Contracts Notes

Section 4: Legal Aspects of a Business

Definition
1. A Contract is an agreement made by two or more parties

that is legally binding or enforceable by law.

2. A Contract is a voluntary but legally binding agreement

between two or more parties.

Contract vs. Social or Domestic Agreement
A Social or Domestic agreement is NOT enforceable by law,

and is really up to the party that suffers to prove to the courts

that he/she really intended the agreement to be legally

binding.
 Types of Contracts

Types of Contracts

Simple Specialty Contract

of Record

Verbal Non-Verbal/ Written Imposed by Court Order

Implied

Written Signed Sealed Delivered

Examples of Everyday Business Contracts
➔ Employment Contracts with Employees
➔ Contracts with customers to supply goods and services
➔ Warranty agreements to repair or replace, free of charge, defective
part/product
➔ Purchase contracts with suppliers
➔ Loan agreements
➔ Insurance Contracts
➔ Rental agreements
➔ Partnership Deeds or Agreements
➔ Merger, Joint Venture of franchise agreements with other companies
Characteristics of a Simple Contract

In order for a Simple Contract to be legally binding it MUST have Seven (7)
Basic Elements:
1. Offer and Acceptance
2. Consideration or Form
3. Capacity/Competence of Parties
4. Legality/Intention to Create Legal Relations
5. Possibility
6. Genuineness of the parties
7. Good Faith
1. Offer
● An offer is a proposal/bid made by a person or his/her
agent to another person or his/her agent.
● The person making the offer is called the OFFEROR.
● The person accepting the offer is called the OFFEREE.
● ACCEPTOR - the Offeree after accepting the offer
● An Offer can be made to a specific person or to the world
at large
● An offer can be oral, implied by conduct or put in writing.
● An Offer must be communicated to the offeree
Ways in which an Offer may be Terminated
Means of termination of Offer Explanation
Rejection by the offeree The offeree does not accept the offer made by the offeror

Death of either party Either the Offeror or Offeree dies

Insanity of either party Either the Offeror or Offeree is deemed to be of unsound mind

Destruction of a key element required The item of consideration may be destroyed (e.g., due to
for performance of the contract natural disaster, war

Counter Offer An alternative offer or counter offer terminates the original offer

Expiration of the specified time The time given for acceptance or a reasonable amount of time
for acceptance has elapsed

Revocation of the offer The Offeror withdraws the offer before it has been accepted
1. Acceptance
● An acceptance, by law, exists when the offeree or his/her
agent agrees to all terms or conditions laid down by the
offeror or his/her agent.
● An acceptance must be made in the manner stated by the
offeror
● An offer must be accepted within a stipulated period of
time.
1. Acceptance continued
● Acceptance must be communicated (in writing, verbally or
by performance/conduct)
● Acceptance must be certain, e.g. a party cannot say I
might buy it at x dollars
● Acceptance must be absolute and unqualified, i.e., the
offeree cannot add extra terms and conditions
● A counter offer is not acceptance and it terminates the
original offer
1. Acceptance continued
● Postal Rule - acceptance by letter is complete when the
letter is posted, even if the letter becomes lost or delayed.
(recommended to use registered mail or courier services)
● If acceptance is sent Electronically, e.g., via email,
telephone or fax message, it takes effect when it is
received by the offeror
 Invitation to Treat
● Definition - An Invitation to Treat is an announcement of willingness to
enter into negotiations.
● It is NOT an Offer and therefore CANNOT be accepted to form a contract
● Examples:
➔ A catalogue or price list
➔ A display of goods for sale with prices
➔ Advertisement of goods for sale
➔ An offer to the public asking them to subscribe for share in a
company
➔ Tender
➔ Auction
2. Consideration or Form
● A consideration is a promise or action made by one party for
the promise or action made by another party, i.e., each party
must receive a benefit.
● A consideration must be:
➔ Real - It must be well defined
➔ Lawful
➔ Not in the past - Cannot use something which has already
been done. It must follow after the contract has been agreed
2. Consideration or Form
● A consideration may be:
➔ Executed - This refers to the price paid by one party in return
for the act or promise of the other party
➔ Example of Executed Consideration: Paul did the gardening in
Sally’s yard and she promised to pay him $500 for his services
at the end of the week. Paul carried out his side of the
agreement by doing the gardening in Sally’s yard
➔ Executory - this is the price promised by one party for the act or
price of another party
3. Capacity/Competence
● The parties must be eligible to enter into a contract
● They should be 18 years and older but there are exceptions to
“ESSENTIAL NECESSITIES”
➔ Necessaries - Articles which are reasonably necessary to a
minor having regard for his station in life, food, clothing, etc.
● Exceptions state that all parties to a contract must be able to act
responsibly and not be exploited on the basis of knowledge,
maturity or temporary lack of consciousness.
3. Capacity continued
● The following groups do not have full capacity to enter into a
contract:
➔ Minors < 18 years
➔ Drunks
➔ Insane Persons
}( Full capacity when sober or sane)
➔ Aliens ( foreign-born residents in a country who have not
been naturalized/whose country is at war with yours (Full
capacity in times of peace)
➔ Prisoners
4. Legality
● Must conform to the laws of the land, e.g. The offeror must be
the legal owner of the goods to be sold.

5. Possibility
● Parties offering consideration must be in a position to be able
to carry out their sides of the contract.
● If one party is unable to carry out his side due to impossibility
and can use another means, then he can carry out his side of
the contract using that method, i.e., providing an alternative
solution
6. Genuineness and 7. Good Faith
● Parties to a contract must be genuine, true and of good faith.
They must enter on their own free will, not by force, coercion or
duress.
Specialty Contracts
● A specialty contract is also called a Deed or a Contract
Under a Seal
● It is a formal agreement that MUST be:
➔ Written - typed up or written in a document form
➔ Signed - All parties to the contract must affix their
signature
➔ Sealed - A seal (embossed, imprinted or pasted) is put
on the document
➔ Delivered - All parties must have a copy of the
document with the details they have agreed on
Specialty Contracts Examples
➔ Hire Purchase Agreements
➔ Mortgage Contracts
➔ Sale of Goods
➔ Sale of Land
➔ Insurance Contracts
➔ Lease of Property
Specialty Contract vs. Simple Contract
Speciality Contract Simple Contract
Must be written Does not have to be written; can
be verbal, implied or written

Can be enforced without Must have consideration to be

consideration, such as a deed of enforced
gift
Must be signed, sealed and Does not have to be signed,
delivered sealed and delivered
Contracts of Record
● Imposed by a court order requesting a party to abide by
obligations laid down by the court.
● Examples:
➔ Alimony Payment
➔ Child Support
➔ Order to pay for damages to the environment
➔ Order to discontinue the production of harmful goods
Breach of Contract
● A Breach of Contract occurs when one party to the
contract fails to do what was agreed
Ways a Contract can be Terminated or Discharged
● Performance: this is where both sides have completed what they agreed to do.
● Agreement/Mutual consent: both parties agree to cancel the contract before it is
completed.
● Renunciation: One party carries out a portion of the contract and fails to go any further
● Merger: One contract is substituted for a higher one
● Lapse of time: Failure of a party to carry out its side of the contract within a reasonable
time
● Bankruptcy: If one of the parties to the contract becomes bankrupt
● Death: One party might dies and cause termination. However, that party’s agent or
beneficiaries may be liable to continue the terms of the contract
Ways a Contract can be Terminated or Discharged
● The subject matter ceasing to exist: for example, if you agree to buy a horse which dies
before you take possession of it.
● Notice: this is so, for example in the case of a contract of employment which can be
brought to an end by either party giving the required length of notice.
● Legislation: in this case, something which was legal at the beginning becomes illegal
by law before it can be performed.
● An agreed event occurring: the parties would have agreed that a particular event if it
occurred would nullify the agreement.
● Frustration: this is where an act though possible at the beginning, becomes impossible
later on.
● Government interference: this may strike at the root of the contract and cause it to be
terminated.
Remedies for Breach of Contract
When a contract is broken the injured party may have several
courses of action open to him:
● To refuse further performance of the contract
● To bring an action/sue for Damages - e.g., to recover loss
income
● To sue for Specific Performance - Court can order that the
party fulfil its contractual obligation by enforcing an order for
specific performance
Remedies for Breach of Contract
● To sue for an Injunction - An injunction is a court order prohibiting a party
from performing an action, e.g., work stoppage on building a roadway
● To sue on a Quantum Meruit (as much as earned or as much as merited)
● Restitution involves returning any money or property already given in the
contract, so as to restore the affected party to their position before the
formation of the contract
 Common terms
1. Void Contract - A contract that cannot be enforced by law, e.g.
because there is an agreement to commit an illegal act
2. Unenforceable Contract - A valid contract which cannot be
enforceable by court law because of some technical defects
such as absence of writing or want of stamps or if the contract
did not make provisions for foreseeable events that prevented
the contract being undertaken
3. Voidable Contract - A valid contract that can be ended because
one of the parties involved has done something unfair, e.g.
misrepresented the goods being sold.
 Common terms
4. “As is, where is” - The item (e.g. a vehicle) will be sold in the
present condition, no repairs would be made to it before its sale
and no transport will be provided before and after its sale
5. Mistakes in a contract -
● Unilateral Mistake - where only one party is mistaken as to
the subject matter or the terms contained in the contract
agreement
● Mutual Mistake - where the parties are at cross purposes
● Common - where both parties make the same mistake
 Reasons Contracts are Voidable
● Misrepresentation - An important statement made by one
party that is not true. It can be innocent if it is made with
the belief that it is true or fraudulent (knowing it is untrue,
keeping silent, failing to disclose).
● Duress - If persons have been threatened of forced to
enter an agreement
● Undue Influence - a contract can be voidable is one party
pressurised the other party into entering the agreement,
i.e., person with higher power takes advantage of the other
party