Contract and its essential elements

A contract is a legally enforceable agreement between two or more parties to do, or not to do, something, creating rights and duties. In Nepal it is governed by the Muluki Civil Code 2074 (earlier by the Contract Act 2056).

Essential elements of a valid contract

1. Offer and acceptance: one party makes a clear proposal and the other accepts it unconditionally (a "meeting of minds").
2. Intention to create legal relations: the parties mean to be legally bound (social promises are not contracts).
3. Lawful consideration: something of value exchanged (payment, work, promise), and it must be lawful.
4. Competent parties: parties must be of legal age (18 years), of sound mind and not disqualified by law.
5. Free consent: no coercion, fraud, undue influence, misrepresentation or mistake.
6. Lawful object: the purpose must not be illegal, immoral or against public policy.
7. Certainty and possibility of performance: terms must be clear and capable of being done.
8. Legal formalities: writing, signing, registration or stamp where the law requires, for example for sale of land or construction contracts above a limit in public works.

If one of these is missing, the contract is void or voidable.

Example: A district office accepts the bid of a contractor to build a bridge for Rs. 5 crore in 12 months. There is offer (bid), acceptance (letter of acceptance), consideration (price), competent parties, and lawful object.