1. DEFINITION OF CONTRACT according to section 2(H) of lawful object, and are not hereby expressly declared to be void.
the contract act “an agreement enforceable by law is a contract.” “where necessary, the agreements must satisfy the requirements
From the definition it is clear that in order to make a contract of law regarding writing, attestation or registration. A valid
there must be 1. an agreemnt, 2. The agreement should be contract is one that meets all the legal requirements for binding
enforceable by law. In order to be enforceable ;by law the contract. A valid contract is an agreement that is binding and
agreement must create legal obligations between the parties. enforceable, in order to be binding and enforceable an agreement
Contract = agreement + legal obligations must posses the essential elements of a valid contract which are
ESSENTIALS OF A VALID CONTRACT According to as under:  agreement – offer & acceptance  Legal
section 2(h) “an agreement enforceable by law” is a contract”. relationship  Lawful consideration  capacity of the parties
 It means an agreement is regarded as a contract when it is  Free consent of the parties  Lawful object  writing and
enforceable by law. In other words, an agreement that the law registration  certainty  possibility of performance  Not
will enforce is a contract. The conditions of enforceability are expressly declared void. Obligation of parties IN valid contract
states in section 10. According to section 10, all agreements are all the parties to the contract are legal responsible for the
contracts if they are made by the free consent of parties, performance of a contract. If one of the parties breaks the
competent to contract. For a lawful consideration, and with a contract, the other party has a right to take action against the
lawful object, and are not hereby expressly declared to be void.” guilty part, the contract can be enforced through the court also.
Where necessary, the agreements must satisfy the requirements 2. VOIDABLE CONTRACT: An agreement which is
of law regarding writing, attestation or registration. An enforceable by law at the option of one or more of the parties
agreement becomes enforceable by law when it fulfills essential thereto, but not at the option of the other or others, is a voidable
conditions. These conditions may be called essentials of a valid contract. A voitable contact is one in which one or more of the
contract which are briefly discussed hereunder. Agreement: For parties have legal rights to cancel their obligations under the
an agreement, there must be a lawful offer, by one party and contract. they are enforceable against both the parties unless a
lawful acceptance of that offer from the other party. The term party with the power to break the contract has exercised that
lawful means that the offer and acceptance must satisfy the power. A voibalbe contract I san agreement which may be
requirements of contract act. Legal relationship: the parties to binding and enforceable but due to some reasons regarding its
an agreement must create legal relationship. It arises when execution it may be rejected by the party entitled to do so.
parties know that if one of them does not fulfill his part of Circumstances under which a contract becomes voidable:
promise. He shall be liable for the failure of a contract, The following are the circumstances under which a contract
agreements of a social or domestic nature do not create legal becomes voidable: 1. a contract becomes voidable when the
relations. Lawful consideration: Consideration is “ something consent of one of the parties to the contract is obtained by
in return’ it means something which is of some value in the eye coercion, undue influence, misrepresentation or fraud. 2. when
of law. It may be some benefit to the other party. Consideration a contract contains reciprocal promises, and one party to the
has been defined as the price paid by one party for the promise contract prevents the other from performing his promise, then
of the other. Capacity of Parties: The parties to an agreement the contract becomes voidable at the option of the party so
must be competent to contract, otherwise it cannot be enforce by prevented. 3. when a party to the contract promises to do a
law. If one of the a parties to the agreement suffers from certain thing at and before specified time, but fails to do it, then
minority, lunacy, idiocy, drunkenness etc. the agreement is not the contract becomes voidable at the option of the promise, if the
enforceable at law, except, in some cases, in case of necessaries intention of the parties was that time should be of the essence of
supplied to a minor or lunatic, the supplier of goods is entitled to the contract. it may however be explained that the question as to
be reimbursed from their estate. Free consent means the consent whether time was the essence of the contract is a question of
of the party should be obtained without fear undue influence, fact. Obligations of the parties: It ia a valid contract until it is
misrepresentation, fraud, etc. Lawful object: It is also necessary avoided by the party having the right to avoide it. Such a
that agreement should be made for a lawful object. Writing and contract can be rescinded by the aggrieved party, i.e. a party
registration: a contract may be oral or in writing, it is essential whose consent was so obtained. If the aggrieved party wants its
for the validity of a contract that it must be in writing, signed performance it can compel the other party for performance. The
and attested by witness and registered with the registrar aggrieved party can reject such contract (i) within a reasonable
appointed by the government for this purpose. Certainty: time and (ii) before the rights of third parties intervene
According to section 29 of the contract act, agreements that otherwise, the contract would be binding. When an aggrieved
meaning of which is not certain or capable of being made certain party avoides the contract, the other party need out performance
are void. For a valid contract, the terms and conditions of an any promise contained in the contract, if the party rescinding a
agreement must be clear and certain. Possibility of voidable contract ahs received any benefit from another party, he
performance: The valid contract must be capable of must restore such benefit, to the person from whom it was
performance, section 56 says “ an agreement to do an act received. Burdon of Proof: The burdon of proof lies on
impossible in itself is void” Not expressly declared void: an plaintiff, i.e. an aggrieved party. It means that the party who
agreement must not be one of those which have been expressly claims that his consent has been obtained by coercion, undue
declared to be void by the act. E.g an agreement in restraint of influence, misrepresentation or fraud has to proof in the court of
trade and an agreement by way of wager have been expressly law, if he cannot prove, than the contract will remain valid.
declared void under section 27 & 30 respectively. VOID CONTRACT: void contract is that which has no legal
KINDS OF CONTRACTS: There are 3 main groups of effect at all. “ a contract which ceases to be enforceable by law
contracts: 1 VALID CONTRACT: all agreements are becomes void, when it ceases to be enforceable. Circumstances
contracts if they are made by the free consent of parties, under which a contract becomes void: Impossibility of
competent to contract, for a lawful consideration, and with a performance, subsequent illegality, rejection of a voidable

2. contract, contingent contract when depending event becomes if a partner earns profit from any transaction of the fir, the profit
impossible, obligation of parties: in case of a void contract, will be paid to the firm.  a partner may not without the
both the parties are not legally responsible to fulfill the contract, consent of his copartners engage in any business, either openly
under this contract any party who has received any benefit is or secretly, which competes the partnership business.
bound to return it, to the person from whom he received it. LIABILITIES every partner is jointly and severally liable for
UNENFORCEABLE CONTRACT: An agreement is illegal business debts.  a new partner cannot be held responsible for
and void if it;  is forbidden by law or  is of such a nature any debts or transactions before his date of admission.  all the
that if permitted, it would defeat the provisions of any law or  partners are responsible for injuries done to outsiders by one of
is fraudulent or  it involves or implies injury to the person or the partners provided the partner has caused this injury during
property of another or  the court regards it as immoral, or the proper conduct of the partnership affairs.  every partner is
opposed to public policy. RIGHTS OF PARTNERS Every to bear the loss of the firm in the agreed proportion nd in the
partner has a right to share equally in the profits earned by the absence of an agreement loss must be borne by all the partners
fir, irrespective of his amount of capital contribution. a equally.  the property of the deceased partner cannot be held
partner is not entitled to receive interest on the capital responsible for any liabilities incurred or transactions happened
contributed by him.  a partner is entitled to received 6% after his death.  a retiring partner is liable for the debts
interest on any loans made by him to the partnership, unless it is incurred before the date of his retirement.
agreed that no such interest would be allowed. Such interest PARTNERSHIP the document in which the respective rights
shall be paid from the date of the payment of advance.  a and obligations of the members of the partnership are written is
partner is not allowed to demand pay or remuneration for taking called “partnership deed” it should be drafted with care and be
part in the conduct of business.  every partner has a right to signed by all the partners. Each partner should have a copy of
take part in the conduct of the business.  a partner shall the deed. At the time of the registration of the fir, a copy of deed
indemnify the firm for any loss caused to it by his willful neglect should be filed with the respective registrar of firm appointed by
in the conduct of the business.  if a partner pays more than his government. Such deed is also called articles of partnership.
proportionate share of the firm’s debts, he may compel his Need & Importance the successful running of partnership
copartners to contribute their relative shares.  the partnership business depends uon the mutual trust and cooperation of
must indemnify every partner in respect of (a) payment made by partners. It is generally observed that such trust and cooperation
him (b) personal liabilities incurred by him in the conduct of the starts disappearing after the firm has worked for some time.
business.  every partner has a right to check the books of Partners start quarreling on petty matters. As a result the firm
accounts of the firm and to get the copies.  a new partner comes to an end. Such possibilities can be minimized and even
cannot be admitted in the firm and an old partner cannot be avoided if there is written agreement between the partners on
expelled from the firm without the prior consent of all the such matters which may create differences in course of time. The
parties.  Nature of the partnership business cannot be altered need and importance can be described as under.  it forms the
without the prior approval of all the partners.  a partner has an basis of the formation of the partnership,  a well though out
implied right to collect partnership debts and to give receipts for partnership deed can guarantee the existence of firm for a long
payments.  a partner can lease both real personal property on time. it is important in the sense that it defines the mutual
behalf of the partnership, provided the lease is reasonably rights duties and liabilities of partners.  it describes the name,
necessary to carry on the partnership business in the ordinary nature of business, names and addresses of partners, and their
course of its affairs.  every partner can act as an agent on capital contribution.  it contains the relevant rules and
behalf of the remaining partners and bind the other partners to regulations governing the business. OFFER OR PROPOSAL:
his act.  every partner has a right to be consulted and heard defination of an offer reveals three essentials of a proposal. 1. it
before any matter is decided. DUTIES OF PARTNERS every must be an expression of the willingness to do or to to abstain
partner is bound to work in the business of the firm to the from doing something. 2. The expression of willingness to do or
greatest common advantage. It means that every partner must to abstain from doing something must be to an other person.
use his knowledge and skill for the benefit of the firm and not There can be no proposal by a person to himself. 3. the
for hi personal gain. He must conduct the business with the best expression of willingness to do or to abstain from doing
of his ability and secure maximum benefits for the firm.  something must be made with a view to obtaining the assent of
every partner must be just and faithful to his copartners. He must the other person to such act or abstienence. Essentials: an offer
observe utmost good fait and fairness towards other partners of may be express or implied.  an offer must create legal
the firm.  every partner must render true and proper accounts relations  the terms of the offer must be certain and not vague
to his copartners, it means that each partner must be ready to  an invitation to offer is not an offer.  an offer may be
explain the accounts of the firm and produce vouchers in support specific or general  an offer must be communicated to the
of the entries. No partner should try to earn secured profit at the offeree  noncompliance of a term  an offer can be subject to
expense of the firm.  every partner must give full information any terms and conditions  two identical cross offers do not
about the firm to his co partners. A partner being an agent of make a contract. TERMINATION OF OFFER: by the
other partners must not conceal any information concerning the communication of notice of revocation by the proposer to the
firm from other partners.  if the firm suffers any loss due to other party. 2 by the lapse of the time prescribed in such
willful negligence or fraud by any partner, the partner concerned proposal for its acceptance, or if no time is so prescribed, by the
must compensate the firm and other partner. Where a partner lapse of reasonable time, without communication of the
acts bonafide the loss caused by his neglect or want of skill or acceptances, 3 by the failure of the acceptor to fulfil a condition
omission is borne by the firm.  in day to day business the precedent to acceptance or by the death or insanity of the
decision is taken by the majority partners.  a partner must not proposer if the fact of his death or insanity comes to the
employ the firm’s property for his personal use or benefits.  knowledge of the acceptor before acceptance. ACCEPTANCE:

3. when the person to whom the proposal is made signifies his Allotment of shares commencement of business.
assent thereto, the proposal is said to be accepted. A proposal Can allot its shares This company cannot allot its
when accepted becomes a promise. Thus acceptance is the assent immediately after its shares till it has received a
given to a proposal and it has the effect of covering the proposal incorporation min. amount of money as
into promise. ESSENTIALS: acceptance must be given by the Statutory meeting subscription.
offeree, acceptance must be absolute and unqualified., refusal For this calling of statutory Calling of statutory meeting
and renewal of proposal, acceptance must be in a prescribed meeting is not essential. and submission of the
way., acceptance must be communicated by the acceptor, Issue of prospectus statutory report is essential.
acceptance may be express or implied, acceptance of a proposal This company cannot issue Issue of prospectus or a
is an acceptance of all the terms, acceptance must succeed the either prospectus or statement statement in lieu of prospectus
offer, acceptance must be given before revocation of offer. in lieu of prospectus. is a must.
TERMINATION OF ACCEPTANCE an acceptance may be Framing of articles of Can choose not to have its
revoked at any time before the communication of the acceptance association own articles and allow itself to
is complete as against the acceptor, but not afterwards. A private company has to be governed by the provisions
DEFINITION OF FREE CONSENT: Section 14 says the frame its own articles of of Table A of schedule 1 of
consent is said to be free when it is not caused by 1 coercion, as association the companies ordinance.
defined in section 15 or, 2 undue influence as defined in section Transfer of shares
16 or 2. fraud, as defined in section 17 or, 4 misrepresentation , There is restriction on the Shares of this company can be
as defined in section 18, or mistake, subject to the provision of transfer of shares in this transferred freely.
section 20, 21 and 22. company. A public company must have
CAPACITY OF PARTIES: Minors, according to section 3 of Minimum number of at least seven directors.
majority act 1875 a person domiciled in Pakistan who is under directors
18 years of age is a minor. Accordingly every person who has A private company must have can do so after getting the
completed the age of 18 years becomes a major, but a minor minimum 2 directors. certificate of commencement
attains majority after 21 years of age in the following 2 cases. 1. Borrowing of business.
where a guardian of minors person or property has been A private company can
appointed by the court under guardian and wards act 1890, 2. borrow money soon after A quorum of PC meeting is 3
where a minor is under the guardianship of court of words. incorporation. who represent not less than
Quorum 25% of the total voting power
persons of unsound mind, Section 12 of the contract act A quorum for a private unless the articles provide for
defines the term sound mind as follows, a person is said to be company’s meeting is two larger number.
sound mind for the purpose of making a contract if at the time members who represent not
when he makes it, he is capable of understanding it and of less than 25% of the total
forming a rational jud to its effect upon his interests, a person voting power unless the Company is required to send
which is usually of unsound mind, but occasionally of sound articles provide for larger copies of profit and loss
mind, may make a contract when he is of sound mind, a person member. account and balance sheet to
who is usually of sound mind but occasionally of unsound mind, Sending of accounts the authority, stock exchange
many not make a contact when he is of unsound mind. A private company is not and registrar.
disqualified persons: according to section 11 the third category required to send copies of
of incompetent person is that who are disqualified from profit and loss account and Must use the word limited
contracting due to political professional or legal status such as; balance sheet to the authority, only at the end of its name.
joint stock company, independent sovereigns and ambassadors, stock exchange and the
aliens, insolvent person. registrar. Atleast seven signatories to
Use of the word Limited memorandum are required.
A private company must use
the words pvt ltd. At the end
of its name. Company is required to
DIFFERENCE BETWEEN PRIVATE & PUBLIC Signatories to memorandum appoint first directors.
LIMITED COMPANY: In order to form a private
Private Company Public Company company only two signatories Cannot give loans to directors
# of members Min 7 & max no limit to the memorandum are or give guarantee for getting
there can be min 2 & max. 50 required. loans.
Area of ownership On the contrary a public First directors
very limited, it is generally company has ownership A private company is not
confined to one family. scattered over a wide area. required to appoint first Cannot give his vote on such
Sale of share directors. agreements in which his
Can not invite general public Can invite the general public Loans to directors interests are involved.
for purchase of shares for purchase of shares. A private company can give
Commencement of business loans to directors or give
Private company can start its A public company cannot start guarantee for getting loans.
business as son as it gets the its business until it has Rights of directors
certificate of incorporation received the certificate of The directors of a private

4. company can give his vote on 4) it must be signed by the maker: It is necessary that the
such agreements in which his maker must sign the promissory note. The signature may be in
interests are involved. any part of the instrument and not necessarily be at the bottom,
when the maker is illiterate, his thumb mark is sufficient. 5) the
NEGOTIABLE INSTRUMENTS: The work negotiable maker must be a certain person: The instrument must indicate
means transferable by delivery, and the word instrument means a who is the person taking responsibility to pay. Where there are
written document which creates a right in favor of some person. two or more makers, they may be liable jointly or jointly and
Thus the term negotiable instrument means a written document individually. But alternative promisor are not allowed. 6) The
transferable by delivery. According to section 13 of the payee must be certain: the payee of a promissory note must
negotiable instruments act, a negotiable instrument means a also be a certain person. The payee’s name can be indicated by
promissory note, bill of exchange or cheque payable either to his official designation only. It may be made payable to two or
order or bearer. A negotiable instrument may be made payable to more payees jointly. It can also be made payable in the
two or more persons jointly, or it may be made payable in the alternative to one of two, or one or some of several payees. The
alternative to one of two, or one or some of several payees. (Sec alternative payees are allowed in law (sec 13 (2)) 7) the sum
12(2). CHARACTERISTICS OF A NEGOTIABLE payable must be certain: It is also necessary that the sum of
INSTRUMENT: Easy Transferability: They are transferable money promised to be payable must be certain and definite. A
from one person to another. The right of ownership in these note is the form “I promise to pay B Rs 500 and all fines
instruments passes either by endorsement or merely delivery. according to rules” is not a valid promissory note. 8) The sum
Transferee can sue in his own name: a note bill of exchange or payable must be in Legal tender money of Pakistan: A
a cheque gives the right to the creditor to recover something promissory note containing a promise to pay a ceratin amount in
from debtor. The creditor can recover this amount himself or can foreign currency or to deliver a certain goods is not a valid
transfer his right to another person. When he transfers his right, promissory note. A promise to pay B Rs 1000 and a horse is not
the transferee of the negotiable instrument can sue the debtor in a valid promissory note. For a valid note, it must contain a
his own name in case of dishonor, without giving notice to the promise to pay a certain amount in Pakistani Currency. Thus a
debtor of the fact that he has become holder. Better title to a note signed by A saying “I promise to pay B Rs 500 and to
bonafide transferee for value: A bonafide transferee of a deliver to him my horse on 1st January next” is not a valid note.
negotiable instrument for value (called holder in due course) gets 9) Other Formalities: Apart from the above essentials, some
the instrument free from all defects. He is not affected by any other things are also necessary, a) it is proper to state the place in
defect of title of the transferor or any prior party. Thus, the a note where it is made. B) the date should also be mentioned on
general concept of law that in case of transfer of property which it is made. C) The promise to pay in the note must be for
“nobody can transfer a better title than that of his own does not lawful consideration. D) it must be properly stamped under the
apply to negotiable instruments. For example, where a person stamp act. E) it is also necessary to cancel all the stamps affixed
sells a stolen radio to another, the true owner can get his radio on the note. Important Points: the following points regarding
back from the buyer even though the buyer may have got it in promissory note are worth noting; 1. a note payable only to a
good faith for consideration. But when somebody gets a particular person is valid even though it is not a negotiable
negotiable instrument, for value in good faith even from a thief, instrument or it restricts its transferability. 2) a promissory note
he gets better title and transferor becomes a holder in due course. cannot be originally made payable to bearer, because only the
The following are some examples of negotiable instruments. government have a right to issue such instruments. 3) it can be
Bills of exchange, promissory notes, cheques, dividend warrants, drawn ”payable to order” originally 4) on endorsement in blank
shares warrants, bearer debentures, government promissory it can become “payable to bearer” or payable to bearer on
notes etc. Promissory Note: according to sec6tion 4 a demand” subsequently. 5) it may not be a bank note or a
promissory note is an instrument in writing (not being a bank currency note.
note or a currency note) containing an unconditional BILL OF EXCHANGE: Section 5 of the act defines bill of
undertaking, signed by the maker, to pay a certain sum of money exchange as follows; “a bill of exchange is an instrument in
only to, or to the order of a certain person, or to the bearer of the writing containing an unconditional order, signed by the maker,
instrument. Parties to the promissory note: There are two directing a certain person to pay a certain sum of money only to ,
parties to a promissory note namely; 1) maker: The person who or to the order of , a certain person or to the bearer of the
makes the promise to pay is called the maker. He is the debtor instrument. Parties to a bill of exchange: There are three parties
and must sign the document. 2) payee: the person to whom to a bill of exchange: 1) drawer: the person who makes the bill
payment is to be made is called payee i.e. creditor. Essentials of is called the drawer 2) Drawee: The person who is directed to
Promissory Note: The following are the essentials of pay is called the drawee. 3) payee: The person to whom the
promissory note. 1) it must be in writing: a promissory note payment is to be made is called the payee.  The drawer or the
must be in writing. A verbal promise to pay does not become a payee in case of endorsement is called the holder. The holder
promissory note. The writing may be on any paper or book, it must present the bill to the drawee for his acceptance. When the
can be written with pen or pencil. It may be printed or typed. 2) drawee accepts the bill, by writing the words “accepted and
it must contain a promise to pay: There must be a promise or signs it, he is called acceptor. But when the bill is drawn “pay to
an undertaking to pay. A mere acknowledgement of debt is not a me or my order. The drawer becomes the payee also. A drawee
promissory note. 3) the promise to pay must be unconditional: may also become the payee when bill is subsequently endorsed
it must contain an unconditional promise to pay. The promise to in favour of the drawee. Similarly, when one draws a bill upon
pay must not depend upon the happening of some uncertain himself, the drawer will become the drawee also. But in this case
event or fulfillment of condition. It must be absolute. If it the holder may treat it as a bill or as note. Essentials of a Bill of
contains a conditional promise, it is not a valid promissory note. Exchange: The following are the essentials of a bill of

5. exchange. 1) it must be in writing 2) it must contain an order to allowed while calculating the maturity date in the case of bill
pay 3) the order to pay must be unconditional 4) it must be drawn payable after the expiry of a certain period. Cheque is
signed by the drawer 5) the drawee must be certain person. 6) always payable on demand there is no question of allowing
the payee must be a certain person. 7) the amount payable must grace days. 6) Stamp: A cheque does not require any stamp. But
be certain. 8) the order must be to pay money only. 9) it must a bill must be stamped. 7) Crossing: Cneque can be crossed for
also comply with the formalities as regards date, place, the purpose of safety. But a bill cannot be crossed. 8) Noting or
consideration, stamps etc. Distinction between promissory protest: there is no system of noting or protest in case of a
note and a Bill of exchange: 1) number of parties: there are cheque. But in case of dishonour of a bill, the holder can cause
two parties in a pro-note, namely the maker and the payee.  In such dishonour to be noted by a notary public. 9) Stopping the
a bill there may be three parties, the drawer, the drawee and the payment: the payment of a cheque can be stopped by the
payee. 2) maker and payee: In a pro-note the maker cannot be drawer. But in case of bill the drawer cannot stop the payment.
the payee because the same person cannot be both the promisor 10) Notice of dishonour: notice of dishonour is not required in
and the promise.  But in a bill the drawer and payee may be cheque. But notice of dishonour is required in bill.
the same person when bill is drawn “pay to me or my order”. 3) CONTRACT OF SALE OF GOODS: section 4(1) of the sale
promise and order: In a promissory note there is a promise to of goods act defines a contract of sale of goods as a contract
make the payment.  whereas in a bill of exchange there is an whereby the seller transfers or agrees to transfer the property in
order for making the payment. 4) Nature of Liability: The goods to the buyer for a price. Essentials of a contract of sale:
liability of maker of a pro-note is primary. But the liability of a The above definition provides the following essentials or
drawer of a bill is secondary and condition. The drawer is liable characteristics of a contract of sale of goods. 1) Two parties:
only when the acceptor does not honour the bill. 5) maker’s The first essential is that there must be two parties to a contract
Position: The maker of a promissory note stands in immediate of sale i.e a buyer and a seller because a person cannot buy his
relation with the payee.  but the drawer of a accepted bill own goods. According to section 4(1) there may be a contract of
stands in an immediate relation with the acceptor and not the sale between one part owner and another, for example, if A and
payee. 6) Payable to Bearer: A pro-note cannot be drawn B jointly own a typewriter. A may sell his share to B. In this way
payable to bearer. But a bill can be so drawn provided it is not B may become sole owner of the typewriter. Similarly, a partner
drawn “payable to bearer on demand. 7) acceptance: A note may buy the goods from the firm in which he is a partner and
requires no acceptance as it is signed by the person who is liable vice versa. 2) Transfer of Property: Transfer of property is the
to pay. The bill must be accepted by the drawee before it is second essential of sale. “property” here means ownership. A
presented for payment. 8) Notice of Dishonour: In case of mere transfer of possession of the goods cannot be termed as
promissory note, no notice is necessary to the maker in case of sale. To constitute a contract of sale the seller must either
dishonour. But in bill of exchange, notice of dishonour must be transfer or agree to transfer the property (ownership) in the
given by the holder to all prior parties who are liable to pay. 9) goods to the buyer. 3) Goods: The subject matter of the contract
Payable to maker: A note cannot be made payable to the maker of sale must be goods. According to section 2(7), goods means
himself. While a bill can be made payable to the maker himself every kind of movable property other than actionable claims and
as one person may become both the drawer and payee or drawee money. And include electricity, water, gas, stock and shares,
and payee. 10) copies: a note cannot be drawn in sets, while a growing crops, grass and things attached to or forming part of
foreign bill can be drawn in sets 11) Protest: A note need not be the land which are agreed to be severed before sale or under the
protested. But a foreign bill must be protested for dishonour contract of sale.  Thus every kind of movable property except
when it is required by law. 12) certain provisions: the actionable claim and money is regarded as goods. Goodwill
provisions relating to presentment for acceptance or acceptance trademarks, copyrights, water, gas electricity, decree of a court
for honour are applicable only to a bill of exchange. These of law all are regarded as goods. With regard to growing crops,
provisions are not applicable to a promissory note. grass and things attached to or forming part of the land such as
CHEQUE: section 6 defines a cheques as follows; “ A cheque is trees, fruits, etc are regarded as goods because they can be
a bill of exchange drawn on a specified banker and not expressed separated from land and taken away by buyer. But the goods
to be payable otherwise, than on demand. Parties to a cheque: which cannot be separated from land are not regarded as goods.
there are three parties to a cheque. Drawer: the person who  Actionable claims, means claims which can be enforced by a
draws the cheque is known as the drawer. Drawee: The bank on legal action, e.g. a debt. Money is also not regarded goods
which the cheque is drawn is known as the drawee. Payee: The because it is the medium of exchange through which goods can
person to whom the cheque is made payable is known as the be bought. However old and rare coins may be treated as goods.
payee. Features of Cheque: 1) it is always drawn on a bank. 2) 4) Price: According to section 2(10) the consideration for a
It is always payable on demand. Distinction between cheque contract of sale must be money called the price. When goods are
and bill of exchange: 1) Drawee: a cheque is always drawn on sold or exchanged for other goods, the transaction is barter, and
a bank, while a bill can be drawn on any person, including a not a contract of sale of goods. If goods are sold partly for goods
bank 2) payable on Demand: a cheque can only be drawn and partly for money, the contract is sale. 5) sale and
payable on demand while a bill may be drawn payable on agreement to sell: the term contract of sale includes, both sale
demand or on the expiry of a certain period after date or sight. 3) and an agreement to sell. Where under a contract of sale the
Payable to bearer on demand: A cheque drawn “payable to property (ownership) in the goods is immediately transferred at
bearer on demand” is valid but a bill drawn “payable to bearer the time of making the contract from the seller to the buyer, the
on demand is void. 4) Acceptance: A cheque does not requires contract is called a sale.  where under a contract of sale the
any acceptance by the drawee before payment can be demanded. transfer of ownership in the goods is to take place at a future
But a bill requires acceptance by the drawee before it is time or subject to some condition thereafter to be fulfilled, the
presented for payment. 5) Grace Days: Three grace days are contract is called an agreement to sell. 6) Other Formalities:

6. According to section 5, there is no specific procedure to make a default the guarantee is given is called the principal debtor or the
contract. It is only the result of offer an acceptance. Neither person for whom guarantee is given is called principal debtor. 
payment nor delivery of goods is necessary at the time of a contract of guarantee is made with the object of enabling a
contract. It may be oral or in writing. Distinction between sale person to get a loan or goods on credit or an employment etc. it
and agreement to sell: the following are the points of may be either oral or written. Some person comes forward and
distinction between sale and an agreement to sell. 1) transfer of tells the lender, or the supplier or the employer that he may be
property (ownership): in a sale the ownership in goods passes trusted and in case of any default. “I undertake to be
to the buyer immediately at the time of making the contract. In responsible.” Essential Features: the following are the essential
other words, the seller ceases to be the owner of the goods and features of contract of guarantee. Principal debt: The purpose
the buyer becomes the owner immediately.  in an agreement of a guarantee is to secure a debt. The existence of a recoverable
to sell, there is no transfer of ownership to the buyer at the time debt is necessary. A contract of guarantee is an agreement
of the contract. The ownership transfers at a certain date or between the principal debtor, the creditor and the surety. The
subject to fulfillment of some condition. 2) Risk of Loss: The three separate contracts exist between them. One between the
general rule is that unless otherwise agreed, the risk of loss principal debtor and the creditor, creating the debt, the second
prima facie passes with ownership. (Sec 26) in case of sale, if between the creditor and the surety creating liability and the
the goods are destroyed the loss falls on the buyer even though third between the principal debtor and surety where the principal
the goods are in the possession of seller, because the ownership debtor requests the surety to act as surety and impliedly
has already passed to the buyer.  in an agreement to sell, promises to indemnify the surety in case the surety incurs a
where the ownership in the goods is yet to pass from seller to the liability.  in a contact of guarantee there should be some one
buyer, such loss has to be borne by the seller even though the liable as a principal debtor and the surety should be liable on
goods are in the possession of the buyer. 3) consequences of principal debtor’s default. It is a principal contract and not a
breach: In case of sale, if the buyer wrongfully neglects or collateral. Consideration: a contract of guarantee, like every
refuses to pay the price of goods, the seller can sue for the price, other contract must have essential elements of a valid contract,
even though the goods are still in his possession.  In an e.g. free consent, legality of object, competency of parties etc. it
agreement to sell, if the buyer fails to accept and pay for the must also be supported by some consideration. But there need
goods, the seller can only sue for damages and not for the price, not be direct consideration between the surety and the creditor
even though the goods are in the possession of buyer. 4) right of and consideration received by the principal debtor is sufficient
resale: in a sale, the ownership is with the buyer and so the for the surety. According to section 127 of the act “anything
seller cannot resell the goods, even though the goods are in the done, or any promise made for the benefit of the principal debtor
possession of seller. If the seller sells the goods, the new buyer may be a sufficient consideration to the surety for giving the
having knowledge of the previous sale does not acquire a title to guarantee. No Misrepresentation: According to section 142, a
the goods. The original buyer can sue and recover the goods guarantee obtained by means of misrepresentation made by the
from the thirds person as owner. The buyer can also sue the creditor or with his knowledge and assent, concerning a material
seller for breach of contract. The right to recover the goods from part of the transaction, is in valid.  in a contract of guarantee,
the third party is, however lost if the subsequent buyer had surety is entitled to know material facts of the contact of
bought them bonafide without notice of the previous sale. (sec. guarantee. It is the duty of the creditor to disclose the material
30)  in an agreement to sell, the ownership in good remains facts about the contract and principal debtor to the surety. If the
with the seller and so he can resell those goods to the new buyer. consent of surety will be obtained by misrepresentation, the
The original buyer can sue for breach of contract only. The surety will be discharged from his liability. Writing not
subsequent buyer gets a good title to the goods, irrespective of necessary: According to section 126, it is not necessary that
his knowledge of previous sale. 5) insolvency of buyer: In a contract of guarantee must be in writing. It may be either oral or
sale, if the buyer is adjudged insolvent before he pays for the written.
goods, the seller, in the absence of lien over the goods, must KIND OF GUARANTEE: a guarantee may be an ordinary
deliver the goods to the official receiver. The seller is entitled guarantee or a continuing guarantee. An ordinary guarantee, has
only to rateable dividend for the price of the goods.  but in an to be distinguished from a continuing guarantee as explained
agreement to sell, in these circumstances, the seller may refuse below; Ordinary Guarantee: The guarantee which is given fro
to deliver the goods to official receiver unless paid for, as a single specific debt or transaction, is called an ordinary or
ownership is still with the seller. 6) insolvency of seller: in a specific guarantee. It comes to an end as soon as the liability
sale, if the seller is adjudged insolvent, the buyer is entitled to under the transaction ends. Continuing Guarantee: according
recover the goods from official receiver because the ownership to section 129 A guarantee, which extends to a series of
in goods is with the buyer.  in an agreement to sell, if the transactions. Is called continuing guarantee. In other words a
buyer has already paid the price, and the seller is adjudged guarantee which covers a number of transactions over a period
insolvent, the buyer can only claim a rateable dividend as a of time is called continuing guarantee. It is just like a standing
creditor and not the goods because the ownership pin them still offer which is accepted by the creditor every time a subsequent
rests with the seller. transaction takes place. Being a standing offer it may be revoked
CONTRACT OF GUARANTEE: “a contract of guarantee is a at any time by the surety as to further transactions.
contract to perform the promise or discharge the liability of a DISTINCTION BETWEEN A CONTRACT OF
third party in case of his default. (sec. 126). Parties: there are INDEMNITY AND A CONTRACT OF GUARANTEE
three parties to a contract of guarantee: 1) surety: the person Indemnity Guarantee
who gives the guarantee is called the surety or guarantor 2) There are two parties the There are three parties, the
creditor: the person to whom the guarantee is given is called the indemnifier and the indemnity creditor, the principal debtor,
creditor. Principal debtor: The person in respect of whose holder. and the surety.

7. The liability of indemnifier is The liability of surety is person employed to do any act for another or to represent
primary and independent. secondary. It means that another in dealings with third person. The person for whom such
The indemnifier acts without surety is liable only if the act is done or who is so represented, is called the principal. 
the request of the debtor. principal debtor falls to the contract which creates the relationship “Principal and agent
The liability of the perform his obligations. is called an agency. Under a contract of agency the agent is
indemnifier arises only on the It is necessary that the surety authorized to create a contract between his principal and a third
happening of a contingency. should give the guarantee at party. An agent is merely a connecting link, after entering into a
The indemnifier cannot sue the request of the debtor. contract of behalf of the principal with a third part, the agent
the third party for loss in his There is an existing legal debt drops out and ceases to be a party to the contract and the contract
own name. he can do so only or duty the performance of binds the principal and the third party as if they have made it
if there is an assignment of which is guaranteed by the themselves.  the person who gives only an advise to another,
claim in his favour. surety. cannot be called an agent. Similarly a person rendering personal
A contract of indemnity is for The surety after he discharges service to his master or working in his factory cannot be called
the reimbursement of loss. the debt owing to the creditor an agent. Agency arises only when one person acts as
There is only one contract can, proceed against the representative to the other in business dealings in order to create
between the indemnifier and principal debtor in his own contractual relations between that other and third person.
the indemnified. right. Essentials of Agency: 1) agreement: the relationship agency is
A contract of guarantee is for the result of an agreement between the principal and agent. The
the security of a debt or good agreement may be express or implied from the conduct of the
conduct of an employee. parties. 2) Principal should be competent to contract:
There are three contracts on according to section 183, any person who is of the age of
between creditor, and the majority according to the law to which he is subject, and who is
principal debtor, the second of sound mind may employ an agent, it follows only a person
between the creditor and the competent to contract can employ an agent, minor, lunatic or a
surety, and the third between drunken person cannot employ an agent. 3) agent need not be
the surety and the principal competent: according to section 184, the agent need not be
debtor. competent to contract. Every person can become an agent. Even
CONTRACT OF INDEMNITY: A contract by which one a minor or a person of unsound mind can be appointed as agent
party promises to save the other from loss caused to him by the because it is the principal who is liable to the third parties for the
conduct of the promisor himself or by the conduct of any other act of his agent. In appointing a person of unsound mind or
person, is called a contract of indemnity. (Sec 124).  in other minor as an agent, the principal takes a great risk because he
words a contract where one person promises to compensate the cannot hold such an agent liable for his misconduct or
other form the loss which may arise due to the conduct of the negligence. 4) consideration not necessary: in order to create
promisor himself or any other person. Is called a contract of an agency the consideration is not necessary. The fact that
indemnity.  a contract of indemnity is made in order to protect principal has agreed, to be represented by the agent is sufficient
the promise against anticipated loss. The contingency upon detriment to the principal to support the contract (sec 185) 5)
which the whole contract of indemnity depends is the happening Intention: the agent must have intention to act on behalf of the
of loss. A contract of indemnity is part of a general class of principal. When the agent enters into a contract for himself, then
contingent contracts. Contracts of insurance are common the principal will not be liable. The principal shall be liable only
examples of indemnity. It must also fulfill all the essential of a when agent contracts with the intention to act on behalf of
valid contract. Parties: there are two parties to a contract of principal. TEST OF AGENCY: agency exists whenever a
indemnity. 1) indemnifier: The person who promises to make person has the authority to act on behalf of the other and to
good the loss is called the indemnifier (promisor). 2) indemnity create contractual relations between that and other persons.
holder: the person whose loss is to be made good is called the When this kind of power is not enjoyed. The relationship is not
indemnity holder or indemnified (promisee). Rights of one of agency. Thus a person is not an agent merely because he
Indemnity Holder: the indemnity holder has the following gives another advise in matter s of business. Similarly, a person
rights against the indemnifier as explained in section 125 of the rendering personal service to his mater cannot be called an
contract act 1872. 1) he is entitled to claim all damages which he agent. PURPOSE OF AGENCY: usually an agency may be
may be compelled to pay in respect of any suit filed against him. created to perform any act which the principal himself could
2) he can recover all costs reasonably incurred, in bringing or lawfully do. The object of agency should not be criminal and
defending such suit, provided he acted prudently or with contrary to public policy. They courts will not enforce an agency
authority of the indemnifier. 3) he can recover all sums which he contract which is against the interest s of the society. There are
may have paid under the terms of any compromise of any such some acts which must be performed by a person himself and
suit, provided the compromise was not against the orders of the cannot be delegated to an agent. Voting, swearing to the truth of
indemnifier and was prudent or was authorized by the documents are the instances where personal action is required.
indemnifier. Rights of indemnifier: It is well known principle GENERAL RULES OF AGENCY: the following are the two
of the law that where one person has agreed to indemnify rules regarding agency: 1) whatever a person competent to
another, he will on making good the loss, be entitled to all the contract can do himself he can do through an agent, except for
ways and means by which the person indemnified might have acts involving personal skill and qualifications. For example, a
protected himself against or reimbursed himself for the loss. person cannot marry through an agent. He cannot paint a picture
AGENT AND PRINCIPAL: section 182 of the contract act through an agent etc. as so doing involves his own skills. 2) The
defines the terms agent and principal as follows; “ An agent is a

8. acts of the agent are the acts of the principal. It means he who
acts through an agent is himself acting.
DISTINCTION BETWEEN AGENT AND SERVANT: the
distinction between agent and servant is as under; 1) a servant
acts under the direct control and supervision of his employer. An
agent does not act under the direct control and supervision of his
principal. 2) a servant has to act according to the orders of the
mater in every particular case. An agent has a wide discretion to
act within the scope of his authority. 3) A servant does not create
relations between his employer and third persons and cannot
bind the master to third parties. An agent creates relations
between his principal and third persons and can bind his
principal to third parties. DISTINCTION BETWEEN AGENT
AND INDEPENDENT CONTRACTOR: the distinction
between an agent and independent cont5ractor is as under: 1) an
independent contractor is employed to perform certain specified
work but he performs the work according to his discretion. An
agent is also employed to do work but he acts within the scope
of the authority entrusted to him by his principal. 2) the
contractor does not represent his employer. An agent always
represents his principal. 3) the contractor cannot bind his
employer to third persons. An agent can bind his principal to
third persons.