Essential Elements of Contracts

Rate this post

Essential Elements of Contracts

Every type of contract is enclosed within the field of agreements whereas all agreements are not contracts. Yet the scope of the contract is broad in comparison to the agreement it is narrower. The agreements provisioned in the law are contracts. The promises and agreements not validated by law can’t be named as contracts.

Agreements are made to guide, simplify, and manage social mores and simply regulate the business. There are several social agreements. But business agreements are of definite nature. Similarly, on the basis of a predetermined agreement, one of the contracting parties does not allow or inform the other before making the agreement which is not possible also. Such a contract is named as the standard form of contract.

Read the Meaning and Definition of Contract.

All the prerequisite elements of the contract are not found in the standard form of contract yet the other party has to assent it. To be the contract there should be the following elements.

1. Offer and Acceptance/Two or More Parties

Among many other elements of contracts as provisioned in Contact law offer and consent are also important elements. At least there are two parties in the contract. The party who in accord with prevailing law proposes to the other party about the agreement is called the proposer. The second party who has been proposed for the contract must consent to the offer according to law.

In this way after offering and consenting to the proposal both of the parties are bound to perform the terms and conditions of the contract. On the contrary, the unlawful offer and illegal assent cannot be legally valid so this type of offer shall not be unlawful.

In this way to bring the contract into force, both the offer and acceptance shall be lawful. Muluki Civil Code 2074, sections 504 (3) (1) has defined the offer, “Offer is the proposal with the intention of gaining acceptance presented to the second party to do or not to do things. Similarly, Section 504(3)(2) of the same Codes defines acceptance as “The consent given by the person to whom a proposal has been proposed in the same meaning of that offer.”

2. Intention to Create Legal Relationship

The essential element of the contract is the intention to create a legal relationship. We have knowingly or unknowingly legally or illegally made several contracts, throughout the day with other individuals, corporate agencies, and institutions. But all their agreements cannot be contracts. For social and commercial activities we make agreements.

Wherever or whenever an agreement is made, if there is an intention to create a legal relationship, it can be the contract. Otherwise, in the absence of intention to retain legal relations, it cannot be a contract but merely becomes an agreement. In the latter case, there is no legal remedy in the court of law if any party breaks the agreement. Because the contract is not law binding and it is not made in accord with prevailing law.

When there is the intention to keep or create a legal relationship and the party is ready to bear the legal obligation created by the contract, the lawsuit can be filed in court to seek legal remedy because it is a lawful contract. The following examples can clarify it in detail:

Example 1: Intention not to Create Legal Relation

Ram Bahadur Thapa invites Shyam Bahadur Pradhan, his friend for dinner on the eve of New Year. Shyam Bahadur happily accepts this invitation. But he does not go there. Rather he calls his friends at his home and enjoys the dinner party. Here, in the invitation, there are proposals and consent. This agreement has been made in the social contest not to keep legal relations but to enjoy the party. In this scenario, Ram Bahadur cannot go to court for legal remedy since there is no intention to retain any legal relation with another party.

Example 2: Intention to Keep Legal Relations

Gyan Bahadur Thapa proposes Ram Bahadur Magar to sell his house located at Baneshwar, Kathmandu for Rs. 2500,000. Ram Bahadur assents to buy the house in the price proposed by the former. Then Gyan Bahadur receives Rs. 2,00,000 from Ram Bahadur as advance money and he is ready to conveyance and pass the registration title of the house into Ram Bahadur’s name within one month when he obtains the rest of the money. It is their agreement in writing. Then Ram Bahadur goes to Gyan Bahadur’s home and gives him the rest of the money but Gyan Bahadur demands more amount of Rs 5,00,000 which Ram Bahadur is unwilling to pay. Now, Ram Bahadur can go to a court of law for legal remedy because this bond was made with the intention of keeping legal relations. Therefore it was a contract. The contract violator cannot escape from the legal obligation or liability created by the contract.

Here, are more two another examples of the cases decided in the court.

Example 1: Balfour vs Balfour3

This family lawsuit filed in court was dismissed as the agreement and the mutual understanding between spouses were not made with the intention of keeping legal relations. The husband has promised to pay 30 pounds each month until the recovery of his wife’s illness. They were British and he was in a job in Sri Lanka. She was ill when he came to Sri Lanka so she could not move with him. He has promised to pay 30 pounds to her. Finally, he did not send the amount and she filed a suit in the court against him. Yet the court dismissed it claiming that it was the domestic affair only.

Example 2: Merit Vs Merit4

In this case, the court had favored the wife claiming that there was intention to keep legal relations between spouses. The home was the joint property of the spouses. If the wife pays the installment dues of the mortgaged home, the husband has to transfer his rights of possession to her. But he declined to do so after she paid all the dues. She sought remedy in court and she won the case. If there is the intention to keep a legal relationship, even a domestic affair turns out to be the subject of a contract which is done under prevailing law.

3. Free Consent

Free consent has been regarded as the most important element of the contract. It is said to be that type of agreement in which there is no fear, undue influence, duress fraud, mistake, misinterpretation, etc. Or there is the reflection of free assent without fear and undue influence in contract.

in other words, the agreement made with free consent is only a valid and lawful contract. The party if feels loss or harm while performing the liability of the contract made against his will or compliance can make it void or null through legal remedy in the court. Therefore, free consent is the essence of a contract.

The parties in the contract are free to choose that type of contract which befits them. They hold the privilege to choose. Further, Nepalese Contract Act 2056 Section 14 declares the contract void if it has not sustained the free consent of the parties involved in it.

Similarly, the same act Section 4 contains the types and nature of the contract, selection of the contents, amount of consideration, legal remedies in case of breach of the contract, or parts of its terms, and handling the dispute that may arise in the contract.

4. Competent Parties

The contracting parties shall not be incompetent. They must be competent enough to know the terms and conditions of the contract. According to section 506(1) of the Muluki Civil Code 2074, except for minors and persons of unsound mind, any other persons are regarded as competent persons to make a contract.

Hence the minor and the person of unsound mind are incompetent persons to conclude the contract. The contract made by the legally incompetent person is bound to be void and does not hold statutory status. Likewise, the contract made by ignorance is also sure to be void. Who is competent? And who is incompetent? It has been discussed in detail in another chapter of this book.

In short, the legally disqualified and incompetent persons cannot be the participants in the contract. Therefore, they need to be competent and qualified.

5. Consideration

Consideration is also an important element of the contract. The contract is not meaningful if there is no consideration. Consideration is an inducement/incentive to a contract or other legal transaction. Moreover, consideration is an incentive element for the contracting parties and an act or the promise thereby done or given by one party in return for the act or promise of another. There can be contracts without consideration in some countries. In several countries, it has not been regarded as the prime element of contract. But in Britain and India, it is supposed to be the prime element.

In the context of the Nepalese Contract Act 2023, which has been repealed now, there was no provision of consideration. But Contract Act 2056 had been defined the consideration, now it has been repealed also. Likewise; Muluki Civil Code 2074, has not been defined too.

Let’s consider an example: Gyan Bahadur offers Bir Bahadur to sell his motorbike for RS.70,000 and the latter gives his consent. Then he pays the stipulated amount to Gyan Bahadur and gets the motorbike. Here, the amount of money is the consideration for the seller, Gyan Bahadur and the motorbike is the consideration for the buyer, Bir Bahadur respectively.

6. Lawful Objectives

The objective of the contract must not be against the prevailing law of the nation. A contract containing unlawful subject matter and objectives cannot be endorsed as a contract that is not law-binding and void. This is how, the subject matter (substance) and objectives of the contract must not be immoral, unlawful, and against public policy. If the contracting parties carry out such contracts which do not comply with the subject of legal remedy in the court of law.

In the Nepalese context as per section 517 (2) (f) of the Muluki Civil Code 2074, void the contract which contains an immoral purpose or is against public morality or interest. It also voids other unlawful contracts having the same nature and forms, under sections 517 (1) (2) from (a) to (L) of the same Act. It clarifies the fact that the objectives of a contract must be lawful and in accord with prevailing law.

7. Agreement not Expressly Declared Void

The terms and conditions of the agreement shall not be explicitly declared void or null. Or the substance and subject matter of the agreement forbidden by law must not be included in the contract. Considering Muluki Civil Code 2074, sections 517 (2) from (a) to (L) have referred to the list of void subjects and substances of the contract: for example, a contract preventing anyone from engaging him in any occupation, profession, and trade not forbidden by prevailing law,

Restraining marriage other than those banned by prevailing law, preventing anyone from enjoying the facilities already being enjoyed by the general public, seeking to prevent the legal rights of any person being enforced by any government or court, etc. Indian Contract Act 1872 also declares void to those contracts upon being forged on, trade, marriage, court prosecution wagering/ gambling, etc., with ambiguous meanings.

In this way, whatever permission has been allowed to run a business or profession by prevailing law not being opposite to it and to do the work prevented by prevailing law if the subject matter and substances or objectives of the contract are set to do, it is automatically void. Thus, an agreement or contract must not be declared void. It is another basic element of the contract.

8. Certainty

Among the elements of the contract, certainty is one of them. The terms and conditions of the contract must be certain and vivid. It means the subject matter or substance of the contract must be clear. There may generally be vague terms and conditions in a contract which can bring undesirable disputes related to the rights and liability or legal obligations which may also create unfair competition between the parties involved in the contract.

Usually, there must be a vivid and meaningful nature of terms and references in the contract. Muluki Civil Code 2074, section 517 (2) (i) refers that contract as void which has no crystal clear meaning. It says, “A contract which is vague as it does not provide reasonable meaning thereof,” turns to be void. Therefore, the terms and conditions of the contract must provide clear and certain proper meaning. Otherwise, it turns out to be void.

Let’s be clear from this example; Suppose Chet Bahadur Rana has got a dealership to sell oil. He makes agreement with Bam Bahadur Nepali to sell 200-ton oil. Yet there is no mention of the brand of oil. In such case, the agreement can be invalid because here is not certainty of selling the exact types of oil, kerosene or cooking oil. If one party seeks a legal remedy in the court, the court can do nothing. Therefore, it is invalid.

9. Possibility of Performance

While contracting between parties the terms and conditions or reference shall be possible to perform practically. For impossible work contract cannot be made. The impossible type of thing of the contract can’t be executed practically. Therefore, one ought to make only the possible type of contract so that it can be performed easily.

On the other hand for an impossible type of contract, one cannot seek legal remedy in the court. Muluki Civil Code 2074, section 517 (2) (g) and (h) are the instances of it. Section 517 (2) (g) is about the subject matters of the contract that the party does not clearly understand and is impossible to implement and Section 517 (2) (h) deals with the impossibility of performing the contract at the time of making a contract.

These natures of contracts are sure to be invalid. That is why at the time of making a contract it ought to be known that if it is possible to perform or not the contract. In this way, the objective of the contract shall have a nature that can be performed easily.

10. Necessary Legal Formalities

Usually, contracts are in writing forms, but sometimes they can be unwritten and oral. Occasionally, there is agreement between parties by conduct. Where there is oral agreement by conduct between parties, in this condition there is no need to official seals, ratification, registration, and other terms and reference. Besides this, there can be other types of agreements that can be officially ratified and executed between parties.

For instance, a written agreement is not complete by writing the terms and conditions, it needs to be ratified, officially registered, and sealed. According to General Code Registration chapter I; (e) agreement to sell real estate, bond of transaction, and mortgage, it needs to be registered. The banking written mortgage-like transaction shall be registered officially.

In this way, many written agreements need official formalities. It is the core of a contract. If there is no official formal registration, the agreement is not officially valid. Muluki Civil Code 2074, section 505(3) has this provision “In case the prevailing law prescribes that any specific procedures or methods must be followed for executing any specific contract or that any specific contract, must be registered at any government office, a contract signed without fulfilling such formalities shall not be valid.”

Visit More Related Posts/Contents

CLICK HERE!

Essential Elements of Contracts

1. Offer and Acceptance/Two or More Parties
2. Intention to create a Legal Relationship
3. Free Consent
4. Competent Parties.
5. Consideration.
6. Lawful Objectives
7. Agreement not Expressly Declared Void
8. Certainty
9. Possibility of Performance.
10. Necessary Legal Formalities.

This site is a free online educational website portal. It collects & shares educational as well as job related contents and Careers Offers.

error: Content is protected !!