Business Law 1

LAW OF CONTRACT
Chapter 1
Introduction
Only the simple term of law does not cover the whole area of society. As a result,
law has verification in their respective areas. Such as: Civil Law, Criminal Law etc.
Such like that in business sectors there are laws passed by the legislature which
is named as Business Law or Commercial Law. This is also known as Mercantile
Law. The parliament of Bangladesh has passed some laws regarding business in
Bangladesh. One of the Commercial Laws which are available in Bangladesh is
The Contract Act, 1872.
1.1 Law of contract in Bangladesh
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. It begins with the preliminary aspects, including a short
preamble and title, extent and date of commencement and interpretation of
words and expressions used in the act. All contracts in Bangladesh are governed
basically by the contract act.
1.2 Contract
An agreement enforceable at law, made between two or more persons, by
which rights are acquired by one or more to acts or forbearances on the part of
the other or others, is a contract. Section 2(h) of the Contract Act, 1872, provides
the authoritative definition of a contract, an agreement enforceable by law is
a contract. It is a simple definition of the term contract given by the Act. From
the definition, it is found that, 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.
Obviously, every agreement does not create obligation. When A offers to sell his
horse to B for Tk. 5000.00, there is an obligation on A to sell and on B to buy the
horse at the stipulated price. Such an agreement is therefore, enforceable by
law. But an agreement between A and B to go together to a picnic does not
create any obligation on either side and is not, therefore, enforceable in law.
The former agreement is, therefore, a contract, while the latter is not.
1.3 A Valid Contract
To understand what these factors are we have to turn to judicial exposition of
the definition of contract as given in the Contract Act, 1872. "The definition of
contract appears to be built upon a succession of definition of the elements
which go to make a contract, such as proposal, acceptance, promise,
consideration, agreement. The requirements for formation of contract are
mainly agreement and consideration. Analyzing the statutory definition of
contract in the light of the above judicial decisions, we find that in order to be
treated as a contract, an agreement must satisfy certain conditions.
From the definition of the Contract of section 2(h), it is expedient that a lawful
agreement is a prerequisite of the formation of the contract. 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.

1.4 Scope of a contract

The Contract Act covers a wide range of contractual rules which cover the law
of variety of contracts. From this point of view 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.
Contract [Section 2(h)]
Agreement [Section 2(e)] Enforceability [Section 10]
Promise[Section2(b)] Consideration [Section 2(d)]
a) Competency of parties
b) Free consent
c) Lawful object
d) Lawful consideration
e) Not unlawful
Proposal [Section 2(a)]
Acceptance [Section 2(b)]
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.

Chapter 2
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, 1872. In the law of contract those certain terms of
classification are used indicating their lawful meaning. So here is a classification
of contract depending on certain moods.
In English Law contracts are broadly classified into formal and informal. The
primary distinction between the two is that the formal contract depends for its
validity on the observance of the forms prescribed by law for the execution of a
contract while the informal contract derives its validity from the presence of
consideration. But formal contract is not recognized by the Contract Act, 1872.
Contracts can be classified 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.
For instance Mr. A proposes Mr.B, I would like to sell my house for Tk. 3lack
and Mr.B replies I agree- this deemed to be an express contract. There are two
types of expressed contract -
1. Written contract
2. Oral contract
3. 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.
For example, if a repairer starts to repair the watch of one person and the later
permits it remaining silent knowingly that the first person is doing so to get a
payment in exchange of this service, it will be treated as a implied by law.
Contracts as regards the mood of time of performance
i. Executed contract
If the conditions of a contract are performed as soon as possible, the contract is
said to be an 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.
ii. 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.

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 fulfil 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. But in case of the first one, all parties of a contract have something
to be performed on the other hand, in the second case; only one party of the
contract possesses the obligation to perform its duty.
Contracts as regards the mood of enforceability and validity
a) Valid contract b) Voidable contract c) Void contract
In addition to the classification of contracts deals with in an earlier chapter,
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.
1. 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.
2. Void Contract
Literally the word void means not binding in law . Accordingly, the term void
contract implies a 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. 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 any one of several considerations for a single object is unlawful, the
agreement is void. [Section 24]
For instance, a promise to supervise, on behalf of B, a legal manufacture of
indigo, and an illegal traffic in opium. B promises to remunerate A by a salary of
Tk. 10,000.00 a year. The agreement is void, the object of A's promise and the
consideration for B's promise being in part unlawful and inseparable from the
lawful part.
(ii) An agreement made without consideration is void except in the case of those
covered by exceptions 1, 2 and 3.
(iii)Every agreement in restrain of the marriage of any person, other than a
minor, is void. [Section 24]. In English law, partial restraint as to time, place or
person, is allowed, provided the restraint is reasonable.
(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"
In Mahboob vs. Rajcoomar case it was ruled that whether the restraint was
general or partial, unqualified or qualified, if it was in the nature of a restraint of
trade, it was void. This interpretation is plainly 'justified by the language used in
the section.
Under this section, agreements of restraint of service have been field to be void.
Thus, an agreement restraining an employee from faking service in any similar
business for a period of five years from the date of the termination of his
agreement, although the restriction only extended to a distance of 40 miles from
the city, the place of his work, has been held to be void, as such a contract is not
covered by the exception (Brahmaputra Tea Co. vs Scarth) But an agreement
to exercise a trade or business for a given period in the exclusive service of one
person is not an agreement in restraint of trade (Pragji vs Pranjiwan)
Section 27 has also been interpreted to disfavour agreements in restraint of
trade competition. "Liberty of trade is not an asset which the law will permit a
person to barter away except in special circumstances'(Vancouver B. Co vs
Breweries) whether a combination between traders or businessmen is or is not
in reality "in restraint of trade", the answer must depend upon the facts of each
particular case. Such combinations have in some instances been upheld (Collius
vs Locke) and in some other ruled void, (Hitlon vs Eckersley) according as the
restraints in such agreements were or were not deemed to be only sufficient to
protect the rightful interests of the parties entering into them.
(v) Agreements in restraint of judicial proceedings are void except, those that
provide for reference of disputes to arbitration. [Section 28] Parties are not at
liberty to contract themselves out of the jurisdiction of courts. There is,
however, "a clear distinction between two classes of cases i.e.
(a) where, in spite of the fact that under the ordinary provisions of law a
particular court would have jurisdiction, the parties provide that another court,
to the exclusion of the former court, shall have jurisdiction to adjudicate upon
the dispute arising under the agreement and;
(b) Cases in which the agreement specifies the place where the terms of the
contract have to be carried out, in other words where according to the fact
stated in the agreement, the cause of action is to be deemed to have arisen.
The first kind of agreement has been held illegal but the second description of
agreement cannot be held to be illegal (Abinash vs Auto supply Co.) Thus, an
agreement that a suit arising out of a contract shall be brought in the High Court
or Small Causes Court only of Calcutta,( Milton and Co. vs O.A. Engineerings
Co.) or of Bombay is not illegal.(Tilakramn vs Kadumal.) In other words, an
agreement between parties to select one of two competent tribunals for the
disposal of their disputes does not infringe the provisions of this Selection. But
where parties agreed between themselves that for the purpose of litigation the
contract should be deemed to have been entered into Bombay, the agreement
having been actually made elsewhere, the contract was void and the Bombay
Court had no jurisdiction, (Dreyfus Co. vs Mirav) for the parties by mutual
consent can no more take away on it when it is not so vested by law.
In Osaka Shosen Kaisha O. S. K. Line vs. Province of East Bangladesh, a Division
Bench of the High Court of Dacca (Dhaka) ruled that agreement under which
the place of suing is restricted to I foreign Court is not hit by the Section". The
essence of this decision is that unless the parties by agreement imposes any
"absolute prohibition" on the right of any party thereto to have his claim decided
In a Court of law, the agreement is not in conflict with the provision of 28 of the
Contract Act. The law on this point so far as Bangladesh is concerned is,
therefore, that parties by agreement can those any of two or more "competent"
Courts to adjudicate on their dispute. But if the Court so chosen is not by itself
"competent" to adjudicate upon the matter in dispute, the agreement is void.
(vi) Agreements which are uncertain, i.e., "the meaning of which is not certain
or capable of being made certain, are void".[Section 29]
2.2 Illustration For instance, A agrees to sell to B "a hundred tons of oil". There
is nothing whatsoever to show what kind of oil was intended. The agreement is
void for uncertainty. But A, who is a dealer in coconut oil only, agrees to sell to
B "one hundred" The nature of A's trade affords an indication of the meaning of
the words. The contract is, therefore, capable of being made certain so us to
mean that A has entered into a contract for the sale of one hundred tons of
coconut oil. (vi) Agreements by way of wager are void. [Section 30] Similarly, a
contract for permanent lease is not void for uncertainty even though it depends
upon the determination of a reasonable amount of Salami in future in as much
as the "reasonable amount of Salami" can be determined by the Court. (vii)
Every agreement of which the object or consideration is unlawful is void.
[Section 23]
(vii) Where both the parties to an agreement are under a mistake K to a matter
of fact essential to the agreement, the agreement is void. [Section 20] (viii)
Contract entered into by minors, lunatics and insolvents are void owing to the
incapacity of such persons to contract. [Section 11]
(ix) An agreement to do an act impossible (Supervening impossibility) in itself is
void. A contract to do an act which, after the contract is made, becomes
impossible, or by reason of some event which the promissory could not prevent,
becomes void when the act becomes impossible or, unlawful (Section 56). (i)
A agrees with B to discover treasure by magic. The agreement is void, (ii) A and
B contract to marry each other. Before the time fixed for the marriage, A goes
mad. The contract becomes void, (iii) A contracts to take in cargo for B at a
foreign port. A's Government afterwards declares war against the country in
which the port is situated. The contract becomes void when the war is declared.
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.
3. 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, avoidable contract is one which is enforced by the law at the opinion of
one of the party. Until it is avoided or rescinded by the party entitled to do so
by exercising his opinion in that behalf, it is a valid contract.
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. Such contract is voidable at the opinion of the aggrieved party i.e. the
party whose consent was so caused (Section 19, 19A). But the aggrieved party
must exercise his option of rejecting the contract (a) Within the reasonable time
(b) before the rights of third parties intervene, otherwise the contract cannot be
repudiated.
A voidable contract is one which can be avoided or set aside at the option of one
of the parties to the contract. The following contracts are voidable under the
law of Bangladesh
(i) When consent to an agreement is caused by coercion fraud or
misrepresentation, the agreement is a contract voidable at the option of the
party whose consent was so caused. [Section- 19] Illustration:
A threaten to shoot B if he does not sell his new Toyota Car to A for tk. 5 lac. B
agrees. The contract has been brought about by coercion and is voidable at the
opinion of B
(ii) When consent to an agreement is caused by undue influence or
misrepresentation, the agreement is a contract voidable at the option of the
party whose consent was thus caused. [Section- 16]
Illustration:
A intended to deceive B falsely representing that the machine produce five
hundred unit in one month at As factory and thereby induces B to buy the
machine The contract has been caused by fraud and misrepresentation and is
voidable at the opinion of B.
(iii)An agreement by a parson of unsound mind due to drunkenness is voidable.
[Section 13] When it is sought to avoid a document on the ground of
unsoundness of mind of the executants, it is not enough to establish that he
used to drink hard and was not generally in a sober state of mind, but it must be
proved by specific evidence to the effect that at the time when the contract was
entered into he was of unsound mind in the sense stated in Section 13 of the
Act. (iv) Certain contracts by minors are voidable either during minority or within
a reasonable time after the attainment of majority. These contracts generally
relate to sale, lease and partnership. These contracts made by a minor are
voidable at his option. (v) When a contract contains reciprocal promises and
one party of the contract prevent the other from performing his promise, then
the contract becomes voidable at the opinion of the party so prevented
[Section- 53] (vi) When a party of the contract promise to perform certain thing
within a specified time, but fails to do it then the contract becomes voidable at
the opinion of the promise, if the intention of the parties was that time should
be of the essence of the contract [Section- 55]
Illustration:
X agrees to sell and deliver 100 bags of sugar to Z or tk. 50000 within one week.
But X does not supply the sugar within the specified time. The contract becomes
void able at the opinion of Z
4. 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. For instance, an oral arbitration agreement is unenforceable
because the law requires an arbitration agreement to be in writing
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".
But even where all the above conditions are satisfied, the courts, under certain
circumstances, will not enforce contracts which are otherwise valid because of
the difficulty created by the law of procedure generally. Such contracts, called
unenforceable contracts are:
(i) a contract made on account of natural love and affection between the parties
standing in a near relation to each other, unless it is written and registered;
(ii) a contract made between persons whereby one agrees to repay a time-
barred debt which was originally due to the other, unless it is in writing and
signed by the party
(iii) making the promise or by his duly authorized agent;
(iv) a contract between parties to refer their present or future disputes to
arbitration, unless it is made in writing;
(v) a contract made by a company, unless it is in writing;
(vi) Under the Transfer of Property Act, all mortgages, other than equitable
mortgages, where the principal money secured is Tk. 100.00 or upwards and
gifts-of immovable property, unless they are in writing and registered.
2.2 Special Types of contract
1. Quasi contract 2. Contingent contract
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. The Contract Act furnishes some
examples of quasi-contract:
(i) If a person, incapable of entering into a contract, or any one 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]
(ii) A person who is interested in the payment of money which another is bound
by law to pay, and who, therefore, pays it, is entitled to be reimbursed by the
other.
(iii)A person, to whom money has been paid or anything delivered by mistake or
under coercion, must repay or return it [Section 72]
A Quasi contract is based upon the equitable principle that a person shall not be
allowed to retain unjustified benefit at the expense of another
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.
A contingent agreement is not enforceable till the event on which it was to
depend has arisen; but when that event has occurred, the contract, for all
purpose, rests on the same footing as if it had been made positively and without
reference to any contingency. The uncertain event on the happening of which
the contract is conditional must be collateral to the contract. This means that it
must not form part of the consideration of the contract but must be
independent of or ancillary to it. The event or condition, again, must not be a
certainty.
The distinction between a contingent contract and a wagering contract lies in
that there is no chance of mutual gain or loss in the former, while such chance
forms the very basis of the latter.
Bangladeshi law on contingent contract
A contract to do or not to do something, if some event collateral to such
contract, does or does not happen. [Section 31]
As to the enforceability of a contingent contract the law in Bangladesh is as
follows:
(i) Contingent contracts to do or not to do of anything if an uncertain future
event happens cannot be enforced by law unless and until that event have
happened. If the event becomes impossible such contract becomes void.
[Section 71] Thus, A makes a contract to pay B a sum of money when B marries
C. This contract is enforceable only when C has been married to B. But if C dies
without being married to B, the contract becomes void.
(ii) Contingent contracts to do or not to do anything if an uncertain future event
does not happen can be enforced when the happening of that event becomes
impossible, and not before. [Section 72] Thus, A agrees to pay B a sum of money
if a certain ship does not return. The ship sinks. The contract can be enforced
when the ship has sunk.
(iii)If the future event on which a contract is contingent is related to the way in
which a person will act at an unspecified time, the event shall be considered to
have become impossible when such person does anything which renders it
impossible that he should so act within any definite time or otherwise than
under further contingencies. [Section 71] Thus, A agrees to pay B a sum of
money if B marries C. C marries D. The marriage of B to C must now be
considered impossible, although it is possible that D may die and C may
afterwards marry B.
(iv) Contingent contracts to do or not to do anything if a very specified uncertain
event happens within a fixed time become void, if at the expiration of the time
fixed, the stipulated event has not happened, or if, before the time fixed, such
event becomes impossible.
Contingent contract to do or not to do anything if a specified uncertain event
does not happen within a fixed time may be enforced by law when the time fixed
has expired and such event has not happened, or, the time fixed has expired, if
it becomes certain that such event will hut happen. [section 35] Thus, (a) A
promises to pay B a sum of money if a certain ship returns within a year. The
contract may be enforced if the ship returns within the year and becomes void
if the ship is burnt within the year, (b) a promise to pay B a sum of money if a
certain ship does not return within a year. The Contract may be enforced if the
ship does not return within the year or is burnt within the year.
(v) Contingent agreements to do or not to do anything if an Impossible event
happens, are void, whether impossibility of the event is known or not to the
parties to the agreement at the time when it is made (Section 36). Thus, (a) A
agrees to pay B Tk. 1000.00 if two straight lines should enclose a space. The
agreement is void, (b) A agrees to pay B Tk. 1000.00 if B will marry A's daughter
C. C was dead at the time of the agreement. The agreement is void.