The Law of Contract

Dr. Emon Kalyan Chowdhury

Ph.D. in Accounting, MBA in Accounting, MBA in Finance, MBA in HRM
Professor, Department of Accounting

CIU Business School

Chittagong Independent University

Nature of Contracts
Definition: A legally binding agreement between two
or more parties.

Essential Elements: Offer, acceptance, consideration,

capacity of parties, free consent, legality of
consideration and object.
The essential elements of a
contract are:
Offer: A clear proposal to enter into a contract.
Acceptance: Unconditional agreement to the terms of the offer.
Consideration: Something of value exchanged by the parties to a
contract.
Intention to Create Legal Relations: Parties must intend to create a
legally binding agreement.
Capacity of Parties: Parties must have the legal ability to enter into a
contract.
Free Consent: Parties must give their consent freely, without coercion,
undue influence, fraud, or misrepresentation.
Lawful Object: The purpose of the contract must be lawful.
Certainty: The terms of the contract must be clear and definite.
Types of Contracts
1. Methodof formation (Expressed, Implied
and Quasi)
2. Thetime of performance (Executed and
executory)
3. The parties of the contract (Bilateral and
unilateral)
4. Legalityor validity of the contract (Valid,
Void, Voidable, Illegal and Unenforceable)
Offer and Acceptance
Offer: A proposal to enter into a contract.

Acceptance: Agreement to the terms of the offer.

General Rules: Must be communicated to the offeror,

must be absolute and unconditional, and must be
within the specified time.
 Key elements of a valid offer
Communication:
The offer must be clearly communicated to the
offeree. This can be done in writing, orally, or through implied
actions.

For example, a store displaying goods for sale with price tags
is an implied offer to sell those goods.
 Key elements
Intention of alegal
to create validrelations:
offer
The offeror must intend to be bound by the
offer.
This means that they must have a serious
intention
to enter into a legal agreement.
For example, a casual statement made in jest or
as
a joke would not be considered an offer.
Definiteness:
Key elements of a valid offer
The terms of the offer must be clear and definite.
This means that the offeror must specify the
essential
terms of the agreement, such as the subject
matter,
price, quantity, and time of performance.
For example, an offer to sell a car without
specifying
the make, model, or price would not be definite.
Invitation to treat:
An Key elements
invitation of is
to treat a valid
not anoffer
offer but rather
an
invitation to negotiate. It is a preliminary step
that
invites the other party to make an offer.

For example, an advertisement in a newspaper

or
online that says "Sale now on!" is an invitation
to
treat, not an offer.
Communication of Offer
Methods of communication
• Oral

• Written

• Implied

Time and place of communication

When and where the offer is received
Intention to Create Legal Relations
Intention to create legal relations is
a crucial element in contract formation.
It signifies that the parties involved in
the agreement intend their promises to
be legally binding. This intention can be
expressed explicitly or implied through
their words, actions, or circumstances.
Presumption in commercial contracts
In commercial contracts, there is a
presumption that the parties intend to create
legal relations. This means that unless there is
clear evidence to the contrary, the courts will
assume that the parties intended their
agreement to be legally enforceable.
Example: A business enters into a contract to
purchase raw materials. The presumption is that
both parties intended the contract to be legally
binding, even if they didn't explicitly state so.
Domestic or Social Arrangements
In domestic or social arrangements, the
presumption is that the parties do not intend to create
legal relations. This means that agreements between
family members or friends are generally not
considered to be contracts unless there is clear
evidence that the parties intended them to be legally
binding.

Example: A parent promises their child to buy them a

new toy. This is typically not considered a contract
because there is no presumption of intention to create
legal relations in a family context.
Rebutting the Presumptions
The presumptions regarding intention to create
legal relations can be rebutted with evidence. This
means that either party can present evidence to
show that the presumption is incorrect.

Example: In a domestic arrangement, if there is

clear evidence that the parties intended their
agreement to be legally binding (e.g., a written
contract, consideration, or reliance on the
promise), the presumption against intention to
create legal relations can be rebutted.
Invitation to Treat
Distinction between offer and invitation to treat:
• Offers are intended to be accepted, while
invitations to treat are merely invitations to
negotiate.
• Examples of invitations to treat: Advertisements,
catalogs, price lists
Acceptance of Offer
Definition of acceptance:
Unconditional agreement to the terms of the offer.

Key elements of a valid acceptance:

•Communication
•Unconditional agreement
•Acceptance by the offeree
Communication of Acceptance
Methods of communication:
• Oral (Oral, Telephone)
• Written (Letter, Email)
• Implied (A customer gets into a taxi without
negotiating a fare, implying acceptance of the
driver's terms.)
Consideration

Consideration:
Something of value exchanged by the parties to a contract.
Importance of Consideration:
•Provides a basis for the enforceability of contracts.
•Ensures that contracts are not based on mere promises.
Types of Consideration

•Executory Consideration:
A promise to do something in the future.
Example: A promise to pay for goods or services.
•Executed Consideration:
Something that has already been done or given.
Example: Payment of money or delivery of goods.
Legal Sufficiency of Consideration
Consideration must be of legal value: It must be
something that the law recognizes as having value.
Examples of legally sufficient consideration:
• A promise to do something
• A promise to refrain from doing something
• A benefit to one party or a detriment to the other
A promise to do something
Promise to perform a service: If someone promises
to paint a house in exchange for a certain amount of
money, the promise to paint is the consideration.
Promise to deliver goods: A promise to deliver a
specific quantity of rice to a buyer in exchange for
payment is another example of consideration.
A promise to refrain from doing
something
Refraining from doing something: If someone
agrees not to sue another person in exchange for a
settlement, the forbearance from suing is the
consideration.
Giving up a legal right: For example, if a person
agrees not to exercise their right to terminate a lease
early in exchange for a certain amount of money, the
forbearance is the consideration.
A benefit to one party or a detriment to the
other
Sale of Property: When a seller sells a property to a
buyer for a price, the buyer benefits by acquiring the
property, while the seller benefits by receiving the
purchase price. This is a classic example of
consideration where both parties gain something.
Employment Contract: In an employment contract,
the employer benefits by obtaining the employee's
labor, while the employee benefits by receiving wages
and other benefits. This exchange of benefits constitutes
consideration.
Adequacy of Consideration
The law does not inquire into the adequacy of
consideration: As long as the consideration is legally
sufficient, the courts will not question its fairness.
Exceptions:
• Fraud (Misrepresentation: low mileage of a car)
• Undue influence (Domination: Boss forces
employee to sign a contract)
• Duress (Threat of harm: kidnapping kids)
Void and Voidable Agreements

Void agreement:
An agreement that is not valid from the beginning and
has no legal effect.

Voidable agreement:
A valid agreement that can be made void at the option
of one or both parties.
Reasons for void agreements
• Illegal object (Sell drugs, commit murder)
• Uncertainty (Vague terms: Selling at reasonable price)

• Restraint of trade (A price-fixing agreement between competitors)

• Impossibility (Selling a land already owned by someone)

• Unlawful consideration (A contract to pay bribe)

Reasons for voidable agreements
• Coercion (Obtaining consent through force or threats)

• Undue influence (Using a position of power to obtain unfair

advantage)

• Fraud (False representation made knowingly or recklessly)

• Misrepresentation (False representation made innocently)

• Mistake (One or both parties are mistaken about a fundamental fact of the
contract)
Consequences of voidable
agreement

•The aggrieved party may avoid the contract:

They can choose to withdraw the contract and recover any
benefits they have conferred.

•Affirmation:
If the aggrieved party affirms the contract, they cannot
later avoid it.
Capacities of parties

Capacity: The legal ability to enter into a contract.

Importance of capacity: Contracts entered into by

persons lacking capacity may be voidable.
Minors
General rule: Minors lack capacity to contract.

Exceptions:
•Contracts for necessaries
•Beneficial contracts
•Contracts ratified after attaining majority

Voidable contracts: Contracts entered into by minors are

generally voidable at their option.
Persons of unsound minds
General rule:
Persons of unsound mind lack capacity to contract.

Test for unsoundness of mind:

Whether the person was capable of understanding the nature
and consequences of the contract.

Voidable contracts:
Contracts entered into by persons of unsound mind are
generally voidable at their option.
Who can perform a contract?
Corporations have the capacity to contract through
their authorized representatives.
Partnerships have the capacity to contract through
their partners.
Who cannot perform a contract
Aliens: Generally have the capacity to contract, but
may be subject to certain restrictions. Immigrants,
tourists, diplomates, refuges etc.
Drunkards: May lack capacity to contract if they are
so intoxicated that they cannot understand the nature
and consequences of their actions.
Convicts: May have limited capacity to contract
depending on the nature of their conviction. Prisoners,
Criminals released on bail etc.
Free consent

•Free consent:
The voluntary agreement of parties to a contract, without
coercion, undue influence, fraud, or misrepresentation.
Termination or discharge of
contract
•Performance: Complete fulfillment of contractual
obligations by both parties.
•Agreement: Mutual consent to terminate the contract.
•Breach: Failure to perform contractual obligations.
•Impossibility: Inability to perform the contract due to
unforeseen circumstances.
•Lapse of time: Expiration of the contract's duration.
•Operation of law: Termination due to events like
bankruptcy or death.
Termination or discharge of
contract
Examples
•Performance: A seller delivers the promised goods to the
buyer, who pays the agreed-upon price.
•Agreement: Parties agree to cancel a contract before it is
fully performed.
•Breach: A buyer fails to pay for goods after receiving them.
•Impossibility: A contract to build a house is terminated due
to a natural disaster.
•Lapse of time: A one-year lease expires.
•Operation of law: A contract is terminated due to the
bankruptcy of one of the parties.
Quasi contracts
A contract implied by law to prevent unjust
enrichment.
Examples:
1. A doctor provides emergency medical care to an
unconscious patient. The patient is liable to pay a
reasonable fee for the services.
2. A person mistakenly pays money to the wrong
person. The payer can recover the money through a
quasi-contract claim.
Law of agency
A relationship where one person (agent) acts on behalf of another person
(principal).
Examples:
1. Actual authority: A real estate agent is authorized to sell a property on
behalf of the owner.
2. Apparent authority: A store manager hires a new employee, giving the
impression that the employee has authority to make decisions on behalf of the
store.
3. Implied authority: An agent is impliedly authorized to perform acts
necessary to carry out their duties.
Thank you