Under common law, a contract is an agreement made orally or in writing between two or more people or which is manifested by conduct and words of the parties, to do or not do something which they then wish to be enforceable according to law and not only as a normal promise between people. For example, if Bob agrees with Jim that Jim will cut the grass in Bob’s garden while Bob is away on holiday and just before Bob leaves he pays Jim $50 for the work, then an enforceable contract has been entered into. However, if Jim just tells Bob that he can help him to cut the grass while Bob is away and Bob agrees, then Jim has only made a promise to Bob which in not enforceable under law.
How is a contract formed?
In order to create an enforceable contract there must be an offer from one person (the offeror) asking another person (the offeree) to do or not do something. There needs to be an acceptance of this offer by the other person (the offeree). And lastly, there needs to be payment of some kind (consideration) for the benefit that is gained from the contract. Consideration is different from a gift or donation as these two types of payments do not ask for a benefit in return, for example if you decide to give $100 to an animal charity then you are not entering into a contract with the charity, they cannot ask anything of you and you cannot ask anything in return from them. Also, consideration does not have to be money. It can consist of products or the performance of a service. This is of course how contracts were originally entered into, for example, your neighbor helps you mend your roof and in return you paid him for his service with a bag of wheat.
A counter-offer is when a person would like to accept an offer but on different terms than those set out in the original offer. Again, there has to be an acceptance of the counter-offer for there to be a contract. For example, company A offers to buy pens (the offer) from company B at a price of $1 for each pen. Company B says they want $2 for each pen (counter-offer). For there to be an enforceable contract, company A has to accept the new price of $2 for each pen.
Essential terms of a contract?
In general, anything can be written in a contract as long as it is an agreement about something legal. The normal content of a contract will firstly set out the parties who have entered into the contract. Then it should also detail the subject matter of that which has been agreed, for example, the delivery of goods or services, the appointment of an exclusive distributor or the development and sale of a new technology. The price that shall be paid should also be set out in detail regarding when and how payment should be made. Most commercial contracts of course often regulate large, complex projects. However, many subject matters, otherwise called clauses or provisions, are standard clauses which are nearly always present in a commercial contract. Examples of such standard clauses are force majeure clauses which regulate what should happen if extraordinary circumstances (for example, war, labor conflicts, etc) arise during the performance of the contract and confidentiality clauses which state to what extent the information which is exchanged between the parties to the contract is to be kept secret, i.e. not given to other parties.
The contract may be clearly stated in writing or been orally agreed between the parties (an express contract). It can also be the case that two people have been conducting themselves in a certain manner and a contract can therefore be understood to exist between them (implied contact), for example, where Peter has employed a builder to build a garage next to his house and during the work the builder notices that the roof on Peters house needs to be fixed, if the builder then starts work on the roof as well and Peter knows this and allows him to carry on, an implied contract relating to the work carried out on the roof will be implied through the actions of Peter and the builder. There are situations where a country’s laws, for example the Statute of Frauds (US), state that a contract involving the sale of land or other real property(e.g. a house) has to be in writing.
When is a contract not formed?
Every adult person is able to enter into a contract. There are however exceptions to this rule. For example, lack of capacity such as being a minor, i.e. people who are below the age of 18, may not enter into a contract. Therefore, if Joe who is 15 buys a mobile phone and agrees to pay for it by monthly payments during a year, if Joe fails to pay one month, the phone company cannot sue Joe as he is unable to enter into an enforceable contract. Also, contracts which have an illegal subject matter, are not enforceable. For example, if one person agrees with another that he will pay him £1000 for a painting which the other person first has to steal from a house, and after being paid the other person never steals the painting, then the contract cannot be enforced as stealing is illegal.
There are other factors which may cause a contract to be invalid. These factors have to do with whether a person has actually consented to the agreement or can be said to be under duress. For example misrepresentation is when one party gives information to induce the other party to enter into the contract and the information turns out to be false, for example if you are told that a painting is an original piece of work by a famous artist and it is actual a copy of the original, then you can return the painting and ask for you money back. Duress is where a party is coerced into entering the contract as a result of immediate fear of injury to himself, other persons, or to his property. An example is if you sign a contract to sell your house because a person is threatening to harm your children if you do not.
Contracts and third parties
Contracts are often made between two parties but there may a contract which is performed in order for a third person or entity to benefit from the performance of the contract (third-party beneficiary contracts). Third parties (assignee) may also gain benefits from a contract they are not party to by being assigned the rights in a contract by one of the contracting parties (assignor). This means that if Pepsi decides to buy Coca Cola, instead of having to negotiate new supply contracts Coca Cola can assign the existing contracts it has to Pepsi and then Pepsi has to perform the contracts and will receive the money under the contracts.
Breach of contract
Breach of contract occurs when one party to the contract acts in contradiction to what the parties have expressly agreed in the contract. A contract can be breached in many different ways, for example, by not paying the whole price stated in the contract. When this occurs, the party who suffers some loss due to the breach will normally terminate the contract and ask a court for compensation. For example, one party may breach a contract by not timely delivering the goods or services that have been agreed. If the other party who was to receive the goods or services suffers a loss due to the delay, he can go to a court and claim different types of remedies in order to receive compensation for the loss. Compensation can be in the form of money but may also be in the form of actions or prohibitions. The following are examples of remedies which may be sought from a court. For a more detailed discussion of remedies please refer to the section on “Remedies”.
This is probably the most common remedy and is a request that the breaching party pay an amount of money representing the loss which has been caused by the breach. Often the parties to a contract will try to assess beforehand how much damages they should have to pay if one party breaches the contract. The pre-determined amount of damages set forth in a contract is called liquidated damages. The amount should be a reasonable estimation of the loss that will be suffered.
If the parties to the contract have not set out what should be paid if one breaches the contract, then a court will have to decide what amount should be awarded. These types of damages compensate the party for the loss suffered, it is not intended to be a punishment against the other party (so-called punitive damages). A party cannot receive damages for losses which are not linked to the breach itself. This means that a party will not be compensated for losses suffered that are not a natural consequence of the breach.
Contract law in practice
Contracts are made in all areas of life, from contracts entered into before marriage about how the property shall be shared in case of a divorce, to all the contracts needed for a project to build a sports stadium. Lawyers are needed to prepare, negotiate, draft (write) and change (amend) the contracts to ensure that they state the parties’ intentions and needs and are enforceable under the laws of the country where they are to be used. A lawyer who works in a commercial department at a law firm will first speak to the parties in order to understand what they want, then based on this, write the contract which then is negotiated, amended and finally signed by the parties. Often law firms will have standard contracts (format or template contracts) which are changed in different ways to suit the individual client’s different needs. Certain clauses are removed or added so that the parties’ intentions are reflected in the contract. For example a lawyer may have different clients all of which are supermarkets. He then uses one standard contract each time one of the supermarket companies wants to enter into a new supply agreement with, e.g. a fruit supplier, and just changes the name of the parties, the price, the type of fruit to be supplied, details about the delivery, etc. Some contracts are short and easily prepared while other consist of many different, interconnected documents which can take many months to negotiate and agree upon.
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