Types & Special Contracts: Formation, Types & Legal Effects

TAKEAWAYS:

• Learn the 6 key classifications of contracts (e.g., unilateral vs. bilateral, express vs. implied) and their legal implications.
• Understand special contracts (indemnity, bailment, guarantee) and their roles in real-world scenarios like insurance policies or loan agreements.
• Master void vs. voidable contracts and how courts enforce (or reject) them—critical for disputes in e-commerce or employment.
• Apply contingent contracts to real cases (e.g., bonus clauses in employment contracts tied to performance).
• Compare quasi-contracts with actual contracts using Nepalese legal precedents (e.g., Muluki Dewani Sanhita).
• Use termination rules to analyze scenarios like Daraz’s order cancellations or Pathao’s driver disputes.

1. Classification of Contracts

Contracts are categorized based on formation, enforceability, and legal effect. Below is a structured breakdown:

A. Based on Formation

mindmap
  root((Classification by Formation))
    Express Contracts
      Definition: Terms explicitly agreed (written/verbal)
      Example: Loan agreement with Nabil Bank
    Implied Contracts
      Definition: Terms inferred from conduct (no explicit words)
      Example: Customer paying for a Daraz order without a receipt
    Quasi-Contracts
      Definition: No actual contract, but court imposes obligation to avoid unjust enrichment
      Example: A landlord repairing a tenant’s roof after a storm (no prior agreement)

Key Difference:

B. Based on Enforceability

mindmap
  root((Classification by Enforceability))
    Valid Contracts
      Definition: Meets all legal requirements (offer, acceptance, consideration)
      Example: A signed lease agreement with Himalayan Java
    Voidable Contracts
      Definition: Legally binding but can be canceled by one party (e.g., due to fraud)
      Example: A minor signing a mobile contract with Ncell (can void it later)
    Void Contracts
      Definition: No legal effect from the start (e.g., illegal purpose)
      Example: A contract to smuggle goods into Nepal
    Unenforceable Contracts
      Definition: Fails technicalities (e.g., no writing for land sale under *Nepal Property Law*)
      Example: Oral agreement to sell land >100 sq.m. (must be in writing)

Worked Example: Scenario: A student borrows ₹5,000 from a friend to buy textbooks, promising to repay in 3 months. If the student refuses to pay, the friend can sue under a valid contract (offer + acceptance + consideration). However, if the friend threatens the student to sign the loan agreement, the contract becomes voidable due to undue influence.

C. Based on Performance

mindmap
  root((Classification by Performance))
    Executed Contracts
      Definition: Fully performed by both parties
      Example: Paying ₹100 for a Daraz order and receiving it
    Executory Contracts
      Definition: Performance pending (e.g., future delivery)
      Example: Pre-ordering a laptop from Daraz (payment made, but delivery not yet)

D. Based on Number of Parties

mindmap
  root((Classification by Parties))
    Unilateral Contracts
      Definition: One party makes a promise; the other performs an act
      Example: Reward for finding a lost phone (offerer promises money; finder performs the act)
    Bilateral Contracts
      Definition: Both parties promise to perform (most common)
      Example: Buying a phone from Ncell (buyer pays; seller delivers)

E. Based on Certainty

mindmap
  root((Classification by Certainty))
    Certain Contracts
      Definition: Terms are clear and unambiguous
      Example: "I will sell you 10 kg of rice for ₹500"
    Contingent Contracts
      Definition: Performance depends on a future uncertain event
      Example: A bonus clause in an employee’s contract: "If sales exceed ₹10M, you get 10% bonus"

Rules for Contingent Contracts:

1. The event must be future and uncertain (e.g., "if it rains tomorrow").
2. The event must be lawful (e.g., not "if the government collapses").
3. The contract is void if the event is impossible (e.g., "if the moon lands on Earth").

Worked Example: Scenario: A farmer agrees to pay a contractor ₹20,000 only if the monsoon arrives by June 15. If the monsoon is delayed, the contract is not enforceable because the event was uncertain and beyond the parties’ control.

2. Special Contracts

Special contracts have unique legal rules and are critical in business and daily life.

A. Contract of Indemnity

Definition: One party (indemnifier) agrees to compensate another (indemnity holder) for losses caused by a third party. Example: A bail bond in Nepal (e.g., a guarantor paying fines if a defendant misses court).

Rights & Duties:

Worked Example: Scenario: Priya takes a loan from Nabil Bank and names her brother as a guarantor. If Priya defaults, the bank can claim from Priya’s brother (indemnity holder). The brother can then sue Priya (third party) for repayment.

B. Contract of Bailment

Definition: One party (bailor) transfers possession of goods to another (bailee) for a specific purpose (e.g., storage, repair). Example: Leaving your phone at a Ncell service center for repair.

Key Rules:

1. Bailee must return the goods in the same condition (unless agreed otherwise).
2. Bailee is liable for loss/damage unless due to bailor’s fault.
3. Bailment is revocable unless the bailee has invested in the goods (e.g., painting a rented car).

Worked Example: Scenario: Ramesh leaves his laptop with a technician for repair. If the technician loses it, Ramesh can claim compensation under a bailment contract. However, if Ramesh gave the technician ₹500 to "fix it quickly" and the technician sold it, the contract becomes voidable due to misuse.

C. Contract of Guarantee

Definition: A third party (guarantor) promises to pay a debtor’s debt if the debtor defaults. Example: A parent guaranteeing a student loan for their child.

Key Rules:

1. The principal debtor must default first.
2. The guarantor’s liability depends on the guarantee terms (e.g., "limited to ₹50,000").
3. The creditor must first claim from the debtor before the guarantor.

Worked Example: Scenario: Anja takes a business loan from Himalayan Bank with her uncle as guarantor. If Anja defaults, the bank can claim from Anja first. If Anja cannot pay, the bank can then claim from the uncle (guarantor). If the uncle pays, he can sue Anja for reimbursement.

D. Quasi-Contract

Definition: No actual contract exists, but the law imposes an obligation to avoid unjust enrichment. Example: A customer accidentally pays extra for a Daraz order and refuses to return the money. The seller can claim the extra amount under quasi-contract.

Nepalese Legal Precedent: Under Muluki Dewani Sanhita, 2074, quasi-contracts are enforced when:

1. One party benefits at another’s expense without justification.
2. The benefiting party cannot return the benefit (e.g., receiving services without paying).

Worked Example: Scenario: A traveler stays at a guesthouse in Pokhara without paying. The guesthouse can sue under quasi-contract to recover the value of the stay, even though no formal contract existed.

3. Termination of Contracts

Contracts end in several ways, each with legal consequences:

Worked Example: Scenario: A restaurant signs a supply contract with a dairy farm for 100 liters of milk daily. If the dairy farm’s cows fall ill (frustration), the contract is terminated, and neither party can claim damages.

4. Voidable vs. Void Contracts

Worked Example: Scenario:

• Void Contract: A contract to smuggle goods into Nepal is void—no court will enforce it, and both parties can walk away.
• Voidable Contract: A 17-year-old signs a mobile contract with Ncell. The contract is voidable—the minor can cancel it, but Ncell can enforce it if the minor does not cancel.

In the Real World

1. eSewa’s Terms of Service

   • Idea: Unilateral contract (eSewa promises to process payments; users perform the act of transferring money).
   • Real Impact: If eSewa fails to process a payment, users can claim breach of contract. If users misuse eSewa (e.g., fraud), eSewa can terminate their account.

2. Daraz’s Order Cancellation Policy

   • Idea: Termination by agreement (buyer can cancel orders before delivery; seller can cancel if stock is unavailable).
   • Real Impact: Daraz’s cancellation rules are legally binding contracts. If a buyer cancels after the seller has fulfilled their part (e.g., packed the order), Daraz may charge a fee or refuse future orders.

3. Nabil Bank’s Loan Guarantee

   • Idea: Contract of guarantee (a co-signer promises to pay if the borrower defaults).
   • Real Impact: If a borrower misses loan payments, Nabil Bank can claim from the co-signer. The co-signer can then sue the borrower for repayment.

Exam Tip

1. Focus on Definitions and Examples:

   • Examiners love clear definitions (e.g., "A contingent contract is one where performance depends on a future uncertain event").
   • Always provide real-world examples (e.g., "Like a bonus clause in an employment contract").

2. Compare Voidable vs. Void Contracts:

   • Use a table to distinguish them (as shown above). Highlight that void contracts are illegal from the start, while voidable contracts can be enforced if not canceled.

3. Apply Legal Rules to Scenarios:

   • For contingent contracts, explain the 3 rules (future event, lawful event, impossibility voids the contract).
   • For termination, link to real cases (e.g., "If a Daraz order is canceled due to frustration [e.g., seller’s warehouse burns down], the contract ends automatically").

4. Memorize Special Contracts:

   • Indemnity: Think of a bail bond or insurance policy.
   • Bailment: Think of leaving your phone at a repair shop.
   • Guarantee: Think of a parent co-signing a loan.

5. Watch for "Against Public Policy" Questions:

   • If a contract is illegal (e.g., smuggling, fraud), it is void and unenforceable.
   • Example: A contract to bribe a government official is void under Nepal’s Prevention of Corruption Act.

6. Use Mermaid Diagrams for Classification:

   • Examiners appreciate structured mindmaps for classifications (e.g., "Types of Contracts by Formation").
   • For termination, use a flowchart to show how contracts end (performance, agreement, breach, etc.).

Final Note: This unit is highly examinable—expect short-answer questions on definitions (e.g., "What is a contingent contract?") and long-answer questions on scenarios (e.g., "A farmer enters a contract to sell wheat if the price exceeds ₹20/kg. The price drops. Discuss the legal implications."). Always link theory to real-world examples (e.g., eSewa, Daraz) to score full marks.