The Contract Act, 1872

J Q M Habibullah, FCS

Lecture 09

The Contract Act, 1872The Act: Contract act 1872 governs the law ofcontract in Bangladesh. The Act came intoforce in the then Bengal on 1 September of1872, and was adopted in Bangladesh withoutchange. It contains the common rules relatingto contracts and differentiates them.Contract: An agreement enforceable by law is acontract. [Section 2 (h).]to be a lawful contract, an agreement isnecessary and that agreement must be lawfulthat is enforceable by law. A contract is thus acombination of two ideas— agreement andobligation.

The Contract (cont.)Formation of Contracts: To form a contract

the following steps are the basic steps those should be followed

Firstly a proposal has to be accepted to be a promise;

Secondly then the promise is to be considered to form an agreement;

Finally the agreement should have the enforceability of law to form a lawful contract

The Contract (cont.)

The Contract (cont.)Scope of a contract: the Act describes two types of

law of contracts; general laws and special laws.

1. General laws relating to contract

(i) Laws relating to formation of contract;

(ii) Laws relating to performance;

(iii)Laws of remedy for a breach of contract.

2. Laws relating to some particular types of contract

(i) Contract of agency;

(ii) Contract of indemnity and guarantee;

(iii)Contract of bailment and pledge.

The Contract (cont.)

Types of Contract:

Contracts so far brought into practice have been classified into different groups on the basis of different tests. The classification of contract is made depending on certain modes. The classification made under certain modes, is not expressly said in the Contract Act, 18 So here is a classification of contract depending on certain moods. 72.

Types of Contract:

a. Contracts depending on the mode ofCreationi. Express contract :The offer and acceptanceof a contract if made in words, either expressedorally or in written words, the contract will beconsidered to be an expressed one. There aretwo types of expressed contract -Writtencontract& Oral contractii. Implied contract: An implied contract isformed when the offer and acceptance of acontract is made without the use of any words,rather by some other means.

Types of Contract:

b. Contracts as regards the mood of time ofperformance

i. Executed contract: If the conditions of a contract areperformed as soon as possible, the contract is said tobe a executed contract. On other words, the contractthe obligations of which, is already performed, or to beperformed in a very short time is the executedcontract.

ii. Executory contract: In this contract the obligationsof the contract is supposed to be performed at the laterperiod of the formation of the contract. There is nolimitation of time for the performance of the contractin this regard. The contract itself suggests suchlimitation, unless it is prescribed by law.

Types of Contract (cont.)

c. Contracts as regards the number of parties

i. Bilateral contract: It is the apparent rule of a contractthat at least two parties are necessary to form a contract.Therefore all contracts are bilateral or multilateral. Wherethere are two or more parties of a contract and both of theparties have their obligations on each other, the contract issaid to be a bilateral contract.

ii. Unilateral contract: In a contract, where one party hasto fulfill his obligations whereas the other party has alreadyperformed his obligations, it is called unilateral contract.

Here it is simply to be noted that in both the above cases,two or more parties are necessary.

Types of Contract (cont.) d. Contracts as regards the mood of

enforceability and validity

i) Valid contract, ii) Voidable contract& iii) Voidcontract. There may be a further division ofcontracts on the basis of their validity andenforceability. Under this criterion Jaw recognizesfour classes of them, viz, (i) Valid, (ii) Void, (in)Voidable, and (iv)Unenforceable.

i. Valid Contract: A contract is in law. Such acontract creates an outstanding obligation or legalliability which law steps in to enforce whenever aparty to the agreement breaks it.

Types of Contract (cont.) ii. Void Contract: Literally the word void means not

binding in law‘. Accordingly the term void contract‘ impliesa useless contract which has no legal effect at all.

“A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable” [Section 2(j)]

It is clear from the definition that a void contract is not void from its inception and that it is valid and binding on the parties when originally entered but subsequent to its formation it becomes invalid and destitute of legal effect because of certain reasons.

Types of Contract (cont.) According to the Contract Act, the following contracts are void abilities:

(i) If any part of a single consideration for one or more objects or any one or any part of anyone of several considerations for a single object is unlawful, the agreement is void.[Section 24]

(ii) An agreement made without consideration is void except in the case of those covered by exceptions.

(iii)Every agreement in restrain of the marriage of any person, other than a minor, is void.[Section 24].

Types of Contract (cont.) (iv) Every agreement in restraint of “’a lawfulprofession, trade or business of any kind is void tothe extent of the restraint" except that "one whosells the goodwill of a business may agree with thebuyer to refrain from carrying on a similarbusiness, within specified local limits, so long it‘sthe buyer or any person deriving title to thegoodwill from him, carries On a like businesstherein provided that such limits appear to thecourt to be reasonable, regard being had to thenature of the business"

Types of Contract (cont.) (v) Agreements in restraint of judicialproceedings are void except, those that provideforreference of disputes to arbitration.[Section 28]

(vi) Agreements which are uncertain, i.e., "themeaning of which is not certain or capableofbeing made certain, are void".[Section 29]

(vii)Agreements by way of wager are void.[Section 30]

(viii) Every agreement of which the object orconsideration is unlawful is void. [Section 23]

Types of Contract (cont.) (v) Agreements in restraint of judicialproceedings are void except, those that provideforreference of disputes to arbitration.[Section 28]

(vi) Agreements which are uncertain, i.e., "themeaning of which is not certain or capableofbeing made certain, are void".[Section 29]

(vii)Agreements by way of wager are void.[Section 30]

(viii) Every agreement of which the object orconsideration is unlawful is void. [Section 23]

Types of Contract (cont.) (ix) Where both the parties to an agreementare under a mistake to a matter of factessential to the agreement, the agreement isvoid. [Section 20]

(x) Contract entered into by minors, lunaticsand insolvents are void owing to theincapacity of such persons to contract.[Section 11]

(xi) An agreement to do an act impossible(Supervening impossibility) in itself isvoid.

Types of Contract (cont.) Distinction between void and illegal contract:

An illegal contract is one whose object isdeclared illegal by law. The distinction,however, lies not in the comparative validity ofthe two or, both are void, but in the fact that anillegal contract is prohibited by law on pain ofpenalty whereas a void contract does not getthe assistance of law.

A further point of distinction is that an illegalcontract affects the collateral transaction but avoid contract does not.

Types of Contract (cont.) iii. Voidable contract: An 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 [Section 2(i)]

Thus a voidable contract is one which is enforced by the law at the opinion of one of the parties. Usually a contract becomes voidable when the consent of one of the parties to the contract is obtained by coercion, undue influence, is representation or fraud.

Types of Contract (cont.) iv. Unenforceable Contract: An unenforceable

contract is one which is valid in itself but is notcapable of being enforced in a court of lawbecause of some technical defects such asabsent of writing, registration, requisite stampsetc. or time barred by the law of limitations.Under Sec. 10 of the Contract Act, "allagreements are contracts if they are made bythe free consent of parties competent tocontract, for a lawful consideration and with alawful object, and are not hereby expressly-declared to be void".

Types of Contract (cont.) e. Special Types of contract

i. Quasi contract&ii. Contingent contract

i. Constructive or Quasi-Contract

Contractual obligations are generally createdvoluntarily. But there are obligations, whichlack voluntariness such as the obligation torepay a sum of money paid under a mistake offact. In such cases, therefore, there is nocontract but, nevertheless, the law treats themas such. Such contracts, existing in Jaw but notin fact, are called quasi-contracts.

Types of Contract (cont.) The Contract Act furnishes some examplesof quasi-contract:

(i) If a person, incapable of entering into acontract or anyone to whom he is legallybound to support, is supplied by anotherperson with necessaries suited to hiscondition in life, the person who hasfurnished such supplies is entitled to bereimbursed from the property of suchincapable person. [Section 68]

Types of Contract (cont.) ii. Contingent contract: A contingent contractis one to do or not to do something if somecontingency happens or does not happen. "Acontingent or as it is called in English law, aconditional promise", says like, "isdistinguished from an absolute promise by thefact that the performance of the contractbecomes due on the happening of a conditionor contingency; so, it is not due immediately onthe making of the contract". Thus A contractsto pay B £100 if B marries C. This is acontingent contract

Offer and acceptance: Offer and acceptance: When one personsignifies to another his willingness to do orto abstain from doing anything, with a viewto obtaining the assent of that other to suchact or abstinence, he is said to make aproposal or offer. (Section 2 a).When theperson to whom the proposal is madesignifies his assent thereto, the proposal issaid to be accepted. A proposal, whenaccepted becomes a promise (section 2b)

Consideration:

When, at the desire of the promisor, thepromisee or any other person has done orabstained from doing, or does or abstainsfrom doing, or promises to do or to abstainfrom doing, something, such act orabstinence or promise is called aconsideration for the promise (section 2d).

Certainty of agreement: While agreement is the basis for allcontracts, not all agreements areenforceable. A preliminary question iswhether the contract is reasonably certain inits essential terms, such as price, subjectmatter and the identity of the parties.Generally the courts endeavour to "make theagreement work", however the courts do notwish to "make contracts for people",

Certainty of agreement: While agreement is the basis for allcontracts, not all agreements areenforceable. A preliminary question iswhether the contract is reasonably certain inits essential terms, such as price, subjectmatter and the identity of the parties.Generally the courts endeavour to "make theagreement work", however the courts do notwish to "make contracts for people",

Certainty of agreement (cont.): While many agreements can be certain, it is byno means certain that in the case of social anddomestic affairs people want their agreementsto be legally binding. Express words, such as"This arrangement. shall not be subject to legaljurisdiction in the law courts" will be respected.In one situation, statute presumes thatcollective agreement between a trade unionand an employer are not intended to createlegal relations, ostensibly to keep excessivelitigation away from labour law.

The Contract Act,1872

Elements of contract:

Each contract requires an offer andacceptance of that offer. Proposal or offer isthe starting point to start to form anagreement. And this agreement may get theshape of a legally binding contract, if itacquires its enforceability in law. If it is saidsimply, when a person asks someone to dosomething, or offer to see someone for aprice, the person is aid to make an offer.

Elements of contract (offer)The authoritative definition of an offer orproposal is given in the Contract Act1872,while defining proposal it says that-

“ where one person signifies to another hiswillingness to do or abstain from doingsomething with a view of obtaining theassent of that other to such act or abstinencehe is said to said a proposal.”

Elements of contract (offer)Elements of offer: If the above mentioneddefinition is analyzed, the followingelements of a proposal are found:

(i) Signification of one‘s willingness;

(ii) Willingness is expressed to anotherperson;

(iii)The willingness may be affirmative ornegative;

(iv) It has a definite object with the intentionto create a legal relation.

Rules of a Proposal/offer:1. The proposer must intent to create legal relations: The

proposal must be one which is capable of creating a legalrelation. If there is no intention to create legal relation ratherthe offer prevail merely an intention to create social relation,that very offer will not be considered as lawful offer.

For example: A businessman residing in Ceylon, promised B,his wife who was living in England for reasons of health, topay he, monthly allowance. It was promised also that theallowance will be continued till her comeback to Ceylon. Thedispute arose when A denied subsequently giving her thepromised allowance. It was held that B could not enforce theobligation as from the nature of the agreement it appearedthat no intention existed to give rise to legal obligation and assuch even there was no offer at all to be accepted andconsequently there was no contract between A and B inrespect of paying the said allowance.

Rules of a Proposal (cont.):2. Mere expression of Intention is not

sufficient: Mere intentions are not sufficientto constitute an offer. Advertisements, pricequotations of prices, catalogue, time-table ofbus or train are not proposals, if someonemakes any statement regarding his anyintention during aconversation of course thatwill not suffice to constitute an offer, eventhough the person to whom such intention isexpressed acts accordingly, there will be nooffer, so no question of acceptance and as suchof any contract.

Rules of a Proposal (cont.):3. Offer may be made to definite Person or some definite class of person or to the world at large generally: An offer made to a definite person or a definite class of person is called a specific offer. And an offer dent to all persons or to the world at large is called a general offer.

4. The proposal must be a definite one: Any statement which is ambiguous, vague or not definite about the offeree or the subject matter, is incapable to constitute a proposal.

Rules of a Proposal (cont.):For example: There was a contract betweenA and B where, inter alia, promised that ifhe was satisfied with him as a customerwould favorably consider an application forrenewal of the17contract. It was held thatthere was nothing in these words whichwould create a legal obligation as thepromise was a vague one since there is nocriterion to determine the satisfaction ascustomer.

Rules of a Proposal (cont.):5. Proposal may be expressed or implied: A

proposal or an offer may be expressed orimplied. When an offer is made stating inwords or in writing, it is called an express offer.On the other hand, when an offer is impliedfrom the conduct of a person, it is called animplied offer. Section9 of the Contract Act,1872 says, in so far as the proposal oracceptance of any promise is madein words, thepromise is said to be express. In so far as suchproposal or acceptance is madeotherwise thanin words, the promise is said to be implied.

Rules of a Proposal (cont.):6. The offer must be definite, certain and unambiguous: There must be a certainty, distinct and unambiguous to form a lawful offer.

For example: A says to B, ―I will give you some money if you pass the exam‖. This is not a valid proposal because the amount of money to be paid is not certain.

Rules of a Proposal (cont.):7. Offer must be communicated to the

offeree: A person cannot accept an offer untilhe knows the subject of the offer. To completean offer lawfully the proposal or offer must becommunicated. Section 4 of the Contract Actsays that, the communication of a proposal iscomplete when it comes to the knowledge ofthe person to whom it is made.

For example: A proposes, by letter, to sell ahouse to B at a certain price. Thecommunication of the proposal is completewhen B receives the letter.

Rules of a Proposal (cont.):

8. An offer may be conditional: An offer maybe made with some conditions. In such cases,the conditions must be communicated to theofferee. Without knowledge of the condition ofan offer if a person accepts an offer, the offerorcannot claim the fulfillment of the condition.But if the conditions are clearly written orexpressed and should have been known to theofferee he cannot pled the ignorance of theconditions.

Invitations to treat:Invitations to treat: An invitation to treat isnot an offer, but an indication of a person'swillingness to negotiate a contract. It's a pre-offer communication. In Harvey v. Facey, anindication by the owner of property that he orshe might be interested in selling at a certainprice, for example, has been regarded as aninvitation to treat. Similarly in Gibson vManchester City Council the words "may beprepared to sell" were held to be a notificationof price and therefore not a distinct offer,

Invitations to treat:The courts have tended to take a consistentapproach to the identification of invitations totreat, as compared with offer and acceptance,in common transactions. The display of goodsfor sale, whether in a shop window or on theshelves of a self-service store, is ordinarilytreated as an invitation to treat and not anoffer.

The holding of a public auction will alsousually be regarded as an invitation to treat.Auctions are, however, a special case generally.

Communication of offer:Communication of the offer, as also of theacceptance, is an essential element in acontract. Two persons may have a commonintention but without communication thereis no agreement. An offer is not; therefore,open to a person who is ignorant of it; noran ignorant compliance with the terms of anoffer means an acceptance of it.

‘’The communication of a proposal iscomplete when it comes to the knowledge ofthe person to whom it is made".

Acceptance:When the person to whom the proposal is madesignifies his assent thereto, the proposal is saidto be accepted. A proposal, when acceptedbecomes a promise.

Communication of acceptance: There areseveral rules dealing with the communicationof acceptance:

i. The acceptance must be communicated

ii. An offer can only be accepted by the offeree,that is, the person to whom the offer is made.

Communication of acceptance (cont.):iii. It may be implied from the construction ofthe contract that the offeror has dispensed withthe requirement of communication ofacceptance (called waiver of communication -which is generally implied in unilateralcontracts).

iv. If the offer specifies a method of acceptance(such as by post or fax), acceptance must be by amethod that is no less effective from the offeror'spoint of view than the method specified.

v. However, acceptance may be inferred fromconduct,

Communication when complete As per Section 4 of the act:

The communication of a proposal iscomplete when it comes to the knowledge ofthe person to whom it is made.

The communication of an acceptance iscomplete, as against the proposer, when it isput in a course of transmission to him, so asto be out of the power of the acceptor; asagainst the acceptor, when it comes to theknowledge of the proposer.

Communication when complete(cont.):The communication of a revocation iscomplete,-as against the person who makesit, when it is put into a course oftransmission to the person to whom it ismade, so as to be out of the power of theperson who makes it; as against the personto whom it is made, when it comes to hisknowledge.

ConsiderationSection 2 of the Contract Act definesconsideration thus: When at the desire ofthe promisor, the promise or any otherperson has done or abstained from doing,does or abstains from doing, promises to door to abstain from doing something, suchact, abstinence or promise is called aconsideration for the promise"

Rules for consideration(a) Real and not sham: Unreality of

consideration arises from a number ofcauses, such as, legal impossibility, physicalabsurdity, uncertainty, and also when itinvolves doing of what one is bound to do.Thus:(i) A, a servant of B, in return for apromise of Tk. 100 promises to give C adischarge for a debt which C owes to B. A'spromise is unreal because it is legallyimpossible for him to give a discharge for adebt owed to his master.

Rules for consideration (cont.)(b) Not be illegal: A consideration is said to be

illegal when it is intended to defeat the provisionsof any law, or is against public policy. Thus, apromise by A to pay B Tk. 100,000 inconsiderationof B's promise to drop a prosecution for robberyinstituted by him against A, is illegal as beingaimed at defeating the provisions of Law.

(c) Must not be past: A past consideration is thatwhich is executed before the promise for which itis paid. Thus, if A promises B Tk. 5,000 for hishaving accompanied A to a shooting last week, theconsideration is past.

Rules for consideration (cont.)(d) Move from the promise: This means that

consideration ought to proceed from the party whois entitled to sueon the contract, for the rule is:"No stranger to the consideration can sue on thecontract". Thus, if A promises to pay B Tk. 10 if Cworks for him in an election, the promise is notenforceable and B cannot sue on it, for, he hasneither done nor forborne nor suffered anythingnor made any promise in return for A's promise.

(e) Need not be adequate: This means that it is fiatthe business of the court to enquire whether theconsiderationin a particular case is substantial,

Rules for consideration(a) Real and not sham: Unreality of

consideration arises from a number ofcauses, such as, legal impossibility, physicalabsurdity, uncertainty, and also when itinvolves doing of what one is bound to do.Thus:(i) A, a servant of B, in return for apromise of Tk. 100 promises to give C adischarge for a debt which C owes to B. A'spromise is unreal because it is legallyimpossible for him to give a discharge for adebt owed to his master.

Any Question???