LECTURE 13

CONTRACTS
Definition of Contract- A legally binding agreement made between
two or more persons,
intended to create legal obligation between them and to be legally
enforceable.
An agreement is an exchange of promises between two or more
parties. (Offer and acceptance)
Concept of a Contract
A contract is an agreement that is enforceable by law. A contract
therefore has legal implications
for the parties who enter into a contract. A mere agreement is not
legally binding and
therefore neither of the parties is liable if anyone breaks the
agreement.
What makes a contract different from an agreement?
A contract requires not only an agreement between parties but also
something of value must be
passed from one party to the next to make the contract binding. For
example, you offer to sell a
friend your used text books for $1000.00. After inspecting your
textbooks the friend agrees and
pays $1000.00. The $1000.00 paid here is the consideration i.e.
something of value that is passed
from one party to the next. Consideration is the price paid for a
promise. You promised to let
your friend have your textbooks if he paid $1000.00. This $1000.00
makes the agreement
binding. You are therefore obligated to deliver the books to your friend
and cannot decide to sell
the books to someone else or to ask for a higher price.
Your neighbour asks you to mow his lawn after which he will pay you
$200.00. You accept this
offer and mow the lawn. The work done here is an act of forbearance.
You are giving something
of value to your neighbour to receive payment for the job. The
consideration in this case is the
work done by you. It is the price that you have paid for the promise to
be paid money for the
job. Consideration passes from promise to promise.
Characteristics of a Simple Contract
There must be offer and acceptance. The offeror is the party that
makes the offer and the offeree
is the person that the offer is being made to. There must a clear offer
and clear acceptance for a
contract to be binding. There is an agreement of the minds.
An offer is a promise in exchange for performance by another party.
An offer can be revoked or
terminated under certain conditions. There are also times when an
offer can be negotiated to
create a counter-offer.
Acceptance occurs when an offeree agrees to be mutually bound to
the terms of the contract by
giving consideration, or something of value like money, to seal the
deal. Keep in mind that
2acceptance follows the mirror image rule, in that acceptance is
valid if the product or service
rendered is exactly what was contained in the offer.
Consideration is the price paid by one party for the promise of the
other. Thus if one party
promises to provide goods or services, something of value must be
given in exchange. This may
be in the form of money, goods, services or it may be an act of
forbearance.
The capacity to contract – Parties to the contract must be over 18
years, of sound mind, not
under the influence of drugs or incarcerated.
There must be no force, misrepresentation or fraud. Persons should not
be forced to sign a
contract e.g. blackmail. They should not be lied to e.g. giving the
wrong year of a car. Fraud may
involve forging someone’s signature.
There must be an obvious intention to create legal relations. This is
based on the actions of the
parties e.g. offer, acceptance and consideration.
A contract must be legal- thus, agreements made between parties
concerning illegal drugs and
any other illegal activity is not a contract.
Terms and Concepts
Misrepresentation- referring to a false statement of fact made by one
party to another party,
which has the effect of inducing that party into the contract
Types of Misrepresentation-
Innocent – untrue statement with reasonable grounds for belief
Negligent- untrue but without reasonable grounds.
Fraudulent – untrue with the knowledge of the truth to mislead.
● Breach - Breach of contract is a legal cause of action in which a
binding agreement or
bargained-for exchange is not honoured by one or more of the parties
to the contract by non-
performance or interference with the other party's performance
● Void -Contract is the contract that cannot be enforceable.
● Voidable- the Voidable Contract is the contract in which one party
has the right to enforce or
rescind the contract.
Rules governing offer and acceptance
31. 2. An offer must be communicated to the other party
The offer may be made generally or a specific person, but acceptance
must be made by a
specific person/s
3. Conditions attached must be brought to the attention of the offeree
at the time of the offer
for the offeree to be bound.
4. Acceptance must be communicated to the offerer. The offeree must
act positively to
constitute acceptance.
5. 6. 7. 8. 9. Offer can be revoked before acceptance unless
consideration was given.
Revocation has to reach the offeree before the offeree has accepted.
Acceptance must be unconditional. No counter offers.
An offer can be accepted by the person to whom the offer is made.
Offer must be within a specified or reasonable time.
10. Offer lapses if time is expired, rejected by offeree, death of offeror
or offerree
11. Use the post – Offer is only made when the post reaches the
offeree and it is accepted
once offeree posts the acceptance whether it is lost or not.
Consideration – consideration should either be good or valuable since
it is the price one pays
to secure the legal obligation on the part of the other.
Consideration must be :
● Real – that is it should be well defined. One should be able to
convert it to cash or
something of value. Transferable and not already obligated to do by
law.
● Lawful – the subject should be a lawful act or the contract is void.
● Consideration must not be past i.e past payments not considered
Executed – When both parties have fulfilled their obligations (eg
Purchase of goods on credit)
Executory – The contract still has to be completed.
Differences between a Simple & a Speciality Contract &
Contract of record.
A simple contract can be made orally, in writing or by the implications
deemed from the actions
of the parties. A specialty contract must be signed by the parties
sealed, for example with a
company seal and finally it must be delivered.
Simple contracts:
- Be in writing
- Oral
- Implied by conduct
4- Consideration is the most important element
- No special form
Examples of specialty contracts include:
1. Mortgages and leases for over three years
2. Sale of land
3. Contracts of insurance
4. Hire purchase agreements
5. Transfer of company shares
6. Assignments of copyright
Characteristics of a Speciality Contract
1. Conditions of Simple Contracts must be present.
2. Must be in writing
3. Signed by both parties
4. Stamped or sealed
5. Attestation or witness
6. Delivered by a promisor.
7. Delivery may be made subject to a condition to be performed later
giving rise to a
escrow.
Something of value, such as a deed, stock, money, or written
instrument, that is put into the
custody of a third person by its owner, a grantor, an obligor, or a
promisor, to be retained until
the occurrence of a contingency or performance of a condition.
An escrow also refers to a writing deposited with someone until the
performance of an act or the
occurrence of an event specified in that writing. The directions given to
the person who accepts
delivery of the document are called the escrow agreement and are
binding between the person
who promises and the person to whom the promise is made. The
writing is held in escrow by a
third person until the purpose of the underlying agreement is
accomplished. When the condition
specified in the escrow agreement is performed, the individual holding
the writing gives it over
to the party entitled to receive it. This is known as the second delivery.
Difference between an Offer & an Invitation to Treat
An invitation to treat is not an offer but an invitation to bid or bargain
for an item. For example,
at an auction persons may bid on various items presented. An
invitation to treat also occurs also
when goods are advertised for sale in the media or in shop windows.
Goods in a shop window or
5goods advertised are not an offer by the owners of the goods but are
technically an invitation for
interested persons to make an offer.
Conditions under which Offer and Acceptance are
communicated
An offer must be very clearly made. An offer can be made to one
person, a group or to the whole
world. For example, offering a reward for a lost wallet is an offer to
anyone finding the wallet.
In cases where there is a counter-offer the original offer is no longer
valid. A counter offer is an
implied rejection of the original offer. For example: John offers to sell
Paula a laptop for
$10,000. Paula subsequently offers him $8000.00 as she thought
$10,000 was too expensive.
Paula has rejected John’s original offer and has made a counter-offer of
$8,000.
Acceptance must also be clear. In the case of a counter offer a clear
acceptance to the new offer
must be identified.
Contracts may be made orally, in writing or they may be implied.
Oral Contracts
Are based on what the parties said. For example, asking someone to
wash your car for payment
Written Contracts
Both offerer and offeree must sign the contract document
Implied Contracts
Implied Contracts are made by the observed actions of the parties
involved. For example,
someone who sits at a table in a restaurant and places an order has
implied that he will pay for
the food that will be served.
Ways in which Contracts may be Terminated
Contracts may be brought to an end:
(a) By performance of the parties i.e. each party completing his
obligations as stipulated by the
contract.
(b) By frustration i.e. an event through no fault of the parties that
make one party unable to
perform the contract. For example: if one party suffers a prolonged
illness which makes him
unable to perform the contract.
(c) By lapse of time i.e. if the time limit set for the contract to be
executed by both parties has
been passed. For example, sellers of real estate usually require that
the buyers pay the full
balance on the property within a certain time period after the initial
down payment has been
made.
6(d) By the mutual agreement of all parties.
(e)If one of the parties become bankrupt after the contract has been
signed.
(f) By changes in law i.e. where a legal contract is rendered illegal
through changes in law.
(g) By notice e.g. some firms require that employees give at least one
month notice when
resigning their positions.
(h) If one party dies.
(i) By breach of contract-When one party defaults on his part of the
agreement i.e. he does not
perform his part of the contract.
REMEDIES FOR BREACH OF CONTRACT
- Damages –compensation in case of a breach contract
- Rescission –to cancel the contract to return parties to former state
before contract by
mutual agreement of both parties
- Restitution – Returning property, money and goods after a breach.
- Waiver of Breach- Non breaching party acceptance of substandard
performance
- Limitation of Liability – a clause that limits liability to a certain
point such as the
purchase price
- Specific performance – When damages are not an appropriate
remedy the breaching
party will have to perform a specific act.
- Liquidated damages- stipulated amount in a contract that the
injured party would
receive in the event of a breach of contract.