LECTURE 10

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 offerer 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
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 Chapter 10
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 offerer 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

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acceptance 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 honored 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 contracts that cannot be enforceable.
 Voidable- the Voidable Contract is the contract in which one party has the right to enforce or
rescind the contract.

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Rules governing offer and acceptance

1. An offer must be communicated to the other party

2. 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. Offer can be revoked before acceptance unless consideration was given.

6. Revocation has to reach the offeree before the offeree has accepted.

7. Acceptance must be unconditional. No counter offers.

8. An offer can be accepted by the person to whom the offer is made.

9. Offer must be within a specified or reasonable time.

10. Offer lapses if time is expired, rejected by offeree, death of offerer 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.

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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

- 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.

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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
goods 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

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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.

(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

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 - 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.

Validity of Contracts

Mr. Larry was delighted to see a 50% discount on his favourite brand of shoes at a shoe store 15
miles away. He took sometime off from work to travel to the store. When he arrived at the store
he was told that that the brand advertised was sold out but he could choose from other brands
available.  Mr. Larry was very angry and requested that he be refunded his travelling expenses.

Is the owner of the store obligated to refund Mr. Larry his travelling expenses?

Answer

The advertisement appearing in the newspaper is not an offer by the store but an invitation to
treat. Therefore readers were being invited to make an offer for items advertised.  The owners of
the store are therefore in no way obligated to Mr. Larry.

Hope stopped at a convenience store on her way home to purchase a few items.  She handed the
cashier her credit card and was surprised when she was told that it declined. She apologized and

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explained that she did not know why her card declined but she will call the bank in the morning.
Susan further explained that she had just enough cash with her to get home and so she could not
pay for the goods. The cashier was very angry and asked the manager to intervene. The manager
insisted that she pay for the goods.

Is Sandra obligated to pay for the goods?

Answer

Sandra has entered into a contract with the convenience store. She made the offer at the cashier
counter when she presented the goods to be cashed. The cashier accepted the offer by cashing the
goods.  In this situation it is up to the manager of the convenience store to accept Hope’s
apology.