International Islamic University

Department of Sharia & Law

LAW OF CONTRACT

Submitted by: Umer Shaukat Khan

Reg # 3257-FSL/LLB(E)F17
Contract:

Meaning: A written or spoken agreement, especially one concerning employment, sales, or tenancy that
is intended to be enforceable by law.

Definition: A contract is a voluntary arrangement between two or more parties that is enforceable by law
as a binding legal agreement. Contract is a branch of the law of obligations in jurisdictions of the civil law
tradition. Contract law concerns the rights and duties that arise from agreements.

Explanation:

A contract arises when the parties agree that there is an agreement. Formation of a contract generally
requires an offer, acceptance, consideration, and a mutual intent to be bound. Each party to a contract
must have capacity to enter the agreement. Minors, intoxicated persons, and those under a mental
affliction may have insufficient capacity to enter a contract. Some types of contracts may require
formalities, such as a memorialization in writing.

Formation:

At common law, the elements of a contract are offer, acceptance, intention to create legal relations, and
consideration.

Not all agreements are necessarily contractual, as the parties generally must be deemed to have an
intention to be legally bound. A so-called gentlemen's agreement is one which is not intended to be legally
enforceable, and which is "binding in honor only".

Elements of a Contract

The requisite elements that must be established to demonstrate the formation of a legally binding
contract are

1. Offer
2. Acceptance
3. Consideration
4. Mutuality of obligation
5. Competency and capacity
6. A written instrument (In certain circumstances)

Offer: An offer is a promise to act or refrain from acting, which is made in exchange for a return promise
to do the same. Some offers anticipate not another promise being returned in exchange but the
performance of an act or forbearance from taking action. For example, a painter’s offer to paint
someone’s house for $100 is probably conditioned on the homeowner’s promise to pay upon completion,
while a homeowner’s offer to pay someone $100 to have his or her house painted is probably conditioned
upon the painter’s successfully performing the job. In either case, an offeree’s power of acceptance is
created when the offeror conveys a present intent to enter a contract in certain and definite terms that
are communicated to the offeree.

Acceptance: Acceptance of an offer is the expression of assent to its terms. Acceptance must generally be
made in the manner specified by the offer. If no manner of acceptance is specified by the offer, then
acceptance may be made in a manner that is reasonable under the circumstances. An acceptance is only
valid, however, if the offeree knows of the offer, the offeree manifests an intention to accept, and the
acceptance is expressed as an unequivocal and unconditional agreement to the terms of the offer.

Consideration: Each party to a contract must provide something of value that induces the other to enter
the agreement. The law calls this exchange of values “consideration.” The value exchanged need not
consist of currency. Instead, it may consist of a promise to perform an act that one is not legally required
to do or a promise to refrain from an act that one is legally entitled to do. For example, if a rich uncle
promises to give his nephew a new sports car if he refrains from smoking cigarettes and drinking alcohol
for five years, the law deems both the uncle’s promise and the nephew’s forbearance lawful
consideration.

Mutuality of obligation: Closely related to the concept of consideration is the mutuality of obligation
doctrine. Under this doctrine, both parties must be bound to perform their obligations or the law will treat
the agreement as if neither party is bound to perform. When an offeree and offeror exchange promises
to perform, one party may not be given the absolute and unlimited right to cancel the contract. Such
arrangements attempt to allow one party to perform at her leisure, while ostensibly not relieving the
other party of his obligations to perform. Most courts declare these one-side arrangements null for lack
of mutuality of obligation. Some courts simply invalidate such contracts for lack of consideration,
reasoning that a party who is given absolute power to cancel a contract suffers no legal detriment.

To avoid having a contract subsequently invalidated by a court, the parties must be careful to limit their
discretion to cancel the contract or otherwise not perform. As long as the right to avoid performance is
dependent on some condition or event outside the control of the party seeking to cancel the contract,
courts will find that mutuality of obligation exists.

Competency and Capacity: A natural person who enters a contract possesses complete legal capacity to
be held liable for the duties he or she agrees to undertake, unless the person is a minor, mentally
incapacitated, or intoxicated. A minor is defined as a person under the age of 18 or 21, depending on the
jurisdiction. A contract made by a minor is voidable at the minor’s discretion, meaning that the contract
is valid and enforceable until the minor takes some affirmative act to disavow the contract. Minors who
choose to disavow their contracts entered may not be held liable for breach. The law assumes that minors
are too immature, naïve, or inexperienced to negotiate on equal terms with adults, and thus courts
protect them from being held accountable for unwisely entering contracts of any kind.

When a party does not understand the nature and consequences of an agreement that he or she has
entered, the law treats that party as lacking mental capacity to form a binding contract. However, a party
will not be relieved from any contractual duties until a court has formally adjudicated the issue after taking
evidence concerning the party’s mental capacity, unless there is an existing court order declaring the party
to be incompetent or insane. Like agreements with minors, agreements with mentally incapacitated
persons are voidable at that person’s discretion. However, a guardian or personal representative may
ratify an agreement for an incapacitated person and thereby convert the agreement into a legally binding
contract.

Contracts entered into by persons under the influence of alcohol and drugs are also voidable at that
person’s discretion, but only if the other party knew or had reason to know the degree of impairment. As
a practical matter, courts rarely show sympathy for defendants who try to avoid contractual duties on
grounds that they were intoxicated. However, if the evidence shows that the sober party was trying to
take advantage of the intoxicated party, courts will typically intervene to void the contract. Persons who
are intoxicated from prescription medication are treated the same as persons who are mentally
incompetent or insane and are generally relieved from their contractual responsibilities more readily than
are persons intoxicated from non-prescription drugs or alcohol.

A written instrument: Not every contract need be in writing to be valid and binding on both parties. But
nearly every state legislature has enacted a body of law that identifies certain types of contracts that must
be in writing to be enforceable. In legal parlance this body of law is called the statute of frauds. Named
after a seventeenth-century English statute, the statute of frauds is designed to prevent a plaintiff from
bringing an action for breach of contract based on a nonexistent agreement for which the only proof of
the agreement is the plaintiff’s perjured testimony. The statue of frauds attempts to accomplish this
objective by prohibiting the enforcement of particular contracts, unless the terms of the contract are
expressly reflected by written note, memorandum, or agreement that is signed by the parties or their
personal representatives.

As originally conceived, the statute of frauds applied to four types of contracts:

1. Promises to pay a debt owed by another person;

2. Promises to marry;
3. Promises to perform an act that cannot possibly be performed within a year from that date of the
promise; and
4. Agreements involving real estate.

However, most states have since expanded the class of contracts that must be in writing to be enforceable.
For example, in many jurisdictions long term leases, insurance contracts, agreements for the sale of
securities, and contracts for the sale of goods above a specified amount are unenforceable unless the
terms of the parties’ agreement are memorialized in writing.

When a written contract is essential:

It is always better to have your contract in writing, no matter how small the job is. Any contract with a
hirer that involves a significant risk to your business should always be carefully considered and put in
writing. This is advisable even if it means delaying the start of the work. A written contract is essential:

• When the contract price is large enough to make or break your business if you don’t get paid

• Where there are quality requirements, specifications or specific materials that must be used

• Where there is some doubt that the hirer has enough money to pay you

• When you must have certain types of insurance for the type of work you are doing

• Where the contract contains essential terms, such as a critical date for the completion of the work before
payment can be made

• Where you or the hirer need to keep certain information confidential

• When it is required by your insurance company for professional indemnity purposes

• Where there is a legal obligation to have a written contract (e.g. trade contracts for building).