INTRODUCTION TO BUSINESS LAW
COURSE CODE: ALD 2202
LECTURE 2
LAWS OF CONTRACT: THE ESSENTIAL ELEMENTS OF
CONTRACT
PRIMARY SOURCE: CHAPTER 1, COMMERCIAL LAW AND INDUSTRIAL LAW, 27TH EDITION BY ARUN
KUMAR SEN AND JITENDRA KUMAR MITRA
Course Instructor: Farzana Tazin
What is a contract?
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An agreement enforceable by law is a contract.
Therefore in a contract there must be
An agreement
An agreement must be enforceable by law
- Section 2(h) of the Indian Contract Act
An agreement comes into existence whenever
one or more persons promise to one or others, to
do or not to do something.
Object and Scope of Law of Contract
3
The law of contract is the most important part
of commercial law because every commercial
transaction starts from an agreement between
two or more parties.
Note: Look into the cement example
Example
4
X enters into a contract to deliver 10 tons
of cement of Y on a certain date. Since
such a contract is enforceable by the
courts, Y can plan his activities on the
basis of getting the cement on the fixed
date. If the contract is broken, Y will get
damages from the court and will not
suffer any loss.
Essential Elements of a Contract
5
An agreement becomes enforceable by law when it
fulfils certain conditions. These conditions are called the
essential elements of a contract.
1. Offer and Acceptance
- A lawful offer by one party
- A lawful acceptance of the offer by the other
party
Note: The term ‘lawful’ implies the offer and
acceptance must conform the rules laid down in the
contract act.
Essential Elements of a Contract cntd.
6
2. Intention to create legal relationship
There must be an ‘intention’ among the
parties that the agreement shall result
in or create ‘legal relations’.
Example
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An agreement to dine at a friend's house is not
an agreement intended to create legal relations
and is not a contract. But an agreement to buy
and sell goods or an agreement to marry, are
agreements intended to create some legal
relationship and are therefore contracts,
provided the other essential elements are
present.
Essential Elements of a Contract cntd.
8
3. Lawful consideration
- An agreement is legally enforceable
only when each of the parties involved
gives something and gets something.
- The ‘something’ given or obtained is
called ‘consideration’.
Essential Elements of a Contract cntd.
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Consideration
A. The consideration may be an act (doing
something) or forbearance (not doing something).
B. Or it can be a promise to do or not to do
something.
C. Consideration may be past (something already
done or not done).
D. It may also be present or future.
E. Only those considerations are valid which are
‘lawful’.
Example
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P agrees to sell a house to Q for Rs.
80000. For P’s promise, the
consideration is Rs. 80000, For Q's
promise, the consideration is the house.
Essential Elements of a Contract cntd.
11
4. Capacity of parties
- Parties to an agreement must be legally
capable of entering into an agreement.
- If any of the parties to the agreement
suffers from disabilities such as minority,
drunkenness, and similar other factors, the
agreement is not enforceable by law, except in
some special cases.
Essential Elements of a Contract cntd.
12
5. Free Consent
- An agreement must be based on the free consent of
all parties.
- If the agreement is induced by undue influence,
mistake, misinterpretation, and fraud then there is
absence of genuine consent.
6. Legality of the object
- The object for which the agreement has been
entered into must not be illegal, or immoral or
opposed to public policy.
Essential Elements of a Contract cntd.
13
7. Certainty
- The agreement must not be unclear.
- It must be possible to establish the meaning of the
agreement. Otherwise it cannot be enforced.
8. Possibility of performance
- The agreement must be capable of being
performed.
- A promise to do an impossible thing cannot be
enforced.
Essential Elements of a Contract cntd.
14
9. Void agreements
- An agreement not enforceable by law is a void
agreement.
For example, a contract between drug
dealers and buyers is void or invalid simply
because the terms of the contract are
illegal. In such a case, neither party can go
to court to enforce the contract.
Essential Elements of a Contract cntd.
15
Voidable agreements
A voidable agreement is one which con be avoided,
set aside by some of the parties to it. ,until it is
avoided, it is a good contract.
For example, . Contracts brought about by,
fraud, undue influence, misrepresentation
etc.
Essential Elements of a Contract cntd.
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10. Writing, registration and legal formalities
- An oral contract is a perfectly good contract, except
those cases where writing and/or registration is required by
some statute (a written law passed by a legislative body).
- In Bangladesh, for example, writing is required in cases of
lease, sale and mortgage of immovable property.
- The terms of an oral contract are sometimes difficult to
prove. Therefore important agreements are usually entered
into in writing even in cases where writing is compulsory.
Classification of Contracts
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Methods of Formation
❖ Express Contract
❖ Express Contract is one which is expressed in
words spoken or written. When such contract is
formed, there is no difficulty in understanding
the rights and obligations of the parties.
Classification of Contracts
18
Implied contract
❖ The conditions of an implied contract is to be
understood from the acts, the conduct of the
parties and/or the course of dealing between
them.
❖ For example:- Order placed for a cup of
coffee in a restaurant.
Classification of Contracts
19
The Time of performance
❖ Executed contract
There are contracts where the parties perform
their obligations immediately, i.e., as soon as the
contract is formed.
Example: B buys an article from a shop and
pays the price immediately. The consideration
moving from B is present or executed
consideration.
Classification of Contracts
20
The time of performance
❖ Executory contract
In this contract the obligations of the parties are
to be performed at a later time.
Example: A promise to pay money at a future
date for goods to be delivered at a future date
is a valid contract.
Classification of Contracts contd.
21
The parties of the contract
❖ Bilateral contracts
❖ There must be at least two parties to the contract.
Therefore all contracts are bilateral or multilateral
❖ Unilateral contracts
❖ In certain contracts one party has to fulfil his
obligations whereas the other party has already
performed his obligations. Such a contract is called
unilateral contract.
Classification of Contracts contd.
22
Legality or Validity of the Contact
Unenforceable Agreement
The term Unenforceable Agreement is used in English law. It
means an agreement which cannot be enforced in a court of
law, one or both of the parties because of some technical
defect, want of registration or non-payment of the requisite
stamp duty .
Illegal Agreement
An Illegal Agreement is one which is against a law In force in
India.
For example:- X agrees to kill Y if Z pays him BDT. 10,000.
it is an unlawful as well as void agreement
Classification of Contracts contd.
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Valid Contract
An agreement which satisfies all' the essential
elements of a contract, and which is
enforceable through the courts is called valid
contract.
For example:- A ask B if he wants to buy his bike
for BDT.10,000. B agrees to buy bike. It is
agreement which is enforceable by law. Hence,
it is contract.
What is a contingent contract?
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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.
Example: A contracts to pay B 50,000 taka if B’s
house is burnt. It is a contingent contract.
Example: X promises to pay Y 30,000 taka if Y
marries Z. There is an offer by X which becomes a
mandatory contract when Y marries Z.
Rules regarding contingent contracts
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The happening of a future uncertain event.
Contracts contingent upon the happening of a future
uncertain event, cannot be enforced by law unless and
until that event has happened. If the event becomes
impossible, such contracts become void.
Example: A contracts to pay B a sum of money when B
marries C .C dies without being married to B. the
contract becomes void.
Rules regarding contingent contracts
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2. The non-happening of an uncertain future event.
Contracts contingent upon the non-happening of
an uncertain future event, can be enforced
when the happening of that event becomes
impossible, and not before.
Example: A agrees to pay B if a certain ship
owned by B does not return. A pays B if B’s ship
sinks.
Rules regarding contingent contracts
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3. When event to be deemed impossible.
If a contract is contingent upon how a person will act at an
unspecified time. the event shall be considered to become
impossible when such person does anything which renders
it impossible that he should so act within any definite time,
or otherwise than under further contingencies
Example: A agrees to pay B a sum of money if B marries C.
However, C marries D. The marriage of B to C may now be
considered impossible although it is possible that D may
die C may afterwards marries B.
Rules regarding contingent contracts cntd.
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4. The happening of an event within a fixed time and the
non-happening of an event within a fixed time.
Contracts contingent upon the happening of an event within
a fixed time, become void if, at the expiration of the fixed
time, such event has not happened, or if, before the time
fixed, such event becomes impossible
Examples: A promises to pay B a sum of money if a certain
ship return within a year. The contract may be enforced if
the ship return within the year, and becomes void if the
ship is burnt within the year
Rules regarding contingent contracts cntd.
29
5. Impossible event.
Contingent agreements to do or not to do anything, 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
Example: A agrees to pay B 50,000 taka when B
marries A’s daughter C. C was dead at the time of
the agreement. The agreement is void.
Assignment
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Contract vs Agreement
Void Agreement vs Illegal Agreement
Void vs Voidable Contracts
Express vs Implied
Executed vs Executory Contract
“All agreements are not contracts but all
contracts are Agreement”
Classification of Contracts contd.
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Note: The students are strictly advised to follow the
assigned text book for details. Examples borrowed
from external sources have been used for a better
understanding of the material. It is mandatory for
the students to read and understand the given
examples.
