THE LAW OF CONTRACT

THE LAW OF CONTRACT

The Nature of A Contract

Introduction

A contract is a legally binding agreement between two ‘parties. When a contract is made, each party is obliged to carry out his part of the agreement. If one party fails to do what was agreed in the contract, the ‘injured party’ can take legal action for breach of contract.

There are three key elements of a simple legal contract:

• offer and acceptance
• an intention to establish legal standing (a binding contract)
• consideration.

A legal contract is formed when one party makes an offer and the other accepts it, as per contract law terminology.

•   the person making the offer is called the ‘offeror’
•   The one who accepts the offer is called the ‘offeree’.

The offeror in a service contract may be the supplier or the recipient, but in a sale contract, the offeror may be either the seller or the buyer.

Contract Types and Evidence

• Contracts may be verbal or in writing.
• Written agreements provide evidence of existence.
• Some contracts want to be in writing.
• Legally required written agreements encompass invoice of trade, customer credit score settlement, debt undertaking, debt sale settlement, and land switch settlement.

• Certain legal agreements, like guarantees, require written evidence of existence.

Intention to Create A Legal Contract

A contract is a binding agreement, but not all agreements are contracts. The courts will simply enforce agreements that had been supposed to be a settlement and so have a legal impact.

The courtroom therefore needs to decide whether or not a goal to create a prison relationship existed while the settlement became made. For these purposes, agreements are divided into two categories:

•   domestic agreements and social agreements
•   commercial agreements.

 Domestic agreements and social agreements:

Courts typically assume that domestic or social agreements are not intended to create legally binding agreements, a presumption in legal cases.

Commercial agreements:

Commercial agreements, including goods, services, and employment contracts, are presumed to be legal due to business dealings, with courts presuming parties intended to create such agreements. 

Offer and acceptance

The Offer

An offer and an acceptance of the offer are necessary for the formation of a contract. The terms that the offeror is likely to be legally obliged using a settlement are outlined in the provide.  

•   An offer must be capable of acceptance. It must therefore be sufficiently definite. It must not be so vague that the offeree does not know what the terms of the offer are.
•   A statement of intention is not an offer.
•   A supply of information, for example, the supply of information regarding a price that someone would be ready to accept the offer. 

The Offeree

1.     An offer may be made to a specific person, to a group of people, or the world at large.

2.     An offer is normally made to a specific person or a specific group of people. If so, it can only be accepted by the person of any of the persons to whom the offer is specifically made.

Offer and an invitation to treat

There is an important distinction between an offer and an invitation to treat.

•       An offer is a legally binding agreement that is formed when accepted.
•       An invitation to treat invites someone to make an offer, which is accepted by the person making the invitation, thereby creating a contract and allowing the person to decide.

Invitations to tender

An invitation to tender is a request for a specific job or item, with the offeror submitting a tender and the offeree accepting or rejecting each. Acceptance can lead to a binding contract or a standing offer, where the offeree agrees to buy the item at the agreed price. 

Termination of an offer

The offeree can reject an offer, which ceases to exist and cannot change their mind. If they reject and then change their mind, they must make a new offer, which the original offeror decides on. The offeree can make a counter-offer, lapse if the offer is open for a specific period, lapse by death, or revocation or withdrawal of the offer.

Revocation of an offer

An offer can be withdrawn before acceptance, and if the offeror does so, the offer is considered revoked.

•   When an offer is revoked, the offeree is no longer able to accept it.
•   An offer is not revoked (withdrawn) until the revocation has been received by the offeree.
•   If the offeree knows that the offer has been withdrawn, he cannot then accept it.

 Counter-offers

Acceptance of an offer requires all terms to be agreed upon, with a counter-offer being a new offer that the original offeree becomes the new offeror.

 Acceptance

Acceptance is crucial for the formation of a legal contract, as the offeree must fully accept the terms, thereby forming the contract.

•   Acceptance is normally in words, either written (including e-mail) or spoken.
•   However, in some cases, acceptance is implied from the conduct of the offeree.

Acceptance is crucial for the formation of a legal contract, as the offeree must fully accept the terms, thereby forming the contract.

•   The offeror might have waived the right to communication of acceptance.
•   When the communication of the acceptance does not reach the offeror because of an oversight or carelessness of the offeror.
•   The postal rule

A counteroffer occurs when an offeree accepts an offer with a change in a contract term, allowing the original offeror to decide whether to accept the counteroffer.

 A counter-offer is not acceptance. It brings the original offer to an end

•   The acceptance must align with the terms of the offer, and the offeree cannot introduce additional terms into the agreement.
•   A conditional acceptance is not acceptance and does not create a binding agreement.

Acceptance and the Postal Rule

The postal rule requires proper address and stamping for acceptance, but can be excluded by specifying alternative methods or requiring notice before posting.

Privity of Contract

Common law doctrine of privity of contract

The common law doctrine of privity of contract is the concept that it only those who are party to the contract (are ‘privy’ to the contract):

•   have rights or liabilities under the contract, and so
•   have the right to enforce the contract.

Contracts therefore do not give rights or obligations to others, known as ‘third parties’, who are not a party to the contract.

Exceptions to the doctrine of privity of contract

There are several exceptions to the general rule of privity of contract. Some of these are listed below.

•       Using formal assignment, a party can transfer benefits to another person, but obligations must be consented to.
•       Where the beneficiary (third party) sues in some other capacity
•       If it is reasonably anticipated that any breach of contract will result in loss to a third party.
•       Where there is a collateral contract.
•       The law of agency allows an agent to establish a contractual relationship between a principal and a third party, even if the third party is unaware of the agency relationship.

Consideration

Definition

Consideration involves the exchange of money for goods or service. One party gives money (consideration) and in return, the other party gives goods or service (also consideration).

Consideration may take the form of:

•   an action – doing something or giving something
•   a forbearance – not doing something, and in forbearing to act, giving up some benefit or right
•   a promise to act or a promise to forbear from acting in the future.

Executed consideration and executory consideration

A distinction can be made between executed and executory consideration.

•   Executed consideration. A promise is a promise made in exchange for the current act, such as exchanging cash for goods at a store.
•   Executory consideration. This involves a future promise to deliver goods, which will be paid for in the future.

Consideration must be sufficient but need not be adequate

The legal principle of consideration requires parties to agree on contract terms and ensure value for money. While consideration doesn’t have to be full value, it must have some economic value for recognition by the court.

The doctrine of promissory estoppel

Promissory estoppel, a law of equity, states that a promise may be enforceable in common law, but the person who made it can be prevented from enforcing their legal rights.

•   In fairness, this might protect the person who was given the promise (the promisee) where he has relied on the promise.
•   Promissory estoppel suspends the promiser’s rights, allowing them to retract their promise with reasonable notice, reverting to the original contractual agreement.
•       Promissory estoppel, based on equity, protects the promisee but should not be used as a tool to extract additional concessions from the promisor.

Contract Terms

The Nature of Contract Terms

A contract’s terms are agreements between parties, and failure to fulfil them results in a breach of contract. If a breach occurs, the other party can file a legal action, with the remedy determined by the court based on the nature of the breached promise. 

Contract Terms and Representations

Representations

A representation is a statement made in the pre-contractual stage to encourage a person to enter into a contract, such as a sales representative’s comments. 

Representations and Warranties

It is common to associate representations with warranties:
• Representation: Statement about current facts to induce contract entry.
• Warranty: Assurance about future, often included as terms in a written contract.

Written contract includes ‘representations and warranties’. 

 Conditions and Warranties

A contract contains a number of different terms. These can be categorised as:

•    Conditions
•    Warranties
•   Innominate terms.

Most terms are either conditions or warranties.

A condition is a crucial aspect of a contract agreement, and if breached, the injured party has the right to:

•   terminate the contract and refuse to carry out his obligations under the terms of the contract, or
•   continue with the agreement and sue for breach of contract (sue for damages).

A warranty is a non-essential term in a contract, preventing a breach that does not harm the contract’s overall purpose or the injured party.

 Innominate terms

Courts now recognize an innominate term in contracts, allowing injured parties to repudiate a contract if it deprives them of “substantially the whole benefit of the contract,” treating it as terminated, similar to a condition term.

Express terms and implied terms

• Express terms: Inserted terms in the contract, either verbal or written.
  • Implied terms: Not expressly stated but part of the contract due to implied inclusion.
• Implied terms can be grouped into three main categories:

1.     Terms implied by custom or usage
2.     Terms implied by the courts
3.     Terms implied by statute. 

Terms implied by custom or usage

A contract may include terms implied by common usage or custom, unless specified in the contract. If an express term differs from custom, the term applies.

Terms implied by the courts

Although parties often decide on the terms of contracts, courts may enforce implied obligations to guarantee commercial efficacy.

Terms implied by statute

Statutes may mandate specific terms in contractual agreements, and if not explicitly stated, they should be implied.

Contracts: Discharge and Breach

Discharge of a contract

Discharge refers to the end of a contract, typically achieved through performance or mutual agreement. However, occasionally uncontrollable events like natural catastrophes or war could make it difficult for the parties to fulfil, which would be a breach of the agreement. This makes the contract void and voidable.

 Partial performance of contract obligations

Contracts are discharged when all obligations are fulfilled, not partially fulfilled. The legal rule on the discharge of contractual obligations was once harsh.

The doctrine of partial performance: quantum meruit

Prior to termination, if no breach occurred, one party can accept partial performance, allowing them to agree to a new contract and release their initial commitments.

Quantum meruit

The principle of ‘quantum meruit’ is used by courts to determine payment for partial completion of a contract and services. This principle applies when the doctrine of partial performance applies or when there is doubt about the amount of payment for work performed under other circumstances. The court determines payment based on the merit and quality of the work done, ensuring that parties are paid as much as they deserve. 

Breach of Contract

Breach of contract occurs when one party fails to fulfil their obligations under the contract, either completely or to a satisfactory standard.  

A breach of contract may be either:

•   a repudiatory breach, or
•   an anticipatory breach.

Repudiatory breach

A repudiatory breach occurs when one party fails to fulfil their contract terms, impacting the other party, or indicating a lack of commitment to the terms.

Anticipatory breach

A repudiatory breach occurs beyond the contract’s fulfillment period, whereas an anticipatory breach occurs before to the contract’s beginning and signifies one party’s intention to violate their obligations or the other party’s inability to fulfill their responsibilities.

Remedies for breach of contract

The court must determine the proper remedy in the event of a breach. The following are the primary remedies:

•   Damages
•   Specific performance
•   Rescission of the contract

Damages

A common law remedy for contract violations is damages, which requires the at-fault party to reimburse the harmed party for the losses incurred. Nonetheless, in some circumstances, courts may use equitable remedies like rescission, specific performance, or injunction.

Specific performance

Common law remedies for contract violations include damages, which oblige the at-fault party to pay the aggrieved party’s compensation. However, courts may also employ equitable remedies.

 Rescission

Common law remedies for contract violations include damages, which oblige the at-fault party to pay the aggrieved party’s compensation. However, courts may also employ equitable remedies.

Written by: Maham Maqbool, Bright Student of ACCA