Lecture 2 contract offer acceptance consideration privity PDF

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Handout No. 2 by Barrister Susmita Rahman, Spring 2016, Law, North South University

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Lecture – 2

Definition and Nature of the law of Contract: The Law of Contract, deals with legal agreements, is the platform upon which the structure of modern business is built. As every commercial transaction starts from an agreement between two or more persons, the Contract Law is hence the most important part of Business Law.1 The law regarding contracts embodied in the Contract Act, 1872 (Act no. IX of 1872) is applicable in Bangladesh. Where the Contract Act does not apply to the case with which a Court has to deal, that Court of Bangladesh is bound to follow the principles of the British Common Law i.e. the rules of justice, equity and good conscience. 2 Nature of the Contract Act: The law of contract imposes certain legal obligations upon the contracting parties and such legal obligations are enforced by the courts. Subject to certain limiting principles, it is usual that the parties make the law for themselves of their contract. The Act does not encroach on the existing usage and custom of trade.3 Given that the terms of the contract do not contravene the general prohibition of law, the parties can make what rules they like regarding the subject matter of the agreement. The Act is not exhaustive. It deals with general principles of contract but other contracts such as partnership, sale of goods, negotiable instruments, etc. are regulated by separate Acts. Definition of Contract: According to Section 2(h) of the 1872 Act “an agreement enforceable by law is a contract”. To constitute an agreement there must be a proposal or offer by one party and its acceptance from the other side. The agreement is only enforceable by law if the agreement is itself legal. Essential Elements of Contract: To be enforceable in law an agreement must satisfy the conditions laid down in Section 10 of the Act as “All agreements are contracts if they are made 1 Commercial Law including Company Law and Industrial Law” by Arun Kumar Sen & Jitendra Kumar Mitra, 25th ed, pg. 1 2 “Text Book on Commercial Law including Company Law” by Md. Iqbal Hossain, 2nd ed, pg. 1 3 ibid

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Handout No. 2 by Barrister Susmita Rahman, Spring 2016, Law, North South University

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by the free consent of the parties, competent to contract for a lawful consideration, with a lawful object, are not expressly declared by the Act to be void, and where necessary, satisfy the requirements of any law as to writing or attestation or registration.” 4 The essential elements of a valid contract are listed below: 1. Offer and Acceptances: There must be a lawful offer and lawful acceptance in accordance with the Contract Act, 1872. 2. Intention to create legal relations: Ajit promises his wife Bita to get a new dress if she sing a song. Bita sang a song but Ajit did not bring a saree for her. Bita cannot bring an action against Ajit in a Court as the agreement lacked the intention to create legal relations. 3. Lawful Consideration: Something given or obtained in exchange for a promise is called consideration. 4. Capacity of the Parties: The parties to an agreement must be legally capable of entering into an agreement. A minor, a lunatic are incapable to be a party. 5. Free Consent: Parities must have free consent. If the agreement is induced by coercion, undue influence, fraud, misrepresentation or mistake then the agreement lacked free consent. 6. Lawful Object: The object for which the contract is made must not be immoral or opposed to public policy or illegal. When a landlord lets his house knowingly to manufacture illegal drug, he cannot claim the rent through Court. 7. Certainty: It must be feasible to ascertain the meaning of the agreement. 8. Possibility of Performance: B agrees with Y to discover treasure by magic. The agreement is not enforceable. 9. Void agreements: The agreement must not have been clearly declared to be void under the Act, e.g. Section 27 provides that agreement in restraint of trade or profession is void. 10. Writing, registration and legal formalities: Contracts like lease, gift, sale, mortgage of immovable property, memorandum and articles of association of a company must be in

4 “Mercantile Law” by M.C. Kuchal, 6th ed, pg. 10

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Handout No. 2 by Barrister Susmita Rahman, Spring 2016, Law, North South University

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written form and be registered. Important agreements are usually reduced into writing even where writing is not compulsory as the oral contracts are difficult to prove. Offer, Acceptance, Consideration and Communication: Offer: To constitute a contract there must be a lawful offer and a lawful acceptance. When J asks to Y ‘Will you buy my book for 300/- ?” It is an offer. If Y says “yes”, the offer is accepted and by this was a contract is formed. Treitel defines an offer as “an expression of willingness to contract on certain terms, made with the intention that it shall become binding as soon as it is accepted by the person to whom it is addressed.” 5 A proposal is also identified an offer. The person making the proposal or offer is called the ‘promisor’ and the person accepting the proposal is called the ‘promisee’ [sec. 2(c)]. A proposal when accepted becomes a promise [from Sec. 2 (b)] Rules to form a valid offer: A legally binding offer must be in conformity with the following rules: 1. An offer may be express or implied. When an offer is made by words, spoken or written is called an express offer and when an offer is inferred from the conduct of the parties or the circumstances of the case is called implied offer. Examples: i) Jack writes to Jill offering to sell his flat for 70 lac taka. It is an express offer. ii) The Dhaka Transport authority runs buses on different routes to carry passengers at the scheduled fares. It is an implied offer by the transport authority.iii) A shoe shiner starts shining Karim’s shoes without being asked to do so, in such circumstances that any reasonable man could guess that he expects to be paid for this, he makes an implied offer.

2. An offer may be specific or general. An offer is said to be specific when it is made to a definite person or persons or to some definite class of persons and offer is said to be general when it is made to the world at large.

5 G.H. Treitel, The Law of Contract, 10th ed.

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Handout No. 2 by Barrister Susmita Rahman, Spring 2016, Law, North South University

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3. An offer must be capable of creating legal relations. An offer to dine at a friend’s place is not a valid offer as it lacked intention to create legal relations. The parties must intend that the transaction should be attended by legal consequences. In business agreements it is always assumed that parties intend legal consequences to follow otherwise there is no contract : Rose & Frank Co. vs Crompton & Brothers Ltd6 4. The terms of the offer must be clear, not vague: Jack purchased a cat from Jim and promised to buy another, if the first one proves lucky. Jack refuses to buy the second horse. Jim could not enforce the agreement, it being uncertain and vague: Taylor vs Portington7

5. An invitation to offer or mere statement of intention is not an offer. Newspaper advertisement inviting applications for a job or inviting tenders for some work is not an offer. The applicants who reply to the advertisement are the offerors. Catalogues of prices or display of goods with prices do not constitute offer. For example, Agora is a self service system shop. In this shop the customer selects goods and takes them to the cash counter for payment. The contract is made when the cashier accepts the offer by accepting payment. The selection of goods constitutes an implied offer to buy the goods and the acceptance of the offer is done when the cashier accepts the payment: Pharmaceuticals Society of Great Britain vs Boots Cash Chemists (Southern) Ltd.8 6. An offer must be communicated to the offeree. Section 4 provides that ‘the communication of a proposal is complete when it comes to the knowledge of the person to whom it is made.”Julie offers 2000 taka to anyone who returns her lost cat. Titly finding the cat took it to Julie without any idea of the offer. Titly is not entitled to the reward money.

6 (1923), 2 K.B. 261 7 (1855), 44 E.R. 128 8 1952. 2 All. E.R. 456

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Handout No. 2 by Barrister Susmita Rahman, Spring 2016, Law, North South University

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7. An offer may be conditional. If conditions are clearly written or expressed, the offeree cannot plead ignorance of the conditions. For example, Jim was injured at a rail accident. Jim cannot claim money from the Railway Company as he bought ticket on which it was written that the company is not liable for personal injuries of the passengers. 8. An offer can be made subject to any terms and conditions.9 Printed contracts or standard forms of contracts often contain large numbers of terms and conditions, which exclude liability under the contract. 9. Offer can be revoked before it is accepted (Section5). An offer may also be revoked by giving a notice, by lapse of time, by death, by counter-offer, by refusal (Section 6). 10. Cross-offers do not make a contract as no agreement can be possible in such a situation. Acceptance: Acceptance is the final consent of the offeree to accept all the terms and conditions of the offer. Section 2(b) defines acceptance as “When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted.” Rules regarding a valid acceptance: 1. Acceptance must be given by the person to whom the proposal is made.10 2. Acceptance must be absolute and unconditional (Section 7). Sid proposes to sell his car at 10 lac taka. Tim accepts the proposal at 8 lac taka. It is a counter-offer, not an acceptance. Even slightest dissimilarity from the terms of the offer makes acceptance invalid.11 3. The acceptance must be expressed in some usual or reasonable manner. The offeree may express his acceptance by word of mouth, telephone, telegram or by post. These are the usual methods of communicating acceptance to the offeror (Section 7(2)). An offer may

9 “Mercantile Law” by M.C. Kuchal, 6th ed, pg. 28 10 Ibid pg. 31 11 Ibid pg. 32

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Handout No. 2 by Barrister Susmita Rahman, Spring 2016, Law, North South University

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also be accepted by conduct.12Where the promisor prescribes a particular mode of acceptance, the offeree must follow the particular mode of acceptance. 4. Acceptance must be communicated to the offeror. There will be no contract if the offeree remains silent and does nothing to show that she has accepted the offer. 5. Time of acceptance: If no time limit is provided by the offeror, the acceptance must be made within reasonable time. If the time is fixed, acceptance must be communicated by that time. Communication of offer and acceptance: Communication of an offer can be done by13 1. oral communication i.e. face to face offer, 2. written communication i.e. through letter, telegram, newspaper, notice etc. and 3. Telecommunication i.e. telephone, e-mail, fax, etc. The communication of an acceptance is completed when the acceptor replies to the proposer (Section 4). Acceptance must be communicated. Silence cannot constitute acceptance. Acceptance may be inferred from conduct or act. If the offeror specifies a mode of acceptance e.g. by post or fax, acceptance must be by a mode that is no less effective than the method specified. An offer can only be accepted by the offeree. Consideration: A contract is not enforceable unless the parties to the contract get something of value. This ‘something of value’ is consideration. Section 2(d) of the Contract Act defines consideration as, “When, at the desire of the promisor, the promise or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or abstain from doing, something such act or abstinence or promise is called a consideration for the promise.’

12 Commercial Law including Company Law and Industrial Law” by Arun Kumar Sen & Jitendra Kumar Mitra, 25th ed, pg. 25 13 “Text Book on Commercial Law including Company Law” by Md. Iqbal Hossain, 2nd ed, pg. 26

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Handout No. 2 by Barrister Susmita Rahman, Spring 2016, Law, North South University

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For example, Sid promises to Tim to draw a portrait of Sid if he get 500 take. Here 500 is the consideration for Sid’s work of drawing portrait. Essential rules of a valid consideration: 1. Consideration must move at the desire of the promisor. The acts done or services rendered voluntarily, or at the desire of third party, will not amount to valid consideration.14 For example, Jim sees Tim’s house on fire and helps in extinguishing it. He cannot demand payment for his services because Tim never asked for help.

2. Section 2(d) provides that Consideration need not move from the promisee alone but may proceed from a third person. However, under English law consideration must move from the promisee. Zita wrote to her nephew Brad, promising to pay him an annuity of $200 in consideration of his marrying Kim. Brad was already engaged to marry Kim. It was held by the court that the fulfillment of Brad’s agreement with Kim was consideration to support Zita’s promise to pay the annuity (Shadwell vs Shadwell15)

3. Consideration need not be adequate but it must be of some value. For example, Sid files a suit against Bir for 10,000 taka. Subsequently he agrees to withdraw the suit on payment of 5,000 taka. Withdrawal of a suit is valuable consideration so as to support the promise to pay money. 4. Public duty: Where the promisee is already under an existing public duty, an express promise to perform, or performance of, that duty will not amount to consideration. For example, Ajit contracts to pay money to a witness who has already received a notice to appear before a trial court.

5. Consideration must not be illegal, immoral, or opposed to public policy. 14 “Mercantile Law” by M.C. Kuchal, 6th ed, pg. 41 15 (1860) 9 C.B.N.S. 159

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Handout No. 2 by Barrister Susmita Rahman, Spring 2016, Law, North South University

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6. Consideration may be past, present or future as is found in its definition. 7. Consideration must be real i.e. consideration must have some value in the eye of law. There are exceptions to the rule ‘no consideration, no contract’ if it is matter ofa) natural love and affection: Section 25(1) b) voluntary compensation: Section 25(2) c) Time barred debt: Section 25(3) d) Contract for appointing agent: Section 185 e) Completed Gift.

Privity to Contract: The common law doctrine of ‘privity to contract’ is applicable in Bangladesh. According to the Contract Act, a stranger to a contract, who is not a party to it, cannot file a suit to enforce it. The terms of the contract can be enforced by the contracting parties and not by third party. There are certain exceptions to the rule that a stranger to the contract cannot sue upon it.16 They are as follows: i)

Beneficiaries in the case of trust: An agreement to create a trust can be enforced by the beneficiary, e.g. Disha agrees to transfer certain properties to Tisha to be held by Tisha in trust for the benefit of Chelsea. Chelsea can enforce the agreement though he was not a party to the agreement.

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Party having married at the minor age: If a person engaged in marriage in the age of minority can enforce other party of the contract to perform necessary promises made in the contract, e.g. The father of the bridegroom had contracted with the father of the bride to make the daughter an allowance if she married the son. After the marriage the daughter sued her father-in-law to recover arrears of the allowance. It was held that, though she was not a party to the contract yet, she was clearly entitled to proceed in equity to enforce her claim.

16 “Text Book on Commercial Law including Company Law” by Md. Iqbal Hossain, 2nd ed, pg.no. 63-64

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Handout No. 2 by Barrister Susmita Rahman, Spring 2016, Law, North South University

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Assignee of a contract: Under certain circumstances a party to contract can transfer his rights under the contract to third parties, e.g. the holder of a bill of exchange can transfer it to any person he wishes. In such cases the transferee or the assignee can sue on the contract even though he was not a party to it originally.

iv)

Family settlement: When family disputes are settled by mutual agreement and the terms of settlement are written down in a document, it is called family settlement. Such agreement can be enforced by members of the family, who were not originally parties to the settlement.

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