A contract can also be defined as a legally binding exchange of promises between two or more parties that the law will enforce -illustrate and explain.
1. INTRODUCTION:
Contract Act 1872 (Act No. IX of 1872) governs the law of contracts in Bangladesh. The Act came into force in Bengal on 1 September of 1872, and was adopted in Bangladesh without change. It contains the common rules relating to contracts and differentiates them. The Act has 238 sections under its 11 chapters. It begins with the preliminary aspects, including a short preamble and title extent and date of commencement and interpretation of words and expressions used in the act.
The way of communication, acceptance, revocation, and conversion of proposal into promise is described in chapter one. Chapter two defines and interprets different types of contracts, voidable contracts, and void agreements. This chapter also defines essential terms such as consent, free consent, undue influence, fraud, and misrepresentation, and gives their legal interpretation. Competency of persons to be a party to contract and the conditions for void contracts are elaborated in this chapter. The definition of contingent contracts and inherent explanations on them and their enforceability are the concerns of chapter three.
Chapter four explains the obligations of parties to contract, effects of complying to these obligations and of refusal to meet them, the time and place of performance of reciprocal promises, appropriation of payments including their legal position, and situations when and by whom contracts must be performed or need not be performed.
Chapter five explains the claims for necessaries supplied to persons incapable of contracting and the reimbursement of claims of persons who pay money due by another in payment of which he is interested. Obligation of persons enjoying benefit of non-gratuitous act and responsibility of a bailee and repayment claim of persons paying a sum of money by mistake are also elaborated in this chapter. Chapter six narrates the consequence of breach of contract. Compensation for loss or damage caused by breach of contract and failure to discharge obligation resembling those created by contract, and the entitlement of compensation are explained in this chapter. Chapter eight defines contract of indemnity, contract of guarantee, surety, and principal debtor and creditor. Interpretation on consideration of guarantee, sureties
Liability, continuing guarantee, revocation of continuing guarantee in different situations, rights and obligations of surety and co-sureties are detailed in this chapter. Finally, there are some schedules at the end of the Act, which have been repealed by the Repealing and Amending Act 1914 (Act X of 1914).
2. BASIC ELEMENTS OF CONTRACT:
All contracts are agreement but all agreement is not contracts. A contract is a legally binding agreement or relationship that exists between two or more parties to do or abstain from performing certain acts. A contract can also be defined as a legally binding exchange of promises between two or more parties that the law will enforce. For a contract to be formed an offer made must backed acceptance of which there must be consideration. Both parties involved must intend to create legal relation on a lawful marter which must be entered into freely and should be possible to perform.
The essential elements of a valid contract are as follows:
- Offer and acceptance: There must a lawful offer1 and a ‘lawful acceptance1 of the offer, thus resulting in an agreement[2]. The adjective ‘lawful’ implies that the offer and acceptance must satisfy the requirements of the contract act in relation thereto. In order to convert a proposal into a promise, the acceptance must-
(a) Be absolute and unqualified;
(b) Be expressed in some usual and reasonable manner[3], unless the proposal prescribes the manner in which it is to be accepted. If the proposal prescribes a manner in which it is to be accepted, and the acceptance is not made in such manner, the proposer may, within a reasonable time after the acceptance is communicated to him, insist that his proposal shall be accepted in the prescribed manner, and not otherwise; but if he fails to do so, he accepts the acceptance. It will be much clearer by some case laws,
Belfour vs. Balfour (1919), 2K.B.571 CA
His case involved a husband and wife. The husband was due to return to Ceylon where he had employment, but the wife, on medical advice was to remain in England The husband promised to pay the wife £30-00 per month until she was able to join him in Ceylon. Later the parties separated and were divorced. The wife brought this action for the money her husband had promised to pay to her but had failed to do so.
HELD- Atkin LJ, Commonly parties to a marriage will make arrangements for personal or household expenses. But they do not amount to contracts, even though there may be present what would amount to consideration if it had occurred between different parties. They are not contracts because the parties do not intend that legal consequences should follow.
One of the most famous cases on forming a contract is Carlill v Carbolic Smoke Ball Company, decided in nineteenth-century England. A medical firm advertised that its new wonder drug, a smoke ball, would cure people’s flu, and if it did not, buyers would receive £100. When sued, Carbolic argued the ad was not to be taken as a serious, legally binding offer. It was merely an imitation to treat.
On the other hand, the section 2(b) of the contract act, 1872, states that, when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. So we can identify three important parts by this definition,
a) Signification of the assent
b) Assent is signified by the person to whom the proposal was made.
c) The term thereto used in this section implies that the assert must be given to the offer as it is.
Brogden v Metropolitan Railway Company (1876-77) L.R. 2 App. Case. 666.
Mr. Brogden, the chief of a partnership of three, had supplied the Metropolitan Railway Company with coals for a number of years. Brogden then suggested that a formal contract should be entered into between them for longer term coal supply. Each side’s agents met together and negotiated. Metropolitan’s agents drew up some terms of agreement and sent them to Brogden. Brogden wrote in some parts which had been left blank and inserted an arbitrator who would decide upon difference which might arise. He wrote “approved” at the end and sent back the agreement documents. Metropolitan’s agent filed the documents and did nothing more. For a while, both acted according to the agreement document’s terms. But then some more serious disagreements arose, and Brogden argued that there had been no formal contract actually established.
Held: The House of Lords (The Lord Chancellor, Lord Cairns, Lord Hatherley, Lord Selborne, Lord Blackburn, and Lord Gordon) held that a contract had arisen by conduct and Brogden had been in clear breach, so he must be liable.
- Intention to create legal relations: There must be an intention among the parties that the agreement should be attached by legal consequences and create legal obligations. Agreements of a social or domestic nature do not contemplate legal relations, and as such they do not give rise to a contract. An agreement to dine at a friend’s house in not an agreement intended to create legal relations and therefore is not a contract. Agreements between husband and wife also lack the intention to create legal relationship and thus do not result in contracts.
For example, where husband and wife draw on a joint bank account, normally such an arrangement does not amount to a contract; Cage v King (1961), However, if they live apart because of the break-up of their marriage, any agreement between them regulating the terms of separation is likely to be contractual in nature. Also, there is no contract if the intention to be legally bound is negated by an express provision in the agreement. Therefore, if an agreement contains a so-called ‘honor clause’ which usually provides that the relevant agreement is not to be a ‘legal agreement’, or if it is expressed to be a ‘gentleman’s agreement’ only, then such agreement will not be enforceable as a contract. Thus, in Rose and Frank Co V Crompton (1923), the parties signed a written agreement whereby X was given a limited right to sell Y’s goods. The agreement contained an ‘honorable pledge’ clause to the effect that the agreement was not a formal legal agreement and was ‘not subject to a legal jurisdiction in the law courts’. The wording was held sufficient to rebut the presumption that the agreement was legally binding.
- Lawful consideration: The third essential element of a valid contract is the presence of ‘consideration’. Consideration has been defined as the price paid by one party for the promise of the other. An agreement is legally enforceable only when each of the parties to it gives something and gets something. The something given or obtained is the price for the promise and is called ‘consideration’ subject to certain exceptions; gratuitous promises are not enforceable at law.
The ‘consideration’ may be an act (doing something) or forbearance (not doing something) or a promise to do or not to do something. It may be past, present or future. But only those considerations are valid which are ‘lawful’. The consideration is ‘lawful’, unless it is forbidden by law; or is of such a nature that, if permitted it would defeat The provisions of any law; or is fraudulent; or involves or implies injury to the person or property of another; or is immoral; or is opposed to public policy (sec.23).
If a person makes a promise (to another), and is not to receive anything back, then this is a gratuitous promise, and such a promise, generally speaking, is not enforceable in law. Examples of gratuitous promises are charities, gifts etc. Such gratuitous promises however are not enforceable in law. If X promises to give Y a gift, and in the end does not give Y anything, there is no way Y can force X to perform the promise. However, it is possible to make such a promise legally enforceable by the signature of a deed. All that it means is that the person signing it intends to be bound by the deed. This is the essence of a contract in a deed, that is, consideration is not necessary. X promises to lend Y a car for the week without charge. If X goes back on his or her word, there is now way that Y can enforce X’s promise. However, if there is a counter promise from Y, to the effect that Y will wash X’s car, then there is no difficulty in finding consideration and there would be a binding contract; Bainbridge v Firmstone (1838).
- Capacity of parties: One of the elements required in order to have a valid contract is contractual capacity’. An adult citizen, that is person over the age of 18 and corporations have full capacity to enter into any kind of contract but certain groups of persons and corporations have certain disabilities in this connection. If any of the parties to the agreement suffers from minority, lunacy, idiocy, drunkenness etc. The agreement is not enforceable at law, except in some special cases e.g., in the case of necessaries supplied to a minor or lunatic, the supplier of goods is entitled to be reimbursed from their estate (sec 68). An illustration is the decision of the High Court in Inder Singh V Parmeshwardhari Singh. A property worth about 25000/- was agreed to be sold by a person for 7,000-only. His mother proved that he was a congenital idiot incapable of understanding the transaction and that he mostly wandered about. A person to all appearances behaves in a normal fashion, but at the same time he may be incapable of forming a judgment of his own.
The liability for necessaries of life supplied to persons of unsound mind or to whom he is legally bound to support is the same as of minors. (Section 68)
- Free consent: Free consent of all the parties to an agreement is another essential element. This concept has two aspects. (1) Consent should be made and (2) it should be free of any pressure or misunderstanding. ‘Consent’ means that the parties must have agreed upon the same thing in the same sense (sec. 13). There is absence of ‘free consent,’ if the agreement is induced by (i)coercion, (ii) undue influence, (iii) fraud, (iv) mis-representation, or (v) mistake (sec. 14). If the agreement is vitiated by any of the first four factors, the contract would be voidable and cannot be enforced by the party guilty of coercion. Undue influence etc.[11]. The other party (i.e., the aggrieved party) can either reject the contract or accept it, subject to the rules laid down in the act. If the agreement is induced by mutual mistake which is material to the agreement, it would be void (sec. 20) Poosathurai vs. Kannappa Chettiar on 18 November, 1919.
- Lawful object: For the formation of a valid contract it is also necessary that the parties to an agreement must agree for a lawful object. The object for which the agreement has been entered into must not be fraudulent or illegal or immoral or opposed to public policy or must not imply injury to the person or the other of the reasons mentioned above the agreement is void[12]. Thus, when a landlord knowingly lets a house to a prostitute to carry on prostitution, he cannot recover the rent through a court of law or a contract for committing a murder is a void contract and unenforceable by law. It was observed in Haji Abdullah Khan vs. Nisar Muhammad Khan that, if under the law there is some condition precedent attached to the validity of transfer it is open to the parties to enter into an agreement subject to compliance with the condition percent. The attack on the agreement for sale on the ground of public policy could only succeed if it was shown that the indentation of the agreement was to defeat the law. If the parties that enter into an agreement for sale contemplate only a sale with the requisite sanction they are not making any effort to defeat the law.
- Writing and registration: According to the contract Act 1872, a contract to be valid, must be in writing and registered. For example, it requires that an agreement to pay a time barred debt must be in writing and an agreement to make a gift for natural love and affection must be in writing and registered to make the agreement enforceable by law which must be observed.
VIII. Certainty: Section 29 of the contract Act provides that” Agreements, the meaning of which is not certain or capable of being made certain, are void[13].” In order to give rise to a valid contract the terms of the agreement must not be vague or uncertain. It must be possible to ascertain the meaning of the agreement, for otherwise, it cannot be enforced. Like, A, agrees to sell B “a hundred ton of oil” there is nothing whatever to show what kind of oil was intended. The agreement is void for uncertainly. For example, A agrees to sell to B “a hundred tons of oil “. There is nothing whatever to show what kind of oil was intended. The agreement is void for uncertainty. But, if A, who is a dealer in cocoanut-oil only, agrees to sell to B “one hundred. Tons of oil”. The nature of A’s trade affords an indication of the meaning of the words, and A has entered into a contract for the sale of one hundred tons of cocoanut-oil.
3. CONCLUSION:
An agreement is a form of cross reference between different parties, which may be written, oral and lies upon the honor of the parties for its fulfillment rather than being in any way enforceable.
All contracts are agreement because there must be mutual understanding between two parties for a contract to be formed. All parties should agree and adhere to the terms and conditions of an offer. There is an old joke that “an oral contract isn’t worth the paper it’s written on”. That’s a reference to the fact that it can be very difficult to prove that an oral contract exists. Absent proof of the terms of the contract, a party may be unable to enforce the contract or may be forced to settle for less than the original bargain. Thus, even when there is not an opportunity to draft up a formal contract, it is good practice to always make some sort of writing, signed by both parties, to memorialize the key terms of an agreement.
At the same time, under most circumstances, if the terms of an oral contract can be proved or are admitted by the other party, an oral contract is every bit as enforceable as one that is in writing. There are, however, “statute of fraud” laws which hold that some contracts cannot be enforced unless reduced to writing and signed by both parties.
BIBLIOGRAPHY
1. Muhammad Ekramul Haque, 1st edition, ‘Law of Contract”
2. The Indian contract act 1872, Google books.
3. http://www.nolo.com/legal-encyclopedia/free-books/small-claims-book/chapter2-3.html)
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5. http://www.janetjennersuggs.com/case-trial-expertise-cases.html
6. Todd D. Rakoff, “Contracts of Adhesion: An Essay in Reconstruction,” 96 Harvard Law Review 1173 (1983).
7. Micheal Furmston, Cheshire, Fifoot & Furmston’s Law of Contract (15th edn., Delhi: Oxford University Press, 2007) at 205.
8. Piyush Joshi, Law Relating to Infrastructure Projects (New Delhi: Butterworths, 2003)
9. P.S. Palande, Coping with Liberalization: The Industry’s Response to New Competition (New Delhi: Response Books, 2000)
10. www.ibef.org
11. A.G. Guest, Principles of the Law of Contract, 22nd Ed. (1964), p. 65
12. arkby’s Elements of Law, 5th Ed., 1896, p. 311
13. Singh, Avtar Contract & Specific Relief, 10th Ed. Eastern Book Company (Lucknow), 2008.
14. Bangia, R.K.15 Law of Contract Part I, 6th Ed. Allahabad Law Agency.
15. urmston, MichaelCheshire, Fifoot & Furmston’s Law of Contract, 14th Ed.Lexis Nexis Butterwoths, 2006.
16. Kumar, P.N.Sanjiva Row’s Commentary on The Indian Contract Act, 1872 and Tenders, 10th Ed.Delhi Law House, 2007.
17. http://en.wikipedia.org/wiki/Currie_v_Misa
18. http://www.thefreedictionary.com/
[1] Section 27 of the Contract Act states that, “Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind is to that extent void.”
[2] When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal..
[3] An offer must be communicated to another person, and it remains open until it is accepted, rejected, retracted or has expired. A counter-offer closes the original offer.
[4] An implied-in-fact contract (a/k/a “implied contract”) is a contract agreed by non-verbal conduct, rather than by explicit words. As defined by the Bangladesh Supreme Court, it is “an agreement ‘implied in fact'” as “founded upon a meeting of minds, which, although not embodied in an express contract, is inferred, as a fact, from conduct of the parties showing, in the light of the surrounding circumstances, their tacit understanding
[5] However, in the majority of commercial transactions there is no need to prove that the parties had such intention, as there is an automatic presumption that the agreement will be binding.
[6] See ; Cage v King (1961)
[7] Consideration is based on the idea of reciprocity – that the person who makes a promise should not be able to enforce this promise, unless something has been given in exchange for it.
[8] Gratuitous promises are promises without consideration A promises her friend B that A will split A’s lottery winnings 50/50 with B. A is a “promisor” and B is a “promisee.” But there is no contract because in making the promise A did not bargain for either a performance by B or a return promise from B, i.e. A’s promise was not supported by consideration. If A wins the lottery but declines to split the lottery winnings with B, the friendship may end but B has no legal claim against A,
[9] He should not be a minor i.e. an individual who has not attained the age of majority i.e. 18 years.
He should be of sound mind while making a contract. A person with unsound mind cannot make a contract.
He is not a person who has been personally disqualified by law.
[10] A Minor is bound by contracts of employment, apprenticeship and education, which are for his or her benefit. See Robbers v Gray (1913).
[11] . Coercion (Section 15): “Coercion” is the committing, or threatening to commit, any act forbidden by the Penal Code under (45, 1860), or the unlawful detaining, or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement.
Undue influence (Section 16): “Where a person who is in a position to dominate the will of another enters into a contract with him and the transaction appears on the face of it, or on the evidence, to be unconscionable, the burden of proving that such contract was not induced by undue influence shall lie upon the person in the position to dominate the will of the other.”
Fraud (Section 17): “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 of his agent, or to induce him to enter into the contract.
Misrepresentation (Section 18): “causing, however innocently, a party to an agreement to make a mistake as to the substance of the thing which is the subject of the agreement”.
Mistake of fact (Section 20): “Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void
[12] See case, Newar Marble Industries Pvt. Ltd. vs. Rajasthan State Electricity Board, Jaipur, 1993.
[13] The terms of the contract are uncertain or incomplete; the parties cannot have reached an agreement in the eyes of the law. An agreement to agree does not constitute a contract, and an inability to agree on key issues, which may include such things as price or safety, may cause the entire contract to fail. However, a court will attempt to give effect to commercial contracts where possible, by construing a reasonable construction of the contract.