DEPARTMENT OF MANAGEMENT STUDIES UNIVERSITY OF DHAKA

COURSE TITLE: LEGAL ENVIRONMENT OF BUSINESS

Report on Low of Contr !t

Submitted to
N "#$% K r&# C'ow('$r) Professor, Department of Management Studies University of Dhaka

Content*
L w of Contr !t B !+,ro$n( of L w of !ontr !t &n B n,% (e*' T)pe* of !ontr !t E**ent& % E%e#ent* of - %&( !ontr !t Con*&(er t&on A,ree#ent* Free !on*ent P rt&e* !o#petent to !ontr !t D&**o%$t&on.Ter#&n t&on of !ontr !t Re#e(&e* for /re !' of !ontr !t

L w of Contr !t
0' t &* L w of !ontr !t1
Contract law is based on the principle expressed in the atin phrase pacta sunt servanda, which is usually translated !agreements must be kept! "s a means of economic ordering, contract reliensual exchange and has been extensively discussed in broader economic, sociological, and anthropological terms# $owever, contract is a form of economic ordering common throughout the world, and different rules apply in %urisdictions applying civil law &derived from 'oman law principles(, )slamic law, socialist legal systems, and customary or local law#

Contr !t means an agreement enforceable by law

parties capable of contracting consent of the parties a lawful ob%ect and consideration

" contract must include the following*

"n agreement comes into existence whenever one or more persons promise to one or others, to do or not to do something, +,very promise and every set of promises, forming the consideration for each other, is an agreement# Some agreements cannot be enforced thought he courts of law, e#g#, an agreement to play cards or go to a cinema# "n agreement, which can be enforced through the courts of law, is called contract

O/2e!t n( S!ope
-he aw of Contract deals with agreements which can be enforced through courts of law# -he aw of Contract is the most important part of commercial law because every commercial transaction starts from an agreement between two or more persons#

"ccording to Salmond a contract is an +agreement creating and defining obligations between the parties#. "ccording to Sir /illiam "nson, +" contract is an agreement enforceable at law made between two or more persons, by which rights are ac0uired by one or more to acts or forbearances on the part of the other or others# -he ob%ect of the aw of Contract is to introduce definiteness in commercial and other transactions# $ow this is done can be illustrated by an example# 1 enters into a contract to deliver 23 tons of coal of 4 on a certain date# Since such a contract is enforceable by the courts, 4 can plan his activities on the basis of getting the coal on the fixed date# )f the contract is broken, 4 will get damages from the court and will not suffer any loss# Sir /illiam "nson observes as follows* +"s the law relating to property had its origin in the attempt to ensure that what a man has lawfully ac0uired he shall retain, so the law of contract is intended to ensure that what a man has been led to expect shall come to pass5 and that what has been promised to him shall be performed#.

L w of !ontr !t &n B n,% (e*'

"ll contracts in 6angladesh are governed basically by the Contract "ct Contract act 2789 governs the law of contract in 6angladesh )t contains the common rules relating to contracts and differentiates them

T)pe* of !ontr !t
Contracts as regards the number of parties i# ii# i# ii# iii# 6ilateral contract Unilateral contract :alid contract :oidable contract :oid contract

Contracts as regards the mood of enforceability and validity

V %&( Contr !t
" contract is in law# Such a contract creates an outstanding obligation or legal liability which law steps in to enforce whenever a party to the agreement breaks it#

Vo&( Contr !t
iterally, the word void means ;not binding in law<# "ccordingly, the term ;void contract< implies a useless contract which has no legal effect at all# +" contract which ceases to be enforceable by law becomes void when it ceases to be enforceable. 3Se!t&on 45267

Vo&( /%e !ontr !t

"n agreement which is enforced by law at the opinion of one or more of the parties thereto, but not at the opinion of the others, is a voidable contract 3Se!t&on 45&67 Usually a contract becomes voidable when the consent of one of the parties to the contract is obtained by coercion, undue influence, misrepresentation or fraud#

Contr !t* w'&!' re -o&( /%e

/hen consent to an agreement is caused by coercion fraud or misrepresentation /hen consent to an agreement is caused by undue influence or misrepresentation# "n agreement by a parson of unsound mind due to drunkenness is voidable Certain contracts by minors are voidable either during minority or within a reasonable time after the attainment of ma%ority# /hen a contract contains reciprocal promises and one party of the contract prevent the other from performing his promise, then the contract becomes voidable

 /hen a party of the contract promise to perform certain thing within a specified time, but fails to do it then the contract becomes voidable

Unenfor!e /%e Contr !t

"n unenforceable contract is one which is valid in itself but is not capable of being enforced in a court of law because of some technical defects such as absent of writing, registration, re0uisite stamps etc# or time barred by the law of limitations "n unenforceable contract is one which is valid in itself but is not capable of being enforced in a court of law because of some technical defects such as absent of writing, registration, re0uisite stamps etc# or time barred by the law of limitations

Unenfor!e /%e !ontr !t*

" contract made on account of natural love and affection between the parties ,unless it is written and registered5 a contract made between persons whereby one agrees to repay a time=barred debt which was originally due to the other, a contract between parties to refer their present or future disputes to arbitration, unless it is made in writing5 a contract made by a company, unless it is in writing5 Under the -ransfer of Property "ct, all mortgages, other than e0uitable mortgages, where the principal money secured is -k# 233#33 or upwards and gifts= of immovable property, unless they are in writing and registered#

Spe!& % T)pe* of !ontr !t

8$ *& !ontr !t Cont&n,ent !ontr !t

Con*tr$!t&-e or 8$ *&9Contr !t
Contractual obligations are generally created voluntarily# 6ut there are obligations, which lack voluntariness such as the obligation to repay a sum of money paid under a mistake of

fact# )n such cases, therefore, there is no contract but, nevertheless, the law treats them as such# Such contracts, existing in >aw but not in fact, are called 0uasi=contract

Cont&n,ent !ontr !t
" contingent contract is one to do or not to do something if some contingency happens or does not happen# !" contingent or as it is called in ,nglish law, a conditional promise! " contingent agreement is not enforceable till the event on which it was to depend has arisen5 but when that event has occurred, the contract, for all purpose, rests on the same footing as if it had been made in case of a valid contract#

E**ent& % E%e#ent* of - %&( !ontr !t

" contract is an agreement between two parties imposing rights and obligations which may be enforced by law# -he courts need some kind of evidence of this agreement, so they look, through the eyes of a reasonable person, for external evidence of it# -o help identify evidence of agreement, it is conventionally analysed into two aspects* offer and acceptance

Offer

Acceptance

Agreement

Enforced by law Contract

"n agreement becomes enforceable by law when it fulfils certain conditions# -hese conditions, which may be called the ,ssential ,lements of a Contract, are explained below#

 Offer and Acceptance: -here must be a lawful offer by one part and a lawful acceptance of the offer by the other and acceptance must conform to the rules laid down in the )ndian Contract "ct regarding offer and acceptance# Intentions to create Legal Relationship: -here must be an intention &among parties( that the agreement shall result in or create legal relations# "n agreement to dine at a friend<s house is not an agreement intended to create legal relations and is not a contract# 6ut 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# Lawful Consideration: Sub%ect to certain exceptions, an agreement is legally enforceable only when each of the parties to it gives something and gets something# "n agreement to do something for nothing is usually not enforceable by law# -he something given or obtained is called consideration# -he consideration may be an act &doing something( or forbearance &not doing something( or a promise to do or not to do something# Consideration may be past &something already done or not done(# )t may also be present or future# 6ut only those considerations are valid which are +lawful.# Capacity of Parties: -he parties to an agreement must be legally capable of entering into an agreement5 otherwise it cannot be enforced by a court of law# /ant of capacity arises from minority, lunacy, idiocy, drunkenness, and similar other factors# )f any of the parties to the agreement suffers from any such disability, the agreement is not enforceable by law, except in some special cases# Free Consent: )n order to be enforceable, an agreement must be based on the free consent of all the parties# -here is absence of genuine consent if the agreement is induced by coercion, undue influence, mistake, misrepresentation, and fraud# " person guilty of coercion, undue influence etc# cannot enforce the agreement# -he other party &the aggrieved party( can enforce it, sub%ect to rules laid down in the "ct# egality of the ?b%ect: -he ob%ect for which the agreement has been entered into must not be illegal or immortal or opposed to public policy#

Free !on*ent
Section 23 of the Contract "ct outlines the elements of a valid contract thus* !"ll agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful ob%ect, and are not hereby expressly declared to be :oid#! Section 2@ of the Contract "ct defines consent thus* !-wo or more persons are said to consent when they agree upon the same thing in the same sense#! Section 2A of the "ct says that consent is free when it is not caused by* Mistake Misrepresentation Braud Coercion and Undue influence

:6 M&*t +e Section 93 of the Contract "ct lays down thus* !/hen both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void!# -he mistake which is necessary to make a contract void must be mutual and not of one of the parties# ,very mistake does not vitiate a contract# -he following among others may be picked up* a( Mistake as to the nature of transaction# b( Mistake as to the identity of the party to a contract# c( Mistake as to the sub%ect=matter of the contract# d( Mistake by one party as to the intention of the other does not render a contract void#

 B n,% (e*'& L w -he Contract "ct provides that, !where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void !# -hough a mistake of fact vitiates a contract, a mistake of law does not# 6angladeshi 'elief may, however, be available in the following cases of mistake of law* )# /here a mistake is so fundamental that it prevents the formation of a real agreement between the parties, it will vitiate the contract though, after all, it is a mistake of law# ))# " mistake as to the existence of a private right has to be treated as a mistake of fact# )))# )f a contract is brought about by deliberate misrepresentation of law, it can be set aside# ):# Mistake as to any foreign law is a mistake of fact# 546 M&*repre*ent t&on Misrepresentation is the positive assertion of something, which is not true though the person making it believes it to be true# Con(&t&on n( 0 rr nt) B n,% (e*'& L w: )n 6angladeshi aw, as laid down by Section 27 of the Contract "ct, misrepresentation means and includes* )# !-he 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!#

))#

!"ny breach of duty which, without an intent to deceive, gains an advantage to the person committing it, or any one claiming under him by misleading another to his pre%udice or to the pre%udice of any one claiming under him!#

)))#

!Causing, however innocently, a party to an agreement to make a mistake as to the substance of the thing which is the sub%ect of the agreement!#

5;6 Fr $( Braud has been defined by "nson as !a false representation of fact made with the knowledge of its falsehood or recklessly without belief in its truth, with the intention that it should be acted upon by the complaining party and actually inducing him to act upon it!# So, )# ))# )))# ):# Braud is a representation of fact which is false# -he false statement must be made with the knowledge of :s falsehood or recklessly# -he false statement must be made with an intention to deceive# -he person to whom the false statement has been made must be actually deceived# B n,% (e*'& L w: )n 6angladeshi law, as laid down by Section 28 of the Contract "ct, fraud means and includes any of the following acts* !-he suggestion as a fact of that which is not true by one who does not believe it to be true !# !-he active concealment of a fact by one having knowledge or belief of the fact!# -his duty to disclose is not enforceable in all cases of contract# )t arises only in the following cases* a( Statutory obligation to disclose# b( Contracts uberrimae fidei#

5<6 Coer!&on

Coercion or duress consists in actual or threatened violence or imprisonment# /here the consent of a party to a contract can be shown to have been obtained by coercion, it is voidable at the option of the party whose consent was so obtained#

B n,% (e*'& L w Section 2C of the Contract "ct defines coercion as !the committing or threatening to commit, any act forbidden by the Penal Code or the unlawful detaining or threatening to detain any property to the pre%udice of any person whatever with the intention of causing any person to enter into an agreementDD# Effe!t of !oer!&on on !ontr !t "n agreement vitiated by coercion is voidable at the option of the party coerced# 6ut if he finds it profitable to uphold the contract, he can enforce specific performance of it# -he party employing coercion has, however, no right under the contract# 5=6 Un($e &nf%$en!e Undue influence is a subtle and improper pressure brought to bear upon a person to induce him to enter into a contract which, in the absence of the said pressure, he would not do# B n,% (e*'& % w: Section 2E&2( of the Contract "ct lays down thus* !" contract is said to be induced by Dundue influenceD where the relation subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other!# "ccording to Section 2E&9( of the Contract "ct, !a person is deemed to be in a position to dominate the will of another!*

)# ))#

/here he holds real or apparent authority over the other, or where he stands in a fiduciary relation to the other5 or /here he makes a contract with a person, whose mental capacity is temporarily or permanently affected by reason of age, illness or mental or bodily distress#

B$r(en of proof Contr !t w&t' P r( n *'&n % ()

Con*&(er t&on A,ree#ent* L w of Contr !t:

Consideration is something of value given by a promisor to a promise in exchange for something of value given by a promise to a promisor# -ypically, the thing of value is a payment, although it may be an act, or forbearance to act, when one is privileged to do so, such as an adult refraining from smoking# Consideration consists of a legal detriment and a bargain# " legal detriment is a promise to do something or refrain from doing something that you have the legal right to do, or voluntarily doing or refraining from doing something, in the context of an agreement# " bargain is something the promisor &the party making promise or offer( wants, usually being one of the legal detriments# -he legal detriment and bargain principles come together in consideration and create an exchange relationship, where both parties agree to exchange something that the other wishes to have

Con*&(er t&on 5B n,% (e*'& L w6

Se!t&on 4 of t'e Contr !t A!t : /hen at the desire of the promissor, the promise or any other person, has done or abstained from doing, does or abstains from doing, promises to do or to abstain from doing something, such act, abstinence or promise is called a consideration for the promise! Ter#&n t&on:

Dissolution or discharge of contract means termination of the contractual relationship between the parties# " contract may be dissolved or discharged in any of the following ways* 6y Performance# 6y "greement or Consent 6y Brustration or )mpossibility of Performance 6y 6reach of Contract# 6y ?peration of aw D&*!' r,e /) Perfor# n!e Performance is the most natural and common mode of discharging a contractual liability# "s soon as the parties to a contract have performed their shares of the promises, the contract is dissolved Must distinguish between Performance which discharges one of the two parties from his liabilities under a contract and Performance which dissolves the contract as a whole# Fo matter what the reason for wanting to terminate a contract, there is a process to follow in order to ensure that termination will result in the least amount of damages being charged to you# -his process is described below in easy=to=follow steps# :>Deter#&ne &f t'e !ontr !t ' * /een f$%%) e?e!$te( # )f all parties have fully performed their obligations under the contract, the contract is executed, and termination is not necessary5 it is a completed contract and the parties have no further obligation to one another#

 4>Deter#&ne &f )o$ ! n re*!&n( t'e !ontr !t# 'escission, or cancellation, of a contract returns the parties to the state they were in before entering into the contract# )t is a complete cancellation of a contract and may be allowed in certain circumstances# -o determine if you can rescind the contract* 'eview the contract for a rescission, or cancellation, clause# -he clause will contain instructions for rescinding the contract and state the time in which you have to do so# )f still within the time specified by the clause, follow the instructions provided in it to rescind the contract# -his will involve providing some form of written notice of your rescission to the other party, such as a signed rescission form, previously provided to you, or a simple letter stating that you are rescinding the contract# )f your contract does not contain a rescission clause, check your state<s statutes, with an attorney or with your state<s "ttorney General, to see if a rescission period may apply# Some state and federal laws re0uire that certain contracts allow for rescission within a specific period, usually @ to 23 days after entering into the contract# Bor example, 'egulation H of the Bederal -ruth in ending "ct gives you the right to cancel certain transactions, in which your home is used for collateral, before midnight of the third business day after signing the contract# Bederal law also allows you @ days to cancel a contract for the purchase of I9C or more in goods or services from a door=to=door salesperson# )f your contract does not contain a rescission clause and cannot be rescinded pursuant to any state or federal law, negotiate rescission with the other party# -he parties to a contract may agree at any time to rescind the contract, even if the contract itself says otherwise# ;>Deter#&ne &f )o$ ' -e n) %e, % r&,'t to ter#&n te t'e !ontr !t # -here are limited circumstances, which afford a party a right to terminate a contract# Such circumstances may include* )mpossibility# )f one party to a contract is unable to perform his or her obligations due to the impossibility of such performance, he or she may

have a legal right to terminate the contract# -he reason for the impossibility of performance must not be the fault of the party who finds it impossible to perform# )t must be either the fault of the other party or the result of an +act of God. or act of nature, such as a hurricane or tornado# Bor example, if you agree to sell your boat tomorrow and tonight a hurricane comes and damages it beyond repair5 you may legally cancel the contract# " common circumstance is that parties to a contract agree to perform certain things which are not impossible at the time when the contract is made but which become impossible to be performed subse0uently due to causes beyond their control# )n such case, the contract is discharged as having become void# Braud# Braud occurs when one party intentionally makes a false representation regarding a material matter of fact, upon which the ot)t may arise in the following ways* )mpossibility arising due to change of law# )mpossibility due to the destruction of a specific thing essential for the performance of a contract# )mpossibility arising out of the death or incapacitating illness of one of the parties to the contract# )mpossibility due to the absence of a fundamental condition# " condition is said to be fundamental to a contract when the whole contract rests on it# party relies, and as a result is in%ured# -he representation must be false and made intentionally# )t must also be in regard to a material matter# Bor example, if a painter represents that he will paint your living room brown, using a specific brand of paint, knowing he will use a different brand, the misrepresentation is not material, because you contracted for a brown living room and you got one# )f the paint works, and is brown, the fact that

the painter used the wrong brand is immaterial# )f the painter had said, he would paint your living brown and instead painted it red that would be a misrepresentation of a material fact# 6reach of contract by the other party# )f one party knowingly fails to comply with the terms of the contract, the other may terminate the contract# " breaching party has no right to complain that the other has ended the contract, which he or she breached# ack of capacity# " contract entered into by a party who lacks capacity, or ability, to contract, such as a minor, or a person with a mental illness, is voidable by the party who lacks capacity# -his means that he or she may terminate the contract at any time# )llegality# " contract entered into for an illegal purpose is void# -his means that either party may terminate the contract at any time, because legally, there is no contract# Bor example, if a party agrees to lease property for a commercial purpose, and then the city reJones the property for residential use only, both parties then have a legal right to terminate the contract, because the purpose of the contract, using the property of a commercial purpose, has been made illegal# Mutual mistake# )f both of the parties make a mistake concerning a material fact, the party affected by the mistake may terminate the contract, so long as the other party has not yet performed <>Ne,ot& te ter#&n t&on w&t' t'e ot'er p rt)# Contact the other party and attempt to negotiate a termination of the contract# Parties to a contract are free to terminate the contract by mutual agreement at any time# ?ffering to pay some type of cancellation fee, return any funds you have received, or continue the contract for a few more months, may do the trick# =>U*e t'e ter#&n t&on !% $*e# Many types of long=term and automatically renewing contracts contain a termination clause, which sets forth the procedure to use should you wish to terminate the contract# " common termination clause will provide that the party who wishes to terminate the

contract must notify the other party of his or her intent to do so in writing and within a certain number of days from the intended date of termination, or the date of automatic renewal, usually between @3 and E3 days# -ermination clauses may include penalties for early termination, so be sure you are willing to pay the penalty before using the clause and terminating the contract# @>Ref$*e to perfor## )f all else fails, a party is always free to refuse to perform his or her obligations under a contract# 6efore choosing this option, you should consult with an attorney to ensure that you completely understand all conse0uences of terminating a contract in this manner# B n,% (e*'& % w Se!t&on =@: a contract to do an act which, after the contract is made, becomes void when the act becomes impossible or unlawful# supervening impediments must not have arisen by reason of some event which the promissor could prevent# )n such case, compensation may be obtained against the person who is unable to perform it# Se!t&on @=: when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it or to make compensation for it to the person from whom he received it#

D&*!' r,e /) Oper t&on of L w

" valid contract may be discharged by the operation of law# " contract can be discharged by the operation of law in the following ways* Mer,er: )t means the assimilation of a smaller contract by a larger one by reason of the fact that they meet and coincide in one and the same person# In*o%-en!): /hen an insolvent is discharged by the )nsolvency Court, he is released from all his debts provable under the 6ankruptcy#

 A%ter t&on: /hen a written contract is altered by way of addition or erasure in a material part, it is dissolved# Such alteration must be affected without the consent

Bre !' of Contr !t

)f a contracting party fails to perform an ssigned duty owed under a contract ,it is called a 6reach of contract#

0' t Fo%%ow* t'e Bre !'1

Waiver of Breac Defective Performance Accepted $it Reservation of Rig t to Damages Contractual Limitations of Remedy or Provision for Liquidated Damages
Contract Continues as ! oug ! ere Were "o Breac Contract Continues as #odified Contract Performed %ut at Reduced Price or& in Suit for 'ull Price& Counterclaim for Damages Remedy Specified in Contract Action for Damages Action for Recession Action for Specific Performance Action for Injunction

Breach of Contract

P rt&e* &n-o%-e( &n /re !' of !ontr !t

Re#e(&e* for /re !' of !ontr !t