Business Law (BLM1007) Contract Law Part I Lecture Notes PDF

Business Law (B L M 1 0 0 7 ) Law of Contract Part I Formation of Contract Terms of Contract Topics Introduction to Contract Law Elements of a contract Offer Acceptance Intention to create legal relations Consideration Terms of a contract Conditions &...

Business Law (B L M 1 0 0 7 ) Law of Contract Part I Formation of Contract Terms of Contract Topics Introduction to Contract Law Elements of a contract Offer Acceptance Intention to create legal relations Consideration Terms of a contract Conditions & warranties What is a contract? Some definitions: ‘An agreement giving rise to obligations which are enforced or recognised at law’. ‘Any legally binding agreement voluntarily entered into by two or more parties.’ ‘An agreement with specific terms between two or more persons or entities in which there is a promise to do something in return for a valuable benefit known as consideration.’ What is a contract? Contract Law Importance of Contract Law Essential for market economy Exchange of goods & services Provides certainty Enforces voluntary agreements (binding) Legal recourse if contract breached News articles Elements of a Contract How do you know whether a contract has been made? The following elements make up a binding contract: 1) Offer 2) Acceptance 3) Consideration 4) Intention to Create Legal Relations All are required for formation of a contract 1. Offer Where one person (the offeror) communicates willingness to another person (the offeree) to enter into a contract and be legally bound by it. General rules: (a) Oral/ writing (b) Can be made to one/group/world (c) Must be communicated to offeree 1. Offer An offer may be made:  orally or in writing  In person, over phone  By letter, email, sms, newspaper ad etc Can be made to:  One person / party, eg. private arrangement  Several persons, eg. ‘all TP students’  World, eg. advertisements 1. Offer Offer to the world at large: Carlill v Carbolic Smokeball D put ad in newspaper, promised to pay £100 to anyone who caught the flu after using smokeball P used as directed but caught the flu anyway. She claimed the £100, D refused to pay...’not serious offer’ 1. Offer Held: Advt. was an offer to the world and any member of the public could accept the offer. Note: An advertisement is generally not considered an offer. It is usually viewed as an “invitation to treat” (see next few slides). Carlill v Carbolic Smoke Ball Co is an exception. 1. Offer The offer must be communicated to offeree i.e. not possible to accept an offer you are unaware of. Example: Offer of reward Was offeree aware of reward? If yes – can accept offer If no – can’t accept 1. Offer Once offer accepted = Agreement Thus: important to recognise what is an offer, & what is not an offer These are not offers: Invitation to treat Supply of information Declaration of intent Invitation to Treat (ITT) An invitation to: start negotiations make an offer (‘please make me an offer’) i.e. the stage before the offer happens Examples of ITT: Advertisements Displays of goods for sale Invitation to Treat Displays of Goods for Sale: Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd Boots was prosecuted for offering restricted drugs for sale. Held: The display of goods was an invitation to treat It was the customer who was offering to buy The sale took place at the counter, when the offer was accepted by the pharmacist Supply of information Harvey v Facey P was interested in buying a farm. P asked D ‘what is lowest price?’ D replied ‘£900’; P said ‘I accept’. D refused to sell for £900 Held: D did not make offer, was only supplying information No contract between D & P Declaration of intent Harris v Nickerson D placed advertisement: ‘We will be having an auction – office furniture for sale’ P saw advt., travelled all the way for auction On day 3, furniture was withdrawn Held: The advt. was not an offer, only a declaration of intent No contract between D & P Termination of Offer An offer is valid until it is terminated i.e. capable of being accepted How to terminate offer? 3 ways – (a) Revocation (i.e. withdrawal) (b) Rejection (including counter-offer) (c) Lapse of time OFFE R Revocation of offer By the offeror Any time before acceptance by offeree i.e. cannot withdraw offer after it has been accepted Revocation must be communicated to be effective i.e. offeree must actually receive it Revocation of offer Byrne v Van Tienhoven Oct 1: D offered to sell P tinplates Oct 8: D revoked offer by letter Oct 11: P telegraphed acceptance Oct 20: P received revocation letter Held: revocation was not effective until Oct 20. However, P accepted offer on Oct 11. The revocation was not effective, and thus there was a valid contract. Rejection of offer An offer ends when it is rejected Rejection can happen in two ways: (1) The offeree rejects the offer (‘No thanks!’) (2) The offeree makes a counter-offer Note: once an offer is rejected it is extinguished and cannot be revived – in other words, it disappears forever! Rejection of offer Rejection by counter-offer: Hyde v Wrench D offered to sell his farm to P for £1000. P rejected offer and made a counter-offer to D to buy farm at £950. D rejected counter-offer. P then said he would pay £1000 after all. But by that time, D had decided he did not want to sell to P for £1000. P sued D. Held: P’s offer of £950 was a counter-offer which terminated D's original offer of £1000. D’s original offer of £1000 was extinguished and could not be revived. Lapse of offer An offer lapses upon: Death of offeror or offeree Lapse of time: 1. The specified period has passed 2. If there is no specified period, then it lapses after “a reasonable period”.  What is a reasonable period depends on the circumstances of each case, including market practice 22 Lapse of offer Lapse after reasonable period: Ramsgate Victoria Hotel v Montefiore The Ramsgate Victoria Hotel June: D offered to buy shares in P November: P informed D that he had been allotted shares D rejected the shares; P sued. Held: D could reject the shares as his offer was not accepted within a reasonable time. D’s offer had lapsed. Elements of Contract Contract 1: 2: 3: 4: Offer Acceptance ICLR Consideration Made: Oral/writing Made to anyone Communicate d Terminated: Revocation Rejection Lapse 2. Acceptance Unconditional consent to offer by offeree General rules: (a) Absolute, unconditional of terms - Counter-offer is not acceptance (b) By prescribed method eg. mail, fax etc - If none stated, then ‘reasonable’ (c) Must be communicated - Oral/ writing/ conduct  2. Acceptance Acceptance must be communicated to the offeror i.e. it must be actually received by the offeror Therefore, silence cannot amount to acceptance Felthouse v Bindley P wrote to D offering to buy his horse for £30. “If I don’t hear from you, I consider the horse mine at that price.” D didn’t reply and sold the horse to someone else. P sued D. Held: Silence was not acceptance. There was no contract between D and P. Elements of Contract Contract 1: 2: 3: 4: Offer Acceptance ICLR Consideration Rules: Oral/writing Rules: Made to Oral/writing/ anyone conduct Communicate Absolute d As prescribed Terminated: Communicate Revocation d Rejection Lapse 3. Intention to Create Legal Relations A contract is only enforceable if the parties intended the contract to be legally binding The court will look at the facts of the case at the time of the contract: What was the intention? There are two types of agreements to look at: Commercial and Business Agreements Domestic and Social Agreements 3. Intention to Create Legal Relations Commercial and Business Agreements: Presumption is that there is an intention to create legal relations Presumption may be rebutted, but usually hard to rebut Domestic and Social Agreements: Presumption is that the parties do not intend the agreement to be legally binding Presumption may be rebutted Elements of Contract Contract 1: 2: 3: 4: Offer Acceptance ICLR Consideration Rules: Oral/writing Rules: Must be an Made to Oral/writing/ intention to anyone conduct have a legally Communicate Absolute bindng d As prescribed contract Terminated: Business vs Communicate Revocation Domestic d setting Rejection Lapse 4. Consideration Meaning: ‘the price or compensation for the promise given by one party to the other’ i.e. ‘the something which is given in exchange for another thing’ General Rule: In order to be valid, a contract must be supported by consideration Exchange (of benefits/promises) A B 4. Consideration So every contract has 2 promisors and 2 promisees: Promisor – the one making the promise Promisee – the one receiving the benefit of the promise If no consideration, contract not binding Exception: contracts under seal (a ‘deed’) – signed, sealed & delivered. Nowadays red stickers from Popular shop used. Seal 4. Consideration Some rules on consideration: 1. Consideration must be real 2. Consideration need not be adequate 3. Consideration must move from promisee 4. Consideration must be legal 5. Consideration must not be past Rules on Consideration 1. Consideration must be real Must be of some value - even if small Not real consideration: acts of love & affection (parent & child) acts of a moral/social duty (lifeguard saving a drowning child) Rules on Consideration 2. Consideration need not be adequate Parties can pay what they like eg. $10 for car eg. peppercorn Used chocolate wrappers! - see Chappel v Nestle Co But it must be sufficient: Must be of some value in the eyes of the law Must be over and above what one is already obliged to do Rules on Consideration Consideration must be sufficient Stilk v Myrick Two sailors abandoned ship. Captain offered extra money to the sailors who stayed on. Company did not pay. Sailors sued. Held: No need to pay. There was no contract as the sailors had not provided consideration for the captain’s promise to pay extra Rules on Consideration 3. Consideration must move from the promisee Privity of contract means that only a party to a contract can sue or be sued on that contract. This means that the person to whom the promise is made must furnish the consideration. If a person has given nothing, he cannot enforce the promise if it is not kept. Recall Donoghue v Stevenson – No privity of contract between Mrs D and the café owner (Mrs D’s friend paid/ gave consideration for the ginger beer). Therefore, Mrs D sued under Negligence Law and not Contract Law. For example: Susie signs up for training with XYZ Pte Ltd Susie’s employer, ABC Pte Ltd, pays XYZ Pte Ltd for the training XYZ fails to conduct the training for Susie Susie is upset. Can she sue XYZ? No, because she did not give XYZ any consideration. Only ABC may sue XYZ Rules on Consideration 4. Consideration must be legal Agreements to do unlawful acts Example: ‘I will pay you $100 to scratch his car’ Charles rents out his flat to Camilla, knowing Camilla intends to use it as a gambling den. After 2 months, Camilla stops paying the rent. Charles sues Camilla. Q: What consideration did the parties give? Do you think Charles will win his case in court? Rules on Consideration 5. Consideration must not be past “Past consideration is no consideration” An act performed before the promise was given is past consideration Example: 1. William, delighted with his maid’s performance in May (past), says that he will give her an extra $50 in June. Later he changes his mind. Q. Can the maid sue him for the $50? 2. William says in July that he will pay an extra $50 if the maid performs well in August (future). The maid performs well. Later William changes his mind. Remember the reward case? Elements of Contract Contract 1: 2: 3: 4: Offer Acceptance ICLR Consideration Rules: Oral/writing Rules: Rules: Must be an Made to Oral/writing/ Real intention to anyone conduct have a legally Need not be Communicated Absolute binding adequate As prescribed contract Move from Terminated: Communicate Business vs promisee Revocation Domestic d Legal Rejection setting Not be past Lapse Summary – Terms of a Contract Statements form part of the contract set out duties & Terms rights of parties Express Implied Conditions Innominate Warranties terms (Discharge & (Discharge or (Damages) damages) damages) Terms of a Contract Terms details or statements which form part of the contract refers to each party’s rights and obligations under a contract eg. the agreed price of something; the agreed quantity; the agreed delivery date Some terms are more important than others Consequences of a breach of a term: If important – contract discharged If not so important – contract continues + damages awarded Therefore, it is important to identify which statements are terms, and which are not. Terms: Express & Implied Terms can be classified as: Express terms: actually discussed by parties Implied terms: not discussed by parties implied by law: courts statute trade practice Conditions, Warranties, Innominate Terms All terms, whether express or implied can be classified into: 1. Conditions 2. Warranties 3. Innominate Terms (for reading only) Conditions Very important, essential or fundamental to the contract “Goes to the root of the contract” If breached, innocent party: has the option to consider the contract “discharged”; and can claim for damages Conditions Example: Michael buys a Ferrari The car can’t move This is a breach of condition because the roadworthiness of a car goes to the root of the contract Michael can return the car, claim a full refund and, in addition, claim damages for additional losses or injuries if any. Warranties Are less important, secondary obligations Do not “go to the root of the contract” If breached, innocent party: must still continue with the contract; but can sue for damages Warranties Example: Michael buys a Lamborghini The car works perfectly except that the radio stops working after 120kmh This is a breach of warranty only because the functioning of the radio does not go to the root of the contract for the sale of a car Michael can claim damages for the radio Innominate terms (for reading only) These terms fall into the ‘grey area’ Difficult to tell whether it is a condition or warranty The damage or loss from a breach of such a term can be very serious or trivial if very serious, contract can be treated as discharged if not serious, only damages can be claimed Innominate terms (for reading only) Example: Michael buys a Porsche The air conditioner fails periodically If that is the only problem, then only damages can be claimed to repair the air-con But if air-con failure leads to an explosion, then: the contract can be considered discharged; and damages claimed the term that the air-con system works properly is thus an innominate term NEXT LECTURE… Contract Law – Part II