Chapter Eleven
Contracts
Dr Khalil Hussein
Professor at Lebanese University
Director of studies at Lebanese Parliament
contract is a legally binding exchange of promises or agreement between parties that the law will enforce. Contract law is based on the Latin phrase pacta sunt servanda (agreements must be kept). Breach of contract is recognized by the law and remedies can be provided. Almost everyone makes contracts everyday. Sometimes written contracts are required, e.g., when buying a house. However the vast majority of contracts can be and are made orally, like buying a law text book, or a coffee at a shop. Contract law can be classified, as is habitual in civil law systems, as part of a general law of obligations[1].
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Contractual formation
In common law jurisdictions there are three key elements to the creation of a contract. These are offer and acceptance, consideration and an intention to create legal relations[2]. In civil law systems the concept of consideration is not central. In addition, for some contracts formalities must be complied with under what is sometimes called a statute of frauds.
Offer and acceptance
Perhaps the most important feature of a contract is that one party makes an offer for a bargain that another accepts. This can be called a 'concurrence of wills' or a 'meeting of the minds' of two or more parties. There must be evidence that the parties had each from an objective perspective engaged in conduct manifesting their assent, and a contract will be formed when the parties have met such a requirement[3]. An objective perspective means that it is only necessary that somebody gives the impression of offering or accepting contractual terms in the eyes of a reasonable person, not that they actually did want to contract.
Offer and acceptance does not always need to be expressed orally or in writing. An implied contract is one in which some of the terms are not expressed in words. This can take two forms. A contract which is implied in fact is one in which the circumstances imply that parties have reached an agreement even though they have not done so expressly. For example, by going to a doctor for a checkup, a patient agrees that he will pay a fair price for the service. If he refuses to pay after being examined, he has breached a contract implied in fact.
Consideration
Consideration is a controversial requirement for contracts under common law (for example money). It is not necessary in civil law systems, and for that reason has come under increasing criticism. The idea is that both parties to a contract must bring something to the bargain. This can be either conferring an advantage on the other party, or incurring some kind of detriment or inconvenience. Three rules govern consideration.
· Consideration must be sufficient, but need not be adequate. For instance, agreeing to buy a car for a penny may constitute a binding contract.[4] While consideration need not be adequate, contracts in which the consideration of one party greatly exceeds that of another may nevertheless be held invalid for lack of sufficient consideration. In such cases, the fact that the consideration is exceedingly unequal can be evidence that there was no consideration at all. Such contracts may also be held invalid for other reasons such as fraud, duress, unequal bargaining power, or contrary to public policy. In some situations, a collateral contract may exist, whereby the existence of one contract provides consideration for another. Critics say consideration can be so small as to make the requirement of any consideration meaningless.
· Consideration must not be from the past. For instance, in Eastwood v. Kenyon,[5] the guardian of a young girl raised a loan to educate the girl and to improve her marriage prospects. After her marriage, her husband promised to pay off the loan. It was held that the guardian could not enforce the promise as taking out the loan to raise and educate the girl was past consideration, because it was completed before the husband promised to repay it.
· Consideration must move from the promisee. For instance, it is good consideration for person A to pay person C in return for services rendered by person B. If there are joint promises, then consideration need only to move from one of the promises.
Formalities and writing
Contrary to common wisdom, an informal exchange of promises can still be binding and legally as valid as a written contract. A spoken contract should be called an oral contract, which might considered a subset of verbal contracts. Any contract that uses words, spoken or written, is a verbal contract. Thus, all oral contracts and written contracts are verbal contracts.
If a contract is in a written form, and somebody signs the contract, then the person is bound by its terms regardless of whether they have read it or not,[6] provided the document is contractual in nature.[7] Furthermore, if a party wishes to use a document as the basis of a contract, reasonable notice of its terms must be given to the other party prior to their entry into the contract[8].This includes such things as tickets issued at parking stations.[9]
Contractual terms
A contractual term is "any provision forming part of a contract"[10] Each term gives rise to a contractual obligation, breach of which can give rise to litigation. Not all terms are stated expressly and some terms carry less legal gravity as they are peripheral to the objectives of the contract.
Classification of Term
· Condition or Warranty[11]Conditions are terms which go to the very root of a contract. Breach of these terms repudiate the contract,allowing the other party to discharge the contract. A warranty is not so imperative so the contract will subsist after a breach. Breach of either will give rise to damages.
· Innominate term:It is the concept of an innominate term, breach of which may or not go to the root of the contract depending upon the nature of the breach. Breach of these terms, as with all terms, will give rise to damages. Whether or not it repudiates the contract depends upon whether legal benefit of the contract has been removed from the innocent party.
Status as a term
Status as a term is important as a party can only take legal action for the non fulfillment of a term as opposed to representations or mere puffs. Legally speaking only statements that amount to a term create contractual obligations. There are various factor that a court may take into account in determining the nature of a statement
Implied Terms
A Term may either be expressed or implied. An Express term is stated by the parties during negotiation or written in a contractual document. Implied terms are not stated but nevertheless form a provision of the contract[12].
Misrepresentation
Misrepresentation means a false statement of fact made by one party to another party and has the effect of inducing that party into the contract. For example, under certain circumstances, false statements or promises made by a seller of goods regarding the quality or nature of the product that the seller has may constitute misrepresentation. A finding of misrepresentation allows for a remedy of rescission and sometimes damages depending on the type of misrepresentation.
Mistake
A mistake is an incorrect understanding by one or more parties to a contract and may be used as grounds to invalidate the agreement. Common law has identified three different types of mistake in contract: unilateral mistake, mutual mistake, and common mistake.
· A unilateral mistake is where only one party to a contract is mistaken as to the terms or subject-matter. The courts will uphold such a contract unless it was determined that the non-mistaken party was aware of the mistake and tried to take advantage of the mistake.[13]
· A common mistake is where both parties hold the same mistaken belief of the facts. Duress and
Damages
There are four different types of damages.
· Compensatory damages which are given to the party which was detrimented by the breach of contract. With compensatory damages, there are two kinds of branches, consequential damages and direct damages.
· Nominal damages which include minimal dollar amounts (often sought to obtain a legal record of who was at fault).
· Punitive damages which are used to punish the party at fault. These are not usually given regarding contracts but possible in a fraudulent situation.
· Exemplary damages which are used to make an example of the party at fault to discourage similar crimes. Fines can be multiplied by factors of up to 50 for such damages.
Third Parties
The doctrine of privity of contract means that only those involved in striking a bargain would have standing to enforce it. In general this is still the case, only parties to a contract may sue for the breach of a contract, although in recent years the rule of privity has eroded somewhat and third party beneficiaries have been allowed to recover damages for breaches of contracts they were not party to[14].
[1] Contract (Hardcover) , Greg Costikyan (Author), Tor Books; 1st ed edition ,2000.,p6.
[2] See Richard Stone ,The Modern Law of Contract, Routledge Cavendish, 2007,ch1.
[3] e.g. Lord Steyn, Contract Law: Fulfilling the Reasonable Expectations of Honest Men (1997) 113 p 433.
[4] Chappell & Co Ltd v Nestle Co Ltd ,1959, 2 All ER 701.
[5] Eastwood v. Kenyon (1840) 11 Ad&E 438.
[6] L'Estrange v. F Graucob Ltd ,1934, p 394
[7] Curtis v. Chemical Cleaning and Dyeing Co,1951 1 KB 805
[8] Hillas and Co. Ltd. v. Arcos Ltd. (1932) 147 LT 503
[9] Ewan McKendrick, Contract Law - Text, Cases and Materials (2005) Oxford University Press
[10] Martin, E [ed] & Law, J [ed], Oxford Dictionary of Law, ed6 (2006, London:OUP).
[11] Not to be confused with a product warranty, which is always referred to as a 'guarantee' in law.
[12] P.S. Atiyah, The Rise and Fall of Freedom of Contract (1979) Clarendon Press.
[13] Smith v. Hughes,p23-25..
[14] Beatson (1998)" Anson's Law of Contract", 27th ed. (Oxford: OUP), p.246
Contracts
Dr Khalil Hussein
Professor at Lebanese University
Director of studies at Lebanese Parliament
contract is a legally binding exchange of promises or agreement between parties that the law will enforce. Contract law is based on the Latin phrase pacta sunt servanda (agreements must be kept). Breach of contract is recognized by the law and remedies can be provided. Almost everyone makes contracts everyday. Sometimes written contracts are required, e.g., when buying a house. However the vast majority of contracts can be and are made orally, like buying a law text book, or a coffee at a shop. Contract law can be classified, as is habitual in civil law systems, as part of a general law of obligations[1].
//
Contractual formation
In common law jurisdictions there are three key elements to the creation of a contract. These are offer and acceptance, consideration and an intention to create legal relations[2]. In civil law systems the concept of consideration is not central. In addition, for some contracts formalities must be complied with under what is sometimes called a statute of frauds.
Offer and acceptance
Perhaps the most important feature of a contract is that one party makes an offer for a bargain that another accepts. This can be called a 'concurrence of wills' or a 'meeting of the minds' of two or more parties. There must be evidence that the parties had each from an objective perspective engaged in conduct manifesting their assent, and a contract will be formed when the parties have met such a requirement[3]. An objective perspective means that it is only necessary that somebody gives the impression of offering or accepting contractual terms in the eyes of a reasonable person, not that they actually did want to contract.
Offer and acceptance does not always need to be expressed orally or in writing. An implied contract is one in which some of the terms are not expressed in words. This can take two forms. A contract which is implied in fact is one in which the circumstances imply that parties have reached an agreement even though they have not done so expressly. For example, by going to a doctor for a checkup, a patient agrees that he will pay a fair price for the service. If he refuses to pay after being examined, he has breached a contract implied in fact.
Consideration
Consideration is a controversial requirement for contracts under common law (for example money). It is not necessary in civil law systems, and for that reason has come under increasing criticism. The idea is that both parties to a contract must bring something to the bargain. This can be either conferring an advantage on the other party, or incurring some kind of detriment or inconvenience. Three rules govern consideration.
· Consideration must be sufficient, but need not be adequate. For instance, agreeing to buy a car for a penny may constitute a binding contract.[4] While consideration need not be adequate, contracts in which the consideration of one party greatly exceeds that of another may nevertheless be held invalid for lack of sufficient consideration. In such cases, the fact that the consideration is exceedingly unequal can be evidence that there was no consideration at all. Such contracts may also be held invalid for other reasons such as fraud, duress, unequal bargaining power, or contrary to public policy. In some situations, a collateral contract may exist, whereby the existence of one contract provides consideration for another. Critics say consideration can be so small as to make the requirement of any consideration meaningless.
· Consideration must not be from the past. For instance, in Eastwood v. Kenyon,[5] the guardian of a young girl raised a loan to educate the girl and to improve her marriage prospects. After her marriage, her husband promised to pay off the loan. It was held that the guardian could not enforce the promise as taking out the loan to raise and educate the girl was past consideration, because it was completed before the husband promised to repay it.
· Consideration must move from the promisee. For instance, it is good consideration for person A to pay person C in return for services rendered by person B. If there are joint promises, then consideration need only to move from one of the promises.
Formalities and writing
Contrary to common wisdom, an informal exchange of promises can still be binding and legally as valid as a written contract. A spoken contract should be called an oral contract, which might considered a subset of verbal contracts. Any contract that uses words, spoken or written, is a verbal contract. Thus, all oral contracts and written contracts are verbal contracts.
If a contract is in a written form, and somebody signs the contract, then the person is bound by its terms regardless of whether they have read it or not,[6] provided the document is contractual in nature.[7] Furthermore, if a party wishes to use a document as the basis of a contract, reasonable notice of its terms must be given to the other party prior to their entry into the contract[8].This includes such things as tickets issued at parking stations.[9]
Contractual terms
A contractual term is "any provision forming part of a contract"[10] Each term gives rise to a contractual obligation, breach of which can give rise to litigation. Not all terms are stated expressly and some terms carry less legal gravity as they are peripheral to the objectives of the contract.
Classification of Term
· Condition or Warranty[11]Conditions are terms which go to the very root of a contract. Breach of these terms repudiate the contract,allowing the other party to discharge the contract. A warranty is not so imperative so the contract will subsist after a breach. Breach of either will give rise to damages.
· Innominate term:It is the concept of an innominate term, breach of which may or not go to the root of the contract depending upon the nature of the breach. Breach of these terms, as with all terms, will give rise to damages. Whether or not it repudiates the contract depends upon whether legal benefit of the contract has been removed from the innocent party.
Status as a term
Status as a term is important as a party can only take legal action for the non fulfillment of a term as opposed to representations or mere puffs. Legally speaking only statements that amount to a term create contractual obligations. There are various factor that a court may take into account in determining the nature of a statement
Implied Terms
A Term may either be expressed or implied. An Express term is stated by the parties during negotiation or written in a contractual document. Implied terms are not stated but nevertheless form a provision of the contract[12].
Misrepresentation
Misrepresentation means a false statement of fact made by one party to another party and has the effect of inducing that party into the contract. For example, under certain circumstances, false statements or promises made by a seller of goods regarding the quality or nature of the product that the seller has may constitute misrepresentation. A finding of misrepresentation allows for a remedy of rescission and sometimes damages depending on the type of misrepresentation.
Mistake
A mistake is an incorrect understanding by one or more parties to a contract and may be used as grounds to invalidate the agreement. Common law has identified three different types of mistake in contract: unilateral mistake, mutual mistake, and common mistake.
· A unilateral mistake is where only one party to a contract is mistaken as to the terms or subject-matter. The courts will uphold such a contract unless it was determined that the non-mistaken party was aware of the mistake and tried to take advantage of the mistake.[13]
· A common mistake is where both parties hold the same mistaken belief of the facts. Duress and
Damages
There are four different types of damages.
· Compensatory damages which are given to the party which was detrimented by the breach of contract. With compensatory damages, there are two kinds of branches, consequential damages and direct damages.
· Nominal damages which include minimal dollar amounts (often sought to obtain a legal record of who was at fault).
· Punitive damages which are used to punish the party at fault. These are not usually given regarding contracts but possible in a fraudulent situation.
· Exemplary damages which are used to make an example of the party at fault to discourage similar crimes. Fines can be multiplied by factors of up to 50 for such damages.
Third Parties
The doctrine of privity of contract means that only those involved in striking a bargain would have standing to enforce it. In general this is still the case, only parties to a contract may sue for the breach of a contract, although in recent years the rule of privity has eroded somewhat and third party beneficiaries have been allowed to recover damages for breaches of contracts they were not party to[14].
[1] Contract (Hardcover) , Greg Costikyan (Author), Tor Books; 1st ed edition ,2000.,p6.
[2] See Richard Stone ,The Modern Law of Contract, Routledge Cavendish, 2007,ch1.
[3] e.g. Lord Steyn, Contract Law: Fulfilling the Reasonable Expectations of Honest Men (1997) 113 p 433.
[4] Chappell & Co Ltd v Nestle Co Ltd ,1959, 2 All ER 701.
[5] Eastwood v. Kenyon (1840) 11 Ad&E 438.
[6] L'Estrange v. F Graucob Ltd ,1934, p 394
[7] Curtis v. Chemical Cleaning and Dyeing Co,1951 1 KB 805
[8] Hillas and Co. Ltd. v. Arcos Ltd. (1932) 147 LT 503
[9] Ewan McKendrick, Contract Law - Text, Cases and Materials (2005) Oxford University Press
[10] Martin, E [ed] & Law, J [ed], Oxford Dictionary of Law, ed6 (2006, London:OUP).
[11] Not to be confused with a product warranty, which is always referred to as a 'guarantee' in law.
[12] P.S. Atiyah, The Rise and Fall of Freedom of Contract (1979) Clarendon Press.
[13] Smith v. Hughes,p23-25..
[14] Beatson (1998)" Anson's Law of Contract", 27th ed. (Oxford: OUP), p.246
