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. Continued.. • 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. Continued… • 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 binding. • 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. Continued….. • 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. continued.. • 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 party. 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). Continued... • 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 case. • 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. Continued... • 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. Continued... • 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 contract.
