Legal Aspects of Business Contracts PDF

Section 4: Legal Aspects of the Business 4.1 Contracts and their characteristics SPECIFIC OBJECTIVES Students should be able to Explain the concept of a contract Identify the types of contracts Describe the characteristics of a simple contract De...

Section 4: Legal Aspects of the Business 4.1 Contracts and their characteristics SPECIFIC OBJECTIVES Students should be able to Explain the concept of a contract Identify the types of contracts Describe the characteristics of a simple contract Describe the characteristics of a specialty contract Objective 1: Explain the concept of contract Definition and Concept of a Contract A contract is an agreement made by two or more parties that is enforceable by law. An agreement is reached when there is meeting of their minds between both parties. It is the most important component of a contract but for a contract to be legally enforceable a number of other important elements must exist. The agreement must also be backed by a good or valid consideration and one that is made for a lawful purpose in a form required by law. Learn any one of these definitions: I. A contract is a mutual agreement between two or more persons or parties, whereby something is done (or promised to be done) or given (or promised to be given) by one or more persons or parties. II. A contract is a legally binding agreement made between two or more persons, by rights acquired by one or more to acts or forbearances on the part of the other or others. III. A contract is an agreement between to or more persons intended to create a legal obligation between them and to be legally enforceable. IV. A contract is an agreement made by two or more parties that is legally binding or enforceable by law. Many people use the word ‘contract’ as an alternative for ‘agreement’. It can have legal implications in a court of law. Many true contracts, i.e., legal or valid contracts, are agreements made in writing. That is to say, an agreement that is written down in some form or the other, signed and witnessed, becomes a contract. But a contract can be made by word of mouth and will still be legal. An agreement is reached when there is a meeting of the minds between both parties. Agreement is, perhaps, the single most important component of a contract, but in order for a contract to be legally enforceable, a number of other important elements must exist.  The agreement must also be backed by good or valid consideration and one which is made for a lawful purpose in a form required by law. N.B: The idea of ‘legal obligation’ imports the notion that the agreement is one that the law recognizes and will enforce. Objective 2: Describe the characteristics of a simple contract; The characteristics/features of a contract In order for a simple contract to be legally binding it must have the following essential elements: i. An agreement ii. An offer iii. An acceptance iv. Consideration or form v. Capacity vi. Legality vii. Possibility viii. Genuineness of the parties and good faith ix. Some contracts must be signed, sealed and delivered (specialty contracts). i. An agreement – is reached when there is a meeting of the minds between both parties. There should be no doubt about what the other party means or understands and one party must not assume what the other party means. ii. An offer- is a proposal or 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 while the person accepting the offer is called the offeree. Note: In a valid contract, only the offeror can make an offer. Therefore, and offer must be distinguished from an invitation to treat or invitation to trade. An offer ✓ Can be made to a specific person or to the world at large. ✓ Can be oral, implied by conduct or put in writing. ✓ Must be communicated to the offeree. ✓ Can only be revoked or withdrawn before acceptance by the offeree. NOTE: Invitation to Treat/ trade/ Bargain Invites to the public or offeree to make offers which may be either accepted or rejected. This is NOT the same an offer. E.g. Catalogues, goods displayed in a show or store with price tag, a notice of goods being auctioned, an advertisement inviting tenders for goods, Property advertised for sale ▪ An acceptance exists when the offeree or his/her agent agrees to all terms or conditions laid down by the offeror or his/her agent. It must be either expressed or implied or inferred. An acceptance  must be made in a manner stated then he/she may use the quickest means possible. An offer must be accepted within a stipulated period of time or must be done within a reasonable period. ▪ Consideration or Form ▪ Capacity ▪ Legality ▪ Possibility ▪ Genuineness of parties and good faith ▪ Some contracts must be sealed and delivered (specialty contracts) Note: An Invitation to treat or to trade or to bargain (through catalogues, price on goods or window displays) invites the public or offeree to make offers which may be either accepted or rejected. This is NOT the same as an offer. E.g. Catalogs, goods displayed in a shop or stage price tag, a notice of goods at an auction Some examples of invitation to trade are: a) Goods displayed in a shop or store with price tag. b) A notice of goods being offered for auction. c) An advertisement inviting tenders for goods. d) Property (e.g. real estate) advertised for sale. iii. 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. OR Agreement to the terms and conditions of an offer. It may be either ‘expressed’ (by word of mouth or by writing), or implied/inferred (by conduct of the offeree, the person accepting) An acceptance must be: ✓ Made in the manner stated, then he/she may use the quickest mean possible. An offer must be accepted within a stipulated period of time or must be done with a reasonable period. ✓ Made through the post office, it is effective once the letter is posted.(It does not matter if the letter was delayed or lost in the post. It is not the same for offers made by post). An offer must be communicated before it is considered as legal. ✓ Made through the telephone fax machine or any of these modern instantaneous means of communication is complete only when received and not when transmitted. iv. A consideration is a promise or action made by one party for the promise or action made by another party. It is important that both parties either promise to do or do something in exchange for the other party’s promised to do so or act. There must be the giver’s consideration and the receiver’s consideration.  A consideration may be a benefit or a detriment. Consideration may be: a) Executed: this refers to the price paid by a party in return for the act or promise of the other party. b) Executory: this is the price promised by one party for the act or promise of another party. Consideration must follow these rules: It must be real It must be possible It must move from the promise It need not be adequate It must not be past Capacity in law means that the parties are eligible to enter into a contact. The law sees all persons as eligible to enter into a contract. However, there is one major exception to this: The exception states that all parties to a contract must be able to act responsible and not to be exploited on the basis of knowledge, maturity or temporary lack of consciousness. Therefore, the following groups do not have full capacity to enter into a contract: Minors- those less than 18 years old Drunks Insane persons Aliens( foreign-born residents in a country who have not been naturalized) whose country is at war with yours V. Legality- all contracts entered into must conform to the laws of the land VI. Possibility- Parties offering consideration must be in a position to be able to carry out their sides of the contract. VII. Genuineness of the parties and the good faith- all parties entering a contract must do so freely and willingly and not by force, coercion or duress. However, there may be a mistake or misrepresentation. A misrepresentation is a statement that is not true. If the statement is made with a genuine belief that is true, then that is innocent misrepresentation. If a statement is made with the knowledge that it is untrue or misleading, then that is a fraudulent misrepresentation. Objective 3 & 4: Describe the characteristics of a simple contract and a specialty contract A simple contract is one which the parties have come to an agreement or deemed to have reached an agreement whereas with the Specialty contract all the terms of the contract should be written in a document which is then signed, sealed and delivered to all parties. Types of Contracts Contacts are in three main types: I. Contract of record II. Simple contract III. Specialty contract (deeds) CONTRACT OF RECORD A Contract of Record is imposed by a court order requesting a party to abide by obligations laid down by the court. In a contract of record, the crown or state in its judicial capacity imposes an obligation upon a person. Examples: (i) a recognizance for good behavior and a recognizance to appear as a witness. The individual signs a form and entry is made in the Court Records. The Court reserves the right to levy on the individual for failure to observe the tern signed to. OR (ii) A man may be required to pay alimony to his wife or a business man maybe told to stop trading. A contract of record is not a true contract. Simple Contracts They may be made orally, in writing, or implied. For a contract to be legally binding it must have seven basic elements. They are: 1) Offer and acceptance of that offer 2) Form or consideration 3) Genuineness of the parties entering the contract 4) Capacity of the parties entering into the contract 5) Legality of the subject matter 6) Possibility 7) Good faith If one of these elements is missing from the agreement then no contract exists. The following are some kinds of simple contracts: I. Bills of Exchange II. Promissory Note III. Marine Insurance Note: the above must be in writing, otherwise they become void. Speciality Contracts (Deed) A specialty contract is a special kind of contract that is not valid unless it is made out in writing and is signed, sealed and delivered. It is also called a deed or a contract under a seal. Contract made without consideration a valid only under seal, as is the transfer of title of land. This is really a formal agreement that must be done in writing. Specialty contracts, apart from being written, must be: I. Signed II. Sealed and III. Delivered Signing means that all the details that the parties have agreed on must be put in a document which must be signed by all of them Sealing means a seal, whether embossed, imprinted or posted, is put on the document. Delivering means that all parties to the contract must have a copy of the document with details they have agreed on. Some examples of specialty contracts are: Hire purchase agreement Mortgage contracts Sale of goods Sale of land Insurance contracts Lease of property All contracts that are sealed R. Carter-White