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Chapter Three: Contracts

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1 Chapter Three: Contracts

2 Contracts: Contracts are  an essential component of commercial law.
A contract is “a legally binding exchange of promises or agreement between parties that the law will enforce”. Contract Law is based on the latin phrase (pacts must be kept). Breach of a contract is recognised by the law and remedies can be provided. Almost everyone makes contracts every day. Sometimes written contracts are required, e.g., when buying a house. However, the vast majority of contracts are made orally.

3 Quasi-Contract A quasi-contract  an implied-in-law contract  is “a legal substitute for a contract”. A quasi-contract  used when a court wishes to create an obligation upon a non-contracting party to avoid injustice. Quasi-contracts are  “the lawful and purely voluntary acts of a man, from which there results any obligation whatever to a third person, and sometime a reciprocal obligation between the parties”. In contracts  consent of the contracting parties  produces obligations In quasi-contracts  no consent is required  the obligation arises from the law or natural equity They are called quasi-contracts, because they bind the parties without being contracts.

4 An example  a plumber accidentally installs a sprinkler system in the lawn of the wrong house.
Will the man be held liable for payment? Yes, if it could be proven that the man knew that the sprinklers were being installed mistakenly  the court would make him pay because of a quasi-contract. No, he would not be liable if that knowledge could not be proven. Fair market value: The defendant's liability  equal = to the value of the benefit conferred by the plaintiff  not necessarily the subjective value that the defendant enjoys. e.g., an accountant prepares tax-payer's taxes, finding a way to get him a large refund. Tax-payer is only liable for the fair market value of tax preparation services  is not inflated up to account for the large refund he enjoyed.

5 Contractual Formation:
Three key elements to the creation of a contract. Offer and acceptance Consideration is the legal concept of value in the common sense, promised to another when making a contract. It can take the form of money, physical objects, services… Intention to create legal relations In addition, for some contracts formalities One of the most famous cases on forming a contract is Carlill v. Carbolic Smoke Ball Company, (in 19th century England). A medical firm advertised that its new drug, a smoke ball, would cure people's flu, and if it did not, buyers would receive £100. Many people sued for their £100 when it did not work. The court of appeal held that it would appear to a reasonable man that Carbolic had made a serious offer. People had given good "consideration" by using a faulty product.


7 Offer and Acceptance: The most important feature of a contract  one party makes an offer for a bargain  another accepts  “concurrence of wills” of two or more parties. Parties must have been engaged in conduct manifesting their assent Objective perspective: it is necessary that somebody gives the impression of offering or accepting contractual terms in the eyes of a reasonable person. In the U.S., an offer is interpreted as inviting the offeree to accept either by promising to perform what the offer requests or by rendering the performance, as the offeree chooses.

8 Offer and acceptance  orally or in writing.
An implied contract  “some of the terms are not expressed in words”. This can take two forms. Implied in fact: where the circumstances imply that parties have reached an agreement even though they have not done so expressly. e.g., by going to a doctor for a checkup, a patient agrees that he will pay for the service. Implied in law: is also called a quasi-contract, because it is a means for the court to remedy situations  in which one party would be unjustly enriched. Example of the plumber who accidentally installed a sprinkler system in the lawn of the wrong house.

9 Consideration and Estoppel:
Consideration is “value paid for a promise”. Consideration is needed for a valid contract. e.g. If you sign a contract with a man, agreeing to buy his car for an amount of money, his consideration is the car, which he promises to give to you. Your consideration is the money that you pay for the car. In basic terms, the offeree must give something back to the offeror in return for his promise. Consideration must be sufficient. Consideration of one party greatly exceeds that of another  may be held invalid for lack of sufficient consideration == or == no consideration. Such contracts may also be held invalid for fraud, duress, unequal bargaining power, or being contrary to public policy.

10 In Civil Law, Consideration is not necessary  and it came under criticism.
In civil law an exchange of promises / concurrence of wills is the correct basis  rather than an exchange in valuable rights Consideration is a controversial requirement for contracts under common law   the concept is based on Estoppel  used to create obligations during pre-contractual negotiations  if a party has given another an assurance and the other has relied on the assurance to his detriment. A number of commentators have suggested that consideration be abandoned, and estoppel be used to replace it as a basis for contracts.

11 Intention to be Legally Bound:
The presumption  in commercial agreements  parties intend to be legally bound. Many domestic and social agreements are unenforceable  lack of intention to be legally bound The case of Balfour v. Balfour. Using contract-like terms, Mr Balfour had agreed to give his wife £30 a month as maintenance while he was abroad They separated and Mr Balfour stopped payments. Mrs Balfour brought an action to enforce the payments. The Court of Appeal, decided “no enforceable agreement as they were not intending to be legally bound by the promise.”

12 The Abstraction Principle:
 special approach to contracts  “abstraction principle” It means  personal obligation of contract forms separately to the title of property being conferred. When contracts are invalidated for some reason e.g. a car buyer was so drunk that he lacked legal capacity to contract, The contractual obligation to pay can be invalidated separate from proprietary title of the car. Unjust Enrichment Law, rather than the Law of Contract  is used to restore title to the rightful owner.

13 Formalities and Writing:
Exchange of promises can be binding and legally = as a written contract. “Verbal contract”  Any contract that uses words, spoken or written. All oral contracts and written contracts. “Non-verbal contract”  non-oral contract  a contract implied by the acts of the parties, which can be either implied in fact or implied in law. Most jurisdictions have rules which may render valid oral contracts unenforceable.  Especially regarding contracts involving large amounts of money or real estate. In the U.S., a contract is unenforceable for the sale of goods over US$500.

14 The purpose of formalities and writing  is to prevent false allegations of the existence of contracts that were never made Contracts that do not meet this requirement are unenforceable, but are not necessarily void. However, a party unjustly enriched by an unenforceable contract may be subject to restitution. In many jurisdictions (in common law)  there is no requirement for the entire contract to be in writing, Although there must be a note evidencing the contract. The note must be signed in some way. It must contain all material terms of the contract, the subject matter and the parties to the contract. In england, some agreements are made orally, but the guarantees must be in writing.

15 Signing a contract  the person is bound by its terms whether they have read it or not.
If a party wishes to use a document as the basis of a contract  reasonable notice of its terms must be given to the other party prior to their entry into the contract. including tickets issued at parking stations.

16 Uncertainty, Incompleteness and Severance:
The terms of the contract are  uncertain or incomplete  Legally  no agreement. Inability to agree on key issues, such as price or safety  may cause the entire contract to fail. Courts attempt to give effect to commercial contracts where possible, by construing a reasonable construction of the contract. Courts may look to external standards, mentioned in the contract or implied by common practice in a certain field. Courts may imply a reasonable price if it is excluded, with the exception of land, and second-hand goods, which are unique.

17 Uncertain or incomplete clauses in the contract + + all options in resolving its true meaning have failed It may be possible to sever and void just those affected clauses if the contract includes a severability clause. The contract standing without the clauses in the eyes of a reasonable person.

18 Contractual Terms: A contractual term is “any provision forming part of a contract  term gives rise to a contractual obligation Some terms are stated expressly some terms carry less legal gravity  peripheral to the objectives of the contract. Provisions appear at the end of the contract  tell the parties how to govern their relationship  have secondary importance  but have significant business consequences. Common provisions include: the governing law provision assignment and delegation provisions waiver of jury trial provisions In general, a party can only take legal action for the non fulfillment of a term.

19 Classification of Terms:
First: Condition or Warranty: Conditions are essential in contract. Breach of these terms will allow the other party to discharge (reject) the contract or seek damages It is an objective matter  whether a term is essential or not. A warranty is not imperative  so the contract will exist after a breach of a warranty, but gives rise to a claim for damages Statute may declare a term to be a condition or warranty e.g. the Sale of Goods Act 1979 provides that terms as to title, description, quality and sample  are conditions save in certain defined circumstances.

20 Second: Implied Terms:
Explicit terms is stated by the parties in a contractual document. Implicit terms are not stated but form a provision of the contract. Terms may be implied due to the proceedings by which the contract was formed. To determine situations where the facts of a case may imply term. (working hours… time) Some jurisdictions, notably  Australia, Israel and India, imply a term of good faith. Other implied terms are through a previous course of dealing trade practice.

21 Implied in law: terms have been implied into standardised relationships.
e.g., Liverpool City Council established a term to be implied into all contracts between tenant and landlord that the landlord is obliged to keep the common areas in a reasonable state of repair. One of the important legislation under the UK law is the Sale of Goods Act 1979,  which imply terms into all contracts whereby goods are sold or services provided. These terms will be implied into all contracts of the same nature as a matter of law. Specialised statutes that deal with particular subjects set up rules by which many contracts are governed are provided with terms. Most countries, for example, have statutes which deal directly with sale of goods, lease transactions, and trade practices.

22 Setting Aside the Contract:
Three different ways. A contract may be deemed Void: implies that a contract never came into existence Voidable: implies that one or both parties may declare a contract ineffective at their wish Unenforceable: implies that neither party have recourse (resort) to a court for a remedy.

23 Misrepresentation: Misrepresentation is “a false statement of fact made by one party to another and has the effect of inducing that party into the contract.” False statements regarding the quality or nature of the product may constitute misrepresentation. A finding of misrepresentation allows for a remedy of rescission or causing damage. Misrepresentation can be made either by words or by conduct Statements of opinion are not statements of fact in the context of misrepresentation. But, if one party claims specialist knowledge on the topic  then it is more likely for the court to hold a statement of opinion as a statement of fact.

24 Mistakes: A mistake is “an incorrect understanding by one or more party to a contract and may be used as bases to invalidate the agreement.” First: Unilateral Mistake -- one party to a contract is mistaken as to the terms or subject-matter. The courts will uphold such a contract unless it was determined that the non-mistaken party was aware of the mistake and tried to take advantage. A contract may be void if there was a mistake in the identity of the contracting party. The plaintiff has to show that, at the time of agreement, he believed the other party's identity was of vital importance. Mistaken to the credibility of the other party is not sufficient.

25 Second: Mutual Mistake -- both parties of a contract are mistaken as to the terms. Each believes they are contracting to something different. The court usually tries to uphold such a contract if a reasonable interpretation of the terms can be found. A contract based on a mutual mistake in judgement is not voidable by the party that is adversely affected. Third: Common Mistake -- both parties hold the same mistaken belief of the facts. common mistake can only void a contract if the mistake of the subject-matter was fundamental to render its identity different from what was contracted  making the performance of the contract impossible.

26 Duress and Undue Influence:
Duress: is “a threat of harm made by one person to compel another to do something against his will or judgment (to a transaction without real assent).” e.g., (in Barton v. Armstrong). Armstrong threatened to kill Barton if he did not sign a contract  the court set the contract aside. An innocent party has to prove that the threat was made and that it was a reason for entry into the contract The onus of proof then shifts to the other party to prove that the threat had no effect in causing the party to enter into the contract.

27 Undue influence: “one person taking advantage of a position of power over another person.”
The law presumes that in certain special relationship, (such as between parent and child, or solicitor and client)  there will be a special risk of one party unduly influencing their conduct for contracting. As an equitable doctrine, the court has the discretion to vitiate such a contract. When no special relationship exists,  but there was a relationship of trust and confidence  it should give rise to such a presumption.

28 Incapacity: Incapacity: “the capacity of a person to either enforce contracts, or have contracts enforced against them is restricted.” e.g., children may not be held to bargains they have made, people who are mentally incapacitated, either by disability or drunkenness. When the law limits or bars a person from engaging in specified activities  any contracts to do so are either voidable or void for incapacity. The law on capacity can serve either a protective function or a way of restraining people who act as agents for others.

29 Illegal Contracts: Illegal Contracts: are “contracts based on an illegal purpose or contrary to public policy.”  -is void. Example, a woman forged her husband's signature on 40 cheques.  To protect her from prosecution, her husband signed a letter to the bank in which he agreed to assume "all liability and responsibility" for the forged cheques.  However, the agreement was unenforceable by the court, because of its goal to "stifle a criminal prosecution." (contract's illegality). Contracts agreeing to work for less than the minimum wage are unenforceable

30 Remedies for Breach of Contract:
Breach of contract is “failure to perform as stated in the contract.” There are many ways to remedy a breached contract assuming it has not been waived. Typically, the remedy is an award of money damages. When dealing with unique subject matter, specific performance may be ordered.

31 Damages: There are four different types of damages:
Compensatory damages  given to the party which was affected by the breach of contract. (consequential damages and direct damages). Nominal damages  include minimal dollar amounts (often sought to obtain a legal record of who was at fault). Punitive damages  used to punish the party at fault.  possible in a fraudulent situation. Exemplary damages  used to make an example of the party at fault to discourage similar crimes. Fines can be multiplied by factors of up to 50 for such damages. Reliance measure: When it is not possible or desirable to award damages measured in above ways  a court may award money damages designed to restore the injured party to the economic position that he had occupied at the time the contract was entered or designed to prevent the breaching party from being unjustly enriched.

32 Specific Performance:
There may be circumstances in which it would be unjust to permit the defaulting party simply to buy out the injured party with damages. The court may order a party "specific performance",  requiring that the contract be performed. or issue an order, known as an "injunction,"  that a party refrain from doing something that would breach the contract. In most jurisdictions, both an order for specific performance and an injunction are discretionary remedies, originating for the most part in equity. Thus, a court will not normally order specific performance. Moreover, the defenses to an action in equity may act as a bar to specific performance. Thus, neither performance nor injunction are available as of right to parties

33 Procedures: In the U.S.  to obtain damages for breach of contract or to obtain specific performance, the aggrieved party may file a civil lawsuit in state court. If the contract contains an arbitration clause  the aggrieved party must submit an arbitration claim. Many contracts provide that all disputes arising will be resolved by arbitration Certain claims  held to be non-arbitrable if they implicate a public interest that goes beyond the narrow interests of the parties (e.g. civil rights violations). Arbitration judgements  enforced in the same manner as court judgements.  However, arbitral decisions are generally immune from appeal unless the arbitrator's decision was irrational or tainted by fraud.

34 In England, Wales and the U. S
In England, Wales and the U.S.  a contract may be enforced by use of a claim, or by applying for an interim injunction To prevent a breach of a contract where such a breach would result in irreparable harm A breach that could not be adequately remedied by money damages.

35 Third Parties: The doctrine of privity of contract means “only those involved in striking a bargain would have standing to enforce it.” Only parties to a contract may sue for the breach of a contract In recent years  third party beneficiaries have been allowed to recover damages for breaches of contracts they were not party to. In England, Rights of Third Parties Act was introduced 1999. Insurance contract!

36 Contractual Theory: Contract theory is “the body of a legal theory that addresses normative and conceptual questions in contract law.” One of the most important questions is why contracts are enforced. One prominent answer focuses on the economic benefits of enforcing bargains. Another maintains that the purpose of contract law is to enforce promises. A third dimension is its relationship to the wider Law of Obligations. Contract is “the total legal obligations which results from the parties' agreement” Obligations resulted from contracts, which are voluntarily undertaken and owed to a specific person Obligations in tort which are based on the wrongful infliction of harm to certain protected interests Restitutionary obligations, based on the unjust enrichment.

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