Class notes for BBIS

Santosh K.C

Learning Unit 2
2. Business Transactions
2.1 Law of contract

Before understanding the law of contract prior knowledge on contract is necessary as contract law is
related to regulation of contract.

Contract can be said as an agreement made between two or more parties to do or not to do something
that is enforceable by law.

The law that regulates the contract is called the contract law/ law of contract. It deals with the general
principle of law governing all contracts, limits of contractual obligation, performance and discharge,
remedies for breach together with the provisions of special contract such as: Bailment, Guarantee etc.

It lay down the information that what the party to the contract can do or cannot do. It also deals about the
obligation of performance of duty emerging out the contract and give remedy for the violation of
obligation.

Meaning and essential elements of Contract

What is contract?

1. According to contract Act 2056 section 2(a) “Contract is an agreement made between two or
more than two parties do or not to do something that is enforceable by law.”
2. Similarly Indian Contract Act 1872 Section 2 define “Contract is an agreement enforceable by
law”
Many scholars has also tried to define the contract

1. According to Salmond “Contract is an agreement creating and defining obligation between the
parties.”
2. According to F Pollock “A contract is a promise or set of promise for the breach of which law
provide remedy.”
Similarly Supreme Court of Nepal in a case of Sarki Kami v. Kancho Kami NKP 2048 page 546 define
Contract as

“To be a contract there should be agreement between two or more than two parties to do or not to do
something and if there is element of offer and acceptance then that could be said as contract.”

Thus the contract is an agreement made between the parties to do or not to do something that should be
enforceable by law. Generally from above definition four elements should be there for contract

1. Two or more than two parties

2. An agreement
3. Enforceable by law
4. Condition – to do or not to do something

Set of Promise + some consideration = Agreement, Agreement+ Enforceable by law = Contract

 Class notes for BBIS
Santosh K.C

E.g. A offered to B that you provide me your laptop I will pay 40000 and if B accepts then there is
contract.

Nature of contract

1. Contract is private law generally made by the parties to the contract

2. Parties are autonomous
3. Contract is a law made the parties for themselves
4. Contract has different types
5. Parties to the contract has obligation to perform duty
6. Violator (Guilty Parity) has to compensate the affected person

In a case of Karishma Impex v. National Trading Limited, Nepal Law Journal 2048, Decision no. 4444 p.
691 Supreme Court held that “ the parties to the contract can create mutual obligation by agreeing upon
the term and condition as per their need within the boundary of law.

Difference between contract and contract law

Contract Contract law

1. Made by the parties to the contract 1. Made by the state

2. It is the private law and performance is 2. It is also private law in general but it must be
limited to the parties generally followed while making contract.

3. Enforce by the parties 3. Enforce by the state

4. it can be the source of contract law 4. it is not the source for contract

Essentials of valid contract

1. Offer and Acceptance

Offer is proposal make by either party to the contract (offeror), to do or not to do some thing and
Acceptance is assent of the offeree (To whom offer is made) to the term of the offer. There must be two
parties to an agreement that means one party makes an offer and another accept it.

There must be consensus ad idem (Meeting of mind) for valid offer and acceptance. If somebody offers in
one way and other party accept in another way that is not acceptance. Moreover the terms of offer must be
definite and acceptance should also be absolute.

2. Intention to create legal relationship

The contract must have the element of intention to create legal relationship to be a valid contract. It is the
conclusive test of the valid contract. Both the parties to the contract must have the intention to create legal
relationship for making valid contract. Generally domestic and social affair lacks the intention to create
legal relationship. But all the business transaction does have.
 Class notes for BBIS
Santosh K.C

In the case of Balfour v. Balfour 1919 K.B 571 the English court of law held "the agreement between
husband and wife is totally a domestic nature and not a contract".

Similarly in the case of Spellman v Spellman (1961) 2 AER 498 English court of law also upheld the
former decision and held "agreement of domestic nature doesn’t create legal obligation to the parties and
it is not a contract."

Thus to be a valid contract there should be element of intention to create legal relationship.

3. Lawful consideration
Generally consideration implies "something in return." It equally implies the concept of "something for
something." In Latin term it is said as a Quid Pro Quo. That means if one party to the contract has given
something to another then he has right to get something from another party. E.g. Ram and Shyam enter
into a contract for sell and purchase of Motorbike; here money and bike for each other are the
consideration.

Consideration must be lawful and those contracts that have unlawful consideration are void contract as
per the section 13 of NCA 2056. Here unlawful consideration means consideration that are prohibited by
law like consideration in the form of weapon, drugs etc.

4. Competent Parties
The parties to the contract must be capable of entering into the contract. Contract made by the parties
those are incapable in the eye of law is void as per the section 13 of NCA 2056.

According to section 3 of the NCA 2056 any person other than mention below is eligible to make a
contract.

a. Those who have not complete 16 years of age

b. Those who are of unsound mind
c. Person who is declare incapable by other laws

Generally above mention person cannot make the contract and contract made by them is not valid and it is
void as per the section 13 of NCA 2056

However if any specific law made them as capable of doing contract then contract made by them is also
valid one.

Moreover contract done by the guardian of above mention person except C category for the benefit of
them then the contract is valid.

5. Free consent
The free consent is also an important essential to be a valid contract. Consent is said to free if there is
absence of fraud, misrepresentation, mistake, coercion and undue influence.

Contract done without free consent is voidable as per the section 14 of NCA2056, and the aggrieved party
can make contract void by lodging case in court of law.
 Class notes for BBIS
Santosh K.C

E.g. Ram and Kailash enter into the contract for sell and purchase of 5 ropani land and Kailash is going to
sell 5 ropani lands to Ram because Ram has told him otherwise he will kill him. This contract is voidable
because Kailash didn’t have given free consent rather in coercion.

6. Legal Objective
The objective of contract should be legal for validity of contract. Whenever parties enter into the contract
the purpose and object should be valid one.

Objective of contract is said to be lawful if (i) it is permitted by law (ii) it is not forbidden by law

If the contract have illegal objective then it is not valid contract and is a void contract as per the section
13 of NCA 2056. E.g. Contract for killing, Contract for carrying a business of prostitution.

7. Certain Meaning
Contract should have certain meaning and it should not have any confusion and ambiguity in obligation to
the parties. Even the court of law doesn’t recognize the contract that has uncertain meaning. Thus the
contract should have certain and definite meaning.

Ram accepts to sell Hari "hundred tons of oil". There is nothing whatever to show, what kind of oil is
intended. It may be kerosene, sunflower and mustard. This is not a valid contract.

8. Possible to perform
Contract is the private law created by the parties for themselves. Thus it should be possible to perform.
Contract that cannot perform is void and doesn’t create any legal obligation to the party. Like, contract on
selling Bike which is not in the name of party.

9. Legal formalities
Generally court of law recognize both Oral and Written contract. But if there is specific law that requires
the contract should have written or register then to create a valid contract, those legal formalities should
be followed. E.g. Section 25 of NCA, Bailment above 5000 should be written.

Difference between Contract and agreement

Agreement Contract

1. Offer and acceptance constitute an agreement 1. Agreement must be enforceable at law to be a contract.

2. An agreement may or may not create legal 2. Contract necessarily create legal obligation.
obligation

3. An agreement is mainly of social and domestic 3. Contract is mainly of commercial nature.

nature.

4. All agreement are not contract 4. All contracts are agreement itself.

5. An agreement may not be recognize by the law 5. To be a valid contract it should be recognize by the
law.