Law Of Contract

Prepared by :-
Musbri Mohamed
DIL; ADIL ( ITM )
Pursuing MBL ( UKM )

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Law of Contract

What is a contract?
How to create a valid contract
Offer and Acceptance
Terms of a contract
Vitiating factors
Discharge of contracts

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What is Law?

Law provides rules.

It tells us what we can and cannot do.
This is true in our personal lives (eg criminal law);
and in our business lives (eg contract law).

Therefore, it is important for a business person to know

the rules which apply to them.

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Why have a Law of Contract?

We saw that contracts can arise in simple,

everyday situations, such as buying a
newspaper or taking a bus.

Modern society operates by people and

companies exchanging goods and services.

The Law of Contract helps to give a structure to

this.

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The Law of Contract is part of Private Law so it
is concerned with relationships between parties.
It helps us to decide what is a valid contract.

The Law of Contract is also part of Civil Law so

it is also concerned with remedies. It helps us if
the other party to a contract does not keep to the
agreement.

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A contract is a legally binding
agreement enforceable in a court of
law. However, not every agreement
between two parties is a legally
binding contract.

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Definition of a contract

A legally binding agreement

that means there must be some kind of
agreement between two parties.

However, not all agreements are contracts

because not all agreements are legally
enforceable.

Legally enforceable means that a court will say

that an agreement is a contract.

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Creating a valid contract

In order to create a valid contract, there must be :-

An offer;
An acceptance;
Consideration;
Capacity to contract; and
Intention to create legal relations.

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Definition of Offer

The person making the offer is the

offeror. The person who accepts the offer
is the offeree.

An offer is a promise by the offeror to be

bound in a contract on particular terms if
there is a proper acceptance of the offer
by the offeree.

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Simple Example

John says to Jim, “I will sell you this book for

£10”. Jim says, “I agree”.

We have an offer and an acceptance.

John is the offeror.
Jim is the offeree.

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Identifying Offers

Some types of statement are not offers:

Statement of intention;
Supply of information; and
Invitation to treat.

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Invitation to Treat

This is an invitation to others to make offers.

In other words, you are asking other people to
make an offer to you.

Some common examples of invitations to treat:-

1. Goods displayed in a shop window;

2. Goods displayed on the shelf of a self-service shop;
3. A public advertisement; and
4. A share prospectus.

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Who is the offeree?

An offer can be made to :-

A particular person;
A group of people; and
The whole world.
If the offer is made to a particular person (or
group) then only that person (or group) may
accept the offer.
Eg: If I offer to sell my car to Jim then only Jim
may accept that offer. John cannot accept.

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If the offer is made to the whole world then
anyone can accept.

We saw an example of this in

Carlill v. Carbolic Smoke Ball Company;

Mrs Carlill accepted the offer by her actions.

She bought and used the medicine.

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Knowledge of the offer

You have to know about the offer before you can

accept it.
If you find my lost dog and return it without
knowing that I had offered to pay £100 to the person
who found it, then you cannot later claim the reward
when a friend tells you about it.

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Acceptance

Once the offeree accepts the offer the contract is

made.
After that, the offeror cannot withdraw the offer
and the offeree cannot withdraw the acceptance.

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What is Acceptance?

The acceptance must agree to the terms of the

contract.
The acceptance cannot try to introduce new
terms.

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Counter-Offers

If the offeree tries to change the terms of the

offer in the acceptance, then this is not an
acceptance, it is a counter-offer.
A counter-offer rejects the offer.
The position of the two parties is reversed.
The offeree becomes the offeror and the offeror
becomes the offeree

For example, in Hyde v Wrench,

Wrench offered to sell his farm for £1,000.
Hyde offered £950.
Wrench rejected this.
Hyde then told Wrench he would accept
Wrench’s original offer.
However, the court said there was not contract.

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The counter-offer of £950 ended the offer of
£1,000 so it could no longer be accepted.
That meant Hyde was now making a new offer
to buy the farm for £1,000.
Wrench could choose to accept or reject this.

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Classical Model

The rules which we have looked at for deciding what makes a

proper offer and proper acceptance are the classical legal model.

They show how a contract should be created.

An offeror makes an offer and if it is accepted by the offeree, a
valid contract is made.

If the offeree makes a counter-offer then the parties change roles

with the offeree becoming the offeror and the offeror now
becoming the offeree.

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If the parties continue negotiating then they
could change roles several times as offers and
counter-offers are made.

Eventually, an offer will be matched with an

acceptance and a contract will be created.

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Beside the fundamental elements of a contract (offer,
acceptance, and consideration), there are other
requirements:

Competence;
Consent ; and
Legality.

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Competence to make a contract means the legal capacity to make a
contract. Generally, people are ruled competent to make contracts if
they are over 18 years of age and of sound mind.
A minor (usually, a person under 18 years of age) who makes a
contract can rescind or void it, with one general exception. A minor
contracting for "necessities" is bound to pay for their reasonable
value. A "necessity" can be food or shelter but, depending upon the
law of the particular state, it may also include a car or other item. A
minor who rescinds a contract gets back whatever the other party
received from the minor.

People who are of unsound mind, that is, those who are
incompetent because of mental illness or disability, can rescind their
contracts, but the standard is high.

Usually, a person who is incompetent must have made the contract

without understanding that they were making a contract and
without realizing the consequences of their action.

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Consent means that each party to the contract must agree to
the terms of the contract. This requirement of consent fits the
general idea of contract as a private law-making activity.

However, consent does not mean that you have to know what
the contract says. For example, when signing a rental car
agreement at the airport counter, you don't know what the
terms are in this contract but you agree to them by signing the
contract.

The law presumes you have consented to a contract by signing

it or manifesting some other type of assent, such as mouse
clicking on I accept buttons in dialog boxes on your computer
screen.

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Legal subject matter is required for a contract
to be enforceable. The law does not enforce
contracts based on illegal activity. For
example, a winner of a poker game usually
cannot go into court and enforce an IOU in a
state in which that type of gambling is illegal.

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Terms of a Contract

Once we know how to create a valid contract,

we need to think about what is in a contract.

A contract is an agreement.
The terms of a contract express what the parties
to the contract have agreed.
A term in a written contract is often called a
clause.

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Once we know that a statement is a term in a
contract, we need to identify what kind of
statement it is.
This is important as different kinds of statements
have different remedies when a party breaches
them.

A breach of contract occurs when one party

does not follow an agreed term of the contract

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There are 3 types of term:

Conditions;
Warranties; and
Innominate terms.

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Conditions

A condition is a basic and important part of the

contract.

If one party breaches a condition then the other

party may:-

End the contract;

Refuse to perform their part of the contract;
Claim damages;

Or

Continue with the contract but then sue for

damages.

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Warranties

On the other hand, a warranty is not

vital to the contract.

If one party breaches a warranty then the

other party can only continue with the
contract and then sue for damages.

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Innominate Terms

These are terms which may be either conditions

or warranties.
It depends how serious the breach of the
contract is.

If the breach is serious the court will say the

term was a condition.

If the breach was less serious then the court will

say it was a warranty.

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Exclusion Clauses

Exclusion clauses are terms of a contract which

try to limit the liability of one of the parties if
they breach the contract.

These clauses can create unfair situations where

one party is able to insist they are included in
the contract because that party is much stronger
than the other party.

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One area where the courts and Parliament have
tried to control the effect of exclusion clauses is
in contracts between business and individual
consumers.

This is because the business is usually in a

stronger position than the consumer.

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Dealing with Exclusion Clauses

When a court looks at an exclusion clause, it

thinks about 3 things:

1.Has the exclusion clause been included in the

contract?
2.How should the exclusion clause be
interpreted?
3.Does the Unfair Contract Terms Act 1977
apply to the exclusion clause?

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Included in the Contract

An exclusion clause has to be part of the contract

or it has no effect.

There are 3 ways that an exclusion clause can

become a term in a contract:-

1.By signature
2.By notice
3.By custom

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By notice

Except in the case where someone does not read

the contract, an exclusion clause is only valid
where the person knew about it or was given
notice of it.

For example, you arrive at a hotel and book a

room for a few days.

When you get to your room, you find a sign

inside which says that the hotel is not
responsible if any of your things are stolen.

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However, the hotel will not be able to rely on
this exclusion as the contract was made before
you got to your room.

The contract was made at the reception desk of

the hotel before you had a chance to see the sign.

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Vitiating Factors

In order to create a valid contract, there must

be:-
An offer
An acceptance
Consideration
Capacity to contract
Intention to create legal relations

There must also be no vitiating factors.

Vitiating factors is the technical term for the

things which make a contract void or
voidable.

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The following are vitiating factors which make
a contract void or voidable:-

Mistake;
Misrepresentation;
Duress;
Undue influence; and
Public policy.

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Valid Contracts

These are agreements which are completely

binding and enforceable.
Parties to valid contracts gain rights and
responsibilities.
The courts will make sure that the parties follow
these rights and responsibilities if there is any
argument.

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Void Contracts

In fact, these are not contracts at all.

They have no legal effect.
The important thing to remember is that you
cannot enforce a void contract.

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Voidable Contracts

This kind of contract is valid unless one of the

parties has it set aside (ie declared void).
This could happen where one party is tricked
into entering a contract by the other party (ie a
misrepresentation).

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Misrepresentation

A misrepresentation is a false statement which

persuades someone to enter into a contract.
The contract is then voidable.

Misrepresentation has 3 parts :-

1.A statement;
2.The statement is about a fact which can be
checked; and
3.The statement causes the party to enter
into the contract.

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A fact

The representation must be a statement about a

specific, existing fact or event which can be
checked.

Therefore, the following things are not

statements of fact :-

Advertising hype;
Statements of law;
Statements of opinion; and
Statements of intention.

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Advertising Hype

Statements such as “this is the best toothpaste in

the world” or “this is the finest sofa on the
market” are not representations.
They are simply statements made to try to
interest the buyer.
However, if the salesperson said something like
“this car uses the same engine as a BMW” then
this may be a misrepresentation if it is not true
This is closer to a statement of fact.

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Types of Misrepresentation

There are 3 types of misrepresentation:-

1.Fraudulent misrepresentation
2.Negligent misrepresentation
3.Innocent misrepresentation

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Discharge of Contracts

Discharge of a contract means that the parties

are released from their obligations in the
contract ie they no longer have to do what they
agreed.

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Discharge of Contracts

A contract can be discharged in 4 ways:-

1. Performance
2. Agreement
3. Frustration
4. Breach

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An assignment is a transfer of contract obligations to
another party. It is a method of getting out of the contract
by getting somebody else to perform the obligations. The
other party to the contract usually must permit an
assignment if it is reasonable, meaning that the
assignment will not jeopardize the security of the other
party or increase its risks.

Normally, an assignment requires the explicit approval

of the other party. Often the original party to the contract
remains liable for the performance of the contract, if the
person to whom the contract is assigned (the assignee)
breaches the contract.

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Contracts are everywhere. They are a part of
modern life, and we enter into them, and
perform them, every day. They are necessary
to the acquisition of goods and services in the
marketplace.

Through contracts, private parties make laws

that govern their commercial relationships.

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