The Law of Contracts

Question 1

What is a contract?

Answer 1

Contracts are agreements entered into by two parties with the intention of creating a legal obligation.

Question 2

Economic functions of contract law

Answer 2

• To prevent opportunism
• To interpolate efficient terms
• To prevent avoidable mistakes in the contracting process
• To allocate risk to the superior risk bearer
• To reduce the costs of resolving contract disputes (transaction costs)

Question 3

General features of contract law

Answer 3

The parties must intend their agreement to be legally binding. This is known as an intention to create legal relations.

The parties must also have reached agreement.

A unilateral contract is one where a party promises to perform some action in return for a specific act, although the other party is not promising to take any action.

Bilateral contracts are those where one of the parties offers to do something in return for an action by the other party (exchange of promises).

A void contract is a contract that the law will not recognize and has no legal effect. Certainty of terms – the terms of the contract must be made clear and sufficient enough to
enable the courts to enforce the contract.

Observability and verifiability are notions that refer to the parties and court’s ability of correctly detecting the contracts contingency.

Question 4

intention to create legal relations.

Answer 4

The parties must intend their agreement to be legally binding.

Question 5

A unilateral contract

Answer 5

is one where a party promises to perform some action in return for a specific act, although the other party is not promising to take any action.

Question 6

Bilateral contracts

Answer 6

are those where one of the parties offers to do something in return for an action by the other party (exchange of promises).

Question 7

A void contract

Answer 7

is a contract that the law will not recognize and has no legal effect.

Question 8

Certainty of terms

Answer 8

the terms of the contract must be made clear and sufficient enough to
enable the courts to enforce the contract.

Question 9

Observability and verifiability

Answer 9

are notions that refer to the parties and court’s ability of correctly detecting the contracts contingency.

Question 10

Offer

Answer 10

is an agreement to a set of terms under which the offeror is willing to be bound.
This offer is made to the offeree, who may be individual, company group of people, or even the entire world. An offer identifies and potentially binds the offeror to the terms outlined to the offeree.

Question 11

The invitation to treat

Answer 11

is the term used when party invites offers – an invitation to negotiate for a good or service.
Examples: advertisements, auctions, and negotiations.

Question 12

Offers can be terminated in some numerous ways. Offers will not exist indefinitely enabling the offeree to accept at any time. The main termination ways are:

Answer 12

• The death of the offeror
• Expiry of a fixed time limit
• Acceptance must be within a reasonable time
• If the offer is rejected
• If counter offer is made

Question 13

Unilateral termination

Answer 13

is only available for open-ended and continuous contracts, and not for fixed term contracts whereby this would represent a breach.

Question 14

Defects in the contract (formation defences):

Answer 14

• Duress (prisila)
• Undue influence (neprimeren vpliv)
• Mistake
• Misrepresentation
• Illegality and incapacity

Question 15

Revocation of an offer

Answer 15

The offeror has the right to revoke his/her offer at any time UNTIL acceptance has taken place. When communicating through the post, revocation is not effective until it has been communicated and hence received by the offeree. Acceptance: mail box rule! Acceptance takes effect on posting, whether this is received or not.

Question 16

Acceptance: mail box rule!

Answer 16

Acceptance takes effect on posting, whether this is received or not.

Question 17

Acceptance

Answer 17

When offeree accepts the offer a valid contract is concluded. The acceptance must in time
limits, full and unconditional and must be communicated.

Communication: written reply, oral statement, or implied through conduct.

Acceptance is valid on posting and not upon the receipt of the acceptance.

Question 18

Consideration

Answer 18

in contract law is merely something of value that is provided and which acts as the inducement to enter into the agreement.

Question 19

Legal relations

Answer 19

mean that the parties view the agreement as a legally enforceable contract and a breach of contract could result in a remedy being sought.

Question 20

Illegality

Answer 20

1. Contracts illegal by statue:
   - Collective agreements between manufacturer to fix/regulate the resale price of goods
   are prohibited
   - Contracts to form cartels
   - Contracts to commit a crime, a tort or a fraud
   - A contract which is damaging to the country’s foreign relations (UK)
2. The illegality renders the whole contract void.

Question 21

For an enforceable agreement to be created the parties involved must have the capacity to
create a contract:

Answer 21

1. Minors are persons under 18 years of age and have capacity to establish most of the contracts except for certain instances where the contract become voidable (sale of shares, the leasing of property…)
2. Mental incapacity – contract void even if the other party was not aware of the incapacity
3. Intoxicated persons, or persons under the influence of any substance – any individual who has ingested, or is otherwise subject to the influences of, alcohol, drugs, medications, or other substances, whose judgment may be impaired.

Question 22

duress

Answer 22

If a contract is established on the basis of violence (or a threat) or unlawful economic pressure, this may be considered to be a case of duress, whereas if a party has unfairly exploited its relationship with the other party – undue influence. In both instances the contract will be held voidable (physical and economic duress).

Question 23

Necessity

Answer 23

Necessity is a promise given under a dire constraint. This dire constraint is imposed on the promisor by someone other than the promise. The cause of dire constraint could be the promisor, a third party or bad luck.

Question 24

Undue influence

Answer 24

Undue influence is an equitable doctrine, applicable where one party abuses his or her personal influence or authority over another to make that other party enter a transaction. If the influence is effective, the transaction is voidable. Party must demonstrate that he/she would not have entered into the contract but for the influence (a case in which one of the parties has unfairly exploited the relationship with the other party).

Question 25

Misrepresentation

Answer 25

Misrepresentation makes contract voidable. Contract becomes voidable if a false statement of fact (not opinion) is made that induces the other party to enter the contract.

Question 26

To determine the misrepresentation, the following must be fulfilled:

Answer 26

• A statement of material fact (not opinion) that induces the other party into the contract (Statement of fact can be written, spoken or pictorial, and may also arise from other conduct)
• A representation must be false
• The innocent part believed the statement to be true
• The representation induced the party into the contract

Question 27

Mistake

Answer 27

Mistake is a mistaken belief at contracting that certain facts are true. It can be argued as a defence, and if raised successfully can lead to void of a contract.
The parties did not have true agreement. Mistake must be fundamental and operational.

• Mutual mistake: both parties are at cross purposes as to the nature of the contract or its subject.
• Unilateral mistake: one party is mistaken as to the terms of the contract of the identity of the other party.
• Common mistake: a mistake where both parties hold the same mistaken belief of the facts.

Question 28

Mutual mistake

Answer 28

: both parties are at cross purposes as to the nature of the contract or its subject.

Question 29

Unilateral mistake

Answer 29

: one party is mistaken as to the terms of the contract of the identity of the other party.

Question 30

Common mistake

Answer 30

: a mistake where both parties hold the same mistaken belief of the facts.

Question 31

Discharge of contracts

Answer 31

When parties are no longer under any contractual obligations to one another, the contract is said to be discharged (and after that a party to that contract cannot be sued for breach of any of its obligations under that contract).

1. Discharge from a contract when the party has completed its obligation
2. Discharge through performance.
3. Discharge through agreement (unilateral or bilateral)
4. Discharge through breach of contracts
5. Discharge by frustration

Question 32

2. Discharge through performance

Answer 32

• If a person has carried out a promise under a contract properly, this is known as
  discharge by performance
• Contracts must be performed strictly in accordance with their terms – although this can
  sometimes have harsh effects
• A contract may be a divisible contract (i.e. payment is made in series of instalments) –
  here if a party fails to do everything he is supposed to do, he is still entitled to be paid those instalments that have already become due.

Question 33

3. Discharge through agreement (unilateral or bilateral)

Answer 33

• The parties may choose to bring their agreement to an end before its obligations have
  been fully performed
• A unilateral discharge occurs where one party has already performed all its obligations
  and the other party wants to be released from is remaining obligations.

Question 34

4. Discharge through breach of contracts

Answer 34

• The whole contract may be discharged by breach. In that case the following remedies
  may be available to the innocent party:

a) Repudiation/rescission (allows innocent party to terminate the contract immediately, but it is only possible if there has been a breach of condition)
b) Damages (allows innocent party to seek financial compensation for loss that it may have suffered as a results of a breach of contract)
c) Equitable remedies (orders made by court such as injunctions)

Question 35

5. Discharge by frustration

Answer 35

• In limited situation the courts may be prepared to regard the contract as discharged if
  something that was out of the parties control had made the subject of the contract illegal or impossible to perform (supervening illegality, government intervention, death, illness, imprisonment, non-occurrence of an event…)

Question 36

Remedies for a breach of contract: if the contract is not performed or obligations are not fulfilled, then the innocent party is entitled to compensations.

Answer 36

• Specific performance (a court order compelling the party in breach to do something, such as transfer the shares in a limited company)
• Injunction (a court order that prohibits the party in breach from doing something, such as not taking steps to sell the shares in a limited company to anyone else)
• Damages

Question 37

Damages

Answer 37

Damages are available in a wide range of circumstances. However, they can only be obtained by applying to court for an order against the party in breach, requiring financial compensation to be paid to the innocent party.

Damages (expectation damages) for breach of a contract are intended to put the innocent party in the position it would have been in had the contract been performed properly.

Question 38

Remoteness of damage:

Answer 38

damages may be only claimed for loss that the party in breach either knew about or could reasonably have foreseen at the time the contract was made. (Mill and shaft model case)

Question 39

Limiting the amount of damage

Answer 39

: this is a second factor and requires the innocent party to take all steps to minimize its loss.

Question 40

Vis major

Answer 40

is a common clause in contracts that essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond control of the parties (war, strike, crime, natural disaster).

Question 41

Unforeseen contingencies:

Answer 41

the performance is still possible at greater cost.

Question 42

Performance of contracts – goods
The goods must be:

Answer 42

The goods must be:
- Fit for the purpose for which they are normally supplied
- Be safe
- Be free from defects, including minor ones
- Function properly for reasonable period of time
- Have a reasonable satisfactory finish and acceptance

Question 43

Repudiation/rescission/cancellation

Answer 43

Allows the innocent party to terminate the contract with immediate effect. Yet, it is only possible where there has been a breach of a condition (which is said to be a repudiatory breach). There is no need to apply to court for permission to exercise this remedy. Following rescission, the contract is at an end and both parties’ obligations are discharged, but the innocent party can still claim damages for losses resulting from the breach.

Question 44

Principles and checkpoints for contracting

Answer 44

1. Enlarging the contractual pie
2. Incentive issues
3. Uncertainty and risk bearing
4. Practical enforceability of contractual conditions
5. Disputes and their resolution

A contract term is in the mutual interests of the parties when and only when it adds more to the value of the contract than it costs

Question 45

Uncertainty and risk bearing

Answer 45

You should deal effectively with uncertainty (numerous unforeseen contingencies). You must include a provision that specifies how the building plans will be altered, or how much will be paid by whom. You have to think about how, in the light of unforeseen contingencies, to substantively alter the contract and allocate the risks.

Question 46

Incentive issues:

Answer 46

You must be aware of the incentives that your contract creates for the other party! You should always ask what the other party will do if a certain contingency materializes. Careful evaluation of incentives (unintended and intended) established by the contract terms is vitally important when fashioning a contract.

Question 47

Practical enforceability:

Answer 47

A contract term must be workable – it must be verifiable at reasonable cost.
- Have you checked and verified the ownership, structure, reputation and solvency, and even existence of your partner?
- Have you asked for payment in advance of delivery and requested security and letters of credit?
- Have you specified the method, time and currency of payments?
- Have you verified that you will be able to convert any Chinese/Indian/Russian currency
into that of your own country?
- Are the provisions of your contract clear of conflicts with local, national, WTO, and
your home country’s laws and regulations?
- Do powerful foreign individuals or organizations have a clear interest in the success of
your business (guanxi)?