CONTRACT
Unit 30
Preview
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Definition
Requirements for a valid contract
Breaking off contractual negotiations
Privity of contract (third party)
Contents of a contract (terms)
Vitiating factors
Ending the contract
Remedies for breach of contract
Legal terms
Definition
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A legally binding agreement between two
or more persons which the courts will
enforce
Generates rights and obligations that may
be enforced by courts
Agreement arises as a result of offer and
acceptance
Requirements for a valid contract
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1) parties must have legal capacity to
enter contracts
2) one party must make a binding offer to
the other, and the offer must be accepted
by the other party
3) consideration
Requirements for a valid contract
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4) Agreement must be genuine
5) in some cases, the contract must be
made in a particular form
6) the object of the contract must not be
disapproved by the law
Offer
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An indication of willingness to do or refrain
from doing sth that is capable of being
converted into a legally binding contract
It is made by an offeror to an offeree and
is capable of acceptance only by an
offeree who knows of its existence
Offer
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An offer is terminated when it has been
revoked, or lapsed, or met with a counteroffer
Acceptance
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Agreement to the terms of an offer that,
provided other requirements are fulfilled,
converts the offer into a legally binding
contract
Acceptance
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If the method by which acceptance is to
be signified is indicated by the offeror,
that method alone will be effective
If it is not, acceptance may be either
express (by word of mouth or in writing)
or inferred by the offeree’s conduct, e.g. if
he receives goods and makes use of them
Acceptance
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Must involve some action on the part of
the offeree
Validity of acceptance
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1) it must
in force;
2) it must
offer
3) it must
4) it must
take place while the offer is still
be on the same terms as the
be unconditional
be communicated to the offeror
Counter-offer
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Acceptance: Only when all the terms of
the offer are agreed to
If you propose a change to the terms of
an original offer, you are making a new
offer – this is called a counter-offer
Counter-offer – a rejection of the original
offer; there can be no contract until the
counter-offer is accepted
Special cases
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When the offer consists of a promise to
confer a benefit on whoever may perform
a specified act, the offeror waives the
requirement of communication
Example
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If the offeror offers a reward for
information, a person able to supply the
information is not expected to accept the
offer formally
The act of giving the information
constitutes the acceptance, the
communication of the acceptance, and the
performance of the contract
Intention to create legal relations
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If it can be shown that it was not the
intenion of the parties to create a legally
binding relationship, there is no contract
Presumption: if the agreement is with
family or friends, the agreement was not
intended to be binding; commercial
agreements – the other way round
Consideration
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An exchange of promises to perform acts
in the future
An act, forbearance, or promise by one
party that constitutes the price
Principles
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1) a valuable consideration is required, i.e.
the act, forbearance, or promise must
have some economic value
2) consideration need not be adequate but
it must be sufficient (it need not constitute
a realistic price as long as it has some
economic value)
Principles
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3) consideration must move from the
promise
4) consideration must not be past
Consideration: example
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A promises to sell a car to party B
B promises to pay $ 5.000 to A for the car
Therefore:
A’s consideration is the promise to transfer
the car to B
B’s consideration is the promise to pay
$5.000 to A for the car
Legal capacity
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Adults have capacity, but not if they are of
unsound mind
Breaking off contractual
negotiations
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In legal systems where the doctrine of
good faith is recognised, breaking off
contractual negotiations may give rise to
legal consequences
No duty to negotiate in good faith in
English law; no liability for pulling out of
negotiations at any stage or for whatever
reason
Privity of contract
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You get the rights or have to fulfill the
obligations of a contract only if you are a
party to the contract
If you are not a party, you can neither sue
nor be sued because of the contract
Exception: third party
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Example: you have entered into a contract with
an insurance company; the aim – that your
partner can benefit from the contract; it would
be pointless if the company later refused to pay
anything to your partner because she was not a
party to the contract
English law allowes a third party who is to
benefit from the contract to enforce it
Contents of the contract
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Express terms
Implied terms
Conditions
Warranties
Exclusion terms
Terms
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Conditions or duties which have to be
carried out as part of a contract,
arrangemens which have to be made
before a contract is valid
Express terms
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Terms that the parties have specifically
agreed to, being terms the parties either
said or wrote
Implied terms
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Example: you buy a boat. The first day
you go sailing the boat sinks. You
complain to the seller, he says the
contract did not promise that the boat
would float
One of the terms implied into a contract of
sale –that goods are of satisfactory quality
and are fit for their purpose
Terms of a contract
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Term: a promise that is part of the
contract
Terms of a contract:
1) conditions
2) warranties
Condition
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A fundamental term
If a party does not carry it out, you not
only have the right to claim damages, but
also to treat the contract as terminated
Warranty
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A term of contract of lesser importance
Does not deal with the main purpose of
the contract
If you have not carried out your
obligations under a warranty, the other
party has the right to sue you for
damages, but not to terminate the
contract
Exclusion clauses
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The purpose: to exclude all liability for failing to
carry out the contract, either at all or not
properly; open to abuse
In order to prevent parties relying on unfair
contract terms, there are strict legal rules about
the use of exclusion clauses
The law protects consumers in particular against
the wrongful use of exclusion clauses by
businesses
Ending the contract
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1) a contract can be set aside (cancelled) if it
later appears there was sth wrong
(misrepresentation, duress, mistake, undue
influence)
2) a contract can be discharged where the
contract is valid, but comes to an end because it
has been carried out,the parties agree to end it,
or there is a serious breach of contract
Contract
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Valid
Void
voidable
Contracts
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Void contract – one that was never legally
valid
Voidable c. – can have legal effect but
could be made void if you want to rescind
it (=annul)
Valid c. – legally enforceable
Reasons to have a contract set
aside: vitiating factors
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Misrepresentaion
Duress and undue influence
Mistake
Misrepresentation
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A representation – a statement that was made
to encourage you to enter into a contract, but it
does not itself become part of the contract
Misrepresentation (false representation) – you
cannot bring an action for breach of contract,
but you can bring special acton for a
misrepresentation if you would not have
otherwise entered into the contract
Remedies for misrepresentation
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Misrepresentation makes the contract voidable
Recission: if you rescind the contract, the parties
are put back in the position they were in before
the contract was entered into. It is as if the
contract never existed
Damages: you can sue for financial
compensation if you have suffered any losses
Duress and undue influence
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Duress: either actual violence or the
threat of violence was used to make the
other party enter into the contract (“sign
this contract or I’ll shoot you!”)
Undue influence: improper pressure other
than violence (e.g. blackmail)
Mistake
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If absolutely fundamental, as it gets to the
very heart of the transaction, the contract
will be considered void from the outset
Discharge of contractual obligations
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Discharge: parties are free of their mutual
obligations
Termination of a contract
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Performance
Express agreement
Breach
Doctrine of frustration
Discharge by performance
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Only after you have carried out everything
you promised to do in the contract,
exactly in the way you agreed to do it,
your contractual obligations will be
discharged
Discharge by agreement
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Parties may agree that the contract should
end automaticaly if some event occurs or
after a fixed period of time
Discharge by breach
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A party has made it clear that he will not
carry out the contract, or
The party has not performed his
obligations properly
Consequences
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Some breaches give you the right to sue
for damages, but not the right to
terminate the contract
Has there been fundamental breach or
not?
Condition or warranty?
Example
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In the contract it states that you must
deliver 10,000 tonnes of tomatoes on 23
May. You deliver tomatoes two days later,
on 25 May.
If the date of delivery was a condition, the
other party has the right not only to claim
damages, but also to end the contract,i.e.
he can refuse to take delivery.
Example
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If the delivery date is a warranty, he does
not have the right to refuse the tomatoes,
only to sue you for any loss he might have
suffered because you delivered two days
late
Common law vs. Civil law
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At common law, contractual liability for
breach is strict and the motive for that
breach is irrelevant
In civil law systems this may seem a very
harsh approach
Discharge by frustration
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Example: you hire a room in a pub for
your band to put on a show. Before the
date for the show, the pub gets burned
down. The fire is not your fault, nor the
fault of the owner of the pub. The fire has
made it impossible to carry out the
contract: discharge by frustration
Force majeure
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It is usual for commercial contracts to
include a force majeure clause: a list of
events considered to be outside the
control of the parties, e.g. labour disputes,
war, riot, accident, fire, flood, etc.
Remedies for breach
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Damages: the aim is to put the claimant in the
position he would have been in if the contract
had been performed properly
Specific performance: an order to make a party
perform his obligations under the contract
Injunction: a court order to stop someone
breaching a term of the contract
Suspension of performance
Suspension of performance
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In civil law systems: if the other party is in
breach, you can stop carrying out your
obligations under the contract
In common law: there is no general
principle allowing for suspension of
performance if the other party is in
breach; suspension of performance –
considered to be breach of contract
Legal terms
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Unconditional acceptance of all the terms
of an offer
Acceptance
Refusal or failure by a party to a contract
to perform an obligation imposed under
the contract
Breach of contract
Legal terms
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Ability of a natural or legal person to enter
into a contract
Capacity
A fundamental term of the contract. If it is
breached, the innocent party may not only
claim damages, but may also opt to treat
the contract as ended
Condition
Legal terms
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A contract must be a bargain. Each party
gives value to the other by exchanging
promises (or by a promise given in
exchange for an act). This exchange of
value is
Consideration
Legally enforceable agreement
Contract
Legal terms
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If not all the terms of an offer have been
accepted, then there is no acceptance of
the offer, but a…This is in effect a new
offer, which now has to be accepted by
the other party
Counter offer
Legal terms
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In contract law, financial compensation that
shuld put the claimant in the position he would
have been if the contract had been performed
properly
Damages
Release from the obligations under a contract.
D…may be by performance, agreement, breach
or frustration
Discharge
Legal terms
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Both parties agree to end the contract
Discharge by agreement
A contract may be discharged by
___where the party in default has refused
to perform, or where the performance is
so defective that there has been
fundamental___
Discharge by breach
Legal terms
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Parties are excused from the contract if,
through no fault of either party, after the
formation of the contract it becomes
impossible to carry out the contract or the
contract has become commercially
pointless
Discharge by frustration
Legal terms
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The obligations under the contract has
been carried out fully and exactly
Discharge by performance
Violence or threats of violence in order to
make someone enter into a contract
duress
Legal terms
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Term in a contract to exclude the liability
of a party for contractual failure. That
failure could be in the form of breach of
contract, misrepresentation or negligence
Exclusion clause
Terms explicitly stated by the parties,
either oral or written
Express terms
Legal terms
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Most contracts include a f__ m___clause. This
lists events considered to be outside the control
of the parties and for which the parties cannot
be held responsible.
Force majeure
A term is f:__ if it goes to the root of the
contract. If it is breached, the breach is referred
to as ____
Fundamental breach
Legal terms
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Terms that can be read into the contract,
whether by custom, statute or by the courts
Implied terms
A court order to stop a clause in the contract
from being broken. It is a discretionary remedy
and will not be ordered if damages are a
sufficient remedy
injunction
Legal terms
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Where the representation is a false statement, it
is called:____. M. can be fraudulent, negligent
or innocent.
Misrepresentation
A contract only confers rights and obligations on
the parties to the contract. There are exceptions
to this rule, both in statute law and common
law.
Privity of contract
Legal terms
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A statement that encourages a party to
enter into the contract, but does not itself
form a part of that contract
Representation
Improper pressure other than violence to
make someone enter into a contract
Undue influence
Legal terms
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A defect that was present in th agreement
at the time the contract was made. The
defect is sufficiently serious to have the
contract set aside. V___ factors include
misrepresentation, mistake, duress and
undue influence
Vitiating factor
Questions
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1. For the formation of a contract, consideration
is one of the three requirements to make an
agreement into a contract. What are the other
two requirements?
2. What is the doctrine of privity of contract?
3. What is the difference between an express
tem and an implied term?
Questions
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4. In English law, contractual terms are
classified according to their importance: a
term may be of fundamental importance
or it may be only a minor term. Name
these two categories of terms.
5. What is the purpose of an exclusion
clause in a contract?
Questions
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6. What is misrepresentation?
7. What is the difference between
discharge by frustration and discharge by
breach?
Contract law case discussion
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Mr Jones is a second-hand car dealer. Miss Smith wants
a second-hand car, but tells Mr Jones that she is only
interested in buying a car which has done less than
10,000 miles. He ofers Miss Smith a 1998 Ford Escort for
a reasonable price. During the trial run, Miss Smith tells
him she likes the car, the price is acceptable, but she
repeats that she only wants the car if it has done less
than 10,000 miles. Mr Jones says: ‘Of course it has not
done more than 10,000 miles. Look at the milometer!”
The milometer shows 7,000 miles.
Contract law case discussion
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However, what Mr Jones said was not
true. The milometer has been tampered
with and Miss Smith finds out that the
care has done at least 30,000 miles.
Advise Miss Smith as to her legal position.
Put the verbs in brackets into
appropriate forms
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In any contractual situation, it __(require,
passive) that the promise ___(make) by each
party must have some economic value.
However, there is no requirement that it must
constitute a realistic price for the promise it
____(buy). Thus, a contract ___(make) to sell a
property worth $200,000 for the sum of $10,000
is legally valid. It would therefore _____(say,
passive) to be legally binding.
Key
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In any contractual situation, it is required
that the promise made by each party must
have some economic value. However,
there is no requirement that it must
constitute a realistic price for the promise
it buys. Thus, a contract made to sell a
property worth $200,000 for the sum of
$10,000 is legally valid. It would therefore
be said to be legally binding.
Fill in the missing words: contractual,
gratuitous, jurisdictions, legislation, party,
promise
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The main effect of the requirement of
consideration is that _____promises made
by one ___ to another (i.e. where one
party makes a ____to another party but
no promises are made in return) do not
give rise to ____obligations. However, it
should be noted that in many ____this
requirement has been displaced by ___in
respect of certain kinds of contract.
Key
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The main effect of the requirement of
consideration is that gratuitous promises made
by one party to another (i.e. where one party
makes a promise to another party but no
promises are made in return) do not give rise to
conractual obligations. However, it should be
noted that in many jurisdictions this requirement
has been displaced by legislation in respect of
certain kinds of contract.