Note on Meaning, Definition, Essential Elements and Classification of Contract

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Meaning and definition of contract:

In today’s globalized business world, the world rotates around ‘give and take’ theory. In such a scenario, a contract is a term that denotes the method of ‘give and take’ rights of the business transaction.

When two or more people agree to do or not to do a particular work enforced by law, there is the formation of a contract.

However, only work enforceable by law is termed as the contract. The study of contract helps to distinguish between valid, voidable (enforceable by only one party) and void (not enforceable) contracts.

According to section 2 (a) of Nepalese contract act 2056, “Contract is an agreement between two or more than two persons to do or not to do something which can be enforceable by law.”

However, it is said that “all contracts are an agreement but all agreements are not contracts”. This is because for an agreement there has to be the presence of offer and acceptance only. But for a contract, there has to be agreement along with enforceability by law.

Agreement= Offer/Proposal + Acceptance

Contract= Agreement + Enforceability by law

Essential elements of a valid contract

1. Offer and acceptance along with legal relationship:

For the existence of a valid contract, there must be the presence of offer and acceptance along with the intention to create a legal relationship with the other party.

For instance: If a father promises to his son to give him $3000 at the end of the months for his pocket money but he is unable to do so, the son cannot file a case against him as there was no any legal relation but only social agreement was made between them.

2. Lawful objects and consideration:

The contract can only be valid if it is done with lawful objects. A contract cannot be formed for illegal objects like drugs. The object of the contract shouldn’t be illegal, immoral or something that would harm for the public policy.

For instance: The contract related to illegal activities like drugs, prostitution etc.

On the other hand, consideration refers to ‘something in return’.

For instance: X agrees to sell his car to Y for $2000. Here Y's promise to pay the sum of $20,00 is the consideration for X's promise to sell the car, and X's promise to sell the car is the consideration for Y's promise to pay the $2000. These are lawful considerations.

3. Competent parties:

Only the person with a sound mind is liable to be bound by a contract. Furthermore, a minor (age less than 18 years), lunatic ( a person having an unsound mind) and insolvent (broke; having debt) cannot be enforced by the law.

For Example

  • X, a minor, borrowed Rs4000 from Y and executed mortgage of his property in favour of the lender. This was void agreement X was not competent to contract. Therefore, the mortgage was not valid and the money to advanced to minor could not be recovered.

4. Free consent:

If a party enters into a contract without his free will due to coercion, undue influence, misrepresentation, mistake or fraud, it is considered as voidable. However, the party can apply to the court of law to make it void.

For instance: If Mr. Folk threatens Mr. Wales to sell his house by pointing a gun in his forehead the contract is voidable. Mr. Wales can file a suit against Mr. Folk to make the contract void.

5. Certainty of meaning:

The agreement must be certain and should not be vague. Both the parties of the agreement should be aware of all the terms and conditions in it.

For instance: Mr. Charles promises to sell a chocolate for $10. There is no specific information about the kind of chocolate he is willing to sell at $10.

6.Possibility of performance:

Only the act that can be performed in the real world is bound by the contract. An agreement to do an impossible act cannot be enforced by law.

For instance: Mr. X promises to discover a diamond necklace through magic. Here the agreement is not enforceable by law and thus is considered void.

7. Necessary legal formalities:

Every contract is to be written and registered in order to make it valid. It should go along with the legal formalities like writing, stamping, and registration, or else it will be considered as unenforceable.

For instance: If Mr. X wants to gift Miss Y a house, he has to go along with the legal formalities of writing, stamping, and registration.

Classification of contract:

Classification of Contracts

Legal Effects:


1. Valid contracts: The agreement enforceable by law is a valid contract. It is the contract which is binding. A contract made between two or more parties with a lawful object and consideration, free consent, certainty and possibility of an agreement with necessary legal formalities by the people who are competent to contract fall under a valid contract.h

Example:

  • X offers to sell a house to Y by receiving Rs.1000000 from Y,Y accepts the offer. It is a valid contract.

2. Void contracts: The agreement that is not enforced by law is a void contract. The social agreement relating to illegal activities, agreement with a competent person is considered to be void.

Example:

  • A contract of two national to export / import goods is valid contract. The outbreak of war between the countries of two parties alters the contract into void one, which was valid at its formation.

3.Voidable Contracts: The agreement that is enforceable by only one party is known as a voidable contract. However, the voidable contracts induced by coercion, undue influence, misrepresentation, mistake or fraud can be taken to the court to make the contract void.

Example:

  • X signs a contract to sell a motorcycle for Rs. 30000 with Y because Y extended threats of life to X for signing contract. Here consent of X is not free but caused by coercion. As a result, X can void te contract.

4. Illegal agreement:The agreements relating to acts that are illegal, immoral and that are causing harm to the public policy falls under illegal agreements. For example, drugs dealing, gambling, prostitution etc.

Example:

  • X receives Rs. 10000 for the promise to kill Y. Here killing is an illegal act.Therefore, the agreement to support killing is also invalid.

5. Unenforceable contracts:When the contract is backed by all the essential elements of a valid contract but consists of a technical defect like writing, forbidden by limitations etc.

Example:

  • X provides Rs. 5000 to Y by making a contract. The legal requirement is that the contract must include signature of at least 2 witness at the time of making contract but the contract has consisted of no witness. This is an unenforceable contract. The law makes the contract of this kind enforceableas soon as the aggrieved party pays fine as prescribed by the court.

When under the terms of contract something remains to be done in the future, it is an executory contract.

For example, Mr. X agrees to pay rent to Mr. Y at the beginning of the month. Here the contract is executory because it is yet to be carried out.

FORMATION

1. Expressed contract:

The contract which is made according to the words spoken or written by parties is known as expressed contract.

Example:

  • X offers Y to buy his car for the Rs.20000 in telephone conversation. Y accepts offer in the conversation. This is an express contract made by words spoken.

2. Implied contract:

The contract that comes into existence on account of the conduct of parties is known as implied contract.

Example:

  • X takes a cup of tea in Y's restaurant. It is an implied contract between X and y.

3. Quasi-contract:

The contract that is created by law under several situations and enforces by legal rights and duties when there is the absence of a real contract.

Example:

  • X, tradesman , leaves certain goods at Y's house by mistake. Y treatsthem as his own. Here, Y is obligedto pay for them

References:

Business Law, Ram Prasad Shrestha;M.K Books, Bhotahity, Kathmandu,2013

Merchantile law, ICAI, 2013

Meaning and definition of contract

Essential elements of a valid contract

1)Offer and acceptance along with legal relationship

2.)Lawful objects and consideration

3) competent parties

4) Free consent

5) Certainty of meaning

6) Possibility of performance

7) Necessary legal formalities

Classification of contract

1. Valid contracts

2. Void contracts

3.Voidable Contracts

4. Illegal agreement

5. Unenforceable contracts

PERFORMANCE 

1. Unilateral contract

2. Bilateral contract

3. Executed contract

4. Executory contract

FORMATION

1. Expressed contract

2. Implied contract

3. Quasi-contract

 

 

 

 

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