WEEK 2

LECTURE 3

MERCANTILE LAW

• MERCANTILE LAW: It is the branch of law that comprises of trade, industry, and commerce.
• It is a growing and expanding branch of law with the changing circumstances of trade
and commerce.
• The term “mercantile law” comes from the Latin word lex mercatoria, which means
“merchant law.”
• MERCHANT: A person, or company, involved in trade particularly with foreign countries
• As in, it is the body of law that regulates transactions in the business community

SCOPE

• Commercial law has a broad scope

• It includes the laws of contract, partnership, sale of goods, and companies

• What must also be understood is that commercial law operates in the same manner as any
other branch of law — civil law, criminal law, administrative law, international trade law

OBJECT OF CONTRACTS

• The definition of a contract can be found at Section 2(h) of The Contract Act, 1872
• A contract is defined as “An agreement enforceable by law […]”
• Law of Contracts is the MOST IMPORTANT part of commercial law because every
commercial transaction starts from an agreement between two or more persons

• JOHN SALMOND: A contract is “an agreement creating and defining obligations between
parties”

• The object of the law of contract is to introduce definiteness (stability/assurance) in

commercial transactions
• FOR EXAMPLE: Say you have made a contract with me. You will buy ten tons of steel
from me and I will deliver the ten tons of steel to you on 28 February. Therefore, you
can plan your other activities accordingly. As in, you can plan how to proceed with
your construction after 28 February.
• However, what happens if I fail to deliver the ten tons of steel on 28 February? Since
you are the aggrieved party, the law will award you damages
• Does this make sense? Think of it this way — contracts ensure certainty of actions

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ESSENTIAL ELEMENTS OF A CONTRACT

1. AGREEMENT

• Offer and acceptance

2. CONSIDERATION

• Both parties to a contract have to provide consideration

• Each side must promise to give something (or do something) for the other side
• Money is the number one form of consideration

3. INTENTION TO CREATE LEGAL RELATIONS

• Parties must intend that their agreement is to have legal binding authority
• The law will not concern itself with purely domestic or social agreements between
people
• There MUST be an intention to create a legal obligation

Balfour v Balfour (EWCA, 1919)

• FACTS: Mr. Balfour and his wife went to England for a vacation, and his wife
became ill and needed medical attention. They made an agreement that Mrs.
Balfour was to remain behind in England when the husband returned to Ceylon (Sri
Lanka) and that Mr. Balfour would pay her £30 per month until he returned. This
understanding was made while their relationship was fine. However, the
relationship later soured and Mr. Balfour discontinued paying Mrs. Balfour the £30
per month. Mrs. Balfour sued for breach of contract.
• ISSUE: Was Mr. Balfour’s offer intended to be legally binding?
• HELD: No.
• It was common and natural for a husband and a wife to make a domestic
agreement involving mutual promises. But, these types of arrangement are NOT
considered to be legal contracts because the parties NEVER intended them to
have legal consequences.
• An arrangement whereby a husband agrees to pay his wife an allowance for her
expenses, or those of the household or their children, is not a legally binding
contract. Such agreements are not enforceable because they are not made with
the intent to create legal obligations and consequences.
• In this way, it is like an agreement between two people to take a walk
together. Not all agreements result in legally binding contracts. If they did,
the resulting number of disputes would overwhelm the judicial system.
Because there is no evidence in this case that the spouses entered the
arrangement for an allowance with the intent that it be legally binding, the
court will not treat it as such
• R ATIO : In domestic agreements, there is a rebuttable presumption that the
agreement was NOT intended to be legally binding.

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 Rose & Frank Co v JR Crompton & Bros Ltd (EWCA, 1923)

• FACTS: Rose and Frank Co. were the exclusive American distributor for J.R.
Crompton's new paper product. In their agreement there was a clause included
stating that the arrangement was not intended to be a formal legal agreement and
would not be subject to legal jurisdiction of either the US or the UK.
• J R Crompton cancelled the agreement because they were unhappy with Rose
and Frank Co’s proceedings and Rose and Frank Co sued for breach. They were
successful at trial, which J R Crompton appealed
• HELD: In business relationships, the parties DO intend to make legally binding
contracts. But in this case, there is no reason why the parties couldn’t provide a
specific clause indicating that their agreement should not be legal. This particular
agreement is enforceable.
• RATIO: In business (commercial contract) there is a rebuttable presumption that the
agreement was intended to be legally binding.

4. FORM

• Certain formalities must be observed. As in, in certain contracts, it must be a written

agreement (Deed)
• SECTION 9 of The Arbitration Act, 2001: Arbitration agreement must be in writing
• SECTION 54A of The Transfer of Property Act, 1882: Transfer of immovable
property must be in writing and registered pursuant to the Registration Act, 1908

5. CAPACITY

• Any party to a contract must be legally capable of entering into a contract

• SECTION 11 of the Contract Act, 1872:

“Every person is competent to contract who is of the age of majority according to the
law to which he is subject, and who is of sound mind, and is not disqualified from
contracting by any law to which he is subject.”

• Age of majority in Bangladesh: 18 years

• Thus, a person under the age of 18 cannot legally enter into a contract
• A person is also said to be incapable of entering into a contract if he/she is intoxicated

6. CONSENT

• Any agreement must have been entered into voluntarily

• Contract will be rescinded if one party proves that the party entered into the contract
under (1) coercion, (2) undue influence, (3) fraud, (4) misrepresentation, or (5) mistake.

7. LEGALITY

• The purpose of any contract must not be illegal or contrary to public policy

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 • A contract that possesses all of these elements will be rendered valid
• A contract that lacks one of these elements will be rendered void, voidable, or
unenforceable

FOUR DIVISIONS OF CONTRACTS

(I) METHOD OF FORMATION OF CONTRACT

1. EXPRESS CONTRACT

• When the contract is formed through spoken words or written words

• Here, there is little difficulty in understanding the rights and obligations of the party
• FOR EXAMPLE: When you have in writing (or spoken words) that you will pay someone
if they supply you ten tons of steel

2. IMPLIED CONTRACT

• The conditions of an implied contract are to be understood from the acts/conduct of the
parties and/or the course of dealing between them
• FOR EXAMPLE: You have a contract with someone to supply you ten tons of steel at a
certain location. You go and pick it up from there. However, as of the last five
deliveries, he has supplied it straight to your house — which is more convenient to you.
Therefore, this becomes an implied contract that the supplier will deliver the goods to
your house henceforth.

3. QUASI CONTRACTS

• A quasi contract is an agreement between two parties without previous obligations to

one another that has been created and legally recognized by the court system. Under a
quasi-contract, neither involved party is expected to create such an agreement; this
contract is arranged and imposed by a judge to correct a circumstance in which one
party acquires something at the expense of the other party.
• FOR EXAMPLE: Consider a pizza that is delivered to the wrong address. The pizza has
already been paid for. If the individual does not correct the delivery man and instead
keeps the pizza, the court system could issue a quasi-contract that would require the
individual to pay back the amount for the pizza to the party that paid for the pizza. The
contract is used to prevent any party from benefiting from a situation at the other party's
expense; the restitution required under the contract is to make the situation fair.

(II) TIME OF PERFORMANCE

1. EXECUTED CONTRACT

• Where the parties perform their duties immediately and none of their obligations
remain outstanding

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 • FOR EXAMPLE: You go to North End and buy a cup of coffee. It is an executed contract.
As in, you pay money and the barista hands you over a cup of coffee.
• FOR EXAMPLE: Leila lost her dog. She releases an advertisement saying she will pay
$500 to the person who brings back her dog. Alice, seeing and relying on the
advertisement, brings to Leila her dog.
• This would be an executed contract even though only one party has completed his/
her obligation to the contract. That is, even though Leila has yet to pay Alice, since
Alice has completed her obligation of the offer, it is an executed contract.

2. EXECUTORY CONTRACT

• The obligations of both parties are to be performed at a later date

• FOR EXAMPLE: Today is 1 January. John formulates an agreement with Jane that he will
coach Jane’s little brother — Timothy — in football from 1 February for a fee of $100
per month.
• This is an executory contract as both parties have outstanding obligations.

(III) PARTIES TO THE CONTRACT

1. BILATERAL CONTRACTS

• There must be at least two parties to a contract.

2. UNILATERAL CONTRACTS

• We’ll speak more of this as the time approaches. But, some contracts are unilateral.
This does not mean that the contract is formed between one person and himself.
• Rather, this means that one person has performed the terms of the agreement, whereas
the other party has not fulfilled his obligations yet.
• FOR EXAMPLE: An advertisement that promises, “I will pay $100 as reward for
someone who brings back to me my lost dog.” Thus, when someone actually finds your
dog and brings it back to you, you are legally bound to pay that $100.
• As in, one party has completed his/her obligations; whereas, the other party has not.
When you pay the $100, you will have fulfilled your obligations too.

(IV) LEGALITY OR VALIDITY OF A CONTRACT

1. VALID

• If the essential elements of a contract are met, it is a valid contract

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2. VOID

• SECTION 2(j) of the Contract Act, 1872:

“A contract which ceases to be enforceable by law becomes void when it ceases to be

enforceable”

• As in, a contract is formed, but it becomes invalid owing to the following reasons:

(i) IMPOSSIBILITY OF PERFORMANCE

• FOR EXAMPLE: John promises to pay Deborah $1,000 if she can ride a
bicycle to the moon.

(ii) SUBSEQUENT ILLEGALITY

• FOR EXAMPLE: Richard agrees to sell to Theodore 100 kgs of potatoes for
$200. However, before delivery, the Government bans the sale of potatoes.

(iii) CONTINGENT CONTRACTS

• FOR EXAMPLE: Nicole agrees to sell a ring to David on condition that Nicole
can first acquire the ring from Janet. However, before Nicole can acquire the
ring from Janet, the latter dies. Thus, it would be impossible for Nicole to
now acquire the ring.

3. VOIDABLE

• Contracts are voidable if it is brought about by coercion, undue influence, fraud, or

misrepresentation
• SECTION 2(i) of the Contract Act, 1872:

“An agreement which is enforceable by law at the option of one or more of the parties
thereto, but not at the option of the other or others, is a voidable contract”

• What this means is that one party wishes to perform the contract; yet, the other party
does not.
• The other party does not wish to perform his/her obligation to the contract because
his/her consent was vitiated since it was brought about by consent, undue influence,
fraud, or misrepresentation
• FOR EXAMPLE: John holds a gun to Paul’s head and tells him to sell his car to John
for $5, and the failure to do so would result in Paul’s death. Fearful of his life, Paul
sells his car to John. This is a voidable contract.
• Understand that in the example above, John wishes to perform his obligation to
the contract (paying Paul $5). However, while Paul accepted John’s $5 and sold
to John his car, since it was brought about by coercion, it is voidable.

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 A CONTRACT CAN ALSO BECOME VOIDABLE IN THE FOLLOWING CIRCUMSTANCES:

(i) WHEN A CONTRACT CONTAINS RECIPROCAL PROMISES AND ONE PARTY

PREVENTS THE OTHER PARTY FROM CARRYING OUT THEIR OBLIGATION
UNDER THE CONTRACT, THEN THE CONTRACT IS VOIDABLE AT THE OPTION OF
THE PARTY PREVENTED
• FOR EXAMPLE: Nathan promises to pay Ryan $1,000 if Ryan builds a balcony in
Nathan’s backyard. However, when Ryan comes over to Nathan’s, Nathan
prevents Ryan from building the balcony. The contract would be voidable at the
option of Ryan.

(ii) WHEN A PARTY TO THE CONTRACT PROMISES TO DO A CERTAIN THING

WITHIN A SPECIFIED TIME, BUT FAILS TO DO SO, THEN THE CONTRACT
BECOMES VOIDABLE AT THE OPTION OF THE PROMISEE (TO WHOM THE
PROMISE WAS MADE), IF THE INTENTION OF THE PARTIES WAS THAT TIME WAS
ESSENTIAL
• FOR EXAMPLE: Lisa promises to sell 10 kgs of coffee to Maria within a week for
$1,000. However, Lisa does not supply the coffee. The contract would, then,
become voidable at the option of Maria.

4. ILLEGAL

• If the agreement (object or consideration) violates the law, it is an illegal agreement

• FOR EXAMPLE: An agreement to murder someone for $5,000 is illegal

DISTINCTION BETWEEN VOID AND ILLEGAL AGREEMENTS

(i) ALL ILLEGAL AGREEMENTS ARE VOID, BUT NOT ALL VOID AGREEMENTS ARE
ILLEGAL
• FOR EXAMPLE: An agreement with a minor is void, but it is not illegal.
However, an agreement to kill someone is illegal as well as void.

(ii) AN ILLEGAL AGREEMENT IS WIDER IN EFFECT IN RELATION TO COLLATERAL

TRANSACTIONS THAN A VOID AGREEMENT
• As in, when an agreement is illegal, any agreement made incidental to the
illegal agreement is void
• FOR EXAMPLE: John hires Jacob to murder Paul for $5,000. However, John
does not have the money. Thus, he borrows money from George (and
George has no idea why the money is being borrowed) so that he can pay
Jacob. George can never recover the money from John even if he finds out
why the money was borrowed.

5. UNENFORCEABLE

• This operates in every way like a valid contract. However, owing to a technical
difficulty, the contract is unenforceable.

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• FOR EXAMPLE: For the transfer of immovable property, pursuant to Section 54(a) of
The Transfer of Property Act, 1882, it must be in writing and then registered under
the Registration Act, 1908. If not in writing, then the contract for the transfer of
immovable property is unenforceable

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