Civil and Criminal Law and Justice · Chapter 5
Study notes aligned to the official NEB syllabus.
A contract (करार) is an agreement between two or more persons. It is an agreement that the law will recognise and enforce. Not every agreement is a contract. Suppose you promise to meet a friend for tea. That promise creates no legal duty. But an agreement to sell land, to supply goods, or to lend money is different. The law stands behind it because the parties mean it to bind them. So a contract is an agreement that creates legal rights and duties between the parties who make it. These rights and duties can be enforced in court. In Nepal the general law of contract is found today in the Muluki Civil Code 2074 (2017). Earlier this subject was governed by the Contract Act 2056. The new Code brought it inside the single code of civil law.
For an agreement to become a valid contract, several essential elements must be present together. Here is what each one means in simple words.
There must be a lawful offer (प्रस्ताव) by one party. There must also be a free acceptance of that offer by the other party. An offer is a clear proposal to do or not do something. Acceptance means saying yes to that exact proposal. In this way the two minds agree on the same thing.
There must be free consent (स्वतन्त्र सहमति). Consent means the agreement of the parties. It is free only when it is given willingly. It must not be obtained by coercion (force or threat), by undue influence (unfair pressure from a stronger party), by fraud (deliberate cheating), by misrepresentation (a false statement), or by a shared mistake. Consent obtained in these ways is not real consent.
The parties must be competent to contract. This means each party must be of sound mind. Each must be of the legal age of majority. And neither must be disqualified by law.
There must be lawful consideration and a lawful object. Consideration means something of value given in return, such as a price or a service. The object is the purpose of the contract. An agreement to do something illegal or immoral cannot be enforced.
The terms must be certain. The parties must know clearly what they have agreed to do. The contract must also be capable of being performed. The parties must intend to create a legal relationship. And the agreement must not be one that the law expressly declares void. A void agreement is one the law treats as having no legal effect.
When all these elements are present, the agreement becomes a contract that binds both sides. Here is a simple example. A shopkeeper (A) offers to sell 100 sacks of cement to a builder (B) at a stated price. B accepts. Both are adults of sound mind. Neither is forced or deceived. The price is the lawful consideration. The sale of cement is a lawful object. The quantity and the price are certain. All the essential elements are present. So a valid contract arises. If A now refuses to deliver, B can go to court. If B refuses to pay, A can go to court. Now change one fact. Suppose B accepted only because A threatened him. Then the consent would not be free. In that case the agreement would be voidable, which means B could cancel it.
Performance means doing what the contract requires. Each party must carry out the duty it promised. When both parties do this, the contract is performed. It then comes to a natural end. Under the Muluki Civil Code 2074, the parties must perform their duties according to the terms they agreed. They must perform at the agreed time, at the agreed place, and in the agreed manner.
Performance can take two forms. It may be actual performance. This is when the duty is in fact carried out. Or it may be a valid tender, which means an offer to perform. A tender happens when a party is ready and offers to perform, but the other side refuses to accept. A lawful tender that is refused usually frees the party who made it. In other words, once you have properly offered to do your part, the fault lies with the person who refused.
Performance may be done by the promisor in person. It may also be done by an authorised person on the promisor's behalf. This is allowed when the contract does not need any special personal skill. Sometimes the duties are reciprocal, which means each party owes a duty to the other. In that case, each party must be ready and willing to perform its own part. Only then can it demand performance from the other.
Here is an example. A tailor agrees to stitch and deliver 50 school uniforms to a school. He must deliver them by a fixed date for an agreed price. Suppose the tailor delivers the finished uniforms of the agreed quality on that date. That is actual performance. The school must now pay. Now suppose the tailor brings the uniforms on the due date, but the school refuses to receive them. The tailor has made a valid tender. A lawful tender that is wrongly refused usually clears the tailor of blame. The school is then the party in the wrong. Also, stitching does not need one named person to do it. So the tailor may have the work done by his employees. The contract does not depend on any unique personal skill.
A breach of contract (करार उल्लंघन) means breaking the contract. It happens when a party fails to do its duty without any lawful excuse. It also happens when a party performs the duty badly, or refuses to perform at all. A party can even breach the contract by saying in advance that it will not perform. A breach gives the injured party a right to a legal remedy. A remedy is the help the law gives to the party who has been wronged. The Muluki Civil Code 2074 recognises the usual remedies. Here they are, one by one.
The most common remedy is compensation or damages. This is a money payment for the actual loss or harm caused by the breach. Its aim is to put the injured party in the position it would have been in if the contract had been performed.
Sometimes money is not a good enough remedy. This can happen with a contract for a particular piece of land or a unique thing. In such a case the court may order specific performance. This means the court orders the party at fault to actually carry out its promise.
The injured party may also be allowed to rescind or cancel the contract. To rescind means to cancel it and treat itself as free from its own duties. In a proper case the court may also grant an injunction. An injunction is a court order that stops a party from doing what it promised not to do.
The injured party is expected to act in good faith. It must also take reasonable steps to limit its own loss. It cannot sit back and let the loss grow larger.
Here is an example. A agrees to supply B with a machine by 1 Baishakh for Rs 500,000. B needs the machine to fulfil an order of his own. Suppose A fails to deliver. B then has to buy the same machine elsewhere for Rs 560,000. B can claim the extra Rs 60,000 as damages. That extra amount is the real loss the breach caused. Now change the example. Suppose A had agreed to sell B a specific plot of ancestral land and then refused. Money would not truly replace that unique plot. So a court might order specific performance. It could compel A to transfer the land. But B must not sit idle and let his loss grow. He must take reasonable steps, such as sourcing the machine promptly, to keep the damage down.
Discharge means that the contract comes to an end. The parties are then freed from their duties under it. A contract may be discharged in several ways. Here are the main ones.
The normal and best way is discharge by performance. This is when both sides do what they agreed.
A contract may be discharged by mutual agreement. This is when the parties agree to replace, cancel or change the contract. There are a few forms of this. Novation means substituting a new contract for the old one. Rescission means cancelling the contract. Remission means accepting less than full performance.
A contract may be discharged by subsequent impossibility or frustration. This is when some later event makes performance impossible or unlawful. The event must not be the fault of either party.
A contract may end by lapse of time (हदम्याद). This is when the time limit the law allows for enforcing it has passed. A contract may also end by operation of law, which means the law itself brings it to an end.
Finally, a contract may be discharged by breach. This is when one party's serious breach lets the other party treat the contract as over and claim its remedy.
Here are some examples. Suppose a landlord agrees to let a hall for a wedding reception. Before the date, the hall is destroyed by fire through nobody's fault. The contract is discharged by subsequent impossibility. Neither side is liable. Now suppose instead that the two parties simply agree to call the booking off and return the advance. Then the contract is discharged by mutual agreement. Finally, suppose a creditor does not sue to recover a loan within the period the law allows. The remedy may be lost by lapse of time (हदम्याद). The moral duty to repay still remains, but the legal remedy is gone.