Case Study: Brothers Furniture Situational Analysis on Furniture Industry

The Contract Act, 1872J Q M Habibullah, FCSLecture 09

The Contract Act, 1872 The Act: Contract act 1872 governs the law of contract in Bangladesh. The Act came into force in the then Bengal on 1 September of 1872, and was adopted in Bangladesh without change. It contains the common rules relating to contracts and differentiates them. Contract: An agreement enforceable by law is a contract. [Section 2 (h).] to be a lawful contract, an agreement is necessary and that agreement must be lawful that is enforceable by law. A contract is thus a combination of two ideas agreement and obligation.

The Contract (cont.)Formation of Contracts: To form a contract the following steps are the basic steps those should be followedFirstly 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 of Creation i. Express contract :The offer and acceptance of a contract if made in words, either expressed orally or in written words, the contract will be considered to be an expressed one. There are two types of expressed contract -Written contract& Oral contract ii. Implied contract: An implied contract is formed when the offer and acceptance of a contract is made without the use of any words, rather by some other means.

Types of Contract: b. Contracts as regards the mood of time of performanceExecuted contract: If the conditions of a contract are performed as soon as possible, the contract is said to be a executed contract. On other words, the contract the obligations of which, is already performed, or to be performed in a very short time is the executed contract.Executory contract: In this contract the obligations of the contract is supposed to be performed at the later period of the formation of the contract. There is no limitation of time for the performance of the contract in this regard. The contract itself suggests such limitation, 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 contract that at least two parties are necessary to form a contract. Therefore all contracts are bilateral or multilateral. Where there are two or more parties of a contract and both of the parties have their obligations on each other, the contract is said to be a bilateral contract. ii. Unilateral contract: In a contract, where one party has to fulfill his obligations whereas the other party has already performed 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) Void contract. There may be a further division of contracts on the basis of their validity and enforceability. Under this criterion Jaw recognizes four classes of them, viz, (i) Valid, (ii) Void, (in) Voidable, and (iv)Unenforceable. i. Valid Contract: A 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.

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 lawful profession, trade or business of any kind is void to the extent of the restraint" except that "one who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits, so long its the buyer or any person deriving title to the goodwill from him, carries On a like business therein provided that such limits appear to the court to be reasonable, regard being had to the nature of the business"

Types of Contract (cont.) (v) Agreements in restraint of judicial proceedings are void except, those that provide forreference of disputes to arbitration. [Section 28] (vi) Agreements which are uncertain, i.e., "the meaning of which is not certain or capable ofbeing made certain, are void".[Section 29] (vii)Agreements by way of wager are void. [Section 30] (viii) Every agreement of which the object or consideration is unlawful is void. [Section 23]

Types of Contract (cont.) (v) Agreements in restraint of judicial proceedings are void except, those that provide forreference of disputes to arbitration. [Section 28] (vi) Agreements which are uncertain, i.e., "the meaning of which is not certain or capable ofbeing made certain, are void".[Section 29] (vii)Agreements by way of wager are void. [Section 30] (viii) Every agreement of which the object or consideration is unlawful is void. [Section 23]

Types of Contract (cont.) (ix) Where both the parties to an agreement are under a mistake to a matter of fact essential to the agreement, the agreement is void. [Section 20](x) Contract entered into by minors, lunatics and insolvents are void owing to the incapacity of such persons to contract. [Section 11](xi) An agreement to do an act impossible (Supervening impossibility) in itself is void.

Types of Contract (cont.) Distinction between void and illegal contract: An illegal contract is one whose object is declared illegal by law. The distinction, however, lies not in the comparative validity of the two or, both are void, but in the fact that an illegal contract is prohibited by law on pain of penalty whereas a void contract does not get the assistance of law. A further point of distinction is that an illegal contract affects the collateral transaction but a void 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 not capable of being enforced in a court of law because of some technical defects such as absent of writing, registration, requisite stamps etc. or time barred by the law of limitations. Under Sec. 10 of the Contract Act, "all agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful 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 created voluntarily. But there are obligations, which lack voluntariness such as the obligation to repay a sum of money paid under a mistake of fact. In such cases, therefore, there is no contract but, nevertheless, the law treats them as such. Such contracts, existing in Jaw but not in fact, are called quasi-contracts.

Types of Contract (cont.) The Contract Act furnishes some examples of quasi-contract: (i) If a person, incapable of entering into a contract or anyone to whom he is legally bound to support, is supplied by another person with necessaries suited to his condition in life, the person who has furnished such supplies is entitled to be reimbursed from the property of such incapable person. [Section 68]

Types of Contract (cont.) ii. Contingent contract: A contingent contract is one to do or not to do something if some contingency happens or does not happen. "A contingent or as it is called in English law, a conditional promise", says like, "is distinguished from an absolute promise by the fact that the performance of the contract becomes due on the happening of a condition or contingency; so, it is not due immediately on the making of the contract". Thus A contracts to pay B 100 if B marries C. This is a contingent contract

Offer and acceptance: Offer and acceptance: When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal or offer. (Section 2 a).When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted becomes a promise (section 2b)

Consideration: When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise (section 2d).

Certainty of agreement: While agreement is the basis for all contracts, not all agreements are enforceable. A preliminary question is whether the contract is reasonably certain in its essential terms, such as price, subject matter and the identity of the parties. Generally the courts endeavour to "make the agreement work", however the courts do not wish to "make contracts for people",

Certainty of agreement: While agreement is the basis for all contracts, not all agreements are enforceable. A preliminary question is whether the contract is reasonably certain in its essential terms, such as price, subject matter and the identity of the parties. Generally the courts endeavour to "make the agreement work", however the courts do not wish to "make contracts for people",

Certainty of agreement (cont.): While many agreements can be certain, it is by no means certain that in the case of social and domestic affairs people want their agreements to be legally binding. Express words, such as "This arrangement. shall not be subject to legal jurisdiction in the law courts" will be respected. In one situation, statute presumes that collective agreement between a trade union and an employer are not intended to create legal relations, ostensibly to keep excessive litigation away from labour law.

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The Contract Act,1872

Elements of contract: Each contract requires an offer and acceptance of that offer. Proposal or offer is the starting point to start to form an agreement. And this agreement may get the shape of a legally binding contract, if it acquires its enforceability in law. If it is said simply, when a person asks someone to do something, or offer to see someone for a price, the person is aid to make an offer.

Elements of contract (offer) The authoritative definition of an offer or proposal is given in the Contract Act1872, while defining proposal it says that- where one person signifies to another his willingness to do or abstain from doing something with a view of obtaining the assent of that other to such act or abstinence he is said to said a proposal.

Elements of contract (offer) Elements of offer: If the above mentioned definition is analyzed, the following elements of a proposal are found: (i) Signification of ones willingness; (ii) Willingness is expressed to another person; (iii)The willingness may be affirmative or negative; (iv) It has a definite object with the intention to 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 legal relation. If there is no intention to create legal relation rather the 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, to pay he, monthly allowance. It was promised also that the allowance will be continued till her comeback to Ceylon. The dispute arose when A denied subsequently giving her the promised allowance. It was held that B could not enforce the obligation as from the nature of the agreement it appeared that no intention existed to give rise to legal obligation and as such even there was no offer at all to be accepted and consequently there was no contract between A and B in respect of paying the said allowance.

Rules of a Proposal (cont.): 2. Mere expression of Intention is not sufficient: Mere intentions are not sufficient to constitute an offer. Advertisements, price quotations of prices, catalogue, time-table of bus or train are not proposals, if someone makes any statement regarding his any intention during aconversation of course that will not suffice to constitute an offer, even though the person to whom such intention is expressed acts accordingly, there will be no offer, so no question of acceptance and as such of 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 between A and B where, inter alia, promised that if he was satisfied with him as a customer would favorably consider an application for renewal of the17contract. It was held that there was nothing in these words which would create a legal obligation as the promise was a vague one since there is no criterion to determine the satisfaction as customer.

Rules of a Proposal (cont.):5. Proposal may be expressed or implied: A proposal or an offer may be expressed or implied. When an offer is made stating in words or in writing, it is called an express offer. On the other hand, when an offer is implied from the conduct of a person, it is called an implied offer. Section9 of the Contract Act, 1872 says, in so far as the proposal or acceptance of any promise is madein words, the promise is said to be express. In so far as such proposal or acceptance is madeotherwise than in 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 until he knows the subject of the offer. To complete an offer lawfully the proposal or offer must be communicated. Section 4 of the Contract Act says that, the communication of a proposal is complete when it comes to the knowledge of the person to whom it is made. For example: A proposes, by letter, to sell a house to B at a certain price. The communication of the proposal is complete when B receives the letter.

Rules of a Proposal (cont.): 8. An offer may be conditional: An offer may be made with some conditions. In such cases, the conditions must be communicated to the offeree. Without knowledge of the condition of an offer if a person accepts an offer, the offeror cannot claim the fulfillment of the condition. But if the conditions are clearly written or expressed and should have been known to the offeree he cannot pled the ignorance of the conditions.

Invitations to treat: Invitations to treat: An invitation to treat is not an offer, but an indication of a person's willingness to negotiate a contract. It's a pre-offer communication. In Harvey v. Facey, an indication by the owner of property that he or she might be interested in selling at a certain price, for example, has been regarded as an invitation to treat. Similarly in Gibson v Manchester City Council the words "may be prepared to sell" were held to be a notification of price and therefore not a distinct offer,

Invitations to treat: The courts have tended to take a consistent approach to the identification of invitations to treat, as compared with offer and acceptance, in common transactions. The display of goods for sale, whether in a shop window or on the shelves of a self-service store, is ordinarily treated as an invitation to treat and not an offer. The holding of a public auction will also usually be regarded as an invitation to treat. Auctions are, however, a special case generally.

Communication of offer: Communication of the offer, as also of the acceptance, is an essential element in a contract. Two persons may have a common intention but without communication there is no agreement. An offer is not; therefore, open to a person who is ignorant of it; nor an ignorant compliance with the terms of an offer means an acceptance of it. The communication of a proposal is complete when it comes to the knowledge of the person to whom it is made".

Acceptance: When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted becomes a promise. Communication of acceptance: There are several rules dealing with the communication of acceptance: i. The acceptance must be communicatedii. 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 of the contract that the offeror has dispensed with the requirement of communication of acceptance (called waiver of communication - which is generally implied in unilateral contracts). iv. If the offer specifies a method of acceptance (such as by post or fax), acceptance must be by a method that is no less effective from the offeror's point of view than the method specified. v. However, acceptance may be inferred from conduct,

Communication when complete As per Section 4 of the act: The communication of a proposal is complete when it comes to the knowledge of the person to whom it is made. The communication of an acceptance is complete, as against the proposer, when it is put in a course of transmission to him, so as to be out of the power of the acceptor; as against the acceptor, when it comes to the knowledge of the proposer.

Communication when complete(cont.): The communication of a revocation is complete,-as against the person who makes it, when it is put into a course of transmission to the person to whom it is made, so as to be out of the power of the person who makes it; as against the person to whom it is made, when it comes to his knowledge.

Consideration Section 2 of the Contract Act defines consideration thus: When at the desire of the promisor, 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"

Rules for consideration(a) Real and not sham: Unreality of consideration arises from a number of causes, such as, legal impossibility, physical absurdity, uncertainty, and also when it involves doing of what one is bound to do. Thus:(i) A, a servant of B, in return for a promise of Tk. 100 promises to give C a discharge for a debt which C owes to B. A's promise is unreal because it is legally impossible for him to give a discharge for a debt 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 provisions of any law, or is against public policy. Thus, a promise by A to pay B Tk. 100,000 inconsideration of B's promise to drop a prosecution for robbery instituted by him against A, is illegal as being aimed at defeating the provisions of Law.(c) Must not be past: A past consideration is that which is executed before the promise for which it is paid. Thus, if A promises B Tk. 5,000 for his having accompanied A to a shooting last week, the consideration is past.

Rules for consideration (cont.)(d) Move from the promise: This means that consideration ought to proceed from the party who is entitled to sueon the contract, for the rule is: "No stranger to the consideration can sue on the contract". Thus, if A promises to pay B Tk. 10 if C works for him in an election, the promise is not enforceable and B cannot sue on it, for, he has neither done nor forborne nor suffered anything nor made any promise in return for A's promise.(e) Need not be adequate: This means that it is fiat the business of the court to enquire whether the considerationin a particular case is substantial,

Rules for consideration(a) Real and not sham: Unreality of consideration arises from a number of causes, such as, legal impossibility, physical absurdity, uncertainty, and also when it involves doing of what one is bound to do. Thus:(i) A, a servant of B, in return for a promise of Tk. 100 promises to give C a discharge for a debt which C owes to B. A's promise is unreal because it is legally impossible for him to give a discharge for a debt owed to his master.

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