Ch07: Principles of Contract Law

Question 1

What is a contract?

Answer 1

A contract is an agreement between two or more persons which establishes legal obligations.

The most common source of legal obligations in business is the contract.

[A contract is a bilateral agreement since obligations operate in both directions and both parties agree to commit themselves to certain acts.

Business agreements that people enter into voluntarily. Contracts create obligations. These obligations are the building blocks used to construct contracts.]

Question 2

What is an obligation?

Answer 2

Obligations arise out of a contract.

The obligations are the consequences of the agreement or contract between two or more parties.

Question 3

What are the three basic requirements in order for an obligation to exist?

Answer 3

1. There must be at least two parties who agree to do something for each other.
2. There must be a prestation (meaning the performance of something due upon an obligation) that is the object of the obligation.
3. There must be a lawful reason for undertaking the obligation.

Question 4

What are the two ways in which obligations may come into existence?

Answer 4

Contracts or an act carried out by someone.

1. Contracts are agreements that people enter into with each other, they may be verbal or written. Some must be in writing, according to the law (ex.: marriage contracts, hypothecs).
2. An act carried out by someone, i.e., causing damage to a person’s property or injuring someone accidentally or deliberately.

Question 5

What is the difference between ‘legal’ and ‘natural’ obligations?

Answer 5

A “legal” obligation is sanctioned by the law and enforceable before the courts. Failure to discharge your obligation gives the other person the right to demand performance and/or damages.

A “natural” obligation is one that binds you in conscience only, i.e., you will pay a debt to someone only if you feel morally bound to do so.

Question 6

What type of agreement is a contract? How are its contents enforced?

Answer 6

A contract is a bilateral agreement since obligations operate in both directions and both parties agree to commit themselves to certain acts.

Legal obligations are enforceable by the courts and create the law between two parties.

General provisions of the Civil Code are used to compensate the missing elements of a contract.

Question 7

What are the 11 contract classifications?

Answer 7

1. Contracts of adhesion
2. Contracts by mutual agreement
3. Synallagmatic or bilateral contracts
4. Unilateral contracts
5. Onerous contracts
6. Gratuitous contracts
7. Commutative contracts
8. Aleatory contracts
9. Contracts of instantaneous performance
10. Contracts of successive performance
11. Consumer contracts

A typical agreement can be a blend of several types of contracts.

Question 8

What is a contract of adhesion? (1)

Answer 8

Contracts of adhesion (art. 1379) in which the conditions are drawn up by only one of the parties and the only choice available to the other party is to accept these conditions or not to enter into the contract (e.g., airline tickets).

Question 9

What is a contract by mutual agreement? (2)

Answer 9

Contracts by mutual agreement (art. 1379) in which both parties discuss and agree on all of the conditions of the contract.

Question 10

What is a synallagmatic or bilateral contract? (3)

Answer 10

Synallagmatic or bilateral contracts (art. 1380) in which both parties have agreed to perform an obligation (e.g., May pays $2 to Kemar and Kemar gives May a chicken wing).

Question 11

What is a unilateral contract? (4)

Answer 11

Unilateral contracts (art. 1380) in which only one party undertakes to perform an obligation (e.g., a pledge to donate).

Question 12

What is an onerous contract? (5)

Answer 12

Onerous contracts (art. 1381) in which each party receives something in return for undertaking an obligation to the other party (e.g., May receives a chicken wing and in return agrees to pay Kemar $2).

Question 13

What is a gratuitous contract? (6)

Answer 13

Gratuitous contracts (art. 1381) in which one party undertakes an obligation that benefits the other party, but the other party does nothing for the first person (e.g., an agreement to donate money to a charity, or looking after a friend’s child without being paid).

Question 14

What in a commutative contract? (7)

Answer 14

Commutative contracts (art. 1382) in which both parties know in detail how much each has to pay, and what each will receive in return (e.g., May’s company buys 10 000 bags of chicken wings and agrees to pay $10 dollars per bag).

Question 15

What is an aleatory contract? (8)

Answer 15

Aleatory contracts (art. 1382) in which the full extent of the obligations is uncertain at the time the contract in entered into and will only be established at a later date extent of the obligations (e.g. a food company agrees in January to buy all of the apples the farmer will grow during the summer and pay $3 per bushel; the number of apples to be sold and the total number of dollars to be paid will be known only when the the apples are harvested in August)

Question 16

What is a contract of instantaneous performance? (9)

Answer 16

Contracts of instantaneous performance (art. 1383) in which there is a one-time discharge of the obligations undertaken (e.g. a bicycle is sold and delivered and the price of $175 is paid).

Question 17

What is a contract of successive performance? (10)

Answer 17

Contracts of successive performance (art. 1383) in which the obligation is to continue doing something on a regular basis for a specified period of time (e.g., an employment contract by which the employee goes to work every day and receives weekly pay for his or her services, or by which a contractor agrees to mow the company’s front lawn once a week for a fee of $25)

Question 18

What is a consumer contract? (11)

Answer 18

Consumer contracts (art. 1384) in which a natural person (not a business) acquires, for personal use, some property or service from a business that offers such property or service to the public (such contracts are dealt with at length under the Consumer Protection Act).

Question 19

What is an agreement?

Answer 19

Result of a negotiation –> agreement

Identifies a legitimate offer and acceptance with obligations.

If it is only an invitation, you can accept or refuse the offer (i.e. invitation is not the same as an offer)

Question 20

What are offer and acceptance?

Answer 20

Offer: clear, precise firm proposition containing a genuine intention to enter into a binding contract

Acceptance: unqualified, unconditional assent which has been communicated to the person making the offer, it creates a contract
–> Must be in the same terms as the offer (no new conditions or becomes counter-offer).
–> Offer formed when and where acceptance is received by the offeror.

Question 21

What are the 7 conditions for the formation of contracts?

Answer 21

Essential elements: (1) an exchange, (2) of consent, (3) between persons, (4) having capacity to contract, (5) in any form unless a special form is required, (6) a cause, (7) an object.

Question 22

What is an exchange? (1st condition)

Answer 22

Exchange: consent between parties may be express or tacit

Express → clear indication on the part of a person

Tacit → when nothing is said but the person carries out some action to indicate acceptance

Question 23

What is offer and acceptance between persons? (3rd condition)

Answer 23

Offer and acceptance: a contract comes into existence where and where of the offer is received, silence cannot be interpreted as acceptance (only refusal).

A promise to enter contract is not the same as acceptance (*but the person has to accept the contract afterward (obliged) & refusal may lead to an action in damages by the person to whom the promise was made)

Question 24

What is consent? (2nd condition)

Answer 24

Consent: must be given freely and willingly, no undue or illegal pressure and if there is, nullifies consent as well as contract and obligations

Question 25

What are the 4 defects of consent?

Answer 25

Error: (ex.) when one person believes a contract is one of sale and the other a contract of lease → error as to the nature of the contract.

Fraud: when one person tricks another into making an error or gives untrue information and based on that information enters into a contract, ex: seller fails to divulge relevant information

Fear: in form of violence or threats of violence to extract someone’s consent, ex: use if a position of authority (ex.: threatens job security)

Lesion: economic harm such as taking financial advantage of a person who is presumed not to know better, can be used by persons who do not have full legal capacity (taken unfair advantage of, ex.: minor who is unaware of something’s true value and overpays)

Question 26

What is meant by having the capacity to contract? (4th condition)

Answer 26

Capacity to contract (legal capacity): parties must have the legal capacity (authority or right) to enter into contracts.

The law sets out specific rules:

Minors:
- If 14 years old, are considered to be of full age (over 18) for all purposes related to their employment or for operation business.
- May validly enter into contracts to look after their ordinary and usual needs (e.g., clothing, books, food, etc.)
- May be assisted by a tutor (legal guardian) to enter certain contracts or engage in legal actions.
- Can avoid responsibility for contractual undertakings for which they do not have legal capacity.
- Are legally represented by their mother and father who are “of right” (automatically) tutors to the minnow; if the parents cannot act as tutors, other adults may be appointed as tutors; the tutorship is supervised by a tutorship council made up of three people appointed by the members of the minor’s family.
- Under certain conditions a minor may be “emancipated.” This means that the minor may be given legal capacity to enter contracts alone, either partially, as a result of a judicial decision, or completely, as a result of the minor’s marriage.

Persons under protective supervisions:
- Have no legal capacity, with the result that they can no longer enter into legal contracts.
- Are over the age of 18, and for reasons of physical or mental incapacity or disability, are unable to look after their own financial affairs.

Question 27

What is a cause? (6th condition)

Answer 27

Cause (Arts 1410 and 1411): A person who enters a contract has a reason for undertaking the obligations contained in the contract. It is not necessary for this reason to be expressed in the contract, but if the reason is an illegal one, it will not be considered valid (ex.: buying a printing machine to produce counterfeit bills).

Question 28

What is an object? (7th condition)

Answer 28

Object (Arts 1412 and 1413): Juridical operations such as a sale, lease or exchange, but contracts where something is illegal or contrary to public order are prohibited.

Question 29

What is form? (5th condition)

Answer 29

Form (Art. 1414): Most contracts do not require any particular working or form to be used. For some (marriage contracts, hypothecs, notarial wills, insurance policies, and collective labor agreements), a form is specified by the law to preserve the validity of the contract.

Question 30

What is the purpose of articles 1425 to 1438 in the Civil Code?

Answer 30

They set out the principles of interpretation that are rooted in fairness and good faith in order to assist businesspeople and the courts to understand and interpret contracts.

For example, these rules state:

Even though words used in the contract can be interpreted in different ways, the courts should try and uncover the real intention or purpose of the parties when they originally entered the contract. (1425)

The historical nature of the relation between the parties and the circumstances must be examined when interpreting a contract. (1426)

Clauses in a contract must be interpreted in line with other clauses in the contract. (1427)

An existing clause should have an effect rather than no effect. Otherwise, why include it in the contract. (1428)

Words having multiple meanings used in a clause must be given a meaning that conforms to the subject matter of the contract. (1429)

In cases of doubt over the meaning of contractual obligations, the court will favor the party that agreed to the obligations rather than the party that imposed them. Contracts are always interpreted in favor of a consumer or a party accepting the terms of a contract of adhesion. (1432)

Incidental (non-expressed) associated obligations must be recognized by the courts. (1434)

An external clause, cited in a contract, binds all parties except when it is a consumer contract or contract of adhesion in which the consumer or adhering party could not have known and was not informed of its existence. (1435)

An illegible or incomprehension clause in a consumer or adhesion contract is null and has no effect, unless it was adequately explained. (1436)

An abusive clause, which is excessive or unreasonably detrimental to a consumer or adhering party is automatically null. (1437)

A clause that is nullified does not render the whole contract invalid if it is possible for the contract to exist without this clause. (1438)