Tuesday, June 8, 2010

Contracts - Overview

Overview of the Law of Contract

v A contract can be defined as an agreement between two or more persons that creates certain rights and obligations that the law will recognise and enforce.

Ø Contracts can be bilateral (i.e. a promise for a promise).

Ø Contracts can also be unilateral (i.e. a promise for the complete performance of an act).

Ø Some contracts will not necessarily be the result of an agreement but will be enforceable because they are made by deed.

Ø Contracts other than those by deed are simple agreements. They may be either written or oral.

Customary Analysis of the Law of Contract – The Five Heads

v The law of contracts is customarily analysed under five heads.

v The first head concerns the elements of a contract.

Ø There are six necessary elements for a valid simple contract: These are applied to determine the dispute over whether a contract has come into existence.

§ 1. agreement (offer and acceptance): - There cannot be a contract whether there is an agreement between two or more persons. This is determined through offer and acceptance.

¨ A party proving a contract needs to prove an offer made by a party and accepted by the other. – This may not always be an issue, however.

· an offer is a definite and clear undertaking to be bound contractually;

¨ It must be communicated to the person to whom it is made before it can be accepted

¨ It may be made to a single person, a class of persons or the world at large

¨ It may be revoked at any time before it is accepted, unless it is an option – a promise supported by consideration to keep an offer open for a period of time

¨ It must be distinguished from an option or an invitation to treat. – An invitation to make an offer.

¨ An offer may be revoked, refused or may lapse if not accepted within a particular time.

¨ If the offer is accepted then there will be an agreement.

· an acceptance is a statement or act showing the offeree’s intention to accept the offeror’s terms without further discussion or negotiation;

¨ The acceptance must be made to the offer or made in reliance on the offer – there cannot be assent without reliance on the offer

¨ Acceptance of an offer must be communicated to the offeror either by words or conduct.

¨ It must be complete and unqualified acceptance of the terms of the offer

¨ The method of acceptance must satisfy the offeror’s requirements

¨ Communication of the acceptance must be made by an appropriate method

Ø If the offeror has not specified a mode of acceptance, valid acceptance would be a same or similar mode to the offer

¨ If the acceptance is mailed, it is effective from the time of posting, not from the time of receipt.

¨ Oral and telegraphic acceptance must be received to be effective, the same goes for fax or email. This is the opposite of acceptance by mail.

¨ Communication of acceptance by an agent must be authorised first.

¨ Communication of acceptance may be dispensed with subject to the agreement of the parties involved.

§ 2. genuine intention to enter into legal relations;

· The parties should contemplate that their agreement will be enforceable in a court of law

· The question of intention is to be determined on an objective basis – this has two aspects

¨ A. Concerning family and social context

Ø There is a presumption that agreements in this context are not intended to be legally enforceable by the courts

¨ B. Concerning commercial/business context

Ø The presumption for these agreements is that they are intended to be legally enforceable

¨ Presumptions can be rebutted by evidence to the contrary

§ 3. consideration:

¨ Contracts by deed do not need consideration to be valid because they are made in a solemn form.

· Consideration is an act or forbearance or a promise to act or forbear to support the promise of another; or

· some benefit received by the promisor or some detriment suffered by the promisee;

¨ Consideration is necessary to the validity of every single contract

¨ It may be executed - can occur in the present or can be executory – the act of forbearance is yet to occur. However, subject to certain statutory exceptions, past consideration is not good consideration.

¨ Consideration must be provided by the person to whom the person is made, however if the promise is made to two parties and only one of the two parties provides the consideration, the contract can still be enforced by both parties. It is not necessary that each party contribute part of the consideration

¨ Consideration may not be commercially adequate.

¨ Consideration must not be too vague or indefinite

¨ Consideration must be of sufficient value in the eyes of the law, thus a moral obligation to perform a promise is not consideration for the promise, as is a promise to perform an existing obligation as it promises no more than what one is already bound to do

Ø In this regard an existing obligation can be of three kinds

§ The performance of a public duty imposed by law

§ The performance of an existing contractual duty

§ Part payment of a debt on the due date is not sufficient consideration for the creditor’s promise to forego the balance due.

§ 4. legal capacity (cf. minors, mentally disabled or intoxicated persons, married women, bankrupts, and corporations);

· Even though the necessary elements for a valid simple contract may be present, the contract may be legally ineffective because of restricted capacity

· Legal capacity can be defined as the intellectual capacity to comprehend the consequences of one’s business acts

· The common law presumes that one who enters into a contract has the legal capacity to contract, but has restricted the legal capacity of certain classes of persons.

· The parties who make the agreement must be mentally capable of understanding the nature of the contract.

· An agreement with a person who lacks legal capacity may be void, voidable or unenforceable

¨ Void = no rights or liabilities arise under the contract for any of the contracting parties

¨ Voidable = one of the parties to the contract can avoid their obligations. It is valid until voided or repudiated

¨ Unenforceable = valid in substance but cannot be enforced because of some technical defect.

§ 5. genuine consent (cf. mistake, misrepresentation, duress, undue influence, or unconscionable conduct);

· Consent must be genuine

· A person may enter into a contract because of some misunderstanding which may be the result of mistake, misrepresentation, duress etc.

§ 6. legality.

· The subject matter must be legal

· Contracts may not be valid in whole or in part if they are illegal (at statute or common law)

Ø These six elements must be present to create a valid contract. Once there is an agreement, a genuine intention to enter into legal relations, and consideration, there is a contract. However, if the one or both of the parties lack legal capacity, or they lack genuine consent, or illegality is involved in the contract, the contract will not be enforced by law.

v The second head in the law of contracts is the terms of the contract (eg. exclusion clauses or statutory implied conditions and warranties).

Ø This is concerned with the rules by reference to which the express and implied terms of the contract are analysed

Ø It is also concerned with the meaning and effect of certain terms

Ø It is also concerned with the rules used to determine the meaning of the terms.

v The third head is concerned with factors vitiating the contract (eg. unfair conduct).

Ø This includes vitiating factors present at formation

Ø Also includes failure to comply with factors rendered necessary by statute

Ø Some of these render contracts void, voidable or unenforceable

Ø Generally the party not responsible for the vitiating factor can enforce the contract against the party who is.

v A fourth head is concerned with the termination of the contract.

Ø Termination takes place when the contract is ended and the parties discharge liability under it.

§ The full performance of the parties will discharge and therefore terminate the contract.

Ø The contract can, however, be terminated for opther reasons.

v A fifth head concerns remedies for breach of contract (eg. damages at common law or specific performance in equity).

Ø The major form of remedy is an action for damages for breach of contract

§ Damages are assessed on the basis that the plaintiff is to be put in the position that they would be in if the contract was fully performed.

Ø There are also a range of other remedies

§ Specific performance – an order directed at the party in default that they perform their obligations

· This will not be made where common law damages would be adequate

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