CONTRACT LAW
INTRODUCTION
• A contract is a voluntary agreement between
two or more parties, which creates legally
enforceable obligations.
• The distinguishing feature of contractual
obligations is that they are based on the
agreement of the parties concerned,
whereas other legal obligations can arise, not
only without the agreement of the parties,
but even against their wishes (example:
damage)
 A contract which creates binding obligations
will be enforced by the courts.
 Mere social arrangements such as an informal
invitation to the dinner are not binding and
therefore cannot be legally enforced.
FORMATION OF A CONTRACT
Freedom of contract
 The parties enter the contract freely.
 The principle of freedom of contract consists of
two elements:
 the freedom to decide whether or not to enter into a
contract
 the freedom to decide on what terms to contract.
 Everybody can refuse to enter into a particular
type of contract.
Freedom of contract
 The contractual obligations are voluntary
obligations
 Unlike the obligations that arises from the damages
 On their willingness depends
 Whether or not they will enter the contract
 Who will they enter the contract with
 What will be the contents of the contract
 The limitations to the Freedom of contracts
 Public order – mandatory rules
Validity of the contract –
the assumptions
1.
The parties (legal & contractual capacity)


Natural persons
Legal persons
The statement of the parties will must be done
freely & seriously
3. The deed as the object of the contractual
obligation must be possible, legal &
determined or at least determinable
4. The motive must be legal
5. The contract must meet the prescribed form
2.
The principles of contract
law
 Freedom of contract
 The parties are free to enter a contract and to
determine its content
 No form required
 The contract can be concluded in any form (by
verbs, by writing or by any other act or deed that
clearly indicates the contract was concluded) unless
it is otherwise proscribed by the law
The principles of contract
law
 Binding character of contract
 Pacta sunt servanda / Pacta dant leges
 The contract validly entered into is binding upon the
parties and makes them liable for the performance
 Good faith & fair dealing
 Each party must act in accordance with the good
faith & fair dealing
Formation of a contract
 As the contract is an agreement between two
parties it comes into existence when one
party makes an offer which is accepted by the
other party
 An offer
 An acceptance
 The consideration (common law systems)
Offer
 Agreement on a contract comes into
existence when one party makes an offer
which is accepted by the other party.
 An offer is a statement to the effect that the
person making it is willing to enter into a
contract, provided that the party to whom is
addressed accepts the terms of the offer.
 This statement must be made with the
intention that it shall be binding as soon as
the offer has been accepted. The person
making the offer is called offeror, the person
whom the offer is made is the offeree. Once
the offeree has received the offer he can
either agree or decline to enter into a
contract with the offeror.
An Acceptance
 If he decides to accept the offer, he must do
so without changing the terms in any way:
the acceptance will only be valid if it is an
unqualified and final expression of assent to
the terms of the offer.
 As soon as acceptance of the offer has been
communicated by the offeree to the offeror, a
binding contract is concluded between them.
An Acceptance
 Statement by the offeree that he accepts the
offer in all its terms & conditions
 Modified acceptance constitutes the counteroffer
 Acceptance becomes effective when it
reaches the offeror
 withdrawable
Consideration
• A bilateral contract consists of two promises.
Example: if A and B form a contract that B will buy
A’s car, both parties promise that they will carry
out the contract and will sell, respectively buy,
the car. In English law a promise is only binding if
it is supported by consideration. Under this
doctrine, which is unique to the common law,
every contract must contain an element of
reciprocity. The contract is viewed as a bargain
and each party must give something in return for
what he receives from the other.
The consideration
 Assumption for concluding the contract in
common law systems
 Every contract must contain the element of
reciprocity to be enforceable – each party
must give something in return for what he
receives from the other party
 Buyer paying the price = seller delivering the
goods
• A contract can also consists of a promise by one
party and the performance of an act by the
other. This is called a unilateral contract, and
the most common example is the situation
where A offers a reward of 100$ to the person
who returns his lost dog. The central feature of
this arrangement is that A is bound by his
promise; if B finds the dog, A must pay him 100$.
B, on the other hand, is not obliged to do
anything. A unilateral contract must be
supported by consideration, in Common law
system, to be binding.
 The function of the doctrine of consideration is
to distinguish between binding and non-binding
agreements.
 Consideration must be sufficient, but need not
be adequate. This means that consideration
must be of some value (sufficient), but it need
not be of the same economic value as that which
it is given in return for (adequate). Therefore
consideration can be valid even though it is
nominal.
Form
 A contract is said to require a certain form if it
has to be recorded in a specific way laid
down by law. Contracts can be entered into
without the parties having to adhere to a
particular form. However, there are
exceptions to this rule. Contracts for the sale
of land have to be in writing. This means that
the terms of the contract must be set out or
at least reffered to in one document.
Intention to create Legal
Relations
 Agreement and consideration are the first
two requirements of a binding contract. The
third is an intention to create legal
relations.
 This exists if the parties intend that any
dispute which might arise from the contract
will be resolved by a court.
CONTENTS OF THE CONTRACT
Express and implied terms
 A contract is often the result of prolonged
negotiations between the parties and not
everything that was said during those
discussions will eventually become part of the
contract. Those statements of the parties which
do not become binding terms of the contract are
called express terms.
 They have to be distinguished from mere
representations, comments made prior to
the formation of the contract which were
made in order to induce the other party to
enter into the contract, but which are not part
of the contract itself.
Contents of contract
 Essential contents
 price & goods in Sales of goods contract
 Natural contents
 Liability for the conformity of the goods, rebus sic stantibus
clause
 Additional contents
 Deadlines, conditions, warranty clauses
 Expressed terms
 Implied terms
 In addition to express terms a contract may
also contain implied terms, i.e. terms which
were not expressly agreed on by the parties.
There are three types of implied terms.
 Terms implied in fact. A term implied in fact
is one which, in the opinion of the court, the
parties must have intended to include in the
contract, even though they did not expressly
include it. Such a term will only be implied if
its ‘’so obvious that it goes without saying’’.
 Terms implied in law. They are based on
policy and are imported into a contract by
operation of law.
 Terms implied by custom. The parties to a
contract will be expected to take account of
all trade usages and customs that exist in the
relevant commercial field.
Conditions, warranties and
innominate terms
 Traditionally the law recognised two classes
of contractual terms, namely conditions and
warranties; a third one has now been added
in the form of innominate terms. The
importance in distinction lies in the different
remedies that are available when a
contractual term is breached.
 A condition is a term which is so important
that in the case of breach the innocent party
is entitled to claim damages and terminate
the contract, if he so wishes.
 Breach of a warranty, on the other hand, only
leads to the right to claim damages; the
victim cannot terminate the contract.
 Innominate terms are and intermediate
category between conditions and warranties.
They are also called intermediate terms. The
remedy that is available for breach of such a
term depends on the severity of the breach in
the individual case.
Standard form contracts
 Standard form contracts are very common
today. They are drawn up in advance by one
party and presented to all potential partners.
There are no individual negotiations bewteen
the parties and the person who is presented
with the contract normally only has the
choice of accepting or rejecting it; he cannot
influence the terms.
 Standard form contracts are often used vis-à-
vis consumers who are not in position to
resist the imposition of unfair terms, even if
they read the proverbial ‘’small print’’
VOID OR VOIDABLE CONTRACTS
Meaning of ‘Void’ and ‘Voidable’
 A contract may either be valid or invalid to a
greater or lesser degree by being void, voidable
or unenforceable.
 ‘Void’ means that an agreement which was
intended to be binding, is in fact not a contract
at all and does not produce any legal effects.
 Benefits which have been transferred, for
example if one party has already paid, must
be returned, as the agreement is void ab initio
(from the beginning), meaning that it is
treated as though it had never existed.
 In some situations it is up to one of the parties
to decide whether or not the legal relations
created by the contract should continue to
exist. This right to rescind the contract is
granted in a variety of situations, such as
misrepresentation. Where the right of
election exists, a contract is said to be
voidable. The party entitled to choose, can
either affirm the contract or avoid it.
 A contract that is neither void nor voidable
may nevertheless be unenforceable. This is
the case if one or both parties cannot be sued
under the contract, even though the contract
itself is valid. A contract is unenforceable if,
for example, the limitation period for its
enforcement has expired.
Capacity
 Capacity refers to a person’s ability to enter
into a binding contract.
 Minors, persons with mental ilnesses or
intoxicated persons all lack contractual
capacity.
Illegality
 Broadly speaking there are two types of
illegality. A contract may be illegal because it
involves the commission of a legal wrong.
 The second kind of contracts which are illegal
are contracts which are in some way against
public policy. Obviously this can include a
wide variety of different circumstances and
not all types of illegality will be of same
seriousness.
Mistake
 There are three types of mistake.
 In the case of unilateral mistake one party
has made a mistake of which the other party
is aware. If both parties make exactly the
same mistake it is called a common mistake.
In mutual mistake each party mistakes the
intention of the other; they are at crosspurposes.
Misrepresentation
 A misrepresentation is a false statement of
past or existing fact made by one party
before or at the time the contract is made,
which is adressed to the other party and
which induces the other party to enter into
the contract.
 Misrepresentations must be distinguished
from instances of non-disclosure. A person
who is guilty of an active misrepresentation
has said something that is not true, while in
the case of non-disclosure someone has
simply not volunteered information. The
distinction is important because generally
there is no duty of disclosure in English law.
 A misrepresentation can be fraudulent,
negligent or innocent, a distinction which
refers to the state of mind of the representor.
A misrepresentation is fraudulent if the
representor knows that the statement he is
making is false.