1. Meaning of Contract
- Generally, contract law is the law of promises. It is the oldest commercial law and the foundation of modern business law.
- It applies not only to business but also to our day-to-day life.
- Definition: A contract is a legally binding exchange of promises or agreement between parties that the law will enforce. As per Section 504(1) of the Civil Code, 2074: a contract is an agreement between two or more parties to do or abstain from doing something, which is enforceable by law.
- In juristic concept a contract has two constituent elements: Agreement and Obligation.
| Daily-life activity | Type of contract |
|---|---|
| Buying a television set | Contract of sale |
| Travelling in a bus | Contract of carriage |
| Giving a laptop for repair | Contract of bailment |
2. Contract Law in Nepal
- Contract law is specified in the Muluki Civil Code Act, 2074 (MCCA-2074) – formally Muluki Devani Samhita, 2074; English title: National Civil Code, 2074. Contract provisions are in Part 5.
- Party autonomy: the Law does not say what contracts parties may make. They are free to make their own bargain, subject to the limits laid down in the Law. Contract law therefore lays down the limits within which parties are free to contract.
Historical development (short)
- Early period: Nepali law was influenced by Hindu philosophy – the Sruties and Smrities of Munies like Narad, Yajnavalkya, Manu. Customs and usages based on Hindu religion governed contractual relations.
- Muluki Ain, 1910 (Rana period) – first time a few provisions on contract were made. Replaced by the new Muluki Ain, 2020.
- Contract Act, 2023 – first separate law on contracts (insufficient and defective in principle).
- Contract Act, 2056 – replaced the 2023 Act with a more complete law.
- Civil Code, 2074 – unified Civil Code; the Contract Act 2056 was repealed. It incorporates modern principles of English and Indian contract law.
| Year | Law |
|---|---|
| 1910 | Muluki Ain (first contract provisions) |
| 2020 | New Muluki Ain |
| 2023 | Contract Act, 2023 |
| 2056 | Contract Act, 2056 (replaced 2023 Act) |
| 2074 | Muluki Civil Code – Contract Act 2056 repealed |
3. Major Provisions of the Civil Code, 2074
| S.N. | Subject | Section | Key point |
|---|---|---|---|
| 1 | Definition | 504 (1) | Contract = agreement between two or more parties enforceable by law. Offer = proposal made by one to another to obtain assent. Acceptance = assent given in the same sense as the offeror intended. |
| 2 | Contractual capacity | 506 | Minors, persons of unsound mind and persons disqualified by law cannot contract. Sec 32 defines minor; Sec 33 defines unsound mind. |
| 3 | Autonomy of parties | 507 | Parties can choose subject matter, fix nature and amount of consideration, terms and conditions, remedies for breach, and procedure to settle disputes. |
| 4 | Offer and acceptance | 508 – 512 | Communication, revocation, when offer/acceptance is treated as revoked, general offer, place of contract. |
| 5 | Contingent contract | 513 | Rules on performance of contingent contracts. |
| 6 | Void and voidable contracts | 517, 518 | Sec 517: list of void contracts (restraint of trade/profession, restraint of marriage, against public policy and welfare of state, unlawful object or consideration). Sec 518: cases where a contract becomes voidable. |
| 7 | Specific contracts | Chapters 6 – 14 | Indemnity and guarantee, bailment and pledge, sale of goods, agency, carriage of goods, lease, hire-purchase, contract labour, etc. |
| 8 | Performance of contract | 521 – 534 | Ways, manner, time, date and place of performance; who can demand it; who is bound; when performance is not needed. |
| 9 | Breach and remedies | 535 – 544 | Remedies: rescission, damages, specific performance, quantum meruit and injunction. |
| 10 | Limitations | Each chapter | Time limit within which the injured party must go to court; otherwise no remedy. |
4. Contract vs Agreement
Contract = Agreement + Enforceability (legal recognition).
| Agreement | Enforceability of agreement |
|---|---|
| An offer when accepted becomes an agreement. | Legal obligation arising from the agreement. (Obligations arising without agreement cannot be contractual.) Parties must be legally bound to perform their promises. |
Case law – Balfour v. Balfour: A husband promised to pay his wife a monthly allowance of 30 pounds for her maintenance. They later separated and he stopped paying. The wife sued. The court held that such arrangements are not contracts because the parties did not intend to create legal relations. Suit dismissed.
Legal obligations without agreement
Some legal obligations arise even without any agreement and are enforceable by courts – e.g. the duty to maintain wife and children, or obligations from tort (civil wrong). There is enforceability but no agreement, hence not a contract.
Conclusion
- A contract is an agreement enforceable by law; the agreement must create a legal obligation.
- All agreements cannot be enforced, so not all agreements are contracts. Hence: "All contracts are agreements but all agreements are not contracts."
- Not all legal obligations are contractual (they may arise without agreement).
- The law of contract is neither the whole law of agreements nor the whole law of obligations. It is the law of (i) those agreements which create legal obligations, and (ii) those obligations which arise from agreements.
Distinction between Contract and Agreement
| Basis | Contract | Agreement |
|---|---|---|
| Definition | An agreement enforceable by law. | An offer when accepted becomes an agreement. |
| Enforceability | Every contract is enforceable. | May not be enforceable. |
| Inter-relationship | A contract includes an agreement. | An agreement does not include a contract. |
| Scope | Limited – includes only commercial agreements (legal assumption). | Wider – includes both social and commercial agreements (legal assumption). |
| Validity | Only legal agreements are contracts. | May be legal or illegal. |
| Legal obligation | Every contract contains a legal obligation. | Not necessary for every agreement. |
5. Essential Elements of a Valid Contract
Section 10 of the Indian Contract Act (a model for the Nepali provisions): All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not expressly declared void. Textbook summary lists 12 elements: two parties; offer and acceptance; intention to create legal relationship; consensus-ad-idem; consideration; free consent; capacity; lawful object; not expressly void; possibility; certainty; legal formalities.
1. Proper offer and acceptance (agreement)
- At least two parties; one makes the offer/proposal, the other accepts.
- Offer and acceptance must be legal.
2. Intention to create legal relationship
- A relationship enforceable by law is a legal relationship.
- Social/domestic agreements: presumed no intention to create legal relations (Balfour v. Balfour).
- Commercial agreements: presumed intention exists.
3. Lawful consideration
- Consideration = something in return, "Quid pro quo".
- It must not be unlawful, immoral or opposed to public policy.
4. Capacity of parties
- Every person is competent to contract if he/she is a major (adult; minor is defined in Sec 32), of sound mind (Sec 33) and not disqualified by law.
- A person of unsound mind may contract during a lucid interval.
- Not competent: alien enemy, foreign sovereigns and accredited representatives of a foreign state, insolvents, convicts.
5. Free consent
- Parties must agree upon the same thing in the same sense – consensus-ad-idem (identity of mind).
- Consent is free when not caused by coercion, undue influence, fraud or misrepresentation.
Example: A threatens to shoot B unless B sells his house to A for Rs. 20,000, and B agrees. This is coercion, so consent is not free – the agreement is voidable at the option of B.
6. Lawful object
- Object = purpose or design. It must not be illegal, immoral or opposed to public policy.
Example: A and B agree to smuggle goods out of Nepal. The object is unlawful, so the agreement cannot be enforced in court.
7. Possibility of performance
- An agreement to do an act impossible in itself is void.
Example: An agreement to discover treasure by magic is void.
8. Certainty
- An agreement whose meaning is unclear or vague is void, unless the terms can be made certain from the circumstances.
Example: A deals in kerosene and coconut oil; B agrees to buy 10 litres of "oil" – meaning is uncertain, so it cannot be enforced. If A deals only in kerosene, the meaning is clear from the circumstances and the agreement is valid.
9. Not expressly declared void
- Agreements in restraint of trade, marriage or legal proceedings are expressly void (Sec 517).
10. Legal formalities
- A contract may be oral or written. Where the law requires writing, registration or attestation, these must be complied with; otherwise it is not enforceable.
Example: A promise to pay a time-barred debt must be in writing.
6. Interpretation of Contract
- Interpret according to the collective desire (intention) of the parties, taking into account their views, conduct and the circumstances.
- If intention cannot be determined, interpret as a person of common prudence would in ordinary circumstances.
- Interpret so as to give effect to the entire contract – no phrase may be set aside, and no single phrase given effect in isolation.
7. Classification of Contracts
Five bases: (A) Enforceability, (B) Formation, (C) Execution/Performance, (D) Liability (existing duty), (E) Creation of obligation (future contingency).
A. On the basis of Enforceability
| Type | Meaning and key points |
|---|---|
| 1. Valid contract | Satisfies all essential elements; enforceable by law; both parties have rights and obligations (A can enforce against B and B against A). |
| 2. Void agreement | Not enforceable by law; creates no rights or obligations; not a contract at all; void ab initio (void from the beginning). |
| 3. Void contract | Valid when made but later ceases to be enforceable due to supervening impossibility, change of law, destruction of subject matter, death or unsoundness of mind of a party – circumstances beyond both parties' control. English law: doctrine of frustration. |
| 4. Voidable contract | Enforceable at the option of one party only (the party whose consent was not free). Binding until that party rescinds it – within a reasonable time or before a third party acquires title to the goods. (If both parties can set it aside it is void; if only one can, it is voidable.) |
| 5. Illegal agreement | Object is unlawful; cannot be enforced; void ab initio; even collateral agreements become void. |
| 6. Unenforceable contract | Cannot be enforced in court because of a technical defect – absence of writing, barred by limitation, lacking signature, stamping or registration. |
B. On the basis of Formation
| Type | Meaning and key points |
|---|---|
| 7. Express contract | Made by words spoken or written. |
| 8. Implied contract | Offer and acceptance made otherwise than in words – by acts of parties or circumstances. |
| 9. Tacit contract | Part of implied contract; inferred from conduct. E.g. cash withdrawal from an ATM; sale by fall of the hammer (auction). |
| 10. Quasi contract | A contract created by law, based on equity and the principle of unjust enrichment. |
C. On the basis of Execution / Performance
| Type | Meaning |
|---|---|
| 11. Executed contract | Both parties have fulfilled their obligations; nothing remains to be done. |
| 12. Executory contract | Both parties still have to perform their obligations. |
| 13. Partly executed and partly executory | One party has performed; the other has still to perform. |
D. On the basis of Liability (existing duty)
| Type | Meaning and key points |
|---|---|
| 14. Unilateral contract (MCQ) | Only one party makes a promise; one-sided – the other party has already performed by doing the desired act. Promise on one side is exchanged for an act on the other. E.g. reward announced for whoever finds a lost passport – if found, the announcer must pay. |
| 15. Bilateral contract | Two-sided; both parties must fulfil obligations. Reciprocal promises – each promise is the consideration for the other. |
E. On the basis of creation of obligation (future contingency)
| Type | Meaning |
|---|---|
| 16. General (simple) contract | Not subject to any future contingency; obligation arises immediately. |
| 17. Contingent contract | Arises only when something happens or does not happen in the future (Sec 513). |
8. Important Comparisons
Void agreement vs Illegal agreement
| Matter | Void agreement | Illegal agreement |
|---|---|---|
| What | Not prohibited by law. | Prohibited by law. |
| Collateral transaction | Enforced. | Not enforced. |
| Punishment | No. | Yes. |
| Void ab initio | May not be void ab initio. | Always void ab initio. |
Void contract vs Voidable contract
| Basis | Void contract | Voidable contract |
|---|---|---|
| Meaning | Contract that ceases to be enforceable (valid when made, later becomes void). | Contract enforceable at the option of one party, not the other. |
| Cause | Supervening impossibility, change of law, etc. (doctrine of frustration). | Consent not free – coercion, undue influence, fraud, misrepresentation. |
| Option | Neither party can enforce it; either may ignore it. | Only the aggrieved party may rescind or affirm. |
| Status until avoided | Void from the date it becomes impossible/illegal. | Valid and binding until the aggrieved party rescinds it. |
| Rights of parties | No rights or obligations after it becomes void. | Rights remain unless and until it is avoided; third parties acquiring title in good faith are protected. |
| Example | Contract to deliver a particular painting; painting destroyed by fire. | A threatens B to sell a house for Rs. 20,000; B may avoid it. |
Note: The void-vs-voidable table is added from standard contract-law principles for the exam question "Distinguish between void and voidable contract". Match it with your teacher's own points if they differ.
9. Nature and Functions of Contract
Nature
- An agreement between two or more persons on a particular matter.
- Creates legal and binding obligations between the parties.
- Establishes a course of action to be performed by them.
- Provides remedies to the affected party if things go wrong.
- Recognised and enforced by law, i.e. contract law.
Functions
- Establishes the value of the exchange or transaction.
- Lays down the respective responsibilities of parties and the standard of performance expected.
- Enables the economic risks involved in transactions to be managed.
- Provides remedies if a promise is not fulfilled.
- Is the instrument by which separate and conflicting interests of participants are reconciled and brought to a common goal.
10. Short Answers (Brief Questions)
Q1. What is contract?
An agreement between two or more parties to do or abstain from doing something, which is enforceable by law (Sec 504(1)). Contract = Agreement + Enforceability.
Q2. What is consideration?
Something in return – "quid pro quo". It must be lawful (not illegal, immoral or against public policy).
Q3. Persons suffering from incapacity to contract?
Minors, persons of unsound mind, and persons disqualified by law (e.g. alien enemy, insolvents, convicts).
Q4. When is consent free?
When it is not caused by coercion, undue influence, fraud or misrepresentation, and parties agree on the same thing in the same sense.
Q5. Define unlawful agreement.
An agreement whose object is illegal, immoral or opposed to public policy; it is void ab initio and cannot be enforced, and collateral agreements also become void.
Q6. What is void agreement?
An agreement not enforceable by law; it creates no rights or obligations and is void ab initio.
Q7. When is a contract voidable?
When it is enforceable at the option of one party only – generally where consent was not free. The aggrieved party may rescind within a reasonable time or before a third party acquires title.
Q8. Distinguish void and illegal agreement.
See Section 8 – void is not prohibited by law, collateral enforced, no punishment; illegal is prohibited, collateral not enforced, punishable, always void ab initio.
Q9. Distinguish void and voidable contract.
See Section 8 – void is unenforceable by both parties; voidable is valid until the aggrieved party avoids it.
Q10. When is an agreement enforceable by law?
When it has all essentials: offer and acceptance, intention to create legal relations, lawful consideration, competent parties, free consent, lawful object, possibility, certainty, formalities, and is not declared void.
11. Exam Question Map and Answer-Writing Guide
| Exam question | Use these sections |
|---|---|
| Define contract; nature and functions | 1, 9 |
| "All contracts are agreements but all agreements are not contracts" (and reverse form) | 4 (conclusion), Contract vs Agreement table, 5 |
| Law of contract is not the whole law of agreement nor obligation | 4 (last conclusion point + Balfour v. Balfour) |
| Essential elements of a valid contract; when does an agreement become void | 5, 7A, 8 |
| Types of contracts; short notes (unenforceable, executed/executory, contingent, quasi) | 7 |
| Void vs voidable; void vs illegal | 8 |
| Contract vs agreement; factors essential for valid contract | 4 table + 5 |
| Law of contract in Nepal / Civil Code provisions | 2, 3 |
How to write a descriptive answer (10 marks)
- Introduction: definition of contract (Sec 504(1)) in 2 – 3 lines.
- Body: headings with 1 – 2 lines each; add a small example for consent, object, possibility and certainty.
- Table or case: use a comparison table when the question says "distinguish"; quote Balfour v. Balfour for intention to create legal relations.
- Conclusion: one-line summary, e.g. "Thus, a contract is an agreement enforceable by law."
Quick memory trick: O-I-C-C-F-L-P-C-F = Offer and acceptance, Intention, Consideration, Capacity, Free consent, Lawful object, Possibility, Certainty, Formalities (plus: not expressly void).
For more free notes visit www.tharusantosh.com.np
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