A contract is a legally binding agreement between two or more parties. It is enforceable by law. The basic principles of contract that apply to banking are:
- Offer and acceptance: An offer is a proposal to enter into a contract. Acceptance is the assent to the offer.
- Consideration: Consideration is something of value that is exchanged between the parties to the contract. It can be money, goods, services, or anything else that has value.
- Intention to create legal relations: The parties to the contract must intend to create legal relations. This means that they must intend that their agreement will be legally binding.
- Legality of the object: The object of the contract must be lawful. This means that it cannot be for an illegal or immoral purpose.
- Possibility of performance: The object of the contract must be possible to perform. This means that it must not be impossible or something that no one could reasonably be expected to do.
- Writing (in certain cases): In certain cases, the law may require that a contract be in writing. For example, a contract for the sale of land must be in writing.
Basic Principles of Contract to be complied in Banking
In addition to the basic principles of contract, there are some additional principles that apply to contracts in banking. These include:
- Capacity: The parties to the contract must have the legal capacity to enter into a contract. This means that they must be of legal age and sound mind.
- Form: In some cases, the law may require that a contract in banking be in a particular form. For example, a contract for a loan may need to be in writing and signed by both parties.
- Notice: In some cases, the law may require that one party give notice to the other party of a change in circumstances. For example, a bank may be required to give notice to a customer of a change in interest rates.
- Good faith: The parties to a contract in banking must act in good faith. This means that they must not act dishonestly or unfairly.
- Principle of indemnity: The principle of indemnity means that a bank is generally not liable for losses that are caused by the customer’s own negligence.
MCQs on Basic Principles of Contract to be complied in Banking
- Which of the following is not a basic principle of contract?
- Offer and acceptance
- Consideration
- Intention to create legal relations
- Legality of the object
- Possibility of performance
- Answer: Possibility of performance. Possibility of performance is not a basic principle of contract. It is a requirement for the validity of a contract.
- A bank offers to lend money to a customer at an interest rate of 10%. The customer accepts the offer. Is this a valid contract?
- Yes, this is a valid contract. It has all the essential elements of a contract: offer, acceptance, consideration, and legality.
- A bank employee promises to give a customer a loan if the customer agrees to pay a bribe. Is this a valid contract?
- No, this is not a valid contract. The bribe is an illegal consideration, so the contract is void.
- A bank customer signs a contract without reading it. Is this a valid contract?
- Yes, this is a valid contract. The customer’s signature indicates that they intended to create legal relations. However, the customer may be able to challenge the contract if they can show that they did not understand the terms of the contract.
- A bank enters into a contract with a customer to provide a loan. The contract is not in writing. Is this a valid contract?
- No, the contract is not valid. A contract for the loan of money must be in writing.