The Law of Contract I:
The nature of a
Contract
Business Law and the Legal Environment
What is a Contract?
A Contract is an Agreement:
•written, oral, inferred by
conduct
•Between 2 or more persons
•Intended by them to be legally
binding and enforceable by law
•It is enforceable by a court of
law or equity
A Contract: according to the
Restatement (second) of
Contracts
‘A contract is a promise or a
set of promises for the breach
of which the law gives a
remedy, or the performance
of which the law in some way
recognizes as a duty.’
Parties to a Contract
• Offeror: the party who makes an offer to enter
into a contract.
• Offeree is the party to whom the offer is made
• In making an offer the offeror promises to do or
to refrain from doing something
• The offeree then has the power to create a
contract by accepting the offeror’s offer
• A contract is created if the offer is accepted.
• No contract is created if the offer is not accepted.
Law of contract: Freedom to contract
•Generally, parties are free to make their own bargains
•But Note:
•Standard form contracts: e.g., for a mobile phone.
•Implied terms: e.g., terms relating to satisfactory quality
are implied into consumer contracts by for example the
UK Consumer Rights Act 2015.
•Prohibition by statute on types of clauses: e.g., clauses
excluding liability for personal injury through
negligence.
Importance
of contracts
to business
Essentials of a valid contract
• Offer and Acceptance
• Consideration - something for something
• An intention to create legal relations (usually
presumed in a business transaction)
• Compliance with required formalities where
applicable
• Capacity to contract
• Genuine consent to the terms
• Contract must be legal
Four Elements of a Contract
•Agreement
•Consideration
•Contractual Capacity
•Lawful Object
Sources of Contract Law
1. Common Law Contracts: developed from early court decisions
that became precedent for later decisions
2. In the United States Uniform Commercial Code: drafted by
National Conference of Commissioners on Uniform State Laws –
provision takes precedence over the common law of contracts.
In the UK Contract Law is legislated through the Sale and
Supply of Goods Act 1994
3. Restatement of the Law of Contract (United States):
compilation of contract law principles as agreed upon by the
drafters
Objective Theory of
Contracts
•The intent to enter into a contract is determined by
the Objective Theory of Contracts:
•that is whether a reasonable person viewing the
circumstances would conclude that the parties
intended to be legally bound
Electronic Commerce and Electronic Contracts
Electronic Commerce (e-commerce): sale and lease of
goods and services and other property and licensing of
software over the internet or by other electronic means
Electronic Contract (e-contract): a contract that is
formed electronically
Electronic contract
•Is an advertisement on a website
an offer or an invitation to treat?
•When is a contract completed on
the internet?
Bilateral and Unilateral Contracts
•BILATERAL CONTRACT
•A promise made in return for a promise – each party
promises to do something.
•UNILATERAL CONTRACT
•One party promises to do something usually in
return for the completion of an act.
•The other party does not promise to perform the
action but if he does so then the contract is
completed
A formal contract is contract that requires a special
form or method of creation
Restatement of Contracts has identified the following
types
Formal • Negotiable instruments, e.g. checks, drafts,
notes, certificate of deposit, etc
Contracts • Letters of Credit: an agreement by the issuer to
pay a specified sum of money upon the receipt of
an invoice and other documents
• Recognizance: a party acknowledges in court he
or she will pay a specified sum of money if a
certain event occurs
• Contracts under seal: one to which a seal (usually
a wax seal) is attached
Informal Contracts
(or Simple contracts)
•All contracts that do not qualify as formal contracts
•Valid informal contracts (e.g., leases, sales contracts, service
contracts) are fully enforceable and may be sued upon if breached
•They are informal only because no special form or method is
required for their creation
•Thus parties to an informal contract can use any words they choose
to express their contract
•Majority of contracts entered into by individuals and businesses are
informal contracts
A valid contract
• A valid contract is a written or expressed agreement between two parties to
provide a product or service. There are essentially six elements of a contract
that make it a legal and binding document. For a contract to be enforceable,
it must contain:
1. An offer that specifically details exactly what will be provided
2. Acceptance, or the agreement by the other party to the offer presented
3. Consideration, or the money or something of interest being exchanged
between the parties
4. Capacity of the parties in terms of age and mental ability
5. Intent of both parties to carry out their promise
6. Object of a contract is legal and not against public policy or in violation
of law
A void contract
•A void contract is missing an element.
•In this case, the contract does not have to be terminated in court.
It simply does not have to be executed, and both parties can walk
away.
•Suppose Dennis offers to sell his neighbor's dog to Jean.
•This would make the contract between the parties void because
Dennis does not actually own the pooch.
•This means the sixth element, legal object, wasn't present.
•It is illegal to sell another person's personal property without
permission.
A voidable contract is a contract in which at least one party
has the option to void his or her contractual obligations.
If the contract is voided both parties are released from their
obligations under the contract.
Voidable If the party with the option chooses to ratify the contract,
both parties must fully perform their obligations.
Contract Contracts maybe, with certain exceptions, voided by
1. minors;
2. insane persons;
3. intoxicated persons;
4. persons acting under duress;
5. undue influence, or fraud and
6. in cases involving mutual mistake.
A contract that is voidable
A contract that is voidable sort of works the same way, but there is an option
for the parties to enforce the terms even though an element is missing, or some
other issue exists with the terms.
The decision to enforce the contract is between the parties.
In a voidable contract, one of the parties is legally bound to honor the contract.
So, a voidable contract can be executed, even though there is an element
missing, if the party not legally bound agrees to move forward.
A contract that is valid, but which the court will
not enforce because of some defect such as
nondisclosure, an extraordinary event or other
legislation.
Unenforceable If a contract is required to be in writing under the
Statute of Frauds but is not, the contract is
Contracts unenforceable.
The parties may voluntarily perform a contract
that is unenforceable
Executed Contracts & Executory
Contracts
Executory Contract:
• Contract that has not been performed by both sides.
• Contracts that have been fully performed by one side but not by the other
are also classified as executory contracts
Executed Contracts
• Executed contract means when both the parties have completely
performed their obligation.
• Means that nothing is left to be done by all the parties under the contract.
Express Contract and Implied Contract
Express Contract
•An agreement that is stated in oral or
written words.
•So, we can say that a promise made in
words is called an express Contract.
Implied – in – Fact contract:
• is implied from the conduct of the parties other than words. An implied
promise results in implied contract.
• when a person, without being requested provides his services under
some circumstances with the expectation that he will be paid and the
other person, knowing such circumstances, accept the benefit of those
services.
Implied Implied – in – Law (quasi-Contract):
Contract • allows a court to award monetary damages to a plaintiff for providing
work or services to a defendant even though no actual contract
between the parties
• Intended to prevent unjust enrichment or unjust detriment
• Does not apply where there is an enforceable contract between the
parties
• A quasi-contract is imposed where:
• (1)one person confers a benefit on another, who retains the benefit
• (2) it would be unjust not to require that person to pay for the benefit
received
