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 pacta sunt servanda (pacts must be kept).[1]Breach of 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.[2] However the vast majority of contracts can be and are made orally, like buying a law text book, or a coffee at a shop. Contract law can be classified, as is habitual in civil law systems, as part of a general law of obligations (along with tort, unjust enrichment or restitution).
The Carbolic Smoke Ball offer, which bankrupted the company because it could not fulfill the terms it advertised
In common law, there are three key elements to the creation of a contract. These are offer and acceptance, consideration, and an intention to create legal relations. In civil law systems the concept of consideration is not central. In addition, for some contracts formalities must be complied with under what is sometimes called a statute of frauds.
One of the most famous cases on forming a contract is Carlill v. Carbolic Smoke Ball Company,[3] decided in nineteenth-century England. A medical firm advertised that its new wonder 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. Fearing bankruptcy, Carbolic argued the advert was not to be taken as a serious, legally binding offer. It was merely an invitation to treat, or mere puff, a gimmick. But the court of appeal held that to a reasonable man Carbolic had made a serious offer. People had given good "consideration" for it by going to the "distinct inconvenience" of using a faulty product. "Read the advertisement how you will, and twist it about as you will," said Lord Justice Lindley, "here is a distinct promise expressed in language which is perfectly unmistakable".
Offer and acceptance
Consideration must be sufficient, but need not be adequate. For instance, agreeing to buy a car for a penny may constitute a binding contract.[8] While consideration need not be adequate, contracts in which the consideration of one party greatly exceeds that of another may nevertheless be held invalid for lack of sufficient consideration. In such cases, the fact that the consideration is exceedingly unequal can be evidence that there was no consideration at all. Such contracts may also be held invalid for other reasons such as fraud, duress, unequal bargaining power, or being contrary to public policy. In some situations, a collateral contract may exist, whereby the existence of one contract provides consideration for another. Critics say consideration can be so small as to make the requirement of any consideration meaningless.
Consideration must not be from the past. For instance, in Eastwood v. Kenyon,[9] the guardian of a young girl raised a loan to educate the girl and to improve her marriage prospects. After her marriage, her husband promised to pay off the loan. It was held that the guardian could not enforce the promise as taking out the loan to raise and educate the girl was past consideration, because it was completed before the husband promised to repay it.
Consideration must move from the promisee. For instance, it is good consideration for person A to pay person C in return for services rendered by person B. If there are joint promisees, then consideration need only to move from one of the promisees.
Civil law systems take the approach that an exchange of promises, or a concurrence of wills alone, rather than an exchange in valuable rights is the correct basis. So if you promised to give me a book, and I accepted your offer without giving anything in return, I would have a legal right to the book and you could not change your mind about giving me it as a gift. However, in common law systems the concept of culpa in contrahendo, a form of 'estoppel', is increasingly used to create obligations during pre-contractual negotiations.[10] Estoppel is an equitable doctrine that provides for the creation of legal obligations 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] However, legislation, rather than judicial development, has been touted as the only way to remove this entrenched common law doctrine. Lord Justice Denning famously stated "The doctrine of consideration is too firmly fixed to be overthrown by a side-wind."[12]
There is a presumption for commercial agreements that parties intend to be legally bound. On the other hand, many kinds of domestic and social agreements are unenforceable on the basis of public policy, for instance between children and parents. One early example is found in Balfour v. Balfour.[13] Using contract-like terms, Mr Balfour had agreed to give his wife £30 a month as maintenance while he was living in Ceylon (Sri Lanka). Once he left, they separated and Mr Balfour stopped payments. Mrs Balfour brought an action to enforce the payments. At the Court of Appeal, the Court held that there was no enforceable agreement as there was not enough evidence to suggest that they were intending to be legally bound by the promise.
The case is often cited in conjunction with Merritt v. Merritt.[14] Here the court distinguished the case from Balfour v. Balfour because Mr and Mrs Merritt, although married again, were estranged at the time the agreement was made. Therefore any agreement between them was made with the intention to create legal relations.
The abstraction principle
Condition or Warranty[25]. Conditions are terms which go to the very root of a contract. Breach of these terms repudiate the contract, allowing the other party to discharge the contract. A warranty is not so imperative so the contract will subsist after a breach. Breach of either will give rise to damages.
It is an objective matter of fact whether a term goes to the root of a contract. By way of illustration, an actress' obligation to perform the opening night of a theatrical production is a condition,[26] whereas a singers obligation to perform during the first three days of rehearsal is a warranty[27].
Statute may also declare a term or nature of term to be a condition or warranty; for example the Sale of Goods Act 1979 s15A[28] provides that terms as to title, description, quality and sample (as described in the Act) are conditions save in certain defined circumstances.
Innominate term. Lord Diplock, in Hong Kong Fir Shipping Co. Ltd. v Kawasaki Kisen Kaisha Ltd.[29], created the concept of an innominate term, breach of which may or not go to the root of the contract depending upon the nature of the breach. Breach of these terms, as with all terms, will give rise to damages. Whether or not it repudiates the contract depends upon whether legal benefit of the contract has been removed from the innocent party. Megaw LJ, in 1970, preferred the use of the classic categorising into condition or warranty due to legal certainty.[30] This was interpreted by the House of Lords as merely restricting its application in Reardon Smith Line Ltd. v Hansen-Tangen[31].
Status as a term
Status as a term is important as a party can only take legal action for the non fulfillment of a term as opposed to representations or mere puffs. Legally speaking only statements that amount to a term create contractual obligations. There are various factor that a court may take into account in determining the nature of a statement
Implied terms
A Term may either be expressed or implied. An Express term is stated by the parties during negotiation or written in a contractual document. Implied terms are not stated but nevertheless form a provision of the contract.
Terms may be implied due to the facts of the proceedings by which the contract was formed. The Privy Council established a five stage test in BP Refinery Western Port v. Shire of Hastings.[32] to determine situations where the facts of a case may imply terms (this only applies to formal contracts in Australia)[33].
Some jurisdictions, notably Australia, Israel or India, imply a term of good faith into contracts. A final way in which terms may be implied due to fact is through a previous course of dealing or common trade practice.
Terms may also be implied in law.
These are terms that have been implied into standardised relationships.
Common law.
Liverpool City Council v. Irwin[34] 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.
Three ways of evaluating a contracted exchange as coercive or voluntary
Statistical consideration - did the participants have a statistical prediction, likelihood of an event occurring which is covered by the contract. Example: X happens every day at 5pm, I enter a contract to avoid X. X does or does not occur.
Phenomenological consideration - what models did the participants have which influenced the perception of what was to occur or what had occurred. Example: I observe X,Y every day at 5pm. I contract against X. Today I did / did not see Y occur.
Moral consideration: Objective consideration of right or wrong outside of the objective cause, or the perceived cause. Example: X occurs everyday at 5pm. X is wrong. Anything that avoids X is good, allowing X even if all parties agree, is bad.
Setting aside the contract
There can be three different ways in which contracts can be set aside. A contract may be deemed 'void', 'voidable' or 'unenforceable'. Voidness implies that a contract never came into existence. Voidability implies that one or both parties may declare a contract ineffective at their wish. Unenforceability implies that neither party may have recourse to a court for a remedy. Recission is a term which means to take a contract back.
Misrepresentation
A unilateral mistake is where only 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 of the mistake.[39] It is also possible for a contract to be void if there was a mistake in the identity of the contracting party. An example is in Lewis v. Avery[40] where Lord Denning MR held that the contract can only be avoided if the plaintiff can show that, at the time of agreement, the plaintiff believed the other party's identity was of vital importance. A mere mistaken belief as to the credibility of the other party is not sufficient.
A mutual mistake is when 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 mistake if a reasonable interpretation of the terms can be found. Although a contract based on a mutual mistake in judgement does not cause the contract to be voidable by the party that is adversely affected. See Raffles v. Wichelhaus.[41]
A common mistake is where both parties hold the same mistaken belief of the facts. This is demonstrated in the case of Bell v. Lever Brothers Ltd.,[42] which established that common mistake can only void a contract if the mistake of the subject-matter was sufficiently fundamental to render its identity different from what was contracted, making the performance of the contract impossible.
Duress and undue influence
Compensatory damages which are given to the party which was detrimented by the breach of contract. With compensatory damages, there are two kinds of branches, consequential damages and direct damages.
Nominal damages which include minimal dollar amounts (often sought to obtain a legal record of who was at fault).
Punitive damages which are used to punish the party at fault. These are not usually given regarding contracts but possible in a fraudulent situation.
Exemplary damages which are 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.
Whenever you have a contract that requires completing something, and a person informs you that it will not be completed before they begin your project, this is referred to anticipatory breach. When it is either not possible or desirable to award damages measured in that way, a court may award money damages designed to restore the injured party to the economic position that he or she had occupied at the time the contract was entered (known as the "reliance measure"), or designed to prevent the breaching party from being unjustly enriched ("restitution").
Specific performance
Ewan McKendrick, Contract Law - Text, Cases and Materials (2005) Oxford University Press
P.S. Atiyah, The Rise and Fall of Freedom of Contract (1979) Clarendon Press
Randy E. Barnett, Contracts (2003) Aspen Publishers
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