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I. Introduction
Everybody as an individual or as a member of an organization makes
various agreements with others everyday. But in many cases we do not know the
legal consequences of these agreements. We make promises and transactions
(buy and sell things for households and organizations). Each time, we need to
know the legal aspects of our activities. Some agreements have no legal validity,
while others do have. Agreements which are legally valid are called contracts.
Thus all contracts are agreements, but all agreements are not contracts.
Therefore, it is necessary for everybody in a civil society to have some basic
knowledge of the Contract Law of the country in which s/he lives. This Makes the
person a more conscious and educated citizen. Many believe that “Law” is the
subject of lawyers only. But this belief has been challenged on the ground that to
build a civil society everybody should have some basic knowledge of “Law”,
particularly the Law of Contract.
As a business executive, an entrepreneur, a customer or a seller, we need
to have adequate knowledge of all the relevant laws that are associated with the
environment of business and economic transactions. However, the laws
governing the various aspects of business and economic transactions are not only
numerously but also difficult to understand for many of us who do not have Law
background.
The Law of Contract contains the basic principles concerning the day to day
business transactions. The Contract Law is divided into a number of areas which
have been made to deal with specific kind of transactions, viz. Formation of a
Contract, Indemnity and Guarantee, Bailment and Pledge, Agency, Sale of Goods,
etc.
II. Objective
The objectives of this chapter is to make the students aware of the legal
consequences of everyday business/economic activities. To achieve this objective,
this chapter of the course will discuss basic principles of the Contract Law of
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Bangladesh. It will focus on the concept of a valid contract and how to create it.
This will include the basic elements and characteristics of a contract, various types
and forms of contract, termination of contract and remedies for breach of
contract. After the end of each topic, a case study will be presented to better
understand the topic. To make the subject easier, legal jargons will be avoided
whenever possible.
PART ONE
Contract Law of Bangladesh
Section 01
1.0 INTRODUCTION
This section provides an introduction to the concept of “Contract”. In this
module, we will get a first hand idea about a contract and the difference between
a contract and an agreement. We will start with the definition of contract and
then break down the definition into various parts or aspects. In Section 2, we will
learn the very first element of a contract – offer.
The Law of Contract of Bangladesh is based on the Indian Contract Act,
1872. In Bangladesh, Contract Law is well defined and Codified Law.
Mr. Rashid, father of Salma Parvin, and Mr. Zaman, father of Mr. Mahbub
agree to a proposal for marriage between Salma and Mahbub. Mr. Mahbub has
completed his MSS in Sociology from New York State University. He is now staying
in Dhaka and looking for a job. Mr. Zaman raise the point that after marriage,
Mahbub will not be able to bear the expenses necessary to maintain a family. In
response, Mr. Rashid agrees to give Taka 150,000 to Mr. Mahbub, the groom.
After the marriage, Mr. Rashid, a businessman, fails to pay Mahbub the promised
amount due to an unexpected financial loss in a business contract. Mr. Zaman and
Mahbub threaten Mr. Rashid and Salma to take legal action against Mr. Rashid.
After couple of days, Mahbub contacts a lawyer to realize the money. The lawyer
advises Mahbub that it is not possible to take any legal action in this matter.
Why? Because the promise of Mr. Rashid to pay money amounts to an
agreement of dowry. Thus, this is, though an agreement, not enforceable by law.
Because, dowry is illegal in Bangladesh. So, this is not a contract. Note that, this is
not a contract not because it is a social engagement or family matter, but because
dowry – whether it is voluntary or non-voluntary – is illegal. It is a “void ab initio”
contract.
We will discuss many examples of contracts later.
II. Promise
The offer when accepted by the person to whom it was made, becomes a
promise the person who made the offer. The person who makes the promise is
promisor and the person who accepts it is the promisee. That is, when the offer is
accepted by the offeree, the offer becomes a promise of the offerer and the
offerer becomes the promisor and the offeree becomes the promisee.
It is important to note that once an offer is made to an offeree and the
offer is accepted by the offeree, both the offere and offeree (promisor and
promisee) become promisor as well as promisee. There does not remain any
difference between a promisor and promisee, since both parties must make
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promise to each other, finally. The concepts of “offer” and “acceptance” become
a circular concept once the contract is finally formed. The concept of
“acceptance” – another important element of contract – will be discussed in
section 03.
II. Intention
Mr. Alam says to Mr. Badal in course of conversation that he (Alam) intends
giving Taka 100,000 to anyone who wants to financially help poor patients at the
Dhaka Shishu (Children’s) Hospital. After couple of months Badal starts paying
money to buy medicine and to pay pathological bills to poor patients of the
Shishu Hospital and informs Mr. Alam about it. Alam says Badal many good things
about helping poor children. In response, Mr. Badal asks Mr. Alam to contribute
taka 100,000 as was said by Alam. However, Alam refuges to contribute anything,
except some good words. In this story, no contract was formed between Badal
and Alam, since Alam did not make any offer with the intention to create any
legal obligation. Thus, there is no contract between Badal and Alam, because
Alam’s statement of giving Taka 100,000 to anyone who wants to financially help
poor patients at the Dhaka Shishu (Children’s) Hospital is not an offer but a mere
statement.
Thus, we find that the offer must be made with the intention of creating
legal relations, otherwise there will be no agreement. Let’s discuss an example.
Mr. Zaman, the Managing Director of a company invites the Chairman of another
company Mr. Zafrul to a party which Zafrul accepts. This does not create any
agreement between them since in this case it is not clear whether the parties
(Zaman and Zafrul) obviously intend to create legal relationship and this is why if
Zaman fails to hold the party without notifying Zafrul, then Zafrul has no legal
remedy against Zaman. Or, if Zafrul fails to attend the party, Zaman cannot take
any legal action against him. This may be a pure social interaction and hence, such
social agreements do not create any contracts.
V. Conditional Offer
When a specified time is mentioned in the offer during which it must be
accepted, the offer remains open for that specified period of time. In his case the
offer is a conditional offer.
I. By Notice
If the offerer gives notice of revocation to the other party, i.e. expressly
withdraw the offer, then the offer comes to an end. An offer may be revoked any
time before acceptance but not afterwards. Once an offer is accepted, there is a
binding contract. The acceptance of an offer becomes binding on the offerer as
soon as the acceptance is put in course of communication to the offerer so as to
be out of power of the acceptor. The notice of revocation does not take effect
until it comes to the knowledge of the offeree.
Exercise: Please, give an example in which a seller makes an offer but it lapses
after the prescribed period of time.
Exercise: Please, give an example in which a seller makes an offer but it lapses
after the reasonable period of time.
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V. By Death or Insanity
An offer lapse by the death or insanity of the offerer or offeree, if the fact of his
death or insanity comes to the knowledge of the other party before acceptance.
VII. By Refusal
An offer automatically terminates once refused by the offeree and cannot be
revived by its subsequent by the offeree.
expressed in some usual or reasonable manner. The offeree may express his
acceptance by word of mouth, telephone, fax or by post.
Mr. Iqbal works in a local bank in Dhaka city as a credit officer. On Monday,
he places an advertisement in a daily newspaper to sell a slightly used 21” Sony
color TV for Taka 15.000.00.
Later that day, Mr. Shamim comes to Iqbal’s house and, after carefully
testing the TV says, “I’ll take it for Taka 10,000.00”. Iqbal replies, “I cannot accept
less than Taka 12,000.00, but I will not sell it to anyone else before Saturday. Let
me have reply by Friday if you want it”. Shamim says, “That is kind of you”.
On Wednesday, Shamim telephones Iqbal in his office and leaves message
with one of his colleagues. Mr. Kabir, stating, “Iqbal, I accept your offer”.
Unfortunately, Iqbal’s colleague does not give the message to Iqbal. Later that
day, Iqbal sells the TV to Kabir for Taka 15,000.00.
On Thursday, Shamim telephones Iqbal in his office, but he is absent due to
illness and Kabir receives the call. Kabir says to Shamim, “I have already bought
the TV from Iqbal”. Shamim rushes to Iqbal’s house to tell about the message he
left with Kabir yesterday. But Iqbal was not at home at that time. He went to
Shamim’s house to withdraw that offer.
On Thursday night, Shamim hears that Iqbal came to his house to withdraw
the offer. However, Iqbal had to go to the hospital directly from Shamim’s house
for treatment where he was recommended by his doctor to get admission
immediately.
that, a consideration for a promise maybe divided into several parts, but all
parts must be consideration together to define the consideration.
Exercise: Give two examples of consideration for two different contracts. Specify
the consideration of each party.
II. Consideration may move either from the promisee or from a third party
Consideration may move either from the promisee or from a third party.
For example, in a case Mr. Wahid granted some properties to his wife Mrs.
Jeshmine directing her at the same time to pay an annual allowance of Taka
60,000 to his brother Rashid. Mrs. Jeshmine also entered into an agreement with
Mr. Rashid promising to pay Taka 60,000 annual allowance. This agreement can
be enforced by Mr. Rashid even though no part of the consideration (property)
received by Jeshmine moved from Rashid. This is thus a contract. A stranger (in
this case Mr. Rashid) to a consideration can sue to enforce the contract, though
a stranger to the contract cannot. We will discuss this issue later in section 05 (in
the containing Privity of Contract and Exceptions to Privity Clause).
I. Consideration must have some economic value and thus it must be something
real
As mentioned above, consideration must have some economic value. By
economic value, we do not only mean something which can command goods and
services in exchange, but also mean that consideration must have some economic
value in the sense that it is something real – illusion, palm reading, ghost, mental
satisfaction, religious satisfaction, impossible/doubtful/illogical things etc. are not
considerations. For instance, we see that many couching centers are giving
guarantee to help student get first division in public examination in exchange of
some couching fee. This guarantee is doubtful and thus is not a sufficient
consideration. Please, find yourself some other common offers which are not
real.
II. Knowledge
It maybe the case that a person must know that he is giving economic value
in order to find consideration. For example, a company offers Rony, a fresh
graduate from a university, a full-time job as Marketing Manager of that
company. The appointment letter states that his salary will be determined on the
basis of his performance. Rony joins the company and works very hard. His fellow
classmates who joined other similar companies as Marketing Managers are
getting about Taka 15,000 per month, on average. After one month, Rony
receives his first pay-cheque of only Taka 5,000. Rony immediately nnotifies the
Human Resource Manager of the company about this very low salary. Human
Resource Manager says that Rony does not deserve more than Taka 5,000. This
Taka 5,000 is not a sufficient consideration, because Rony did not know that the
company pays much lower salary than other similar organizations. In another
case, Mr. Jashim sold his new Rado watch to one of his friends only for Taka 300.
He did not know that his father had bought this watch for Taka 24,000 only three
days ago from Dubai. However, the buyer knew it. This consideration (Taka 300) is
not a sufficient consideration because Jashim did not know the values of what he
is getting in exchange of what. If he knew the value of the consideration (the
watch), then it is reasonable and valid. If for some reason, he did not know, then
this consideration is not valid because it is not sufficient.
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V. Part performance
Part performance (such as part payment of a loan) by third party –
accepted by creditor, is valid/ sufficient. For example, Bela owes Taka 1,000 to
Zafar. Bela promises to repay Taka 1,000 with 15% annual interest within three
years. After three years Bela pays only Taka 600 and her creditor, Zafar, agreed to
accept. The consideration is sufficient.
I. Past consideration
When the consideration of one party was given before the date of promise,
it is said to be past. For example, Milon does some work for Shumi in the month
of January (without expecting any payment). In February, Shumi promises to pay
him some money. The consideration of Shumi (moving from Milon) is past
consideration. In Bangladesh Law, past consideration is a good consideration and
thus is valid.
Example: Mr. Akram says to his nephew, a student of Law, that if he gets first
class Mr. Akram will give him a car. This is not a contract, but simply gratuitous
promise subject to a condition. This gratuitous promise is known as Nudum
Pactum. The following are the exceptional cases where consideration is not
required to create a valid contract:
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IV. Agency
No consideration is required to create an agency. We will cover the Law of
Agency in this course later.
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V. Completed gift
In case of completed gift, consideration is not necessary for such contracts.
For example, if a person gives certain properties (e.g. land for mosque) to another
according to the provisions of the Transfer of Property Act (i.e. by a written or
registered document), he cannot subsequently demand the property back on the
ground that there was no consideration. Such a gift is called Completed Gift.
Note that promise to give some money to a charity is not a valid contract,
but once given, it cannot be asked for return.
In this chapter, we will discuss the doctrine of privity of a contract and the
situations when this doctrine cannot be enforced.
the contract) cannot file a suit to enforce it (the contract). But a stranger to the
consideration can sue to enforce it, provided the stranger is a party to the
contract. For example, in a contract between Abul, Salma, and Zaman, whereby
Abul pays Taka 5,000 to Salma for delivery of some specified goods to Zaman.
Here, Zaman did not give anything to anybody (a stranger to the consideration)
But Zaman, though did not promise anything to anybody, can sue Salma for the
delivery of the specified goods. Because Zaman is a party to the contract.
Notice that if only Abul and Salma made the contract (Zaman was not a
party to the contract), then Zaman cannot sue Salma for the delivery of goods
despite the fact that Zaman is a beneficiary of the consideration. However, here
Abul can sue, and Zaman can also sue if it was under a trust. This is an exception
to the privity clause.
Khwaja Ahmed returns home without completing his MS degree. After a couple of
days, Dilruba's father dies in a road accident.
In this case, Dilruba is not a party to the contract. But she can enforce the
contract.
Exercise: In the above case, do you find a violation of any rules of a contract?
Exercise: Can you tell a case where an Official Assignee was appointed for a minor
and the assignee enforced the contracts in which the minor was a beneficiary?
not discuss them in this course. In the case of such difficult exceptions, we should
consult a lawyer.
Exercise: Please give an example of a contract from your own experience when
privity clause is no longer required to be fulfilled.
I. Lawful Offer
There must be a lawful offer by one party to other party or parties. The
offer must conform to all the rules regarding offer as per the Contract Law of
Bangladesh.
II. Acceptance
There must be a lawful acceptance of the offer by the other party or
parties. The acceptance must conform to all the rules regarding acceptance as per
the Contract Law of Bangladesh.
V. Free Consent
In order to be enforceable, an agreement must be based on the free
consent of all the parties. There is the absence of genuine or free consent if the
consent is induced by coercion or duress, undue influence, mistake,
misrepresentation or fraud.
In many cases, an apparent agreement may not, in fact, be a valid contract
between the parties. Therefore, it is essential that every agreement must be a
true expression of the intention of the parties. An agreement does not reflect the
real intention of the parties when it is vitiated by mistake, misrepresentation,
fraud, coercion and undue influence.
A. Coercion or Duress
It is the committing or threatening to commit any acts forbidden by the
Penal Code or the unlawful detaining or threatening to detain any property to the
prejudice of any person whatsoever, with the intention of causing any person to
enter into an agreement.
Elements of Duress: The traditional elements of duress are: (a) a wrongful threat
and (b) fear that overcomes the victim's free will.
(a) Wrongful Threat: Much business conduct involves express or implied threats
that are not wrongful. Threatening to deal with someone else if a supplier will not
give one a better price is the essence of healthy competition, and in the absence
of extraordinary circumstances certainly is not wrongful. But many kinds of
threats are wrongful and can lead to duress. They include threats to the person,
threats to the property, and threats to one's business or means of earning a living.
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(b) Overcoming of Free Will: To constitute duress, the threat must produce fear
sufficient to overcome a party's free will. The criterion for a test of sufficiency in
most cases is the reaction of the particular individual threatened. Courts consider
a party's age, gender, mental capacity, and other relevant circumstances. Note
that the particular individual need not be as brave as the "ordinary reasonable
person." The law protects the unusually timid.
(c) Psychological Distress: Psychological distress can also overcome a party’s free
will.
B. Undue Influence
A contract is said to be induced by undue influence, where the relations
subsisting between the parties are such that one of the parties is in a position to
dominate the will of the other and uses that position to obtain an unfair
advantage over the other. Thus, it is presumed that persons holding
real/apparent authority, such as money lender, guardians and their wards,
teachers and the pupils. Persons in a fiduciary relationship, such as husband and
wife, guru and his follower, legal advisers and their clients, etc. and persons
affected by mental incapacities, such as patients.
In brief, undue influence occurs when one party overcomes the free will of
the other party by unfair persuasion. Unfair persuasion is most likely to occur in
either of the following two situations:
1. A person is under the domination of another person.
2. There is such a relationship of trust and confidence (called a "fiduciary
relationship") between two persons that one of them is justified in assuming
that his/her best interest will be protected by the other.
Please note: A pardanashin lady is one who observes complete seclusion. They
are regarded by law as a class of persons having imperfect knowledge of the
world and especially imposed to undue influence. Therefore, when a contract is
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made with a pardanashin woman, it is not enough that its terms have been
explained to her and she misunderstands them and their effect upon her
interests.
C. Fraud
Fraud is a false representation of fact, made with a knowledge of its
falsehood or recklessly without belief in its truth, with the intention that it would
be acted upon by the other party and inducing him to act upon it. Is silence
amounts to fraud? Mere silence as to facts likely to affect the willingness of a
person to enter into a contract is not fraud; but silence amounts to fraud in the
following cases: (a) When the circumstances of the case are such that it is the
duty of the person keeping silence to speak, (b) When silence is in itself
equivalent to speech. For example, A sells by auction to B, a horse which A knows
to be unsound. A says nothing to B about the horse's unsoundness. This is not
fraud in A. But if B says to A: "If you do not deny it, I shall assume that the horse is
sound". A says nothing here. In this case, A's silence is equivalent to speech.
D. Mistake
A mistake may be one of fact or of law. When both parties to an agreement
are under a mistake as to a matter of fact essential to the agreement or about a
law not in force in Bangladesh, the consent is not free and the agreement is void.
But, if only one party is laboring under a mistake, or if both parties are mistaken
as to a law in force in Bangladesh, then the contract is not void.
E. Misrepresentation
Under Free Consent, we have discussed Coercion/Duress, Undue
influence, Fraud, and Mistake. In addition to these four vitiating elements,
another important element of free consent is MISREPRESENTATION.
Contracts induced by misrepresentation, fraud, duress/coercion, mistake,
and undue influence are generally considered unlawful or voidable. The reality of
free consent requires that all these vitiating elements are absent. The recent
developments on the issue of free consent in the UK and USA are significant and
very complicated. Misrepresentation has roots both in the contract and in tort,
and it is impossible to give a coherent account of the subject without discussing
both contract and tort together. In this attachment, we discuss some basic issues
of misrepresentation very briefly in simple language within the scope of the
Contract law of Bangladesh.
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Please note, to have misrepresentation, one of the parties must have made
an untrue assertion of fact or engaged in some conduct that is the equivalent of
an untrue assertion of fact. The fact asserted must be the past or existing fact, as
distinguished from a promise or prediction about some future happening. The
concealment of a fact through some active conduct intended to prevent the other
party from discovering the fact is considered to be the equivalent of an assertion.
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Taka 30 (and in fact, the whole contract) is implied by the conduct of the parties.
In legal effect, there is no difference between an express contract and an implied
contract. They differ merely in the manner in which assent is manifested.
contract by the other party's fraud may avoid (cancel) the contract or may
enforce it and have damages for any loss caused by the fraud. A void contract is
nothing more than an attempt to contracting that never produced a contract
because some essential contractual element (mutual assent, consideration, legal
object, or capacity of the parties) was missing. A person who has been declared
insane by the court lacks contractual capacity. That person's alleged contract is
void.
III. By frustration
A contract may also be dissolved by frustration. By frustration, we mean
the impossibility in the fulfillment of the purpose of the parties in entering into a
contract.
V. By lapse of time
Contracts may be terminated by lapse of time. In civil suits, the obligations
and liabilities in contracts are barred by a time limitation. The provisions of the
law are stated in the Limitations Acts.