Law of Contracts

During its course of life a business uses or becomes subject to a large number of laws. To name only a few major ones, there are laws governing contracts, sale of goods and negotiable instruments; laws relating to taxation such as laws of customs and excise, income tax, sales tax etc.
Then there are laws covering formation and management of companies, law of partnership and trusts, a body of labour laws and several others that may apply to a business during its career.
In most cases, the owner or the manager of a business, whether small or large, would hardly have the knowledge or an understanding of a particular law with which his business may be confronted on a particular occasion. He is entirely dependent on the advice of his lawyer.
The owner/manager is seldom in a position to evaluate its merit, even in a very general way. The lawyer will charge his fee but would take no responsibility for the outcome of the case. The owner or the manager would not even know why he lost his case except what the lawyer may choose to tell him.
Sometimes a business executive may unknowingly take an action, or omit to take one, that lands him in legal trouble. If he had a fair idea of the law applicable to the issue, he would not, most probably, have landed himself in the mess in the first place. He would have avoided a lot of expense and hassle.
The present series of articles have been designed with the object of making the business community familiar with the main provisions and features of major laws relevant to most businesses.
The purpose is to enable an average businessman to make a knowledgeable assessment of the worth of the lawyer he is considering to engage. If the former has a working knowledge of the relevant law he will be in a much better position to evaluate the worth of the lawyer, which will come out during the discussion of the case with the lawyer.
The business executive will thus be better equipped to make an appropriate choice of a lawyer and to monitor the progress of the case more critically and meaningfully.
While writing these articles an attempt has been made to explain the essentials of selected laws in brief and simple terms. The idea is to make the reader understand the complexities and subtleties of laws rather to intimidate him with high-sounding nonsense.
LAW OF CONTRACTS: We begin our discussion with the law of contracts as this law is, perhaps, the most commonly used law in the business world. It is also, arguably, the most sophisticated of the corporate laws. Rooted in antiquity it has taken centuries to evolve to its present stage.
It is still evolving in its finer points with fresh interpretations of its more subtle aspects by the superior judiciary of the world.
In Pakistan the law of contracts is embodied in the Contract Act of 1872. At one time the laws relating to sale of goods and negotiable instruments were also part of the Contract Act.
These were, however, separated form the Contract Act in the 1930s and were made into independent laws called the Sale of Goods Act and the Negotiable Instruments Act.
The first question that we need to address ourselves to is: What is an agreement?
Simply stated, a legal contract is an agreement between one or more parties, based on consideration for each party, and is enforceable by law.
But then, what is an agreement?
AN AGREEMENT HAS TWO ESSENTIAL COMPONENTS:
-- There should be a proposal (also called offer) from one party to another; and,
-- There should be an acceptance (also called consent) of that proposal by the other party
-- As soon as the second party accepts the proposal, an agreement comes into existence.
The third question is: What is consideration?
Consideration is the benefit that the parties to the agreement agree to provide to one another. For example:
A makes an offer to B to buy B's car for a sum of Rs 6 lakh. B accepts A's offer. For A the consideration is the ownership of B's car. For B the consideration is the receipt of the sum of Rs 6 lac. Consideration can also be viewed as the respective prices the parties pay to each other for the benefit to be received by each other.
Finally, what is meant by "enforceable by law"?
Only such agreements are enforceable by law as create valid legal relationship between the parties. In other words, for an agreement to be enforceable by law it has to create legal rights and obligations of the parties towards one another. Any agreement that does not create such rights and obligations is not an agreement enforceable by law.
For example: A says to B, "come and have dinner with me tonight". B accepts A's invitation, but fails to turn up at A's dinner. A can not sue B for breach.
Of the contract because no contract existed between them, as the agreement did not create any legal relationship between the parties, leading to legal obligations and rights towards each other. It was an agreement of a social nature; hence, not enforceable by law.