . . . . . . . . . . . . 852.4.1.2.2 Conditional Offers. . . . . . . . . . . . . . . . 852.4.1.2.3 Firm Offers. . . . . . . . . . . . . . . . . . . 852.4.1.2.4 Detrimental reliance. . . . . . . . . . . . . . . 85

2.4.1.3 Rejection of the Offer by the Offeree . . . . . . . . . . 862.4.1.4 Counteroffer of the Offeree . . . . . . . . . . . . . . 862.4.1.5 Offer Not Accepted in the Prescribed Manner by the Offeree . 86

2.4.2 Termination by Operation of the Law . . . . . . . . . . . . . . . 86

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2.4.2.1 Destruction of the Subject-Matter . . . . . . . . . . . . 872.4.2.2 Death or Incompetency of the Offeror or Offeree . . . . . . 872.4.2.3 Supervening Illegality . . . . . . . . . . . . . . . . 872.4.2.4 Lapse of Time . . . . . . . . . . . . . . . . . . . 87

2.5 Acceptance and its Essential Elements . . . . . . . . . . . . . . . . 882.5.1 Definition of Acceptance . . . . . . . . . . . . . . . . . . . . 882.5.2 Acceptance Must be Absolute and Unqualified . . . . . . . . . . 88

2.5.2.1 Who May Accept . . . . . . . . . . . . . . . . . . 882.5.2.2 Absolute and Unqualified Acceptance . . . . . . . . . . 882.5.2.3 Effect of Acceptance . . . . . . . . . . . . . . . . . 89

2.5.3 Acceptance Must be Made in Reliance on the Offer . . . . . . . . 892.5.4 Any Conditions as to the Method of Acceptance Must be Complied With 892.5.5 The Acceptance Becomes Effective When it is Communicated to the

Offeror . . . . . . . . . . . . . . . . . . . . . . . . . . . . 902.5.5.1 Manner of Acceptance . . . . . . . . . . . . . . . . 90

2.5.5.1.1 Communication by Words or Conduct. . . . . . . . . 902.5.5.1.2 Silence as Acceptance. . . . . . . . . . . . . . 90

2.5.5.2 Communication of Acceptance . . . . . . . . . . . . . 902.5.5.2.1 Unilateral Contract. . . . . . . . . . . . . . . . 902.5.5.2.2 Bilateral Contract. . . . . . . . . . . . . . . . 91

2.5.5.3 Exceptions to the General Rule of Communication of Acceptanceto the Offeree . . . . . . . . . . . . . . . . . . . . 91

2.5.5.3.1 Unilateral Contracts as an Exception. . . . . . . . . 912.5.5.3.2 Acceptance-Upon-Dispatch Rule or the Postal Rule or the Mail-

Box Rule. . . . . . . . . . . . . . . . . . . 912.5.6 Revocation of Acceptance . . . . . . . . . . . . . . . . . . . 92

Ch. 3 Consideration 933.1 Definition of Consideration and the Legal Rules Governing Consideration 95

3.1.1 Definition of Consideration and the Rationale Underlying Consideration 953.1.1.1 Definition . . . . . . . . . . . . . . . . . . . . . 953.1.1.2 Rationale and the Future of Consideration . . . . . . . . 96

3.1.2 The General Rules of Consideration . . . . . . . . . . . . . . . 973.1.2.1 Rule 1: Consideration Must be Sufficient But it Need Not be Ad-

equate . . . . . . . . . . . . . . . . . . . . . . 973.1.2.1.1 Things of Very Little Value. . . . . . . . . . . . . 973.1.2.1.2 Intangible Returns Like Natural Affection. . . . . . . . 973.1.2.1.3 Compromise and Forbearance to Sue. . . . . . . . . 973.1.2.1.4 Performance of a Duty Already Imposed by Law. . . . . 983.1.2.1.5 Performance of a Contractual Duty Already Imposed. . . . 98


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3.1.2.1.6 Part Payment of a Debt Owed. . . . . . . . . . . . 983.1.2.1.7 Performance of a Contractual Duty Imposed by Contract With

a Third Party. . . . . . . . . . . . . . . . . . 983.1.2.2 Rule 2: English Law Says That Past Consideration is not Good

Consideration. Does the Contract Act Say it is? . . . . . . 983.1.2.3 Rule 3: English Law Says Consideration Must Move From the

Promisee, but the Contract Act Says it Can Move From AnotherPerson as Well . . . . . . . . . . . . . . . . . . . 99

3.1.2.3.1 Consideration and the Doctrine of Privity. . . . . . . . 993.1.2.3.2 Position Under the Contract Act. . . . . . . . . . . 100

3.1.2.4 Rule 4: In Certain Exceptional Cases Agreements Without Con-sideration Will be Enforced . . . . . . . . . . . . . . 100

3.1.2.4.1 Consideration and promissory estoppel. . . . . . . . 1013.1.2.4.2 Exceptions Created by the Contract Act. . . . . . . . 101

3.1.3 The Essentials of a Valid Consideration . . . . . . . . . . . . . 1013.1.3.1 It must be something of legal value, that is, sufficient. . . . . 1023.1.3.2 Consideration must be something that moves at the desire of the

promissor . . . . . . . . . . . . . . . . . . . . . 1023.1.3.3 It may be past act that was requested by the promissor . . . 1023.1.3.4 It may be a present or future act . . . . . . . . . . . . 1023.1.3.5 It must be real and not based upon illusory promises . . . . 1023.1.3.6 It must not be something that the promisee is legally or contrac-

tually bound to perform . . . . . . . . . . . . . . . . 1023.1.3.7 It must be lawful . . . . . . . . . . . . . . . . . . . 102

3.2 Consideration and Objectives That are Lawful, and Those That Not . . 1033.2.1 General Principles Governing Illegality . . . . . . . . . . . . . . 103

3.2.1.1 Effect of Illegality . . . . . . . . . . . . . . . . . . 1033.2.1.2 Exceptions to Effect of Illegality . . . . . . . . . . . . 103

3.2.1.2.1 Protection of One Party. . . . . . . . . . . . . . 1033.2.1.2.2 No Knowledge of the Illegal Purpose of the Other Party. . . 103

3.2.1.3 Partial Illegality . . . . . . . . . . . . . . . . . . . 1033.2.1.4 Crimes and Torts . . . . . . . . . . . . . . . . . . 104

3.2.2 Illegality and the Contract Act . . . . . . . . . . . . . . . . . . 1043.2.3 Lawful Objects or Considerations . . . . . . . . . . . . . . . . 1043.2.4 Unlawful Objects or Considerations . . . . . . . . . . . . . . . 105

3.2.4.1 Agreements Against Public Welfare . . . . . . . . . . . 1053.2.4.1.1 Agreements Contrary to Public Policy and Morality. . . . 1053.2.4.1.2 Agreements in Restraint of Marriage. . . . . . . . . 1053.2.4.1.3 Agreements Injuring Public Service. . . . . . . . . . 1053.2.4.1.4 Agreements Involving Conflict of Interest. . . . . . . . 106


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3.2.4.1.5 Agreements Obstructing Legal Processes. . . . . . . 1063.2.4.1.6 Agreements That Defeat the Purpose of the Law. . . . . 1063.2.4.1.7 Agreements That Amount to Discrimination. . . . . . . 1063.2.4.1.8 Wagers and Lotteries. . . . . . . . . . . . . . . 106

3.2.4.2 Agreements Affecting the Regulation of Business . . . . . 1063.2.4.2.1 Fraudulent Agreements. . . . . . . . . . . . . . 1063.2.4.2.2 Agreements in Restraint of Trade. . . . . . . . . . . 1073.2.4.2.3 Licensed Professions and Dealings. . . . . . . . . . 1073.2.4.2.4 Uncertain Agreements. . . . . . . . . . . . . . 107

3.3 Exceptions to the rule: “No consideration, no contract” . . . . . . . . . 1073.3.1 The General Rule is that Without Consideration There is No Contract 107

3.3.1.1 Consideration is an Essential Element of an Agreement . . . 1073.3.1.2 The Contract Act Says That Without Consideration a Contract is

Void . . . . . . . . . . . . . . . . . . . . . . . 1083.3.1.3 The Contract Act Also Says That an Unlawful Consideration

Makes an Agreement Void . . . . . . . . . . . . . . 1083.3.2 Exceptions to the Rule That Without Consideration There is no Agree-

ment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1083.3.2.1 Exceptions Created by the Contract Act . . . . . . . . . 108

3.3.2.1.1 Agreements Based Upon Natural Love and Affection (§25(1)). 1083.3.2.1.2 Compensation for Services Rendered (§25(2)). . . . . . 1093.3.2.1.3 Promise to pay time-barred debt (§25(3)). . . . . . . . 1103.3.2.1.4 Gifts Already Completed (§25, Expl. 1). . . . . . . . . 1103.3.2.1.5 Agency (§185). . . . . . . . . . . . . . . . . 110

3.3.2.2 Consideration and Promissory Estoppel . . . . . . . . . 1103.3.2.2.1 Forseeability That the Other Party Will Rely on the Promise. 1103.3.2.2.2 Actual Detrimental Reliance by the Other Party. . . . . . 110

Ch. 4 Capacity of the Parties 1134.1 Persons Competent to Contract and Those Who are Incompetent . . . 114

4.1.1 Persons Who Are Competent to Contract . . . . . . . . . . . . . 1144.1.2 Persons Who Are Not Competent to Contract . . . . . . . . . . . 114

4.1.2.1 Persons Incompetent Due to Mental Deficiency . . . . . . 1144.1.2.1.1 Minors. . . . . . . . . . . . . . . . . . . . 1144.1.2.1.2 Lunatics, and Idiots. . . . . . . . . . . . . . . . 1144.1.2.1.3 Drunken Person and one Delirious Due to Fever. . . . . 115

4.1.2.2 Incompetence Based on Status . . . . . . . . . . . . 1154.1.2.2.1 Alien Friends and Alien Enemies. . . . . . . . . . . 1154.1.2.2.2 Foreign State. . . . . . . . . . . . . . . . . . 1154.1.2.2.3 Diplomatic Agents. . . . . . . . . . . . . . . . 115


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4.1.2.2.4 Professional Persons. . . . . . . . . . . . . . . 1164.1.2.2.5 Married Women. . . . . . . . . . . . . . . . . 1164.1.2.2.6 Corporations. . . . . . . . . . . . . . . . . . 116

4.2 Contract Entered into by a Minor and Circumstances Under Which it isEnforceable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1164.2.1 Who is a Minor? . . . . . . . . . . . . . . . . . . . . . . . . 1164.2.2 General Rule: The Contract of a Minor is Void, and a Minor Cannot Bind

Himself by Contract . . . . . . . . . . . . . . . . . . . . . . 1164.2.3 Exceptions to the General Rule . . . . . . . . . . . . . . . . . 117

4.2.3.1 Contract for Necessaries Supplied to the Minor . . . . . . 1174.2.3.2 Contract of Employment . . . . . . . . . . . . . . . 1174.2.3.3 Where Minor has Received a Benefit . . . . . . . . . . 118

4.2.4 Contract by Minor and Restitution . . . . . . . . . . . . . . . . 1184.2.5 Minor’s Contracts and His Parents . . . . . . . . . . . . . . . . 118

4.3 Persons Whose Contracts are Performed by a Third Party . . . . . . . 1194.3.1 Minors . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1194.3.2 Lunatics . . . . . . . . . . . . . . . . . . . . . . . . . . . 1194.3.3 Idiots and Feeble-Minded Persons . . . . . . . . . . . . . . . . 1194.3.4 Corporations . . . . . . . . . . . . . . . . . . . . . . . . . 119

Ch. 5 Free Consent 1215.1 Types of Free Consent and Legal Effects . . . . . . . . . . . . . . . 123

5.1.1 Two Types of Free Consent . . . . . . . . . . . . . . . . . . . 1235.1.1.1 Consent Ad Idem or Meeting of the Minds . . . . . . . . 1245.1.1.2 Non-Voluntary or Induced Consent . . . . . . . . . . . 124

5.1.2 Effect of Mutual Mistake on Consent . . . . . . . . . . . . . . . 1245.1.3 Effect of Induced Consent: Misrepresentation, Coercion, Fraud and Un-

due Influence . . . . . . . . . . . . . . . . . . . . . . . . . 1255.2 Mistakes and Their Legal Effect in Contract Law . . . . . . . . . . . . 125

5.2.1 The Nature of Mistakes and the Types of Mistake . . . . . . . . . 1255.2.2 Mutual Mistakes or Mistakes That Nullify Consent or Common Mistakes 125

5.2.2.1 General Rule: Contract is Void Where the Mistake is a Funda-mental Mistake of Fact . . . . . . . . . . . . . . . . 125

5.2.2.2 Examples of Fundamental Mistakes That Make the Contract Void 1265.2.2.2.1 Mistake About the Existence of the Subject-Matter. . . . 1265.2.2.2.2 Mistake About Some Quality of the Subject-Matter. . . . 127

5.2.2.3 Exceptions Created by the Rules of Equity Where Mistakes arenot Fundamental . . . . . . . . . . . . . . . . . . 128

5.2.2.3.1 Equity Does Not Adopt a Narrow Definition of “FundamentalMistake”. . . . . . . . . . . . . . . . . . . . 128


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5.2.2.3.2 Mistakes of Law and Mistakes of Fact. . . . . . . . . 1285.2.3 Unilateral Mistakes or Mistakes That May Negative Consent or Cross-

Purposes Mistakes . . . . . . . . . . . . . . . . . . . . . . 1285.2.3.1 General Rule: Contract is Not Void, the Objective Test is Applied 1295.2.3.2 Contract May Become Void if Mistake is Serious . . . . . . 129

5.2.3.2.1 Two Conditions Must be Met for a Contract to be Void. . . 1295.2.3.2.2 Mistakes as to the Subject-Matter. . . . . . . . . . . 1305.2.3.2.3 Mistakes as to the Person. . . . . . . . . . . . . 1305.2.3.2.4 Mistakes as to Terms. . . . . . . . . . . . . . . 130

5.3 Misrepresentation and Fraud: Distinction Between the Two . . . . . . 1315.3.1 Contracts Based on Deception . . . . . . . . . . . . . . . . . 1315.3.2 Fraud . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131

5.3.2.1 Elements of Fraud in § 17 . . . . . . . . . . . . . . . 1315.3.2.1.1 The Wrongdoer Made a False Representation of a Material

Fact. . . . . . . . . . . . . . . . . . . . . 1315.3.2.1.2 The Wrongdoer Intended to Deceive the Innocent Party. . . 1325.3.2.1.3 The Innocent Party Relied on the Misrepresentation. . . . 1325.3.2.1.4 The Innocent Party Was Injured. . . . . . . . . . . 132

5.3.2.2 Effect of Fraud . . . . . . . . . . . . . . . . . . . 1335.3.3 Misrepresentation or Innocent Misrepresentation . . . . . . . . . 133

5.3.3.1 Elements of Misrepresentation . . . . . . . . . . . . . 1335.3.3.1.1 The Party Made a Misrepresentation Believing it to be True and

Without the Intention to Deceive. . . . . . . . . . . 1335.3.3.1.2 The Misrepresentation Was Not Intended to Deceive the Other

Party. . . . . . . . . . . . . . . . . . . . . 1345.3.3.1.3 The Other Party Relied on the Misrepresentation and Was In-

duced to Enter Into a Contract. . . . . . . . . . . . 1345.3.3.1.4 An Advantage Was Gained by the Party Misrepresenting and a

Consequent Loss Was Caused to the Other Party. . . . . 1345.3.3.2 Effect of Innocent Misrepresentation . . . . . . . . . . 134

5.3.3.2.1 Contract Voidable. . . . . . . . . . . . . . . . 1345.3.3.2.2 Contract Void if the Result is a Mutual Mistake. . . . . . 1345.3.3.2.3 Contract Not Voidable Where the Truth Could be Discovered by

Due Diligence. . . . . . . . . . . . . . . . . . 1345.3.4 Failure to Disclose Information . . . . . . . . . . . . . . . . . 134

5.3.4.1 Generally There is no Duty of Disclosure . . . . . . . . . 1355.3.4.2 Exceptions: Where There is a Duty of Disclosure . . . . . 135

5.3.4.2.1 Change of Circumstances. . . . . . . . . . . . . 1355.3.4.2.2 Custom. . . . . . . . . . . . . . . . . . . . 1355.3.4.2.3 Contracts Uberrimae Fidei. . . . . . . . . . . . . 135


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5.3.4.2.4 Analogous Contracts. . . . . . . . . . . . . . . 1365.3.4.2.5 Relationship of the Parties. . . . . . . . . . . . . 1365.3.4.2.6 Statutory Duties of Disclosure. . . . . . . . . . . . 136

5.3.4.3 Effect of Non-Disclosure . . . . . . . . . . . . . . . 1365.3.5 Distinction Between Fraud and Misrepresentation . . . . . . . . . 136

5.3.5.1 Distinction Based on Intention to Deceive . . . . . . . . 1365.3.5.2 Distinction Based on the Ability of the Other Party to Discover the

Truth . . . . . . . . . . . . . . . . . . . . . . . 1365.3.5.3 Fraud Amounts to a Criminal Offence . . . . . . . . . . 1375.3.5.4 Fraud Can Lead to a Claim for Damages . . . . . . . . . 137

5.4 Coercion and Undue influence . . . . . . . . . . . . . . . . . . . . 1375.4.1 Contracts Based on Improper Pressure . . . . . . . . . . . . . 1375.4.2 Coercion or Duress . . . . . . . . . . . . . . . . . . . . . . 137

5.4.2.1 Elements of Coercion . . . . . . . . . . . . . . . . 1375.4.2.1.1 Committing or Threatening to Commit an Act Prohibited by the

PPC. . . . . . . . . . . . . . . . . . . . . 1375.4.2.1.2 Unlawful detention or a threat to detain, any property, to the

prejudice of any person whatever. . . . . . . . . . . 1385.4.2.1.3 The coercion must be accompanied by intention to induce the

other party to consent to the agreement. . . . . . . . 1385.4.2.1.4 The party subjected to coercion must enter into the contract as

a result of such coercion. . . . . . . . . . . . . . 1385.4.2.1.5 The coercion may be directed against someone else or some-

one else’s property. . . . . . . . . . . . . . . . 1385.4.2.2 Effect of Coercion . . . . . . . . . . . . . . . . . . 138

5.4.3 Undue Influence . . . . . . . . . . . . . . . . . . . . . . . . 1385.4.3.1 Elements of Undue Influence . . . . . . . . . . . . . 138

5.4.3.1.1 A fiduciary or confidential relationship must have existed be-tween the parties. . . . . . . . . . . . . . . . 138

5.4.3.1.2 The dominant party must have unduly used his influence to per-suade the servient party to enter into the contract. . . . . 139

5.4.3.2 Effect of Undue Influence . . . . . . . . . . . . . . . 1395.4.4 Protection of Particular Groups of Persons and Inequality of Bargaining

Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1395.4.5 Distinction Between Coercion and Undue Influence . . . . . . . . 140

5.4.5.1 Coercion Invokes Physical Force . . . . . . . . . . . . 1405.4.5.2 Undue Influence is Based Upon the Existence of a Relationship

Between the Dominant and the Servient Party . . . . . . 1405.4.5.3 Coercion is a Criminal Offence . . . . . . . . . . . . . 1405.4.5.4 Contract Based Upon Coercion is Voidable . . . . . . . . 140


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Ch. 6 Third-Party Rights and Privity of Contract 1416.1 Two Rules Related to Third-Parties and the Doctrine of Privity . . . . . 141

6.1.1 A Third Person Cannot be Subjected to a Burden by a Contract to Whichhe is Not a Party . . . . . . . . . . . . . . . . . . . . . . . . 141

6.1.2 A Person Who is Not a Party to a Contract Cannot Sue Upon the Con-tract in Order to Obtain the Promised Performance . . . . . . . . 142

6.2 Privity of Contract and Consideration . . . . . . . . . . . . . . . . . 1426.2.1 The Doctrine of Privity of Contract . . . . . . . . . . . . . . . . 1426.2.2 Consideration Must Move From the Promisee . . . . . . . . . . . 1436.2.3 Are These Two Rules the Same? . . . . . . . . . . . . . . . . 1436.2.4 The Contracts (Right of Third Parties) Act 1999, UK . . . . . . . . 143

6.3 The Contract Act Says Consideration Can Move From Another Person asWell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1436.3.1 First View: Stranger Can Sue According to the Act . . . . . . . . 1446.3.2 Second View: Stranger Cannot Sue: Pollock and Mulla . . . . . . 1446.3.3 Third Possibility: Is the Act Talking About a Very Narrow Situation . 144

6.3.3.1 Another Meaning of the Maxim . . . . . . . . . . . . . 1456.3.3.2 A Narrow Situation . . . . . . . . . . . . . . . . . 145

6.4 Exceptions to the Doctrine of Privity . . . . . . . . . . . . . . . . . . 1456.4.1 Assuming a Collateral Contract . . . . . . . . . . . . . . . . . 1456.4.2 Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1456.4.3 Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1466.4.4 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . 1466.4.5 Negotiable Instruments . . . . . . . . . . . . . . . . . . . . . 1466.4.6 Statutory Exceptions: Insurance and Others . . . . . . . . . . . 146

Ch. 7 Contingent Contracts and the Rules of Their Enforcement 1477.1 Meaning of Contingent Conditions and Contracts . . . . . . . . . . . 147

7.1.1 The Meaning of Condition in General . . . . . . . . . . . . . . 1487.1.2 Contingent Conditions . . . . . . . . . . . . . . . . . . . . . 148

7.1.2.1 Condition Precedent. . . . . . . . . . . . . . . . . . 1487.1.2.2 Condition Subsequent. . . . . . . . . . . . . . . . . 148

7.1.3 Contingent Contract . . . . . . . . . . . . . . . . . . . . . . 1487.1.4 Essential Elements of a Contingent Contract . . . . . . . . . . . 149

7.1.4.1 Contract Must Depend Upon the Occurrence of an ExternalEvent . . . . . . . . . . . . . . . . . . . . . . . 149

7.1.4.2 The Event Must be an Uncertain Future Event . . . . . . 1497.1.4.3 The Event Must be Collateral and Incidental to the Main Contract 1497.1.4.4 Contract Must Not be Based on Impossible Conditions . . . 149

7.2 The Rules for Contingent Contracts . . . . . . . . . . . . . . . . . . 149


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7.2.1 Fixed Time Not Stipulated . . . . . . . . . . . . . . . . . . . 1497.2.1.1 Event is to Happen—§ 32 . . . . . . . . . . . . . . . 1497.2.1.2 Event is Not to Happen—§ 33 . . . . . . . . . . . . . 150

7.2.2 Fixed Time Stipulated—§ 35 . . . . . . . . . . . . . . . . . . 1507.2.2.1 Event is to Happen Within Fixed Time . . . . . . . . . . 1507.2.2.2 Event is Not to Happen Within Fixed Time . . . . . . . . 150

7.2.3 When Event is the Future Conduct of a Living Person—§ 34 . . . . 1517.2.4 Agreement Contingent on Impossible Events are Void—§ 36 . . . . 151

7.3 Contingent Contracts and Wagering Contracts . . . . . . . . . . . . 1517.3.1 Meaning of Wager . . . . . . . . . . . . . . . . . . . . . . . 1517.3.2 Wagering Contracts and Commercial Transactions . . . . . . . . 1527.3.3 Wagering and Contingent Contracts Distinguished . . . . . . . . 152

7.3.3.1 The Uncertain Event is Not Collateral to the Wagering Contract 1527.3.3.2 In a Wagering Contract There is no Intention to Exchange Goods

or Services . . . . . . . . . . . . . . . . . . . . . 1527.3.3.3 There is no Real Consideration In a Wagering Contract . . . 152

Ch. 8 Performance of Contracts 1538.1 Performance of Contract and Associated Conditions . . . . . . . . . . 156

8.1.1 Preliminary Ideas About Performance . . . . . . . . . . . . . . 1568.1.1.1 Meaning of Performance . . . . . . . . . . . . . . . 1568.1.1.2 In a Vast Majority of Cases Formation and Performance Take

Place at the Same Time . . . . . . . . . . . . . . . 1568.1.1.3 Meaning of Performance in the Contract Act . . . . . . . 157

8.1.1.3.1 Must Either Perform. . . . . . . . . . . . . . . 1578.1.1.3.2 Or Offer to Perform. . . . . . . . . . . . . . . . 1578.1.1.3.3 Unless Performance Excused. . . . . . . . . . . . 157

8.1.2 Tender of Performance . . . . . . . . . . . . . . . . . . . . . 1578.1.2.1 Making a Performance Tender Protects the Party Making the

Tender . . . . . . . . . . . . . . . . . . . . . . 1578.1.2.2 Conditions for Making a Performance Tender . . . . . . . 158

8.1.2.2.1 The Tender Must be Unconditional. . . . . . . . . . 1588.1.2.2.2 The Tender Must be Complete. . . . . . . . . . . . 1588.1.2.2.3 Tender Must be Made at the Required Time and Place. . . 1588.1.2.2.4 The Person to Whom it is Made Must Have Reasonable Oppor-

tunity to Ascertain Possibility of Performance. . . . . . 1588.1.2.2.5 The Person to Whom it is Made Must Have Reasonable Oppor-

tunity to Ascertain That Performance is Proper. . . . . . 1588.1.2.2.6 A Performance Tender May be Made to One of Several Joint

Promissees. . . . . . . . . . . . . . . . . . 158


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8.1.2.2.7 Where Personal Services are Required, the Promisor Must Per-form the Contract Himself. . . . . . . . . . . . . 158

8.1.3 Adequacy of Performance v. Anticipatory Breach . . . . . . . . . 1598.1.3.1 Does § 39 Apply to Anticipatory Breach Alone or to Inadequate

Performance as Well? . . . . . . . . . . . . . . . . 1598.1.3.2 Adequacy of Performance . . . . . . . . . . . . . . 160

8.1.3.2.1 Substantial Performance. . . . . . . . . . . . . . 1608.1.3.2.2 Satisfaction of Promisee. . . . . . . . . . . . . . 161

8.1.3.3 Anticipatory Breach . . . . . . . . . . . . . . . . . 1618.1.3.3.1 Accepting the Breach. . . . . . . . . . . . . . . 1618.1.3.3.2 Keeping the Contract Alive. . . . . . . . . . . . . 161

8.1.4 Who is to Perform the Contract? . . . . . . . . . . . . . . . . 1618.1.4.1 Where Personal Services are Required, the Promisor Must Per-

form the Contract Himself . . . . . . . . . . . . . . . 1628.1.4.1.1 Personal Services. . . . . . . . . . . . . . . . 1628.1.4.1.2 Where Performance by Third Person is Accepted in the Case of

Personal Services. . . . . . . . . . . . . . . . 1628.1.4.2 In Other Cases, Performance May be Undertaken by a Compe-

tent Person . . . . . . . . . . . . . . . . . . . . 1628.1.4.2.1 Promisor Himself. . . . . . . . . . . . . . . . 1628.1.4.2.2 Representative. . . . . . . . . . . . . . . . . 1628.1.4.2.3 Agent. . . . . . . . . . . . . . . . . . . . 162

8.1.4.3 Where There Are Joint Promisors . . . . . . . . . . . 1638.1.4.3.1 Liability for Performance is “Joint and Several” as in a Partner-

ship. . . . . . . . . . . . . . . . . . . . . 1638.1.4.3.2 The Liability for Performance Passes to the Representatives on

the Death of the Joint Promisor, as in the Case of a Partnership. 1648.1.5 Time and Place of Performance . . . . . . . . . . . . . . . . . 164

8.1.5.1 Method of Performance With Respect to Time and Place . . 1648.1.5.1.1 No Application Required. . . . . . . . . . . . . . 1648.1.5.1.2 Where Application Required. . . . . . . . . . . . 1658.1.5.1.3 Method May Vary as Desired by the Promisee. . . . . . 165

8.1.5.2 Where Time is the Essence of the Contract . . . . . . . . 1658.1.5.2.1 Where time is of the essence, a failure to perform on time makes

the contract voidable at the option of the promisee. . . . 1658.1.5.2.2 Where time is not of the essence, a failure to perform on time

does not make the contract voidable, but the promisee is entitledto recover loss. . . . . . . . . . . . . . . . . 166


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8.1.5.2.3 Where time is of the essence, and on failure to perform thepromisee accepts delayed performance, he is not entitled to re-cover loss unless he gives notice to the promisor. . . . . 166

8.1.5.2.4 Where time is of the essence is not expressly stated, it will begathered from the terms of the contract, especially where delaycan lead to injury or the nature of the contract requires it to beso construed. . . . . . . . . . . . . . . . . . 166

8.2 Reciprocal Promises and Governing Rules . . . . . . . . . . . . . . 1678.2.1 Dependent and Independent Promises; Concurrent Conditions; Condi-

tions Precedent and Subsequent . . . . . . . . . . . . . . . . 1678.2.1.1 Three Types of Conditions . . . . . . . . . . . . . . 167

8.2.1.1.1 Condition Precedent. . . . . . . . . . . . . . . 1678.2.1.1.2 Condition Subsequent. . . . . . . . . . . . . . . 1678.2.1.1.3 Concurrent Conditions. . . . . . . . . . . . . . 167

8.2.1.2 Dependent and Independent Promises . . . . . . . . . 1678.2.1.2.1 Where Conditions are Concurrent or Conditions Precedent,

Promises are Dependent. . . . . . . . . . . . . . 1678.2.1.2.2 In the case of conditions subsequent, Express or Implied,

Promises are Independent. . . . . . . . . . . . . 1688.2.1.3 Reciprocal Promises are Either Dependent Promises or Indepen-

dent Promises . . . . . . . . . . . . . . . . . . . 1688.2.1.4 Order of Performance is Relevant in Dependent Promises . . 168

8.2.2 Dependent Reciprocal Promises . . . . . . . . . . . . . . . . 1688.2.2.1 In Simultaneous Reciprocal Promises (Concurrent) Promisor

Need Not Perfom Unless Promisee Ready and Willing to Perform 1688.2.2.2 Where the Order of Performance is Fixed by Contract, the

promises Shall be Performed in That Order . . . . . . . . 1688.2.2.3 Where the Order of Performance is Not Expressly Fixed by Con-

tract, the promises Shall be Performed in the Order Required bythe Nature of the Contract . . . . . . . . . . . . . . . 169

8.2.2.4 Where the Conditions are Concurrent, but One Party is Pre-vented by the Other From Performance, the Contract BecomesVoidable . . . . . . . . . . . . . . . . . . . . . . 169

8.2.2.5 Where one Promise is a Condition Precedent, its Non-Performance Makes the Contract Unenforceable and Leads toCompensation . . . . . . . . . . . . . . . . . . . 170

8.2.2.6 Where Time is of the Essence or a Condition Precedent, any Partof the Promise Not Performed on Time Makes That Part Voidable 170


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8.2.2.7 Where Time is Not of the Essence, That is, Not a ConditionPrecedent, Non-Performance on Time Does Not Make the Con-tract Voidable But Gives Rise to Damages . . . . . . . . 170

8.2.3 Independent Reciprocal Promises . . . . . . . . . . . . . . . . 1708.2.3.1 Where a Subsequent Event Makes a Promise Impossible or Un-

lawful, the Contract Becomes Void . . . . . . . . . . . 1718.2.3.2 Where the Promisor Was Aware of the Impossibility Beforehand,

he is Liable for Damages . . . . . . . . . . . . . . . 1718.2.3.3 In Independent Promises, Where One Set of Promises is Legal

and Another Related Set of Promises is Illegal, the Second Setis a Void Agreement . . . . . . . . . . . . . . . . . 171

8.2.3.4 In Independent Promises, Where One Branch of an AlternativePromise is Illegal, the Illegal Branch is Void . . . . . . . . 171

8.3 Rules Governing Appropriation of Payments . . . . . . . . . . . . . . 1728.3.1 Meaning of Appropriation and Debt . . . . . . . . . . . . . . . 1728.3.2 The Rules for Appropriation of Payments . . . . . . . . . . . . . 172

8.3.2.1 The Debtor Has the Prior Right of Appropriation . . . . . . 1728.3.2.2 Where the Debtor Does Not Appropriate, the Right to Appropriate

Devolves on the Creditor . . . . . . . . . . . . . . . 1738.3.2.3 Where the Debtor Does Not Appropriate, the Right to Appropriate

Devolves on the Creditor . . . . . . . . . . . . . . . 1738.4 Conditions Under Which a Contract Need Not be Performed . . . . . . 174

8.4.1 Meaning of “Contracts Need Not be Performed” . . . . . . . . . . 1748.4.2 Contracts That Need Not be Performed . . . . . . . . . . . . . 174

8.4.2.1 Mutual Rescission . . . . . . . . . . . . . . . . . . 1748.4.2.2 Novation . . . . . . . . . . . . . . . . . . . . . . 1748.4.2.3 Alteration or Substitution . . . . . . . . . . . . . . . 1758.4.2.4 Accord and Satisfaction . . . . . . . . . . . . . . . 1758.4.2.5 No Performance Where Voidable Contract Rescinded . . . 1758.4.2.6 No Performance Where Facilities for Performance Denied . . 176

Ch. 9 Discharge of Contracts 1779.1 Discharge by Performance . . . . . . . . . . . . . . . . . . . . . . 178

9.1.1 The Normal Discharge of Contracts . . . . . . . . . . . . . . . 1789.1.2 The Nature of Performance . . . . . . . . . . . . . . . . . . . 179

9.1.2.1 Tender of Performance. . . . . . . . . . . . . . . . 1799.1.2.1.1 The Tender Must be Unconditional. . . . . . . . . . 1799.1.2.1.2 The Tender Must be Complete. . . . . . . . . . . . 1799.1.2.1.3 Tender Must be Made at the Required Time and Place. . . 179


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9.1.2.1.4 The Person to Whom it is Made Must Have Reasonable Op-portunity to Ascertain Possibility of Performance by the OtherParty. . . . . . . . . . . . . . . . . . . . . 179

9.1.2.1.5 The Person to Whom it is Made Must Have Reasonable Oppor-tunity to Ascertain That Performance is Proper. . . . . . 179

9.1.2.1.6 A Performance Tender May be Made to One of Several JointPromisees. . . . . . . . . . . . . . . . . . . 179

9.1.2.1.7 Where Personal Services are Required, the Promisor Must Per-form the Contract Himself. . . . . . . . . . . . . 179

9.1.2.2 Payment . . . . . . . . . . . . . . . . . . . . . . 1809.1.3 Time of Performance . . . . . . . . . . . . . . . . . . . . . . 180

9.1.3.1 Method of Performance With Respect to Time and Place . . 1809.1.3.2 Where Time is the Essence of the Contract . . . . . . . . 180

9.1.4 Adequacy of Performance . . . . . . . . . . . . . . . . . . . 1809.1.4.1 Substantial Performance . . . . . . . . . . . . . . . 1819.1.4.2 Satisfaction of Promisee . . . . . . . . . . . . . . . 181

9.1.5 Guarantee of Performance . . . . . . . . . . . . . . . . . . . 1819.2 Discharge by Action of the Parties . . . . . . . . . . . . . . . . . . . 181

9.2.1 Discharge by Unilateral Action . . . . . . . . . . . . . . . . . 1819.2.2 Discharge by Agreement . . . . . . . . . . . . . . . . . . . . 181

9.2.2.1 Mutual Rescission . . . . . . . . . . . . . . . . . . 1829.2.2.2 Novation . . . . . . . . . . . . . . . . . . . . . . 1829.2.2.3 Alteration or Substitution . . . . . . . . . . . . . . . 1829.2.2.4 Accord and Satisfaction . . . . . . . . . . . . . . . 182

9.3 Discharge by Frustration . . . . . . . . . . . . . . . . . . . . . . . 1829.3.1 Meaning of Frustration . . . . . . . . . . . . . . . . . . . . . 1829.3.2 Discharge by Impossibility . . . . . . . . . . . . . . . . . . . 183

9.3.2.1 The Contract Act and Impossibility . . . . . . . . . . . 1839.3.2.2 Destruction of Subject-Matter . . . . . . . . . . . . . 1839.3.2.3 Death of Either Party . . . . . . . . . . . . . . . . . 1849.3.2.4 Subject-Matter Unavailable . . . . . . . . . . . . . . 184

9.3.3 Frustration, Force Majeure and Hardship . . . . . . . . . . . . . 1849.3.3.1 Force Majeure Clause . . . . . . . . . . . . . . . . 1859.3.3.2 Hardship Clause . . . . . . . . . . . . . . . . . . 1859.3.3.3 Intervener Clause . . . . . . . . . . . . . . . . . . 185

9.3.4 Supervening Illegality . . . . . . . . . . . . . . . . . . . . . 1859.3.5 Frustration of Purpose . . . . . . . . . . . . . . . . . . . . . 1859.3.6 The Legal Effect of Frustration . . . . . . . . . . . . . . . . . 185

9.3.6.1 Contract Becomes Void in Case of Frustration . . . . . . 1859.3.6.2 Self-Induced Frustration . . . . . . . . . . . . . . . 186


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9.3.6.3 Where One Party Had the Knowledge of the Impossible or Un-lawful Act . . . . . . . . . . . . . . . . . . . . . 186

9.4 Discharge by Breach . . . . . . . . . . . . . . . . . . . . . . . . . 1869.4.1 Actual Breach, Inferior Performance or Material Breach . . . . . . 1869.4.2 Anticipatory Breach . . . . . . . . . . . . . . . . . . . . . . 186

Ch. 10 Quasi Contracts 18710.1 Quasi-Contract, Quantum Meruit, or Implied-in-Law Contract . . . . . 18710.2 Necessaries Supplied . . . . . . . . . . . . . . . . . . . . . . . . . 18710.3 Payment by a Third Party . . . . . . . . . . . . . . . . . . . . . . . 18810.4 Person Enjoying Non-Gratuitous Act . . . . . . . . . . . . . . . . . 18810.5 Responsibility of finder of goods . . . . . . . . . . . . . . . . . . . . 188

Ch. 11 Remedies for Breach of Contract 18911.1 Meaning of Breach of Contract and the Nature of Remedies . . . . . . 191

11.1.1 The Meaning of Breach of Contract . . . . . . . . . . . . . . . 19111.1.1.1 Definition . . . . . . . . . . . . . . . . . . . . . 19111.1.1.2 The Occurrence of Breach . . . . . . . . . . . . . . 19111.1.1.3 The Consequences of Breach: Remedies . . . . . . . . 191

11.1.1.3.1 Damages (Including Those Damages That Arise From RightfulRescission). . . . . . . . . . . . . . . . . . 191

11.1.1.3.2 Specific Relief. . . . . . . . . . . . . . . . . 19211.1.1.3.3 Restitution. . . . . . . . . . . . . . . . . . . 192

11.1.2 The Nature and Kinds of Damages . . . . . . . . . . . . . . . 19211.1.2.1 Kinds of Damages . . . . . . . . . . . . . . . . . . 192

11.1.2.1.1 Liquidated Damages. . . . . . . . . . . . . . . 19211.1.2.1.2 Unliquidated Damages. . . . . . . . . . . . . . 193

11.1.2.2 The Compensatory Principle . . . . . . . . . . . . . 19311.1.2.2.1 The Criterion is “Loss to the Plaintiff”. . . . . . . . . 19311.1.2.2.2 Meaning of Loss. . . . . . . . . . . . . . . . . 19411.1.2.2.3 No Punitive Damages to be Awarded. . . . . . . . . 19411.1.2.2.4 Injury to Feelings Not to be Compensated. . . . . . . 194

11.1.2.3 Kinds of Loss Recoverable . . . . . . . . . . . . . . 19411.1.2.3.1 The Expectation Interest. . . . . . . . . . . . . . 19411.1.2.3.2 The Reliance Interest. . . . . . . . . . . . . . . 19411.1.2.3.3 The Restitution Interest. . . . . . . . . . . . . . 19411.1.2.3.4 The Interest Preferred by the Plaintiff. . . . . . . . . 19411.1.2.3.5 Consequential and Incidental Loss. . . . . . . . . . 195

11.1.2.4 Valuing the Loss . . . . . . . . . . . . . . . . . . 19511.1.3 Specific Relief . . . . . . . . . . . . . . . . . . . . . . . . . 195

11.1.3.1 Specific Performance . . . . . . . . . . . . . . . . 195


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11.1.3.1.1 Damages Must be “Inadequate”. . . . . . . . . . . 19511.1.3.1.2 Discretion of Court. . . . . . . . . . . . . . . . 19511.1.3.1.3 Personal Service. . . . . . . . . . . . . . . . 196

11.1.3.2 Injunction . . . . . . . . . . . . . . . . . . . . . 19611.1.3.3 Damages in Lieu of Specific Performance or Injunction . . . 196

11.2 Rules for the Measurement of Damages . . . . . . . . . . . . . . . . 19611.2.1 General Rules of Assessment . . . . . . . . . . . . . . . . . . 196

11.2.1.1 The Bases of Assessment . . . . . . . . . . . . . . 19611.2.1.1.1 Claim for Reliance Loss. . . . . . . . . . . . . . 19611.2.1.1.2 Claim for Restitution Interest. . . . . . . . . . . . 19711.2.1.1.3 Claim for Expectation Loss. . . . . . . . . . . . . 197

11.2.1.2 Relevance of Market Values . . . . . . . . . . . . . . 19711.2.1.3 Speculative Damages . . . . . . . . . . . . . . . . 19711.2.1.4 Taxation . . . . . . . . . . . . . . . . . . . . . . 19711.2.1.5 Time for Assessment . . . . . . . . . . . . . . . . 198

11.2.2 Methods of Limiting Damages . . . . . . . . . . . . . . . . . . 19811.2.2.1 Remoteness of Damages . . . . . . . . . . . . . . . 19811.2.2.2 Causation . . . . . . . . . . . . . . . . . . . . . 19811.2.2.3 Mitigation of Damages . . . . . . . . . . . . . . . . 19911.2.2.4 Special Rules . . . . . . . . . . . . . . . . . . . . 199

11.3 Distinction Between (Liquidated) Damages and Penalties . . . . . . . 19911.3.1 Meaning of Liquidated Damages and Penalty . . . . . . . . . . . 19911.3.2 The Contract Act Permits Liquidated Damages as Well as Penalties, but

Subjects Them to the Discretion of the Court . . . . . . . . . . . 19911.3.2.1 A Contract May Contain a Liquidated Damages Clause or a

Penalty Clause . . . . . . . . . . . . . . . . . . . 20011.3.2.2 The Amount to be Actually Paid is What the Court Considers

Reasonable . . . . . . . . . . . . . . . . . . . . 20011.3.2.3 What the Court Considers Reasonable Cannot Exceed the

Named Amount . . . . . . . . . . . . . . . . . . . 20011.3.3 English Law Permits Liquidated Damages But Not Penalties, and Hence

Distinguishes Between Them . . . . . . . . . . . . . . . . . . 20011.3.3.1 A Penalty Clause is One That Stipulates a Sum That is Extrava-

gant and Unconscionable . . . . . . . . . . . . . . . 20011.3.3.2 A Provision Will be Treated as a Liquidated Damages Clause if

Precise Pre-Estimation is an Impossibility . . . . . . . . 20111.3.3.3 A Clause is Penal if it Imposes the Same Amount on Several

Breaches . . . . . . . . . . . . . . . . . . . . . 20111.3.3.4 Where a Fixed Amount is Due and the Clause Imposes a Much

Larger Sum in Case of Breach . . . . . . . . . . . . . 201


18 M L C

11.4 Circumstances Under Which Restitution is Permitted by the Contract Act 20111.4.1 Restitution is Required Upon Rescission After Voidable Contract . . 20111.4.2 Restitution After Void Agreement . . . . . . . . . . . . . . . . 20111.4.3 Restitution is Required When Amount Has Been Paid by Mistake or

Under Coercion . . . . . . . . . . . . . . . . . . . . . . . . 202

Ch. 12 Indemnity and Guarantee 20312.1 Contracts of Indemnity and Guarantee—and the Distinction Between

Them . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20512.1.1 Contract of Indemnity . . . . . . . . . . . . . . . . . . . . . 205

12.1.1.1 Meaning of Indemnity in the Contract Act . . . . . . . . 20512.1.1.2 Rights of Indemnity-Holder . . . . . . . . . . . . . . 20612.1.1.3 Rights of the Indemnifier . . . . . . . . . . . . . . . 206

12.1.2 Contract of Guarantee . . . . . . . . . . . . . . . . . . . . . 20612.1.2.1 Meaning of Surety Arrangement and Guaranty Arrangement in

Other Jurisdictions . . . . . . . . . . . . . . . . . . 20612.1.2.2 Meaning of Surety Arrangement and Guaranty Arrangement in

the Contract Act . . . . . . . . . . . . . . . . . . . 20712.1.2.2.1 Meaning of Contract of Guarantee in the Contract Act. . . 20712.1.2.2.2 Joint Debtors and the Surety Arrangement. . . . . . . 208

12.1.3 Distinction Between Indemnity and Guarantee . . . . . . . . . . 20812.1.3.1 Liability of Indemnifier is Primary, While That of Surety is Sec-

ondary . . . . . . . . . . . . . . . . . . . . . . 20812.1.3.2 In Surety a Principal Debt Must Exist, While Indemnity Depends

on a Later Contingency . . . . . . . . . . . . . . . . 20912.1.3.3 There Are Two Parties in Idemnity, While There Are Three in a

Contract of Guarantee . . . . . . . . . . . . . . . . 20912.1.3.4 Contract of Indemnity is For Loss, While Contract of Guarantee

Provides a Security . . . . . . . . . . . . . . . . . 20912.1.3.5 Subrogation Takes Place in Guarantee, But Not in Indemnity . 209

12.2 Continuing Guarantee and its Revocation . . . . . . . . . . . . . . . 20912.2.1 Kinds of Guarantee . . . . . . . . . . . . . . . . . . . . . . 209

12.2.1.1 Absolute and Conditional of Guarantees . . . . . . . . . 20912.2.1.2 General and Special Guarantees . . . . . . . . . . . . 20912.2.1.3 Limited and Unlimited Guarantees . . . . . . . . . . . 21012.2.1.4 Single Transaction and Continuing Guarantees . . . . . . 210

12.2.2 Nature of Continuing Guarantee . . . . . . . . . . . . . . . . . 21012.2.2.1 Meaning of Continuing Guarantee . . . . . . . . . . . 21012.2.2.2 Salient Features of Continuing Guarantee . . . . . . . . 210

12.2.2.2.1 Not Limited by Number of Transactions. . . . . . . . 210


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12.2.2.2.2 Can be Revoked by Notice to Creditor. . . . . . . . . 21012.2.2.2.3 Death of Surety Terminates the Guarantee. . . . . . . 210

12.2.3 Revocation of Continuing Guarantee . . . . . . . . . . . . . . . 21112.2.3.1 Revocation by Notice . . . . . . . . . . . . . . . . 21112.2.3.2 Revocation Upon Death of Surety . . . . . . . . . . . 21112.2.3.3 General Reasons for Revocation . . . . . . . . . . . . 211

12.3 Rights of a Surety as Against Principal Debtor and Against Co-sureties 21112.3.1 Rights of Surety Against Principal Debtor . . . . . . . . . . . . . 211

12.3.1.1 Subrogation on Performance by Surety . . . . . . . . . 21112.3.1.2 The Surety Can Benefit From All the Securities Available to the

Creditor . . . . . . . . . . . . . . . . . . . . . . 21212.3.1.3 Principal Debtor Under Obligation to Indemnify Surety . . . 212

12.3.2 Rights of Surety Against Co-Sureties . . . . . . . . . . . . . . 21212.3.2.1 Where Guarantee Contingent Upon Joining of Co-Surety, the Va-

lidity of the Guarantee Depends on His Joining . . . . . . 21212.3.2.2 Co-Surety Must Contribute Equally . . . . . . . . . . . 21312.3.2.3 Co-Sureties Bound in Different Sums to Contribute Equally if Per-

mitted by Their Respective Obligations . . . . . . . . . 21312.3.3 Discharge of Surety From Liability . . . . . . . . . . . . . . . . 213

12.3.3.1 Cases Where Surety is Discharged From Liability . . . . . 21312.3.3.1.1 Surety Discharged to the Extent of Security Disposed of. . 21312.3.3.1.2 Surety is Discharged due to Variance in Terms of Contract

When Surety’s Consent Not Obtained. . . . . . . . . 21412.3.3.1.3 Surety is Discharged by Release or Discharge of Principal

Debtor. . . . . . . . . . . . . . . . . . . . 21412.3.3.1.4 Surety is Discharged When Creditor Compounds With, Gives

Time to, or Agrees not to Sue Principal Debtor. . . . . . 21412.3.3.1.5 Where a Remedy Available to the Surety is Destroyed by Cred-

itor’s Act or Omission, the Surety is Discharged. . . . . 21412.3.3.2 Cases Where Surety is Not Discharged From Liability . . . 214

12.3.3.2.1 Surety is Not Discharged When Agreement is Made With ThirdPerson to Give Time to Principal debtor. . . . . . . . 215

12.3.3.2.2 When Creditor Decides Not to Sue the Principal Debtor theSurety is Not Discharged. . . . . . . . . . . . . . 215

12.3.3.2.3 Release of one Co-Surety Does Not Discharge Other Co-Sureties. . . . . . . . . . . . . . . . . . . . 215

12.3.4 Defences to Liability Available to Surety . . . . . . . . . . . . . 21512.3.4.1 Where Guarantee Has Been Obtained by Misrepresentation . 21512.3.4.2 Where Guarantee Has Been Obtained by Concealment . . . 215


20 M L C

Ch. 13 Bailment and Pledge 21713.1 Meaning of Bailment, and Duties of Bailor and Bailee . . . . . . . . . 219

13.1.1 General Meaning and Types of Bailment . . . . . . . . . . . . . 21913.1.1.1 Meaning of Bailment . . . . . . . . . . . . . . . . . 22013.1.1.2 Elements Necessary to Create a Bailment . . . . . . . . 220

13.1.1.2.1 Personal Property. . . . . . . . . . . . . . . . 22013.1.1.2.2 Delivery of Possession. . . . . . . . . . . . . . 22013.1.1.2.3 Bailment Agreement. . . . . . . . . . . . . . . 220

13.1.1.3 Types of Bailment . . . . . . . . . . . . . . . . . . 22013.1.1.3.1 Ordinary Bailments. . . . . . . . . . . . . . . . 22013.1.1.3.2 Special Bailments. . . . . . . . . . . . . . . . 221

13.1.2 Rights and Duties of Bailor . . . . . . . . . . . . . . . . . . . 22113.1.2.1 Duties of the Bailor . . . . . . . . . . . . . . . . . 221

13.1.2.1.1 The Bailor Must Disclose Defects in the Property to the Bailor. 22113.1.2.1.2 In a Gratuitous Bailment, the Expenses if any of the Bailment

are to be Borne by the Bailor. . . . . . . . . . . . 22213.1.2.1.3 The Bailor Must Indemnify the Bailee for any Loss Caused Due

to a Defect in Title or Defect in Goods. . . . . . . . . 22213.1.2.2 Rights of the Bailor . . . . . . . . . . . . . . . . . 222

13.1.2.2.1 Bailor has the General Right to Claim Damages, Compensationor Restoration of the Goods Where Bailee Does not PerformDuties. . . . . . . . . . . . . . . . . . . . 222

13.1.2.2.2 Bailor Can Sue Third Party Wrong-Doers Who Interfere Withthe Bailment. . . . . . . . . . . . . . . . . . 222

13.1.2.2.3 Bailor is entitled to Increase or Profit from Goods Arising DuringBailment. . . . . . . . . . . . . . . . . . . 222

13.1.3 Rights and Duties of the Bailee . . . . . . . . . . . . . . . . . 22213.1.3.1 Duties of a Bailee . . . . . . . . . . . . . . . . . . 222

13.1.3.1.1 A Duty of Care Lies on the Bailee With Respect to the PropertyBailed. . . . . . . . . . . . . . . . . . . . 223

13.1.3.1.2 Bailee Cannot Make Unauthorized use of the Goods Bailed. 22313.1.3.2 Rights of a Bailee . . . . . . . . . . . . . . . . . . 223

13.1.3.2.1 Bailee has the General Right to Claim Damages, CompensationWhere Bailor Does not Perform His Duties. . . . . . . 223

13.1.3.2.2 Bailee Can Sue Third Party Wrong-Doers Who Interfere Withthe Bailment. . . . . . . . . . . . . . . . . . 223

13.1.3.2.3 Bailee is Not Liable in General for Loss or Destruction of theGoods Bailed. . . . . . . . . . . . . . . . . . 223

13.1.3.2.4 In General Bailee Cannot Mix the Goods Bailed With His OwnGoods. . . . . . . . . . . . . . . . . . . . 224


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13.1.3.2.5 Bailee Must Restore Goods Lent Gratuitously. . . . . . 22413.1.3.2.6 Bailee Must Return the Goods Upon Termination of Bailment. 224

13.1.4 Termination of Bailment . . . . . . . . . . . . . . . . . . . . 22513.1.4.1 Bailment for a Specified Purpose . . . . . . . . . . . . 22513.1.4.2 Bailment for a Specified Period . . . . . . . . . . . . . 22513.1.4.3 Violation of Terms of Bailment by Bailee . . . . . . . . . 22513.1.4.4 Termination of Gratuitous Bailment . . . . . . . . . . . 225

13.1.4.4.1 The Bailor May Terminate the Bailment at Any Time. . . . 22513.1.4.4.2 The Death of the Bailor or Bailee Terminates a Gratuitous Bail-

ment. . . . . . . . . . . . . . . . . . . . . 22613.2 Distinction Between General and Particular Lien . . . . . . . . . . . . 226

13.2.1 Particular Lien . . . . . . . . . . . . . . . . . . . . . . . . . 22613.2.1.1 The Bailee Must Have Provided Some Services Required by the

Purpose of the Bailment . . . . . . . . . . . . . . . 22613.2.1.2 The Services Provided Must be Based Upon Labour or Skill of

the Bailee Exercised Upon the Goods . . . . . . . . . . 22613.2.1.3 Lien is Not Established Until the Services Have Been Performed

and Remuneration Has Become Due . . . . . . . . . . 22613.2.1.4 Lien Pertains to Property of the Bailment and Not to Other Goods

in Possession of the Bailee . . . . . . . . . . . . . . 22713.2.1.5 Lien is Not Established if There is Contract That Negates Such

Lien . . . . . . . . . . . . . . . . . . . . . . . 22713.2.2 General Lien . . . . . . . . . . . . . . . . . . . . . . . . . 227

13.2.2.1 Special Class of Bailees Have a General Lien Without a Contractto This Effect . . . . . . . . . . . . . . . . . . . . 227

13.2.2.2 All Other Persons Can Have a General Lien if They Have Con-cluded a Contract to This Effect . . . . . . . . . . . . 227

13.2.3 Distinction Between Particular and General Lien . . . . . . . . . 22813.2.3.1 A General Lien Pertains to Any Property in Possession of the

Bailee, While a Particular Lien Applies to Goods of a ParticularBailment . . . . . . . . . . . . . . . . . . . . . . 228

13.2.3.2 A General Lien is Available to a Special Group of Bailees, Whilea Particular Lien is Available to All Bailees . . . . . . . . 228

13.3 Rights and Responsibilities of Finder of Goods . . . . . . . . . . . . 22813.3.1 Meaning of Finder of Goods and His Responsibility . . . . . . . . 22813.3.2 Right of Finder of Goods, Especially the Right to Sell the Goods . . 228

13.3.2.1 Rights . . . . . . . . . . . . . . . . . . . . . . . 22813.3.2.1.1 No Right to Sue for Expenses Voluntarily Incurred. . . . . 22813.3.2.1.2 Right to Retain Goods Until Compensation Made. . . . . 22913.3.2.1.3 Right to Sue for Specific Reward Offered by Owner. . . . 229


22 M L C

13.3.2.2 Selling of Goods Commonly on Sale . . . . . . . . . . 22913.4 Conditions for a Valid Pledge . . . . . . . . . . . . . . . . . . . . . 229

13.4.1 Meaning of “Pledge,” “Pawnor” and “Pawnee” . . . . . . . . . . . 22913.4.1.1 Elements . . . . . . . . . . . . . . . . . . . . . 229

13.4.1.1.1 Goods Delivered Serve as Security. . . . . . . . . . 22913.4.1.1.2 Pledge is Made as Security for Debt. . . . . . . . . . 22913.4.1.1.3 Pledge May Also be Made for the Performance of a Promise. 229

13.4.1.2 Pledge Distinguished From Mortgage and Lien . . . . . . 23013.4.1.2.1 Distinguished From Mortgage. . . . . . . . . . . . 23013.4.1.2.2 Distinguished From Lien. . . . . . . . . . . . . . 230

13.4.1.3 Rights of Pawnee . . . . . . . . . . . . . . . . . . 23013.4.1.3.1 Pawnee’s right of Retainer. . . . . . . . . . . . . 23013.4.1.3.2 Particular Lien: Pawnee Not to Retain for Debt or Promise Other

Than that for Which Goods Pledged. . . . . . . . . . 23013.4.1.3.3 He Can Recover Extraordinary Expenses Incurred. . . . 23013.4.1.3.4 Pawnee Has Right to Sue or Sell Goods in Case of Default by

Pawnor. . . . . . . . . . . . . . . . . . . . 23013.4.1.4 Pawnor’s Right to Redeem Goods Prior to Sale . . . . . . 231

13.4.2 Pledge of Goods by Person Who Does Not Own the Goods . . . . 23113.4.2.1 Pledge by Mercantile Agent . . . . . . . . . . . . . . 23113.4.2.2 Pledge by Person in Possession Under Voidable Contract . . 23113.4.2.3 Pledge Where Pawnor has Only a Limited Interest . . . . . 231

Ch. 14 Agency 23314.1 Agency and Duties of Principal and Agent . . . . . . . . . . . . . . . 236

14.1.1 The Purpose and Meaning of Agency . . . . . . . . . . . . . . 23614.1.1.1 The Purpose and Meaning of Agency . . . . . . . . . . 23614.1.1.2 The Meaning of Agency . . . . . . . . . . . . . . . 236

14.1.2 The Creation of Agency . . . . . . . . . . . . . . . . . . . . 23614.1.3 Types of Agents and Employment Relations . . . . . . . . . . . 236

14.1.3.1 Types of Employment Relations . . . . . . . . . . . . 23714.1.3.1.1 Employer-Employee Relationship. . . . . . . . . . . 23714.1.3.1.2 Principal-Agent Relationship. . . . . . . . . . . . 23714.1.3.1.3 Principal-Independent Contractor Relationship. . . . . . 237

14.1.3.2 Types of Agents . . . . . . . . . . . . . . . . . . . 23714.1.3.2.1 Mercantile Agents. . . . . . . . . . . . . . . . 23714.1.3.2.2 Professional Agents. . . . . . . . . . . . . . . 238

14.1.4 General Rules, Rights and Duties . . . . . . . . . . . . . . . . 23814.1.4.1 Duties of Agent or Rights of the Principal . . . . . . . . . 238


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14.1.4.1.1 An Agent is Duty-Bound to Observe the Directions of the Princi-pal Where Available Otherwise He is to Follow Good BusinessPractices. . . . . . . . . . . . . . . . . . . 238

14.1.4.1.2 An Agent is Duty-Bound to Conduct the Business of the Prin-cipal With Skill and Diligence and the Principal has a right toDemand This of the Agent. . . . . . . . . . . . . 238

14.1.4.1.3 Agent is Bound to Render Proper Accounts to His Principal, andthe Principal Has a Right to Demand Proper Accounts. . . 239

14.1.4.1.4 Agent is Duty-Bound to Communicate With Principal. . . . 23914.1.4.1.5 Agent Should Obtain the Consent of the Principal When He

Wishes to Deal on His Own Account in Principal’s Business. 23914.1.4.1.6 Agent has a Duty to Pay Sums Received for Principal. . . 240

14.1.4.2 Duties of Principal or Rights of the Agent . . . . . . . . . 24014.1.4.2.1 Agent has a Right to Retain Amounts Due to Him From Amounts

Received on Principal’s Account. . . . . . . . . . . 24014.1.4.2.2 With Some Exceptions, Agent’s Right to Payment Accrues

Upon Completion of the Work. . . . . . . . . . . . 24014.1.4.2.3 Agent Has No Right to Remuneration in Case of Business Mis-

conduct. . . . . . . . . . . . . . . . . . . . 24014.1.4.2.4 Agent Has a Right of Lien on Principal’s Property Till He is Paid. 24014.1.4.2.5 Agent Has a Right to be Indemnified for Consequences of Law-

ful Acts. . . . . . . . . . . . . . . . . . . . 24014.1.4.2.6 Agent Has a Right to be Indemnified for Acts Done in Good

Faith. . . . . . . . . . . . . . . . . . . . . 24114.1.4.2.7 Agent Has No Right to Claim Indemnity For Criminal Act. . 24114.1.4.2.8 Agent has Right to Claim Compensation for Injury Caused by

Principal’s Neglect. . . . . . . . . . . . . . . . 24114.1.5 Legal Effects of Agency and Third Parties . . . . . . . . . . . . 241

14.1.5.1 Contracts Entered Into by Agent Are Like Contracts Concludedby Principal Himself . . . . . . . . . . . . . . . . . 241

14.1.5.2 When Agent Exceeds Authority His Authorized Acts if SeparableAre Binding . . . . . . . . . . . . . . . . . . . . 241

14.1.5.3 When Excessive Authority is Not Separable, Principal is NotBound . . . . . . . . . . . . . . . . . . . . . . . 242

14.1.5.4 As Regards Third Parties, Notice of Information to AgentAmounts to Notice to Principal . . . . . . . . . . . . . 242

14.1.5.5 Effect on Agreements Made by Agent of misrepresentation orfraud by agent . . . . . . . . . . . . . . . . . . . 242

14.2 Constitution and Termination of Agency . . . . . . . . . . . . . . . . 24214.2.1 Creation of Agency . . . . . . . . . . . . . . . . . . . . . . 242


24 M L C

14.2.1.1 Legal Capacity . . . . . . . . . . . . . . . . . . . 24214.2.1.1.1 Who May Employ an Agent. . . . . . . . . . . . . 24314.2.1.1.2 Who May be an Agent. . . . . . . . . . . . . . . 243

14.2.1.2 Consideration is Not Necessary for Agency . . . . . . . . 24314.2.1.3 Authority is Either Expressed or Implied . . . . . . . . . 243

14.2.1.3.1 Expressed Agency. . . . . . . . . . . . . . . . 24314.2.1.3.2 Implied Agency. . . . . . . . . . . . . . . . . 244

14.2.1.4 Incidental Authority . . . . . . . . . . . . . . . . . 24414.2.1.5 Emergency Powers . . . . . . . . . . . . . . . . . 24414.2.1.6 Apparent Agency or Agency by Estoppel . . . . . . . . . 244

14.2.2 Termination or Revocation of Agency . . . . . . . . . . . . . . 24514.2.2.1 Agency May be Terminated by Revocation of Principal or by Re-

nunciation by Agent . . . . . . . . . . . . . . . . . 24514.2.2.2 Agency is Terminated When Business of the Agency is Com-

pleted . . . . . . . . . . . . . . . . . . . . . . . 24514.2.2.3 Agency is Terminated by Death or Insanity of the Principal or the

Agent . . . . . . . . . . . . . . . . . . . . . . . 24514.2.2.4 Agency May be Terminated When Principal is Adjudged Insolvent 24514.2.2.5 Sub-Agents Authority is Terminated When the Agency Itself is

Terminated . . . . . . . . . . . . . . . . . . . . . 24514.2.2.6 When Agency Cannot be Terminated . . . . . . . . . . 245

14.2.2.6.1 Where Agent has an Interest in Subject-Matter. . . . . . 24614.2.2.6.2 Where Authority has Been Partly Exercised. . . . . . . 246

14.2.2.7 When Compensation May be Required For Termination or Re-nunciation . . . . . . . . . . . . . . . . . . . . . 246

14.2.2.8 Revocation and renunciation May be Expressed or Implied . 24614.2.2.9 Termination of Authority of Agent Becomes Effective When it Be-

comes Known to the Agent for the Agent and to Third Party Whenit Comes to His Knowledge . . . . . . . . . . . . . . 247

14.3 Ratification and its Rules . . . . . . . . . . . . . . . . . . . . . . . 24714.3.1 Agency by Ratification . . . . . . . . . . . . . . . . . . . . . 24714.3.2 Essential Elements of Ratification . . . . . . . . . . . . . . . . 247

14.3.2.1 Ratification may be Expressed or Implied . . . . . . . . 24714.3.2.2 Ratification is Possible Only After Complete Knowledge of Facts 24814.3.2.3 Where Part of a Transaction is Ratified, it Amounts to Ratifying

the Whole Transaction . . . . . . . . . . . . . . . . 24814.3.2.4 The Effect of Ratification Must Not be to Injure Third Person . 248

14.3.3 Legal effect of Ratification and Liability . . . . . . . . . . . . . . 24814.3.3.1 Ratification Validates the Transaction From the Start as if it Had

Been Performed by Principal’s Authority . . . . . . . . . 248


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14.3.3.2 Liability Where Act of Pretended Agent Not Ratified, the Pre-tended Agent is Liable . . . . . . . . . . . . . . . . 248

14.3.3.3 Where a Person Falsely Contracts as Agent, He is Not Entitledto Performance Even if in Reality He Was Acting on His OwnAccount . . . . . . . . . . . . . . . . . . . . . . 249

14.3.3.4 Where a Principal Induces Belief That Agent’s Acts are Autho-rized, he is Liable . . . . . . . . . . . . . . . . . . 249

14.4 Cases in Which an Agent Can Himself Sue or be Sued by the ContractingParty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24914.4.1 In General, Agent Cannot Personally Enforce Nor be Bound by Contract

on Behalf of Principal . . . . . . . . . . . . . . . . . . . . . 24914.4.2 Third Party Has Right Against Agent and Principal Where Principal Not

Disclosed . . . . . . . . . . . . . . . . . . . . . . . . . . . 25014.4.3 Where Principal is Not Disclosed, Principal is to Enforce Contract Within

the Arrangement Between Agent and Third Party . . . . . . . . . 25014.4.4 In cases where Agent is Personally Liable, Third Party May, at His Op-

tion, Hold the Principal or the Agent Liable . . . . . . . . . . . . 250

II SALE OF GOODS 251

Ch. 15 Contract of Sale of Goods 25315.1 Sale and Agreement to Sell . . . . . . . . . . . . . . . . . . . . . . 255

15.1.1 Brief History of Legislation on the Sale of Goods: General Framework 25515.1.1.1 Earlier Legislation . . . . . . . . . . . . . . . . . . 25515.1.1.2 The Contract Act, 1872 still Applies in Certain Cases . . . . 25515.1.1.3 Contract of Sale is Primarily Meant for Business People and Not

Consumers . . . . . . . . . . . . . . . . . . . . 25515.1.2 Sale of Goods and Other Similar Contracts . . . . . . . . . . . . 256

15.1.2.1 Sale Contract defined . . . . . . . . . . . . . . . . 25615.1.2.2 The Following Contracts Not Sale of Goods Due to the Distinc-

tions Made . . . . . . . . . . . . . . . . . . . . . 25715.1.2.2.1 Contract of Exchange or Barter. . . . . . . . . . . 25715.1.2.2.2 Currency Transactions. . . . . . . . . . . . . . 25715.1.2.2.3 Contracts for Work and Material. . . . . . . . . . . 25715.1.2.2.4 Hire-Purchase. . . . . . . . . . . . . . . . . 25715.1.2.2.5 Construction Contracts. . . . . . . . . . . . . . 25715.1.2.2.6 Bailment. . . . . . . . . . . . . . . . . . . 25715.1.2.2.7 Contract of Agency. . . . . . . . . . . . . . . . 258

15.1.3 Sale and Agreement to Sell: Distinction . . . . . . . . . . . . . 258


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15.1.3.1 A Sale is an Executed Agreement, While an Agreement to Sell isan Executory Agreement . . . . . . . . . . . . . . . 258

15.1.3.2 In a Sale Property Stands Transferred to the Buyer, but in anAgreement to Sell it Will Pass Later . . . . . . . . . . . 259

15.1.3.3 In a Sale Risk of Loss of Goods is Now With Buyer, but in anAgreement to Sell Risk Stays With the Seller . . . . . . . 259

15.1.3.4 In Case of Breach of Agreement, More Remedies Are AvailableAfter Sale . . . . . . . . . . . . . . . . . . . . . 259

15.1.3.5 After Sale the Buyer has a Right in Rem, but After Agreement toSell He Only Has a Right in Personam . . . . . . . . . . 259

15.1.3.6 After an Agreement to Sell, the Seller Still Has the Right to Sellthe Goods to a Third Party . . . . . . . . . . . . . . 259

15.1.4 Formation of the Sale Contract . . . . . . . . . . . . . . . . . 25915.1.4.1 Offer and Acceptance . . . . . . . . . . . . . . . . 260

15.1.4.1.1 Offer and Acceptance as in All Contracts. . . . . . . . 26015.1.4.1.2 The Offer and Acceptance (Contract) May Require Immediate

or Delayed Performance or Partly Immediate and Partly De-layed. . . . . . . . . . . . . . . . . . . . . 260

15.1.4.1.3 The Offer and Acceptance (Contract) May be Expressed in Writ-ing or by Word of Mouth Subject to Requirements of the Law orMay be Inferred From Conduct. . . . . . . . . . . . 260

15.1.4.2 Subject-Matter of Contract: Types of Goods Under the Sale ofGoods Act . . . . . . . . . . . . . . . . . . . . . 260

15.1.4.2.1 General Meaning of “Goods”. . . . . . . . . . . . 26015.1.4.2.2 Existing Goods and Future Goods, Contingent Goods, Specific,

Ascertained and Unascertained Goods. . . . . . . . 26115.1.4.2.3 Two Rules Affected by the Classification of Goods. . . . . 263

15.2 Elements of the Sale Contract and Issues of Price . . . . . . . . . . . 26315.2.1 Essential Elements of a Sale Contract . . . . . . . . . . . . . . 263

15.2.1.1 The Requirements for Valid Contracts Must be Present . . . 26315.2.1.2 There Subject-Matter of the Contract of Sale Must be Goods . 26415.2.1.3 There Must be “Money Consideration” Called the Price . . . 26415.2.1.4 For a Contract of Sale There Must be a Seller and a Buyer . 26415.2.1.5 A Contract of Sale May be Preceded by an Agreement to Sell 26415.2.1.6 Property in the Goods Must be Transferred Fro the Seller to the

Buyer . . . . . . . . . . . . . . . . . . . . . . . 26415.2.2 Modes of Fixing the Price . . . . . . . . . . . . . . . . . . . . 264

15.2.2.1 Price May be Fixed Expressly in the Contract . . . . . . . 26415.2.2.2 The Contract May Provide the Manner or Method of Fixing the

Price . . . . . . . . . . . . . . . . . . . . . . . 265


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15.2.2.3 The Price May be Determined by the Course of Dealing Betweenthe Parties . . . . . . . . . . . . . . . . . . . . . 265

15.2.2.4 Where the Above Three Methods Are Not Followed, the BuyerWill Pay a “Reasonable” Price to the Seller . . . . . . . . 265

15.2.2.5 The Price May be Determined by a Third Party on the Basis ofValuation . . . . . . . . . . . . . . . . . . . . . 265

15.2.3 Modes of Payment of Price . . . . . . . . . . . . . . . . . . . 26515.2.3.1 The Seller is Not Bound to Accept Anything Other Than domestic

Currency as Price, But He May Accept the Usual Methods ofPayment . . . . . . . . . . . . . . . . . . . . . . 265

15.2.3.2 Earnest or Deposit May be Paid and Appropriated According tothe Customary Practice . . . . . . . . . . . . . . . . 265

15.2.3.3 The Buyer May Deduct Tax or Other Amounts Required by Lawto be Deducted, While Making Payment . . . . . . . . . 266

Ch. 16 Conditions and Warranties 26716.1 Condition, Warranty and Their Breach . . . . . . . . . . . . . . . . . 268

16.1.1 Meaning of Condition and Warranty . . . . . . . . . . . . . . . 26816.1.1.1 Meaning of Condition . . . . . . . . . . . . . . . . 268

16.1.1.1.1 Conditions Laid Down by Statute. . . . . . . . . . . 26916.1.1.1.2 Conditions Construed by the Courts. . . . . . . . . . 26916.1.1.1.3 Conditions Laid Down by the Parties. . . . . . . . . 269

16.1.1.2 Meaning of Warranty . . . . . . . . . . . . . . . . . 26916.1.1.3 Time May be of the Essence of the Contract, That is, an Essen-

tial Condition, but it is Not so With Respect to Time of PaymentUnless Expressly Specified . . . . . . . . . . . . . . 269

16.1.1.4 Distinction Between Condition and Warranty . . . . . . . 27016.1.1.4.1 A Condition Pertains to the Main Purpose of the Contract, but a

Warranty Does Not. . . . . . . . . . . . . . . . 27016.1.1.4.2 The Contract Can be Repudiated Due to a Breach of a Condi-

tion, but it Cannot be Repudiated on Breach of a Warranty. . 27016.1.1.4.3 A Condition May be Treated as a Warranty, but a Warranty Can-

not be Interpreted as a Condition. . . . . . . . . . . 27016.1.2 Breach of Condition Treated as Breach of Warranty . . . . . . . . 270

16.1.2.0.4 The Buyer May Waive a Condition or Elect to Treat it as a War-ranty. . . . . . . . . . . . . . . . . . . . . 270

16.1.2.0.5 Where Non-Severable Goods Have Been Delivered in Whole orin Part, a Breach of a Condition Will be Treated as a Breach ofWarranty. . . . . . . . . . . . . . . . . . . 270


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16.1.2.0.6 A Condition That is Impossible to Perform Cannot be Treatedas a Warranty. . . . . . . . . . . . . . . . . . 271

16.1.3 Express and Implied Conditions . . . . . . . . . . . . . . . . . 27116.1.3.1 Express Conditions . . . . . . . . . . . . . . . . . 27116.1.3.2 Implied Conditions . . . . . . . . . . . . . . . . . . 271

16.1.3.2.1 There is an Implied Condition That the Seller Has a Good Titleto the Goods. . . . . . . . . . . . . . . . . . 271

16.1.3.2.2 Sale By Description: Implied Condition That the Goods ShallCorrespond to the Description. . . . . . . . . . . . 272

16.1.3.2.3 Sale By Sample: Implied Condition That the Bulk of the GoodsShall Conform to the Sample. . . . . . . . . . . . 273

16.1.3.2.4 Sale By Description and Sample: Bulk of the Goods Must Cor-respond With Sample as Well as Description. . . . . . 273

16.1.4 Express and Implied Warranties . . . . . . . . . . . . . . . . . 27316.1.4.1 Implied Warranty of Quiet Possession . . . . . . . . . . 27416.1.4.2 Implied Warranty That Goods Will be Free of Charge and En-

cumbrance . . . . . . . . . . . . . . . . . . . . . 27416.1.4.3 Warranty Implied by Usage of Trade . . . . . . . . . . 27416.1.4.4 An Express Warranty Will Not Negative an Implied Warranty Un-

less it is Inconsistent With it . . . . . . . . . . . . . . 27416.2 Caveat Emptor and Caveat Venditor . . . . . . . . . . . . . . . . . 274

16.2.1 The Meaning of the Rule “Caveat Emptor” and When is it Applicable 27416.2.1.1 Where the Buyer Makes Known That He is Buying Goods for a

Particular Purpose and is Relying on the Judgment of the Seller 27516.2.1.2 Where the Goods Are bought by Description and Seller Deals in

Such Goods . . . . . . . . . . . . . . . . . . . . 27516.2.2 The Federal Shariat Court Declared the Rule of “Caveat Emptor” to be

Un-Islamic and the Law Stands Amended . . . . . . . . . . . . 275

Ch. 17 Transfer of Ownership 27717.1 Rules Governing Transfer of Property Between Seller and Buyer . . . . 277

17.1.1 Sale of Goods and the Passing of Property or Title . . . . . . . . 27717.1.1.1 The Main Purpose of Sale is the Passing of Property . . . . 27817.1.1.2 Risk Passes With Ownership . . . . . . . . . . . . . 27817.1.1.3 Owner Has Right of Action . . . . . . . . . . . . . . 27817.1.1.4 Situations Like Insolvency . . . . . . . . . . . . . . . 278

17.1.2 General Rules for the Passing of Property . . . . . . . . . . . . 27817.1.2.1 Unascertained Goods . . . . . . . . . . . . . . . . 279

17.1.2.1.1 An Agreement for the Sale of Unascertained Goods is an“Agreement to Sell.”. . . . . . . . . . . . . . . 279


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17.1.2.1.2 Unascertained Goods, In Certain Cases, Stand Ascertained ifThey Are Appropriated to the Contract by Buyer or Seller. . 279

17.1.2.2 Ascertained Goods . . . . . . . . . . . . . . . . . 27917.1.2.2.1 Broad General Rule: Property Passes When the Parties Intend

it to Pass. . . . . . . . . . . . . . . . . . . 27917.1.2.2.2 Implied Sub-Rules for Determining the Intention of the Parties. 280

17.2 Seller Cannot Give to the Buyer a Better Title Than he Himself has . . 28117.2.1 The General Rule of Good Title . . . . . . . . . . . . . . . . . 28117.2.2 Exceptions to the General Rule . . . . . . . . . . . . . . . . . 281

17.2.2.1 Sale by a Mercantile Agent and Sale Under Implied Authority ofOwner . . . . . . . . . . . . . . . . . . . . . . 281

17.2.2.2 Sale by a Joint Owner . . . . . . . . . . . . . . . . 28117.2.2.3 Sale by Person in Possession Through a Voidable Contract . 28117.2.2.4 Sale by Buyer or Seller in Possession After Sale . . . . . 28217.2.2.5 Unpaid Seller Exercising Lien . . . . . . . . . . . . . 282

Ch. 18 Performance and Breach 28318.1 Rules Governing Delivery of Goods . . . . . . . . . . . . . . . . . . 285

18.1.1 General Rules: Meaning of Delivery and Duties . . . . . . . . . . 28518.1.1.1 Meaning of Delivery and Part Delivery . . . . . . . . . . 28518.1.1.2 Seller Duty Bound to Deliver the Goods and Buyer Duty Bound

to Accept Them and Pay for Them . . . . . . . . . . . 28518.1.1.2.1 Payment of Price and Delivery are, Therefore, Concurrent Con-

ditions. . . . . . . . . . . . . . . . . . . . 28518.1.1.2.2 Buyer Needs to Apply for Delivery. . . . . . . . . . 285

18.1.2 Specific Rules as to Delivery . . . . . . . . . . . . . . . . . . 28518.1.2.1 Parties to Agree Whether Buyer is to Take Possession or Seller

is to Send Goods . . . . . . . . . . . . . . . . . . 28518.1.2.2 Stipulations as to Place and Time of Delivery . . . . . . . 286

18.1.2.2.1 Existing Goods to be Delivered at the Place They Are Sold orWhere Located. . . . . . . . . . . . . . . . . 286

18.1.2.2.2 Future Goods to be Delivered at the Place Where They AreManufactured or Produced. . . . . . . . . . . . . 286

18.1.2.2.3 Where Seller Bound to Send Goods, But No Time of DeliveryFixed. . . . . . . . . . . . . . . . . . . . . 286

18.1.2.3 Third-Party Holding Goods Must Acknowledge That He is Hold-ing on Buyer’s Behalf . . . . . . . . . . . . . . . . 286

18.1.2.4 Demand for Delivery or Tender of Delivery Effective Only at Rea-sonable Hour . . . . . . . . . . . . . . . . . . . . 286

18.1.2.5 Cost of Putting Goods in Deliverable State to be Borne by Seller 286


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18.1.2.6 Delivery of Wrong Quantity . . . . . . . . . . . . . . 28618.1.2.7 There is no Obligation to Accept Installment deliveries, Unless

Agreed . . . . . . . . . . . . . . . . . . . . . . 28718.1.3 Acceptance and Rejection of Goods . . . . . . . . . . . . . . . 287

18.1.3.1 Meaning of Acceptance . . . . . . . . . . . . . . . . 28718.1.3.2 Buyer Has Right of Examining the Goods . . . . . . . . 28718.1.3.3 Buyer Need Not Return Rejected Goods But Must Communicate

Rejection to Seller . . . . . . . . . . . . . . . . . . 28718.1.3.4 Buyer Liable for Loss for Neglecting or Refusing Delivery of

Goods . . . . . . . . . . . . . . . . . . . . . . 28718.2 Unpaid Seller’s Right of Stoppage of Goods in Transit . . . . . . . . . 288

18.2.1 Meaning of Unpaid Seller and His Rights in General . . . . . . . . 28818.2.1.1 Meaning of Unpaid Seller . . . . . . . . . . . . . . . 28818.2.1.2 General Rights of Unpaid Seller . . . . . . . . . . . . 288

18.2.1.2.1 Where Property May Have Passed to the Buyer. . . . . 28818.2.1.2.2 Additional Remedy Where Property Has Not Passed to the

Buyer. . . . . . . . . . . . . . . . . . . . . 28818.2.2 Unpaid Seller’s Lien and its Termination . . . . . . . . . . . . . 288

18.2.2.1 When Seller is in Possession of the Goods . . . . . . . . 28918.2.2.2 When Seller has Made Part Delivery . . . . . . . . . . 28918.2.2.3 Termination of Lien . . . . . . . . . . . . . . . . . 289

18.2.3 Unpaid Seller’s Right of Stoppage in Transit . . . . . . . . . . . 28918.2.3.1 Meaning of Right of Stoppage in Transit . . . . . . . . . 28918.2.3.2 Duration of Transit . . . . . . . . . . . . . . . . . . 29018.2.3.3 How stoppage in transit is effected . . . . . . . . . . . 29018.2.3.4 When Right to Stoppage in Transit Defeated . . . . . . . 290

18.2.4 Right of Re-Sale by Seller . . . . . . . . . . . . . . . . . . . 29118.2.4.0.1 The Second Buyer Acquires a Good Title. . . . . . . . 29118.2.4.0.2 Right to Claim Damages Not Prejudiced Even Where Right to

Re-Sell Reserved and Contract Rescinded. . . . . . . 29118.3 Remedies Available to Buyer and Seller of Goods for Breach of Contract 291

18.3.1 Remedies Available to the Seller . . . . . . . . . . . . . . . . 29118.3.1.1 Suit of Price . . . . . . . . . . . . . . . . . . . . 291

18.3.1.1.1 Where Property in the Goods has Passed to the Buyer. . . 29118.3.1.1.2 Where Property in the Goods has Not Passed to the Buyer, But

Price Payable on a Certain Day. . . . . . . . . . . 29118.3.1.2 Damages for Non-Acceptance . . . . . . . . . . . . . 29118.3.1.3 Repudiation or Contract Before Due Date . . . . . . . . 29218.3.1.4 Interest by Way of Damages and Special Damages . . . . 292

18.3.2 Remedies Available to the Buyer . . . . . . . . . . . . . . . . 292


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18.3.2.1 Damages for Non-Delivery . . . . . . . . . . . . . . 29218.3.2.2 Specific Performance . . . . . . . . . . . . . . . . 29218.3.2.3 Remedy for Breach of Warranty . . . . . . . . . . . . 29218.3.2.4 Repudiation or Contract Before Due Date . . . . . . . . 29318.3.2.5 Interest by Way of Damages and Special Damages . . . . 293

III NEGOTIABLE INSTRUMENTS 295

Ch. 19 Nature and Function of Negotiable Istruments 29719.1 The Nature of Negotiable Instruments . . . . . . . . . . . . . . . . . 29719.2 The Function of Negotiable Instruments . . . . . . . . . . . . . . . . 297

19.2.1 As a Substitute for Money . . . . . . . . . . . . . . . . . . . 29719.2.2 Extension of Credit . . . . . . . . . . . . . . . . . . . . . . 29819.2.3 The Essential Feature of These Two Functions . . . . . . . . . . 298

19.3 The Scope and Application of the Negotiable Instruments Act, 1881 . . 29819.3.1 Only the State Bank Can Issue Bearer Notes and Bills of Exchange

Payable on Demand . . . . . . . . . . . . . . . . . . . . . . 29919.3.2 Every Negotiable Instrument is Governed by the Negotiable Instruments

Act and No Usage or Custom at Variance with its Provisions Applies toSuch Instruments . . . . . . . . . . . . . . . . . . . . . . . 300

Ch. 20 Kinds of Negotiable Instruments and Parties 30120.1 Kinds of Negotiable Instruments . . . . . . . . . . . . . . . . . . . . 301

20.1.1 Promissory Note—Two Parties—Promise to Pay . . . . . . . . . 30120.1.2 Essential Features of a Promissory Note . . . . . . . . . . . . . 30320.1.3 Bill of Exchange—Three Parties—Order to Pay . . . . . . . . . . 30320.1.4 Cheque—Three Parties—Order to Pay . . . . . . . . . . . . . . 304

20.2 Classification of Negotiable Instruments . . . . . . . . . . . . . . . . 30520.3 Legal Capacity of Parties . . . . . . . . . . . . . . . . . . . . . . . 30620.4 Original and Additional Parties . . . . . . . . . . . . . . . . . . . . 307

20.4.1 Original Parties . . . . . . . . . . . . . . . . . . . . . . . . 30720.4.2 Additional Parties . . . . . . . . . . . . . . . . . . . . . . . 308

Ch. 21 Negotiability 31121.1 Definition of Negotiability . . . . . . . . . . . . . . . . . . . . . . . 31121.2 Advantages of Negotiability and Rules of Evidence . . . . . . . . . . 312

21.2.1 Advantages of Negotiability . . . . . . . . . . . . . . . . . . . 31221.2.2 Presumptions as to Negotiable Instruments (Rules of Evidence) . . 312

21.3 Requirements of Negotiability . . . . . . . . . . . . . . . . . . . . . 31321.3.1 A negotiable instrument must be in writing . . . . . . . . . . . . 313


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21.3.2 The instrument must be signed by the maker or drawer . . . . . . 31321.3.3 A negotiable instrument must contain an unconditional promise or order

to pay . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31421.3.4 The instrument must state sums certain in money . . . . . . . . . 31421.3.5 The instrument must be payable on demand or at a definite time . . 31521.3.6 An instrument must be payable to order or to bearer . . . . . . . . 315

21.4 Factors not Affecting Negotiability . . . . . . . . . . . . . . . . . . . 31621.5 Distinctions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 316

21.5.1 Distinction between a bill of exchange and a promissory note . . . . 31621.5.2 Distinction between a bill of exchange and a cheque . . . . . . . 31621.5.3 What is a letter of credit? What is the relationship between a letter of

credit and a bill of exchange? . . . . . . . . . . . . . . . . . . 317

Ch. 22 Transfer of Negotiable Instruments 31922.1 Transfer of Negotiable Instruments and its Effect . . . . . . . . . . . 319

22.1.1 Effect of Transfer . . . . . . . . . . . . . . . . . . . . . . . 32022.1.2 Whether, at a Particular Time, the Instrument is an Order Instrument or

a Bearer Instrument? . . . . . . . . . . . . . . . . . . . . . 32022.1.3 Who May Negotiate (§51) . . . . . . . . . . . . . . . . . . . 32022.1.4 Negotiating an Order Instrument . . . . . . . . . . . . . . . . 32022.1.5 Negotiating a Bearer Instrument . . . . . . . . . . . . . . . . . 32122.1.6 Converting Order Instruments to Bearer and Vice-versa . . . . . . 322

22.2 Kinds of Indorsements . . . . . . . . . . . . . . . . . . . . . . . . 32222.2.1 Blank Indorsement (§16) . . . . . . . . . . . . . . . . . . . . 32322.2.2 Indorsement in Full or Special Indorsement (§16) . . . . . . . . . 32322.2.3 Qualified Indorsement (§52) . . . . . . . . . . . . . . . . . . 32322.2.4 Conditional indorsements (§52) . . . . . . . . . . . . . . . . . 32322.2.5 Restrictive Indorsement . . . . . . . . . . . . . . . . . . . . 324

22.2.5.1 Indorsements prohibiting further indorsement (§50(2)(a)) . . 32422.2.5.2 Indorsement for deposit or collection (§50(2)(b)) . . . . . . 324

22.2.6 Partial Indorsement . . . . . . . . . . . . . . . . . . . . . . 32422.2.7 Correction of Name . . . . . . . . . . . . . . . . . . . . . . 32422.2.8 Requisites of a Valid Indorsement . . . . . . . . . . . . . . . . 32422.2.9 Legal Effect of Indorsement . . . . . . . . . . . . . . . . . . . 325

22.3 Assignment of Negotiable Instruments . . . . . . . . . . . . . . . . 32522.3.1 Assignment by Act of the Parties . . . . . . . . . . . . . . . . 32522.3.2 Assignment by Operation of the Law . . . . . . . . . . . . . . . 325

Ch. 23 Kinds of Claimants and Their Rights 32723.1 Kinds of Claimants . . . . . . . . . . . . . . . . . . . . . . . . . . 327

23.1.1 Ordinary Holders and Assignees . . . . . . . . . . . . . . . . 328


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23.1.2 Favoured Holders: Holder in Due Course and Holder Through a Holderin Due Course . . . . . . . . . . . . . . . . . . . . . . . . . 328

23.2 Holder in Due Course . . . . . . . . . . . . . . . . . . . . . . . . . 32823.2.1 Must be a Holder . . . . . . . . . . . . . . . . . . . . . . . 32923.2.2 Must be a Holder for Consideration . . . . . . . . . . . . . . . 32923.2.3 That the instrument has not become overdue or dishonoured . . . . 330

23.2.3.1 Maturity . . . . . . . . . . . . . . . . . . . . . . 33023.2.3.2 Acquiring Instrument After Dishonour . . . . . . . . . . 331

23.2.4 That he took the instrument without notice of the transferor’s defectivetitle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 331

23.3 Holder Through a Holder in Due Course . . . . . . . . . . . . . . . . 331

Ch. 24 Liability, Defences and Discharge of Parties 33324.1 Liability of Parties to Negotiable Instruments . . . . . . . . . . . . . . 33424.2 Signature Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . 334

24.2.1 Primary Liability Depends on Who is Asked to Pay First . . . . . . 33424.2.1.1 Primary Liability of Maker . . . . . . . . . . . . . . . 33524.2.1.2 Primary Liability of Drawee/Acceptor . . . . . . . . . . 33524.2.1.3 Primary Liability and the Concepts of Principal & Surety . . 335

24.2.2 Secondary Liability is Triggered When Primary Liability Fails and ThenCertain Conditions are Met . . . . . . . . . . . . . . . . . . . 33624.2.2.1 Proper Presentment . . . . . . . . . . . . . . . . . 33724.2.2.2 Dishonour of Instrument . . . . . . . . . . . . . . . 33824.2.2.3 Notice of Dishonour . . . . . . . . . . . . . . . . . 338

24.2.3 Accommodation Parties . . . . . . . . . . . . . . . . . . . . 33924.2.4 Unauthorized Signatures . . . . . . . . . . . . . . . . . . . . 33924.2.5 Special Rules for Unauthorized Indorsements Including Forgery . . 339

24.3 Warranty Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . 33924.4 Defences Against Payment . . . . . . . . . . . . . . . . . . . . . . 340

24.4.1 Universal (or real) defences work against all kinds of holders includingthe holder in due course . . . . . . . . . . . . . . . . . . . . 34124.4.1.1 Forgery . . . . . . . . . . . . . . . . . . . . . . 34124.4.1.2 Defective title or fraud in the execution—when it was in the notice

of the transferee . . . . . . . . . . . . . . . . . . 34124.4.1.3 Material Alteration . . . . . . . . . . . . . . . . . . 34124.4.1.4 Discharge in Bankruptcy (insovency) . . . . . . . . . . 34124.4.1.5 Minority . . . . . . . . . . . . . . . . . . . . . . 34224.4.1.6 Illegality . . . . . . . . . . . . . . . . . . . . . . 34224.4.1.7 Mental Incapacity . . . . . . . . . . . . . . . . . . 34224.4.1.8 Extreme Duress . . . . . . . . . . . . . . . . . . . 342


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24.4.2 Personal (or limited) defences do not work against the holder in duecourse . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34224.4.2.1 Breach of Contract or Breach of Warranty . . . . . . . . 34224.4.2.2 Lack or Failure of Consideration . . . . . . . . . . . . 34224.4.2.3 Fraud not in the notice of the holder in due course . . . . . 343

24.5 Discharge From Liability . . . . . . . . . . . . . . . . . . . . . . . 34324.5.1 Discharge by Payment or Tender of Payment . . . . . . . . . . . 34324.5.2 Discharge by Cancellation or Release . . . . . . . . . . . . . . 34324.5.3 Discharge by Reacquisition . . . . . . . . . . . . . . . . . . . 34324.5.4 Discharge Due to Material Alteration . . . . . . . . . . . . . . . 34324.5.5 Parties Not Consenting to a Concession Made by the Holder Dis-

charged . . . . . . . . . . . . . . . . . . . . . . . . . . . 344

Ch. 25 Cheques and the Banking System 34525.1 Cheques . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34525.2 The Bank-Customer Relationship . . . . . . . . . . . . . . . . . . . 345

25.2.1 Creditor-Debtor Relationship . . . . . . . . . . . . . . . . . . 34625.2.2 Agency Relationship . . . . . . . . . . . . . . . . . . . . . . 34625.2.3 Other Contractual Relations . . . . . . . . . . . . . . . . . . 346

25.3 Types of Cheques: Open and Crossed . . . . . . . . . . . . . . . . 34625.3.1 Open Cheque . . . . . . . . . . . . . . . . . . . . . . . . . 34625.3.2 Crossed Cheque . . . . . . . . . . . . . . . . . . . . . . . 347

25.4 Honouring Cheques and the Liability of the Bank . . . . . . . . . . . 34725.4.1 When Bank Must Honour Cheque . . . . . . . . . . . . . . . . 34725.4.2 When Bank Must Refuse Payment . . . . . . . . . . . . . . . 34825.4.3 When Bank May Refuse Payment . . . . . . . . . . . . . . . . 348

IV PARTNERSHIP 351

Ch. 26 Nature of Partnership 35326.1 Characteristics of Partnership—Distinguished From Company . . . . . 353

26.1.1 The Partnership Act and the Nature of Partnership . . . . . . . . 35326.1.1.1 Partnership is Based Upon Agency Law . . . . . . . . . 35326.1.1.2 The Partnership Act, 1932 . . . . . . . . . . . . . . 354

26.1.2 The Meaning and Characteristics of Partnership . . . . . . . . . 35426.1.2.1 The Definition of Partnership . . . . . . . . . . . . . 35426.1.2.2 Elements or Characteristics of Partnership . . . . . . . . 355

26.1.2.2.1 Partnership is an association of two or more persons. . . 35526.1.2.2.2 Partnership is the result of an agreement between two or more

persons. . . . . . . . . . . . . . . . . . . . 355


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26.1.2.2.3 Partnership is formed to carry out some business. . . . . 35626.1.2.2.4 The agreement is for sharing of the profits of the business. . 35626.1.2.2.5 The business is either carried on by all or by any one or more

persons acting for all. . . . . . . . . . . . . . . 35626.1.3 Partnership and Co-ownership . . . . . . . . . . . . . . . . . 35726.1.4 Partnership and Company . . . . . . . . . . . . . . . . . . . 357

26.2 Meaning of Firm and its Registration . . . . . . . . . . . . . . . . . 35826.2.1 The Nature of a Firm . . . . . . . . . . . . . . . . . . . . . . 35826.2.2 Registration of the Firm . . . . . . . . . . . . . . . . . . . . 359

26.2.2.1 Effect of Non-Registration . . . . . . . . . . . . . . . 35926.2.2.2 Rights and Matters Not Affected by Non-Registration . . . . 360

26.2.3 Contents of the Registration Application . . . . . . . . . . . . . 360

Ch. 27 Formation of Partnership 36327.1 Sharing of Profit Essential Element, but not Sole Test . . . . . . . . . 363

27.1.1 Financing by Institutions Excluded . . . . . . . . . . . . . . . . 36627.2 Types of Partners and Partnership . . . . . . . . . . . . . . . . . . 367

27.2.1 Types of Partnership . . . . . . . . . . . . . . . . . . . . . . 36727.2.1.1 General Partnerships . . . . . . . . . . . . . . . . 36727.2.1.2 Limited Liability Partnerships . . . . . . . . . . . . . 368

27.2.2 Types of Partners . . . . . . . . . . . . . . . . . . . . . . . 36827.2.2.1 The Corporate Partner . . . . . . . . . . . . . . . . 36827.2.2.2 The Salaried Partner . . . . . . . . . . . . . . . . . 36927.2.2.3 Partner by Holding Out or Estoppel or Nominal Partner . . . 36927.2.2.4 Incoming Partner . . . . . . . . . . . . . . . . . . 37127.2.2.5 Outgoing Partner or Retiring Partner . . . . . . . . . . 371

27.3 Minor as Partner—Rights and Liabilities . . . . . . . . . . . . . . . . 37227.3.1 Situation Prior to Attaining Majority . . . . . . . . . . . . . . . 372

27.3.1.1 Right to Share Profits . . . . . . . . . . . . . . . . 37227.3.1.2 Right to Inspect Accounts . . . . . . . . . . . . . . . 37227.3.1.3 Share Liable for Acts of the Firm . . . . . . . . . . . . 37227.3.1.4 May Not Sue Partners for Payment of his Share . . . . . . 372

27.3.2 Situation After Attaining Majority . . . . . . . . . . . . . . . . . 37227.3.2.1 On Becoming a Partner . . . . . . . . . . . . . . . . 37327.3.2.2 On Not Becoming a Partner . . . . . . . . . . . . . . 373

Ch. 28 Rights and Liabilities of Partners 37528.1 Nature of the Relationship Between Partners . . . . . . . . . . . . . 375

28.1.1 Duties of Partners . . . . . . . . . . . . . . . . . . . . . . . 37528.1.2 Rights of Partners as Owners . . . . . . . . . . . . . . . . . . 37628.1.3 Liability of Partnership and Partners for Particular Acts . . . . . . 377


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28.1.3.1 Contracts . . . . . . . . . . . . . . . . . . . . . 37728.1.3.2 Torts . . . . . . . . . . . . . . . . . . . . . . . 37828.1.3.3 Crimes . . . . . . . . . . . . . . . . . . . . . . 378

28.1.4 Nature of Partner’s Liability . . . . . . . . . . . . . . . . . . . 37828.1.5 Extent of Partner’s Liability . . . . . . . . . . . . . . . . . . . 379

28.2 Implied Authority of Partner and Limitations . . . . . . . . . . . . . . 38028.2.1 Authority of Majority Partners or Conduct of Business by Majority Deci-

sion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38028.2.2 Express Authority of Individual Partners . . . . . . . . . . . . . 38128.2.3 Implied or Customary Authority of Partners . . . . . . . . . . . . 38128.2.4 Limitations on Authority and Third Persons . . . . . . . . . . . . 38228.2.5 Transactions That Require Unanimous Decision . . . . . . . . . 383

Ch. 29 Dissolution of Partnership Firms 38529.1 Stages and Modes of Dissolution of Partnership . . . . . . . . . . . . 386

29.1.1 Stages in the Dissolution of the Firm . . . . . . . . . . . . . . . 38629.1.1.1 Dissolution of Firm and its Effect . . . . . . . . . . . . 38629.1.1.2 Dissolution of Partnership and its Reconstitution . . . . . . 387

29.1.2 Different Ways of Dissolution of Firm . . . . . . . . . . . . . . . 38729.1.2.1 Dissolution by Agreement of the Parties (§40) . . . . . . . 38729.1.2.2 Dissolution of Partnership at Will by Notice (§43) . . . . . 38829.1.2.3 Dissolution by the Operation of the Law . . . . . . . . . 388

29.1.2.3.1 Compulsory Dissolution (§41). . . . . . . . . . . . 38829.1.2.3.2 Partnership With a Duration and Particular Partnership (§42(a)

& (b)). . . . . . . . . . . . . . . . . . . . . 38829.1.2.3.3 Dissolution When the Firm Cannot be Reconstituted. . . . 388

29.1.2.4 Dissolution by Court (§44) . . . . . . . . . . . . . . 38929.2 Grounds of Dissolution by Court . . . . . . . . . . . . . . . . . . . . 389

29.2.1 Partner has Become of Unsound Mind . . . . . . . . . . . . . . 38929.2.2 Partner can no Longer Perform his Duties . . . . . . . . . . . . 38929.2.3 Partner Guilty of Conduct Harmful for the Business . . . . . . . . 38929.2.4 Partner Guilty of Breach of Managerial and Business Agreements . 38929.2.5 Partner has Transferred his Interest in Business or Subjected it to a

Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38929.2.6 Business can only be Run at a Loss . . . . . . . . . . . . . . . 38929.2.7 Any Other Equitable Ground . . . . . . . . . . . . . . . . . . 390

29.3 Rights and Obligations of Partners After Dissolution . . . . . . . . . . 39029.3.1 Rights of Partners After Dissolution . . . . . . . . . . . . . . . 390

29.3.1.1 General Authority for Purposes of Winding Up . . . . . . 39029.3.1.2 Right to Have Business Wound Up . . . . . . . . . . . 390


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29.3.1.3 Right to Reclaim Premium Already Paid . . . . . . . . . 39029.3.1.4 Right Where Partnership Terminated on Account of Fraud or Mis-

representation . . . . . . . . . . . . . . . . . . . 39029.3.1.5 Right to Prevent Use of Firm Name and Property . . . . . 391

29.3.2 Liabilities of Partners After Dissolution . . . . . . . . . . . . . . 39129.3.2.1 Liability for Acts Done After Dissolution . . . . . . . . . 39129.3.2.2 Liability for Personal Profits Earned after Dissolution . . . . 39129.3.2.3 Liability Where Debts Have to be Cleared . . . . . . . . 391

V COMPANY LAW 393

Ch. 30 The Functions of Company Law and its Sources 39530.1 The Objects and Divisions of Company Law . . . . . . . . . . . . . . 396

30.1.1 Objects of Company Law . . . . . . . . . . . . . . . . . . . . 39630.1.2 The Functions of Company Law . . . . . . . . . . . . . . . . . 39630.1.3 The Divisions of Company Law . . . . . . . . . . . . . . . . . 399

30.1.3.1 Objects, Functions and Sources of Company Law . . . . . 39930.1.3.2 Meaning of Company and its Types . . . . . . . . . . . 40030.1.3.3 Choosing the Business Form . . . . . . . . . . . . . 40030.1.3.4 The Corporate Form (Pre-incorporation, Incorporation & Com-

mencement of Business) . . . . . . . . . . . . . . . 40030.1.3.5 The Governing Documents of a Company (Memorandum and Ar-

ticles) . . . . . . . . . . . . . . . . . . . . . . . 40030.1.3.6 Financing: Share Capital and Loan Capital . . . . . . . . 40030.1.3.7 Transactions in Shares, Profits and Dividends . . . . . . . 40130.1.3.8 The Corporate Structure (Members, Directors, and Officers) . 40130.1.3.9 Corporate Books and Records . . . . . . . . . . . . . 40130.1.3.10 Compromises, Arrangements and Reconstruction . . . . . 40130.1.3.11 Winding Up . . . . . . . . . . . . . . . . . . . . 40130.1.3.12 The Regulating Body and its Procedures (SECP) . . . . . 401

30.2 Outline History of Company Law . . . . . . . . . . . . . . . . . . . 40230.2.1 From the 11th to the 16th Century: Earlier Forms . . . . . . . . . 40230.2.2 From the 16th Century Until 1825: Royal Charters . . . . . . . . 40230.2.3 1720: Fear of Companies . . . . . . . . . . . . . . . . . . . 40230.2.4 Unincorporated Associations . . . . . . . . . . . . . . . . . . 40330.2.5 The Formative Years—1825 to 1855: Repeal of the Bubble Act and

Creation of Limited Liability . . . . . . . . . . . . . . . . . . . 40330.2.6 The Joint Stock Companies Act, 1844 . . . . . . . . . . . . . . 40330.2.7 Later Developments—1856 to 1910 . . . . . . . . . . . . . . . 40430.2.8 The Companies Act, 1913 Till the Present . . . . . . . . . . . . 404


38 M L C

30.3 The Sources of Company Law . . . . . . . . . . . . . . . . . . . . 40430.4 The Future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 405

Ch. 31 The Meaning of Company and its Types 40731.1 Definition of Company . . . . . . . . . . . . . . . . . . . . . . . . 40731.2 Distinctive Features of Companies . . . . . . . . . . . . . . . . . . 40831.3 Company, “body corporate,” and “corporation” . . . . . . . . . . . . . 40931.4 Holding Companies and Their Subsidiaries . . . . . . . . . . . . . . 41031.5 Associated Undertakings and Associated Persons . . . . . . . . . . . 41031.6 Foreign Companies . . . . . . . . . . . . . . . . . . . . . . . . . . 41131.7 Illegal Associations and Obligatory Registration . . . . . . . . . . . . 411

31.7.1 Associations that are not illegal . . . . . . . . . . . . . . . . . 41231.7.2 Consequences for the illegal association . . . . . . . . . . . . . 41231.7.3 Unregistered Companies . . . . . . . . . . . . . . . . . . . . 413

31.8 Companies and Other Forms of Business Organisation . . . . . . . . 41431.9 Types of Companies in General . . . . . . . . . . . . . . . . . . . . 41531.10 Companies Registrable Under the Ordinance . . . . . . . . . . . . . 41531.11 Applicability of Ordinance to Statutory Companies . . . . . . . . . . . 41631.12 Government Companies . . . . . . . . . . . . . . . . . . . . . . . 41731.13 Non-Banking Finance Companies . . . . . . . . . . . . . . . . . . . 417

31.13.1 Forex Companies . . . . . . . . . . . . . . . . . . . . . . . 41831.14 Company Law and the Jurisdiction of the Courts . . . . . . . . . . . . 419

31.14.1 Power of Commission to Initiate Action in Court Against Management 419

Ch. 32 Choosing the Business Form 42132.1 The Advantages and Disadvantages of Incorporation . . . . . . . . . 422

32.1.1 Advantages . . . . . . . . . . . . . . . . . . . . . . . . . . 42232.1.2 Disadvantages . . . . . . . . . . . . . . . . . . . . . . . . 423

32.2 Brief Description of Registered Companies . . . . . . . . . . . . . . 42432.2.1 The Concept of Limited Liability . . . . . . . . . . . . . . . . . 424

32.2.1.1 The meaning of limited liability . . . . . . . . . . . . . 42432.2.1.2 Limited liability and contributories . . . . . . . . . . . . 425

32.2.2 Company limited by shares . . . . . . . . . . . . . . . . . . . 42532.2.3 Company limited by guarantee . . . . . . . . . . . . . . . . . 42632.2.4 Unlimited company . . . . . . . . . . . . . . . . . . . . . . 428

32.3 Conversion of partnerships into companies . . . . . . . . . . . . . . 42832.4 Private Companies and Their Privileges . . . . . . . . . . . . . . . . 428

32.4.1 Privileges and exemptions for private companies . . . . . . . . . 42932.4.2 Handicaps for a private company . . . . . . . . . . . . . . . . 430

32.5 Distinction Between Public and Private Companies . . . . . . . . . . 43032.6 The Single Member Company . . . . . . . . . . . . . . . . . . . . . 432


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Ch. 33 The Corporate Form 43533.1 Formation of a Company . . . . . . . . . . . . . . . . . . . . . . . 436

33.1.1 Stages in the Formation of a Company . . . . . . . . . . . . . . 43633.2 Pre-incorporation Contracts, Provisional Contracts and Promoters . . . 437

33.2.1 Promoters . . . . . . . . . . . . . . . . . . . . . . . . . . 43733.2.2 Pre-incorporation contracts . . . . . . . . . . . . . . . . . . . 438

33.2.2.1 A company cannot enter into contracts before its existence . 43833.2.2.2 A company intending to benefit from a preliminary contract must

make a new contract—it cannot ratify the earlier contract . . 43933.2.2.3 A promoter stands in a fiduciary relationship towards his com-

pany . . . . . . . . . . . . . . . . . . . . . . . 44033.2.2.4 A promoter cannot make a secret profit . . . . . . . . . 440

33.2.3 Provisional contracts . . . . . . . . . . . . . . . . . . . . . . 44133.3 Incorporation Procedure . . . . . . . . . . . . . . . . . . . . . . . 44133.4 Registration and the Role of the Registrar . . . . . . . . . . . . . . . 442

33.4.1 Registration of memorandum and articles under § 30 . . . . . . . 44233.4.2 Registration and its effect . . . . . . . . . . . . . . . . . . . . 44333.4.3 Certificate of Incorporation: conclusive evidence that the objects of the

company are lawful . . . . . . . . . . . . . . . . . . . . . . 44333.5 Commencement of Business . . . . . . . . . . . . . . . . . . . . . 44533.6 Steps to be Followed After Registration . . . . . . . . . . . . . . . . 44533.7 Conversion of a Private Company into a Public Company and Vice Versa 44833.8 The Effect of the Separate Legal Personality of the Company . . . . . 449

33.8.1 A company is distinct from its members . . . . . . . . . . . . . 44933.8.2 A company may make a valid contract with one of its members . . . 45033.8.3 The property of the company belongs to it and not to its members . 45033.8.4 A company’s business is not the business of the member . . . . . 451

33.9 Piercing the Corporate Veil or Disregarding the Corporate Form . . . . 45133.9.1 When the company becomes an enemy company in times of war . . 45233.9.2 When the company is acting as an agency of its members . . . . . 45233.9.3 When the company is used to perpetrate a fraud . . . . . . . . . 45333.9.4 When the company is used to evade contractual obligations . . . . 45333.9.5 When the statutory law requires that the veil be lifted . . . . . . . 453

Ch. 34 Memorandum, Articles, Prospectus and Associated Doctrines 45534.1 General Constitutional Features . . . . . . . . . . . . . . . . . . . . 456

34.1.1 Two Constitutional Documents . . . . . . . . . . . . . . . . . 45634.1.2 The Death of the Objects Clause in the Memorandum . . . . . . . 457

34.2 Memorandum of Association . . . . . . . . . . . . . . . . . . . . . 45734.2.1 Contents of the Memorandum: Six Clauses . . . . . . . . . . . 457


40 M L C

34.2.2 Form of the Memorandum . . . . . . . . . . . . . . . . . . . 45834.2.3 Name . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45834.2.4 Registered office . . . . . . . . . . . . . . . . . . . . . . . 45934.2.5 Objects and Powers in the Memorandum . . . . . . . . . . . . . 460

34.2.5.1 The meaning of objects and powers . . . . . . . . . . . 46034.2.6 Alteration of the Clauses of the Memorandum . . . . . . . . . . 461

34.2.6.1 Alteration of the name clause . . . . . . . . . . . . . 46134.2.6.2 Change of registered office and the objects clauses . . . . 46234.2.6.3 Change in the liability clause . . . . . . . . . . . . . 46334.2.6.4 Alteration of the capital clause . . . . . . . . . . . . . 46334.2.6.5 Application for confirmation of alteration of memorandum under

section 21 . . . . . . . . . . . . . . . . . . . . . 46434.3 Articles of Association . . . . . . . . . . . . . . . . . . . . . . . . 464

34.3.1 Form of Articles of Association . . . . . . . . . . . . . . . . . 46534.3.2 Content of Articles of Association . . . . . . . . . . . . . . . . 46634.3.3 Alteration of Articles of Association . . . . . . . . . . . . . . . 467

34.3.3.1 The alteration must not be in contravention of the provisions ofthe Companies Ordinance . . . . . . . . . . . . . . 467

34.3.3.2 The alteration must not be in contravention of the memorandumof association . . . . . . . . . . . . . . . . . . . . 467

34.3.3.3 The alteration must not attempt to legalise something that is ille-gal . . . . . . . . . . . . . . . . . . . . . . . . 467

34.3.3.4 The alteration must not operate against the substantive rights ofminority shareholders . . . . . . . . . . . . . . . . 467

34.3.3.5 The alteration must not increase the liability of the existing share-holders . . . . . . . . . . . . . . . . . . . . . . 468

34.3.3.6 The alteration must not amount to a breach of contract with anoutsider . . . . . . . . . . . . . . . . . . . . . . 468

34.3.3.7 The alteration must be made in good faith and for the good of thecompany . . . . . . . . . . . . . . . . . . . . . 468

34.3.3.8 The alteration must be approved by special resolution . . . 46834.4 Memorandum and Articles of Association as a Contract . . . . . . . . 468

34.4.1 Binding on members in relation to the company . . . . . . . . . . 46934.4.2 Binding on company in relation to the members . . . . . . . . . . 46934.4.3 Binding on members inter se (in their relation to one another) . . . 46934.4.4 Not binding on the company in relation to outsiders . . . . . . . . 470

34.5 Company Contracts and Associated Doctrines . . . . . . . . . . . . 47034.5.1 Preliminary: Conditions or hurdles pertaining to contracts concluded by

a company . . . . . . . . . . . . . . . . . . . . . . . . . . 47034.5.2 Doctrine of Ultra Vires . . . . . . . . . . . . . . . . . . . . . 471


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34.5.3 Constructive Notice of Memorandum and Articles . . . . . . . . . 47334.5.4 Doctrine of Indoor Management . . . . . . . . . . . . . . . . . 473

34.6 Interpretation of the Memorandum and Articles . . . . . . . . . . . . 47434.7 Prospectus and Statement in Lieu of a Prospectus . . . . . . . . . . 474

34.7.1 Meaning of Prospectus and its Objects . . . . . . . . . . . . . . 47434.7.2 Contents of the Prospectus . . . . . . . . . . . . . . . . . . . 47534.7.3 Legal Rules for Issuing Prospectus . . . . . . . . . . . . . . . 475

34.7.3.1 Time and date of Issue . . . . . . . . . . . . . . . . 47634.7.3.2 Requirements for the statement of an expert . . . . . . . 47634.7.3.3 Approval and registration of the prospectus . . . . . . . . 47634.7.3.4 The terms of the contracts mentioned not to be varied . . . 477

34.7.4 Liability for Untrue Statements in the Prospectus . . . . . . . . . 47734.7.4.1 Civil liability . . . . . . . . . . . . . . . . . . . . 47734.7.4.2 Criminal liability . . . . . . . . . . . . . . . . . . . 478

34.7.5 Statement in Lieu of a Prospectus . . . . . . . . . . . . . . . . 47834.7.6 Prospectus by Implication . . . . . . . . . . . . . . . . . . . 47934.7.7 Making a Public Offering Abroad . . . . . . . . . . . . . . . . 47934.7.8 Prospectus of a Foreign Company . . . . . . . . . . . . . . . . 479

Ch. 35 Financing the Company: Share Capital and Loan Capital 48135.1 The Meaning and Forms of Capital . . . . . . . . . . . . . . . . . . 482

35.1.1 Share Capital . . . . . . . . . . . . . . . . . . . . . . . . . 48235.1.1.1 Nominal Capital or capital the company is authorised to is-

sue—authorised capital . . . . . . . . . . . . . . . . 48235.1.1.2 Issued Capital . . . . . . . . . . . . . . . . . . . 48335.1.1.3 Subscribed Capital and Minimum Subscription . . . . . . 48335.1.1.4 Called-up capital, paid-up capital and unpaid capital . . . . 48435.1.1.5 Equity share capital . . . . . . . . . . . . . . . . . 48535.1.1.6 Kinds of shares in general . . . . . . . . . . . . . . 48535.1.1.7 Kinds of shares permitted by the Ordinance . . . . . . . 486

35.1.2 Redeemable capital . . . . . . . . . . . . . . . . . . . . . . 48735.1.3 Loan Capital . . . . . . . . . . . . . . . . . . . . . . . . . 48835.1.4 The Meaning of Security and Equity Security . . . . . . . . . . . 488

35.2 Borrowing Powers and Charges . . . . . . . . . . . . . . . . . . . . 48935.2.1 Borrowing Powers of Companies . . . . . . . . . . . . . . . . 489

35.2.1.1 Borrowing powers and restrictions placed on them . . . . . 48935.2.1.2 Types of borrowing . . . . . . . . . . . . . . . . . 489

35.2.2 Debenture and Types of Debentures . . . . . . . . . . . . . . . 49035.2.2.1 The meaning of debenture . . . . . . . . . . . . . . 49035.2.2.2 General features of debentures . . . . . . . . . . . . 490


42 M L C

35.2.2.3 Kinds of debentures . . . . . . . . . . . . . . . . . 49135.2.3 Difference Between Share and Debenture . . . . . . . . . . . . 49135.2.4 Legal Provisions Pertaining to Debentures . . . . . . . . . . . . 492

35.2.4.1 Issue of debentures . . . . . . . . . . . . . . . . . 49235.2.4.2 Re-issue of redeemed debentures . . . . . . . . . . . 49235.2.4.3 Debentures do not carry voting rights . . . . . . . . . . 49335.2.4.4 Debentures with pari passu provision . . . . . . . . . . 49335.2.4.5 Allotment of debentures . . . . . . . . . . . . . . . 49335.2.4.6 Transfer of debentures . . . . . . . . . . . . . . . . 49335.2.4.7 Register of debenture holders . . . . . . . . . . . . . 49335.2.4.8 The trust deed . . . . . . . . . . . . . . . . . . . 493

35.2.5 Remedies Available to Debenture Holders . . . . . . . . . . . . 49435.2.5.1 Unsecured debenture holders . . . . . . . . . . . . . 49435.2.5.2 Secured debenture holders . . . . . . . . . . . . . . 494

35.2.6 Underwriting and Underwriting Agreement . . . . . . . . . . . . 49535.2.7 Fixed and Floating Charges and Registration of Charges . . . . . 496

35.2.7.1 Types of charges . . . . . . . . . . . . . . . . . . 49635.2.7.1.1 Creation of the charge. . . . . . . . . . . . . . 49735.2.7.1.2 Fixed charge or specific charge. . . . . . . . . . . 49735.2.7.1.3 Floating charge. . . . . . . . . . . . . . . . . 497

35.2.7.2 Priorities among various charges . . . . . . . . . . . . 49835.2.7.3 Distinguishing the fixed charge from the floating charge . . . 49935.2.7.4 Registration of mortgages and charges . . . . . . . . . 499

35.2.8 Acceptance of Deposits . . . . . . . . . . . . . . . . . . . . 49935.3 The Raising, Employment and Maintenance of Capital . . . . . . . . . 500

35.3.1 Raising capital . . . . . . . . . . . . . . . . . . . . . . . . 50035.3.2 Employment of capital . . . . . . . . . . . . . . . . . . . . . 50135.3.3 Maintenance of capital . . . . . . . . . . . . . . . . . . . . . 502

35.4 Alteration and Reduction of Share Capital . . . . . . . . . . . . . . . 50235.4.0.1 Alteration proper and mandatory alteration (§ 92) . . . . . 50235.4.0.2 Reduction of capital . . . . . . . . . . . . . . . . . 503

35.5 Buying Back By Company of its Own Shares . . . . . . . . . . . . . 504

Ch. 36 Transactions in Shares, Profits and Dividends 50736.1 Shares and Their Transfer . . . . . . . . . . . . . . . . . . . . . . 50836.2 The Legal Status of a Share . . . . . . . . . . . . . . . . . . . . . 50836.3 Allotment of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . 510

36.3.1 Meaning of allotment . . . . . . . . . . . . . . . . . . . . . . 51036.3.2 Rules governing allotment . . . . . . . . . . . . . . . . . . . 511

36.3.2.1 Rules governing offer and acceptance . . . . . . . . . . 511


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36.3.2.2 Statutory restrictions on allotment . . . . . . . . . . . 51236.3.3 Allotment procedure and return of allotment . . . . . . . . . . . 51336.3.4 Irregular allotment and its effect . . . . . . . . . . . . . . . . . 513

36.4 Shares at a Premium and at a Discount . . . . . . . . . . . . . . . . 51436.4.1 Shares at a premium . . . . . . . . . . . . . . . . . . . . . . 51436.4.2 Shares at a discount . . . . . . . . . . . . . . . . . . . . . . 514

36.5 Share Certificates and Share Warrants . . . . . . . . . . . . . . . . 51536.5.1 Share certificate . . . . . . . . . . . . . . . . . . . . . . . . 51536.5.2 Share warrants . . . . . . . . . . . . . . . . . . . . . . . . 516

36.6 Transfer and Transmission of Shares . . . . . . . . . . . . . . . . . 51636.6.1 Transfer of shares . . . . . . . . . . . . . . . . . . . . . . . 51636.6.2 Transmission of shares . . . . . . . . . . . . . . . . . . . . . 517

36.7 Procedure for Transfer of Shares . . . . . . . . . . . . . . . . . . . 51736.8 Blank Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51836.9 Bonus Shares, Right Shares and Lien on Shares . . . . . . . . . . . 518

36.9.1 Bonus shares . . . . . . . . . . . . . . . . . . . . . . . . . 51836.9.2 Right shares . . . . . . . . . . . . . . . . . . . . . . . . . 519

36.10 The Meaning of Calls, Forfeiture and Surrender of Shares . . . . . . . 51936.11 Insider Trading and Market Manipulation . . . . . . . . . . . . . . . 52036.12 Divisible Profits Under the Ordinance . . . . . . . . . . . . . . . . . 52136.13 Dividends: Statutory Requirements . . . . . . . . . . . . . . . . . . 521

36.13.1 Dividends are to be paid out of profits alone . . . . . . . . . . . 52136.13.2 Dividends are to be paid of profits of the current year or previous years 52236.13.3 Dividends are to be paid in cash alone . . . . . . . . . . . . . . 52236.13.4 Dividends are to be paid to the holder of the shares . . . . . . . . 52236.13.5 Dividends are to be paid on the nominal value of the shares . . . . 52236.13.6 Dividends are to be paid within fort-five days of their declaration . . 52236.13.7 Before payment of dividends a part of the profits may be transferred to

the reserve fund . . . . . . . . . . . . . . . . . . . . . . . . 52336.13.8 Dividends can be declared only by a resolution passed by members in

a general meeting . . . . . . . . . . . . . . . . . . . . . . . 52336.13.9 Directors may declare an interim dividend . . . . . . . . . . . . 52336.13.10 Dividend once declared becomes final and amounts to a debt to be paid

to the shareholders . . . . . . . . . . . . . . . . . . . . . . 52336.14 Unclaimed Dividends . . . . . . . . . . . . . . . . . . . . . . . . . 524

Ch. 37 Corporate Structure 52537.1 The Major Players in the Corporate Structure . . . . . . . . . . . . . 527

37.1.1 The Players and Their Interests . . . . . . . . . . . . . . . . . 52737.1.2 The Major Players in Pakistan . . . . . . . . . . . . . . . . . . 527


44 M L C

37.1.3 The Function of Shareholders . . . . . . . . . . . . . . . . . . 52837.2 Member of a Company . . . . . . . . . . . . . . . . . . . . . . . . 528

37.2.1 Where a person is a member, but not a shareholder . . . . . . . . 52937.2.2 Where a person is a shareholder, but not a member . . . . . . . . 52937.2.3 Legal capacity of a member . . . . . . . . . . . . . . . . . . 53037.2.4 Acquiring and relinquishing membership . . . . . . . . . . . . . 53037.2.5 Minimum and maximum number of members . . . . . . . . . . . 53137.2.6 Register of Members and Index . . . . . . . . . . . . . . . . . 531

37.2.6.1 Register of members . . . . . . . . . . . . . . . . . 53137.2.6.2 Index of members . . . . . . . . . . . . . . . . . . 53137.2.6.3 Rectification of register . . . . . . . . . . . . . . . . 532

37.2.7 Return of Annual List of Members . . . . . . . . . . . . . . . . 53237.2.8 Rights and Liabilities of a Member . . . . . . . . . . . . . . . . 532

37.2.8.1 Rights of members . . . . . . . . . . . . . . . . . 53237.2.8.2 Liabilities of members . . . . . . . . . . . . . . . . 533

37.2.9 Voting Rights and Variation of shareholder rights . . . . . . . . . 53437.2.9.1 Voting rights . . . . . . . . . . . . . . . . . . . . 53437.2.9.2 Variation of shareholder’s rights . . . . . . . . . . . . 534

37.3 The Directors: Appointment, Duties and Liabilities . . . . . . . . . . . 53537.3.1 The Director and His Legal Position . . . . . . . . . . . . . . . 535

37.3.1.1 Meaning of director . . . . . . . . . . . . . . . . . 53537.3.1.2 Legal status of director . . . . . . . . . . . . . . . . 53537.3.1.3 Number of directors . . . . . . . . . . . . . . . . . 53637.3.1.4 Types of directors . . . . . . . . . . . . . . . . . . 537

37.3.2 Qualifications and Appointment of Directors . . . . . . . . . . . 53837.3.2.1 Qualifications and disqualifications of directors . . . . . . 53837.3.2.2 Consent to act as director . . . . . . . . . . . . . . . 539

37.3.3 Vacation of Office and Removal of Directors . . . . . . . . . . . 53937.3.3.1 Term of office of directors . . . . . . . . . . . . . . . 53937.3.3.2 Retiring directors and elections . . . . . . . . . . . . . 540

37.3.4 Election of New Directors Under the Ordinance . . . . . . . . . . 54037.3.4.1 Steps prior to election . . . . . . . . . . . . . . . . 54037.3.4.2 Cumulative voting and minority directors . . . . . . . . . 54137.3.4.3 Example of the method of cumulative voting . . . . . . . 541

37.3.5 Powers of Directors . . . . . . . . . . . . . . . . . . . . . . 54237.3.5.1 General Powers of the BOD . . . . . . . . . . . . . . 54237.3.5.2 Specific Powers of the BOD Exercised Through Special Resolu-

tion . . . . . . . . . . . . . . . . . . . . . . . . 54337.3.5.3 Powers Delegated to Individual Directors . . . . . . . . . 54437.3.5.4 Restrictions on the Powers of Directors . . . . . . . . . 544


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37.3.5.5 Proceedings of Directors or Meetings of the BOD . . . . . 54437.3.6 Duties and Liabilities of Directors . . . . . . . . . . . . . . . . 545

37.3.6.1 Duties of Directors . . . . . . . . . . . . . . . . . . 54537.3.6.2 Liabilities of Directors . . . . . . . . . . . . . . . . 546

37.4 Professional Managers and Officials . . . . . . . . . . . . . . . . . 54737.4.1 Managing Director or Chief Executive Officer . . . . . . . . . . . 547

37.4.1.1 Appointment of Managing Director or Chief Executive Officer 54737.4.1.2 Powers and Duties of the Chief Executive Officer . . . . . 548

37.4.2 The Company Secretary . . . . . . . . . . . . . . . . . . . . 54837.4.3 Remuneration of Managers . . . . . . . . . . . . . . . . . . . 548

37.5 Company Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . 54937.5.1 Types of Meetings in a Company . . . . . . . . . . . . . . . . 549

37.5.1.1 The Statutory Meeting and the Statutory Report . . . . . . 55037.5.1.2 The Annual General Meeting (AGM) . . . . . . . . . . 55037.5.1.3 The Extraordinary General Meeting . . . . . . . . . . . 551

37.5.2 Meetings of the Board of Directors and Other Meetings . . . . . . 55237.5.2.1 Meetings of the BoD . . . . . . . . . . . . . . . . . 55237.5.2.2 Meetings of creditors . . . . . . . . . . . . . . . . . 55237.5.2.3 Meetings of debenture-holders . . . . . . . . . . . . . 553

37.5.3 Legal Validity of Meetings . . . . . . . . . . . . . . . . . . . 55337.5.4 Voting at Meetings . . . . . . . . . . . . . . . . . . . . . . . 553

37.5.4.1 Voting by show of hands . . . . . . . . . . . . . . . 55337.5.4.2 Voting by poll . . . . . . . . . . . . . . . . . . . . 55437.5.4.3 Proxies . . . . . . . . . . . . . . . . . . . . . . 554

37.5.5 Resolutions in Meetings and Their Types . . . . . . . . . . . . . 55437.5.5.1 Special resolution . . . . . . . . . . . . . . . . . . 55537.5.5.2 Ordinary resolution . . . . . . . . . . . . . . . . . 55537.5.5.3 General provisions as to resolutions . . . . . . . . . . . 555

37.5.6 Minutes of Meetings . . . . . . . . . . . . . . . . . . . . . . 55637.6 Protection of Minority Shareholders . . . . . . . . . . . . . . . . . . 556

37.6.1 Foss v. Harbottle: Majority Rule . . . . . . . . . . . . . . . . . 55637.6.2 Protection of minority under the Ordinance . . . . . . . . . . . . 557

37.7 Prevention of Mismanagement and Oppression . . . . . . . . . . . . 55737.7.1 Instances of oppression . . . . . . . . . . . . . . . . . . . . 55837.7.2 Instances of mismanagement . . . . . . . . . . . . . . . . . . 55837.7.3 Remedies for preventing oppression and mismanagement . . . . . 559

Ch. 38 Corporate Books and Records 56138.1 Books of Account . . . . . . . . . . . . . . . . . . . . . . . . . . . 561

38.1.1 Meaning of Books of Account . . . . . . . . . . . . . . . . . . 561


46 M L C

38.1.2 Legal Requirements for Books of Account . . . . . . . . . . . . 56238.1.3 Annual accounts of the company . . . . . . . . . . . . . . . . 563

38.2 Auditors: Qualifications, Appointment and Removal . . . . . . . . . . 56338.2.1 Necessity of Audit . . . . . . . . . . . . . . . . . . . . . . . 56338.2.2 Qualification and Disqualifications of Auditors . . . . . . . . . . . 56438.2.3 Appointment, Remuneration and Removal of Auditors . . . . . . . 565

38.2.3.1 First auditors . . . . . . . . . . . . . . . . . . . . 56538.2.3.2 Subsequent auditors . . . . . . . . . . . . . . . . . 56538.2.3.3 Remuneration . . . . . . . . . . . . . . . . . . . 56538.2.3.4 Removal . . . . . . . . . . . . . . . . . . . . . . 566

38.3 Auditors: Rights, Duties and Liabilities . . . . . . . . . . . . . . . . 56638.3.1 Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . 566

38.3.1.1 Right to access books . . . . . . . . . . . . . . . . 56638.3.1.2 Right to call for information and explanations . . . . . . . 56638.3.1.3 Right to attend general meetings of the company and to receive

notices . . . . . . . . . . . . . . . . . . . . . . 56638.3.1.4 Right to visit branches of the company . . . . . . . . . . 56638.3.1.5 Right to recover remuneration . . . . . . . . . . . . . 56638.3.1.6 Right to make a representation on retirement . . . . . . . 567

38.3.2 Duties of Auditors . . . . . . . . . . . . . . . . . . . . . . . 56738.4 Special Audit and Cost Audit . . . . . . . . . . . . . . . . . . . . . 568

Ch. 39 Compromises, Arrangements and Reconstruction 56939.1 Distinction Between Compromises, Arrangements, Reconstruction and

Amalgamation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56939.2 Procedure for Effecting Organisational Changes . . . . . . . . . . . . 571

Ch. 40 Winding Up 57340.1 Distinction Between Winding Up and Dissolution . . . . . . . . . . . 57340.2 Modes of Winding Up . . . . . . . . . . . . . . . . . . . . . . . . . 57440.3 Compulsory Winding Up by the Court . . . . . . . . . . . . . . . . . 574

40.3.1 Reasons for compulsory winding up . . . . . . . . . . . . . . . 57540.3.2 Persons entitled to apply for compulsory winding up . . . . . . . . 57640.3.3 Provisions Applicable to Compulsory Winding Up . . . . . . . . . 577

40.3.3.1 Commencement of winding up . . . . . . . . . . . . . 57740.3.3.2 Powers of court on petition . . . . . . . . . . . . . . 57740.3.3.3 Consequences of winding up order . . . . . . . . . . . 57840.3.3.4 Procedure for winding up of company and filing of petition before

respective High Court . . . . . . . . . . . . . . . . 57840.3.3.5 Appointment of official liquidator . . . . . . . . . . . . 579

40.4 Liquidators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 579


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40.5 Voluntary Winding Up . . . . . . . . . . . . . . . . . . . . . . . . . 58040.5.1 Kinds of voluntary winding up . . . . . . . . . . . . . . . . . . 58040.5.2 Members’ voluntary winding up . . . . . . . . . . . . . . . . . 580

40.5.2.1 Reasons for members’ voluntary winding up . . . . . . . 58040.5.2.2 Consequences of members’ voluntary winding up . . . . . 58040.5.2.3 Procedure for members’ voluntary winding up . . . . . . . 581

40.5.3 Creditors’ voluntary winding up . . . . . . . . . . . . . . . . . 58240.5.3.1 Procedure for creditors’ voluntary winding up . . . . . . . 582

40.6 Contributory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58340.6.1 Meaning of contributory and the nature of his liability . . . . . . . 58340.6.2 Liability of directors whose liability is unlimited . . . . . . . . . . 58440.6.3 Liability of past and present members: lists of contributories . . . . 584

40.7 Order of Payment of Liabilities . . . . . . . . . . . . . . . . . . . . 58540.8 Defunct Companies . . . . . . . . . . . . . . . . . . . . . . . . . . 586

Ch. 41 Securities Regulation 58741.1 The Origin of Securities Law . . . . . . . . . . . . . . . . . . . . . 58741.2 The Securities and Exchange Commission of Pakistan (SECP) . . . . 588

41.2.1 The Preliminary Part of the SECP, 1997 . . . . . . . . . . . . . 58941.2.2 The Commission . . . . . . . . . . . . . . . . . . . . . . . 59041.2.3 The Board . . . . . . . . . . . . . . . . . . . . . . . . . . 59241.2.4 Powers and Functions of the Commission and the Board . . . . . . 592

41.2.4.1 Functions and powers of the Commission . . . . . . . . 59241.2.4.2 Cases in which approval of the Commission is required . . . 59441.2.4.3 Functions and powers of the Board . . . . . . . . . . . 59441.2.4.4 Adjudication of Rights by the Commission . . . . . . . . 59541.2.4.5 Enforcement and Investigation . . . . . . . . . . . . . 59541.2.4.6 Cognizance and Prosecution of Offences . . . . . . . . 59541.2.4.7 The Schedule . . . . . . . . . . . . . . . . . . . 596

41.3 The Meaning of Security and Exchange . . . . . . . . . . . . . . . . 59741.4 The Major Areas to be Regulated . . . . . . . . . . . . . . . . . . . 598

41.4.1 Company Affairs . . . . . . . . . . . . . . . . . . . . . . . . 59841.4.2 Stock Exchanges . . . . . . . . . . . . . . . . . . . . . . . 59841.4.3 Insider Trading . . . . . . . . . . . . . . . . . . . . . . . . 59941.4.4 Securities, Credit and Fraudulent Acts . . . . . . . . . . . . . . 599

Index 601
