Elements of Contract in Nepal

Introduction to Contracts

A contract is an agreement that holds enforceability within a court of law. If a contract lacks the essential elements of a valid contract, it generally becomes void or voidable.

According to Salmond, a contract is an agreement that establishes and outlines obligations between the involved parties.

Additionally, S.W. Anson defines a contract as a legally binding agreement between two or more individuals, through which one or more parties gain rights to actions or refrains on the part of the others.

Contractual Laws in Nepal

National Civil Code

Within the context of Nepal, the National Civil Code of 2017 encompasses all contractual provisions considered key requisites in Corporate Law. Part 5 of the National Civil Code contains clauses concerning contracts.

This section comprises chapters like Contract Formation, Contract Validity, Provisions Governing Contract Performance, and more.

Contract Act 2056

Formerly, the Contract Act of 2056 was the primary source of contract law in Nepal.

It consisted of nearly 90 sections, encompassing qualifications of contracting parties, concluded contracts, offer and acceptance, contingent contracts, void and voidable contracts, among other aspects.

Essential Elements of Contract in Nepal

All contracts are agreements, but not all agreements are contracts. To constitute a legally enforceable contract, it must encompass essential components, as elaborated below:

Involvement of Two Parties

A contract is established between two or more parties, as an individual cannot contract with themselves. The parties commonly involved in a contract are the offeror and acceptor.

Section 22 of the National Civil Code bestows every citizen the right to enter into contracts, subject to the law.

Parties can include natural persons as well as legal entities in the context of Nepal.

Offer and Acceptance

In every contract, one party presents an offer to the other party. Upon acceptance of the contract, the latter becomes the acceptor. Offering constitutes an initial step in contract formation, and offers can be specific, general, express, or even implied in nature.

Both the offer and acceptance must be unambiguous and unconditional. However, for the offer to be valid, it must be communicated to the offeree, being absolute, certain, and clear.

Ultimately, a legal or contractual relationship is formed between the offeree and acceptor.

Intent to Establish Legal Relations

In any contract, both parties must hold the clear intent to establish a legally binding relationship, enforceable by law. Lack of such intent from either party negates the existence of a contract.

Generally, agreements of ethical, religious, or informal nature lack the necessary intent to create a legal relationship, whereas formal commercial agreements possess the requisite intent.

Voluntary Consent

A fundamental element of a valid contract is voluntary consent. Voluntary consent signifies the affirmation and validation of the agreement’s terms.

Nevertheless, certain forms of consent might be influenced by fraud, undue influence, or misrepresentation.

Hence, voluntary consent refers to independent and self-driven consent from the other party. If the contract lacks true voluntariness, the affected party retains the option to reject the contract, rendering it voidable.

Competency and Capacity

Competency is the legally established capacity to enter into a contract as dictated by the law. In Nepal, any individual aged 18 or above, without mental impairment, can engage in contracts.

However, this age requirement may vary according to the jurisdiction of the country. In the past, individuals aged 16 or above could partake in valid contracts.

Lawful Consideration

Lawful consideration is another indispensable component of a valid contract. Consideration signifies the benefits or merits exchanged between parties.

Lawful consideration refers to a contractual state wherein parties maintain a quid-pro-quo relationship with mutual reciprocity.

The consideration within a contract must be lawful and valid, as illegal considerations render contracts void.

Lawful Object

The primary contention underlying the agreement upon which the contract is established must possess lawful attributes.

In simpler terms, if the objective of the contract itself is unlawful, the contract is deemed invalid.

For instance, consider a contract formed between a seller and a dealer for the sale of liquor, but the seller lacks the necessary liquor-selling license.

Agreements not Expressly Declared Void

Certain types of agreements are explicitly declared void by the laws of Nepal, such as agreements restraining trade and commerce or those restraining legal proceedings.

Section 512 of the National Civil Code outlines the conditions under which a contract is declared void.

These conditions encompass a contract in restraint of marriage, unless prohibited by law; a contract with an illegal purpose; a contract formed for immoral or against public order purposes.

Certainty

The terms, conditions, and underlying agreement forming the basis of the contract must be precise and devoid of ambiguity.

Courts enforce agreements that are clear and certain in their terms and provisions.

Possibility of Performance

An additional crucial element in Nepalese contracts pertains to the feasibility of contract performance. An agreement that is inherently impossible to execute or fulfill is inherently void.

As the law does not mandate the execution of the impossible, such a contract becomes unenforceable and lacks the essential considerations.

Formalities

The contract between the involved parties must be established either in writing, orally, or through the parties’ conduct.

The agreement must adhere to the requisite formalities dictated by the law.

A valid contract necessitates writing, registration, stamping, or other formal components as per legal requirements.

Oral elements suffice if the aforementioned options are impractical.

Case Laws related to Elements of Contract in Nepal

Achyut Prasad Kharel V. Council of Ministers

For a comprehensive contract formation, mutual consent between the parties, incorporating both offer and acceptance, is essential.

The offer must include elements of consideration, as guided by contract law.

Chitra Bahadur Karki V. Maniram Aggrawal

Consideration stands as a pivotal element of a valid contract, wherein promises and mutual benefits constitute the core of contractual obligations.

Thus, both parties must perceive tangible benefits for a contract to be considered valid.

Conclusion

Contracts are a prerequisite within the commercial domain, with mutually beneficial agreements being the standard in Nepal and beyond its borders.

As contracts are legally enforceable agreements, the parties have the autonomy to draft contracts based on mutual consent.

In Nepal, the National Civil Code governs contract stipulations and contract law holistically, spanning from contract formation to contract performance.