Contract Formation, Construction & Interpretation

in
Contracting
Contract Formation
Freedom of Contract

 In the absence of some ground for declaring a contract void or

voidable, parties may make such contracts as they choose .
Contract Formation
Contractual capacity

Contractual Capacity is the ability to understand that a contract is

being made and to understand its general meaning:
 Everyone is presumed to have contractual capacity unless proven
otherwise

 Contractual capacity can exist even though a party does not understand its
every provision of the contract.
Contract Formation
Contractual capacity

 Not all persons have contractual Capacity to form a contract or

enter into a contractual obligation.
 Such persons suffer contractual incapacity
 Status Incapacity
 Factual Incapacity
Contract Formation:
Status Incapacity

Class of persons having contractual incapacity due

to the status of the person i.e., Minors under age 18.

 Minors can avoid or disaffirm contract:

 must return consideration or offer it back to other party
 must return what remains
 If nothing remains, minor can still disaffirm
 Minor can refuse to pay or can get what had been paid
Contract Formation:
Factual Incapacity

a) Mentally Incompetent Persons

When a party does not comprehend the nature and 
consequences of the contract when it is formed, he or she is regar
ded as having mental incapacity
Contract Formation
Factual Incapacity:

b) Intoxicated Person
 Contract voidable if degree of intoxication high
 On becoming sober again, may disaffirm or
affirm the contract
 Unreasonable delay to disaffirm such contract
may bar the person to assert such right
Contract Formation:
Mistake

 Validity of a contract may be affected by a mistake made by

both the contracting parties

 Unilateral Mistake: does not affect the contract if not known to

other party

 Party making mistake may avoid the contract if mistake is

recognized by other party
Contract Formation
Mutual Mistake

 Contract is voidable if mistake adversely affects the agreed exchange by the

adversely affected party.
 For example, a customer goes to the sample room of an interior decorator to select a carpet and asks th
e clerk to show him a navy carpet, which he subsequently purchases and takes with him. The sales slip 
notes that the carpet purchased is navy. When, upon examining the carpet in daylight, the customer di
scovers that it is black, not navy as he thought when he bought it, a mutual mistake would have occurr
ed, since both the seller and buyer were in error concerning the correct color of the carpet sold. Since th
ere had never been a true and complete meeting of the minds, no mutual assent was actually arrived a
t, and the buyer would be entitled to return the carpet and obtain a full refund

 Mistake in Transcription or Printing of Contract;

 If printed contract different from earlier oral contract, petition to court to reform contract
 Burden of proof on the affected party
Contract Formation
Deception

 One of the parties misled by the other:

 by a fraudulent statement or

 by a failure to disclose information (duty-bound)

 Intentional Misrepresentation: Fraud (Tort)

 Material misrepresentation of fact
 affects genuineness of assent
 conceals intention of one party
Contract Formation
Genuine Assent

 Offer & Acceptance is based on Statement of Opinion or Value:

 Building was very good,
 Deal was excellent

To determine genuine assent to form a contract

 Statement of Opinion vs statement of fact
Contract Formation

Contractual Capacity & Genuine Assent

 Statement about future expectations:

 Statement if not true
 becomes fraudulent only when other party relies on it

 To determine extent of fraud, Court considers

 sophistication of statement
 expertise of parties and
 commercial setting of transaction
Contract Formation
Non-Disclosure of information:

Under certain circumstances, non-disclosure of information may make a

contract voidable

 General Rule of Non-liability: Non-disclosure of information that is

not asked for, does not impose fraud liability
Contract Formation
Exceptions to General Rule of Non-Disclosure

 Unknown Defect or condition

Jones buying Smith’s house, assume that Smith, while not a professional engineer or
building contractor, did have some knowledge about foundations. Smith also knew that
several of his neighbors had  foundation trouble due to the type of soil in their
neighborhood.  He therefore had reason to know that the cracks in his wall and roof
were the result of foundation problems and not the result of the house simply settling. 
Assume that Jones did not know that the neighbors of Smith had foundation problems. 
In this situation, Jones would have a strong argument that the contract should be
rescinded or that Smith should pay Jones damages for the cost of repairs to the
foundation.
 Confidential relationship – failure to disclose regarded as
fraudulent
 Active concealment
 positive act of hiding information
 Furnishing wrong information
If two parties have a confidential relationship, such as that of attorney
and client, the attorney has a duty to reveal anything that is material to
his client when dealing with this client in a business matter.  The
attorney’s silence has the same legal consequences as knowingly
making a false statement of a material fact to his client. 
Parol Evidence Rule

 The Parol Evidence Rule:
governs the admissibility of evidence other than the actual written agreement
when a dispute arises over a written contract.

For example, in a dispute over the sale of a home, if the buyer and seller have
signed a written contract for the sale of a home and have written down that
the sales price is $500,000, the buyer will be barred from introducing
evidence of a discussion that he had with the seller where she agreed to sell
it to him for $400,000 or that she agreed to throw in a car as part of the
purchase price.

Written contract can be modified only if aggrieved party proves to court under Parol
Evidence Rule that a fraud or mistake has been committed
Contract Formation:
Pressure

One of the parties entering into the contract as a result of undue influence
or physical or economic duress:
An aged parent entrusts business affairs to a trusted son

Disabled person may rely on a nurse

Client may follow his attorney

Non-exercise of free will

Contract Formation:
Duress

A party may enter into a contract to avoid danger

 Physical Duress:
Physical Harm to person
Physical Harm to Property
Resulting agreement is voidable
Contract Formation

Contractual Capacity & Genuine Assent

 Economic Duress:

A condition where one individual is induced by a wrongful act or threat

of another to make a contract under circumstances that deprive one to
exercise his own free will.
Contract Formation:
Consideration

Consideration: It is what a Promisor demands and receives as the price

for the promise.
Contract Formation
Case Study

 Lester purchased a used automobile from MacKintosh Motors. He asked the

seller if the car had ever been in a wreck. Salesperson who never saw the car
stated that it’s never been in a wreck. Infact the car had an accident and its
worth was much less. When Lester came to know the fact, he sued Mackintosh
Motors which defended by saying that the salesman did not know the
statement was false and did not intend to deceive Lester. Did conduct of sales
person constitute fraud?
Contract Formation
Case Study

Alama & Richard make a contract for the sale of an automobile.

They orally agree that the price Richard is to pay is $2000 but
when the written contract is typed, amount is wrongly stated as
$3000. The contract is signed before anyone notices the
mistake. Alama then claims that written contract is binding and
that Richard is to pay $3000. Richard claims that he is required
to pay only the originally agreed-on amount of $2000. Is he
correct?
Contract Formation
Case Study

Adams claimed that Boyd owned him money but was under
impression that Boyd did not have much money. On the basis of
this impression, Adams made a settlement agreement with Boyd
for a nominal amount. When Adam later learnt that Boyd was in
fact reasonably wealthy, Adams sought to set the Agreement
aside. Was Adams entitled to do so?
.

Thankyou
Q&A