Law of Contract
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
The essential elements of a contract are:
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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.
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.
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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:
1. AUCTIONS
In an auction, the auctioneer's call for bids is an invitation to treat, a request
for offers. The bids made by persons at the auction are offers, which the
auctioneer can accept or reject as he chooses. Similarly, the bidder may
retract his bid before it is accepted. See:
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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:
Hyde v Wrench (1840) 3 Beav 334.
A counter-offer should be distinguished from a mere request for information.
See:
Stevenson v McLean (1880) 5 QBD 346.
If A makes an offer on his standard document and B accepts on on a
document containing his conflicting standard terms, a contract will be made
on B's terms if A acts upon B's communication, eg by delivering goods. This
situation is known as the "battle of the forms". See:
Butler Machine Tool v Excell-o-Corp [1979] 1 All ER 965.
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:
(a) Where X advertises for offers to supply a specified quantity of goods, to be
supplied during a specified time, and Y offers to supply, acceptance of Y's
tender creates a contract, under which Y is bound to supply the goods and the
buyer X is bound to accept them and pay for them.
(b) Where X advertises for offers to supply goods up to a stated maximum,
during a certain period, the goods to be supplied as and when demanded,
acceptance by X of a tender received from Y does not create a contract.
Instead, X's acceptance converts Y's tender into a standing offer to supply the
goods up to the stated maximum at the stated price as and when requested to
do so by X. The standing offer is accepted each time X places an order, so that
there are a series of separate contracts for the supply of goods. See:
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