Week 2: Business and Corporate Law PDF

BUSINESS AND CORPORATE LAW WEEK 2: FORMATION OF A CONTRACT; PRIVITY AND EXEMPTION CLAUSES  Objectives At the end of this section, the student should be able to: 1. Explain the elements/requirements for formation of a contract 2. Describe the various types of terms of a...

BUSINESS AND CORPORATE LAW WEEK 2: FORMATION OF A CONTRACT; PRIVITY AND EXEMPTION CLAUSES  Objectives At the end of this section, the student should be able to: 1. Explain the elements/requirements for formation of a contract 2. Describe the various types of terms of a contract 3. Explain exemption/exclusion clauses 4. Describe privity of contract  CONTRACT: Formation A contract is a legally binding agreement. Simple contracts Need NOT be in writing. The law may state that a contract must be in writing, e.g., sale of land and hire purchase. A contract for sale of goods can be made by conduct or orally (See Barclays Bank v Modibedi case). Essential elements of a contract: a. Offer (by the offeror) and acceptance (by the offeree) (agreement) establishes consensus ad idem (meeting of the minds). The offer contains terms, e.g., price, condition of goods etc. Some terms are material and if they are breached, the contract may be ended/terminated with damages/monetary compensation. Breach of immaterial terms leads to an award of damages only. Some terms are implied, for instance by legislation e.g., minimum wage in employment law. Custom and trade usage may also imply terms into a contract and the circumstances of the case.  Contract: Formation cont. a. Agreement Offer and acceptance make a bilateral contract, i.e., both parties are aware they are in an agreement Offer: A proposal made with the intention that if it is accepted, the parties become bound. It must be: -lawful -made with intention -certain or reasonably certain/not ambiguous: Scammel v Ouston. -communicated -made in any manner -Made by a person with contractual capacity: (a major-18 years and above; not under the influence of alcohol or drugs; mentally capacitated) Contract: Formation cont. An offer is not the same as an invitation to treat: An invitation to treat is an indication that a person is willing to receive offers; e.g.: Advertisements with no reward: Patridge v Crittenden. If the advertisement requires someone to fulfil something or perform some act, like buy and use a product and some payment is promised if the result is not as advertised, this is an offer which may create a unilateral contract (no need to communicate acceptance) Read: Carlill v Carbolic Smokeball Co Invitation to treat cont. Auction sales Display of goods on a shop window: Fisher v Bell Goods on self-service shop/store: Pharmaceutical Society of Great Britain v Boots Cash Chemists Shares prospectus (shares to the public) NB: Legislation may alter the position of the common law to protect a party, e.g. Section 5 of the Consumer Protection Act protects consumers from false or misleading representaions  Contract: Formation cont. Termination of offer: -Lapse: if time for acceptance is stated. If no time for acceptance is stated, the offer shall lapse on expiry of reasonable time. What amounts to reasonable time depends on the circumstances of each case -Rejection: express or by counter-offer: A counter-offer occurs when the offeree clearly changes a term or terms of the offer, e.g. Hyde v Wrench (1840) -Revocation/withdrawal (by the offeror): Before acceptance. Withdrawal after acceptance is invalid and the parties are bound unless there is a contrary intention by both parties Termination of an offer cont. -Death of either party. -Frustration (force majeure): an event not caused by and beyond the control of the offeror, e.g. floods etc. -Failure of a condition precedent, e.g., ‘’I will sell the furniture if my sister agrees.’’ The offer will end if the sister is not in agreement Contract: Formation cont. Rules of acceptance of an offer: Must be consistent with the offer (See Hyde v Wrench) Within the time stated/reasonable time Be communicated to the offeror (reach him) except in unilateral offers (Carlill) and in communication by post-Entores v Miles Far Eastern Corporation: Contract is established when the letter of acceptance is posted. May be express or by conduct Offeree must be aware of the existence of the offer: Bloom v American Swiss Watch Co. Contract: Formation cont. The opposite of a bilateral contract is a unilateral contract. In a unilateral contract, there is no communication of acceptance. The offeree fulfils the specific act in the offer. Unilateral contract: Carlill v Carbolic Smoke Ball Co. (1893): An advertisement stated that whoever used the smoke ball and contracted influenza would be rewarded with £ 100. Mrs Carlill saw the advertisement, bought the smoke ball and used it but caught influenza. The company refused to pay. What did the court decide?  Contract: Formation cont. An agreement is either valid, void or voidable. Valid agreement: Legally binding Void: Not legally enforceable, e.g., due to illegality Voidable agreement: It can be set aside at the option/choice of its victim. Acceptance was made either due to the following three factors: (i) Misrepresentation: (Fraudulent/intentional; negligent or innocent) See Spice Girls Ltd v Aprilia World Service (2000). (ii) Duress: Physical or economic pressure: See Atlas Express v Kafco (1989) (iii) Undue influence: Some business relationships are based on trust in which one party exercises dominance or control of the other party in the relationship, e.g., a medical doctor sells his ‘good’ car to his patient of many years. The patient discovers the  Contract: Formation cont. b. Intention to create legal relations/to contract In addition to agreement, the parties should demonstrate mental attitude to be bound. Intention is usually derived from the conduct of the parties. It is hardly expressed in written or spoken word. In commercial agreements (exchange of goods and services) it is obvious that the parties intend to bind each other unless they agree in one way or another that they are not serious. In social or domestic agreements, the parties are presumed not to have intention to bind each other, e.g., agreeing to a wedding invitation, gifts etc. However, they may state clearly that the agreement is binding although it is not of a commercial nature.  Contract: Privity of contract Privity of contract Contract only enforceable by those privy (party) to it Some exceptions: -Life Insurance: Dependants can sue although they are not parties to the contract. -Contract between two parties but for the benefit of a third party. The third party can sue either or both parties. -Cession: transfer of rights by the creditor (cedent) against the debtor. The new creditor (cessionary) can sue the debtor although the two parties did not enter into a contract. For example, B owes C some money. C instructs B to pay D the entire amount. D can sue B if he is not paid, notwithstanding that there is no contract between the two parties. Executors, liquidators, trustees etc. acting as representatives/fiduciaries. They execute affairs they did not contract individually.  Contract: Terms of a contract Terms of a contract A term is an issue that govern the relationship between the parties to a contract Classification of terms: Material terms: Breach may cause the termination of the contract (Essentialia terms) Immaterial terms: Breach entitles the wronged party to damages or other remedy but not to end the contract Express terms: Agreed by the parties (can be material, immaterial or both) Implied terms: Imported into the contract, e.g., by law (for instance minimum wage; business custom. Can be material, immaterial or both. Contract: Exclusion/exemption clause Contract: Exclusion/exemption clause Exemption clause: It excludes a party to a contract from liability even if they are in breach. Rules: -Must be lawful (e.g., not against Consumer Protection Act) -The clause must be an integral part of the contract: notice of the clause before contracting is necessary: Olley v Marlborough Court -An exemption clause binds a party even if the contract was not read: E’strange v Graucob; also see Botswana Vaccines Institute v DHL -If the clause is ambiguous, it is interpreted against the party relying on the clause: contra proferentem rule THANK YOU