“Freedom of contract is Right of an adult to make a legally binding mutual agreement with one or more other persons, without governmental interference”-explains & illustrate
Contracts and agreements are related in so many significant ways. Contracts mean in agreement on specific matters weather those are national or international aspects of agreements or not. In a broad sense, contract is an agreement between two or more competent parties in which an offer is made and accepted, and each party benefits. The agreement can be formal, informal, written, oral or just plain understood. Some contracts are required to be in writing in order to be enforced.
Freedom of contract is Right of an adult to make a legally binding mutual agreement with one or more other persons, without governmental interference as to what type of obligations he or she can take upon himself or herself. The sanctity of contract means giving recognition to the contractual framework with appropriate legislation. For example, the procurement of public services is governed by various tendering acts / procurement laws. These laws provided sanctity to contract.
The law of contract is the most important part of commercial law because every commercial transaction stars from an agreement between two or more persons. This essay will be discussed in two separate parts in the freedom of contract and sanctity of contract. And partied should be as free as possible to make agreements on their own terms without interference of the court.
Objective laws are laws that confine government to its one legitimate function: protecting individual rights. The preamble to the Act states that the objects of the contract Act, 1872, are—
i. To define certain parts of the law relating to contracts: and
ii. To amend certain parts of the law relating to contracts.
Laws must be objective in both form and substance. In form, the law must allow each individual to know, before taking any action, what conduct is illegal, why it is forbidden, and what will be the penalty for violation. In substance, the law must forbid only such private conduct as violates the individual rights of others. Laws against murder, for example, satisfy both requirements.
Objective law is the indispensable basis for a “government of laws and not of men.” When law is clear and precise, it leaves no room for bureaucrats or policemen to exercise arbitrary power through unpredictable, subjective decisions. For instance, note the crucial contrast between the law of homicide and the law of antitrust, which forbids “unreasonable restraints of trade,” a foggy term that can be applied to any business transaction—or not, as the prosecutor pleases.
Because government exercises a monopoly on the legal use of force, government’s every action must be objectively controlled and explicitly authorized. Such rigid constraints leave private citizens alone to pursue their lives, free of the perpetual fear experienced under a regime of non-objective law.
Freedom of contract law & Legal Definition:
The doctrine which states that people have the right to legally bind them is known as freedom of contract. Freedom of contract is a judicial concept which holds that contracts are based on mutual agreement and free choice. Therefore, contracts are not be hampered by external control such as governmental interference. This is the principle which supports that people are able to fashion their relations by private agreements, when opposed to the assigned roles of the feudal system.
Freedom of contract embraces two closely connected, but two different concepts. Firstly, it indicates that contracts were based on mutual agreement. Secondly, it emphasizes that the creation of a contract was the result of a free choice unhampered by external control including the government or the legislature.
Sanctity of Contract:
An essential function of government is the protection and enforcement of contracts, including the resolution of disputes that arise there from—their impartial resolution, in accordance with objectively defined laws. Under such a system, none of the parties needs to (or may) decide unilaterally that he is a victim with the onus of taking physical action to repair his interests. Here again the government acts to defend men’s rights and thus to prevent any arbitrary use of physical force. Proper civil courts, Miss Rand observes, are “the most crucial need of a peaceful society.” Criminals are a small minority; contractual protection for honest undertakings, however, is a daily necessity of civilized life.—(source: Leonard Peikoff)
Scheme of the contract Act, 1872:
The contracts of the Act can be divided into two broad categories:
1. General laws relating to contract
2. Laws relating some particular types of contracts.
Again each of these categories can be diverted in to three broad parts.
1. General laws relating to contract
a. Formation of contract
b. Performance of contract
c. Breach of contract and remedies.
2. Laws relating some particular types of contracts.
a. Contracts of indemnity and guarantee
b. Contracts of bailment and pledge
c. Contract of agency
So, the first part relating to contract is about how is a contract formed, after a contract is formed the question of performance of that contract arises. Sometimes law excuses certain performances and if not them either the parties will perform their respective contractual obligations or the parties who fail to perform accordingly will be held liable for breach of contract. So the last part relates with the breach of contract and the remedies.
Scope of the contract Act, 1872:
The contract Act 1872, is not exhaustive and where the act does not cover the case with which the court has to deal, the court is bound the follow principles of the English common law, i.e., the roll of justices, equity and conscience. The contract Act 1872, does not say any things about the plays where the contract is made it is no part of the ordinary law of contract.
Conflict of laws:
Where the contract is made in one jurisdiction and is to be performed in another jurisdiction or other countries or issued upon in a jurisdiction where it was not made or to be performed, it becomes necessary to determine the law of which legal system will govern the contract or any particular aspect of it. Our Act is silent on his issue.
Formation of a contract:
Contract: it is mentioned in section 2(h) of the contract Act, 1872, that “an agreement enforceable by law is a contract”.
This is the simple definition if the term ‘contract’ given by the Act. So, accordingly it means that whenever the agreement acquires the qualification of enforceability by law then it becomes a contract. In other words, the agreements may be of two types:
1. Agreements enforceable by law; and
2. Agreements not enforceable by law.
The agreements which are enforceable by law only those can be the contracts which are not enforceable by law, there may be plenty of agreements, some of which are enforceable by law. Suppose, an agreement to purchase 1kg heroine is not enforceable by law and as such it cannot be a contract, but an agreement for the purchase of a computer is enforceable by law and as such is a contract, in this regard, we can reach to a conclusion that “all contracts are agreement, but all agreements are not contract”. Because, to be a contract it must be an agreement first of all, so a contract is necessarily an agreement. But an agreement is not necessarily a contract, suppose the above agreement to purchase heroine is not a contract since it is not enforceable by law. So “all contracts are agreement, but all agreements are not contract”. However, in fact the definition of the term contract given in section2(h) is not exhaustive one, because it does not given a clear idea about a contract, since the two terms agreement and enforceable by law use by the law have not been clarified here. So for a clear idea about a contract we have to depend on at least two other definitions, of 1. Agreement And 2.Enforceability by law, even in fact this will not suffice, because this attempt will further make us dependent on some other necessary definitions. Let us start the effort with the definition of “Agreement”.
Section 2(e) provides that—
Every promise and every set of promises forming the consideration for each other is an agreement.
By a proper dissection of the definition we get two constituent elements of an agreement:
1. Promise and
It was held in Bangladesh Muktijodha kalian trust represented by the Managing Director Vs. Kamal Trading Agency and others that the consensus ad idem or meeting of minds of the parties is required to constituted an agreement.
Section 2(d) while defining the term Consideration provides that—
When at the desire of the promissory the promise or any other person has done or abstained from doing or does or abstains 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. Consideration may be past, present or future.
Analyzing the above definition we get the following ingredients of consideration:
It is an act or abstinence. That means it may be positive or negative. It is worth mentioning here that the law uses the word ‘Something’ in connection with the terms, ‘act or abstinence’ to constitute a consideration. Thus the law does not confine the requirement of such act or abstinence within any particular types or nature rather makes it open using the term something’s which means in fact everything.
Section 2 (b) says that ‘a proposal when accepted becomes a promise’. If we analyze this definition of ‘promise’ than we see that to constitute a promise two components are essential:
1. Proposal And
That means first of all a proposal is necessary and then that must be accepted to have a promise. So, now the questions are towards proposal and acceptance.
Section 2(a) says—-
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.
Here two constituent sectors of an offer are found. First, to be an offer there must be a signification of one’s willingness to another. Secondly, the signification must be made with a definite object that is intended to have the consent from the person to whom it is addressed. As such, we see that, generally, here no new terminology to be defined has been used by the law and accordingly it can be identified at the starting point of the definition of a contract.
After an offer is found there must be an acceptance to reach the stage of promise. Section 2 (b) says—
When the person to whom the proposal is made signifies his assent thereto the proposal is said to be accepted.
Thus the essence of the acceptance is the assent or consent that is coming from the offeree. It simply speaks of giving one’s consent to the offer as it is made by the offeror and as such it will be a valid acceptance to convert an offer into a promise.
Since we have got by this time at least a starting point, so now, let us take an effort to summarize the whole chain towards the meaning of contract. Accordingly a contract is constituted by an agreement and enforceability by law and an agreement is constituted by promise and consideration, and a promise constituted by offer and acceptance, and we observed the definition of consideration also.
The deficiency of this summary based on the above discussion is that it only analyzed one of the two components of the contract, that is agreement and kept silence about enforceable by law. In order to analyze the phrase ‘enforceable by law’, we have to concentrate on section 10 that speaks about the issue, which is when an agreement becomes enforceable by law.
Section 10 says—
All agreement are contracts if they are made by the free consent of parties component to contract for a lawful consideration and with a lawful object and are not hereby expressly declared to be void.
We have seen earlier in the first precise definition of the contract that an agreement enforceable by law is a contract, which means to be a contract an agreement must be enforceable by law. So it can be expressed from another dimension that an agreement which is a contract is, of course, enforceable by law. So, since section 10 of the Act lays down in the agreement which are contract this in fact says when does an agreement became enforceable by law and accordingly we get the answer that to be enforceable by law, i.e., to be a contract must fulfill the following conditions:
i. The parties must be competent
ii. The consent of parties must be free
iii. The consideration must be lawful
iv. The object must be lawful
v. The agreement must not expressly declared void by law
So these five conditions are the further conditions to be satisfied to convert and agreement into a contract. Accordingly there may be an agreement by the incompetent parties without free consent and it is immaterial whether the consideration or object is lawful or not. Thus if two person agree to have a transition the ultimate object of which is smuggling that will be never the less an agreement shows that cannot be a contract, again if a person of unsound mind inters into a business transition that may be an agreement through that will not be a contract. But that particular agreement cannot be a contract without satisfying the above condition.
It would be convenient if the above components ate projected through the following diagram.
The above drawn diagram shows the formation of a contract. Each of the above constituent elements of contract will be discussed in detail in the following pages. Before starting that elaborate discussion about formation of a contract let us now concentrated or different types of contract. We can categorize contract from various dimension and perspectives.
Types of Contracts:
It is possible to classify the types of contracts from two perspectives, i.e. as regards the modes of creation and as regards the enforceability and validity.
As regards the mode of creation:
Express and implied contract:
In fact, we get the idea to divide contract in these two divisions from section 9 of the Act, which says that in so far as the proposal or acceptance of any promise is made in words, the promise is said to be express. In so far as such proposal or acceptance is made otherwise than in words, the promise is said to be implied.
1. Express contract:
If the offer and acceptance of a contract are made in words, i.e. either expressed orally or in words, the contract will be deemed to be an express one. For instance, A tell ‘ I would like to sell this car for Tk. 3 Laces’ and B replies ‘ I agree’-this is an express contract. Thus express contract may be of two types:
Ø Written Contract and
Ø Oral contract
2. Implied Contract:
If the offer and acceptance of a contract are made otherwise than in words, it will be treated as an implied contract. For instance, if a shoe shiner starts polishing the shoes of one person and latter permits it remains silent knowingly their the 1st person is doing so to get a payment in exchange of the services, it will be treated by the law as an case of implies contract.
As regards the enforceability and validity:
i. Valid contract.
ii. Voidable contract
iii. Void contract
i. Valid contract: An agreement enforceable by law is a contract and this is valid contract. In other words, the valid contracts are that agreement which fulfills all requirements of valid contracts as imposed by the law. Accordingly, section 10 must be taken into consideration which says directly about the requirements of a valid contract. It has been discussed above elaborately.
ii. Voidable contract: Voidable contract has been defined in section 2 (i) as…..
‘An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others’
Thus it appears that the violability of a contract is a temporary status. It has to be made enforceable by law or has to be set aside and both these are dependent at the option of the parties of one side and not at the option of other side. A contract can become voidable for many reasons if determined by the law. Once a contract becomes voidable, it acquires a temporary and transitional status. It has to be either validated. The law gives this power of validating it to the parties of one side of the contract, not of the other side. The law determines at whose option it will be valid in each particular case considering the nature of that voidable contract. Thus a contract cannot remain as voidable forever; rather it has to be valid or void.
iii. Void contract .:Section 2(j )says that-
A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable.
Thus the law defines void contract very precisely saying that a contract becomes void by ceasing its enforceability by law. The definition in fact implies two things to be void contract:
1) One valid contract is there
2) Then it must cease its enforceability by law
Thus, it does not speak about void abinitio. Because, law says that it has to cease its enforceability and it will be void only when it will cease that enforceability, So that for ceasing the enforceability it must acquire it at first and whenever it will have the enforceability by law that implies the presence of a valid contract. Thus, the precondition of a void contract is the extensive of a valid contract and afterwards somehow its enforceability will be ceased and then it will be treated as void contract. It can be concluded by saying that a void contract was a valid contract once upon a time and subsequently for some reasons it lost its enforceability in law and then it has become a void contract. And there may have various grounds for ceasing the enforceability of law, e.g., supervening impossibility or illegality. Let us now concentrate on certain other terms—-
Void agreement: it has been clearly defined by section 2(g) which says—-
An agreement not enforceable by law is said to be void.
Thus an agreement, in fact, will either be enforceable by law or not. If it becomes enforceable by law it will be a contract and if failed to be so then it will remain as agreement and the legal status of that agreement will be ‘void agreement’. And there are obviously certain criteria set by law for the enforceability and those criteria have been discussed earlier.
Distinction between void agreement and void contract:
There is a similarity between these two terms, void agreement and void contract, that is, both of these are not enforceable by law. The only basic distinction between t5his two is that a void contract was valid ones upon a time, but a void agreement was never is a position to be enforceable by law, in the other words void agreements implies ab initio, i.e.: void from very beginning or from its birth, where as void contract implies that it is not void at its very inception rather it was born as valid or was enforceable by law, and subsequently it creased 6to enforceable by law.
‘The concept illegal agreement’ has not been defined by the act, but it is definition can be inferred from the relevant laws that it means the agreement which is illegal. It is worth mentioning here that all illegal agreements are void but all void agreement are not illegal, because illegality is one of the ground to be void may be other reasons of for which an agreement may be void but in that case that’s same cannot be term as illegal. Suppose, entering in to an agreement to right 100standards pages, within five minutes in one’s own hand writing is void agreement, but this is not illegal agreement. But, if somehow and agreement becomes illegal than obviously that will be void agreement
This is a misnomer, because it creates a paradoxical situation. A contract implies that it is enforceable by law. So, whenever the term ‘contract’ is used it cannot bear the term illegal with it, because that will create self contradiction which will give rise to a paradox, Because the agreement which is enforceable by law cannot be termed as illegal. That is why illegal agreement is a correct term but not the illegal contract
This is another interesting terminology which has not been defined in the contract Act, 1872. It means a contract which cannot be enforced by the courts of law for some technical reasons. Suppose, the right arising out of a time barred contract may not be enforceable in the courts of law and such as contract may be termed as unenforceable contract.
The elements mentioned above must all be present. If any one of them is absent, the agreement does not become a contract. An agreement which fulfils all the essential elements is enforceable by law and is called a contract. From this it follows that, every contract is an agreement but all agreements are not contracts. Any agreement to make their own terms without the interference of the courts and their agreements should be respected. But the agreement must be void than it will be pass by the court/rules of law.
Every contract gives rise to certain legal obligations or duties on the part of the contracting parties. The legal obligations are enforced by the courts. An agreement which satisfies all the essential elements of a contract, and which is enforceable through the court. It follows from above, that a valid contract has to comply with certain requirements to be enforceable. The most important requirements are that the parties must have contracting capacity, reach consensus on clear terms of the agreement, and comply with formalities, if prescribed by law.
· Commercial law and Labour & Industrial law by M.AHAMMED; published by: Bangladesh law Book Company, 26 Bangla Bazar, Dhaka-1000.
· Law of Contract by Muhammad Ekramul Haque: published by :law lyceum, centre for law, justice and peace, 84/1 central road, Dhanmondi, Dhaka-1205.
· Commercial law(including company law) and Industrial law by Arun Kumar Sen and Jitendra kumar Mitra: published by: D. Chakraborty for the world press private Ltd. 37A College street, Calcutta-700073.
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 58 C 5931(cal) 659.
 (1998) 50 DLR (AD) 171.