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Introduction to Contract Law

INTRODUCTION TO THE LAW OF CONTRACT

 

DEFINITION

A contract may be defined as a legally binding agreement or, in the words of Sir Frederick Pollock: “A promise or set of promises which the law will enforce”.

The agreement will create rights and obligations that may be enforced in the courts. The normal method of enforcement is an action for damages for breach of contract, though in some cases the court may order performance by the party in default.

CLASSIFICATION

 Contracts may be divided into two broad classes:

 1.        Contracts by deed - A deed is a formal legal document signed, witnessed and delivered to effect a conveyance or transfer of property or to create a legal obligation or contract.

2.         Simple contracts - Contracts which are not deeds are known as simple contracts. They are informal contracts and may be made in any way – in writing, orally or they may be implied from conduct.

 

Another way of classifying contracts is according to whether they are “bilateral” or “unilateral”.

1.         Bilateral contracts - A bilateral contract is one where a promise by one party is exchanged for a promise by the other. The exchange of promises is enough to render them both enforceable. Thus in a contract for the sale of goods, the buyer promises to pay the price and the seller promises to deliver the goods.

2.         Unilateral contracts - A unilateral contract is one where one party promises to do something in return for an act of the other party, as opposed to a promise, eg, where X promises a reward to anyone who will find his lost wallet. The essence of the unilateral contract is that only one party, X, is bound to do anything. No one is bound to search for the lost wallet, but if Y, having seen the offer, recovers the wallet and returns it, he/she is entitled to the reward.

ELEMENTS

1.         Agreement - An agreement is formed when one party accepts the offer of another and involves a “meeting of the minds”.

2.         Consideration - Both parties must have provided consideration, ie, each side must promise to give or do something for the other.

3.         Intention to create legal relations - The parties must have intended their agreement to have legal consequences. The law will not concern itself with purely domestic or social agreements.

4.         Form - In some cases, certain formalities (that is, writing) must be observed.

5.         Capacity - The parties must be legally capable of entering into a contract.

6.         Consent - The agreement must have been entered into freely. Consent may be vitiated by duress or undue influence.

7.         Legality - The purpose of the agreement must not be illegal or contrary to public policy.

A contract which possesses all these requirements is said to be valid. The absence of an essential element will render the contract either void, voidable or unenforceable (as to which see below).

In addition, a contract consists of various terms, both express and implied. A term may be inserted into the contract to exclude or limit one party’s liability (the so-called “small print”). A term may also be regarded as unfair. A contract may be invalidated by a mistake and where the contract has been induced by misrepresentation the innocent party may have the right to set it aside. As a general rule, third parties have no rights under a contract but there are exceptions to the doctrine of privity. There are different ways of discharging a contract and remedies are available for breach of contract at common law and in equity.

ENFORCEABILITY

 1.        Void contracts - A “void contract” is one where the whole transaction is regarded as a nullity. It means that at no time has there been a contract between the parties. Any goods or money obtained under the agreement must be returned. Where items have been resold to a third party, they may be recovered by the original owner.

2.         Voidable contracts - A contract which is voidable operates in every respect as a valid contract unless and until one of the parties takes steps to avoid it. Anything obtained under the contract must be returned, insofar as this is possible. If goods have been resold before the contract was avoided, the original owner will not be able to reclaim them.

3.         Unenforceable contracts -  An unenforceable contract is a valid contract but it cannot be enforced in the courts if one of the parties refuses to carry out its terms. Items received under the contract cannot generally be reclaimed.

FORMATION OF A CONTRACT

INTRODUCTION

A contract may be defined as an agreement between two or more parties that is intended to be legally binding. The first requisite of any contract is an agreement (consisting of an offer and acceptance). At least two parties are required; one of them, the offeror, makes an offer which the other, the offeree, accepts.

OFFER

 An offer is an expression of willingness to contract made with the intention that it shall become binding on the offeror as soon as it is accepted by the offeree. A genuine offer is different from what is known as an "invitation to treat", ie where a party is merely inviting offers, which he is then free to accept or reject. The following are examples of invitations to treat:

ACCEPTANCE

 An acceptance is a final and unqualified acceptance of the terms of an offer. To make a binding contract the acceptance must exactly match the offer. The offeree must accept all the terms of the offer.

The following rules have been developed by the courts with regard to acceptance:

1. COUNTER OFFERS - If in his reply to an offer, the offeree introduces a new term or varies the terms of the offer, then that reply cannot amount to an acceptance. Instead, the reply is treated as a "counter offer", which the original offeror is free to accept or reject. A counter-offer also amounts to a rejection of the original offer which cannot then be subsequently accepted. See:

2. CONDITIONAL ACCEPTANCE - If the offeree puts a condition in the acceptance, then it will not be binding.

3. TENDERS - A tender is an offer, the acceptance of which leads to the formation of a contract. However, difficulties arise where tenders are invited for the periodical supply of goods:

4. COMMUNICATION OF ACCEPTANCE - The general rule is that an acceptance must be communicated to the offeror. Until and unless the acceptance is so communicated, no contract comes into existence:

5. METHOD OF ACCEPTANCE - The offer may specify that acceptance must reach the offeror in which case actual communication will be required. If a method is prescribed without it being made clear that no other method will suffice then it seems that an equally advantageous method would suffice.

6. KNOWLEDGE OF THE OFFER - An offeree may perform the act that constitutes acceptance of an offer, with knowledge of that offer, but for a motive other than accepting the offer. The question that then arises is whether his act amounts to a valid acceptance.

7. CROSS-OFFERS - A writes to B offering to sell certain property at a stated price. B writes to A offering to buy the same property at the same price. The letters cross in the post. Is there (a) an offer and acceptance, (b) a contract?

TERMINATION OF THE OFFER

 1. ACCEPTANCE - Once an offer has been accepted, a binding contract is made and the offer ends.

2. REJECTION - If the offeree rejects the offer that is the end of it.

3. REVOCATION - The offer may be revoked by the offeror at any time until it is accepted. However, the revocation of the offer must be communicated to the offeree(s). Unless and until the revocation is so communicated, it is ineffective.

4. COUNTER OFFER - See above

5. LAPSE OF TIME - Where an offer is stated to be open for a specific length of time, then the offer automatically terminates when that time limit expires. Where there is no express time limit, an offer is normally open only for a reasonable time.

6. FAILURE OF A CONDITION - An offer may be made subject to conditions. Such a condition may be stated expressly by the offeror or implied by the courts from the circumstances. If the condition is not satisfied the offer is not capable of being accepted.

7. DEATH - The offeree cannot accept an offer after notice of the offeror's death. However, if the offeree does not know of the offeror's death, and there is no personal element involved, then he may accept the offer.

CONSIDERATION

INTRODUCTION

The mere fact of agreement alone does not make a contract. Both parties to the contract must provide consideration if they wish to sue on the contract. This means that each side must promise to give or do something for the other. (Note: if a contract is made by deed, then consideration is not needed.)

For example, if one party, A (the promisor) promises to mow the lawn of another, B (the promisee), A's promise will only be enforceable by B as a contract if B has provided consideration. The consideration from B might normally take the form of a payment of money but could consist of some other service to which A might agree. Further, the promise of a money payment or service in the future is just as sufficient a consideration as payment itself or the actual rendering of the service. Thus the promisee has to give something in return for the promise of the promisor in order to convert a bare promise made in his favour into a binding contract.

DEFINITION

Lush J. in Currie v Misa (1875) LR 10 Exch 153 refered to consideration as consisting of a detriment to the promisee or a benefit to the promisor:

"… some right, interest, profit or benefit accruing to one party, or some forebearance, detriment, loss or responsibility given, suffered or undertaken by the other."

The definition given by Sir Frederick Pollock, approved by Lord Dunedin in Dunlop v Selfridge Ltd [1915] AC 847, is as follows:

"An act or forebearance of one party, or the promise thereof, is the price for which the promise of the other is bought, and the promise thus given for value is enforceable."

TYPES OF CONSIDERATION

1. EXECUTORY CONSIDERATION

Consideration is called "executory" where there is an exchange of promises to perform acts in the future, eg a bilateral contract for the supply of goods whereby A promises to deliver goods to B at a future date and B promises to pay on delivery. If A does not deliver them, this is a breach of contract and B can sue. If A delivers the goods his consideration then becomes executed.

2. EXECUTED CONSIDERATION

If one party makes a promise in exchange for an act by the other party, when that act is completed, it is executed consideration, eg in a unilateral contract where A offers 50 reward for the return of her lost handbag, if B finds the bag and returns it, B's consideration is executed.


RULES GOVERNING CONSIDERATION

 

1. CONSIDERATION MUST NOT BE PAST - If one party voluntarily performs an act, and the other party then makes a promise, the consideration for the promise is said to be in the past. The rule is that past consideration is no consideration, so it is not valid and cannot be used to sue on a contract. For example, A gives B a lift home in his car. On arrival B promises to give A 5 towards the petrol. A cannot enforce this promise as his consideration, giving B a lift, is past.

2. CONSIDERATION MUST BE SUFFICIENT  BUT NEED NOT BE ADEQUATE - Providing consideration has some value, the courts will not investigate its adequacy. Where consideration is recognised by the law as having some value, it is described as "real" or "sufficient" consideration. The courts will not investigate contracts to see if the parties have got equal value.

3. CONSIDERATION MUST MOVE FROM THE PROMISEE - The person who wishes to enforce the contract must show that they provided consideration; it is not enough to show that someone else provided consideration. The promisee must show that consideration "moved from" (ie, was provided by) him. The consideration does not have to move to the promisor. If there are three parties involved, problems may arise.

4. FOREBEARANCE TO SUE - If one person has a valid claim against another (in contract or tort) but promises to forbear from enforcing it, that will constitute valid consideration if made in return for a promise by the other to settle the claim.

5. EXISTING PUBLIC DUTY -  If someone is under a public duty to do a particular task, then agreeing to do that task is not sufficient consideration for a contract.

6. EXISTING CONTRACTUAL DUTY -  If someone promises to do something they are already bound to do under a contract, that is not valid consideration.

7. EXISTING CONTRACTUAL DUTY OWED TO A THIRD PARTY - If a party promises to do something for a second party, but is already bound by a contract to do this for a third party, this is good consideration.

 

INTENTION TO CREATE LEGAL RELATIONS

 

INTRODUCTION

The parties must intend the agreement to be legally binding. But how can the court find out what is in the parties' minds? The nearest the courts can get to discover this intention is to apply an objective test and judge the situation by what was said and done. The law divides agreements into two groups, social & domestic agreements and business agreements.

SOCIAL & DOMESTIC AGREEMENTS

 

This group covers agreements between family members, friends and workmates. The law presumes that social agreements are not intended to be legally binding.

Agreements between a husband and wife living together as one household are presumed not to be intended to be legally binding, unless the agreement states to the contrary. See:

Balfour v Balfour [1919] - The presumption against a contractual intention will not apply where the spouses are not living together in amity at the time of the agreement. See:

MISREPRESENTATION

 

INTRODUCTION

A misrepresentation is a false statement of fact made by one party to another, which, whilst not being a term of the contract, induces the other party to enter the contract.

The effect of an actionable misrepresentation is to make the contract voidable, giving the innocent party the right to rescind the contract and/or claim damages.

1. FALSE STATEMENT OF FACT - An actionable misrepresentation must be a false statement of fact, not opinion or future intention or law.

2. THE MISREPRESENTATION MUST HAVE INDUCED THE CONTRACT -  The false statement must have induced the representee to enter into the contract. The requirements here are that (a) the misrepresentation must be material and (b) it must have been relied on.

TYPES OF MISREPRESENTATION

 Once misrepresentation has been established it is necessary to consider what type of misrepresentation has been made. There are three types of misrepresentation: fraudulent, negligent and wholly innocent. The importance of the distinction lies in the remedies available for each type.

(A)    FRAUDULENT MISREPRESENTATION - Fraudulent misrepresentation was defined by Lord Herschell in Derry v Peek (1889) as a false statement that is "made (i) knowingly, or (ii) without belief in its truth, or (iii) recklessly, careless as to whether it be true or false." Therefore, if someone makes a statement which they honestly believe is true, then it cannot be fraudulent.

(B) NEGLIGENT MISREPRESENTATION - This is a false statement made by a person who had no reasonable grounds for believing it to be true. There are two possible ways to claim: either under common law or statute.

 

REMEDIES FOR MISREPRESENTATION

 

Once an actionable misrepresentation has been established, it is then necessary to consider the remedies available to the misrepresentee.

DISCHARGE OF CONTRACT

 

A contract may be discharged by performance, agreement, breach, or frustration.

 

1. PERFORMANCE-  THE GENERAL RULE

The general rule is that the parties must perform precisely all the terms of the contract in order to discharge their obligations.

2. AGREEMENT - The general rule is that what has been created by agreement may be extinguished by agreement.

An agreement by the parties to an existing contract to extinguish the rights and obligations that have been created is itself a binding contract, provided that it is made under seal or supported by consideration. Where the agreement for discharge is not under seal, the legal position varies according to whether the discharge is bilateral or unilateral:

BILATERAL DISCHARGE - Bilateral discharge occurs whenever both parties to the contract have some right to surrender, eg where there has been non-performance by either party, or is partly performed by one or both parties.

UNILATERAL DISCHARGE - Unilateral discharge takes place where only one party has rights to surrender. Where one party has entirely performed his part of the agreement, he is no longer under obligations but has rights to compel the performance of the agreement by the other party. For unilateral discharge, unless the agreement is under seal, consideration must be furnished in order to make the agreement enforceable, i.e. accord and satisfaction.

3. BREACH - A failure to perform the terms of a contract constitutes a breach.

4. FRUSTRATION - The doctrine of frustration operates in situations where it is established that due to subsequent change in circumstances, the contract is rendered impossible to perform, or it has become deprived of its commercial purpose by an event not due to the act or default of either party.

Please note that these notes are luecture outlines and should not be substituted for notes not taken during class.

Dreana Marshall