Business Law
Introduction:
Ø Every society has laws.
Ø No society can imagine with out law. The existence of laws depends on the time and society.
Ø Every society creates norms to regulate the behaviours of the people to maintain peace and security by which the normal life can run.
Ø The breaking of such norms is also inevitable. There are also the people in the society who seeks to achieve benefit by breaking such norms which ultimately disturb the society.
Ø Therefore, the society also provided some punishment/ penalty/ compensation/ remedy etc if such norms were violated.
Ø Law regulates the human behaviours.
Ø Law creates the rights and duties.
Ø Laws are made for:
o To grant legal validity of the subjects that is not regulated by existing laws. -krlnt sfg"gsf] cefj ePsf s'g} ljifonfO{ lgoldt ug{ sfg"gL Joj:yfdf :yfg lbg . _
o To reforms the existing laws with the pace of time or -krlnt sfg"gdf ;d;fdlos ;'wf/ u/L ;dfhsf] ult ;'xfpFbf] cfjZos ;+zf]wg ug{_
o To create the news laws to meet the societal needs. -ljBdfg ;dfhdf gofF cfjZostf cg';f/ sfg"gdf Jofks Pj+ cfd'n kl/jt{g ug{_
o To consolidate or codified the existing scattered norms. -a]Unf a]Un} sfg"gdf 5l/P/ /x]sf km'6s/ sfg"gx?nfO{ Pslqt u/L ;+lxtfs/0f ug{_
Ø With the development of the society, it has been divided in to many interests.
Ø Some knowledge of law is necessary for all person because 'ignorance of law is no excuse'
Ø Each member of society must proceed to a large extent in conformity with recognized rules and principles of social conduct.
Ø Division of labour.
Ø Business law is one of them
Ø Just as a game of football or cricket, life in general and the business world in particular could not continue without law to regulate the conduct of people and to protect their property and contractual rights.
Ø To understand business law it is necessary to understand the law.
1. Meaning & Definition of law
Law is those rules and principles that governs and regulates social conduct and the observance of which can be enforced in courts. It operates the actions of persons in respect to one another and in respect to the entire social group or society.
Law is that;
ü Which establishes uniformity of conduct.
ü Seeks to achieve an ethical purpose
ü Law expresses social solidarity
ü Law comprises the rules which protect interest of individual or groups.
Three meaning of law:
1. Law is legal order that is the regime of adjusting relation and ordering conduct by the systematic application of force of organized political society.
2. The whole body of legal principle which obtain a political organized society.
3. It is used to mean all official control in a politically organized society.
Ø In general sense law means an order of the universe, of events, of things or actions.
Ø In its juridical sense it means a body of rules of conduct, action or behaviour of person made and enforced by the state.
Ø Law in its widest sense includes any rules of actions i.e. any standard or pattern to which actions are ought to be confirmed.
Definition of Law:
Law has been defined from different approaches;
Ø By its basis in reason, religion or ethics'
Ø By its sources in custom, precedent or legislation
Ø By its effects on the life of society
Ø By its methods of its formal expression or authoritative application and
Ø By the ends that it seeks to achieve.
· Law is changing concepts. The purpose and function of law has been different in different times.
· A social change in society brings about a change in the definition, scope and function of law.
Ex. What is prohibited behaviour today may become permissible conduct tomorrow and vice versa. Thus the abortion which was considered to be heinous crime because of the immorality involved in it is no longer an offence after the enactment of law legalizing abortion.
Different jurist at different times have made attempts to define the term 'law' but it is very difficult to find out the perfect definition.
· Old definition laid emphasis on religious aspects of life and they are not applicable today.
· To give a definition of law is a more difficult task due to many reasons.
First: The difference between the laws of the two societies and the term 'law' is used for different meanings.
(Ex. Hindu- Dharma, Islamic- Hukum, Roman- Jus, French- Dorit, and in German- Richt. )
Second: different definition of the same thing may be given if it is viewed from different angles and one angle does not take into consideration the views from different angle.
(A definition which does not cover all the aspect would be imperfect definition)
Third; the function and scope of law remains always changing (As we all know, law is social science, it grows and develops with the society. The developments of society in modern times have created new problems. The law is required to cover new fields and to move in new direction.)
Therefore, it is very difficult for a definition of law given at a particular time to remains valid for all times to come.
A definition which is most satisfactory today might prove narrow and incomplete tomorrow.
Blacks Law Dictionary, "The regime that orders human activities and relations through systematic application of the force of politically organized society or through social pressure, backed by in such a society"
" The aggregate of legislation, judicial precedents and accepted legal principles; that the body of authoritative grounds of judicial and administrative action"
Justinian has defined "Law is the standard of what is just or unjust"
Salmond, "Law is the body of principles recognized and applied by the state in the administration of justice"
John Austin, "Law is the aggregate of rules set by men as politically superior or sovereign to men as politically subject."
Holland, "Law is the general rule of external human action enforced by a sovereign political authority"
Savigny, "Law is like language develops with the life of people"
Roscou Pound, " Law is the body of knowledge and experience with the aid of which a large part of social engineering is carried on."
2. Nature of Law
According to Fuller Law should be meet following nature:
a) Generality (b) Publicly Promulgate (c) Prospective in effect (d) Clear and intelligible (e) Consistent (f) Avoidance of contradictory (g) Avoidance of impossible demand (h) Congruence between official action and declare rule.
According to H.L.A Hart;
a) Law permits or restrict the conduct
b) Describe that the compensation should be given to the injured party
c) Defines the process of valid contract grants the rights and duties.
d) Judicial organs which interpret the law and impose sanctions
e) Legislative body to create and repeal laws.
(What is the meaning of the words is not important)
Other Natures;
- Changing nature of laws
- Normative
- Equality before laws and equal protection of laws.
- Ignorance of law is no excuse
- Constitution is the fundamental law of land
In the Middle Ages, law was considered to have been dictated by Divine Will, and revealed to wise men. The most ancient legal precedents and customs were considered to be the best law
In its most general and comprehensive sense, law signifies a rule of action, and is applied indiscriminately to all kinds of action; whether animate or inanimate, rational or irrational. In its more confined sense, law denotes the rule, not of actions in general, but of human action or conduct.Law is generally divided into four principle classes, namely: Natural law; The law of nations; Public law; and, Private or civil law.
When considered in relation to its origin, it is statute law or common law.When examined as to its different systems it is divided into civil law, common law, canon law.When applied to objects, it is civil, criminal or penal.
It is also divided into natural law and positive law. Into written law, lex scripta; and unwritten law, lex non scripta. Into law merchant, martial law, municipal law and foreign law. When considered as to their duration, laws are immutable and arbitrary or positive. When viewed as to their effect, they are prospective and retrospective.
3. Sources of Law
Source is the place from where something origin. The expression 'source of law may mean the origin from which rules of human conduct came into existence and derived legal force or binding character. The different jurists have differently expressed their views regarding the sources of law. According to some jurists, society itself is the source of law while the sovereign is considered as exclusive source for others. Austin says that law originates from sovereign. Savigny traces the origin of law in the general consciousness of people. Theologians say that the law originates form God. The Dharma Sastra, Kuran, Bible etc. are the sources of law as per them.
The expression source of law has three meanings;
Firstly; Formal sources- which confers binding authority as a rule and converts the rule into law. Therefore, state is the formal source of law.
Secondly; Literary source- the place where, if a person wants to get information about law, he goes to look for it i.e. form which actual knowledge of the law may be gained e.g. statutes, decided cases and text books.
Thirdly; Material sources- which supplies the matter on the content of law. Therefore, custom, religion, agreement, opinion of text writers etc. are material source.
To sum up, the custom, precedent, legislation and conventional rules etc. are the main sources of law. If we study the legal system of modern times most of the law is made by legislation. In some countries precedent plays the primary role while custom in other. Similarly, juristic writings, foreign decisions, moral considerations and social values of the time and place some times become sources of law. Generally the law comes from these sources. We can divide these sources in to two broad categories to study the sources of law such as (a) Binding Sources (b) Non-binding or persuasive source. Legislation, precedent and customs are regarded as binding sources and juristic writings, foreign decisions, moral considerations and social values are nonbinding sources.
A. Custom
Custom is a habitual course of conduct observed uniformly and voluntarily by the people. Customs evolve when people find any act to be good and beneficial, which is agreeable to their society; they practice it and frequently followed by approving and accepting in the community for generations. The custom arises when people consciously or unconsciously adopt some definite rules governing common rights and obligations. These types of laws created by people themselves to solve the same problems and consistently recognized.
Holland describes the custom as like as the formation of path across the grass field. One man crosses a grass field accidentally or for his convenience. Other peoples also follow the same path by the similar reason. Eventually a clear foot-path is emerges across the green grass field. In the same way the custom comes into existence. Therefore, a certain rules or practice is followed by some one for the reasons of convenience etc. Others without being to do so follow the same rule and become a habitual course of conduct in that society. In this way imitation plays an important role in the growth of a custom.
It is one of the oldest forms of law making.
i. Kinds of custom
In wider sense, Custom can be divided in to two broad categories.
a) Customs without sanctions and
b) Customs having sanctions.
a) Customs without sanctions; these types of customs are non-obligatory. They are observed due to pressure of the public opinion.
b) Customs having sanctions; these types of customs are enforced by the state which may be divided into two types.
a. Legal customs and
b. Conventional Customs.
a. Legal customs; legal customs are those customs which are recognized by the courts and law become a part of the law of land. (Mohammedan Law) Legal customs are two types
i. Local and
ii. General
i. Local custom; these types of customs are only apply in a defined locality. It also applies in certain sectors, families. Muluki Ain, Sec. 10 a. of the Chapter of incest. 'No punishment shall be imposed on any marriage or sexual relations according to the custom of person.'
j. General Custom; these types of customs prevail throughout the territory of the state. Generally, the customs which are treated to be the part of the law of the land are general customs. Sec. 8,9,10 of the Chapter of Adal (Justice and Equity) of Muluki Ain.
b. Conventional Customs:
Conventional customs are those customs which govern the parties to an agreement. It is an established practice which is binding not because of any legal authority independently possessed by it but because it has been expressly or impliedly incorporated in a contract between the parties concerned. Parties, sometimes expressly and sometimes impliedly agree to them.
A conventional custom is thus an established rule concerning trade, contract or sale of goods etc. The business laws were in the beginning customary in character and later on it recognized or adopted by courts and statutes.
ii. Essentials of a Custom
There are many customs prevailing in the society but they are not custom in the eye of law. In other words there are some certain pre-requisites that the custom must fulfill. These are as follows;
1. Antiquity
2. Continuity
3. Peaceable enjoyment
4. Obligatory force
5. Certainty
6. Consistency
7. Reasonableness
8. Conformity with statutes.
1. Antiquity: A custom must be ancient to have the force of law. It should be practiced from the immemorial times i.e. time so remote that no living man remembers its origin or can give evidence concerning it.
2. Continuity: A custom must have been practiced continuously. If it faced disturbance or interruption in practicing such types of custom can not be considered to have the legal force. Therefore, continuity is another essential of custom.
3. Peaceful enjoyment: The custom must have been enjoyed peacefully. Disputed or the custom which brought violence in the society such custom is not can not be considered as the source of law.
4. Obligatory: The custom must have an obligatory force. It must have been supported by the general public opinion and enjoyed as a right of right. If such practice was maintained by surreptitiousness it cannot be a custom.
5. Certainty: The vague or indefinite custom cannot be recognized as valid custom.
6. Consistency: There must be consistency among the custom. It must not come into conflict with other established custom.
7. Reasonableness: Another requisite of a valid custom is reasonableness. If the custom is unreasonable in the eye of learned personality or in the eye of justice such custom can be declare void. The custom can be held unreasonable if it impose an unusual burden on one person or some person for the benefit of others if it would obviously tend to destroy its legal validity.
8. Conformity with statutes: A custom must be conformed to the existing statute law. In other words, if it is to be valid and to have the fore of law, must not conflict with any statute.
The custom having above pre-requisites is recognized and enforced by the state.
B. Legislation
The term 'Legislation' is derived form the Latin words 'legis' and 'laterm'. 'Legis' means a law and 'laterm' means to make or put or set. Legislation is the process of making or setting law. It is the promulgation of legal rules by an authority which has the power to do so.
Broadly speaking the term legislation can be express to denote three senses.
Firstly; the term legislation covers any sources of law making process including precedent, customs, conventional law etc.
Secondly: It includes every expression of the will of the legislature whether directed to the making of law or not.
Thirdly; in restrict sense, the making of rules and laws to be followed and enforced in the courts of the state. These rules can only made by competent law making organ.
When we use the term legislation as a source of law it denotes the creation of law by an organ of government and excludes other sources.
Legislation is a most important source of law in the present context. In most of the country democratically formed, legislative authority is vested in the parliament and law is generally considered as the will of the parliament.
a. Types of legislation
The legislation can be divided in to two kinds
i) Supreme legislation
ii) Delegated or subordinate legislation
i) Supreme Legislation: law made by the sovereign power of the state which is capable to create, amend, and repeal the law. (Parliamentary laws)
ii) Delegated legislation: law made by the executive under the power delegated to it by the supreme legislative authority. ( Ministerial laws or rules )
Legislation is the sole function of parliament or legislator. The peoples are only subjected to those rules which are made by their representatives. But due to some reasons the supreme legislatures is unable to create all the laws regulating the behaviours of people. These reasons may be; lack of sufficient time, technicality of matters, emergency, flexibility, local matters etc.
C. Precedent
Precedent is a previous instance or case which is or may be taken as an example or rule for subsequent cases. In general sense precedent means some set of pattern guiding the future conduct. In legal sense it is the guidance or authority of past decisions of future cases.
In every legal system has a set of judiciary. The function of the judiciary is to adjudicate the laws made by parliament. In the beginning of the judicial history, courts are guided by customs and principles of justice. As society develops, the legislation become main source of law and the judges decide the cases according to it. Even in the modern time, the judges sometime perform active role. In the case of first impression, in the matter of interpretation, or filling up any lacuna in the law, the judges decide the cases from their own conviction and right reasons. Such types of decisions may be useful on other similar cases therefore it is applicable and become authority.
Precedent is an important source of law in Nepal.
Article 96(2), "Any interpretation given to a law or any legal principle laid down by the Supreme Court in the course of hearing of a suit shall be binding on His Majesty's Government and all offices and courts"
Precedent can be classified in tow types; Authoritative and persuasive.
Authoritative precedent is those types of precedent which is mandatory to follow by the sub-ordinate bodies, persons and the government as declared law. Persuasive precedent is not mandatory but it can be followed if applicable to the similar cases.
D. Conventional Rules
Conventional rules are the rules agreed on by persons for the regulation of their conduct toward one another. It is a law constituted by agreement as having force of special law between the parties. Hence, the conventional rule is also a source of law.
E. Opinion of Experts
Opinion of experts and the text book writers on law sometimes work as a source of law. Although there is not punishment of the state behind them and there is no binding force except a persuasive value, they are consulted by the courts and are sometimes followed by them. Therefore, the opinions of experts become a source of law.
4. Types of law :
Law can be classified differently from different perspective. Different jurists have exposed their views from their own approaches in respect of types of law. There are no universal applications of these divisions. However, broadly speaking law can be classified in to following types.
National Law
International Law
Substantive Law
Procedural Law
Public Law
Private Law
Administrative Law
Criminal Law
Civil Procedural
Criminal Procedural
Law of evidence
Law
Constitutional Law
According to Salmond There are 8 types of law
1. Imperative law : command of sovereign.
2. Physical law/ law of Natural law
3. Moral laws
4. Conventional law
5. Customary law
6. Practical or Technical law
7. International law
8. Civil law (law made by state)
1.3 Concept and Importance of Business law
· Business law is the union of two words Business and law. Business is an act of any human activities for the purpose of earning money and law is a set of rules and principles that has been enforced by the state to regulate human activities. Therefore, it is a set of rules and principles to regulate the business activities.
· Business law is also known as trade law, mercantile law and commercial law etc. It is a branch of civil law. It includes within its scope the contract law, law of sales of goods, law of negotiable instrument, law of agency, banking law, law of insurance, law of indemnity and guarantee, bailment and pledge carriage and transportation etc.
· Business law is designed for conducting business activities in a systematic manner. It is the rules that govern from the establishment of a business to the operation, development or extension and dissolution of it. More over it also regulate the relationship between the business persons and government.
· Before the law relating to business came into existence, business was undertaken on the basis of customs, usages, religion and judicial decisions. In the process of development, merchants themselves operated their business activities by formulating different rules. These rules become insufficient and state began to create the business law.
Meaning of Business law
According to M.C. Sukla, "mercantile law may be defined as that branch of law which deals with the rights and obligation of mercantile persons arising out of mercantile transactions in respect of mercantile property.'
Accroding to M.C. Kuchhal, " the term mercantile law may be defined as that branch of law which comprises laws concerning trade, industry and commerce'.
Accroding to N.D. Kapoor, "mercantile law is also used to denote the aggregate body of those legal rules which are connected with trade, industry and commerce."
Characteristics of business law
· Business law is concerned with the economic activities.
· It regulates trade, industry, commerce and business.
· It also regulates relationship between national and international business persons and government.
· Business law is related to both business and society.
· Business law protects rights and interests of business persons.
· It is formulated for the purpose of fair business environment.
Importance of Business law
Just as a game of football and cricket could not be played satisfactorily without rules to govern the player, so, business world also could not continue without law to regulate the conduct of peoples and to protect their property and contract right. Therefore, its importance can be outlined as follows.
· Business law creates uniformity to establishment, operate and dissolution of business activity.
· It helps to increase and maintain business transactions
· It provide environment to develop capital market.
· It strengthen economic development
· It prepare the foundation for national development
· It help to create employment and remove poverty
· It creates favorable environment for investment.
Sources of Business law
The sources of business law mean the places of origin from where business law came into existence. As we discussed above that before business law came into existence, business activities was conducted on the basis of customs, usages and judicial decisions. In the process of development or in the course of conducting business, the merchants themselves created rules of their conduct by establishing conventional rules. When these sources of law found insufficient states itself started to regulate the business activities by formulating different kinds of business laws such as Contract Act, Company Act, Banking Act and Arbitration Act etc. Similarly, if such acts are found insufficient to settle dispute arising out between business persons, judicial decisions provide clear path to the business law. Moreover, foreign laws, opinion of experts also plays while creating business laws. Therefore, the sources of business law are the customs, judicial decisions, statutory laws, conventional rules, opinions of experts and foreign laws etc.
Being a state of cultural similarity, neighbour and open border, Nepalese and Indian legal system can be found similar in many respects. Therefore, the sources of business law of India and Nepal is same which are as follows.
1. Custom and Usages
Custom and usages are main sources of business law. Business persons established formulate rules to settling down disputes and to regulate transaction in the business activity. With the pace of time such rules become part and parcel of business and established as custom. State recognizes these customs while creating laws and recognized and applied by the court if it is not contradictory or opposed to the existing law of the country. Large part of the business law is derived form customs usages in any country. For example: law of lending and borrowing money, law of sales goods, law of bailment etc.
2. British mercantile law
British mercantile law is a direct source of business law of India whereas it only is only an indirect source for Nepalese business law. Nepalese legal system has directly and indirectly influenced by Indian legal system in many respects. Its open border, cultural similarity, geographical closeness and many of Nepalese leaders and legal professionals were educated in India, made necessary to adopt Indian business law. Large part of the Indian business laws are based on British mercantile law which are based on statutes and judicial decision. British mercantile law has its sources on common law, law of merchant, equity, and statute law.
3. Judicial decisions:
It is impossible to regulate each and every activity of daily business by the statutory law. By this reason, the courts of the countries are empowered to deliver justice and have power to interpret law. Therefore, courts decisions become mandatory in the absence of clear cut law regulating disputes. These decisions are applicable to the same types of cases if appeared before it. So far as Nepalese business law is concerned, decision made by the Supreme Court is a source of law according to Article 96 (2) of the Constitution of the Kingdom of Nepal.
4. Statutory laws;
Statutory law means the rules enacted by parliament or legislatures. Now a day, legislation is the most efficient and most usual way of creating, changing and repealing laws. Legislature is a place where numbers of business laws are formulated such as Contract Acts and Banking Acts etc. Parliament is supreme in legislation. Major part of business law in the modern society is found in the statutory law. Therefore, it is a primary source of business law.
5. Opinion of Experts;
Opinion of experts and the text book writers on business law sometimes work as a source of law. Although there is not punishment of the state behind them and there is no binding force except a persuasive value, they are consulted by the courts and are sometimes followed by them to settle dispute. Therefore, the opinions of experts become a source of law.
6. Commercial Treaties and Agreements:
Treaties and agreements made between two countries for the purpose of conducting business activities also a sources of law. According to Sec. 9.1 of the Treaty Act, 2047, any treaty made by Nepal shall prevail over the national law. Therefore, it is also a main source of business law of Nepal. (Indo-Nepal trade treaty, 1996).
Chapter 2
Contract
2.1 Introduction
· In broadest sense contract is an exchanges of promises by two or more parties. In strict sense, it is an exchange of promises by two or more parties resulting in an obligation to do or not to do a particular act which obligation is recognized and enforced by law.
· Contract is an agreement between two or more parties creating obligation that are enforceable or otherwise recognizable at lat.
· Law of contract is an oldest branch of business and commercial transaction.
· From the beginning of the human civilization law of contract has been existed in one form or other.
· If criminal law is created for the purpose of safety and security of human being and property in the same way law of contract is created for the security and stability of the business world.
· Business world is based on the enforceability of promise therefore; law of contract is concerned with the enforceability of promises.
· Law of contract is the foundation for the other branches of commercial or business law.
· Law of contract affects every one of us and every one of us enters into contract day by day.
· When some one enters into a contract, the parties of a contract have two alternatives open to them.
· They may rely on another's honour to ensure performance or
· There should be legally enforceable obligation to perform the agreement.
· The first is insufficient protection therefore; legal means of enforcing promises has been developed in civilized society.
· Legally enforceable promises are termed contract.
· The function of the law of contract is to see that as far as possible, expectations created by promise of the parties are fulfilled and obligation proscribed by the agreements f the parties are enforced.
· Therefore, it is said that contract is cement that holds our economic system together.
· Contract gives right to one person and cast a corresponding duty on another person.
· On this account law gives remedy for the breach of promise and recognizes its due performance as duty.
· Hence, it is an agreement creating obligation.
2.2 Meaning & Definitions
Salmond: " A Contract is an agreement creating and defining obligation between the parties"
David Walker, " A contract is an agreement between two or more persons intended to create a legal obligation between them and to be legally enforceable.
Anson, " A contract is an agreement enforceable by law made between two or more persons by which rights are acquired by one or more acts done or forbearance on the part of others"
J. B. Sounders Esce: "Contract is an agreement between competent persons upon a consideration to do or to abstain from doing some acts"
As per the Sec 2 (a) of the Contract Act 2056, "Contract is an agreement between two or more persons to do or not to do something, which can be enforceable by law."
All contracts are agreements but all agreements are not contracts.
2.3 Essentials of a valid contract
1. Two Parties: there are at least two persons to make the contract.
2. Proposal & Acceptance: proposal or offer by one party and acceptance of the proposal or offer by another party resulting in an agreement.
3. Legal relationship: an intention to create legal relationship or an intent to have legal consequences
4. Free consent: genuine consent between the parties (not marred by mistake, undue influence, coercion, fraud or misrepresentation)
5. Competent parties; the parties of the contract are capable of contracting.
6. Lawful objective; the object contracted for is legal and is not opposed to public policy.
7. Consideration; The agreement supported by lawful consideration.
8. Possibility of performance; The agreement is capable of being performed
9. Certainty; the terms of the contract are certain.
10. Verbal or written and registration
11. Not expressly declared void.
2.4 Classification of contract;
1. On the basis of Modes of creation of Contract
a. Express versus Implied Contract
b. Direct Versus Indirect
c. Formal Versus Simple
2. On the basis of Performance of Contract
a. Executed versus executory contract
3. On the basis of origin of liability of the parties
a. General versus contingent contract
4. On the basis of nature of contractual liability
a. Unilateral versus bilateral contract
5. On the basis of the nature of offer
a. Particular versus general
6. On the basis of enforceability of contract
a. Valid, void, voidable and unenforceable contract.
2.5 Distinction between Agreement and Contract.
Agreement
Contract
1
An agreement is a mutual understanding between two or more persons for their future performance.
1
A contract is an agreement between two or more parties creating rights and obligations enforceable by law.
2
All Contracts are agreements
2
But not all agreements are contract
3
Offer and acceptance is not an essential of agreement. In other words agreement can be formed without offer and acceptance.
3
In order to enter in to a contract, there must be the presence of offer by one party and acceptance of the offer by another party.
4
The parties need not have intention to create legal relationship.
4
The parties of the contract must have the intention to create legal relationship.
5
The incompetent parties also can enter in to an agreement.
5
Only the competent party can enter in to a contract.
6
Agreement can be formed without consideration.
6
Whereas, consideration is an essential element of a valid contract.
7
Mere an agreement does not create legal obligation.
7
Contract creates legal obligation.
8
Agreement is not binding to the parties. At any time they can revoke their promises.
8
The terms and conditions of the contract are binding to the parties. If any party breaches it, the victim is eligible to get remedy.
9
All agreements are not legally enforceable.
9
All contracts are legally enforceable.
10
The scope of an agreement is wider and vague.
10
The scope of the contract is limited.
2.6 Distinction between Void and Voidable Contract.
Void Contract
Voidable Contract
1
Void Contract is a contract that has no legal effect so that there is really no contract in the existence at all.
1
Voidable contract is a contract that can be rejected at the option of one party.
2
Void contract is not binding to the parities.
2
Voidable contract is binding to the parties unless the courts declare it to be void.
3
Void contract is not enforceable by law.
3
Voidable contract is enforceable if the affected party does not take action it.
4
Void contract is void from the very beginning.
4
Voidable contract is valid if affected party does not take any action within the time prescribed by law.
5
Void contract is void because it is created for stopping the parties to do legal activities such as not to establish legal business, not to get legal marriage, not to consume public facilities, not to suit in the court and illegal contract etc.
5
Voidable contract can be declared void because it is created against the free will of parties.
2.7 Rules regarding Offer and Acceptance
2.7.1 Rules regarding Offer
a. Meaning and definition :
An offer is an expression of willingness to enter into a contract with the intention that it shall become binding on the offeror immediately when accepted by the offeree. Offer may be in written, verbal or implied.
Offer according to the Sec. 2 (a) of the Indian Contract Act, 1872, " When one person signifies to another his willingness to do or to abstain from doing anything with a view to obtaining assent of the other to such act or abstinence, he is said to make a proposal."
Sec 2 (b) of Nepalese Contract Act, 2056 define offer as, "Offer means a proposal put by a person with a hope to get assent from the other to do or not to do something."
Anson defines the term offer as, "Willingness signified with an intention to obtaining legal validity."
From the above definition of offer, it is clear that;
Ø Offer is an expression of willingness
Ø To do or not to do any thing
Ø Expression put to the another person or persons
Ø The objective of the offer is to get assent
Ø With intention to create legal relationship.
Therefore, an offer is a proposal by one person, whereby he express his willingness to enter into a contractual obligation in return for a promise or act or forbearance.
An offer consists of two parts;
a) A promise by the offeror
b) A request addressed to the offeree for something in return.
The promise that the offeror makes is not binding upon him until the offeree unconditionally accept.
b. Rules regarding Offer:
i. Contractual Intention : An offer must intend to create legal relationship
- A Social invitation does not amount offer:
Ordinary invitation to social affairs are not offer in the eye of law.
Ex. Invitation to dinner.
- An offer made in excitement is not offer:
A person may make a proposal in a jest without any thought or intention of creating a binding obligation. A proposal made in jest or excitement can not be expected reasonable offer.
Ex. Political speech. Etc.
- Invitation to Negotiate is not offer
The first statement made by one to another is not necessarily an offer. In many cases there may be preliminary discussion or an invitation by one party to the other to negotiate or talk business.
Ex. The statement "Do you want to buy this car of mine?"
- Invitation to offer is not offer:
Invitation of tender for sale or purchase does not amount an offer.
An announcement that a person will sell his property at public auction.
ii. Definite offer:
An offer must be definite and certain. If it is indefinite, loose or vague it can not be accepted because the court can not tell what the parties are to do.
A brought a horse form B promising to by another if the first one proves lucky and refuse to buy the second horse.
iii. Communication of the Offer:
An offer must be communicated to the offeree. An offer becomes effective only when it has been communicated to the offeree.
iii. Offer may be express or implied.
iv. Offer may be particular or general
v. Offer must put forwarded to get assent
vi. Offer should not be against the public interest and social value.
vii. Offer must be in request form not in order
viii. No term the non-compliance of which would amount acceptance:
Offer can not put saying that if acceptance is not communicated by a certain period of time, the offer would be considered as accepted.
C. Types of Offer:
1. Express and implied offer
2. Direct and Indirect offer
3. Specific and general offer
4. Counter Offer (Sec. 9 f.)
5. Identical / cross offer.
D. Termination or Revocation of Offer:
An offer continues in existence and capable of acceptance until it is brought to end. Revocation of offer takes place in any of the following ways;
1. Revocation : According to Sec. 8(1) of the Contract Act 2056 the offer may be revoked by the offeror at any time up until it is accepted.
2. Lapse of time: (Offer lapses after stipulated time). An offer does not remain open indefinitely. If an offer is stated to be open for a specific length of time then the offer automatically terminates when that time limit expires. Sec. 9 (a)
3. Expire of reasonable time Sec. 9.b.
4. Death or insanity:
An offer lapses by the death or insanity of the offeror or the offeree before acceptance. Sec. 9 (c)
The effect of the death of the offeror or offeree depands upon the nature of the offer. If it is involved the performance of promise which was personal to the offeree such as writing a book or singing a concert, then offer can not be accepted once news of the death has been communicated to the offeree.
5. Illegality: An offer lapses by subsequent illegality. If the performance of the contract become illegal offer the offer is made it lapses.
6. Non fulfillment of condition: Sec 9 (g) An offer lapses by not being accepted in the mode prescribed or if no mode is prescribed, in some usual and reasonable manner.
7. Rejection of Offeree: An offer lapses by rejection of offer by the offeree.
8. Counter Offer: An offer lapses by counter offer by the offeree Sec. 9 (f)
9. Communication of Offer and withdraw at once: If the offeree received a offer and withdraw notice at once offer lapses.
10. Destruction of subject matter
Acceptance:
Meaning of Acceptance:
Acceptance is the manifestation by the offeree of his assent to the terms of offer.
Mathematically,
Offer + Acceptance = Contract
The acceptance must be absolute and unconditional
It must accept just what is offered
It is an expression of intention to agree the terms and condition offered.
Sec. 2 (c) of the Nepalese Contract Act, 2056,
" Acceptance means an assent given by a person upon the offer in a sense as taken by the offerer."
Sec 2 (b) of the Indian Contract Act, 1872,
" When a person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, become a promise."
Anson defines " Acceptance of an offer is the expression by words or conduct of assent to the terms of the offer in the manner prescribed or indicated by the offerer."
Rules Regarding Acceptance:
1. Only the offeree can accept the offer; (Boulton vs Jones (1857) 157 ER 232.)
A sold his business to his manager without disclosing the fact to his customers. On the afternoon of the day on which the sale was carried through, a customer (Jones) who had a running account sent an order for some goods addressed to the dealer of the business by name. The new owner of the business executed the order without disclosing that business had changed hands.
It was held that he could not recover the prices as there is no contract.
If the offer is directed not to a specific person individual, any one can accept it.
2. Offer may be accepted either expressly or impliedly
3. Offeree must have the knowledge of the offer before acceptance (Lal Man Shukla Vs Gauri Dutta an Indian Case) 1913 11 All L.j.
Gauri Dutta sent his servent Lalman to trace his nephew. He then announced a reward of Rs. 500/- to anyone who traces his nephew. Lalman traced the boy without the knowledge of reward and brought to home. Subsequently when he came to know of the reward, he claimed it.
It was held that Lalman was not entitled to the reward because he did not know about the reward when he traced the missing boy.
4. Offeree must accept the offer absolutely and unconditionally
5. Offeree must accept the offer as prescribed in the offer
6. Acceptance must be communicated to the offerer.
a. Mental or not communicated acceptance is no acceptance. (Brogden vs Metropolitan Railway Co. ) 1877, A.C. 666
A draft agreement relating to the supply of coal was sent to the manager of the railway company for his acceptance. The manager wrote the word "approved" and put the draft in a drawer intending to send it to the company's solicitors for formal contract being drawn up. By mistake, the document remained in the drawer and was never completed.
It was held that this mental act did not amount to acceptance and so did not complete the contract.
Sec. 7.1. of the Contract Act 2056.
7. Acceptance must be given with in fixed time or reasonable time
8. Once Offer rejected by offeree can be accepted later (Sec. 8. 3. of Contract Act 2056)
Revocation and Termination of Acceptance:
1. Revocation before the offeree communicated. (Sec. 8.2)
2. Death or insanity (9.e)
3. Two notice
Consideration
· Contract result only when one promise is made in exchange for something in return.
· The something in return is what we mean by consideration.
· Mere promise is not enforceable by law.
· A promise must be accepted by a return promise. (Ex. A mere promise to make a gift is not enforceable by law. )
· To be enforceable, a promise must be purchased.
· Consideration provides at least some objective guarantee of deliberation, a certain protection against hasty and ill contract.
· Consideration is an aid in determining that promises are worthy of enforcement.
· Doctrine of consideration is the most important test of enforceability of a contract.
· Therefore, Offer+Acceptance+Consideration = A Contract.
Meaning:
Sir Frederick Pollock has defined consideration as " the price for which a promise of other is brought"
Lush J (in Currie vs. Misa, 1875)
" A valuable consideration in the sense of the law may consist either in some right, interest, profit or benefit accruing[1] to the one party or some forbearance[2] detriment[3], loss or responsibility given suffered or undertaken by the other."
Sec 2(d) of the Indian Contract Act 1872 has defined "When at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstain[4] from doing, or promises to do or to abstain from doing something, such act or abstinence or promise is called a consideration for the promise."
Sec 2 (d) of the Nepalese Contract Act defines consideration as "consideration means a promise made by a person to do or not to do something for the acts done or undone by the other according to that mentioned in the offer."
Kinds of Consideration
A consideration may be classified in to three kinds
a) Executory consideration: future consideration. It is the price promised by one party in return for the other party's promise, e.g. a promise to deliver goods or to render services at a future date.
b) Executed or present consideration means consideration which takes place simultaneously with the promise or completely performed consideration.
C) Past Consideration means a past act or forbearance that is one which took place and is complete before the promise is made.
Rules Regarding Consideration
a. Contract must be supported by consideration ( A contract without consideration is a gratuity or gift)
b. Consideration must move at the desire of the promisor
The promisor must desire the act or forbearance. The act performed at the desire of third party can not be consideration. It is essential that what is done must have been done at the desire of the promisor and not voluntarily. ( If A notices B's house being on fire and rushes voluntarily to B's help, there is no consideration.)
c. Consideration may move from the promisee or any other person. (In Chinnaya Rau vs. Ramayya , 1881, An Old lady, by a deed of gift, made over certain property to her daughter with a direction that the daughter should pay an annunity to A's brother as had been done by A. The daughter did not pay the annunity as promised. A's brother sued the daughter. It was held that the consideration moved from A though not from her brother. That was sufficient consideration for daughter's promise to A's brother.)
d. Consideration may be past, present or future. ( however in English contract law past consideration is not good consideration)
e. Consideration need not necessarily be adequate
f. Consideration must not be illegal and against the public policy (Sec 13.8 void contract)
g. Consideration must be real but not illusory
h. Parties are autonomous to fix and determine the consideration (Sec 4 of the Contract Act. )
Exceptions of Consideration
The general rule is that no consideration no contract.
But in the following condition contract without consideration is also valid and enforceable by law.
1. Agreement made on account of natural love and affection.
(Sec 25 of the Indian contract Act )
If it is made by a written document.
If it is registered under the law.
If it is made on account of natural love and affection
If the parties to is stand in a close relation to each other.
2. Past voluntary acts or services (Sec 25.2 of I.C.A)
If it is a promise to pay wholly or in part
The person who is to be compensated has done something rendered some services voluntarily.
3. A time barred debt.
If it is a promise to pay the whole or any part of the debt
If it is made in writing
It is signed by the debtor of by his agent authorized
It is related to a debt which could not be enforced by a creditor because of limitation.
4. Charity
5. Gift ( Dan Bakas)
6. Agency
7. Contract under Seal
Contractual Capacity
Introduction;
Ø Contractual capacity is one of the essentials of a valid contract.
Ø Law presumes that every person is competent to enter into contract and if any one claims exemption from liability on the ground of incapacity to contract he must prove such capacity.
Ø The contractual capacity prescribes the qualification of the parties to enter into a contract.
Ø The law of contractual capacity prevents weak persons from being cheated by strong person mentally, physically and legally.
Ø The rationale of law of contractual capacity is to permit the competent parties to make contract and restrict the incompetence from doing so.
Ø Parties who enter into the contract must have the capacity to do so.
Ø An agreement made by incompetent parties is not valid and enforceable.
Ø Such type of contract does not create any rights and obligation between the parties.
Ø Sec. 11 of the Indian Contract Act 1872 provides " every person is competent to contract who is of the age of majority according to the law to which he is subject and who is of sound mind and is not disqualified from contracting by any law to which he is subject."
Ø If we convert in to a negative proposition it will read as ' no person is competent to contract who is not the age of majority, who is of unsound mind and disqualified from contracting by any law. '
Ø Nepalese Contract Act has not defined the term however it has laid down some rules regarding contractual capacity. According to Sec. 3 of the Act " Except person who has not completed 16 years of age or who is of unsound mind any person deemed to have capacity to contract."
Ø Similarly Sec 3(2) reads that a person not declared disqualified under current law is also competent to contract.
From the above discussion the following persons are incompetent to contract.
1. Minors
2. Persons of unsound mind
3. Disqualified person by law.
1. Minors:
Minor is a person who has not reached full legal age; a child or juvenile.
Sec 2 (a) of the Children's Act 1992, "Child means every human being below the age of 16 years"
Sec 3 of the Indian Majority Act 1875, " A person domiciled in India, who is under 18 years of age is a minor"
Sec. 3 (1) of the Contract Act, 2056 expressly provides that a minor is a person who has not completed the age of 16 years.
According to Indian Contract Act, 1872 minor is the age below 18 years
Similarly in English law it is 21 years.
The parties must have sufficient capacity to contract.
If a party is not capable of understanding the nature and reasonably foreseeable consequences of the agreement and if he/she is not capable of understanding the implication of the act and of its reasonably foreseeable consequences at this circumstances the contract may be void.
Agreement should not be considered valid where a party of the agreement is not in a position to decide whether or not to enter into a contract because their knowledge and understanding are impaired by youth.
Therefore law relating to minor is to protect minor against own inexperience.
It generally protects minor, preserves his rights and interest and help.
Law preserves minor's rights and estates, excuse their faults and assist them in their pleadings
The judges are their Counselors
The Jury are their Servants and
Law is their guardian.
Rules Regarding Minors Agreement
1. A contract made by a minor becomes void.
Sec. 13 (j) of the Contract Act 2056.
A minor's contract is altogether void in law and a minor therefore con not bind himself by a contract.
In the case of Mohari Bibi vs Dhar Dharamodas Ghose 1903, the minor had executed a mortgage for the sum of Rs 20000 out of which the lender had paid the minor only about Rs 8000. The minor then filed a suit for setting aside the mortgage. It was contended that as the contract was voidable and the minor was now repudiating it the amount Rs 8000 actually paid to the minor must be refunded under Sec 65 of the Indian Contract Act.
Privy Council pointed out that as the minor's contract was absolutely void no question of refunding money could arise in these circumstances.
2. Contract for the benefit of a minor is valid contract
All those contracts to which a person incompetent to contract is a party are void, as against him, but he can derive benefit under them.
A minor is incapable of making an instrument but not incapable of becoming a payee or endorsee.
Minority is a personal privilege and only the minor can take advantage of it; the other party is bound.
3. Contract of minor by fraudulent concealment may liable of compensation. (on the basis of equity)
Principle of estoppel
Minor has no privilege to cheat other by misusing minority.
4. No ratification on attaining the age of majority
Contract made by a minor can not be ratified by him even after the he attains majority.
5. Minors liability for necessaries supplied to him according to his status in life
Necessaries are supplied or necessary services are rendered to a minor or any person and the like dependent on him the minor is liable to pay out of his property for them.
It must be noted that only the property is liable not the minor himself.
Sec 11 (a) of the Contract Act 2056.
The following have been held as necessaries in India.
Ø Cost incurred in successfully defending a suit on behalf of a minor on which property was in jeopardy.
Ø Costs incurred in defending hid in a prosecution.
Ø A loan to minor to save his property from sale in execution of a decree
Ø Money advanced to a Hindu minor to meet his marriage expenses. Etc.
It is important to note in this connection that necessaries must not be luxury and excessively costly and must have been supplied to the minor for his benefit.
6. Contract can be made on behalf of Minor
Contract Act. 2056, Labour Act 2048, Children's Act 2048, Muluki Ain 2020 Court Management, sec. 24
7. Minor can be a partner of a company.
8. Minor can be employed as an agent.
9. Minor as a shareholder
10. Minor can not be declare as insolvent
11. Where contract made by minor and major jointly, the minor is not liable under the agreement but the major do.
Rules Regarding Person of Unsound Mind
· One of the essential conditions of capacity to contract is a sound mind of the parties to contract.
· Person of unsound mind is also incompetent to enter into a contract.
· Contract made by the unsound mind is void and does not have any legal effect.
Nepal Contract act has not defined the term unsound mind. However the section 3 (b) of the Act provides that a person of unsound mind is incompetent to contract.
Sec. 12 of the Indian Contract Act has clearly defined a person of sound mind.
According to it, " A person is said to be of sound mind for the purpose of making a contract, if at the time when he makes it, is capable to understand the terms of the contract and to form a rational judgment as to its effect on his interest."
This section further states;
i) " A person who is usually of unsound mind but occasionally of sound mind, may make contract when he is of sound mind.
ii) " A person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind."
Therefore,
At the time when a person makes a contract if:
ü He is incapable of understand the term and condition of the contract,
ü He is incapable to form a rational judgment and
ü He is incapable to judge the effect of contract on his interest
Are person of unsound mind may make contract;
Ø Occasional sound person may make contract when he is sound.
Ø Occasional unsound person may not make contract when he is unsound.
Unsoundness caused by
· Idiocy______ permanent insanity
· Lunacy or insanity _____ Temporarily sound and temporarily sound
· Drunkenness ________ unsound up to the effect of drinks.
· Hypnotism _________ unsound for certain span of time because of another's tactics
· Mental decay______ incompetent caused by old age or over excitement or other physical effect.
Legal effects:
· Similar to that of Minor
· It is void and not enforceable by law. However contract for the sake of interest or benefit of such person is valid and enforceable by law.
· Guardians may make contract on behalf of such persons. (Sec. 3.3)
· (Sec. 24, 25 and 83 of the Chapter of Court Procedure of Muluki Ain)
· Necessaries supplied to such persons entitled to recover. (Sec. 11 a.)
2. Disqualified Persons;
1. Alien Enemies:
During the continuation of the war and alien enemy can not make contract.
Contract made before the war between an alien enemies either dissolved or suspended for the duration of the war and revived after the war is over.
2. Foreign Sovereigns and Ambassadors.
· Vienna Convention on Diplomatic Relation, 1961
· Vienna Convention on Consular Relation, 1963
Three types of Diplomats
Ambassador, /fhb't
Plenipotentiary ;jf{lwsf/ ;DkGg ljz]if b't
Charge d' Affaires sfo{jfxs b't
Three type of Deplomatic staff
· Diplomatic staffs: head, consultants, consular and assistance of consular, Military Attaché (z}lgs ;xr/L) and assistance, cultural Attaché, First to 3rd secretary etc.
· Administrative and technical Staff
· Helpers
Immunities:
· Inviolability of Person
· Immunity from criminal jurisdictions (only the diplomatic staff are entitled)
· Immunity from civil and administration jurisdiction (only the diplomatic staff are entitled)
· Fiscal Immunities
3. Professional Person
4. Corporation
5. Convicted ( Sec. 10 of the Government Money and company Management Act 2020 provides that person cannot make contract with government if he is convicted in murder, cheating, theft and the like.
6. Married women
7. Insolvent
Free Consent
The Consent is an agreement, approval or permission to make contract, especially given voluntarily by a competent person.
Consent means a consent freely and voluntarily given and consent is not consent if it is not freely and voluntarily given or obtained by force, threat, intimidation, deception and fraudulent means
A person shall not be deemed or presumed to have consented to make a contract if that person agreed to it under coercion, including the use of threat, or physical violence... economic deprivation, abuse of authority, deception, or threat to the welfare or security of a child.
Therefore, a contractual parties are deemed to have dissent if
i) The parties makes contract through force or threats of force.
ii) The makes contract under fear even though there is no actual force.
iii) The person was unconscious due to any cause including drink or drugs.
iv) The consent obtained through fraud.
v) The person is too young/ under the capacity to consent.
vi) The person is mentally incapacitated.
vii) The consent taken by false representation.
Nepalese Contract Act has not defined the term free consent. However Sec. 14 (1) of the Act provides that contract made by coercion or undue influence or fraud or misrepresentation is viodable at the option of the aggravated party.
Sec. 13 of the Indian Contract Act 1872 has defined the consent regarding contract as "Two or more persons are said to consent when they agree upon the same thing in the same sense."
Similarly Sec. 14 of the ICA, states that "consent is said to be free when it is not caused by coercion undue influence, misrepresentation, fraud or Mistake"
From the above discussion Contract made under following situation are not outcome of the free consent and voidable.
a. Coercion
b. Fraud
c. Undue influence
d. Misrepresentation
e. Mistake
A. Coercion
To compel the person to do something against his will.
Sec. 15 of the Indian Contract Act, defines " Coercion is the committing or threatening to commit any act forbidden by Indian penal code, or unlawful detaining or threatening to detain any property to the prejudice or any person whatever with the intention of causing any person to enter into an agreement."
Nepalese Contract Act has almost the same definition of Coercion. As per the Sec. 14 (a) of the Act Coercion means 'detaining or threatening to detain property or to injure or threaten to injure life or reputation or to commit or threat to commit any thing forbidden by law in force in Nepal with the intention of a person to enter into a contract against his will.'
Coercion occurred if a person makes contract with other;
· By withholding of any property of the other person
· by threatening to withhold any property
· By injuring the life and body.
· By threatening to injure life, body and reputation
· By taking action in contravention of law
· By threatening to take action in contravention of law.
Legal effect is viodable under the Sec 14. Sec 84 and 89 (2) (b).
Circumstances for non-coercion
A) Threat to file a suit
B) Threat to commit suicide
C) High price and high rates
B. Fraud
Fraud means a knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his or her detriment.
In fraud person disclose things falsely with a view to deceive another.
So, it is making a person to believe that a things is true which in fact is false.
For example: Selling a copper ornament stating that it is gold.
Selling land by showing fake documents of ownerships.
Sec. 14 (1) (C) of the Contract Act defines, "When, with intent to deceive the other party to the contract or his agent, a party or his agent induces him to believe a thing as true, which is not true, conceals actively any subject matter of the contract and does some such act as existing Nepalese laws specially declare fraudulent, that is said to be fraud."
According to this above definition, any contract falls under the following situation is regarded as fraudulent contract and is voidable at the option of the aggravated party.
ü Intention to deceive the other party or his agent to the contract.
ü By inducing the party to believe false act as true,
ü By Concealing actively any factual matter.
ü By doing any act which has been declared fraud by the existing Nepalese law.
Sec. 17 of the Indian Contract Act defines " Fraud means and includes any of the following acts committed by a party to a contract, or with his connivance or by his agent, with intent to deceive another party thereto or his agent; or to induce him to enter into the contract :-
1) the suggestion, as a fact, of that which is not true by one who does not believe it to be true.
2) The active concealment of the fact by one having knowledge or belief of the fact.
3) A promise made without any intention of performing it
4) Any other act fitted to deceive
5) Any such act or omission as the law specially declares to be fraudulent.
According to the Sec. 17 of the Contract Act, if the contract is made in the following situation is regarded fraud contract and voidable.
a. By a party to a contract or his agent
b. False statement
c. Intentional non performance
d. Deception
e. Fraudulent act or omission
Consequences of Contract
Fraudulent contract is voidable. For this purpose the aggravated party must go to the court within the time limit prescribed by law. If the court declare void he is not liable under such contract. In case he fails to avoid the contract it comes into existence.
To avoid and not to avoid the fraud contract depends upon the decision of the aggravate party.
The aggravated party can enjoy the following rights.
A) avoid the contract
B) Claim compensation for the damages
C) Restitute
To constitute fraud there must be;
a) Intention to deceive the other party
b) The other party must be deceived
c) Self deceiving is no fraud.
d) Mere commendation of one's goods is no fraud.
Silence and Fraud
In the business transactions some of the facts regarding the subject matter must be disclosed and some are not necessary to be disclosed.
If the party disclosed the facts that may be harmful to the other party. In such a situation the aggravated party may charge of fraud. But all silence is not fraud. This is why it is said that silence has double status in the case of fraud.
A) A mere silence is not amount a fraud.
B) Silence is fraud if;
a. Statutory obligation to disclose
b. Contract utmost confidence
c. Changes in circumstances
d. Half truths.
e. Silence equivalent to speech
C. Undue Influence:
When a party enters into a contract under any kind of influence, mental pressure or persuasion which prevents him from exercising a free and independent judgment is said to be under undue influence.
An influence exercised by a contracting party who is in the dominant position for obtaining unfair advantage over the other party and the influence misused is called undue influence.
Sec. 14 (1.b.) of Nepalese Contract Act defines undue influence as " an influence exercised by a person upon another person who is under his influence for personal advantage or interest with an intention to have unfair benefit."
Sec. 16 (1) of the Indian Contract Act defines "A contract is said to be induced by undue influence where the relation subsisting between the parties are such that one of them is in a position to dominate the will of the other, and he uses that position to obtain an unfair advantage over the other."
Sec. 16 (2) further clarifies that a person is deemed to be in a position to dominate the will of another if;
i) he hold a real or apparent authority over the other. ( Relationship between master and servant, principle and temporary teacher, parents and child)
ii) He stands in a fiduciary relation to the other or (; Relationship of mutual trust and confidence; such as trustee and beneficiary, guru and his disciples, lawyer and client, guardian and ward etc.)
iii) He makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness or mental or bodily distress.
Some presumptions of undue influence;
A contract can be deemed to have made by undue influence if;
i) Consideration is inadequate or
ii) There is a fiduciary relation between the parties
iv) There is inequality between the parties in respect of social status position, post age etc. of the parties.
v) A greater sum is demanded than the actual sum must be obtained.
vi) There is absence of independent advisors for the weaker party.
D. Misrepresentation
According to Anson, misrepresentation means " a false statement which the person making it honestly believes to be true or which at any rate he does not know to be false."
Parties of a contract must present the matter fact truly and factually. If represents the fact wrongly it is called misrepresentation or false representation. In such a situation consent taken to make a contract is not considered as free consent and is voidable. Thus misrepresent is a misstatement or false representation of fact made by a party to the contract to another. It is a representation when wrongly made by a party to the contract to another innocently or without any intention to deceive the other party.
According to Sec. 14 (1.d) of the Nepalese Contract Act the following acts are regarded misrepresentation.
a) False statement made by a party without reasonable ground.
b) Injuriously misleading to the other.
c) Ignorance mistake on the subject matter
Similarly the Sec. 18 of the Indian Contact Act defines the term misrepresentation.
According to it, misrepresentation exists in the case where;
I) Positive assertion (Positively assert fact is true without sufficient information)
II) Breaches of duty
III) Causing mistake innocently.
Consequences of Misrepresentation
I. Innocent party can avoid or withdraw the contract and is not entitled to compensation.
II. The aggrieved party can insist upon performance if he thinks fit.
III. In some circumstances the aggrieved party neither can withdraw the contract not can insist the performance of contract if; (Sec 19 of ICA)
a. He was aware of the misrepresentation.
b. An innocent third party has acquired the rights in the subject matter of the contract.
Mistake
· Mistake is another factor which hampers free consent.
· Parties of the contract must agree upon the same thing in the same sense.
· Mistake is a wrong opinion or misunderstands about something.
· Doctrine of mistake is important part of contract laws.
· Fraud is a intentional misrepresentation to deceive other party whereas no such intention exists in misrepresentation. In the Mistake parties of the contract misunderstood the fact.
· All Mistakes are not voidable. Only that contract by mistake is voidable where fundamental error exists.
Types of Mistake
I. Mistake of law
i. Mistake of National Law
ii. Mistake of International law
II. Mistake of Fact
Mistake of fact is void according to the Indian Contract Act Sec. 20 if;
Both parties to the agreement are under mistake
The mistake is as to the fact essential to the agreement.
Two types of Mistake of Fact
I. Unilateral Mistake : Unilateral mistake is not voidable contract. But mistake of identity of person is voidable)
II. Bilateral Mistake:
a. Both or all the parties must be under a mistake
b. The mistake must be as to some fact and
c. Mistake must relate to the fact i.e. affecting substance of the whole consideration essential to the agreement.
The following cases fall under the bilateral Mistake.
i. Mistake as to the subject matter
ii. Mistake as to the existence of subject matter
iii. Mistake as to the identity of the subject matter.
iv. Mistake as to the quantity of the subject matter
v. Mistake as to the quality of the subject matter
vi. Mistake as to the price of the subject matter
vii. Mistake as to the title of the subject matter
viii. Mistake as to the possibility of performance
Quasi Contract
· A contract to be enforceable must have certain essential elements, namely offer and acceptance, free consent, lawful objectives and consideration and capacity to contract.
· But under certain conditions the law creates and enforces legal rights and obligations when no real contract exists
· These obligations are known as quasi contract.
· It is also known as constructive contract which is based on the equitable principle that ' a person shall not be allowed to be benefited himself unjustly at the losses of another."
· It is not a contract at all. It is an obligation that the law creates.
· In the absence of any agreement between the parties, the acts of the parties or others have placed in the position as contracting parties.
Rules Regarding Quasi Contract
The following types of quasi contracts have been dealt within the Nepalese Contract Act. 2056.
1. Necessary supplied to a person incapable of contracting or on his behalf (Sec. 11 a.)
The person who has supplied to a person incapable if making contract (minors, idiots, lunatics etc) with the necessary of life, is entitled to recover their value. However, the amount is recoverable only from the property of such incapable person.
2. Payment to third party of money which another is bond to pay (Sec. 11 b.)
If the properties of a person get into the hands of third parties who will not release them unless some amount due from another is paid. In such a situation if a person paid the amount on behalf of the second party, then he is bound by law to pay and the former is entitled to return by other.
3. Obligation of a person enjoying benefit of non-gratuitous act (Sec. 11 c.)
If a person lawfully does something for another person, or delivers anything to him without any intention of doing gratuitously and the other person accepts and enjoys the benefit, the later must compensate the former.
4. Obligation of a person possessing the goods (Sec. 11 d.)
If a person lawfully possesses the goods which is not belonging to him and take them into his custody his responsibility is as same as that of a bailee.
5. Obligation of a person paid by mistake (Sec. 11 e.)
If a person pays money to another by mistake, the receiver is bound to return money to the payer.
Contingent contract
· Every person who is bound by an obligation must be ready to perform it at the time when he had promised to perform.
· A contingent contract is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen.
· (A contract to pay Rs. 1 lakh if B's house is burnt)
· Quite a good part of commercial business transactions consists of contingent contract such as insurance; indemnity and guarantee are contingent contract.
· A wager is a contingent agreement is restricted by law.
· A contract in which performance by one party is conditional upon the performance of other is conditional but not contingent.
· If A agrees to deliver 100 bags of wheat and B agrees to pay the price only afterwards, the obligation of B to pay is conditional upon A's delivering the wheat, but is not a contingent contract.
Therefore all the conditional contracts are not contingent contract. The contingent contract has following features.
1. Performance depending on a future event
2. Collateral event
3. Uncertain event
4. Event not depending on the will of promisor.
Rules Regarding Contingent Contract
1. Contract on the happening of future uncertain event is not enforceable until such event happens. (Sec. 21.1)
If the agreement is made to do or not to do something on the happening of some event in future, the liability will not arise until and unless such event happens.
Contingent contract upon the happening of a future uncertain event, can not be enforced by law unless and until that event has happened. If the event becomes impossible, such contract becomes unenforceable.
2. Contract on the non-happening of future uncertain event is enforceable if it is impossible to happen. (Sec. 12.3)
If a contract is to do or not to do something on the non happening of some uncertain event in future, the liability will arise only if the event becomes impossible to happen.
3. When event becomes impossible to happen, the contractual liability will not arise. (Sec. 12.2)
Ex. A agrees to pay B Rs 1 lakhs if B marries to C. But C marries to D. The marries to B to C become impossible now.
4. Contract on the happening of a event within a fixed time become void if at the expiration of time, such event has not happened, before the time fixed such event becomes impossible. (Sec. 12.4)
5. Contract on the non-happening of a event within fixed time may be enforced by law if;
a. When the time fixed has expired
b. Such event has not happened
c. It becomes certain that such event will not happen.
6. An agreement is made for an impossible act is void ab initio.
Ex. Contract to marry with dead person.
Legality of Object and Consideration
Legality of object and consideration is one of the most important elements for forming a valid contract.
A Contract to become a legal and attaining legal status there must be legal objectives and consideration.
If the objective and consideration of a contract is inconformity with the existing laws that contract is not enforceable by law and in some cases it is also punishable.
Object is the purpose or intention of the contract and Consideration is the something in return.
Unlawful and illegal objectives and consideration makes the contract void. (Sec. 13.k.)
When the object and consideration of a contract become illegal and unlawful?
2. If Object and consideration is forbidden by law. (Sec. 13 .e.)
3. If it defeats the existing legal provision.
4. If it is fraudulent
5. If it involves or implies injury to the persons or property of another.
6. If the objects and consideration is immoral (Sec. 13.f.)
7. If the contract is opposed to the Public policy
a. Agreement of trading with alien enemy
b. Agreement interfering parental rights
c. Agreement restraining personal freedom
d. Agreement to obtain or for the sale/transfer of the public titles/offices
e. Agreement in restraint of marriage (Sec. 13.b)
f. Agreement interfering administration of justice
g. Agreement made to defend a criminal
h. Agreement tending to create monopolies
8. If the agreement is void
a. Agreement in restraint profession, occupation and trade (Sec. 13.a)
However, the following contracts are not void.
i. the contract made for purchase and sale of goodwill,
ii. the contract in restraint any trade or occupation among the partners
iii. the contract in restraint of trade and occupation within the fix period and place among the partners after leaving the partnership firm.
iv. The contract in restraint of not accepting any person, firm, company or any entity's service within the fixed period.
b. Agreement in restraint of Marriage. (13.b)
c. Agreement in restraint of enjoying public facilities. (Sec. 13.c)
d. Agreement in restraint legal proceedings and process (Sec 13 d)
e. Agreement made with incompetent parties.
f. Agreement impossible to perform at the time of making the contract.
g. Unclear Agreement.
Assignment of Contract
· Generally assignment means to transfer or handover some acts.
· In Contract law assignment of contract means to handover or transfer one's contractual rights and liabilities to the third person.
· According to Anson, assignment means "Transfer of contractual right and liability by a party to the contract to some other person who is not a party."
· Ordinarily the contractual party cannot assign contractual rights and obligation to the third person which is also known as privity of contract.
· But it is not absolute rule. In some circumstances assignment is necessary and has been recognized by law such as contract relating to trust, insurance and negotiable instruments are the exception of principle of privity of contract.
· All types of contract are not possible to assignment. Those contract which can assign to the third party must assign due process of law.
· After assignment of contract the third party is entitled to receive benefits or rights and has to bear liabilities under the contract.
· The party who assigns is called assigner and who is assigned is called assignee.
A Contract Can be Assign by Two Methods
a. By the act of the parties to contract
b. By operation of law.
Rules Regarding Assignment of Contract
1. Contract involving personal skill and capacity can not be assigned. (Sec. 76)
2. Contract can be assigned only after getting the consent of the concerned party.
3. Liability of the contract can be assigned only after getting the consent of the other party. (Proviso Sec.77)
4. Rights and benefits under a contract can be assigned.
5. After becoming unsound mind or death of any contracting party, rights and liabilities of the contract can be transferred to the legal representatives. (Sec. 76)
6. If any of the contracting party becomes insolvent, rights and duties can be transferred to the liquidator or other official receiver. (After the order of Court)
Performance of Contract
· Possibility of performance of contract is an essential of a valid contract.
· The end of making a contract is performance.
· The term performance means the fulfillment or execution of promises made by the contracting parties.
· The performance of contract implies the fulfillment of the term and condition of the contract without breaching it.
· The parties of contract specify their rights and obligation in the forms of term and condition. When they execute it in the same manner or line of the promise is called performance of contract.
· If parties unable to fulfill their rights and obligations intentionally, that amount breaches of contract and the aggravated party is subjected to get remedy.
Importance of Performance:
1. Both parties satisfy from their contract.
2. Good performance encourages them to future contract.
3. Greater profit and lesser looses to the both parties.
4. Get rid from disputes and court cases.
5. Fulfillment of the objectives.
6. Good relationship.
7. Avoidance of unnecessary expenditures.
Rules Regarding Performance;
Rules regarding performance are an important part of the contract. To understand the rules of performance the following questions need to be answered.
1. Who can demand the performance of contract?
2. Who must perform the contract?
3. When and how to perform the contract?
4. Where to perform the contract?
5. In what conditions a contract need not be performed?
1. Who can demand the performance of Contract?
a. Only the contracting parties can demand the performance. Sec. 78 (1)
b. Third party or beneficiary can demand the performance. (The proviso)
c. Legal representative or heirs of the promise can demand the performance.
d. By persons who jointly promises. (sec. 78. 2.)
2. Who must perform the contract? (Sec. 75,76 and 78)
a. Contracting parties should perform the contract.
b. Legal representative (Sec. 76)
c. The agent of contracting party. (Sec. 77)
d. The third party (Sec 77.2.)
e. By joint contracting parties. (Sec. 77.3)
3. When and how to perform the contract? (Sec. 71.1, 2, and 3)
a. As mentioned in the contract.
b. If the time and mode is not specified in the contract but the performance can be made at some specified time or mode, the contract should be performed at the same time and in the same way.
c. If the time and mode is not mentioned in the contract, which can be perform in reasonable time and mode.
4. Where to perform the contract? (Sec. 72. 1, 2, 3, and 4)
a. As mentioned in the contract.
b. If the delivery place of goods is not mentioned, it should be delivered at the place where it was situated.
c. If the place is not mentioned, but the performance can be made at some specified place, the contract should be performed in the specified place.
d. If the place is not mentioned the parties fix the reasonable place.
5. In what conditions a contract need not be performed? (Sec. 73)
a. Incase of relief by party.
b. Incase of viodable contract.
c. Incase of breaches of contract.
d. Incase of application of any provision by law.
e. If contract becomes impossible to be performed by any reasons specified in Sec. 79.
Termination or Discharge of Contract
· Termination is an end of something.
· Termination or discharge of contract means discontinuation of the contractual relationship between parties.
· Contractual parties are entitled to enjoy and fulfill rights and obligation and they remains liable under contract until and unless it comes to an end.
· The termination of contract may take place either by performance or agreement or operation of law or impossibility or lapse of time or by breaches of time.
· Modes of termination and discharge of contract
1. By performance
When parties fulfill their respective obligations under the contract in the same way what they had promised to do, contract is automatically terminated.
Most of the contracts are terminated by the performance.
2. Termination by agreement or consent. (Sec. 81)
a. Alteration x]/km]/ u/]/
b. Novation gof s/f/ u/]/
c. Rescission / Cancellation vf/]hL
d. Remission kl/Tofu
e. Waiver clwsf/sf] Tofu
f. Accord and satisfaction ;xdlt / ;+t'li6
3. Termination by lapse of time
4. Termination by operation of law
a. Death of the promisor ( Contract based on the personal skill and qualification is terminated as soon as the promisor dies.)
b. Insolvency (When court declares a party to the contract become insolvent the rights and liabilities are transferred to the official receiver and debtor become incapable to repay debt.)
c. Merger (Contract providing inferior right vanishes into or mixed with the contract providing superior rights as a result former contract is terminated.)
d. Unauthorized material alteration (
5. Termination by Breaches of Contract.
6. Supervening impossibility of performance.
Doctrine of Supervening impossibility
· Before 1863 doctrine of absolute contract was prevailed. Parties were liable to fulfill their liabilities in any situation.
· In 1863, the High Court of England in the case of Taylor vs Caldwell propounded the doctrine of frustration.
· In America and India it is called Doctrine of Supervening impossibility.
· This Doctrine says that the law does not compel a man to do the impossible thing. Therefore contract is discharged when performance become impossible.
· In the case of Taylor vs Caldwell, Caldwell lets a music hall to Taylor for a series of concerts for some days. The hall was accidentally burnt down before the date of the first concert. It was held that the contract was discharged.
· Indian and Nepalese Contract Act has also adopted the same rule in the contract law.
· According to Sec. 56 of the Indian Contract Act 1872 "Contract to do or not to do an act which after formation of the contract become impossible or by reason of some event, becomes void, when the act becomes impossible or unlawful.'
· Similarly Sec. 79(1) of the Contract Act provides "where it becomes impossible to execute a contract due to fundamental change in the circumstances prevailing at the time of contract, the parties need not perform the work under the contract."
Circumstances where the doctrine of supervening impossibility or frustration applies;
1. Amendment or change of law (Sec. 79.2.a)
2. Death or permanent incapacity (Sec. 79.2.d.)
3. Natural disaster and outbreak of war (79.2.b)
4. Destruction of subject matter (792.c)
5. Failure of ultimate purpose
Effects of Benefit Received from the contract terminated on the basis Supervening impossibility. (79.4.a and c)
1. Amount to be refunded.
2. Determination of work or amount and recovery of expenses.
Cases Where DOSI does not apply.
1. Difficulty of performance of Contract
2. Commercial impossibility
3. Impossibility due to the default of a third person.
4. Strikes and lockouts.
5. Failure of one objects among other.
6. Additional taxes, fees or other revenue to be paid.
Remedies for Breach of Contract
· What is Breach of Contract?
· It is a refusal of doing any acts promised under the contract.
· It is violation of term and condition of contract.
· It is non fulfillment of obligation under contract.
· Parties are liable to fulfill their respective promises within time, place, and modes specified in the contract. If they intentionally fails to fulfill the obligation and promises that amount a breach of contract.
Sec. 82(1) of the Nepalese Contract Act, 2056 reads " if a party to a contract fails to fulfill his contractual obligation under the contract, or give information to the other party that he will not perform the work as mentioned in the contract, or if his actions and conduct show that he is incapable of performing the work as mentioned in the contract, he is deemed to have broken the contract."
Types of Beach of Contract
1. Anticipatory Breach
2. Actual Breach
1. Anticipatory/ constructive Breach ;
An anticipatory breach of contract is such a breach which takes place before the time fixed for performance. If a party of a contract reject his obligation or gives pre-information to the other party that he will not perform his obligation before the time for performance mentioned in the contract it is said to be an anticipatory breach of contract.
Anticipatory breach may take place either in two ways.
a) By notice
b) By conduct
Effect of anticipatory breach
i) The aggravated party can rescind the contract and immediately take a legal action for breach of contract without waiting until the due date for performance.
ii) He may treat the contract as active and wait till the time the work was to be done and can take legal action for breach of contract if the promise still remains unperformed.
2. Actual Breach:
When a party of contract does not perform his obligation under the contract within the time, modes, and place is called actual breach of contract. Such breach either expressed or implied.
Remedies for Breach of Contract
1. Right to Rescission of the Contract (Sec. 82.2) (s/ff/ /2 ug]{ jf ;dfKt ug]{ clwsf/)
2. Right to Claim damages ( Ifltk"lt{df bfjl ug]{ clwsf/) Sec. 83
a. Compensation for actual loss (Sec. 83.1)
b. Compensation for an amount equal to that mentioned in the contract. (Sec. 83.2)
c. Reasonable compensation if not mentioned in the contract.
3. Right to specific performance
4. Right to injunction
5. Right to Restitution
6. Right to Arbitration
7. Right to claim for Quantum Meruit
Doctrine of Quantum Meruit
· Doctrine of English Contract law.
· Quantum Meruit literally means "as much as earned" or " as much merited"
· If a person has done work for another person, he is entitled to recover from the other a reasonable remuneration for the work actually done, eventhough no particular remuneration of such work has been fixed by the contract.
· Quantum Meruit means the payment in proportion to the amount of the work done.
· If a contract has been breached by a party, the other party has right to claim for Quantum Meruit. It means he can sue for a proportionate remuneration or compensation for the work or goods which the aggrieved party has done already or delivered under the contract.
· The Claim for quantum meruit does not arise unless and until the original contract is terminated.
[1] Ensuring
[2] Tolerance
[3] disadvantage
[4] to decide not to do something
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Great reference for business law. And very informative the details provided were well written and understandable
ReplyDeletedenver business attorney .
This was very useful to me.
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