Uploaded by Ahmed Osman


Meaning of Contract Law
• Contract law is the foundation upon which the superstructure of
modern business is built.
• Contract law is the law relating to agreements or promises. It
determines which agreements are enforceable and regulates
those agreements by providing remedies if contractual obligations
(undertakings or promises) are broken. It is concerned with the
study of the legal principles which underlie all contracts.
• Contract law may, therefore, be defined as a set of rules governing
the relationship, content and validity of an agreement between
two or more persons (individuals, companies or other institution)
regarding the sale of goods, provision of services or exchange of
interests or ownership.
• By developing a body of rules to deal with specific
situations, contract law gives parties, who conclude a
contract, a set of guidelines by which they can safely
contract in the future without having to negotiate each
separate aspect of the contract.
• The rules, then, not only identify how the parties must
behave in order to say that they have formed a valid and
enforceable contract; they also identify things that the
parties must not do in order to achieve the contract, such
as misrepresenting the truth of the agreement being
reached. In essence, then, the law of contract gives
contracting parties a framework to operate within and a
means of finding a remedy when things go wrong.
Purpose and Importance of Contract law
• Explaining the object of the contract law, Sir William Anson observes,
“The law of contract is intended to ensure that what a man has been
led to expect shall come to pass, that what has been promised to him
shall be performed”.
• ‘. . . contract law has many “purposes”, but the central one is to support
and to control the millions of agreements that collectively make up the
“market economy”.’ H. G. Beale, W. D. Bishop and M. P. Furmston,
Contract: Cases and Materials (4th edn, Butterworths, 2001).
• Contract law expands our freedom of choice. It enables us to bargain
with others for mutual advantages. It provides a framework within
which parties can decide upon and bargain for their own legal
obligations. It plays a facilitative role for people who wish to make rules
for themselves and express their individual preferences. It does not
determine the content of every single bargain or exchange; it only
creates a framework which allows the parties to determine the content
of their bargain.
• Contract law enables exchanges that would otherwise not take place, by
giving certainty to parties as to promises made by other parties.
• Security and stability of the business world are dependant upon the law
of contracts. It would be impossible for businessmen to plan ahead if
they did not have the assurance that agreements once made would be
• Contract law also furnishes the basis for the other branches of business
law. The rules relating to sale of goods, negotiable instruments,
insurance, partnership and insolvency are all founded upon the general
principles of contract law.
• Contract law also protects the interests of the parties who are
vulnerable or weak in terms of bargaining power. To ensure fairness in a
bargain and to accommodate other important social values, it puts
certain restrictions or limitations to the freedom of parties to bargain
and agree the terms and conditions of their contractual relationship.
Meaning and Definition of a Contract
• Treitel in The Law of Contract defines a contract as: an agreement giving
rise to obligations which are enforced or recognised by law.
• Beatson, in Anson’s Law of Contract, defines it as: A legally binding
agreement made between two or more persons, by which rights are
acquired by one or more to acts or forbearances on the part of the other
or others.
• Section 2(a) of the Contract Act, 2000 (of Nepal) also defines the term
'Contract’. According to it, ‘Contract’ means an agreement, which is
enforceable by law, concluded between two or more parties to do or not
to do a work.
• A contract is thus essentially a commercial agreement, an agreement
between two parties which is enforceable in law. It is based on the
promises that the two parties make to each other.
• A contract can alternatively be described as a bargain. One party makes
a promise in return for the promise of the other and the promises are
mutually enforceable because of the price that one party has paid for
the promise of the other.
• Despite the use of different words to define ‘contract’, it is clear from
the above definitions that a contract essentially consists of three
elements: (1) Two or more parties (2) An agreement to do or not to
something and (3) Enforceable by law.
• The first element is the presence of at least two parties.
• The second element is an agreement to do or not to do something. In
order to constitute an agreement, there must be an offer by a party and
the acceptance of that offer by the other party. The essence of an
agreement is the meeting of the minds of the parties. This means that
the parties to the agreement must have agreed about the subjectmatter of the agreement in the same sense at the same time. This is
called consensus ad idem in legal term.
• The third element is enforceability in law. Only legally
enforceable agreement is binding upon the parties. Legally
enforceable means law will provide an appropriate remedy to
the aggrieved party if a party do not fulfill his/her obligation
(duty, undertaking or promise) under the agreement.
• To be legally enforceable, the parties must show that they had
an intention to create a legal obligation or legal relationship
through the agreement.
• It is not always easy to determine whether or not parties
intended to create a legal obligation in a given case. It is usually
determined by analysing all the circumstances surrounding an
agreement and its subject matter. Social or family arrangements
are not generally considered as intended to create a legal
obligation. (Balfour vs. Balfour ).
Why contracts are enforced by law
• The rules regarding enforceability of agreements grew out of the need
for certainty in relationships, whether between businesses or between
private individuals. We can none of us safely conduct ourselves without
knowing that we are able to rely on arrangements that we have made.
• Law should protect legitimate expectations. An agreement made
between two parties creates legitimate expectations in both that the
terms of the arrangement will be carried out and that they will receive
whatever benefit that is expected from the agreement.
• Enforcement of contracts is economically efficient. Parties will
commonly risk expenditure or do work in reliance on a promise that a
particular agreement will be carried out.
• It is simply unfair that if one party is ready to perform, or indeed has
performed, their part of the bargain the other party should escape or
avoid his obligations without some means of redress for the injured
Essentials of a Valid Contract
• To be enforceable by law, an agreement must possess the
essential elements of a valid contract. All agreements are
contracts if they are made by the free consent of the parties,
competent to contract, for a lawful consideration, with a lawful
object, are not expressly declared by the Contract Act to be void,
and where necessary, satisfy the requirements of any law as to
writing or attestation or registration.
• Agreement (Offer + Acceptance). When one person signifies to
another his/her willingness to do or abstain from doing anything
with a view to obtaining the assent of that other to such act or
abstinence he/she is said to make an offer. The first step towards
creating a contract is that one person shall signify or make an
offer to the other, with a view to obtaining the acceptance of that
another person to whom the offer is made. When the person to
whom the offer is made signifies his assent of it, the offer is said
to be accepted. An offer when accepted becomes an agreement
or promise. (Section 5 of Contract Act, 2000).
Essentials of a Valid Contract Continue...
• Two Parties. There must be two parties.
• Competent Parties. A person is competent to contract, if
he/she is of the age of majority (16 years), is of sound mind,
and is not disqualified from contracting by any law to which
he/she is subject (Section 3 of Contract Act, 2000).
• Free consent. Free and genuine consent of all the parties to an
agreement is another essential element. This concept has two
aspects: (1) consent should be made and (2) it should be free
of any pressure, fear or misunderstanding. ‘Consent’ means
that the parties must have agreed upon the same thing in the
same sense. There is absence of ‘free consent,’ if the
agreement is induced by (i)coercion, (ii) undue influence, (iii)
fraud, (iv) misrepresentation, or (v) mistake. (We will discuss in
detail about these five concepts in the next classes).
• Certainty and clarity. The terms of a contract should be clear. In other words,
the contract must not be vague. If the meaning of the agreement can be made
certain by the circumstances, it could be treated as a valid contract. For
instance, a company agrees with a person that on the expiration of his existing
contract, it would favourably consider an application by him for a renewal of
his contract. The agreement is not valid because of uncertainly (it is not clear
what the term “favourably consider” means). See Montreal Gas Co. v. Vasey
• Intention to create a legal obligation. The parties entering into a contract
must have an intention to create a legal obligation or legal relationship.
If there is no intention to create a legal obligation, that agreement is not a
valid contract. Generally, there is no intention to create a legal relationship in
social and domestic agreements. For instance, an invitation for lunch does not
create a legal obligation. In business or commercial agreements, it is usually
presumed that the parties intended to create a legal obligation. However, if
the parties clearly indicate that they did not have any such intention, then that
agreement is not a valid contract. For instance, an agreement wherein it is
clearly stated that "This agreement is not intended to create formal or legal
agreement and shall not be subject to legal jurisdiction in the law of courts" is
not a valid contract. See Rose & Frank Co. V. Crompton Bros. Case.
• Lawful consideration. Consideration means “something in return”. It is
an advantage or benefit moving from one party to the other in return of
agreeing to do something. An agreement is valid only when each of the
parties to it gives something and gets something in return. The
something given or obtained is the price for the promise and is called
‘consideration’. It may be an act (doing something) or forbearance (not
doing something) or a promise to do or not to do something. It may be
past, present or future. But only those considerations are valid which are
not forbidden by law.
• Legality of object. For the formation of a valid contract, it is also
necessary that the parties to an agreement must agree for a lawful
object or purpose. The object for which the agreement has been entered
into must not be illegal or immoral or opposed to public policy or
interest. Thus, when a house-owner knowingly lets a house to a
prostitute to carry on prostitution, he cannot recover the rent through a
court of law, or a contract for committing a murder is not a valid contract
and unenforceable by law.
• Possibility of Performance. If the act to be done under an agreement is
impossible of performance, physically or legally, the agreement cannot be
enforced by law. There must be possibility of performance of the
agreement to consider it as a valid contract.
• Not expressly declared void by law. To be a valid contract, the agreement
must not have been expressly declared void by law. Section 13 of the
Contract Act, 2000 provides a list of various types of agreements, such as an
agreement to prohibit marriage, that have been expressly declared null and
void by that Section. For example, Ram promises to pay NPR 50,00,000 to
Sita if she does not marry throughout her life and Sita promise not to marry
at all. This agreement cannot be treated as a valid contract owing to the fact
that, under Section 13 of the Contract Act, restraint of marriage is expressly
declared void. Some of the agreements which have been expressly declared
void are agreement in restraint of legal proceedings, agreement in restraint
of trade, and agreement in restraint of marriage.
• Legal Formalities: If law provides that certain formalities (such as writing,
registration etc.) be fulfilled, then they must be fulfilled to create a valid