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introduction to Nepalese business law


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Nepalese business law

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introduction to Nepalese business law

  1. 1. Chapter-1 The nature of law Nature in simple sense refers to something in totality. When we are asking for the nature of someone or something we are first of all giving name to someone or something. We are also defining someone or something in the second place. Likewise, we highlight on the significance and features of someone or something. Therefore, the nature of law refers to the meaning of law, definition of law, significance of law, characteristics of law and so on. The nature of law signifies the law in totality. As the nature of law signifies the law in totality, it can never be stated exactly. However, the nature of law can be pointed out by the following heads. 1. Meaning of law In its simplest sense, law can be understood as a rule. There may be various forms of rules such as individual rules, religious rules, family rules, social rules, economic rules, administrative rules, constitutional rules, taxation rules, rules of college, rules of games, gravitational rules, and rules of the nature and so on. In its widest sense, the law means every kind of rules that regulate the human activities. In its narrower sense, every kind of rule does not necessarily constitute the law. The law is that kind of rule which is recognized and enforced by the state. Law is a rule made by the state. The law making body of the state is known as the legislature or the parliament. The legislature makes the laws to regulate the behavior of the citizens of the state. In this sense, law means a body of rules of conduct, action, or behavior of persons made and enforced by the state. Every state makes certain rules for its citizen allowing them to do something and makes certain other rules forbidding (not allowing to do) them from doing something. These rules as such are called laws. In another sense, law is a body of principles and theories established by jurists and legal experts. The principles and theories are very important for the understanding of law. Therefore, they equally give sense of the law. For instance, the subject or study of science becomes incomplete without studying the theories of Charles Darwin, Albert Einstein & others, so the understanding of law is inadequate and incomplete without the knowledge of the principles and theories of law. Such principles and theories of law provide an accurate picture of law. For instance, ‘ignorance of law is not excused’ is a universally accepted principle of law. Nobody can escape liabilities (punishment, fine, imprisonment etc) just by saying that he/she did not know the law. Here are some other recognized principles of law: ‘None is guilty unless he /she is proved to be guilty’, ‘Let the heaven fall, justice has to be done’,’ Justice must not only be done but also must be seen to have been done’, ‘Let the ten criminals go without punishment but save a single innocent person’, ‘Law cannot help those who do not heed to their rights’ ‘no consideration, no contract’ and so on. Without understanding these principles and theories of law, the nature of the law cannot be construed at all. Law is synonymous to the word ‘Dharma” i.e. duty in the Hindu philosophy and ‘Hukum” in the Islamic system. Romans call it ‘jus” and in Germany and France it is called as ‘Ritch” and ‘Droit” respectively. Whatever nomenclatures may be given in different countries, the law is essential to regulate the human activities in every society. Therefore, different societies have made law for regulating their activities. A society cannot function well without the presence of law in it.
  2. 2. Sometimes, law represents customs and traditions prevalent in society. Customs and traditions are long habits of people and thus deserve the obedience of people. The state respects customs and traditions of people and allows them for their observance. As human behaviors are regulated by customs and traditions, they are laws as such. Likewise, laws are conventions i.e. agreements and contracts. Agreements and contracts also regulate the activities of human beings. When we agree to do something, we are obliged to do that. It is so because we have made laws for ourselves in the form of promises. We have to fulfill our promises. Contracts are special kind of agreements. They bind the contracting parties because the terms of the contracts are laws for them. Religious precepts also guide the behavior of people. Certain of our conduct are regulated by the religion as well. We have to follow them even though we may not like to do them. For example, when we do marriage, we follow the religious rituals. In this way, law is an instrument that guides, regulates and systemizes human behavior. In its widest sense, it can be understood in terms of any rules of actions. It may include every standard, values, norms, ideals and precepts, the rules of gravity, the rules of the universe, the rules of nature and the like. Thus, we can say that law is any kind of rule that guides, regulates and systemizes human behavior. It is a body of principles and theories propagated by scholars and it is a conglomeration of rules made by the legislative organ of the state. Put all of these assertions together should be understood as the law. 2. Definitions of law Definitions of law are the ways of looking at law by people. Different people see law from different ways which are called the definitions of law. Law can never be defined. Jurists have made endeavors to define law but none is able to provide its universally acceptable definition. Various scholars from various angles have variously defined law. There is no unanimity of opinion regarding the real nature of law and its definition. Some scholars define law as a rule administered and enforced by the court of law whereas some others regard it as a rule guided by the state. Some jurists define in terms of commands of the Almighty and some have defined it in the form of customs and traditions. However, none has been able to provide the universally acceptable definition of it. There are many definitions of law given by different jurists at different times. They have defined law from different angles. Some have defined it on the basis of its nature, some concentrate mainly on its sources. Some define law in terms of its effects on society while others prefer to define it in terms of ends or purposes of law. They make a volume of books if we collect definitions given by them. Therefore, to make easier to understand law, they are put in a category, which is known as a school of law. The school of law reflects the nature of law. It is a collection of similar definitions on law given by different jurists. Such schools of law are namely natural law school, Analytical law school, Historical law school, Economic law school, Sociological law school, and Realist law school. We cannot explain here all of the definitions of law according to the schools of law. Here are selected some of the definitions of law, which will make us to understand the meaning and nature of law so far. Austin says: - “Law is a general command of the sovereign backed by sanction”. According to Austin, law is a command of the sovereign. The command is general in nature. A command given to a particular person or group of a person is not law at all. For example, if the sovereign authority commands his servant to bring a cup of tea, it is not law at all because this
  3. 3. command is targeted to a particular person. This means the law should be imperative for all. On the other hand, if he says none will kill other person, this will be the law. The commands to be law must be given by politically superior individual to the inferior one. Such commands are always backed by sanction. That means the person who violates the law in the form of command gets punishment. To him, people obey commands (laws) because in breach of it they inflict punishment. Austinian definition of law is not free from criticism. First of all, he is not clear about the sovereign who he is. He fails to demarcate the politically superior one who commands- whether he meant the king or parliament, is not clear. The parliament makes laws; the monarch approves them in modern system of governance. Secondly, all laws are not and/or cannot be commands as such. Some laws create institutions; others provide powers to the positions attached with them. Thirdly, people obey laws not because of fear of punishment but also due to their preservation of their rights and duties. Civil law does not inflict punishment people follow it notwithstanding. Lastly, his definition of law does not cover the international law, which has been one of the branches of law. Salmond defines law as follows: -“Law is a body of principles recognized and applied by the state in the administration of justice.” This definition is insufficient. This is so by multiple reasons. In the first place, the body of principles is an abstract notion. It does not refer to the concrete idea of law. The law, which we talk about, is the law that consists of the statutes (Acts of parliament). The law making organ of the state lays down precise rules, not the body of principles. In the second place, law tries to achieve various purposes. Salmond says that only the administration of justice is the end of law. There is an existence of just laws according to him. But unjust laws equally exist in the state. Therefore, the law does not only refer to the notion of justice but also it is used to structure the state and its institutions as well. Law is not only the body of principles but also of the rules recognized and applied by the state, not only in the administration of justice but also to achieve different ends of law. According to Holland, “Law is a general rule of external human action enforced by a sovereign political authority.” To Holland, law is a general rule which is applied to all. This means it is not for a particular person. It regulates the external human action which means internal human actions are not the subject of law. For instance, you join a college. How you should behave at college may be the law. Whereas, how you think or study at home, which subject first and which one last is up to you. It is your internal action. Therefore, it is not law according to Holland. The law is enforced by the sovereign political authority. This is very important to know that the law cannot be made and enforced by anybody. It should be enforced by the political sovereign according to Holland. Supposing, there are 205 members of parliament who are elected by the people make the law in the parliament is the law as such. Everybody has to abide by the law made by them. Contrarily, if 205 Nepalese citizens gather together and declare something as law, it cannot be called law. This is so because they are not sovereign political authority. Members of parliament have sovereign authority and the rules made by them are laws according to Holland. Blackstone opines:-‘Law in its most general and comprehensive sense signifies a rule of action, and is applied indiscriminately to all kinds of actions, whether animate or inanimate, rational or irrational.” His definition is more appropriate. Law does not have a limited sense. It should be taken into its broader sense. He says that the law can be any kind of rule for human action. It is applied to all without discrimination. Where there is some action, a set of rules is necessary to follow and that set of rules according to Blackstone, is the law.
  4. 4. 3. Importance of law The law is very essential thing in human life. Law is very important instrument to regulate human behavior. Law is very important tool to maintain the law and order situation in society. It is useful in giving rights and imposing duties to the individuals and various authorities. It is the law, which provides powers and immunities. It also provides liberty and freedom. Apart from providing powers, immunities, liberties and equality, there are various purposes of law. The ultimate end of the law is the administration and delivery of justice. The primary function of law is the delivery of justice. Justice is divided as corrective and distributive. The law creates organizations and institutions to accomplish that purpose. The law provides procedures for the administration of justice and for the guidance of human actions. The law imposes duties on everybody and punishes them in case of non-compliance to it. We cannot imagine a society devoid of law. There will be disorder and chaos in society in absence of law. Might will be right and the mighty will take everything and weaker ones will always be exploited by them. It is the law, which protects weak ones from the strong and powerful ones. It is awake when we sleep and we wander freely because the law is there. Law is the king of the kings for the weak may prevail over the strong by means of law. It is above everybody. Law is not subject to anybody; rather everybody is subject to it. The law rules over the king as well. Law is a social science and grows and develops with the growth and development of society. New developments in society create new problems and law is required to deal with these problems. For instance, space law came in being when people invented the space and explored the different planets in the space and marine law when they explored beneath the sea and ocean. Likewise, when the computer was invented then the cyber law was required. So, the law is required when the new subject and discipline is invented. Law is an instrument of social change. When changes take place in society, the law is required to shape them. To make some changes in society, the state must take recourse of the law. Whenever society gets transformation, the law is required to mechanize it. For instance, law has played a tremendous role to shape the process of industrialization and is shaping the present scientific and technological development. The grip of law extends to the reach of people either it is the space or the sea. The new advent in science and technology necessitates the presence of law. The development on computer science has demanded the control over cybernetics crimes. In the present age, law pervades all the spheres of human activities and the state seeks to regulate them through the instrumentality of law. We can further state the significance of law as follows: 1. Law is used to fulfill the common will of the people. People have common will. People collectively need road, drinking water, school, universities, health facilities, job opportunities, good environment, development and many more things in common. Therefore, law is necessary to fulfill the common desire of people. Economic, social, cultural, Educational etc conditions move on their desired destination by the help of law. The state distributes its resources and offers opportunities to its citizens by means of law. In the form of rule, law brings discipline in any field and for its breach, it inflicts punishment. At the same time, it is required to save the innocent people from the criminal ones. It is needed to eliminate the social evils prevalent in society and to uplift the socially, economically, and culturally back-warded class of society. The law is very important tool to carry out the popular concept of social welfare state. Likewise, the political, social, economic etc ideals or philosophies are transformed into reality by using
  5. 5. the law as equipment. Therefore, law is very necessary commodity in our life. There is anarchy, lawlessness, disorder, tyranny and always oppression in the country where the law is not respected and followed. It measures the standard of a person or society by calculating their regard and obedience to it. The more we obey the law the more we are sophisticated and developed. European civilization is said to be standard because of their obedience to law. 2. Law brings uniformity in the system: Rules are made for all. When the laws are made they are meant for everybody. When one has to do something for a particular job, others need to do the same thing. For instance, everyone needs to follow the same process when getting citizenship certificate, the same process while incorporating the company and the like. By this, there happens uniformity in the regulation of human activities. 3. Law systematizes human activities: When the human beings follow the law, they need to do it systematically. This means they need to carry out their activities one by one in order. For instance, company may be incorporated but first of all, a person willing to establish a company needs to file an application in the company registrar’s office. Then company registrar makes certain investigation on the application. If all of the criteria are fulfilled the person gets the certificate of incorporation of company. It prescribes the method by which it brings a system. Every human activity is arranged according to a system. For example, the state cannot recruit government officials without fulfilling a system. A person willing to join the government offices must take examination scheduled by the law. They must undergo the public service commission’s examination and pass the examination. You need to pass a bachelor’s degree to join the Master’s degree. To do that you must have passed the certificate level and to join the certificate level, one must have passed the S.L.C. and for going through S.L.C., s/he must have studied from one to grade ten. By this we can easily understand that the law systematizes human activities. 4. Law and order situation is maintained through the instrumentality of law: Peace and tranquility is maintained by the law. If there is no law, the mighty shall take everything. There are police, army and other state forces who are appointed to regulate the movement of the people. People cannot loot, assault and kill anybody. The life, liberty and property of people are protected and human dignity is maintained by the law. The state gives punishment to those who do not uphold the law. Without peace, prosperity is not possible. For peace, law and order situation must be present. For this law is required and implemented by the state. 5. Law is the king of the kings: The law has to be followed by everyone in the state from the head of the state and government to the general people. It is for all. Even the king or the Prime Minister is not exempted from the grip of the law. None can do whatever he/she likes to do. When anyone does contrary to law, he/she is punished according to the terms of the law. Everybody has to abide by the law. Therefore, the law is the king of kings. It is supremo in the state. 6. Justice is the ultimate end of the law: The ultimate end of the state is to provide the justice to its people. The law is an instrumentality of the state to achieve that end. There is disorder and chaos in a state where the justice is lost. Every system in a state is targeted directly or indirectly to provide justice to the people. Justice may be corrective or distributive. The corrective justice is available through the courts. It covers a small part of the justice. When there is any dispute among the state and the citizen or between the people themselves, the courts settle the disputes. It is regarded as the corrective justice.
  6. 6. Distributive justice is another kind of justice. It is the justice provided by the government. It covers a vital and major portion of the justice. People need various types of facilities, need law and order system in a country, require different opportunities available in a country, education, health facilities available, natural resources to be exploited for the betterment of the people. When every people are distributed with the facilities like road, drinking water, schools, colleges, job opportunitites, health security and the like equally and indiscriminately, there is the availability of distributive justice. These and many other category constitutes a distributive justice. The law is necessary to provide the justice whether it is corrective or the distributive in its nature. 7. Protection of human rights: Another importance of law can be stated as the protection of human rights. These rights are very essential for a human being to sustain life and develop personalities. The state is always prone to encroach upon the rights of human beings. The law is required to save people from such encroachment of rights. The significance of law is not complete just by the statements mentioned above. In fact, its importance is great and we cannot state it that easily. It is important for the rulers and the ruled, for the students and teachers, for the government officials and the citizens, for the courts and the police, foreigners and nationals and everybody while doing anything permitted by law. The law has effect on every aspect of our lives. It governs our conduct from the birth to the death. We live in a society which has developed a complex body of rules to control the activities of its members. We cannot think of our life without the presence of law. 4. Characteristics of law Some of the features and characteristics of law are traceable from its meaning, definitions and importance of law. They have been mentioned above. Some of the features of law are given below: 1. Law is dynamic in nature: One of the characteristics of law is its dynamism. It keeps on changing with time, place, and social exigencies or necessities. It changes with changes and developments in the society. Therefore a law, which dominated our society yesterday we find repealed today and thus outmoded. When the society changes the law can be changed according to the social necessity. By this reason, law has remained as a central point for the state at any time. 2. Law is not an end in itself: Law is not an objective of the state. The state uses the law to achieve its various objectives. It is a means to an end. One of the ends is securing justice- be it corrective or distributive. Corrective justice seeks to remedy the wrongs. It is the justice provided by the courts. Distributive justice seeks to ensure fair distribution of national resources, social benefits and burdens among the members of the society. Another end of law is to preserve the life, property and liberty of the people. The other purpose of law is maximization of the happiness of the people. The purpose of the law is to promote the interest of the minorities in race, sex, caste, language, religion and so on. So, the law is required to accomplish any of the objectives of the state. 3. Functions of law: According to Dean Roscoe Pound, there are four functions of law. They are in the first place to maintain law and order situation in society. If there is no law and order situation in the country, no field of national life can be operated properly. Peace and security are the first priority of the state. This is obtained by the law only.
  7. 7. Secondly, the law is required to have the social engineering. This means reformations in the society for its betterment. It is required to create the social institutions. Thirdly, it is required to ensure maximum freedom of individuals by which they can develop their personalities. And lastly, it is required to satisfy the basic needs of the people. The contents of the basic needs are not necessarily the food, shelter and clothes only. Apart from these, today the basic needs include education, health and social security as well. 4. The law by and large provides uniformity in the system: Uniformity is necessary for certainty and predictability of actions. The laws are fixed and generalized and the citizens can plan their activities with certainty and can predict the legal consequence of their activities. This brings stability and security in the social order. 5. The law is flexible in nature: It can be altered easily when the society so demands. If the law is not changed as per time, place and social needs, people will resent with dissatisfaction. This brings stability and security in the social order. As the law is flexible, it is bent according to the wish of the ruler. Dictators ruled over the state as they wished because of its flexibility. Any law can be made by the parliament just by a simple majority. 6. The law is territorial and extra-territorial in nature: Law is both territorial and extra- territorial in nature. It is territorial in the sense that its operation is limited within the national territory of the state. Usually laws made by the state are applied to persons, things and events, which are within its territory. The land laws, the law of marriage, divorce, property, administration, health, education etc are applicable within the state jurisdiction. However, in certain instances, there is extra-territorial operation of law. It also operates outside the territory of the enforcing state. Criminal law, international law etc have extra-territorial jurisdiction. They empower the court to try offenses of privacy, committed outside the state territory. Generally, the offenses of privacy, treason, murder committed by any person in any part of the world would be tried in courts of the state concerned. However, territoriality is a matter of self-limitation and therefore not uniform. This varies from state to state. Basically when the disputed matter is the concern of other country, it has extra-territoriality. For example, a person commits crime in one nation and absconds to another nation, is a matter of concern for both the nation. Therefore, the laws regarding to this is extra-territorial in nature. 7. The equality is another feature of law: The law is meant for all. The law treats all equally. There is no discrimination in the application of law. Also it gives equal protection to all. It does not make discrimination on the grounds of race, religion, caste, sex, locality, or the like. ‘Like persons are treated alike’ is the concept of equality before law. However, the special treatment can be initiated by the state for those who are socially economically back ward class of the society. Absolute equality can never be achieved and the law does not go for the perfect equality. It is relative in nature. 8. Law is the king of the kings: It is above all. Everybody has to obey the law. When being a Prime Minister a person kills another, he is tried on the criminal offenses just like a layman is tried. The law is the king of the Prime Minister and even the king. This means none is above the law. Where the law is made subject to anybody, the system is either military occupation or a dictatorship. 9. Prevailing method of law: The legislative organ of the state i.e. the parliament makes the law, the executive implements it and the court adjudicates and interprets it. As the parliament consists of the representatives of the people, it is deemed that people make
  8. 8. law themselves. The executive applies the law according to the will of the legislature. The court sees that the law is properly applied /enforced by the executive according to the will of the parliament. If the executive has not implemented it properly, then the courts make corrections on its implementation. It gives punishment to the guilty and provides remedy to the innocent person. The content of the characteristics of law is not complete just by stating the statements above. For the general understanding of the law, the statements present a clear picture of the nature of law. 5. Types of law For a proper understanding of law, a classification of laws is not only desirable but also necessary. It makes clear relation between different rules and their effect on each other. It also helps in arranging them in a concise and systematic manner. Scholars have tried to classify law from time to time. However, their every effort has become incomplete due to the changing nature of law and for this the law needs a new classification in every age. There are many types of law according to many scholars. First of all, we will see the classification of law according to some scholars. Salmond has also classified the law. His classification is highly cited by scholars. Salmond divides law into eight categories. They are described as follows: 1. Imperative law: Such laws prescribe general course of action by superior authority. The commands of the sovereign are imperative laws. The sovereign gives commands to do certain things and not to do certain things. The observance of these laws does not depend on the pleasure of people. Sanction is imposed by the state for the disobedience of imperative laws. 2. Physical or scientific law: Physical laws are also called the laws of science. They are the expressions of the nature. The moon revolves round the earth and the earth around the sun is the physical law. We cannot change them. They are in existence since time immemorial. 3. Natural and moral law: Natural law is based on the principles of right and wrong. It includes all forms of righteous actions. It is eternal or universal law. It is based on reason or logics; therefore it is also called the rational law. It embodies the principles of morality and ethics. It does not contain physical compulsion. 4. Conventional law: According to Salmond, conventional law means any rule or system of rules agreed upon by person for the regulation of their conduct towards each other. This is applicable to the contracting parties. Rules of club, rules of games (cricket, football), and rules of co-operative society or any other voluntary association are some of the examples of conventional law. In a business, it is necessary to conclude the contract. Conventional law is also applied in the international relations and concern. A treaty is a conventional law. 5. Customary law: To Salmond, any rule of action, which is actually observed by men, is customary law. Customary law is based on the customs. They are long habits of people. People uphold the customs and rules to obey the customs are the customary rules. People in common observe Dashain, Tihar, Id, Christmas, etc are customs. Rules regarding to their celebrations are customary rules. Though conventional law may be voluntary, it is still law. The state gives validity to customs when they are firmly established. Hindu law
  9. 9. regarding marriage, succession, minority and guardianship, adoption and maintenance are based on customary law. 6. Practical and technical law: Those laws which are made to fulfill the practical or real objectives in a particular field of human activity are known as practical laws. They are called technical laws as they function in a particular field and they are technically made in a set form. The law of architecture, the law of music, the laws of construction, building etc are some examples. 7. International law: Such rules, which regulate relations between the states, are called international law. International law relates to the functioning of international institutions and organizations and their relations with each other. It is the law which regulates their relations with states and individuals. It contains certain rule of law relating to individuals so far as the rights and duties of such individuals are the concern of the international community. It can be found in international treaties and conventions. Beyond the state territory international is applied. These laws are based on the consent of the sovereign states. This means until the sovereign state agrees to obey, they are not applicable for the state. WTO rules could not be applied to Nepal until Nepal acceded to it. 8. Civil law: To Salmond, civil law is of the state or of the land. It is territorial in nature. It creates legal rights. This law regulates the relationship between the individuals. Salmond has not classified the criminal law as law. The criminal law is very important branch of law. Therefore, his classification does not cover every branches of law. Now, the laws are classified on the different basis as mentioned below. There are two types of law on the basis of the nature of law. They are substantive law and procedural law. They are closely related with each other. They are explained in brief as below: 1. Substantive law: This law is that branch of law, which deals with the rights, liberties, powers and immunities of people. This law confers rights, liberties, powers and immunities on the people. It provides rights, liberties and imposes obligations. It not only determines legal policies, rights, liberties and duties but also fixes the liabilities (fine, punishment, imprisonment etc) in case of infringement of such rights, liberties and duties. The law which creates something is the substantive law. The law which says there shall be a Supreme Court of Nepal is a substantive law as it creates the Supreme Court of Nepal. 2. Procedural law: This law is that branch of law, which deals with the methods of carrying out the provisions made by the substantive law. It helps to fulfill the objectives of the substantive law. It states how and from where the innocent party can get remedy if his rights are violated. It studies about the methods of getting remedy. It controls and regulates the procedure adoptable in the course of litigation. Rights defined and provided by the substantive law are enforced or carried out according to the method laid down by the procedural law. Procedural law deals especially with such matters as the filing of petition, summons, and rejoinder, collection of proof, pleading, judgment and execution of the verdict. As this law explains about the process for litigation, it is applicable in the criminal and civil cases equally. On the basis of the relationship among the states, between the state and its citizens, and among citizens, law can be categorized into the following types: On the basis of relationship among the states, the law is divided as international law and national law.
  10. 10. 1. International law: It is that branch of law which regulates the behavior of the nations. It is divided into public international law and private international law. Public international law is the body of rules which governs the conduct and relations of the states with each other. Private international law is the body of those rules and principles according to which cases having foreign elements are decided. It settles the relationship between the citizens of one nation and another. 2. National law: It is the law which is applied within a state. Every law, which is found within the state territory, comes under this category. It is known as municipal law. It is divided as public and private law. On the basis of the relationship between the state and its citizens, law is divided as public law and private law. They are explained as follows: 1. Public law: Public law is that branch of law which concerns with the relationship between the state and its citizens. This branch of law is the collection of such rules which are of public concern or importance or include the public interests. For instance, when a crime takes place it becomes concern of everybody. Therefore, rules regarding to crime or control of crime are called the public laws. Basically, public law is divided into three categories. They are constitutional law, administrative law and criminal law. They are described as given below: a. Constitutional law: It is that branch of public law which is concerned with the working of the constitution. It covers such matters as the position of the king, the formation and election of the government, the composition and procedures of the parliament, the functioning of the local and central government, citizenship and civil liberties of the individuals, composition of the judicial system. It determines the nature of the state and the structure of the government. When a new government is formed, everybody has concern over it. Therefore, it is a part of public law. b. Administrative law: Administrative law deals with the administration of a country. There are many government organizations and offices of the government for its operation. This law concerns with the structure, powers and functions of the organization of administration, the limits of powers of the officers of the government. It also deals with the methods by which their powers are controlled including the legal remedies available to persons whose rights have been infringed. It deals with the functioning of the government service holders. c. Criminal law: Criminal law is the law related to the crimes. It defines offences and prescribes punishments for them. It does not only prevent the crimes but also punishes the offenders. It is necessary to maintain law and order situation and establish peace within the state. The state initiates legal proceedings against the criminals and is always a party in criminal cases. When a crime takes place in society, the police make investigation on the crimes and they file cases against the criminals. 2. Private law: Private law is that branch of law which deals with the relationship between individuals. It is only the concern of a private individual. This branch of law regulates the activities of individuals who make disputes with each other. It primarily concerns with the rights and duties of individuals towards each other. The state involvement in this area of law is confined to providing a civilized method of
  11. 11. resolving the dispute that has arisen. Thus, the legal process is begun by the aggrieved citizen and not by the state. It is also called civil law. It is divided into many specialized area. Some of its types are given below. a. Property law: Property law deals with the matters belonging to the property of the individual. It studies about the corporeal and incorporeal property of the individual. Corporeal property is that property, which has physical existence, like the land, house, TV, radio etc. Incorporeal property is that which cannot be seen but realized such as goodwill, paten right, design, trademark and copyrights. Thus, property covers land, goods and intangible rights such as debts, copy or the goodwill of a business. The rule that regulates these matters is the law of property. Other aspects of property law are inheritance, partition of property, sale and purchase of property etc. b. Family law: Family law deals with the relationship between the family members and studies about the succession, inheritance, anomaly, husband and wife relationship, partition, marriage and wills. c. The law of tort: A tort is a civil wrong. A tort is a wrongful act that causes harm or injury to a person or his/her property. If a harm or injury is caused, the tort allows the injured person to recover damages. Even though the tort appears to be a crime, it is not a part of criminal law. It is a part of civil law. The law of tort seeks to provide a legal remedy for the victims of certain forms of harmful conduct. A numbers of distinct areas of tortuous liabilities have been developed to protect people from many forms of wrongful conduct, which may occur in a modern society. Examples of such kinds of harmful conduct are interference with a person’s ownership or possession of land or to business or personal reputations i.e. tort or defamation; interference with a person’s use and enjoyment of land i.e. tort of nuisance; personal injury and death i.e. torts of negligence; passing off, inducement of breach of contract, conspiracy. The aggrieved party has to initiate the lawsuit. It governs the relationship between the individuals. d. Trust law: It deals with the rights and duties of the trustee and beneficiaries, management of property in trust etc. e. Law of contract: It is that type of law, which is created by the contracting parties by themselves through their promises and agreements. The law of contract regulates most of the business activities. f. Business law: Business law is that branch of civil law which regulates the business activities. Business law includes such laws which are related to the trade, commerce and industry. The law of contract is very important part of the business law. 6. Sources of law Sources of law comprise of two words. They are ‘source’ and ‘law’. A source is an origin in general. It means from where we get something is a source. Hence a source of law means origin of law. The source of law says from where the law comes. In other words, it means that from where the law is made i.e. modes of making law. There are different views regarding to the origin of law. Theologians believe that the law emanates from god. Austin says law originates
  12. 12. from the sovereign as he regards the law as the command of the sovereign. Savigny says it is found and develops from the common consciousness of the people. He calls it as volkgeist. Positivists claim that the legislation only is the source of law as the law is made by the parliament. Let’s see the views of the jurists regarding the source of law. Jurist views on the sources of law we can classify the sources of law into two kinds. They are the primary sources and secondary sources of law. 1. Primary sources of law: Primary sources of law are those sources of law, which are originated from the authentic institutions or agreement. These are such sources which supply the law directly and they are binding on the people. These sources bind the people, the court, government agencies, and the other parties concerned. They are major sources because they have legal authority to make the law. The laws made by these institutions are very important and in modern world the laws made by such authorities are highly obeyed and observed by the people. They are direct sources of law as they give law directly. The primary sources of law are legislation, precedent, custom and conventions. They are explained below. a. Legislation: The word legislation is derived from the two Latin words- legis and laterm. In its literal sense, legis means a law and laterm means to make. Therefore in its literal meaning legislation means to make a law. The word legislation means laws that are made by the parliament in a set form. And it is the only body competent to make law. In its broader sense, the acts of law making, determining of state policy, ratification of treaty and termination of it, declaration of government schemes and budgetary rules etc are also regarded as legislation. Salmond says that legislation is that source of law, which consists in the declaration of legal rules by a competent authority. There is a fixed procedure of law making. The parliament has to make laws according to the procedure laid down by the law and the constitution. b. Custom: It is another major source of law. It is originated from the habits and behavior of the people. Customs are such habits of people, which are observed since a long time. People practice them in common and they give consent on them. Therefore they are major sources of law. Those who disobey the customs are ousted from their society. The state also cannot violate the customs. Customs have been found in all societies like Hindu, Muslim, Christian, etc. A large portion of legislation is said to base on customs in Nepal. In Muluki Ain, there are many customary rules such as it prohibits marriage within seven generations. A custom is a rule existing from ancient time to regulate human behavior. It is a natural process in society. Violation of custom may result in exclusion from society. Every legal system has accepted the position of custom. In absence of legislation and precedent, custom plays a vital role. Custom plays a vital role in Hindu law and English law. It is supposed to continue and it provides an element of law and brings certainty and permanency. In Nepal, a large portion of rules contain customary law. Debt transactions, money landing, marriage and women’s property are some of the examples. Different customs have been declared as void when they are illegal
  13. 13. like bhauju biraune, sati system, etc. They are abolished when they are inconsistent with morality, public policy, statute and reasonability. c. Precedent: Precedent like legislation is an independent source of law. It is a unique concept of legal source developed by common law system. In its literal meaning, it is past instance or past decision of the court. Keeton says that a precedent is a judicial decision, which has a legal force. Jenx says: “A precedent is a decision given by a competent court in a disputed legal question which is not limited to general guidance and direction but becomes authoritative.” The principle of precedent was originated in England. It is now followed in America, Australia, Canada, India, Nepal and other countries of the world. In Nepal the principle of precedent was adopted only after 2007 B.S. Any interpretation of law or a lawsuit is binding on the government of Nepal including all government offices and the court. The decisions of the court establish the precedent. There are some reasons to take precedent as source of law. It supplies timely law. It is refining because the judges establish the precedent only after discussing the cases at hand. It is a measuring rod to legal development. It protects judges from wrongs. It reflects illegal and biased functions of judges. There are many kinds of precedents. On the basis of bindingness, they are authoritative precedent and persuasive precedent. The former has a legal force and the latter does not have a legal force. On the basis of its nature they are original precedent and declaratory precedent. On the basis of its nature of power they are absolute precedent and conditional precedent. The law made by the judges is known as the precedent. Judges do not make law as such but if there is a gap of law, they can make law to fulfill the legal gap. They fulfill the legal gap by deciding the case at hand, which is the precedent and is binding to all. The judges in the similar cases that come before the court in the future apply the precedents. Thus they are major sources of law. d. Conventions: Conventions are agreements, which are laws for the contracting parties. The terms and conditions of the contract are laws for the parties involved in it. This is why it is also a major source of law. Once the contracting parties agree upon doing something or promise to do something, they must fulfill their promises or carry out what they agreed on. Their promises work as law for them. If you agree to hire a room for 2,000/- rupees per month, you are obliged to pay Rs. 2,000/- per month. This is so because you have made law for yourself and you need to uphold it. In this way, conventions are major sources of law as well. Agreements may be made between and among the states. They are called convention or treaty. They are contracts for the countries involved in the conventions or treaties. The provisions of such conventions or treaties are the laws for the countries signing on them. Nepal has signed many conventions and treaties. For instance, Nepal has signed in the convention of world trade organization, convention on the universal declaration of human rights, 1948, international convention on the protection of civil and political rights, 1966, convention on the elimination of all forms of discrimination against women, convention on the rights of the child and so on. The provisions
  14. 14. containing on these documents are the laws for Nepal. Thus, the conventions and treaty supply the law and therefore they are the major sources of law. 2. Secondary sources of law: Secondary sources of law are those sources of law, which are not binding, but they provide an ample source for them. They are sources because they help people to know the law from them. They do not make law themselves but help in providing information, knowledge or ideas on law. They are indirect sources because they help to make law indirectly. Such sources of law can be put in the following category: a. Opinion of experts or juristic writing: The articles, books, etc written by scholars are secondary sources of law as they provide knowledge on law. Sometimes, the opinions of experts supply the good information regarding to laws. They are not binding but they help to understand the law. Juristic writings are taken into consideration by the judges, lawyers, professors and students while understanding the principle of a particular case. They give us wide ranging ideas regarding to the law and legal precepts. b. Historical documents: They are helpful to understand the development of law. They provide us the knowledge on the development of law and legal concepts. They represent a particular period and we can get idea about the law existing at a particular period. c. Decisions of Foreign court: The decisions of foreign court can be helpful while deciding cases. Every country goes through the decisions of the foreign courts to emphasize on their logics. d. Foreign law: While making new law they become very helpful. It is very helpful to make a comparative study on law. e. Principles of morality: They are helpful to guide people on their profession. These principles contain ethical values. If any profession lacks ethics then they help the parliament to frame laws in the form of code of conduct. Religious texts are also secondary sources of law, which provide knowledge on law. The law making authority cannot go against the religious texts. Meaning and importance of business law The word ‘business’ includes such words like commerce, trade and industry. The word ‘business law’ comprises of two words. They are business and law. The term business refers to occupation, profession, enterprise, commerce, trade and industry. The works related to the livelihood of people are the business activities. When any activities are targeted to earn certain profit by doing certain works is known as the business. Law as already stated is any kind of rule of action. Business law thus literally means any kind of rule to regulate the activities pertaining to the business, trade, commerce and industry or the livelihood of people. It is also known as commercial law or mercantile law. Business law deals with the subject matters such as law of contract, pledge and bailment, indemnity and guarantee, agency, sale of goods, law of carriage, banking, tourism, foreign investments and technology transfer, insurance, negotiable instruments, various matters relating to company such as incorporation of company, operation of company and dissolution of company etc.
  15. 15. Business law is a branch of civil law which deals with the relationship between one citizen and another. There is an individual dealing with the business matters with another citizen and rules which are needed to conduct their activities are called the business law. A business person needs to do different activities to run the business. He has to deal with the government offices, with the society, with other business people. He/she has also to recruit the employees necessary for the company. For that he/she needs certain rules for its regulation. These rules are known as the business rules. When a person starts a business and establishes the company or a business firm or partnership, the rules for its operation are also business rules. When goods are sent in the market, the transportation is necessary. Rules are necessary while carrying goods from one place to another. The rules regarding to the carriage are also the business laws. The state requires business law to regulate the state affairs regarding to the economic activities of human beings. It arranges every economic activity to be operated smoothly and regularly. It also clearly defines the outlines for the settlement of the disputes related to the business and economic activities. This law deals with such business rules which state about the business enterprises, firms, workers, promoters, production, distribution, profits, business related crimes, restrictions on the business, globalization of the business, privatization of the business and the like. There are different definitions given by different scholars regarding to the business law. M.C. Kuchchal in book business law defines the business law as “The term business law may be defined as that branch of law which comprises laws concerning trade, industry and commerce.” Likewise, A. K. Sundaram in his book, ‘The Business Environment’ says: “Business law provides legitimacy, security, control and incentives to business activities. It also protects rights and interests of consumers of labor, business and society.” Business law is very important in the regulation of business activities. It is very important to regulate the trade, commerce and industrial activities. By properly regulating the business activities, a country attains prosperity and affluence. There are various principles and theories developed in the business field which are binding to the business people. For example, ‘no consideration, no contract’ is a principle of business law. These principles are also part of the business law. The cases decided by the court are also part of the business law. There is code of conduct to be followed by the business people which also forms part of the business law. Business law is very important for the sustainable development of business. Business law is very important branch of civil law. It protects the business interests of people. The importance of business law can be stated as follows: 1. Business law facilitates the business community: Business law encourages the business community to do different types of businesses. Business people are offered different types of facilities while running a business firm or organization. Business makes possible to use different kinds of commodity produced in one part of the world to another part. We are using different kinds of facilities due to the business expansion. The expansion of business has been possible due to the business law. 2. It is important to create good environment for the business: Business law creates good environment for the investment. People like to make investments in different sectors where they see certain profits. When the investors are satisfied with the peace environment, they think their investment would be fruitful. So when there are no business conditions in a country, there is no prosperity gained. It is the business law which provides equal protection to all businessmen and creates a good environment in a country.
  16. 16. 3. Strong economy: Strong economy is the basic objective of any country. Peoples economic rights are protected when there are sufficient opportunities available for the people of that country. When most of the population of the country is engaged in business activities, the economy of that country is strong and people get their economic rights protected. Economy is strong by operation of various kinds of business activities. People doing business do pay the taxes to the nation by which the nation can collect a huge amount of money to do its developmental activities. People get job in different fields as the business is possible in any field of subjects permitted by law. 4. It brings uniformity in the system: As the law is equally applicable to all, by this, there is uniformity in the business field. For instance, when A needs to run a business, he has to register the business in the company registrar’s office. The same rule is applicable to another person/s who wants to do any business. They need to conduct the annual general meeting of the company and need to employ certain types of people to do the company works. The company has to audit its accounts and keep the proper records of taxation. A company or a business firm has to show its rules to carry out any kind of activities. This brings uniformity in the business field. None can do whatever s/he likes to do in business. The business law controls and regulates all of the business activities of a country by which there is uniformity in the business realm. 5. Systematization in business: The business law creates rights and imposes duties on the individuals of various capacities. A business should not be understood just as running a bakery café or a retailer. It should be understood as the operation of large scale of business activities. Where many people work under the same umbrella of business in different capacities. For instance, banking is a kind of business and to do banking transactions, certain kinds of rules and regulations are necessary. When the banks and financial institutions are established, they are made to do certain things in common. When people do things in common, it becomes systematic. Business firms and organizations can carry out their activities in their style subject to the parameters determined by the law. In doing so, they may create sub-systems for the operation of their business. 6. Justice is an end of business law: The importance of business law lies in the fact that it provides justice to the people involved in the business activities. It protects the interests of the investors and gives opportunities to the needy and therefore provides distributive justice to the people. Business law also guarantees the rights of the employers and employees equally. It sees whether the interests of the investors are protected. At the same time, it also sees that the employees are not exploited and their jobs are guaranteed, they are duly paid and their jobs are secured and they are given full securities to their jobs. In case there are any kind of disputes between the employer and the employee, the business law sees that the disputes are amicably resolved. Therefore, the business law is very important to provide justice to the needy. Sources of business law A source is an origin in general. It means from where something comes is the source of something. Business law also comes from various sources. The sources of business can be generalized from the sources of law discussed above. The business law basically is derived from the general sources of law. Here are given the sources of business law in Nepal.
  17. 17. 1. Legislation: Legislation is the basic source of business law. Legislation is the act of parliament. The parliament is the basic organ which is responsible to make the law. Therefore, it makes different kinds of law including the business law. There are many business related laws made and enforced by the parliament. For example, the contract Act, 2056, Company Act, 2006, Arbitration Act, 2055, Agency Act, 2014, the bank and financial institutions Act, and so on. Parliament makes the laws when and as required. These laws are made by the deliberative process by the representative of the people. This is a major source of the business law. 2. Customs: There are many customs prevalent in the business field as well. The customs are the long habits of people involved in the business field. Customs are made by the people themselves while doing the business. When the business customs are followed by business people in common and recognized by the state, they become law for the business people. They are major sources of business law. 3. Precedent: Courts do settle the business related disputes. When there is the gap of law, the decisions of the courts become precedents and they are the laws for the ensuing cases in the courts. Where there are laws for the disputes related to the business transactions, the court must follow the laws and decide the cases at hand. If there is no law for the disputed matter, then the courts cannot say that the case will be decided when the law is made by the parliament. The courts have to decide and the decision becomes the law until the new law comes into existence. 4. Convention/contracts: Conventions are also called contracts. Contracts are the agreements made between two or more than two parties. Parties to a convention or contract may be people or the states. When the states are the contracting parties and make agreements, the agreements are called the conventions. The contracts are the promises made by the parties. When the parties agree to do or not do anything, they are bound to that. Therefore, the terms and conditions contained in the agreement are laws for the contracting parties. In a business, parties need to form agreement at the different level of their business operation. This is the age of globalization and people sitting at one corner of the world may do business activities in another corner of the globe. This is possible only through the agreements and contracts. Foreign investments have been very important part for the business activities of a country. Therefore, contracts and conventions are very important sources of business law anywhere. 5. British Mercantile law: As India was ruled over by the Britishers, they imposed their business rules in India earlier. But later on the same rules were taken into consideration by the Indian business people. Now, different business rules left by the Britishers are in existence in India. As Nepal is influenced by the Inidan business and its business rules, British Mercantile law is the source of business law in Nepal as well. Once the British had colony almost all over the world and they framed various business rules to protect their business in their colonial state. India got the rules imposed initially and later on they became part of the Indian business. Nepal largely depends on the business rules applied in India. Therefore, the British mercantile law is the source of business in India and Nepal. 6. Principles of morality: Business gives profit to the business people. The simple theory of profit gain must be ‘earning by fair means’. The principles of morality tell business people to earn by fair means. These principles contain the ethical elements in them and they suggest the business people to guide their conduct in the right path. When ethical
  18. 18. values are greatly ignored, the laws are framed to control such mal-practices. Therefore, the principles of morality are also the sources of business law. 7. Decisions of foreign courts: The decisions made by the foreign courts are not binding on any country. However, when the decisions made by the foreign courts have wide ranging effect, they may be taken into consideration by the parliament while making laws, by the courts while deciding the cases at hand and by the business people themselves. That’s why they are also the sources of business law. 8. Writings or opinions of experts: Writing or opinions of experts are also the sources of business law as they provide the knowledge on the business law. Without studying the books written by the scholars, there is no meaning of the law clear. The books and writings of the experts are helpful in finding out the theory and making the interpretations of the laws. Without making research on the subject of law or business law, there can no forward moment of the society. The research on law guides the development of law. Writing on the subject of business law also may depend on the research and invention for the problems faced by the business community. Therefore, the researches and writings are the sources of business law. For the importance of legal environment and the court system, jurisdiction and civil procedures in Nepal, see S.N. Kalika, Business law for BBA, Buddha Publication. Chapter two Essentials of Nepalese Contract Law Nature and the importance of the law of contract The law of contract consists of two words. They are the law and the contract. The law means rules in the simple sense. And the contract means agreements or promises. In its literal meaning, the law of contract refers to the rules regarding to the rules of agreement or promises. The rules which are necessary to form the agreements or the promises are called the law of the contract. The law of contract comes in the form of the Acts of the parliament, the judicial decisions and customs and traditions. The contract Act, 2056 is the law of contract in Nepal. It contains various rules of contract in it. The law of contact is one of the oldest braches of law because the rules of contract were laid down since people started living in a group and society. The system of making promises can even be traced back since the emergence of human civilization because people in society used to make promises one way or the other way for various kinds of activities. The law of contract is the most important branch of law as it covers a major portion of business law. Business law becomes lame and defunct if we take out the law of the contract from it. Most of the business transactions are based on the contracts or promises. The theory of social contract reminds us how the people in general made a big contract to protect their life, liberty and property. They promised with each other for peaceful living in a group and society. Since then the law of contract developed and came to the present age. After deciding a particular form of business organization, a businessman seeks to establish and build up the business. This involves acquiring land and equipment, employing staffs and managing necessary raw materials, marketing and so on. There is a presence of contract in such business transactions. A contract, as most people think, is not necessarily a formal written document, which is signed by the parties in the presence of witnesses. In practice,
  19. 19. few contracts are like this. Many contracts are made without formalities. The parties making contract may even not know the legal importance of the contracts they are entering into. Of course, we enter into many contracts day by day knowingly or unknowingly. We read newspapers, we travel by bus or train, we open the internet service, we use electricity, and telephone, etc. There is the presence of contract under these all activities. The law of contract protects our rights where we have made contract indirectly. The law of contract provides the answers to these questions like what are contracts, what are the rights and obligations of the parties to the contract, what happens if any party breaks the contract and so on. The law of contract is that branch of business law which deals with the trade, commerce and industry. It basically deals with the agreements and the promises made by the people while carrying out the business transactions. The agreements are necessary at different stages of the business transactions. However, the law of contract is not related to the business alone. It equally deals with the transactions pertaining to the other matters as well. The law of contract is the foundation for the structure of modern business. In business transactions the promises are made first and the performance follows thereafter. In such a situation if any party reverts from the promise without incurring any liability, there would be impossible to carry on trade and commerce by anybody. Hence the law of contract emerged which lays down the legal rules relating to promises, their formation, their performance, and their enforceability. Regarding the object of the law of contract Prof. Anson observes: “The law of contract is intended to ensure that what a man has been led to expect shall come to pass, that what has been promised to him shall be performed.”1 There is no area of business law where the law of contract is not necessary. It is necessary for the bailment and pledge, agency, indemnity and guarantee, sale of goods, insurance, partnership, insolvency, investment and technology transfer, carriage of goods, arbitration etc. Meaning and definition of contract: Contracts are the major sources of law. By making contracts, people make laws for themselves. They are bound with what they agreed to do. A contract is a promise which must be enforceable by law. The promise is recognized and enforced by the court of law. So, such promises which are enforced by the court are contracts. The contract has always recognized obligation because the contracts create rights and duties for the contracting parties. Where one party gets right for something, another party has the obligation to uphold the right of that party. There happens an exchange of the promises between the contracting parties in a contract. Contract is an exchange of promises by two or more persons, having recognized obligation to do or not to do something. In the process of making contract there is always an exchange of promises between two or more parties. The promises exchanged without obligations are not contracts at all. The non- fulfillment of such agreements gives the aggrieved (innocent) party a right to sue against the guilty party in the court of law. Likewise, legal duties consist of doing something or not doing something on the part of the contracting patties. Thus a contract is an exchange of promises between the parties having some obligation recognized by law to do something or not do something. A contract is an agreement possessing all essentials. This means agreements or promises need certain qualifications to be contracts. A promise made to go on a picnic is not a contract. 1 M.C. Kuchchal, Mercantile law, Sixth Edn.Vikas Publishing house,(2006) p. 7.
  20. 20. However, it may be an agreement. In fact, an agreement requires certain essential elements to become contracts. Such essential elements are lawful offer and acceptance, two competent parties, consideration, intention to create legal relationship, legality of objects, free consent, possibility of performance, certainty, writing and registration, not expressly declared as void etc. If any of these essentials are lacking in an agreement, it cannot become a contract. Different scholars have defined a contract differently. Let’s discuss their definitions to know the meaning of contract more precisely. Here are some of the definitions of given by different scholars: Salmond: “A contract is an agreement creating and defining obligations between the two parties or more persons.” Salmond defines the term contract as an agreement made between the parties and such agreements create and define the obligations or legal duties for them. Therefore, all the agreements which create and determine the legal duties of all the contracting parties to the agreement can be said as contracts. Hence the agreement to be contract must create and define obligation between the parties. Pollock: “Every agreement and promises enforceable at law is a contract. A contract is a promise or a set of promises for the breach of which law provides remedy.” To him, every agreement and promises must be enforceable in the court of law to become contract. He further says that a promise or a set of promises is a contract, which gives remedy in case of its breach. Section 2 (h) of the Indian contract Act, 1872: “An agreement enforceable by law is a contract”. This definition is similar with the definition given by Prof. Anson. Section 2(a) of the contract Act, 2056 (Nepal): “A contract is an agreement made between two or more parties to do or not to do any work which is legally enforceable.” According to our contract Act, it is an agreement that is made between two or more persons. They agree to do or not to do any work. The agreement gives certain rights and imposes certain duties, which are enforced by the court of law. Section 1 of the restatement of American contract law: This definition gives more accurate definition of the contract: ‘A contract is a promise or a set of promises, for the breach of which the law gives remedy or the performance of which the law in some ways recognizes as a duty.’ The American definition of contract refers to a promise or a set of promises the performance of which recognizes as a legal duty and on the breach of which the law provides the remedy to the injured party to bring the legal action in court. We can infer three things from this definition as follows: Thus, a contract is found defined by different scholars in different ways. Some of them highlight on the legal obligation of the parties whereas some focus on the capacity of the parties. Again some of them prefer to define it on the basis of lawful consideration and some other on the basis of one element of the contract or the other. But the contract must be defined covering all of the elements of the contract. From the above-mentioned definitions, it is clear that the contract is something more than the mere agreement. It must also be supported by some more elements, which will be explained later on. But note that enforceability is one of the basic requirements. It means that if one of the parties does not fulfill his promise, he must have the right to go to the court of law. A contract is a promise as well as an agreement to do or not to do something. Two or more than two parties are necessary to make a contract. Under the enforceability the obligation or the legal duty is very important concept. The agreement will be enforceable at law when it is supported by obligation. There can be no contract if it is without any obligation.
  21. 21. However, the obligation arises not only by the agreement alone but from various sources such as obligation arises out of tort, out of quasi-contract, out of judgment of the court, out of relations like husband and wife, out of an agreement. The contract law requires that the obligation should come out of the agreement. The obligation that arises out of other sources does not form a contract. Therefore Salmond says that the law of contract is not the whole law of agreement nor it is the whole law of obligation. It is the law of those agreements that create the obligation and those which have their source in agreement. Thus it can be said that all contracts are agreements but all agreements are not the contract. Contracts are those agreements which are enforceable at law. This means that they are supported by some obligations creating some rights and duties on the part of the contracting parties. The term contract does not include the agreements of social, religious, moral and family matters. The agreement is a wider term whereas the contract is used in a narrower sense. The agreement must possess certain elements to become a contract. Without such elements the agreements remains an agreement and cannot become a contract. What are those essential elements of contracts? Let’s know them in the following heading. Essential elements of a valid contract The law of contract requires that an agreement to be a valid contract must be enforceable at law. The agreement is enforceable at law only when it possesses the following essentials: 1. lawful offer and lawful acceptance: All contracts are agreements but all agreements are not contracts. This means that an agreement may be made on anything but the contract requires some of the essential elements. An agreement is a part of the contract but the contract is not a part of it. An agreement has two essential elements only. They are offer and acceptance. The offer may be made for anything. It does not require that the offer must be legal only. But in a contract the offer must also be legal and real one. The acceptance should also be duly made. This is why when the other party duly accepts an offer made to a party that constitutes a contract. Offer + acceptance = agreement. Lawful offer + lawful acceptance = the contract. 2. Lawful Consideration: Consideration is the process of bargaining. The agreement must be a part of bargain. Each side must promise to give or do something for the other. This means the agreement must be supported by the lawful consideration. Lawful means which is not fraudulent, forbidden by law, immoral or opposed to public policy. Either of the parties must be benefited or got loss while making the contract is the concept of consideration. In other words, consideration means something in return. The general rule is that there is no contract without any consideration except for certain exceptions. This is why consideration is very important element of the contract. 3. Intention to create legal relation: The agreement concerns with the moral, social, domestic or family arrangements. But the contract does not. It concerns with the agreements which intend to have legal effects. This means that the parties must have intended their agreement to have legal consequences. The agreement made between two parties for a picnic is not a contract because it does not intend to create any legal relationship. Therefore, an agreement must create legal obligations. The obligations must be enforceable by law. An obligation is the legal duty to do or abstain from doing a definite
  22. 22. act or acts. So, without an intention to create a legal relationship, there can no contract. It is essential element of the contract. 4. Capability or capacity of the parties: Two competent parties is another essential element of the contract. A contract cannot be made with oneself. A competent party is who is capable to conclude the contract. The parties must be qualified by law to make any contract. Basically when a party is unable to know or decide what he is going to do, he is said to be incapable to conclude a contract. This happens when a party is a minor or insane. Besides, the law itself regards certain person as incapable to make contract. They are insolvent or bankrupt, criminals or morally turpitudes, and the one who has not paid the government dues etc. There are certain other people who are disqualified by law such as foreign diplomat, alien enemy. 5. Free consent: The agreement must have been entered into freely and must involve a “meeting of minds’. This means both of the parties to the contract must have agreed in the same sense and for the same thing. The elements, which derogate free consent, do not constitute a contract. The consent is not free when it is obtained by coercion, undue influence, fraud, misrepresentation of facts and mistake. There must be free consent of the parties. 6. Written form and registration: Generally the contracts may be made orally and in the written form. Sometimes, the contract may be implied as well. However, in some cases, certain formalities are required. Some agreement must be in writing and others may be oral or express. It is very appropriate if the agreements are in writing. Agreement in writing gives more authenticity. The contracts which need written form and registration do not get validity until and unless they are made in written form and registered in the government offices. 7. Lawful objects or legality of objects: The objective of an agreement must be lawful. If its purpose is illegal, it does not form a contract. The law always encourages people to do the good things only. So the purpose of law is for the good of people. The contract is void if the purpose is unlawful. The objects of any contract will be treated as lawful or legal when it is not forbidden by law or it is not of such a nature that if permitted to do, will violate or affect another law. The law does not permit the contract which contains immorality, which is against the public policy, which contains criminality and the like. A contract has lawful object when it is not of a fraudulent nature. It does not injure or affect the property of the third person. It is not of immoral nature. It is not of the nature opposed to the public policy. An agreement made to kill people is void due to its illegal purpose. The void contracts do not contain lawful objects. Therefore, the legality of object is one of the essential elements of the contract. 8. Certainty: Certainty is another element of the contract. There are certain provisions of the contract. There are certain clauses, terms and conditions in the contract. They must be clear and comprehensive. The contract to be valid, the terms, clauses or conditions included in it must give clear and precise meaning. In other words, the meaning and intention of the parties to the contract must be clear. It should not be vague. The terms and conditions of
  23. 23. the contract should not give more meanings and senses. If the meaning of the contract cannot be understood, the contract will not be enforced. The contract which cannot be unforced is the useless contract. 9. Possibility of performance: This is also very important element of the contract. The contract must be possible to perform. The contracts are made for its performance and the contract which cannot be performed cannot be said as the contract. The contracts must be possible to perform. The contracts, which are impossible to perform, are void and useless. There are two facets of the possibility of performance. First is that some contracts may not be possible at the time of making. This means they may be seen impossible to perform from the beginning. Such contracts are void ab initio (from the beginning). Secondly, some contracts may be possible at the time of making the contract, but later on they may turn to be impossible. This happens by the subsequent impossibility. For example, you made a contract to sell your horse to your friend. It is possible to perform at the time of making this contract. But when you went to stable to deliver the horse, you found the horse was dead. Now, it is impossible to sell the dead horse. Such contracts are void from the time of such impossibility. If the contracts are not possible to perform, they do not become the part of the contract. So, possibility of performance is very important element of the contract. Kinds of contract The nature of contract to some extent is related with the kinds of contract. Therefore here are given the kinds of contract. Contracts are classified on the different basis. It becomes easier for us to understand the nature of contract from its classification. From different point of view, the contract is classified as follows: 1. On the basis of enforceability: There are four types of contract on the basis of enforceability. a. Valid contract: A valid contract is an agreement enforceable by law. It becomes enforceable at law when it possesses all the essential elements of the contract. Therefore the contract which has two competent parties, lawful consideration, legality of objects, intention to create legal relationship, free consent, possibility of performance, certainty, lawful offer and acceptance, in some cases written and registered and not expressly declared void is a valid contract. b. Voidable contracts: Such contracts which lack free consent of either of the parties in the contract are known as the voidable contracts. The contracts in which coercion, undue influence, misrepresentation, fraud and mistake are present are said to be voidable contracts. The innocent or the aggrieved party has an option to renounce the contract. If he does so the court may declare such contracts as void. These contracts are valid contracts so long as the innocent party does not go to the court to declare them void. Such contracts are valid until the court declares them as invalid. There is likelihood that such contracts may be declared as void by the court. They are effective and operative if the injured party does not go to the court. Section 14 of Nepales Contract Act has recognized the contracts that are voidable as follows: i. Contract by coercion: The term ‘coercion” refers to compel someone to do something against his will by using physical force. The physical force is present in the contract caused by coercion. It may be a threat to do something or stopping
  24. 24. property of someone or assaulting someone. It is punishable by law where a party makes another party to sign on the document against his will. If one of the parties gets consent of the other by using physical force and the contract is concluded, the contact is voidable. The consent comes from the force, not automatically from the mind of the contracting party. Therefore, the contract is voidable when it is caused by coercion. ii. Contract by undue influence: Where the parties in a contract are in such a position that they can easily influence each other, there is likelihood that the contract is caused by undue influence. One party in a contract must be in a dominant position and another party must be in a weak position. Then only the contract is likely to be induced by the undue influence. Just by having close relationship or dominant position does not constitute the undue influence. Parties to the contract have fiduciary relationship and by using that relationship, one of the parties has obtained the consent of another and thus the contract must have been formed. This is a contract by undue influence. The fiduciary relation consists of the relationship between the parents and children, master and servant, teacher and student, doctor and patient, lawyer and client, creditor and debtor, employee and employer etc. In this type of contract mental force is used. The innocent party gives consent on the contract not freely but due to the mental pressure exerted on him/her by another party. Undue influence also lacks the free consent and the contract becomes voidable at the option of the innocent party. iii. Contract by misrepresentation: The term misrepresentation means falsifying the statements. If one of the parties in the contract obtains consent of the other party by presenting false statements as true that is said to be contract by misrepresentation. The guilty party provokes the innocent party to make the contract by representing the untruth as the truth. The innocent party gives consent without knowing the reality. This is why this type of contract is violable. iv. Contract by fraud: the term ‘fraud’ means to deceive or cheat. If one of the parties deceives another party and gets or imitates his/her signature on the document and the document and the contract is formed, this is known as contract by fraud. In the case of misrepresentation, the innocent party gives consent but he is misguided whereas in the case of fraud he does not give consent but deceiving him or imitating his signature the guilty party obtains his consent. Fraud is a serious type of crime. There may be many situations where the fraud is made. v. Contract by mistake: Where the consent has been given by mistake, there is no free consent of the parties. The contract is voidable where one of the parties is mistaken. If there is unilateral mistake, the contract is voidable at the option of the mistaking party. If there is bilateral mistake, then the contract is void. c. Void contract: Literally, the term “void’ means ‘not binding in law”. Accordingly, the word ‘void contract” implies a useless contract, which has no legal effect at all.2 There is difference between a void contract and a void agreement. A void agreement can never be a contract, as it is void from the beginning. But the void contract is valid in certain cases when it is entered into. However, it turns to be void afterwards. The contract becomes void afterwards due to subsequent impossibility, subsequent illegality, by declaring void under a voidable contract, in the case of a contract contingent on the happening of an 2 M.C. Kuchchal, ibid p. 14.
  25. 25. uncertain future event if that event becomes impossible. In the case of void agreement there is absence of one or more essential elements of a valid contract except for the free consent. According to section 13 of Nepalese Contract Act, 2056, there are certain contracts, which are void. No liabilities on the part of the contracting party are created in these contracts as they are void. They are given below:  Contracts in restraint of trade and profession: None can prohibit any one from practicing trade and choosing profession if the existing law has not restrained. If one makes contracts prohibiting another from choosing trade and profession it is a void contract. For instance, A and B are very intelligent students and they passed the bachelor level in the same division with the same marks. Two vacancies were available and both of them entered into a contract in which they made provisions that for which vacancy A would apply B would not apply for and vice versa. Later on, A applied for both of the vacancies. B cannot enforce this contract because the contract is made in restraint of trade and profession. The contract is void due to restraining of trade and profession. In this case, the contract does not need to be declared as void by the court. The section 13 of Nepales Contract Act has provided some exceptions to this rule. Any employer may make a contract with any employee who carries out the special work restraining him from doing same work anywhere else during the time of his/her job period or after the job as well. For example, a beer company may prohibit its chemist (who blends different ingredients in beer) to do the job in any other competitive company for certain period or even for life. Likewise, any employee who holds secret information or formula of any industry, trade or business may be restricted to do the job or supply the secret information to anybody else. Another exception for the restriction of trade and profession is the sale purchase of goodwill of a trade. This means a contract can be made by prohibiting the seller to make sale purchase of goodwill to anybody and carry out the same business for the fixed time mentioned in the contract. The purchase of the goodwill may prohibit the seller not to do the same trade in the stipulated time and place mentioned in the contract. The third exception applies in the case of partnership. A contract can be made resisting partners from doing the same kind of other trade and profession with the competitors of that business.  Contracts in restraints of marriage. When the existing law allows marrying, a contract cannot prohibit anyone from marrying. The contract is void. The contract, which curtails the personal freedom of a person, gets no validity and thus is automatically cancelled. There is famous case in England. 3In this case, the court of England held that Catherine could not recover 1000 pound from Peers in the breach of the contract in which he agreed to pay her if he married to someone else. Peers was a boy and had made a contract with Catharine, a girl that he would marry to Catherine only. If he married anyone else, he would pay 1000 pound to Catherine. Later on, Peers married to another girl. Catherine’s father Lowe filed a case in the court asking for the agreed amount. But the court rejected the claim as agreed to Catherine as the contract itself was void, which prohibited the marriage. So, the contract in restraint of marriage is void. 3 Lowe V. Peers, 1768, 18 ER 160.
  26. 26.  Contracts in restraint of using common facilities: Common facilities indicate the river, pond, tap, grazing land, common path, playing ground, road, temple, jungle, etc. So the contract made to restrict on the use of them is void contract. One needs not to go to the court to declare them as void. The common facilities are for all. When the law allows them to use, none by making contract can prohibit from using them. Suppose there is a river beside a village. Ram and Shyam are the villagers. They enter into an agreement and state that they will collectively defend anybody who uses the river for any purpose. This contract is void.  Contracts in restraints of execution of legal rights from the court or in restraints of legal proceedings: Nobody can stop using one’s legal rights which the law permits. The court has the power to execute the legal right. The legal right cannot be executed by the parties themselves. The contract is void if it restricts the execution of the legal right. Likewise, nobody can make agreement to restrict the legal proceedings. The legal proceeding has to be followed in the same way as it is. If anybody makes a contract to follow in the way they agree, it is useless and hence void. Legal proceedings also refer to the proceedings which are applied during the execution of the law by the courts and the government offices. If two parties make a contract that they will not got to the court for the appeal against the decision made by the arbitrator is void because it is against the legal proceedings.  Contracts against the existing law: None can make any contracts contrary to the existing law. Law must have permitted to do the contract as such. A house rent is a valid contract because it is permitted by law. The law permits to give one’s house on rent. But the agreement is void when a person lends a house to run a prostitution business. The law forbids opening brothels. Likewise, when someone makes a contract to sell the weapons to anybody else is void because the law has prohibited doing so. So, none can make a contract to assault, kill, harm to the property of another person as the law has forbidden to do that.  Contracts against the public policy or interest: Contracts which are concluded against the public policy or interest are void. A person makes a contract to lease Tundikhel is void as it is against the public policy or interest. When the contracts are immoral, they are against the public policy. The content of immorality and public policy may be very long. Morality refers to what is right and wrong. What is considered right by the public is moral and the policy in which the public has benefit is the matter of public policy. The morality may come under the public policy. Common facilities are the matter of public policy. Bribery and corruption are the matters of public concern or interest. Therefore, such contracts which are against the public policy or interest are void.  Ambiguous contracts: Where the contract made by the parties is so vague that the parties are not at the state of performing it, it becomes void due to its ambiguity. Also contracts made by mistake are void due to their ambiguity. The contracts which carry more than one meaning are called the ambiguous contracts, they are void.  Impossible contracts: Some contracts are impossible prima facie. Such contracts which are impossible at the outset of making are void ab initio. For instance, a person promises his lover to bring a star for her from the sky is impossible prima facie. Another person promises make alive a dead person is impossible contract.
  27. 27. Some contracts become impossible due to supervening impossibility. This means contracts are possible to perform at the beginning. But later on certain circumstances so appear that the performance of the contract becomes impossible. They are impossible subsequently. In both of conditions, the contracts are void due to impossibility of performance.  A contract made by incapable person: A contract made by a minor is a void contract. A contract made by a criminal and insolvent person is also void. A contract made by foreign sovereign is also void. Likewise, contracts made with the incapable person who cannot distinguish what is right or wrong, are void contracts.  Contracts that contain illegal object: Such contracts which has illegal objective are also void. If the purpose or design of the contract is illegal, such contracts are void. They cannot be enforced by the court of law. When two thieves agree before stealing the goods to share the stolen goods equally and but later on the mighty one took more, another thief cannot complain about it to the court. This is void contract as it does not contain legality of objects.  Immoral contracts are void contracts. Contracts made for the supply of girls and contracts of bribery are example of immoral contracts. They are void contracts. d. Unenforceable contracts: Such contracts which are valid but are not capable of being enforced in a court of law are unenforceable contracts. They are valid as they contain every essential element necessary for the valid contracts. However, they cannot be enforced by the court because of some technical defects. Such technical defects may be expiry of time for the enforcement of the contract. The time barred debts are the examples of unenforceable contracts. Offer and Acceptance Offer and acceptance is the first step in the process of making the contract. Offer & acceptance make an agreement, which is one of the essential elements of the contract provided there is a lawful offer by one party and a lawful acceptance of the offer by another party. Offer and acceptance is required in order to form a contract. Offer + acceptance = an agreement. The agreement is the basis of a contract. Parties’ intentions determine whether or not a contract is formed and what the contents of the contract are. It is from the offer and acceptance that the obligations (duties) on the parties are imposed and the rights of the parties are created. For example, A says to B: “I want to sell my horse to you for Rs. 50,000/-. Will you buy it?” The offer has been made to B. If B says he wants to buy it, the acceptance is made and a contract of sale of goods is formed. Now, A and B get certain duties and rights out of the contract. A has a duty to deliver the horse to B and has a right to get Rs. 50,000/- from B. Likewise, B has a duty to pay Rs. 50,000/- to A and gets right to get the horse from A. The law of contract is mainly about the enforcement of the promises or the agreements. Remember that not all promises or the agreements are enforced by the law or the courts. To enforce a set of promises, or an agreement, courts look for the presence of certain elements. When these elements are present, a court will find that the agreement is a contract. Remember all agreements are not contracts. Therefore, the courts will find that the elements necessary to form a contract are present in the agreements. As a student you need to know the elements required to constitute an enforceable contract. To say that we have a contract means that the parties have
  28. 28. voluntarily assumed liabilities with regard to each other. The process of agreement begins with an offer. For a contract to be formed, this offer must be unconditionally accepted. The law imposes various requirements as to the communication of the offer and the acceptance. Once there has been a valid communication of the acceptance, the law requires that certain other elements like contractual capacity, legality of object, free consent, possibility of performance etc are present. If these elements are not present, a court will not find that a contract exists between the parties. In the absence of a contract, neither party will be bound to the promises or agreements they have made. It is thus of importance to determine whether or not a contract has been formed. For this, the starting point is the offer and acceptance. Let’s see what are offer and acceptance and different rules regarding to them. Meaning of Offer An offer is an indication of one party’s willingness to enter into a contract. A contract is formed with the party to whom the offer is made as soon as he accepts the terms of the offer. Offer is nothing other than showing or expressing an intention to do or not to do something by one party to the other party. An offer in simple sense is a proposal. The proposal is made by one party with the object of obtaining the assent of the other party in the contract. An offer is a proposal made by one party to the other to do or not to do something. Section2 (b) of the Nepalese Contract Act (NCA), 2056 has defined the offer as: “A proposal made by one party before another with an intention to get acceptance to do or not to do something”. Likewise, section 2 (a) of the Indian contract Act, 1872 states: “When one person signifies to another his willingness to do or 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.”This definition tells us how a proposal is made. From the above definitions, we can infer the following things for the offer: 1. The offer is a willingness to do or to abstain from doing something. This means one has to begin with some expressions, which becomes an offer. A mere expression of intention does not constitute an offer. It must be an expression to be legally bound with what has been expressed. Mere expression of opinion also is not an offer. If someone says he would sell his car in an emergency if he gets even Rs. 10,000/- is not an offer as it is an expression of opinion and there is no intention to be legally bound with what he said. 2. The willingness must be done to another party to the contract. This means that a proposal cannot be made to oneself. He must make the offer to another person to get acceptance on the proposal. 3. The expressions of willingness must be made to get the consent (assent) of the other party. An enquiry is not a proposal. It must seek for acceptance. If someone gives just information, it does not constitute the offer. Hence, the offer must satisfy the above – mentioned elements. The person who makes offer is the offeror and the person to whom the offer is made is called the offeree and if the person accepts the offer he is called the acceptor. 4. There is always an intention to create a legal relationship with another party. Without the intention to create a legal relationship with another party, a contract cannot be created. Legal rules regarding to a valid offer: