Session 08: Introduction to the Law of Contract PDF

Unit VΙ – OSU4404 Session 08: Introduction to the Law of Contract Session 08 Introduction to the Law of Contract Contents Introduction 8.1. What is a contract? 8.2 Importance of contract 8.3. The beginning of a contract 8.4. The development of the contract 8.5. Some facto...

Unit VΙ – OSU4404 Session 08: Introduction to the Law of Contract Session 08 Introduction to the Law of Contract Contents Introduction 8.1. What is a contract? 8.2 Importance of contract 8.3. The beginning of a contract 8.4. The development of the contract 8.5. Some factors affecting modern contract law. 8.6. The modern law of contract in Sri Lanka Introduction A contract is an agreement that binds the parties. The distinguished characteristic of a contractual agreement, when compared with other agreements, is the feature of a binding legal obligation. In everyday life, we encounter numerous forms of contracts, such as agreeing to terms when downloading a new computer program, engaging a contractor to repair a leaking roof, and even buying a meal at a restaurant. Therefore, Knowing the principles of contracts is not only a talent required of lawyers; it enlightens everyone on an essential institution that we use all the time and generally take for granted. This subject is intended to illustrate the wide range of concerns that emerge when entering and enforcing contracts. It will explain what a contract is and will also examine the purpose and relevance of contracts. The desire to create legal relations, legality, and morality, and the distinction between gifts and bargains will then be discussed. The course also looks into frequent pitfalls such as one-sided promises, errors, fraud, frustration, performance, and breach of contract. 8.1 What is a contract? 2 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙ – OSU4404 Session 08: Introduction to the Law of Contract The purpose of a contract is to establish the rights and obligations of each party and to provide a framework for the parties to work together towards a common goal. Therefore, it can be either verbal or written, but written contracts are usually preferred because they give a clear record of the agreement. Certain factors must be present for a contract to be declared valid, including: Offer: One party must make an offer to enter into a contract with another party. Acceptance: The other party must accept the offer, creating a binding agreement between the parties. Consideration: Both parties must exchange something of value, such as money, goods, or services. Intention to create legal relations (Mutuality): Both parties must intend for the agreement to create legally binding obligations. Capacity: Both parties must have the legal capacity to enter into the agreement, meaning they are of legal age and are not under duress or undue influence. Legality: The agreement must be for a lawful purpose and not violate any laws or public policy. These factors will be thoroughly discussed in subsequent sessions. Figure: Elements of a Contract 3 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙ – OSU4404 Session 08: Introduction to the Law of Contract 8.2 Importance of contract Contracts are essential for the management of business relationships. They set out the expectations and obligations of each party, including the scope of work, timelines, payment terms, and dispute resolution mechanisms. A wellwritten contract can assist in avoiding misunderstandings and disagreements by ensuring that all parties are on the same page from the beginning. Here are some reasons why management and business students should understand contracts. Understanding the legal implications: A contract is a legally enforceable agreement that specifies the terms and circumstances of a business transaction. Understanding contract law is essential for management and business students because it allows them to identify the legal implications of contracts, the rights and obligations of parties, and how to mitigate contract risks. Effective negotiation: Negotiation is an essential part of business deals, and contracts are often negotiated between parties. Management and business students with contract knowledge are better equipped to negotiate favourable terms and conditions for their businesses. Minimizing disputes: Clear and precise contracts help to minimize misunderstandings and disputes between parties. Students with contract knowledge can create and review contracts to ensure that all parties are on the same page, which can help to avoid costly legal disputes. Protecting the interests of the business: Contracts are designed to protect the interests of the parties involved. Business students with contract knowledge can draft and review contracts that adequately protect their company's interests, whether they are negotiating with suppliers, customers, or employees. Complying with legal requirements: Certain contracts, such as employment contracts and lease agreements, must comply with legal requirements. Management and business students with contract knowledge can ensure that their business's contracts are legally compliant, protecting their company from potential legal liabilities. Contracts can also serve to protect the interests of the people concerned. A contract, for example, can include confidentiality clauses to protect sensitive business information or indemnification clauses to share liability amongst the parties in the event of a breach. Businesses can reduce risk and safeguard their bottom line by properly negotiating and designing contracts. Because of the aforementioned reasons, contract knowledge is crucial for management and business students it allows them to understand the legal 4 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙ – OSU4404 Session 08: Introduction to the Law of Contract implications of business deals, negotiate effectively, minimise disputes, protect their company's interests, and comply with legal requirements. Activity 08.1 1. What is a contract? 2. Identify the importance of knowing contract law? 8.3 The beginning of a contract Many legal systems are notable for their tardiness in developing any general theory of contract. The contract derives from simple transactions in prehistoric society, some of which can be detected as the hazy form of what we would term contracts in modern law. Practise hardens the transactions into established forms, and then the rights and the obligations with the passage of time. Therefore, the concept of contracts has been around for thousands of years and has its origins in ancient civilizations. In ancient Mesopotamia, for example, around 2100 BCE, clay tablets were used to record contracts related to trade and business transactions. Similarly, the ancient Greeks and Romans also used written contracts in their business dealings. In modern times, the concept of contracts was further developed and refined by legal scholars and practitioners. During the Middle Ages, contract law began to take shape in Europe, with the development of the common law system in England and the emergence of legal principles such as consideration and mutual assent. 8.4 The development of the contract The roots of the form of contract with which the law is concerned can be found in commercial exchange. Ready or instantaneous barter is widely regarded as the first commercial transaction to arise. With further development, there succeeds to ready barter the practise of credit barter in which the party is liable to furnish subsequently to some articles other than lending. In these transactions as in most modern contracts, the 5 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙ – OSU4404 Session 08: Introduction to the Law of Contract obligation of one party remains outstanding thus taking a choice step beyond the elements of give and take of ready barter. Barter in some form or another was common in the ancient world. The appearance of currency was the next milepost in the development of the contract. Discs or bars of brass or copper gold or silver in any form and other non-perishable articles capable of convenient handling all served this purpose with the increasing use of currency, barter developed into sales and money loans and incidental to the latter thee sprang up, in the more advanced societies, contract of suretyship mortgage and pledge. Further economic and social development threw up in course of time the multifarious types and forms of contract known to the world’s legal system. In any discussion of the early history of contracts, it would be well however to bear in mind that while it is one thing to say that agreements and promises have existed in the sense that they were enforceable at law. As observed in the preceding section it was the particular transaction. Rather than its underlying promise that held the attention of the law in its early stage. With further progress there became discernible a shift of emphasis from form to intention. This trend results in a steady movement of the law towards the principle promised by its venue to engender an interest in its performance and that claim to enforceability springs not from the shape that it may take but from the fact that it was made. In step with this development, there resulted also an extension of the scope and availability of contractual rights and remedies. Therefore, the study of contracts in Ceylon be primarily concerned with the Roman, Roman-Dutch, and English legal systems and shall therefore proceed to a brief examination of the process of adaptation and extension by which each system approached maturity in regard to the matter of contract. The empirical approach of the Roman and common law systems, like most others, must lead them from individual occurrences to universal principles. Ad hoc relief gained an underlying basis of principle over time, and the expansion of the concept led to the extension of the field of relief. This extension was likewise achieved under the rising pressures of new conditions, through the relaxing of technicalities and the addition of new categories of relief when occasion necessitated. 8.5 Some factors affecting modern contract law. Although we have demonstrated that global agreement is an essential and fundamental characteristic of every contract, it is important to remember that the word agreement is not always of the type that is usually known in 6 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙ – OSU4404 Session 08: Introduction to the Law of Contract popular parlance. The first qualifying element is that the courts look at the agreement objectively rather than subjectively, and if a person has acted in such a way that he appears to have agreed even though he has not in his own mind. This objective premise is founded on the requirement for commercial convenience. The second qualifying criteria is that if one of the parties has a monopoly, the other party has no actual choice and cannot be called to agree in popular terms. This has an impact on the idea of contract freedom. Thus, if a householder wishes to receive power for his home, he must obtain it from the electricity board, which is a state monopoly, by consenting to all of the terms outlined by the latter in the contractual agreement, even if he disagrees with some of the terms outlined above. He will have to make do without the electricity supply. Contracting on standard terms has become extremely frequent. As a result, it is obvious that a client who contracts on such conventional terms has them imposed on him and does not actually agree to them. The same lack of actual choice develops when, notwithstanding the absence of a monopoly position, one of the parties belongs to a group that has agreed to put forward identical terms. Many trade organisations have developed standard form contracts that only its members are ready to sign. The third qualifying condition is that the law occasionally imposes requirements on one or both of the contracting parties because the contracting parties are typically expected to adhere to specific standards of behavior. The courts have developed a doctrine of implied terms, holding that a term sometimes exists in a contract even if it is not expressly stated by the parties, for example, these terms have been implied by law into contracts some of those terms by contrary agreement so that the principle of the agreement was not truly infringed. However, until they do so, they are obligated by various obligations to which they have not expressly consented and may not have been aware. In addition, there are many fields or activities in which without there being any proceeding history of judicially implied terms statute law restricts the freedom of persons to agree to their own contractual terms. Letting a residential property govern by the Rent Act is one such example. Another significant aspect of a contract is its binding obligation, which refers to its legal consequences or enforceability. A contract is defined as an agreement that is legally binding. However, the term enforceable must be understood in its corrective context. If a party can have his contract enforced, it means that he can acquire a court order ordering the other party to perform his share of the deal. This is not always the case. The court could use its discretion to issue such an order, known as an order of particular 7 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙ – OSU4404 Session 08: Introduction to the Law of Contract performance, or, in most cases, an order of damage or breach of contract. In this case, the party at fault is not obliged to perform his contract, but rather to pay a monetary penalty to the aggrieved party for failing to create it in the first place. 8.6 The Modern Law of Contract in Sri Lanka The Roman Dutch law being the common law of Sri Lanka, the general law of contract in Sri Lanka is the Roman Dutch law. However certain areas of the law of contract are governed by English law. The application of English law. The application of English law principles has taken place when the Roman Dutch law on particular matters. In several cases, Sri Lankan judges have relied on English law to deepen and extend the concepts of Roman-Dutch law. The judges in South Africa have taken a similar approach. In Sri Lanka, many statutes based on English contract law have been adopted. For example, statutes that have included or are based on English law govern the sale of goods, bills of exchange, carriage of goods by sea, insurance, business law, agency, and partnership. Although judicial rulings have considerably shifted this situation, RomanDutch law remains the dominant law in many areas of contract law. Furthermore, statute has modified Roman Dutch law in the laws governing special contracts of sale, hiring, suretyship, and donation. In addition, the personal laws of Sri Lanka may become applicable at some point in determining a contractual matter. Thus, in cases connected to contract law, unless it can be demonstrated that either English law, statute law, or personal law applies to a particular matter, the law to be applied to a question on contract law is Roman-Dutch law. Recommended reading Weeramantry, C. G. (1967). The Law of Contracts. Mortlake Press. Anson’s Law of Contract, Harlow Beaton, Oxford University Press, Oxford. Contract Law, Text, Cases and Material, McKendrick E, Oxford University Press, Oxford. 8 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙ – OSU4404 Session 08: Introduction to the Law of Contract Summary A contract is a legally binding agreement between two or more parties. This session provides a fundamental introduction for business students who start studying contract law. This basically introduces what a contract is and the importance of understanding contracts. Following that, it will trace the origins and evolution of contract law to the present time. It also provides a rudimentary understanding of contract law as it relates in the Sri Lankan context. As a result, it is proven how English law is applicable in contract law domains. The subsequent sessions will cover some fundamental concepts of contract law. Learning Outcomes Identify what is a contract. Understand the importance of knowing contract law. Finding the beginning of the concept of contract Identify the process of developing contract law. Understand the factors which affecting a modern contract. Identify the laws which govern contract law in Sri Lanka. Review Questions 1. What is a contract, and why is it important to clearly understand contract law? Discuss the fundamental elements that define a contract and explain the significance of contract law in facilitating economic transactions and maintaining legal order. 2. Write an essay about the importance of studying contract law for management students. 3. How the concept of the contract has begun and how it has developed till modern times. 4. What are the laws affecting for contracts in Sri Lanka. 5. Describe the process of developing contract law. Explain how contract law evolves through a combination of legislation, judicial decisions, and common law principles. Discuss the role of legal precedents and the importance of judicial interpretation in shaping contract law. 6. Identify and discuss the factors that can affect a modern contract. Consider external influences such as social, economic, and technological factors that may impact the formation, interpretation, and enforcement of contracts in today's complex business environment. 9 Copyright © 2023, The Open University of Sri Lanka (OUSL)