CONTRACT - Business Law (BBS 2nd Year)

 (Define contract)

A contract is an agreement enforceable by law. The law of contract is the basis of business. Every business activity is determined and guided by the agreement of the concerned parties. In fact, the law of contract is concerned with everybody and every aspect of the business to perform any kind of act. And it is concerned with the rights and obligation of the parties entering into it.

According to A.J Salmond: "An agreement creating and defining obligation between two or more parties is a contract.

Supreme court of Nepal: "An agreement of two or more parties with condition is contract.

In short the contract includes the following:

- two or more parties

- an agreement on the ground of free consent

- exchange of promise by meeting the minds

- enforceable  by law.

In short the right and liabilities that are created reciprocally between the concerned parties can be called contract.

Nature of Contract:

A contract is an agreement which is enforceable by the law. The above definition have cleared that an agreement between two or more parties concluded with their consent, creates rights and liabilities between them. Such consent of the parties creates contract. An agreement is regarded as a contract where there are the main characteristics of valid contract presented in it. There should be the certain characteristics to be the contract determined by the law.

The nature of law can be discussed in the following grounds:

1) Agreement/ Promissory Nature:  Contract is a private legislation, which is formed and binding between the concerned parties on the ground of their agreement. Agreement has two element one is there should be two parties making an agreement, one can not enter into a contract alone. Another is.....

meeting of minds of concerning parties. An agreement is the outcomes of consenting minds of the parties. The contracting parties must meet their minds as regards the subject matter of the contract, in the same sense, upon the same thing and at the same time.

2) Private legislation: A contract is a private legislation binding from those parties who are involved in it. When any one breches the contract the other party becomes victimize financially. Therefore, the victim party may enforce by the court.

3) Legal Obligation: There must be legal obligation in an agreement to become a contract. Usually it is presumed that the parties entering into a commercial agreement intend to create a legal relationship between them. The agreement which do not establish a legal relationship are not contracts.

Contract = legality + Obligation + Business Matter

4) Freedom/ Autonomy of parties: The parties of contract must be autonomous to deliver their genuine consent at the time of concluding contracts. It is also known as a freedom of contracts. The concerning parties of the contract should be free to choose the form of contract, its subject and determine consideration and its extent as well as the term of condition.

5) purity of Contract: Sacrosanctness is another nature of contract. The common law system protects contract from commission of fraud, misrepresentation, mistake, coercion and undue influence and effort to control the economic exploitation of employee by the doctrine of restraint of trade.

6) Function of Contract: Contract is a means for the achievement of purpose of the parties. The following function are performed by nature through the contract.

- to facilitate forward planning of transaction and to make provision for future contingencies.

- to establish the respective responsibilities of the parties and performance to be expected from them.

- To enable the economic risks involved in the transaction to be allocated in advance between the parties.

- To provide alternative way or remedy if thing go wrong.

- Creation of legal rights to protect own interest.

Essential Element of A valid Contract                                                (IQ) 20

Contract and agreement:

In general contract is an agreement between two or more parties. In fact such agreement are not contract. Only those agreement which are enforceable by the law are contract. In the agreement, the parties of it make promises about something which is to be performed, when such promises or expectation of the parties become an agreement and when this agreement is backed up by law it becomes a contract which creates legally binding obligation between the parties.

The scope of an agreement is wider than of contract because a contract must fulfill some essential elements. It has limited scope which exists within the limitation of legality. Thus all contract are agreements but all agreement are not contract.  Thus contract essentially consists of two element first is agreement and second is its enforceability. Where certain duties or obligation are created by agreement between the parties, contract law deals with , where as an agreement which does not create obligation is not the subject matter of contract law.

The essential elements of a valid contract are as follows:

1) Offer and Acceptance:  There must be an agreement between two parties to create a contract. The agreement involves a valid offer by one party and valid acceptance of the offer by other party. Therefore the journey of contract always starts with offer and acceptance.

2) Consideration: Consideration means something in return. It has motivation power to fulfill the promise. The agreement born when contracting parties are giving and getting something in return. It is not necessary to be cash or kind, it may be a promise to do or not to do something. But it must be real and lawful, which may be in past, present and future.

3) Legal Relationship: At the time of entering into an agreement the parties should have the intention to create legal relationship between them to avoid all types of conflicts. This types of legal relationship helps victim party to have legal remedy in case of failure of either party. Agreement without legal relation can not be enforced. For example: The relationship between a loaner and borrower can not attract the law of contract. The father promise his son to get a cycle if he passed the exam. Son passed the exam, The son claims for his prize. In such matter , father not bound to take cycle for his son, because they had no such intention to create legal relationship while making the promises. To be fallen in contract law the agreements parties must have the intention to establish legal relationship between them.

4) Free Consent: When the parties of contract agrees upon same thing in the same sense, their consent must be free from oppression, under influence, misrepresentation, fraud and mistake of law. The consent must be made with knowingly and freely. If the consent is not free the parties can avoid the contract.

5) Meeting of Minds: To be a contract, two or more than two persons must agree upon same thing in the same sense. If 'A' want to purchase 'X' but B want to sell 'Y' than there is no contract raised between 'A' and 'B' because there is no meeting of minds.

6) Competent ( Capable) parties:  the parties who are involved in the agreement must be competent to contract. If incompetent parties are in a contract, it is not valid. The parties not capable to contract are minor person of unsound mind and legally disqualified person.

7) Lawful Objectives:  The objectives of agreement must be lawful to be a valid contract. If the subject matter of agreement are not lawful ( illegal, immoral and oppose to public policy) are not contract, and the agreement having this types of objectives are not enforced by law.

8) Not declared to be void: Those agreements which are expressly declared void by the contract and other law force are not the contract. Agreement to kill the life of other or agreement to steal goods are illegal and void. Similarly agreement in restraint  marriage, or profession are void by NCA.

9) Certainty: The objectives of an agreement must be certain and clear and practical. The contract which is uncertain due to lack of providing reasonable meaning is void. For example: A agrees B that he will purchase another car if the first car becomes lucky to him. Such agreement can not enforce against A, and B can not claim for another purchase by A. Because the term ' lucky' does not have any certain and clear meaning in practical life.

10) Possibility of performance:  The objectives or the action to complete the agreement must be possible to perform. Any act which can not be done or is non- perform able does not create legal obligation to the contracting parties.

11) Legal formalities: the contract must be in written form and comply with other legal provision such as registration in government office