CONTRACT Unit 30 Preview 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 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 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 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 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and is capable of acceptance only by an offeree who knows of its existence Offer An offer is terminated when it has been revoked, or lapsed, or met with a counter- offer Acceptance Agreement to the terms of an offer that, provided other requirements are fulfilled, converts the offer into a legally binding contract Acceptance 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 Must involve some action on the part of the offeree Validity of acceptance 1) it must take place while the offer is still in force; 2) it must be on the same terms as the offer 3) it must be unconditional 4) it must be communicated to the offeror Counter-offer 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 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 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 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 An exchange of promises to perform acts in the future An act, forbearance, or promise by one party that constitutes the price Principles 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 3) consideration must move from the promise 4) consideration must not be past Consideration: example 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 Adults have capacity, but not if they are of unsound mind Breaking off contractual negotiations 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 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 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 Express terms Implied terms Conditions Warranties Exclusion terms Terms 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 Terms that the parties have specifically agreed to, being terms the parties either said or wrote Implied terms 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 Term: a promise that is part of the contract Terms of a contract: 1) conditions 2) warranties Condition 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 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 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 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 Valid Void voidable Contracts 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 Misrepresentaion Duress and undue influence Mistake Misrepresentation 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 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 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 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 Discharge: parties are free of their mutual obligations Termination of a contract Performance Express agreement Breach Doctrine of frustration Discharge by performance 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 Parties may agree that the contract should end automaticaly if some event occurs or after a fixed period of time Discharge by breach A party has made it clear that he will not carry out the contract, or The party has not performed his obligations properly Consequences 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 6. What is misrepresentation? 7. What is the difference between discharge by frustration and discharge by breach? Contract law case discussion 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 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 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 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 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 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.