Business Law
MAN-3
Bakiev Erlan, Ph. D.
Contracts
1 Nature of contract
2 Elements of contract formation
3 Offer
4 Acceptance
5 Consideration
6 Intention to create legal relations
7 Capacity to contract
8 Legality of object
9 Requirement of writing
10 Contract interpretation
1 Nature of contract
1.1 Contract
A promise or set of promises which
the law will enforce.
China: an agreement the law will
enforce.
1.2 Contract law
Where people make law for themselves
Where people can express their
individual preferences
It accommodates most relationships with
minimum conflict
The prime example of law in its
facilitative role.
2 Elements of contract formation
(1) Offer
(2) Acceptance
(3) Consideration
(4) Intention to create legal relations
(5) Capacity to contract
(6) Legality of object
(7) Requirement of writing
3 Offer
3.1 Nature
(1) A tentative promise made by offeror subject to
conditions or containing a request to the offeree
(2) Invitation to treat, invitation to offer
Display of goods
Mail of catalogue
Newspaper & mass media advertisement
(3)Exception
Advertisement selling fixed number of
items at fixed price on first come first
to serve basis
Reward advertisement
3.2 Communication
(1)Orally, or in writing, or by gesture
(2)Offer is communicated upon receipt.
(3) Offeree can not accept an offer until first learning
of it.
One may find and return a lost article to the
owner unaware of the reward ad. N.
Cross offer:
A writes to B offering to sell her car for
$100 and B has written a letter crossing A’s
letter proposing to buy A’s car for $100. No
contract unless anyone makes subsequent
acceptance.
3.3 Standard form (model form)
(1) “See back”, “see the reverse side”, or “notices”
(2) Document provider: adequate notice to offeree.
Else, invalid.
3.4 Lapse and revocation
(1) Lapse
Expiration: if time is fixed
After reasonable time
Either party dies or becomes incompetent
(2) Revocation
Withdraw anytime before acceptance
Effective upon receipt by offeree
Case study:
• A sends a letter dated March 5 to B offering to
sell its house for $1000, saying the offer is open
until March 9 and it must have heard from B by
then. B receives it on March 6 and immediately
prepares letter of acceptance. Before B delivers
his acceptance in the morning of March 7, A
changes its mind and calls B saying it cancels
the offer.
Revocation is valid.
(3) Rejection
Is this good (best) price?
(4) Counter offer
It is the rejection of previous offer and
birth of new offer
4 Acceptance
4.1 Positive nature
(1) Words or conduct
Habitual act
(2) Silence
Offeror normally can’t stipulate it as
mode of acceptance
Habitually used, or agreed in advance: Y
4.2 Communication
(1) Same or advantageous method of communication
(2) By stipulated method as per offeror’s advice
(3) Post rule (telegram)
Valid upon dropping the letter in mailbox
Exception: offeror stipulated speedier method than
post
(4) Unilateral contract: no communication
(5) Other situations
Valid upon receipt of acceptance
Telephone: dead line, acceptance is ineffective.
4.3 Place of formation
(1) Contract is formed in the place where the
acceptance takes effect.
(2) Instantaneous communication: place
where offeror receives acceptance
5 Consideration
5.1 Meaning
It is the price for which the promise of
the other is bought
Exchange of promise: contract
Any party have both gains and losses
5.2 What constitute consideration?
(1) Anything having market value
(2) Exception:
Love
Gratitude
Past consideration
5.3 Adequacy
(1) No requirement: exchange of equal
value
(2) $ 1 is adequate consideration
Case study：
Adams, creditor of Brown, threatened to sue
Brown for the debt of $ 1000. Cox, friend of
Brown, then promised to pay Adams the debt
if Adams would refrain from suing, and
Adams agreed. If Cox failed to pay Adams as
agreed, and Adams sued him for breach of
contract, Adams would succeed.
Forbearance to sue is adequate consideration.
5.4 Gratuitous promises: N
(1) Gift promise is gratuitous, not amount to contract
for lack of consideration.
(2) Promisor isn’t bound by gratuitous promise, once he
undertakes the performance of it, he should do it
without negligence. He is liable, if he injure the
promisee.
5.5 Motive contrasted with consideration: past
consideration, N
(1) Motive is irrelevant. It does not affect the question
of consideration.
Case study
– Adams saved Bodnar from drowning.
Afterwards Bodnar promised to pay
Adams $ 100 out of gratitude. Bodnar’s
promise
was
made
for
“past
consideration”, therefore unenforceable.
5.6 Existing legal duty: N
(1) Statutory duty: N
Police, teacher, etc.
A promise to members of crew to increase
their pay if they don’t desert the ship, is
unenforceable.
(2) Existing contractual duty: N
Shield against economic blackmail:
construction firm
Add difficulty for contract
modification: in order for it to be
enforceable, “peppercorn” type
negligible value or under seal may be
good choice.
5.7 Gratuitous reduction of debt: N
(1) Consideration makes debt reduction difficult.
(2) Way out
Time is of value. Payment before due date is
sufficient consideration.
Trade the debt with object of negligible value.
Third party purchases the debt from the
creditor: debt transaction.
Creditor agrees in writing and under seal to
reduce the debt.
A owed B $1000 falling due on March 1. B needed money
urgently. He would not care if A could not repay the same
amount. His reduction of the debt can only be enforceable
under the following manners:
★ B agreed to reduce it to $800, in return A would
repay him before March1.
★ B agreed to abandon the debt, in return A gave him
something of value, e.g., a watch
★ A’s friend, C agreed to pay B $800, in return B
would refrain from suing A.
★ A and B made the debt reduction agreement in
writing and under seal.
6 Intention to create legal relations
6.1 Business agreement
(1) Rule: such intention is presumed present.
(2) Exception: hard evidence to prove that they are not
serious.
6.2 Family, domestic arrangement
(1) Rule: such intention is presumed not present.
(2) Exception: hard evidence to prove that they are
serious.
(3) Reliance cost, pre-contract fault liability
7 Capacity to contract
7.1 Minors
(1) Necessaries: enforceable
Two criteria determining necessity: must be necessary in
relation to his station in life; must not already have
adequate stock of them.
Food, clothing, lodging, medical attention, legal advice
and transport: Y
Expensive jewelry, love: N
Only liable for reasonable price, not contract price. In
Chinese: tong sou wu qi
(2) Not liable for non-necessaries
May repudiate if the goods are still in his possession
If he sells, can’t repudiate unless returns the money paid.
People trading with minor run two risks: whether he will
pay for it; whether he will refund.
(3) Contract indirectly affecting minor
Adult can recover money lent to minor only if in fact
used for necessities.
If it is spent at races, lender can’t recover it.
Exemption from contract liability, no exemption from
tort liability.
Case study
A minor hires a riding horse promising to
handle with care. In his exuberance he
injures the horse by riding too hard.
The owner can’t sue A for breach of contract
for riding horse is non-necessary. He may
not A for tort of negligence either. He can
only sue A something outside of the
contract.
(5) Upon attaining majority
Repudiate non-necessity contract
acquiring
permanent
continuous
interest. Else, enforceable.
Ratify non-necessity contract without
continuous interest, then enforceable.
7.2 Other person of diminished capacity
(1) Unsound mind
(2) Incapacitated through drink or drugs
(3) Protection: similar to minors.
7.3 Corporations
(1) It can make any contract that natural person does.
Most company laws adopt this.
(2) Ultra vires: abandoned
7.4 Bankrupt debtors
(1) Under certain contractual disabilities, until he receives
a discharge from the court.
8 Legality of object
8.1 Void v Illegal contract
(1) Void: restore to position before contract
was attempted.
(2) Illegal contract: no remedy for plaintiff. If
property has been transferred, no recovery will
be allowed.
8.2 Illegal by statute
(1) smuggling, drug traffic, sex dealing etc.
8.3 Illegal by common law and public policy
(1) Contract contemplating the commission of tort, is illegal.
(2) Promise to pay witness for appearing or not appearing to
give evidence in criminal procedure is illegal.
8.4 Void by statute
(1) Any provision in employment contract depriving
employee’s protection of Worker’s Compensation Act.
(2) Bankruptcy Act: transfer of property by gift or at
inadequate price 12 months before bankruptcy is void.
9 Requirement of writing
(1) Contract concerning interests in land
(2) Not to be performed by either party with 1 year
(3) Ratifying minor’s contract
(4) Guarantee
(5) Arrangement made in consideration of marriage
(6) Executor’s promise to answer damages out of his
own estate
10 Contract interpretation
10.1 Express terms
(1) Plain-meaning (strict) approach, liberal
approach
10.2 Parol Evidence rule: oral evidence
10.3 Implied terms as a method of interpretation