Contract Law - Best Notes For BBA Pokhara University

Those rules and regulations which are related with contractual relation is called the contract law.
Contract law is a part of business law. It is known as the private law. It belongs with right and obligation of contracting parties.
Contract is an agreement made between two or more than two parties with intention to establish the legal relationship.
All contract are agreement but all agreement are not Contract. To be a valid contract there must be satisfied some essential elements of valid Contract.
If there is not intention to establish legal relation between parties, there is not valid contract.

Background of Nepali Contract Law

Contract law is a part of business law. It has business motive. Consideration is one of the most important essential element of valid contract.
Nepal has not long history of Contract Law.
First time Nepal Government has introduced Contract Act, in 2023, Which was incorporated basic provisions regarding to general contract. That Act was not cover modern aspects of Contract law. There was Only 19 section.
After the restoration new political system at 2047 B.S (1990); Nepal has adopted new national economic policy based on Privatization, Liberalization and Globalization.
Then, Nepal enacted the Contract Act, 2056 with modern aspects of contract law.
General Civil Code 2074 had replaced Contract Act 2056 and now General Civil Code regulated contract related matters

Definition of Contract

It is an agreement which made between two or more than two parties. It creates rights and obligation between parties on reciprocal basis.
Agreement means consensus of parties in regarding to same things in same understanding.
Contract means exchange of promises by one party to another party to do or not to do some things which can be enforced or recognized by law.
The term contract has been defined by different scholars, statutes, dictionaries and judicial decision in different way.
“An agreement enforceable by law is a contract” – Sec.2 (h) of Indian Contract Act 1872
“Contract means meeting of mind between two or more parties to do or not to do some things through offer and acceptance” Thirth kumari vs. Ramshanker Shrestha Nepal kanoon partika 2040 page 298
“A written or spoken agreement intended to be enforceable by law”- Oxford Dictionary
“A contract is an agreement between two or more persons intended to create a legal obligation between them and to be legally enforceable to them”-David M. Walker
“Contract is an agreement between two or more than two person to do or not to do something, which can be enforceable by Law.”- Sec. 504(1) of General Civil Code 2074

Features

An agreement to do or not to do something.
Made between two or more than two parties.
Exchange of Promises
Enforceable by law
Creation of reciprocal rights and duties
To get return something

Essential Elements of Valid Contract

An agreement becomes enforceable by law when all the essential elements of a valid contract are present. Thus, absence of any of the above said elements is adequate to make the contract invalid.

Plurality of Parties

There must be at least two parties to form a contract. A single person can not enter into a contract. Two parties, namely offerer and acceptor must be under an agreement for a valid contract. There must be at least two parties to form a contract. A single person can not enter into a contract. Two parties, namely offerer and acceptor must be under an agreement for a valid contract. There must be at least two parties to form a contract. A single person can not enter into a contract. Two parties, namely offerer and acceptor must be under an agreement for a valid contract.

Proper Offer and Acceptance

There must be at least two parties one making the offer and the other accepting it. Offer means if somebody makes proposals to do something or not to do something. Offer and acceptance is most important elements for valid contract.

Intention to Create Legal Relationship

To constitute a contract legal relationship between or among parties should be seen otherwise remedy of that contract could not be achieved.

Lawful Consideration

An agreement is legally enforceable only when each of the party gives something and gets something. Consideration has been defined as the price paid by one party for the promise of other

Free consent of all the parties to an agreement is another essential element of valid contract. Consent means that the parties must have agreed up on the same thing in the same sense. There is absence of free consent the agreement does not amount the valid status.

Nature of Contract

Nature means inborn or inherent qualities and capabilities which can distinguish any subject matter from each other.
Civil Nature
Social and Business Nature
Autonomous Nature
Limited Nature
Legal enforceability
Relating to promise and obligation
Ever growing discipline etc.

Valid Contract

Valid Contract: Which agreement has satisfied all essential elements is called the valid Contract. Only valid Contract can establish the legal relation between the contracting parties.
A valid contract is an agreement which can create the rights and obligations between parties and enforceable by law. An agreement becomes enforceable by law which satisfied all essentials elements of valid contract.
General Civil Code 2074 Sec. 505 underline that; If there is free consent of parties, competency and qualification of parties, certainty of subject matters and lawful obligation such contract can be valid and enforceable by law.

Features of Valid Contract

Valid contracts are legally enforceable and binding to parties. It ensures the right to get return some things for parties.
It creates the rights and obligations between parties. such rights and duties of parties are reciprocal.
consideration is one of most essential element of valid contract.
General rule is “No Consideration No Contract “
In case of breach of contract innocent party can resume the legal remedy.
Valid contract commenced by valid offer and acceptance and it ended by performance of contract or breach of contract. If Parties are fulfilled their reciprocal obligations it is known happy ending of contract

Voidable Contract (Sec. 518 of GCC 2074)

The contract, made without the free consent of party, is known voidable contract. It can be converted into void but depends on the option of the parties. Party can reject or accept it. If party wants to reject it, he must go to the court at the prescribed time.
Following conditions must be satisfied to be voidable contract

Contract Made by Coercion

Coercion is a term which denotes that a person is compelled to do or no to do something as against his will or interest.
It is an act of using unlawful force for obtaining consent of person who does not voluntarily agree to enter in to a contract.
Therefore when a party of contract is compelled to enter such contract with use of force by another party under a threat is known as coercion. Under the English law it is known as duress.

Features of Coercion

Committing or threatening to commit any act forbidden any law.
Unlawfully detaining or threatening to detain any property.
Threatening to injure body, life, or prestige of a person.

Contract made by Undue Influence

When a party enters in to a contract under any kind of influence, mental pressure or persuasion, which prevents him from exercising a free and independent judgment, is known as undue influence. It is an abuse of one’s position and to achieve unfair benefit.
It is clear that one of the party is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other is an undue influence and a contract is formed in this way is called a contract by undue influence.
A contract formulate by undue influence is voidable at the option of aggrieved party whose consent is obtained by using undue influence.
The aggrieved party can avoid the contract but Such contract remains valid until it is declared void by the court or the aggrieved party remains silence or voluntarily accepts it.

Contract made by Fraud

Fraud is a willful misrepresentation with intent to deceive another person to believing that a thing is true which is untrue or false. It means fraud is misrepresentation with bad intention. It is made knowingly by a party to deceive another.
It includes following things under fraud;
To induce a party to believe a false act as true one,
To conceal (hide) actively any factual truth,
To do any act by which the party believes false as true, and
To do some such acts which are declared to be fraudulent by other Nepalese laws.
The aggrieved party has right to take legal action to avoid the contract where his consent was obtained through fraud.

Contract made by Misrepresentation

A representation means a statement of fact made by one party to the other, either before or at the time of contract, relating to some matter essential to the formation of the contract with an intention to induce the other party to enter in to a contract. A representation when wrongly made, either innocently or intentionally, is termed as a misrepresentation.
Submitting a false statement or false particulars of any fact without any reasonable basis.
Causing any party of the contract to his prejudice.
Causing a mistake deliberately about the subject matter.
Misrepresentation is a representation when wrongly made by a party to the contract to another innocently or without any intention to deceive the other party.

Contract made by Mistake

Mistake is ‘misconception’. It is a slip which is made not by design but by mischance. The party of a contract intending to do anything but it does something else is a mistake. Contract made by unilateral mistake and mistake of fact turns into voidable contract.
When one or both parties of contract commit mistake of law or when both the parties commit mistake of facts the contract turns into void.
Mistake of law
Mistake of fact
Unilateral mistake
Bilateral mistake

Void Agreement (Sec. 517 of GCC 2074)

An agreement which is not enforceable by law is called void agreement. It is void from the very beginning. It can not established the legal relation between the parties. It can not create any rights and duties between parties.
Agreement to prevent the legal rights of any person
Agreement in restraint Marriage.
Agreement which cannot be performed and impossible to performance.
Subject of contract is vague or does not provide meaning.
Agreement concluded by an incompetent person.
Agreement made by mutual mistake.
Agreement concluded with an unlawful consideration or objective.
Agreement without Consideration

Offer

An offer is a proposal presented by one person to another with the intention of obtaining his assent for performing or not performing any work. Sec.504 (3) (1) GCC 2074)

Features of an offer:

Expression of willingness or desire
Proposal for to do or not to do any work
Making to another person
Hope of getting assent
Intention to create legal relationship
Example: ‘A’ offers to ‘B’ to sale his house for Rs 50,00,000. It is an offer of ‘A’ to ‘B’. If ‘B’ provides acceptance. legal relationship will establish between ‘A’ and ‘B’.

Types of Offer

Express offer:
An offer by written and Spoken form
Implied offer:
An offer by Conduct
General offer:
An offer make to public at large. Any one can accept
Specific offer:
An offer to particular person. Offeree only can accept
Counter offer:
If offeree changes any terms and conditions
Cross offer:
When two parties make similar offer propose each other without knowledge

Rules regarding valid Offer

The person who made an offer to another person is called the Offerer and The Person to whom made an offer is called the Offeree.
An offer must be made with the intention to establish legal relationship
An offer must be certain and clear
An offer made with the hope to get acceptance
Cross and counter offer does not make a contract
An offer should not contain a term that non-communication or rejection would amount to an acceptance
An invitation of offer is not an offer
Mere declaration of intention is not an offer.

Communication of Offer

In general sense; Communication means exchange any information to another person. It means information must be come to the knowledge of concern person.
Communication of offer means the proposal made by offerer come to the knowledge of offeree.
Offer must be communicated to offeree in proper as well as prescribed manner.
Communication is an essential elements of valid offer. Without proper communication of an offer there is no validity of an offer. It means validity of an offer depends on communication.
Offer is completed when it comes to the proper knowledge of offeree

Revocation of offer

Revocation means cancel and withdrawal of an offer
Offerer has right to revoke the offer
Revocation can terminate the offer
Usual method of revocation is notification. (before acceptance)

Rules of Revocation of an offer:

By expiry of prescribed (Stipulated) time
By expiry of reasonable time
By death or Insanity of offerer
By Counter Offer
By non fulfillment of conditions
By rejection of offeree
By subsequent illegality of subject matter
By destruction of subject matter

Acceptance

Acceptance of an offer is the expression by words or conduct of assent to the terms of an offer in manner which is prescribed or indicated by the offerer.
Acceptance is the consent given by the person to whom an offer has been presented and it is based in the same meaning of that offer. Sec.504(3) (2) GCC 2074)

Features of Acceptance:

Express of assent
Acceptance can made by word and by conduct
Assent over the terms and conditions of offer
Acceptance given by prescribed manner
It is the foundation of valid Contract
It established the legal relationship
It creates the rights and obligations

Rules regarding to Valid Acceptance

Acceptance must be made after an offer
Offer can be accepted by the offeree
Acceptance must be absolute and unconditional
Acceptance must be given within prescribed time or reasonable time
Acceptance must be before the offer lapses or revokes
Acceptance must be communicated in usual or prescribed manner
Mental or non-communication acceptance is no valid acceptance
Only valid acceptance can be established the legal relation between the contractual parties.

Communication of Acceptance

Acceptance is the foundation of valid contract
After acceptance the proposal of offerer; the offeree must be informed to offerer
General process of acceptance is to provide the notice of assent.
Communication can be completed when acceptance comes to the knowledge of an offerer
Communication must be proper and unconditional
Conditional acceptance does not amount the validity of acceptance.
The mode of proper acceptance must be as prescribed by offerer or usual modes of communication

Rules for Revocation of Acceptance

Once made an acceptance of proposal by offeree; than he can cancel the acceptance before properly communicated it to offerer.
Acceptance can be revoke by notice but it must be made before the proper communication of acceptance.
Revocation by Death or insanity of Acceptor
Revocation by lapse of time
Revocation by non-fulfillment of terms and conditions of proposal
Revocation of by Subsequent Impossibility
Change of law
Destruction of subject matter

Consideration

Consideration means to get something return for performing and not performing any task.
It is one of the most essential elements of a valid contract. It must be important in the eye of the law. And It is the foundation of valid contract.
General rule is “No Consideration No Contract” but there are some exceptional rule.
Without consideration no agreement regarded as valid contract. Consideration can create legal obligations between contractual parties.
Consideration may be made in the form of money, goods, promise to do or not doing something and providing service.
Consideration means a promise made to perform or not to perform any work in consideration of performance or non-performance of any work prescribed in the proposal.

Features of Consideration

Consideration is returning matter for performing or not performing anytask.
It is most essentials element of valid contract and It stands on desire of the Promisor.
It can be given by the promisee or any other person on behalf of him.
It can be past, present or future. There is not rule of adequacy of consideration.
It may be more or less but must be reasonable.
It is something real or valuable from view point of law.
Consideration can not be against existing law, morality and against the public policy.

Types of Consideration

Present consideration:
It is also known as executed consideration. Parties of contract perform their respective obligations at the time of formation of Contract.
Past Consideration:
The consideration that is related to the past work is known as past consideration. No things remain for further perform.
Future consideration:
Promises at present and fulfill in future is known as future consideration.
The legal relationship establish at present but consideration will get in future.

Rules of Valid Consideration

Consideration must move at the desire of the offerer
Consideration need not be adequate. Parties are autonomous to determine the consideration.
Consideration must not be illegal
Consideration must not be against the public policy
Consideration must be real but not illusory
Consideration must be valuable to some extent in the eye of law.
Parties are autonomous to determine Consideration
Consideration may be past, present or future
Consideration may move from the promisee to any other person

Contract without Consideration
(Exceptional rule of consideration)

Natural Love and affection
Contract to pay time–barred debt
Contract of Gift
Contract of Agency
Promise to compensation
Contribution to Charity

Free consent is an another most essential element of valid contract.
Without the free consent contract does not amount legality or validity.
Free consent means same understanding on same things in the same sense.
Free consent provides for a contract:
Meeting of the mind of parties,
Enforceability of contract,
Legal remedy for aggrieved party.
Famous Jurist Salmond states that: If there is any error in consensus of meeting of the mind of the parties then there is no valid contract.
‘Consent’ can be defined as “Consent given by the person to whom a offer has been presented in the same meaning of that offer.”
Indian Contract Act, 1872 Section 13 defines ‘Consent’ as two or more persons said to consent when they agree up on the something in the same sense.
Consent involves identity of minds of consensus ad-idem. (Agreeing upon the same thing in the same sense)
There is no consensus ad-idem among the contracting parties, there is no real consent and hence no valid contract also.
Consent is said to be free when it is not caused by;
Coercion
Undue influence
Fraud
Misrepresentation
Mistake etc.
These factors are elaborated under part of Voidable Contract. You can make reference from that chapter.
These five elements are called vitiating factors of free consent.
If the contract is made under coercion, undue influence, fraud and misrepresentation then contract will be voidable and It depends on option of the aggrieved party.
But when consent is caused by ‘bilateral mistake’ as to a matter of fact essential to the agreement, the agreement will be void. Similarly, If both parties are mistaken of law, the agreement also would be void.

Free consent is the foundation of valid contract.
Without free consent any agreement does not amount the valid contract.
Parties are autonomous to determine the consideration.
Free consent creates the meeting of the mind (Consensus ad idem) between the parties of contract.
Free consent creates the legal obligations.
Free consent binds the parties to fulfill their obligations.
It helps to determine the consideration
Free consent helps to perform the contract.
Free consent helps to create the favorable legal environment to growth and to develop the business.

Contingent Contract

The word ‘Contingent’ means uncertain and conditional event. It means there is no certainty about something which may or may not happen.
The performance of contract is dependent upon, the happening or non happening of an uncertain event.
The contingent contract contains a conditional promise.
Contingent contract means a contract part of performance of which at least is dependent on the happening of a contingence.- Black’ Law Dictionary
In case a contract has been concluded to perform or not to perform any work if any event happen in the future, the contract shall not create any liability until such event happen.- Sec.513 GCC 2074)

Features of Contingent Contract

There must be a contract to do or not to do something.
The performance of contract must depend upon the happening or non happening of a future uncertain event.
The event must be possible but uncertain.
The event must be collateral to the subject matter of a contract.
The event not depending on the will of the promisor

Rules regarding to Contingent Contract

On the happening of an uncertain future event
On the non-happening of an uncertain future event
Happening of an uncertain event within specific time
Non happening of an uncertain event within a fixed time
Event must not be impossible etc.

Performance of Contract

Performance means to fulfill or execute the lawful promises of parties. It implies fulfillment of the terms and conditions of an agreement to respective parties.
Performance of contract plays a significant role in the context of contract. Performing of their respective obligations by all parties of contract is the normal and natural mode of discharging or termination of contract.
Fulfillment of respective promises by the concerned parties in a manner as designed in a contract without making any change in its terms is called the performance of contract.
Chapter Four, Section 521 to 534 of GCC 2074, has made provisions relating to the performance of contract.

Importance of Performance

The parties get happy ending of contract by performance.
The good performance encourages the parties to further contract.
Objectives of both parties are completed due to performance.
To establish a good relations between the parties.
To maintain the good business relation.
To maintain law and order.
To develop business efficiency.
For the prosperity of business.
For the development of the human civilization.

Rules regarding to Performance of Contract

Person to demand for performance of the Contract

Only contracting parties can demand the performance of contract. (Promisor)
The third party or beneficiary can demand the performance of contract.
By legal representative or heirs can demand to performance the contract. (Heirs and Legal representative)
By persons who jointly promise to the contract. (Joint promises)

Person bound to perform the Contract

By Promisor himself.
Contracting parties.
Legal representatives and Heirs.
By the agent of parties.
By Third party
By joint contracting parties.

Conditions where contract need not be performed

In case of relief of party
In case of voidable contract
In case of breach of contract
In case of subsequent occurrence or supervening impossibility of the circumstance

Discharge of Contract

Simply, the word termination is an end of something.
Termination or discharge of a contract means discontinuation of the contractual relationship between the parties.
Discharge of contract is fulfillment of respective obligations of the parties and is the end of contract.
A contract can be terminated when the contracting parties become free from their liability or legal obligations arising from a contract.
Discharge of a contract may take place;
Due to performance
Mutual agreement between the parties of Contract
Operation of law
Impossibility of contract.

Mode of Discharge of Contract

Termination by performance
Actual performance
Attempted performance or Tender of performance
Discharged by mutual agreement or Consent of parties
Novation Alteration Remission
Rescission Waiver Merger
Discharge by subsequent or supervening impossibility or illegality of subject-matter
Destruction of the subject matter
Death or permanent incapacity of parties
Non-existence of a particular state of things
Change of circumstance
Declaration of war and natural calamities

Breach of Contract

Where party to contract fails to fulfill obligations under the contract within the fixed time or within reasonable time or expressed his intention not to fulfill obligations under the contract; it is called breach of contract.
Whenever a party breaks the contract, the other innocent party will be relieved from performing the contract and he can rescind (cancel) the contract by sending a notice to the other party. When the contract is breached aggrieved party can sue for his loss. Sec.535 GCC 2074)
A breach of a contract includes the following elements:
If the party fails to fulfill obligations under the contract.
If the party gives information to the other party that he will not perform the work as mentioned in the contract.
If by action and conduct the party seems to be incapable of performing the work as mentioned in the contract.
A breach of contract may be by spoken or written or by conduct.

Types or Mode of Breach of Contract

Actual breach
Breach on due date of performance
Breach on during the performance
Anticipatory breach of contract
An anticipatory breach of contract may happen on the following condition
By Renunciation (Denial)
By Creating some impossibility
Change in law
Change in circumstances
Destruction of Subject matter

Remedy for Breach of Contract

Breach of contract means non fulfillment of obligations
When the party fails to fulfill the obligations under contract as prescribed or reasonable time and manner it is called breach of the contract.
A breach of the contract is just opposite to a performance of contract.
When the one party breaks the contract, the other party may become “free from the contractual obligations by the notification to termination of the contract or “to seek remedy for specific performance of contract as well as compensation for loss”.
Such Specific performance or Compensation of loss is known remedy for breach of Contract.
Self help remedy
Right to rescind the contract
Judicial remedy
Rights to claim damages
Compensation for actual loss
Amount mentioned under contract
Rights to specific performance of contract
Where compensation for the breach of contract is not adequate.
Where the liability of contract does not rest upon personal nature. (Personal skill or knowledge)
Where a specific performance is not applicable due to the change of circumstances.
Where the breaching party itself has claimed for a specific performance against the injured party.

Frequently Asked Questions (FAQ)

What is a Contract?

A legally binding agreement that establishes legally enforceable obligations between two or more parties is called a contract.

What constitutes an Offer?

A clear and firm proposal that expresses a willingness to enter into a contract on specific terms is made by one party (the offeror) to another (the offeree).

What is Acceptance?

Acceptance of an offer is the expression by words or conduct of assent to the terms of an offer in manner which is prescribed or indicated by the offerer.

Court System

Legal Environment – Business Law

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