INTRODUCTION

• A contract is a voluntary agreement between two or more parties, which creates legally enforceable obligations.

• The distinguishing feature of contractual obligations is that they are based on the agreement of the parties concerned, whereas other legal obligations can arise, not only without the agreement of the parties, but even against their wishes (example: damage)

A contract which creates binding obligations will be enforced by the courts.

Mere social arrangements such as an informal invitation to the dinner are not binding and therefore cannot be legally enforced.

FORMATION OF A CONTRACTFreedom of contract The parties enter the contract freely. The principle of freedom of contract

consists of two elements: the freedom to decide whether or not to

enter into a contract the freedom to decide on what terms to

contract. Everybody can refuse to enter into a

particular type of contract.

Freedom of contract

The contractual obligations are voluntary obligations

Unlike the obligations that arises from the damages

On their willingness depends Whether or not they will enter the contract Who will they enter the contract with What will be the contents of the contract

The limitations to the Freedom of contracts

Public order – mandatory rules

Validity of the contract –

the assumptions1. The parties (legal & contractual capacity) Natural persons Legal persons

2. The statement of the parties will must be done freely & seriously

3. The deed as the object of the contractual obligation must be possible, legal & determined or at least determinable

4. The motive must be legal5. The contract must meet the prescribed

form

The principles of contract law Freedom of contract

The parties are free to enter a contract and to determine its content

No form required The contract can be concluded in any form

(by verbs, by writing or by any other act or deed that clearly indicates the contract was concluded) unless it is otherwise proscribed by the law

The principles of contract law Binding character of contract

Pacta sunt servanda / Pacta dant leges The contract validly entered into is binding

upon the parties and makes them liable for the performance

Good faith & fair dealing Each party must act in accordance with

the good faith & fair dealing

Formation of a contract

As the contract is an agreement between two parties it comes into existence when one party makes an offer which is accepted by the other party

An offer An acceptance The consideration (common law systems)

Offer

Agreement on a contract comes into existence when one party makes an offer which is accepted by the other party.

An offer is a statement to the effect that the person making it is willing to enter into a contract, provided that the party to whom is addressed accepts the terms of the offer.

This statement must be made with the intention that it shall be binding as soon as the offer has been accepted. The person making the offer is called offeror, the person whom the offer is made is the offeree. Once the offeree has received the offer he can either agree or decline to enter into a contract with the offeror.

An Acceptance

If he decides to accept the offer, he must do so without changing the terms in any way: the acceptance will only be valid if it is an unqualified and final expression of assent to the terms of the offer.

As soon as acceptance of the offer has been communicated by the offeree to the offeror, a binding contract is concluded between them.

An Acceptance

Statement by the offeree that he accepts the offer in all its terms & conditions

Modified acceptance constitutes the counter-offer

Acceptance becomes effective when it reaches the offeror

withdrawable

Consideration

• A bilateral contract consists of two promises.

Example: if A and B form a contract that B will buy A’s car, both parties promise that they will carry out the contract and will sell, respectively buy, the car. In English law a promise is only binding if it is supported by consideration. Under this doctrine, which is unique to the common law, every contract must contain an element of reciprocity. The contract is viewed as a bargain and each party must give something in return for what he receives from the other.

The consideration

Assumption for concluding the contract in common law systems

Every contract must contain the element of reciprocity to be enforceable – each party must give something in return for what he receives from the other party

Buyer paying the price = seller delivering the goods

• A contract can also consists of a promise by one party and the performance of an act by the other. This is called a unilateral contract, and the most common example is the situation where A offers a reward of 100$ to the person who returns his lost dog. The central feature of this arrangement is that A is bound by his promise; if B finds the dog, A must pay him 100$. B, on the other hand, is not obliged to do anything. A unilateral contract must be supported by consideration, in Common law system, to be binding.

The function of the doctrine of consideration is to distinguish between binding and non-binding agreements.

Consideration must be sufficient, but need not be adequate. This means that consideration must be of some value (sufficient), but it need not be of the same economic value as that which it is given in return for (adequate). Therefore consideration can be valid even though it is nominal.

Form

A contract is said to require a certain form if it has to be recorded in a specific way laid down by law. Contracts can be entered into without the parties having to adhere to a particular form. However, there are exceptions to this rule. Contracts for the sale of land have to be in writing. This means that the terms of the contract must be set out or at least reffered to in one document.

Intention to create Legal Relations Agreement and consideration are the

first two requirements of a binding contract. The third is an intention to create legal relations.

This exists if the parties intend that any dispute which might arise from the contract will be resolved by a court.

CONTENTS OF THE CONTRACTExpress and implied terms

A contract is often the result of prolonged negotiations between the parties and not everything that was said during those discussions will eventually become part of the contract. Those statements of the parties which do not become binding terms of the contract are called express terms.

They have to be distinguished from mere representations, comments made prior to the formation of the contract which were made in order to induce the other party to enter into the contract, but which are not part of the contract itself.

Contents of contract

Essential contents price & goods in Sales of goods contract

Natural contents Liability for the conformity of the goods, rebus sic

stantibus clause

Additional contents Deadlines, conditions, warranty clauses

Expressed terms Implied terms

In addition to express terms a contract may also contain implied terms, i.e. terms which were not expressly agreed on by the parties. There are three types of implied terms.

Terms implied in fact. A term implied in fact is one which, in the opinion of the court, the parties must have intended to include in the contract, even though they did not expressly include it. Such a term will only be implied if its ‘’so obvious that it goes without saying’’.

Terms implied in law. They are based on policy and are imported into a contract by operation of law.

Terms implied by custom. The parties to a contract will be expected to take account of all trade usages and customs that exist in the relevant commercial field.

Conditions, warranties and innominate terms Traditionally the law recognised two

classes of contractual terms, namely conditions and warranties; a third one has now been added in the form of innominate terms. The importance in distinction lies in the different remedies that are available when a contractual term is breached.

A condition is a term which is so important that in the case of breach the innocent party is entitled to claim damages and terminate the contract, if he so wishes.

Breach of a warranty, on the other hand, only leads to the right to claim damages; the victim cannot terminate the contract.

Innominate terms are and intermediate category between conditions and warranties. They are also called intermediate terms. The remedy that is available for breach of such a term depends on the severity of the breach in the individual case.

Standard form contracts

Standard form contracts are very common today. They are drawn up in advance by one party and presented to all potential partners. There are no individual negotiations bewteen the parties and the person who is presented with the contract normally only has the choice of accepting or rejecting it; he cannot influence the terms.

Standard form contracts are often used vis-à-vis consumers who are not in position to resist the imposition of unfair terms, even if they read the proverbial ‘’small print’’

VOID OR VOIDABLE CONTRACTSMeaning of ‘Void’ and ‘Voidable’ A contract may either be valid or

invalid to a greater or lesser degree by being void, voidable or unenforceable.

‘Void’ means that an agreement which was intended to be binding, is in fact not a contract at all and does not produce any legal effects.

Benefits which have been transferred, for example if one party has already paid, must be returned, as the agreement is void ab initio (from the beginning), meaning that it is treated as though it had never existed.

In some situations it is up to one of the parties to decide whether or not the legal relations created by the contract should continue to exist. This right to rescind the contract is granted in a variety of situations, such as misrepresentation. Where the right of election exists, a contract is said to be voidable. The party entitled to choose, can either affirm the contract or avoid it.

A contract that is neither void nor voidable may nevertheless be unenforceable. This is the case if one or both parties cannot be sued under the contract, even though the contract itself is valid. A contract is unenforceable if, for example, the limitation period for its enforcement has expired.

Capacity

Capacity refers to a person’s ability to enter into a binding contract.

Minors, persons with mental ilnesses or intoxicated persons all lack contractual capacity.

Illegality

Broadly speaking there are two types of illegality. A contract may be illegal because it involves the commission of a legal wrong.

The second kind of contracts which are illegal are contracts which are in some way against public policy. Obviously this can include a wide variety of different circumstances and not all types of illegality will be of same seriousness.

Mistake

There are three types of mistake. In the case of unilateral mistake

one party has made a mistake of which the other party is aware. If both parties make exactly the same mistake it is called a common mistake. In mutual mistake each party mistakes the intention of the other; they are at cross-purposes.

Misrepresentation

A misrepresentation is a false statement of past or existing fact made by one party before or at the time the contract is made, which is adressed to the other party and which induces the other party to enter into the contract.

Misrepresentations must be distinguished from instances of non-disclosure. A person who is guilty of an active misrepresentation has said something that is not true, while in the case of non-disclosure someone has simply not volunteered information. The distinction is important because generally there is no duty of disclosure in English law.

A misrepresentation can be fraudulent, negligent or innocent, a distinction which refers to the state of mind of the representor. A misrepresentation is fraudulent if the representor knows that the statement he is making is false.