Contract Law: Formation, Effects, and Scope

Contract Formation Stages

• Three stages to consider when dealing with contracts are formation, performance, and termination
• A contract is binding and enforceable upon validation

Effects of a Valid Contract

• Once made, a contract becomes binding, obligating parties to fulfill their agreed-upon duties
• If one party fails to meet their obligations, the other party can seek legal recourse for breach of contract

Scope of Contract Law

• Contract law provides a framework for every commercial transaction, ranging from small purchases to major business deals

Case Law Subject

• Early contract law was developed mainly though court cases
• Many historical cases still remain significant
• The consensus theory of contract was an important 19th century theory: contracts are self-imposed

Role of Courts

• Courts used to prioritize upholding contracts, following a "laissez-faire" philosophy
• Modern statutes have adjusted the court's role to ensure fair-trading, especially concerning "diligent contracts" where negotiation isn't possible

Judicial Considerations

• Courts used to assume parties freely entered contracts
• Emphasis was placed on negotiation
• The legal framework now addresses unequal bargaining power through parliamentary intervention to counter unfair clauses in non-negotiable contracts

Conditions for Valid Contract

• A valid contract requires an agreement (offer and acceptance), consideration from both parties, intention to create a legal relation, and the capacity of all parties

Contractual Binding

• Reunion of all conditions makes a contract binding, but is also subject to the rule of privity

Offer and Acceptance

• Fundamental elements of contract formation are the offer and the acceptance
• The offeror makes an offer that must be accepted by the offeree
• Determining an offer is essential because it's binding once offeree accepts

Notion of an Offer

• An offer expresses the offeror's intention to be bound, subject to the offeree's acceptance
• Terms must be simple but can be complex

Invitation to Treat

• Invitation to treat isn't an offer, but an invitation to make an offer

Shop example: supermarket

• Displaying products is an invitation to make an offer and not an offer in itself
• The contract is made at the checkout when the consumer offers to buy and the shop assistant accepts

Shop example: offer process

• The consumer makes the offer at the checkout and the shop representative accepts
• A shop assistant can refuse the offer
• Offers can be made in various ways (orally, writing, or by conduct)

Acceptance Methods

• Acceptance is generally expressible orally, in writing via email, etc
• Shop assistants accept offers through their conduct by scanning items and asking for payment

Acceptance Criteria

• Acceptance must be unqualified
• The offer must be accepted as is without changes or removals

Counter-offers

• Changing the original offer's terms is a counteroffer which means it is not an acceptance
• A counteroffer implies rejection of the original offer, a new offer created, and the destruction of the old offer

Formation of Contracts

• Contracts are formed when the offeree communicates acceptance to the offeror
• A time gap can exist between acceptance communication and contract formation

The Postal Rule

• An exception applies to contracts formed by post
• It follows the UK and US mailbox rule
• The contract is formed when the acceptance letter is sent, not when received
• The postal rule can be dangerous for the offeror given the offeror is bound without knowing
• To avoid complications, offers can stipulate acceptance must occur upon receipt of the letter

Complex Contract Scenarios

• Contract making can be lengthy during business contracts that involve lawyers, drafts, and revisions
• Complex contracts can blur the lines between offeror and offeree

Notion of Consideration

• Consideration is essential in Anglo-American contract law
• It refers to what each party pledges to do for the other, and without it no contract exists

Consideration: what it is

• In a service exchange, consideration involves paying fees for legal services rendered
• Consideration may be a tangible give or agreement not to exercise to do something (forbearance -- give up your right to sue)

Contract Amendments

• Contract amendments must also involve consideration from both parties
• The buyer must also receive something if an increase in the selling price is decided

Consideration Types

• Consideration can be executory, executed, or past

Consideration: Executory

• Executory is a promise exchanged for another promise
• For example, an offer to sell a car with later payments is an executory consideration

Consideration: Executed

• Executed is a promise made in return for an act performed

Consideration: Past

• The rule differs in England, where past consideration is invalid
• Past is when an act is performed before a promise is made
• In America, past consideration can form a contract if the promisor gains an advantage

Rule of Promissory Estoppel

• The rule prevents one party from contradicting themselves if another party relies on it to their detriment
• It can be used as a shield (defense) in the UK but also as a sword (cause of action) in the US

Legal Intentions

• Legal intention is a required element
• It requires the intent to be legally bound
• Not all agreements are contracts if legal bounds are missing

Distributing Agreements

• Agreement to give my car to my friend and I do not follow through. He cannot take me to court. There was no expectation that he had to do anything
• Distribution agreements must intend to be binding in order to be legally binding

Capacity Requirements

• Capacity is the legal right to enter into a contract
• It ensures parties understand associated consequences
• Protections exist for minors or those with mental disabilities, who require representatives to act on their behalf

Representation Options

• Representation includes granting power of attorney or establishing an agency agreement
• The law or a contract can grant it

Capacity: Legal persons

• Legal persons require representatives
• The company's articles/memorandum dictates the capacity to make contracts

Formalities, Writing, Orally or by Conduct

• There is the general rule that contracts can be made in any way
• Some types of contracts must be, in writing, to be valid (guaranteed agreement)
• Some contracts must be made in writing and registered to be enforceable with third parties

The Parties

• Privity is the rule that only those party to a contract have rights and obligations
• A party beneficiary contract is an exception
• It permits 3rd party benefits (life insurance)

Transfers

• Assignments are when contracts transfer (not to start legal action), someone who wasn’t a party is eventually bound
• Some intuitive-personae contracts need the other party's approval to transfer (franchise agreement)

Common Law and Contracts

• Common law previously assumed people entered valid contracts voluntarily
• To enter validly, you must have a full awareness of all circumstances

Vitiating a Factor

• If a contract is made without full knowledge, or forced, it won’t be binding

Vitiatiing Factors (several)

• Illegality of the subject matter
• Misrepresentation
• Mistake
• Duress
• Undue influence

Illegality if Subject Matter

• An illegal subject in the matter renders the contract void, an absolute nullity

Misrepresentation Definition

• It is an untrue statement, it induces the other to enter the contract

Requirements for Misrepresentation

• There must be a statement, commonly verbal or written, but can come from body language
• Generally, silence isn't a statement except when circumstances change

Misrepresentation: statement of facts

• The statement must be fact-based
• For a land purchase, billing commission inquiry and answers must be factual

Misrepresentation: Influenced

• False statements must have induced the other party to enter the contract
• It must be proven that the influence had an impact on my decision

Party Knowing False Statement

• The contract cannot be cancelled if they know it’s false

Types of Misrepresentation

• Innocent: false statement without knowledge
• Negligent: untrue with a need to know
• Fraudulent : party knows the lie because it is intentional

Mitigating Damage in Misrepresentation

• In the first two, the contract can be cancelled
• The number of damages is higher for intentional infliction

VOID and VOIDABLE

• Illegal is void = absolute nullity
• Misrepresentation is voidable: contract is made, remains valid until voided

Treating a contract as Valid

• If you choose not to cancel, and to keep treating is as valid (you affirm the contract), that option belongs to whom the one who has lied

Three Types of Mistakes

• Unilateral: 1 party makes the mistake, and the other knows
• Common: both parties make the same mistake
• Mutual: both parties make the a mistake but not the same one

Mistakes Vitiating a Factor

• The mistake must be decisive
• The mistake must be about the substance of the contact, not the qualities of the subject

Duress and Undue Influence

• Forced parties lack choice
• Either using physical or psychological terror
• Or even unjustified economic pressure (duress)

Undue Influence

• Undue influence is when someone is going to use a special relationship to enter a contract
• For instance, doctors who use their doctor patient relationship to secure a real estate deal, can raise undue influence concerns
• This influence is only presumed when the deal is disadvantageous, placing legal burden on the influencer
• Normal relationships (husband and wife), do not indicate specific relationships and are not presumed with influence

Sanctions

• A contract isn’t void, as it remains voidable, except in instances of illegality in the subject matter