Chapter-1

The nature of law

Nature in simple sense refers to something in totality. When we are asking for the nature of

someone or something we are first of all giving name to someone or something. We are also defining someone or something in the second place. Likewise, we highlight on the significance and features of someone or something. Therefore, the nature of law refers to the meaning of law,

definition of law, significance of law, characteristics of law and so on. The nature of law signifies the law in totality. As the nature of law signifies the law in totality, it can never be

stated exactly. However, the nature of law can be pointed out by the following heads.

1. Meaning of law

In its simplest sense, law can be understood as a rule. There may be various forms of

rules such as individual rules, religious rules, family rules, social rules, economic rules, administrative rules, constitutional rules, taxation rules, rules of college, rules of games, gravitational rules, and rules of the nature and so on. In its widest sense, the law means every

kind of rules that regulate the human activities. In its narrower sense, every kind of rule does not necessarily constitute the law. The law

is that kind of rule which is recognized and enforced by the state. Law is a rule made by the state. The law making body of the state is known as the legislature or the parliament. The legislature makes the laws to regulate the behavior of the citizens of the state. In this sense, law means a

body of rules of conduct, action, or behavior of persons made and enforced by the state. Every state makes certain rules for its citizen allowing them to do something and makes certain other

rules forbidding (not allowing to do) them from doing something. These rules as such are called laws.

In another sense, law is a body of principles and theories established by jurists and legal

experts. The principles and theories are very important for the understanding of law. Therefore, they equally give sense of the law. For instance, the subject or study of science becomes

incomplete without studying the theories of Charles Darwin, Albert Einstein & others, so the understanding of law is inadequate and incomplete without the knowledge of the principles and theories of law. Such principles and theories of law provide an accurate picture of law. For

instance, ‘ignorance of law is not excused’ is a universally accepted principle of law. Nobody can escape liabilities (punishment, fine, imprisonment etc) just by saying that he/she did not

know the law. Here are some other recognized principles of law: ‘None is guilty unless he /she is proved to be guilty’, ‘Let the heaven fall, justice has to be done’,’ Justice must not only be done but also must be seen to have been done’, ‘Let the ten criminals go without punishment but save

a single innocent person’, ‘Law cannot help those who do not heed to their rights’ ‘no consideration, no contract’ and so on. Without understanding these principles and theories of

law, the nature of the law cannot be construed at all. Law is synonymous to the word ‘Dharma” i.e. duty in the Hindu philosophy and

‘Hukum” in the Islamic system. Romans call it ‘jus” and in Germany and France it is called as

‘Ritch” and ‘Droit” respectively. Whatever nomenclatures may be given in different countries, the law is essential to regulate the human activities in every society. Therefore, different societies

have made law for regulating their activities. A society cannot function well without the presence of law in it.

Sometimes, law represents customs and traditions prevalent in society. Customs and traditions are long habits of people and thus deserve the obedience of people. The state respects

customs and traditions of people and allows them for their observance. As human behaviors are regulated by customs and traditions, they are laws as such. Likewise, laws are conventions i.e.

agreements and contracts. Agreements and contracts also regulate the activities of human beings. When we agree to do something, we are obliged to do that. It is so because we have made laws for ourselves in the form of promises. We have to fulfill our promises. Contracts are special kind

of agreements. They bind the contracting parties because the terms of the contracts are laws for them. Religious precepts also guide the behavior of people. Certain of our conduct are regulated

by the religion as well. We have to follow them even though we may not like to do them. For example, when we do marriage, we follow the religious rituals.

In this way, law is an instrument that guides, regulates and systemizes human behavior.

In its widest sense, it can be understood in terms of any rules of actions. It may include every standard, values, norms, ideals and precepts, the rules of gravity, the rules of the universe, the

rules of nature and the like. Thus, we can say that law is any kind of rule that guides, regulates and systemizes human

behavior. It is a body of principles and theories propagated by scholars and it is a conglomeration

of rules made by the legislative organ of the state. Put all of these assertions together should be understood as the law.

2. Definitions of law

Definitions of law are the ways of looking at law by people. Different people see law from different ways which are called the definitions of law. Law can never be defined. Jurists

have made endeavors to define law but none is able to provide its universally acceptable definition. Various scholars from various angles have variously defined law. There is no unanimity of opinion regarding the real nature of law and its definition. Some scholars define

law as a rule administered and enforced by the court of law whereas some others regard it as a rule guided by the state. Some jurists define in terms of commands of the Almighty and some

have defined it in the form of customs and traditions. However, none has been able to provide the universally acceptable definition of it.

There are many definitions of law given by different jurists at different times. They have

defined law from different angles. Some have defined it on the basis of its nature, some concentrate mainly on its sources. Some define law in terms of its effects on society while others

prefer to define it in terms of ends or purposes of law. They make a volume of books if we collect definitions given by them. Therefore, to make easier to understand law, they are put in a category, which is known as a school of law. The school of law reflects the nature of law. It is a

collection of similar definitions on law given by different jurists. Such schools of law are namely natural law school, Analytical law school, Historical law school, Economic law school,

Sociological law school, and Realist law school. We cannot explain here all of the definitions of law according to the schools of law. Here are selected some of the definitions of law, which will make us to understand the meaning and nature of law so far.

Austin says: - “Law is a general command of the sovereign backed by sanction”. According to Austin, law is a command of the sovereign. The command is general in nature. A

command given to a particular person or group of a person is not law at all. For example, if the sovereign authority commands his servant to bring a cup of tea, it is not law at all because this

command is targeted to a particular person. This means the law should be imperative for all. On the other hand, if he says none will kill other person, this will be the law. The commands to be

law must be given by politically superior individual to the inferior one. Such commands are always backed by sanction. That means the person who violates the law in the form of command

gets punishment. To him, people obey commands (laws) because in breach of it they inflict punishment.

Austinian definition of law is not free from criticism. First of all, he is not clear about the

sovereign who he is. He fails to demarcate the politically superior one who commands- whether he meant the king or parliament, is not clear. The parliament makes laws; the monarch approves

them in modern system of governance. Secondly, all laws are not and/or cannot be commands as such. Some laws create institutions; others provide powers to the positions attached with them. Thirdly, people obey laws not because of fear of punishment but also due to their preservation of

their rights and duties. Civil law does not inflict punishment people follow it notwithstanding. Lastly, his definition of law does not cover the international law, which has been one of the

branches of law. Salmond defines law as follows: -“Law is a body of principles recognized and applied

by the state in the administration of justice.” This definition is insufficient. This is so by

multiple reasons. In the first place, the body of principles is an abstract notion. It does not refer to the concrete idea of law. The law, which we talk about, is the law that consists of the statutes

(Acts of parliament). The law making organ of the state lays down precise rules, not the body of principles. In the second place, law tries to achieve various purposes. Salmond says that only the administration of justice is the end of law. There is an existence of just laws according to him.

But unjust laws equally exist in the state. Therefore, the law does not only refer to the notion of justice but also it is used to structure the state and its institutions as well. Law is not only the

body of principles but also of the rules recognized and applied by the state, not only in the administration of justice but also to achieve different ends of law.

According to Holland, “Law is a general rule of external human action enforced by a

sovereign political authority.” To Holland, law is a general rule which is applied to all. This means it is not for a particular person. It regulates the external human action which means

internal human actions are not the subject of law. For instance, you join a college. How you should behave at college may be the law. Whereas, how you think or study at home, which subject first and which one last is up to you. It is your internal action. Therefore, it is not law

according to Holland. The law is enforced by the sovereign political authority. This is very important to know that the law cannot be made and enforced by anybody. It should be enforced

by the political sovereign according to Holland. Supposing, there are 205 members of parliament who are elected by the people make the law in the parliament is the law as such. Everybody has to abide by the law made by them. Contrarily, if 205 Nepalese citizens gather together and

declare something as law, it cannot be called law. This is so because they are not sovereign political authority. Members of parliament have sovereign authority and the rules made by them

are laws according to Holland. Blackstone opines:-‘Law in its most general and comprehensive sense signifies a rule

of action, and is applied indiscriminately to all kinds of actions, whether animate or

inanimate, rational or irrational.” His definition is more appropriate. Law does not have a limited sense. It should be taken into its broader sense. He says that the law can be any kind of

rule for human action. It is applied to all without discrimination. Where there is some action, a set of rules is necessary to follow and that set of rules according to Blackstone, is the law.

3. Importance of law

The law is very essential thing in human life. Law is very important instrument to regulate

human behavior. Law is very important tool to maintain the law and order situation in society. It is useful in giving rights and imposing duties to the individuals and various authorities. It is the law, which provides powers and immunities. It also provides liberty and freedom. Apart from

providing powers, immunities, liberties and equality, there are various purposes of law. The ultimate end of the law is the administration and delivery of justice. The primary function of law

is the delivery of justice. Justice is divided as corrective and distributive. The law creates organizations and institutions to accomplish that purpose. The law provides procedures for the administration of justice and for the guidance of human actions. The law imposes duties on

everybody and punishes them in case of non-compliance to it. We cannot imagine a society devoid of law. There will be disorder and chaos in society in absence of law. Might will be right

and the mighty will take everything and weaker ones will always be exploited by them. It is the law, which protects weak ones from the strong and powerful ones. It is awake when we sleep and we wander freely because the law is there. Law is the king of the kings for the weak may prevail

over the strong by means of law. It is above everybody. Law is not subject to anybody; rather everybody is subject to it. The law rules over the king as well.

Law is a social science and grows and develops with the growth and development of society. New developments in society create new problems and law is required to deal with these problems. For instance, space law came in being when people invented the space and explored

the different planets in the space and marine law when they explored beneath the sea and ocean. Likewise, when the computer was invented then the cyber law was required. So, the law is

required when the new subject and discipline is invented. Law is an instrument of social change. When changes take place in society, the law is

required to shape them. To make some changes in society, the state must take recourse of the

law. Whenever society gets transformation, the law is required to mechanize it. For instance, law has played a tremendous role to shape the process of industrialization and is shaping the present

scientific and technological development. The grip of law extends to the reach of people either it is the space or the sea. The new advent in science and technology necessitates the presence of law. The development on computer science has demanded the control over cybernetics crimes. In

the present age, law pervades all the spheres of human activities and the state seeks to regulate them through the instrumentality of law. We can further state the significance of law as follows:

1. Law is used to fulfill the common will of the people . People have common will. People collectively need road, drinking water, school, universities, health facilities, job opportunities, good environment, development and many more things in common.

Therefore, law is necessary to fulfill the common desire of people. Economic, social, cultural, Educational etc conditions move on their desired destination by the help of law.

The state distributes its resources and offers opportunities to its citizens by means of law. In the form of rule, law brings discipline in any field and for its breach, it inflicts punishment. At the same time, it is required to save the innocent people from the criminal

ones. It is needed to eliminate the social evils prevalent in society and to uplift the socially, economically, and culturally back-warded class of society. The law is very

important tool to carry out the popular concept of social welfare state. Likewise, the political, social, economic etc ideals or philosophies are transformed into reality by using

the law as equipment. Therefore, law is very necessary commodity in our life. There is anarchy, lawlessness, disorder, tyranny and always oppression in the country where the

law is not respected and followed. It measures the standard of a person or society by calculating their regard and obedience to it. The more we obey the law the more we are

sophisticated and developed. European civilization is said to be standard because of their obedience to law.

2. Law brings uniformity in the system: Rules are made for all. When the laws are made

they are meant for everybody. When one has to do something for a particular job, others need to do the same thing. For instance, everyone needs to follow the same process when

getting citizenship certificate, the same process while incorporating the company and the like. By this, there happens uniformity in the regulation of human activities.

3. Law systematizes human activities: When the human beings follow the law, they need

to do it systematically. This means they need to carry out their activities one by one in order. For instance, company may be incorporated but first of all, a person willing to

establish a company needs to file an application in the company registrar’s office. Then company registrar makes certain investigation on the application. If all of the criteria are fulfilled the person gets the certificate of incorporation of company. It prescribes the

method by which it brings a system. Every human activity is arranged according to a system. For example, the state cannot recruit government officials without fulfilling a

system. A person willing to join the government offices must take examination scheduled by the law. They must undergo the public service commission’s examination and pass the examination. You need to pass a bachelor’s degree to join the Master’s degree. To do that

you must have passed the certificate level and to join the certificate level, one must have passed the S.L.C. and for going through S.L.C., s/he must have studied from one to grade

ten. By this we can easily understand that the law systematizes human activities. 4. Law and order situation is maintained through the instrumentality of law: Peace and

tranquility is maintained by the law. If there is no law, the mighty shall take everything.

There are police, army and other state forces who are appointed to regulate the movement of the people. People cannot loot, assault and kill anybody. The life, liberty and property

of people are protected and human dignity is maintained by the law. The state gives punishment to those who do not uphold the law. Without peace, prosperity is not possible. For peace, law and order situation must be present. For this law is required and

implemented by the state. 5. Law is the king of the kings: The law has to be followed by everyone in the state from

the head of the state and government to the general people. It is for all. Even the king or the Prime Minister is not exempted from the grip of the law. None can do whatever he/she likes to do. When anyone does contrary to law, he/she is punished according to the

terms of the law. Everybody has to abide by the law. Therefore, the law is the king of kings. It is supremo in the state.

6. Justice is the ultimate end of the law: The ultimate end of the state is to provide the justice to its people. The law is an instrumentality of the state to achieve that end. There is disorder and chaos in a state where the justice is lost. Every system in a state is targeted

directly or indirectly to provide justice to the people. Justice may be corrective or distributive. The corrective justice is available through the courts. It covers a small part of

the justice. When there is any dispute among the state and the citizen or between the people themselves, the courts settle the disputes. It is regarded as the corrective justice.

Distributive justice is another kind of justice. It is the justice provided by the government. It covers a vital and major portion of the justice. People need various types of facilities,

need law and order system in a country, require different opportunities available in a country, education, health facilities available, natural resources to be exploited for the

betterment of the people. When every people are distributed with the facilities like road, drinking water, schools, colleges, job opportunitites, health security and the like equally and indiscriminately, there is the availability of distributive justice. These and many other

category constitutes a distributive justice. The law is necessary to provide the justice whether it is corrective or the distributive in its nature.

7. Protection of human rights: Another importance of law can be stated as the protection of human rights. These rights are very essential for a human being to sustain life and develop personalities. The state is always prone to encroach upon the rights of human

beings. The law is required to save people from such encroachment of rights.

The significance of law is not complete just by the statements mentioned above. In fact, its importance is great and we cannot state it that easily. It is important for the rulers and the ruled, for the students and teachers, for the government officials and the citizens, for the courts and the

police, foreigners and nationals and everybody while doing anything permitted by law. The law has effect on every aspect of our lives. It governs our conduct from the birth to the death. We

live in a society which has developed a complex body of rules to control the activities of its members. We cannot think of our life without the presence of law.

4. Characteristics of law

Some of the features and characteristics of law are traceable from its meaning, definitions and importance of law. They have been mentioned above. Some of the features of law are given below:

1. Law is dynamic in nature: One of the characteristics of law is its dynamism. It keeps on changing with time, place, and social exigencies or necessities. It changes with changes

and developments in the society. Therefore a law, which dominated our society yesterday we find repealed today and thus outmoded. When the society changes the law can be changed according to the social necessity. By this reason, law has remained as a central

point for the state at any time. 2. Law is not an end in itself: Law is not an objective of the state. The state uses the law to

achieve its various objectives. It is a means to an end. One of the ends is securing justice- be it corrective or distributive. Corrective justice seeks to remedy the wrongs. It is the justice provided by the courts. Distributive justice seeks to ensure fair distribution of

national resources, social benefits and burdens among the members of the society. Another end of law is to preserve the life, property and liberty of the people. The other

purpose of law is maximization of the happiness of the people. The purpose of the law is to promote the interest of the minorities in race, sex, caste, language, religion and so on. So, the law is required to accomplish any of the objectives of the state.

3. Functions of law: According to Dean Roscoe Pound, there are four functions of law. They are in the first place to maintain law and order situation in society. If there is no law

and order situation in the country, no field of national life can be operated properly. Peace and security are the first priority of the state. This is obtained by the law only.

Secondly, the law is required to have the social engineering. This means reformations in the society for its betterment. It is required to create the social institutions. Thirdly, it is

required to ensure maximum freedom of individuals by which they can develop their personalities. And lastly, it is required to satisfy the basic needs of the people. The

contents of the basic needs are not necessarily the food, shelter and clothes only. Apart from these, today the basic needs include education, health and social security as well.

4. The law by and large provides uniformity in the system: Uniformity is necessary for

certainty and predictability of actions. The laws are fixed and generalized and the citizens can plan their activities with certainty and can predict the legal consequence of their

activities. This brings stability and security in the social order. 5. The law is flexible in nature: It can be altered easily when the society so demands. If the

law is not changed as per time, place and social needs, people will resent with

dissatisfaction. This brings stability and security in the social order. As the law is flexible, it is bent according to the wish of the ruler. Dictators ruled over the state as they

wished because of its flexibility. Any law can be made by the parliament just by a simple majority.

6. The law is territorial and extra-territorial in nature: Law is both territorial and extra-

territorial in nature. It is territorial in the sense that its operation is limited within the national territory of the state. Usually laws made by the state are applied to persons,

things and events, which are within its territory. The land laws, the law of marriage, divorce, property, administration, health, education etc are applicable within the state jurisdiction. However, in certain instances, there is extra-territorial operation of law. It

also operates outside the territory of the enforcing state. Criminal law, international law etc have extra-territorial jurisdiction. They empower the court to try offenses of privacy,

committed outside the state territory. Generally, the offenses of privacy, treason, murder committed by any person in any part of the world would be tried in courts of the state concerned. However, territoriality is a matter of self-limitation and therefore not uniform.

This varies from state to state. Basically when the disputed matter is the concern of other country, it has extra-territoriality. For example, a person commits crime in one nation and

absconds to another nation, is a matter of concern for both the nation. Therefore, the laws regarding to this is extra-territorial in nature.

7. The equality is another feature of law: The law is meant for all. The law treats all

equally. There is no discrimination in the application of law. Also it gives equal protection to all. It does not make discrimination on the grounds of race, religion, caste,

sex, locality, or the like. ‘Like persons are treated alike’ is the concept of equality before law. However, the special treatment can be initiated by the state for those who are socially economically back ward class of the society. Absolute equality can never be

achieved and the law does not go for the perfect equality. It is relative in nature. 8. Law is the king of the kings: It is above all. Everybody has to obey the law. When being

a Prime Minister a person kills another, he is tried on the criminal offenses just like a layman is tried. The law is the king of the Prime Minister and even the king. This means none is above the law. Where the law is made subject to anybody, the system is either

military occupation or a dictatorship. 9. Prevailing method of law: The legislative organ of the state i.e. the parliament makes

the law, the executive implements it and the court adjudicates and interprets it. As the parliament consists of the representatives of the people, it is deemed that people make

law themselves. The executive applies the law according to the will of the legislature. The court sees that the law is properly applied /enforced by the executive according to the

will of the parliament. If the executive has not implemented it properly, then the courts make corrections on its implementation. It gives punishment to the guilty and provides

remedy to the innocent person. The content of the characteristics of law is not complete just by stating the statements above. For the general understanding of the law, the statements present a clear picture of the nature of law.

5. Types of law

For a proper understanding of law, a classification of laws is not only desirable but also necessary. It makes clear relation between different rules and their effect on each other. It also

helps in arranging them in a concise and systematic manner. Scholars have tried to classify law from time to time. However, their every effort has become incomplete due to the changing nature

of law and for this the law needs a new classification in every age. There are many types of law according to many scholars. First of all, we will see the classification of law according to some scholars.

Salmond has also classified the law. His classification is highly cited by scholars. Salmond divides law into eight categories. They are described as follows:

1. Imperative law: Such laws prescribe general course of action by superior authority. The commands of the sovereign are imperative laws. The sovereign gives commands to do certain things and not to do certain things. The observance of these laws does not depend

on the pleasure of people. Sanction is imposed by the state for the disobedience of imperative laws.

2. Physical or scientific law: Physical laws are also called the laws of science. They are the expressions of the nature. The moon revolves round the earth and the earth around the sun is the physical law. We cannot change them. They are in existence since time

immemorial. 3. Natural and moral law: Natural law is based on the principles of right and wrong. It

includes all forms of righteous actions. It is eternal or universal law. It is based on reason or logics; therefore it is also called the rational law. It embodies the principles of morality and ethics. It does not contain physical compulsion.

4. Conventional law: According to Salmond, conventional law means any rule or system of rules agreed upon by person for the regulation of their conduct towards each other. This

is applicable to the contracting parties. Rules of club, rules of games (cricket, football), and rules of co-operative society or any other voluntary association are some of the examples of conventional law. In a business, it is necessary to conclude the contract.

Conventional law is also applied in the international relations and concern. A treaty is a conventional law.

5. Customary law: To Salmond, any rule of action, which is actually observed by men, is customary law. Customary law is based on the customs. They are long habits of people. People uphold the customs and rules to obey the customs are the customary rules. People

in common observe Dashain, Tihar, Id, Christmas, etc are customs. Rules regarding to their celebrations are customary rules. Though conventional law may be voluntary, it is

still law. The state gives validity to customs when they are firmly established. Hindu law

regarding marriage, succession, minority and guardianship, adoption and maintenance are based on customary law.

6. Practical and technical law: Those laws which are made to fulfill the practical or real objectives in a particular field of human activity are known as practical laws. They are

called technical laws as they function in a particular field and they are technically made in a set form. The law of architecture, the law of music, the laws of construction, building etc are some examples.

7. International law: Such rules, which regulate relations between the states, are called international law. International law relates to the functioning of international institutions

and organizations and their relations with each other. It is the law which regulates their relations with states and individuals. It contains certain rule of law relating to individuals so far as the rights and duties of such individuals are the concern of the international

community. It can be found in international treaties and conventions. Beyond the state territory international is applied. These laws are based on the consent of the sovereign

states. This means until the sovereign state agrees to obey, they are not applicable for the state. WTO rules could not be applied to Nepal until Nepal acceded to it.

8. Civil law: To Salmond, civil law is of the state or of the land. It is territorial in nature. It

creates legal rights. This law regulates the relationship between the individuals. Salmond has not classified the criminal law as law. The criminal law is very important

branch of law. Therefore, his classification does not cover every branches of law. Now, the laws are classified on the different basis as mentioned below. There are two types of law on the basis of the nature of law. They are substantive law and

procedural law. They are closely related with each other. They are explained in brief as below: 1. Substantive law: This law is that branch of law, which deals with the rights, liberties,

powers and immunities of people. This law confers rights, liberties, powers and immunities on the people. It provides rights, liberties and imposes obligations. It not only determines legal policies, rights, liberties and duties but also fixes the liabilities

(fine, punishment, imprisonment etc) in case of infringement of such rights, liberties and duties. The law which creates something is the substantive law. The law which says

there shall be a Supreme Court of Nepal is a substantive law as it creates the Supreme Court of Nepal.

2. Procedural law: This law is that branch of law, which deals with the methods of

carrying out the provisions made by the substantive law. It helps to fulfill the objectives of the substantive law. It states how and from where the innocent party can get remedy

if his rights are violated. It studies about the methods of getting remedy. It controls and regulates the procedure adoptable in the course of litigation. Rights defined and provided by the substantive law are enforced or carried out according to the method laid

down by the procedural law. Procedural law deals especially with such matters as the filing of petition, summons, and rejoinder, collection of proof, pleading, judgment and

execution of the verdict. As this law explains about the process for litigation, it is applicable in the criminal and civil cases equally.

On the basis of the relationship among the states, between the state and its citizens, and

among citizens, law can be categorized into the following types: On the basis of relationship among the states , the law is divided as international law and

national law.

1. International law: It is that branch of law which regulates the behavior of the nations. It is divided into public international law and private international law. Public

international law is the body of rules which governs the conduct and relations of the states with each other. Private international law is the body of those rules and principles

according to which cases having foreign elements are decided. It settles the relationship between the citizens of one nation and another.

2. National law: It is the law which is applied within a state. Every law, which is found

within the state territory, comes under this category. It is known as municipal law. It is divided as public and private law.

On the basis of the relationship between the state and its citizens , law is divided as public law and private law. They are explained as follows:

1. Public law: Public law is that branch of law which concerns with the relationship

between the state and its citizens. This branch of law is the collection of such rules which are of public concern or importance or include the public interests. For instance,

when a crime takes place it becomes concern of everybody. Therefore, rules regarding to crime or control of crime are called the public laws. Basically, public law is divided

into three categories. They are constitutional law, administrative law and criminal law. They are described as given below:

a. Constitutional law: It is that branch of public law which is concerned with

the working of the constitution. It covers such matters as the position of the king, the formation and election of the government, the composition and

procedures of the parliament, the functioning of the local and central government, citizenship and civil liberties of the individuals, composition of the judicial system. It determines the nature of the state and the structure of

the government. When a new government is formed, everybody has concern over it. Therefore, it is a part of public law.

b. Administrative law: Administrative law deals with the administration of a country. There are many government organizations and offices of the government for its operation. This law concerns with the structure, powers

and functions of the organization of administration, the limits of powers of the officers of the government. It also deals with the methods by which their

powers are controlled including the legal remedies available to persons whose rights have been infringed. It deals with the functioning of the government service holders.

c. Criminal law: Criminal law is the law related to the crimes. It defines offences and prescribes punishments for them. It does not only prevent the

crimes but also punishes the offenders. It is necessary to maintain law and order situation and establish peace within the state. The state initiates legal proceedings against the criminals and is always a party in criminal cases.

When a crime takes place in society, the police make investigation on the crimes and they file cases against the criminals.

2. Private law: Private law is that branch of law which deals with the relationship between individuals. It is only the concern of a private individual. This branch of law

regulates the activities of individuals who make disputes with each other. It primarily concerns with the rights and duties of individuals towards each other. The state

involvement in this area of law is confined to providing a civilized method of

resolving the dispute that has arisen. Thus, the legal process is begun by the aggrieved citizen and not by the state. It is also called civil law. It is divided into many

specialized area. Some of its types are given below. a. Property law: Property law deals with the matters belonging to the property

of the individual. It studies about the corporeal and incorporeal property of the individual. Corporeal property is that property, which has physical existence, like the land, house, TV, radio etc. Incorporeal property is that which cannot

be seen but realized such as goodwill, paten right, design, trademark and copyrights. Thus, property covers land, goods and intangible rights such as

debts, copy or the goodwill of a business. The rule that regulates these matters is the law of property. Other aspects of property law are inheritance, partition of property, sale and purchase of property etc.

b. Family law: Family law deals with the relationship between the family members and studies about the succession, inheritance, anomaly, husband and

wife relationship, partition, marriage and wills. c. The law of tort: A tort is a civil wrong. A tort is a wrongful act that causes

harm or injury to a person or his/her property. If a harm or injury is caused,

the tort allows the injured person to recover damages. Even though the tort appears to be a crime, it is not a part of criminal law. It is a part of civil law.

The law of tort seeks to provide a legal remedy for the victims of certain forms of harmful conduct. A numbers of distinct areas of tortuous liabilities have been developed to protect people from many forms of wrongful conduct,

which may occur in a modern society. Examples of such kinds of harmful conduct are interference with a person’s ownership or possession of land or to

business or personal reputations i.e. tort or defamation; interference with a person’s use and enjoyment of land i.e. tort of nuisance; personal injury and death i.e. torts of negligence; passing off, inducement of breach of contract,

conspiracy. The aggrieved party has to initiate the lawsuit. It governs the relationship between the individuals.

d. Trust law: It deals with the rights and duties of the trustee and beneficiaries, management of property in trust etc.

e. Law of contract: It is that type of law, which is created by the contracting

parties by themselves through their promises and agreements. The law of contract regulates most of the business activities.

f. Business law: Business law is that branch of civil law which regulates the business activities. Business law includes such laws which are related to the trade, commerce and industry. The law of contract is very important part of

the business law.

6. Sources of law

Sources of law comprise of two words. They are ‘source’ and ‘law’. A source is an origin

in general. It means from where we get something is a source. Hence a source of law means origin of law. The source of law says from where the law comes. In other words, it means that

from where the law is made i.e. modes of making law. There are different views regarding to the origin of law. Theologians believe that the law emanates from god. Austin says law originates

from the sovereign as he regards the law as the command of the sovereign. Savigny says it is found and develops from the common consciousness of the people. He calls it as volkgeist.

Positivists claim that the legislation only is the source of law as the law is made by the parliament. Let’s see the views of the jurists regarding the source of law.

Jurist views on the sources of law

we can classify the sources of law into two kinds. They are the primary sources and secondary sources of law.

1. Primary sources of law: Primary sources of law are those sources of law, which are originated from the

authentic institutions or agreement. These are such sources which supply the law directly and they are binding on the people. These sources bind the people, the court, government agencies, and the other parties concerned. They are major sources because

they have legal authority to make the law. The laws made by these institutions are very important and in modern world the laws made by such authorities are highly obeyed

and observed by the people. They are direct sources of law as they give law directly. The primary sources of law are legislation, precedent, custom and conventions. They are explained below.

a. Legislation: The word legislation is derived from the two Latin words- legis and laterm. In its literal sense, legis means a law and laterm means to make.

Therefore in its literal meaning legislation means to make a law. The word legislation means laws that are made by the parliament in a set form. And it is the only body competent to make law. In its broader sense, the acts of law

making, determining of state policy, ratification of treaty and termination of it, declaration of government schemes and budgetary rules etc are also regarded

as legislation. Salmond says that legislation is that source of law, which consists in the declaration of legal rules by a competent authority. There is a fixed procedure of law making. The parliament has to make laws according to

the procedure laid down by the law and the constitution.

b. Custom: It is another major source of law. It is originated from the habits and

behavior of the people. Customs are such habits of people, which are observed since a long time. People practice them in common and they give consent on them. Therefore they are major sources of law. Those who disobey the customs

are ousted from their society. The state also cannot violate the customs. Customs have been found in all societies like Hindu, Muslim, Christian, etc. A

large portion of legislation is said to base on customs in Nepal. In Muluki Ain, there are many customary rules such as it prohibits marriage within seven generations. A custom is a rule existing from ancient time to regulate human

behavior. It is a natural process in society. Violation of custom may result in exclusion from society. Every legal system has accepted the position of

custom. In absence of legislation and precedent, custom plays a vital role. Custom plays a vital role in Hindu law and English law. It is supposed to continue and it provides an element of law and brings certainty and

permanency. In Nepal, a large portion of rules contain customary law. Debt transactions, money landing, marriage and women’s property are some of the

examples. Different customs have been declared as void when they are illegal

like bhauju biraune, sati system, etc. They are abolished when they are inconsistent with morality, public policy, statute and reasonability.

c. Precedent: Precedent like legislation is an independent source of law. It is a unique concept of legal source developed by common law system. In its literal

meaning, it is past instance or past decision of the court. Keeton says that a precedent is a judicial decision, which has a legal force. Jenx says: “A precedent is a decision given by a competent court in a disputed legal question

which is not limited to general guidance and direction but becomes authoritative.” The principle of precedent was originated in England. It is now

followed in America, Australia, Canada, India, Nepal and other countries of the world. In Nepal the principle of precedent was adopted only after 2007 B.S. Any interpretation of law or a lawsuit is binding on the government of Nepal

including all government offices and the court. The decisions of the court establish the precedent. There are some reasons to take precedent as source of

law. It supplies timely law. It is refining because the judges establish the precedent only after discussing the cases at hand. It is a measuring rod to legal development. It protects judges from wrongs. It reflects illegal and biased

functions of judges. There are many kinds of precedents. On the basis of bindingness, they are authoritative precedent and persuasive precedent. The

former has a legal force and the latter does not have a legal force. On the basis of its nature they are original precedent and declaratory precedent. On the basis of its nature of power they are absolute precedent and conditional precedent.

The law made by the judges is known as the precedent. Judges do not make law as such but if there is a gap of law, they can make law to fulfill the legal

gap. They fulfill the legal gap by deciding the case at hand, which is the precedent and is binding to all. The judges in the similar cases that come before the court in the future apply the precedents. Thus they are major sources of

law. d. Conventions: Conventions are agreements, which are laws for the contracting

parties. The terms and conditions of the contract are laws for the parties involved in it. This is why it is also a major source of law. Once the contracting parties agree upon doing something or promise to do something, they must

fulfill their promises or carry out what they agreed on. Their promises work as law for them. If you agree to hire a room for 2,000/- rupees per month, you are

obliged to pay Rs. 2,000/- per month. This is so because you have made law for yourself and you need to uphold it. In this way, conventions are major sources of law as well. Agreements may be made between and among the

states. They are called convention or treaty. They are contracts for the countries involved in the conventions or treaties. The provisions of such conventions or

treaties are the laws for the countries signing on them. Nepal has signed many conventions and treaties. For instance, Nepal has signed in the convention of world trade organization, convention on the universal declaration of human

rights, 1948, international convention on the protection of civil and political rights, 1966, convention on the elimination of all forms of discrimination

against women, convention on the rights of the child and so on. The provisions

containing on these documents are the laws for Nepal. Thus, the conventions and treaty supply the law and therefore they are the major sources of law.

2. Secondary sources of law:

Secondary sources of law are those sources of law, which are not binding, but they provide an ample source for them. They are sources because they help people to know the law from them. They do not make law themselves but help in providing

information, knowledge or ideas on law. They are indirect sources because they help to make law indirectly. Such sources of law can be put in the following category:

a. Opinion of experts or juristic writing: The articles, books, etc written by scholars are secondary sources of law as they provide knowledge on law. Sometimes, the opinions of experts supply the good information regarding to

laws. They are not binding but they help to understand the law. Juristic writings are taken into consideration by the judges, lawyers, professors and students while

understanding the principle of a particular case. They give us wide ranging ideas regarding to the law and legal precepts.

b. Historical documents: They are helpful to understand the development of law.

They provide us the knowledge on the development of law and legal concepts. They represent a particular period and we can get idea about the law existing at a

particular period. c. Decisions of Foreign court: The decisions of foreign court can be helpful while

deciding cases. Every country goes through the decisions of the foreign courts to

emphasize on their logics. d. Foreign law: While making new law they become very helpful. It is very helpful

to make a comparative study on law. e. Principles of morality: They are helpful to guide people on their profession.

These principles contain ethical values. If any profession lacks ethics then they

help the parliament to frame laws in the form of code of conduct. Religious texts are also secondary sources of law, which provide knowledge on law. The law

making authority cannot go against the religious texts.

Meaning and importance of business law

The word ‘business’ includes such words like commerce, trade and industry. The word ‘business

law’ comprises of two words. They are business and law. The term business refers to occupation, profession, enterprise, commerce, trade and industry. The works related to the livelihood of people are the business activities. When any activities are targeted to earn certain profit by doing

certain works is known as the business. Law as already stated is any kind of rule of action. Business law thus literally means any kind of rule to regulate the activities pertaining to the

business, trade, commerce and industry or the livelihood of people. It is also known as commercial law or mercantile law. Business law deals with the subject matters such as law of contract, pledge and bailment, indemnity and guarantee, agency, sale of goods, law of carriage,

banking, tourism, foreign investments and technology transfer, insurance, negotiable instruments, various matters relating to company such as incorporation of company, operation of

company and dissolution of company etc.

Business law is a branch of civil law which deals with the relationship between one citizen and another. There is an individual dealing with the business matters with another citizen

and rules which are needed to conduct their activities are called the business law. A business person needs to do different activities to run the business. He has to deal with the government

offices, with the society, with other business people. He/she has also to recruit the employees necessary for the company. For that he/she needs certain rules for its regulation. These rules are known as the business rules. When a person starts a business and establishes the company or a

business firm or partnership, the rules for its operation are also business rules. When goods are sent in the market, the transportation is necessary. Rules are necessary while carrying goods from

one place to another. The rules regarding to the carriage are also the business laws. The state requires business law to regulate the state affairs regarding to the economic activities of human beings. It arranges every economic activity to be operated smoothly and

regularly. It also clearly defines the outlines for the settlement of the disputes related to the business and economic activities. This law deals with such business rules which state about the

business enterprises, firms, workers, promoters, production, distribution, profits, business related crimes, restrictions on the business, globalization of the business, privatization of the business and the like.

There are different definitions given by different scholars regarding to the business law. M.C.

Kuchchal in book business law defines the business law as “The term business law may be defined as that branch of law which comprises laws concerning trade, industry and commerce.” Likewise, A. K. Sundaram in his book, ‘The Business Environment’ says: “Business law

provides legitimacy, security, control and incentives to business activities. It also protects rights and interests of consumers of labor, business and society.”

Business law is very important in the regulation of business activities. It is very important to regulate the trade, commerce and industrial activities. By properly regulating the business activities, a country attains prosperity and affluence. There are various principles and theories

developed in the business field which are binding to the business people. For example, ‘no consideration, no contract’ is a principle of business law. These principles are also part of the

business law. The cases decided by the court are also part of the business law. There is code of conduct to be followed by the business people which also forms part of the business law.

Business law is very important for the sustainable development of business.

Business law is very important branch of civil law. It protects the business interests of people. The importance of business law can be stated as follows:

1. Business law facilitates the business community: Business law encourages the business community to do different types of businesses. Business people are offered different types of facilities while running a business firm or organization. Business makes possible to use

different kinds of commodity produced in one part of the world to another part. We are using different kinds of facilities due to the business expansion. The expansion of business has

been possible due to the business law. 2. It is important to create good environment for the business: Business law creates good

environment for the investment. People like to make investments in different sectors where

they see certain profits. When the investors are satisfied with the peace environment, they think their investment would be fruitful. So when there are no business conditions in a

country, there is no prosperity gained. It is the business law which provides equal protection to all businessmen and creates a good environment in a country.

3. Strong economy: Strong economy is the basic objective of any country. Peoples economic rights are protected when there are sufficient opportunities available for the people of that

country. When most of the population of the country is engaged in business activities, the economy of that country is strong and people get their economic rights protected. Economy

is strong by operation of various kinds of business activities. People doing business do pay the taxes to the nation by which the nation can collect a huge amount of money to do its developmental activities. People get job in different fields as the business is possible in any

field of subjects permitted by law. 4. It brings uniformity in the system: As the law is equally applicable to all, by this, there is

uniformity in the business field. For instance, when A needs to run a business, he has to register the business in the company registrar’s office. The same rule is applicable to another person/s who wants to do any business. They need to conduct the annual general meeting of

the company and need to employ certain types of people to do the company works. The company has to audit its accounts and keep the proper records of taxation. A company or a

business firm has to show its rules to carry out any kind of activities. This brings uniformity in the business field. None can do whatever s/he likes to do in business. The business law controls and regulates all of the business activities of a country by which there is uniformity

in the business realm. 5. Systematization in business: The business law creates rights and imposes duties on the

individuals of various capacities. A business should not be understood just as running a bakery café or a retailer. It should be understood as the operation of large scale of business activities. Where many people work under the same umbrella of business in different

capacities. For instance, banking is a kind of business and to do banking transactions, certain kinds of rules and regulations are necessary. When the banks and financial institutions are

established, they are made to do certain things in common. When people do things in common, it becomes systematic. Business firms and organizations can carry out their activities in their style subject to the parameters determined by the law. In doing so, they may

create sub-systems for the operation of their business. 6. Justice is an end of business law: The importance of business law lies in the fact that it

provides justice to the people involved in the business activities. It protects the interests of the investors and gives opportunities to the needy and therefore provides distributive justice to the people. Business law also guarantees the rights of the employers and employees

equally. It sees whether the interests of the investors are protected. At the same time, it also sees that the employees are not exploited and their jobs are guaranteed, they are duly paid

and their jobs are secured and they are given full securities to their jobs. In case there are any kind of disputes between the employer and the employee, the business law sees that the disputes are amicably resolved. Therefore, the business law is very important to provide

justice to the needy.

Sources of business law

A source is an origin in general. It means from where something comes is the source of

something. Business law also comes from various sources. The sources of business can be generalized from the sources of law discussed above. The business law basically is derived from

the general sources of law. Here are given the sources of business law in Nepal.

1. Legislation: Legislation is the basic source of business law. Legislation is the act of parliament. The parliament is the basic organ which is responsible to make the law.

Therefore, it makes different kinds of law including the business law. There are many business related laws made and enforced by the parliament. For example, the contract

Act, 2056, Company Act, 2006, Arbitration Act, 2055, Agency Act, 2014, the bank and financial institutions Act, and so on. Parliament makes the laws when and as required. These laws are made by the deliberative process by the representative of the people.

This is a major source of the business law. 2. Customs: There are many customs prevalent in the business field as well. The customs

are the long habits of people involved in the business field. Customs are made by the people themselves while doing the business. When the business customs are followed by business people in common and recognized by the state, they become law for the

business people. They are major sources of business law.

3. Precedent: Courts do settle the business related disputes. When there is the gap of law,

the decisions of the courts become precedents and they are the laws for the ensuing cases in the courts. Where there are laws for the disputes related to the business transactions, the court must follow the laws and decide the cases at hand. If there is no

law for the disputed matter, then the courts cannot say that the case will be decided when the law is made by the parliament. The courts have to decide and the decision

becomes the law until the new law comes into existence. 4. Convention/contracts: Conventions are also called contracts. Contracts are the

agreements made between two or more than two parties. Parties to a convention or

contract may be people or the states. When the states are the contracting parties and make agreements, the agreements are called the conventions. The contracts are the

promises made by the parties. When the parties agree to do or not do anything, they are bound to that. Therefore, the terms and conditions contained in the agreement are laws for the contracting parties. In a business, parties need to form agreement at the different

level of their business operation. This is the age of globalization and people sitting at one corner of the world may do business activities in another corner of the globe. This

is possible only through the agreements and contracts. Foreign investments have been very important part for the business activities of a country. Therefore, contracts and conventions are very important sources of business law anywhere.

5. British Mercantile law: As India was ruled over by the Britishers, they imposed their business rules in India earlier. But later on the same rules were taken into consideration

by the Indian business people. Now, different business rules left by the Britishers are in existence in India. As Nepal is influenced by the Inidan business and its business rules, British Mercantile law is the source of business law in Nepal as well. Once the British

had colony almost all over the world and they framed various business rules to protect their business in their colonial state. India got the rules imposed initially and later on

they became part of the Indian business. Nepal largely depends on the business rules applied in India. Therefore, the British mercantile law is the source of business in India and Nepal.

6. Principles of morality: Business gives profit to the business people. The simple theory of profit gain must be ‘earning by fair means’. The principles of morality tell business

people to earn by fair means. These principles contain the ethical elements in them and they suggest the business people to guide their conduct in the right path. When ethical

values are greatly ignored, the laws are framed to control such mal-practices. Therefore, the principles of morality are also the sources of business law.

7. Decisions of foreign courts: The decisions made by the foreign courts are not binding on any country. However, when the decisions made by the foreign courts have wide

ranging effect, they may be taken into consideration by the parliament while making laws, by the courts while deciding the cases at hand and by the business people themselves. That’s why they are also the sources of business law.

8. Writings or opinions of experts: Writing or opinions of experts are also the sources of business law as they provide the knowledge on the business law. Without studying the

books written by the scholars, there is no meaning of the law clear. The books and writings of the experts are helpful in finding out the theory and making the interpretations of the laws. Without making research on the subject of law or business

law, there can no forward moment of the society. The research on law guides the development of law. Writing on the subject of business law also may depend on the

research and invention for the problems faced by the business community. Therefore, the researches and writings are the sources of business law.

For the importance of legal environment and the court system, jurisdiction and civil

procedures in Nepal, see S.N. Kalika, Business law for BBA, Buddha Publication.

Chapter two

Essentials of Nepalese Contract Law

Nature and the importance of the law of contract

The law of contract consists of two words. They are the law and the contract. The law means rules in the simple sense. And the contract means agreements or promises. In its literal meaning, the law of contract refers to the rules regarding to the rules of agreement or promises.

The rules which are necessary to form the agreements or the promises are called the law of the contract. The law of contract comes in the form of the Acts of the parliament, the judicial

decisions and customs and traditions. The contract Act, 2056 is the law of contract in Nepal. It contains various rules of contract in it.

The law of contact is one of the oldest braches of law because the rules of contract were

laid down since people started living in a group and society. The system of making promises can even be traced back since the emergence of human civilization because people in society used to

make promises one way or the other way for various kinds of activities. The law of contract is the most important branch of law as it covers a major portion of business law. Business law becomes lame and defunct if we take out the law of the contract from it. Most of the business

transactions are based on the contracts or promises. The theory of social contract reminds us how the people in general made a big contract to protect their life, liberty and property. They

promised with each other for peaceful living in a group and society. Since then the law of contract developed and came to the present age. After deciding a particular form of business organization, a businessman seeks to

establish and build up the business. This involves acquiring land and equipment, employing staffs and managing necessary raw materials, marketing and so on. There is a presence of

contract in such business transactions. A contract, as most people think, is not necessarily a formal written document, which is signed by the parties in the presence of witnesses. In practice,

few contracts are like this. Many contracts are made without formalities. The parties making contract may even not know the legal importance of the contracts they are entering into. Of

course, we enter into many contracts day by day knowingly or unknowingly. We read newspapers, we travel by bus or train, we open the internet service, we use electricity, and

telephone, etc. There is the presence of contract under these all activities. The law of contract protects our rights where we have made contract indirectly. The law of contract provides the answers to these questions like what are contracts, what are the rights and obligations of the

parties to the contract, what happens if any party breaks the contract and so on. The law of contract is that branch of business law which deals with the trade, commerce and

industry. It basically deals with the agreements and the promises made by the people while carrying out the business transactions. The agreements are necessary at different stages of the business transactions. However, the law of contract is not related to the business alone. It equally

deals with the transactions pertaining to the other matters as well. The law of contract is the foundation for the structure of modern business. In business transactions the promises are made

first and the performance follows thereafter. In such a situation if any party reverts from the promise without incurring any liability, there would be impossible to carry on trade and commerce by anybody. Hence the law of contract emerged which lays down the legal rules relating to promises,

their formation, their performance, and their enforceability. Regarding the object of the law of contract Prof. Anson observes: “The law of contract is intended to ensure that what a man has been

led to expect shall come to pass, that what has been promised to him shall be performed.”1 There is no area of business law where the law of contract is not necessary. It is necessary for the bailment and pledge, agency, indemnity and guarantee, sale of goods, insurance, partnership,

insolvency, investment and technology transfer, carriage of goods, arbitration etc.

Meaning and definition of contract:

Contracts are the major sources of law. By making contracts, people make laws for themselves.

They are bound with what they agreed to do. A contract is a promise which must be enforceable by law. The promise is recognized and enforced by the court of law. So, such promises which

are enforced by the court are contracts. The contract has always recognized obligation because the contracts create rights and duties for the contracting parties. Where one party gets right for something, another party has the obligation to uphold the right of that party. There happens an

exchange of the promises between the contracting parties in a contract.

Contract is an exchange of promises by two or more persons, having recognized obligation to do or not to do something. In the process of making contract there is always an exchange of promises between two or more parties. The promises exchanged without obligations are not

contracts at all. The non- fulfillment of such agreements gives the aggrieved (innocent) party a right to sue against the guilty party in the court of law. Likewise, legal duties consist of doing

something or not doing something on the part of the contracting patties. Thus a contract is an exchange of promises between the parties having some obligation recognized by law to do something or not do something.

A contract is an agreement possessing all essentials. This means agreements or promises need

certain qualifications to be contracts. A promise made to go on a picnic is not a contract.

1 M.C. Kuchchal, Mercantile law, Sixth Edn.Vikas Publishing house, (2006) p. 7.

However, it may be an agreement. In fact, an agreement requires certain essential elements to become contracts. Such essential elements are lawful offer and acceptance, two competent

parties, consideration, intention to create legal relationship, legality of objects, free consent, possibility of performance, certainty, writing and registration, not expressly declared as void etc.

If any of these essentials are lacking in an agreement, it cannot become a contract. Different scholars have defined a contract differently. Let’s discuss their definitions to know the

meaning of contract more precisely. Here are some of the definitions of given by different scholars:

Salmond: “A contract is an agreement creating and defining obligations between the two

parties or more persons.” Salmond defines the term contract as an agreement made between the parties and such agreements create and define the obligations or legal duties for them.

Therefore, all the agreements which create and determine the legal duties of all the contracting parties to the agreement can be said as contracts. Hence the agreement to be contract must create

and define obligation between the parties. Pollock: “Every agreement and promises enforceable at law is a contract. A contract is a

promise or a set of promises for the breach of which law provides remedy.” To him, every

agreement and promises must be enforceable in the court of law to become contract. He further says that a promise or a set of promises is a contract, which gives remedy in case of its breach.

Section 2 (h) of the Indian contract Act, 1872: “An agreement enforceable by law is a contract”. This definition is similar with the definition given by Prof. Anson. Section 2(a) of the contract Act, 2056 (Nepal): “A contract is an agreement made between

two or more parties to do or not to do any work which is legally enforceable.” According to our contract Act, it is an agreement that is made between two or more persons. They agree to do

or not to do any work. The agreement gives certain rights and imposes certain duties, which are enforced by the court of law. Section 1 of the restatement of American contract law: This definition gives more accurate

definition of the contract: ‘A contract is a promise or a set of promises, for the breach of which the law gives remedy or the performance of which the law in some ways recognizes as a duty.’

The American definition of contract refers to a promise or a set of promises the performance of which recognizes as a legal duty and on the breach of which the law provides the remedy to the injured party to bring the legal action in court. We can infer three things from this definition as

follows:

Thus, a contract is found defined by different scholars in different ways. Some of them highlight on the legal obligation of the parties whereas some focus on the capacity of the parties. Again some of them prefer to define it on the basis of lawful consideration and some other on the basis

of one element of the contract or the other. But the contract must be defined covering all of the elements of the contract. From the above-mentioned definitions, it is clear that the contract is

something more than the mere agreement. It must also be supported by some more elements, which will be explained later on. But note that enforceability is one of the basic requirements. It means that if one of the parties does not fulfill his promise, he must have the right to go to the

court of law. A contract is a promise as well as an agreement to do or not to do something. Two or more than two parties are necessary to make a contract. Under the enforceability the

obligation or the legal duty is very important concept. The agreement will be enforceable at law when it is supported by obligation. There can be no contract if it is without any obligation.

However, the obligation arises not only by the agreement alone but from various sources such as obligation arises out of tort, out of quasi-contract, out of judgment of the court, out of relations

like husband and wife, out of an agreement. The contract law requires that the obligation should come out of the agreement. The obligation that arises out of other sources does not form a

contract. Therefore Salmond says that the law of contract is not the whole law of agreement nor it is the whole law of obligation. It is the law of those agreements that create the obligation and those which have their source in agreement. Thus it can be said that all contracts are agreements

but all agreements are not the contract. Contracts are those agreements which are enforceable at law. This means that they are supported by some obligations creating some rights and duties on

the part of the contracting parties. The term contract does not include the agreements of social, religious, moral and family matters. The agreement is a wider term whereas the contract is used in a narrower sense. The agreement must possess certain elements to become a contract. Without

such elements the agreements remains an agreement and cannot become a contract. What are those essential elements of contracts? Let’s know them in the following heading.

Essential elements of a valid contract

The law of contract requires that an agreement to be a valid contract must be enforceable at law.

The agreement is enforceable at law only when it possesses the following essentials:

1. lawful offer and lawful acceptance:

All contracts are agreements but all agreements are not contracts. This means that an agreement may be made on anything but the contract requires some of the essential

elements. An agreement is a part of the contract but the contract is not a part of it. An agreement has two essential elements only. They are offer and acceptance. The offer may

be made for anything. It does not require that the offer must be legal only. But in a contract the offer must also be legal and real one. The acceptance should also be duly made. This is why when the other party duly accepts an offer made to a party that constitutes a contract.

Offer + acceptance = agreement. Lawful offer + lawful acceptance = the contract.

2. Lawful Consideration: Consideration is the process of bargaining. The agreement must be a part of bargain. Each side must promise to give or do something for the other. This means the agreement must be

supported by the lawful consideration. Lawful means which is not fraudulent, forbidden by law, immoral or opposed to public policy. Either of the parties must be benefited or got loss

while making the contract is the concept of consideration. In other words, consideration means something in return. The general rule is that there is no contract without any consideration except for certain exceptions. This is why consideration is very important

element of the contract.

3. Intention to create legal relation: The agreement concerns with the moral, social, domestic or family arrangements. But the contract does not. It concerns with the agreements which intend to have legal effects. This means that the parties must have

intended their agreement to have legal consequences. The agreement made between two parties for a picnic is not a contract because it does not intend to create any legal

relationship. Therefore, an agreement must create legal obligations. The obligations must be enforceable by law. An obligation is the legal duty to do or abstain from doing a definite

act or acts. So, without an intention to create a legal relationship, there can no contract. It is essential element of the contract.

4. Capability or capacity of the parties: Two competent parties is another essential element

of the contract. A contract cannot be made with oneself. A competent party is who is capable to conclude the contract. The parties must be qualified by law to make any contract. Basically when a party is unable to know or decide what he is going to do, he is

said to be incapable to conclude a contract. This happens when a party is a minor or insane. Besides, the law itself regards certain person as incapable to make contract. They are

insolvent or bankrupt, criminals or morally turpitudes, and the one who has not paid the government dues etc. There are certain other people who are disqualified by law such as foreign diplomat, alien enemy.

5. Free consent: The agreement must have been entered into freely and must involve a

“meeting of minds’. This means both of the parties to the contract must have agreed in the same sense and for the same thing. The elements, which derogate free consent, do not constitute a contract. The consent is not free when it is obtained by coercion, undue

influence, fraud, misrepresentation of facts and mistake. There must be free consent of the parties.

6. Written form and registration: Generally the contracts may be made orally and in the

written form. Sometimes, the contract may be implied as well. However, in some cases,

certain formalities are required. Some agreement must be in writing and others may be oral or express. It is very appropriate if the agreements are in writing. Agreement in writing

gives more authenticity. The contracts which need written form and registration do not get validity until and unless they are made in written form and registered in the government offices.

7. Lawful objects or legality of objects: The objective of an agreement must be lawful. If its

purpose is illegal, it does not form a contract. The law always encourages people to do the good things only. So the purpose of law is for the good of people. The contract is void if the purpose is unlawful. The objects of any contract will be treated as lawful or legal when

it is not forbidden by law or it is not of such a nature that if permitted to do, will violate or affect another law. The law does not permit the contract which contains immorality, which

is against the public policy, which contains criminality and the like. A contract has lawful object when it is not of a fraudulent nature. It does not injure or affect the property of the third person. It is not of immoral nature. It is not of the nature opposed to the public policy.

An agreement made to kill people is void due to its illegal purpose. The void contracts do not contain lawful objects. Therefore, the legality of object is one of the essential elements

of the contract.

8. Certainty: Certainty is another element of the contract. There are certain provisions of the

contract. There are certain clauses, terms and conditions in the contract. They must be clear and comprehensive. The contract to be valid, the terms, clauses or conditions included in it

must give clear and precise meaning. In other words, the meaning and intention of the parties to the contract must be clear. It should not be vague. The terms and conditions of

the contract should not give more meanings and senses. If the meaning of the contract cannot be understood, the contract will not be enforced. The contract which cannot be

unforced is the useless contract.

9. Possibility of performance: This is also very important element of the contract. The contract must be possible to perform. The contracts are made for its performance and the contract which cannot be performed cannot be said as the contract. The contracts must be

possible to perform. The contracts, which are impossible to perform, are void and useless. There are two facets of the possibility of performance. First is that some contracts may not

be possible at the time of making. This means they may be seen impossible to perform from the beginning. Such contracts are void ab initio (from the beginning). Secondly, some contracts may be possible at the time of making the contract, but later on they may turn to

be impossible. This happens by the subsequent impossibility. For example, you made a contract to sell your horse to your friend. It is possible to perform at the time of making this

contract. But when you went to stable to deliver the horse, you found the horse was dead. Now, it is impossible to sell the dead horse. Such contracts are void from the time of such impossibility. If the contracts are not possible to perform, they do not become the part of

the contract. So, possibility of performance is very important element of the contract.

Kinds of contract

The nature of contract to some extent is related with the kinds of contract. Therefore here are

given the kinds of contract. Contracts are classified on the different basis. It becomes easier for us to understand the nature of contract from its classification. From different point of view, the

contract is classified as follows: 1. On the basis of enforceability: There are four types of contract on the basis of enforceability.

a. Valid contract: A valid contract is an agreement enforceable by law. It becomes enforceable at law when it possesses all the essential elements of the contract. Therefore

the contract which has two competent parties, lawful consideration, legality of objects, intention to create legal relationship, free consent, possibility of performance, certainty, lawful offer and acceptance, in some cases written and registered and not expressly

declared void is a valid contract. b. Voidable contracts: Such contracts which lack free consent of either of the parties in the

contract are known as the voidable contracts. The contracts in which coercion, undue influence, misrepresentation, fraud and mistake are present are said to be voidable contracts. The innocent or the aggrieved party has an option to renounce the contract. If

he does so the court may declare such contracts as void. These contracts are valid contracts so long as the innocent party does not go to the court to declare them void. Such

contracts are valid until the court declares them as invalid. There is likelihood that such contracts may be declared as void by the court. They are effective and operative if the injured party does not go to the court. Section 14 of Nepales Contract Act has recognized

the contracts that are voidable as follows: i. Contract by coercion: The term ‘coercion” refers to compel someone to do

something against his will by using physical force. The physical force is present in the contract caused by coercion. It may be a threat to do something or stopping

property of someone or assaulting someone. It is punishable by law where a party makes another party to sign on the document against his will. If one of the parties

gets consent of the other by using physical force and the contract is concluded, the contact is voidable. The consent comes from the force, not automatically from the

mind of the contracting party. Therefore, the contract is voidable when it is caused by coercion.

ii. Contract by undue influence: Where the parties in a contract are in such a

position that they can easily influence each other, there is likelihood that the contract is caused by undue influence. One party in a contract must be in a

dominant position and another party must be in a weak position. Then only the contract is likely to be induced by the undue influence. Just by having close relationship or dominant position does not constitute the undue influence. Parties to

the contract have fiduciary relationship and by using that relationship, one of the parties has obtained the consent of another and thus the contract must have been

formed. This is a contract by undue influence. The fiduciary relation consists of the relationship between the parents and children, master and servant, teacher and student, doctor and patient, lawyer and client, creditor and debtor, employee and

employer etc. In this type of contract mental force is used. The innocent party gives consent on the contract not freely but due to the mental pressure exerted on him/her

by another party. Undue influence also lacks the free consent and the contract becomes voidable at the option of the innocent party.

iii. Contract by misrepresentation: The term misrepresentation means falsifying the

statements. If one of the parties in the contract obtains consent of the other party by presenting false statements as true that is said to be contract by misrepresentation.

The guilty party provokes the innocent party to make the contract by representing the untruth as the truth. The innocent party gives consent without knowing the reality. This is why this type of contract is violable.

iv. Contract by fraud: the term ‘fraud’ means to deceive or cheat. If one of the parties deceives another party and gets or imitates his/her signature on the document and

the document and the contract is formed, this is known as contract by fraud. In the case of misrepresentation, the innocent party gives consent but he is misguided whereas in the case of fraud he does not give consent but deceiving him or imitating

his signature the guilty party obtains his consent. Fraud is a serious type of crime. There may be many situations where the fraud is made.

v. Contract by mistake: Where the consent has been given by mistake, there is no free consent of the parties. The contract is voidable where one of the parties is mistaken. If there is unilateral mistake, the contract is voidable at the option of the

mistaking party. If there is bilateral mistake, then the contract is void. c. Void contract: Literally, the term “void’ means ‘not binding in law”. Accordingly, the

word ‘void contract” implies a useless contract, which has no legal effect at all.2 There is difference between a void contract and a void agreement. A void agreement can never be a contract, as it is void from the beginning. But the void contract is valid in certain cases

when it is entered into. However, it turns to be void afterwards. The contract becomes void afterwards due to subsequent impossibility, subsequent illegality, by declaring void

under a voidable contract, in the case of a contract contingent on the happening of an

2 M.C. Kuchchal, ibid p. 14.

uncertain future event if that event becomes impossible. In the case of void agreement there is absence of one or more essential elements of a valid contract except for the free

consent. According to section 13 of Nepalese Contract Act, 2056, there are certain contracts, which are void. No liabilities on the part of the contracting party are created in

these contracts as they are void. They are given below:

Contracts in restraint of trade and profession: None can prohibit any one from

practicing trade and choosing profession if the existing law has not restrained. If one makes contracts prohibiting another from choosing trade and profession it is a void contract. For instance, A and B are very intelligent students and they passed

the bachelor level in the same division with the same marks. Two vacancies were available and both of them entered into a contract in which they made provisions

that for which vacancy A would apply B would not apply for and vice versa. Later on, A applied for both of the vacancies. B cannot enforce this contract because the contract is made in restraint of trade and profession. The contract is void due to

restraining of trade and profession. In this case, the contract does not need to be declared as void by the court. The section 13 of Nepales Contract Act has provided

some exceptions to this rule. Any employer may make a contract with any employee who carries out the special work restraining him from doing same work anywhere else during the time of his/her job period or after the job as well. For

example, a beer company may prohibit its chemist (who blends different ingredients in beer) to do the job in any other competitive company for certain period or even

for life. Likewise, any employee who holds secret information or formula of any industry, trade or business may be restricted to do the job or supply the secret information to anybody else. Another exception for the restriction of trade and

profession is the sale purchase of goodwill of a trade. This means a contract can be made by prohibiting the seller to make sale purchase of goodwill to anybody and

carry out the same business for the fixed time mentioned in the contract. The purchase of the goodwill may prohibit the seller not to do the same trade in the stipulated time and place mentioned in the contract. The third exception applies in

the case of partnership. A contract can be made resisting partners from doing the same kind of other trade and profession with the competitors of that business.

Contracts in restraints of marriage. When the existing law allows marrying, a contract cannot prohibit anyone from marrying. The contract is void. The contract, which curtails the personal freedom of a person, gets no validity and thus is

automatically cancelled. There is famous case in England. 3In this case, the court of England held that Catherine could not recover 1000 pound from Peers in the breach

of the contract in which he agreed to pay her if he married to someone else. Peers was a boy and had made a contract with Catharine, a girl that he would marry to Catherine only. If he married anyone else, he would pay 1000 pound to Catherine.

Later on, Peers married to another girl. Catherine’s father Lowe filed a case in the court asking for the agreed amount. But the court rejected the claim as agreed to

Catherine as the contract itself was void, which prohibited the marriage. So, the contract in restraint of marriage is void.

3 Lowe V. Peers, 1768, 18 ER 160.

Contracts in restraint of using common facilities: Common facilities indicate the

river, pond, tap, grazing land, common path, playing ground, road, temple, jungle, etc. So the contract made to restrict on the use of them is void contract. One needs not to go to the court to declare them as void. The common facilities are for all.

When the law allows them to use, none by making contract can prohibit from using them. Suppose there is a river beside a village. Ram and Shyam are the villagers.

They enter into an agreement and state that they will collectively defend anybody who uses the river for any purpose. This contract is void.

Contracts in restraints of execution of legal rights from the court or in

restraints of legal proceedings: Nobody can stop using one’s legal rights which the law permits. The court has the power to execute the legal right. The legal right

cannot be executed by the parties themselves. The contract is void if it restricts the execution of the legal right. Likewise, nobody can make agreement to restrict the legal proceedings. The legal proceeding has to be followed in the same way as it is.

If anybody makes a contract to follow in the way they agree, it is useless and hence void. Legal proceedings also refer to the proceedings which are applied during the

execution of the law by the courts and the government offices. If two parties make a contract that they will not got to the court for the appeal against the decision made by the arbitrator is void because it is against the legal proceedings.

Contracts against the existing law: None can make any contracts contrary to the existing law. Law must have permitted to do the contract as such. A house rent is a

valid contract because it is permitted by law. The law permits to give one’s house on rent. But the agreement is void when a person lends a house to run a prostitution

business. The law forbids opening brothels. Likewise, when someone makes a contract to sell the weapons to anybody else is void because the law has prohibited doing so. So, none can make a contract to assault, kill, harm to the property of

another person as the law has forbidden to do that.

Contracts against the public policy or interest: Contracts which are concluded

against the public policy or interest are void. A person makes a contract to lease Tundikhel is void as it is against the public policy or interest. When the contracts

are immoral, they are against the public policy. The content of immorality and public policy may be very long. Morality refers to what is right and wrong. What is considered right by the public is moral and the policy in which the public has

benefit is the matter of public policy. The morality may come under the public policy. Common facilities are the matter of public policy. Bribery and corruption

are the matters of public concern or interest. Therefore, such contracts which are against the public policy or interest are void.

Ambiguous contracts: Where the contract made by the parties is so vague that the

parties are not at the state of performing it, it becomes void due to its ambiguity. Also contracts made by mistake are void due to their ambiguity. The contracts

which carry more than one meaning are called the ambiguous contracts, they are void.

Impossible contracts: Some contracts are impossible prima facie. Such contracts

which are impossible at the outset of making are void ab initio. For instance, a person promises his lover to bring a star for her from the sky is impossible prima

facie. Another person promises make alive a dead person is impossible contract.

Some contracts become impossible due to supervening impossibility. This means contracts are possible to perform at the beginning. But later on certain

circumstances so appear that the performance of the contract becomes impossible. They are impossible subsequently. In both of conditions, the contracts are void due

to impossibility of performance.

A contract made by incapable person: A contract made by a minor is a void

contract. A contract made by a criminal and insolvent person is also void. A contract made by foreign sovereign is also void. Likewise, contracts made with the incapable person who cannot distinguish what is right or wrong, are void contracts.

Contracts that contain illegal object: Such contracts which has illegal objective are also void. If the purpose or design of the contract is illegal, such contracts are

void. They cannot be enforced by the court of law. When two thieves agree before stealing the goods to share the stolen goods equally and but later on the mighty one took more, another thief cannot complain about it to the court. This is void contract

as it does not contain legality of objects.

Immoral contracts are void contracts. Contracts made for the supply of girls and

contracts of bribery are example of immoral contracts. They are void contracts. d. Unenforceable contracts: Such contracts which are valid but are not capable of being

enforced in a court of law are unenforceable contracts. They are valid as they contain every essential element necessary for the valid contracts. However, they cannot be enforced by the court because of some technical defects. Such technical defects may be

expiry of time for the enforcement of the contract. The time barred debts are the examples of unenforceable contracts.

Offer and Acceptance

Offer and acceptance is the first step in the process of making the contract. Offer & acceptance make an agreement, which is one of the essential elements of the contract provided there is a

lawful offer by one party and a lawful acceptance of the offer by another party. Offer and acceptance is required in order to form a contract. Offer + acceptance = an agreement. The agreement is the basis of a contract. Parties’ intentions determine whether or not a contract is

formed and what the contents of the contract are. It is from the offer and acceptance that the obligations (duties) on the parties are imposed and the rights of the parties are created. For

example, A says to B: “I want to sell my horse to you for Rs. 50,000/-. Will you buy it?” The offer has been made to B. If B says he wants to buy it, the acceptance is made and a contract of sale of goods is formed. Now, A and B get certain duties and rights out of the contract. A has a

duty to deliver the horse to B and has a right to get Rs. 50,000/- from B. Likewise, B has a duty to pay Rs. 50,000/- to A and gets right to get the horse from A.

The law of contract is mainly about the enforcement of the promises or the agreements. Remember that not all promises or the agreements are enforced by the law or the courts. To

enforce a set of promises, or an agreement, courts look for the presence of certain elements. When these elements are present, a court will find that the agreement is a contract. Remember all

agreements are not contracts. Therefore, the courts will find that the elements necessary to form a contract are present in the agreements. As a student you need to know the elements required to constitute an enforceable contract. To say that we have a contract means that the parties have

voluntarily assumed liabilities with regard to each other. The process of agreement begins with an offer. For a contract to be formed, this offer must be unconditionally accepted. The law

imposes various requirements as to the communication of the offer and the acceptance. Once there has been a valid communication of the acceptance, the law requires that certain other

elements like contractual capacity, legality of object, free consent, possibility of performance etc are present. If these elements are not present, a court will not find that a contract exists between the parties. In the absence of a contract, neither party will be bound to the promises or

agreements they have made. It is thus of importance to determine whether or not a contract has been formed. For this, the starting point is the offer and acceptance. Let’s see what are offer and

acceptance and different rules regarding to them.

Meaning of Offer

An offer is an indication of one party’s willingness to enter into a contract. A contract is formed with the party to whom the offer is made as soon as he accepts the terms of the offer. Offer is

nothing other than showing or expressing an intention to do or not to do something by one party to the other party. An offer in simple sense is a proposal. The proposal is made by one party with the object of obtaining the assent of the other party in the contract. An offer is a proposal made

by one party to the other to do or not to do something.

Section2 (b) of the Nepalese Contract Act (NCA), 2056 has defined the offer as: “A proposal made by one party before another with an intention to get acceptance to do or not to do something”. Likewise, section 2 (a) of the Indian contract Act, 1872 states: “When one person

signifies to another his willingness to do or 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.”This

definition tells us how a proposal is made. From the above definitions, we can infer the following things for the offer:

1. The offer is a willingness to do or to abstain from doing something. This means one has

to begin with some expressions, which becomes an offer. A mere expression of intention does not constitute an offer. It must be an expression to be legally bound with what has

been expressed. Mere expression of opinion also is not an offer. If someone says he would sell his car in an emergency if he gets even Rs. 10,000/- is not an offer as it is an expression of opinion and there is no intention to be legally bound with what he said.

2. The willingness must be done to another party to the contract. This means that a proposal cannot be made to oneself. He must make the offer to another person to get acceptance on

the proposal. 3. The expressions of willingness must be made to get the consent (assent) of the other

party. An enquiry is not a proposal. It must seek for acceptance. If someone gives just

information, it does not constitute the offer. Hence, the offer must satisfy the above –mentioned elements. The person who makes offer is the offeror and the person to whom

the offer is made is called the offeree and if the person accepts the offer he is called the acceptor.

4. There is always an intention to create a legal relationship with another party. Without the

intention to create a legal relationship with another party, a contract cannot be created.

Legal rules regarding to a valid offer:

The offer gets validity if it fulfills the rules regarding to the offer. The rules regarding to valid offer refer to different matters which are considered at the making of offer. The rules are not in

the categorical fashion. They are the different things which are related with the offer. They give validity to the offer. They are given below.

1. Express or implied offer: An offer may be express or implied. Both of the offers are valid. There is no question that one offer is more important than the other. In any way the offer may be made. This is the first rule regarding a valid offer. An offer may be made

either by words or by conducts. The offer which is expressed by words may be spoken or written it is called an express offer. The written offers can be made by letters, telegrams,

telex messages, advertisements etc. The oral offers can be made in person or over telephone. Implied offer refers to the offer made through the conduct of the party. No words spoken or written are used in the implied offer. It can be understood that the offer

has been made through the conduct of the offeror. It is made by positive acts or signs so that the person acting or making signs mean to say or convey something. Circumstances

tell us that the offer was made to form a contract. However, silence of a party can never be an offer by conduct.

2. The offeror must intend to create legal relations: The offer is valid only when the

offeror intends to give rise to legal consequences. This means the offer must be able to create legal relations. If the offer is accepted, the parties must intend to go to the court to

make another party fulfill the terms of the offer. When someone makes offer to go on a picnic, the acceptor agrees to go and pay Rs. 1,000/- for the picnic. But later he cannot attend the picnic and fails to pay the said amount. He cannot be taken to the court for the

breach of the agreement. This is so because the parties do not intend to go to the court. There is no intention to create legal relationship out of that offer. This is a social type of

offer. The family, religious, domestic and social types of offers do not contain the intention to create legal relationship. Therefore, they are not valid offer. In a commercial type of transactions, parties intend to create legal consequences. Therefore, there is be a

valid offer in those types of transactions. 3. The offer must be certain: The terms or provisions containing in the offer must be

definite and certain. If the words of the offer give more than one meaning and they do not give certainty, it does not amount to a lawful offer. When the terms of the offer are ambiguous and vague, the binding obligation on the part of the parties cannot be created.

A says to B that if his bike turned to be lucky to him during some days’ riding, then he would buy it. This cannot be an offer due to uncertainty of the terms.

4. The principle of objective intention of the offer: It is important to know that the objective intention of the parties determines the legal effects of their words or actions. Where a person secretly intends something different from he made an offer, that intention

cannot constitute a contract. The intention which he presented before the offeree is an objective intention which constitutes the valid offer. This is known as the principle of

objective intention. The principle suggests that the statements or actions of the offeror should be as interpreted as the reasonable person would mean to it in the position of the offeree. This means “words are to be interpreted as they were reasonably understood by

the man to whom they were spoken, not as they were understood by the man who spoke them.”4 Let us take the following instances to illustrate how the conditions of the actual

4 Justice Blackburn in Smith V. Hughes (1871).

and objective intention operate in practice. First5 is that the University of Salford sent a letter to Mr. Moran offering him a place on the Physiotherapy course. It was accepted by

Mr. Moran. However, the University claimed that it did not mean to offer him a place and that the offer was the result of a clerical error. The Court of Appeal held that there was a

strong case for saying that a contract had been formed. The University’s apparent intent was clearly to offer Mr. Moran a place, and this is the way that Mr. Moran interpreted the letter. Second is the case of Raffles v Wichelhaus (1864) the parties agreed a sale of 125

bales of cotton, to be delivered from Bombay on a particular ship, the Peerless. Unfortunately, there were two ships with this name, leaving Bombay at different times.

One party thought the agreement referred to the ship leaving in October, but the other thought it referred to the ship leaving in December. The claimant brought an action for the price. It was held that the fact that the meaning of the agreement was ambiguous was

capable of giving a defense. It was not possible to work out what the apparent intent of the defendant was, so the objective principle did not apply and the court had to look at the

actual intent of the parties. If the actual intention of one party was different from that of the other, there would be no contract. Finally, in the case of Scriven v Hindley (1913), the claimant was selling bales of hemp and bales of tow at auction. However, he did not make

clear which lot was the hemp and which lot was the tow. The defendant, thinking that he was bidding for the lot that contained the hemp, actually bid for the tow. It was held that

there was no contract for the sale of the tow, because the defendant’s apparent intent (to bid for the tow) had been caused by not making it clear which lot was which. Therefore, the objective principle did not apply. So, the court looked at the parties’ actual intention.

The defendant’s intention (to buy the hemp) did not coincide with the claimant’s intention (to sell the defendant the tow) so there was no contract.

5. An offer entails a complete negotiation process: An offer is an expression of

willingness to make a contract on certain terms. It must be made with the intention that it

will become binding upon the acceptance. There must be no further negotiations or discussions required. Where further negotiations or discussions are needed, it is not an

offer. It is very important to know that all communications are not the offers. We must distinguish an offer from other steps in the negotiation process. Other steps in the negotiation process might include a statement of intention, a supply of information or an

invitation to treat. Therefore, the offer is different from the statement of intention, supply of information or the invitation to treat. These steps require complete negotiation to

become the offer.

A statement of intention: A statement of intention is not an offer. In this, one party states that

he intends to do something. This differs from an offer as it does not state that the party will do something. For example, where someone advertises for the auction of the goods, it is just a

statement of intention. No contract is formed when a person makes an advertisement in the newspaper that his house is in sell. He is just making statement of his intention. A supply of information: Where a party just supplies information to another party, it is not an

offer. Information is supplied to enlighten another party. An invitation to treat or offer: An offer is different from ‘an invitation to treat’. It is also

known as ‘an invitation to offer’ or ‘an invitation to receive’. This is a puzzling term. An

5 Moran v University of Salford (1993).

invitation to treat is an indication of a willingness to conduct business. It is an invitation to make an offer or to commence negotiations. His object is merely to send information that he is willing

to open negotiations with him. Such invitations for offer are therefore not offers in the eyes of law. When they are accepted, they do not form any contract. Here are some examples:

f. A display of goods: The display of goods with a price ticket attached in a shop or on a supermarket is not an offer to sell but an invitation to treat. The customers are invited to make an offer to buy. In the case of Pharmaceutical Society of Great Britain

v. Boots Cash Chemists Ltd. (1953), the court of appeal held that the display of drugs on the open shelf constituted an invitation to treat. If there is a self-service in a

departmental store and the customers are asked to pick up the articles and go to the cashier’s desk to pay, the store is not making an offer. It is just making an invitation to offer. When the cashier accepts the payment, then only the contract is made.

However, where the store advertises that it will make a special discount to ‘the first 20 or like that, the store is making an offer for the period of time specified in the

advertisement. Whosoever becomes among the 20 people to buy the advertised article is entitled to receive the discount. Other examples are the sale promotion schemes. They are special offers, not special invitation to treat.

g. Advertisements, catalogues and brochures: Many business houses use the press, TV and commercial radio to sell their products direct to the public. They use the word

offer in the advertisements. Even if the word ‘offer’ is used, the advertisement is still an invitation to treat. If any motorbike company claims, for example, the bike would run 105 km/per lt., the contractual obligation is not formed on the part of the

advertiser if someone buys the bike believing that it would in fact run 105km/per lt. Likewise, the information containing in the catalogues and brochures do not make an

offer. They are just invitation to offer. h. Company prospectuses: When a company wishes to raise capital by selling shares to

the public, it must issue a prospectus. The prospectus seems like an offer by the

company but it is an invitation to treat. Potential investors apply for the share(s) which is an offer and the directors then decide who to allot the share to, which is an

acceptance. A prospective shareholder by filling up a share application form, usually attached to the prospectus, is making an offer, not the company itself.

i. Auctions: An auctioneer at the time of auction inviting offers from the bidders is not

making an offer. At an auction, the call for bids by an auctioneer is just an invitation to treat. The bids are offers. The auctioneer selects the highest bid and the acceptance

is completed by the fall of the last hammer. j. Tenders: Large undertakings, such as public authorities, often place contracts

inviting interested firms to tender (offer) for the business. An invitation to tender can

give rise to a binding obligation on the part of the inviter to consider tenders submitted in accordance with the conditions of the tender. The acceptance of a tender

has different legal consequences, depending on the wording of the original invitation to tender.

6. An offer may be made to a particular person, a group of person or the world at

large: An offer is said to be particular when it is made to a definite person or a particular person. The person whom it is made can accept such an offer. It can be made to a group of

persons in that any member of that group can accept the offer. When the offer is made to a particular person or a group of person it is called a specific or a particular offer.

Sometimes an offer may be made to the world at large or the public in general. This offer is known as the general offer. Any person who fulfills the requisite conditions may accept

the general offer. Reward cases are examples of this kind of offer. Where someone offers a reward for the return of a lost dog, the offer can be accepted by anyone who knows

about it and finds the dog. In the case of Carlill v. Carbolic Smoke Ball6, the company inserted advertisements in a number of newspapers stating that it would pay 100 pound to anyone who caught ‘flu’ after using its smoke balls for 14 days. The company further

stated that to show its sincerity in the matter it had deposited 1000 pound at a bank to meet possible claims. Mrs. Carlill bought one of the smoke balls, used it as directed but still

caught ‘flu’. She claimed the hundred pounds but the company refused to pay her. She went to the court and the court concluded that she was entitled to recover the hundred pound reward as it was a general offer made to her.

7. Communication of offer: An offer must be communicated. It is effective only when it is communicated to the offeree. If the offer is not made known to the offeree, there can be no

acceptance and no contract. The acceptance without the knowledge of the offer makes no contract at all. This was established in a case7where the defendant’s nephew absconded from home. He sent his servant, the plaintiff, in search of the boy. After the servant had

left, the defendant announced a reward of Rs. 501/- to anyone giving information about the boy. The servant, before seeing the advertisement, had traced the boy and informed the

defendant. Later on, reading the notice of reward, the servant claimed it. His suit was dismissed on the ground that he could not accept the offer unless he had knowledge of it. Therefore, the offeree must have knowledge of the offer before he can accept it.

8. An offer cannot contain a term the non-compliance of which may be assumed to

amount to acceptance: An offerror cannot say that if the offeree does not accept the offer

within so and so date, the offer would be deemed to have been accepted. Such a burden cannot be imposed on the offeree. It is for the offeree to accept the offer or not; therefore, he may communicate his acceptance accordingly. If the offeree does not reply to the

offeror, no contract is formed because there is no obligation to reply. 9. The offeror is free to put any terms and conditions in the offer: An offer can be made

subject to any terms and conditions. An offeror may attach any terms and conditions to the offer he makes. He may even prescribe the mode of acceptance if he so wishes. The offeree will have to accept all the terms of the offer. There is no contract unless all the

terms of the offer are complied with and accepted in the mode prescribed. Remember that the acceptor is also free whether or not to accept the terms and conditions.

10. Two identical cross-offers: If the two parties think in the same way and propose each other for the acceptance of their offers, it does not make a contract. They are two identical offers. When the offers are identical offers, there is no contract formed. Even though they

make the same offer, the offers need to be accepted. There is nobody who accepts the offer. Therefore, they are not the contracts. They are also called the cross-offers as they

are made by each other in ignorance of each other’s offer. This does not amount to an offer. Neither of the parties can be called the acceptor of the offers.

11. Time of offer: If the time has been fixed for the acceptance of the offer, the offer must be

accepted within that time. If no time is fixed within which the offer may be accepted, the

6 Carlill v. carbolic smoke ball Co. (1813) 1 Q.B. 256. 7 Lalman v. Gauri Dutta (1913) 11 All. L.J. 389 (India).

offer does not remain open for all time. It should be accepted within a reasonable time. The reasonability depends on the circumstances of the case.

12. Status of the special terms in a contract: There may be many special terms in the offer. If there are special terms in a contract, they must be notified to the offeree. The

offeree may be a customer, a consumer or a client. If the special terms are notified to the offeree, it is a valid offer. If these special terms are not brought to the customer’s notice, there is no valid offer. If the offer is accepted and the contract is formed, the special terms

do not bind the customer. Therefore, they are brought to the customer’s notice by drawing his attention to them particularly. For example, where certain conditions are written on the

back of a travel ticket or deposit of luggage in a room and the words, ‘for conditions see back’ are printed on the face of it, it constitutes a valid offer. In such cases, the buyer of the ticket is the acceptor of the offer. The buyer of the ticket is bound by whatever

conditions are written on the back of the ticket whether he has read them or not. The offer may be brought to the notice of the customer by inferring that a man of general prudence

could find them by exercising general prudence. For instance, where certain conditions forming the part of the offer are printed in a language not understood by the offeree but his attention has been drawn to them in a reasonable manner, it also constitutes a valid offer.

In such a case, the law imposes an obligation upon the offeree to ask for the translation of the conditions. If he fails to do so, it is presumed that he has constructive notice of these

special terms and he will be bound by them. Lapse or termination of offer: The offer is not made for all the time. It is not that the offer once made is meant for an

indefinite time. When the offer comes to an end, it is called the termination of offer. It is important to know when the offer comes to an end. It is also known as the lapse of offer,

as it remains no more in vogue. The offer is terminated in the following conditions: 1. Termination of offer after the stipulated or reasonable time: If the acceptance

is not communicated within the stipulated time mentioned in the offer, the offer

comes to an end. If no time is prescribed in the offer, the acceptance must be communicated within a reasonable time, otherwise the offer lapses.

2. An offer lapses if it is not accepted in the mode prescribed: If the offer provides any mode of acceptance, the offeror must accept the method prescribed by the offeror. If no mode has been prescribed in the offer, the acceptance must be

done in some usual and reasonable manner, otherwise, the offer lapses. Sometimes, the modes of acceptance may be funny, but the offer must be

accepted in the same mode. If the offer says that the acceptance must be made by waving a flag or by ringing a bell, the acceptance must be made accordingly. Failure to follow the mode provided makes the offer lapse.

3. By rejection: An offer lapses by rejection. The accepter may reject the offer. To accept or reject the offer is the right of the acceptor. The rejection may be express

and implied. Express rejection may be spoken or written. Implied rejection is the one where the offeree either makes a counter offer or where the offeree gives a conditional acceptance.

4. By death or insanity: The offer comes to an end if the offeror or the offeree dies or becomes insane before acceptance. But the acceptor must have the knowledge

of the death or insanity before the acceptance. The acceptance is valid if the

acceptor had no knowledge of the death or insanity of the offeree before acceptance. The heirs cannot accept the offer on behalf of their predecessors.

5. Revocation: Revocation refers to the withdrawal of the offer by the offeror. The offeror may at any time withdraw the offer made to the offeree. If he takes back

his offer, it is regarded as the revocation of the offer. As soon as he takes it back, the offer comes to an end. All the terms and conditions attached with the offer must be satisfied by acceptor. If any conditions are to be fulfilled by the offeree

before acceptance and the acceptor fails to do so, the offer comes to an end. 6. Subsequent illegality or destruction of the subject matter: If there is a change

in law and that makes the offer illegal, the offer comes to an end. Again if the subject matter of the offer remains no longer in existence, the offer comes to an end.

Acceptance

An acceptance is a clear indication of the offeree’s unqualified agreement to the terms of the

offer in the manner set out in the offer. A contract is formed when the acceptance of an offer is made. When a proposal is made to someone, the party whom it is made must accept it or the contract is not formed. Acceptance is the expression of the assent by the acceptor on the proposal

made by the offeror. Section 2 (c) of Nepalese Contract Act, 2056, defines the acceptance thus: “Acceptance means an assent given by a person upon the offer in the sense taken by the

offeror.” Likewise, section 2(b) of the Indian contract Act, 1872 says: “When a person to

whom the proposal is made, signifies his assent thereto, the proposal is said to be accepted.

A proposal, when accepted, becomes a promise.” Thus an acceptance is nothing more than an

assent given by a person for the proposal made by another. If a person other than the offeree accepts the offer, the contract is not formed.

Rules regarding to the acceptance

There are many rules regarding to the acceptance. Some of them have already been discussed.

They are discussed as given below in their bullet forms: 1. The person to accept: Acceptance must be given by the person to whom the offer is

made. Only the person or persons to whom it is made can accept the offer. The offeree can only accept the offer. Another person without the consent of the offeror cannot accept it. When an offer is made to a particular, that particular person can only

accept it. No other person can accept it. Similarly, any member of the group can accept an offer which is made to a group of person. If it is made to the world at large,

any person who has the knowledge of existence of the offer can accept it. 2. Express or implied acceptance: It may be express or implied. The express

acceptance stands for the acceptance that has been made either in writing or by words

of mouth or by performance of some required act of the offeree. The Carlill v. Carbolic case is an example of acceptance by performance of some required act. It is

implied when it is accepted by the conduct of the offeree. Suppose, I make an order to the shopkeeper to purchase some goods from him. He without saying anything sends the goods to me. This is an implied acceptance. You climb on a bus from Jawalakhel

to Ratnapark. You have accepted the offer made by the bus owner when you climbed on the bus. A contract is formed as soon as you step in. This is another example of an

implied acceptance.

3. Acceptance must be absolute, unqualified and according to the exact terms of

the offer: Section 7 of the Indian contract Act lays down this rule. This means the

acceptance must be as it is made by the offeor. It is effective, when the offer is unconditional and unqualified. You cannot say that if this happens I will accept it. If

you put any terms of your own, the acceptance is qualified and it terminates the offer.

4. Mode of acceptance: Mode of acceptance has been discussed above. Section 7(2) of Indian contract Act states that acceptance must be expressed in some usual and

reasonable manner, unless the proposal prescribes the manner in which it is to be accepted. If the proposal has prescribed mode of acceptance, the offeree must accept

according to that mode. If the offeror prescribes no mode of acceptance, the acceptance must be communicated according to some usual and reasonable mode. The usual modes of communication may be made by post, electronic means of

communication and others. They may be express or implied.When acceptance is given by words spoken and written or by post or telegram, it is called an express

acceptance. Implied acceptance may be given either by doing some required act e.g. stepping in a public bus by a passenger. If the offeror prescribes a mode, it should be given in the same manner even if the mode is funny. However, silence dies not

amount to the mode of acceptance. A person cannot say that if within a certain time acceptance were not communicated the offer would be considered as accepted.

5. Mental acceptance: Mental acceptance is no acceptance. It is not communicated therefore it is no acceptance.This is so even where the offeror has said that such a mode of acceptance would suffice. Acceptance must be communicated to the offeror

otherwise it has no effect. There has to be identity of minds. If the acceptance of the offer does not come to the knowledge of the offeror, there is no contract.

6. Communication of acceptance: The acceptor must communicate the acceptance. This means the acceptance must pass from the offeree to the offeror. The offeree himself or through his authorized agent may communicate to the offeror.

7. Time of acceptance: The general rule regarding to the time of acceptance is the time fixed by the offeror. If the offeror has stipulated the time for the offer, the acceptor

must accept it within that time. If the time was not prescribed by the offeror, it must be communicated within a reasonable time and before the offer lapses and/or is revoked by the offeror. Likewise, the acceptance must be given after receiving the

offer. This means first the offer should be made and the acceptance should follow. It should not precede the offer.

8. Status of rejected offers: Rejected offers are the counter offers which terminate the original offers. We may come to think that if the offeree attached certain terms and conditions to the original offer whether or not the contract may be formed as it comes

to an end. Remember that there is always a bargain in the business. The business cannot sustain if you don’t have some sort of liberty to put your conditions. If the

offeree keeps counter offers the original offer comes to an end. This is true but if the offeror agrees to the terms of the offeree, then his status changes to that of an offeree. He becomes the acceptor if he accepts the counter offers. The contract is formed. The

offers are renewed. The counter offer becomes a fresh offer and the contract may be formed accordingly.

Consideration

Meaning and rules regarding consideration

Meaning of consideration

Consideration is one of the essential elements of contract. Each party in a contract makes

one or more promises for another party. They exchange their promises with each other. Each side must promise to give or do something for the other. They get ‘something in return’ (quid pro quo) for their promises. That ‘something in return ‘is the consideration, which has some value in

the eyes of law and is an essential element of every valid simple contract. A promise of a gift will not be binding unless made in the form of a special contract. In another words, parties to a

contract give something and take something. This 'giving and taking' something is consideration. For example, A agreed to sell his car at the rate of 6 lacks to B. From this contract, A gets 6 lacks for his car and B gets the car for his 6 lacks. Therefore, 6 lacks is the consideration for A and the

car is the consideration for B. The general rule of contract is that ‘no consideration, 'no contract'. If there is any contract

without consideration it is void and has no legal effects. So consideration is very important element of a contract. Blackstone says: “A consideration of some sort or the other is so necessary to the forming of a contract that a nudun pactum (i.e. agreement to do or pay something on one

side, without any compensation on the other) will not at law support an action; and man cannot be compelled to perform it”. The party, which does not get any consideration, cannot be

compelled to perform the contractual obligations. Thus the contract made without consideration becomes void. But remember that this rule is not always applicable. There are certain contracts that can be made without consideration'. We'll see them later on. Now let's see the definition

given by some scholars about consideration.

Definition of consideration:

Black's Law Dictionary: "Consideration is the inducement to contract, the cause, motive,

price or impelling influence which induces a contracting party to enter into a contract, the

reason or material cause of contract". According to this definition, consideration is the

inducing element that makes the contracting party to enter into it. None makes a contract for nothing. He makes it for some benefits. He agrees to the terms and conditions of the contract for he sees some benefits out of it. Consideration is that benefit which induces the contracting party.

F. Pollock: "Consideration is the price for which the promise of the offer is bought." To him, the price contained in the offers is the consideration.

Justice Patterson: "Consideration means something which is of value in the eye of law.....it may be some benefit to the plaintiff or some detriment to the defendant". This definition has mentioned three things in the consideration. First, it is of some value in the eyes of law. Second,

it may be some benefits to the plaintiff, and the third, it may be some detriment to the defendant. Section 2 (d) of Nepalese Contract Act defines:"Consideration means promise made to do

or not to do any work in return of doing or not doing of any work mentioned in the offer". According to this definition, what one agrees to do as mentioned in the offer and gets return for that constitutes the consideration.

Consideration may take two forms. First of all, Executed consideration is where one party promises to do something in return for the act of another, e.g. reward case. Mrs. Smith

announces Rs. 10,000 reward for the return of 'lucy', a cat. David sees the advertisement, finds the cat and returns it to Mrs. Smith and claims the reward. This is an executed consideration.

'Cash with order' terms are examples of executed consideration. Secondly, Executory consideration is where the parties exchange promises to perform acts in the future, e.g. 'cash on

delivery' terms. Jones promises to pay 55000 when a new computer is delivered. Catherine promises to deliver the computer within one month. Both of them will perform their promises in

the future. Thus, this is an Executory consideration. The concept of consideration distinguishes the agreements from gratuitous promises. The

agreements that contain consideration are enforced by the court of law but the gratuitous

promises are normally unenforceable.

Rules regarding consideration

Rules regarding to consideration are the elements of consideration. Basically there are very important things we should know regarding to the consideration which are termed as rules or

elements of the consideration. We should analyze them from different angle to know exactly the consideration in law.

1. Consideration is legal value, bargained for and given in exchange for an act or

promise: A promise generally cannot be enforced against the person who made it unless the person to whom the promise was made has given up something of legal value in

exchange of the promise. The legal value has two parts. First, the promise does or agrees to do something he had no prior legal duty to do. Or the second, the promisee refrains

from doing or agrees not to do something he has a legal right to do. So, legal value is a necessary condition for the consideration. Bargained for exchange: Just because something has legal value, it is not necessarily

consideration. Legal value must be bargained for and given in exchange for the promisor’s promise to constitute consideration. The legal value must be the motive or

inducement for the other party’s promise or the performance. Exchanges that fail to meet consideration requirements :

a. Illusory promises: An illusory promise is one that does not bind the promisor to

do anything. e.g. “I will buy all the rice I want”. This type of promise does not serve as consideration. There may also be cancellation or termination clause in a

contract. A cancellation or termination clause in a contract that can be exercised at any time for any reason renders illusory. If any clause requires notice or minimum time before cancellation, it likely meets the consideration requirement.

For instance, “No cancellation within 90 days”, “No cancellation without a 30-day notice”, etc. If the exercise of the clause is conditioned on some act of the

party, it is not considered as illusory. e.g. failure to live up to dealership obligations. The uniform commercial code (UCC) has legitimized the output and requirements

contracts, obligating both parties to act in good faith. The output contracts are those contracts which obligate one party to buy all of the output (goods) of the

other party. e.g. “I will buy all you can make”. Requirement contracts are those contracts which obligate one party to buy all of its requirements (goods) from the other party. e.g., “I will buy everything I need from you”. These contracts are not

considered as illusory, even though courts of law may sometimes refuse to enforce these contracts. The UCC has endorsed them. So, they are generally

enforceable.

Exclusive dealing contracts: Exclusive dealing contracts are those contracts which give the distributor or the dealer the exclusive right to sell a manufacturer’s

products in a particular territory. The promises would be illusory if the distributor or the dealer had no duty to sell or manufacturer had no duty to supply. The UCC

imposes a duty on the distributor/dealer to use his best efforts to sell the goods and a reciprocal duty on the manufacturer to use his best efforts to supply the goods in good faith.

b. Preexisting duties: As a general rule, if someone performs or agrees to perform a preexisting duty, such promise does not constitute any consideration. For

example, Ram made a house rent contract with Shyam. Ram agreed to pay Rs. 5,000/- as a house rent per month. To pay house rent monthly is a preexisting duty of Ram. If Ram makes another contract of paying the rent to Shyam’s wife

for the same lease does not constitute the consideration. In the meanwhile, performing or agreeing to perform the preexisting public duties does not

constitute the consideration. If Ram says to Shyam: “Give me Rs. 10,000/- and I will not burn down your house.” In this case Rs. 10,000/- is not a consideration because not to commit a crime is not consideration. It is a preexisting public duty

not to do any crime. A policeman cannot claim any money when he catches any criminals. To do that is his public duty.

Preexisting duty and contract modification: An agreement to modify an existing contract requires some new consideration to be enforceable. If there is any new consideration like finishing early, adding something, there must be

consideration on the part of another. For example, you made a contract of house construction to your contractor to be completed by March. You needed the house

earlier to be completed and made modifications on the terms and included it to be completed earlier. Now, the contractor may ask for the extra charges to be paid to him. Likewise, if the modification resulted from unforeseen circumstances that

make a party’s performance more difficult than originally anticipated, consideration may be required. If the modification agreement was fair and free

from coercion, the court may find that the old agreement was terminated and the new contract was formed.

c. Forbearance to sue: A promise to refrain from pursuing a legal claim is regarded

as forbearance to sue. Generally, we cannot make contracts to forbid anyone from exercising one’s legal right. However, if someone agrees to refrain from pursuing

a legal claim in good faith, it can be a valid consideration. If such promise is made for the settlement agreements, it is a valid consideration. There must be a good faith belief by promisee in the validity of the claim in order for forbearance

to amount to consideration. d. Past consideration: Because it was not bargained for in exchange, past

consideration is not valid consideration. For example, in consideration for your good behavior as a minor, I will pay you Rs. 5,000/- does not bind me as it is not a consideration. It is a gratuitous promise.

e. Moral obligation: Promises made to satisfy a preexisting obligation are generally unenforceable. e.g. food and lodging, emergency care. Parents cannot enforce

their agreements on the ground of providing food and lodging to their kids.

2. Consideration must move at the desire of the promisor: Something done or services rendered voluntarily, or at the desire of the third party does not amount to valid

consideration. Consideration must be made at the desire of the promisor. This does not require that the consideration must confer some benefit on the promisor. It would be

enough if the act or forbearance or promise forming consideration was given at the promisor's request, the benefit may accrue to a third party. For example, A requests B to deliver him some goods on credit. B agrees to do so provided C guarantees the payment

of the price of the goods. C promises to guarantee the payment. This is a contract of guarantee. Though the benefit is not conferred on C but the consideration is formed by

C's promise of guarantee. 3. Consideration moved from the promisee or any other persons: According to section

2(d) of the Indian contract Act, consideration can move from the promisee or any other

person. As long as there is consideration for a promise, it is immaterial who has furnished it. This means that even a stranger to the consideration can sue on a contract. For

example, A made a deed of giving property to B. In the deed, A included a condition that B should pay an annuity to C. Likewise, on the same day, B made a contract with X to pay annuity even to him (X). In this situation, X can claim for the consideration out of the

agreement made between A and B, even though X is not a party to the original contract. This is an Indian practice.

4. The principle of privity of contract is also applicable in the case of consideration: The basic rule of a contract is that a stranger to a contract cannot interfere into the contract. The parties to a contract can only determine the terms and conditions and

enforce the terms and conditions of the contract. A person who is not a party to a contract has nothing to do with contractual rights and duties. Only the parties to a contract owe

any duties and rights arising out of the contract. Consideration is an essential element of a contract. From this follows that consideration should also be settled and shared between the contracting parties alone. This principle is popularly known as the principle of privity

of contract. The principle of privity of contract is essential for enforcing any rights arising out of the contract. But this rule is not strictly followed in every circumstance.

There are certain exceptions to this rule. They are given below: a. In case of a trust: In a trust, the trustees run, regulate and administer the

functions of the trust for the benefit of the beneficiaries. Though

beneficiaries are not party to the contract made by the trustee on behalf of the trust, they can sue to enforce their rights under the contract. A puts his

property to be held by N in trust for the benefit of B. B can sue to enforce his rights against N.

b. Family settlement: Family matters are settled by a family member who

commands the family generally. The head of the family or the karta of the family carries out the functions on behalf of the family in such matters like

partition or family arrangement for maintenance or marriage expenses of family members. Other family members are not the signatory of the contract. Even though they are not the parties to the contract, they can sue

on the ground of the arrangement. The rule of privity of contract is not applicable to them. In the determination of consideration, they can play a

part as well.

c. Where the third party constitutes himself as an agent of the

contracting party: A receives Rs, 10000/- from B to pay to C. A spent that

money. Here C can recover that money from A though he is not a contracting party.

d. In case of agency: The relationship between the principal and the agent is known as the agency. Where the agent has made contract on behalf of the principal, the principal not the agent is bound with what the agent has done

for him. The principal can sue against the third party, even though the agent made the contract. In the case of consideration, the agent may determine

the consideration on behalf of the principal and the principal is bound to accept the consideration determined by the agent.

e. In case of assignment of rights under a contract: When the rights are

assigned under a contract, the assignee can enforce the rights arising out of the contract. The assignment of the contract may be by the parties to the

third party or by operation of law. For example, A owns a bus and makes an insurance of it. He sells the bus to B. B can recover the insurance of the bus from the insurance company, even though he is not the contracting

party to the insurance. Likewise, when a company goes into liquidation, the official assignee or the receiver can enforce the contract made with the

third party, even though he is not the contracting party. 5. Consideration must not be illegal: Agreements, which have illegal objects, are void.

Consideration arising out of illegal agreements is not valid. Consideration should not be

immoral and against public policy. The objective of the contract must be permitted by law, morality and public policy.

6. Adequacy of Consideration: Courts generally do not look at whether the consideration was adequate to the promise given. Consideration must be sufficient to form a contract but need not be adequate. It is more than enough that there is the presence of

consideration in a contract. So how much consideration must be present there is immaterial. There is no requirement for the bargain to be strictly commercial. If a man is

prepared to sell his car for Rs 1000 the contract will not fail for lack of consideration. The courts will not help someone who complains of making a bad bargain. In the case of Thomas v Thomas (1842), after the death of her husband Mrs. Thomas agreed to pay rent

of one pound a year in order to continue living in the same house. It was held that the payment of one pound was valid consideration. A person who promises to carry out a

duty, which he is already obliged to perform, is in reality offering nothing of value. The consideration will be insufficient. However, if a person does more than he is bound to do, there may require consideration. Even the promise involves a public duty imposed by

law; consideration is required to do the extra job. In the case of Glasbrook Bros Ltd v Glasmorgan county council (1925), Glasbrook Bros were the owners of a strike-hit mine.

They requested for police protection for the safety men whose presence was necessary to prevent the mine flooding. They were unhappy with the arrangements originally offered by the local police. Eventually it was agreed that 70 policemen would be stationed in the

colliery and the Glasbrook Bros would pay for this extra security. The House of Lords (the supreme court of England) held that since the police had provided more protection

than they thought necessary, this constituted consideration. They were entitled to payment. The court held that the consideration was formed where someone does

something more than his legal duty. But consideration was not necessary where somebody does his legal duties. In the case of Collins v Godefroy8, Collins was

subpoenaed to give evidence in a case in which Godefroy was a party. A subpoena is a court order, which compels a person’s attendance at court. Godefroy promised to pay 6

guineas for Collins' loss of time. Collin’s action to recover this money failed because he was already under a legal duty to appear in the court. He had not done anything extra. Likewise, there is another case called Stilk v. Myrick (1809). During the course of a

voyage from London to the Baltic and back, two of a ship’s crew deserted. The captain promised to share the wages of the deserters amongst the remaining crew. It was held that

this promise was not binding as the sailors were already contractually bound to meet such emergencies of the voyage. They had not provided consideration. Courts generally don’t want to second grade the bargaining decisions of the parties.

Freedom to contract = freedom to make bad bargains. This ensures certainty and predictability. Courts generally don’t look at the real-world value. However, there are

certain exceptions on which the courts may look into. There is inadequate consideration on face of agreement. e.g. if one offers Rs. 1,000/- for another’s Rs. 5,00/- and 20 same books for 40 same books. Courts may refuse to enforce disguised gratuitous or gift

promises. e.g. Rs. 100/- for a car. 7. Consideration may be past, present and future: When something is done or suffered

before the date of the agreement at the desire of the promisor, it is called past consideration. For example, A asked B to teach his son. B agreed and started teaching for two months. A fixed after two months the tuition fees of B @ 300 per month. If one party

voluntarily performs an act, and the other party then makes a promise, the consideration for the promise is said to be in the past. Under English law, past consideration is regarded

as no consideration at all. Jones gives Susan a lift home. On arrival she offers Rs 100/- towards the petrol but she finds no change and says she will pay tomorrow. Jones cannot enforce Susan's promise. The rule about past consideration is not strictly followed. If,

e.g., a person is asked to perform a service, which is duly carried out, and later a promise to pay is made, the promise is binding. Consideration, which moves simultaneously with

the promise, is called 'present consideration'. This is also called the executed consideration. A buys a pen and gives money to the shopkeeper. This is the example of present consideration. When the consideration on both sides is to move at a future date, it

is called 'future consideration'. This is also called the 'executory consideration'. There is an exchange of promises and each promise is a consideration for the other. For example,

A promises to sell 15 computers to B after two weeks and B agreed to pay the price on the date of delivery. This is future consideration.

8. Consideration must be real: Consideration must be real and competent. Where the

consideration is physically impossible, legally impossible, uncertain and illusory consideration is not a real one and therefore is not a valid consideration. A promise to do

something which is physically unavailable or impossible does not make a valid consideration. For example, to make a dead man alive, or run at a speed of 200 km/h. A promise to do something, which is illegal, does not make a valid consideration e.g. a

promise to sell human beings. A promise to pay such remuneration 'as shall be deemed right' is uncertain and vague. An illusory or deceptive consideration consists in a promise

to perform a public duty, or to perform a contract already made with the promisor.

8 (1831), I.B.& Ad. 950.

9. The rule of 'no consideration no contract': The general rule of a contract is that the contract must be supported by consideration. The contract, which is devoid of

consideration, is void and ineffective. But there are certain exceptions to this rule. There can be certain contract, which can be valid even if they are not supported by

consideration. They are explained as follows. a. Agreements made on account of love and affection: An agreement made without

consideration is valid if it is made on account of love and affection. Section 25(1) of the

Indian contract Act states that an agreement made on account of love and affection must be (a) expressed in writing, (b) registered under the law, (c) influenced by love and

affection, and (d) made between the parties standing in a near relation to each other. This agreement is valid if it is made without the consideration.

b. Agreements made to compensate for past voluntary act or service: If an agreement to

compensate for the past voluntary act or service is done at the desire of the promisor, the contract becomes valid even if there is no consideration present in the agreement. But the

work or the service should have been done voluntarily. If it is not voluntary but rendered at the desire of the promisor it constitutes the past consideration. For example, A helped B extinguishing (putting out) the fire without B's request. If B agrees to give him Rs.

1000/- for his work, the contract is valid. But remember the following two things: first, the promisor must be in existence at the time the service was rendered. Where a promoter

rendered services for a company not then in existence, a subsequent promise by the company to pay for him could not be brought within this exception9. That is there must be presence of consideration. Secondly, the promisor must be to compensate who has

himself done something for the promisor. If on behalf of the doer someone else is compensated, there must be consideration present or the contract will be void on graound

of want of consideration. For example, A served B very well during his illness. B was very happy with the service rendered by A and asked A to take some cash and kind. But A refused it. In this situation C, the son of A, cannot claim for the cash and kind. B will

not be bound to pay C even if he agreed to pay that to C. Contract made between A and C would be invalid because of lack of consideration.

c. Agreements made to pay a time barred debt: Time barred debts are not enforceable at law. But if the debtor agrees to pay such debts, such agreements become valid without consideration. Time barred debts loose enforceability. Even though the debtor may regard

that the debt was received by him, the courts cannot order him to pay due to the expiry of time to recover the debt. But if the debtor is kind and likes to pay the time barred debt

and thus makes any contract with the creditor, the contract without consideration is very valid.

d. Completed gift: A gift is valid without consideration. However, it must be complete i.e.

must be given. Gift does not require the near relationship or love and affection. It may be given to any person.

e. Remission by the promisee of performance of the promise: If someone agrees to receive less than what actually he should get, the agreement is valid though there is no consideration. When a creditor agrees to give up a part of his claim, the contract is valid.

If a bank declares to give up the interest of 10% to its debtors who clear their dues within so and so date, the bank is obliged to waive 10% of the interest who pay within that date.

The contract is valid though the bank does not get any consideration.

9 Ahmedabad Jubilee spinning Company vs. Chhotalal (1908), 10 Bombey L.R. 141.

f. Contribution to charity: A promise would be enforceable if on the faith of the promised subscription, the promisee takes definite steps in furtherance of the object and undertakes

a liability, to the extent of liability incurred. For example A promises to contribute to charity to B. B to carry out the promise of A makes a contract with C, say, for the

construction of a building as A agreed to donate. A is bound to pay to B. But where the promise had done nothing to carry out the promise or on the faith of the promise, a promised subscription is not legally recoverable.

g. Agency: If the contract is related to the agency, it may be valid contract even without consideration. In the agency, agency may be gratuitous whereby the agent may not be

paid. If it is gratuitous one, it is valid without consideration. Free Consent

Free consent refers to the genuineness of contract. It is a desire to enter into the contract.

It involves free will of contracting party. Parties involved in the contract must have agreed voluntarily. Pushing and pulling factors may stand contrary to the free consent. A party freely

puts and offers and another accepts it as it is. They must not be forced to offer and accept. They must create legal obligations themselves.

Free consent is one of the most essential elements of the contract. Free consent means

giving assent to a contract in an open and free manner. It is very important because it binds the contracting parties.

Contract is a major source of law. The parties themselves create the law. If they make law themselves, they must be free to determine the terms and conditions of the contract. Free consent makes them to perform the terms and conditions of the contract. If there is no consent they are

not bound to perform it. There is an unhappy ending if the contract is not made by free consent of the parties.

No definitions of free consent can be found in Nepalese Contract Act. However, section 13 of Indian Contract Act, 1872 defines it (free consent) as- "Two or more than two persons are said to consent when they agree upon the same thing in the same sense". Sec. 14 of this Act

further states that consent is not free if it is caused by coercion, undue influence, misrepresentation, fraud or mistake.

There must be meeting of minds of the contracting parties. Consensus ad idem (true consent) of the parties must be present. There are certain elements, which derogate the free consent of the parties. In other words, there is no free consent if the contract is caused by

coercion, undue influence, misrepresentation, fraud or mistake. Where the contract is caused by coercion, misrepresentation, undue influence and fraud the contract is voidable at the option of

the innocent party but it is void if it is caused by bilateral mistake.

Coercion

The word coercion means to compel someone to do something. In a contract if somebody compels a person to enter into a contract, it is regarded as coercion. In coercion, consent of a

party is obtained by use of force or under a threat. In simple sense, it means using force to do something. If the consent in a contract is obtained by using force, it is called contract by coercion. The term 'coercion' has been defined in section 15 of the Indian contract Act, 1872 as

"coercion is the committing or threatening to commit, an act forbidden by the Indian 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". The following two things are traceable from the definition of the Indian contract Act: coercion means (a)

committing or threatening to commit any act forbidden by the Indian penal code, and (b) unlawful detaining or threatening to detain any property. If these two conditions are present in a

contract, the contract is induced by coercion. Explanation to section 14 (a) of Nepalese Contract Act says: "To detain or threaten to detain property or injure or threaten to injure life or reputation

or commit or threaten to commit anything forbidden by law for causing any person to enter into a contract is said to have caused coercion". The following things are discerned from the definition given on 'coercion by Nepalese Contract Act:

- To detain or threaten to detain the property. - To injure or threaten to injure life.

- To injure or threaten to injure reputation. - To commit or threaten to commit anything forbidden by law.

If the contract is caused by any of these elements, the contract is said to have caused by coercion.

Elements of coercion Following elements are necessary for coercion:

Committing or threatening to commit an act forbidden by law: According to Indian contract Act, the act of coercion must be against the Indian penal code whereas Nepalese Contract Act says that any act contrary to Nepalese law amounts to coercion. Nepalese law is wider than

Indian law in this regard. In the case of Ranaganayakama v. Alwar Setti (1889), a Madrasi man died and relatives of the deceased threatened the window to adopt a boy or they would not take

the dead body of her husband for cremation. The widow adopted the boy and subsequently went to the court to cancel the adoption. The court held that the adoption was induced by coercion as the widow was compelled to adopt the boy without her consent. Therefore the contract so caused

was declared as void by the court. If anybody commits an act forbidden by law constitutes coercion. If he does not commit but threatens to commit an act forbidden by law, constitutes the

coercion. Threat to commit suicide: To commit suicide means to kill oneself. If somebody gives threatening to commit suicide, s/he is threatening to her/himself. Therefore, to commit suicide or

threaten to commit suicide is not punishable by the law. If anybody threatens to commit suicide and gets consent of the other party, the contract so made is voidable at the option of the innocent

party. There is no free consent when someone gets consent by threatening to commit suicide. To attempt to commit suicide is punishable by law. If the contract has been formed by threatening to commit suicide, it is voidable as there is no free consent present in the contract.

Threat to file a case in criminal or civil proceedings: If someone threatens to file a case in case s/he does not agree to do, it does not amount to coercion. The law does not regard it as the

agreement caused by coercion. It is so because to file a case in criminal and civil proceedings is a legal right of a person. If someone threatens to file a case against someone and gets consent on the contract, it becomes a valid contract. But if someone threatens on the false ground and gets

consent, the contract is voidable. Detention or threat to detain property: This amounts to coercion. If anybody detains the

property of another with a view to obtain consent for making the contract, it is coercion. There is no free consent present in a contract, if it is caused by threatening to detain the property too. For example, A threatens B to deliver him 50 trucks of goods or he will lockup his godown. To do

that he has already sent four goondas to the godown. B sees four unknown people rooming around his godown and B agrees to deliver him the goods as demanded by him. Threatening of

detention of property causes to form the coercion and the contract so caused lacks free consent and is voidable at the option of the innocent party.

Injure or threaten to injure the life and reputation: An act injurious to life and reputation of a person may be used as a means of coercion. If a person strikes two chides on the chicks of

another person and gets the consent on the agreement, there is presence of injuries to life. The consent so obtained is caused by the coercion and is voidable.

Against whom coercion may be directed: According to Indian contract Act, it may be directed against any person. According to Nepalese law, in the case of act forbidden by law it may be directed against anybody but for detaining property and injuring life and reputation it must be

directed against the person who gives consent. In other words, under Indian law, coercion may be caused against life of anybody and property of anybody but in Nepal it may be caused only

against the life, reputation and property of the person whose consent is obtained. Indian law is graceful in this regard. For example, an industrialist is threatened to provide jobs to 100 people or they will abduct the children of a school. The industrialist agrees to do that constitutes the

coercion because it may be directed against anyone. Burden of proof: The burden of proof lies on the party who claims that the contract was induced

by the coercion. So, ‘he who claims has to prove’ principle is applied in coercion. Effects of coercion: A contract made using coercion is voidable. The aggrieved party has options to accept or reject it. The aggrieved party may exercise the option to affirm the

transaction. The guilty party is bound to perform the contract so caused. The aggrieved party may repudiate (cancel) the transactions. If a person to whom the money has been paid or

anything delivered under coercion, must repay or return it to the other party according to section 72 of the Indian contract Act.

Undue influence

Undue influence is the unfair persuasion of a person by a party who is in a dominant position. The contracts made between the parties having, fiduciary relations, dominate positions,

superior authority, etc are possibly made by undue influence. In this-type of contract one of the parties is so vulnerable (weak) that he may give consent to another party, which takes unfair advantages from the contract. The law protects him/her from being exploited on the ground of

undue influence. The person holding superior position may easily obtain consent of another party to make a contract in which he is more benefited. To provide justice to the innocent party, the

law makes sure that the contracts are not made by undue influence. Section 16(1) of Indian contract Act defines: “A contract is said to be induced by undue influence where (a) the relations subsisting between the parties are such that one of the parties is

in a position to dominate the will of another, and (b) he uses that position to obtain an unfair advantage over the other”. Likewise, explanation (1) to section 14(1) (b) of the Nepalese

Contract Act reads: “undue influence means influence exercised by a person upon another who is under his influence for personal advantage or interest with an intention to have unfair advantage”. From the above definitions, we can find two essential elements of the undue

influence. They are (a) dominant position and (b) exercise of that position for unfair advantage. They are explained as given below.

Elements of Undue Influence

1. Dominant position or relation: We can say that one is in a dominant position or relation. One can easily dominate the will of another where he has a fiduciary relation. The fiduciary

relations are such relations which are of utmost trust and confidence. By having the dominant or fiduciary relations, the parties are not in the same footing. There has to be a dominant position or

fiduciary relation between the contracting party to be undue influence. This rule is applicable where one party obtains consent abusing the relation and has betrayed another party. This kind of

relations may be many. Section 16(2) of Indian contract Act says that a person is in a position to dominate the will of another in the following situations:

- Where he holds a real or apparent authority over the other, or where he stands in a fiduciary relation to the other.

- Where he makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of illness, age, or mental or bodily distress.

Likewise, explanation (2) to section 14 (1) (b) of Nepalese Contract Act says that a person can

easily influence another if- - The person is under his detention, guardianship or protection.

- The person whose mental capacity is temporarily or permanently affected by reason of illness, age, or mental or bodily distress.

- Person over whom there is possibility to exercise economic or social influence.

Thus, we come to know that there are at least the following people who remain in dominant position:

a. A real or apparent authority: A real or apparent authority can easily influence the will of another. Person in authority may include an income tax officer in relation to an assessee, a magistrate (like chief district officer) or police officer in relation to an accused

person and the like. b. Fiduciary relation: Every relationship of trust and confidence is a fiduciary relation.

This category is very wide. It includes relationship between master and servant, lawyer and client, doctor and patient, creditor and debtor, bankers and client, teacher and student, parent and children etc.

c. Mental and physical distress: A person is in distress when his mental capacity is temporarily or permanently affected. It may be due to old age, or mental or bodily illness

or any other cause. Such a person is easily persuaded to give consent to the contract. 2. Exercise of dominant position to obtain an unfair advantage: Just having dominant position does not make any sense. This means contracts may be made by the person having

dominant position. They are valid contracts if there is presence of the dominant position and the contract has been made by free consent of the contracting parties. But if the dominant position

has been used ‘to obtain an unfair advantage’, then the contract is caused by undue influence. The contract made by the person in dominant position is valid where there is no abuse of that position or relation for unfair advantage. If A being the manager of B a clerk buys his bike at the

rate of current market price of the bike, the contract is valid due to absence of the undue influence though he has a dominant position. But A being the HR Manager says to B he will

offer him a job if he provides him with 20% of his salary to him per month. B agrees and gets job and later on refuses to give A 20% of his salary. This is a contract caused by undue influence. 3. Presumption of undue influence: In certain situation the law and the court presume that there

was exercise of undue influence. Some of them are mentioned below: a. Unconscionable contracts: Where one of the parties to the contract is in a position to

dominate the will of another and the contract is clearly unreasonable or excessive, the law and the court will presume that the consent must have been obtained by undue influence. High rate of interest and high prices are examples of such contracts. Unconscionable

contracts take place mostly in money lending transactions where moneylenders charge high rates of interest from the needy borrowers. The presumption of undue influence on

the ground of high rate is raised only when the following two things are proved: (1) that the money lender was in a position to dominate the will of the borrower and (2) that the

bargain is unreasonable i.e. rate of interest is excessive without any valid reason. The burden of proving that there was no undue influence lies on the part of the person in a

dominant position. High prices or exorbitant prices charged by the trader are generally not considered as the case of the undue influence but where there is no market

competition, the question may be debatable. b. The contract made with ‘pardanashin women’: A pardanasin woman is a woman who

covers her face with some cloths. In Nepal, ‘there is no existence of the concept of

‘pardanasin women’. Some Muslim women do put burkas in their head to cover their face. But the contract Act has not made any provisions regarding to it. In India also, there

is no statutory or judicial definition of ‘pardanasin women’. There is a presumption of undue influence in case of a contract made by or with a 'pardanasin women’. She can avoid any contract entered into by her on the plea of undue influence. If such case arises,

it is for the other party to prove that no undue influence was used. The protection granted to ‘pardanasin women’ is also extended to illiterate or ignorant ladies who are equally

exposed to the danger and risk of unfair deal. Likewise, if a contract has been made in the language which is not understood or known by the contracting parties, then also the court will regard that the contract has been caused by the undue influence.

Burden of proof: The burden of proof will lie upon the person who was in a position to dominate the will o f the other. It is sufficient that the person in a weak position says that the

consent was sought by undue influence. The court will take side of the person in a weak position. The person in a dominant position has to make a full disclosure of the facts to prove that the consent was genuine. He needs to prove that the benefits are adequate for the person in a weak

position. He has also to prove that the consent was free and no unfair advantage was taken out of the contract.

Effects or consequences of the undue influence: Contract induced by undue influence is voidable at the option of the party. The court has discretion to direct the aggrieved party for refunding the benefit. The court may order to refund in whole or in part or set aside the contract

without any direction to refund the benefit. There are two points which are notable at this point. First is that contract is not voidable if there is lack of judgment. If there is lack of knowledge of

facts or absence of foresight, the contract remains valid and is generally not sufficient reason for setting aside a contract on the ground of undue influence. Persuasion and argument are not in themselves undue influence. Undue influence implies mental and moral coercion. If there is

mental or moral coercion present, then only the consent of one of the parties to the contract does not become free. Secondly, if the consent has been obtained to benefit the third party, then also

there will be the contract caused by undue influence. The contract becomes voidable in this situation too. In other words, it is not necessary that the person in a position to dominate the will of the other party must himself be benefited. It is sufficient if the third person in whom he is

interested is benefited.

Difference between coercion and undue influence

Subjects Coercion Undue influence

Meaning Coercion means to compel another to do something.

Consent is obtained by committing or threatening to

Undue influence means an influence exerted on another to get

unfair benefit. Consent is obtained from the denomination of the will

commit an act forbidden by law. of the other.

Force It involves mostly the use of physical or violent force to

obtain the consent of another party.

There is a use of moral force to obtain consent.

Target It is directed against a person or his property.

There is a threat against the person himself and not against the

property of the person.

Relationship There is no relationship needed to exist in between the parties.

There has to be some sort of relationship between the parties

whereby one party must be seen to dominate the will of another.

Burden of proof

The burden of proof lies in the

person who claims that the contract was caused by coercion. The plaintiff is responsible to

prove in the coercion.

The burden of proof lies in the

person who is in the dominant position. The defendant is responsible to prove in the contract

caused by undue influence.

Criminality Coercion is a crime. Undue influence is not a crime.

Misrepresentation

To misrepresent means to give false account of something. When a party to a contract gives false

statements to another party and the party is induced by that false statement to enter into a contract, it is called misrepresentation. Representation means a statement of fact made by one

party to another. If the facts or statements turn to be false, they are called misrepresentation. Misrepresentation is incorrect or false statement but the falsity is not due to deceive or defraud the other party. Such a statement is made incorrectly.

Contract is not a one time job. We need to make a series of negotiations to enter into a contract.

So we make different types of statement to another party to conclude a contract. We have to make the statements before the contract. If we do not make presentation before the other party, the contract may not be concluded. We have to convince another party and we need to be sure

regarding certain matters. Before the contract, parties may make advertisement. It is also a kind of representation. The advertisement provides certain statements regarding the commodity.

Advertisement is just an invitation to offer. If they are falsely presented to the parties, they are not misrepresentations. However, they may form misrepresentation if they are presented in the form of offer as in the case of Carlill v. Carbolic. There may be negotiations before signing on

the contract. If the negotiations are falsely presented, it amounts to misrepresentation. Remedy may be available for the misrepresentation made during the time of negotiation. False statement

may be the part of the contract. They may contain in the form of terms and conditions of the contract. If the terms and conditions of the contract are false, there is remedy available in the breach of contract. The innocent party may rescind the contract claiming the compensation in the

breach of contract.

It may be made before or at the time of making the contract. It may relate to some matter essential to the formation of the contract. If one party makes some statements with an intention

to induce the other party to enter into the contract, it is called representation. And if the party makes wrong statements knowingly or unknowingly, it is called misrepresentation. It may be

expressed by words spoken or written or implied from the acts and conduct of the parties. A presentation when wrongly made, either innocently or intentionally, is termed as misrepresentation. When the misrepresentation is very serious, it turns to be fraud. Fraud begins

with the intentional misrepresentation.

Definition of misrepresentation

Prof. ‘Anson says “Misrepresentation is 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”.

According to section 18 of Indian contract Act, 1872, misrepresentation means the following

three things: a. The positive assertion in a manner not warranted by the information of the person

making it, of that which is not true, though he believes it to be true; or

b. Any breach of duty which, without an intention to deceive, gains an advantage to the person committing it, or any one claiming under him, by misleading another

to his prejudice or to the prejudice of any one claiming under him; or c. 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.

Likewise, section 14 (1) (d) of Nepalese contract Act, 2056 has defined misrepresentation as: “Submission of a false statement on any matter without any reasonable basis of the fact,

misleading a party so as to aggrieve him and inducing mistake about the subject matter of the contract.”

From the above definitions, we can say that if a person makes a statement of fact without any reasonable ground, there is misrepresentation. He must honestly believe it as truth though it is

not true. A says to B that his land produces l00 q of rice. B believes it to be true though he has no ground to believe. Later on he finds the land produces only 75q. This is misrepresentation. Likewise, a statement when made was true but subsequently it became false. The person making

the statement has an obligation to disclose the change in circumstances. If he fails to disclose amounts to misrepresentation. Lastly, to commit a mistake as to the quality or nature of the thing

bargained is misrepresentation. A sold B l00q of wheat stating that no sulphur was used in cultivation of wheat. But he found 5 q of wheat produced by using sulphur. This is also misrepresentation.

The formation of a contract is often preceded by a series of negotiations between the parties.

Some of the statements made may later turn out to be false. The nature of the statement will determine whether remedy is available. A false statement, which is not incorporated into the contract, is known as misrepresentation. A misrepresentation is a false statement, made by one

party, which induces the other to enter into the contract. As a general rule, keeping quiet about something does not amount to misrepresentation. Gestures, smiles and nods can amount to a

statement and false gestures, smiles and nods may be regarded as the misrepresentation.

If someone does not speak, it is not regarded as misrepresentation. However, silence can amount to the misrepresentation if there are certain situations where a failure to speak will amount to an

actionable misrepresentation. They are: a. Where there is a relationship of good faith between the parties, e.g. between the partners.

Every partner has a duty to disclose (give) true accounts and full information regarding all things affecting the firm to any partner. If they remain silent, it amounts to misrepresentation.

b. Where the contract is one of the utmost good faith, e.g. contracts of insurance. When a party makes contract of insurance, it is a duty of the party to disclose about the

merchantability, fitness of the goods and health of the person who is to be insured. If the party knows the defects in the goods and health of the person, does not tell about it to the indemnifier, it constitutes misrepresentation. For example, when you make insurance of

health, you have to present the proof of your good health, if you do not do so because you are suffering from certain disease, it may amount to misrepresentation. You need to

disclose of your health status to the company. c. Where a half-truth is offered. A wants to sell his house to B. To sell his house to B, he

says that Mr. Federick, a rich person of the town is a renter of the house. B believes that

Mr. Federick would offer him a nice rent and agrees to buy the house. But Mr. Federick owed a huge amount of loan and has not been able even to pay him rent for two months.

The contract is voidable induced by misrepresentation because A has told the half-truth only.

d. Where there has been a change in circumstances between the time of negotiations and the

conclusion of the contract. For example, A wished to sell his medical practice to B. He stated correctly that the practice was worth 2000 pound a year. They agreed to purchase

after two months. He fell sick and practice was run by other doctors and ran down to 5 pound a week. He was held liable for misrepresentation due to the failure of informing changes in circumstances.

The misrepresentation must involve a statement of fact. If it involves a statement of law, opinion

or intention, it does not constitutes misrepresentation. A statement of law cannot amount to misrepresentation since everyone is presumed to know the law. A statement of intention will not normally amount to misrepresentation because a representation is a statement about the existing

facts or past events. However, if a person misrepresents what he intends to do in the future, he may be liable for misrepresentation. In Edington v Fitzmaurice (1885), the directors of a

company invited members of the public to lend money to the company. The directors stated that the money would be used to improve the company’s buildings and extend the business. The director’s real intention was to pay off the company’s existing debts. The English court held that

the directors’ statement was a fraudulent misrepresentation. Moreover, a statement of opinion will not normally be actionable as misrepresentation because an opinion is a statement of belief

to present your opinion, you don’t need any proof. Misrepresentation shows that the false statement has induced the person to enter into the contract.

Kinds of misrepresentation

There are three kinds of misrepresentation. a. Fraudulent misrepresentation: Fraudulent misrepresentation is falsification of

statement to defraud others. The main objective of false stamen is to cheat other. So a person will be liable for fraud if he makes fraudulent misrepresentation. It is a

statement, which he knows to be false, or he has no belief in its truth. A person wanted to sell “Khula Manch”. He presents the fake laalpurja (land registration

evidence) to the purchaser. His presentation as an owner of Khula Manch is a fraudulent misrepresentation.

b. Negligent misrepresentation: Where the party negligently makes the presentation of the figures which are false, it is called negligent misrepresentation. In this case, the person making the false statement has no reasonable grounds for believing the

statements to be true. Damages may be awarded either in tort for a negligent misrepresentation.

c. Innocent misrepresentation: Innocent misrepresentation is a type of misrepresentation where the party makes it unknowingly and innocently. It is made without any intention to cheat another party. The main aim of making this type of

misrepresentation is to induce another party to make a contract. An innocent misrepresentation is a false statement made by a person who had reasonable ground

to believe that it was true when it was made. Effects of misrepresentation

If a contract is induced by misrepresentation, it is voidable. The aggrieved party may affirm or rescind the contract. If the innocent party affirms the contract, the contract is as valid as a valid

contract. If he likes to rescind the contract, the court may declare the contract as invalid. The innocent party may claim compensation as well. No claim of damages is available by way of interest or otherwise for expenses incurred. If the aggrieved party had a chance to discover the

truth with his ordinary prudence but he did not use it, the remedy is not available.

Fraud Fraud is a crime of cheating somebody. It includes all acts that are committed by a person with an intention to deceive another person. Fraud may be express or implied. It is expressed if it is

made by words whether spoken or written. It is implied from the acts and the conduct of the parties. The content of fraud may be wide. The main objective of fraud is to cheat another person

in any way. Fraud means a false representation of facts. It must be made intentionally or knowingly by a

party to deceive or cheat another party. For example, A sells a ring to B. He says that it is made of gold whereas in fact the ring is made of brass. This is fraud. So, intention is the main element

for fraud. Definition of fraud

Lord Herschel defines: "Fraud is a false statement made knowingly or without belief in its truth or recklessly or carelessly whether it be true or false”. Fraud is a willful misrepresentation. When

a person discloses a thing falsely with a view to deceiving another, it is called fraud. To deceive means to intentionally mislead somebody and cheat. If it has been done to cheat a person making him to believe that a thing is true which in reality, it is false and thus the contract has been made,

it is called fraud. Section 17 of the Indian contract Act has defined fraud in the following words: “Fraud means

and includes any of the following acts committed by a party to a contract or with his convenience

or by his agent, with intent to deceive or to induce another party thereto or his agent, to enter into contract:

a. The suggestion that a fact is true when it is not true by one who does not believe it to be true.

b. The active concealment of a fact by a person who has knowledge or belief of the fact. c. A promise made without any intention of performing it. d. Any other act fitted to deceive.

e. Any such act or omission as the law specifically declares to be fraudulent. Section 14 (1) (c) of Nepalese Contract Act reads: “If a person or his agent with an intention of

deceiving another person or his agent induces to believe a thing as true, which is not true, conceals actively any subject matter of the contract and does some acts which the Nepalese existing laws specially has declared to be fraudulent, that is regarded to be fraud”.

From the above mentioned definitions, we can state that fraud takes place in the following conditions:

1. Manipulation of the truth: Where a contracting person induces another contracting person to believe a thing as true, which is in reality false, it becomes a fraud. A person of the contract must persuade another person on false thing by making him to believe it as

true. If a thief sells a ring of gold saying that it is his ring, it is a fraud. 2. Concealment of the subject matter of the contract: Fraud also takes place where a

contracting party makes an active concealment of the subject matter of the contract. A gets signature of B which allows him to sell a piece of land registered in the name of B. This is a fraud by concealment of the subject matter. B does not know that he has signed

on the document allowing A to work on his behalf. So, to conceal or hide the subject matter of the contract constitutes the fraud. Another example is where A sells his horse to

B. He does not tell him that the horse cannot run more than an hour. A’s concealing of this fact becomes fraud here.

3. False statement: A false statement begins with lying and when lied intentionally, it is

fraud. If the narrator honestly believes that his statement is true, he cannot be liable in deceit. The suggestion that a fact is true when it is not true by one who does not believe it

to be true constitutes fraud. 4. Active concealment of fact: Fraud takes place where there is an active concealment of a

fact by a person who has knowledge or belief of the fact and knowing that he induces

another party to make a contract. Mere non-disclosure of fact is not fraud if there is no duty to disclose. The principle of caveat emptor or ‘buyer beware' is the general principle

of sale of goods where the seller is not bound to disclose the defects in the goods he is selling. It does not constitute a fraud.

5. A promise made without any intention of performing it: Fraud also takes place when

a man while entering into the contract has no intention to perform his promise. His main intention is to cheat another person. If one takes money with an intention not return them,

it is a fraud. If someone takes your motorbike on rent but does not return it to you, you can charge him for fraud.

6. Any other acts to deceive: Human brain is so fertile that a fraud/imposter may devise

new techniques for defrauding others. So we cannot limit the scope of fraud just by saying this and that is fraud. The definition and nature fraud is quit impossible to say. It

may include all surprise, tricks, cunning, dissembling and other unfair ways that is used to cheat anyone.

7. Any such act or omission as the law specially declares to be fraudulent: If any law has specially declared any act or omission to be fraudulent, they are also fraud. The

existing laws may declare particular acts or omissions as fraud, if anybody commits/omits those acts, it constitutes fraud.

Exceptions of fraud

There are certain things which resemble with fraud but are not regarded as fraud. They are called

the Exceptions of fraud. They do not amount to fraud. They are given below:

A mere expression of opinion: If someone expresses his/her opinion is not a fraud

even if the opinion is wrong. So there is difference between an opinion and fraud.

Deceit without an intention of deceiving: If a person is cheated but you don’t have

any intention to cheat does not amount to fraud. You borrowed Rs. 10,000/- from your friend and said that you will return that money next month. You got some financial problems and lost a huge amount of money and could not return that money

within the said time. This is not a fraud as your intention was not to cheat your friend.

Deceit that does not deceive is: In criminal law, mens rea (intention) and actus

reaus (incident) are essential for a crime. If there is no intention to do something and that something has not happened, it is not regarded as a crime. In fact, both the

intention and incident must have taken place, then only there is the crime taking place. If the fraud does not take place, it is not a fraud even though you wanted to cheat another party.

Deceit caused due to one’s own negligence: If one is cheated by one’s own mistake, it is not fraud. You went to a departmental store to buy a jacket and you saw one and

took it to the cash counter, ordered to pack it for you and paid for the jacket. To your surprise, you found that jacket torn in the arms. Now, you cannot blame the

shopkeeper for the defects and fraud. It is due to your own negligence. The shopkeeper is not bound to return the torn jacket. Likewise, the principle of caveat emptor demands the buyer to test the goods he is buying. The buyer himself knows

the choice and fitness of the goods for him/herself. If buyer does negligence in buying goods, he cannot sue the seller on the ground of fraud.

Mere commendation of goods: One is free to praise his goods. If one is not allowed to commend his goods, it is difficult to sell the goods. So if the vendor sells goods saying that his goods are the best in the world when in fact the goods are the worst, it

does not constitutes the fraud. Silence and fraud

When a person speaks false and cheats another, it is fraud. It is very pertinent to explore whether there is fraud when one does not speak. So the question naturally arises, can silence be fraudulent. There are certain situations, where silence can be fraud. Let’s make certain discussion

on this question.

As a general rule mere silence is not fraud. If there is no duty imposed by law to

disclose all material facts regarding the contract, silence does not amount to fraud. So the general rule is that fraud takes place by speaking untruth. You must tell truth. When

one speaks false with an intention to cheating other, it is fraud. But this rule is not applicable in all situations. Let’s find another principle.

Silence is fraud if the circumstances of the case are such that regard being had

them ‘it is the duty of the person to speak’: According to the explanation to section

17 of the Indian contract Act, where the law imposes a duty to disclose all material fact regarding the contract, the person has to speak or disclose them before another party. If

he does not speak, his silence becomes fraud. These contracts are of utmost good faith and confidence. They are as follows:

a. In the case of fiduciary relationship: Fiduciary relationships include the relationship between the principal and agent, guardian and ward, trustee and beneficiary, parents and children, teacher and student etc. Where the parties have a fiduciary relation to each

other, the person who is entrusted to work has a duty to act with utmost good faith. These relationships are of good faith and trust. Therefore, they must make a full disclosure of

all material facts concerning the transaction known to him. If anybody does not make disclosure of the material fact, it is the active concealment, so it amounts to fraud.

b. In the case of insurance: In the case of contracts of marine, fire and life insurance, the

indemnity holder is supposed to disclose all material facts before the indemnifier. A concealment or misstatement of a material fact will render the contract void due to fraud.

c. In the case of betrothal: Both parties to a contract of marriage engagement must disclose every material fact regarding to each other. Otherwise the other party can break off the engagement. If anything later on found out that was lied, it renders the marriage

engagement void. d. In the case of family settlements: Family matters are generally settled by the head of the

family or the person entrusted to handle the family arrangements. When the Contracts of family settlements and arrangements are made, they need to be communicated to every family member. If there is no full disclosure of material facts within the knowledge of the

parties to such contracts, such a contract is not binding if either party has been misled by the concealment of material facts.

e. In the case of Share allotments: While demanding the subscription of shares from the public, the promoters and directors of a company must give accurate information regarding to the status of the company. They are required to disclose all information

regarding the company with accuracy, if they do not provide the accurate information, they are committing fraud. If they demand subscription of shares for one thing and make

investment of the money into another, it also amounts to fraud.

Silence is fraud where the circumstances are such that ‘silence is in itself,

equivalent to speech’: According to explanation of section 17 of the Indian contract Act, another situation where silence can be fraud is where silence itself is equal to speech. A says to B ‘if you do not deny, I shall assume that the bike is on condition’. B

does not speak anything. His silence is equivalent to speech. If there is any defect found in the bike, the contract of selling bike is void on the ground of fraud.

Effects of fraud

If a contract is caused by fraud, there is no free consent present in the formation of the contract. The contract which lacks free consent is either voidable or void. The contract cause by fraud is

voidable at the option of the innocent party. Fraud is a serious type of crime. It not only makes the contract voidable, but also it may affect the people at large. There may be scandals on the swindle. It affects not the contracting party itself but also it affects the society. It is the concern

of the state itself. However, the injured party can rescind or cancel the contract caused by fraud. The innocent party may avoid the contract. If the innocent party remains quit, the contract caused

by fraud is valid and if the party goes to the court, the court may declare the contract so caused as void. Therefore, the contract caused by fraud is voidable. It does not itself is void. The

aggrieved party may also claim for the compensation for the damages he suffered from the contract. He may ask the other party to put him in the same position where he would have been if

the representation made had been true.

Difference between the misrepresentation and fraud

Subjects Misrepresentation Fraud

Meaning It means to present something falsely to make another party to conclude a contract. The

falsity may arise from knowledge or ignorance.

It means falsification of statement with a view to cheat another party. Fraud means

cheat, deceive, imposter another party.

Intention It is an innocent wrong. There

is no intention to deceive. The person making the false statement believes to be true.

The intention in misrepresentation is to induce

another party to make a contract.

It implies an intention to

deceive, hence it is intentional or willful wrong. The intention in fraud is not to

make a contract but to cheat or deceive another party.

Claim for damages It gives the innocent party to rescind the contract and there

can be no suit for damages.

It is a civil and criminal wrong which entitles a party to claim

damages in addition to the right to rescind the contract.

Mistake

Mistake is an erroneous belief about something. There are two kinds of mistake. They are mistake of law and mistake of fact.

1. Mistake of law: The universal principle of law is that the ignorance of law is no excuse. Mistake of law, therefore, is not excused and it does not let the party to avoid the

contract. Mistake of law may also be the mistake of national law and mistake of foreign law. If there is the mistake of national law, the principle of ignorance of law is no excuse is applied. If the parties make the mistake of national law, there is no contract avoided.

The contract remains as valid. If there is the mistake of foreign law, it is regarded as the mistake of fact and if both of the parties are mistaken regarding the foreign law, the

contract is void on the ground of mistake. 2. Mistake of fact: Mistake of fact is mistake in actual course of events or information. It is

also of two kinds. They are bilateral mistake and unilateral mistake. They are described

below: a. Bilateral mistake: Bilateral means two sided. When the mistake is both sided, it is called

bilateral mistake. While making the contract if the parties to contract misunderstand each other and are at cross-purposes, there is a bilateral mistake. There is no offer and acceptance. Each party understands the contract in their own way. As they are thinking

differently, there is no agreement at all and it is void ab initio. The following conditions must be fulfilled to declare the contract void ab initio:

i. Both of the parties must be under a mistake: The mistake must be mutual or reciprocal. Both of the parties must have thought differently for concluding the contract.

The first condition for the contract to be caused by mistake is that both parties misunderstand each other. For example, A wanted to sell his goods to Ram Bahadur and

Ram Bahadur wanted to buy 10 q. of rice. A thought Ram Bahadur from Palpa whereas he was from Parbat. Ram Bahadur thought the goods meant rice in fact it was wheat. Both of the parties are at cross purposes, so there is a bilateral mistake. The contract is

void ab initio. ii. Mistake must relate to some fact and not to judgment or opinion. If A buys a

motorcar thinking that it worth one lack and pays for it. Later on he came to know that the bike in fact cost 60,000/- only. The contract is valid. This is the case of judgment where the contract is valid. So, the contract must belong to some facts, not to judgement

of something. iii. The fact must be essential: The fact must be able to affect the validity of the contract.

The fact must refer to the conditions contained in the contract. The mistakes which may be fall under the condition may be put into the following heads:

a) Mistake as to the subject matter: The contract is void if the subject matter is no more in

existence and it never was in existence. If the parties to the contract make mistakes as to the subject matter of the contract, the contract is void. The subject matter is so essential

part of the contract that parties must not make mistake as to the subject matter of the contract. A agrees to buy the horse of B. The horse dies. There is no existence of the subject matter for which the agreement was done. The contract is Void.

b) Mistake as to the identity of the subject matter: The parties may be mistaken as to the identity of the subject matter. If a seller makes an offer in respect of one thing and the

buyer accepts but is thinking of something else, the parties are talking at cross-purposes and there is no contract. One party had one thing in mind and the other had another situation makes the contract void. Identity of the subject matter is also constitutes a

condition to the contract. c) Mistake as to the title (ownership) of the subject matter: The title of the subject

matter of the contract is also very important part of the contract. If there is mistake regarding to the ownership of the subject matter, the contract is void.

d) Mistake as to the quantity of the subject matter: Quantity may be a condition to the

contract. If both of the parties make mistake as to the quantity of the subject matter, the agreement is void. For example, A wanted to buy three piece of jackets from B. B is a

wholesaler and sells only at least fifty pieces of jackets. A asked B for the price of the jacket. B sent the price to A. happy with the price A demanded the three pieces of the Jacket from B. B sent 50 pieces of jacket to A. This contract is void on the basis of

mistake as to the quantity of the subject matter. A is obliged to pay for the three jackets only.

e) Mistake as to the quality of the subject matter: Quality is also essential part of the contract. If the parties make mistakes as to the quality of the subject matter, the contract is void. A thought of selling a carthorse but B thought it as a racehorse. The quality of the

horse is mistaken by both of the parties and the contract is void in this situation. b. Unilateral mistake: Unilateral mistake is one sided mistake. In this type of mistake only

one of the parties is mistaken as to a matter of fact. In the case of unilateral mistake, a contract remains valid unless the mistake is caused by coercion, undue influence,

misrepresentation or fraud. The contract is voidable at the option of the aggrieved party. There are three kinds of consequences of the contract made by unilateral mistake.

i. If a man due to his own negligence or lack of reasonable care does not ascertain what he is contracting about, he cannot avoid the contract. The contract remains valid if there is

lack of judgment or mistake is made by one’s own negligence. ii. If the unilateral mistake is caused by coercion, undue influence, misrepresentation or

fraud, the contract is voidable at the option of the innocent party.

iii. In the following two cases, the contract becomes void; a) Mistake as to the identity of person contracted with, where such identity is

important. If one of the parties makes a mistake about the identity of the person he is contracting with, this may invalidate the contract. Where the identity of the party contracted with is material to the contract, a mistake will result in the

contract being void. b) Mistake as to the nature and character of a written document: as a general rule, a

person who signs a document is assumed to have read, understood and agreed to its contents. Exceptionally, a person may be able to plead non est factum i.e. ‘it is not my deed’. Three elements must be present if the contract is to be avoided:

first, the signature must have been induced by fraud, second, the document signed must be fundamentally different from that thought to be signed, and lastly, the

signer must not have acted negligently.

Contingent contract

Contingent means conditional, situational or accidental. Contract means an agreement. So in

simple sense, conditional or accidental agreements enforceable by law are contingent contracts. Contingent contracts are those contracts the performance of which depends on some conditions or accidents. When we make contracts on certain conditional things, that thing has to happen. 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. Thus it is a contract, the performance of which depends upon,

the happening or non-happening of an uncertain event, collateral to such contract. A contracts with B for Rs. 2,00,000/- doing insurance of his house if burnt and agrees to pay Rs. 1000 Annual premium. This is a contingent contract because the contract comes into force if B’s house

is burnt. So burning of house is a condition or contingent to this contract.

Nepalese contract Act has not defined the contingent contract. However, certain rules regarding to indemnity and guarantee have been provided in this Act. Section 31 of the Indian contract Act has defined the contingent contract in the following way: “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”. So, the contingent contract may be made on non-happening of some event as well. The

contingent contracts are made on uncertain future event, not on the certain one. Essentials of a Contingent Contract

1. The performance of a contingent contract is made dependent upon the happening or non-

happening of some event. 2. The event on which the performance is made to depend, is an event collateral to the contract,

i.e., it does not form part of the reciprocal promises which constitute the contract.

3. The contingent event should not be the mere will of the promisor. For example, A promises to pay B Rs. 1,000, if he so chooses, it is not a contingent contract. However, where the event is

within the promisor’s will but not merely his will, it may be a contingent contract. For example, A promises to pay B Rs. 1,000, if A left Delhi for Bombay, it is a contingent contract, because

going to Bombay is an event no doubt within A’s will, but is not merely his will. 4. Any ordinary contract can be changed into a contingent contract, if its performance is made dependent upon the happening or non-happening of an uncertain event, collateral to such

contract. For example, A promises to pay 2,000 to B if he is elected as a president of a particular association. A advances loan to B as C guarantees the loan. C guarantees it and the transaction is

so made. This is a contingent contract because of C's guarantee. Contacts of insurances, indemnity and guarantee are examples of contingent contract. In the case of contingent contract the uncertain event must be collateral to such contracts. In simple words, the collateral event is

one, which does not form part of consideration of the contract, arid is independent of it. For example, A contracts to pay 50,000/- to B, a contractor, for constructing a building provided the

construction is approved by an architect. It is a contingent contract. There are two elements in the contingent contract. First is that the performance of such a contract depends on the happening or non-happening of some future uncertain event. And secondly, the future event is collateral i.e.

incidental to the contract. Rule regarding enforcement of the contingent contract

There are certain rules regarding to the contingent contract. They are given below: 1. Contingent contracts to do or not to do anything, if an uncertain future event

happens, cannot be enforced by law unless and until that event has happened. If

such event becomes impossible, such contract becomes void. (Section 32 of Indian

contract Act). For example, A makes a contract with B to buy B’s horse if A survives C.

This contract cannot be enforced by law unless and until C dies in A’s life-time. A makes a contract with B to sell a horse to B at a specified price if C, to whom the horse has been offered, refuses to buy him. The contract cannot he enforced by law unless and until C

refuses to buy the horse. A contracts to pay B a sum of money when B marries C. C dies without being married to B. The contract becomes void. A makes a contract with B to

buy his house. B’ had already made contract with C to sell that house. B says that if C did not buy the house, he would sell it to him. The contract made between A and B is not enforceable until and unless C did not buy the house. If the house was burnt, the contract

between A and, B becomes void. 2. Contingent contracts, if an uncertain future event does not happen, can be enforced

when the happening of that event becomes impossible and not before (section 33 of

ICA). A agrees to pay 10,000/- to B if the ship does not return. The ship sinks. B can get that amount. The contract can be enforced when the ship sinks.

3. Contingent contracts, if a specified uncertain event happens within a fixed time,

becomes void, if, at the expiration of the time fixed such event has not happened or

if, before the time fixed, such event becomes impossible (sec. 34). A promises to pay a sum of money as loan to B if a certain ship returns, within a year. The contract is enforced if it returns within a year. A agrees to pay B a sum of money if B marries C. C

marries D. The marriage of B to C must now be considered impossible, although it is possible that D may die and C may afterwards marry B.

4. Contingent contracts, if a specified uncertain event does not happen within a fixed

time, may be enforced by law when the time fixed has expired and such event has

not happened, or before the time fixed has expired if it becomes certain that such

event will not happen (Sec. 35). A promises to pay B a sum of money as insurance

claim if a certain ship does not return within a year. The contract may be enforced if the ship does not return within the year, or is burnt within the year.

5. Contingent agreements, if an impossible event happens, are void, whether the

impossibility of the event is known or not to the parties to the agreement at the time

when it is made (sec. 36). A agrees to’ pay B Rs. 1,000/- as a loan, if B will marry A’s

daughter C. C was dead at the time of agreement. The agreement is void. 6. Event linked with future conduct of a living person: When a contingent contract is

made on the future conduct of a living parson, no liability under it shall be considered to have emerged if such person does any work in such a manner as to perform that work or in such a manner that the work can be performed. For example, A agrees to pay B Rs.

10,000/- if B marries C. C marries D. The marriage between B and C is impossible. Conduct of a person cannot be controlled by making any agreement at present. If you say

someone to write a proposal for the research and you said you would chose her as your director of the project when the proposal is accepted. She wrote a proposal and you were able to file the proposal in the concerned office. The office selected your proposal. Now

even if you made the agreement to appoint the director of that project. The agreement cannot be enforced by it is made to control the future of conduct of a person.

Discharge of contract

Modes of termination of contract

Meaning of termination of contract

In simple words, to terminate is to come to an end or to bring something to an end. Thus, to terminate a contract means to bring a contract to an end. When we are saying about the termination of contract, we are saying that we are bringing contractual obligations to the end of

the contract. Certain rights and obligations of the contracting parties always back up contracts. Termination of contract extinguishes those rights and obligations arising out of contract. It means

that the rights and duties of the contracting parties are discharged. This means that parties are no longer bound by the terms and conditions of the contract when the termination of contract takes place. The contract begins with offer and acceptance whereas ends with the termination of the

contract. So, the termination of contract is also known as the discharge of the contract. Parties of the contract are no longer liable for what they agreed to do, therefore, it is the discharge of the

contract. The contract may come to an end and parties are discharged from their contractual obligations in

the following ways: by performance of contract, by an agreement, by frustration, by breach of contract and by operation of law. Modes of termination of contract are stated in their respective

headings as follows: 1. Termination of contract by performance: The safest and best way of termination of

contract is by performance of contract. When the contracting parties fulfill their side of

promises, they are discharged from their obligation and the contract goes terminated itself. But if one of the parties does something less than or different from that what he agreed to do,

he is not discharged from the contract. The other party who fulfills his sides of promises gets

certain rights against the party who violates the contract. Let’s see the performance of contract in detail.

Meaning and importance of performance of contract

In simple words, performance of contract means carrying out or executing the terms and conditions contained in the contract. It is a fulfillment of promises made by the parties to each

other. The fulfillment takes place when the parties take actions for their promises to carry out. The achievements from the contracts are possible only when the parities perform the contract.

The parties must carry out what they agreed under their contract. One cannot do less or different from that which he agreed to do. This means he is bound by what they agreed on or promised to

do. When they accomplish the purpose of their agreement, it is known as the performance of the contract:

Performance of contract means fulfillment of respective contractual obligations made according to the terms and conditions of the contract. Parties are no more bound by the terms and

conditions of the contract after performing it. Section 74 of the Nepalese Contract Act, 2056, says that each party of the contract must perform their liabilities under contract. After completion

of object or act under contract it is ispo facto terminated. Contracts must be possible to perform from the beginning. Impossibility of performance from the

beginning leads a contract to ineffectiveness and the contract is void ab initio. The safest and best way of terminating or coming to an end of a contract is by the performance of contract.

There are many advantages to the parties of the contract when they perform the contract. After they perform the contract, they are discharged from their contractual liability. Importance of performance of the contract can be stated as put below.

- By fulfilling their contractual obligations, they remain happy. - Performance of contract encourages them to initiate further contracts.

- They grow trustworthy with each other. - They save themselves from any kind of disputes, which may save their time, money

and resources.

- Purpose of making contracts is easily accomplished by performance of contract. - Good relationship between the contracting parties continues through the performance.

Rules regarding to performance of contract

A contract creates obligations. ‘Performance of a Contract’ means the carrying out of these obligations. Section 37 of ICA requires that the parties to a contract must either perform or offer

to perform their respective promises, unless such performance is dispensed with or excused under the provisions of the Contract Act, or of any other law. Sections from 74 to 81 of NCA

have made provisions regarding to the performance of the contract.

1. Performance must be unconditional one: The performance of contract must be exact

and as per the terms and conditions contained in the contract. A party cannot attach further terms later on to perform the contract. He has to carry out in the same manner as

prescribed in the contract itself. Contracts are meant to perform. So, any terms and

conditions attached when the turn to perform them comes, makes the contract conditional. The first rule of performance is that it must be unconditional.

2. Offer to perform or attempted performance: An actual performance is where each party fulfills their respective contractual liabilities under the contract. After fulfillment,

both of the parties are discharged from their liabilities. The contract automatically comes to an end.

If the nature of contract requires that one party has carried out his side of obligation and then another party has to fulfill his promises, the doctrine of substantial performance is attracted. If

the first party has substantially carried out the terms of the contract, he may recover for the work he has done. However, another party can show defects of performance.

Attempted performance is also known as a tender of performance. This is an offer made to the other party to perform his obligation under the contract. The tendering party gets rights to sue in

the court or have a specific performance. The tender may be of goods, services or money. It may happen that the promisor offers performance of his obligation under the contract at the

proper time and place but the promisee refuses to accept the performance. This is called as ‘Tender’ or ‘attempted performance’. According to Section 38 of ICA, if a valid tender is made

and is not accepted by the promisee, the promisor shall not be responsible for nonperformance nor shall he lose his rights under the contract. A tender or offer of performance to be valid must satisfy the following conditions:

1. It must be unconditional

A conditional offer of performance is not valid and the promisor shall not be relieved thereby. A

‘tender’ is conditional where it is not in accordance with the terms of the contract. For instance, X offers to Y the principal amount of the loan. This is not a valid tender since the whole amount of principal and interest is not offered. Likewise, X a debtor, offers to pay Y the debt due by

installments and tenders the first installment. This is not a valid tender10 2. It must be made at proper time and place, and under such circumstances that the

person to whom it is made may have a reasonable opportunity of ascertaining that the person offering to perform is able and willing there and then to do the whole of what he is bound by his promise to do.

For instance, X offers by post to pay Y the amount he owes. This is not a valid tender, as X is not able ‘there and then’ to pay. Likewise, X offers the goods contracted to Y at 1 A.M. This is not a

valid tender unless it was so agreed. As to what is proper time and place, depends upon the intention of the parties and the provisions of Section 46 to 50 which are discussed on p. 86.

3. Since the tender is an offer to deliver anything to the promisee, the promisee must have a reasonable opportunity to see that the thing offered is the thing contracted

for. For example, A contracts to deliver B at his warehouse, on 1st March 1989, 100 bales of cotton of a particular quality. A must bring the cotton to B’s warehouse on the appointed day, under such circumstances that B may have a

reasonable opportunity of satisfying himself that the thing offered is cotton of the

10 Behari Lal v. Ram Ghulam, 24 All. 461.

quality contracted for, and that there are 100 bales. Notice that an offer to one of several joint promisees has the same Legal effect as an offer to all of them.

If one of the parties only partially carries out his side of the contract, but the other party excising

a genuine choice, accepts the benefit of the partial performance, he has to pay for the benefit received. Sometimes performance may be prevented by the promises. The other party can bring an action to recover for the work he has done.

Divisible contracts: Some contracts are said to be entire. This means that a party is not entitled

to payment until he has completely performed his part of the contract. Other contracts may be divisible, i.e. the obligations can be split up into stages. Part Payments can be claimed for each completed stage. Contracts relating to construction are divisible one. A contract to build a house

usually provides for payment to be made in three stages, after the foundations have been laid down, when the roof goes on and completion of the house. The performance of divisible contract

is always attempted performance. It cannot be completed at a single stage. 3. Time for and method of performance of contract: The general rule is that the time and

manner for performance of contract must be precisely written down in the contract itself.

If the time and manner of performance have been stipulated in the contract, the performance should take place according to the terms of the contract. If the contract fails

to stipulate time and manner in the contract it should be performed within the reasonable time according to section 71 of the NCA.

4. Place for performance of contract: Section 72 of Nepalese Contract Act explains the

place of performance of the contract. When a promise is to be performed without application by the promisee and no place is fixed for its performance, the promisor must

apply to the promisee to appoint a reasonable place for the performance of the promise, and perform it at such place.

If the place of performance is fixed in the contract it should be performed on the same

place.

Where the contract is silent about the place it should be performed according to the

customs and practices prevalent. It means where certain type of acts can be performed at certain place the performance should take place at that place.

If the contract is delivery of goods, the location of the goods should be the place of performance of contract.

If the above-mentioned conditions do not exist the parties can decide the place of performance with mutual consent.

The performance of any promise may be made in any manner, or at any time which the promisee prescribes or sanctions.

5. Person to perform the contract: There are certain rules regarding to person to perform

the contract. They are as follows: a. Performance by the parties only: The principle of privity contract is applicable

here. The principle of privity of contract demands that the parties who make the contract only can execute the contract. A stranger to the party cannot ask for the performance of the contract. This usually happens in cases where personal skills,

qualification, and interest is involved. For instance contracts to paint, sign or marriage cannot be assigned to anybody. They must be carried out by the person

who makes it. In these cases, the rule is that the contract dies with the death of the contracting party.

b. Performance by the agent: If in a contract where personal skill of the promisor is not involved or the contract does not state it is to be performed by the prormisor

only, it can be performed by any person assigned by the promisor. He may appoint an agent or any other person for that. The contract performed by such person is deemed to be performed by the principal himself according to the law of

agency. c. Performance by the Legal heir: Contractual liabilities and rights are transferred

to the legal heirs except for the contract of personal capacity. Legal heirs are successors of the contracting parties. If the performance is done by the legal heirs, it is also valid one. Beneficiary can also demand for the performance of the

contract. Contracts may need to be performed in an order. If the order is fixed in the contract itself it

should be performed in that order. If it is not mentioned in the contract and the question of the order of performance comes to the front it should be decided, as the nature of the contract requires. Parties involved in the contract have a duty to provide facilities for performance of

contract.

6. Performance of joint promises

Joint promises are those promises whereby the contract involves more than two persons in one or both sides. Joint promises may take any of the following shapes:

e. Where several joint promisors make a promise with a single promisee e.g. A, B, C jointly promise to pay 3 lacks to D.

f. Where a single promiser makes a promise with several joint promisees, e.g. A promises to pay 3 lacks to B, C & D.

g. Where several joint promisors make a promise with several joint promisees e.g. A, B &

C promise to pay 3 lacks to M, N & O.

a. Who can demand performance of joint promises?

If the contract solves the problem of performance, it should be according to the terms of the contract. If the not, when a promise is made to several persons jointly, the right to claim

performance lies with all the promisees jointly. A single promisee cannot demand performance. In case of the death of any promisee, the right devolves to the legal representatives (heirs) of the

diseased promisee. b. By whom joint promises most be performed? Following rules are applicable:

1) All promisors:

If the contract itself has stated something about it (performance), all of the promisors have to perform accordingly. If the contract does not state anything, all such promisors must jointly

fulfill the promise. In case of the death or insanity of any promisor, his legal representative has to fulfill the promise. But the contracts involving personal skills (e.g. to paint a picture) cannot be performed by legal heirs.

2) Any one or more of joint promisors:

If there is no contract, the promisee may compel any or more of the promisors to perform the

joint promises. If the liability has already been fixed, then he can compel to a promisor only up to his liability.

3) Equal contribution between joint promisors:

If one of the several joint promisors is made to perform the whole contract he may demand equal

contribution from the promisors. 4) Sharing of loss:

If one of the joint promisors makes a default in making contribution, if any, the remaining joint promisors must bear the loss arising from such debtors in equal shares.

5) Release of one of the joint promisors:

If one promisor fulfills his part of liability, he is discharged from liability but other promisors remain to fulfill the respective liabilities.

Contracts which need not be performed

A contract need not be performed in the following conditions:

1. If the parties mutually agree to substitute the original contract by a

new one or to rescind or alter it11. For example, A owes money to B

under a contract. It is agreed between A, B and C that B shall henceforth accept C as his debtor, instead of A. The old debt of A to B is at an end,

and a new debt from C to B has been contracted. 2. If the promisee dispenses with or remits, wholly or in part the performance

of the promise made to him or extends the time for such performance or accepts any satisfaction for it12. A promises to paint a picture for B. B afterwards forbids him to do so. A is no longer bound to perform the

promise. A owes B Rs. 5,000. C pays to B Rs. 1,000 and B accepts them, in satisfaction of his claim on A. This payment is a discharge of the whole

claim. 3. If the person, at whose option the contract is voidable, rescinds it13. 4. If the promisee neglects or refuses to afford the promisor reasonable

facilities for the performance of his promise14. A contracts with B to repair B’s house. B neglects or refuses to point out to A the places in which his

house requires repair. A need not perform.

Performance of reciprocal promises15 Reciprocal promise means a promise in return for a promise. Thus, where a contract consists of promise by one party (to do or not to do something in future) in consideration of a similar

promise by other party, it will be called a case of reciprocal promises. Reciprocal promises maybe divided into three groups:

a. Mutual and Dependent, b. Mutual and Independent, and c. Mutual and Concurrent.

a. Mutual and dependent: In such a case the performance of one party depends upon the prior performance of the other party. Thus, if the promisor who must perform, fails to

perform it, he cannot claim the performance of the reciprocal promise. On the other hand,

11 Section 62 of the Indian Contract Act, 1872. 12 Section 63, ibid. 13 Section 64, id. 14 Section 67,id. 15 See, sections 51 to 54 and section 57, id.

he must make compensation to the other party to the contract for any loss which such other party may sustain by the nonperformance of the contract. For instance, A contracts

with B to execute certain builder’s work for a fixed price, B supplying the necessary timber for the work. B refuses to furnish any timber and the work cannot be executed. A

need not execute the work and B is bound to make compensation to A for any loss caused to him by the non-performance of the contract. Likewise, A promises B to sell him 100 bales of merchandise, to be delivered next day and B promises A to pay for them within a

month. A does not deliver according to his promise. B’s promise to pay need not be performed, and A must make compensation.

b. Mutual and independent: In such cases, each party must perform his promise without waiting for the performance or readiness to perform on the part of the other. For example, X promises Y to deliver him goods on 10th July and Y in turn promises to pay the price

on 6th July. Y’s paying the price is independent of X’s delivering the goods and even if Y does not pay the price on 6th July, X must deliver the goods, on 10th July. He can of

course, sue Y for compensation. c. Mutual and concurrent: In such cases the promises have to be simultaneously performed.

According to Section 51, when a contract consists of reciprocal promises to be

simultaneously performed, no promisor need perform his promise unless the promisee is ready and willing to perform his reciprocal promise. For example, A and B contract that

A shall deliver goods to B to be paid by instilments, the first installment to be paid on delivery. A need not deliver, unless B is ready and willing to pay for the goods on delivery. And B need not pay for the goods unless A is ready and willing to deliver them

on payment. Likewise, A and B contract that A shall deliver goods to B at a price to be paid for by B on delivery. A need not deliver, unless B is ready and willing to pay the

first installment on delivery. And B need not pay the first installment, unless A is ready and willing to deliver the goods on payment of the first installment.

d. Reciprocal promises to do things legal and also other things illegal: Where persons

reciprocally promise, firstly, to do certain things which are legal and secondly, under specified circumstances, to do certain things which are illegal, the first set of promises is

a contract but second is a void agreement. For example, A and B agree that A shall sell B a house for Rs. 10,000 but that if B uses it as a gambling house, he shall pay A 50,000 rupees for it. The first set of reciprocal promises, namely, to sell the house and pay

10,000 rupees for it is a contract. The second set is for unlawful object, that B may use the house as a gambling house and is a void agreement.

2. Termination of contract by an agreement: Contract itself is an agreement, parties agree

to do or not to do something. If they again agree to terminate the contract, they can do it. It

doesn’t matter where the performance of the contract has reached. The parties may have agreed in their original contract that it should end automatically with the happening of

some event or after a fixed period of time. The agreement may have included a term allowing either party to terminate the contract by giving notice. Either the employer or employee giving reasonable notice to the other, for example, can bring a contract of

employment to an end. Employer must consider the rules about unfair dismissal and redundancy. A contract may be discharged by the execution of a separate agreement. The

new agreement will only discharge the old contract if it possesses all the characteristics of a

valid contract. There may be several ways that the parties agree to terminate the contract but the recognized ways are put below:

1. Novation: Novation of contract means substitution of the old contract or change of parties in the contract. In both of the situations, the contracting parties are entitled to a

new status in the contract and the original contract gets terminated. The parties are discharged from the obligations arising out of the original contract. The existing parties may include a new party or one of the existing parties may be excluded from the contract.

Change of the parties is a novation of the contract. But consent of the third person and the existing party is a must. Not breach but the substitution of the old contract discharges the

parties from obligations through novation. 2. Rescission or cancellation: The contracting parties may agree to quit the contract before

the date of performance. This is known as rescission or cancellation of contract. The

abandonment of promises is cancellation for each party. In novation a new one substitutes the old contract but in rescission all the rights and liabilities under the old contract come

to an end without a new contract. The cancellation of old contract discharges both of the parties from performance.

3. Alteration: Alteration means amendment or change in the existing contract. If there is a

material alteration, the alteration becomes effective. The parties are discharged from performing the previous provisions contained in the contract. In novation new contract

substitutes the old one but in alteration the old contract remains effective only material part of it is altered.

4. Remission: Remission means making less difficult or weakening. The party who has

right to demand performance can insist on performance or he may waive his right of performance or accept any other satisfaction for performance. He may extend time for

performance. A has to recover Rs.1000/- from B but accepts only Rs.500/- and excuses him of the rest of the amount. This is an example of remission. Remission discharges the party to the extent of release.

5. Waiver: Waiver is the abandonment of right that everyone is at liberty to waive. A waiver is nothing else than a release. Total discount on the liability of the contract is

known as waiver. 3. Termination of contract by frustration

Frustration means impossibility. Contracts cannot be made on impossibility. They are void from the beginning if made. But what where initially it is perfectly possible to carry out the contract,

and but later on a change in circumstances occurs making it impossible to carry out the agreement? The contract comes to be terminated when the subsequent impossibility arises. Therefore, subsequent impossibility renders the contract terminated and the parties are released

from their contractual obligations. This is also one of the modes of termination of contract.

Until the 19th century, the rule was that the parties were under an absolute duty to perform their contractual obligations. A person was not excused simply because outside events had made performance impossible. This rule brought injustice to the parties. Therefore, for the first time in

England this rule was softened by the principle of frustration in the case of Taylor v. Caldwell (1863). The courts in England recognized an exception to the rule about absolute contracts under

the doctrine of frustration. If performance of the contract is prevented by the events beyond the control of the parties, the contract is terminated and the parties discharged from their obligations.

Originated in England, this principle was adopted as the principle of supervening impossibility in

other countries including Nepal. Sometimes, this principle is termed as the doctrine of subsequent impossibility (DOSI) and sometimes as post contractual impossibility. Nepal has also

adopted this principle through Nepalese Contract Act, 2056 as the principle of fundamental changes in circumstances. Section 79 of NCA has embodied this principle and states that the parties are not bound to perform the contract where there is fundamental change in

circumstances.

Prof. S.W. Anson says that a change of circumstance renders the contract legally or physically impossible to perform. Likewise, Mr. G. H. Treitel opines that under the doctrine of frustration a contract may be discharged if after its formation events occur making its performance impossible

or illegal. There are basically three circumstances where the doctrine of frustration is applicable.

Physical impossibility: This is where someone or something necessary to carry out the contract is not available. In the case of Taylor v. Caldwell the plaintiff had hired the Surry Gardens and music hall for a series of concerts. However, after making the agreement and before the date of

first performance, the hall was burnt by fire. It was held that the contract was discharged and parties released from their obligations. If the presence of a particular person is necessary for the

execution of the contract, the death of that person will discharge the contract. Frustration may also apply if a party is unavailable because of illness, internment or imprisonment. Supervening illegality: A subsequent change in the law or circumstances may make

performance of the contract illegal. An import/export contract will be illegal if war breaks out with the country of destination. The parties will be discharged from their contractual obligation

as the contract goes terminated. At the time of making contract for example supplying timber was legal and later on the government changed the law making it illegal. The contract cannot be enforced due to subsequent impossibility.

Foundations of the contract destroyed: The parties may have their contract on the basis of some forthcoming events. If the event fails to take place and, as a result, the main purpose of the

contract cannot be achieved, the doctrine of frustration will apply. In the case of Krill v. Henry (1903) Henry hires a room overlooking the route of Edward VII’s coronation possession. The possession was cancelled. The court held that the contract had been frustrated. A contract will

only be frustrated if the change in circumstances has had a substantial effect on the main purpose of the contract. The fact that it has become more difficult or expensive to carry out the contract

will not excuse the parties. This is not applicable in the case of commercial impossibility. According to Nepalese Contract Act, 2056, the principle of supervening impossibility is

applicable in the following conditions: 1. Destruction of the subject-matter: According to section 79(2c) when, without any fault

of either party, the subject matter of the contract essential for performance is destroyed, the contract comes to an end.

2. Death or permanent incapacity: According to section 79(2) (d), the death or permanent

incapacity of the party terminates the contract. This happens where the contract involves the personal efficiency, skill or qualification or talents of a person. The contract gets

terminated as soon as the person dies or turns to be insane.

3. Change in law: According to 79(2)(a), if there is the change in law or by the order of government the work to be performed under the contract becomes illegal; the contract

should not be performed. Performance of such contract may be punishable by law. 4. Change of circumstances: According to section 79, where the circumstances prevalent

at the time of contract entirely change due to any or more events before or at the time of performance, the contract becomes impossible to perform. The change in circumstances may take place due to outbreak of war or natural calamities like floods, landslides,

earthquakes, volcanic eruption, etc. Consequences of frustration: At common law, a frustrating event has the effect of bringing the

contract to immediate end. The rights and liabilities of the parties are frozen at the moment of frustration. The rule is that money payable before frustration remained payable and money paid before frustration could not be recovered. In Nepal, the amount is recoverable according to

section 79 of NCA any received amount has to be refunded and a party is entitled to recover for the work he has done under the contract.

Circumstances where the principle of supervening impossibility is not applicable : A minor impossibility of performance does not affect the contract. However, there are certain exceptions to the rule of frustration. The doctrine of frustration will not apply in the following situations:

- Where the parties have foreseen the likelihood of such an event occurring and have made express provisions for it in the contract.

- Where one of the parties is responsible for the frustrating event. This is known as self-induced frustration.

Under the Nepalese contract Act, DOSI is not applicable in the following situations:

1. Difficulty of performance: The performance must be impossible for the application of the principle of subsequent impossibility. Difficulty to discharge the contract does

not affect the contractual obligations. If there is an alternative to the performance the rule of frustration is not applicable. Section 79 (3) (a) of NCA has clearly provided this principle.

2. Commercial impossibility: Section 79 (3b) of NCA says that the contracting parties are not discharged from their contractual liabilities by claiming that they did not get

expected profit or got loss or they faced increase in wages or prices of raw materials and so on.

3. Default by a third party: Parties are not freed from their contractual duties because

of unavailability of the third party or his mistake. If the contract becomes quite difficult due to these reasons, the principle of frustration does not apply. This has been

provided by the section 79(3)(c) of the NCA. 4. Strikes and lockouts: Where impossibility of performance arises due to the events

such as strikes, lockouts & civil disturbances, the contract is not discharged. Sec.79

(3)(d) of NCA has embodied this principle. 5. Additional taxes, revenues, fees and fines: Section 79 (3) (e) of NCA says that

additional taxes, fees and fines do not provide any facility for the application of frustration. The government at different time charges taxes, revenues, fees and fines. They are expected in the eyes of law.

6. Failure of one of the objects of the contract: does not attract the principle of frustration. Section 79 (3) (f) of NCA says that where the parties have fulfilled all of

the objectives of the contract but they failed to achieve one, it does not render the contract as void on the ground of impossibility.

4. Breach of contract

A bitter or inconvenient way of terminating a contract is through breach of contract. A beach is a violation of the terms and conditions of contract or neglect of promises made by either of the

contracting parties. To put it in another way, breach of contract is breaking or neglect of promises or of an agreement. A failure of a party to perform his contractual liabilities is also attributed to the breach of contract. This means that non-fulfillment of obligations by a party to

the contract is a breach of contract.

Nepalese Contract Act, 2056 defines the breach of contract in the following way: “If a party to

a contract fails to fulfill his contractual obligations under the contract, or gives 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 contract, he is deemed to

have broken the contract.” From the above definition, we find that a party breaks the contract

in the following three conditions: (a) failure to fulfill his contractual obligations. (b) gives information about his not performing the contract and (c) his actions and conduct make him incapable to perform the contract.

When a party fails to perform within the stipulated time or within reasonable time or performs in

a different manner from that what they agreed to do, he has broken the contract in any of these conditions. The breach may take place before or during the performance of contract. The breach does not always terminate the contract. Only the material breach terminates the contract. Non-

material breach will give the innocent-party the right to claim for damages. Modes of Breach: Breach of contract may take place in either ways:

1. Actual Breach: This is where a party does not perform or denies performing the contract at the time of performance. Actual breach cannot take place before the date of performance. A agrees to supply one hundred Qt. of sugar to B at the rate of 3000/- per Qt. on the day of first

January. But he sells that sugar to C at the 3l00/- per Qt. This is an actual breach of contract. B is an innocent party who is not bound to pay the agreed amount to A or he can claim for

compensation against A. Actual Breach can take place while performing the contract. Where a party performs only a part

of contract and then fails to perform another part is an actual breach. A makes a contract with B to supply the above said amount of sugar in five installments. B supplies two installments. Then

A asks B to supply no more. Here A has made an actual breach of the contract. Therefore actual breach may take place at the time of performance or during the time of performance. 2. Anticipatory Breach: This is where a party breaks the contract before the date of

performance. An anticipatory breach of contract is breach of contract occurring before the time fixed for performance has arrived. It may take place in two ways:

a. Through notice: Here a party gives pre-information to another party that he will not perform the contract. He renounces or leaves the contract giving notice in advance. A promises to sell his bike to B on the day of 27th February. But on the

15th February, he informs B that he will not sell his bike. This is an anticipatory breach through notice.

b. Through Conduct: This is where a party makes himself disable to perform the contract. A agrees to marry with B on March but marriages with C on January.

This is an anticipatory breach through conduct. Effects of Anticipatory Breach: In case of anticipatory breach, the innocent party can exercise

the following options: He can cancel the contract and immediately take a legal action for breach of contract without waiting until the due date of performance. He may treat the contract as operative and wait till the time the work is done and can take legal action for breach of contract

if it still remains unperformed. Remedy for Breach of Contract

In simple words, remedy means a legal treatment provided by law or by court of law to the innocent party. Remedy is a tool (means) to provide justice to the injured party. Remedy provides justice to the injured party and reprimands the guilty party. The parties to a contract are

bound to perform their respective liabilities. If a party refuses to perform his contractual obligations, the breach of contract takes place. The innocent or aggrieved party can enforce his

rights in the courts of law. Every breach of contract gives the injured party the right to recover his damages or financial losses. Other remedies may be specific performance or injunction granted or something else. The process of enforcing rights is known as remedies for breach of

contract.

Where a party fails to perform his contractual obligations, the injured party has remedies available on the basis of procedure or nature of the contract. On the basis of procedure, there are two types of remedies available to the injured party. The first is self- help remedy. The injured

party himself exercises this remedy without any help of the court. The sale of the debtor’s pledged property by a bank is an example of this type of remedy. The second is arbitrational

remedy. Sometimes, parties may themselves have written down in the contract itself that they will settle the disputes by way of arbitration. When any breach takes place under that contract, the innocent party must get remedy through arbitration. In other circumstances the aggrieved

party can have the following remedies available through the order of the regular court: a. Rescission of contract: When a party breaks the contract, the other party may also

rescind (cancel) the contract. The innocent party will have a choice not to perform the contract and choose to quit it. Section 82(2) of Nepalese contract Act provides this remedy to the injured party. He can furnish a notice to the other party and set himself

free from any contractual obligations. When there is breach, the other party can rescind the contract and need not perform his part of obligation. He can decide not to

take any legal action. In case the aggrieved party intends to sue the guilty party for damages; he has to file a suit for rescission of the contract. The court may grant rescission. The aggrieved party is freed from all his obligations when the court orders

rescission of the contract. If there is any damage sustained by the innocent party, the court may also order for the compensation for any damages. Generally, a suit for

rescission is accompanied by a suit for damages. b. Claim for damages: Another remedy available from the court is the remedy for

damages. Damages are monetary compensation. They are allowed to the injured party

for loss or injury suffered by him as a result of breach of contract. Damages must contain compensation not punishment. By awarding damages, the court aims to put

the injured party into the position in which he would have been, had there been performance. The rule is that compensation must be commensurate with the injury or

loss sustained. It should arise naturally from the breach. If the actual loss is not proved, no damages will be awarded. The injured party may bring an action for

damages against the guilty party. Section 83 of Nepalese contract Act states that if breach of contract by a party causes losses to the other party, the injured party can

claim for damages or losses he has suffered from the breach. According to Nepalese contract Act, the injured party can claim the amount of compensation as follows:

i. Compensation of actual loss: Section 83(1) of NCA states that the injured party can

claim an actual loss he has suffered from breach of contract. ii. Amount mentioned in the contract: According to section 83(2) of the same Act the

injured party can claim the amount mentioned in the contract if the contract mentions about the amount of loss for compensation in breach.

iii. If not mentioned in the contract: If not mentioned in the contract and actual loss is not

traceable, he must claim reasonable amount for damages or losses he suffered from the breach.

It is quite difficult to fix the damages for the breach of contract. So, the courts have developed certain rules to fix the damages. In the case of Hadley v. Baxendale (1854) the court laid down

two rules to fix the damages, which is popularly known as Hadley’s rule. In this case, Hadley (H) got a breakage of the crankshaft of his mill. H delivered the shaft to Baxendale (B), a common

carrier. He was to take it to the manufacturer at Greenwich as a pattern for new one. There was delay in the carriage of the shaft by B. H claimed for loss of profit for the delay of delivery of the shaft. It was held that B was not liable for the loss of profit caused by the delay because it was a

remote consequence. However, the court established that B had made a mistake. Still only nominal damages were awarded. The court laid down two rules to fix the damages under the

principle of remoteness. This principle helps to fix the extent of liability arising out of breach. It helps to draw a line of recoverable damage. They are:

a. Principle of General damage: Principle of general damage requires that the damages

can only be awarded which are general in nature. It arises naturally in the usual course of things from breach of contract. When you are carrying a machine by a truck, there is

likelihood that machine gets scratches. So, you can claim for the scratches on your machine. If the truck gets an accident and your machine is impaired, you cannot blame the carrier for that loss. This is not a general damage. So, the general damage arises

naturally. The injured party is entitled to claim damages incurred naturally. The defendant is liable for all that naturally happen in the usual course of things after the

breach. b. Principle of Special damage: Principle of special damage requires that the special

damages must be foreseen and agreed by the contracting parties. When you are carrying

the machine through the truck, you must do the insurance of the machine. Then only you are entitled to claim for the special damage. You must have foreseen that the truck may

get an accident and your machine may be ruined. It arises not naturally but it arises from unusual circumstances. In this type of damages the innocent party cannot recover the damages unless he establishes that the guilty party acted for the loss. Damages are not

recoverable unless the special circumstances were contemplated by the parties or they have already talked about the possibility of special circumstances. Both of the damages

have been provided under section 83 of NCA. For example, if you make a contract of insurance, you are entitled to claim damage for what you have made the insurance of.

After these two principles were laid down by the court in the case of Hedley, the courts gave their decision on these two principles of damages.

Things to know about the damages

1. Damages are compensatory not penal: Damages are always compensatory which do

not inflict punishment on the defaulting party. One cannot get punishment or imprisonment in violation of contract. Since these damages are intended to protect the injured party’s expectation or interest or value, he should get the loss of value. So, if

anybody tries to impose punishment, he cannot do so. Punishment is available only in case of crime. Breach of contract is not a crime.

2. Nominal damages: If there is no loss, no damages are awarded. But the court may order nominal damages. In breach of contract, the innocent party can recover nominal damages as well. In the case of Charter v. Sullivan (1957) the court in England held that the

plaintiff was entitled to recover 40 shillings in breach of contract of purchasing of car. 3. Exemplary or vindictive damages: Damages as warning or to take revenge are not

allowed to recover. So, one cannot say that he would make another person pay fine by the court order and record his name in the court. You cannot take revenge for the breach of contract. You can only recover your loss sustained by you due to the breach of contract.

There are, however, two exceptions to this rule. a. Breach of a contract to marry: In this case the aggrieved party may get the exemplary

or vindictive damages. b. Dishonor of a cheque by a banker: If there is sufficient money in the account of the

customer and the bank dishonors the cheque, then the customer may claim for the

vindictive damage. The actual amount of damages will differ according to the status of the party. The greater the status is the greater damages may be awarded to the innocent

party. 4. Liquidated damages and penalty damages: liquidated damage means a sum fixed up in

advance. They have fixed up the damages by themselves. The contracting parties have

already fixed the damages for the breach of contract which is fair and genuine pre-estimate of the probable loss. It is likely to result from the breach. Penalty damage is a

sum fixed up in advance but it is meant to provide penalty for the breach of the contract. There may be no loss on the part of the innocent party. It is extravagant and unconscionable in amount in comparison with the loss. Sometimes, the parties fix up at

the time of contract the sum payable as damages in case of breach. Liquidated damages are recoverable but penalty damages cannot be recovered. The court will not entertain the

penalty damages. 5. Cost of legal proceedings: The aggrieved party can claim the amount spent in the

lawsuit in addition to the claim for damages. The court may award the cost of legal

proceedings to the injured party. so, whenever, the innocent party files a case in the court, he is allowed to claim the cost of legal proceedings.

c. Suit for quantum meruit:

In its literal sense, quantum meruit means ‘as much as earned/ as much as merited’ or ‘in proportion of the work done’. The principle of quantum meruit gives the innocent party a right to

claim compensation for the work he has already done. The reasonable remuneration or price for the work must be given to the party who has done it. A right to sue on quantum meruit arises

after the partial performance of the contract is done by one party and the other party does not give payment of the portion of the job he has carried out. When one party does only partial

performance of the contract and quits the contract, there is a breach of contract. The party which breaks contract may have to get his remuneration out of the contract. So, the principle of

quantum meruit says that if there is anything t be obtained by any of the parties, they must get it. It doesn’t matter the party is the breacher of the contract. This remedy is available without claiming damages. It may also be available in addition to claiming damages for breach. The

injured party may claim reasonable compensation only for the work done or he may claim compensation for the partial performance. He may file a suit on quantum meruit and may claim

payment in proportion to the work done or goods supplied in the following cases: a. Where the work has been done according to the contract, and it has been discharged by

the default of the defendant. In the case of Planche v. Colburn (1831), P agreed to write

a volume to be published in a magazine owned by C. When he completed a part of the volume C left the magazine. The court decided that P was entitled to get remuneration

for the work he had done. In the case of a wrongful breach of contract the injured party can always claim payment on quantum meruit whether the contract is divisible or not.

b. Where the work has been done according to the contract, which is discovered void, or

becomes void provided the contract is divisible. C was appointed as an MD of a company by the board of directors of the company. Later on it was discovered that the

board of directors were disqualified to make appointments. It was held by the court that C was entitled to get payment on quantum meruit. (Craven Ellis v. Canons Ltd. (1936). At the same time, A makes a contract with B to construct a house. The house, after B

completed a storey, was burnt. The contract becomes void. A has to pay for the work done by B.

c. When a person enjoys benefit of non-gratuitous act although there exists no express agreement between the parties: When services are rendered or goods are supplied by a person (a) without any intention of doing so gratuitously, and (b) the benefit of the

same is enjoyed by the other party, the latter must compensate or restore the thing so delivered, for example, A ploughs B’s field with a tractor at B’s presence. B is bound to

pay A.

d. Suit for Specific performance

Specific performance means the actual carrying out of the contract as agreed. It is an

order of court to the defaulting party in which he is ordered to carry out what he agreed to do initially. In other words, where the innocent party demands for specific performance, the court issues an order making the guilty party to perform the contract. This is known as specific

performance as the party asks for what was agreed to do. Under certain circumstances an aggrieved party may file a suit for specific performance. Such a suit may be filed either instead

of or in-addition to a suit for damages. A decree for specific performance is not granted for contracts of every nature. It is only where it is just and equitable to do so i.e. where the legal remedy is inadequate or defective that the courts issue a decree for specific performance. The

injured party will get this remedy where monetary compensation is not exact substitution for it. It is usually granted in contracts connected with land, buildings, rare articles and unique goods

having some special value. In England, specific performance is available in the contract pertaining to immovable property, rare articles or antique/unique goods. But there are some

exceptions to this rule. The exceptions have been recognized by section 86(2) of NCA. According to this section, the aggrieved party cannot demand the specific performance in the

following situations: - Where the amount of compensation is adequate.

- Where the contract is based on personal expertise, skill or knowledge. - Where the court cannot supervise execution of the work regularly. For example, the

contract is divisible in nature i.e. contract of construction.

- Where the subject matter is destroyed. - Where the party breaking the contract demands for specific performance.

e. Injunction

An injunction is an equitable remedy that is preventive in nature. In other words, it is an order of the court that prevents the guilty party from doing something. The court orders the guilty party

not to do the work that the contract prevents him from doing it. Where the contract itself includes a negative term and the party tries to do it, the innocent party gets the right to prevent him from doing it. Injunction is granted where a party at the time of making the contract promises of not

doing the work but he does it while the contract is being performed. In the case of Lumley v. Wagner (1852) the court held that Wagner could not sing for another during the time she

contracted with Lumley. The facts of the case were that Wagner agreed to sing at Lumley’s theatre only during the contract period. But Wagner made another contract with another party to sing at another theatre. The court granted injunction to restrain Wagner from singing for another

party. Therefore injunction enforces the negative term of the contract by restraining the party from doing anything against the contract. The injunction makes the specific performance of the

contract possible. It is particularly appropriate in cases of 'anticipatory breach’ where damages, would not be an adequate relief. A agrees to buy all electrical goods from the shop of B. later on if A tries to buy those goods from C’s shop, B has right to stop him from buying those goods

from C’s shop. The order of the court in this regard is the injunction.