Legal Environment for Business in Nepal 5 March 2017 LAW OF CONTRACT Legal Environment for Business in Nepal 5 March 2017 Saroj Shrestha

Difference between Agreement and Contract Basis of Difference Agreement Contract Creation The union of offer and acceptance creates agreement The union of agreement and its enforceability creates contract Legal Obligation Agreement alone does not create legal obligation to perform Contract alone creates legal obligation to perform Binding nature Agreement is not binding on the parties to it Contract is binding on the parties to it. Scope Agreement is a vague term Contract is a limited term Inclusion Agreement does not include Contract Contract includes agreement.

Essential Elements of Contract 1. Plurality of Parties: At least TWO parties 2. Offer and acceptance 3. Intention to create legal relationship 4. Free Consent 5.Capacity to contract/Competency 6. Lawful Consideration 7. Lawful Objective 8. Agreement not expressly declared void 9. Clarity and Certainty 10. Possibility of Performance 11. Legal Formalities

Essential Elements 1.Two Parties: There must be two or more parties to create a contract. Contact Act, 2056 provides in its definition that, there must be two or more parties to conclude a valid contract. (Sec. 2 (a) of Contract Act, 2056) 2. Offer and Acceptance: There must be an agreement between two parties to create a contract. The agreement involves valid offer by one party and a valid acceptance to the offer by the other party.

Essential Elements.. 3. Intention to create legal relationship: The parties to a contract have to intend that it creates legal relation and has legal consequences. The victim party to a binding agreement can have legal remedies in case of failure of the either party. Agreement without legal ground can not be enforced. Agreement without intention of legal relationship of a domestic nature do not contemplate legal relationship

Essential Elements.. 4. Free Consent: Free consent of the contracting parties is a must to create a contract. Consent may not be free, if it is obtained on the ground of Coercion, Undue- influence, Fraud Misrepresentation and Mistake of law. Such contract is voidable. (Sec. 14 of CA, 2056) 5. Capacity to contract/Competency : The parties to the agreement must be competent to contract. If incompetent parties are in a contract are minors, persons of unsound mind and legally disqualified persons. (Sec. 3 of CA, 2056)

Essential Elements 6. Lawful Consideration: Consideration means ‘something in return’. There is general rule ‘No consideration no contract’. The agreement is enforceable only when contracting parties are giving and getting something in return. It is not necessary to be cash or kind, it may be a promise to do or not to do something. But it must be real and lawful, which may be in past, present and future.

Essential Elements… 7. Lawful Objective: The objective of a contract must be lawful. Those objectives are not lawful if there are a. illegal b. immoral and c. oppose to the public policy. A contract of such objectives is not enforceable by law. They are void from the beginning (Sec. 13 (k) CA, 2056). 8. Not expressly declared to be void : The agreement must not be expressly declared void by any existing law. Sec. 13 of CA, 2056 declares that those types of contract will be void which are clearly prescribed in the Act e.g. Agreements in

Essential Elements… restraint of trade, marriage, legal proceedings against public policy etc. 9. Clarity and Certainty: Precision or certainty in objective, terms and conditions of contract is another essential element. Certain not vague or indefinite or words of latent ambiguity.

Essential Elements… 10. Possibility of Performance: Must be possible to perform. Impossible contracts are not valid because performance is the very nature of law of contract. Latin Phase ‘Lex non cogitad impossibilia’ means ‘Law does not compel to do what is not possible’. 11. Legal formalities: A contract may be made expressly but some contracts are recognized after fulfilling certain legal formalities.

If you have any questions or concerns, please discuss .. Thank you ! Saroj Shrestha