Business Law Case Study Year 1

UNIT 4.1

PREVIOUS CLASS QUIZ

CONTRACT LAW (PART 1)

What is contract?

A contract is an agreement giving rise to obligations which are enforced or

recognised by law.

GENERAL PRINCIPLES OF

CONTRACT LAW

The formation of a contract is based on obligations that are freely assumed rather than imposed. Liability in contract is based on voluntary undertaking of the obligations by the individual.

As such, the law assumes that the parties are free to make a contract any way they wish, based on the concept of freedom and equality. In making the bargains, the parties enjoy equal position. The obligation imposed under a contract is self-imposed, entered freely by the parties.

The law is only concerned with the fulfillment of certain conditions by the parties so that the transaction can be recognized as a legally binding and enforceable agreement.

Freedom of Contract

The power to enter contracts and to formulate the terms of contractual relationships can be regarded as an integral part of personal liberty. For instance, this respect for the exercise of personal liberty is the policy reason underlying the rule in contracts that one may not be bound to a contract absent that person’s assent.

Liberty of contract also enforces individual rights to hold and deal with property. Like other liberties, freedom of contract is limited by corresponding rights held by other persons and by the state’s legitimate interest in appropriate regulation. Such regulation may be directed, for example, at protecting weaker parties from the free exercise of overwhelming contractual power by stronger dominant parties.

Morality of Keeping a Promise

There is also a longstanding moral dimension of contract in law since there is an ethical as well as legal obligation to keep one’s promises. Thus, contracts should be honoured not only because reliability is necessary to foster economic interaction, but simply because it is morally wrong to break them.

Although it often seems that the role that this basic moral value plays in contract law is subtle, society and courts are not indifferent to the ethical implications of dishonouring contracts— especially in the case of deliberate breaches that are motivated by bad faith.

Accountability for Conduct and Reliance

A person should be held accountable for words or acts reasonably manifesting intent to contract, and that the other party, acting reasonably, should be entitled to rely on that manifestation of assent. An objective test of reasonableness is thus often used to evaluate a party’s conduct.

The value of protecting reasonable reliance is pervasive in contract law. A person who has entered a contract has the right to rely on the undertakings that have been given; if those undertakings are breached, then the law must enforce them.

When parties in numerous specific situations feel secure in relying on promises, the expectation arises in society as a whole that contracts can be relied on and that there is legal recourse for breaches.

This concept of security of contracts is indispensable to economic interaction. Without it, there would be little incentive to make or rely upon contracts.

Fairness, Social Justice and Economic Aspects

Contract law has some express doctrines that address questions of unfairness, such as doctrines of unconscionability and good faith.

Social justice and protection of the underdog modern contract law is also sensitive to the imposition of contractual obligations through coercion, dishonesty or lack of meaningful choice resulting from power imbalance.

Because contracts are concerned with economic exchanges, contract law must inevitably be economic in its purpose. After all, the goals of contract law include facilitating trade and commerce, regulating the manner in which people deal with each other in the marketplace, and enforcing commercial obligations.

FUNDAMENTAL ELEMENTS OF A CONTRACT

FUNDAMENTAL ELEMENTS OF A CONTRACT

*ENFORCEABLE= able to be imposed so that it must be complied with.

Objective Theory of Contracts:

The first requisite of a contract is that the parties should have reached agreement.

Generally speaking, an agreement is reached when one party makes an offer, which is accepted by another party. In deciding whether the parties have reached agreement, the courts will apply an objective test.

The objective theory of contracts holds that an agreement between parties is legally binding if, in the opinion of a reasonable person who is not a party to the contract, an offer has been made and accepted.

The objective theory of contracts supersedes the previous standard, known as the subjective theory of contracts. Thus, the main determinant in the validity of a contract is the acts, or external performances of the parties, not the internal state of mind, or intent of the parties, that exists when coming to an agreement.

Objective Theory of Contracts vs. Subjective Theory of Contracts:

• Party A owns a guitar signed by Elvis Presley appraised as being worth several hundred thousand dollars. A neighbor, Party B, expresses interest in the guitar and in jest tells Party A that they’d pay a million dollars for the opportunity to own such a treasured keepsake. Party A agrees and challenges in court that an agreement was reached with the neighbor, even though he knows that the neighbor does not have access to that kind of money. The subjective theory holds that there was not a “meeting of the minds,” and that neither party had an expectation of the transfer of the guitar occurring.

• In a similar scenario, the neighbor expresses interest in the guitar, and this time, Party A states a price for selling the guitar based on the appraisal rate and actually lets the neighbor get the instrument appraised by a third-party. The neighbor then sells valuable assets to raise the funds to purchase the guitar, but at the last minute the owner decides not to sell. Applying the objective theory, the court could determine that through the act of setting a price, letting an independent appraisal occur and the neighbor acting to raise the funds, a valid contract between the parties does exist.

…THE ELEMENT OF OFFER:

An offer is an expression of willingness to contract on specified terms, made with the intention that it is to be binding once accepted by the person to whom it is addressed.

There must be an objective manifestation of intent by the offeror to be bound by the offer if accepted by the other party. Therefore, the offeror will be bound if his/her words or conduct are such as to induce a reasonable third party observer to believe that he intends to be bound, even if in fact he has no such intention.

An offer can be addressed to a single person, to a specified group of persons, or to the world at large.

…THE ELEMENT OF OFFER:

OFFER vs. INVITATION TO TREAT

An offer must be distinguished from an invitation to treat, by which a person does not make an offer but invites another party to do an offer. Whether a statement is an offer or an invitation to treat depends primarily on the intention with which it is made.

An invitation to treat is not made with the intention that it is to be binding as soon as the person to whom it is addressed communicates his assent to its terms.

Common examples of invitations to treat include advertisements or displays of goods on a shelf in a self-service store.

…THE ELEMENT OF ACCEPTANCE:

An acceptance is a final and unqualified expression of assent to the terms of an offer. Again, there must be an objective manifestation, by the recipient of the offer, of an intention to be bound by its terms. An offer must be accepted in accordance with its precise terms if it is to form an agreement. It must exactly match the offer and ALL terms must be accepted.

An offer may be accepted by conduct (for example, an offer to buy goods can be accepted by sending them to the offeror).

…THE ELEMENT OF ACCEPTANCE:

Acceptance has no legal effect until it is communicated to the offeror (because it could cause hardship to the offeror to be bound without knowing that his/her offer had been accepted).

An offer which requires acceptance to be communicated in a specified way can generally be accepted only in that way. If acceptance occurs via an instantaneous medium such as e-mail, it will take effect at the time and place of receipt. Note that an offeror cannot stipulate that the offeree's silence amounts to acceptance.

An offer may be revoked at any time before its acceptance, however the revocation must be communicated to the offeree. Although revocation need not be communicated by the offeror personally (it can be made by a reliable third party), if it is not communicated, the revocation is ineffective.

…THE ELEMENT OF ACCEPTANCE:

Once an offer has been accepted, the parties have an agreement. That is the basis for a contract, but is not sufficient in itself to create legal obligations.

*A communication fails to take effect as an acceptance where it attempts to vary the terms of an offer. In such cases it is a counter-offer, which the original offeror can either accept or reject. Making a counteroffer amounts to a rejection of the original offer which cannot subsequently be restored or accepted (unless the parties agree). It is important to distinguish a counter- offer from a mere request for further information regarding the original offer.

THE ELEMENT OF CONTRACTUAL INTENTION:

An agreement (even if supported by consideration) is not binding as a contract if it was made without an intention to create legal intentions. That is, the parties must intend their agreement to be legally binding. Many social arrangements do not amount to contracts because they are not intended to be legally binding. Equally, many domestic arrangements, such as between husband and wife, or between parent and child, lack force because the parties did not intend them to have legal consequences. In the case of ordinary commercial transactions, there is a presumption that the parties intended to create legal relations. The burden of rebutting this presumption is on the party who asserts that no legal effect was intended, and the burden is a heavy one.

THE ELEMENT OF CONSIDERATION:

A promise is not, as a general rule, binding as a contract unless it is supported by consideration (or it is made as a deed).

Consideration is "something of value" which is given for a promise and is required in order to make the promise enforceable as a contract. This is traditionally either some detriment to the promisee (in that he may give value) and/or some benefit to the promisor (in that he may receive value).

For example, payment by a buyer is consideration for the seller's promise to deliver goods, and delivery of goods is consideration for the buyer's promise to pay. It follows that an informal cost-free promise does not amount to a contract.

• Consideration must be sufficient, but need not be adequate.

• Consideration must not be from the past.

• Consideration must be derived from the promise.

(LEGAL) CAPACITY OF PARTIES EACH PARTY MUST BE FULLY ABLE OR HAVE THE LEGAL CAPACITY AND COMPETENCE TO ENTER INTO THE CONTRACT IN ORDER FOR IT TO BE CONSIDERED VALID (AGE, SOUND MIND, ETC).

CONSENT THE CONSENT OF THE PARTIES TO CREATE A CONTRACT MUST BE VALID/FREE. IF THE CONSENT IS OBTAINED BY FORCE, UNDUE INFLUENCE, OR FRAUD, THERE IS NO REAL CONSENT.

LEGALITY (LAWFUL OBJECT) CONTRACTS CANNOT BE CREATED TO GOVERN THE TRADE OF ILLEGAL PRODUCTS OR SERVICES.

CERTAINTY OF TERMS AND CONDITIONS THE TERMS AND CONDITIONS OF A CONTRACT MUST BE CLEAR, COMPLETE AND CERTAIN.

POSSIBILITY OF PERFORMANCE AN AGREEMENT TO DO AN IMPOSSIBLE ACT IS NOT VALID. IF THE ACT IS LEGALLY OR PHYSICALLY IMPOSSIBLE TO PERFORM, THE AGREEMENT CANNOT BE ENFORCED BY LAW.

THE ELEMENT OF CERTAINTY: …

Another main element in a contract would be certainty. The terms and regulations being made in a contract should be stated clearly and understood by the parties of the contract. If the agreement is not certain, it would be no longer valid. For example, if the guest wants to stay in a hotel, , the guest needs to inform how many days he or she is staying at the hotel, the type of room, and also the date when he or she are going stay and the number of days he or she is staying.

Said differently, wording of the agreement must be clear and not uncertain or vague. On the ground of uncertainty, an agreement would stand void. If the meaning of the agreement can be made certain by the circumstances, it could be treated as a valid contract.

If an agreement is not considered certain and thereby lacks this requirement, then it will not be enforceable.

Every case involved with a dispute as to whether a contract lacks certainty is heavily fact based and individual. As such, it is always important to pay close attention to the facts surrounding the agreement, and any clauses or wording relating to said agreement.

The two areas that need to be considered when reviewing whether an agreement is certain can be broadly placed into two categories:

(a) vagueness of the agreement and

(b) whether it is incomplete.

…THE ELEMENT OF CERTAINTY:

Vagueness

• If an agreement is considered too vague or abstract, and without altering the agreements’ terms, or without adding new terms it could not be reconciled, no effect will be given to the agreement.

• As considering all vague agreements to be contractually unenforceable would not be realistically appropriate, there are various methods that can provide certain agreements with legal enforceability.

…THE ELEMENT OF CERTAINTY:

Methods for resolving vagueness:

• Use of business customs and trade usages: In the interest of contractual and commercial certainty, a Court will often give effect to vague agreements by filling their gaps in with business, customs and trade usages. If a party however is not used to any such business, customs and trade usages the Court may not find it appropriate to use this method.

• Reasonableness: Where a contract would fail through virtue of an uncertainty the Court will apply an objective standard to the agreement to fix the issue. For example, a contract was made for the supply of goods described as “fair”. As “fair” in terms of goods is not an adequate description, the Court can apply an objective assessment and determine that “fair” in the context of the agreement can be adequately defined.

• Doctrine of severability: If a clause is irreconcilable with the agreement due to how vague it is the Court may completely strike it from the agreement so the rest of said agreement can be legally enforced. For instance, if an agreement says it is subject to “usual conditions of acceptance”, the Court would consider this phrase meaningless and exclude it from the agreement. Similarly, if a phrase contradicts itself then the Court may remove it from the agreement.

• The contract itself: The contract itself may also be able to resolve any ambiguity in the work. For instance, all disputes concerning the potential vagueness of the contract can be resolved by an arbitrator.

Incompleteness

• An agreement does not require every minor detail to be addressed for it to be capable of legal enforceability. Every vital/essential piece of information however is required.

• The degree to which a term is considered vital/essential within an agreement varies depending of the facts surrounding the agreement. Where in one case a period of a lease and the property being conveyed are essential terms within the agreement in another the price of goods being sold may not actually be considered important.

• It is always prudent then to pay direct attention to the facts when making a conclusion based on potential incompleteness of a contract, the key thing to consider is the extent to which a term is in fact vital to the agreement. The other important things to consider are the other methods in which a contracts’ potential incompleteness can be resolved.

…THE ELEMENT OF CERTAINTY:

Methods of resolving incompleteness:

• Determination by a contracting party: If a term within a contract is missing e.g. price of goods to be sold, there may be a clause in the contract that permits a particular party to resolve the issue.

• Determination by a third party of mechanism: If a situation arises where a contact is incomplete through a lack of terms due to a third party requirement or mechanism needing to be activated, such as an independent valuation. The Court themselves may ensure that this term is given effect in order to ensure the contract is provided with its missing terms. This however can be contrasted by cases where the third party assistance or mechanism is itself essential to the agreement, such as a very specific third party needing to value a particular thing. The Court in these situations is unable to give effect to the agreement themselves.

Capacity to contract depends on the age and mental health of a person. This means that some people do not have capacity to contract and are not deemed to have legal competence. This is to protect people who are not legally competent to protect themselves from harming themselves financially, or legally. This group primarily includes children and people who have psychological issues, who may not realise that they create lasting problems with an action or purchase.

Children and those under 18 have limited legal capacity – and to some extent they have none. This means that these persons can only conduct valid legal transactions under certain conditions, often requiring the presence of a parent or legal guardian. Minors make usual, everyday purchases without having to ask their legal guardians for permission. What counts as an everyday purchase depends on the case. Children and adolescents can easily buy things such as stationery, food, cinema tickets etc. at any time – this is not considered to be dependent on capacity to contract. Minors can enter informal employment contracts – for example for babysitting, gardening, or holiday jobs – and have to comply with agreed services. In some cases, the parent or legal guardian may need to give their consent. In principle, either parent can be the legal representative, individually entitled to represent the child. In the case of joint custody, the parents jointly represent the interests of the child. In the case where a child does not have any parents, their legal guardian takes on this role.

THE ELEMENT OF CAPACITY: …

A person's capacity may be wholly or partially withdrawn due to serious mental illness. Depending on the type and severity of the illness, a person who is not a minor, but perhaps unable to make some decisions will still be able to contract in other cases.

For example: If an adult incapable of legal capacity buys a few sweets at a kiosk this is legitimate, as it is a matter of usual, minor cash transactions. Whether the cash transactions can be judged as minor or customary depends on the situation – if someone enters a binding phone contract, although the tariff may not be high, it might be that the individual cannot actually commit to paying that monthly amount.

In addition to minors, persons with disabilities, or mental health issues, may also be able to register as having limited capacity to contract, regardless of their age. This usually only passes if these persons are not only temporarily unable to decide for themselves.

Some examples which may lead to an exception in someone’s capacity to contract may be intellectual disability, advanced dementia, affective disorders, etc.

If, as a result of illness or an accident, a person of full age is no longer in a position to decide for themselves, a legal guardian must be appointed.

…THE ELEMENT OF CAPACITY:

PARTIES OF CONTRACT

UNILATERAL CONTRACTS AND BILATERAL CONTRACTS

In a unilateral contract, only one party makes the promise. The promise made by one party is made open and available for everyone until someone would take on the action that is a prerequisite to the fulfillment of the promise made by the one who made the promise. The promise will only be fulfilled once someone made an act on it.

• For example, a girl had lost her pet cat and her family promised a reward worth 200€ if someone can find the cat. If someone finds the cat first, the girl’s family will pay their promised reward. No one is obliged to make a promise that they will find the cat; hence, it’s only the girl’s family who has made the promise, thus there is only one party who makes a promise.

A bilateral contract, by contrast, is what people think of when they hear the word “contract.” In a bilateral contract, there are two parties who both agree to do a certain promise.

• For the same example mentioned above, if their neighbor promises to find the girl’s cat in exchange for 200€ reward coming from the girl’s family, then there are already two parties both entering into an agreement.

FORMS OF CONTRACT

WRITTEN CONTRACTS AND VERBAL/ORAL CONTRACTS Written contracts are the ones we most commonly think of. The terms and conditions are spelled out, including details such as deadlines and payment dates, both parties agree and sign the contract. Writtencontractsare express contracts. A verbal contract is the one that have been agreed by spoken communication. It has nothing documented on paper. Verbal contracts canbe regardedasan implied contract in the sense thatwhen two parties act like they have entered into a contract, it can be concluded that an implied contract exists.

In general, oral contracts are just as valid as written ones. Said differently, while it is a good practice to have all contracts in writing, it is not always necessary to have a written contract to create a legally enforceable agreement between parties. However, in some cases law requires a contract to be in writing, i.e. certain kinds of contracts must be written in order to be legally binding. It is usually required the following types of contracts to be in writing: • Sale of land contracts • Contracts for answering for another's debt • Contracts exceeding a certain amount of money • Contracts involving certain sales of goods • Etc.

Express contracts consist of agreements in which the terms are stated by the parties. The terms may be stated orally or in writing. But the contract as a whole must reflect the intention of the parties.

An implied contract is a legally-binding obligation that derives from actions, conduct, or circumstances of one or more parties in an agreement. It has the same legal force as an express contract. An implied contract occurs when both parties mutually consent to an agreement even without having a written contract or an agreement expressed verbally.

Implied contracts are sometimes also referred to as quasi-contracts.

EXPRESS CONTRACTS AND IMPLIED CONTRACTS

EXPRESS CONTRACTS AND IMPLIED CONTRACTS

Said differently, the difference between implied and express contract is essentially as follows:

• An express contract is one in which the terms and conditions are spelled out in the contract, either verbally or in writing. Once an express contract has been established and agreed upon, an identical implied contract cannot exist.

• An implied contract is one in which the terms and conditions are inferred by the actions of the parties involved.

In other words, in an express contract, words, either written or verbal, are used to bring the contract to fruition, whereas an implied contract comes into existence even as the result of actions, behavior, circumstances.

CONTENTS OF A CONTRACT

CONTENTS OF A CONTRACT

The contents of a contract are known as terms or clauses. An agreement will generally consist of various terms. Even the simplest forms of contract will have terms.

The main terms generally being the price paid and the subject matter of the contract, e.g. the goods or services provided. It is common for businesses to have standard form written terms which can be quite lengthy. It is not a requirement that terms are written in simple contracts, although writing is required in certain types of contract e.g. contracts for the sale of land, mortgages and consumer credit agreements.

Contract terms may be express or implied and they may be classed as either conditions, warranties or innominate terms. Where a contract is formed orally it may be difficult to establish which statements made in negotiating the contract amount to terms and which statements are merely representations.

MAIN KINDS OF TERMS

The terms will be of twoTerms of contract set out duties of each party under that agreement. kinds:

1) Express terms: these are laid down by the parties themselves;

1) Implied terms: these are read into the contract by the court on the basis of the nature of the agreement and the parties’ apparent intentions, or on the basis of law on certain types of contract.

Generally, the form of contractual terms may be either:

– Wholly oral

– Wholly written

– Partly oral and partly written.

IMPLIED TERMS…

Four categories of implied terms are:

1. Implied by fact

2. Implied by law

3. Implied by custom

4. Implied by trade usage

…IMPLIED TERMS 1. Terms implied by fact:

– These are terms that courts assume both parties would have intended to include in the contract had they

thought about the issue. They are implied on a “one-off” basis.

– Two overlapping tests have been trad. used to ascertain parties’ intention:

• Officious bystander test: “if, while the parties were making the bargain, an officious bystander were to suggest some express provision for it in the agreement, they would testily suppress him with a common “Oh, of course!”.

• Business efficacy test: terms must be implied to make contract work, i.e. without that implied term the contract cannot work.

– Both tests are subjective in the sense that they ask what parties in the case at hand would have agreed, not what a reasonable person in their position would have agreed. So the term cannot be implied if one of the parties was unaware of the subject matter of the term or facts on which it is based.

– Now, however, application of the two tests has been supplanted by an objective “construction” approach which involves arriving at a proper construction or interpretation of the contract:

• “In every case in which it is said that some provision ought to be implied in an instrument, the question for the court is whether such a provision would spell out in express words what the instrument, read against the relevant background, would reasonably be understood to mean”.

…IMPLIED TERMS

2. Terms implied in law:

– These are terms which the law requires present in certain types of contracts (i.e. not just on the “one-off” basis and sometimes irrespective of the wishes of the parties). E.g. tenancy agreements will include implied term that the landlord must take reasonable care to keep common parts of property in good repair; contracts of employment will include implied term that employer will give departing employee a job reference and implied term that employer and employee will not act in ways “likely to undermine the trust and confidence required if the employment relationship is to continue”.

– Statutes will also imply terms: e.g. sale of goods to consumers will have implied term that goods are “of satisfactory quality”.

3. Terms implied by custom

– Terms can be implied if there is evidence that under local custom they would usually be present.

4. Terms implied by trade usage

– Terms routinely used in contracts within a particular trade or business may be implied into other such contracts.

MAIN TYPES OF TERMS…

of which hasThree types of contractual terms, each normative importance relative to the others, are:

1. Conditions

2. Warranties

3. Innominate terms

…MAIN TYPES OF TERMS

Conditions

– These are the most important terms of contract. Serious consequences if breeched. Innocent party can treat contract as repudiated (and thus is freed from rendering further performance of contract) and can sue for damages.

– Description in contract of term as “condition” is not necessarily determinative of question whether term is condition. Courts tend to search for evidence that parties really intended term to be such.

– Statute may determine that certain terms are to be treated as conditions (e.g. certain terms relating to title to goods and quality of goods are not just to be implied into consumer contracts but also to be conditions).

– Case law also determines that certain terms – typically standard terms in commercial contracts – are to be treated as such.

Warranties

–Of lesser importance than conditions and can be breached without such serious consequences. Innocent party can sue for damages but is not able to terminate the contract.

Innominate terms

– Can be either conditions or warranties. Breach of them can be serious or trivial depending on particular fact situation. If effects serious, they are conditions and vice versa.

– Introduction or recognition of this category of terms has given more flexibility to law, but also created more potential for uncertainty. Hence, courts have subsequently been inclined to hold that certain terms will usually be conditions to give commercial actors in a particular market certainty.