The law of contract is the most important part of commercial law because every commercial transaction starts from an agreement between two persons

The law of contract is the most important part of commercial law because every commercial transaction starts from an agreement between two persons -explain &illustrate in reference to commercial contracts and basic principles of contracts

1. Introduction:

A contract is made when a person signifies his willingness to do or to abstain from doing anything with a view of obtaining the assent of the other party. Such act or abstinence is said to make a proposal.

Now-a-days Law affects every aspect of human life in its broadest sense. “The word law includes the forces of nature that determine the physical environment in which each individual will live and the moral laws that regulate how the individual must behave when dealing with other people.

Law is the command of the sovereign that means it has its source in sovereign authority, law is accompanied by sanctions and the command to be a law should compel a course of conduct being a command the law must flow from a determinate person or group of persons with the threat of displeasure if it is not obeyed. Sovereignty is however only a part of the state, so in ultimate sense, law emanates from the state. Thus the term law is used to denote rules of conduct emanated from and enforced by the state. People living in an organized society have to follow certain common rules, otherwise peaceful living is impossible. It is all the physical, moral and governmental form of a legal system.

According to salmond “Law is the body of principles recognized and applied by the state in the administration of justice”.

According to Holland “Law is a rule of external human action enforced by the sovereign political authority” From this definition it follow that there are three essential characteristics of law.

1. Law is a rule relating to the action of human beings.

2. Law attempts to regulate the external action of human being.

3. Law is enforced by the state.

So Law is a general word use by different people to communicate idea and law is a rule prescribed by some authority to regulate human action.

2. Rule of Law:

The rule of law states that “No man is punishable or can be lawfully made to suffer in body or goods except for a distinct breach of law established in the ordinary legal manner before the ordinary courts”.

In other word’s there must be supremacy of law, the breach of law must be proved in a duly constitute court of law. Thus the rule of law implies equal protection of law.

The rule of law being from the concept if equality of all persons. That means apply the same law over all persons in the state and give all persons equal rights and privileges for the protection of their human liberties.

Rule of law also state that “no man is above law”. Every man whatever his rank or condition, is subject to the ordinary law of the state. And amenable to the jurisdiction of ordinary tribunal that means legal right and legal obligation must hold equally as for all citizen.

1. Laws must exist and those laws should be obeyed by all, including government officials.

2. Laws should be written with reasonable clarity to avoid unfair enforcement.

3. Law must avoid contradictions.

4. Law must not command the impossible.

5. Law must stay constant through time to allow the formalization of rules; however, law also must allow for timely revision when the underlying social and political circumstances have changed.

7. Official action should be consistent with the declared rule.

Finally rule of law is the result of states and judicial decisions determining the rights of private persons. Thus the constitution law of the country follows from the ordinary law of the land.

3. Commercial law and contract:

The law of contract is the most important part of commercial law because every commercial transaction starts from an agreement between two persons. Now the law of the country related the money object, Example- Inheritance and transfer of property, relationship between persons, crimes and their punishment, as well as matters relating to industry, trade and commerce.

Section 2(h) of the Indian contract act provides that “an agreement enforceable by law is a contract”. There fore in a contract there must be an agreement and the agreement must be enforceable by law.

An agreement comes into existence whenever one or more person’s promises, forming the consideration for each other, is an agreement. Some agreements cannot be enforced through the court of law, Example- An agreement to play cards or go to cinema. An agreement, which can be enforce through the court of law is called contract.

According to Sir William Anson, “A contract is an agreement enforceable at law made between two or more persons, by which rights are acquired by one or more to acts or forbearances on the part of the other or others.

The object of the law of contract is to introduce definite in commercial and other transaction. These can be illustrated by an example- X enter into a contract to deliver to toms of coals of Y on a certain date. Since such a contract is enforceable by the court, Y can plan his activities on the basis of getting the coal on the fixed date. If the contract is broken Y will get damages from the court and will not suffer any loss.

Sir William Anson observes as follows, “As the law relation to property had its origin in the attempt to ensure that what a man has lawfully acquired he shall retain, so the law of contract is intended to ensure that what a man has been led to expect shall come to pass, and that what has been promised to his shall be performed”.

4. Contract and Individual competency :

This is contrary to the general rule of individual of contract meaning; a contract can only be enforced by the parties directly are related by the contract i.e. promissor and acceptor. Every other person lacks the legal relationship to the contract.

A valid contact is a legally binding agreement, between two parties, which agreement may be evidenced by writing, words or action. Three essential elements must be present here namely-

  • Agreement
  • An intention to create legal relations.
  • Consideration.

It is almost invariably the case that the two parties to a contract bring different levels of bargaining power with them. A contract may be made between a large retail company and an individual. For example- In such cases the agreement is likely to be in the form of a standard form contract, prepared by the dominant party and which the other party has no choice but to take or leave.

Generally speaking the law will not wish to restrict or interfere with the ability of contractual parties to decide weather or not to enter into contract and it called the terms “Freedom of contract”. However it will often intervene where one party seeks an unfair advantage as a result of his superior bargaining position.

Such intervention will be made by the courts or by legislation. Thus, for example, the sale of good Act implies terms into a contract which impose obligations on the business seller as to the quality and fitness for purpose of the good he sells. Likewise the consumer credit Act affords the customer protection where he enters into credit agreements. In respect of accession

Clauses, in which typically the stronger party seeks to avoid liability, the unfair contract terms Act may result in such a clause being void outright or void if the court considers it to be unreasonable.

5. Essential elements of contract and Individual competency of Relationship:

There are certain elements that must be present for a legally binding contract. Now we demonstrated here the relationship between the Individual competency and the essential elements.

5.1: Agreement:

The formation of an agreement is the first part of the making of the contract. Section 2(c) of contract Act 1872 defines agreement as “every promise and every set of promises forming the consideration for each other”. Thus the definition of an agreement divides itself into two elements

(i) Promise.

(ii) Consideration.

(i) Promise:

Section 2 (b) define a promise as “a proposal when it is accepted”. Here also a promise breaks up into two elements namely

(a) proposal (b) acceptance

(a) proposal:

When a 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

(b) Acceptance:

Thus for the formation of a contract, It is necessary that one part make proposal and other part accept it .

So, here we see that to be a promise it must be accepted by the other party. Which ensure the power conferring rules which enables individuals to enter into agreement of their own choice.

5.2: Offer and acceptance:

A contact comes into existence when a definite offer has been unconditionally accepted. Offer is an expression of willingness to contract on a specific set of terms, made by the offeror with the intention that, if the offer is accepted, he or she will be bound by a contract. And acceptance is an expression of absolute and unconditional agreement to all the terms set out in the offer. It can be oral on in writing. The acceptance must exactly mirror the original offer made.

To be contract there must be lawful offer by one party and a lawful acceptance of the other party or parties. The objective “lawful” implies that the offer and acceptance must confirm the power conferring rules which enables individuals to enter into agreement of their own choice on their own terms.

5.3: Intention to Create Legal Relationship:

The agreement may have all other agreements of valid contract it would not be a contract until the intention to create a legal relationship is established. The intention to create legal relationship is the most essential element of a valid contract and it’s completely obvious. So to be a contract there must be an intention (among parties) that the agreement shall result in or create legal relations. An agreement to dine at a friend’s house is not an agreement intended to create legal relations and is not a contract. But an agreement to buy or sell goods or an agreement to marry are agreements intended to create some legal relationship and are therefore contracts provided other essential elements presents. So if both pretties are not legally intended then the contract is not form. And this legal intention gives the individual to that power which enable individuals to enter into agreement of their own choice on their own terms.

5.4: Capacity of Parties:

The capacity of parties emphasizes that parties entering the contract must be capable of understanding it and forming a rational judgment as to its effect upon their interests. The parties to an agreement must be legally capable of entering into an agreement; otherwise it cannot be enforced be a court of law. Here want of capacity arises from minority, lunacy, idiocy, drunkenness, and similar other factors, if any of the parties to the agreement suffer from any such disability, the agreement is not enforceable by law, except in some special case. So individual parties capacity is vary much important to make a contract.

5.5: Free consent:

Two or more people are said to consent when they agree on same thing in the same sense. According to Section -10 of the contract ACT all agreements are contacts if they are made by the “free consent” of all the parties of them (agreements), for a lawful consideration will a lawful object and are not expressly declared as void

Section -13 of the contract ACT define consent as follows –“two or more persons are said to consent when they agree upon the something in the same sense.

Section -14 of the contract ACT lay down that consent is not free if it is caused by coercion, undue influence, fraud misrepresentation and mistake.

(A). Coercion:

The act of coercion must be directed to any person not necessarily the other party to the agreement. Coercion defined Section -15 of the contract ACT define coercion as under “coercion is committing or threatening to commit, any Act forbidden by the Bangladesh penal code 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.

(b). Undue influence:

According to Section 16(2) of the contract Act undue influence is assumed to be in the following causes –

(i). Where one party has an apparent authority over the other or where he is in a fiduciary relationship to the other. Fiduciary relationship exists in cases of father and son, doctor and patient, guardian and ward, solicitor and client etc.

Example: Father Give some money to his son when he was minor, When the son came to age father misused his parental influence and obtained from his son a bond for money which was gather than the amount father had advanced. Here father employed undue influence.

(ii).Where one party enter into a contract with a person who is mentally affected because of age , illness or mental or bodily distress, mental capacity may be affected temporary or permanently.

Section -16(c) of the contract Act defines undue influence as “A contract is said to be induced by undue influence where the relations subsisting between the parties are such that one of the parties is in a position to obtain an unfair-advantage over the other.

Finely it has been stated under section-19A that a contract is void able at the option of the party who has given consent to an agreement being persuaded by undue influence. The affected person can cancel such agreement completely or if the party so affected his received any benefit by such contract in that case the court can set a side on the basis of terms and condition’s as consider just (so it is prove here). So here it is proved that law is the power conferring rules which enable individuals to enter into agreement of their own choice on their own terms.

(C) Misrepresentation:

A representation is not a term, but a statement of fact made by one party to the other during their preliminary negotiations, which was intended to induce the other party to enter into that contract. It must be a statement of fact and not an opinion. Misrepresentation is therefore an incorrect statement made innocently.

When one party induces or instigates another party to enter into contract by giving him a false statement or ascertain about some fact relating to the contract at the time of the contract or before then the statement or assertion is called misrepresentation. A misrepresentation originates from inaccurate representation; of course, inaccuracy is not due the intention of defrauding the other party to the contract. Under section 18 of the contract act misrepresentation may be caused by (a) Unwarranted Assertion (b) Breach of duty and (c) Innocent mistake.

In the consequence of misrepresentation the affected person can avoid the contract and he can get the contract performed and that he shall be put in the position in which he would have been, had the representation been true. But if the person who consented by misrepresentation had the ways of discovering the truth with ordinary diligence in that case he has no remedy (so here also prove that).

(c) Fraud:

This is misrepresentation made with an intention to deceive or cheat. Fraud means and includes any of the following acts committed by the party to contract (or his connivance or by his agent) with an intention to deceive another party thereto (or his agent) inducing him to enter into the contract:

1. The suggestion that a material fact is true when it is not, by a person who does not believe it to

Be true.

(d) Mistake:

Mistake on a point of native law does not affect the contract; Mistake on a point of law in force in a foreign country is to be treated as mistake of fact.

5.6: Legality of the Object:

A contract must be entered for lawful consideration and lawful object. Lawful object is with regard to the purpose or design i.e. the object for entering in to the contract must be legal. If the plaintiff gives evidence that manifests any form of illegality in the nature of the contract he wishes to enforce, his action will fail. This explains the maxim- Ex turpi causa non-oritur action i.e. there can be no action upon a wrongful ground. In same cases, object and consideration may be the same.

– If it implies or involves injury to a person or property of another person. It is the object of the law to protect its persons and their properties.

– If it is fraudulent i.e. it aims at cheating other people.

To be a contract the objective for which the agreement has been entered into must not illegal or immortal or opposed to public policy.


A contract is a binding agreement between two or more parties that usually results in some type of performance. Without doubt, trade and commerce could not thrive if freely made agreements were not normally carried out. Contract can be viewed as a method in which men bargaining with one another can make sure that their promises will last longer than their changeable states of mind. The law of contract provides a mechanism through which private individuals can, to a certain degree, predict, control, and stabilize the future. Contracts allow people to incur reciprocal responsibilities and commitments, to make promises others can rely on, to remove some uncertainty from life, and to establish reasonable expectations for future actions.

Contract is a general idea that once parties duly enter into a contract, they must honor their obligations under that contract. Whereas, efficient breach theory is that parties should feel free to breach a contract and pay damages, so long as this result is more economically efficient than performing under the contract.

A function of the state, operating mainly through the court system, is to enforce performance by requiring the promissory to fulfill his bargain on penalty of fine or imprisonment or by awarding judgment against him for money damages when, without legal reason, he fails to perform. State compulsion has replaced private force, which was common in earlier time periods. State enforcement in concerns of bargain and promise can be viewed as one of the state’s most important functions behind only peacekeeping and property defense. In essence, a breach of contract is an indirect use of force.


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